-----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, Wa3ArZ6Htj1JuvQfrOjgLnW8oGJRAtZYRPsUPfRurWbnritq/kNZqFUbc/CfBjsV eEfpNlzY3HUTFE2Glli49g== 0000879703-98-000022.txt : 19981120 0000879703-98-000022.hdr.sgml : 19981120 ACCESSION NUMBER: 0000879703-98-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981119 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: 000-20660 FILM NUMBER: 98755588 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 September 30, 1998 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 November 16, 1998 was: 19,129,340. COMPUTER CONCEPTS CORP. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION Page Condensed Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997 3 Condensed Consolidated Statements of Operations and Comprehensive Income For the Three and Nine Months Ended September 30, 1998 and 1997 4 Condensed Consolidated Statements of Cash Flows For the Nine Months ended September 30, 1998 and 1997 5 Notes to Condensed Consolidated Financial Statements 6 - 16 Management's Discussion and Analysis of Financial Condition and Results of Operations 17 - 23 PART II - OTHER INFORMATION Item 1. Legal Proceedings 24 Item 2. Changes in Securities 24 Item 3. Defaults Upon Senior Securities 24 Item 4. Submission of Matters to a Vote of Security Holders 24 Item 5. Other Information 24 Item 6. Exhibits and Reports on Form 8-K 24 Signatures 25 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS as of September 30, 1998 and December 31, 1997 (in thousands, except share data)
September 30, December 31, 1998 1997 ASSETS -------------- ------------ (Unaudited) ----------- CURRENT ASSETS: Cash and cash equivalents $ 15,258 $ 778 Accounts receivable, net of allowance for doubtful accounts of $371 and $252 in 1998 and 1997, respectively 10,702 11,718 Installment receivables 10,154 6,148 Advances to officers 818 1,070 Prepaid expenses and other current assets 5,959 1,987 Deferred tax assets, current 180 - -------- -------- 43,071 21,701 INSTALLMENT RECEIVABLES, due after one year 7,729 6,480 PROPERTY AND EQUIPMENT, net 2,489 2,069 SOFTWARE COSTS, net 6,179 3,730 EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED, net of accumulated amortization of $3,571 and $2,477 in 1998 and 1997, respectively 9,278 4,611 OTHER ASSETS 1,174 707 DEFERRED TAX ASSETS, non-current 365 - -------- -------- $ 70,285 $ 39,298 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 5,901 $ 7,225 Current portion of long- term debt 1,124 1,291 Current income taxes payable 506 - Deferred installment revenue 6,981 5,506 Deferred maintenance revenue 6,435 6,267 -------- -------- 20,947 20,289 DEFERRED INSTALLMENT REVENUE, earned after one year 1,919 825 DEFERRED MAINTENANCE REVENUE, earned after one year 7,662 7,122 LONG-TERM DEBT, net of current portion 1,636 1,395 -------- -------- Total liabilities 32,164 29,631 -------- -------- MINORITY INTEREST 4,872 - -------- -------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common stock, $.0001 par value; 150,000,000 authorized; 19,082,341 shares in 1998 and 12,744,751 shares in 1997 issued and outstanding 2 1 Additional paid-in capital 106,576 91,641 Accumulated deficit (73,013) (81,741) Foreign currency translation (76) (54) Unrealized loss on marketable securities (240) (180) -------- -------- Total shareholders' equity 33,249 9,667 -------- -------- $ 70,285 $ 39,298 ======== ======== See Notes to Condensed Consolidated Financial Statements.
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Unaudited) For the Three and Nine Months Ended September 30, (in thousands, except per share data)
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 ---- ---- ---- ---- REVENUE: Software licenses $ 8,194 $ 4,343 $ 17,983 $ 11,050 Maintenance 2,630 2,578 7,827 7,407 Professional services 1,926 45 6,045 1,474 -------- -------- -------- -------- 12,750 6,966 31,855 19,931 COSTS AND EXPENSES: Cost of revenue - software licenses 434 262 1,132 653 Cost of revenue - maintenance 1,776 1,455 4,886 4,155 Cost of revenue - professional services 1,719 38 5,183 1,927 Research and development 1,498 1,406 3,316 3,121 Sales and marketing 7,216 5,820 19,394 12,928 General and administrative 3,136 2,520 7,965 7,090 Amortization and depreciation 1,478 546 2,718 1,594 Unusual charges - - - 850 -------- -------- -------- -------- 17,257 12,047 44,594 32,318 -------- -------- -------- -------- LOSS FROM OPERATIONS (4,507) (5,081) (12,739) (12,387) OTHER INCOME/(EXPENSE): Gain on partial disposition of subsidiary 15,839 - 22,466 - Gain on sale of net assets of subsidiary - 813 - 813 Interest expense (173) (104) (732) (137) Minority interest in earnings of subsidiary (275) - (275) - Interest charge pertaining to the discount on convertible debentures - (408) - (1,288) -------- -------- -------- -------- INCOME (LOSS) BEFORE INCOME TAXES 10,884 (4,780) 8,720 (12,999) -------- -------- -------- -------- BENEFIT FROM INCOME TAXES 8 - 8 - -------- -------- -------- -------- NET INCOME (LOSS) 10,892 (4,780) 8,728 (12,999) OTHER COMPREHENSIVE INCOME: Foreign currency translation adjustments (15) - (22) - Marketable securities reserve adjustments (60) - (60) - COMPREHENSIVE INCOME (LOSS) $10,817 $ (4,780) $ 8,646 $(12,999) ======== ======== ======== ======== BASIC NET INCOME (LOSS) PER SHARE $ 0.61 $ (0.41) $ 0.56 $ (1.22) ======== ======== ======== ======== DILUTED NET INCOME (LOSS) PER SHARE $ 0.60 $ (0.41) $ 0.53 $ (1.22) ======== ======== ======== ======== BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 17,811 11,745 15,595 10,690 ======== ======== ======== ======== DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 18,008 11,745 16,364 10,690 ======== ======== ======== ======== See Notes to Condensed Consolidated Financial Statements.
