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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 September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
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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: 12,358,955 shares of the
Registrant's Common Stock, par value $0.01 per share, were outstanding as of
November 3, 2000.
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SMITH-GARDNER & ASSOCIATES, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 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 Nine Months Ended September 30, 2000
and 1999 .............................................................. 2
b.) Condensed Consolidated Balance Sheets
as of September 30, 2000 and December 31, 1999 ........................ 3
c.) Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2000 and 1999 ................. 4
d.) Notes to Condensed Consolidated Financial Statements .............. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk ............ 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ..................................................... 13
Item 2. Changes in Securities and Use of Proceeds .............................. 14
Item 6. Exhibits and Reports on Form 8-K ...................................... 14
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 Nine months ended
September 30, September 30,
2000 1999 2000 1999
--------- -------- -------- --------
Revenue:
License fees and software sales $ 7,469 $ 7,354 $ 18,548 $ 19,152
Computer hardware sales 2,547 2,670 7,601 6,535
Support 2,466 2,090 7,033 5,523
Services 1,623 1,206 4,109 3,480
-------- -------- -------- --------
Total revenue 14,105 13,320 37,291 34,690
Cost of revenue:
License fees and software sales 2,440 2,217 7,295 5,545
Computer hardware sales 2,233 2,096 6,267 4,837
Support 1,411 1,283 4,591 3,580
Services 907 866 2,698 2,468
-------- -------- -------- --------
Total cost of revenue 6,991 6,462 20,851 16,430
-------- -------- -------- --------
Gross margin 7,114 6,858 16,440 18,260
Operating expenses:
General and administrative 2,932 1,915 8,759 6,077
Sales and marketing 1,736 1,379 5,816 4,069
Research and development 1,066 875 3,333 2,258
-------- -------- -------- --------
Total operating expenses 5,734 4,169 17,908 12,404
-------- -------- -------- --------
Operating income (loss) 1,380 2,689 (1,468) 5,856
Interest income, net 638 492 1,798 1,035
-------- -------- -------- --------
Income before income tax expense 2,018 3,181 330 6,891
Income tax expense (1,432) (1,286) (701) (2,417)
-------- -------- -------- --------
Net income (loss) $ 586 $ 1,895 $ (371) $ 4,474
======== ======== ======== ========
Basic net income (loss) per share $ 0.05 $ 0.16 $ (0.03) $ 0.39
======== ======== ======== ========
Diluted net income (loss) per share $ 0.05 $ 0.15 $ (0.03) $ 0.38
======== ======== ======== ========
Weighted average shares used in basic per share
computation 12,390 12,201 12,376 11,417
======== ======== ======== ========
Weighted average shares used in diluted per share
computation 12,460 12,700 12,376 11,916
======== ======== ======== ========
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 AMOUNTS)
(UNAUDITED)
September 30, December 31,
2000 1999
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 38,038 $ 39,246
Accounts receivable, net of allowance for doubtful accounts of
$2,352 at September 30, 2000 and $616 at December 31, 1999 9,474 8,425
Income tax receivable 538 383
Inventory 274 275
Deferred income taxes 1,104 554
Prepaid expenses and other current assets 874 597
-------- --------
Total current assets 50,302 49,480
Property and equipment, net 2,968 1,879
Other assets 103 109
-------- --------
Total assets $ 53,373 $ 51,468
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 5,963 $ 5,429
Deferred revenue 1,152 659
Current portion of capital lease obligation 23 57
-------- --------
Total current liabilities 7,138 6,145
Long term portion of capital lease obligation 109 122
Deferred income taxes 137 38
-------- --------
Total liabilities 7,384 6,305
Stockholders' equity:
Common stock, $.01 par value. Authorized 50,000,000 shares;
issued and outstanding 12,358,955 shares and
12,276,578 at September 30, 2000 and December 31, 1999,
respectively 124 123
Treasury stock, at cost (284) --
Additional paid in capital 56,513 54,871
Accumulated other comprehensive loss (162) --
Accumulated deficit (10,202) (9,831)
-------- --------
Total stockholders' equity 45,989 45,163
-------- --------
Total liabilities and stockholders' equity $ 53,373 $ 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 Nine Months Ended
September 30,
2000 1999
--------- ---------
Net (loss) income $ (371) $ 4,474
Adjustments to reconcile net (loss) income
to net cash (used in) provided by operating activities:
Depreciation and amortization expense 547 348
Non-cash compensation expense 31 33
Bad debt expense 1,763 251
Foreign currency loss (214) --
Deferred income taxes (582) (451)
