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 March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0 - 20660
COMPUTER CONCEPTS CORP.
(Exact name of registrant as specified in its charter)
Delaware 11-2895590
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 Orville Drive, Bohemia, N.Y. 11716
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (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 May 13, 1999
was: 20,420,839.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION Page
Condensed Consolidated Balance Sheets
as of March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations
and Comprehensive Income For the
Three Months Ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
For the Three Months ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6 - 11
Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
as of March 31, 1999 and December 31, 1998
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31 December 31,
ASSETS 1999 1998
---- ----
(Unaudited)
---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $13,272 $ 8,176
Accounts receivable, net of allowance for doubtful accounts
of $1,601 and $1,350 in 1999 and 1998, respectively 12,623 27,412
Installment receivables 18,440 16,406
Inventories 419 419
Deferred tax assets, current - 306
Advances to officers 542 895
Prepaid expenses and other current assets 6,785 10,128
------- -------
52,081 63,742
Installment accounts receivable, due after one year 7,759 7,908
Property and equipment, net 3,893 3,564
Software costs, net 4,936 5,594
Excess of cost over fair value of net assets acquired, net of
accumulated amortization of $4,908 and $4,239 in 1999 and
1998, respectively 7,765 8,610
Deferred tax assets, noncurrent 500 484
Other assets 1,631 2,000
------- -------
$78,565 $91,902
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 7,203 $11,428
Current portion of long- term debt 2,080 6,117
Income taxes payable 164 2,207
Deferred installment revenue 7,317 7,314
Deferred maintenance revenue 8,016 9,107
------- -------
24,780 36,173
Deferred installment revenue, earned after one year 4,617 7,883
Deferred maintenance revenue, earned after one year 6,912 3,924
Long-term debt, net of current portion 2,401 1,403
------- -------
Total liabilities 38,710 49,383
------- -------
Minority interest 9,353 8,503
Commitments and contingencies
Shareholders' equity:
Common stock, $.0001 par value; 150,000,000
authorized; 20,420,839 shares in 1999 and 19,324,839
shares in 1998 issued and outstanding 2 2
Additional paid-in capital 108,349 106,515
Accumulated deficit (77,545) (72,194)
Accumulated other comprehensive loss (304) (307)
------- -------
Total shareholders' equity 30,502 34,016
------- -------
$ 78,565 $ 91,902
======== ========
<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 Months Ended March 31,
(in thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revenue:
Software licenses, net $ 6,730 $ 3,760
Maintenance 3,539 2,562
Professional services 3,699 1,302
------- -------
13,968 7,624
Cost of revenue:
Software licenses 373 492
Maintenance 625 409
Professional services 3,166 1,314
------- -------
4,164 2,215
------- -------
Gross margin 9,804 5,409
------- -------
Operating expenses
Research and development 4,069 2,172
Sales and marketing 8,385 4,206
General and administrative 2,915 2,249
Amortization and depreciation 1,684 567
------- -------
17,053 9,194
------- -------
Operating loss (7,249) (3,785)
Other income (expense)
Gain on partial disposition of subsidiary 2,031 -
Interest income (expense), net (12) 25
Minority interest in earnings of subsidiary (46) -
------- -------
Loss before (benefit from) provision for income taxes (5,276) (3,760)
Benefit from (provision for) income taxes (75) 206
------- -------
Net loss $(5,351) $(3,554)
======= =======
Other comprehensive income:
Foreign currency translation adjustments 3 8
Comprehensive income (loss) $(5,348) $(3,546)
======= =======
Basic and diluted net loss per share $ (0.27) $ (0.27)
======= =======
Weighted average common shares outstanding 20,089 13,111
======= =======
<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 Three Months Ended March 31,
(in thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<S> <C> <C>
Cash flows from operating activities
Net loss $ (5,351) $ (3,554)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization:
Software costs 792 174
Property and equipment 416 255
Excess of cost over fair value of net assets acquired 669 207
Other 1 4
Minority interest in net income of subsidiary 46 -
Provision for doubtful accounts 114 60
Common stock and options issued for services 1,744 89
Softworks common stock exchanged for services 634 -
Gain on partial disposition of subsidiary (2,031) -
Changes in operating assets and liabilities
Accounts receivable 12,641 2,353
Installment accounts receivable, due after one year 149 (693)
Inventories - -
Prepaid expenses and other current assets 5,511 494
Other assets 369 53
Accounts payable and accrued expenses (4,239) (1,291)
Current income taxes (2,043) -
Deferred income taxes 290 -
Deferred revenue (1,366) 1,884
-------- --------
Net cash provided (used) by operating activities 8,346 35
-------- --------
Cash flows from investing activities
Capital expenditures (745) (292)
Additional consideration for Softworks acquisition - (262)
Cash received from sale of limited license (see Note 7) 400 -
