UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT UNDER 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 _____________
COMMISION FILE NUMBER: 000-27257
SMARTDISK CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 65-0733580
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3506 Mercantile Avenue, Naples, Florida 34104
---------------------------------------------
(Address of principal executive offices)
(941) 436-2500
--------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
---------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
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) Yes [X] No [ ], and (2) has been subject to
such filing requirements for the past 90 days. Yes [ ] No [X].
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15 (d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes ______________ No ______________
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
As of October 31, 1999, there were 15,976,011 shares of the Registrant's Common
Stock outstanding, par value $0.001.
<PAGE>
SMARTDISK CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
1) Condensed Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998.
2) Condensed Consolidated Statements of Operations for the three months
ended and nine months ended September 30, 1999 and 1998.
3) Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998.
4) Notes to Condensed Consolidated Financial Statements -- September 30,
1999.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Item 3. Quantitative and Qualitative Disclosure of Market Risk
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit 27.1 - Financial Data Schedule (available in EDGAR format only)
2
<PAGE>
PART I - FINANCIAL INFORMATION
SMARTDISK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------------------- ---------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,186,266 $ 2,919,728
Restricted cash 1,050,000 1,050,000
Accounts receivable, net 5,492,294 2,195,356
Notes receivable 4,775,561 1,381,886
Inventories, net 537,941 1,689,020
Prepaid expenses and other current assets 2,500,165 280,291
--------------------- ---------------------
Total current assets 18,542,227 9,516,281
Property and equipment, net 2,324,034 682,014
Intangible assets, net 1,077,667 740,978
Capitalized IPO costs 1,630,973 -
Deposits and other assets 241,663 196,682
--------------------- ---------------------
TOTAL ASSETS $ 23,816,564 $ 11,135,955
===================== =====================
LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 5,923,553 $ 3,706,297
Bank line of credit 4,746,082 2,247,718
Deferred research and development contract revenue 2,335,121 -
Other accrued liabilities 2,456,354 693,590
--------------------- ---------------------
Total current liabilities 15,461,110 6,647,605
Deferred income tax liability 353,871 184,658
Stockholder loan - 648,147
Commitments and contingencies
Redeemable common stock; 2,487,500 shares issued
and outstanding 9,991,918 9,991,918
Stockholders' deficit:
Preferred stock, $.001 par value; 5,000,000 shares
authorized; none issued - -
Common stock, $.001 par value; 60,000,000 shares authorized;
10,116,988 issued and 10,036,011 outstanding at September 30,
1999; 9,296,723 issued and 9,216,496 outstanding at
December 31, 1998 10,117 9,297
Capital in excess of par value 21,915,640 16,351,092
Treasury stock, 80,977 shares at September 30, 1999 and
80,227 shares at December 31, 1998, at cost (58,304) (57,764)
Accumulated other comprehensive income 714,515 478,948
Notes receivable from officers/employees (417,334) (417,334)
Accumulated deficit (24,154,969) (22,700,612)
--------------------- ---------------------
Total stockholders' deficit (1,990,335) (6,336,373)
--------------------- ---------------------
TOTAL LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS'
DEFICIT $ 23,816,564 $ 11,135,955
===================== =====================
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
SMARTDISK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ -------------------------------------
1999 1998 1999 1998
--------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Revenues
Product sales $11,330,427 $ 4,848,850 $ 25,127,147 $ 8,638,829
Royalties 133,233 40,096 329,253 222,419
--------------- ----------------- ---------------- -----------------
Total revenues 11,463,660 4,888,946 25,456,400 8,861,248
Cost of revenues 6,968,112 3,368,673 17,239,130 6,621,191
--------------- ----------------- ---------------- -----------------
Gross profit 4,495,548 1,520,273 8,217,270 2,240,057
Operating expenses
Research and development 1,416,864 292,653 3,870,355 977,524
Sales and marketing 733,474 819,322 2,176,859 1,550,072
General and administrative 1,397,494 1,075,628 3,368,902 3,161,527
--------------- ----------------- ---------------- -----------------
Total operating expenses 3,547,832 2,187,603 9,416,116 5,689,123
--------------- ----------------- ---------------- -----------------
Operating income (loss) 947,716 (667,330) (1,198,846) (3,449,066)
Interest and other income (expense) 13,625 (16,779) 71,906 (2,456)
--------------- ----------------- ---------------- -----------------
Net income (loss) before income taxes 961,341 (684,109) (1,126,940) (3,451,522)
Income tax expense (benefit) 259,651 6,158 327,417 (32,236)
