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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
CHAPTER A FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 0-25297
ECOMETRY CORPORATION
(Exact name of registrant as specified in its charter)
FLORIDA 65-0090038
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1615 SOUTH CONGRESS AVENUE, 33445-6368
DELRAY BEACH, FLORIDA (Zip Code)
(Address of Principal Executive Offices)
(Registrant telephone number, including area code): (561) 265-2700
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE PER SHARE (NASDAQ NATIONAL MARKET)
(Title of each Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 2, 2001, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $15,103,916 based on the
closing price on that date of $1.875 per share. As of that date, there were
12,381,122 shares of the registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Items 10, 11, 12 and 13 of Part III of this Form
10-K is incorporated by reference to the Definitive Proxy Statement of the
Company relating to the 2001 Annual Meeting of Shareholders.
Certain exhibits listed in Part IV of this Form 10-K are incorporated by
reference from prior filings made by the registrant under the Securities Act of
1933, as amended.
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ECOMETRY CORPORATION AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
INDEX
PAGE
NUMBER
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 20
Item 3. Legal Proceedings........................................... 20
Item 4. Submission of Matters to a Vote of Security Holders......... 21
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 22
Item 6. Selected Financial Data..................................... 23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 25
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 34
Item 8. Financial Statements and Supplementary Data................. 34
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 34
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 35
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PART I
This report contains or incorporates by reference forward-looking
statements that are subject to risks and uncertainties. Forward-looking
statements include information concerning the financial condition, results of
operations, plans, objectives, future performance and business of Ecometry
Corporation and its subsidiaries (the "Company" or "Ecometry Corporation"),
formerly known as Smith-Gardner & Associates, Inc. The Company changed its name
to Ecometry Corporation in December 2000. The Company includes forward-looking
statements in descriptions of future earnings and cash flows, anticipated
capital expenditures and management's strategies, plans and objectives.
Statements preceded by, followed by or that include the words "believes,"
"expects," "anticipates" or similar expressions are generally considered to be
forward-looking statements. Forward-looking statements involve both known and
unknown risks and uncertainties and actual results or performance may therefore
differ materially from the expected results or performance expressed or implied
by the forward-looking statements.
ITEM 1. BUSINESS
GENERAL
The Company is a leading provider of enterprise software solutions and
services to the multi-channel commerce industry. The Company's clients include
direct marketing and catalog companies, retailers and manufacturers with
significant direct sales channels, Internet-only companies and fulfillment
houses. The Company's Ecometry family of software products ("Ecometry Retail
Enterprise" or "Ecometry") is designed to automate multi-channel commerce
activities, including marketing, advertising analysis, sales, telemarketing,
ordering, customer services, merchandising, procurement, electronic and Internet
commerce, supply chain management, warehousing, shipping, accounting and systems
operation. Ecometry Retail Enterprise also provides managers and sales personnel
with real-time operations, inventory and customer data to improve both
management decision making and customer service.
Since its inception in 1988, management of the Company has concentrated on
providing software-based systems and services to leading direct marketing
companies and to retailers and manufacturers with significant direct sales
channels. By focusing on this market, management believes that the Company has
been able to develop significant industry expertise that has been incorporated
in the functionality of the Company's products and services. The Ecometry
Commerce Engine offers over 3,000 functional options, the ability to process up
to 300,000 transactions per day and is used primarily by companies with
high-volume direct sales operations. Ecometry Retail Enterprise, the Company's
end-to-end retail commerce solution, is a highly scalable system that enables
real-time interactive customer ordering and customer services, and automates the
processing of front and back-office functions for companies selling products
through all direct sales channels.
The Company's Ecometry Retail Enterprise Solution is used by more than 300
clients located primarily in North America and Europe. Ecometry Corporation's
client base includes companies such as Nordstrom, RedEnvelope.com, Lego, Nine
West, Brookstone, Egghead.com, KBkids.com, Hickory Farms, MicroWarehouse, QVC
Network and Time Life.
The Company was incorporated as a Florida corporation in 1988. The
Company's principal offices are located at 1615 South Congress Avenue, Delray
Beach, Florida 33445-6368 and the telephone number at that location is (561)
265-2700.
INDUSTRY BACKGROUND
Prior to the emergence of the multi-channel commerce industry, the direct
sales industry principally consisted of companies engaged in marketing and
selling their products and services through traditional direct marketing
channels, such as catalogs, direct mailings, print ads, telemarketing,
television or radio. Typically, the selling process involved marketers
contacting and soliciting potential customers through these traditional direct
marketing channels. Those customers ordered their products by mail, paid by
check and received purchased products by carrier thereafter. This process
normally took four to six weeks due to lengthy processing times and slow
delivery via postal service. As the direct sales industry matured, the sales
process
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evolved to include toll-free telephone numbers for ordering and customer
service, faster delivery methods and customers' increasing preference to pay by
credit card. Until the mid 1980s, the direct sales industry remained dominated
by companies selling exclusively through traditional direct marketing channels.
In the 1990's, many companies selling exclusively through traditional
direct marketing channels achieved significant success due to their ability to
address growing customer demand for greater convenience and more personalized
service. As a result, many retailers who had previously sold only through retail
outlets entered the direct sales industry. Examples of such retailers include
Macy's, Bloomingdale's, Nordstrom and Saks Fifth Avenue, which market and sell
their products through retail outlets as well as catalogs and direct mailings.
The advantages of direct sales for retailers include an increased ability to
target existing clients, provide better customer service and decrease their
costs of operations.
With the emergence and acceptance of the Internet as a business-to-business
and business-to-consumer sales channel and the rapid growth in interactive
Internet commerce, the direct sales industry has expanded to include a much
broader range of companies. In addition to traditional direct marketing efforts,
direct sales over the Internet have become a new, important sales channel for a
wide range of companies who traditionally relied predominantly on in-store
sales, large in-house direct sales organizations, independent distributors, or
person-to-person solicitation. The growth in interactive Internet commerce
coupled with increasing competition among retailers and marketers have
significantly increased the use of direct marketing and sales strategies and
have greatly expanded the range of marketers and retailers deploying such
strategies. This new multi-thronged sales approach to retailing, referred to as
multi-channel commerce, is being quickly adopted by companies who have
previously sold through single channels.
THE MULTI-CHANNEL COMMERCE INDUSTRY TODAY
The multi-channel commerce industry encompasses companies selling products
to customers through direct channels, such as catalogs, direct mail, TV
infomercials, radio, print ads, outbound telemarketing, the Internet and other
direct sales based channels, in addition to traditional in-store sales.
According to the Direct Marketing Association ("DMA"), U.S. sales revenue
attributable to the direct sales channel was estimated to reach more than $1.7
trillion in annual sales for the year 2000.
According to the DMA, the fastest growing segment within the direct sales
industry is interactive marketing over the Internet. Companies using this
marketing channel distribute advertising over the Internet via Web sites or paid
advertisements on targeted third-party sites or browsers and frequently offer
customers the convenience of purchasing merchandise directly through Internet
commerce applications. In 2000, $2.8 billion was forecasted by DMA in
expenditures for interactive marketing and it is expected to grow by 38%
annually to reach $13.8 billion in 2005. Sales revenue that results from
interactive media expenditures was expected by DMA to reach $24.2 billion in
2000. Online direct marketing sales are expected by DMA to grow annually by 41.3
% to reach $136.4 billion in 2005. As in other areas of direct marketing,
projected sales growth rates for the next five years are much higher than
projected growth rates for interactive marketing expenditures.
THE MULTI-CHANNEL COMMERCE SOFTWARE MARKET
As a result of the growth in Internet commerce and the increased use of
other direct sales channels, many marketers are expanding to a multi-channel
sales strategy and need to enhance their information technology solutions to
accommodate the direct sales business model. The Company believes that such
companies seek information technology solutions that can help them effectively
manage their customer database, order flow from web pages and other sales
channels while simultaneously centralizing and automating their front and
back-office operations and managing all aspects of their multi-channel sales
operations. These solutions must be able to integrate seamlessly with the other
systems or applications that these companies currently use, and must enable
real-time information flow to help managers target potential customers, analyze
sales and product strategies, enhance and access customer service records and
synchronize key data. Multi-channel retailers require systems that are flexible
and that support innovative new marketing initiatives and methods of operation,
which may be implemented in the future. Since certain direct sales segments,
particularly the
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Internet commerce segment, are growing rapidly, multi-channel commerce systems
must also be highly scalable and efficient.
Current technology alternatives for companies with multi-channel commerce
operations are typically comprised of general purpose or retail-oriented
enterprise resource planning ("ERP") software and electronic commerce add-on
applications without real-time access to enterprise databases. This technology
solution is prevalent among companies that traditionally sell through
wholesalers, distributors, in-house sales forces or retail outlets. Another
common technology alternative consists of point solutions targeted to Internet
commerce, but with limited breadth and depth of functionality. These point
solutions tend to be difficult to use and do not help managers access and
leverage the enterprise knowledge residing in company databases. In-house
technology solutions are also common in the multi-channel commerce industry,
especially among larger companies. These in-house solutions are typically
expensive to develop, modify and maintain and require a sophisticated in-house
software development staff. Also, technology development is typically not the
core strength of the company, and in-house software often lacks the vision and
perspective to keep up with technological change. As a result, management of the
Company believes that a significant opportunity exists for third-party
technology providers to offer enterprise-wide, best-of-breed software solutions
designed specifically for multi-channel commerce.
THE ECOMETRY CORPORATION SOLUTION
The Company's cornerstone software solution is Ecometry Retail Enterprise,
a fully integrated, enterprise-wide, mission-critical, multi-channel commerce
software suite which includes its award-winning systems previously known as MACS
and WebOrder. The software suite helps managers of multi-channel commerce
companies operate their businesses more effectively and efficiently by
automating operations and making available real-time information relating to
nearly every facet of these companies' operations. The solution incorporates
analytical tools, best-of-breed methodologies, in-depth functionality and
enterprise-wide information flow. The Company also provides extensive customer
support services, custom development and integration services as well as web
design, consulting, installation and training.
Ecometry Online (previously known as WebOrder) provides a real-time
interactive Internet commerce solution within the Ecometry suite. Ecometry
Online, first installed in November 1997, positions the Company to benefit from
the strong growth in the Internet commerce segment of the multi-channel commerce
industry. Ecometry Online provides real-time customer access to inventory
availability, order status and customer service functions. Ecometry Online
enables Internet marketers to effectively manage order flow from Web pages and
other direct sales channels while simultaneously integrating marketing, sales
and back-office operations.
The Company's Ecometry International product offers a solution targeted at
multi-channel commerce companies based abroad. Ecometry International is
specifically designed to address issues that are unique to these companies, such
as value-added tax requirements, multiple currencies, international document
formats, local banking and shipping carrier interfaces, and different mailing
and address formats.
The Company's solutions are designed to provide its clients with the
following benefits:
Fully Integrated and Highly Functional Solutions. Ecometry supports
all of the major areas of multi-channel commerce including marketing,
advertising analysis, merchandising, sales, purchasing, accounting,
telemarketing, ordering, customer service, electronic and Internet
commerce, supply chain management, warehousing, shipping, production and
systems operation. The solution enables real-time information flow that
supports marketing and database analytics and sophisticated management
reports. Ecometry also eliminates potential errors arising from the
maintenance of multiple unsynchronized databases. In addition to
approximately 3,000 standard features, the Company's software solutions
offer approximately 1,500 customization options and enable its users to
tailor this solution to their changing business needs and processes without
disrupting the underlying data model and interrupting the business.
Versatility and Open Technology Environment. The Ecometry solutions
use open technology and readily integrate with many third-party systems and
software applications. Ecometry Online resides on
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front-end web servers and runs on Unix, Linux and NT platforms. Ecometry
Commerce Engine resides on back-end servers and runs on HP3000, Unix, and
NT platforms. The solution is ODBC compliant, which enables the exchange of
data with other common computing platforms used by manufacturers and
retailers, such as IBM's AS400 and various other systems. Ecometry has been
successfully integrated with software solutions provided by third-party
vendors such as Island Pacific, Manhattan Associates, PeopleSoft and Great
Plains. We believe the entire multi-channel commerce market can be
addressed by Ecometry's present platforms.
High Volume Internet Commerce Capability. Ecometry Online provides an
Internet commerce solution, which incorporates the scalability and
functionality of its proven Ecometry Commerce Engine and can accommodate
the Internet commerce requirements of very large retailers. Ecometry Online
enables traditional retailers, manufacturers, and catalogers to add a high
volume Internet commerce channel to their marketing and sales activities.
Processing Scalability and Reduced Operating Costs. Ecometry enables
companies to process up to 300,000 orders per day, minimize overhead costs,
enhance decision support and data analytics, improve the efficiency and
quality of customer services and streamline overall operations. Ecometry
can also reduce the operating costs that would otherwise be associated with
the ongoing maintenance and updating of legacy, batch and mainframe
systems.
STRATEGY
The Company's objective is to become the world's leading provider of
software solutions to the multi-channel commerce industry. The Company's
strategies to achieve this objective include the following:
Capitalize on Multi-Channel Commerce Growth. The Company intends to
continue to expand its marketing and sales of Ecometry Retail Enterprise to
traditional retailers and manufacturers as well as direct marketing and
catalog companies who are selling to their customers across multiple touch
points, such as websites, mobile wireless devices, stores, call centers and
online trading exchanges. Ecometry offers a sophisticated, highly scalable
technology solution for multi-channel commerce activities providing a
single view of the customer across each customer interaction channel. With
the emergence of the Internet as the fastest growing sales and service
medium of the retail industry and the growing need for retailers to be more
competitive, companies are rapidly adopting multi-channel sales and service
strategies.
Develop New Product Offerings. The Company is expanding its product
line with new complementary front-end modules that are designed to be
integrated with Ecometry. One such product offering, released in April
2000, is E-Mail Executive, an online e-mail management system that
intelligently routes and responds to incoming customer e-mails. E-Mail
Executive is fully integrated with the Ecometry database of product
information and customer order history. Additionally, the history of e-mail
correspondence is centrally maintained and viewable by call center
representatives. The Company believes that E-Mail Executive is one of its
many new software modules that allow multi-channel retailers to increase
sales, improve customer service and maintain customer loyalty.
Deploy Product Offerings Across New Platforms. The Company completed
development of its Ecometry solutions on the Unix platform in 2000 and will
be focused on deploying it at client sites in early 2001. Additionally, the
Company released an updated version of its NT product that incorporates all
the features and functions of the HP3000-based product with the exception
of a built-in General Ledger and Accounts Payable system. With Ecometry
available on the HP3000, Unix and NT platforms, the company believes it can
now address a broader market.
Extend Product Offerings With Strategic Alliances. The Company seeks
to increase its business development activities and further extend its
product line through partnerships with companies offering best of breed
solutions. The Company established a formal Business Alliance Program in
2000 targeted at establishing new strategic technology and service partners
to maximize lead generation opportunities and to further enhance Ecometry
software and services.
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Develop Global Markets. The Company seeks to further develop its
international presence and sales. The Company opened offices in the United
Kingdom and Australia in mid-1997 and has since added approximately 50
employees to its international operations. Although the Company intends to
close its operation in Australia in 2001, it will continue to leverage its
strong domestic presence to increase its sales in international markets,
particularly in Europe.
Increase Sales to Existing Clients. In 2001, the Company's sales team
intends to build on the momentum in 2000 for selling optional product
modules to its existing clients. Optional modules such as Predictive
Response, Computer Telephony Integration (CTI), Inventory Forecasting,
E-Mail Executive and other new modules planned for release in 2001 are
examples of the optional modules expected to be marketed to existing and
new clients.
Expand Direct Sales Force. In 2000, the Company expanded and
restructured its sales organization with new direct sales executives and
technical sales support consultants. Additionally, regional sales
executives were assigned account management responsibilities for existing
clients in their territory in order to get closer to the Company's
customers and maximize client add-on sales opportunities. The Company will
continue to evaluate the need to increase the size of its sales force in
order to penetrate its expanded market opportunity.
Expand Service Offerings. The Company's consulting and service
offerings are critical components of its client-driven solution. The
Company intends to continue to expand its comprehensive consulting and
client support services to facilitate the timely installation,
implementation and effective utilization of its products.
Pursue Strategic Opportunities. The Company believes that the market
for software which automates multi-channel commerce operations is highly
fragmented and rapidly evolving, with many new product introductions and
many large and small industry participants. These factors may create the
opportunity to effect strategic transactions, including acquisitions,
alliances or other partnerships, in order to increase the breadth of the
Company's product offerings, establish new sales and marketing channels and
exploit evolving market opportunities. While the Company presently has no
commitments to effect any such transactions, it intends to pursue such
opportunities in order to enhance further its competitive position as the
marketplace evolves.
PRODUCTS
The Ecometry family of products offers an integrated, flexible, modular
solution for front and back-office operations, decision support analytics,
Internet commerce marketing and transaction processing functionality. The first
version of the Ecometry Commerce Engine (previously known as MACS) was installed
in 1990. In 1997, the Company released a new Internet-based solution called
Ecometry Online (previously known as WebOrder). Together, the Ecometry Commerce
Engine and the Ecometry Online module, make up the Ecometry suite of
applications. Also part of the Ecometry family of products is Ecometry
International, which was designed to accommodate specific European business
requirements and was introduced by the Company in January 1998.
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The following chart summarizes the core Ecometry products and typical
users:
PRODUCT DESCRIPTION OF FUNCTIONS TYPICAL USERS
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Ecometry Retail Enterprise........ Fully integrated, Companies selling through
enterprise-wide, multi-channel multiple channels including
commerce solution that Direct Marketing companies,
automates all major functional Retailers and Manufacturers
areas for companies selling with daily transaction volumes
through the Internet, retail of up to 300,000.
stores, catalogs, direct mail,
telemarketing, print ads, mail,
television, radio and other
direct sales channels; includes
over 3,000 functions
encompassing marketing,
advertising, sales,
merchandising, purchasing,
accounting, shopping cart and
taking orders, customer
services, warehousing,
shipping, production and
systems operation; providing
real-time management
information for each functional
area.
Ecometry International............ Ecometry International International-based
(previously known as EuroMACS) multi-channel retailers,
accommodates the needs of including Direct Marketing
multi-channel retailers located Companies, Retailers and
abroad in areas relating to Manufacturers with daily
value-added tax requirements, transaction volumes of up to
international mailing address 300,000.
formats, and interfacing with
international shipping carriers
and banking institutions.