Software development and technology purchases (222) (389)
Repayment of (advances to) officers, net 353 (126)
-------- --------
Net cash used in investing activities (214) (1,069)
-------- --------
Cash flows from financing activities
Net proceeds from sales of common stock and options - 2,157
Proceeds from long-term debt 2,021 -
Repayments of long-term debt (5,060) (106)
-------- --------
Net cash provided (used) by financing activities (3,039) 2,051
-------- --------
Effect of exchange rate changes on cash and cash equivalents 3 8
-------- --------
Net increase in cash and cash equivalents 5,096 1,025
Cash and cash equivalents, beginning of period 8,176 778
-------- --------
Cash and cash equivalents, end of period $ 13,272 $ 1,803
======== ========
<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 Months Ended March 31, 1999 and 1998
1. Interim Financial Information
The condensed consolidated balance sheet as of March 31, 1999, and the condensed
consolidated statements of operations and cash flows for the three months ended
March 31, 1999, and 1998, have been prepared by the Company without audit. These
interim financial statements include all adjustments, consisting only of normal
recurring accruals, which management considers necessary for a fair presentation
of the financial statements for the above periods. The results of operations for
the three months ended March 31, 1999, are not necessarily indicative of results
that may be expected for any other interim periods or for the full year.
These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto for the year ended
December 31, 1998. The accounting policies used in preparing the condensed
consolidated financial statements are consistent with those described in the
December 31, 1998, consolidated financial statements.
2 The Company
Computer Concepts Corp. and subsidiaries (the "Company") design, develop, market
and support information delivery software products, including end-user data
access tools for use in personal computer and client/server environments.
Through its Softworks subsidiary, the Company develops, markets and supports
systems management software products for corporate mainframe data centers. In
1997, the Company created a business unit, "professional services" , which
primarily resells computer hardware and for a fee, will assist in the design,
construction and installation of technology systems. The Company makes use of
its proprietary data access technology, d.b.Express in its d.b.Express Internet
Information Server, which is an Internet database providing Internet access to
detail telephone records. Data can be visually presented using the Company's
patented data visualization technology. Additionally, in June,1998, the Company
completed an acquisition of software (and related sales and marketing rights)
which is designed to provide non computer literate owners (e.g. parents,
guardians, schools, etc) the ability to identify threats as well as
objectionable material which may be viewed by users of the computer on the
Internet (e.g. children).
3. Shareholders' Equity
During the three month period ended March 31, 1999, the Company issued the
following restricted common stock:
i. As part of a bonus incentive compensation plan, the Company issued
470,500 shares to several non-executive employees for which it recorded a
non cash charge to earnings, of $826,000;
ii. issued 510,500 shares of its common stock to various consultants for
which it recorded a non cash charge to earnings of $910,000;
iii. In lieu of cash, the Company, issued 115,000 shares for an acquisition
of a technology license. The Company recorded amortization expense of
$8,000 during the three month period ending March 31, 1999.
4. Legal matters
In July 1995, the Company received notice of an action alleging the Company had
not used its best efforts to register warrants to purchase 50,000 shares of the
Company's common stock within 30 days from written notice to the Company,
pursuant to a financial consulting agreement. The Company has maintained that it
has always used its best efforts to cause the registration of those warrants to
occur. However, to avoid the expense and resolve the uncertainties of
litigation, the matter was settled by including 38,500 warrants in the Company's
then pending registration statement, with the balance of 11,500 warrants being
canceled. The registration statement became effective on August 9, 1996.
Although the Company believes this matter has been resolved, releases have not
yet been exchanged, nor has a stipulation of dismissal been filed. The Company
is unable to predict the ultimate outcome of this suit and, accordingly, no
adjustment has been made in the consolidated financial statements for any
potential losses.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended March 31, 1999 and 1998
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 has been substantially completed and, unless a summary judgment
is granted to one side or the other, this case is expected to go to trial. 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.
During February 1999, the Company and certain officers received notification
that they had been named as defendants in a class action alleging violations of
certain securities laws with respect to the content of certain Company
announcements. The Company and its counsel are vigorously defending the matter.
