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 June 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 August 14,
1998 was: 17,201,960.
1
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION Page
Condensed Consolidated Balance Sheets
as of June 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations
and Comprehensive Income For the Three and
Six Months Ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
For the Six Months ended June 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6 - 13
Management's Discussion and Analysis of Financial
Condition and Results of Operations 14 - 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of
Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
as of June 30, 1998 and December 31, 1997
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1998 1997
---- ----
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,390 $ 778
Accounts receivable, net of allowance
for doubtful accounts of $340 and
$252 in 1998 and 1997, respectively 8,810 11,718
Installment receivables 7,918 6,148
Advances to officers 862 1,070
Prepaid expenses and other current assets 6,241 1,987
-------- --------
26,221 21,701
INSTALLMENT RECEIVABLES, due after one year 7,948 6,480
PROPERTY AND EQUIPMENT, net 2,380 2,069
SOFTWARE COSTS, net 6,760 3,730
EXCESS OF COST OVER FAIR VALUE OF
NET ASSETS ACQUIRED, net of accumulated
amortization of $2,902 and $2,477 in
1998 and 1997, respectively 9,943 4,611
OTHER ASSETS 1,010 707
-------- --------
$ 54,262 $ 39,298
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 6,525 $ 7,225
Convertible debenture 2,000 -
Short term bank loan 500 -
Current portion of long- term debt 671 1,291
Deferred installment revenue 6,923 5,506
Deferred maintenance revenue 5,598 6,267
-------- --------
22,217 20,289
DEFERRED INSTALLMENT REVENUE, earned
after one year 7,918 7,122
DEFERRED MAINTENANCE REVENUE, earned
after one year 1,547 825
LONG-TERM DEBT, net of current portion 1,584 1,395
-------- --------
Total liabilities 33,266 29,631
-------- --------
MINORITY INTEREST 408 -
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.0001 par value;
150,000,000 authorized; 17,056,159
shares in 1998 and 12,744,751 shares
in 1997 issued and outstanding 2 1
Additional paid-in capital 104,726 91,641
Accumulated deficit (83,899) (81,741)
Foreign currency translation (61) (54)
Unrealized loss on marketable securities (180) (180)
-------- --------
Total shareholders' equity 20,588 9,667
-------- --------
$ 54,262 $ 39,298
======== ========
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
3
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COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
For the Three and Six Months Ended June 30,
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE:
Software licenses $ 6,275 $ 4,389 $ 10,372 $ 7,033
Maintenance 2,625 2,458 5,176 4,829
Professional services 2,586 575 3,562 1,412
-------- -------- -------- --------
11,486 7,422 19,110 13,274
COSTS AND EXPENSES:
Cost of revenue - software licenses 205 129 698 161
Cost of revenue - maintenance 2,235 2,218 4,266 3,486
Cost of revenue - professional services 2,023 521 3,212 1,604
Research and development 785 1,067 1,539 1,651
Sales and marketing 7,527 4,073 11,693 7,077
General and administrative 2,736 2,941 4,689 4,706
Amortization and depreciation 672 527 1,239 1,078
Unusual charges - 850 - 850
-------- -------- -------- --------
16,183 12,326 27,336 20,613
-------- -------- -------- --------
LOSS FROM OPERATIONS (4,697) (4,904) (8,226) (7,339)
OTHER INCOME/(EXPENSE):
Gain on partial disposition of subsidiary 6,627 - 6,627 -
Interest expense (536) - (559) -
Interest charge pertaining to the discount on
convertible debentures - (880) - (880)
-------- -------- -------- --------
NET INCOME (LOSS) 1,394 (5,784) ( 2,158) (8,219)
-------- -------- -------- --------
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustments (15) - (7) -
COMPREHENSIVE INCOME (LOSS) $ 1,379 $ (5,784) $ (2,165) $ (8,219)
======== ======== ======== ========
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE $ 0.09 $ (0.57) $ (0.15) $ (0.81)
======== ======== ======== ========
BASIC WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 14,990 10,140 14,066 10,151
======== ======== ======== ========
DILUTED WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 15,948 10,140 14,066 10,151
======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
4
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COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended June 30,
(in thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities
Net loss $ (2,158) $ (8,219)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization:
Software costs 416 298
Property and equipment 557 421
Excess of cost over fair value of net assets
acquired 425 362
Other 2 3
Gain on partial disposition of subsidiary (6,627) -
Provision for doubtful accounts 239 162