The prices of Ecometry Retail Enterprise and Ecometry International range
from $80,000 to more than $5 million, depending on the number of users and CPUs
required.
In addition to the core products incorporated into Ecometry Retail
Enterprise, there are a number of optional modules available to Ecometry
clients. The following chart summarizes the functions and benefits of the more
widely used optional modules:
MODULE DESCRIPTION OF FUNCTIONS BENEFITS
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Point of Sale..................... Interfaces real-time with the Enables companies to run a
catalog/Internet customer and store and direct sales company
order database and facilitates via one centralized database.
the display of separate store
inventories; provides cash
register processing and
optional drop shipping of
unavailable items.
Knowledge Center.................. Provides access to marketing Assists clients in increasing
and merchandising information profitability and provides
to facilitate real-time clients a competitive business
decision support needs. advantage.
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MODULE DESCRIPTION OF FUNCTIONS BENEFITS
- ------ ------------------------ --------
Assembly.......................... Facilitates the procurement of Enables companies to run light
raw materials and creates bills manufacturing operations.
of materials to track assembly
process; tracks costs of
assembly (including labor and
machine time) and forecasts
demand for raw materials.
Continuity........................ Enables negative option-type Streamlines operations of
promotions and facilitates companies that sell books,
monthly club programs, customer records, videos and other
maintenance procedures and continuing- demand products.
other incentive programs.
Installment Billing............... Facilitates installment Enables billing of customers'
payments, returns and credit cards in multiple
cancellations. installments.
Outbound Telemarketing............ Uses existing selection Enables companies to become
criteria and Ecometry database more proactive in selling to
to create campaigns; automates existing customers and
customer service and prospects.
solicitation functions.
Computer Telephony Integration
(CTI)........................... Provides a caller ID feature Decreases telephone line and
which facilitates rapid order personnel costs associated with
entry and customer service a phone operator requesting
look-up functions. customer information to search
the database and bring up their
account.
Radio Frequency Inventory
Management...................... Provides for wireless real-time Increases warehouse personnel
inventory updates between the productivity and improves
mobile warehouse personnel and inventory accuracy.
Ecometry.
Predictive Response............... Facilitates dynamic cross-sell Enables companies to increase
and upsell recommendations to conversion of web browsers to
online customers using buyers and increase the average
behavioral profiling, past dollars per order.
purchase history and rules
based logic.
E-Mail Executive.................. Automatic e-mail routing based Enables companies to
on keywords. Intelligent e-mail efficiently manage all inbound
responses can be driven from customer e-mails and automate
predefined templates and the The response process.
knowledge database.
Gift Registry/Wish Lists.......... Offers customers the ability to Enables companies to facilitate
create "wish lists" and gift the gift purchasing process for
registries for personal use or their customers Via the
for sharing with friends and Internet.
family.
Wireless Application Protocol
(WAP)........................... Ecometry marketing, ordering Enables companies to increase
and customer service functions sales penetration by offering
via wireless devices (mobile ordering and service
phones, digital assistants, capabilities via wireless
etc.). devices.
Pricing for these optional modules is based on individual user requirements
and needs.
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The Ecometry Commerce Engine operates in a HP Series 3000, MPE/iX
environment, HP 9000 Unix environment and Microsoft Windows NT environment.
Ecometry Retail Enterprise is a scalable, fully upward compatible computer
system in which all hardware upgrades are performed at the CPU site. The
programming languages used for Ecometry are COBOL, C++, Java and Visual Basic.
All HP3000 and HP9000 Ecometry systems provide high online transaction
processing performance and functionality and support major networking protocols
such as OSI, TCP/IP, SNA, and OSF/DCE. The Company has developed its own TCP/IP
Application Program Interface ("API"), which serves as the foundation to
communicate directly between Ecometry and the Internet. This socket-based API
also has the ability to communicate with other Windows-based applications.
Ecometry requires a Microsoft Internet information server and communicates with
the HP3000 or HP9000 through the Company's own API. The API enables Ecometry to
communicate with other platforms through an exchange of data from Ecometry to
databases including Oracle, Microsoft SQL Server and Microsoft Access.
PRODUCTS UNDER DEVELOPMENT
The Company is currently developing new products in response to demands
presented by companies in the multi-channel commerce industry including:
DESCRIPTION OF
PRODUCT PRODUCT BENEFITS
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Ecometry Parallel WebShopper................ Provides highly Enables highly
scalable web content scalable Internet
and shopping functions commerce functions and
for high volume redundancy
websites through the capabilities for high
use of Ecometry's volume websites.
Universal Data
Interchange (UDI)
technology.
Ecometry Content Manager.................... Manages extensible Enables merchandisers
product content for and web designers to
the Internet, such as tap product
product information from a
specifications, central database for
customer testimonials, enhanced and
installation/ care integrated product
instructions, etc. management functions.
Ecometry Campaign Manager................... Provides sophisticated Enables marketers to
internet campaign cost effectively
management functions acquire new customers
including personalized and increase repeat
opt in/opt out business from existing
programs. customers through the
Internet.
Ecometry StoreLink.......................... Provides integration Enables brick and
with 3(rd) party or mortar retailers to
in-house developed easily integrate
retail store existing store systems
management systems for into the Ecometry
sharing customer, Retail Enterprise
inventory and sales systems
data across the retail infrastructure.
enterprise.
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DESCRIPTION OF
PRODUCT PRODUCT BENEFITS
------- -------------- --------
Ecometry StoreRouter........................ Provides the option to Enables retailers to
ship leverage inventory
e-commerce/catalog across all sales
orders direct to channels -- minimizing
customers from an backorders due to out
individual retail of stock situations in
store or reserve an one channel.
item for pick-up based Additionally it
on customizable provides convenience
business rules. for customers who
prefer to pick-up
their orders at the
physical store.
Ecometry SupplyLink......................... Facilitates Enables companies to
Internet-based cost effectively
communications with expand their product
manufacturers and offerings and increase
suppliers for shipping their sales.
orders direct to
customers and provides
management of the
entire "virtual
warehousing" process.
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The Company expects to introduce these new optional Ecometry modules during
the next twelve to eighteen months.
CLIENTS
The Company's clients include traditional direct marketing and catalog
companies, brick and mortar retailers and manufacturing companies, Internet-only
based retailers, and fulfillment houses. The Company generally targets leading
multi-channel commerce companies in their respective industry segments. The
Company has sold its products to more than 320 clients. The following is a
representative list of the Company's clients as of December 31, 2000, generally
categorized by industry segment:
APPAREL/SHOES GENERAL MERCHANDISE GIFTS
Coldwater Creek, Inc RedEnvelope.com
dELiA*s KBkids.com
Huntington Clothiers, Inc Lego Direct Marketing, Inc.
Nine West Group Brookstone, Inc.
Nordstrom, Inc. Hammacher Schlemmer
COMPUTER SOFTWARE/HARDWARE TV HOME SHOPPING
Creative Computers Arcadia
Outpost.com, Inc. The Shopping Channel
Egghead.com, Inc. Littlewoods
Micro Warehouse QVC Network, Inc.
Multiple Zones International Inc.
EDUCATIONAL OTHERS
SUPPLIES/BOOKS
JC Penney Logistics, Inc.
ClassroomDirect.com Zomax
Marboro Books Corp. (Barnes & United Methodist Publishing House
Noble) United States Mint
Rodale Press, Inc
Time Life, Inc.
FOOD AND BEVERAGE
eCandy.com
Ethel M. Chocolates
Hickory Farms, Inc
Wine Enthusiast
None of the Company's clients accounted for more than 10% of the Company's
revenue in 2000, 1999 or 1998. For the year ended December 31, 1998, the
Company's two largest clients, United States Mint and Multiple Zones, in the
aggregate accounted for 16.8% of the Company's revenue. In 1997, the Company's
three largest clients, Genesis Direct, Inc., dELiA*s and KAO Infosystems Co., in
the aggregate accounted for 18.6% of the Company's revenue.
CLIENT SERVICES
Client Support
The Company believes that a high level of service and support is critical
to its success and an important competitive advantage. The Company's
installation teams consist of a project manager, a technical lead, two support
analysts and as many installers or trainers as are required for a given
installation. The installation team assists clients in configuring the system to
meet their business requirements. They also train the client's executives,
managers, and trainers on the application. Clients will stay in the installation
support team for a period of three to six months after they begin processing
orders through the system. Thereafter, the Company
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transitions the client to its standard support services provided by the Company.
The Company's installation teams completed 46 installations in 1998, 77
installations in 1999, and 39 installations in 2000.
The Company's client support function is responsible for servicing its
clients after the initial implementation project is complete. The Company has
client support operations in the United States and the United Kingdom and
currently supports approximately 250 clients in over 15 countries. These
operations enable the Company to respond more quickly and effectively to the
needs of its multinational and international clients. Approximately 75% of
current Ecometry users participate in the Company's support services program.
The Company believes that a close and active service and support
relationship is important to client satisfaction and also provides the Company
with information regarding evolving client requirements. For example, the
Company assigns an Account Manager to all clients. Each Account Manager handles
multiple clients and has a dedicated team of Support Analysts to ensure that
issues are resolved in an expedient manner. In addition, the Company provides
telephone support from 8:00 a.m. to 9:00 p.m. (EST) weekdays, 24 X 7 support for
production stopping issues, and uses electronic bulletin boards and other forms
of electronic distribution to provide clients with the latest information
regarding the Company's products.
In general, the Company provides two kinds of support: standard and Major
Account. The Company's standard support services provide complete, full time
technical support. When a client calls the Company with a question or issue, it
is initially reviewed by the Account Manager and then assigned to a team member
for resolution. More complex issues can then be referred to the Company's
technical support team and, if necessary, to the Company's programming unit. The
Company provides its clients with telephone support to give timely responses to
systems issues. The Company continually communicates with its clients through
seminars, and Account Managers provide weekly reports and conference calls to
each client detailing the status of the account. Event schedules, product
enhancement requests and electronic mail are available to clients on the
Company's Internet web site as well. In addition, this Internet support site
contains a knowledge database where searches can be done based on key-words, a
section for frequently asked questions and how-to's, an archive of release notes
for current and prior upgrades, as well as a complete set of on-line user
documentation.
The Company's Major Account support services provide premier technical
service for its larger clients through the assignment of a dedicated Account
Manager and a team of support personnel. For these clients, the Company
maintains a copy of their production software environment on the Company's
client support system to enable the Account Manager to expedite the resolution
of all client issues. The Company believes that such services build a strong,
strategic relationship, which enhances the future business prospects of the
Company.
Support contracts are typically service agreements pursuant to which
clients pay a monthly fee based on a percentage of the total software license
fee. Installation and training are either included in the initial license fee or
invoiced separately as services revenue. Depending on the services delivered,
support services typically are priced at 18% of the total license fee per year
and include, without charge, any new version releases of software. Major Account
services are typically priced based on the level of support services provided
and number of CPU's.
The Company's Client Services department has specialized groups to assist
clients with technical and hardware issues. The department also contains a
separate specialized group for web design, support and installation of Ecometry
Online. This group is responsible for assisting the customers with the
implementation of the Ecometry Online software feature, and the resolution of
all related issues. The web design group will work with clients to design a
quality E-commerce site that is fully integrated to the Ecometry application
suite.
As of December 31, 2000, the Company employed 142 Client Support Services
personnel, consisting of 35 Implementation, 61 Standard Support, 21 Major
Account support, 8 Web Implementation and support and 17 Technical and Hardware
support personnel.
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Consulting and Customization
The Company's consultants conduct site examinations and assist clients in
developing and implementing advanced Ecometry strategies. With significant
experience in the direct commerce industry, the Company's consultants provide
practical and proven direction in developing strategies, which apply
best-practice Ecometry methodologies that meet the client's requirements.
Depending on the client's needs, the Company offers:
- Requirements analysis and Ecometry software evaluation services;
- Advanced Ecometry methodology consulting;
- Benchmarking and other advanced strategy workshops involving clients and
industry experts;
- Integration services and technical consulting in areas such as data
conversion, system interfaces and database/network tuning;
- Project management services intended to lead the client through the
implementation activities required to achieve successfully the client's
business objectives; and
- Custom programming for system enhancements and system interfacing.
Consulting and customization services are delivered directly by the Company
but are also delivered in conjunction with third-party service providers such as
systems integrators and specialist consulting firms.
Training and Education
The Company offers a variety of standard and customized training and
education services at client sites, at the Company's headquarters in Delray
Beach, Florida, and at selected regional sites throughout the country. Upon the
installation of Ecometry Retail Enterprise, the Company provides a two-week
training course for each client's staff. The training curriculum is delivered by
specialists who utilize proven education techniques and advanced technology. The
Company also offers 15 standard courses at various times throughout the year as
well as customized on-site courses for training in the application of its
Ecometry products through the Ecometry Corporation Academy. The Company also
offers a "train the trainer" program in which the Company trains client
employees designated as trainers within their organization. These trainers are
educated in both training techniques and the optimal use of the Company's
products. The Company believes its train-the-trainer methodology is a crucial
element in the success of its implementations, which often span multiple
departments, plants and countries. Continuing education and training is
delivered through standard courses with package prices or can be contracted for
on a time and materials basis.
SALES AND MARKETING
The Company markets and sells its products and services to new prospects
and existing clients primarily through its direct sales force. These personnel
are trained in the Company's products and service offerings and in the
operations of the Company's clients. The Company's personnel use a
"consultative" selling approach, because the sales process requires an
understanding of the multi-channel commerce industry as well as comprehensive
computer and systems expertise.
The Company's sales force is supported by marketing personnel who generate
and qualify leads through advertising and marketing campaigns, produce product
literature, periodic newsletters and direct mail campaigns, and arrange
attendance at trade shows and conventions. The marketing department also
supports the sales force with appropriate documentation or presentation and
demonstration materials for use during the sales process. The Company also
supports its direct sales and marketing force with a group of systems
engineering professionals, many of who also possess vertical market and
practical Ecometry expertise.
As of December 31, 2000, the Company employed 52 sales and marketing
personnel (47 domestically and 5 internationally), consisting of 22 sales
representatives and 30 marketing and other support personnel.
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The Company's method of marketing and selling to a new prospect consists of
identifying the prospect, qualifying the prospect and, if the prospect is
qualified, preparing and presenting a sales proposal. The prospecting process
includes placing advertisements in trade publications, acquiring mailing lists,
telemarketing, direct mailing, and participating in trade shows to generate
leads for the direct sales force. Once a prospect is qualified, the appropriate
direct sales personnel visit the prospect to understand the prospect's specific
requirements. This process usually results in the preparation of a written
proposal describing the hardware, software and services that meet the prospect's
requirements. While the Company's sales personnel generally make the initial
sales contact, large and complex installations generally involve the use of the
Company's professional services group. This group works closely with the sales
team to identify the optimal configuration of Ecometry required for such
prospects. This sales cycle typically ranges from three to six months.
The Company has executed a hardware resale agreement with Client Systems,
Inc., a distributor of HP products. The Company also has a strategic
relationship with Hewlett-Packard consisting of cooperative marketing and sales
activities in the multi-channel commerce industry. Currently, the Company is one
of the leading resellers of the HP3000 products.
The Ecometry user community and the Company have organized an international
users' group whose advisory committee plays an important role in helping the
Company develop and refine its Ecometry products and services strategies. In
addition, the Company hosts an annual World Conference, which includes
presentations by the Company and clients concerning the features and
capabilities of the Company's products. The Company also participates in trade
conferences worldwide to promote global sales and use of the Ecometry products.
All of these conferences include workshops, round table discussions and special
sessions devoted to products, technologies and Ecometry methodologies. More than
500 attendees participated in the Company's World Conference and Expo 2000 held
in Miami, Florida.
RESEARCH AND DEVELOPMENT
The Company's business analysis, programming, quality assurance and
advanced technologies teams perform the Company's research and development
function. The business analysis group performs the functional and technical
requirements for the enhancements that are requested either from the Company's
clients or internal product management group. The programming group is
responsible for the Ecometry software maintenance and enhancement process. The
Company uses a version and patch approach to software release control and
uniformly maintains a current version of each of its products, which is not
subject to enhancements, and a development version, which is enhanced twice per
annum. The Company releases monthly patch updates of its current versions upon
code corrections and believes that this process maximizes the stability of its
products, which is critical to the day-to-day operations of a direct commerce
company. The quality assurance group tests the software each time it passes
through the business and programming groups and performs regression testing
prior to the release of any patch updates or new releases. The advanced
technologies group is responsible for the identification and initial development
of new technology opportunities.
The Company follows a structured development methodology to ensure the
timely and cost-effective production of high-quality software. The Company has a
formal process through which clients may have input as to modifications of the
Company's products and believes that this input helps it deliver a leading
industry solution to its current and prospective clients.
As of December 31, 2000, the research and development staff consisted of 98
employees globally. From time to time, the Company has also engaged outside
consultants in its product development efforts. Total expenses for research and
development in the fiscal years ended December 31, 1998, 1999 and 2000 were
approximately $2.3 million, $3.4 million and $4.4 million, respectively. No
software development costs were capitalized in fiscal 1998, 1999 or 2000. In
accordance with Statement of Financial Accounting Standards No. 86, software
development costs are expensed as incurred until technological feasibility of
the software is established, after which any additional costs are capitalized.
To date, the Company has expensed all software development costs because
development costs incurred subsequent to the establishment of technological
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feasibility have been minimal. The Company anticipates that it will continue to
commit substantial resources to product development and enhancements in the
future.
COMPETITION
The market for multi-channel commerce software is competitive, rapidly
evolving and highly sensitive to new product introductions and marketing efforts
by industry participants. This market is also highly fragmented and served by
ERP software providers, electronic commerce software providers, consulting firms
and point solution providers targeting the multi-channel commerce industry. The
Company's largest competitors include companies such as Commercialware, JDA
Software, Retek, Oracle, PeopleSoft, BroadVision and InterWorld. The Company's
products also compete with information systems developed and serviced internally
by in-house MIS departments. Although the Company believes that none of its
competitors currently compete against the Company in all industry segments,
there can be no assurance that such competitors will not compete against the
Company in the future in additional industry segments. Many of the Company's
potential future competitors may have significantly greater financial, technical
and marketing resources, generate higher revenues and may have greater name
recognition than does the Company. In addition, as the Company expands into new
segments of the multi-channel commerce industry, such as Internet commerce, it
will face competition from other software companies, MIS departments and
unforeseen sources. Compared with the Company, these competitors may have
greater resources, operating experience, credibility and relationships in such
new segments. Although the Company believes that it currently competes favorably
in all industry segments and against all competitors, there can be no assurance
that it will do so in the future.