However, the Company is unable to predict the ultimate outcome of this claim
and, accordingly, no adjustments have been made in the consolidated financial
statements for any potential losses or potential issuance of common stock.
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.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended March 31, 1999 and 1998
6. Segment information
The Financial Accounting Standards Board issued Statement No. 131 "Disclosures
about Segments of an Enterprise and Related Information," which became effective
for the Company in 1998 and has been implemented for all periods presented. The
Company and its subsidiaries operate in two separate business segments, computer
software and professional services. The computer software segment, which
operates both domestically and internationally, is primarily engaged in the
design, development, marketing and support of 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. International operations include foreign
subsidiaries located in the United Kingdom, France, Brazil, Australia, Spain,
Italy and Germany and several international distributors primarily in Europe and
Asia. The professional services segment, which operates domestically, is
primarily engaged in the reselling of computer hardware, design, construction
and installation of technology systems, as well as marketing the d.b.Express
Internet Information Server, also referred to as a "server farm".
<TABLE>
<CAPTION>
Business information
Three Months Ended
------------------
March 31,
---------
(In Thousands $) 1999 1998
---- ----
<S> <C> <C>
Revenue
Computer Software $10,269 $6,322
Professional Services 3,699 1,302
------- ------
Total $13,968 $7,624
======= ======
Operating Income (loss)
Computer Software $(7,598) $(3,715)
Professional Services 349 (70)
------- ------
Total $(7,249) $(3,785)
======= ======
</TABLE>
<TABLE>
<CAPTION>
At March 31, At December 31,
1999 1998
------------ --------------
<S> <C> <C>
Identifiable Assets
Computer Software $73,651 $76,950
Professional Services 4,914 14,952
------- -------
Total $78,565 $91,902
======= =======
</TABLE>
In classifying business information into segments, the Company specifically
identifies revenue, expenses and identifiable assets of the professional
services segment; items not specifically identified are included in the computer
software segment.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
Geographical information:
Three Months Ended
------------------
March 31,
---------
(In Thousands $) 1999 1998
---- ----
<S> <C> <C>
Revenue:
United States $10,743 $ 6,318
International 3,225 1,306
-------- -------
Total $ 13,968 $ 7,624
======== =======
Operating Income/(loss):
United States $ (8,448) $(3,196)
International 1,199 (589)
-------- -------
Total $ (7,249) $(3,785)
======== =======
</TABLE>
<TABLE>
<CAPTION>
At March 31, At December 31,
1999 1998
------------ --------------
<S> <C> <C>
Identifiable Assets:
United States $67,106 $82,377
International 11,459 9,525
-------- -------
Total $78,565 $91,902
======== =======
</TABLE>
Major customer
For the three months ended March 31,1999, the Company had one major customer
with revenue of $2,911,000 (20.8% of total revenue). This amount is included in
the Professional Services and Domestic categories.
7. Internet Tracking & Security Ventures, LLC
On June 30, 1998, pursuant to an Asset Purchase and Sale Agreement, the Company
acquired certain software and related sales and marketing rights from Internet
Tracking & Security Ventures, LLC ("ITSV") in exchange for 1,900,000 restricted
shares of the Company's common stock and 1,000,000 restricted shares of common
stock of the Company's then wholly owned subsidiary, Softworks. The acquired
software program, known as "Computer Cop," is designed to inform non computer
literate parents, guardians and alike, what materials, or possible threats to
the safety and well being their children or others have been accessing over the
internet, such as objectionable web sites, text, pictures, screens, electronic
mail, etc. The Agreement also includes the rights to the use of Richard "Bo"
Dietl's name in conjunction with the promotion and endorsement of the software
as well as appearances by Mr. Dietl in support of the software in regional and
national marketing campaigns. Orders for the initial version of the product
began shipping during the fourth quarter, 1998.
The acquisition has been valued at an aggregate of $12,210,000 determined as
follows: 1,900,000 restricted shares of the Company have been valued at
$5,700,000 and the 1,000,000 restricted shares of Softworks' common stock have
been valued at $6,510,000 (based upon the ultimate net proceeds to the selling
shareholders in Softworks' initial public offering which became effective August
4, 1998). The $12,210,000 purchase price has been allocated to the fair value of
the assets acquired at June 30, 1998, based upon a written valuation from an
independent investment banking firm. Accordingly, $2,700,000 has been allocated
to "Software costs", $4,150,000 has been recorded as "Prepaid expenses and other
current assets" and $5,360,000 has been recorded as "Excess of cost over fair
value of net assets acquired".
