AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 11, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ACCPAC INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 7372 77-0469911
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer Identification
of incorporation or Classification Code Number) No.)
organization)
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2525 AUGUSTINE DRIVE
SANTA CLARA, CALIFORNIA 95054
(408) 562-8400
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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FREDERICK S. WYSOCKI
CHIEF EXECUTIVE OFFICER AND PRESIDENT
2525 AUGUSTINE DRIVE
SANTA CLARA, CALIFORNIA 95054
(408) 562-8400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
SCOTT F. SMITH, ESQ. GERALD S. TANENBAUM, ESQ.
STEPHEN A. INFANTE, ESQ. CAHILL GORDON & REINDEL
HOWARD, DARBY & LEVIN 80 PINE STREET
1330 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10005
NEW YORK, NEW YORK 10019 (212) 701-3000
(212) 841-1000
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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, check
the following box. / /
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. / / ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ____________
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 number of the earlier effective registration statement for the same
offering. / / ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
Common Stock, par value $.01 per share.................................................. $51,750,000 $15,267
(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457(c).
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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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
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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 JUNE 11, 1998
PROSPECTUS
SHARES
[LOGO]
ACCPAC INTERNATIONAL, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
All of the shares of Common Stock (the "Common Stock") offered hereby (the
"Offering") are being offered by ACCPAC International, Inc. ("ACCPAC" or the
"Company"), a subsidiary of Computer Associates International, Inc. ("Computer
Associates"). Upon completion of the Offering, Computer Associates will
beneficially own approximately % of the outstanding Common Stock ( % if the
Underwriters' over-allotment option is exercised in full). See "Risk
Factors--Control by and Relationship with Computer Associates; Potential
Conflicts of Interest."
Prior to the Offering, there has been no public market for the Common Stock. It
is currently anticipated that the initial public offering price will be between
$ and $ per share. See "Underwriting" for information relating
to the factors to be considered in determining the initial public offering price
of the Common Stock. The Common Stock has been submitted for approval for
quotation on the Nasdaq National Market under the symbol "ACPI."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
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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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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Per Share........................................ $ $ $
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Total(3)......................................... $ $ $
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(1) The Company and Computer Associates have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $ .
(3) The Company has granted the Underwriters an option to purchase up to an
additional shares of Common Stock, on the same terms as set forth above,
solely to cover over-allotments, if any. If such option is exercised in full,
the total Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
The shares of Common Stock being offered by this Prospectus are being offered by
the Underwriters, subject to prior sale, when, as and if delivered to and
accepted by the Underwriters, and subject to approval of certain legal matters
by Cahill Gordon & Reindel, counsel for the Underwriters. It is expected that
delivery of the shares of Common Stock will be made against payment therefor on
or about , 1998 at the offices of J.P. Morgan Securities Inc., 60
Wall Street, New York, New York.
J.P. MORGAN & CO. COWEN & COMPANY
, 1998
DESCRIPTION OF INSIDE FRONT COVER
A pyramidal depiction of the markets in which the Company sells its products,
identifying the Company's major product offerings in each market: small
office/home office -- Simply Accounting; small business -- ACCPAC for Windows
Small Business Series; and corporate -- ACCPAC for Windows Corporate Series, and
offsetting the enterprise market, in which the Company does not compete. Above
the depiction is the heading "ACCPAC INTERNATIONAL Total Financial & Business
Management Solutions."
2
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
No person has been authorized to give any information or make any
representations not 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 any Underwriter. This Prospectus does not constitute an offer
to sell, or a solicitation of an offer to buy, the Common Stock in any
jurisdiction to any person to whom it is unlawful to make such offer or
solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Company subsequent to the date hereof.
No action has been or will be taken in any jurisdiction by the Company or any
Underwriter that would permit a public offering of the Common Stock or
possession or distribution of this Prospectus in any jurisdiction where action
for that purpose is required, other than in the United States. Persons into
whose possession this Prospectus comes are required by the Company and the
Underwriters to inform themselves about and to observe any restrictions as to
the offering of the Common Stock and the distribution of this Prospectus.
In this Prospectus, unless the context otherwise requires, references to
"Dollars" and to "$" are to United States dollars.
TABLE OF CONTENTS
PAGE
Prospectus Summary............................. 4
Risk Factors................................... 9
Special Note Regarding Forward-Looking
Statements................................... 17
Use of Proceeds................................ 17
Dividend Policy................................ 17
Capitalization................................. 18
Dilution....................................... 19
Selected Consolidated Financial Data........... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 22
PAGE
Business....................................... 32
Arrangements Between the Company and Computer
Associates................................... 46
Management..................................... 49
Ownership of Common Stock...................... 55
Description of Capital Stock................... 56
Shares Available for Future Sale............... 60
Underwriting................................... 62
Legal Matters.................................. 63
Experts........................................ 63
Available Information.......................... 63
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 the
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.
"ACCPAC," "ACCPAC for Windows," "ACCPAC for Windows Corporate Series," "ACCPAC
for Windows Small Business Series," "ACCPAC Plus Accounting," "BPI Accounting
II," "Simply Accounting," "SupportPlus," "CA-ACCPAC/2000," "e.Advantage Suite,"
"e.PR/US.Inquiry," "e.PR/CDN.Inquiry," "e.OE.Inquiry," "e.OE.Order,"
"e.PO.Requisition," and "e.PO.Inquiry" are trademarks or service marks of the
Company. All other trademarks, service marks or brand names appearing in this
Prospectus are the property of their respective holders.
The Company intends to furnish its stockholders with annual reports containing
audited consolidated financial statements certified by an independent public
accounting firm and quarterly reports containing interim unaudited financial
statements for each of the first three quarters of each fiscal year.
3
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT FOR THE HISTORICAL INFORMATION
CONTAINED IN THIS PROSPECTUS, THE MATTERS DISCUSSED HEREIN (INCLUDING, IN
PARTICULAR, THOSE DISCUSSED IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS") ARE FORWARD
LOOKING IN NATURE AND INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL
RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN FORWARD-LOOKING
STATEMENTS. UNLESS THE CONTEXT OTHERWISE REQUIRES, (I) "ACCPAC" OR THE "COMPANY"
MEANS ACCPAC INTERNATIONAL, INC. AND ITS SUBSIDIARIES OR THE ACCPAC DIVISION OF
COMPUTER ASSOCIATES, THE PREDECESSOR OF ACCPAC INTERNATIONAL, INC., (II)
"COMPUTER ASSOCIATES" MEANS COMPUTER ASSOCIATES INTERNATIONAL, INC. AND ITS
SUBSIDIARIES (OTHER THAN THE COMPANY), (III) THE COMPANY'S "ACCPAC FOR WINDOWS"
AND "ACCPAC FOR WINDOWS PLUS SERIES" PRODUCT LINES ARE BEING RENAMED IN
CONNECTION WITH THE RELEASE OF THE NEXT VERSIONS THEREOF AND ARE RESPECTIVELY
REFERRED TO IN THIS PROSPECTUS BY THEIR NEW NAMES "ACCPAC FOR WINDOWS CORPORATE
SERIES" AND "ACCPAC FOR WINDOWS SMALL BUSINESS SERIES," RESPECTIVELY, AND
TOGETHER, AS "ACCPAC FOR WINDOWS," (IV) "DISTRIBUPRO" MEANS DISTRIBUPRO, INC., A
WHOLLY OWNED SUBSIDIARY OF ACCPAC, AND (V) THE INFORMATION CONTAINED IN THIS
PROSPECTUS (A) ASSUMES THAT THE PRICE TO PUBLIC OF THE COMMON STOCK OFFERED
HEREBY WILL BE $ PER SHARE (THE MIDPOINT OF THE RANGE SET FORTH ON THE
COVER OF THIS PROSPECTUS) AND THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS
NOT EXERCISED, (B) REFLECTS A 2,000-FOR-1 STOCK SPLIT OF THE COMMON STOCK WHICH
WILL BECOME EFFECTIVE PRIOR TO THE CONSUMMATION OF THE OFFERING AND (C) REFLECTS
AN INCREASE IN THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK TO 25,000,000
WHICH WILL BECOME EFFECTIVE PRIOR TO THE CONSUMMATION OF THE OFFERING. UNLESS
OTHERWISE DEFINED HEREIN, CAPITALIZED TERMS USED IN THIS SUMMARY HAVE THE
RESPECTIVE MEANINGS ASCRIBED TO THEM ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
ACCPAC is a leading provider of financial accounting and business management
software solutions to the corporate, small business and small office/home office
markets. The Company's products automate essential accounting functions and
enhance the strategic value of financial and business information. As of March
31, 1998, the Company had an installed client base consisting of over 300,000
registered clients in the United States and Canada and additional registered
clients in more than 100 other countries. ACCPAC and its predecessors have been
providing financial accounting software solutions since 1979.
In today's competitive markets, companies of all sizes are dedicating
substantial resources towards software solutions that streamline and reduce
costs associated with key business functions (such as financial accounting,
operations management and other business processes) while providing robust
functionality, flexibility and reliability. International Data Corporation
("IDC"), an independent provider of information technology data, estimates that
the total worldwide market for financial accounting software will grow from
approximately $5.3 billion in 1997 to approximately $10.4 billion in 2002.
The Company's software solutions are tailored to meet the specific needs of
businesses in three markets: the mid-sized business or corporate (Corporate),
small business (Small Business) and small office/home office (SOHO) markets.
Companies in these markets generally have from less than $1 million up to $500
million in sales and from one to several thousand employees. The Company's
ACCPAC for Windows Corporate Series and ACCPAC for Windows Small Business Series
are targeted at the Corporate and Small Business markets, respectively. The
Company also offers a DOS-based product, ACCPAC Plus Accounting, for these
markets. Simply Accounting is the Company's Windows-based product offering for
the SOHO market. The Company believes that its products provide substantial
value in the form of robust functionality, ease of implementation, accounting
integrity and compatibility with market-leading technologies.
ACCPAC for Windows Corporate Series and ACCPAC for Windows Small Business Series
include suites of applications ranging from financial management (general
ledger, accounts receivable and accounts payable) to operations management
(order processing, purchasing, inventory management, payroll, analysis and
reporting and sales force automation) to software development and interface
customization. Users of the ACCPAC for Windows
4
Corporate Series also have the option to install ACCPAC's e.Advantage Server,
which enables secure online access to any aspect of the ACCPAC for Windows
business logic and Internet-based inquiry and transaction processing
capabilities. ACCPAC has spent considerable time and effort developing the
object-oriented, layered and multi-tier architecture incorporated in these
products. The Company believes that this architecture allows it to quickly adapt
to existing and emerging operating systems, databases and user interfaces and
rapidly develop increased functionality for ACCPAC for Windows products. Simply
Accounting is a comprehensive, off-the-shelf solution that simplifies
bookkeeping and ensures accounting integrity by providing an automated audit
trail. To date, the vast majority of Simply Accounting sales have been in
Canada.
The Company markets and sells its products and services to the Corporate and
Small Business markets primarily through its experienced and well-trained
network of business partners ( "Business Partners"), which consists of
approximately 3,000 value added resellers ("VARs") and qualified installers
("QIs"), including systems integrators, regional distributors, Big 5 and other
accounting firms, professional organizations, software vendors and specialized
software consultants. ACCPAC offers its Business Partners, among other things,
extensive, hands-on training in the installation, implementation and maintenance
of the Company's products, technical support and presales consulting. The
Company distributes its products, as well as third-party products, to its
Business Partners in the United States, Canada and the Caribbean through its
DistribuPro subsidiary. The Company markets and sells Simply Accounting through
mass merchandise retail channels, primarily in Canada.
The Company plans to extend its position as a leading provider of financial
accounting and business management software for the Corporate, Small Business
and SOHO markets. Key elements of the Company's strategy are outlined below.
- - In addition to aggressively pursuing new clients, the Company intends to
leverage its large installed client base to generate future sales of its
products. Through focused direct marketing campaigns and financial incentives,
the Company intends to encourage its existing DOS-based clients to migrate to
the Company's Windows-based products and to encourage all of its existing
clients to purchase upgrades, add-on modules, additional user seats and
support and maintenance services.
- - The Company plans to strengthen and expand its network of Business Partners by
continuing to provide them with extensive hands-on training, expanding the
distribution infrastructure in existing territories and adding new Business
Partners in under-served geographic areas.
- - The Company plans to increase its investment in sales and marketing to create
greater awareness of and brand recognition for the ACCPAC family of products.
- - The Company intends to extend its technology leadership by continuing to
devote significant resources to its research and development efforts, forming
strategic alliances and continuing to encourage the Company's more than 200
independent software development partners to create applications for use with
the Company's products.
- - The Company plans to leverage the increased use of the Internet and
open-system architectures by working with its electronic business
("e-Business") development partners to offer a wide array of products that
enable electronic information delivery, electronic document workflow, Web
self-service applications, electronic data interchange ("EDI") transactions
processing and Web-based business-to-business and business-to-consumer
transactions.
The Company's principal executive offices are located at 2525 Augustine Drive,
Santa Clara, California 95054. The Company intends to move its principal
executive offices to 6700 Koll Center Parkway, Suite 300, Bernal Corporate Plaza
I, Pleasanton, California 94566 in August 1998. See "Business--Properties." The
Company's telephone number is (408) 562-8400, and its World Wide Web home site
is at http://www.accpac.com. Information contained in the Company's World Wide
Web home site shall not be deemed to be a part of this Prospectus.
5
RELATIONSHIP WITH COMPUTER ASSOCIATES
The predecessors to ACCPAC's current products, as well as the DistribuPro
business, were acquired by Computer Associates as part of a series of unrelated
business acquisitions between 1985 and 1989. ACCPAC became an independent
business unit ("iBU") of Computer Associates in April 1996, was incorporated in
Delaware in October 1997 and became a subsidiary of Computer Associates
effective January 1998. Computer Associates is a publicly owned company engaged
in the design, development, marketing, sale and support of standardized computer
software products for use with a broad range of desktop, midrange and mainframe
computers. Immediately after the Offering, Computer Associates will own
5,250,000 shares of Common Stock, which will represent approximately % of the
outstanding Common Stock ( % if the Underwriters' over-allotment option is
exercised in full). After the Offering, through its ownership of such shares of
Common Stock, Computer Associates will have the ability to elect all directors
of the Company and, thus, will be in a position to control all matters affecting
the Company. Computer Associates has advised the Company that its current intent
is to continue to hold all such Common Stock owned by it. However, Computer
Associates is not subject to any contractual obligation to retain any such
Common Stock, except that Computer Associates has agreed not to sell or
otherwise dispose of any shares of Common Stock for a period of 180 days after
the date of this Prospectus without the prior written consent of J.P. Morgan
Securities Inc. See "Risk Factors--Control by and Relationship with Computer
Associates; Potential Conflicts of Interest" and "--Possible Future Sales of
Common Stock by Computer Associates; Shares Eligible for Future Sale,"
"Arrangements Between the Company and Computer Associates" and "Underwriting."
In anticipation of the Offering, the Company and Computer Associates have
entered into, or will enter into, a number of agreements relating to the
contribution and transfer by Computer Associates to the Company of the assets
constituting the ACCPAC division and governing the future relationship between
the parties, including a Contribution Agreement, a Registration Rights Agreement
and a Real Estate Agreement. The Contribution Agreement sets forth the agreement
pursuant to which the assets of the ACCPAC division were contributed and
transferred by Computer Associates to the Company in exchange for (i) the
assumption of liabilities associated with such assets, (ii) 5,250,000 newly
issued shares of Common Stock, (iii) a promissory note in the principal amount
of $5.0 million (the "Computer Associates Note") and (iv) a worldwide,
perpetual, fully paid license for the internal use by Computer Associates of all
present and future software products of the Company. The Contribution Agreement
also provides generally that the Company shall indemnify Computer Associates for
liabilities associated with the Company's assets and operations and that
Computer Associates shall indemnify the Company for liabilities associated with
Computer Associates' operations. In addition, the Contribution Agreement
provides for the filing of consolidated or combined tax returns and payment of
taxes for fiscal 1998 and the period prior to consummation of the Offering. The
Registration Rights Agreement will give Computer Associates certain rights to
require the Company to effect registrations under the Securities Act of 1933, as
amended (the "Securities Act"), of the Common Stock owned by Computer Associates
and to bear the expenses of such registrations. The Real Estate Agreement
contains the terms upon which, among other things, certain co-occupied offices
and facilities will be shared by Computer Associates and the Company for a
period of time. For a summary of the terms of these agreements, see
"Arrangements Between the Company and Computer Associates."
6
THE OFFERING
COMMON STOCK OFFERED.......................... shares
COMMON STOCK OUTSTANDING
AFTER THE OFFERING(1)....................... shares
USE OF PROCEEDS............................... The net proceeds to the Company from the
Offering, after the deduction of estimated
underwriting discounts and expenses payable
by the Company, are estimated to be
approximately $ million ($ million if
the Underwriters' over-allotment option is
exercised in full). The Company intends to
use $5.0 million of the net proceeds to pay
in full the Computer Associates Note and the
balance for working capital and other
general corporate purposes, including
increased investment in sales and marketing,
expansion of the Company's Business Partner
network, further development of products and
technology and possible acquisitions of, or
investments in, complementary businesses,
technologies or products. See "Use of
Proceeds."
DIVIDEND POLICY............................... The Company intends to retain its earnings
to fund development of its business and does
not anticipate paying dividends in the
foreseeable future. See "Dividend Policy."
CONTROLLING STOCKHOLDER....................... For information regarding the Company's
controlling stockholder, see "Arrangements
Between the Company and Computer
Associates."
RISK FACTORS.................................. For a discussion of certain considerations
relevant to an investment in the Common
Stock, see "Risk Factors."
PROPOSED NASDAQ NATIONAL MARKET SYMBOL........ "ACPI"
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(1) Excludes 500,000 shares of Common Stock issuable upon the exercise of stock
options outstanding as of June 1, 1998. See "Management--1998 Stock Incentive
Plan."
7
SUMMARY CONSOLIDATED FINANCIAL DATA
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DOLLARS IN THOUSANDS, EXCEPT PER YEAR ENDED MARCH 31
SHARE DATA 1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA
Revenue:
License....................... $23,050 $26,789 $23,955 $19,709 $24,820
Service....................... 11,479 6,979 10,593 7,985 7,495
Third-party products.......... 9,143 13,424 31,267 17,234 16,623
---------- ---------- ---------- ---------- ----------
Total revenue................... 43,672 47,192 65,815 44,928 48,938
Cost of revenue:
License....................... 6,721 5,437 4,011 4,452 4,675
Service....................... 2,249 1,853 2,238 1,799 1,937
Third-party products.......... 8,137 11,947 27,682 15,106 14,670
---------- ---------- ---------- ---------- ----------
Total cost of revenue........... 17,107 19,237 33,931 21,357 21,282
---------- ---------- ---------- ---------- ----------
Gross profit.................... 26,565 27,955 31,884 23,571 27,656
Operating expenses:
Sales and marketing........... 16,919 11,348 10,014 7,916 9,428
Research and development...... 7,052 7,130 5,340 3,733 3,916
General and administrative.... 8,635 5,971 4,734 4,808 4,885
Compensation related to
issuance of Common
Stock(1).................... -- -- -- -- 2,800
---------- ---------- ---------- ---------- ----------
Total operating expenses........ 32,606 24,449 20,088 16,457 21,029
---------- ---------- ---------- ---------- ----------
Income (loss) from operations... (6,041) 3,506 11,796 7,114 6,627
Other income (expense), net..... (82) 2 (43) (31) (18)
---------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes......................... (6,123) 3,508 11,753 7,083 6,609
Provision (benefit) for income
taxes......................... (2,296) 1,315 4,407 2,656 2,478
---------- ---------- ---------- ---------- ----------
Net income (loss)............... $(3,827) $2,193 $7,346 $4,427 $4,131
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Pro forma basic and diluted
earnings per share(2)......... $
----------
----------
Shares used in computing pro
forma basic and diluted
earnings per
share.........................
----------
----------
------------------------
AT MARCH 31, 1998
AS
DOLLARS IN THOUSANDS ACTUAL ADJUSTED(3)
----------- -----------
CONSOLIDATED BALANCE SHEET DATA
Cash and cash equivalents........................................ $4,013
Working capital.................................................. 3,620
Total assets..................................................... 13,990
Note payable to Computer Associates.............................. 5,000
Total stockholders' equity (deficit)............................. (798)
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(1) Relates to the January 1998 issuance of 150,000 shares of Common Stock (net
of 100,000 shares repurchased for tax withholding purposes) to certain executive
officers and key employees of the Company. See "Management--Restricted Stock
Grant" and Note (4) of Notes to Consolidated Financial Statements.
(2) See Note (1) of Notes to Consolidated Financial Statements for information
concerning the computation of pro forma earnings per share.
(3) As adjusted to reflect the sale of shares of Common Stock offered
hereby and the payment in full of the Computer Associates Note.
8
RISK FACTORS
THE FOLLOWING FACTORS SHOULD BE CAREFULLY CONSIDERED, TOGETHER WITH THE
INFORMATION PROVIDED ELSEWHERE IN THIS PROSPECTUS, IN EVALUATING AN INVESTMENT
IN THE COMMON STOCK OFFERED HEREBY.
LACK OF INDEPENDENT OPERATING HISTORY; RISKS ASSOCIATED WITH REDUCED OWNERSHIP
INTEREST IN THE COMPANY BY COMPUTER ASSOCIATES
Prior to the consummation of the Offering, the Company was operated as a
division or iBU of Computer Associates. Accordingly, no financial or operating
history of the Company as an independent entity is available for a potential
investor to evaluate. After the Offering, the Company will operate as a
stand-alone entity and will no longer benefit from the direct operational,
financial and other support previously provided by Computer Associates to the
Company and, thus, the Company will be expected, among other things, to fund its
own working capital requirements and to incur additional general and
administrative expenses and will be responsible for obtaining on its own all
administrative, support and other services previously provided by Computer
Associates. In addition, certain of the Company's agreements are between third
parties and Computer Associates and will require the consent of such third
parties to the assignment of Computer Associates' rights thereunder to the
Company. Although the Company's management believes that it can perform such
services or obtain them on acceptable terms and obtain such necessary consents,
if the Company is unable to accomplish any of the foregoing, the Company's
business, financial condition and results of operations could be materially
adversely affected. See "Arrangements Between the Company and Computer
Associates."
The Company believes that the quality and breadth of its product distribution
and its ability to seek new Business Partners currently benefit from its
relationship with Computer Associates. The Company could lose some of its
Business Partners as a result of the reduced percentage ownership interest of
Computer Associates in the Company. The Company will seek to replace any
Business Partners that it loses due to the reduced percentage ownership interest
of Computer Associates in the Company. Should the Company fail to replace any
such Business Partners with equal or better quality Business Partners, the
losses could have a material adverse effect on the Company's business, financial
condition and results of operations.
CONTROL BY AND RELATIONSHIP WITH COMPUTER ASSOCIATES; POTENTIAL CONFLICTS OF
INTEREST
The Company is a subsidiary and, prior to January 1998, was an iBU, of Computer
Associates. Following the Offering, Computer Associates will own approximately
% of the outstanding Common Stock ( % if the Underwriters' over-allotment
option is exercised in full). After the Offering, through its ownership of
shares of Common Stock, Computer Associates will have the ability to elect all
directors of the Company and, thus, will be in a position to control all matters
affecting the Company, including any determination with respect to acquisition
or disposition of Company assets, future issuance of Common Stock or other
securities of the Company, the Company's incurrence of debt and any dividends
payable on Common Stock. Conflicts of interest may arise in the future between
the Company and Computer Associates in a number of areas relating to their past
and ongoing relationship, including allocation of capital, dividends, incurrence
of indebtedness, tax matters, financial commitments, registration rights,
administration of benefit plans, service arrangements, potential acquisitions of
businesses and other corporate opportunities, the issuance and sale of capital
stock of the Company and the election of directors. The Company has also granted
Computer Associates certain "demand" and "piggyback" registration rights with
respect to the Common Stock owned by Computer Associates. In addition, the
Company's Amended and Restated Certificate of Incorporation will include certain
provisions relating to the allocation of business opportunities that may be
suitable for both the Company and Computer Associates. See "Arrangements Between
the Company and Computer Associates."
Charles P. McWade and Robert H. Toth are directors of the Company. Each of such
persons is an officer and employee of Computer Associates. See "Management." The
Company and Computer Associates have entered into a number of agreements for the
purpose of defining their ongoing relationship. As a result of Computer
Associates' ownership interest in the Company, the terms of such agreements were
not, and the terms of any
9
future agreements may not be, the result of arm's-length negotiations. For
example, under the Contribution Agreement, the Company has agreed to bear the
economic risk that the conveyance of assets of Computer Associates comprising
the ACCPAC iBU may be insufficient to vest the Company with good and marketable
title to such assets, free and clear of any security interest. In addition,
several of Computer Associates' divisions engage in the development, marketing,
sale or support of financial management software for the enterprise market that
could compete with the Company's products. Although the Company believes that
its products currently do not directly compete with Computer Associates'
products, there are no restrictions, contractual or otherwise, on Computer
Associates' competing with the Company in the Company's markets. Accordingly, if
Computer Associates changes its current strategy, or makes an acquisition, it
may compete directly with the Company. Such competition could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Arrangements Between the Company and Computer Associates."
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY
The Company has experienced, and is likely to continue to experience,
fluctuations in quarterly operating results caused by many factors, including,
without limitation, (i) variations in the demand for the Company's products and
services, (ii) timing of introductions of new products or enhancements to
existing products by the Company or its competitors, (iii) increased
competition, (iv) timing and composition of orders from the Company's clients,
(v) variations in the mix of sales, (vi) changes in the pricing policies of the
Company or its competitors and (vii) the publication of opinions about the
products of the Company or its competitors by industry analysts or others.
The Company has experienced, and expects to continue to experience, seasonality.
