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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
[ ] 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. 0-25297
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SMITH-GARDNER & ASSOCIATES, INC.
FLORIDA 65-0090038
(State of Incorporation) (I.R.S. Employer Identification No.)
1615 SOUTH CONGRESS AVENUE, DELRAY BEACH, FL 33445-6368
TELEPHONE: (561) 265-2700
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 12,422,905 shares of the
Registrant's Common Stock, par value $0.01 per share, were outstanding as of
August 3, 2000.
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SMITH-GARDNER & ASSOCIATES, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)
a.) Condensed Consolidated Statements of Operations
for the Three Months and Six Months Ended June 30, 2000 and 1999............... 3
b.) Condensed Consolidated Balance Sheets
as of June 30, 2000 and December 31, 1999...................................... 4
c.) Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2000 and 1999................................ 5
d.) Notes to Condensed Consolidated Financial Statements........................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................. 14
Item 2. Changes in Securities and Use of Proceeds.......................................... 14
Item 6. Exhibits and Reports on Form 8-K................................................... 15
Signatures...................................................................................... 16
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
Revenue:
License fees and software sales $ 4,795 $ 6,623 $ 11,079 $ 11,798
Computer hardware sales 1,681 2,548 5,054 3,864
Support 2,380 1,806 4,568 3,433
Services 1,386 1,341 2,485 2,274
-------- -------- -------- --------
Total revenue 10,242 12,318 23,186 21,369
Cost of revenue:
License fees and software sales 2,117 1,883 4,855 3,328
Computer hardware sales 1,337 1,912 4,034 2,742
Support 1,597 1,213 3,180 2,297
Services 961 891 1,791 1,601
-------- -------- -------- --------
Total cost of revenue 6,012 5,899 13,860 9,968
-------- -------- -------- --------
Gross margin 4,230 6,419 9,326 11,401
Operating expenses:
General and administrative 3,622 2,072 5,826 4,163
Sales and marketing 2,295 1,570 4,080 2,690
Research and development 1,171 728 2,267 1,382
-------- -------- -------- --------
Total operating expenses 7,088 4,370 12,173 8,235
-------- -------- -------- --------
Operating (loss) income (2,858) 2,049 (2,847) 3,166
Interest income, net 615 447 1,159 544
-------- -------- -------- --------
(Loss) income before income tax benefit (expense) (2,243) 2,496 (1,688) 3,710
Income tax benefit (expense) 967 (948) 731 (1,131)
-------- -------- -------- --------
Net (loss) income $ (1,276) $ 1,548 $ (957) $ 2,579
======== ======== ======== ========
Basic net (loss) income per share $ (0.10) $ 0.13 $ (0.08) $ 0.23
======== ======== ======== ========
Diluted net (loss) income per share $ (0.10) $ 0.12 $ (0.08) $ 0.22
======== ======== ======== ========
Weighted average shares used in basic per share computation 12,414 12,197 12,368 11,019
======== ======== ======== ========
Weighted average shares used in diluted per share computation 12,414 12,711 12,368 11,533
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
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SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
June 30, December 31,
2000 1999
-------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 37,860 $ 39,246
Accounts receivable, net of allowance for doubtful accounts of
$2,055 (unaudited) at June 30, 2000 and $616 at December 31,
1999 7,747 8,425
Income tax receivable 2,852 383
Inventory 379 275
Deferred income taxes 554 554
Prepaid expenses and other current assets 864 597
-------- --------
Total current assets 50,256 49,480
Property and equipment, net 2,791 1,879
Other assets 107 109
-------- --------
Total assets $ 53,154 $ 51,468
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 5,766 $ 5,429
Deferred revenue 1,461 659
Current portion of capital lease obligation 46 57
-------- --------
Total current liabilities 7,273 6,145
Long term portion of capital lease obligation 105 122
Deferred income taxes 474 38
-------- --------
Total liabilities 7,852 6,305
Stockholders' equity:
Common stock, $.01 par value. Authorized 50,000,000 shares;
issued and outstanding 12,422,905 shares (unaudited) and
12,276,578 at June 30, 2000 and December 31, 1999,
respectively. 124 123
Additional paid in capital 56,089 54,871
Accumulated other comprehensive loss (123) --
Accumulated deficit (10,788) (9,831)
-------- --------
Total stockholders' equity 45,302 45,163
-------- --------
Total liabilities and stockholders' equity $ 53,154 $ 51,468
======== ========
See accompanying notes to condensed consolidated financial statements.
