UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File No. 0 - 20660
COMPUTER CONCEPTS CORP.
(Exact name of registrant as specified in its charter)
Delaware 11-2895590
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 Orville Drive, Bohemia, N.Y. 11716
(Address of principal executive offices) (Zip Code)
Registrant=s telephone number, including area code (516) 244-1500
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
The number of shares of $.0001 par value stock outstanding as of August 10,
1999 was 20,755,919.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION Page
----
Condensed Consolidated Balance Sheets
as of June 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations
and Comprehensive Income For the Three and
Six Months Ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
For the Six Months ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6 - 14
Management=s Discussion and Analysis of Financial
Condition and Results of Operations 15 - 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
as of June 30, 1999 and December 31, 1998
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- -------------
(Unaudited)
----------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 15,406 $ 8,176
Accounts receivable, net of
allowance for doubtful accounts
of $1,067 and $1,350 in 1999
and 1998, respectively 6,792 27,412
Installment receivables - 16,406
Inventories 384 419
Deferred tax assets, current - 306
Advances to officers 740 895
Prepaid expenses and other current assets 2,689 10,128
-------- --------
Total current assets 26,011 63,742
Installment accounts receivable, due
after one year - 7,908
Property and equipment, net 1,354 3,564
Software costs, net 1,822 5,594
Excess of cost over fair value of net
assets acquired, net of
accumulated amortization of $1,767
and $4,239 in 1999 and 1998, respectively 3,417 8,610
Investment in Softworks 10,797 -
Deferred tax assets, noncurrent - 484
Other assets 82 2,000
======== ========
$ 43,483 $ 91,902
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 4,478 $11,428
Current portion of long- term debt 16 6,117
Income taxes payable 50 2,207
Deferred installment revenue - 7,314
Deferred maintenance revenue 42 9,107
-------- --------
Total current liabilities 4,586 36,173
Deferred installment revenue, earned after
one year - 7,883
Deferred maintenance revenue, earned after
one year 21 3,924
Long-term debt, net of current portion - 1,403
-------- --------
Total liabilities 4,607 49,383
-------- --------
Minority interest - 8,503
Commitments and contingencies
Shareholders' equity:
Common stock, $.0001 par value;
150,000,000 authorized; 20,755,919 shares
in 1999 and 19,324,839 shares in 1998
issued and outstanding 2 2
Additional paid-in capital 108,655 106,515
Accumulated deficit (69,477) (72,194)
Accumulated other comprehensive loss (304) (307)
-------- --------
Total shareholders= equity 38,876 34,016
-------- --------
$ 43,483 $ 91,902
======== ========
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
For the Three and Six Months Ended June 30,
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Software licenses, net $ 218 $ 6,275 $ 6,940 $ 10,372
Maintenance 10 2,625 3,549 5,176
Professional services 9,417 2,586 13,124 3,562
------- ------- ------- -------
9,645 11,486 23,613 19,110
------- ------- ------- -------
Cost of revenue:
Software licenses 42 205 277 698
Maintenance - 1,611 548 3,257
Professional services 8,573 2,187 11,816 3,540
------- ------- ------- -------
8,615 4,003 12,641 7,495
------- ------- ------- -------
Gross margin 1,030 7,483 10,972 11,615
------- ------- ------- -------
Operating expenses
Research and development 942 1,245 5,011 2,220
Sales and marketing 3,611 7,527 12,135 11,693
General and administrative 1,726 2,736 4,641 4,689
Amortization and depreciation 995 672 2,679 1,239
------- ------- ------- -------
7,274 12,180 24,466 19,841
------- ------- ------- -------
Operating loss (6,244) (4,697) (13,494) (8,226)
Other income (expense)
Gain on partial disposition of
subsidiary 14,410 6,627 16,441 6,627
Equity in loss of Softworks (125) - (125) -
Interest income (expense), net 27 (536) 16 (559)
Minority interest in earnings of
subsidiary - - (46) -
------- ------- ------- -------
Income (loss) before
provision for income taxes 8,068 1,394 2,792 (2,158)
Provision for income taxes income - - (75) -
------- ------- ------- -------
Net income (loss) $8,068 $1,394 $ 2,717 $(2,158)
======= ======= ======= =======
Other comprehensive income:
Foreign currency translation
adjustments - (15) 3 (7)
Comprehensive income (loss) $8,068 $1,379 $ 2,720 $(2,165)
======= ======= ======= =======
Basic and diluted net income (loss)
per share $ 0.39 $ 0.09 $ 0.13 $ (0.15)
======= ======= ======= =======
Basic weighted average common shares
outstanding 20,454 14,990 20,272 14,066
======= ======= ======= =======
Diluted weighted average common shares
outstanding 20,454 15,948 20,272 14,066
======= ======= ======= =======
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended June 30,
(in thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities
Net income (loss) $2,717 ($2,158)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities
Depreciation and amortization:
Software costs 1,142 416
Property and equipment 600 557
Excess of cost over fair value of net assets acquired 1,096 425
Other - 2
Equity in loss of Softworks 125 -
Minority interest in net income of subsidiary 46 -
Provision for doubtful accounts - 239
Common stock and options issued for services 2,140 2,704
Softworks common stock exchanged for services 1,729 525
Gain on partial disposition of subsidiary (16,441) (6,627)
Changes in operating assets and liabilities
Accounts receivable 10,843 899
Installment accounts receivable, due after one year 149 (1,468)
Inventories 35 -
Prepaid expenses and other current assets 1,284 (104)
Other assets 357 (305)
Accounts payable and accrued expenses (2,584) (645)
Current income taxes (2,043) -
Deferred income taxes 290 -
Deferred revenue (1,378) 2,266
------- -------
Net cash provided (used) by operating activities 107 (3,274)
------- -------
Cash flows from investing activities
Capital expenditures (1,088) (868)
Additional consideration for Softworks acquisition - (452)
Cash received from sale of limited license (see Note 7) 400 -
Reduction in cash resulting from excluding Softworks
from consolidation (see Note 8) (6,759) -
Proceeds from sales of Softworks common stock (see Note 8) 17,406 -
Proceeds from exercises of options to purchase Softworks
common stock (see Note 8) 240 -
Software development and technology purchases (190) (746)
Repayment of officers loans, net 155 208
------- -------
Net cash provided (used) by investing activities 10,164 (1,858)
------- -------
Cash flows from financing activities
Net proceeds from sales of common stock and
exercises of options - 4,682
Proceeds from issuance of convertible debt
(net of issuance costs) - 1,925
Proceeds from long-term debt 2,021 500
Repayments of long-term debt (5,065) (356)
------- -------
Net cash provided (used) by financing activities (3,044) 6,751
------- -------
Effect of exchange rate changes on cash and cash equivalents 3 (7)
------- -------
Net increase in cash and cash equivalents 7,230 1,612
Cash and cash equivalents, beginning of period 8,176 778
------- -------
Cash and cash equivalents, end of period $15,406 $2,390
======= =======
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Six Months Ended June 30, 1999 and 1998
1. Interim Financial Information
The condensed consolidated balance sheet as of June 30, 1999, and the condensed
consolidated statements of operations and cash flows for the three and six
months ended June 30, 1999, and 1998, have been prepared by the Company without
audit. These interim financial statements include all adjustments, consisting
only of normal recurring accruals, which management considers necessary for a
fair presentation of the financial statements for the above periods. The results
of operations for the three months ended June 30, 1999, are not necessarily
indicative of results that may be expected for any other interim periods or for
the full year.
