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, 1997
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
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 April 7, 1998, there were 13,602,563 shares of the registrant's Common
Stock outstanding. The aggregate market value of the Common Stock held by
non-affiliates was approximately $51,859,771 based on the closing sale price of
the Common Stock as quoted on the NASDAQ on such date.
<PAGE>
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, and develop, market and support systems management software
products for corporate mainframe data centers. During 1997, a new business unit
commenced operations which is designed to provide a wide array of information
technology, support and services. The Company has been built through a
combination of development, acquisitions and a strategic partnership.
The Company has incurred consolidated net losses of $12,385,000, $18,953,000,
and $18,365,000 and during the years ended December 31, 1997, 1996 and 1995,
respectively, and cumulative net losses of $81,741,000 through December 31,
1997. For the year ended December 31, 1997, net cash used in operating
activities was $6,937,000.
Although the Company's liquidity position at December 31, 1997, was adversely
affected by the Company's continuing losses, the equity and debt placements
during the year then ended, aggregating $6,123,000, have enabled the Company to
continue operating. The Company does not currently maintain a credit facility
with any financial institution although the Company is actively seeking an asset
based working capital line of credit. Management's plans to remain a going
concern (see Note 1 of Notes to the Consolidated Financial Statements) require
additional financing, until such time as sufficient cash flows are generated
from operations. This financing is anticipated to be in the form of a working
capital line of credit and additional equity placements or other debt
instruments; however, there can be no assurance that the Company will be able to
obtain sufficient financing or will be successful in achieving positive cash
flows from operations in order to execute its business plan.
GENERAL
During the years 1989 through 1992, the Company was primarily engaged in
research and development activities regarding its primary product, "d.b.Express
." 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
1994, the Company continued the process of evaluating its businesses and
determining where its strategic focus and financial and management resources
should be directed. As a result, for the fourth quarter of 1994, the Company
adjusted the value of certain assets to reflect their net realizable value and
management's current operating plan. In 1995, 1996 and 1997, the Company
determined to further focus its activities to its Softworks, Inc. subsidiary and
exploitation of the parent Company's d.b.Express software technology and in
1996, sold its "Superbase" technology assets and in 1997 sold the net assets of
its MapLinx Inc. subsidiary. As a result, for the third and fourth quarters of
1995 and for the fourth quarter of 1996, the Company adjusted the value of
certain assets to reflect their net realizable value.
In October 1990, Computer Concepts acquired RAMP Associates, Inc. ("RAMP"), a
privately owned Delaware corporation engaged in general computer consulting
services. RAMP was previously owned by Russell Pellicano, the inventor of
d.b.Express, and currently a director and officer of the Company. During the
fourth quarter of 1993, in connection with its long-term strategic plan, the
Company eliminated its general computer consulting service line, taking a charge
for the write-off of the unamortized goodwill associated with RAMP as well as
the accrual of certain severance costs.
<PAGE>
Effective September 1993, the Company acquired Softworks, Inc. ("Softworks"), a
private Maryland company founded in 1977, and an acknowledged leader providing
critical systems management solutions.. Softworks currently markets nineteen
software products, and holds over 5,000 licenses in over 1,950 customer
installations worldwide. The products are installed in approximately 80 of the
Fortune 100 companies' data centers. See Note 3 of Notes to Consolidated
Financial Statements for the year ended December 31, 1997 for further
explanations of all acquisitions.
During June 1994, the Company completed the purchase of the Superbase technology
and certain related assets from Software Publishing Corporation. Superbase is a
database programming language. The Company sold this asset in the second quarter
of 1996.
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 exploitation of the d.b.Express technology and its Softworks subsidiary, the
Company sold the net assets of MapLinx in 1997.
During December 1994, through its Softworks' subsidiary, the Company acquired
DBopen, Inc. ("DBopen"), a provider of PC database administration tools
employing client/server technology. As a result of limited sales and changing
market conditions late in 1995, it became apparent that significant additional
expenditures would have to be incurred to modify the product to meet these
changing market conditions. In the opinion of management, such additional
expenditures exceeded the potential benefits, and accordingly, a decision was
made to discontinue the products. Consistent with this decision, the Company
wrote off the carrying value of its investment in the DBopen acquisition of
$1,320,000 in the fourth quarter of 1995.
The Company's long-term strategic plan is 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) through sales of existing products and new technologies as
well as continuing to support the Softworks' mainframe sector. To achieve this
plan, the Company plans growth of d.b.Express primarily through the development
of several vertical markets. Telecommunications is presently being targeted as
one of the first vertical markets. Additionally the Company will also focus on
software tools for the data warehousing markets. These markets are being driven
by wide-scale corporate right-sizing and the empowerment of people to access
enterprise-wide data, both of which create greater efficiencies and corporate
profits. Additionally, new, potentially significant, components in Softworks'
strategic plan are Softworks' Year 2000 technology which positions the Company
to capitalize on providing solutions for certain elements of the impending
world-wide year 2000 problem and a line of multi-platform products. In addition
to the d.b.Express and Softworks product lines, the Company has a newly formed
business unit, referred to as Professional Services, which is designed to
provide a wide array of information technology, support and services. The
Company has employed an individual formerly with I.B.M. having expertise in this
field and intends to capitalize on his experience and competency in order to
create a unique, single management infrastructure to support an extensive
selection of services and vendors. The Company's new business line offers
solutions, support, and strategies to solve various business crises in such
areas as: 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.
At the Company's Annual Meeting of Shareholders held November 26, 1997,
authorization for an amendment to the Company's Articles of Incorporation to
increase its authorized capital from 150,000,000 shares of Common Stock to
300,000,000 shares of Common Stock was approved, and authorization to effect a
reverse stock split at a ratio from 1 for 2 up to 1 for 10, was approved. On
March 18, 1998, the Company announced that it was implementing a restructuring
of its capital structure with 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. Further,
the Company has determined not to implement the approved increase of its
authorized capital. Accordingly, all references to numbers of shares and per
share data have been restated for all periods presented so as to reflect the
reverse stock split, except for Item 4 - Submission of Matters to a Vote of
Security Holders.
<PAGE>
The Company is continuing the process it began in 1996, of strengthening its
corporate management team by retaining key employees and consultants to oversee,
direct and supervise the operations as well as sales and marketing. The Company
believes that the increase in and strengthening of upper level management,
throughout the corporation will aid and improve its performance in the future.
In 1997, the Company was ranked in a national survey based on five year revenue
growth as the 9th fastest growing high technology company in the United States.
With respect to the d.b.Express technology, the Company is continuing its
efforts to secure d.b.Express license agreements as well as pursue specific
vertical markets, such as telecommunications. In this regard, the Company
announced that its d.b.Express technology has been licensed to British Telecom
and has been integrated into British Telecommunications, plc's Syncordia
Services' C-View application which allows customers to remotely access over the
Internet a wide variety of account information maintained in Syncordia's central
data repository. The d.b.Express technology enables the customer to access the
data without the need to download the data first and is believed to provide at
least one solution to that aspect of the Internet "bandwidth" problem.
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 through a
visually-based proprietary software tool. 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 has been further
improved to enable it to analyze millions of records and to act over the
Internet without the need to first download the data being analyzed.
Telecommunications industry specific applications of the technology have also
been developed and are now 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.
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 computer programming
or knowledge of SQL.
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 multi-dimensional picture of the data which 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.
<PAGE>
The d.b.Express Internet Information Server is an Internet database information
server accessed through direct dial, Intranet and/or the Internet. This
technology eliminates the need to download data prior to analysis - a paradigm
shift of major proportions in the data mining field - thereby overcoming a major
Internet problem, that of high data volume and limited bandwidth, currently
responsible for the lengthy delays associated with data downloading. Millions of
records of data can be visually presented using the Company's patented data
visualization technology. The technology provides users with a "Filescape" , (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, thereby creating new levels of cost savings and operational efficiencies
not possible using previously existing technologies.
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 bar chart 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 that allows the
exploration of data patterns, trends, and exceptions. Data searches, queries and
analyses can be converted to sophisticated, but simple to use presentations
providing integrated business graphics and report writing capabilities.
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. 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.
<PAGE>
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 and Windows NT and DOS
Intel-based workstations. Computer Concepts, through technology synergies
afforded by Softworks, is designing extensions to d.b.Express that can be
installed on mainframes. The ability to operate on mainframes would open
substantial new markets for the application of d.b.Express.
High Processing Speed
Once a database has been read by d.b.Express, 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.
Windows Version 1.0 of d.b.Express was introduced in December 1993 and the DOS
version was introduced in late 1992. Windows Version 2.0, with significantly
enhanced functionality based on user feedback, was introduced in the second
quarter of 1994 and Windows 95 Version was introduced in the third quarter of
1995. Windows NT, Internet Server and JAVA Applet versions have been introduced
in 1996 and 1997.
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 in the computer industry and is perceived as
a new technology which many users may defer usage of until the product has
established its use by large numbers of users. The Company believes its focus on
large scale users and its new Internet access technology will lead to such
usage, however, there is no assurance that the Company will be successful in
implementing sales and wide based usage of the product.
Limited Resources to Market and Promote d.b.Express
The Company has limited cash resources with which to market and promote
d.b.Express, and 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.
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, which are not
able to access large quantities of data with the nearly instantaneous results of
d.b.Express and/or without 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.
<PAGE>
Softworks' Systems Management Software Products
Softworks provides software products and services for critical information
technology ("IT") needs in the areas of performance, data and storage
management, and the Year 2000. Softworks' Year 2000 suite of products are
specifically designed to assist in all phases of the Year 2000 conversion
effort, including a heavy emphasis on providing solutions for the testing phase,
which is estimated by industry analysts to account for 60% of the entire Year
2000 conversion market.
Softworks' products optimize system and application performance, reduce hardware
expenditures, and significantly enhance the reliability and availability of the
data processing environment. In addition, Softworks' products help organizations
manage common, critical IT processes across large multi-platform environments.
Softworks' products are developed using a set of core technologies and R&D
principles called Softworks SavanTechnology ("SST"). SST differentiates
Softworks from its competition by going beyond the traditional monitoring and
reporting style of systems management. SST products incorporate a high degree of
embedded intelligence, offer controlled automation options that interface with
existing software, and facilitate proactive systems management.
Softworks' current systems management product offerings include:
Performance Management
The Performance Arena comprises powerful product sets that help address a wide
variety of application and systems performance issues. The sets automate manual
tuning efforts, helps reduce processing times by up to 90%, improves resource
utilization, eliminates large file limitations, and pinpoints and corrects
performance bottlenecks to maintain systems and applications availability.
Products include Performance Essential, VSAM Quick Index, VSAM Assist, and
TeraSAM.
Data and Storage Management
The DataStor Arena products are a crucial resource for improving the
availability, integrity, and recoverability of critical corporate information.
Products include CenterStage/MVS and Catalog Solution, the world's premier
catalog management and recovery tool.
Year 2000
The 2000 Arena offerings comprise a suite of products specifically designed to
assist in all phases of the Year 2000 conversion effort. These solutions produce
year 2000 compliant applications in a timely and cost-effective fashion. 2000
Arena products bring a number of benefits to users including the ability to:
quickly and easily identify and prioritize Year 2000 conversion efforts, rapidly
convert programs using a combination of methods depending on the individual
environment, determine how environments will operate as the date changes to the
new millennium, and ensure that converted applications will operate in the new
millennium through comprehensive testing. 2000 Arena products include six major
products that cover mission-critical IT environments such as MVS, OS/390, and
various distributed platforms.
Softworks products address both the mainframe and distributed environments. The
mainframe market has slowed in unit sales, but has grown in processor
capabilities of Millions of Instructions per Second ("MIPS").
As such, Softworks has adopted a MIPS-based pricing model that allows the
company to take advantage of this growth in enterprise servers.
<PAGE>
SALES AND MARKETING
d.b.Express is currently being marketed to the telecommunications industry,
governmental entities, financial services industry, Fortune 1000 companies and
OEM s (producers of other software products incorporating d.b.Express
technology) in the United States. The Company utilizes a direct sales force as
well as an indirect network of distributors and resellers for this market The
Company s direct sales force presently consists of sales and support personnel
operating from the Company's headquarters in Bohemia, New York. 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 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.
