UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-20660
COMPUTER CONCEPTS CORP.
(Exact name of registrant as specified in its charter)
Delaware 11-2895590
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 Orville Drive, Bohemia, N.Y. 11716
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 244-1500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Title of each class Name of each exchange on which registered
-------------------- -----------------------------------------
Common Stock, par value $.0001 NASDAQ
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 26 1999, there were 20,370,837 shares of the registrant's Common
Stock outstanding. The aggregate market value of the Common Stock held by
non-affiliates was approximately $30,556,000 based on the closing sale price of
the Common Stock as quoted on the NASDAQ on such date.
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Computer Concepts Corp and Subsidiaries
Form 10-K for the Year Ended December 31, 1998
Table of Contents
PART I
PAGE
----
ITEM 1 Business 3
ITEM 2 Properties 13
ITEM 3 Legal Proceedings 13
ITEM 4 Submission of Matters to a Vote
of Security Holders 15
PART II
ITEM 5 Market for Registrant's Common Equity
and Related Stockholder Matters 16
ITEM 6 Selected Consolidated Financial Data 17
ITEM 7 Management's Discussion and Analysis
of Financial Condition and
Results of Operations 18
ITEM 7a Quantitative and Qualitative Disclosures
About Market Risk 23
ITEM 8 Financial Statement and Supplementary Data 23
ITEM 9 Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure 23
PART III
ITEM 10 Directors and Executive Officers of the Registrant 24
ITEM 11 Executive Compensation 26
ITEM 12 Security Ownership of Certain Beneficial Owners and
Management 28
ITEM 13 Certain Relationships and Related Transactions 28
PART IV
ITEM 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 29
SIGNATURE 31
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Item 1. BUSINESS
INTRODUCTION
The Company was organized under the name Unique Ventures, Inc. as a "blind
pool" public company, under the laws of the State of Delaware on August 27,
1987, and changed its name to Computer Concepts Corp. in 1989. Computer Concepts
Corp. and its subsidiaries (hereinafter referred to as "Computer Concepts" or
the "Company") operate in the computer software industry segment and design,
develop, market and support information delivery software products, including
end-user data access tools for personal computers and client/server
environments, and develop, market and support systems management software
products for corporate mainframe data centers. During 1997, a new business unit
commenced operations which is designed to provide a wide array of information
technology, support and services. In 1998, the Company acquired software
technology rights as well as certain marketing rights for a system which
monitors internet usage. The Company has been built through a combination of
development, acquisitions and a strategic partnership.
During the years 1989 through 1992, the Company was primarily engaged in
research and development activities regarding its primary product,"d.b.Express."
During 1993, the Company began to expand its product, sales, marketing and
administrative activities, and began the transition from a research and
development-oriented company into a market-driven software products business. In
1994, the Company continued the process of evaluating its businesses and
determining where its strategic focus and financial and management resources
should be directed, and as a result, the Company adjusted the value of certain
assets to reflect their net realizable value and management's current operating
plan. In 1995, the Company decided to focus its activities on Softworks, Inc.
and the exploitation of the parent Company's d.b.Express software technology. As
such, in 1996, it sold its "Superbase" technology assets and in 1997 sold the
net assets of its MapLinx Inc. subsidiary.
See Note 3 of Notes to Consolidated Financial Statements for the year ended
December 31, 1998, for further explanations of all acquisitions and
dispositions.
In October 1990, Computer Concepts acquired RAMP Associates, Inc. ("RAMP"),
a privately owned Delaware corporation engaged in general computer consulting
services. RAMP was previously owned by Russell Pellicano, the inventor of
d.b.Express, and currently a director and officer of the Company. During the
fourth quarter of 1993, in connection with its long-term strategic plan, the
Company eliminated its general computer consulting service line, taking a charge
for the write-off of the unamortized goodwill associated with RAMP as well as
the accrual of certain severance costs.
Effective September 1993, the Company acquired Softworks, Inc.
("Softworks"), a private Maryland company founded in 1977, and an acknowledged
leading provider of critical systems management solutions.In August, 1998,
Softworks completed a public offering, after which the Company's ownership
interest was reduced to approximately 72%. Additional transactions, as described
in Note 3 to the Consolidated Financial Statements, further reduced the
Company's ownership interestin Softworks to 50.2%. Softworks has over 6,000
licenses of its products in use at over 2,000 installations worldwide, including
installations at approximately 87% of the Fortune 100. Softworks' common stock
is traded on the NASDAQ National Market under the symbol, "SWRX".
During June 1994, the Company completed the purchase of the Superbase
technology and certain related assets from Software Publishing Corporation.
Superbase is a database programming language. The Company sold this asset in the
second quarter of 1996.
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During December 1994, the Company acquired MapLinx, Inc. ("MapLinx"), a
provider of PC based software that allows for geographical presentation of
database information. In conjunction with the Company's decision to focus its
activities on exploitation of the d.b.Express technology and its Softworks
subsidiary, the Company sold the net assets of MapLinx in 1997.
On June 30, 1998, pursuant to an Asset Purchase and Sale Agreement, the
Company acquired certain software and related sales and marketing rights. The
acquired software technology, marketed under the trade name Bo Dietl's One Tough
Computer Cop ("ComputerCop"), is designed to inform non computer literate
parents, guardians and alike, what materials, or possible threats to the safety
and well being of their children or others has been accessed over the internet,
such as objectionable web sites, text, pictures, screens, electronic mail, etc.
The Agreement also includes the rights to the use of Richard "Bo" Dietl's name
in conjunction with the promotion and endorsement of the software as well as
appearances by Mr. Dietl in support of the software in regional and national
marketing campaigns. Orders for the initial version of the product began
shipping in November, 1998.
The Company's strategic plan is focused on becoming a preeminent provider
of innovative software products which break down barriers between people and
data (thereby allowing corporate users to more easily access enterprise-wide
data) through sales of existing products and new technologies as well as
continuing to support the Softworks' mainframe sector. In addition, this plan
includes, among other factors, the exploitation of the Company's proprietary
technology, d.b.Express, primarily through the development of several vertical
markets. Telecommunications is presently being targeted as one of the first
vertical markets. Further, the Company will also focus on the development of its
professional services segment as well as the newly acquired technology,
ComputerCop.
PRODUCTS
d.b.Express
d.b.Express provides business with a simple, fast, low-cost method of
finding, organizing, analyzing and using information contained in databases over
the internet. The software employs a unique graphical user interface ("GUI")
that enables users to directly access and use information contained in
relational and pseudo-relational databases created by many database management
systems ("DBMS") on the market. In addition, this proprietary software tool has
the ability to directly utilize information obtained from spreadsheets and data
in the form of American Standard Code for Information Interchange ("ASCII")
files. The technology enables users to analyze millions of records over the
Internet without the need to first download the data being analyzed.
Telecommunications industry specific applications of the technology have been
developed and is being marketed.
d.b.Express does not replace DBMS programs. Instead, it improves the
accessibility of databases created by DBMS by eliminating the need to write
queries in computer code and facilitates data searches through the use of
graphical query tools. Prior to the availability of d.b.Express, comparable
analytical and presentation capabilities were possible only through costly
executive information systems ("EIS") or customized programs developed and
supported by highly-skilled MIS professionals. The need for MIS professionals
and programming effectively raises the cost of access to information in terms of
time and money. Ultimately, these barriers result in less timely and lower
quality business decision-making.
There are some DBMS access tools on the market that claim to eliminate the
need to use computer code and provide graphical query capability. All of these
programs, however, only simplify the writing of computer code, usually through
industry-standard structured query language ("SQL"), by having users develop
logic in a semi-procedural facility. While reducing some problems associated
with the writing of computer code, such as "typographical errors", they do not
eliminate the need for knowledge of computer code or database structure and
organization, and require significant training of the user. d.b.Express enables
the access and productive use of complex databases without computer programming
or knowledge of SQL.
d.b.Express approaches database accessibility uniquely, enabling people at
all levels of an organization to analyze the data without any knowledge of
programming. d.b.Express achieves this in two steps. First, d.b.Express,
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utilizing proprietary algorithms, accesses and automatically summarizes all of
the records in the required databases into its own format. Second, the software
presents users with an intuitive multi-dimensional picture of the data which the
user can easily customize to his need with a simple point and click interface.
In addition to a vast simplification of database access and analysis,
d.b.Express performs these tasks faster than any DBMS because the software does
not reread the database for each task; it only reads the summaries it has
created.
The d.b. Express Internet Information Server is an Internet database
information service. This service makes use of its proprietary data access
technology by providing Internet access to detail telephone records for
customers both in the U.S. and Great Britain. With this service, customers can
access via the Internet, numerous telephone call records. Data can be visually
presented using the Company's patented data visualization technology. The
technology provides users with a "Filescape"TM (an all encompassing picture of
data similar to a landscape picture) from which users are able to perform
point-and-click, ad hoc queries in order to discover anomalies, trends and
misuse of their data, and, if desired, infinite drill down to individual detail
records. This is accomplished within seconds, rather than hours, which the
Company believes could create cost savings and operational efficiencies.
Customers are able to review and analyze their telephone usage at the detail
level, and are able to review and, if desired, print standard pre-generated
reports, ad hoc reports based on predefined templates, or define and
review/print their own and ad hoc reports, all without taking delivery of the
large volume of data required. In order to meet the archival requirements of
customers, the Company produces CDs of each month's billing details. In order to
provide this service, the Company has put into place a comprehensive data
center. The service is available on a seven day/24 hour a day basis.
The advantages inherent to d.b.Express include the following:
Ease of Use
Using the analogy of an automatic camera, d.b.Express simplifies data
access and analysis by providing a sophisticated, simple-to-use vehicle to take
pictures of complex data. By combining an intuitive point and click interface
with a powerful integration and retrieval engine in a low-cost product,
d.b.Express breaks down the barriers between people and data. After d.b.Express
has read one or more databases, the data is presented to the user in a
"filescape" using a common bar chart metaphor. The user merely points to a bar
in the chart and clicks to view data from the highest summary level to the
lowest level of detail. d.b.Express provides powerful desktop functionality that
allows the exploration of data patterns, trends, and exceptions. Data searches,
queries and analyses can be converted to sophisticated, but simple to use
presentations providing integrated business graphics and report writing
capabilities.
Interfaces With Leading Databases and Other Tools
d.b.Express provides direct access to leading databases created by DBMS
vendors, including CA-Clipper, Microsoft Access, Foxbase and FoxPro, Lotus
Approach, Borland dBase and Paradox, Oracle, Informix, Sybase, Ingres, SQL
Server, IBM DB2 and DB2/2, Netware SQL, Gupta SQL Base, Progress, XDB, SQL/DS,
Teradata and Btrieve. These DBMS's represent more than 85% of the installed
relational database management systems ("RDBMS") worldwide. In addition,
d.b.Express is able to access data contained in spreadsheets and read data in
ASCII format which further broadens the software s capability with other DBMS
products. d.b.Express results can be exported to popular spreadsheets, report
writers, graphics packages and word processors including Lotus 1-2-3, Excel,
Quattro Pro, ReportSmith, Crystal Reports, Harvard Graphics, Power Point,
WordPerfect and Word.
Ability To Integrate Data From Databases Created By Multiple Vendors
When d.b.Express reads a database it creates its own summaries of
information through its proprietary process. Information contained in databases
is formatted into d.b.Express proprietary format. This permits users to access
and compare information contained in enterprise-wide databases created by
different vendors simultaneously in the d.b.Express user-friendly environment.
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Works in Common Operating Environments
d.b.Express operates in virtually all file server and peer-to-peer
networking environments providing data to Microsoft Windows and Windows NT
workstations. Computer Concepts, through technology synergies afforded by
Softworks, is designing extensions to d.b.Express that can be installed on
mainframes. The ability to operate on mainframes would open substantial new
markets for the application of d.b.Express.
High Processing Speed
Once a database has been read by d.b.Express, d.b.Express employs
proprietary matrix storage technology rather than rereading each data element in
that database. All packaged DBMS reread every single data element each time a
task, such as sorting or analysis, is performed. The elimination of the
rereading step through d.b.Express proprietary process vastly increases the
speed of data access enabling ad hoc analysis at a rate far faster than possible
with any other system. The advantage of the d.b.Express process over other
processes increases with the size and complexity of the database.
d.b.Express breaks down barriers between people and data by eliminating the
need for SQL expertise, saving time by gaining decision-critical information
through rapid data access and analysis, and saving money through minimal
training investment and cost-effective product implementation.
Windows Version 1.0 of d.b.Express was introduced in December 1993 and the
DOS version was introduced in late 1992. Windows Version 2.0, with significantly
enhanced functionality based on user feedback, was introduced in the second
quarter of 1994 and Windows 95 Version was introduced in the third quarter of
1995. Windows NT, Internet Server and JAVA Applet versions have been introduced
in 1996 and 1997.
Disadvantages in regard to d.b.Express include the following:
Lack of Established User-base and Acceptance of the Product
d.b.Express is not yet widely used in the computer industry and is
perceived as a new technology which many users may defer usage of until the
product has established its use by large numbers of users. The Company believes
its focus on large scale users and its new Internet access technology will lead
to such usage, however, there is no assurance that the Company will be
successful in implementing sales and wide based usage of the product.
Limited Resources to Market and Promote d.b.Express
The Company has limited cash resources with which to market and promote
d.b.Express, and regardless of the unique patented aspects of the product, if
the Company is not able to effectively market and promote the usage of the
product, the successful dispersion of the product as a widely used access tool
may not be achieved.
Alternative Methods Available to Access Data and Potential New Technologies
d.b.Express' access method is patented and unique, however, alternative
methods for accessing data exist, primarily text based search engines, which are
not able to access large quantities of data with the nearly instantaneous
results of d.b.Express and/or without knowledge of specific database query
languages. The Company is not aware of any alternative technology which can
effect data searches with the speed, and without sophisticated programming
skills, which d.b.Express provides, however, it is possible that new
technologies will be developed which may effectively compete with d.b.Express.
If such new technologies are developed, they could negatively impact the
Company's ability to successfully market and promote d.b.Express.
Softworks' Systems Management Software Products
Softworks provides automated systems management solutions to help
organizations more efficiently and effectively manage their IT infrastructure.
Their software incorporates intelligent agent technology to perform system and
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data management and analysis tasks across multi-platform environments. By
applying Softworks technology, customers are able to maintain high standards of
service delivery and respond more easily to the rapid introduction of new
technologies. The products are designed to enable its customers to exploit the
most application-appropriate processor without incurring the expense of
maintaining multiple teams of technology specialists for each operating system
platform.
Softworks' products optimize system and application performance, reduce
hardware expenditures, and significantly enhance the reliability and
availability of the data processing environment. In addition, Softworks'
products help organizations manage common, critical IT processes across large
multi-platform environments. Softworks' products are developed using a set of
core technologies and R&D principles called Softworks SavanTechnology ("SST").
SST differentiates Softworks from its competition by going beyond the
traditional monitoring and reporting style of systems management. SST products
incorporate a high degree of embedded intelligence, offer controlled automation
options that interface with existing software, and facilitate proactive systems
management.
Softworks' current systems management product offerings include:
Integrated Storage and Performance Management Solution. Softworks provides
integrated Arenas for both storage and performance management. They believe that
many organizations want an integrated suite of products to address their storage
and performance needs, and theirs solutions provide the functionality and
scalability that is typically required. Their solutions are designed to optimize
system and application performance, and enhance the reliability and availability
of the data processing environment for enterprises that employ large system,
UNIX and/or NT computing environments.
Automated Responses to Systems Management Requirements. In contrast to
conventional systems management solutions which merely provide reporting and
monitoring capabilities, Softworks' new generation of products provide proactive
alerts, programmed responses and automated corrective actions. This use of
automation enables organizations to employ fewer specialized technicians to
manage the increasing volume and complexity within the enterprise computing
environment, thereby enabling IT personnel to focus more of their time on other
mission-critical systems management tasks. "Proactive alerts" detect system
events and abnormalities and alert the user to potential system, application or
data availability issues. Their products probe system resources to determine if
key storage and performance indicators are within acceptable ranges. If an "out
of reasonable range" condition is detected, the products offer three
alternative, but not mutually exclusive, responses. The products can (i) notify
the management console or appropriate network or system monitoring software;
(ii) automatically correct the issue using "pre-programmed responses" which
enable the user to programmatically tell the product what to do in the event
that a particular condition is detected; or (iii) guide the user through
"automated corrective actions" which present the user with one or more
alternative responses to the condition and guide the user through the corrective
action.
Application of "Best Practices" to a Multi-Platform Environment. Softworks'
solutions are designed to enable the centralized control of disparate
applications and platforms, thereby facilitating the implementation of an
organization's "best practices" across multi-platform environments. The
solutions operate efficiently in multi-platform environments by using embedded
intelligent agents which recognize and respond to the particular requirements of
each specific operating system.
Reduced Cost of Systems Management. Softworks' solutions are designed to
reduce the overall cost of managing an organization's IT infrastructure through
a combination of advanced products and technology with comprehensive service and
support. Their SST technology is specifically designed to enable customers (i)
to minimize the amount of intervention by IT personnel, thereby enabling them to
focus on other mission-critical systems management tasks, and (ii) to facilitate
system availability 24 hours per day, seven days per week. Furthermore, their
solution often reduces hardware expenditures by permitting organizations to
defer purchases of CPU and storage upgrades.
Using their proprietary SST development methodologies and core
technologies, Softworks has developed products which are grouped into four
Arenas:
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Performance Management Arena:
The Performance Arena comprises powerful product sets that help address a
wide variety of application and systems performance issues. The sets automate
manual tuning efforts, helps reduce processing times by up to 90%, improves
resource utilization, eliminates large file limitations, and pinpoints and
corrects performance bottlenecks to maintain systems and applications
availability. Products include Performance Essential, VSAM Quick Index, VSAM
Assist, and TeraSAM.