These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto for the year ended
December 31, 1998. The accounting policies used in preparing the condensed
consolidated financial statements are consistent with those described in the
December 31, 1998, consolidated financial statements.
2. The Company
The most significant portion of the Company's operations had historically been
conducted through one of its subsidiaries, Softworks, Inc. ("Softworks").
Softworks was wholly owned by the Company through June 29, 1998 and majority
owned through March 31, 1999. Through a series of transactions that included an
initial public offering of Softworks in August 1998, various exchanges of
Softworks common stock owned by the Company to consultants and employees for
services rendered, a private placement of Softworks common stock owned by the
Company in December 1998 and a second public offering in June 1999, the
Company's ownership of Softworks was reduced from 100% to 38%. Accordingly,
Softworks is accounted for as a consolidated subsidiary through March 31, 1999,
and commencing April 1, 1999, Softworks' results are accounted for using the
equity method of accounting. See Note 8 for further details.
Computer Concepts Corp. and subsidiaries (the "Company") design, develop, market
and support information delivery software products, including end-user data
access tools for use in personal computer and client/server environments.
Through Softworks, the Company developed, marketed and supported systems
management software products for corporate mainframe data centers. In 1997, the
Company created a business unit, "professional services" , which primarily
resells computer hardware and for a fee, will assist in the design, construction
and installation of technology systems. The Company makes use of its proprietary
data access technology, d.b.Express TM in its d.b.Express TM Internet
Information Server, more commonly referred to as a "server farm." This service
presently is being marketed solely to the telecommunications industry. The
server farm permits end user the ability to access and analyze information
through the internet. Data can be visually presented using the Company=s
patented data visualization technology. Additionally, in June, 1998, the Company
completed an acquisition of software (and related sales and marketing rights)
which is designed to provide non computer literate owners (e.g. parents,
guardians, schools, etc) the ability to identify threats as well as
objectionable material which may be viewed by users of the computer on the
internet (e.g. children).
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Six Months Ended June 30, 1999 and 1998
3. Shareholders' Equity
During the six month period ended June 30, 1999, the Company issued the
following restricted common stock:
i. As part of a bonus incentive compensation plan, the Company issued 655,500
shares (of which 185,000 were issued in the three month period ended June
30, 1999) to several non-executive employees for which it recorded a non
cash charge to earnings of $990,000 (of which $164,000 pertains to the
shares issued during the three month period ended June 30, 1999);
ii. Issued 660,500 shares (of which 150,000 were issued in the three month
period ended June 30, 1999) of its common stock to various consultants for
which it recorded a non cash charge to earnings of $1,050,000 (of which
$140,000 pertains to the shares issued during the three month period ended
June 30, 1999);
iii. In lieu of cash, in January, 1999, the Company issued 115,000 shares for an
acquisition of a technology license. The Company recorded amortization
expense of $33,000 during the six months ended June 30, 1999.
4. Legal matters
In March 1995, an action was originally commenced against the Company and a
number of defendants. In early 1997, after a change in counsel, the plaintiff
amended the complaint for a second time, now naming as defendants only the
Company and three of its officers. The second amended complaint alleges that
certain third parties, unrelated to the Company, transferred certificates
representing 1,000,000 shares of the Company's common stock to the plaintiff.
The complaint further alleges that such shares were endorsed in blank by the
third parties and became bearer securities, which were negotiated to the
plaintiff by physical delivery. The certificates had not been legally acquired
from the Company and the certificates were reported to the Securities and
Exchange Commission by the Company as stolen certificates. Plaintiff has
requested validation of the transfer of the certificates and is seeking damages
of an unspecified amount, consisting of alleged diminution in market value of
the subject shares from 1994 through the date of any judgment in the plaintiff=s
favor. Discovery has been substantially completed and, unless a summary judgment
is granted to one side or the other, this case is expected to go to trial. The
Company and its counsel believe that the Company=s position regarding the claim
has substantial factual and legal support and are vigorously defending the
matter. However, the Company is unable to predict the ultimate outcome of this
claim and, accordingly, no adjustments have been made in the consolidated
financial statements for any potential losses or potential issuance of common
stock.
During February 1999, the Company and certain officers received notification
that they had been named as defendants in a class action alleging violations of
certain securities laws with respect to the content of certain Company
announcements. The Company and its counsel are vigorously defending the matter.
However, the Company is unable to predict the ultimate outcome of this claim
and, accordingly, no adjustments have been made in the consolidated financial
statements for any potential losses or potential issuance of common stock.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Six Months Ended June 30, 1999 and 1998
5. Reclassifications
Certain reclassifications have been made to the condensed consolidated financial
statements shown for the prior year in order to have it conform to the current
year's classifications.
