UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0 - 20660
COMPUTER CONCEPTS CORP.
(Exact name of registrant as specified in its charter)
Delaware 11-2895590
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 Orville Drive, Bohemia, N.Y. 11716
(Address of principal executive offices) (Zip Code)
Registrant=s telephone number, including area code (516) 244-1500
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of $.0001 par value stock outstanding as of November 18,
1999 was 20,529,250.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION Page
Condensed Consolidated Balance Sheets
as of September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations
and Comprehensive Income For the Three and
Nine Months Ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
For the Nine Months ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6 - 14
Management's Discussion and Analysis of Financial
Condition and Results of Operations 15 - 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
as of September 30, 1999 and December 31, 1998
(in thousands, except share data)
<TABLE>
<CAPTION>
September December
30, 31,
ASSETS 1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 13,702 $ 8,176
Accounts receivable, net of allowance for
doubtful accounts of $361 and
$1,350 in 1999 and 1998, respectively 811 27,412
Installment receivables - 16,406
Inventories 250 419
Deferred tax assets, current - 306
Advances to officers 823 895
Prepaid expenses and other current assets 1,485 10,128
------- -------
Total current assets 17,071 63,742
Installment accounts receivable, due after one year - 7,908
Property and equipment, net 1,453 3,564
Software costs, net 1,592 5,594
Excess of cost over fair value of net assets
acquired, net of accumulated amortization
of $2,194 and $4,239 in 1999 and 1998,
respectively 2,990 8,610
Investment in Softworks 11,351 -
Deferred tax assets, noncurrent - 484
Other assets 156 2,000
-------- --------
$ 34,613 $ 91,902
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 1,693 $11,428
Dividend payable 6,000 -
Current portion of long- term debt 9 6,117
Income taxes payable 50 2,207
Deferred installment revenue - 7,314
Deferred maintenance revenue 42 9,107
------- -------
Total current liabilities 7,794 36,173
Deferred installment revenue, earned after
one year - 7,883
Deferred maintenance revenue, earned after
one year 11 3,924
Long-term debt, net of current portion - 1,403
------- -------
Total liabilities 7,805 49,383
------- -------
Minority interest - 8,503
Commitments and contingencies
Shareholders' equity:
Common stock, $.0001 par value; 150,000,000
authorized; 20,765,830 and 19,324,839
shares issued in 1999 and 1998, respectively,
and 20,591,450 and 19,324,839 shares
outstanding in 1999 and 1998, respectively 2 2
Additional paid-in capital l08,674 106,515
Accumulated deficit (81,355) (72,194)
Accumulated other comprehensive loss (217) (307)
------- -------
27,104 34,016
Common stock in treasury, at cost - 174,380
shares in 1999 (296) -
------- -------
Total shareholders' equity 26,808 34,016
------- -------
$ 34,613 $ 91,902
======= =======
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
-3-
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
For the Three and Nine Months Ended September 30,
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Software licenses, net $ 385 $ 8,194 $ 7,326 $ 17,983
Maintenance 11 2,630 3,560 7,827
Professional services 410 1,926 13,533 6,045
-------- -------- -------- --------
806 12,750 24,419 31,855
-------- -------- -------- --------
Cost of revenue:
Software licenses 157 434 434 1,132
Maintenance - 1,776 548 4,886
Professional services 109 1,719 11,926 5,183
-------- -------- -------- --------
266 3,929 12,908 11,201
-------- -------- -------- --------
Gross margin 540 8,821 11,511 20,654
-------- -------- -------- --------
Operating expenses
Research and development 2,081 1,498 7,825 3,316
Sales and marketing 2,607 7,216 14,007 19,394
General and administrative 1,309 3,136 5,966 7,965
Amortization and depreciation 1,019 1,478 3,698 2,718
-------- -------- -------- --------
7,016 13,328 31,496 33,393
-------- -------- -------- --------
Operating loss (6,476) (4,507) (19,985) (12,739)
Other income (expense)
Gain on partial disposition
of subsidiary 3 15,839 16,444 22,466
Equity in earnings of Softworks 446 - 321 -
Interest income (expense), net 194 (173) 210 (732)
Minority interest in earnings
of subsidiary - (275) (46) (275)
-------- -------- -------- --------
Income (loss) before provision for
income taxes (5,833) 10,884 (3,056) 8,720
Benefit from (provision for) income taxes (42) 8 (102) 8
-------- -------- -------- --------
Net income (loss) (5,875) 10,892 (3,158) 8,728
Other comprehensive income:
Foreign currency translation
adjustments 87 (15) 90 (22)
Marketable securities reserve
adjustments - (60) - (60)
-------- -------- -------- --------
Comprehensive income (loss) $(5,788) $10,817 $ (3,068) $8,646
======== ======== ======== ========
Basic net income (loss) per share $ (0.28) $ 0.61 $ (0.15) $ 0.56
======== ======== ======== ========
Diluted net income (loss) per share $ (0.28) $ 0.60 $ (0.15) $ 0.53
======== ======== ======== ========
Basic weighted average common shares
outstanding 20,736 17,811 20,429 15,595
======== ======== ======== ========
Diluted weighted average common shares
outstanding 20,736 18,008 20,429 16,364
======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
-4-
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended September 30,
(in thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities
Net income (loss) $(3,158) 8,728
Adjustments to reconcile net income (loss) to net
cash used by operating activities
Depreciation and amortization:
Software costs 1,532 1,514
Property and equipment 803 899
Excess of cost over fair value of net assets acquired 1,523 1,094
Other - 2
Equity in earnings of Softworks (321) -
Minority interest in net income of subsidiary 46 275
Provision for doubtful accounts 93 324
Common stock and options issued for services 2,150 3,548
Softworks common stock exchanged for services 2,522 1,612
Gain on partial disposition of subsidiary (16,444) (22,466)
Deferred income tax benefit - (545)
Other - 421
Changes in operating assets and liabilities
Accounts receivable 16,731 (3,314)
Installment accounts receivable, due after one year 149 (1,249)
Inventories 168 -
Prepaid expenses and other current assets 1,695 (230)
Other assets 283 (467)
Accounts payable and accrued expenses (5,377) (1,047)
Current income taxes (2,043) 506
Deferred income taxes 290 -
Deferred revenue (1,388) 3,277
-------- --------
Net cash used by operating activities ( 746) (7,118)
-------- --------
Cash flows from investing activities
Capital expenditures (1,391) (1,319)
Additional consideration for Softworks acquisition - (678)
Cash received from sale of limited license (see Note 7) 400 -
Reduction in cash resulting from excluding Softworks
from consolidation (see Note 8) (6,759) -
Proceeds from sales of Softworks common stock (see Note 8) 17,406 19,419
Proceeds from exercises of options to purchase Softworks
common stock (see Note 8) 240 -
Software development and technology purchases (351) (1,263)
Repayment of officers loans, net 72 252
-------- --------
Net cash provided by investing activities 9,617 16,411
-------- --------
Cash flows from financing activities
Net proceeds from sales of common stock and exercises
of options - 5,210
Proceeds from issuance of convertible debt (net of
issuance costs) - 1,925
Acquisition of treasury stock (296) -
Repayment of convertible debt - (2,000)
Proceeds from long-term debt 2,021 -
Repayments of long-term debt (5,072) 74
-------- --------
Net cash provided (used) by financing activities (3,347) 5,209
-------- --------
Effect of exchange rate changes on cash and cash equivalents 2 (22)
-------- --------
Net increase in cash and cash equivalents 5,526 14,480
Cash and cash equivalents, beginning of period 8,176 778
-------- --------
Cash and cash equivalents, end of period $13,702 $15,258
======== ========
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
-5-
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Nine Months Ended September 30, 1999 and 1998
1. Interim Financial Information
The condensed consolidated balance sheet as of September 30, 1999, and the
condensed consolidated statements of operations and cash flows for the three and
nine months ended September 30, 1999, and 1998, have been prepared by the
Company without audit. These interim financial statements include all
adjustments, consisting only of normal recurring accruals, which management
considers necessary for a fair presentation of the financial statements for the
above periods. The results of operations for the three months ended September
30, 1999, are not necessarily indicative of results that may be expected for any
other interim periods or for the full year.
