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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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: 12,207,671
shares of the Registrant's Common Stock, par value $0.01 per share,
were outstanding as of November 1, 1999.
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SMITH-GARDNER & ASSOCIATES, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 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 Nine Months Ended September 30, 1999 and 1998.......... 3
b.) Condensed Consolidated Balance Sheets
as of September 30, 1999 and December 31, 1998.................................. 4
c.) Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 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.........................................................................................17
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three months ended Nine months ended
September 30, September 30,
-------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Revenue:
License fees and software sales $7,354 $5,850 $19,152 $ 13,128
Computer hardware sales 2,670 2,895 6,535 5,340
Support 2,090 1,382 5,523 3,817
Services 1,206 962 3,480 2,464
------------ ------------ ------------ ------------
Total revenue 13,320 11,089 34,690 24,749
------------ ------------ ------------ ------------
Cost of revenue:
License fees and software sales 2,217 2,048 5,545 5,271
Computer hardware sales 2,096 2,059 4,837 3,968
Support 1,283 822 3,580 2,282
Services 866 601 2,468 1,607
------------ ------------ ------------ ------------
Total cost of revenue 6,462 5,530 16,430 13,128
------------ ------------ ------------ ------------
Gross margin 6,858 5,559 18,260 11,621
Operating expenses:
General and administrative 1,915 1,729 6,077 4,646
Sales and marketing 1,379 579 4,069 1,653
Research and development 875 577 2,258 1,638
------------ ------------ ------------ ------------
Total operating expenses 4,169 2,885 12,404 7,937
------------ ------------ ------------ ------------
Operating income 2,689 2,674 5,856 3,684
Other income (expense) 492 (418) 1,035 (1,282)
------------ ------------ ------------ ------------
Income before income taxes 3,181 2,256 6,891 2,402
Income tax expense 1,286 -- 2,417 --
------------ ------------ ------------ ------------
Net income $1,895 $2,256 $ 4,474 $ 2,402
============ ============ ============ ============
Basic net income per share $ 0.16 $ 0.43 $ 0.39 $ 0.46
============ ============ ============ ============
Diluted net income per share $ 0.15 $ 0.31 $ 0.38 $ 0.39
============ ============ ============ ============
Weighted average shares used in historical
basic per share computation 12,201 5,263 11,417 5,263
============ ============ ============ ============
Weighted average shares used in historical
diluted per share computation 12,700 8,139 11,916 8,139
============ ============ ============ ============
Income before pro forma provision for income tax expense 3,181 2,256 6,891 2,402
Pro forma provision for income tax expense 1,286 1,070 2,417 1,053
------------ ------------ ------------ ------------
Pro forma net income $1,895 $1,186 $ 4,474 $ 1,349
============ ============ ============ ============
Pro forma basic net income per share $ 0.16 $ 0.23 $ 0.39 $ 0.26
============ ============ ============ ============
Pro forma diluted net income per share $ 0.15 $ 0.18 $ 0.38 $ 0.26
============ ============ ============ ============
Weighted average shares used in pro forma
basic per share computation 12,201 5,263 11,417 5,263
============ ============ ============ ============
Weighted average shares used in pro forma
diluted per share computation 12,700 8,139 11,916 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)
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 40,800 $ 1,577
Accounts receivable, net of allowance for
doubtful accounts of $609 (unaudited) at
September 30, 1999 and $459 at December 31, 1998 7,994 5,855
Inventory 167 198
Deferred income taxes 634 --
Prepaid expenses and other current assets 641 195
-------- --------
Total current assets 50,236 7,825
Property and equipment, net 1,693 985
Deferred offering costs -- 552
Other assets 109 108
-------- --------
Total assets $ 52,038 $ 9,470
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 5,126 $ 2,755
Income tax payable 1,935 --
Current portion of capital lease obligation 44 --
Deferred revenue 1,038 1,165
-------- --------
Total current liabilities 8,143 3,920
Convertible debt and accrued interest -- 16,500
Long term portion of capital lease obligation 135 --
Deferred income taxes 52 --
-------- --------
Total liabilities 8,330 20,420
Stockholders' equity (deficit):
Common stock, $.01 par value. Authorized
50,000,000 shares; issued and outstanding
12,204,408 shares (unaudited) and 5,263,100
at September 30, 1999 and December 31, 1998,
respectively 122 53
Additional paid in capital 54,466 3,516
Accumulated deficit (10,880) (14,519)
-------- --------
Total stockholders' equity (deficit) 43,708 (10,950)
-------- --------
Total liabilities and stockholders' equity (deficit) $ 52,038 $ 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 Nine Months Ended
September 30,
-----------------------------
1999 1998
------------ ------------
Net income $ 4,474 $ 2,402
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 348 237
Non-cash compensation expense 33 19
Bad debt expense 251 46
Deferred income taxes (582) --