6. Segment information
The Financial Accounting Standards Board issued Statement No. 131 "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 domestically, is primarily engaged in the design, development,
marketing and support of information delivery software products and software
products which are designed to provide non computer literate owners the ability
to identify threats as well as objectionable material which may be viewed by
users of the computer on the internet. Until March 31, 1999 (see Note 8), the
Company was also engaged in systems management software products for corporate
mainframe data centers. International operations pertaining to these systems
management software products included foreign subsidiaries located in the United
Kingdom, France, Brazil, Australia, Spain, Italy and Germany and several
international distributors primarily in Europe and Asia. The professional
services segment, which operates domestically, is primarily engaged in the
reselling of computer hardware, design, construction and installation of
technology systems, as well as marketing the d.b.Express Internet Information
Server, also referred to as a "server farm".
Business information
<TABLE>
<CAPTION>
(In thousands) Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
1999 1998(a) 1999(b) 1998(a)
---- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue
Computer Software $ 228 $ 8,900 $10,489 $15,548
Professional Services 9,417 2,586 13,124 3,562
------- -------- ------- -------
Total $ 9,645 $11,486 $23,613 $19,110
======= ======== ======= =======
Operating Income (loss)
Computer Software $(6,604) $(5,038) $(14,134) $(8,260)
Professional Services 360 341 640 34
------- -------- ------- -------
Total $(6,244) $(4,697) $(13,494) $(8,226)
======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Identifiable Assets At June 30,1999 At December 31, 1998
--------------- --------------------
<S> <C> <C>
Computer Software $34,860 $76,950
Professional Services 8,623 14,952
------- -------
Total $43,483 $91,902
======= =======
(a) Includes Softworks for the entire period
(b) Includes Softworks for the three months ended March 31, 1999
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Six Months Ended June 30, 1999 and 1998
In classifying business information into segments, the Company specifically
identifies revenue, expenses and identifiable assets of the professional
services segment; items not specifically identified are included in the computer
software segment.
Geographical information:
<TABLE>
<CAPTION>
(In thousands) Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
1999 1998(a) 1999(b) 1998(a)
---- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue
United States $9,635 $ 9,444 $20,378 15,752
International 10 2,042 3,235 3,358
------- -------- ------- -------
Total 9,645 $11,486 $23,613 $19,110
======= ======== ======= =======
Operating Income/(loss):
United States $(6,254) $(4,579) $(14,703) $(7,529)
International 10 (118) 1,209 (697)
------- -------- ------- -------
Total $(6,244) $(4,697) $(13,494) $(8,226)
======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Identifiable Assets At June 30,1999 At December 31, 1998
--------------- --------------------
<S> <C> <C>
United States $43,483 $ 82,377
International - 9,525
------- --------
Total $43,483 $ 91,902
======= ========
(a) Includes Softworks for the entire period
(b) Includes Softworks for the three months ended March 31, 1999
</TABLE>
Major customer
For the three months ended June 30, 1999 and 1998, the Company had one major
contract involving two customers, with combined revenues of $9,114,000 (94.5%)
of total revenue) and $2,526 ,000 (22.0%) of total revenue, respectively. For
the six months ended June 30, 1999 and 1998, the Company had one major contract
involving two customers, with combined revenues of $12,653,000 (53.6% of total
revenue) and $3,079,000 (16.1% of total revenue), respectively. These amounts
are included in the Professional Services and Domestic categories.
7. Internet Tracking & Security Ventures, LLC
On June 30, 1998, pursuant to an Asset Purchase and Sale Agreement, the Company
acquired certain software and related sales and marketing rights from Internet
Tracking & Security Ventures, LLC (AITSV@) 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 AComputerCOP,@ is designed to inform non computer
literate parents, guardians and alike, what materials, or possible threats to
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Six Months Ended June 30, 1999 and 1998
the safety and well being their children or others have been accessing over the
internet, such as objectionable web sites, text, pictures, screens, electronic
mail, etc. The Agreement also includes the rights to the use of Richard "Bo"
Dietl's name in conjunction with the promotion and endorsement of the software
as well as appearances by Mr. Dietl in support of the software in regional and
national marketing campaigns. Orders for the initial version of the product
began shipping during the fourth quarter, 1998.
The acquisition has been valued at an aggregate of $12,210,000 determined as
follows: 1,900,000 restricted shares of the Company have been valued at
$5,700,000 and the 1,000,000 restricted shares of Softworks' common stock have
been valued at $6,510,000 (based upon the ultimate net proceeds to the selling
shareholders in Softworks' initial public offering which became effective August
4, 1998). The $12,210,000 purchase price has been allocated to the fair value of
the assets acquired at June 30, 1998, based upon a written valuation from an
independent investment-banking firm. Accordingly, $2,700,000 has been allocated
to "Software costs", $4,150,000 has been recorded as "Prepaid expenses and other
current assets" and $5,360,000 has been recorded as "Excess of cost over fair
value of net assets acquired".
In March, 1999, the Company sold certain rights to license ComputerCOP to a
marketing company (Bo-Tel, Inc.) for $400,000. The license rights are limited to
granting a specified original equipment manufacturer of personal computers the
right to embed the software in its computers for sale to the general public.
Bo-Tel, Inc. is an affiliate of ITSV, and accordingly, this sale has been
accounted for as a reduction of the cost of the assets acquired from ITSV.
The software costs will be amortized using the greater of the ratio of current
revenue to the total projected revenue for the software or the straight-line
method using an estimated useful life of 30 months. The prepaid expenses will be
expensed as the related services are performed (including, but not limited to,
appearances, promotion and endorsement). The excess of cost over fair value of
net assets acquired, which primarily relate to the use of the name "Bo Dietl"
will be amortized using the straight-line method over 36 months. However, as a
product that the Company has only recently commenced marketing, it is reasonably
possible that the estimates of anticipated future gross revenue, the remaining
economic life of the product, or both will be reduced significantly in the near
term due to the unpredictability of the product's market acceptance and
competitive pressures (including technological obsolescence). As a result, the
carrying amount of the assets acquired from ITSV (approximately $5,850,000 at
June 30, 1999) may be reduced materially in the near term.