These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto for the year ended
December 31, 1998. The accounting policies used in preparing the condensed
consolidated financial statements are consistent with those described in the
December 31, 1998, consolidated financial statements.
2. The Company
The most significant portion of the Company's operations had historically been
conducted through one of its subsidiaries, Softworks, Inc. ("Softworks").
Softworks was wholly owned by the Company through June 29, 1998 and majority
owned through March 31, 1999. Through a series of transactions that included an
initial public offering of Softworks in August 1998, various exchanges of
Softworks common stock owned by the Company to consultants and employees for
services rendered, a private placement of Softworks common stock owned by the
Company in December 1998 and a second public offering in June 1999, the
Company's ownership of Softworks was reduced from 100% to 38.5%. Accordingly,
Softworks is accounted for as a consolidated subsidiary through March 31, 1999,
and commencing April 1, 1999, Softworks' results are accounted for using the
equity method of accounting. See Note 8 for further details.
Computer Concepts Corp. and subsidiaries (the "Company") design, develop, market
and support information delivery software products, including end-user data
access tools for use in personal computer and client/server environments.
Through Softworks, the Company developed, marketed and supported systems
management software products for corporate mainframe data centers. In 1997, the
Company created a business unit, "professional services" , which primarily
resells computer hardware and for a fee, will assist in the design, construction
and installation of technology systems. The Company makes use of its proprietary
data access technology, d.b.ExpressJ in its d.b.ExpressJ Internet Information
Server, more commonly referred to as a "server farm." This service presently is
being marketed solely to the telecommunications industry. The server farm
permits end users the ability to access and analyze information through the
internet. Data can be visually presented using the Company's patented data
visualization technology. Additionally, in June, 1998, the Company completed an
acquisition of software (and related sales and marketing rights) which is
designed to provide non computer literate owners (e.g. parents, guardians,
schools, etc) the ability to identify threats as well as objectionable material
which may be viewed by users of the computer on the internet (e.g. children).
-6-
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Nine Months Ended September 30, 1999 and 1998
3. Shareholders' Equity
During the nine month period ended September 30, 1999, the Company issued the
following restricted common stock:
i. As part of a bonus incentive compensation plan, the Company issued
665,500 shares (of which 10,000 were issued in the three month period
ended September 30, 1999) to several non-executive employees for which
it recorded a non cash charge to earnings of $1,010,000.
ii. Issued 660,500 shares of its common stock to various consultants for
whom it recorded a non cash charge to earnings of $1,050,000.
iii. In lieu of cash, in January, 1999, the Company issued 115,000 shares,
valued at $100,000, for an acquisition of a technology license. The
Company recorded amortization expense of $58,000 during the nine
months ended September 30, 1999.
Pursuant to a Board Resolution adopted in January, 1999, the Company was
authorized to repurchase shares of its common stock at times and amounts that
would be in the best interest of the Company. In the third quarter of 1999,
174,380 shares of common stock were purchased at an average price of $1.697. In
the fourth quarter of 1999, as of the filing date, an additional 62,200 shares
were repurchased at an average price of $1.552.
Pursuant to a Board Resolution adopted in August, 1999, the Company paid, on
November 15, 1999, a cash dividend of $6,000,000 (approximately $0.29 per share)
to shareholders of record as of September 30, 1999.
4. Legal matters
In March, 1995 an action was commenced against the Company and a number of
defendants unrelated to the Company (Barbara Merkens v Aval Guarantee Ltd.,
Walter Mennel, J. Forror, A. Faehndreich-Braun, T&M consulting AG, M. Schmidt,
E. G. Baltruschat and Computer Concepts Corp., United States District Court,
Eastern District of New York) which action was later amended naming as
defendants only the Company and three of its officers. The Company denied
plaintiff's allegations and filed a motion for summary judgment. On or about
November 8, 1999, the motion for summary judgment was granted in favor of the
Company and its officers subject only to the plaintiff's statutory rights of
appeal.
During February 1999, the Company and certain officers received notification
that they had been named as defendants in a class action alleging violations of
certain securities laws with respect to the content of certain Company
announcements. The Company and its counsel are vigorously defending the matter.
However, the Company is unable to predict the ultimate outcome of this claim
and, accordingly, no adjustments have been made in the consolidated financial
statements for any potential losses or potential issuance of common stock.
In August of 1999, the Company and its directors were served with a complaint
filed in the Chancery Court of Delaware, New Castle County (Nadef v. Daniel
DelGiorno, et al and Computer Concepts Corp. as Nominal Defendant, C.A. No.
17676-NC) as a derivative action alleging awards of excess compensation and
requesting a judgment in favor of the Company for such excess compensation. The
Company and defendants have denied the allegations and are vigorously defending
the matter, however, the Company is unable to predict the outcome of this claim
and, accordingly, no adjustments have been made in the consolidated financial
statements in regard to this matter.
-7-
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Nine Months Ended September 30, 1999 and 1998
5. Reclassifications
Certain reclassifications have been made to the condensed consolidated financial
statements shown for the prior year in order to have it conform to the current
year=s classifications.
