UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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 (631) 244-1500
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
The number of shares of $.0001 par value stock outstanding as of May 18, 2000
was: 21,940,566.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION Page
Condensed Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999 . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations and Comprehensive
Income For the Three Months Ended March 31, 2000 and 1999 . . . 4
Condensed Consolidated Statements of Cash Flows
For the Three Months ended March 31, 2000 and 1999 . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . . 6 - 14
Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . 15 - 20
PART II OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 21
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . 21
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . 21
Item 4. Submission of Matters to a Vote of Security Holders. . . 21
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . 21
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 21
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 AND DECEMBER 31, 1999
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $15,324 $ 1,852
Accounts receivable, net of allowance for sales
returns and doubtful accounts of $8 and $493
in 2000 and 1999, respectively 460 443
Investment in Softworks, held for sale - 10,329
Assets held for sale - ComputerCOP - 3,876
Deferred tax assets, current - 9,197
Advances to officers - 1,822
Prepaid expenses and other current assets 612 865
Investment in NetWolves Corporation 31,875 -
Cash held in escrow 10,091 -
------- -------
Total current assets 58,362 28,384
Property and equipment, net 1,538 1,345
Other assets 320 295
------- -------
$60,220 $30,024
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 4,210 $ 5,446
Restructuring costs payable 11,015 -
Dividend payable 2,194 -
Deferred maintenance revenue 32 42
Income taxes payable 3,650 50
------- -------
Total current liabilities 21,101 5,538
------- -------
Commitments and contingencies
Shareholders' equity
Common stock, $.0001 par value; 150,000,000 shares
authorized; 21,940,566 and 20,765,825 shares issued
in 2000 and 1999, respectively; and 21,940,566 and
20,529,245 shares outstanding in 2000 and 1999,
respectively 2 2
Additional paid-in capital 103,060 102,868
Accumulated deficit (58,093) (77,766)
Accumulated other comprehensive loss (5,850) (225)
------- -------
39,119 24,879
Common stock in treasury, at cost - 236,580 shares - (393)
------- -------
Total shareholders' equity 39,119 24,486
------- -------
$60,220 $30,024
======= =======
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
-----------------------------------
2000 1999
------- -------
(In thousands, except per share data)
<S> <C> <C>
Revenue
Software licenses, net $ 35 $ 6,730
Maintenance 11 3,539
Professional services 480 3,699
------- -------
526 13,968
------- -------
Cost of revenue
Software licenses, net 11 216
Maintenance - 548
Professional services 78 3,243
------- -------
89 4,007
------- -------
Gross margin 437 9,961
------- -------
Operating expenses
Research and development 3,044 4,470
Sales and marketing 3,293 8,141
General and administrative 3,272 2,915
Amortization and depreciation 209 1,684
Non-recurring restructuring charge 14,813 -
------- -------
24,631 17,210
------- -------
Operating loss (24,194) (7,249)
Other income (expenses)
Gain on sale of Softworks 47,813 2,031
Gain on sale of ComputerCOP assets held for sale 8,534 -
Interest income (expense), net 332 (12)
Minority interest in earnings of Softworks - (46)
------- -------
Income (loss) before provision for income taxes 32,485 (5,276)
Provision for income taxes (12,812) (75)
------- -------
Net income (loss) $19,673 $(5,351)
======= =======
Other comprehensive (loss) income
Unrealized loss on marketable securities (5,625) -
Foreign currency translation adjustments - 3
------- -------
Comprehensive income (loss) $14,048 $(5,348)
======= =======
Basic net income (loss) per share $ 0.96 $ (0.27)
======= =======
Diluted net income (loss) per share $ 0.93 $ (0.27)
======= =======
Basic weighted average common shares outstanding 20,522 20,089
======= =======
Diluted weighted average common shares outstanding 21,188 20,089
======= =======
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
--------------------------
2000 1999
------- -------
(In thousands)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $19,673 $(5,351)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities
Depreciation and amortization
Software costs - 792
Property and equipment 212 416
Excess of cost over fair value of net assets
acquired - 669
Other 1 1
Minority interest in net income of Softworks - 46
Provision for doubtful accounts - 114
Deferred income taxes 9,197 290
Common stock and options issued for services 2,522 1,744
Common stock issued for settlement of restructuring
charges 1,180 -
NetWolves common stock issued for services and for
settlement of restructuring charges 2,000
Softworks common stock exchanged for services - 634
Gain on sale of Softworks and ComputerCOP (56,347) (2,031)
Changes in operating assets and liabilities
Accounts receivable (17) 12,641
Installment accounts receivable - 149
Prepaid expenses and other current assets 253 5,511
Assets held for sale - ComputerCOP (18) -
Cash held in escrow (91) -
Other assets (26) 369
Accounts payable and accrued expenses (1,648) (4,239)
Restructuring costs payable 11,015 -
Income taxes payable 3,600 (2,043)
Deferred revenue (10) (1,366)
------- -------
Net cash (used in) provided by operating
activities (8,504) 8,346
------- -------
Cash flows from investing activities
Proceeds from the sale of Softworks stock (net of
$3,157 of expenses) 48,301 -
Cash utilized in the ComputerCOP/NetWolves
transaction (including $1,819 of expenses) (22,319) -
Investment in NetWolves Corporation (4,500) -
Capital expenditures (405) (745)
Cash received from the license of technology - 400
Software development and technology purchases - (222)
Repayment of officers' loans, net 899 353
------- -------
Net cash provided by (used in) investing
activities 21,976 (214)
------- -------
Cash flows from financing activities
Proceeds from long term debt - 2,021
Repayments of long term debt - (5,060)
------- -------
Net cash used in financing activities - (3,039)
------- -------
Effects of exchange rate changes on cash and cash
equivalents - 3
------- -------
Net increase in cash and cash equivalents 13,472 5,096
Cash and cash equivalents, beginning of period 1,852 8,176
------- -------
Cash and cash equivalents, end of period $15,324 $13,272
======= =======
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
1 Interim financial information
The condensed consolidated balance sheet as of March 31, 2000, and the
condensed consolidated statements of operations and comprehensive income
and cash flows for the three months ended March 31, 2000 and 1999, have
been prepared by the Company without audit. These interim financial
statements include all adjustments, consisting only of normal recurring
accruals, which management considers necessary for a fair presentation of
the financial statements for the above periods. The results of operations
for the three months ended March 31, 2000, 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, 1999. The accounting policies used in
preparing the condensed consolidated financial statements are consistent
with those described in the December 31, 1999, consolidated financial
statements.