Change in assets and liabilities:
Accounts receivable (2,390) (3,593)
Inventory 31 (481)
Prepaid expenses and other current assets (446) (29)
Other assets (1) 4
Accounts payable and accrued expenses 2,371 3,131
Income tax payable 1,935 --
Accrued interest payable (4,500) 1,350
Deferred revenue (127) 1,279
------------ ------------
Net cash provided by operating activities 1,397 4,365
Cash flows used in investing activities:
Capital expenditures (877) (522)
------------ ------------
Net cash used in investing activities (877) (522)
Cash flows provided by (used in) financing activities:
Redemption of preferred stock (12,000) --
Issuance of common stock, net of offering costs 51,538 (374)
Distribution to stockholders (835) (71)
------------ ------------
Net cash provided by (used in) financing
activities 38,703 (445)
------------ ------------
Net increase in cash and cash equivalents 39,223 3,398
Cash and cash equivalents at beginning of period 1,577 169
------------ ------------
Cash and cash equivalents at end of period $ 40,800 $ 3,567
============ ============
Supplemental cash flow information:
Cash paid for interest $ 4,665 $ --
============ ============
Cash paid for income taxes $ 976 $ --
============ ============
Supplemental non-cash investing 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
September 30, 1999
(unaudited)
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
disclosures necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the results
for the periods presented have been included. These condensed consolidated
financial statements should be read in connection with the Annual Report on Form
10-K of Smith-Gardner & Associates, Inc. ("Company") as of and for the year
ended December 31, 1998.
(2) RECLASSIFICATION
The condensed consolidated financial statements for the nine months ended
September 30, 1998 were reclassified in order to conform to the current period
presentation.
(3) 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.
(4) COMPLETION OF INITIAL PUBLIC OFFERING AND CONVERSION
On January 29, 1999, the Company and selling shareholders sold 4,410,000 shares
of the Company's 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 underwriters exercised their option to
purchase 661,500 additional shares of the Company's common stock from which the
Company received net proceeds of $7,382,340.
(5) EARNINGS PER SHARE
Historical basic net income per share is calculated by dividing net income by
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 and adjustments to net income using the
if converted and treasury stock methods.
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 and adjustments to net income using the
if converted and treasury stock methods.
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Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------- ------------- -------------- -------------
HISTORICAL DATA:
BASIC NET INCOME:
Net income $ 1,895 $ 2,256 $ 4,474 $ 2,402
============ ============= ============ ============
Weighted average common shares outstanding 12,201 5,263 11,417 5,263
============ ============= ============ ============
Basic net income per share $ .16 $ .43 $ .39 $ .46
============ ============= ============ ============
DILUTED NET INCOME:
Net income $ 1,895 $ 2,256 $ 4,474 $ 2,402
Plus: interest expense on convertible debt -- 450 -- 1,350
Less: preferred stock dividends assuming
conversion of preferred stock -- (180) -- (540)
------------ ------------- ------------ ------------
$ 1,895 $ 2,526 $ 4,474 $ 3,212
============ ============= ============ ============
Weighted average common shares outstanding 12,201 5,263 11,417 5,263
Potentially dilutive securities:
Stock options 499 620 499 620
Convertible debt -- 2,256 -- 2,256
------------ ------------- ------------ ------------
Equivalent shares 12,700 8,139 11,916 8,139
============ ============= ============ ============
Diluted net income per share $ .15 $ .31 $ .38 $ .39
============ ============= ============ ============
PRO FORMA DATA:
BASIC NET INCOME:
Pro forma net income $ 1,895 $ 1,186 $ 4,474 $ 1,349
============ ============= ============ ============
Weighted average common shares outstanding 12,201 5,263 11,417 5,263
============ ============= ============ ============
Pro forma basic net income per share $ .16 $ .23 $ .39 $ .26
============ ============= ============ ============
DILUTED NET INCOME:
Pro forma net income $ 1,895 $ 1,186 $ 4,474 $ 1,349
Plus: interest expense on convertible debt -- 450 -- 1,350
Less: preferred stock dividends assuming
conversion of preferred stock -- (180) -- (540)
------------ ------------- ------------ ------------
$ 1,895 $ 1,456 $ 4,474 $ 2,159
============ ============= ============ ============
Weighted average common shares outstanding 12,201 5,263 11,417 5,263
Potentially dilutive securities:
Stock options 499 620 499 --
Convertible debt -- 2,256 -- --
------------ ------------- ------------ ------------
Equivalent shares 12,700 8,139 11,916 5,263
============ ============= ============ ============
Pro forma diluted net income per share $ .15 $ .18 $ .38 $ .26
============ ============= ============ ============
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(6) REVENUE RECOGNITION
The Company follows SOP 97-2, SOFTWARE REVENUE RECOGNITION. 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 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.
