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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1998
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Commission File Number 0-25498
CONCENTRA CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 04-2827026
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
21 North Avenue
Burlington, MA 01803-3301
(Address of principal executive offices)
(781) 229-4600
(Registrant's telephone number, including area code)
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
----- -----
As of October 28, 1998, there were issued and outstanding 6,103,944 shares of
the Registrant's Common Stock.
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<PAGE>
CONCENTRA CORPORATION
FORM 10-Q
For the quarter ended September 30, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
ITEM 1. Condensed Consolidated Financial Statements:
a) Condensed Consolidated Balance Sheets as of September 30,
1998 (unaudited) and March 31, 1998........................... 3
b) Condensed Consolidated Statements of Operations for the three
and six-months ended September 30, 1998 and 1997 (unaudited).. 4
c) Condensed Consolidated Statements of Cash Flows for the six-
months ended September 30, 1998 and 1997 (unaudited).......... 5
d) Notes to Condensed Consolidated Financial Statements.......... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 10
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders............... 19
ITEM 6. Exhibits and Reports on Form 8-K.................................. 20
Signatures........................................................ 21
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
CONCENTRA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
----------- -----------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,502 $ 1,067
Accounts receivable, net of allowance for doubtful accounts of
$780 and $795, respectively 3,315 4,507
Other current assets 2,009 959
----------- -----------
Total current assets 7,826 6,533
Property and equipment, net 1,678 1,874
Capitalized software costs, net 1,410 1,986
Intangible assets, net 326 516
Other assets 96 303
=========== ===========
Total assets $11,336 $11,212
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,786 $ 3,481
Accrued expenses 2,764 3,469
Income tax payable 225 302
Deferred revenue 1,497 2,714
Current portion of capital lease obligations 348 348
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Total current liabilities 6,620 10,314
Capital lease obligations 327 473
Commitments and contingencies - -
Stockholders' equity:
Preferred stock - $.01 par value; 4,000,000 shares authorized,
no shares issued or outstanding - -
Common stock - $.00001 par value; 40,000,000 shares authorized,
6,103,944 and 6,093,806 shares issued and outstanding at
September 30, 1998 and March 31, 1998, respectively - -
Additional paid-in capital 27,844 27,789
Accumulated deficit (23,175) (27,002)
Cumulative translation adjustment (280) (362)
----------- -----------
Total stockholders' equity 4,389 425
----------- -----------
Total liabilities and stockholders' equity $11,336 $11,212
=========== ===========
</TABLE>
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The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
CONCENTRA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Software licenses $ 473 $ 1,968 $ 967 $ 2,902
Services 1,804 2,910 3,435 5,163
Software royalties from distributors 3,717 - 11,417 -
Related party software and services - 100 - 646
-------- -------- -------- --------
Total revenues 5,994 4,978 15,819 8,711
Operating expenses:
Cost of software licenses 320 428 628 1,428
Cost of services 1,278 472 2,668 2,161
Cost of software royalties from distributors 242 - 474 -
Sales and marketing 2,070 2,542 5,080 6,605
Research and development 1,228 780 2,521 1,688
General and administrative 676 590 1,411 1,371
Restructuring charge - - - 283
-------- -------- -------- --------
Total operating expenses 5,814 4,812 12,782 13,536
Income (loss) from operations 180 166 3,037 (4,825)
Interest income 43 54 51 120
Interest expense (19) (26) (58) (52)
Other (expense) income (4) (61) 837 10
Loss on investment - (527) - (577)
-------- -------- -------- --------
Income (loss) before income taxes 200 (394) 3,867 (5,324)
Provision for income taxes 30 10 40 20
======== ======== ======== ========
Net income (loss) $ 170 $ (404) $ 3,827 $ (5,344)
======== ======== ======== ========
Net income (loss) per common share - basic $ 0.03 $ (0.07) $ 0.63 $ (0.97)
======== ======== ======== ========
Weighted average number of common shares
outstanding - basic 6,088 5,545 6,087 5,526
======== ======== ======== ========
Net Income (loss) per common share - diluted $0.03 $(0.07) $ 0.63 $ (0.97)
======== ======== ======== ========
Weighted average number of common shares
outstanding - diluted 6,097 5,545 6,108 5,526
======== ======== ======== ========
</TABLE>
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The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
CONCENTRA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,827 $ (5,344)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 1,151 1,251
Foreign exchange loss 14 3
Reclass of ICAD Capitalized Software Costs 649 -
Write off of intangible assets - 372
Provision for bad debt - 100
Loss on sale of marketable securities - 14
Write down of other asset - 82
Changes in operating assets and liabilities:
Accounts receivable 1,268 6,964
Other assets (982) 66
Accounts payable (1,668) (566)
Accrued expenses (782) (1,393)
Deferred revenue (1,185) (403)
Income taxes payable (77) (20)
-------- --------
Net cash provided by operating activities 2,215 1,126
Cash flows from investing activities:
Purchase of property and equipment (205) (93)
Capitalized software costs (450) (475)
Purchase of intangible assets - (102)
Proceeds from sale of marketable securities - 189
-------- --------
Net cash used in investing activities (655) (481)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance cost 55 60
Proceeds from exercise of stock options - 174
Principal payments under capital lease obligations (146) (174)
-------- --------
Net cash (used in) provided by financing activities (91) 60
Effects of exchange rates on cash and cash equivalents (34) (106)
Net increase in cash and cash equivalents 1,435 599
Cash and cash equivalents at beginning of year 1,067 3,890
======== ========
Cash and cash equivalents at end of period $ 2,502 $ 4,489
======== ========
Supplemental disclosure of cash flow information:
Interest paid $57 $52
Income taxes paid $51 $40
Supplemental disclosure of non-cash investing and financing activities:
Equipment acquired under capital lease obligations - $104
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
CONCENTRA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Concentra Corporation (the "Company") and its wholly-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated. In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary to present such information fairly. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to Securities and Exchange Commission rules and
regulations. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1998. Operating results for the three and six-month periods ended
September 30, 1998 may not necessarily be indicative of the results to be
expected for any other interim period or for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. The most significant estimates in the financial statements
include but are not limited to accounts receivable, sales and return, and income
tax valuation allowances. Actual results could differ from those estimates.