In recent years, the Company has recognized a proportionately greater percentage
of its revenue and operating income in its third and fourth fiscal quarters. Due
to the effects of such seasonality, the Company may experience relatively lower
net income in the first and second fiscal quarters than in the third and fourth
fiscal quarters of any fiscal year.
Due to the foregoing factors as well as the lack of an independent operating
history, the Company believes that its quarterly operating results are likely to
vary significantly in the future. In addition, if for any particular period
revenue from sales of third-party software through DistribuPro were to represent
an increased percentage of the Company's total revenue, the Company would
experience reduced gross profits as a percentage of total revenue due to the
significantly lower margins associated with third-party software sales.
Furthermore, in some future quarter, the Company's results of operations may
fall below the expectations of the Company, securities analysts and investors.
In such event, the trading price of the Company's Common Stock would likely be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
PRODUCT MIGRATION FROM DOS TO WINDOWS
Prior to fiscal 1995, substantially all of the Company's revenue from sales of
its financial accounting software was derived from DOS-based versions of those
products. Beginning in fiscal 1995, the Company shifted its focus from products
based on DOS and local area network (LAN) technologies (ACCPAC Plus Accounting,
BPI Accounting II and earlier versions of Simply Accounting) to products based
on Windows and multi-tier technologies. In connection with this shift, the
Company is actively promoting the migration of its DOS-based product clients to
its Windows-based products, ACCPAC for Windows and Simply Accounting. There can
be no assurance that a significant percentage of the Company's installed base of
DOS clients will migrate to the Company's Windows-based products. In particular,
the Company believes that smaller clients may be less likely to migrate because
the cost of migrating may be high relative to their needs and because, in many
cases, the DOS-based products adequately meet their needs. If a significant
number of the Company's DOS clients elect not to migrate to the Company's
Windows-based products, purchase competitive products or encounter problems in
implementing the Company's Windows-based products, the Company's business,
financial condition and results of operations could be materially adversely
affected. In addition, as a result of the decrease in general demand for
DOS-based products and the Company's shift in focus to Windows-based products,
the Company's revenue from
10
new product sales of its DOS-based products have been declining and are expected
to continue to decline. There can be no assurance that the decline in revenue
from new product sales of the Company's DOS-based products will not 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."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
In fiscal 1998, the Company derived approximately 32.7% of its total revenue
from sales in Canada and the vast majority of Simply Accounting sales have been
made in Canada. Product sales in Canada are denominated in Canadian Dollars and
then translated into U.S. Dollars for accounting purposes. As a result, a
decline in the value of the Canadian Dollar relative to the value of the U.S.
Dollar may decrease the amount of revenue reported from Canadian operations. In
addition, over the past several years, there has been a movement in the Province
of Quebec for Quebec to separate from the rest of Canada. The Company believes
that the possible separation by Quebec may have a negative impact on the
Canadian economy. A decline in the value of the Canadian Dollar relative to the
value of the U.S. Dollar or a downturn in the Canadian economy could have a
material adverse effect on the Company's business, financial condition and
results of operations. Conversely, because a significant amount of the Company's
operating expenses are payable in Canadian Dollars, an increase in the value of
the Canadian Dollar relative to the value of the U.S. Dollar could have the
effect of increasing the Company's expenses in Canada when translated into U.S.
Dollars, which could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company does not currently
hedge its exposure to fluctuations in currency exchange rates.
In fiscal 1998, approximately 14.2% of the Company's total revenue was derived
from sales outside of the United States and Canada. There can be no assurance
that the Company will be able to maintain and expand its activities in
international markets. In addition, there are certain risks inherent in doing
business in international markets, such as unexpected changes in regulatory
requirements, export controls relating to encryption technology and other export
restrictions, tariffs and other trade barriers, difficulties in staffing and
managing foreign operations, political instability, fluctuations in currency
exchange rates, reduced protection for intellectual property rights in some
countries combined with a greater incidence and acceptance of software piracy,
potentially adverse tax consequences and potential liability associated with
possible errors that may occur in the translation and localization of the
Company's products for specific countries. There can be no assurance that one or
more of such factors will not have a material adverse effect on the Company's
current or future international operations and, consequently, on the Company's
business, financial condition and results of operations.
RAPIDLY EVOLVING MARKETS; TECHNOLOGICAL CHANGE
The computer software business in which the Company competes is rapidly evolving
and can be expected to further evolve in the future as a result of changing
technology, industry standards, product innovations and client requirements.
There can be no assurance that the Company's technology will meet, or be
adaptable to meet, these standards. The Company's ability to compete effectively
will depend upon its ability to anticipate and react to changes in its markets
in a timely manner. There can be no assurance that substantial resources in
product development and enhancement will not be required in the future, that the
Company will be able to successfully develop and bring to market new products
and services in a timely and cost-effective manner or that products, services or
technologies developed by others will not render the Company's products,
services and technologies non-competitive or obsolete. Companies involved in the
development and manufacture of new products that contain complex new
technologies often encounter difficulties in performance and reliability and
encounter delays in introducing, or implementing, their products. If such
problems were to occur at a significant level with respect to the Company's
products or services, the Company could experience increased costs,
cancellations of contracts and negative publicity, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, there may be reluctance in certain
marketplaces to accept these new technologies, making it difficult for the
Company to sell its products. See "Business--Products" and
"--Competition."
11
COMPETITION
The Company's business is extremely competitive. The Company's products are
targeted towards businesses in the Corporate, Small Business and SOHO markets.
The Company has experienced competition to date from both established and
emerging software companies that offer similar products targeted at businesses
within the Company's markets. The Company also faces additional competition in
individual countries from local competitors. The Company believes it currently
competes on the basis of (i) the ease of use, features, performance and price of
its products, (ii) the quality of its Business Partners, (iii) the quality of
its service and technical support for its clients and Business Partners, (iv)
technology and (v) new product introductions. While the Company believes that it
currently competes favorably overall with respect to these factors, there can be
no assurance that the Company will be able to continue to do so.
The Company's products compete with those from several vendors servicing a range
of markets, from the Corporate, Small Business and SOHO markets. The Company
currently competes in the Corporate market with J.D. Edwards & Company, Great
Plains Software, Inc., Lawson Associates, Inc., Platinum Software Corporation,
The Sage Group Plc. and Solomon Software, Inc., among others. In addition, the
Company believes that products may be introduced to these markets by other
vendors who traditionally compete in the enterprise market. Such potential
competitors include Baan Company N.V., Oracle Corporation, PeopleSoft, Inc. and
SAP AG. In the Small Business market, the Company's primary competitors include
Great Plains Software, Inc., Platinum Software Corporation, The Sage Group Plc.,
Solomon Software, Inc. and Systems Union Group Ltd., among others. The Company
currently faces competition in the SOHO market from Automatic Data Processing,
Inc.'s Peachtree unit and Intuit Inc., among others. Currently, several of
Computer Associates' iBUs engage in the development, marketing, sale or support
of financial management software for the enterprise market. Although the Company
believes that its products do not directly compete with Computer Associates'
products, there are no restrictions, contractual or otherwise, on Computer
Associates competing with the Company in the Company's markets. Such competition
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Competition" and
"Arrangements Between the Company and Computer Associates."
Certain competitors may have greater financial, technical and marketing
resources and name recognition than the Company. Competitors may bundle their
software with other software or enter into agreements whereby third parties sell
their software thereby decreasing the attractiveness of the Company's products.
In addition, competitors may lower their prices, which may force the Company to
match price cuts and thereby decrease the Company's profitability. Accordingly,
there can be no assurance that the Company will be able to design new products
or improve existing ones to maintain its competitive position in the industry.
Increased competitive pressures from current and future competitors could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, if one of the Company's competitors is
acquired by a well-capitalized company, the Company could face increased
competition that could have a material adverse effect on the Company's business,
financial condition and results of operations.
RELIANCE ON BUSINESS PARTNERS
The Company has no direct sales force. The Company relies exclusively upon its
Business Partner network to sell, install and service its products (other than
Simply Accounting and BPI Accounting II). The Company's Business Partners are
not contractually required to exclusively sell the Company's products and may
sell competing products. Accordingly, there can be no assurance that the
Company's Business Partners will aggressively market the Company's products or
will maintain their relationships with the Company. The failure of the Company
to maintain its existing Business Partner relationships, or to establish new
Business Partner relationships in the future, could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, although the Company believes that it has adequate procedures in
place to assure that its Business Partners are adequately trained and qualified
to sell, install, implement and support the Company's products, there can be no
assurance that its Business Partners are so trained or qualified. Furthermore,
there can be no assurance that the Company's Business Partners will sell
customers the financial accounting software product that suits the customer's
needs, or that its Business Partners will properly install,
12
implement or support the Company's products. There have been instances in the
past where the Company has been named as a defendant in litigation brought by
customers claiming that a Business Partner sold the client an inappropriate
product or did not correctly install and implement a product. Although the
Company has not previously been required to pay significant monetary
compensation in connection with such litigation, there can be no assurance that
any adverse judgment in connection with any similar future litigation or the
negative publicity resulting from similar litigation would not have a material
adverse affect on the Company's business, financial condition and results of
operations.
RELIANCE ON MARKET-LEADING TECHNOLOGIES; RELIANCE ON THIRD-PARTY SUPPLIERS
The Company's software products are designed to work with market-leading
technologies including those from Microsoft, such as Windows NT, Windows 95 and
SQL Server. Although the Company believes that these market-leading technologies
are and will be widely utilized by Corporate, Small Business and SOHO market
businesses, no assurance can be given that these businesses will actually adopt
such technologies as anticipated or will not in the future migrate to other
computing technologies that the Company does not support. Moreover, for the
Company to be successful, the Company's products and technology must be
compatible with new developments in these market-leading technologies.
The Company's products utilize certain software licensed to it by third-party
software developers. Although the Company believes that there are alternatives
for these products, any significant interruption in the supply of such
third-party software could have a material adverse impact on the Company's sales
unless and until the Company can replace the functionality provided by these
products. In addition, the Company is to a certain extent dependent upon such
third parties' abilities to enhance their current products, to develop new
products on a timely and cost-effective basis and to respond to emerging
industry standards and other technological changes. There can be no assurance
that the Company would be able to replace the functionality provided by the
third-party software currently offered in conjunction with the Company's
products in the event that such software becomes obsolete or incompatible with
future versions of the Company's products or is otherwise not adequately
maintained or updated. The absence of or any significant delay in the
replacement of that functionality could have a material adverse effect on the
Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH FAILURE TO TIMELY RELEASE PERIODIC SOFTWARE UPDATES
The Company's financial accounting software products are affected by changes in
laws, regulations and generally accepted accounting principles, and generally
must be updated periodically to maintain their accuracy and competitiveness.
There can be no assurance that the Company will be able to release these
periodic updates on a timely basis in the future. Failure to do so could have a
material adverse effect on market acceptance of the Company's products, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, significant changes in tax
laws and regulations or other regulatory provisions or in generally accepted
accounting principles applicable to the Company's products could require the
Company to make a significant investment in product modifications, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Products."
RISKS ASSOCIATED WITH NEW PRODUCT OFFERINGS; POTENTIAL FOR UNDETECTED ERRORS
Products as complex as the Company's software systems may contain undetected
errors or failures when first introduced, as upgrades are added or adapted to
different projects. There can be no assurance that, despite significant testing
by the Company, errors will not be found in the Company's products after
commercial introduction. In many cases, the Company's products integrate with
third-party applications, and any errors in such third-party applications deemed
critical to the use of the Company's products could adversely impact the
marketability of the Company's products. Although the Company has not
experienced material adverse effects resulting from any such errors or defects
to date, there can be no assurance that errors or defects will not be discovered
in the future, causing delays in product introduction and shipments or requiring
design modifications that could materially adversely affect the Company's
business, financial condition and results of operations.
13
MANAGEMENT OF GROWTH; RISK OF ACQUISITIONS
The Company's growth, as well as its transition towards becoming a stand-alone
entity, have resulted in an increase in responsibilities placed upon the
Company's management and has placed added pressures on the Company's operating
and other systems. To effectively manage its growth and its independence from
Computer Associates, the Company will be required to continue to implement
additional systems and controls, and to expand, train and manage its employee
base. There can be no assurance that the management skills and systems currently
in place will be adequate for the Company to operate on a stand-alone basis,
that they will be sufficient if the Company continues to grow, or that the
Company will be able to implement additional systems successfully and in a
timely manner as required. In addition, the Company from time to time may seek
acquisitions of businesses, products and technologies that are complementary to
those of the Company, or that allow the Company to enter new markets. Any such
acquisition would place additional strains upon the Company's management
resources. There also can be no assurance that any such acquisition will be
successful or will not be dilutive to the Company's earnings per share. See
"Business--Employees" and "Management."
YEAR 2000 COMPLIANCE
Although the Company believes that all of the current versions of its products
are year 2000 compliant, the Company could face decreased revenue due to the
year 2000 problem. Businesses typically budget fixed amounts for Management
Information Systems ("MIS"). Because many businesses' systems are not year 2000
compliant, businesses will be forced to divert MIS resources to fix their year
2000 problems instead of purchasing other hardware or software. Such a diversion
of resources could have a material adverse affect on the Company's business,
financial condition and results of operations. In addition, even if the
Company's products are year 2000 compliant, other systems or software used by
the Company's clients, including software bundled with the Company's products
and other software provided to the Company's clients by its Business Partners in
connection with a sale of the Company's products and other products distributed
through DistribuPro, may not be year 2000 compliant. The failure of such
noncompliant third-party software or systems could affect the perceived
performance of the Company's products, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Certain older versions of the Company's products were not year 2000 compliant.
The Company believes that certain software companies whose products were not
year 2000 compliant have been sued based upon a claim that the failure of their
product to be year 2000 compliant constitutes a breach of warranty, a design
defect or similar claims. Suits have been structured as class actions. If the
Company were sued based upon a similar claim, there can be no assurance that the
Company would prevail in such litigation or that any adverse judgment or the
cost of defending a class action suit or suits would not have a material adverse
effect on the Company's business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company's performance is substantially dependent on its executive officers
and key sales, support and technical personnel, all of whom are employed at will
and are not bound by an employment agreement to continue in the employ of the
Company. The loss of any such executive officer or personnel could have a
material adverse effect on the Company. The Company does not maintain "key man"
life insurance for the benefit of the Company on any of its employees. The
market for technologically skilled and managerial employees in the software
industry is extremely competitive. The Company's ability to attract, hire,
train, assimilate and retain such employees is instrumental to its success, and
there can be no assurance that the Company will be able to do so. The failure to
do so would have a material adverse affect on the Company's business, financial
condition and results of operations.
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY; RISK OF THIRD-PARTY CLAIMS OF
INFRINGEMENT
The Company's ability to compete successfully and achieve future revenue growth
will depend, in part, on its ability to protect its proprietary technology and
operate without infringing upon the rights of others. There can be
14
no assurance that the Company will be able to successfully protect its
intellectual property or that the Company's intellectual property or proprietary
technology will not otherwise become known or be independently developed by
competitors. The inability of the Company to protect its intellectual property
and proprietary technology could have a material adverse effect on the Company's
business, financial condition and results of operations.
To establish and protect its proprietary rights in its products, the Company
relies on a combination of copyright, trademark and trade secret laws, a
mandatory software registration mechanism on certain products, confidentiality
and non-disclosure agreements with its employees, licensing arrangements with
its clients and limitations on access to and distribution of its proprietary
information. Although it does not do so for its ACCPAC for Windows or Simply
Accounting products, the Company has in the past made source code for ACCPAC
Plus Accounting available to certain of its Business Partners and clients. This
availability may increase the likelihood of misappropriation or other misuse of
the Company's intellectual property. The Company has no patents or patent
applications pending, and existing trade secret and copyright laws provide only
limited protection of the Company's proprietary rights. The Company currently
licenses its products under "shrink wrap" licenses that are not signed by its
licensees. These shrink wrap licenses may be unenforceable under the laws of
certain jurisdictions. In addition, the laws of certain countries in which the
Company's products are sold do not protect the Company's intellectual property
rights to the same extent as the laws of the United States and Canada.
As the number of patents, copyrights and other intellectual property rights in
the Company's industry increases, and as the coverage of these rights and the
functionality of these products in the market further overlap, the Company
believes that software developers or distributors may increasingly become the
subject of infringement claims or litigation arising therefrom. For example, in
May 1998, DistribuPro was named as a third party defendant in connection with a
copyright and trademark infringement claim against an unrelated third party
relating to certain networking products sold through DistribuPro. Furthermore,
the Company may in the future be notified that it is infringing upon certain
patent or other intellectual property rights of others. Although the Company has
never been directly involved in any material intellectual property dispute and
does not believe that it is infringing on any third party's intellectual
property rights, there can be no assurance that such infringement claims, or
litigation relating thereto, will not occur in the future. Such claims or
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Legal Proceedings."
POSSIBLE FUTURE SALES OF COMMON STOCK BY COMPUTER ASSOCIATES; SHARES ELIGIBLE
FOR FUTURE SALE
Subject to applicable federal securities laws and the restrictions set forth
below, after completion of the Offering, Computer Associates may sell some or
all of the shares of Common Stock beneficially owned by it or distribute any or
all of such shares of Common Stock to its stockholders. The sale or distribution
of such shares in the public market or to its stockholders, or the perception
that such sale or divestment by Computer Associates could occur, could
negatively affect the prevailing market price for the Company's Common Stock.
Computer Associates has advised the Company that it currently intends to
continue to hold all of the Common Stock owned by it. However, Computer
Associates is not subject to any contractual obligation to retain any of such
Common Stock, except that Computer Associates has agreed not to, directly or
indirectly, offer, sell, offer to sell, contract or sell or otherwise dispose of
any shares of Common Stock or securities convertible into Common Stock or
register for sale under the Securities Act any shares of Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of J.P. Morgan Securities Inc. See "Underwriting." As a result, there
can be no assurance that Computer Associates will continue to maintain
beneficial ownership of any of the Common Stock owned by it following the
Offering. Computer Associates will have registration rights with respect to the
shares of the Common Stock owned by it following the Offering, which would
facilitate any future disposition. See "Arrangements Between the Company and
Computer Associates."
NO PRIOR PUBLIC MARKET; DETERMINATION OF OFFERING PRICE; POSSIBLE VOLATILITY
There has been no prior public market for the Common Stock, and there can be no
assurance that an active public market for the Common Stock will develop or be
sustained after the Offering. The initial public offering
15
price has been determined by negotiations among representatives of the Company,
representatives of Computer Associates and representatives of the Underwriters
and may not be indicative of future market prices. See "Underwriting" for
information related to the method of determining the initial public offering
price. The trading price of the Common Stock could be subject to wide
fluctuations in response to quarter-to-quarter variations in operating results,
changes in earnings estimates by analysts, announcements of technological
innovations or new products by the Company or its competitors, general
conditions in the software and computer industries and other events or factors.
In addition, in recent years the stock market in general, and the shares of
technology companies in particular, have experienced extreme price fluctuations.
This volatility has had a substantial effect on the market prices of securities
issued by many companies for reasons unrelated to the operating performance of
the specific companies. These broad market fluctuations may adversely affect the
market price of the Common Stock. See "Underwriting."
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation and Amended and Restated By-laws and Delaware General Corporation
Law Section 203 may render more difficult, or have the effect of discouraging,
unsolicited takeover bids from third parties or the removal of incumbent
management of the Company. See "Description of Capital Stock--Certain
Certificate of Incorporation and By-law Provisions" and "--Section 203 of the
Delaware General Corporation Law." Although such provisions do not have a
substantial practical significance to investors while Computer Associates,
through its ownership of Common Stock, is in a position to effectively control
all matters affecting the Company, such provisions could have the effect of
depriving stockholders of an opportunity to sell their shares at a premium over
prevailing market prices should Computer Associates no longer be in such
control.
DILUTION
Investors in the Offering will suffer an immediate and substantial dilution in
net tangible book value per share. Upon the exercise of outstanding options to
purchase the Common Stock, investors will incur additional dilution. See
"Dilution."
16
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" and elsewhere herein including, without limitation,
those concerning (i) the Company's strategy (including, without limitation, the
Company's plans to leverage its installed client base to generate future sales
growth), (ii) the Company's plans for its business, (iii) the Company's
liquidity and capital expenditures, (iv) the Company's plans for new product
introductions and future releases of new versions of its existing products
(including, without limitation, the planned introduction of the Company's
SupportPlus Maintenance program) and (v) the ability of the Company to continue
to rely on its Business Partners, contain certain forward-looking statements
concerning the Company's operations, economic performance and financial
condition. Because such statements involve risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause such differences include,
but are not limited to, those discussed under "Risk Factors."
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after the deduction of
estimated underwriting discounts and expenses payable by the Company, are
estimated to be approximately $ million ($ million if the Underwriters'
over-allotment option is exercised in full). The Company intends to use $5.0
million of the net proceeds to pay in full the Computer Associates Note and the
balance for working capital and other general corporate purposes, including
increased investment in sales and marketing, expansion of the Company's Business
Partner network and further development of products and technology. In addition,
the Company may seek to make acquisitions of, or investments in, businesses,
technologies or products that are complementary to the Company's business. The
Company has no present understandings, commitments or agreements with respect to
any material acquisitions of other businesses, products or technologies. Pending
such uses, the Company intends to invest the proceeds from the Offering in
interest-bearing, investment grade securities.
The Computer Associates Note is an unsecured, general obligation of the Company,
is due and payable in full on the earlier of the consummation of the Offering
and December 31, 1999, and bears no interest if paid in full on or prior to
December 31, 1998. If the Computer Associates Note is not paid in full at such
time, it will bear interest at a rate of 9% per annum. See "Arrangements Between
the Company and Computer Associates."
DIVIDEND POLICY
The Company has never declared or paid any dividends, nor does it presently
expect to declare or pay any dividends in the foreseeable future. The
declaration and payment of dividends by the Company are subject to the
discretion of its Board of Directors. Any determination as to the payment of
dividends will depend upon, among other things, general business conditions, the
Company's financial results, contractual, legal and regulatory restrictions
regarding the payment of dividends by the Company's subsidiaries, credit and
loan agreement restrictions in effect from time to time and such other factors
as the Board of Directors may consider to be relevant. See "Use of Proceeds."
17
CAPITALIZATION
The following table sets forth the consolidated capitalization of the Company as
of March 31, 1998 (i) on an actual basis and (ii) as adjusted to give effect to
the sale of shares of Common Stock hereby and the application of a portion
of the net proceeds therefrom to pay in full the Computer Associates Note. This
table should be read in conjunction with the Consolidated Financial Statements
of the Company, including the Notes thereto, appearing elsewhere in this
Prospectus.
----------------------
AS OF MARCH 31, 1998
AS
ACTUAL ADJUSTED
---------- ----------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
Note payable to Computer Associates................................. $5,000 --
---------- ----------
Stockholders' Equity (Deficit):
Preferred Stock, $.01 par value, no shares authorized (Actual),
1,000,000 shares authorized (As Adjusted), no shares outstanding
(Actual and As Adjusted).......................................... -- --
Common Stock, $.01 par value, 25,000,000 shares authorized (Actual
and As Adjusted), 5,400,000 shares issued and outstanding
(Actual), and shares issued and outstanding (As Adjusted)
(1)............................................................... 54
Additional paid-in capital.......................................... --
Accumulated deficit................................................. (632)
Cumulative foreign currency translation adjustment.................. (220)
---------- ----------
Total stockholders' equity (deficit)................................ (798)
---------- ----------
Total capitalization................................................ $4,202 $
---------- ----------
---------- ----------
- ------------------------
(1) Excludes 500,000 shares of Common Stock issuable upon the exercise of stock
options outstanding as of June 1, 1998. See "Management--1998 Stock Incentive
Plan."
18
DILUTION
The net tangible book value (deficit) of the Company as of March 31, 1998 was
$(966,000), or $(0.18) per share of Common Stock. Net tangible book value
(deficit) per share represents the amount of total tangible assets of the
Company reduced by the amount of its total liabilities and divided by the number
of shares of Common Stock outstanding. After giving effect to (i) the sale of
shares of Common Stock hereby and, (ii) the deduction of estimated
underwriting discounts and expenses of the Offering, the pro forma net tangible
book value of the Company as of March 31, 1998 would have been $ , or $
per share of Common Stock. This represents an immediate dilution of $ per
share to new investors. The following table illustrates this per share dilution:
----------------------
Assumed initial public offering price per share of Common Stock..... $
Net tangible book value (deficit) per share of Common Stock as of
March 31, 1998.................................................... $(0.18)
Increase in net tangible book value per share of Common Stock
attributable to new investors.....................................
----------
Pro forma net tangible book value per share of Common Stock after
the Offering......................................................
----------
Dilution per share to new investors................................. $
----------
----------
The following table summarizes as of March 31, 1998, after giving effect to the
sale of shares of Common Stock hereby: (i) the number of shares of Common
Stock purchased by existing stockholders from the Company and the total
consideration and average price per share paid to the Company for such shares,
(ii) the number of shares of Common Stock to be purchased by new investors in
the Offering and the total consideration and the price per share paid by them
for such shares and (iii) the percentage of shares purchased from the Company by
existing stockholders and the new investors and the percentages of the
consideration paid to the Company for such shares by existing stockholders and
new investors.
----------------------------------------------------------
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ----------------------
AVERAGE
PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ---------- ---------- ---------- ----------
Existing Stockholders........... % $ % $
New Investors...................
---------- ---------- ---------- ----------
Total........................... 100.0% $ 100.0%
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
The foregoing tables assume no exercise of outstanding options and no exercise
of any options that may be granted in the future under the 1998 Stock Incentive
Plan. As of June 1, 1998, there were outstanding options to purchase 500,000
shares of Common Stock at an exercise price of $11.20 per share, none of which
were exercisable. Based on the pro forma net tangible book value of $
per share after the Offering, dilution to new investors would be $ per
share if all of the outstanding stock options were exercised. See
"Management--1998 Stock Incentive Plan" and Note (4) of Notes to Consolidated
Financial Statements.