8. GAIN ON PARTIAL DISPOSITION OF SUBSIDIARY
Prior to June 30, 1998, Softworks was a wholly owned subsidiary of the Company
with 14,083,000 shares of common stock outstanding. On August 4, 1998, Softworks
completed a public offering of 4,200,000 shares of its common stock at a price
of $7.00 per share (less underwriting fees and commissions of $0.49 per share)
as follows: 1,700,000 shares of common stock were sold by Softworks; 1,000,000
shares were sold by ITSV and 1,500,000 shares were sold by the Company.
Softworks common stock is traded on the NASDAQ National Market under the symbol
"SWRX."
In addition to the public offering discussed above, in 1998, the Company sold
1,000,000 shares of Softworks common stock for $5,000,000 (sold December 1998,
cash received first quarter 1999) and exchanged 1,877,700 shares of Softworks
common stock to employees and consultants for services rendered or to be
rendered. As a result of the various transactions described above, the Company's
ownership interest in Softworks was reduced from 100% to 54.5% as of December
31, 1998.
In January, 1999, the Company, through the exchange of 687,600 restricted shares
of Softworks common stock, further reduced its ownership interest from 54.5% to
50.2% as follows:
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Six Months Ended June 30, 1999 and 1998
1. The Company issued as 1999 bonus incentive compensation, 298,000 restricted
shares of Softworks common stock to two executives, vesting 25% on January
1, 1999, 25% on April 1, 1999, 25% on July 1, 1999 and 25% on October
1,1999. These shares would fully vest in the event of the acquisition of
Softworks, or the Company by any third party. Accordingly, the Company will
record a non-cash charge to operations of $269,250 each quarter.
2. The Company issued 389,600 restricted shares of Softworks, as well as
80,000 contract options to acquire restricted shares of Softworks' common
stock owned by the Company, exercisable at $1.00 per share and expire
December 31, 1999 to various consultants (40,000 of these options were
exercised in June, 1999). The related contracts are for services to be
performed over time frames ranging from twelve to twenty-four months. The
$1,774,000 value of the shares and options will be charged to operations
over the terms of the related contracts.
As a result of the January, 1999 transactions, the Company recognized in the
first quarter a gain of $2,031,000, representing the difference between the fair
value of the Softworks common stock exchanged, and the related carrying value of
the Company's investment in Softworks.
In April, 1999, certain stock options previously granted by Softworks to its
employees and consultants were exercised, which had the effect of reducing the
Company's ownership interest in Softworks from 50.2% to 49.7%. In June 1999,
Softworks completed a second public offering of 3,900,000 shares of its common
stock at a price of $10.50 per share (less underwriting fees and commissions of
$.63 per share) as follows: 1,000,000 shares were sold by Softworks, 1,256,933
shares were sold by the Company, and 1,643,067 shares were sold by other
existing shareholders. In conjunction with the offering, the Company issued
200,000 contract options to acquire restricted shares of Softworks common stock
owned by the Company to a consultant, exercisable at $1.00 per share, which
vested upon completion of the offering. The options were exercised in June 1999.
The result of these transactions was to further reduce the Company's ownership
of Softworks to 38.0% or 6,505,767 shares of Softworks common stock at June 30,
1999. The Company recognized a gain of $14,410,000 in the second quarter of
1999.
Commencing April 1, 1999, Softworks' results are accounted for using the equity
method of accounting and are no longer consolidated. Under the equity method of
accounting, the Company's share of Softworks' earnings or losses is included in
the Company's consolidated operating results in a single line item. Summarized
financial information of Softworks for the quarter ended June 30, 1999 as well
as pro forma consolidated financial information as if Softworks were accounted
for using the equity method for all prior periods presented is as follows:
Softworks, Inc.
Summarized Financial Information
<TABLE>
<CAPTION>
Condensed Statement of Operations Condensed Balance Sheet
Three months ended June 30, 1999 June 30, 1999
(in thousands) (in thousands)
<S> <C> <S> <C>
Revenue $11,615 Current assets $44,349
Cost of revenue 730 Non-current assets 22,062
------- -------
Gross margin 10,885 $66,411
=======
Operating expenses 11,303
-------
Operating loss (418)
-------
Net loss ($288)
=======
Current liabilities $23,641
Non-current liabilities 14,071
Stockholders' equity 28,699
-------
$66,411
=======
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Six Months Ended June 30, 1999 and 1998
Computer Concepts Corp. and Subsidiaries
Pro Forma Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------
(in thousands)
Pro-forma
Actual Adjustments Pro-forma Actual Adjustment Pro-forma
------ ----------- --------- ------ ---------- ---------
ASSETS LIABILITIES AND
SHAREHOLDERS'
EQUITY
<S> <C> <C> <C> <S> <C> <C> <C>
Current Assets $ 63,742 $ (38,282) $ 25,460 Current liabilities $36,173 $(26,501) $ 9,672
Long-term receivables 7,908 (7,908) - Deferred revenue 11,807 (11,764) 43
Property, plant and
equipment, net 3,564 (2,499) 1,065 Long-term debt 1,403 (1,401) 2
Software costs, net 5,594 (3,039) 2,555 ------ -------- -----
Total liabilities 49,383 (39,666) 9,717
Goodwill, net 8,610 (4,143) 4,467
Other assets 2,484 (2,384) 100 Minority Interest 8,503 (8,503) -
Investment in
subsidiary, equity
method - 10,086 Shareholders' equity 34,016 - 34,016
-------- -------- -------- ------- -------- -------
10,086
--------
$ 91,902 $(48,169) $ 43,733 $91,902 $(48,169) $43,733
======== ======== ======== ======= ======== ======
</TABLE>
<TABLE>
<CAPTION>
Computer Concepts Corp. and Subsidiaries
Pro Forma Condensed Consolidated Statements of Operations
For the six months ended June 30, 1999 For the six months ended June 30, 1998
-------------------------------------- ---------------------------------------
(in thousands) (in thousands)
Pro-forma Pro-forma
Actual Adjustments Pro-forma Actual Adjustments Pro-forma
------ ----------- --------- ------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue $23,613 $(10,258) $13,355 $19,110 $(15,649) $ 3,461
Cost of Revenue 12,641 (764) 11,877 7,495 (4,310) 3,185
------- -------- ------- ------- -------- -------
Gross Margin 10,972 (9,494) 1,478 11,615 (11,339) 276
------- -------- ------- ------- -------- -------
Total Operating Expenses 24,466 (9,342) 15,124 19,841 (11,930) 7,911
------- -------- ------- ------- -------- -------
Operating (loss)
income (13,494) (152) (13,646) (8,226) 591 (7,635)
