-----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, O3GRUg0aDzNb172GFx4B12lHSMebFetCajEtEk81glrY39/tjdFP9UUnxGIQ2SLt I42FyhpW7/+PuC/L7JpNWA== 0000932214-00-000063.txt : 20000314 0000932214-00-000063.hdr.sgml : 20000314 ACCESSION NUMBER: 0000932214-00-000063 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000313 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-K SEC ACT: SEC FILE NUMBER: 000-20660 FILM NUMBER: 568104 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-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 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 (631) 244-1500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Title of each class Name of each exchange on which registered -------------------- ----------------------------------------- Common Stock, par value $.0001 NASDAQ Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 8, 2000, there were 20,529,245 shares of the registrant's Common Stock outstanding. The aggregate market value of the Common Stock held by non-affiliates was approximately $33,507,000 based on the closing sale price of the Common Stock as quoted on the NASDAQ on such date. Computer Concepts Corp. and Subsidiaries Form 10-K for the Year Ended December 31, 1999 Table of Contents PART I PAGE ---- ITEM 1 Business 3 ITEM 2 Properties 11 ITEM 3 Legal Proceedings 11 ITEM 4 Submission of Matters to a Vote of Security Holders 12 PART II ITEM 5 Market for Registrant's Common Equity and Related Stockholder Matters 13 ITEM 6 Selected Consolidated Financial Data 14 ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 15 ITEM 7a Quantitative and Qualitative Disclosures About Market Risk 22 ITEM 8 Financial Statement and Supplementary Data 22 ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 22 PART III ITEM 10 Directors and Executive Officers of the Registrant 23 ITEM 11 Executive Compensation 25 ITEM 12 Security Ownership of Certain Beneficial Owners and Management 26 ITEM 13 Certain Relationships and Related Transactions 28 PART IV ITEM 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 30 SIGNATURE 33 2 PART I Item 1. BUSINESS - ------------------ INTRODUCTION The Company was organized under the name Unique Ventures, Inc. as a "blind pool" public company, under the laws of the State of Delaware on August 27, 1987, and changed its name to Computer Concepts Corp. in 1989. Computer Concepts Corp. and its subsidiaries (hereinafter referred to as "Computer Concepts" or the "Company"), operate in the computer software industry segment and design, develop, market and support information delivery software products, including end-user data access tools for personal computers and client/server environments. The most significant portion of the Company's operations had historically been conducted through one of its subsidiaries, Softworks, Inc. ("Softworks"). Through Softworks, the Company developed, marketed and supported systems management software products for corporate mainframe data centers. Softworks was wholly owned by the Company through June 29, 1998, and majority owned through March 31, 1999. Through a series of transactions that included an initial public offering of Softworks in August, 1998, various exchanges Softworks common stock owned by the Company to consultants and employees for services rendered, a private placement of Softworks common stock owned by the Company in December, 1998, and a second public offering in June, 1999, the Company's ownership of Softworks was reduced from 100% to 35% as of December 31, 1999. Accordingly, Softworks is accounted for as a consolidated subsidiary through March 31, 1999, and commencing April 1, 1999, Softworks' results are accounted for using the equity method of accounting. On January 27, 2000, the Company sold its entire 35% interest to EMC Corporation for approximately $61 million in cash, before expenses. During the years 1989 through 1992, the Company was primarily engaged in research and development activities regarding its primary product, "d.b.Express TM". During 1993, the Company began to expand its product, sales, marketing and administrative activities, and began the transition from a research and development-oriented company into a market-driven software products business. In 1995, the Company decided to focus on the parent Company's d.b.Express software technology and Softworks, Inc. As such, in 1996, it sold its "Superbase" technology assets and in 1997 sold the net assets of its MapLinx, Inc. subsidiary. During 1997, a new business unit commenced operations, which is designed to provide a wide array of information technology, support and services. In 1998, the Company acquired software technology rights as well as certain marketing rights for a system that monitors Internet usage. See Note 3 of Notes to Consolidated Financial Statements for the year ended December 31, 1999, for further explanations of all acquisitions and dispositions. Effective September, 1993, the Company acquired Softworks, a private Maryland company founded in 1977, and an acknowledged leading provider of critical systems management solutions. In August, 1998, Softworks completed a public offering, after which the Company's ownership interest was reduced to approximately 72%. Additional transactions, as described in Notes 3 and 18 to the Consolidated Financial Statements, further reduced the Company's ownership interest in Softworks. Pursuant to a tender offer dated December 21, 1999, the Company sold its remaining 35% interest in Softworks (a total of 6,145,767 shares) to EMC Corporation and its subsidiary ("EMC") for $10.00 per share. The transaction, which was completed on January 27, 2000, provided aggregate cash proceeds of $61,458,000 (less $10,000,000 placed in escrow) and resulted in a pre-tax gain, net of expenses, of $47,607,000 recorded in the first quarter of 2000. During December, 1994, the Company acquired MapLinx, Inc. ("MapLinx"), a provider of PC based software that allows for geographical presentation of database information. In conjunction with the Company's decision to focus its activities on the exploitation of the d.b.Express technology and its Softworks subsidiary, the Company sold the net assets of MapLinx in 1997. 3 In June, 1998, the Company acquired certain software and related sales and marketing rights. The acquired software technology, marketed under the trade name Bo Dietl's One Tough ComputerCOP ("ComputerCOP"), is designed to inform non computer literate parents, guardians and alike, what materials, or possible threats to the safety and well being of their children or others has been accessed over the Internet, such as objectionable web sites, text, pictures, screens, electronic mail, etc. The Agreement also included 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. Mr. Dietl has been recognized as one of the most decorated police officers of the city of New York. In February, 2000, the Company sold a newly created wholly owned subsidiary with assets consisting primarily of $20.5 million cash, the above referenced technology and remaining marketing rights, inventory and related receivables for 1,775,000 shares of NetWolves Corporation (OTCBB: "WOLV"). The transaction was valued at approximately $35.5 million. In January, 2000, the Company elected to significantly curtail operations of its business unit, marketed as professional services, which primarily resold computer hardware and assisted in the design, and installation of technology systems. Further, the Company is in the process of developing a unique media station display, which will combine Internet strategy and e-commerce with multi-media forms of delivery, presentation and interaction with end-users. This Internet based communications/advertising network is being designed to create a means by which businesses can promote specific brand/product/service awareness. The Company intends to market this technology in association with owners and/or managers of high traffic venue areas (i.e., malls, airports, etc.) to local, regional and national businesses. This business concept will require additional capital in order to complete its development and to support its marketing plan. In order to achieve its goal, the Company intends to partner or co-venture with various potential investors and strategic partners. A primary part of the Company's present strategic plan is to focused on becoming a preeminent provider of innovative software products which break down barriers between people and data thereby allowing corporate users to more easily access enterprise-wide data. In addition, this plan includes, among other factors, the exploitation of the Company's proprietary technology, d.b.Express, primarily through the development of several vertical markets. Telecommunications is presently being targeted as one of the first vertical markets. PRODUCTS -------- d.b.Express ----------- d.b.Express provides business with a simple, fast, low-cost method of finding, organizing, analyzing and using information contained in databases over the Internet. The software employs a unique graphical user interface ("GUI") that enables users to directly access and use information contained in relational and pseudo-relational databases created by many database management systems ("DBMS") on the market. In addition, this proprietary software tool has the ability to directly utilize information obtained from spreadsheets and data in the form of American Standard Code for Information Interchange ("ASCII") files. The technology enables users to analyze millions of records over the Internet without the need to first download the data being analyzed. Telecommunications industry specific applications of the technology have been developed and are being marketed. d.b.Express does not replace DBMS programs. Instead, it improves the accessibility of databases created by DBMS by eliminating the need to write queries in computer code and facilitates data searches through the use of graphical query tools. Prior to the availability of d.b.Express, comparable analytical and presentation capabilities were possible only through costly executive information systems ("EIS") or customized programs developed and supported by highly skilled MIS professionals. The need for MIS professionals and programming effectively raises the cost of access to information in terms of time and money. Ultimately, these barriers result in less timely and lower quality business decision-making. 4 There are some DBMS access tools on the market that claim to eliminate the need to use computer code and provide graphical query capability. All of these programs, however, only simplify the writing of computer code, usually through industry-standard structured query language ("SQL"), by having users develop logic in a semi-procedural facility. While reducing some problems associated with the writing of computer code, such as "typographical errors", they do not eliminate the need for knowledge of computer code or database structure and organization, and require significant training of the user. d.b.Express enables the access and productive use of complex databases without specific computer knowledge. d.b.Express enables a broader population within an organization to visually and interactively mine their data without the need or support from internal or external MIS staff. d.b.Express approaches database accessibility uniquely, enabling people at all levels of an organization to analyze the data without any knowledge of programming. d.b.Express achieves this in two steps. First, d.b.Express, utilizing proprietary algorithms, accesses and automatically summarizes all of the records in the required databases into its own format. Second, the software presents users with an intuitive dual-dimensional picture of the data that the user can easily customize to his need with a simple point-and-click interface. In addition to a vast simplification of database access and analysis, d.b.Express performs these tasks faster than any DBMS because the software does not reread the database for each task; it only reads the summaries it has created. Windows(R) Version 1.0 of d.b.Express was introduced in December 1993 and the DOS version was introduced in late 1992. Windows (R) Version 2.0, with significantly enhanced functionality based on user feedback, was introduced in the second quarter of 1994 and Windows 95(R) Version was introduced in the third quarter of 1995. Windows NT, Internet Server and JAVA Applet versions were introduced in 1996 and 1997. Version 6.0 was released during the fourth quarter of 1999. In addition to increasing d.bExpress' ability to interactively access, via the Internet, millions of records in a matter of seconds, additional features include ad-hoc reporting capabilities and integrated mapping capability. d.b.Express Internet Information Server --------------------------------------- The d.b.Express Internet Information Server is an Internet database information service. This service makes use of its proprietary data access technology by providing Internet access to detail telephone records for customers both in the U.S. and Great Britain. With this service, customers can access via the Internet, numerous detail telephone call records. Data can be visually presented using the Company's patented data visualization technology. The technology provides users with a "Filescape TM" (an all encompassing picture of data similar to a landscape picture) from which users are able to perform point-and-click, ad-hoc queries in order to discover anomalies, trends and misuse of their data, and, if desired, infinite drill down to individual detail records. This is accomplished within seconds, rather than hours, which the Company believes could create cost savings and operational efficiencies. Customers are able to review and analyze their telephone usage at the detail level, and are able to review and, if desired, print standard pre-generated reports, ad-hoc reports based on predefined templates, or define and review/print their own ad-hoc reports, all without taking delivery of the large volume of data required. In order to meet the archival requirements of customers, the Company produces CDs of each month's billing details. In order to provide this service, the Company has put into place a comprehensive data center. The service is available 24 hours a day, 7 days a week, 365 days a year. The advantages inherent to d.b.Express include the following: ------------------------------------------------------------ Ease of Use Using the analogy of an automatic camera, d.b.Express simplifies data access and analysis by providing a sophisticated, simple-to-use vehicle to take pictures of complex data. By combining an intuitive point-and-click interface with a powerful integration and retrieval engine in a low-cost product, d.b.Express breaks down the barriers between people and data. After d.b.Express has read one or more databases, the data is presented to the user in a "filescape" using a common histogram metaphor. The user merely points to a bar in the chart and clicks to view data from the highest summary level to the lowest level of detail. d.b.Express provides powerful desktop functionality, via the Internet, that allows the exploration of data patterns, trends, and exceptions. Data searches, queries and analyses can be converted to sophisticated, simple to use presentations providing integrated business graphics and report writing capabilities. 5 Interfaces With Leading Databases and Other Tools d.b.Express provides direct access to leading databases created by DBMS vendors, including CA-Clipper, Microsoft Access, Foxbase and FoxPro, Lotus Approach, Borland dBase and Paradox, Oracle, Informix, Sybase, Ingres, SQL Server, IBM DB2 and DB2/2, Netware SQL, Gupta SQL Base, Progress, XDB, SQL/DS, Teradata and Btrieve and any other database with ODBC support. These DBMS's represent more than 85% of the installed relational database management systems ("RDBMS") worldwide. In addition, d.b.Express is able to access data contained in spreadsheets and read data in ASCII format which further broadens the software's capability with other DBMS products. d.b.Express results can be exported to popular spreadsheets, report writers, graphics packages and word processors including Lotus 1-2-3, Excel, Quattro Pro, ReportSmith, Crystal Reports, Harvard Graphics, Power Point, WordPerfect and Word. Ability To Integrate Data From Databases Created By Multiple Vendors When d.b.Express reads a database, it creates its own summaries of information through its proprietary process. Information contained in databases is formatted into d.b.Express' proprietary format. This permits users to access and compare information contained in enterprise-wide databases created by different vendors simultaneously in the d.b.Express' user-friendly environment. Works in Common Operating Environments d.b.Express operates in virtually all file server and peer-to-peer networking environments providing data to Microsoft Windows (R) and Windows NT workstations. d.b.Express Internet Information Server provides secure visual data mining functionality through Internet browsers such as Microsoft Internet Explorer and Netscape Communicator. High Processing Speed Once a database source has been processed, d.b.Express employs proprietary matrix storage technology rather than rereading each data element in that database. All packaged DBMS reread every single data element each time a task, such as sorting or analysis, is performed. The elimination of the rereading step through d.b.Express' proprietary process vastly increases the speed of data access enabling ad-hoc analysis at a rate far faster than possible with any other system. The advantage of the d.b.Express process over other processes increases with the size and complexity of the database. d.b.Express breaks down barriers between people and data by eliminating the need for SQL expertise, saving time by gaining decision-critical information through rapid data access and analysis, and saving money through minimal training investment and cost-effective product implementation. Disadvantages in regard to d.b.Express include the following: ------------------------------------------------------------ Lack of Established User-base and Acceptance of the Product d.b.Express is not yet widely used and is perceived as a new technology which may defer acceptance. The Company believes its focus on large-scale users and its new Internet Server Farm technology could help overcome the lack of acceptance in the market place. There is no assurance that the Company will be successful in reaching its sales plan to gain widespread usage of the technology. Limited Resources to Market and Promote d.b.Express The Company has limited resources with which to market and promote d.b.Express. Regardless of the unique patented aspects of the product, if the Company is not able to effectively market and promote the usage of the product, the successful dispersion of the product as a widely used access tool may not be achieved. 6 Alternative Methods Available to Access Data and Potential New Technologies d.b.Express' access method is patented and unique. However, alternative methods for accessing data exist, primarily text based search engines. We believe that many of the alternative methods require knowledge of specific database query languages. The Company is not aware of any alternative technology which can effect data searches with the speed, and without sophisticated programming skills, which d.b.Express provides, however, it is possible that new technologies will be developed which may effectively compete with d.b.Express. If such new technologies are developed, they could negatively impact the Company's ability to successfully market and promote d.b.Express. Softworks Product line ---------------------- As noted above, and in Note 18 to the Consolidated Financial Statements, the Company, in January, 2000, sold its remaining interest in Softworks. Softworks provided automated storage and performance management solutions to help organizations more efficiently and effectively manage their IT infrastructures. Their products possessed the following key features: - -- Integrated Storage Management. Softworks believed that many organizations wanted an integrated suite of products to address their multi-platform storage management needs. Their solutions provided a single point of control and management of storage in OS/390, UNIX and NT computing environments. In addition to having provided conventional storage management functions, their solutions were designed to enhance and ensure data and system availability. - -- Automated Storage and Performance Management. In contrast to conventional storage and performance management solutions which merely provide reporting and monitoring capabilities, their products provided automated proactive alerts, programmed responses and corrective actions, which enabled IT personnel to focus more of their time on complex mission-critical systems management tasks. "Proactive alerts" detected system events and abnormalities and alerted the user to potential system, application or data availability issues. Their products probed system resources to determine if key storage and performance indicators fell within acceptable ranges. If an "out of reasonable range" condition was detected, their products offered three alternative, but not mutually exclusive, responses. Their products could: -- notify the management console or appropriate network or system monitoring software; -- automatically correct the condition using "pre-programmed responses" which enabled the user to program the product to respond appropriately to a particular condition; or -- guide the user through "automated corrective actions" which presented the user with one or more alternative responses to the condition and guided the user through the corrective action. - -- Intelligent Agent Technology. Their software incorporated intelligent agent technology to perform analysis and management tasks across multi-platform environments. This technology permitted systems information to be shared across platforms, as well as with a central point of control. This technology also reduced the need for platform-specific expertise and enhanced their customers' ability to effectively manage their systems. - -- Application of "Best Practices" to a Multi-Platform Environment. Their solutions were designed to enable the centralized control of disparate applications and platforms, thereby facilitating the implementation of an organization's "best practices" across multi-platform environments and allowing them to tailor responses to specific requirements. Their solutions operated efficiently in multi-platform environments by using embedded intelligent agents, which recognized and responded to the particular requirements of each specific operating system. 