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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File No. 0-20660
COMPUTER CONCEPTS CORP.
(Exact name of registrant as specified in its charter)
Delaware 11-2895590
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 Orville Drive, Bohemia, N.Y. 11716
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (631) 244-1500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Title of each class Name of each exchange on which registered
-------------------- -----------------------------------------
Common Stock, par value $.0001 NASDAQ
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 8, 2000, there were 20,529,245 shares of the registrant's Common
Stock outstanding. The aggregate market value of the Common Stock held by
non-affiliates was approximately $33,507,000 based on the closing sale price of
the Common Stock as quoted on the NASDAQ on such date.
Computer Concepts Corp. and Subsidiaries
Form 10-K for the Year Ended December 31, 1999
Table of Contents
PART I PAGE
----
ITEM 1 Business 3
ITEM 2 Properties 11
ITEM 3 Legal Proceedings 11
ITEM 4 Submission of Matters to a Vote of Security Holders 12
PART II
ITEM 5 Market for Registrant's Common Equity and
Related Stockholder Matters 13
ITEM 6 Selected Consolidated Financial Data 14
ITEM 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
ITEM 7a Quantitative and Qualitative Disclosures
About Market Risk 22
ITEM 8 Financial Statement and Supplementary Data 22
ITEM 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 22
PART III
ITEM 10 Directors and Executive Officers of the Registrant 23
ITEM 11 Executive Compensation 25
ITEM 12 Security Ownership of Certain Beneficial Owners
and Management 26
ITEM 13 Certain Relationships and Related Transactions 28
PART IV
ITEM 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 30
SIGNATURE 33
2
PART I
Item 1. BUSINESS
- ------------------
INTRODUCTION
The Company was organized under the name Unique Ventures, Inc. as a "blind
pool" public company, under the laws of the State of Delaware on August 27,
1987, and changed its name to Computer Concepts Corp. in 1989. Computer Concepts
Corp. and its subsidiaries (hereinafter referred to as "Computer Concepts" or
the "Company"), operate in the computer software industry segment and design,
develop, market and support information delivery software products, including
end-user data access tools for personal computers and client/server
environments. 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. Through a series of transactions that included an
initial public offering of Softworks in August, 1998, various exchanges
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. On January 27, 2000, the
Company sold its entire 35% interest to EMC Corporation for approximately $61
million in cash, before expenses.
During the years 1989 through 1992, the Company was primarily engaged in
research and development activities regarding its primary product, "d.b.Express
TM". During 1993, the Company began to expand its product, sales, marketing and
administrative activities, and began the transition from a research and
development-oriented company into a market-driven software products business. In
1995, the Company decided to focus on the parent Company's d.b.Express software
technology and Softworks, Inc. As such, in 1996, it sold its "Superbase"
technology assets and in 1997 sold the net assets of its MapLinx, Inc.
subsidiary. During 1997, a new business unit commenced operations, which is
designed to provide a wide array of information technology, support and
services. In 1998, the Company acquired software technology rights as well as
certain marketing rights for a system that monitors Internet usage. See Note 3
of Notes to Consolidated Financial Statements for the year ended December 31,
1999, for further explanations of all acquisitions and dispositions.
Effective September, 1993, the Company acquired Softworks, a private
Maryland company founded in 1977, and an acknowledged leading provider of
critical systems management solutions. In August, 1998, Softworks completed a
public offering, after which the Company's ownership interest was reduced to
approximately 72%. Additional transactions, as described in Notes 3 and 18 to
the Consolidated Financial Statements, further reduced the Company's ownership
interest in Softworks. 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, net of expenses, of $47,607,000 recorded in the first quarter of
2000.
During December, 1994, the Company acquired MapLinx, Inc. ("MapLinx"), a
provider of PC based software that allows for geographical presentation of
database information. In conjunction with the Company's decision to focus its
activities on the exploitation of the d.b.Express technology and its Softworks
subsidiary, the Company sold the net assets of MapLinx in 1997.
3
In June, 1998, the Company acquired certain software and related sales and
marketing rights. The acquired software technology, marketed under the trade
name Bo Dietl's One Tough ComputerCOP ("ComputerCOP"), is designed to inform non
computer literate parents, guardians and alike, what materials, or possible
threats to the safety and well being of their children or others has been
accessed over the Internet, such as objectionable web sites, text, pictures,
screens, electronic mail, etc. The Agreement also 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. Mr. Dietl has been recognized as
one of the most decorated police officers of the city of New York. In February,
2000, the Company sold a newly created wholly owned subsidiary with assets
consisting primarily of $20.5 million cash, the above referenced technology and
remaining marketing rights, inventory and related receivables for 1,775,000
shares of NetWolves Corporation (OTCBB: "WOLV"). The transaction was valued at
approximately $35.5 million.
In January, 2000, the Company elected to significantly curtail operations
of its business unit, marketed as professional services, which primarily resold
computer hardware and assisted in the design, and installation of technology
systems.
Further, the Company is in the process of developing a unique media station
display, which will combine Internet strategy and e-commerce with multi-media
forms of delivery, presentation and interaction with end-users. This Internet
based communications/advertising network is being designed to create a means by
which businesses can promote specific brand/product/service awareness. The
Company intends to market this technology in association with owners and/or
managers of high traffic venue areas (i.e., malls, airports, etc.) to local,
regional and national businesses. This business concept will require additional
capital in order to complete its development and to support its marketing plan.
In order to achieve its goal, the Company intends to partner or co-venture with
various potential investors and strategic partners.
A primary part of the Company's present strategic plan is to focused on
becoming a preeminent provider of innovative software products which break down
barriers between people and data thereby allowing corporate users to more easily
access enterprise-wide data. In addition, this plan includes, among other
factors, the exploitation of the Company's proprietary technology, d.b.Express,
primarily through the development of several vertical markets.
Telecommunications is presently being targeted as one of the first vertical
markets.
PRODUCTS
--------
d.b.Express
-----------
d.b.Express provides business with a simple, fast, low-cost method of
finding, organizing, analyzing and using information contained in databases over
the Internet. The software employs a unique graphical user interface ("GUI")
that enables users to directly access and use information contained in
relational and pseudo-relational databases created by many database management
systems ("DBMS") on the market. In addition, this proprietary software tool has
the ability to directly utilize information obtained from spreadsheets and data
in the form of American Standard Code for Information Interchange ("ASCII")
files. The technology enables users to analyze millions of records over the
Internet without the need to first download the data being analyzed.
Telecommunications industry specific applications of the technology have been
developed and are being marketed.
d.b.Express does not replace DBMS programs. Instead, it improves the
accessibility of databases created by DBMS by eliminating the need to write
queries in computer code and facilitates data searches through the use of
graphical query tools. Prior to the availability of d.b.Express, comparable
analytical and presentation capabilities were possible only through costly
executive information systems ("EIS") or customized programs developed and
supported by highly skilled MIS professionals. The need for MIS professionals
and programming effectively raises the cost of access to information in terms of
time and money. Ultimately, these barriers result in less timely and lower
quality business decision-making.
4
There are some DBMS access tools on the market that claim to eliminate the
need to use computer code and provide graphical query capability. All of these
programs, however, only simplify the writing of computer code, usually through
industry-standard structured query language ("SQL"), by having users develop
logic in a semi-procedural facility. While reducing some problems associated
with the writing of computer code, such as "typographical errors", they do not
eliminate the need for knowledge of computer code or database structure and
organization, and require significant training of the user. d.b.Express enables
the access and productive use of complex databases without specific computer
knowledge. d.b.Express enables a broader population within an organization to
visually and interactively mine their data without the need or support from
internal or external MIS staff.
d.b.Express approaches database accessibility uniquely, enabling people at
all levels of an organization to analyze the data without any knowledge of
programming. d.b.Express achieves this in two steps. First, d.b.Express,
utilizing proprietary algorithms, accesses and automatically summarizes all of
the records in the required databases into its own format. Second, the software
presents users with an intuitive dual-dimensional picture of the data that the
user can easily customize to his need with a simple point-and-click interface.
In addition to a vast simplification of database access and analysis,
d.b.Express performs these tasks faster than any DBMS because the software does
not reread the database for each task; it only reads the summaries it has
created.
Windows(R) Version 1.0 of d.b.Express was introduced in December 1993 and
the DOS version was introduced in late 1992. Windows (R) Version 2.0, with
significantly enhanced functionality based on user feedback, was introduced in
the second quarter of 1994 and Windows 95(R) Version was introduced in the third
quarter of 1995. Windows NT, Internet Server and JAVA Applet versions were
introduced in 1996 and 1997. Version 6.0 was released during the fourth quarter
of 1999. In addition to increasing d.bExpress' ability to interactively access,
via the Internet, millions of records in a matter of seconds, additional
features include ad-hoc reporting capabilities and integrated mapping
capability.
d.b.Express Internet Information Server
---------------------------------------
The d.b.Express Internet Information Server is an Internet database
information service. This service makes use of its proprietary data access
technology by providing Internet access to detail telephone records for
customers both in the U.S. and Great Britain. With this service, customers can
access via the Internet, numerous detail telephone call records. Data can be
visually presented using the Company's patented data visualization technology.
The technology provides users with a "Filescape TM" (an all encompassing picture
of data similar to a landscape picture) from which users are able to perform
point-and-click, ad-hoc queries in order to discover anomalies, trends and
misuse of their data, and, if desired, infinite drill down to individual detail
records. This is accomplished within seconds, rather than hours, which the
Company believes could create cost savings and operational efficiencies.
Customers are able to review and analyze their telephone usage at the detail
level, and are able to review and, if desired, print standard pre-generated
reports, ad-hoc reports based on predefined templates, or define and
review/print their own ad-hoc reports, all without taking delivery of the large
volume of data required. In order to meet the archival requirements of
customers, the Company produces CDs of each month's billing details. In order to
provide this service, the Company has put into place a comprehensive data
center. The service is available 24 hours a day, 7 days a week, 365 days a year.
The advantages inherent to d.b.Express include the following:
------------------------------------------------------------
Ease of Use
Using the analogy of an automatic camera, d.b.Express simplifies data
access and analysis by providing a sophisticated, simple-to-use vehicle to take
pictures of complex data. By combining an intuitive point-and-click interface
with a powerful integration and retrieval engine in a low-cost product,
d.b.Express breaks down the barriers between people and data. After d.b.Express
has read one or more databases, the data is presented to the user in a
"filescape" using a common histogram metaphor. The user merely points to a bar
in the chart and clicks to view data from the highest summary level to the
lowest level of detail. d.b.Express provides powerful desktop functionality, via
the Internet, that allows the exploration of data patterns, trends, and
exceptions. Data searches, queries and analyses can be converted to
sophisticated, simple to use presentations providing integrated business
graphics and report writing capabilities.
5
Interfaces With Leading Databases and Other Tools
d.b.Express provides direct access to leading databases created by DBMS
vendors, including CA-Clipper, Microsoft Access, Foxbase and FoxPro, Lotus
Approach, Borland dBase and Paradox, Oracle, Informix, Sybase, Ingres, SQL
Server, IBM DB2 and DB2/2, Netware SQL, Gupta SQL Base, Progress, XDB, SQL/DS,
Teradata and Btrieve and any other database with ODBC support. These DBMS's
represent more than 85% of the installed relational database management systems
("RDBMS") worldwide. In addition, d.b.Express is able to access data contained
in spreadsheets and read data in ASCII format which further broadens the
software's capability with other DBMS products. d.b.Express results can be
exported to popular spreadsheets, report writers, graphics packages and word
processors including Lotus 1-2-3, Excel, Quattro Pro, ReportSmith, Crystal
Reports, Harvard Graphics, Power Point, WordPerfect and Word.
Ability To Integrate Data From Databases Created By Multiple Vendors
When d.b.Express reads a database, it creates its own summaries of
information through its proprietary process. Information contained in databases
is formatted into d.b.Express' proprietary format. This permits users to access
and compare information contained in enterprise-wide databases created by
different vendors simultaneously in the d.b.Express' user-friendly environment.
Works in Common Operating Environments
d.b.Express operates in virtually all file server and peer-to-peer
networking environments providing data to Microsoft Windows (R) and Windows NT
workstations. d.b.Express Internet Information Server provides secure visual
data mining functionality through Internet browsers such as Microsoft Internet
Explorer and Netscape Communicator.
High Processing Speed
Once a database source has been processed, d.b.Express employs proprietary
matrix storage technology rather than rereading each data element in that
database. All packaged DBMS reread every single data element each time a task,
such as sorting or analysis, is performed. The elimination of the rereading step
through d.b.Express' proprietary process vastly increases the speed of data
access enabling ad-hoc analysis at a rate far faster than possible with any
other system. The advantage of the d.b.Express process over other processes
increases with the size and complexity of the database.
d.b.Express breaks down barriers between people and data by eliminating the
need for SQL expertise, saving time by gaining decision-critical information
through rapid data access and analysis, and saving money through minimal
training investment and cost-effective product implementation.
Disadvantages in regard to d.b.Express include the following:
------------------------------------------------------------
Lack of Established User-base and Acceptance of the Product
d.b.Express is not yet widely used and is perceived as a new technology
which may defer acceptance. The Company believes its focus on large-scale users
and its new Internet Server Farm technology could help overcome the lack of
acceptance in the market place. There is no assurance that the Company will be
successful in reaching its sales plan to gain widespread usage of the
technology.
Limited Resources to Market and Promote d.b.Express
The Company has limited resources with which to market and promote
d.b.Express. Regardless of the unique patented aspects of the product, if the
Company is not able to effectively market and promote the usage of the product,
the successful dispersion of the product as a widely used access tool may not be
achieved.
6
Alternative Methods Available to Access Data and Potential New Technologies
d.b.Express' access method is patented and unique. However, alternative
methods for accessing data exist, primarily text based search engines. We
believe that many of the alternative methods require knowledge of specific
database query languages. The Company is not aware of any alternative technology
which can effect data searches with the speed, and without sophisticated
programming skills, which d.b.Express provides, however, it is possible that new
technologies will be developed which may effectively compete with d.b.Express.
If such new technologies are developed, they could negatively impact the
Company's ability to successfully market and promote d.b.Express.
Softworks Product line
----------------------
As noted above, and in Note 18 to the Consolidated Financial Statements,
the Company, in January, 2000, sold its remaining interest in Softworks.
Softworks provided automated storage and performance management solutions to
help organizations more efficiently and effectively manage their IT
infrastructures. Their products possessed the following key features:
- -- Integrated Storage Management. Softworks believed that many organizations
wanted an integrated suite of products to address their multi-platform
storage management needs. Their solutions provided a single point of
control and management of storage in OS/390, UNIX and NT computing
environments. In addition to having provided conventional storage
management functions, their solutions were designed to enhance and ensure
data and system availability.
- -- Automated Storage and Performance Management. In contrast to conventional
storage and performance management solutions which merely provide reporting
and monitoring capabilities, their products provided automated proactive
alerts, programmed responses and corrective actions, which enabled IT
personnel to focus more of their time on complex mission-critical systems
management tasks. "Proactive alerts" detected system events and
abnormalities and alerted the user to potential system, application or data
availability issues. Their products probed system resources to determine if
key storage and performance indicators fell within acceptable ranges. If an
"out of reasonable range" condition was detected, their products offered
three alternative, but not mutually exclusive, responses. Their products
could:
-- notify the management console or appropriate network or system
monitoring software;
-- automatically correct the condition using "pre-programmed responses"
which enabled the user to program the product to respond appropriately
to a particular condition; or
-- guide the user through "automated corrective actions" which presented
the user with one or more alternative responses to the condition and
guided the user through the corrective action.
- -- Intelligent Agent Technology. Their software incorporated intelligent agent
technology to perform analysis and management tasks across multi-platform
environments. This technology permitted systems information to be shared
across platforms, as well as with a central point of control. This
technology also reduced the need for platform-specific expertise and
enhanced their customers' ability to effectively manage their systems.
- -- Application of "Best Practices" to a Multi-Platform Environment. Their
solutions were designed to enable the centralized control of disparate
applications and platforms, thereby facilitating the implementation of an
organization's "best practices" across multi-platform environments and
allowing them to tailor responses to specific requirements. Their solutions
operated efficiently in multi-platform environments by using embedded
intelligent agents, which recognized and responded to the particular
requirements of each specific operating system.
7
Their solutions were designed to reduce an organization's overall cost to
manage its IT infrastructure through a combination of advanced products and
technology with comprehensive service and support. Softworks' SST technology was
specifically designed to enable their customers to minimize the amount of
intervention by IT personnel and to facilitate system availability 24 hours per
day, seven days per week. Their solutions have often reduced hardware
expenditures by permitting organizations to defer purchases of CPU and storage
upgrades. Organizations using Softoworks' automated products could achieve a
higher level of system performance, respond more easily to the rapid
introduction of new technologies and require fewer specialized technicians to
manage the increasing size and complexity of their computing environments.
Bo Dietl's One Tough ComputerCOP ("ComputerCOP")
------------------------------------------------
As noted above and in Note 18 to the Consolidated Financial Statements, the
Company, in February, 2000, sold this asset. ComputerCOP is Internet monitoring
software that enables a parent, guardian or businessman, the ability to easily
see what the users of their home or office computer have been viewing on the
Internet. Today's Internet environment has caused children, and the public at
large, to become exposed to objectionable pictures and text as they navigate
through the Internet; sometimes intentionally, but many times, unintentionally.
In addition, the popularity of Internet "chat rooms", especially those appealing
to children, have proven fertile ground for pedophiles to communicate with those
children, and, on occasion, to set up clandestine meetings with these children
unbeknownst to their parents or guardians.
When an individual goes "online" the Internet browser "catches" the images
and text files at the web address the user has selected and "saves" them to
certain directories on the computer's hard drive so as to display these files
and images. This browser activity is not apparent to the user. As the user goes
to other sites, the browser continues to "catch" and "save" these files. The
image and text files remain on the computer's hard drive until the user removes
them, either manually or by instructing the browser to do so. It is important to
note that it is often in the user's best interest not to remove these files,
since it improves future download speed. Speed is key to the enjoyment of the
Internet.
ComputerCOP capitalizes on both the browser's "catch" and "save" function
and the user's desire for quick-loading web pages. The program is completely
contained on the CD-ROM and does not need to be installed. Automatically, upon
insertion of the CD into the CD-ROM drive, the product will scan the computer's
hard drive for files containing words that match the program's library of
potentially offensive words and/or phrases and searches for Internet-native
images. After scanning, a main viewing window is displayed that subsequently
displays the words, phrases and images found. All directions are clearly stated
for the user on the display window at all times.
One of ComputerCOP's most dramatic functions is its ability to display text
files that have been erased by the home or office user but not yet written over
by the computer. The ability to display these files adds to the program goal,
which is to give an accurate reflection of the home or office users activities
on the Internet. It is an important function to note as it allows ComputerCOP to
"catch" the computer savvy child or employee who wishes to mask his/her Internet
activities by deleting or erasing his Internet files found in Internet browser
directories such as cache. These files are displayed in the main viewing window
with the words, "Deleted File" noted under the display.