Data and Storage Management:
The DataStor Arena products are a crucial resource for improving the
availability, integrity, and recoverability of critical corporate information.
Products include CenterStage/MVS and Catalog Solution, the world's premier
catalog management and recovery tool.
Year 2000:
The 2000 Arena offerings comprise a suite of products specifically designed
to assist in all phases of the Year 2000 conversion effort. These solutions
produce year 2000 compliant applications in a timely and cost-effective fashion.
2000 Arena products bring a number of benefits to users including the ability
to: quickly and easily identify and prioritize Year 2000 conversion efforts,
rapidly convert programs using a combination of methods depending on the
individual environment, determine how environments will operate as the date
changes to the new millennium, and ensure that converted applications will
operate in the new millennium through comprehensive testing. 2000 Arena products
include six major products that cover mission-critical IT environments such as
MVS, OS/390, and various distributed platforms.
Professional Services:
Softworks' professional services organization provides implementation,
training and consulting services for its own software and that of third party
software as well. The Company's professional services unit provides a wide array
of information technology, support and services which offer solutions, support,
and strategies to solve various business needs in such areas as network
determinations, help desk applications, wiring/cabling, LAN connections,
moves/adds/changes, and project management, as well as overseeing new
installations and offering on-site component repair.
Computer Cop
Computer Cop is an Internet monitoring software that enables a parent,
guardian or businessman the ability to easily see what the users of their home
or office computer have been viewing on the Internet. Today's Internet
environment has caused children, and the public at large, to become exposed to
objectionable pictures and text as they navigate through the Internet; sometimes
intentionally, but many times, unintentionally. In addition, the popularity of
Internet "chat rooms", especially those appealing to children, have proven
fertile ground for pedophiles to communicate with those children, and, on
occasion, to set up clandestine meetings with these children unbeknownst to
their parents or guardians.
When an individual goes "online" the Internet browser "catches" the images
and text files at the web address the user has selected and "saves" them to
certain directories on the computer's hard drive so as to display these files
and images. This browser activity is not apparent to the user. As the user goes
to other sites, the browser continues to "catch" and "save" these files. The
image and text files remain on the computer's hard drive until the user removes
them, either manually or by instructing the browser to do so. It is important to
note that it is often in the user's best interest not to remove these files
since it improves future download speeds. Speed is key to the enjoyment of the
Internet.
Computer Cop capitalizes on both the browser's "catch" and "save" function
and the user's desire for quick- loading web pages. The program, which is
completely contained on the CD-ROM and does need to be installed, automatically,
upon insertion of CD into the CD-ROM drive, scans the computer's hard drive for
files containing words that match the program's library of potentially offensive
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words and/or phrases and searches for Internet-native images. After scanning, a
main viewing window is displayed that subsequently displays the words, phrases
and images found. All directions are clearly stated for the user on the display
window at all times.
One of Computer Cop's most dramatic functions is its ability to display
text files that have been erased by the home or office user but not yet written
over by the computer. The ability to display these files adds to the program
goal, which is to give an accurate reflection of the home or office users
activities on the Internet. It is an important function to note as it allows
Computer Cop to "catch" the computer savvy child or employee who wishes to mask
his/her Internet activities by deleting or erasing his Internet files found in
Internet browser directories such as cache. These files are displayed in the
main viewing window with the words, "Deleted File" noted under the display.
The Interface, and indeed, the program itself, was designed to be very
intuitive and simple to use. The idea was to let the program, which is
essentially several utility programs merged into one, do all the work behind the
scenes and allow the user, who may possess little or no computer skills, to be
informed about his or her child's or employees' Internet activities, without
restricting the child's or employees' use.
Professional Services
The Company's professional services unit provides a wide array of
information technology, support and services which offer solutions, support, and
strategies to solve various business needs in such areas as hardware
requirements, network determinations, help desk applications, wiring/cabling,
LAN connections, moves/adds/changes, and project management, as well as
overseeing new installations and offering on-site component repair.
SALES AND MARKETING
d.b.Express is currently being marketed to the telecommunications industry,
governmental entities, financial services industry, Fortune 1000 companies and
OEM s (producers of other software products incorporating d.b.Express
technology) in the United States. The Company utilizes a direct sales force and
support personnel operating from the Company's headquarters in Bohemia, New
York. as well as an indirect network of distributors and resellers.
During the third quarter of 1998, the Company began its marketing efforts
of the technology acquired in June, 1998, under the product name Bo Dietl's One
Tough Computer Cop. The product is marketed through an in-house sales force as
well as an independent marketing firm. Subsequent to year end, in an effort to
expand product exposure, the Company entered into additional distribution
agreements. Further, the Company is pursuing the licensing of this technology to
various OEMs. Additionally, as part of the acquisition Mr. Dietl, on behalf of
the Company, continues to make promotional appearances on major radio and
television broadcasts, on such programs as America's Most Wanted, and CNN .
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The professional services business segment has been primarily marketed
through the efforts of an individual, formerly with I.B.M., who possesses the
necessary experience along with a small in-house support staff.
Softworks markets its products and services through its worldwide
distribution channels which include direct sales personnel, agents, and
distributors. Softworks has approximately 115 sales and sales support employees
engaged in promoting the licensing of their products and services. In the United
States they operate 10 sales offices. Internationally, Softworks has sales
offices in Australia, Brazil, Canada, France, Spain, Japan, Germany and the
United Kingdom. The U.K. office also covers the Scandinavian and Benelux
countries. Softworks' International distributors currently are located in
Argentina, Chile, Israel, Korea, Mexico, Peru, Philippines, South Africa,
Thailand, Turkey, Uruguay and Venezuela. All offices are responsible for
specific geographic territories that may extend beyond the state, province, or
country in which the office is located.
Softworks' direct sales force is comprised of account managers and sales
engineers who, in addition to the sale of their products, are responsible for
technical demonstrations, product installation and product implementation. A
separate Federal Accounts group specifically targets United States government
clients, including end-users and system integrators. In addition to the
traditional distribution channels, they have established a web-based interface
to allow the purchase and download of UNIX-based products.
Since 1996, Softworks has actively encouraged customers who have licensed
only one or two products to license multiple products and to enter into
multi-year maintenance agreements to generate additional revenue and a
significant deferred revenue stream.
The mainframe market has slowed in unit sales, but has grown in processor
capabilities measured in Millions of Instructions per Second ("MIPS"). As such,
Softworks has adopted a MIPS-based pricing model for mainframe products that
enables the company to take advantage of this growth in enterprise servers.
Pricing for mainframe products is based on the computational capacity of the CPU
s on which the software operates. Pricing for non-mainframe and cross-platform
varies from enterprise-wide agreements to "per seat" pricing. Softworks also
generates revenue through maintenance and support agreements that are reviewed
annually on the anniversary of the original purchase date. The renewal rate for
these contracts is over 95%. Other revenue is generated when product licenses
are transferred to different/larger CPU s. No customer of Softworks comprised
10% or more of the Company s 1998 consolidated revenue.
SEASONALITY AND BACKLOG
The Company s quarterly results are subject to fluctuations from a wide
variety of factors including, but not limited to, new product introductions,
domestic and international economic conditions, customer budgetary
considerations, the Company s sales compensation plan, the timing of product
upgrades, customers' support agreement renewal cycles and fee recognition in
connection with exclusive distribution and other agreements. As a result of the
foregoing factors, the Company s operating results for any quarter are not
necessarily indicative of results for any future period.
The Company generally produces inventory shortly before anticipated product
shipment. Accordingly, the Company has not experienced significant product
backlog nor believes that the existence of product backlog is a relevant
indicator of future sales performance.
MANUFACTURING AND DISTRIBUTION
The Company currently contracts the manufacture of software diskettes,
product documentation and packaging for certain products within its d.b.Express
product line as well as Computer Cop to non-affiliated third-party
manufacturers. Due to the existence of numerous companies providing manufacture
of these items, the Company is not dependent on any one contractor.
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Softworks produces its own tapes and is not dependent on any one contractor
for materials.
RESEARCH AND DEVELOPMENT
The computer software industry is characterized by rapid technological
change, which requires ongoing development and maintenance of software products.
It is customary for modifications to be made to a software product as experience
with its use grows or changes in manufacturers' hardware and software so
require.
The Company believes that its research and development staff, many with
extensive experience in the industry, represents a significant competitive
advantage. As of December 31, 1998, the Company's research and development group
consisted of 102 employees. The Company seeks to recruit highly qualified
employees, and its ability to attract and retain such employees will be a
principal factor in its success in maintaining a leading technological position.
For the three years ended December 31, 1998, 1997 and 1996, research and
development expenses were approximately $11,200,000, $8,800,000 and $5,300,000,
respectively. The Company believes that significant investments in research and
development are required in order to remain competitive.
COMPETITION
The Company's products are marketed in a highly competitive environment.
Such environment is characterized by rapid change, frequent product
introductions and declining prices. Further, the Company s PC products have been
designed specifically for use on the Intel X86 family of computers, utilizing
other well known database products. No assurance can be given that the Company s
patents and copyrights will effectively protect the Company from any copying or
emulation of the Company s products in the future.
The Company considers certain end-user data access tool and executive
information system software companies to be competitors to its d.b.Express
product including Trinzic Corporation, Cognos, Inc., Comshare Corp. and Pilot
Software, Inc.. The Company believes that d.b.Express can compete effectively
against such companies product offerings based on ease of use, lack of
programming, data access speed and price.
The Company believes Computer Cop to be in a highly competitive, low margin
segment of the PC software market. The first internet filtering software was
introduced in 1995. Since that time a wide variety of software products have
become available giving parents, guardians as well as the business world the
ability to block and filter various categories of objectionable material. Today,
products such as NetNanny, cyberSafe, CYBERsitter, CyberSnoop, GuardiaNet and
many others are considered by the Company to be strong competition.
The Company's professional services unit, operates in a highly price and
service sensitive business environment. Potential customers can opt for larger
more well established companies such as I.B.M. and Dell or midsize PC
resellers/service providers such as Entex, Micros to Mainframes, CompuCom or
Infotech for hardware and related services. Additionally,. competition comes
from the major consulting services organizations such as Computer Science Corp.
or Andersen Consulting. There are several small consulting/cabling/integration
firms located throughout the United States.
Although the Company believes that Softworks maintains a competitive
advantage by bundling its software products to minimize point product
competition and by offering products which they believe are unavailable from its
competitors, there are no assurances that they can maintain or enhance its
competitive position against current and future competitors. Softworks' primary
competitors are Sterling Software, Inc. and Boole & Babbage, Inc. in the data
and storage management market; Boole & Babbage, Inc. and Computer Associates
International, Inc. in the performance management market; and Compuware, Inc.
and Viasoft Inc. in the Year 2000 market. The Company believes that its products
compete effectively on the basis of quality, functionality, technical support
and service, and embedded intelligence and proactive automation. Significant
factors such as the emergence of new products, fundamental changes in computing
technology and data storage and manipulation platforms and applications and
aggressive pricing and marketing strategies by the Company's competitors may
affect their competitive position.
Many of the Company's current and potential competitors have longer
operating histories, greater name recognition, larger installed customer bases
and substantially greater financial, technical and marketing resources than the
Company. There can be no assurance that the Company's current and potential
competitors will not develop products that may be or may be perceived to be more
effective or responsive to technological change than are the Company's current
or future products or that the Company's technologies and products will not be
rendered obsolete by such developments. Increased competition could result in
price reductions, reduced margins or loss of market share, any of which could
have a material adverse effect on the Company's business, operating results and
financial condition.
<PAGE>
EMPLOYEES
The Company had 331 employees at March 26, 1999, including 127 in
marketing, sales and support services, 161 in technical support, (including
research and development) and 43 in corporate finance and administration. The
Company employs 268 people in the United States and 63 outside of the United
States. The future success of the Company will depend in large part upon its
continued ability to attract and retain highly skilled and qualified personnel.
Competition for such personnel is intense, and the Company has experienced
turnover in its management group. None of the Company s employees are
represented by a labor union. The Company believes that its relations with its
employees are good.
PATENTS AND TRADEMARKS
The Company has three federally registered trademarks: "CCC" ,
"d.b.Express" and "dbACCEL" . In addition, the Company received a patent for the
proprietary aspects of its d.b.Express technology in 1994, and a second,
expanded patent on that technology in 1995, which broadened the claims regarding
the product's graphical interface and indexing. The underlying technology for
Computer Cop is patent pending. Softworks has received copyrights for their
entire product line.
Item 2. PROPERTIES
The Company leases various facilities for its Corporate headquarters and
subsidiary operations. The Company's two primary facilities are as follows:
<TABLE>
<CAPTION>
Description Location Square Footage Lease term Annual Rental Cost
- ----------- -------- -------------- ---------- ------------------
<S> <C> <C> <C> <C>
Corporate Bohemia, NY 10,000 7/1/94 - 6/30/02 $192,600
Subsidiary Alexandria, VA 31,000 9/1/94 - 8/31/01 $411,000 (1)
</TABLE>
(1) Lease provides for a renewal option for five years at an annual increase of
3% per year, and is renewable at the option of the Company.
The Company also leases an aggregate of approximately 20,000 sq. ft. at an
aggregate annual rental of approximately $350,000 in eleven locations throughout
North America which are used for sales activities. The Company also maintains
international sales offices in Australia, Brazil, France, Spain, Germany, Canada
and the United Kingdom.
Item 3. LEGAL PROCEEDINGS
During May 1994, the Company and certain officers received notification
that they had been named as defendants in a class action alleging violations of
certain securities laws with respect to disclosures made regarding the Company's
acquisition of Softworks during 1993. On September 12, 1996, the settlement of
this class action claim was approved by the United States District Court,
Eastern District of New York. The Company recorded a charge to earnings in the
first quarter of 1996 of $2,075,000 to reflect this settlement consisting of
$75,000 plus 261,400 shares of the Company's common stock.
In September 1994, the Company received notice of an action alleging breach
of contract regarding an acquisition transaction initiated during 1993. In July
1995, a settlement agreement was reached whereby the Company was required to pay
$75,000 and agreed to an amendment of the original contract to acquire the
<PAGE>
license for additional software. Pursuant to such amendment, the Company issued
a non-interest bearing promissory note in the amount of $389,000 payable in 36
monthly installments, with the final payment scheduled for August 1, 1998, which
amount was recorded as an unusual charge in the 1995 consolidated statement of
operations.
In July 1995, the Company received notice of an action alleging the Company
had not used its best efforts to register warrants to purchase 50,000 shares of
the Company's common stock within 30 days from written notice to the Company,
pursuant to a financial consulting agreement. The Company has maintained that it
has always used its best efforts to cause the registration of those warrants to
occur. However, to avoid the expense and resolve the uncertainties of
litigation, the matter was settled by including 38,500 warrants in the Company's
then pending registration statement, with the balance of 11,500 warrants being
canceled. The registration statement became effective on August 9, 1996.
Although the Company believes this matter has been resolved, releases have not
yet been exchanged, nor has a stipulation of dismissal been filed. The Company
is unable to predict the ultimate outcome of this suit and, accordingly, no
adjustment has been made in the consolidated financial statements for any
potential losses.
In July 1995, the Company and certain officers received notification that
they had been named as defendants in a class action claim in regard to
announcements and statements regarding the Company's business and products.
Although the Company denied any wrongdoing, in an effort to avoid further
expense and resolve the uncertainty of litigation, in July 1997 the Company
agreed to a Stipulation and Agreement of Settlement ("Stipulation Agreement") of
this class action. In February, 1998, the Court entered a final order approving
the terms of the Stipulation Agreement. The Company delivered 119,850 shares of
its common stock, valued at $500,000. Additionally, the Company and its
insurance carrier each paid $350,000, in full settlement of this matter.
Accordingly, the Company recorded an $850,000 Unusual Charge to earnings in
1997.
On June 11, 1996, the Company received notice of entry of a default
judgement against it for $1,500,000 and specific performance to effect the
registration of common stock held by Merit Technology, Inc. in a matter in which
the Company had not been served or received notice (In Re: Merit Technology,
Inc., Debtor, U.S. Bankruptcy Court, Eastern District of Texas). On August
13,1996, the default judgement was set aside by the Court. During December 1996,
this matter was settled with the Company issuing 10,000 shares of its common
stock.
During March 1997, the Company received a Complaint filed in the U.S.
District Court for the Western District of Texas, by Dell Computer Corporation.
The Second Amended Complaint alleged that the Company failed to deliver product
as contracted for and further alleged damages in excess of $850,000. In
February, 1998, a cash settlement of $130,000 was agreed to and paid by the
Company's insurance carrier.
In March 1995, an action was originally commenced against the Company and a
number of defendants (Barbara Merkens v Aval Guarantee Ltd., Walter Mennel, J.
Forror, A. Faehndreich-Braun, T&M Consulting AG, M. Schmidt, E.G. Baltruschat
and Computer Concepts Corp.; United States District Court, Eastern District of
New York). In early 1997, after a change in counsel, the plaintiff amended the
complaint for a second time, now naming as defendants only the Company and three
of its officers. The second amended complaint alleges that certain third
parties, unrelated to the Company, transferred certificates representing
1,000,000 shares of the Company's common stock to the plaintiff. The complaint
further alleges that such shares were endorsed in blank by the third parties and
became bearer securities which were negotiated to the plaintiff by physical
delivery. The certificates had not been legally acquired from the Company and
the certificates had been reported to the Securities and Exchange Commission by
the Company as stolen certificates. Plaintiff has requested validation of the
transfer of the certificates and is seeking damages of an unspecified amount,
consisting of alleged diminution in market value of the subject shares from 1994
through the date of any judgment in the plaintiff's favor. Discovery 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 issuances of common stock.