Other Income (expense)
Gain on partial
disposition of
subsidiary 16,441 - 16,441 6,627 - 6,627
Interest (expense)
income, net 16 - 16 (559) 247 (312)
Minority interest
expense (46) 46 - - - -
Equity in loss of
Softworks (125) 46 (79) - (838) (838)
------- -------- ------- ------- -------- -------
Income (loss) before
provision for
income taxes 2,792 (60) 2,732 (2,158) - (2,158)
------- -------- ------- ------- -------- -------
Provision for
income taxes (75) 60 (15) - - -
------- -------- ------- ------- -------- -------
Net income (loss) $2,717 $ - $2,717 $(2,158) $ - $(2,158)
======= ======== ======= ======= ======== =======
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Six Months Ended June 30, 1999 and 1998
Computer Concepts Corp. and Subsidiaries
Pro Forma Condensed Consolidated Statements of Operations
For the three months ended June 30, 1998
(in thousands)
<TABLE>
<CAPTION>
Actual Pro-forma Adjustments Pro-forma
------ --------------------- ---------
<S> <C> <C> <C>
Revenue $11,486 $(9,053) $2,433
Cost of Revenue 4,003 (2,000) 2,003
------- ------- -------
Gross Margin 7,483 (7,053) 430
Total Operating Expenses 12,180 (6,858) 5,322
------- ------- -------
Operating (loss) income (4,697) (195) (4,892)
------- ------- -------
Other Income (expense)
Gain on partial disposition
of subsidiary 6,627 - 6,627
Interest (expense) income,
net (536) 200 (336)
Minority interest expense - - -
------- ------- -------
Equity in loss of Softworks - (5) (5)
------- ------- -------
Income before provision
for income taxes 1,394 - 1,394
Provision for income taxes - - -
------- ------- -------
Net income $1,394 $ - $1,394
======= ======= =======
</TABLE>
9. Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, AAccounting for Income Taxes" (ASFAS 109"). SFAS 109 requires
the determination of deferred tax assets and liabilities based on the
differences between the financial statement and income tax bases of assets and
liabilities, using enacted tax rates SFAS No.109 requires that the net deferred
tax asset be adjusted by a valuation allowance, if, based on the weight of
available evidence, it is more likely than not that some portion or all of the
net deferred tax asset will not be realized.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three and Six Months Ended June 30, 1999 and 1998
Through August 4,1998, the results of the Company's U.S. operations conducted
through its Softworks subsidiary have been included in the Company's
consolidated Federal income tax returns. However, separate provisions for income
taxes have been determined for Softworks= wholly owned foreign subsidiaries that
are not eligible to be included in the U.S. Federal income tax returns. As a
result of the initial public offering of Softworks, the Company's ownership of
Softworks was reduced below 80% and Softworks is no longer eligible to be
included in the Company's consolidated Federal income tax returns.
It is expected that the Company will utilize a portion of its available net
operating loss carryforwards to substantially reduce the taxable income
resulting from the gain on partial disposition of Softworks.
10. Management's plans
Prior to 1998, the Company incurred substantial consolidated net losses and used
substantial amounts of cash in operating activities, which were primarily
financed through private placements of common stock and convertible debentures.
During 1998, and 1999, the Company continued to use substantial amounts of cash
in its operations, however, cash requirements were primarily financed through
Softworks initial public offering and additional sales of Softworks common
stock. Management's current plan is focused on becoming a preeminent provider of
innovative software products and services which are, and continue to be designed
and developed to:
-- break down barriers between people and data;
-- exploit the Company's patented technologies;
-- capitalize on the internet marketplace.
The Company is currently focusing on four general product categories:
1. The continued marketing of the d.b.Express Internet Information Server
Services;
2. Continue to exploit the d.b.Express technology through the development of
new vertical markets;
3. Continue to develop its Professional Services division; and
4. Capitalize on the growth of the internet and parents' need to monitor their
children's activities through the sale of ComputerCOP.
Additionally, the Company is currently reviewing its long-term business
strategy.
While management believes that its plan will ultimately enable them to achieve
positive cash flows from operations, until such time, additional cash may be
necessary to implement such plan. Although there can be no assurances,
management has several alternative sources to fund the development of its plan,
including additional debt and equity financing (if necessary), or additional
sales of its investment in Softworks common stock, which, as a consequence of
Softworks initial public offering, became a readily marketable asset (See Note
8).16
<PAGE>
COMPUTER CONCEPTS CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND LIQUIDITY
For the Three Months Ended March 31, 1999 and 1998
Forward-Looking Statements.
- --------------------------
All statements other than statements of historical fact included in this Form
10-Q including, without limitation, statements under, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" regarding the
Companys financial position, business strategy and the plans and objectives of
management for future operations, are forward-looking statements. When used in
these Form 10-Q, words such as "anticipate," "believe," "estimate," "expect,"
"intend" and similar expressions, as they relate to the Company or its
management, identify forward-looking statements. Such forward-looking statements
are based on the beliefs of management, as well as assumptions made by, and
information currently available to, the Companys management. Actual results
could differ materially from those contemplated by the forward-looking
statements as a result of certain factors including but not limited to,
fluctuations in future operating results, technological changes or difficulties,
management of future growth, expansion of international operations, the risk of
errors or failures in the Companys software products, dependence on proprietary
technology, competitive factors, risks associated with potential acquisitions,
the ability to recruit personnel, and the dependence on key personnel. Such
statements reflect the current views of management with respect to future events
and are subject to these and other risks, uncertainties and assumptions relating
to the operations, results of operations, growth strategy and liquidity of the
Company. All subsequent written and oral forward-looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by this paragraph.