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.
(7) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in thousands):
September 30, December 31,
1999 1998
----------------- -----------------
Accounts payable $ 2,439 $ 1,161
Sales tax payable 878 760
Deferred rent 168 205
Accrued payroll 922 269
Accrued legal 137 127
Other 582 233
----------------- -----------------
$ 5,126 $ 2,755
================= =================
(8) 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 provision for income tax expense presented on
the condensed consolidated statements of operations for the three months and
nine months ended September 30, 1998 represent the estimated taxes that would
have been recorded had the Company been a C corporation for income tax purposes
for these periods.
The Company's S corporation status terminated in connection with the initial
public offering. The Company, pursuant to an agreement with the existing
shareholders, made a distribution on September 9, 1999 in the form of promissory
notes. The aggregate principal amount of the promissory notes was $834,743, and
represented the shareholders' individual income tax liabilities for the period
beginning January 1, 1998 and ending on December 31, 1998. The notes were paid
in full on September 13, 1999.
(9) LEGAL PROCEEDINGS
On October 26, 1999 the Company entered into a settlement agreement with Robelle
Consulting, Ltd. ("Robelle"). Under the terms of the settlement agreement, the
Company agreed to pay to Robelle on or before November 1, 1999, the sum of
$100,000, which was paid on October 27, 1999. In addition, the Company also
agreed to pay $90,000 on or before April 14, 2000. This amount was provided for
at December 31, 1998 in the condensed consolidated financial statements.
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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 SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
LICENSE FEES AND SOFTWARE SALES. Sales of license fees and software accounted
for approximately 55.2% of the Company's total revenue for the three months
ended September 30, 1999. License fees and software sales consist of license
fees for the new installation of the Company's MACS and WebOrder software and
related modules, license fees for third-party software, and additional user
license fees and software upgrades for its existing clients. License fees and
software sales are based on the number of users and type and number of CPUs.
License fees and software sales increased 25.7% to $7.4 million during the three
months ended September 30, 1999 compared to $5.9 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 $1.6
million for the three months ended September 30, 1998 to $2.7 million for the
same period in 1999, and computer software upgrades increased from $4.2 million
to $4.6 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. Sales of computer hardware accounted for approximately
20.0% of the Company's total revenue for the three months ended September 30,
1999. Sales of computer hardware consist of sales of computer hardware systems
and peripheral hardware components. Computer hardware revenue decreased 7.7% to
$2.7 million for the three months ended September 30, 1999, compared to $2.9
million for the three months ended September 30, 1998. The decrease was related
to lower total hardware upgrade sales during the three months ended September
30, 1999 compared to the same period in 1998. Computer hardware revenue relating
to new client sales increased 105.3% to $1.2 million for the three months ended
September 30, 1999, compared to $607,000 for the same period in 1998. The
increase in computer hardware sales to new clients is a direct result of more
installations during the quarter ended September 30, 1999. Computer hardware
upgrades decreased by 37.7% to $1.4 million for the three months ended September
30, 1999, compared to $2.3 million for the same period in 1998. The decrease in
hardware upgrade sales is attributable to a very large upgrade to one client
during the three months ended September 30, 1998.