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Nine Months Ended September 30, (in thousands)
1998 1997 ---- ---- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Cash flows from operating activities Net income (loss) $ 8,728 $ (12,999) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization: Software costs 1,514 480 Property and equipment 899 679 Excess of cost over fair value of net assets acquired 1,094 552 Other 2 3 Gain on partial disposition of subsidiary (22,466) - Gain on sale of net assets of subsidiary - (813) Provision for doubtful accounts 324 61 Common stock and options issued for services 3,548 3,766 SOFTWORKS common stock exchanged for services 1,612 - Deferred income tax benefit ( 545) - Minority interest in earnings of subsidiary 275 - Non-cash unusual charges - 500 Non-cash interest charge for discount on convertible debt - 1,288 Other 421 - Changes in operating assets and liabilities Accounts receivable (3,314) (4,235) Installment accounts receivable, due after one year (1,249) (3,266) Inventories - 10 Prepaid expenses and other current assets (230) (134) Other assets (467) 81 Accounts payable and accrued expenses (1,047) 2,502 Current income taxes payable 506 - Deferred revenue 3,277 5,653 ------ ------ Net cash used in operating activities (7,118) (5,872) ------ ------ Cash flows from investing activities Capital expenditures (1,319) (1,164) Additional consideration for SOFTWORKS acquisition (678) (486) Proceeds from the sale of net assets of subsidiary (net) - 230 Net proceeds from initial public offering of subsidiary 19,419 - Software development and technology purchases (1,263) (525) Advances to officers, net 252 (179) ------ ------ Net cash provided by (used in) investing activities 16,411 (2,124) ------ ------ Cash flows from financing activities Net proceeds from sales of common stock and options 5,210 2,783 Proceeds from issuance of convertible debt (net of issuance costs) 1,925 3,381 Repayment of convertible debt (2,000) - Net proceeds (repayments) of long-term debt 74 (243) ------ ------ Net cash provided by financing activities 5,209 5,921 ------ ------ Effect of exchange rate changes on cash and cash equivalents (22) - ------ ------ Net increase (decrease) in cash and cash equivalents 14,480 (2,075) Cash and cash equivalents, beginning of period 778 5,675 ------ ------ Cash and cash equivalents, end of period $ 15,258 $ 3,600 ------ ------ See Notes to Condensed Consolidated Financial Statements.