--------------- ----------------- ---------------- -----------------
Net income (loss) $ 701,690 $ (690,267) $ (1,454,357) $ (3,419,286)
=============== ================= ================ =================
Earnings (loss) per share - basic $ 0.07 $ (0.09) $ (0.16) $ (0.43)
=============== ================= ================ =================
Earnings (loss) per share - diluted $ 0.05 $ (0.09) $ (0.16) $ (0.43)
=============== ================= ================ =================
Weighted average shares used to calculate
earnings (loss) per share amounts
Basic 9,616,286 8,031,979 9,234,346 7,876,561
=============== ================= ================ =================
Diluted 12,766,328 8,031,979 9,234,346 7,876,561
=============== ================= ================ =================
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
SMARTDISK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------------
1999 1998
------------------- ---------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,454,357) $ (3,419,286)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 936,802 444,383
Amortization 387,121 282,339
Bad debt expense 81,469 32,561
Provision for inventory obsolescence 100,900 -
Employee stock option expense 76,500 -
Deferred income tax benefit 169,213 (66,399)
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivables (3,378,407) (453,579)
Notes receivable (3,393,675) (479,117)
Inventories 1,050,179 (2,136,459)
Prepaid expenses and other current assets (2,219,874) (53,089)
Capitalized IPO costs (1,630,973) -
Deposits and other assets (39,979) (168,938)
Intangible assets (429,156) -
Increase (decrease) in liabilities:
Accounts payable 2,217,256 2,144,627
Deferred research and development contract revenue 2,335,121 -
Other accrued liabilities 1,762,764 762,463
------------------- ---------------------
Net cash used in operating activities (3,429,096) (3,110,494)
Cash flows from investing activities:
Purchases of property and equipment (2,399,110) (939,797)
Increase in restricted cash - (1,079,590)
------------------- ---------------------
Net cash used in investing activities (2,399,110) (2,019,387)
Cash flows from financing activities:
Proceeds from issuance of exchangeable note - 5,000,000
Net proceeds from line of credit 2,498,364 477,684
Repayment of stockholder loan - (4,323,970)
Repayment of loan from related parties - (1,045,000)
Proceeds from sale of redeemable common stock - 4,950,000
Proceeds from sale of common stock 4,300,000 165,000
Proceeds from exercise of stock options 175,496 94,967
Proceeds from sale of stock by SDL 65,225 -
Purchase of treasury stock (540) (57,764)
------------------- ---------------------
Net cash provided by financing activities 7,038,545 5,260,917
Effect of exchange rate fluctuations on cash 56,199 (19,968)
------------------- ---------------------
Increase (decrease) in cash 1,266,538 111,068
Cash and cash equivalents at beginning of period 2,919,728 329,778
------------------- ---------------------
Cash and cash equivalents at end of period $ 4,186,266 $ 440,846
=================== =====================
Significant non-cash activities:
Acquisition of SDL patents $300,000
Conversion of stockholder loan to capital $648,147
Exchange of note payable plus accrued interest for redeemable
common stock $5,041,918
Notes receivable obtained for stock option exercise $417,334
Issuance of common stock for licenses and trademarks $300,000 $600,000
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements for
SmartDisk Corporation ("SmartDisk" or the "Company") have been prepared in
accordance with generally accepted accounting principles for the interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine-month periods ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999. The balance sheet at December 31,
1998 has been derived from the audited financial statements at that date but
does not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
Certain amounts in prior periods have been reclassified to conform to the
current period presentation.
For further information, refer to the consolidated financial statements and
footnotes thereto for the six months ended June 30, 1999 and 1998 (unaudited)
and the years ended December 31, 1998, 1997 and 1996 included in the Company's
Registration Statement on Form S-1 (Commission File No. 333-82793), which was
declared effective on October 5, 1999.
NOTE 2. STOCKHOLDERS' DEFICIT
In January and July 1999, SmartDisk sold a total of 650,000 shares of its common
stock in private transactions for gross proceeds of $4.3 million.
In August 1999, the Company completed a reverse stock split of one for four.
These condensed consolidated financial statements and footnotes have been
retroactively restated to reflect the reverse stock split in the prior periods,
including all references in the financial statements to number of shares and per
share amounts.
In August 1999, the Company amended and restated its Certificate of
Incorporation such that the number of shares of authorized capital stock was
increased to 65,000,000 shares, consisting of 60,000,000 shares of common stock
with a par value of $0.001 per share and 5,000,000 shares of preferred stock
with a par value $0.001 per share.
