UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-20660
COMPUTER CONCEPTS CORP.
(Exact name of registrant as specified in its charter)
Delaware 11-2895590
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 Orville Drive, Bohemia, N.Y. 11716
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 244-1500
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of $.0001 par value stock outstanding as of November
16, 1998 was: 19,129,340.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION Page
Condensed Consolidated Balance Sheets
as of September 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations
and Comprehensive Income For the Three and
Nine Months Ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
For the Nine Months ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6 - 16
Management's Discussion and Analysis of Financial
Condition and Results of Operations 17 - 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
as of September 30, 1998 and December 31, 1997
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
ASSETS -------------- ------------
(Unaudited)
-----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 15,258 $ 778
Accounts receivable, net of allowance
for doubtful accounts of $371 and
$252 in 1998 and 1997, respectively 10,702 11,718
Installment receivables 10,154 6,148
Advances to officers 818 1,070
Prepaid expenses and other current assets 5,959 1,987
Deferred tax assets, current 180 -
-------- --------
43,071 21,701
INSTALLMENT RECEIVABLES, due after one year 7,729 6,480
PROPERTY AND EQUIPMENT, net 2,489 2,069
SOFTWARE COSTS, net 6,179 3,730
EXCESS OF COST OVER FAIR VALUE OF NET
ASSETS ACQUIRED, net of accumulated
amortization of $3,571 and $2,477 in
1998 and 1997, respectively 9,278 4,611
OTHER ASSETS 1,174 707
DEFERRED TAX ASSETS, non-current 365 -
-------- --------
$ 70,285 $ 39,298
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 5,901 $ 7,225
Current portion of long- term debt 1,124 1,291
Current income taxes payable 506 -
Deferred installment revenue 6,981 5,506
Deferred maintenance revenue 6,435 6,267
-------- --------
20,947 20,289
DEFERRED INSTALLMENT REVENUE, earned after
one year 1,919 825
DEFERRED MAINTENANCE REVENUE, earned after
one year 7,662 7,122
LONG-TERM DEBT, net of current portion 1,636 1,395
-------- --------
Total liabilities 32,164 29,631
-------- --------
MINORITY INTEREST 4,872 -
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.0001 par value; 150,000,000
authorized; 19,082,341 shares
in 1998 and 12,744,751 shares in 1997
issued and outstanding 2 1
Additional paid-in capital 106,576 91,641
Accumulated deficit (73,013) (81,741)
Foreign currency translation (76) (54)
Unrealized loss on marketable securities (240) (180)
-------- --------
Total shareholders' equity 33,249 9,667
-------- --------
$ 70,285 $ 39,298
======== ========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
For the Three and Nine Months Ended September 30,
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE:
Software licenses $ 8,194 $ 4,343 $ 17,983 $ 11,050
Maintenance 2,630 2,578 7,827 7,407
Professional services 1,926 45 6,045 1,474
-------- -------- -------- --------
12,750 6,966 31,855 19,931
COSTS AND EXPENSES:
Cost of revenue - software licenses 434 262 1,132 653
Cost of revenue - maintenance 1,776 1,455 4,886 4,155
Cost of revenue - professional services 1,719 38 5,183 1,927
Research and development 1,498 1,406 3,316 3,121
Sales and marketing 7,216 5,820 19,394 12,928
General and administrative 3,136 2,520 7,965 7,090
Amortization and depreciation 1,478 546 2,718 1,594
Unusual charges - - - 850
-------- -------- -------- --------
17,257 12,047 44,594 32,318
-------- -------- -------- --------
LOSS FROM OPERATIONS (4,507) (5,081) (12,739) (12,387)
OTHER INCOME/(EXPENSE):
Gain on partial disposition of subsidiary 15,839 - 22,466 -
Gain on sale of net assets of subsidiary - 813 - 813
Interest expense (173) (104) (732) (137)
Minority interest in earnings of subsidiary (275) - (275) -
Interest charge pertaining to the discount
on convertible debentures - (408) - (1,288)
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 10,884 (4,780) 8,720 (12,999)
-------- -------- -------- --------
BENEFIT FROM INCOME TAXES 8 - 8 -
-------- -------- -------- --------
NET INCOME (LOSS) 10,892 (4,780) 8,728 (12,999)
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustments (15) - (22) -
Marketable securities reserve adjustments (60) - (60) -
COMPREHENSIVE INCOME (LOSS) $10,817 $ (4,780) $ 8,646 $(12,999)
======== ======== ======== ========
BASIC NET INCOME (LOSS) PER SHARE $ 0.61 $ (0.41) $ 0.56 $ (1.22)
======== ======== ======== ========
DILUTED NET INCOME (LOSS) PER SHARE $ 0.60 $ (0.41) $ 0.53 $ (1.22)
======== ======== ======== ========
BASIC WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 17,811 11,745 15,595 10,690
======== ======== ======== ========
DILUTED WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 18,008 11,745 16,364 10,690
======== ======== ======== ========
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended September 30,
(in thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities
Net income (loss) $ 8,728 $ (12,999)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization:
Software costs 1,514 480
Property and equipment 899 679
Excess of cost over fair value of net assets acquired 1,094 552
Other 2 3
Gain on partial disposition of subsidiary (22,466) -
Gain on sale of net assets of subsidiary - (813)
Provision for doubtful accounts 324 61
Common stock and options issued for services 3,548 3,766
SOFTWORKS common stock exchanged for services 1,612 -
Deferred income tax benefit ( 545) -
Minority interest in earnings of subsidiary 275 -
Non-cash unusual charges - 500
Non-cash interest charge for discount on convertible debt - 1,288
Other 421 -
Changes in operating assets and liabilities
Accounts receivable (3,314) (4,235)
Installment accounts receivable, due after one year (1,249) (3,266)
Inventories - 10
Prepaid expenses and other current assets (230) (134)
Other assets (467) 81
Accounts payable and accrued expenses (1,047) 2,502
Current income taxes payable 506 -
Deferred revenue 3,277 5,653
------ ------
Net cash used in operating activities (7,118) (5,872)
------ ------
Cash flows from investing activities
Capital expenditures (1,319) (1,164)
Additional consideration for SOFTWORKS acquisition (678) (486)
Proceeds from the sale of net assets of subsidiary (net) - 230
Net proceeds from initial public offering of subsidiary 19,419 -
Software development and technology purchases (1,263) (525)
Advances to officers, net 252 (179)
------ ------
Net cash provided by (used in) investing activities 16,411 (2,124)
------ ------
Cash flows from financing activities
Net proceeds from sales of common stock and options 5,210 2,783
Proceeds from issuance of convertible debt
(net of issuance costs) 1,925 3,381
Repayment of convertible debt (2,000) -
Net proceeds (repayments) of long-term debt 74 (243)
------ ------
Net cash provided by financing activities 5,209 5,921
------ ------
Effect of exchange rate changes on cash and cash equivalents (22) -
------ ------
Net increase (decrease) in cash and cash equivalents 14,480 (2,075)
Cash and cash equivalents, beginning of period 778 5,675
------ ------
Cash and cash equivalents, end of period $ 15,258 $ 3,600
------ ------
<FN>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Nine Months Ended September 30, 1998 and 1997
1. INTERIM FINANCIAL INFORMATION
The condensed consolidated balance sheet as of September 30, 1998, and the
condensed consolidated statements of operations and cash flows for the nine
months ended September 30, 1998, and 1997, have been prepared by the Company
without audit. These interim financial statements include all adjustments,
consisting only of normal recurring accruals, which management considers
necessary for a fair presentation of the financial statements for the above
periods. The results of operations for the three months ended September 30,
1998, are not necessarily indicative of results that may be expected for any
other interim periods or for the full year.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto for the
year ended December 31, 1997. The accounting policies used in preparing the
condensed consolidated financial statements are consistent with those described
in the December 31, 1997, consolidated financial statements, except for recently
issued accounting pronouncements as described in Notes 6 and 7, and Note 9 which
describes the consolidation policy with respect to minority interest.
