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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _______ to _______
Commission File No. 0-25297
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ECOMETRY CORPORATION
FLORIDA 65-0090038
(State of Incorporation) (I.R.S. Employer Identification No.)
1615 SOUTH CONGRESS AVENUE, DELRAY BEACH, FL 33445-6368
TELEPHONE: (561) 265-2700
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 12,469,287 shares of the
Registrant's Common Stock, par value $0.01 per share, were outstanding as of
July 27, 2001.
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ECOMETRY CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)
a.) Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2001 and 2000............. 2
b.) Condensed Consolidated Balance Sheets as of
June 30, 2001 and December 31, 2000........................... 3
c.) Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2001 and 2000....................... 4
d.) Notes to Condensed Consolidated Financial Statements.......... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 11
Item 2. Changes in Securities and Use of Proceeds..................... 12
Item 4. Submission of Matters to Vote of Security Holders............. 12
Item 6. Exhibits and Reports on Form 8-K.............................. 12
Signatures................................................................. 13
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PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ECOMETRY CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended Six months ended
June 30, June 30,
--------------------------- ---------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenue:
License fees $ 2,473 $ 3,149 $ 3,459 $ 7,174
Third party software and hardware 1,962 3,326 3,228 8,959
Support 2,853 2,381 5,718 4,568
Services 872 1,386 1,937 2,485
-------- -------- -------- --------
Total revenue 8,160 10,242 14,342 23,186
Cost of revenue:
License fees 454 878 1,236 1,797
Third party software and hardware 1,372 2,576 2,327 7,092
Support 1,591 1,597 3,151 3,180
Services 547 961 1,332 1,791
-------- -------- -------- --------
Total cost of revenue 3,964 6,012 8,046 13,860
-------- -------- -------- --------
Gross margin 4,196 4,230 6,296 9,326
Operating expenses:
General and administrative 2,580 3,622 5,283 5,826
Sales and marketing 1,778 2,295 3,577 4,080
Research and development 1,137 1,171 2,424 2,267
-------- -------- -------- --------
Total operating expenses 5,495 7,088 11,284 12,173
-------- -------- -------- --------
Operating loss (1,299) (2,858) (4,988) (2,847)
Interest income, net 457 615 1,024 1,159
-------- -------- -------- --------
Loss before income tax benefit (842) (2,243) (3,964) (1,688)
Income tax benefit 173 967 839 731
-------- -------- -------- --------
Net loss $ (669) $ (1,276) $ (3,125) $ (957)
======== ======== ======== ========
Basic net loss per share $ (0.05) $ (0.10) $ (0.25) $ (0.08)
======== ======== ======== ========
Diluted net loss per share $ (0.05) $ (0.10) $ (0.25) $ (0.08)
======== ======== ======== ========
Weighted average shares used in basic per
share computation 12,381 12,414 12,381 12,368
======== ======== ======== ========
Weighted average shares used in diluted per
share computation 12,381 12,414 12,381 12,368
======== ======== ======== ========
See accompanying notes to unaudited condensed
consolidated financial statements.
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ECOMETRY CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
June 30, December 31,
2001 2000
-------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 37,769 $ 36,827
Accounts receivable, net of allowance for doubtful
accounts of $1,229 at June 30, 2001 and $901 at
December 31, 2000 3,400 7,055
Income tax receivable 1,742 1,995
Inventory 189 313
Deferred income taxes 595 819
Prepaid expenses and other current assets 779 534
-------- --------
Total current assets 44,474 47,543
Property and equipment, net 2,771 2,812
Other assets 148 211
-------- --------
Total assets $ 47,393 $ 50,566
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 3,785 $ 4,768
Deferred revenue 1,703 729
Current portion of capital lease obligation 33 31
-------- --------
Total current liabilities 5,521 5,528
Long term portion of capital lease obligation 98 115
Deferred income taxes 172 167
-------- --------
Total liabilities 5,791 5,810
Stockholders' equity:
Common stock, $.01 par value. Authorized 50,000,000
shares; issued and outstanding 12,446,122 shares and
12,424,027 at June 30, 2001 and December 31, 2000,
respectively 124 124
Additional paid in capital 56,539 56,506
Accumulated deficit (14,541) (11,416)
Accumulated other comprehensive loss (236) (174)
Treasury stock, at cost (65,000 shares in 2001 and 2000) (284) (284)
-------- --------
Total stockholders' equity 41,602 44,756
-------- --------
Total liabilities and stockholders' equity $ 47,393 $ 50,566
======== ========
See accompanying notes to unaudited condensed
consolidated financial statements.
