-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BZCdQYdJ47QrFUDSvdYMwXEzBx1yJxumFGg4hdYF4HC6KgQh2IgUo18WV5vXouQE uP+F4hyk84XmaVTQK+IWFw== 0000879703-99-000007.txt : 19990517 0000879703-99-000007.hdr.sgml : 19990517 ACCESSION NUMBER: 0000879703-99-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPUTER CONCEPTS CORP /DE CENTRAL INDEX KEY: 0000879703 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 112895590 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-72203 FILM NUMBER: 99622196 BUSINESS ADDRESS: STREET 1: 80 ORVILLE DR CITY: BOHEMIA STATE: NY ZIP: 11716 BUSINESS PHONE: 5162441500 MAIL ADDRESS: STREET 1: 80 ORVILLE DRIVE CITY: BOHEMIA STATE: NY ZIP: 11716 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 0 - 20660 COMPUTER CONCEPTS CORP. (Exact name of registrant as specified in its charter) Delaware 11-2895590 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 80 Orville Drive, Bohemia, N.Y. 11716 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (516) 244-1500 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ The number of shares of $.0001 par value stock outstanding as of May 13, 1999 was: 20,420,839. COMPUTER CONCEPTS CORP. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION Page Condensed Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998 3 Condensed Consolidated Statements of Operations and Comprehensive Income For the Three Months Ended March 31, 1999 and 1998 4 Condensed Consolidated Statements of Cash Flows For the Three Months ended March 31, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6 - 11 Management's Discussion and Analysis of Financial Condition and Results of Operations 12 - 14 PART II - OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Changes in Securities 15 Item 3. Defaults Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS as of March 31, 1999 and December 31, 1998 (in thousands, except share data)
March 31 December 31, ASSETS 1999 1998 ---- ---- (Unaudited) --------- CURRENT ASSETS: Cash and cash equivalents $13,272 $ 8,176 Accounts receivable, net of allowance for doubtful accounts of $1,601 and $1,350 in 1999 and 1998, respectively 12,623 27,412 Installment receivables 18,440 16,406 Inventories 419 419 Deferred tax assets, current - 306 Advances to officers 542 895 Prepaid expenses and other current assets 6,785 10,128 ------- ------- 52,081 63,742 Installment accounts receivable, due after one year 7,759 7,908 Property and equipment, net 3,893 3,564 Software costs, net 4,936 5,594 Excess of cost over fair value of net assets acquired, net of accumulated amortization of $4,908 and $4,239 in 1999 and 1998, respectively 7,765 8,610 Deferred tax assets, noncurrent 500 484 Other assets 1,631 2,000 ------- ------- $78,565 $91,902 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 7,203 $11,428 Current portion of long- term debt 2,080 6,117 Income taxes payable 164 2,207 Deferred installment revenue 7,317 7,314 Deferred maintenance revenue 8,016 9,107 ------- ------- 24,780 36,173 Deferred installment revenue, earned after one year 4,617 7,883 Deferred maintenance revenue, earned after one year 6,912 3,924 Long-term debt, net of current portion 2,401 1,403 ------- ------- Total liabilities 38,710 49,383 ------- ------- Minority interest 9,353 8,503 Commitments and contingencies Shareholders' equity: Common stock, $.0001 par value; 150,000,000 authorized; 20,420,839 shares in 1999 and 19,324,839 shares in 1998 issued and outstanding 2 2 Additional paid-in capital 108,349 106,515 Accumulated deficit (77,545) (72,194) Accumulated other comprehensive loss (304) (307) ------- ------- Total shareholders' equity 30,502 34,016 ------- ------- $ 78,565 $ 91,902 ======== ======== See Notes to Condensed Consolidated Financial Statements.
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Unaudited) For the Three Months Ended March 31, (in thousands, except per share data)
1999 1998 ---- ---- Revenue: Software licenses, net $ 6,730 $ 3,760 Maintenance 3,539 2,562 Professional services 3,699 1,302 ------- ------- 13,968 7,624 Cost of revenue: Software licenses 373 492 Maintenance 625 409 Professional services 3,166 1,314 ------- ------- 4,164 2,215 ------- ------- Gross margin 9,804 5,409 ------- ------- Operating expenses Research and development 4,069 2,172 Sales and marketing 8,385 4,206 General and administrative 2,915 2,249 Amortization and depreciation 1,684 567 ------- ------- 17,053 9,194 ------- ------- Operating loss (7,249) (3,785) Other income (expense) Gain on partial disposition of subsidiary 2,031 - Interest income (expense), net (12) 25 Minority interest in earnings of subsidiary (46) - ------- ------- Loss before (benefit from) provision for income taxes (5,276) (3,760) Benefit from (provision for) income taxes (75) 206 ------- ------- Net loss $(5,351) $(3,554) ======= ======= Other comprehensive income: Foreign currency translation adjustments 3 8 Comprehensive income (loss) $(5,348) $(3,546) ======= ======= Basic and diluted net loss per share $ (0.27) $ (0.27) ======= ======= Weighted average common shares outstanding 20,089 13,111 ======= ======= See Notes to Condensed Consolidated Financial Statements.