2 The Company
Computer Concepts Corp. and subsidiaries (the "Company") develop, market
and support information delivery software products. The Company makes use
of its proprietary data access technology, d.b.Express, in its d.b.Express
Internet Information Server, more commonly referred to as a "Server Farm."
This service presently is being marketed solely to the telecommunications
industry. The Server Farm permits end users the ability to access and
analyze information through the Internet. Data can be visually presented
using the Company's patented data visualization technology.
In April 2000, the Company began offering a new consulting service, known
as Global Telecommunication Solutions ("GTS"). The primary function of the
GTS consulting service is to create cost savings for its customers through
effectively negotiating their telecommunications and network service
provider contracts. The Company intends to combine this service with its
Server Farm to create a unique, powerful detailed customer profile. This
new, enhanced profile will allow customers to efficiently optimize all
telecommunications contract compliance, establish traffic metrics, monitor
invoice accuracy and rate compliance as well as support complex invoicing
and reporting requirements, exception reporting and electronic invoicing
all via the Internet.
The most significant portion of the Company's operations had historically
been conducted through one of its subsidiaries, Softworks, Inc.
("Softworks"). Through Softworks, the Company developed, marketed and
supported systems management software products for corporate mainframe data
centers. Softworks was wholly owned by the Company through June 29, 1998,
and majority owned through March 31, 1999. On January 27, 2000, the Company
sold its remaining interest to EMC Corporation for approximately $61
million in cash, before expenses (Note 8).
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). On
February 14, 2000, the Company sold the ComputerCOP technology to NetWolves
Corporation (Note 8).
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. In 1999, this
business unit had one major contract, involving two customers, which was
completed in 1999. The Company does not currently have any other sales
contracts for this business unit and is no longer actively pursuing new
contracts.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
3 Restructuring
In the first quarter of 2000, the Company's newly appointed Board of
Directors approved and the Company announced a restructuring plan that will
streamline the Company's operations and overhead structure, including: (i)
elimination of employees, expenses and commitments that supported the
ComputerCOP technology (sold to NetWolves, Note 8), (ii) elimination of
employees, expenses and commitments that supported the Company's
development project related to a multi-media display station (Note 11), and
(iii) general reduction of operating expenses. As a result, the Company
recorded a non-recurring restructuring charge of $14,813,000 related to the
termination of 53 employees, retirement packages for certain Company
officers and directors, certain long-term consulting contracts and
operating leases. Cash requirements of this plan are estimated at
$12,133,000; $1,180,000 was settled with Company stock; and $1,500,000 was
settled with NetWolves common stock. As of March 31, 2000, the remaining
cash requirement is $11,015,000, which is expected to be primarily expended
during the next 12 months.
The restructuring charge includes costs directly related to the Company's
plan. EITF No. 94-3 and SEC Staff Accounting Bulletin No. 100 provide
specific requirements as to appropriate recognition of costs associated
with employee termination benefits and other exit costs. Employee
termination costs are recognized when details of the severance arrangements
are communicated to affected employees (all 53 employees were actually
terminated in March 2000). Other exit costs (such as contractual
obligations) that are not associated with or that do not benefit activities
that will be continued are recognized at the date of commitment to an exit
plan subject to certain conditions. Other costs directly related to the
restructuring that are not eligible for recognition at the commitment date
are expensed as incurred.
The activity in the restructuring accrual for the quarter ended March 31,
2000 is summarized in the table below:
<TABLE>
<CAPTION>
Employee Officer/director Consulting Operating Other Total
-------- ---------------- ---------- --------- ----- -----
terminations retirement contracts leases
------------ ---------- --------- ------
packages
--------
<S> <C> <C> <C> <C> <C>
Restructuring charge
to operations $2,243,000 $7,535,000 $3,681,000 $369,000 $985,000 $14,813,000
Cash expenditures - (558,000) (500,000) - (60,000) (1,118,000)
Company stock
issuances (200,000) (100,000) (630,000) - (250,000) (1,180,000)
Netwolves stock
exchanged - (1,500,000) - - - (1,500,000)
---------- -----------
Restructuring accrual,
March 31, 2000 $2,043,000 $5,377,000 $2,551,000 $369,000 $675,000 $11,015,000
========== ========== ========== ======== ======== ===========
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
-- Employee termination costs represent severance and related benefits
for the 53 employees that were terminated in March 2000: 18 employees
in sales and administration, 14 employees involved in the development
project related to a multi-media display station, 11 employees related
to ComputerCOP and 10 employees in general research and development.