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ECOMETRY CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
For Six Months Ended
June 30,
---------------------------
2001 2000
-------- --------
Net loss $ (3,125) $ (957)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization expense 421 351
Non-cash compensation expense -- 15
Tax benefit from stock option exercises -- 751
Bad debt expense 353 1,458
Deferred income taxes 229 436
Change in assets and liabilities:
Accounts receivable 3,262 (896)
Income tax receivable 253 (2,469)
Inventory 124 (104)
Prepaid expenses and other current assets (245) (270)
Other assets 62 --
Accounts payable and accrued expenses (996) 348
Deferred revenue 982 812
-------- --------
Net cash provided by (used in) operating activities 1,320 (525)
Cash flows used in investing activities:
Capital expenditures (392) (1,287)
-------- --------
Net cash used in investing activities (392) (1,287)
Cash flows provided by (used in) financing activities:
Employee stock option exercises -- 453
Proceeds from issuance of common stock 33 --
Payments on capital lease (15) (29)
-------- --------
Net cash provided by financing activities 18 424
Effect of exchange rates on cash and cash equivalents (4) 2
-------- --------
Net increase (decrease) in cash and cash equivalents 942 (1,386)
Cash and cash equivalents at beginning of period 36,827 39,246
-------- --------
Cash and cash equivalents at end of period $ 37,769 $ 37,860
======== ========
Supplemental cash flow information:
Cash paid for income taxes $ -- $ 391
======== ========
See accompanying notes to unaudited condensed
consolidated financial statements.
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ECOMETRY CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2001
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and disclosures necessary for a fair
presentation of financial position, results of operations and cash flows in
conformity with generally accepted accounting principles. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of the results for the periods presented have
been included. These unaudited condensed consolidated financial statements
should be read in connection with the Annual Report on Form 10-K of Ecometry
Corporation ("Company") as of and for the year ended December 31, 2000.
The results of operations for the six months ended June 30, 2001 are not
necessarily indicative of results that may be expected for the full fiscal year.
(2) PRINCIPLES OF CONSOLIDATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
(3) EARNINGS PER SHARE
Basic net income per share is calculated using the weighted average number of
common shares outstanding during the period. Diluted net income per share is
computed on the basis of the weighted average number of common shares
outstanding plus the dilutive effect of common share equivalents ("CSE's")
outstanding using the treasury stock method. As of June 30, 2001 the only
potential common shares are the options outstanding at the end of the period.
These potential common shares have been excluded from the computation of diluted
net loss per share for the three and six months ended June 30, 2001 because
their effect would have been antidilutive. CSE's of 246,401 were not included in
the diluted net loss per share calculation for the three and six months ended
June 30, 2000 since their effect would be antidilutive. The numbers presented
below are in thousands, except per share amounts.
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
BASIC AND DILUTED NET LOSS:
Net loss $ (669) $ (1,276) $ (3,125) $ (957)
======== ======== ======== ========
Weighted average common shares
outstanding 12,381 12,414 12,381 12,368
Dilutive common stock equivalents -- -- -- --
-------- -------- -------- --------
Equivalent shares 12,381 12,414 12,381 12,368
======== ======== ======== ========
Basic and diluted net loss per share $ (0.05) $ (0.10) $ (0.25) $ (0.08)
======== ======== ======== ========
(4) STOCK REPURCHASE PLAN
On June 28, 2000, the Company announced that its Board of Directors approved a
stock repurchase plan. Under the plan, the Company is authorized to repurchase
up to one million shares of its common stock. The extent to which the Company
repurchases its shares and the timing of such purchases will depend upon market
conditions and other corporate considerations. To date, the Company has
repurchased 65,000 shares of the Company's common stock under the plan. The
shares were purchased at an average price of $4.37 per share, for a total
purchase price of $284,000 and recorded as treasury stock. No shares were
repurchased during the second quarter of 2001.
(5) REVENUE RECOGNITION
The Company follows SOP 97-2, "Software Revenue Recognition" (as amended by SOP
98-9). SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on vendor
specific objective evidence ("VSOE") of the relative fair values of the
elements. VSOE is determined by the price charged when the element is sold
separately. The revenue allocated to hardware and software products generally is
recognized when the hardware and software have been delivered and installed, the
fee is fixed and determinable and the collectibility is probable. The revenue
allocated to post contract customer support is consistent with fees charged for
renewals and is recognized ratably over the term of the support. Revenue
allocated to service elements is recognized as the services are performed.
(6) FOREIGN CURRENCY TRANSLATION
The functional currencies of the Company's foreign subsidiaries are their
respective local currencies. The translation of the applicable foreign
currencies into U.S. dollars is performed for balance sheet accounts using
current exchange rates in effect at the balance sheet date and for revenue and
expense accounts using average rates prevailing during the period. Resulting
translation adjustments are accumulated as a component of stockholder's equity
and comprehensive loss.