6
<PAGE>
NOTE 3. EARNINGS (LOSS) PER SHARE DATA
Basic earnings (loss) per share is calculated by dividing net income (loss) by
the weighted average number of common shares outstanding during the period.
Diluted earnings (loss) per share is calculated by dividing net income (loss) by
the weighted average number of common shares outstanding for the period plus the
dilutive effect of the conversion of the outstanding redeemable common stock,
outstanding shares of non-vested stock and outstanding stock options using the
"treasury stock" method. For all of 1998 and the nine months ended September 30,
1999, the redeemable common stock, shares of non-vested stock and stock options
were excluded from the calculation of earnings (loss) per share because they
were anti-dilutive. They have been included in the computation of earnings per
share for the three months ended September 30, 1999 due to their dilutive effect
on earnings per share.
The following table sets forth the computation of basic and diluted earnings
(loss) per share for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ----------------------------------
1999 1998 1999 1998
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Basic:
Net income (loss) $ 701,690 $ (690,267) $(1,454,357) $(3,419,286)
============== ============== =============== ===============
Weighted average shares outstanding 9,616,286 8,031,979 9,234,346 7,876,561
============== ============== =============== ===============
Basic earnings (loss) per share $ 0.07 $ (0.09) $ (0.16) $ (0.43)
============== ============== =============== ===============
Diluted:
Net income (loss) $ 701,690 $ (690,267) $(1,454,357) $(3,419,286)
============== ============== =============== ===============
Weighted average shares outstanding 9,616,286 8,031,979 9,234,346 7,876,561
Effect of conversion of redeemable common
stock 2,487,500 - - -
Effect of non-vested stock 395,420 - - -
Net effect of dilutive stock options--based
on the treasury stock method 267,122 - - -
-------------- -------------- --------------- ---------------
12,766,328 8,031,979 9,234,346 7,876,561
============== ============== =============== ===============
Diluted earnings (loss) per share $ 0.05 (0.09) $ (0.16) $ (0.43)
============== ============== =============== ===============
</TABLE>
7
<PAGE>
NOTE 4. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes all changes in equity that result from
transactions and other economic events during the period other than transaction
with stockholders. The significant components of other comprehensive income
(expense) for the Company include equity adjustments resulting from the
translation of the balance sheet for the Japanese branch and the European
subsidiary. The following table sets forth the computation of comprehensive
income (loss) for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Net income (loss) $ 701,690 $ (690,267) $(1,454,357) $(3,419,286)
Other comprehensive income (expense):
Currency translation adjustment 240,998 57,461 235,567 (4,377)
--------------- -------------- --------------- --------------
Total comprehensive income (loss) $ 942,688 $ (632,806) $(1,218,790) $(3,423,663)
=============== ============== =============== ==============
</TABLE>
NOTE 5. SEGMENT INFORMATION
SmartDisk operates in the United States, Japan and Europe and derives
substantially all of its revenues from sales of its FlashPath product, a
solid-state electronic device in the shape of a 3.5-inch floppy diskette. The
Company operates in one reportable business segment. There have been no
significant changes in our operating segments or in the geographic location of
our long-lived assets since June 30, 1999, the date of our most recent audited
financial statements included in our prospectus dated October 5, 1999.
NOTE 6. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. Because SmartDisk
currently holds no derivative instruments and does not engage in hedging
activities, we expect that the adoption of SFAS No. 133 will have no material
impact on our financial position, results of operations or cash flows. We will
be required to implement SFAS No. 133 for the year ending December 31, 2001.
8
<PAGE>
NOTE 7. SUBSEQUENT EVENTS
On October 5, 1999, the Company's Registration Statement filed on Form S-1 with
the Securities and Exchange Commission was declared effective. The Company
realized net proceeds of approximately $33.8 million from the sale of 3,000,000
shares of common stock at an initial public offering price of $13.00 per share
after deducting offering expenses of approximately $2.5 million and underwriting
discounts and commissions. In addition, the underwriters fully exercised their
option to purchase an additional 450,000 shares of common stock at the offering
price resulting in net additional proceeds to the Company of approximately $5.4
million after deducting underwriting discounts and commissions.
Upon the successful completion of the Company's initial public offering, the
2,487,500 shares of redeemable common stock outstanding as of September 30,
1999, converted into nonredeemable common stock.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and the notes thereto included in
Item 1 of this Quarterly Report.