The Interface, and indeed, the program itself, was designed to be very
intuitive and simple to use. The idea was to let the program, which is
essentially several utility programs merged into one, do all the work behind the
scenes and allow the user, who may possess little or no computer skills, to be
informed about his or her child's or employees' Internet activities without
restricting the child's or employees' use.
Professional Services
The Company's professional services unit provides a wide array of
information technology, support and services which offer solutions, support, and
strategies to solve various business needs in such areas as hardware, network
determinations, help desk applications, wiring/cabling, LAN connections,
moves/adds/changes, and project management, as well as overseeing new
installations and offering on-site component repair. However, as noted above and
in Item 7 - Management's Discussion and Analysis of Financial Condition, the
operation of this business unit were significantly curtailed in January, 2000.
8
SALES AND MARKETING
d.b.Express is currently being marketed to the telecommunications industry.
The Company utilizes a direct sales force and support personnel operating from
the Company's headquarters in Bohemia, New York.
During the third quarter of 1998, the Company began its marketing efforts
of the technology acquired in June, 1998, under the product name Bo Dietl's One
Tough ComputerCOP. The product is marketed through an in-house sales force as
well as an independent marketing firm. Subsequent to year-end, in an effort to
expand product exposure, the Company entered into additional distribution
agreements. Further, the Company pursued the licensing of this technology to
various OEMs. Additionally, as part of the acquisition Mr. Dietl, on behalf of
the Company, made promotional appearances on major radio and television
broadcasts, on such programs as America's Most Wanted, and CNN.
The professional services business segment has been primarily marketed
through the efforts of an individual, formerly with I.B.M., who possesses the
necessary experience along with a small in-house support staff.
Softworks marketed its products and services through its worldwide
distribution channels which included direct sales personnel, agents, and
distributors. In the United States they operated 10 sales offices.
Internationally, Softworks had sales offices in Australia, Brazil, Canada,
France, Spain, Japan, Germany and the United Kingdom. The U.K. office also
covered the Scandinavian and Benelux countries. Softworks' International
distributors were located in Argentina, Chile, Israel, Korea, Mexico, Peru,
Philippines, South Africa, Thailand, Turkey, Uruguay and Venezuela. All offices
were responsible for specific geographic territories that may have extended
beyond the state, province, or country in which the office was located.
Softworks adopted a MIPS- (Millions of Instructions per Second ("MIPS"))
based pricing model for mainframe products that enabled the company to take
advantage of growth in enterprise servers. Pricing for mainframe products was
based on the computational capacity of the CPU's on which the software operated.
Pricing for non-mainframe and cross-platform varied from enterprise-wide
agreements to "per seat" pricing. Softworks also generated revenue through
maintenance and support agreements that were reviewed annually on the
anniversary of the original purchase date. Other revenue was generated when
product licenses were transferred to different/larger CPU's. No customer of
Softworks comprised 10% or more of the Company's consolidated revenue.
SEASONALITY AND BACKLOG
The Company's quarterly results are subject to fluctuations from a wide
variety of factors including, but not limited to, new product introductions,
domestic and international economic conditions, customer budgetary
considerations, the timing of product upgrades, customers' renewal cycles and
fee recognition in connection with exclusive distribution and other agreements.
As a result of the foregoing factors, the Company's operating results for any
quarter are not necessarily indicative of results for any future period.
The Company generally produces inventory shortly before anticipated product
shipment. Accordingly, the Company has not experienced significant product
backlog nor believes that the existence of product backlog is a relevant
indicator of future sales performance.
MANUFACTURING AND DISTRIBUTION
The Company currently contracts the manufacture of software diskettes,
product documentation and packaging for certain products within its d.b.Express
product line as well as ComputerCOP to non-affiliated third-party manufacturers.
Due to the existence of numerous companies providing manufacture of these items,
the Company is not dependent on any one contractor.
Softworks produced its own tapes and was not dependent on any one
contractor for materials.
9
RESEARCH AND DEVELOPMENT
The computer software industry is characterized by rapid technological
change, which requires ongoing development and maintenance of software products.
It is customary for modifications to be made to a software product as experience
with its use grows or changes in manufacturers' hardware and software so
require.
The Company believes that its research and development staff, many with
extensive experience in the industry, represents a significant competitive
advantage. As of December 31, 1999, the Company's research and development group
consisted of 51 employees. Further, when needed, the Company frequently retains
the services of independent professional consultants. The Company seeks to
recruit highly qualified employees, and its ability to attract and retain such
employees will be a principal factor in its success in maintaining a leading
technological position. For the three years ended December 31, 1999, 1998 and
1997, research and development expenses were approximately $10,500,000,
$11,200,000 and $8,800,000, respectively. The Company believes that significant
investments in research and development are required in order to remain
competitive.
COMPETITION
The Company's products are marketed in a highly competitive environment.
Such an environment is characterized by rapid change, frequent product
introductions and declining prices. Further, the Company's PC products have been
designed specifically for use on the Intel X86 family of computers, utilizing
other well known database products. No assurance can be given that the Company's
patents and copyrights will effectively protect the Company from any copying or
emulation of the Company's products in the future.
The Company considers certain end-user data access tool and executive
information system software companies to be competitors to its d.b.Express
product, including Trinzic Corporation, Cognos, Inc., Comshare Corp. and Pilot
Software, Inc. The Company believes that d.b.Express can compete effectively
against such companies' product offerings based on ease of use, lack of
programming, data access speed and price.
The Company believes ComputerCOP to be in a highly competitive, low margin
segment of the PC software market. The first Internet filtering software was
introduced in 1995. Since that time a wide variety of software products have
become available giving parents, guardians as well as the business world the
ability to block and filter various categories of objectionable material. Today,
products such as NetNanny, cyberSafe, CYBERsitter, CyberSnoop, GuardiaNet and
many others are considered by the Company to be strong competition.
The Company's professional services unit, operates in a highly price and
service sensitive business environment. Potential customers could opt for larger
more well established companies such as I.B.M. and Dell or midsize PC
resellers/service providers such as Entex, Micros to Mainframes, CompuCom or
Infotech for hardware and related services. Additionally, competition comes from
the major consulting services organizations such as Computer Science Corp. or
Andersen Consulting. There are several small consulting/cabling/integration
firms located throughout the United States.
Softworks' primary competitors were Sterling Software, Inc. and Boole &
Babbage, Inc. in the data and storage management market; Boole & Babbage, Inc.
and Computer Associates International, Inc. in the performance management
market; and Compuware, Inc. and Viasoft Inc. in the Year 2000 market. The
Company believed that its products competed effectively on the basis of quality,
functionality, technical support and service, and embedded intelligence and
proactive automation. Significant factors such as the emergence of new products,
fundamental changes in computing technology and data storage and manipulation
platforms and applications and aggressive pricing and marketing strategies by
Softworks' competitors may have affected their competitive position.
10
Many of the Company's current and potential competitors have longer
operating histories, greater name recognition, larger installed customer bases
and substantially greater financial, technical and marketing resources than the
Company. There can be no assurance that the Company's current and potential
competitors will not develop products that may be or may be perceived to be more
effective or responsive to technological change than are the Company's current
or future products or that the Company's technologies and products will not be
rendered obsolete by such developments. Increased competition could result in
price reductions, reduced margins or loss of market share, any of which could
have a material adverse effect on the Company's business, operating results and
financial condition.
EMPLOYEES
The Company had 91 employees, all in the United States, at March 3, 2000,
including 25 in marketing, sales and support services, 51 in technical support,
(including research and development) and 15 in corporate finance and
administration all in the United States. The future success of the Company will
depend in large part upon its continued ability to attract and retain highly
skilled and qualified personnel. Competition for such personnel is intense, and
the Company has experienced turnover in its management group. None of the
Company's employees are represented by a labor union. The Company believes that
its relations with its employees are good.
PATENTS AND TRADEMARKS
The Company has three federally registered trademarks: "CCC"TM,
"d.b.Express"TM and "dbACCEL"TM. In addition, the Company received a patent for
the proprietary aspects of its d.b.Express technology in 1994, and a second,
expanded patent on that technology in 1995, which broadened the claims regarding
the product's graphical interface and indexing. Softworks had copyrights for
their entire product line.
Item 2. PROPERTIES
- --------------------
The Company leases various facilities for its Corporate headquarters and
operations. The Company's primary facility is:
Description Location Square Footage Lease term Annual Rental Cost
- ----------- -------- -------------- ----------- ------------------
Corporate Bohemia, NY 10,000 7/1/94 - 6/30/02 $192,600
Item 3. LEGAL PROCEEDINGS
- ---------------------------
In March, 1995, an action was originally commenced against the Company and
a number of defendants (Barbara Merkens v. Aval Guarantee Ltd., Walter Mennel,
J. Forror, A. Faehndreich-Braun, T&M Consulting AG, M. Schmidt, E.G. Baltruschat
and Computer Concepts Corp.; United States District Court, Eastern District of
New York). In early 1997, after a change in counsel, the plaintiff amended the
complaint for a second time, now naming as defendants only the Company and three
of its officers. The second amended complaint alleges that certain third
parties, unrelated to the Company, transferred certificates representing
1,000,000 shares of the Company's common stock to the plaintiff. The complaint
further alleges that such shares were endorsed in blank by the third parties and
became bearer securities which were negotiated to the plaintiff by physical
delivery. The certificates had not been legally acquired from the Company and
the certificates had been reported to the Securities and Exchange Commission by
the Company as stolen certificates. Plaintiff has requested validation of the
transfer of the certificates and is seeking damages of an unspecified amount,
consisting of alleged diminution in market value of the subject shares from 1994
through the date of any judgment in the plaintiff's favor. The Company denied
plaintiff's allegations and filed a motion for summary judgment. On or about
November 8, 1999, the motion for summary judgment was granted in favor of the
Company and its officers. However, the plaintiff filed an appeal, which is being
contested by the Company. The Company is unable to predict the ultimate outcome
11
of this claim and, accordingly, no adjustments have been made in the
consolidated financial statements for any potential losses or potential
issuances of common stock.
During 1999, the Company and certain officers received notification that
they had been named as defendants in a class action (case # CV 99 1046, Kassouf,
et al v. Computer Concepts Corp., Daniel DelGiorno, Sr. and Daniel DelGiorno
Jr., U.S. District Court, Eastern District of New York) alleging violations of
certain securities laws with respect to the content of certain Company
announcements. The Company and its counsel are vigorously defending this matter.
However, the Company is unable to predict the outcome of this claim and,
accordingly, no adjustments have been made in the consolidated financial
statements for any potential losses or potential issuance of common stock.
In August of 1999, the Company and its directors were served with a
complaint filed in the Chancery Court of Delaware, New Castle County (Nadef v.
Daniel DelGiorno, et al and Computer Concepts Corp. as Nominal Defendant; C.A.
No. 17676-NC) as a derivative action alleging awards of excess compensation and
requesting a judgment in favor of the Company for such excess compensation. The
Company and defendants have denied the allegations and are vigorously defending
the matter, however, the Company is unable to predict the outcome of this claim
and, accordingly, no adjustments have been made in the consolidated financial
statements in regard to this matter.
In November, 1999, a company subsidiary was added as a party in an amended
complaint (Outdoor Systems, Inc., et al v. A. Esman and MallNet Media Corp.;
Superior Court, Arizona, Maricopa County; No. CV 99- 12185). The complaint
alleges that Esman (a consultant to the Company) violated a personal non-compete
agreement in performing services for MallNet (one of the Company's
subsidiaries), and Outdoor Systems contends 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's subsidiary 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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
At the Company's annual shareholders' meeting, held on December 20, 1999,
the shareholders of the Company elected the individuals identified below as the
Company's Board of Directors. Their terms expire at the next annual shareholders
meeting.
Daniel DelGiorno, Sr., Daniel DelGiorno, Jr., Russell Pellicano, Jack S.
Beige, Esq., Augustin Medina.
The tabulation of the results of the shareholders' vote was:
For Against/Withheld/Abstain
--- ------------------------
Daniel DelGiorno, Sr. 15,574,634 657,579
Daniel DelGiorno, Jr. 15,574,634 659,391
Russell Pellicano 15,574,634 655,281
Jack S. Beige, Esq. 15,574,634 655,501
Augustin Medina 15,574,634 655,381
A proposal for the appointment by the Board of Directors of Hays & Co. as
the Company's independent certified public accountants for calendar year 1999
was approved by a vote of: 16,788,347 - For; 238,796 - Against; with 68,371 -
Abstained.
12
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK
- ----------------------------------------------
The Company's Common Stock has been traded on NASDAQ since September 23,
1992. The following table sets forth the high and low sales prices for the
Company's common stock by fiscal quarters for the last two years, as restated
for the reverse-stock split noted below.
On March 18, 1998, the Board of Directors declared a reverse split at a
ratio of 1 for 10 shares with a record date of March 27,1998, and an effective
date of March 30,1998. Par value and authorized shares remain unchanged at
$0.0001 and 150,000,000 shares respectively. All references to numbers of shares
and per share data have been restated for all years presented except where noted
so as to reflect the reverse-stock split.
High Bid Low Bid
--------- -------
1998:
First Quarter 5 5/8 3 7/16
Second Quarter 7 3 9/16
Third Quarter 6 1/4 1 15/32
Fourth Quarter 3 1/2 1 3/4
1999:
First Quarter 2 3/8 1 13/32
Second Quarter 1 15/16 1 1/4
Third Quarter 2 1 3/32
Fourth Quarter 2 1/4 1
2000:
(Through March 8, 2000) 2 11/16 1 21/32
As of March 8, 2000, the total number of shareholders of the Company's
common stock was approximately 16,084, with 1,688 holders of record, exclusive
of shareholders whose shares are held in the name of their brokers or stock
depositories, which are estimated to be approximately 14,396 additional
shareholders.
In 1999, the Company declared a special dividend of $6 million
(approximately $0.29 per share), which was paid on November 15, 1999, to
shareholders of record as of September 30, 1999.
In February, 2000, the Company declared a dividend of $0.10 per share
(aggregating approximately $2 million) to its shareholders of record on March
15, 2000, and payable on May 1, 2000.
13
Item 6. SELECTED FINANCIAL DATA
- ---------------------------------
The following selected consolidated financial data for the five fiscal
years ended December 31, 1999, 1998, 1997, 1996 and 1995 are derived from the
Company's audited financial statements. To better understand the following
financial information, investors should also read the "Management's Discussion
and Analysis of Operations." This data should also be read in conjunction with
the consolidated financial statements of the Company, related notes, and other
financial information included elsewhere in this form 10-K. All numbers are in
thousands, except per share amounts.
In August, 1998, Softworks completed a public offering, after which the
Company's ownership interest was reduced to approximately 72%. In April, 1999,
the Company's ownership of Softworks was reduced below 50%, and accordingly,
commencing April 1, 1999, Softworks' results are accounted for using the equity
method of accounting and are no longer consolidated. See Note 3 to the
Consolidated Financial Statements which provides pro forma consolidated
financial information as if Softworks were accounted for using the equity method
for the three years ended December 31, 1999, 1998 and 1997.
Consolidated Statements of Operations Data:
Year Ended December 31,
-----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Revenue $24,640 $61,988 $29,738 $19,030 $16,302
Costs of revenue 13,044 21,018 3,663 2,043 7,074
-------- -------- -------- -------- --------
Gross Margin 11,596 40,970 26,075 16,987 9,228
-------- -------- -------- -------- --------
Research and development 10,525 11,193 8,785 5,347 1,270
Sales and marketing 17,417 28,496 17,033 13,038 9,166
General and administration 11,472 12,718 9,111 8,185 8,191
Amortization and depreciation 4,738 4,207 2,386 3,550 4,104
Unusual charges - - 686 2,590 1,102
Reduction in carrying values of long-lived assets - - - 412 3,760
-------- -------- -------- -------- --------
Total costs and expenses 44,152 56,614 38,001 33,122 27,593
-------- -------- -------- -------- --------
Operating loss (32,556) (15,644) (11,926) (16,135) (18,365)
Gain on partial disposition of Softworks 17,107 28,785 - - -
Equity in earnings of Softworks 512 - - - -
Gain on sale of net assets of subsidiary - - 813 - -
Other income (expense), net 316 (485) 16 (8) -
Interest charge pertaining to discount on
convertible debentures - - (1,288) (2,810) -
Minority interest in earnings of Softworks (46) (1,361) - - -
-------- -------- -------- -------- --------
Income (loss) before provision for income taxes (14,667) 11,295 (12,385) (18,953) (18,365)
Benefit/(provision) for income taxes 9,095 (1,748) - - -
-------- -------- -------- -------- --------
Net income (loss) $(5,572) $9,547 $(12,385) $(18,953) $(18,365)
======== ======== ======== ======== ========
Basic net income (loss) per share $(0.27) $0.58 $(1.11) $(2.66) $(3.73)
======== ======== ======== ======== ========
Diluted net income (loss) per share $(0.27) $0.56 $(1.11) $(2.66) $(3.73)
======== ======== ======== ======== ========
Basic weighted average common shares outstanding 20,455 16,523 11,163 7,130 4,921
======== ======== ======== ======== ========
Diluted weighted average common shares outstanding 20,455 17,031 11,163 7,130 4,921
======== ======== ======== ======== ========
December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Consolidated Balance Sheet Data:
Cash and cash equivalents $1,852 $ 8,176 $ 778 $ 5,675 $ 579
Working capital (deficit) 22,846 27,569 1,412 2,809 (2,998)
Total assets 30,024 91,902 39,298 27,671 16,081
Long term debt, less current portion - 1,403 1,395 526 800
Minority Interest - 8,503 - - -
Shareholders' equity 24,486 34,016 9,667 9,524 2,009
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
Forward-Looking Statements
All statements other than statements of historical fact included in this
Form 10-K 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-K, words such as "anticipate," "believe," "estimate,"
"expect," "intend" and similar expressions, as they relate to the Company or its
management, identify forward-looking statements. Such forward-looking statements
are based on the beliefs of management, as well as assumptions made by, and
information currently available to, the Company's management. Actual results
could differ materially from those contemplated by the forward-looking
statements as a result of certain factors including but not limited to,
fluctuations in future operating results, technological changes or difficulties,
management of future growth, expansion of international operations, the risk of
errors or failures in the Company's software products, dependence on proprietary
technology, competitive factors, risks associated with potential acquisitions,
the ability to recruit personnel, and the dependence on key personnel. Such
statements reflect the current views of management with respect to future events
and are subject to these and other risks, uncertainties and assumptions relating
to the operations, results of operations, growth strategy and liquidity of the
Company. All subsequent written and oral forward-looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by this paragraph.
Overview
The Company designs, develops, markets and supports information delivery
software products, including end- user data access tools for use in personal
computer and client/server environments. Through Softworks, the Company
developed, marketed and supported systems management software products for
corporate mainframe data centers. The Company makes use of its proprietary data
access technology, d.b.Express TM in its d.b.Express TM Internet Information
Server, more commonly referred to as a "Server Farm." This service presently is
being marketed solely to the telecommunications industry. The Server Farm
permits end users the ability to access and analyze information through the
Internet. Data can be visually presented using the Company's patented data
visualization technology.