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(7) COMPREHENSIVE LOSS
The Company's total unaudited comprehensive loss is as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2001 2000 2001 2000
------- ------- ------- -------
Net loss $ (669) $(1,276) $(3,125) $ (957)
Other comprehensive loss:
Foreign currency translation
adjustments (9) (87) (62) (123)
------- ------- ------- -------
Total comprehensive loss $ (678) $(1,363) $(3,187) $(1,080)
======= ======= ======= =======
(8) 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 did not have an impact on the Company's
unaudited consolidated financial statements.
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 an impact
on our financial position or results of operations.
In September 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 140 ("SFAS No. 140"),
"Accounting for Transfer and Servicing of Financial Assets and Extinguishments
of Liabilities". SFAS No. 140 provides guidance on accounting for (1)
securitization transactions involving financial assets; (2) sales of financial
assets (including loan participations); (3) factoring transactions; (4) wash
sales; (5) servicing assets and liabilities; (6) collateralized borrowing
arrangements; (7) securities lending transactions; (8) repurchase agreements;
and (9) extinguishment of liabilities. The provisions of SFAS No. 140 became
effective for transactions entered into after March 31, 2001. SFAS No. 140 did
not have an impact of the Company's financial position or operating results.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141") and
Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001
as well as all purchase method business combinations completed after June 30,
2001. SFAS 142 will require that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually. SFAS 141 is effective immediately, except with regard to business
combinations initiated prior to July 1, 2001 and SFAS 142 is effective January
1, 2002.
Furthermore, any goodwill and intangible assets determined to have indefinite
useful lives that are acquired in a purchase business combination completed
after June 30, 2001 will not be amortized. Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001 will continue to
be amortized until the adoption of SFAS 142. SFAS 141 will require upon adoption
of SFAS 142 that goodwill acquired in a prior purchase business combination be
evaluated and any necessary reclassifications be made in order to conform to the
new criteria in SFAS 141 for recognition apart from goodwill. Any impairment
loss will be measured as of the date of the adoption and recognized as a
cumulative effect of a change in accounting principles in the first interim
period. We do not expect the adoption of these standards to have a material
effect on the Company's consolidated financial statements.
(9) CONTINGENCIES.
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.
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The Company's reply in support of the motion to dismiss was filed on March 21,
2001 and oral argument was held on April 2, 2001. The motion to dismiss is
currently under consideration with the Court.
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 June 30, 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 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
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.
The following table sets forth, for the periods indicated, the dollar and
percentage changes of statement of operations items. The numbers presented below
are in thousands, except for percentage amounts:
Three Months Ended Change Three Months Six Months Ended Change Six Months
June 30, Ended June 30, June 30, Ended June 30,
-------------------- ------------------ -------------------- -------------------
2001 2000 $ % 2001 2000 $ %
-------- -------- -------- ------ -------- -------- -------- -------
Revenue:
License fees $ 2,473 $ 3,149 $ (676) (21.5)% $ 3,459 $ 7,174 $ (3,715) (51.8)%
Third party software and
hardware 1,962 3,326 (1,364) (41.0) 3,228 8,959 (5,731) (64.0)
Support 2,853 2,381 472 19.8 5,718 4,568 1,150 25.2
Services 872 1,386 (514) (37.1) 1,937 2,485 (548) (22.1)
-------- -------- -------- ------ -------- -------- -------- -------
Total revenue 8,160 10,242 (2,082) (20.3) 14,342 23,186 (8,844) (38.1)
Cost of revenue:
License fees 454 878 (424) (48.3) 1,236 1,797 (561) (31.2)
Third party software and
hardware 1,372 2,576 (1,204) (46.7) 2,327 7,092 (4,765) (67.2)
Support 1,591 1,597 (6) (0.4) 3,151 3,180 (29) (0.9)
Services 547 961 (414) (43.1) 1,332 1,791 (459) (25.7)
-------- -------- -------- ------ -------- -------- -------- -------
Total cost of revenue 3,964 6,012 (2,048) (34.1) 8,046 13,860 (5,814) (42.0)
-------- -------- -------- ------ -------- -------- -------- -------
Gross margin 4,196 4,230 (34) (0.8) 6,296 9,326 (3,030) (32.5)
Operating expenses:
General and administrative 2,580 3,622 (1,042) (28.8) 5,283 5,826 (543) (9.3)
Sales and marketing 1,778 2,295 (517) (22.5) 3,577 4,080 (503) (12.3)