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended March 31, 1999 and 1998
In March, 1999, the Company sold certain rights to license ComputerCOP to a
marketing company (Bo-Tel, Inc.) for $400,000. The license rights are limited to
granting a specified original equipment manufacturer of personal computers the
right to embed the software in its computers for sale to the general public.
Bo-Tel, Inc. is an affiliate of ITSV, and accordingly, this sale has been
accounted for as a reduction of the cost of the assets acquired from ITSV. The
software costs will be amortized using the greater of the ratio of current
revenue to the total projected revenue for the software or the straight-line
method using an estimated useful life of 30 months. The prepaid expenses will be
expensed as the 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. However, as a
product that the Company has only recently commenced marketing, it is reasonably
possible that the estimates of anticipated future gross revenue, the remaining
economic life of the product, or both will be reduced significantly in the near
term due to the unpredictability of the product's market acceptance and
competitive pressures (including technological obsolescence). As a result, the
carrying amount of the assets acquired from ITSV (approximately $7,300,000 at
March 31, 1999) may be reduced materially in the near term.
8. GAIN ON PARTIAL DISPOSITION OF SUBSIDIARY
Prior to June 30, 1998, Softworks was a wholly owned subsidiary of the Company
with 14,083,000 shares of common stock outstanding. On August 4, 1998, Softworks
completed a public offering of 4,200,000 shares of its common stock at a price
of $7.00 per share (less underwriting fees and commissions of $0.49 per share)
as follows: 1,700,000 shares of common stock were sold by Softworks; 1,000,000
shares were sold by ITSV and 1,500,000 shares were sold by the Company.
Additionally, in the third quarter of 1998, options to acquire approximately
3,600,000 restricted shares of Softworks common stock were granted to Softworks
officers and key employees. All options are exercisable at the initial public
offering price of $7.00 per share. On May 4, 1999, Softworks filed Form S-8
covering the registration of the common stock issuable pursuant to these
options. Softworks common stock is traded on the NASDAQ National Market under
the symbol "SWRX." In addition to the public offering discussed above, in 1998,
the Company sold 1,000,000 shares of Softworks common stock for $5,000,000 and
exchanged 1,877,700 shares of Softworks common stock to employees and
consultants for services rendered or to be rendered. As a result of the various
transactions described above, the Company's ownership interest in Softworks was
reduced from 100% to 54.5% as of December 31, 1998. In January, 1999, the
Company, through the exchange of 687,600 restricted shares of Softworks common
stock, further reduced its ownership interest from 54.5% to 50.2% or 8,017,700
shares of Softworks common stock at March 31, 1999 as follows:
1. The Company issued as 1999 bonus incentive compensation, 298,000 restricted
shares of Softworks common stock to two executives, vesting 25% on January
1, 1999, 25% on April 1, 1999, 25% on July 1, 1999 and 25% on September
1,1999. These shares would fully vest in the event of the acquisition of
Softworks, or the Company by any third party. Accordingly, the Company will
record a non cash charge to operations of $269,250 each quarter.
2. The Company issued 389,600 restricted shares of Softworks, as well as
80,000 contract options to acquire restricted shares of Softworks' common
stock owned by the Company, exercisable at $1.00 per share and expire
December 31, 1999 to various consultants. The related contracts are for
services to be performed over time frames ranging from twelve to
twenty-four months. The $1,774,000 value of the shares and options will be
charged to operations over the terms of the related contracts.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended March 31, 1999 and 1998
As a result of the January, 1999 transactions, the Company recognized a gain of
$2,031,000, representing the difference between the fair value of the Softworks
common stock exchanged, and the related carrying value of the Company's
investment in Softworks.