PROPRIETARY RIGHTS AND LICENSES
The Company primarily relies on a combination of copyright, trademark and
trade secret laws, unpatented proprietary know-how, license agreements,
non-disclosure and other contractual provisions and technical measures to
protect its proprietary rights in its products and technology. The Company
typically distributes its software products under software license agreements,
which contain, among other things, provisions limiting the use, copying and
transfer of the licensed program. The Company has obtained a United States
copyright registration for the source code of certain of its Ecometry software.
The Company currently has operations in the United States and the United
Kingdom, and clients in over 17 countries license its products for use. The
Company has registered MACS, MACSII, MACSIII, EUROMACS, THE MACSIMUM, MACSACCESS
and the "SG" logo as well as the SMITH-GARDNER name as trademarks in the United
States. The Company also has applied for the registration as trademarks in the
United States of PREDICTIVE RESPONSE, ECOMETRY, ECOMETRY RETAIL ENTERPRISE,
STOREROUTER AND ECOMETRY STOREROUTER. The Company believes that international
protection and enforcement of intellectual property rights for software products
in particular may be more limited than in the United States. Specifically,
intellectual property laws in certain countries may not protect software
companies from the loss of intellectual property rights through reverse
engineering.
The Company has entered into several agreements regarding the integration
of the intellectual property of third parties into its products. Parties to such
agreements include Robelle, Bradmark, Cognos, GTS and DISC.
The Company generally enters into confidentiality agreements with employees
and clients, which limit rights and access to, and distribution of, any
proprietary or confidential information. Furthermore, employees execute
agreements requiring disclosure and assignment to the Company of all of the
intellectual property rights associated with any ideas, concepts, techniques,
inventions, processes, or works of authorship relating to the business of the
Company and developed or created during the course of performing work for the
Company or its clients.
The Company does not believe that any of its products infringe the
proprietary rights of third parties. There can be no assurance that the steps
taken by the Company to protect its proprietary rights will be adequate to
prevent misappropriation of its technology or development by others of similar
technology.
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Because the software development industry is characterized by rapid
technological change, however, the Company believes that factors such as the
technological and creative skills of its personnel, new product developments,
frequent product enhancements, industry reputation and client support are more
important to establishing and maintaining a leadership position than the various
legal protections available for its technology.
RISK FACTORS
In addition to the other information contained in this Form 10-K, investors
should consider the following factors carefully as this report contains
"forward-looking statements" relating to, without limitation, future performance
and plans and objectives of management for future operations that are based on
the beliefs of, assumptions made by and information currently available to the
Company's management. The cautionary statements set forth in this "Risk Factors"
section and elsewhere in this Form 10-K identify important factors with respect
to such forward-looking statements, including certain risks and uncertainties,
that could cause actual results to differ materially from those expressed in or
implied by such forward-looking statements.
Dependence on Principal Product Line. The Company currently derives
substantially all of its revenue from sales of its Ecometry Retail Enterprise
family of products and related services and hardware. The Company expects to
continue to focus on providing software-based systems and services to leading
direct marketing companies, retailers, manufacturers with significant direct
sales channels, Internet-only companies and fulfillment houses. Any factor
adversely affecting the Company's target client market in general, or the
Company's products in particular, could adversely affect the Company's business,
financial condition or results of operations. The Company's future performance
will depend in large part on the continued acceptance of its current product
line as well as successful development, introduction and client acceptance of
new and enhanced versions of Ecometry Retail Enterprise. There can be no
assurance that the Company will be successful in marketing and selling Ecometry
Retail Enterprise or in developing and introducing new or enhanced versions of
the Company's software solution. Any factor adversely affecting the sale of the
Company's Ecometry family of products or other new products, including delays in
development, software flaws, incompatibility with industry-leading hardware
platforms or operating systems, or negative ratings of the Company's products
could have a material adverse effect on the Company's business, financial
condition or results of operations.
Class Action Litigation. 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 were substantially similar and alleged, among other
things that the Company made material misrepresentations and omissions regarding
the Company's future revenues, growth, expenditures, and that the Company failed
to disclose adverse information regarding the collectibility of amounts owed by
a client. The complaints alleged 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 sought, among other things, certification as a class and an
award of damages in an amount to be determined at trial. On September 11, 2000
the court consolidated all four actions, and appointed four individuals to serve
as "lead plaintiffs." The plaintiffs filed their Consolidated Amended Complaint
on November 20, 2000. On January 4, 2001 the defendants filed a motion to
dismiss the consolidated complaint. The plaintiffs filed an opposition to the
defendants' motion to dismiss on February 20, 2001. Discovery in this action has
not yet commenced and will be stayed pursuant to statute based on the filing of
the motion to dismiss. The stay would be lifted in the event that the court
denies the motion to dismiss. A loss in these actions could have a material
adverse effect on the Company's financial condition and results of operations.
At this time, the Company cannot reasonably estimate the ultimate loss, if any,
related to this action and, therefore, the Company has not recorded an accrual
for loss as of December 31, 2000.
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Dependence on Product Development. The market for the Company's products
and services is characterized by rapidly changing technology, evolving industry
standards and new product introductions. The Company's future success will
depend in part upon its ability to enhance its existing products and services
and to develop and introduce new products and services to meet changing industry
and client requirements. There can be no assurance that the Company will be able
to avoid the possible obsolescence of its products due to rapid technological
change and evolving industry standards. The process of developing software
products such as those offered by the Company is extremely complex and is
expected to become increasingly complex and expensive in the future. The Company
is currently developing a number of new software products including, among
others, Ecometry Parallel WebShopper, Ecometry Content Manager, Ecometry
Campaign Manager, Ecometry StoreLink, Ecometry StoreRouter, Ecometry SuppyLink.
There can be no assurance that the Company will successfully complete the
development of such new products in a timely fashion or that the Company's
current or future products will satisfy the needs of the targeted client
industry. The Company's continued growth is highly dependent on the success of
such products, and a failure of any one of such products to achieve market
acceptance could have a material adverse effect on the Company's business,
financial condition or results of operations. In addition, certain of the
Company's clients request customization of the Company's software products to
address unique characteristics of their businesses or computing environments.
The Company's commitment to customization could delay the delivery or
installation of products, which, in turn, could materially adversely affect the
Company's relationship with significant clients or otherwise materially
adversely affect its business, financial condition or results of operations.
The Company's ability to remain competitive and respond to technological
change is also dependent, to a lesser degree, upon the Omnidex software, which
the Company licenses from Dynamic Information System Corporation ("DISC") and
the SuprTool software, which the Company licenses from Robelle Solutions
Technology, Inc. ("Robelle"), both of which are incorporated in the Ecometry
Retail Enterprise Solution. In the event that Omnidex, SuprTool or other
products from similar such vendors have design defects or flaws, or if such
products are unexpectedly delayed in their introduction or become obsolete
subsequent to release, the Company's business, financial condition or operating
results could be materially adversely affected. Such material adverse effects
could diminish the Company's reputation, credibility and relationships with its
current and prospective clients. There can also be no assurance that products or
services developed by others will not adversely affect the Company's competitive
position or render its products noncompetitive or obsolete.
Dependence on the Multi-Channel Commerce Software Market. The Company
currently derives substantially all of its revenue from licensing its
applications software, selling related software, hardware, support, consulting
and training services to companies in the multi-channel Commerce Software
market. As a result of the growth in Internet commerce and the increased use of
other direct sales channels, many marketers are expanding to a multi-channel
sales strategy and need to enhance their information technology solutions to
accommodate the direct sales business model. The Company's clients include a
range of organizations in the multi-channel commerce target market. The success
of the Company's clients is directly related to general economic conditions
affecting consumer purchases from multi-channel commerce target market. In
addition, because of the capital expenditures required in connection with an
investment in the Company's products and services, the Company believes that
demand for its products could be disproportionately affected by fluctuations,
disruptions, instability or downturns in the non-store marketing industry and
general economic conditions in the United States and Europe, which may cause
clients and potential clients to delay, cancel or reduce any planned
expenditures for the Company's software products and services. Any resulting
decline in demand for the Company's products and services could have a material
adverse effect on the Company's business, financial condition or results of
operations.
Dependence on Proprietary Technology. The Company's success and ability to
compete are dependent largely upon its proprietary technology. The Company
relies on a combination of trade secret, copyright and trademark law,
nondisclosure agreements and technical measures to protect its proprietary
technology. The Company enters into confidentiality agreements with all of its
employees, as well as with its clients and potential clients seeking proprietary
information, and limits access to and distribution of its software,
documentation and other proprietary information. There can be no assurance that
the steps taken by the Company in this regard will be adequate to deter
misappropriation or independent third-party development of
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its technology. In addition, the laws of some foreign countries do not protect
proprietary technology rights to the same extent, as do the laws of the United
States. There can be no assurance that third parties will not assert
infringement claims in the future or, if infringement claims are asserted, that
such claims will be resolved in the Company's favor. Any infringement claims
resolved against the Company could have a material adverse effect on the
Company's business, financial condition or results of operations.
Fluctuations in Quarterly Performance; Seasonality. The Company's revenue
and operating results have varied substantially from quarter to quarter. The
Company's quarterly operating results may continue to fluctuate due to a number
of factors, including: (i) the timing, size and nature of the Company's
individual license and hardware transactions; (ii) the timing of the
introduction and the market acceptance, if any, of new products or product
enhancements by the Company or its competitors; (iii) the timeliness of such
product introductions relative to any announced timetable; (iv) the size and
timing of individual orders; (v) the deferral of orders by clients in
anticipation of new products or product upgrades; (vi) technological changes in
the operating systems upon which the Company's products run; (vii) changes in
the Internet adversely affecting Internet commerce; (viii) the relative
proportions of revenue derived from license fees, hardware, maintenance,
consulting, professional services, and other recurring revenue; (ix) the
hardware/software revenue mix; (x) the ability to procure and deliver hardware
system components within a required time period; (xi) changes in the Company's
operating expenses; (xii) the timing and magnitude of software upgrades, if any,
by the Company's clients; (xiii) price changes in the Company's products; (xiv)
personnel changes; and (xv) fluctuations in economic and financial market
conditions, which may determine the ability of a client to obtain time-critical
financing, or impact the Company's ability to collect its outstanding
receivables. Fluctuations in operating results may also occur as a result of the
Company's business strategy to focus on developing and selling customized
applications to larger customers to meet such customers' specific requirements.
The Company believes it will be difficult to predict the timing of these
sales because they involve both designing the solution to meet the client's
needs and convincing the client to purchase the products, and other risks over
which the Company has little or no control. The Company is generally unable to
adjust its spending quickly enough to compensate for unexpected shortfalls in
revenue. Consequently, a significant shortfall in revenue in any quarter could
adversely impact the Company's operating results for that quarter. As a result,
the Company believes that period-to-period comparisons of its operating results
will not necessarily be meaningful and should not be relied upon as an
indication of future performance.
The timing, size and nature of individual license transactions are also
important factors in the Company's quarterly operating results. Many such
license transactions involve large dollar amounts, and the sales cycles for
these transactions are often lengthy and unpredictable. There can be no
assurance that the Company will be successful in closing large license
transactions on a timely basis or at all. The Company generally has realized
lower revenue in the fourth calendar quarter of the year than in the other
quarters. The Company believes that this has been due primarily to the tendency
of many of the Company's clients to avoid implementing a new system or an
upgrade of an existing system during the holiday season, typically the busiest
time of year for substantially all of the Company's clients. Due to all of the
foregoing factors, the Company believes that period-to-period comparisons of its
operating results are not necessarily meaningful and that such comparisons
cannot be relied upon as indicators of future performance. There can be no
assurance that the Company will be profitable in the future, that future revenue
and operating results will not vary substantially or that the Company's
operating results will not be below the expectations of public market analysts
and investors. In either case, the price of the Common Stock could be materially
adversely affected by fluctuations in the Company's quarterly performance or
future losses of the Company.
Management of Growth. The growth in the size and complexity of the
Company's business as well as its client base has placed, and any additional
growth would be expected to continue to place, a significant strain on the
Company's management, operations and resources. The Company anticipates that
continued growth, if any, will require it to recruit, hire and retain a
substantial number of new research and development, managerial, finance, sales,
marketing and support personnel. There can be no assurance that the Company will
be successful in recruiting, hiring or retaining such personnel. The Company's
ability to compete effectively and to manage future growth, if any, will depend
on its ability to implement and improve operational, financial
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and management information systems on a timely basis and to expand, train,
motivate and manage its work force. There can be no assurance that the Company's
personnel, systems, procedures and controls will be adequate to support the
Company's operations. Furthermore, one element of the Company's growth strategy
is to seek acquisitions of businesses, products and technologies that are
complementary to those of the Company. There can be no assurance that the
Company will be able to fully integrate any such acquired businesses with the
Company's existing operations, operate any such businesses profitably or
otherwise implement its growth strategy. If the Company's management is unable
to manage growth effectively, the Company's business, financial condition or
results of operations could be materially adversely affected.
Expansion into New Markets. As the multi-channel commerce continues to
evolve, it is expected that there will be an increase in the number of marketers
utilizing marketing functions in which automation plays a key role in the sales
process. With the rapid growth of Internet commerce and the continued growth of
the non-store marketing industry in general, the Company expects to target
clients to whom it has not previously sold its products and who sell their
products in markets in which the Company has not previously participated. There
can be no assurance that the Company will be able to sell products to these new
market participants. In addition, some of the Company's existing clients will
expand their activities into markets in which the Company has limited or no
experience. There can be no assurance that the Company will be able to
successfully expand its business with these existing clients. If the Company is
unable to sell products to these new market participants and develop its
business with its existing clients entering new markets, the Company's growth
plans would be curtailed which could have a materially adverse effect on the
Company's business, financial condition or results of operations.
Dependence on Third Parties. The development and implementation of the
Company's Ecometry Retail Enterprise software depends on proprietary technology
licensed from third parties. The implementation of Ecometry Retail Enterprise
Solution is dependent on Omnidex by DISC, and other imbedded software from
Robelle and Bradmark. The introduction and increased market acceptance of other
operating systems that are incompatible with the Company's products, or the
failure of the Hewlett-Packard ("HP") MPE/iX operating system to continue to
receive market acceptance, could materially adversely affect the market for the
Company's products. Ecometry Retail Enterprise Solution also relies on certain
proprietary features of the IMAGE database management system developed by HP.
Ecometry Retail Enterprise Solution for UNIX and Ecometry Retail Enterprise
Solution for NT, are dependent on the Raima, Oracle and SQL Server databases.
The introduction and increased market acceptance of database management systems
that are incompatible with the Company's products, the failure of HP3000
products to achieve continued market acceptance, or the Company's inability to
procure HP3000 products, could adversely affect the market for the Company's
products. In the event the Company's current platform becomes obsolete, there
can be no assurance that the Company would be able to license in a timely
fashion, or at all, a database with similar features and on terms acceptable to
the Company. Any failure of the Company to license such a database would
adversely affect its business, financial condition or results of operations.
Dependence on Hardware Sales. In conjunction with the licensing of
Ecometry products, the Company resells a variety of hardware developed and
manufactured by third parties in order to provide the Company's clients with an
integrated solution. The Company obtains its HP3000 hardware pursuant to a
distribution agreement with Client Systems, Inc., an HP distributor; and HP Unix
hardware from Hallmark. Revenue from such hardware sales can amount to a
significant portion of the Company's total revenue in any period. For the fiscal
years ended December 31, 2000, 1999 and 1998, revenue derived from the sale of
hardware amounted to 19.0%, 18.4% and 19.9%, respectively, of the Company's
total revenue. As the market for the distribution of hardware products becomes
more competitive, the Company's clients may choose to purchase such hardware
directly from the manufacturers or distributors of such products, with a
resulting decrease in the Company's revenue derived from the sales of such
products.
Competition. The market for multi-channel commerce software is
competitive, rapidly evolving and highly sensitive to new product introductions
and marketing efforts by industry participants. This market is also highly
fragmented and served by ERP software providers, electronic commerce software
providers, consulting firms and point solution providers targeting the
multi-channel commerce industry. The Company's largest competitors include
companies such as Commercialware, JDA Software, Retek, Oracle, PeopleSoft,
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BroadVision and InterWorld. The Company's products also compete with information
systems developed and serviced internally by in-house MIS departments. Although
the Company believes that none of its competitors currently compete against the
Company in all industry segments, there can be no assurance that such
competitors will not compete against the Company in the future in additional
industry segments. Many of the Company's potential future competitors may have
significantly greater financial, technical and marketing resources, generate
higher revenues and may have greater name recognition than does the Company. In
addition, as the Company expands into new segments of the multi-channel commerce
industry, such as Internet commerce, it will face competition from other
software companies, MIS departments and unforeseen sources. Compared with the
Company, these competitors may have greater resources, operating experience,
credibility and relationships in such new segments. Although the Company
believes that it currently competes favorably in all industry segments and
against all competitors, there can be no assurance that it will do so in the
future. There can be no assurance that the Company's competitors will not
develop products comparable or superior to those developed by the Company or
adapt more quickly than the Company to new technologies, evolving industry
trends or changing client requirements. It is also possible that alliances among
competitors may emerge and rapidly acquire significant market share. Increased
competition may result in price reductions, reduced gross margins and loss of
market share, any of which could materially adversely affect the Company's
business, financial condition or results of operations. There can be no
assurance that the Company will be able to compete effectively against current
and future competitors
Product Defects and Product Liability. The Company's software products are
highly complex and sophisticated and could from time to time contain design
defects or software errors that could be difficult to detect and correct.
Errors, bugs or viruses may result in loss of or delay in market acceptance or
loss of client data as well as diminish the Company's reputation, credibility
and relationships with its current clients and any prospective clients. There
can be no assurance that, despite testing by the Company and its clients, errors
will not be found in the Company's products, which errors could result in a
delay in or the prevention of the applicable software product from attaining
broad market acceptance and thus could have a material adverse effect upon the
Company's business, financial condition or results of operations. The Company's
products are frequently used by its clients to perform mission-critical
functions. Therefore, design defects, software errors, misuse of the Company's
products, incorrect data from external sources or other potential problems
within or outside of the Company's control that may arise from the use of the
Company's products could result in financial or other damage to the Company's
clients. Although the Company's license agreements with its clients typically
contain provisions designed to limit the Company's exposure to such potential
claims, the provisions may not effectively protect the Company against such
claims and the liability and costs associated therewith. Although the Company
maintains general liability insurance coverage, including coverage for errors or
omissions, there can be no assurance that such coverage will continue to be
available on reasonable terms or will be available in sufficient amounts to
cover one or more large claims, or that the insurer will not disclaim coverage
as to any future claim. Accordingly, any such claim could have a material
adverse effect upon the Company's business, financial condition or results of
operations.
