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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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________to _________
Commission File No. 0-25297
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SMITH-GARDNER & ASSOCIATES, INC.
FLORIDA 65-0090038
(State of Incorporation) (I.R.S. Employer Identification No.)
1615 SOUTH CONGRESS AVENUE, DELRAY BEACH, FL 33445-6368
TELEPHONE: (561) 265-2700
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 12,197,753 shares of the
Registrant's Common Stock, par value $0.01 per share, were outstanding as of
August 2, 1999.
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SMITH-GARDNER & ASSOCIATES, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
Page
----
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
a.) Condensed Consolidated Statements of Operations
for the Three Months and Six Months Ended June 30, 1999 and 1998.......3
b.) Condensed Consolidated Balance Sheets
as of June 30, 1999 and December 31, 1998..............................4
c.) Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1999 and 1998........................5
d.) Notes to Condensed Consolidated Financial Statements...................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk................15
Part II. Other Information
Item 1. Legal Proceedings ........................................................15
Item 2. Changes in Securities and Use of Proceeds.................................15
Item 6. Exhibits and Reports on Form 8-K..........................................15
Signatures..............................................................................16
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Revenue:
Computer software $4,837 $2,572 $8,921 $4,649
Computer hardware 4,334 3,359 6,741 5,076
Support 1,806 1,214 3,433 2,434
Services 1,341 984 2,274 1,501
------------ ------------ ------------ ------------
Total revenue 12,318 8,129 21,369 13,660
------------ ------------ ------------ ------------
Cost of revenue:
Computer software 714 703 1,301 1,273
Computer hardware 3,081 2,546 4,769 3,858
Support 1,213 740 2,297 1,461
Services 891 579 1,601 1,006
------------ ------------ ------------ ------------
Total cost of revenue 5,899 4,568 9,968 7,598
------------ ------------ ------------ ------------
Gross margin 6,419 3,561 11,401 6,062
Operating expenses:
General and administrative 2,072 1,510 4,163 2,917
Sales and marketing 1,570 554 2,690 1,074
Research and development 728 576 1,382 1,061
------------ ------------ ------------ ------------
Total operating expenses 4,370 2,640 8,235 5,052
------------ ------------ ------------ ------------
Operating income 2,049 921 3,166 1,010
Other income (expense) 447 (430) 544 (864)
------------ ------------ ------------ ------------
Income before income taxes 2,496 491 3,710 146
Income tax expense 948 -- 1,131 --
------------ ------------ ------------ ------------
Net income $1,548 $ 491 $2,579 $ 146
============ ============ ============ ============
Basic net income per share $ 0.13 $ 0.09 $ 0.23 $ 0.03
============ ============ ============ ============
Diluted net income per share $ 0.12 $ 0.09 $0.22 $0.03
============ ============ ============ ============
Weighted average shares used in historical basic per share computation 12,197 5,263 11,019 5,263
============ ============ ============ ============
Weighted average shares used in historical diluted per share computation 12,711 5,263 11,533 5,263
============ ============ ============ ============
Income before pro forma income tax expense 2,496 491 3,710 146
Pro forma provision for income tax expense (benefit) 948 198 1,461 (17)
------------ ------------ ------------ ------------
Pro forma net income 1,548 293 2,249 163
============ ============ ============ ============
Pro forma basic net income per share $ 0.13 $ 0.06 $ 0.20 $ 0.03
============ ============ ============ ============
Pro forma diluted net income per share $ 0.12 $ 0.06 $0.20 $0.03
============ ============ ============ ============
Weighted average shares used in pro forma basic per share computation 12,197 5,263 11,019 5,263
============ ============ ============ ============
Weighted average shares used in pro forma diluted per share computation 12,711 5,263 11,533 5,263
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements
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SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, December 31,
1999 1998
----------------- ------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $38,390 $ 1,577
Accounts receivable, net of allowance for doubtful accounts of
$504 at June 30, 1999 and $459 at December 31, 1998 8,272 5,855
Inventory 104 198
Deferred income taxes 527 --
Prepaid expenses and other current assets 457 195
----------------- ------------------
Total current assets 47,750 7,825
Property and equipment, net 1,595 985
Deferred offering costs -- 552
Other assets 69 108
----------------- ------------------
Total assets $49,414 $ 9,470
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 4,680 $ 2,755
Income tax payable 601 --
Current portion of capital lease obligation 44 --
Deferred revenue 1,299 1,165
----------------- ------------------
Total current liabilities 6,624 3,920
Convertible debt and accrued interest -- 16,500
Long term portion of capital lease obligation 135 --
Deferred income taxes 64 --
----------------- ------------------
Total liabilities 6,823 20,420
Stockholders' equity (deficit):
Common stock, $.01 par value. Authorized 50,000,000
shares; issued and outstanding 12,197,628 shares
and 5,263,100 at June 30, 1999 and December 31,
1998, respectively. 122 53
Additional paid in capital 54,409 3,516
Accumulated deficit (11,940) (14,519)
----------------- ------------------
Total stockholders' equity (deficit) 42,591 (10,950)
----------------- ------------------
Total liabilities and stockholders' equity (deficit) $49,414 $ 9,470
================= ==================
See accompanying notes to condensed consolidated financial statements
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SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
For Six Months Ended
June 30,