<PAGE>
In 1995, Fletcher Capital Corp. filed a claim against the Company, its
president and several unrelated parties, regarding a claim for an unspecified
amount of commissions in the form of options from the Company and cash from the
other parties. This matter was settled in February, 1997 with the issuance of
36,000 options exercisable at $3.50 per share, 25,200 shares of common stock
(issued January, 1998) and cash payments totaling $31,000.
During 1999, the Company and certain officers received notification that
they had been named as defendants in a class action (case #CV991046, Kassouf, et
al. v. Computer Concepts Corp., Daniel DelGiorno, Sr. and Daniel DelGiorno, Jr.,
U.S. District Court, Eastern District of New York) alleging violations of
certain securities laws with respect to the content of certain Company
announcements. The Company and its counsel are vigorously defending this 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 for any potential losses or potential issuance of common stock.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual shareholders' meeting, held on December 23, 1998,
the shareholders of the Company elected the individuals identified below as the
Company's Board of Directors. Their terms expire at the next annual shareholders
meeting.
Daniel DelGiorno, Sr., Daniel DelGiorno, Jr., Russell Pellicano,
Jack S. Beige, Esq., Augustin Medina.
The tabulation of the results of the shareholders' vote was:
<TABLE>
<CAPTION>
For Withheld
--- --------
<S> <C> <C>
Daniel DelGiorno, Sr. 14,019,246 542,127
Daniel DelGiorno, Jr. 14,019,246 542,227
Russell Pellicano 14,067,145 535,152
Jack S. Beige, Esq. 14,019,673 534,695
Augustine Medina 14,019,246 536,262
</TABLE>
A proposal for the appointment by the Board of Directors of Hays & Co. as
the Company's independent certified public accountants for calendar year 1998
was approved by a vote of: 14,067,145 - For; 436,675 - Against; with 492,212 -
Abstained.
<PAGE>
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK
The Company's Common Stock has been traded on NASDAQ since September 23,
1992. The following table sets forth the high and low sales prices for the
Company s Common Stock by fiscal quarters for the last three years, as restated
for the reverse stock split noted above.
On March 18, 1998, the Board of Directors declared a reverse split at a
ratio of 1 for 10 shares with a record date of March 27,1998, and an effective
date of March 30,1998. Par value and authorized shares remain unchanged at
$0.0001 and 150,000,000 shares respectively. All references to numbers of shares
and per share data have been restated for all years presented except where noted
so as to reflect the reverse stock split.
<TABLE>
<CAPTION>
High Bid Low Bid
----------- -----------
<S> <C> <C>
1996:
First Quarter 28 7/16 17 3/16
Second Quarter 20 5/8 10
Third Quarter 13 1/8 5 5/16
Fourth Quarter 7 13/16 3 1/8
1997:
First Quarter 10 5/16 5 15/16
Second Quarter 7 3/16 5
Third Quarter 7 31/32 3 3/4
Fourth Quarter 9 1/16 4 11/16
1998:
First Quarter 5 5/8 3 7/16
Second Quarter 7 3 9/16
Third Quarter 6 1/4 1 15/32
Fourth Quarter 3 1 3/4
1999:
(Through March 26, 1999) 2 3/16 1 13/32
</TABLE>
As of March 26, 1999, the total number of shareholders of the Company's
Common Stock was approximately 22,300, with 1,680 holders of record, exclusive
of shareholders whose shares are held in the name of their brokers or stock
depositories which are estimated to be approximately 20,620 additional
shareholders.
<PAGE>
Item 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for the five fiscal
years ended December 31, 1998, 1997, 1996,1995 and 1994 are derived from the
Company's audited financial statements. To better understand the following
financial information, investors should also read the "Management's Discussion
and Analysis of Operations." This data should also be read in conjunction with
the consolidated financial statements of the Company, related notes, and other
financial information included elsewhere in this form 10-K. All numbers are in
thousands, except per share amounts.
Consolidated Statements of Operations Data:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue $61,988 $29,738 $19,030 $16,302 $13,695
------- ------- ------- ------- -------
Costs of revenue 21,018 3,663 2,043 7,074 5,537
------- ------- ------- ------- -------
Gross Margin 40,970 26,075 16,987 9,228 8,158
Research and development 11,193 8,785 5,347 1,270 521
Sales and marketing 28,496 17,033 13,038 9,166 5,850
General and administration 12,718 9,111 8,185 8,191 7,936
Amortization and depreciation 4,207 2,386 3,550 4,104 2,452
Unusual charges - 686 2,590 1,102 3,178
Reduction in carrying values
of long-lived assets - - 412 3,760 -
------- ------- ------- ------- -------
Total costs and expenses 56,614 38,001 33,122 34,667 25,474
------- ------- ------- ------- -------
Operating loss (15,644) (11,926) (16,135) (18,365) (11,779)
Gain on partial disposition
of subsidiary 28,785 - - - -
Gain on sale of net assets
of subsidiary - 813 - - -
Other income (expense), net (485) 16 (8) - (428)
Interest charge pertaining to
discount on convertible
debentures - (1,288) (2,810) - -
Minority interest in earnings of
subsidiary (1,361) - - - -
------- ------- ------- ------- -------
Income(loss) before provision
for income taxes 11,295 (12,385) (18,953) (18,365) (12,207)
Provision for income tax (1,748) - - - -
------- ------- ------- ------- -------
Net income (loss) $9,547 $(12,385) $(18,953) $(18,365) $(12,207)
======= ======= ======= ======= =======
Basic net Income (loss) per share $0.58 $(1.11) $(2.66) $(3.73) $(5.06)
======= ======= ======= ======= =======
Diluted net income (loss) per
share $0.56 $(1.11) $(2.66) $(3.73) $(5.06)
======= ======= ======= ======= =======
Basic weighted average common
shares outstanding 16,523 11,163 7,130 4,921 2,411
======= ======= ======= ======= =======
Diluted weighted average
common shares outstanding 17,031 11,163 7,130 4,921 2,411
======= ======= ======= ======= =======
Year Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Consolidated Balance Sheet Data:
Cash and cash equivalents $8,176 $ 778 $5,675 $ 579 $ 501
Working capital (deficit) 27,569 1,412 2,809 (2,998) (3,590)
Total assets 91,902 39,298 27,671 16,081 21,609
Long term debt, less current
portion 1,403 1,395 526 800 695
Minority interest 8,503 - - - -
Shareholders' equity 34,016 9,667 9,524 2,009 7,839
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition and Liquidity
Prior to 1998, the Company incurred substantial consolidated 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, the Company's use of cash in its operations, was primarily financed
through Softworks' initial public offering from which the Company received
approximately $19,419,000. In December, 1998, the Company sold additional shares
of Softworks' common stock for a $5,000,000 promissory note, which was fully
paid in February, 1999. In addition, the Company received net proceeds of
$5,228,000 from the sale of the parent Company's common stock and exercise of
options as well as $1,925,000, representing the net proceeds of the sale of a
debenture (which was repaid on a timely basis, in August, 1998). At December 31,
1998, the Company had working capital of $27,569,000 and as of March 26, 1999,
the Company had cash and cash equivalents of approximately $ 12,300,000
(unaudited).
Net Income for the year of $9,547,000 was offset by various non-cash items,
primarily Company and Softworks common stock and options issued for services of
$9,014,000, amortization and depreciation of $4,726,000, the minority interest
in Softworks of $1,361,000 and the gain of $28,785,000 on the partial
disposition of Softworks. Increases in operating assets and liabilities of
$13,343,000 was another primary factor which accounted for the net cash used in
operating activities of $17,871,000 .
Net cash provided by investing activities of $15,295,000 was offset by,
among other factors, the acquisition of additional property and equipment of
$2,721,000, the development and / or purchase of software technologies of
$900,000, as well as additional consideration for Softworks of $678,000. These
uses of cash were primarily financed with the proceeds from the initial public
offering of Softworks, of $19,419,000.
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. The
entire balance due was repaid in the first quarter of 1999. See Note 9.
Management's strategic plan is focused on becoming a preeminent provider of
innovative software products, which break down barriers between people and data
through sale of existing products and new technologies. The Company is currently
focusing on four general product categories:
1. To continue to exploit the d.b.Express technology through continued
development of several vertical markets;
2. To further develop its Softworks product line;
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. Since the
Company's ownership interest in Softworks is currently 50.2%, any additional
sales of its investment would reduce the Company's ownership interest to below
50%. Additionally, the financial results of Softworks would no longer be
consolidated with the Company, and, accordingly, the Company's financial
presentation would be significantly altered.
<PAGE>
Results of Operations
Fiscal 1998 Compared to Fiscal 1997
During 1998, the Company more than doubled its total revenue, increasing
$32,250,000 to $61,988,000 from 1997's level of $29,738,000. Record volume was
achieved in software license revenue, increasing $13,905,000 or 77.7 % to
$31,795,000 in 1998, from $17,890,000 in 1997. The increase was primarily due to
the increased sales of Softworks products resulting from continued expansion of
its worldwide sales force, the conversion from CPU-based pricing to MIPS-based
pricing and the introduction of Resource Availability into the DataStor Arena.
During 1998, MIPS-based licenses accounted for 74% of new Softworks sales. Sales
in the DataStor Arena accounted for 59% of total software license revenue in
1998 and 1997. Software license revenue from the Performance Arena accounted for
32% of total software license revenue in 1998 and 1997. License revenue from the
Year 2000 Arena accounted for 5.3% of total software license revenue in 1998 and
3.5% in 1997. International revenue increased 85.9% to $8,798,000 in 1998 from
$4,732,000 in 1997. This increase is attributable to the continuing
international expansion of Softworks. Effective June 30, 1998, the Company
completed the acquisition of certain software, known as Computer Cop, and
related sales and marketing rights. In conjunction with the sales and marketing
efforts also obtained in the acquisition, the Company released the initial
version of this technology during November, 1998. According to the Statement of
Financial Accounting Standards No 48, "Revenue Recognition When Right of Return
Exists", ("SFAS 48"), recognition of revenue for products of this nature
require, among other factors, the elimination of rights of return. Accordingly,
the recognition of revenue has been delayed until all the requirements of SFAS
48 are met.
Maintenance revenue increased 5.2% to $10,503,000 in 1998 from $9,980,000
in 1997. This increase is attributable to overall growth in license revenue and
renewals of maintenance contracts by the installed customer base.
The Company commenced operations of its Professional services unit during
1997. Professional services principally offers solutions, support, and
strategies to solve various business crises in such areas as: hardware
requirements, network determinations, help desk applications,
programming/programmer services, wiring/cabling, LAN connections,
moves/adds/changes, and project management, as well as overseeing new
installations and offering on-site component repair. This unit increased in
revenue more than tenfold, from $1,868,000 in 1997 to $19,690,000 in 1998.
Approximately $14,878,000 of Professional services 1998 revenue was attributable
to one customer. The overall business line is extremely competitive, and as
such, the gross margin for this business segment is approximately 10.4%.
Further, it is difficult to predict future revenue.
Cost of software license revenue includes royalties paid to Softworks
employee developers and to a third party under a licensing agreement,
amortization of capitalized software development costs and costs of shipping and
fulfillment. Cost of software license revenue for the year ended December 31,
1998 of $1,978,000 represents an increase of $812,000 over the prior year amount
of $1,166,000. Stated as a percentage of software license revenue, the
$1,978,000 is 6.2%, a slight decrease from the prior year of 6.5%. Cost of
maintenance revenue, stated as a percentage of revenue, increased 4.3 percentage
points during 1998, from 9.0% in 1997 to 13.3% in 1998. The cost of professional
services, as a percentage of revenue, increased slightly from 85.5% in 1997 to
89.6% in 1998. When comparing the Company's total cost of revenue ($21,018,000
in 1998 to the prior year amount of $3,663,000), as a percentage of total
revenue, there is a significant increase - 33.9% as compared to 12.3% for the
prior year. This is due primarily from the higher cost of revenue associated
with the professional services segment.
Research and development expenses include salaries and related costs for
software developers, quality assurance and documentation personnel involved in
the Company's research and development efforts. Research and development
increased 27.4% to $11,193,000 in 1998 from $8,785,000 in 1997. The increase is
primarily attributable to an increase in personnel necessary to support the
Company's research and development efforts.
Sales and marketing expenses include salaries and related costs,
commissions, travel, facilities, communications costs and promotional expenses
for the Company's direct sales organization and marketing staff. As a percentage
<PAGE>
of revenue, sales and marketing expenses decreased to 46.0% in 1998 from 57.3%
in 1997. The actual costs increased $11,463,000 to $28,496,000 in 1998, from
$17,033,000 for the prior year. Approximately $7,229,000 of this increase
related to Softworks. This increase was attributable primarily to increased
commission expenses resulting from increased sales, and increased personnel
costs resulting from growth in the Softworks sales organization. In addition,
the opening of the international sales offices of Germany, Australia and Spain
and one domestic sales office contributed to an increase in certain fixed costs
over 1997. Approximately $2,892,000 of the total sales and marketing increase
related to the marketing of d.b.Express and approximately $1,760,000 related to
the marketing of Computer Cop (which commenced at the end of the third quarter
in 1998), offset by the elimination of $418,000 of 1997 MapLinx expenses.
General and administrative expenses include administrative salaries and
related benefits, management fees, recruiting and relocation expenses, as well
as legal, accounting and other professional fees. General and administrative
expenses rose $3,607,000 from $9,111,000 in 1997 to $12,718,000 in 1998. The
increase in general and administrative expenses was principally due to an
increase in finance and administrative personnel necessary to support the
Company's growth.
Amortization and depreciation expense increased $1,821,000 to $4,207,000 in
1998. The amortization of the technology acquired during the year accounting for
approximately $1,450,000 of the increase.
Gain on partial disposition of subsidiary of $28,785,000 represents the
gain associated with the initial public offering of Softworks as well as the
sale and exchange of additional Softworks common stock as further described in
Note 3 to the Consolidated Financial Statements.
Minority interest expense of $1,361,000 represents the earnings
attributable to the separate public ownership of Softworks, which was a wholly
owned subsidiary of the Company until June 30, 1998.
Fiscal 1997 Compared to Fiscal 1996
Revenue reached a record high for the Company, rising $10,708,000 or 56.3%
to $29,738,000 for the year ended December 31, 1997, over the prior year's
$19,030,000. The primary factors contributing to this growth include: (i) an
increase in Softworks' revenue of $10,245,000, due, in part, to an increase in
processor capabilities measured in Millions of Instructions per Second ("MIPS");
and (ii) a newly formed business unit which is designed to provide a wide array
of information technology, support and services. This unit known as Professional
Services, ("professional services") generated revenue of $1,868,000.
Professional services . A loss of revenue of $1,642,000 was due to the sale of
Maplinx subsidiary.
Cost of Revenue - software licenses of $1,166,000, represents a $157,000
decrease over last year. Additionally, when viewed as a percentage of revenue,
the decrease also represents a decrease of 5.4 percentage points (6.5% for 1997
vs. 11.9% for 1996). The Company anticipates this trend to continue for the
foreseeable future.
During 1997, sales and marketing expenses increased $3,995,000 to
$17,033,000 from $13,038,000 for the year ended December 31, 1996. This increase
was due, in part, to expanded global operations, as well as increased marketing
efforts of the Company's wide breadth of products, (d.b.Express, professional
services and Softworks suite of products, known as Softwork SavanTechnology,
which includes the Year 2000 suite) of $5,591,000. These costs were offset by
the sale of Maplinx which generated savings of $1,025,000.
General and administrative expenses increased $926,000 or 11.3%, to
$9,111,000 for the year ending December 31, 1997 as compared to $8,185,000 for
the year ended December 31,1996. The increase at Softworks was $645,000, while
corporate overhead / d.b.Express increased $693,000 offset by savings associated
with the sale Maplinx of $390,000.
Research and development costs increased significantly during 1997, nearly
65%. The $8,785,000 represents a $3,438,000 increase over the prior year's
$5,347,000. This increase is primarily due to Softworks' evolving "Y2K" and
<PAGE>
multi-platform technology, as well as to the development of the d.b.Express Java
based internet applications software, which is the underlying technology of the
Company's recently announced agreement with British Telecommunications, plc.
See Note 13 to the Consolidated Financial Statements for a discussion of
unusual charges incurred for the years ended December 31, 1998, 1997 and 1996
respectively.
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 Company 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.
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.
<PAGE>
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.
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.
ITEM 7a QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
<PAGE>
SAFE HARBOR STATEMENT
Certain information contained in this annual report, particularly
information regarding future economic performance and finances, plans and
objectives of management, is forward-looking. In some cases, information
regarding certain important factors that could cause actual results to differ
materially from any such forward-looking statement appear together with such
statement. The following factors, in addition to other possible factors not
listed, could affect the Company's actual results and cause such results to
differ materially from those expressed in forward-looking statements. These
factors include competition within the computer software industry, which remains
extremely intense, both domestically and internationally, with many competitors
pursuing price discounting; changes in economic conditions; the development of
new technologies and/or changes in operating systems which could obsolete or
diminish the value of existing technologies and products; personnel related
costs; legal claims; risks inherent to rolling out new software and new software
technologies; the current lack of adequate financial resources to carry out the
Company's current business plan in regard to the d.b.Express technology; the
potential cash and non-cash costs of raising additional capital or the possible
failure to raise necessary capital; changes in accounting principles applicable
to the Company's activities and other factors set forth in the Company's filings
with the Securities and Exchange Commission.
