-----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, Rh8w3Qyjw4QZ/Ie6n7RIxV0dwi3Fj6MPXpF2ar0+5/gAjFjR+ukvaGoxsux1mzh5 G4/CNSKAfgFHyX0xV7M8Xw== 0000932214-99-000057.txt : 19991122 0000932214-99-000057.hdr.sgml : 19991122 ACCESSION NUMBER: 0000932214-99-000057 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991119 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPUTER CONCEPTS CORP /DE CENTRAL INDEX KEY: 0000879703 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 112895590 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-72203 FILM NUMBER: 99761225 BUSINESS ADDRESS: STREET 1: 80 ORVILLE DR CITY: BOHEMIA STATE: NY ZIP: 11716 BUSINESS PHONE: 5162441500 MAIL ADDRESS: STREET 1: 80 ORVILLE DRIVE CITY: BOHEMIA STATE: NY ZIP: 11716 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 0 - 20660 COMPUTER CONCEPTS CORP. (Exact name of registrant as specified in its charter) Delaware 11-2895590 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 80 Orville Drive, Bohemia, N.Y. 11716 (Address of principal executive offices) (Zip Code) Registrant=s telephone number, including area code (516) 244-1500 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares of $.0001 par value stock outstanding as of November 18, 1999 was 20,529,250. COMPUTER CONCEPTS CORP. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION Page Condensed Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 3 Condensed Consolidated Statements of Operations and Comprehensive Income For the Three and Nine Months Ended September 30, 1999 and 1998 4 Condensed Consolidated Statements of Cash Flows For the Nine Months ended September 30, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6 - 14 Management's Discussion and Analysis of Financial Condition and Results of Operations 15 - 22 PART II - OTHER INFORMATION Item 1. Legal Proceedings 23 Item 2. Changes in Securities 23 Item 3. Defaults Upon Senior Securities 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 23 Item 6. Exhibits and Reports on Form 8-K 23 Signatures 24 COMPUTER CONCEPTS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS as of September 30, 1999 and December 31, 1998 (in thousands, except share data)
September December 30, 31, ASSETS 1999 1998 ---- ---- (Unaudited) Current Assets: Cash and cash equivalents $ 13,702 $ 8,176 Accounts receivable, net of allowance for doubtful accounts of $361 and $1,350 in 1999 and 1998, respectively 811 27,412 Installment receivables - 16,406 Inventories 250 419 Deferred tax assets, current - 306 Advances to officers 823 895 Prepaid expenses and other current assets 1,485 10,128 ------- ------- Total current assets 17,071 63,742 Installment accounts receivable, due after one year - 7,908 Property and equipment, net 1,453 3,564 Software costs, net 1,592 5,594 Excess of cost over fair value of net assets acquired, net of accumulated amortization of $2,194 and $4,239 in 1999 and 1998, respectively 2,990 8,610 Investment in Softworks 11,351 - Deferred tax assets, noncurrent - 484 Other assets 156 2,000 -------- -------- $ 34,613 $ 91,902 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses $ 1,693 $11,428 Dividend payable 6,000 - Current portion of long- term debt 9 6,117 Income taxes payable 50 2,207 Deferred installment revenue - 7,314 Deferred maintenance revenue 42 9,107 ------- ------- Total current liabilities 7,794 36,173 Deferred installment revenue, earned after one year - 7,883 Deferred maintenance revenue, earned after one year 11 3,924 Long-term debt, net of current portion - 1,403 ------- ------- Total liabilities 7,805 49,383 ------- ------- Minority interest - 8,503 Commitments and contingencies Shareholders' equity: Common stock, $.0001 par value; 150,000,000 authorized; 20,765,830 and 19,324,839 shares issued in 1999 and 1998, respectively, and 20,591,450 and 19,324,839 shares outstanding in 1999 and 1998, respectively 2 2 Additional paid-in capital l08,674 106,515 Accumulated deficit (81,355) (72,194) Accumulated other comprehensive loss (217) (307) ------- ------- 27,104 34,016 Common stock in treasury, at cost - 174,380 shares in 1999 (296) - ------- ------- Total shareholders' equity 26,808 34,016 ------- ------- $ 34,613 $ 91,902 ======= ======= See Notes to Condensed Consolidated Financial Statements.
-3- COMPUTER CONCEPTS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Unaudited) For the Three and Nine Months Ended September 30, (in thousands, except per share data)
Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------ 1999 1998 1999 1998 ---- ---- ---- ---- Revenue: Software licenses, net $ 385 $ 8,194 $ 7,326 $ 17,983 Maintenance 11 2,630 3,560 7,827 Professional services 410 1,926 13,533 6,045 -------- -------- -------- -------- 806 12,750 24,419 31,855 -------- -------- -------- -------- Cost of revenue: Software licenses 157 434 434 1,132 Maintenance - 1,776 548 4,886 Professional services 109 1,719 11,926 5,183 -------- -------- -------- -------- 266 3,929 12,908 11,201 -------- -------- -------- -------- Gross margin 540 8,821 11,511 20,654 -------- -------- -------- -------- Operating expenses Research and development 2,081 1,498 7,825 3,316 Sales and marketing 2,607 7,216 14,007 19,394 General and administrative 1,309 3,136 5,966 7,965 Amortization and depreciation 1,019 1,478 3,698 2,718 -------- -------- -------- -------- 7,016 13,328 31,496 33,393 -------- -------- -------- -------- Operating loss (6,476) (4,507) (19,985) (12,739) Other income (expense) Gain on partial disposition of subsidiary 3 15,839 16,444 22,466 Equity in earnings of Softworks 446 - 321 - Interest income (expense), net 194 (173) 210 (732) Minority interest in earnings of subsidiary - (275) (46) (275) -------- -------- -------- -------- Income (loss) before provision for income taxes (5,833) 10,884 (3,056) 8,720 Benefit from (provision for) income taxes (42) 8 (102) 8 -------- -------- -------- -------- Net income (loss) (5,875) 10,892 (3,158) 8,728 Other comprehensive income: Foreign currency translation adjustments 87 (15) 90 (22) Marketable securities reserve adjustments - (60) - (60) -------- -------- -------- -------- Comprehensive income (loss) $(5,788) $10,817 $ (3,068) $8,646 ======== ======== ======== ======== Basic net income (loss) per share $ (0.28) $ 0.61 $ (0.15) $ 0.56 ======== ======== ======== ======== Diluted net income (loss) per share $ (0.28) $ 0.60 $ (0.15) $ 0.53 ======== ======== ======== ======== Basic weighted average common shares outstanding 20,736 17,811 20,429 15,595 ======== ======== ======== ======== Diluted weighted average common shares outstanding 20,736 18,008 20,429 16,364 ======== ======== ======== ======== See Notes to Condensed Consolidated Financial Statements.