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three and Nine Months Ended September 30, 1998 and 1997 1. INTERIM FINANCIAL INFORMATION The condensed consolidated balance sheet as of September 30, 1998, and the condensed consolidated statements of operations and cash flows for the nine months ended September 30, 1998, and 1997, 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 September 30, 1998, 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, 1997. The accounting policies used in preparing the condensed consolidated financial statements are consistent with those described in the December 31, 1997, consolidated financial statements, except for recently issued accounting pronouncements as described in Notes 6 and 7, and Note 9 which describes the consolidation policy with respect to minority interest. 2. BASIS OF PRESENTATION 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 and systems management software products for corporate mainframe data centers. The Company created a "professional services" division in 1997. For a fee, the Company assists in the design, construction and installation of technology systems, including the reselling of computer hardware. The Company's professional services organization also provides systems management services, including training, implementation of software, and staff augmentation. Additionally, effective June 30,1998, 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) 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) . See Note 8. The Company's principal market is the United States. Overseas revenue is principally generated from European subsidiaries and distributors. While the Company has reported net income of $10,892,000 and $8,728,000 for the three and nine months ended September 30, 1998, respectively, it has incurred consolidated losses from operations of $4,507,000 and $12,999,000, for the same respective periods. Further, the Company has incurred consolidated net losses of $12,385,000, $18,953,000 and $18,365,000 for the years December 31, 1997, 1996, 1995, respectively. As a result of the partial disposition of one of its subsidiaries, SOFTWORKS, Inc., ("SOFTWORKS") the Company recognized a gain of approximately $22,466,000 during the nine month period ended September 30, 1998 (See Note 9). For the nine month period ended September 30, 1998, net cash used in operating activities was $7,118,000, reflecting the above net income adjusted for various non-cash charges which aggregate $9,144,000, the $22,466,000 gain referred to above, and a net change in (cash used by) operating assets and liabilities of $2,524,000. The Company's cash requirements were primarily financed through the partial disposition of SOFTWORKS, the sale of restricted common stock, the exercises of stock options, and proceeds from the issuance of a convertible debenture. COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three and Nine Months Ended September 30, 1998 and 1997 2. BASIS OF PRESENTATION (continued) The Company does not maintain a comprehensive credit facility with any financial institution, although the Company is actively seeking to obtain a secured line of credit. The Company has continued to incur significant expenditures with respect to the development and marketing of its d.b.Express technology without generating any significant revenue. As a result of continued operating losses and the use of significant cash in operations, there is substantial doubt about the Company's ability to continue as a going concern. No adjustments have been made with respect to the consolidated financial statements to record the results of the ultimate outcome of this uncertainty. Management's plans to remain a going concern require additional financing until such time as the Company achieves positive cash flows from operations including the successful exploitation of the Company's d.b.Express technology as well as its newly acquired software product (See Note 8). The Company's current source of operating revenue continues to be primarily derived from SOFTWORKS. The Company has incurred significant losses (both cash and non-cash expenses) as a result of the development and marketing of the d.b.Express technology. Nevertheless, management believes that its proprietary d.b.Express technology has significant potential in several areas and solves certain significant business issues in the telecommunications and Internet related markets. In order to realize the potential of this technology, the Company is vigorously continuing its efforts to enter into sales or license agreements of its d.b.Express technology as well as its world wide web hosting services. Management believes that the successful exploitation of: i.- the d.b.Express technology; ii.- projected growth in professional services; and iii.- the newly acquired software product and related marketing rights; among other factors, will eventually enable the Company to achieve positive cash flows from operations and reduce its dependency on cash flows from financing activities. In January, 1998, the Company consummated the sale of approximately $1,978,000 (net of expenses of approximately $162,000) of restricted common stock. In May, 1998, the Company obtained approximately $1,925,000 (net of fees and commissions of approximately $75,000) from the sale of a convertible debenture. The debenture would have matured on August 28, 1998, and was convertible upon a payment default. In August, 1998, prior to maturity, the Company repaid the debenture plus interest aggregating approximately $2,460,000. Although the Company increased cash by approximately $19,400,000, in August, 1998, through the sale of 3,200,000 shares of its SOFTWORKS subsidiary (See Note 9), until such time as sufficient cash flows are generated from operations, additional financing will be necessary. There can be no assurances that the Company will be able to obtain sufficient financing or will be successful in achieving positive cash flows from operations in order to execute its business plan. COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three and Nine Months Ended September 30, 1998 and 1997 3. SHAREHOLDERS' EQUITY a. Common Stock Split On March 18, 1998, the Board of Directors declared a reverse split at a ratio of 1 for 10 shares with a record date of March 27, 1998 and an effective date of March 30,1998. Par value and authorized shares remain unchanged at $0.0001 and 150,000,000 shares respectively. All references to numbers of shares and per share data have been restated for 1997 so as to reflect the reverse stock split b. Sale of Common Stock In January, 1998, the Company consummated the sale of restricted stock under a private