7 Their solutions were designed to reduce an organization's overall cost to manage its IT infrastructure through a combination of advanced products and technology with comprehensive service and support. Softworks' SST technology was specifically designed to enable their customers to minimize the amount of intervention by IT personnel and to facilitate system availability 24 hours per day, seven days per week. Their solutions have often reduced hardware expenditures by permitting organizations to defer purchases of CPU and storage upgrades. Organizations using Softoworks' automated products could achieve a higher level of system performance, respond more easily to the rapid introduction of new technologies and require fewer specialized technicians to manage the increasing size and complexity of their computing environments. Bo Dietl's One Tough ComputerCOP ("ComputerCOP") ------------------------------------------------ As noted above and in Note 18 to the Consolidated Financial Statements, the Company, in February, 2000, sold this asset. ComputerCOP is Internet monitoring software that enables a parent, guardian or businessman, the ability to easily see what the users of their home or office computer have been viewing on the Internet. Today's Internet environment has caused children, and the public at large, to become exposed to objectionable pictures and text as they navigate through the Internet; sometimes intentionally, but many times, unintentionally. In addition, the popularity of Internet "chat rooms", especially those appealing to children, have proven fertile ground for pedophiles to communicate with those children, and, on occasion, to set up clandestine meetings with these children unbeknownst to their parents or guardians. When an individual goes "online" the Internet browser "catches" the images and text files at the web address the user has selected and "saves" them to certain directories on the computer's hard drive so as to display these files and images. This browser activity is not apparent to the user. As the user goes to other sites, the browser continues to "catch" and "save" these files. The image and text files remain on the computer's hard drive until the user removes them, either manually or by instructing the browser to do so. It is important to note that it is often in the user's best interest not to remove these files, since it improves future download speed. Speed is key to the enjoyment of the Internet. ComputerCOP capitalizes on both the browser's "catch" and "save" function and the user's desire for quick-loading web pages. The program is completely contained on the CD-ROM and does not need to be installed. Automatically, upon insertion of the CD into the CD-ROM drive, the product will scan the computer's hard drive for files containing words that match the program's library of potentially offensive words and/or phrases and searches for Internet-native images. After scanning, a main viewing window is displayed that subsequently displays the words, phrases and images found. All directions are clearly stated for the user on the display window at all times. One of ComputerCOP's most dramatic functions is its ability to display text files that have been erased by the home or office user but not yet written over by the computer. The ability to display these files adds to the program goal, which is to give an accurate reflection of the home or office users activities on the Internet. It is an important function to note as it allows ComputerCOP to "catch" the computer savvy child or employee who wishes to mask his/her Internet activities by deleting or erasing his Internet files found in Internet browser directories such as cache. These files are displayed in the main viewing window with the words, "Deleted File" noted under the display. The Interface, and indeed, the program itself, was designed to be very intuitive and simple to use. The idea was to let the program, which is essentially several utility programs merged into one, do all the work behind the scenes and allow the user, who may possess little or no computer skills, to be informed about his or her child's or employees' Internet activities without restricting the child's or employees' use. Professional Services The Company's professional services unit provides a wide array of information technology, support and services which offer solutions, support, and strategies to solve various business needs in such areas as hardware, network determinations, help desk applications, wiring/cabling, LAN connections, moves/adds/changes, and project management, as well as overseeing new installations and offering on-site component repair. However, as noted above and in Item 7 - Management's Discussion and Analysis of Financial Condition, the operation of this business unit were significantly curtailed in January, 2000. 8 SALES AND MARKETING d.b.Express is currently being marketed to the telecommunications industry. The Company utilizes a direct sales force and support personnel operating from the Company's headquarters in Bohemia, New York. During the third quarter of 1998, the Company began its marketing efforts of the technology acquired in June, 1998, under the product name Bo Dietl's One Tough ComputerCOP. The product is marketed through an in-house sales force as well as an independent marketing firm. Subsequent to year-end, in an effort to expand product exposure, the Company entered into additional distribution agreements. Further, the Company pursued the licensing of this technology to various OEMs. Additionally, as part of the acquisition Mr. Dietl, on behalf of the Company, made promotional appearances on major radio and television broadcasts, on such programs as America's Most Wanted, and CNN. The professional services business segment has been primarily marketed through the efforts of an individual, formerly with I.B.M., who possesses the necessary experience along with a small in-house support staff. Softworks marketed its products and services through its worldwide distribution channels which included direct sales personnel, agents, and distributors. In the United States they operated 10 sales offices. Internationally, Softworks had sales offices in Australia, Brazil, Canada, France, Spain, Japan, Germany and the United Kingdom. The U.K. office also covered the Scandinavian and Benelux countries. Softworks' International distributors were located in Argentina, Chile, Israel, Korea, Mexico, Peru, Philippines, South Africa, Thailand, Turkey, Uruguay and Venezuela. All offices were responsible for specific geographic territories that may have extended beyond the state, province, or country in which the office was located. Softworks adopted a MIPS- (Millions of Instructions per Second ("MIPS")) based pricing model for mainframe products that enabled the company to take advantage of growth in enterprise servers. Pricing for mainframe products was based on the computational capacity of the CPU's on which the software operated. Pricing for non-mainframe and cross-platform varied from enterprise-wide agreements to "per seat" pricing. Softworks also generated revenue through maintenance and support agreements that were reviewed annually on the anniversary of the original purchase date. Other revenue was generated when product licenses were transferred to different/larger CPU's. No customer of Softworks comprised 10% or more of the Company's consolidated revenue. SEASONALITY AND BACKLOG The Company's quarterly results are subject to fluctuations from a wide variety of factors including, but not limited to, new product introductions, domestic and international economic conditions, customer budgetary considerations, the timing of product upgrades, customers' renewal cycles and fee recognition in connection with exclusive distribution and other agreements. As a result of the foregoing factors, the Company's operating results for any quarter are not necessarily indicative of results for any future period. The Company generally produces inventory shortly before anticipated product shipment. Accordingly, the Company has not experienced significant product backlog nor believes that the existence of product backlog is a relevant indicator of future sales performance. MANUFACTURING AND DISTRIBUTION The Company currently contracts the manufacture of software diskettes, product documentation and packaging for certain products within its d.b.Express product line as well as ComputerCOP to non-affiliated third-party manufacturers. Due to the existence of numerous companies providing manufacture of these items, the Company is not dependent on any one contractor. Softworks produced its own tapes and was not dependent on any one contractor for materials. 9 RESEARCH AND DEVELOPMENT The computer software industry is characterized by rapid technological change, which requires ongoing development and maintenance of software products. It is customary for modifications to be made to a software product as experience with its use grows or changes in manufacturers' hardware and software so require. The Company believes that its research and development staff, many with extensive experience in the industry, represents a significant competitive advantage. As of December 31, 1999, the Company's research and development group consisted of 51 employees. Further, when needed, the Company frequently retains the services of independent professional consultants. The Company seeks to recruit highly qualified employees, and its ability to attract and retain such employees will be a principal factor in its success in maintaining a leading technological position. For the three years ended December 31, 1999, 1998 and 1997, research and development expenses were approximately $10,500,000, $11,200,000 and $8,800,000, respectively. The Company believes that significant investments in research and development are required in order to remain competitive. COMPETITION The Company's products are marketed in a highly competitive environment. Such an environment is characterized by rapid change, frequent product introductions and declining prices. Further, the Company's PC products have been designed specifically for use on the Intel X86 family of computers, utilizing other well known database products. No assurance can be given that the Company's patents and copyrights will effectively protect the Company from any copying or emulation of the Company's products in the future. The Company considers certain end-user data access tool and executive information system software companies to be competitors to its d.b.Express product, including Trinzic Corporation, Cognos, Inc., Comshare Corp. and Pilot Software, Inc. The Company believes that d.b.Express can compete effectively against such companies' product offerings based on ease of use, lack of programming, data access speed and price. The Company believes ComputerCOP to be in a highly competitive, low margin segment of the PC software market. The first Internet filtering software was introduced in 1995. Since that time a wide variety of software products have become available giving parents, guardians as well as the business world the ability to block and filter various categories of objectionable material. Today, products such as NetNanny, cyberSafe, CYBERsitter, CyberSnoop, GuardiaNet and many others are considered by the Company to be strong competition. The Company's professional services unit, operates in a highly price and service sensitive business environment. Potential customers could opt for larger more well established companies such as I.B.M. and Dell or midsize PC resellers/service providers such as Entex, Micros to Mainframes, CompuCom or Infotech for hardware and related services. Additionally, competition comes from the major consulting services organizations such as Computer Science Corp. or Andersen Consulting. There are several small consulting/cabling/integration firms located throughout the United States. Softworks' primary competitors were Sterling Software, Inc. and Boole & Babbage, Inc. in the data and storage management market; Boole & Babbage, Inc. and Computer Associates International, Inc. in the performance management market; and Compuware, Inc. and Viasoft Inc. in the Year 2000 market. The Company believed that its products competed effectively on the basis of quality, functionality, technical support and service, and embedded intelligence and proactive automation. Significant factors such as the emergence of new products, fundamental changes in computing technology and data storage and manipulation platforms and applications and aggressive pricing and marketing strategies by Softworks' competitors may have affected their competitive position. 10 Many of the Company's current and potential competitors have longer operating histories, greater name recognition, larger installed customer bases and substantially greater financial, technical and marketing resources than the Company. There can be no assurance that the Company's current and potential competitors will not develop products that may be or may be perceived to be more effective or responsive to technological change than are the Company's current or future products or that the Company's technologies and products will not be rendered obsolete by such developments. Increased competition could result in price reductions, reduced margins or loss of market share, any of which could have a material adverse effect on the Company's business, operating results and financial condition. EMPLOYEES The Company had 91 employees, all in the United States, at March 3, 2000, including 25 in marketing, sales and support services, 51 in technical support, (including research and development) and 15 in corporate finance and administration all in the United States. The future success of the Company will depend in large part upon its continued ability to attract and retain highly skilled and qualified personnel. Competition for such personnel is intense, and the Company has experienced turnover in its management group. None of the Company's employees are represented by a labor union. The Company believes that its relations with its employees are good. PATENTS AND TRADEMARKS The Company has three federally registered trademarks: "CCC"TM, "d.b.Express"TM and "dbACCEL"TM. In addition, the Company received a patent for the proprietary aspects of its d.b.Express technology in 1994, and a second, expanded patent on that technology in 1995, which broadened the claims regarding the product's graphical interface and indexing. Softworks had copyrights for their entire product line. Item 2. PROPERTIES - -------------------- The Company leases various facilities for its Corporate headquarters and operations. The Company's primary facility is:
Description Location Square Footage Lease term Annual Rental Cost - ----------- -------- -------------- ----------- ------------------ Corporate Bohemia, NY 10,000 7/1/94 - 6/30/02 $192,600
Item 3. LEGAL PROCEEDINGS - --------------------------- In March, 1995, an action was originally commenced against the Company and a number of defendants (Barbara Merkens v. Aval Guarantee Ltd., Walter Mennel, J. Forror, A. Faehndreich-Braun, T&M Consulting AG, M. Schmidt, E.G. Baltruschat and Computer Concepts Corp.; United States District Court, Eastern District of New York). 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 had been 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. The Company denied plaintiff's allegations and filed a motion for summary judgment. On or about November 8, 1999, the motion for summary judgment was granted in favor of the Company and its officers. However, the plaintiff filed an appeal, which is being contested by the Company. The Company is unable to predict the ultimate outcome 11 of this claim and, accordingly, no adjustments have been made in the consolidated financial statements for any potential losses or potential issuances of common stock. During 1999, the Company and certain officers received notification that they had been named as defendants in a class action (case # CV 99 1046, Kassouf, et al v. Computer Concepts Corp., Daniel DelGiorno, Sr. and Daniel DelGiorno Jr., U.S. District Court, Eastern District of New York) alleging violations of certain securities laws with respect to the content of certain Company announcements. The Company and its counsel are vigorously defending this matter. However, the Company is unable to predict the 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 August of 1999, the Company and its directors were served with a complaint filed in the Chancery Court of Delaware, New Castle County (Nadef v. Daniel DelGiorno, et al and Computer Concepts Corp. as Nominal Defendant; C.A. No. 17676-NC) as a derivative action alleging awards of excess compensation and requesting a judgment in favor of the Company for such excess compensation. The Company and defendants have denied the allegations and are vigorously defending the matter, however, the Company is unable to predict the outcome of this claim and, accordingly, no adjustments have been made in the consolidated financial statements in regard to this matter. In November, 1999, a company subsidiary was added as a party in an amended complaint (Outdoor Systems, Inc., et al v. A. Esman and MallNet Media Corp.; Superior Court, Arizona, Maricopa County; No. CV 99- 12185). The complaint alleges that Esman (a consultant to the Company) violated a personal non-compete agreement in performing services for MallNet (one of the Company's subsidiaries), and Outdoor Systems contends that they have been compelled to offer terms more generous to their customers than they otherwise would have offered. Plaintiffs did not disclose the amount of their alleged damages and requested injunctive relief. The Company's subsidiary has denied the allegation and is vigorously defending the matter, however, the Company is unable to predict the outcome of this claim and, accordingly, no adjustments have been made in the consolidated financial statements in regard to this matter. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------- At the Company's annual shareholders' meeting, held on December 20, 1999, the shareholders of the Company elected the individuals identified below as the Company's Board of Directors. Their terms expire at the next annual shareholders meeting. Daniel DelGiorno, Sr., Daniel DelGiorno, Jr., Russell Pellicano, Jack S. Beige, Esq., Augustin Medina. The tabulation of the results of the shareholders' vote was:
For Against/Withheld/Abstain --- ------------------------ Daniel DelGiorno, Sr. 15,574,634 657,579 Daniel DelGiorno, Jr. 15,574,634 659,391 Russell Pellicano 15,574,634 655,281 Jack S. Beige, Esq. 15,574,634 655,501 Augustin Medina 15,574,634 655,381
A proposal for the appointment by the Board of Directors of Hays & Co. as the Company's independent certified public accountants for calendar year 1999 was approved by a vote of: 16,788,347 - For; 238,796 - Against; with 68,371 - Abstained. 12 PART II Item 5. MARKET FOR REGISTRANT'S COMMON STOCK - ---------------------------------------------- The Company's Common Stock has been traded on NASDAQ since September 23, 1992. The following table sets forth the high and low sales prices for the Company's common stock by fiscal quarters for the last two years, as restated for the reverse-stock split noted below. 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 all years presented except where noted so as to reflect the reverse-stock split.
High Bid Low Bid --------- ------- 1998: First Quarter 5 5/8 3 7/16 Second Quarter 7 3 9/16 Third Quarter 6 1/4 1 15/32 Fourth Quarter 3 1/2 1 3/4 1999: First Quarter 2 3/8 1 13/32 Second Quarter 1 15/16 1 1/4 Third Quarter 2 1 3/32 Fourth Quarter 2 1/4 1 2000: (Through March 8, 2000) 2 11/16 1 21/32
As of March 8, 2000, the total number of shareholders of the Company's common stock was approximately 16,084, with 1,688 holders of record, exclusive of shareholders whose shares are held in the name of their brokers or stock depositories, which are estimated to be approximately 14,396 additional shareholders. In 1999, the Company declared a special dividend of $6 million (approximately $0.29 per share), which was paid on November 15, 1999, to shareholders of record as of September 30, 1999. In February, 2000, the Company declared a dividend of $0.10 per share (aggregating approximately $2 million) to its shareholders of record on March 15, 2000, and payable on May 1, 2000. 13 Item 6. SELECTED FINANCIAL DATA - --------------------------------- The following selected consolidated financial data for the five fiscal years ended December 31, 1999, 1998, 1997, 1996 and 1995 are derived from the Company's audited financial statements. To better understand the following financial information, investors should also read the "Management's Discussion and Analysis of Operations." This data should also be read in conjunction with the consolidated financial statements of the Company, related notes, and other financial information included elsewhere in this form 10-K. All numbers are in thousands, except per share amounts. In August, 1998, Softworks completed a public offering, after which the Company's ownership interest was reduced to approximately 72%. In April, 1999, the Company's ownership of Softworks was reduced below 50%, and accordingly, commencing April 1, 1999, Softworks' results are accounted for using the equity method of accounting and are no longer consolidated. See Note 3 to the Consolidated Financial Statements which provides pro forma consolidated financial information as if Softworks were accounted for using the equity method for the three years ended December 31, 1999, 1998 and 1997.