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SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
For Six Months Ended
June 30,
2000 1999
--------- --------
Net (loss) income $ (957) $ 2,579
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Depreciation and amortization expense 351 221
Non-cash compensation expense 15 11
Bad debt expense 1,458 68
Deferred income taxes 436 (463)
Change in assets and liabilities:
Accounts receivable (896) (2,485)
Inventory (104) 94
Income tax receivable (1,718) 70
Prepaid expenses and other current assets (270) (262)
Other assets -- 39
Accounts payable and accrued expenses 348 1,925
Income tax payable -- 601
Accrued interest payable -- (4,500)
Deferred revenue 812 134
-------- --------
Net cash used in operating activities (525) (1,968)
Cash flows used in investing activities:
Capital expenditures (1,287) (652)
-------- --------
Net cash used in investing activities (1,287) (652)
Cash flows provided by financing activities:
Employee stock option exercises 453 56
Issuance of common stock -- 50,825
Deferred offering costs 552
Redemption of preferred stock -- (12,000)
Payments on capital lease (29) --
-------- --------
Net cash provided by financing activities 424 39,433
Effect of exchange rates on cash and cash equivalents 2 --
-------- --------
Net (decrease) increase in cash and cash equivalents (1,386) 36,813
Cash and cash equivalents at beginning of period 39,246 1,577
-------- --------
Cash and cash equivalents at end of period $ 37,860 $ 38,390
======== ========
Supplemental cash flow information:
Cash paid for interest $ -- $ 4,665
======== ========
Cash paid for income taxes $ 391 $ 915
======== ========
Supplemental non-cash flow transactions:
Tax benefit from stock option exercises $ 751 $ 70
======== ========
See accompanying notes to condensed consolidated financial statements.
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SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
June 30, 2000
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
disclosures necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the results
for the periods presented have been included. These condensed consolidated
financial statements should be read in connection with the Annual Report on Form
10-K of Smith Gardner and Associates, Inc. as of and for the year ended December
31, 1999.
The results of operations for the six months ended June 30, 2000 are not
necessarily indicative of results that may be expected for any other interim
periods or for the full fiscal year.
(2) PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company and
its two wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(3) EARNINGS PER SHARE
Basic net income per share is calculated using the weighted average number of
common shares outstanding during the period. Diluted net income per share is
computed on the basis of the weighted average number of common shares
outstanding plus the dilutive effect of common share equivalents ("CSE's")
outstanding using the treasury stock method. CSE's consisting of 246,000 stock
options were not included in the diluted net loss per share calculation for the
three and six months ended June 30, 2000 since their effect would be
antidilutive. The numbers presented below are in thousands, except per share
amounts.
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-------- ------- ------- -------
BASIC NET INCOME:
Net (loss) income $ (1,276) $ 1,548 $ (957) $ 2,579
======== ======= ======= =======
Weighted average common shares outstanding 12,414 12,197 12,368 11,019
======== ======= ======= =======
Basic net (loss) income per share $ (.10) $ .13 $ (.08) $ .23
======== ======= ======= =======
DILUTED NET INCOME:
Net (loss) income $ (1,276) $ 1,548 $ (957) $ 2,579
======== ======= ======= =======
Weighted average common shares outstanding 12,414 12,197 12,368 11,019
Dilutive common stock equivalents -- 514 -- 514
-------- ------- ------- -------
Equivalent shares 12,414 12,711 12,368 11,533
======== ======= ======= =======
Diluted net (loss) income per share $ (.10) $ .12 $ (.08) $ .22
======== ======= ======= =======
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(4) STOCK REPURCHASE PLAN
On June 28, 2000, the Company announced that its Board of Directors approved a
stock repurchase plan. Under the plan, the Company may repurchase up to one
million shares of its common stock. The extent to which the Company repurchases
its shares and the timing of such purchases will depend upon market conditions
and other corporate considerations. No shares were repurchased under this plan
as of June 30, 2000.
(5) REVENUE RECOGNITION
The Company follows SOP 97-2, SOFTWARE REVENUE RECOGNITION. SOP 97-2 generally
requires revenue earned on software arrangements involving multiple elements to
be allocated to each element based on vendor specific objective evidence
("VSOE") of the relative fair values of the elements. VSOE is determined by the
price charged when the element is sold separately. The revenue allocated to
hardware and software products generally is recognized when the hardware and
software have been delivered and installed, the fee is fixed and determinable
and the collectibility is probable. The revenue allocated to post contract
customer support is consistent with fees charged for renewals and is recognized
ratably over the term of the support. Revenue allocated to service elements is
recognized as the services are performed.
In March 1999, SOP 98-9 was issued which amends SOP 97-2 guidance on VSOE for
multiple element arrangements in which there is VSOE of fair value of all the
undelivered elements, and VSOE of fair value does not exist for one or more of
the delivered elements. This SOP does not currently apply to the Company since
VSOE of fair value exists for all elements in the Company's contracts.