The Company adopted Statement of Financial Accounting Standards No. 130
("SFAS 130") "Reporting Comprehensive Income," effective April 1, 1998. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. The Company's only item of other
comprehensive income relates to foreign currency translation adjustments, and is
presented separately on the balance sheet as required. If presented on the
statement of operations for the three and six-months ended September 30, 1998
and September 30, 1997, comprehensive income (loss) would have been $189,000 and
$3,909,000 for the fiscal 1999 periods and $(493,000) and $(5,392,000) for the
fiscal 1998 periods.
The Company adopted Statement of Financial Accounting Standards No. 131
("SFAS 131") "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"), effective April 1, 1998. SFAS 131 does not need to be
applied to interim financial statements in the initial year of its application,
but comparative information for interim periods in the initial year of
application is to be reported in financial statements for interim periods in the
second year of application. SFAS 131 establishes standards for the way that
public business enterprises report selected information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. SFAS 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company will make the necessary disclosures in conjunction with the filing
of their annual 10-K for the year ended March 31, 1999.
The Company adopted Statement of Position No. 97-2, "Software Revenue
Recognition" ("SOP 97-2"), effective April 1, 1998. SOP 97-2 provides guidance
on applying generally accepted accounting principles in recognizing revenue on
software transactions. SOP 97-2 supercedes SOP 91-1, Software Revenue
Recognition, the AICPA's previous guidance on software revenue recognition.
On January 1, 1999, eleven of the fifteen member countries of the European
Union are scheduled to establish fixed conversion rates between their existing
currencies and the euro. The participating countries have agreed to adopt the
euro as their common legal currency on that date. The Company is assessing the
potential impact from the euro conversion in a number of areas, including the
following: (1) the competitive impact of cross-border price transparency, which
may make it more difficult for businesses to charge different prices for the
same products on a country-by-country basis; (2) the impact on currency exchange
costs and currency exchange rate risk; and (3) the impact on existing contracts.
At this stage of its assessment, the Company cannot predict the anticipated
impact of the euro conversion on the Company's financial position or results of
operations. The Company does not expect the euro conversion to have a material
impact on the Company's financial position or results of operations.
Certain fiscal year 1998 balances have been reclassified to conform to
fiscal year 1999 presentation.
B. COMMITMENTS AND CONTINGENCIES
During fiscal 1996, the Company entered into a $5,000,000 five-year
applications consulting services contract with a significant customer of the
Company. The five-year applications consulting services contract contains volume
pricing discounts subject to adjustments for increased costs. The Company has a
minimum commitment of $2,500,000 for outside applications services to be used by
the Company over a five-year period. The minimum commitment of $2,500,000 is
paid in five yearly payments commencing December 31, 1996. These yearly payments
are $250,000, $500,000, $550,000, $600,000 and $600,000 for the five calendar
years beginning December 31, 1996, respectively. As a consequence of the Source
License and Exclusive Distributorship Agreement (see Note E), the payment of the
minimum commitment fee for the last three years of the contract will be shared
equally between the Company and Knowledge Technologies International ("the
Distributor"), a new company formed by Electra Fleming Investment Trust, plc
("Electra Fleming"), a UK based investment management firm. The Company's policy
is to recognize the consulting service expenses as the expenses are incurred.
The Company believes that based on current forecasts,the minimum payment
accruals will be utilized. However, given the significant sales fluctuations
which may occur in any given period, it is possible that the minimum commitment
would not be met, thus requiring the Company to record a charge in excess of the
services utilized. At September 30, 1998, the Company has used both the minimum
first and second-year commitments of $250,000 and $500,000 and has $243,000
remaining to be used on the third-year commitment. Accordingly, the Company has
recorded this unused balance in prepaid assets.
C. INVESTMENT IN LOANDATA, INC.
On December 24, 1997 the Company entered into an agreement to acquire a
53.4% majority interest in a newly-created limited liability company which is
the successor to the business of Loandata. Loandata contributed all of its
assets, including its proprietary technology, to the newly-established
subsidiary of the Company, in exchange for a minority interest in the
subsidiary. As a consequence of this transaction, the Company consolidated 100%
of Loandata in its consolidated balance sheet as of September 30, 1998 and in
its consolidated statement of operations for the period from December 24, 1997
to September 30, 1998. Prior to December 24, 1997, the Company used the equity
method of accounting.