19
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated income statement data for each of the years in the
three-year period ended March 31, 1998, and consolidated balance sheet data as
of March 31, 1997 and 1998, presented below were derived from the audited
Consolidated Financial Statements of the Company and the related Notes thereto,
appearing elsewhere in this Prospectus. The consolidated statements of
operations data for each of the years in the two-year period ended March 31,
1995, and consolidated balance sheet data as of March 31, 1994, 1995 and 1996,
presented below were derived from unaudited Consolidated Financial Statements of
the Company not included in this Prospectus and include, in the opinion of the
Company, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the Company's financial position at that
date and the results of operations for those periods. The data set forth below
should be read in conjunction with the Consolidated Financial Statements and the
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," appearing elsewhere in this Prospectus.
----------------------------------------------------------
YEAR ENDED MARCH 31
DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA 1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenue:
License....................... $23,050 $26,789 $23,955 $19,709 $24,820
Service....................... 11,479 6,979 10,593 7,985 7,495
Third-party products.......... 9,143 13,424 31,267 17,234 16,623
---------- ---------- ---------- ---------- ----------
Total revenue................... 43,672 47,192 65,815 44,928 48,938
Cost of revenue:
License....................... 6,721 5,437 4,011 4,452 4,675
Service....................... 2,249 1,853 2,238 1,799 1,937
Third-party products.......... 8,137 11,947 27,682 15,106 14,670
---------- ---------- ---------- ---------- ----------
Total cost of revenue........... 17,107 19,237 33,931 21,357 21,282
---------- ---------- ---------- ---------- ----------
Gross profit.................... 26,565 27,955 31,884 23,571 27,656
Operating expenses:
Sales and marketing........... 16,919 11,348 10,014 7,916 9,428
Research and development...... 7,052 7,130 5,340 3,733 3,916
General and administrative.... 8,635 5,971 4,734 4,808 4,885
Compensation related to
issuance of Common Stock
(1)......................... -- -- -- -- 2,800
---------- ---------- ---------- ---------- ----------
Total operating expenses........ 32,606 24,449 20,088 16,457 21,029
---------- ---------- ---------- ---------- ----------
Income (loss) from operations... (6,041) 3,506 11,796 7,114 6,627
Other income (expense), net..... (82) 2 (43) (31) (18)
---------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes......................... (6,123) 3,508 11,753 7,083 6,609
Provision (benefit) for income
taxes......................... (2,296) 1,315 4,407 2,656 2,478
---------- ---------- ---------- ---------- ----------
Net income (loss)............... $(3,827) $2,193 $7,346 $4,427 $4,131
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Pro forma basic and diluted
earnings per share (2)........ $
----------
----------
Shares used in computing pro
forma
basic and diluted earnings
per share.....................
----------
----------
20
----------------------------------------------------------
AT MARCH 31
DOLLARS IN THOUSANDS 1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents....... -- -- -- -- $4,013
Working capital................. $5,007 $2,474 $4,139 $5,504 3,620
Total assets.................... 16,584 11,232 11,462 10,901 13,990
Note payable to Computer
Associates.................... -- -- -- -- 5,000
Total division/stockholders'
equity (deficit).............. 6,035 2,796 4,244 5,697 (798)
- ------------------------
(1) Relates to the January 1998 issuance of 150,000 shares of Common Stock (net
of 100,000 shares repurchased for tax witholding purposes) to certain executive
officers and key employees of the Company. See "Management--Restricted Stock
Grant" and Note (4) of Notes to Consolidated Financial Statements.
(2) See Note (1) of Notes to Consolidated Financial Statements for information
concerning the computation of pro forma earnings per share.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the Company's Consolidated
Financial Statements, including the Notes thereto, and the other financial
information included elsewhere in this Prospectus.
OVERVIEW
ACCPAC is a leading provider of financial accounting and business management
software solutions to the Corporate, Small business and SOHO markets. ACCPAC and
its predecessors have been providing financial accounting software solutions
since 1979.
The predecessors to ACCPAC's current products, as well as the DistribuPro
business, were acquired by Computer Associates as part of a series of unrelated
business acquisitions between 1985 and 1989. ACCPAC became an iBU of Computer
Associates in April 1996, was incorporated in Delaware in October 1997 and
became a subsidiary of Computer Associates effective January 1998.
In fiscal 1997, the Company began transferring a number of key selling and
administrative functions, including accounting, client care and telesales, from
Computer Associates in New York to ACCPAC in Santa Clara, California. In
addition, most of ACCPAC's research and development personnel were relocated
from a number of sites to the Richmond, British Columbia, Canada facility, while
North American technical support was consolidated in Santa Clara and Richmond.
The Company also removed ACCPAC Plus Accounting and ACCPAC for Windows from the
retail distribution channel in Canada in order to consolidate the Company's
North American distribution strategy.
In fiscal 1998, the Company assumed responsibility for its international sales,
which were previously managed by Computer Associates' regional international
operations. The Company also relocated sales and marketing personnel to reduce
reliance on Computer Associates' facilities and completed the transfer of
accounting functions to ACCPAC in Santa Clara. In addition, the Company
consolidated its client care and technical support functions into the Richmond
facility and began providing technical staff to assist its Business Partners
with in-field technical advice and assistance. The Company also created an
in-house Business Partner communication and recruitment group.
In January 1998, the Company issued 150,000 shares of Common Stock (net of
100,000 shares repurchased for tax withholding purposes) to certain executive
officers and key employees of the Company. In connection with such issuance, the
Company recognized compensation expense of $2.8 million in the fourth quarter of
fiscal 1998. There will be no additional charge to the Company's financial
statements in connection with such transaction. See "Management--Restricted
Stock Grant" and Note (4) of Notes to Consolidated Financial Statements.
Historically, the Company derived a substantial percentage of its license
revenue from its DOS-based products. Over the last three fiscal years, the
Company increasingly dedicated sales and marketing and research and development
resources to support its Windows-based product lines. Sales of the Company's
Windows-based products have grown as a percentage of revenue over the last three
fiscal years and represented a majority of the Company's total license and
service revenue for the fiscal years ended March 31, 1997 and 1998. See
"Business-- Strategy--Leverage Installed Base."
Over the last three fiscal years, a substantial majority of service revenue
related to maintenance services. In the past, the Company has offered its
customers optional support and maintenance programs and relied upon its Business
Partner network to provide client support. While the Company will continue to
rely primarily on its Business Partners to provide clients with front-end
support, the Company is introducing a multi-level SupportPlus Maintenance
program that provides clients with automatic product upgrades and a choice of
various levels of technical support.
22
ACCPAC employs a distribution model that includes mass merchandise retail
channels for its Simply Accounting products and a network of Business Partners
for its ACCPAC for Windows and ACCPAC Plus Accounting product lines. The Company
also uses a system of distributors for sales outside the United States, Canada
and the Caribbean. The Company's DistribuPro subsidiary acts as the distribution
arm for ACCPAC for Windows and ACCPAC Plus Accounting in the United States,
Canada and the Caribbean. In addition to distributing the Company's products,
DistribuPro sells third-party products, DistribuPro's revenue from sales of
third-party products have significantly lower margins than software license and
service revenue from the Company's products. See "Risk Factors--Potential
Fluctuations in Quarterly Results; Seasonality."
The Company has made and expects to continue to make substantial expenditures
for research and development. The Company's research and development operations
are located in Richmond. As of May 1, 1998, the Company had 68 full time
employees in research and development, including programming, documentation and
quality assurance testing. Between fiscal 1992 and 1994, the Company made
significant expenditures in developing its object-oriented and layered
architecture for its ACCPAC for Windows products. Generally, the Company's
research and development costs have been expensed as incurred.
The Consolidated Financial Statements of the Company, including the Notes
thereto, which are discussed below, reflect the consolidated financial position,
results of operations, and cash flows of the business transferred to the Company
from Computer Associates pursuant to the Contribution Agreement. The
Consolidated Financial Statements include allocations from Computer Associates
of certain expenses related to the Company. Management believes these
allocations are reasonable.
The financial information included herein may not necessarily reflect the
consolidated financial position, results of operation, and cash flows of the
Company in the future or what it would have been had it been a separate,
stand-alone entity during the periods presented.
23
RESULTS OF OPERATIONS
The following table sets forth, for each of the fiscal years indicated, certain
consolidated statements of income data as a percentage of total revenue:
----------------------------------
YEAR ENDED MARCH 31
1996 1997 1998
---------- ---------- ----------
Revenue:
License............................................... 36.4% 43.9% 50.7%
Service............................................... 16.1 17.8 15.3
Third-party products.................................. 47.5 38.3 34.0
---------- ---------- ----------
Total revenue........................................... 100.0 100.0 100.0
Cost of revenue:
License............................................... 6.1 9.9 9.5
Service............................................... 3.4 4.0 4.0
Third-party products.................................. 42.1 33.6 30.0
---------- ---------- ----------
Total cost of revenue................................... 51.6 47.5 43.5
---------- ---------- ----------
Gross profit............................................ 48.4 52.5 56.5
Operating expenses:
Sales and marketing................................... 15.2 17.6 19.3
Research and development.............................. 8.1 8.3 8.0
General and administrative............................ 7.2 10.7 10.0
Compensation related to issuance of common stock...... -- -- 5.7
---------- ---------- ----------
Total operating expenses................................ 30.5 36.6 43.0
---------- ---------- ----------
Income from operations.................................. 17.9 15.9 13.5
Other income (expense), net............................. 0.0 (0.1) 0.0
---------- ---------- ----------
Income before income taxes.............................. 17.9 15.8 13.5
Provision for income taxes.............................. 6.7 5.9 5.1
---------- ---------- ----------
Net income.............................................. 11.2% 9.9% 8.4%
---------- ---------- ----------
---------- ---------- ----------
24
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 1997
REVENUE
Total revenue increased 8.9% to $48.9 million in 1998 from $44.9 million in
1997. License revenue increased 25.9% to $24.8 million in 1998 from $19.7
million in 1997. Decreases in service revenue of 6.1% and revenue from
third-party products of 3.5% partially offset this increase.
LICENSE. License revenue increased to $24.8 million in 1998 from $19.7 million
in 1997 and accounted for 50.7% of total revenue in 1998 up from 43.9% in 1997.
This increase in license revenue was primarily attributable to a substantial
increase in sales of ACCPAC for Windows after the 1997 fiscal third quarter
release of ACCPAC for Windows Corporate Series (Version 3.0) and ACCPAC for
Windows Small Business Series. Also contributing to the increase were additional
international sales of the Company's DOS-based ACCPAC Plus Accounting products.
These increases were partially offset by slightly lower revenue from Simply
Accounting and BPI Accounting II.
SERVICE. Service revenue decreased to $7.5 million in 1998 from $8.0 million in
1997 and represented 15.3% of total revenue in 1998 as compared to 17.8% in
1997. In 1996, ACCPAC implemented a program to shift maintenance and support
services from ACCPAC to the Company's Business Partner network. As a result,
revenue derived from these services has declined each year since 1996. While the
Company will continue to rely predominantly on its Business Partners to provide
clients with front-end support, the Company plans to require its clients to
purchase, beginning in July 1998, a one-year SupportPlus Maintenance contract as
a part of the original sale of all ACCPAC for Windows products.
THIRD-PARTY PRODUCTS. Third-party products revenue decreased to $16.6 million
in 1998 from $17.2 million in 1997 and represented 34.0% of total revenue in
1998 as compared to 38.3% in 1997. The decrease in third-party products revenue
was primarily due to lower sales volume as the Company reduced the total number
of third-party products sold by DistribuPro.
COST OF REVENUE
Total cost of revenue was $21.3 million, or 43.5% of total revenue, in 1998, as
compared to $21.4 million, or 47.5% of total revenue, in 1997. The decrease in
total cost of revenue as a percentage of total revenue resulted from an
increased proportion of higher margin license revenue relative to third-party
products revenue.
COST OF LICENSE. The cost of license revenue consists of media, product
manuals, shipping and fulfillment and royalties paid to third parties. The cost
of license revenue was $4.7 million, or 18.8% of license revenue in 1998,
compared to $4.5 million, or 22.6% of license revenue, in 1997. The decrease in
the cost of license revenue as a percentage of license revenue resulted from
reduced costs of packaging of the ACCPAC for Windows products, which were
redesigned in the third quarter of 1998 and from the reduction of royalty rates
paid to the Company's independent software development partners.
COST OF SERVICE. The cost of service revenue consists primarily of personnel
costs, telephone charges related to providing telephone support training and
consulting services. The cost of service revenue was $1.9 million, or 25.8% of
service revenue in 1998, as compared to $1.8 million, or 22.5% of revenue, in
1997. The increase in cost of service revenue as a percentage of service revenue
resulted from a decrease in maintenance revenue without a corresponding decrease
in fixed maintenance costs.
COST OF THIRD-PARTY PRODUCTS. The cost of third-party products revenue consists
of the cost of products purchased from third parties that are sold through
DistribuPro, including materials and freight costs. The cost of third-party
products revenue decreased to $14.7 million, or 88.3% of third-party products
revenue, in 1998, from $15.1 million, or 87.7% of third-party products revenue,
in 1997. The increase in the cost of third-party products as a percentage of the
third-party products revenue resulted from an overall increase in third-party
vendors' pricing schedules which could not be passed on to customers.
25
SALES AND MARKETING
Sales and marketing expenses consist primarily of advertising, marketing
programs, tradeshow participation, public relations and other promotional
expenses, personnel costs, commissions and travel costs. Sales and marketing
expenses increased 19.1% to $9.4 million in 1998 from $7.9 million in 1997. As a
percentage of total revenue, sales and marketing expenses increased to 19.3% in
1998 from 17.6% in 1997. The increase in sales and marketing expenses as a
percentage of total revenue was primarily attributable to the establishment of a
telesales group and a strategic accounts group as well as an increase in the
size of the Company's client care operations.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of personnel costs and fees
paid to outside consultants. Research and development expenses increased 4.9% to
$3.9 million in 1998 from $3.7 million in 1997. As a percentage of total
revenue, research and development expenses decreased to 8.0% in 1998 from 8.3%
in 1997. The research and development expenses decreased as a percentage of
total revenue due to the continuation of a cost consolidation program initiated
in 1997 pursuant to which the Company relocated and consolidated its research
and development personnel in Richmond.
GENERAL AND ADMINISTRATIVE
General and administrative expenses include the costs of corporate operations,
costs for financial, administrative and management personnel and related travel
expenses, finance and accounting costs, human resources, occupancy and equipment
costs and other general operations. General and administrative expenses
increased 1.6% to $4.9 million in 1998 from $4.8 million in 1997. As a
percentage of total revenue, general and administrative expenses decreased to
10.0% in 1998 from 10.7% in 1997. The decrease in general and administrative
expenses as a percentage of total revenue occurred as the Company's general
administrative costs remained generally constant while revenue increased.
COMPENSATION RELATED TO ISSUANCE OF COMMON STOCK
The Company incurred a non-cash charge of $2.8 million, or 5.7% of total
revenue, in 1998 relating to the January 1998 issuance of Common Stock to
certain executive officers and key employees. There was no similar charge in
1997.
PROVISION FOR INCOME TAXES
The provision for income taxes decreased 6.7% to $2.5 million in 1998 from $2.7
million in 1997 as a result of lower pre-tax income for 1998 relative to 1997.
The Company's results have been, and until consummation of the Offering will be,
included in the consolidated income tax returns filed by Computer Associates.
The Company's provision for income taxes has been calculated using Computer
Associates' effective tax rate of 37.5%, which approximates the provision for
income taxes for the Company on a separate return basis. However, there can be
no assurance that the Company's effective income tax rate for future periods
will not be greater than 37.5%. See "Arrangements Between the Company and
Computer Associates" and Note (1) of Notes to Consolidated Financial Statements.
NET INCOME
Net income decreased 6.7% to $4.1 million in 1998 from $4.4 million in 1997. As
a percentage of total revenue, net income decreased to 8.4% in 1998 from 9.9% in
1997.
26
FISCAL YEAR ENDED MARCH 31, 1997 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 1996
REVENUE
Total revenue decreased 31.7% to $44.9 million in 1997 from $65.8 million in
1996. A decrease in third-party products revenue accounted for a majority of the
decline, decreasing 44.9% to $17.2 million in 1997 from $31.3 million in 1996.
In addition, license revenue declined 17.7% to $19.7 million in 1997 from $24.0
million in 1996 and service revenue declined 24.6% to $8.0 million in 1997 from
$10.6 million in 1996.
LICENSE. License revenue decreased to $19.7 million in 1997 from $24.0 million
in 1996 and accounted for 43.9% of total revenue in 1997, up from 36.4% in 1996.
During 1997, license revenue decreased as the Company sold inventory of older
versions of Simply Accounting at reduced prices. As a result, the Company
experienced reduced license revenue in the first two quarters of 1997. In
addition, sales of ACCPAC for Windows and ACCPAC Plus Accounting were negatively
affected due to the discontinued use of retail distribution channels in Canada
for sales of such products.
SERVICE. Service revenue decreased to $8.0 million in 1997 from $10.6 million
in 1996 and represented 17.8% of total revenue in 1997, as compared to 16.1% in
1996. In 1996, ACCPAC implemented a program to shift maintenance and support
services from the Company to its Business Partner network, resulting in a
decline in 1997 service revenue derived from these services.
THIRD-PARTY PRODUCTS. Third-party products revenue decreased to $17.2 million
in 1997 from $31.3 million in 1996 and represented 38.3% of total revenue in
1997, as compared to 47.5% in 1996. During 1996, the Company sold approximately
$16.2 million of software products from Microdyne Corporation in connection with
an upgrade of Novell NetWare. This revenue did not recur in 1997.
COST OF REVENUE
Total cost of revenue was $21.4 million, or 47.5% of total revenue, in 1997, as
compared to $33.9 million, or 51.6% of total revenue, in 1996. The decrease in
total cost of revenue as a percentage of total revenue resulted from an
increased proportion of higher margin Company software products sold relative to
third-party products.
COST OF LICENSE. The cost of license revenue was $4.5 million, or 22.6% of
license revenue, in 1997, compared to $4.0 million, or 16.7% of license revenue,
in 1996. The increase in the cost of license revenue as a percentage of license
revenue resulted from new royalty agreements which had higher royalty rates
payable to third-party development suppliers during the initial stages of the
contracts.
COST OF SERVICE. Cost of service revenue was $1.8 million, or 22.5% of service
revenue, in 1997, as compared to $2.2 million, or 21.1% of service revenue, in
1996. The increase in the cost of service revenue as a percentage of service
revenue resulted primarily from a decrease in maintenance revenue without a
corresponding decrease in fixed maintenance costs.
COST OF THIRD-PARTY PRODUCTS. The cost of third-party products revenue
decreased to $15.1 million, or 87.7% of third-party products revenue, in 1997,
from $27.7 million, or 88.5% of third-party products revenue, in 1996. This
decrease in the cost of third-party products revenue as a percentage of
third-party products revenue resulted from the lower costs associated with sales
made during 1997 relative to the costs associated with software sales from
Microdyne Corporation in 1996.
SALES AND MARKETING
Sales and marketing expenses decreased 21.0% to $7.9 million in 1997 from $10.0
million in 1996. As a percentage of total revenue, sales and marketing expenses
increased to 17.6% in 1997 from 15.2% in 1996. The increase in sales and
marketing expenses as a percentage of total revenue occurred as expenses,
including personnel costs, failed to decline at the same rate as revenue. The
absolute decrease in expenses was primarily attributable to the Company's
consolidation of its sales channels. In particular, during 1997, the Company
27
removed ACCPAC Plus Accounting and ACCPAC for Windows products from the retail
distribution channel in Canada in order to consolidate its North American
distribution strategy. As a result, the Company was able to reduce levels of
marketing and retail channel sales incentives.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased 30.1% to $3.7 million in 1997 from
$5.3 million in 1996. As a percentage of total revenue, research and development
expenses increased to 8.3% in 1997 from 8.1% in 1996. The increase in research
and development expenses as a percentage of total revenue occurred as research
and development expenses, including personnel costs, failed to decline at the
same rate as total revenue. The absolute decrease in research and development
expenses resulted from a cost consolidation program initiated in 1997 pursuant
to which the Company relocated and consolidated its research and development
personnel primarily in Richmond.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 1.6% to $4.8 million in 1997 from
$4.7 million in 1996. As a percentage of total revenue, general and
administrative expenses increased to 10.7% in 1997 from 7.2% in 1996. General
and administrative costs as a percentage of total revenue increased as general
and administrative costs remained stable while revenue declined.
PROVISION FOR INCOME TAXES
The provision for income taxes decreased 39.7% to $2.7 million in 1997 from $4.4
million in 1996 as a result of lower pre-tax income for 1997 relative to 1996.
The Company's results have been, and until consummation of the Offering will be,
included in the consolidated income tax returns filed by Computer Associates.
The Company's provision for income taxes has been calculated using Computer
Associates' effective tax rate of 37.5%, which approximates the provision for
income taxes for the Company on a separate return basis. However, there can be
no assurance that the Company's effective income tax rate for future periods
will not be greater than 37.5%. See "Arrangements Between the Company and
Computer Associates" and Note (1) of Notes to Consolidated Financial Statements.
NET INCOME
Net income decreased 39.7% to $4.4 million in 1997 from $7.3 million in 1996. As
a percentage of total revenue, net income decreased to 9.9% in 1997 from 11.2%
in 1996.
28
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly statements of
operations data for each of the eight quarters of fiscal 1997 and 1998, as well
as the percentage of the Company's revenue. 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 that 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.
----------------------------------------------------------------------------
QUARTER ENDED
JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30
1996 1996 1996 1997 1997 1997
----------- ----------- ----------- ----------- ----------- -----------
DOLLARS IN THOUSANDS
Revenue:
License................................. $4,457 $3,209 $5,644 $6,399 $4,105 $5,568
Service................................. 2,209 2,178 1,869 1,729 1,785 1,929
Third-party products.................... 4,594 4,446 4,336 3,858 4,224 3,883
----------- ----------- ----------- ----------- ----------- -----------
Total revenue............................. 11,260 9,833 11,849 11,986 10,114 11,380
Cost of revenue:
License................................. 1,058 757 1,231 1,406 859 1,006
Service................................. 394 433 460 512 409 475
Third party products.................... 4,033 3,917 3,683 3,473 3,767 3,447
----------- ----------- ----------- ----------- ----------- -----------
Total cost of revenue..................... 5,485 5,107 5,374 5,391 5,035 4,928
----------- ----------- ----------- ----------- ----------- -----------
Gross profit.............................. 5,775 4,726 6,475 6,595 5,079 6,452
Operating expenses:
Sales and marketing..................... 1,869 1,843 2,055 2,149 2,141 2,116
Research and development................ 1,051 927 873 882 922 990
General and administrative.............. 1,064 1,213 1,222 1,309 1,096 1,113
Compensation related to issuance of
Common Stock.......................... -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses.................. 3,984 3,983 4,150 4,340 4,159 4,219
----------- ----------- ----------- ----------- ----------- -----------
Income from operations.................... 1,791 743 2,325 2,255 920 2,233
Other income (expense), net............... (41) (37) (19) 66 (7) (10)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes......... 1,750 706 2,306 2,321 913 2,223
Provision (benefit) for income taxes...... 656 265 865 870 342 834
----------- ----------- ----------- ----------- ----------- -----------
Net income................................ $1,094 $441 $1,441 $1,451 $571 $1,389
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
DEC. 31 MARCH 31
1997 1998
----------- -----------
DOLLARS IN THOUSANDS
Revenue:
License................................. $8,250 $6,897
Service................................. 1,839 1,942
Third-party products.................... 4,651 3,865
----------- -----------
Total revenue............................. 14,740 12,704
Cost of revenue:
License................................. 1,364 1,446
Service................................. 526 527
Third party products.................... 4,084 3,372
----------- -----------
Total cost of revenue..................... 5,974 5,345
----------- -----------
Gross profit.............................. 8,766 7,359
Operating expenses:
Sales and marketing..................... 2,336 2,835
Research and development................ 1,010 994
General and administrative.............. 1,275 1,401
Compensation related to issuance of
Common Stock.......................... -- 2,800
----------- -----------
Total operating expenses.................. 4,621 8,030
----------- -----------
Income from operations.................... 4,145 (671)
Other income (expense), net............... (8) 7
----------- -----------
Income (loss) before income taxes......... 4,137 (664)
Provision (benefit) for income taxes...... 1,551 (249)
----------- -----------
Net income................................ $2,586 $(415)
----------- -----------
----------- -----------
----------------------------------------------------------------------------
QUARTER ENDED
JUNE 30 SEPT.30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30
1996 1996 1996 1997 1997 1997
----------- ----------- ----------- ----------- ----------- -----------
Revenue:
License................................. 39.6% 32.6% 47.6% 53.4% 40.6% 48.9%
Service................................. 19.6 22.2 15.8 14.4 17.6 17.0
Third-party products.................... 40.8 45.2 36.6 32.2 41.8 34.1
----------- ----------- ----------- ----------- ----------- -----------
Total revenue............................. 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
License................................. 9.4 7.7 10.4 11.7 8.5 8.8
Service................................. 3.5 4.4 3.9 4.3 4.0 4.2
Third-party products.................... 35.8 39.8 31.1 29.0 37.3 30.3
----------- ----------- ----------- ----------- ----------- -----------
Total cost of revenue..................... 48.7 51.9 45.4 45.0 49.8 43.3
----------- ----------- ----------- ----------- ----------- -----------
Gross profit.............................. 51.3 48.1 54.6 55.0 50.2 56.7
Operating expenses:
Sales and marketing..................... 16.6 18.8 17.3 17.9 21.2 18.6
Research and development................ 9.3 9.4 7.4 7.4 9.1 8.7
General and administrative.............. 9.5 12.3 10.3 10.9 10.8 9.8
Compensation related to issuance of
Common Stock.......................... -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses.................. 35.4 40.5 35.0 36.2 41.1 37.1
----------- ----------- ----------- ----------- ----------- -----------
Income from operations.................... 15.9 7.6 19.6 18.8 9.1 19.6
Other income (expense), net............... (0.4) (0.4) (0.1) 0.6 (0.1) (0.1)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes......... 15.5 7.2 19.5 19.4 9.0 19.5
Provision (benefit) for income taxes...... 5.8 2.7 7.3 7.3 3.4 7.3
----------- ----------- ----------- ----------- ----------- -----------
Net income................................ 9.7% 4.5% 12.2% 12.1% 5.6% 12.2%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
DEC. 31 MARCH 31
1997 1998
----------- -----------
Revenue:
License................................. 56.0% 54.3%
Service................................. 12.4 15.3
Third-party products.................... 31.6 30.4
----------- -----------
Total revenue............................. 100.0 100.0
Cost of revenue:
License................................. 9.2 11.4
Service................................. 3.6 4.2
Third-party products.................... 27.7 26.5
----------- -----------
Total cost of revenue..................... 40.5 42.1
----------- -----------
Gross profit.............................. 59.5 57.9
Operating expenses:
Sales and marketing..................... 15.8 22.3
Research and development................ 6.9 7.8
General and administrative.............. 8.7 11.0
Compensation related to issuance of
Common Stock.......................... -- 22.1
----------- -----------
Total operating expenses.................. 31.4 63.2
----------- -----------
Income from operations.................... 28.1 (5.3)
Other income (expense), net............... -- 0.1
----------- -----------
Income (loss) before income taxes......... 28.1 (5.2)
Provision (benefit) for income taxes...... 10.6 (1.9)
----------- -----------
Net income................................ 17.5% (3.3%)
----------- -----------
----------- -----------
29
The Company has experienced, and is likely to continue to experience,
fluctuations in quarterly operating results caused by many factors, including,
without limitation, (i) variations in the demand for the Company's products and
services, (ii) timing of introductions of new products or enhancements to
existing products by the Company or its competitors, (iii) increased
competition, (iv) timing and composition of orders from the Company's clients,
(v) variations in the mix of revenue, (vi) changes in the pricing policies of
the Company or its competitors and (vii) the publication of opinions about the
products of the Company or its competitors by industry analysts or others.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through internally generated
cash flow and extensions of intercompany credit from Computer Associates. The
Company had working capital of $3.6 million at March 31, 1998. As of March 31,
1998, the Company had cash and cash equivalents of $4.0 million.