Overview
- --------
Computer Concepts Corp. and subsidiaries (the "Company") design, develop, market
and support information delivery software products, including end-user data
access tools for use in personal computer and client/server environments.
Through Softworks, the Company developed, marketed and supported systems
management software products for corporate mainframe data centers. In 1997, the
Company created a business unit, "professional services," which primarily
resells computer hardware and for a fee, will assist in the design, construction
and installation of technology systems. The Company makes use of its proprietary
data access technology, d.b.Express TM in its d.b.Express TM Internet
Information Server, more commonly referred to as a server farm. This service
presently is being marketed solely to the telecommunications industry. The
server farm permits end user the ability to access and analyze information
through the internet. Data can be visually presented using the Companys patented
data visualization technology. Additionally, in June, 1998, the Company
completed an acquisition of software (and related sales and marketing rights)
which is designed to provide non computer literate owners (e.g. parents,
guardians, schools, etc) the ability to identify threats as well as
objectionable material which may be viewed by users of the computer on the
internet (e.g. children).
The Company currently consists of three product lines: professional services,
d.b.Express TM Internet Information Server services (reported with professional
services in the accompanying financial statements), and software technology and
related sales and marketing rights, acquired in June, 1998 (marketed as
ComputerCOP). d.b.Express TM technology, a visually-based proprietary software
tool, can provide businesses with a simple, fast, low-cost method of finding,
organizing, analyzing and using information contained in databases. During 1997,
the Company commenced operations of the professional services unit. The
professional services unit offers solutions, support and strategies to solve
various business crises in such areas as: selection and reselling of hardware,
network determination, help desk applications, wiring/cabling, LAN connections,
moves/adds/changes, and project management. Additionally, this unit could
oversee new installations as well as offering on-site component repair.
ComputerCOP is designed to provide non computer literate owners (e.g. parents)
the ability to identify threats as well as objectionable material which may be
viewed by users of the computer on the internet (e.g. children). Orders for the
initial version of the product began shipping during the fourth quarter, 1998.
The method of revenue recognition for each product line is dependent upon the
type and manner of service provided and or the terms of product sales.
<PAGE>
COMPUTER CONCEPTS CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND LIQUIDITY
For the Three Months Ended March 31, 1999 and 1998
As described above in Note 8, during the three months ended June 30, 1999, the
Companys ownership interest in Softworks was reduced to 38.0%. Accordingly, the
financial results of Softworks are not consolidated with the Company commencing
with the quarter ending June 30, 1999.
Results of Operations
- ---------------------
Commencing April 1, 1999, Softworks results are accounted for using the equity
method of accounting and are no longer consolidated. Under the equity method of
accounting, the Company's share of Softworks earnings or losses is included in
the Company's consolidated operating results in a single line item. Summarized
financial information of consolidated operating results with Softworks accounted
for using the equity method for the three and six months ended June 30, 1999 and
1998 is as follows:
Computer Concepts Corp. and Subsidiaries
Actual and Pro Forma Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the three months ended June 30, For the six months ended June 30,
----------------------------------- ----------------------------------
(in thousands) (in thousands)
1999 1998 1999 1998
---- ---- ---- ----
(Actual) (Pro-forma) (Pro-forma) (Pro-forma)
------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue
Software licenses, net $ 218 $ 8 $ 211 $ 27
Maintenance 10 10 20 20
Professional services 9,417 2,415 13,124 3,414
------ ------ -------- -------
9,645 2,433 13,355 3,461
Cost of Revenue
Software licenses 42 1 61 4
Maintenance - - - -
Professional services 8,573 2,002 11,816 3,181
------ ------ -------- -------
Gross margin 1,030 430 1,478 276
------ ------ -------- -------
Research and development costs 942 815 2,510 1,526
Sales and marketing costs 3,611 3,030 7,194 3,831
General and administrative
costs 1,726 1,331 3,451 2,332
Amortization and depreciation 995 146 1,969 222
------ ------ -------- -------
7,274 5,322 15,124 7,911
------ ------ -------- -------
Operating loss (6,244) (4,892) (13,646) (7,635)
Gain on partial disposition
of subsidiary (see Note 8) 14,410 6,627 16,441 6,627
Other expense, net (98) (341) (78) (1,150)
------ ------ -------- -------
Net income (loss) $8,068 $1,394 $ 2,717 ($2,158)
====== ====== ======== =======
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND LIQUIDITY
For the Three Months Ended March 31, 1999 and 1998
The following discussion about the "results of operations" is based on the
operating results as presented in the above table.
Total revenue for the three and six-month periods ended June 30, 1999 when
compared to the same time frames in the prior year, increased $7,212,000 and
$9,894,000, respectively. The significant portion of the professional services
revenue has been derived from one major contract involving two customers for the
resale of computer hardware and related services (see Note 6- Major customer),
which is substantially complete. The Company is currently pursuing additional
contracts, however, there can be no assurances that the Company will be
successful in obtaining these contracts. The remaining portion of revenue
included in professional services is generated from the Company's d.b.Express
Internet Information Server, (the "server farm"). At present, this technology
has only been developed to provide service to the telecommunications industry.
The Company is currently negotiating/finalizing contracts with several new
customers, which if consummated, should increase the monthly revenue.
Substantially all of the revenue in the software license category relates to
ComputerCOP. The Company began shipping ComputerCOP in the last quarter of 1998
and has shipped in excess if 100,000 copies of the product to various retailers,
distributors and individuals to date. However, since most of the shipments are
made with right of return, the Company has delayed the recognition of revenue
until the requirements of Statement of Financial Accounting Standards No. 48,
Revenue Recognition When Right of Return Exists have been met. The Company
anticipates releasing ComputerCOP Deluxe, which is a new version with several
new features and enhancements, primarily designed for individual consumers.
Further, the Company also plans to release two completely new versions,
ComputerCOP Professional and ComputerCOP Forensic, for which orders have already
been received. ComputerCOP Professional and ComputerCOP Forensic are primarily
designed for law enforcement professionals, such as police departments, parole
officers and other government agencies. The Company anticipates the release of
these three products in the next several months.