Softworks generates almost half of its income by selling perpetual licenses for
the use of its products. Pricing for mainframe products is based on the
computational capacity of the CPU s on which the software operates. Pricing for
non-mainframe and cross-platform varies from enterprise-wide agreements to "per
seat" pricing. The Company also generates revenue through maintenance and
support agreements that are reviewed annually on the anniversary of the original
purchase date. In 1997 , approximately half of total Softworks revenue came from
recurring maintenance and support agreements. The renewal rate for these
contracts is over 95%. Other revenues are generated when product licenses are
transferred to different/larger CPU s. No customer of Softworks comprised 10% or
more of the Company s 1997 consolidated revenues.
Softworks has products installed at 1,950 sites worldwide including more than 80
of the Fortune 100. Softworks maintains vendor alliance relationships with
leading organizations such as IBM, Hewlett-Packard, SUN and Oracle. These
programs provide Softworks access to pre-release versions of software in order
to help ensure that Softworks' products exploit the newest technology and
continue to be compatible with new operating systems and database releases.
These programs also provide Softworks with insight for strategic planning and
product direction.
Softworks presently operates out of its headquarter in Alexandria, VA, with 12
offices in North America and 5 offices in Europe, South America, and Australia.
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
Company s sales compensation plan, the timing of product upgrades, customers'
support agreement 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 its d.b.Express product line 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.
<PAGE>
Softworks produces its own tapes and is not dependent on any one contractor for
materials.
Competition
The Company s products are marketed in a highly competitive environment. Such
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.
Softworks products compete with offerings from Boole & Babbage, Computer
Associates International Inc., BMC, Compuware and Platinum technologies. The
products compete effectively based on quality of support, price, and product
quality. Many of the Company s existing and potential competitors possess
substantially greater financial, marketing and technology resources than the
Company.
Employees
The Company had 252 employees at March 31,1998, including 100 in marketing,
sales and support services, 95 in technical support (including research and
development) and 57 in corporate finance and administration. 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" , "d.b.Express" and
"dbACCEL" . 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 has received copyrights for their
entire product line.
Item 2. PROPERTIES
The Company leases various facilities for its Corporate headquarters and
subsidiary operations. The Company's two primary facilities are as follows:
<TABLE>
<CAPTION>
Description Location Square Footage Lease term Annual Rental
Cost
<S> <C> <C> <C> <C>
Corporate Bohemia, NY 10,000 7/1/94 - 6/30/00 $151,200
Subsidiary Alexandria, VA 25,000 9/1/94 - 8/31/01 $318,000 (1)
<FN>
(1) Lease provides for annual increases of 3% per year, and is renewable at the
option of the Company.
</FN>
</TABLE>
<PAGE>
Item 3. LEGAL PROCEEDINGS
During May 1994, 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 disclosures made regarding the Company's
acquisition of Softworks during 1993. On September 12, 1996, the settlement of
this class action claim was approved by the United States District Court,
Eastern District of New York. The Company recorded a charge to earnings in the
first quarter of 1996 of $2,075,000 to reflect this settlement consisting of
$75,000 plus 261,400 shares of the Company's common stock.
In September 1994, the Company received notice of an action alleging breach of
contract regarding an acquisition transaction initiated during 1993. In July
1995, a settlement agreement was reached whereby the Company was required to pay
$75,000 and agreed to an amendment of the original contract to acquire the
license for additional software. Pursuant to such amendment, the Company issued
a non-interest bearing promissory note in the amount of $389,000 payable in 36
monthly installments, with the final payment scheduled for August 1, 1998, which
amount was recorded as an unusual charge in the 1995 consolidated statement of
operations.
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.
In July 1995, the Company and certain officers received notification that they
had been named as defendants in a class action claim in regard to announcements
and statements regarding the Company's business and products. Although the
Company continues to deny any wrongdoing, in an effort to avoid further expense
and resolve the uncertainty of litigation, in July 1997 the Company agreed to a
Stipulation and Agreement of Settlement ("Stipulation Agreement") of this class
action. In February, 1998, the Court entered a final order approving the terms
of the Stipulation Agreement. The Company agreed to deliver 119,850 shares of
its common stock, valued at $500,000. Further, as of the filing date, the
Company and its insurance carrier each paid $350,000, totaling $700,000.
Based upon the Stipulation Agreement, the Company recorded an $850,000 Unusual
Charge to earnings in the quarter ended June 30, 1997.
On June 11, 1996, the Company received notice of entry of a default judgement
against it for $1,500,000 and specific performance to effect the registration of
common stock held by Merit Technology, Inc. in a matter which the Company had
not been served or received notice (In Re: Merit Technology, Inc., Debtor, U.S.
Bankruptcy Court, Eastern District of Texas). On August 13,1996, the default
judgement was set aside by the Court. During December 1996, this matter was
settled with the Company issuing 10,000 shares of its common stock.
<PAGE>
During March 1997, the Company received a Complaint filed in the U.S. District
Court for the Western District of Texas, by Dell Computer Corporation. The
Second Amended Complaint alleged that the Company failed to deliver product as
contracted for and further alleged damages in excess of $850,000. In February,
1998, a cash settlement of $130,000 was agreed to and paid by the Company's
insurance carrier.
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. Discovery was
substantially completed in January 1998 and, unless a summary judgment is
granted to one side or the other, this case is expected to go to trial later in
1998. The Company and its counsel believe that the Company's position regarding
the claim has substantial factual and legal support and are vigorously defending
the matter. However, the Company is unable to predict the ultimate outcome of
this claim and, accordingly, no adjustments have been made in the consolidated
financial statements for any potential losses or potential issuances of common
stock.
In 1995, Fletcher Capital Corp. filed a claim against the Company, its president
and several unrelated parties, regarding a claim for an unspecified amount of
commissions in the form of options from the Company and cash from the other
parties. This matter was settled in February 1997 with the issuance of 36,000
options exercisable at $3.50 per share, $126,000 paid with 25,200 shares of
common stock (issued in January, 1998) and cash payments totaling $31,000.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
As noted above, all references to numbers of shares in matters submitted to a
vote of security holders are stated at pre-reverse-split levels.
At the Company's annual shareholders' meeting, held on November 26, 1997, 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 affirmative vote of a majority of the votes cast at the Annual Meeting is
required for approval of each matter to be submitted to a vote of the
shareholders, except that the votes of the holders of a majority of all shares
entitled to vote is required to approve the proposals to amend the Company's
Certificate of Incorporation to: reclassify its board of directors and require a
two-thirds vote to amend that article of the Articles of Incorporation,
authorize a reverse stock split, authorize the board to increase the number of
authorized shares of Common Stock and authorize a new class of Preferred Stock.
The tabulation of the results of the shareholders' vote was:
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C> <C>
Daniel DelGiorno, Sr. 98,416,623 1,446,529 5,187,251
Daniel DelGiorno, Jr. 98,414,948 1,445,204 5,183,909
Russell Pellicano 98,412,606 1,319,046 4,064,464
Jack S. Beige, Esq. 98,421,398 1,436,754 4,047,626
Augustin Medina 98,420,547 1,311,105 5,029,051
</TABLE>
<PAGE>
A proposal to amend the Certificate of Incorporation to provide for a classified
Board of Directors failed to gain approval by the vote of: 23,539,526 - For;
9,211,347 - Against; 1,788,495 - Abstained. (Although the majority of votes cast
were in favor of the proposal, the number of votes cast on this proposal was not
sufficient to pass the proposal.)
A proposal to amend the Company's Certificate of Incorporation to authorize 1
million shares of preferred stock, the voting powers, full or limited, or no
voting powers, and the designations, preferences and relative, participating,
optional or other special rights, and qualifications or restrictions thereof, of
which may be determined by the Board of Directors failed by a vote of:
18,696,437 - For; 12,034,536 - Against; and 745,172 Abstained. (Although the
majority of votes cast were in favor of the proposal, the number of votes cast
on this proposal was not sufficient to pass the proposal.)
A proposal to grant the Board of Directors authority to amend the Certificate of
Incorporation to effect a "one for two reverse stock split" of the Common Stock
passed by the vote of: 91,681,471 - For; 11,209,581 - Against; 890,214 -
Abstain.
A proposal to grant the Board of Directors authority to amend the Certificate of
Incorporation to effect a "one for three reverse stock split" of the Common
Stock passed by the vote of: 89,555,805 - For; - 13,361,298 - Against; 773,955 -
Abstain.
A proposal to grant the Board of Directors authority to amend the Certificate of
Incorporation to effect a "one for four reverse stock split" of the Common Stock
passed by a vote of : 89,600,534 - For; 13,293,177 - Against; 826,407 - Abstain.
A proposal to grant the Board of Directors authority to amend the Certificate of
Incorporation to effect a "one for five reverse stock split" of the Common Stock
passed by a vote of : 90,155,648 - For; 12,879,355 - Against; 686,115 - Abstain.
A proposal to grant the Board of Directors authority to amend the Certificate of
Incorporation to effect a "one for six reverse stock split" of the Common Stock
passed by a vote of : 89,435,066 - For; 14,030,712 - Against; 837,318 - Abstain.
A proposal to grant the Board of Directors authority to amend the Certificate of
Incorporation to effect a "one for seven reverse stock split" of the Common
Stock passed by a vote of : 88,777,349 - For; 14,120,331 - Against; 823,438 -
Abstain.
A proposal to grant the Board of Directors authority to amend the Certificate of
Incorporation to effect a "one for eight reverse stock split" of the Common
Stock passed by a vote of : 88,793,708 - For; 13,339,856 - Against; 787,554 -
Abstain.
A proposal to grant the Board of Directors authority to amend the Certificate if
Incorporation to effect a " one for nine reverse stock split" of the Common
Stock passed by a vote of : 88,838,794 - For; 14,104,570 - Against; 780,754 -
Abstain.
<PAGE>
A proposal to grant the Board of Directors authority to amend the Certificate of
Incorporation to effect a "one for ten reverse stock split" of the Common Stock
passed by a vote of : 89,408,542 - For; 13,557,602 - Against; 754,973 - Abstain.
A proposal to adopt a 1997 Stock Incentive Plan failed to receive sufficient
votes to pass. 19,416,986 - For; 11,023,239 - Against; 1,035,770 - Abstain.
A proposal to grant the Board of Directors authority to amend the Certificate of
Incorporation to increase the authorized shares of Common Stock from 150,000,000
to 300,000,000 was approved by a vote of:
92,435,065 - For; 10,557,676 - Against; 728,377 - Abstain.
A proposal for the appointment by the Board of Directors of Hays & Co. as the
Company's independent certified public accountants for fiscal/calendar year 1997
was approved by a vote of: 97,224,840 - For; 15,871,462 - Against; 974,816 -
Abstain.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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 three years, as restated
for the reverse stock split noted above.
<TABLE>
<CAPTION>
High Bid Low Bid
----------- -----------
<S> <C> <C>
1995:
First Quarter 10 5/16 4 3/8
Second Quarter 49 11/16 2 1/2
Third Quarter 20 13 3/4
Fourth Quarter 35 12 13/16
1996:
First Quarter 28 7/16 17 3/16
Second Quarter 20 5/8 10
Third Quarter 13 1/8 5 5/16
Fourth Quarter 7 13/16 3 1/8
1997
First Quarter 10 5/16 5 15/16
Second Quarter 7 3/16 5
Third Quarter 7 31/32 3 3/4
Fourth Quarter 9 1/16 4 11/16
1998
First Quarter 6 7/8 3 1/8
</TABLE>
As of March 31, 1998, the total number of shareholders of the Company's
Common Stock was approximately 22,000, with 1,700 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 20,300 additional
shareholders.
<PAGE>
Item 6. SELECTED FINANCIAL DATA
The data should be read in conjunction with the consolidated financial
statements, related notes and other financial information included elsewhere in
this Form 10-K.