D. NET INCOME PER COMMON SHARE
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share is computed by dividing net income by the sum of the
weighted-average number of common shares outstanding for the period plus the
number of common shares issuable upon the assumed exercise of all dilutive
securities, such as stock options. The following table reconciles the numerator
and denominator of the basic and diluted earnings per share computations shown
on the Condensed Consolidated Statements of Operations.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic EPS:
Numerator:
Net Income (Loss) $ 170 $ (404) $ 3,827 $ (5,344)
Denominator:
Common Shares Outstanding 6,088 5,545 6,087 5,526
Basic EPS $ 0.03 $ (0.07) $ 0.63 $ (0.97)
======== ======== ======== ========
Diluted EPS:
Numerator:
Net Income (Loss) $ 170 $ (404) $ 3,827 $ (5,344)
Denominator:
Common Shares Outstanding 6,088 5,545 6,087 5,526
Common Stock Equivalents 9 - 21 -
-------- -------- -------- --------
6,097 5,545 6,108 5,526
Diluted EPS: $ 0.03 $ (0.07) $ 0.63 $ (0.97)
======== ======== ======== ========
</TABLE>
Options to purchase 1,289,091 and 281,377 shares for the three and
six-month periods ended September 30, 1998 were excluded from the calculation of
diluted earnings per share because the exercise prices of those options exceeded
the average market price of common stock for the three and six-month periods
ended September 30, 1998.
E. THE SOURCE LICENSE AND EXCLUSIVE DISTRIBUTORSHIP AGREEMENT
On June 1, 1998 the Company entered into a Source License and Exclusive
Distributorship Agreement, ("the Agreement"), to license the ICAD System(R), a
knowledge-based engineering software product, to Knowledge Technologies
International ("the Distributor"), a new company formed by Electra Fleming
Investment Trust, plc ("Electra Fleming"), a UK based investment management
firm. The Agreement grants the Distributor an exclusive worldwide license to use
the key software and intellectual property rights of the ICAD business and
assigns to the Distributor certain assets and contracts relating to the ICAD
business. Under the terms of the Agreement, the Distributor has agreed to pay
the Company fixed and variable royalties consisting of (a) eight fixed quarterly
royalty installments, totaling $18.7 million, and (b) a variable royalty in
1999, 2000 and 2001 equal to 10% of the amount by which gross revenues of the
Distributor related to the licensed software, calculated on a cumulative basis
from the date of the closing of the Agreement, exceed $17.5 million for the year
ending March 31, 1999, $35.0 million for the two-year period ending March 31,
2000 and $52.5 million for the three-year period ending March 31, 2001, in each
case less the aggregate variable royalties paid in respect of prior periods. The
Company will record revenue in the period in which the payments have been
received and the related services have been performed. Electra Fleming has
agreed to guarantee only the payment of the fixed royalty payments under the
Agreement. For the three and six-month periods ended September 30, 1998, the
Company received $3.7 and $11.4 million, respectively, in royalty payments from
the Distributor.
F. TRANSITION AGREEMENT
Contemporaneous with the execution and delivery of the Agreement, the
Company and the Distributor entered into a Transition Agreement. The Transition
Agreement is designed to enable the Distributor to operate with a minimum of
disruption during the transition period and provides for the transfer of certain
assets of the Company, including equipment, furniture and other agreed-upon
items in connection with the operation of the ICAD business. The Transition
Agreement also provides for the continuing provision of services by the Company
to the Distributor on a short-term basis, including shared use of the Company's
office facilities, networking and computing resources currently utilized by the
ICAD business and corporate services, in return for payment of the appropriate
allocated costs incurred. The Company will account for all payments received
from the Distributor for shared occupancy of facilities and use of computing
resources and corporate services as a reduction in the Company's expenses
associated therewith.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Management's Discussion and Analysis of Financial Condition and Results of
Operations, as well as other portions of this document, include certain
forward-looking statements about the Company's business and new products,
revenues, expenditures and operating and capital requirements. The Private
Securities Litigation Reform Act of 1995 contains certain safe harbors regarding
forward-looking statements. From time to time, information provided by the
Company or statements made by its directors, officers or employees may contain
"forward-looking" information subject to numerous risks and uncertainties. Any
statements made herein that are not statements of historical fact are
forward-looking statements including, but not limited to, statements concerning
the characteristics and growth of the Company's markets and customers, the
Company's objectives and plans for future operations and products and the
Company's expected liquidity and capital resources. Such forward-looking
statements are based on a number of assumptions and involve a number of risks
and uncertainties, and, accordingly, actual results could differ materially.
RISK FACTORS
DEPENDENCE ON PRINCIPAL PRODUCTS. With the approval of the Source License
and Exclusive Distributorship Agreement, ("the Agreement"), which the company
entered into on June 1, 1998, with Knowledge Technologies International, ("the
Distributor") by the Company's shareholders, thereby licensing the ICAD products
from the Company's group of products, the risks associated with the Company's
current reliance on the Sales Force Automation core group of products and
Loandata have been exacerbated. As a result, any factor adversely affecting
sales of the Company's Sales Force Automation products would have a material
adverse effect on the Company. The Company's future financial performance will
depend in significant part upon the successful development, introduction and
customer acceptance of new or enhanced versions of the Sales Force Automation
products and other products. There can be no assurance that the Company will be
successful in marketing SellingPoint and related products or any new or enhanced
products the Company may develop in the future, including Loandata. In addition,
competitive pressures or other factors may result in price erosion that could
have a material adverse effect on the Company's results of operation.
BROADER MARKET ACCEPTANCE. Broader market acceptance of the Company's
products is critical to the Company's future success. The Company believes that
broader market acceptance of its products will depend on a number of factors
including: product functionality, product reliability, price and performance
characteristics, ease of use and the displacement of existing design approaches.