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Three Months Ended March 31, (in thousands)
1999 1998 ---- ---- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Cash flows from operating activities Net loss $ (5,351) $ (3,554) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization: Software costs 792 174 Property and equipment 416 255 Excess of cost over fair value of net assets acquired 669 207 Other 1 4 Minority interest in net income of subsidiary 46 - Provision for doubtful accounts 114 60 Common stock and options issued for services 1,744 89 Softworks common stock exchanged for services 634 - Gain on partial disposition of subsidiary (2,031) - Changes in operating assets and liabilities Accounts receivable 12,641 2,353 Installment accounts receivable, due after one year 149 (693) Inventories - - Prepaid expenses and other current assets 5,511 494 Other assets 369 53 Accounts payable and accrued expenses (4,239) (1,291) Current income taxes (2,043) - Deferred income taxes 290 - Deferred revenue (1,366) 1,884 -------- -------- Net cash provided (used) by operating activities 8,346 35 -------- -------- Cash flows from investing activities Capital expenditures (745) (292) Additional consideration for Softworks acquisition - (262) Cash received from sale of limited license (see Note 7) 400 - Software development and technology purchases (222) (389) Repayment of (advances to) officers, net 353 (126) -------- -------- Net cash used in investing activities (214) (1,069) -------- -------- Cash flows from financing activities Net proceeds from sales of common stock and options - 2,157 Proceeds from long-term debt 2,021 - Repayments of long-term debt (5,060) (106) -------- -------- Net cash provided (used) by financing activities (3,039) 2,051 -------- -------- Effect of exchange rate changes on cash and cash equivalents 3 8 -------- -------- Net increase in cash and cash equivalents 5,096 1,025 Cash and cash equivalents, beginning of period 8,176 778 -------- -------- Cash and cash equivalents, end of period $ 13,272 $ 1,803 ======== ======== See Notes to Condensed Consolidated Financial Statements.
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three Months Ended March 31, 1999 and 1998 1. Interim Financial Information The condensed consolidated balance sheet as of March 31, 1999, and the condensed consolidated statements of operations and cash flows for the three months ended March 31, 1999, and 1998, have been prepared by the Company without audit. These interim financial statements include all adjustments, consisting only of normal recurring accruals, which management considers necessary for a fair presentation of the financial statements for the above periods. The results of operations for the three months ended March 31, 1999, are not necessarily indicative of results that may be expected for any other interim periods or for the full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 1998. The accounting policies used in preparing the condensed consolidated financial statements are consistent with those described in the December 31, 1998, consolidated financial statements. 2 The Company Computer Concepts Corp. and subsidiaries (the "Company") design, develop, market and support information delivery software products, including end-user data access tools for use in personal computer and client/server environments. Through its Softworks subsidiary, the Company develops, markets and supports systems management software products for corporate mainframe data centers. In 1997, the Company created a business unit, "professional services" , which primarily resells computer hardware and for a fee, will assist in the design, construction and installation of technology systems. The Company makes use of its proprietary data access technology, d.b.Express in its d.b.Express Internet Information Server, which is an Internet database providing Internet access to detail telephone records. Data can be visually presented using the Company's patented data visualization technology. Additionally, in June,1998, the Company completed an acquisition of software (and related sales and marketing rights) which is designed to provide non computer literate owners (e.g. parents, guardians, schools, etc) the ability to identify threats as well as objectionable material which may be viewed by users of the computer on the Internet (e.g. children). 3. Shareholders' Equity During the three month period ended March 31, 1999, the Company issued the following restricted common stock: i. As part of a bonus incentive compensation plan, the Company issued 470,500 shares to several non-executive employees for which it recorded a non cash charge to earnings, of $826,000; ii. issued 510,500 shares of its common stock to various consultants for which it recorded a non cash charge to earnings of $910,000; iii. In lieu of cash, the Company, issued 115,000 shares for an acquisition of a technology license. The Company recorded amortization expense of $8,000 during the three month period ending March 31, 1999. 4. Legal matters In July 1995, the Company received notice of an action alleging the Company had not used its best efforts to register warrants to purchase 50,000 shares of the Company's common stock within 30 days from written notice to the Company, pursuant to a financial consulting agreement. The Company has maintained that it has always used its best efforts to cause the registration of those warrants to occur. However, to avoid the expense and resolve the uncertainties of litigation, the matter was settled by including 38,500 warrants in the Company's then pending registration statement, with the balance of 11,500 warrants being canceled. The registration statement became effective on August 9, 1996. Although the Company believes this matter has been resolved, releases have not yet been exchanged, nor has a stipulation of dismissal been filed. The Company is unable to predict the ultimate outcome of this suit and, accordingly, no adjustment has been made in the consolidated financial statements for any potential losses. COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three Months Ended March 31, 1999 and 1998 In March 1995, an action was originally commenced against the Company and a number of defendants. In early 1997, after a change in counsel, the plaintiff amended the complaint for a second time, now naming as defendants only the Company and three of its officers. The second amended complaint alleges that certain third parties, unrelated to the Company, transferred certificates representing 1,000,000 shares of the Company's common stock to the