Dependence on Key Personnel. The Company's business involves the delivery
of services and is labor intensive. The Company's success will depend in large
part upon its ability to attract, recruit, hire, retain and motivate highly
skilled employees. There is significant competition for employees with the
skills required to perform the services offered by the Company. There can be no
assurance that the Company will be able to attract and retain sufficient numbers
of highly skilled employees in the future. The loss of Wilburn W. Smith, the
Company's Chairman and Executive Vice President -- Sales and Allan J. Gardner,
the Company's Chief Technology Officer, or a significant number of the Company's
highly skilled employees, could have a material adverse effect on the Company's
business, financial condition or results of operations, including its ability to
attract employees, obtain new clients and perform installations. The Company
does not hold a key person insurance policy on the lives of any of its executive
officers or directors and has not entered into employment agreements with any of
its executive officers.
Risks Associated with International Operations. The Company intends to
maintain its foothold in international sales of its product. In order to
maintain its international presence, the Company must support its foreign
operations. This will require management attention and financial resources and
could materially
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22
adversely affect the Company's business, financial condition or results of
operations. In addition, there can be no assurance that the Company will be able
to maintain or increase international market demand for the Company's products.
In addition, the Company's international business may be subject to a variety of
risks, including difficulties in collecting international accounts receivable or
obtaining U.S. export licenses, potentially longer payment cycles, increased
costs associated with maintaining international marketing efforts, the
introduction of non-tariff barriers and higher duty rates and difficulties in
enforcement of contractual obligations and intellectual property rights and
risks associated with the Company's non-use of any hedging instruments to
protect against possible currency fluctuations. There can be no assurance that
such factors will not have a material adverse effect on the Company's future
international sales and, consequently, on the Company's business, financial
condition or results of operations.
In light of these risks and uncertainties, the forward-looking events
discussed in this report might not occur. The Company undertakes no obligation
to publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise.
EMPLOYEES
As of December 31, 2000, the Company had a total of 390 full-time employees
globally. Of the 390 employees 336 are employed domestically by the parent
company: 84 in product development, 46 in sales and marketing, 44 in training
and professional services, 142 in client support services and 20 in management,
administration and finance. The Company's subsidiaries comprise the remaining
employees with 7 employed by our newly established subsidiary, NewHaven Software
Corporation, 45 employees in the United Kingdom and 2 in Australia. None of the
Company's employees are subject to a collective bargaining agreement, and the
Company has not experienced any work stoppages. The Company believes that its
employee relations are good.
ITEM 2. PROPERTIES
The Company is headquartered in Delray Beach, Florida, where it leases
approximately 73,000 square feet of office space pursuant to a lease that
expires in December 2006. The annual rent expense under such lease is
approximately $940,000. The Company also leases approximately 1,000 square feet
of space in the United States for NewHaven Software Corporation, its domestic
subsidiary, in Rosemont, Illinois. The annual rental fee on this space is
approximately $40,000. Internationally, the Company leases approximately 5,000
square feet of office space in the United Kingdom and approximately 1,000 square
feet in Australia to house its operations abroad. The annual rent under such
leases is approximately $100,000 and $30,000, respectively. The Company also
leases office space in Texas and Missouri for certain of its marketing and sales
activities. The annual rent under such leases is $7,200 and $12,000,
respectively. The aggregate annual facility lease payments of the Company during
the fiscal year ended December 31, 2000 was $1,517,963.
ITEM 3. LEGAL PROCEEDINGS
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 were substantially similar and alleged, among other
things that the Company made material misrepresentations and omissions regarding
the Company's future revenues, growth, expenditures, and that the Company failed
to disclose adverse information regarding the collectibility of amounts owed by
a client. The complaints alleged 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 sought, among other things, certification as a class and an
award of damages in an amount to be determined at trial.
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23
On September 11, 2000 the court consolidated all four actions, and
appointed four individuals to serve as "lead plaintiffs." The plaintiffs filed
their Consolidated Amended Complaint on November 20, 2000. On January 4, 2001
the defendants filed a motion to dismiss the consolidated complaint. The
plaintiffs filed an opposition to the defendants' motion to dismiss on February
20, 2001.
Discovery in this action has not yet commenced and will be stayed pursuant
to statute based on the filing of the motion to dismiss. The stay would be
lifted in the event that the court denies the motion to dismiss. Management
believes these plaintiffs claims are without merit and intends to defend them
vigorously. At this time, the Company cannot reasonably estimate the ultimate
loss, if any, related to this action and, therefore, the Company has not
recorded an accrual for loss as of December 31, 2000.
In May 2000, one of the Company's clients discontinued its operations, and
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 negotiated a settlement for the dismissal of the
Involuntary Bankruptcy petition under which the Company's client would dedicate
certain funds to be distributed to all of the holders of allowed, undisputed,
uncontingent, and liquidated unsecured claims. The order approving the
settlement was entered on November 2, 2000 and became final November 13, 2000.
The Company received a settlement check in the amount of $172,578 in January
2001.
From time to time, the Company is involved in other legal proceedings
incidental to the conduct of its business. The Company believes that this other
litigation, individually or in the aggregate, to which it is currently a party
is not likely to have a material adverse effect on the Company's business,
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) A Special Meeting of Shareholders of Ecometry Corporation was held on
November 10, 2000 pursuant to a proxy statement dated October 11, 2000.
(b) The following matter was submitted to a vote at the meeting.
A proposal to approve an amendment to the Company's Amended and Restated
Articles of Incorporation to change the name of the Company to "Ecometry
Corporation".
Votes in favor: 12,039,707
Votes against: 45,306
Abstention: 15,373
A total of 12,100,386 shares were represented at the meeting, constituting
a quorum in accordance with the applicable provisions of the By-laws of the
Company.
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24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading in the NASDAQ National Market
under the symbol "SGAI" on January 29, 1999. On December 4, 2000 the Company
changed its name from Smith-Gardner & Associates to Ecometry Corporation and
continued trading in the NASDAQ National Market under the new symbol of "ECOM".
Market price information is not available prior to January 1999. The following
table sets forth the range of high and low bid prices for the Company's common
stock for the period from January 1999 through December 2000, as reported by
NASDAQ. The quotes represent "Inter-dealer" prices without retail markups,
markdowns or commissions and may not necessarily represent actual transactions.
HIGH LOW
------- -------
Year Ended December 31, 1999
First Quarter............................................. $21.875 $ 9.750
Second Quarter............................................ $16.625 $ 7.875
Third Quarter............................................. $10.750 $ 6.938
Fourth Quarter............................................ $21.375 $ 7.375
Year Ended December 31, 2000
First Quarter............................................. $23.375 $15.875
Second Quarter............................................ $18.000 $ 3.688
Third Quarter............................................. $ 5.938 $ 2.750
Fourth Quarter............................................ $ 4.047 $ 1.375
As of March 2, 2001, there were 12,381,422 shares of Common Stock
outstanding, held by 49 stockholders of record. The Company believes that
certain holders of record hold a substantial number of shares of Common Stock as
nominees for a significant number of beneficial owners. The closing price for
the Company's Common Stock on March 2, 2001 was $1.875 per share.
The payment of dividends is within the discretion of the Board of
Directors. It is the present intention of the Board of Directors to retain all
future earnings for use in the Company's business operations and, accordingly,
the Board does not anticipate declaring any dividends in the foreseeable future.
USE OF PROCEEDS FROM REGISTERED SECURITIES
In connection with the Offering, the Company's Registration Statement on
Form S-1 (No. 333-63125) (the "Registration Statement") was declared effective
on January 28, 1999. Pursuant to such Registration Statement, on February 3,
1999, the Company and certain selling shareholders sold 4,000,000 and 410,000
shares of Common Stock, respectively, at a price of $12 per share. The managing
underwriters for this sale of Common Stock were BT Alex. Brown Incorporated and
SoundView Technology Group (collectively, the "Underwriters"). On March 3, 1999,
pursuant to the Underwriters' over-allotment option, the Company sold an
additional 661,500 shares of Common Stock at a price of $12 per share. All of
the securities offered by the Registration Statement were sold in the Offering
and thereafter the Offering terminated. The aggregate gross proceeds to the
Company in connection with the Offering were approximately $55.9 million. The
total expenses incurred in connection with the Offering, including underwriting
discounts and commissions, and fees for registration, legal, accounting,
transfer agent, printing and other miscellaneous fees, were approximately $5.1
million, resulting in net offering proceeds of approximately $50.8 million to
the Company.
As of March 2, 2001, the net proceeds of the Offering have been used as
follows: (i) $12.0 million to redeem all of the 12,000 shares of redeemable
preferred stock, par value $.01 per share and $1,000 per share preference value
(the "Redeemable Preferred Stock"), issued to certain lenders (Advent VII L.P.,
Advent Atlantic and Pacific II L.P., Advent Industrial II L.P., Advent New York
L.P., Chestnut Capital International III Limited Partnership and TA Venture
Investors Limited Partners (each a "Lender" and collectively the "Lenders"))
upon the conversion of the Convertible Debentures, (ii) approximately $4.7
million to pay accrued interest due and payable on the Convertible Debentures,
and (iii) approximately $835,000 in the form
22
25
of a distribution to Wilburn Smith, Allan J. Gardner and Thomas Quigley, who
were the Company's sole shareholders prior to the Offering, in the aggregate
amount representing the individual income tax liability of each of such
shareholders for the period beginning January 1, 1998 and ending on December 31,
1998, the date immediately preceding the Company's voluntary S Corporation
revocation. The remaining net proceeds are being used for working capital,
capital expenditures and for general corporate purposes.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below as of December 31,
2000 and 1999 and for each of the years in the five-year period ended December
31, 2000 are derived from the Consolidated Financial Statements of the Company
which have been audited by KPMG LLP, independent public accountants. The
Company's consolidated balance sheets as of December 31, 2000 and 1999, and
consolidated statements of operations for each of the years in the three year
period ended December 31, 2000 appear elsewhere in this report. The following
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the Consolidated Financial
Statements and Notes thereto, included elsewhere in this report.
2000 1999 1998 1997 1996
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue:
License fees and software sales..... $22,070 $26,102 $ 18,097 $ 8,471 $ 5,932
Computer hardware sales............. 8,661 8,598 6,703 4,757 7,370
Support............................. 9,696 7,630 5,335 4,100 4,038
Services............................ 5,189 4,268 3,567 1,324 1,189
------- ------- -------- -------- --------
Total revenue............... 45,616 46,598 33,702 18,652 18,529
Cost of sales and services:
License fees and software sales..... 8,595 7,957 7,371 3,956 585
Computer hardware sales............. 7,083 6,372 4,916 3,558 5,805
Support............................. 6,098 5,050 3,222 3,271 3,141
Services............................ 3,525 3,165 2,271 1,104 902
------- ------- -------- -------- --------
Total cost of sales and
services.................. 25,301 22,544 17,780 11,889 10,433
------- ------- -------- -------- --------
Gross Profit.......................... 20,315 24,054 15,922 6,763 8,096
Operating expenses:
General and administrative.......... 11,559 8,061 6,538 4,567 4,776
Sales and marketing................. 7,825 5,585 2,430 1,482 980
Research and development............ 4,439 3,421 2,254 2,011 2,254
------- ------- -------- -------- --------
Total operating expenses.... 23,823 17,067 11,222 8,060 8,010
------- ------- -------- -------- --------
(Loss) income from operations......... (3,508) 6,987 4,700 (1,297) 86
Other income (expense):
Interest expense:
Interest on outstanding debt........ -- (165) (1,800) (1,500) (1,200)
Amortization of original issue
discount (1)..................... -- -- -- (680) (1,378)
Loss on disposal of assets............ (114) -- -- -- --
Interest income....................... 2,413 1,749 102 109 42
------- ------- -------- -------- --------
Total interest income
(expense), net............ 2,299 1,584 (1,697) (2,071) (2,536)
------- ------- -------- -------- --------
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2000 1999 1998 1997 1996
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Loss) Income before provision for
income taxes........................ (1,209) 8,571 3,003 (3,368) (2,450)
Provision for income taxes............ (375) (3,048) -- -- --
------- ------- -------- -------- --------
Net (loss) income..................... $(1,584) $ 5,523 $ 3,003 $ (3,368) $ (2,450)
======= ======= ======== ======== ========
Net (loss) income per share:
Basic............................... $ (0.13) $ 0.48 $ 0.57 $ (0.64) $ (0.47)
======= ======= ======== ======== ========
Diluted............................. $ (0.13) $ 0.44 $ 0.50 $ (0.64) $ (0.47)
======= ======= ======== ======== ========
Weighted average shares used in
calculating net (Loss) income per
share:
Basic............................... 12,372 11,622 5,263 5,263 5,263
======= ======= ======== ======== ========
Diluted............................. 12,372 12,426 8,131 5,263 5,263
======= ======= ======== ======== ========
Pro forma data (unaudited):
(Loss) income before income tax
(expense) benefit................ $ 8,571 $ 3,003 $ (3,368) $ (2,450)
Pro forma income tax (expense) benefit
(2)................................. (3,378) (1,215) 948 360
------- -------- -------- --------
Pro forma net (loss) income (2)....... $ 5,193 $ 1,788 $ (2,420) $ (2,090)
======= ======== ======== ========
BALANCE SHEET DATA:
Cash and cash equivalents........... $36,827 $39,246 $ 1,577 $ 169 $ 39,246
Working capital..................... 42,016 43,335 3,904 16 43,335
Total assets........................ 50,566 51,468 9,470 3,135 51,468
Convertible debt and accrued
interest (1)..................... -- -- 16,500 14,700 12,520
Stockholders' equity (deficit)
(1).............................. 44,756 45,162 (10,951) (13,918) (10,550)
- ---------------
(1) The fair value of the conversion features of the Convertible Debentures was
determined to be $3.5 million based on the difference between the stated
interest rates and the estimated market rate of such Convertible Debentures
on the date of issuance. The amount is included in additional paid-in
capital in the accompanying consolidated balance sheet, with the resulting
Original Issue Discount ("OID") on the convertible debt being amortized from
the date of issuance (December 19, 1994) to the date the security first
became convertible (June 30, 1997). This interest expense is a non-cash
item.
(2) Prior to completing its initial public offering of Common Stock and as a
result of its election to be treated as an S Corporation for income tax
purposes, the Company was not subject to federal or certain state income
taxes. Upon the Company's voluntary revocation of its S Corporation status
effective January 1, 1999, the Company is subject to federal and certain
state income taxes at applicable rates for a C Corporation. The unaudited
pro forma income tax (expense) benefit presented in the consolidated
statements of operations represents the estimated taxes that would have been
recorded had the Company been a C Corporation for income tax purposes for
each of the periods presented.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S CONSOLIDATED
FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE HEREIN.
OVERVIEW
The Company is a leading provider of enterprise software solutions and
services to the multi-channel commerce industry. The Company's clients include
direct marketing and catalog companies, retailers and manufacturers with
significant direct sales channels, Internet-only companies and fulfillment
houses. The Company's Ecometry family of software products is designed to
automate multi-channel commerce activities, including marketing, advertising
analysis, sales, telemarketing, ordering, customer services, merchandising,
procurement, electronic and Internet commerce, supply chain management,
warehousing, shipping, accounting and systems operation. Ecometry Retail
Enterprise also provides managers and sales personnel with real-time operations,
inventory and customer data to improve both management decision making and
customer service.
Since its inception in 1988, management of the Company has concentrated on
providing software-based systems and services to leading direct marketing
companies and to retailers and manufacturers with significant direct sales
channels. By focusing on this market, management believes that the Company has
been able to develop significant industry expertise that has been incorporated
in the functionality of the Company's products and services. The Ecometry
Commerce Engine offers over 3,000 functional options, the ability to process up
to 300,000 transactions per day and is used primarily by companies with
high-volume direct sales operations. Ecometry Retail Enterprise, the Company's
end-to-end retail commerce solution, is a highly scalable system that enables
real-time interactive customer ordering and customer services, and automates the
processing of front and back-office functions for companies selling products
through all direct sales channels.
In 1997 the Company opened offices in the United Kingdom and Australia to
expand its presence abroad. In November 2000, the Company acquired the
intellectual property rights to Haven Corporation's popular software products
MailOrder Wizard and Castle through its newly formed domestic subsidiary,
NewHaven Software Corporation. The purchase will allow the company to expand its
market opportunities and customer base. In March 2001, the Company elected to
discontinue its operation in Australia. This will not have a material adverse
effect on the Company's business, financial condition or results of operations.
In December 2000, the Company changed its name from Smith-Gardner &
Associates, Inc. to Ecometry Corporation. The new name leverages the strong
brand recognition associated with the company's award-winning, flagship software
solution.
The current year's decrease in sales resulted from a general slowdown in
the economy and lower revenue from internet-only e-commerce clients, which were
negatively impacted by the ability to secure financing. Due to the inability of
internet-only and start-up companies to obtain financing, the Company changed
its strategic sales focus to more established companies looking to expand to
multi-channel retail opportunities. With this shift to more established
companies the Company has experienced longer sales cycles.
The Company generates revenue from four principal sources: (i) license fees
for software products; (ii) sales of related computer hardware components; (iii)
software support; and (iv) services consisting of consulting, training, custom
programming, and web design. System revenue, which includes software license
fees and hardware components, is generated by sales to new and existing clients.
The Company's revenue and long-term growth are largely dependent on the
sale of its systems to new clients. System sales to new clients represented
27.6% of total revenue during the year ended December 31, 2000, a decrease of
17.8% from the year ended December 31, 1999. System sales to new clients
represented 32.9% of total revenue during the year ended December 31, 1999, an
increase of 25.4% from the year ended December 31, 1998.
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System upgrades represented 39.8% of total revenue for the year ended
December 31, 2000 compared to 41.6% and 37.3% for the years ended December 31,
1999 and 1998, respectively. System upgrades consist primarily of additional
software user license fees and central processing unit ("CPU") upgrades for its
existing clients. The Company believes that upgrades are dictated solely by the
business requirements of individual clients and, therefore, the Company is
unable to accurately predict or explain the actual mix between software and
hardware upgrades.