For many potential customers, the methodology represented in the Company's
products generally represents a new approach to the sales process. As a result,
a decision by a customer to purchase the Company's products often involves a
significant evaluation period. Failure or material delay of the Company's
products to achieve broader market acceptance would have a material adverse
effect on the Company's business and financial results. In addition, any factor
adversely affecting the overall Sales Force Automation software market could
have a material adverse effect on the Company's business and financial results.
HISTORY OF LOSSES. Although the Company has been profitable for the fiscal
years ended March 31, 1995 and 1996, the Company has experienced net losses in
the fiscal years ended March 31, 1998 and 1997. As a result, as of September 30,
1998, the Company had an accumulated deficit (including acquisition-related
expenses) of approximately $23.2 million. Although the guaranteed royalty
payments to the Company under the Agreement with the Distributor will partially
offset the loss of revenue from direct sales of the ICAD product, there can be
no assurance that the Company will be able to generate revenue from the Sales
Force Automation Business and other sources in amounts sufficient to replace the
ICAD revenues as they taper off during the period of the guaranteed fixed
royalties. Furthermore, there can be no assurances that, even if the future loss
of ICAD revenue is fully offset by increases in Sales Force Automation revenue,
the Company will achieve or sustain profitability in future periods.
<PAGE>
NEED FOR ADDITIONAL LIQUIDITY. The Company expects to devote substantially
the entire proceeds from the Agreement to finance its continuing operations. The
Company's strategy for growth of the Sales Force Automation Business may require
significant additional resources and, in light of the Company's recent losses
and the current unavailability of institutional lines of credit, there can be no
certainty that adequate funding will be available from other sources to sustain
operation or growth of the Company's business after termination of the
guaranteed royalty payments. The revenue derived from royalties under the
Agreement may prove to be less than the aggregate revenues the Company would
have been able to earn from continued operation of the ICAD Business.
CONCENTRATION OF CUSTOMERS. Historically, a significant portion of the
Company's revenues in any particular period has been attributable to sales to a
limited number of customers. This concentration of customers can cause the
Company's revenues and earnings to fluctuate from quarter to quarter, based on
major customers' requirements and the timing of their orders. Although the
Company believes that, with the expansion of the Sales Force Automation
Business, its reliance on a small number of significant customers will be
reduced, there can be no assurances that the Company will be able to expand its
customer base. Furthermore, during the period of fixed royalties under the
Agreement, the Company expects to receive a substantial part of its revenue from
the Distributor. There can be no assurances that any of the Company's major
Sales Force Automation customers will continue to purchase products and services
in amounts similar to previous years. The loss of business from one or more of
these customers may have a material adverse impact on the Company.
POTENTIAL FOR LOSSES IN REMAINING BUSINESS. With the consummation of the
Agreement, the Company now has two principal operating components, SellingPoint
and Loandata, which are smaller, less mature businesses and are currently in a
development stage and operating at a loss. Depending on the growth and
performance of SellingPoint and Loandata, the Company could continue to be faced
with operating losses in future periods.
UNCERTAINTY OF VARIABLE ROYALTY PAYMENTS. If the Distributor does not
perform to certain minimum revenue targets over the period in which the Company
would be due incremental payments for the strong performance of the Distributor,
the variable portion of the royalty payments will not be paid. The Agreement
includes certain variable royalty payments based upon the operation of the ICAD
Business by the Distributor. (See "Liquidity and Capital Resources"). There can
be no assurance that the Distributor will successfully operate the ICAD Business
or that any variable royalty payments will become due as a result. In addition,
the variable royalty payments under the Agreement are not guaranteed by the
Guarantor or any other party.
ABSENCE OF SECURITY FOR FUTURE PAYMENTS. Although Electra Investment Trust,
plc is guaranteeing the fixed royalty payments under the Agreement, the
guarantee is unsecured. If the Distributor and Electra Investment Trust, plc
encounter financial difficulties, there can be no assurance that all royalty
payments will be paid.
<PAGE>
COMPETITION. The market in which the Company offers SellingPoint and other
Sales Force Automation products is highly competitive. Many of the Company's
competitors and potential competitors have significantly greater financial,
technological and marketing resources than the Company. Competitive pressures
faced by the Company could force the Company to reduce its prices, resulting in
slower revenue growth and reduced profitability. Furthermore, the products
offered by other companies may prove to be superior to the Company's products or
may achieve greater market acceptance. There can be no assurance that the
Company will be able to compete successfully against current and future sources
of competition in the sale force automation sector or that competition will not
have a material adverse effect on the Company's business, operating results or
financial condition.
VARIABILITY OF QUARTERLY OPERATING RESULTS. The Company has experienced and
may experience in the future significant quarter-to-quarter fluctuations in its
operating results. Factors such as the timing of significant orders, the timing
of new product introductions and upgrades, the length of customer product
evaluation periods, the mix of products sold and the mix of domestic versus
international revenues could contribute to this quarterly variability. A
substantial portion of the Company's revenues in a quarter are derived from
purchase orders received that quarter, which makes the Company's financial
performance more susceptible to an unexpected downturn in business and more
unpredictable. In addition, the Company's expense levels are based in part on
expectations of future revenue levels and a shortfall in expected revenues could
therefore result in a disproportionate decrease in the Company's net income.