-----------------------------
1999 1998
------------- -----------
Net income $2,579 $ 146
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 221 149
Non-cash compensation expense 11 7
Bad debt expense 68 --
Deferred income taxes (463) --
Change in assets and liabilities:
Accounts receivable (2,485) (1,312)
Inventory 94 (730)
Prepaid expenses and other current assets (262) (31)
Other assets 39 --
Accounts payable and accrued expenses 1,925 916
Income tax payable 601 --
Accrued interest payable (4,500) 900
Deferred revenue 134 2,008
------------- -----------
Net cash provided by (used in) operating
activities (2,038) 2,053
Cash flows used in investing activities:
Capital expenditures (652) (345)
------------- -----------
Net cash used in investing activities (652) (345)
Cash flows provided by financing activities:
Payment of convertible debt (12,000) --
Issuance of common stock, net of offering costs 51,503 --
------------- -----------
Net cash provided by (used in) financing
activities 39,503 --
------------- -----------
Net increase (decrease) in cash and cash equivalents 36,813 1,708
Cash and cash equivalents at beginning of period 1,577 169
------------- -----------
Cash and cash equivalents at end of period $38,390 $ 1,877
============= ===========
Supplemental cash flow information:
Cash paid for interest 4,665 --
============= ===========
Cash paid for income taxes 915 --
============= ===========
Supplemental non-cash flow transactions:
Capital lease additions $ 179 $ --
============= ===========
See accompanying notes to condensed consolidated financial statements
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SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
June 30, 1999
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
disclosures necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the results
for the periods presented have been included. These condensed consolidated
financial statements should be read in connection with the Annual Report on
Form 10-K of Smith Gardner and Associates, Inc. as of and for the year ended
December 31, 1998.
(2) PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include the
accounts of the Company and its two wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
(3) COMPLETION OF INITIAL PUBLIC OFFERING AND CONVERSION
On January 29, 1999, the Company and selling shareholders sold 4,410,000 shares
of its common stock in an initial public offering from which the Company
received proceeds of $43,483,000, net of underwriter commissions and offering
costs. At that time, the Company's $12 million outstanding convertible
debentures (the "Convertible Debentures") were converted into redeemable
convertible preferred stock and redeemable participating preferred stock and
the redeemable convertible preferred stock was then converted into 2,255,614
shares of common stock.
On February 3, 1999, the Company redeemed in full the redeemable participating
preferred stock for $12,000,000 and paid accrued interest in the amount of
$4,665,000. On February 26, 1999, the underwriter exercised the option to
purchase 661,500 additional shares of the Company's common stock from which the
Company received net proceeds of $7,382,340.
(4) EARNINGS PER SHARE
Historical basic net income per share is calculated using the weighted average
number of common shares outstanding during the period. Historical 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 equivalent shares
("CSE's") outstanding using the treasury stock method.
Pro forma basic income per share is calculated by dividing pro forma net income
by the weighted average number of shares of common stock outstanding. Pro forma
diluted net income per share was computed on the basis of the weighted average
number of common shares outstanding plus the dilutive effect of common
equivalent shares ("CSE's") outstanding using the treasury stock method.
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Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ------------------------------
1999 1998 1999 1998
------------- ------------- -------------- -------------
BASIC NET INCOME:
Net income $1,548 $ 491 $ 2,579 $ 146
============= ============== ============= =============
Weighted average common shares outstanding 12,197 5,263 11,019 5,263
============= ============== ============= =============
Basic net income per share $ .13 $ .09 $ .23 $ .03
============= ============== ============= =============
DILUTED NET INCOME:
Net income $1,548 $ 491 $ 2,579 $ 146
============= ============== ============= =============
Weighted average common shares outstanding 12,197 5,263 11,019 5,263
Common stock equivalents 514 -- 514 --
------------- -------------- ------------- -------------
Equivalent shares 12,711 5,263 11,533 5,263
============= ============== ============= =============
Diluted net income per share $ .12 $ .09 $ .22 $ .03
============= ============== ============= =============
PRO FORMA DATA:
BASIC NET INCOME:
Pro forma net income $1,548 $ 293 $ 2,249 $ 163
============= ============== ============= =============
Weighted average common shares outstanding 12,197 5,263 11,019 5,263
============= ============== ============= =============
Pro forma basic net income per share $ .13 $ .06 $ .20 $ .03
============= ============== ============= =============
DILUTED NET INCOME:
Pro forma net income $1,548 $ 293 $ 2,249 $ 163
============= ============== ============= =============
Weighted average common shares outstanding 12,197 5,263 11,019 5,263
Common stock equivalents 514 -- 514 --
------------- -------------- ------------- -------------
Equivalent shares 12,711 5,263 11,533 5,263
============= ============== ============= =============
Pro forma diluted net income per share $ .12 $ .06 $ .20 $ .03
============= ============== ============= =============
(5) 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
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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 management's
best estimate based on development costs of the element to date. 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. The adoption of SOP 97-2
did not have a material impact on the Company's results of operations.