Cash provided by operating activities was $6.1 million, $3.1 million and $11.6
million for fiscal 1996, 1997 and 1998, respectively. The decrease in cash
provided by operations in fiscal 1997 was primarily due to lower net income. The
increase in cash provided by operations in fiscal 1998 was primarily due to an
increase in net income (after adjusting for non-cash compensation charges), a
decrease in accounts receivable and an increase in accounts payable.
Cash used in investing activities was $121,000, $138,000 and $377,000 during
fiscal 1996, 1997 and 1998, respectively. The use of cash in investing
activities was for purchases of property and equipment.
Cash used in financing activities was $5.9 million, $3.0 million and $7.3
million during fiscal 1996, 1997 and 1998, respectively, and relates to net cash
transfers to Computer Associates.
In the first quarter of fiscal 1999, the Company plans to make a payment of $1.1
million for tax withholdings on behalf of certain employees in connection with
the issuance of shares of Common Stock to certain executive officers and key
employees of the Company. See "Management--Restricted Stock Grant."
In connection with the contribution and transfer by Computer Associates to the
Company of the assets of the ACCPAC division, the Company, among other things,
issued to Computer Associates the Computer Associates Note in the principal
amount of $5.0 million. The Computer Associates Note is an unsecured, general
obligation of the Company, is due and payable in full on the earlier of the
consummation of the Offering and December 31, 1999 and bears no interest if paid
in full on or prior to December 31, 1998. If the Computer Associates Note is not
paid in full at such time, it will bear interest at a rate of 9% per annum. The
Computer Associates Note will be repaid upon consummation of the Offering using
$5.0 million of the proceeds thereof.
The Company believes that the net proceeds from the Offering, together with its
current cash balances and cash provided by future operations, 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.
The Company recognizes the significance of the year 2000 problem as it relates
to its internal systems. It has an overall plan and a systematic process in
place to make its internal financial and administrative systems year 2000-ready
within the next 12 to 18 months. The cost of this exercise is not viewed to have
a material effect on the Company's results of operations or liquidity.
Contingency plans have also been developed such that any failure to convert will
not adversely affect overall performance.
NEW ACCOUNTING PRONOUNCEMENTS
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position No. 97-2 ("SOP 97-2"), "Software Revenue Recognition", as
amended by Statement of Position 98-4, which the Company
30
will adopt for transactions entered into in the fiscal year beginning April 1,
1998. SOP 97-2 provides guidance on recognizing revenue on software transactions
and supersedes SOP 91-1. The Company believes the adoption of SOP 97-2 will not
have a significant impact on its current revenue recognition practices.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130") and Statement of Financial Accounting Standards No. 131, "Disclosures
About Segments of an Enterprise and Related Information ("FAS 131"). FAS 130
establishes rules for reporting and displaying of comprehensive income. FAS 131
requires the Company use the "management approach" in disclosing segment
information. Both statements are effective for the Company during the year
ending March 31, 1999. The Company does not believe that the adoption of FAS 130
or FAS 131 will have a material impact on the Company's consolidated financial
position, results of operations or cash flows.
31
BUSINESS
ACCPAC is a leading provider of financial accounting and business management
software solutions to the Corporate, Small Business and SOHO markets. The
Company's products automate essential accounting functions and enhance the
strategic value of financial and business information. As of March 31, 1998, the
Company had an installed client base consisting of over 300,000 registered
clients in the United States and Canada and additional registered clients in
more than 100 other countries. ACCPAC and its predecessors have been providing
financial accounting software solutions since 1979.
INDUSTRY OVERVIEW
In today's competitive markets, companies of all sizes use computers to help
improve performance and efficiency in their businesses. Many businesses are
dedicating substantial resources towards software solutions that streamline and
reduce costs associated with key business functions (such as financial
accounting, operations management and other business processes) while providing
robust functionality, flexibility and reliability. According to International
Data Corporation ("IDC"), an independent provider of information technology
data, financial accounting software is one of the largest market segments within
the business applications software market. IDC estimates that the total
worldwide market for financial accounting software will grow from approximately
$5.3 billion in 1997 to approximately $10.4 billion in 2002.
The Company believes that there are three primary factors driving change in the
financial accounting software market: (1) the continuing advancement of
high-powered, low-cost personal computers ("PCs") which are easier to use and
maintain; (2) the replacement of older systems, driven by standardization on
Windows platforms, recognition of the year 2000 problem and the changes
anticipated as European countries adopt a single Euro-currency; and (3) the
impact of the Internet and e-Business revolution.
The market for financial accounting software consists of businesses in four
markets: the small office/home office (SOHO), small business (Small Business),
mid-sized business or corporate (Corporate) and the enterprise (Enterprise)
markets. The Company targets clients in the SOHO, Small Business and Corporate
markets. The SOHO market generally consists of businesses that have annual
revenue of $1 million or less and fewer than five employees. The Small Business
market generally includes companies that have between $1 million and $20 million
in annual revenue, 100 or fewer employees and five or fewer concurrent users of
accounting software. The Corporate market generally is composed of companies
with $20 million to $500 million in annual revenue, between 100 and several
thousand employees and more than five concurrent users of accounting software.
Customers in each market have unique requirements for their financial accounting
and business management software.
SOHO MARKET
SOHO businesses are leveraging increasing PC power, declining PC costs and the
availability and ease of use of software applications to manage financial
functions that have traditionally required specialized training or were
delegated to outside professionals. By using accounting software packages, SOHO
businesses can automate daily bookkeeping tasks, reduce costs and improve
business decision-making by providing timely access to critical business
information. In addition, accountants and auditors of SOHO businesses often
support the use of accounting software because it can reduce the time and costs
required to perform audits and prepare tax returns.
SOHO businesses generally factor cost, ease of self-installation, ease of use
and general availability into their decision to acquire business technologies.
SOHO users generally seek packaged solutions that cost less than $250, are
widely available at retail PC outlets and are easy to self-install and use.
According to the United States Small Business Administration ("USSBA"), in 1995,
there were approximately 2.6 million businesses in the United States with 1 to 4
employees. Statistics Canada ("STATSCAN"), a Canadian government department,
estimated that in 1996, there were approximately 565,000 businesses in Canada
with 1 to 4 employees.
32
SMALL BUSINESS MARKET
Small businesses typically use PCs within simple peer-to-peer or small networked
systems as their primary technology platform. Within the networked systems of
small businesses, information can be shared among multiple users, but most
application functionality resides within the individual PCs. Small businesses
employ accounting software applications to save time, reduce costs and increase
the ability to access and share information in a timely manner. Small businesses
demand more robust functionality than is provided by off-the-shelf software that
is targeted at the SOHO market. In addition, small businesses frequently demand
the flexibility to generate customized reports. They look for software solutions
that can be scaled to meet the needs of a growing company, have an affordable
cost of ownership over the life of the product and can be implemented with ease
and relative speed. These companies typically target price points below $5,000
and require installation times of no longer than several weeks. To satisfy these
requirements, and because they do not usually employ formal management
information systems ("MIS") departments, small businesses often rely on outside
parties, such as VARs or QIs, to help them implement an accounting software
solution.
ACCPAC believes that the Small Business market will be increasingly
characterized by greater adoption of more sophisticated networked systems and
the growth of Internet-related technologies. The Company believes that the
increased use of more sophisticated networked systems will drive the need for
accounting software that is compatible with the most widely used networking
platforms and that provides an open architecture capable of integrating Internet
and other leading technologies.
According to the USSBA, in 1995, there were approximately 2.0 million businesses
in the United States with 5 to 99 employees. STATSCAN estimates that in 1996,
there were approximately 400,000 businesses in Canada with 5 to 99 employees.
CORPORATE MARKET
Corporate users typically have some mix of networked architectures as well as
legacy mainframe or minicomputer technology platforms, and often have distinct
MIS departments to implement, integrate and maintain such systems. Legacy
systems are often difficult to integrate with other corporate systems and,
therefore, do not allow dynamic access to information. As a result, the
accounting software market is characterized by a significant migration towards
client/server- or multi-tier-based applications. Multi-tier systems allow
businesses to maintain records, process transactions and make data available in
a distributed environment so that organizations can more readily share and
access up-to-date, high-integrity data with which to make business decisions.
The Company believes that usage of multi-tier systems is growing rapidly and
represents a significant opportunity for accounting software vendors who support
multi-tier architectures.
Accounting software purchase decisions are typically made by senior corporate
managers. Third parties, like VARs and accountants, frequently influence
purchase decisions and assist with the implementation and maintenance of
accounting software solutions. Corporate clients have high volume processing
requirements and complex financial management needs, and they seek accounting
solutions that are easy to use, flexible, scalable and cost effective over the
life of the application. Corporate users also seek advanced functionality,
features and reporting capabilities as well as customization using industry
standard tools. Additionally, Corporate clients need to integrate accounting
solutions with, or replace, legacy business systems that manage such functions
as inventory, payroll and human resources. Accounting software solutions must
also be compatible with various database languages, such as Pervasive Btrieve
and Microsoft SQL, and must keep pace with industry trends like the increased
adoption of Microsoft operating environments, including Windows NT, Windows 95
and SQL Server. Corporate clients seek accounting software solutions that
generally cost $100,000 or less and require installation times of no more than a
few months.
According to the USSBA, in 1995, there were approximately 91,000 businesses in
the United States with 100 to 4,999 employees. STATSCAN estimates that in 1996,
there were approximately 19,000 businesses in Canada with 100 to 4,999
employees.
33
THE ACCPAC SOLUTION
ACCPAC designs, develops, markets, sells and supports a family of financial
accounting and business management software products that target a broad range
of customers from the Corporate to the Small Business and SOHO markets. The
Company's software solutions are tailored to the specific needs of each market
and are designed to:
PROVIDE ROBUST FUNCTIONALITY AND SUPERIOR ACCOUNTING INTEGRITY
ACCPAC products incorporate a range of accounting and business functions
tailored to each target market. In all cases, accounting integrity is a primary
design consideration. For example, the Company's SOHO solution, Simply
Accounting, provides an integrated suite of accounting functions and maintains
an automated audit trail of all transactions. The Company's ACCPAC for Windows
Small Business Series offers more sophisticated accounting functionality,
flexible reporting options and integration with vertical industry software. The
Company's ACCPAC for Windows Corporate Series extends the accounting
functionality even further through Internet-based inquiry and transaction
processing. In addition, ACCPAC regularly updates its products to account for
changes in accounting and tax statutes. The Company's products are also scalable
to accommodate clients' needs as their businesses grow.
DELIVER COST EFFECTIVE PRODUCTS AND EASE OF IMPLEMENTATION
ACCPAC solutions are designed to provide substantial value and ease of
implementation. The Company believes that its products offer a superior value by
combining lower price points with a level of functionality typically found in
more expensive products. In addition, the Company's Investment Protection
Program provides cost savings to the client when trading up within the ACCPAC
family of products. Simply Accounting is designed for self-installation by
non-accountants; ACCPAC for Windows Small Business Series may be installed,
set-up and fully functioning in a simple network environment within days or
weeks; and ACCPAC for Windows Corporate Series may be installed, set-up,
integrated with other Corporate systems and customized within weeks or months.
PROVIDE FLEXIBLE, OPEN ARCHITECTURE
Each ACCPAC solution provides flexibility and functionality suited to the needs
of the markets it serves. ACCPAC for Windows Small Business Series offers an
open, Btrieve database and a selection of powerful, built-in report writers,
Web-based document publishing and a host of tailorable options. ACCPAC for
Windows Corporate Series employs a multi-tiered architecture and provides more
advanced flexibility features such as inherent multiple currency and multiple
language support.
EMBRACE AND ENHANCE MARKET-LEADING TECHNOLOGIES
The Company identifies market-leading technologies and incorporates them into
its product strategy. For example, Simply Accounting is 32-bit, Microsoft Office
integrated and Web-enabled. ACCPAC for Windows Small Business Series is designed
for use with Microsoft's Windows 95, Windows NT and Small Business Server and
incorporates advanced reporting technologies. ACCPAC for Windows Corporate
Series leverages these technologies and extends this approach to include
Microsoft SQL Server and Internet Information Server, among others. The Company
uses industry standard programming languages such as Java, ActiveX, BASIC and C
in developing certain of its products. The Company intends to continue to select
and support proven, leading technologies as they gain market acceptance.
INCORPORATE AND LEVERAGE INTERNET TECHNOLOGIES
The Company believes that the increasing use of the Internet by businesses of
all sizes will drive the need for Internet functionality. Simply Accounting
provides basic Internet capabilities that enable users to quickly access courier
parcel-tracking systems on the Web and send forms such as customer statements
and invoices via the Internet. The ACCPAC for Windows Small Business Series
manages advanced report publishing via the Internet.
34
The ACCPAC for Windows Corporate Series supports key components of e-Business:
electronic information delivery, electronic document workflow, Web self-service
applications, EDI transactions processing and Web-based business-to-business and
business-to-consumer transactions.
STRATEGY
The Company's strategy is to extend its position as a leading provider of
financial accounting and business management software for the Corporate, Small
Business and SOHO markets. The following are the key elements of the Company's
strategy:
LEVERAGE INSTALLED BASE
In addition to aggressively pursuing new clients, the Company plans to
aggressively leverage its installed client base to generate future sales of its
various accounting software products. As of March 31, 1998, the Company had an
installed client base consisting of over 300,000 registered clients in the
United States and Canada and has additional registered clients in more than 100
other countries. The Company intends to grow sales through focused direct
marketing campaigns emphasizing to its existing DOS-based clients the benefits
of migrating to the Company's Windows-based products. To encourage this
migration, the Company has developed specific software utilities to facilitate
the conversion of a client's existing data to the ACCPAC for Windows format. In
addition, the Company has developed an Investment Protection Program, which
provides existing DOS-based clients with a financial incentive to migrate to the
Company's Windows-based products. The Company also intends to encourage its
existing clients to purchase upgrades, add-on modules and additional user seats
as well as the Company's SupportPlus Maintenance plan.
STRENGTHEN AND EXPAND GLOBAL BUSINESS PARTNER NETWORK
The Company plans to strengthen and expand its extensive network of Business
Partners, which currently consists of approximately 3,000 VARs and QIs. The
Company plans to continue to invest considerable resources in the professional
development of its Business Partners, ensuring that they have extensive,
hands-on training with the Company's products and are provided with additional
training and technical support when new products are released. The Company also
plans to expand its distribution infrastructure in existing territories and add
new Business Partners in previously under-served geographic areas.
INCREASE INVESTMENT IN SALES AND MARKETING
The Company plans a targeted sales and marketing campaign to create greater
awareness of and brand recognition for the ACCPAC family of products. ACCPAC's
plans include increased direct marketing to its installed customer base
regarding the benefits of upgrades, add-ons, the SuppportPlus Maintenance plan
and, where appropriate, migration from DOS- to Windows-based products. The
Company plans to invest to improve the functionality and communication value of
its Web-site, achieve higher profile involvement at industry trade shows, and
increase print advertising, public relations efforts and end user seminars. The
Company believes that these efforts will properly position its products as among
the most reliable, most robust and lowest cost of ownership financial accounting
and business management solutions available in the marketplace today. In
addition, the Company and its Business Partners will continue to provide
instruction and certification on ACCPAC products at educational institutions,
temporary staffing agencies, accounting firms and professional associations,
increasing the number of professionals that are familiar with the Company's
products. See "--Sales and Marketing."
EXTEND TECHNOLOGY LEADERSHIP
The Company intends to extend its technological leadership and maintain its
record of product innovation by continuing to devote significant resources to
research and development efforts and by forming strategic relationships that
further enhance product functionality and ease of use. The Company believes that
the object-
35
oriented and multi-tiered architecture of its newer products provide advantages
which include faster time to market for new products and upgrades, greater
scalability, module expansion, a high level of application stability,
compatibility and ease of integration with a broad range of operating
environments, a comprehensive and affordable e-Business solution and rapid
integration with add-on products developed by third-party independent software
developers. The Company works with over 200 independent software developers who
create applications for use with ACCPAC's Windows-based and ACCPAC Plus
Accounting products. These third-party applications add functionality and
features that extend ACCPAC's core products to better meet the particular needs
of specific vertical industries and end markets, such as manufacturing resource
planning and restaurant management applications.
ESTABLISH E-BUSINESS LEADERSHIP
The Company believes that the increasing penetration of Internet-based
technologies across businesses of all sizes provides vendors with a tremendous
opportunity to sell their core accounting products as a part of a comprehensive
and affordable e-Business solution. The Company and its e-Business development
partners intend to offer a wide array of products that enable electronic
information delivery, electronic document workflow, Web self-service
applications, EDI transactions processing and Web-based business-to-business and
business-to-consumer transactions. The Company believes that clients will
benefit from the Company's accounting software and e-Business solutions by being
better able to access, exchange, manipulate and strategically use information
which can lead to higher sales, improved customer service and increased
management and employee productivity.
36
PRODUCTS
With its ACCPAC for Windows and Simply Accounting product lines, the Company's
software solutions serve businesses from the Corporate and Small Business
markets to the SOHO market. ACCPAC for Windows is sold in products suites, which
enables customers to purchase their desired level of functionality. Simply
Accounting is a comprehensive, off-the-shelf offering.
The following table provides selected information relating to the Company's
ACCPAC for Windows, ACCPAC Plus Accounting and Simply Accounting product lines:
----------------------------------------------------------------------
ACCPAC FOR
ACCPAC FOR WINDOWS
WINDOWS SMALL BUSINESS ACCPAC PLUS SIMPLY
CORPORATE SERIES SERIES ACCOUNTING ACCOUNTING
---------------- ---------------- ---------------- ----------------
Target Markets Corporate Small Business Corporate and SOHO
Small Business
Initial Release 1994 1997 1979 1985
Current Version/ 3.0/1997 3.0/1997 6.5/1997 6.0/1998
Release Date
Typical System $13,000-$47,000 $4,000-$6,500 $3,500-$6,000 US$129/C$179
Price (1)
Client Operating Windows NT Windows NT DOS Windows NT
System Windows 95 Windows 95 Windows 95
Windows 3.11 Windows 3.11
Network Windows NT Windows NT Windows NT not applicable
Operating Novell NetWare Novell NetWare Novell NetWare
System Peer-to-Peer Peer-to-Peer
Typical Number 5-100+ 1-5 1-5 1
of Users
Database Btrieve (Client- Btrieve Proprietary Proprietary
Server) (Workstation
MS-SQL Engine)
- ------------------------
(1) For ACCPAC for Windows Corporate Series, the typical system price range
reflects a system consisting of 3 to 6 modules with 5 to 30 users on an MS-SQL
database. For ACCPAC for Windows Small Business Series and ACCPAC Plus
Accounting, the typical system price range reflects a system consisting of 3 to
6 modules with 3 to 5 users. The system price specified is the price paid by the
client to a Business Partner or, in the case of Simply Accounting, to the retail
outlet and does not represent sale proceeds to ACCPAC.
WINDOWS-BASED PRODUCTS
ACCPAC FOR WINDOWS CORPORATE SERIES. ACCPAC for Windows Corporate Series is
designed to meet the core accounting needs of mid-sized business clients. The
Corporate Series is year 2000 compliant, is capable of meeting high volume
processing requirements, supports multi-tier architectures, has advanced
reporting and e-Business capabilities, handles multiple currencies and multiple
languages and allows 99 years of history and 45-digit account codes and can be
customized using industry standard tools. ACCPAC for Windows Corporate Series
has received recognition from certain industry publications. For example, a
survey of VARs by VAR Business magazine (May 98) rated ACCPAC for Windows as the
leading Windows accounting software product, ranking it first in six of eight
product feature categories; Corporate Controller Magazine (February 1997) named
it
37
Best Value for the three modules reviewed (general ledger, accounts receivable
and accounts payable), Best Multicurrency and Best Built-in Report Writers.
ACCPAC for Windows Corporate Series supports both Microsoft SQL Server and
Pervasive Btrieve databases and runs on Microsoft Windows 95 and Windows NT and
Novell NetWare. ACCPAC for Windows Corporate Series is a modular system that
allows each business to purchase and combine those applications that match its
needs.
ACCPAC for Windows Corporate Series is "Web-enabled," extending timely and easy
access and delivery of financial information to users throughout an organization
and to authorized outside parties. Users of the Corporate Series have the option
to install an e.Advantage Server which, through Java and ActiveX applets,
enables secure online access to any aspect of the software's business logic and
to key accounting data using an Internet Web browser. ACCPAC for Windows
Corporate Series incorporates functionality from Seagate Software (Crystal Info)
and Brio Technologies (BrioQuery) which provide online data analysis tools that
enable users to run queries and publish reports as HTML pages that can be
stored, transmitted or viewed using an Internet Web browser. In addition to
these tools, the Financial Reporter of ACCPAC for Windows Corporate Series
General Ledger can generate reports in Microsoft Excel, which can enable users
to publish financial data directly to the Web.
To expand the scope of the ACCPAC for Windows Corporate Series' Internet
solutions, ACCPAC offers the e.Advantage Software Development Kit. The
e.Advantage Software Development Kit allows ACCPAC's Business Partners to
implement additional applications to meet the specialized needs of vertical
industries and others within the Corporate market.
The Company has integrated e-Business functionality into its products through
technology inherent in ACCPAC for Windows Corporate Series, or technologies
provided by the Company's e-Business development partners, such as Brio
Technologies (online analytical processing (OLAP) decision support tools) and
Seagate Software (Web-enabled information delivery solutions). The Company
intends to integrate additional e-Business functionality from JetForm
Corporation (electronic forms management and workflow solutions) and The EC
Company (low-cost EDI transactions processing) into the next version of the
ACCPAC for Windows Corporate Series.
ACCPAC for Windows Corporate Series includes the following product suites:
------------------------------------------------------------
SUITE DESCRIPTION
- ------------------------------ ------------------------------------------------------------
Financial Management Provides robust functionality, flexibility and ease of use
with reporting and customization options. All modules
provide international features such as multiple currency and
multiple language support. The available modules are General
Ledger, Accounts Receivable and Accounts Payable.
Operations Management Provides solutions that integrate with the Financial
Management Suite for order processing, purchasing, inventory
management, payroll, analysis and reporting and sales force
automation. The available modules are Order Entry, Inventory
Control, Purchase Order, U.S. Payroll, Canadian Payroll,
SmartSales* and BrioQuery*.
e.Advantage Combines traditional accounting and operations functions
with e-Business applications. Currently available modules
include e.Advantage Server, e.OE.Order, e.AR.Inquiry,
e.PR/US.Inquiry and e.PR/CDN.Inquiry. Additionally, the
Company offers electronic information delivery and Web
self-service applications and intends to integrate
electronic document workflows and EDI transactions
processing.
Customization and Development Enables clients, Business Partners and other third-party
developers to customize and extend the functionality of the
ACCPAC for Windows Corporate Series. The available modules
are Software Development Kit, e.Advantage Software
Development Kit and Customization Kit.
- ------------------------
* Products licensed from third parties.
38
Initially released in 1994 as CA-ACCPAC/2000, the current version (3.0) of the
ACCPAC for Windows Corporate Series was released in 1997 under the name "ACCPAC
for Windows." ACCPAC for Windows Corporate Series is marketed and sold through
the Company's Business Partners. The price to the client typically ranges from
$13,000 to $47,000 depending on the number of modules purchased and the database
being supported.