plaintiff. The complaint further alleges that such shares were endorsed in blank by the third parties and became bearer securities, which were negotiated to the plaintiff by physical delivery. The certificates had not been legally acquired from the Company and the certificates were reported to the Securities and Exchange Commission by the Company as stolen certificates. Plaintiff has requested validation of the transfer of the certificates and is seeking damages of an unspecified amount, consisting of alleged diminution in market value of the subject shares from 1994 through the date of any judgment in the plaintiff's favor. Discovery has been substantially completed and, unless a summary judgment is granted to one side or the other, this case is expected to go to trial. The Company and its counsel believe that the Company's position regarding the claim has substantial factual and legal support and are vigorously defending the matter. However, the Company is unable to predict the ultimate outcome of this claim and, accordingly, no adjustments have been made in the consolidated financial statements for any potential losses or potential issuance of common stock. During February 1999, the Company and certain officers received notification that they had been named as defendants in a class action alleging violations of certain securities laws with respect to the content of certain Company announcements. The Company and its counsel are vigorously defending the matter. However, the Company is unable to predict the ultimate outcome of this claim and, accordingly, no adjustments have been made in the consolidated financial statements for any potential losses or potential issuance of common stock. 5. Reclassifications Certain reclassifications have been made to the condensed consolidated financial statements shown for the prior year in order to have it conform to the current year's classifications. COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three Months Ended March 31, 1999 and 1998 6. Segment information The Financial Accounting Standards Board issued Statement No. 131 "Disclosures about Segments of an Enterprise and Related Information," which became effective for the Company in 1998 and has been implemented for all periods presented. The Company and its subsidiaries operate in two separate business segments, computer software and professional services. The computer software segment, which operates both domestically and internationally, is primarily engaged in the design, development, marketing and support of information delivery software products, including end-user data access tools for use in personal computer and client/server environments and systems management software products for corporate mainframe data centers. International operations include foreign subsidiaries located in the United Kingdom, France, Brazil, Australia, Spain, Italy and Germany and several international distributors primarily in Europe and Asia. The professional services segment, which operates domestically, is primarily engaged in the reselling of computer hardware, design, construction and installation of technology systems, as well as marketing the d.b.Express Internet Information Server, also referred to as a "server farm".
Business information Three Months Ended ------------------ March 31, --------- (In Thousands $) 1999 1998 ---- ---- Revenue Computer Software $10,269 $6,322 Professional Services 3,699 1,302 ------- ------ Total $13,968 $7,624 ======= ====== Operating Income (loss) Computer Software $(7,598) $(3,715) Professional Services 349 (70) ------- ------ Total $(7,249) $(3,785) ======= ======
At March 31, At December 31, 1999 1998 ------------ -------------- Identifiable Assets Computer Software $73,651 $76,950 Professional Services 4,914 14,952 ------- ------- Total $78,565 $91,902 ======= =======
In classifying business information into segments, the Company specifically identifies revenue, expenses and identifiable assets of the professional services segment; items not specifically identified are included in the computer software segment. COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three Months Ended March 31, 1999 and 1998
Geographical information: Three Months Ended ------------------ March 31, --------- (In Thousands $) 1999 1998 ---- ---- Revenue: United States $10,743 $ 6,318 International 3,225 1,306 -------- ------- Total $ 13,968 $ 7,624 ======== ======= Operating Income/(loss): United States $ (8,448) $(3,196) International 1,199 (589) -------- ------- Total $ (7,249) $(3,785) ======== =======
At March 31, At December 31, 1999 1998 ------------ -------------- Identifiable Assets: United States $67,106 $82,377 International 11,459 9,525 -------- ------- Total $78,565 $91,902 ======== =======
Major customer For the three months ended March 31,1999, the Company had one major customer with revenue of $2,911,000 (20.8% of total revenue). This amount is included in the Professional Services and Domestic categories. 7. Internet Tracking & Security Ventures, LLC On June 30, 1998, pursuant to an Asset Purchase and Sale Agreement, the Company acquired certain software and related sales and marketing rights from Internet Tracking & Security Ventures, LLC ("ITSV") in exchange for 1,900,000 restricted shares of the Company's common stock and 1,000,000 restricted shares of common stock of the Company's then wholly owned subsidiary, Softworks. The acquired software program, known as "Computer Cop," is designed to inform non computer literate parents, guardians and alike, what materials, or possible threats to the safety and well being their children or others have been accessing over the internet, such as objectionable web sites, text, pictures, screens, electronic mail, etc. The Agreement also includes the rights to the use of Richard "Bo" Dietl's name in conjunction with the promotion and endorsement of the software as well as appearances by Mr. Dietl in support of the software in regional and national marketing campaigns. Orders for the initial version of the product began shipping during the fourth quarter, 1998. The acquisition has been valued at an aggregate of $12,210,000 determined as follows: 1,900,000 restricted shares of the Company have been valued at $5,700,000 and the 1,000,000 restricted shares of Softworks' common stock have been valued at $6,510,000 (based upon the ultimate net proceeds to the selling shareholders in Softworks' initial public offering which became effective August 4, 1998). The $12,210,000 purchase price has been allocated to the fair value of the assets acquired at June 30, 1998, based upon a written valuation from