2. BASIS OF PRESENTATION
Computer Concepts Corp. and subsidiaries (the "Company") design, develop,
market and support information delivery software products, including end-user
data access tools for use in personal computer and client/server environments
and systems management software products for corporate mainframe data centers.
The Company created a "professional services" division in 1997. For a fee, the
Company assists in the design, construction and installation of technology
systems, including the reselling of computer hardware. The Company's
professional services organization also provides systems management services,
including training, implementation of software, and staff augmentation.
Additionally, effective June 30,1998, the Company completed an acquisition of
software and related sales and marketing rights which is designed to provide non
computer literate owners (e.g. parents) the ability to identify threats as well
as objectionable material which may be viewed by users of the computer on the
Internet (e.g. children) . See Note 8. The Company's principal market is the
United States. Overseas revenue is principally generated from European
subsidiaries and distributors.
While the Company has reported net income of $10,892,000 and $8,728,000 for
the three and nine months ended September 30, 1998, respectively, it has
incurred consolidated losses from operations of $4,507,000 and $12,999,000, for
the same respective periods. Further, the Company has incurred consolidated net
losses of $12,385,000, $18,953,000 and $18,365,000 for the years December 31,
1997, 1996, 1995, respectively. As a result of the partial disposition of one of
its subsidiaries, SOFTWORKS, Inc., ("SOFTWORKS") the Company recognized a gain
of approximately $22,466,000 during the nine month period ended September 30,
1998 (See Note 9). For the nine month period ended September 30, 1998, net cash
used in operating activities was $7,118,000, reflecting the above net income
adjusted for various non-cash charges which aggregate $9,144,000, the
$22,466,000 gain referred to above, and a net change in (cash used by) operating
assets and liabilities of $2,524,000. The Company's cash requirements were
primarily financed through the partial disposition of SOFTWORKS, the sale of
restricted common stock, the exercises of stock options, and proceeds from the
issuance of a convertible debenture.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Nine Months Ended September 30, 1998 and 1997
2. BASIS OF PRESENTATION (continued)
The Company does not maintain a comprehensive credit facility with any
financial institution, although the Company is actively seeking to obtain a
secured line of credit. The Company has continued to incur significant
expenditures with respect to the development and marketing of its d.b.Express
technology without generating any significant revenue. As a result of continued
operating losses and the use of significant cash in operations, there is
substantial doubt about the Company's ability to continue as a going concern. No
adjustments have been made with respect to the consolidated financial statements
to record the results of the ultimate outcome of this uncertainty.
Management's plans to remain a going concern require additional financing
until such time as the Company achieves positive cash flows from operations
including the successful exploitation of the Company's d.b.Express technology as
well as its newly acquired software product (See Note 8). The Company's current
source of operating revenue continues to be primarily derived from SOFTWORKS.
The Company has incurred significant losses (both cash and non-cash expenses) as
a result of the development and marketing of the d.b.Express technology.
Nevertheless, management believes that its proprietary d.b.Express technology
has significant potential in several areas and solves certain significant
business issues in the telecommunications and Internet related markets. In order
to realize the potential of this technology, the Company is vigorously
continuing its efforts to enter into sales or license agreements of its
d.b.Express technology as well as its world wide web hosting services.
Management believes that the successful exploitation of: i.- the d.b.Express
technology; ii.- projected growth in professional services; and iii.- the newly
acquired software product and related marketing rights; among other factors,
will eventually enable the Company to achieve positive cash flows from
operations and reduce its dependency on cash flows from financing activities.
In January, 1998, the Company consummated the sale of approximately
$1,978,000 (net of expenses of approximately $162,000) of restricted common
stock. In May, 1998, the Company obtained approximately $1,925,000 (net of fees
and commissions of approximately $75,000) from the sale of a convertible
debenture. The debenture would have matured on August 28, 1998, and was
convertible upon a payment default. In August, 1998, prior to maturity, the
Company repaid the debenture plus interest aggregating approximately $2,460,000.