ACCPAC FOR WINDOWS SMALL BUSINESS SERIES. ACCPAC for Windows Small Business
Series is the Company's financial accounting solution for small businesses that
require a Windows solution that is year 2000 compliant, flexible and
cost-effective, but does not require information technology personnel dedicated
to database administration. It has the same core technology as ACCPAC for
Windows Corporate Series and supports up to five concurrent users in a Windows
environment.
ACCPAC for Windows Small Business Series includes the following product suites:
------------------------------------------------------------
SUITE DESCRIPTION
- ------------------------------ ------------------------------------------------------------
Financial Management Provides robust functionality, flexibility and ease of use.
The available modules are General Ledger, Accounts
Receivable and Accounts Payable.
Operations Management Provides solutions that integrate with the Financial
Management Suite. The available modules are Order Entry and
Inventory Control, as well as the following ACCPAC for
Windows Corporate Series modules: Purchase Order, U.S.
Payroll, Canadian Payroll, SmartSales* and BrioQuery*.
- ------------------------
* Products licensed from third parties.
The current version (3.0) of the ACCPAC for Windows Small Business Series was
released in 1997 under the name "ACCPAC for Windows Plus Series." ACCPAC for
Windows Small Business Series is marketed and sold through the Company's
Business Partners. The price to the client typically ranges from $4,000 to
$6,500 depending on the number of modules purchased.
SIMPLY ACCOUNTING. Simply Accounting provides SOHO businesses with a
comprehensive set of accounting functions that simplifies bookkeeping and
improves business processes in an easy-to-use package suitable for the
non-accountant. The accounting and business functions of this comprehensive,
single user package include general ledger, accounts receivable, accounts
payable, inventory, sales orders, purchase orders, payroll, project costing,
bank reconciliation, financial reporting and forms management. Simply Accounting
integrates with Microsoft Office to provide business owners with reporting
flexibility and is Internet-enabled to improve typical business processes such
as delivery of customer statements and other business forms.
Initially released in 1985, the current version (6.0) was released in April
1998. Version 6.0 runs on Windows 95 and Windows NT and is year 2000 compliant.
The Company is authorized to use the "Designed for Microsoft Windows NT/Windows
95 logo" on the current version of its Simply Accounting product. Simply
Accounting is marketed and sold through mass merchandise retail channels
primarily in Canada at a suggested retail price of US$129/C$179. To date, the
vast majority of Simply Accounting sales have been in Canada.
DOS-BASED PRODUCTS
ACCPAC PLUS ACCOUNTING. ACCPAC Plus Accounting provides highly flexible,
reliable and cost-effective accounting functionality for Corporate and Small
Business clients using the DOS operating environment on a single station or in a
networked configuration. ACCPAC Plus Accounting functions are provided as
separate modules which include general ledger, accounts receivable, accounts
payable, inventory control, order entry, job cost and payroll, among others. A
number of third-party, independent software vendors have developed specialized
software for the ACCPAC Plus Accounting line providing clients with specialized
vertical industry applications such as manufacturing resource planning and
restaurant management applications, among others.
39
Initially released in 1979, the current version (6.5) was released in 1997 and
is year 2000 compliant. ACCPAC Plus Accounting is marketed and sold through the
Company's Business Partners. The price to the client typically ranges from
$3,000 to $6,000 depending on the number of modules purchased.
BPI ACCOUNTING II. BPI Accounting II is a DOS-based accounting solution for
small businesses that combines general ledger, accounts receivable, accounts
payable, order entry, inventory control and payroll functions. Clients have the
ability to run BPI Accounting II on LANs.
Initially released in 1986, the current version (5.0) was released in 1997 and
is year 2000 compliant. BPI Accounting II is marketed and sold direct and
through distributors at a suggested U.S. retail price of $225. The Company does
not currently plan to release any new versions of this product.
40
ACCPAC FOR WINDOWS ARCHITECTURE
In designing its ACCPAC for Windows products, the Company has employed the
following product architecture:
[Graphic depicting five layers of ACCPAC for Windows architecture: user
interface, user interface layers, modules containing application/business logic,
database layer, database]
OBJECT-ORIENTED FRAMEWORK
ACCPAC for Windows code is written within an object-oriented framework. In this
framework, ACCPAC's business processing logic is segmented into objects which
are program entities that contain both data and procedures that drive the
operation of the product. For example, when a person enters an order into the
order entry module and wants to verify if the order should be accepted, object
code is activated which checks if there is inventory in stock, the price the
product should be sold at and whether the customer has available credit.
This object-oriented framework is executed in a layered design that insulates
the business processing object code from the technical complexities of operating
systems, hardware platforms, network requirements and end-user interface
preferences. By layering the object code, core business logic code can be
deployed by clients on a LAN, wide area network (WAN) or the Internet, without
the need to rewrite the code for each implementation. In addition, the
object-oriented framework coupled with the ACCPAC XAPI (external application
programming interface) is well-suited to the integration of non-ACCPAC software
with ACCPAC for Windows, increasing the attractiveness of ACCPAC for Windows as
a core financial management system for third-party software developers.
The Company has invested significant resources in the development of the
object-oriented framework for its ACCPAC for Windows product family. The Company
believes that its object-oriented technology will allow it to quickly adapt to
existing and emerging operating systems, databases and user interfaces and
develop increased functionality for ACCPAC for Windows family products.
MULTI-TIER PROCESSING
ACCPAC's object-oriented and layered architecture supports multi-tier
environments, which enhance processing flexibility and efficiency. Multi-tier
processing is the ability to have parts of an application run on two or more
distinct central processing units ("CPUs"), whether they are the desktop
computer, the application server or the database server. Specifically,
multi-tier-processing capabilities are an advancement over simple client-server
two-tier designs and enhance scalability and deployment capabilities over WANs
and the Internet. ACCPAC for Windows Corporate Series with the ACCPAC
e.Advantage Server is a three-tier system that separates processing on the
database server, the application server and the Internet-based user's CPU.
CLIENT SERVICES
The Company believes that prompt and effective service and technical support is
an important component of a complete financial accounting system and is critical
to the long-term satisfaction of its clients and Business Partners. As of May 1,
1998, the Company provided service and technical support through a service
organization consisting of 37 technical support employees, 20 client care
employees and 11 Business Partner service employees.
To supplement the primary support provided by its Business Partners, the Company
intends to offer its clients a multi-level SupportPlus Maintenance program that
provides automatic product upgrades and a choice of various levels of technical
support. The options will range from the most basic plan, which will consist
solely of product upgrades, to the most extensive package, which will include
product upgrades, technical support, online access to the product's technical
library and quarterly conference calls with Company technicians to optimize the
functionality of the product. The Company intends to charge an annual fee for
the SupportPlus Maintenance program ranging from 15% to 40% of the suggested
retail price of the supported products depending upon the
41
selected level of service. The Company intends to require the purchase of a
one-year SupportPlus Maintenance contract with the original sale of all ACCPAC
for Windows products.
SALES AND MARKETING
SALES
The Corporate, Small Business and SOHO markets that the Company targets are
characterized by different sales dynamics. Accordingly, each market is served by
different distribution channels. The Company sells its Corporate and Small
Business products in the United States, Canada and the Caribbean through
DistribuPro (the Company's internal distributor, see "--DistribuPro") and in
other regions through distributors who then resell the products to the Company's
Business Partners, which then sell, install, implement and train their clients
on the product. The Company's Business Partners include approximately 3,000 VARs
and QIs worldwide, including systems integrators, regional distributors, Big 5
and other accounting firms, professional organizations, software vendors and
specialized software consultants. The extensive use of Business Partners by the
Company allows for an industry specific and geographically diverse indirect
sales force. The Company is working to enlist additional distributors in
international markets that it considers under-served. The Company sells its SOHO
product, Simply Accounting, through mass merchandise wholesale distributors that
resell the product to retail stores and other retail outlets.
The Company recruits Business Partners using a three-pronged approach that
focuses on the particular needs of the various types of Business Partners. The
Company's Strategic Accounts Group recruits Big 5 accounting firms and large
system integrators which sell to large multinational Corporate clients. Using a
direct sales approach comprised of one-on-one meetings, product demonstrations,
product launch planning and product training, the Company's regionally-oriented
outside sales force recruits system integrators and regional distributors which
sell to smaller Corporate clients. The Company uses telemarketing and seminars
to recruit small accounting firms, software consultants and QIs which sell to
the Small Business market.
The Company believes that having qualified and knowledgeable Business Partners
is critical to the success of selling and supporting the Company's products. The
Company invests considerable resources in the professional development of its
Business Partners. Newly recruited Business Partners undertake up to 12 days of
intensive, hands-on training in the installation, implementation and maintenance
of the Company's products and are required to pass a certification exam before
being permitted to implement the Company's products. The Company offers its
Business Partners technical support, presales consulting, monthly conference
calls with senior trainers and technical support people, and access to a private
section of the Company's Web-site which contains a knowledge base of the
Company's products and technical discussion groups.
MARKETING
The Company's marketing efforts are focused on creating greater awareness and
brand recognition for the ACCPAC family of products. In addition, the Company
provides marketing support for its Business Partners to enable them to
successfully market, sell and install the Company's products.
The Company promotes its products worldwide through a combination of
advertisements in financial and technical publications, links from its Business
Partners' and industry-focused Web-sites, a public relations program and a
presence at industry tradeshows. The Company's direct marketing efforts to its
installed base include a combination of direct mail and telemarketing designed
to create client interest in upgrading their accounting software, purchasing
add-on modules and additional user seats, and, where appropriate, migrating from
the Company's DOS-based products to its Windows-based products. The Company
engages in cooperative marketing efforts with its Business Partners to support
their local marketing efforts. In addition, the Company hosts annual conferences
for its Business Partners to provide them with information and training on the
Company's products.
42
EDUCATION COMMUNITY
The Company currently licenses its accounting software to more than 2,000
secondary and post-secondary educational institutions in North America,
resulting in the training of many students on the Company's products. The
Company believes that relationships with educational institutions and
professional associations are instrumental in increasing awareness of the
Company's products and in developing a base of experienced users who may be
available to the Company as future clients, business partners and employees. The
Company actively promotes its products in the educational community and among
professional organizations, including the Certified General Accountants
Association which trains accountants in Canada, China, including Hong Kong, the
Caribbean and Bermuda.
The Company works with several book publishers including Prentice-Hall, Houghton
Mifflin, McGraw-Hill, Addison-Wesley-Longman and Nelson Canada to produce
teacher and student accounting workbooks. Several book publishers have produced
general accounting textbooks, which use the Company's products to emphasize
accounting concepts. The Company markets and sells the educational versions of
the products through specialty education distributors such as Nacscorp in the
United States and Ingram Education and Merisel Education in Canada.
DISTRIBUPRO
The DistribuPro business was acquired by Computer Associates in 1988 and was
made a part of the ACCPAC division. The Company's DistribuPro subsidiary sells
the Company's products, as well as products developed for use with ACCPAC
products by the Company's development partners and other third-party products,
to the Company's Business Partners and other resellers in the United States,
Canada and the Caribbean. DistribuPro's account managers are trained on the
Company's products as well as complementary products and can make product
recommendations to the Company's Business Partners. The Company believes that
DistribuPro provides the Company's Business Partners with certain benefits,
including one-stop procurement of ACCPAC and related or complementary
third-party products. The Company further believes that DistribuPro encourages
third-parties to develop products for the ACCPAC platform by offering them an
established distribution channel.
CUSTOMERS
Through its Business Partners, the Company sells its ACCPAC for Windows and
ACCPAC Plus Accounting products to a wide range of small and mid-sized
businesses, including divisions of large enterprises, and, through mass
merchandise retail channels, it sells Simply Accounting to a wide range of SOHO
businesses. As of March 31, 1998, the Company had over 300,000 registered
clients in the United States and Canada and additional registered clients in
more than 100 other countries.
RESEARCH AND DEVELOPMENT
Since its inception, the Company has made substantial investments in research
and development. During fiscal 1996, 1997 and 1998, software development
expenditures were approximately $5.3 million, $3.7 million and $3.9 million,
respectively. All of such research and development expenditures were expensed as
incurred. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations." As of May 1, 1998, the Company
had a total of 68 employees engaged in research and development, quality
assurance and documentation.
The Company's research and development efforts employ a standard development
process to guide software development through stages of product concept, market
requirements analysis, product definition, design specification, coding, testing
and release. These efforts are also focused on identifying, developing and
integrating leading technologies into its products to better meet client needs.
43
INTELLECTUAL PROPERTY RIGHTS AND LICENSES
The Company regards certain features of its internal operations, software and
documentation as its intellectual property. The Company relies on a combination
of copyright, trademark and trade secret laws, a mandatory software registration
mechanism for certain products, confidentiality and non-disclosure agreements
with its employees, licensing arrangements with its clients and limitations on
access to and distribution of its proprietary information. The Company has no
patents or patent applications pending. The Company believes that, because of
the rapid pace of technological change in the computer software industry, trade
secret and copyright protection are less significant than factors such as the
knowledge, ability and experience of the Company's employees, frequent product
enhancements and the timeliness and quality of support services. It is the
Company's policy to file for protection of its basic trademarks and service
marks in countries in which the Company sells its products either directly or
through its international Business Partners and in which protection is available
and advisable. The Company currently licenses all of its products under "shrink
wrap" licenses that are not signed by its licensees. These shrink wrap licenses
may be unenforceable under the laws of certain jurisdictions. In addition, the
laws of certain countries in which the Company's products are sold do not
protect the Company's intellectual property rights to the same extent as the
laws of the United States and Canada. Despite these measures, there can be no
assurance that the Company will be able to fully protect its intellectual
property. See "Risk Factors-- Limited Protection of Proprietary Technology; Risk
of Third-Party Claims of Infringement."
COMPETITION
The Company's business is extremely competitive. The Company's products are
targeted towards businesses in the Corporate, Small Business and SOHO markets.
The Company has experienced competition to date from both established and
emerging software companies that offer similar products targeted at businesses
within the Company's markets. The Company also faces additional competition in
individual countries from local competitors. The Company believes it currently
competes on the basis of (i) the ease of use, features, performance and price of
its products, (ii) the quality of its Business Partners, (iii) the quality of
its service and technical support for its clients and Business Partners, (iv)
technology and (v) new product introductions. While the Company believes that it
currently competes favorably overall with respect to these factors, there can be
no assurance that the Company will be able to continue to do so.
The Company's products compete with those from several vendors servicing a range
of markets, from the Corporate markets to the Small Business markets to the SOHO
Business markets. The Company currently competes in the Corporate market with
J.D. Edwards & Company, Great Plains Software, Inc., Lawson Associates, Inc.,
Platinum Software Corporation, The Sage Group Plc. and Solomon Software, Inc.,
among others. In addition, the Company believes that products may be introduced
to these markets by other vendors who traditionally compete in the enterprise
market. Such potential competitors include Baan Company N.V., Oracle
Corporation, PeopleSoft, Inc. and SAP AG. In the Small Business market, the
Company's primary competitors include Great Plains Software, Inc., Platinum
Software Corporation, The Sage Group Plc., Solomon Software, Inc. and Systems
Union Group Ltd., among others. The Company currently faces competition in the
SOHO market from Automatic Data Processing, Inc.'s Peachtree unit and Intuit
Inc., among others. Currently, several of Computer Associates' iBUs engage in
the development, marketing, sale or support of financial management software for
the enterprise market. Although the Company believes that its products do not
directly compete with Computer Associates' products, there are no restrictions,
contractual or otherwise, on Computer Associates' competing with the Company in
the Company's markets. Such competition could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Arrangements Between the Company and Computer Associates."
Certain competitors may have greater financial, technical and marketing
resources and name recognition than the Company. Competitors may bundle their
software with other software or enter into agreements whereby third parties sell
their software thereby decreasing the attractiveness of the Company's products.
In addition, competitors may lower their prices, which may force the Company to
match price cuts and thereby decrease the Company's profitability. Accordingly,
there can be no assurance that the Company will be able to design new
44
products or improve existing ones to maintain its competitive position in the
industry. Increased competitive pressures from current and future competitors
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, if one of the Company's
competitors is acquired by a well-capitalized company, the Company could face
increased competition that could have a material adverse effect on the Company's
business, financial condition and results of operations.
EMPLOYEES
As of May 1, 1998, the Company had a total of 244 full time equivalent employees
("FTEs"). Of such FTEs, 89 were based in the United States, 147 were based in
Canada and 8 were based in other countries. None of the Company's employees are
represented by a labor union. Management believes that its relations with the
Company's employees are good.
LEGAL PROCEEDINGS
In May 1998, the Company's DistribuPro subsidiary was named as a third-party
defandant in connection with a copyright and trademark infrigement claim
relating to certain networking products it distributed. The matter is being
litigated in the United States District Court for the Northern District of
California. The third-party complaint alleges that DistribuPro should be liable
for any amounts for which the third-party plaintiffs are found to be liable. On
June 9, 1998, DistribuPro filed a motion to dismiss the third-party claim. While
the third-party complaint seeks to hold DistribuPro responsible for potentially
significant amounts, the Company does not believe the third-party claim has
merit and will vigorously defend against it. Accordingly, the Company does not
expect the thirty-party claim to have a material adverse effect on the Company's
business, financial condition and results of operations.
In addition to the foregoing, from time to time, the Company is involved in
litigation arising out of operations in the normal course of business. As of the
date of this Prospectus, except as described above, the Company is not a party
to any legal proceedings the adverse outcome of which, individually or in the
aggregate, could reasonably be expected to have a material adverse effect on the
Company's business, financial condition and results of operations.
PROPERTIES
The Company's principal executive, administrative, sales and marketing and
operations facility is located at 2525 Augustine Drive, Santa Clara, California
95054, where the Company occupies approximately 30,000 square feet of space. The
Santa Clara facility is owned by Computer Associates. Pursuant to the Real
Estate Agreement between the Company and Computer Associates, Computer
Associates will permit the Company to remain in that portion of the facility
that it currently occupies until the Company is able to relocate its operations
to a new facility. Computer Associates will charge the Company $62,000 per month
for such continued use. See "Arrangements Between the Company and Computer
Associates." In August 1998, the Company intends to relocate all of its Santa
Clara operations to a 30,000 square foot facility located in Pleasanton,
California, for which the Company has executed a letter of intent with the
prospective landlord.
The lease for the Company's 43,000 square foot Richmond, British Columbia
facility, which houses the Company's research and development operations, client
care and technical support functions, is between Computer Associates and a
third-party landlord. Pursuant to the Real Estate Agreement, Computer Associates
will either assign the Richmond lease, or sublet the Richmond facility, to the
Company. Pursuant to the Real Estate Agreement, Computer Associates will have
the right to occupy and use that portion of the Richmond facility that Computer
Associates currently occupies. For such continued occupancy, Computer Associates
will pay the Company an annual amount equal to C$18.50 per square foot plus
Computer Associates' proportionate share of facility operating expenses
including real estate taxes. The Company also occupies space at 13 other
Computer Associates' offices located in the United States, Canada, Australia,
China and Singapore. Total rental expense for the Company was $800,000, $800,000
and $1,100,000 during fiscal 1996, 1997 and 1998, respectively. The
45
Company anticipates that it may lease additional space during the next 12 months
as it transitions out of Computer Associates' office space.
ARRANGEMENTS BETWEEN THE COMPANY AND COMPUTER ASSOCIATES
The predecessors to ACCPAC's current products, as well as the DistribuPro
business, were acquired by Computer Associates as part of a series of unrelated
business acquisitions between 1985 and 1989. ACCPAC became an iBU of Computer
Associates in April 1996, was incorporated in Delaware in October 1997 and
became a subsidiary of Computer Associates effective January 1998. Computer
Associates is a publicly owned company engaged in the design, development,
marketing, sale and support of standardized computer software products for use
with a broad range of desktop, midrange and mainframe computers. Immediately
after the Offering, Computer Associates will own 5,250,000 shares of Common
Stock, which will represent approximately % of the outstanding Common Stock
( % if the Underwriters' over-allotment option is exercised in full). After
the Offering, as the owner of such shares, Computer Associates will have the
ability to elect all directors of the Company and, thus, will be in a position
to control all matters affecting the Company. Computer Associates has advised
the Company that its current intent is to continue to hold all of the Common
Stock beneficially owned by it. However, Computer Associates is not subject to
any contractual obligation to retain any of such Common Stock, except that
Computer Associates has agreed not to sell or otherwise dispose of any shares of
Common Stock for a period of 180 days after the date of this Prospectus without
the prior written consent of J.P. Morgan Securities Inc. See "Risk
Factors--Control by and Relationship with Computer Associates; Potential
Conflict of Interest" and "--Possible Future Sales of Common Stock by Computer
Associates; Shares Eligible for Future Sale" and "Underwriting."
The following is a summary of certain agreements between the Company and
Computer Associates that have been, or will be, entered into in contemplation of
the Offering. Each such summary is qualified in its entirety by reference to the
forms of such agreements, which are filed as exhibits to the Registration
Statement of which this Prospectus is a part.
CONTRIBUTION AGREEMENT
The following is a summary of the contribution agreement that has been entered
into in contemplation of the Offering (the "Contribution Agreement"). The
Contribution Agreement sets forth the agreement between the Company and Computer
Associates with respect to the transfer and contribution (the "Contribution") by
Computer Associates to the Company of the assets (the "Company Assets")
constituting the ACCPAC division of Computer Associates (including, without
limitation, certain intellectual property rights, accounts receivable, contract
rights, certain fixed assets and all of the outstanding capital stock of
DistribuPro). Pursuant to the Contribution Agreement, the Contribution was made
effective as of January 1, 1998 (the "Contribution Date").
In connection with the Contribution, Computer Associates received 5,250,000
newly issued shares of Common Stock and the Computer Associates Note. The
Computer Associates Note is an unsecured, general obligation of the Company, is
due and payable in full on the earlier of the consummation of the Offering and
December 31, 1999 and bears no interest if paid in full on or prior to December
31, 1998. If the Computer Associates Note is not paid in full at such time, it
will bear interest at a rate of 9% per annum. In addition, pursuant to the
Contribution Agreement, the Company assumed all of the liabilities and
obligations (whether absolute, accrued, contingent or otherwise and whether due
or to become due) relating to or arising out of the Company Assets and the
operation of the ACCPAC business, as conducted at any time prior to, on or after
the Contribution Date, regardless of where or against whom such liabilities are
asserted or determined and regardless of whether arising from, or alleged to
arise from negligence, recklessness, violation of law, fraud or
misrepresentation by CA or its directors, officers, employees or agents (the
"Assumed Liabilities"). The Company also granted Computer Associates a
worldwide, perpetual, fully-paid license (including maintenance) for the
internal use by Computer Associates of all present and future Company software
products (including, without limitation, products acquired after the
Contribution Date); provided that if the Company is required to pay royalties to
any third-party resulting from the use by Computer Associates of any such
Company software, Computer Associates will reimburse the Company therefor.
Except as expressly set forth therein, neither Computer Associates nor the
Company has made any representation or warranty as to the assets, business or
liabilities contributed, transferred or assumed as part of the Contribution, as
to any consents or approvals required in connection therewith, as to the value
or freedom from any security interest of any of the Company Assets contributed,
as to the absence of any defenses or
46
freedom from counterclaim with respect to any claim of any party or as to the
legal sufficiency of any assignment, document or instrument delivered to convey
title to any Company Assets contributed. The Contribution Agreement expressly
provides that the Contributed Assets were being contributed and transferred on
an "as is," "where is" basis, and the Company agreed to bear the economic and
legal risks that the conveyance is insufficient to vest in the Company good and
marketable title, free and clear of any security interest.
Pursuant to the Contribution Agreement, the Company has agreed to indemnify,
defend and hold Computer Associates harmless from and against any and all costs
or liabilities relating to or resulting from (i) the failure of the Company to
pay, perform or otherwise promptly discharge any Assumed Liabilities or (ii) the
Company Assets and the Company's business and operations, including any
litigation pending or threatened or that arises in the future and primarily or
exclusively involving the Company Assets, the Assumed Liabilities or the ACCPAC
business. In the Contribution Agreement, Computer Associates has granted the
Company the benefits of any applicable insurance coverage. The Contribution
Agreement provides that Computer Associates agrees to indemnify, defend and hold
the Company harmless from and against any costs or liabilities relating to
Computer Associates' operations (other than those attributable to the Company's
operations). The Contribution Agreement also specifies certain procedures with
respect to claims subject to indemnification and related matters.
In addition, the Contribution Agreement provides that ACCPAC will make a payment
to Computer Associates in an amount equal to 37.5% of the positive income
(before income taxes) of ACCPAC and its subsidiaries for the fiscal year ending
March 31, 1998 and the fiscal period beginning April 1, 1998 and ending on the
date the Offering is consummated, in order to compensate Computer Associates for
ACCPAC's share of any consolidated or combined taxes. In the event that ACCPAC
generates a net loss for such period and such loss results in a tax benefit to
Computer Associates, the Contribution Agreement requires Computer Associates to
compensate ACCPAC for such tax benefit when such benefit is realized.
REGISTRATION RIGHTS AGREEMENT
The following is a summary of the Registration Rights Agreements between the
Company and Computer Associates that will be entered into in contemplation of
the Offering (the "Registration Rights Agreement"). Pursuant to the Registration
Rights Agreement, Computer Associates will have the right to require the Company
to effect three registrations under the Securities Act of all or any part of the
Common Stock owned by Computer Associates, subject to certain limitations, and
to bear the expenses of such registrations (other than underwriting discounts
and commissions, if any). No such registration may be required by Computer
Associates prior to the expiration of the 180-day period following the date of
the consummation of the Offering without the prior written consent of J.P.
Morgan Securities Inc. See "Underwriting." In addition, the Registration Rights
Agreement gives Computer Associates the right to include its shares of Common
Stock in any registration of shares of Common Stock initiated by the Company
following the Offering. The Registration Rights Agreement also contains
provisions whereby the Company and Computer Associates agree to indemnify each
other and their respective subsidiaries as well as their respective directors,
officers, employees, agents and representatives for certain costs and
liabilities relating to violations of federal and state securities laws in
connection with any such registration of Common Stock owned by Computer
Associates.
