1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/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, 1998
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
SMITH-GARDNER & ASSOCIATES, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
FLORIDA 65-0090038
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1615 SOUTH CONGRESS AVENUE
DELRAY BEACH, FLORIDA 33445-6368
(Address of Principal Executive Offices) (Zip Code)
(561) 265-2700
- --------------------------------------------------------------------------------
(Registrant telephone number, including area code)
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 [ ] No [X]
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 15, 1999, the aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately $119,543,310 based on
the closing price on that date of $16.625 per share. As of that date, there were
12,191,504 shares of the registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable
2
EXPLANATORY NOTE
This Amended Annual Report on Form 10-K/A is being filed for the
purpose of amending and restating "Item 8. Financial Statements and
Supplementary Data," to include the city and state in the independent
accountant's report dated February 12, 1999 and to include disclosure pertaining
to SAB Topic 11M regarding SOP 98-9, MODIFICATION OF SOP 97-2, SOFTWARE REVENUE
RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS.
2
3
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Smith-Gardner & Associates, Inc.:
We have audited the accompanying consolidated balance sheets of Smith-Gardner &
Associates, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, redeemable preferred stock and
stockholders' deficit and cash flows for each of the years in the three-year
period ended December 31, 1998. 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, 1998,
as listed in item 14(a)2 of the Company's 1998 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Smith-Gardner &
Associates, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule for each of the years in the three-year period ended December 31, 1998,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
February 12, 1999
Ft. Lauderdale, Florida
3
4
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
1998 1997
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 1,576,804 $ 168,590
Accounts receivable, net of allowance for doubtful accounts
of $459,000 in 1998 and $469,227 in 1997 5,855,140 1,845,225
Inventory 197,465 219,963
Prepaid expenses and other current assets 195,173 135,382
------------ ------------
Total current assets 7,824,582 2,369,160
Deferred offering costs 551,946 --
Property and equipment, net 984,780 685,319
Other assets 108,195 80,576
------------ ------------
$ 9,469,503 $ 3,135,055
============ ============
Liabilities, Redeemable Preferred Stock
and Stockholders' Deficit
Current liabilities:
Accounts payable $ 1,160,773 $ 548,350
Accrued expenses 1,594,197 1,420,990
Deferred revenue 1,165,275 383,378
------------ ------------
Total current liabilities 3,920,245 2,352,718
Convertible debt 12,000,000 12,000,000
Accrued interest payable 4,500,000 2,700,000
------------ ------------
Total liabilities 20,420,245 17,052,718
Redeemable preferred stock, 10,000,000 shares authorized:
Redeemable convertible participating preferred stock,
$.01 par value; none issued -- --
Redeemable preferred stock, $1,000 par value, none issued -- --
Commitments and contingencies (notes 4 and 12)
Stockholders' deficit:
Common stock, $0.01 par value. Authorized 50,000,000
shares; issued and outstanding 5,263,100 shares 52,631 52,631
Additional paid-in capital 3,516,258 3,481,562
Accumulated deficit (14,519,631) (17,451,856)
------------ ------------
Total stockholders' deficit (10,950,742) (13,917,663)
------------ ------------
$ 9,469,503 $ 3,135,055
============ ============
See accompanying notes to consolidated financial statements.