In April, 1999, certain stock options previously granted by Softworks to its
employees and consultants were exercised, which had the effect of reducing the
Company's ownership interest in Softworks from 50.2% to 49.7%. Accordingly, the
financial results of Softworks are not expected to be consolidated with the
Company commencing with the quarter ending June 30, 1999. The following pro
forma consolidated balance sheets and statements of operations present the
Company's results with Softworks accounted for on the equity method (i.e. as an
unconsolidated subsidiary):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------------------------- ---------------------------
(in thousands) (in thousands)
Pro-forma Pro-forma
Actual Adjustments Pro-forma Actual Adjustments Pro-forma
------ ----------- --------- ------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets $52,081 $(35,225) $16,856 $63,742 $(38,282) $25,460
Long-term receivables 7,759 (7,759) - 7,908 (7,908) -
Property plant and equipment, net 3,893 (2,698) 1,195 3,564 (2,499) 1,065
Software costs, net 4,937 (2,732) 2,205 5,594 (3,039) 2,555
Goodwill, net 7,765 (3,921) 3,844 8,610 (4,143) 4,467
Other assets 2,130 (2,061) 69 2,484 (2,384) 100
Investment in subsidiary, equity method - 9,331 9,331 - 10,086 10,086
------- ------- ------ ------ ------- ------
$78,565 $(45,065) $33,500 $91,902 $(48,169) $43,733
======= ======== ======= ======= ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $24,780 $(21,814) $ 2,966 $36,173 $(26,501) $ 9,672
Deferred revenue 11,529 (11,497) 32 11,807 (11,764) 43
Long term debt 2,401 (2,401) - 1,403 (1,401) 2
------- ------- ------ ------ ------- ------
Total liabilities 38,710 (35,712) 2,998 49,383 (39,666) 9,717
Minority interest 9,353 (9,353) - 8,503 (8,503) -
Shareholders' equity 30,502 - 30,502 34,016 - 34,016
------- ------- ------ ------ ------- ------
$78,565 $(45,065) $33,500 $91,902 $(48,169) $43,733
======= ======== ======= ======= ======== ======
</TABLE>
<TABLE>
<CAPTION>
For the three months ended March 31, 1999 For the three months ended March 31, 1998
----------------------------------------- -----------------------------------------
(in thousands) (in thousands)
Pro-forma Pro-forma
Actual Adjustments Pro-forma Actual Adjustments Pro-forma
------ ----------- --------- ------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue $13,968 $(10,258) $ 3,710 $ 7,624 $(6,596) $1,028
Cost of Revenue 4,164 (764) 3,400 2,215 (964) 1,251
------- ------- ------- ------- ------- ------
Gross margin 9,804 (9,494) 310 5,409 (5,632) (223)
------- ------- ------- ------- ------- ------
Total Operating Expenses 17,053 (9,342) 7,711 9,194 (6,681) 2,513
------- ------- ------- ------- ------- ------
Operating (loss) income (7,249) (152) (7,401) (3,785) 1,049 (2,736)
Other income (expense)
Gain on partial disposition of subsidiary 2,031 - 2,031 - - -
Interest (expense) income, net" (12) - (12) 25 - 25
Minority interest expense (46) 46 - - - -
Income (loss) from subsidiary - 46 46 - (843) (843)
------- ------- ------- ------- ------- ------
Loss before provision (benefit) for income taxes (5,276) (60) (5,336) (3,760) 206 (3,554)
Provision (benefit) for income taxes (75) 60 (15) 206 (206) -
------- ------- ------- ------- ------- ------
Net loss $(5,351) $(0) $(5,351) $(3,554) $ - $(3,554)
======= ======= ======= ======= ======= ======
</TABLE>
<PAGE>
Additionally, on May 3, 1999, Softworks filed Form S-1 with the Securities and
Exchange Commission announcing the offering of 3.5 million shares of its common
stock. Of the shares being offered, one million shares are being sold by
Softworks, 800,000 shares are being sold by the Company and 1,700,000 shares are
being sold by other existing shareholders. In conjunction with the offering, the
Company issued 200,000 contract options to acquire restricted shares of
Softworks common stock owned by the Company, exercisable at $1.00 per share,
which vest only upon successful completion of this offering.
9. Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires
the determination of deferred tax assets and liabilities based on the
differences between the financial statement and income tax bases of assets and
liabilities, using enacted tax rates SFAS No.109 requires that the net deferred
tax asset be adjusted by a valuation allowance, if, based on the weight of
available evidence, it is more likely than not that some portion or all of the
net deferred tax asset will not be realized.
Through August 4,1998, the results of the Company's U.S. operations conducted
through its SOFTWORKS subsidiary have been included in the Company's
consolidated Federal income tax returns. However, separate provisions for income
taxes have been determined for SOFTWORKS' wholly owned foreign subsidiaries that
are not eligible to be included in the U.S. Federal income tax returns. As a
result of the initial public offering of SOFTWORKS, the Company's ownership of
SOFTWORKS was reduced below 80% and SOFTWORKS is no longer eligible to be
included in the Company's consolidated Federal income tax returns.