Change in assets and liabilities:
Accounts receivable (2,961) (2,390)
Inventory 1 31
Income tax receivable 560 --
Prepaid expenses and other current assets (281) (446)
Other assets 4 (1)
Accounts payable and accrued expenses 770 2,371
Income tax payable -- 1,935
Accrued interest payable -- (4,500)
Deferred revenue 508 (127)
-------- --------
Net cash (used in) provided by operating activities (94) 1,397
Cash flows used in investing activities:
Capital expenditures (1,670) (877)
-------- --------
Net cash used in investing activities (1,670) (877)
Cash flows provided by (used in) financing activities:
Employee stock option exercises 898 79
Issuance of common stock -- 50,907
Repurchase of common stock (284) --
Deferred offering costs -- 552
Distribution to stockholders -- (835)
Redemption of preferred stock -- (12,000)
Payments on capital lease (48) --
-------- --------
Net cash provided by financing activities 566 38,703
Effect of exchange rates on cash and cash equivalents (10) --
-------- --------
Net (decrease) increase in cash and cash equivalents (1,208) 39,223
Cash and cash equivalents at beginning of period 39,246 1,577
-------- --------
Cash and cash equivalents at end of period $ 38,038 $ 40,800
======== ========
Supplemental cash flow information:
Cash paid for interest $ -- $ 4,665
======== ========
Cash paid for income taxes $ 556 $ 976
======== ========
Supplemental non-cash flow transactions:
Tax benefit from stock option exercises $ 751 $ 179
======== ========
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)
September 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 & Associates, Inc. as of and for the year ended December
31, 1999.
The results of operations for the nine months ended September 30, 2000 are not
necessarily indicative of results that may be expected for the full fiscal year.
(2) PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include the
accounts of the Company and two of its 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 approximately
70,000 stock options were not included in the diluted net loss per share
calculation for the nine months ended September 30, 2000 since their effect
would be antidilutive. The numbers presented below are in thousands, except per
share amounts.
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----------- -------- -------- ---------
BASIC NET INCOME (LOSS):
Net income (loss) $ 586 $ 1,895 $ (371) $ 4,474
======== ======== ======== ========
Weighted average common shares outstanding 12,390 12,201 12,376 11,417
======== ======== ======== ========
Basic net income (loss) per share $ .05 $ .16 $ (.03) $ .39
======== ======== ======== ========
DILUTED NET INCOME (LOSS):
Net income (loss) $ 586 $ 1,895 $ (371) $ 4,474
======== ======== ======== ========
Weighted average common shares outstanding 12,390 12,201 12,376 11,417
Dilutive common stock equivalents 70 499 -- 499
-------- -------- -------- --------
Equivalent shares 12,460 12,700 12,376 11,916
======== ======== ======== ========
Diluted net income (loss) per share $ .05 $ .15 $ (.03) $ .38
======== ======== ======== ========
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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 is authorized to 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. During the third quarter of 2000,
the Company repurchased 65,000 shares of the Company's common stock under the
plan. The shares were purchased at an average price of $4.37 per share, for a
total purchase price of $284,000. The impact of the stock repurchase activity
had no appreciable effect on earnings per share in the third quarter of 2000.
(5) REVENUE RECOGNITION
The Company follows SOP 97-2, SOFTWARE REVENUE RECOGNITION (as amended by SOP
98-9). 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.
(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 September 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 Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------ ----------- ----------- ---------
(unaudited)
Net (loss) income $ 586 $ 1,895 $ (371) $ 4,474
Other comprehensive loss:
Foreign currency translation
adjustments (39) -- (162) --
------- ------- ------- -------
Total comprehensive income (loss) $ 547 $ 1,895 $ (533) $ 4,474
======= ======= ======= =======
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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. SFAS No. 133, as amended, is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. The Company does not expect SFAS No. 133 to have a material affect on its
consolidated financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), which provides guidance on the recognition, presentation, and disclosure
of revenue in financial statements filed with the SEC. SAB No. 101 outlines the
basic criteria that must be met to recognize and provides guidance for
disclosures related to revenue recognition policies. The impact of SAB No. 101
will not have a material affect on the Company's consolidated financial position
or results of operations.