In 1997, the Company created a business unit, "professional services",
which primarily resold computer hardware and for a fee, will assist in the
design, construction and installation of technology systems. In January, 2000,
the Company significantly curtailed the operations of this business unit.
In June, 1998, the Company completed an acquisition of software (and
related sales and marketing rights) which is primarily designed to provide non
computer literate owners (e.g., parents, guardians, schools, etc.) the ability
to identify threats as well as objectionable material which may be viewed by
users of the computer on the Internet (e.g. children). In February 2000, the
Company sold a newly created wholly owned subsidiary with assets consisting
primarily of $20.5 million cash, the above referenced technology and remaining
marketing rights, inventory and related receivables for 1,775,000 shares of
NetWolves Corporation (OTCBB: "WOLV"). The transaction was valued at
approximately $35.5 million.
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 ("EMC") for $10.00 per share cash. 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, net of
expenses, of $47,607,000, recorded in the first quarter of 2000.
15
Further, the Company is in the process of developing a unique media station
display, which will combine Internet strategy and e-commerce with multi-media
forms of delivery, presentation and interaction with end-users. This Internet
based communications/advertising network is being designed to create a means by
which businesses can promote specific brand/product/service awareness. The
Company intends to market this technology in association with owners and/or
managers of high traffic venue areas (i.e., malls, airports, etc.) to local,
regional and national businesses. This business concept will require additional
capital in order to complete its development and to support its marketing plan.
In order to achieve its goal, the Company intends to partner or co-venture with
various potential investors and strategic partners.
Financial Condition and Liquidity
The Company has incurred substantial operating losses and used substantial
amounts of cash in operating activities. Prior to 1998, these losses were
primarily financed through private placements of common stock and convertible
debentures. During 1998, and 1999 cash requirements of the parent company were
primarily financed through a series of separate transactions which included an
initial public offering of Softworks in August 1998, a private placement of
Softworks common stock owned by the Company in December 1998, various exchanges
of Softworks common stock owned by the Company to consultants and employees and
a second public offering of Softworks in June, 1999.
Pursuant to the tender offer in December, 1999, the Company liquidated its
remaining position in Softworks, through an offer to purchase for cash all
outstanding shares of the common stock of Softworks, Inc. made by a wholly owned
subsidiary of EMC Corporation. This transaction, which closed in January, 2000,
resulted in the Company receiving approximately $51 million in January, 2000,
and an additional $10 million, which was placed in escrow. In connection with
the tender offer, the Company entered into an escrow agreement whereby $10
million of the sales proceeds were placed into an escrow account to secure
potential liabilities of the Company arising from an indemnification agreement
between the Company and EMC. Pursuant to the es0crow agreement, the escrow
funds, net of any claims, will be released to the Company on January 25, 2001.
See Note 18 to the Consolidated Financial Statements.
In January, 2000, the Company elected to significantly curtail operations
of its business unit, marketed as professional services, which primarily resold
computer hardware and assisted in the design, and installation of technology
systems. For the year ended December 31, 1999, this business unit had one major
contract involving two major customers, with combined revenue of $12,297,000
(49.9% of total revenue). However, this business unit generates low margins, and
operated in a highly competitive and very volatile business arena. Accordingly,
management elected to significantly curtail the operations of this unit as it
does not coincide with its short and long-range business plans. The Company
currently does not have any other sales contracts.
In February 2000, the Company sold a newly created wholly owned subsidiary
with assets consisting primarily of $20.5 million cash, certain software
marketed under the trade name Bo Dietl's One Tough ComputerCOP ("ComputerCOP")
and the remaining related sales and marketing rights thereto, inventory and
related receivables for 1,775,000 shares of NetWolves Corporation ("NetWolves")
(OTCBB: "WOLV"). The transaction was valued at approximately $35.5 million
dollars. See Note 18 to the Consolidated Financial Statements. Additionally, the
Company purchased 225,000 shares from certain NetWolves shareholders for $4.5
million.
During 1999, the Company purchased $1,499,000 of additional property and
equipment, of which Softworks purchased approximately $452,000 during the first
quarter of 1999. Approximately $700,000 was for equipment purchased to enhance,
expand and improve the Server Farm. Approximately $200,000 of equipment and
$230,000 of software technology was purchased for the multi-media Internet
product presently in development. The balance of approximately $127,000 was for
general equipment. During 1999, the Company advanced $821,000 to various
officers, which, subsequent to year-end was repaid.
16
During 1998, the parent Company entered into an Accounts Receivable
Purchase Agreement, whereby the Company from time to time could, on a full
recourse basis, assign some of their accounts receivable generated from the
reselling of hardware. Upon specific invoice approval, an advance of 85% of the
underlying receivable would be provided to the Company. The remaining balance
(15%), less an administrative fee of approximately 1/2% plus interest at the
rate of 1-1/2% per month, would be paid to the Company once the customer has
paid. The entire balance due was repaid in the first quarter of 1999, and the
agreement expired in November, 1999.
Management's current plan is focused on becoming a preeminent provider of
innovative software products and services which:
-- exploit the Company's patented technologies;
-- capitalize on the Internet marketplace.
To achieve its goals, the Company continues to:
-- market the d.b.Express Internet Information Server Services (the
"Server Farm") to the telecommunications sector;
-- explore and develop applications/uses of the d.b.Express technology
for additional vertical markets;
-- develop or acquire new products and services that adhere to the
Company's goals and objectives.
The Company believes that the recent business transactions are indicative
of its plan to improve performance as well as its on-going effort to increase
shareholder value. Further, the Company is currently reviewing both its short
and long-term business strategies.
While management believes that its plan will ultimately enable them to
achieve positive cash flows from operations, until such time, additional cash
may be necessary to implement such plan. Although there can be no assurances,
management has several alternative sources to fund the development of its plan,
including additional debt and equity financing (if necessary), or sell/divest
part of its recent investment in NetWolves. (See Note 18 to the Consolidated
Financial Statements).
Results of Operations
Fiscal 1999 Compared to Fiscal 1998
Commencing April 1, 1999, Softworks' results are accounted for using the
equity method of accounting and are no longer consolidated. Under the equity
method of accounting, the Company's share of Softworks' earnings or losses is
included in the Company's consolidated operating results in a single line item.
Pro forma consolidated operating results as if Softworks were accounted for
using the equity method for the years ended December 31, 1999, and 1998, is as
follows:
17
Computer Concepts Corp. and Subsidiaries
Pro Forma Condensed Consolidated Statements of Operations
For the year ended December 31,
(in thousands)
1999 1998
---- ----
Revenue
Software licenses, net $ 700 $ 70
Maintenance 42 42
Professional services 13,640 18,127
------- -------
14,382 18,239
Cost of Revenue
Software licenses 242 133
Maintenance - -
Professional services 12,038 16,634
------- -------
Gross margin 2,102 1,472
------- -------
Research and development costs 8,025 3,395
Sales and marketing costs 12,476 9,014
General and administrative costs 10,281 8,283
Amortization and depreciation 4,028 2,037
------- -------
34,810 22,729
------- -------
Operating loss (32,708) (21,257)
Gain on partial disposition of Softworks 17,107 28,785
Other 874 2,376
------- -------
(Loss) Income Before Benefit for Income taxes (14,727) 9,904
Benefit (Provision) for Income Taxes 9,155 (357)
------- -------
Net income (loss) $(5,572) $9,547
======= =======
The following discussion about the 1999 results of operations is based on
the operating results as presented in the above table.
For the year ended December 31, 1999, total revenue decreased by
$3,857,000, when compared to the year ended December 31, 1998, primarily as a
result of a decrease in professional services revenue of $4,487,000. As noted
above, the Company has no open hardware contracts, and, in January 2000, elected
to significantly curtail the operations of this business unit. Also included in
professional services is revenue generated from the Server Farm. At present,
this technology has been developed to provide services solely to the
telecommunications industry. For the years ended December 31, 1999, and 1998,
revenue was $1,436,000 and $663,000, 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. The Company began shipping the initial version
of ComputerCOP during the last quarter of 1998 to various distributors,
retailers, and individuals. Since shipments are made with right of return, the
Company delays the recognition of revenue until the requirements of Statement of
Financial Accounting Standards No. 48, "Revenue Recognition When Right of Return
Exists" have been met. As noted above, during the first quarter of 2000, the
Company sold the ComputerCOP technology. As a result of the actions noted above,
the Company's primary source of revenue is currently generated from the Server
Farm.
The Server Farm generates much higher gross margin than does 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 consists primarily of amounts paid to
the Company's suppliers for goods and services. The cost of revenue related to
the Server Farm, for the year ended December 31, 1999, was $317,000, or 22.1%.
Cost of revenue related to the Server Farm for the year ended December 31, 1998,
was $259,000, or 39.1% of revenue. The Company believes that the cost of revenue
associated with the Server Farm revenue is not directly proportional. As such,
18
as revenue increases, costs, as a percentage of revenue, should decrease. The
cost of revenue, related to the resale of computer hardware and related services
of $11,721,000 was 96.0%, an increase, when compared to 88.7% for this business
unit for the year ended December 31, 1998. The depreciation of the Server Farm's
hardware is included in "Amortization and depreciation." Cost of revenue with
respect to ComputerCOP is currently running at approximately 35%. The
amortization costs of the purchased software technology related to ComputerCOP
are included in "Amortization and depreciation."
Research and development expenses include salaries and related costs for
software developers, quality assurance and documentation personnel involved in
the Company's research and development efforts. Costs for the year ended
December 31, 1999, increased approximately $4,630,000 to $8,025,000 when
compared to the year ended December 31, 1998. Approximately $3,826,000 of
additional expense was incurred in connection with the development of the
multi-media technology during the year ended December 31, 1999. A portion of the
variance, approximately $700,000, is attributable to costs associated with the
initial concept and designs, early stage development and implementation of the
Internet multi-media technology. Additional increases were incurred in
expenditures relating to further development of Server Farm technology.
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 $3,462,000 to $12,476,000 for the year ended December 31, 1999, when
compared to $9,014,000 for the year ended December 31, 1998. A major portion of
the variance pertains to costs associated with ComputerCOP. The Company expensed
non-cash charges of approximately $2,909,000 related to the appearances and
product endorsements made on behalf of ComputerCOP during the year ended
December 31, 1999, resulting in an increase of approximately $1,375,000, when
compared to the year ended December 31, 1998. The ComputerCOP acquisition
occurred in mid 1998. Additionally, the Company expended approximately $655,000
in its efforts to market ComputerCOP (nominal expense for the year ended
December 31, 1998, as the Company commenced marketing the product late in the
fourth quarter of that year). Further, salaries and commissions related to
ComputerCOP increased approximately $275,000. The Company has also incurred an
additional $320,000 of sales and commission expenses related to the resale of
computer hardware and related services in its professional services division
when compared to the same period in 1998. Also, the Company incurred expenses of
approximately $791,000 in its effort to market the multi-media display still
under development. The balance of the sales and marketing costs, approximately
$7,182,000, 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 are
necessary in order to maintain and improve market position and product
recognition. It should be noted that ComputerCOP and the non-Server Farm portion
of professional services have been either sold or significantly reduced during
the first quarter of fiscal 2000. Accordingly, the Company believes expenses
should be lower in future periods.
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 $1,998,000 to $10,281,000
for the year ended December 31, 1999, when compared to the year ended December
31, 1998. Major factors contributing to this increase include, among other
things, increased compensation and additional staffing, legal expenses incurred
in defending the Company from litigation and the retention of financial
consultants.
Amortization and depreciation expenses increased $1,991,000 when comparing
the years ended December 31, 1999 and December 31, 1998. The increase is
primarily attributable to the purchased software and goodwill acquired in the
ComputerCOP transaction.
Gain on partial disposition of Softworks of $17,107,000 represents the gain
associated with a public offering of Softworks as well as the sale and exchange
of additional Softworks common stock as further described in Note 3 to the
Consolidated Financial Statements.
19
The $9,155,000 benefit from income taxes represents the reduction of the
valuation allowance on the Company's deferred tax assets. As a result of the
Company's sale of its remaining interest in Softworks and the sale of
ComputerCOP, the Company will recognize a taxable gain in the first quarter of
2000. Accordingly, a portion of the Company's net operating loss carry-forwards
and other deferred tax assets have become utilizable.
Fiscal 1998 Compared to Fiscal 1997
During 1998, the Company more than doubled its total revenue, increasing
$32,250,000 to $61,988,000 from 1997's level of $29,738,000. Record volume was
achieved in software license revenue, increasing $13,905,000 or 77.7 % to
$31,795,000 in 1998, from $17,890,000 in 1997. The increase was primarily due to
the increased sales of Softworks products resulting from continued expansion of
its worldwide sales force, the conversion from CPU-based pricing to MIPS-based
pricing and the introduction of Resource Availability into the DataStor Arena.
During 1998, MIPS-based licenses accounted for 74% of new Softworks sales. Sales
in the DataStor Arena accounted for 59% of total software license revenue in
1998 and 1997. Software license revenue from the Performance Arena accounted for
32% of total software license revenue in 1998 and 1997. License revenue from the
Year 2000 Arena accounted for 5.3% of total software license revenue in 1998 and
3.5% in 1997. International revenue increased 85.9% to $8,798,000 in 1998 from
$4,732,000 in 1997. This increase is attributable to the continuing
international expansion of Softworks. Effective June 30, 1998, the Company
completed the acquisition of certain software, known as ComputerCOP, and related
sales and marketing rights. In conjunction with the sales and marketing efforts
also obtained in the acquisition, the Company released the initial version of
this technology during November 1998. According to the Statement of Financial
Accounting Standards No 48, "Revenue Recognition When Right of Return Exists",
("SFAS 48"), recognition of revenue for products of this nature require, among
other factors, the elimination of rights of return. Accordingly, the recognition
of revenue has been delayed until all the requirements of SFAS 48 are met.
Maintenance revenue increased 5.2% to $10,503,000 in 1998 from $9,980,000
in 1997. This increase is attributable to overall growth in license revenue and
renewals of maintenance contracts by the installed customer base.
The Company commenced operations of its professional services unit during
1997. Professional services principally offers solutions, support, and
strategies to solve various business crises in such areas as: hardware
requirements, network determinations, help desk applications,
programming/programmer services, wiring/cabling, LAN connections,
moves/adds/changes, and project management, as well as overseeing new
installations and offering on-site component repair. This unit increased in
revenue more than tenfold, from $1,868,000 in 1997 to $19,690,000 in 1998.
Approximately $14,878,000 of professional services 1998 revenue was attributable
to one customer. The overall business line is extremely competitive, and as
such, the gross margin for this business segment is approximately 10.4%.
Further, it is difficult to predict future revenue.
Cost of software license revenue includes royalties paid to Softworks
employee developers and to a third party under a licensing agreement,
amortization of capitalized software development costs and costs of shipping and
fulfillment. Cost of software license revenue for the year ended December 31,
1998, of $1,978,000 represents an increase of $812,000 over the prior year
amount of $1,166,000. Stated as a percentage of software license revenue, the
$1,978,000 is 6.2%, a slight decrease from the prior year of 6.5%. Cost of
maintenance revenue, stated as a percentage of revenue, increased 4.3 percentage
points during 1998, from 9.0% in 1997 to 13.3% in 1998. The cost of professional
services, as a percentage of revenue, increased slightly from 85.5% in 1997 to
89.6% in 1998. When comparing the Company's total cost of revenue ($21,018,000
in 1998 to the prior year amount of $3,663,000), as a percentage of total
revenue, there is a significant increase - 33.9% as compared to 12.3% for the
prior year. This is due primarily from the higher cost of revenue associated
with the professional services segment.
20
Research and development expenses include salaries and related costs for
software developers, quality assurance and documentation personnel involved in
the Company's research and development efforts. Research and development
increased 27.4% to $11,193,000 in 1998 from $8,785,000 in 1997. The increase is
primarily attributable to an increase in personnel necessary to support the
Company's research and development efforts.
Sales and marketing expenses include salaries and related costs,
commissions, travel, facilities, communications costs and promotional expenses
for the Company's direct sales organization and marketing staff. As a percentage
of revenue, sales and marketing expenses decreased to 46.0% in 1998 from 57.3%
in 1997. The actual costs increased $11,463,000 to $28,496,000 in 1998, from
$17,033,000 for the prior year. Approximately $7,229,000 of this increase
related to Softworks. This increase was attributable primarily to increased
commission expenses resulting from increased sales, and increased personnel
costs resulting from growth in the Softworks sales organization. In addition,
the opening of the international sales offices of Germany, Australia and Spain
and one domestic sales office contributed to an increase in certain fixed costs
over 1997. Approximately $2,892,000 of the total sales and marketing increase
related to the marketing of d.b.Express and approximately $1,760,000 related to
the marketing of ComputerCOP (which commenced at the end of the third quarter in
1998), offset by the elimination of $418,000 of 1997 MapLinx expenses.
General and administrative expenses include administrative salaries and
related benefits, management fees, recruiting and relocation expenses, as well
as legal, accounting and other professional fees. General and administrative
expenses rose $3,607,000 from $9,111,000 in 1997 to $12,718,000 in 1998. The
increase in general and administrative expenses was principally due to an
increase in finance and administrative personnel necessary to support the
Company's growth.
Amortization and depreciation expense increased $1,821,000 to $4,207,000 in
1998. The amortization of the technology acquired during the year accounting for
approximately $1,450,000 of the increase.
Gain on partial disposition of subsidiary of $28,785,000 represents the
gain associated with the initial public offering of Softworks as well as the
sale and exchange of additional Softworks common stock as further described in
Note 3 to the Consolidated Financial Statements.
Minority interest expense of $1,361,000 represents the earnings
attributable to the separate public ownership of Softworks, which was a wholly
owned subsidiary of the Company until June 30, 1998.
Year 2000 Issues
Assessment. The Year 2000 Problem has thus far not affected computers,
software, and other equipment used, operated, or maintained by the Company.
Software Sold to Consumers. The Company believes that it has substantially
identified and resolved all potential Year 2000 Problems with any of the
software products it develops and markets. However, management also believes
that it is not possible to determine with complete certainty that all Year 2000
Problems affecting the Company's software products have been identified or
corrected due to the complexity of these products and the fact that these
products interact with other third party vendor products and operate on computer
systems which are not under the Company's control.
Internal Infrastructure. The Company believes that it has identified
substantially all of the major computers, software applications, and related
equipment used in connection with its internal operations that must be modified,
upgraded, or replaced to minimize the possibility of a material disruption to
its business.
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 were not affected by the Year 2000 Problem.
Suppliers. The Company has not incurred issues involving the Year 2000
Problem.
21
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------
Not applicable.
Item 8. FINANCIAL STATEMENTS
- ------------------------------------
The financial statements and exhibits to Form 10 - K are included beginning
on page F-1 and are indexed under Items 14(a), 14 (b) and 14(c), respectively.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
AND FINANCIAL DISCLOSURE
- ---------------------------------------------------------------
None.