It is expected that the Company will utilize a portion of its available net
operating loss carryforwards to substantially reduce the taxable income
resulting from the gain on partial disposition of SOFTWORKS.
10. Management's plans
Prior to 1998, the Company incurred substantial consolidated net losses and used
substantial amounts of cash in operating activities, which were primarily
financed through private placements of common stock and convertible debentures.
During 1998, and 1999, the Company continued to use substantial amounts of cash
in its operations, however, cash requirements were primarily financed through
Softworks initial public offering and additional sales of Softworks common
stock. Management's strategic plan is focused on becoming a preeminent provider
of innovative software products and services which are, and continue to be
designed and developed to:
a- break down barriers between people and data;
b- exploit the Company's patented technologies;
c- capitalize on the internet marketplace.
Additionally, the Company's plan is to further develop its professional services
unit through increased staffing and expanded services.
The Company is currently focusing on four general product categories:
1. The continued marketing of the d.b.Express Internet Information Server
Services;
2. Continue to exploit the d.b.Express technology through the development
of new vertical markets;
3. Continue to develop its Professional Services division; and
4. Capitalize on the growth of the Internet and parents' need to monitor
their children's activities through the sale of Computer Cop.
While management believes that its plan will ultimately enable them to achieve
positive cash flows from operations, until such time, additional cash may be
necessary to implement such plan. Although there can be no assurances,
management has several alternative sources to fund the development of its plan,
including additional debt and equity financing (if necessary), or additional
sales of its investment in Softworks common stock, which, as a consequence of
Softworks initial public offering, became a readily marketable asset. (See Note
8)
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND LIQUIDITY
For the Three Months Ended March 31, 1999 and 1998
Forward-Looking Statements.
- --------------------------
All statements other than statements of historical fact included in this Form
10-Q including, without limitation, statements under, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" regarding the
company's financial position, business strategy and the plans and objectives of
management for future operations, are forward-looking statements. When used in
this Form 10-Q, words such as "anticipate," "believe," "estimate," "expect,"
"intend" and similar expressions, as they relate to the Company or its
management, identify forward-looking statements. Such forward-looking statements
are based on the beliefs of management, as well as assumptions made by, and
information currently available to, the Company's' management. Actual results
could differ materially from those contemplated by the forward-looking
statements as a result of certain factors including but not limited to,
fluctuations in future operating results, technological changes or difficulties,
management of future growth, expansion of international operations, the risk of
errors or failures in the Company's software products, dependence on proprietary
technology, competitive factors, risks associated with potential acquisitions,
and the ability to recruit personnel, the dependence on key personnel. Such
statements reflect the current views of management with respect to future events
and are subject to these and other risks, uncertainties and assumptions relating
to the operations, results of operations, growth strategy and liquidity of the
Company. All subsequent written and oral forward-looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by this paragraph.
Overview
- --------
Computer Concepts Corp. and subsidiaries (the "Company") design, develop, market
and support information delivery software products, including end-user data
access tools for use in personal computer and client/server environments.
Through its Softworks subsidiary, the Company develops, markets and supports
systems management software products for corporate mainframe data centers. In
1997, the Company created a business unit, "professional services" , which
primarily resells computer hardware and for a fee, will assist in the design,
construction and installation of technology systems. The Company makes use of
its proprietary data access technology, d.b.Express in its d.b.Express Internet
Information Server, which is an Internet database providing Internet access to
detail telephone records. Data can be visually presented using the Company's
patented data visualization technology. Additionally, in June,1998, the Company
completed an acquisition of software (and related sales and marketing rights)
which is designed to provide non computer literate owners (e.g. parents,
guardians, schools, etc) the ability to identify threats as well as
objectionable material which may be viewed by users of the computer on the
Internet (e.g. children).
The Company currently consists of four operating units or product lines:
d.b.Express Internet information Server, professional services, Softworks, the
fourth being the software technology and related sales and marketing rights,
acquired in June, 1998. 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 professional
services unit will offer solutions, support and strategies to solve various
business crises in such areas as: selection and reselling of hardware, network
determination, help desk applications, wiring/cabling, LAN connections,
moves/adds/changes, and project management. Additionally, this unit could
oversee new installations as well as offering on-site component repair. 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 during the fourth
quarter, 1998. The method of revenue recognition for each unit, is dependent
upon the type and manner of service provided and or the terms of product sales.
As described above in note 8, in April,1999, the Company's ownership interest in
Softworks was reduced to 49.7%, due to the exercise of Softworks stock options.