an independent investment banking firm. Accordingly, $2,700,000 has been allocated to "Software costs", $4,150,000 has been recorded as "Prepaid expenses and other current assets" and $5,360,000 has been recorded as "Excess of cost over fair value of net assets acquired". COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three Months Ended March 31, 1999 and 1998 In March, 1999, the Company sold certain rights to license ComputerCOP to a marketing company (Bo-Tel, Inc.) for $400,000. The license rights are limited to granting a specified original equipment manufacturer of personal computers the right to embed the software in its computers for sale to the general public. Bo-Tel, Inc. is an affiliate of ITSV, and accordingly, this sale has been accounted for as a reduction of the cost of the assets acquired from ITSV. The software costs will be amortized using the greater of the ratio of current revenue to the total projected revenue for the software or the straight-line method using an estimated useful life of 30 months. The prepaid expenses will be expensed as the related services are performed (including, but not limited to, appearances, promotion and endorsement). The excess of cost over fair value of net assets acquired, which primarily relate to the use of the name "Bo Dietl" will be amortized using the straight-line method over 36 months. However, as a product that the Company has only recently commenced marketing, it is reasonably possible that the estimates of anticipated future gross revenue, the remaining economic life of the product, or both will be reduced significantly in the near term due to the unpredictability of the product's market acceptance and competitive pressures (including technological obsolescence). As a result, the carrying amount of the assets acquired from ITSV (approximately $7,300,000 at March 31, 1999) may be reduced materially in the near term. 8. GAIN ON PARTIAL DISPOSITION OF SUBSIDIARY Prior to June 30, 1998, Softworks was a wholly owned subsidiary of the Company with 14,083,000 shares of common stock outstanding. On August 4, 1998, Softworks completed a public offering of 4,200,000 shares of its common stock at a price of $7.00 per share (less underwriting fees and commissions of $0.49 per share) as follows: 1,700,000 shares of common stock were sold by Softworks; 1,000,000 shares were sold by ITSV and 1,500,000 shares were sold by the Company. Additionally, in the third quarter of 1998, options to acquire approximately 3,600,000 restricted shares of Softworks common stock were granted to Softworks officers and key employees. All options are exercisable at the initial public offering price of $7.00 per share. On May 4, 1999, Softworks filed Form S-8 covering the registration of the common stock issuable pursuant to these options. Softworks common stock is traded on the NASDAQ National Market under the symbol "SWRX." In addition to the public offering discussed above, in 1998, the Company sold 1,000,000 shares of Softworks common stock for $5,000,000 and exchanged 1,877,700 shares of Softworks common stock to employees and consultants for services rendered or to be rendered. As a result of the various transactions described above, the Company's ownership interest in Softworks was reduced from 100% to 54.5% as of December 31, 1998. In January, 1999, the Company, through the exchange of 687,600 restricted shares of Softworks common stock, further reduced its ownership interest from 54.5% to 50.2% or 8,017,700 shares of Softworks common stock at March 31, 1999 as follows: 1. The Company issued as 1999 bonus incentive compensation, 298,000 restricted shares of Softworks common stock to two executives, vesting 25% on January 1, 1999, 25% on April 1, 1999, 25% on July 1, 1999 and 25% on September 1,1999. These shares would fully vest in the event of the acquisition of Softworks, or the Company by any third party. Accordingly, the Company will record a non cash charge to operations of $269,250 each quarter. 2. The Company issued 389,600 restricted shares of Softworks, as well as 80,000 contract options to acquire restricted shares of Softworks' common stock owned by the Company, exercisable at $1.00 per share and expire December 31, 1999 to various consultants. The related contracts are for services to be performed over time frames ranging from twelve to twenty-four months. The $1,774,000 value of the shares and options will be charged to operations over the terms of the related contracts. COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three Months Ended March 31, 1999 and 1998 As a result of the January, 1999 transactions, the Company recognized a gain of $2,031,000, representing the difference between the fair value of the Softworks common stock exchanged, and the related carrying value of the Company's investment in Softworks. In April, 1999, certain stock options previously granted by Softworks to its employees and consultants were exercised, which had the effect of reducing the Company's ownership interest in Softworks from 50.2% to 49.7%. Accordingly, the financial results of Softworks are not expected to be consolidated with the Company commencing with the quarter ending June 30, 1999. The following pro forma consolidated balance sheets and statements of operations present the Company's results with Softworks accounted for on the equity method (i.e. as an unconsolidated subsidiary):
March 31, 1999 December 31, 1998 -------------------------------- --------------------------- (in thousands) (in thousands) Pro-forma Pro-forma Actual Adjustments Pro-forma Actual Adjustments Pro-forma ------ ----------- --------- ------ ----------- --------- ASSETS Current assets $52,081 $(35,225) $16,856 $63,742 $(38,282) $25,460 Long-term receivables 7,759 (7,759) - 7,908 (7,908) - Property plant and equipment, net 3,893 (2,698) 1,195 3,564 (2,499) 1,065 Software costs, net 4,937 (2,732) 2,205 5,594 (3,039) 2,555 Goodwill, net 7,765 (3,921) 3,844 8,610 (4,143) 4,467 Other assets 2,130 (2,061) 69 2,484 (2,384) 100 Investment in subsidiary, equity method - 9,331 9,331 - 10,086 10,086 ------- ------- ------ ------ ------- ------ $78,565 $(45,065) $33,500 $91,902 $(48,169) $43,733 ======= ======== ======= ======= ======== ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities $24,780 $(21,814) $ 2,966 $36,173 $(26,501) $ 9,672 Deferred revenue 11,529 (11,497) 32 11,807 (11,764) 43 Long term debt 2,401 (2,401) - 1,403 (1,401) 2 ------- ------- ------ ------ ------- ------ Total liabilities 38,710 (35,712) 2,998 49,383 (39,666) 9,717 Minority interest 9,353 (9,353) - 8,503 (8,503) - Shareholders' equity 30,502 - 30,502 34,016 - 34,016 ------- ------- ------ ------ ------- ------ $78,565 $(45,065) $33,500 $91,902 $(48,169) $43,733 ======= ======== ======= ======= ======== ======