Of these employees, 44 received severance benefits generally payable
over 3 to 9 months, commencing April 2000; one of these employees also
received 100,000 shares of Company common stock (valued at $200,000)
towards the settlement of his severance obligation.
-- Officer/director retirement packages represent retirement packages for
the Company's Chairman, its Chief Executive Officer and other board
members. $1,500,000 was paid with 75,000 shares of NetWolves common
stock (valued at $20 per share), $100,000 was paid with 50,000 shares
of Company common stock, $558,000 was paid in March 2000, $4,800,000
was paid in April 2000, $500,000 is payable on or before March 1, 2001
and the $77,000 balance relates to employee benefits payable over
various time periods.
-- The Company settled 5 long-term consulting contracts that will no
longer be required. The Company agreed to pay off a 1999 consulting
agreement with S.J. & Associates, Inc. for $1,276,000. Additionally,
the Company settled three consulting agreements that were entered into
during 2000 (originally totaling $1,785,000) for an aggregate of
$1,277,000 (one of the agreements, settled for $524,000, is with a
related party). Further, the Company will pay $1,128,000 as part of a
retirement arrangement with the Company's general counsel. These
obligations are payable as follows: $630,000 was paid in the form of
the Company's common stock; $500,000 cash was paid in March 2000;
$1,220,000 cash was paid in April 2000; and the $1,331,000 balance
will be paid over the next five years.
-- Operating leases represent the settlement of the remaining lease
payments with respect to certain automobile and equipment leases that
are no longer required. Payments are expected to be paid over the
remaining terms of the leases, which range from 3 to 38 months.
-- Other costs represent consulting fees related to the creation and
execution of the restructuring plan (including $250,000 to S.J. &
Associates, Inc. paid in the form of 125,000 shares of the Company's
common stock), legal fees and other exit costs.
4 Shareholders' equity
In February 2000, the Company declared a dividend of $0.10 per share
(aggregating $2,194,000) to its shareholders of record on March 15, 2000
and payable on May 1, 2000.
During the three month period ended March 31, 2000, the Company issued
1,821,500 shares of its common stock valued at $2.00 per share based on the
quoted price of the Company's common stock. The Company also recorded
transactions with respect to treasury stock and stock options as detailed
below:
-- Issued 590,000 shares of its common stock as settlement of
certain employee, director and consultant liabilities in
conjunction with its restructuring plan (Note 3). The shares were
valued at $1,180,000.
-- Issued 534,000 shares of its common stock as settlement of
employee bonuses. The shares were valued at $1,068,000, of which
$468,000 was accrued in 1999.
-- Issued 697,500 shares of its common stock to various consultants
for which it recorded a non cash charge to earnings of
$1,395,000. S.J. & Associates, Inc. was issued 375,000 of these
shares upon achieving certain performance goals pursuant to its
1999 contract.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
-- The Company's Chairman and Chief Executive Officer tendered
410,179 shares of the Company's common stock, valued at $923,000
based on the quoted price at the time, towards the repayment of
officers' loans.
-- The Company retired 236,580 shares of treasury stock purchased by
the Company in 1999. The shares were returned to authorized but
unissued status.
-- In March 2000, the Company granted 285,000 options to employees
and 70,000 options to consultants for services previously
rendered. All options are fully vested, are exercisable at $2.09
per share and expire December 31, 2001. The employee options have
an intrinsic value of zero and the options to consultants were
valued at $59,000 using the Black-Scholes option-pricing model.
During the three month period ended March 31, 1999, the Company issued the
following restricted common stock:
-- As part of a bonus incentive compensation plan, the Company
issued 470,500 shares to several non-executive employees for
which it recorded a non cash charge to earnings, of $826,000;
-- Issued 510,500 shares of its common stock to various consultants
for which it recorded a non cash charge to earnings of $910,000;
-- In lieu of cash, the Company issued 115,000 shares for an
acquisition of a technology license. The Company recorded
amortization expense of $8,000 during the three months ended
March 31, 1999.
5 Legal matters
In March 1995, an action was commenced against the Company and a number of
defendants unrelated to the Company which action was later amended naming
only the Company and three of its officers as defendants. The 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. The Company denied
plaintiff's allegations and filed a motion for summary judgment. In
November 1999, the motion for summary judgment was granted in favor of the
Company and its officers. However, the plaintiff filed an appeal, which is
being contested by the Company. The Company is unable to predict the
ultimate outcome of this appeal and, accordingly, no adjustments have been
made in the consolidated financial statements for any potential losses or
potential issuance of common stock.
During 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 MONTHS ENDED MARCH 31, 2000 AND 1999
In August 1999, The Company and its directors were served with a derivative
action complaint alleging awards of excess compensation and requesting a
judgment in favor of the Company for such excess compensation. The Company
and defendants have denied the allegations and are vigorously defending the
matter, however, the Company is unable to predict the outcome of this claim
and, accordingly, no adjustments have been made in the consolidated
financial statements in regard to this matter.
In November 1999, the Company (through one of its subsidiaries) was added
as a party in an amended complaint. The complaint alleges that a Company
consultant violated a personal non- compete agreement in performing
services for the Company. The plaintiffs contend that they have been
compelled to offer terms more generous to their customers than they
otherwise would have offered. Plaintiffs did not disclose the amount of
their alleged damages and requested injunctive relief. The Company has
denied the allegation and is vigorously defending the matter, however, the
Company is unable to predict the outcome of this claim and, accordingly, no
adjustments have been made in the consolidated financial statements in
regard to this matter.