Accordingly, the financial results of Softworks are not expected to be
consolidated with the Company commencing with the quarter ending June 30, 1999.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND LIQUIDITY
For the Three Months Ended March 31, 1999 and 1998
Results of Operations
- ---------------------
Total revenue for the quarter ended March 31, 1999, $13,968,000, reflects an
increase of $6,344,000, or 83% when compared to $7,624,000 for the same period
last year. A significant factor contributing to this growth was software license
revenue increasing 79% or $2,970,000. 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 March 31, 1999, from professional services increased $2,397,000 to
$3,699,000 when compared to $1,302,000 for the three months ended March 31,
1998.
The cost of revenue - software licenses, as a percentage of software license
revenue, decreased from 13% of software license revenue for the quarter ended
March 31, 1998, to 6% for the quarter ended March 31, 1999. 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 March 31, 1999, as a percent of maintenance revenue increased 2 percentage
points to 18% from 16% when compared to the three months ended March 31, 1998.
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 March 31, 1999 was 86%, a decrease
of 15% as compared to the three months period ended September 30, 1998. 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 March 31, 1999,
increased approximately $1,897,000 over the same period last year. This increase
was primarily a result of the Company's expanded efforts made toward the
development of additional enhancements and upgrades to the d.b.Express
technology and of an increase in personnel necessary to support Softworks'
research and development efforts.
Sales and marketing expenses increased by $4,179,000 to $8,385,000 for the three
months ended March 31, 1999 when compared to $4,206,000 incurred for the same
period in 1998. The increase was primarily due to increased commission expenses
resulting from increased sales, and increased personnel costs due to the
expanded sales organization. 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 1999, due to additional personnel and
related costs associated with the planned growth and pursuit of new market
opportunities.
General and administrative costs increased $666,000 to $2,915,000 for the three
months ended March 31, 1999, when compared to the three months ended March 31,
1998. Major factors contributing to the increase are expanded staffing levels
which the Company believes necessary in order to support its growth. However, as
a percentage of total revenue, general and administrative costs decreased from
29% for the three months ended March 31, 1998 to 21% for the three month period
ended March 31, 1999.
Amortization and depreciation increased by $1,117,000 from $567,000 for the
three months ended March 31, 1998, to $1,684,000 for the three months ended
March 31, 1999. This increase is due to primarily to increases in purchased
software and goodwill.
Gain on partial disposition of subsidiary - see Note 8.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND LIQUIDITY
For the Three Months Ended March 31, 1999 and 1998
Financial Condition and Liquidity
- ---------------------------------
The Company has reported a net loss of $5,351,000 (of which $93,000 net income
was attributable to Softworks) for the three months ended March 31, 1999. For
the years ended December 31, 1998, 1997, 1996, the Company had consolidated net
income of $9,547,000, and consolidated net losses of $12,385,000 and
$18,953,000, respectively. As a result of the partial disposition of Softworks,
the Company recognized a gain of approximately $2,031,000 during the three month
period ended March 31, 1999 (see Note 8). For the three month period ended March
31, 1999, net cash provided by operating activities was $8,346,000 (of which
$75,000 was attributable to Softworks), consisting of: a net change in operating
assets and liabilities of $11,312,000, (of which $1,044,000 net use was
attributable to Softworks' operations), various non-cash charges which
aggregated $4,416,000, (of which $1,026,000 was attributable to Softworks), the
$2,031,000 gain referred to above, offset by the net loss.
Prior to 1998, the Company incurred substantial consolidated net losses and used
substantial amounts of cash in operating activities, which were primarily
financed through private placements of common stock and convertible debentures.
During 1998, and 1999, the Company continued to use substantial amounts of cash
in its operations, however, cash requirements were primarily financed through
Softworks initial public offering and additional sales of Softworks common
stock. At, March 31, 1999, and December 31, 1998, the Company had working
capital of $27,301,000 (unaudited) and $27,569,000,respectively. Management's
strategic plan is focused on becoming a preeminent provider of innovative
software products and services which are, and continue to be designed and
developed to:
a- break down barriers between people and data;
b- exploit the Company's patented technologies;
c- capitalize on the internet marketplace.
Additionally, the Company's plan is to further develop its professional services
unit through increased staffing and expanded services.