In March 1999, SOP 98-9 was issued which amends SOP 97-2 guidance on VSOE for
multiple element arrangements in which there is VSOE of fair value of all the
undelivered elements, and VSOE of fair value does not exist for one or more of
the delivered elements. This SOP does not currently apply to the Company since
VSOE of fair value exists for all elements in the Company's contracts.
(6) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in thousands):
June 30, December 31,
1999 1998
----------------- -----------------
Accounts payable $ 2,194 $ 1,161
Sales tax payable 869 760
Deferred rent 181 205
Accrued payroll 581 76
Accrued legal 132 127
Accrued vacation 193 193
Other 530 233
----------------- -----------------
$ 4,680 $ 2,755
================= =================
(7) INCOME TAXES
On January 1, 1999, the Company terminated its S-corporation status. In
connection with this termination, the Company now records income taxes in
accordance with Statement of Financial Accounting Standards No. 109, Accounting
for income taxes. The pro forma income tax expense (benefit) presented on the
condensed consolidated statements of operations for the three months and six
months ended June 30, 1998 represent the estimated taxes that would have been
recorded had the Company been a C corporation for income tax purposes for the
three months and six months ended June 30, 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, AND THE RELATED NOTES THERETO,
INCLUDED ELSEWHERE HEREIN. IN ADDITION, REFERENCE SHOULD BE MADE TO THE
COMPANY'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, AND
RELATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS INCLUDED IN THE COMPANY'S MOST RECENT ANNUAL REPORT ON FORM 10-K.
RESULTS OF OPERATIONS
The Company is a leading provider of mission-critical, enterprise-wide software
solutions, and related hardware and services, to the non-store marketing
industry. The Company's clients in the non-store marketing industry are
traditional direct marketing companies and Internet-only retailers, as well as
wholesalers, fulfillment houses and retailers with significant non-store sales
channels. The Company's MACS family of software products is designed to
automate non-store commerce activities, including advertising analysis, sales,
telemarketing, ordering, merchandising, procurement, electronic and Internet
commerce, warehousing, shipping, accounting and systems operation. The MACS
products also provide managers and sales personnel with real-time operations,
inventory and customer data to improve both management decision making and
customer service.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
COMPUTER SOFTWARE. Sales of computer software licenses accounted for
approximately 39.3% of the Company's total revenue for the three months ended
June 30, 1999. Computer software license fees consist of license fees for the
new installation of the Company's MACS software and related modules, and
additional user license fees and software upgrades for its existing clients.
Computer software license fees are based on the number of users and type and
number of CPUs. Computer software license fees increased 88.1% to $4.8 million
during the three months ended June 30, 1999 compared to $2.6 million for the
same period in 1998. This increase resulted from an increase in computer
software sales to both new and existing clients. New client computer software
sales increased from $1.9 million for the three months ended June 30, 1998 to
$2.7 million in 1999, and computer software upgrades increased from $719,000 to
$2.1 million for the same periods. The increase was related to more new client
installations in 1999, an expanded client base, several of the Company's
clients performing system upgrades, and increased purchases of optional
modules.
COMPUTER HARDWARE. Sales of computer hardware accounted for approximately 35.2%
of the Company's total revenue for the three months ended June 30, 1999. Sales
of computer hardware consist of sales of computer systems, peripheral
components and third-party software. Computer hardware revenue increased 29.0%
to $4.3 million for the three months ended June 30, 1999, compared to $3.4
million for the three months ended June 30, 1998. Computer hardware revenue
relating to new client sales increased 4.0% to $2.6 million for the three
months ended June 30, 1999, compared to $2.5 million for the same period in
1998. The marginal increase in computer hardware sales to new clients is
attributable to a shift to leasing arrangements whereby the Company only
records a commission on the sale which is based on the difference between the
Company's cost and selling price to the client. Computer hardware upgrades
increased by 99.1% to $1.8 million for the three months ended June 30, 1999,
compared to $883,000 for the same period in 1998. The increase in 1999 resulted
from an expanded client base and several of the Company's clients performing
system upgrades.