In March 2000, the FASB issued FASB Interpretation No. 44,"Accounting for
Certain Transactions Involving Stock Compensation" (" FIN No. 44"). FIN No. 44
further defines the accounting consequence of various modifications to the terms
of a previously fixed stock option or award under APB Opinion No. 25. FIN No. 44
became effective on July 1, 2000, but certain conclusions in FIN No. 44 cover
specific events that occur after December 15, 1998 or January 12, 2000. The
Company does not expect FIN No. 44 to have a material affect on its consolidated
financial position or results of operations.
(9) CONTINGENCIES
Between June 22, 2000 and August 14, 2000, four purported class-action
complaints were 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. A settlement has been approved but will not become final
until November 13, 2000 unless a notice of appeal or a motion for re-hearing is
filed prior thereto. Presently, the Company is uncertain 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. If a notice of appeal or a
motion for re-hearing is filed before the order is finalized, 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. 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 Ecometry family of software products 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.
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The following table sets forth, for the periods indicated, the dollar and
percentage changes of statement of operations items:
Three Months Ended Nine Months Ended Change Three Months Change Nine Months
September 30, September 30, Ended September 30, 2000 Ended September 30, 2000
------------------------- --------------------- ------------------------ ------------------------
2000 1999 2000 1999 $ % $ %
------------ ----------- -------- ---------- ------------ ---------- ------------ ----------
Revenue:
License fees and software sales $ 7,469 $ 7,354 $ 18,548 $ 19,152 $ 115 1.6% $ (604) (3.2)%
Computer hardware sales 2,547 2,670 7,601 6,535 (123) (4.6) 1,066 16.3
Support 2,466 2,090 7,033 5,523 376 18.0 1,510 27.4
Services 1,623 1,206 4,109 3,480 417 34.6 629 18.1
-------- -------- -------- -------- -------- ------ -------- ------
Total revenue 14,105 13,320 37,291 34,690 785 5.9 2,601 7.5
Cost of sales and services:
License fees and software sales 2,440 2,217 7,295 5,545 223 10.0 1,750 31.6
Computer hardware sales 2,233 2,096 6,267 4,837 137 6.6 1,430 29.6
Support 1,411 1,283 4,591 3,580 128 10.0 1,011 28.2
Services 907 866 2,698 2,468 41 4.7 230 9.4
-------- -------- -------- -------- -------- ------ -------- ------
Total cost of sales
and services 6,991 6,462 20,851 16,430 529 8.2 4,421 26.9
-------- -------- -------- -------- -------- ------ -------- ------
Gross margin 7,114 6,858 16,440 18,260 256 3.7 (1,820) (10.0)
Operating expenses:
General and administrative 2,932 1,915 8,759 6,077 1,017 53.2 2,682 44.1
Sales and marketing 1,736 1,379 5,816 4,069 357 25.8 1,747 42.9
Research and development 1,066 875 3,333 2,258 191 21.8 1,075 47.7
-------- -------- -------- -------- -------- ------ -------- ------
Total operating expenses 5,734 4,169 17,908 12,404 1,565 37.5 5,504 44.4
-------- -------- -------- -------- -------- ------ -------- ------
Income (loss) from operations 1,380 2,689 (1,468) 5,856 (1,309) (48.7) (7,324) (125.1)
Interest income, net 638 492 1,798 1,035 146 29.7 763 73.5
-------- -------- -------- -------- -------- ------ -------- ------
Income before income tax expense 2,018 3,181 330 6,891 (1,163) (36.6) (6,561) (95.2)
Income tax expense (1,432) (1,286) (701) (2,417) 146 10.2 1,716 71.0
--------- -------- --------- -------- -------- ------ -------- ------
Net income (loss) $ 586 $ 1,895 $ (371) $ 4,474 $ (1,309) (69.1)% $ (4,845) (108.3)%
======== ======== ======== ======== ======== ====== ======== ======
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
LICENSE FEES AND SOFTWARE SALES. License fees and software sales accounted for
approximately 53.0% of the Company's total revenue for the three months ended
September 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
increased 1.6% during the three months ended September 30, 2000 compared to the
same period in 1999. New client computer software sales increased 26.3% from
$2.7 million for the three months ended September 30, 1999 to $3.5 million in
2000, and existing client computer software sales decreased 13.2%, from $4.6
million to $4.0 million for the same periods. The increase in new client
software sales was due to a greater proportion of software license fees to the
total new client system sales. Existing client computer software sales decreased
due to fewer clients purchasing upgrades than during the third quarter of 1999.