SUPPORT. Support revenue accounted for approximately 15.7% of the Company's
total revenue during the three months ended September 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 51.2% to $2.1 million during the three months
ended September 30, 1999, compared to $1.4 million for the three months ended
September 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 9.1% of the Company's
revenue for the three months ended September 30, 1999. Services revenue consists
principally of revenue derived from training, consulting and custom programming.
Services revenue increased 25.4% to $1.2 million in the three months ended
September 30, 1999 compared to $962,000 for the same period in 1998. This
increase was due primarily to an expanded client base and
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increased demand for consulting services.
TOTAL REVENUE. Total revenue increased 20.1% to $13.3 million for the three
months ended September 30, 1999, compared to $11.1 million for the same period
in 1998. New client sales increased 77.2% to $4.0 million from $2.3 million for
the three months ended September 30, 1998. The increase was due to a higher
number of installations during the three months ended September 30, 1999,
compared to the same period in 1998. Also contributing to the increase were
sales of WebOrder and optional modules. Revenue from client system and component
upgrades decreased by 7.1% to $6.0 million for the three months ended September
30, 1999, compared to $6.5 million for the same period in 1998. The decrease was
attributable to a very large system upgrade from one client in the third quarter
of 1998.
COST OF LICENSE FEES AND SOFTWARE SALES. Cost of license fees and software
sales, which includes licenses fees for third-party software, installation and
training salaries directly related to new software sales, and subcontractor
fees, increased 8.2% to $2.2 million during the three months ended September 30,
1999, compared to $2.0 million for the three months ended September 30, 1998.
The increase is attributable to the addition of personnel for training and
installation and higher costs for third party software licenses. Cost of
computer software as a percentage of total revenue decreased to 16.6% from 18.5%
for the three months ended September 30, 1998. Cost of license fees and software
sales as a percentage of license fees and software sales decreased to 30.1% from
35.0% for the three months ended September 30, 1998. These decreases are due to
greater efficiencies and increased utilization of personnel resources in 1999.
COST OF COMPUTER HARDWARE SALES. Cost of computer hardware sales, which consists
of purchases of computer systems and peripheral hardware components, increased
1.8% to $2.1 million for the three months ended September 30, 1999. Costs of
computer hardware sales as a percentage of total revenue decreased to 15.7% in
the three months ended September 30, 1999 from 18.6% 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 sales as a percentage of
computer hardware sales revenue was 78.5% and 71.1% for the three months ended
September 30, 1999 and 1998, respectively. The increase resulted from hardware
price increases that were not passed through to the customers.
COST OF SUPPORT. Cost of support consists primarily of personnel costs
associated with the support of the Company's software products and third-party
computer software packages, and the cost of user documentation distributed to
clients. Cost of support increased 56.1% to $1.3 million for the three months
ended September 30, 1999 from $822,000 for the same period in 1998. The increase
was due to an 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 9.6% for the three months ended September 30, 1999 from 7.4% for
the same period in 1998. Cost of support as a percentage of support revenue
increased to 61.4% for the three months ended September 30, 1999 from 59.4% 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 44.2% to $866,000 during the
three months ended September 30, 1999, compared to $601,000 for the same period
in 1998. The increase was due to the addition of professional service and
training staff, and increased programming resources. Cost of services as a
percentage of total revenue increased to 6.5% from 5.4% for the three months
ended September 30, 1998. Cost of services as a percentage of services revenue
increased to 71.8% for the three months ended September 30, 1999 from 62.5% for
the same period in 1998. The increase was related to increased compensation
expense for additional professional services, training and programming personnel
to meet growing client demand.
TOTAL COST OF SALES AND SERVICES. Total cost of sales and services increased by
16.8% to $6.5 million for the three months ended September 30, 1999, compared to
$5.5 million for the same period in 1998. The increase in total cost of sales
and services is attributable to increased compensation expense for personnel
added to accommodate current and anticipated client demand.