DEPENDENCE ON THIRD PARTY LICENSED TECHNOLOGY. The Company licenses from
Electronic Data Systems ("EDS"), a principal customer and marketing partner of
the Company, a solid modeling software module called Parasolid, which is one of
the most widely used of The SellingPoint System modules. The loss of the right
to use such software could reduce the attractiveness of the Company's products
to certain customers. The Company believes that alternative solid modeling
software is available. However, there can be no assurances that such
alternatives would achieve market acceptance or be available on a timely basis
or on similar terms. The Company believes that the cost associated with
technology licensed from third parties is not material to its results of
operations and does not constitute a significant portion of the total cost of
the Company's products into which such third party technology is incorporated.
TECHNOLOGICAL DEMANDS OF THE MARKETPLACE. The sales force automation market
in which the Company competes is characterized by rapid technological changes
and advances. The Company's future success will depend upon its ability to
enhance its existing products and introduce new products which keep pace with
technological developments in the marketplace and address the increasingly
sophisticated needs of its end-users. There can be no assurance that the Company
will be successful in introducing and marketing product enhancements or new
products on a timely basis, or that enhancements or new products will achieve
market acceptance.
<PAGE>
DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's success is heavily
dependent upon its proprietary technology. The Company does not have patents on
any of its technology and relies on contracts and the laws of copyright and
trade secrets to protect such technology. The Company maintains a trade secrets
program, enters into confidentiality or license agreements with its employees,
resellers and end-users and limits access to and distribution of its software,
documentation and other proprietary information. Effective copyright and trade
secret protection may not be available in every foreign country in which the
Company's products are distributed. There can be no assurance that the steps
taken by the Company to protect its proprietary technology will be adequate to
prevent misappropriation of its technology by third parties, or that third
parties will not be able to develop similar technology independently. Although
the Company is not aware that any of its technology infringes the rights of
third parties, there can be no assurance that other parties will not assert
technology infringement claims against the Company, or that, if asserted, such
claims will not prevail.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends in large part
upon a number of key management and technical employees. The loss of the
services of one or more key employees, including Lawrence W. Rosenfeld, the
Company's Chairman and Chief Executive Officer, could have a material adverse
effect on the Company. In addition, the Company's success will depend in
significant part upon its ability to attract and retain highly-skilled
management, technical, and sales and marketing personnel. Competition for such
personnel is intense and there can be no assurance that the Company will be
successful in attracting and retaining such personnel.
MANAGEMENT OF GROWTH. The Company's business has grown significantly over
the past several years as a result of both internal growth and business and
product acquisitions. The Company may make additional acquisitions in the
future. Managing this growth and integrating acquired products and businesses
require a significant amount of management time and skill. There can be no
assurance that the Company will be effective in managing its future growth or in
assimilating acquisitions, or that any failure to manage growth or assimilate an
acquisition will not have a material adverse effect on the Company's business,
operating results or financial condition.
YEAR 2000 COMPLIANCE.
BACKGROUND. The Company recognizes that it must ensure that its products and
operations will not be adversely impacted by year 2000 software failures (the
"Year 2000 Problem") which can arise in time-sensitive software applications
which utilize a field of two digits to define the applicable year. In such
applications, a date using "00" as the year may be recognized as the year 1900
rather than the year 2000.
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 they 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 are not expected to be material to the Company's 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 is has substantially
identified and resolved all potential Year 2000 Problems with any of the
software products which 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>
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.
SUPPLIERS. The Company leases most of its computer equipment and other
office equipment. The Company has numerous third party suppliers of computers,
software and other equipment used, operated, or maintained by the Company. The
Company has limited or no control over the actions of these third party
suppliers. Thus, while the Company expects that it will be able to resolve any
significant Year 2000 Problems with these systems, there can be no assurance
that these suppliers will resolve any or all Year 2000 Problems with these
systems before the occurrence of a material disruption to the business of the
Company or any of its customers. Any failure of these third parties to resolve
Year 2000 Problems with their systems in a timely manner could have a material
adverse effect on the Company's business, financial condition and results of
operation.
MOST LIKELY CONSEQUENCES OF YEAR 2000 PROBLEMS. The Company expects to
identify and resolve all Year 2000 Problems that could materially 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, the Company cannot accurately predict how many Year 2000
Problem-related failures will occur or the severity, duration or financial
consequences of these perhaps inevitable and unforeseen failures. As a result,
management expects that the Company could likely suffer the following
consequences:
1. a significant number of operational inconveniences and inefficiencies
for the Company and its clients 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 clients to prevent or
alleviate material business disruptions.
Based on the activities described above, the Company does not believe that the
Year 2000 Problem will have a material adverse effect on the Company's business
or results of operations.
DISCLAIMER. The discussion of the Company's efforts, and management's
expectations, relating to Year 2000 compliance are forward-looking statements.
The Company's ability to achieve Year 2000 compliance and the level of
incremental costs associated therewith could be adversely impacted by, among
other things, the availability and cost of programming and testing resources,
vendors' abilities to modify proprietary software and unanticipated problems
identified in the ongoing compliance review.
INTERNATIONAL OPERATIONS. The Company's international revenues were $5.2
million, $12.0 million and $7.7 million in the fiscal years ended 1998, 1997 and
1996 respectively, representing 37.7%, 50.0% and 37.3%, respectively, of the
Company's revenues in such years. Although the Company expects that
international revenues will fluctuate from period to period, it expects such
revenues to account for a significant percentage of its revenues in the future.