22
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
- ---------------------------------------------------------------
Directors and Executive Officers
As of March 7, 2000, the names, ages and positions of the directors and
executive officers of the Company are as follows:
Name Age Position
---- --- --------
Daniel DelGiorno, Sr. 67 Chairman, Ass't. Sec. and Director
Daniel DelGiorno, Jr. 44 President, CEO, Treasurer, Director
Russell Pellicano 59 Secretary, Director
Jack S. Beige 55 Director
Augustin Medina 59 Director
Edward Warman 57 Exec. V. P. of Products and Services
George Aronson 51 Chief Financial Officer
Anthony Coppola 45 Executive Vice President
Daniel DelGiorno, Sr. has been Chairman, Chief Executive Officer (to
October, 1997), Assistant Secretary and a director of the Company since April,
1989, and is the father of Daniel DelGiorno, Jr., the Company's President and
also a director. During the period 1987 to April, 1989, Mr. DelGiorno, Sr.
together with Mr. Pellicano (a director of the Company) was engaged in the
research and development of d.b.Express. Prior thereto, during the period 1985
to May, 1987, Mr. DelGiorno, Sr. was the Chief Executive Officer of Myotech,
Inc. ("Myotech"), a privately held corporation which produced computerized
muscle testing equipment for chiropractors and physical therapists. Myotech was
sold to Hemodynamics, Inc. in May, 1987, and later became a public corporation.
Mr. DelGiorno, Sr. was a practicing chiropractor for many years and had founded
a chiropractic clinic employing 4 chiropractors and 6 technicians in addition to
administrative personnel. He also successfully collaborated with Mr. Pellicano
in connection with the design and development of medical equipment for
comparative muscle testing. A patent has been granted to Mr. Pellicano and Mr.
DelGiorno, Sr. in connection therewith. In addition, Mr. DelGiorno, Sr. is the
holder of a patent for a digital myograph for the testing of muscles by
computer. Mr. DelGiorno, Sr. is also an officer, director and shareholder of
Tech Marketing Group Corp. which is a holding company and a shareholder of the
Company. See "Security Ownership of Certain Beneficial Owners and Management"
and "Certain Transactions".
Daniel DelGiorno, Jr., the Company's President, CEO, Treasurer and a
director, is the son of Daniel DelGiorno, Sr. and has been with the Company
since April, 1989. Prior to joining the Company and during the period 1987 to
1989, Mr. DelGiorno, Jr. was involved in providing the management and financial
support for and collaborated with Mr. DelGiorno, Sr. and Russell Pellicano in
connection with the development of d.b.Express. During the period 1984 to May,
1987, he was the President of Myotech, a privately held Company producing muscle
testing equipment. He is also the President, a director and principal
shareholder with Daniel DelGiorno, Sr. of Tech Marketing Group Corp., a
privately held corporation which is a shareholder of the Company. See "Security
Ownership of Certain Beneficial Owners and Management" and "Certain
Transactions".
Russell Pellicano is a director and Secretary of the Company since April,
1989 and served as Vice President, Secretary and Director from April, 1989,
through February, 1994. Mr. Pellicano was the original founder and principal of
RAMP Associates Inc. ("RAMP"), which was acquired by the Company in October,
1990, through which he has engaged in consulting to major corporations and
others for the design of software and hardware for computers. A major customer
of RAMP since its inception has been Grumman Corporation. Mr. Pellicano, through
RAMP, has been consulting for Grumman and other corporations. He is the chief
architect and designer of d.b.Express and has been involved in designing and
developing computer software and hardware for the past 30 years. Among many
noteworthy projects for which he was responsible at Grumman was the design and
installation of the Orbiting Astronomical Observatory Space Craft Ground
Station, and he was a member of the launch team at Cape Kennedy in conjunction
therewith. He was also Senior Systems Analyst for Grumman in connection with the
test instrumentation for the forward sweep wing (X29) experimental aircraft
on-board computer system, and the F- 14D and the A-6E production aircraft. Mr.
Pellicano is a graduate of C. W. Post College in 1973 with a degree in
Electrical Engineering.
23
Jack S. Beige, D.C., J. D., was appointed a director in November, 1995, for
a term beginning January, 1996, and was appointed as a member of the Audit
Committee and the Compensation Committee, also effective January, 1996. Mr.
Beige received his Juris Doctor degree in 1993 and has been a practicing
attorney, primarily in business related matters, on Long Island, New York, since
then. Prior thereto, Mr. Beige practiced chiropractic medicine, was President of
BSJ Realty Corporation, President of All Travel, Ltd. and was President of Comp
Consulting, Inc. During his practice as a chiropractic doctor, he was elected a
Fellow of the International College of Chiropractors, was appointed as Chairman
of the New York State Worker's Compensation Board, Chiropractic Practice
Committee and was elected President of the New York State Chiropractic
Association in 1987. Mr. Beige is admitted to the New York State Bar and is a
member of the New York State Bar Association, the Nassau and Suffolk County Bar
Associations and is a member of the American Arbitration Association.
Augustin Medina was appointed a director in November, 1995, for a term
beginning January, 1996, and was appointed as a member of the Audit Committee
and the Compensation Committee, also effective January, 1996. During the last
five years and previously, Mr. Medina has been an independent business broker
associated with the Montecristi Corporation, Gallagher Associates and Anderson
Credit and Leasing, on Long Island, New York. Mr. Medina's business background
includes advising and assisting businesses in computer and non-computer related
businesses in their development and structuring of sales and marketing programs.
Edward Warman joined the Company in September, 1993, as Vice President of
Products and Services. From 1989 to 1993, he served as Vice President, Product
Development for Comdisco Disaster Recovery Services, Inc. where he was
responsible for the design and implementation of a new product line of disaster
recovery software. From 1984 to 1989, Mr. Warman was Vice President of Research
and Development at Intersolv, Inc., with responsibility for a software
development staff exceeding 100 people. Prior to 1984, he served in various
software development management positions at organizations including Cincom
Systems, Inc., Computer Resources, and Monsanto. Mr. Warman possesses degrees in
systems analysis, economics and chemical engineering.
George Aronson, CPA, has been the Chief Financial Officer of the Company
since August, 1995. From March, 1989 to August, 1995, he was the Chief Financial
Officer of Hayim & Co., an importer/distribution organization. Mr. Aronson
graduated from Long Island University with a major in accounting in 1972
receiving a Bachelor of Science degree and is a Certified Public Accountant.
Anthony Coppola, has been Executive Vice President in charge of
development, marketing and sales of the Company's d.b.Express based
telecommunications call detailing business since January, 1999, having
previously worked with the Company in various capacities related to sales and
marketing management beginning in 1994. His reponsibilities include the
management and direction of the design and programming for the
telecommunications applications, as well as direct involvement with the sales
and marketing of the Company's applications and services to IBM and the
Company's other primary customers. Prior to joining the Company, Mr. Coppola was
President of American Multimedia Corp., a firm active in consulting and the
development and marketing of industry specific training software.
24
Item 11. EXECUTIVE COMPENSATION
- ---------------------------------
The following table sets forth the annual and long-term compensation with
respect to the Chairman and Chief Executive Officer and each of the other
executive officers of the Company who earned more than $100,000 for services
rendered for the years ended December 31, 1999, 1998, and 1997. Directors are
not contractually compensated for their services, however, the Directors
received a formula grant of 100,000 restricted stock options for 1999.
Summary Compensation Table
Annual Compensation Long-Term Compensation
----------------------------- --------------------------------------------------
Securities All
Other Restricted Underlying Other
Name and Fiscal Annual Stock Options/ Compen-
Principal Position Year Salary Bonus Compensation Awards SARS sation
(9)(6)(4) (2)(8)(5)
- -------------------------------------------------------------------------------------------------------------------
Dan DelGiorno,Sr.,(1) 1999 $270,000 $1,130,000 $ - - 200,000 -
Director 1998 260,000 1,030,000 - - 190,000 -
1997 260,000 327,000 - - - -
Dan DelGiorno, Jr.(1) 1999 - 1,354,000 - - 200,000 -
President, C.E.O. 1998 - 1,291,000 - - 350,000 -
Director 1997 - 753,000 - - - -
Russell Pellicano (7) 1999 - 317,000 - - 100,000 -
Secretary 1998 - 76,000 - - 25,000 -
Director 1997 - 199,000 - - - -
Ed Warman (3) 1999 169,000 - - - - -
Vice President of Products 1998 151,000 - - - 25,000 -
& Services 1997 148,000 - - - - -
George Aronson 1999 170,000 532,000 - - 150,000 -
Chief Financial Officer 1998 157,000 456,000 - - 150,000 -
1997 157,000 233,000 - - - -
Anthony Coppola 1999 136,000 418,000 - - 60,000
Executive Vice President 1998 125,000 98,000 - - 105,750
1997 104,000 12,000 - - -
All Officers as a Group 1999 745,000 3,751,000 - - 710,000 -
1998 693,000 2,951,000 - - 845,750 -
1997 669,000 1,524,000 - - - -
Footnotes
(1) In June, 1997, D. DelGiorno, Sr. and D. DelGiorno Jr. each had 60,000 stock
options (originally granted in 1995) repriced from $15.00 to $.10 (since
exercised). In October, 1998, D. DelGiorno Sr. and D. DelGiorno, Jr. each
had 68,100 stock options (originally granted in 1995) repriced from $5.00
to $2.00 (see Note 5).
(2) Options were granted in April,1998, at prices ranging from $4.00 to $6.00
per share, expiring December 31, 2000. In October, 1998 these options were
repriced to $2.00 and extended to December 31, 2002.
(3) All of Mr Warman's options were repriced to $2.00 in 1998, when the market
price was $1.75 per share.
(4) Bonus amounts reflected above for 1997, were in the form of stock options
and the Company's common stock, which were subject to forfeiture and /or
restrictions.
(5) Certain options were repriced in 1997and all employee options were repriced
to $2.00 per share in 1998. (Except for any options which have an exercise
price below $2.00).
(6) Bonus' granted in 1998 for Messrs. DelGiorno, Sr., DelGiorno, Jr., Aronson
and Coppola were in the form of restricted shares of Softworks common
stock.
25
(7) In October, 1998, Mr. Pellicano had 10,000 options (originally granted in
1995) repriced from $15.00 to $2.00.
(8) During 1999, the Company granted options to Messrs. DelGiorno,Sr.,
DelGiorno,Jr., Pellicano, Aronson and Coppola, in the amounts of 200,000,
200,000, 100,000, 150,000 and 50,000, respectively. These options are fully
vested, exercisable at $1.25 per share and expire November 30, 2001.
Additionally, during 1999, Mr. Coppola was granted 10,000 options
exercisable at $1.34 and expire December 31, 2002.
(9) The Company granted cash bonuses in 1999, to Messrs. DelGiorno,Sr.,
Pellicano, Aronson and Coppola in the amounts of $750,000, $272,000,
$150,000 and $218,000, respectively. Mr. Pellicano and Mr. Coppola received
$45,000 and $218,000, respectively, in the form of the Company's Common
Stock. The balance of 1999 bonuses are in the form of restricted shares of
Softworks Common Stock.
Option/SAR Grants in Last Fiscal Year
In 1999, Messrs. DelGiorno, Sr., DelGiorno, Jr., Aronson, Pellicano and
Coppola were granted vested stock options expiring November 30, 2001, which are
exercisable at $1.25 per share as follows: 200,000, 200,000, 150,000, 100,000
and 50,000, respectively.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Value
The following table set forth certain information with respect to stock
option exercises by the named Executive Officers during the fiscal year ended
December 31, 1999, and the value of unexercised options held by them at fiscal
year-end.
Number of Value of
Unexercised Unexercised
Options at In-the-Money
Fiscal Year Options at
End Fiscal Year End (1)
----------------------- -------------------------
Shares Acquired Value
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ---------------- ------------ ----------- ------------- ----------- ------------
Daniel DelGiorno, Sr. - - 458,100 - $ 87,600 $ -
Daniel DelGiorno, Jr. - - 618,100 - 87,600 -
Russell Pellicano - - 135,000 - 43,800 -
Ed Warman - - 53,600 - - -
George Aronson - - 300,000 - 65,700 -
Anthony Coppola - - 165,750 - 25,380 -
Footnotes
(1) Market Value of the Company's Common Stock on December 31, 1999, was
$1.688. In-the-money options at year end were as follows: Messrs.
DelGiorno, Sr.- 200,000; DelGiorno,Jr.- 200,000, Pellicano - 100,000;
Aronson - 150,000 and Coppola - 60,000.
26
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
- ----------------------------------------------------------
The following table sets forth certain information as of March 10, 2000,
with respect to the beneficial ownership of the Company's Common Stock by all
persons known by the Company to be the beneficial owners of more than 5% of its
outstanding shares of Common Stock, by directors who own Common Stock and all
officers and directors as a group:
Common Stock % of
Beneficially Outstanding
Name of Beneficial Owner Owned Shares (2)
- ------------------------ ------------- -------------
Daniel Del Giorno, Sr. (1)(3)(4) 458,100 2.2%
Daniel Del Giorno, Jr. (1)(3)(5)(6) 625,326 3.0
Russell Pellicano (1)(7) 196,500 1.0
Jack S. Beige (1) (8) 140,000 *
Augustin Medina (1) (12) 149,764 *
George Aronson (1)(10) 403,000 1.9
Anthony Coppola (1)(13) 203,875 1.0
Ed Warman(1)(9) 158,600 *
Bo-Tel LLC(11) 2,220,000 10.8
All Officers and Directors as a
Group (7 persons) 2,335,165 10.4%
- -------
* = Less than 1%
Footnotes
(1) The address of the holder is 80 Orville Drive, Suite 200, Bohemia, New York
11716.
(2) Based upon 20,529,245 shares outstanding as of March 9, 2000, plus
outstanding options exercisable within 60 days owned by above named
parties.
(3) Includes shares held by his spouse.
(4) Includes 258,100 options exercisable at $2.00 per share, and 200,000
options exercisable at $1.25 per share.
(5) Includes 418,100 options exercisable at $2.00 per share, and 200,000
options exercisable at $1.25 per share.
27
(6) Daniel DelGiorno, Jr. has majority control of Tech Marketing Group Corp.,
which owns 17,405 shares of the Company. (The Company has no business
dealings with Tech Marketing Group Corp.)
(7) Includes 35,000 options exercisable at $2.00 per share, and 100,000 options
exercisable at $1.25 per share.
(8) Includes 250, 500 and 100,000 options exercisable at $2.00 and $1.75 and
$1.25 per share, respectively.
(9) Includes 53,100 and 500 options in the Company (exercisable at $2.00 and
$1.75 per share respectively).
(10) Includes 150,000 options exercisable at $2.00 per share and 150,000 options
exercisable at $1.25 per share.
(11) Includes 320,000 shares of the Company's Common Stock owned by a party
which has a financial interest in Internet Tracking & Security Ventures,
LLC.
(12) Includes 100,000 options exercisable at $1.25 per share.
(13) Includes 105,250, 10,000, 500 and 50,000 options exercisable at $2.00,
$1.34, $1.75 and $1.25, respectively.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The Company has, from time to time advanced funds to Messrs. Dan DelGiorno,
Sr. and Dan DelGiorno, Jr. with such advances being payable upon demand and bear
interest at the rate of 7% per annum. At December 31, 1999, the loan balance due
from these two officers was approximately $1,663,000. Additionally, at December
31, 1999, a loan balance of approximately $159,000 was due from Mr. Aronson.
During the first quarter of 2000, Messrs. Dan DelGiorno Sr. and Dan DelGiorno,
Jr. repaid approximately $1,547,000 consisting of $624,000 and 410,179 shares of
the Company's Common Stock, valued at $923,000. Mr. Aronson repaid his loan in
full.
During 1999, the Company paid an outside Director approximately $170,000
for legal fees and consulting services. Additionally the Company granted 25,000
shares of restricted stock, valued at $45,000 and 100,000 stock options.
During 1999, the Company paid an outside Director consulting fees of
$56,000. Additionally the Company granted 25,000 shares of restricted stock,
valued at $45,000 and 100,000 stock options.
In 1999, the Company's general counsel received cash compensation of
$689,000, and 75,000 shares of Softworks Common Stock and 150,000 Company stock
options valued at $395,000, for business and financial consulting services
rendered.
In 1999, a consultant (who also has a financial interest in ITSV) received
cash compensation of $215,000 and 117,000 shares of Softworks Common Stock
valued at $423,000 for various consulting services.
SJ & Associates, Inc.
In July, 1998, and during 1999, the Company entered into various agreements
with SJ & Associates, Inc. (including its affiliates are collectively referred
to as "SJ") for various services which provide for the following compensation:
-- SJ received minimum annual compensation pursuant to several agreements
aggregating $227,000 per annum through, November, 1999. Commencing in
December 1999, SJ receives minimum annual compensation pursuant to two
agreements aggregating $276,000 per annum. The agreements expire in
November 2004. SJ also consulted with Softworks in various capacities
throughout 1999, and received compensation directly from Softworks.
-- In 1999, SJ was retained to assist the Company in its efforts to sell
shares in Softworks second public offering (Note 3). The Company
issued 200,000 contract options to acquire restricted shares of
Softworks Common Stock owned by the Company, exercisable at $1.00 per
share, which vested upon completion of Softworks second public
offering. The options were exercised in June, 1999.
28
-- In November, 1999, and February, 1999, 100,000 shares of Softworks
Common Stock and 80,000 shares of the Company's Common Stock,
respectively, were issued to SJ as payment for various consulting
matters. Additionally, SJ was awarded 75,000 fully vested options of
the Company's Common Stock exercisable at $1.25 per share and expiring
November 30, 2001. The stock and options were valued at $621,000 and
were charged to operations in 1999.
-- During 1999, the Company paid an affiliate of SJ $700,000 relating to
certain multi-media Internet technology.
-- In 1999, the Company entered into an agreement with SJ to provide
assistance to the Company in locating, negotiating and ultimately
closing a transaction for the sale of the Company's entire remaining
holdings of Softworks, the sale of the Company's ComputerCOP
technology and related investment in NetWolves Corporation (Note 18).
The Company agreed to pay SJ 4.0% of the value of the transactions.
Accordingly, in the first quarter of 2000, SJ earned $2,458,000 with
respect to the Softworks transaction and $1,420,000 with respect to
the transaction with NetWolves Corporation.
29
PART IV
Item 14. (a) 1. FINANCIAL STATEMENTS Page
- -------------------------------------- ----
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets
December 31, 1999 and 1998 F-2
Consolidated Statements of Operations
Years Ended December 31, 1999, 1998 and 1997 F-3
Consolidated Statement of Shareholders' Equity
Years Ended December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997 F-5
Notes To Consolidated Financial Statements F-6
14. (a). 2. - SCHEDULES
- -----------------------
NONE
14. (a). 3.- EXHIBITS
- ----------------------
2.1 Reorganization Agreement dated April 22, 1989. (Incorporated by reference
to Exhibit 2(a) to the Company's Form S-1 Registration Statement) (1)
2.2 Merger Agreement between Computer Concepts Investment Corp. and RAMP
Associates Inc. dated October 31, 1990. (Incorporated by reference to
Exhibit 2(b) to the Company's Form S-1 Registration Statement)(1).