COMPUTER HARDWARE SALES. Sales of computer hardware accounted for approximately
18.1% of the Company's total revenue for the three months ended September 30,
2000. Sales of computer hardware consist of sales of computer hardware systems
and peripheral hardware components. Computer hardware revenue decreased 4.6% for
the three months ended September 30, 2000, compared to the three months ended
September 30, 1999. Computer hardware revenue relating to new client sales
decreased 10.4% to $1.1 million for the three months ended September 30, 2000,
compared to $1.2 million for the same period in 1999. Computer hardware upgrades
were $1.4 million for the three months ended September 30, 2000 and September
30, 1999. Overall hardware sales were down for the three months ended September
30, 2000 as compared to the same period last year due to lower new customer
hardware sales. This is primarily due to a lower proportion of hardware sales to
the total new client system sales.
SUPPORT. Support revenue accounted for approximately 17.5% of the Company's
total revenue during the three months ended September 30, 2000. Support revenue
consists of fees for technical support services and updates for the Ecometry
software, optional modules, and integrated third-party software utilities.
Support revenue increased 18.0% during the three months ended September 30,
2000, compared to the three months ended September 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 11.5% of the Company's
revenue for the three months ended September 30, 2000. Services revenue consists
principally of revenue derived from consulting, custom programming, training,
and web design. Services revenue increased 34.6% for the three months ended
September 30, 2000 compared to the same period in 1999. This increase was due
primarily to an expanded client base and increased demand for consulting and web
design services.
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TOTAL REVENUE. Total revenue increased 5.9% for the three months ended September
30, 2000. New client sales increased 14.9% to $4.6 million from $4.0 million for
the three months ended September 30, 1999. The increase in new system sales
revenue resulted primarily from larger customer contracts during the third
quarter. Sales to existing customers decreased by 10.0% from $6.0 million to
$5.4 million due to fewer system upgrades during the quarter ended September
30, 2000.
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 10.0% during the three months ended September 30, 2000, compared to
the three months ended September 30, 1999. Cost of computer software as a
percentage of software license fees increased to 32.7% from 30.1% for the three
months ended September 30, 1999. These increases are due to higher personnel
costs combined with increased third party software costs and lower margins on
third party software.
COST OF COMPUTER HARDWARE SALES. Cost of computer hardware sales, which consists
of purchases of computer hardware systems and peripheral hardware components,
increased 6.6% for the three months ended September 30, 2000, compared to the
same period in 1999. Cost of computer hardware as a percentage of computer
hardware revenue was 87.6% and 78.5% for the three months ended September 30,
2000 and 1999, respectively. These increases are attributable to a change in the
sales mix toward larger clients, which generate lower margins. The Company
anticipates that future sales to larger companies will be at similar margins.
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 10.0% for the three months ended September
30, 2000 from the same period in 1999. The increase was primarily due to an
increase in support personnel necessary to meet the requirements of a growing
client base. Cost of support as a percentage of support revenue decreased to
57.2% from 61.4% for the three months ended September 30, 2000 and 1999,
respectively. This decrease is due to new client additions combined with
increased efficiencies.
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 4.7% during the three months
ended September 30, 2000, compared to the same period in 1999. Cost of services
as a percentage of services revenue decreased to 55.9% for the three months
ended September 30, 2000 from 71.8% for the same period in 1999. The decreased
costs were primarily due to greater utilization of existing personnel.
TOTAL COST OF SALES AND SERVICES. Total cost of sales and services increased by
8.2% for the three months ended September 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 and lower margins on third party software
and hardware components.
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 53.2%
for the three months ended September 30, 2000, compared to the same period in
1999. This increase was due to higher legal and professional fees, facility
costs, communication expenses, travel expenses, increases to the provision for
doubtful accounts, recruiting and relocation fees, and other costs associated
with additional personnel. General and administrative expenses as a percentage
of total revenue increased to 20.8% for the three months ended September 30,
2000 from 14.4% 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
25.8% for the three months ended September 30, 2000, compared to the same period
in 1999. This increase resulted from additional personnel costs due to an
expanded sales force, increased trade show expenses, travel expenses and
expanded marketing, advertising, and public relations programs. Sales and
marketing expenses as a percentage of total revenue increased to 12.3% for the
three months ended September 30, 2000 from 10.4% for the three months ended
September 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 21.8% during the three
months ended September 30, 2000 compared to the same period in 1999. This
increase was primarily due to ongoing investment in the development of new and
improved products. The Company expects to continue making significant
investments in new and enhanced products in future periods.