The international portion of the Company's business is subject to a number of
inherent risks, including difficulties in building and managing international
operations, difficulties in managing distributors, difficulties in translating
products into foreign languages, fluctuations in the value of foreign
currencies, import/export duties and quotas and unexpected regulatory, economic
or political changes in international markets. There can be no assurance that
these factors will not adversely affect the Company's international revenues or
its overall financial performance
RESULTS OF OPERATIONS
TOTAL REVENUES. Substantially all of the Company's revenues are derived from
the licensing of software products and the performance of related services. The
Company's total revenues increased 20% to $6.0 million for the three-month
period ended September 30, 1998, from $5.0 million for the three-month period
ended September 30, 1997. The Company's total revenues increased 82% to $15.8
million for the six-month period ended September 30, 1998, from $8.7 million for
the six-month period ended September 30, 1997. These increases were due
primarily to software royalties from the Distributor pursuant to the Agreement.
<PAGE>
SOFTWARE LICENSES. Software license revenues decreased 76% to $.5 million
for the three-month period ended September 30, 1998, from $2.0 million for the
three-month period ended September 30, 1997, and decreased as a percentage of
revenues to 8% from 40%. Software license revenues decreased 67% to $1.0 million
for the six-month period ended September 30, 1998, from $2.9 million for the
six-month period ended September 30, 1997, and decreased as a percentage of
revenues to 6% from 33%. The decreases were primarily due to the decrease in
ICAD software license revenues as a result of the Agreement.
SERVICES. Service revenues decreased 38% to $1.8 million for the
three-month period ended September 30, 1998, from $2.9 million for the
three-month period ended September 30, 1997, and decreased as a percentage of
revenues to 30% from 58%. Service revenues decreased 33% to $3.4 million for the
six-month period ended September 30, 1998, from $5.2 million for the six-month
period ended September 30, 1997, and decreased as a percentage of revenues to
22% from 59%. Service revenues are derived from customer support, consulting,
and training services. The decreases were primarily due to lower ICAD
maintenance revenues as a result of the Agreement.
SOFTWARE ROYALTIES FROM DISTRIBUTORS. Software royalties from distributors,
for the three and six-month periods ended September 30, 1998, were $3.7 million
and $11.4 million, and represented 62% and 72% of total revenues, respectively.
There were no software royalties from distributors for the three and six-month
periods ended September 30, 1997. The majority of the royalty revenue for the
three and six-month periods ended September 30, 1998 were a result of the
Agreement
RELATED PARTY SOFTWARE AND SERVICES. There were no related party software
and services revenue for the three and six-month periods ended September 30,
1998. Revenues from related parties for the three and six-month periods ended
September 30, 1997 were $0.1 million and $0.6 million, and represented 2% and 7%
of total revenues, respectively.
COST OF SOFTWARE LICENSES. Cost of software licenses, consisting of the
amortization of capitalized software, license fees to third-party suppliers and
software duplication and fulfillment costs, decreased 25% to $0.3 million for
the three-month period ended September 30, 1998, from $0.4 million for the
three-month period ended September 30, 1997, and increased as a percentage of
software revenues to 68% from 22%. Cost of software licenses decreased 56% to
$0.6 million for the six-month period ended September 30, 1998, from $1.4
million for the six-month period ended September 30, 1997, and increased as a
percentage of software revenues to 65% from 49%. The dollar decrease for the
three-month period ended September 30, 1998 was primarily due to lower software
license revenues. The dollar decrease for the six-month period ended September
30, 1998 was due to lower software license revenues and amortization costs
associated with intangible assets, due to the write-off of one large,
ICAD-related intangible asset in the six-month period ended September 30, 1997.
COST OF SERVICES. Cost of services, consisting primarily of personnel costs
for customer support, training and applications consulting, increased 171% to
$1.3 million for the three-month period ended September 30, 1998, from $0.5
million for the three-month period ended September 30, 1997, and increased as a
percentage of service revenues to 71% from 16%. Cost of services increased 23%
to $2.7 million for the six-month period ended September 30, 1998, from $2.2
million for the six-month period ended September 30, 1997, and increased as a
percentage of service revenues to 78% from 42%. The dollar increase for the
three and six-month periods ended September 30, 1998 was due primarily to higher
employee-related and consulting expenses, associated with a higher mix of
consulting services rendered during the current period, which historically have
low margins.
COST OF SOFTWARE ROYALTIES FROM DISTRIBUTORS. Cost of software royalties
from distributors was $0.2 million and $0.5 million for the three and six-month
periods ended September 30, 1998, respectively. There was no cost of software
royalties from distributors for the three and six-month periods ended September
30, 1997.
<PAGE>
SALES AND MARKETING. Sales and marketing expenses, which include
distribution, pre-sales support and marketing costs, decreased 19% to $2.0
million for the three-month period ended September 30, 1998, from $2.5 million
for the three-month period ended September 30, 1997, and decreased as a
percentage of revenues to 35% from 51%. The decreases were primarily due to
decreased commissions associated with decreased revenues and lower marketing
expenses in the current three-month period ended September 30, 1998. Sales and
marketing expenses decreased 23% to $5.1 million for the six-month period ended
September 30, 1998, from $6.6 million for the six-month period ended September
30, 1997. As a percentage of revenues, sales and marketing expenses decreased to
32% for the six-month period ended September 30, 1998, compared to 76% for the
six-month period ended September 30, 1997. These decreases for the six-month
period ended September 30, 1998 were primarily due to decreased commissions
associated with decreased software license revenues as well as lower levels of
marketing costs.