Common stock and options issued for services 2,704 1,796
Softworks common stock exchanged for services 525 -
Non-cash unusual charges - 500
Non-cash interest charge for discount on
convertible debt - 880
Changes in operating assets and liabilities
Accounts receivable 899 (2,597)
Installment accounts receivable, due after
one year (1,468) (1,227)
Inventories - 10
Prepaid expenses and other current assets (104) (326)
Other assets (305) 81
Accounts payable and accrued expenses (645) 1,149
Deferred revenue 2,266 2,502
------ ------
Net cash used in operating activities (3,274) (4,205)
------ ------
Cash flows from investing activities
Capital expenditures (868) (823)
Additional consideration for Softworks
acquisition (452) (311)
Software development and technology purchases (746) (420)
Advances to officers, net 208 (155)
------ ------
Net cash used in investing activities (1,858) (1,709)
------ ------
Cash flows from financing activities
Net proceeds from sales of common stock
and options 4,682 4,005
Proceeds from issuance of convertible debt
(net of issuance costs) 1,925 -
Proceeds from bank loan 500 -
Net repayments of long-term debt (356) (259)
------ ------
Net cash provided by financing activities 6,751 3,746
------ ------
Effect of exchange rate changes on cash and
cash equivalents (7) -
------ ------
Net increase (decrease) in cash and cash equivalents 1,612 (2,168)
Cash and cash equivalents, beginning of period 778 5,675
------ ------
Cash and cash equivalents, end of period $ 2,390 $ 3,507
====== ======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Six Months Ended June 30, 1998 and 1997
1. INTERIM FINANCIAL INFORMATION
The condensed consolidated balance sheet as of June 30, 1998, and the condensed
consolidated statements of operations and cash flows for the six months ended
June 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 June 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 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 has recently entered into the technology infrastructure service and
construction business, referred to as "professional services". For a fee, the
Company assists in the design, construction and installation of building
technology systems. 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 $1,394,000 for the three months
ended June 30, 1998, it has incurred a consolidated loss from operations of
$4,697,000 for the same period and a net loss of $2,158,000 for the six months
ended June 30, 1998. As a result of the partial disposition of one of its
subsidiaries, SOFTWORKS, Inc., ("SOFTWORKS") the Company recognized a gain of
approximately $6,627,000 during the three month period ended June 30, 1998 (See
Note 9). 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. For the six month period ended June 30, 1998, net cash used
in operating activities was $3,274,000, reflecting the above net loss in
addition to various non-cash items aggregating $1,759,000 less a net change
(cash provided by) operating assets and liabilities of $643,000. The Company's
cash requirements were primarily financed through the sale of common stock,
exercises of stock options, proceeds from the issuance of a convertible
debenture and a short term bank loan.
6
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Six Months Ended June 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 and has successfully obtained a short term bank loan of $500,000. 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 subsidiary, SOFTWORKS, 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.
Management believes that the successful exploitation of both the d.b.Express
technology,as well as the newly acquired software product and related marketing
rights, 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. 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 has increased its cash by approximately $20,000,000, 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.
7
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Six Months Ended June 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 six months ended June 30, 1998, 796,000 options were
exercised at prices ranging from $0.10 to $5.00. Proceeds raised from these
exercises aggregated approximately $2,703,000.
c. Transactions with consultants
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 option compensation
During the three month period ended June 30, 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 a non-cash
charge to earnings of approximately $1,469,000. The Company, through the advise
of its compensation committee, issued 1,209,148 options to several officers and
key employees of both the Company and its then wholly owned subsidiary,
SOFTWORKS, which have an exercise price of $4.00and are fully vested. All
options expire December 31, 2000. A Form S-8 filed on May 15, 1998, registered
approximately 779,000 of the underlying shares of the Company's common stock.