Although the Company increased cash by approximately $19,400,000, in August,
1998, through the sale of 3,200,000 shares of its SOFTWORKS subsidiary (See Note
9), until such time as sufficient cash flows are generated from operations,
additional financing will be necessary. There can be no assurances that the
Company will be able to obtain sufficient financing or will be successful in
achieving positive cash flows from operations in order to execute its business
plan.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Nine Months Ended September 30, 1998 and 1997
3. SHAREHOLDERS' EQUITY
a. Common Stock Split
On March 18, 1998, the Board of Directors declared a reverse split at a
ratio of 1 for 10 shares with a record date of March 27, 1998 and an effective
date of March 30,1998. Par value and authorized shares remain unchanged at
$0.0001 and 150,000,000 shares respectively. All references to numbers of shares
and per share data have been restated for 1997 so as to reflect the reverse
stock split
b. Sale of Common Stock
In January, 1998, the Company consummated the sale of restricted stock
under a private placement to accredited United States investors under Regulation
D. Proceeds from this sale totaled $1,978,000, net of commissions and fees of
approximately $162,000. A total of 496,232 shares were sold at a price of
$4.3125 per share. The closing bid price of the Company's common stock, as
stated on the NASDAQ Small Cap Market did not exceed an average of $5.28 for any
five consecutive trading days during the thirty days immediately following the
effective date of the Registration Statement (effective February 6, 1998, see
Note 4). Accordingly, under the terms of this transaction, the Company issued
approximately 280,000 additional shares in April, 1998.
Additionally, during the nine months ended September 30, 1998,
approximately 939,000 options were exercised at prices ranging from $0.10 to
$5.00. Proceeds raised from these exercises aggregated approximately $3,232,000.
c. Transactions with consultant
During October, 1997, the Company issued 114,765 restricted shares of
common stock to HPS America, Inc. ("HPS") for settlement of product development
costs of approximately $600,000 owed to HPS and its affiliates. These shares had
a valuation guarantee based on the Company's stock price during the first 30
days immediately following the effective date of a registration statement
(January 6, 1998). The shares were sold at a value less than the guaranteed
amount and the Company settled the shortfall with a cash payment of
approximately $170,000 in the first quarter of 1998.
d. Stock / stock option compensation
During April, 1998, the Company issued 1,628,900 stock options to several
officers, key employees, including those at SOFTWORKS, and consultants. The
options range in exercise price from $4.00 to $6.00 and vest December 31, 1998,
but are subject to forfeiture should the Company not achieve profitability of at
least $5,000,000 for the year ending December 31, 1998. Additionally, in lieu of
cash compensation, the Company issued 895,000 stock options to several
consultants for which the Company recorded, during the three month period ended
June 30, 1998, a non-cash charge to earnings of approximately $1,469,000. The
Company, pursuant to the compensation committee, issued 1,209,148 options to
officers and employees of both the Company and its then wholly owned subsidiary,
SOFTWORKS, which have an exercise price of $4.00 and are fully vested. All
options expire December 31, 2000.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Nine Months Ended September 30, 1998 and 1997
d. Stock / stock option compensation - (continued)
During September, 1998, the Company canceled 1,266,667 stock options,
1,067,750 with an exercise price of $4.00 and 27,500 with an exercise price of
$6.00 which were included in the April, 1998 grant. The balance of 171,417
options canceled had exercise prices ranging from $3.75 to $15.00. In lieu of
the canceled stock options the Company issued 1,034,300 shares of the Company's
restricted common stock.
4. COMMITMENTS AND CONTINGENCIES
a. Contingent Consideration
In connection with the 1993 acquisition of SOFTWORKS, the Company is
required to make additional payments to two of SOFTWORKS' former shareholders,
based upon certain product revenues for the years 1995 through 1998, up to a
maximum of $1,000,000 each, for an aggregate maximum of $2,000,000. Through
September 30, 1998, the Company incurred and paid the aggregate maximum
liability of $2,000,000 to the non-employee former shareholders, which has been
treated as additional consideration in connection with the acquisition, and,
accordingly, included in the excess of cost over the fair value of net assets
acquired, as these individuals did not continue in the employment of the Company
subsequent to the acquisition.
b. Registration Statements / Restricted Securities
During December, 1997, the Company filed three registration statements: (i)
an amended registration statement on Form S-1 (No. 33-97560, effective January
6, 1998) which amended a registration statement that was originally effective on
August 9, 1996, (ii) a registration statement on Form S-8 (No. 333-42795,
effective upon filing, December 19, 1997), and (iii) a registration statement on
Form S-1 (No. 333-42919, effective January 6, 1998). The primary purpose of
these registration statements was to register outstanding restricted common
stock and shares issuable upon exercise of outstanding options.
On January 22, 1998, the Company filed another registration statement on
Form S-1 ( No. 333-44683, effective February 6, 1998). The primary purpose of
this registration statement was to register shares issued in January, 1998,
pursuant to a private placement (See Note 3).
On May 15, 1998 the Company filed a registration statement on Form S-8 (
No. 333-52875 ) for 779,148 options and 122,500 shares of the Company's common
stock which was effective upon filing. The primary purpose of this registration
statement was to register shares issued to certain consultants and non-officer
employees.
Other than the restricted shares issued for the acquisition referred to in
Note 8,plus the balance of the stock options granted in April, 1998 as well as
the recently issued shares of the Company's common stock discussed in Note 3,
substantially all of the Company's outstanding common stock (including shares
issuable upon exercise of outstanding options) have been either registered or
are qualified for sale in the market pursuant to Rule 144 of the Securities Act
of 1933, as amended.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Nine Months Ended September 30, 1998 and 1997
4. COMMITMENTS AND CONTINGENCIES (Continued)
c. Legal Matters
In July, 1995, the Company and certain officers received notification that
they have been named as defendants in a class action claim in regard to
announcements and statements regarding the Company's business and products.
Although the Company denied any wrongdoing, in an effort to avoid further
expense and resolve the uncertainty of litigation, in July, 1997, the Company
tentatively agreed to a Stipulation and Agreement of Settlement ("Stipulation
Agreement") of this class action. In February, 1998, the Court entered a final
order approving the terms of the Stipulation Agreement. The Company agreed to
deliver $500,000 of its common stock, and in April, 1998, the Company delivered
119,850 shares. Further, the Company and its insurance carrier each paid
$350,000, totaling $700,000. Based upon the Stipulation Agreement, the Company
recorded an $850,000 Unusual Charge to earnings in the quarter ended June 30,
1997.
In March, 1995, an action was originally commenced against the Company and
a number of defendants. In early 1997, after a change in counsel, the plaintiff
amended the complaint for a second time, now naming as defendants only the
Company and three of its officers. The second amended complaint alleges that
certain third parties, unrelated to the Company, transferred certificates
representing 1,000,000 shares of the Company's common stock to the plaintiff.