(6) FOREIGN CURRENCY TRANSLATION
The functional currencies of the Company's foreign subsidiaries are their
respective local currencies. The translation of the applicable foreign
currencies into U.S. dollars is performed for balance sheet accounts using
current exchange rates in effect at the balance sheet date and for revenue and
expense accounts using average rates prevailing during the period. Adjustments
resulting from the translation of foreign currency financial statements were
insignificant at December 31, 1999. As of June 30, 2000, cumulative foreign
currency translation adjustments were included in the shareholders' equity
section of the balance sheet.
(7) COMPREHENSIVE INCOME
Effective July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No.
130 requires the reporting of comprehensive income in addition to net income
from operations. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of certain financial information that
historically has not been recognized in the calculation of net income. The
Company's total comprehensive (loss) income is as follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
------- ------- ------- --------
(unaudited)
Net (loss) income $(1,276) $ 1,548 $ (957) $ 2,579
Other comprehensive loss:
Foreign currency translation
adjustments (87) -- (123) --
------- ------- ------- -------
Total comprehensive (loss) income $(1,363) $ 1,548 $(1,080) $ 2,579
======= ======= ======= =======
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(8) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires an entity to recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133 is expected to be effective for
the Company's year ending December 31, 2001. The Company does not believe that
the adoption of SFAS No. 133 will have a significant impact on the Company's
financial reporting.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101") and amended it in March and June 2000. We are required to adopt the
provisions of SAB 101 in our fourth quarter of fiscal 2000. We are currently
reviewing the provisions of SAB 101 and have not fully assessed the impact of
its adoption. While SAB 101 does not supercede the software industry specific
revenue recognition guidance, which we believe we comply with, the SEC Staff has
recently informally indicated its views related to SAB 101 that may change
current interpretations of software revenue recognition requirements. Such SEC
interpretations could result in many software companies, including us, recording
a cumulative effect of a change in accounting principles retroactive to January
1, 2000.
(9) CONTINGENCIES
On June 22, 2000, a purported class-action complaint was filed against the
Company and certain of its officers in the United States District Court for the
Southern District of Florida. On July 6 a separate purported class-action
complaint was filed against the Company and certain of its officers in the
United States District Court for the Southern District of Florida. The
complaints allege that certain sections of the Securities Exchange Act of 1934
were violated.
Management believes these actions are without merit and intends to defend them
vigorously. At this point in time, it is not possible to quantify the potential
range of loss to the Company.
In May 2000, one of the Company's clients discontinued its operations.
Subsequently, on July 3, 2000 an involuntary bankruptcy proceeding was commenced
against the client. The Company does not believe that it will be able to collect
its current receivables from the client and therefore set up an additional
reserve on account of such receivables. In connection with the bankruptcy
proceeding the Company may be required to return some portion of the payments
received by it to the bankruptcy estate. The Company would vigorously oppose any
attempt to obtain such reimbursement. At this point in time, it is not possible
to quantify the potential additional loss, if any, to the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The Company is a leading provider of mission-critical, enterprise-wide software
solutions, and related hardware and services, to the direct commerce industry.
The Company's clients in the direct commerce industry are traditional direct
marketing companies and Internet-only retailers, as well as wholesalers,
fulfillment houses and retailers with significant non-store sales channels. The
Company's MACS and WebOrder family of software products, renamed Ecometry in
April 2000, are designed to automate non-store commerce activities, including
advertising analysis, sales, telemarketing, ordering, merchandising,
procurement, electronic and Internet commerce, warehousing, shipping, accounting
and systems operation. The Ecometry products also provide managers and sales
personnel with real-time operations, inventory and customer data to improve both
management decision making and customer service.