placement to accredited United States investors under Regulation D. Proceeds from this sale totaled $1,978,000, net of commissions and fees of approximately $162,000. A total of 496,232 shares were sold at a price of $4.3125 per share. The closing bid price of the Company's common stock, as stated on the NASDAQ Small Cap Market did not exceed an average of $5.28 for any five consecutive trading days during the thirty days immediately following the effective date of the Registration Statement (effective February 6, 1998, see Note 4). Accordingly, under the terms of this transaction, the Company issued approximately 280,000 additional shares in April, 1998. Additionally, during the nine months ended September 30, 1998, approximately 939,000 options were exercised at prices ranging from $0.10 to $5.00. Proceeds raised from these exercises aggregated approximately $3,232,000. c. Transactions with consultant During October, 1997, the Company issued 114,765 restricted shares of common stock to HPS America, Inc. ("HPS") for settlement of product development costs of approximately $600,000 owed to HPS and its affiliates. These shares had a valuation guarantee based on the Company's stock price during the first 30 days immediately following the effective date of a registration statement (January 6, 1998). The shares were sold at a value less than the guaranteed amount and the Company settled the shortfall with a cash payment of approximately $170,000 in the first quarter of 1998. d. Stock / stock option compensation During April, 1998, the Company issued 1,628,900 stock options to several officers, key employees, including those at SOFTWORKS, and consultants. The options range in exercise price from $4.00 to $6.00 and vest December 31, 1998, but are subject to forfeiture should the Company not achieve profitability of at least $5,000,000 for the year ending December 31, 1998. Additionally, in lieu of cash compensation, the Company issued 895,000 stock options to several consultants for which the Company recorded, during the three month period ended June 30, 1998, a non-cash charge to earnings of approximately $1,469,000. The Company, pursuant to the compensation committee, issued 1,209,148 options to officers and employees of both the Company and its then wholly owned subsidiary, SOFTWORKS, which have an exercise price of $4.00 and are fully vested. All options expire December 31, 2000. COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three and Nine Months Ended September 30, 1998 and 1997 d. Stock / stock option compensation - (continued) During September, 1998, the Company canceled 1,266,667 stock options, 1,067,750 with an exercise price of $4.00 and 27,500 with an exercise price of $6.00 which were included in the April, 1998 grant. The balance of 171,417 options canceled had exercise prices ranging from $3.75 to $15.00. In lieu of the canceled stock options the Company issued 1,034,300 shares of the Company's restricted common stock. 4. COMMITMENTS AND CONTINGENCIES a. Contingent Consideration In connection with the 1993 acquisition of SOFTWORKS, the Company is required to make additional payments to two of SOFTWORKS' former shareholders, based upon certain product revenues for the years 1995 through 1998, up to a maximum of $1,000,000 each, for an aggregate maximum of $2,000,000. Through September 30, 1998, the Company incurred and paid the aggregate maximum liability of $2,000,000 to the non-employee former shareholders, which has been treated as additional consideration in connection with the acquisition, and, accordingly, included in the excess of cost over the fair value of net assets acquired, as these individuals did not continue in the employment of the Company subsequent to the acquisition. b. Registration Statements / Restricted Securities During December, 1997, the Company filed three registration statements: (i) an amended registration statement on Form S-1 (No. 33-97560, effective January 6, 1998) which amended a registration statement that was originally effective on August 9, 1996, (ii) a registration statement on Form S-8 (No. 333-42795, effective upon filing, December 19, 1997), and (iii) a registration statement on Form S-1 (No. 333-42919, effective January 6, 1998). The primary purpose of these registration statements was to register outstanding restricted common stock and shares issuable upon exercise of outstanding options. On January 22, 1998, the Company filed another registration statement on Form S-1 ( No. 333-44683, effective February 6, 1998). The primary purpose of this registration statement was to register shares issued in January, 1998, pursuant to a private placement (See Note 3). On May 15, 1998 the Company filed a registration statement on Form S-8 ( No. 333-52875 ) for 779,148 options and 122,500 shares of the Company's common stock which was effective upon filing. The primary purpose of this registration statement was to register shares issued to certain consultants and non-officer employees. Other than the restricted shares issued for the acquisition referred to in Note 8,plus the balance of the stock options granted in April, 1998 as well as the recently issued shares of the Company's common stock discussed in Note 3, substantially all of the Company's outstanding common stock (including shares issuable upon exercise of outstanding options) have been either registered or are qualified for sale in the market pursuant to Rule 144 of the Securities Act of 1933, as amended. COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three and Nine Months Ended September 30, 1998 and 1997 4. COMMITMENTS AND CONTINGENCIES (Continued) c. Legal Matters In July, 1995, the Company and certain officers received notification that they have been named as defendants in a class action claim in regard to announcements and statements regarding the Company's business and products. Although the Company denied any wrongdoing, in an effort to avoid further expense and resolve the uncertainty of litigation, in July, 1997, the Company tentatively agreed to a Stipulation and Agreement of Settlement ("Stipulation Agreement") of this class action. In February, 1998, the Court entered a final order approving the terms of the Stipulation Agreement. The Company agreed to deliver $500,000 of its common stock, and in April, 1998, the Company delivered 119,850 shares. Further, the Company and its insurance carrier each paid $350,000, totaling $700,000. Based upon the Stipulation Agreement, the Company recorded an $850,000 Unusual Charge to earnings in the quarter ended June 30, 1997. 