Consolidated Statements of Operations Data:
(Note: all information presented is on a post reverse split basis)
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues $29,738 $19,030 $16,302 $13,695 $3,360
------- ------- ------- ------- ------
Costs and expenses
Costs of revenues and technical support 9,461 5,944 7,074 5,537 1,783
Sales and marketing 17,033 13,038 9,166 5,850 3,092
General and administration 8,902 8,009 8,191 7,936 5,892
Amortization and depreciation 2,550 3,684 4,104 2,452 924
Research and development 3,016 1,496 1,270 521 606
Unusual charges 686 2,590 1,102 3,178 4,402
Reduction in carrying values of long-lived assets - 412 3,760 - -
------- ------- ------- ------- -------
Total costs and expenses 41,648 35,173 34,667 25,474 16,699
------- ------- ------- ------- -------
Operating loss (11,910) (16,143) (18,365) (11,779) (13,339)
Other income (expense), net 813 - - (428) (111)
Interest charge pertaining to discount on
convertible debentures (1,288) (2,810) - - -
-------- -------- -------- -------- --------
Net loss $(12,385) $(18,953) $(18,365) $(12,207) $(13,450)
======== ======== ======== ======== ========
Basic and diluted net loss per share $(1.11) $(2.66) $(3.73) $(5.06) $(8.56)
Weighted average common shares outstanding 11,163 7,130 4,921 2,411 1,572
</TABLE>
<TABLE>
<CAPTION>
December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands)
Consolidated Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $2,312 $2,809 $(2,998) $(3,590) $ 2,545
====== ====== ======= ======= =======
Total assets 37,244 27,671 16,081 21,609 20,807
====== ====== ======= ======= =======
Long term debt, less current portion 241 526 800 695 172
=== === === === ===
Shareholders' equity 9,667 9,524 2,009 7,839 12,168
===== ===== ===== ===== ======
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Condition and Liquidity
The Company has incurred consolidated net losses of $12,385,000, $18,953,000 and
$18,365,000 during the years ended December 31, 1997, 1996 and 1995,
respectively, and cumulative net losses of $81,741,000 through December 31,
1997. As of December 31, 1997, the Company's current assets exceeded its current
liabilities by $2,312,000. For the year ended December 31, 1997, net cash used
in operating activities was $6,937,000. Net cash used in operating activities
for 1997, was less than the Company's total net loss primarily due to non-cash
expenses (including common stock and options issued for services of $5,515,000,
amortization and depreciation of $2,550,000 and non-cash interest charges
pertaining to the discount on convertible debentures of $1,288,000) ,offset by
increases in operating assets and liabilities. Cash was also used for certain
investing activities including capital expenditures of $1,455,000 and the
purchase and development of software technologies of $1,559,000. These uses of
cash were primarily financed through the sales of convertible debentures and
common stock and exercises of stock options approximating $6,123,000, net of
commissions.
Management's Plan to Continue as a Going Concern
Although the Company's liquidity position at December 31, 1997, was adversely
affected by the Company's continuing losses, the private placements of debt and
equity during the year then ended have enabled the Company to continue
operating. The Company does not currently maintain a credit facility with any
financial institution, although the Company is actively seeking to obtain an
asset based working capital line of credit. Management's plans to remain a going
concern, as more fully described in Note 1 to the Consolidated Financial
Statements, require additional financing until such time as sufficient cash
flows are generated from operations. However, there can be no assurance that the
Company will be able to obtain sufficient financing to execute its business
plan. As a result of the continuing operating losses, and the lack of sufficient
funds to execute its business plan, there is substantial doubt about the
Company's ability to continue as a going concern. No adjustments have been made
with respect to the consolidated financial statements to record the results of
the ultimate outcome of this uncertainty.
Management's plans to remain a going concern require additional financing until
such time as the Company achieves positive cash flows from operations through
the continued growth of its wholly-owned subsidiary, Softworks, Inc.
("Softworks") and the successful exploitation of the Company's d.b.Express
technology. The Company's current source of operating revenue continues to be
primarily derived from Softworks. The Company has incurred significant losses
(both cash expenses and non-cash expenses as described in these notes) as a
result of the development and marketing of the d.b.Express technology.
Nevertheless, management believes that its proprietary d.b.Express technology
has significant potential in several areas and solves certain significant
business issues particularly in the telecommunications and internet related
markets. In order to realize the potential of this technology, the Company is
vigorously continuing its efforts to enter into sales or license agreements of
its d.b.Express technology. Management believes that the successful exploitation
of its d.b.Express technology, as well as the continued growth of Softworks,
will eventually enable the Company to achieve positive cash flows from
operations and reduce its dependency on cash flows from financing activities.
However, to satisfy its immediate cash needs, the Company consummated the sale
of $1,978,000 (net of expenses) of restricted common stock in January, 1998 (
see Note 13 to these Consolidated Financial Statements). Until sufficient cash
flows are generated from operations, additional financing is anticipated to be
in the form of an asset based working capital line of credit, additional equity
or other debt instruments. There can be no assurances that the Company will be
able to obtain sufficient financing or will be successful in achieving positive
cash flows from operations in order to achieve its business plan.
<PAGE>
The year 1997 witnessed the true beginning of the Company's global expansion, as
evidenced by the licensing agreement with British Telecommunications, plc and
Softworks' creation of operating units in Brazil, and France, with planned
expansion into Australia, Spain, Italy and Germany scheduled for 1998.
Additionally, the Company markets to a host of other countries in the
international community through a network of distributors that service the
following countries: Switzerland, Scandinavia, Israel, Japan, Singapore,
Thailand, and South Africa. Combined with the existing operations in the United
Kingdom, Computer Concepts is establishing itself as an international provider
of enterprise-wide software. As described in Note 2 of the Consolidated
Financial Statements, the Company has overseas revenue totaling $5,354,000,
$4,882,000, and $2,732,000 respectively for the years ended December 31, 1997,
1996 and 1995.
In 1997, the Company was ranked in a national survey based on five year revenue
growth as the 9th fastest growing high technology company in the United States.
Management believes that the successful exploitation of the Company's
d.b.Express technology, the continuing success of the additional new Softworks
products (Softworks plans to release Resource Availability and CenterStage for
multi-platforms in 1998 to address real-time data and storage management across
multiple platforms), expansion into new geographical markets, among other
things, should enable the Company to eventually achieve positive cash flows from
operations. Due to the recent success and rapid growth of the Company's
Softworks' subsidiary, management no longer believes that the Company's future
success is solely dependent upon the successful exploitation of the d.b.Express
technology. Further, additional markets for potential future sales include entry
into the Year 2000 and multi-platform markets through its Softworks subsidiary
as well as entry into the Internet market with its patented d.b.Express
technology leveraging JAVA and the Internet.
Softworks sells perpetual and fixed term licenses for its mainframe products,
for which extended payment terms of three to five years may be offered. In the
case of extended payment term agreements, the customer is contractually bound to
equal annual fixed payments. The first year of post contract support (PCS) is
bundled with standard license agreements. In the case of extended payment term
agreements, PCS is bundled for the length of the payment term. Thereafter, in
both instances, the customer may purchase PCS annually. Revenue with respect to
such extended payment terms are deferred and recognized over the period of the
installment payment plan. At December 31, 1997, the amount of such future
receivables extending beyond one year was $6,480,000, and is included in
installment accounts receivable, due after one year with the same amount
included in deferred revenue, earned after one year, in the accompanying
consolidated balance sheet.
During 1997 the Company sold the net assets and liabilities and the underlying
software technology of its Maplinx subsidiary. Since its acquisition, MapLinx'
revenue had diminished and it had incurred continuing losses. As a result, the
Company had evaluated the carrying value of the unamortized portion of the
MapLinx excess of cost over fair value of net assets acquired and unamortized
software development costs, aggregating $412,000 at December 31, 1996, and had
determined that its recoverability was doubtful. Accordingly, the Company
wrote-off such long-lived assets in the fourth quarter of 1996. 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 received for the balance.
Approximately $190,000 plus interest was paid in January 1998 and $45,000 plus
interest is to be paid later in 1998. As a result, in 1997 the Company
recognized an $813,000 gain on the sale of the net assets of MapLinx.
Results of Operations
Fiscal 1997 Compared to Fiscal 1996
Revenue reached a record high for the Company, rising $10,708,000 or 56.3% to
$29,738,000 for the year ended December 31, 1997, over the prior year's
$19,030,000. The primary factors contributing to this growth include: (i) an
<PAGE>
increase in Softworks' revenue of $10,245,000, due, in part, to an increase in
processor capabilities measured in Millions of Instructions per Second ("MIPS");
and (ii) a newly formed business unit which is designed to provide a wide array
of information technology, support and services. This unit known as Professional
Services, ("professional services") generated revenue of $1,868,000.
Professional services offers solutions, support, and strategies to solve various
business crises in such areas as: 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. A loss of revenue of
$1,642,000 was due to the sale of Maplinx subsidiary.
Cost of Revenue - software licenses and support of $7,674,000, represents a
$1,730,000 increase over last year. However, when viewed as a percentage of
revenue, represents a decrease of 3.7 percentage points (27.5% for 1997 vs.
31.2% for 1996). The Company anticipates this trend to continue for the
foreseeable future. In an effort to establish the professional services business
unit, the Company operated at lower than standard margins.
During 1997, sales and marketing expenses increased $3,995,000 to $17,033,000
from $13,038,000 for the year ended December 31, 1996. This increase was due, in
part, to expanded global operations, as well as increased marketing efforts of
the Company's wide breadth of products, (d.b.Express, professional services and
Softworks suite of products, known as SoftworkSavanTechnology, which includes
the Year 2000 suite) of $5,591,000. These costs were offset by the sale of
Maplinx which generated savings of $1,025,000.
General and administrative expenses increased $893,000 or 11.1%, to $8,902,000
for the year ended December 31, 1997 as compared to $8,009,000 for the year
ending December 31,1996. The increase at Softworks was $643,000, while corporate
overhead / d.b.Express increased $640,000 offset by savings associated with the
sale Maplinx of $390,000.
Research and development costs increased significantly during 1997, nearly 102%.
The $ 3,016,000 represents a $1,520,000 increase over the prior year's
$1,496,000. This increase is primarily due to Softworks' evolving "Y2K" and
multi-platform technology, as well as to the development of the d.b.Express Java
based internet applications software, which is the underlying technology of the
Company's recently announced agreement with British Telecommunications, plc.
See Note 10 to the Consolidated Financial Statements for a discussion of unusual
charges incurred for the years ended December 31, 1997, 1996 and 1995
respectively.
Fiscal 1996 Compared to Fiscal 1995
Revenues for the year ended December 31, 1996 were $19,030,000, an increase of
$2,728,000 or 17% over the prior years total of $16,302,000. This increase was
primarily due to the increase in Softworks' revenues of $4,899,000 and
d.b.Express revenues of $180,000, offset by reductions in net revenues of
MapLinx of $1,560,000 and discontinued subsidiaries of $840,000.
Cost of revenues and technical support, of $5,944,000 represents a decrease of
$1,130,000 from the prior year's amount of $7,074,000 due principally to reduced
costs incurred by MapLinx of $407,000 and by the discontinuation of Superbase
and CCEL operations of $1,320,000, offset by increases related to d.b.Express of
$681,000.
During 1996, sales and marketing expenses for the Company increased $3,872,000
to $13,038,000 from $9,166,000 for the year ended December 31, 1995. The
increase was due, in part, to Softworks efforts in establishing overseas
operations of $2,319,000. The remaining portion of the increase was attributable
to d.b.Express.
<PAGE>
General and administrative expenses decreased $182,000, to $8,009,000 for the
year ending December 31, 1996 versus $8,191,000 for the year ending December 31,
1995. The decrease was principally due to discontinued subsidiaries of
$1,053,000, reductions by MapLinx of $50,000, offset by increases at Softworks
of $723,000 and costs associated with d.b.Express of $384,000.
Research and development costs increased $226,000 in 1996 to $1,496,000 over the
prior years' amount of $1,270,000, due principally to refinements in d.b.Express
technology.
The reduction in carrying value of long-lived assets of $412,000 in 1996,
pertains to the write-down of MapLinx intangible assets.
Safe Harbor Statement
Certain information contained in this annual report, particularly information
regarding future economic performance and finances, plans and objectives of
management, is forward-looking. In some cases, information regarding certain
important factors that could cause actual results to differ materially from any
such forward-looking statement appear together with such statement. The
following factors, in addition to other possible factors not listed, could
affect the Company's actual results and cause such results to differ materially
from those expressed in forward-looking statements. These factors include
competition within the computer software industry, which remains extremely
intense, both domestically and internationally, with many competitors pursuing
price discounting; changes in economic conditions; the development of new
technologies and/or changes in operating systems which could obsolete or
diminish the value of existing technologies and products; personnel related
costs; legal claims; risks inherent to rolling out new software and new software
technologies; the current lack of adequate financial resources to carry out the
Company's current business plan in regard to the d.b.Express technology; the
potential cash and non-cash costs of raising additional capital or the possible
failure to raise necessary capital; changes in accounting principles applicable
to the Company's activities and other factors set forth in the Company's filings
with the Securities and Exchange Commission.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data listed in the accompanying Index
to Financial Statements and Schedules is attached as part of this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On May 22, 1997, with the approval of the Registrant's Board of Directors and
Audit Committee, the Registrant dismissed Grant Thornton LLP as its independent
auditors for the year ending December 31, 1997.