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INCOME FROM OPERATIONS. As a result of the foregoing factors, the Company's
income from operations decreased by 48.7% for the three months ended September
30, 2000 as compared to the three months ended September 30, 1999.
INTEREST INCOME, NET. Net interest income increased by 29.7% for the three
months ended September 30, 2000, compared to the same period in 1999. The
increase was due to higher interest rates earned on cash reserves.
INCOME TAX EXPENSE. The effective income tax rate for the three months ended
September 30, 2000 was 71.0% compared to 40.4% 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. The primary reason for
the high effective tax rate resulted from an increase in estimated operating
losses from the Company's United Kingdom subsidiary that currently cannot be
utilized to reduce income tax expense.
NET INCOME. As a result of the above factors, the Company's net income decreased
by 69.1% for the three months ended September 30, 2000 compared to the same
period in 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
LICENSE FEES AND SOFTWARE SALES. Sales of license fees and software sales
accounted for approximately 49.7% of the Company's total revenue for the nine
months ended September 30, 2000. License fees and software sales decreased 3.2%
during the nine months ended September 30, 2000 compared to the same period in
1999. This decrease is attributable to a decrease in Ecometry software sales to
new and existing clients, offset by increased sales of Ecometry Online software
and Module software and third party software embedded in the Company's products
to new and existing clients. New client computer software sales were $8.6
million for both the nine months ended September 30, 2000 and September 30,
1999. Computer software upgrades decreased by 5.2% from $10.5 million to $10.0
million for the same periods primarily due to fewer clients purchasing
additional user licenses.
COMPUTER HARDWARE SALES. Sales of computer hardware accounted for approximately
19.6% of the Company's total revenue for the nine months ended September 30,
2000. Computer hardware revenue increased 16.3% for the nine months ended
September 30, 2000, compared to the nine months ended September 30, 1999.
Computer hardware revenue relating to new client sales decreased 16.3% for the
nine months ended September 30, 2000, compared to the same period in 1999. The
decrease is primarily due to a lower proportion of hardware sales to the total
system sales. Computer hardware upgrades increased by 54.1% for the nine months
ended September 30, 2000, compared to the same period in 1999. The increase in
2000 was attributable to upgrades from an expanded client base and several of
the Company's clients performing major system upgrades.
SUPPORT. Support revenue accounted for approximately 18.9% of the Company's
total revenue during the nine months ended September 30, 2000. Support revenue
increased 27.4% during the nine months ended September 30, 2000, compared to the
nine months ended September 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 11.0% of the Company's
revenue for the nine months ended September 30, 2000. Services revenue increased
18.1% during the nine months ended September 30, 2000 compared to the same
period in 1999. This increase was due to greater client demand for web design,
consulting, implementation, custom programming and training services.
TOTAL REVENUE. Total revenue increased 7.5% for the nine months ended September
30, 2000, compared to the same period in 1999. New client sales decreased 5.1%
to $11.4 million from $12.0 million for the nine months ended September 30,
1999. Revenue from client system and component upgrades increased by 7.8% to
$14.8 million for the nine months ended September 30, 2000, compared to $13.7
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
31.6% during the nine months ended September 30, 2000, compared to the nine
months ended September 30, 1999. The increase is attributable to the additional
costs of training and installation personnel and third party software
components. Cost of computer software as a percentage of software license fees
increased to 39.3% from 29.0% for the nine months ended September 30, 1999. The
increase is due to the aforementioned reasons as well as lower margins on third
party software sales during the nine months ended September 30, 2000.
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COST OF COMPUTER HARDWARE SALES. Cost of computer hardware increased 29.6% for
the nine months ended September 30, 2000, compared to the same period in 1999.
This increase to hardware cost is related to the 16.3% increase in computer
hardware revenue for the nine months ended September 30, 2000 compared to the
same period in 1999. Cost of computer hardware as a percentage of computer
hardware revenue was 82.5% and 74.0% for the nine months ended September 30,
2000 and 1999, respectively. This increase is due primarily to greater sales to
existing clients and a change in the sales mix toward larger clients, which
generate lower margins. The Company anticipates that future sales to larger
customers will generate lower margins on hardware sales.