-4- COMPUTER CONCEPTS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Nine Months Ended September 30, (in thousands)
1999 1998 ---- ---- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Cash flows from operating activities Net income (loss) $(3,158) 8,728 Adjustments to reconcile net income (loss) to net cash used by operating activities Depreciation and amortization: Software costs 1,532 1,514 Property and equipment 803 899 Excess of cost over fair value of net assets acquired 1,523 1,094 Other - 2 Equity in earnings of Softworks (321) - Minority interest in net income of subsidiary 46 275 Provision for doubtful accounts 93 324 Common stock and options issued for services 2,150 3,548 Softworks common stock exchanged for services 2,522 1,612 Gain on partial disposition of subsidiary (16,444) (22,466) Deferred income tax benefit - (545) Other - 421 Changes in operating assets and liabilities Accounts receivable 16,731 (3,314) Installment accounts receivable, due after one year 149 (1,249) Inventories 168 - Prepaid expenses and other current assets 1,695 (230) Other assets 283 (467) Accounts payable and accrued expenses (5,377) (1,047) Current income taxes (2,043) 506 Deferred income taxes 290 - Deferred revenue (1,388) 3,277 -------- -------- Net cash used by operating activities ( 746) (7,118) -------- -------- Cash flows from investing activities Capital expenditures (1,391) (1,319) Additional consideration for Softworks acquisition - (678) Cash received from sale of limited license (see Note 7) 400 - Reduction in cash resulting from excluding Softworks from consolidation (see Note 8) (6,759) - Proceeds from sales of Softworks common stock (see Note 8) 17,406 19,419 Proceeds from exercises of options to purchase Softworks common stock (see Note 8) 240 - Software development and technology purchases (351) (1,263) Repayment of officers loans, net 72 252 -------- -------- Net cash provided by investing activities 9,617 16,411 -------- -------- Cash flows from financing activities Net proceeds from sales of common stock and exercises of options - 5,210 Proceeds from issuance of convertible debt (net of issuance costs) - 1,925 Acquisition of treasury stock (296) - Repayment of convertible debt - (2,000) Proceeds from long-term debt 2,021 - Repayments of long-term debt (5,072) 74 -------- -------- Net cash provided (used) by financing activities (3,347) 5,209 -------- -------- Effect of exchange rate changes on cash and cash equivalents 2 (22) -------- -------- Net increase in cash and cash equivalents 5,526 14,480 Cash and cash equivalents, beginning of period 8,176 778 -------- -------- Cash and cash equivalents, end of period $13,702 $15,258 ======== ======== See Notes to Condensed Consolidated Financial Statements.
-5- COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three and Nine Months Ended September 30, 1999 and 1998 1. Interim Financial Information The condensed consolidated balance sheet as of September 30, 1999, and the condensed consolidated statements of operations and cash flows for the three and nine months ended September 30, 1999, and 1998, have been prepared by the Company without audit. These interim financial statements include all adjustments, consisting only of normal recurring accruals, which management considers necessary for a fair presentation of the financial statements for the above periods. The results of operations for the three months ended September 30, 1999, are not necessarily indicative of results that may be expected for any other interim periods or for the full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 1998. The accounting policies used in preparing the condensed consolidated financial statements are consistent with those described in the December 31, 1998, consolidated financial statements. 2. The Company The most significant portion of the Company's operations had historically been conducted through one of its subsidiaries, Softworks, Inc. ("Softworks"). 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 38.5%. 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. See Note 8 for further details. Computer Concepts Corp. and subsidiaries (the "Company") design, develop, market and support information delivery software products, including end-user data access tools for use in personal computer and client/server environments. Through Softworks, the Company developed, marketed and supported systems management software products for corporate mainframe data centers. In 1997, the Company created a business unit, "professional services" , which primarily resells computer hardware and for a fee, will assist in the design, construction and installation of technology systems. The Company makes use of its proprietary data access technology, d.b.ExpressJ in its d.b.ExpressJ 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. Additionally, in June, 1998, the Company completed an acquisition of software (and related sales and marketing rights) which is designed to provide non computer literate owners (e.g. parents, guardians, schools, etc) the ability to identify threats as well as objectionable material which may be viewed by users of the computer on the internet (e.g. children). -6- COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three and Nine Months Ended September 30, 1999 and 1998 3. Shareholders' Equity During the nine month period ended September 30, 1999, the Company issued the following restricted common stock: i. As part of a bonus incentive compensation plan, the Company issued 665,500 shares (of which 10,000 were issued in the three month period ended September 30, 1999) to several non-executive employees for which it recorded a non cash charge to earnings of $1,010,000. ii. Issued 660,500 shares of its common stock to various consultants for whom it recorded a non cash charge to earnings of $1,050,000. iii. In lieu of cash, in January, 1999, the Company issued 115,000 shares, valued at $100,000, for an acquisition of a technology license. The Company recorded amortization expense of $58,000 during the nine months ended September 30, 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. In the third quarter of 1999, 174,380 shares of common stock were purchased at an average price of $1.697. In the fourth quarter of 1999, as of the filing date, an additional 62,200 shares were repurchased at an average price of $1.552. 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. 4. Legal matters In March, 1995 an action was commenced against the Company and a number of defendants unrelated to the Company (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) which action was later amended naming as defendants only the Company and three of its officers. 