1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 6, 1998
REGISTRATION NO. 333-58421
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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FILETEK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
7372
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
52-1343762
(IRS EMPLOYER
IDENTIFICATION NUMBER)
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9400 KEY WEST AVENUE
ROCKVILLE, MARYLAND 20850
(301) 251-0600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
PRINCIPAL EXECUTIVE OFFICES)
WILLIAM THOMPSON
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
FILETEK, INC.
9400 KEY WEST AVENUE
ROCKVILLE, MARYLAND 20850
(301) 251-0600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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Copies to:
ELLIOT H. COLE,
EDWIN M. MARTIN, JR., ESQUIRE ESQUIRE DAVID J. SORIN, ESQUIRE
NANCY A. SPANGLER, ESQUIRE JOHN H. VOGEL, ESQUIRE ANDREW P. GILBERT, ESQUIRE
PIPER & MARBURY L.L.P. PATTON BOGGS LLP BUCHANAN INGERSOLL PROFESSIONAL CORPORATION
1200 19TH STREET, N.W. 2550 M STREET, N.W. 500 COLLEGE ROAD EAST
WASHINGTON, D.C. 20036 WASHINGTON, D.C. 20037 PRINCETON, N.J. 08540
(202) 861-3900 (202) 457-6000 (609) 987-6800
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") check the following box. [ ]
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If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED
TITLE OF EACH CLASS OF SECURITIES TO MAXIMUM AGGREGATE AMOUNT OF
BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE(2)
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Shares of Common Stock, par value $.01............. $50,000,000 $0
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(1) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(o) under the Securities Act.
(2) A registration fee of $14,750 was paid at the time of the initial filing of
this registration statement.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED AUGUST 6, 1998
SHARES
[FILETEK, INC. LOGO TO COME]
COMMON STOCK
Of the shares of Common Stock offered hereby (the "Offering"),
shares are being sold by FileTek, Inc. (the "Company") and
shares are being sold by certain stockholders of the Company
(the "Selling Stockholders"). The Company will not receive any proceeds from the
sale of shares of Common Stock by the Selling Stockholders.
Prior to this Offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price of the Common Stock will be between $ and $ per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. Upon completion of the Offering, the
Company's Chairman and Chief Executive Officer will beneficially own or have the
right to control approximately % of the Company's outstanding shares of
Common Stock. The Company has applied for quotation of the Common Stock on the
Nasdaq National Market under the symbol "FLTK."
SEE "RISK FACTORS" COMMENCING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount(1) Company(2) Stockholders(2)
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Per Share.............................. $ $ $ $
Total(3)............................... $ $ $ $
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters.
(2) Before deducting expenses payable by the Company, estimated at $ .
(3) The Company and certain Selling Stockholders have granted to the
Underwriters a 30-day option to purchase up to an additional
and shares of Common Stock, respectively, solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the Price to Public will total $ , the Underwriting Discount will
total $ , the Proceeds to Company will total $ and the
Proceeds to Selling Stockholders will total $ . See "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any orders in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the offices of NationsBanc Montgomery Securities LLC on or about ,
1998.
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NationsBanc Montgomery Securities LLC
BancAmerica Robertson Stephens
FAC/Equities
, 1998
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Graphic and text appearing on inside front cover of the Prospectus:
Headline: FileTek's StorHouse
The Atomic Data Store Solution to Today's Management
Challenges
[graphic depicting a StorHouse hub with its benefits depicted graphically and
verbally]
Graphic text: Centralized management of enterprise atomic data
Rapid access to all atomic data
Optimized data storage across storage hierarchy
Virtually unlimited atomic data scalability
Easy integration
Rapid ROI
Text: StorHouse provides cost-effective, timely access to
enterprise-level atomic data.
Atomic Data: Transactional data at its most granular level.
[FileTek logo appears on this page.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER
SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
Graphic and text appearing on left spread page of inside front cover of the
Prospectus:
Spread headline: FileTek Enable Business Intelligence
Software that manages the storage of and access to atomic
data generated by the enterprise.
Left Spread:
Text: The Problem: Valuable atomic data is difficult to
access for business intelligence.
[graphic depicting a web of connections between various
operation data sources (billing, accounting, customer service and orders and
supplies) and decision support databases (operations, functional, department and
data mining). Additional connections join the operational data sources and a
disposal bin, and the billing and accounting sources and a graphic representing
a file level archive.]
Text: Multiple data sources and extracts make access to atomic
data slow, complex and costly.
Discarded data not available at all.
Operational data sources are not scalable and not designed
for information query access.
Data stored off-line requires time consuming search of data
files.
Data on-line is in summary form only and extraction can be
costly and complex.
Graphic and text appearing on right spread page of inside front cover of the
Prospectus:
Text: The Solution: StorHouse's Hub & Spoke architecture makes
atomic data available for business
intelligence.
[graphic depicting the hub and spoke architecture with
StorHouse as the hub connecting to each operational data source and to each
decision support database]
Text: StorHouse simplifies the management of multiple atomic data
sources.
IT personnel have the tools they need to build, store and
manage terabytes to petabytes of atomic data in a format
easily accessible across the enterprise.
Corporate comptrollers preserve investments in existing
technology because StorHose complements and interacts easily
with current data warehouse systems.
Business analysts gain rapid response to selected requests
for information.
Information planners achieve cost-effective distribution of
data over storage assets.
All end-users have access to the specific data they need
precisely when they need it.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information including "Risk Factors" and the Consolidated Financial Statements
and Notes thereto, appearing elsewhere in this Prospectus.
THE COMPANY
FileTek, Inc. ("FileTek" or the "Company") develops, markets and supports
integrated data storage and access management solutions that allow organizations
to meet their business intelligence needs through efficient collection, storage
and management of, and timely, shared access to, massive amounts of data at
their most granular level ("atomic data"). The Company's recently released
StorHouse products are capable of supporting volumes of relational and
non-relational atomic data that are substantially larger than those which can be
supported by conventional database technologies and at a significantly lower
cost per unit of managed storage. Using StorHouse, organizations can optimize
their data access requirements across a variety of low-cost media, such as tape
and optical disk. StorHouse provides enterprise-wide access to data for an
organization's business intelligence applications, while simultaneously managing
storage resources efficiently. The Company is targeting the largest
organizations within the Fortune 500, which generally have the most pressing
need to store and access massive amounts of data, with a particular focus on the
telecommunications, financial services and retail industries.
The amount of data generated by IT systems is growing at an exponential
rate. Business intelligence, which is critical to an organization's
competitiveness, requires timely access to this data. Conventional data
warehouses fail to meet organizations' business need to access atomic data for
enterprise-wide business intelligence. Relational databases underlying
conventional data warehouses cannot scale with the large and growing volumes of
atomic data that organizations generate and need to store, manage and access.
According to International Data Corporation ("IDC"), the data warehouse market
was $8 billion in 1996 and is expected to grow to $24 billion by 2001. FileTek
targets the atomic data store ("ADS") segment of the data warehouse market.
The Company believes that its StorHouse solution has no practical limit to
the amount of data it can manage. The solution enables organizations to convert
transactional data generated by disparate operational systems into valuable
business information. Organizations can use this information for business
intelligence applications, enabling more informed business decision making.
Unlike conventional relational databases that rely solely on the use of
expensive magnetic disk, StorHouse employs its own relational database
management system that accesses and manages data on multiple layers in the
storage hierarchy, including high-capacity, low-cost, removable media, such as
tape or optical disk. FileTek's technology leverages the investments that
organizations have in their existing IT infrastructure by complementing rather
than replacing current data storage, access and analysis solutions, running on a
variety of platforms.
The Company's objective is to be a leading provider of enterprise-wide
integrated storage and access management solutions for massive volumes of atomic
data in both relational and non-relational formats. To achieve this objective,
the Company plans to maintain and extend its technological leadership, focus on
customers with large ADS requirements, leverage its installed customer base,
maintain its vertical focus, increase penetration of international markets and
leverage its sales and marketing resources with strategic partnerships. The
Company has a strategic relationship with Storage Technology Corporation ("STK")
to jointly market and sell FileTek's ADS solution integrated with STK's disk and
tape products.
The Company has licensed current or previous generations of its products to
more than fifty companies, including leading organizations such as Bear Stearns
and Co., Inc. ("Bear Stearns"), Citibank, N.A. ("Citibank"), Morgan Stanley Dean
Witter Trust F.S.B. ("Morgan Stanley"), Pacific Bell ("PacBell", now SBC
Communications, Inc.), NationsBanc Services, Inc. ("NationsBank"), United
Airlines, Inc. ("United Airlines") and U S West Communications, Inc. ("U S
West"). Four of the Company's customers have already purchased the StorHouse
solution. The Company sells its products primarily through its direct sales
force based in the U.S.
The Company was incorporated in Delaware in May 1984. Unless the context
otherwise requires, references in this Prospectus to the "Company" and "FileTek"
refer to FileTek, Inc. and its consolidated subsidiary, FileTek UK Limited
("FileTek UK"). The Company's principal executive offices are located at 9400
Key West Avenue, Rockville, Maryland 20850. The Company's telephone number at
that address is (301) 251-0600.
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5
THE OFFERING
Common Stock offered by the
Company............................. shares
Common Stock offered by the Selling
Stockholders...................... shares
Common Stock to be outstanding after
the Offering........................ shares (1)
Use of proceeds..................... For working capital and other general
corporate purposes including the
expansion of sales and marketing,
customer support and product
development activities, international
expansion, capital expenditures and
possible acquisitions. See "Use of
Proceeds."
Proposed Nasdaq National Market
symbol.............................. FLTK
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(1) Based on the number of shares of Common Stock outstanding on July 31, 1998,
plus shares of Common Stock issuable upon exercise of stock options to
be exercised immediately prior to the closing of the Offering. Excludes (i)
1,092,663 shares of Common Stock subject to outstanding options under the
1990 Stock Option Incentive Plan as of July 31, 1998, at a weighted average
exercise price of $1.70 per share, of which options for 541,968 shares were
exercisable, and 257,147 shares available for issuance pursuant to future
options; (ii) 529,352 shares of Common Stock subject to outstanding options
as of July 31, 1998 under the 1990 Non-qualified Stock Option Plan, at a
weighted average exercise price of $1.02, all of which were exercisable, and
3,898 shares available for issuance pursuant to future options; (iii)
1,500,000 shares of Common Stock reserved for issuance under the 1998
Omnibus Stock Plan, none of which are outstanding; (iv) shares
of Common Stock reserved for issuance under the 1998 Directors' Stock Option
Plan, none of which are outstanding (collectively, the "Stock Plans"); and
(v) 508,557 shares of Common Stock reserved for issuance for outstanding
options not granted under the Stock Plans as of July 31, 1998, at an average
exercise price of $1.68 per share, of which options for 480,432 shares were
exercisable. See "Risk Factors -- Shares Eligible for Future Sale" and
"Management -- Employee Benefit Plans."
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
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1993 1994 1995 1996 1997(1) 1997 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues.................... $ 19,720 $ 13,856 $ 22,387 $ 17,789 $ 23,699 $ 11,298 $ 18,994
Gross profit................ 10,877 6,161 11,455 3,666 12,022 5,588 10,512
Net income (loss) before
taxes..................... 933 (3,911) 2,715 (6,661) 1,824 743 4,833
Net income (loss)........... 886 (3,922) 2,697 (6,708) 1,509 656 4,833
Basic net income per
share(2).................. $ 187.00 $ 83.38 $ 56.21
Basic weighted average
shares outstanding(2)..... 8,070 7,860 85,974
Diluted net income per
share(2).................. $ 0.17 $ 0.07 $ 0.49
Diluted weighted average
shares outstanding(2)..... 8,777,740 8,808,297 9,836,168
JUNE 30, 1998
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ACTUAL AS ADJUSTED(3)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 7,807
Working capital............................................. 3,535
Total assets................................................ 21,993
Capital lease obligations, net of current portion........... 325
Stockholders' equity........................................ 7,168
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(1) See Note 2 of Notes to Consolidated Financial Statements, which addresses
the comparability of financial results for the periods presented.
(2) For a description of the basic and diluted earnings per share ("EPS")
calculations and the basic and diluted weighted average shares outstanding,
see Notes 2 and 12 of Notes to Consolidated Financial Statements.
(3) Adjusted to give effect to (i) the sale by the Company of shares
of Common Stock offered hereby and the application of the estimated net
proceeds therefrom and (ii) the exercise of stock options to purchase
shares of Common Stock at an exercise price of approximately
$ per share, which exercise will occur immediately prior to the
closing of the Offering. See "Use of Proceeds" and "Capitalization."
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FORWARD-LOOKING STATEMENTS
Information contained in this Prospectus includes "forward-looking
statements" that are based largely on the Company's current expectations and are
subject to a number of risks and uncertainties. The Company faces many risks and
uncertainties, including those described in this Prospectus under the caption
"Risk Factors." Because of these many risks and uncertainties, the Company's
actual results may differ materially from any results presented in or implied by
the forward-looking statements included in this Prospectus.
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Except as otherwise indicated, all information in this Prospectus: (i)
assumes no exercise of the Underwriters' over-allotment option; (ii) reflects a
three-for-two split of the Company's Common Stock, effected in the form of a
stock dividend in June 1998; and (iii) assumes the conversion of the Company's
convertible preferred stock (the "Convertible Preferred Stock") into 8,719,440
shares of Common Stock upon the closing of the Offering. See "Description of
Capital Stock" and "Underwriting." A glossary of terms used herein appears at
page 59.
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FileTek, StorHouse, Storage Machine and AMMO-II are registered trademarks
of FileTek, Inc. Web-AMMO, VROM, LAN-AMMO and StorHouse/SM, are trademarks that
are used by FileTek, Inc. All other trademarks used in this Prospectus are the
property of their respective owners.
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RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should consider carefully the following risk factors in evaluating the
Company and its business before purchasing the shares of Common Stock offered
hereby.
VARIABILITY IN QUARTERLY RESULTS
The Company has experienced, and expects to continue to experience,
significant fluctuations in quarterly operating results caused by a number of
factors, many of which are outside the Company's control. Such factors include,
but are not limited to: (i) the volume, timing and mix of orders received during
the quarter, which are difficult to forecast; (ii) the timing and customer
acceptance of new products or product enhancements introduced by the Company or
its competitors; (iii) changes in pricing policies by the Company or its
competitors; (iv) market acceptance of and changes in demand for the Company's
products; (v) the length and unpredictability of the sales cycle associated with
the Company's systems; (vi) the amount of deferred revenue at the beginning of
the quarter to be amortized to revenue during the quarter and deferrals, if any,
established for transactions consummated in the quarter; (vii) customer
budgetary constraints and spending patterns; (viii) the Company's ability to
attract and retain key personnel, including sales personnel; (ix) personnel
changes and changes in the timing and level of operating expenses; (x)
fluctuations in foreign exchange rates; and (xi) changes in general economic
conditions.
Products are generally shipped as orders are received, and accordingly, the
Company has operated with relatively small backlog. A single order can represent
a significant percentage of the Company's revenue for any quarter. In addition,
a substantial portion of the Company's shipments has occurred and may continue
to occur near the end of a quarter. Delivering a product or closing a sale after
the close of a quarter can cause revenues and operating results to fall
significantly short of anticipated levels for such quarter. Accordingly, the
Company's quarterly operating results are difficult to predict. Further, the
Company incurs significant fixed costs based upon its expectations as to future
revenue that may never be achieved. Such expenditures include continued
investment in research and development, the establishment of a worldwide
customer support capability, the building of a sales and sales support staff,
and the hiring of administrative staff and the investment in related capital
equipment. The timing of expansion and the rate and extent to which new sales
personnel become productive could also cause material fluctuations in the
Company's quarterly operating results. To the extent that such expenses are not
subsequently followed by appropriate levels of increased revenues, the Company's
business, financial condition and results of operations may be materially
adversely affected.
Due to these factors, the Company believes that period-to-period
comparisons of its operating results may not be necessarily meaningful and
should not be relied upon as indications of future performance. There can be no
assurance that the Company will be profitable on a quarter-to-quarter basis in
the future. In the future the Company's operating results may at times fall
below expectations of analysts and investors and, in such event, the price of
the Company's Common Stock will likely be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company derives its revenue primarily from the sale of large systems
and recognizes revenue in accordance with Statement of Position 97-2 ("SOP
97-2"), Software Revenue Recognition, issued by the Accounting Standards
Executive Committee ("AcSEC") of the American Institute of Certified Public
Accountants in October 1997. In general terms, SOP 97-2 requires revenue earned
on software arrangements involving multiple elements, such as additional
software products, upgrades and enhancements, rights to exchange or return
software, postcontract customer support ("PCS"), or services, including elements
deliverable only on a when-and-if-available basis, to be allocated to the
various elements of such sale based on vendor-specific objective evidence
("VSOE") of fair values allocable to each such element. If sufficient VSOE of
fair values does not exist, all revenue from the sale could be deferred until
such sufficient evidence exists, or until all elements have satisfied the
requirements for revenue recognition. SOP 97-2 is newly issued and has not yet
been subject to interpretation in practice or in applicable accounting
guidelines. There can be no assurance that the future application of, or
subsequent interpretations or amendment of, SOP 97-2 will not require the
Company to defer the recognition of certain elements of revenue or result in
revenue patterns that
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are materially different from historical periods. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 2 of
Notes to Consolidated Financial Statements.
LIMITED PROFITABILITY; ACCUMULATED DEFICIT; UNCERTAIN FUTURE OPERATING RESULTS
The Company has incurred substantial net losses from time to time,
including net losses of $6.7 million in 1996. As of June 30, 1998, the Company
had an accumulated deficit of approximately $13.8 million. Although the Company
has had six consecutive quarters of profitability beginning with the first
quarter of 1997, there can be no assurance that the Company will remain
profitable on a quarterly or annual basis. While the Company achieved
significant revenue growth in 1997 and the first two quarters of 1998, the
Company does not expect to sustain the same rate of revenue growth in future
periods. In addition, the Company intends to increase its operating expenses
significantly in the remainder of 1998 and thereafter. Therefore, the Company's
operating results will be adversely affected if revenue does not increase at
corresponding levels. The Company's financial prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by emerging
companies, particularly companies leading product development in evolving
markets. To address these risks, the Company must, among other things,
successfully increase the scope of its operations, respond to competitive
developments and changes in general economic conditions, continue to attract,
retain and motivate qualified personnel and continue to commercialize products
incorporating advanced technologies. There can be no assurance that the Company
will be successful in addressing such risks, and the failure to do so would have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
LONG AND UNPREDICTABLE SALES CYCLE
The Company believes that the purchase or license of its products is
discretionary and represents a strategic decision involving significant capital
investments by its customers, requiring executive-level approval of investment
and system architecture. The time between initial customer contact and execution
of a sales or license agreement associated with the initial purchase of the
Company's products is typically no less than six months and can be 18 months or
longer. Such purchasing and licensing decisions are subject to a number of
significant risks and delays over which the Company has little or no control,
such as the customer's budgetary constraints and changes in purchasing
priorities. Further, to the extent that potential customers divert resources and
attention to issues associated with the Year 2000 issue, such sales cycle could
be extended. During the course of the sales cycle, the competitive environment
in which the Company operates may change significantly due to the introduction
of new products in the marketplace or changes in pricing policies of
competitors. Customers' budgetary constraints and purchasing priorities may also
change significantly prior to the completion of a sales cycle, such as when a
prospective customer is acquired or merges with another entity. As a result, the
Company may expend significant resources pursuing potential sales that do not
become consummated and its business, financial condition and results of
operations could be in the future, as they have been in the past, materially
adversely affected if customers or prospective customers delay, reduce or cancel
orders. See "-- Variability in Quarterly Results" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
PRODUCT CONCENTRATION; MARKET ACCEPTANCE; NEW PRODUCT
The Company derives substantially all of its revenues from the license of
its StorHouse and Storage Machine software products, the sale of related
third-party hardware and the provision of maintenance and other services. The
Company is concentrating its future marketing on its StorHouse products that
were first released in 1997. The Company expects that revenues from StorHouse
products will become the primary source of its product revenues in the future.
As of July 31, 1998, the Company had sold to four customers a total of nine
StorHouse systems, five of which were for ADS uses and two of which included
StorHouse/RM. The Company's future operating results are dependent upon
establishing a sustained market for these new products. In addition, a reduction
in demand for these products due to increased competition, a general decline in
the market, product obsolescence or otherwise would have a material adverse
effect on the Company's business, financial condition and results of operations.
There can be no assurance that such sustained market acceptance can be
established and the failure to accomplish this goal would have a material
adverse effect on
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the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Products and Technology."
CUSTOMER CONCENTRATION
The Company is dependent on a small number of customers for a substantial
portion of its revenues. In 1995, AT&T Corp. ("AT&T"), U S West and PacBell
accounted for 11.7%, 12.0% and 13.8%, respectively, of the Company's revenues.
In 1996, AT&T and Bank of America National Trust and Savings Association ("Bank
of America"), accounted for 12.5% and 10.1%, respectively, of the Company's
revenues. In 1997, AT&T and U S West accounted for 19.7% and 10.8%,
respectively, of the Company's revenues. For the six months ended June 30, 1998,
the Company's five largest customers accounted for a total of 74.2% of revenues.
The Company expects that it will continue to be dependent upon a limited number
of new and existing customers for a significant portion of its revenues,
although such customers are expected to vary. As a result, the failure by the
Company to successfully sell its products or services to one or more targeted
new or existing customers in any particular period, the deferral or cancellation
of orders by one or more of these customers, or the loss of a major customer,
could have a material adverse effect on the Company's business, financial
condition and results of operations. None of the Company's customers have
entered into an agreement requiring ongoing minimum purchases from the Company.
There can be no assurance that these customers will be a source of revenues in
the future. See "Business -- Customers."
DEPENDENCE ON GROWTH OF KEY MARKETS
The markets for atomic data stores, data warehouses and business
intelligence solutions continue to emerge. The Company's future financial
performance will depend to a large extent on the increasing number of
organizations that adopt data warehouses for atomic data storage to improve
business intelligence. There can be no assurance that these markets will grow or
that the Company will be successful. If these markets fail to grow, or grow more
slowly than the Company currently anticipates, the Company's business, financial
condition and results of operations will be materially adversely affected.
Historically, the software industry has experienced significant periodic
downturns, often in connection with, or in anticipation of, major releases of
new technology and products, which can affect the timing and size of orders from
customers. The Company's business, financial condition and results of operations
may in the future reflect substantial fluctuations from period to period as a
consequence of periodic downturns in the software industry, as well as general
economic conditions. See "Business -- Industry Background."
COMPETITION
The market for the Company's products is intensely competitive and subject
to rapid change. The Company's products compete with other storage, storage
management and database products offered by a number of vendors, including EMC
Corporation ("EMC"), International Business Machines Corporation ("IBM"),
Microsoft Corporation ("Microsoft"), NCR Corporation ("NCR") and Oracle
Corporation ("Oracle"). These vendors have substantially greater resources and
market influence than FileTek. There are relatively low barriers to entry in the
software market, and thus the Company expects additional competition from other
established and emerging companies if the ADS market develops. The development
of new technologies or products by others could have a material adverse impact
on the Company's business. There is also a substantial risk that announcement of
competing products by large competitors could result in the cancellation or
delay of customer orders in anticipation of the introduction of such new
products. Many of the Company's competitors have well-established relationships
with current and potential customers of the Company, have extensive knowledge of
the relational database industry and are capable of offering a single vendor
solution. As a result, the Company's competitors may be able to respond more
quickly to new or emerging technologies and changes in products than can the
Company. In addition, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
increase the ability of their products to address customer needs. Accordingly,
it is possible that new competitors or alliances among competitors may emerge
and rapidly acquire significant market share. Furthermore, increased price
competition, particularly with respect to hardware resales, may result in
downward pressure on the Company's gross margins and could have a material
adverse effect on the Company's gross margins and operating results. New product
introductions by the Company's competitors or
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by the Company itself could cause a decline in sales and intensified price-based
competition, particularly at the end of a product life cycle, resulting in lower
prices and adversely affecting the Company's business, financial condition and
results of operations. There can be no assurance that the Company will be able
to compete successfully against current and future competitors or that
competitive pressures faced by the Company will not materially adversely affect
its business, financial condition and results of operations. See "Business --
Competition" and "-- Proprietary Rights."
RAPID TECHNOLOGICAL CHANGE AND DEPENDENCE ON NEW PRODUCTS
The market for mass data storage and access management products is
characterized by a high degree of technological change, frequent product
introductions, evolving industry standards and changes in end-user requirements.
The introduction of competitive products embodying new technologies or the
emergence of new industry standards could render the Company's existing products
obsolete and unmarketable. A significant benefit of the Company's StorHouse
products is their ability to optimize the use of optical and tape storage
devices that are less costly than magnetic disk devices. There can be no
assurance that such benefit will remain or that some other storage technology
will not render obsolete the benefits of the FileTek technology. The Company's
financial prospects will depend in part on its ability to enhance existing
products and to develop and introduce new products to meet diverse and evolving
customer requirements and keep pace with technological developments and emerging
industry standards such as new operating systems, hardware platforms, user
interfaces and storage media. The development of new products or enhanced
versions of existing products and services entails significant technical
complexities. There can be no assurance that the Company will be successful in
developing and marketing product enhancements or new products that respond to
technological changes or evolving industry standards, that the Company will not
experience difficulties that could delay or prevent the successful development
and marketing of these products and enhancements, or that any new products and
product enhancements it may introduce will achieve market acceptance. See
"-- Risk of Product Defects; Product Liability" and "Business -- Industry
Background."
The Company makes substantial investments in product research and new
product development. The Company intends to continually enhance StorHouse and
related products. Any significant delay in the introduction of future
enhancements could adversely affect the Company's competitive position. Further,
the announcement of new products by the Company can result in a diminished rate
of sale for the Company's existing products as customers anticipate new product
introductions. From time to time, the Company may temporarily suspend or delay
shipments or divert development resources from other projects to correct such
product deficiencies detected after shipping. The effort to identify and correct
bugs and make design changes typically is expensive and time consuming. Failure
to correct product deficiencies in a timely manner in the future could result in
a material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will succeed
in developing and introducing new products and product improvements that respond
to technological change in a timely fashion or that its products will achieve
substantial widespread market acceptance. See "Business -- Research and
Development."
MANAGEMENT OF GROWTH
The Company intends to increase the size of its sales and marketing force
and to otherwise increase its workforce to address anticipated growth in sales.
The Company's operating results will be adversely affected if revenues do not
increase sufficiently to compensate for the increase in operating expenses
caused by further expansion. In addition, the Company's planned expansion of
operations may cause significant strain on its management, technical,
administrative, financial and operational resources, and result in increased
demands on its internal systems, procedures and controls. To manage its growth
effectively, the Company must continue to improve and expand its existing
resources and management information systems and attract, train and motivate
qualified employees. If the Company is unable to manage future growth
effectively, its business, financial condition and results of operations will be
adversely affected.
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DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions and performance of its key management, software development,
engineering, customer support and sales and marketing personnel, many of whom
would be difficult to replace and all of whom are employees at will. The loss of
services of such key personnel could adversely affect the Company's business,
financial condition and results of operations.
The Company's success also is highly dependent on its continuing ability to
identify, hire, train, motivate and retain highly qualified management,
technical and sales and marketing personnel. Competition for such personnel is
intense, and the Company believes that there is a shortage of qualified
personnel with the skills required to manage, develop, sell and market its
solutions and enhancements in today's highly competitive environment. In
particular, the Company intends to significantly increase its sales and
marketing personnel. The competition for quality sales personnel is intense. The
Company believes that it may have difficulty recruiting such personnel given the
high level of technical expertise required and the Company's lengthy sales
cycle. There can be no assurance that the Company will be able to attract,
assimilate or retain highly qualified personnel in the future. The inability to
attract and retain the necessary personnel would have a material adverse effect
on the Company's business, results of operations and financial condition. See
"Business -- Employees" and "Management."
YEAR 2000 COMPLIANCE
Many currently installed operating systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
need additional digits to distinguish 21st century dates from 20th century
dates. As a result, computer systems and/or software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance. A limited number of the Company's older
products, to the best of the Company's knowledge, are not Year 2000 compliant,
and customers that have licensed such products have been advised of this fact.