Research and development 1,137 1,171 (34) (2.8) 2,424 2,267 157 6.9
-------- -------- -------- ------ -------- -------- -------- -------
Total operating expenses 5,495 7,088 (1,593) (22.5) 11,284 12,173 (889) (7.3)
-------- -------- -------- ------ -------- -------- -------- -------
Loss from operations (1,299) (2,858) 1,559 54.5 (4,988) (2,847) (2,141) (75.2)
Interest income, net 457 615 (158) (25.6) 1,024 1,159 (135) (11.7)
-------- -------- -------- ------ -------- -------- -------- -------
Loss before income tax benefit (842) (2,243) 1,401 62.5 (3,964) (1,688) (2,276) (134.9)
Income tax benefit 173 967 (794) (82.1) 839 731 108 14.7
-------- -------- -------- ------ -------- -------- -------- -------
Net loss $ (669) $ (1,276) $ 607 47.6% $ (3,125) $ (957) $ (2,168) (226.8)%
======== ======== ======== ====== ======== ======== ======== =======
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The following table sets forth, for the periods indicated, the dollar and
percentage changes for new and existing client sales by system component. The
numbers presented below are in thousands, except for percentage amounts:
Three Months Ended Change Three Months Six Months Ended Change Six Months
June 30, Ended June 30, June 30, Ended June 30,
------------------ ------------------ ------------------ ------------------
2001 2000 $ % 2001 2000 $ %
------- ------- ------- ------ ------- ------- ------- ------
NEW CLIENT SYSTEM SALES:
License fees $ 1,622 $ 2,097 $ (475) (22.6)% $ 2,067 $ 3,656 $(1,589) (43.5)%
Third party software and
hardware 1,024 1,153 (129) (11.2) 1,555 3,055 (1,500) (49.1)
------- ------- ------- ------ ------- ------- ------- ------
Total new client system sales $ 2,646 $ 3,250 $ (604) (18.6)% $ 3,622 $ 6,711 (3,089) (46.0)%
======= ======= ======= ====== ======= ======= ======= ======
EXISTING CLIENT SYSTEM SALES:
License fees $ 851 $ 1,052 $ (201) (19.2)% $ 1,392 $ 3,518 $(2,126) (60.4)%
Third party software and
hardware 938 2,173 (1,235) (56.8) 1,673 5,904 (4,231) (71.7)
------- ------- ------- ------ ------- ------- ------- ------
Total existing client system
sales $ 1,789 $ 3,225 $(1,436) (44.6)% $ 3,065 $ 9,422 $(6,357) (67.5)%
======= ======= ======= ====== ======= ======= ======= ======
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
SALES OF LICENSE FEES. License fees accounted for approximately 30.3% of the
Company's total revenue for the three months ended June 30, 2001. License fees
sales consist of license fees for the installation of the Company's Ecometry
software and related modules, and additional user license fees for its existing
clients. License fees are based primarily on the number of users. Computer
software license fees decreased 21.5% during the three months ended June 30,
2001 compared to the same period in 2000. New client computer software sales
decreased 22.6% for the three months ended June 30, 2001 compared to the same
period in 2000 and existing client computer software sales decreased 19.2% for
the same period. Although the Company had an increase in the number of new
system sales in the second quarter of 2001 as compared to the second quarter in
2000, the average software revenue per contract recognized during the current
period was lower. The decrease in existing client base revenue is primarily
attributable to a general slowdown in the economy, which resulted in fewer
customer upgrades.
SALES OF THIRD PARTY SOFTWARE AND HARDWARE. Sales of third party software and
hardware accounted for approximately 24.0% of the Company's total revenue for
the three months ended June 30, 2001. Sales of third party software and computer
hardware consist of sales of license fees for third-party operating system
software, computer hardware systems and peripheral hardware components. Third
party software and computer hardware revenue decreased 41.0% for the three
months ended June 30, 2001, compared to the three months ended June 30, 2000.
Third party software and computer hardware revenue relating to new client sales
decreased 11.2% to $1.0 million for the three months ended June 30, 2001,
compared to $1.2 million for the same period in 2000. This decrease in revenue
is related to sales of NT and UNIX platform sales, which typically have a
significantly lower amount of third party equipment and software associated with
the sale. Third party software and computer hardware upgrades were $938,000 for
the three months ended June 30, 2001 and $2.2 million for the period ending June
30, 2000.
SUPPORT. Support revenue accounted for approximately 35.0% of the Company's
total revenue during the three months ended June 30, 2001. Support revenue
consists of fees for technical support services and updates for the Ecometry
software, optional modules, and integrated third-party software utilities.
Support revenue increased 19.8% during the three months ended June 30, 2001,
compared to the three months ended June 30, 2000. The increase resulted from the
addition of new clients during 2000, as well as support fee increases related to
software user license upgrades.