For the three months ended March 31, 1999 For the three months ended March 31, 1998 ----------------------------------------- ----------------------------------------- (in thousands) (in thousands) Pro-forma Pro-forma Actual Adjustments Pro-forma Actual Adjustments Pro-forma ------ ----------- --------- ------ ----------- --------- Revenue $13,968 $(10,258) $ 3,710 $ 7,624 $(6,596) $1,028 Cost of Revenue 4,164 (764) 3,400 2,215 (964) 1,251 ------- ------- ------- ------- ------- ------ Gross margin 9,804 (9,494) 310 5,409 (5,632) (223) ------- ------- ------- ------- ------- ------ Total Operating Expenses 17,053 (9,342) 7,711 9,194 (6,681) 2,513 ------- ------- ------- ------- ------- ------ Operating (loss) income (7,249) (152) (7,401) (3,785) 1,049 (2,736) Other income (expense) Gain on partial disposition of subsidiary 2,031 - 2,031 - - - Interest (expense) income, net" (12) - (12) 25 - 25 Minority interest expense (46) 46 - - - - Income (loss) from subsidiary - 46 46 - (843) (843) ------- ------- ------- ------- ------- ------ Loss before provision (benefit) for income taxes (5,276) (60) (5,336) (3,760) 206 (3,554) Provision (benefit) for income taxes (75) 60 (15) 206 (206) - ------- ------- ------- ------- ------- ------ Net loss $(5,351) $(0) $(5,351) $(3,554) $ - $(3,554) ======= ======= ======= ======= ======= ======
Additionally, on May 3, 1999, Softworks filed Form S-1 with the Securities and Exchange Commission announcing the offering of 3.5 million shares of its common stock. Of the shares being offered, one million shares are being sold by Softworks, 800,000 shares are being sold by the Company and 1,700,000 shares are being sold by other existing shareholders. In conjunction with the offering, the Company issued 200,000 contract options to acquire restricted shares of Softworks common stock owned by the Company, exercisable at $1.00 per share, which vest only upon successful completion of this offering. 9. Income Taxes The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires the determination of deferred tax assets and liabilities based on the differences between the financial statement and income tax bases of assets and liabilities, using enacted tax rates SFAS No.109 requires that the net deferred tax asset be adjusted by a valuation allowance, if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax asset will not be realized. Through August 4,1998, the results of the Company's U.S. operations conducted through its SOFTWORKS subsidiary have been included in the Company's consolidated Federal income tax returns. However, separate provisions for income taxes have been determined for SOFTWORKS' wholly owned foreign subsidiaries that are not eligible to be included in the U.S. Federal income tax returns. As a result of the initial public offering of SOFTWORKS, the Company's ownership of SOFTWORKS was reduced below 80% and SOFTWORKS is no longer eligible to be included in the Company's consolidated Federal income tax returns. It is expected that the Company will utilize a portion of its available net operating loss carryforwards to substantially reduce the taxable income resulting from the gain on partial disposition of SOFTWORKS. 10. Management's plans Prior to 1998, the Company incurred substantial consolidated net losses and used substantial amounts of cash in operating activities, which were primarily financed through private placements of common stock and convertible debentures. During 1998, and 1999, the Company continued to use substantial amounts of cash in its operations, however, cash requirements were primarily financed through Softworks initial public offering and additional sales of Softworks common stock. Management's strategic plan is focused on becoming a preeminent provider of innovative software products and services which are, and continue to be designed and developed to: a- break down barriers between people and data; b- exploit the Company's patented technologies; c- capitalize on the internet marketplace. Additionally, the Company's plan is to further develop its professional services unit through increased staffing and expanded services. The Company is currently focusing on four general product categories: 1. The continued marketing of the d.b.Express Internet Information Server Services; 2. Continue to exploit the d.b.Express technology through the development of new vertical markets; 3. Continue to develop its Professional Services division; and 4. Capitalize on the growth of the Internet and parents' need to monitor their children's activities through the sale of Computer Cop. While management believes that its plan will ultimately enable them to achieve positive cash flows from operations, until such time, additional cash may be necessary to implement such plan. Although there can be no assurances, management has several alternative sources to fund the development of its plan, including additional debt and equity financing (if necessary), or additional sales of its investment in Softworks common stock, which, as a consequence of Softworks initial public offering, became a readily marketable asset. (See Note 8) COMPUTER CONCEPTS CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND LIQUIDITY For the Three Months Ended March 31, 1999 and 1998 Forward-Looking Statements. - -------------------------- All statements other than statements of historical fact included in this Form 10-Q including, without limitation, statements under, "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the company's financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. When used in this Form 10-Q, words such as "anticipate," "believe," "estimate," "expect," "intend" and similar expressions, as they relate to the Company or its management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, the Company's' management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors including but not limited to, fluctuations in future operating results, technological changes or difficulties, management of future growth, expansion of international operations, the risk of errors or failures in the Company's software products, dependence on proprietary technology, competitive factors, risks associated with potential acquisitions, and the ability to recruit personnel, the dependence on key personnel. Such statements reflect the current views of management with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the operations, results of operations, growth strategy and liquidity of the Company. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by this paragraph. Overview - -------- Computer Concepts Corp. and subsidiaries (the "Company") design, develop, market and support information delivery software products, including end-user data access tools for use in personal computer and client/server environments. Through its Softworks subsidiary, the Company develops, markets and supports systems management software products for corporate mainframe data centers. In 1997, the Company created a business unit, "professional services" , which primarily resells computer hardware and for a fee, will assist in the design, construction and installation of technology systems. The Company makes use of its proprietary data access technology, d.b.Express in its d.b.Express Internet Information Server, which is an Internet database providing Internet access to detail telephone records. Data can be visually presented using the Company's patented data visualization technology. Additionally, in June,1998, the Company completed an acquisition of software (and related sales and marketing rights) which is designed to provide non computer literate owners (e.g. parents, guardians, schools, etc) the ability to identify threats as well as objectionable material which may be viewed by users of the computer on the Internet (e.g. children). The Company currently consists of four operating units or product lines: d.b.Express Internet information Server, professional services, Softworks, the fourth being the software technology and related sales and marketing rights, acquired in June, 1998. d.b.Express provides businesses with a simple, fast, low-cost method of finding, organizing, analyzing and using information contained in databases through a visually-based proprietary software tool. SOFTWORKS, provides systems management software products that optimize mainframe system performance, reduce hardware expenditures, and enhance the reliability and availability of the data processing environment. During 1997, the Company commenced operations of the professional services unit. The professional services unit will offer solutions, support and strategies to solve various business crises in such areas as: selection and reselling of hardware, network determination, help desk applications, wiring/cabling, LAN connections, moves/adds/changes, and project management. Additionally, this unit could oversee new installations as well as offering on-site component repair. The newly acquired software is designed to provide non computer literate owners (e.g. parents) the ability to identify threats as well as objectionable material which may be viewed by users of the computer on the internet (e.g. children) . Orders for the initial version of the product began shipping during the fourth quarter, 1998. The method of revenue recognition for each unit, is dependent upon the type and manner of service provided and or the terms of product sales. As described above in note 8, in April,1999, the Company's ownership interest in Softworks was reduced to 49.7%, due to the exercise of Softworks stock options. Accordingly, the financial results of Softworks are not expected to be consolidated with the Company commencing with the quarter ending June 30, 1999. COMPUTER CONCEPTS CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND LIQUIDITY For the Three Months Ended March 31, 1999 and 1998 Results of Operations - --------------------- Total revenue for the quarter ended March 31, 1999, $13,968,000, reflects an increase of $6,344,000, or 83% when compared to $7,624,000 for the same period last year. A significant factor contributing to this growth was software license revenue increasing 79% or $2,970,000. The introduction of new products, services and enhancements as well as an expanding global sales force are major contributors to the growth. Additionally, revenue generated during the three months ended March 31, 1999, from professional services increased $2,397,000 to $3,699,000 when compared to $1,302,000 for the three months ended March 31, 1998. The cost of revenue - software licenses, as a percentage of software license revenue, decreased from 13% of software license revenue for the quarter ended March 31, 1998, to 6% for the quarter ended March 31, 1999. The cost of revenue- software licenses consists primarily of royalties paid to Company developers and to third parties. Cost of revenue - maintenance, for the three month period ended March 31, 1999, as a percent of maintenance revenue increased 2 percentage points to 18% from 16% when compared to the three months ended March 31, 1998. The increase is primarily attributable to additional payroll and related costs. Cost of revenue - professional services, stated as a percent of professional services revenue, for the three months ended March 31, 1999 was 86%, a decrease of 15% as compared to the three months period ended September 30, 1998. The increase in dollars in cost of revenue - professional services is consistent with the increase in its revenue. Research and development costs for the three month period ended March 31, 1999, increased approximately $1,897,000 over the same period last year. This increase was primarily a result of the Company's expanded efforts made toward the development of additional enhancements and upgrades to the d.b.Express technology and of an increase in personnel necessary to support Softworks' research and development efforts. Sales and marketing expenses increased by $4,179,000 to $8,385,000 for the three months ended March 31, 1999 when compared to $4,206,000 incurred for the same period in 1998. The increase was primarily due to increased commission expenses resulting from increased sales, and increased personnel costs due to the expanded sales organization. While sales and marketing costs have risen, the Company believes the increases are necessary in order to maintain, and in some instances gain market presence. The Company anticipates a continued growth in spending to continue for the remainder of 1999, due to additional personnel and related costs associated with the planned growth and pursuit of new market opportunities. General and administrative costs increased $666,000 to $2,915,000 for the three months ended March 31, 1999, when compared to the three months ended March 31, 1998. Major factors contributing to the increase are expanded staffing levels which the Company believes necessary in order to support its growth. However, as a percentage of total revenue, general and administrative costs decreased from 29% for the three months ended March 31, 1998 to 21% for the three