The complaint further alleges that such shares were endorsed in blank by the
third parties and became bearer securities which were negotiated to the
plaintiff by physical delivery. The certificates had not been legally acquired
from the Company and the certificates were reported to the Securities and
Exchange Commission by the Company as stolen certificates. Plaintiff has
requested validation of the transfer of the certificates and is seeking damages
of an unspecified amount, consisting of alleged diminution in market value of
the subject shares from 1994 through the date of any judgment in the plaintiff's
favor. Discovery was substantially completed in January, 1998, and, unless a
summary judgment is granted to one side or the other, this case is expected to
go to trial later in 1998. The Company and its counsel believe that the
Company's position regarding the claim has substantial factual and legal support
and are vigorously defending the matter. However, the Company is unable to
predict the ultimate outcome of this claim and, accordingly, no adjustments have
been made in the consolidated financial statements for any potential losses or
potential issuance of common stock.
In 1995, Fletcher Capital Corp. filed a claim against the Company, its
president and several unrelated parties, regarding a claim for an unspecified
amount of commissions in the form of options from the Company and cash from the
other parties. This matter was settled in February, 1997, with the issuance of
36,000 options exercisable at $3.50 per share, $126,000 paid with 25,200 shares
of common stock (issued January, 1998) and cash payments totaling $31,000.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Nine Months Ended September 30, 1998 and 1997
4. COMMITMENTS AND CONTINGENCIES (Continued)
d. Software distribution agreement
In July, 1997, the Company acquired from Cognizant Technology Solutions
Corporation ("CTS") rights to technology ( the "Technology") that compliment the
Company's existing Year 2000 product solutions. Pursuant to the software
distribution agreement, in exchange for the Technology rights, the Company is
required to pay CTS a royalty on sales of the Technology at defined rates
subject to minimum annual royalties of; $100,000, $900,000, $1,400,000 and
$400,000 for the years 1997 through 2000. An asset, equal to the present value
of the minimum royalties, of $2,160,000 has been recorded as purchased and
acquired software technologies for resale and is being amortized over the five
year term of the agreement. The payment obligation is recorded as long term
debt.
e. Employment agreements
The Company recently entered into six new employment agreements with key
SOFTWORKS employees. The agreements terminate at various times through December
31, 2002. Five of the agreements automatically renew for one year periods unless
SOFTWORKS or the employee notify the other party ninety days prior to the end of
any renewal term. The last agreement is "at-will". One agreement provides for
the issuance of a $500,000 full recourse loan, interest bearing at the rate of
approximately 6.0% per annum, unsecured, and payable on December 1, 2000,
subject to certain acceleration provisions. The six employment agreements
provide for an aggregate annual base compensation of $809,000. All are eligible
for incentive bonuses subject to SOFTWORKS achieving various net income levels.
5. RECLASSIFICATIONS
Certain reclassifications have been made to the condensed consolidated
financial statements shown for the prior year in order to have it conform to the
current year's classifications.
6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Position 97-2, "Software Revenue Recognition", ("SOP 97-2"),
which superceded Statement of Position 91-1 "Software Revenue Recognition" was
issued to provide further guidance on applying generally accepted accounting
principles to software transactions, and became effective for transactions
entered into beginning in 1998. In March, 1998, Statement of Position 98-4 ("SOP
98-4"), amended a portion of SOP 97-2 The adoption of SOP 97-2 and the amendment
contained in SOP 98-4 did not require any changes to the Company's method for
the accounting of software transactions and therefore had no impact on the
Company's financial statements.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Nine Months Ended September 30, 1998 and 1997
6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)
GEOGRAPHIC INFORMATION
The Company is primarily engaged in a single line of business. The
geographic data is summarized between the United States and international.
International consists of operations through the Company's international
subsidiaries in the United Kingdom, France, Brazil, Australia, Spain, Germany,
and Italy, as well as sales generated through international distributors
primarily in Europe and Asia. Geographic data is presented in accordance with
Statement of Financial Accounting Standards No. 131, " Disclosures About
Segments of an Enterprise and Related Information" for all periods presented as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
United States $ 10,330 $ 5,462 $ 26,097 $ 16,611
International 2,420 1,195 5,758 3,320
-------- -------- -------- --------
Total $ 12,750 $ 6,657 $ 31,855 $ 19,931
======== ======== ======== ========
Operating Income:
United States $ (4,280) $(4,912) $(11,795) $(11,834)
International (227) (169) (944) (553)
-------- -------- -------- --------
Total $ (4,507) $(5,081) $(12,739) $(12,387)
======== ======== ======== ========
Sept. 30, 1998 Dec. 31, 1997
-------------- -------------
Identifiable Assets:
United States $ 63,768 $36,630
International 6,517 2,668
-------- -------
Total $ 70,285 $39,298
======== =======
</TABLE>
7. REPORTING OF COMPREHENSIVE INCOME
In January, 1998, the Company began accounting for comprehensive income in
accordance with Statement of Financial Accounting Standards No. 130 - "Reporting
Comprehensive Income." Accordingly, the Company displayed other items of
comprehensive income in the accompanying Condensed Consolidated Statements of
Operations and Comprehensive Income.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Nine Months Ended September 30, 1998 and 1997
8. ASSET ACQUISITION
On June 30, 1998, pursuant to an Asset Purchase and Sale Agreement, the
Company acquired certain software and related sales and marketing rights from
Internet Tracking & Security Ventures ("ITSV") in exchange for 1,900,000
restricted shares of the Company's common stock and 1,000,000 restricted shares
of common stock of the Company's then wholly owned subsidiary, SOFTWORKS. The
acquired software program is designed to inform non computer literate parents,
guardians and alike, exactly what materials, or possible threats to the safety
and well being their children or others have been accessing over the internet,
such as objectionable web sites, text, pictures, screens, electronic mail, etc.
The Agreement also includes the rights to the use of Richard "Bo" Dietl's name
in conjunction with the promotion and endorsement of the software as well as
appearances by Mr. Dietl in support of the software in regional and national
marketing campaigns. Orders for the initial version of the product began
shipping in November, 1998.
The acquisition has been valued at an aggregate of $12,210,000 determined
as follows: 1,900,000 restricted shares of the Company have been valued at
$5,700,000 and the 1,000,000 restricted shares of SOFTWORKS' common stock have
been value at $6,510,000 (based upon the ultimate net proceeds to the selling
shareholders in SOFTWORKS' initial public offering which became effective August
4, 1998 (See Note 9).