SERVICES. Services revenue accounted for approximately 10.7% of the Company's
revenue for the three months ended June 30, 2001. Services revenue consists
principally of revenue derived from consulting, custom programming, training,
implementation and web design. Services revenue decreased 37.1% for the second
quarter of 2001 compared to the same period in 2000. This decrease was primarily
due to lower consulting revenue. Due to the economic slowdown, clients are
hesitant to utilize outside consultants.
TOTAL REVENUE. Total revenue decreased 20.3% for the three months ended June 30,
2001. New client sales decreased 18.6% to $2.6 million from $3.3 million for the
three months ended June 30, 2001. Sales to existing customers decreased by 44.6%
from $3.2 million to $1.8 million due to fewer system upgrades during the
quarter ended June 30, 2001. The decrease in system sales is primarily due to
the economic slowdown and associated decrease in technology purchases.
COST OF LICENSE FEES. Cost of license fees, which consists of installation and
training salaries directly related to new software sales, subcontractor fees,
and third party software costs relating to sales of proprietary software
modules, decreased 48.3% during the three months ended June 30, 2001, compared
to the three months ended June 30, 2000. This decrease resulted primarily from
headcount reductions through attrition, and a change in the allocation of
installation personnel. Cost of license fees as a percentage of license fee
revenue decreased to 18.3% from 27.9% for the three months ended June 30, 2001.
COST OF THIRD PARTY SOFTWARE AND HARDWARE. Cost of third party software and
hardware sales, which includes license fees for third-party operating system
software, purchases of computer hardware systems and peripheral hardware
components, decreased 46.7% for the three months ended June 30, 2001, compared
to the same period in 2000. This decrease is attributable to lower sales of
third party software and hardware. Cost of third party software and hardware as
a percentage of third party software and hardware revenue was 69.9% and 77.4%
for the three months ended June 30, 2001 and 2000, respectively. This decrease
was primarily attributable to lower sales discounts on computer hardware
systems.
COST OF SUPPORT. Cost of support consists primarily of personnel costs
associated with the support of the Company's software products and third-party
computer software packages, and the cost of user documentation distributed to
clients. Cost of support remained relatively consistent for the three months
ended June 30, 2001 and 2000. Cost of support as a percentage of support revenue
decreased to 55.8% from 67.1% for the three months ended June 30, 2001 and 2000,
respectively. This decrease is due to new client additions and increases
relating to user license upgrades.
COST OF SERVICES. Cost of services, which consists of salaries for consulting
employees, allocated salaries for training, programming and implementation, and
payments to outside contractors, decreased 43.1% during the three months ended
June 30, 2001, compared to the same period in 2000. Cost of
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services as a percentage of services revenue decreased to 62.7% for the three
months ended June 30, 2001 from 69.4% for the same period in 2000. The decrease
in cost resulted primarily from lower personnel costs and increased
efficiencies.
TOTAL COST OF REVENUE. Total cost of sales and services decreased by 34.1% for
the three months ended June 30, 2001, compared to the same period in 2000. The
decrease in total cost of sales and services is primarily attributable to lower
system sales and lower personnel costs during the second quarter of 2001.
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 decreased 28.8%
for the three months ended June 30, 2001, compared to the same period in 2000.
This decrease was due primarily to a significant increase to the Company's
provision for doubtful accounts in the second quarter of 2000. General and
administrative expenses as a percentage of total revenue decreased to 31.6% for
the three months ended June 30, 2001 from 35.4% for the same period in 2000. The
Company has implemented and will continue to implement cost cutting measures to
reduce expenses as necessary, provided such measures are not detrimental to
accomplishment of the Company's goals.
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, and participation in industry conferences
and trade shows. Sales and marketing expenses decreased by 22.5% for the three
months ended June 30, 2001, compared to the same period in 2000. This decrease
is attributable to lower costs for advertising, public relations, personnel
costs, and lower commissions on sales. Sales and marketing expenses as a
percentage of total revenue decreased to 21.8% for the three months ended June
30, 2001 from 22.4% for the three months ended June 30, 2000. The Company has
implemented and will continue to implement cost cutting measures to reduce
expenses as necessary, provided such measures are not detrimental to
accomplishment of the Company's goals.
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 decreased 2.8% during the three
months ended June 30, 2001 compared to the same period in 2000. This decrease
was due primarily to lower fees for outside services. The Company expects to
continue making significant investments in new and enhanced products in future
periods to ensure competitive positioning as economic conditions improve.
LOSS FROM OPERATIONS. As a result of the foregoing factors, the Company
experienced a loss of $1.3 million from operations for the three months ended
June 30, 2001 compared to a loss of $2.9 million from operations for the same
period last year.