6. Segment information
The Financial Accounting Standards Board issued Statement No. 131 ADisclosures
about Segments of an Enterprise and Related Information,@ which became effective
for the Company in 1998 and has been implemented for all periods presented. The
Company and its subsidiaries operate in two separate business segments, computer
software and professional services. The computer software segment, which
operates domestically, is primarily engaged in the design, development,
marketing and support of information delivery software products and software
products which are designed to provide non computer literate owners the ability
to identify threats as well as objectionable material which may be viewed by
users of the computer on the internet. Until March 31, 1999 (see Note 8), the
Company was also engaged in systems management software products for corporate
mainframe data centers. International operations pertaining to these systems
management software products included foreign subsidiaries located in the United
Kingdom, France, Brazil, Australia, Spain, Italy and Germany and several
international distributors primarily in Europe and Asia. The professional
services segment, which operates domestically, is primarily engaged in the
reselling of computer hardware, design, construction and installation of
technology systems, as well as marketing the d.b.Express Internet Information
Server, also referred to as a "server farm". Business information
<TABLE>
<CAPTION>
(In thousands) Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1999 1998(a) 1999(b) 1998(a)
---- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue
Computer Software $ 396 $ 10,824 $ 10,886 $ 25,810
Professional Services 410 1,926 13,533 6,045
------- -------- -------- --------
Total $ 806 $ 12,750 $ 24,419 $ 31,855
======= ======== ======== ========
Operating Income (loss)
Computer Software $ (6,593) $ (4,553) $(21,040) $(13,091)
Professional Services 117 46 1,055 352
------- -------- -------- --------
Total $ (6,476) $ (4,507) $(19,985) $(12,739)
======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Identifiable Assets At September 30, 1999 At December 31, 1998
--------------------- --------------------
<S> <C> <C>
Computer Software $31,800 $76,950
Professional Services 2,813 14,952
------- -------
Total $34,613 $91,902
======= =======
(a) Includes Softworks for the entire period
(b) Includes Softworks for the three months ended March 31, 1999
</TABLE>
-8-
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Nine Months Ended September 30, 1999 and 1998
In classifying business information into segments, the Company specifically
identifies revenue, expenses and identifiable assets of the professional
services segment; items not specifically identified are included in the computer
software segment.
<TABLE>
<CAPTION>
Geographical information:
(In thousands) Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998(a) 1999(b) 1998(a)
---- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue:
United States $795 $10,319 $21,173 26,066
International 11 2,431 3,246 5,789
---- ------- ------- -------
Total $806 $12,750 $24,419 $31,855
==== ======= ======= =======
Operating Income/(loss):
United States $(6,426) $(4,291) $(20,986) $(12,223)
International (50) (216) 1,001 (516)
------- ------- -------- --------
Total $(6,476) $(4,507) $(19,985) $(12,739)
======= ======= ======== ========
</TABLE>
<TABLE>
Identifiable Assets:
At September At December
30, 1999 31, 1999
------------ ------------
<S> <C> <C>
United States $34,613 $ 82,377
International - 9,525
------- --------
Total $34,613 $ 91,902
======= ========
(a) Includes Softworks for the entire period
(b) Includes Softworks for the three months ended March 31, 1999
</TABLE>
Major customer
For the three months ended September 30,1999 and 1998, the Company had one major
contract involving two customers, with combined revenues of $64,000 (7.94% of
total revenue) and $ 593,000 (4.65% of total revenue), respectively. For the
nine months ended September 30, 1999 and 1998, the Company had one major
contract involving two customers, with combined revenues of $12,546,000 (51.38%
of total revenue) and $3,690,000 (11.58% of total revenue), respectively. These
amounts are included in the Professional Services and Domestic categories.
-9-
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Nine Months Ended September 30, 1999 and 1998
7. Internet Tracking & Security Ventures, LLC
On June 30, 1998, pursuant to an Asset Purchase and Sale Agreement, the Company
acquired certain software and related sales and marketing rights from Internet
Tracking & Security Ventures, LLC ("ITSV") in exchange for 1,900,000 restricted
shares of the Company's common stock and 1,000,000 restricted shares of common
stock of the Company's then wholly owned subsidiary, Softworks. The acquired
software program, known as "ComputerCOP," is designed to inform non computer
literate parents, guardians and alike, what materials, or possible threats to
the safety and well being their children or others have been accessing over the
internet, such as objectionable web sites, text, pictures, screens, electronic
mail, etc. The Agreement also includes the rights to the use of Richard "Bo"
Dietl's name in conjunction with the promotion and endorsement of the software
as well as appearances by Mr. Dietl in support of the software in regional and
national marketing campaigns. Orders for the initial version of the product
began shipping during the fourth quarter, 1998.
The acquisition has been valued at an aggregate of $12,210,000 determined as
follows: 1,900,000 restricted shares of the Company have been valued at
$5,700,000 and the 1,000,000 restricted shares of Softworks' common stock have
been valued at $6,510,000 (based upon the ultimate net proceeds to the selling
shareholders in Softworks' initial public offering which became effective August
4, 1998). The $12,210,000 purchase price has been allocated to the fair value of
the assets acquired at June 30, 1998, based upon a written valuation from an
independent investment-banking firm. Accordingly, $2,700,000 has been allocated
to "Software costs", $4,150,000 has been recorded as "Prepaid expenses and other
current assets" and $5,360,000 has been recorded as "Excess of cost over fair
value of net assets acquired".
In March, 1999, the Company sold certain rights to license ComputerCOP to a
marketing company (Bo-Tel, Inc.) for $400,000. The license rights are limited to
granting a specified original equipment manufacturer of personal computers the
right to embed the software in its computers for sale to the general public.
Bo-Tel, Inc. is an affiliate of ITSV, and accordingly, this sale has been
accounted for as a reduction of the cost of the assets acquired from ITSV.
The software costs will be amortized using the greater of the ratio of current
revenue to the total projected revenue for the software or the straight-line
method using an estimated useful life of 30 months. The prepaid expenses were
expensed as the related services were performed (including, but not limited to,
appearances, promotion and endorsement), and such services were substantially
completed by the end of the third quarter of 1999. The excess of cost over fair
value of net assets acquired, which primarily relate to the use of the name "Bo
Dietl" will be amortized using the straight-line method over 36 months. However,
as a product that the Company has only recently commenced marketing, it is
reasonably possible that the estimates of anticipated future gross revenue, the
remaining economic life of the product, or both will be reduced significantly in
the near term due to the unpredictability of the product's market acceptance and
competitive pressures (including technological obsolescence). As a result, the
carrying amount of the assets acquired from ITSV (approximately $4,319,000 at
September 30, 1999) may be reduced materially in the near term.