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 subject only to the plaintiff's statutory rights of appeal. During February 1999, the Company and certain officers received notification that they had been named as defendants in a class action alleging violations of certain securities laws with respect to the content of certain Company announcements. The Company and its counsel are vigorously defending the matter. However, the Company is unable to predict the ultimate outcome of this claim and, accordingly, no adjustments have been made in the consolidated financial statements for any potential losses or potential issuance of common stock. 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. -7- COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three and Nine Months Ended September 30, 1999 and 1998 5. Reclassifications Certain reclassifications have been made to the condensed consolidated financial statements shown for the prior year in order to have it conform to the current year=s classifications. 6. Segment information The Financial Accounting Standards Board issued Statement No. 131 ADisclosures 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 which 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 (see Note 8), the Company was also engaged in systems management software products for corporate mainframe data centers. International operations pertaining to these systems management software products included foreign subsidiaries located in the United Kingdom, France, Brazil, Australia, Spain, Italy and Germany and several international distributors primarily in Europe and Asia. The professional services segment, which operates domestically, is primarily engaged in the reselling of computer hardware, design, construction and installation of technology systems, as well as marketing the d.b.Express Internet Information Server, also referred to as a "server farm". Business information
(In thousands) Three Months Ended Nine Months Ended September 30, September 30, -------------------- -------------------- 1999 1998(a) 1999(b) 1998(a) ---- ------- ------- ------- Revenue Computer Software $ 396 $ 10,824 $ 10,886 $ 25,810 Professional Services 410 1,926 13,533 6,045 ------- -------- -------- -------- Total $ 806 $ 12,750 $ 24,419 $ 31,855 ======= ======== ======== ======== Operating Income (loss) Computer Software $ (6,593) $ (4,553) $(21,040) $(13,091) Professional Services 117 46 1,055 352 ------- -------- -------- -------- Total $ (6,476) $ (4,507) $(19,985) $(12,739) ======= ======== ======== ========
Identifiable Assets At September 30, 1999 At December 31, 1998 --------------------- -------------------- Computer Software $31,800 $76,950 Professional Services 2,813 14,952 ------- ------- Total $34,613 $91,902 ======= ======= (a) Includes Softworks for the entire period (b) Includes Softworks for the three months ended March 31, 1999
-8- COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three and Nine Months Ended September 30, 1999 and 1998 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.
Geographical information: (In thousands) Three Months Ended Nine Months Ended September 30, September 30, 1999 1998(a) 1999(b) 1998(a) ---- ------- ------- ------- Revenue: United States $795 $10,319 $21,173 26,066 International 11 2,431 3,246 5,789 ---- ------- ------- ------- Total $806 $12,750 $24,419 $31,855 ==== ======= ======= ======= Operating Income/(loss): United States $(6,426) $(4,291) $(20,986) $(12,223) International (50) (216) 1,001 (516) ------- ------- -------- -------- Total $(6,476) $(4,507) $(19,985) $(12,739) ======= ======= ======== ========
Identifiable Assets: At September At December 30, 1999 31, 1999 ------------ ------------ United States $34,613 $ 82,377 International - 9,525 ------- -------- Total $34,613 $ 91,902 ======= ======== (a) Includes Softworks for the entire period (b) Includes Softworks for the three months ended March 31, 1999
Major customer For the three months ended September 30,1999 and 1998, the Company had one major contract involving two customers, with combined revenues of $64,000 (7.94% of total revenue) and $ 593,000 (4.65% of total revenue), respectively. For the nine months ended September 30, 1999 and 1998, the Company had one major contract involving two customers, with combined revenues of $12,546,000 (51.38% of total revenue) and $3,690,000 (11.58% of total revenue), respectively. These amounts are included in the Professional Services and Domestic categories. -9- COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three and Nine Months Ended September 30, 1999 and 1998 7. Internet Tracking & Security Ventures, LLC On June 30, 1998, pursuant to an Asset Purchase and Sale Agreement, the Company acquired certain software and related sales and marketing rights from Internet Tracking & Security Ventures, LLC ("ITSV") in exchange for 1,900,000 restricted shares of the Company's common stock and 1,000,000 restricted shares of common stock of the Company's then wholly owned subsidiary, Softworks. The acquired software program, known as "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 during the fourth quarter, 1998. The acquisition has been valued at an aggregate of $12,210,000 determined as follows: 1,900,000 restricted shares of the Company have been valued at $5,700,000 and the 1,000,000 restricted shares of Softworks' common stock have been valued at $6,510,000 (based upon the ultimate net proceeds to the selling shareholders in Softworks' initial public offering which became effective August 4, 1998). The $12,210,000 purchase price has been allocated to the fair value of the assets acquired at June 30, 1998, based upon a written valuation from an independent investment-banking firm. Accordingly, $2,700,000 has been allocated to "Software costs", $4,150,000 has been recorded as "Prepaid expenses and other current assets" and $5,360,000 has been recorded as "Excess of cost over fair value of net assets acquired". In March, 1999, the Company sold certain rights to license ComputerCOP to a marketing company (Bo-Tel, Inc.) for $400,000. The license rights are limited to granting a specified original equipment manufacturer of personal computers the right to embed the software in its computers for sale to the general public. Bo-Tel, Inc. is an affiliate of ITSV, and accordingly, this sale has been accounted for as a reduction of the cost of the assets acquired from ITSV. The software costs will be amortized using the greater of the ratio of current revenue to the total projected revenue for the software or the straight-line method using an estimated useful life of 30 months. The prepaid expenses were expensed as the related services were performed (including, but not limited to, appearances, promotion and endorsement), and such services were substantially completed by the end of the third quarter of 1999. The excess of cost over fair value of net assets acquired, which primarily relate to the use of the name "Bo Dietl" will be amortized using the straight-line method over 36 months. However, as a product that the Company has only recently commenced marketing, it is reasonably possible that the