Certain statements contained in this report on Form 10-Q are forward-looking in
nature within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities and Exchange Act of 1934. These forward-looking
statements involve risks and uncertainties that could cause actual results to
differ materially from those in such forward-looking statements. Readers are
cautioned not to place undue reliance on the forward-looking statements included
in this document, which are based on information available to the Company on the
date hereof. The Company makes no commitment to update any such forward-looking
statements or to disclose any facts, events, or circumstances after the date
hereof that may affect the accuracy of any forward-looking statement. Readers
should carefully review the risks described in other documents we file from time
to time with the Securities and Exchange Commission, including the Company's
Prospectus dated October 5, 1999.
OVERVIEW
SmartDisk designs and develops products that enable consumers to easily share
digital data among advanced consumer electronic products, PCs and the Internet.
Consumers are increasingly relying on the transfer of digital information
between electronic devices as an important part of their daily lifestyles. We
believe that our products provide an easy-to-use, cost-effective and versatile
solution for the exchange of digital data. Our patented products, FlashPath and
Smarty, allow consumers to use the familiar 3.5 inch floppy drive--found on most
PCs worldwide--to simplify the exchange of images, music, voice and other
digital data. This widely recognized format reduces consumer intimidation
frequently created by new technologies, facilitating the adoption of our
products and various consumer-oriented digital appliances.
Our FlashPath and Smarty products can be used with a variety of PC hardware
platforms and software environments. Our driver software is included with our
products and can also be downloaded free of charge from the Internet. The
software enables our products to operate with Windows 95, Windows 98, Windows
NT, NEC Windows and Macintosh operating systems. The versatility of our products
will become more important as consumers increase their reliance on flash memory
cards to store and transfer digital data where traditional memory storage
devices such as floppy disks are inadequate due to capacity or form factor
constraints. FlashPath transfers digital data to the PC without cables or
hardware installation and without using limited desktop space or personal
computer ports.
10
<PAGE>
Our current FlashPath product is used primarily to transfer images to PCs from
digital cameras using the Toshiba SmartMedia flash memory card. SmartMedia cards
are used in cameras made by a number of leading camera manufacturers, including
FujiFilm, Olympus, Polaroid, Ricoh, Sanyo, Sharp and Toshiba.
We are currently developing, with Sony and SanDisk, additional FlashPath
products to support their flash memory cards--the Memory Stick and the
MultiMediaCard. These flash memory cards are expected to have applications in
"smart" cellular phones, digital cameras and camcorders, digital audio players
and video game devices. In addition to our product development efforts with Sony
and SanDisk, we also have strategic relationships with a number of key
electronics industry companies, including Atmel, Hitachi, Mitsumi, NEC, Toshiba
and Yamaichi. Our strategic partners actively participate in the development of
our product pipeline, provide us with access to leading-edge manufacturing
capabilities, and market and distribute our products globally.
RESULTS OF OPERATIONS
REVENUES. Our product revenues from the sale of our FlashPath and Smarty
products are recognized at the time of shipment to customers. Our royalty
revenues consist of royalties earned on the sales of our first product,
SafeBoot, which is licensed to and sold by Fischer International, an affiliate.
Our total revenues were approximately $11.5 for the three months ended September
30, 1999 compared to approximately $4.9 million for the same period of the
preceding year. Total revenues were approximately $25.5 million for the nine
months ended September 30, 1999 compared to approximately $8.9 million in the
same period of the preceding year. These increases were attributable to higher
sales of our FlashPath product, which was commercially introduced by SmartDisk
in mid-1998, partially offset by decreases in our Smarty sales of approximately
$160,000 for the three months ended September 30, 1999 and $440,000 for the nine
months ended September 30, 1999. As a result of the growth of our FlashPath
revenues and the decrease in Smarty sales, Smarty revenues represented less than
3% of total revenues in the nine months ended September 30, 1999 compared to 11%
in the nine months ended September 30, 1998.
COST OF REVENUES. Cost of revenues includes the purchased cost of product,
packaging, freight and royalties for our FlashPath and Smarty products, the
creation of disks for our SafeBoot product and scrap and inventory provisions.
Cost of revenues increased to approximately $7.0 million for the three months
ended September 30, 1999 compared to approximately $3.4 million for the same
period of the preceding year. Cost of revenues were approximately $17.2 million
for the nine months ended September 30, 1999 compared to approximately $6.6
million for the same period of the preceding year. These increases in cost were
due primarily to the increase in sales of our FlashPath product.