6 Reclassifications
Certain reclassifications have been made to the condensed consolidated
financial statements shown for the prior period in order to have it conform
to the current period's classifications.
7 Segment information
The Company and its subsidiaries previously operated in two separate
business segments, computer software and professional services. With the
sale of Softworks and ComputerCOP (Note 8) and the completion of its major
professional services contract, the Company is now operating in one
business segment. Its primary activity is providing services to the
telecommunications industry through the d.b. Express Server Farm (Note 1).
8 Dispositions
ComputerCOP Corp.
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 acquisition was valued at an aggregate of
$12,210,000. The Agreement also included 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.
The $12,210,000 purchase price was 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 was allocated
to "Software costs", $4,150,000 was recorded as "Prepaid expenses and other
current assets" and $5,360,000 was recorded as "Excess of cost over fair
value of net assets acquired". The "assets held for sale ComputerCOP" at
December 31, 1999 included $250,000 of inventories, $1,064,000 of software
costs and $2,562,000 of goodwill.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
In March 1999, the Company sold certain rights to license ComputerCOP to a
marketing company (Bo-Tel, Inc.) for $400,000. The license rights were
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 was accounted for as a reduction of the cost of the assets acquired
from ITSV.
Pursuant to an agreement dated February 10, 2000, on February 14th, the
Company sold its recently formed subsidiary, ComputerCop Corp. to NetWolves
Corporation ("NetWolves", traded on the NASDAQ SmallCap Market under the
symbol "WOLV") in exchange for 1,775,000 shares of NetWolves common stock.
The assets of ComputerCop Corp. included the ComputerCOP technology (and
certain related assets including inventory) and $20.5 million in cash. The
transaction was treated as a sale of the ComputerCOP technology for 750,000
shares valued at $15 million and the purchase of 1,025,000 shares from
NetWolves for $20.5 million. Additionally, the Company purchased 225,000
shares from certain NetWolves shareholders for $4.5 million. The sale of
the Company's ComputerCOP technology resulted in a pre-tax gain of
$8,534,000, net of $2,572,000 of expenses, recorded in the first quarter of
2000. The $40,000,000 value of the 2,000,000 shares of NetWolves stock was
determined based upon the quoted market price ($20. per share) of the
NetWolves stock at the time the transaction was agreed to and announced and
was also based on a fairness opinion obtained from the Company's investment
banker.
All of the shares of NetWolves stock owned by the Company ("Trust Shares")
are subject to a Voting Trust Agreement wherein the Trustee, NetWolves'
Chief Executive Officer, has been granted the right to vote all Trust
Shares for a minimum period of six months to a maximum period of two years.
The Voting Trust terminates with respect to any shares sold pursuant to a
registration statement effected by NetWolves. The Voting Trust also
terminates at the end of six months with respect to shares privately sold
(if any), if aggregate sales are 25% or less of the total Trust Shares, and
terminates at the end of twelve months with respect to shares privately
sold (if any), if aggregate sales are 50% or less of the total Trust
Shares. The Company also received piggyback registration rights and a one
time demand registration right effective after August 15, 2000, in regard
to the NetWolves stock.
As of March 31, 2000, the Company owns 1,875,000 shares of NetWolves common
stock: 75,000 shares were exchanged as part of the restructuring plan (Note
3), 25,000 shares were used to pay legal fees to the Company's general
counsel with respect to the NetWolves transaction, and 25,000 shares were
issued as a bonus to an executive officer. All shares exchanged were valued
at $20. The Company accounts for its investment in NetWolves as a
marketable security available for sale in accordance with Statement of
Financial Standards No. 115 "Accounting For Certain Investments in Debt and
Equity Securities." At March 31, 2000, the quoted market value of the
1,875,000 shares of NetWolves common stock was $31,875,000 ($17 per share).
The unrealized loss of $5,625,000 was recorded as a charge to "accumulated
other comprehensive loss." On May 18, 2000, the quoted market value of the
NetWolves common stock was $18,281,000 ($9.75 per share).
Softworks, Inc.
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 35% as of December 31, 1999. 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.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Pursuant to a tender offer dated December 21, 1999, the Company sold its
remaining 35% interest in Softworks (a total of 6,145,767 shares) to EMC
Corporation and its subsidiary ("EMC") for $10.00 per share. The
transaction, which was completed on January 27, 2000, provided aggregate
cash proceeds of $61,458,000 (less $10,000,000 placed in escrow) and
resulted in a pre-tax gain of $47,813,000, net of $3,316,000 of expenses,
recorded in the first quarter of 2000.
In connection with the tender offer, the Company entered into an
Indemnification Agreement that provides, in part, that the Company shall
indemnify EMC from all losses sustained by EMC as a result of any breach of
certain representations and warranties appearing in the Agreement and Plan
of Merger between Softworks and EMC. The term of the Indemnification
Agreement is two years from the date of closing. Pursuant to an Escrow
Agreement, the Company deposited $10,000,000 of the sales proceeds into an
interest bearing escrow account to secure any potential liabilities arising
from the Indemnification Agreement. The escrow funds, net of any claims
against them, are to be released to the Company one year from the date of
closing.