The Company recognizes revenue in accordance with Statement of Position
("SOP") 97-2, Software Revenue Recognition. Under this provision, hardware and
software license fees for new systems are recognized as revenue when the
hardware and software has been delivered and installed, the fee is fixed and
determinable and the collectibility is probable. Revenue relating to system
upgrades is recognized upon installation, provided that all significant
obligations have been met. The Company recognizes revenue from hardware and
software upgrades upon receipt by the client.
Each new client executes a contract, which identifies the number of
licensed Ecometry users, hardware configuration, and pricing for the software
license and support services. The contract also contains pricing provisions for
supplemental software user licenses and CPU upgrades. The Company typically
receives a deposit equal to 25% of the system selling price upon contract
signing and the remaining balance is payable in accordance with the system
implementation schedule. The differences between amounts received and amounts
recognized are recorded as deferred revenue.
Support services are billed monthly, in advance, and revenue from such
services is recognized ratably over the contract term. The Company's software
support agreements typically have one-year terms, are automatically renewed
annually and may be terminated at the discretion of the client. Historically,
more than 75% of all clients utilizing the Company's software have renewed their
support agreements.
Training and consulting services are performed on a time-and-materials
basis and revenue is recognized as the services are completed. Contract
programming and web design services are generally short-term in nature and
performed on a fixed-fee basis. When performed in conjunction with a sale to a
new client, contract programming revenue is recognized upon delivery and receipt
of a signed client acknowledgment.
In accordance with Statement of Financial Accounting Standards No. 86,
software development costs are expensed as incurred until technological
feasibility of the software is established, after which any additional costs are
capitalized. To date, the Company has expensed all software development costs
because development costs incurred subsequent to the establishment of
technological feasibility have been minimal.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain statement of operations items to total revenue:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
Revenue:
License fees and software sales......................... 48.4% 56.0% 53.7%
Computer hardware sales................................. 19.0 18.4 19.9
Support................................................. 21.2 16.4 15.8
Services................................................ 11.4 9.2 10.6
----- ----- -----
Total revenue................................... 100.0 100.0 100.0
Cost of sales and services:
License fees and software sales......................... 18.9 17.1 21.9
Computer hardware sales................................. 15.5 13.7 14.6
Support................................................. 13.4 10.8 9.6
Services................................................ 7.7 6.8 6.7
----- ----- -----
Total cost of sales and services................ 55.5 48.4 52.8
----- ----- -----
Gross profit.................................... 44.5 51.6 47.2
Operating expenses:
General and administrative.............................. 25.3 17.3 19.4
Sales and marketing..................................... 17.2 12.0 7.2
Research and development................................ 9.7 7.3 6.7
----- ----- -----
Total operating expenses........................ 52.2 36.6 33.3
----- ----- -----
Income (loss) from operations................... (7.7) 15.0 13.9
Other income (expense):
Interest expense:
Interest on outstanding debt............................ -- (0.4) (5.3)
Loss on disposal of assets.............................. (0.3) -- --
Interest income......................................... 5.3 3.8 0.3
----- ----- -----
Total interest expense, net..................... 5.0 3.4 (5.0)
----- ----- -----
(Loss) income before tax benefit (expense)................ (2.7) 18.4 8.9
Provision for income taxes................................ (0.8) (6.5) --
----- ----- -----
Net (Loss) income......................................... (3.5)% 11.9% 8.9%
===== ===== =====
Pro forma data (unaudited):
Income before provision for income taxes................ 18.4 8.9
Pro forma provision for income taxes (unaudited).......... (7.2) (3.6)
----- -----
Pro forma net income (unaudited).......................... 11.1% 5.3%
===== =====
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The following table sets forth, for the periods indicated, the dollar and
percentage changes of statement of operations items:
CHANGE CHANGE
YEAR ENDED DECEMBER 31, 2000 VS. 1999 1999 VS. 1998
--------------------------- ---------------- ---------------
2000 1999 1998 $ % $ %
------- ------- ------- ------- ------ ------ ------
Revenue:
License fees and software
sales.......................... $22,070 $26,102 $18,097 $(4,032) (15.5)% $8,005 44.2%
Computer hardware sales.......... 8,661 8,598 6,703 63 0.7 1,895 28.3
Support.......................... 9,696 7,630 5,335 2,066 27.1 2,295 43.0
Services......................... 5,189 4,268 3,567 921 21.6 701 19.7
------- ------- ------- ------- ------ ------ ------
Total Revenue............. 45,616 46,598 33,702 (982) (2.1) 12,896 38.3
Cost of sales and services
License fees and software sales.... 8,595 7,957 7,371 638 8.0 587 8.0
Computer hardware sales.......... 7,083 6,372 4,916 711 11.2 1,456 29.6
Support.......................... 6,098 5,050 3,222 1,048 20.8 1,828 56.7
Services......................... 3,525 3,165 2,271 360 11.4 894 39.4
------- ------- ------- ------- ------ ------ ------
Total cost of sales and
services................ 25,301 22,544 17,780 2,757 12.2 4,765 26.8
------- ------- ------- ------- ------ ------ ------
Gross Margin....................... 20,315 24,054 15,922 (3,739) (15.5) 8,131 51.1
Operating expenses:
General and administrative....... 11,559 8,061 6,538 3,498 43.4 1,523 23.3
Sales and marketing.............. 7,825 5,585 2,430 2,240 40.1 3,155 129.8
Research and development......... 4,439 3,421 2,254 1,018 29.8 1,167 51.8
------- ------- ------- ------- ------ ------ ------
Total operating
expenses................ 23,823 17,067 11,222 6,756 39.6 5,845 52.1
------- ------- ------- ------- ------ ------ ------
(Loss) income from operations...... (3,508) 6,987 4,700 (10,495) (150.2) 2,287 48.6
Total interest income
(expense), net.......... 2,299 1,584 (1,697) 715 45.1 3,281 193.3
------- ------- ------- ------- ------ ------ ------
(Loss) income before provision for
income taxes..................... (1,209) 8,571 3,003 (9,780) (114.1) 5,568 185.4
Provision for income taxes......... (375) (3,048) -- 2,673 87.7 (3,048) (100.0)
------- ------- ------- ------- ------ ------ ------
Net (loss) income.................. $(1,584) $ 5,523 $ 3,003 $(7,107) (128.7)% $2,520 83.9%
======= ======= ======= ======= ====== ====== ======
Pro forma data (unaudited):
Income before provision for income
taxes............................ $ 8,571 $ 3,003 $(8,571) (100.0) $5,568 185.4
Pro forma provision for income
taxes............................ (3,378) (1,215) 3,378 100.0 (2,163) (178.0)
------- ------- ------- ------ ------ ------
Pro forma net income............... $ 5,193 $ 1,788 $(6,777) (130.5)% $3,405 190.4%
======= ======= ======= ====== ====== ======
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
License Fees and Software Sales. 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. The
decrease in computer software license fees in 2000 compared to 1999 resulted
from lower sales to both new and existing clients. New client computer software
sales decreased from $11.2 million for the year ended December 31, 1999 to $9.3
million for the same period in 2000, and computer software upgrades decreased
from $14.9 million to $12.7 million for the same periods.
Computer Hardware Sales. Sales of computer hardware consist of sales of
computer hardware systems and peripheral hardware components. The increase in
computer hardware revenue in 2000 compared to 1999 is a result of increased
sales to existing clients. Computer hardware revenue relating to new client
sales decreased to $3.2 million for the year ended December 31, 2000, compared
to $4.2 million for the same period in 1999. Computer hardware upgrades
increased to $5.4 million for the year ended December 31, 2000, compared to $4.4
million for the same period in 1999.
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Support. 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 typically represents 18% of the
underlying license fee each year. 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 consists principally of revenue derived from
consulting, custom programming, training, implementation services and web
design. Services revenue increased in 2000 compared to 1999 primarily due to an
expanded client base and increased demand for consulting and web design
services.
Total Revenue. New client sales for the year ended December 31, 2000
decreased 17.8% from the same period in 1999 due to fewer installations
partially offset by higher average revenue per installation. Revenue from client
system and component upgrades decreased by 6.4% in 2000 compared to 1999.
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 from 1999 to 2000. The increase in costs during 2000 compared to 1999
resulted from higher personnel costs and a greater proportion of third party
software components. Cost of computer software as a percentage of software
license fees increased to 38.9% from 30.5% due to lower software revenues and
under-utilization of personnel.
Cost of Computer Hardware Sales. Cost of computer hardware sales, which
consists of purchases of computer hardware systems and peripheral hardware
components increased from 1999 to 2000. The increase in costs from 1999 to 2000
is due to the increase in computer hardware revenue, and a change in the sales
mix toward larger clients, which generate lower margins. The Company anticipates
that future sales to larger customers will continue to increase and therefore,
generate lower margins on hardware sales. Also, in 1999, the Company recorded
hardware leasing transactions where there were no costs associated with the
sale.
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 in 2000 compared to 1999 due to higher salary
costs for support personnel.
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 from 1999 to 2000. Cost
of services increased from 1999 to 2000 due to higher personnel costs and the
greater use of outside contractors.
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 during 2000 compared to 1999 as a result of increased bad debt
expense, continued investment in infrastructure and higher professional fees.
The Company does not anticipate making any material infrastructure investments
in future periods.
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. The increase in sales and marketing
expenses during the year ended December 31, 2000 compared to the year ended
December 31, 1999 resulted from the expansion of the sales force, higher sales
commissions, increased trade show expenses, expanded marketing and advertising
programs, public relations, including costs associated with the Company's name
change, and increased 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 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 during the year ended
December 31, 2000, compared to the year ended December 31, 1999 representing
improvements to existing products and
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ongoing development of new products. The Company expects to continue making
significant investments in new and enhanced products in future periods.
Other Income (Expense), 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 from 1999 to
2000. 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
1999 was $165,000. See "Liquidity and Capital Resources" and Note 7 of Notes to
the Consolidated Financial Statements.
Provision for Income Taxes. The provision for income taxes was
approximately $375,000 for the year ended December 31, 2000, compared to $3.0
million for 1999. The income tax provision as a percentage of taxable income for
the year ended December 31, 2000 was higher than 1999 as a result of: (i) an
increase in the valuation allowance by $631,000 in 2000 for deferred tax assets
attributed to losses from foreign operations, and (ii) a one-time tax benefit of
$330,000 in 1999 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.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
License Fees and Software Sales. The increase in computer software license
fees in 1999 compared to 1998 is a result of increased sales to both new and
existing clients. New client computer software sales increased from $9.1 million
for the year ended December 31, 1998 to $11.2 million for the same period in
1999, and computer software upgrades increased from $9.0 million to $14.9
million for the same periods.
Computer Hardware Sales. The increase in computer hardware revenue in 1999
compared to 1998 is a result of increased sales to both new and existing
clients. Computer hardware revenue relating to new client sales increased to
$4.2 million for the year ended December 31, 1999, compared to $3.1 million for
the same period in 1998. Computer hardware upgrades increased to $4.4 million
for the year ended December 31, 1999, compared to $3.6 million for the same
period in 1998.
Support. The increase in support revenue from 1998 to 1999 is a result of
new clients added during 1999, as well as support fee increases related to
software user license upgrades.
Services. Services revenue increased in 1999 compared to 1998 primarily
due to increases in revenue from consulting services.
Total Revenue. New client sales in 1999 increased 25.3% from 1998 due to
more installations and a higher average revenue per installation. Revenue from
client system and component upgrades increased by 54.0% in 1999 compared to 1998
due to the Company's expanding client base and upgrades from internet-only
retailers that tend to make smaller initial purchases and upgrade rapidly.
Cost of License Fees and Software Sales. The increase in costs during 1999
compared to 1998 resulted from higher personnel costs related to increased
installations of new systems and sales to new clients. Cost of computer software
as a percentage of software license fees decreased due to a higher percentage of
software license upgrades which have no associated personnel costs.
Cost of Computer Hardware Sales. The increase in cost from 1998 to 1999
was directly related to the corresponding increase in computer hardware revenue
during 1999.
Cost of Support. Cost of support increased in 1999 compared to 1998 due to
increased compensation expense associated with additional resources required to
accommodate new client growth.
Cost of Services. Cost of services increased from 1998 to 1999 due to
increased compensation expense for professional services resources added to
accommodate higher anticipated client demand combined with a reduced demand for
services during the fourth quarter of 1999.
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General and Administrative. General and administrative expenses increased
during 1999 compared to 1998 as a result of additional personnel, the costs
associated with being a public company, and increased infrastructure costs to
accommodate the higher employee headcount.
Sales and Marketing. The increase in sales and marketing expenses during
1999 compared to 1998 resulted from higher sales commissions, increased
participation in industry trade shows, and expanded marketing and advertising
programs.
Research and Development. Research and development expenses increased
during the year ended December 31, 1999, compared to the year ended December 31,
1998 due to ongoing development of the UNIX product, new WebOrder modules and
existing product enhancements.
Other Income (Expense), Net. Net interest income increased in 1999
compared to 1998 due to interest income related to cash proceeds from the
Company's initial public offering and the retirement of the Debentures in
conjunction with the initial public offering. See "Liquidity and Capital
Resources" and Note 7 of Notes to the Consolidated Financial Statements.
Pro Forma Income Tax (Provision) Benefit. The pro forma effective tax rate
for the year ended December 31, 1999 was a provision of 39.4% compared to 40.5%
for the year ended December 31, 1998. Effective pro forma income tax rates
differ 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, pro forma effective rates vary between periods because of
the differing effects the net losses of foreign subsidiaries have on pro forma
income before income taxes.
SEASONALITY
The Company generally has realized lower revenue in the fourth quarter of
the year than in the other quarters. The Company believes that this has been due
primarily to the tendency of many of the Company's clients to avoid implementing
a new system or an upgrade of an existing system during the holiday season,
typically the busiest time of year for substantially all of the Company's
clients. Due to all of the foregoing factors, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and that such comparisons cannot be relied upon as indicators of
future performance.
LIQUIDITY AND CAPITAL RESOURCES
On February 3, 1999, the Company and selling shareholders sold 4,410,000
shares of its Common Stock in an initial public offering from which the Company
received proceeds of approximately $43.4 million net of underwriter commissions
and offering costs. At that time, the Debentures were converted into the
Convertible Preferred Stock and the Redeemable Preferred Stock. Contemporaneous
with the offering and pursuant to the terms of the Convertible Preferred Stock,
the Lenders converted the Convertible Preferred Stock into 2,255,614 shares of
Common Stock. On February 3, 1999, the Company redeemed in full the Redeemable
Preferred Stock for $12,000,000 and paid accrued interest in the amount of
$4,665,000.
On February 26, 1999, the underwriters exercised their option to purchase
661,500 additional shares of the Company's common stock from which the Company
received proceeds of $7,382,340.
During 1999, the Company financed its operations and growth primarily from
the issuance of debt and equity securities. For the year ended December 31,
2000, the Company financed its operations primarily through the use of remaining
proceeds from its initial public offering. At December 31, 2000, the Company's
primary sources of liquidity consisted of cash and cash equivalents totaling
$36.8 million.
The Company's operating activities used cash for the year ended December
31, 2000, in the amount of $1.1 million, and provided cash for the years ended
December 31, 1999 and 1998, of $64,850, and $2.7 million, respectively. For the
year ended December 31, 2000, the Company's operating cash was used primarily by
losses from operations and increased income taxes receivable. For the year ended
December 31, 1998, the Company's operating cash was provided by net income,
continued deferral of interest payments due under the
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Convertible Debentures, client deposits received in advance of recognized
revenue, and increased accounts payable and accrued expenses partially offset by
increases to accounts receivable.
Cash used in investing activities was approximately $1.8 million, $1.2
million, and $585,000, for the years ended December 31, 2000, 1999, and 1998,
respectively. This cash was used for capital expenditures in the ordinary course
of business. The Company's capital expenditures relate primarily to purchases of
computers, printers and software to support the Company's operations, as well as
furniture, fixtures and leasehold improvements. The Company expects its rate of
purchases of property and equipment will increase with the demand for more
sophisticated computer equipment and software programs to maintain its
competitiveness within its industry.
For the year ended December 31, 2000, cash provided by financing activities
totaled $542,000, which consisted primarily of proceeds from employee stock
option exercises and the recovery of profits from certain beneficial owners
pursuant to Section 16(b) of the Securities Exchange Act of 1934. 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. During 1999, cash
provided by financing activities totaled $38.8 million, which consisted
primarily of proceeds received from the Company's initial public offering and
the underwriters' option to purchase additional shares. This was offset by
repayment in full of the Convertible Debentures, payment of offering costs
related to the Company's initial public offering and distributions made to its
existing stockholders. For the year ended December 31, 1998, cash used in
financing activities totaled $623,000, which consisted of distributions to
stockholders and deferred offering costs.
As of December 31, 2000, the Company had working capital of approximately
$42.0 million as compared to approximately $43.3 million in 1999. The change in
working capital is attributable to the Company's use of cash, coupled with a
decrease in accounts receivable offset by an increase to the Company's income
tax receivable. As of December 31, 1999, the Company had working capital of
approximately $43.3 million as compared to working capital of approximately $3.9
million at December 31, 1998. The change in working capital from December 31,
1998 to December 31, 1999, resulted primarily from an increase in current assets
of $42.4 million due to cash proceeds from the Company's initial public offering
and the underwriters' exercising their option to purchase additional shares from
the Company.
Net accounts receivable decreased by approximately $1.4 million from
December 31, 1999 to December 31, 2000. This decrease was primarily attributable
to the $3.5 million decrease in sales between the fourth quarter of 2000 and the
fourth quarter of 1999.
Deferred revenue increased by approximately $70,000 from December 31, 1999
to December 31, 2000. Deferred revenue represents amounts billed to clients for
which revenue will be recognized in future periods.
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 for a total cost of approximately
$284,000. The Company does not believe any purchases under the plan will affect
its ability to fund operations.
As described elsewhere in this form 10-K under "Legal Proceedings," the
Company is party to various legal proceedings including class action lawsuits.
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 December 31, 2000. A loss in this litigation may have a
material adverse effect on the Company's results of operations and financial
condition.
Based on its current available working capital, management believes there
is sufficient funding to meet its operating expenditures for the foreseeable
future.