estimates of anticipated future gross revenue, the remaining economic life of the product, or both will be reduced significantly in the near term due to the unpredictability of the product's market acceptance and competitive pressures (including technological obsolescence). As a result, the carrying amount of the assets acquired from ITSV (approximately $4,319,000 at September 30, 1999) may be reduced materially in the near term. 8. GAIN ON PARTIAL DISPOSITION OF SUBSIDIARY Prior to June 30, 1998, Softworks was a wholly owned subsidiary of the Company with 14,083,000 shares of common stock outstanding. On August 4, 1998, Softworks completed a public offering of 4,200,000 shares of its common stock at a price of $7.00 per share (less underwriting fees and commissions of $0.49 per share) as follows: 1,700,000 shares of common stock were sold by Softworks; 1,000,000 shares were sold by ITSV and 1,500,000 shares were sold by the Company. Softworks common stock is traded on the NASDAQ National Market under the symbol "SWRX." In addition to the public offering discussed above, in 1998, the Company sold 1,000,000 shares of Softworks common stock for $5,000,000 (sold December 1998, cash received first quarter 1999) and exchanged 1,877,700 shares of Softworks common stock to employees and consultants for services rendered or to be rendered. As a result of the various transactions described above, the Company's ownership interest in Softworks was reduced from 100% to 54.5% as of December 31, 1998. -10- COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three and Nine Months Ended September 30, 1999 and 1998 In January, 1999, the Company, through the exchange of 687,600 restricted shares of Softworks common stock, further reduced its ownership interest from 54.5% to 50.2% as follows: 1. The Company issued as 1999 bonus incentive compensation, 298,000 restricted shares of Softworks common stock to two executives, vesting 25% on January 1, 1999, 25% on April 1, 1999, 25% on July 1, 1999 and 25% on October 1,1999. These shares would fully vest in the event of the acquisition of Softworks, or the Company by any third party. Accordingly, the Company will record a non-cash charge to operations of $269,250 each quarter. 2. The Company issued 389,600 restricted shares of Softworks, as well as 80,000 contract options to acquire restricted shares of Softworks= common stock owned by the Company, exercisable at $1.00 per share and expire December 31, 1999 to various consultants (40,000 of these options were exercised in June, 1999). The related contracts are for services to be performed over time frames ranging from twelve to twenty-four months. The $1,774,000 value of the shares and options will be charged to operations over the terms of the related contracts. As a result of the January, 1999, transactions, the Company recognized in the first quarter a gain of $2,031,000, representing the difference between the fair value of the Softworks common stock exchanged, and the related carrying value of the Company's investment in Softworks. In April, 1999, certain stock options previously granted by Softworks to its employees and consultants were exercised, which had the effect of reducing the Company=s ownership interest in Softworks from 50.2% to 49.7%. In June 1999, 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. As a result of these transactions, the Company recognized a gain of $14,410,000 in the second quarter of 1999. As of September 30, 1999, the Company's ownership of Softworks was 38.5%, or 6,505,767 shares of Softworks common stock. 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 three and nine months ended September 30, 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: -11- COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three and Nine Months Ended September 30, 1999 and 1998 Softworks, Inc. Summarized Financial Information
Condensed Statement of Operations Condensed Balance Sheet Three and nine months ended September 30, 1999 September 30, 1999 (in thousands) (in thousands) Three Months Nine Months Ended Ended September 30, 1999 September 30, 1999 ------------------ ------------------ Current assets $43,977 Non-current assets 23,904 ------- Revenue $14,904 $36,777 $67,881 ======= Cost of revenue 753 2,248 ------- ------- Gross margin 14,151 34,529 Current liabilities $24,019 Operating expenses 12,147 32,744 Non-current liabilities 15,596 ------- ------- Operating income 2,004 1,785 Stockholders' equity 28,266 ------- ------- ------- Net income $1,141 $ 946 $67,881 ======= ======= =======
Computer Concepts Corp. and Subsidiaries Pro Forma Condensed Consolidated Balance Sheet ---------------------------------------------- December 31, 1998 (in thousands)
Pro-forma Pro-forma Actual Adjustments Pro-forma Actual Adjustment 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 11,807 (11,764) 43 Property plant 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 subsidiary, equity method - 10,086 10,086 Shareholders' equity 34,016 - 34,016 -------- -------- -------- -------- -------- -------- $91,902 $(48,169) $43,733 $91,902 $(48,169) $43,733 ======== ======== ======== ======== ======== ========
-12- Computer Concepts Corp. and Subsidiaries Pro Forma Condensed Consolidated Statements of Operations
For the nine months ended September 30, 1999 For the nine months ended September 30, 1998 (in thousands) (in thousands) Pro-forma Pro-forma Actual Adjustments Pro-forma Actual Adjustment Pro-forma ------ ----------- --------- ------ ---------- --------- Revenue $24,419 $(10,258) $14,161 $31,855 $(26,896) $ 4,959 Cost of Revenue 12,908 (764) 12,144 11,201 (6,310) 4,891 -------- -------- -------- -------- -------- -------- Gross Margin 11,511 (9,494) 2,017 20,654 (20,586) 68 -------- -------- -------- -------- -------- -------- Total Operating Expenses 31,496 (9,342) 22,154 33,393 (19,959) 13,434 -------- -------- -------- -------- -------- -------- Operating (loss) income (19,985) (152) (20,137) (12,739) (627) (13,366) Other Income (expense) Gain on partial disposition of subsidiary 16,444 - 16,444 22,466 - 22,466 Interest (expense) income, net 210 - 210 (732) 253 (479) Minority interest expense (46) 46 - (275) 275 - Equity in earnings of Softworks 321 46 367 - 99 99 -------- -------- -------- -------- -------- -------- Income (loss) before provision for income taxes (3,056) (60) (3,116) 8,720 - 8,720 Benefit from (provision for) income taxes (102) 60 (42) 8 - 8 -------- -------- -------- -------- -------- -------- Net income (loss) $(3,158) $ - $ (3,158) $ 8,728 $ - $ 8,728 ======== ======== ======== ======== ======== ========
Computer Concepts Corp. and Subsidiaries Pro Forma Condensed Consolidated Statements of Operations For the three months ended September 30, 1998 (in thousands)