Pro forma condensed consolidated statements of operations (unaudited)
Pro forma condensed consolidated statements of operations as if the
transactions described above were consummated as of the beginning of each
of the quarters ended March 31, 2000 and 1999, are as follows (in
thousands):
<TABLE>
<CAPTION>
Three months ended March 31, 2000
Pro Forma Adjustments
---------------------
NetWolves/
Softworks ComputerCOP
Actual Transaction Transaction Pro Forma
------ ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue $ 526 $ - $ (35) $ 491
Cost of revenue 89 - (11) 78
------- -------- ------- --------
Gross margin 437 - (24) 413
Total operating expenses 24,631 - (229) 24,402
------- -------- ------- --------
Operating loss (24,194) - 205 (23,989)
Other income (expense)
Gain on sale of Softworks 47,813 (47,813) - -
Gain on sale of ComputerCOP assets,
held for sale 8,534 - (8,534) -
Other, net 332 - - 332
------- -------- ------- --------
Income (loss) before provision for
income taxes 32,485 (47,813) (8,329) (23,657)
Provision for income taxes (12,812) 10,800 1,997 (15)
------- -------- ------- --------
Net income (loss) $19,673 $(37,013) $(6,332) $(23,672)
======= ======== ======= ========
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
Three months ended March 31, 1999
Pro Forma Adjustments
---------------------
NetWolves/
Softworks ComputerCOP
Actual Transaction Transaction Pro Forma
------ ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue $13,968 $(10,258) $ (3) $ 3,707
Cost of revenue 4,007 (764) (19) 3,224
------- -------- ------- --------
Gross margin 9,961 (9.494) 16 483
Total operating expenses 17,210 (9,342) (1,838) 6,030
------- -------- ------- --------
Operating loss (7,249) (152) 1,854 (5,547)
Other income (expense)
Gain on sale of Softworks 2,031 (2,031) - -
Other, net (58) 92 - 34
------- -------- ------- --------
Loss before provision for income
taxes (5,276) (2,091) 1,854 (5,513)
Provision for income taxes (75) 60 - (15)
------- -------- ------- --------
Net loss $(5,351) $ (2,031) $ 1,854 $ (5,528)
======= ======== ======= ========
</TABLE>
9 Income taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
SFAS 109 requires the determination of deferred tax assets and liabilities
based on the differences between the financial statement and income tax
bases of assets and liabilities, using enacted tax rates. SFAS No.109
requires that the net deferred tax asset be adjusted by a valuation
allowance, if, based on the weight of available evidence, it is more likely
than not that some portion or all of the net deferred tax asset will not be
realized.
As a result of the Company's sale of its remaining interest in Softworks in
January 2000 and the sale of its ComputerCOP technology in February 2000
(Note 8), the Company recognized a taxable gain in the first quarter of
2000 and utilized all of its currently available net operating loss
carryforwards. The Company's tax provision for the quarter ended March 31,
2000, consists of deferred tax expense of $9,197,000 and current tax
expense of $3,615,000.
10 Earnings per share
For 1999, 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 2000, the Company's dilutive instruments are "in the
money" stock options with various exercise dates and prices. 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:
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------
2000 1999
------- -------
(in thousands, except per share data)
<S> <C> <C>
Numerator:
Net income (loss) $ 19,673 $(5,351)
Denominator: ======== =======
Weighted average shares outstanding
(Denominator for basic EPS) 20,522 20,089
Effect of dilutive securities
Stock options 666 N/A
------- -------
Denominator for diluted EPS 21,188 20,089
======= =======
Basic net income (loss) per share $ 0.96 $ (0.27)
Diluted net income (loss) per share $ 0.93 $ (0.27)
</TABLE>
11 Multi-media display station
During 1999, the Company began to develop a unique multi-media display
station, which combines Internet strategy and e-commerce with multi-media
forms of delivery, presentation and interaction with end-users. This
Internet based communications/advertising network was being designed by the
Company to create a means by which businesses could promote specific
brand/product/service awareness. The Company intended to market this
technology in association with owners and/or managers of high traffic venue
areas (i.e., malls, airports, etc.) to local, regional and national
businesses. From inception through March 31, 2000, the Company invested
approximately $7,000,000 in its marketing and development efforts (charged
to operations as incurred). Additional funds will be required in order to
complete development and bring the product to market. As part of the
Company's restructuring plan (Note 3), the newly appointed Board of
Directors agreed that it was in the Company's best interest to immediately
cease all funding of this project, while maximizing its value. As a result,
in April 2000, the Company entered into a contractual arrangement with an
unrelated third party, whereby the Company transferred all of its
in-process research and development technology related to the multi-media
display station for the rights to 50% of the future profits (as defined),
if any, from the third party's operation or sale of this technology. The
third party agreed to utilize its contacts in the industry and also agreed
to fund all future costs associated with the continued development and
marketing of the display station. There can be no assurances that the
Company will recognize any proceeds from this transaction. The related
intangible assets continue to be recorded at their net book value of zero.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
MANAGEMENT DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Forward looking statements
All statements other than statements of historical fact included in this Form
10-Q including, without limitation, statements under, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" regarding the
Company's financial position, business strategy and the plans and objectives of
management for future operations, are forward-looking statements. When used in
this Form 10-Q, words such as "anticipate," "believe," "estimate," "expect,"
"intend" and similar expressions, as they relate to the Company or its
management, identify forward-looking statements. Such forward-looking statements
are based on the beliefs of management, as well as assumptions made by, and
information currently available to, the Company's' management. Actual results
could differ materially from those contemplated by the forward- looking
statements as a result of certain factors including but not limited to,
fluctuations in future operating results, technological changes or difficulties,
management of future growth, the risk of errors or failures in the Company's
software products, dependence on proprietary technology, competitive factors,
risks associated with potential acquisitions, the ability to recruit personnel,
and the dependence on key personnel. Such statements reflect the current views
of management with respect to future events and are subject to these and other
risks, uncertainties and assumptions relating to the operations, results of
operations, growth strategy and liquidity of the Company. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by this
paragraph.