SUPPORT. Support revenue accounted for approximately 14.7% of the Company's
total revenue during the three months ended June 30, 1999. Support revenue
consists of fees for technical support services and product enhancements for
the MACS software, optional modules, and integrated third-party software
utilities. Support revenue typically represents 17% of the underlying license
fee each year. Support revenue increased 48.8% to $1.8 million during the three
months ended June 30, 1999, compared to $1.2 million for the three months ended
June 30, 1998. The increase resulted from the addition of new clients during
1998 and 1999, as well as support fee increases related to software user
license upgrades.
SERVICES. Services revenue accounted for approximately 10.9% of the Company's
revenue for the three months ended June 30, 1999. Services revenue consists
principally of revenue derived from training, consulting, and custom
programming. Services revenue increased 36.2% to $1.3 million in the three
months ended June 30, 1999 compared to $984,000 for the same period in 1998.
This increase was due primarily to an expanded client base and increased demand
for consulting and training services.
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TOTAL REVENUE. Total revenue increased 51.5% to $12.3 million for the three
months ended June 30, 1999, compared to $8.1 million for the same period in
1998. New client sales increased 22.1% to $5.3 million from $4.3 million for
the three months ended June 30, 1998. The increase was due to a higher number
of installations during the three months ended June 30, 1999, compared to the
same period in 1998. Also contributing to the increase were sales of optional
modules and sales of WebOrder and the MACS for NT product. Revenue from client
system and component upgrades increased by 143.0% to $3.9 million for the three
months ended June 30, 1999, compared to $1.6 million for the same period in
1998, due to an expanding client base and increased sales efforts directed
toward existing clients.
COST OF COMPUTER SOFTWARE. Cost of computer software, which includes
installation and training salaries directly related to new software sales and
subcontractor fees, increased 1.7% to $714,000 during the three months ended
June 30, 1999, compared to $703,000 for the three months ended June 30, 1998.
The increase is attributable to the addition of personnel for training and
installation. Cost of computer software as a percentage of total revenue
decreased to 5.8% from 8.6% for the three months ended June 30, 1998. Cost of
computer software as a percentage of software license fees decreased to 14.8%
from 27.3% for the three months ended June 30, 1998. These decreases are due to
greater efficiencies and increased utilization of personnel resources in 1999
as well as increased software license upgrades, which have minimal cost
associated with the sale.
COST OF COMPUTER HARDWARE. Cost of computer hardware, which consists of
purchases of computer systems, peripheral components and third party software,
increased 21.0% to $3.1 million for the three months ended June 30, 1999,
compared to $2.5 million for the same period in 1998. This increase was related
to the 29.0% increase in computer hardware revenue for the three months ended
June 30, 1999 compared to 1998. Costs of computer hardware as a percentage of
total revenue decreased to 25.0% in the three months ended June 30, 1999 from
31.3% for the same period in 1998, due primarily to a shift in sales mix
reducing the relative contribution of computer hardware sales. Costs of
computer hardware as a percentage of computer hardware revenue was 71.1% and
75.8% for the three months ended June 30, 1999 and 1998, respectively. The
decrease resulted from leasing transactions whereby the Company had no cost
associated with the sale. In such situations, the Company records only a
commission, which is based on the difference between the Company's cost and
selling price to the client.
COST OF SUPPORT. Cost of support consists primarily of personnel costs
associated with the support of the Company's MACS product and third-party
computer software packages and the cost of MACS user documentation distributed
to clients. Cost of support increased 63.9% to $1.2 million for the three
months ended June 30, 1999 from $740,000 for the same period in 1998. The
increase was due to a significant increase in support personnel necessary to
meet the requirements of a growing client base. Cost of support as a percentage
of total revenue increased to 9.9% for the three months ended June 30, 1999
from 9.1% for the same period in 1998. Cost of support as a percentage of
support revenue increased to 67.2% for the three months ended June 30, 1999
from 61.0% for the same period in 1998.
COST OF SERVICES. Cost of services, which consists of salaries for professional
services employees, allocated salaries for training and programming personnel,
and payments to outside contractors, increased 53.9% to $891,000 during the
three months ended June 30, 1999, compared to $579,000 for the same period in
1998. The increase was due to the addition of professional service and training
staff, and a greater allocation of programmer salaries. Cost of services as a
percentage of total revenue increased to 7.2% from 7.1% for the three months
ended June 30, 1998. Cost of services as a percentage of services revenue
increased to 66.4% for the three months ended June 30, 1999 from 58.8% for the
same period in 1998. The increase was related to the addition of professional
services and programming personnel to meet client demand.