11
<PAGE>
GROSS PROFIT. Our gross profit for the third quarter of 1999 increased to
approximately $4.5 million or 39% of revenue, compared to approximately $1.5
million or 31% of revenue in the comparable quarter of 1998. Our gross profit
for the nine months ended September 30, 1999 increased to approximately $8.2
million or 32% of revenue, compared to approximately $2.2 million or 25% of
revenue in the comparable period of the preceding year. The increase in the
gross profit and gross profit percentage from year to year is primarily the
result of revenue growth and improved margins on our FlashPath product. The
improved FlashPath product margins achieved in the third quarter are related to
our efforts to reduce our cost per unit and a favorable mix associated with
higher shipments to customers outside of our largest OEMs. We expect gross
margins on our FlashPath product for SmartMedia to remain approximately
consistent with the current level; however, our largest OEM customers may seek
price concessions, which could cause a reduction in our gross margins.
RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses consist
primarily of salaries and payroll-related expenses for our design and
development engineers, as well as prototype supplies and contract or
professional services. These expenses increased to approximately $1.4 million
for the third quarter of 1999 compared to approximately $290,000 in the
comparable period of the preceding year. Approximately $580,000 of this increase
was attributable to the hiring of additional technical personnel, including
salaries and related payroll expenses, approximately $310,000 to costs incurred
in conjunction with a research and development contract and approximately
$190,000 to the outsourcing of product development.
Research and development expenses increased to approximately $3.9 million for
the first nine months of 1999 compared to approximately $980,000 in the
comparable period of the preceding year. Approximately $1.1 million of this
increase was attributable to the hiring of additional technical personnel,
including salaries and related payroll expenses, approximately $1.0 million to
costs associated with a research and development contract and approximately
$470,000 to the outsourcing of product development.
All of these expenses were to support our development of enhanced versions of
our existing FlashPath and Smarty products, as well as our development of new
FlashPath products designed to work with the Sony Memory Stick and the SanDisk
MultiMediaCard. We expect that our research and development expenses will
continue to increase in connection with the development of our future FlashPath
products.
SALES AND MARKETING EXPENSES. Sales and marketing expenses include salaries,
benefits and travel expenses for our sales, marketing and product management
personnel in the United States and Japan. These expenses also include other
selling and marketing expenditures for items such as trade shows, marketing and
promotional programs. Sales and marketing expenses decreased to approximately
$730,000 for the third quarter of 1999 compared to approximately $820,000 in the
comparable period of the preceding year. The higher costs in 1998 are
attributable to various additional costs incurred with the introduction of the
FlashPath product including salaries and payroll related expenses to ramp up our
Tokyo, Japan office which was established in March 1998.
12
<PAGE>
Sales and marketing expenses for the first nine months of 1999 increased to
approximately $2.2 million compared to $1.6 million in the comparable period of
the preceding year. Approximately $300,000 of this increase was attributable to
additional staffing, including salaries and related expenses, at our Tokyo,
Japan office, approximately $100,000 to additions in our sales and marketing
staff and related expenses at our headquarters office in Florida, and
approximately $200,000 to promotional programs, including travel and related
expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses include
the salaries and related expenses of our executive management, finance,
information systems, human resources, legal and administrative functions, as
well as lease rental expense, utilities, maintenance expenses, taxes, insurance,
legal and accounting professional fees, depreciation and amortization. General
and administrative expenses increased to approximately $1.4 million in the third
quarter of 1999 from approximately $1.1 million in the comparable period of the
preceding year. Such expenses increased to approximately $3.4 million in the
first nine months of 1999 from approximately $3.2 million in the comparable
period of the preceding year. The increase in expenses from year to year is
primarily due to increases in professional services, legal fees and personnel
related costs including salaries, bonuses and relocation expenses.
INTEREST AND OTHER INCOME (EXPENSE). Interest and other income (expense)
includes interest earned on cash balances, interest expense on the bank line of
credit in Japan and gains or losses on foreign exchange. There were no
significant fluctuations between the comparable periods from year to year.