2.3 Merger Agreement between Computer Concepts Corp. and Softworks, Inc.
(Incorporated by reference to Exhibit 2(a) to the Company's Form 8-K filed
on October 29, 1993).
2.4 Merger Agreement dated December 31, 1994, between the Company, its wholly
owned subsidiary, CCC/MapLinx Corp., and MapLinx Corp. and Merit
Technology, Inc.(Incorporated by reference to Exhibit 10(a) to the
Company's Annual Report on Form 10-K/A for the year ended December 31,
1994).
3.1(i)(a) Certificate of Incorporation, as amended. (Incorporated by reference
to Exhibit 3(a) of Form S-1 Registration Statement).(1)
(b) Certificate of Amendment (Change in Name) (Incorporated by reference
to Exhibit 3(a) of Form S-1 Registration Statement).(1)
(c) Certificate of Amendment (Change in Name) (Incorporated by reference
to Exhibit 3(a) of Form S-1 Registration Statement).(1)
(d) Certificate of Amendment (Authorizing Increase in Shares of Common
Stock) (Incorporated by reference to Exhibit 3 (i) (d) to Form 10-K
for the year ended 1995).
(e) Certificate of Amendment (Authorizing one for ten reverse-stock split
as of March 30, 1998).
3.2(ii) By-Laws. (Incorporated by reference to Exhibit 3(d) to the Company's
Form S-1 Registration Statement).(1)
4.1 Form of Common Stock Certificate. (Incorporated by reference to Exhibit 4
to the Company's Form S-1 Registration Statement).(1)
4.2 Computer Concepts Directors, Officers and Consultants 1993 Stock Option
Plan (Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8 filed on June 28, 1995).
30
4.3 Computer Concepts Employees 1993 Stock Option Plan (Incorporated by
reference to Exhibit 4.2 to the Company's Registration Statement on Form
S-8 filed on June 28, 1995).
4.4 Computer Concepts 1995 Incentive Stock Plan (Incorporated by reference
to Exhibit 5 to the Company's Proxy Statement filed on January 29, 1996).
9 Voting Trust Agreement among Computer Concepts Corp., Softworks, Inc. and
Trustees dated August 4, 1998 (Incorporated by reference to subsidiary
Softworks, Inc. Registration Statement filed on Form S-1, SEC File No.
333-53939 declared effective August 4, 1998).
10.1 Lease Extension Agreement between Atrium Executive Center and the Company
(Incorporated by reference to Exhibit 10 (g) (ii) to the Company's Annual
Report on Form 10 - K for the year ended December 31, 1993).
10.2 Agreement between Software Publishing Corp. and the Company dated June 14,
1994. (Incorporated by reference to Exhibit 10(a) to the Company's Form 8-K
filed on July 1, 1994).
10.3 Asset Purchase Agreement dated June 30, 1998, between the Company and
Internet Tracking and Security Ventures, LLC. (Incorporated by reference to
Form 8-K dated July 15, 1998).
10.4 Offer to Purchase dated December 23, 1999, among Eagle Merger Corp., EMC
Corporation and Computer Concepts Corp. (Incorporated by reference to
Exhibit 1 to the Company's Form 8-K filed on February 9, 2000).
10.5 Indemnification Agreement dated December 21, 1999, among EMC Corporation,
Eagle Merger Corp. and Computer Concepts Corp. (Incorporated by reference
to Exhibit 2 to the Company's Form 8-K filed on February 9, 2000).
10.6 Indemnification Agreement dated December 21, 1999, among Softworks, Inc.
and Computer Concepts Corp. (Incorporated by reference to Exhibit 3 to the
Company's Form 8-K filed on February 9, 2000).
31
10.7 Escrow Agreement dated December 21, 1999, among EMC Corporation, Eagle
Merger Corp., Computer Concepts Corp. and State Street Bank and Trust
Company, Inc. as escrow agent. (Incorporated by reference to Exhibit 4 to
the Company's Form 8-K filed on February 9, 2000).
10.8 Exchange Agreement, dated February 10, 2000, among Computer Concepts Corp.,
NetWolves Corporation and ComputerCOP Corp. (Incorporated by reference to
Exhibit 10.1 to the Company's Form 8-K filed on March 2, 2000).
10.9 Voting Trust Agreement dated February 10, 2000, among Computer Concepts
Corp., NetWolves Corporation and Walter M. Groteke. (Incorporated by
reference to Exhibit 10.2 to the Company's Form 8-K on March 2, 2000).
10.10Registration Rights Agreement between Computer Concepts Corp. and
NetWolves Corporation. (Incorporated by reference to Exhibit 10.3 to the
Company's Form 8-K filed on March 2, 2000).
16.1 Dismissal of Independent Auditors. (Incorporated by reference to Form 8-K
dated May 29, 1997).
16.2 Engagement of New Independent Auditors. (Incorporated by reference to Form
8-K dated June 3, 1997).
(1)Filed with Form S-1, Registration Statement of Computer Concepts Corp.
Reg. No 3-47322 and are incorporated herein by reference.
14. (b) REPORTS ON FORM 8-K
- ---------------------------
None.
14. (c) THE FOLLOWING EXHIBITS ARE FILED HEREWITH:
- --------------------------------------------------
(23) (a) Consent of Daniel B. Kinsey, P.C.
(23) (b) Consent of Hays & Company
32
SIGNATURES
----------
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMPUTER CONCEPTS CORP.
/s/ Daniel DelGiorno
-------------------------
Daniel DelGiorno, Jr.,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
NAME TITLE DATE
/s/ Daniel DelGiorno
_____________________ President, Treasurer, March 13, 2000
Daniel DelGiorno, Jr. Chief Executive Officer,
Director
/s/ Daniel DelGiorno
_____________________ Director, March 13, 2000
Daniel DelGiorno, Sr. Assistant Secretary
/s/ Jack S. Beige
_____________________ Director March 13, 2000
Jack S. Beige
/s/ Russell Pellicano
_____________________ Director, Secretary March 13, 2000
Russell Pellicano
/s/ George Aronson
_____________________ Chief Financial Officer March 13, 2000
George Aronson
33
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
CONTENTS
--------
INDEPENDENT AUDITOR'S REPORT...........................................F-1
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998.................................... F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1999, 1998 and 1997.................. F-3
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Years ended December 31, 1997, 1998 and 1999.................. F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997.................. F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................ F-6 F-39
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Board of Directors and Shareholders
Computer Concepts Corp.
Bohemia, New York
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying consolidated balance sheets of Computer
Concepts Corp. and subsidiaries (the "Company") as of December 31, 1999 and
1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Computer Concepts
Corp. and subsidiaries as of December 31, 1999 and 1998, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1999 in conformity with generally
accepted accounting principles.
s/ Hays & Company
February 18, 2000
New York, New York
COMPUTER CONCEPTS CORP. AND SUBSIDIAREIS
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
------------
1999 1998
---- ----
ASSETS
Current assets
Cash and cash equivalents $ 1,852 $ 8,176
Accounts receivable, net of allowance for
sales returns and doubtful accounts of
$493 and $1,350 in 1999 and 1998, respectively 443 27,412
Installment receivables - 16,406
Investment in Softworks, held for sale 10,329 -
Assets held for sale ComputerCOP 3,876 -
Inventories - 419
Prepaid expenses and other current assets 865 10,022
Advances to officers 1,822 1,001
Deferred tax assets, current 9,197 306
-------- --------
Total current assets 28,384 63,742
Installment accounts receivable, due after one year - 7,908
Property and equipment, net 1,345 3,564
Software costs, net - 5,594
Excess of cost over fair value of net assets acquired,
net of accumulated amortization of $4,239 in 1998 - 8,610
Other assets 295 2,000
Deferred tax assets, noncurrent - 484
-------- --------
$ 30,024 $ 91,902
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 5,442 $11,428
Current portion of long-term debt 4 6,117
Deferred installment revenue - 7,314
Deferred maintenance revenue 42 9,107
Income taxes payable 50 2,207
-------- --------
Total current liabilities 5,538 36,173
Deferred installment revenue, earned after one year - 7,883
Deferred maintenance revenue, earned after one year - 3,924
Long-term debt, net of current portion - 1,403
-------- --------
Total liabilities 5,538 49,383
-------- --------
Minority interest - 8,503
-------- --------
Commitments and contingencies
Shareholders' equity
Common stock, $.0001 par value;
150,000,000 shares authorized;
20,765,825 and 19,324,839 shares
issued in 1999 and 1998,
respectively; and 20,529,245 and
19,324,839 shares outstanding
in 1999 and 1998, respectively 2 2
Additional paid-in capital 102,868 106,515
Accumulated deficit (77,766) (72,194)
Accumulated other comprehensive loss (225) (307)
-------- --------
24,879 34,016
Common stock in treasury, at cost 236,580
shares in 1999 (393) -
-------- --------
Total shareholders' equity 24,486 34,016
-------- --------
$ 30,024 $91,902
======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
F-2
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Revenue
Software licenses, net $ 7,337 $ 31,795 $ 17,890
Maintenance 3,570 10,503 9,980
Professional services 13,733 19,690 1,868
-------- -------- --------
24,640 61,988 29,738
-------- -------- --------
Cost of revenue
Software licenses 457 1,978 1,166
Maintenance 549 1,392 900
Professional services 12,038 17,648 1,597
-------- -------- --------
13,044 21,018 3,663
-------- -------- --------
Gross margin 11,596 40,970 26,075
-------- -------- --------
Operating expenses
Research and development 10,525 11,193 8,785
Sales and marketing 17,417 28,496 17,033
General and administrative 11,472 12,718 9,111
Amortization and depreciation 4,738 4,207 2,386
Unusual charges, net - - 686
-------- -------- --------
44,152 56,614 38,001
-------- -------- --------
Operating loss (32,556) (15,644) (11,926)
Other income (expense)
Gain on partial disposition of
Softworks 17,107 28,785 -
Equity in earnings of Softworks 512 - -
Gain on sale of net assets of
subsidiary - - 813
Interest income (expense), net 316 (485) 16
Interest charge pertaining to the
discount on convertible debentures - - (1,288)
Minority interest in earnings of
Softworks (46) (1,361) -
-------- -------- --------
(Loss) income before benefit
(provision) for income taxes (14,667) 11,295 (12,385)
Benefit (provision) for income taxes 9,095 (1,748) -
-------- -------- --------
Net (loss) income $ (5,572) $ 9,547 $(12,385)
======== ======== ========
Basic net (loss) income per share $ (0.27) $ 0.58 $ (1.11)
======== ======== ========
Diluted net (loss) income per share $ (0.27) $ 0.56 $ (1.11)
======== ======== ========
Basic weighted average common shares
outstanding 20,455 16,523 11,163
======== ======== ========
Diluted weighted average common shares
outstanding 20,455 17,031 11,163
======== ======== ========
The accompanying notes are an integral
part of these consolidated financial
statements.
F-3
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(in thousands)
Accumulated
Additional other Total
Common stock paid-in Accumulated comprehensive Treasury shareholders' Comprehensive
Shares Amount capital deficit loss Stock equity income (loss)
------ ------ ----------- ----------- -------------- -------- -------------- --------------
Balance, January 1, 1997 101,335 $ 10 $ 78,870 $(69,356) $ - $ - $9,524
Net proceeds from sales of
common stock and options
exercised 5,390 1 2,741 - - - 2,742
Common stock and options issued
for services 9,042 1 5,514 - - - 5,515
Conversion of convertible
debentures 11,982 1 4,668 - - - 4,669
Common stock adjustment related
to settlement (302) - (164) - - - (164)
Currency translation
Adjustment - - - - (54) - (54) $ (54)
Marketable securities
valuation adjustment - - - - (180) - (180) (180)
Net loss - - - (12,385) - (12,385) (12,385)
One-for-ten reverse stock split*(114,702) (12) 12 - - - - -
--------- ----- ------ -------- ------ ----- -------- ---------
Total comprehensive loss $(12,619)
=========
Balance, December 31, 1997 12,745 1 91,641 (81,741) (234) - 9,667
Net proceeds from sales of
common stock and options
exercised 2,403 - 5,228 - - - 5,228
Common stock and options issued
for services 2,090 1 3,462 - - - 3,463
Common stock issued for
settlements 187 - 484 - - - 484
Common stock issued for
asset acquisition 1,900 - 5,700 - - - 5,700
Currency translation
adjustment - - - - (13) - (13) $ (13)
Marketable securities
valuation adjustment - - - - (60) - (60) (60)
Net income - - - 9,547 - - 9,547 9,547
--------- ----- ------ -------- ------ ----- -------- ---------
Total comprehensive income $ 9,474
=========
Balance, December 31, 1998 19,325 2 106,515 (72,194) (307) - 34,016
Common stock and options issued
for services 1,441 - 2,353 - - - 2,353
Dividend declared - - (6,000) - - - (6,000)
Acquisition of treasury stock (237) - - - - (393) (393)
Currency translation adjustment - - - - 42 - 42 $ 42
Marketable securities
valuation adjustment - - - - 40 - 40 40
Net loss - - - (5,572) - - (5,572) (5,572)
--------- ------ -------- -------- ------- ------- ------- ---------
Total comprehensive loss $ (5,490)
=========
Balance, December 31, 1999 20,529 $ 2 $102,868 $(77,766) $ (225) $ (393) $24,486
========= ====== ======== ======== ======= ======= =======
* The Board of Directors declared a one-for-ten reverse stock split effective
for shareholders of record as of the close of business on March 27, 1998. Common
stock and additional paid-in capital as of December 31, 1997 have been restated
to reflect this reverse stock split (Notes 2 and 10).
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash flows from operating activities
Net (loss) income $ (5,572) $ 9,547 $(12,385)
Adjustments to reconcile net (loss) income to
net cash used in operating activities
Amortization and depreciation:
Property and equipment 1,020 1,226 965
Software costs 1,940 1,736 832
Excess of cost over fair value of net
assets acquired 1,951 1,762 749
Other 3 2 4
Provision for doubtful accounts - 324 136
Common stock and options issued for services 2,353 3,463 5,515
Softworks common stock exchanged for services 4,814 5,551 -
Non-cash unusual charges - - 336
Non-cash interest charge pertaining to the discount on
convertible debentures - - 1,288
Gain on partial disposition of Softworks (17,107) (28,785) -
Equity in earnings of Softworks (512) - -
Minority interest in earnings of Softworks 46 1,361 -
Gain on sale of net assets of subsidiary - - (813)
Deferred income tax benefit (8,907) (790) -
Other - 75 -
Changes in operating assets and liabilities
Accounts receivable 17,192 (26,276) (9,070)
Inventories 169 (419) 10
Prepaid expenses and other current assets 1,786 947 (967)
Installment accounts receivable 149 (1,428) (2,766)
Other assets 144 (1,293) (457)
Accounts payable and accrued expenses (1,669) 4,411 2,884
Deferred revenue (1,399) 8,508 6,802
Income taxes payable (2,043) 2,207 -
--------- -------- --------
Net cash used in operating activities (5,642) (17,871) (6,937)
--------- -------- --------
Cash flows from investing activities
Expenditures for property and equipment (1,499) (2,721) (1,455)
Software development and technology purchases (230) (900) (1,559)
Proceeds from the license of technology 400 - -
Reduction in cash resulting from excluding Softworks
from the consolidated financial statements (6,759) - -
Proceeds from the sale of net assets of subsidiary, net - - 230
Advances (to) from officers, net (821) 175 (388)
Additional consideration paid for Softworks
and MapLinx acquisitions - (678) (523)
Proceeds from the sale of Softworks common stock 17,676 19,419 -
--------- -------- --------
Net cash provided by (used in) investing
activities 8,767 15,295 (3,695)
--------- -------- --------
Cash flows from financing activities
Net proceeds from sales of common stock and options exercised - 5,228 2,742
Net proceeds from sale of debenture - 1,925 3,381
Acquisition of treasury stock (393) - -
Payment of dividend (6,000) - -
Repayment of debenture - (2,000) -
(Repayments of) advances from long-term debt (3,056) 4,834 (344)
--------- -------- --------
Net cash (used in) provided by financing activities (9,449) 9,987 5,779
--------- -------- --------
Effect of exchange rate changes on cash and cash equivalents - (13) (44)
--------- -------- --------
Net (decrease) increase in cash and cash equivalents (6,324) 7,398 (4,897)
Cash and cash equivalents, beginning of year 8,176 778 5,675
--------- -------- --------
Cash and cash equivalents, end of year $ 1,852 $ 8,176 $ 778
========= ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1 The Company
Computer Concepts Corp. and subsidiaries (the "Company") design, develop,
market and support information delivery software products, including end-user
data access tools for use in personal computer and client/server environments.
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. 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. On January 27, 2000, the Company sold its entire
35% interest to EMC Corporation for approximately $61 million in cash, before
expenses (Notes 3 and 18).
In 1997, the Company created a business unit, "professional services",
which primarily resells computer hardware and for a fee, will assist in the
design, construction and installation of technology systems.
The Company makes use of its proprietary data access technology,
d.b.Express 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 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 (Notes 3 and 18).
2 Significant accounting policies
Common stock split
At the Company's annual shareholders' meeting on November 26, 1997, the
Company's shareholders granted the Board of Directors authority to effect a
reverse stock split. On March 18, 1998, the Board of Directors declared a
one-for-ten reverse stock split effective for shareholders of record as of the
close of business on March 27, 1998. Common stock and additional paid-in capital
as of December 31, 1997 have been restated to reflect this split. Par value and
authorized shares remain unchanged at $.0001 and 150,000,000 shares,
respectively.
The effect of the stock split has been retroactively reflected as of
December 31, 1997 in the consolidated balance sheet and statement of changes in
shareholders' equity, but activity in the statement of changes in shareholders'
equity for 1997 was not restated. All references to the number of common shares
and per share amounts elsewhere in the consolidated financial statements and
related footnotes have been restated to reflect the effect of the split for all
periods presented.
F-6
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2 Significant accounting policies (continued)
Principles of consolidation and equity method.
The consolidated financial statements include the accounts of Computer
Concepts Corp. and its subsidiaries. All significant intercompany transactions
and balances have been eliminated in consolidation. The separate public
ownership of Softworks, Inc. ("Softworks"- see Note 3), which was a majority
owned subsidiary of the Company through March 31, 1999, is reflected in the
consolidated balance sheet and results of operations as minority interest.
Effective April 1, 1999, when the Company's ownership interest in Softworks
was reduced below 50%, the Company began accounting for Softworks using the
equity method of accounting. Under the equity method of accounting, the
Company's proportionate share of Softworks' earnings or losses is included in
the Company's consolidated operating results in a single line item.