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 was substantially completed in January, 1998, and, unless a summary judgment is granted to one side or the other, this case is expected to go to trial later in 1998. 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. In 1995, Fletcher Capital Corp. filed a claim against the Company, its president and several unrelated parties, regarding a claim for an unspecified amount of commissions in the form of options from the Company and cash from the other parties. This matter was settled in February, 1997, with the issuance of 36,000 options exercisable at $3.50 per share, $126,000 paid with 25,200 shares of common stock (issued January, 1998) and cash payments totaling $31,000. COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three and Nine Months Ended September 30, 1998 and 1997 4. COMMITMENTS AND CONTINGENCIES (Continued) d. Software distribution agreement In July, 1997, the Company acquired from Cognizant Technology Solutions Corporation ("CTS") rights to technology ( the "Technology") that compliment the Company's existing Year 2000 product solutions. Pursuant to the software distribution agreement, in exchange for the Technology rights, the Company is required to pay CTS a royalty on sales of the Technology at defined rates subject to minimum annual royalties of; $100,000, $900,000, $1,400,000 and $400,000 for the years 1997 through 2000. An asset, equal to the present value of the minimum royalties, of $2,160,000 has been recorded as purchased and acquired software technologies for resale and is being amortized over the five year term of the agreement. The payment obligation is recorded as long term debt. e. Employment agreements The Company recently entered into six new employment agreements with key SOFTWORKS employees. The agreements terminate at various times through December 31, 2002. Five of the agreements automatically renew for one year periods unless SOFTWORKS or the employee notify the other party ninety days prior to the end of any renewal term. The last agreement is "at-will". One agreement provides for the issuance of a $500,000 full recourse loan, interest bearing at the rate of approximately 6.0% per annum, unsecured, and payable on December 1, 2000, subject to certain acceleration provisions. The six employment agreements provide for an aggregate annual base compensation of $809,000. All are eligible for incentive bonuses subject to SOFTWORKS achieving various net income levels. 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. 6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Statement of Position 97-2, "Software Revenue Recognition", ("SOP 97-2"), which superceded Statement of Position 91-1 "Software Revenue Recognition" was issued to provide further guidance on applying generally accepted accounting principles to software transactions, and became effective for transactions entered into beginning in 1998. In March, 1998, Statement of Position 98-4 ("SOP 98-4"), amended a portion of SOP 97-2 The adoption of SOP 97-2 and the amendment contained in SOP 98-4 did not require any changes to the Company's method for the accounting of software transactions and therefore had no impact on the Company's financial statements. COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three and Nine Months Ended September 30, 1998 and 1997 6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued) GEOGRAPHIC INFORMATION The Company is primarily engaged in a single line of business. The geographic data is summarized between the United States and international. International consists of operations through the Company's international subsidiaries in the United Kingdom, France, Brazil, Australia, Spain, Germany, and Italy, as well as sales generated through international distributors primarily in Europe and Asia. Geographic data is presented in accordance with Statement of Financial Accounting Standards No. 131, " Disclosures About Segments of an Enterprise and Related Information" for all periods presented as follows (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 ---- ---- ---- ---- Revenue: United States $ 10,330 $ 5,462 $ 26,097 $ 16,611 International 2,420 1,195 5,758 3,320 -------- -------- -------- -------- Total $ 12,750 $ 6,657 $ 31,855 $ 19,931 ======== ======== ======== ======== Operating Income: United States $ (4,280) $(4,912) $(11,795) $(11,834) International (227) (169) (944) (553) -------- -------- -------- -------- Total $ (4,507) $(5,081) $(12,739) $(12,387) ======== ======== ======== ======== Sept. 30, 1998 Dec. 31, 1997 -------------- ------------- Identifiable Assets: United States $ 63,768 $36,630 International 6,517 2,668 -------- ------- Total $ 70,285 $39,298 ======== =======
7. REPORTING OF COMPREHENSIVE INCOME In January, 1998, the Company began accounting for comprehensive income in accordance with Statement of Financial Accounting Standards No. 130 - "Reporting Comprehensive Income." Accordingly, the Company displayed other items of comprehensive income in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income. COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three and Nine Months Ended September 30, 1998 and 1997 8. ASSET ACQUISITION 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 ("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 is designed to inform non computer literate parents, guardians and alike, exactly 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 in November, 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 value 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 (See Note 9). 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". 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 a useful life of 30 months. The prepaid expenses will be expensed as 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. 9. 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. As part of the consideration for the assets acquired from ITSV (see Note 8), on June 30, 1998, the Company exchanged 1,000,000 restricted shares of SOFTWORKS common stock. Also on June 30, 1998, the Company exchanged 100,000 restricted shares of SOFTWORKS common stock to a member of its Internet Strategy Committee, (who now also serves as Chairman of the Board of SOFTWORKS) for services rendered through June 30, 1998, resulting in a charge to operations of $525,000. 