The Company has provided certain warranties on such older products and has
committed to consult with its customers to ensure Year 2000 compliance for such
products. The Company believes, based upon initial testing and the use of a
proper method of date storage in the development process, that its StorHouse
software products licensed to its customers are Year 2000 compliant and has so
warranted to its customers. However, the Company has not completed a
comprehensive test of its StorHouse software products to determine whether they
are Year 2000 compliant. The Solaris operating system in the Sun Microsystems,
Inc. ("Sun") servers resold by the Company is not Year 2000 compliant, but Sun
has announced that it will provide its licensees with revised versions that are
Year 2000 compliant which the Company will then provide to its customers. There
can be no assurance that software incorporated within the Company's products,
whether developed by the Company or third parties, will not experience Year 2000
compliance difficulties, or that such difficulties will not have a material
adverse effect on the operation of the Company's products and the Company's
resulting business, financial condition and results of operations. The Company
has established no reserves for expenses associated with correcting Year 2000
issues or for any liabilities associated with such non-compliance.
The Company believes that the purchasing patterns of customers and
potential customers may be significantly affected by Year 2000 issues. Many
companies are expending significant resources to correct or patch their current
software systems for Year 2000 compliance. These expenditures may result in
reduced funds available to purchase software products such as those offered by
the Company.
RISKS ASSOCIATED WITH EXPANSION OF INDIRECT SALES CHANNELS
To date, the Company has sold its products principally through its direct
sales channel. An integral part of the Company's strategy is to develop a
channel of international distributors and strategic partners. The Company's
indirect channels have accounted for limited revenues to date. The Company
intends to continue investing resources to develop such channels, which could
adversely affect the Company's operating results if the Company's efforts do not
generate significant increases in sales and license revenues. There can be no
assurance that the Company will be able to attract distributors and strategic
partners that will be able to market the Company's products effectively and will
be qualified to provide timely and cost-effective customer
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support and service. The inability to recruit distributors and strategic
partners could adversely affect the Company's business, financial condition and
results of operations. See "Business -- Sales and Marketing."
DEPENDENCE ON SUPPLIERS
The Company's StorHouse software products currently run only on servers
manufactured and supplied by Sun. The Company is an authorized reseller of such
Sun products. In the event that Sun withdraws this authorization, or if the Sun
products lose their market acceptance due to obsolescence or other factors, the
Company's business, financial condition and results of operations would be
adversely affected. Further, the time and cost associated with porting the
StorHouse software products to another platform will likely have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company's products currently interface with storage
devices manufactured by a limited number of vendors. In the event the Company is
required to develop interfaces with other vendors' storage devices, the time and
cost associated with such development could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Products and Technology."
RISKS OF PRODUCT DEFECTS; PRODUCT LIABILITY
The Company offers third-party hardware and software and its own software
as part of its integrated solution. The software incorporated in the Company's
products is complex and may contain errors, failures or defects, especially when
first introduced or when new versions or enhancements are released. The Company
has in the past discovered software errors and hardware defects in certain of
its products and has experienced delays in shipments of products during the
period required to correct these errors. Despite testing by the Company and by
current and potential customers, there can be no assurance that defects and
errors will not be found in new versions or enhancements of existing products or
in new products, after commencement of commercial shipments. Any such defects
and errors could result in adverse customer reactions, delays in market
acceptance, expensive product changes, diversion of development resources,
increases in service or warranty costs or loss of revenues, any of which could
have a material adverse effect upon the Company's business, financial condition
and results of operations. The Company's agreements with its customers typically
contain provisions designed to limit the Company's exposure to potential product
liability and other warranty claims. It is possible, however, that the
limitation of liability provisions and efforts to exclude certain warranties
contained in the agreements may not be effective under the laws of certain
jurisdictions. Although the Company has not experienced any product liability
claims to date, there can be no assurance that the sale and support of products
by the Company may not subject the Company to such claims in the future. The
Company maintains general liability and excess liability (umbrella form)
insurance, but does not maintain product liability insurance. A successful
product liability claim brought against the Company could have a material
adverse effect on the Company's business, financial condition and results of
operations.
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT
The Company relies on a combination of copyright, patent, trademark and
trade secret laws together with confidentiality procedures and contractual
provisions to protect its proprietary technology. For example, the Company
licenses rather than sells its software and requires licensees to enter into
license agreements, which impose restrictions on licensees' ability to use the
software. In addition, the Company seeks to avoid disclosure of its trade
secrets by various means, including but not limited to, requiring those persons
with access to the Company's proprietary information to execute confidentiality
agreements with the Company. The Company has entered into source code escrow
agreements with a number of its customers requiring release of source code under
certain conditions. Such agreements provide that such parties will have a
limited, non-exclusive right to use such code in the event that the Company
fails to meet its maintenance and certain other obligations. The provision of
source code in escrow may increase the possibility of misappropriation by third
parties. The Company currently has three U.S. patents protecting certain methods
and techniques used in the software incorporated in the Company's products.
There can be no assurances, however, that the Company's patents will not be
invalidated, circumvented or challenged, or that the rights granted thereunder
will provide competitive advantages to the Company or that any of the Company's
future patent applications, if any, will be issued with the scope of the claims
sought by the Company, if at all. Furthermore, there can be no assurance that
others will not develop technologies that are similar or superior to the
Company's technology or design
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around any patent that is owned or may come to be owned by the Company. Despite
the Company's efforts to protect its proprietary rights, unauthorized parties
may attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. Policing unauthorized use
of the Company's proprietary technology and patents is difficult. In addition,
the laws of some foreign countries do not protect the Company's proprietary
rights as fully as do the laws of the United States. There can be no assurance
that the Company's means of protecting its proprietary rights in the United
States or abroad will be adequate or that competitors will not independently
develop and exploit similar technology. The Company has not been notified that
its products infringe the proprietary rights of others. There can be no
assurance, however, that third parties will not claim infringement by the
Company with respect to current or future products. The Company expects that
software product developers will increasingly be subject to infringement claims
as the number of products and competitors in the Company's industry segment
grows and the functionality of products in different industry segments overlaps.
Any such claims, with or without merit, could be time-consuming, result in
costly litigation, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, if at all,
which, in either event, could have a material adverse effect upon the Company's
business, financial condition and results of operations. See "Business --
Proprietary Rights."
INTERNATIONAL OPERATIONS
International sales accounted for 5.9% of the Company's revenue in 1997.
The Company maintains a sales office in London, England. The Company intends to
continue to expand its international operations and enter additional
international markets, which will require significant management attention and
financial resources and could adversely affect the Company's business, financial
condition and results of operations. In order to expand international sales
successfully, the Company must hire additional personnel and/or recruit
additional international distributors. Additional risks inherent in the
Company's international business activities generally include unexpected changes
in currency exchange rates, regulatory requirements, tariffs and other trade
barriers, costs of localizing products for foreign countries, lack of acceptance
of localized products in foreign countries, longer accounts receivable payment
cycles, difficulties in managing international operations, potentially adverse
tax consequences including restrictions on the repatriation of earnings, weaker
intellectual property protection and the burdens of complying with a wide
variety of foreign and U.S. laws. There can be no assurance that such factors
will not have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussions and Analysis
of Financial Condition and Results of Operations" and "Business -- Sales and
Marketing."
FUTURE ACQUISITIONS
The Company may in the future pursue acquisitions of complementary product
lines or businesses. Future acquisitions by the Company may result in
potentially dilutive issuances of equity securities, the incurrence of
additional debt or amortization expenses related to goodwill and other
intangible assets, which could adversely affect the Company's profitability or
earnings per share. In addition, acquisitions involve numerous risks, including
difficulties in the assimilation of the operations and products of the acquired
companies, the diversion of management's attention from other business concerns,
risks of entering markets in which the Company has no or limited direct prior
experience, and the potential loss of key employees of the acquired company.
There are currently no negotiations, commitments or agreements with respect to
any acquisition. In the event that such an acquisition does occur, however, no
assurance can be given as to the effect thereof on the Company's business,
financial condition and results of operations.
CONTROL BY EXISTING STOCKHOLDERS; FACTORS INHIBITING TAKEOVER
Following this Offering, Mr. Thompson will beneficially own or have the
right to control approximately % of the Company's outstanding shares of
Common Stock. Accordingly, Mr. Thompson will continue to control the outcome of
all corporate stockholder actions, including the election of directors and the
approval of transactions involving a change in control of the Company. See
"Principal and Selling Stockholders."
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The Company's Amended and Restated Certificate of Incorporation provides
that shares of the Company's Preferred Stock may be issued in the future without
further stockholder approval and upon such terms and conditions, at a price and
having such rights, privileges and preferences, as the Board of Directors may
determine. The rights of the holders of Common Stock will be subject to, and may
be adversely affected by, the rights of the holders of any Preferred Stock that
may be issued. The issuance of shares of Preferred Stock, while potentially
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no present intent to issue any shares of Preferred
Stock. The Company is also subject to the anti-takeover provisions of Section
203 of the Delaware General Corporation Law, which could have the effect of
delaying or preventing a change of control of the Company. The foregoing
provisions may have the effect of deterring hostile takeovers or delaying or
preventing changes in control or management of the Company, including
transactions in which stockholders might otherwise receive a premium for their
shares over then current market prices. In addition, these provisions may limit
the ability of stockholders to approve transactions that they may deem to be in
their best interest. See "Description of Capital Stock -- Delaware Law and
Certain Provisions of the Company's Amended and Restated Certificate of
Incorporation and Bylaws."
BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS
The completion of this Offering will provide significant benefits to the
current stockholders of the Company, including certain of its directors and
officers. The Company will not receive any of the net proceeds from the sale of
shares by the Selling Stockholders, which will be approximately $
million in the aggregate. The completion of this Offering will also create a
public market for the Common Stock and thereby is likely to substantially
increase the market value of the Common Stock held by current stockholders. Upon
the closing of this Offering, the difference between the aggregate purchase
price paid by all of the Company's current stockholders for their shares and the
aggregate market value of such shares will be approximately $ million.
NO PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Common
Stock and there can be no assurance that an active trading market will develop
or be sustained after this Offering. The initial offering price for Common Stock
to be sold by the Company and the Selling Stockholders will be determined by
agreement among the Company, the Selling Stockholders and the Underwriters and
will not necessarily be indicative of the market price at which the Company's
Common Stock will trade after this Offering. See "Underwriting." Factors such as
announcements of new products or technological innovations by the Company or its
competitors, as well as quarterly variations in the Company's operating results,
or failure by the Company to meet expectations of securities analysts may cause
the market price of the Company's stock to fluctuate significantly. In addition,
the stock market in recent years has experienced extreme price and volume
fluctuations which have particularly affected the market prices of many high
technology stock issues and which have often been unrelated or disproportionate
to the operating performance of such companies. These broad market fluctuations,
as well as general economic conditions, may adversely affect the market price of
the Company's Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of shares of Common Stock in the public market
following this Offering could adversely affect the market price of the Common
Stock. Upon completion of this Offering, the Company will have outstanding
shares of Common Stock. The shares offered hereby
will be freely tradable in the public market. The remaining
shares outstanding are restricted securities which may be traded in accordance
with an exemption from registration. As of the date of this Prospectus, except
for the shares offered hereby, substantially all of the
outstanding shares of Common Stock and substantially all of the shares of Common
Stock underlying options, are subject to lock-up agreements (the "Lock-up
Agreements") with the Representatives of the Underwriters. Stockholders and
optionees executing Lock-up Agreement may not sell, offer, contract or grant any
option to sell, pledge, transfer, establish an open put equivalent position or
otherwise dispose of their securities subject to the
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respective Lock-up Agreements for 180 days after the date of this Prospectus.
NationsBanc Montgomery Securities LLC may, in its sole discretion, release any
or all securities subject to Lock-up Agreements at any time or from time to time
without notice. Upon expiration of the Lock-up Agreements 180 days after the
date of this Prospectus, approximately additional shares of
Common Stock (including shares of Common Stock which may be
acquired upon the exercise of outstanding options) will be available for sale in
the public market, subject to the provisions of Rule 144 or Rule 701 of the
Securities Act of 1933, as amended. The Company intends to register the sale of
approximately shares of Common Stock issuable under its Stock
Option Plans following the 90th day after the date of this Prospectus. The
Company is unable to predict the effect that sales made under Rule 144, Rule 701
or other exemptions from registration may have on the then-prevailing market
price of the Common Stock. Sales pursuant to Rule 144, Rule 701 or other
exemptions from registration may have an adverse effect on the market price for
the Common Stock and could impair the Company's ability to raise additional
capital through subsequent offerings of its equity securities. See "Description
of Capital Stock," "Shares Eligible for Future Sale" and "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION
The assumed initial offering price is substantially higher than the book
value per share of the Common Stock. Investors purchasing shares of Common Stock
in this Offering will therefore incur immediate and substantial dilution of
$ per share in the net tangible book value per share of Common Stock
(after deducting the underwriting discount and estimated offering expenses
payable by the Company). To the extent outstanding options to purchase Common
Stock are exercised, there will be further dilution. See "Dilution" and "Shares
Eligible for Future Sale."
DISCRETIONARY USE OF PROCEEDS
The primary purposes of this Offering are to increase the Company's working
and equity capital, create a public market for the Company's Common Stock,
facilitate future access to public markets, and increase the Company's
visibility and credibility in its marketplace. As of the date of this
Prospectus, the Company has no specific plans to use substantially all of the
proceeds of this Offering. As a consequence, the Company will have the
discretion to allocate a large percentage of such proceeds to uses that the
stockholders may not deem desirable, and there can be no assurance that the
proceeds can or will be invested to yield a significant return. See "Use of
Proceeds."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares
of Common Stock offered by the Company are estimated to be approximately
$ million ($ million if the Underwriters' over-allotment
option is exercised in full), assuming an initial public offering price of
$ per share and after deducting the estimated underwriting discounts and
estimated expenses payable by the Company in connection with the Offering. The
Company will not receive any proceeds from the sale of shares of Common Stock
offered by the Selling Stockholders. See "Principal and Selling Stockholders."
The primary purposes of this Offering are to increase the Company's working
and equity capital, create a public market for the Company's Common Stock,
facilitate access to public markets and increase the Company's visibility and
credibility in its marketplace. The Company expects to use the net proceeds from
the Offering for working capital and other general corporate purposes, including
expansion of the Company's sales and marketing, customer support and product
development activities, international expansion, capital expenditures and
possible acquisitions, however the Company currently has no specific plans for
the use of the proceeds of the Offering. See "Risk Factors -- Discretionary Use
of Proceeds."
From time to time in the ordinary course of business, the Company expects
to evaluate the acquisition of businesses, products and technologies that
complement the Company's business for which portion of the net proceeds may be
used. Currently, however, the Company does not have any understandings,
commitments or agreements with respect to any such acquisitions. Pending
application of the net proceeds for the purposes described above, the Company
intends to invest such funds in short-term, investment-grade, interest bearing
securities.
DIVIDEND POLICY
The Company currently anticipates that it will retain all future earnings
for use in its business and does not anticipate that it will pay any cash
dividends in the foreseeable future. The payment of any future dividends will be
at the discretion of the Company's Board of Directors and will depend upon,
among other things, the Company's results of operations, capital requirements,
general business conditions, contractual restrictions on payment of dividends,
if any, legal and regulatory restrictions on payment of dividends, and other
factors the Company's Board of Directors may deem relevant. In addition, the
Company's existing bank line of credit prohibits the payment of cash dividends
without prior approval. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
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CAPITALIZATION
The following table sets forth, as of June 30, 1998, (i) the actual
capitalization of the Company, and (ii) the capitalization of the Company on a
pro forma basis reflecting the conversion of all outstanding shares of
convertible preferred stock into 8,719,440 shares of Common Stock upon the
closing of the Offering as adjusted to give effect to the sale of
shares of Common Stock offered by the Company hereby (at an
assumed initial public offering price of $ per share) and the application of
the estimated net proceeds therefrom. See "Use of Proceeds." This table should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements and notes thereto appearing elsewhere in this Prospectus.
JUNE 30, 1998
----------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS EXCEPT
SHARE DATA)
Capital lease obligations, net of current portion........... $ 325 $
Stockholders' equity (deficit):
Preferred stock, Series A: $.01 par value, 4,500,000
shares authorized, 3,669,986 shares issued and
outstanding, actual; 4,500,000 shares authorized, no
shares issued or outstanding, pro forma, as adjusted... 37
Preferred stock, Series B: $.01 par value, 2,400,000
shares authorized, 2,142,973 shares issued and
outstanding, actual; 2,400,000 shares authorized, no
shares issued or outstanding, pro forma, as adjusted... 21
Common stock: $.01 par value, shares authorized,
87,417 shares issued and outstanding, actual;
shares authorized,
issued and outstanding, pro forma, as
adjusted (1).......................................... 1
Additional capital........................................ 21,559
Accumulated deficit....................................... (13,795)
Unearned compensatory stock options....................... (652)
Cumulative foreign currency translations.................. (3)
-------- --------
Total stockholders' equity........................ 7,168
-------- --------
Total capitalization.............................. $ 7,493 $
======== ========
- ---------------
(1) Includes shares of Common Stock issuable upon exercise of stock
options to be exercised immediately prior to the closing of the Offering.
Excludes (i) 1,092,663 shares of Common Stock subject to outstanding options
as of June 30, 1998, under the 1990 Stock Option Incentive Plan, at a
weighted average exercise price of $1.70 per share, of which options for
540,676 shares were exercisable, and 256,470 shares available for issuance
pursuant to future options; (ii) 529,352 shares of Common Stock subject to
outstanding options as of June 30, 1998, under the 1990 Non-qualified Stock
Option Plan at a weighted average exercise price of $1.02, all of which were
exercisable, and 3,898 shares available for issuance pursuant to future
options; (iii) 1,500,000 shares of Common Stock reserved for issuance under
the 1998 Omnibus Stock Plan, none of which are outstanding; (iv)
shares of Common Stock reserved for issuance under the 1998 Directors'
Stock Option Plan, none of which are outstanding; and (v) 508,557 shares of
Common Stock reserved for issuance for outstanding options not granted under
the Stock Plans, at an average exercise price of $1.68 per share, of which
options for 474,807 shares were exercisable. See "Risk Factors -- Shares
Eligible for Future Sale" and "Management -- Employee Benefit Plans."
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DILUTION
The pro forma net tangible book value of the Company's Common Stock as of
June 30, 1998, giving effect to the conversion of all outstanding Preferred
Stock into Common Stock upon the closing of this Offering, was approximately
$6.5 million or $0.74 per share. "Pro forma net tangible book value" per share
represents the amount of total tangible assets (total assets less intangible
assets) less total liabilities, divided by the 8,806,857 shares of Common Stock
outstanding. Dilution per share represents the difference between the amount per
share paid by purchasers of shares of Common Stock in this Offering at an
assumed initial public offering price of $ per share and the application of
the estimated net proceeds therefrom. After giving effect to the sale of
shares of Common Stock in this Offering at the initial public
offering price of $ per share and the application of the estimated net
proceeds therefrom, the pro forma net tangible book value of the Company as of
June 30, 1998 would have been $ , or $ per share. This represents
an immediate increase in net tangible book value of $ per share to existing
stockholders and an immediate dilution of $ per share to purchasers of
Common Stock in the Offering. The following table illustrates the per share
dilution in net tangible book value to new purchasers:
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share as of June 30,
1998................................................... $0.74
Pro forma increase per share attributable to new
investors..............................................
-----
Pro forma net tangible book value after the Offering........
-------
Pro forma dilution per share to new investors............... $
=======
The following table summarizes on a pro forma basis as of June 30, 1998,
the total number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by
existing stockholders and the new investors (at an assumed initial public
offering price of $ per share and without giving effect to the underwriting
discount and estimated offering expenses):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
Existing stockholders(1)(2)............... 8,806,857 % $20,965,728 % $2.38
New stockholders..........................
--------- ----- ----------- -----
Totals............................... 100.0% $ 100.0%
========= ===== =========== =====
- ---------------
(1) Sales by the Selling Stockholders in this Offering will reduce the number of
shares of Common Stock held by existing stockholders to
shares, or % of the total number of shares of Common Stock to be
outstanding after this Offering ( % if the Underwriters' over-allotment
option is exercised in full), and will increase the number of shares of
Common Stock held by new investors to , or % of the
total number of shares to be outstanding ( shares or % if
the Underwriters' over-allotment option is exercised in full). See
"Principal and Selling Stockholders."
(2) Includes shares of Common Stock issuable upon exercise of
stock options to be exercised immediately prior to the closing of this
Offering at an exercise price of approximately $ per share.
The foregoing tables exclude 2,130,572 shares reserved for issuance upon
the exercise of stock options outstanding at June 30, 1998 under the Company's
Stock Plans at a weighted average exercise price of $1.53 per share. To the
extent such options are exercised, there will be further dilution to new
investors. See "Management -- Employee Benefit Plans" and Note 8 of Notes to
Consolidated Financial Statements.
17
19
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of the Company set forth below
should be read in conjunction with the Consolidated Financial Statements of the
Company, including the Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations." The statement of operations
data for the years ended December 31, 1995, 1996 and 1997 and the balance sheet
data as of December 31, 1996 and 1997, have been derived from, and are qualified
by reference in the Company's consolidated financial statements audited by Ernst
& Young LLP, independent auditors. The statement of operations data for the
years ended December 31, 1993 and 1994 and the balance sheet data as of December
31, 1993, 1994 and 1995 are derived from audited financial statements not
included herein. The interim consolidated financial data set forth below for the
six-month periods ended June 30, 1997 and 1998 has been derived from the
unaudited consolidated financial statements included elsewhere in this
Prospectus. The unaudited consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary for a fair presentation of the financial position and
results of operations for the period. Operating results for the six months ended
June 30, 1998 are not necessarily indicative of the results that may be expected
for the entire year ending December 31, 1998.
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------------- -----------------------
1993 1994 1995 1996 1997(1) 1997 1998
------- ------- ------- ------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues....................................... $19,720 $13,856 $22,387 $17,789 $ 23,699 $ 11,298 $ 18,994
Cost of revenues............................... 8,843 7,695 10,932 14,123 11,677 5,710 8,482
------- ------- ------- ------- ---------- ---------- ----------
Gross profit................................... 10,877 6,161 11,455 3,666 12,022 5,588 10,512
------- ------- ------- ------- ---------- ---------- ----------
Operating expenses:
Sales and marketing.......................... 6,062 6,246 5,763 5,044 3,891 1,870 2,488
Research and development..................... 2,546 2,064 1,068 3,180 3,646 1,790 1,943
General and administrative................... 1,194 1,520 1,805 1,746 2,148 858 1,529
------- ------- ------- ------- ---------- ---------- ----------
Total operating expenses................... 9,802 9,830 8,636 9,970 9,685 4,518 5,960
------- ------- ------- ------- ---------- ---------- ----------
Income (loss) from operations.................. 1,075 (3,669) 2,819 (6,304) 2,337 1,070 4,552
Interest and other, net........................ (142) (242) (104) (357) (513) (327) 281
------- ------- ------- ------- ---------- ---------- ----------
Income (loss) before provision for income
taxes........................................ 933 (3,911) 2,715 (6,661) 1,824 743 4,833
Provision for income taxes..................... 47 11 18 47 315 87 --
------- ------- ------- ------- ---------- ---------- ----------
Net income (loss).............................. $ 886 $(3,922) $ 2,697 $(6,708) $ 1,509 $ 656 $ 4,833
======= ======= ======= ======= ========== ========== ==========
Basic net income per share(2).................. $ 187.00 $ 83.38 $ 56.21
========== ========== ==========
Basic weighted average shares outstanding(2)... 8,070 7,860 85,974
========== ========== ==========
Diluted net income per share(2)................ $ 0.17 $ 0.07 $ 0.49
========== ========== ==========
Diluted weighted average shares
outstanding(2)............................... 8,777,740 8,808,297 9,836,168
========== ========== ==========
DECEMBER 31,
-------------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- ---------- ----------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 72 $ 18 $ 21 $ 31 $ 7,163 $ 7,807
Working capital (deficit)...................... 531 (1,226) (1,190) (4,411) (1,653) 3,535
Total assets................................... 9,265 12,439 16,453 11,668 22,131 21,993
Notes payable -- related parties............... -- -- 956 2,100 -- --
Capital lease obligations, net of current
portion...................................... 495 427 230 294 480 325
Stockholders' equity........................... 3,249 4,739 7,436 733 2,291 7,168
- ---------------
(1) See Note 2 of Notes to Consolidated Financial Statements, which addresses
the comparability of financial results for the periods presented.
(2) For a description of the basic and diluted EPS calculations and the basic
and diluted weighted average shares outstanding, see Notes 2 and 12 of Notes
to Consolidated Financial Statements.
18
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with FileTek's
audited Consolidated Financial Statements and the notes thereto. Certain
statements in the discussion are forward-looking statements. In evaluating such
statements, prospective investors should specifically consider the various
factors identified in this Prospectus that could cause actual results to differ
materially from those expressed in such forward-looking statements including the
matters set forth in "Risk Factors."
BACKGROUND
FileTek develops, markets and supports integrated data storage and access
management solutions that allow organizations to meet their business
intelligence needs through efficient collection, storage and management of, and
timely, shared access to, massive amounts of atomic data. The Company's recently
released StorHouse products are capable of supporting volumes of relational and
non-relational data that are substantially larger than those which can be
supported by conventional database technologies and at a significantly lower
cost per unit of managed storage. StorHouse provides enterprise-wide access to
data for an organization's business intelligence applications, while
simultaneously managing storage resources efficiently. The Company sells its
products primarily through its direct sales force based in the U.S.
The Company introduced its first product, Storage Machine, in 1987 and
introduced a second generation Storage Machine in 1992, which, as further
enhanced, is now known as StorHouse/SM. Until late 1996, the Company focused
exclusively on the computer output to laser disk ("COLD") market. The Company
experienced rapid growth from 1991 through 1993 as FileTek became a market
leader in the high-end, mainframe-attached, COLD market. Increased price
competition from other storage solutions resulted in uneven revenues from 1994
through 1996. The Company continues to sell into the COLD market, but does not
expect significant revenue growth therefrom.
In 1994, FileTek began developing its relational manager ("RM") software,
StorHouse/RM, which is designed for customers with the need to access large
volumes of relational data, as its primary future growth strategy. In 1996, the
Company further refined its strategy to focus on the need for the storage and
management over time of large volumes of the most granular form of data
collected by an organization in its business transactions (the "ADS market").
The Company made its first sale in the ADS market with its StorHouse/SM and
StorHouse/RM products in 1997. As of July 31, 1998, the Company had sold to four
customers a total of nine StorHouse systems, five of which were for ADS uses and
two of which included StorHouse/RM. See "Risk Factors -- Product Concentration;
Market Acceptance; New Product." The Company is growing its sales force to
increase sales of StorHouse and to expand its penetration of the ADS market.
The Company's revenues are derived primarily from software licenses,
hardware resales (including storage media) and maintenance services. Most of
these revenues are derived from transactions that involve systems comprised of
both hardware and software and are the result of a sales cycle that is typically
no less than six months and can be 18 months or longer. Software license
revenues are derived from one-time licenses of the right to use one or more of
the Company's software products in perpetuity at prices generally based on a
combination of the capacity of storage being managed, the type and size of
server platform, enabled connectivity and, in some cases, the number of client
seats. Hardware resales consist primarily of servers and storage devices
manufactured by third parties including Sun. The Company's business, financial
condition and results of operations could be adversely affected if the Company
is required to port the StorHouse products to additional hardware platforms
because prospective customers do not wish to purchase Sun servers. See "Risk
Factors -- Dependence on Suppliers." In addition, the Company may elect to port
the StorHouse products to additional hardware platforms for other reasons which
may require significant development time and cost. Maintenance is provided for
both hardware and software. The Company believes that software license revenues
will continue to increase as a percentage of revenues, in part as a result of
marketing partnerships with hardware vendors similar to the agreement signed in
June 1998 with STK.
Effective January 1, 1997, the Company elected early adoption of SOP 97-2,
which results in deferrals of sales and license revenues from certain StorHouse
product transactions. See "-- Recent Accounting
19
21
Pronouncements." For arrangements where the Company has established VSOE for
hardware, software licenses and PCS revenues, the Company recognizes hardware
and software revenues, assuming collectibility is probable, at the later of
product shipment to the customer or when significant obligations, if any, have
been fulfilled. Revenues on follow-on sales to existing customers are generally
recognized, assuming collectibility is probable, upon shipment. For arrangements
for which VSOE has not been established and the only undelivered element is PCS,
the Company recognizes revenues for the entire arrangement ratably over the PCS
period, generally three to 12 months. The Company believes that VSOE will not be
established until at least several additional sales and deliveries of
StorHouse/RM product have occurred. As such, it is likely, at least in the near
term, that the majority of StorHouse/RM product sales and license revenues, as
well as certain other sales and license revenues, will be deferred and amortized
over the respective PCS periods. Revenues for maintenance of hardware and
software and other service revenues are recognized ratably over the periods
during which the services are performed.