month period ended March 31, 1999. Amortization and depreciation increased by $1,117,000 from $567,000 for the three months ended March 31, 1998, to $1,684,000 for the three months ended March 31, 1999. This increase is due to primarily to increases in purchased software and goodwill. Gain on partial disposition of subsidiary - see Note 8. COMPUTER CONCEPTS CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND LIQUIDITY For the Three Months Ended March 31, 1999 and 1998 Financial Condition and Liquidity - --------------------------------- The Company has reported a net loss of $5,351,000 (of which $93,000 net income was attributable to Softworks) for the three months ended March 31, 1999. For the years ended December 31, 1998, 1997, 1996, the Company had consolidated net income of $9,547,000, and consolidated net losses of $12,385,000 and $18,953,000, respectively. As a result of the partial disposition of Softworks, the Company recognized a gain of approximately $2,031,000 during the three month period ended March 31, 1999 (see Note 8). For the three month period ended March 31, 1999, net cash provided by operating activities was $8,346,000 (of which $75,000 was attributable to Softworks), consisting of: a net change in operating assets and liabilities of $11,312,000, (of which $1,044,000 net use was attributable to Softworks' operations), various non-cash charges which aggregated $4,416,000, (of which $1,026,000 was attributable to Softworks), the $2,031,000 gain referred to above, offset by the net loss. Prior to 1998, the Company incurred substantial consolidated net losses and used substantial amounts of cash in operating activities, which were primarily financed through private placements of common stock and convertible debentures. During 1998, and 1999, the Company continued to use substantial amounts of cash in its operations, however, cash requirements were primarily financed through Softworks initial public offering and additional sales of Softworks common stock. At, March 31, 1999, and December 31, 1998, the Company had working capital of $27,301,000 (unaudited) and $27,569,000,respectively. Management's strategic plan is focused on becoming a preeminent provider of innovative software products and services which are, and continue to be designed and developed to: a- break down barriers between people and data; b- exploit the Company's patented technologies; c- capitalize on the internet marketplace. Additionally, the Company's plan is to further develop its professional services unit through increased staffing and expanded services. The Company is currently focusing on four general product categories: 1. The continued marketing of the d.b.Express Internet Information Server Services; 2. Continue to exploit the d.b.Express technology through the development of new vertical markets; 3. Continue to develop its Professional Services division; and 4. Capitalize on the growth of the Internet and parents' need to monitor their children's activities through the sale of Computer Cop. While management believes that its plan will ultimately enable them to achieve positive cash flows from operations, until such time, additional cash may be necessary to implement such plan. Although there can be no assurances, management has several alternative sources to fund the development of its plan, including additional debt and equity financing (if necessary), or additional sales of its investment in Softworks common stock, which, as a consequence of Softworks initial public offering, became a readily marketable asset. At March 31, 1999, the Company owned 8,017,700 shares of Softworks common stock (see Note 8). Net cash used in investing activities of $214,000 was attributable to the acquisition of additional property and equipment of $745,000, the development and / or purchase of software technologies of $222,000, offset by the repayment of Officers Loans of $353,000 and $400,000 received from the sale of a limited license (see Note7). COMPUTER CONCEPTS CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND LIQUIDITY For the Three Months Ended March 31, 1999 and 1998 During November, 1998, the parent Company entered into an Accounts Receivable Purchase Agreement, whereby the Company from time to time may, on a full recourse basis, assign some of their accounts receivable. Upon specific invoice approval, an advance of 85% of the underlying receivable is provided to the Company. The remaining balance (15%), less an administrative fee of approximately 1/2% plus interest at the rate of 1 1/2% per month, is paid to the Company once the customer has paid. This agreement expires in November 1999. At March 31, 1999, there were no receivables assigned nor any amount due the lender. YEAR 2000 ISSUES Background. Some computers, software, and other equipment include programming code in which calendar year data is abbreviated to only two digits. As a result of this design decision, some of these systems could fail to operate or fail to produce correct results if "00" is interpreted to mean 1900, rather than 2000. These problems are widely expected to increase in frequency and severity as the year 2000 approaches, and are commonly referred to as the "Millenium Bug"or "Year 2000 Problem". Assessment. The Year 2000 Problem could affect computers, software, and other equipment used, operated, or maintained by the Company. Accordingly, the Company is reviewing its internal computer programs and systems to ensure that the programs and systems will be Year 2000 compliant. The Company presently believes that its computer systems will be Year 2000 compliant in a timely manner. However, while the estimated cost of these efforts is not expected to be material to the Company's overall financial position, or any year's results of operations, there can be no assurance to this effect. The Softworks subsidiary has obtained certification of its processes to assess Year 2000 Problems from the Information Technology Association of America (ITAA). Because the Company's business involves software development, the Company has not sought further verification or validation by independent third parties of its corrections of Year 2000 Problems. However, the Company's Year 2000 project team is reviewing the Company's project plans and monitoring progress against those plans. Software Sold to Consumers. The Company believes that it has substantially identified and resolved all potential Year 2000 Problems with any of the software products it develops and markets. However, management also believes that it is not possible to determine with complete certainty that all Year 2000 Problems affecting