REAL ESTATE AGREEMENT
The following is a summary of the Real Estate Agreement between the Company and
Computer Associates that will be entered into in contemplation of the Offering
(the "Real Estate Agreement"). The Real Estate Agreement sets forth the
agreements with respect to the facilities in which both the Company and Computer
Associates to some extent conduct operations of their respective businesses. The
Company's Santa Clara facility is owned by Computer Associates. Pursuant to the
Real Estate Agreement, Computer Associates will permit the Company to remain in
that portion of the Santa Clara facility that it currently occupies until such
time as the Company is able to relocate its Santa Clara operations to a new
facility. Computer Associates will charge the Company $62,000 per month for such
continued use. The lease for the Richmond, British Columbia facility is between
Computer Associates and a third-party landlord. Pursuant to the Real Estate
Agreement, Computer Associates will either assign the Richmond lease, or sublet
the Richmond facility, to the Company. Computer Associates currently occupies
space in the Richmond facility and, pursuant to the Real Estate Agreement,
Computer Associates will have the right to occupy and use that portion of the
Richmond facility that it currently occupies and, for such right, will pay the
Company an amount equal to C$18.50 per square foot plus Computer Associates'
proportionate share of facility operating expenses including real estate taxes.
In addition, the Company currently conducts a
47
portion of its business operations in 13 other office locations where Computer
Associates is the primary tenant. The Real Estate Agreement specifies that at 11
of those locations, Computer Associates will allow the Company's employees to
remain rent-free until September 30, 1998 at which time they will be required to
relocate. In one of the remaining offices, the Company will be allowed to occupy
that portion of the office in which it currently occupies space for an aggregate
of approximately C$6,000 per month plus the Company's proportionate share of
office operating expenses, including real estate taxes. In the other remaining
office, the Company will be allowed to occupy that portion of the office in
which it currently occupies space and, for such right, will pay a proportionate
share of rent and office operating expenses, including real estate taxes. All
rights will be co-terminous with the primary leases and may be terminated at any
time by either party upon six months' prior notice.
48
MANAGEMENT
The following table sets forth certain information with respect to the executive
officers, key employees and directors of the Company, and their ages as of June
1, 1998:
- ---------------------------------------------------------------------------------------------------
NAME AGE POSITION AND OFFICE
- ---------------------------- --- --------------------------------------------------------
Frederick S. Wysocki 48 Chairman, Director, Chief Executive Officer and
President
John (Don) Thomson 48 Vice President, Research and Development
John Schoutsen 42 Vice President, Sales (Canada)
David A. Carlson 33 Vice President, Sales
Donnat Lettman 37 Vice President, Chief Financial Officer and Treasurer
William E. Copeland, Jr. 50 Vice President, Marketing
Gee Sing Low 41 Vice President, Sales (Asia-Pacific)
Rajiv Katira 34 Vice President, Operations
Julie DeMaria 40 Vice President, DistribuPro
Charles P. McWade 53 Director
Robert H. Toth 41 Director
FREDERICK S. WYSOCKI has served as Chairman, President, Chief Executive Officer
and a director of the Company since January 1998. From April 1996 to December
1997, Mr. Wysocki served as General Manager of the ACCPAC iBU. From April 1993
through March 1996, he was General Manager of DistribuPro. From 1986 to March
1993, Mr. Wysocki was responsible for sales and marketing for Computer
Associates' MicroProducts division first for Canada, then for the United States
and then worldwide. In October 1983, he joined Basic Software Group ("BSG"), a
predecessor to ACCPAC where he served as Manager of Sales and Marketing until it
was acquired by Computer Associates in 1985. Prior to joining BSG, Mr. Wysocki
founded two software companies. Mr. Wysocki earned a Bachelor of Commerce in
Marketing from the University of British Columbia.
JOHN (DON) THOMSON has served as Vice President, Research and Development of the
Company since January 1998 and of the ACCPAC iBU since April 1996. From January
1986 to April 1996, Mr. Thomson served as President of Donald Thomson Ltd., a
small software development company. Mr. Thomson co-founded BSG. Mr. Thomson
earned a B.S. in Mathematics and a M.S. in Computer Science from the University
of British Columbia.
JOHN SCHOUTSEN has served as Vice President, Sales (Canada) of the Company since
January 1998 and of the ACCPAC iBU since April 1997. From April 1996 to April
1997, Mr. Schoutsen served as Assistant Vice President, Sales and Marketing of
the ACCPAC iBU for Canada. From April 1995 to April 1996, Mr. Schoutsen served
as Assistant Vice President, Marketing for Computer Associates Canada, Ltd. and
was Director of Marketing from April 1992 to March 1995. Mr. Schoutsen earned a
B.A. in Writing from York University and an M.F.A. in Creative Writing from the
University of British Columbia.
DAVID A. CARLSON has served as a Vice President, Sales of the Company since
January 1998 and of the ACCPAC iBU since April 1997. From April 1996 to March
1997, Mr. Carlson served as Business Development Manager for the ACCPAC iBU.
From September 1993 to March 1996, Mr. Carlson served in various technical
consulting positions for Computer Associates. From June 1991 through September
1993, Mr. Carlson was manager of ACCPAC training services. From December 1987 to
May 1991, Mr. Carlson was a QI for the Company's products. Mr. Carlson attended
the University of Evansville where he studied Computer Engineering.
DONNAT LETTMAN has served as Vice President, Chief Financial Officer and
Treasurer of the Company since January 1998 and of the ACCPAC iBU since November
1997. From April 1996 to November 1997, Mr. Lettman served as Treasurer for
Infresco Corporation, a data integration software company and a wholly owned
subsidiary of Computer Associates. From April 1994 to March 1996, Mr. Lettman
served as Assistant Vice President, Finance for Computer Associates. From April
1993 to March 1994, Mr. Lettman was Controller for Computer
49
Associates Canada Limited, a wholly owned Canadian subsidiary of Computer
Associates. Mr. Lettman earned a B.S. in Finance and an M.B.A. in Finance from
New York Institute of Technology.
WILLIAM E. COPELAND, JR. has served as Vice President, Marketing of the Company
since January 1998. From June 1995 to September 1997, Mr. Copeland served as
Vice President, Marketing for Edge Software, Inc., a process improvement
software company. From December 1993 to April 1995, Mr. Copeland was Vice
President, Marketing for Sherpa Corporation, a product data management software
company. From February 1991 to August 1993, Mr. Copeland served as Vice
President, Marketing for ASK/Ingres, Inc., a relational database company. Mr.
Copeland previously worked in various levels of brand management at General
Mills, Inc., Ralston-Purina Company, Rayovac Corporation and Lego AS and was in
charge of industry marketing at Hewlett-Packard Company. Mr. Copeland earned a
B.S. in Industrial Management from University of Illinois and an M.B.A. from
Northwestern University.
GEE SING LOW has served as Vice President, Sales (Asia-Pacific) of the Company
since January 1998 and of the ACCPAC iBU since May 1997. From October 1996 to
April 1997, Mr. Low was Vice President, General Manager of the MicroProducts
Division for Asia for Computer Associates and was Assistant Vice President,
Country Manager from October 1994 to September 1996. From April 1991 to
September 1994, Mr. Low was an Account Manager of the MicroProducts Division for
Asia for Computer Associates. He earned a B.S. from the Universiti Malaya,
Malaysia and an M.B.A. from the Asian Institute of Management, Philippines.
RAJIV KATIRA has served as Vice President, Operations of the Company since
January 1998 and of the ACCPAC iBU since April 1996. From April 1994 to March
1996, Mr. Katira served as a Vice President, Research and Development for
Computer Associates and was Assistant Vice President of Marketing Services from
April 1993 to March 1994. Mr. Katira earned a Bachelor of Engineering in
Industrial and Production from Manipal Institute of Technology, India and an
M.S. in Industrial Engineering from Oklahoma State University.
JULIE DEMARIA has served as Vice President, DistribuPro since May 1996. From
August 1995 to May 1996, Ms. DeMaria served as Operations Manager, Sales and
Marketing Manager of DistribuPro and was Purchasing Manager of DistribuPro from
May 1989 to August 1995. Ms. DeMaria attended West Valley College.
CHARLES P. MCWADE has been a Director of the Company since January 1998. Mr.
McWade has been Senior Vice President--Business Development of Computer
Associates since April 1998, having served from 1983 to March 1998 in various
senior financial positions at Computer Associate, including Senior Vice
President and Treasurer from April 1988 to March 1994. Mr. McWade joined
Computer Associates in 1983.
ROBERT H. TOTH has been a Director of the Company since January 1998. Mr. Toth
has been a Senior Vice President of Computer Associates since April 1992 and
since October 1997 has been responsible for overseeing various iBUs of Computer
Associates including the Company. Mr. Toth previously served as Senior Vice
President of Computer Associates Strategic Alliances, Global Accounts and
various business operations covering Latin America, Africa, Middle East and
Japan. Mr. Toth joined Computer Associates in 1984.
All directors are elected annually to serve until the next annual meeting of
stockholders and until their successors have been elected and qualified.
Prior to the consummation of the Offering, the Company's Board of Directors
expects to nominate two additional individuals, who are not affiliated with the
Company or Computer Associates, to become directors of the Company after
consummation of the Offering (the "Independent Directors"). The Company's Board
of Directors is expected to appoint the Independent Directors to a compensation
committee of the Board of Directors (the "Compensation Committee") and an audit
committee of the Board of Directors (the "Audit Committee"). Both such
committees will be comprised solely of independent directors. The Compensation
Committee will establish remuneration levels for certain officers of the Company
and perform such functions as may be delegated to it under the Company's
employee benefit programs and executive compensation programs. The Audit
Committee will select and engage, on behalf of the Company, the independent
public accountants to audit the Company's annual financial statements. The Audit
Committee also will review and approve the planned scope of the annual audit.
50
The Board of Directors may, from time to time, establish certain other
committees to facilitate the management of the Company.
Officers are elected at the annual meeting of the Board of Directors held each
year for a term of one year, and they are elected to serve until the next annual
meeting.
EXECUTIVE COMPENSATION
The following table sets forth certain compensation information with respect to
the President and Chief Executive Officer of the Company and the four other most
highly compensated executive officers of the Company (the "Named Executive
Officers") for services rendered in all capacities to the Company for the fiscal
year ended March 31, 1998.
SUMMARY COMPENSATION TABLE
------------------------------------------------------------------------------------------------
ALL OTHER
ANNUAL COMPENSATION LONG-TERM COMPENSATION COMPENSATION(8)
---------------------------------------- ---------------------------------------- ------------
OTHER
ANNUAL RESTRICTED COMPUTER
NAME AND COMPEN- STOCK ASSOCIATES ACCPAC
PRINCIPAL POSITION SALARY(1) BONUS(2) SATION(3) AWARD(4) OPTIONS(5) OPTIONS(6)
- -------------------- ------------ ------------ ------------ ------------ ------------ ------------
Frederick S. $110,000 $250,000 -- $980,000 2,025 150,000 $12,260
Wysocki...........
President and
Chief Executive
Officer
John Thomson........ 98,000(7) 56,892(7) -- 252,000 1,050 45,000 5,841
Vice President,
Research and
Development
John Schoutsen...... 66,500(7) 56,441(7) -- 156,800 750 27,500 5,071
Vice President,
Sales (Canada)
David A. Carlson.... 53,000 49,152 -- 252,000 36,250 5,841
Vice President,
Sales
Donnat Lettman...... 89,375 11,250 -- 252,000 36,250 10,148
Vice President,
Chief Financial
Officer and
Treasurer
- ------------------------
(1) Amounts included consist of salary payments for the respective year and
amounts deferred pursuant to Section 401(k) of the Internal Revenue Code of
1986, as amended (the "Code").
(2) Includes bonuses and commissions earned and paid for the fiscal year ended
March 31, 1998.
(3) Less than 10% of the total of annual salary and bonus.
(4) The following number of shares of Common Stock were granted to the Named
Executive Officers in January 1998: Mr. Wysocki--87,500; Mr. Thomson--22,500;
Mr. Schoutsen--14,000; Mr. Carlson--22,500; Mr. Lettman--22,500. The aggregate
dollar amounts of the stock grants were determined by multiplying the number of
shares granted by $11.20, which the Company's Board of Directors determined was
the per share fair market value of the Common Stock in January 1998, based on
relative market values per share of other software companies of comparable size
and characteristics. A certain number of these shares were repurchased from each
Named Executive Officer for tax withholding purposes. For a description of the
restricted stock grant, see "--Restricted Stock Grant."
(5) The options are options to purchase common stock of Computer Associates
("Computer Associates Common Stock"). See "--Computer Associates Options."
(6) The options are options to purchase Common Stock granted under the Company's
1998 Stock Incentive Plan. See "--1998 Stock Incentive Plan."
(7) Compensation was paid in Canadian Dollars. The specified information has
been converted into US$ at a rate of C$1 equals US$.70.
(8) Represents matching and discretionary contributions under the Computer
Associates Savings Harvest Plan (the "401(k) Plan").
51
OPTION GRANTS TO EXECUTIVE OFFICERS
The following table sets forth certain information regarding grants of options
to purchase Common Stock during fiscal 1998 to each Named Executive Officer.
----------------------------------------------------------------------------------
INDIVIDUAL GRANTS
----------------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
AT
ASSUMED ANNUAL
NUMBER OF PERCENTAGE RATES OF STOCK PRICE
SECURITIES OF TOTAL APPRECIATION FOR OPTION
UNDERLYING OPTIONS EXERCISE TERM
OPTIONS GRANTED TO PRICE EXPIRATION --------------------------
NAME GRANTED(1) EMPLOYEES PER SHARE DATE 5% 10%
- --------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Frederick S. Wysocki............. 150,000 30.0% $11.20 03/31/2008 $1,056,000 $2,677,500
John Thomson..................... 45,000 9.0 11.20 03/31/2008 316,800 803,250
John Schoutsen................... 27,500 5.5 11.20 03/31/2008 193,600 490,875
David A. Carlson................. 36,250 7.3 11.20 03/31/2008 255,200 647,063
Donnat Lettman................... 36,250 7.3 11.20 03/31/2008 255,200 647,063
- ------------------------
(1) Each of these options is exercisable for one share of Common Stock. The
options, which were granted as of March 31, 1998, vest and become exercisable
20% annually over a five-year period.
The following table sets forth certain information regarding grants of options
to purchase Computer Associates Common Stock during fiscal 1998 to each Named
Executive Officer.
----------------------------------------------------------------------------------
INDIVIDUAL GRANTS
----------------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
AT
ASSUMED ANNUAL
NUMBER OF PERCENTAGE RATES OF STOCK PRICE
SECURITIES OF TOTAL APPRECIATION FOR OPTION
UNDERLYING OPTIONS EXERCISE TERM
OPTIONS GRANTED TO PRICE EXPIRATION --------------------------
NAME GRANTED(1) EMPLOYEES(2) PER SHARE DATE 5% 10%
- --------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Frederick S. Wysocki............. 2,025 * $29.33 04/06/97 $37,356 $94,667
John Thomson..................... 1,050 * 29.33 04/06/97 19,370 49,087
John Schoutsen................... 750 * 29.33 04/06/97 13,836 35,062
David A. Carlson.................
Donnat Lettman................... -- -- -- -- -- --
- ------------------------
* Less than 1%.
(1) Each of these options is exercisable for one share of Computer Associates
Common Stock. The options, which were granted as of April 17, 1997, vest and
become exercisable over a five-year period: (i) 10% on the first anniversary of
the date of grant; (ii) 15% on the second anniversary of the date of grant;
(iii) 20% on the third anniversary of the date of grant; (iv) 25% on the fourth
anniversary of the date of grant; and (v) 30% on the fifth anniversary of the
date of grant.
(2) Percent of total options granted based on total options granted to Computer
Associates employees.
52
FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information regarding Common Stock
options exercised during fiscal 1998 and the fiscal year-end value of
unexercised Common Stock options for each Named Executive Officer.
----------------------------------------------------------------------------------
NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT MARCH 31, 1998(1) AT MARCH 31, 1998(2)
ACQUIRED VALUE -------------------------- --------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Frederick S. Wysocki............. -- -- -- 150,000 -- --
John Thomson..................... -- -- -- 45,000 -- --
John Schoutsen................... -- -- -- 27,500 -- --
David A. Carlson................. -- -- -- 36,250 -- --
Donnat Lettman................... -- -- -- 36,250 -- --
- ------------------------
(1) Each of these options is exercisable for one share of Common Stock.
(2) Each of these options was granted as of March 31, 1998 at a per share
exercise price equal to $11.20 per share, which was determined by the Company's
Board of Directors to be the fair market value of one share of Common Stock as
of such date, based on relative market values per share of other software
companies of comparable size and characteristics.
The following table sets forth certain information regarding options to purchase
Computer Associates Common Stock exercised during fiscal 1998 and the fiscal
year-end value of unexercised options to purchase Computer Associates Common
Stock for each Named Executive Officer.
----------------------------------------------------------------------------------
NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT MARCH 31, 1998(1) AT MARCH 31, 1998
ACQUIRED VALUE -------------------------- --------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Frederick S. Wysocki............. 2,500 $107,770 1,179 9,614 $41,444 $342,265
John Thomson..................... -- -- -- 1,050 -- 29,838
John Schoutsen................... 3,417 162,734 428 3,966 15,037 147,237
David A. Carlson.................
Donnat Lettman................... 792 23,547 3,719 2,858 187,957 130,593
- ------------------------
(1) Each of these options is exercisable for one share of Computer Associates
Common Stock.
(2) Value is calculated by subtracting the exercise price per share from the
closing price of Computer Associates Common Stock at March 31, 1998 and
multiplying the result by the number of shares subject to the option.
53
RESTRICTED STOCK GRANT
In January 1998, the Company's Board of Directors issued (the "Restricted Stock
Grant") certain executive officers and key employees of the Company an aggregate
of 150,000 shares of restricted Common Stock (net of 100,000 shares repurchased
for tax withholding purposes)(the "Restricted Stock"). The Restricted Stock
Grant was made to encourage the recipients to create shareholder value by
providing them with a meaningful, long-term ownership interest in the Company.
The Restricted Stock Grant was fully vested when made and not subject to risk of
forfeiture; provided that, for a period of three years after the effective date
of the Restricted Stock Grant, the recipients may not sell, assign, transfer,
pledge, grant any option for the purchase of, or otherwise dispose of or reduce
one's risk of ownership with respect to, any shares of Restricted Stock, except
by will or the laws of descent and distribution. The Restricted Stock has not
been registered or qualified under the Securities Act or the securities laws of
any state or other jurisdiction and may not be sold, pledged or otherwise
transferred except pursuant to effective registrations or qualifications
relating thereto under the Securities Act and applicable state securities or
blue sky laws or pursuant to exemptions therefrom. See "Shares Available for
Future Sale."
In connection with the Restricted Stock Grant, for federal income tax purposes,
each recipient recognized ordinary income on the effective date of grant, in an
amount equal to the product of the fair market value of a share of Restricted
Stock on such date (which was determined by the Company's Board of Directors to
be $11.20) and the number of shares of Restricted Stock granted to such
recipient. The Company recorded a compensation expense of $2.8 million in the
fourth quarter of fiscal 1998 with respect to the Restricted Stock Grant.
1998 STOCK INCENTIVE PLAN
As of January 1998, the Company adopted the Company's 1998 Stock Incentive Plan
(the "Plan"). The purpose of the Plan is to provide employees of the Company
additional incentive and reward opportunities designed to enhance the profitable
growth of the Company. All employees who are key to the Company's growth and
profitability will be eligible to receive awards under the Plan. The Plan
provides for the granting of incentive stock options intended to qualify under
Section 422 of the Code and options that do not constitute incentive stock
options. The Plan also provides for the granting of stock appreciation rights
("SARs"). To date, the Plan has been administered by the Company's Board of
Directors. Following the Offering, the Plan will be administered by the
Compensation Committee. In general, the Committee is authorized to select the
recipients of awards and the terms and conditions of those awards; provided that
the per share exercise price of options and SARs granted under the Plan may not
be less than 100% of the fair market value of a share of the Common Stock on the
date of grant. The number of shares of Common Stock that may be issued under the
Plan may not exceed 1,500,000 shares (subject to adjustment to reflect stock
dividends, stock splits, recapitalizations and similar changes in the Company's
capital structure). Shares of Common Stock which are attributable to awards that
have expired, terminated or been canceled or forfeited are available for
issuance or use in connection with future awards.
Effective as of March 31, 1998, the Company granted options under the Plan to
purchase an aggregate of 500,000 shares of Common Stock at $11.20 per share. It
is anticipated that further grants under the Plan will be made from time to time
in the future.
COMPUTER ASSOCIATES OPTIONS
Computer Associates has informed the Company that all outstanding options to
purchase shares of Computer Associates Common Stock held by employees of the
Company shall remain outstanding until the earliest of the exercise thereof, the
expiration thereof and the date that the optionholder is no longer an employee
of the Company, and that the unvested options shall continue to vest and become
exercisable pursuant to the terms of grant until the earlier of the expiration
thereof and the date that the optionholder is no longer an employee of the
Company.
54
401(K) PLAN
Computer Associates has maintained the 401(k) Plan for the benefit of its
employees and the employees of its subsidiaries. The 401(k) Plan is intended to
be a qualified plan under Section 401(a) of the Code, and certain contributions
made thereunder qualify for tax deferral under Section 401(k) of the Code. The
401(k) Plan has been funded through Computer Associates' and participating
employees' contributions and generally provides that employees may contribute,
through payroll deductions, a percentage of their regular salary. Computer
Associates makes matching and discretionary contributions for participants in
the 401(k) Plan. Participants in the 401(k) Plan have received a 50% match of
their contributions, up to a maximum of 5% of annual compensation (subject to
certain Code limitations), and a portion of the Computer Associates'
discretionary contribution for each year generally in proportion to their annual
compensation. Computer Associates' contributions under the 401(k) Plan vest in
incremental amounts over a period of seven years from date of hire and are 100%
vested after seven years. All employees who have been in the employ of Computer
Associates or one of its subsidiaries for at least one year are eligible to
participate. The 401(k) Plan is administered by a committee of officers and
employees of Computer Associates appointed by Computer Associates' Board of
Directors. The Company currently intends to implement its own employee savings
plan similar to the 401(k) Plan, at which time the Company's employees will no
longer participate in the 401(k) Plan.
COMPENSATION OF DIRECTORS
It is anticipated that directors who do not receive compensation as officers or
employees of the Company, Computer Associates or any of their respective
affiliates will be paid an annual board membership fee of $8,000 and an
attendance fee equal to the lesser of (i) $500 for each meeting of the Board of
Directors and committees thereof and (ii) $2,000 per year. The Company does not
pay any additional compensation to directors who receive compensation as
officers or employees of the Company, Computer Associates or any of their
respective affiliates.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not for fiscal 1998, and does not currently, have a Compensation
Committee. Following the Offering, the Company intends to form a Compensation
Committee and anticipates naming the two Independent Directors to serve on the
committee.
OWNERSHIP OF COMMON STOCK
Computer Associates owns approximately 97.2% of the Common Stock of the Company
outstanding prior to the Offering. Upon consummation of the Offering, Computer
Associates will beneficially own approximately % of the outstanding Common
Stock ( % if the Underwriters' over-allotment option is exercised in full). See
"Arrangements Between the Company and Computer Associates." The principal
executive offices of Computer Associates are located at One Computer Associates
Plaza, Islandia, New York 11788-7000. Except as described above, the Company is
not aware of any person or group that will beneficially own more than 5% of the
outstanding shares of Common Stock following the Offering.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock and Computer Associates Common Stock as
of June 1, 1998 (i) by each director (ii) by each Named Executive Officer and
(iii) by all executive officers and directors of the Company as a group. Except
as otherwise noted, the
55
individual director, director nominee or executive officer or their family
members had sole voting and investment power with respect to such securities.
-------------------------------------------------------------
COMMON STOCK
---------------------------------
COMPUTER
TO BE OWNED ASSOCIATES
OWNED PRIOR TO AFTER THE COMMON
THE OFFERING(1) OFFERING(1) STOCK(2)(3)
-------------------- ---------------------- ---------------
NAME NUMBER % NUMBER % NUMBER
- -------------------------------------------------- --------- --- ----------- --- ---------------
Frederick S. Wysocki.............................. 52,500 * 52,500 *
John (Don) Thomson................................ 13,500 * 13,500 *
David A. Carlson.................................. 13,500 * 13,500 *
John Schoutsen.................................... 8,400 * 8,400 *
Donnat Lettman.................................... 13,500 * 13,500 *
Charles P. McWade................................. --(4) -- --(4) -- 99,347
Robert H. Toth.................................... --(4) -- --(4) --
All directors and executive officers as a group
(7 persons)..................................... 101,400 1.9% 101,400 (5)
- ------------------------
* Less than 1%
(1) Neither the individuals specified in the table nor the directors and
executive officers as a group have the right to acquire beneficial ownership of
any additional shares of Common Stock within 60 days of June 1, 1998 within the
meaning of Rule 13-3(d)(1) under the Securities Exchange Act of 1934, as
amended.
(2) No individual director or Named Executive Officer beneficially owns 1% or
more of the Computer Associates Common Stock, nor do the directors and executive
officers as a group.
(3) Includes beneficial ownership of the following number of shares of Computer
Associates Common Stock which may be acquired within 60 days of June 1, 1998
pursuant to stock options awarded under the Plan: Mr. Wysocki- 2,498; Mr.
Thomson- 106; Mr. Schoutsen- 1,808; Mr. Lettman- 5,151; Mr. Carlson- 294; Mr.
McWade- 73,826; Mr. Toth- 33,695.
(4) Excludes the 5,250,000 shares of Common Stock held by Computer Associates,
of which Messrs. McWade and Toth disclaim beneficial ownership.