While the Company has experienced significant percentage growth in revenues
in recent periods and currently expects substantial, although potentially lower,
percentage growth in revenues throughout 1998, prior percentage revenue growth
rates should not be considered as necessarily indicative of future growth rates
or operating results, and there are a number of factors that could materially
affect expected revenue and operating results for fiscal 1998 and subsequent
periods. See "Risk Factors -- Variability in Quarterly Results," "-- Limited
Profitability; Accumulated Deficit; Uncertain Future Operating Results,"
"-- Long and Unpredictable Sales Cycle," "-- Product Concentration; Market
Acceptance; New Product," "--Customer Concentration," "-- Competition,"
"-- Rapid Technological Change and Dependence on New Products," "-- Management
of Growth," "-- Dependence on Key Personnel," "-- Year 2000 Compliance" and
"-- Dependence on Suppliers."
Cost of software license revenues includes direct labor, other direct
costs, amortization of capitalized software development costs and overhead.
Costs of hardware sales includes hardware and storage media products purchased
for resale, direct labor, other direct costs and overhead. Cost of maintenance
revenue includes personnel expenses, parts, amortization of spare parts, travel
and subcontracting services.
Sales and marketing expense consists primarily of salaries, commissions,
bonuses and benefits to sales, systems engineering and marketing personnel,
travel, tradeshow participation, public relations, sales collateral and other
promotional expenses. The Company expects that sales and marketing expense will
increase in absolute dollars and, for the near term, as a percentage of revenues
as the Company increases the size of its sales force and enhances its marketing
capabilities.
Research and development expense consists primarily of salaries, bonuses
and benefits, depreciation of equipment and contract programmer fees. The
Company expects research and development expense to increase as the Company
continues to develop and enhance its products.
Certain software development costs have been capitalized in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed ("SFAS No.
86"). In 1995, 1996 and 1997, approximately $2.9 million, $504,000 and $6,000,
respectively, were capitalized. There was no additional capitalization in the
six-month period ended June 30, 1998, and the balance of capitalized software
development costs at June 30, 1998 was $630,000.
General and administrative expense consists primarily of salaries, bonuses,
benefits and travel for senior management, financial, legal, human resources,
administrative, and management information systems personnel, professional
services and other administrative costs. The Company expects that general and
administrative expense will increase to support expanding operations and
operating as a public company.
The Company has recorded deferred compensation expense of $692,000 for the
difference between the exercise price and the deemed fair market value of
certain shares of the Company's Common Stock underlying options granted during
the six months ended June 30, 1998. Of such deferred expense, approximately
$134,000 will be recognized as compensation expense during the year ended
December 31, 1998. The remainder will be amortized over the ensuing three-year
period. See Note 8 of Notes to Consolidated Financial Statements.
The Company incurred significant operating losses from inception through
1996 that significantly reduced the Company's provision for income taxes through
1997. No operating loss carryforwards are available to the
20
22
Company subsequent to 1997. The Company expects to provide for income taxes at
rates that approximate statutory rates for future reporting periods; provided,
however, to the extent an unrecorded asset exists through the valuation
allowance for net deferred tax assets, the tax provision may be affected by
management's consideration for the need of an increase or decrease in the
valuation allowance with respect to the net deferred tax assets.
RESULTS OF OPERATIONS
The following table sets forth details of the components of revenues for
the periods indicated:
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------ -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS)
Revenues:
Software licenses................. $ 5,055 $ 2,835 $ 5,437 $ 2,679 $ 6,428
Hardware.......................... 10,527 5,911 7,486 3,721 5,993
Maintenance and other services.... 6,805 9,043 10,776 4,898 6,573
------- ------- ------- ------- -------
$22,387 $17,789 $23,699 $11,298 $18,994
======= ======= ======= ======= =======
The following table sets forth certain statement of operations data as a
percentage of revenues for the periods indicated:
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------ -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
Revenues:
Software licenses................. 22.6% 15.9% 22.9% 23.7% 33.8%
Hardware.......................... 47.0 33.2 31.6 32.9 31.6
Maintenance and other services.... 30.4 50.9 45.5 43.4 34.6
------- ------- ------- ------- -------
100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------- -------
Cost of revenues....................... 48.8 79.4 49.3 50.5 44.7
------- ------- ------- ------- -------
Gross profit........................... 51.2 20.6 50.7 49.5 55.3
------- ------- ------- ------- -------
Operating expenses:
Sales and marketing............... 25.7 28.3 16.3 16.6 13.1
Research and development.......... 4.8 17.9 15.4 15.8 10.2
General and administrative........ 8.1 9.8 9.1 7.6 8.0
------- ------- ------- ------- -------
38.6 56.0 40.8 40.0 31.3
------- ------- ------- ------- -------
Operating income (loss)................ 12.6 (35.4) 9.9 9.5 24.0
Interest and other, net................ (0.5) (2.0) (2.2) (2.9) 1.5
------- ------- ------- ------- -------
Income (loss) before provision for
income taxes......................... 12.1 (37.4) 7.7 6.6 25.5
Provision for income taxes............. 0.1 0.3 1.3 0.8 --
------- ------- ------- ------- -------
Net income (loss)...................... 12.0% (37.7)% 6.4% 5.8% 25.5%
======= ======= ======= ======= =======
21
23
The following table sets forth the cost of revenues as a percentage of the
related revenues for the periods indicated:
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------ -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
Cost of software licenses(1)........... 17.7% 29.3% 11.5% 10.7% 5.0%
Cost of hardware....................... 51.4 66.9 73.4 79.4 75.5
Cost of maintenance and other
services............................. 68.0 64.6 51.6 50.4 55.3
- ---------------
(1) The percentage for 1996 does not include the write-off of capitalized
software development costs. See Note 2 of Notes to Consolidated Financial
Statements.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
REVENUES
Total revenues. Total revenues increased 68.1% to $19.0 million in the
first six months of 1998 from $11.3 million in the first six months of 1997. The
increase resulted primarily from increases in software license revenues and, to
a lesser extent, from increases in maintenance and other services revenues and
hardware revenues.
Software license revenues. Software license revenues increased 140.0% to
$6.4 million in the first six months of 1998 from $2.7 million in the first six
months of 1997. This increase resulted from licensing of software in the ADS
market where revenues were first recognized in the second quarter of 1997, while
such revenues from the COLD market declined for the first six months of 1998
relative to the same period in the prior year. The decrease in COLD revenues
reflected a decline in the licensing of software upgrades and add-ons to
existing customers.
Hardware revenues. Hardware revenues increased 61.1% to $6.0 million in the
first six months of 1998 from $3.7 million in the first six months of 1997. This
increase was attributable to increased hardware resales in the ADS market in the
first six months of 1998, offset in part by a decline in sales from the COLD
market during the same period. The decrease in COLD revenues reflected a decline
in the sales of upgrades and add-ons to existing customers.
Maintenance and other services revenues. Maintenance and other services
revenues increased 34.2% to $6.6 million in the first six months of 1998 from
$4.9 million in the first six months of 1997. The increase was primarily
attributable to an increase in the installed customer base.
COST OF REVENUES
Total cost of revenues. The total cost of revenues increased 48.5% to $8.5
million in the first six months of 1998 from $5.7 million in the first six
months of 1997. The total cost of revenues as a percentage of total revenues
decreased to 44.7% in the first six months of 1998 from 50.5% in the first six
months of 1997. The decrease was attributable to increased levels of software
licenses, which carry higher margins than sales of hardware and maintenance and
other services. Software license revenues as a percentage of total revenues
increased to 33.8% of revenues in the first six months of 1998 from 23.7% of
revenues in the first six months of 1997.
Cost of software license revenues. The cost of software license revenues
increased 12.9% to $324,000 in the first six months of 1998 from $287,000 in the
first six months of 1997. The cost of software licenses as a percentage of
software license revenues decreased to 5.0% in the first six months of 1998 from
10.7% in the first six months of 1997. The decrease was attributable to the
amortization of capitalized software development costs over a larger base of
software license revenues.
Cost of hardware revenues. The cost of hardware revenues increased 53.0% to
$4.5 million in the first six months of 1998 from $3.0 million in the first six
months of 1997. The increase is attributable to the increase in revenues from
hardware resales in the first six months of 1998 from the first six months of
1997. The cost of hardware revenues as a percentage of hardware revenues
decreased to 75.4% in the first six months of 1998 from 79.4% in the first six
months of 1997. The decrease was attributable to changes in the mix of hardware
22
24
products sold and to benefits achieved from the allocation of fixed hardware
integration costs over a larger hardware revenue base.
Cost of maintenance and other services revenues. The cost of maintenance
and other services revenues increased 47.3% to $3.6 million in the first six
months of 1998 from $2.5 million in the first six months of 1997. The cost of
maintenance and other services revenues as a percentage of maintenance and other
services revenues increased to 55.3% in the first six months of 1998 from 50.4%
in the first six months of 1997. The increase was primarily attributable to
unusually small expenses in 1997 because of the reversal of accruals as a result
of the termination of a maintenance subcontract.
SALES AND MARKETING
Sales and marketing expense increased 33.0% to $2.5 million in the first
six months of 1998 from $1.9 million in the first six months of 1997. This
increase is attributable to increased headcount, increased commissions and
increased travel expenses resulting from increased sales activity, as well as
expenses associated with the relocation of the Company's Vice President of
Marketing. Sales and marketing expenses as a percentage of total revenues
declined to 13.1% in the first six months of 1998 from 16.6% in the first six
months of 1997. This decrease resulted from an increase in the Company's
revenues as well as greater revenue productivity associated with the sales and
licenses of the Company's products in the ADS market, offset, in part, by an
increase associated with new hires.
RESEARCH AND DEVELOPMENT
Research and development expense increased 8.5% to $1.9 million in the
first six months of 1998 from $1.8 million in the first six months of 1997. The
increase was primarily attributable to hiring associated with the ongoing
development of the StorHouse products. Research and development expense as a
percentage of revenues declined to 10.2% in the first six months of 1998 from
15.8% in the first six months of 1997. This decrease resulted from growth in the
Company's revenues.
GENERAL AND ADMINISTRATIVE
General and administrative expense increased 78.2% to $1.5 million in the
first six months of 1998 from $858,000 in the first six months of 1997. General
and administrative expense as a percentage of revenues increased to 8.0% in the
first six months of 1998 from 7.6% in the first six months of 1997. The increase
was primarily attributable to an increase in personnel in anticipation of
planned company growth and increases in amounts accrued for incentive
compensation plans for members of the Company's executive management.
OTHER INCOME AND EXPENSES
Net other income was $281,000 in the first six months of 1998 while net
other expenses were $327,000 in the first six months of 1997. This change was
attributable to elimination of interest on notes payable repaid during 1997. In
addition, short-term investment of excess cash balances earned $268,000 in
interest income in the first six months of 1998 while interest income earned in
the first six months of 1997 was insignificant.
INCOME TAXES
There was no provision for income taxes in the first six months of 1998 as
compared to $87,000 in the first six months of 1997. The provision for income
taxes for the six months ended June 30, 1998 was offset by a reduction in the
valuation allowance with respect to the net deferred tax assets associated with
taxes paid or to be paid in 1998, which could be recoverable in a two year
period. The provision for income taxes as a percentage of net income before tax
was 11.7% in the first six months of 1997, due to the utilization of net
operating loss carryforwards.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES
Total revenues. Total revenues increased 33.2% to $23.7 million in 1997
from $17.8 million in 1996. The increase resulted from increases in software
license revenues and, to a lesser extent, from increases in maintenance and
other services revenues and hardware revenues.
23
25
Software license revenues. Software license revenues increased 91.7% to
$5.4 million in 1997 from $2.8 million in 1996. This increase was primarily
attributable to the increase in licensing of software in the ADS market and, to
a lesser extent, in the COLD market.
Hardware revenues. Hardware revenues increased 26.7% to $7.5 million in
1997 from $5.9 million in 1996. The increase was attributable to hardware
resales in the ADS market in 1997, which were offset by a decline in hardware
resales in the COLD market in 1997. The decrease in COLD revenues reflected a
decline in the sale of hardware upgrades and add-ons to existing customers.
Maintenance and other services revenues. Maintenance and other services
revenues increased 19.2% to $10.8 million in 1997 from $9.0 million in 1996. The
increase was attributable to an increase in the installed customer base.
COST OF REVENUES
Total cost of revenues. The total cost of revenues declined 17.3% to $11.7
million in 1997 from $14.1 million in 1996. The total cost of revenues as a
percentage of total revenues decreased to 49.3% in 1997 from 79.4% in 1996. The
decrease was attributable to increased revenues from higher margin software
licenses, which increased to 22.9% of revenues in 1997 from 15.9% of revenues in
1996 and to a decrease in cost of software license revenues due to the write-off
of capitalized software development costs in 1996.
Cost of software license revenues. The cost of software license revenues
decreased 24.8% to $624,000 in 1997 from $830,000 in 1996. The cost of software
license revenues as a percentage of software license revenues decreased to 11.5%
in 1997 from 29.3% in 1996. This decrease was primarily attributable to a
decrease in the amortization of capitalized software development costs that
resulted from the write-off of such capitalized costs in 1996. See Note 2 of
Notes to Consolidated Financial Statements.
Cost of hardware revenues. The cost of hardware revenues increased 39.0% to
$5.5 million in 1997 from $4.0 million in 1996. The cost of hardware revenues as
a percentage of hardware revenues increased to 73.4% in 1997 from 66.9% in 1996.
This increase was attributable to changes in the mix of hardware products sold.
Cost of maintenance and other services revenues. The cost of maintenance
and other services revenues decreased 5.0% to $5.6 million in 1997 from $5.8
million in 1996. The cost of maintenance and other services revenues as a
percentage of maintenance and other services revenues decreased to 51.6% in 1997
from 64.6% in 1996. This decrease was primarily attributable to improvements in
economies of scale derived from the growing customer base as well as cost
reductions achieved by changes in the Company's maintenance subcontractor
arrangements.
Write-off of capitalized software development costs. The Company incurred a
write-off of capitalized software development costs of $3.5 million in 1996 as a
result of a reassessment of the recoverability of these costs.
SALES AND MARKETING
Sales and marketing expense decreased 22.9% to $3.9 million in 1997 from
$5.0 million in 1996. Sales and marketing expense as a percentage of revenues
declined to 16.4% in 1997 from 28.4% in 1996. These decreases were a direct
result of restructuring activities implemented in October 1996. Combined
personnel in sales and marketing were reduced from 30 to 20 persons during the
last quarter of 1996.
RESEARCH AND DEVELOPMENT
Research and development expense increased 14.6% to $3.6 million in 1997
from $3.2 million in 1996. Research and development expense as a percentage of
revenues declined to 15.4% in 1997 from 17.9% in 1996. This decrease resulted
from growth in the Company's revenues.
GENERAL AND ADMINISTRATIVE
General and administrative expense increased 23.0% to $2.1 million in 1997
from $1.7 million in 1996. This increase was primarily attributable to the
payment of incentive compensation to members of the Company's executive
management. General and administrative expense as a percentage of revenues
declined
24
26
to 9.1% in 1997 from 9.8% in 1996. The decrease as a percentage of revenue was
attributable to the increase in revenues.
In October 1996, the Company took several measures to reduce the level of
operating expenses, refocus operations and achieve profitability in operations.
The restructuring took the form of a reduction in force along with a hiring
freeze and restrictions on discretionary operating and capital expenditures, as
well as voluntary temporary reductions in salary for certain members of the
executive management team.
OTHER INCOME AND EXPENSES
Other expenses increased 44.0% to $513,000 in 1997 from $357,000 in 1996.
This increase was attributable to an increase in borrowings during the first
half of 1997.
INCOME TAXES
The provision for income taxes increased to $315,000 in 1997 from $47,000
in 1996. The provision for income taxes in 1997 represented amounts accrued for
Federal, state and local income taxes, net of utilization of net operating loss
carryforwards generated in prior periods. The provision for income taxes in 1996
primarily represented amounts accrued for the Federal alternative minimum tax.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES
Total revenues. Total revenues decreased 20.5% to $17.8 million in 1996
from $22.4 million in 1995. The decrease resulted primarily from a decrease in
hardware resales and, to a lesser extent, from a decrease in software license
revenues, offset in part by an increase in maintenance and other services
revenues.
Software license revenues. Software license revenues decreased 43.9% to
$2.8 million in 1996 from $5.1 million in 1995. During 1996, the Company faced
increased competition from alternative storage solutions, which resulted in
lower sales to the COLD market.
Hardware revenues. Hardware revenues decreased 43.9% to $5.9 million in
1996 from $10.5 million in 1995. This decrease was attributable to the same
competitive factor noted for software license revenues.
Maintenance and other services revenues. Maintenance and other services
revenues increased 32.9% to $9.0 million in 1996 from $6.8 million in 1995. The
increase was primarily attributable to the expanded customer base.
COST OF REVENUES
Total cost of revenues. The total cost of revenues increased 29.2% to $14.1
million in 1996 from $10.9 million in 1995. The total cost of revenues as a
percentage of revenues increased to 79.4% in 1996 from 48.8% in 1995, primarily
as a result of the write-off of capitalized software development costs to cost
of sales in late 1996, as well as discounting on hardware sales.
Cost of software license revenues. The cost of software license revenues
decreased 7.4% to $830,000 in 1996 from $896,000 in 1995. The cost of software
licenses as a percentage of software license revenues increased to 29.3% in 1996
from 17.7% in 1995. This increase was attributable to the write-off of
capitalized software development costs to cost of sales in late 1996 as well as
the decline in software licenses in 1996 from 1995.
Cost of hardware revenues. The cost of hardware revenues decreased 26.9% to
$4.0 million in 1996 from $5.4 million in 1995. The cost of hardware revenues as
a percentage of hardware revenues increased to 66.9% in 1996 from 51.4% in 1995.
The increase was primarily attributable to higher discounting levels required to
remain competitive in light of overall decreasing prices in the storage
industry.
Cost of maintenance and other services revenues. The cost of maintenance
and other services revenues increased 26.4% to $5.8 million in 1996 from $4.6
million in 1995. The cost of maintenance and other services revenues as a
percentage of maintenance and other services revenues decreased to 64.6% in 1996
from 68.0% in 1995. This decrease was attributable to increasing economies of
scale as a result of providing maintenance services to a growing customer base.
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Write-off of capitalized software development costs. The Company incurred a
write-off of capitalized software development costs of $3.5 million in 1996 as a
result of a reassessment of the recoverability of these costs.
SALES AND MARKETING
Sales and marketing expense decreased 12.5% to $5.0 million in 1996 from
$5.8 million in 1995. Sales and marketing expense as a percentage of revenues
increased to 28.4% in 1996 from 25.7% in 1995. This decrease in expense
paralleled the decrease in revenues which led to lower commission, travel and
similar expenses. The increase was attributable to lower revenues in 1996 as
compared to 1995.
RESEARCH AND DEVELOPMENT
Research and development expense increased 197.7% to $3.2 million in 1996
from $1.1 million in 1995. Research and development expense as a percentage of
revenues increased to 17.9% in 1996 from 4.8% in 1995. This increase was
primarily attributable to development of the StorHouse products. The costs
incurred for the development of the StorHouse products did not meet the
capitalization criteria of SFAS No. 86. Accordingly, all such costs were
expensed as incurred.
GENERAL AND ADMINISTRATIVE
General and administrative expense decreased 3.3% to $1.7 million in 1996
from $1.8 million in 1995. General and administrative expense as a percentage of
revenues increased to 9.8% in 1996 from 8.1% in 1995. This increase was
attributable to lower revenues in 1996.
OTHER INCOME AND EXPENSES
Other expenses increased to $357,000 in 1996 from $104,000 in 1995. The
increase was primarily attributable to a decrease in capitalized interest on
software and development costs to $44,000 in 1996 from $256,000 in 1995.
INCOME TAXES
The provision for income taxes was $47,000 and $18,000 in 1996 and 1995,
respectively.
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QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited quarterly statement of
operations data for each of the eight quarters ended June 30, 1998. The
information for each of these quarters is derived from unaudited consolidated
financial statements and, in the opinion of management, includes all adjustments
consisting of only normal and recurring adjustments necessary for a fair
presentation of the information. The results of operations for any quarter and
any quarter-to-quarter trends are not necessarily indicative of the results to
be expected for any future period.
1996 1997 1998
------------------ -------------------------------------- -----------------
SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
-------- ------- ------- ------- -------- ------- ------- -------
(IN THOUSANDS)
Revenues:
Software licenses........................ $ 483 $ 636 $ 1,338 $1,341 $1,269 $1,489 $2,800 $3,628
Hardware................................. 1,084 1,182 2,364 1,357 1,276 2,489 2,725 3,268
Maintenance and other services........... 2,295 2,312 2,394 2,504 2,803 3,075 3,028 3,545
------- ------- ------- ------ ------ ------ ------ ------
3,862 4,130 6,096 5,202 5,348 7,053 8,553 10,441
------- ------- ------- ------ ------ ------ ------ ------
Cost of revenues:
Software licenses........................ 272 125 125 162 176 161 162 162
Hardware................................. 662 958 2,009 945 861 1,682 2,006 2,515
Maintenance and other services........... 1,549 1,435 1,130 1,339 1,411 1,676 1,770 1,868
Write-off of capitalized software
development............................ 631 2,861 -- -- -- -- -- --
------- ------- ------- ------ ------ ------ ------ ------
3,114 5,379 3,264 2,446 2,448 3,519 3,938 4,545
------- ------- ------- ------ ------ ------ ------ ------
Gross profit............................... 748 (1,249) 2,832 2,756 2,900 3,534 4,615 5,896
------- ------- ------- ------ ------ ------ ------ ------
Operating expenses:
Sales and marketing...................... 1,124 998 953 917 952 1,069 1,134 1,354
Research and development................. 746 863 917 873 866 990 929 1,014
General and administrative............... 536 301 435 423 455 835 691 838
------- ------- ------- ------ ------ ------ ------ ------
2,406 2,162 2,305 2,213 2,273 2,894 2,754 3,206
------- ------- ------- ------ ------ ------ ------ ------
Operating income (loss).................... (1,658) (3,411) 527 543 627 640 1,861 2,690
Interest and other, net.................... (146) (132) (142) (185) (127) (59) 158 124
------- ------- ------- ------ ------ ------ ------ ------
Income (loss) before provision for income
taxes.................................... (1,804) (3,543) 385 358 500 581 2,019 2,814
Provision for income taxes................. 1 29 51 36 102 126 -- --
------- ------- ------- ------ ------ ------ ------ ------
Net income (loss).......................... $(1,805) $(3,572) $ 334 $ 322 $ 398 $ 455 $2,019 $2,814
======= ======= ======= ====== ====== ====== ====== ======
1996 1997 1998
------------------ -------------------------------------- -----------------
SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
-------- ------- ------- ------- -------- ------- ------- -------
Revenues:
Software licenses........................ 12.5% 15.4% 21.9% 25.8% 23.7% 21.1% 32.7% 34.7%
Hardware................................. 28.1 28.6 38.8 26.1 23.9 35.3 31.9 31.3
Maintenance and other services........... 59.4 56.0 39.3 48.1 52.4 43.6 35.4 34.0
------- ------- ------- ------ ------ ------ ------ ------
100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------ ------ ------ ------ ------
Cost of revenues........................... 80.6 130.2 53.6 47.0 45.8 49.9 46.0 43.5
------- ------- ------- ------ ------ ------ ------ ------
Gross profit............................... 19.4 (30.2) 46.4 53.0 54.2 50.1 54.0 56.5
------- ------- ------- ------ ------ ------ ------ ------
Operating expenses:
Sales and marketing...................... 29.1 24.2 15.6 17.6 17.8 15.2 13.3 13.0
Research and development................. 19.3 20.9 15.1 16.8 16.2 14.0 10.9 9.7
General and administrative............... 13.9 7.3 7.1 8.1 8.5 11.8 8.0 8.0
------- ------- ------- ------ ------ ------ ------ ------
62.3 52.4 37.8 42.5 42.5 41.0 32.2 30.7
------- ------- ------- ------ ------ ------ ------ ------
Operating income (loss).................... (42.9) (82.6) 8.6 10.5 11.7 9.1 21.8 25.8
Interest and other, net.................... (3.8) (3.2) (2.3) (3.6) (2.4) (0.8) 1.8 1.2
------- ------- ------- ------ ------ ------ ------ ------
Income (loss) before provision for income
taxes.................................... (46.7) (85.8) 6.3 6.9 9.3 8.3 23.6 27.0
Provision for income taxes................. 0.0 0.7 0.8 0.7 1.9 1.8 -- --
------- ------- ------- ------ ------ ------ ------ ------
Net income (loss).......................... (46.7)% (86.5)% 5.5% 6.2% 7.4% 6.5% 23.6% 27.0%
======= ======= ======= ====== ====== ====== ====== ======
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The following table sets forth the cost of revenues as a percentage of the
related revenues for the periods indicated:
1996 1997 1998
------------------ -------------------------------------- -----------------
SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
-------- ------- ------- ------- -------- ------- ------- -------
Cost of software licenses(1)............... 56.3% 19.8% 9.3% 12.1% 13.9% 10.9% 5.8% 4.5%
Cost of hardware........................... 61.0 81.1 85.0 69.6 67.5 67.6 73.6 77.0
Cost of maintenance and other services..... 67.5 62.0 47.2 53.5 50.3 54.5 58.4 52.7
- ---------------
(1) The percentages for the quarters ended September 30, 1996 and December 31,
1996 do not include the write-off of capitalized software development costs.
See Note 2 of Notes to Consolidated Financial Statements.
The Company's quarterly operating results have been and are expected to
continue to be subject to variations as a result of a number of factors,
including size and timing of orders and the product mix in any particular
quarter. Products are generally shipped as orders are received, and accordingly,
the Company has operated with relatively small backlog. A single order can
represent a significant percentage of the Company's revenue for any quarter. In
addition, a substantial portion of the Company's shipments has occurred and may
continue to occur near the end of a quarter. Accordingly, the Company's
quarterly operating results are difficult to predict until the end of a quarter
and delays in product delivery or closing a sale can cause revenues and
operating results to fall significantly short of anticipated levels. Further,
the Company incurs significant fixed costs based upon its expectations as to
future revenue that may never be achieved due to the Company's long sales cycle.
Such expenditures include continued investment in research and development, the
establishment of a worldwide customer support capability and the building of a
sales and sales support staff, the hiring of administrative staff and related
capital equipment requirements. See "Risk Factors -- Variability in Quarterly
Results" and "-- Customer Concentration."
Inflation has not had a significant impact on the Company's results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its working capital requirements and capital
expenditures primarily from loans and privately placed equity investments. The
primary source of equity funds has been from the Company's Chief Executive
Officer, William C. Thompson. In 1995, Mr. Thompson loaned the Company $1.3
million. The outstanding balance of $955,894 as of December 31, 1995 was repaid
in full in February 1996. During 1996, the Company borrowed an aggregate of $2.1
million from Mr. Thompson and in February 1997 an additional $640,000 was
borrowed. All outstanding loans and accrued interest were repaid to Mr. Thompson
in full during 1997 and there was no outstanding balance at December 31, 1997.
In addition, Centennial Computer Corporation ("Centennial"), of which Mr.
Thompson is President and principal stockholder, made loans to the Company
during the years ended December 31, 1995, 1996 and 1997 totalling $7.4 million,
$4.2 million and $3.9 million, respectively. All of such loans had been repaid
as of December 31, 1997. The Company maintains a $6.0 million line of credit
(the "Line of Credit"), for purposes of financing accounts receivable and
inventory and to issue letters of credit. There were no borrowings under the
Line of Credit as of March 31, 1998. The Line of Credit expires on May 31, 1999.
The Company had a working capital deficit of $1.2 million, $4.4 million and $1.7
million at December 31, 1995, 1996 and 1997, respectively, and a surplus of $3.5
million as of June 30, 1998. These amounts include deferred revenue of $3.1
million, $2.7 million, $14.8 million and $10.7 million at December 31, 1995,
1996 and 1997 and June 30, 1998, respectively.