TOTAL COST OF SALES AND SERVICES. Total cost of sales and services increased by
29.2% to $5.9 million for the three months ended June 30, 1999, compared to
$4.6 million for the same period in 1998. The increase in total cost of sales
and services is attributable to higher hardware cost in the amount of $535,000,
and an increase of $815,000 in personnel and other costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include the
cost of the Company's finance, human resources, information services, and
administrative functions. General and administrative expenses increased 37.4%
to $2.1 million for the three months ended June 30, 1999, compared to $1.5
million in 1998. This increase was primarily due to $131,000 in additional
salaries and benefits related to an expanding workforce and client base, and
approximately $431,000 of additional communication, recruiting, insurance,
professional fees, and other expenses related to the increased headcount.
General and administrative expenses as a percentage of total revenue decreased
to 16.8% for the three months ended June 30, 1999 from 18.6% for the same
period in 1998.
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SALES AND MARKETING. Sales and marketing expenses include personnel costs,
sales commissions related to sales and marketing of the Company's products and
services, and the cost of advertising, public relations and participation in
industry conferences and trade shows. Sales and marketing expenses increased by
183.6% to $1.6 million for the three months ended June 30, 1999, compared to
$554,000 for the same period in 1998. This increase resulted from additional
personnel costs, increased trade show expenses, and expanded marketing and
advertising programs. Sales and marketing expenses as a percentage of total
revenue increased to 12.8% for the three months ended June 30, 1999 from 6.8%
for the three months ended June 30, 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses include costs
associated with the development of new products. Such expenses consist
primarily of employee salaries and benefits, consulting expenses (including
amounts paid to subcontractors for development work), and the cost of
development software and hardware. Research and development expenses increased
26.3% to $727,000 during the three months ended June 30, 1999 compared to
$576,000 for the same period in 1998. This increase was primarily due to
improvements to existing products and ongoing development of new products such
as various modules and MACS for UNIX.
INCOME FROM OPERATIONS. As a result of the foregoing factors, the Company's
income from operations increased by $1.1 million to $2.0 million for the three
months ended June 30, 1999 as compared to income of $922,000 for the three
months ended June 30, 1998.
OTHER INCOME (EXPENSE) NET. Net interest income, which includes interest income
on available cash and interest expense associated with the $12.0 million
aggregate principal amount of Convertible Debentures held by certain lenders
(the "Lenders"), increased to $447,000 for the three months ended June 30,
1999, compared to net interest expense of $430,000 for the same period in 1998.
The increase was due to interest income earned on proceeds received from the
Company's initial public offering on January 29, 1999, and the underwriter
exercising the overallotment option to purchase additional shares from the
Company on February 26, 1999. Also, the Company is no longer accruing interest
on the Convertible Debentures, which were converted on January 29, 1999,
concurrent with the closing of the initial public offering.
INCOME TAX (EXPENSE) BENEFIT. The historical effective tax rate for the three
months ended June 30, 1999 was 38.0%. There was no effective tax rate
applicable for the three months ended June 30, 1998 due to the Company's
Subchapter S Corporation status. The pro forma effective tax rate for the three
months ended June 30, 1999 was 38.0% compared to a pro forma effective tax rate
of 40.3% for the same period in 1998 which assumed the Company was a C
Corporation. The effective income tax rate differs from the federal statutory
rates because of the following: (i) the effect of state income taxes and (ii )
net losses of foreign subsidiaries for which no income tax benefit has been
realized. Also, effective rates vary between periods because of the differing
effects the net income and losses of foreign subsidiaries have on income before
income taxes.
NET INCOME. As a result of the above factors, the Company's net income
increased by $1.1 million to $ 1.5 million for the three months ended June 30,
1999 from net income of $491,000 in 1998. The Company's pro forma net income
increased by $1.2 million to $ 1.5 million for the three months ended June 30,
1999 from pro forma net income of $293,000 for the same period in 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
COMPUTER SOFTWARE. Sales of computer software licenses accounted for
approximately 41.8% of the Company's total revenue for the six months ended
June 30, 1999. Computer software license fees increased 91.9% to $8.9 million
during the six months ended June 30, 1999 compared to $4.6 million for the same
period in 1998. This increase is attributable to an increase in computer
software sales to new and existing clients. New client computer software sales
increased from $2.8 million for the six months ended June 30, 1998 to $4.6
million for the same period in 1999, and computer software upgrades increased
from $1.8 million to $4.3 million for the same periods. The increase in 1999
resulted from a higher number of new client installations and several of the
Company's existing clients implementing system upgrades.