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. As a result of these transactions, the Company's ownership interest in SOFTWORKS was reduced to 92.2% on June 30, 1998, and subsequently further reduced to 71.9% on August 4, 1998. Additionally, in the third quarter of 1998, options to acquire 3,637,500 restricted shares of SOFTWORKS common stock have been granted to the Company and SOFTWORKS officers, key employees and consultants, of which 806,500 options, which vested upon the public offering date, are currently exercisable ( into restricted shares of COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three and Nine Months Ended September 30, 1998 and 1997 9. GAIN ON PARTIAL DISPOSITION OF SUBSIDIARY - (Continued) SOFTWORKS' common stock). The balance vest, ranging from December 31, 1998, through December 31, 2002, and could vest earlier, should SOFTWORKS achieve certain financial thresholds. All options are exercisable at the initial public offering price of $7.00 per share. During the quarter ended June 30th, 1998, the Company recognized a $6,627,000 gain on the sale of the 1,100,000 shares of SOFTWORKS' common stock representing the difference between the fair value of the SOFTWORKS common stock exchanged, and the related adjusted carrying value of the Company's investment in SOFTWORKS. In accordance with Staff Accounting Bulletins 51 and 84, in the third quarter of 1998, the Company recognized a net gain of $15,271,000 to reflect the reduction of its ownership interest in SOFTWORKS from 92.2% to 71.9%. Additionally, in the third quarter of 1998, the Company exchanged 535,000 restricted shares of SOFTWORKS'common stock to various consultants for services rendered; as a result of such exchange, the Company recognized a gain of $568,000 (and a non-cash charge to operations of $1,087,000). In conjunction with the SOFTWORKS public offering, the remaining shares of SOFTWORKS common stock owned by the Company have been placed in a voting trust. The voting power of the trust is held by three trustees who are members of the Board of Directors of SOFTWORKS. One trustee is the C.E.O. and President of the Company. The remaining two trustees are SOFTWORKS directors who do not have a significant financial interest in the Company, one of which is the Chairman of SOFTWORKS. The agreement provides that upon a change in either of the remaining two trustees, the non-Company stockholders have control of the selection of the successor director/trustee. This agreement remains in effect as long as the Company continues to own at least 25% of SOFTWORKS. For financial reporting purposes, the assets, liabilities and operations of SOFTWORKS will continue to be included in the Company's consolidated financial statements. As of September 30, 1998, the Company owns 68.5% of SOFTWORKS. The public's interest in SOFTWORKS is reflected in the consolidated balance sheet and results of operations as minority interest. COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three and Nine Months Ended September 30, 1998 and 1997 10.EARNINGS PER SHARE For 1997, outstanding stock options, warrants and other potential stock issuances have not been considered in the computation of diluted earnings per share amounts since the effect of their inclusion would be antidilutive. For 1998, the Company's dilutive instruments are "in the money" stock options with various exercise dates and prices as well as certain contingent stock issuances (which were issued prior to June 30, 1998). The Company uses the treasury stock method to calculate the effect that the conversion of the stock options would have on earnings per share. The following table sets forth the computation of basic and diluted earnings per share.
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 ---- ---- ---- ---- (Thousands except per share data) Numerator: Net Income (Loss) $10,892 $(4,780) $8,728 $(12,999) ======= ======= ====== ======== Denominator: wtd avg Shares Outstanding (Denominator for Basic EPS) 17,811 11,745 15,595 10,690 Effect of Dilutive Securities/ Stock Options 197 N/A 483 N/A Contingent Stock issuances 0 N/A 286 N/A ------- ------- ------- ------- Denominator for Diluted EPS 18,008 11,745 16,085 10,690 ======= ======= ====== ======== Basic Net Income (Loss) EPS $0.61 $(0.41) $0.56 $(1.22) Diluted Net Income (Loss) EPS $0.60 $(0.41) $0.53 $(1.22) 11. BENEFIT FROM INCOME TAXES The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). SFAS No. 109 requires the determination of deferred tax assets nd liabilities based on the differences between the financial statement and income tax bases of assets and liabilities, using enacted tax rates. SFAS No. 109 requires that the net deferred tax asset is 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 (Note 9), the Company's ownership of SOFTWORKS is reduced below 80% and SOFTWORKS is no longer eligible to be included in the Company's consolidated Federal income tax returns. Accordingly, since the future realization of the SOFTWORKS' component of the deferred tax asset ($902,000 as of August 4, 1998) is no longer uncertain, the related valuation allowance has been eliminated. 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. COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three and Nine Months Ended September 30, 1998 and 1997 BUSINESS DESCRIPTION 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 and systems management software products for corporate mainframe data centers. The Company created a "professional services" division in 1997. For a fee, the Company assists in the design, construction and installation of building technology systems, including the reselling of computer hardware. The Company's professional services organization also provides systems management services, including training, implementation of software, and staff augmentation. Additionally, effective June 30,1998, 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) 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) . See Note 8. The Company's principal market is the United States. Overseas revenue is principally generated from European subsidiaries and distributors. The Company currently consists of three operating units or product lines: d.b.Express , SOFTWORKS, and professional services unit. With the consummation of the acquisition of the software technology and related sales and marketing rights effective June 30, 1998, the Company has grown to four units. 