8. GAIN ON PARTIAL DISPOSITION OF SUBSIDIARY
Prior to June 30, 1998, Softworks was a wholly owned subsidiary of the Company
with 14,083,000 shares of common stock outstanding. On August 4, 1998, Softworks
completed a public offering of 4,200,000 shares of its common stock at a price
of $7.00 per share (less underwriting fees and commissions of $0.49 per share)
as follows: 1,700,000 shares of common stock were sold by Softworks; 1,000,000
shares were sold by ITSV and 1,500,000 shares were sold by the Company.
Softworks common stock is traded on the NASDAQ National Market under the symbol
"SWRX."
In addition to the public offering discussed above, in 1998, the Company sold
1,000,000 shares of Softworks common stock for $5,000,000 (sold December 1998,
cash received first quarter 1999) and exchanged 1,877,700 shares of Softworks
common stock to employees and consultants for services rendered or to be
rendered. As a result of the various transactions described above, the Company's
ownership interest in Softworks was reduced from 100% to 54.5% as of December
31, 1998.
-10-
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Nine Months Ended September 30, 1999 and 1998
In January, 1999, the Company, through the exchange of 687,600 restricted shares
of Softworks common stock, further reduced its ownership interest from 54.5% to
50.2% as follows:
1. The Company issued as 1999 bonus incentive compensation, 298,000 restricted
shares of Softworks common stock to two executives, vesting 25% on January
1, 1999, 25% on April 1, 1999, 25% on July 1, 1999 and 25% on October
1,1999. These shares would fully vest in the event of the acquisition of
Softworks, or the Company by any third party. Accordingly, the Company will
record a non-cash charge to operations of $269,250 each quarter.
2. The Company issued 389,600 restricted shares of Softworks, as well as
80,000 contract options to acquire restricted shares of Softworks= common
stock owned by the Company, exercisable at $1.00 per share and expire
December 31, 1999 to various consultants (40,000 of these options were
exercised in June, 1999). The related contracts are for services to be
performed over time frames ranging from twelve to twenty-four months. The
$1,774,000 value of the shares and options will be charged to operations
over the terms of the related contracts.
As a result of the January, 1999, transactions, the Company recognized in the
first quarter a gain of $2,031,000, representing the difference between the fair
value of the Softworks common stock exchanged, and the related carrying value of
the Company's investment in Softworks.
In April, 1999, certain stock options previously granted by Softworks to its
employees and consultants were exercised, which had the effect of reducing the
Company=s ownership interest in Softworks from 50.2% to 49.7%. In June 1999,
Softworks completed a second public offering of 3,900,000 shares of its common
stock at a price of $10.50 per share (less underwriting fees and commissions of
$.63 per share) as follows: 1,000,000 shares were sold by Softworks, 1,256,933
shares were sold by the Company, and 1,643,067 shares were sold by other
existing shareholders. In conjunction with the offering, the Company issued
200,000 contract options to acquire restricted shares of Softworks common stock
owned by the Company to a consultant, exercisable at $1.00 per share, which
vested upon completion of the offering. The options were exercised in June 1999.
As a result of these transactions, the Company recognized a gain of $14,410,000
in the second quarter of 1999. As of September 30, 1999, the Company's ownership
of Softworks was 38.5%, or 6,505,767 shares of Softworks common stock.
Commencing April 1, 1999, Softworks' results are accounted for using the equity
method of accounting and are no longer consolidated. Under the equity method of
accounting, the Company's share of Softworks' earnings or losses is included in
the Company's consolidated operating results in a single line item. Summarized
financial information of Softworks for the three and nine months ended September
30, 1999 as well as pro forma consolidated financial information as if Softworks
were accounted for using the equity method for all prior periods presented is as
follows:
-11-
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Nine Months Ended September 30, 1999 and 1998
Softworks, Inc.
Summarized Financial Information
<TABLE>
<CAPTION>
Condensed Statement of Operations Condensed Balance Sheet
Three and nine months ended September 30, 1999 September 30, 1999
(in thousands) (in thousands)
Three Months Nine Months
Ended Ended
September 30, 1999 September 30, 1999
------------------ ------------------
<S> <C> <C> <C>
Current assets $43,977
Non-current assets 23,904
-------
Revenue $14,904 $36,777 $67,881
=======
Cost of revenue 753 2,248
------- -------
Gross margin 14,151 34,529 Current liabilities $24,019
Operating expenses 12,147 32,744 Non-current liabilities 15,596
------- -------
Operating income 2,004 1,785 Stockholders' equity 28,266
------- ------- -------
Net income $1,141 $ 946 $67,881
======= ======= =======
</TABLE>
Computer Concepts Corp. and Subsidiaries
Pro Forma Condensed Consolidated Balance Sheet
----------------------------------------------
December 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Pro-forma Pro-forma
Actual Adjustments Pro-forma Actual Adjustment Pro-forma
------ ----------- --------- ------ ---------- ---------
ASSETS LIABILITIES AND
SHAREHOLDERS'
EQUITY
<S> <C> <C> <C> <C> <C> <C>
Current Assets $63,742 $(38,282) $25,460 Current liabilities $36,173 $(26,501) $ 9,672
Long-term receivables 7,908 (7,908) - Deferred revenue 11,807 (11,764) 43
Property plant and equipment,
net 3,564 (2,499) 1,065 Long-term debt 1,403 (1,401) 2
-------- -------- --------
Software costs, net 5,594 (3,039) 2,555 Total liabilities 49,383 (39,666) 9,717
Goodwill, net 8,610 (4,143) 4,467
Other assets 2,484 (2,384) 100 Minority Interest 8,503 (8,503) -
Investment in subsidiary,
equity method - 10,086 10,086 Shareholders' equity 34,016 - 34,016
-------- -------- -------- -------- -------- --------
$91,902 $(48,169) $43,733 $91,902 $(48,169) $43,733
======== ======== ======== ======== ======== ========
</TABLE>
-12-
<PAGE>
Computer Concepts Corp. and Subsidiaries
Pro Forma Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the nine months ended September 30, 1999 For the nine months ended September 30, 1998
(in thousands) (in thousands)
Pro-forma Pro-forma
Actual Adjustments Pro-forma Actual Adjustment Pro-forma
------ ----------- --------- ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue $24,419 $(10,258) $14,161 $31,855 $(26,896) $ 4,959
Cost of Revenue 12,908 (764) 12,144 11,201 (6,310) 4,891
-------- -------- -------- -------- -------- --------
Gross Margin 11,511 (9,494) 2,017 20,654 (20,586) 68
-------- -------- -------- -------- -------- --------
Total Operating Expenses 31,496 (9,342) 22,154 33,393 (19,959) 13,434
-------- -------- -------- -------- -------- --------
Operating (loss) income (19,985) (152) (20,137) (12,739) (627) (13,366)
Other Income (expense)