(5) Includes beneficial ownership of 117,378 shares of Computer Associates
Common Stock which may be acquired within 60 days of June 1, 1998 pursuant to
stock options awarded under the Plan.
DESCRIPTION OF CAPITAL STOCK
GENERAL
Immediately after the Offering, the authorized capital stock of the Company will
consist of (i) 25,000,000 shares of Common Stock, par value $.01 per share (the
"Common Stock"), and (ii) 1,000,000 shares of Preferred Stock, par value $.01
per share (the "Preferred Stock"). Immediately following the Offering,
shares of Common Stock ( shares if the Underwriters' over-allotment
option is exercised in full) will be outstanding. All of the shares of Common
Stock that will be outstanding immediately following the Offering, including the
shares of Common Stock sold in the Offering, will be validly issued, fully paid
and nonassessable. As of the closing date of the Offering, there will be no
Preferred Stock outstanding. A description of the material terms and provisions
of the Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") and the Company's Amended and Restated By-laws
(the "By-laws") affecting the relative rights of the Common Stock and the
Preferred Stock is set forth below. The following description of the capital
stock of the Company is intended as a summary only and is qualified in its
entirety by reference to the form of the Certificate of Incorporation and
By-laws, a copy of each of which is filed as an exhibit to the Registration
Statement.
56
COMMON STOCK
The holders of Common Stock will be entitled to one vote for each share held of
record on all matters voted upon by stockholders and may not use cumulative
voting for the election of directors. Thus, the owners of a majority of the
Common Stock outstanding will be able to elect all of the directors. Subject to
any preferential rights of any outstanding shares of Preferred Stock created by
the Company's Board of Directors from time to time, each outstanding share of
Common Stock will be entitled to participate equally in any distribution of net
assets made to the stockholders in liquidation, dissolution or winding up of the
Company and will be entitled to participate equally in dividends and other
distributions, if, as and when declared by the Company's Board of Directors.
There will be no redemption, sinking fund, conversion or preemptive rights with
respect to the Common Stock. All shares of Common Stock will have equal rights
and preferences.
PREFERRED STOCK
Pursuant to the Certificate of Incorporation, the Company will be authorized to
issue up to 1,000,000 shares of Preferred Stock which may be issued from time to
time in one or more series upon authorization by the Company's Board of
Directors. The Board of Directors, without further approval of the stockholders,
will be authorized to fix the number of shares constituting any series, dividend
rights and terms, conversion rights and terms, voting rights and terms,
redemption rights and terms, liquidation preferences and any other rights,
preferences, privileges and restrictions applicable to each series of the
Preferred Stock. The issuance of the Preferred Stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes could, among other things, adversely affect the voting power of the
holders of the Common Stock and, under certain circumstances, may render more
difficult, or have the effect of discouraging unsolicited takeover bids from
third parties, or the removal of incumbent management of the Company, or
otherwise adversely affect the market price for the Common Stock. The Company
has no present plans to issue any Preferred Stock.
CERTAIN CERTIFICATE OF INCORPORATION AND BY-LAW PROVISIONS
CORPORATE OPPORTUNITIES
The Certificate of Incorporation will provide that Computer Associates shall
have no duty to refrain from engaging in the same or similar activities or lines
of business as the Company, and neither Computer Associates nor any officer or
director thereof (except as provided below) shall be liable to the Company or
its stockholders for breach of any fiduciary duty by reason of any such
activities of Computer Associates. In the event that Computer Associates
acquires knowledge of a potential transaction or matter which may be a corporate
opportunity for both Computer Associates and the Company, Computer Associates
shall have no duty to communicate or offer such corporate opportunity to the
Company and shall not be liable to the Company or its stockholders for breach of
any fiduciary duty as a stockholder of the Company by reason of the fact that
Computer Associates pursues or acquires such corporate opportunity for itself,
directs such corporate opportunity to another person, or does not communicate
information regarding such corporate opportunity to the Company.
57
In the event that a director or officer of the Company who is also a director or
officer of Computer Associates acquires knowledge of a potential transaction or
matter which may be a corporate opportunity for both the Company and Computer
Associates, such director or officer of the Company shall have fully satisfied
and fulfilled the fiduciary duty of such director or officer to the Company and
its stockholders with respect to such corporate opportunity if such director or
officer acts in a manner consistent with the following policy:
(i) a corporate opportunity offered to any person who is an officer of
the Company, and who is also a director but not an officer of Computer
Associates, shall belong to the Company;
(ii) a corporate opportunity offered to any person who is a director but
not an officer of the Company, and who is also a director or officer of
Computer Associates, shall belong to the Company if such opportunity is
expressly offered to such person in writing solely in his or her capacity as
a director of the Company, and otherwise shall belong to Computer
Associates; and
(iii) a corporate opportunity offered to any person who is an officer of
both the Company and Computer Associates shall belong to the Company if such
opportunity is expressly offered to such person in writing solely in his or
her capacity as an officer of the Company, and otherwise shall belong to
Computer Associates.
For purposes of the foregoing:
(i) A director of the Company who is Chairman of the Board of Directors
of the Company or of a committee thereof shall not be deemed to be an
officer of the Company by reason of holding such position (without regard to
whether such position is deemed an officer of the Company under the By-laws
of the Company), unless such person is a full-time employee of the Company;
and
(ii) (A) The term "Company" shall mean the Company and all corporations,
partnerships, joint ventures, associations and other entities in which the
Company beneficially owns (directly or indirectly) 50% or more of the
outstanding voting stock, voting power, partnership interests or similar
voting interests, and (B) the term "Computer Associates" shall mean Computer
Associates and all corporations, partnerships, joint ventures, associations
and other entities (other than the Company, defined in accordance with
clause (A) of this section (ii)) in which Computer Associates beneficially
owns (directly or indirectly) 50% or more of the outstanding voting stock,
voting power, partnership interests or similar voting interests.
The foregoing provisions of the Certificate of Incorporation shall expire on the
date that Computer Associates ceases to own beneficially Common Stock
representing at least 20% of the total voting power of all classes of
outstanding Common Stock and no person who is a director or officer of the
Company is also a director or officer of Computer Associates or any of its
subsidiaries (other than the Company).
In addition to any vote of the stockholders required by the Certificate of
Incorporation, until the time that Computer Associates ceases to own
beneficially Common Stock representing at least 20% of the total voting power of
all classes of outstanding Common Stock, the affirmative vote of the holders of
more than 80% of the total voting power of all classes of outstanding Common
Stock shall be required to alter, amend or repeal the corporate opportunity
provisions described above in a manner adverse to the interests of Computer
Associates and its subsidiaries (other than the Company), or to adopt any
provision that is adverse to the interests of Computer Associates and its
subsidiaries (other than the Company) and inconsistent with such corporate
opportunity provisions. Accordingly, so long as Computer Associates beneficially
owns Common Stock representing at least 20% of the total voting power of all
classes of outstanding Common Stock, it can prevent any such alteration,
amendment, repeal or adoption.
Any person purchasing or otherwise acquiring Common Stock will be deemed to have
notice of, and to have consented to, the foregoing provisions of the Certificate
of Incorporation.
58
PROVISIONS THAT MAY HAVE AN ANTI-TAKEOVER EFFECT
Certain provisions of the Certificate of Incorporation and By-laws summarized
below may be deemed to have an anti-takeover effect and may delay, deter or
prevent a tender offer or takeover attempt that a stockholder might consider to
be in its best interest, including attempts that might result in a premium being
paid over the market price for the shares held by stockholders.
The Certificate of Incorporation will provide that, subject to any rights of
holders of Preferred Stock to elect additional directors under specified
circumstances, the number of directors of the Company will be fixed by the
By-laws. The By-laws will provide that, subject to any rights of holders of
Preferred Stock to elect directors under specified circumstances, the number of
directors will be fixed from time to time exclusively by resolution of the Board
of Directors adopted by the vote of directors constituting a majority of the
total number of directors that the Company would have if there were no vacancies
on the Company's Board of Directors, but shall consist of not more than nine nor
less than three directors. In addition, the Certificate of Incorporation and
By-laws will provide that, subject to any rights of holders of Preferred Stock,
and unless the Company's Board of Directors otherwise determines, any vacancies
will be filled by the affirmative vote of a majority of the remaining members of
the Board of Directors, though less than a quorum, or by a sole remaining
director; except as otherwise provided by law, any such vacancy may not be
filled by the stockholders.
The By-laws will provide for an advance notice procedure for the nomination,
other than by or at the direction of the Board of Directors, of candidates for
election as directors as well as for other stockholder proposals to be
considered at annual meetings of stockholders. In general, notice of intent to
nominate a director or raise matters at such meetings will have to be received
in writing by the Company not less than 60 nor more than 90 days prior to the
anniversary of the previous year's annual meeting of stockholders, and must
contain certain information concerning the person to be nominated or the matters
to be brought before the meeting and concerning the stockholder submitting the
proposal. The Certificate of Incorporation and By-laws will also provide that
special meetings of stockholders may be called only by certain specified
officers of the Company or by any such officer at the request in writing of the
Board of Directors; special meetings of stockholders cannot be called by
stockholders.
In addition, the Certificate of Incorporation will provide that any action
required or permitted to be taken by stockholders may be effected by written
consent; provided that, on and after the date on which Computer Associates
ceases to beneficially own 50% or more of the total voting power of all classes
of outstanding Common Stock, any action required or permitted to be taken by
stockholders may be effected only at a duly called annual or special meeting of
stockholders and may not be effected by a written consent by stockholders in
lieu of such a meeting.
The Certificate of Incorporation will also provide that the affirmative vote of
the holders of at least 75% of the total voting power of all classes of
outstanding Common Stock, voting together as a single class, is required to
amend, repeal or adopt any provision inconsistent with the foregoing provisions
of the Certificate of Incorporation. The Certificate of Incorporation and
By-laws will further provide that the By-laws may be altered, amended or
repealed by the Company's Board of Directors or by the affirmative vote of the
holders of at least 75% of the total voting power of all classes of outstanding
Common Stock, voting together as a single class.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is a Delaware corporation subject to Section 203 of the Delaware
General Corporation Law (the "Delaware Law"). Section 203 provides that, subject
to certain exceptions specified therein, a corporation shall not engage in any
business combination with any "interested stockholder" for a three-year period
following the time that such stockholder becomes an interested stockholder
unless (i) prior to such time, 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 the transaction commenced (excluding
certain shares) or (iii) on or
59
subsequent to such time, the business combination is approved by the board of
directors of the corporation and 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 specified in Section 203 of the Delaware Law, an interested
stockholder is defined to include (x) any person that 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. Under certain circumstances, Section 203 of the Delaware Law makes it
more difficult for an "interested stockholder" to effect various business
combinations with a corporation for a three-year period, although the
stockholders may elect to exclude a corporation from the restrictions imposed
thereunder. The restrictions of Section 203 will not apply to Computer
Associates, however, because (i) the Company's Board of Directors approved the
transaction which resulted in Computer Associates becoming an "interested
stockholder" prior to the consummation of that transaction and (ii) at the time
Computer Associates became an "interested stockholder," the restrictions of
Section 203 did not apply to the Company because the Company did not have a
class of voting stock (x) listed on a national securities exchange, (y)
authorized for quotation on the Nasdaq Stock Market or (z) held of record by
more than 2,000 stockholders.
LIMITATIONS ON DIRECTORS' LIABILITY
The Certificate of Incorporation provides that no director of the Company shall
be liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of 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) in respect of certain unlawful dividend payments or
stock redemptions or repurchases or (iv) for any transaction from which the
director derived an improper personal benefit. The effect of these provisions
will be to eliminate the rights of the Company and its stockholders (through
stockholders' derivative suits on behalf of the Company) to recover monetary
damages against a director for breach of fiduciary duty as a director (including
breaches resulting from grossly negligent behavior), except in the situations
described above.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock will be .
SHARES AVAILABLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have shares of Common
Stock issued and outstanding ( shares if the Underwriters' over-allotment
option is exercised in full). Of these shares, the shares of Common Stock to
be sold in the Offering ( shares if the Underwriter's over-allotment option
is exercised in full) will be freely tradeable without restrictions or further
registration under the Securities Act, except for any shares purchased by an
"affiliate" of the Company (as that term is defined in Rule 144 adopted under
the Securities Act ("Rule 144")), which will be subject to the resale
limitations of Rule 144.
The Company, Computer Associates and each of the Company's directors and
officers, who in the aggregate will hold, following the Offering, 5,400,000
shares of Common Stock (plus any shares purchased in the Offering), have agreed
that they will not, directly or indirectly, without the prior written consent of
J.P. Morgan Securities Inc., offer, sell, offer to sell, contract to sell, or
otherwise dispose of any shares of Common Stock or securities convertible into
Common Stock or register for sale under the Securities Act any Common Stock for
a period of 180 days after the date of this Prospectus, except that the Company
may issue, and grant options to purchase, shares of Common Stock under its stock
option plans. See "Underwriting."
Immediately after the Offering, Computer Associates will own 5,250,000 shares of
Common Stock, which will represent approximately % of the outstanding Common
Stock ( % if the Underwriters' over-allotment option is exercised in full).
None of the shares of Common Stock beneficially owned by Computer Associates
will be registered under the Securities Act upon consummation of the Offering
and may not be sold by Computer
60
Associates in the absence of an effective registration statement under the
Securities Act, except in accordance with Rule 144 or another exemption from
registration. However, Computer Associates has certain demand and piggyback
registration rights to require the Company to effect registration of all of the
shares of Common Stock owned by Computer Associates. See "Arrangements Between
the Company and Computer Associates--Registration Rights Agreement."
Prior to the Offering, there has been no market for the Common Stock, and no
prediction can be made as to the effect, if any, that market sales of
outstanding shares of Common Stock, or the availability of such shares for sale,
will have on the market price of the Common Stock prevailing from time to time.
Nevertheless, sales of substantial amounts of Common Stock beneficially owned by
Computer Associates in the public market, or the perception that such sales
could occur, could adversely affect prevailing market prices for the Common
Stock offered in the Offering.
Although Computer Associates in the future may effect or direct sales or other
dispositions of Common Stock that would reduce its beneficial ownership interest
in the Company, Computer Associates has advised the Company that its current
intent is to continue to hold all of the Common Stock beneficially owned by it.
However, Computer Associates is not subject to any contractual obligation to
retain such Common Stock, except that Computer Associates has agreed not to,
directly or indirectly, offer, sell, offer to sell, contract to sell or
otherwise dispose of any shares of Common Stock or securities convertible into
Common Stock or register for sale under the Securities Act any Common Stock for
a period of 180 days after the date of this Prospectus without the prior written
consent of J.P. Morgan Securities Inc. As a result, there can be no assurance
concerning the period of time during which Computer Associates will maintain its
beneficial ownership of Common Stock owned by it following the Offering. See
"Underwriting."
Effective as of January 14, 1998, the Company issued an aggregate of 150,000
shares of Common Stock (net of 100,000 shares repurchased for tax withholding
purposes) to certain executive officers and key employees of the Company. See
"Management--Restricted Stock Grant." The recipients may not sell, assign,
transfer, pledge, grant any option for the purchase of, or otherwise dispose of
or reduce their risk of ownership with respect to, any shares of Restricted
Stock until January 14, 2001, except by will or the laws of descent and
distribution. The Restricted Stock has not been registered or qualified under
the Securities Act or the securities laws of any state or other jurisdiction and
may not be sold except pursuant to an effective registration under the
Securities Act or pursuant to Rule 144 or another exemption therefrom.
As of March 31, 1998, the Company granted options under the Plan to purchase an
aggregate of 500,000 shares of Common Stock at $11.20 per share. The options
vest according to a fixed five-year schedule beginning on the first anniversary
of the date of the grants. An additional 1,000,000 shares of Common Stock are
available for future grants under the Plan. See "Management--1998 Stock
Incentive Plan." Rule 701 under the Securities Act provides that the shares of
Common Stock acquired on the exercise of currently outstanding options may be
resold by persons, other than "affiliates," beginning 90 days after the date of
this Prospectus, subject only to the manner of sale provisions of Rule 144, and
by "affiliates" under Rule 144 without compliance with its one-year minimum
holding period, subject to certain limitations. The Company intends to file one
or more registration statements on Form S-8 under the Securities Act to register
all shares of Common Stock subject to outstanding stock options and Common Stock
issuable pursuant to the Plan.
In general, under Rule 144, a person (or persons whose shares are required to be
aggregated) who has beneficially owned shares of Common Stock for at least one
year, including a person who may be deemed an "affiliate," is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of one percent of the total number of outstanding shares of the class of
stock being sold and the average weekly reported trading volume of the class of
stock being sold during the four calendar weeks preceding such sale. A person
who is not deemed an "affiliate" of the Company at any time during the three
months preceding a sale and who has beneficially owned shares for at least two
years is entitled to sell such shares under Rule 144 without regard to the
volume limitations described above. As defined in Rule 144, an "affiliate" of an
issuer is a person that directly or indirectly through the use of one or more
intermediaries controls, is controlled by, or is
61
under common control with, such issuer. The foregoing summary of Rule 144 is not
intended to be a complete description thereof.
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom J.P. Morgan
Securities Inc. and Cowen & Company are acting as representatives (the
"Representatives"), have severally agreed, subject to the terms and conditions
set forth in the underwriting agreement between the Company and the
Representatives (the "Underwriting Agreement"), to purchase from the Company,
and the Company has agreed to sell to the Underwriters, the respective number of
shares of Common Stock set forth opposite their names below.
----------
NUMBER OF
UNDERWRITERS SHARES
----------
----------
J.P. Morgan Securities Inc......................................................
Cowen & Company.................................................................
----------
Total
----------
----------
The nature of the Underwriters' obligations under the Underwriting Agreement is
such that all of the Common Stock being offered, excluding shares covered by the
over-allotment option granted to the Underwriters, must be purchased if any are
purchased.
The Representatives have advised the Company that the several Underwriters
propose to offer the Common Stock to the public initially at the public offering
price set forth on the cover page of this Prospectus and may offer the Common
Stock to selected dealers at such price less a concession not to exceed $ per
share. The Underwriters may allow, and such dealers may reallow, a concession to
other dealers not to exceed $ per share. After the initial public offering of
the Common Stock, the public offering price and other selling terms may be
changed by the Representatives.
The Company has granted the Underwriters an option, exercisable within 30 days
after the date of this Prospectus, to purchase up to additional shares of
Common Stock from the Company at the same price per share to be paid by the
Underwriters for the other shares offered hereby. If the Underwriters purchase
any such additional shares pursuant to the option, each of the Underwriters will
be committed to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may exercise the
option only to cover over-allotments, if any, made in connection with the
distribution of the Common Stock offered hereby.
Prior to the Offering, there has been no public market for the Common Stock. The
initial public offering price will be determined by negotiations among the
Company, Computer Associates and the Representatives. Among the factors to be
considered in determining the initial public offering price are prevailing
market conditions, the market valuations of certain publicly traded companies,
the Company's past and present financial performance and revenue and earnings of
comparable companies in recent periods, estimates of the business potential and
prospects of the Company, the experience of Company's management and the
position of the Company in the industry.
The Representatives have informed the Company that the Underwriters will not
confirm, without prior specific written approval, sales to their customer
accounts as to which they have discretionary trading power.
The Company, Computer Associates and each of the Company's directors and
officers, who in the aggregate will hold, following the Offering, 5,400,000
shares of Common Stock (plus any shares purchased in the Offering), have agreed
that they will not, directly or indirectly, without the prior written consent of
J.P. Morgan Securities Inc., offer, sell, offer to sell, contract to sell or
otherwise dispose of any shares of Common Stock or securities convertible into
Common Stock or register for sale under the Securities Act any Common Stock for
a period of
62
180 days after the date of this Prospectus, except that the Company may issue,
and grant options to purchase, shares of Common Stock under the Plans. See
"Shares Available for Future Sale."
The Company and Computer Associates have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act, or
to contribute to payments the Underwriters may be required to make in respect
thereof. However, Computer Associates aggregate liability for such indemnity and
contribution obligations is limited to an aggregate of $7.5 million.
The Common Stock has been submitted for approval for quotation on the Nasdaq
National Market under the symbol "ACPI."
At the Company's request, the Underwriters have reserved % of the Common Stock
offered for sale at the initial offering price to the Company's employees and
other persons having business relationships with the Company. The number of
shares of Common Stock available for sale to other members of the public will be
reduced to the extent that these persons purchase such reserved shares. Any
reserved shares not purchased will be offered by the Underwriters on the same
basis as the other shares offered hereby.
In connection with the Offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock.
Specifically, the Underwriters may overallot the Offering, creating a syndicate
short position. In addition, the Underwriters may bid for, and purchase, shares
of Common Stock in the open market to cover syndicate shorts or to stabilize the
price of the Common Stock. Finally, the underwriting syndicate may reclaim
selling concessions allowed for distributing shares of Common Stock in the
Offering, if the syndicate repurchases previously distributed Common Stock in
syndicate covering transactions in stabilization transactions or otherwise. Any
of these activities may stabilize or maintain the market price of the shares of
Common Stock above independent market levels. The Underwriters are not required
to engage in these activities, and may end any of these activities at any time.
From time to time in the ordinary course of their respective business, certain
of the Underwriters and their affiliates have engaged in and may in the future
engage in commercial banking and/or investment banking transactions with the
Company and its affiliates.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Howard Darby & Levin, New York, New York. Cahill Gordon & Reindel, a
partnership including a professional corporation, New York, New York is acting
as counsel for the Underwriters in connection with certain legal matters
relating to the Offer. Howard Darby & Levin has in the past provided, and may
continue to provide, legal services to Computer Associates and its affiliates.
EXPERTS
The Consolidated Financial Statements of the Company as of March 31, 1997 and
1998 and for each of the three years in the period ended March 31, 1998,
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.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, exhibits, schedules and supplements thereto, the "Registration
Statement"), under the Securities Act and the rules and regulations thereunder,
for the registration of the Common Stock offered hereby. This Prospectus, which
forms a part of the Registration Statement, does not contain all the information
set forth in the Registration Statement, certain parts of which have been
omitted as
63
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement. Statements contained in this
Prospectus as to the contents of any contract or other document referred to
herein are not necessarily complete and, where such contract or other document
is an exhibit to the Registration Statement, each such statement is qualified in
all respects by the provisions of such exhibit, to which reference is hereby
made. The Registration Statement can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at Seven World Trade Center, 13th Floor, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of all or any portion of the Registration Statement can
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the
Registration Statement is publicly available through the Commission's site on
the Internet's World Wide Web, located at http://www.sec.gov.
64
ACCPAC INTERNATIONAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors...................................... F-2
Consolidated Balance Sheets............................................................ F-3
Consolidated Statements of Income...................................................... F-4
Consolidated Statements of Division and Stockholders' Equity (Deficit)................. F-5
Consolidated Statements of Cash Flows.................................................. F-6
Notes to Consolidated Financial Statements............................................. F-7
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
ACCPAC International, Inc.
We have audited the accompanying consolidated balance sheets of ACCPAC
International, Inc. as of March 31, 1997 and 1998, and the related consolidated
statements of income, division and stockholders' equity (deficit), and cash
flows for each of the three years in the period ended March 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ACCPAC
International, Inc. at March 31, 1997 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1998, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
San Jose, California
June 5, 1998, except for Note 4
as to which the date is
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion of
the stock split described in Note 4 to the financial statements.
San Jose, California /s/ ERNST & YOUNG LLP
June 11, 1998
F-2
ACCPAC INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
--------------------
March 31
DOLLARS IN THOUSANDS 1997 1998
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................................................. -- $4,013
Accounts receivable, less allowance for doubtful accounts of $1,078 in 1997 and $711 in
1998.................................................................................... $7,808 5,225
Inventories............................................................................... 2,900 3,467
Deferred income taxes..................................................................... -- 703
--------- ---------
Total current assets........................................................................ 10,708 13,408
Property and equipment, net................................................................. 193 414
Deferred financing costs.................................................................... -- 168
--------- ---------
Total assets................................................................................ $10,901 $13,990
--------- ---------
--------- ---------
LIABILITIES, AND DIVISION AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................................................... $1,262 $4,025
Accrued compensation and related liabilities.............................................. -- 1,120
Deferred revenue.......................................................................... 2,987 3,296
Other accrued liabilities................................................................. 955 1,347
--------- ---------
Total current liabilities................................................................... 5,204 9,788
Note payable to Computer Associates International, Inc...................................... -- 5,000
Commitments and Contingencies
Division equity............................................................................. 5,697 --
Total stockholders' equity (deficit):
Common Stock, $0.01 par value:
Authorized shares -- 25,000,000 at March 31, 1998
Issued and outstanding shares -- 5,400,000 at March 31, 1998............................ -- 54
Additional paid-in capital................................................................ -- --
Accumulated deficit....................................................................... -- (632)
Cumulative foreign currency translation adjustment........................................ -- (220)
--------- ---------
Total stockholders' equity (deficit)........................................................ -- (798)
--------- ---------
Total liabilities, and division and stockholders' equity (deficit).......................... $10,901 $13,990
--------- ---------
--------- ---------
See accompanying notes.
F-3
ACCPAC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
-------------------------------
YEARS ENDED MARCH 31
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA 1996 1997 1998
--------- --------- ---------
Revenue:
License........................................................................ $ 23,955 $ 19,709 $ 24,820
Service........................................................................ 10,593 7,985 7,495
Third-party products........................................................... 31,267 17,234 16,623
--------- --------- ---------
Total revenue.................................................................... 65,815 44,928 48,938
Cost of revenue:
License........................................................................ 4,011 4,452 4,675
Service........................................................................ 2,238 1,799 1,937
Third-party products........................................................... 27,682 15,106 14,670
--------- --------- ---------
Total cost of revenue............................................................ 33,931 21,357 21,282
--------- --------- ---------
Gross profit..................................................................... 31,884 23,571 27,656
Operating expenses:
Sales and marketing............................................................ 10,014 7,916 9,428
Research and development....................................................... 5,340 3,733 3,916
General and administrative..................................................... 4,734 4,808 4,885
Compensation related to issuance of common stock............................... -- -- 2,800
--------- --------- ---------
Total operating expenses....................................................... 20,088 16,457 21,029
--------- --------- ---------
Income from operations........................................................... 11,796 7,114 6,627
Other income (expense), net...................................................... (43) (31) (18)
--------- --------- ---------
Income before income taxes....................................................... 11,753 7,083 6,609
Provision for income taxes....................................................... 4,407 2,656 2,478
--------- --------- ---------
Net income....................................................................... $7,346 $4,427 $4,131
--------- --------- ---------
--------- --------- ---------
Pro forma basic and diluted earnings per share...................................