<PAGE>
Item 8. FINANCIAL STATEMENTS
The financial statements and exhibits to Form 10-K are included beginning
on Page F-1 and are indexed under Items 14(a), 14 (b) and 14(c), respectively.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
AND FINANCIAL DISCLOSURE
NONE
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Directors and Executive Officers
As of March 30, 1999, the names, ages and positions of the directors and
executive officers of the Company are as follows:
Name Age Position
- ---- --- --------
Daniel Del Giorno, Sr. 66 Chairman, Ass't. Sec. and Director
Daniel Del Giorno, Jr. 44 President, CEO, Treasurer, Director
Russell Pellicano 58 Secretary, Director
Jack S. Beige 54 Director
Augustin Medina 58 Director
Edward Warman 56 Exec. V. P. of Products and Services
George Aronson 50 Chief Financial Officer
Daniel Del Giorno, Sr. has been Chairman, Chief Executive Officer (to
October, 1997), Assistant Secretary and a director of the Company since April
1989, and is the father of Daniel Del Giorno, Jr., the Company's President and
also a director. During the period 1987 to April 1989, Mr. Del Giorno, Sr.
together with Mr. Pellicano (director of the Company) was engaged in the
research and development of d.b.Express. Prior thereto, during the period 1985
to May 1987, Mr. Del Giorno, Sr. was the Chief Executive Officer of Myotech,
Inc. ("Myotech"), a privately held corporation which produced computerized
muscle testing equipment for chiropractors and physical therapists. Myotech was
sold to Hemodynamics, Inc. in May 1987 and later became a public corporation.
Mr. Del Giorno, Sr. was a practicing chiropractor for many years and had founded
a chiropractic clinic employing 4 chiropractors and 6 technicians in addition to
administrative personnel. He also successfully collaborated with Mr. Pellicano
in connection with the design and development of medical equipment for
comparative muscle testing. A patent has been granted to Mr. Pellicano and Mr.
Del Giorno, Sr. in connection therewith. In addition, Mr. Del Giorno, Sr. is the
holder of a patent for a digital myograph for the testing of muscles by
computer. Mr. Del Giorno, Sr. is also an officer, director and shareholder of
Tech Marketing Group Corp. which is a holding company and a shareholder of the
Company. See "Security Ownership of Certain Beneficial Owners and Management"
and "Certain Transactions".
Daniel Del Giorno, Jr., the Company's President, CEO, Treasurer and a
director, is the son of Daniel Del Giorno, Sr. and has been with the Company
since April 1989. Prior to joining the Company and during the period 1987 to
1989 Mr. Del Giorno, Jr. was involved in providing the management and financial
support for and collaborated with Mr. Del Giorno, Sr. and Russell Pellicano in
connection with the development of d.b.Express. During the period 1984 to May
<PAGE>
1987, he was the President of Myotech, a privately held Company producing muscle
testing equipment. He is also the President, a director and principal
shareholder with Daniel Del Giorno, Sr. of Tech Marketing Group Corp., a
privately held corporation which is a shareholder of the Company. See "Security
Ownership of Certain Beneficial Owners and Management" and "Certain
Transactions".
Russell Pellicano is a director and Secretary of the Company since April,
1989 and served as Vice President, Secretary and Director since April 1989
through February 1994. Mr. Pellicano was the original founder and principal of
RAMP Associates Inc. ("RAMP"), which was acquired by the Company in October
1990, through which he has engaged in consulting to major corporations and
others for the design of software and hardware for computers. A major customer
of RAMP since its inception has been Grumman Corporation. Mr. Pellicano, through
RAMP, has been consulting for Grumman and other corporations. He is the chief
architect and designer of d.b.Express and has been involved in designing and
developing computer software and hardware for the past 30 years. Among many
noteworthy projects for which he was responsible at Grumman was the design and
installation of the Orbiting Astronomical Observatory Space Craft Ground
Station, and he was a member of the launch team at Cape Kennedy in conjunction
therewith. He was also Senior Systems Analyst for Grumman in connection with the
test instrumentation for the forward sweep wing (X29) experimental aircraft
on-board computer system, and the F-14D and the A-6E production aircraft. Mr.
Pellicano is a graduate of C. W. Post College in 1973 with a degree in
Electrical Engineering.
Jack S. Beige, D.C., J. D., was appointed a director in November, 1995, for
a term beginning January, 1996, and was appointed as a member of the Audit
Committee and the Compensation Committee, also effective January, 1996. Mr.
Beige received his Juris Doctor degree in 1993 and has been a practicing
attorney, primarily in business related matters, on Long Island, New York, since
then. Prior thereto, Mr. Beige practiced chiropractic medicine, was President of
BSJ Realty Corporation, President of All Travel, Ltd. and was President of Comp
Consulting, Inc. During his practice as a chiropractic doctor, he was elected a
Fellow of the International College of Chiropractors, was appointed as Chairman
of the New York State Worker's Compensation Board, Chiropractic Practice
Committee and was elected President of the New York State Chiropractic
Association in 1987. Mr. Beige is admitted to the New York State Bar and is a
member of the New York State Bar Association, the Nassau and Suffolk County Bar
Associations and is a member of the American Arbitration Association.
Augustin Medina was appointed a director in November, 1995, for a term
beginning January, 1996, and was appointed as a member of the Audit Committee
and the Compensation Committee, also effective January, 1996. During the last
five years and previously, Mr. Medina has been an independent business broker
associated with the Montecristi Corporation, Gallagher Associates and Anderson
Credit and Leasing, on Long Island, New York. Mr. Medina's business background
includes advising and assisting businesses in computer and non-computer related
businesses in their development and structuring of sales and marketing programs.
Edward Warman joined the Company in September 1993 as Vice President of
Products and Services. From 1989 to 1993, he served as Vice President, Product
Development for Comdisco Disaster Recovery Services, Inc. where he was
responsible for the design and implementation of a new product line of disaster
recovery software. From 1984 to 1989, Mr. Warman was Vice President of Research
and Development at Intersolv, Inc., with responsibility for a software
development staff exceeding 100 people. Prior to 1984, he served in various
software development management positions at organizations including Cincom
Systems, Inc., Computer Resources, and Monsanto. Mr. Warman possesses degrees in
systems analysis, economics and chemical engineering.
George Aronson, CPA, has been the Chief Financial Officer of the Company
since August, 1995. From March 1989 to August, 1995, he was the Chief Financial
Officer of Hayim & Co., an importer/distribution organization. Mr. Aronson
graduated from Long Island University with a major in accounting in 1972
receiving a Bachelor of Science degree and is a Certified Public Accountant.
<PAGE>
Item 11. EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation with
respect to the Chairman and Chief Executive Officer and each of the other
executive officers of the Company who earned more than $100,000 for services
rendered for the years ended December 31, 1998, 1997, and 1996. Directors are
not compensated for their services, however, the outside directors received a
formula grant of stock pursuant to the 1995 Outside Directors Stock Plan.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
----------------------------- --------------------------------------------------
Securities All
Other Restricted Underlying Other
Name and Fiscal Annual Stock Options/ Compen-
Principal Position Year Salary Bonus Compensation Awards SARS sation
(2)(5) (6)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dan DelGiorno,Sr., (1)(7) 1998 $260,000 $1,030,000 $ - - 190,000 -
Director 1997 260,000 327,000 - - - -
1996 259,000 232,000 - - - -
Dan DelGiorno, Jr.(1)(7) 1998 - 1,291,000 - - 350,000 -
President, C.E.O. 1997 - 753,000 - - - -
Director 1996 - 232,000 - - - -
Russell Pellicano (8) 1998 - 76,000 - - 25,000 -
Secretary 1997 - 199,000 - - - -
Director 1996 - 195,000 - - - -
Ed Warman (3) 1998 151,000 - - - 25,000 -
Vice President of Products 1997 148,000 - - - - -
& Services 1996 116,000 53,000 - - - -
George Aronson (4)(7) 1998 157,000 456,000 - - 150,000 -
Chief Financial Officer 1997 157,000 233,000 - - - -
1996 144,000 187,000 - - - -
All Officers as a Group 1998 $568,000 $2,853,000 - - 740,000 -
1997 565,000 1,512,000 - - - -
1996 519,000 899,000 - - - -
<FN>
Footnotes
(1) In June, 1997, D. DelGiorno, Sr and D. DelGiorno Jr each had 60,000 stock
options (originally granted in 1995) repriced from $15.00 to $.10 (since
exercised). In October, 1998, D. DelGiorno Sr and D. DelGiorno, Jr each had
68,100 stock options ( originally granted in 1995) repriced from $5.00 to
$2.00 (see note 6).
(2) In April, 1998, Mssrs. Del Giorno, Sr, DelGiorno, Jr, Aronson, Pellicano
and Warman were each granted securities subject to vesting conditions
(since met) expiring December 31, 2000 and/or options during 1998 reflected
in the Bonus and/or Securities underlying options/SARs columns, which
include the following option grants which were exercisable at prices
ranging from $4.00 to $6.00 per share: 190,000, 350,000, 150,000, 25,000and
25,000 respectively. These options were repriced to $2.00 in October, 1998.
(3) Mr. Warman was granted the right to 8,000 options in 1994 which vested @
2,000 per year in 1994,1995,1996, and 1997, exercisable at $15.00; 20,000
options in 1995, exercisable at $5.00; and 20,000 shares of common stock in
November, 1996. All of Mr Warman's options were repriced to $2.00 in 1998,
when the market price was $1.75 per share (see note 6).
(4) Mr. Aronson was granted 2,500 options at $5.00 in November, 1995, which
were repriced to $0.10 in June, 1997. (Since exercised).
(5) Bonus amounts reflected above for the years ended December 31, 1997 and
1996, were in the form of stock options and the Company's common stock,
which were subject to forfeiture and /or restrictions, except for shares
valued at $172,000 and $28,000 issued to Dan DelGiorno, Sr and George
Aronson in 1996, respectively.
(6) This column includes the number of options granted, in the year of grant
and excludes options repricings. Certain options were repriced in 1997and
all employee options were repriced to $2.00 per share in 1998. (Except for
any options which have an exercise price below $2.00)
(7) Bonus' granted in 1998 for Messrs. DelGiorno, Sr., DelGiorno, Jr and
Aronson were in the form of restricted shares of Softworks common stock.
(8) In October, 1998, Mr. Pellicano had 10,000 options (originally granted in
1995) repriced from $15.00 to $2.00.
</FN>
</TABLE>
<PAGE>
Option/SAR Grants in Last Fiscal Year
THE FOLLOWING TABLE SETS FORTH INFORMATION WITH RESPECT TO STOCK OPTION/SARs
GRANTED TO EXECUTIVE OFFICERS DURING THE FISCAL YEAR ENDED DECEMBER 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES % OF TOTAL OPTIONS/ GRANT DATE
UNDERLYING OPTIONS/ SARS GRANTED TO EXERCISE EXPIRATION PRESENT VALUE
NAME SARS GRANTED EMPLOYEES IN FISCAL YEAR PRICE ($ PER SH) DATE ($ PER SH)(3)
- ------------------ -------------------- ------------------------ --------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Dan DelGiorno, Sr. 184,000 3.72 % $4.00(1) 12/31/00 $0.86
6,000 0.12 % $6.00(1) 12/31/00 $0.56
258,100 5.22 % $2.00(2) 12/31/02 $0.90
Dan DelGiorno, Jr. 337,500 6.82 % $4.00(1) 12/31/00 $0.86
12,500 0.25 % $6.00(1) 12/31/00 $0.56
418,100 8.45 % $2.00(2) 12/31/02 $0.90
Russell Pellicano 25,000 0.51 % $4.00(1) 12/31/00 $0.86
35,000 0.71 % $2.00(2) 12/31/02 $0.90
Ed Warman 25,100 0.51 % $4.00(1) 12/31/00 $0.86
53,100 1.07 % $2.00(2) 12/31/02 $0.90
500 0.01 % $1.75 12/31/02 $0.40
George Aronson 145,000 2.93 % $4.00(1) 12/31/00 $0.86
5,000 0.10 % $6.00(1) 12/31/00 $0.56
150,000 3.03 % $2.00(2) 12/31/02 $0.90
<FN>
(1) Option granted in April 1998 and subsequently cancelled in October 1998 when employee options were repriced, see (2).
(2) All employee options with an exercise price greater than $2 were repriced to $2 on October 8, 1998. Repriced options
are to expire on December 31, 2002, unless the original expiration date was due to expire at a later date.
(3) The present value of the option was valued using the Black-Scholes pricing model.
The Black-Scholes option-pricing model used the following assumptions
(A) expected volatility ranging from 61% to 105%
(B) risk-free interest rates of 4.18% to 5.56%
(C) expected lives ranging from 2.72 to 4.23
</FN>
</TABLE>
In 1998, Mssrs. Del Giorno, Sr, DelGiorno, Jr, Aronson, Pellicano and
Warman were each granted securities subject to vesting conditions (since met)
expiring December 31, 2000, which are exercisable at $2.00 per share: 190,000,
350,000, 150,000, 25,000and 25,000 respectively.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Value
The following table set forth certain information with respect to stock
option exercises by the named Executive Officers during the fiscal year ended
December 31, 1998, and the value of unexercised options held by them at fiscal
year-end.
<TABLE>
<CAPTION>
Number of Value of
Unexercised Unexercised
Options at In-the-Money
Fiscal Year Options at
End Fiscal Year End (1)
----------------------- -------------------------
Shares Acquired Value
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ---------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Daniel Del Giorno, Sr. 60,000 115,000 258,100 - $ 7,743 -
Daniel Del Giorno, Jr. 60,000 115,000 418,100 - 12,540 -
Russell Pellicano - - 35,000 - 1,050 -
Ed Warman - - 53,600 - 1,733 -
George Aronson 2,500 4,825 150,000 - 4,500 -
<FN>
Footnotes
(1) Market Value of the underlying securities at fiscal year end ($2.03) minus the exercise price.
</FN>
</TABLE>
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information as of March 26, 1999,
with respect to the beneficial ownership of the Company's Common Stock by all
persons known by the Company to be the beneficial owners of more than 5% of its
outstanding shares of Common Stock, by directors who own Common Stock and all
officers and directors as a group:
<TABLE>
<CAPTION>
Parent Company Subsidiary - Softworks
Common Stock % of Common Stock % of
Beneficially Outstanding Beneficially Outstanding
Name of Beneficial Owner Owned Shares (2) Owned Shares(11)
- ------------------------ ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Daniel Del Giorno, Sr. (1)(3)(4) 353,100 1.7% 328,000 2.0%
Daniel Del Giorno, Jr. (1)(3)(5)(6) 740,509 3.5 778,500 4.8
Russell Pellicano (1)(7) 71,500 * * *
Jack S. Beige (1) (8) 67,694 * * *
Augustin Medina (1) 49,764 * * *
George Aronson (1)(10) 253,000 1.2 126,100 *
Ed Warman(1)(9) 158,600 * * *
Internet Tracking & Sec.Vent, LLC (12) 2,220,000 10.4 250,000 1.5
All Officers and Directors as a
Group (7 persons) 1,694,167 8.0% 1,232,600 7.6%
- -------
* = Less than 1%
<FN>
Footnotes
(1) The address of the holder is 80 Orville Drive, Suite 200, Bohemia, New York
11716.
(2) Based upon 21,286,387 shares deemed outstanding as of March 26,1999
(includes outstanding options exercisable within 60 days owned by above
named parties).
(3) Includes shares held by his spouse.
(4) Includes 258,100 options in the Company (exercisable at $2.00 per share).
(5) Includes 418,100 options in the Company (exercisable at $2.00 per share).
(6) Daniel DelGiorno, Jr. has majority control of Tech Marketing Group which
owns 17,405 shares of the Company. (The Company has no business dealings
with Tech Marketing Group)
(7) Includes 35,000 options in the Company (exercisable at $2.00 per share).
(8) Includes 250 and 500 options in the Company (exercisable at $2.00 and $1.75
per share, respectively).
(9) Includes 53,100 and 500 options in the Company (exercisable at $2.00 and
$1.75 per share respectively).
(10) Includes 150,000 options in the Company (exercisable at $2.00 per share).
(11) Based upon 16,139,500 Softworks, Inc. shares deemed outstanding as of March
26,1999 (includes outstanding options exercisable within 60 days owned by
above named parties).
(12) Includes 320,000 shares of the Company's common stock and 250,000 shares of
Softworks, Inc. common stock which are owned by a party which has a
financial interest in Internet Tracking & Security Ventures, LLC.
</FN>
</TABLE>
<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has, from time to time advanced funds to Messrs. Dan DelGiorno,
Sr and Dan DelGiorno, Jr. with such advances being payable upon demand and
bearing no interest. Effective January 1, 1997, these advances became interest
bearing at the rate of 7% per annum. At December 31, 1998, the loan balance due
from these two officers was approximately $895,000. Additionally, at December
31, 1998, a loan balance of approximiately $106,000 was due from Mr. Aronson.
During the first quarter of 1999, repayments of $450,000 were made by Messrs.
Dan DelGiorno Sr. and Dan DelGiorno, Jr and $45,000 by Mr. Aronson. See Item 11.
Executive Compensation and Item 12. Security Ownership of Certain Beneficial
Owners and Management.
During the years ended December 31, 1998, 1997 and 1996, the Company paid
an outside Director fees for legal and consulting services aggregating $149,000,
$165,000 and $127,000, respectively.
The Company paid an outside Director consulting fees of $52,000 in each of
the years ended December 31, 1998, 1997 and 1996, respectively.
In 1998, the Company's general counsel received cash compensation of
$207,000 and 180,000 Company stock options (which were subsequently canceled)
valued at $171,000. In addition to the shares of Softworks and Company common
stock (as discussed in Notes 3 and 11), related entities received 266,000 shares
of Softworks common stock, valued at $541,000, for business and financial
consulting services rendered.
In 1998, a consultant (who also has a financial interest in ITSV) received
cash compensation of $185,000 and 300,000 Company stock options (which were
subsequently canceled) valued at $254,000 in addition to the shares of Softworks
and Company common stock (as discussed in Notes 3 and 11).
In June 1996 and July 1998, the Company entered into various agreements
with S.J. & Associates, Inc. (including its affiliates are collectively referred
to as "SJ") for various services which provide for the following compensation:
- SJ receives minimum annual compensation pursuant to several agreements
aggregating $227,000 per annum. The agreements expire at various
times through May 2001.