Consolidated Statements of Operations Data: Year Ended December 31, ----------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Revenue $24,640 $61,988 $29,738 $19,030 $16,302 Costs of revenue 13,044 21,018 3,663 2,043 7,074 -------- -------- -------- -------- -------- Gross Margin 11,596 40,970 26,075 16,987 9,228 -------- -------- -------- -------- -------- Research and development 10,525 11,193 8,785 5,347 1,270 Sales and marketing 17,417 28,496 17,033 13,038 9,166 General and administration 11,472 12,718 9,111 8,185 8,191 Amortization and depreciation 4,738 4,207 2,386 3,550 4,104 Unusual charges - - 686 2,590 1,102 Reduction in carrying values of long-lived assets - - - 412 3,760 -------- -------- -------- -------- -------- Total costs and expenses 44,152 56,614 38,001 33,122 27,593 -------- -------- -------- -------- -------- Operating loss (32,556) (15,644) (11,926) (16,135) (18,365) Gain on partial disposition of Softworks 17,107 28,785 - - - Equity in earnings of Softworks 512 - - - - Gain on sale of net assets of subsidiary - - 813 - - Other income (expense), net 316 (485) 16 (8) - Interest charge pertaining to discount on convertible debentures - - (1,288) (2,810) - Minority interest in earnings of Softworks (46) (1,361) - - - -------- -------- -------- -------- -------- Income (loss) before provision for income taxes (14,667) 11,295 (12,385) (18,953) (18,365) Benefit/(provision) for income taxes 9,095 (1,748) - - - -------- -------- -------- -------- -------- Net income (loss) $(5,572) $9,547 $(12,385) $(18,953) $(18,365) ======== ======== ======== ======== ======== Basic net income (loss) per share $(0.27) $0.58 $(1.11) $(2.66) $(3.73) ======== ======== ======== ======== ======== Diluted net income (loss) per share $(0.27) $0.56 $(1.11) $(2.66) $(3.73) ======== ======== ======== ======== ======== Basic weighted average common shares outstanding 20,455 16,523 11,163 7,130 4,921 ======== ======== ======== ======== ======== Diluted weighted average common shares outstanding 20,455 17,031 11,163 7,130 4,921 ======== ======== ======== ======== ======== December 31, 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Consolidated Balance Sheet Data: Cash and cash equivalents $1,852 $ 8,176 $ 778 $ 5,675 $ 579 Working capital (deficit) 22,846 27,569 1,412 2,809 (2,998) Total assets 30,024 91,902 39,298 27,671 16,081 Long term debt, less current portion - 1,403 1,395 526 800 Minority Interest - 8,503 - - - Shareholders' equity 24,486 34,016 9,667 9,524 2,009
14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------- Forward-Looking Statements All statements other than statements of historical fact included in this Form 10-K including, without limitation, statements under, "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding 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-K, 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, the ability to recruit personnel, and 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 The Company designs, develops, markets and supports information delivery software products, including end- user data access tools for use in personal computer and client/server environments. Through Softworks, the Company developed, marketed and supported systems management software products for corporate mainframe data centers. The Company makes use of its proprietary data access technology, d.b.Express TM in its d.b.Express TM Internet Information Server, more commonly referred to as a "Server Farm." This service presently is being marketed solely to the telecommunications industry. The Server Farm permits end users the ability to access and analyze information through the Internet. Data can be visually presented using the Company's patented data visualization technology. In 1997, the Company created a business unit, "professional services", which primarily resold computer hardware and for a fee, will assist in the design, construction and installation of technology systems. In January, 2000, the Company significantly curtailed the operations of this business unit. In June, 1998, the Company completed an acquisition of software (and related sales and marketing rights) which is primarily 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). In February 2000, the Company sold a newly created wholly owned subsidiary with assets consisting primarily of $20.5 million cash, the above referenced technology and remaining marketing rights, inventory and related receivables for 1,775,000 shares of NetWolves Corporation (OTCBB: "WOLV"). The transaction was valued at approximately $35.5 million. Pursuant to a tender offer dated December 21, 1999, the Company sold its remaining 35% interest in Softworks (a total of 6,145,767 shares) to EMC Corporation ("EMC") for $10.00 per share cash. The transaction, which was completed on January 27, 2000, provided aggregate cash proceeds of $61,458,000 (less $10,000,000 placed in escrow) and resulted in a pre-tax gain, net of expenses, of $47,607,000, recorded in the first quarter of 2000. 15 Further, the Company is in the process of developing a unique media station display, which will combine Internet strategy and e-commerce with multi-media forms of delivery, presentation and interaction with end-users. This Internet based communications/advertising network is being designed to create a means by which businesses can promote specific brand/product/service awareness. The Company intends to market this technology in association with owners and/or managers of high traffic venue areas (i.e., malls, airports, etc.) to local, regional and national businesses. This business concept will require additional capital in order to complete its development and to support its marketing plan. In order to achieve its goal, the Company intends to partner or co-venture with various potential investors and strategic partners. Financial Condition and Liquidity The Company has incurred substantial operating losses and used substantial amounts of cash in operating activities. Prior to 1998, these losses were primarily financed through private placements of common stock and convertible debentures. During 1998, and 1999 cash requirements of the parent company were primarily financed through a series of separate transactions which included an initial public offering of Softworks in August 1998, a private placement of Softworks common stock owned by the Company in December 1998, various exchanges of Softworks common stock owned by the Company to consultants and employees and a second public offering of Softworks in June, 1999. Pursuant to the tender offer in December, 1999, the Company liquidated its remaining position in Softworks, through an offer to purchase for cash all outstanding shares of the common stock of Softworks, Inc. made by a wholly owned subsidiary of EMC Corporation. This transaction, which closed in January, 2000, resulted in the Company receiving approximately $51 million in January, 2000, and an additional $10 million, which was placed in escrow. In connection with the tender offer, the Company entered into an escrow agreement whereby $10 million of the sales proceeds were placed into an escrow account to secure potential liabilities of the Company arising from an indemnification agreement between the Company and EMC. Pursuant to the es0crow agreement, the escrow funds, net of any claims, will be released to the Company on January 25, 2001. See Note 18 to the Consolidated Financial Statements. In January, 2000, the Company elected to significantly curtail operations of its business unit, marketed as professional services, which primarily resold computer hardware and assisted in the design, and installation of technology systems. For the year ended December 31, 1999, this business unit had one major contract involving two major customers, with combined revenue of $12,297,000 (49.9% of total revenue). However, this business unit generates low margins, and operated in a highly competitive and very volatile business arena. Accordingly, management elected to significantly curtail the operations of this unit as it does not coincide with its short and long-range business plans. The Company currently does not have any other sales contracts. In February 2000, the Company sold a newly created wholly owned subsidiary with assets consisting primarily of $20.5 million cash, certain software marketed under the trade name Bo Dietl's One Tough ComputerCOP ("ComputerCOP") and the remaining related sales and marketing rights thereto, inventory and related receivables for 1,775,000 shares of NetWolves Corporation ("NetWolves") (OTCBB: "WOLV"). The transaction was valued at approximately $35.5 million dollars. See Note 18 to the Consolidated Financial Statements. Additionally, the Company purchased 225,000 shares from certain NetWolves shareholders for $4.5 million. During 1999, the Company purchased $1,499,000 of additional property and equipment, of which Softworks purchased approximately $452,000 during the first quarter of 1999. Approximately $700,000 was for equipment purchased to enhance, expand and improve the Server Farm. Approximately $200,000 of equipment and $230,000 of software technology was purchased for the multi-media Internet product presently in development. The balance of approximately $127,000 was for general equipment. During 1999, the Company advanced $821,000 to various officers, which, subsequent to year-end was repaid. 16 During 1998, the parent Company entered into an Accounts Receivable Purchase Agreement, whereby the Company from time to time could, on a full recourse basis, assign some of their accounts receivable generated from the reselling of hardware. Upon specific invoice approval, an advance of 85% of the underlying receivable would be 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, would be paid to the Company once the customer has paid. The entire balance due was repaid in the first quarter of 1999, and the agreement expired in November, 1999. Management's current plan is focused on becoming a preeminent provider of innovative software products and services which: -- exploit the Company's patented technologies; -- capitalize on the Internet marketplace. To achieve its goals, the Company continues to: -- market the d.b.Express Internet Information Server Services (the "Server Farm") to the telecommunications sector; -- explore and develop applications/uses of the d.b.Express technology for additional vertical markets; -- develop or acquire new products and services that adhere to the Company's goals and objectives. The Company believes that the recent business transactions are indicative of its plan to improve performance as well as its on-going effort to increase shareholder value. Further, the Company is currently reviewing both its short and long-term business strategies. 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 sell/divest part of its recent investment in NetWolves. (See Note 18 to the Consolidated Financial Statements). Results of Operations Fiscal 1999 Compared to Fiscal 1998 Commencing April 1, 1999, Softworks' results are accounted for using the equity method of accounting and are no longer consolidated. Under the equity method of accounting, the Company's share of Softworks' earnings or losses is included in the Company's consolidated operating results in a single line item. Pro forma consolidated operating results as if Softworks were accounted for using the equity method for the years ended December 31, 1999, and 1998, is as follows: 17 Computer Concepts Corp. and Subsidiaries Pro Forma Condensed Consolidated Statements of Operations For the year ended December 31, (in thousands)
1999 1998 ---- ---- Revenue Software licenses, net $ 700 $ 70 Maintenance 42 42 Professional services 13,640 18,127 ------- ------- 14,382 18,239 Cost of Revenue Software licenses 242 133 Maintenance - - Professional services 12,038 16,634 ------- ------- Gross margin 2,102 1,472 ------- ------- Research and development costs 8,025 3,395 Sales and marketing costs 12,476 9,014 General and administrative costs 10,281 8,283 Amortization and depreciation 4,028 2,037 ------- ------- 34,810 22,729 ------- ------- Operating loss (32,708) (21,257) Gain on partial disposition of Softworks 17,107 28,785 Other 874 2,376 ------- ------- (Loss) Income Before Benefit for Income taxes (14,727) 9,904 Benefit (Provision) for Income Taxes 9,155 (357) ------- ------- Net income (loss) $(5,572) $9,547 ======= =======
The following discussion about the 1999 results of operations is based on the operating results as presented in the above table. For the year ended December 31, 1999, total revenue decreased by $3,857,000, when compared to the year ended December 31, 1998, primarily as a result of a decrease in professional services revenue of $4,487,000. As noted above, the Company has no open hardware contracts, and, in January 2000, elected to significantly curtail the operations of this business unit. Also included in professional services is revenue generated from the Server Farm. At present, this technology has been developed to provide services solely to the telecommunications industry. For the years ended December 31, 1999, and 1998, revenue was $1,436,000 and $663,000, respectively. The Company is currently negotiating/finalizing several new contracts, which if consummated, should increase revenue. Substantially all of the revenue in the software license category relates to ComputerCOP. The Company began shipping the initial version of ComputerCOP during the last quarter of 1998 to various distributors, retailers, and individuals. Since shipments are made with right of return, the Company delays the recognition of revenue until the requirements of Statement of Financial Accounting Standards No. 48, "Revenue Recognition When Right of Return Exists" have been met. As noted above, during the first quarter of 2000, the Company sold the ComputerCOP technology. As a result of the actions noted above, the Company's primary source of revenue is currently generated from the Server Farm. The Server Farm generates much higher gross margin than does the reselling business unit. The Server Farm cost of revenue consists primarily of the direct labor associated with processing call detail records. The cost of revenue related to the resale of computer hardware consists primarily of amounts paid to the Company's suppliers for goods and services. The cost of revenue related to the Server Farm, for the year ended December 31, 1999, was $317,000, or 22.1%. Cost of revenue related to the Server Farm for the year ended December 31, 1998, was $259,000, or 39.1% of revenue. The Company believes that the cost of revenue associated with the Server Farm revenue is not directly proportional. As such, 18 as revenue increases, costs, as a percentage of revenue, should decrease. The cost of revenue, related to the resale of computer hardware and related services of $11,721,000 was 96.0%, an increase, when compared to 88.7% for this business unit for the year ended December 31, 1998. The depreciation of the Server Farm's hardware is included in "Amortization and depreciation." Cost of revenue with respect to ComputerCOP is currently running at approximately 35%. The amortization costs of the purchased software technology related to ComputerCOP are included in "Amortization and depreciation." Research and development expenses include salaries and related costs for software developers, quality assurance and documentation personnel involved in the Company's research and development efforts. Costs for the year ended December 31, 1999, increased approximately $4,630,000 to $8,025,000 when compared to the year ended December 31, 1998. Approximately $3,826,000 of additional expense was incurred in connection with the development of the multi-media technology during the year ended December 31, 1999. A portion of the variance, approximately $700,000, is attributable to costs associated with the initial concept and designs, early stage development and implementation of the Internet multi-media technology. Additional increases were incurred in expenditures relating to further development of Server Farm technology. Sales and marketing expenses include salaries and related costs, commissions, travel, facilities, communications costs and promotional expenses for the Company's direct sales organization and marketing staff. Expenses increased $3,462,000 to $12,476,000 for the year ended December 31, 1999, when compared to $9,014,000 for the year ended December 31, 1998. A major portion of the variance pertains to costs associated with ComputerCOP. The Company expensed non-cash charges of approximately $2,909,000 related to the appearances and product endorsements made on behalf of ComputerCOP during the year ended December 31, 1999, resulting in an increase of approximately $1,375,000, when compared to the year ended December 31, 1998. The ComputerCOP acquisition occurred in mid 1998. Additionally, the Company expended approximately $655,000 in its efforts to market ComputerCOP (nominal expense for the year ended December 31, 1998, as the Company commenced marketing the product late in the fourth quarter of that year). Further, salaries and commissions related to ComputerCOP increased approximately $275,000. The Company has also incurred an additional $320,000 of sales and commission expenses related to the resale of computer hardware and related services in its professional services division when compared to the same period in 1998. Also, the Company incurred expenses of approximately $791,000 in its effort to market the multi-media display still under development. The balance of the sales and marketing costs, approximately $7,182,000, relate to the Company's Server Farm (in the telecommunications industry as well as exploring new vertical market applications) and marketing research for products and services currently under development. While sales and marketing expenses have risen, the Company believes that its expenditures are necessary in order to maintain and improve market position and product recognition. It should be noted that ComputerCOP and the non-Server Farm portion of professional services have been either sold or significantly reduced during the first quarter of fiscal 2000. Accordingly, the Company believes expenses should be lower in future periods. General and administrative expenses include administrative and executive salaries and related benefits, legal, accounting and other professional fees as well as general corporate overhead. Expenses increased $1,998,000 to $10,281,000 for the year ended December 31, 1999, when compared to the year ended December 31, 1998. Major factors contributing to this increase include, among other things, increased compensation and additional staffing, legal expenses incurred in defending the Company from litigation and the retention of financial consultants. Amortization and depreciation expenses increased $1,991,000 when comparing the years ended December 31, 1999 and December 31, 1998. The increase is primarily attributable to the purchased software and goodwill acquired in the ComputerCOP transaction. Gain on partial disposition of Softworks of $17,107,000 represents the gain associated with a public offering of Softworks as well as the sale and exchange of additional Softworks common stock as further described in Note 3 to the Consolidated Financial Statements. 