The Company may, in the future, acquire businesses or products
complementary to the Company's business, or otherwise obtain the right to use
complementary technologies, although there can be no assurance that any such
acquisitions will be made. The need for cash to finance additional working
capital or to make
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acquisitions may cause the Company to seek additional equity or debt financing.
There can be no assurance that such financing will be available, or that the
Company's need for higher levels of working capital will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the FASB issued Statement of Financial Accounting Standards
(SFAS) Nos. 137 and 138, Accounting for Derivative Instruments and Hedging
Activities, which amends the effective date of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards for derivative financial instruments and
hedging activities and requires the Company to recognize all derivatives as
either assets or liabilities on the balance sheet and measure them at fair
value. Gains and losses resulting from changes in fair value would be accounted
for based on the use of the derivative and whether it is designated and
qualifies for hedge accounting. SFAS Nos. 133 and 138 are effective for all
fiscal quarters of the fiscal years beginning after June 30, 2000. The effect on
January 1, 2001 of such adoption is not expected to have an impact on the
Company.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain
of the SEC's views in applying accounting principles generally accepted in the
United States of America to revenue recognition in financial statements. In
March 2000, the SEC issued SAB 101A, which delayed the implementation date of
SAB No. 101. In June 2000, the SEC issued SAB 101B, which further delayed the
implementation date of SAB 101. The Company adopted SAB 101 beginning October 1,
2000, effective as of January 1, 2000. The adoption of SAB 101 did not have a
material impact on our financial position or results of operations.
In March 2000, the FASB issued Financial Interpretation No. 44 ("FIN 44").
"Accounting for Certain Transactions Involving Stock Compensation-an
Interpretation of APB No. 25." FIN 44 clarifies the application of APB 25 for
certain issues including: (a) the definition of employee for purposes of
applying APB 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
was effective July 1, 2000, except for the provisions that relate to
modifications that directly or indirectly reduce the exercise price of an award
and the definition of an employee, which were effective after December 15, 1998.
The adoption of FIN 44 did not have a material impact on our financial position
or results of operations.
ITEM 7A. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements as of December 31, 2000 and
1999 and for each of the years in the three-year period ended December 31, 2000,
and the respective notes thereto, are set forth elsewhere in this report. An
index of these financial statements appears in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
The information required by Items 10, 11, 12 and 13 of Part III of Form
10-K will be set forth in the definitive Proxy Statement of the Company relating
to the 2001 Annual Meeting of Shareholders and is
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incorporated herein by reference. The Proxy Statement will be filed within 120
days of the fiscal year ended December 31, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements are filed as part of
this Form 10-K:
Ecometry Corporation and Subsidiaries Consolidated Financial
Statements:
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 2000 and 1999
Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 2000
Consolidated Statements of Redeemable Preferred Stock and
Stockholders' Equity (Deficit) for each of the years in the
three-year period ended December 31, 2000
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 2000
Notes to Consolidated Financial Statements.
(2) The following financial statement schedule is filed as part of this
Form 10-K:
Schedule II of Valuation and Qualifying Accounts.
(3) See Exhibit Index included elsewhere herein.
(b) Reports on Form 8-K:
The Company filed a Report on Form 8-K dated November 13, 2000, which
disclosed that the shareholders of the Company approved an amendment to the
Company's Amended and Restated Articles of Incorporation to change the name of
the Company from Smith-Gardner & Associates, Inc. to Ecometry Corporation.
The Company filed a Report on Form 8-K dated December 4, 2000, which
disclosed that the Company changed its name from Smith-Gardner & Associates,
Inc. to Ecometry Corporation.
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ECOMETRY CORPORATION AND SUBSIDIARIES
(FORMERLY SMITH-GARDNER & ASSOCIATES, INC.)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
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INDEPENDENT AUDITORS' REPORT
The Board of Directors
Ecometry Corporation
(formerly Smith-Gardner & Associates, Inc.):
We have audited the accompanying consolidated balance sheets of Ecometry
Corporation and subsidiaries (formerly Smith-Gardner & Associates, Inc.) as of
December 31, 2000 and 1999, and the related consolidated statements of
operations, redeemable preferred stock, stockholders' equity (deficit) and
comprehensive loss, and cash flows for each of the years in the three-year
period ended December 31, 2000. In connection with our audits of the
consolidated financial statements, we have also audited the financial statement
schedule for each of the years in the three-year period ended December 31, 2000,
as listed in item 14(a)2 of the Company's 2000 Annual Report on Form 10-K. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ecometry
Corporation and subsidiaries (formerly Smith-Gardner & Associates, Inc.) as of
December 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG
Fort Lauderdale, Florida
January 19, 2001
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ECOMETRY CORPORATION AND SUBSIDIARIES
(FORMERLY SMITH-GARDNER & ASSOCIATES, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 36,826,743 $39,245,784
Accounts receivable, net of allowance for doubtful
accounts of $901,028 in 2000 and $615,809 in 1999...... 7,054,624 8,425,232
Income tax receivable..................................... 1,994,535 382,246
Inventory................................................. 313,568 275,022
Prepaid expenses and other current assets................. 534,424 597,185
Deferred taxes............................................ 819,503 554,243
------------ -----------
Total current assets.............................. 47,543,397 49,479,712
Property and equipment, net................................. 2,811,851 1,878,988
Other assets................................................ 210,733 108,831
------------ -----------
$ 50,565,981 $51,467,531
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,009,778 $ 2,435,556
Accrued expenses.......................................... 2,757,711 2,992,953
Deferred revenue.......................................... 728,977 658,979
Current installments of obligations under capital
leases................................................. 31,271 57,446
------------ -----------
Total current liabilities......................... 5,527,737 6,144,934
Obligations under capital leases, excluding current
installments.............................................. 114,823 121,607
Deferred taxes.............................................. 167,471 38,850
------------ -----------
Total liabilities................................. 5,810,031 6,305,391
------------ -----------
Commitments and contingencies (note 14)
Stockholders' equity:
Common stock, $0.01 par value. Authorized 50,000,000
shares; issued and outstanding 12,424,027 and
12,276,578 shares as of December 31, 2000 and 1999,
respectively........................................... 124,240 122,766
Preferred stock, $.01 par value. Authorized 10,000,000
shares; none issued and outstanding.................... -- --
Additional paid-in capital................................ 56,506,192 54,871,317
Accumulated deficit....................................... (11,415,891) (9,831,943)
Accumulated other comprehensive loss...................... (174,404) --
Treasury stock, at cost (65,000 shares in 2000)........... (284,187) --
------------ -----------
Total stockholders' equity........................ 44,755,950 45,162,140
------------ -----------
$ 50,565,981 $51,467,531
============ ===========
See accompanying notes to consolidated financial statements.
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ECOMETRY CORPORATION AND SUBSIDIARIES
(FORMERLY SMITH-GARDNER & ASSOCIATES, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2000
2000 1999 1998
----------- ----------- -----------
Revenue:
License fees and software sales........................... $22,070,081 $26,101,966 $18,096,841
Computer hardware sales................................... 8,660,916 8,598,354 6,703,253
Support................................................... 9,696,364 7,629,486 5,334,727
Services.................................................. 5,188,420 4,267,864 3,567,451
----------- ----------- -----------
Total revenue...................................... 45,615,781 46,597,670 33,702,272
----------- ----------- -----------
Cost of sales and services:
License fees and software sales........................... 8,594,987 7,957,588 7,370,957
Computer hardware sales................................... 7,082,957 6,371,708 4,915,784
Support................................................... 6,097,512 5,049,726 3,222,260
Services.................................................. 3,525,181 3,164,593 2,270,562
----------- ----------- -----------
Total cost of sales and services................... 25,300,637 22,543,615 17,779,563
----------- ----------- -----------
Gross profit....................................... 20,315,144 24,054,055 15,922,709
Operating expenses:
General and administrative................................ 11,558,377 8,061,036 6,538,097
Sales and marketing....................................... 7,824,764 5,584,798 2,430,460
Research and development.................................. 4,439,466 3,420,772 2,253,663
----------- ----------- -----------
Total operating expenses........................... 23,822,607 17,066,606 11,222,220
----------- ----------- -----------
(Loss) income from operations...................... (3,507,463) 6,987,449 4,700,489
Other (expense) income:
Interest expense:
Interest on outstanding debt............................ -- (165,000) (1,800,000)
Interest income........................................... 2,411,674 1,748,428 102,346
Loss on disposal of property and equipment................ (113,636) -- --
----------- ----------- -----------
(Loss) income before provision for income taxes.... $(1,209,425) $ 8,570,877 $ 3,002,835
Provision for income taxes.................................. (374,523) (3,048,446) --
----------- ----------- -----------
Net (loss) income........................................... $(1,583,948) $ 5,522,431 $ 3,002,835
=========== =========== ===========
Net (loss) income per share:
Basic..................................................... $ (0.13) $ 0.48 $ 0.57
=========== =========== ===========
Diluted................................................... $ (0.13) $ 0.44 $ 0.50
=========== =========== ===========
Weighted average shares used in calculating net (loss)
income per share:
Basic................................................... 12,371,771 11,621,598 5,263,100
=========== =========== ===========
Diluted................................................. 12,371,771 12,426,427 8,131,344
=========== =========== ===========
Pro forma data (unaudited):
Income before income tax expense.......................... $ 8,570,877 $ 3,002,835
Pro forma provision for income tax expense................ (3,377,446) (1,214,770)
----------- -----------
Pro forma net income...................................... $ 5,193,431 $ 1,788,065
=========== ===========
Pro forma net income per share:
Basic................................................... $ 0.45 $ 0.34
=========== ===========
Diluted................................................. $ 0.41 $ 0.34
=========== ===========
Weighted average shares outstanding used in calculating pro
forma net income per share (unaudited):
Basic................................................... 11,621,598 5,263,100
=========== ===========
Diluted................................................. 12,426,427 5,263,100
=========== ===========
See accompanying notes to consolidated financial statements.
38
41
ECOMETRY CORPORATION AND SUBSIDIARIES
(FORMERLY SMITH-GARDNER & ASSOCIATES, INC.)
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK, STOCKHOLDERS' EQUITY
(DEFICIT) AND COMPREHENSIVE LOSS
FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2000
REDEEMABLE PREFERRED STOCK STOCKHOLDERS' EQUITY (DEFICIT)
-------------------------- ------------------------------------------------------
COMMON STOCK
--------------------- ADDITIONAL ACCUMULATED
SHARES AMOUNT SHARES AMOUNT PAID-IN-CAPITAL (DEFICIT)
----------- ------------ ---------- -------- --------------- ------------
Balance, December 31,
1997.................. -- $ -- 5,263,100 $ 52,631 $ 3,481,562 $(17,451,856)
Non-cash compensation
expense............. -- -- -- -- 34,696 --
Shareholders
distributions....... -- -- -- -- -- (70,610)
Net income............ -- -- -- -- -- 3,002,835
----------- ------------ ---------- -------- ----------- ------------
Balance, December 31,
1998.................. -- -- 5,263,100 52,631 3,516,258 (14,519,631)
Issuance of redeemable
convertible
participating
preferred stock..... 22,556 226 -- -- -- --
Issuance of redeemable
participating
preferred stock..... 12,000 12,000,000 -- -- -- --
Issuance of common
stock in initial
public offering, net
of expenses......... -- -- 4,661,500 46,615 50,789,857 --
Conversion of
redeemable
participating
preferred stock..... (22,556) (226) 2,255,614 22,556 (22,556) --
Redemption of
redeemable
participating
preferred stock..... (12,000) (12,000,000) -- -- -- --
Exercise of stock
options............. -- -- 96,364 964 243,007 --
Non-cash compensation
expense............. -- -- -- -- 41,588 --
Stockholder
distributions....... -- -- -- -- -- (834,743)
Tax benefit on
exercise of
options............. -- -- -- -- 303,163 --
Net income............ -- -- -- -- -- 5,522,431
----------- ------------ ---------- -------- ----------- ------------
Balance, December 31,
1999.................. -- -- 12,276,578 122,766 54,871,317 (9,831,943)
Exercise of stock
options............. -- -- 147,449 1,474 454,017 --
Non-cash compensation
expense............. -- -- -- -- 25,800 --
Tax benefit on
exercise of
options............. -- -- -- -- 751,000 --
Repayment of
shareholder gain.... -- -- -- -- 404,058 --
Purchase of treasury
stock............... -- -- -- -- -- --
Net loss.............. -- -- -- -- -- (1,583,948)
Cumulative foreign
currency translation
adjustment.......... -- -- -- -- -- --
Comprehensive loss..
----------- ------------ ---------- -------- ----------- ------------
Balance, December 31,
2000.................. -- $ -- 12,424,027 $124,240 $56,506,192 $(11,415,891)
=========== ============ ========== ======== =========== ============
STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE TREASURY STOCKHOLDERS'
LOSS STOCK (DEFICIT) EQUITY
------------- --------- ----------------
Balance, December 31,
1997.................. $ -- $ -- $(13,917,663)
Non-cash compensation
expense............. -- -- 34,696
Shareholders
distributions....... -- -- (70,610)
Net income............ -- -- 3,002,835
--------- --------- ------------
Balance, December 31,
1998.................. -- -- (10,950,742)
Issuance of redeemable
convertible
participating
preferred stock..... -- -- --
Issuance of redeemable
participating
preferred stock..... -- -- --
Issuance of common
stock in initial
public offering, net
of expenses......... -- -- 50,836,472
Conversion of
redeemable
participating
preferred stock..... -- -- --
Redemption of
redeemable
participating
preferred stock..... -- -- --
Exercise of stock
options............. -- -- 243,971
Non-cash compensation
expense............. -- -- 41,588
Stockholder
distributions....... -- -- (834,743)
Tax benefit on
exercise of
options............. -- -- 303,163
Net income............ -- -- 5,522,431
--------- --------- ------------
Balance, December 31,
1999.................. -- -- 45,162,140
Exercise of stock
options............. -- -- 455,491
Non-cash compensation
expense............. -- -- 25,800
Tax benefit on
exercise of
options............. -- -- 751,000
Repayment of
shareholder gain.... -- -- 404,058
Purchase of treasury
stock............... -- (284,187) (284,187)
Net loss.............. -- -- (1,583,948)
Cumulative foreign
currency translation
adjustment.......... (174,404) -- (174,404)
------------
Comprehensive loss.. (1,758,352)
--------- --------- ------------
Balance, December 31,
2000.................. $(174,404) $(284,187) $ 44,755,950
========= ========= ============
See accompanying notes to consolidated financial statements.
39
42
ECOMETRY CORPORATION AND SUBSIDIARIES
(FORMERLY SMITH-GARDNER & ASSOCIATES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2000
2000 1999 1998
----------- ------------ -----------
Cash flows provided by operating activities:
Net (loss) income......................................... $(1,583,948) $ 5,522,431 $ 3,002,835
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization........................... 737,490 478,361 285,314
Loss on disposal of property and equipment.............. 113,636 -- --
Deferred taxes, net..................................... (136,639) (515,393) --
Non-cash compensation expense........................... 25,800 41,588 34,696
Bad debt expense........................................ 1,751,036 251,293 458,330
Change in assets and liabilities:
Accounts receivable................................... (506,671) (2,821,385) (4,468,245)
Income tax receivable................................. (1,611,073) (382,246) --
Inventory............................................. (38,546) (77,557) 22,498
Prepaid expenses and other current assets............. 60,077 (402,012) (59,791)
Other assets.......................................... (103,993) (636) (27,619)
Accrued interest payable.............................. -- (4,500,000) 1,800,000
Accounts payable...................................... (476,485) 1,274,783 612,423
Accrued expenses...................................... (198,840) 1,398,756 173,207
Deferred revenue...................................... 81,419 (506,296) 781,897
Tax benefit related to exercise of stock options........ 751,000 303,163 --
----------- ------------ -----------
Net cash (used in) provided by operating
activities....................................... (1,135,737) 64,850 2,615,545
----------- ------------ -----------
Cash flows used in investing activities:
Capital expenditures...................................... (1,811,564) (1,193,516) (584,775)
----------- ------------ -----------
Net cash used in investing activities.............. (1,811,564) (1,193,516) (584,775)
----------- ------------ -----------
Cash flows provided by (used in) financing activities:
Payment of capital lease.................................. (32,959) -- --
Redemption of preferred stock............................. -- (12,000,000) --
Distributions to stockholders............................. -- (834,743) (70,610)
Proceeds from public offering of common stock, net........ -- 51,388,418 (551,946)
Proceeds from issuance of common stock.................... 455,491 243,971 --
Repurchase of Company stock............................... (284,187) -- --
Repayment of shareholder gain............................. 404,058 -- --
----------- ------------ -----------
Net cash provided by (used in) financing
activities....................................... 542,403 38,797,646 (622,556)
----------- ------------ -----------
Effect of foreign currency exchange rate changes on
cash and cash equivalents........................ (14,143) -- --
Net (decrease) increase in cash and cash
equivalents...................................... (2,419,041) 37,668,980 1,408,214
Cash and cash equivalents at beginning of year.............. 39,245,784 1,576,804 168,590
----------- ------------ -----------
Cash and cash equivalents at end of year.................... $36,826,743 $ 39,245,784 $ 1,576,804
=========== ============ ===========
Supplemental cash flow information:
Cash paid during the year for interest.................... $ -- $ 4,665,000 $ --
=========== ============ ===========
Cash paid for income taxes................................ $ 1,372,451 $ 3,430,692 $ --
=========== ============ ===========
Supplemental disclosure of non-cash investing and financing
information:
Capital lease additions................................... $ -- $ 179,053 $ --
=========== ============ ===========
See accompanying notes to consolidated financial statements.
40
43
ECOMETRY CORPORATION AND SUBSIDIARIES
(FORMERLY SMITH-GARDNER & ASSOCIATES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
Ecometry Corporation (formerly Smith Gardner and Associates, Inc.), (the
"Company") was incorporated on December 13, 1988 under the laws of the state of
Florida. The Company primarily licenses a computer software package it designed
and developed to automate companies that sell through catalogs, the Internet,
media advertisement, direct mail or broadcast advertisements, and also sells the
computer hardware required to use the software. The Company also provides
consulting, training, programming and technical support services.
The Company opened satellite offices in Sydney, Australia ("SGA Pty.") and
Cambridge, England ("SGA Ltd.") in September 1997 and June 1997, respectively.