RESEARCH AND DEVELOPMENT. Research and development expenses, consisting
primarily of employee salaries and benefits and development costs, increased 57%
to $1.2 million for the three-month period ended September 30, 1998, from $0.8
million for the three-month period ended September 30, 1997, and increased as a
percentage of revenues to 20% from 16%. Research and development expenses
increased 49% to $2.5 million for the six-month period ended September 30, 1998,
from $1.7 million for the six-month period ended September 30, 1997, and
decreased as a percentage of revenues to 16% from 19%. The dollar increase for
the three and six-month periods ended September 30, 1998 was primarily due to
research and development costs associated with the Company's Loandata
subsidiary.
GENERAL AND ADMINISTRATIVE. General and administrative expenses, consisting
primarily of expenses associated with the finance, human resources and
administrative departments, increased 15% to $0.7 million for the three-month
period ended September 30, 1998, from $0.6 million for the three-month period
ended September 30, 1997, and decreased as a percentage of revenues to 11% from
12%. General and administrative expenses increased 3% to $1.4 million for the
six-month period ended September 30, 1998, from $1.4 million for the six-month
period ended September 30, 1998, and decreased as a percentage of revenues to 9%
from 16%. The increases were primarily due to higher employee-related expenses
in the three and six-month periods ended September 30, 1998.
RESTRUCTURING. There were no restructuring charges for the three and
six-month periods ended September 30, 1998, nor the three-month period ended
September 30, 1997. Restructuring charges for the six-month period ended
September 30, 1997 were $0.3 million.
INTEREST INCOME. Interest income, consisting of interest from cash and cash
equivalents, for the three and six-month periods ended September 30, 1998 was
$43,000 and $51,000, respectively. Interest income for the three and six-month
periods ended September 30, 1997 was $54,000 and $120,000, respectively. The
decreases in both periods, as compared to the same periods of the prior year,
were due to lower cash balances in each of the respective periods.
INTEREST EXPENSE. Interest expense for the three and six-month periods ended
September 30, 1998 was $19,000 and $58,000, respectively. Interest expense for
the three and six-month periods ended September 30, 1997 was $26,000 and
$52,000, respectively.
OTHER (EXPENSE) INCOME. Other (expense) income, consisting primarily of
foreign exchange gains (losses) on intercompany transactions for the three-month
period ended September 30, 1998 was and expense of $4,000, compared with expense
of $588,000 for the three-month period ended September 30, 1997. Other income
for the six-month period ended September 30, 1998 was income of $837,000,
compared with expense of $567,000 for the six-month period ended September 30,
1997. During the three and six-month periods ended September 30, 1998, the
Company recorded other income related to expenses of the Company reimbursable
under the Transition Agreement between the Company and the Distributor ("the
Transition Agreement").
<PAGE>
LOSS ON INVESTMENT. There was no loss on investment for the three and
six-month periods ended September 30, 1998. Loss on investment for the three and
six-month periods ended September 30, 1997 was $0.5 and $0.6 million,
respectively, and relates to the change from equity method to consolidation
accounting for Loandata.
PROVISION FOR INCOME TAXES. The income tax provision for the three and
six-month periods ended September 30, 1998, was $30,000 and $40,000,
respectively. The income tax provision for the three and six-month periods ended
September 30, 1997, was $10,000 and $20,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company held cash and cash equivalents of
approximately $2.5 million.
During the six-month period ended September 30, 1998, the Company
recorded net income of $3.8 million and generated a net cash increase of $1.4
million. The Company's operating activities included a decrease in accounts
receivable of $1.3 million, an increase in other assets of $1.0 million, a
decrease in accounts payable and accrued expenses of $2.5 million, and a
decrease in deferred revenue of $1.2 million. Investing activities included
capitalized software costs of $0.5 million and capital expenditures of $0.2
million.
During fiscal 1996, the Company entered into a $5,000,000 five-year
applications consulting services contract with a significant customer of the
Company. The five-year applications consulting services contract contains volume
pricing discounts subject to adjustments for increased costs. The Company has a
minimum commitment of $2,500,000 for outside applications services to be used by
the Company over a five-year period. The minimum commitment of $2,500,000 is
paid in five yearly payments commencing December 31, 1996. These yearly payments
are $250,000, $500,000, $550,000, $600,000 and $600,000 for the five calendar
years beginning December 31, 1996, respectively. As a consequence of the
Agreement, the payment of the minimum commitment fee for the last three years of
the contract will be shared equally between the Company and the Distributor. The
Company's policy is to recognize the consulting service expenses as the expenses
are incurred. The Company believes that, based on current forecasts, the minimum
payment accruals will be utilized. However, given the significant sales
fluctuations which may occur in any given period, it is possible that the
minimum commitment would not be met, thus requiring the Company to record a
charge in excess of the services utilized. At September 30, 1998, the Company
has used both the minimum first and second-year commitments of $250,000 and
$500,000 and has $243,000 remaining to be used on the third-year commitment.
Accordingly, the Company has recorded this unused balance in prepaid assets.