Net cash provided by operations in 1995 was $4.9 million. Net cash used by
operations in 1996 was $49,000. Net cash provided by operations in 1997 was
$13.2 million. This was used to repay all borrowings and accrued interest under
note agreements discussed above, finance property and equipment acquisitions,
and increase cash reserves. Net cash provided by operations in the first six
months of 1998 was $1.5 million. The Company expects receivables and inventory
to continue to be a significant use of cash in operating activities.
Net cash used in investing activities was $4.2 million, $1.9 million,
$723,000 and $645,000 in 1995, 1996, 1997, and the first six months of 1998,
respectively. In 1995 and 1996, approximately $3.1 million and $534,000,
respectively, was used to finance capitalized software development costs, with
the balance used to procure property and equipment. In 1997 and the first six
months of 1998, the principal use of funds was for the procurement of property
and equipment. The Company expects this factor to continue to require cash in
the future.
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Net cash used by financing activities was $738,000 in 1995. Net cash
provided by financing activities was $2.0 million in 1996, while net cash used
by financing activities was $5.4 million and $233,000 in 1997 and in the first
six months of 1998, respectively. The principal source of financing was
borrowings. The principal use of financing has been the repayment of borrowings
and capital lease obligations.
The Company has not paid any dividends on its capital stock since inception
and currently anticipates that it will retain all available funds for use in its
business. The Company does not, therefore, anticipate paying any cash dividend
in the foreseeable future. Furthermore, the Company is prohibited from declaring
or paying cash dividends on its capital stock under the terms of the Line of
Credit.
The Company believes that the net proceeds from this Offering, together
with its current cash balances, cash provided by future operations and available
borrowings under the Line of Credit, will be sufficient to meet its working
capital and anticipated capital expenditure requirements for at least the next
12 months. Although operating activities may provide cash in certain periods, to
the extent the Company experiences growth in the future its operating and
investing activities may require significant cash. Consequently, any such future
growth may require the Company to obtain additional equity or debt financing.
YEAR 2000 COMPLIANCE
Significant uncertainty exists concerning the potential effects associated
with Year 2000 compliance. However, based on the business risk associated with
the Company's information systems, management does not anticipate that the Year
2000 will have a significant impact on its information systems or result in a
significant commitment of resources to resolve potential problems with its
systems associated with this event.
A limited number of the Company's older products, to the best of the
Company's knowledge, are not Year 2000 compliant, and customers that have
licensed such products have been advised of this fact. The Company has provided
certain warranties on such older products and has committed to consult with its
customers to ensure Year 2000 compliance for such products. The Company
believes, based upon initial testing and the use of a proper method of date
storage in the development process, that its StorHouse software products
licensed to its customers are Year 2000 compliant and has so warranted to its
customers. However, the Company has not completed a comprehensive test of its
StorHouse software products to determine whether they are Year 2000 compliant.
The Solaris operating system in the Sun servers resold by the Company is not
Year 2000 compliant, but Sun has announced that it will provide its licensees
with revised versions that are Year 2000 compliant which the Company will then
provide to its customers. See "Risk Factors -- Year 2000 Compliance."
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Comprehensive Income, which is required to be adopted in the year ended December
31, 1998 consolidated financial statements. SFAS No. 130 requires that an
enterprise (a) classify items of comprehensive income by their nature in the
financial statements and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the Statement of Stockholders' Equity. The provisions of SFAS No. 130
are effective for fiscal years beginning after December 15, 1997. The Company's
components of comprehensive income are not considered material and as such have
not been disclosed in the consolidated financial statements. See Note 2 of Notes
to Consolidated Financial Statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which is
required to be adopted in the year ended December 31, 1998 consolidated
financial statements. SFAS No. 131 changes the way public companies report
segment information in annual financial statements and also requires those
companies to report selected segment information in interim financial reports to
stockholders. The disclosures for segment information in the consolidated
financial statements is not expected to be material to its financial condition
and results of operations.
In October 1997, the AcSEC issued SOP 97-2, Software Revenue Recognition,
which supersedes SOP 91-1. SOP 97-2 generally requires revenue earned on
software arrangements involving multiple elements, such as additional software
products, upgrades or enhancements, rights to exchange or return-software, post-
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31
contract customer support, or services, including elements deliverable only on a
when-and-if-available basis, to be allocated to the various elements of such
sale based on VSOE allocable to each such element. If sufficient VSOE of fair
market values does not exist, revenue from the sale will be deferred until such
sufficient evidence exists, or until all elements have satisfied the
requirements for revenue recognition. The Company has adopted SOP 97-2 effective
January 1, 1997. The adoption of SOP 97-2 for any years prior to the year ended
December 31, 1997 would have no material impact on the Company's financial
results for such years. See Note 2 of Notes to Consolidated Financial
Statements.
In March 1998, AcSEC issued Statement of Position 98-1 ("SOP 98-1"),
Accounting for the Costs of Computer Software Developed For or Obtained for
Internal Use. SOP 98-1 is effective for the Company beginning January 1, 1998.
SOP 98-1 will require the capitalization of certain costs incurred after the
date of adoption in connection with developing or obtaining software for
internal-use. The Company currently expenses such costs as incurred. The Company
has not yet assessed what the impact on SOP 98-1 will be on the Company's future
earnings or financial position.
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BUSINESS
COMPANY OVERVIEW
FileTek develops, markets and supports integrated data storage and access
management solutions that allow organizations to meet their business
intelligence needs through efficient collection, storage and management of, and
timely, shared access to, massive amounts of atomic data. The Company's recently
released StorHouse products are capable of supporting volumes of relational and
non-relational atomic data that are substantially larger than those which can be
supported by conventional database technologies and at a significantly lower
cost per unit of managed storage. Using StorHouse, organizations can optimize
their data access requirements across a variety of low-cost storage media, such
as tape and optical disk. StorHouse provides enterprise-wide access to data for
an organization's business intelligence applications, while simultaneously
managing storage resources efficiently.
The Company is targeting the largest organizations within the Fortune 500,
which generally have the most pressing need to store and access massive amounts
of data, with a particular focus on the telecommunications, financial services
and retail industries. The Company has licensed its current or previous
generations of products to more than fifty companies, including leading
organizations, such as Bear Stearns, Citibank, Morgan Stanley, NationsBank,
PacBell, United Airlines and U S West. The Company sells its products primarily
through its direct sales force based in the U.S.
INDUSTRY BACKGROUND
Organizations are increasingly implementing IT systems to automate business
processes, enhance productivity and improve customer service. These IT systems
generate valuable data, the amount of which is growing at an exponential rate.
Business intelligence is critical to the competitiveness of organizations.
Decision makers need an integrated view of the enterprise and timely access to
data spanning multiple operational systems and extending several months or even
years into the organization's history. Too frequently, however, decision makers'
requests for information needed to support business intelligence go unfulfilled
because operational systems do not possess the structure and architecture
necessary to support efficient access to the underlying data.
Data warehouse technology emerged in the late 1980s to address
organizations' ever-growing demand for more complete and timely information.
Conventional data warehouses generally comprise a collection of large,
integrated relational databases with associated end-user access and analysis
tools. Data warehouses are designed to capture data from transaction-based
operational systems in an effort to store it in a data structure more suited to
analysis. According to industry sources, by 1996, 90% of the largest companies
in the U.S. had built a data warehouse or were in the process of constructing
one. According to IDC, the data warehouse market was $8 billion in 1996 and is
expected to grow to $24 billion by 2001.
Conventional data warehouses fail to meet organizations' business needs to
access data at its most granular level ("atomic data") for enterprise-wide
business intelligence. Storing and accessing atomic data in a timely and
cost-effective manner is critical to informed business decision making,
particularly for large organizations that generate large volumes of atomic data.
Examples of atomic data include call detail records from a telephone switch,
detail data generated by financial transactions and specific point of sale data
from sales receipts. Storing, managing, sharing and accessing atomic data is
complex, time consuming and expensive.
Relational databases underlying data warehouses cannot scale with the large
and growing volumes of atomic data organizations generate and need to store,
manage and access. Further, these relational databases are very expensive and
time consuming to deploy and maintain. Organizations attempt to overcome these
limitations by deploying multiple smaller data warehouses or data marts. The
data mart approach in turn creates interface management challenges, data
movement and coordination problems and additional expense.
Because conventional database technologies are not designed to support
massive volumes of data, organizations are often compelled to summarize atomic
data and otherwise limit the amount of atomic data history available to decision
makers. This compromise approach severely limits the effectiveness of data
warehouses to provide access to the broadest range of atomic data and drill down
to relevant data in a timely
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manner, if at all. For example, telecommunications companies that archive
individual call-detail data and store only summaries of customers' monthly phone
bills online lose the ability to dynamically access and analyze data to
understand customers' calling patterns. Dynamic access to such atomic data could
yield valuable business insights for customizing marketing and pricing programs
and optimizing network utilization.
Decision makers are increasingly seeking solutions to dynamically access
atomic data across the enterprise. The volume of data that must be stored and
made accessible often greatly exceeds the scale of conventional relational
database technologies. The complex data storage management environments created
by conventional data warehouses also fail to meet user demand for access to
enterprise-wide atomic data in an easy, efficient and cost-effective manner.
Finally, organizations need data storage management systems that integrate with
existing operational systems and business intelligence platforms, thus
preserving their IT infrastructure investments.
THE FILETEK SOLUTION
FileTek provides integrated data storage and access management solutions
that allow organizations to meet their business intelligence needs through
efficient collection, storage and management of, and timely, shared access to,
massive amounts of atomic data. The Company's StorHouse products are capable of
supporting volumes of relational and non-relational atomic data that are
substantially larger than can be supported by conventional database technologies
and at a significantly lower cost per unit of managed storage. FileTek's
solution offers the following advantages:
Management of and Access to Enterprise-Level Atomic Data. StorHouse uses a
centralized, hub and spoke architecture for collecting, moving, managing and
accessing massive amounts of atomic data. StorHouse (the hub) serves as a
central repository for all information generated by an organization's
operational systems. Spokes branching off StorHouse consist of, on the back-end,
the disparate operational systems upon which the hub draws its data and, on the
front-end, the business intelligence platforms such as data marts that typically
serve as the engines used to analyze data. The hub and spoke architecture
rapidly and selectively moves data throughout the organization, providing the
appropriate level of consistent, integrated, enterprise-level data to decision
makers when required.
Data Scalability. Unlike conventional data warehouse technologies,
StorHouse has no practical limit to the amount of data it can manage. StorHouse
employs a relational database management system that can address and manage data
on high-capacity removable media, such as tape and optical disk. Organizations
can build and manage a StorHouse atomic data store ("ADS") that exceeds hundreds
of terabytes (or even petabytes) and stores billions of transactions. An
organization's specific performance and capacity requirements determine the
appropriate storage devices and processors for a given StorHouse implementation.
Timely, Cost-Effective Solution. Using StorHouse, organizations can
optimize their data access requirements across a variety of low-cost storage
media, such as tape and optical disk. Organizations can retrieve row-level data
from any data layer in the storage hierarchy, including optical and tape, for
analysis and reporting, eliminating time spent restoring off-line archived data
to disk. StorHouse enables users to directly access selected data using industry
standard Structured Query Language ("SQL") rather than costly and complex
customized programs. StorHouse also provides automatic data back-up and recovery
and total media management, thereby reducing the level of required IT support.
Easy Integration with Existing IT Infrastructure. StorHouse leverages the
investments that organizations have in their existing IT infrastructure by
complementing rather than replacing current data storage, access and analysis
solutions, running on a variety of platforms. StorHouse's open architecture
design eases integration with an organization's existing systems, minimizing
disruption to these systems.
STRATEGY
The Company's objective is to be a leading provider of enterprise-wide,
integrated storage and access management solutions for massive volumes of atomic
data in both relational and non-relational formats. To achieve this goal, the
Company is pursuing the following strategies:
Extend Technology Leadership. The Company believes that maintaining and
extending its technology leadership will continue to provide the Company with a
competitive advantage. The Company has developed
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innovative data management technologies that provide a substantial advantage in
offering record-level shared access to a virtually unlimited amount of data
throughout the storage hierarchy. The Company will continue to invest in
research and development to improve performance, integrate new storage
technologies and support additional data types and industry-standard interfaces.
Focus on Large Atomic Data Store Requirements. The Company believes that
its StorHouse solution is uniquely suited for large organizations that have a
need to store and access extremely large volumes of atomic data. As a result,
the Company is targeting specific vertical industries, such as
telecommunications, financial services and retail, which have the most pressing
need for high-end data storage management that delivers timely access to atomic
data. These industries are highly competitive and, the Company believes, can
benefit the most from a scalable data storage solution that can meet their
overall business intelligence requirements.
Leverage Installed Customer Base. The Company believes that its success in
meeting the business intelligence needs of its sophisticated installed customer
base should enable it to leverage its success with existing customers to market
and sell StorHouse solutions. More than 50 customers have licensed the Company's
Storage Machine products for COLD applications. The Company plans to leverage
its installed customer base by selling additional products to customers while
also using its strong customer relationships as references to gain new
customers. The Company's core software in use by all of its existing customers
has been considerably enhanced during the development of StorHouse. The Company
plans to offer current COLD customers an attractive upgrade path that can lead
to an integrated COLD and ADS solution.
Expand Distribution Channels and Markets. The Company believes that it
needs to expand its distribution channels to increase penetration in its
targeted vertical markets. The Company sells its products primarily through its
direct sales force in the U.S. The Company plans to expand its direct sales
force with experienced, senior-level sales and systems engineering professionals
in major geographic areas of the country. The Company recently hired a director
of international operations to focus on global expansion. The Company's
international sales channel initiatives may include direct sales and indirect
channels such as joint venture, joint marketing, value-added resale and master
distribution arrangements.
Continue to Develop Strategic Relationships. The Company believes it can
accelerate industry adoption of StorHouse and gain additional visibility through
the development of strategic relationships. The Company recently entered into a
strategic relationship with STK to jointly market and sell FileTek's ADS
solution integrated with STK's disk and tape products. The Company seeks to
extend its strategic relationships by pursuing closer marketing ties with
additional vendors of complementary hardware and storage components.
PRODUCTS AND TECHNOLOGY
Technology
The Company's key technology efforts are based on providing solutions that
address advanced storage management, rapid access to data and data availability.
Accordingly, the Company has developed an ADS technology that serves as the
engine for storing and efficiently accessing large amounts of data. Using a
variety of applications, users can access relational or non-relational data
stored in StorHouse through industry standard gateways or custom developed
interfaces. The Company's StorHouse technology has the following key attributes:
- Row-level and Record-level Access from Removable Media. Unlike
conventional storage management technologies that access data at the
file level, FileTek's patented technology provides direct access to
row-level relational data and record- or object-level access to
non-relational data, even when the data is stored on high-capacity
and low-cost removable storage media such as tape and optical disk.
StorHouse eliminates the need to load and restore data from tapes to
a database to provide shared access. StorHouse's ability to manage
relational data stored on high-capacity storage devices sets it
apart from other database systems that are restricted to accessing
data from more expensive disk storage devices.
- Relational and Non-relational Access. StorHouse managed data can be
stored in a relational format and accessed by SQL and database
gateways such as open database connectivity ("ODBC") and distributed
relational database architecture ("DRDA"). StorHouse/RM, an
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optional product, enables users to access directly relational data
stored on fixed or removable media storage devices. StorHouse also
offers an Application Programming Interface ("SM/ API"), using
patented technology, that provides open application access to data
stored in non-relational formats (or objects) such as textual
reports and audio data.
- Intelligent Data Management. The Company's Volume Storage
Allocation and Control ("VSAC") software manages data and storage
allocation across multiple storage media. VSAC manages both the
logical and physical placement of data automatically according to
user-specified attributes. StorHouse management software has several
performance features designed to optimize the performance of storage
devices, most significantly media that employ robotics such as tape
and optical storage systems. StorHouse manages a performance buffer
on magnetic disk where most frequently accessed data is stored to
provide significantly faster overall data access performance.
StorHouse manages duplicate copies of data for back-up and recovery
if a device fails. System security, performance monitoring and
maintenance features are standard StorHouse functions.
- Data Load and Unload Performance. ADS applications frequently
require the loading of massive data volumes each day. StorHouse is
capable of loading data at very high rates (two megabytes per second
per stream) across multiple data input streams. StorHouse is also
capable of creating hundreds of thousands of index entries per
second across multiple input streams. The Company's patented data
segmentation method partitions data by time period (day, month,
etc.), thus avoiding the need to update a massive number of indices
each time data is loaded. Unloading data at high rates is also
essential to robust ADS applications. StorHouse is capable of
unloading up to multiple terabytes of data to other databases and
applications on a daily basis.
- Support of Industry Standard Hardware Technology. StorHouse
software runs on a standard Sun Ultra Enterprise server, a highly
scalable, high performance server platform. StorHouse also supports
widely used, industry standard mass storage systems from vendors
such as FileNET Corporation ("FileNET"), Hitachi, Ltd. ("Hitachi"),
STK, Sun and Symbios, Inc. ("Symbios"). Each storage device can be
used by StorHouse interchangeably. StorHouse is designed to
integrate with existing and future mass storage systems.
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Products
The following chart describes the Company's primary products and highlights
the key features of each:
YEAR OF PRODUCT CUSTOMER
PRODUCT FIRST SHIPMENT FEATURES BENEFITS
Core
Products:
StorHouse/SM 1997 - Advanced HSM facility for - Concurrent access by multiple
storing, managing and applications
accessing record-level data - Reduces data storage
- Runs on Solaris 2.x operating administration costs
system - Capable of using new
- Supports a variety of devices technology when introduced
including tape, optical and - High data availability
RAID
- Access through SM/API
StorHouse/RM 1997 - Relational, row-level access - Supplies consistent atomic
to removable media, such as tape data to decision makers
- Supports SQL, ODBC and DRDA - Complements current business
gateways intelligence systems
- Manages terabytes to petabytes - Transcends data scalability
of relational data limitations of other
- Utilizes all of the features technologies
of StorHouse/SM - Combines multiple technologies
- Very high volume data loader into one integrated product
and extractor performance
- Patented indexing and data
segmentation technology
Other
Products:
AMMO-II 1992 - Used to view on-line reports - Menu-driven access to archived
and customer statements data
- Advanced computer output to - Robust logging to facilitate
microfiche replacement product auditing, security and
set chargebacks
- Browse, display and print
character and mixed mode AFP
reports
LAN-AMMO 1995 - Enables distribution of - Provides easy-to-use GUI
document data to servers on - Network-based users get AMMO
local area networks functionality
Web-AMMO 1996 - An Internet/Intranet report - Provides easy-to-use World
retrieval and viewing Wide Web browser access to
application information archived to
AMMO-II
VROM 1994 - Stores and retrieves data on - Eliminates the need to produce
StorHouse in CD-ROM format duplicate copies of CDs
- Transparently accesses data - Reduces distribution costs of
from network applications non-electronic data
StorHouse/SM. StorHouse/SM is the specialized hierarchical storage
management ("HSM") sub-system of the StorHouse solution, responsible for
automating critical system management tasks, such as data migration, backup and
recovery. It controls a hierarchy of storage devices comprised of redundant
arrays of independent disks ("RAID"), erasable and write-once-read-many ("WORM")
optical disk jukeboxes and automated tape libraries. Regardless of storage
hierarchy (size and media), StorHouse transparently migrates data through the
hierarchy to provide high performance access to the most active data and
low-cost storage for the less active data. StorHouse accesses data records
directly, rather than accessing only files. In addition, active indices and data
may be stored on a magnetic disk performance buffer. This configuration enables
timely access to data within very large files, even though most of the data may
be stored on relatively slow storage devices.
StorHouse/SM automatically indexes, stores and manages the migration and
archiving of long-term retention data. It is designed to assure data integrity
and control, providing facilities for backup, off-site storage and archive
duplexing. As a result, StorHouse/SM maintains the integrity of documents and
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transactions as originals, while significantly reducing the costs and enhancing
the service levels associated with older technologies such as microfiche. In
addition, duplex data can be stored in separate libraries to avoid single points
of failure.
StorHouse/RM. StorHouse/RM works in conjunction with StorHouse/SM to
administer the storage, access and movement of relational data. StorHouse/RM
provides row-level SQL access to atomic data on any layer, including tape, in
the StorHouse storage hierarchy. StorHouse/RM provides a relational database
management system ("RDBMS") capable of storing and retrieving massive amounts of
data, allowing users to store and manage all of their atomic data efficiently.
StorHouse/RM stores the segments of relational tables and their indices in
StorHouse/SM, through which the relational data can be automatically migrated to
the least expensive storage media. StorHouse/RM, using StorHouse/SM, can
directly access the rows needed for massive tables either to respond to a direct
SQL query or to unload the data needed to populate a data mart.
StorHouse/RM segmentation partitions enable rapid query response as only
the data volumes covering each query's date range need to be mounted. This
feature separates the indices from data so the indices can be stored at a higher
layer in the hierarchy than the data thereby enabling faster access. As an
example, the indices could reside for months on magnetic disks, then migrate to
optical disks where they would reside for years before finally migrating to
tape, while the data might reside on magnetic disks only for a few days before
migrating to tape. Segments within the relational tables can be migrated
individually because of the table segmentation features of StorHouse/RM.
StorHouse/RM enables the segment migration plan to be customized for each
application and to be managed with little human effort.
Other Products. FileTek's desktop end-user products provide tools used to
access and view through the SM/API interface the data stored on StorHouse. In
turn, StorHouse systems, with StorHouse/RM, access atomic data via SQL and other
industry standard database-to-database gateways and interfaces.
AMMO-II (Alternative to Microfiche/Microfilm On-line). AMMO-II is an
MVS-based software product that gives StorHouse users access to terabytes
of on-line information through existing terminals. AMMO-II provides
multi-feature viewing capabilities, flexible key accessibility, print
support, and ease of implementation with minimal impact on the users'
current operations. AMMO-II provides both flexible retrieval and
hierarchical storage design.
LAN-AMMO. LAN-AMMO is a work group computing software product that
allows data to be stored and manipulated locally. LAN-AMMO runs on leading
workstations and servers and manages currently-active work group data. It
accesses the AMMO server for enterprise data. LAN-AMMO allows viewing under
a graphical user interface ("GUI") as well as printing and faxing.
Web-AMMO. Web-AMMO is an Internet/Intranet report retrieval and
viewing software product that provides World Wide Web access to information
archived to a StorHouse system with AMMO-II. With Web-AMMO, customer
service representatives and business customers can access and view months
to years of corporate and customer data stored on a mainframe, a StorHouse
system, or on a distributed document LAN server with any web browser that
supports Frames and Java. Web-AMMO provides secure Internet/Intranet access
to terabytes of report data across an enterprise.
VROM (Virtual CD-ROM Archive). VROM is a virtual data repository that
allows data to be stored as a virtual CD-ROM (in standard CD-ROM format)
and read from StorHouse using Windows family Input/Output. The tool allows
organizations to provide a shared use facility for access to the data and
reduce the management, distribution and production costs associated with
creating multiple copies of CD-ROMs for data access and viewing.
Year 2000 Compliance. A limited number of the Company's older products, to
the best of the Company's knowledge, are not Year 2000 compliant, and customers
that have licensed such products have been advised of this fact. The Company has
provided certain warranties on such older products and has committed to consult
with its customers to ensure Year 2000 compliance for such products. The Company
believes, based upon initial testing and the use of a proper method of date
storage in the development process, that its StorHouse software products
licensed to its customers are Year 2000 compliant and has so warranted to its
customers. However, the Company has not completed a comprehensive test of its
StorHouse software products to determine whether they are Year 2000 compliant.
The Solaris operating system in the Sun servers
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resold by the Company is not Year 2000 compliant, but Sun has announced that it
will provide its licensees with revised versions that are Year 2000 compliant
which the Company will then provide to its customers. See "Risk Factors -- Year
2000 Compliance."
CUSTOMERS
As of June 30, 1998, more than 50 customers in a wide range of industries
had licensed the Company's products. The following is a list of selected
customers of the Company, segmented by industry concentration, which purchased
an aggregate of at least $100,000 or more in products or services from the
Company during the two-year period ended December 31, 1997.
FINANCIAL SERVICES
Banco Popular De Puerto Rico
Bear Stearns and Co., Inc.
Citibank, N.A.
Citicorp Global Technology, Inc.
Edward D. Jones & Co.
First Commercial Corporation
First Security Information Technology,
Inc.
Fleet Services Corporation
Glendale Federal Bank, F.S.B.
Household International, Inc.
Keystone Financial, Inc.
MasterCard International Incorporated
Mellon Bank, N.A.
Morgan Stanley Dean Witter Trust
F.S.B.
NationsBanc Services, Inc.
("NationsBank")
TELECOMMUNICATIONS
Pacific Bell
U S West Communications, Inc.
OTHER
Defense Logistics Agency
Northern Indiana Public Service
Company
South African Mutual Life Assurance
Society ("Old Mutual")
Spiegel, Inc.
United Air Lines, Inc.
United Services Automobile Association
The Company is dependent on a small number of customers for a substantial
portion of its revenue. In 1995, AT&T, U S West and PacBell accounted for 11.7%,
12.0% and 13.8%, respectively, of the Company's revenues, with the five largest
customers accounting for an aggregate of 51.2% of revenues for the period. In
1996, AT&T and Bank of America accounted for 12.5% and 10.1%, respectively, of
the Company's revenue, with the five largest customers accounting for an
aggregate of 39.9% of revenue for the period. In 1997, AT&T and U S West
accounted for 19.7% and 10.8%, respectively, of the Company's revenues, with the
five largest customers accounting for an aggregate of 48.2% of revenue for the
period. For the six months ended June 30, 1998, the Company's five largest
customers accounted for an aggregate of 74.2% of the Company's revenues. See
"Risk Factors -- Customer Concentration."
Case Studies
NationsBank. NationsBank used to rely on microfiche to store the
historical data of many of its departments, including research, adjustment,
trust, general ledger, cash management and credit cards. Answering complex
internal or customer queries was a very labor-intensive process that often
required hours and in some cases days of manual procedures. To address this
problem and the high cost associated with data storage on microfiche,
NationsBank evaluated low-cost media as a replacement for microfiche and
selected a predecessor to StorHouse/SM in 1991. With this COLD system,
approximately 30,000 employees have access to customer records and other
historical data on a real-time basis, as the information is stored on accessible
electronic media. With savings approaching $1 million per year on labor alone,
NationsBank achieved rapid payback from installing the system. The bank
currently has three terabytes of data stored on the system, and expects this
number to reach 11 terabytes within two years. NationsBank has also realized
substantial qualitative benefits through improved customer service, from being
able to respond to customer queries rapidly. Based on current information needs,
NationsBank is in the process of upgrading to the Company's StorHouse system,
and is committed to the elimination of microfiche across the bank.
Old Mutual. Old Mutual, one of the world's largest insurance companies,
based in South Africa, previously used DAT tape to store all of its voice
recordings from its Call Centers and stock trading desks, and
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paper file storage for its policy information. This information was difficult to
access on a timely basis and expensive to store and retrieve. Old Mutual
implemented the Company's StorHouse solution in early 1998 to address the need
for timely access to customer documentation, and is currently in the process of
implementing a system that will store six to twelve months worth of call
recordings and workflow information. The system is expected to store and manage
more than 20 terabytes of information. Old Mutual expects to improve its
operations through the reduction of headcount, the more efficient use of
existing storage devices, and better customer service. As additional business
units are added to the system, Old Mutual estimates that it will save millions
of dollars per year in operating costs. It also expects to realize additional
cost savings through the significant reduction of settlements related to
disputed accounts.
SALES AND MARKETING
The Company sells and markets its products primarily through its direct
sales force based in Rockville, Maryland and additional sales offices in Boca
Raton, Chicago, Dallas, Denver, New York, Orlando, Phoenix, San Francisco and
London, England. As of July 31, 1998, the Company's sales and marketing
organization consisted of 27 employees, of which 18 were direct sales
representatives.
The Company's direct sales team includes both sales personnel and systems
engineers who conduct multiple presentations and demonstrations of the Company's
products at customer sites as part of the direct sales effort. Systems engineers
provide comprehensive on-site training and pre-sale customer support services.
The Company's sales cycle is typically no less than six months and can be 18
months or longer depending on the product and the market segment. To support its
direct sales efforts, the Company conducts a number of marketing programs,
including public relations, seminars, trade shows, product education and user
group conferences, speaking engagements and publications.
The Company recently entered into a strategic relationship with STK, which
the Company believes will enhance its sales, marketing and support activities.