The Company is currently focusing on four general product categories:
1. The continued marketing of the d.b.Express Internet Information Server
Services;
2. Continue to exploit the d.b.Express technology through the development of
new vertical markets;
3. Continue to develop its Professional Services division; and
4. Capitalize on the growth of the Internet and parents' need to monitor their
children's activities through the sale of Computer Cop.
While management believes that its plan will ultimately enable them to achieve
positive cash flows from operations, until such time, additional cash may be
necessary to implement such plan. Although there can be no assurances,
management has several alternative sources to fund the development of its plan,
including additional debt and equity financing (if necessary), or additional
sales of its investment in Softworks common stock, which, as a consequence of
Softworks initial public offering, became a readily marketable asset. At March
31, 1999, the Company owned 8,017,700 shares of Softworks common stock (see Note
8).
Net cash used in investing activities of $214,000 was attributable to the
acquisition of additional property and equipment of $745,000, the development
and / or purchase of software technologies of $222,000, offset by the repayment
of Officers Loans of $353,000 and $400,000 received from the sale of a limited
license (see Note7).
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND LIQUIDITY
For the Three Months Ended March 31, 1999 and 1998
During November, 1998, the parent Company entered into an Accounts Receivable
Purchase Agreement, whereby the Company from time to time may, on a full
recourse basis, assign some of their accounts receivable. Upon specific invoice
approval, an advance of 85% of the underlying receivable is provided to the
Company. The remaining balance (15%), less an administrative fee of
approximately 1/2% plus interest at the rate of 1 1/2% per month, is paid to the
Company once the customer has paid. This agreement expires in November 1999. At
March 31, 1999, there were no receivables assigned nor any amount due the
lender.
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 is not expected to be
material to the Company's overall financial position, or any year's results of
operations, there can be no assurance to this effect.
The Softworks subsidiary 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 June, 1999.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND LIQUIDITY
For the Three Months Ended March 31, 1999 and 1998
Systems Other than Information Technology Systems. In addition to computers and
related systems, the operation of office and facilities equipment, such as fax
machines, photocopiers, telephone switches, security systems, elevators, and
other common devices may be affected by the Year 2000 Problem. The Company is
currently assessing the potential effect of, and costs of remediating, the Year
2000 Problem on its office and facilities equipment and expects to complete such
assessment by the June, 1999.
The Company estimates the total cost to the Company of completing any required
modifications, upgrades, or replacements of these internal systems will not have
a material adverse effect on the Company's business or results of operations.
This estimate is being monitored and will be revised as additional information
becomes available.
Suppliers. The Company has initiated communications, including surveys, with
third party suppliers of the major computers, software, and other equipment
used, operated, or maintained by the Company to identify and, to the extent
possible, to resolve issues involving the Year 2000 Problem. However, the
Company has limited or no control over responses to its inquiries and the
actions of these third party suppliers. Thus, while the Company does not
anticipate any significant Year 2000 Problems with these systems, there can be
no assurance that these suppliers will resolve any or all of their Year 2000
Problems with these systems before the occurrence of a material disruption to
the business of the Company or any of its customers. Any failure of these third
parties to resolve Year 2000 problems with their systems in a timely manner
could have a material adverse effect on the Company's business, financial
condition, and results of 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
A. a significant number of operational inconveniences and inefficiencies for
the Company and its customers that may divert management's time and
attention and financial and human resources from its ordinary business
activities; and
B. a lesser number of serious system failures that may require significant
efforts by the Company or its customers to prevent or alleviate material
business disruptions.
C. the inability to determine with any degree of certainty, the changes if
any, in buying habits of its current and potential customers due to their
concerns over Year 2000 issues.
Contingency Plans. The Company 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 June 1999. 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 workarounds for
information systems, and similar approaches. If the Company is required to
implement any of these contingency plans, it could have a material adverse
effect on the Company's financial condition and results of operations.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND LIQUIDITY
For the Three Months Ended March 31, 1999 and 1998
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.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
PART II - OTHER INFORMATION
For the Three Months Ended March 31, 1999 and 1998
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K Not applicable.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
PART II - OTHER INFORMATION
For the Three Months Ended March 31, 1999 and 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMPUTER CONCEPTS CORP.
/s/ Daniel DelGiorno, Jr.
Daniel DelGiorno Jr. President, C.E.O. Treasurer, May 14, 1999
- -------------------- Director
/s/ George Aronson
George Aronson Chief Financial Officer May 14, 1999
- --------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the quarterly period ending March 31, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
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<RECEIVABLES> 21,983
<ALLOWANCES> 1,601
<INVENTORY> 419
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