8
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Six Months Ended June 30, 1998 and 1997
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 June 30, 1998,
the Company has incurred an aggregate liability of $2,000,000 (of which
approximately $1,778,000 has been 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.
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, and the recently issued options 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.
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 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 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.
9
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Six Months Ended June 30, 1998 and 1997
4. COMMITMENTS AND CONTINGENCIES (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.
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.
10
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Six Months Ended June 30, 1998 and 1997
4. COMMITMENTS AND CONTINGENCIES (continued)
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. As of this filing this loan has not
yet been issued. 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"), which was
issued to provide further guidance on applying generally accepted accounting
principles to software transactions, became effective for transactions entered
into beginning in 1998. The SOP 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 for the period ended June 30, 1998.
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.
11
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Six Months Ended June 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 of 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. No revenue from the sale of this software has been
generated to date. The Company intends to release the product during the third
quarter, 1998.
The acquisition has been valued at an aggregate of $12,210,000 determined as
follows: 1,900,000 restricted shares of the Company have been valued at
$5,700,000 and the 1,000,000 restricted shares of SOFTWORKS' common stock have
been 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) which is expected to
occur over the next 12 months. 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
12
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Six Months Ended June 30, 1998 and 1997
9. GAIN ON PARTIAL DISPOSITION OF SUBSIDIARY (Continued)
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
4,310,000 restricted shares of SOFTWORKS common stock have been granted to the
Company and SOFTWORKS officers, key employees and consultants, of which 986,500
options, which vested upon the public offering date, are currently exercisable
(into restricted shares of 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 30, 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
the third quarter of 1998, the Company will recognize an additional gain in
accordance with Staff Accounting Bulletins 51 and 84, to reflect the reduction
of ownership interest in SOFTWORKS from 92.2% to 71.9%.
In conjunction with the SOFTWORKS public offering, 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. The public's interest in SOFTWORKS is reflected in the consolidated
balance sheet and results of operations as minority interest.
13
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Three and Six Months Ended June 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 has recently entered into the technology infrastructure service and
construction business, referred to as "professional services". For a fee, the
Company assists in the design, construction and installation of building
technology systems. 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 , SOFTWORKSs, and the recently formed 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. To spearhead the 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, single
management 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: network
determinations, 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).
The method of revenue recognition will be dependent upon the type and manner of
service provided.
14
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1998 and 1997
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 1998 Compared With June 30, 1997
Total revenue for the quarter ended June 30, 1998, $11,486,000, reflects an
increase of $4,064,000 when compared to $7,422,000 for the same period last
year. When comparing the six months ended June 30, 1998, to 1997, revenue
increased $5,836,000 from $13,274,000 to $19,110,000. Significant factors
contributing to the growth include, increases of $1,886,000 and $3,339,000 of
software license revenue for the three and six month periods ended June 30, 1998
as compared to the same period in the prior year. Significant factors for this
growth include the introduction of new products and or enhancements at Softworks
as well as an expanded sales force. Additionally, revenue generated during the
three months ended June 30, 1998, from professional services increased
$2,011,000 to $2,586,000 when compared to $575,000, for the three months ended
June 30, 1997. While there can be no assurances, the Company believes that this
revenue growth should continue due in part to its planned enhanced product line,
expansion into additional markets, and an increased sales force.
The cost of revenue - software licenses, as a percent of software license
revenue increased slightly from 2.9% for the quarter ended June 30, 1997, to
3.3% for the quarter ended June 30, 1998. Cost of revenue - maintenance, for the
three month period ended June 30, 1998, as a percent of maintenance revenue
decreased slightly, 5.1 percentage points to 85.12% from 90.2% when compared to
the three months ended June 30, 1997. This improvement is attributable
reductions in payroll and related costs. Cost of revenue - professional
services, as a percent of professional services revenue, improved by 11.9
percentage points when comparing the quarters ended June 30, 1997 - (90.1%) with
1998 - (78.2%). 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 June 30, 1998,
decreased approximately $282,000 over the same period last year, and decreased
$112,000 to $1,539,000 for the six months ended June 30, 1998, from $1,651,000
for the prior year six month period, primarily as a result of the Company's
having significantly completed the initial phase of the d.b.Express
telecommunications technology.