Gain on partial disposition
of subsidiary 16,444 - 16,444 22,466 - 22,466
Interest (expense) income,
net 210 - 210 (732) 253 (479)
Minority interest expense (46) 46 - (275) 275 -
Equity in earnings of
Softworks 321 46 367 - 99 99
-------- -------- -------- -------- -------- --------
Income (loss) before provision
for income taxes (3,056) (60) (3,116) 8,720 - 8,720
Benefit from (provision for)
income taxes (102) 60 (42) 8 - 8
-------- -------- -------- -------- -------- --------
Net income (loss) $(3,158) $ - $ (3,158) $ 8,728 $ - $ 8,728
======== ======== ======== ======== ======== ========
</TABLE>
Computer Concepts Corp. and Subsidiaries
Pro Forma Condensed Consolidated Statements of Operations
For the three months ended September 30, 1998
(in thousands)
<TABLE>
<CAPTION>
Pro-forma
Actual Adjustments Pro-forma
------ ----------- ---------
<S> <C> <C> <C>
Revenue $ 12,750 $(11,247) $ 1,503
Cost of Revenue 3,929 (2,346) 1,583
-------- -------- --------
Gross Margin 8,821 (8,901) (80)
Total Operating Expenses 13,328 (8,136) 5,192
-------- -------- --------
Operating (loss) income (4,507) (765) (5,272)
-------- -------- --------
Other Income (expense)
Gain on partial disposition
of subsidiary 15,839 - 15,839
Interest (expense) income, net (173) 74 (99)
Minority interest expense (275) 275 -
Pro rata share of SOFTWORKS
equity changes - 416 416
-------- -------- --------
Income before provision (benefit)
for income taxes 10,884 - 10,884
Provision (benefit) for income taxes 8 - 8
-------- -------- --------
Net income $10,892 $ - $ 10,892
======== ======== ========
</TABLE>
-13-
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Nine Months Ended September 30, 1999 and 1998
9. Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, AAccounting for Income Taxes" (ASFAS 109"). SFAS 109 requires
the determination of deferred tax assets and liabilities based on the
differences between the financial statement and income tax bases of assets and
liabilities, using enacted tax rates SFAS No.109 requires that the net deferred
tax asset be adjusted by a valuation allowance, if, based on the weight of
available evidence, it is more likely than not that some portion or all of the
net deferred tax asset will not be realized.
Through August 4,1998, the results of the Company's U.S. operations conducted
through its Softworks subsidiary have been included in the Company's
consolidated Federal income tax returns. However, separate provisions for income
taxes have been determined for Softworks' wholly owned foreign subsidiaries that
are not eligible to be included in the U.S. Federal income tax returns. As a
result of the initial public offering of Softworks, the Company's ownership of
Softworks was reduced below 80% and Softworks is no longer eligible to be
included in the Company's consolidated Federal income tax returns.
It is expected that the Company will utilize a portion of its available net
operating loss carryforwards to substantially reduce the taxable income
resulting from the gain on partial disposition of Softworks.
-14-
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Nine Months Ended September 30, 1999 and 1998
10. Management's plans
Prior to 1998, the Company incurred substantial consolidated net losses and used
substantial amounts of cash in operating activities, which were primarily
financed through private placements of common stock and convertible debentures.
During 1998, and 1999, the Company continued to use substantial amounts of cash
in its operations, however, cash requirements were primarily financed through
Softworks initial public offering and additional sales of Softworks common
stock. Management=s current plan is focused on becoming a preeminent provider of
innovative software products and services which are, and continue to be designed
and developed to:
-- break down barriers between people and data;
-- exploit the Company=s patented technologies;
-- capitalize on the internet marketplace.
The Company is currently focusing on five general product or services
categories:
1. The continued marketing of the d.b.Express Internet Information Server
Services (the "Server Farm");
2. Continue to explore the use of the d.b.Express technology through the
development of new vertical markets;
3. Continue to develop its Professional Services division;
4. Capitalize on the growth of the internet through the sale of ComputerCOP;
and
5. Continue the development of new products and services.
Additionally, the Company continues to reexamine its long-term business
strategy.
While management believes that its plan will ultimately enable them to achieve
positive cash flows from operations, until such time, additional cash may be
necessary to implement such plan. Although there can be no assurances,
management has several alternative sources to fund the development of its plan,
including additional debt and equity financing (if necessary), or additional
sales of its investment in Softworks common stock, which, as a consequence of
Softworks initial public offering, became a readily marketable asset (see Note
8).
-15-
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND LIQUIDITY
For the Three and Nine Months Ended September 30, 1999 and 1998
Forward-Looking Statements.
All statements other than statements of historical fact included in this Form
10-Q including, without limitation, statements under, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" regarding the
Company's financial position, business strategy and the plans and objectives of
management for future operations, are forward-looking statements. When used in
this Form 10-Q, words such as "anticipate," "believe," "estimate," "expect,"
"intend" and similar expressions, as they relate to the Company or its
management, identify forward-looking statements. Such forward-looking statements
are based on the beliefs of management, as well as assumptions made by, and
information currently available to, the Company's management. Actual results
could differ materially from those contemplated by the forward-looking
statements as a result of certain factors including but not limited to,
fluctuations in future operating results, technological changes or difficulties,
management of future growth, expansion of international operations, the risk of
errors or failures in the Company's software products, dependence on proprietary
technology, competitive factors, risks associated with potential acquisitions,
the ability to recruit personnel, and the dependence on key personnel. Such
statements reflect the current views of management with respect to future events
and are subject to these and other risks, uncertainties and assumptions relating
to the operations, results of operations, growth strategy and liquidity of the
Company. All subsequent written and oral forward-looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by this paragraph.
Overview
Computer Concepts Corp. and subsidiaries (the "Company") design, develop, market
and support information delivery software products, including end-user data
access tools for use in personal computer and client/server environments.