4
5
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For each of the years in the three-year period ended December 31, 1998
1998 1997 1996
------------ ------------ ------------
Revenue:
Computer software $ 11,536,185 $ 5,083,442 $ 5,932,255
Computer hardware 13,263,909 8,144,206 7,370,088
Support 5,334,728 4,100,488 4,037,966
Services 3,567,450 1,324,074 1,188,468
------------ ------------ ------------
Total revenue 33,702,272 18,652,210 18,528,777
------------ ------------ ------------
Cost of sales and services:
Computer software 2,500,452 1,504,002 584,493
Computer hardware 9,786,288 6,009,813 5,804,615
Support 3,222,259 3,271,268 3,141,395
Services 2,270,564 1,104,195 902,077
------------ ------------ ------------
Total cost of sales and services 17,779,563 11,889,278 10,432,580
------------ ------------ ------------
Gross profit 15,922,709 6,762,932 8,096,197
Operating expenses:
General and administrative 6,538,097 4,567,292 4,775,430
Research and development 2,253,663 2,010,858 2,254,206
Sales and marketing 2,430,460 1,482,061 980,371
------------ ------------ ------------
Total operating expenses 11,222,220 8,060,211 8,010,007
------------ ------------ ------------
Income (loss) from operations 4,700,489 (1,297,279) 86,190
Other (expense) income:
Interest expense:
Interest on outstanding debt (1,800,000) (1,500,000) (1,200,000)
Amortization of original issue discount -- (679,697) (1,378,276)
Interest income 102,346 109,067 41,814
------------ ------------ ------------
Net income (loss) $ 3,002,835 $ (3,367,909) $ (2,450,272)
============ ============ ============
Net income (loss) per share:
Basic $ 0.57 $ (0.64) $ (0.47)
============ ============ ============
Diluted $ 0.50 $ (0.64) $ (0.47)
============ ============ ============
Weighted average shares used in calculating net income (loss)
per share:
Basic 5,263,100 5,263,100 5,263,100
============ ============ ============
Diluted 8,131,344 5,263,100 5,263,100
============ ============ ============
Pro forma data:
Net income (loss) before income tax (expense) benefit 3,002,835 (3,367,909) (2,450,272)
Pro forma provision for income tax (expense) benefit (unaudited) (1,214,770) 948,427 359,819
------------ ------------ ------------
Pro forma net income (loss) (unaudited) $ 1,788,065 $ (2,419,482) $ (2,090,453)
============ ============ ============
Pro forma net income per share (unaudited):
Basic 0.34
============
Diluted 0.34
============
Weighted average shares outstanding used in calculating
pro forma net income per share (unaudited):
Basic 5,263,100
============
Diluted 5,263,100
============
See accompanying notes to consolidated financial statements.
5
6
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
Consolidated Statements of Redeemable Preferred Stock and Stockholders' Deficit
For each of the years in the three-year period ended December 31, 1998
STOCKHOLDERS' DEFICIT
----------------------------------------------------------------------------
RETAINED
REDEEMABLE COMMON STOCK EARNINGS TOTAL
PREFERRED --------------------------- ADDITIONAL (ACCUMULATED STOCKHOLDERS'
STOCK SHARES AMOUNT PAID-IN CAPITAL DEFICIT) DEFICIT
----------- ---------- ----------- --------------- ------------ -----------
Balance, December 31, 1995 $ -- 5,263,100 $ 52,631 $ 3,481,562 $(11,633,675) $(8,099,482)
Net loss -- -- -- -- (2,450,272) (2,450,272)
----------- ---------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 -- 5,263,100 52,631 3,481,562 (14,083,947) (10,549,754)
Net loss -- -- -- -- (3,367,909) (3,367,909)
----------- ---------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 -- 5,263,100 52,631 3,481,562 (17,451,856) (13,917,663)
Net income -- -- -- -- 3,002,835 3,002,835
Non-cash compensation expense -- -- -- 34,696 -- 34,696
Shareholders distributions -- -- -- -- (70,610) (70,610)
----------- ---------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 $ -- 5,263,100 $ 52,631 $ 3,516,258 $(14,519,631) $(10,950,742)
=========== ========== =========== =========== ============ ============
See accompanying notes to consolidated financial statements.
6
7
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSDIAIRES
Consolidated Statements of Cash Flows
For each of the years in the three-year period ended December 31, 1998
1998 1997 1996
----------- ----------- -----------
Cash flows provided by operating activities:
Net income (loss) $ 3,002,835 $(3,367,909) $(2,450,272)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 285,314 232,548 184,772
Amortization of original issue discount -- 679,697 1,378,276
Non-cash compensation expense 34,696 -- --
Bad debt expense 458,330 485,185 771,567
Change in assets and liabilities:
Accounts receivable (4,468,245) 359,329 (156,777)
Inventory 22,498 (207,097) 292,086
Prepaid expenses and other current assets (59,791) 30,067 249,524
Other assets (27,619) (26,246) (4,330)
Accrued interest payable 1,800,000 1,500,000 1,200,000
Accounts payable 612,423 268,323 (581,374)
Accrued expenses 173,207 552,243 (194,900)
Deferred revenue 781,897 36,510 (602,363)
----------- ----------- -----------
Net cash provided by operating activities 2,615,545 542,650 86,209
----------- ----------- -----------
Cash flows used in investing activities:
Capital expenditures (584,775) (234,277) (251,192)
----------- ----------- -----------
Net cash used in investing activities (584,775) (234,277) (251,192)
----------- ----------- -----------
Cash flows (used in) provided by financing activities:
Distributions to stockholders (70,610) -- --
Advances from officers -- -- 200,000
Proceeds from repayment of employees loans -- -- 24,600
Repayment of advances from officers -- (200,000) --
Deferred offering costs (551,946) -- --
----------- ----------- -----------
Net cash (used in) provided by financing
activities (622,556) (200,000) 224,600
----------- ----------- -----------
Net increase in cash and cash equivalents 1,408,214 108,373 60,217
Cash and cash equivalents at beginning of year 168,590 60,217 --
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,576,804 $ 168,590 $ 60,217
=========== =========== ===========
Supplemental cash flow information:
Cash paid during the year for interest $ -- $ -- $ --
=========== =========== ===========
See accompanying notes to consolidated financial statements.