Overview
Computer Concepts Corp. and subsidiaries (the "Company") develop, market and
support information delivery software products. The Company makes use of its
proprietary data access technology, d.b.Express, in its d.b.Express Internet
Information Server, more commonly referred to as a "Server Farm." This service
presently is being marketed solely to the telecommunications industry. The
Server Farm permits end-users the ability to access and analyze information
through the Internet. Data can be visually presented using the Company's
patented data visualization technology. In April 2000, the Company began
offering a new consulting service, known as Global Telecommunications Solutions
("GTS"). The primary function of GTS is to create cost savings for its customers
through effectively negotiating their telecommunications and network service
provider contracts. The Company intends to combine this service with its Server
Farm to create a unique, powerful detailed information source for its customer.
In the first quarter of 2000, the Company's newly appointed Board of Directors
approved and the Company announced a restructuring plan that it believes will
streamline the Company's operations and reduce overhead. As a result, the
Company recorded a non-recurring restructuring charge of $14,813,000.
In February 2000 the Company sold its recently formed subsidiary, ComputerCop
Corp. to NetWolves Corp. ("NetWolves") for 1,775,000 shares of NetWolves common
stock.
The most significant portion of the Company's operations had historically been
conducted through one of its subsidiaries, Softworks, Inc. ("Softworks").
Through Softworks, the Company developed, marketed and supported systems
management software products for corporate mainframe data centers. Softworks was
wholly owned by the Company through June 29, 1998, and majority owned through
March 31, 1999. On January 27, 2000, the Company sold its remaining interest to
EMC Corporation.
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. In 1999, this business unit
had one major contract, involving two customers, which was completed in 1999.
The Company does not currently have any other sales contracts for this business
unit and is no longer actively pursuing new contracts.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
MANAGEMENT DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Results of operations
Commencing April 1, 1999, Softworks' results were accounted for using the equity
method of accounting and were no longer consolidated. Under the equity method of
accounting, the Company's share of Softworks' earnings or losses were included
in the Company's consolidated operating results in a single line item. Pro forma
condensed consolidated operating results as if Softworks were accounted for
using the equity method for the quarter ended March 31, 1999, on a consistent
basis with the actual results for the quarter ended March 31, 2000, is as
follows:
Computer Concepts Corp. and Subsidiaries
----------------------------------------
Actual and Pro Forma Condensed Consolidated Statements of Operations
--------------------------------------------------------------------
<TABLE>
<CAPTION>
For the three months ended
--------------------------
March 31,
---------
(in thousands)
2000 1999
---- ----
(Actual) (Proforma)
------ --------
<S> <C> <C>
Revenue
Software licenses, net $ 35 $ -
Maintenance 11 11
Professional services 480 3,699
------- -------
526 3,710
------- -------
Cost of revenue
Software licenses 11 -
Maintenance - -
Professional services 78 3,243
------- -------
Gross margin 437 467
------- -------
Research and development 3,044 1,971
costs
Sales and marketing costs 3,293 3,199
General and administrative 3,272 1,725
costs
Amortization and depreciation 209 974
Non-recurring restructurxing
charge 14,813 -
------- -------
24,631 7,869
------- -------
Operating loss (24,194) (7,402)
Gain on sale of Softworks 47,813 2,031
Gain on sale of ComputerCOP
assets held for sale 8,534 -
Interest and other income 332 20
Provision for income taxes (12,812) -
------- -------
Net income (loss) $19,673 $(5,351)
======= =======
</TABLE>
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
MANAGEMENT DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
The following discussion about the results of operations is based on the
operating results as presented in the above table.
For the three month period ended March 31, 2000, total revenue decreased by
$3,184,000, when compared to the three month period ended March 31, 1999,
primarily as a result of a $3,399,000 decrease in its hardware reselling
business unit. The Company has no open hardware contracts, and, in January 2000,
elected to significantly curtail the operations of this business unit. Also
included in the professional services category is revenue generated from the
Server Farm. At present, this technology has been developed to provide services
solely to the telecommunications industry. For the three months ended March 31,
2000, and 1999, revenue was $480,000 and $300,000, respectively. The Company is
currently negotiating/finalizing several new contracts, which if consummated,
should increase revenue. Substantially all of the revenue in the software
license category relates to ComputerCOP. During the first quarter of 2000, the
Company sold the ComputerCOP technology. See Note 8. During the first quarter of
2000, the Company's primary source of revenue was generated from the Server
Farm. While there can be no assurances, the Company believes that its new GTS
consulting services will begin to generate revenue in July 2000.
The Server Farm generates much higher gross margin than did the reselling
business unit. The Server Farm cost of revenue consists primarily of the direct
labor associated with processing call detail records. The cost of revenue
related to the resale of computer hardware consisted primarily of amounts paid
to the Company's suppliers for goods and services. The cost of revenue related
to the Server Farm, for the three month period ended March 31, 2000, was
$78,000, or 16.2% of revenue. The cost of revenue related to the Server Farm,
for the three month period ended March 31, 1999, was $77,000, or 25.7% of
revenue. The Company believes that the cost of revenue associated with the
Server Farm revenue is not directly proportional. As such, as revenue increases,
costs, as a percentage of revenue, should decrease. The depreciation of the
Server Farm's hardware is included in "Amortization and depreciation."