- A bonus of $200,000 is payable to SJ should the Company achieve
$5,000,000 of net d.b.Express revenue, which expires May 2001.
- During 1998, SJ was granted 425,000 options to purchase the Company's
common stock at exercise prices ranging from $4.00 to $6.00 per share,
resulting in a charge to operations of $365,000; 275,000 of these
options were exercised and the remaining 150,000 options were
cancelled.
- As discussed in notes 3 and 11, SJ also received shares of the
Company's and Softworks' common stock during 1998.
- SJ also received 190,000 shares of Softworks common stock (issued
directly from Softworks) in conjunction with their initial public
offering.
<PAGE>
PART IV
Item 14. (a) 1. FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets
December 31, 1998 and 1997 F-2
Consolidated Statements of Operations
Years Ended December 31, 1998, 1997 and 1996 F-3
Consolidated Statement of Shareholders' Equity
Years Ended December 31, 1996, 1997 and 1998 F-4
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996 F-5
Notes To Consolidated Financial Statements F-6
14. (a). 2. - SCHEDULES - NONE
14. (a). 3. - EXHIBITS
2.1 Reorganization Agreement dated April 22, 1989. (Incorporated by reference
to Exhibit 2(a) to the Company's Form S-1 Registration Statement) (1)
2.2 Merger agreement between Computer Concepts Investment Corp. and RAMP
Associates Inc. dated October 31, 1990. (Incorporated by reference to
Exhibit 2(b) to the Company's Form S-1 Registration Statement)(1)
2.3 Merger agreement between Computer Concepts Corp. and Softworks, Inc.
(Incorporated by reference to Exhibit 2(a) to the Company's Form 8-K filed
on October 29, 1993)
2.4 Merger Agreement dated December 31, 1994, between the Company, its wholly
owned subsidiary, CCC/MapLinx Corp., and MapLinx Corp. and Merit
Technology, Inc.(Incorporated by reference to Exhibit 10(a) to the
Company's Annual Report on Form 10-K/A for the year ended December 31,
1994.)
3.1(i)(a) Certificate of Incorporation, as amended. (Incorporated by reference
to Exhibit 3(a) of Form S-1 Registration Statement.)(1)
(b) Certificate of Amendment (Change in Name) (Incorporated by reference
to Exhibit 3(a) of Form S-1 Registration Statement.)(1)
(c) Certificate of Amendment (Change in Name) (Incorporated by reference
to Exhibit 3(a) of Form S-1 Registration Statement.)(1)
(d) Certificate of Amendment (Authorizing Increase in Shares of Common
Stock) (Incorporated by reference to Exhibit 3 (i) (d) to Form 10-K
for the year ended 1995
(e) Certificate of Amendment (Authorizing one for ten reverse stock split
as of March 30, 1998).
3.2(ii) By-Laws. (Incorporated by reference to Exhibit 3(d) to the Company's
Form S-1 Registration Statement.)(1)
4.1 Form of Common Stock Certificate. (Incorporated by reference to Exhibit 4
to the Company's Form S-1 Registration Statement.)(1)
4.2 Computer Concepts Directors, Officers and Consultants 1993 Stock Option
Plan (Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8 filed on June 28, 1995)
4.3 Computer Concepts Employees 1993 Stock Option Plan (Incorp. by reference to
Exhibit 4.2 to the Company's Registration Statement on Form S-8 filed on
June 28, 1995)
4.4 Computer Concepts 1995 Incentive Stock Plan (Incorporated by reference to
Exhibit 5 to the Company's Proxy Statement filed on January 29, 1996.)
<PAGE>
9 Voting Trust Agreement among Computer Concepts Corp., Softworks, Inc. and
Trustees dated August 4, 1998 (Incorporated by reference to subsidiary
Softworks, Inc. Registration Statement filed on Form S-1, SEC File No.
333-53939 declared effective August 4, 1998)
10.1 Lease Extension Agreement between Atrium Executive Center and the Company
(Incorp. by reference to Exhibit 10 (g) (ii) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1993.)
10.2 Agreement between Software Publishing Corp. and the Company dated June 14,
1994. (Incorp. by reference to Exhibit 10(a) to the Company's Form 8-K
filed on July 1, 1994.)
10.3 Asset Purchase Agreement dated June 30, 1998, between the Company and
Internet Tracking and Security Ventures, LLC. (Incorporated by reference to
Form 8-K dated July 15, 1998)
16.1 Dismissal of Independent Auditors. (Incorporated by reference to Form 8-K
dated May 29, 1997.)
16.2 Engagement of New Independent Auditors. (Incorporated by reference to Form
8-K dated June 03, 1997.)
(1) Filed with Form S-1, Registration Statement of Computer Concepts Corp.
Reg. No 3-47322 and are incorporated herein by reference
14. (b) Reports on Form 8-K
June 30, 1998 Item 2 - Acquisition of Assets
14. (c) The following Exhibits are filed herewith:
(21) Subsidiaries of the Company.
(23) (a) Consent of Daniel B. Kinsey, P.C.
(b) Consent of Hays & Company
<PAGE>
COMPUTER CONCEPTS CORP.
FORM 10-K
DECEMBER 31, 1998
EXHIBIT 21 - SUBSIDIARIES OF THE COMPANY
Softworks, Inc. (Maryland)
Superbase, Inc. (Delaware) (Inactive)
MapLinx Inc. (Delaware) (Inactive)
Computer Concepts Europe Ltd.(UK) (Inactive)
Ramp Inc.(Delaware) (Inactive)
The subsidiaries listed below are those of Softworks, Inc.
SOFTWORKS INTERNATIONAL LTD. 99%* United Kiindom Jan-95
SOFTWORKS-S.A. 99%* France Mar-97
SOFTWORKS SAVANTECHNOLOGY DO BRASIL 100% Brasil May-97
SOFTWORKS INTERNATIONAL PTY. LTD. 100% Australia Oct-97
SOFTWORKS SAVANTECHNOLOGY INT'L SA 100% Spain Apr-98
SOFTWORKS ITALIA S.r.l. 100% Italy Apr-98
SOFTWORKS SERVICES CORP. 100% Texas May-98
SOFTWORKS SAVANTECHNOLOGY PTE., LTD. 100% Singapore Jul-98
SOFTWORKS DEUTSCHLAND GmbH 100% Germany Sep-98
SOFTWORKS FSC, INC. 100% U.S. Vergin Islands Sep-98
SOFTWORKS IRELAND, LTD. 100% Republic of Ireland In formation
SOFTWORKS JAPAN 100% Japan In formation
*Foreign law of the host country requires that an individual with European
citizenship be a shareholder.
Softworks presently uses its Managing Director to fulfill this requirement.
<PAGE>
Board of Directors and Shareholders
Computer Concepts Corp.
Bohemia, New York
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying consolidated balance sheets of Computer
Concepts Corp. and subsidiaries (the "Company") as of December 31, 1998 and
1997, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Computer Concepts
Corp. and subsidiaries as of December 31, 1998 and 1997, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
/s/ Hays & Company
March 4, 1999
New York, New York
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 8,176 $ 778
Accounts receivable, net of allowance for sales
returns and doubtful accounts of $1,350
and $252 in 1998 and 1997, respectively 27,412 11,718
Installment receivables 16,406 6,148
Inventories 419 -
Prepaid expenses and other current assets 10,128 1,987
Advances to officers 895 1,070
Deferred tax assets, current 306 -
------- -------
Total current assets 63,742 21,701
Installment accounts receivable, due after one year 7,908 6,480
Property and equipment, net 3,564 2,069
Software costs, net 5,594 3,730
Excess of cost over fair value of net assets acquired,
net of accumulated amortization of $4,239 and $2,477
in 1998 and 1997, respectively 8,610 4,611
Other assets 2,000 707
Deferred tax assets, noncurrent 484 -
------- -------
$91,902 $39,298
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $11,428 $ 7,225
Current portion of long-term debt 6,117 1,291
Deferred installment revenue 7,314 5,506
Deferred maintenance revenue 9,107 6,267
Income taxes payable 2,207 -
------- -------
Total current liabilities 36,173 20,289
Deferred installment revenue, earned after one year 7,883 7,122
Deferred maintenance revenue, earned after one year 3,924 825
Long-term debt, net of current portion 1,403 1,395
------- -------
Total liabilities 49,383 29,631
------- -------
Minority interest 8,503 -
------- -------
Commitments and contingencies
Shareholders' equity
Common stock, $ .0001 par value; 150,000,000
shares authorized; issued and outstanding -
19,324,839 shares in 1998
and 12,744,751 shares in 1997 2 1
Additional paid-in capital 106,515 91,641
Accumulated deficit (72,194) (81,741)
Accumulated other comprehensive loss (307) (234)
------- -------
Total shareholders' equity 34,016 9,667
------- -------
$91,902 $39,298
======= =======
The accompanying notes are an integral part of
these consolidated financial statements.
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except share data)
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenue
Software licenses, net $ 31,795 $ 17,890 $ 11,116
Maintenance 10,503 9,980 7,914
Professional services 19,690 1,868 -
-------- -------- --------
61,988 29,738 19,030
-------- -------- --------
Cost of revenue
Software licenses 1,978 1,166 1,323
Maintenance 1,392 900 720
Professional services 17,648 1,597 -
-------- -------- --------
21,018 3,663 2,043
-------- -------- --------
Gross margin 40,970 26,075 16,987
-------- -------- --------
Operating expenses
Research and development 11,193 8,785 5,347
Sales and marketing 28,496 17,033 13,038
General and administrative 12,718 9,111 8,185
Amortization and depreciation 4,207 2,386 3,550
Unusual charges, net - 686 2,590
Reduction in carrying values of
long-lived assets - - 412
-------- -------- --------
56,614 38,001 33,122
-------- -------- --------
Operating loss (15,644) (11,926) (16,135)
Other income (expense)
Gain on partial disposition of subsidiary 28,785 - -
Gain on sale of net assets of subsidiary - 813 -
Interest income (expense), net (485) 16 (8)
Interest charge pertaining to the discount
on convertible debentures - (1,288) (2,810)
Minority interest in earnings of subsidiary (1,361) - -
-------- -------- --------
Income (loss) before provision for income
taxes 11,295 (12,385) (18,953)
Provision for income taxes (1,748) - -
--------- -------- --------
Net income (loss) $ 9,547 $(12,385) $(18,953)
========= ======== ========
Basic net income (loss) per share $ 0.58 $ (1.11) $ (2.66)
========= ======== ========
Diluted net income (loss) per share $ 0.56 $ (1.11) $ (2.66)
========= ======== ========
Basic weighted average common shares
outstanding 16,523 11,163 7,130
========= ======== ========
Diluted weighted average common shares
outstanding 17,031 11,163 7,130
========= ======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
</TABLE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional other Total
Common stock paid-in Accumulated comprehensive shareholders' Comprehensive
Shares Amount capital deficit loss equity income (loss)
------ ------ ---------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 57,475 $ 6 $ 52,406 $(50,403) $ - $ 2,009
Net proceeds from sales of
common stock and options
exercised 6,365 1 1,996 - - 1,997
Common stock and options issued
for services 7,680 1 3,445 - - 3,446
Common stock issued formerly
subject to forfeiture 5,075 - 1,508 - - 1,508
Conversion of common stock
formerly subject to
redemption 4,490 - 4,000 - - 4,000
Conversion of convertible
Debentures 16,632 2 12,739 - - 12,741
Common stock issued for
settlements 3,618 - 2,776 - - 2,776
Net loss and comprehensive loss - - - (18,953) - (18,953) $(18,953)
------- ------- ------- -------- -------- -------- =========
Balance, December 31, 1996 101,335 10 78,870 (69,356) - 9,524
Net proceeds from sales of
common stock and options
exercised 5,390 1 2,741 - - 2,742
Common stock and options issued
for services 9,042 1 5,514 - - 5,515
Conversion of convertible
debentures 11,982 1 4,668 - - 4,669
Common stock adjustment related
to settlement (302) - (164) - - (164)
Currency translation
Adjustment - - - - (54) (54) $ (54)
Marketable securities
valuation adjustment - - - - (180) (180) (180)
Net loss - - - (12,385) - (12,385) (12,385)
One-for-ten reverse stock split * (114,702) (12) 12 - - - -
--------- ------- ------- -------- -------- -------- ----------
Total comprehensive loss $(12,619)
==========
Balance, December 31, 1997 12,745 1 91,641 (81,741) (234) 9,667
Net proceeds from sales of
common stock and options
exercised 2,403 - 5,228 - - 5,228
Common stock and options issued
for services 2,090 1 3,462 - - 3,463
Common stock issued for
settlements 187 - 484 - - 484
Common stock issued for
asset acquisition 1,900 - 5,700 - - 5,700
Currency translation
adjustment - - - - (13) (13) $ (13)
Marketable securities
valuation adjustment - - - - (60) (60) (60)
Net income - - - 9,547 - 9,547 9,547
--------- ------- -------- -------- -------- -------- ---------
Total comprehensive income $ 9,474
=========
Balance, December 31, 1998 19,325 $ 2 $106,515 $(72,194) $ (307) $34,016
========= ======= ======== ========= ======== ========
<FN>
* The Board of Directors declared a one-for-ten reverse stock split effective
for shareholders of record as of the close of business on March 27, 1998. Common
stock and additional paid-in capital as of December 31, 1997 have been restated
to reflect this reverse stock split (Notes 2 and 11).
The accompanying notes are an integral part of
these consolidated financial statements.
</FN>
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities
Net income (loss) $ 9,547 $(12,385) $ (18,953)
Adjustments to reconcile net income (loss) to
net cash used in operating activities
Amortization and depreciation:
Property and equipment 1,226 965 806
Software costs 1,736 832 1,910
Excess of cost over fair value of net
assets acquired 1,762 749 959
Other 2 4 9
Provision for doubtful accounts 324 136 154
Common stock and options issued for services 3,463 5,515 3,446
Softworks common stock exchanged for services 5,551 - -
Common stock issued subject to forfeiture - - 1,508
Non-cash unusual charges - 336 2,415
Non-cash interest charge pertaining to the discount
on convertible debentures - 1,288 2,810
Reduction in carrying values of long-lived assets - - 412
Gain on partial disposition of subsidiary (28,785) - -
Minority interest in earnings of subsidiary 1,361 - -
Gain on sale of net assets of subsidiary - (813) -
Deferred income tax benefit (790)
Other 75 - -
Changes in operating assets and liabilities
Accounts receivable (26,276) (9,070) (4,723)
Inventories (419) 10 94
Prepaid expenses and other current assets 947 (967) (637)
Installment accounts receivable (1,428) (2,766) (3,714)
Other assets (1,293) (457) (129)
Accounts payable and accrued expenses 4,411 2,884 569
Deferred revenue 8,508 6,802 8,070
Income taxes payable 2,207 -
-------- -------- --------
Net cash used in operating activities (17,871) (6,937) (4,994)
-------- -------- --------
Cash flows from investing activities
Expenditures for property and equipment (2,721) (1,455) (832)
Software development and technology purchases (900) (1,559) (526)
Proceeds from the sale of technology 450
Proceeds from the sale of net assets of subsidiary,
net - 230 -
Advances from (to) officers, net 175 (388) (297)
Additional consideration for Softworks and MapLinx
acquisitions (678) (523) (459)
Proceeds from the initial public offering of
Softworks 19,419 - -
-------- -------- --------
Net cash provided by (used in) investing
activities 15,295 (3,695) (1,664)
-------- -------- --------
Cash flows from financing activities
Net proceeds from sales of common stock and
options exercised 5,228 2,742 1,997
Net proceeds from sale of debenture 1,925 3,381 9,931
Repayment of debenture (2,000) - -
Advances from (repayments of) long-term debt 4,834 (344) (174)
-------- -------- --------
Net cash provided by financing activities 9,987 5,779 11,754
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents (13) (44) -
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 7,398 (4,897) 5,096
Cash and cash equivalents, beginning of year 778 5,675 579
-------- -------- --------
Cash and cash equivalents, end of year $ 8,176 $ 778 $ 5,675
======== ======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1 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 and systems management software products for corporate
mainframe data centers. The Company created a "professional services"
division in 1997 that resells computer hardware and for a fee, the Company
will assist in the design, construction and installation of technology
systems. The Company's professional services organization also provides
systems management services, including training, implementation of software
and staff augmentation. Additionally, effective June 30,1998, the Company
completed an acquisition of software and related sales and marketing rights
which is designed to provide non computer literate owners (e.g. parents)
the ability to identify threats as well as objectionable material which may
be viewed by users of the computer on the Internet (e.g. children).
2 Significant accounting policies
Common stock split
At the Company's annual shareholders' meeting on November 26, 1997, the
Company's shareholders granted the Board of Directors authority to effect a
reverse stock split in a ratio ranging from one-for- two through
one-for-ten. On March 18, 1998, the Board of Directors declared a
one-for-ten reverse stock split effective for shareholders of record as of
the close of business on March 27, 1998. Common stock and additional
paid-in capital as of December 31, 1997 have been restated to reflect this
split. Par value and authorized shares remain unchanged at $.0001 and
150,000,000 shares, respectively.
The effect of the stock split has been retroactively reflected as of
December 31, 1997 in the consolidated balance sheet and statement of
changes in shareholders' equity, but activity in the statement of changes
in shareholders' equity for 1997 and prior periods was not restated. All
references to the number of common shares and per share amounts elsewhere
in the consolidated financial statements and related footnotes have been
restated to reflect the effect of the split for all periods presented.
Principles of consolidation
The consolidated financial statements include the accounts of Computer
Concepts Corp. and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. The
separate public ownership of Softworks, Inc. ("Softworks"- see Note 3),
which was a wholly owned subsidiary of the Company until June 30, 1998, is
reflected in the consolidated balance sheet and results of operations as
minority interest.