Pro-forma Actual Adjustments Pro-forma ------ ----------- --------- Revenue $ 12,750 $(11,247) $ 1,503 Cost of Revenue 3,929 (2,346) 1,583 -------- -------- -------- Gross Margin 8,821 (8,901) (80) Total Operating Expenses 13,328 (8,136) 5,192 -------- -------- -------- Operating (loss) income (4,507) (765) (5,272) -------- -------- -------- Other Income (expense) Gain on partial disposition of subsidiary 15,839 - 15,839 Interest (expense) income, net (173) 74 (99) Minority interest expense (275) 275 - Pro rata share of SOFTWORKS equity changes - 416 416 -------- -------- -------- Income before provision (benefit) for income taxes 10,884 - 10,884 Provision (benefit) for income taxes 8 - 8 -------- -------- -------- Net income $10,892 $ - $ 10,892 ======== ======== ========
-13- COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three and Nine Months Ended September 30, 1999 and 1998 9. Income Taxes The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, AAccounting for Income Taxes" (ASFAS 109"). SFAS 109 requires the determination of deferred tax assets and liabilities based on the differences between the financial statement and income tax bases of assets and liabilities, using enacted tax rates SFAS No.109 requires that the net deferred tax asset be adjusted by a valuation allowance, if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax asset will not be realized. Through August 4,1998, the results of the Company's U.S. operations conducted through its Softworks subsidiary have been included in the Company's consolidated Federal income tax returns. However, separate provisions for income taxes have been determined for Softworks' wholly owned foreign subsidiaries that are not eligible to be included in the U.S. Federal income tax returns. As a result of the initial public offering of Softworks, the Company's ownership of Softworks was reduced below 80% and Softworks is no longer eligible to be included in the Company's consolidated Federal income tax returns. It is expected that the Company will utilize a portion of its available net operating loss carryforwards to substantially reduce the taxable income resulting from the gain on partial disposition of Softworks. -14- COMPUTER CONCEPTS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the Three and Nine Months Ended September 30, 1999 and 1998 10. Management's plans Prior to 1998, the Company incurred substantial consolidated net losses and used substantial amounts of cash in operating activities, which were primarily financed through private placements of common stock and convertible debentures. During 1998, and 1999, the Company continued to use substantial amounts of cash in its operations, however, cash requirements were primarily financed through Softworks initial public offering and additional sales of Softworks common stock. Management=s current plan is focused on becoming a preeminent provider of innovative software products and services which are, and continue to be designed and developed to: -- break down barriers between people and data; -- exploit the Company=s patented technologies; -- capitalize on the internet marketplace. The Company is currently focusing on five general product or services categories: 1. The continued marketing of the d.b.Express Internet Information Server Services (the "Server Farm"); 2. Continue to explore the use of the d.b.Express technology through the development of new vertical markets; 3. Continue to develop its Professional Services division; 4. Capitalize on the growth of the internet through the sale of ComputerCOP; and 5. Continue the development of new products and services. Additionally, the Company continues to reexamine 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, additional cash may be necessary to implement such plan. Although there can be no assurances, management has several alternative sources to fund the development of its plan, including additional debt and equity financing (if necessary), or additional sales of its investment in Softworks common stock, which, as a consequence of Softworks initial public offering, became a readily marketable asset (see Note 8). -15- COMPUTER CONCEPTS CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND LIQUIDITY For the Three and Nine Months Ended September 30, 1999 and 1998 Forward-Looking Statements. All statements other than statements of historical fact included in this Form 10-Q including, without limitation, statements under, "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the Company's financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. When used in this Form 10-Q, words such as "anticipate," "believe," "estimate," "expect," "intend" and similar expressions, as they relate to the Company or its management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, the Company's management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors including but not limited to, fluctuations in future operating results, technological changes or difficulties, management of future growth, expansion of international operations, the risk of errors or failures in the Company's software products, dependence on proprietary technology, competitive factors, risks associated with potential acquisitions, 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 Computer Concepts Corp. and subsidiaries (the "Company") design, develop, market and support information delivery software products, including end-user data access tools for use in personal computer and client/server environments. Through 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.ExpressJ in its d.b.ExpressJ 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 resells computer hardware and for a fee, will assist in the design, construction and installation of technology systems. Additionally, 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). The Company currently consists of three product lines: professional services, d.b.ExpressJ Internet Information Server services (reported with professional services in the accompanying financial statements), and software technology and related sales and marketing rights, acquired in June, 1998 (marketed as "ComputerCOP"). d.b.ExpressJ technology, a visually-based proprietary software tool, can provide businesses with a simple, fast, low-cost method of finding, organizing, analyzing and using information contained in databases. During 1997, the Company commenced operations of the professional services unit. The professional services unit offers solutions, support and strategies to solve various business crises in such areas as: selection and reselling of hardware, network determination, help desk applications, wiring/cabling, LAN connections, moves/adds/changes, and project management. Additionally, this unit could oversee new installations as well as offering on-site component repair. ComputerCOP is designed to provide non computer literate owners (e.g. parents) the ability to identify threats as well as objectionable material which may be viewed by users of the computer on the internet (e.g. children). Orders for the initial version of the product began shipping during the fourth quarter, 1998. The method of revenue recognition for each product line is dependent upon the type and manner of service provided and or the terms of product sales. 