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 10.7% to
$1.9 million for the three months ended September 30, 1999, compared to $1.7
million in 1998. This increase was primarily due to additional salaries and
benefits related to an expanding workforce and client base, and additional
facilities, communication, recruiting, insurance, professional fees, and other
expenses related to the Company's increased headcount. General and
administrative expenses as a percentage of total revenue decreased to 14.4% for
the three months ended September 30, 1999 from 15.6% for the same period in
1998.
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SALES AND MARKETING. Sales and marketing expenses include personnel costs,
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
138.4% to $1.4 million for the three months ended September 30, 1999, compared
to $579,000 for the same period in 1998. This increase resulted from additional
personnel costs, expenses associated with increased trade show participation,
and expanded marketing and advertising programs. Sales and marketing expenses as
a percentage of total revenue increased to 10.4% for the three months ended
September 30, 1999 from 5.2% for the three months ended September 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 51.6% to $875,000
during the three months ended September 30, 1999 compared to $577,000 for the
same period in 1998. This increase was primarily due to improvements to existing
products and ongoing development of new products such as software modules and
MACS for UNIX.
INCOME FROM OPERATIONS. As a result of the foregoing factors, the Company's
income from operations was comparable for the three months ended September 30,
1999 and September 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 previously held by certain
lenders (the "Lenders"), increased to $492,000 for the three months ended
September 30, 1999, compared to net interest expense of $418,000 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
underwriters exercising the overallotment option to purchase additional shares
from the Company on February 26, 1999. Furthermore, 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. The historical effective tax rate for the three months ended
September 30, 1999 was 40.4%. There was no effective tax rate applicable for the
three months ended September 30, 1998 due to the Company's Subchapter S
Corporation status. The pro forma effective tax rate for the three months ended
September 30, 1999 was 40.4% compared to a pro forma effective tax rate of 47.4%
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 decreased
by $361,000 to $1.9 million for the three months ended September 30, 1999 from
net income of $2.3 million for the same period in 1998. The Company's pro forma
net income increased by $709,000 to $1.9 million for the three months ended
September 30, 1999 from pro forma net income of $1.2 million for the same period
in 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
LICENSE FEES AND SOFTWARE SALES. Sales of license fees and software accounted
for approximately 55.2% of the Company's total revenue for the nine months ended
September 30, 1999. License fees and software sales increased 45.9% to $19.2
million during the nine months ended September 30, 1999 compared to $13.1
million for the same period in 1998. New client license fee and software sales
increased from $6.4 million for the nine months ended September 30, 1998 to $8.6
million for the same period in 1999. License fee and software sale upgrades
increased from $6.7 million for the nine months ended September 30, 1998 to
$10.5 million for the nine months ended September 30, 1999. The increase in 1999
resulted from a higher number of new client installations and the Company's
existing clients implementing user license and system upgrades.
COMPUTER HARDWARE SALES. Sales of computer hardware accounted for approximately
18.8% of the Company's total revenue for the nine months ended September 30,
1999. Computer hardware sales increased 22.4% to $6.5 million for the nine
months ended September 30, 1999, compared to $5.3 million for the nine months
ended September 30, 1998. Computer hardware sales relating to new client sales
increased 46.7% to $3.4 million for the nine months ended September 30, 1999,
compared to $2.3 million for the same period in 1998. The change resulted from
increased new
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client system installations in 1999. Computer hardware upgrades increased by
4.1% to $3.2 million for the nine months ended September 30, 1999, compared to
$3.0 million for the same period in 1998. The increase in 1999 was attributable
to an expanded client base.
SUPPORT. Support revenue accounted for approximately 15.9% of the Company's
total revenue during the nine months ended September 30, 1999. Support revenue
increased 44.7% to $5.5 million during the nine months ended September 30, 1999,
compared to $3.8 million for the nine months ended September 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 10.0% of the Company's
revenue for the nine months ended September 30, 1999. Services revenue increased
41.3% to $3.5 million in the nine months ended September 30, 1999 compared to
$2.5 million for the same period in 1998. This increase was due to growing
demand for consulting and training services.