19 The $9,155,000 benefit from income taxes represents the reduction of the valuation allowance on the Company's deferred tax assets. As a result of the Company's sale of its remaining interest in Softworks and the sale of ComputerCOP, the Company will recognize a taxable gain in the first quarter of 2000. Accordingly, a portion of the Company's net operating loss carry-forwards and other deferred tax assets have become utilizable. Fiscal 1998 Compared to Fiscal 1997 During 1998, the Company more than doubled its total revenue, increasing $32,250,000 to $61,988,000 from 1997's level of $29,738,000. Record volume was achieved in software license revenue, increasing $13,905,000 or 77.7 % to $31,795,000 in 1998, from $17,890,000 in 1997. The increase was primarily due to the increased sales of Softworks products resulting from continued expansion of its worldwide sales force, the conversion from CPU-based pricing to MIPS-based pricing and the introduction of Resource Availability into the DataStor Arena. During 1998, MIPS-based licenses accounted for 74% of new Softworks sales. Sales in the DataStor Arena accounted for 59% of total software license revenue in 1998 and 1997. Software license revenue from the Performance Arena accounted for 32% of total software license revenue in 1998 and 1997. License revenue from the Year 2000 Arena accounted for 5.3% of total software license revenue in 1998 and 3.5% in 1997. International revenue increased 85.9% to $8,798,000 in 1998 from $4,732,000 in 1997. This increase is attributable to the continuing international expansion of Softworks. Effective June 30, 1998, the Company completed the acquisition of certain software, known as ComputerCOP, and related sales and marketing rights. In conjunction with the sales and marketing efforts also obtained in the acquisition, the Company released the initial version of this technology during November 1998. According to the Statement of Financial Accounting Standards No 48, "Revenue Recognition When Right of Return Exists", ("SFAS 48"), recognition of revenue for products of this nature require, among other factors, the elimination of rights of return. Accordingly, the recognition of revenue has been delayed until all the requirements of SFAS 48 are met. Maintenance revenue increased 5.2% to $10,503,000 in 1998 from $9,980,000 in 1997. This increase is attributable to overall growth in license revenue and renewals of maintenance contracts by the installed customer base. The Company commenced operations of its professional services unit during 1997. Professional services principally offers solutions, support, and strategies to solve various business crises in such areas as: hardware requirements, network determinations, help desk applications, programming/programmer services, wiring/cabling, LAN connections, moves/adds/changes, and project management, as well as overseeing new installations and offering on-site component repair. This unit increased in revenue more than tenfold, from $1,868,000 in 1997 to $19,690,000 in 1998. Approximately $14,878,000 of professional services 1998 revenue was attributable to one customer. The overall business line is extremely competitive, and as such, the gross margin for this business segment is approximately 10.4%. Further, it is difficult to predict future revenue. Cost of software license revenue includes royalties paid to Softworks employee developers and to a third party under a licensing agreement, amortization of capitalized software development costs and costs of shipping and fulfillment. Cost of software license revenue for the year ended December 31, 1998, of $1,978,000 represents an increase of $812,000 over the prior year amount of $1,166,000. Stated as a percentage of software license revenue, the $1,978,000 is 6.2%, a slight decrease from the prior year of 6.5%. Cost of maintenance revenue, stated as a percentage of revenue, increased 4.3 percentage points during 1998, from 9.0% in 1997 to 13.3% in 1998. The cost of professional services, as a percentage of revenue, increased slightly from 85.5% in 1997 to 89.6% in 1998. When comparing the Company's total cost of revenue ($21,018,000 in 1998 to the prior year amount of $3,663,000), as a percentage of total revenue, there is a significant increase - 33.9% as compared to 12.3% for the prior year. This is due primarily from the higher cost of revenue associated with the professional services segment. 20 Research and development expenses include salaries and related costs for software developers, quality assurance and documentation personnel involved in the Company's research and development efforts. Research and development increased 27.4% to $11,193,000 in 1998 from $8,785,000 in 1997. The increase is primarily attributable to an increase in personnel necessary to support the Company's research and development efforts. Sales and marketing expenses include salaries and related costs, commissions, travel, facilities, communications costs and promotional expenses for the Company's direct sales organization and marketing staff. As a percentage of revenue, sales and marketing expenses decreased to 46.0% in 1998 from 57.3% in 1997. The actual costs increased $11,463,000 to $28,496,000 in 1998, from $17,033,000 for the prior year. Approximately $7,229,000 of this increase related to Softworks. This increase was attributable primarily to increased commission expenses resulting from increased sales, and increased personnel costs resulting from growth in the Softworks sales organization. In addition, the opening of the international sales offices of Germany, Australia and Spain and one domestic sales office contributed to an increase in certain fixed costs over 1997. Approximately $2,892,000 of the total sales and marketing increase related to the marketing of d.b.Express and approximately $1,760,000 related to the marketing of ComputerCOP (which commenced at the end of the third quarter in 1998), offset by the elimination of $418,000 of 1997 MapLinx expenses. General and administrative expenses include administrative salaries and related benefits, management fees, recruiting and relocation expenses, as well as legal, accounting and other professional fees. General and administrative expenses rose $3,607,000 from $9,111,000 in 1997 to $12,718,000 in 1998. The increase in general and administrative expenses was principally due to an increase in finance and administrative personnel necessary to support the Company's growth. Amortization and depreciation expense increased $1,821,000 to $4,207,000 in 1998. The amortization of the technology acquired during the year accounting for approximately $1,450,000 of the increase. Gain on partial disposition of subsidiary of $28,785,000 represents the gain associated with the initial public offering of Softworks as well as the sale and exchange of additional Softworks common stock as further described in Note 3 to the Consolidated Financial Statements. Minority interest expense of $1,361,000 represents the earnings attributable to the separate public ownership of Softworks, which was a wholly owned subsidiary of the Company until June 30, 1998. Year 2000 Issues Assessment. The Year 2000 Problem has thus far not affected computers, software, and other equipment used, operated, or maintained by the Company. 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 the 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. 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 were not affected by the Year 2000 Problem. Suppliers. The Company has not incurred issues involving the Year 2000 Problem. 21 ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------------- Not applicable. Item 8. FINANCIAL STATEMENTS - ------------------------------------ The financial statements and exhibits to Form 10 - K are included beginning on page F-1 and are indexed under Items 14(a), 14 (b) and 14(c), respectively. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE - --------------------------------------------------------------- None. 22 Part III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT - --------------------------------------------------------------- Directors and Executive Officers As of March 7, 2000, the names, ages and positions of the directors and executive officers of the Company are as follows: Name Age Position ---- --- -------- Daniel DelGiorno, Sr. 67 Chairman, Ass't. Sec. and Director Daniel DelGiorno, Jr. 44 President, CEO, Treasurer, Director Russell Pellicano 59 Secretary, Director Jack S. Beige 55 Director Augustin Medina 59 Director Edward Warman 57 Exec. V. P. of Products and Services George Aronson 51 Chief Financial Officer Anthony Coppola 45 Executive Vice President Daniel DelGiorno, Sr. has been Chairman, Chief Executive Officer (to October, 1997), Assistant Secretary and a director of the Company since April, 1989, and is the father of Daniel DelGiorno, Jr., the Company's President and also a director. During the period 1987 to April, 1989, Mr. DelGiorno, Sr. together with Mr. Pellicano (a director of the Company) was engaged in the research and development of d.b.Express. Prior thereto, during the period 1985 to May, 1987, Mr. DelGiorno, Sr. was the Chief Executive Officer of Myotech, Inc. ("Myotech"), a privately held corporation which produced computerized muscle testing equipment for chiropractors and physical therapists. Myotech was sold to Hemodynamics, Inc. in May, 1987, and later became a public corporation. Mr. DelGiorno, Sr. was a practicing chiropractor for many years and had founded a chiropractic clinic employing 4 chiropractors and 6 technicians in addition to administrative personnel. He also successfully collaborated with Mr. Pellicano in connection with the design and development of medical equipment for comparative muscle testing. A patent has been granted to Mr. Pellicano and Mr. DelGiorno, Sr. in connection therewith. In addition, Mr. DelGiorno, Sr. is the holder of a patent for a digital myograph for the testing of muscles by computer. Mr. DelGiorno, Sr. is also an officer, director and shareholder of Tech Marketing Group Corp. which is a holding company and a shareholder of the Company. See "Security Ownership of Certain Beneficial Owners and Management" and "Certain Transactions". Daniel DelGiorno, Jr., the Company's President, CEO, Treasurer and a director, is the son of Daniel DelGiorno, Sr. and has been with the Company since April, 1989. Prior to joining the Company and during the period 1987 to 1989, Mr. DelGiorno, Jr. was involved in providing the management and financial support for and collaborated with Mr. DelGiorno, Sr. and Russell Pellicano in connection with the development of d.b.Express. During the period 1984 to May, 1987, he was the President of Myotech, a privately held Company producing muscle testing equipment. He is also the President, a director and principal shareholder with Daniel DelGiorno, Sr. of Tech Marketing Group Corp., a privately held corporation which is a shareholder of the Company. See "Security Ownership of Certain Beneficial Owners and Management" and "Certain Transactions". Russell Pellicano is a director and Secretary of the Company since April, 1989 and served as Vice President, Secretary and Director from April, 1989, through February, 1994. Mr. Pellicano was the original founder and principal of RAMP Associates Inc. ("RAMP"), which was acquired by the Company in October, 1990, through which he has engaged in consulting to major corporations and others for the design of software and hardware for computers. A major customer of RAMP since its inception has been Grumman Corporation. Mr. Pellicano, through RAMP, has been consulting for Grumman and other corporations. He is the chief architect and designer of d.b.Express and has been involved in designing and developing computer software and hardware for the past 30 years. Among many noteworthy projects for which he was responsible at Grumman was the design and installation of the Orbiting Astronomical Observatory Space Craft Ground Station, and he was a member of the launch team at Cape Kennedy in conjunction therewith. He was also Senior Systems Analyst for Grumman in connection with the test instrumentation for the forward sweep wing (X29) experimental aircraft on-board computer system, and the F- 14D and the A-6E production aircraft. Mr. Pellicano is a graduate of C. W. Post College in 1973 with a degree in Electrical Engineering. 23 Jack S. Beige, D.C., J. D., was appointed a director in November, 1995, for a term beginning January, 1996, and was appointed as a member of the Audit Committee and the Compensation Committee, also effective January, 1996. Mr. Beige received his Juris Doctor degree in 1993 and has been a practicing attorney, primarily in business related matters, on Long Island, New York, since then. Prior thereto, Mr. Beige practiced chiropractic medicine, was President of BSJ Realty Corporation, President of All Travel, Ltd. and was President of Comp Consulting, Inc. During his practice as a chiropractic doctor, he was elected a Fellow of the International College of Chiropractors, was appointed as Chairman of the New York State Worker's Compensation Board, Chiropractic Practice Committee and was elected President of the New York State Chiropractic Association in 1987. Mr. Beige is admitted to the New York State Bar and is a member of the New York State Bar Association, the Nassau and Suffolk County Bar Associations and is a member of the American Arbitration Association. Augustin Medina was appointed a director in November, 1995, for a term beginning January, 1996, and was appointed as a member of the Audit Committee and the Compensation Committee, also effective January, 1996. During the last five years and previously, Mr. Medina has been an independent business broker associated with the Montecristi Corporation, Gallagher Associates and Anderson Credit and Leasing, on Long Island, New York. Mr. Medina's business background includes advising and assisting businesses in computer and non-computer related businesses in their development and structuring of sales and marketing programs. Edward Warman joined the Company in September, 1993, as Vice President of Products and Services. From 1989 to 1993, he served as Vice President, Product Development for Comdisco Disaster Recovery Services, Inc. where he was responsible for the design and implementation of a new product line of disaster recovery software. From 1984 to 1989, Mr. Warman was Vice President of Research and Development at Intersolv, Inc., with responsibility for a software development staff exceeding 100 people. Prior to 1984, he served in various software development management positions at organizations including Cincom Systems, Inc., Computer Resources, and Monsanto. Mr. Warman possesses degrees in systems analysis, economics and chemical engineering. George Aronson, CPA, has been the Chief Financial Officer of the Company since August, 1995. From March, 1989 to August, 1995, he was the Chief Financial Officer of Hayim & Co., an importer/distribution organization. Mr. Aronson graduated from Long Island University with a major in accounting in 1972 receiving a Bachelor of Science degree and is a Certified Public Accountant. Anthony Coppola, has been Executive Vice President in charge of development, marketing and sales of the Company's d.b.Express based telecommunications call detailing business since January, 1999, having previously worked with the Company in various capacities related to sales and marketing management beginning in 1994. His reponsibilities include the management and direction of the design and programming for the telecommunications applications, as well as direct involvement with the sales and marketing of the Company's applications and services to IBM and the Company's other primary customers. Prior to joining the Company, Mr. Coppola was President of American Multimedia Corp., a firm active in consulting and the development and marketing of industry specific training software. 24 Item 11. EXECUTIVE COMPENSATION - --------------------------------- The following table sets forth the annual and long-term compensation with respect to the Chairman and Chief Executive Officer and each of the other executive officers of the Company who earned more than $100,000 for services rendered for the years ended December 31, 1999, 1998, and 1997. Directors are not contractually compensated for their services, however, the Directors received a formula grant of 100,000 restricted stock options for 1999.
Summary Compensation Table Annual Compensation Long-Term Compensation ----------------------------- -------------------------------------------------- Securities All Other Restricted Underlying Other Name and Fiscal Annual Stock Options/ Compen- Principal Position Year Salary Bonus Compensation Awards SARS sation (9)(6)(4) (2)(8)(5) - ------------------------------------------------------------------------------------------------------------------- Dan DelGiorno,Sr.,(1) 1999 $270,000 $1,130,000 $ - - 200,000 - Director 1998 260,000 1,030,000 - - 190,000 - 1997 260,000 327,000 - - - - Dan DelGiorno, Jr.(1) 1999 - 1,354,000 - - 200,000 - President, C.E.O. 1998 - 1,291,000 - - 350,000 - Director 1997 - 753,000 - - - - Russell Pellicano (7) 1999 - 317,000 - - 100,000 - Secretary 1998 - 76,000 - - 25,000 - Director 1997 - 199,000 - - - - Ed Warman (3) 1999 169,000 - - - - - Vice President of Products 1998 151,000 - - - 25,000 - & Services 1997 148,000 - - - - - George Aronson 1999 170,000 532,000 - - 150,000 - Chief Financial Officer 1998 157,000 456,000 - - 150,000 - 1997 157,000 233,000 - - - - Anthony Coppola 1999 136,000 418,000 - - 60,000 Executive Vice President 1998 125,000 98,000 - - 105,750 1997 104,000 12,000 - - - All Officers as a Group 1999 745,000 3,751,000 - - 710,000 - 1998 693,000 2,951,000 - - 845,750 - 1997 669,000 1,524,000 - - - - Footnotes (1) In June, 1997, D. DelGiorno, Sr. and D. DelGiorno Jr. each had 60,000 stock options (originally granted in 1995) repriced from $15.00 to $.10 (since exercised). In October, 1998, D. DelGiorno Sr. and D. DelGiorno, Jr. each had 68,100 stock options (originally granted in 1995) repriced from $5.00 to $2.00 (see Note 5). (2) Options were granted in April,1998, at prices ranging from $4.00 to $6.00 per share, expiring December 31, 2000. In October, 1998 these options were repriced to $2.00 and extended to December 31, 2002. (3) All of Mr Warman's options were repriced to $2.00 in 1998, when the market price was $1.75 per share. (4) Bonus amounts reflected above for 1997, were in the form of stock options and the Company's common stock, which were subject to forfeiture and /or restrictions. (5) Certain options were repriced in 1997and all employee options were repriced to $2.00 per share in 1998. (Except for any options which have an exercise price below $2.00). (6) Bonus' granted in 1998 for Messrs. DelGiorno, Sr., DelGiorno, Jr., Aronson and Coppola were in the form of restricted shares of Softworks common stock. 25 (7) In October, 1998, Mr. Pellicano had 10,000 options (originally granted in 1995) repriced from $15.00 to $2.00. (8) During 1999, the Company granted options to Messrs. DelGiorno,Sr., DelGiorno,Jr., Pellicano, Aronson and Coppola, in the amounts of 200,000, 200,000, 100,000, 150,000 and 50,000, respectively. These options are fully vested, exercisable at $1.25 per share and expire November 30, 2001. Additionally, during 1999, Mr. Coppola was granted 10,000 options exercisable at $1.34 and expire December 31, 2002. (9) The Company granted cash bonuses in 1999, to Messrs. DelGiorno,Sr., Pellicano, Aronson and Coppola in the amounts of $750,000, $272,000, $150,000 and $218,000, respectively. Mr. Pellicano and Mr. Coppola received $45,000 and $218,000, respectively, in the form of the Company's Common Stock. The balance of 1999 bonuses are in the form of restricted shares of Softworks Common Stock.
Option/SAR Grants in Last Fiscal Year In 1999, Messrs. DelGiorno, Sr., DelGiorno, Jr., Aronson, Pellicano and Coppola were granted vested stock options expiring November 30, 2001, which are exercisable at $1.25 per share as follows: 200,000, 200,000, 150,000, 100,000 and 50,000, respectively. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Value The following table set forth certain information with respect to stock option exercises by the named Executive Officers during the fiscal year ended December 31, 1999, and the value of unexercised options held by them at fiscal year-end.
Number of Value of Unexercised Unexercised Options at In-the-Money Fiscal Year Options at End Fiscal Year End (1) ----------------------- ------------------------- Shares Acquired Value Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable ---- ---------------- ------------ ----------- ------------- ----------- ------------ Daniel DelGiorno, Sr. - - 458,100 - $ 87,600 $ - Daniel DelGiorno, Jr. - - 618,100 - 87,600 - Russell Pellicano - - 135,000 - 43,800 - Ed Warman - - 53,600 - - - George Aronson - - 300,000 - 65,700 - Anthony Coppola - - 165,750 - 25,380 - Footnotes (1) Market Value of the Company's Common Stock on December 31, 1999, was $1.688. In-the-money options at year end were as follows: Messrs. DelGiorno, Sr.- 200,000; DelGiorno,Jr.- 200,000, Pellicano - 100,000; Aronson - 150,000 and Coppola - 60,000.
26 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ---------------------------------------------------------- The following table sets forth certain information as of March 10, 2000, with respect to the beneficial ownership of the Company's Common Stock by all persons known by the Company to be the beneficial owners of more than 5% of its outstanding shares of Common Stock, by directors who own Common Stock and all officers and directors as a group:
Common Stock % of Beneficially Outstanding Name of Beneficial Owner Owned Shares (2) - ------------------------ ------------- ------------- Daniel Del Giorno, Sr. (1)(3)(4) 458,100 2.2% Daniel Del Giorno, Jr. (1)(3)(5)(6) 625,326 3.0 Russell Pellicano (1)(7) 196,500 1.0 Jack S. Beige (1) (8) 140,000 * Augustin Medina (1) (12) 149,764 * George Aronson (1)(10) 403,000 1.9 Anthony Coppola (1)(13) 203,875 1.0 Ed Warman(1)(9) 158,600 * Bo-Tel LLC(11) 2,220,000 10.8 All Officers and Directors as a Group (7 persons) 2,335,165 10.4% - ------- * = Less than 1% Footnotes (1) The address of the holder is 80 Orville Drive, Suite 200, Bohemia, New York 11716. (2) Based upon 20,529,245 shares outstanding as of March 9, 2000, plus outstanding options exercisable within 60 days owned by above named parties. (3) Includes shares held by his spouse. (4) Includes 258,100 options exercisable at $2.00 per share, and 200,000 options exercisable at $1.25 per share. (5) Includes 418,100 options exercisable at $2.00 per share, and 200,000 options exercisable at $1.25 per share. 27 (6) Daniel DelGiorno, Jr. has majority control of Tech Marketing Group Corp., which owns 17,405 shares of the Company. (The Company has no business dealings with Tech Marketing Group Corp.) (7) Includes 35,000 options exercisable at $2.00 per share, and 100,000 options exercisable at $1.25 per share. (8) Includes 250, 500 and 100,000 options exercisable at $2.00 and $1.75 and $1.25 per share, respectively. (9) Includes 53,100 and 500 options in the Company (exercisable at $2.00 and $1.75 per share respectively). (10) Includes 150,000 options exercisable at $2.00 per share and 150,000 options exercisable at $1.25 per share. (11) Includes 320,000 shares of the Company's Common Stock owned by a party which has a financial interest in Internet Tracking & Security Ventures, LLC. (12) Includes 100,000 options exercisable at $1.25 per share. (13) Includes 105,250, 10,000, 500 and 50,000 options exercisable at $2.00, $1.34, $1.75 and $1.25, respectively.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- The Company has, from time to time advanced funds to Messrs. Dan DelGiorno, Sr. and Dan DelGiorno, Jr. with such advances being payable upon demand and bear interest at the rate of 7% per annum. At December 31, 1999, the loan balance due from these two officers was approximately $1,663,000. Additionally, at December 31, 1999, a loan balance of approximately $159,000 was due from Mr. Aronson. During the first quarter of 2000, Messrs. Dan DelGiorno Sr. and Dan DelGiorno, Jr. repaid approximately $1,547,000 consisting of $624,000 and 410,179 shares of the Company's Common Stock, valued at $923,000. Mr. Aronson repaid his loan in full. During 1999, the Company paid an outside Director approximately $170,000 for legal fees and consulting services. Additionally the Company granted 25,000 shares of restricted stock, valued at $45,000 and 100,000 stock options. During 1999, the Company paid an outside Director consulting fees of $56,000. Additionally the Company granted 25,000 shares of restricted stock, valued at $45,000 and 100,000 stock options. In 1999, the Company's general counsel received cash compensation of $689,000, and 75,000 shares of Softworks Common Stock and 150,000 Company stock options valued at $395,000, for business and financial consulting services rendered. In 1999, a consultant (who also has a financial interest in ITSV) received cash compensation of $215,000 and 117,000 shares of Softworks Common Stock valued at $423,000 for various consulting services. SJ & Associates, Inc. In July, 1998, and during 1999, the Company entered into various agreements with SJ & Associates, Inc. (including its affiliates are collectively referred to as "SJ") for various services which provide for the following compensation: -- SJ received minimum annual compensation pursuant to several agreements aggregating $227,000 per annum through, November, 1999. Commencing in December 1999, SJ receives minimum annual compensation pursuant to two agreements aggregating $276,000 per annum. The agreements expire in November 2004. SJ also consulted with Softworks in various capacities throughout 1999, and received compensation directly from Softworks. -- In 1999, SJ was retained to assist the Company in its efforts to sell shares in Softworks second public offering (Note 3). 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 vested upon completion of Softworks second public offering. The options were exercised in June, 1999. 28 -- In November, 1999, and February, 1999, 100,000 shares of Softworks Common Stock and 80,000 shares of the Company's Common Stock, respectively, were issued to SJ as payment for various consulting matters. Additionally, SJ was awarded 75,000 fully vested options of the Company's Common Stock exercisable at $1.25 per share and expiring November 30, 2001. The stock and options were valued at $621,000 and were charged to operations in 1999. -- During 1999, the Company paid an affiliate of SJ $700,000 relating to certain multi-media Internet technology. -- In 1999, the Company entered into an agreement with SJ to provide assistance to the Company in locating, negotiating and ultimately closing a transaction for the sale of the Company's entire remaining holdings of Softworks, the sale of the Company's ComputerCOP technology and related investment in NetWolves Corporation (Note 18). The Company agreed to pay SJ 4.0% of the value of the transactions. Accordingly, in the first quarter of 2000, SJ earned $2,458,000 with respect to the Softworks transaction and $1,420,000 with respect to the transaction with NetWolves Corporation. 29 PART IV Item 14. (a) 1. FINANCIAL STATEMENTS Page - -------------------------------------- ---- Report of Independent Certified Public Accountants F-1 Consolidated Balance Sheets December 31, 1999 and 1998 F-2 Consolidated Statements of Operations Years Ended December 31, 1999, 1998 and 1997 F-3 Consolidated Statement of Shareholders' Equity Years Ended December 31, 1999, 1998 and 1997 F-4 Consolidated Statements of Cash Flows Years Ended December 31, 1999, 1998 and 1997 F-5 Notes To Consolidated Financial Statements F-6 14. (a). 2. - SCHEDULES - ----------------------- NONE 14. (a). 3.- EXHIBITS - ---------------------- 2.1 Reorganization Agreement dated April 22, 1989. (Incorporated by reference to Exhibit 2(a) to the Company's Form S-1 Registration Statement) (1) 2.2 Merger Agreement between Computer Concepts Investment Corp. and RAMP Associates Inc. dated October 31, 1990. (Incorporated by reference to Exhibit 2(b) to the Company's Form S-1 Registration Statement)(1). 2.3 Merger Agreement between Computer Concepts Corp. and Softworks, Inc. (Incorporated by reference to Exhibit 2(a) to the Company's Form 8-K filed on October 29, 1993). 2.4 Merger Agreement dated December 31, 1994, between the Company, its wholly owned subsidiary, CCC/MapLinx Corp., and MapLinx Corp. and Merit Technology, Inc.(Incorporated by reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K/A for the year ended December 31, 1994). 3.1(i)(a) Certificate of Incorporation, as amended. (Incorporated by reference to Exhibit 3(a) of Form S-1 Registration Statement).(1) (b) Certificate of Amendment (Change in Name) (Incorporated by reference to Exhibit 3(a) of Form S-1 Registration Statement).(1) (c) Certificate of Amendment (Change in Name) (Incorporated by reference to Exhibit 3(a) of Form S-1 Registration Statement).(1) (d) Certificate of Amendment (Authorizing Increase in Shares of Common Stock) (Incorporated by reference to Exhibit 3 (i) (d) to Form 10-K for the year ended 1995). (e) Certificate of Amendment (Authorizing one for ten reverse-stock split as of March 30, 1998). 3.2(ii) By-Laws. (Incorporated by reference to Exhibit 3(d) to the Company's Form S-1 Registration Statement).(1) 4.1 Form of Common Stock Certificate. (Incorporated by reference to Exhibit 4 to the Company's Form S-1 Registration Statement).(1) 4.2 Computer Concepts Directors, Officers and Consultants 1993 Stock Option Plan (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8 filed on June 28, 1995). 30 4.3 Computer Concepts Employees 1993 Stock Option Plan (Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8 filed on June 28, 1995). 4.4 Computer Concepts 1995 Incentive Stock Plan (Incorporated by reference to Exhibit 5 to the Company's Proxy Statement filed on January 29, 1996). 9 Voting Trust Agreement among Computer Concepts Corp., Softworks, Inc. and Trustees dated August 4, 1998 (Incorporated by reference to subsidiary Softworks, Inc. Registration Statement filed on Form S-1, SEC File No. 333-53939 declared effective August 4, 1998). 10.1 Lease Extension Agreement between Atrium Executive Center and the Company (Incorporated by reference to Exhibit 10 (g) (ii) to the Company's Annual Report on Form 10 - K for the year ended December 31, 1993). 10.2 Agreement between Software Publishing Corp. and the Company dated June 14, 1994. (Incorporated by reference to Exhibit 10(a) to the Company's Form 8-K filed on July 1, 1994). 10.3 Asset Purchase Agreement dated June 30, 1998, between the Company and Internet Tracking and Security Ventures, LLC. (Incorporated by reference to Form 8-K dated July 15, 1998). 10.4 Offer to Purchase dated December 23, 1999, among Eagle Merger Corp., EMC Corporation and Computer Concepts Corp. (Incorporated by reference to Exhibit 1 to the Company's Form 8-K filed on February 9, 2000). 10.5 Indemnification Agreement dated December 21, 1999, among EMC Corporation, Eagle Merger Corp. and Computer Concepts Corp. (Incorporated by reference to Exhibit 2 to the Company's Form 8-K filed on February 9, 2000). 10.6 Indemnification Agreement dated December 21, 1999, among Softworks, Inc. and Computer Concepts Corp. (Incorporated by reference to Exhibit 3 to the Company's Form 8-K filed on February 9, 2000). 31 10.7 Escrow Agreement dated December 21, 1999, among EMC Corporation, Eagle Merger Corp., Computer Concepts Corp. and State Street Bank and Trust Company, Inc. as escrow agent. (Incorporated by reference to Exhibit 4 to the Company's Form 8-K filed on February 9, 2000). 10.8 Exchange Agreement, dated February 10, 2000, among Computer Concepts Corp., NetWolves Corporation and ComputerCOP Corp. (Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed on March 2, 2000). 10.9 Voting Trust Agreement dated February 10, 2000, among Computer Concepts Corp., NetWolves Corporation and Walter M. Groteke. (Incorporated by reference to Exhibit 10.2 to the Company's Form 8-K on March 2, 2000). 10.10Registration Rights Agreement between Computer Concepts Corp. and NetWolves Corporation. (Incorporated by reference to Exhibit 10.3 to the Company's Form 8-K filed on March 2, 2000). 16.1 Dismissal of Independent Auditors. (Incorporated by reference to Form 8-K dated May 29, 1997). 16.2 Engagement of New Independent Auditors. (Incorporated by reference to Form 8-K dated June 3, 1997). (1)Filed with Form S-1, Registration Statement of Computer Concepts Corp. Reg. No 3-47322 and are incorporated herein by reference. 14. (b) REPORTS ON FORM 8-K - --------------------------- None. 14. (c) THE FOLLOWING EXHIBITS ARE FILED HEREWITH: - -------------------------------------------------- (23) (a) Consent of Daniel B. Kinsey, P.C. (23) (b) Consent of Hays & Company 32 SIGNATURES ---------- Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMPUTER CONCEPTS CORP. /s/ Daniel DelGiorno ------------------------- Daniel DelGiorno, Jr., Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. NAME TITLE DATE /s/ Daniel DelGiorno _____________________ President, Treasurer, March 13, 2000 Daniel DelGiorno, Jr. Chief Executive Officer, Director /s/ Daniel DelGiorno _____________________ Director, March 13, 2000 Daniel DelGiorno, Sr. Assistant Secretary /s/ Jack S. Beige _____________________ Director March 13, 2000 Jack S. Beige /s/ Russell Pellicano _____________________ Director, Secretary March 13, 2000 Russell Pellicano /s/ George Aronson _____________________ Chief Financial Officer March 13, 2000 George Aronson 33 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 CONTENTS -------- INDEPENDENT AUDITOR'S REPORT...........................................F-1 CONSOLIDATED BALANCE SHEETS December 31, 1999 and 1998.................................... F-2 CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 1999, 1998 and 1997.................. F-3 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Years ended December 31, 1997, 1998 and 1999.................. F-4 CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1999, 1998 and 1997.................. F-5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................ F-6 F-39 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 Board of Directors and Shareholders Computer Concepts Corp. Bohemia, New York INDEPENDENT AUDITOR'S REPORT We have audited the accompanying consolidated balance sheets of Computer Concepts Corp. and subsidiaries (the "Company") as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Computer Concepts Corp. and subsidiaries as of December 31, 1999 and 1998, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. s/ Hays & Company February 18, 2000 New York, New York COMPUTER CONCEPTS CORP. AND SUBSIDIAREIS CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
December 31, ------------ 1999 1998 ---- ---- ASSETS Current assets Cash and cash equivalents $ 1,852 $ 8,176 Accounts receivable, net of allowance for sales returns and doubtful accounts of $493 and $1,350 in 1999 and 1998, respectively 443 27,412 Installment receivables - 16,406 Investment in Softworks, held for sale 10,329 - Assets held for sale ComputerCOP 3,876 - Inventories - 419 Prepaid expenses and other current assets 865 10,022 Advances to officers 1,822 1,001 Deferred tax assets, current 9,197 306 -------- -------- Total current assets 28,384 63,742 Installment accounts receivable, due after one year - 7,908 Property and equipment, net 1,345 3,564 Software costs, net - 5,594 Excess of cost over fair value of net assets acquired, net of accumulated amortization of $4,239 in 1998 - 8,610 Other assets 295 2,000 Deferred tax assets, noncurrent - 484 -------- -------- $ 30,024 $ 91,902 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses $ 5,442 $11,428 Current portion of long-term debt 4 6,117 Deferred installment revenue - 7,314 Deferred maintenance revenue 42 9,107 Income taxes payable 50 2,207 -------- -------- Total current liabilities 5,538 36,173 Deferred installment revenue, earned after one year - 7,883 Deferred maintenance revenue, earned after one year - 3,924 Long-term debt, net of current portion - 1,403 -------- -------- Total liabilities 5,538 49,383 -------- -------- Minority interest - 8,503 -------- -------- Commitments and contingencies Shareholders' equity Common stock, $.0001 par value; 150,000,000 shares authorized; 20,765,825 and 19,324,839 shares issued in 1999 and 1998, respectively; and 20,529,245 and 19,324,839 shares outstanding in 1999 and 1998, respectively 2 2 Additional paid-in capital 102,868 106,515 Accumulated deficit (77,766) (72,194) Accumulated other comprehensive loss (225) (307) -------- -------- 24,879 34,016 Common stock in treasury, at cost 236,580 shares in 1999 (393) - -------- -------- Total shareholders' equity 24,486 34,016 -------- -------- $ 30,024 $91,902 ======== ======== The accompanying notes are an integral part of these consolidated financial statements.
F-2 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
Year ended December 31, ----------------------- 1999 1998 1997 ---- ---- ---- Revenue Software licenses, net $ 7,337 $ 31,795 $ 17,890 Maintenance 3,570 10,503 9,980 Professional services 13,733 19,690 1,868 -------- -------- -------- 24,640 61,988 29,738 -------- -------- -------- Cost of revenue Software licenses 457 1,978 1,166 Maintenance 549 1,392 900 Professional services 12,038 17,648 1,597 -------- -------- -------- 13,044 21,018 3,663 -------- -------- -------- Gross margin 11,596 40,970 26,075 -------- -------- -------- Operating expenses Research and development 10,525 11,193 8,785 Sales and marketing 17,417 28,496 17,033 General and administrative 11,472 12,718 9,111 Amortization and depreciation 4,738 4,207 2,386 Unusual charges, net - - 686 -------- -------- -------- 44,152 56,614 38,001 -------- -------- -------- Operating loss (32,556) (15,644) (11,926) Other income (expense) Gain on partial disposition of Softworks 17,107 28,785 - Equity in earnings of Softworks 512 - - Gain on sale of net assets of subsidiary - - 813 Interest income (expense), net 316 (485) 16 Interest charge pertaining to the discount on convertible debentures - - (1,288) Minority interest in earnings of Softworks (46) (1,361) - -------- -------- -------- (Loss) income before benefit (provision) for income taxes (14,667) 11,295 (12,385) Benefit (provision) for income taxes 9,095 (1,748) - -------- -------- -------- Net (loss) income $ (5,572) $ 9,547 $(12,385) ======== ======== ======== Basic net (loss) income per share $ (0.27) $ 0.58 $ (1.11) ======== ======== ======== Diluted net (loss) income per share $ (0.27) $ 0.56 $ (1.11) ======== ======== ======== Basic weighted average common shares outstanding 20,455 16,523 11,163 ======== ======== ======== Diluted weighted average common shares outstanding 20,455 17,031 11,163 ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements.
F-3 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (in thousands)
Accumulated Additional other Total Common stock paid-in Accumulated comprehensive Treasury shareholders' Comprehensive Shares Amount capital deficit loss Stock equity income (loss) ------ ------ ----------- ----------- -------------- -------- -------------- -------------- Balance, January 1, 1997 101,335 $ 10 $ 78,870 $(69,356) $ - $ - $9,524 Net proceeds from sales of common stock and options exercised 5,390 1 2,741 - - - 2,742 Common stock and options issued for services 9,042 1 5,514 - - - 5,515 Conversion of convertible debentures 11,982 1 4,668 - - - 4,669 Common stock adjustment related to settlement (302) - (164) - - - (164) Currency translation Adjustment - - - - (54) - (54) $ (54) Marketable securities valuation adjustment - - - - (180) - (180) (180) Net loss - - - (12,385) - (12,385) (12,385) One-for-ten reverse stock split*(114,702) (12) 12 - - - - - --------- ----- ------ -------- ------ ----- -------- --------- Total comprehensive loss $(12,619) ========= Balance, December 31, 1997 12,745 1 91,641 (81,741) (234) - 9,667 Net proceeds from sales of common stock and options exercised 2,403 - 5,228 - - - 5,228 Common stock and options issued for services 2,090 1 3,462 - - - 3,463 Common stock issued for settlements 187 - 484 - - - 484 Common stock issued for asset acquisition 1,900 - 5,700 - - - 5,700 Currency translation adjustment - - - - (13) - (13) $ (13) Marketable securities valuation adjustment - - - - (60) - (60) (60) Net income - - - 9,547 - - 9,547 9,547 --------- ----- ------ -------- ------ ----- -------- --------- Total comprehensive income $ 9,474 ========= Balance, December 31, 1998 19,325 2 106,515 (72,194) (307) - 34,016 Common stock and options issued for services 1,441 - 2,353 - - - 2,353 Dividend declared - - (6,000) - - - (6,000) Acquisition of treasury stock (237) - - - - (393) (393) Currency translation adjustment - - - - 42 - 42 $ 42 Marketable securities valuation adjustment - - - - 40 - 40 40 Net loss - - - (5,572) - - (5,572) (5,572) --------- ------ -------- -------- ------- ------- ------- --------- Total comprehensive loss $ (5,490) ========= Balance, December 31, 1999 20,529 $ 2 $102,868 $(77,766) $ (225) $ (393) $24,486 ========= ====== ======== ======== ======= ======= ======= * The Board of Directors declared a one-for-ten reverse stock split effective for shareholders of record as of the close of business on March 27, 1998. Common stock and additional paid-in capital as of December 31, 1997 have been restated to reflect this reverse stock split (Notes 2 and 10). The accompanying notes are an integral part of these consolidated financial statements.
F-4 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
Year ended December 31, ----------------------- 1999 1998 1997 ---- ---- ---- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Cash flows from operating activities Net (loss) income $ (5,572) $ 9,547 $(12,385) Adjustments to reconcile net (loss) income to net cash used in operating activities Amortization and depreciation: Property and equipment 1,020 1,226 965 Software costs 1,940 1,736 832 Excess of cost over fair value of net assets acquired 1,951 1,762 749 Other 3 2 4 Provision for doubtful accounts - 324 136 Common stock and options issued for services 2,353 3,463 5,515 Softworks common stock exchanged for services 4,814 5,551 - Non-cash unusual charges - - 336 Non-cash interest charge pertaining to the discount on convertible debentures - - 1,288 Gain on partial disposition of Softworks (17,107) (28,785) - Equity in earnings of Softworks (512) - - Minority interest in earnings of Softworks 46 1,361 - Gain on sale of net assets of subsidiary - - (813) Deferred income tax benefit (8,907) (790) - Other - 75 - Changes in operating assets and liabilities Accounts receivable 17,192 (26,276) (9,070) Inventories 169 (419) 10 Prepaid expenses and other current assets 1,786 947 (967) Installment accounts receivable 149 (1,428) (2,766) Other assets 144 (1,293) (457) Accounts payable and accrued expenses (1,669) 4,411 2,884 Deferred revenue (1,399) 8,508 6,802 Income taxes payable (2,043) 2,207 - --------- -------- -------- Net cash used in operating activities (5,642) (17,871) (6,937) --------- -------- -------- Cash flows from investing activities Expenditures for property and equipment (1,499) (2,721) (1,455) Software development and technology purchases (230) (900) (1,559) Proceeds from the license of technology 400 - - Reduction in cash resulting from excluding Softworks from the consolidated financial statements (6,759) - - Proceeds from the sale of net assets of subsidiary, net - - 230 Advances (to) from officers, net (821) 175 (388) Additional consideration paid for Softworks and MapLinx acquisitions - (678) (523) Proceeds from the sale of Softworks common stock 17,676 19,419 - --------- -------- -------- Net cash provided by (used in) investing activities 8,767 15,295 (3,695) --------- -------- -------- Cash flows from financing activities Net proceeds from sales of common stock and options exercised - 5,228 2,742 Net proceeds from sale of debenture - 1,925 3,381 Acquisition of treasury stock (393) - - Payment of dividend (6,000) - - Repayment of debenture - (2,000) - (Repayments of) advances from long-term debt (3,056) 4,834 (344) --------- -------- -------- Net cash (used in) provided by financing activities (9,449) 9,987 5,779 --------- -------- -------- Effect of exchange rate changes on cash and cash equivalents - (13) (44) --------- -------- -------- Net (decrease) increase in cash and cash equivalents (6,324) 7,398 (4,897) Cash and cash equivalents, beginning of year 8,176 778 5,675 --------- -------- -------- Cash and cash equivalents, end of year $ 1,852 $ 8,176 $ 778 ========= ======== ======== The accompanying notes are an integral part of these consolidated financial statements.