Grant Thornton LLP's reports on the financial statements for the past two fiscal
years contained no adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles,
other than to include in their report for the Company's financial statements as
of and for the year ended December 31, 1996, the following statement: "The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As shown in the consolidated
financial statements, the Company continued to sustain significant losses and
use substantial amounts of cash in operations during the year ended December 31,
1996. These factors, among others, as discussed in Note 1 to the consolidated
financial statements, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty."
During the two most recent fiscal (calendar) years and through the date of
dismissal (May 22, 1997) there were no disagreements with Grant Thornton LLP on
any matter of accounting principle or practice, financial statement disclosure
or auditing scope or procedure, which disagreement(s), if not resolved to Grant
Thornton LLP's satisfaction, would have caused Grant Thornton LLP to make
reference to the subject matter of the disagreement(s) in connection with its
reports on the Registrant's financial statements.
The response letter from Grant Thornton LLP required by Item 304 of Regulation
S-K was filed as an exhibit on Form 8-K and is hereby incorporated by reference.
On June 2, 1997, with the approval of the Registrant's Board of Directors and
Audit Committee, the Registrant retained Hays & Company (internationally, Hays
Allan Affiliates) as its independent auditors for the years ending December 31,
1997, 1996 and 1995.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
As of April 7,1998, the names, ages and positions of the directors and
executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Daniel Del Giorno, Sr. 65 Chairman, Ass't. Sec. and Director
Daniel Del Giorno, Jr. 43 President, CEO, Treasurer, Director
Russell Pellicano 57 Secretary, Director
Jack S. Beige 53 Director
Augustin Medina 57 Director
Edward Warman 55 Exec. V. P. of Products and Services
George Aronson 49 Chief Financial Officer
</TABLE>
<PAGE>
Daniel Del Giorno, 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 Del Giorno, Jr., the Company's President and
also a director. During the period 1987 to April 1989, Mr. Del Giorno, Sr.
together with Mr. Pellicano (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. Del Giorno, 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. Del Giorno, 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.
Del Giorno, Sr. in connection therewith. In addition, Mr. Del Giorno, Sr. is the
holder of a patent for a digital myograph for the testing of muscles by
computer. Mr. Del Giorno, 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 Del Giorno, Jr., the Company's President, CEO, Treasurer and a
director, is the son of Daniel Del Giorno, Sr. and has been with the Company
since April 1989. Prior to joining the Company and during the period 1987 to
1989 Mr. Del Giorno, Jr. was involved in providing the management and financial
support for and collaborated with Mr. Del Giorno, 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 Del Giorno, 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 since 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.
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.
<PAGE>
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.
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, 1997, 1996, and 1995. Directors are
not compensated for their services, however, the outside directors received a
formula grant of stock pursuant to the 1995 Outside Directors Stock Plan.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
----------------------------- --------------------------------------------------
Securities All
Other Restricted Underlying Other
Name and Fiscal Annual Stock Option Options/ Compen-
Principal Position Year Salary Bonus(4) Compensation Awards SARS sation
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Daniel DelGiorno,Sr.,(1)(5) 1997 $260,000 $ 327,000 $ - - - -
Director 1996 259,000 232,000 - - - -
1995 240,000 84,000 - 128,000 128,000 -
Daniel DelGiorno, Jr.(1)(5) 1997 - 753,000 - - - -
President, C.E.O. 1996 - 232,000 - - - -
Director 1995 - 84,000 - 128,000 128,000 -
Russell Pellicano(2) 1997 - 199,000 - - - -
Secretary 1996 - 195,000 - - -
Director 1995 - - - 10,000 10,000 -
Ed Warman (3)(5) 1997 148,000 - - - - -
Vice President of Products 1996 116,000 53,000 - - - -
& Services 1995 117,000 - - 20,000 20,000 -
George Aronson (4)(5) 1997 157,000 233,000 - - - -
Chief Financial Officer 1996 144,000 187,000 - - - -
1995 31,000 - - 2,500 2,500 -
All Officers as a Group 1997 $565,000 $1,512,000 - - - -
1996 519,000 899,000 - - - -
1995 388,000 168,000 - 288,500 288,500 -
<PAGE>
<FN>
Footnotes
- ---------
(1) 50,000 Stock options had an original exercise price of $25.60 per share,
their fair market value at date of grant, and were repriced to reflect an above
market exercise price of $5.00 per share effective May 1995, when the market
value was $2.80 per share. D. Del Giorno, Sr., and D. DelGiorno, Jr. were each
granted an aggregate of 30,000 shares of stock and 18,000 options exercisable at
$5.00, and 60,000 options exercisable at $15.00, in May and November 1995, and
the 60,000 were repriced to $0.10 in June,1997, and 75,000 shares in November,
1996.
(2) R. Pellicano was granted 10,000 options exercisable at $15.00 in November,
1995.
(3) Mr. Warman was granted the right to 8,000 options in 1994 which vested at
2,000 per year in 1994, 1995, 1996 and 1997, exercisable at $15.00; 20,000
options in 1995, exercisable at $5.00; and 20,000 shares of common stock in
November, 1996.
(4) Mr. Aronson joined the Company in September, 1995 as Chief Financial
Officer, was granted 2,500 options at $5.00 in November, 1995, which were
repriced to $0.10 in June, 1997.
(5) Bonus amounts reflected above for the years ended December 31, 1997 and
1996, are in the form of stock option and the Company's common stock, which were
subject to forfeiture and /or restrictions, except for shares valued at $172,000
and $28,000 issued to Dan DelGiorno, Sr and George Aronson in 1996,
respectively.
</FN>
</TABLE>
Option/SAR Grants in Last Fiscal Year
No options or SARs were granted to Named Officers in 1997.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Value
The following table set forth certain information with respect to stock
option exercises by the named Executive Officers during the fiscal year ended
December 31, 1997, and the value of unexercised options held by them at fiscal
year-end.
<PAGE>
<TABLE>
<CAPTION>
Number of Value of
Unexercised Unexercised
Options at In-the-Money
Fiscal Year Options at
End Fiscal Year End (1)
----------------------- -------------------------
Shares Acquired Value
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ---------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Daniel Del Giorno, Sr. - - 128,100 - $294,000 -
Daniel Del Giorno, Jr. - - 128,100 - 294,000 -
Russell Pellicano - - 10,000 - - -
Ed Warman - - 28,000 - - -
George Aronson - - 2,500 - 12,250 -
<FN>
Footnotes
- ---------
(1) Market Value of the underlying securities at fiscal year end minus the
exercise price.
</FN>
</TABLE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information as of April 7,1998, 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:
<TABLE>
<CAPTION>
Common Stock % of Outstanding
Name of Beneficial Owner Beneficially Owned Shares (2)
- ------------------------ ------------------- ------------------
<S> <C> <C>
Daniel Del Giorno, Sr. (1)(3)(4) 297,550 2.2%
Daniel Del Giorno, Jr. (1)(3)(4)(7) 415,505 3.1%
Russell Pellicano (1)(5) 68,100 *
Jack S. Beige (1) (3) 41,944 *
Augustin Medina (1) 24,764 *
George Aronson (1)(8) 103,000 *
Ed Warman(1)(6) 151,500 1.1%
All Officers and Directors as a
Group (7 persons) (3,4,5,6) 1,102,363 8.2%
<FN>
- -------
* Less than 1%
Footnotes
- ---------
(1) The address of the holder is 80 Orville Drive, Suite 200, Bohemia, New York
11716.
(2) Based upon 13,742,207 shares deemed (includes outstanding options owned by
above named parties)outstanding as of April 7, 1998.
(3) Includes shares held by his spouse.
(4) Includes 68,000 options (exercisable at $5.00 per share), and 60,000 options
(exercisable at $0.10).
(5) Includes 10,000 options (exercisable at $15.00 per share).
(6) Includes 20,000 options (exercisable at $15.00 per share) and 8,000 options,
exercisable at $5.00 per share.
(7) Daniel Del Giorno, Jr. has majority control of Tech Marketing Group which
owns 17,405 shares. (The Company has no business dealings with Tech Marketing
Group)
(8) Includes 2,500 options (exercisable at $0.10 per share).
</FN>
</TABLE>
<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Two executive officers of the Company have received advances from time to time,
with such advances being payable on demand and bearing no interest. Effective,
January, 1997, these advances are interest bearing at the rate of 7% per annum.
At December 31, 1997, the loan balance due from these officers was approximately
$1,070,000. See Item 11. Executive Compensation and Item 12. Security Ownership
of Certain Beneficial Owners and Management, regarding grants of stock and
options to Directors and Officers.
During the fourth quarter, the Company advanced approximately $126,000 to
another officer/director. The advance was settled with the Company prior to year
end December 31, 1996, through the transfer of marketable securities to the
Company with a market value of $126,000.
During the years ended December 31, 1997, 1996 and 1995, the Company paid an
outside Director, fees for legal services and consulting fees aggregating
$165,000, $127,000 and $64,000, respectively.
During the years ended December 31, 1997, 1996 and 1995, the Company paid an
outside Director consulting fees of $52,000, $52,000 and $30,000, respectively.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page
----
(a) Financial Statements
--------------------
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets
December 31, 1997 and 1996 F-2
Consolidated Statements of Operations
Years Ended December 31, 1997, 1996 and 1995 F-3
Consolidated Statement of Shareholders' Equity
Years Ended December 31, 1995, 1996 and 1997 F-4
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995 F-5
Notes To Consolidated Financial Statements F-6 - F-26
(b) Reports on Form 8-K
-------------------
May 23, 1997 Item 9 - Sale of equity securities pursuant to Regulation S
May 29, 1997 Item 4 - Dismissal of independent Auditors
June 03,1997 Item 4 - Engagement of new independent auditors
(c) 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 ubsidiary, 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.)
<PAGE>
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)
4.3 Computer Concepts Employees 1993 Stock Option Plan (Incorp. 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.)
10.1 Lease Extension Agreement between Atrium Executive Center and the Company
(Incorp. 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 . (Incorp. by reference to Exhibit 10(a) to the Company's Form 8-K
filed on July 1, 1994.)
10.3 Agreement between Computer Concepts Europe, Ltd. and the Company dated
September 27, 1993. (Incorporated by reference to Exhibit 10(v) to the
Company's Annual Report on Form 10-K/A for the year ended December 31,
1993.)
10.4 Agreement between Computer Concepts Europe, Ltd. and the Company dated
September 27, 1993.(Incorporated by reference to Exhibit 10(w) to the
Company's Annual Report on Form 10-K/A for the year ended December 31,
1993.)
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 03, 1997.)
(21) Subsidiaries of the Company.
Softworks, Inc. (Maryland)
(23) Consent of Hays & Company
- ---------
(1)Filed with Form S-1, Registration Statement of Computer Concepts Corp. Reg.
No 3-47322 and are incorporated herein by reference
<PAGE>
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, Jr.
----------------------
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, Jr.
_________________ President, Treasurer, April 8, 1998
Daniel DelGiorno, Jr. Chief Executive Officer,
Director
Daniel DelGiorno, Sr.