These offices are separately incorporated and are wholly owned subsidiaries of
the Company. The Company, through its wholly owned subsidiary, New Haven
Software Corporation, incorporated in September 2000, purchased intellectual
property and customer databases from Haven Corporation in November 2000.
The consolidated financial statements include the accounts of the Company
and its three wholly owned subsidiaries SGA Pty., SGA Ltd. and New Haven. All
significant intercompany balances and transactions have been eliminated in
consolidation.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
(c) Inventory
Inventory consists of computer hardware and software held for resale. It is
stated at the lower of cost, as determined on a specific identification basis,
or market.
(d) Property and Equipment
Property and equipment are stated at cost and are depreciated on the
straight-line basis over the estimated useful lives of the assets which range
from three to seven years. Leasehold improvements are amortized on the
straight-line basis over the shorter of the lease term or estimated useful life
of the asset.
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. The Company has no impaired assets at
December 31, 2000.
(e) Software Development Costs
The Company accounts for software development costs under Statement of
Financial Accounting Standards No. 86, "Accounting for Costs of Computer
Software to Be Sold, Leased or Otherwise Marketed" ("SFAS No. 86"). Under SFAS
No. 86, the costs associated with software development are required to be
41
44
ECOMETRY CORPORATION AND SUBSIDIARIES
(FORMERLY SMITH-GARDNER & ASSOCIATES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 -- (CONTINUED)
capitalized after technological feasibility has been established. The Company
considers technological feasibility to be established when the product design
and working model of the software product are completed and confirmed by testing
the software product. Costs incurred by the Company subsequent to the
establishment of technological feasibility have been insignificant and, as a
result, the Company has not capitalized any development costs.
(f) Revenue Recognition
The Company recognizes revenue in accordance with the provisions of
Statement of Position 97-2, Software Revenue Recognition (SOP 97-2). 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, the Company adopted SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions. SOP 98-9
amends SOP 97-2 to require recognition of revenue using the "residual method"
when (1) there is VSOE of the fair values of all undelivered elements in a
multiple-element arrangement that is not accounted for using long-term contract
accounting, (2) VSOE of fair value does not exist for one or more of the
delivered elements in the arrangement, and (3) all revenue recognition criteria
in SOP 97-2 other than the requirement for VSOE of the fair value of each
delivered element of the arrangement are satisfied. Under the residual method,
the arrangement fee is recognized as follows: (1) the total fair value of the
undelivered elements, as indicated by VSOE, is deferred and subsequently
recognized in accordance with the relevant sections of SOP 97-2 and (2) the
difference between the total arrangement fee and the amount deferred for the
undelivered elements is recognized as revenue related to the delivered elements.
The adoption of SOP 98-9 did not have a material impact on results of
operations.
At December 31, 2000 and 1999, the Company had deferred revenue related to
computer hardware and software sales, customer support and services paid in
advance.
(g) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 ("SFAS No. 107"),
"Disclosures About Fair Value of Financial Instruments," requires disclosure of
fair value of certain financial instruments. Cash and cash equivalents, accounts
receivable, inventory and prepaid expenses and other current assets, as well as
accounts payable, accrued expenses and other current liabilities, as reflected
in the consolidated financial statements, approximate fair value because of the
short-term maturity of these instruments.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
42
45
ECOMETRY CORPORATION AND SUBSIDIARIES
(FORMERLY SMITH-GARDNER & ASSOCIATES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 -- (CONTINUED)
(h) Income Taxes
The Company elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code (the "Code") through 1998. Accordingly, the taxable (loss)
income of the Company was reported on the individual tax returns of the
stockholders.
On January 1, 1999, the Company terminated its S corporation status. In
connection with this termination, the Company now records income taxes in
accordance with Statement of Financial Accounting Standards No. 109 ("SFAS No.
109"), "Accounting for Income Taxes." Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized as a change in income in the period that includes the enactment date.
The pro forma provision for income tax expense presented on the consolidated
statements of operations for the year ended December 31, 1998 represent the
estimated taxes that would have been recorded had the Company been a C
corporation for income tax purposes for that period.
The pro forma provisions for income tax expense presented on the
consolidated statement of operations for the year ended December 31, 1999
represents the historical income tax expense for the year ended December 31,
1999 less a one-time benefit resulting from the conversion of the S corporation
to C corporation.
The Company's S corporation status was terminated in connection with the
initial public offering. The Company, pursuant to an agreement with the existing
shareholders, made a distribution of $834,743 which represented the
shareholders' individual income tax liabilities for the period beginning January
1, 1998 and ending on December 31, 1998.
(i) Basic and Diluted Net Income per Share
Basic net income per share was computed by dividing net income by the
weighted average number of shares of common stock outstanding for each period
presented. Diluted net income per share for the years ended December 31, 1999
and 1998, was computed by giving effect to common stock equivalents and assuming
conversion of debt to redeemable preferred stock. Incremental shares and
adjustments to net income are determined using the "if converted" and treasury
stock methods as follows:
1999 1998
---------- ----------
Net income as reported...................................... $5,522,431 $3,002,835
Plus: interest expense on convertible debt assuming
conversion................................................ -- 1,800,000
Less: preferred stock dividends assuming conversion of debt
to redeemable preferred stock......................... -- (719,541)
---------- ----------
Net income available to common stockholders, as adjusted.... $5,522,431 $4,083,294
========== ==========
Weighted average shares outstanding......................... 11,621,598 5,263,100
Common stock equivalents:
Conversion of convertible debt............................ -- 2,255,614
Incremental shares using treasury stock method............ 804,829 612,630
---------- ----------
12,426,427 8,131,344
========== ==========
Basic net income per share.................................. $ 0.48 $ 0.57
========== ==========
Diluted net income per share................................ $ 0.44 $ 0.50
========== ==========
43
46
ECOMETRY CORPORATION AND SUBSIDIARIES
(FORMERLY SMITH-GARDNER & ASSOCIATES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 -- (CONTINUED)
As of December 31, 2000 the only potential common shares are the options
outstanding at the end of the year (note 8). These potential common shares have
been excluded from the computation of diluted net loss per share for the year
ended December 31, 2000, because their effect would have been antidilutive.
(j) Pro Forma Net Income and Pro Forma Net Income Per Share Computations
(Unaudited)
The pro forma net income presented in the consolidated statements of
operations reflects the pro forma effects for income taxes as if the Company had
been a taxable entity for the periods presented. In addition, the pro forma net
income for the year ended December 31, 1999 excludes a one-time tax benefit
resulting from conversion of the S corporation to C corporation. Pro forma basic
and diluted net income per share for each of the years ended December 31, 1999
and 1998 was computed by dividing pro forma net income by the weighted average
number of shares of common stock outstanding.
For the year ended December 31, 2000, there is no pro forma presentation
since the Company was a C corporation for the entire year.
(k) 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 year. Resulting
translation adjustments are accumulated as a component of stockholder's equity
and comprehensive loss.
The Company enters into transactions based on the Company's local currency
which results in limited foreign currency risk. The Company does not utilize
derivative instruments.
(l) Use of Estimates
The Company's management has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(m) Start-up Costs
In March 1998, the AICPA issued Statement of Position 98-5 ("SOP 98-5")
"Reporting on the Costs of Start-Up Activities." Pursuant to the provisions of
SOP 98-5, all costs associated with start-up activities, including organization
costs, should be expensed as incurred. Companies that previously capitalized
such costs were required to write off the unamortized portion of such costs as a
cumulative effect of a change of accounting principle. The Company had an
insignificant amount of these costs and the adoption of SOP 98-5 did not have a
significant impact on the Company's consolidated financial statements.
(n) Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"),
which establishes standards for reporting and displaying comprehensive income
and its components in a full set of financial statements. SFAS No. 130 requires
that companies classify items of other comprehensive earnings by their nature in
a financial statement and display the balance of other comprehensive income
separately from accumulated deficit and additional paid-in capital in the equity
section of the balance sheet. Comprehensive income is defined as a change in
44
47
ECOMETRY CORPORATION AND SUBSIDIARIES
(FORMERLY SMITH-GARDNER & ASSOCIATES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 -- (CONTINUED)
equity during the financial reporting period of a business enterprise resulting
from non-owner sources. The only component of accumulated other comprehensive
loss is related to the Company's foreign currency translation adjustment in
2000.
(o) Segment Reporting
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. The Company operates in one segment, for management
reporting purposes.
2. INITIAL PUBLIC OFFERING
On February 3, 1999, the Company and certain selling shareholders sold
4,410,000 shares of its common stock in an initial public offering from which
the Company received proceeds of $43,454,132, net of underwriter commissions and
offering costs. At that time, the Company's $12 million outstanding convertible
debentures (the "Convertible Debentures") were converted into redeemable
convertible preferred stock and redeemable participating preferred stock.
Contemporaneous with the offering, the redeemable convertible preferred stock
was converted into 2,255,614 shares of common stock.
On February 3, 1999, the Company redeemed in full the redeemable
participating preferred stock for $12,000,000 and paid accrued interest in the
amount of $4,665,000. On February 26, 1999, the underwriters of the Company's
initial public offering exercised their option to purchase 661,500 additional
shares of the Company's common stock from which the Company received net
proceeds of $7,382,340.
3. PROPERTY AND EQUIPMENT, NET
Property and equipment, net of accumulated depreciation and amortization
consists of the following:
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Office equipment............................................ $2,631,942 $2,760,548
Office furnishings and fixtures............................. 922,062 375,088
Leasehold improvements...................................... 500,795 170,037
---------- ----------
4,054,799 3,305,673
Less accumulated depreciation and amortization.............. 1,242,948 1,426,685
---------- ----------
$2,811,851 $1,878,988
========== ==========
4. LEASES
The Company entered into an agreement to lease office facilities under a
non-cancelable operating lease commencing January 1995 and expiring December
2001 with an option to renew for one five-year term. The lease contains certain
incentives including rent abatements, rent discounts, leasehold improvement
reimbursements, cash allowances and scheduled base rent increases over the term
of the lease. In December 1999, the Company entered into an agreement to lease
additional office facilities and extend the lease for existing facilities under
a non-cancelable operating lease commencing December 1999 and expiring December
2006. Generally accepted accounting principles require that the full costs of a
lease be recognized ratably over the term of the lease. Accordingly, the Company
has recorded deferred credits of $939,610 and $678,631 at December 31, 2000 and
1999, respectively, to reflect the excess of rent expense over the incentives
received.
45
48
ECOMETRY CORPORATION AND SUBSIDIARIES
(FORMERLY SMITH-GARDNER & ASSOCIATES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 -- (CONTINUED)
The deferred credit is included in accrued expenses in the accompanying
consolidated balance sheets. In addition to the base rent payment, the Company
pays a monthly allocation of the building's operating expenses. During 1997, the
Company also entered into lease agreements for office facilities in the United
Kingdom which expire in 2003 and Australia on a month-to-month basis. During
2000, the Company entered into a semi-annual facility lease agreement for its
New Haven Software Corporation subsidiary.
Future minimum lease payments under noncancelable facility leases as well
as equipment leases and future minimum capital lease payments as of December 31,
2000 are as follows:
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
- ------------------------ -------- ----------
2001........................................................ $ 46,591 $ 881,994
2002........................................................ 46,591 1,164,000
2003........................................................ 46,591 1,128,398
2004........................................................ 42,708 1,154,068
2005........................................................ -- 1,200,152
Thereafter.................................................. -- 1,248,349
-------- ----------
Total minimum lease payments...................... $182,481 $6,776,961
==========
Less amount representing interest (at a rate of 9.65%)...... 36,387
--------
Present value of net minimum capital lease payments....... 146,094
Less current installments of obligations under capital
leases.................................................... 31,271
--------
Obligations under capital leases, excluding current
installments........................................... 114,823
========
Total rent expense associated with operating leases was $2,211,395,
$1,344,496 and $1,237,607 during 2000, 1999 and 1998, respectively.
5. LINE OF CREDIT
The Company has a $7.5 million line of credit with a financial institution.
The interest rate is LIBOR (6.0 percent at December 31, 2000) plus 1.25 percent.
As of December 31, 2000 the Company had no borrowings under this line of credit.
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Sales tax/VAT payable....................................... $ 47,556 $ 256,792
Sales tax contingencies..................................... 380,562 546,091
Deferred rent............................................... 939,610 678,631
Accrued payroll............................................. 452,117 855,944
Accrued legal............................................... 160,000 32,000
Accrued vacation............................................ 334,107 254,591
Accrued commissions......................................... 101,766 88,291
Other....................................................... 341,993 280,613
---------- ----------
$2,757,711 $2,992,953
========== ==========
47
49
ECOMETRY CORPORATION AND SUBSIDIARIES
(FORMERLY SMITH-GARDNER & ASSOCIATES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 -- (CONTINUED)
7. CONVERTIBLE DEBT
On December 19, 1994, the Company entered into a Debenture Purchase
Agreement (the "Agreement") with various partnerships (the "Lenders") in
connection with the private placement of $12,000,000 convertible subordinated
debentures (the "Debentures"). The fair value of the conversion feature of the
$12,000,000 debentures was determined to be $3,481,562 based on the difference
between the stated interest rates and the market rate of such debentures on the
date of issuance. This amount is included in additional paid-in capital in the
accompanying consolidated balance sheets. The resulting original issue discount
("OID") on the convertible debt was amortized from the issue date (December 19,
1994) to the date it first became convertible (June 30, 1997) to achieve an 18
percent effective interest rate.
An IPO was closed on February 3, 1999. As discussed in note 2, on February
3, 1999, the debentures were converted into two classes of preferred stock and
the preferred stock was redeemed. Contemporaneous with the offering, the lenders
converted the redeemable convertible participating preferred stock into
2,255,614 shares of common stock.
8. EMPLOYEE BENEFIT AND STOCK OPTION PLANS
The Company maintains an employee retirement savings plan (the "Plan")
under Internal Revenue Code Section 401(k). The Plan is available to all
full-time employees over 21 years of age with more than three months of
employment with the Company. The Company provides matching contributions which
vest to the employees immediately and range from 10 percent to 35 percent,
depending on years of service of the matchable deferrals of each participant
entitled to matching contributions, not to exceed 2.8 percent of the
participant's compensation. There was $162,523, $160,278 and $102,713 provided
by the Company in matching contributions for the years ended December 31, 2000,
1999 and 1998, respectively.
SGA Ltd. also maintains an employee benefit plan (the "Ltd. Plan"). This is
an employee-directed plan which allows the employees to set aside from 1 to 5
percent of their salary to be deposited to a fund of their choice. SGA Ltd. will
match each employee's contribution from 1 to 5 percent of their salary. There
was $56,916, $36,437 and $10,427 provided by the Company in matching
contributions for the years ended December 31, 2000, 1999 and 1998,
respectively.
On April 1, 1996 the Company adopted a stock option plan. Under this plan,
the Company may grant options for up to 850,000 shares of common stock. An
option's maximum term is ten years. Each option vests as follows: 25 percent one
year after the date of grant and the balance in successive equal quarterly
installments of 6.25 percent each, at the end of each of the next 12 calendar
quarters. At December 31, 2000, the Company has granted 638,582 options under
this stock option plan at exercise prices ranging from $2.53 to $15.78 per
share. Included in these granted options, on April 1, 1996, under the stock
option plan 494,120 options to purchase common stock were granted to an
executive officer of the Company. The options vest as follows: 82,353 shares one
year after the grant date; 20,588 shares at the end of each of the next 12
calendar quarters subsequent to the vesting commencement date; 82,355 shares
upon the date the aggregate market value of the Company's outstanding common
stock has equaled or exceeded $100 million for 30 days (June 8, 1999); and the
remaining 82,356 shares upon the earlier to occur of (a) March 21, 2006 or (b)
the market value of the Company's outstanding common stock has equaled or
exceeded $150 million for 30 days. Of the 494,120 of options granted, 394,120
options are exercisable and 100,000 options have already been exercised as of
December 31, 2000.
At June 30, 1998, the Company established an additional stock option plan
("1998 Stock Option Plan"). Under this plan the Company may grant options for up
to 1,500,000 shares of common stock. On May 16, 2000, the 1998 Stock Option Plan
was amended to increase the number of options authorized for issuance to
47
50
ECOMETRY CORPORATION AND SUBSIDIARIES
(FORMERLY SMITH-GARDNER & ASSOCIATES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 -- (CONTINUED)
2,250,000. At December 31, 2000, the Company has granted 1,871,559 options under
the 1998 Stock Option Plan at exercise prices ranging from $3.00 to $17.35 per
share. Each option vests 25 percent one year after the date of grant (the
"vesting date") and an additional 25 percent on each of the next three
anniversaries of the vesting date.
The Company applies APB Opinion No. 25 in accounting for its stock option
plan. Stock compensation expense is recognized at the date options are vested
when the exercise price is lower than fair market value at the date of grant.
Stock compensation expense for the years ended December 31, 2000, 1999 and 1998
was $25,800, $41,588 and $34,696, respectively. Had the Company determined
compensation cost based on fair value at the grant date for its stock options
under Statement No. 123, the Company's net (loss) income and net (loss) income
per share for each of the years in the three-year period ended December 31, 2000
would have changed to pro forma amounts indicated below:
PRO FORMA DISCLOSURES 2000 1999 1998
- --------------------- ----------- ---------- ----------
Net (loss) income:
As reported................................. $(1,583,948) $5,522,431 $3,002,835
Pro forma................................... $(3,188,759) $3,832,838 $2,655,001
Basic net (loss) income per share:
As reported................................. (.13) .48 .57
Pro forma................................... (.26) .33 .50
Diluted net (loss) income per share:
As reported................................. (.13) .44 .50
Pro forma................................... (.26) .31 .46
The weighted-average fair market value per share of options granted to
employees was estimated at $12.42, $10.65 and $1.62, for the years ended
December 31, 2000, 1999 and 1998, respectively. The fair value of each option
was estimated at the date of grant using the Black-Scholes model with the
following assumptions used:
2000 1999 1998
------- ------- -------
Expected life........................................... 6 years 6 years 5 years
Dividends............................................... None None None
Risk-free interest rate................................. 5.24% 6.28% 5.65%
Expected volatility..................................... 56% 50% 50%
The following table summarizes information about stock options outstanding
under the Plans as of December 31, 2000:
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE NUMBER AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE OF SHARES EXERCISE
PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ---------------- ----------- ------------ -------- ----------- --------
$ 2.53 to $ 3.75 524,634 5.28 $ 2.56 489,178 $ 2.53
$ 4.00 to $ 8.69 444,500 9.35 6.66 54,875 8.65
$ 9.31 to $12.00 655,003 7.55 11.94 288,146 12.00
$12.56 to $17.35 651,000 9.23 15.63 8,750 14.81
--------- -------
2,275,137 9.80 840,949 6.30
========= =======
48
51
ECOMETRY CORPORATION AND SUBSIDIARIES
(FORMERLY SMITH-GARDNER & ASSOCIATES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 -- (CONTINUED)
Option activity for the Plans is summarized as follows:
WEIGHTED
AVERAGE
EXERCISE
NUMBER OF PRICE PER
SHARES SHARE
--------- ---------
Balance outstanding at December 31, 1997.................... 752,120 $ 2.53
Options granted........................................... 667,761 11.57
Options forfeited......................................... (6,427) 2.53
---------
Balance outstanding at December 31, 1998.................... 1,413,454 6.80
Options granted........................................... 454,500 10.52
Options exercised......................................... (96,364) 2.53
Options forfeited......................................... (62,892) 9.60
---------
Balance outstanding at December 31, 1999.................... 1,708,698
=========
Options granted........................................... 886,000 12.42
Options exercised......................................... (147,449) 3.12
Options forfeited......................................... (172,112) 12.10
---------
Balance at December 31, 2000................................ 2,275,137 9.80
=========
Exercisable at December 31, 2000............................ 840,949 6.30
=========
Subsequent to December 31, 2000 an additional 25,000 shares were granted at
prices ranging from $1.75 -- $3.50 per share.