Through Softworks, the Company developed, marketed and supported systems
management software products for corporate mainframe data centers. The Company
makes use of its proprietary data access technology, d.b.ExpressJ in its
d.b.ExpressJ Internet Information Server, more commonly referred to as a "server
farm." This service presently is being marketed solely to the telecommunications
industry. The server farm permits end users the ability to access and analyze
information through the internet. Data can be visually presented using the
Company's patented data visualization technology. In 1997, the Company created a
business unit, "professional services" , which primarily resells computer
hardware and for a fee, will assist in the design, construction and installation
of technology systems. Additionally, in June, 1998, the Company completed an
acquisition of software (and related sales and marketing rights) which is
primarily designed to provide non computer literate owners (e.g. parents,
guardians, schools, etc) the ability to identify threats as well as
objectionable material which may be viewed by users of the computer on the
internet (e.g. children). The Company currently consists of three product lines:
professional services, d.b.ExpressJ Internet Information Server services
(reported with professional services in the accompanying financial statements),
and software technology and related sales and marketing rights, acquired in
June, 1998 (marketed as "ComputerCOP"). d.b.ExpressJ technology, a
visually-based proprietary software tool, can provide businesses with a simple,
fast, low-cost method of finding, organizing, analyzing and using information
contained in databases. During 1997, the Company commenced operations of the
professional services unit. The professional services unit offers solutions,
support and strategies to solve various business crises in such areas as:
selection and reselling of hardware, network determination, help desk
applications, wiring/cabling, LAN connections, moves/adds/changes, and project
management. Additionally, this unit could oversee new installations as well as
offering on-site component repair. ComputerCOP is designed to provide non
computer literate owners (e.g. parents) the ability to identify threats as well
as objectionable material which may be viewed by users of the computer on the
internet (e.g. children).
Orders for the initial version of the product began shipping during the fourth
quarter, 1998. The method of revenue recognition for each product line is
dependent upon the type and manner of service provided and or the terms of
product sales. Further, the Company is in the process of developing a unique
media station display which will combine internet strategy and e-commerce with
multi-media forms of delivery, presentation and interaction with end-users. This
internet based communications/advertising network is being designed to create a
means by which businesses can promote specific brand/product/service awareness.
The Company intends to market this technology in association with owners and/or
-16-
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND LIQUIDITY
For the Three and Nine Months Ended September 30, 1999 and 1998
managers of high traffic venue areas (i.e.malls, airports, etc.) to local,
regional and national businesses. This business concept will require additional
capital in order to complete its development and to support its marketing plan.
In order to achieve its goal, the Company intends to partner or co-venture with
various potential investors and strategic partners.
As described above in Note 8, during the three months ended June 30, 1999, the
Company's ownership interest in Softworks fell below 50%. Accordingly, the
financial results of Softworks are not consolidated with the Company commencing
with the quarter ending June 30, 1999.
Results of Operations
Commencing April 1, 1999, Softworks' results are accounted for using the equity
method of accounting and are no longer consolidated. Under the equity method of
accounting, the Company's share of Softworks' earnings or losses is included in
the Company's consolidated operating results in a single line item. Summarized
financial information of consolidated operating results with Softworks accounted
for using the equity method for the three and nine months ended September 30,
1999 and 1998 is as follows:
Computer Concepts Corp. and Subsidiaries
Actual and Pro Forma Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the three months ended September For the nine months ended September 30,
--------------------------------------- ---------------------------------------
(in thousands) (in thousands)
1999 1998 1999 1998
(Actual) (Pro-forma) (Pro-forma) (Pro-forma)
-------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue
Software licenses, net $ 385 $ 23 $ 596 $ 49
Maintenance 11 11 32 32
Professional services 410 1,469 13,533 4,878
-------- -------- -------- --------
806 1,503 14,161 4,959
Cost of Revenue
Software licenses 157 8 218 72
Maintenance - - - -
Professional services 109 1,350 11,926 4,142
-------- -------- -------- --------
Gross margin 540 145 2,017 745
-------- -------- -------- --------
Research and development costs 2,081 1,089 5,324 3,188
Sales and marketing costs 2,607 2,048 9,066 5,879
General and administrative costs 1,309 1,417 4,776 3,958
Amortization and depreciation 1,019 863 2,988 1,086
-------- -------- -------- --------
7,016 5,417 22,154 14,111
-------- -------- -------- --------
Operating loss (6,476) (5,272) (20,137) (13,366)
Gain on partial disposition
of subsidiary (see Note 8) 3 15,839 16,444 22,466
Other 598 325 535 (372)
-------- -------- -------- --------
Net income (loss) $(5,875) $10,892 $(3,158) $8,728
-------- -------- -------- --------
</TABLE>
-17-
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND LIQUIDITY
For the Three and Nine Months Ended September 30, 1999 and 1998
The following discussion about the "results of operations" is based on the
operating results as presented in the above table.
Total revenue for the three and nine-month periods ended September 30, 1999 when
compared to the same time frames in the prior year, decreased $697,000 and
increased $9,202,000, respectively. Revenue derived from a now completed
contract included in professional services decreased approximately $1,344,000 to
$75,000 for the three months ended September 30, 1999 when compared to the three
months ended September 30, 1998. However, this contract resulted in a $7,906,000
increase in professional service revenue for the nine months ended September 30,
1999 as compared to the same period in the prior year. The Company is currently
pursuing additional contracts, however, there can be no assurances that the
Company will be successful in obtaining these contracts. Included in
professional services is revenue generated from the server farm. At present,
this technology has been developed to provide services solely to the
telecommunications industry. For the three months ended September 30, 1999 and
1998, revenue was $335,000 and $50,000, respectively. For the nine months ended
September 30, 1999 and 1998, revenue was $987,000 and $238,000, respectively.
The Company is currently negotiating/finalizing contracts with several new
customers, which if consummated, should increase the monthly revenue.
Substantially all of the revenue in the software license category relates to
ComputerCOP. The Company began shipping the initial version of ComputerCOP
during the last quarter of 1998 to various distributors, retailers, and
individuals. Since shipments are made with right of return, the Company delays
the recognition of revenue until the requirements of Statement of Financial
Accounting Standards No. 48, "Revenue Recognition When Right of Return Exists"
have been met. The Company anticipates releasing ComputerCOP Deluxe, which is a
new version with several new features and enhancements, primarily designed for
individual consumers. Further, the Company also plans to release two completely
new versions, ComputerCOP Professional and ComputerCOP Forensic, for which
orders have already been received. ComputerCOP Professional and ComputerCOP
Forensic are primarily designed for law enforcement professionals, such as
police departments, parole officers and other government agencies.
The cost of revenue for professional services, as a percentage of its revenue,
decreased from 91.9% for the quarter ended September 30, 1998, to 26.6% for the
quarter ended September 30, 1999, and increased from 84.9% for the nine months
ended September 30, 1998 to 88.1% for the nine months ended September 30, 1999.