INTEREST INCOME, NET. Net interest income decreased by 25.6% for the three
months ended June 30, 2001, compared to the same period in 2000. The increase
was due to lower interest rates earned on cash balances.
INCOME TAX BENEFIT. The effective income tax rate for the three months ended
June 30, 2001 was 20.6% compared to 43.1% for the second quarter of 2000. The
effective income tax rate differs from the federal statutory rates because of
the following: (i) the establishment of a partial valuation allowance against
federal and state deferred tax assets, (ii) the effect of state income taxes,
and (iii) the full valuation of net losses of foreign subsidiaries. Also,
effective rates vary between periods because of the differing effects the net
income and losses of foreign subsidiaries have on income before income taxes.
NET LOSS. As a result of the above factors, the Company experienced a net loss
of $669,000 for the three months ended June 30, 2001 compared to a net loss of
$1.3 million for the same period in 2000.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
SALES OF LICENSE FEES. License fees accounted for approximately 24.1% of the
Company's total revenue for the six months ended June 30, 2001. Computer
software license fees decreased 51.8% during the six months ended June 30, 2001
compared to the same period in 2000. New client computer software sales
decreased 43.5% from $3.7 million for the six months ended June 30, 2000 to $2.1
million in 2001, and existing client computer software sales decreased 60.4%,
from $3.5 million to $1.4 million for the same periods. This decrease in revenue
is primarily attributable to a general slowdown in the economy, which resulted
in fewer new system sales and license upgrades.
SALES OF THIRD PARTY SOFTWARE AND HARDWARE. Sales of third party software and
hardware accounted for approximately 22.5% of the Company's total revenue for
the six months ended June 30, 2001. Third party software and computer hardware
revenue decreased 64.0% for the six months ended June 30, 2001, compared to the
six months ended June 30, 2000. Third party software and computer hardware
revenue relating to new client sales decreased 49.1% to $1.6 million for the six
months ended June 30, 2001, compared to $3.1 million for the same period in
2000. This decrease in revenue is related to fewer system sales and a greater
proportion of NT and UNIX sales, which typically include a smaller proportion of
third party software and hardware. Third party software and computer hardware
upgrades were $1.7 million for the six months ended June 30, 2001 and $5.9
million for the period ending June 30, 2000. This decrease resulted from fewer
clients purchasing license and system upgrades.
SUPPORT. Support revenue accounted for approximately 40.0% of the Company's
total revenue during the six months ended June 30, 2001. Support revenue
increased 25.2% during the six months ended June 30, 2001, compared to the six
months ended June 30, 2000. The increase resulted from the addition of new
clients, as well as support fee increases related to software user license
upgrades.
SERVICES. Services revenue accounted for approximately 13.5% of the Company's
revenue for the six months ended June 30, 2001. Services revenue decreased 22.1%
for the first six months of 2001 compared to the same period in 2000. This
decrease was primarily due to lower consulting revenue.
TOTAL REVENUE. Total revenue decreased 38.1% for the six months ended June 30,
2001. New client sales decreased 46.0% to $3.6 million from $6.7 million for the
six months ended June 30, 2001. Sales to existing customers decreased by 67.5%
from $9.4 million to $3.1 million due to fewer system upgrades during the
quarter ended June 30, 2001.
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COST OF LICENSE FEES. Cost of license fees decreased 31.2% during the six months
ended June 30, 2001, compared to the six months ended June 30, 2000. This
decrease is due to lower personnel costs during 2001. Cost of license fees as a
percentage of license fee revenue increased to 35.7% from 25.0% for the six
months ended June 30, 2001. This increase is due to lower software sales of
proprietary software.
COST OF THIRD PARTY SOFTWARE AND HARDWARE. Cost of third party software and
hardware sales, decreased 67.2% for the six months ended June 30, 2001, compared
to the same period in 2000. This decrease is attributable to lower sales of
third party software and hardware. Cost of third party software and hardware as
a percentage of third party software and hardware revenue was 72.1% and 79.2%
for the six months ended June 30, 2001 and 2000, respectively. This decrease was
primarily attributable to lower sales discounts on computer hardware systems.
COST OF SUPPORT. Cost of support was consistent for the six months ended June
30, 2001 compared to the same period in 2000. Cost of support as a percentage of
support revenue decreased to 55.1% from 69.6% for the six months ended June 30,
2001 and 2000, respectively. This decrease is due to new client additions and
increases relating to user license upgrades.
COST OF SERVICES. Cost of services decreased 25.7% during the six months ended
June 30, 2001, compared to the same period in 2000. Cost of services as a
percentage of services revenue decreased to 68.7% for the six months ended June
30, 2001 from 72.1% for the same period in 2000. The decrease in cost resulted
primarily from lower personnel costs and increased utilization.