The following table sets forth, for the periods indicated, the dollar and
percentage changes of statement of operations items:
Three Months Ended Six Months Ended Change Three Months Change Six Months
June 30, June 30, Ended June 30, 2000 Ended June 30, 2000
-------------------- -------------------- ------------------- -------------------
2000 1999 2000 1999 $ % $ %
-------- -------- -------- -------- -------- ------- -------- -------
Revenue:
License fees and software sales $ 4,795 $ 6,623 $ 11,079 $ 11,798 $ (1,828) (27.6)% $ (719) (6.1)%
Computer hardware sales 1,681 2,548 5,054 3,864 (867) (34.0) 1,190 30.8
Support 2,380 1,806 4,568 3,433 574 31.8 1,135 33.1
Services 1,386 1,341 2,485 2,274 45 3.4 211 9.3
-------- -------- -------- -------- -------- ------- -------- -------
Total revenue 10,242 12,318 23,186 21,369 (2,076) (16.9) 1,817 8.5
Cost of sales and services:
License fees and software sales 2,117 1,883 4,855 3,328 234 12.4 1,527 45.9
Computer hardware sales 1,337 1,912 4,034 2,742 (575) (30.1) 1,292 47.1
Support 1,597 1,213 3,180 2,297 384 31.6 883 38.4
Services 961 891 1,791 1,601 70 7.9 190 11.9
-------- -------- -------- -------- -------- ------- -------- -------
Total cost of sales and
services 6,012 5,899 13,860 9,968 113 1.9 3,892 39.0
-------- -------- -------- -------- -------- ------- -------- -------
Gross margin 4,230 6,419 9,326 11,401 (2,189) (34.1) (2,075) (18.2)
Operating expenses:
General and administrative 3,622 2,072 5,826 4,163 1,550 74.8 1,663 40.0
Sales and marketing 2,295 1,570 4,080 2,690 725 46.2 1,390 51.7
Research and development 1,171 728 2,267 1,382 443 60.9 885 64.0
-------- -------- -------- -------- -------- ------- -------- -------
Total operating expenses 7,088 4,370 12,173 8,235 2,718 62.2 3,938 47.8
-------- -------- -------- -------- -------- ------- -------- -------
(Loss) income from operations (2,858) 2,049 (2,847) 3,166 (4,907) (239.5) (6,013) (189.9)
Interest income, net 615 447 1,159 544 (168) 37.5 (616) 113.3
-------- -------- -------- -------- -------- ------- -------- -------
(Loss) income before income tax
benefit (expense) (2,243) 2,496 (1,688) 3,710 (4,739) (189.9) (5,398) (145.5)
Income tax benefit (expense) 967 (948) 731 (1,131) 1,915 202.0 1,862 (164.7)
-------- -------- -------- -------- -------- ------- -------- -------
Net (loss) income $ (1,276) $ 1,548 $ (957) $ 2,579 $ (2,824) (182.4)% $ (3,536) (137.1)%
======== ======== ======== ======== ======== ======= ======== =======
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
LICENSE FEES AND SOFTWARE SALES. License fees and software sales accounted for
approximately 46.8% of the Company's total revenue for the three months ended
June 30, 2000. License fees and software sales consist of license fees for the
installation of the Company's Ecometry software and related modules, license
fees for third-party software, and additional user license fees, and software
upgrades for its existing clients. License fees and software sales are based on
the number of users and type and number of CPUs. Computer software license fees
decreased 27.6% during the three months ended June 30, 2000 compared to the same
period in 1999. New client computer software sales decreased 28.9% from $3.7
million for the three months ended June 30, 1999 to $2.6 million in 2000, and
existing client computer software sales decreased 25.1% from $2.9 million to
$2.2 million for the same periods. These decreases were due to the Company
strategically refocusing its sales efforts to more established companies, which
have longer sales and implementation cycles, and the delay of sales expected to
be recognized in this quarter.
COMPUTER HARDWARE SALES. Sales of computer hardware accounted for approximately
16.4% of the Company's total revenue for the three months ended June 30, 2000.
Sales of computer hardware consist of sales of computer hardware systems and
peripheral hardware components. Computer hardware revenue decreased 34.0% for
the three months ended June 30, 2000, compared to the three months ended June
30, 1999. Computer hardware revenue
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relating to new client sales decreased 59.8% to $631,000 for the three months
ended June 30, 2000, compared to $1.6 million for the same period in 1999. The
decrease in computer hardware sales was due to lower new system sales in the
quarter ended June 30, 2000 compared to the same period in 1999. Computer
hardware upgrades increased by 7.3% to $1.0 million for the three months ended
June 30, 2000, compared to $978,000 for the same period in 1999. The
aforementioned decreases resulted from the Company strategically refocusing its
sales efforts to more established companies, which have longer sales and
implementation cycles, and the delay of sales expected to be recognized in this
quarter.
SUPPORT. Support revenue accounted for approximately 23.2% of the Company's
total revenue during the three months ended June 30, 2000. Support revenue
consists of fees for technical support services and product enhancements for the
Ecometry software, optional modules, and integrated third-party software
utilities. Support revenue increased 31.8% to $2.4 million during the three
months ended June 30, 2000, compared to $1.8 million for the three months ended
June 30, 1999. The increase resulted from the addition of new clients during
1999 and 2000, as well as support fee increases related to software user license
upgrades.