Research and development expenses include costs for the development of the
multi-media display station, salaries and related costs for software developers,
quality assurance and documentation personnel involved in the Company's research
and development efforts. Costs attributable to the development of the
multi-media display station was $245,000 in the 1999 period and increased by
$1,548,000 to $1,793,000 in the 2000 period. Pursuant to the restructuring plan,
the Company ceased development of this project thereby eliminating these
development costs in the future. The Company also reduced its development costs
with respect to the Server Farm by $475,000, when comparing the 2000 period to
1999. The Company anticipates further reductions in future periods.
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. Expenses increased
$94,000 to $3,293,000 for the three-month period ended March 31, 2000, when
compared to $3,199,000 for the three month period ended March 31, 1999. Included
in this change was a reduction of approximately $975,000 in non-cash advertising
charges related to ComputerCOP taken in 1999, but not in 2000. Since ComputerCOP
was sold in the first quarter of 2000, these costs will be eliminated in the
future. Costs attributable to the sales and marketing of the multi-media display
station was $81,000 in the 1999 period and increased by $516,000 to $597,000 in
the 2000 period. Pursuant to the restructuring plan, the Company ceased
marketing this project thereby eliminating these sales and marketing costs in
the future. The balance of the change in sales and marketing costs, an increase
of $553,000, 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 were
necessary in order to maintain and improve market position and product
recognition. The Company believes sales and marketing expenses should be lower
in future periods.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
MANAGEMENT DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
General and administrative expenses include administrative and executive
salaries and related benefits, legal, accounting and other professional fees as
well as general corporate overhead. Expenses increased $1,547,000 to $3,272,000
for the three-month period ended March 31, 2000, when compared to the three-
month period ended March 31, 1999. Major factors contributing to this increase
include, among other things, increased compensation, legal expenses incurred in
defending the Company from litigation and the retention of financial
consultants. As a result of reductions made pursuant to the Company's
restructure plan, the Company believes general and administrative expenses
should be lower in future periods.
Amortization and depreciation expenses decreased $765,000 when comparing the
three-month periods ended March 31, 2000 and March 31, 1999. The decrease is
primarily attributable to the elimination of purchased software and goodwill
acquired in the ComputerCOP transaction. See Note 8.
Gain on sale of Softworks of $47,813,000 represents the gain associated with a
tender offering for the purchase of Softworks common stock made by EMC
Corporation, which was completed on January 27, 2000. See Note 8.
Gain on sale of ComputerCOP assets held for sale of $8,534,000 represents the
gain associated with an agreement dated February 10, 2000 for the sale of the
ComputerCOP subsidiary to NetWolves Corporation. See Note 8.
As a result of the Company's sale of its remaining interest in Softworks in
January 2000 and the sale of its ComputerCOP technology in February 2000, the
Company recognized a taxable gain in the first quarter of 2000 and utilized all
of its currently available net operating loss carryforwards. The Company's tax
provision for the quarter ended March 31, 2000, consists of deferred tax expense
of $9,197,000 and current tax expense of $3,615,000.
Financial Condition and Liquidity
During the first quarter of 2000, the Company continued to incur substantial
operating losses and used substantial amounts of cash in operating activities,
which were primarily financed through sale of Softworks common stock. The
Company sold its remaining interest in Softworks to EMC Corporation and its
subsidiary ("EMC") for $10.00 per share. The transaction was completed on
January 27, 2000, and provided cash proceeds of $48,301,000 (net of expenses and
fees of $3,157,000), and $10,000,000, which was placed in an interest bearing
escrow account. The escrow funds, net of any claims against them, are to be
released to the Company one year from the date of closing. Also during the first
quarter of 2000, the Company sold ComputerCOP Corp. for 1,775,000 shares of
NetWolves Corp., valued at $20 per share (aggregating $35,500,000). The assets
of ComputerCOP Corp. included the ComputerCOP technology (and certain related
assets including inventory) and $20,500,000 in cash. The Company purchased
225,000 additional shares from certain NetWolves shareholders for $4,500,000.
The Company paid approximately $1,819,000 in related fees and expenses. See Note
8.
In the first quarter of 2000, the Company's newly appointed Board of Directors
approved and the Company announced a restructuring plan that it believes will
streamline the Company's operations and overhead structure (Note 3). Key
elements of the restructure plan include: (i) elimination of employees, expenses
and commitments that supported the ComputerCOP technology (sold to NetWolves,
see Note 8), (ii) elimination of employees, expenses and commitments that
supported the Company's development project related to a multi-media display
station (see Note 11), and (iii) general reduction of corporate operating
expenses. The activity for the quarter ended March 31, 2000 and through May 15,
2000, is summarized in the table below:
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
MANAGEMENT DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
Employee Officer/director Consulting Operating Other Total
-------- ---------------- ---------- --------- ----- -----
terminations retirement contracts leases
------------ ---------- --------- ------
packages
--------
<S> <C> <C> <C> <C> <C> <C>
Restructuring charge
to operations $2,243,000 $7,535,000 $3,681,000 $369,000 $985,000 $14,813,000
Cash paid - (558,000) (500,000) - (60,000) (1,118,000)
Company stock
issuances (200,000) (100,000) (630,000) - (250,000) (1,180,000)
Netwolves stock
exchanged - (1,500,000) - - - (1,500,000)
---------- ---------- ---------- -------- -------- -----------
Balance March 31, 2000 2,043,000 5,377,000 2,551,000 369,000 675,000 11,015,000
Cash paid (397,000) (4,807,000) (1,247,000) (30,000) - (6,481,000)
---------- ---------- ---------- -------- -------- -----------
Restructuring accrual,
May 15, 2000 $1,646,000 $ 570,000 $1,304,000 $339,000 $675,000 $ 4,534,000
========== ========== ========== ======== ======== ===========
</TABLE>
The balance of the restructuring liability is payable as follows: $2,821,000
payable during the next 10 months, $483,000 is payable over various periods up
to 36 months and $1,230,000 is payable over the next five years.