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 -16- COMPUTER CONCEPTS CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND LIQUIDITY For the Three and Nine Months Ended September 30, 1999 and 1998 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. As described above in Note 8, during the three months ended June 30, 1999, the Company's ownership interest in Softworks fell below 50%. Accordingly, the financial results of Softworks are not consolidated with the Company commencing with the quarter ending June 30, 1999. Results of Operations 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 consolidated operating results with Softworks accounted for using the equity method for the three and nine months ended September 30, 1999 and 1998 is as follows: Computer Concepts Corp. and Subsidiaries Actual and Pro Forma Condensed Consolidated Statements of Operations
For the three months ended September For the nine months ended September 30, --------------------------------------- --------------------------------------- (in thousands) (in thousands) 1999 1998 1999 1998 (Actual) (Pro-forma) (Pro-forma) (Pro-forma) -------- ----------- ----------- ----------- Revenue Software licenses, net $ 385 $ 23 $ 596 $ 49 Maintenance 11 11 32 32 Professional services 410 1,469 13,533 4,878 -------- -------- -------- -------- 806 1,503 14,161 4,959 Cost of Revenue Software licenses 157 8 218 72 Maintenance - - - - Professional services 109 1,350 11,926 4,142 -------- -------- -------- -------- Gross margin 540 145 2,017 745 -------- -------- -------- -------- Research and development costs 2,081 1,089 5,324 3,188 Sales and marketing costs 2,607 2,048 9,066 5,879 General and administrative costs 1,309 1,417 4,776 3,958 Amortization and depreciation 1,019 863 2,988 1,086 -------- -------- -------- -------- 7,016 5,417 22,154 14,111 -------- -------- -------- -------- Operating loss (6,476) (5,272) (20,137) (13,366) Gain on partial disposition of subsidiary (see Note 8) 3 15,839 16,444 22,466 Other 598 325 535 (372) -------- -------- -------- -------- Net income (loss) $(5,875) $10,892 $(3,158) $8,728 -------- -------- -------- --------
-17- COMPUTER CONCEPTS CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND LIQUIDITY For the Three and Nine Months Ended September 30, 1999 and 1998 The following discussion about the "results of operations" is based on the operating results as presented in the above table. Total revenue for the three and nine-month periods ended September 30, 1999 when compared to the same time frames in the prior year, decreased $697,000 and increased $9,202,000, respectively. Revenue derived from a now completed contract included in professional services decreased approximately $1,344,000 to $75,000 for the three months ended September 30, 1999 when compared to the three months ended September 30, 1998. However, this contract resulted in a $7,906,000 increase in professional service revenue for the nine months ended September 30, 1999 as compared to the same period in the prior year. The Company is currently pursuing additional contracts, however, there can be no assurances that the Company will be successful in obtaining these contracts. 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 three months ended September 30, 1999 and 1998, revenue was $335,000 and $50,000, respectively. For the nine months ended September 30, 1999 and 1998, revenue was $987,000 and $238,000, respectively. The Company is currently negotiating/finalizing contracts with several new customers, which if consummated, should increase the monthly 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. The Company anticipates releasing ComputerCOP Deluxe, which is a new version with several new features and enhancements, primarily designed for individual consumers. Further, the Company also plans to release two completely new versions, ComputerCOP Professional and ComputerCOP Forensic, for which orders have already been received. ComputerCOP Professional and ComputerCOP Forensic are primarily designed for law enforcement professionals, such as police departments, parole officers and other government agencies. The cost of revenue for professional services, as a percentage of its revenue, decreased from 91.9% for the quarter ended September 30, 1998, to 26.6% for the quarter ended September 30, 1999, and increased from 84.9% for the nine months ended September 30, 1998 to 88.1% for the nine months ended September 30, 1999. The cost of revenue consists primarily of amounts paid to the Company's suppliers for goods and services related to the resale of computer hardware and related services in its professional services unit. The cost of revenue related to the server farm primarily consists of the direct labor associated with processing call detail records. 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 37%. The Company expects to improve its margins as volume increases. Further, the Company anticipates that based upon the expected selling price of ComputerCOP Professional and ComputerCOP Forensic, gross margins should improve. The amortization costs of the purchased software technology related to ComputerCOP are included in "Amortization and depreciation." -18- COMPUTER CONCEPTS CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND LIQUIDITY For the Three and Nine Months Ended September 30, 1999 and 1998 Research and development costs for the three-month period ended September 30, 1999, increased approximately $992,000 to $2,081,000 when compared to the three-month period ended September 30, 1998. For the nine months ended September 30, 1999, costs increased $2,136,000 to $5,324,000 when compared to the nine months ended September 30, 1998. Approximately $1,355,000 and $2,975,000 of additional expense was incurred in connection with the development of the multi-media technology during the three and nine month periods ended September 30, 1999. A portion of these variances, $675,000 paid to an entity, is attributable to costs associated with the initial concept and designs, early stage development and implementation of the internet multi-media technology. Offsetting these increases were reductions in expenditures relating to further development of d.b.Express technology. Sales and marketing expenses increased $559,000 to $2,607,000 for the three month period ended September 30, 1999, when compared to $2,048,000 for the same period in the prior year and increased $3,187,000 to $9,066,000 for the nine month period ended September 30, 1999, when compared to $5,879,000 for the same period in the prior year. For the nine months ended September 30, 1999, a major portion of the variance pertains to the increase in the non-cash charge of