The cost of revenue for professional services, as a percentage of its revenue,
increased from 83% for the quarter ended June 30, 1998, to 91% for the quarter
ended June 30, 1999, and decreased from 93% for the six months ended June 30,
1998 to 90% for the six months ended June 30, 1999. The cost of revenue consists
primarily of amounts paid to the Companys suppliers for goods and services
related to the resale of computer hardware and related services in its
professional services unit. The cost of revenue related to the server farm
primarily consists of the direct labor associated with processing call detail
records. The depreciation of the server farm's hardware is included in
"Amortization and depreciation." Cost of revenue with respect to ComputerCOP is
currently running at approximately 20%. The Company expects to improve its
margins as volume increases. Further, the Company anticipates that based upon
the expected selling price of ComputerCOP Professional and ComputerCOP Forensic,
gross margins should improve. The amortization costs of the purchased software
technology related to ComputerCOP are included in "Amortization and
depreciation."
Research and development costs for the three-month period ended June 30, 1999,
increased approximately $127,000 over the comparable period last year. For the
six months ended June 30, 1999, costs increased $984,000 when compared to the
six months ended June 30, 1998. These increases were primarily a result of
enhancements, upgrades and the development of additional vertical applications
to the d.b.Express Internet Information Server, and the three new versions of
ComputerCOP. Further, expenditures have been made by the Company in its
continuing efforts to create and bring to market new technologies.
<PAGE>
COMPUTER CONCEPTS CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND LIQUIDITY
For the Three Months Ended March 31, 1999 and 1998
Sales and marketing expenses increased $581,000 to $3,611,000 for the three
month period ended June 30, 1999, when compared to $3,030,000 for the same
period in the prior year and increased $3,363,000 to $7,194,000 for the six
month period ended June 30, 1999, when compared to $3,831,000 for the same
period in the prior year. A major portion of sales and marketing costs is the
non-cash charge related to the specific marketing rights obtained in the
acquisition of ComputerCOP of approximately $2,074,000 during the six months
ended June 30, 1999. The Company will continue to recognize costs associated
with these specific marketing rights as the related services are performed,
which is expected to approximate $1,037,000 for each quarter through 1999. The
Company has expended an additional $500,000 marketing ComputerCOP (none in
1998). The Company has also incurred approximately $425,000 of sales and
commission expenses related to the resale of computer hardware and related
services in its professional services division (approximately $50,000 in 1998).
The balance of the sales and marketing costs relate to the Company's server farm
(in the telecommunications industry as well as exploring new vertical market
applications) and marketing research for products and services currently under
development. While sales and marketing expenses have risen, the Company believes
that its expenditures are necessary in order to maintain and improve market
position and product recognition.
General and administrative costs increased $395,000 to $1,726,000 for the three
months ended June 30, 1999, when compared to the three months ended June 30,
1998, and increased $1,119,000 to $3,451,000 for the six months ended June 30,
1999, when compared to the six months ended June 30, 1998. Major factors
contributing to these increases are expanded staffing levels, which the Company
believes necessary in order to support anticipated growth, legal expenses the
Company has incurred in defending itself from the class action law suit, and
non-cash executive compensation.
Amortization and depreciation expenses increased $849,000 when comparing the
three-month periods ended June 30, 1999 and June 30, 1998. Further, it increased
$1,747,000 when comparing the six-month periods ended June 30, 1999 and June 30,
1998. The increases are primarily attributable to the purchased software and
goodwill acquired in the transaction effective June 30, 1998 (see Note 7).
Gain on partial disposition of subsidiary - see Note 8.
Liquidity and Capital Resources
- -------------------------------
For the six-month period ended June 30, 1999, net cash provided by operating
activities was $107,000, $75,000 of which was attributable to Softworks. The
Company had one major contract involving two customers that provided
approximately $5,000,000 net cash for the six-month period ended June 30, 1999,
primarily as a result of timing differences between accounts receivable and
accounts payable. The Company is currently pursuing additional contracts,
however, there can be no assurances that the Company will be successful in
obtaining these contracts.
Net cash provided by investing activities of $10,164,000 ($10,616,000 excluding
Softworks) was primarily attributable to the proceeds from sales of Softworks
common stock and the exercises of options to purchase Softworks common stock,
totaling $17,646,000 offset by the reduction in cash of $6,759,000 attributable
to excluding Softworks from consolidation (see Note 8).
During November, 1998, the parent Company entered into an Accounts Receivable
Purchase Agreement, whereby the Company from time to time may, on a full
recourse basis, assign some of their accounts receivable. Upon specific invoice
approval, an advance of 85% of the underlying receivable is provided to the
Company. The remaining balance (15%), less an administrative fee of
approximately 2% plus interest at the rate of 1 1/2% per month, is paid to the
Company once the customer has paid. This agreement expires in November, 1999.
During the first quarter of 1999, the Company repaid $4,172,000 of related debt
and at June 30, 1999, there were no receivables assigned or any amount due the
lender.
Prior to 1998, the Company incurred substantial consolidated net losses and used
substantial amounts of cash in operating activities, which were primarily
financed through private placements of common stock and convertible debentures.
During 1998, and 1999, the Company continued to use substantial amounts of cash
in its operations, however, cash requirements were primarily financed through
Softworks initial public offering and additional sales of Softworks common
stock. At June 30, 1999, and December 31, 1998 (excluding Softworks), the
Company had working capital of $21,425,000 (unaudited) and $15,787,000
(unaudited), respectively. As of August 10, 1999, the Company had cash and cash
equivalents totaling approximately $15,980,000 (unaudited).
<PAGE>
COMPUTER CONCEPTS CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND LIQUIDITY
For the Three Months Ended March 31, 1999 and 1998
Management's current plan is focused on becoming a preeminent provider of
innovative software products and services which are, and continue to be designed
and developed to:
-- break down barriers between people and data;
-- exploit the Companys patented technologies;
-- capitalize on the internet marketplace.
The Company is currently focusing on four general categories:
1. The continued marketing of the d.b.Express Internet Information Server
Services;
2. Continue to exploit the d.b.Express technology through the development of
new vertical markets;
3. Continue to develop its Professional Services division; and
4. Capitalize on the growth of the internet and parents need to monitor their
childrens activities through the sale of ComputerCOP.