Sales and marketing expenses increased by $3,454,000 to $7,527,000 from the
second quarter of the prior year amount of $4,073,000. The increase was
primarily due to costs at SOFTWORKS rising $1,341,000, over the three month
period of the prior year. These additional expenditures incurred were
attributable to the marketing of the Year 2000 suite of products, the
SavanTechnology line and additional location and employee costs for new offices
both in the U.S. as well as overseas. Additionally, costs associated with
d.b.Express increased from the prior year by $2,205,000, due principally in part
to an expanded sales and marketing force,as well as non-cash stock options to
several consultants. (See Note 3) The above referenced increases were offset by
a decrease of $92,000, associated with the sale of Maplinx. For the six month
period ended June 30, 1998, expenses increased when compared to the six months
ended June 30, 1997 by $4,616,000, primarily due to factors mentioned above.
While, as a percentage of total revenue, sales and marketing has risen, the
Company believes the increases are necessary in order to maintain, and in some
instances gain market presence.
15
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the Three and Six
Months Ended June 30, 1998 and 1997
RESULTS OF OPERATIONS (Continued)
Three and Six Months Ended June 30, 1998 Compared With June 30, 1997 (Continued)
General and administrative costs decreased $205,000 to $2,736,000 for the three
months ended June 30, 1998, when compared to the three months ended June 30,
1997 of $2,941,000,and $17,000 for the six months ended June 30,1998. Major
factors contributing to the change include a reduction in the Company's
corporate overhead which was partially offset by increases to SOFTWORKS'
overhead.
Amortization and depreciation increased by $145,000 from $527,000 for the three
months ended June 30, 1997, to $672,000 for the three months ended June 30,
1998. This increase is due to primarily to increases in purchased software and
goodwill (See Note 4).
Gain on partial disposition of subsidiary - see Note 8.
Interest expenses incurred during the quarter ended June 30, 1998, of $536,000
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 4 and 2).
16
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the Three and Six
Months Ended June 30, 1998 and 1997
FINANCIAL CONDITION AND LIQUIDITY
While the Company has reported net income of $1,394,000 for the three months
ended June 30, 1998, it has incurred a consolidated loss from operations of
$4,697,000 for the same period and a net loss of $2,158,000 for the six months
ended June 30, 1998. As a result of the partial disposition of one of its
subsidiaries, SOFTWORKS, Inc., ("SOFTWORKS") the Company recognized a gain of
approximately $6,627,000 during the three month period ended June 30, 1998 (See
Note 9). 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. For the six month period ended June 30, 1998, net cash used
in operating activities was $3,274,000, reflecting the above net loss in
addition to various non-cash items aggregating $1,759,000 less a net change
(cash provided by) operating assets and liabilities of $643,000. The Company's
cash requirements were primarily financed through the sale of common stock,
exercises of stock options, proceeds from the issuance of a convertible
debenture and a short term bank loan.
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 and has successfully obtained a short term bank loan of $500,000. 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 subsidiary, SOFTWORKS, 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.
Management believes that the successful exploitation of both the d.b.Express
technology, as well as the newly acquired software product and related marketing
rights, 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. 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 has increased its cash by approximately $20,000,000, in
August, 1998, through the sale of 3,200,000 shares of its SOFTWORKS subsidiary
17
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the Three and Six
Months Ended June 30, 1998 and 1997
FINANCIAL CONDITION AND LIQUIDITY (Continued)
(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.
Safe Harbor Statement
Certain information contained in this annual 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 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.
18
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
PART II - OTHER INFORMATION
For the Three and Six Months Ended June 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.
19
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
PART II - OTHER INFORMATION
For the Three and Six Months Ended June 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, August 19, 1998
Director
/s/ George Aronson
George Aronson Chief Financial Officer August 19, 1998
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This schedule contains summary financial information extracted from the
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