F-5 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 1 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. The most significant portion of the Company's operations had historically been conducted through one of its subsidiaries, Softworks, Inc. ("Softworks"). Through Softworks, the Company developed, marketed and supported systems management software products for corporate mainframe data centers. Softworks was wholly owned by the Company through June 29, 1998 and majority owned through March 31, 1999. Through a series of transactions that included an initial public offering of Softworks in August 1998, various exchanges of Softworks common stock owned by the Company to consultants and employees for services rendered, a private placement of Softworks common stock owned by the Company in December 1998 and a second public offering in June 1999, the Company's ownership of Softworks was reduced from 100% to 35% as of December 31, 1999. Accordingly, Softworks is accounted for as a consolidated subsidiary through March 31, 1999, and commencing April 1, 1999, Softworks' results are accounted for using the equity method of accounting. On January 27, 2000, the Company sold its entire 35% interest to EMC Corporation for approximately $61 million in cash, before expenses (Notes 3 and 18). 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, more commonly referred to as a "Server Farm." This service presently is being marketed solely to the telecommunications industry. The server farm permits end users the ability to access and analyze information through the internet. Data can be visually presented using the Company's patented data visualization technology. 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). On February 14, 2000, the Company sold the ComputerCOP technology to NetWolves Corporation (Notes 3 and 18). 2 Significant accounting policies Common stock split At the Company's annual shareholders' meeting on November 26, 1997, the Company's shareholders granted the Board of Directors authority to effect a reverse stock split. On March 18, 1998, the Board of Directors declared a one-for-ten reverse stock split effective for shareholders of record as of the close of business on March 27, 1998. Common stock and additional paid-in capital as of December 31, 1997 have been restated to reflect this split. Par value and authorized shares remain unchanged at $.0001 and 150,000,000 shares, respectively. The effect of the stock split has been retroactively reflected as of December 31, 1997 in the consolidated balance sheet and statement of changes in shareholders' equity, but activity in the statement of changes in shareholders' equity for 1997 was not restated. All references to the number of common shares and per share amounts elsewhere in the consolidated financial statements and related footnotes have been restated to reflect the effect of the split for all periods presented. F-6 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 2 Significant accounting policies (continued) Principles of consolidation and equity method. The consolidated financial statements include the accounts of Computer Concepts Corp. and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The separate public ownership of Softworks, Inc. ("Softworks"- see Note 3), which was a majority owned subsidiary of the Company through March 31, 1999, is reflected in the consolidated balance sheet and results of operations as minority interest. Effective April 1, 1999, when the Company's ownership interest in Softworks was reduced below 50%, the Company began accounting for Softworks using the equity method of accounting. Under the equity method of accounting, the Company's proportionate share of Softworks' earnings or losses is included in the Company's consolidated operating results in a single line item. Revenue recognition The Company records revenue in accordance with Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), issued by the American Institute of Certified Public Accountants (as modified by Statement of Position 98-9), which was adopted in 1998. The adoption of these pronouncements was not material to the Company's revenue recognition policy for software transactions. Revenue from the sale of perpetual and term software licenses are recognized, net of provisions for returns, at the time of delivery and acceptance of software products by the customer, when collectibility is probable. Through Softworks, the Company provided customers with the option to pay for license fees in one lump sum or generally in equal annual installments over extended periods of time, generally three to five years. In such instances, the Company did not consider sales contracts with amounts due for periods greater than one year from delivery, fixed and determinable, and accordingly recognized such amounts as revenue when they became due. Maintenance revenue that is bundled with an initial license fee is deferred and recognized ratably over the maintenance period. Amounts deferred for maintenance are based on the fair value of equivalent maintenance services sold separately. Revenue from professional services, such as the reselling of computer hardware, systems management services, training and staff augmentation, is recognized as the units are shipped or the services are performed. Construction revenue is recognized using the percentage of completion method based on the cost incurred relative to total estimated costs. Cost of revenue Cost of revenue in the consolidated financial statements of operations is presented exclusive of amortization and depreciation shown separately. Reporting of comprehensive income (loss) In January, 1998, the Company began reporting comprehensive income (loss) in accordance with Statement of Financial Accounting Standards No. 130 - "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes additional disclosure requirements, but does not effect the measurement of results of operations. Accordingly, the Company displays other items of comprehensive income (loss) in the accompanying consolidated statement of shareholders' equity. F-7 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 2 Significant accounting policies (continued) Installment accounts receivable Through Softworks, perpetual license agreements were executed under installment payment plans generally with annual payment terms of three to five years. Revenue and related sales commissions were deferred and recognized as payments became due. Property and equipment Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the related assets, whichever is shorter. Capitalized lease assets are amortized over the shorter of the lease term or the service life of the related assets. Software costs Costs associated with the development of software products are generally capitalized once technological feasibility is established. Purchased software technologies are recorded at cost and software technologies acquired in purchase business transactions are recorded at their estimated fair value. Software costs associated with technology development and purchased software technologies are amortized using the greater of the ratio of current revenue to total projected revenue for a product or the straight-line method over its estimated useful life. Amortization of software costs begins when products become available for general customer release. Costs incurred prior to establishment of technological feasibility are expensed as incurred and reflected as research and development costs in the accompanying consolidated statements of operations. Excess of cost over fair value of net assets acquired The excess of cost over the fair value of net assets acquired in purchased business transactions is amortized on a straight-line basis over periods ranging from three to ten years. Impairment of long-lived assets The Company reviews its long-lived assets, including goodwill resulting from business acquisitions, capitalized software costs and property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine if impairment exists, the Company compares the estimated future undiscounted cash flows from the related long-lived assets to the net carrying amount of such assets. Once it has been determined that an impairment exists, the carrying value of the asset is adjusted to fair value. Factors considered in the determination of fair value include current operating results, trends and the present value of estimated expected future cash flows. Income taxes The Company accounts for income taxes using the liability method. The liability method 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. Additionally, net deferred tax assets are 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 assets will not be realized. F-8 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 2 Significant accounting policies (continued) Basic and diluted net income (loss) per share The Company displays earnings per share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 requires dual presentation of basic and diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share include the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Cash and cash equivalents The Company considers all investments with original maturities of three months or less to be cash equivalents. Included in cash and cash equivalents at December 31, 1998 is a $1,000,000 certificate of deposit that is being used to collateralize a stand by letter of credit in favor of one of the Company's professional services vendors. Foreign currency The functional currency for all of the Company's foreign operations through Softworks was the subsidiary's local currency. Assets and liabilities of foreign subsidiaries were translated into U.S. dollars at year-end exchange rates and revenue and expense accounts and cash flows were translated at average exchange rates during the period. Gains and losses resulting from translation were recorded as accumulated other comprehensive income in shareholders' equity. Transaction gains and losses were recognized in the consolidated statements of operations as incurred. Included in cash and cash equivalents at December 31, 1998, is approximately $464,000, respectively, of cash denominated in various foreign currencies. Marketable securities Marketable securities, which are classified as "available for sale" (except for the Company's investment in Softworks accounted for using the equity method of accounting), are valued at fair market value. Unrealized gains or losses are recorded net of income taxes as accumulated other comprehensive income in shareholders' equity, whereas realized gains and losses are recognized in the Company's statements of operations using the first-in, first-out method. The fair market value of marketable securities approximates $52,000 and $10,000 at December 31, 1999 and 1998, respectively, and is included in "Prepaid expenses and other current assets." Advertising and promotional costs Advertising and promotional costs are reported in "Sales and marketing" expense in the consolidated statements of operations and are expensed when incurred. Prepaid advertising costs, which were included in "Prepaid expenses and other current assets" in the consolidated balance sheets (see Note 4), consisted of prepayments for personal appearances and promotion of ComputerCOP (see Note 3). These assets were expensed in 1999 and 1998 as the related services were performed. F-9 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 2 Significant accounting policies (continued) Pre-opening expenses During 1998, the Company adopted Statement of Position 98-5, "Reporting on the Cost of Start- Up Activities," issued by the American Institute of Public Accountants. The adoption of this statement requires the expensing of pre-opening costs as incurred. The Company expensed approximately $300,000 for 1998 start-up activities associated with Softworks' German subsidiary. The adoption had no impact on prior years. Reclassifications Certain reclassifications have been made to the consolidated financial statements shown for the prior years in order to have them conform to the current year's classifications. Concentrations and fair value of financial instruments Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash investments and accounts receivable. At December 31, 1999, the Company has cash investments of approximately $1,585,000 at one bank. The balance of the Company's cash investments are held at various financial institutions, which limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with respect to accounts receivable are not material at December 31, 1999. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. Unless otherwise disclosed, the fair value of financial instruments approximates their recorded value. Use of estimates In preparing consolidated financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 3 Acquisitions and dispositions 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 "ComputerCOP," 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 in November, 1998. F-10 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 3 Acquisitions and dispositions (continued) Internet Tracking & Security Ventures, LLC (continued) 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". 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 are 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 were expensed as the related services were 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" are amortized using the straight-line method over 36 months. In February 2000, the Company sold its ComputerCOP technology to NetWolves Corporation, an unrelated publicly traded corporation (see Note 18). The "assets held for sale ComputerCOP" at December 31, 1999 included $250,000 of inventories, $1,064,000 of software costs and $2,562,000 of goodwill. Softworks, Inc. In October 1993, the Company completed the acquisition of all of the common stock of Softworks, a privately held Maryland company founded in 1977. Softworks provided systems management software products for mainframe data centers. The purchase price approximated $5,700,000, which included $2,000,000 in cash and 100,000 shares of the Company's restricted common stock. The acquisition was accounted for using the purchase method of accounting. Accordingly, assets and liabilities were recorded at their fair values as of September 1, 1993, the effective date of the acquisition, and the operations of Softworks were included in the Company's consolidated statements of operations since that date. The excess of cost over the fair value of net assets acquired, which originally approximated $5,484,000, was being amortized over ten years. The agreement also required the Company to make additional contingent purchase consideration payments of up to $2,000,000, which was paid through December 31, 1998 and was treated as additional consideration in connection with the acquisition. F-11 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 3 Acquisitions and dispositions (continued) Softworks, Inc. (continued) 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 an initial 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. In addition to the initial public offering discussed above, the following transactions, with respect to Softworks common stock owned by the Company, were recorded in 1998: - -- On July 1, 1998, the Company exchanged 100,000 restricted shares of Softworks common stock to a member of its Internet Strategy Committee, (who also served as Chairman of the Board of Softworks) for services rendered, resulting in a charge to operations of $525,000. - -- The Company exchanged 136,000 restricted shares of Softworks common stock to the Company's general counsel for services rendered, resulting in a charge to operations of $276,000. - -- The Company exchanged 768,100 restricted shares of Softworks common stock to three of the Company's executive officers for services rendered, resulting in a charge to operations of $2,777,000. - -- The Company exchanged 133,000 restricted shares of Softworks common stock to a consultant (who also has a financial interest in ITSV) for business advisory services rendered, resulting in a charge to operations of $270,000. - -- The Company exchanged 471,000 restricted shares of Softworks common stock to various consultants and employees for services rendered, resulting in a charge to operations of $1,068,000. - -- The Company exchanged 269,600 restricted shares of Softworks common stock to two consultants (including 167,300 shares to S.J. & Associates, Inc., "SJ" see Note 13) related to separate contracts for services to be rendered over twelve months commencing In October 1998. The $635,000 value of these shares was expensed over the terms of the contracts. - -- In December 1998, the Company sold 1,000,000 restricted shares of Softworks common stock in a private placement in exchange for a $5,000,000 full recourse promissory note. The note, which is included in "prepaid expenses and other current assets" at December 31, 1998, was timely paid in full in the first quarter of 1999. F-12 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 3 Acquisitions and dispositions (continued) Softworks, Inc. (continued) The total value of the Softworks common stock exchanged by the Company for the above-described services in 1998 was $5,551,000. As a result of the ITSV asset acquisition, the Softworks initial public offering and the various transactions described above, the Company's ownership interest in Softworks was reduced to 54.5% as of December 31, 1998. Accordingly, the Company recognized a gain of $28,785,000 representing the difference between the fair value of the Softworks common stock exchanged or sold, and the related adjusted carrying value of the Company's investment in Softworks (pursuant to Staff Accounting Bulletins 51 and 84). The following additional transactions were recorded in 1999: - -- The Company exchanged 529,000 restricted shares of Softworks common stock to three of the Company's executive officers for services rendered in 1999 resulting in a charge to operations of $2,117,000. - -- In exchange for services rendered by several consultants in 1999, the Company granted options to acquire 80,000 restricted shares of Softworks common stock owned by the Company that were exercisable at $1.00 per share. These options were exercised in 1999. The $389,000 value of these options was charged to operations in 1999. - -- The Company exchanged 618,600 restricted shares of Softworks common stock to various employees and consultants (including 117,000 shares to a consultant with a financial interest in the ITSV) for services rendered in 1999 resulting in a charge to operations of $2,608,000. - -- 125,000 shares of Softworks common stock, originally issued to a consultant in 1998, were returned to the Company in 1999, because the services were not satisfactorily performed. The original $300,000 value of these shares was credited to operating expenses in 1999. - -- In June, Softworks completed a second public offering of 3,900,000 shares of its common stock at a price of $10.50 per share (less underwriting fees and commissions of $.63 per share) as follows: 1,000,000 shares were sold by Softworks, 1,256,933 shares were sold by the Company, and 1,643,067 shares were 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 to a consultant, exercisable at $1.00 per share, which vested upon completion of the offering. The options were exercised in June 1999. The total value of the Softworks common stock exchanged by the Company for the above- described services (excluding the 200,000 contract options) in 1999 was $4,814,000. As a result of these transactions, the Company's ownership in Softworks was further reduced to 35% at December 31, 1999. Accordingly, the Company recognized a gain of $17,107,000 representing the difference between the fair value of the Softworks common stock exchanged or sold, and the related adjusted carrying value of the Company's investment in Softworks (pursuant to Staff Accounting Bulletins 51 and 84). In January 2000, the Company sold its remaining interest in Softworks to EMC Corporation, an unrelated publicly traded corporation, for $10.00 per share cash (Note 18). F-13 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 3 Acquisitions and dispositions (continued) Softworks, Inc. (continued) In April 1999, the Company's ownership of Softworks was reduced below 50%, and accordingly, commencing April 1, 1999, Softworks' results are accounted for using the equity method of accounting and are no longer consolidated. Under the equity method of accounting, the Company's share of Softworks' earnings or losses is included in the Company's consolidated operating results in a single line item. Summarized financial information of Softworks for the entire year ended December 31, 1999, as well as pro forma consolidated financial information as if Softworks were accounted for using the equity method for all prior periods presented is as follows (in thousands): Softworks, Inc. Summarized Financial Information
Condensed Consolidated Condensed Consolidated Balance Sheet Statement of Operations Year ended December 31, 1999 December 31, 1999 ---------------------------- ------------------------------------ Revenue $ 54,570 Current assets $ 46,593 Cost of revenue 3,325 Non current assets 27,436 -------- --------- Gross margin 51,245 $ 74,029 Operating expenses 48,805 ========= --------- Operating income $ 2,440 Current liabilities $ 28,206 ========= Net income $ 1,456 Non-current liabilities 16,506 ========= Shareholders' equity 29,317 --------- $ 74,029 =========
F-14 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 3 Acquisitions and dispositions (continued) Softworks, Inc. (continued)
Computer Concepts Corp. and Subsidiaries Pro Forma Condensed Consolidated Balance Sheet (Unaudited) December 31, 1998 Pro Forma Pro Forma Actual Adjustments Pro Forma Actual Adjustments Pro Forma ------ ----------- --------- ------ ----------- --------- Assets Liabilities and Shareholders' equity Current assets $ 63,742 $ (38,282) $ 25,460 Current liabilities $ 36,173 $(26,501) $ 9,672 Long-term receivables 7,908 (7,908) - Deferred revenue,long-term 11,807 (11,764) 43 Property and equipment, net 3,564 (2,499) 1,065 Long-term debt 1,403 (1,401) 2 ------- -------- ------- Software costs, net 5,594 (3,039) 2,555 Total liabilities 49,383 (39,666) 9,717 Goodwill, net 8,610 (4,143) 4,467 Other assets 2,484 (2,384) 100 Minority interest 8,503 (8,503) - Investment in Softworks, equity method - 10,086 10,086 Shareholders' equity 34,016 - 34,016 --------- --------- --------- --------- --------- --------- $ 91,902 (48,169) $ 43,733 $ 91,902 $(48,169) $ 43,733 ========= ========= ========= ========= ========= =========
F-15 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 3 Acquisitions and dispositions (continued) Softworks, Inc. (continued)