The amount of stock compensation expense to be recognized in the future as
of December 31, 2000 is as follows:
YEAR ENDING DECEMBER 31,
- ------------------------
2001........................................................ $14,554
2002........................................................ 1,031
-------
Total future stock compensation expense........... $15,585
=======
9. INCOME TAXES
Pretax income (loss) is derived from the following sources:
2000 1999 1998
----------- ---------- ----------
Domestic.......................................... $ 848,183 $8,720,007 $3,155,995
Foreign........................................... (2,057,608) (149,130) (153,160)
----------- ---------- ----------
Total................................... $(1,209,425) $8,570,877 $3,002,835
=========== ========== ==========
The provision for income taxes for the years ended December 31, 2000 and
1999 represents the historical provision for income taxes of the Company which
includes a one-time tax benefit due to the change from an S corporation to a C
corporation. The unaudited pro forma provision for income taxes for the year
ended December 31, 1998 represents the estimated taxes that would have been
presented had the Company been a
49
52
ECOMETRY CORPORATION AND SUBSIDIARIES
(FORMERLY SMITH-GARDNER & ASSOCIATES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 -- (CONTINUED)
C corporation for income tax purposes for the year. The significant components
of the provision for income taxes are as follows:
HISTORICAL HISTORICAL PRO FORMA
2000 1999 1998
---------- ---------- -----------
(UNAUDITED)
Current:
Federal...................................... $ 375,060 $2,967,293 $1,004,126
State........................................ 136,102 596,027 203,627
--------- ---------- ----------
Total current........................ 511,162 3,563,320 1,207,753
Deferred:
Federal...................................... (68,381) (486,379) 4,045
State........................................ (68,258) (28,495) 2,972
--------- ---------- ----------
Total deferred....................... (136,639) (514,874) 7,017
--------- ---------- ----------
Total income tax expense............. $ 374,523 $3,048,446 $1,214,770
========= ========== ==========
Current tax benefits of $751,000 and $303,163 related to the exercise of
vested nonqualified stock options were credited directly to additional paid-in
capital in 2000 and 1999, respectively.
For the years ended December 31, 2000 and 1999, the reconciliation below
represents the difference between the historical provision for income taxes
calculated using the statutory federal income tax rate of 34 percent and the
actual income tax. For the year ended December 31, 1998, the reconciliation
represents the provision for income taxes calculated using the statutory federal
income tax rate of 34 percent and the pro forma provision for income taxes:
HISTORICAL HISTORICAL PRO FORMA
2000 1999 1998
---------- ---------- -----------
(UNAUDITED)
Provision for income tax (benefit) expense
using statutory tax rate..................... $(411,205) $2,914,185 $1,020,964
State income taxes, net of federal income tax
benefit...................................... 44,777 343,873 136,356
Change in valuation allowance.................. 631,531 60,857 56,274
Effect of change to C-corporation.............. -- (329,519) --
Difference between US and non-US tax rates..... 68,361 (10,153) (7,298)
Other, net..................................... 41,059 69,203 8,474
--------- ---------- ----------
Provision for income taxes expense............. $ 374,523 $3,048,446 $1,214,770
========= ========== ==========
50
53
ECOMETRY CORPORATION AND SUBSIDIARIES
(FORMERLY SMITH-GARDNER & ASSOCIATES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2000 and 1999 are as follows:
2000 1999
---------- --------
Deferred tax assets:
Accrued expenses.......................................... $ 368,073 $314,426
Allowance for doubtful accounts........................... 370,733 239,817
Foreign and state net operating loss carryforward......... 539,256 --
Other..................................................... 172,972 --
---------- --------
Total deferred tax asset.......................... 1,451,034 554,243
Valuation allowance......................................... (631,531) --
---------- --------
Net deferred tax assets........................... 819,503 554,243
---------- --------
Deferred tax liabilities:
Depreciation and amortization............................. 110,623 38,607
Other..................................................... 56,848 243
---------- --------
Total deferred tax liabilities.................... 167,471 38,850
---------- --------
Net deferred tax asset............................ $ 652,032 $515,393
========== ========
Net operating loss carryforwards (NOL) generated by the UK and Australian
subsidiaries were $1.2 million and $590,000, respectively. The Company's
management believes that it is more likely than not that the results of future
U.S. operations will generate sufficient taxable income to realize the deferred
tax assets attributed to the U.S. operations. A valuation allowance for the full
amount of the related tax benefit in the UK and Australian operations has been
established due to the uncertainties associated with the utilization NOL
carryforwards.
10. BUSINESS AND CREDIT CONCENTRATIONS
The Company currently derives substantially all of its revenue from sales
of its Ecometry Online family of products and related services and hardware. Any
factor adversely affecting the sale of the Company's Ecometry Online products or
other new products, could have a material affect on the Company's business,
financial condition and results of operations.
The Company sells its products primarily to customers located in the United
States. In 2000, 2.5 percent of the Company's sales were to customers outside
the United States.
The Company purchases its hardware from a distributor of Hewlett Packard
and 86 percent, 84 percent and 80 percent of its computer hardware was purchased
from this distributor for the years ended December 31, 2000, 1999 and 1998,
respectively. The Company owed this supplier $726,167, $769,884 and $259,102 at
December 31, 2000, 1999 and 1998, respectively. Accordingly, any adverse change
in the product pricing or the operations of this distributor could significantly
affect the operating results of the Company.
No single customer accounted for more than 10 percent of total revenue for
each of the years in the three-year period ended December 31, 2000. In addition,
there were accounts receivable from three customers at December 31, 2000 that
exceeded 10 percent of total accounts receivable for approximately $2,972,000.
The Company estimates an allowance for doubtful accounts generally based on
an analysis of collections in prior years, the credit worthiness of its
customers as well as general economic conditions. Consequently, an adverse
change in those factors could affect the Company's estimate of its bad debts.
52
54
ECOMETRY CORPORATION AND SUBSIDIARIES
(FORMERLY SMITH-GARDNER & ASSOCIATES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 -- (CONTINUED)
The Company increased the valuation allowance for its UK and Australian
subsidiaries as described in note 9. The Company also recognized a deferred tax
asset for its U.S. operations due to managements belief that there will be
sufficient taxable income in the future to offset the NOL carryforwards.
Consequently, an adverse change in those factors could affect the operating
results of the Company.
11. EMPLOYEE STOCK PURCHASE PLAN
In July 2000, the Company established an Employee Stock Purchase Plan
(ESPP). Under the ESPP, the Company is authorized to grant up to 250,000 shares
of common stock to its employees. Stock is purchased at 85 percent of the lower
price at the beginning or end of the offering period. The initial offering
period began July 1, 2000 and ended on December 31, 2000. Under the ESPP,
purchases of stock during each offering period are limited to $25,000, 10
percent of compensation and 500 shares. Payroll deductions are made for
participating employees during the offering period. Participants may cancel up
to the last day of the offering period and withdraw all funds. During the
initial offering period, the Company issued 22,095 shares at $1.75 per share.
12. 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. The Company repurchased
65,000 shares of the Company's common stock under the plan as of December 31,
2000. The shares were purchased at an average price of $4.37 per share, for a
total purchase price of $284,187 and recorded as treasury stock.
13. COMMITMENTS AND CONTINGENCIES
Class Action Litigation
Between June 22, 2000 and August 14, 2000, four purported class-action
complaints were filed against the Company and several of its officers. 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. 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 notion to dismiss. Management believes these actions
are without merit and intends to defend them vigorously. There can be no
assurance the Company will be successful in defending this claim. An unfavorable
outcome could have a material adverse affect on the Company's business,
financial condition or results of operation. At this time, the Company cannot
reasonably estimate the ultimate loss, if any, or predict the outcome related to
these actions and, therefore, the Company has not recorded an accrual for loss
as of December 31, 2000.
Creditor Bankruptcy
In May 2000, one of the Company's clients discontinued its operations. 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 negotiated a settlement for the dismissal of the Involuntary
Bankruptcy petition under which the Company's client would dedicate certain
funds to be distributed to all of the holders of allowed, undisputed,
uncontingent, and liquidated unsecured claims. The order approving the
settlement
52
55
ECOMETRY CORPORATION AND SUBSIDIARIES
(FORMERLY SMITH-GARDNER & ASSOCIATES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999 -- (CONTINUED)
was entered on November 2, 2000 and became final November 13, 2000. The Company
received a settlement check in the amount of $172,578 in January 2001.
Other Legal Matters
The Company is also involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
14. SHORT-SWING PROFITS
During fiscal year 2000, it was discovered by the Company that beneficial
owners (as defined by the Securities Exchange Act of 1934) had profited from
sales and subsequent purchases of the Company's common stock that were made
within six months ("short-swing profits"). Pursuant to Section 16(b) of the
Securities Exchange Act of 1934, the Company acted to recover these profits from
the beneficial owners. As a result, the Company received $404,058, which has
been credited to additional paid-in capital as a contribution to stockholders'
equity (deficit).
15. NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the FASB issued Statement of Financial Accounting Standards
(SFAS) Nos. 137 and 138, Accounting for Derivative Instruments and Hedging
Activities, which amends the effective date of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards for derivative financial instruments and
hedging activities and requires the Company to recognize all derivatives as
either assets or liabilities on the balance sheet and measure them at fair
value. Gains and losses resulting from changes in fair value would be accounted
for based on the use of the derivative and whether it is designated and
qualifies for hedge accounting. SFAS Nos. 133 and 138 are effective for all
fiscal quarters of the fiscal years beginning after June 30, 2000. The effect on
January 1, 2001, of such adoption is not expected to have an impact on the
Company.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain
of the SEC's views in applying accounting principles generally accepted in the
United States of America to revenue recognition in financial statements. In
March 2000, the SEC issued SAB 101A, which delayed the implementation date of
SAB No. 101. In June 2000, the SEC issued SAB 101B, which further delayed the
implementation date of SAB 101. The Company adopted SAB 101 beginning October 1,
2000, effective as of January 1, 2000. The adoption of SAB 101 did not have a
material impact on our financial position or results of operations.
In March 2000, the FASB issued Financial Interpretation No. 44 ("FIN 44").
"Accounting for Certain Transactions Involving Stock Compensation-an
Interpretation of APB No. 25." FIN 44 clarifies the application of APB 25 for
certain issues including: (a) the definition of employee for purposes of
applying APB 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
was effective July 1, 2000, except for the provisions that relate to
modifications that directly or indirectly reduce the exercise price of an award
and the definition of an employee, which were effective after December 15, 1998.
The adoption of FIN 44 did not have a material impact on our financial position
or results of operations.
53
56
SCHEDULE II
ECOMETRY CORPORATION AND SUBSIDIARIES
(FORMERLY SMITH GARDNER AND ASSOCIATES, INC.)
VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2000
BALANCE AT BALANCE
BEGINNING (A) (B) AT END
OF YEAR CHARGES DEDUCTIONS OF YEAR
---------- ---------- ----------- --------
Description:
Reserves and allowances deducted from asset
accounts:
1998
Allowance for doubtful accounts............ $469,227 $ 413,624 $ (423,851) $459,000
======== ========== =========== ========
Description:
Reserves and allowances deducted from asset
accounts:
1999
Allowances for doubtful accounts........... $459,000 $ 251,293 $ (94,484) $615,809
======== ========== =========== ========
Description:
Reserves and allowances deducted from asset
accounts:
2000
Allowances for doubtful accounts........... $615,809 $1,751,036 $(1,465,817) $901,028
======== ========== =========== ========
- ---------------
(a) Charges to the reserve account represent increase in reserve levels and
establishment of specific reserves.
(b) Deductions to the reserve account represent write-offs and net of recoveries
which occurred during the year.
54
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ECOMETRY CORPORATION
(Registrant)
By: /s/ WILBURN W. SMITH
------------------------------------
Wilburn W. Smith
Chairman of the Board
Date: March 16, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf by the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ MARTIN K. WEINBAUM Vice President -- Finance, March 16, 2001
- ----------------------------------------------------- Chief Financial Officer,
Martin K. Weinbaum Secretary and Treasurer
(Principal Financial and
Accounting Officer)
/s/ ALLAN J. GARDNER Chief Technology Officer and March 16, 2001
- ----------------------------------------------------- Director
Allan J. Gardner
/s/ WILBURN W. SMITH Executive Vice March 16, 2001
- ----------------------------------------------------- President -- Sales and
Wilburn W. Smith Chairman
/s/ FRANCIS H. ZENIE Director March 16, 2001
- -----------------------------------------------------
Francis H. Zenie
/s/ ROBERT C. KNEIP Director March 16, 2001
- -----------------------------------------------------
Robert C. Kneip
/s/ JAMES J. FELCYN, JR. Director March 16, 2001
- -----------------------------------------------------
James J. Felcyn, Jr.
55
58
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
3.1 -- Amended and Restated Articles of Incorporation of the
Company, as amended(4).
3.2 -- By-Laws of the Company, as amended(5).
3.3 Amendment to Amended and Restated Articles of Incorporation
of the Company*
4.1 -- Form of Certificate of Common Stock(2).
10.1 -- Ecometry Corporation's Stock Option Plan(1).+
10.2 -- Form of Stock Option Agreement pursuant to Ecometry
Corporation's Stock Option Plan(1).+
10.3 -- Ecometry Corporation's Amended and Restated 1998 Stock
Option Plan, as amended (8).+
10.4 -- Form of Stock Option Agreement pursuant to Ecometry
Corporation's 1998 Stock Option Plan(1).+
10.5 -- Ecometry Corporation's 401(k)/Profit Sharing Plan(2).+
10.6 -- Debenture Purchase Agreement dated December 19, 1994(1).
10.7 -- Form of Convertible Debenture Due 2000 issued to Advent VII
L.P.(1).
10.8 -- Form of Convertible Debenture Due 2000 issued to Advent
Atlantic and Pacific II L.P.(1).
10.9 -- Form of Convertible Debenture Due 2000 issued to Advent
Industrial II L.P.(1).
10.10 -- Form of Convertible Debenture Due 2000 issued to Advent New
York L.P.(1).
10.11 -- Form of Convertible Debenture Due 2000 issued to Chestnut
Capital International.(1).
10.12 -- Form of Convertible Debenture Due 2000 issued to TA Venture
Investors Limited.(1).
10.13 -- Registration Rights Agreement dated December 19, 1994(1).
10.14 -- Non-Competition Agreement by and between Ecometry
Corporation & and Wilburn Smith(1).
10.15 -- Non-Competition Agreement by and between Ecometry
Corporation and Allan Gardner(1).
10.16 -- Form of Non-Compete Agreement executed by Ecometry
Corporation's key employees(1).
10.17 -- Lease Agreement dated July 1, 1994, by and between Arbors
Associates, Ltd. and Ecometry Corporation(2).
10.18 -- Agreement dated March 17, 1998, by and between Client
Systems, Inc. and Ecometry Corporation(1).
10.19 -- Agreement dated February 8, 1994, by and between Cognos
Corporation and Ecometry Corporation(1).
10.20 -- Agreement dated December 29, 1989, by and between Dynamic
Information Systems Corporation and Ecometry Corporation(1).
10.21 -- Tax Indemnification Agreement(1).
10.22 -- Second Amendment to Lease Agreement dated December 1, 1999,
by and between Arbors Associates, Ltd and Ecometry
Corporation(6).
56
59
EXHIBIT DESCRIPTION
- ------- -----------
10.23 -- Ecometry Corporation's Employee Stock Purchase Plan(7)+
21.1 -- Subsidiaries of Ecometry Corporation*
23.1 -- Consent of KPMG LLP*
- ---------------
* Filed herewith.
+ Compensatory plan or arrangement.
(1) Incorporated by reference to the exhibit of like number to
Amendment No. 1 to Registrant's Registration Statement on
Form S-1, File No. 333-63125, filed with the Commission on
December 18, 1998.
(2) Incorporated by reference to the exhibit of like number to
Amendment No. 2 to Registrant's Registration Statement on
Form S-1, File No. 333-63125, filed with the Commission on
January 11, 1999.
(3) Incorporated by reference to the exhibit of like number to
Amendment No. 3 to Registrant's Registration Statement on
Form S-1, File No. 333-63125, filed with the Commission on
January 27, 1999.
(4) Incorporated by reference to Exhibit 3.2 of the Amendment
No. 2 to Registrant's Registration Statement on Form S-1,
File No. 333-63125, filed with the Commission on January 11,
1999.
(5) Incorporated by reference to Exhibit 3.4 of the Amendment
No. 2 to Registrant's Registration Statement on Form S-1,
File No. 333-63125, filed with the Commission on January 11,
1999.
(6) Incorporated by reference to Exhibit 10.22 of the Annual
Report on Form 10-K filed with the Commission on March 29,
2000.
(7) Incorporated by reference to Annex A of the Company's
Definitive Proxy Statement on Schedule 14A filed on April
12, 2000.
(8) Incorporated by reference to Annex B of the Company's
Definitive Proxy Statement on Schedule 14A filed on April
12, 2000.
57