The Company believes that this relationship will provide joint marketing and
sales opportunities for the Company's direct sales teams, expand the
distribution of its products and broaden its product offerings through product
bundling. Under the STK agreement, the parties have agreed to identify and
target opportunities to jointly market the Company's products and STK's hardware
as part of the StorHouse solution and to coordinate their sales and marketing
efforts with respect to these opportunities. The agreement may be terminated
upon 60-days notice by either party after the initial term expires on June 9,
1999. The Company is actively seeking other strategic partners with products
that are complementary to those of the Company.
SERVICE AND SUPPORT
FileTek's customer support organization provides 24-hour-a-day,
seven-day-a-week support services for the Company's products throughout the U.S.
Customer support provides pre-installation and installation services,
maintenance and repair, post-sales support, relocation services and system
software and applications support services. Remote diagnostic and support
capabilities are available for the systems serviced. The national response
support center, which is staffed with both hardware and software support
specialists, provides initial telephone consulting, problem determination,
recovery and problem resolution, and dispatches field personnel to customer
sites as needed. The Company subcontracts with various third-party support
companies for field hardware support local to the customer sites. In order to
provide high system availability and responsive service, FileTek provides field
support personnel with required spare parts in various locations and at select
parts depots strategically located near customer sites. The Company plans to
continue to expand its customer support organization as its customer base grows.
As of July 31, 1998, the Company had 27 employees in its customer support
organization.
The Company also assembles, integrates and tests all components of its
products. FileTek has implemented a comprehensive quality control program
whereby the fully-assembled system is loaded with system software and subjected
to product testing prior to shipment. As of July 31, 1998, the Company had four
employees providing integration services.
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RESEARCH AND DEVELOPMENT
The Company believes that its future success will depend upon its ability
to continue to enhance its product offerings, which requires a continued
investment in research and development. As of July 31, 1998, the Company's
research and development organization consisted of 28 full-time employees and
one part-time employee. The Company spent $4.0 million, $3.7 million, $3.7
million and $1.9 million on research and development and capitalized software
development for the years ended December 31, 1995, 1996 and 1997 and the six
months ended June 30, 1998, respectively. Of such amounts for such periods, $1.1
million, $3.2 million, $3.6 million and $1.9 million, respectively, were
attributable to research and development expense.
The Company's development efforts include providing enabling software and
drivers to extend the StorHouse system by introducing new types of storage
devices into the storage hierarchy, designing and developing new client server
interfaces and adding additional functionality. Although most development
activities are performed in-house, the Company occasionally enters into
development and licensing arrangements with third parties and technology
partners for certain development and/or technology licensing activities.
FileTek generally releases new versions of its software products every six
to twelve months depending on business opportunities and market requirements for
added functionality. New hardware components are integrated when they provide
significant performance or cost benefits and when required to meet market
requirements. Software to access new storage devices can be added independent of
releases.
The Company's product development initiatives are focused on the
development of new releases of StorHouse solutions and on complementary
applications. The Company plans to begin beta testing version 5.1 of
StorHouse/SM in the second half of 1998. This version is slated to interface to
the STK library control software, enabling StorHouse to use STK's entire line of
libraries. In addition, it will enable shared use, so that an MVS attached
library with available capacity can be used. Control Center ("CC") is a new GUI
system management tool for both StorHouse/SM and StorHouse/RM. CC provides a
framework under which certain StorHouse modules can execute and provide an
easy-to-learn and easy-to-use administrative interface. The Company began the
development of CC in 1997 and expects to begin beta testing in the second half
of 1998.
COMPETITION
The market for the Company's products is intensely competitive and subject
to rapid change. The Company's products compete with other storage, storage
management and database products offered by a number of vendors, including
Compaq Computer Corporation, EMC, IBM, Information Builders, Inc., Microsoft,
NCR and Oracle. These vendors have substantially greater resources and market
influence than FileTek. There are relatively low barriers of entry in the
software market, and thus the Company expects additional competition from other
established and emerging companies if the atomic data store market continues to
develop and expand. The development of new technologies or products by others
could have a material adverse impact on the Company's business. There is also a
substantial risk that the announcement of competing products by large
competitors could result in the cancellation or delay of customer orders in
anticipation of the introduction of such new products. Many of the Company's
competitors have well-established relationships with current and potential
customers of the Company, have extensive knowledge of the relational database
industry and are capable of offering a single vendor solution. As a result, the
Company's competitors may be able to respond more quickly to new or emerging
technologies and changes in products than can the Company. In addition, current
and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address customer needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. See "Risk Factors -- Competition."
The Company believes that the principal competitive factors affecting its
market include product features such as record-level access from removable
media, data movement performance and efficiency, data scalability, data storage
price performance, breadth of supported operating systems and storage devices,
integration with industry standards, functionality, product reputation, quality,
performance, price, sales and
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marketing effort and customer support. Although the Company believes that it
currently competes favorably with respect to such factors, there can be no
assurance that the Company can maintain its competitive position against current
and potential competitors, especially those with greater financial, marketing,
service, support, technical and other resources than the Company.
PROPRIETARY RIGHTS
The Company relies on a combination of copyright, patent, trademark and
trade secret laws together with confidentiality procedures and contractual
provisions to protect its proprietary technology. For example, the Company
licenses rather than sells its software and requires licensees to enter into
license agreements, which impose restrictions on licensees' ability to use the
software. In addition, the Company seeks to avoid disclosure of its trade
secrets by various means, including but not limited to requiring those persons
with access to the Company's proprietary information to execute confidentiality
agreements with the Company. The Company has entered into source code escrow
agreements with a number of its customers requiring release of source code under
certain conditions. Such agreements provide that such parties will have a
limited, non-exclusive right to use such code in the event that the Company
fails to meet its maintenance or certain other obligations. The provision of
source code in escrow may increase the likelihood of misappropriation by third
parties. The Company owns three U.S. patents. One patent relates to data
integrity, transportability and direct access of unformatted bitstreams. A
second patent covers a method of virtual memory storage allocation with dynamic
adjustment to manage the allocation of removable storage media (VSAC). A third
patent covers a number of StorHouse features associated with accessing very
large tables and using HSM to store RDBMS data. There can be no assurance that
the patent rights will be sufficient to protect the Company's technology.
Although the Company intends to protect its rights vigorously, there can be no
assurance that these measures will be successful. In addition, the laws of
certain foreign countries may not protect the Company's proprietary rights to
the same extent as do the laws of the United States. However, while the
Company's ability to compete could be affected by its ability to protect its
proprietary product and technology rights, the Company believes that such
protection is less significant to its success than experienced management,
technical expertise, marketing skills, new product introductions and frequent
product enhancements. See "Risk Factors -- Limited Protection of Proprietary
Technology; Risks of Infringement."
The Company licenses certain software from third parties and incorporates
it in the Company's software products for sublicense to its end users.
EMPLOYEES
As of July 31, 1998, the Company had 106 employees (including three
part-time employees), consisting of 105 in the U.S. and one in the U.K. Of this
total, 29 were employed in research, product development, engineering, and
publications; 27 (one in the U.K.) were employed in sales and marketing; four
were employed in integration services; 27 were employed in customer support; and
19 were employed in finance, operations and administrative positions.
Competition for employees in the Company's industry is intense. None of the
Company's employees are represented by labor unions. The Company has not
experienced any labor stoppages and considers its relations with its employees
to be good.
FACILITIES
The Company's principal administrative, marketing, research and development
and integration facilities are located in approximately 42,000 square feet of
leased space in Rockville, Maryland. The lease on this facility will expire in
April 2001 and the Company has an option to extend the lease for an additional
three-year period thereafter. In addition, the Company leases sales and service
space in eight other locations within the U.S. and one location in the U.K. The
Company believes that these facilities are adequate for its current needs and
that suitable additional or substitute space will be available as needed to
accommodate expansion of the Company's operations.
LEGAL PROCEEDINGS
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. The
Company is not a party to any legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
NAME AGE POSITION
---- --- --------
William C. Thompson................... 65 Chief Executive Officer and Chairman of the Board
David L. Beamer....................... 56 President, Chief Operating Officer and Director
John G. Burgess....................... 60 Vice President and Chief Technical Officer
William P. Loomis..................... 44 Vice President, Finance and Administration, Chief
Financial Officer, Treasurer and Secretary
George R. Pasterak.................... 40 Vice President, Development
Greg A. Sheard........................ 55 Vice President, Customer Support
Robert W. Simonds..................... 39 Vice President, Marketing
Gary G. Szukalski..................... 35 Vice President, North American Sales Operations
Elliot H. Cole(1)..................... 66 Director
Lewis S. Frauenfelder(1).............. 58 Director
Kenneth W. Simonds(1)................. 63 Director
- ---------------
(1) Member of the Compensation and Audit Committees.
WILLIAM C. THOMPSON, a co-founder of the Company, has served as Chief
Executive Officer and Chairman of the Board since the Company's inception in May
1984. Mr. Thompson was also President of the Company from April 1984 until March
1989 and from July 1990 until October 1993. Mr. Thompson is also the founder,
President and director of Centennial Computer Corporation ("Centennial"), a
specialized financial services and leasing company.
DAVID L. BEAMER has been President, Chief Operating Officer and a member of
the Board of Directors of the Company since October 1993. From April through
September 1993, Mr. Beamer was on an extended vacation. From September 1992
until April 1993, Mr. Beamer was Vice President and General Manager, Huron
Operations, of Amdahl Corporation, a mainframe computer systems company. From
January 1992 until August 1992, Mr. Beamer was Vice President and General
Manager, European Operations of Amdahl. From January 1991 until January 1992,
Mr. Beamer was Vice President Corporate Marketing, and from January 1986 until
December 1990, was Vice President and General Manager, U.S. Operations of
Amdahl.
JOHN G. BURGESS, a co-founder of the Company, has been Vice President and
Chief Technical Officer since the Company's inception in May 1984. From January
1980 until April 1984, Mr. Burgess was Vice President of Development for
Centennial. From December 1967 until January 1980, Mr. Burgess was Vice
President of Development for Tesdata Systems Corporation, a performance
management company.
WILLIAM P. LOOMIS has been Vice President of Finance and Administration,
Chief Financial Officer, Treasurer and Secretary of the Company since July 1990.
From July 1989 until July 1990, Mr. Loomis was Director of Corporate Operations
of the Company. From January 1987 until July 1989, Mr. Loomis was Controller of
the Company. Mr. Loomis also serves as the Vice President of Finance of
Centennial.
GEORGE R. PASTERAK has been Vice President, Development since July 1998.
From August 1989 until July 1998, Mr. Pasterak worked with the National Security
Agency where he provided program management services and became Director of
Infrastructure Engineering in January 1997. From June 1994 until December 1996,
Mr. Pasterak also served as a part-time Vice President and Director of Software
Engineering for LightSpeed Computing, Inc., a Microsoft solution provider
specializing in custom database solutions.
GREG A. SHEARD has been Vice President, Customer Support of the Company
since April 1993. From January 1991 until April 1993, Mr. Sheard provided
consulting in the area of customer support strategies and operations for a
number of high technology companies. From June 1988 until December 1990, Mr.
Sheard was Vice President, Customer Service for Stratus Computer, Inc., a
computer systems company.
ROBERT W. SIMONDS has been Vice President, Marketing since August 1997.
From January 1996 until August 1997, Mr. Simonds was founding partner of Simonds
Associates, a management consulting firm
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specializing in the data warehouse marketplace that provided consulting services
to the Company. From August 1995 until January 1996, Mr. Simonds was Senior
Manager with Coopers & Lybrand Consulting. From December 1991 until August 1995,
Mr. Simonds was a Senior Director, Industry Consulting, with NCR Corporation, a
data warehouse solutions and computer systems company.
GARY G. SZUKALSKI has been Vice President of North American Sales
Operations of the Company since April 1995 and has been with the Company since
January 1986. Mr. Szukalski's previous positions with the Company included
District Sales Manager and Director, Systems Engineering
ELLIOT H. COLE has been a director of the Company since its inception in
1984. He is a senior partner in the law firm of Patton Boggs LLP, Washington,
D.C., the Company's general counsel, and serves as a director of, and acts as
general counsel for, a number of technology-based companies. Mr. Cole is
currently a director of First Medical Group, Inc.
LEWIS S. FRAUENFELDER has been a director of the Company since March 1993.
Mr. Frauenfelder has been the President and Chief Operating Officer of Benchmark
Tape Systems Corporation, a magnetic tape storage systems company, since April
1998. Since May 1996, Mr. Frauenfelder has been a data storage industry
consultant. From March 1995 until May 1996, Mr. Frauenfelder was President and
Chief Executive Officer of DataSonix Incorporated, a mobile data storage
products company. From October 1990 until March 1995, Mr. Frauenfelder was
President and Chief Executive Officer of Fujitsu Computer Products of America,
Inc., a data storage and image products company.
KENNETH W. SIMONDS has been a director of the Company since May 1992 and
previously served as a director from January 1989 through February 1990. From
1985 until April 1992, Mr. Simonds was President and Chief Executive Officer of
Teradata Corporation, a database computer company, and was elected Chairman of
Teradata in October 1988. Prior thereto, he served in various executive
capacities with Amdahl Corporation. Mr. Simonds is a director of Printrak
International Inc.
All directors hold office until the next annual meeting of stockholders and
the election and qualification of their successors. Executive officers of the
Company are elected by the Board of Directors and serve until their successors
are duly elected and qualified. Other than Kenneth W. Simonds and Robert W.
Simonds, who are father and son, there are no other family relationships among
any of the directors and executive officers of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Audit Committee consists of Messrs. Cole, Frauenfelder and K. Simonds.
The Audit Committee reviews, with the Company's independent auditors, the scope,
timing and results of audit and other services that the independent auditors are
asked to perform. In addition, the Audit Committee will make annual
recommendations to the Board of Directors for the appointment of independent
auditors for the ensuing year.
The Compensation Committee consists of Messrs. Cole, Frauenfelder and K.
Simonds. The Compensation Committee will review and evaluate the compensation
and benefits of the executive officers, review general policy matters relating
to compensation and benefits of employees of the Company and make
recommendations concerning these matters to the Board of Directors. The
Compensation Committee also will administer the Company's stock option plan.
DIRECTORS' COMPENSATION
Directors who are not employees of the Company currently include Messrs.
Cole, Frauenfelder and Simonds (the "Outside Directors"). No directors receive
an annual retainer or fees for attending regular meetings of the Board of
Directors. All directors are reimbursed for reasonable expenses incurred by them
in attending such meetings. Outside Directors will automatically receive annual
stock option grants of shares pursuant to the 1998 Directors'
Stock Option Plan. See "-- Employee Benefit Plans."
The Company granted to each of the Outside Directors options to purchase
7,500 shares of Common Stock at an exercise price of $0.67 per share and 7,500
shares of Common Stock at an exercise price of $7.33 per share in April 1997 and
April 1998, respectively. Such options vest quarterly over two years. In
addition, in September 1997, the Company granted to Mr. Frauenfelder an option
to purchase 30,000 shares of Common
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Stock at an exercise price of $0.67 per share. Such options were replacements
for options that were originally granted in 1993 at $1.33 per share. Mr.
Frauenfelder has purchased 15,000 of such shares.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
earned by William C. Thompson the Company's Chief Executive Officer and for each
of the other four most highly compensated executive officers of the Company
whose total compensation for services in all capacities to the Company exceeded
$100,000 during the year ended December 31, 1997 (the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
------------
NUMBER OF
ANNUAL COMPENSATION(2) SECURITIES
----------------------- UNDERLYING
NAME AND PRINCIPAL POSITIONS(1) SALARY BONUS(3) OPTIONS
------------------------------- -------- -------- ------------
William C. Thompson(4)................................... $ -- $331,432 --
Chairman of the Board and Chief Executive Officer
David L. Beamer(5)....................................... 150,000 152,280 90,000
President and Chief Operating Officer
William P. Loomis........................................ 119,000 89,576 60,000
Vice President, Finance and Administration, Chief
Financial Officer, Treasurer and Secretary
John G. Burgess.......................................... 103,000 89,576 30,000
Vice President and Chief Technical Officer
Gary G. Szukalski........................................ 100,000 120,326 60,600
Vice President, North American Sales Operations
- ---------------
(1) Robert W. Simonds became the Company's Vice President, Marketing, effective
August 18, 1997. His annual base salary is $140,000 plus a bonus of not less
than $65,000. Mr. Simonds received a grant of options to purchase 150,000
shares of Common Stock effective September 12, 1997.
(2) In accordance with the rules of the Securities and Exchange Commission, the
compensation set forth in the table does not include medical, group life
insurance or other benefits which are available to all salaried employees of
the Company, and certain perquisites and other benefits, securities or
property that do not exceed the lesser of $50,000 or 10% of the person's
salary and bonus shown in the table.
(3) Includes amounts accrued in 1997 and paid or to be paid in 1998 in the
amounts of $243,804 to Mr. Thompson; $112,018 to Mr. Beamer; $65,893 to Mr.
Loomis; $65,893 to Mr. Burgess; and $53,805 to Mr. Szukalski. Bonus amount
for Mr. Szukalski represents accruals for commission overrides.
(4) Mr. Thompson elected to forego his salary in 1997. He did not receive any
stock, stock-based or other forms of non-cash consideration in lieu thereof.
His salary of $134,000 was reinstated effective January 1, 1998, and
increased to $200,000 as of April 1, 1998.
(5) Mr. Beamer's salary increased to $200,000 as of April 1, 1998.
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The following table sets forth all individual grants of stock options
during 1997 to each of the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
----------------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENTAGE OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM (5)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME(1) GRANTED(2) FISCAL YEAR(3) PER SHARE(4) DATE 5% 10%
------- ---------- -------------- ------------ ---------- --------- ---------
William C. Thompson........ -- -- -- -- -- --
David L. Beamer(6)......... 90,000 16.7% $0.67 4/16/07 $37,734 $95,625
William P. Loomis(6)....... 60,000 11.1 0.67 4/16/07 25,156 63,750
John G. Burgess(6)......... 30,000 5.6 0.67 4/16/07 12,578 31,875
Gary G. Szukalski(7)....... 60,600 11.3 0.67 4/16/07 25,407 64,387
- ---------------
(1) Robert W. Simonds was granted options to purchase 150,000 shares of Common
Stock effective September 12, 1997 at an exercise price of $0.67.
(2) Options were "non-qualified" stock options and were granted under the Stock
Plans at an exercise price not less than the market value on the date of
grant as determined by the Board of Directors of the Company. See
"-- Employee Benefit Plans."
(3) Based on options to purchase an aggregate of 538,407 shares granted to
employees in 1997, including options granted to the Named Executive
Officers.
(4) All options were granted at exercise prices equal to the fair market value
of the Common Stock, as determined by the Board of Directors, on the date of
grant.
(5) Potential realizable values are net of exercise price, but before taxes
associated with exercise. Amounts represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. The assumed 5% and 10% rates of stock price appreciation are provided
in accordance with rules of the United States Securities and Exchange
Commission and do not represent the Company's estimate or projection of the
future Common Stock price. Actual gains, if any, on stock option exercises
are dependent on the future performance of the Common Stock, overall market
conditions and the option holders' continued employment through the vesting
period.
(6) Options are immediately exercisable at the date of grant, with shares
purchased upon exercise of such options subject to repurchase by the Company
and certain employee stockholders at the original exercise price upon the
occurrence of certain events until such shares are vested ("Repurchase
Rights"). The shares vest with respect to such repurchase to the extent of
25% on April 1, 1998 and an additional approximately 2% every month
thereafter.
(7) Options vest over a four year period at a rate of 25% annually, beginning
April 1, 1997, so long as the individual is employed by the Company. Shares
underlying such options are subject to the Repurchase Rights.
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The following table sets forth information regarding option exercises
during 1997 and exercisable and unexercisable stock options held as of December
31, 1997 by each of the Named Executive Officers:
AGGREGATED OPTION EXERCISES IN LAST YEAR AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
SHARES UNEXERCISED OPTIONS AT OPTIONS AT
ACQUIRED DECEMBER 31, 1997 DECEMBER 31, 1997 (1)
ON VALUE ------------------------------- ---------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------- -------- ----------- ------------- ----------- -------------
William C. Thompson......... -- $-- 88,950 -- $ $
David L. Beamer(2).......... 15,000 -- 420,150 52,500
William P. Loomis(2)........ 15,000 -- 295,948 --
John G. Burgess(2).......... -- -- 134,250 --
Gary G. Szukalski........... -- -- 59,400 90,000
- ---------------
(1) There was no public market for the Common Stock as of December 31, 1997.
Accordingly, these values have been calculated on the basis of an assumed
initial offering price of $ per share, less the applicable exercise
price, multiplied by the number of shares underlying such options.
(2) Certain options are immediately exercisable at the date of grant, but any
such shares purchased are subject to the Repurchase Rights. Of the
exercisable options, 330,150, 210,948 and 83,625 options held by Messrs.
Beamer, Loomis and Burgess, respectively, are vested with respect to the
Repurchase Rights as of December 31, 1997. See "Employee Benefit
Plans -- 1990 Non-qualified Stock Option Plan."
No compensation intended to serve as incentive for performance to occur
over a period longer than one year was paid pursuant to a long-term incentive
plan during the last year to any of the Named Executive Officers.
EMPLOYEE BENEFIT PLANS
1990 Stock Option Incentive Plan. The Company's 1990 Stock Option
Incentive Plan (the "SOIP") was adopted by the Board of Directors and approved
by the stockholders in June 1990. As of July 31, 1998, an aggregate of 1,374,000
shares of Common Stock had been reserved for issuance upon the exercise of
options under the SOIP. As of July 31, 1998, options to purchase 1,092,663
shares of Common Stock were outstanding at a weighted average exercise price of
approximately $1.70 per share; and 256,470 shares remained available for future
grant under the SOIP. All shares issued pursuant to the SOIP were granted at the
fair market value of the Company's Common Stock as of the time of grant, as
determined by the Board of Directors. The SOIP is currently administered by the
Compensation Committee. Subject to the provisions of the SOIP, the Compensation
Committee has the discretion to determine the optionees, the type of option to
be granted the terms of the grants and such other related provisions as are
consistent with the SOIP.
The SOIP provides for the grant of options to employees and directors who
are also employees of FileTek either as options qualifying for treatment under
the Internal Revenue Service Code of 1986, as incentive stock options ("ISOs"),
or as non-qualified stock options ("NSOs"). To date, all options granted have
been NSOs. The exercise price of options granted under the SOIP may not be less
than 100% of the fair market value of the Common Stock on the date of grant. No
option may be granted with a term exceeding ten years or result in, upon
exercise, an optionee holding over 10% of the outstanding stock. In the case of
ISOs, the aggregate fair market value of stock with respect to ISOs exercisable
for the first time by an employee may not exceed $100,000. The exercise price of
an ISO grant to an optionee who beneficially owns 10% or more of the outstanding
capital stock of the Company may not be less than 110% of the fair market value
per share on the date of grant.
Generally, options granted under the plan become exercisable at the rate of
25% per year beginning one year after the date of grant. Of the 1,092,663
options outstanding pursuant to the SOIP as of July 31, 1998, approximately
541,968 were immediately exercisable. The options terminate not more than ten
years from the date of grant, subject to earlier termination of the optionee's
death, disability or termination of employment with the Company, but provided
that the term of any options granted to a holder of more than 10% of the
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outstanding shares of capital stock may be no longer than five years. The SOIP
terminates in June 2000, unless sooner terminated by the Board of Directors.
Options are not assignable or otherwise transferable except by will or the
laws of descent and distribution. In the event of a reorganization, merger or
consolidation in which the Company is not the surviving corporation, or upon the
sale of all or substantially all of the Company's assets to another corporation,
the successor corporation shall assume all of the Company's outstanding options
or substitute new options therefor. The Board of Directors has the discretion in
any such event to determine and to make effective provisions for the
acceleration of time during which an option may be exercised, in which case the
option shall terminate within thirty days from the date of notification.
Notwithstanding the foregoing, the Board of Directors, in its sole discretion,
may determine that in connection with any such reorganization, merger, or
consolidation in which the Company is not the surviving corporation, optionees
shall receive cash equal to the excess of the fair market value of such shares
immediately prior to the effective date of such reorganization, merger or
consolidation over the exercise price.
The Company has a right of first refusal to purchase any shares of stock
that may be purchased upon the exercise of options granted under the SOIP that
an optionee may propose to transfer to a third party. In addition, the Company
has the right to repurchase at fair market value all shares held by an optionee
upon the optionee's termination of employment or service with the Company, for
any reason, within a specified period. The Company must repurchase the shares at
a price not less than the original exercise price per share of the optionee,
unless otherwise mutually agreed.
1990 Non-qualified Stock Option Plan. The Company's 1990 Non-qualified
Stock Option Plan (the "NSOP") was adopted by the Board of Directors and
approved by the stockholders in June 1990. As of July 31, 1998, an aggregate of
549,750 shares of Common Stock have been reserved for issuance under the NSOP.
As of July 31, 1998, options to purchase 529,352 shares of Common Stock were
outstanding at a weighted average exercise price of approximately $1.02 per
share and 3,898 shares remained available for future grant under the NSOP. All
shares issued pursuant to the NSOP were granted at the fair market value of the
Company's Common Stock as of the time of grant, as determined by the Board of
Directors. The NSOP is currently administered by the Board of Directors,
although the Board of Directors may delegate administration to a committee of at
least three directors.
Options granted under the NSOP are immediately exercisable, whether vested
or not. However, shares purchased under the NSOP which are not vested are
generally subject to repurchase by the Company at the original exercise price if
the purchaser ceases to be an employee of the Company. The repurchase option
typically lapses as to 25% of the shares granted following the first year after
the vesting commencement date and approximately 2% of the shares following each
additional month. As of July 31, 1998, 181,406 of the shares of Common Stock to
be purchased pursuant to options granted under the NSOP would be subject to the
Company's repurchase option if the underlying options were exercised. The
exercise price of options granted under the NSOP may not be less than 100% of
the fair market value of the Common Stock on the date of grant. No option may be
granted with a term exceeding ten years or result in, upon exercise, an optionee
holding over 10% of the outstanding stock. Subject to the provisions of the
NSOP, the Board of Directors has the discretion to determine the optionees, the
terms of the grants and such other related provisions as are consistent with the
NSOP.
The options terminate not more than ten years from the date of grant,
subject to earlier termination on the optionee's death, disability or
termination of employment with the Company. The NSOP terminates in June 2000,
unless sooner terminated by the Board of Directors.
Options are not assignable or otherwise transferable except by will or the
laws of descent and distribution. In the event of a reorganization, merger, or
consolidation in which the Company is not the surviving corporation or upon the
sale of all or substantially all of the Company's assets to another corporation,
the successor corporation shall assume all of the Company's outstanding options
or substitute new options therefor. The Board of Directors shall have the
discretion and power in any such event to determine and to make effective
provisions for the acceleration of time during which an option may be exercised,
in which case the option shall terminate within thirty days from the date of
notification. Notwithstanding the foregoing, the Board of Directors, in its sole
discretion, may determine that in connection with any such reorganization,
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merger or consolidation in which the Company is not the surviving corporation,
optionees shall receive cash equal to the excess of the fair market value of
such shares immediately prior to the effective date of such reorganization,
merger or consolidation over the exercise price.
The Company has a right of first refusal under the NSOP equivalent to that
under the SOIP.
At the discretion of the Board of Directors, an option agreement granted
pursuant to the NSOP may provide that, upon the purchase of stock of the Company
by a person other than an institutional investor such as a bank, insurance
company, venture capital firm, underwriter or small business investment company,
which results in a change in control, options granted hereunder will become
immediately exercisable without regard to the vesting and installment provisions
thereof.
Stock Option Agreements. In addition to stock options granted pursuant to
one of the aforementioned stock option plans, as of July 31, 1998, options to
purchase 508,557 shares of Common Stock pursuant to individualized stock option
agreements were outstanding at a weighted average exercise price of
approximately $1.68 per share. As of July 31, 1998, approximately 480,432 are
immediately exercisable.
1998 Omnibus Plan. The Company's 1998 Omnibus Stock Plan (the "Omnibus
Plan") was adopted by the Board of Directors and approved by the stockholders in
June 1998. The Omnibus Plan authorizes the issuance of an aggregate of up to
1,500,000 shares of Common Stock with respect to certain "Awards" made under the
Omnibus Plan. All such shares remain available for future grant under the
Omnibus Plan.