_________________ Director, April 8, 1998
Daniel DelGiorno, Sr. Assistant Secretary
Russell Pellicano
_________________ Secretary April 8, 1998
Russell Pellicano Director
George Aronson
__________________ Chief Financial Officer April 8, 1998
George Aronson
<PAGE>
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, 1997 and
1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. 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, 1997 and 1996, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the consolidated
financial statements, the Company continued to sustain significant losses and
use substantial amounts of cash in operations during the year ended December 31,
1997. These factors, among others, as discussed in Note 1 to the consolidated
financial statements, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/Hays & Company
February 27, 1998, except for Note 2 which is
dated March 18, 1998
New York, New York
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 778 $ 5,675
Accounts receivable, net of allowance for doubtful
accounts of $252 and $693 in 1997 and 1996, respectively 17,866 9,044
Advances to officers 1,070 682
Inventories - 29
Prepaid expenses and other current assets 1,987 1,036
--------- ---------
21,701 16,466
Installment accounts receivable, due after one year 6,480 3,714
Property and equipment, net 2,069 1,605
Software costs, net 1,676 949
Excess of cost over fair value of net assets acquired,
net of accumulated amortization of $2,477 and $2,628 in 1997
and 1996, respectively 4,611 4,683
Other assets 707 254
-------- ---------
$ 37,244 $ 27,671
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 7,225 $ 4,227
Current portion of long-term debt 391 458
Deferred revenue 11,773 8,972
--------- ---------
19,389 13,657
Deferred revenue, earned after one year 7,947 3,964
Long-term debt, net of current portion 241 526
--------- ---------
Total liabilities 27,577 18,147
--------- ---------
Commitments and contingencies
Shareholders' equity (Note 2)
Common stock, $ .0001 par value; 150,000,000 shares authorized;
issued and outstanding - 12,744,751 shares in 1997
(127,447,510 shares before the split) and
101,335,000 shares in 1996 1 10
Additional paid-in capital 91,641 78,870
Accumulated deficit (81,741) (69,356)
Foreign currency translation (54) -
Unrealized loss on marketable securities (180) -
--------- ---------
Total shareholders' equity 9,667 9,524
--------- ---------
$ 37,244 $ 27,671
========= =========
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
</FN>
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenue
Software licenses and support $ 27,870 $ 19,030 $ 16,302
Professional services 1,868 - -
--------- --------- ---------
29,738 19,030 16,302
--------- --------- ---------
Costs and expenses
Cost of revenue - software licenses
and support 7,674 5,944 7,074
Cost of revenue - professional services 1,787 - -
Sales and marketing 17,033 13,038 9,166
General and administrative 8,902 8,009 8,191
Amortization and depreciation 2,550 3,684 4,104
Research and development 3,016 1,496 1,270
Unusual charges, net 686 2,590 1,102
Reduction in carrying values of long-lived assets - 412 3,760
--------- --------- ---------
41,648 35,173 34,667
--------- --------- ---------
Operating loss (11,910) (16,143) (18,365)
--------- --------- ---------
Other income (expense)
Gain on sale of net assets of subsidiary 813 - -
Interest charge pertaining to the discount on
convertible debentures (1,288) (2,810) -
--------- --------- ---------
Net loss $ (12,385) $ (18,953) $ (18,365)
========= ========= =========
Basic and diluted net loss per share $ (1.11) $ (2.66) $ (3.73)
========= ========= =========
Weighted average common shares outstanding 11,163 7,130 4,921
========= ========= =========
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
</FN>
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(in thousands)
<TABLE>
<CAPTION>
Foreign Marketable
Additional currency securities Total
Common stock paid-in Accumulated translation valuation shareholders'
Shares Amount capital deficit adjustment adjustment equity
------ ------ ---------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 34,233 $ 3 $ 39,895 $ (32,038) $ (21) $ - $ 7,839
Net proceeds from sales of
common stock 20,886 3 8,864 - - - 8,867
Common stock and options
issued for services 2,137 - 3,234 - - - 3,234
Common stock and options
issued for settlement of
trade payables 219 - 413 - - - 413
Currency translation
adjustment - - - - 21 - 21
Net loss - - - (18,365) - - (18,365)
-------- ------ --------- ----------- ---------- --------- -----------
Balance, December 31, 1995 57,475 6 52,406 (50,403) - - 2,009
Net proceeds from sales of
common stock and options
exercised 6,365 1 1,996 - - - 1,997
Common stock and options
issued for services 7,680 1 3,445 - - - 3,446
Common stock issued formerly
subject to forfeiture 5,075 - 1,508 - - - 1,508
Conversion of common stock
formerly subject to
redemption 4,490 - 4,000 - - - 4,000
Conversion of convertible
debentures 16,632 2 12,739 - - - 12,741
Common stock issued for
settlements 3,618 - 2,776 - - - 2,776
Net loss - - - (18,953) - - (18,953)
------- ------ -------- ---------- ---------- ----------- -----------
Balance, December 31, 1996 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 adjusted for
settlements (302) - (164) - - - (164)
Currency translation
adjustment - - - - (54) - (54)
Marketable securities
valuation adjustment - - - - - (180) (180)
Net loss - - - (12,385) - - (12,385)
One-for-ten reverse stock
split * (114,702) (12) 12 - - - -
------- ------ ------- --------- ----------- --------- ----------
Balance, December 31, 1997 12,745 $ 1 $91,641 $ (81,741) $ (54) $ (180) $ 9,667
======= ====== ======= ========= =========== ========= ==========
<FN>
*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 8).
The accompanying notes are an integral part of
these consolidated financial statements.
</FN>
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(12,385) $(18,953) $(18,365)
Adjustments to reconcile net loss to net cash used in
operating activities
Amortization and depreciation:
Property and equipment 965 806 672
Software costs 832 1,910 1,924
Excess of cost over fair value of net assets acquired 749 959 1,480
Other 4 9 28
Provision for doubtful accounts 136 154 7
Common stock and options issued for services 5,515 3,446 3,234
Common stock issued subject to forfeiture - 1,508 -
Non-cash unusual charges 336 2,415 269
Non-cash interest charge pertaining to the discount on
convertible debentures 1,288 2,810 -
Reduction in carrying values of long-lived assets - 412 3,760
Gain on sale of net assets of subsidiary (813) - -
Changes in operating assets and liabilities
Accounts receivable (9,070) (4,723) (802)
Inventories 10 94 91
Prepaid expenses and other current assets (967) (637) 174
Installment accounts receivable (2,766) (3,714) -
Other assets (457) (129) 39
Accounts payable and accrued expenses 2,884 569 (998)
Deferred revenue 6,802 8,070 1,036
------- ------- -------
Net cash used in operating activities (6,937) (4,994) (7,451)
------- ------- -------
Cash flows from investing activities
Capital expenditures (1,455) (832) (547)
Software development and technology purchases (1,559) (526) (545)
Proceeds from the sale of technology - 450 -
Proceeds from the sale of net assets of subsidiary, net 230 - -
Advances to officers, net (388) (297) (271)
Additional consideration for Softworks and Maplinx acquisitions (523) (459) (320)
------ ------- ------
Net cash used in investing activities (3,695) (1,664) (1,683)
------ ------- ------
Cash flows from financing activities
Net proceeds from sales of common stock and options 2,742 1,997 8,867
exercised
Net proceeds from sale of convertible debentures 3,381 9,931 -
(Repayments of) advances from long-term debt (344) (174) 345
------ ------- ------
Net cash provided by financing activities 5,779 11,754 9,212
------ ------- ------
Effect of exchange rate changes on cash and cash equivalents (44) - -
------ ------- ------
Net (decrease) increase in cash and cash equivalents (4,897) 5,096 78
Cash and cash equivalents, beginning of year 5,675 579 501
------ ------- ------
Cash and cash equivalents, end of year $ 778 $ 5,675 $ 579
====== ======= ======
<FN>
The accompanying notes are an integral part of
these consolidated financial statements
</FN>
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1 Basis of presentation
Computer Concepts Corp. and subsidiaries (the "Company") design, develop,
market and support information delivery software products, including
end-user data access tools for use in personal computer and client/server
environments and systems management software products for corporate
mainframe data centers. Additionally, the Company has recently entered into
the technology infrastructure service and construction business, also
referred to as "professional services", whereby for a fee the Company
assists in the design, construction and installation of building technology
systems. The Company's principal market is the United States. Overseas
revenue is principally generated from European subsidiaries and
distributors.
The Company has incurred consolidated net losses of $12,385,000, $18,953,000 and
$18,365,000 during the years ended December 31, 1997, 1996 and 1995,
respectively, and cumulative net losses of $81,741,000 through December 31,
1997. For the years ended December 31, 1997, 1996 and 1995, net cash used in
operating activities was $6,937,000, $4,994,000 and $7,451,000 respectively, as
detailed in the accompanying consolidated statements of cash flows. The
Company's cash requirements were primarily financed through the sale of
convertible debentures and common stock and exercises of stock options
approximating $6,123,000, $11,928,000 and $8,867,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. The Company does not currently
maintain a credit facility with any financial institution, although the Company
is actively seeking to obtain an asset based working capital line of credit. The
Company has continued to incur significant expenditures with respect to the
development and marketing of its d.b.Express technology without generating any
significant revenue . As a result of continued operating losses, the use of
significant cash in operations and the lack of sufficient funds to execute its
business plan, there is substantial doubt about the Company's ability to
continue as a going concern. No adjustments have been made with respect to the
consolidated financial statements to record the results of the ultimate outcome
of this uncertainty.
Management's plans to remain a going concern require additional financing
until such time as the Company achieves positive cash flows from operations
through the continued growth of its wholly-owned subsidiary, Softworks,
Inc. ("Softworks") and the successful exploitation of the Company's
d.b.Express technology. The Company's current source of operating revenue
continues to be primarily derived from Softworks. The Company has incurred
significant losses (both cash and non-cash expenses as described in these
notes) as a result of the development and marketing of the d.b.Express
technology. Nevertheless, management believes that its proprietary
d.b.Express technology has significant potential in several areas and
solves certain significant business issues in the telecommunications and
Internet related markets. In order to realize the potential of this
technology, the Company is vigorously continuing its efforts to enter into
sales or license agreements of its d.b.Express technology. Management
believes that the successful exploitation of its d.b.Express technology, as
well as the continued growth of Softworks, will eventually enable the
Company to achieve positive cash flows from operations and reduce its
dependency on cash flows from financing activities. However, to satisfy its
immeidate cash needs, the Company consummated the sale of $1,978,000 (net
of expenses) of restricted common stock in January 1998 (Note 13). Until
sufficient cash flows are generated from operations, additional financing
is anticipated to be in the form of an asset based working capital line of
credit, additional equity or other debt instruments. There can be no
assurances that the Company will be able to obtain sufficient financing or
will be successful in achieving positive cash flows from operations in
order to execute its business plan.
<PAGE>
2 Significant accounting policies
Common stock split
At the Company's annual shareholders' meeting on November 26, 1997, the
Company's shareholders passed a resolution to grant the Board of Directors
authority to amend the Articles of Incorporation to increase the authorized
shares of common stock from 150,000,000 to 300,000,000. Additionally, the
shareholders granted the Board of Directors authority to effect a reverse
stock split in a ratio ranging from one-for-two through one-for-ten. 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 will remain unchanged at $.0001 and 150,000,000 shares,
respectively. The number of shares issued at December 31, 1997, after
giving effect to the split, was 12,744,751 (127,447,510 shares issued
before the split).
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 for 1997 and prior periods
was not restated in those statements. 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.
Principles of consolidation
The consolidated financial statements include the accounts of Computer
Concepts Corp. and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in
consolidation.
Revenue recognition
License revenue is recognized at the time of delivery and acceptance of
software products, where collectibility is generally deemed probable and no
significant/insignificant obligations exist. Where realization of sale
proceeds is not deemed probable, license revenue is recognized on the
installment (cash) method following delivery. Maintenance revenue is
deferred and recognized ratably over the maintenance period. Consulting
fees and professional service revenue are recognized as services are
performed and construction revenue is recognized on the percentage of
completion method based on the cost incurred relative to total estimated
costs.
Installment accounts receivable
Perpetual license agreements may be executed under installment payment
terms with monthly, quarterly or annual payment terms for up to five years.
Revenue and related sales commissions are deferred and recognized over the
period of the installment payment plan.
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.
<PAGE>
2 Significant accounting policies (continued)
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 estimated fair
value. Amortization of software costs begins when products become available
for general customer release. Software costs associated with certain types
of software are amortized on a straight-line basis over the estimated
economic lives of the products (generally two to five years), while
software costs associated with certain other types of software are
amortized using the income forecast method over the estimated economic
lives of those products. Management periodically evaluates whether these
intangible assets are impaired (and appropriately adjusts carrying values)
by comparing the net carrying value of the asset to the undiscounted
expected future cash flows to be generated by the asset.
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 the excess of cost over fair
value of net assets acquired is evaluated by comparing the estimated future
undiscounted cash flows from the related assets of the acquired business to
the carrying amount of such assets. It is the Company's policy to
periodically review and evaluate whether there has been an impairment in
the value of intangibles and adjust the carrying values accordingly.
Factors considered in the valuation include current operating results,
trends and anticipated future cash flows.
Income taxes
Deferred tax assets and liabilities are recognized based on the differences
between the financial and tax bases of assets and liabilities using enacted
tax rates in effect for the year in which differences are expected to
reverse. The Company has recorded no provisions for income taxes in the
accompanying consolidated financial statements as a result of incurred
losses.
Net loss per share
Basic net loss per share is based on the weighted average number of common
shares outstanding. Outstanding stock options, warrants and other potential
stock issuances have not been considered in the computation of diluted per
share amounts since the effect of their inclusion would be antidilutive.