Revenue recognition
The Company records revenue in accordance with Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2"), issued by the American
Institute of Certified Public Accountants (as modified by Statement of
Position 98-9), which was adopted in 1998. The adoption of these
pronouncements was not material to the Company's revenue recognition policy
for software transactions. Revenue from the sale of perpetual and term
software licenses are recognized, net of provisions for returns, at the
time of delivery and acceptance of software products by the customer, when
collectibility is probable. The Company provides customers with the option
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
2 Significant accounting policies (continued)
Revenue recognition (continued)
to pay for license fees in one lump sum or generally in equal annual
installments over extended periods of time, generally three to five years.
In such instances, the Company does not consider sales contracts with
amounts due for periods greater than one year from delivery, fixed and
determinable, and accordingly recognizes such amounts as revenue when they
become due. Maintenance revenue that is bundled with an initial license fee
is deferred and recognized ratably over the maintenance period. Amounts
deferred for maintenance are based on the fair value of equivalent
maintenance services sold separately.
Revenue from professional services, such as the reselling of computer
hardware, systems management services, training and staff augmentation, is
recognized as the units are shipped or the services are performed.
Construction revenue is recognized using the percentage of completion
method based on the cost incurred relative to total estimated costs.
Cost of revenue
Cost of revenue in the consolidated financial statements of operations is
presented exclusive of amortization and depreciation shown separately.
Reporting of comprehensive income (loss)
In January, 1998, the Company began reporting comprehensive income (loss)
in accordance with Statement of Financial Accounting Standards No. 130 -
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
additional disclosure requirements, but does not effect the measurement of
results of operations. Accordingly, the Company displays other items of
comprehensive income (loss) in the accompanying consolidated statement of
shareholders' equity.
Installment accounts receivable
Perpetual license agreements may be executed under installment payment
plans generally with annual payment terms of three to five years. Revenue
and related sales commissions are deferred and recognized as payments
become due.
Property and equipment
Property and equipment are stated at cost and depreciated on a
straight-line basis over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the lives of the respective
leases or the service lives of the related assets, whichever is shorter.
Capitalized lease assets are amortized over the shorter of the lease term
or the service life of the related assets.
Software costs
Costs associated with the development of software products are generally
capitalized once technological feasibility is established. Purchased
software technologies are recorded at cost and software technologies
acquired in purchase business transactions are recorded at their estimated
fair value. Software costs associated with technology development and
purchased software technologies are amortized using the greater of the
ratio of current revenue to total projected revenue for a product or the
straight-line method over its estimated useful life. Amortization of
software costs begins when products become available for general customer
release. Costs incurred prior to establishment of technological feasibility
are expensed as incurred and reflected as research and development costs in
the accompanying consolidated statements of operations.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
2 Significant accounting policies (continued)
Excess of cost over fair value of net assets acquired
The excess of cost over the fair value of net assets acquired in purchased
business transactions is amortized on a straight-line basis over periods
ranging from three to ten years.
Impairment of long-lived assets
The Company reviews its long-lived assets, including goodwill resulting
from business acquisitions, capitalized software costs and property and
equipment, for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully
recoverable. To determine if impairment exists, the Company compares the
estimated future undiscounted cash flows from the related long-lived assets
to the net carrying amount of such assets. Once it has been determined that
an impairment exists, the carrying value of the asset is adjusted to fair
value. Factors considered in the determination of fair value include
current operating results, trends and the present value of estimated
expected future cash flows.
Income taxes
The Company accounts for income taxes using the liability method. The
liability method 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.
Additionally, net deferred tax assets are 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 assets will not
be realized.
Basic and diluted net income (loss) per share
The Company displays earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128").
SFAS 128 requires dual presentation of basic and diluted earnings per
share. Basic earnings per share includes no dilution and is computed by
dividing net income (loss) available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted
earnings per share includes the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock.
Cash and cash equivalents
The Company considers all investments with original maturities of three
months or less to be cash equivalents. Included in cash and cash
equivalents at December 31, 1998 is a $1,000,000 certificate of deposit
that is being used to collateralize a stand by letter of credit in favor of
one of the Company's professional services vendors.
Foreign currency
The functional currency for all of the Company's foreign operations is the
subsidiary's local currency. Assets and liabilities of foreign subsidiaries
are translated into U.S. dollars at year-end exchange rates and revenue and
expense accounts and cash flows are translated at average exchange rates
during the period. Gains and losses resulting from translation are recorded
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
2 Significant accounting policies (continued)
Foreign currency (continued)
as accumulated other comprehensive income in shareholders' equity.
Transaction gains and losses are recognized in the consolidated statements
of operations as incurred.
Included in cash and cash equivalents at December 31, 1998 and 1997, is
approximately $464,000 and $278,000, respectively, of cash denominated in
various foreign currencies.
Marketable securities
Marketable securities, which are all classified as "available for sale",
are valued at fair market value. Unrealized gains or losses are recorded
net of income taxes as accumulated other comprehensive income in
shareholders' equity, whereas realized gains and losses are recognized in
the Company's statements of operations using the first-in, first-out
method. Net book value of marketable securities approximates $10,000 and
$40,000 at December 31, 1998 and 1997, respectively, and is included in
"Prepaid expenses and other current assets."
Advertising and promotional costs
Advertising and promotional costs are reported in "Sales and marketing"
expense in the consolidated statements of operations and are expensed when
incurred. Prepaid advertising costs, which are included in "Prepaid
expenses and other current assets" in the consolidated balance sheets (see
Note 5), consist of prepayments for personal appearances and promotion of
one of the Company's new software products, Computer Cop (see Note 3).
These assets are expensed as the related services are performed.
Pre-opening expenses
During 1998, the Company adopted Statement of Position 98-5, "Reporting on
the Cost of Start-Up Activities," issued by the American Institute of
Public Accountants. The adoption of this statement requires the expensing
of pre-opening costs as incurred. The Company expensed approximately
$300,000 for 1998 start-up activities associated with Softworks' German
subsidiary. The adoption had no impact on prior years.
Reclassifications
Certain reclassifications have been made to the consolidated financial
statements shown for the prior years in order to have them conform to the
current year's classifications.
Concentrations and fair value of financial instruments
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash investments and
trade and installment accounts receivables. At December 31, 1998, the
Company has cash investments of approximately $2,062,000 and $4,062,000 at
two separate banking institutions. The balance of the Company's cash
investments are held at various financial institutions, which limits the
amount of credit exposure to any one financial institution. At December 31,
1998, the Company has one customer that accounts for approximately
$11,234,000 of its trade accounts receivable (related to its professional
services division); this receivable was substantially collected in the
first quarter of 1999. Concentrations of credit risk with respect to the
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
2 Significant accounting policies (continued)
remaining trade and installment accounts receivables are limited due to the
large number of customers comprising the Company's revenue base and their
dispersion across different industries and geographic areas. The Company
performs ongoing credit evaluations of its customers' financial condition
and, generally, requires no collateral from its customers. Unless otherwise
disclosed, the fair value of financial instruments approximates their
recorded value.
Use of estimates
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the consolidated
financial statements, as well as the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
3 Acquisitions and dispositions
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 in November, 1998.
The acquisition has been valued at an aggregate of $12,210,000 determined
as follows: 1,900,000 restricted shares of the Company have been valued at
$5,700,000 and the 1,000,000 restricted shares of Softworks' common stock
have been 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".
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 ($9,462,000 at December 31, 1998)
may be reduced materially in the near term.
<PAGE>
3 Acquisitions and dispositions (continued)
Softworks, Inc.
In October 1993, the Company completed the acquisition of all of the common
stock of Softworks, a privately held Maryland company founded in 1977.
Softworks provides systems management software products for mainframe data
centers.
The purchase price approximated $5,700,000, which included $2,000,000 in
cash and 100,000 shares of the Company's restricted common stock. The
acquisition has been accounted for using the purchase method of accounting.
Accordingly, assets and liabilities were recorded at their fair values as
of September 1, 1993, the effective date of the acquisition, and the
operations of Softworks have been included in the Company's consolidated
statements of operations since that date. The excess of cost over the fair
value of net assets acquired, which originally approximated $5,484,000, is
being amortized over ten years. The agreement also requires the Company to
make additional contingent purchase consideration payments to two of
Softworks' former shareholders based upon certain product revenue for the
years 1995 through 1998, up to a maximum of $1,000,000 each, for an
aggregate maximum of $2,000,000. As of December 31, 1998, the Company has
paid the maximum of $2,000,000 to the non-employee former shareholders,
which has been treated as additional consideration in connection with the
acquisition and, accordingly, included in the excess of cost over the fair
value of net assets acquired, as these individuals did not continue in the
employment of the Company subsequent to the acquisition.
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. At December 31, 1998, approximately 1,600,000 options are
currently exercisable (into restricted shares of Softworks' common stock).
The balance vests over various periods through December 31, 2003, and could
vest earlier, should Softworks achieve certain financial thresholds. All
options are exercisable at the initial public offering price of $7.00 per
share. Softworks common stock is traded on the NASDAQ National Market under
the symbol "SWRX."
In conjunction with the Softworks public offering, the remaining shares of
Softworks common stock owned by the Company have been placed in a voting
trust. The voting power of the trust is held by three trustees who are
members of the Board of Directors of Softworks. One trustee is the C.E.O.
and President of the Company. The remaining two trustees are Softworks
directors who do not have a significant financial interest in the Company,
one of which is the Chairman of Softworks. The agreement provides that upon
a change in either of the remaining two trustees, the non-Company
shareholders have control of the selection of the successor
director/trustee. This agreement remains in effect as long as the Company
continues to own at least 25% of Softworks.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
3 Acquisitions and dispositions (continued)
Softworks, Inc. (continued)
In addition to the public offering discussed above, the following
transactions, with respect to Softworks common stock owned by the Company,
were recorded in 1998:
- On July 1, 1998, the Company exchanged 100,000 restricted shares of
Softworks common stock to a member of its Internet Strategy Committee,
(who now also serves as Chairman of the Board of Softworks) for services
rendered, resulting in a charge to operations of $525,000.
- The Company exchanged 136,000 restricted shares of Softworks common
stock to the Company's general counsel for services rendered, resulting
in a charge to operations of $276,000.
- The Company exchanged 768,100 restricted shares of Softworks common
stock to three of the Company's executive officers for services rendered,
resulting in a charge to operations of $2,777,000.
- The Company exchanged 133,000 restricted shares of Softworks common
stock to a consultant (who also has a financial interest in ITSV) for
business advisory services rendered, resulting in a charge to operations
of $270,000.
- The Company exchanged 471,000 restricted shares of Softworks common
stock to various consultants and employees for services rendered,
resulting in a charge to operations of $1,068,000.
- The Company exchanged 269,600 restricted shares of Softworks common
stock to two consultants (including 167,300 shares to S.J. & Associates,
Inc., "SJ" see Note 14) related to separate contracts for services to
be rendered over twelve months commencing In October 1998. The $635,000
value of these shares will be expensed over the terms of the contracts.
- In December 1998, the Company sold 1,000,000 restricted shares of
Softworks common stock in a private placement in exchange for a
$5,000,000 full recourse promissory note. The note, which is included in
"prepaid expenses and other current assets" at December 31, 1998,
was timely paid in full in the first quarter of 1999.
The total value of the Softworks common stock exchanged by the Company for
the above-described services in 1998 was $5,551,000. As a result of the
ITSV asset acquisition, the Softworks public offering and the various
transactions described above, the Company's ownership interest in Softworks
was reduced from 100% to 54.5%. Accordingly, the Company recognized a gain
of $28,785,000 representing the difference between the fair value of the
Softworks common stock exchanged or sold, and the related adjusted carrying
value of the Company's investment in Softworks (pursuant to Staff
Accounting Bulletins 51 and 84).
In January 1999, the Company entered into the following additional
transactions that further reduced the Company's ownership interest in
Softworks from 54.5% to 50.2%:
- The Company exchanged an additional 298,000 restricted shares of
Softworks common stock to two of the Company's executive officers for
services to be rendered in 1999. These shares will be valued at $1,077,000.
<PAGE>
3 Acquisitions and dispositions (continued)
Softworks, Inc. (continued)
- The Company exchanged 389,600 restricted shares of Softworks common stock
to three consultants (including 117,000 shares to a consultant with a
financial interest in ITSV) related to separate contracts for services to
be rendered. Two of these contracts relate to assistance with the Company's
professional services division and one contract relates to assistance with
the design and marketing of d.b.Express telecommunications applications.
One contract has a twenty-four month term and two of the contracts have
terms of twelve months, all commencing in January 1999. The $1,409,000
value of these shares will be expensed over the terms of the related
contracts.
- In exchange for services to be rendered by several consultants in 1999, the
Company granted options to acquire 80,000 restricted shares of Softworks
common stock owned by the Company that are exercisable at $1.00 per share
and expire December 31, 1999.
Superbase
In June 1994, the Company completed the purchase of the Superbase product
technology and certain related assets from Software Publishing Corporation
("SPC") in exchange for shares of the Company's restricted common stock and
cash totaling $4,075,000. However, as a result of the Company's subsequent
decision not to invest in the further development and marketing of the
Superbase software technology, the Company sold the technology in 1996 for
$450,000 in cash. A charge to operations was recorded in 1995 to reduce the
carrying value of the asset to its net realizable value.
The purchase agreement included a provision stating that the restricted
shares were to be included in an effective registration statement and any
violation would result in the payment of a penalty to SPC. The Company
failed to meet several of the agreed upon filing requirements and was
required to compensate SPC a total of $1,713,000 (an unusual charge of
$515,000 was recorded in 1996 and unusual charges of $1,198,000 were
recorded in prior years), payable in a combination of cash and additional
shares of the Company's common stock. During 1997, based upon mutual
agreement and a final settlement, SPC returned approximately 30,000 penalty
shares. As a result, the Company recorded a corresponding reduction to
unusual charges in the fourth quarter of 1997 totaling $164,000 (Note 13).
MapLinx, Inc.
During December 1994, the Company completed the acquisition of MapLinx Inc.
("MapLinx"), a developer and provider of personal computer database
geographic utilities used with Windows database and spreadsheet products.
In connection with the acquisition, the Company issued 167,248 shares
having a fair value of $900,000 at the acquisition date. The acquisition
was accounted for as a purchase and, accordingly, assets acquired and
liabilities assumed were recorded at their fair values as of December 31,
1994 and the operations of MapLinx were included in the Company's
consolidated statements of operations since that date. The cost of the
acquisition exceeded the fair value of net assets acquired by $904,000 and
had been classified as the "excess of cost over fair value of net assets
acquired" and was being amortized on a straight-line basis over a period of
three years.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
3 Acquisitions and dispositions (continued)
MapLinx, Inc. (continued)
Since its acquisition, MapLinx' revenue had diminished and it had incurred
continuing losses. As a result, the Company evaluated the carrying value of
the unamortized portion of the MapLinx goodwill and unamortized software
development costs, aggregating $412,000 at December 31, 1996, and had
determined that its recoverability was doubtful. Accordingly, the Company
wrote-off such long-lived assets in the fourth quarter of 1996. However, in
July 1997, the Company completed a transaction in which it sold all rights
to the underlying software technologies of MapLinx. Further, as part of the
transaction, the purchaser acquired all of MapLinx' current assets and
assumed certain of its liabilities. The sales price of approximately
$850,000 was adjusted (reduced) by the excess of MapLinx' current
liabilities over current assets (approximately $380,000), resulting in a
net sales price of approximately $470,000. Approximately $235,000 was paid
at closing and a $235,000 note receivable was issued for the balance (the
note receivable was subsequently collected). As a result, in 1997 the
Company recognized an $813,000 gain on the sale of the net assets of
MapLinx.