Revenue recognition
The Company records revenue in accordance with Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2"), issued by the American Institute of
Certified Public Accountants (as modified by Statement of Position 98-9), which
was adopted in 1998. The adoption of these pronouncements was not material to
the Company's revenue recognition policy for software transactions. Revenue from
the sale of perpetual and term software licenses are recognized, net of
provisions for returns, at the time of delivery and acceptance of software
products by the customer, when collectibility is probable. Through Softworks,
the Company provided customers with the option to pay for license fees in one
lump sum or generally in equal annual installments over extended periods of
time, generally three to five years. In such instances, the Company did not
consider sales contracts with amounts due for periods greater than one year from
delivery, fixed and determinable, and accordingly recognized such amounts as
revenue when they became due. Maintenance revenue that is bundled with an
initial license fee is deferred and recognized ratably over the maintenance
period. Amounts deferred for maintenance are based on the fair value of
equivalent maintenance services sold separately.
Revenue from professional services, such as the reselling of computer
hardware, systems management services, training and staff augmentation, is
recognized as the units are shipped or the services are performed. Construction
revenue is recognized using the percentage of completion method based on the
cost incurred relative to total estimated costs.
Cost of revenue
Cost of revenue in the consolidated financial statements of operations is
presented exclusive of amortization and depreciation shown separately.
Reporting of comprehensive income (loss)
In January, 1998, the Company began reporting comprehensive income (loss)
in accordance with Statement of Financial Accounting Standards No. 130 -
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes additional
disclosure requirements, but does not effect the measurement of results of
operations. Accordingly, the Company displays other items of comprehensive
income (loss) in the accompanying consolidated statement of shareholders'
equity.
F-7
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2 Significant accounting policies (continued)
Installment accounts receivable
Through Softworks, perpetual license agreements were executed under
installment payment plans generally with annual payment terms of three to five
years. Revenue and related sales commissions were deferred and recognized as
payments became due.
Property and equipment
Property and equipment are stated at cost and depreciated on a
straight-line basis over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the lives of the respective leases or
the service lives of the related assets, whichever is shorter. Capitalized lease
assets are amortized over the shorter of the lease term or the service life of
the related assets.
Software costs
Costs associated with the development of software products are generally
capitalized once technological feasibility is established. Purchased software
technologies are recorded at cost and software technologies acquired in purchase
business transactions are recorded at their estimated fair value. Software costs
associated with technology development and purchased software technologies are
amortized using the greater of the ratio of current revenue to total projected
revenue for a product or the straight-line method over its estimated useful
life. Amortization of software costs begins when products become available for
general customer release. Costs incurred prior to establishment of technological
feasibility are expensed as incurred and reflected as research and development
costs in the accompanying consolidated statements of operations.
Excess of cost over fair value of net assets acquired
The excess of cost over the fair value of net assets acquired in purchased
business transactions is amortized on a straight-line basis over periods ranging
from three to ten years.
Impairment of long-lived assets
The Company reviews its long-lived assets, including goodwill resulting
from business acquisitions, capitalized software costs and property and
equipment, for impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be fully recoverable. To
determine if impairment exists, the Company compares the estimated future
undiscounted cash flows from the related long-lived assets to the net carrying
amount of such assets. Once it has been determined that an impairment exists,
the carrying value of the asset is adjusted to fair value. Factors considered in
the determination of fair value include current operating results, trends and
the present value of estimated expected future cash flows.
Income taxes
The Company accounts for income taxes using the liability method. The
liability method requires the determination of deferred tax assets and
liabilities based on the differences between the financial statement and income
tax bases of assets and liabilities, using enacted tax rates. Additionally, net
deferred tax assets are adjusted by a valuation allowance if, based on the
weight of available evidence, it is more likely than not that some portion or
all of the net deferred tax assets will not be realized.
F-8
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2 Significant accounting policies (continued)
Basic and diluted net income (loss) per share
The Company displays earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS
128 requires dual presentation of basic and diluted earnings per share. Basic
earnings per share includes no dilution and is computed by dividing net income
(loss) available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share include the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock.
Cash and cash equivalents
The Company considers all investments with original maturities of three
months or less to be cash equivalents. Included in cash and cash equivalents at
December 31, 1998 is a $1,000,000 certificate of deposit that is being used to
collateralize a stand by letter of credit in favor of one of the Company's
professional services vendors.
Foreign currency
The functional currency for all of the Company's foreign operations through
Softworks was the subsidiary's local currency. Assets and liabilities of foreign
subsidiaries were translated into U.S. dollars at year-end exchange rates and
revenue and expense accounts and cash flows were translated at average exchange
rates during the period. Gains and losses resulting from translation were
recorded as accumulated other comprehensive income in shareholders' equity.
Transaction gains and losses were recognized in the consolidated statements of
operations as incurred.
Included in cash and cash equivalents at December 31, 1998, is
approximately $464,000, respectively, of cash denominated in various foreign
currencies.
Marketable securities
Marketable securities, which are classified as "available for sale" (except
for the Company's investment in Softworks accounted for using the equity method
of accounting), are valued at fair market value. Unrealized gains or losses are
recorded net of income taxes as accumulated other comprehensive income in
shareholders' equity, whereas realized gains and losses are recognized in the
Company's statements of operations using the first-in, first-out method. The
fair market value of marketable securities approximates $52,000 and $10,000 at
December 31, 1999 and 1998, respectively, and is included in "Prepaid expenses
and other current assets."
Advertising and promotional costs
Advertising and promotional costs are reported in "Sales and marketing"
expense in the consolidated statements of operations and are expensed when
incurred. Prepaid advertising costs, which were included in "Prepaid expenses
and other current assets" in the consolidated balance sheets (see Note 4),
consisted of prepayments for personal appearances and promotion of ComputerCOP
(see Note 3). These assets were expensed in 1999 and 1998 as the related
services were performed.
F-9
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2 Significant accounting policies (continued)
Pre-opening expenses
During 1998, the Company adopted Statement of Position 98-5, "Reporting on
the Cost of Start- Up Activities," issued by the American Institute of Public
Accountants. The adoption of this statement requires the expensing of
pre-opening costs as incurred. The Company expensed approximately $300,000 for
1998 start-up activities associated with Softworks' German subsidiary. The
adoption had no impact on prior years.
Reclassifications
Certain reclassifications have been made to the consolidated financial
statements shown for the prior years in order to have them conform to the
current year's classifications.
Concentrations and fair value of financial instruments
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash investments and
accounts receivable. At December 31, 1999, the Company has cash investments of
approximately $1,585,000 at one bank. The balance of the Company's cash
investments are held at various financial institutions, which limits the amount
of credit exposure to any one financial institution. Concentrations of credit
risk with respect to accounts receivable are not material at December 31, 1999.
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. Unless
otherwise disclosed, the fair value of financial instruments approximates their
recorded value.
Use of estimates
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the consolidated financial
statements, as well as the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
3 Acquisitions and dispositions
Internet Tracking & Security Ventures, LLC
On June 30, 1998, pursuant to an Asset Purchase and Sale Agreement, the
Company acquired certain software and related sales and marketing rights from
Internet Tracking & Security Ventures, LLC ("ITSV") in exchange for 1,900,000
restricted shares of the Company's common stock and 1,000,000 restricted shares
of common stock of the Company's then wholly owned subsidiary, Softworks. The
acquired software program, known as "ComputerCOP," is designed to inform non
computer literate parents, guardians and alike, what materials, or possible
threats to the safety and well being their children or others have been
accessing over the internet, such as objectionable web sites, text, pictures,
screens, electronic mail, etc. The Agreement also includes the rights to the use
of Richard "Bo" Dietl's name in conjunction with the promotion and endorsement
of the software as well as appearances by Mr. Dietl in support of the software
in regional and national marketing campaigns. Orders for the initial version of
the product began shipping in November, 1998.
F-10
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3 Acquisitions and dispositions (continued)
Internet Tracking & Security Ventures, LLC (continued)
The acquisition has been valued at an aggregate of $12,210,000 determined
as follows: 1,900,000 restricted shares of the Company have been valued at
$5,700,000 and the 1,000,000 restricted shares of Softworks' common stock have
been valued at $6,510,000 (based upon the ultimate net proceeds to the selling
shareholders in Softworks' initial public offering which became effective August
4, 1998). The $12,210,000 purchase price has been allocated to the fair value of
the assets acquired at June 30, 1998, based upon a written valuation from an
independent investment banking firm. Accordingly, $2,700,000 has been allocated
to "Software costs", $4,150,000 has been recorded as "Prepaid expenses and other
current assets" and $5,360,000 has been recorded as "Excess of cost over fair
value of net assets acquired".
In March 1999, the Company sold certain rights to license ComputerCOP to a
marketing company (Bo-Tel, Inc.) for $400,000. The license rights are limited to
granting a specified original equipment manufacturer of personal computers the
right to embed the software in its computers for sale to the general public.
Bo-Tel, Inc. is an affiliate of ITSV, and accordingly, this sale has been
accounted for as a reduction of the cost of the assets acquired from ITSV.
The software costs are amortized using the greater of the ratio of current
revenue to the total projected revenue for the software or the straight-line
method using an estimated useful life of 30 months. The prepaid expenses were
expensed as the related services were performed (including, but not limited to,
appearances, promotion and endorsement). The excess of cost over fair value of
net assets acquired, which primarily relate to the use of the name "Bo Dietl"
are amortized using the straight-line method over 36 months.
In February 2000, the Company sold its ComputerCOP technology to NetWolves
Corporation, an unrelated publicly traded corporation (see Note 18). 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.
Softworks, Inc.
In October 1993, the Company completed the acquisition of all of the common
stock of Softworks, a privately held Maryland company founded in 1977. Softworks
provided systems management software products for mainframe data centers. The
purchase price approximated $5,700,000, which included $2,000,000 in cash and
100,000 shares of the Company's restricted common stock. The acquisition was
accounted for using the purchase method of accounting. Accordingly, assets and
liabilities were recorded at their fair values as of September 1, 1993, the
effective date of the acquisition, and the operations of Softworks were included
in the Company's consolidated statements of operations since that date. The
excess of cost over the fair value of net assets acquired, which originally
approximated $5,484,000, was being amortized over ten years. The agreement also
required the Company to make additional contingent purchase consideration
payments of up to $2,000,000, which was paid through December 31, 1998 and was
treated as additional consideration in connection with the acquisition.
F-11
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3 Acquisitions and dispositions (continued)
Softworks, Inc. (continued)
Prior to June 30, 1998, Softworks was a wholly owned subsidiary of the
Company with 14,083,000 shares of common stock outstanding. On August 4, 1998,
Softworks completed an initial public offering of 4,200,000 shares of its common
stock at a price of $7.00 per share (less underwriting fees and commissions of
$0.49 per share) as follows: 1,700,000 shares of common stock were sold by
Softworks; 1,000,000 shares were sold by ITSV and 1,500,000 shares were sold by
the Company.
In addition to the initial public offering discussed above, the following
transactions, with respect to Softworks common stock owned by the Company, were
recorded in 1998:
- -- On July 1, 1998, the Company exchanged 100,000 restricted shares of
Softworks common stock to a member of its Internet Strategy Committee, (who
also served as Chairman of the Board of Softworks) for services rendered,
resulting in a charge to operations of $525,000.
- -- The Company exchanged 136,000 restricted shares of Softworks common stock
to the Company's general counsel for services rendered, resulting in a
charge to operations of $276,000.
- -- The Company exchanged 768,100 restricted shares of Softworks common stock
to three of the Company's executive officers for services rendered,
resulting in a charge to operations of $2,777,000.
- -- The Company exchanged 133,000 restricted shares of Softworks common stock
to a consultant (who also has a financial interest in ITSV) for business
advisory services rendered, resulting in a charge to operations of
$270,000.
- -- The Company exchanged 471,000 restricted shares of Softworks common stock
to various consultants and employees for services rendered, resulting in a
charge to operations of $1,068,000.
- -- The Company exchanged 269,600 restricted shares of Softworks common stock
to two consultants (including 167,300 shares to S.J. & Associates, Inc.,
"SJ" see Note 13) related to separate contracts for services to be rendered
over twelve months commencing In October 1998. The $635,000 value of these
shares was expensed over the terms of the contracts.
- -- In December 1998, the Company sold 1,000,000 restricted shares of Softworks
common stock in a private placement in exchange for a $5,000,000 full
recourse promissory note. The note, which is included in "prepaid expenses
and other current assets" at December 31, 1998, was timely paid in full in
the first quarter of 1999.
F-12
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3 Acquisitions and dispositions (continued)
Softworks, Inc. (continued)
The total value of the Softworks common stock exchanged by the Company for
the above-described services in 1998 was $5,551,000. As a result of the ITSV
asset acquisition, the Softworks initial public offering and the various
transactions described above, the Company's ownership interest in Softworks was
reduced to 54.5% as of December 31, 1998. Accordingly, the Company recognized a
gain of $28,785,000 representing the difference between the fair value of the
Softworks common stock exchanged or sold, and the related adjusted carrying
value of the Company's investment in Softworks (pursuant to Staff Accounting
Bulletins 51 and 84).
The following additional transactions were recorded in 1999:
- -- The Company exchanged 529,000 restricted shares of Softworks common stock
to three of the Company's executive officers for services rendered in 1999
resulting in a charge to operations of $2,117,000.
- -- In exchange for services rendered by several consultants in 1999, the
Company granted options to acquire 80,000 restricted shares of Softworks
common stock owned by the Company that were exercisable at $1.00 per share.
These options were exercised in 1999. The $389,000 value of these options
was charged to operations in 1999.
- -- The Company exchanged 618,600 restricted shares of Softworks common stock
to various employees and consultants (including 117,000 shares to a
consultant with a financial interest in the ITSV) for services rendered in
1999 resulting in a charge to operations of $2,608,000.
- -- 125,000 shares of Softworks common stock, originally issued to a consultant
in 1998, were returned to the Company in 1999, because the services were
not satisfactorily performed. The original $300,000 value of these shares
was credited to operating expenses in 1999.
- -- In June, Softworks completed a second public offering of 3,900,000 shares
of its common stock at a price of $10.50 per share (less underwriting fees
and commissions of $.63 per share) as follows: 1,000,000 shares were sold
by Softworks, 1,256,933 shares were sold by the Company, and 1,643,067
shares were sold by other existing shareholders. In conjunction with the
offering, the Company issued 200,000 contract options to acquire restricted
shares of Softworks common stock owned by the Company to a consultant,
exercisable at $1.00 per share, which vested upon completion of the
offering. The options were exercised in June 1999.
The total value of the Softworks common stock exchanged by the Company for
the above- described services (excluding the 200,000 contract options) in 1999
was $4,814,000. As a result of these transactions, the Company's ownership in
Softworks was further reduced to 35% at December 31, 1999. Accordingly, the
Company recognized a gain of $17,107,000 representing the difference between the
fair value of the Softworks common stock exchanged or sold, and the related
adjusted carrying value of the Company's investment in Softworks (pursuant to
Staff Accounting Bulletins 51 and 84).
In January 2000, the Company sold its remaining interest in Softworks to
EMC Corporation, an unrelated publicly traded corporation, for $10.00 per share
cash (Note 18).
F-13
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3 Acquisitions and dispositions (continued)
Softworks, Inc. (continued)
In April 1999, the Company's ownership of Softworks was reduced below 50%,
and accordingly, commencing April 1, 1999, Softworks' results are accounted for
using the equity method of accounting and are no longer consolidated. Under the
equity method of accounting, the Company's share of Softworks' earnings or
losses is included in the Company's consolidated operating results in a single
line item. Summarized financial information of Softworks for the entire year
ended December 31, 1999, as well as pro forma consolidated financial information
as if Softworks were accounted for using the equity method for all prior periods
presented is as follows (in thousands):
Softworks, Inc.
Summarized Financial Information
Condensed Consolidated Condensed Consolidated Balance Sheet
Statement of Operations
Year ended December 31, 1999 December 31, 1999
---------------------------- ------------------------------------
Revenue $ 54,570 Current assets $ 46,593
Cost of revenue 3,325 Non current assets 27,436
-------- ---------
Gross margin 51,245 $ 74,029
Operating expenses 48,805 =========
---------
Operating income $ 2,440 Current liabilities $ 28,206
=========
Net income $ 1,456 Non-current liabilities 16,506
========= Shareholders' equity 29,317
---------
$ 74,029
=========
F-14
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3 Acquisitions and dispositions (continued)
Softworks, Inc. (continued)
Computer Concepts Corp. and Subsidiaries
Pro Forma Condensed Consolidated Balance Sheet
(Unaudited)
December 31, 1998
Pro Forma Pro Forma
Actual Adjustments Pro Forma Actual Adjustments Pro Forma
------ ----------- --------- ------ ----------- ---------
Assets Liabilities and
Shareholders' equity
Current assets $ 63,742 $ (38,282) $ 25,460 Current liabilities $ 36,173 $(26,501) $ 9,672
Long-term receivables 7,908 (7,908) - Deferred revenue,long-term 11,807 (11,764) 43
Property and
equipment, net 3,564 (2,499) 1,065 Long-term debt 1,403 (1,401) 2
------- -------- -------
Software costs, net 5,594 (3,039) 2,555 Total liabilities 49,383 (39,666) 9,717
Goodwill, net 8,610 (4,143) 4,467
Other assets 2,484 (2,384) 100 Minority interest 8,503 (8,503) -
Investment in Softworks,
equity method - 10,086 10,086 Shareholders' equity 34,016 - 34,016
--------- --------- --------- --------- --------- ---------
$ 91,902 (48,169) $ 43,733 $ 91,902 $(48,169) $ 43,733
========= ========= ========= ========= ========= =========
F-15
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3 Acquisitions and dispositions (continued)
Softworks, Inc. (continued)
Computer Concepts Corp. and Subsidiaries
Pro Forma Condensed Consolidated Statements of Operations
(Unaudited)
Year ended December 31, 1999 Year ended December 31, 1998 Year ended December 31, 1997
----------------------------- ----------------------------- ----------------------------
Pro Forma Pro Forma Pro Forma
Actual Adjustments Pro Forma Actual Adjustments Pro Forma Actual Adjustments Pro Forma
------ ----------- --------- ------ ----------- ---------- ------ ------------ ---------
Revenue $ 24,640 $(10,258) $ 14,382 $ 61,988 $(43,749) $18,239 $29,738 $(26,770) $2,968
Cost of revenue 13,044 (764) 12,280 21,018 (4,251) 16,767 3,663 (1,635) 2,028
-------- --------- -------- -------- --------- ------- -------- --------- -------
Gross margin 11,596 (9,494) 2,102 40,970 (39,498) 1,472 26,075 (25,135) 940
Total operating
expenses 44,152 (9,342) 34,810 56,614 (33,885) 22,729 38,001 (23,269) 14,732
-------- --------- -------- -------- --------- ------- -------- --------- -------
Operating (loss)
income (32,556) (152) (32,708) (15,644) (5,613) (21,257) (11,926) (1,866) (13,792)
Other income
(expense)
Gain on partial
disposition of
Softworks 17,107 - 17,107 28,785 - 28,785 - - -
Interest and other
(expense) income,
net 316 - 316 (485) 240 (245) (459) 44 (415)
Minority interest (46) 46 - (1,361) 1,361 - - - -
Equity in earnings
of Softworks 512 46 558 - 2,621 2,621 - 1,822 1,822
-------- --------- -------- -------- --------- ------- -------- -------- -------
(Loss) income
before benefit
(provision) for
income taxes (14,667) (60) (14,727) 11,295 (1,391) 9,904 (12,385) - (12,385)
Benefit (provision)
for income taxes 9,095 60 9,155 (1,748) 1,391 (357) - - -
--------- --------- -------- -------- --------- ------- -------- --------- ---------
Net (loss)
income $ (5,572) - $ (5,572) $ 9,547 $ - $ 9,547 $ (12,385) $ - $(12,385)
========= ========= ========= ========= ========= ========= ========== ========= =========
F-16
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3 Acquisitions and dispositions (continued)
MapLinx, Inc.