All references to net loss per share have been restated to reflect the
effect of the reverse stock split for all periods presented.
<PAGE>
2 Significant accounting policies (continued)
Overseas Revenue
The Company is engaged in one material business segment, operating
principally in North America, during the years 1995 through 1997. Overseas
revenue, principally generated from European subsidiaries and distributors,
is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Germany $ 1,386 $ 1,699 $ 1,361
United Kingdom 2,566 1,762 528
Canada 422 305 282
Australia 176 278 113
Japan 203 234 274
Other Locations 601 604 174
------- ------- -------
$ 5,354 $ 4,882 $ 2,732
======= ======= =======
</TABLE>
Cash and cash equivalents
The Company considers all investments with original maturities of three
months or less to be cash equivalents. The carrying amount of temporary
cash investments approximates the fair value because of the short maturity
of those instruments.
Foreign currency
Assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at year-end exchange rates and revenue and expense items are
translated at average exchange rates during the period. Gains and losses
resulting from translation are recorded as cumulative translation
adjustments in shareholders' equity. Transaction gains and losses are
recognized in the consolidated statements of operations as incurred.
Marketable securities
Marketable securities, which are all classified as "available for sale",
are valued at fair market value. Unrealized gains or losses are recorded
net of income taxes directly to shareholders' equity, whereas realized
gains and losses are recognized in the Company's statements of operations
using the first-in, first-out method. Net book value of marketable
securities approximates $40,000 and $190,000 at December 31, 1997 and 1996,
respectively, and is included in other current assets.
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.
<PAGE>
2 Significant accounting policies (continued)
Concentrations of credit risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash investments and
trade accounts receivables. At December 31, 1997, 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 trade accounts receivables are limited due
to the large number of customers comprising the Company's revenue base and
their dispersion across different industries and geographic areas. The
Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers.
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.
Recently issued accounting pronouncements
There are four recently issued accounting pronouncements that potentially
impact the financial accounting and/or reporting of the Company. Statement
of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), Statement of
Financial Accounting Standards No. 128, "Earning Per Share" ("SFAS 128"),
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131").
SOP 97-2, which was issued to provide further guidance on applying
generally accepted accounting principles to software transactions, becomes
effective for transactions entered into beginning in 1998. Initial adoption
of this statement may only be on a prospective basis. The Company is
currently reviewing the impact that adopting this statement will have on
future reported operations.
SFAS 128 establishes new standards for computing and presenting earnings
per share which simplifies the previous standards and makes them comparable
to international standards. This statement became effective beginning with
the Company's quarter ended December 31, 1997, and requires restatement of
all prior-period earnings per share data. Since the Company's common stock
equivalents are antidilutive, adoption of SFAS 128 does not have an impact
on the consolidated financial statements.
SFAS 130, which presents standards for reporting and display of
comprehensive income and its components, becomes effective for the Company
in 1998 with reclassifications made to previous years required. The Company
is currently reviewing the impact that adopting this statement will have on
future financial presentations. Since the Company does not have material
components of other comprehensive income, it is not expected that adoption
will have a material impact on its consolidated financial presentation.
<PAGE>
2 Significant accounting policies (continued)
Recently issued accounting pronouncements (continued)
SFAS 131, which presents standards for determining a reportable segment and
for disclosing information regarding each such segment, becomes effective
for the Company in 1998 with reclassifications made to previous years
required. Since the Company has historically operated in one industry
segment, adoption of SFAS 131 will not have an impact on the consolidated
financial statement disclosures.
3 Acquisitions
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 provides 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, 50,000
shares of which were contingently issuable upon realizing certain 1993
revenue goals. These goals were achieved and the shares were issued. The
acquisition has been 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 have been 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, is
being amortized over ten years. The agreement also requires the Company to
make additional contingent purchase consideration payments to two of
Softworks' former shareholders based upon certain product revenue for the
years 1995 through 1998, up to a maximum of $1,000,000 each, for an
aggregate maximum of $2,000,000. Through December 31, 1997, the Company has
incurred a liability of $1,604,000, ($1,327,000 of which was paid) to the
non-employee former shareholders, which has been treated as additional
consideration in connection with the acquisition and, accordingly, included
in the excess of cost over the fair value of net assets acquired, as these
individuals did not continue in the employment of the Company subsequent to
the acquisition.
Superbase
In June 1994, the Company completed the purchase of the Superbase product
technology and certain related assets from Software Publishing Corporation
("SPC") in exchange for 203,118 shares of the Company's restricted stock
valued at approximately $4,000,000 and $75,000 in cash. SPC received a
valuation guarantee for the stock issued, and was permitted to sell such
stock in an orderly manner over a twelve month period following
registration, which was originally required to be completed before December
31, 1994. The agreement provided that should such registration statement
not be effective by December 31, 1994, SPC, at its option, could require
the Company to repurchase the shares issued for the amount of the valuation
guarantee.
<PAGE>
3 Acquisitions (continued)
Superbase (continued)
On January 19, 1995, SPC and the Company entered into an extension
agreement whereby the Company was given an extension to file the
registration statement to February 15, 1995. In exchange for that
extension, the Company agreed to pay SPC $560,000 (the "Penalty Amount"),
payable $300,000 in cash in three monthly installments ($100,000 was paid
in 1995 and $200,000 was paid in October 1996), and $260,000 in additional
shares of Company common stock. These additional shares also had a
valuation guarantee. As a result of the Company's failure to meet the
December 31, 1994 registration statement filing deadline, the Company
recorded a $560,000 charge for the Penalty Amount in 1994. The extension
agreement included a provision that if the Company did not meet the
February 15, 1995 deadline, and the registration was not completed by May
31, 1995, SPC was entitled to either of the following (at SPC's option):
(i) the payment of an additional penalty payment equal to $638,000 payable
equally in cash and Company common stock, or (ii) the repurchase of the
shares as provided for in the agreement. The Company did not meet the May
31, 1995 requirement and SPC decided to receive the penalty equally in cash
and stock. Accordingly, the Company accrued for an additional penalty
payment of $638,000 as an unusual charge in 1995 (Note 10).
In October 1996, the Company and SPC signed a Settlement and Mutual Release
Agreement. This agreement permitted SPC to accelerate its ability to sell
its remaining shares, with the Company paying $619,000 in cash ($200,000 of
the cash portion of the Penalty Amount, $319,000 of the May 31, 1995
additional penalty amount, and $100,000 of related interest expense) and
issuing an additional 30,900 shares of the Company's common stock, which
were fair valued at $183,000, to settle all claims between the parties. The
Company recorded an additional unusual charge of $515,000 in 1996,
reflecting such final settlement. During 1996, the Company issued 539,300
shares of its common stock (consisting of 449,000 shares upon the
redemption conversion and 90,300 shares relating to penalties and the final
settlement) ending its commitments under the SPC agreements. However,
during 1997, based upon mutual agreement, the 90,300 penalty shares were
reduced by 30,215 shares. As a result, the Company recorded a corresponding
reduction to unusual charges in the fourth quarter of 1997 totaling
$164,000 (Note 10).
The stock originally issued to SPC was included in the accompanying balance
sheet as "Common Stock Subject to Redemption" which was classified as debt
in the event the Company would have been required to repurchase the shares
at the guaranteed price. This amount has been reclassified to equity, as
the ultimate resolution did not require the Company to repurchase the
shares.
During the year ended December 31, 1995, as a result of the Company's
decision to not invest in the further development and marketing of the
Company's Superbase software technology, the Company recorded a charge to
operations of $2,440,000. This reduced the carrying value of this asset to
$450,000. During 1996, the Company sold the underlying software technology,
with the Company realizing cash proceeds of $450,000.
<PAGE>
3 Acquisitions (continued)
MapLinx, Inc.
During December 1994, the Company completed the acquisition of MapLinx Inc.
("MapLinx"), a developer and provider of personal computer database
geographic utilities used with Windows database and spreadsheet products.
In connection with the acquisition, the Company issued 167,248 shares
having a fair value of $900,000 at the acquisition date. The acquisition
has been accounted for as a purchase and, accordingly, assets acquired and
liabilities assumed were recorded at their fair values as of December 31,
1994 and the operations of MapLinx, are included in the Company's
consolidated statements of operations since that date. The cost of the
acquisition exceeded the fair value of net assets acquired by $904,000 and
had been classified as the "excess of cost over fair value of net assets
acquired" and was being amortized on a straight line basis over a period of
three years.
Since its acquisition, MapLinx' revenue had diminished and it had incurred
continuing losses. As a result, the Company had evaluated the carrying
value of the unamortized portion of the MapLinx excess of cost over fair
value of net assets acquired and unamortized software development costs,
aggregating $412,000 at December 31, 1996, and had determined that its
recoverability was doubtful. Accordingly, the Company wrote-off such
long-lived assets in the fourth quarter of 1996. However, in July 1997, the
Company completed a transaction in which it sold all rights to the
underlying software technologies of 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.
Approximately $190,000 plus interest was paid in January 1998 and $45,000
plus interest is to be paid later in 1998. As a result, in 1997 the Company
recognized an $813,000 gain on the sale of the net assets of MapLinx.
Financial information pertaining to MapLinx (excluding the $235,000 note
receivable) as of and for the years ended December 31, 1997, 1996 and 1995,
is summarized below (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- --------- ---------
<S> <C> <C> <C>
Current assets $ - $ 366 $ 831
Total assets - 429 1,520
Current liabilities - 517 729
Total liabilities - 520 743
Net revenue 578 2,220 3,780
Net loss, (1997 amount prior to
gain on sale of $813) (323) (1,497) (508)
</TABLE>
<PAGE>
3 Acquisitions (continued)
DBopen, Inc.
During October 1994, the Company entered into an agreement to acquire
DBopen, Inc. ("DBopen"), a provider of personal computer database
administration tools employing client/server technology. In connection with
the acquisition, the Company issued $939,000 of restricted common stock and
assumed long-term debt of approximately $423,000. The acquisition had been
accounted for as a purchase and, accordingly, DBopen's assets and
liabilities were recorded at their fair values as of December 31, 1994 and
the operations of DBopen were included in the Company's operations since
that date. The cost of the acquisition exceeded the fair value of net
assets acquired by $1,916,000 which had been classified as the "excess of
cost over fair value of net assets acquired".
As a result of limited sales and changing market conditions during late
1995, it became apparent that significant additional expenditures would
have to be incurred in order to modify the DBopen products to meet such
changing market conditions. In the opinion of management, such additional
costs would exceed the projected benefits and the decision was made to
discontinue the products. Consistent with this business decision, the
Company wrote-off the remaining carrying value of its investment in DBopen
of $1,320,000 in the fourth quarter of 1995.
4 Installment accounts receivable
During 1996, the Company began offering customers extended payment term
alternatives to purchase software. The payment schedule for installment
accounts receivable, due after one year, at December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
Installment accounts receivable (in thousands)
<S> <C>
Due in 1999 $ 4,161
Due in 2000 1,422
Due in 2001 897
------------
$ 6,480
============
</TABLE>
Long-term deferred revenue, earned after one year, at December 31, 1997,
which relates to the installment accounts receivable above, as well as
certain maintenance revenue billed in advance of the maintenance period, is
scheduled to be earned as follows:
<TABLE>
<CAPTION>
Long-term deferred revenue (in thousands)
<S> <C>
Earned in 1999 $ 5,585
Earned in 2000 1,465
Earned in 2001 897
------------
$ 7,947
============
</TABLE>
<PAGE>
5 Property and equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
Useful life
in years 1997 1996
----------- -------- ---------
(in thousands)
<S> <C> <C> <C>
Computer equipment and software 3 to 7 $ 4,009 $ 2,807
Furniture and fixtures 5 to 7 347 279
Leasehold improvements 7 500 473
-------- --------
4,856 3,559
Less accumulated depreciation
and amortization (2,787) ( 1,954)
-------- --------
Property and equipment, net $ 2,069 $ 1,605
======== ========
</TABLE>
6 Software costs
Software costs consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
-------- ---------
(in thousands)
<S> <C> <C>
Capitalized software development costs $ 4,817 $ 3,538
Purchased and acquired software technologies 2,174 1,894
--------- --------
6,991 5,432
Less accumulated amortization (5,315) (4,483)
--------- --------
Software costs, net $ 1,676 $ 949
========= ========
</TABLE>
7 Accounts payable and accrued expenses
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
--------- ---------
(in thousands)
<S> <C> <C>
Trade accounts payable $ 2,424 $ 1,253
Class action settlement (Note 12) 1,200 -
Accrued payroll and benefits 628 616
Commissions payable 1,368 556
Other accrued expenses 1,605 1,802
--------- ---------
$ 7,225 $ 4,227
========= =========
</TABLE>
<PAGE>
8 Shareholders' equity
Common stock and convertible debt securities
Year ended December 31, 1997
During 1997, the Company consummated sales of restricted common stock under
various private placement agreements, including sales of convertible debt
securities. The private placements were pursuant to Regulation D and
Regulation S. 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 is
required to issue approximately 500,000 additional shares.