On June 1, 1998 the Company entered into a Source License and Exclusive
Distributorship Agreement, ("the Agreement"), to license the ICAD System(R), a
knowledge-based engineering software product, to the Distributor. The Agreement
grants the Distributor an exclusive worldwide license to use the key software
and intellectual property rights of the ICAD business and assigns to the
Distributor certain assets and contracts relating to the ICAD business. Under
the terms of the Agreement, the Distributor has agreed to pay the Company fixed
and variable royalties consisting of (a) eight fixed quarterly royalty
installments, totaling $18.7 million, and (b) a variable royalty in 1999, 2000,
and 2001 equal to 10% of the amount by which gross revenues of the Distributor
related to the licensed software, calculated on a cumulative basis from the date
of the closing of the Agreement, exceed $17.5 million for the year ending March
31, 1999, $35.0 million for the two-year period ending March 31, 2000 and $52.5
million for the three-year period ending March 31, 2001, in each case less the
aggregate variable royalties paid in respect of prior periods. The Company will
record revenue in the period in which the payments are received and the related
services have been performed. Electra Fleming has agreed to guarantee only the
payment of the fixed royalty payments under the Agreement. For the three and
six-month periods ended September 30, 1998, the Company received $3.7 and $11.4
million, respectively, in royalty payments from the Distributor.
<PAGE>
Contemporaneous with the execution and delivery of the Agreement, the
Company and the Distributor entered into a Transition Agreement. The Transition
Agreement is designed to enable the Distributor to operate with a minimum of
disruption during the transition period and provides for the transfer of certain
assets of the Company, including equipment, furniture and other agreed-upon
items in connection with the operation of the ICAD business. The Transition
Agreement also provides for the continuing provision of services by the Company
to the Distributor on a short-term basis, including shared use of the Company's
office facilities, networking and computing resources currently utilized by the
ICAD business and corporate services, in return for payment of the appropriate
allocated costs incurred. The Company will account for all payments received
from the Distributor for shared occupancy of facilities and use of computing
resources and corporate services as a reduction in the Company's expenses
associated therewith.
The Company believes that existing sources of liquidity and anticipated
funds from operations will satisfy the Company's working capital and capital
expenditure requirements through the next 12 months. There can be no assurance
that the Company's existing sources of liquidity will be adequate to fund the
future capital needs of the Company.
<PAGE>
PART II. OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) On August 10, 1998, the Annual Meeting of the Shareholders of the Company
was held at the Renaissance Bedford Hotel, 44 Middlesex Turnpike, Bedford,
Massachusetts.
b) The Board of Directors is divided into three classes serving staggered
terms in accordance with the Company's Restated Certificate of
Incorporation. Lawrence W. Rosenfeld and Alberto de Bendedictis were
reelected as directors at the Annual Meeting to serve a three-year term
ending in 2001. The term of office of each A. William Berkman, Jr., William
E. Kelly, Vincenzo Cannatelli and Stephen J. Cucchiaro continued after the
Annual Meeting.
c) At the Annual Meeting, the Shareholders also voted (1) to approve an
amendment to authorize an additional 300,000 shares of common stock for
issuance under the Company's 1993 Stock Plan, and (2) to ratify the
selection of PricewaterhouseCoopers L.L.P. as the Company's independent
accountants for the fiscal year ending March 31, 1999.
The following votes were tabulated on the aforementioned proposals:
1. Election of Directors.
Number of Shares
For Withheld Authority
Lawrence W. Rosenfeld 4,672,171 225,263
Alberto de Bendedictis 4,697,334 200,100
2. Approval of an amendment to increase by 300,000 the number of shares of
common stock authorized for issuance under the Company's 1993 Stock
Plan.
Number of Shares
For 4,533,702
Against 351,682
Abstain 12,050
Broker non-votes 0
3. Ratification of the selection of PricewaterhouseCoopers L.L.P. as the
Company's independent accountants for the fiscal year ending March
31, 1999.
Number of Shares
For 4,873,779
Against 16,905
Abstain 6,750
(d) Not applicable.
<PAGE>
ITEM 5 - OTHER INFORMATION
On August 17, 1998, the Board of Directors, pursuant to the authority
granted in the certificate of incorporation and the by-laws, increased the
number of directors costituting the Board of Directors, from 6 to 7. The Board
of Directors also elected David Greenhouse to fill the vacancy created by the
increase in the number of authorized directors.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
+3.01 Restated Certificate of Incorporation of the Registrant, as
amended to date.
++3.02 Restated By-Laws of the Registrant.
++4.01 Specimen Stock Certificate for Common Stock, $.00001 par value.
+++4.02 Rights Agreement dated as of April 24, 1997, between the
Registrant and The First National Bank of Boston, as Rights
Agent.
+++4.03 Form of Certificate of Designations of the Voting Powers,
Preferences and Relative, Participating, Optional and Other
Special Rights, Qualifications, Limitations or Restrictions
of Series A Participating Cumulative Preferred Stock of the
Registrant.
+++4.04 Form of Right Certificate.
++4.05 1987 Stock Plan.
++4.06 1993 Stock Plan (as amended through August 10, 1998).
++4.07 1994 Non-Employee Directors Stock Option Plan.
++4.08 1995 Employee Stock Purchase Plan.
++++27 Financial Data Schedule.
- --------------------------------------------------------------------------------
+ Previously filed with the Registrant's Annual Report on Form 10-K
for the fiscal year ended March 31, 1997.
++ Previously filed as an Exhibit to the Registrant's Registration
Statement No. 33-86550.
+++ Previously filed as an Exhibit to the Registrant's Form 8-K dated
April 24, 1997.
++++ Filed herewith.
(b) No reports on Form 8-K were filed by the Company during the fiscal quarter
covered by this report.
<PAGE>
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.
CONCENTRA CORPORATION
Date: November 2, 1998
By: /s/ Alex Braverman
Alex Braverman
Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED BALANCE SHEETS ON THE FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30,
1998 AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AS FILED ON FORM
10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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