The $12,210,000 purchase price has been allocated to the fair value of the
assets acquired at June 30, 1998, based upon a written valuation from an
independent investment banking firm. Accordingly, $2,700,000 has been allocated
to "Software costs"; $4,150,000 has been recorded as "Prepaid expenses and other
current assets" and $5,360,000 has been recorded as "Excess of cost over fair
value of net assets acquired". The software costs will be amortized using the
greater of the ratio of current revenue to the total projected revenue for the
software or the straight line method using a useful life of 30 months. The
prepaid expenses will be expensed as related services are performed, (including,
but not limited to, appearances, promotion and endorsement). The excess of cost
over fair value of net assets acquired, which primarily relate to the use of the
name "Bo Dietl" will be amortized using the straight line method over 36 months.
9. GAIN ON PARTIAL DISPOSITION OF SUBSIDIARY
Prior to June 30, 1998, SOFTWORKS was a wholly owned subsidiary of the
Company with 14,083,000 shares of common stock outstanding. As part of the
consideration for the assets acquired from ITSV (see Note 8), on June 30, 1998,
the Company exchanged 1,000,000 restricted shares of SOFTWORKS common stock.
Also on June 30, 1998, the Company exchanged 100,000 restricted shares of
SOFTWORKS common stock to a member of its Internet Strategy Committee, (who now
also serves as Chairman of the Board of SOFTWORKS) for services rendered through
June 30, 1998, resulting in a charge to operations of $525,000. On August 4,
1998, SOFTWORKS completed a public offering of 4,200,000 shares of its common
stock at a price of $7.00 per share (less underwriting fees and commissions of
$0.49 per share) as follows: 1,700,000 shares of common stock were sold by
SOFTWORKS; 1,000,000 shares were sold by ITSV and 1,500,000 shares were sold by
the Company. As a result of these transactions, the Company's ownership interest
in SOFTWORKS was reduced to 92.2% on June 30, 1998, and subsequently further
reduced to 71.9% on August 4, 1998. Additionally, in the third quarter of 1998,
options to acquire 3,637,500 restricted shares of SOFTWORKS common stock have
been granted to the Company and SOFTWORKS officers, key employees and
consultants, of which 806,500 options, which vested upon the public offering
date, are currently exercisable ( into restricted shares of
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Nine Months Ended September 30, 1998 and 1997
9. GAIN ON PARTIAL DISPOSITION OF SUBSIDIARY - (Continued)
SOFTWORKS' common stock). The balance vest, ranging from December 31, 1998,
through December 31, 2002, and could vest earlier, should SOFTWORKS achieve
certain financial thresholds. All options are exercisable at the initial public
offering price of $7.00 per share.
During the quarter ended June 30th, 1998, the Company recognized a
$6,627,000 gain on the sale of the 1,100,000 shares of SOFTWORKS' common stock
representing the difference between the fair value of the SOFTWORKS common stock
exchanged, and the related adjusted carrying value of the Company's investment
in SOFTWORKS. In accordance with Staff Accounting Bulletins 51 and 84, in the
third quarter of 1998, the Company recognized a net gain of $15,271,000 to
reflect the reduction of its ownership interest in SOFTWORKS from 92.2% to
71.9%. Additionally, in the third quarter of 1998, the Company exchanged 535,000
restricted shares of SOFTWORKS'common stock to various consultants for services
rendered; as a result of such exchange, the Company recognized a gain of
$568,000 (and a non-cash charge to operations of $1,087,000).
In conjunction with the SOFTWORKS public offering, the remaining shares of
SOFTWORKS common stock owned by the Company have been placed in a voting trust.
The voting power of the trust is held by three trustees who are members of the
Board of Directors of SOFTWORKS. One trustee is the C.E.O. and President of the
Company. The remaining two trustees are SOFTWORKS directors who do not have a
significant financial interest in the Company, one of which is the Chairman of
SOFTWORKS. The agreement provides that upon a change in either of the remaining
two trustees, the non-Company stockholders have control of the selection of the
successor director/trustee. This agreement remains in effect as long as the
Company continues to own at least 25% of SOFTWORKS.
For financial reporting purposes, the assets, liabilities and operations of
SOFTWORKS will continue to be included in the Company's consolidated financial
statements. As of September 30, 1998, the Company owns 68.5% of SOFTWORKS. The
public's interest in SOFTWORKS is reflected in the consolidated balance sheet
and results of operations as minority interest.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Nine Months Ended September 30, 1998 and 1997
10.EARNINGS PER SHARE
For 1997, outstanding stock options, warrants and other potential stock
issuances have not been considered in the computation of diluted earnings per
share amounts since the effect of their inclusion would be antidilutive. For
1998, the Company's dilutive instruments are "in the money" stock options with
various exercise dates and prices as well as certain contingent stock issuances
(which were issued prior to June 30, 1998). The Company uses the treasury stock
method to calculate the effect that the conversion of the stock options would
have on earnings per share. The following table sets forth the computation of
basic and diluted earnings per share.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Thousands except per share data)
Numerator:
Net Income (Loss) $10,892 $(4,780) $8,728 $(12,999)
======= ======= ====== ========
Denominator:
wtd avg Shares Outstanding
(Denominator for Basic EPS) 17,811 11,745 15,595 10,690
Effect of Dilutive Securities/
Stock Options 197 N/A 483 N/A
Contingent Stock issuances 0 N/A 286 N/A
------- ------- ------- -------
Denominator for Diluted EPS 18,008 11,745 16,085 10,690
======= ======= ====== ========
Basic Net Income (Loss) EPS $0.61 $(0.41) $0.56 $(1.22)
Diluted Net Income (Loss) EPS $0.60 $(0.41) $0.53 $(1.22)
11. BENEFIT FROM INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 requires the determination of deferred tax assets nd liabilities
based on the differences between the financial statement and income tax bases of
assets and liabilities, using enacted tax rates. SFAS No. 109 requires that the
net deferred tax asset is adjusted by a valuation allowance, if, based on the
weight of available evidence, it is more likely than not that some portion or
all of the net deferred tax asset will not be realized.