Financial information pertaining to MapLinx (excluding the $235,000 note
receivable) as of and for the years ended December 31, 1997 and 1996, is
summarized below (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current assets $ - $ 366
Total assets - 429
Current liabilities - 517
Total liabilities - 520
Net revenue 578 2,220
Net loss, (1997 amount prior to
gain on sale of $813) (323) (1,497)
</TABLE>
4 Installment accounts receivable
During 1996, the Company began offering customers extended payment term
alternatives to purchase software. The payment schedule for installment
accounts receivable, due after one year, at December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
Installment accounts receivable (in thousands)
<S> <C>
Due in 2000 $ 5,249
Due in 2001 1,852
Due in 2002 756
Due in 2003 51
$ 7,908
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
4 Installment accounts receivable (continued)
Long-term deferred revenue, earned after one year, at December 31, 1998,
which relates to the installment accounts receivable above, as well as
certain maintenance revenue billed in advance of the maintenance period, is
scheduled to be earned as follows:
<TABLE>
<CAPTION>
Software
Total Licenses Maintenance
----- -------- -----------
<S> <C> <C> <C>
Earned in 2000 $ 5,225 $ 3,988 $ 1,237
Earned in 2001 1,852 1,428 424
Earned in 2002 756 534 222
Earned in 2003 50 38 12
-------- -------- -------
$ 7,883 $ 5,988 $ 1,895
======== ======== =======
</TABLE>
5 Prepaid expense and other current assets
Prepaid expenses and other current assets consist of the following:
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Prepaid expenses $ 1,135 $ 466
Prepaid advertising 2,767 -
Deferred commissions 839 511
Notes and loans receivable 375 582
Note receivable sale of Softworks
common stock (Note 3) 5,000 -
Other current assets 12 428
-------- --------
$ 10,128 $ 1,987
======== ========
</TABLE>
Additionally, included in other assets are noncurrent deferred commissions
of $878,000 and $538,000 at December 31, 1998 and 1997, respectively.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
6 Property and equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
Useful life
in years 1998 1997
------------ ---- ----
(in thousands)
<S> <C> <C> <C>
Computer equipment and software 3 to 7 $ 6,485 $ 4,009
Furniture and fixtures 5 to 7 532 347
Leasehold improvements 7 554 500
------- -------
7,571 4,856
Less accumulated depreciation
and amortization (4,007) (2,787)
------- -------
Property and equipment, net $ 3,564 $ 2,069
======= =======
</TABLE>
7 Software costs
Software costs consist of the following:
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Capitalized software development costs $ 5,873 $ 4,817
Purchased and acquired software technologies 7,219 4,228
-------- -------
13,092 9,045
Less accumulated amortization (7,498) (5,315)
-------- -------
Software costs, net $ 5,594 $ 3,730
======== =======
</TABLE>
In July 1997, Softworks acquired from Cognizant Technology Solutions
Corporation ("CTS") the rights to two technologies (the "Technology") that
complement Softworks' existing Year 2000 product solutions. Pursuant to the
software distribution agreement, in exchange for the Technology rights,
Softworks is required to pay CTS a royalty on sales of the Technology at
defined rates subject to minimum annual royalties as follows: $100,000 in
1997, $900,000 in 1998, $1,400,000 in 1999 and $400,000 in 2000. An asset
equal to the present value of the minimum annual royalties of $2,160,000
has been recorded as purchased and acquired software technologies and is
being amortized over the five year term of the agreement. The payment
obligation is recorded as long-term debt.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
8 Accounts payable and accrued expenses
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Trade accounts payable $ 4,901 $ 2,424
Class action settlement (Note 15) - 1,200
Accrued payroll and benefits 888 628
Commissions payable 2,373 1,368
Other accrued expenses 3,266 1,605
------- -------
$11,428 $ 7,225
======= =======
</TABLE>
9 Long-term debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Notes payable factor (a) $ 4,167 $ -
Purchased software (see Note 7) 2,462 2,054
Capitalized lease obligation (b) 771 107
Notes payable other 120 525
------- -------
7,520 2,686
Less current portion of long-term debt (6,117) (1,291)
------- -------
Long-term debt, net of current portion $ 1,403 $ 1,395
======= =======
</TABLE>
(a) During November 1998 the Company entered into an Accounts Receivable
Purchase Agreement with Silicon Valley Financial Services, a division of
Silicon Valley Bank ("Silicon Valley"), whereby the Company from time to
time may, on a full recourse basis, assign some of their professional
services accounts receivable to Silicon Valley. Upon specific invoice
approval by Silicon Valley, 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 Silicon
Valley. This agreement expires in November 1999. The entire balance due
Silicon Valley was repaid in the first quarter of 1999.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
9 Long-term debt (continued)
(b) The Company leases certain computer equipment under long-term
non-cancelable leases, which are classified as capital leases and are
included in property and equipment. At December 31, 1998, the future
minimum lease payments under capital leases are summarized as follows (in
thousands):
<TABLE>
<S> <C>
Year ending December 31,
1999 $ 289
2000 274
2001 268
------
831
Amounts representing interest (60)
------
Net $ 771
======
</TABLE>
(c) Additionally, in May 1998, the Company obtained approximately
$1,925,000 (net of fees and commissions of approximately $75,000) from the
sale of a debenture. The debenture would have matured on August 28, 1998,
and was convertible into Company common stock upon a payment default. In
August 1998, prior to maturity, the Company repaid the debenture plus
interest aggregating approximately $2,460,000.
10 Earnings per share
For 1997 and 1996, outstanding stock options, warrants and other potential
stock issuances have not been considered in the computation of diluted
earnings per share amounts since the effect of their inclusion would be
antidilutive. For 1998, the Company's dilutive instruments are "in the
money" stock options with various exercise dates and prices as well as
certain contingent stock issuances. The Company uses the treasury stock
method to calculate the effect that the conversion of the stock options
would have on earnings per share ("EPS"). The following table sets forth
the computation of basic and diluted EPS:
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Numerator:
Net income (loss) $ 9,547 $(12,385) $(18,953)
Denominator:
Weighted average shares outstanding
(Denominator for basic EPS) 16,523 11,163 7,130
Effect of dilutive securities
Stock options 477 N/A N/A
Contingent stock issuances 31 N/A N/A
--------- -------- ---------
Denominator for diluted EPS 17,031 11,163 7,130
========== ========= ========
Basic net income (loss) per share $ 0.58 $ (1.11) $ (2.66)
========== ========== =========
Diluted net income (loss) per share $ 0.56 $ (1.11) $ (2.66)
========== ========== =========
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
11 Shareholders' equity
Common stock and convertible debt securities
Year ended December 31, 1998
In January 1998, the Company consummated the sale of restricted common
stock under a private placement to accredited investors pursuant to
Regulation D. Proceeds from this sale totaled $1,978,000, net of
commissions and fees of approximately $162,000. Originally, 496,232 shares
were sold at a price of $4.3125 per share. The closing bid price of the
Company's common stock, as stated on the NASDAQ Small Cap Market did not
exceed an average of $5.28 for any five consecutive trading days during the
thirty days immediately following the effective date of the Registration
Statement (effective February 6, 1998). Accordingly, under the terms of
this transaction, the Company issued approximately 281,000 additional
shares in April 1998.
Year ended December 31, 1997
During 1997, the Company consummated sales of restricted common stock under
various private placement agreements pursuant to Regulation D and
Regulation S, including sales of convertible debt securities. Proceeds
raised from these sales aggregated $6,123,000, net of commissions and
expenses of approximately $769,000 and the discount of $1,288,000
pertaining to the convertible debt. A total of 1,659,773 shares were sold
(including 1,198,234 shares related to the convertible debentures) at
prices ranging from $3.00 to $6.50 and a total of 105,696 options were
exercised at prices ranging from $.10 to $5.00. Additionally, 28,265 shares
were returned to the Company, pursuant to adjustments related to valuation
guarantees for stock transactions occurring in prior years. Details of the
Regulation D and Regulation S private placements are as follows:
- The private placements pursuant to Regulation D contained a valuation
guarantee based on the closing bid price of the Company's common stock
following the effective date of a Registration Statement. The
Registration Statement became effective in January 1998, and as a
result, the Company issued approximately 500,000 additional shares.
- Pursuant to Regulation S, the Company received net proceeds of
approximately $3,381,000 (net of commissions and fees of $484,000)
through the sale of non-interest bearing convertible debentures. These
debentures were convertible, at the option of the holder, commencing
45 days from the date of issuance into restricted common stock of the
Company. The convertible debentures had an assured discount of 25%
from the prices of the Company's common stock at various defined
periods. In connection with this discount, the Company recorded a non-
cash interest charge of $1,288,000. All of these convertible
debentures were converted into an aggregate of 1,198,234 shares of the
Company's common stock in 1997.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
11 Shareholders' equity (continued)
Common stock and convertible debt securities (continued)
Year ended December 31, 1996
During 1996, the Company consummated sales of restricted common stock under
various private placement agreements, including sales of convertible debt
securities. Proceeds raised from these sales aggregated $11,928,000, net of
offering commissions and expenses of approximately $1,664,000 and the
discount of $2,810,000 pertaining to the convertible debt. A total of
1,928,600 shares were sold (including 1,663,200 shares related to the
convertible debentures) at prices ranging from $2.00 to $20.00 per share.
Approximately 910,400 shares were also issued in 1996 pursuant to valuation
guarantees under stock transactions during the years ended December 31,
1994 and 1995 (371,100 shares) and pursuant to valuation guarantees and the
settlement of the SPC transaction described in Note 3 (539,300 shares).
Sales of the aforementioned convertible debt securities were made pursuant
to Regulation S, resulting in net proceeds to the Company of approximately
$9,931,000 (net of commissions and fees of $1,371,000). These debentures
were convertible, at the option of the holder, commencing 45 days from the
date of issuance into restricted common stock of the Company. The
convertible debentures had assured discounts ranging from 20% to 32.5% from
the market price on the date of conversion. In connection with this
discount, the Company recorded a non-cash interest charge of $2,810,000.
All of these convertible debentures were converted into an aggregate of
1,663,200 shares of the Company's common stock in 1996.
Transactions with officers, employees and consultants
During 1998, the Company issued 2,090,000 restricted shares of common stock
to various officers, employees and consultants and recorded a non-cash
charge to operations of $2,208,000 as follows:
- The Company issued 501,000 shares to SJ (Note 14) for services
rendered in connection with the initial public offering of Softworks,
resulting in a $478,000 charge against the "Gain on partial
disposition of subsidiary." SJ also received 224,000 shares for other
services rendered, resulting in a charge to operations of $378,000.
- The Company issued 182,000 shares to a member of its Internet Strategy
Committee (who now also serves as the Chairman of the Board of
Softworks) for services rendered, resulting in a charge to operations
of $237,000.
- The Company issued 181,000 shares to its general counsel for services
rendered, resulting in a charge to operations of $146,000.
- The Company issued 80,000 shares to a consultant for services rendered
to the Company, resulting in a charge to operations of $63,000.
Subsequently, the consultant was elected to the Softworks Board of
Directors.
- The Company issued 320,000 shares to a consultant (who also has a
financial interest in ITSV) for business advisory services rendered,
resulting in a charge to operations of $266,000.
- The Company issued 602,000 shares to various other employees and
consultants for services rendered, resulting in a charge to operations
of $640,000.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
11 Shareholders' equity (continued)
Transactions with officers, employees and consultants (continued)
During 1997, the Company issued 904,234 shares of common stock (including
the 114,765 shares to HPS discussed below), 811,000 of which are
restricted, to officers, employees and outside consultants. Additionally,
in 1997, in lieu of cash compensation to various officers, employees and
consultants, the Company's Board of Directors granted 138,000 new options
and authorized a reduction of the exercise price of 391,500 outstanding
options. The repriced options originally had exercise prices ranging from
$5.00 to $15.00 per share and were reduced to prices ranging from $0.10 to
$10.00 per share. Accordingly, the Company recorded non-cash charges of
approximately $5,515,000 relating to shares and options, as adjusted for
the value of 210,000 canceled options.
During October, 1997, the Company issued 114,765 restricted shares of
common stock (included in the above amounts) to HPS America, Inc. ("HPS")
for settlement of product development costs of approximately $600,000 owed
to HPS and its affiliates. These shares had a valuation guarantee based on
the Company's stock price during the first 30 days immediately following
the effective date of a registration statement (January 6, 1998). The
shares were sold at a value less than the guaranteed amount and the Company
settled the shortfall with a cash payment of approximately $170,000 in the
first quarter of 1998.
In November 1996, the Company issued 230,000 restricted and 277,500
unrestricted shares of the Company's common stock to various officers,
employees and consultants. These shares were subject to forfeiture if the
Company did not ultimately sign contracts valued in excess of $3,000,000
during 1997; this provision was met and the shares are no longer subject to
forfeiture. Such shares had a fair value at the date of issuance of
$1,508,000, which has been recorded as a non-cash charge in the Company's
statement of operations for the year ended December 31, 1996. In addition
to the shares identified above, the Company issued 768, 000 shares of
common stock in 1996 to officers, employees and consultants that were not
subject to forfeiture. These additional shares had a fair value at the date
of issuance of $3,446,000, which is included as a non-cash charge in the
Company's statement of operations for the year ended December 31, 1996.
Stock option plans
On March 20, 1996, the Company's shareholders approved the adoption of the
1995 Stock Incentive Plan (the "1995 Incentive Plan"). Eligible
participants in the 1995 Incentive Plan are officers and employees of the
Company and consultants to the Company. Pursuant to the 1995 Incentive
Plan, the Board of Directors or a committee thereof may also grant
restricted stock, stock appreciation rights, performance grants or such
other types of awards as it may determine. The total number of common
shares issuable upon the exercise of all stock options under the 1995
Incentive Plan may not exceed 1,000,000 shares, subject to adjustments upon
the occurrence of certain events, as defined. The 1995 Incentive Plan
provides for the granting of (i) incentive options to purchase the
Company's common stock at the fair market value on the date of grant and
(ii) non-qualified options to purchase the Company's common stock at not
less than the fair market value on the date of grant.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
11 Shareholders' equity (continued)
Stock option plans (continued)
On March 20, 1996, the Company's shareholders also approved the Outside
Director Stock Option Plan (the "Director Plan"). Directors of the Company
who are not full-time employees of the Company are eligible to participate
in the Director Plan. The total number of common shares issuable upon the
exercise of all stock options under the Director Plan may not exceed 50,000
shares, subject to adjustments upon the occurrence of certain events, as
defined. Pursuant to the Director Plan, each non-employee director will be
granted options with five year terms commencing March 1, 1996, and on the
first day of each March thereafter, to purchase that number of shares of
common stock having a market value of $50,000. Options granted shall vest
in one year.
On February 19, 1998, the Company's Board of Directors authorized and
adopted a plan for compensation, referred to as the 98 Incentive Stock
Option Plan, which provides for the grant of non- qualified stock options,
to officers and employees of the Company and consultants to the Company,
exercisable at or above the market price on the date of grant. All grants,
which have varying expiration dates, shall be subject to various vesting
conditions including specific performance goals.
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). The Company applies APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for its
plans and recognizes non cash compensation charges related to the intrinsic
value of stock options granted to employees. If the Company had elected to
recognize compensation expense based upon the fair value at the date of
grant for awards under these plans and for Softworks common stock options
granted to its employees (Note 3), consistent with the methodology
prescribed by SFAS 123, the effect on the Company's net income (loss) and
net income (loss) per share would be as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (loss)
As reported $ 9,547 $(12,385) $(18,953)
Pro forma $ 2,968 $(12,704) $(19,363)
Net income (loss) per share
As reported
Basic net loss per share $ .58 $ (1.11) $ (2.66)
Diluted net loss per share $ .56 $ (1.11) $ (2.66)
Pro forma
Basic net income (loss) per share $ .18 $ (1.14) $ (2.72)
Diluted net income (loss) per share $ .17 $ (1.14) $ (2.72)
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
11 Shareholders' equity (continued)
Stock option plans (continued)
The fair value of Company common stock options granted to employees during
1998, 1997 and 1996, approximated $4,243,000, $319,000 and $410,000
respectively, are estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: (1) expected
volatility ranging from 61% to 116% in 1998, 104% to 144% in 1997 and 79%
to 157% in 1996, (2) risk-free interest rates of 4.09% to 5.56% in 1998,
5.8% in 1997 and 5.12% to 6.37% in 1996, and (3) expected lives ranging
from .28 to 4.23 years in 1998, .44 to 2.15 years in 1997, and 1 to 4.25
years in 1996.
The fair value charged to the consolidated financial statements (net of
minority interest) related to Softworks common stock options granted to
employees during 1998, approximated $2,336,000, are estimated on the date
of grant using the Black-Scholes option-pricing model with the following
assumptions: (1) expected volatility ranging from 72% to 130%, (2)
risk-free interest rates of 5.4% to 6.3%, and (3) expected lives ranging
from 1.1 to 4.4 years.
The Company grants options under multiple stock-based compensation plans
that do not differ substantially in the characteristics of the awards. The
following is a summary of stock option activity for 1998, 1997 and 1996,
relating to all of the Company's common stock plans (shares are in
thousands):
<TABLE>
<CAPTION>
Weighted
average
exercise
Shares price
------ --------
<S> <C> <C>
Outstanding at January 1, 1996 2,045 $ 8.20
Granted 454 $ 9.10
Exercised (164) $ 9.40
Forfeited (54) $12.20
-------
Outstanding at December 31, 1996 2,281 $ 8.20
Granted 529 $ 2.19
Exercised (106) $ 2.48
Forfeited (1,390) $11.77
-------
Outstanding at December 31, 1997 1,314 $ 7.83
Granted 6,369 $ 3.24
Exercised (1,103) $ 2.93
Forfeited (3,741) $ 4.68
-------
Outstanding at December 31, 1998 2,839 $ 3.58
=======
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
11 Shareholders' equity (continued)
Stock option plans (continued)
At December 31, 1998, a total of 2,771,000 options are exercisable at
various exercise prices: 2,358,000 options are exercisable at prices
ranging from $1.75 to $2.00 per share, 196,000 options at $2.50 to $5.00,
and 217,000 options at $5.92 to $46.30. The weighted-average remaining
contractual life of options outstanding at December 31, 1998 is 3.79 years.
A total of 2,839,000 shares of the Company's common stock are reserved for
options, warrants and contingencies at December 31, 1998.
At December 31, 1997, a total of 1,302,000 options are exercisable at
various exercise prices: 882,000 options are exercisable at prices ranging
from $.10 to $5.00 per share, 290,000 options at $6.00 to $15.00 and
130,000 options at $20.00 to $46.30. The weighted-average remaining
contractual life of options outstanding at December 31, 1997 is 1.30 years.
A total of 1,545,000 shares of the Company's common stock are reserved for
options, warrants and contingencies at December 31, 1997
At December 31, 1996 there were 1,796,000 options exercisable. These
options were exercisable at various prices ranging from $.10 to $46.30.
Total compensation costs recognized for stock option awards amounted to
$1,255,000, $1,326,000 and $621,000 for the years ended December 31, 1998,
1997 and 1996, respectively. Compensation cost represents the fair value of
options granted to non-employees and the intrinsic value of options granted
to employees.
During October 1998, the Company's Board of Directors authorized a
reduction of the exercise price of 2,234,235 outstanding options to
purchase common stock (issued to employees) to $2.00 per share ($0.25
higher than the fair market value at the date of the Board action), with an
expiration date of December 31, 2002. The substantial majority of such
options were previously issued at exercise prices ranging from $4.00 to
$5.00 per share.
Registration statements/restricted securities
The Company has used restricted common stock for the purchase of certain
companies (Note 3) and has sold restricted common stock in private
placements. At December 31, 1998, approximately 4,910,000 shares of
restricted common stock were issued and outstanding.