TOTAL COST OF REVENUE. Total cost of sales and services decreased by 42.0% for
the six months ended June 30, 2001, compared to the same period in 2000. The
decrease in total cost of sales and services is primarily attributable to lower
system sales and lower personnel costs during the six months ended June 30,
2001.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased 9.3%
for the six months ended June 30, 2001, compared to the same period in 2000.
This decrease was due primarily to a significant increase to the Company's
provision for doubtful accounts in the second quarter of 2000 offset by
severance pay and higher insurance, facility, travel, and communication costs
during the current period. General and administrative expenses as a percentage
of total revenue increased to 36.8% for the six months ended June 30, 2001 from
25.1% for the same period in 2000. The increase was due to lower revenues during
the six months ended June 30, 2001. The Company has implemented and will
continue to implement cost cutting measures to reduce expenses as necessary,
provided such measures are not detrimental to accomplishment of the Company's
goals.
SALES AND MARKETING. Sales and marketing expenses decreased by 12.3% for the six
months ended June 30, 2001, compared to the same period in 2000. Sales and
marketing expenses as a percentage of total revenue increased to 24.9% for the
six months ended June 30, 2001 from 17.6% for the six months ended June 30,
2000. The increase was due to lower revenues during the six months ended June
30, 2001. The Company has implemented and will continue to implement cost
cutting measures to reduce expenses as necessary, provided such measures are not
detrimental to accomplishment of the Company's goals.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 6.9%
during the six months ended June 30, 2001 compared to the same period in 2000.
This increase was primarily due to ongoing investment in the development of new
and improved products. The Company expects to continue making significant
investments in new and enhanced products in future periods to ensure competitive
positioning as economic conditions improve.
LOSS FROM OPERATIONS. As a result of the foregoing factors, the Company
experienced a loss of $5.0 million from operations for the six months ended June
30, 2001 compared to a loss of $2.8 million from operations for the same period
last year.
INTEREST INCOME, NET. Net interest income decreased by 11.7% for the six months
ended June 30, 2001, compared to the same period in 2000. The decrease was due
to lower interest rates earned on available cash.
INCOME TAX BENEFIT. The effective income tax rate for the six months ended June
30, 2001 was 21.2% compared to 43.3% for the same period in 2000. The effective
income tax rate differs from the federal statutory rates because of the
following: (i) the establishment of a partial valuation allowance against
federal and state deferred tax assets, (ii) the effect of state income taxes,
and (iii) the full valuation of net losses of foreign subsidiaries. Also,
effective rates vary between periods because of the differing effects the net
income and losses of foreign subsidiaries have on income before income taxes.
NET LOSS. As a result of the above factors, the Company experienced a net loss
of $3.1 million for the six months ended June 30, 2001 compared to a net loss of
$957,000 for the same period in 2000.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001, the Company's primary sources of liquidity consisted of cash
and cash equivalents totaling $37.8 million.
The Company's operating activities provided cash for the six months ended June
30, 2001 in the amount of $1.3 million and used cash in the amount of $525,000
for the same period in 2000. The increase in cash provided was primarily due to
the collection of outstanding account receivable balances combined with
increased cash deposits from customers offset by losses from operations during
the six months ended June 30, 2001.
Cash used in investing activities, was approximately $392,000 and $1.3 million,
for the six months ended June 30, 2001 and 2000, respectively. This cash was
used for capital expenditures, which relate primarily to purchases of computers,
printers and software to support the Company's operations, as well as furniture,
fixtures and leasehold improvements. Capital expenditures were higher during the
six months ended June 30, 2000 due to the Company's facility expansion. The
Company expects its purchases of property and equipment for the remainder of
2001 to be lower than during the first six months of the year.
For the six months ended June 30, 2001, cash provided by financing activities
totaled $18,000, which consisted primarily of proceeds from sales of common
stock under the Company's employee stock purchase plan offset by operating lease
payments. Cash provided by financing activities totaled $424,000 for the six
months ended June 30, 2000, which consisted primarily of proceeds from the
exercise of employee stock options.
As of June 30, 2001, the Company had working capital of approximately $39.0
million as compared to working capital of approximately $43.0 million at June
30, 2000.
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As described elsewhere in this form 10-Q 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 June 30, 2001. A loss in this litigation could have a material
adverse effect on the Company's results of operations and financial condition.
In June 2000, the Company announced a stock repurchase plan, under which it was
authorized to purchase up to one million shares of its common stock. To date the
Company has repurchased 65,000 shares totaling $284,000.