Through August 4, 1998, the results of the Company's U.S. operations
conducted through its SOFTWORKS subsidiary have been included in the Company's
consolidated Federal income tax returns. However, separate provisions for income
taxes have been determined for SOFTWORKS' wholly-owned foreign subsidiaries that
are not eligible to be included in the U.S. Federal income tax returns. As a
result of the initial public offering of SOFTWORKS (Note 9), the Company's
ownership of SOFTWORKS is reduced below 80% and SOFTWORKS is no longer eligible
to be included in the Company's consolidated Federal income tax returns.
Accordingly, since the future realization of the SOFTWORKS' component of the
deferred tax asset ($902,000 as of August 4, 1998) is no longer uncertain, the
related valuation allowance has been eliminated.
It is expected that the Company will utilize a portion of its available net
operating loss carryforwards to substantially reduce the taxable income
resulting from the gain on partial disposition of SOFTWORKS.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Nine Months Ended September 30, 1998 and 1997
BUSINESS DESCRIPTION
Computer Concepts Corp. and subsidiaries (the "Company") design, develop,
market and support information delivery software products, including end-user
data access tools for use in personal computer and client/server environments
and systems management software products for corporate mainframe data centers.
The Company created a "professional services" division in 1997. For a fee, the
Company assists in the design, construction and installation of building
technology systems, including the reselling of computer hardware. The Company's
professional services organization also provides systems management services,
including training, implementation of software, and staff augmentation.
Additionally, effective June 30,1998, the Company completed an acquisition of
software and related sales and marketing rights which is designed to provide
non- computer literate owners (e.g. parents) the ability to identify threats as
well as objectionable material which may be viewed by users of the computer on
the internet (e.g. children) . See Note 8. The Company's principal market is the
United States. Overseas revenue is principally generated from European
subsidiaries and distributors.
The Company currently consists of three operating units or product lines:
d.b.Express , SOFTWORKS, and professional services unit. With the consummation
of the acquisition of the software technology and related sales and marketing
rights effective June 30, 1998, the Company has grown to four units. d.b.Express
provides businesses with a simple, fast, low-cost method of finding, organizing,
analyzing and using information contained in databases through a visually-based
proprietary software tool. SOFTWORKS, provides systems management software
products that optimize mainframe system performance, reduce hardware
expenditures, and enhance the reliability and availability of the data
processing environment. During 1997, the Company commenced operations of the
professional services unit. The Company employs an individual, formerly with
I.B.M., having expertise in this field and intends to capitalize on his
experience and competency in order to create a unique infrastructure to support
an extensive selection of services and vendors. The professional services unit
will offer solutions, support and strategies to solve various business crises in
such areas as: selection of hardware, network determination, help desk
applications, wiring/cabling, LAN connections, moves/adds/changes, and project
management. It can also provide training, implementation of software, and staff
augmentation. Additionally, this unit will oversee new installations as well as
offering on-site component repair. The newly acquired software is designed to
provide non computer literate owners (e.g. parents) the ability to identify
threats as well as objectionable material which may be viewed by users of the
computer on the internet (e.g. children) . Orders for the initial version of the
product began shipping in November, 1998. The method of revenue recognition for
each unit, will be dependent upon the type and manner of service provided and or
the terms of product sales.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Nine Months Ended September 30, 1998 and 1997
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 1998 Compared With September 30, 1997
Total revenue for the quarter ended September 30, 1998, $12,750,000,
reflects an increase of $5,784,000, or 83% when compared to $6,966,000 for the
same period last year. A significant factor contributing to this growth was
software license revenue increasing 89% or $3,851,000. The introduction of new
products, services and enhancements as well as an expanding global sales force
are major contributors to the growth. Additionally, revenue generated during the
three months ended September 30, 1998, from professional services increased
$1,881,000 to $1,926,000 when compared to $45,000 for the three months ended
September 30, 1997. While there can be no assurances, the Company believes that
this revenue growth should continue due in part to planned product enhancements,
new released product line, continued global expansion, and an increased sales
force. When comparing the nine months ended September 30, 1998, to 1997, revenue
increased $11,924,000, or 60%, from $19,931,000 to $31,855,000.
The cost of revenue - software licenses, as a percentage of software
license revenue, decreased from 6% of software license revenue for the quarter
ended September 30, 1997, to 5% for the quarter ended September 30, 1998. The
cost of revenue- software licenses consists primarily of royalties paid to
Company developers and to third parties. Cost of revenue - maintenance, for the
three month period ended September 30, 1998, as a percent of maintenance revenue
increased 11 percentage points to 67% from 56% when compared to the three months
ended September 30, 1997. The increase is primarily attributable to additional
payroll and related costs. Cost of revenue - professional services, stated as a
percent of professional services revenue, for the three months ended September
30, 1998 was 89% an increase of 4% as compared to the three months period ended
September 30, 1997. The increase in dollars in cost of revenue - professional
services is consistent with the increase in its revenue.
Research and development costs for the three month period ended September
30, 1998, increased approximately $92,000 over the same period last year, and
increased $195,000 to $3,316,000 for the nine months ended September 30, 1998,
from $3,121,000 for the prior year nine month period.
Sales and marketing expenses increased by $1,396,000 to $7,216,000 for the
three months ended September 30, 1998 when compared to $5,820,000 incurred for
the same period in 1997. The increase was primarily due to increased commission
expenses resulting from increased sales, and increased personnel costs due to
the expanded sales organization. However, as a percentage of total revenue,
sales and marketing costs decreased from 84% for the three months ended
September 30, 1997 to 56% for the three month period ended September 30, 1998.
For the nine month period ended September 30, 1998, sales and marketing expenses
increased $6,466,000 when compared to the nine months ended September 30, 1997,
primarily due to the factors mentioned above. As with the three month period
ended September 30, 1998, the nine month period ended September 30, 1998, sales
and marketing, when viewed as a percentage of total revenue, decreased from 65%
to 61%. While sales and marketing costs have risen, the Company believes the
increases are necessary in order to maintain, and in some instances gain market
presence. The Company anticipates a continued growth in spending to continue for
the remainder of 1998, due to additional personnel and related costs associated
with the planned growth and pursuit of new market opportunities.