In July 1997, the Company completed a transaction in which it sold all
rights to the underlying software technologies of MapLinx, Inc. (previously a
wholly owned consolidated subsidiary, "MapLinx"). Further, as part of the
transaction, the purchaser acquired all of MapLinx' current assets and assumed
certain of its liabilities. The sales price of approximately $850,000 was
adjusted (reduced) by the excess of MapLinx' current liabilities over current
assets (approximately $380,000), resulting in a net sales price of approximately
$470,000. Approximately $235,000 was paid at closing and a $235,000 note
receivable was issued for the balance (the note receivable was subsequently
collected). As a result, in 1997 the Company recognized an $813,000 gain on the
sale of the net assets of MapLinx. Included in the consolidated financial
statements is $578,000 of net revenue and $323,000 of net loss (excluding the
$813,000 gain on sale) pertaining to MapLinx operations for the year ended
December 31, 1997.
4 Prepaid expense and other current assets
Prepaid expenses and other current assets consist of the following:
December 31,
----------------------------
1999 1998
---- ----
(in thousands)
Prepaid expenses $ 386 $ 1,135
Prepaid advertising - 2,767
Deferred commissions - 839
Notes and loans receivable 427 269
Note receivable sale of Softworks
common stock (Note 3) - 5,000
Other current assets 52 12
-------- --------
$ 865 $10,022
======== ========
Additionally, included in other assets are noncurrent deferred commissions
of $878,000 at December 31, 1998.
F-17
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
5 Property and equipment
Property and equipment consist of the following:
December 31,
Useful life
in years 1999 1998
------------ ---- ----
(in thousands)
Computer equipment and software 3 to 7 $ 3,211 $ 6,485
Furniture and fixtures 5 to 7 390 532
Leasehold improvements 7 - 554
-------- --------
3,601 7,571
Less accumulated depreciation
and amortization (2,256) (4,007)
-------- --------
Property and equipment, net $ 1,345 $ 3,564
======== ========
6 Software costs
Software costs consist of the following:
December 31,
1999 1998
---- ----
(in thousands)
Capitalized software development costs $ 3,775 $ 5,873
Purchased and acquired software technologies - 7,219
------- -------
3,775 13,092
Less accumulated amortization (3,775) (7,498)
-------- --------
Software costs, net 0 $ 5,594
======== ========
In July 1997, Softworks acquired the rights to two technologies (the
"Technology") that complement its existing product solutions. Pursuant to the
software distribution agreement, Sofworks is required to pay a royalty on sales
of the Technology at defined rates subject to minimum annual royalties. An asset
equal to the present value of the minimum annual royalties of $2,160,000 was
recorded as purchased and acquired software technologies and was being amortized
over the five year term of the agreement. The payment obligation was recorded as
long-term debt. The asset and liability were removed from the Company's
consolidated financial statements as part of the de-consolidation of Softworks
(Note 3).
F-18
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
7 Accounts payable and accrued expenses
Accounts payable and accrued expenses consist of the following:
December 31,
------------
1999 1998
---- ----
(in thousands)
Trade accounts payable $ 1,194 $ 4,901
Sales taxes payable 647 657
Accrued payroll and benefits 1,675 888
Commissions payable - 2,373
Other accrued expenses 1,926 2,609
--------- ---------
$ 5,442 $ 11,428
========= =========
8 Long-term debt
Long-term debt consists of the following:
December 31,
------------
1999 1998
---- ----
(in thousands)
Notes payable factor (a) $ - $ 4,167
Purchased software (see Note 6) - 2,462
Capitalized lease obligation (c) 4 771
Notes payable other (c) - 120
--------- ---------
4 7,520
Less current portion of
long-term debt (4) (6,117)
--------- ---------
Long-term debt, net of
current portion $ - $ 1,403
========= =========
(a) During November 1998 the Company entered into an Accounts Receivable
Purchase Agreement with Silicon Valley Financial Services, a division
of Silicon Valley Bank ("Silicon Valley"), whereby the Company from
time to time may, on a full recourse basis, assign some of their
professional services accounts receivable to Silicon Valley. Upon
specific invoice approval by Silicon Valley, an advance of 85% of the
underlying receivable is provided to the Company. The remaining
balance (15%), less an administrative fee of approximately 1/2% plus
interest at the rate of 1-1/2% per month, is paid to the Company once
the customer has paid Silicon Valley. The entire balance due Silicon
Valley was repaid in the first quarter of 1999 and the agreement
expired in November 1999.
F-19
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
8 Long-term debt (continued)
(b) Additionally, in May 1998, the Company obtained approximately
$1,925,000 (net of fees and commissions of approximately $75,000) from
the sale of a debenture. The debenture would have matured on August
28, 1998, and was convertible into Company common stock upon a payment
default. In August 1998, prior to maturity, the Company repaid the
debenture plus interest aggregating approximately $2,460,000.
(c) These obligations primarily related to Softworks and were removed from
the Company's consolidated financial statements as part of the
de-consolidation of Softworks (Note 3).
9 Earnings per share
For 1999 and 1997, outstanding stock options, warrants and other potential
stock issuances have not been considered in the computation of diluted earnings
per share amounts since the effect of their inclusion would be antidilutive. For
1998, the Company's dilutive instruments are "in the money" stock options with
various exercise dates and prices as well as certain contingent stock issuances.
The Company uses the treasury stock method to calculate the effect that the
conversion of the stock options would have on earnings per share ("EPS"). The
following table sets forth the computation of basic and diluted EPS:
Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(in thousands)
Numerator:
Net income (loss) $ (5,572) $ 9,547 $ (12,385)
========= ========= =========
Denominator:
Weighted average shares outstanding
(Denominator for basic EPS) 20,455 16,523 11,163
Effect of dilutive securities
Stock options N/A 477 N/A
Contingent stock issuances N/A 31 N/A
--------- --------- ---------
Denominator for diluted EPS 20,455 17,031 11,163
========= ========= =========
Basic net income (loss) per share $ (0.27) $ 0.58 $ (1.11)
Diluted net income (loss) per share $ (0.27) $ 0.56 $ (1.11)
F-20
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
10 Shareholders' equity
Common stock and convertible debt securities
Year ended December 31, 1999
Pursuant to a Board Resolution adopted in January 1999, the Company was
authorized to repurchase shares of its common stock at times and amounts that
would be in the best interest of the Company. During 1999, 236,580 shares of
common stock were purchased at an average price of $1.66.
Pursuant to a Board Resolution adopted in August 1999, the Company paid on
November 15, 1999, a cash dividend of $6,000,000 (approximately $0.29 per share)
to shareholders of record as of September 30, 1999.
Year ended December 31, 1998
In January 1998, the Company consummated the sale of restricted common
stock under a private placement to accredited investors pursuant to Regulation
D. Proceeds from this sale totaled $1,978,000, net of commissions and fees of
approximately $162,000. Originally, 496,232 shares were sold at a price of
$4.3125 per share. The closing bid price of the Company's common stock, as
stated on the NASDAQ Small Cap Market did not exceed an average of $5.28 for any
five consecutive trading days during the thirty days immediately following the
effective date of the Registration Statement (effective February 6, 1998).
Accordingly, under the terms of this transaction, the Company issued
approximately 281,000 additional shares in April 1998.
Year ended December 31, 1997
During 1997, the Company consummated sales of restricted common stock under
various private placement agreements pursuant to Regulation D and Regulation S,
including sales of convertible debt securities. Proceeds raised from these sales
aggregated $6,123,000, net of commissions and expenses of approximately $769,000
and the discount of $1,288,000 pertaining to the convertible debt. A total of
1,659,773 shares were sold (including 1,198,234 shares related to the
convertible debentures) at prices ranging from $3.00 to $6.50 and a total of
105,696 options were exercised at prices ranging from $.10 to $5.00.
Additionally, 28,265 shares were returned to the Company, pursuant to
adjustments related to valuation guarantees for stock transactions occurring in
prior years. Details of the Regulation D and Regulation S private placements are
as follows:
-- The private placements pursuant to Regulation D contained a valuation
guarantee based on the closing bid price of the Company's common stock
following the effective date of a Registration Statement. The
Registration Statement became effective in January 1998, and as a
result, the Company issued approximately 500,000 additional shares.
F-21
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
10 Shareholders' equity (continued)
Common stock and convertible debt securities (continued)
Year ended December 31, 1997 (continued)
-- Pursuant to Regulation S, the Company received net proceeds of
approximately $3,381,000 (net of commissions and fees of $484,000)
through the sale of non-interest bearing convertible debentures. These
debentures were convertible, at the option of the holder, commencing
45 days from the date of issuance into restricted common stock of the
Company. The convertible debentures had an assured discount of 25%
from the prices of the Company's common stock at various defined
periods. In connection with this discount, the Company recorded a
non-cash interest charge of $1,288,000. All of these convertible
debentures were converted into an aggregate of 1,198,234 shares of the
Company's common stock in 1997.
Transactions with officers, employees and consultants
During the year ended December 31, 1999, the Company issued the following
restricted common stock:
-- As part of a bonus incentive compensation plan, the Company issued
665,500 shares to several non-executive employees for which it
recorded a non cash charge to operations of $1,010,000.
-- Issued 660,491 shares of its common stock to various consultants for
whom it recorded a non cash charge to operations of $1,050,000.
-- In lieu of cash, in January 1999, the Company issued 115,000 shares,
valued at $100,000, for an acquisition of a technology license. This
asset was fully amortized during the year ended December 31, 1999.
During 1998, the Company issued 2,090,000 restricted shares of common stock
to various officers, employees and consultants and recorded a non-cash charge to
operations of $2,208,000 as follows:
-- The Company issued 501,000 shares to SJ (Note 13) for services
rendered in connection with the initial public offering of Softworks,
resulting in a $478,000 charge against the "Gain on partial
disposition of Softworks." SJ also received 224,000 shares for other
services rendered, resulting in a charge to operations of $378,000.
-- The Company issued 182,000 shares to a member of its Internet Strategy
Committee (who now also serves as the Chairman of the Board of
Softworks) for services rendered, resulting in a charge to operations
of $237,000.
-- The Company issued 181,000 shares to its general counsel for services
rendered, resulting in a charge to operations of $146,000.
-- The Company issued 80,000 shares to a consultant for services rendered
to the Company, resulting in a charge to operations of $63,000.
Subsequently, the consultant was elected to the Softworks Board of
Directors.
F-22
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
10 Shareholders' equity (continued)
Transactions with officers, employees and consultants (continued)
-- The Company issued 320,000 shares to a consultant (who also has a
financial interest in ITSV) for business advisory services rendered,
resulting in a charge to operations of $266,000.
-- The Company issued 602,000 shares to various other employees and
consultants for services rendered, resulting in a charge to operations
of $640,000.
During 1997, the Company issued 904,234 shares of common stock (including
the 114,765 shares to HPS discussed below), 811,000 of which are restricted, to
officers, employees and outside consultants. Additionally, in 1997, in lieu of
cash compensation to various officers, employees and consultants, the Company's
Board of Directors granted 138,000 new options and authorized a reduction of the
exercise price of 391,500 outstanding options. The repriced options originally
had exercise prices ranging from $5.00 to $15.00 per share and were reduced to
prices ranging from $0.10 to $10.00 per share. Accordingly, the Company recorded
non-cash charges of approximately $5,515,000 relating to shares and options, as
adjusted for the value of 210,000 canceled options.
During October, 1997, the Company issued 114,765 restricted shares of
common stock (included in the above amounts) to HPS America, Inc. ("HPS") for
settlement of product development costs of approximately $600,000 owed to HPS
and its affiliates. These shares had a valuation guarantee based on the
Company's stock price during the first 30 days immediately following the
effective date of a registration statement (January 6, 1998). The shares were
sold at a value less than the guaranteed amount and the Company settled the
shortfall with a cash payment of approximately $170,000 in the first quarter of
1998.
Stock option plans
On February 19, 1998, the Company's Board of Directors authorized and
adopted a plan for compensation, referred to as the 98 Incentive Stock Option
Plan, which provides for the grant of non-qualified stock options, to officers
and employees of the Company and consultants to the Company, exercisable at or
above the market price on the date of grant. All grants, which have varying
expiration dates, shall be subject to various vesting conditions including
specific performance goals.
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its plans and
recognizes non cash compensation charges related to the intrinsic value of stock
options granted to employees. If the Company had elected to recognize
compensation expense based upon the fair value at the date of grant for awards
under these plans and for Softworks common stock options granted to its
employees (Note 3), consistent with the methodology prescribed by SFAS 123, the
effect on the Company's net income (loss) and net income (loss) per share would
be as follows (in thousands, except per share data):
F-23
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
10 Shareholders' equity (continued)
Stock option plans (continued)
Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(in thousands)
Net income (loss)
As reported $ (5,572) $ 9,547 $ (12,385)
Pro forma $ (6,118) $ 2,968 $ (12,704)
Net income (loss) per share
As reported
Basic net loss per share $ (0.27) $ .58 $ (1.11)
Diluted net loss per share $ (0.27) $ .56 $ (1.11)
Pro forma
Basic net income (loss) per share $ (0.30) $ .18 $ (1.14)
Diluted net income (loss) per share $ (0.30) $ .17 $ (1.14)
The fair value of Company common stock options granted to employees during
1999, 1998 and 1997, approximated $546,000, $4,243,000 and $319,000,
respectively, are estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: (1) expected volatility of
62% to 66% in 1999, 61% to 116% in 1998 and 104% to 144% in 1997, (2) risk-free
interest rates of 5.81% in 1999, 4.09% to 5.56% in 1998 and 5.8% in 1997, and
(3) expected lives of 2 to 3.53 years in 1999, .28 to 4.23 years in 1998 and .44
to 2.15 years in 1997.
The fair value charged to the consolidated financial statements (net of
minority interest) related to Softworks common stock options granted to
employees during 1998, approximated $2,336,000, are estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions: (1) expected volatility ranging from 72% to 130%, (2) risk-free
interest rates of 5.4% to 6.3%, and (3) expected lives ranging from 1.1 to 4.4
years.
F-24
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
10 Shareholders' equity (continued)
Stock option plans (continued)
The Company grants options under multiple stock-based compensation plans
that do not differ substantially in the characteristics of the awards. The
following is a summary of stock option activity for 1999, 1998 and 1997,
relating to all of the Company's common stock plans (shares are in thousands):
Weighted
average
exercise
Shares price
------ ----------
Outstanding at January 1, 1997 2,281 $ 8.20
Granted 529 $ 2.19
Exercised (106) $ 2.48
Forfeited (1,390) $ 11.77
-------
Outstanding at December 31, 1997 1,314 $ 7.83
Granted 6,369 $ 3.24
Exercised (1,103) $ 2.93
Forfeited (3,741) $ 4.68
-------
Outstanding at December 31, 1998 2,839 $ 3.58
Granted 1,870 $ 1.25
Exercised - $ N/A
Forfeited (306) $ 11.54
-------
Outstanding at December 31, 1999 4,403 $ 2.04
=======
At December 31, 1999, a total of 4,282,000 options are exercisable at
various exercise prices: 4,116,000 options are exercisable at prices ranging
from $1.25 to $2.00 per share, 66,000 options at $2.50 to $3.50 and 100,000
options at $6.25 to $25.60. The weighted-average remaining contractual life of
options outstanding at December 31, 1999 is 3.08 years. A total of 4,403,000
shares of the Company's common stock are reserved for options, warrants and
contingencies at December 31, 1999.
At December 31, 1998, a total of 2,771,000 options are exercisable at
various exercise prices: 2,358,000 options are exercisable at prices ranging
from $1.75 to $2.00 per share, 196,000 options at $2.50 to $5.00, and 217,000
options at $5.92 to $46.30. The weighted-average remaining contractual life of
options outstanding at December 31, 1998 is 3.79 years. A total of 2,839,000
shares of the Company's common stock are reserved for options, warrants and
contingencies at December 31, 1998.
F-25
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
10 Shareholders' equity (continued)
Stock option plans (continued)
At December 31, 1997, a total of 1,302,000 options are exercisable at
various exercise prices: 882,000 options are exercisable at prices ranging from
$.10 to $5.00 per share, 290,000 options at $6.00 to $15.00 and 130,000 options
at $20.00 to $46.30. The weighted-average remaining contractual life of options
outstanding at December 31, 1997 is 1.30 years. A total of 1,545,000 shares of
the Company's common stock are reserved for options, warrants and contingencies
at December 31, 1997
Total compensation costs recognized for stock option awards amounted to
$193,000, $1,255,000 and $1,326,000 for the years ended December 31, 1999, 1998
and 1997, respectively. Compensation cost represents the fair value of options
granted to non-employees and the intrinsic value of options granted to
employees.
During October 1998, the Company's Board of Directors authorized a
reduction of the exercise price of 2,234,235 outstanding options to purchase
common stock (issued to employees) to $2.00 per share ($0.25 higher than the
fair market value at the date of the Board action), with an expiration date of
December 31, 2002. The substantial majority of such options were previously
issued at exercise prices ranging from $4.00 to $5.00 per share.
Registration statements/restricted securities
The Company has used restricted common stock for the purchase of certain
companies (Note 3), as compensation to employees and consultants for services
rendered, and has sold restricted common stock in private placements. At
December 31, 1999, approximately 3,769,000 shares of restricted common stock
were issued and outstanding.
On February 11, 1999 the Company filed a registration statement on Form S-8
(No. 333-72203) for 2,262,235 options and 2,230,084 shares of the Company's
common stock which was effective upon filing. The primary purpose of this
registration statement was to register options, which were repriced in October
1998, and shares issued to employees and certain consultants.
On May 15, 1998 the Company filed a registration statement on Form S-8 (No.
333-52875) for 779,148 options and 122,500 shares of the Company's common stock
which was effective upon filing. The primary purpose of this registration
statement was to register shares issued to certain consultants and non-officer
employees.
On January 22, 1998, the Company filed another registration statement on
Form S-1 (No. 333- 44683, effective February 6, 1998). The primary purpose of
this registration statement was to register shares issued in January 1998
pursuant to a private placement.
In December 1997, the Company filed three registration statements: (i) an
amended registration statement on Form S-1 (No. 33-97560, effective January 6,
1998) which amended a registration statement that was originally effective on
August 9, 1996, (ii) a registration statement on Form S-8 (No. 333-42795,
effective upon filing, December 19, 1997), and (iii) a registration statement on
Form S-1 (No. 333-42919, effective January 6, 1998). The primary purpose of
these registration statements was to register outstanding restricted common
stock and shares issuable upon exercise of outstanding options.