7
8
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
Smith-Gardner & 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,
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 two 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.
(b) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with
an original maturity of three months or less to be cash
equivalents.
(c) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its two wholly owned subsidiaries SGA Pty. and SGA
Ltd. All significant intercompany balances and transactions have
been eliminated in consolidation.
(d) INVENTORY
Inventory consists of computer hardware. It is stated at the lower
of cost or market as determined on a specific identification
basis.
(e) 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 five 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.
(Continued)
8
9
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The Company implemented the provisions of Statement of Financial
Accounting Standards No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
effective January 1, 1996. The Company reviews its long-lived
assets (property and equipment) for impairment whenever events or
circumstances indicate that the carrying amount of an asset may
not be recoverable. If the sum of the expected cash flows,
undiscounted and without interest, is less than the carrying
amount of the asset, an impairment loss is recognized as the
amount by which the carrying amount of the asset exceeds its fair
value. The Company has no material impaired assets.
(f) 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" ("FAS 86"). Under FAS 86, the costs associated with
software development are required to be capitalized after
technological feasibility has been established. Technological
feasibility was established when the product design and working
model of the software product was 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.
(g) REVENUE RECOGNITION
Prior to 1997, the Company followed the provisions of Statement of
Position (SOP) 91-1. Revenue from computer hardware and software
sales was recognized upon installation, substantial fulfillment of
all obligations under the sales contract and when collectibility
was probable. Revenues related to consulting, training and
technical support were recognized upon completion of the services.
In October 1997, the American Institute of Certified Public
Accountants (AICPA) issued SOP 97-2, SOFTWARE REVENUE RECOGNITION,
which superseded SOP 91-1. The Company adopted SOP 97-2 for
software transactions entered into in 1997. 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. For an element not yet being sold
separately, VSOE is determined using managements best estimate
based on development costs to date of the element. The revenue
allocated to hardware and software products generally is
recognized when the hardware and software has been delivered and
installed, the fee is fixed and determinable and the
collectibility is probable. The revenue allocated to postcontract
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. The adoption of SOP 97-2 did not have a material impact
on the Company's results of operations.
In March 1999, the AICPA issued SOP 98-9, MODIFICATIONS OF SOP
97-2, SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN
TRANSACTIONS, which amends SOP 97-2 guidance on vendor specific
objective evidence (VSOE) for multiple element arrangements in
which there is VSOE of fair market value of all the undelivered
elements, and VSOE of fair value does not exist for one or more of
the delivered elements. This SOP does not currently apply to the
Company since VSOE of fair value exists for all elements in its
contracts.
(Continued)
9
10
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
At December 31, 1998 and 1997, the Company had deferred revenue
recorded in the accompanying consolidated balance sheets related
to systems, customer support and services paid in advance.
(h) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards 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. The fair value of
the conversion feature of the long-term debt instrument was
determined in note 6(b).
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.
(i) INCOME TAXES
The Company has elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code (the "Code").
Accordingly, the taxable income (loss) of the Company is reported
on the individual income tax returns of the stockholders. The only
states in which the Company does business in, who do not recognize
S corporation status are California and New Jersey. The Company
started doing business in these states in 1997. The California and
New Jersey income tax expense is immaterial to the consolidated
financial statements for the years ended December 31, 1998 and
1997. Therefore, the consolidated statements of operations do not
include federal or state income tax expense.
For the foreign entities, there is no charge for corporation tax
or provision for deferred tax, due to the availability of
accumulated tax losses of $413,594 as of December 31, 1998.