Management believes that it has adequate cash to finance operations for the
foreseeable future.
FORWARD LOOKING STATEMENTS
Certain matters discussed in this Form 10-Q may be "forward-looking statements"
as defined in the Private Securities Litigation Reform Act of 1995, including
but not limited to statements related to plans for future business development
activities, anticipated costs of revenue, margins, product mix and service
revenues, research and development and selling, general and administrative
activities, liquidity and capital needs, resources and the outcome of legal
proceedings involving the Company. Such forward-looking statements are subject
to risks, uncertainties and other factors, which could cause actual results to
differ materially from future results expressed or implied by such
forward-looking statements. Investors are cautioned that any forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
contemplated by such forward-looking statements.
Factors that may cause actual future events to differ materially from our
forward-looking statements include, but are not limited to the following:
- the unpredictability of revenues due to the large dollar amounts of
the Company's individual license transactions and the lengthy and
unpredictable sales cycles for these transactions;
- the Company's dependence on the development, introduction and client
acceptance of new and enhanced versions of the Ecometry software
products;
- the Company's ability to control costs, including costs associated
with the Company's infrastructure and increased research and
development expenses;
- the Company's dependence on new product development;
- uncertainties regarding the outcome of pending class action litigation
against the Company;
- the Company's reliance on a combination of trade secrets, copyright
and trademark law, nondisclosure agreements and technical measures to
protect its proprietary technology;
- the Company's ability to sell its products in new markets within the
direct commerce industry;
- the Company's dependence on proprietary technology licensed from
third parties;
- the Company's ability to continue to resell a variety of hardware and
software developed and manufactured by third parties;
- the Company's ability to maintain margins on the sale of hardware and
software developed and manufactured by third parties;
- significant competition in the software and direct commerce industry
and competitive pricing for the Company's products;
- customer concentration;
- fluctuations in demand for the Company's products which are dependent
upon the condition of the software and direct commerce industries;
- the Company's ability to collect receivables; and
- other risks and uncertainties described in the Company's prospectus
dated January 29, 1999, Forms 10-K and 10-Q and other documents filed
with the Securities and Exchange Commission.
In light of these risks and uncertainties, the forward-looking events discussed
in this Form 10-Q might not occur. The Company undertakes no obligation to
publicly update or revise any forward-looking statements contained in this Form
10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Management believes the risk of loss arising from adverse changes in interest
rates, foreign currency exchange rates, commodity prices and other relevant
market rates and prices, such as equity prices, if any, is immaterial.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is involved in legal proceedings incidental to
the conduct of its business. Other than as disclosed below and in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2000, the
Company believes that litigation, individually or in the aggregate, to which it
is currently a party, is not likely to have a material adverse affect on the
Company's business, financial condition or results of operations.
Between June 22, 2000 and August 14, 2000, four purported class-action
complaints were filed against the Company and Messrs. Gary G. Hegna, Martin K.
Weinbaum, Allan Gardner and Wilburn Smith, officers of the Company, in the
United States District Court for the Southern District of Florida.
All four complaints 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 there under
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
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"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.
The Company's reply in support of the motion to dismiss was filed on March 21,
2001 and oral argument was held on April 2, 2001. The motion to dismiss is
currently under consideration with the Court.
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 June 30, 2001.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 29, 1999, the Company's Registration Statement on Form S-1, File No.
333-63125, relating to the Company's initial public offering was declared
effective by the SEC. As of May 9, 2001, the proceeds of the offering have been
used as follows: (i) to redeem in full the Company's outstanding Redeemable
Participating Preferred Stock ($12.0 million) and (ii) to repay accrued interest
related to the Convertible Debentures ($4.7 million). Management expects that
the balance of the net proceeds of the offering will be utilized to finance
potential future acquisitions and for general corporate purposes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of Ecometry Corporation was
held on May 2, 2001 pursuant to a proxy statement dated March
26, 2001.
(b) The following matters were submitted to a vote at the meeting:
(i) Election of the following nominee as a Class II director
for a three-year term:
Votes in Votes
Favor Against Abstentions
---------- ------- -----------
James J. Felcyn, Jr. 11,521,450 436,379 --
(ii) A proposal to ratify the re-appointment of KPMG LLP as
the Company's independent certified public accountants
for the fiscal year ending December 31, 2001.
Votes in Favor: 11,562,735
Votes Against: 34,733
Abstentions: 135,033
A total of 11,958,029 shares were presented at the meeting,
constituting a quorum in accordance with the applicable provisions of the
By-Laws of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 2, 2001 ECOMETRY CORPORATION
By: /s/ Martin K. Weinbaum
-------------------------------------
Martin K. Weinbaum
Vice President Finance and Chief
Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
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