COMPUTER HARDWARE. Sales of computer hardware accounted for approximately 31.5%
of the Company's total revenue for the six months ended June 30, 1999. Computer
hardware revenue increased 32.8% to $6.7 million for the six months ended June
30, 1999, compared to $5.1 million for the six months ended June 30, 1998.
Computer hardware revenue relating to new client sales decreased 7.3% to $3.4
million for the six months ended June 30, 1999, compared to $3.7 million for
the same period in 1998. The decrease resulted from a shift to leasing
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arrangements whereby the Company only records a commission on the sale, which
is based on the difference between the Company's cost and selling price to the
client. Computer hardware upgrades increased by 137.7% to $3.3 million for the
six months ended June 30, 1999, compared to $1.4 million for the same period in
1998. The increase in 1999 was attributable to an expanded client base and
several of the Company's clients performing major system upgrades.
SUPPORT. Support revenue accounted for approximately 16.1% of the Company's
total revenue during the six months ended June 30, 1999. Support revenue
increased 41.0% to $3.4 million during the six months ended June 30, 1999,
compared to $2.4 million for the six months ended June 30, 1998. The increased
support revenue resulted from the addition of new clients during 1998 and 1999,
as well as support fee increases related to software user license upgrades.
SERVICES. Services revenue accounted for approximately 10.6% of the Company's
revenue for the six months ended June 30, 1999. Services revenue increased
51.5% to $2.3 million in the six months ended June 30, 1999 compared to $1.5
million for the same period in 1998. This increase was due to growing demand
for consulting and training services, new client software modifications, and
custom interfaces to third-party products.
TOTAL REVENUE. Total revenue increased 56.4% to $21.4 million for the six
months ended June 30, 1999, compared to $13.7 million for the same period in
1998. New client sales increased 24.2% to $8.0 million from $6.5 million for
the six months ended June 30, 1998. The increase was due to the higher number
of installations during the six months ended June 30, 1998. Also contributing
to the increase were sales of the WebOrder and the MACS for NT products, and
optional modules. Revenue from client system and component upgrades increased
by 134.9% to $7.6 million for the six months ended June 30, 1999, compared to
$3.3 million for the same period in 1998 due to an expanding client base and
increased sales efforts directed toward existing clients.
COST OF COMPUTER SOFTWARE. Cost of computer software increased 2.1% to $1.3
million during the six months ended June 30, 1999, compared to $1.3 million for
the six months ended June 30, 1998. The increase is attributable to the
addition of training and installation personnel. Cost of computer software as a
percentage of total revenue decreased to 6.1% from 9.3% for the six months
ended June 30, 1998. Cost of computer software as a percentage of software
license fees decreased to 14.6% from 27.4% for the six months ended June 30,
1998. The decrease is due to increased utilization of personnel resources in
1999, as well as increased software license upgrades which have no cost
associated with the sale.
COST OF COMPUTER HARDWARE. Cost of computer hardware increased 23.6% to $4.8
million for the six months ended June 30, 1999, compared to $3.9 million for
the same period in 1998. This increase to hardware cost is related to the 32.8%
increase in computer hardware revenue for the six months ended June 30, 1999
compared to 1998. Costs of computer hardware as a percentage of total revenue
decreased to 22.3% in 1999 from 28.2% in 1998, due primarily to a shift in
sales mix reducing the relative contribution of computer hardware sales. Costs
of computer hardware as a percentage of computer hardware revenue was 70.8% and
76.0% for the six months ended June 30, 1999 and 1998, respectively. The
decrease resulted from leasing transactions whereby the Company had no cost
associated with the sale. In such situations, the Company records only a
commission, which is based on the difference between the Company's cost and
selling price to the client.
COST OF SUPPORT. Cost of support increased 57.3% to $2.3 million for the six
months ended June 30, 1999 from $1.5 million for the same period in 1998. The
increase was due to a significant increase in support personnel necessary to
meet the requirements of the growing client base. Cost of support as a
percentage of total revenue increased to 10.8% for the six months ended June
30, 1999 from 10.7% for the same period in 1998. Cost of support as a
percentage of support revenue increased to 66.9% for the six months ended June
30, 1999 from 60.0% for the same period in 1998.
COST OF SERVICES. Cost of services increased 59.2% to $1.6 million during the
six months ended June 30, 1999, compared to $1.0 million for the same period in
1998. The increase was due to the addition of professional service employees
and a greater allocation of programming personnel related to the increases in
custom programming revenue. Cost of services as a percentage of total revenue
increased to 7.5% from 7.4% for the six months ended June 30, 1998. Cost of
services as a percentage of service revenue increased to 70.4% for the six
months ended June 30, 1999 from 67.0% in 1998. The increase was related to the
addition of personnel to meet the demand for custom programming, training and
professional services.