Subsequent to year-end, the Company terminated its S corporation
status due to the initial public offering discussed in note 2. In
connection with this termination, the Company will record income
taxes in accordance with Statement of Financial Accounting
Standards No. 109, ACCOUNTING FOR INCOME TAXES.
(Continued)
10
11
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The unaudited pro forma net income (loss) 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 all periods presented.
(j) BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
The Company has presented net income (loss) per share pursuant to
SFAS No. 128, Earnings Per Share and the Securities and Exchange
Commission Staff Accounting Bulletin No. 98.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS 128),
EARNINGS PER SHARE. SFAS 128 specifies new standards designed to
improve the earnings per share ("EPS") information provided in
financial statements by simplifying the existing computational
guidelines, revising the disclosure requirements and increasing
the comparability of EPS data on an international basis. SFAS 128
is effective for financial statements issued for periods ending
after December 15, 1997. The adoption of SFAS 128 in 1997 did not
have a significant impact on the Company's reported EPS.
In accordance with Securities and Exchange Commission ("SEC")
Staff Accounting Bulletin No. 98, certain common stock and common
stock equivalents issued for nominal consideration prior to the
initial filing of a registration statement relating to an Offering
are treated as outstanding for the entire period. The Company had
no nominal issuances during this period.
Basic net income (loss) per share was computed by dividing net
income (loss) by the weighted average number of shares of common
stock outstanding for each period presented. Diluted net income
per share 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
for the year ended December 31, 1998 as follows:
Net income as reported $ 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 $ 4,083,294
===========
Weighted average shares outstanding 5,263,100
Common stock equivalents 2,868,244
-----------
8,131,344
===========
Basic net income per share $ .57
===========
Diluted net income per share $ .50
===========
(Continued)
11
12
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Common stock equivalents were not considered for the years ended
December 31, 1996 and 1997 since their effect would be
antidilutive.
(k) PRO FORMA NET INCOME (LOSS) AND PRO FORMA NET INCOME PER SHARE
COMPUTATIONS (UNAUDITED)
The pro forma net income (loss) 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.
Pro forma basic and diluted net income per share for the year
ended December 31, 1998 was computed by dividing pro forma net
income by the weighted average number of shares of common stock
outstanding.
1998
----------
Pro forma net income $1,788,065
==========
Weighted average shares outstanding 5,263,100
==========
Basic and diluted pro forma net income per share $ .34
==========
Common stock equivalents in the diluted proforma net income per
share calculation were not considered for the year ended December
31, 1998 since their effect would be antidilutive.
(l) FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's foreign subsidiaries,
which began operations in 1997, is 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 of exchange
prevailing during the year. Adjustments resulting from the
translation of foreign currency financial statements for the years
ended December 31, 1998 and 1997 were $(1,136) and ($5,000),
respectively. Such amounts were recorded in the consolidated
statements of operations for each period.
The Company does not enter into transactions that may result in
foreign currency risk. All transactions are made based on the
Company's local currency. Therefore, the Company does not utilize
hedging instruments.
(Continued)
12
13
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(m) USE OF ESTIMATES
Management of the Company 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.
(n) YEAR 2000 (UNAUDITED)
Management believes their internal computer systems are Year 2000
compliant. The Year 2000 issue results from computer programs
being written using two digits rather than four to define the
applicable year. The Company's products have been determined by
the Company to be Year 2000 compliant.
The Company has also reviewed its internal support systems and to
the extent possible, its vendors' systems to confirm Year 2000
compliance. Any failure of the Company or its suppliers or clients
to be "Year 2000" compliant could have a material adverse effect
on the Company's business, financial condition or results of
operations. The Company has expensed all costs associated with
these systems changes as the costs are incurred.
(o) SEGMENT REPORTING
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS No. 131"). SFAS No. 131 is effective
for financial statements for periods beginning after December 15,
1997. SFAS No. 131 establishes standards for the way public
business enterprises report information about operating segments
in annual financial statements and requires those enterprises to
report selected information about operating segments in interim
financial reports issued to shareholders. The adoption of SFAS No.
131 did not have a significant impact on the Company's financial
reporting as of and for the three year period ended December 31,
1998.
(p) 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 are
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 financial
statements.
(Continued)
13
14
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(2) LIQUIDITY
The Company has been developing its software and new products and has
expanded its operations internationally which resulted in losses for the
years ended December 31, 1996 and 1997.