SERVICES. Services revenue accounted for approximately 13.5% of the Company's
revenue for the three months ended June 30, 2000. Services revenue consists
principally of revenue derived from training, consulting, and custom
programming. Services revenue increased 3.4% to $1.4 million in the three months
ended June 30, 2000 compared to $1.3 million for the same period in 1999. This
increase was due primarily to an expanded client base and increased demand for
training, consulting and web design services.
TOTAL REVENUE. Total revenue decreased 16.9% for the three months ended June 30,
2000. New client sales decreased 38.5% to $3.2 million from $5.3 million for the
three months ended June 30, 1999. This decrease in revenue resulted from the
Company strategically refocusing its sales efforts to more established
companies, which have longer sales and implementation cycles, and the delay of
sales expected to be recognized in this quarter.
COST OF LICENSE FEES AND SOFTWARE SALES. Cost of license fees and software
sales, which includes license fees for third-party software, installation and
training salaries directly related to new software sales and subcontractor fees,
increased 12.4% during the three months ended June 30, 2000, compared to the
three months ended June 30, 1999. The increase is attributable to higher
training and installation personnel costs. Cost of computer software as a
percentage of software license fees increased to 44.1% from 28.4% for the three
months ended June 30, 1999. These increases are due to higher personnel costs
combined with a reduction in license fees and software sales for the second
quarter of 2000.
COST OF COMPUTER HARDWARE SALES. Cost of computer hardware sales, which consists
of purchases of computer hardware systems and peripheral hardware components,
decreased 30.1% for the three months ended June 30, 2000, compared to the same
period in 1999. This decrease was related to the 34.0% decrease in computer
hardware revenue during the quarter ended June 30, 2000. Cost of computer
hardware as a percentage of computer hardware revenue was 79.6% and 75.1% for
the three months ended June 30, 2000 and 1999, respectively. The increase
resulted from a higher proportion of sales to existing clients, which receive
higher volume discounts.
COST OF SUPPORT. Cost of support consists primarily of personnel costs
associated with the support of the Company's software product and third-party
computer software packages, and the cost of user documentation distributed to
clients. Cost of support increased 31.6% for the three months ended June 30,
2000 from the same period in 1999. The increase was due to a significant
increase in support personnel necessary to meet the requirements of a growing
client base. Cost of support as a percentage of support revenue was consistent
at 67.1% and 67.2% for the three months ended June 30, 2000 and 1999,
respectively.
COST OF SERVICES. Cost of services, which consists of salaries for professional
services employees, allocated salaries for training and programming personnel,
and payments to outside contractors, increased 7.9% during the three months
ended June 30, 2000, compared to the same period in 1999. Cost of services as a
percentage of services revenue increased to 69.4% for the three months ended
June 30, 2000 from 66.4% for the same period in 1999. The increased costs were
due to higher costs for personnel and outside contractors.
TOTAL COST OF SALES AND SERVICES. Total cost of sales and services increased by
1.9% for the three months ended June 30, 2000, compared to the same period in
1999. The increase in total cost of sales and services is primarily attributable
to higher personnel costs.
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GENERAL AND ADMINISTRATIVE. General and administrative expenses include the cost
of the Company's facility, finance, human resources, information services, and
administrative functions. General and administrative expenses increased 74.8%
for the three months ended June 30, 2000, compared to the same period in 1999.
This increase was primarily due to a significant increase to the Company's
provision for doubtful accounts relating to one of its customers that
discontinued its operations and was subsequently forced into involuntary
bankruptcy, as well as increased facility and other costs associated with
additional personnel. General and administrative expenses as a percentage of
total revenue increased to 35.4% for the three months ended June 30, 2000 from
16.8% for the same period in 1999.
SALES AND MARKETING. Sales and marketing expenses include personnel costs, sales
commissions related to sales and marketing of the Company's products and
services, and the cost of advertising, public relations and participation in
industry conferences and trade shows. Sales and marketing expenses increased by
46.2% for the three months ended June 30, 2000, compared to the same period in
1999. This increase resulted from additional personnel costs, increased trade
show expenses, and expanded marketing, advertising programs, public relations
and product re-branding costs. Sales and marketing expenses as a percentage of
total revenue increased to 22.4% for the three months ended June 30, 2000 from
12.7% for the three months ended June 30, 1999. Investments in sales and
marketing activities are planned to continue in future periods.
RESEARCH AND DEVELOPMENT. Research and development expenses include costs
associated with the development of new products. Such expenses consist primarily
of employee salaries and benefits, consulting expenses (including amounts paid
to subcontractors for development work), and the cost of development software
and hardware. Research and development expenses increased 60.9% during the three
months ended June 30, 2000 compared to the same period in 1999. This increase
was primarily due to ongoing development of new products such as various modules
and Ecometry for UNIX. The Company expects to continue making significant
investments in new and enhanced products in future periods.