. 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.
Year ended December 31, 1996
During 1996, the Company consummated sales of restricted common stock under
various private placement agreements, including sales of convertible debt
securities. Proceeds raised from these sales aggregated $11,928,000, net of
offering commissions and expenses of approximately $1,664,000 and the
discount of $2,810,000 pertaining to the convertible debt. A total of
1,928,600 shares were sold (including 1,663,200 shares related to the
convertible debentures) at prices ranging from $2.00 to $20.00 per share.
Approximately 910,400 shares were also issued in 1996 pursuant to valuation
guarantees under stock transactions during the years ended December 31,
1994 and 1995 (371,100 shares) and pursuant to valuation guarantees and the
settlement of the SPC transaction described in Note 3 (539,300 shares).
Sales of the aforementioned convertible debt securities were made pursuant
to Regulation S, resulting in net proceeds to the Company of approximately
$9,931,000 (net of commissions and fees of $1,371,000). 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
<PAGE>
8 Shareholders' equity (continued)
Common stock and convertible debt securities (continued)
Year ended December 31, 1996 (continued)
convertible debentures had assured discounts ranging from 20% to 32.5% from
the market price on the date of conversion. In connection with this
discount, the Company recorded a non-cash interest charge of $2,810,000.
All of these convertible debentures were converted into an aggregate of
1,663,200 shares of the Company's common stock in 1996.
Year ended December 31, 1995
During 1995, the Company consummated sales of restricted common stock under
various private placement agreements. Proceeds raised from these sales
aggregated $8,867,000, net of offering commissions and expenses of
approximately $1,500,000. A total of 1,934,000 shares (excluding 55,500
shares sold under an option) were sold at prices ranging from $2.00 to
$20.00 per share. A total of 99,100 shares were also issued pursuant to
valuation guarantees.
Transactions with officers, employees and consultants
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.
In November 1996, the Company issued 230,000 restricted and 277,500
unrestricted shares of the Company's common stock to various officers,
employees and consultants. These shares were subject to forfeiture if the
Company did not ultimately sign contracts valued in excess of $3,000,000
during 1997; this provision was met and the shares are no longer subject to
forfeiture. Such shares had a fair value at the date of issuance of
$1,508,000, which has been recorded as a non-cash charge in the Company's
statement of operations for the year ended December 31, 1996. In addition
to the shares identified above, the Company issued 768,000 shares of common
stock in 1996 to officers, employees and consultants which were not subject
to forfeiture. These additional shares had a fair value at the date of
issuance of $3,446,000, which is included as a non-cash charge in the
Company's statement of operations for the year ended December 31, 1996.
<PAGE>
8 Shareholders' equity (continued)
Transactions with officers, employees and consultants (continued)
In December 1995, the Company entered into an agreement with Perot Systems
Corporation ("Perot") in connection with the marketing of the d.b.Express
technology. The Company issued 50,000 options at $25.60 per share to
purchase common stock in connection with the agreement and recognized an
expense of $235,000 representing the fair value of such options. Pursuant
to such agreement, Perot also had the ability to earn specified amounts of
options and commissions based upon future sales of d.b. Express where Perot
participated substantially in the sales or license process. No revenue was
earned through this agreement and, accordingly, no additional options or
commissions were paid. In August 1997, the Company gave notice to terminate
the contract with Perot effective December 1997.
During the fourth quarter of 1995, the Company also entered into various
other marketing and consulting agreements expiring at various dates through
November 1997. The Company issued 167,800 options at $15.00 per share to
purchase common stock in connection with these agreements and recognized
expenses aggregating $1,056,000 representing the fair value of such
options. In April 1997, 100,000 of the options were rescinded and the
Company issued 40,000 restricted shares of the Company's common stock to
such consultants in lieu of such options.
Stock option plans
During October 1993, the Company adopted the Employees' 1993 Stock Option
Plan (the "Employees' Plan"), the 1993 Directors, Officers and Consultants
Stock Option Plan (the "DOC Plan") and the 1993 Prior Service Plan (the
"Prior Services Plan"), collectively the "1993 Plans," all of which are
non-qualified plans providing for the grant of stock or options to eligible
participants. The Board of Directors has the authority to determine all
terms and provisions under which options are granted, including the persons
to whom options are granted, the number of shares and exercise price per
share of common stock to be covered by each option and the time or times at
which options shall be exercisable. During 1994, the Board of Directors
authorized a restriction on the exercise of substantially all outstanding
options and warrants. Exercises of options and warrants are subject to the
requirement that, at the time of exercise, at least 25% of the Company's
authorized capital stock be unissued, unreserved and available for
issuance. On March 20, 1996, the Company's shareholders approved the
termination of the above 1993 Plans.
Also on March 20, 1996, the Company's shareholders approved the adoption of
the 1995 Stock Incentive Plan (the "1995 Incentive Plan"). Eligible
participants in the 1995 Incentive Plan are officers and employees of the
Company and consultants to the Company. Pursuant to the 1995 Incentive
Plan, the Board of Directors or a committee thereof may also grant
restricted stock, stock appreciation rights, performance grants or such
other types of awards as it may determine. The total number of common
shares issuable upon the exercise of all stock options under the 1995
Incentive Plan may not exceed 1,000,000 shares, subject to adjustments upon
the occurrence of certain events, as defined. The 1995 Incentive Plan
provides for the granting of (i) incentive options to purchase the
Company's common stock at the fair market value on the date of grant and
(ii) non-qualified options to purchase the Company's common stock at not
less than the fair market value on the date of grant.
<PAGE>
8 Shareholders' equity (continued)
Stock option plans (continued)
On March 20, 1996, the Company's shareholders also approved the Outside
Director Stock Option Plan (the "Director Plan"). Directors of the Company
who are not full-time employees of the Company are eligible to participate
in the Director Plan. The total number of common shares issuable upon the
exercise of all stock options under the Director Plan may not exceed 50,000
shares, subject to adjustments upon the occurrence of certain events, as
defined. Pursuant to the Director Plan, each non-employee director will be
granted options with five year terms commencing March 1, 1996, and on the
first day of each March thereafter, to purchase that number of shares of
common stock having a market value of $50,000. Options granted shall vest
in one year.
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 stock options excisable 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. No stock options have been granted pursuant to
the 98 Incentive Stock Option Plan.
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 does not recognize compensation expense for its employee
stock-based compensation plans. If the Company had elected to recognize
compensation expense based upon the fair value at the date of grant for
awards under these plans consistent with the methodology prescribed by SFAS
123, the effect on the Company's net loss and net loss per share would be
as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net loss
As reported $ 12,385 $ 18,953 $ 18,365
Pro forma $ 12,704 $ 19,363 $ 20,202
Net loss per share
As reported $ 1.11 $ 2.66 $ 3.73
Pro forma $ 1.14 $ 2.72 $ 4.11
</TABLE>
The fair value of options granted during 1997, 1996 and 1995, respectively,
are estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions: (1) expected volatility ranging from
104% to 144% in 1997, 79% to 157% in 1996 and from 80% to 161% in 1995, (2)
risk-free interest rates of 5.8% in 1997, 5.12% to 6.37% in 1996 and 5.37%
to 7.75% in 1995, and (3) expected lives ranging from .44 to 2.15 years in
1997, 1 to 4.25 years in 1996 and 1.25 to 5.3 years in 1995.
<PAGE>
8 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 1997, 1996 and 1995,
relating to all of the Company's plans (shares are in thousands):
<TABLE>
<CAPTION>
Weighted
average
exercise
Shares price
------ --------
<S> <C> <C>
Outstanding at January 1, 1995 675 $ 11.00
Granted 1,496 $ 7.40
Exercised (16) $ 10.60
Forfeited (110) $ 14.70
-----
Outstanding at December 31, 1995 2,045 $ 8.20
Granted 454 $ 9.10
Exercised (164) $ 9.40
Forfeited (54) $ 12.20
-----
Outstanding at December 31, 1996 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
=====
</TABLE>
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
At December 31, 1996 and 1995 there were 1,796,000 and 1,650,000 options
exercisable, respectively. These options were exercisable at various prices
ranging from $.10 to $46.30.
Total compensation costs recognized for stock-option awards amounted to
$1,326,000, $621,000 and $2,568,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
During May 1995, the Company's Board of Directors authorized a reduction of
the exercise price of 418,450 outstanding options to purchase common stock
to $5.00 per share ($2.20 higher than the fair market value at the date of
the Board action). The substantial majority of such options were previously
issued at an exercise price of $12.50 per share.
Registration statements/restricted securities
The Company has used restricted common stock for the purchase of certain
companies (Note 3) and has sold restricted common stock in private
placements. At December 31, 1997, approximately 1,533,600 shares of
restricted common stock were issued and outstanding.
<PAGE>
8 Shareholders' equity (continued)
Registration statements/restricted securities (continued)
However, in late 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.
Additionally, 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 (Note 13).
Accordingly, substantially all of the Company's outstanding common stock
(including shares issuable upon exercise of outstanding options) have been
either registered or are qualified for sale in the market pursuant to Rule
144 of the Securities Act of 1933 as amended.
9 Income taxes
The tax effects of temporary differences which give rise to deferred tax
assets and liabilities are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
---------- -----------
(in thousands)
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ 24,903 $ 19,393
Tax credit carryforward 430 420
Compensation 3,804 3,491
Fixed and intangible assets 467 674
Capitalized software development costs 677 453
Other 707 838
---------- ----------
30,988 25,269
Valuation allowance (30,988) (25,269)
---------- ----------
$ - $ -
========== ==========
</TABLE>
A valuation allowance is required against deferred tax assets if, based on
the weight of available evidence, it is more likely than not that some or
all of the deferred tax assets may not be realized. The full valuation
allowances at December 31, 1997 and 1996 reflect uncertainties with respect
to future realization of net operating loss carryforwards.
<PAGE>
9 Income taxes (continued)
At December 31, 1997, the Company has net operating loss carryforwards
approximating $59,000,000 available to reduce future taxable income. These
losses, which expire through 2012, are subject to limitations as a result
of IRC Section 382 rules governing changes in control. The Company has not
quantified the amount of such limitations.
10 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 will be settled with the issuance of
119,850 shares of common stock in the first quarter of 1998, see Note 12),
net of $164,000 which relates to the return of 30,215 shares of the
Company's common stock related to the SPC settlement (Note 3).
Included in unusual charges for the year ended December 31, 1996, are
charges aggregating $2,590,000 including the following: $2,075,000, of
which $2,000,000 (representing 261,400 shares of the Company's common
stock) is non-cash, for costs associated with the settlement of certain
litigation (Note 12), and $515,000 of which $415,000 (representing 75,000
shares of the Company's common stock) is non-cash relating to the final
settlement of SPC (Note 3).
Included in unusual charges for the year ended December 31, 1995, are
charges aggregating $1,102,000 including the following: Penalty Amounts to
SPC of $638,000 (Note 3) and settlement of certain litigation of
approximately $464,000 (Note 12).
11 Related party and other transactions
Two executive officers of the Company have received advances from time to
time, with such advances being payable upon demand and bearing no interest.
Effective January 1, 1997, these advances are interest bearing at the rate
of 7% per annum.
During the fourth quarter of 1996, the Company advanced approximately
$126,000 to another officer. This advance was settled with the Company
prior to the year ended December 31, 1996, through the transfer of
marketable securities to the Company with a market value of $126,000.
During the years ended December 31, 1997, 1996 and 1995, the Company paid
an outside Director fees for legal and consulting fees aggregating
$165,000, $127,000 and $64,000, respectively.
The Company paid an outside Director consulting fees of $52,000, $52,000
and $30,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
<PAGE>
12 Commitments and contingencies
Commission/royalty commitments
In June 1996, the Company entered into various agreements with a consultant
(including its affiliates) in connection with the marketing of the
Company's d.b.Express product which provides for the following
compensation:
. The consultant had the ability to earn 25,000 options for every
$1,250,000 in net d.b.Express revenue, up to a maximum of 100,000
options. In June 1997, these options were rescinded and the
Company issued 25,000 shares of the Company's common stock (of
which 12,500 shares were restricted).