On January 29, 1999, the Company and selling shareholders sold 4,410,000
shares of its common stock in an Initial Public Offering (Offering) from
which the Company received proceeds of $44,640,000 after payment of
underwriter commissions.
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 (see note 6).
On February 26, 1999, the underwriter exercised the option to purchase
661,500 additional shares of the Company's common stock from which the
Company received proceeds of $7,382,340.
Based on the Offering proceeds, payment of outstanding convertible debt,
increased sales in 1998 and the Company's anticipated operating results,
management believes there is sufficient funding to meet its operating
expenditures.
(3) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
1998 1997
---------- ----------
Office equipment $1,655,823 $1,144,364
Office furnishings and fixtures 199,953 131,553
Leasehold improvements 77,328 32,179
---------- ----------
1,933,104 1,308,096
Less accumulated depreciation and
amortization 948,324 622,777
---------- ----------
$ 984,780 $ 685,319
========== ==========
(4) OPERATING LEASES
The Company entered into an agreement to lease office facilities under a
noncancelable 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. 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 a
deferred credit ($205,060 and $235,440 at December 31, 1998 and 1997,
respectively) to reflect the excess of rent expense over cash payments
(see note 5). 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 and Sydney which expire in 2003.
(Continued)
14
15
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Future minimum lease payments under these office facilities leases as
well as equipment leases as of December 31, 1998 are as follows:
Year ending December 31,
1999 $ 597,435
2000 552,822
2001 542,348
2002 96,938
2003 18,849
------------
Total minimum lease payments $ 1,808,392
============
Rental expense, including operating leases with lease terms of less than
one year, was $1,237,607, $669,543 and $597,905 during 1998, 1997 and
1996, respectively.
(5) ACCRUED EXPENSES
Accrued expenses consists of the following:
1998 1997
---------- ----------
Sales tax payable $ 145,409 $ 92,011
Sales tax contingencies 614,783 614,783
Deferred rent 205,060 235,440
Accrued payroll 75,980 95,215
Accrued legal 127,000 109,000
Accrued vacation 192,610 132,162
Other 233,355 142,379
---------- ----------
$1,594,197 $1,420,990
========== ==========
(6) CONVERTIBLE DEBT
(a) DEBENTURE PURCHASE AGREEMENT
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"). Principal on the Debentures was payable in two
equal installments of $6,000,000 on December 1, 1999 and December
1, 2000, and bore interest at 10 percent through June 30, 1997 and
bore interest at 15 percent through maturity. A portion of this
borrowing was attributed to its conversion feature due to the
difference between the stated rates and the estimated market rate
at the time of issuance. [See note 6(b).] Interest was payable
quarterly in arrears and commenced on March 31, 1995. The
Agreement provided for a default rate of interest of 20 percent on
all principal amounts not paid within 15 days of the date due. At
December 31, 1998, the Company
(Continued)
15
16
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
was not in compliance with certain debt covenants. The Lenders
waived any remedies on default against the Company as outlined in
the Agreement and waived compliance by the Company with respect to
such covenants through the consummation of an Offering. The
Company agreed with the Lenders to defer all quarterly interest
and principal payments due or payable in order to maintain
sufficient working capital for the Company's needs through the
consummation of an Offering.
On June 30, 1997 the Debentures became convertible at the option
of a majority in interest of the Lenders into 22,556.14 shares of
the Company's redeemable convertible participating preferred stock
and one share of redeemable participating preferred stock for each
$1,000 of principal outstanding. The redeemable convertible
participating preferred stock is convertible to common stock at
the rate of 100 shares of common stock for each share of preferred
stock. See note 6(b) for valuation of conversion features. See
redemption features of preferred stock in note 7.
An Offering was consummated on January 29, 1999. As discussed in
note 2, the Company repaid all principal and interest outstanding
related to the debentures. On January 29, 1999, the debentures
were converted into two classes of preferred stock.
Contemporaneous with the offering, the lenders converted the
redeemable convertible participating preferred stock into
2,255,614 shares of common stock.
(b) ORIGINAL ISSUE DISCOUNT
The fair value of the conversion feature of the $12,000,000
debentures discussed in note 6(a) was determined to be $3,481,562
based on the difference between the stated interest rates and the
market rate of such debentures estimated to be 18 percent on the
date of issuance. The 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. At December 31, 1998 and 1997,
the OID was fully amortized.