<PAGE>
RESULTS OF OPERATIONS (Continued)
Three and Nine Months Ended September 30, 1998 Compared With September 30, 1997
(Continued)
General and administrative costs increased $616,000 to $3,136,000 for the
three months ended September 30, 1998, when compared to the three months ended
September 30, 1997, of $2,520,000,and $875,000 for the nine months ended
September 30,1998, when compared to the nine month period ended September 30,
1997 . Major factors contributing to the increase are expanded staffing levels
which the Company believes necessary in order to support its growth plus
additional costs associated with the initial public offering of SOFTWORKS in
August, 1998.
Amortization and depreciation increased by $932,000 from $546,000 for the
three months ended September 30, 1997, to $1,478,000 for the three months ended
September 30, 1998. This increase is due to primarily to increases in purchased
software and goodwill (See Notes 4 and 8).
Gain on partial disposition of subsidiary - see Note 9.
Interest expenses incurred during the quarter ended September 30, 1998, of
$173,000 consist primarily of charges relating to the convertible debenture,
which was repaid in August, 1998, and imputed interest charges resulting from
the calculation of the present value of minimum annual royalties for purchased
technologies for resale. (See Notes 2 and 4).
Benefit from income taxes - See Note 11
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Nine Months Ended September 30, 1998 and 1997
FINANCIAL CONDITION AND LIQUIDITY
While the Company has reported net income of $10,892,000 and $8,728,000 for
the three and nine months ended September 30, 1998, respectively, it has
incurred consolidated losses from operations of $4,507,000 and $12,739,000, for
the same respective periods. Further, the Company has incurred consolidated net
losses of $12,385,000, $18,953,000 and $18,365,000 for the years December 31,
1997, 1996, 1995, respectively. As a result of the partial disposition of one of
its subsidiaries, SOFTWORKS, Inc., ("SOFTWORKS") the Company recognized a gain
of approximately $22,466,000 during the nine month period ended September 30,
1998 (See Note 9). For the nine month period ended September 30, 1998, net cash
used in operating activities was $7,118,000, reflecting the above net income
offset by various non-cash items which aggregate $9,144,000, the $22,466,000
gain referred to above, and a net change in (cash provided by) operating assets
and liabilities of $2,524,000. The Company's cash requirements were primarily
financed through the partial disposition of SOFTWORKS, the sale of restricted
common stock, the exercises of stock options, and proceeds from the issuance of
a convertible debenture.
The Company does not maintain a comprehensive credit facility with any
financial institution, although the Company is actively seeking to obtain a
secured line of credit. The Company has continued to incur significant
expenditures with respect to the development and marketing of its d.b.Express
technology without generating any significant revenue. As a result of continued
operating losses and the use of significant cash in operations, there is
substantial doubt about the Company's ability to continue as a going concern. No
adjustments have been made with respect to the consolidated financial statements
to record the results of the ultimate outcome of this uncertainty.
Management's plans to remain a going concern require additional financing
until such time as the Company achieves positive cash flows from operations
including the successful exploitation of the Company's d.b.Express technology as
well as its newly acquired software product (See Note 8). The Company's current
source of operating revenue continues to be primarily derived from SOFTWORKS.
The Company has incurred significant losses (both cash and non-cash expenses) as
a result of the development and marketing of the d.b.Express technology.
Nevertheless, management believes that its proprietary d.b.Express technology
has significant potential in several areas and solves certain significant
business issues in the telecommunications and Internet related markets. In order
to realize the potential of this technology, the Company is vigorously
continuing its efforts to enter into sales or license agreements of its
d.b.Express technology as well as its world wide web hosting services.
Management believes that the successful exploitation of: i.- the d.b.Express
technology; ii.- projected growth in professional services; and iii.- the newly
acquired software product and related marketing rights; among other factors,
will eventually enable the Company to achieve positive cash flows from
operations and reduce its dependency on cash flows from financing activities.
In January, 1998, the Company consummated the sale of approximately
$1,978,000 (net of expenses of approximately $162,000) of restricted common
stock. In May, 1998, the Company obtained approximately $1,925,000 (net of fees
and commissions of approximately $75,000) from the sale of a convertible
debenture. The debenture would have matured on August 28, 1998. In August, 1998,
prior to maturity, the Company repaid the debenture plus interest aggregating
approximately $2,460,000. Although the Company increased cash by approximately
$20,000,000 in August, 1998, through the sale of 3,200,000 shares of its
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Nine Months Ended September 30, 1998 and 1997
FINANCIAL CONDITION AND LIQUIDITY Continued
SOFTWORKS subsidiary (See Note 9), until such time as sufficient cash flows are
generated from operations, additional financing will be necessary. There can be
no assurances that the Company will be able to obtain sufficient financing or
will be successful in achieving positive cash flows from operations in order to
execute its business plan.
YEAR 2000 ISSUES
Background. Some computers, software, and other equipment include
programming code in which calendar year data is abbreviated to only two digits.
As a result of this design decision, some of these systems could fail to operate
or fail to produce correct results if "00" is interpreted to mean 1900, rather
than 2000. These problems are widely expected to increase in frequency and
severity as the year 2000 approaches, and are commonly referred to as the
"Millenium Bug"or "Year 2000 Problem".
Assessment. The Year 2000 Problem could affect computers, software, and
other equipment used, operated, or maintained by the Company. Accordingly, the
Company is reviewing its internal computer programs and systems to ensure that
the programs and systems will be Year 2000 compliant. The Company presently
believes that its computer systems will be Year 2000 compliant in a timely
manner. However, while the estimated cost of these efforts are not expected to
be material to the Company's overall financial position, or any year's results
of operations, there can be no assurance to this effect.
SOFTWORKS has obtained certification of its processes to assess Year 2000
Problems from the Information Technology Association of America (ITAA). Because
the Company's business involves software development, the Company has not sought
further verification or validation by independent third parties of its
corrections of Year 2000 Problems. However, the Company's Year 2000 project team
is reviewing the Company's project plans and monitoring progress against those
plans.
Software Sold to Consumers. The Company believes that it has substantially
identified and resolved all potential Year 2000 Problems with any of the
software products it develops and markets. However, management also believes
that it is not possible to determine with complete certainty that all Year 2000
Problems affecting the Company's software products have been identified or
corrected due to complexity of these products and the fact that these products
interact with other third party vendor products and operate on computer systems
which are not under the Company's control.