COST OF SUPPORT. Cost of support increased 28.2% for the nine months ended
September 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
65.3% for the nine months ended September 30, 2000 from 64.8% for the same
period in 1999.
COST OF SERVICES. Cost of services increased 9.4% during the nine months ended
September 30, 2000, compared to the same period in 1999. The increase was due to
lower margins on third party software and computer hardware sales, higher
personnel costs, the greater use of outside contractors to meet increased
demand.
TOTAL COST OF SALES AND SERVICES. Total cost of sales and services increased by
26.9% for the nine months ended September 30, 2000, compared to the same period
in 1999. The increase in total cost of sales and services is attributable to
lower margins on third party software and computer hardware sales and higher
personnel costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 44.1%
for the nine months ended September 30, 2000, compared to the same period in
1999. This change was due to increases to the Company's provision for doubtful
accounts, including a provision for one of the Company's clients that
discontinued its operations, facility costs, legal and professional fees, travel
expenses, and other costs associated with additional personnel.
SALES AND MARKETING. Sales and marketing expenses increased by 42.9% for the
nine months ended September 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
costs associated with the Company's user conference. Investments in sales and
marketing activities are planned to continue in future periods.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 47.7%
during the nine months ended September 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. 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 125.1% for the nine months ended
September 30, 2000 as compared to the nine months ended September 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 by 73.5% for the nine
months ended September 30, 2000, compared to 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. Interest expense for the nine
months ended September 30, 1999 was $165,000.
INCOME TAX EXPENSE. The effective tax rate for the nine months ended September
30, 2000 was 212.4% compared to 35.1% for the first nine months of 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. The tax rate was reduced 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. 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. The primary reason for the high effective tax rate
resulted from an increase in estimated operating losses from the Company's
United Kingdom subsidiary that currently cannot be utilized to reduce income tax
expense.
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NET (LOSS) INCOME. As a result of the above factors, the Company's net income
decreased by 108.0% for the nine months ended September 30, 2000 compared to the
same period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company's primary sources of liquidity consisted of
cash and cash equivalents totaling $38.0 million.
The Company's operating activities used cash for the nine months ended September
30, 2000 in the amount of $809,000 and provided cash in the amount of $1.4
million for the same period in 1999. The decrease in cash provided was
primarily due to lower income from operations during the nine months ended
September 30, 2000.
Cash used in investing activities was approximately $1.7 million and $877,000,
for the nine months ended September 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 nine months of 2000 due to expenses associated
with a material expansion of existing facilities. The Company expects its
purchases of property and equipment will increase as its employee base grows.
For the nine months ended September 30, 2000, cash provided by financing
activities totaled $1.3 million, which consisted primarily of proceeds from
employee stock option exercises. This was slightly offset by the repurchase of
65,000 shares of the Company's common stock during the third quarter of 2000.
The shares were purchased at an average price of $4.37 per share, for a total
purchase price of $284,000. Cash provided by financing activities totaled $38.7
million for the nine months ended September 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 September 30, 2000, the Company had working capital of approximately $43.2
million as compared to working capital of approximately $42.1 at September 30,
1999. At this time, the Company cannot reasonably estimate the ultimate loss, if
any, related to these actions and, therefore, the Company has not recorded an
accrual for loss as of September 30, 2000.
As described elsewhere in this form 10-Q under "Legal Proceedings," the Company
is party to various legal proceedings including class action lawsuits and an
involuntary bankruptcy proceeding by one of its customers. With respect to the
class action lawsuits, management believes these class actions are without merit
and intends to defend these lawsuits vigorously. At this time, the Company
cannot reasonably estimate the ultimate loss, if any, related to these class
actions and, therefore, the Company has not recorded an accrual for loss as of
September 30, 2000. A loss in this litigation may have a material adverse effect
on the Company's results of operations and financial condition.
With respect to the bankruptcy of one of the Company's customers, since
management does not believe that it will be able to collect its current
receivables from the customer, management has recorded a loss reserve for such
receivables. Management may be required to increase this reserve if the
settlement described under "Legal Proceedings" is not finalized and the Company
is 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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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. To date the
Company has repurchased 65,000 shares totaling to $284,000. The Company does not
believe any purchases under the plan will affect its ability to fund operations.