(7) PREFERRED STOCK
In connection with the issuance of $12,000,000 of Debentures [see note
6(a)], the Company amended its Articles of Incorporation by designating
22,556.14 shares of authorized preferred stock as redeemable convertible
participating preferred stock (the "redeemable convertible preferred
stock"). Holders of the redeemable convertible preferred stock are
entitled to receive (i) dividends at the same rate as dividends are paid
with respect to the common stock based on the number of shares of common
stock into which such shares of redeemable convertible preferred stock is
then convertible; and (ii) $31.90 per share cumulative dividend per year
through November 30, 1999 ($15.95 per share for the year ended December
1, 2000) less the amount of common stock dividends paid.
The redeemable convertible stock is redeemable at the option of the
Company between December 1, 2000 and December 1, 2001 at the fair market
value per share.
(Continued)
16
17
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Each share of redeemable convertible preferred stock entitles the holder
to such number of votes per share as shall equal the number of shares of
common stock into which such share of redeemable convertible preferred
stock is then convertible. Shares of redeemable convertible preferred
stock were convertible into shares of common stock automatically upon the
closing of the Offering discussed in note 2. Shares of redeemable
convertible preferred stock were converted into shares of common stock at
an initial conversion rate of 100 shares of common stock for each share
of preferred stock, whereby each share of convertible preferred stock was
valued for conversion purposes at $532.00 per share.
In addition, as part of the aforementioned amendment to its articles of
incorporation, the Company designated 12,000 shares of authorized
preferred stock as redeemable preferred stock. The holders of the
redeemable preferred stock are not entitled to receive any cash dividends
nor any voting rights or powers. The redeemable preferred stock was
subject to mandatory redemption upon the closing date of the Offering
(February 3, 1999). All redeemable preferred stock was redeemed at a
redemption price of $1,000 per share.
The redeemable preferred stockholders have liquidation preference of
$1,000 per share to any convertible preferred and common stockholder. The
convertible preferred and common stockholders share ratably in the
proceeds from any liquidation of assets.
(8) EMPLOYEE BENEFIT AND STOCK OPTIONS 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. Effective April 1994, 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 $102,713,
$46,573 and $39,069 provided by the Company in matching contributions for
the years ended December 31, 1998, 1997 and 1996, respectively.
SGA Ltd., also maintains an employee benefit plan (the "Ltd. Plan"). This
is an employee-directed plan which allows the employee to set aside from
1 to 5 percent of their salary to be deposited to a fund of their choice.
SGA Ltd. will match the employee's contribution up to 5 percent.
Provisions of the Ltd. Plan are substantially the same as the Plan.
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 subsequent to the date of grant.
During 1998, 1997 and 1996, 65,720, 155,000 and 214,000 options,
respectively, were granted to employees. Of these options, 142,314 were
exercisable at December 31, 1998. In addition, 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
(Continued)
17
18
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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 earlier to occur of (a) March 21, 2006, or (b) the
market value of the Company's outstanding stock has equaled or exceeded
$100 million for 30 days; 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 stock has equaled or exceeded $150 million for 30
days. At December 31, 1998, the officer had 226,469 of exercisable
options, none of which were exercised.
At June 30, 1998, the Company adopted 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. At December 31, 1998, the
Company has granted 602,041 options under the 1998 Stock-Option Plan at
an exercise price of $12.00 per share which represents the Offering
price. None of these options were exercised at December 31, 1998. Each
option vests based on the same schedule as the 1996 stock option plan.
The fair market value of the underlying stock related to these options
was estimated to be $2.53 - $12.00 as of grant dates from 1996 through
1998. 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. There was no compensation expense recorded in
1996 and 1997. Stock compensation expense for the year ended December 31,
1998 was $34,696. Had the Company determined compensation cost based on
fair value at the grant date for its stock options under Statement No.
123, there would have been no effect for the year ended December 31,
1996. The Company's net loss for the year ended December 31, 1997 would
have increased by $311,525. The Company's net income for the year ended
December 31, 1998 would have decreased by $347,834.