PROVISION FOR INCOME TAXES. We are subject to tax in Japan and a number of other
jurisdictions where we do business, including the United States and United
Kingdom. These jurisdictions have different marginal tax rates. As of September
30, 1999, we provided for Japanese withholding tax of approximately $257,000 on
royalty income from Japan. We also provided for Japanese income tax of
approximately $164,000 due to income earned in Japan. In addition, income tax
benefits of approximately $94,000 and $70,000 were realized in the September 30,
1999 and 1998 periods due to amortization of intangible assets. As of December
31, 1998 we had a net operating loss carry forward of approximately $6.1 million
for United States federal income tax purposes. However, we have provided a
valuation allowance to reduce the related deferred tax asset to zero.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During 1998 and 1999, we financed our operations and repaid loans outstanding
through short-term borrowings and the sale of equity securities in private
placements with several strategic investors. At September 30, 1999, we had total
cash and cash equivalents of approximately $4.2 million and working capital of
approximately $3.1 million.
Our Japanese branch has a line of credit with maximum borrowing capacity of $2.8
million (305 million Yen). The facility is collateralized by a time deposit and
accounts receivable. The Company maintains a time deposit with the bank that has
a balance at September 30, 1999 of approximately $1.0 million. We may borrow up
to 90% of this amount. In addition, accounts receivable of up to $1.9 million
(200 million Yen) of specified trade customers may be used as additional
collateral. The interest rate on borrowings under the credit facility is 1.375%
per year and the credit facility must be renewed every six months. The current
agreement expires on December 25, 1999. The outstanding balance under the line
of credit was approximately $1.9 million and approximately $870,000 as of
September 30, 1999 and December 31, 1998, respectively.
The Japanese branch also discounts certain short-term promissory notes received
from trade customers with the bank. Bank borrowings collateralized by promissory
notes totaled approximately $2.9 million at September 30, 1999 and approximately
$1.4 million at December 31, 1998.
Net cash used in operating activities was approximately $3.4 million for the
first nine months of 1999 as compared to approximately $3.1 million for the
first nine months of 1998. Net cash used in operating activities for the first
nine months of 1999 was due to an approximate $1.5 million net loss and
increases in accounts and notes receivable of approximately $6.8 million,
prepaid expenses and other current assets of approximately $2.2 million and
capitalized IPO costs of approximately $1.6 million. These amounts were
partially offset by a decrease in inventories of approximately $1.1 million and
increases in accounts payable of approximately $2.2 million, accrued expenses of
approximately $2.3 and deferred research and development revenues of
approximately $1.8 million.
Net cash used in investing activities was approximately $2.4 million for the
first nine months of 1999. Cash was used for capital expenditures, primarily the
acquisition of production equipment for the manufacture of our products in
Japan.
Net cash provided by financing activities was approximately $7.0 million in the
first nine months of 1999. This was primarily attributable to approximately $4.5
million in proceeds from private sales of the Company's common stock and the
exercise of stock options, as well as, approximately $2.5 million in net
borrowings under the Company's line of credit.
14
<PAGE>
In October 1999, Smartdisk successfully completed its initial public offering of
3,000,000 shares of common stock at $13 per share. In addition, the underwriters
fully exercised their over-allotment option to purchase an additional 450,000
shares of common stock at the offering price. After deducting discounts and
commissions and estimated offering expenses, we realized net proceeds of
approximately $39.2 million.
We believe that our cash and cash equivalents, credit facility and the net
proceeds of the initial public offering, will be sufficient to meet our working
capital and anticipated capital expenditure needs for at least the next 12
months. We may need to raise additional capital if we expand more rapidly than
initially planned, to develop new or enhanced products and/or services, to
respond to competitive pressures or to acquire complementary products,
businesses or technologies. The capital, if needed, may not be available or may
not be available on terms acceptable to us.
YEAR 2000 ISSUE
The "Year 2000 Issue" refers generally to the problems that some software may
have in determining the correct century of the year. Many existing electronic
systems, including computer systems, use only the last two digits to refer to a
year. Therefore, these systems may recognize a date using "00" as 1900 rather
than the year 2000. If not corrected, these electronic systems could fail or
create erroneous results when addressing dates on and after January 1, 2000.
In assessing the effect of the Year 2000 Issue on SmartDisk, we determined that
we need to evaluate four general areas:
o Supplier relationships;
o Internal infrastructure;
o Products sold to customers; and
o Other third-party relationships.
MANUFACTURER AND SUPPLIER RELATIONSHIPS. We outsource the manufacturing of our
products to a number of subcontractors. If our subcontractors are affected by
the Year 2000 Issue, our supply of products could be delayed or eliminated. Any
disruption in our supply of products from our subcontractors would seriously
harm our business, financial condition and results of operations. We have
obtained assurances on Year 2000 compliance from some of our suppliers who
provide critical components to our major products. We will continue to seek
assurance from our other suppliers on their Year 2000 readiness. We have
obtained assurances on Year 2000 compliance from our major subcontractors that
their manufacturing of our products will be unaffected by the Year 2000 Issue.