the Company's software products have been identified or corrected due to complexity of these products and the fact that these products interact with other third party vendor products and operate on computer systems which are not under the Company's control. Internal Infrastructure. The Company believes that it has identified substantially all of the major computers, software applications, and related equipment used in connection with its internal operations that must be modified, upgraded, or replaced to minimize the possibility of a material disruption to its business. The Company has commenced the process of modifying, upgrading, and replacing major systems that have been identified as adversely affected, and expects to complete this process before the end of June, 1999. COMPUTER CONCEPTS CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND LIQUIDITY For the Three Months Ended March 31, 1999 and 1998 Systems Other than Information Technology Systems. In addition to computers and related systems, the operation of office and facilities equipment, such as fax machines, photocopiers, telephone switches, security systems, elevators, and other common devices may be affected by the Year 2000 Problem. The Company is currently assessing the potential effect of, and costs of remediating, the Year 2000 Problem on its office and facilities equipment and expects to complete such assessment by the June, 1999. The Company estimates the total cost to the Company of completing any required modifications, upgrades, or replacements of these internal systems will not have a material adverse effect on the Company's business or results of operations. This estimate is being monitored and will be revised as additional information becomes available. Suppliers. The Company has initiated communications, including surveys, with third party suppliers of the major computers, software, and other equipment used, operated, or maintained by the Company to identify and, to the extent possible, to resolve issues involving the Year 2000 Problem. However, the Company has limited or no control over responses to its inquiries and the actions of these third party suppliers. Thus, while the Company does not anticipate any significant Year 2000 Problems with these systems, there can be no assurance that these suppliers will resolve any or all of their Year 2000 Problems with these systems before the occurrence of a material disruption to the business of the Company or any of its customers. Any failure of these third parties to resolve Year 2000 problems with their systems in a timely manner could have a material adverse effect on the Company's business, financial condition, and results of operation. Most Likely Consequences of Year 2000 Problems. The Company expects to identify and resolve all Year 2000 Problems that could materially adversely affect its business operations. However, management believes that it is not possible to determine with complete certainty that all Year 2000 Problems affecting the Company have been identified or corrected. The number of devices that could be affected and the interactions among these devices are simply too numerous. In addition, one cannot accurately predict how many Year 2000 Problem- related failures will occur or the severity, duration, or financial consequences of these perhaps inevitable failures. As a result, management expects that the Company could likely suffer the following A. a significant number of operational inconveniences and inefficiencies for the Company and its customers that may divert management's time and attention and financial and human resources from its ordinary business activities; and B. a lesser number of serious system failures that may require significant efforts by the Company or its customers to prevent or alleviate material business disruptions. C. the inability to determine with any degree of certainty, the changes if any, in buying habits of its current and potential customers due to their concerns over Year 2000 issues. Contingency Plans. The Company is currently developing contingency plans to be implemented as part of its efforts to identify and correct Year 2000 Problems affecting its internal systems. The Company expects to complete its contingency plans by the end of June 1999. Depending on the systems affected, these plans could include accelerated replacement of affected equipment or software, short to medium-term use of backup equipment and software, increased work hours for Company personnel or use of contract personnel to correct on an accelerated schedule any Year 2000 Problems that arise or to provide manual workarounds for information systems, and similar approaches. If the Company is required to implement any of these contingency plans, it could have a material adverse effect on the Company's financial condition and results of operations. COMPUTER CONCEPTS CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND LIQUIDITY For the Three Months Ended March 31, 1999 and 1998 Disclaimer. The discussion of the Company's efforts, and management's expectations, relating to Year 2000 compliance are forward-looking statements. The Company's ability to achieve Year 2000 compliance and the level of incremental costs associated therewith, could be adversely impacted by, among other things, the availability and cost of programming and testing resources, vendors' ability to modify proprietary software, and unanticipated problems identified in the ongoing compliance review. COMPUTER CONCEPTS CORP. AND SUBSIDIARIES PART II - OTHER INFORMATION For the Three Months Ended March 31, 1999 and 1998 Item 1. Legal Proceedings Not applicable. Item 2. Changes in Securities Not applicable. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K Not applicable. COMPUTER CONCEPTS CORP. AND SUBSIDIARIES PART II - OTHER INFORMATION For the Three Months Ended March 31, 1999 and 1998 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMPUTER CONCEPTS CORP. /s/ Daniel DelGiorno, Jr. Daniel DelGiorno Jr. President, C.E.O. Treasurer, May 14, 1999 - -------------------- Director /s/ George Aronson George Aronson Chief Financial Officer May 14, 1999 - -------------- EX-27 2
5 This schedule contains summary financial information extracted from the financial statements for the quarterly period ending March 31, 1999 and is qualified in its entirety by reference to such financial statements. 3-MOS DEC-31-1999 MAR-31-1999 13,272 18 21,983 1,601 419 52,081 4,309 416 78,565 24,780 0 0 0 2 30,500 78,565 13,968 13,968 4,164 21,217 46 0 12 (5,276) 75 (5,351) 0 0 0 (5,351) (0.27) (0.27)
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