TOTAL COST OF SALES AND SERVICES. Total cost of sales and services increased by
31.2% to $10.0 million for the six months ended June 30, 1999, compared to $7.6
million for the same period in 1998. The increase in total cost of sales and
services is attributable to higher hardware and personnel costs.
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GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 42.7%
to $4.2 million for the six months ended June 30, 1999, compared to $2.9
million for the same period in 1998. This increase was primarily due to
$390,000 in additional salaries and benefits resulting from increases in
administrative personnel related to an expanding workforce and client base, and
approximately $856,000 of additional communication, recruiting, insurance,
travel, professional fees, and other expenses related to the expanded
workforce. General and administrative expenses as a percentage of total revenue
decreased to 19.5% for the six months ended June 30, 1999 from 21.4% for the
same period in 1998.
SALES AND MARKETING. Sales and marketing expenses increased by 150.4% to $2.7
million for the six months ended June 30, 1999, compared to $1.1 million for
the same period in 1998. This increase resulted from additional personnel
costs, increased trade show expenses, and expanded marketing and advertising
programs. Sales and marketing expenses as a percentage of total revenue
increased to 12.6% for the six months ended June 30, 1999 from 7.9% for the six
months ended June 30, 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 30.3% to
$1.4 million during the six months ended June 30, 1999, compared to $1.1
million for the same period in 1998. This increase was primarily due to
additional development salaries relating to improvements to existing products
and ongoing development of new products such as new modules and MACS for UNIX.
INCOME FROM OPERATIONS. As a result of the foregoing factors, the Company's
income from operations increased by $2.2 million to $3.2 million for the six
months ended June 30, 1999 as compared to income of $1.0 million for the six
months ended June 30, 1998.
OTHER INCOME (EXPENSE) NET. Net interest income, which includes interest
expense associated with the $12.0 million aggregate principal amount of
Convertible Debentures held by the Lenders and interest income on available
cash, increased to $544,000 for the six months ended June 30, 1999, compared to
net interest expense of $864,000 for the same period in 1998. The increase was
due to interest income earned on proceeds received from the Company's initial
public offering on January 29, 1999, and the underwriter exercising the
overallotment option to purchase additional shares from the Company on February
26, 1999. Also, the Company is no longer accruing interest on the Convertible
Debentures, which were converted on January 29, 1999, concurrent with the
closing of the initial public offering.
INCOME TAX (EXPENSE) BENEFIT. The historical effective tax rate for the six
months ended June 30, 1999 was 30.5%. There was no effective tax rate
applicable for the six months ended June 30, 1998 due to the Company's
Subchapter S Corporation status. The pro forma tax rate for the six months
ended June 30, 1999 was 39.4% compared to a pro forma tax benefit of 11.6% in
1998 which assumed the Company was taxed as a C Corporation. The tax benefit
for the first six months of 1999 was due to a one-time tax benefit of $330,000
which resulted from the Company recording its beginning deferred tax assets in
connection with the Company becoming a C Corporation as of January 1, 1999. The
effective income tax rate differs from the federal statutory rates because of
the following: (i) the effect of state income taxes; (ii) net losses of foreign
subsidiaries for which no income tax benefit has been realized and (iii) the
set up of the beginning deferred tax assets. Also, effective rates vary between
periods because of the differing effects the net income and losses of foreign
subsidiaries have on income before income taxes.
NET INCOME. As a result of the above factors, the Company's net income
increased by $2.4 million to $ 2.6 million for the six months ended June 30,
1999 compared to net income of $146,000 in 1998. The Company's pro forma net
income increased by $2.1 million to $ 2.6 million for the six months ended June
30, 1999 compared to pro forma net income of $163,000 in 1998.
LIQUIDITY AND CAPITAL RESOURCES
On January 29, 1999, the Company and selling shareholders sold 4,410,000 shares
of its common stock in an initial public offering from which the Company
received proceeds of $43,483,000 net of underwriter commissions and offering
costs. At that time, the Convertible Debentures were converted into the
Redeemable Convertible Preferred Stock and the Redeemable Participating
Preferred Stock and the Redeemable Convertible Preferred Stock was then
converted into 2,255,614 shares of common stock.
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On February 3, 1999, the Company redeemed in full the Redeemable Participating
Preferred Stock for $12,000,000 and paid accrued interest in the amount of
$4,665,000. On February 26, 1999, the underwriter exercised the option to
purchase 661,500 additional shares of the Company's common stock from which the
Company received net proceeds of $7,382,340.
At June 30, 1999, the Company's primary sources of liquidity consisted of cash
and cash equivalents totaling $38.4 million.
For the six months ended June 30, 1999, the Company's operating activities used
cash of $2.0 million. For the six months ended June 30, 1998, operating
activities provided $1.2 million. The use of cash in 1999 was primarily related
to the repayment of accrued interest on the Convertible Debentures.