Computer Concepts Corp. and Subsidiaries Pro Forma Condensed Consolidated Statements of Operations (Unaudited) Year ended December 31, 1999 Year ended December 31, 1998 Year ended December 31, 1997 ----------------------------- ----------------------------- ---------------------------- Pro Forma Pro Forma Pro Forma Actual Adjustments Pro Forma Actual Adjustments Pro Forma Actual Adjustments Pro Forma ------ ----------- --------- ------ ----------- ---------- ------ ------------ --------- Revenue $ 24,640 $(10,258) $ 14,382 $ 61,988 $(43,749) $18,239 $29,738 $(26,770) $2,968 Cost of revenue 13,044 (764) 12,280 21,018 (4,251) 16,767 3,663 (1,635) 2,028 -------- --------- -------- -------- --------- ------- -------- --------- ------- Gross margin 11,596 (9,494) 2,102 40,970 (39,498) 1,472 26,075 (25,135) 940 Total operating expenses 44,152 (9,342) 34,810 56,614 (33,885) 22,729 38,001 (23,269) 14,732 -------- --------- -------- -------- --------- ------- -------- --------- ------- Operating (loss) income (32,556) (152) (32,708) (15,644) (5,613) (21,257) (11,926) (1,866) (13,792) Other income (expense) Gain on partial disposition of Softworks 17,107 - 17,107 28,785 - 28,785 - - - Interest and other (expense) income, net 316 - 316 (485) 240 (245) (459) 44 (415) Minority interest (46) 46 - (1,361) 1,361 - - - - Equity in earnings of Softworks 512 46 558 - 2,621 2,621 - 1,822 1,822 -------- --------- -------- -------- --------- ------- -------- -------- ------- (Loss) income before benefit (provision) for income taxes (14,667) (60) (14,727) 11,295 (1,391) 9,904 (12,385) - (12,385) Benefit (provision) for income taxes 9,095 60 9,155 (1,748) 1,391 (357) - - - --------- --------- -------- -------- --------- ------- -------- --------- --------- Net (loss) income $ (5,572) - $ (5,572) $ 9,547 $ - $ 9,547 $ (12,385) $ - $(12,385) ========= ========= ========= ========= ========= ========= ========== ========= =========
F-16 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 3 Acquisitions and dispositions (continued) MapLinx, Inc. In July 1997, the Company completed a transaction in which it sold all rights to the underlying software technologies of MapLinx, Inc. (previously a wholly owned consolidated subsidiary, "MapLinx"). Further, as part of the transaction, the purchaser acquired all of MapLinx' current assets and assumed certain of its liabilities. The sales price of approximately $850,000 was adjusted (reduced) by the excess of MapLinx' current liabilities over current assets (approximately $380,000), resulting in a net sales price of approximately $470,000. Approximately $235,000 was paid at closing and a $235,000 note receivable was issued for the balance (the note receivable was subsequently collected). As a result, in 1997 the Company recognized an $813,000 gain on the sale of the net assets of MapLinx. Included in the consolidated financial statements is $578,000 of net revenue and $323,000 of net loss (excluding the $813,000 gain on sale) pertaining to MapLinx operations for the year ended December 31, 1997. 4 Prepaid expense and other current assets Prepaid expenses and other current assets consist of the following:
December 31, ---------------------------- 1999 1998 ---- ---- (in thousands) Prepaid expenses $ 386 $ 1,135 Prepaid advertising - 2,767 Deferred commissions - 839 Notes and loans receivable 427 269 Note receivable sale of Softworks common stock (Note 3) - 5,000 Other current assets 52 12 -------- -------- $ 865 $10,022 ======== ========
Additionally, included in other assets are noncurrent deferred commissions of $878,000 at December 31, 1998. F-17 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 5 Property and equipment Property and equipment consist of the following:
December 31, Useful life in years 1999 1998 ------------ ---- ---- (in thousands) Computer equipment and software 3 to 7 $ 3,211 $ 6,485 Furniture and fixtures 5 to 7 390 532 Leasehold improvements 7 - 554 -------- -------- 3,601 7,571 Less accumulated depreciation and amortization (2,256) (4,007) -------- -------- Property and equipment, net $ 1,345 $ 3,564 ======== ========
6 Software costs Software costs consist of the following:
December 31, 1999 1998 ---- ---- (in thousands) Capitalized software development costs $ 3,775 $ 5,873 Purchased and acquired software technologies - 7,219 ------- ------- 3,775 13,092 Less accumulated amortization (3,775) (7,498) -------- -------- Software costs, net 0 $ 5,594 ======== ========
In July 1997, Softworks acquired the rights to two technologies (the "Technology") that complement its existing product solutions. Pursuant to the software distribution agreement, Sofworks is required to pay a royalty on sales of the Technology at defined rates subject to minimum annual royalties. An asset equal to the present value of the minimum annual royalties of $2,160,000 was recorded as purchased and acquired software technologies and was being amortized over the five year term of the agreement. The payment obligation was recorded as long-term debt. The asset and liability were removed from the Company's consolidated financial statements as part of the de-consolidation of Softworks (Note 3). F-18 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 7 Accounts payable and accrued expenses Accounts payable and accrued expenses consist of the following:
December 31, ------------ 1999 1998 ---- ---- (in thousands) Trade accounts payable $ 1,194 $ 4,901 Sales taxes payable 647 657 Accrued payroll and benefits 1,675 888 Commissions payable - 2,373 Other accrued expenses 1,926 2,609 --------- --------- $ 5,442 $ 11,428 ========= =========
8 Long-term debt Long-term debt consists of the following:
December 31, ------------ 1999 1998 ---- ---- (in thousands) Notes payable factor (a) $ - $ 4,167 Purchased software (see Note 6) - 2,462 Capitalized lease obligation (c) 4 771 Notes payable other (c) - 120 --------- --------- 4 7,520 Less current portion of long-term debt (4) (6,117) --------- --------- Long-term debt, net of current portion $ - $ 1,403 ========= =========
(a) During November 1998 the Company entered into an Accounts Receivable Purchase Agreement with Silicon Valley Financial Services, a division of Silicon Valley Bank ("Silicon Valley"), whereby the Company from time to time may, on a full recourse basis, assign some of their professional services accounts receivable to Silicon Valley. Upon specific invoice approval by Silicon Valley, 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 Silicon Valley. The entire balance due Silicon Valley was repaid in the first quarter of 1999 and the agreement expired in November 1999. F-19 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 8 Long-term debt (continued) (b) Additionally, in May 1998, the Company obtained approximately $1,925,000 (net of fees and commissions of approximately $75,000) from the sale of a debenture. The debenture would have matured on August 28, 1998, and was convertible into Company common stock upon a payment default. In August 1998, prior to maturity, the Company repaid the debenture plus interest aggregating approximately $2,460,000. (c) These obligations primarily related to Softworks and were removed from the Company's consolidated financial statements as part of the de-consolidation of Softworks (Note 3). 9 Earnings per share For 1999 and 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. The Company uses the treasury stock method to calculate the effect that the conversion of the stock options would have on earnings per share ("EPS"). The following table sets forth the computation of basic and diluted EPS:
Year ended December 31, ----------------------- 1999 1998 1997 ---- ---- ---- (in thousands) Numerator: Net income (loss) $ (5,572) $ 9,547 $ (12,385) ========= ========= ========= Denominator: Weighted average shares outstanding (Denominator for basic EPS) 20,455 16,523 11,163 Effect of dilutive securities Stock options N/A 477 N/A Contingent stock issuances N/A 31 N/A --------- --------- --------- Denominator for diluted EPS 20,455 17,031 11,163 ========= ========= ========= Basic net income (loss) per share $ (0.27) $ 0.58 $ (1.11) Diluted net income (loss) per share $ (0.27) $ 0.56 $ (1.11)
F-20 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 10 Shareholders' equity Common stock and convertible debt securities Year ended December 31, 1999 Pursuant to a Board Resolution adopted in January 1999, the Company was authorized to repurchase shares of its common stock at times and amounts that would be in the best interest of the Company. During 1999, 236,580 shares of common stock were purchased at an average price of $1.66. Pursuant to a Board Resolution adopted in August 1999, the Company paid on November 15, 1999, a cash dividend of $6,000,000 (approximately $0.29 per share) to shareholders of record as of September 30, 1999. Year ended December 31, 1998 In January 1998, the Company consummated the sale of restricted common stock under a private placement to accredited investors pursuant to Regulation D. Proceeds from this sale totaled $1,978,000, net of commissions and fees of approximately $162,000. Originally, 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). Accordingly, under the terms of this transaction, the Company issued approximately 281,000 additional shares in April 1998. Year ended December 31, 1997 During 1997, the Company consummated sales of restricted common stock under various private placement agreements pursuant to Regulation D and Regulation S, including sales of convertible debt securities. Proceeds raised from these sales aggregated $6,123,000, net of commissions and expenses of approximately $769,000 and the discount of $1,288,000 pertaining to the convertible debt. A total of 1,659,773 shares were sold (including 1,198,234 shares related to the convertible debentures) at prices ranging from $3.00 to $6.50 and a total of 105,696 options were exercised at prices ranging from $.10 to $5.00. Additionally, 28,265 shares were returned to the Company, pursuant to adjustments related to valuation guarantees for stock transactions occurring in prior years. Details of the Regulation D and Regulation S private placements are as follows: -- The private placements pursuant to Regulation D contained a valuation guarantee based on the closing bid price of the Company's common stock following the effective date of a Registration Statement. The Registration Statement became effective in January 1998, and as a result, the Company issued approximately 500,000 additional shares. F-21 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 10 Shareholders' equity (continued) Common stock and convertible debt securities (continued) Year ended December 31, 1997 (continued) -- Pursuant to Regulation S, the Company received net proceeds of approximately $3,381,000 (net of commissions and fees of $484,000) through the sale of non-interest bearing convertible debentures. These debentures were convertible, at the option of the holder, commencing 45 days from the date of issuance into restricted common stock of the Company. The convertible debentures had an assured discount of 25% from the prices of the Company's common stock at various defined periods. In connection with this discount, the Company recorded a non-cash interest charge of $1,288,000. All of these convertible debentures were converted into an aggregate of 1,198,234 shares of the Company's common stock in 1997. Transactions with officers, employees and consultants During the year ended December 31, 1999, the Company issued the following restricted common stock: -- As part of a bonus incentive compensation plan, the Company issued 665,500 shares to several non-executive employees for which it recorded a non cash charge to operations of $1,010,000. -- Issued 660,491 shares of its common stock to various consultants for whom it recorded a non cash charge to operations of $1,050,000. -- In lieu of cash, in January 1999, the Company issued 115,000 shares, valued at $100,000, for an acquisition of a technology license. This asset was fully amortized during the year ended December 31, 1999. During 1998, the Company issued 2,090,000 restricted shares of common stock to various officers, employees and consultants and recorded a non-cash charge to operations of $2,208,000 as follows: -- The Company issued 501,000 shares to SJ (Note 13) for services rendered in connection with the initial public offering of Softworks, resulting in a $478,000 charge against the "Gain on partial disposition of Softworks." SJ also received 224,000 shares for other services rendered, resulting in a charge to operations of $378,000. -- The Company issued 182,000 shares to a member of its Internet Strategy Committee (who now also serves as the Chairman of the Board of Softworks) for services rendered, resulting in a charge to operations of $237,000. -- The Company issued 181,000 shares to its general counsel for services rendered, resulting in a charge to operations of $146,000. -- The Company issued 80,000 shares to a consultant for services rendered to the Company, resulting in a charge to operations of $63,000. Subsequently, the consultant was elected to the Softworks Board of Directors. F-22 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 10 Shareholders' equity (continued) Transactions with officers, employees and consultants (continued) -- The Company issued 320,000 shares to a consultant (who also has a financial interest in ITSV) for business advisory services rendered, resulting in a charge to operations of $266,000. -- The Company issued 602,000 shares to various other employees and consultants for services rendered, resulting in a charge to operations of $640,000. During 1997, the Company issued 904,234 shares of common stock (including the 114,765 shares to HPS discussed below), 811,000 of which are restricted, to officers, employees and outside consultants. Additionally, in 1997, in lieu of cash compensation to various officers, employees and consultants, the Company's Board of Directors granted 138,000 new options and authorized a reduction of the exercise price of 391,500 outstanding options. The repriced options originally had exercise prices ranging from $5.00 to $15.00 per share and were reduced to prices ranging from $0.10 to $10.00 per share. Accordingly, the Company recorded non-cash charges of approximately $5,515,000 relating to shares and options, as adjusted for the value of 210,000 canceled options. During October, 1997, the Company issued 114,765 restricted shares of common stock (included in the above amounts) 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. Stock option plans On February 19, 1998, the Company's Board of Directors authorized and adopted a plan for compensation, referred to as the 98 Incentive Stock Option Plan, which provides for the grant of non-qualified stock options, to officers and employees of the Company and consultants to the Company, exercisable at or above the market price on the date of grant. All grants, which have varying expiration dates, shall be subject to various vesting conditions including specific performance goals. The Company has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its plans and recognizes non cash compensation charges related to the intrinsic value of stock options granted to employees. If the Company had elected to recognize compensation expense based upon the fair value at the date of grant for awards under these plans and for Softworks common stock options granted to its employees (Note 3), consistent with the methodology prescribed by SFAS 123, the effect on the Company's net income (loss) and net income (loss) per share would be as follows (in thousands, except per share data): F-23 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 10 Shareholders' equity (continued) Stock option plans (continued)
Year ended December 31, ----------------------- 1999 1998 1997 ---- ---- ---- (in thousands) Net income (loss) As reported $ (5,572) $ 9,547 $ (12,385) Pro forma $ (6,118) $ 2,968 $ (12,704) Net income (loss) per share As reported Basic net loss per share $ (0.27) $ .58 $ (1.11) Diluted net loss per share $ (0.27) $ .56 $ (1.11) Pro forma Basic net income (loss) per share $ (0.30) $ .18 $ (1.14) Diluted net income (loss) per share $ (0.30) $ .17 $ (1.14)
The fair value of Company common stock options granted to employees during 1999, 1998 and 1997, approximated $546,000, $4,243,000 and $319,000, respectively, are estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (1) expected volatility of 62% to 66% in 1999, 61% to 116% in 1998 and 104% to 144% in 1997, (2) risk-free interest rates of 5.81% in 1999, 4.09% to 5.56% in 1998 and 5.8% in 1997, and (3) expected lives of 2 to 3.53 years in 1999, .28 to 4.23 years in 1998 and .44 to 2.15 years in 1997. The fair value charged to the consolidated financial statements (net of minority interest) related to Softworks common stock options granted to employees during 1998, approximated $2,336,000, are estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (1) expected volatility ranging from 72% to 130%, (2) risk-free interest rates of 5.4% to 6.3%, and (3) expected lives ranging from 1.1 to 4.4 years. F-24 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 10 Shareholders' equity (continued) Stock option plans (continued) The Company grants options under multiple stock-based compensation plans that do not differ substantially in the characteristics of the awards. The following is a summary of stock option activity for 1999, 1998 and 1997, relating to all of the Company's common stock plans (shares are in thousands):
Weighted average exercise Shares price ------ ---------- Outstanding at January 1, 1997 2,281 $ 8.20 Granted 529 $ 2.19 Exercised (106) $ 2.48 Forfeited (1,390) $ 11.77 ------- Outstanding at December 31, 1997 1,314 $ 7.83 Granted 6,369 $ 3.24 Exercised (1,103) $ 2.93 Forfeited (3,741) $ 4.68 ------- Outstanding at December 31, 1998 2,839 $ 3.58 Granted 1,870 $ 1.25 Exercised - $ N/A Forfeited (306) $ 11.54 ------- Outstanding at December 31, 1999 4,403 $ 2.04 =======
At December 31, 1999, a total of 4,282,000 options are exercisable at various exercise prices: 4,116,000 options are exercisable at prices ranging from $1.25 to $2.00 per share, 66,000 options at $2.50 to $3.50 and 100,000 options at $6.25 to $25.60. The weighted-average remaining contractual life of options outstanding at December 31, 1999 is 3.08 years. A total of 4,403,000 shares of the Company's common stock are reserved for options, warrants and contingencies at December 31, 1999. At December 31, 1998, a total of 2,771,000 options are exercisable at various exercise prices: 2,358,000 options are exercisable at prices ranging from $1.75 to $2.00 per share, 196,000 options at $2.50 to $5.00, and 217,000 options at $5.92 to $46.30. The weighted-average remaining contractual life of options outstanding at December 31, 1998 is 3.79 years. A total of 2,839,000 shares of the Company's common stock are reserved for options, warrants and contingencies at December 31, 1998. F-25 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 10 Shareholders' equity (continued) Stock option plans (continued) At December 31, 1997, a total of 1,302,000 options are exercisable at various exercise prices: 882,000 options are exercisable at prices ranging from $.10 to $5.00 per share, 290,000 options at $6.00 to $15.00 and 130,000 options at $20.00 to $46.30. The weighted-average remaining contractual life of options outstanding at December 31, 1997 is 1.30 years. A total of 1,545,000 shares of the Company's common stock are reserved for options, warrants and contingencies at December 31, 1997 Total compensation costs recognized for stock option awards amounted to $193,000, $1,255,000 and $1,326,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Compensation cost represents the fair value of options granted to non-employees and the intrinsic value of options granted to employees. During October 1998, the Company's Board of Directors authorized a reduction of the exercise price of 2,234,235 outstanding options to purchase common stock (issued to employees) to $2.00 per share ($0.25 higher than the fair market value at the date of the Board action), with an expiration date of December 31, 2002. The substantial majority of such options were previously issued at exercise prices ranging from $4.00 to $5.00 per share. Registration statements/restricted securities The Company has used restricted common stock for the purchase of certain companies (Note 3), as compensation to employees and consultants for services rendered, and has sold restricted common stock in private placements. At December 31, 1999, approximately 3,769,000 shares of restricted common stock were issued and outstanding. On February 11, 1999 the Company filed a registration statement on Form S-8 (No. 333-72203) for 2,262,235 options and 2,230,084 shares of the Company's common stock which was effective upon filing. The primary purpose of this registration statement was to register options, which were repriced in October 1998, and shares issued to employees and certain consultants. 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. 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. In 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. F-26 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 11 Income taxes Through August 4, 1998, the results of the Company's U.S. operations conducted through its Softworks subsidiary were included in the Company's consolidated Federal income tax returns. Separate provisions for income taxes were determined for Softworks' wholly owned foreign subsidiaries that were 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 was 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) was no longer uncertain, the related valuation allowance (with respect to Softworks domestic operations only) was eliminated as of December 31, 1998. Additionally, as a result of the Company's sale of its remaining interest in Softworks in January 2000 and the sale of its ComputerCOP technology in February 2000 (Note 18), the Company will recognize a taxable gain in the first quarter of 2000. Accordingly, the Company reduced its valuation allowance by $9,197,000 (approximately $7,000,000 of which relates to deferred tax assets created in previous years) as of December 31, 1999. The following table summarizes components of the benefit (provision) for current and deferred income taxes for the years ended December 31, 1999 and 1998:
Year ended December 31, ----------------------- Benefit (provision) for income taxes 1999 1998 ---- ---- Current United States $ 196 $(2,196) Foreign - (32) State and other (8) (306) ------- ------- Total 188 (2,534) ------- ------- Deferred United States 8,950 632 State and other (43) 154 ------- ------- Total 8,907 786 ------- ------- $ 9,095 $(1,748) ======= =======
F-27 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 11 Income taxes (continued) The following table summarizes the significant differences between the U.S. Federal statutory tax rate and the Company's effective tax rate for financial statement purposes for the years ended December 31, 1999 and 1998:
Year ended December 31, ----------------------- 1999 1998 ---- ---- U.S. Federal statutory tax rate 35.0% (34.0)% State and local taxes, net of U.S. Federal tax effect - (6.5) Non taxable portion of gain related to Softworks initial public offering - 12.4 Reduction of deferred tax asset valuation reserve 47.9 7.4 Utilization of net operating loss carryforward - 7.1 Permanent differences- compensation (12.2) - Amortization of intangible assets (6.0) - Other (2.7) (1.9) ------- ------- Effective tax rate 62.0% (15.5)% ======= =======
The tax effects of temporary differences that give rise to deferred tax assets and liabilities are summarized as follows:
Year ended December 31, ----------------------- 1999 1998 ---- ---- (in thousands) Deferred tax assets Net operating loss carryforwards $ 23,283 $ 23,063 Tax credit carryforward 565 430 Compensation - 731 Fixed and intangible assets 1,710 1,083 Other 280 1,153 -------- -------- 25,838 26,460 Deferred tax liabilities Investment in Softworks, held for sale (2,817) - -------- -------- 23,021 26,460 Valuation allowance (13,824) (25,670) -------- -------- Deferred tax assets, current $ 9,197 $ 790 ======== ========