TOTAL REVENUE. Total revenue increased 40.2% to $34.7 million for the nine
months ended September 30, 1999, compared to $24.7 million for the same period
in 1998. New client sales increased 37.9% to $12.0 million during the nine
months ended September 30, 1999 from $8.7 million for the nine months ended
September 30, 1998. The increase was due to the higher number of new client
installations during the nine months ended September 30, 1999. Also contributing
to the increase were sales of WebOrder and optional modules. Revenue from client
system and component upgrades increased by 40.1% to $13.7 million for the nine
months ended September 30, 1999, compared to $9.8 million for the same period in
1998 due to an expanding client base and increased sales focus directed toward
existing clients.
COST OF LICENSE FEES AND SOFTWARE SALES. Cost of license fees and software sales
increased 5.2% to $5.5 million during the nine months ended September 30, 1999,
compared to $5.3 million for the nine months ended September 30, 1998. The
increase is attributable primarily to the addition of training and installation
personnel. Cost of license fees and software sales as a percentage of total
revenue decreased to 16.0% in the nine months ended September 30, 1999 from
21.3% for the nine months ended September 30, 1998. Cost of computer software as
a percentage of software license fees decreased to 29.0% in the nine months
ended September 30, 1999 from 40.2% for the nine months ended September 30,
1998. The decrease is due to increased utilization of personnel resources in
1999, as well as higher software license upgrades which have minimal cost
associated with the sale.
COST OF COMPUTER HARDWARE SALES. Cost of computer hardware sales increased 21.9%
to $4.8 million for the nine months ended September 30, 1999, compared to $4.0
million for the same period in 1998. The increase to computer hardware cost is
related to the 22.4% increase in computer hardware revenue for the nine months
ended September 30, 1999. Costs of computer hardware sales as a percentage of
total revenue decreased to 14.0% in the nine months ended September 30, 1999
from 16.0% for the same period in 1998. Cost of computer hardware sales as a
percentage of computer hardware revenue was 74.0% and 74.3% for the nine months
ended September 30, 1999 and 1998, respectively. This marginal decrease resulted
from leasing transactions whereby the Company had minimal 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 56.9% to $3.6 million for the nine
months ended September 30, 1999 from $2.3 million for the same period in 1998.
The increase was due to the addition of support personnel necessary to meet the
requirements of the growing client base. Cost of support as a percentage of
total revenue increased to 10.3% for the nine months ended September 30, 1999
from 9.2% for the same period in 1998. Cost of support as a percentage of
support revenue increased to 64.8% for the nine months ended September 30, 1999
from 59.8% for the same period in 1998.
COST OF SERVICES. Cost of services increased 53.6% to $2.5 million during the
nine months ended September 30, 1999, compared to $1.6 million for the same
period in 1998. The increase was due to the addition of professional service
employees to meet the growing demand for training and consulting services from
the Company's growing client base. Cost of services as a percentage of service
revenue increased to 70.9% for the nine months ended September 30, 1999 from
65.2% for the same period in 1998. The increase was related to increased
compensation expense associated with addition of personnel to meet higher demand
for custom programming, training and professional services.
TOTAL COST OF SALES AND SERVICES. Total cost of sales and services increased by
25.2% to $16.4 million for the nine
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months ended September 30, 1999, compared to $13.1 million for the same period
in 1998. The increase in total cost of sales and services is attributable to
higher hardware and personnel costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 30.8%
to $6.1 million for the nine months ended September 30, 1999, compared to $4.6
million for the same period in 1998. This increase was primarily due to
additional salaries and benefits resulting from increases in administrative
personnel related to an expanding workforce and client base, and additional
facilities, 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 17.5% for the nine months
ended September 30, 1999 from 18.8% for the same period in 1998.