F-26
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
11 Income taxes
Through August 4, 1998, the results of the Company's U.S. operations
conducted through its Softworks subsidiary were included in the Company's
consolidated Federal income tax returns. Separate provisions for income taxes
were determined for Softworks' wholly owned foreign subsidiaries that were not
eligible to be included in the U.S. Federal income tax returns. As a result of
the initial public offering of Softworks, the Company's ownership of Softworks
was reduced below 80% and Softworks was no longer eligible to be included in the
Company's consolidated Federal income tax returns. Accordingly, since the future
realization of the Softworks' component of the deferred tax asset ($902,000 as
of August 4, 1998) was no longer uncertain, the related valuation allowance
(with respect to Softworks domestic operations only) was eliminated as of
December 31, 1998. Additionally, 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 18), the Company will recognize a taxable gain
in the first quarter of 2000. Accordingly, the Company reduced its valuation
allowance by $9,197,000 (approximately $7,000,000 of which relates to deferred
tax assets created in previous years) as of December 31, 1999.
The following table summarizes components of the benefit (provision) for
current and deferred income taxes for the years ended December 31, 1999 and
1998:
Year ended December 31,
-----------------------
Benefit (provision) for income taxes
1999 1998
---- ----
Current
United States $ 196 $(2,196)
Foreign - (32)
State and other (8) (306)
------- -------
Total 188 (2,534)
------- -------
Deferred
United States 8,950 632
State and other (43) 154
------- -------
Total 8,907 786
------- -------
$ 9,095 $(1,748)
======= =======
F-27
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
11 Income taxes (continued)
The following table summarizes the significant differences between the U.S.
Federal statutory tax rate and the Company's effective tax rate for financial
statement purposes for the years ended December 31, 1999 and 1998:
Year ended December 31,
-----------------------
1999 1998
---- ----
U.S. Federal statutory tax rate 35.0% (34.0)%
State and local taxes, net of U.S. Federal
tax effect - (6.5)
Non taxable portion of gain related to
Softworks initial public offering - 12.4
Reduction of deferred tax asset
valuation reserve 47.9 7.4
Utilization of net operating loss
carryforward - 7.1
Permanent differences- compensation (12.2) -
Amortization of intangible assets (6.0) -
Other (2.7) (1.9)
------- -------
Effective tax rate 62.0% (15.5)%
======= =======
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are summarized as follows:
Year ended December 31,
-----------------------
1999 1998
---- ----
(in thousands)
Deferred tax assets
Net operating loss carryforwards $ 23,283 $ 23,063
Tax credit carryforward 565 430
Compensation - 731
Fixed and intangible assets 1,710 1,083
Other 280 1,153
-------- --------
25,838 26,460
Deferred tax liabilities
Investment in Softworks, held for sale (2,817) -
-------- --------
23,021 26,460
Valuation allowance (13,824) (25,670)
-------- --------
Deferred tax assets, current $ 9,197 $ 790
======== ========
During 1998, $4,700,000 of net operating loss carry forwards were utilized
to substantially reduce the taxable income resulting from the gain on partial
disposition of Softworks. At December 31, 1999, the Company has net operating
loss carryforwards remaining of approximately $55,000,000 available to reduce
future taxable income. These losses, which expire through 2019, are subject to
substantial limitations as a result of IRC Section 382 rules governing changes
in control. Approximately $30,000,000 of these losses are available to be
utilized in the year 2000. After the year 2000, approximately $2,700,000 of
losses become available each year (subject to, among other things, adjustment
upon further changes in control) until the losses expire.
F-28
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
12 Unusual charges
Included in unusual charges for the year ended December 31, 1997, are
charges aggregating $686,000, of which $850,000 relates to the settlement of
certain litigation ($500,000 was settled with the issuance of 119,850 shares of
common stock in the first quarter of 1998), net of $164,000 which relates to the
return of 30,215 shares of the Company's common stock related to a settlement
with Software Publishing Corporation.
13 Related party and other transactions
Three executive officers of the Company have received advances from time to
time, with such advances being payable upon demand and bearing interest at the
rate of 7% per annum. In the first quarter of 2000, the officers repaid
$1,706,000 of these advances, consisting of $783,000 in cash and 410,179 shares
of Company common stock valued at $933,000.
During the years ended December 31, 1999, 1998 and 1997, the Company paid
an outside Director fees for legal and consulting services aggregating $170,000,
$149,000 and $165,000, respectively. Additionally, in 1999 the Company granted
25,000 shares of stock and 100,000 stock options to such Director, valued at
$45,000.
The Company paid an outside Director consulting fees of $56,000, $52,000
and $52,000 in each of the years ended December 31, 1999, 1998 and 1997,
respectively. Additionally, in 1999 the Company granted 25,000 shares of stock
and 100,000 stock options to such Director, valued at $45,000.
In 1999, the Company's general counsel received cash compensation of
$689,000, and 75,000 shares of Softworks common stock and 150,000 Company stock
options valued at $395,000, for business and financial consulting services
rendered. In 1998, the Company's general counsel received cash compensation of
$207,000 and 180,000 Company stock options (which were subsequently cancelled)
valued at $171,000. Also in 1998 (in addition to the shares of Softworks and
Company common stock as discussed in Notes 3 and 10), related entities received
266,000 shares of Softworks common stock, valued at $541,000, for business and
financial consulting services rendered.
In 1999, a consultant (who also has a financial interest in ITSV) received
cash compensation of $215,000 and 117,000 shares of Softworks common stock
valued at $423,000 for various consulting services. In 1998, the consultant
received cash compensation of $185,000 and 300,000 Company stock options (which
were subsequently cancelled) valued at $254,000 in addition to the shares of
Softworks and Company common stock (as discussed in Notes 3 and 10).
S.J. & Associates, Inc.
In July 1998, and during 1999, the Company entered into various agreements
with S.J. & Associates, Inc. (including its affiliates are collectively referred
to as "SJ") for various services which provide for the following compensation:
-- SJ received minimum annual compensation pursuant to several agreements
aggregating $227,000 per annum through November 1999. Commencing in
December 1999, SJ receives minimum annual compensation pursuant to two
agreements aggregating $276,000 per annum. The agreements expire in
November 2004. SJ also consulted with Softworks in various capacities
throughout 1999 and received compensation directly from Softworks.
F-29
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
13 Related party and other transactions (continued)
S.J. & Associates, Inc. (continued)
-- During 1998, SJ was granted 425,000 options to purchase the Company's
common stock at exercise prices ranging from $4.00 to $6.00 per share,
resulting in a charge to operations of $365,000; 275,000 of these
options were exercised and the remaining 150,000 options were
cancelled.
-- As discussed in Notes 3 and 10, SJ also received shares of the
Company's and Softworks common stock during 1998.
-- SJ also received 190,000 shares of Softworks common stock (issued
directly from Softworks) in conjunction with their initial public
offering in 1998.
-- In 1999, SJ was retained to assist the Company in its efforts to sell
shares in Softworks second public offering (Note 3). The Company
issued 200,000 contract options to acquire restricted shares of
Softworks common stock owned by the Company, exercisable at $1.00 per
share, which vested upon completion of Softworks second public
offering. The options were exercised in June 1999.
-- In November 1999, 100,000 shares of Softworks common stock and 80,000
shares of the Company's common stock were issued to SJ as payment for
various consulting matters. Additionally, SJ was awarded 75,000 fully
vested options of the Company's common stock exercisable at $1.25 per
share and expiring November 30, 2001. The stock and options were
valued at $621,000 and were charged to operations in 1999.
-- During 1999, the Company paid an affiliate of SJ $700,000 relating to
certain multi-media Internet technology.
-- In 1999, the Company entered into an agreement with SJ to provide
assistance to the Company in locating, negotiating and ultimately
closing a transaction for the sale of the Company's entire remaining
holdings of Softworks, the sale of the Company's ComputerCOP
technology and related investment in NetWolves Corporation (Note 18).
The Company agreed to pay SJ 4.0% of the value of the transactions.
Accordingly, in the first quarter of 2000, SJ earned $2,458,000 with
respect to the Softworks transaction and $1,420,000 with respect to
the transaction with NetWolves Corporation.
F-30
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
14 Commitments and contingencies
Operating leases
Operating leases are primarily for office space, equipment and automobiles.
At December 31, 1999, the future minimum lease payments under operating leases
are summarized as follows (in thousands):
Year ending December 31,
2000 $ 528
2001 421
2002 175
Thereafter -
--------
Total $1,124
========
Rent expense approximated $592,000, $1,285,000 and $1,198,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
Defined contribution plan
The Company provides pension benefits to eligible employees through a
401(k) plan. Employer matching contributions to this 401(k) plan approximated
$41,000, $106,000 and $66,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
Legal matters
In July 1995, the Company received notice of an action alleging the Company
had not used its best efforts to register warrants to purchase 50,000 shares of
the Company's common stock within 30 days from written notice to the Company,
pursuant to a financial consulting agreement. The Company has maintained that it
has always used its best efforts to cause the registration of those warrants to
occur. However, to avoid the expense and resolve the uncertainties of
litigation, the matter was settled by including 38,500 warrants in the Company's
then pending registration statement, with the balance of 11,500 warrants being
canceled. The registration statement became effective on August 9, 1996.
Although the Company believes this matter has been resolved, releases have not
yet been exchanged, nor has a stipulation of dismissal been filed. The Company
is unable to predict the ultimate outcome of this suit and, accordingly, no
adjustment has been made in the consolidated financial statements for any
potential losses.
F-31
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
14 Commitments and contingencies (continued)
Legal matters (continued)
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 had been reported to the Securities and
Exchange Commission by the Company as stolen certificates. Plaintiff has
requested validation of the transfer of the certificates and is seeking damages
of an unspecified amount, consisting of alleged diminution in market value of
the subject shares from 1994 through the date of any judgment in the plaintiff's
favor. 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.
In August of 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.
F-32
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
15 Management's plans
The Company has continued to incur substantial operating losses and to use
substantial amounts of cash in operating activities, which were primarily
financed through sales and exchanges of Softworks common stock. Management's
current plan is focused on becoming a preeminent provider of innovative software
products and services which continues to exploit the Company's patented
technologies. To achieve its goals, the Company expects to continue to market
the d.b.Express Internet Information Server (the "Server Farm") to the
telecommunications sector. The Company is continually reviewing its long-term
business strategy.
While management believes that its plan will ultimately enable them to
achieve positive cash flows from operations, until such time, substantial cash
may be necessary to implement such plan. Although there can be no assurances,
management has several alternative sources to fund the development of its plan,
including cash on hand, additional debt and equity financing (if necessary), or
the partial disposition (if necessary) of its recent investment in NetWolves
(Note 18).
16 Consolidated Statements of Cash Flows
Supplemental disclosure of cash flow information for the years ended
December 31, 1999, 1998 and 1997 is summarized as follows:
Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(in thousands)
Interest paid $ 139 $ 541 $ 153
====== ====== ======
Net taxes paid (refunds received) $ 102 $ (23) $ (74)
====== ====== ======
F-33
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
16 Consolidated Statements of Cash Flows (continued)
Non-cash investing and financing activities for the years ended December
31, 1999, 1998 and 1997 is summarized as follows:
Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(in thousands)
Exchange of the Company's and Softworks
common stock to ITSV (Note 3):
Prepaid advertising $ - $ 4,150 $ -
Goodwill - 5,360 -
Software development costs - 2,700 -
-------- -------- --------
$ - $ 12,210 $ -
======== ======== ========
Capitalized software technology (Note 7) $ - $ - $ 2,160
======== ======== ========
Note receivable for the sale of Softworks
common stock by the Company $ - $ 5,000 $ -
======== ======== ========
Reduction in cash resulting from excluding
Softworks from the consolidated financial
statements:
Account and installment receivables $ 33,942 $ - $ -
Prepaid expenses and other current assets 2,282 - -
Property and equipment, net 2,698 - -
Intangible assets, net 6,653 - -
Other non current assets 2,061 - -
Accounts payable and accrued expenses (4,468) - -
Deferred revenue (26,787) - -
Current and long-term debt (4,460) - -
Minority interest (9,353) - -
Investment in Softworks (9,327) - -
-------- -------- --------
$ (6,759) $ - $ -
======== ======== ========
F-34
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
17 Segment information
The Financial Accounting Standards Board issued Statement No. 131
"Disclosures about Segments of an Enterprise and Related Information," which
became effective for the Company in 1998 and has been implemented for all
periods presented. The Company and its subsidiaries operate in two separate
business segments, computer software and professional services. The computer
software segment, which operates domestically, is primarily engaged in the
design, development, marketing and support of information delivery software
products and software products that are designed to provide non-computer
literate owners the ability to identify threats as well as objectionable
material, which may be viewed by users of the computer on the internet. Until
March 31, 1999, through Softworks (see Note 3), the Company was also engaged in
systems management software products for corporate mainframe data centers.
International operations of Softworks' foreign subsidiaries were located in the
United Kingdom, France, Brazil, Australia, Spain, Italy and Germany and several
international distributors primarily in Europe and Asia. The professional
services segment, which operates domestically, is primarily engaged in the
design, construction and installation of technology systems, including the
reselling of computer hardware. The professional services segment also provides
services through the d.b. Express Internet Information Server, also referred to
as a "Server Farm".
Business information
Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(in thousands)
Revenue
Computer Software $ 10,907 $ 42,298 $ 27,870
Professional Services 13,733 19,690 1,868
-------- -------- --------
Total $ 24,640 $ 61,988 $ 29,738
======== ======== ========
Operating income (loss)
Computer Software $(33,215) $(17,193) $(11,976)
Professional Services 659 1,549 50
-------- -------- --------
Total $(32,556) $(15,644) $(11,926)
======== ======== ========
Identifiable assets
Computer Software $ 28,762 $ 76,950 $ 38,827
Professional Services 1,262 14,952 471
-------- -------- --------
Total $ 30,024 $ 91,902 $ 39,298
======== ======== ========
In classifying business information into segments, the Company specifically
identifies revenue, expenses and identifiable assets of the professional
services segment; items not specifically identified are included in the computer
software segment.
F-35
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
17 Segment information (continued)
Geographical information
Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(in thousands)
Revenue
Domestic $ 21,383 $ 53,190 $ 25,006
International 3,257 8,798 4,732
-------- -------- --------
Total $ 24,640 $ 61,988 $ 29,738
======== ======== ========
Operating income (loss)
Domestic $(33,568) $(14,870) $(11,386)
International 1,012 (774) (540)
-------- -------- --------
Total $(32,556) $(15,644) $(11,926)
======== ======== ========
Identifiable assets
Domestic $ 30,024 $ 82,377 $ 36,630
International - 9,525 2,668
-------- -------- --------
Total $ 30,024 $ 91,902 $ 39,298
======== ======== ========
Major customer
For the year ended December 31, 1999, the Company had one major contract
involving two customers, with combined revenue of $12,297,000 (49.9% of total
revenue). This amount is included in the Professional Services and Domestic
categories.
For the year ended December 31, 1998, the Company had one major customer
with revenue of $14,878,000 (24% of total revenue). This amount is included in
the Professional Services and Domestic categories.
18 Subsequent events
Softworks, Inc.
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,
net of expenses, of $47,607,000 recorded in the first quarter of 2000. The
entire amount of "Investment in Softworks, held for sale" is included in current
assets at December 31, 1999.
F-36
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
18 Subsequent events (continued)
Softworks, Inc. (continued)
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 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.
NetWolves Corporation
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 OTCBB 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 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, net of expenses, of $8,812,000 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 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. The Company expects to
account 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."
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, or at the end of six months in the event (1) NetWolves
has not been listed for trading on the NASDAQ SmallCap market or the NASDAQ
National Market System, or (2) 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.
F-37
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
18 Subsequent events (continued)
Pro forma consolidated financial statements
Pro forma condensed consolidated financial statements as if the
transactions described above were consummated as of December 31, 1999 and as of
the beginning of the year ended December 31, 1999, are as follows:
Computer Concepts Corp. and Subsidiaries
Pro Forma Condensed Consolidated Balance Sheet
(Unaudited)
December 31, 1999
(in thousands)
Pro Forma Adjustments
---------------------
Softworks NetWolves
Actual Transaction Transaction Pro Forma
------ ----------- ----------- ---------
Assets
Cash $ 1,852 $ 51,458 $ (25,000) $ 28,310
Investment in Softworks, held for sale 10,329 (10,329) - -
Assets held for sale ComputerCOP 3,876 - (3,876) -
Deferred tax assets, current 9,197 (7,760) (1,437) -
Other current assets 3,130 - - 3,130
Investment in NetWolves Corporation - - 40,000 40,000
Cash held in escrow - 10,000 - 10,000
Property and equipment, net 1,345 - - 1,345
Other assets 295 -` - 295
-------- -------- --------- --------
$ 30,024 $ 43,369 $ 9,687 $ 83,080
======== ======== ========= ========
Liabilities and shareholders' equity
Current liabilities (1) $ 5,538 $ 3,522 $ 2,312 $ 11,372
Income taxes payable, current - 8,902 1,648 10,550
Shareholders' equity 24,486 30,945 5,727 61,158
-------- -------- --------- --------
$ 30,024 $ 43,369 $ 9,687 $ 83,080
======== ======== ========= ========
(1) Pro forma adjustments represent expenses incurred in connection with
completing each of the transactions.
F-38
COMPUTER CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
18 Subsequent events (continued)
Pro forma consolidated financial statements (continued)
Computer Concepts Corp. and Subsidiaries
Pro Forma Condensed Consolidated Statement of Operations
(Unaudited)
Year ended December 31, 1999
(in thousands)
Pro Forma Adjustments
---------------------
NetWolves/
Softworks ComputerCOP
Actual Transaction Transaction Pro Forma
------ ----------- ----------- ----------
Revenue $ 24,640 $ (10,258) $ (690) $ 13,692
Cost of revenue 13,044 (764) (241) 12,039
-------- --------- -------- ---------
Gross margin 11,596 (9,494) (449) 1,653
Total operating expenses (1) 44,152 (9,342) (6,547) 28,263
-------- --------- -------- ---------
Operating (loss) income (32,556) (152) 6,098 (26,610)
Other income (expense)
Gain on partial disposition of
Softworks 17,107 (17,107) - -
Equity in earnings of Softworks 512 (512) - -
Interest and other (expense) income,
net 316 - - 316
Minority interest in earnings of
Softworks (46) 46 - -
-------- --------- -------- ---------
Loss before benefit (provision)
income taxes (14,667) (17,725) 6,098 (26,294)
Benefit (provision)for income taxes 9,095 (7,700) (1,437) (42)
-------- --------- -------- ---------
Net loss $ (5,572) $ (25,425) $ 4,661 $ (26,336)
======== ========= ======== =========
(1) The ComputerCOP operating expense adjustment includes $5,617,000 of
amortization expense related to ComputerCOP's intangible assets.
Dividend
In February, 2000, the Company declared a dividend of $0.10 per share
(aggregating approximately $2,000,000) to its shareholders of record on March
15, 2000 and payable on May 1, 2000.
F-39