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 Company employs an individual, formerly with I.B.M., having expertise in this field and intends to capitalize on his experience and competency in order to create a unique infrastructure to support an extensive selection of services and vendors. The professional services unit will offer solutions, support and strategies to solve various business crises in such areas as: selection of hardware, network determination, help desk applications, wiring/cabling, LAN connections, moves/adds/changes, and project management. It can also provide training, implementation of software, and staff augmentation. Additionally, this unit will 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 in November, 1998. The method of revenue recognition for each unit, will be dependent upon the type and manner of service provided and or the terms of product sales. COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three and Nine Months Ended September 30, 1998 and 1997 RESULTS OF OPERATIONS Three and Nine Months Ended September 30, 1998 Compared With September 30, 1997 Total revenue for the quarter ended September 30, 1998, $12,750,000, reflects an increase of $5,784,000, or 83% when compared to $6,966,000 for the same period last year. A significant factor contributing to this growth was software license revenue increasing 89% or $3,851,000. 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 September 30, 1998, from professional services increased $1,881,000 to $1,926,000 when compared to $45,000 for the three months ended September 30, 1997. While there can be no assurances, the Company believes that this revenue growth should continue due in part to planned product enhancements, new released product line, continued global expansion, and an increased sales force. When comparing the nine months ended September 30, 1998, to 1997, revenue increased $11,924,000, or 60%, from $19,931,000 to $31,855,000. The cost of revenue - software licenses, as a percentage of software license revenue, decreased from 6% of software license revenue for the quarter ended September 30, 1997, to 5% for the quarter ended September 30, 1998. 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 September 30, 1998, as a percent of maintenance revenue increased 11 percentage points to 67% from 56% when compared to the three months ended September 30, 1997. 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 September 30, 1998 was 89% an increase of 4% as compared to the three months period ended September 30, 1997. 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 September 30, 1998, increased approximately $92,000 over the same period last year, and increased $195,000 to $3,316,000 for the nine months ended September 30, 1998, from $3,121,000 for the prior year nine month period. Sales and marketing expenses increased by $1,396,000 to $7,216,000 for the three months ended September 30, 1998 when compared to $5,820,000 incurred for the same period in 1997. The increase was primarily due to increased commission expenses resulting from increased sales, and increased personnel costs due to the expanded sales organization. However, as a percentage of total revenue, sales and marketing costs decreased from 84% for the three months ended September 30, 1997 to 56% for the three month period ended September 30, 1998. For the nine month period ended September 30, 1998, sales and marketing expenses increased $6,466,000 when compared to the nine months ended September 30, 1997, primarily due to the factors mentioned above. As with the three month period ended September 30, 1998, the nine month period ended September 30, 1998, sales and marketing, when viewed as a percentage of total revenue, decreased from 65% to 61%. 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 1998, due to additional personnel and related costs associated with the planned growth and pursuit of new market opportunities. RESULTS OF OPERATIONS (Continued) Three and Nine Months Ended September 30, 1998 Compared With September 30, 1997 (Continued) General and administrative costs increased $616,000 to $3,136,000 for the three months ended September 30, 1998, when compared to the three months ended September 30, 1997, of $2,520,000,and $875,000 for the nine months ended September 30,1998, when compared to the nine month period ended September 30, 1997 . Major factors contributing to the increase are expanded staffing levels which the Company believes necessary in order to support its growth plus additional costs associated with the initial public offering of SOFTWORKS in August, 1998. Amortization and depreciation increased by $932,000 from $546,000 for the three months ended September 30, 1997, to $1,478,000 for the three months ended September 30, 1998. This increase is due to primarily to increases in purchased software and goodwill (See Notes 4 and 8). Gain on partial disposition of subsidiary - see Note 9. Interest expenses incurred during the quarter ended September 30, 1998, of $173,000 consist primarily of charges relating to the convertible debenture, which was repaid in August, 1998, and imputed interest charges resulting from the calculation of the present value of minimum annual royalties for purchased technologies for resale. (See Notes 2 and 4). Benefit from income taxes - See Note 11 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three and Nine Months Ended September 30, 1998 and 1997 FINANCIAL CONDITION AND LIQUIDITY While the Company has reported net income of $10,892,000 and $8,728,000 for the three and nine months ended September 30, 1998, respectively, it has incurred consolidated losses from operations of $4,507,000 and $12,739,000, for the same respective periods. Further, the Company has incurred consolidated net losses of $12,385,000, $18,953,000 and $18,365,000 for the years December 31, 1997, 1996, 1995, respectively. As a result of the partial disposition of one of its subsidiaries, SOFTWORKS, Inc., ("SOFTWORKS") the Company recognized a gain of approximately $22,466,000 during the nine month period ended September 30, 1998 (See Note 9). For the nine month period ended September 30, 1998, net cash used in operating activities was $7,118,000, reflecting the above net income offset by various non-cash items which aggregate $9,144,000, the $22,466,000 gain referred to above, and a net change in (cash provided by) operating assets and liabilities of $2,524,000. The Company's cash requirements were primarily financed through the partial disposition of SOFTWORKS, the sale of restricted common stock, the exercises of stock options, and proceeds from the issuance of a convertible debenture. The Company does not maintain a comprehensive credit facility with any financial institution, although the Company is actively seeking to obtain a secured line of credit. The Company has continued to incur significant expenditures with respect to the development and marketing of its d.b.Express technology without generating any significant revenue. As a result of continued operating losses and the use of significant cash in operations, there is substantial doubt about the Company's ability to continue as a going concern. No adjustments have been made with respect to the consolidated financial statements to record the results of the ultimate outcome of this