SALES AND MARKETING. Sales and marketing expenses increased by 146.2% to $4.1
million for the nine months ended September 30, 1999, compared to $1.7 million
for the nine months ended September 30, 1998. This increase resulted from
additional personnel costs, expenses associated with increased trade show
participation, and expanded marketing and advertising programs. Sales and
marketing expenses as a percentage of total revenue increased to 11.7% for the
nine months ended September 30, 1999 from 6.7% for the nine months ended
September 30, 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 37.8% to
$2.3 million during the nine months ended September 30, 1999, compared to $1.6
million for the same period in 1998. This increase was primarily due to
additional development resources associated with improvements to existing
products and ongoing development of new products such as software 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 $5.9 million for the nine
months ended September 30, 1999 as compared to income of $3.7 million for the
nine months ended September 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 previously held by the Lenders, and interest income on available
cash, increased to $1.0 million for the nine months ended September 30, 1999,
compared to net interest expense of $1.3 million 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 underwriters
exercising the over-allotment 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. The historical effective tax rate for the nine months ended
September 30, 1999 was 35.1%. There was no effective tax rate applicable for the
nine months ended September 30, 1998 due to the Company's Subchapter S
Corporation status. The pro forma tax rate for the nine months ended September
30, 1999 was 35.1% compared to a pro forma tax benefit of 43.8% in 1998, which
assumed the Company was taxed as a C Corporation. The Company recorded a
one-time tax benefit of $330,000 during the first nine months of 1999 which
resulted from the Company recording its beginning deferred tax assets in
connection with the Company becoming a C Corporation as of January 1, 1999. 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 $2.1 million to $4.5 million for the nine months ended September 30, 1999
compared to net income of $2.4 million for the same period in 1998. The
Company's pro forma net income increased by $3.1 million to $4.5 million for the
nine months ended September 30, 1999 compared to pro forma net income of $1.3
million for the same period 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 underwriters 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.
On August 23, 1999, the Company entered into a $7,500,000 line of credit with
NationsBank. The line of credit, which is for a one year term and provides for
interest at LIBOR plus 1.25%, will be used for general corporate use as needed.
The line of credit does not contain any conditions or restrictive covenants that
would be expected to materially affect the Company's business, financial
condition or results of operations. As of November 9, 1999, the Company has not
borrowed any funds under the line of credit.
On September 9, 1999 the Company made a distribution to its existing
shareholders as of December 31, 1998 totaling $834,743 in the form of promissory
notes due and payable, together with accrued interest, on December 31, 1999. The
aggregate amount represented the shareholders' individual income tax liabilities
for the period beginning January 1, 1998 and ending on December 31, 1998, the
date of the Company's voluntary S Corporation revocation. The notes were paid in
full on September 13, 1999.
At September 30, 1999, the Company's primary sources of liquidity consisted of
cash and cash equivalents totaling $40.8 million.
For the nine months ended September 30, 1999, the Company's operating activities
provided cash of $1.4 million. For the nine months ended September 30, 1998,
operating activities provided $4.4 million. The decrease in cash flow from
operating activities during 1999 is primarily due to an interest payment of
$4,500,000 related to the Convertible Debentures.
Cash used in investing activities was approximately $877,000 and $522,000, for
the nine months ended September 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 nine months ended September 30, 1999, cash provided by financing
activities totaled $38.7 million, which consisted primarily of proceeds received
from the Company's initial public offering and the underwriters' option to
purchase additional shares. This was offset by repayment in full of the
Convertible Debentures, payment of offering costs related to the Company's
initial public offering and distributions made to the stockholders.
As of September 30, 1999, the Company had working capital of approximately $42.1
million as compared to working capital of approximately $3.9 million at December
31, 1998. The change in working capital from December 31, 1998 to September 30,
1999, resulted primarily from an increase in current assets of $42.4 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. Total expenditures for time and materials to make such products
compliant were less than $40,000. The Company has also determined that all
material vendor systems are Year 2000 compliant. 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
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compliant were approximately $16,000. In addition, the Company 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 believed to be 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.
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. 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.
On October 26, 1999 the Company entered into a settlement agreement with
Robelle. Under the terms of the settlement agreement, the parties agreed to
fully compromise, settle, and discharge all claims and counterclaims asserted in
the respective lawsuits filed by the Company and Robelle, as described in the
Company's report on Form 10-K for the period ending December 31, 1998. In
addition, the Company agreed to pay to Robelle on or before November 1, 1999,
the sum of $100,000, which was paid on October 27, 1999, and cease the
installation and distribution of its software product MACSAccess, to all of its
HP3000 customers. The Company also agreed to commence inclusion of Robelle's
SUPRTOOL product in all new sales to HP3000 customers, and pay a fee to Robelle
for all of its existing customers that had not purchased the SUPRTOOL product.
This sum is estimated to be $90,000 and is due and payable on or before April
14, 2000. All liabilities related to the litigation were accrued in the
Company's December 31, 1998 financial statements.
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. 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 November 9, 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.
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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: November 9, 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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