Management believes that it has adequate cash to finance operations in the
foreseeable future.
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 revenue, margins, product mix and service
revenues, research and development and selling, general and administrative
activities, liquidity and capital needs, resources and the outcome of legal
proceedings involving the Company. 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.
Factors that may cause actual future events to differ materially from our
forward-looking statements include, but are not limited to the following:
- the unpredictability of revenues due to the large dollar
amounts of the Company's individual license transactions and
the lengthy and unpredictable sales cycles for these
transactions;
- the Company's dependence on the development, introduction and
client acceptance of new and enhanced versions of the Ecometry
software products;
- the Company's ability to control costs, including costs
associated with the expansion of the Company's sales force and
infrastructure and increased research and development
expenses;
- the Company's dependence on new product development;
- uncertainties regarding the outcome of pending class action
litigation against the Company and the bankruptcy of one of
the Company's customers;
- the Company's reliance on a combination of trade secrets,
copyright and trademark law, nondisclosure agreements and
technical measures to protect its proprietary technology;
- the Company's ability to sell its products in new markets
within the direct commerce industry;
- the Company's dependence on proprietary technology licensed
from third parties;
- the Company's ability to continue to resell a variety of
hardware and software developed and manufactured by third
parties;
- the Company's ability to maintain margins on the sale of
hardware and software developed and manufactured by third
parties;
- significant competition in the software and direct industry
and competitive pricing for the Company's products;
- customer concentration;
- fluctuations in demand for the Company's products which are
dependent upon the condition of the software and direct
commerce industries;
- the Company's ability to collect receivables; and
- other risks and uncertainties described in the Company's
prospectus dated January 29, 1999, Forms 10-K and 10-Q and
other documents filed with the Securities and Exchange
Commission.
In light of these risks and uncertainties, the forward-looking events discussed
in this Form 10-Q might not occur. The Company undertakes no obligation to
publicly update or revise any forward-looking statements contained in this Form
10-Q.
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.
Between June 22, 2000 and August 14, 2000, four purported class-action
complaints were 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.
All four 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 any complaint. On September 11, 2000 the court consolidated all four actions,
and appointed four individuals to serve as "lead plaintiffs." Plaintiffs are
required to serve an amended and consolidated complaint no later than November
20, 2000. Discovery in this action has 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. At this time, the Company cannot reasonably estimate the ultimate
loss, if any, related to these actions and, therefore, the Company has not
recorded an accrual for loss as of September 30, 2000.
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In May 2000, one of the Company's clients discontinued its operations.
Subsequently, on July 3, 2000 an involuntary bankruptcy petition for relief was
commenced by certain creditors against the client. The Company and its Committee
of Unsecured Creditors have negotiated a settlement for the dismissal of the
Involuntary Bankruptcy petition, in exchange for which the Company's client and
its creditors will, among other things, release each other from any and all
other claims that each may have against the other. In addition to the releases,
the Company's client will dedicate certain segregated funds in the total amount
of $2.7 million to be distributed to all of the holders of allowed, undisputed,
uncontingent, and liquidated unsecured claims, which according to the Company's
client, will total approximately $12.5 million. From these amounts it is
estimated that the holders of such claims will receive a distribution of
approximately 20%. The order approving the settlement was entered on November 2,
2000 and will not become final until November 13, 2000, unless a notice of
appeal or a motion for re-hearing is filed prior thereto. At most, the Company
will be able to recover a maximum estimated amount of 20% of its current
receivables from the client, and therefore set up an additional reserve on
account of such receivables. If a notice of appeal or a motion for re-hearing is
filed before the order is finalized, the settlement dismissed herein may not be
enforceable or binding upon the parties. Thus, 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. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 29, 1999, the Company's Registration Statement on Form S-1, File No.
333-63125, relating to the Company's initial public offering was declared
effective by the SEC. As of November 10, 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.
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 July 3, 2000, which included a copy
of a press release announcing the Company's preliminary expectations for the
second fiscal quarter ending June 30, 2000. The Company anticipated revenue in
the range of $9 million to $11 million, compared to $12.3 million in the second
quarter of 1999. The Company also anticipated reporting a loss per share in the
range of $.13 to $.16 compared to net income of $.12 per share for the second
quarter of 1999.
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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: November 10, 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