The Omnibus Plan provides for grants of options to employees, officers,
directors and consultants of the Company or any affiliate of the Company
provided, however, that no individual may receive an award of more than 250,000
shares in any one fiscal year. "Awards" under the Omnibus Plan may take the form
of grants of stock options, stock appreciation rights, restricted or
unrestricted stock, phantom stock, performance awards or any combination
thereof. The Omnibus Plan is administered by the Board of Directors, or by such
committee or committees as may be appointed by the Board of Directors from time
to time (the "Administrator"). The Administrator has sole power and authority,
consistent with the provisions of the Omnibus Plan, to determine which eligible
participants will receive Awards, the form of the Awards and the number of
shares of Common Stock covered by each Award, to impose terms, limits,
restrictions and conditions upon Awards, to modify, amend, extend or renew
Awards (with the consent of the awardee), to accelerate or change the exercise
timing of Awards or to waive any restrictions or conditions to an Award and to
establish objective and conditions for earning Awards.
Unless otherwise determined by the Administrator, and in any event in the
case of an incentive stock option or a stock appreciation right granted with
respect to an incentive stock option, Awards are not transferable other than by
will or the laws of descent and distribution. Unless otherwise determined by the
Administrator in accordance with the provisions of the immediately preceding
sentence, an Award may be exercised during the lifetime of the grantee, only by
the grantee or, during the period the grantee is under a legal disability, by
the grantee's guardian or legal representative. Unless terminated sooner by the
Board of Directors, the Omnibus Plan terminates in June 2008 or the date on
which all shares available for issuance shall have been issued pursuant to the
exercise or cancellation of Awards under the Omnibus Plan.
1998 Directors' Stock Option Plan. The 1998 Directors' Stock Option Plan
(the "Director Plan") was adopted by the Board of Directors and approved by the
stockholders in 1998. Under the terms of the Director Plan,
directors of the Company who are not employees of the Company (the "Eligible
Directors") are eligible to receive non-statutory options to purchase shares of
Common Stock. A total of shares of Common Stock may be issued
upon exercise of options granted under the Director Plan. Unless terminated
sooner by the Board of Directors, the Director Plan will terminate in June 2008,
or the date on which all shares available for issuance under the Director Plan
shall have been issued pursuant to the exercise of options granted under the
Director Plan.
Under the Director Plan, options to purchase shares of
Common Stock will be granted to each Eligible Director on the date of each
annual meeting of stockholders after the closing of the Offering. Options will
vest at the rate of one-twelfth of the total grant per month, and will vest in
full at the earlier of (i) the first anniversary of the date of the grant or
(ii) the date of the next annual meeting of stockholders.
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The exercise price of options granted under the Director Plan will equal the
fair market value per share of the Common Stock on the date of grant.
Options granted under the Director Plan are not transferable by the
optionee except by will or by the laws of descent and distribution or pursuant
to a qualified domestic relations order. In the event an optionee ceases to
serve as a director, each option may be exercised by the optionee for the
portion then exercisable at any time within 60 days after the optionee ceases to
serve as a director; provided, however, that in the event that the optionee
ceases to serve as a director due to his death or disability, then the optionee,
or his or her administrator, executor or heirs, may exercise the exercisable
portion of the option for up to 180 days following the date the optionee ceases
to serve as a director. No option is exercisable after the expiration of seven
years from the date of grant.
401(k) Retirement Savings Plan. In February 1990, the Company adopted the
FileTek 401(k) Savings Plan, a plan qualified under Sections 401(a) and 401(k)
of the Internal Revenue Service Code. Generally, all employees are eligible to
participate in the 401(k) plan after they complete three months of service.
Eligible employees may contribute up to 15% of their compensation, not to exceed
the maximum excludable amount allowed by the Internal Revenue Service, and such
amounts will be 100% vested at all times. Effective January 1, 1995, the Company
began matching 25% of the first $1,200 of each participating employee's
contributions to the plan. Any matching contributions vest immediately.
AGREEMENTS WITH EMPLOYEES
Employees of the Company are generally required to enter into agreements
(i) prohibiting disclosure of confidential or proprietary information of the
Company, (ii) prohibiting activities involving certain potential conflicts of
interest with the Company and (iii) assigning inventions to the Company. In
addition, in certain cases the agreements generally provide that, upon
termination, the employee will not work in certain capacities for a competitor
and will not competitively solicit Company customers or employees for a
designated period of time. Otherwise, employees of the Company are not subject
to written employment contracts.
The Company presently has no employment contracts with any of its officers,
other than as set forth above. Under certain conditions, the exercisability and
vesting of certain stock options granted to certain Named Executive Officers may
be accelerated in the event of certain corporate transactions or changes in
control.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1997, the Company did not have a Compensation Committee. The Board
of Directors, Messrs. Thompson, Beamer, Cole, Frauenfelder and Simonds, was
involved in compensation decisions. On June 12, 1998, the Board of Directors
established a Compensation Committee composed of the Outside Directors to
administer the Company's executive compensation program. There are no
Compensation Committee interlocks. See "Certain Transactions" for a description
of certain relationships and transactions between the Company and its directors
and executive officers.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Amended and Restated Certificate of Incorporation limits the
liability of directors to the maximum extent permitted by Delaware law and
provides that the Company shall indemnify its officers and directors to the
fullest extent permitted by law. Delaware law provides that directors of a
company will not be personally liable for monetary damages for breach of their
fiduciary duties as directors except for liability (i) for any breach of their
loyalty to the company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation Law
or (iv) for any transactions from which the director derived an improper
personal benefit.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
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CERTAIN TRANSACTIONS
During 1996 and 1997, the Company borrowed an aggregate of $2.7 million
from the William C. Thompson Revocable Trust (the "Trust"). William C. Thompson,
the Company's Chief Executive Officer, Chairman of the Board and principal
stockholder is a co-trustee and the sole beneficiary of the Trust. These
borrowings were in the form of subordinated debt at an interest rate of prime
plus 3.5% per annum. In May 1997, the Trust assigned $2.1 million of the
subordinated notes, under the same terms and conditions, to the William C.
Thompson Family Limited Partnership, which is indirectly controlled by Mr.
Thompson. Interest expense accrued on these notes was approximately $282,000 in
1997. All outstanding loans and accrued interest were repaid in full during 1997
and there was no outstanding balance at December 31, 1997.
From 1993 to 1997, the Company borrowed funds from Centennial, an entity
100% owned by Mr. Thompson and his family, the President of which is Mr.
Thompson and the Vice President of Finance of which is William P. Loomis, the
Company's Vice President of Finance and Administration, Chief Financial Officer,
Treasurer and Secretary. These loans, which took the form of demand notes with
interest payable monthly at the rate of prime plus 1% until May 31, 1993 and at
prime thereafter, included aggregate borrowings of $3.9 million in 1997.
Interest expense accrued and paid on these loans was approximately $80,000 in
1997. There was no outstanding balance on these loans at December 31, 1997.
Since 1990, the Company has leased certain equipment and related software
from Centennial at effective annual interest rates ranging from 12% to 18%. All
of the leases are capital leases. Capital lease additions from Centennial were
approximately $45,000 in 1997. Interest expense on these capital lease
obligations was approximately $44,000 in 1997. As of December 31, 1997, monthly
installments were approximately $12,000 and the capital lease obligation balance
to Centennial was approximately $217,000. There were no capital lease additions
subsequent to December 31, 1997 and the entire capital lease obligation to
Centennial was repaid in full in March 1998.
Centennial and FileTek prorate the costs of shared facilities based on
employee counts. Centennial reimbursed FileTek approximately $42,000 in 1997 for
its share of the facilities. The Company is required to provide a letter of
credit to collateralize its lease obligations pursuant to the terms and
conditions of the Company's lease for its headquarters' facility. The amount of
the letter of credit, which varies over time, was $50,272 in April 1998. Mr.
Thompson has personally provided the collateral for this letter of credit and
did not receive any additional consideration for this provision. Upon completion
of this Offering, no letter of credit will be required under the lease.
Since the Company's inception, it has been represented in its legal affairs
primarily by the law firm of Patton Boggs LLP. Elliot H. Cole, a director of the
Company, is a senior partner of that firm.
The Company believes that the terms of all of the transactions described in
this section were no less favorable than those which would have been obtained
had these transactions occurred with unaffiliated persons. All transactions with
affiliates have been, and will continue to be, on terms no less favorable to the
Company than those which could be obtained from unaffiliated parties. The
Company has adopted a policy whereby all future transactions between the Company
and its officers, directors and affiliates will be on terms no less favorable to
the Company than could be obtained from unrelated third parties and will be
approved by a majority of the disinterested members of the Board of Directors.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding Common Stock as of July 31, 1998, and as
adjusted to reflect the sale of the shares offered by: (i) each person who is
known by the Company to own beneficially more than 5% of the Company's Common
Stock; (ii) each director and Named Executive Officer; (iii) all officers and
directors as a group; and (iv) each Selling Stockholder.
NUMBER OF SHARES NUMBER OF SHARES
BENEFICIALLY OWNED NUMBER OF BENEFICIALLY OWNED AFTER
BEFORE OFFERING(2)(3) SHARES OFFERING(3)
--------------------- BEING -------------------------
NAME OF STOCKHOLDER(1) NUMBER PERCENT OFFERED NUMBER PERCENT
---------------------- ---------- -------- --------- ----------- -----------
William C. Thompson (4)..................... 8,124,694 91.2%
William P. Loomis (5)(6).................... 526,198 5.8
David L. Beamer (7)......................... 464,775 5.0
Elliot H. Cole (5)(8)....................... 348,075 3.9
John G. Burgess (9)......................... 284,250 3.2
Gary G. Szukalski (10)...................... 87,150 1.0
Greg A. Sheard (11)......................... 75,000 *
Lewis S. Frauenfelder (12).................. 43,875 *
Kenneth W. Simonds (13)..................... 43,875 *
Robert W. Simonds (14)...................... 37,500 *
Directors and Executive Officers as a group
(11 persons) (5)(15)...................... 9,832,892 97.7%
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* Less than 1%.
(1) Unless otherwise noted, the stockholder's address is at the Company's
principal executive offices.
(2) The persons named in this table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable and except as indicated
in the other footnotes to this table. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission. In
computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of Common Stock subject to
options held by that person that are currently exercisable or exercisable
within 60 days after July 31, 1998, are deemed outstanding. Such shares,
however, are not deemed outstanding for the purpose of computing the
percentage ownership of any other person.
(3) Applicable percentage of ownership is based on 8,806,857 shares of Common
Stock outstanding on July 31, 1998, including 8,719,440 shares issuable
upon the conversion of the Preferred Stock, and shares of Common
Stock outstanding after the completion of this Offering. Common Stock
issuable upon exercise of options is deemed to be outstanding and to be
beneficially owned by the person holding such options for the purpose of
computing the percentage ownership of such person but are not treated as
outstanding for the purpose of computing the percentage ownership of any
other person.
(4) Includes 7,533,896 shares of Common Stock held by the Thompson Family
L.L.C., as General Partner for the William C. Thompson Family Limited
Partnership, 485,798 shares of Common Stock held as a life interest,
jointly purchased with Mr. Thompson's adult children, and 103,950 shares of
Common Stock issuable upon exercise of options, 15,000 shares of which are
subject to the Company's repurchase option. Excludes 202,500 shares of
Common Stock held by trusts for the benefit of Mr. Thompson's children, as
to which Mr. Thompson disclaims beneficial ownership. Excludes 125,595
shares of Common Stock held by W. Mark Thompson, son of Mr. Thompson, as to
which Mr. Thompson disclaims beneficial ownership.
(5) Includes 101,250 shares of Common Stock held by Elliot H. Cole and William
P. Loomis as co-trustees for the 1986 William Mark Thompson Trust and
101,250 shares of Common Stock held as co-trustees for the 1986 Katherine
Thompson Trust, as to which Mr. Cole and Mr. Loomis disclaim beneficial
ownership.
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(6) Includes 307,198 shares of Common Stock issuable upon exercise of options,
69,844 of which are subject to the Company's Repurchase Rights pursuant to
the NSOP and of which shares will be issued upon the exercise of
options immediately prior to the closing of the Offering.
(7) Includes 440,775 shares of Common Stock issuable upon exercise of options,
61,875 of which are subject to the Company's Repurchase Rights pursuant to
the NSOP and of which shares will be issued upon the exercise of
options immediately prior to the closing of the Offering.
(8) Includes 15,825 shares of Common Stock issuable upon exercise of options.
(9) Includes 134,250 shares of Common Stock issuable upon exercise of options,
34,688 of which are subject to the Company's Repurchase Rights pursuant to
the NSOP.
(10) Includes 1,500 shares of Common Stock held by Mr. Szukalski's wife and
85,650 shares of Common Stock issuable upon exercise of options,
of which shares will be issued upon the exercise of options immediately
prior to the closing of the Offering.
(11) Includes 75,000 shares of Common Stock issuable upon exercise of options,
of which shares will be issued upon the exercise of options
immediately prior to the closing of the Offering.
(12) Includes 28,875 shares of Common Stock issuable upon exercise of options,
of which shares will be issued upon the exercise of options
immediately prior to the closing of the Offering.
(13) Includes 28,875 shares of Common Stock issuable upon exercise of options,
of which shares will be issued upon the exercise of options
immediately prior to the closing of the Offering.
(14) Includes 37,500 shares of Common Stock issuable upon exercise of options,
of which shares will be issuable upon the exercise of options
immediately prior to the closing of the Offering.
(15) Includes an aggregate of 1,257,898 shares of Common Stock issuable upon
exercise of options, 181,406 of which are subject to the Company's
Repurchase Rights pursuant to the NSOP and of which shares will
be issued upon the exercise of options immediately prior to the closing of
the Offering.
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DESCRIPTION OF CAPITAL STOCK
Effective upon the closing of the Offering, the authorized capital stock of
the Company will consist of 25,000,000 shares of Common Stock, $.01 par value
per share, and 5,000,000 shares of preferred stock, $.01 par value per share
(the "Preferred Stock").
COMMON STOCK
At July 31, 1998, there were 87,417 shares of Common Stock issued and
outstanding and held of record by 19 stockholders. Following the closing of the
Offering, the Company will have shares of Common Stock issued and
outstanding, comprised of: (i) shares issued and outstanding prior to
this Offering; (ii) shares issued by the Company in connection
with this Offering; and (iii) 8,719,440 shares issued to holders of the
Company's Convertible Preferred Stock which automatically convert into Common
Stock upon the closing of this Offering.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding Preferred Stock.
Holders of the Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in this Offering will be, when issued and paid for, duly
authorized, legally issued, fully paid and nonassessable. The rights,
preferences and privileges of holders of Common Stock are subject to, and may be
adversely affected by, the rights of the holders of shares of any series of
Preferred Stock which the Company may designate and issue in the future.
PREFERRED STOCK
Upon the closing of this Offering, all outstanding shares of Convertible
Preferred Stock will be converted into shares of Common Stock. Thereafter, the
Board of Directors will be authorized, subject to certain limitations prescribed
by law, without further stockholder approval, to issue from time to time up to
an aggregate of 5,000,000 shares of Preferred Stock in one or more series and to
fix or alter the designations, preferences, rights and any qualifications,
limitations or restrictions of the shares of each such series thereof, including
the dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption (including sinking fund provisions), redemption price or prices,
liquidation preferences and the number of shares constituting any series or
designations of such series. The issuance of Preferred Stock may have the effect
of delaying, deterring or preventing a change of control of the Company. The
Company has no present plans to issue any shares of Preferred Stock.
The Company believes that the Preferred Stock will provide the Company with
increased flexibility in structuring possible future financings and
acquisitions, and in meeting other corporate needs that might arise. Having such
authorized shares available for issuance will allow the Company to issue shares
of Preferred Stock without the expense and delay of holding a special
stockholders' meeting. The authorized shares of Preferred Stock, as well as
shares of Common Stock, will be available for issuance without further action by
stockholders of the Company, unless such action is required by applicable law or
the rules of any stock exchange or quotation system on which the Company's
securities may be listed or quoted.
DELAWARE LAW AND CERTAIN PROVISIONS OF THE COMPANY'S AMENDED AND RESTATED
CERTIFICATE AND BYLAWS
The Company's Amended and Restated Certificate of Incorporation and Bylaws
provide that the number of directors shall be determined from time to time by
resolution adopted by a majority of the Board of Directors.
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Section 203 of the Delaware General Corporation Law, as amended ("Section
203"), provides that, subject to certain exceptions specified therein, an
"interested stockholder" of a Delaware corporation shall not engage in any
business combination, including mergers or consolidations, asset sales or other
transactions, with the corporation for a three-year period following the date at
which the stockholder becomes an "interested stockholder" unless (i) prior to
such date, the board of directors of the corporation approved either the
business combination or the transaction which resulted in the stockholder
becoming an "interested stockholder," (ii) upon consummation of the transaction
which resulted in the stockholder becoming an "interested stockholder," the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time that the transaction commenced (excluding certain
shares), or (iii) on or subsequent to such date, the business combination is
approved by the board of directors of the corporation and authorized at an
annual or special meeting of stockholders by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the "interested
stockholder." Except as otherwise specified in Section 203, an "interested
stockholder" is defined to include (x) any person which is the owner of 15% or
more of the outstanding voting stock of the corporation, or is an affiliate or
associate of the corporation and was the owner of 15% or more of the outstanding
voting stock of the corporation at any time within three years immediately prior
to the relevant date and (y) the affiliates and associates of any such person.
The Company's stockholders, by adopting an amendment to its Certificate of
Incorporation or Bylaws, may elect not to be governed by Section 203, effective
immediately upon adoption of such amendment. Neither the Amended and Restated
Certificate of Incorporation nor the Bylaws presently exclude the Company from
the restrictions imposed by Section 203.
These and other provisions could have the effect of making it more
difficult to acquire the Company by means of a tender offer, proxy contest or
otherwise or to remove the incumbent officers and directors of the Company.
These provisions may discourage certain types of coercive takeover practices and
encourage persons seeking to acquire control of the Company to first negotiate
with the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Boston EquiServe
LP.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no public market for the securities
of the Company. Upon completion of this Offering, based upon the number of
shares outstanding at , 1998, there will be shares of
Common Stock of the Company outstanding (assuming no exercise of the
Underwriters' over-allotment option or options outstanding under the Company's
stock option plans). Of these shares, the shares sold in this
Offering will be freely tradable without restriction or further registration
under the Securities Act of 1933, as amended (the "Securities Act"), except that
any shares purchased by "affiliates" of the Company, as that term is defined in
Rule 144 ("Rule 144") under the Securities Act ("Affiliates"), may generally
only be sold in compliance with the limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES
The remaining shares of Common Stock are deemed "restricted
securities" under Rule 144. Of the restricted securities, approximately
shares of Common Stock, which are not subject to Lock-up
Agreements with the Representatives of the Underwriters, will be eligible for
immediate sale in the public market pursuant to Rule 144(k) under the Securities
Act. Approximately additional shares of Common Stock, which are
not subject to Lock-up Agreements, will be eligible for sale in the public
market in accordance with Rule 144 or Rule 701 under the Securities Act
beginning 90 days after the date of this Prospectus. Upon expiration of the
Lock-up Agreements 180 days after the date of this Prospectus (and assuming no
exercise of any outstanding options), approximately additional
shares of Common Stock will be available for sale in the public market, subject
to the provisions of Rule 144 under the Securities Act.
Stockholders and optionholders holding in the aggregate approximately
shares of Common Stock (including shares of Common
Stock that may be acquired pursuant to the exercise of options held by them and
exercisable within 60 days of , 1998) on the date of this
Prospectus, have agreed that, for a period of 180 days after the date of this
Prospectus, they will not sell, offer, contract or grant any option to sell,
pledge, transfer, establish an open put equivalent position or otherwise dispose
of any shares of Common Stock, any options to purchase shares of Common Stock or
any shares convertible into or exchangeable for shares of Common Stock, owned
directly by such persons or with respect to which they have the power of
disposition, without the prior written consent of NationsBanc Montgomery
Securities LLC which may be given, at its sole discretion, and at any time or
from time to time as to any or all such shares without notice.
In general, under Rule 144 as currently in effect, beginning 90 days after
the effective date of the Registration Statement of which this Prospectus is a
part, a stockholder, including an Affiliate, who has beneficially owned his or
her restricted securities (as that term is defined in Rule 144) for at least one
year from the later of the date such securities were acquired from the Company
or (if applicable) the date they were acquired from an Affiliate is entitled to
sell, within any three-month period, a number of such shares that does not
exceed the greater of 1% of the then outstanding shares of Common Stock
( shares immediately after this Offering) or the average weekly
trading volume in the Common Stock during the four calendar weeks preceding the
date on which notice of such sale was filed under Rule 144, provided certain
requirements concerning availability of public information, manner of sale and
notice of sale are satisfied. In addition, under Rule 144(k), if a period of at
least two years has elapsed between the later of the date the restricted
securities were acquired from the Company or (if applicable) the date they were
acquired from an Affiliate of the Company, a stockholder who is not an Affiliate
of the Company at the time of sale and has not been an Affiliate of the Company
for at least three months prior to the sale is entitled to sell the shares
immediately without compliance with the foregoing requirements under Rule 144.
Securities issued in reliance on Rule 701 (such as shares of Common Stock
acquired pursuant to the exercise of certain options granted under the Company's
stock plans) are also restricted securities and, beginning 90 days after the
date of this Prospectus, may be sold by stockholders other than Affiliates of
the
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Company subject only to the manner of sale provisions of Rule 144 and by
Affiliates under Rule 144 without compliance with its one-year holding period
requirement.
OPTIONS
The Company intends to file registration statements on Form S-8 under the
Securities Act to register shares of Common Stock issued or reserved for
issuance under the Stock Option Plans, thus permitting the resale of such shares
by nonaffiliates in the public market without restriction, subject to Rule 144
limitations applicable to Affiliates and the Lock-up Agreements noted above, if
applicable. Such registration statements will not be effective prior to the date
90 days after the date of the Prospectus.
EFFECT OF SALES OF SHARES
Prior to this Offering, there has been no public market for the Common
Stock of the Company, and no prediction can be made as to the effect, if any,
that market sales of shares of Common Stock or the availability of shares for
sale will have on the market price of the Common Stock prevailing from time to
time. Nevertheless, sales of significant numbers of shares of the Common Stock
in the public market could adversely affect the market price of the Common Stock
and could impair the Company's future ability to raise capital through an
offering of its equity securities.
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UNDERWRITING
The Underwriters named below (the "Underwriters"), represented by
NationsBanc Montgomery Securities LLC, BancAmerica Robertson Stephens and
FAC/Equities, a division of First Albany Corporation (the "Representatives"),
have severally agreed, subject to the terms and conditions set forth in the
Underwriting Agreement, to purchase from the Company and the Selling
Stockholders the number of shares of Common Stock indicated below opposite their
respective names at the initial public offering price less the underwriting
discount set forth on the cover page of this Prospectus. The Underwriting
Agreement provides that the obligations of the Underwriters are subject to
certain terms and conditions precedent and that the Underwriters are committed
to purchase all of such shares, if any are purchased.
NUMBER OF
UNDERWRITER SHARES
----------- ---------
NationsBanc Montgomery Securities LLC.......................
BancAmerica Robertson Stephens..............................
First Albany Corporation....................................
--------
Total
========
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters initially propose to offer the Common Stock to the public
on the terms set forth on the cover page of this Prospectus. The Underwriters
may allow to selected dealers a concession of not more than $ per share, and
the Underwriters may allow, and any such dealers may reallow, a concession of
not more than $ per share to certain other dealers. After the initial public
offering, the offering price and other selling terms may be changed by the
representatives. The Common Stock is offered subject to receipt and acceptance
by the Underwriters and to certain other conditions, including the right to
reject orders in whole or in part.
The Company and certain Selling Stockholders have granted an option to the
Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to an aggregate maximum of additional
shares of Common Stock to cover over-allotments, if any, at the same price per
share as the initial shares to be purchased by the Underwriters. To the extent
that the Underwriters exercise this option, the Underwriters will be committed,
subject to certain conditions, to purchase such additional shares in
approximately the same proportion as set forth in the above table. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with this Offering.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters against certain liabilities,
including civil liabilities, under the Securities Act, or will contribute to
payments the Underwriters may be required to make in respect thereof.
Stockholders and optionholders of the Company, who immediately following
this Offering (assuming no exercise of the over-allotment option) collectively
will beneficially own shares of Common Stock, have agreed not to
directly or indirectly sell, offer, contract or grant any option to sell,
pledge, transfer, establish an open put equivalent position or otherwise dispose
of any rights with respect to any shares of Common Stock, any options to
purchase Common Stock, or any securities convertible or exchangeable for Common
Stock, owned directly by such holders or with respect to which they have the
power of disposition for a period of 180 days after the date of this Prospectus
without the prior written consent of NationsBanc Montgomery Securities LLC.
NationsBanc Montgomery Securities LLC may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to the
Lock-up Agreements. In addition, the Company has agreed not to sell, offer to
sell, contract to sell or otherwise sell or dispose of any shares of Common
Stock or any rights to acquire Common Stock, other than pursuant to its stock
plans or upon the exercise of outstanding options, for a period of 180 days
after the date of this Prospectus without the prior consent of NationsBanc
Montgomery Securities LLC. See "Shares Eligible for Future Sale."
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In connection with this Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock, including over-allotment, stabilization, syndicate covering
transactions and imposition of penalty bids. In an over-allotment, the
Underwriters would allot more shares of Common Stock to their customers in the
aggregate than are available for purchase by the Underwriters under the
Underwriting Agreement. Stabilizing means the placing of any bid, or the
effecting of any purchase, for the purpose of pegging, fixing or maintaining the
price of a security. In a syndicate covering transaction, the Underwriters would
place a bid or effect a purchase to reduce a short position created in
connection with this Offering. Pursuant to a penalty bid, NationsBanc Montgomery
Securities LLC, on behalf of the Underwriters, would be able to reclaim a
selling concession from an Underwriter if shares of Common Stock originally sold
by such Underwriter are purchased in syndicate covering transactions. These
transactions may result in the price of the Common Stock being higher than the
price that might otherwise prevail in the open market. These transactions may be
effected on the Nasdaq National Market, in the over-the-counter market or
otherwise, and, if commenced, may be discontinued at any time.
The Representatives have informed the Company that they do not expect to
make sales to accounts over which they exercise discretionary authority in
excess of 5% of the number of shares of Common Stock offered hereby.
Prior to this Offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price has been
determined through negotiations among the Company and the Representatives. Among
the factors considered in such negotiations were the history of, and prospects
for, the Company and the industry in which it competes, an assessment of the
Company's management, the present state of the Company's development, the
prospects for future earnings of the Company, the prevailing market conditions
at the time of this Offering, market valuations of publicly traded companies
that the Company and the Representatives believe to be comparable to the
Company, and other factors deemed relevant.
LEGAL MATTERS
Certain legal matters with respect to the Common Stock will be passed upon
for the Company by Piper & Marbury L.L.P., Washington, D.C. and for the Selling
Stockholders by Patton Boggs LLP, Washington, D.C. Certain legal matters in
connection with the Offering will be passed upon for the Underwriters by
Buchanan Ingersoll Professional Corporation, Princeton, New Jersey.
EXPERTS
The consolidated financial statements of FileTek, Inc. at December 31, 1996
and 1997, and for each of the three years in the period ended December 31, 1997,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
(including all amendments thereto, the "Registration Statement") under the
Securities Act of 1933, with respect to the Common Stock offered hereby. As
permitted by the rules and regulations of the Commission, this prospectus omits
certain information contained in the Registration Statement and the exhibits and
schedules filed therewith. For further information with respect to the Company
and the Common Stock offered hereby, reference is made to the Registration
Statement and the exhibits and schedules filed therewith. Statements contained
in this Prospectus concerning the contents of any contract or any other document
referred to are not necessarily complete; reference is made in each instance to
the copy of such contract or document filed as an exhibit to the Registration
Statement. Each such statement is qualified in all respects by such reference to
such exhibits. The Registration
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Statement, including exhibits and schedules thereto, may be inspected without
charge at the Commission's principal office, Public Reference Section, Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices
of the Commission located at Seven World Trade Center, Suite 1300, NY, NY 10048
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois,
60661-2511. Copies of all or any part thereof may be obtained from the Public
Reference Section of the Commission after payment of fees prescribed by the
Commission. The Commission also maintains a Web Site that contains reports,
proxy statements and other information regarding registrants, including the
Company, that file such information electronically with the Commission. The
address of the Commission's Web Site is http://www.sec.gov.