Internal Infrastructure. The Company believes that it has identified
substantially all of the major computers, software applications, and related
equipment used in connection with its internal operations that must be modified,
upgraded, or replaced to minimize the possibility of a material disruption to
its business. The Company has commenced the process of modifying, upgrading, and
replacing major systems that have been identified as adversely affected, and
expects to complete this process before the end of 1998.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Nine Months Ended September 30, 1998 and 1997
YEAR 2000 ISSUES -Continued
Systems Other than Information Technology Systems. In addition to computers
and related systems, the operation of office and facilities equipment, such as
fax machines, photocopiers, telephone switches, security systems, elevators, and
other common devices may be affected by the Year 2000 Problem. The Company is
currently assessing the potential effect of, and costs of remediating, the Year
2000 Problem on its office and facilities equipment.
The Company estimates the total cost to the Company of completing any
required modifications, upgrades, or replacements of these internal systems will
not have a material adverse effect on the Company's business or results of
operations. This estimate is being monitored and will be revised as additional
information becomes available.
Suppliers. The Company has initiated communications, including surveys,
with third party suppliers of the major computers, software, and other equipment
used, operated, or maintained by the Company to identify and, to the extent
possible, to resolve issues involving the Year 2000 Problem. However, the
Company has limited or no control over the actions of these third party
suppliers. Thus, while the Company does not anticipate any significant Year 2000
Problems with these systems, there can be no assurance that these suppliers will
resolve any or all Year 2000 Problems with these systems before the occurrence
of a material disruption to the business of the Company or any of its customers.
Any failure of these third parties to resolve Year 2000 problems with their
systems in a timely manner could have a material adverse effect on the Company's
business, financial condition, and results of operation.
Most Likely Consequences of Year 2000 Problems. The Company expects to
identify and resolve all Year 2000 Problems that could materially adversely
affect its business operations. However, management believes that it is not
possible to determine with complete certainty that all Year 2000 Problems
affecting the Company have been identified or corrected. The number of devices
that could be affected and the interactions among these devices are simply too
numerous. In addition, one cannot accurately predict how many Year 2000
Problem-related failures will occur or the severity, duration, or financial
consequences of these perhaps inevitable failures. As a result, management
expects that the Company could likely suffer the following consequences:
1. a significant number of operational inconveniences and inefficiencies
for the Company and its clients that may divert management's time and
attention and financial and human resources from its ordinary business
activities; and
2. a lesser number of serious system failures that may require
significant efforts by the Company or its clients to prevent or
alleviate material business disruptions.
Contingency Plans. The Company is currently developing contingency plans to
be implemented as part of its efforts to identify and correct Year 2000 Problems
affecting its internal systems. The Company expects to complete its contingency
plans by the end of 1998. Depending on the systems affected, these plans could
include accelerated replacement of affected equipment or software, short to
medium-term use of backup equipment and software, increased work hours for
Company personnel or use of contract personnel to correct on an accelerated
schedule any Year 2000 Problems that arise or to provide manual work-arounds for
information systems, and similar approaches. If the Company is required to
implement any of these contingency plans, it could have a material adverse
effect on the Company's financial condition and results of operations.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Nine Months Ended September 30, 1998 and 1997
YEAR 2000 ISSUES -Continued
Based on the activities described above, the Company does not believe that
the Year 2000 Problem will have a material adverse effect on the Company's
business or results of operations.
Disclaimer. The discussion of the Company's efforts, and management's
expectations, relating to Year 2000 compliance are forward-looking statements.
The Company's ability to achieve Year 2000 compliance and the level of
incremental costs associated therewith, could be adversely impacted by, among
other things, the availability and cost of programming and testing resources,
vendors' ability to modify proprietary software, and unanticipated problems
identified in the ongoing compliance review.
Safe Harbor Statement
- ---------------------
Certain information contained in this quarterly report, particularly information
regarding future economic performance and finances, plans and objectives of
management, is forward-looking. In some cases, information regarding certain
important factors that could cause actual results to differ materially from any
such forward-looking statement appear together with such statement. The
following factors, in addition to other possible factors not listed, could
affect the Company's actual results and cause such results to differ materially
from those expressed in forward- looking statements. These factors include
competition within the computer software industry, which remains extremely
intense, both domestically and internationally, with many competitors pursuing
price discounting; changes in economic conditions; the development of new
technologies and/or changes in operating systems which could obsolete or
diminish the value of existing technologies and products; personnel related
costs; legal claims; risks inherent to rolling out new software and new software
technologies; the inability to maintain of adequate financial resources to carry
out the Company's current business plan in regard to the d.b.Express technology;
the potential cash and non-cash costs of raising additional capital or the
possible failure to raise necessary capital; changes in accounting principles
applicable to the Company's activities and other factors set forth in the
Company's filings with the Securities and Exchange Commission.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
PART II - OTHER INFORMATION
For the Three and Nine Months Ended September 30, 1998 and 1997
Item 1. Legal Proceedings
See Note 4 to the condensed consolidated financial statements.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
Report on Form 8-K dated June 15, 1998 covering Item 2 - Acquisition of Assets
and Item 7 - Financial Statements and Exhibits.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
PART II - OTHER INFORMATION
For the Three and Nine Months Ended September 30, 1998 and 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMPUTER CONCEPTS CORP.
/s/ Daniel DelGiorno, Jr.
Daniel DelGiorno Jr. President, C.E.O. Treasurer, November 19, 1998
Director
/s/ George Aronson
George Aronson Chief Financial Officer November 19, 1998
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the quarterly period ending September 30, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 15,258
<SECURITIES> 0
<RECEIVABLES> 21,227
<ALLOWANCES> 371
<INVENTORY> 0
<CURRENT-ASSETS> 43,071
<PP&E> 2,489
<DEPRECIATION> 0
<TOTAL-ASSETS> 70,285
<CURRENT-LIABILITIES> 20,947
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 33,247
<TOTAL-LIABILITY-AND-EQUITY> 70,285
<SALES> 31,855
<TOTAL-REVENUES> 31,855
<CGS> 11,201
<TOTAL-COSTS> 44,594
<OTHER-EXPENSES> 275
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 732
<INCOME-PRETAX> 8,720
<INCOME-TAX> 8
<INCOME-CONTINUING> 8,728
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,728
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.53
</TABLE>