(LOSS) INCOME FROM OPERATIONS. As a result of the foregoing factors, the
Company's income from operations decreased by $4.9 million to a loss of $2.9
million for the three months ended June 30, 2000 as compared to income of $2.0
million for the three months ended June 30, 1999.
INTEREST INCOME, NET. Net interest income increased to $615,000 for the three
months ended June 30, 2000, compared to net interest income of $447,000 for the
same period in 1999. The increase was due to higher interest rates earned on
cash reserves.
INCOME TAX EXPENSE. The effective tax rate for the three months ended June 30,
2000 was 43.1% compared to 38.0% for the second quarter of 1999. The effective
income tax rate differs from the federal statutory rates because of the
following: (i) the effect of state income taxes and (ii) the full valuation of
net losses of foreign subsidiaries. Also, effective rates vary between periods
because of the differing effects the net income and losses of foreign
subsidiaries have on income before income taxes.
NET INCOME. As a result of the above factors, the Company's net income decreased
by $2.8 million to a loss of $1.3 million for the three months ended June 30,
2000 from net income of $1.5 million in 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
LICENSE FEES AND SOFTWARE SALES. Sales of license fees and software sales
accounted for approximately 47.8% of the Company's total revenue for the six
months ended June 30, 2000. License fees and software sales decreased 6.1%
during the six months ended June 30, 2000 compared to the same period in 1999.
This decrease is attributable to a decrease in computer software sales to new
clients. New client computer software sales decreased by 14.9% from $5.9 million
for the six months ended June 30, 1999 to $5.0 million for the same period in
2000. The decrease in new client sales resulted from the Company strategically
refocusing its sales efforts to more established companies, which have longer
sales and implementation cycles, and the delay of sales expected to be
recognized in this quarter. Computer software upgrades increased by 2.6% from
$5.9 million to $6.1 million for the same periods.
COMPUTER HARDWARE SALES. Sales of computer hardware accounted for approximately
21.8% of the Company's total revenue for the six months ended June 30, 2000.
Computer hardware revenue increased 30.8% for the six months ended June 30,
2000, compared to the six months ended June 30, 1999. Computer hardware revenue
relating to new client sales decreased 19.7% for the six months ended June 30,
2000, compared to the same period in 1999. The
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decrease resulted from the Company strategically refocusing its sales efforts to
more established companies, which have longer sales and implementation cycles,
and the delay of sales expected to be recognized in this quarter. Computer
hardware upgrades increased by 92.2% for the six months ended June 30, 2000,
compared to the same period in 1999. The increase in 2000 was attributable to
upgrades from an expanded client base, several of the Company's clients
performing major system and module upgrades.
SUPPORT. Support revenue accounted for approximately 19.7% of the Company's
total revenue during the six months ended June 30, 2000. Support revenue
increased 33.1% during the six months ended June 30, 2000, compared to the six
months ended June 30, 1999. The increased support revenue resulted from the
addition of new clients during 1999 and 2000, as well as support fee increases
related to software user license upgrades.
SERVICES. Services revenue accounted for approximately 10.7% of the Company's
revenue for the six months ended June 30, 2000. Services revenue increased 9.3%
to $2.5 million in the six months ended June 30, 2000 compared to $2.3 million
for the same period in 1999. This increase was due to growing client demand for
web design, consulting, programming and training services.
TOTAL REVENUE. Total revenue increased 8.5% for the six months ended June 30,
2000, compared to the same period in 1999. New client sales decreased 16.2% to
$6.7 million from $8.0 million for the six months ended June 30, 1999. Revenue
from client system and component upgrades increased by 23.0% to $9.4 million for
the six months ended June 30, 2000, compared to $7.7 million for the same period
in 1999 due to an expanding client base and increased sales efforts directed
toward existing clients.
COST OF LICENSE FEES AND SOFTWARE SALES. Cost of computer software increased
45.9% during the six months ended June 30, 2000, compared to the six months
ended June 30, 1999. The increase is attributable to the additional costs of
training and installation personnel. Cost of computer software as a percentage
of software license fees increased to 43.8% from 28.2% for the six months ended
June 30, 1999. The increase is due to increased personnel costs and lower
license fees and software sales during the six months ended June 30, 2000.
COST OF COMPUTER HARDWARE SALES. Cost of computer hardware increased 47.1% for
the six months ended June 30, 2000, compared to the same period in 1999. This
increase to hardware cost is related to the 30.8% increase in computer hardware
revenue for the six months ended June 30, 2000 compared to the same period in
1999. Cost of computer hardware as a percentage of computer hardware revenue was
79.8% and 71.0% for the six months ended June 30, 2000 and 1999, respectively.