On February 11, 1999 the Company filed a registration statement on Form S-8
(No. 333-72203) for 2,262,235 options and 2,230,084 shares of the Company's
common stock which was effective upon filing. The primary purpose of this
registration statement was to register options, which were repriced in
October 1998, and shares issued to employees and certain consultants.
On May 15, 1998 the Company filed a registration statement on Form S-8 (No.
333-52875) for 779,148 options and 122,500 shares of the Company's common
stock which was effective upon filing. The primary purpose of this
registration statement was to register shares issued to certain consultants
and non-officer employees.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
11 Shareholders' equity (continued)
Registration statements/restricted securities (continued)
Additionally, on January 22, 1998, the Company filed another registration
statement on Form S-1 (No. 333-44683, effective February 6, 1998). The
primary purpose of this registration statement was to register shares
issued in January 1998 pursuant to a private placement (Note 11).
In late December 1997, the Company filed three registration statements: (i)
an amended registration statement on Form S-1 (No. 33-97560, effective
January 6, 1998) which amended a registration statement that was originally
effective on August 9, 1996, (ii) a registration statement on Form S-8 (No.
333-42795, effective upon filing, December 19, 1997), and (iii) a
registration statement on Form S-1 (No. 333-42919, effective January 6,
1998). The primary purpose of these registration statements was to register
outstanding restricted common stock and shares issuable upon exercise of
outstanding options.
12 Income taxes
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 is reduced below 80% and
Softworks is no longer eligible to be included in the Company's
consolidated Federal income tax returns. Accordingly, since the future
realization of the Softworks' component of the deferred tax asset ($902,000
as of August 4, 1998) is no longer uncertain, the related valuation
allowance (with respect to Softworks domestic operations only) has been
eliminated. As a result of consolidated net losses, the Company did not pay
Federal income taxes prior to 1998.
The following table summarizes components of the provision for current and
deferred income taxes for the year ended December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Provision for income taxes
Current
United States $ 2,196
Foreign 32
State and other 306
---------
Total $ 2,534
=========
Deferred
United States $ (632)
Foreign 0
State and other (154)
---------
Total
(786)
---------
$ 1,748
=========
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
12 Income taxes (continued)
The following table summarizes the significant differences between the U.S.
Federal statutory tax rate and the Company's effective tax rate for
financial statement purposes for the year ended December 31, 1998:
<TABLE>
<S> <C>
U.S. Federal statutory tax rate 34.0%
State and local taxes, net of U.S. Federal
tax effect 6.5
Non taxable portion of gain related to
Softworks initial public offering (12.4)
Reduction of deferred tax asset valuation reserve (7.4)
Utilization of net operating loss carryforward (7.1)
Other 1.9
------
Effective tax rate 15.5%
======
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $ 23,063 $ 24,903
Tax credit carryforward 430 430
Compensation 731 3,804
Fixed and intangible assets 419 467
Capitalized software development costs 664 677
Other 1,153 707
-------- --------
26,460 30,988
Valuation allowance 25,670 (30,988)
-------- --------
$ 790 $ -
======== ========
</TABLE>
During 1998, $4,700,000 of net operating loss carry forwards were utilized
to substantially reduce the taxable income resulting from the gain on
partial disposition of Softworks. At December 31, 1998, the Company has net
operating loss carryforwards remaining of approximately $54,000,000
available to reduce future taxable income. These losses, which expire
through 2012, are subject to substantial limitations as a result of IRC
Section 382 rules governing changes in control.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
13 Unusual charges
Included in unusual charges for the year ended December 31, 1997, are
charges aggregating $686,000, of which $850,000 relates to the settlement
of certain litigation ($500,000 was settled with the issuance of 119,850
shares of common stock in the first quarter of 1998, see Note 15), net of
$164,000 which relates to the return of 30,215 shares of the Company's
common stock related to the SPC settlement (Note 3).
Included in unusual charges for the year ended December 31, 1996, are
charges aggregating $2,590,000 including the following: $2,075,000, of
which $2,000,000 (representing 261,400 shares of the Company's common
stock) is non-cash, for costs associated with the settlement of certain
litigation (Note 15), and $515,000 of which $415,000 (representing 75,000
shares of the Company's common stock) is non-cash relating to the final
settlement of SPC (Note 3).
14 Related party and other transactions
Three executive officers of the Company have received advances from time to
time, with such advances being payable upon demand and bearing no interest.
Effective January 1, 1997, these advances became interest bearing at the
rate of 7% per annum. In the first quarter of 1999, the officers repaid
$495,000 of these advances.
During the years ended December 31, 1998, 1997 and 1996, the Company paid
an outside Director fees for legal and consulting services aggregating
$149,000, $165,000 and $127,000, respectively.
The Company paid an outside Director consulting fees of $52,000 in each of
the years ended December 31, 1998, 1997 and 1996, respectively.
In 1998, the Company's general counsel received cash compensation of
$207,000 and 180,000 Company stock options (which were subsequently
cancelled) valued at $171,000. In addition to the shares of Softworks and
Company common stock (as discussed in Notes 3 and 11), related entities
received 266,000 shares of Softworks common stock, valued at $541,000, for
business and financial consulting services rendered.
In 1998, a consultant (who also has a financial interest in ITSV) received
cash compensation of $185,000 and 300,000 Company stock options (which were
subsequently cancelled) valued at $254,000 in addition to the shares of
Softworks and Company common stock (as discussed in Notes 3 and 11).
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
14 Related party and other transactions (continued)
S.J. & Associates, Inc.
In June 1996 and July 1998, the Company entered into various agreements
with S.J. & Associates, Inc. (including its affiliates are collectively
referred to as "SJ") for various services which provide for the following
compensation:
- SJ receives minimum annual compensation pursuant to several
agreements aggregating $227,000 per annum. The agreements expire at
various times through May 2001.
- A bonus of $200,000 is payable to SJ should the Company achieve
$5,000,000 of net d.b.Express revenue, which expires May 2001.
- During 1998, SJ was granted 425,000 options to purchase the Company's
common stock at exercise prices ranging from $4.00 to $6.00 per share,
resulting in a charge to operations of $365,000; 275,000 of these
options were exercised and the remaining 150,000 options were
cancelled.
- As discussed in Notes 3 and 11, SJ also received shares of the
Company's and Softworks common stock during 1998.
- SJ also received 190,000 shares of Softworks common stock (issued
directly from Softworks) in conjunction with their initial public
offering.
15 Commitments and contingencies
Employment agreements
During 1998, the Company entered into six employment agreements with key
Softworks employees. The agreements terminate at various times through
December 31, 2002. Five of the agreements automatically renew for one-year
periods unless Softworks or the employee notifies the other party ninety
days prior to the end of any renewal term. The last agreement is "at-will".
One agreement provides for the issuance of a $500,000 full recourse loan
(issued in 1999), interest bearing at the rate of approximately 6.0% per
annum, unsecured, and payable on December 1, 2000, subject to certain
acceleration provisions. The six employment agreements provide for an
aggregate annual base compensation of approximately $800,000. All are
eligible for incentive bonuses subject to Softworks achieving various net
income levels.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
15 Commitments and contingencies (continued)
Operating leases
Operating leases are primarily for office space, equipment and automobiles.
At December 31, 1998, the future minimum lease payments under operating
leases are summarized as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31,
1999 $1,502
2000 1,371
2001 1,013
2002 261
2003 101
Thereafter -
------
Total $4,248
======
</TABLE>
Rent expense approximated $1,285,000, $1,198,000 and $850,000, for the
years ended December 31, 1998, 1997 and 1996, respectively.
Defined contribution plan
The Company provides pension benefits to eligible employees through a
401(k) plan. Employer matching contributions to this 401(k) plan
approximated $106,000, $66,000 and $36,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
Legal matters
During May 1994, the Company and certain officers received notification
that they had been named as defendants in a class action alleging
violations of certain securities laws with respect to disclosures made
regarding the Company's acquisition of Softworks during 1993. On September
12, 1996, the settlement of this class action claim was approved by the
United States District Court, Eastern District of New York. The Company
recorded a charge to earnings in the first quarter of 1996 of $2,075,000 to
reflect this settlement consisting of $75,000 plus 261,400 shares of the
Company's common stock.
In September 1994, the Company received notice of an action alleging breach
of contract regarding an acquisition transaction initiated during 1993. In
July 1995, a settlement agreement was reached whereby the Company was
required to pay $75,000 and agreed to an amendment of a software license
contract to acquire the license for additional software. Pursuant to such
amendment, the Company issued a non-interest bearing promissory note in the
amount of $389,000 payable in 36 monthly installments. The final payment
related to this promissory note was made in August 1998.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
15 Commitments and contingencies (continued)
Legal matters (continued)
In July 1995, the Company received notice of an action alleging the Company
had not used its best efforts to register warrants to purchase 50,000
shares of the Company's common stock within 30 days from written notice to
the Company, pursuant to a financial consulting agreement. The Company has
maintained that it has always used its best efforts to cause the
registration of those warrants to occur. However, to avoid the expense and
resolve the uncertainties of litigation, the matter was settled by
including 38,500 warrants in the Company's then pending registration
statement, with the balance of 11,500 warrants being canceled. The
registration statement became effective on August 9, 1996. Although the
Company believes this matter has been resolved, releases have not yet been
exchanged, nor has a stipulation of dismissal been filed. The Company is
unable to predict the ultimate outcome of this suit and, accordingly, no
adjustment has been made in the consolidated financial statements for any
potential losses.
In July 1995, the Company and certain officers received notification that
they had been named as defendants in a class action claim in regard to
announcements and statements regarding the Company's business and products.
Although the Company denied any wrongdoing, in an effort to avoid further
expense and resolve the uncertainty of litigation, in July 1997 the Company
agreed to a Stipulation and Agreement of Settlement ("Stipulation
Agreement") of this class action. In February, 1998, the Court entered a
final order approving the terms of the Stipulation Agreement. The Company
delivered 119,850 shares of its common stock, valued at $500,000;
additionally, the Company and its insurance carrier each paid $350,000, in
full settlement of the matter. Based upon the Stipulation Agreement, the
Company recorded an $850,000 Unusual Charge to earnings in 1997.
On June 11, 1996, the Company received notice of entry of a default
judgement against it for $1,500,000 and specific performance to effect the
registration of common stock held by Merit Technology, Inc. in a matter in
which the Company had not been served or received notice. On August
13,1996, the default judgement was set aside by the Court. During December
1996, this matter was settled with the Company issuing 10,000 shares of its
common stock.
During March 1997, the Company received a Complaint filed in the U.S.
District Court for the Western District of Texas, by Dell Computer
Corporation. The Second Amended Complaint alleged that the Company failed
to deliver product as contracted for and further alleged damages in excess
of $850,000. In February, 1998, a cash settlement of $130,000 was agreed to
and paid by the Company's insurance carrier.
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
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
15 Commitments and contingencies (continued)
Legal matters (continued)
and, unless a summary judgment is granted to one side or the other, this
case is expected to go to trial later. The Company and its counsel believe
that the Company's position regarding the claim has substantial factual and
legal support and are vigorously defending the matter. However, the Company
is unable to predict the ultimate outcome of this claim and, accordingly,
no adjustments have been made in the consolidated financial statements for
any potential losses or potential issuance of common stock.
In 1995, Fletcher Capital Corp. filed a claim against the Company, its
president and several unrelated parties, regarding a claim for an
unspecified amount of commissions in the form of options from the Company
and cash from the other parties. This matter was settled in February 1997
with the issuance of 36,000 options exercisable at $3.50 per share, 25,200
shares of common stock (issued January 1998) and cash payments totaling
$31,000.
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.
16 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, 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,
which break down barriers between people and data through sale of existing
products and new technologies. The Company is currently focusing on four
general product categories:
1. To continue to exploit the d.b.Express technology through continued
development of several vertical markets;
2. To further develop its Softworks product line;
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. Since the Company's ownership interest in
Softworks is currently 50.2%, any additional sales of its investment would
reduce the Company's ownership interest to below 50%. Additionally, the
financial results of Softworks would no longer be consolidated with the
Company, and, accordingly, the Company's financial presentation would be
significantly altered.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
17 Consolidated Statements of Cash Flows
Supplemental disclosure of cash flow information for the years ended
December 31, 1998, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Interest paid $ 541 $ 153 $ 53
====== ======= =======
Net taxes paid (refunds received) $ 23 $ (74) $ 40
====== ======= =======
</TABLE>
Non-cash investing and financing activities for the years ended December
31, 1998, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Exchange of the Company's and Softworks
common stock to ITSV (Note 3):
Prepaid advertising $ 4,150 $ - $ -
Goodwill 5,360 - -
Software development costs 2,700 - -
-------- -------- --------
$12,210 $ - $ -
======== ======== ========
Capitalized software technology
(Note 7) $ - $ 2,160 $ -
========= ======== ========
Note receivable for the sale
of Softworks common stock
by the Company $ 5,000 $ - $ -
======== ======== ========
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
18 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 engaged in the design, construction and installation of
technology systems, including the reselling of computer hardware. The
Company's professional services segment also provides systems management
services, including training, implementation of software, and staff
augmentation.
Business information
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Revenue
Computer Software $ 42,298 $ 27,870 $ 19,030
Professional Services 19,690 1,868 -
-------- -------- --------
Total $ 61,988 $ 29,738 $ 19,030
======== ======== ========
Operating income (loss)
Computer Software $(17,193) $(11,976) $(16,135)
Professional Services 1,549 50 -
-------- -------- --------
Total $(15,644) $(11,926) $(16,135)
======== ======== ========
Identifiable assets
Computer Software $ 76,950 $ 38,827 $ 27,671
Professional Services 14,952 471 -
-------- -------- --------
Total $ 91,902 $ 39,298 $ 27,671
======== ======== ========
</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 CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
18 Segment information (continued)
Geographical information
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Revenue
Domestic $ 53,190 $ 25,006 $ 14,148
International 8,798 4,732 4,882
-------- -------- --------
Total $ 61,988 $ 29,738 $ 19,030
======== ======== ========
Operating income (loss)
Domestic $(14,870) $(11,386) $(17,041)
International (774) (540) 906
-------- -------- --------
Total $(15,644) $(11,926) $(16,135)
======== ======== ========
Identifiable assets
Domestic $ 82,377 $ 36,630 $ 26,400
International 9,525 2,668 1,271
-------- -------- --------
Total $ 91,902 $ 39,298 $ 27,671
======== ======== ========
</TABLE>
Major customer
For the year ended December 31, 1998, the Company had one major customer
with revenue of $14,878,000 (24% of total revenue). This amount is included
in the Professional Services and Domestic categories.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMPUTER CONCEPTS CORP.
/s/ March 31, 1999
----------------------
Daniel DelGiorno, Jr.,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
NAME TITLE DATE
/s/ Daniel DelGiorno
______________________ President, Treasurer, March 31, 1999
Daniel DelGiorno, Jr. Chief Executive Officer,
Director
/s/ Daniel DelGiorno
______________________ Director, March 31, 1999
Daniel DelGiorno, Sr. Assistant Secretary
/s/ Jack S. Beige
______________________ Director March 31, 1999
Jack S. Beige
/s/ George Aronson
______________________ Chief Financial Officer March 31, 1999
George Aronson
March 31, 1999
COMPUTER CONCEPTS CORP.
80 Orville Drive
Bohemia, New York 11716
Re: Computer Concepts Corp.
Dear Sirs:
In conjunction with the filing of Form 10-K for the year ended December 31,
1998, for Computer Concepts Corp., I hereby consent to the incorporation by
reference to the opinion of the Daniel B. Kinsey, P.C. firm included in the
Registration Statements of Computer Concepts Corp. on Forms S-8 filed with the
Securities and Exchange Commission by Computer Concepts Corp. and effective on
December 30, 1994 (File No. 33-88260), on June 28, 1995 (File No. 33-94058) on
April 25, 1996 (File No. 333-4070), on January 6, 1998 (File No. 333-42795), on
May 15, 1998 (File No. 333-52875) and on February 11, 1999 (File No. 333-72203)
and on Form S-1 declared effective on August 9, 1996, and as amended on Form
S-1/A on January 6, 1998 (File No. 33-97560), on Form S-1 on January 6, 1998
(File No. 333-42919) and on Form S-1 on February 6, 1998 (File No. 333-44683).
Very truly yours,
DANIEL B. KINSEY, P.C.
/s/ Daniel B. Kinsey
Daniel B. Kinsey
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in the Registration Statements
of Computer Concepts Corp. on Forms S-8 (File No. 33-88260, effective December
30, 1994, File No. 33-94058, effective June 28, 1995, File No. 333-4070,
effective April 25, 1996, File No. 333-42795, effective December 19, 1997, File
No. 333-52875, effective May 15, 1998 and File No. 333-72203, effective February
11, 1999) of our report dated March 4, 1999, appearing in the Annual Report on
Form 10-K of Computer Concepts Corp. for the year ended December 31, 1998.
/s/ Hays & Company
Hays & Company
March 30, 1999
New York, New York
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the year ended December 31, 1998 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,176
<SECURITIES> 17
<RECEIVABLES> 27,412
<ALLOWANCES> 1,350
<INVENTORY> 419
<CURRENT-ASSETS> 63,742
<PP&E> 3,564
<DEPRECIATION> 1,226
<TOTAL-ASSETS> 91,902
<CURRENT-LIABILITIES> 36,173
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 34,014
<TOTAL-LIABILITY-AND-EQUITY> 91,902
<SALES> 61,988
<TOTAL-REVENUES> 61,988
<CGS> 21,018
<TOTAL-COSTS> 56,614
<OTHER-EXPENSES> 27,424
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 485
<INCOME-PRETAX> 11,295
<INCOME-TAX> 1,748
<INCOME-CONTINUING> 9,547
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,547
<EPS-PRIMARY> 0.58
<EPS-DILUTED> 0.56
</TABLE>