The weighted-average fair market value per share of options granted to
employees was estimated at $1.62 and $1.60, for the years ended December
31, 1998 and 1997, respectively. The fair value of each option was
estimated at the date of grant using the minimum value method with the
following assumptions used:
Expected life 5 years
Dividends None
Interest rate 5.65% in 1998
and 5.45% in 1997
(Continued)
18
19
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Stock option activity since inception is indicated as follows:
Weighted
Weighted average
Average remaining
Exercise contractual
Shares Price life (years)
--------- ---------- -----------
Outstanding at inception --
Granted 708,120 $ 2.53
Forfeited (77,000) 2.53
---------
Balance outstanding at December 31, 1996 631,120 2.53
Granted 155,000 2.53
Forfeited (34,000) 2.53
---------
Balance outstanding at December 31, 1997 752,120 2.53
Granted 30,607 2.53
Granted 637,154 12.00
Forfeited (6,427)
---------
Balance outstanding at December 31, 1998 1,413,454
=========
Exercisable at December 31, 1998 357,908 $ 2.53 8.79
=========
Subsequent to December 31, 1998, an additional 200,000 shares were
granted at $12.00 per share.
The amount of stock compensation expense recognized at the date options
are vested for options granted as of December 31, 1998 when the exercise
price was lower than fair market value at the date of grant is as
follows:
(Unaudited)
Years ending December 31,
--------------------------
1999 $43,612
2000 34,447
2001 23,494
2002 1,513
(9) RELATED PARTY TRANSACTIONS
In connection with the issuance of convertible debt (see note 6), certain
of the Company's senior executives entered into noncompete agreements,
which expire upon the third anniversary date of the termination of the
executives' employment.
(Continued)
19
20
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(10) INCOME TAXES
Years Ended December 31,
----------------------------------------------
1998 1997 1996
----------- ----------- -----------
Income taxes as reported $ -- -- --
Pro forma adjustment (unaudited) (1,214,770) $ 948,427 $ 359,819
----------- ----------- -----------
Pro forma income tax (expense) benefit
(unaudited) $(1,214,770) $ 948,427 $ 359,819
=========== =========== ===========
The unaudited proforma income tax (expense) benefit presented on the
consolidated statements of operations represent 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. The proforma income tax
(expense) benefit is as follows (unaudited):
1998 1997 1996
----------- ----------- -----------
Pro forma (unaudited):
Current:
Federal $(1,004,126) $ 897,416 $ 62,798
Foreign -- -- --
State (203,627) 187,580 12,609
Deferred:
Federal (4,045) (108,897) 229,124
State (2,972) (27,672) 55,288
----------- ----------- -----------
Total pro forma $(1,214,770) $ 948,427 $ 359,819
=========== =========== ===========
A reconciliation of income tax (expense) benefit calculated using the
statutory federal income tax rate and the pro forma income tax (expense)
benefit is as follows (unaudited):
1998 1997 1996
----------- ----------- -----------
Income tax (expense) benefit using statutory
tax rate $(1,020,964) $ 1,145,089 $ 833,092
Effect of:
State and local income taxes, net of federal
income tax $ (136,356) $ 105,539 $ 44,812
Change in valuation allowance $ (56,274) $ (61,263) $ --
Difference between US and non-US tax rates $ 7,298 $ (27,221) --
Original issue discount amortization $ -- $ (231,097) $ (468,614)
Change in effective tax rates $ 9,761 $ 22,256 $ (43,379)
Other, net $ (18,235) $ (4,876) $ (6,092)
----------- ----------- -----------
Pro forma income tax (expense) benefit $(1,214,770) $ 948,427 $ 359,819
=========== =========== ===========
20
21
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The Company will issue promissory notes to its existing shareholders in
an aggregate amount representing the individual tax liability for each of
the existing shareholders for the period beginning January 1, 1998 and
ending on December 31, 1998. Amount is estimated to be $850,000.
(11) BUSINESS AND CREDIT CONCENTRATIONS
The Company currently derives substantially all of its revenue from sales
of its MACS family of products and related services and hardware. Any
factor adversely affecting the sale of the Company's MACS 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. Continuing relationships are maintained with most
customers through product-support arrangements and sales of system
upgrades.
During 1997 and 1996, the Company purchased approximately 65 percent and
74 percent, respectively, of its computer hardware from Hewlett Packard.
At December 31, 1997, the Company owed this supplier approximately
$98,000. In 1998, the Company began purchasing its hardware from a
distributor of Hewlett Packard due to a change in Hewlett Packards
distribution channels. 59 percent of its computer hardware was purchased
from this distributor and Hewlett Packard for the year ended December 31,
1998. The Company owed this supplier $259,102 at December 31, 1998.
Accordingly, any adverse change in the product pricing or the operations
of Hewlett Packard could significantly effect the operating results of
the Company. However, the Company is currently in the process of
engineering its product to operate on multiple platforms.