Additionally, the Company is currently reviewing its long-term business
strategy.
While management believes that its plan will ultimately enable them to achieve
positive cash flows from operations, until such time, additional cash may be
necessary to implement such plan. Although there can be no assurances,
management has several alternative sources to fund the development of its plan,
including additional debt and equity financing (if necessary), or additional
sales of its investment in Softworks common stock, which, as a consequence of
Softworks initial public offering, became a readily marketable asset (See Note
8).
YEAR 2000 ISSUES
Background. Some computers, software, and other equipment include programming
code in which calendar year data is abbreviated to only two digits. As a result
of this design decision, some of these systems could fail to operate or fail to
produce correct results if "00" is interpreted to mean 1900, rather than 2000.
These problems are widely expected to increase in frequency and severity as the
year 2000 approaches, and are commonly referred to as the Millennium Bug or
"Year 2000 Problem".
Assessment. The Year 2000 Problem could affect computers, software, and other
equipment used, operated, or maintained by the Company. Accordingly, the Company
is reviewing its internal computer programs and systems to ensure that the
programs and systems will be Year 2000 compliant. The Company presently believes
that its computer systems will be Year 2000 compliant in a timely manner.
However, while the estimated cost of these efforts is not expected to be
material to the Company's overall financial position, or any year's results of
operations, there can be no assurance to this effect.
Software Sold to Consumers. The Company believes that it has substantially
identified and resolved all potential Year 2000 Problems with any of the
software products it develops and markets. However, management also believes
that it is not possible to determine with complete certainty that all Year 2000
Problems affecting the Company's software products have been identified or
corrected due to complexity of these products and the fact that these products
interact with other third party vendor products and operate on computer systems
which are not under the Company's control.
<PAGE>
COMPUTER CONCEPTS CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND LIQUIDITY
For the Three Months Ended March 31, 1999 and 1998
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 September, 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 September, 1999. The Company estimates the total cost to the
Company of completing any required modifications, upgrades, or replacements of
these internal systems will not have a material adverse effect on the Company's
business or results of operations. This estimate is being monitored and will be
revised as additional information becomes available.
Suppliers. The Company has initiated communications, including surveys, with
third party suppliers of the major computers, software, and other equipment
used, operated, or maintained by the Company to identify and, to the extent
possible, to resolve issues involving the Year 2000 Problem. However, the
Company has limited or no control over responses to its inquiries and the
actions of these third party suppliers. Thus, while the Company does not
anticipate any significant Year 2000 Problems with these systems, there can be
no assurance that these suppliers will resolve any or all of their Year 2000
Problems with these systems before the occurrence of a material disruption to
the business of the Company or any of its customers. Any failure of these third
parties to resolve Year 2000 problems with their systems in a timely manner
could have a material adverse effect on the Company's business, financial
condition, and results of operations.
Most Likely Consequences of Year 2000 Problems. The Company expects to identify
and resolve all Year 2000 Problems that could materially adversely affect its
business operations. However, management believes that it is not possible to
determine with complete certainty that all Year 2000 Problems affecting the
Company have been identified or corrected. The number of devices that could be
affected and the interactions among these devices are simply too numerous. In
addition, one cannot accurately predict how many Year 2000 Problem-related
failures will occur or the severity, duration, or financial consequences of
these perhaps inevitable failures. As a result, management expects that the
Company could likely suffer the following:
1. a significant number of operational inconveniences and inefficiencies for
the Company and its customers that may divert management's time and
attention and financial and human resources from its ordinary business
activities; and
2. a lesser number of serious system failures that may require significant
efforts by the Company or its customers to prevent or alleviate material
business disruptions; and
3. the inability to determine with any degree of certainty, the changes if
any, in buying habits of its current and potential customers due to their
concerns over Year 2000 issues.
Contingency Plans. The Company 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 September, 1999. Depending on the systems affected, these
plans could include accelerated replacement of affected equipment or software,
short to medium-term use of backup equipment and software, increased work hours
for Company personnel or use of contract personnel to correct on an accelerated
schedule any Year 2000 Problems that arise or to provide manual workarounds for
information systems, and similar approaches. If the Company is required to
implement any of these contingency plans, it could have a material adverse
effect on the Company's financial condition and results of operations.
<PAGE>
COMPUTER CONCEPTS CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND LIQUIDITY
For the Three Months Ended March 31, 1999 and 1998
Disclaimer. The discussion of the Company's efforts, and management's
expectations, relating to Year 2000 compliance are forward-looking statements.
The Company's ability to achieve Year 2000 compliance and the level of
incremental costs associated therewith, could be adversely impacted by, among
other things, the availability and cost of programming and testing resources,
vendors' ability to modify proprietary software, and unanticipated problems
identified in the ongoing compliance review.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
PART II - OTHER INFORMATION
For the Three and Six Months Ended June 30, 1999 and 1998
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
Not applicable.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
PART II - OTHER INFORMATION
For the Three and Six Months Ended June 30, 1999 and 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMPUTER CONCEPTS CORP.
/s/ Daniel DelGiorno, Jr.
Daniel DelGiorno Jr. President, C.E.O. Treasurer, August 13, 1999
Director
/s/ George Aronson
George Aronson Chief Financial Officer August 13, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the quarterly period ending June 30, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 15,406
<SECURITIES> 12
<RECEIVABLES> 7,859
<ALLOWANCES> 1,067
<INVENTORY> 384
<CURRENT-ASSETS> 26,011
<PP&E> 3,119
<DEPRECIATION> 1,765
<TOTAL-ASSETS> 43,483
<CURRENT-LIABILITIES> 4,586
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 38,874
<TOTAL-LIABILITY-AND-EQUITY> 43,483
<SALES> 9,645
<TOTAL-REVENUES> 9,645
<CGS> 8,615
<TOTAL-COSTS> 7,274
<OTHER-EXPENSES> 14,285
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27
<INCOME-PRETAX> 8,068
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,068
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,068
<EPS-BASIC> 0.39
<EPS-DILUTED> 0.39
</TABLE>