The increase resulted from sales to existing customers, which generate lower
margins.
COST OF SUPPORT. Cost of support increased 38.4% for the six months ended June
30, 2000 from the same period in 1999. The increase was due to an increase in
support personnel necessary to meet the requirements of the growing client base.
Cost of support as a percentage of support revenue increased to 69.6% for the
six months ended June 30, 2000 from 66.9% for the same period in 1999.
COST OF SERVICES. Cost of services increased 11.9% during the six months ended
June 30, 2000, compared to the same period in 1999. The increase was due to
greater personnel costs associated with these services. The increase was related
to the addition of personnel to meet the demand for custom programming,
training, and professional and web design services.
TOTAL COST OF REVENUE. Total cost of sales and services increased by 39.0% for
the six months ended June 30, 2000, compared to the same period in 1999. The
increase in total cost of sales and services is attributable to higher hardware
and personnel costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 40.0%
for the six months ended June 30, 2000, compared to the same period in 1999.
This increase was primarily due to a significant increase to the Company's
provision for doubtful accounts as well as increased facility and other costs
associated with additional personnel.
SALES AND MARKETING. Sales and marketing expenses increased by 51.7% for the six
months ended June 30, 2000, compared to the same period in 1999. This increase
resulted from additional personnel costs, increased trade show expenses, and
expanded marketing and advertising programs, public relations and product
re-branding costs. Investments in sales and marketing activities are planned to
continue in future periods.
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RESEARCH AND DEVELOPMENT. Research and development expenses increased 64.0%
during the six months ended June 30, 2000, compared to the same period in 1999.
This increase was primarily due to improvements to existing products and ongoing
development of new products such as various modules and Ecometry for UNIX. The
Company expects to continue making significant investments in new and enhanced
products in future periods.
(LOSS) INCOME FROM OPERATIONS. As a result of the foregoing factors, the
Company's income from operations decreased by $6.0 million for the six months
ended June 30, 2000 as compared to the six months ended June 30, 1999.
INTEREST INCOME, NET. Net interest income, which includes interest income on
available cash and interest expense associated with the $12.0 million aggregate
principal amount of Convertible Debentures, increased to $1.2 million for the
six months ended June 30, 2000, compared to net interest income of $544,000 for
the same period in 1999. The increase in income was due to higher interest rates
earned on available cash and the fact that the Company is no longer accruing
interest on the Convertible Debentures, which were converted on January 29,
1999, concurrent with the closing of the Company's initial public offering.
INCOME TAX EXPENSE. The effective tax rate for the six months ended June 30,
2000 was 43.3% compared to 30.5% for the first six months of 1999. The tax rate
was lower in 1999 due to a one-time tax benefit of $330,000, which resulted from
the Company recording its beginning deferred tax assets in connection with the
Company becoming a C Corporation as of January 1, 1999. The effective income tax
rate differs from the federal statutory rates because of the following: (i) the
effect of state income taxes; (ii) the full valuation of net losses of foreign
subsidiaries; and (iii) the set up of the beginning deferred tax assets. Also,
effective rates vary between periods because of the differing effects the net
income and losses of foreign subsidiaries have on income before income taxes.
NET INCOME. As a result of the above factors, the Company's net income decreased
by $3.5 million to a loss of $957,000 for the six months ended June 30, 2000
compared to net income of $2.6 million in 1999.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company's primary sources of liquidity consisted of cash
and cash equivalents totaling $37.9 million.
The Company's operating activities used cash for the six months ended June 30,
2000 and 1999, of $1.3 million and $2.0 million, respectively.
Cash used in investing activities was approximately $1.3 million and $652,000,
for the six months ended June 30, 2000 and 1999, respectively. This cash was
used for capital expenditures, which relate primarily to purchases of computers,
printers and software to support the Company's operations, as well as furniture,
fixtures and leasehold improvements. Capital expenditures increased
significantly during the first six months of 2000 due to expenses associated
with a material expansion of existing facilities. The Company expects its rate
of purchases of property and equipment to increase as its employee base grows.
For the six months ended June 30, 2000, cash provided by financing activities
totaled $1.2 million, which consisted primarily of proceeds from employee stock
option exercises. Cash provided by financing activities totaled $39.5 million
for the six months ended June 30, 1999, which consisted of proceeds received
from the Company's initial public offering and the underwriters' option to
purchase additional shares, employee stock option exercises and income tax
benefit relating to the stock option exercises, offset by repayment in full of
the $12.0 million aggregate principal amount of Convertible Debentures and
associated interest.