approximately $2,286,000 related to appearances and product endorsements made on behalf of ComputerCOP. Additionally, the Company expended approximately $500,000 in its efforts to market ComputerCOP (no expense for the nine months ended September 30, 1998 as the Company had not commenced marketing the product). The Company has also incurred an additional $375,000 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 approximately $431,000 in its effort to market the multi-media display still under development. Offsetting these items is a reduction in expenditures for outside consultants of approximately $543,000. The balance of the sales and marketing costs 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. General and administrative costs decreased $108,000 to $1,309,000 for the three months ended September 30, 1999, when compared to the three months ended September 30, 1998, and increased $818,000 to $4,776,000 for the nine months ended September 30, 1999, when compared to the nine months ended September 30, 1998. Major factors contributing to this latter increase are expanded staffing levels, which the Company believes necessary in order to support anticipated growth, legal expenses the Company has incurred in defending itself from the class action law suit, and non-cash executive compensation. Amortization and depreciation expenses increased $156,000 when comparing the three-month periods ended September 30, 1999 and September 30, 1998. Further, it increased $1,902,000 when comparing the nine-month periods ended September 30, 1999 and September 30, 1998. The increases are primarily attributable to the purchased software and goodwill acquired in the ComputerCOP transaction (see Note 7). Gain on partial disposition of subsidiary - see Note 8. Liquidity and Capital Resources For the nine-month period ended September 30, 1999, net cash used by operating activities was $746,000. The Company had one major contract involving two customers that provided approximately $8,850,000 net cash for the nine-month period ended September 30, 1999, primarily as a result of timing differences between accounts receivable and accounts payable. The Company is currently pursuing additional contracts, however, there can be no assurances that the Company will be successful in obtaining these contracts. Net cash provided by investing activities of $9,617,000 was primarily attributable to the proceeds from sales of Softworks common stock and the exercises of options to purchase Softworks common stock, totaling $17,646,000 offset by the reduction in cash of $6,759,000 attributable to excluding Softworks from consolidation (see Note 8). Additionally, capital expenditures for the nine month period ended September 30, 1999 totaled approximately $1,391,000. -19- COMPUTER CONCEPTS CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND LIQUIDITY For the Three and Nine Months Ended September 30, 1999 and 1998 During November, 1998, the parent Company entered into an Accounts Receivable Purchase Agreement, whereby the Company from time to time may, on a full recourse basis, assign some of their accounts receivable. Upon specific invoice approval, an advance of 85% of the underlying receivable is provided to the Company. The remaining balance (15%), less an administrative fee of approximately 2% plus interest at the rate of 1 1/2% per month, is paid to the Company once the customer has paid. This agreement expires in November, 1999. During the first quarter of 1999, the Company repaid $4,172,000 of related debt and at September 30, 1999, there were no receivables assigned or any amount due the lender. Prior to 1998, the Company incurred substantial consolidated net losses and used substantial amounts of cash in operating activities, which were primarily financed through private placements of common stock and convertible debentures. During 1998, and 1999, the Company continued to use substantial amounts of cash in its operations, however, cash requirements were primarily financed through Softworks initial public offering and additional sales of Softworks common stock. At September 30, 1999, and December 31, 1998 (excluding Softworks), the Company had working capital of $9,277,000 (unaudited) and $15,788,000 (unaudited), respectively. As of November 16, 1999, the Company had cash and cash equivalents totaling approximately $4,972,000 (unaudited), after taking into account the $6,000,000 dividend paid on November 15, 1999. (see Note 3). Management's current plan is focused on becoming a preeminent provider of innovative software products and services which are, and continue to be designed and developed to: -- break down barriers between people and data; -- exploit the Company=s patented technologies; -- capitalize on the internet marketplace. The Company is currently focusing on five general product or services categories: 1. The continued marketing of the d.b.Express Internet Information Server Services (the "Server Farm"); 2. Continue to explore the use of the d.b.Express technology through the development of new vertical markets; 3. Continue to develop its Professional Services division; 4. Capitalize on the growth of the internet through the sale of ComputerCOP; and 5. Continue the development of new products and services. Additionally, the Company continues to reexamine 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, additional cash may be necessary to implement such plan. Although there can be no assurances, management has several alternative sources to fund the development of its plan, including additional debt and equity financing (if necessary), or additional sales of its investment in Softworks common stock, which, as a consequence of Softworks initial public offering, became a readily marketable asset (see Note 8). -20- COMPUTER CONCEPTS CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND LIQUIDITY For the Three and Nine Months Ended September 30, 1999 and 1998 YEAR 2000 ISSUES Background. Some computers, software, and other equipment include programming code in which calendar year data is abbreviated to only two digits. As a result of this design decision, some of these systems could fail to operate or fail to produce correct results if "00" is interpreted to mean 1900, rather than 2000. These problems are widely expected to increase in frequency and severity as the year 2000 approaches, and are commonly referred to as the "Millennium Bug" or "Year 2000 Problem". Assessment. The Year 2000 Problem could affect computers, software, and other equipment used, operated, or maintained by the Company. Accordingly, the Company is reviewing its internal computer programs and systems to ensure that the programs and systems will be Year 2000 compliant. The Company presently believes that its computer systems will be Year 2000 compliant in a timely manner. However, while the estimated cost of these efforts is not expected to be material to the Company's overall