No single customer accounted for more than 10 percent of total revenue
for the year ended December 31, 1998 and 1997. One customer accounted for
10.7 percent of total revenue for the year ended December 31, 1996. In
addition, there were accounts receivable from three customers at December
31, 1998, each of which exceeded 10 percent of total accounts receivable
for approximately $2,325,000.
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 effect the Company's estimate of
its bad debts.
21
22
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(12) COMMITMENTS AND CONTINGENCIES
(a) LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions
arising in the ordinary course of business. If the plaintiff's
claims are probable, the appropriate amount is accrued in the
consolidated financial statements. In the opinion of management,
the ultimate disposition of matters not accrued will not have a
material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.
(b) COMMITMENTS
The Company has committed to fund the operations of SGA Ltd. and
SGA Pty. for a period of at least one year. The Company does not
believe this to be a risk since the costs associated with
operating these subsidiaries are not significant.
(c) TAX LIABILITY
The Internal Revenue Service ("IRS") is currently auditing the
Company's tax returns for fiscal 1995. One issue the IRS is
reviewing is whether the issuance of the Convertible Debentures in
December 1994 resulted in the Company failing to qualify as an S
Corporation. In the event the IRS determines that the Company did
not qualify as an S Corporation for fiscal 1995 or any fiscal year
thereafter, the Company would be subject to a significant tax
liability. The shareholders have agreed to indemnify the Company
for any tax liability to the Company. To the extent the
shareholders are unable to fulfill such indemnification and
satisfy all outstanding tax liability to which the Company is
subject, the Company's business, financial condition or results of
operations could be materially adversely affected.
(13) AUTHORIZATION OF COMMON AND PREFERRED STOCK
In September 1998, the Company increased the capital stock to 50,000,000
shares of common stock at $.01 par value per share and 10,000,000 shares
of preferred stock at $.01 par value per share. The consolidated
financial statements retroactively effect these increases in authorized
capital stock.
(14) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES"
("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It
requires an entity to recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair
value. The Company does not believe that the adoption of SFAS No. 133
will have a significant impact on the Company's financial reporting.
22
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K.
(a)(1) The following consolidated financial statements are filed as part
of this Form 10-K:
Smith-Gardner & Associates, Inc. Consolidated Financial
Statements:
Independent Auditors Report
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Operations for each of the years in
the three year period ended December 31, 1998
Consolidated Statements of Redeemable Preferred Stock and
Stockholders' Deficit for each of the years in the three year
period ended December 31, 1998
Consolidated Statements of Cash Flows for each of the years in
the three year period ended December 31, 1998
Notes to Consolidated Financial Statements.
(2) The following financial statement schedules are filed as part of
this Form 10-K:
Schedule I of Valuation and Qualifying Accounts.
(3) See Exhibit Index included elsewhere herein.
(b) Reports on Form 8-K:
None
23
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amended Annual Report
on Form 10-K/A to be signed on its behalf by the undersigned thereunto duly
authorized.
Date: May 21, 1999
SMITH-GARDNER & ASSOCIATES, INC.
(Registrant)
By: /s/ Gary C. Hegna
------------------------------
Gary C. Hegna
Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Amended Annual Report on Form 10-K/A 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/ Gary G. Hegna President, Chief Executive Officer and Director May 21, 1999
- --------------------------------- (Principal Executive Officer)
Gary G. Henna
/s/ Martin K. Weinbaum Vice President - Finance, Chief Financial May 21, 1999
- --------------------------------- Officer, Secretary and Treasurer
Martin K. Weinbaum (Principal Financial and Accounting Officer)
/s/ Allan Gardner Executive Vice President - Advanced May 21, 1999
- --------------------------------- Technologies and Co-Chairman of the Board
Allan Gardner
/s/ Wilburn Smith Executive Vice President - Sales and Co- May 21, 1999
- --------------------------------- Chairman of the Board
Wilburn Smith
/s/ Francis H. Zenie Director May 21, 1999
- ---------------------------------
Francis H. Zenie
/s/ Jacqueline C. Morby Director May 21, 1999
- ---------------------------------
Jacqueline C. Morby
/s/ James J. Felcyn, Jr. Director May 21, 1999
- ---------------------------------
James J. Felcyn, Jr.
24
25
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
23.1 Consent of KPMG LLP
25