---------
---------
Shares used in computing pro forma basic and diluted
earnings per share..............................................................
---------
---------
See accompanying notes.
F-4
ACCPAC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF DIVISION AND
STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------------------------------
Cumulative
Foreign Total
Common Stock Additional Currency Stockholders'
DOLLARS AND SHARES IN Division -------------------- Paid-In Accumulated Translation Equity
THOUSANDS Equity Shares Amount Capital Deficit Adjustment (Deficit)
---------- --------- --------- ---------- ---------- ---------- ----------
Balance at March 31, 1995..... $2,796
Net income.................. 7,346
Net transfers to Computer
Associates International,
Inc....................... (5,897)
Foreign currency
translation............... (2)
----------
Balance at March 31, 1996..... 4,243
Net income.................. 4,427
Net transfers to Computer
Associates International,
Inc....................... (2,956)
Foreign currency
translation............... (17)
----------
Balance at March 31, 1997..... 5,697
Net income.................. 4,546
Net transfers to Computer
Associates International,
Inc....................... (3,577)
Foreign currency
translation............... (25)
----------
Balance at December 31,
1997........................ 6,641 -- -- -- -- -- --
Net loss.................... -- -- -- -- $(415) -- $(415)
Incorporation of Company as
of January 1998 and
issuance of note payable
to Computer Associates
International, Inc. in
connection with
Contribution Agreement.... (5,000) 5,250 $53 $174 -- $(227) --
Issuance of Common Stock to
employees................. -- 250 2 2,798 -- -- 2,800
Repurchase of Common Stock
from employees............ -- (100) (1) (1,119) -- -- (1,120)
Net transfers to Computer
Associates International,
Inc....................... (1,641) -- -- (1,853) (217) -- (2,070)
Foreign currency
translation............... -- -- -- -- -- 7 7
---------- --------- --------- ---------- ---------- ---------- ----------
Balance at March 31, 1998..... -- 5,400 $54 -- $(632) $(220) $(798)
---------- --------- --------- ---------- ---------- ---------- ----------
---------- --------- --------- ---------- ---------- ---------- ----------
See accompanying notes.
F-5
ACCPAC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------
YEARS ENDED MARCH 31
DOLLARS IN THOUSANDS 1996 1997 1998
---------- ---------- ----------
OPERATING ACTIVITIES
Net income.............................................. $7,346 $4,427 $4,131
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 348 49 156
Compensation expense related to issuance of common
stock............................................... -- -- 2,800
Deferred income taxes................................. -- -- (703)
Changes in operating assets and liabilities:
Accounts receivable................................. 1,606 (745) 2,502
Inventories......................................... (2,006) 1,378 (567)
Accounts payable.................................... (391) (1,298) 2,595
Other accrued liabilities........................... (1,034) 98 392
Deferred revenue.................................... 207 (815) 309
---------- ---------- ----------
Net cash provided by operating activities............... 6,076 3,094 11,615
INVESTING ACTIVITIES
Purchases of property and equipment..................... (121) (138) (377)
FINANCING ACTIVITIES
Net transfers to Computer Associates International,
Inc................................................... (5,897) (2,956) (7,288)
Effect of exchange rate changes on cash................. (58) -- 63
---------- ---------- ----------
Net increase in cash and cash equivalents............... -- -- 4,013
Cash and cash equivalents at beginning of period........ -- -- --
---------- ---------- ----------
Cash and cash equivalents at end of period.............. -- -- $4,013
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes.
F-6
ACCPAC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND
ACCPAC International, Inc. (the "Company") is currently a subsidiary of Computer
Associates International, Inc. ("Computer Associates"). The Company was
incorporated in October 1997. The Company designs, develops, markets and
supports a family of financial management and business management software
products. Prior to January 1, 1998, the Company operated as a division of
Computer Associates. Effective January 1, 1998, pursuant to a contribution
agreement (the "Contribution Agreement") between Computer Associates and the
Company, Computer Associates contributed and transferred to the Company the
assets and liabilities constituting the ACCPAC division of Computer Associates.
In connection with the Contribution Agreement, the Company issued 5,250,000
shares of Common Stock and issued a note payable to Computer Associates in the
amount of $5,000,000. The note payable to Computer Associates is due at the
earlier of the consummation of the inital public offering of Common Stock or
December 31, 1999. At March 31, 1998, the Company has 5,400,000 shares of Common
Stock issued and outstanding. At March 31, 1998, Computer Associates holds
5,250,000 shares of Common Stock and employees of the Company hold 150,000
shares of Common Stock.
BASIS OF PRESENTATION
The consolidated financial statements reflect the financial position, results of
operations, changes in division and stockholders' equity (deficit) and cash
flows of the business that was transferred to the Company from Computer
Associates as if the Company were a separate entity for all periods presented.
The consolidated financial statements have been prepared using the historical
basis in the assets and liabilities and historical results of operations related
to the Company's business. Changes in division equity primarily represent the
net income of the Company plus net cash transfers to Computer Associates. The
consolidated financial statements include allocations from Computer Associates,
which have been made primarily on a direct basis, of certain expenses related to
the Company. Allocations of expenses from Computer Associates to the Company on
an indirect basis have not been significant. Management believes these
allocations are reasonable.
The financial information included herein may not necessarily reflect the
consolidated financial position, results of operations, changes in stockholders'
equity (deficit) and cash flows of the Company in the future or what they would
have been had it been a separate, stand-alone entity during the periods
presented.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATIONS
In translating financial statements for operations outside the United States,
all assets and liabilities are translated using the exchange rate in effect at
the balance sheet date. All revenue, costs and expenses are translated using
F-7
ACCPAC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
an average exchange rate. These translation adjustments are included as a
separate component of stockholder's equity (deficit).
CASH AND CASH EQUIVALENTS
All highly liquid investments with maturities of three months or less are
considered to be cash equivalents.
INVENTORIES
Inventories, which consist primarily of finished software products and marketing
and promotional materials, are carried at the lower of cost (first in, first out
method) or market value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the related assets as
follows:
---------
Computer equipment............................................... 3 years
Furniture and fixtures........................................... 7 years
DEFERRED FINANCING COSTS
Deferred financing costs represent costs incurred in connection with the
proposed initial public offering of common stock.
REVENUE RECOGNITION
License and third-party products revenue is generally recognized upon shipment,
net of estimated returns, when all significant contractual obligations have been
satisfied and the resulting receivable is deemed collectible by management.
Maintenance revenue is recognized ratably over the term of the related
agreements, which in most cases is one year. Revenue from consulting services is
recognized as the services are provided. The Company's revenue recognition
policy is in compliance with the provisions of the American Institute of
Certified Public Accountants' Statement of Position 91-1, "Software Revenue
Recognition."
CONCENTRATION OF CREDIT RISK
The principal geographical markets for the Company's products are North America
and Asia/Pacific. Customers include medium and small-sized corporations in a
variety of industries. The Company performs credit evaluations of its customers
and generally does not require collateral. No single customer accounted for 10%
or more of total revenue in the years ended March 31, 1996, 1997 and 1998.
RESEARCH AND DEVELOPMENT
The Company accounts for software development costs in accordance with Statement
of Financial Accounting Standards No. 86, "Accounting for Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed," under which certain
development costs incurred subsequent to the establishment of technological
feasibility are capitalized and amortized over the estimated lives of the
related products. Technological feasibility is established upon completion of a
working model. As of March 31, 1998, such capitalized software development costs
were insignificant, and all software development costs have been charged to
research and development in the accompanying consolidated statements of income.
F-8
ACCPAC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
Advertising costs are expensed as incurred. Such costs were $2,772,000,
$2,184,000 and $3,177,000 in the years ended March 31, 1996, 1997 and 1998,
respectively.
STOCK-BASED COMPENSATION
The Company accounts for employee stock options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
has adopted the "disclosure only" alternative described in Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation."
INCOME TAXES
Historically, the Company's results have been included in the consolidated
income tax returns of Computer Associates. Income tax expense in the Company's
consolidated financial statements has been provided using the Computer
Associates effective tax rate of 37.5%, which approximates the provision for
income taxes on a separate return basis.
EARNINGS PER SHARE
Historical earnings per share have not been presented because they would not be
meaningful. At March 31, 1998, the Company had 5,400,000 shares of common stock
outstanding, of which 5,250,000 shares are owned by Computer Associates and
150,000 shares are owned by certain of the Company's employees. Pro forma basic
and diluted earnings per share is calculated based on earnings divided by the
number of shares of Common Stock outstanding as of March 31, 1998. The
calculation also gives effect to the sale of shares of Common Stock in
the initial public offering, the proceeds of which will be used to repay the
note payable of $5,000,000 to Computer Associates outstanding. Options to
purchase 500,000 shares of the Company's Common Stock have not been included
because the effect would not be significant.
NEW ACCOUNTING PRONOUNCEMENTS
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position No. 97-2 ("SOP 97-2"), "Software Revenue Recognition," as
amended by Statement of Position 98-4, which the Company will adopt for
transactions entered into in the fiscal year beginning April 1, 1998. SOP 97-2
provides guidance on recognizing revenue on software transactions and supersedes
SOP 91-1. The Company believes the adoption of SOP 97-2 will not have a
significant impact on its current revenue recognition practices.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130") and Statement of Financial Accounting Standards No. 131, "Disclosures
About Segments of an Enterprise and Related Information ("FAS 131"). FAS 130
establishes rules for reporting and displaying of comprehensive income. FAS 131
requires the Company use the "management approach" in disclosing segment
information. Both statements are effective for the Company during the year
ending March 31, 1999. The Company does not believe that the adoption of FAS 130
or FAS 131 will have a material impact on the Company's consolidated financial
position, results of operations or cash flows.
2. NOTE PAYABLE
In connection with the Contribution Agreement, the Company issued a note payable
to Computer Associates in the amount of $5,000,000. The note payable is due at
the earlier of the consummation of the initial public
F-9
ACCPAC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. NOTE PAYABLE (CONTINUED)
offering of Common Stock or December 31, 1999 and bears interest at 9% per
annum; however, no interest accrues on the note if the note is paid in full on
or prior to December 31, 1998.
3. INCOME TAXES
The Contribution Agreement governs the allocation of consolidated or combined
federal and state and local income tax liabilities for the periods before the
consummation of the initial public offering of Common Stock. Computer Associates
will prepare and file all consolidated federal, combined state and local income
tax or franchise tax returns required to be filed for periods during which the
Company is a member of Computer Associates consolidated group. Pursuant to the
Contribution Agreement, the Company will be required to pay to Computer
Associates its tax liability computed at 37.5% of the Company's earnings,
subject to certain modifications.
The provision for income taxes consists of the following:
----------------------------------
YEARS ENDED MARCH 31
----------------------------------
1996 1997 1998
---------- ---------- ----------
Current................................. $4,690 $2,417 $2,235
Deferred................................ (283) 239 243
---------- ---------- ----------
$4,407 $2,656 $2,478
---------- ---------- ----------
---------- ---------- ----------
The Company's tax provision is higher than the 35% statutory rate primarily due
to state and local taxes.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred tax assets at
March 31, 1998 primarily relate to the allowance for doubtful accounts
(approximately $270,000) and accrued costs.
4. STOCKHOLDERS' EQUITY (DEFICIT)
DIVISION EQUITY
The average division equity balance was $3,447,000, $4,897,000, and $6,064,000
for the years ended March 31, 1996 and 1997 and the nine months ended December
31, 1997, respectively. Effective January 1, 1998, pursuant to the Contribution
Agreement, the Company issued a note payable to Computer Associates in the
amount of $5,000,000. Prior to January 1, 1998, the Company participated in
Computer Associates' cash management system, whereby cash payments related to
the Company's operating expenses were made by Computer Associates and cash
generated from the Company's operations were remitted to Computer Associates.
Net cash payments to Computer Associates were $5,897,000, $2,956,000, and
$7,288,000 in the years ended March 31, 1996, 1997, and 1998, respectively. The
Company has treated all net cash payments to Computer Associates as equity
distributions.
COMMON STOCK
In January 1998, the Company issued 150,000 shares of Common Stock (net of
100,000 shares repurchased by the Company in exchange for the Company's
agreement to pay the employee withholding taxes up to certain maximums related
to the issuance of the Common Stock) to certain employees for no cash
consideration. Included in accrued compensation and related liabilities is
$1,120,000 for employee withholding taxes to be paid by the Company related to
the issuance of the Common Stock to employees. The Company recognized
compensation
F-10
ACCPAC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
expense of $2.8 million associated with the issuance of the shares. The shares
are not transferable until three years after the date of issuance. On March 31,
1998, the Board of Directors approved an amendment to the Certificate of
Incorporation to increase the authorized Common Stock to 25,000,000 shares.
1998 STOCK PLAN
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock awards because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123 ("FAS 123") requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, when the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation is recognized.
The Company's 1998 Stock Incentive Plan (the "Plan") was approved by the Board
of Directors in January 1998. The Plan provides for the grant of incentive stock
options, nonstatutory stock options and stock purchase rights to employees. The
Company has reserved 1,500,000 shares of Common Stock for issuance under the
Plan. The Plan expires in 2008. Pursuant to the Plan, the exercise price may not
be less than the fair market value of common stock on the date of grant. Stock
options expire no later than ten years from the date of grant. In the event of
voluntary or involuntary termination of employment with the Company for any
reason, with or without cause, all unvested options are forfeited and all vested
options must be exercised within a 90-day period. Vesting provisions for options
granted under the Plan are determined by the Board of Directors. Options
generally vest ratably over a five year period. In March 1998, options to
purchase 500,000 shares of Common Stock were granted at an exercise price of
$11.20 per share. At March 31, 1998, 1,000,000 shares of Common Stock remained
available for future grants under the Plan. No options were vested at March 31,
1998.
Pro forma information regarding net income and earnings per share is required by
FAS 123, which requires that the information be determined as if the Company had
accounted for its employee stock options granted under the fair value method.
The fair value of the options granted was estimated at the date of grant using
the minimum value method with the following weighted-average assumptions:
----------
Risk-free interest rate......................................... 5.7%
Dividend yield.................................................. 0%
Volatility...................................................... 0%
Expected life of option in years................................ 5
The weighted average fair value of options granted during the year ended March
31, 1998 was $2.76. For purposes of pro forma disclosures, the estimated fair
value of options is amortized to expense over the options' vesting period.
Because no options have vested through March 31, 1998, the pro forma net income
and earnings per share does not differ from the amounts reported by the Company.
The minimum value method differs from other methods designed to estimate the
fair value of options, such as the Black-Scholes options pricing model, because
it does not consider the effect of expected volatility. Because the Company's
employee stock options have characteristics significantly different from those
of traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
F-11
ACCPAC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
PREFERRED STOCK
On March 31, 1998, the Board of Directors approved an amendment to the
Certificate of Incorporation to allow, upon completion of the initial public
offering, the issuance of 1,000,000 shares of Preferred Stock and to determine
the dividend rights, conversion rights, voting rights, preferences, privileges
and restrictions without any further vote or action by the stockholders.
STOCK SPLIT
On March 31, 1998, the Board of Directors approved a 2000-for-1 stock split of
issued and outstanding Common Stock to take effect immediately prior to
consummation of the initial public offering. All shares in the accompanying
consolidated financial statements have been retroactively adjusted to reflect
the stock split.
5. SAVINGS PLANS
The majority of the Company's employees are eligible to participate in savings
plans sponsored by Computer Associates. The plans allow employees to contribute
a portion of their pre-tax salaries in accordance with specified guidelines. The
Company matches a certain percentage of employee contributions, up to certain
limits. Computer Associates also maintains a profit sharing plan. The Company's
expense related to the Computer Associates savings plans was $545,000, $416,000
and $386,000 in the years ended March 31, 1996, 1997 and 1998, respectively.
6. COMMITMENTS AND CONTINGENCIES
The Company leases or subleases facilities owned or leased by Computer
Associates. Rental expense for these facilities for the years ended March 31,
1996, 1997 and 1998 was $800,000, $800,000 and $1,100,000, respectively. The
Company leases its facilities from Computer Associates on a monthly basis.
In May 1998, the Company's DistribuPro subsidiary was named as a third-party
defendant in connection with a copyright and trademark infringement claim
relating to certain networking products it distributed. The matter is being
litigated in the United States District Court for the Northern District of
California. The third-party complaint alleges that DistribuPro should be liable
for any amounts for which the third-party plaintiffs are found to be liable.
While the third-party claim seeks to hold DistribuPro responsible for
potentially significant amounts, the Company does not believe the third-party
complaint has merit and will vigorously defend against it. Accordingly, the
Company does not expect the third-party claim to have a material adverse effect
on the Company's business, financial condition and results of operations.
7. EXPORT SALES
Revenue from customers outside the United States accounted for 35.6%, 44.0% and
46.9% of revenue in the years ended March 31, 1996, 1997 and 1998, respectively.
Revenue from customers in Canada accounted for 26.9%, 32.7% and 32.7% of revenue
in the years ended March 31, 1996, 1997 and 1998, respectively. No other
geographical area accounted for more than 10% of total revenue.
F-12
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Securities and Exchange Commission registration fee.............................. $ 15,267
NASD fee......................................................................... 5,675
NASDAQ listing fee............................................................... *
Transfer Agent's and registrar's fees............................................ *
Blue Sky fees and expenses....................................................... *
Printing expenses................................................................ *
Legal fees and expenses.......................................................... *
Accounting fees.................................................................. *
Miscellaneous.................................................................... *
---------
Total...................................................................... $
---------
---------
- ------------------------
* To be supplied by amendment. All fees other than the SEC registration fee,
the NASD fee and the NASDAQ listing fee are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware (the
"Delaware Law") empowers a Delaware corporation to indemnify any persons who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person is or was an officer or
director of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding, provided that
such officer or director acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the corporation's best interests,
and, for criminal proceedings, had no reasonable cause to believe his or her
conduct was illegal. A Delaware corporation may indemnify officers and directors
against expenses (including attorneys' fees) in connection with the defense or
settlement of an action by or in the right of the corporation under the same
conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the corporation.
Where an officer or director is successful on the merits or otherwise in the
defense of any action referred to above, the corporation must indemnify him or
her against the expenses which such officer or director actually and reasonably
incurred.
In accordance with the Delaware Law, the Company's Amended and Restated
Certificate of Incorporation (the "Certificate of Incorporation") contains a
provision to limit the personal liability of the directors of the Company for
violations of their fiduciary duty. This provision eliminates each director's
liability to the Company or its stockholders for monetary damages except (i) for
any breach of the director's duty of 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) under Section 174 of the
Delaware Law providing for liability of directors for unlawful payment of
dividends or unlawful stock purchases or redemptions or (iv) for any transaction
from which a director derived an improper personal benefit. The effect of this
provision will be to eliminate the personal liability of directors for monetary
damages for actions involving a breach of their fiduciary duty of care,
including any such actions involving gross negligence, except in the situations
described above.
Pursuant to the underwriting agreement that will be filed as an exhibits to this
registration statement relating to underwritten Offering of securities, the
underwriters parties thereto have agreed to indemnify each officer and
II-1
director of the Company and each person, if any, who controls the Company within
the meaning of the Securities Act of 1933, against certain liabilities,
including liabilities under said Act.
The Certificate of Incorporation provides for indemnification of the officers
and directors of the Company to the full extent permitted by applicable law.
The Company intends to enter into a director and officer insurance policy that
will provide for reimbursement or payments for losses arising from claims
against covered directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Within the past three years, the Company has issued and sold the following
unregistered securities:
(i) On January 7, 1998, Computer Associates contributed and transferred to
the Company the assets constituting the ACCPAC division in exchange for the
assumption of the liabilities associated with such assets, 2,625 shares of
its Common Stock and a note in the principal amount of $5.0 million.
(ii) In January 1998, the Company granted and issued to certain of its
executive officers and key employees an aggregate of 75 shares of restricted
Common Stock (net of 50 shares repurchased for tax withholding purposes). In
connection with this issuance, the Company incurred a one-time charge of
$2.8 million in the fourth quarter of fiscal 1998, which the Company's Board
of Directors determined was the aggregate fair market value of the
restricted shares on the date of grant.
(iii) As of March 31, 1998, the Company issued to certain of its executive
officers and key employees options to purchase an aggregate of 250 shares of
its Common Stock under the 1998 Stock Incentive Plan at an exercise price
per share of $22,400.
The Company believes that these transactions described above were exempt from
registration under Section 4(2) of the Securities Act of 1933 because in each
case the subject securities were sold to a single sophisticated investor who was
purchasing for investment without a view to further distribution.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(A) EXHIBITS
EXHIBIT
NO.
- -------------
1.1 -- Form of Underwriting Agreement*
3.1 -- Form of Amended and Restated Certificate of Incorporation of the Company*
3.2 -- Form of Amended and Restated By-laws of the Company*
4.1 -- Specimen Certificate of Common Stock of the Company*
5.1 -- Opinion and Consent of Howard, Darby & Levin*
10.1 -- Contribution Agreement between the Company and Computer Associates dated as of January 7, 1998*
10.2 -- Form of Registration Rights Agreement between the Company and Computer Associates*
10.3 -- Real Estate Agreement between the Company and Computer Associates*
10.4 -- ACCPAC 1998 Stock Incentive Plan*
10.5 -- Material Contracts*
21.1 -- List of Subsidiaries*
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Howard, Darby & Levin (included in 5.1)
24.1 -- Power of Attorney (see registration statement signature page)
27.1 -- Financial Data Schedule (for SEC use only)
- ------------------------
* To be filed by amendment.
II-2
(B) FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts
Schedules not listed above have been ommitted because the information required
to be set forth therein is not applicable or is shown in the Consolidated
Financial Statements or Notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned hereby undertakes that:
A. The undersigned Company hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters
to permit the prompt delivery to each purchaser.
B. 1. 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 Company pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
2. 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.
C. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company 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 Company 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 whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Santa Clara, State of
California, on the 11th day of June, 1998.
ACCPAC INTERNATIONAL, INC.
By: /s/ FREDERICK S. WYSOCKI
-----------------------------------------
Name: Frederick S. Wysocki
Title: CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Each person whose signature appears below hereby constitutes and appoints
Frederick S. Wysocki and Donnat Lettman, his true and lawful attorneys-in-fact
and agents, each acting alone, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including, without limitation,
post-effective amendments) to this Registration Statement and any subsequent
registration statement filed by the Registrant pursuant to Rule 462(b) of the
Securities Act of 1933, which relates to this Registration Statement, and to
file the same, with all exhibits thereto, and all documents in connection
herewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, each acting alone, or his or their substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chairman, President, Chief
/s/ FREDERICK S. WYSOCKI Executive Officer
- ------------------------------ (Principal Executive June 11, 1998
Frederick S. Wysocki Officer) and Director
Vice President, Chief
/s/ DONNAT LETTMAN Financial Officer and
- ------------------------------ Treasurer (Principal June 11, 1998
Donnat Lettman Financial and Accounting
Officer)
/s/ CHARLES P. MCWADE
- ------------------------------ Director June 11, 1998
Charles P. McWade
/s/ ROBERT H. TOTH
- ------------------------------ Director June 11, 1998
Robert H. Toth
II-4
EXHIBIT INDEX
EXHIBIT
NO.
- -----------
1.1 --Form of Underwriting Agreement*
3.1 --Form of Amended and Restated Certificate of Incorporation of the Company*
3.2 --Form of Amended and Restated By-laws of the Company*
4.1 --Specimen Certificate of Common Stock of the Company*
5.1 --Opinion and Consent of Howard, Darby & Levin*
10.1 --Contribution Agreement between the Company and Computer Associates dated as of January 7, 1998*
10.2 --Form of Registration Rights Agreement between the Company and Computer Associates*
10.3 --Real Estate Agreement between the Company and Computer Associates*
10.4 --ACCPAC 1998 Stock Incentive Plan*
10.5 --Material Contracts*
21.1 --List of Subsidiaries*
23.1 --Consent of Ernst & Young LLP
23.2 --Consent of Howard, Darby & Levin (included in 5.1)
24.1 --Power of Attorney (see registration statement signature page)
27.1 --Financial Data Schedule (for SEC use only)
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* To be filed by amendment.
II-5
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We have audited the consolidated financial statements of ACCPAC International,
Inc. as of March 31, 1997 and 1998 (except for Note 4, as to which the date is
), and for each of the three years in the period ended March 31,
1998, and have issued our report thereon dated June 5, 1998 (included elsewhere
in this Registration Statement.) Our audits also included the financial
statement schedule listed in Item 16(b) of this Registration Statement. This
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,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
San Jose, California
June 5, 1998
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The foregoing report is in the form that will be signed upon completion of the
stock split described in Note 4 to the financial statements.
San Jose, California /s/ ERNST & YOUNG LLP
June 11, 1998
S-1
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
DOLLARS IN THOUSANDS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF YEAR EXPENSES DEDUCTIONS(1) YEAR
----------- ------------- ------------- -----------
Allowance for doubtful accounts:
March 31, 1996............................................... $ 1,260 $ 849 $412 $ 1,697
March 31, 1997............................................... 1,697 973 1,592 1,078
March 31, 1998............................................... 1,078 729 1,096 711
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(1) Amounts written off net of recoveries.
S-2