Cash used in investing activities was approximately $652,000 and $345,000, for
the six months ended June 30, 1999 and 1998, respectively. 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. The Company expects its rate of
purchases of property and equipment to increase as its employee base grows.
For the six months ended June 30, 1999, cash provided by financing activities
totaled $39.5 million, which consisted of proceeds received from the Company's
initial public offering and the underwriters' option to purchase additional
shares, employee stock option exercises and an income tax benefit related to
the stock option exercises. This was offset by repayment in full of the
Convertible Debentures, and payment of offering costs related to the Company's
initial public offering.
As of June 30, 1999, the Company had working capital of approximately $41.1
million as compared to working capital of approximately $873,000 at June 30,
1998. The change in working capital from June 30, 1998 to June 30, 1999,
resulted primarily from an increase in current assets of $39.0 million due to
cash proceeds from the Company's initial public offering, the underwriters'
exercising their option to purchase additional shares from the Company, and
income from operations.
Management believes that it has adequate cash to finance operations in the
foreseeable future.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the Year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, prior to
January 1, 2000, computer systems and/or software used by many companies may
need to be upgraded to comply with such Year 2000 requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance. The original design of MACS featured a
four-position century field, which provided century independence. The only
exception to this feature was the GTS program developed by a third-party
provider and incorporated into MACS to provide general ledger and accounts
payable functions.
The Company's MACS products have been determined to be fully Year 2000
compliant, except for the GTS program. The Company performed tests of all major
functionality within the MACS family of software products; specifically those
areas which utilize date fields. GTS provided Year 2000 compliant code to the
Company in September 1998. With respect to the GTS programs, the Company has
identified all changes necessary to integrate the Year 2000 compliant code into
MACS. The Company completed the internal functional integration and made
available compliant code for supported MACS versions in March 1999. Total
expenditures for time and materials to implement such changes were less than
$40,000. The Company has also reviewed all material vendor systems for Year
2000 compliance and either confirmed that these systems are Year 2000 compliant
or obtained Year 2000 compliance statements from the respective vendor. All of
the Company's mission-critical network and desktop software is Year 2000
compliant. The Company's total expenditures for time and materials to make such
systems Year 2000 compliant were approximately $16,000. In addition, the
Company has reviewed all of its internal systems including its hardware and
software systems, its embedded systems, networks, accounting systems, and
development, testing, training and demonstration platforms for Year 2000
compliance. The Company has upgraded all internal systems to Year 2000
compliant operating system versions where compliance statements were not
provided for such systems. There were no material costs incurred by the Company
in connection with testing its vendor or internal systems. All of the Company's
non-IT systems are Year 2000 compliant. Any failure of the Company or its
suppliers or clients to be Year 2000 compliant, however, could result in a
material adverse effect on the Company's business, financial condition and
results of operations.
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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 in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 29, 1999, the Company and selling shareholders sold 4,410,000 shares
of its common stock in an initial public offering from which the Company
received proceeds of $43,483,000 net of underwriter commissions and offering
costs. At that time, the outstanding Convertible Debentures were converted into
Redeemable Convertible Preferred Stock and Redeemable Participating Preferred
Stock. Contemporaneous with the offering, the Lenders converted the redeemable
convertible stock into 2,255,614 shares of common stock.
On February 3, 1999, the Company redeemed in full the Redeemable Participating
Preferred Stock for $12,000,000 and paid accrued interest in the amount of
$4,665,000. On February 26, 1999, the underwriter exercised the option to
purchase 661,500 additional shares of the Company's common stock from which the
Company received net proceeds of $7,382,340.
As of August 13, 1999, the proceeds of the Offering have been used as follows:
(i) to redeem in full the Company's outstanding Redeemable Participating
Preferred Stock ($12.0 million) and (ii) to repay accrued interest related to
the Convertible Debentures ($4.7 million). Management expects that the balance
of the net proceeds of the Offering will be utilized to finance potential
future acquisitions and for general corporate purposes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K
None.
FORWARD LOOKING STATEMENTS
Certain matters discussed in this Form 10-Q may be "forward-looking statements"
as defined in the Private Securities Litigation Reform Act of 1995, including
but not limited to statements related to plans for future business development
activities, anticipated costs of revenues, product mix and service revenues,
research and development and selling, general and administrative activities,
and liquidity and capital needs and resources. Such forward-looking statements
are subject to risks, uncertainties and other factors, which could cause actual
results to differ materially from future results expressed or implied by such
forward-looking statements. Investors are cautioned that any forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
contemplated by such forward-looking statements.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 13, 1999 SMITH-GARDNER & ASSOCIATES, INC.
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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EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
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