. 42,500 options to purchase the Company's common stock at an
exercise price of $6.50 per share. In June 1997, the Company
reduced the exercise price of these options to $2.50.
. The consultant was loaned $250,000 payable in five annual
installments of $50,000, plus interest at 6% per annum. In
January 1997, the consultant repaid the entire loan balance
including interest through that date.
. The consultant receives minimum annual compensation pursuant to
several agreements aggregating $227,000 per annum. The agreements
expire at various times through May 2001.
. A bonus of $200,000 payable should the Company achieve $5,000,000
of net d.b.Express revenue.
Leases
The Company leases certain computer equipment under long-term
non-cancelable leases which are classified as capital leases and are
included as part of property and equipment. Operating leases are primarily
for office space, equipment and automobiles.
At December 31, 1997, the future minimum lease payments under operating and
capital leases are summarized as follows:
<TABLE>
<CAPTION>
Operating Capital
leases leases
--------- ---------
(in thousands)
<S> <C> <C>
Year ending December 31,
1998 $ 915 $ 86
1999 769 22
2000 584 5
2001 347 -
2002 101 -
-------- ---------
2,716 113
Amounts representing interest - (6)
-------- ---------
Net $ 2,716 $ 107
======== =========
</TABLE>
<PAGE>
12 Commitments and contingencies (continued)
Leases (continued)
Rent expense approximated $1,198,000, $850,000 and $807,000, for the years
ended December 31, 1997, 1996 and 1995, 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 $66,000, $36,000 and $26,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
Self insurance
For the twelve months ended January 31, 1998, the Company provided health
insurance benefits to its employees pursuant to a self-insurance plan.
Claims under the self-insurance program, which were administered by a third
party administrator, were limited to a maximum of $50,000 per person with
an aggregate maximum annual cost to the Company of approximately $600,000.
The Company has accrued and paid at the maximum level, however, there is a
dispute with the insurance broker regarding the responsibility for claims
incurred but not reported at termination of the policy. No provision for
any additional liability, which may result, has been recorded in the
accompanying consolidated financial statements. Commencing February 1,
1998, the Company is offering health insurance to its employees under
traditional insurance programs.
Software Distribution Agreement
In July 1997, the Company acquired from Cognizant Technology Solutions
Corporation ("CTS") the rights to two technologies (the "Technology") that
complement the Company's existing Year 2000 product solutions. Pursuant to
the software distribution agreement, in exchange for the Technology rights,
the Company is required to pay CTS a royalty on sales of the Technology at
defined rates subject to minimum annual royalties as follows: $100,000 in
1997, $900,000 in 1998, $1,400,000 in 1999 and $400,000 in 2000.
Legal matters
During May 1994, 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 disclosures made
regarding the Company's acquisition of Softworks during 1993. On September
12, 1996, the settlement of this class action claim was approved by the
United States District Court, Eastern District of New York. The Company
recorded a charge to earnings in the first quarter of 1996 of $2,075,000 to
reflect this settlement consisting of $75,000 plus 261,400 shares of the
Company's common stock.
In September 1994, the Company received notice of an action alleging breach
of contract regarding an acquisition transaction initiated during 1993. In
July 1995, a settlement agreement was reached whereby the Company was
required to pay $75,000 and agreed to an amendment of the original contract
to acquire the license for additional software. Pursuant to such amendment,
the Company issued a non-interest bearing promissory note in the amount of
$389,000 payable in 36 monthly installments, with the final payment
scheduled for August 1, 1998, which amount was recorded as an unusual
charge in the 1995 consolidated statement of operations.
<PAGE>
12 Commitments and contingencies (continued)
Legal matters (continued)
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.
In July 1995, the Company and certain officers received notification that
they have been named as defendants in a class action claim in regard to
announcements and statements regarding the Company's business and products.
Although the Company continues to deny any wrongdoing, in an effort to
avoid further expense and resolve the uncertainty of litigation, in July
1997 the Company tentatively agreed to a Stipulation and Agreement of
Settlement ("Stipulation Agreement") of this class action. In February,
1998, the Court entered a final order approving the terms of the
Stipulation Agreement. The Company agreed to deliver $500,000 of its common
stock, and in April 1998, the Company will deliver 119,850 shares. Further,
the Company and its insurance carrier will each pay $350,000, totaling
$700,000. Based upon the Stipulation Agreement, the Company recorded an
$850,000 Unusual Charge to earnings in the quarter ended June 30, 1997.
On June 11, 1996, the Company received notice of entry of a default
judgement against it for $1,500,000 and specific performance to effect the
registration of common stock held by Merit Technology, Inc. in a matter
which the Company had not been served or received notice (In Re: Merit
Technology, Inc., Debtor, U.S. Bankruptcy Court, Eastern District of
Texas). On August 13,1996, the default judgement was set aside by the
Court. During December 1996, this matter was settled with the Company
issuing 10,000 shares of its common stock.
During March 1997, the Company received a Complaint filed in the U.S.
District Court for the Western District of Texas, by Dell Computer
Corporation. The Second Amended Complaint alleged that the Company failed
to deliver product as contracted for and further alleged damages in excess
of $850,000. In February, 1998, a cash settlement of $130,000 was agreed to
and paid by the Company's insurance carrier.
<PAGE>
12 Commitments and contingencies (continued)
Legal matters (continued)
In March 1995, an action was originally commenced against the Company and a
number of defendants. In early 1997, after a change in counsel, the
plaintiff amended the complaint for a second time, now naming as defendants
only the Company and three of its officers. The second amended complaint
alleges that certain third parties, unrelated to the Company, transferred
certificates representing 1,000,000 shares of the Company's common stock to
the plaintiff. The complaint further alleges that such shares were endorsed
in blank by the third parties and became bearer securities which were
negotiated to the plaintiff by physical delivery. The certificates had not
been legally acquired from the Company and the certificates were reported
to the Securities and Exchange Commission by the Company as stolen
certificates. Plaintiff has requested validation of the transfer of the
certificates and is seeking damages of an unspecified amount, consisting of
alleged diminution in market value of the subject shares from 1994 through
the date of any judgment in the plaintiff's favor. Discovery was
substantially completed in January 1998 and, unless a summary judgment is
granted to one side or the other, this case is expected to go to trial
later in 1998. The Company and its counsel believe that the Company's
position regarding the claim has substantial factual and legal support and
are vigorously defending the matter. However, the Company is unable to
predict the ultimate outcome of this claim and, accordingly, no adjustments
have been made in the consolidated financial statements for any potential
losses or potential issuance of common stock.
In 1995, Fletcher Capital Corp. filed a claim against the Company, its
president and several unrelated parties, regarding a claim for an
unspecified amount of commissions in the form of options from the Company
and cash from the other parties. This matter was settled in February 1997
with the issuance of 36,000 options exercisable at $3.50 per share,
$126,000 paid with 25,200 shares of common stock (issued January 1998) and
cash payments totaling $31,000.
13 Subsequent event
Common stock
In January, 1998, the Company consummated the sale of restricted stock
under a private placement to accredited United States investors under
Regulation D. Proceeds from this sale totalled $1,978,000, net of
commissions and fees of approximately $162,000. A total of 496,232 shares
were sold at a price of $4.3125 per share. The closing bid price of the
Company's common stock, as stated on the NASDAQ Small Cap Market did not
exceed an average of $5.28 for any five consecutive trading days during the
thirty days immediately following the effective date of the Registration
Statement (effective February 6, 1998, see Note 8). Accordingly, under the
terms of this transaction, the Company is required to issue approximately
280,000 additional shares.
COMPUTER CONCEPTS CORP.
FORM 10-K
DECEMBER 31, 1997
(As filed with the State of Delaware 3/20/98)
Certificate of Amendment
of
Computer Concepts Corp.
Computer Concepts Corp., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware DOES HEREBY
CERTIFY:
FIRST: That at a meeting of the Board of Directors of Computer Concepts Corp.
resolutions were adopted setting forth a proposed amendment of the Certificate
of Incorporation of said corporation, declaring said amendment to be advisable.
The resolution setting forth the proposed amendment is as follows:
RESOLVED, that the Certificate of Incorporation of Computer Concepts Corp.
be amended by changing the Articles thereof numbered "FOURTH" so that, as
amended, said Article shall be and read as follows:
(a) "The capital stock of this corporation is 150,000,000 shares of common
stock with $.0001 par value per share."
(b) "Any and all previously issued shares (including shares issuable upon
exercise of outstanding options or warrants) of Common Stock of the par
value of $.0001 per share as of March 30, 1998, shall be combined and
reclassified on a ratio of one share for ten shares of Common Stock with
such combined shares to have a par value of $.0001 per share."
SECOND: That thereafter, pursuant to Section 242 of Delaware General Corporation
Law (the "Law") and resolution of its Board of Directors, said amendment was
directed to be considered at the next annual meeting of the stockholders.
THIRD: That the annual meeting of stockholders was duly called and held upon
notice in accordance with Section 222 of the Law with such notice setting forth
such amendment in full and accompanied by a Proxy Statement including a brief
summary of the changes to be effected thereby.
FOURTH: That at the Annual Meeting of Stockholders of Computer Concepts Corp.
duly and validly convened and held on November 26, 1998, at which meeting a
quorum was present, a majority of the outstanding stock of the class entitled to
vote thereon (Common) of Computer Concepts Corp. was voted in favor of the
proposed amendment, with said amendment thereby being duly and validly adopted
in accordance with Section 242 of the Law.
FIFTH: That the capital of said corporation shall not be reduced under or by
reason of said amendment.
SIXTH: That the Board of Directors duly adopted a resolution on March 18, 1998,
pursuant to the authorization provided by the shareholders at the November 26,
1997, meeting, to effect a reverse stock split in the ratio of one share for ten
shares, such that each ten outstanding shares, issued or issuable, of Common
Stock, par value $.0001, shall be combined and become one share of Common Stock,
par value $.0001. Further, fractional shares shall not be issued; if any
shareholder holds a number of shares not divisible by ten, then such shares
shall be combined to the extent of such number equally divisible by ten, and the
remaining "fractional" shares shall not be issued, and a cash payment equal to
the value of such fractional shares shall be issued to such shareholders based
on the closing/last sale price reported by NASDAQ for the company's stock on the
record date.
SEVENTH: That said amendment has been duly adopted and shall be effective upon
filing and recording of this executed and acknowledged certificate in accordance
with Section 103 of the Law.
IN WITNESS WHEREOF, said corporation has caused its corporate seal to be
hereunto affixed and this certificate to be signed by Daniel Del Giorno, Jr.,
its President, and Daniel Del Giorno, Sr., its Ass't. Secretary, this 18th day
of March, 1998.
s/ Daniel Del Giorno, Jr. s/ Daniel Del Giorno, Sr.
- --------------------------- --------------------------
Daniel Del Giorno, Jr., President Del Giorno, Sr., Ass't. Secretary
Hays & Company
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in the Registration Statements of
Computer Concepts 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 and File No. 333-42795, effective December 19, 1997) of our
report dated February 27, 1998 (except for Note 2 which is dated March 18,
1998), which report includes an explanatory paragraph as to an uncertainty with
respect to the Company's ability to continue as a going concern, appearing in
the Annual Report on Form 10-K of Computer Concepts Corp. for the year ended
December 31, 1997.
/s/Hays & Company
Hays & Company
April 7, 1998
New York, New York
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated financial statements for the twelve months ended December 31, 1997
and is qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 778
<SECURITIES> 48
<RECEIVABLES> 18,118
<ALLOWANCES> 252
<INVENTORY> 0
<CURRENT-ASSETS> 21,701
<PP&E> 4,856
<DEPRECIATION> 2,787
<TOTAL-ASSETS> 37,244
<CURRENT-LIABILITIES> 19,389
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 9,666
<TOTAL-LIABILITY-AND-EQUITY> 37,244
<SALES> 29,738
<TOTAL-REVENUES> 29,738
<CGS> 9,461
<TOTAL-COSTS> 41,648
<OTHER-EXPENSES> 475
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 153
<INCOME-PRETAX> (12,385)
<INCOME-TAX> (12,385)
<INCOME-CONTINUING> (12,385)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,385)
<EPS-PRIMARY> (1.11)
<EPS-DILUTED> (1.11)
</TABLE>