We will continue to seek assurance from our other subcontractors on their Year
2000 readiness.
15
<PAGE>
INTERNAL INFRASTRUCTURE. The Year 2000 Issue could also affect our internal
systems, including both our information technology and non-information
technology systems. We have completed an assessment of our material internal
information technology systems, including third-party software and hardware
technology. In addition, we have implemented changes to our network and
workstation software and hardware for our internal information technology
systems to make them Year 2000 ready. We have also completed an assessment of
our internal non-information technology systems, such as our test facility, and
we have implemented changes to those critical internal non-information
technology systems to make them Year 2000 ready. We will continue to monitor and
maintain all internal systems into the year 2000. We have completed our
remediation plan for non-compliant or possibly non-compliant information
technology systems.
PRODUCTS SOLD TO CUSTOMERS. Our FlashPath and Smarty products do not contain two
digit date codes and therefore are generally unaffected by the Year 2000 Issue.
However, once shipped, our products are used in conjunction with products, which
we do not develop. The performance of our products could be affected if a Year
2000 Issue exists in a different component of a customer's product. We have not,
and will not, assess the existence of these potential problems in our customers'
products.
We have received assurances from our major customers on their Year 2000
readiness. Our current or future customers may incur significant expenses to
achieve Year 2000 compliance. If our customers are not Year 2000 compliant, they
may experience significant costs to remedy problems, or they may face litigation
costs. In either case, Year 2000 issues could reduce or eliminate the budgets
that current or potential customers could have for purchases of our products and
services. As a result, our business, results of operations or financial
condition could be materially adversely affected.
OTHER THIRD-PARTY RELATIONSHIPS. We rely on outside vendors for utilities and
telecommunication services as well as climate control, building access and other
infrastructure services. We are not capable of independently evaluating the Year
2000 compliance of the systems utilized to supply these services. We cannot
assure you that these suppliers will resolve any or all Year 2000 Issues with
these systems before the occurrence of a material disruption to our business.
Any failure of these third parties to resolve Year 2000 Issues with their
systems in a timely manner could have a material adverse effect on our business,
financial condition or results of operations.
We are currently developing a contingency plan to address situations that may
result if we are unable to achieve Year 2000 readiness of our critical
operations, however, we cannot assure that all possibilities will be adequately
addressed.
Any investigations we have undertaken with respect to Year 2000 Issues have been
funded from available cash, and these costs have not been separately accounted
for. To date, these costs have not been significant.
16
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 1, 1999, SmartDisk sold an aggregate of 352,500 shares of common stock
to three investors for $2,820,000, or $8.00 per share. This included 312,500
shares purchased by SCM Microsystems, Inc. for $2,500,000, or $8.00 per share.
SmartDisk also sold an aggregate of 20,000 shares of common stock to Timothy
Tomlinson and D. James Bidzos, two of its directors, for $160,000, or $8.00
per share. Individually, Mr. Tomlinson received 7,500 shares and Mr. Bidzos
received 12,500 shares. In addition, First TZMM Investment Partnership, an
entity affiliated with Tomlinson Zisko Morosoli & Maser LLP of which Mr.
Tomlinson is a partner, acquired 27,500 shares of common stock for $220,000,
or $8.00 per share.
The sale of the above securities was deemed to be exempt from registration under
the Securities Act in reliance upon Section 4(2) of the Securities Act or Rule
701 promulgated under Section 3(b) of the Securities Act as transactions by an
issuer not involving any public offering or transactions pursuant to
compensation benefit plans and contracts relating to compensation as provided
under such Rule 701. The recipients of securities in each such transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof, and
appropriate legends were affixed to the share certificates issued in such
transactions. All recipients had adequate access, through their relationships
with the Registrant, to information about the Registrant.
On October 6, 1999, the Company completed an initial public offering of its
common stock, $.001 par value (the "Offering"). The managing underwriters for
the offering were BancBoston Robertson Stephens Inc., Hambrecht & Quist LLC and
US Bancorp Piper Jaffray Inc. (the "Underwriters"). The shares of common stock
sold in the Offering were registered under the Securities Act of 1933, as
amended, on a Registration Statement on Form S-1 (No. 333-82793) (the
"Registration Statement"). The Registration Statement was declared effective by
the Securities and Exchange Commission (the "SEC") on October 5, 1999.