During 1998, $4,700,000 of net operating loss carry forwards were utilized to substantially reduce the taxable income resulting from the gain on partial disposition of Softworks. At December 31, 1999, the Company has net operating loss carryforwards remaining of approximately $55,000,000 available to reduce future taxable income. These losses, which expire through 2019, are subject to substantial limitations as a result of IRC Section 382 rules governing changes in control. Approximately $30,000,000 of these losses are available to be utilized in the year 2000. After the year 2000, approximately $2,700,000 of losses become available each year (subject to, among other things, adjustment upon further changes in control) until the losses expire. F-28 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 12 Unusual charges Included in unusual charges for the year ended December 31, 1997, are charges aggregating $686,000, of which $850,000 relates to the settlement of certain litigation ($500,000 was settled with the issuance of 119,850 shares of common stock in the first quarter of 1998), net of $164,000 which relates to the return of 30,215 shares of the Company's common stock related to a settlement with Software Publishing Corporation. 13 Related party and other transactions Three executive officers of the Company have received advances from time to time, with such advances being payable upon demand and bearing interest at the rate of 7% per annum. In the first quarter of 2000, the officers repaid $1,706,000 of these advances, consisting of $783,000 in cash and 410,179 shares of Company common stock valued at $933,000. During the years ended December 31, 1999, 1998 and 1997, the Company paid an outside Director fees for legal and consulting services aggregating $170,000, $149,000 and $165,000, respectively. Additionally, in 1999 the Company granted 25,000 shares of stock and 100,000 stock options to such Director, valued at $45,000. The Company paid an outside Director consulting fees of $56,000, $52,000 and $52,000 in each of the years ended December 31, 1999, 1998 and 1997, respectively. Additionally, in 1999 the Company granted 25,000 shares of stock and 100,000 stock options to such Director, valued at $45,000. In 1999, the Company's general counsel received cash compensation of $689,000, and 75,000 shares of Softworks common stock and 150,000 Company stock options valued at $395,000, for business and financial consulting services rendered. In 1998, the Company's general counsel received cash compensation of $207,000 and 180,000 Company stock options (which were subsequently cancelled) valued at $171,000. Also in 1998 (in addition to the shares of Softworks and Company common stock as discussed in Notes 3 and 10), related entities received 266,000 shares of Softworks common stock, valued at $541,000, for business and financial consulting services rendered. In 1999, a consultant (who also has a financial interest in ITSV) received cash compensation of $215,000 and 117,000 shares of Softworks common stock valued at $423,000 for various consulting services. In 1998, the consultant received cash compensation of $185,000 and 300,000 Company stock options (which were subsequently cancelled) valued at $254,000 in addition to the shares of Softworks and Company common stock (as discussed in Notes 3 and 10). S.J. & Associates, Inc. In July 1998, and during 1999, the Company entered into various agreements with S.J. & Associates, Inc. (including its affiliates are collectively referred to as "SJ") for various services which provide for the following compensation: -- SJ received minimum annual compensation pursuant to several agreements aggregating $227,000 per annum through November 1999. Commencing in December 1999, SJ receives minimum annual compensation pursuant to two agreements aggregating $276,000 per annum. The agreements expire in November 2004. SJ also consulted with Softworks in various capacities throughout 1999 and received compensation directly from Softworks. F-29 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 13 Related party and other transactions (continued) S.J. & Associates, Inc. (continued) -- During 1998, SJ was granted 425,000 options to purchase the Company's common stock at exercise prices ranging from $4.00 to $6.00 per share, resulting in a charge to operations of $365,000; 275,000 of these options were exercised and the remaining 150,000 options were cancelled. -- As discussed in Notes 3 and 10, SJ also received shares of the Company's and Softworks common stock during 1998. -- SJ also received 190,000 shares of Softworks common stock (issued directly from Softworks) in conjunction with their initial public offering in 1998. -- In 1999, SJ was retained to assist the Company in its efforts to sell shares in Softworks second public offering (Note 3). 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 vested upon completion of Softworks second public offering. The options were exercised in June 1999. -- In November 1999, 100,000 shares of Softworks common stock and 80,000 shares of the Company's common stock were issued to SJ as payment for various consulting matters. Additionally, SJ was awarded 75,000 fully vested options of the Company's common stock exercisable at $1.25 per share and expiring November 30, 2001. The stock and options were valued at $621,000 and were charged to operations in 1999. -- During 1999, the Company paid an affiliate of SJ $700,000 relating to certain multi-media Internet technology. -- In 1999, the Company entered into an agreement with SJ to provide assistance to the Company in locating, negotiating and ultimately closing a transaction for the sale of the Company's entire remaining holdings of Softworks, the sale of the Company's ComputerCOP technology and related investment in NetWolves Corporation (Note 18). The Company agreed to pay SJ 4.0% of the value of the transactions. Accordingly, in the first quarter of 2000, SJ earned $2,458,000 with respect to the Softworks transaction and $1,420,000 with respect to the transaction with NetWolves Corporation. F-30 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 14 Commitments and contingencies Operating leases Operating leases are primarily for office space, equipment and automobiles. At December 31, 1999, the future minimum lease payments under operating leases are summarized as follows (in thousands):
Year ending December 31, 2000 $ 528 2001 421 2002 175 Thereafter - -------- Total $1,124 ========
Rent expense approximated $592,000, $1,285,000 and $1,198,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Defined contribution plan The Company provides pension benefits to eligible employees through a 401(k) plan. Employer matching contributions to this 401(k) plan approximated $41,000, $106,000 and $66,000 for the years ended December 31, 1999, 1998 and 1997, respectively. 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. F-31 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 14 Commitments and contingencies (continued) Legal matters (continued) In March 1995, an action was commenced against the Company and a number of defendants unrelated to the Company which action was later amended naming only the Company and three of its officers as defendants. The 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 had been 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. The Company denied plaintiff's allegations and filed a motion for summary judgment. In November 1999, the motion for summary judgment was granted in favor of the Company and its officers. However, the plaintiff filed an appeal, which is being contested by the Company. The Company is unable to predict the ultimate outcome of this appeal and, accordingly, no adjustments have been made in the consolidated financial statements for any potential losses or potential issuance of common stock. During 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. In August of 1999, The Company and its directors were served with a derivative action complaint alleging awards of excess compensation and requesting a judgment in favor of the Company for such excess compensation. The Company and defendants have denied the allegations and are vigorously defending the matter, however, the Company is unable to predict the outcome of this claim and, accordingly, no adjustments have been made in the consolidated financial statements in regard to this matter. In November 1999, the Company (through one of its subsidiaries) was added as a party in an amended complaint. The complaint alleges that a Company consultant violated a personal non-compete agreement in performing services for the Company. The plaintiffs contend that they have been compelled to offer terms more generous to their customers than they otherwise would have offered. Plaintiffs did not disclose the amount of their alleged damages and requested injunctive relief. The Company has denied the allegation and is vigorously defending the matter, however, the Company is unable to predict the outcome of this claim and, accordingly, no adjustments have been made in the consolidated financial statements in regard to this matter. F-32 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 15 Management's plans The Company has continued to incur substantial operating losses and to use substantial amounts of cash in operating activities, which were primarily financed through sales and exchanges of Softworks common stock. Management's current plan is focused on becoming a preeminent provider of innovative software products and services which continues to exploit the Company's patented technologies. To achieve its goals, the Company expects to continue to market the d.b.Express Internet Information Server (the "Server Farm") to the telecommunications sector. The Company is continually reviewing its long-term business strategy. While management believes that its plan will ultimately enable them to achieve positive cash flows from operations, until such time, substantial 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 cash on hand, additional debt and equity financing (if necessary), or the partial disposition (if necessary) of its recent investment in NetWolves (Note 18). 16 Consolidated Statements of Cash Flows Supplemental disclosure of cash flow information for the years ended December 31, 1999, 1998 and 1997 is summarized as follows:
Year ended December 31, ----------------------- 1999 1998 1997 ---- ---- ---- (in thousands) Interest paid $ 139 $ 541 $ 153 ====== ====== ====== Net taxes paid (refunds received) $ 102 $ (23) $ (74) ====== ====== ======
F-33 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 16 Consolidated Statements of Cash Flows (continued) Non-cash investing and financing activities for the years ended December 31, 1999, 1998 and 1997 is summarized as follows:
Year ended December 31, ----------------------- 1999 1998 1997 ---- ---- ---- (in thousands) Exchange of the Company's and Softworks common stock to ITSV (Note 3): Prepaid advertising $ - $ 4,150 $ - Goodwill - 5,360 - Software development costs - 2,700 - -------- -------- -------- $ - $ 12,210 $ - ======== ======== ======== Capitalized software technology (Note 7) $ - $ - $ 2,160 ======== ======== ======== Note receivable for the sale of Softworks common stock by the Company $ - $ 5,000 $ - ======== ======== ======== Reduction in cash resulting from excluding Softworks from the consolidated financial statements: Account and installment receivables $ 33,942 $ - $ - Prepaid expenses and other current assets 2,282 - - Property and equipment, net 2,698 - - Intangible assets, net 6,653 - - Other non current assets 2,061 - - Accounts payable and accrued expenses (4,468) - - Deferred revenue (26,787) - - Current and long-term debt (4,460) - - Minority interest (9,353) - - Investment in Softworks (9,327) - - -------- -------- -------- $ (6,759) $ - $ - ======== ======== ========
F-34 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 17 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 domestically, is primarily engaged in the design, development, marketing and support of information delivery software products and software products that are designed to provide non-computer literate owners the ability to identify threats as well as objectionable material, which may be viewed by users of the computer on the internet. Until March 31, 1999, through Softworks (see Note 3), the Company was also engaged in systems management software products for corporate mainframe data centers. International operations of Softworks' foreign subsidiaries were 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 design, construction and installation of technology systems, including the reselling of computer hardware. The professional services segment also provides services through the d.b. Express Internet Information Server, also referred to as a "Server Farm". Business information
Year ended December 31, ----------------------- 1999 1998 1997 ---- ---- ---- (in thousands) Revenue Computer Software $ 10,907 $ 42,298 $ 27,870 Professional Services 13,733 19,690 1,868 -------- -------- -------- Total $ 24,640 $ 61,988 $ 29,738 ======== ======== ======== Operating income (loss) Computer Software $(33,215) $(17,193) $(11,976) Professional Services 659 1,549 50 -------- -------- -------- Total $(32,556) $(15,644) $(11,926) ======== ======== ======== Identifiable assets Computer Software $ 28,762 $ 76,950 $ 38,827 Professional Services 1,262 14,952 471 -------- -------- -------- Total $ 30,024 $ 91,902 $ 39,298 ======== ======== ========
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. F-35 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 17 Segment information (continued) Geographical information
Year ended December 31, ----------------------- 1999 1998 1997 ---- ---- ---- (in thousands) Revenue Domestic $ 21,383 $ 53,190 $ 25,006 International 3,257 8,798 4,732 -------- -------- -------- Total $ 24,640 $ 61,988 $ 29,738 ======== ======== ======== Operating income (loss) Domestic $(33,568) $(14,870) $(11,386) International 1,012 (774) (540) -------- -------- -------- Total $(32,556) $(15,644) $(11,926) ======== ======== ======== Identifiable assets Domestic $ 30,024 $ 82,377 $ 36,630 International - 9,525 2,668 -------- -------- -------- Total $ 30,024 $ 91,902 $ 39,298 ======== ======== ========
Major customer For the year ended December 31, 1999, the Company had one major contract involving two customers, with combined revenue of $12,297,000 (49.9% of total revenue). This amount is included in the Professional Services and Domestic categories. For the year ended December 31, 1998, the Company had one major customer with revenue of $14,878,000 (24% of total revenue). This amount is included in the Professional Services and Domestic categories. 18 Subsequent events Softworks, Inc. Pursuant to a tender offer dated December 21, 1999, the Company sold its remaining 35% interest in Softworks (a total of 6,145,767 shares) to EMC Corporation and its subsidiary ("EMC") for $10.00 per share. The transaction, which was completed on January 27, 2000, provided aggregate cash proceeds of $61,458,000 (less $10,000,000 placed in escrow) and resulted in a pre-tax gain, net of expenses, of $47,607,000 recorded in the first quarter of 2000. The entire amount of "Investment in Softworks, held for sale" is included in current assets at December 31, 1999. F-36 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 18 Subsequent events (continued) Softworks, Inc. (continued) In connection with the tender offer, the Company entered into an Indemnification Agreement that provides, in part, that the Company shall indemnify EMC from all losses sustained by EMC as a result of any breach of certain representations and warranties appearing in the Agreement and Plan of Merger between Softworks and EMC. The term of the Indemnification Agreement is two years from the date of closing. Pursuant to an Escrow Agreement, the Company deposited $10,000,000 of the sales proceeds into an escrow account to secure any potential liabilities arising from the Indemnification Agreement. The escrow funds, net of any claims against them, are to be released to the Company one year from the date of closing. NetWolves Corporation Pursuant to an agreement dated February 10, 2000, on February 14th, the Company sold its recently formed subsidiary, ComputerCop Corp. to NetWolves Corporation ("NetWolves", traded on the OTCBB under the symbol "WOLV") in exchange for 1,775,000 shares of NetWolves common stock. The assets of ComputerCop Corp. included the ComputerCOP technology (and certain related assets including inventory) and $20.5 million in cash. The transaction was treated as a sale of the ComputerCOP technology for 750,000 shares valued at $15 million and the purchase 1,025,000 shares from NetWolves for $20.5 million. Additionally, the Company purchased 225,000 shares from certain NetWolves shareholders for $4.5 million. The sale of the Company's ComputerCOP technology resulted in a pre-tax gain, net of expenses, of $8,812,000 recorded in the first quarter of 2000. The $40,000,000 value of the 2,000,000 shares of NetWolves stock was determined based upon the quoted market price of the NetWolves stock at the time the transaction was agreed to and announced and was also based on a fairness opinion obtained from the Company's investment banker. The Company expects to account for its investment in NetWolves as a marketable security available for sale in accordance with Statement of Financial Standards No. 115 "Accounting For Certain Investments in Debt and Equity Securities." All of the shares of NetWolves stock owned by the Company ("Trust Shares") are subject to a Voting Trust Agreement wherein the Trustee, NetWolves' Chief Executive Officer, has been granted the right to vote all Trust Shares for a minimum period of six months to a maximum period of two years. The Voting Trust terminates with respect to any shares sold pursuant to a registration statement effected by NetWolves, or at the end of six months in the event (1) NetWolves has not been listed for trading on the NASDAQ SmallCap market or the NASDAQ National Market System, or (2) with respect to shares privately sold, if any, if aggregate sales are 25% or less of the total Trust Shares, and terminates at the end of twelve months with respect to shares privately sold, if any, if aggregate sales are 50% or less of the total Trust Shares. The Company also received piggyback registration rights and a one time demand registration right effective after August 15, 2000, in regard to the NetWolves stock. F-37 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 18 Subsequent events (continued) Pro forma consolidated financial statements Pro forma condensed consolidated financial statements as if the transactions described above were consummated as of December 31, 1999 and as of the beginning of the year ended December 31, 1999, are as follows:
Computer Concepts Corp. and Subsidiaries Pro Forma Condensed Consolidated Balance Sheet (Unaudited) December 31, 1999 (in thousands) Pro Forma Adjustments --------------------- Softworks NetWolves Actual Transaction Transaction Pro Forma ------ ----------- ----------- --------- Assets Cash $ 1,852 $ 51,458 $ (25,000) $ 28,310 Investment in Softworks, held for sale 10,329 (10,329) - - Assets held for sale ComputerCOP 3,876 - (3,876) - Deferred tax assets, current 9,197 (7,760) (1,437) - Other current assets 3,130 - - 3,130 Investment in NetWolves Corporation - - 40,000 40,000 Cash held in escrow - 10,000 - 10,000 Property and equipment, net 1,345 - - 1,345 Other assets 295 -` - 295 -------- -------- --------- -------- $ 30,024 $ 43,369 $ 9,687 $ 83,080 ======== ======== ========= ======== Liabilities and shareholders' equity Current liabilities (1) $ 5,538 $ 3,522 $ 2,312 $ 11,372 Income taxes payable, current - 8,902 1,648 10,550 Shareholders' equity 24,486 30,945 5,727 61,158 -------- -------- --------- -------- $ 30,024 $ 43,369 $ 9,687 $ 83,080 ======== ======== ========= ======== (1) Pro forma adjustments represent expenses incurred in connection with completing each of the transactions.
F-38 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 18 Subsequent events (continued) Pro forma consolidated financial statements (continued) Computer Concepts Corp. and Subsidiaries Pro Forma Condensed Consolidated Statement of Operations (Unaudited) Year ended December 31, 1999 (in thousands)
Pro Forma Adjustments --------------------- NetWolves/ Softworks ComputerCOP Actual Transaction Transaction Pro Forma ------ ----------- ----------- ---------- Revenue $ 24,640 $ (10,258) $ (690) $ 13,692 Cost of revenue 13,044 (764) (241) 12,039 -------- --------- -------- --------- Gross margin 11,596 (9,494) (449) 1,653 Total operating expenses (1) 44,152 (9,342) (6,547) 28,263 -------- --------- -------- --------- Operating (loss) income (32,556) (152) 6,098 (26,610) Other income (expense) Gain on partial disposition of Softworks 17,107 (17,107) - - Equity in earnings of Softworks 512 (512) - - Interest and other (expense) income, net 316 - - 316 Minority interest in earnings of Softworks (46) 46 - - -------- --------- -------- --------- Loss before benefit (provision) income taxes (14,667) (17,725) 6,098 (26,294) Benefit (provision)for income taxes 9,095 (7,700) (1,437) (42) -------- --------- -------- --------- Net loss $ (5,572) $ (25,425) $ 4,661 $ (26,336) ======== ========= ======== ========= (1) The ComputerCOP operating expense adjustment includes $5,617,000 of amortization expense related to ComputerCOP's intangible assets.
Dividend In February, 2000, the Company declared a dividend of $0.10 per share (aggregating approximately $2,000,000) to its shareholders of record on March 15, 2000 and payable on May 1, 2000. F-39 EX-23.1 2 INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference in the Registration Statements of Computer Comcepts Corp. on Forms S-8 (File No. 33-88260, effective December 30, 1994, File No. 33-94058, effective June 28, 1995, File No. 333-4070, effective April 25, 1996, File No. 333-42795, effective December 19, 1997, File No. 333-52875, effective May 15, 1998 and File No. 333-72203, effective February 11, 1999) of our report dated February 18, 2000, appearing in the Annual Report on Form 10-K of Computer Concepts Corp. for the year ended December 31, 1999. /s/ Hays & Company Hays & Company March 10, 2000 New York, New York EX-23.2 3 March 13, 2000 COMPUTER CONCEPTS CORP. 80 Orville Drive Bohemia, New York 11716 Re: Computer Concepts Corp. Dear Sirs: In conjunction with the filing of Form 10-K for the year ended December 31, 1999, for Computer Concepts Corp., I hereby consent to the incorporation by reference to the opinion of the Daniel B. Kinsey, P. C. firm included in the Registration Statements of Computer Concepts Corp. on Forms S-8 filed with the Securities and Exchange Commission by Computer Concepts Corp. and effective on December 30, 1994 (File No. 33-88260), on June 28, 1995 (File No. 33-94058), on April 25, 1996 (File No. 333-4070), on January 6, 1998 (File No. 333-42795), on May 15, 1998 (File No. 333-52875) and on February 11, 1999 (File No. 333-72203) and on Form S-1 declared effective on August 9, 1996, and as amended on Form S-1/A on January 6, 1998 (File No. 33- 97560), on Form S-1 on January 6, 1998 (File No. 333-42919) and on Form S-1 on February 6, 1998 (File No. 333-44683). Very truly yours, Daniel B. Kinsey, P.C. /s/ Daniel B. Kinsey Daniel B. Kinsey EX-27 4
5 This schedule contains summary financial information extracted from the consolidated financial statements for the year ended December 31, 1999 and is qualified in its entirety by reference to such statements. 12-MOS DEC-31-1999 DEC-31-1999 1,852 51 936 493 0 28,384 3,601 2,256 30,024 5,538 0 0 0 2 102,868 30,024 24,640 24,640 13,044 44,152 (18,028) 0 139 (14,667) (9,095) (5,572) 0 0 0 (5,572) (0.27) (0.27)
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