The Company intends to distribute to its stockholder annual reports
containing audited financial statements. The Company also intends to make
available to its stockholders, within 45 days after the end of each fiscal
quarter, reports for the first three quarters of each fiscal year containing
interim unaudited financial information.
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GLOSSARY
ADS Atomic Data Store (ADS) is a data warehouse that contains
the most granular level of information that an enterprise
can collect at a single point of service. An atomic data
store contains detail rather than aggregate data.
AMMO-II Alternative to Microfilm/Microfiche On-line (AMMO-II) is
FileTek's enterprise-wide solution for providing on-line
access to multiple terabytes of information that are
typically filed, printed or archived to microfiche or
microfilm. AMMO-II lets end-users store report information
on host DASD and StorHouse Systems, then access and view
that information in seconds.
API Application Programming Interface (API) is a programming
language interface between a system control program or a
licensed program and an end-user program. The StorHouse
Callable Interface is an API.
COLD Computer Output to Laser Disk (COLD) is a software system
that archives computer generated documents to storage media
that can be electronically accessed and viewed on-line.
DASD Direct Access Storage Device (DASD) is a storage device that
provides immediate access to stored data.
Data Mart A subset of the data resource, usually oriented to a
specific purpose or major data subject, that may be
distributed to support business needs. The concept of a data
mart can apply to any data whether they are operational
data, evaluational data, spatial data or metadata.
Data An implementation of an informational database used to store
Warehouse sharable data sourced from an operational
database-of-record. It is typically a subject database that
allows users to tap into a company's vast store of
operational data to track and respond to business trends and
facilitate forecasting and planning efforts.
DRDA Distributed Relational Database Architecture (DRDA) is a
database access standard defined by IBM.
Gigabyte A gigabyte (GB) is a unit of storage equal to 1,000
megabytes.
HSM Hierarchical Storage Management (HSM) is a system
architecture based on a hierarchy of storage technologies
that provide the proper balance between system performance
and storage costs. HSM systems typically migrate data from
expensive high-performance storage media to less expensive
lower-performance storage based on frequency of use. HSM
provides an economical means for managing and storing
massive amounts of data.
LAN-AMMO LAN-AMMO is FileTek's LAN-based client/server extension of
AMMO-II. LAN-AMMO lets end-users view, print and fax
archived documents, including character-based, mixed-mode
and pure AFP, from a local area network.
ODBC Open Database Connectivity (ODBC) is Microsoft's interface,
based on SQL, designed to allow for a universal command set
for data access across multiple database types.
Petabyte A petabyte (PB) is a unit of storage equal to 1,000
terabytes.
RAID Redundant Array of Independent Disks (RAID) is an array of
magnetic disks where part of the storage capacity is used to
store redundant information about data on the other disks.
RDBMS Relational Database Management System (RDBMS) is
comprehensive software that manages one or more databases
perceived as a set of tables and manipulated in accordance
with the relational model of data.
SQL Structured Query Language (SQL) is a standardized language
for defining and manipulating data in a relational database.
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Storage Storage Machine, FileTek's first storage management system
Machine designed for the COLD market, is the forerunner of
StorHouse/SM.
StorHouse StorHouse is FileTek's patented enterprise-wide software
solution for managing the capture, storage, movement and
access of gigabytes to petabytes of relational and
non-relational atomic data.
StorHouse/RM StorHouse/RM is FileTek's patented relational database
management system (RDBMS) software. It works in conjunction
with FileTek's hierarchical storage management (HSM)
software component, StorHouse/SM, to administer the storage,
access, and movement of relational atomic data.
StorHouse/SM StorHouse/SM is FileTek's patented hierarchical storage
management software for managing terabytes to petabytes of
enterprise-wide atomic data.
SM/API SM/API, or Callable Interface, provides access to StorHouse
from user applications. It is a collection of callable
subroutines that allow an application to perform file
maintenance and status operations and data transfers to and
from StorHouse.
Terabyte A terabyte (TB) is a unit of storage equal to 1,000
gigabytes.
WORM Write Once Read Many (WORM) is a type of optical media that
supports one write and many reads. Data written to WORM
optical is permanent and cannot be erased.
VROM VROM is FileTek's client/server software product for
accessing StorHouse data from Windows applications. VROM
lets end-uses access data from StorHouse just like they
access data on a hard drive or CD-ROM.
VSAC Volume Storage Allocation and Control (VSAC) is FileTek's
patented software component for logically grouping
relational and non-relational data according to specific
access and aging patterns. VSAC tracks available space,
chooses appropriate volumes and allocates or deallocates
physical storage automatically according to user-tunable
parameters.
Web-AMMO Web-AMMO is FileTek's Internet/Intranet report retrieval and
viewing software. It provides World Wide Web access to
documents archived to an AMMO-II system.
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FILETEK, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
63
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
FileTek, Inc.
We have audited the accompanying consolidated balance sheets of FileTek,
Inc. as of December 31, 1996 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, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of FileTek, Inc.
at December 31, 1996 and 1997, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, in 1997
the Company changed its method of accounting for software revenue recognition.
/s/ Ernst & Young LLP
Vienna Virginia
April 16, 1998, except for Note 13,
as to which the date is June 18, 1998
F-2
64
FILETEK, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, PRO FORMA
------------------- JUNE 30, JUNE 30, 1998
1996 1997 1998 (NOTE 13)
-------- -------- ----------- -------------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents......................... $ 31 $ 7,163 $ 7,807
Accounts receivable, less allowance of
approximately $83, $75 and $253 at December 1996
and 1997 and June 30, 1998, respectively........ 3,371 4,789 4,642
Inventory......................................... 2,717 5,291 2,979
Receivable from the sale of Common Stock.......... -- 50 --
Other............................................. 111 179 860
Deferred income taxes............................. -- 235 1,747
-------- -------- --------
Total current assets......................... 6,230 17,707 18,035
Property and equipment, net............................ 3,867 3,442 3,300
Capitalized software development costs, net............ 1,548 954 630
Other.................................................. 23 28 28
-------- -------- --------
Total assets................................. $ 11,668 $ 22,131 $ 21,993
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 863 $ 1,342 $ 587
Accrued liabilities............................... 1,699 2,536 3,077
Deferred revenues................................. 2,745 14,812 10,741
Notes payable..................................... 5,078 -- --
Income taxes payable.............................. -- 444 --
Current portion of capital lease obligations...... 256 226 95
-------- -------- --------
Total current liabilities.................... 10,641 19,360 14,500
Capital lease obligations, net of current portion...... 294 480 325
-------- -------- --------
Total liabilities............................ 10,935 19,840 14,825
Stockholders' equity:
Preferred Stock, Series A, $.01 par value;
4,500,000 shares authorized; 3,669,986 shares
issued and outstanding at December 31, 1996,
1997 and June 30, 1998.......................... 37 37 37 $ --
Preferred Stock, Series B, $.01 par value;
2,400,000 shares authorized; 2,142,973 shares
issued and outstanding at December 31, 1996,
1997 and June 30, 1998.......................... 21 21 21 --
Common Stock, $.01 par value; 8,400,000 shares
authorized; 7,797, 83,697 and 87,417 shares
issued and outstanding at December 31, 1996,
1997 and June 30, 1998, respectively (8,806,857
pro forma shares)............................... -- 1 1 88
Additional capital................................ 20,814 20,864 21,559 21,530
Accumulated deficit............................... (20,137) (18,628) (13,795) (13,795)
Unearned compensatory stock options............... -- -- (652) (652)
Cumulative foreign currency translations.......... (2) (4) (3) (3)
-------- -------- -------- --------
Total stockholders' equity................... 733 2,291 7,168 7,168
-------- -------- -------- --------
Total liabilities and stockholders' equity... $ 11,668 $ 22,131 $ 21,993 $ 21,993
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
65
FILETEK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------- -----------------------
1995 1996 1997 1997 1998
--------- ---------- ---------- ---------- ----------
(UNAUDITED)
Revenues:
Software licenses............. $ 5,055 $ 2,835 $ 5,437 $ 2,679 $ 6,428
Hardware...................... 10,527 5,911 7,486 3,721 5,993
Maintenance and other
services.................... 6,805 9,043 10,776 4,898 6,573
--------- ---------- ---------- ---------- ----------
Total revenues........... 22,387 17,789 23,699 11,298 18,994
--------- ---------- ---------- ---------- ----------
Costs of revenues:
Software licenses............. 896 830 624 287 324
Hardware...................... 5,410 3,955 5,497 2,954 4,521
Maintenance and other
services.................... 4,626 5,846 5,556 2,469 3,637
Write-off of capitalized
software development
costs....................... -- 3,492 -- -- --
--------- ---------- ---------- ---------- ----------
Total costs of
revenues............... 10,932 14,123 11,677 5,710 8,482
--------- ---------- ---------- ---------- ----------
Gross profit....................... 11,455 3,666 12,022 5,588 10,512
--------- ---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing........... 5,763 5,044 3,891 1,870 2,488
Research and development...... 1,068 3,180 3,646 1,790 1,943
General and administrative.... 1,805 1,746 2,148 858 1,529
--------- ---------- ---------- ---------- ----------
Total operating
expenses............... 8,636 9,970 9,685 4,518 5,960
--------- ---------- ---------- ---------- ----------
Income (loss) from operations...... 2,819 (6,304) 2,337 1,070 4,552
--------- ---------- ---------- ---------- ----------
Other income (expense):
Interest income............... 10 4 29 -- 268
Interest expense.............. (518) (478) (590) (351) (48)
Capitalized interest.......... 256 44 11 11 --
Other income.................. 148 73 37 13 61
--------- ---------- ---------- ---------- ----------
Total other income
(expense).............. (104) (357) (513) (327) 281
--------- ---------- ---------- ---------- ----------
Income (loss) before provision for
income taxes..................... 2,715 (6,661) 1,824 743 4,833
Provision for income taxes......... 18 47 315 87 --
--------- ---------- ---------- ---------- ----------
Net income (loss).................. $ 2,697 $ (6,708) $ 1,509 $ 656 $ 4,833
========= ========== ========== ========== ==========
Basic net income (loss) per
share............................ $1,047.47 $(1,156.89) $ 187.00 $ 83.38 $ 56.21
========= ========== ========== ========== ==========
Diluted net income (loss) per
share............................ $ 0.31 $(1,156.89) $ 0.17 $ 0.07 $ 0.49
========= ========== ========== ========== ==========
Weighted average shares outstanding
basic............................ 2,575 5,798 8,070 7,860 85,974
========= ========== ========== ========== ==========
Weighted average shares outstanding
diluted.......................... 8,787,281 5,798 8,777,740 8,808,297 9,836,168
========= ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
66
FILETEK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------ ------------------ --------------- ADDITIONAL ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
--------- ------ --------- ------ ------ ------ ---------- -----------
Balance at December 31,
1994........................ 3,669,986 $37 2,142,973 $21 2,098 $-- $20,809 $(16,126)
Exercise of stock options..... -- -- -- -- 1,500 -- 1 --
Net income.................... -- -- -- -- -- -- -- 2,697
Foreign currency
translations................ -- -- -- -- -- -- -- --
--------- --- --------- --- ------ --- ------- --------
Balance at December 31,
1995........................ 3,669,986 37 2,142,973 21 3,598 -- 20,810 (13,429)
Exercise of stock options..... -- -- -- -- 4,199 -- 4 --
Net loss...................... -- -- -- -- -- -- -- (6,708)
Foreign currency
translations................ -- -- -- -- -- -- -- --
--------- --- --------- --- ------ --- ------- --------
Balance at December 31,
1996........................ 3,669,986 37 2,142,973 21 7,797 -- 20,814 (20,137)
Exercise of stock options..... -- -- -- -- 75,900 1 50 --
Net income.................... -- -- -- -- -- -- -- 1,509
Foreign currency
translations................ -- -- -- -- -- -- -- --
--------- --- --------- --- ------ --- ------- --------
Balance at December 31,
1997........................ 3,669,986 37 2,142,973 21 83,697 1 20,864 (18,628)
Exercise of stock options
(unaudited)................. -- -- -- -- 3,720 -- 3 --
Net income (unaudited)........ -- -- -- -- -- -- -- 4,833
Foreign currency translations
(unaudited)................. -- -- -- -- -- -- -- --
Issuance of compensatory stock
options (unaudited)......... -- -- -- -- -- -- 692 --
Amortization of compensatory
stock options (unaudited)... -- -- -- -- -- -- -- --
--------- --- --------- --- ------ --- ------- --------
Balance at June 30, 1998
(unaudited)................. 3,669,986 $37 2,142,973 $21 87,417 $ 1 $21,559 $(13,795)
========= === ========= === ====== === ======= ========
CUMULATIVE
UNEARNED FOREIGN TOTAL
COMPENSATORY CURRENCY STOCKHOLDERS'
STOCK OPTIONS TRANSLATIONS EQUITY
------------- ------------ -------------
Balance at December 31,
1994........................ $ -- $(2) $4,739
Exercise of stock options..... -- -- 1
Net income.................... -- -- 2,697
Foreign currency
translations................ -- (1) (1)
----- --- ------
Balance at December 31,
1995........................ -- (3) 7,436
Exercise of stock options..... -- -- 4
Net loss...................... -- -- (6,708)
Foreign currency
translations................ -- 1 1
----- --- ------
Balance at December 31,
1996........................ -- (2) 733
Exercise of stock options..... -- -- 51
Net income.................... -- -- 1,509
Foreign currency
translations................ -- (2) (2)
----- --- ------
Balance at December 31,
1997........................ -- (4) 2,291
Exercise of stock options
(unaudited)................. -- -- 3
Net income (unaudited)........ -- -- 4,833
Foreign currency translations
(unaudited)................. -- 1 1
Issuance of compensatory stock
options (unaudited)......... (692) -- --
Amortization of compensatory
stock options (unaudited)... 40 -- 40
----- --- ------
Balance at June 30, 1998
(unaudited)................. $(652) $(3) $7,168
===== === ======
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
67
FILETEK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------ -----------------
1995 1996 1997 1997 1998
-------- -------- -------- ------- -------
(UNAUDITED)
OPERATING ACTIVITIES
Net income (loss)............................. $ 2,697 $ (6,708) $ 1,509 $ 656 $ 4,833
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................. 1,821 2,222 2,183 1,066 1,111
Amortization of unearned compensatory stock
options..................................... -- -- -- -- 40
Deferred income taxes......................... -- -- (235) -- (1,512)
Foreign currency translations................. (1) 1 (2) (1) 1
Write-off of capitalized software development
costs....................................... -- 3,492 -- -- --
Changes in operating assets and liabilities:
Accounts receivable, net................. (1,244) 1,987 (1,418) (2,217) 147
Inventory, net........................... (683) (702) (2,574) 146 2,312
Other assets............................. 400 87 (73) (87) (681)
Accounts payable......................... 82 24 479 (272) (755)
Accrued expenses......................... 236 (109) 837 449 541
Deferred revenue......................... 1,631 (343) 12,067 1,078 (4,071)
Income taxes payable..................... -- -- 444 44 (444)
-------- -------- -------- ------- -------
Net cash provided by (used in) operating
activities.................................. 4,939 (49) 13,217 862 1,522
INVESTING ACTIVITIES
Purchase of property and equipment............ (1,060) (1,399) (707) (342) (645)
Capitalized software development costs........ (3,138) (534) (16) (16) --
-------- -------- -------- ------- -------
Net cash used in investing activities......... (4,198) (1,933) (723) (358) (645)
FINANCING ACTIVITIES
Borrowings from related parties............... 8,751 6,257 4,587 2,613 --
Repayments of borrowings from related
parties..................................... (7,795) (5,113) (6,687) (2,347) --
Borrowings from banks......................... 16,367 18,181 11,941 8,542 --
Repayment of borrowings from banks............ (17,767) (17,003) (14,919) (8,628) --
Repayment of capital lease obligations........ (295) (334) (285) (169) (286)
Proceeds from notes receivable for issuance of
common stock................................ -- -- -- -- 50
Proceeds from issuance of stock............... 1 4 1 -- 3
-------- -------- -------- ------- -------
Net cash provided by (used in) financing
activities.................................. (738) 1,992 (5,362) 11 (233)
-------- -------- -------- ------- -------
Net increase (decrease) in cash and cash
equivalents................................. 3 10 7,132 515 644
Cash and cash equivalents at beginning of
period...................................... 18 21 31 31 7,163
-------- -------- -------- ------- -------
Cash and cash equivalents at end of period.... $ 21 $ 31 $ 7,163 $ 546 $ 7,807
======== ======== ======== ======= =======
Supplemental cash flow information:
Interest paid............................ $ 518 $ 372 $ 670 $ 415 $ 40
======== ======== ======== ======= =======
Income taxes paid........................ $ 8 $ 44 $ 99 $ 43 $ 2,477
======== ======== ======== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
68
FILETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
FileTek, Inc. ("the Company") was incorporated on May 1, 1984 under the
laws of Delaware. The Company develops, markets and supports integrated data
storage and access management solutions that allow organizations to meet their
business intelligence needs through efficient collection, storage and management
of, and timely, shared access to, massive amounts of data at their most granular
level ("atomic data"). The Company has a wholly-owned subsidiary, FileTek UK
Limited, which is primarily involved in the marketing of the Company's products
in the U.K. and Europe.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary. Upon consolidation, all
intercompany accounts and transactions are eliminated.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, cash equivalents are defined
as highly liquid investments with original maturities of three months or less.
INVENTORY
Inventory is stated at the lower of cost or market value on a specific
identification basis which approximates first-in, first-out. Work-in-process
inventory includes cost of materials, direct labor and manufacturing overhead.
REVENUE RECOGNITION
During October 1997, the Accounting Standards Executive Committee ("AcSEC")
of the American Institute of Certified Public Accountants issued Statement of
Position 97-2 ("SOP 97-2"), Software Revenue Recognition. Effective January 1,
1997, the Company elected early adoption of SOP 97-2 and Statement of Position
98-4 ("SOP 98-4"), Deferral of the Effective Date of a Provision of SOP 97-2,
Software Revenue Recognition. As permitted by SOP 97-2, prior year financial
statements have not been restated to reflect the change in accounting method.
There is no cumulative effect as of January 1, 1997, as a result of adopting SOP
97-2.
SOP 97-2, which supersedes Statement of Position 91-1, Software Revenue
Recognition, requires revenue earned on software arrangements involving multiple
elements (i.e., software products, upgrades/enhancements, postcontract customer
support ("PCS"), installation, training, etc.) to be allocated to each element
based on the relative fair values of the elements. The relative fair value of
the elements is determined based on vendor-specific objective evidence ("VSOE").
VSOE as defined by SOP 97-2, is limited to the price charged when the element is
sold separately or if the element is not yet sold separately, the price set by
management having the relevant authority. If VSOE does not exist for the
allocation of revenue to the various elements of
F-7
69
FILETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the arrangement, all revenue from the arrangement should be deferred until the
earlier of the point at which (1) such VSOE does exist or (2) all elements of
the arrangement are delivered.
During March 1998, AcSEC issued SOP 98-4 which defers for one year the
implementation of the provisions of SOP 97-2, which limit what is considered
VSOE. AcSEC is reconsidering the definition of VSOE and may amend SOP 97-2 to
incorporate a revised definition before the one-year deferral in SOP 98-4
expires. SOP 98-4 continues to acknowledge that the price charged for an element
when it is sold separately represents the best evidence of VSOE of fair value,
but recognizes that it is not the only evidence of VSOE fair value.
For arrangements where the Company has established VSOE for hardware,
software licenses and PCS revenues, the Company recognizes hardware revenues and
software license fees, assuming collectibility is probable, at the later of
product shipment to the customer or when significant obligations, if any, have
been fulfilled. Revenues on follow-on sales to existing customers are generally
recognized, assuming collectibility is probable, upon shipment. PCS revenues are
deferred for PCS warranty periods and are recognized over the PCS period.
For arrangements for which VSOE has not been established and the only
undelivered element is PCS, the Company recognizes the revenues for the entire
arrangement ratably over the PCS period.
Maintenance and other services revenues are recognized ratably over the
contractual period as the services are performed. Operating lease revenues are
recognized ratably over the lease term. Direct costs include raw materials,
direct labor, other direct costs, and manufacturing overhead.
As of December 31, 1997 and June 30, 1998, approximately $3,160,000 and
$2,393,000 of inventory and $9,350,000 and $7,119,000 of deferred revenues,
respectively, were due to the adoption of SOP 97-2, as amended by SOP 98-4. The
adoption of SOP 97-2 for any years prior to the year ended December 31, 1997
would have no material impact on the Company's financial results for the years
ended December 31, 1995 and 1996.
DEFERRED REVENUES
The Company records deferred revenues for advance billings while complying
with the aforementioned revenue recognition policies.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization on
property and equipment, spare parts and purchased computer software are
calculated on the straight-line method over the estimated useful lives of the
assets of four to five years. Amortization on equipment under capital leases is
computed under straight-line or accelerated methods in order to result in net
book value that does not exceed any related purchase option price or any
estimated future residual value.
SOFTWARE DEVELOPMENT COSTS
Certain software development costs are capitalized when incurred.
Capitalization of software development costs begins upon the establishment of
technological feasibility. The establishment of technological feasibility and
the ongoing assessment of recoverability of capitalized software development
costs requires considerable judgment by management with respect to certain
external factors, including, but not limited to, technological feasibility,
anticipated future gross revenues, estimated economic life and changes in
software and hardware technologies. Amortization of such costs is based on the
greater of (a) the ratio of current gross revenues to the sum of current and
anticipated gross revenues, or (b) the straight-line method, over the shorter of
three years or the remaining estimated economic life of the product. It is
possible that such
F-8
70
FILETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
estimates of future gross revenues, the remaining economic life of such
products, or both, may be reduced as a result of future events.
During the years ended December 31, 1995, 1996, and 1997 and for the six
months ended June 30, 1997 and 1998, the Company capitalized approximately,
$3,138,000, $534,000, $16,000, $16,000 and $0 respectively, of software
development costs and amortized approximately, $646,000, $798,000, $610,000,
$287,000 and $324,000, respectively, of such software development costs to cost
of revenues. Software development costs also include capitalized interest which
is amortized over the straight-line method over the shorter of three years or
the remaining estimated economic life of the product. All other research and
development costs are charged to expense as incurred.
In accordance with Statement of Financial Accounting Standards No. 86,
Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed, at each balance sheet date, the Company continually compares the
unamortized costs of capitalized software development costs to the expected
future revenues for such products. If the unamortized costs exceed the expected
future net realizable value, the excess amount is written off. During the year
ended December 31, 1996, the Company wrote-off approximately $3,492,000 of
capitalized software development costs as a result of a reassessment of the
recoverability of these costs.
INCOME TAXES
The Company provides for income taxes in accordance with the liability
method. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
EARNING (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128").
SFAS No. 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All earnings (loss)
per share amounts for all periods have been presented, and where appropriate,
restated to conform to the SFAS No. 128 requirements.
Basic and diluted 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 earnings
(loss) per share as if they were outstanding for all periods presented. To date
the Company has not had any nominal issuances or grants at nominal prices.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, ("SFAS No. 123"). SFAS No. 123 allows companies to account for
stock-based compensation either under the new provisions of SFAS No. 123 or
under the provisions of Accounting Principals Board Opinion No. 25, Accounting
for Stock Issued to Employees ("APB No. 25"), but requires pro forma disclosures
in the footnotes to the consolidated financial statements as if the measurement
provisions of SFAS No. 123 had been adopted. The Company accounts for its
stock-based compensation in accordance with APB No. 25. As such, the adoption of
SFAS No. 123 did not impact the Company's consolidated financial condition or
results of operations.
F-9
71
FILETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECENT PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
No. 130"), which establishes standards for reporting the components of
comprehensive income and requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
included in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income includes net income as well as
certain non-owners items that are reported directly within a separate component
of stockholders' equity. The provisions of SFAS No. 130 are effective for fiscal
years beginning after December 15, 1997. The Company's components of
comprehensive income are not considered material and as such have not been
disclosed in the consolidated financial statements.
The Company intends to adopt Statement of Financial Accounting Standards
No. 131, Disclosure about Segments of an Enterprise and Related Information
("SFAS No. 131"), in fiscal year 1998. SFAS No. 131 changes the way companies
report segment information and requires segments to be determined based on how
management measures performance and makes decisions about allocating resources.
The adoption of SFAS No. 131 is not expected to materially impact the Company's
financial position or results of operations.
In March 1998, AcSEC issued Statement of Position 98-1 ("SOP 98-1"),
Accounting for the Costs of Computer Software Developed For or Obtained for
Internal Use. SOP 98-1 is effective for the Company beginning after January 1,
1998. SOP 98-1 will require the capitalization of certain costs incurred after
the date of adoption in connection with developing or obtaining software for
internal-use. The Company currently expenses such costs as incurred. The Company
has not yet assessed what the impact of SOP 98-1 will be of the Company's future
earnings or financial position.
INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the six month period ended June 30,
1998 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998.
3. PROPERTY AND EQUIPMENT
Property and equipment, at cost, including equipment under capital lease
obligations, consists of the following (in thousands):
DECEMBER 31,
-----------------
1996 1997
------ -------
Equipment................................................... $4,851 $ 5,294
Spare parts................................................. 3,516 4,210
Purchased software and license agreements................... 695 701
Office furniture and equipment.............................. 377 382
------ -------
9,439 10,587
Less accumulated depreciation and amortization.............. 5,572 7,145
------ -------
$3,867 $ 3,442
====== =======
F-10
72
FILETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACCRUED LIABILITIES
Accrued liabilities consists of the following (in thousands):
DECEMBER 31,
----------------
1996 1997
------ ------
Accrued payroll and related costs........................... $ 459 $ 602
Accrued bonuses............................................. -- 648
Accrued vacation............................................ 144 144
Accrued sales tax........................................... 188 299
Accrued maintenance costs................................... 511 388
Accrued interest............................................ 108 13
Other accrued expenses...................................... 289 442
------ ------
$1,699 $2,536
====== ======
5. INCOME TAXES
The components of the provision (benefit) for income taxes are as follows
(in thousands):
DECEMBER 31, JUNE 30,
--------------------- ---------------
1995 1996 1997 1997 1998
---- ---- ----- ---- -------
(UNAUDITED)
Current:
Federal............................................ $18 $20 $ 235 $37 $ 1,243
State.............................................. -- 27 315 50 270
--- --- ----- --- -------
Total current.............................. 18 47 550 87 1,512
Deferred:
Federal............................................ -- -- (235) -- (1,243)
State.............................................. -- -- -- -- (270)
--- --- ----- --- -------
Total deferred............................. -- -- (235) -- (1,512)
--- --- ----- --- -------
Total provision for income taxes........... $18 $47 $ 315 $87 $ --
=== === ===== === =======
F-11
73
FILETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant components of the Company's deferred tax liabilities and assets
are (in thousands):
DECEMBER 31, JUNE 30,
----------------- -----------
1996 1997 1998
------- ------- -----------
(UNAUDITED)
Deferred tax liabilities:
Capitalized software development costs........... $ 588 $ 362 $ 240
Cost of goods sold deferred in accordance with
SOP 97-2....................................... -- 1,199 909
Tax in excess of book depreciation............... 342 -- --
Other............................................ 27 23 22
------- ------- -------
Total deferred tax liabilities.............. 957 1,584 1,171
------- ------- -------
Deferred tax assets:
Deferred revenues................................ 246 4,413 3,344
Accrued vacation................................. 55 55 107
Book in excess of tax depreciation............... -- 118 172
Reserve for obsolete inventory................... 131 310 395
Reserve for doubtful accounts.................... 31 29 76
Unused tax credits............................... 74 -- --
Other............................................ 41 19 18
Alternative minimum tax credit................... -- 235 235
Net operating loss carryforwards................. 4,495 -- --
------- ------- -------
Total deferred tax assets................... 5,073 5,179 4,347
Valuation allowance for deferred tax assets...... (4,116) (3,360) (1,429)
------- ------- -------
Net deferred tax assets.......................... 957 1,819 2,918
------- ------- -------
Total....................................... $ -- $ 235 $ 1,747
======= ======= =======
F-12
74
FILETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1996, the Company had available tax net operating loss
carryforwards of approximately $10,636,000, which were utilized during the year
ended December 31, 1997. In 1996, the valuation allowance primarily applied to
the net operating loss carryforwards. In 1997, the valuation allowance primarily
applied to deferred tax assets arising from deferred revenues. The valuation
allowance increased by approximately $2,642,000 and decreased by approximately
$756,000 for the years ended December 31, 1996 and 1997, respectively.