The Offering commenced on October 6, 1999 and closed on October 12, 1999. On
October 15, 1999, the Underwriters fully exercised their over-allotment option
to purchase an additional 450,000 shares of common stock at the Offering price.
The purchase of these additional shares closed on October 20, 1999. A total of
3,450,000 shares of common stock in the aggregate were sold at a price of $13.00
per share resulting in gross proceeds of $44.85 million.
17
<PAGE>
The Company incurred expenses of approximately $5.65 million, of which
approximately $3.14 million represented underwriting discounts and commissions
and approximately $2.51 million represented other expenses related to the
offering. None of the expenses incurred was paid directly or indirectly to any
director, officer, general partner of the Company or their associates, persons
owning 10 percent or more of any class of equity securities of the Company, or
an affiliate of the Company, other than legal fees totaling approximately
$85,000 paid to Tomlinson Zisko Morosoli & Maser LLP of which Timothy Tomlinson,
a director of the Company, is a partner. The net offering proceeds to the
Company after total expenses was approximately $39.20 million.
We have not used any of the net proceeds from the initial public offering. The
net proceeds have been invested in cash, cash equivalents and short-term
investments. We plan to use the proceeds for general corporate purposes,
including working capital. The use of the proceeds from the offering does not
represent a material change in the use of proceeds described in the prospectus.
Upon the completion of the Company's initial public offering, the 2,487,500
outstanding shares of redeemable common stock converted into nonredeemable
common stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In July 1999, the Company submitted to its stockholders for action by written
consent each of the following proposals:
1. Approval of the adoption by the Company of a 1999 Incentive Compensation Plan
and the reservation for issuance thereunder of 2,500,000 shares of common stock.
2. Approval of the adoption by the Company of a 1999 Employee Stock Purchase
Plan and the reservation for issuance thereunder of 465,000 shares of common
stock.
3. Approval of a one for four reverse split of the Company's common stock.
4. Approval of the amendment and restatement of the Certificate of Incorporation
of the Company to increase the number of shares of capital stock to 65,000,000
shares, consisting of 60,000,000 shares of common stock with par value of $.001
per share and 5,000,000 shares of preferred stock with a par value of $.001 per
share.
The approval of the proposals required the affirmative vote of a majority of the
Company's outstanding shares of common stock and redeemable common stock, voting
together as a single class on an as-converted into common stock basis.
The Company's stockholders approved each of the proposals. Of the 12,523,511
shares of common stock and redeemable common stock outstanding as of July 22,
1999 (the record date for the action by written consent), 8,645,385 shares were
affirmatively voted in favor of all proposals.
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description
--------------- --------------------------------------------------------
27.1 Financial Data Schedule (available in EDGAR format only)
(b) Reports on Form 8-K:
None
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SmartDisk Corporation
By: /s/ MICHAEL S. BATTAGLIA
----------------------------------------------
Michael S. Battaglia
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ MICHAEL R. MATTINGLY
----------------------------------------------
Michael R. Mattingly
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: November 15, 1999
20
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27.1 Financial data schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the SmartDisk
Corporation Condensed Consolidated Balance Sheet (Unaudited) for September 30,
1999 and Condensed Consolidated Statement of Income (Unaudited) for the Nine
Months ended September 30, 1999 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,236,266
<SECURITIES> 0
<RECEIVABLES> 10,382,558
<ALLOWANCES> 114,703
<INVENTORY> 537,941<F1>
<CURRENT-ASSETS> 18,542,227
<PP&E> 3,635,522
<DEPRECIATION> 1,311,488
<TOTAL-ASSETS> 23,816,564
<CURRENT-LIABILITIES> 15,461,110
<BONDS> 0
0
0
<COMMON> 10,117
<OTHER-SE> (2,000,452)
<TOTAL-LIABILITY-AND-EQUITY> 23,816,564
<SALES> 25,127,147
<TOTAL-REVENUES> 25,456,400
<CGS> 17,239,130
<TOTAL-COSTS> 17,239,130
<OTHER-EXPENSES> 9,416,116
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,384
<INCOME-PRETAX> (1,126,940)
<INCOME-TAX> (327,417)
<INCOME-CONTINUING> (1,454,357)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,454,357)
<EPS-BASIC> (.16)<F2>
<EPS-DILUTED> (.16)
<FN>
<F1>Inventories are net of reserve of $100,900 at September 30, 1999.
<F2>The information reported above under "EPS-PRIMARY" represents basic earnings
per share for the nine months ended September 30, 1999.
</FN>
</TABLE>