financial position, or any year's results of operations, there can be no assurance to this effect. Software Sold to Consumers. The Company believes that it has substantially identified and resolved all potential Year 2000 Problems with any of the software products it develops and markets. However, management also believes that it is not possible to determine with complete certainty that all Year 2000 Problems affecting the Company's software products have been identified or corrected due to complexity of these products and the fact that these products interact with other third party vendor products and operate on computer systems which are not under the Company's control. Internal Infrastructure. The Company believes that it has identified substantially all of the major computers, software applications, and related equipment used in connection with its internal operations that must be modified, upgraded, or replaced to minimize the possibility of a material disruption to its business. The Company has commenced the process of modifying, upgrading, and replacing major systems that have been identified as adversely affected, and expects to complete this process before year end. Systems Other than Information Technology Systems. In addition to computers and related systems, the operation of office and facilities equipment, such as fax machines, photocopiers, telephone switches, security systems, elevators, and other common devices may be affected by the Year 2000 Problem. The Company is currently assessing the potential effect of, and costs of remediating the Year 2000 Problem on its office and facilities equipment and expects to complete such assessment by year end. The Company estimates the total cost to the Company of completing any required modifications, upgrades, or replacements of these internal systems will not have a material adverse effect on the Company's business or results of operations. This estimate is being monitored and will be revised as additional information becomes available. Suppliers. The Company has initiated communications, including surveys, with third party suppliers of the major computers, software, and other equipment used, operated, or maintained by the Company to identify and, to the extent possible, to resolve issues involving the Year 2000 Problem. However, the Company has limited or no control over responses to its inquiries and the actions of these third party suppliers. Thus, while the Company does not anticipate any significant Year 2000 Problems with these systems, there can be no assurance that these suppliers will resolve any or all of their Year 2000 Problems with these systems before the occurrence of a material disruption to the business of the Company or any of its customers. Any failure of these third parties to resolve Year 2000 problems with their systems in a timely manner could have a material adverse effect on the Company's business, financial condition, and results of operations. -21- COMPUTER CONCEPTS CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND LIQUIDITY For the Three and Nine Months Ended September 30, 1999 and 1998 Most Likely Consequences of Year 2000 Problems. The Company expects to identify and resolve all Year 2000 Problems that could materially adversely affect its business operations. However, management believes that it is not possible to determine with complete certainty that all Year 2000 Problems affecting the Company have been identified or corrected. The number of devices that could be affected and the interactions among these devices are simply too numerous. In addition, one cannot accurately predict how many Year 2000 Problem-related failures will occur or the severity, duration, or financial consequences of these perhaps inevitable failures. As a result, management expects that the Company could likely suffer the following: 1. a significant number of operational inconveniences and inefficiencies for the Company and its customers that may divert management's time and attention and financial and human resources from its ordinary business activities; and 2. a lesser number of serious system failures that may require significant efforts by the Company or its customers to prevent or alleviate material business disruptions, and 3. the inability to determine with any degree of certainty, the changes if any, in buying habits of its current and potential customers due to their concerns over Year 2000 issues. Contingency Plans. The Company has developed contingency plans to be implemented in the event of any Year 2000 problems affecting its internal systems. Depending on the systems affected, these plans could include the use of Company owned cellular telephones, conducting business from alternative locations, accelerated replacement of affected equipment or software, short to medium-term use of backup equipment and software, and possible increased work hours for Company personnel or use of contract personnel to correct on an accelerated schedule any Year 2000 problems that arise or to provide manual workarounds for information systems, and similar approaches. If the Company is required to implement any of these contingency plans, it could have a material adverse effect on the Company's financial condition and results of operations. Disclaimer. The discussion of the Company's efforts, and management's expectations, relating to Year 2000 compliance are forward-looking statements. The Company's ability to achieve Year 2000 compliance and the level of incremental costs associated therewith, could be adversely impacted by, among other things, the availability and cost of programming and testing resources, vendors' ability to modify proprietary software, and unanticipated problems identified in the ongoing compliance review. -22- COMPUTER CONCEPTS CORP. AND SUBSIDIARIES PART II - OTHER INFORMATION For the Three and Nine Months Ended September 30, 1999 and 1998 Item 1. Legal Proceedings Not applicable. Item 2. Changes in Securities Not applicable. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K Not applicable. Not applicable -23- COMPUTER CONCEPTS CORP. AND SUBSIDIARIES PART II - OTHER INFORMATION For the Three and Nine Months Ended September 30, 1999 and 1998 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMPUTER CONCEPTS CORP. /s/ Daniel DelGiorno, Jr. Daniel DelGiorno Jr. President, C.E.O. Treasurer, November 19, 1999 Director /s/ George Aronson George Aronson Chief Financial Officer November 19, 1999 -24- EX-27 2
5 This schedule contains summary financial information extracted from the financial statements for the quarterly period ending September 30, 1999 and is qualified in its entirety by reference to such financial statements. 9-MOS DEC-31-1999 SEP-30-1999 13,702 11 1,172 361 250 17,071 3,501 2,048 34,613 7,794 0 0 0 2 26,806 34,613 806 806 266 7,016 643 (5,833) 1 (5,833) 42 (5,875) 0 0 0 (5,875) (0.28) (0.28)
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