The cost of revenue consists primarily of amounts paid to the Company's
suppliers for goods and services related to the resale of computer hardware and
related services in its professional services unit. The cost of revenue related
to the server farm primarily consists of the direct labor associated with
processing call detail records. The depreciation of the server farm's hardware
is included in "Amortization and depreciation." Cost of revenue with respect to
ComputerCOP is currently running at approximately 37%. The Company expects to
improve its margins as volume increases. Further, the Company anticipates that
based upon the expected selling price of ComputerCOP Professional and
ComputerCOP Forensic, gross margins should improve. The amortization costs of
the purchased software technology related to ComputerCOP are included in
"Amortization and depreciation."
-18-
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND LIQUIDITY
For the Three and Nine Months Ended September 30, 1999 and 1998
Research and development costs for the three-month period ended September 30,
1999, increased approximately $992,000 to $2,081,000 when compared to the
three-month period ended September 30, 1998. For the nine months ended September
30, 1999, costs increased $2,136,000 to $5,324,000 when compared to the nine
months ended September 30, 1998. Approximately $1,355,000 and $2,975,000 of
additional expense was incurred in connection with the development of the
multi-media technology during the three and nine month periods ended September
30, 1999. A portion of these variances, $675,000 paid to an entity, is
attributable to costs associated with the initial concept and designs, early
stage development and implementation of the internet multi-media technology.
Offsetting these increases were reductions in expenditures relating to further
development of d.b.Express technology.
Sales and marketing expenses increased $559,000 to $2,607,000 for the three
month period ended September 30, 1999, when compared to $2,048,000 for the same
period in the prior year and increased $3,187,000 to $9,066,000 for the nine
month period ended September 30, 1999, when compared to $5,879,000 for the same
period in the prior year. For the nine months ended September 30, 1999, a major
portion of the variance pertains to the increase in the non-cash charge of
approximately $2,286,000 related to appearances and product endorsements made on
behalf of ComputerCOP. Additionally, the Company expended approximately $500,000
in its efforts to market ComputerCOP (no expense for the nine months ended
September 30, 1998 as the Company had not commenced marketing the product). The
Company has also incurred an additional $375,000 of sales and commission
expenses related to the resale of computer hardware and related services in its
professional services division when compared to the same period in 1998. Also,
the Company incurred approximately $431,000 in its effort to market the
multi-media display still under development. Offsetting these items is a
reduction in expenditures for outside consultants of approximately $543,000. The
balance of the sales and marketing costs relate to the Company's server farm (in
the telecommunications industry as well as exploring new vertical market
applications) and marketing research for products and services currently under
development. While sales and marketing expenses have risen, the Company believes
that its expenditures are necessary in order to maintain and improve market
position and product recognition.
General and administrative costs decreased $108,000 to $1,309,000 for the three
months ended September 30, 1999, when compared to the three months ended
September 30, 1998, and increased $818,000 to $4,776,000 for the nine months
ended September 30, 1999, when compared to the nine months ended September 30,
1998. Major factors contributing to this latter increase are expanded staffing
levels, which the Company believes necessary in order to support anticipated
growth, legal expenses the Company has incurred in defending itself from the
class action law suit, and non-cash executive compensation.
Amortization and depreciation expenses increased $156,000 when comparing the
three-month periods ended September 30, 1999 and September 30, 1998. Further, it
increased $1,902,000 when comparing the nine-month periods ended September 30,
1999 and September 30, 1998. The increases are primarily attributable to the
purchased software and goodwill acquired in the ComputerCOP transaction (see
Note 7).
Gain on partial disposition of subsidiary - see Note 8.
Liquidity and Capital Resources
For the nine-month period ended September 30, 1999, net cash used by operating
activities was $746,000. The Company had one major contract involving two
customers that provided approximately $8,850,000 net cash for the nine-month
period ended September 30, 1999, primarily as a result of timing differences
between accounts receivable and accounts payable. The Company is currently
pursuing additional contracts, however, there can be no assurances that the
Company will be successful in obtaining these contracts.
Net cash provided by investing activities of $9,617,000 was primarily
attributable to the proceeds from sales of Softworks common stock and the
exercises of options to purchase Softworks common stock, totaling $17,646,000
offset by the reduction in cash of $6,759,000 attributable to excluding
Softworks from consolidation (see Note 8). Additionally, capital expenditures
for the nine month period ended September 30, 1999 totaled approximately
$1,391,000.
-19-
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND LIQUIDITY
For the Three and Nine Months Ended September 30, 1999 and 1998
During November, 1998, the parent Company entered into an Accounts Receivable
Purchase Agreement, whereby the Company from time to time may, on a full
recourse basis, assign some of their accounts receivable. Upon specific invoice
approval, an advance of 85% of the underlying receivable is provided to the
Company. The remaining balance (15%), less an administrative fee of
approximately 2% plus interest at the rate of 1 1/2% per month, is paid to the
Company once the customer has paid. This agreement expires in November, 1999.
During the first quarter of 1999, the Company repaid $4,172,000 of related debt
and at September 30, 1999, there were no receivables assigned or any amount due
the lender.
Prior to 1998, the Company incurred substantial consolidated net losses and used
substantial amounts of cash in operating activities, which were primarily
financed through private placements of common stock and convertible debentures.
During 1998, and 1999, the Company continued to use substantial amounts of cash
in its operations, however, cash requirements were primarily financed through
Softworks initial public offering and additional sales of Softworks common
stock. At September 30, 1999, and December 31, 1998 (excluding Softworks), the
Company had working capital of $9,277,000 (unaudited) and $15,788,000
(unaudited), respectively. As of November 16, 1999, the Company had cash and
cash equivalents totaling approximately $4,972,000 (unaudited), after taking
into account the $6,000,000 dividend paid on November 15, 1999. (see Note 3).
Management's current plan is focused on becoming a preeminent provider of
innovative software products and services which are, and continue to be designed
and developed to:
-- break down barriers between people and data;
-- exploit the Company=s patented technologies;
-- capitalize on the internet marketplace.
The Company is currently focusing on five general product or services
categories:
1. The continued marketing of the d.b.Express Internet Information Server
Services (the "Server Farm");
2. Continue to explore the use of the d.b.Express technology through the
development of new vertical markets;
3. Continue to develop its Professional Services division;
4. Capitalize on the growth of the internet through the sale of ComputerCOP;
and
5. Continue the development of new products and services.
Additionally, the Company continues to reexamine its long-term business
strategy.