As of June 30, 2000, the Company had working capital of approximately $43.0
million as compared to working capital of approximately $41.1 at June 30, 1999.
The Company is party to various legal proceedings including a class action
lawsuit and an involuntary bankruptcy proceeding by one of its customers. The
Company does not believe these items will have a material effect on its
liquidity.
In June 2000, the Company announced a stock repurchase plan, under which it was
authorized to purchase up to one million shares of its common stock. The Company
does not believe any purchases under the plan will affect its ability to fund
operations.
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Management believes that it has adequate cash to finance operations in the
foreseeable future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Management believes the risk of loss arising from adverse changes in interest
rates, foreign currency exchange rates, commodity prices and other relevant
market rates and prices, such as equity prices, if any, is immaterial.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is involved in legal proceedings incidental to
the conduct of its business. Other than as disclosed below and in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1999, the
Company believes that litigation, individually or in the aggregate, to which it
is currently a party, is not likely to have a material adverse affect on the
Company's business, financial condition or results of operations.
On June 22, 2000, a purported class-action complaint was filed against the
Company and Messrs. Gary G. Hegna, Martin K. Weinbaum, Allan Gardner and Wilburn
Smith, officers of the Company, in the United States District Court for the
Southern District of Florida. On July 6, 2000 a separate purported class-action
complaint was filed against the Company and the aforementioned officers in the
United States District Court for the Southern District of Florida.
Both complaints are substantially similar and allege, among other things, that
the Company made material misrepresentations and omissions regarding the
Company's future revenues, growth, expenditures, and whether its reserve for
doubtful accounts complied with Generally Accepted Accounting Principles. The
complaints allege that the defendants violated Section 10(b) of the Securities
Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 thereunder by making
untrue statements or omitting to state material facts in connection with
purchases of Company common stock by the plaintiffs and others in the purported
class from October 27, 1999 through June 16, 2000, and that the defendants
violated Section 20(a) of the Exchange Act through the same conduct by virtue of
their allegedly being "controlling persons" of the Company. The Complaints
generally seek, among other things, certification as a class and an award of
damages in an amount to be determined at trial.
The defendants have been served with each complaint, but have not yet responded
to either complaint. Discovery in these actions have not yet commenced and will
be stayed pursuant to statute based on the filing of a motion to dismiss, which
stay would be lifted in the event that the court denies such motion to dismiss.
Management believes these actions are without merit and intends to defend them
vigorously.
In May 2000, one of the Company's clients discontinued its operations.
Subsequently, on July 3, 2000 an involuntary bankruptcy proceeding was commenced
against the client. The Company does not believe that it will be able to collect
its current receivables from the client and therefore set up an additional
reserve on account of such receivables. In connection with the bankruptcy
proceeding the Company may be required to return some portion of the payments
received by it to the bankruptcy estate. The Company would vigorously oppose any
attempt to obtain such reimbursement. At this point in time, it is not possible
to quantify the potential additional loss, if any, to the Company.
ITEM 2. USE OF PROCEEDS
As of August 11, 2000, the proceeds of the Offering have been used as follows:
(i) to redeem in full the Company's outstanding Redeemable Participating
Preferred Stock ($12.0 million) and (ii) to repay accrued interest related to
the Convertible Debentures ($4.7 million). Management expects that the balance
of the net proceeds of the Offering will be utilized to finance potential future
acquisitions and for general corporate purposes.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed a Report on Form 8-K dated May 25, 2000, which included a copy
of a press release announcing that one of the Company's enterprise solution
customers notified the Company that it was experiencing cash flow difficulties
and was evaluating its business alternatives. As a result, the Company set up an
additional accounts receivable reserve and expected a reduction of earnings per
share for the three months ended June 30, 2000.
FORWARD LOOKING STATEMENTS
Certain matters discussed in this Form 10-Q may be "forward-looking statements"
as defined in the Private Securities Litigation Reform Act of 1995, including
but not limited to statements related to plans for future business development
activities, anticipated costs of revenues, product mix and service revenues,
research and development and selling, general and administrative activities, and
liquidity and capital needs and resources. Such forward-looking statements are
subject to risks, uncertainties and other factors, which could cause actual
results to differ materially from future results expressed or implied by such
forward-looking statements. Investors are cautioned that any forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
contemplated by such forward-looking statements.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 11, 2000 SMITH-GARDNER & ASSOCIATES, INC.
By: /s/ Martin K. Weinbaum
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Martin K. Weinbaum
Vice President Finance and Chief
Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
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EXHIBIT INDEX
Exhibit Description
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27 Financial Data Schedule
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