uncertainty. Management's plans to remain a going concern require additional financing until such time as the Company achieves positive cash flows from operations including the successful exploitation of the Company's d.b.Express technology as well as its newly acquired software product (See Note 8). The Company's current source of operating revenue continues to be primarily derived from SOFTWORKS. The Company has incurred significant losses (both cash and non-cash expenses) as a result of the development and marketing of the d.b.Express technology. Nevertheless, management believes that its proprietary d.b.Express technology has significant potential in several areas and solves certain significant business issues in the telecommunications and Internet related markets. In order to realize the potential of this technology, the Company is vigorously continuing its efforts to enter into sales or license agreements of its d.b.Express technology as well as its world wide web hosting services. Management believes that the successful exploitation of: i.- the d.b.Express technology; ii.- projected growth in professional services; and iii.- the newly acquired software product and related marketing rights; among other factors, will eventually enable the Company to achieve positive cash flows from operations and reduce its dependency on cash flows from financing activities. In January, 1998, the Company consummated the sale of approximately $1,978,000 (net of expenses of approximately $162,000) of restricted common stock. In May, 1998, the Company obtained approximately $1,925,000 (net of fees and commissions of approximately $75,000) from the sale of a convertible debenture. The debenture would have matured on August 28, 1998. In August, 1998, prior to maturity, the Company repaid the debenture plus interest aggregating approximately $2,460,000. Although the Company increased cash by approximately $20,000,000 in August, 1998, through the sale of 3,200,000 shares of its COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three and Nine Months Ended September 30, 1998 and 1997 FINANCIAL CONDITION AND LIQUIDITY Continued SOFTWORKS subsidiary (See Note 9), until such time as sufficient cash flows are generated from operations, additional financing will be necessary. There can be no assurances that the Company will be able to obtain sufficient financing or will be successful in achieving positive cash flows from operations in order to execute its business plan. 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 are 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. SOFTWORKS 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 1998. COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three and Nine Months Ended September 30, 1998 and 1997 YEAR 2000 ISSUES -Continued 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. 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 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 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 consequences: 1. a significant number of operational inconveniences and inefficiencies for the Company and its clients that may divert management's time and attention and financial and human resources from its ordinary business activities; and 2. a lesser number of serious system failures that may require significant efforts by the Company or its clients to prevent or alleviate material business disruptions. 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 1998. 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 work-arounds 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 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three and Nine Months Ended September 30, 1998 and 1997 YEAR 2000 ISSUES -Continued Based on the activities described above, the Company does not believe that the Year 2000 Problem will have a material adverse effect on the Company's business or results of operations. 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. Safe Harbor Statement - --------------------- Certain information contained in this quarterly report, particularly information regarding future economic performance and finances, plans and objectives of management, is forward-looking. In some cases, information regarding certain important factors that could cause actual results to differ materially from any such forward-looking statement appear together with such statement. The following factors, in addition to other possible factors not listed, could affect the Company's actual results and cause such results to differ materially from those expressed in forward- looking statements. These factors include competition within the computer software industry, which remains extremely intense, both domestically and internationally, with many competitors pursuing price discounting; changes in economic conditions; the development of new technologies and/or changes in operating systems which could obsolete or diminish the value of existing technologies and products; personnel related costs; legal claims; risks inherent to rolling out new software and new software technologies; the inability to maintain of adequate financial resources to carry out the Company's current business plan in regard to the d.b.Express technology; the potential cash and non-cash costs of raising additional capital or the possible failure to raise necessary capital; changes in accounting principles applicable to the Company's activities and other factors set forth in the Company's filings with the Securities and Exchange Commission. COMPUTER CONCEPTS CORP. AND SUBSIDIARIES PART II - OTHER INFORMATION For the Three and Nine Months Ended September 30, 1998 and 1997 Item 1. Legal Proceedings See Note 4 to the condensed consolidated financial statements. 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 Report on Form 8-K dated June 15, 1998 covering Item 2 - Acquisition of Assets and Item 7 - Financial Statements and Exhibits. COMPUTER CONCEPTS CORP. AND SUBSIDIARIES PART II - OTHER INFORMATION For the Three and Nine Months Ended September 30, 1998 and 1997 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, November 19, 1998 Director /s/ George Aronson George Aronson Chief Financial Officer November 19, 1998
EX-27 2
5 This schedule contains summary financial information extracted from the financial statements for the quarterly period ending September 30, 1998 and is qualified in its entirety by reference to such financial statements. 9-MOS DEC-31-1998 SEP-30-1998 15,258 0 21,227 371 0 43,071 2,489 0 70,285 20,947 0 0 0 2 33,247 70,285 31,855 31,855 11,201 44,594 275 0 732 8,720 8 8,728 0 0 0 8,728 0.56 0.53
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