As discussed above and as detailed in the Condensed Consolidated Statement of
Cash Flows, during the quarter ended March 31, 2000, the Company received
$48,301,000 from the sale of Softworks, utilized $26,819,000 in the
NetWolves/ComputerCOP transaction and $8,504,000 in operating activities
(including $1,118,000 from the restructuring) resulting in a cash balance of
$15,324,000 as of March 31, 2000. Subsequent to March 31, 2000, the Company paid
a dividend to its stockholders totaling $2,194,000, paid restructuring costs of
$6,481,000, reduced its March 31, 2000 accounts payable and accrued expenses by
approximately $2,300,000 and paid current operating expenses of approximately
$507,000, resulting in a cash balance of $3,842,000 as of May 15, 2000.
Management's current short-term plan is primarily focused on achieving operating
profit by successfully marketing innovative software products and services which
capitalize on the Company's patented technologies. To achieve its goals, the
Company has restructured its operations, which reduced its operating expenses,
while continuing to market the Server Farm to the telecommunications sector.
Additionally, the Company intends to successfully market its new consulting
service, GTS. The Company is continually reviewing its long-term business
strategy.
As discussed in Note 11, in April 2000, the Company entered into a contractual
arrangement with an unrelated third party, whereby the Company transferred all
of its in-process research and development technology related to the multi-media
display station for the rights to 50% of the future profits (as defined), if
any, from the third party's operation or sale of this technology. The third
party agreed to utilize its contacts in the industry and also agreed to fund all
future costs associated with the continued development and marketing of the
display station. There can be no assurances that the Company will recognize any
proceeds from this transaction.
While management believes that its plan will ultimately enable them to achieve
positive cash flows from operations, until such time, substantial cash may be
necessary to implement such plan. Although there can be no assurances,
management has several sources to fund the development of its plan, including
the $10,000,000 currently being held in escrow which becomes available to the
Company (net of any claims) in January 2001, or the partial disposition (if
necessary) of its recent investment in NetWolves. The Company is also seeking to
obtain a line of credit.
NetWolves is an innovator of all-in-one Internet gateway software systems, which
is a trend in the networking industry due to the enhanced functionality, offered
to end-users. Their primary product is marketed under the trade name, FoxBox.
NetWolves incorporates a series of software modules managed by a single
administrative interface that protects end user investment and offers cost
savings. NetWolves also offers Internet based distance training and profit
enhancing programs for the petroleum industry. At March 31, 2000, the quoted
market value of the 1,875,000 shares of NetWolves common stock was $31,875,000
($17 per share). On May 18, 2000, the quoted market value of the NetWolves
common stock was $18,281,000 ($9.75 per share).
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
MANAGEMENT DISCUSSIONS AND ANALYSIS
OF FINANCIAL CONDITION AND LIQUIDITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
YEAR 2000 ISSUES
The Company did not experience any significant malfunctions or errors in its
operating or business systems when the date changed from 1999 to 2000. Based on
operations since January 1, 2000, the Company does not expect any significant
impact to its ongoing business as a result of the "Year 2000 issue". However it
possible that the full impact of the date change, which was of concern to
computer programs that use two digits instead of four digits to define years,
has not been fully recognized. The Company believes that any such problems are
unlikely and that should they occur, they would be minor and correctable. In
addition, the Company could still be negatively affected if the Year 2000 or
similar issues adversely affect any of its suppliers. The Company is currently
not aware of any significant Year 2000 or similar problems that have arisen for
any of its vendors.
The Company estimates that it expended approximately $50,000 on Year 2000
readiness efforts through March 31, 2000. The Company does not anticipate any
further expenditures in connection with the Year 2000 issue.
<PAGE>
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
PART II - OTHER INFORMATION
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
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.
Report on Form 8-K dated March 2, 2000 covering Item 2- Disposition of Assets
and Item 7- Financial Statements and Exhibits relating to sale of ComputerCop
Corp.
Report on Form 8-K dated February 9, 2000 covering Item 2- Disposition of Assets
and Item 7- Financial Statements and Exhibits relating to sale of the Company's
holdings of Softworks, Inc.
<PAGE>
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/ James Cannavino
- ------------------------
James Cannavino
Chairman and Director
/s/ George Aronson
- ------------------------
George Aronson
Chief Financial Officer
Date: May 18, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the quarterly period ending March 31, 2000 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 15,324
<SECURITIES> 31,875
<RECEIVABLES> 468
<ALLOWANCES> 8
<INVENTORY> 0
<CURRENT-ASSETS> 58,362
<PP&E> 3,928
<DEPRECIATION> 2,930
<TOTAL-ASSETS> 60,220
<CURRENT-LIABILITIES> 21,101
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 103,060
<TOTAL-LIABILITY-AND-EQUITY> 60,220
<SALES> 526
<TOTAL-REVENUES> 526
<CGS> 89
<TOTAL-COSTS> 24,631
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 32,485
<INCOME-TAX> 12,812
<INCOME-CONTINUING> 19,673
<DISCONTINUED> 0
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<NET-INCOME> 19,673
<EPS-BASIC> 0.96
<EPS-DILUTED> 0.93
</TABLE>