While management believes that its plan will ultimately enable them to achieve
positive cash flows from operations, until such time, additional cash may be
necessary to implement such plan. Although there can be no assurances,
management has several alternative sources to fund the development of its plan,
including additional debt and equity financing (if necessary), or additional
sales of its investment in Softworks common stock, which, as a consequence of
Softworks initial public offering, became a readily marketable asset (see Note
8).
-20-
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND LIQUIDITY
For the Three and Nine Months Ended September 30, 1999 and 1998
YEAR 2000 ISSUES
Background. Some computers, software, and other equipment include programming
code in which calendar year data is abbreviated to only two digits. As a result
of this design decision, some of these systems could fail to operate or fail to
produce correct results if "00" is interpreted to mean 1900, rather than 2000.
These problems are widely expected to increase in frequency and severity as the
year 2000 approaches, and are commonly referred to as the "Millennium Bug" or
"Year 2000 Problem".
Assessment. The Year 2000 Problem could affect computers, software, and other
equipment used, operated, or maintained by the Company. Accordingly, the Company
is reviewing its internal computer programs and systems to ensure that the
programs and systems will be Year 2000 compliant. The Company presently believes
that its computer systems will be Year 2000 compliant in a timely manner.
However, while the estimated cost of these efforts is not expected to be
material to the Company's overall financial position, or any year's results of
operations, there can be no assurance to this effect.
Software Sold to Consumers. The Company believes that it has substantially
identified and resolved all potential Year 2000 Problems with any of the
software products it develops and markets. However, management also believes
that it is not possible to determine with complete certainty that all Year 2000
Problems affecting the Company's software products have been identified or
corrected due to complexity of these products and the fact that these products
interact with other third party vendor products and operate on computer systems
which are not under the Company's control.
Internal Infrastructure. The Company believes that it has identified
substantially all of the major computers, software applications, and related
equipment used in connection with its internal operations that must be modified,
upgraded, or replaced to minimize the possibility of a material disruption to
its business. The Company has commenced the process of modifying, upgrading, and
replacing major systems that have been identified as adversely affected, and
expects to complete this process before year end.
Systems Other than Information Technology Systems. In addition to computers and
related systems, the operation of office and facilities equipment, such as fax
machines, photocopiers, telephone switches, security systems, elevators, and
other common devices may be affected by the Year 2000 Problem. The Company is
currently assessing the potential effect of, and costs of remediating the Year
2000 Problem on its office and facilities equipment and expects to complete such
assessment by year end. The Company estimates the total cost to the Company of
completing any required modifications, upgrades, or replacements of these
internal systems will not have a material adverse effect on the Company's
business or results of operations. This estimate is being monitored and will be
revised as additional information becomes available.
Suppliers. The Company has initiated communications, including surveys, with
third party suppliers of the major computers, software, and other equipment
used, operated, or maintained by the Company to identify and, to the extent
possible, to resolve issues involving the Year 2000 Problem. However, the
Company has limited or no control over responses to its inquiries and the
actions of these third party suppliers. Thus, while the Company does not
anticipate any significant Year 2000 Problems with these systems, there can be
no assurance that these suppliers will resolve any or all of their Year 2000
Problems with these systems before the occurrence of a material disruption to
the business of the Company or any of its customers. Any failure of these third
parties to resolve Year 2000 problems with their systems in a timely manner
could have a material adverse effect on the Company's business, financial
condition, and results of operations.
-21-
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND LIQUIDITY
For the Three and Nine Months Ended September 30, 1999 and 1998
Most Likely Consequences of Year 2000 Problems. The Company expects to identify
and resolve all Year 2000 Problems that could materially adversely affect its
business operations. However, management believes that it is not possible to
determine with complete certainty that all Year 2000 Problems affecting the
Company have been identified or corrected. The number of devices that could be
affected and the interactions among these devices are simply too numerous. In
addition, one cannot accurately predict how many Year 2000 Problem-related
failures will occur or the severity, duration, or financial consequences of
these perhaps inevitable failures. As a result, management expects that the
Company could likely suffer the following:
1. a significant number of operational inconveniences and inefficiencies for
the Company and its customers that may divert management's time and
attention and financial and human resources from its ordinary business
activities; and
2. a lesser number of serious system failures that may require significant
efforts by the Company or its customers to prevent or alleviate material
business disruptions, and
3. the inability to determine with any degree of certainty, the changes if
any, in buying habits of its current and potential customers due to their
concerns over Year 2000 issues.
Contingency Plans. The Company has developed contingency plans to be implemented
in the event of any Year 2000 problems affecting its internal systems. Depending
on the systems affected, these plans could include the use of Company owned
cellular telephones, conducting business from alternative locations, accelerated
replacement of affected equipment or software, short to medium-term use of
backup equipment and software, and possible increased work hours for Company
personnel or use of contract personnel to correct on an accelerated schedule any
Year 2000 problems that arise or to provide manual workarounds for information
systems, and similar approaches. If the Company is required to implement any of
these contingency plans, it could have a material adverse effect on the
Company's financial condition and results of operations.
Disclaimer. The discussion of the Company's efforts, and management's
expectations, relating to Year 2000 compliance are forward-looking statements.
The Company's ability to achieve Year 2000 compliance and the level of
incremental costs associated therewith, could be adversely impacted by, among
other things, the availability and cost of programming and testing resources,
vendors' ability to modify proprietary software, and unanticipated problems
identified in the ongoing compliance review.
-22-
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
PART II - OTHER INFORMATION
For the Three and Nine Months Ended September 30, 1999 and 1998
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K Not applicable.
Not applicable
-23-
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
PART II - OTHER INFORMATION
For the Three and Nine Months Ended September 30, 1999 and 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMPUTER CONCEPTS CORP.
/s/ Daniel DelGiorno, Jr.
Daniel DelGiorno Jr. President, C.E.O. Treasurer, November 19, 1999
Director
/s/ George Aronson
George Aronson Chief Financial Officer November 19, 1999
-24-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the quarterly period ending September 30, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 13,702
<SECURITIES> 11
<RECEIVABLES> 1,172
<ALLOWANCES> 361
<INVENTORY> 250
<CURRENT-ASSETS> 17,071
<PP&E> 3,501
<DEPRECIATION> 2,048
<TOTAL-ASSETS> 34,613
<CURRENT-LIABILITIES> 7,794
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 26,806
<TOTAL-LIABILITY-AND-EQUITY> 34,613
<SALES> 806
<TOTAL-REVENUES> 806
<CGS> 266
<TOTAL-COSTS> 7,016
<OTHER-EXPENSES> 643
<LOSS-PROVISION> (5,833)
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> (5,833)
<INCOME-TAX> 42
<INCOME-CONTINUING> (5,875)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,875)
<EPS-BASIC> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