The valuation allowance as of December 31, 1997 and for the period June 30,
1998 is primarily as a result of deferred revenue (deferred tax asset) for which
no taxes have been paid and therefore no tax expense recorded. Accordingly, a
valuation allowance has been recorded against this asset as there is no
recoverability based upon the Company's historical taxable activity.
At December 31, 1995 and 1996, the Company had unused tax credits of
approximately $74,000 which were utilized during the year ended December 31,
1997. At December 31, 1997, the Company had unused alternative minimum tax
credits of approximately $235,000 that are available to offset future
alternative minimum taxes payable.
The following is a summary of the items that caused recorded income taxes
to differ from taxes computed using the statutory federal income tax rate for
the years ended December 31, 1995, 1996 and 1997 (in thousands):
DECEMBER 31, JUNE 30,
------------------------ ---------------
1995 1996 1997 1997 1998
----- ----- ------ ------ -----
(UNAUDITED)
Tax expense (benefit) at statutory
rate................................... 34.0 (34.0) 34.0 34.0 34.0
Effect of:
State income tax, net............... -- 0.3 11.2 5.0 5.6
Other............................... 0.5 0.5 0.5 0.5 0.5
Valuation allowance................. (33.8) 32.5 (28.43) (27.77) (40.1)
----- ----- ------ ------ -----
Provision (benefit) for income taxes..... 0.7 (0.7) 17.27 11.73 --
===== ===== ====== ====== =====
6. NOTES PAYABLE
Notes payable consist of the following (in thousands):
DECEMBER 31,
-------------
1996 1997
------ ----
Note payable to the Company's Chairman and Chief Executive
Officer; interest accrues monthly at prime (8.25% at
December 31, 1996) plus 3.5%; principal and unpaid
interest due as follows:
May 10, 1997................................................ $ 210 $--
June 20, 1997............................................... 780 --
August 14, 1997............................................. 35 --
September 5, 1997........................................... 540 --
September 16, 1997.......................................... 400 --
November 14, 1997........................................... 135 --
------ --
2,100 --
Borrowings under bank line of credit........................ 2,978 --
------ --
$5,078 $--
====== ==
F-13
75
FILETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has available a line of credit with a bank which is secured by
the Company's accounts receivable, certain sales-type leases and inventory.
Under the line of credit agreement, the Company may borrow funds, based on
eligible accounts receivable, investment in sales-type leases and inventory
balances, as defined, not to exceed an aggregate borrowing level of $6,000,000.
The Company may obtain up to $400,000 in letters of credit pursuant to the line
of credit agreement. There were no outstanding letters of credit or principal
borrowings under the line of credit at December 31, 1997. Any borrowings under
the agreement are due and payable on May 31, 1999, unless otherwise renewed or
extended and may be payable on demand if the Company does not maintain certain
liquidity and net worth conditions. Interest was payable monthly at the bank's
prime rate (8.5 percent at December 31, 1997) through May 31, 1997 and at LIBOR
plus 2% thereafter. Approximately $181,000, $179,000 and $125,000 in interest
payments were made on the line of credit during the years ended December 31,
1995, 1996 and 1997, respectively. There was approximately $4,000 and $13,000 of
accrued interest due as of December 31, 1996 and 1997, respectively.
7. COMMITMENTS
The Company leases its facilities under operating leases and certain
equipment and software under capital leases. The facilities' leases provide for
annual minimum rent increases of three percent. Rental expense for operating
leases was approximately $1,013,000, $1,050,000 and $966,000 during the years
ended December 31, 1995, 1996 and 1997, respectively. The Company has posted an
irrevocable letter of credit of $46,000 as a security deposit as of December 31,
1997, which is personally guaranteed by the Company's Chairman and Chief
Executive Officer. Neither the letter of credit obligation nor the personal
marketable securities of the Company's Chairman and Chief Executive Officer used
to collateralize the letter of credit are recorded on the consolidated balance
sheet of the Company at December 31, 1997. This letter of credit requirement
does not encumber the availability of letters of credit under the Company's line
of credit as described in Note 6. The amount of the letter of credit was
increased to $50,000 in April 1998 in accordance with scheduled rent increases.
The Company leases certain equipment under capital leases. The cost of
assets under capital leases and the related accumulated amortization is
$1,001,000, $1,443,000 and $526,000, $709,000, respectively, at December 31,
1996 and 1997, respectively. Amortization expense related to these leases is
included with depreciation and amortization expense in the consolidated
statement of cash flows.
The aggregate liability for future rentals as of December 31, 1997 is as
follows (in thousands):
CAPITAL OPERATING
LEASES LEASES
-------- ---------
1998........................................................ $297 $ 773
1999........................................................ 228 654
2000........................................................ 134 640
2001........................................................ 107 213
2002........................................................ 75 --
---- ------
841 $2,280
======
Less amounts representing interest.......................... 135
----
Present value of minimum lease payments..................... 706
Less current portion........................................ 226
----
$480
====
F-14
76
FILETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY
PREFERRED STOCK
During 1989, 1992 and 1994, the Company sold one series of voting preferred
stock ("Series A"). Series A is superior in rights and preferences to all other
classes of stock. Each share of Series A is convertible into one share of Common
Stock at any time subject to adjustment under certain dilutive circumstances.
Conversion is automatic in the event of a public offering of common stock with
aggregate proceeds in excess of specified amounts and per-share prices in excess
of $25. See Note 13. Voting rights are on an as-converted basis. A total of
5,504,979 Common shares have been reserved for issuance in the event of Series A
conversion.
In the event of a merger, consolidation, sale or liquidation, the holders
of Series A will be entitled to distribution preferences of $5 per share, plus
accrued dividends. To date, no dividends have been declared by the Board of
Directors.
During 1990, the Company issued a second series of voting preferred stock
("Series B"). One share of Series B was issued in exchange for each share of
outstanding Common Stock. Series B is subordinate in rights and preferences to
Series A, but is superior in rights and preferences to all other classes of
stock. Each share of Series B is convertible into one share of Common Stock at
any time. Conversion is automatic in the event of a public offering of common
stock with aggregate proceeds in excess of specified amounts and per-share
prices in excess of $12. Voting rights are on an as-converted basis. A total of
3,214,461 Common shares have been reserved for issuance in the event of Series B
conversion.
Series B may be redeemed, at the option on the Company, provided that such
redemption of Series B is approved by a two-thirds vote of the issued and
outstanding shares of Series A. The redemption price for shares of Series B
shall be $5 per share plus all accrued dividends and a prorated $0.50 per share
per year redemption premium.
In the event of a merger, consolidation, sale or liquidation, the holders
of Series B will be entitled to distribution preferences of $5 per share, plus
accrued dividends.
STOCK OPTIONS
The Company has granted nonqualified Common Stock options to certain
employees and directors. Options are granted at the fair market value of the
Company's Common Stock on the date of grant. Generally, the options become
either exercisable over four to five years commencing one year from the date of
the grant or are immediately exercisable, but are subject to repurchase by the
Company on a pro rata basis over four years at the original exercise price. The
options expire seven to ten years from the date of the grant.
F-15
77
FILETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Additional information with respect to stock option activity is summarized
as follows:
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
Outstanding at December 31, 1994......................... 1,514,305 $1.12
Options granted..................................... 250,800 0.68
Options exercised................................... (1,500) 0.67
Options canceled or expired......................... (86,325) 1.11
--------- -----
Outstanding at December 31, 1995......................... 1,677,280 1.05
Options granted..................................... 277,875 0.87
Options exercised................................... (4,199) 0.87
Options canceled or expired......................... (190,689) 1.02
--------- -----
Outstanding at December 31, 1996......................... 1,760,267 1.03
Options granted..................................... 590,907 0.67
Options exercised................................... (75,900) 0.67
Options canceled or expired......................... (351,640) 1.04
--------- -----
Outstanding at December 31, 1997......................... 1,923,634 0.93
--------- -----
Options granted..................................... 236,250 6.31
Options exercised................................... (3,720) 0.71
Options canceled or expired......................... (25,592) 0.95
--------- -----
Outstanding at June 30, 1998............................. 2,130,572 $1.53
========= =====
Options exercisable at June 30, 1998..................... 1,544,835 $1.09
========= =====
The following table summarizes information about stock options outstanding
at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -----------------------------
WEIGHTED-
AVERAGE
REMAINING
CONTRACTUAL WEIGHTED- WEIGHTED-
RANGE OF NUMBER LIFE AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------------- ----------- ----------- -------------- ----------- --------------
$0.67 1,158,279 6.96 $0.67 776,689 $0.67
$0.83 3,750 7.86 0.83 1,872 0.83
$0.87 221,380 8.28 0.87 112,840 0.87
$1.33 464,775 5.79 1.33 456,612 1.33
$2.67 75,450 1.29 2.67 75,450 2.67
--------- ---- ----- --------- -----
$0.67 -- $2.67 1,923,634 6.61 $0.93 1,423,463 $1.00
========= ==== ===== ========= =====
There were 1,423,463 options exercisable at December 31, 1997, of which
225,625 options were subject to repurchase by the Company at the original
exercise price. At December 31, 1997, 1,923,634 Common shares have been reserved
for issuance upon exercise of the options and 326,362 Common shares have been
reserved for future grants.
Had compensation cost for the Company's stock option plans been determined
based upon the fair value at the grant date for awards under the plans
consistent with the methodology prescribed under SFAS No. 123,
F-16
78
FILETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Company's net income (loss) and earnings (loss) per share would have been
the amounts indicated below (in thousands, except per share data):
YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
--------- ----------- ---------
Net income (loss) and earnings (loss) per share as
would be reported under SFAS No. 123:
Net income (loss)............................ $ 2,688 $ (6,731) $ 1,222
Basic net income (loss) per share............ $1,043.88 $ (1,160.92) $ 151.43
Diluted net income (loss) per share.......... $ 0.31 $ (1,160.92) $ 0.14
The effect of applying SFAS No. 123 on 1997 pro forma net income (loss) as
stated above is not necessarily representative of the effects on reported net
income (loss) for future years due to, among other things, (1) the vesting
period of the stock options and (2) the fair value of additional stock options
in future years. The fair value of the options granted during 1995 are estimated
at $0.20 per share on the date of grant using the minimum value option-pricing
model with the following assumptions: dividend yield 0%, risk-free interest rate
of 6.00% and expected life of 6 years. The fair value of the options granted
during 1996 are estimated at $0.25 per share on the date of grant using the
minimum value option-pricing model with the following assumptions: dividend
yield 0%, risk-free interest rate of 6.00% and expected life of 6 years. The
fair value of the options granted during 1997 are estimated at $0.19 per share
on the date of grant using the minimum value option-pricing model with the
following assumptions: dividend yield 0%, risk-free interest rate of 6.00% and
expected life of 6 years.
During the year ended December 31, 1997, employees and directors exercised
75,000 options to purchase Common Stock in exchange for notes receivable
totaling $50,000. Prior to March 31, 1998, the notes receivable were repaid by
these individuals.
UNEARNED COMPENSATORY STOCK OPTIONS (UNAUDITED)
The Company applies APB No. 25 in accounting for the stock option plan,
and, accordingly, recognizes compensation expense for the difference between the
deemed fair value of the underlying Common Stock and the grant price of the
option at the date of grant. During the six months ended June 30, 1998, the
Company granted 236,250 options to purchase Common Stock. These options have a
weighted-average exercise price of $6.31. During the six months ended June 30,
1998, the Company recorded unearned compensatory stock options of $692,000 for
the difference between the option exercise price and the deemed fair value on
the date of grant of stock options. The Company is amortizing such amounts
ratably over the vesting period of the options, which is generally four years.
During the six months ended June 30, 1998, the Company recognized $40,000 of
compensation expense related to the Common Stock options.
9. RELATED PARTY TRANSACTIONS
Centennial Computer Corporation ("Centennial") and the Company are related
by common management and ownership. Centennial made loans to the Company during
the years ended December 31, 1995, 1996 and 1997 totaling approximately
$7,416,000, $4,157,000 and $3,947,000, respectively, which have been repaid as
of December 31, 1997. Interest expense accrued and paid on the loans was
approximately $105,000, $74,000 and $80,000 for the years ended December 31,
1995, 1996 and 1997, respectively.
Centennial also leases computer equipment to the Company under obligations
classified as capital leases. Decreasing monthly installments beginning at
approximately $17,000, including interest at 12 to 18 percent, are due through
December 1998. The capital lease obligation to Centennial was approximately
$330,000 and $217,000 at December 31, 1996 and 1997, respectively. Interest
expensed and paid on the capital leases for the
F-17
79
FILETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
years ended December 31, 1995, 1996 and 1997 was approximately $51,000, $52,000
and $44,000, respectively. During March 1998, the Company repaid the entire
capital lease obligation to Centennial.
In addition to the financing activities discussed above, the companies
prorate the costs of shared facilities based on employee counts. Centennial
reimbursed the Company approximately $38,000, $36,000 and $42,000 for its share
of facilities during the years ended December 31, 1995, 1996 and 1997,
respectively.
During years ended December 31, 1995, 1996 and 1997, the Company's Chairman
and Chief Executive Officer made loans totaling $1,335,000, $2,100,000 and
$640,000, respectively, to the Company. During the years ended December 31,
1995, 1996 and 1997, the Company made principal and interest payments totaling
approximately $106,000, $956,000 and $2,382,000. In May 1997, this individual
assigned these subordinated notes to a related family entity under the same
terms and conditions. Interest expense incurred on these notes was approximately
$282,000 during 1997, including interest accrued on notes entered into during
both 1996 and 1997. There was approximately $103,000 of accrued interest at
December 31, 1996. All outstanding loans and accrued interest were repaid in
full during 1997 and there was no outstanding balance at December 31, 1997.
10. MAJOR CUSTOMERS
During 1995, three customers accounted for an aggregate of approximately
37% of the Company's revenues. During 1996, two customers accounted for an
aggregate of approximately 23% of the Company's revenues. During 1997, two
customers accounted for an aggregate of approximately 31% of the Company's
revenues.
11. RETIREMENT PLAN
Effective January 1, 1990, the Company established a defined contribution
plan (the "Plan") which covers substantially all the employees of the Company
and qualifies as a deferred salary arrangement under Section 401(k) of the
Internal Revenue Code. The Company may make matching contributions at its
discretion of up to 25% of the participants' first $1,200 contribution. Employee
contributions are limited to the Internal Revenue Service annual contribution
limit ($9,500 for calendar year 1997). The Company made contributions of
$22,000, $22,000 and $19,000 to the Plan for the years ended December 31, 1995,
1996 and 1997, respectively.
F-18
80
FILETEK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per share (in thousands, except share data):
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
Numerator:
Net income (loss).......................... $ 2,697 $ (6,708) $ 1,509 $ 656 $ 4,833
========== ========== ========== ========== ==========
Denominator:
Denominator for basic earnings per share --
weighted-average shares.................. 2,575 5,798 8,070 7,860 85,974
Effect of dilutive securities:
Employee stock options..................... 65,266 -- 50,230 80,998 1,097,442
Unearned compensatory stock options........ -- -- -- -- (66,686)
Conversion of Series A Preferred Stock..... 5,504,979 -- 5,504,979 5,504,979 5,504,979
Conversion of Series B Preferred Stock..... 3,214,461 -- 3,214,461 3,214,461 3,214,461
---------- ---------- ---------- ---------- ----------
Dilutive potential common shares:.............. 8,784,706 -- 8,769,670 8,800,437 9,750,195
---------- ---------- ---------- ---------- ----------
Denominator for diluted earnings per
share -- adjusted weighted-average
shares................................... 8,787,281 5,798 8,777,740 8,808,297 9,836,163
========== ========== ========== ========== ==========
Basic net loss per share................... $ 1,047.47 $(1,156.89) $ 187.00 $ 83.38 $ 56.21
========== ========== ========== ========== ==========
Diluted net loss per share................. $ 0.31 $(1,156.89) $ 0.17 $ 0.07 $ 0.49
========== ========== ========== ========== ==========
13. PRO FORMA INFORMATION
The consolidated financial statements include unaudited pro forma
information as of June 30, 1998 to reflect, upon the Company's initial public
offering, the conversion of all outstanding shares of Series A and Series B
Preferred Stock into shares of Common Stock.
14. SUBSEQUENT EVENTS
PREFERRED STOCK
On June 12, 1998, the stockholders of the Company approved an amendment to
the Company's certificate of incorporation to modify the conversion rights of
Series A and Series B. Effective June 17, 1998, each share of Series A and
Series B shall automatically convert into shares of Common Stock upon the
consummation of an initial public offering in which the public offering price is
not less than $8.00 per share, and the net proceeds to the Company are not less
than $15,000,000.
COMMON STOCK
On June 12, 1998, the Board of Directors approved a 3-for-2 stock split in
the form of a stock dividend of the Company's Common Stock. All references in
the accompanying consolidated financial statements to the number of shares of
Common Stock and per-share amounts have been restated to reflect the split.
STOCK OPTIONS
In June 1998, the Company adopted the 1998 Omnibus Plan (the "Omnibus
Plan"). Pursuant to the Omnibus Plan, employees, officers, directors of the
Company or any affiliate of the Company may receive options to purchase Common
Stock. The Omnibus Plan is administered by the Board of Directors, or by such
committee or committees as may be appointed by the Board of Directors. 1,500,000
shares have been reserved for issuance under the Omnibus Plan.
F-19
81
- ------------------------------------------------------
- ------------------------------------------------------
No dealer, sales representative or other person has been authorized to give
any information or to make any representations in connection with this Offering
other than those contained in this Prospectus, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or the Underwriters. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any securities other than the
shares of Common Stock to which it relates or an offer to, or a solicitation of,
any person in any jurisdiction in which such offer or solicitation would be
unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
changes in the affairs of the Company or that the information contained herein
is correct as of any time subsequent to the date hereof.
----------------------------
TABLE OF CONTENTS
----------------------------
PAGE
----
Prospectus Summary................... 3
Risk Factors......................... 6
Use of Proceeds...................... 15
Dividend Policy...................... 15
Capitalization....................... 16
Dilution............................. 17
Selected Consolidated Financial
Data............................... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 19
Business............................. 31
Management........................... 41
Certain Transactions................. 49
Principal and Selling Stockholders... 50
Description of Capital Stock......... 52
Shares Eligible for Future Sale...... 54
Underwriting......................... 56
Legal Matters........................ 57
Experts.............................. 57
Additional Information............... 57
Glossary............................. 59
Index to Financial Statements........ F-1
Until , 1998 (25 days
after the date of this Prospectus), all
dealers effecting transactions in the
Common Stock, whether or not participating
in this distribution, may be required to
deliver a Prospectus. This is in addition
to the obligation of dealers to deliver a
Prospectus when acting as Underwriters and
with respect to their unsold allotments or
subscriptions.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
SHARES
[FILETEK LOGO]
COMMON STOCK
----------------------------
PROSPECTUS
----------------------------
NationsBanc Montgomery
Securities LLC
BancAmerica
Robertson Stephens
FAC/Equities
, 1998
------------------------------------------------------
------------------------------------------------------
82
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses to be paid by the
Registrant in connection with the sale and distribution of the securities
offered hereby, other than underwriting discounts and commissions. All of the
amounts shown are estimated except the Securities and Exchange Commission
registration fee, the NASD filing fee and the Nasdaq listing fee.
Securities and Exchange Commission filing fee............... $ 14,750
National Association of Securities Dealers, Inc. filing
fee....................................................... 5,500
Nasdaq/NNM listing fee...................................... *
Transfer agent's and registrar's fees....................... *
Printing expenses........................................... 200,000
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue Sky filing fees and expenses........................... 10,000
Miscellaneous expenses...................................... *
--------
Total............................................. $
========
- ---------------
*To be added by amendment.
All of the above expenses will be paid by the Registrant.
14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of Section 145 of the Delaware General Corporation Law
empowers a corporation to indemnify any person who was or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that he is or was
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all of the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful in the defense of any action, suit or proceeding
referred to in subsection (a) and (b) or in the defense of any
II-1
83
claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith; that the indemnification provided by Section 145 shall not
be deemed exclusive of any other rights to which the indemnified party may be
entitled; and that the scope of indemnification is extended to directors,
officers, employees or agents of a constituent corporation absorbed in a
consolidation or merger and persons serving in that capacity at the request of
the constituent corporation. Section 145 also empowers the corporation to
purchase and maintain insurance on behalf of a director or officer of the
corporation against any liability asserted against him or incurred by him in any
such capacity or arising out of his status as such whether or not the
corporation would have the power to indemnify him against such liabilities under
Section 145.
The Registrant has executed indemnification agreements with each of its
officers and directors pursuant to which the registrant has agreed to indemnify
such parties to the full extent permitted by law, subject to certain exceptions,
if such party becomes subject to an action because such party is a director or
officer of the Registrant.
Section 102(b)(7) of the Delaware General Corporation Law enables a
corporation in its certificate of incorporation to limit the personal liability
of members of its board of directors for violation of a director's fiduciary
duty of care. This Section does not, however, limit the liability of a director
for breaching his duty of loyalty, failing to act in good faith, engaging in
intentional misconduct or knowingly violating a law, or from any transaction in
which the director derived an improper personal benefit. This Section also will
have no effect on claims arising under the federal securities laws. The
Registrant's Amended and Restated Certificate of Incorporation limits the
liability of its directors as authorized by Section 102(b)(7).
The Registrant intends to obtain liability insurance for the benefit of its
directors and officers that provides coverage of losses of directors and
officers for liabilities arising out of claims against such persons acting as
directors or officers of the registrant (or any subsidiary thereof) due to any
breach of duty, neglect, error, misstatement, misleading statement, omission or
act done by such directors and officers, except as prohibited by law.
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director. The form of
Underwriting Agreement filed as Exhibit 1 to this Registration Statement
provides for indemnification by the Underwriters of the Registrant and its
directors and officers, and by the Registrant of the Underwriters, for certain
liabilities arising under the Securities Act of 1933, as amended (the "Act") or
otherwise.
15. RECENT SALES OF UNREGISTERED SECURITIES
Since August 1, 1995, the Registrant has issued unregistered securities in
the transactions described below. Securities issued in such transactions were
offered and sold in reliance upon the exemption from registration under Section
4(2) of the Act, relating to sales by an issuer not involving any public
offering, or under Rule 701 under the Act as transactions made pursuant to a
written compensatory plan or pursuant to a written contract relating to
compensation. The sales of securities were made without the use of an
underwriter and the certificates evidencing the shares bear a restrictive legend
permitting the transfer thereof only upon registration of the shares or an
exemption under the Act. All recipients had adequate access to information about
the Registrant.
(i) Since August 1, 1995, the Registrant has issued 83,819 shares of Common
Stock due to the exercise of options at a weighted average exercise price of
$0.68 per share.
(ii) Since August 1, 1995, the Registrant has issued stock options to
purchase an aggregate of 728,775 shares of its Common Stock under the 1990 Stock
Option Incentive Plan at a weighted average exercise price of $2.10 per share.
(iii) Since August 1, 1995, the Registrant has issued stock options to
purchase an aggregate of 288,750 shares of its Common Stock under the 1990
Non-Statutory Option Plan at a weighted average exercise price of $1.33 per
share.
II-2
84
(iv) Since June 1, 1995, the Registrant has issued stock options to
purchase an aggregate of 104,757 shares of its Common Stock through separate
option agreements at a weighted average exercise price of $2.15 per share.
16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the
Registrant.
3.2 Amended and Restated Bylaws of the Registrant.
4.1@ Specimen stock certificate for shares of Common Stock of the
Registrant.
5.1 Form of Opinion of Piper & Marbury L.L.P. regarding legality
of securities being registered.
10.1 Amended and Restated 1990 Stock Option Incentive Plan.
10.2 Amended and Restated 1990 Non-qualified Stock Option Plan.
10.3 1998 Omnibus Stock Plan.
10.4@ 1998 Directors' Stock Option Plan.
10.5 Lease Agreement dated April 13, 1993, by and between the
Registrant and Principal Mutual Life Insurance Company.
10.6 First Addendum to Lease Agreement dated September 30, 1993,
by and between the Registrant and Principal Mutual Life
Insurance Company (relating to Exhibit 10.5).
10.7 First Lease Amendment dated July 9, 1997, by and between the
Registrant and Principal Mutual Life Insurance Company
(relating to Exhibit 10.5).
10.8 Loan Agreement dated May 31, 1998, by and between the
Registrant and NationsBank, N.A.
10.9 Revolving Promissory Note issued by the Company on May 31,
1998, to NationsBank, N.A.
10.10 Security Agreement dated August 31, 1994, by and between the
Registrant and/or Filetek UK Limited and NationsBank, N.A.
10.11 Subordination Agreement dated August 31, 1994, by and
between William C. Thompson Revocable Trust, Patsy A.
Thompson Revocable Trust, William C. Thompson, Individually
and/or Patsy A. Thompson, Individually, the Registrant and
NationsBank, N.A.
10.12*+ Direct Original Equipment Manufacturer Agreement dated
December 9, 1996, by and between the Registrant and Sun
Microsystems Computer Company, a division of Sun
Microsystems, Inc.
21.1 Subsidiaries of the Registrant.
23.1* Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Piper & Marbury L.L.P. (to be included as part of
Exhibit 5.1 hereto).
23.3* Consent of Patton Boggs LLP.
24.1 Power of Attorney (included in signature pages).
27* Financial Data Schedule.
- ---------------
* Filed herewith.
@ To be filed by amendment.
+ Portions of this Exhibit were omitted and filed separately with the Secretary
of the Commission pursuant to the Registrant's Application Requesting
Confidential Treatment under Rule 406 of the Act, on the date hereof.
All other exhibits previously filed.
(B) FINANCIAL STATEMENT SCHEDULES
SCHEDULE DESCRIPTION
-------- -----------
Schedule II... Valuation and Qualifying Accounts and Reserves
17. UNDERTAKINGS
A. The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriter to permit prompt delivery to each purchaser.
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B. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described in Item 14, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
C. For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be a part of this registration
statement as of the time it was declared effective.
D. For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Rockville, State of Maryland, on the 6th day of August, 1998.
FILETEK, INC.
By: /s/ WILLIAM C. THOMPSON
------------------------------------
William C. Thompson
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to Registration Statement has been signed below by the
following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ WILLIAM C. THOMPSON Chairman of the Board and Chief Executive August 6, 1998
- ------------------------------------------ Officer (Principal Executive Officer)
William C. Thompson
* President, Chief Operating Officer and August 6, 1998
- ------------------------------------------ Director
David L. Beamer
/s/ WILLIAM P. LOOMIS Vice President, Finance and Administration, August 6, 1998
- ------------------------------------------ Chief Financial Officer, Treasurer and
William P. Loomis Secretary (Principal Accounting
and Financial Officer)
* Director August 6, 1998
- ------------------------------------------
Elliot H. Cole
Director August 6, 1998
- ------------------------------------------
Lewis S. Frauenfelder
Director August 6, 1998
- ------------------------------------------
Kenneth W. Simonds
/s/ *WILLIAM P. LOOMIS
- ------------------------------------------
William P. Loomis
Attorney-in-Fact
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SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
FILETEK, INC.
BALANCE AT BALANCE
BEGINNING OF AT END OF
CLASSIFICATION PERIOD ADDITIONS DEDUCTIONS PERIOD
-------------- ------------ --------- ---------- ---------
Allowance for doubtful accounts:
Year ended December 31, 1995.............. 45 55 -- 100
Year ended December 31, 1996.............. 100 19 36(1) 83
Year ended December 31, 1997.............. 83 67 75(1) 75
Reserve for inventory obsolescence:
Year ended December 31, 1995.............. 159 -- 159
Year ended December 31, 1996.............. 159 185 -- 344
Year ended December 31, 1997.............. 344 528 -- 872
- ---------------
(1) Write off of accounts receivable
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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
FileTek, Inc.
We have audited the consolidated financial statements of FileTek, Inc. as
of December 31, 1996 and 1997 and for each of the three years in the period
ended December 31, 1997 and have issued our report thereon dated April 16, 1998,
except for Note 13, as to which the date is June 18, 1998 (included elsewhere in
this Registration Statement). Our audits also included the financial statement
schedule listed in Item 16(b) of this Registration Statement. The schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Vienna, Virginia
April 16, 1998, except Note 13,
as to which the date is June 18, 1998
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