<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-19155
STATE OF THE ART, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3664592
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
56 TECHNOLOGY
IRVINE, CALIFORNIA 92618
(Address of principal executive offices) (Zip Code)
(714) 753-1222
(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 periods 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
---- ----
As of May 1, 1997 the issuer had 11,277,863 shares of common stock, no par
value, outstanding.
Page 1 of 12
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STATE OF THE ART, INC.
INDEX
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PAGE No.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1997 and December 31, 1996........................... 2
Condensed Consolidated Statements of Income
Three months ended March 31, 1997
and March 31, 1996............................................. 3
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 1997
and March 31, 1996............................................. 4
Notes to Condensed Consolidated Financial Statements............. 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 6-10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 11
Item 6(a). Exhibits................................................... 11
Item 6(b). Reports on Form 8-K........................................ 11
SIGNATURES.............................................................. 12
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
STATE OF THE ART, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,246 $22,029
Short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,255 15,064
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,019 5,407
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,414 1,494
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,097 1,180
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234 109
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 84
----------- ------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,350 45,367
----------- ------------
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,472 5,334
Capitalized software development costs, net . . . . . . . . . . . . . . . . . . . 1,276 1,441
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218 189
----------- ------------
$53,316 $52,331
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,417 $ 2,481
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,271 1,544
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,661 1,046
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4
----------- ------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 4,350 5,075
----------- ------------
Accrued rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240 244
----------- ------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,590 5,319
----------- ------------
Shareholders' equity:
Preferred stock, 1,000,000 shares authorized, none issued and outstanding . . .
Common stock, no par value; 25,000,000 shares authorized; 11,276,597
and 11,157,477 shares issued and outstanding at March 31, 1997 and
December 31, 1996, respectively . . . . . . . . . . . . . . . . . . . . . . . 19,609 18,330
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,117 28,682
----------- ------------
Total shareholders' equity. . . . . . . . . . . . . . . . . . . . . . . 48,726 47,012
----------- ------------
$53,316 $52,331
=========== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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STATE OF THE ART, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
---------------------
March 31, March 31,
1997 1996
----------- ---------
<S> <C> <C>
Net revenues . . . . . . . . . . . . . . . . . . $12,682 $11,182
Cost of revenues . . . . . . . . . . . . . . . . 2,368 2,268
----------- ---------
Gross profit . . . . . . . . . . . . . . . . . . 10,314 8,914
Operating expenses:
Sales and marketing . . . . . . . . . . . . 5,744 4,388
Research and development . . . . . . . . . . 2,830 2,784
General and administrative . . . . . . . . . 1,594 1,280
----------- ----------
Total operating expenses . . . . . . . . . . . . 10,168 8,452
----------- ----------
Operating income . . . . . . . . . . . . . . . . 146 462
Interest income. . . . . . . . . . . . . . . . . 460 346
----------- ----------
Income before income taxes . . . . . . . . . . . 606 808
Provision for income taxes . . . . . . . . . . . 171 283
----------- ----------
Net income . . . . . . . . . . . . . . . . . . . $ 435 $ 525
=========== ==========
Net income per share (Note 2). . . . . . . . . . $ 0.04 $ 0.05
=========== ==========
Weighted average common shares
and equivalents (Note 2) . . . . . . . . . . . 11,672 11,451
=========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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STATE OF THE ART, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------
1997 1996
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Cash flows from operating activities:
<S> <C> <C>
Net income.............................................................. $ 435 $ 525
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization...................................... 703 564
Provision for deferred income taxes................................ (1) (27)
Loss(gain) on sale of property and equipment....................... 11 (8)
Changes in assets and liabilities:
Accounts receivable............................................. (612) 421
Inventories..................................................... 80 3
Prepaid expenses................................................ 83 (8)
Other assets.................................................... (29) 41
Accounts payable................................................ (1,064) (135)
Accrued expenses................................................ (273) (319)
Deferred revenue................................................ 615 169
Income taxes payable............................................ 132 (1,294)
Notes payable................................................... (3) --
Accrued rent.................................................... (4) 12
Other noncurrent liabilities.................................... -- (4)
----------- -----------
Net cash provided by (used in) operating activities........ 73 (60)
Cash flows from investing activities:
Purchase of short-term investments...................................... (191) (207)
Proceeds from sale of property and equipment............................ 7 8
Capital expenditures -- property and equipment.......................... (686) (428)
Capital expenditures -- software development costs...................... (8) (70)
----------- -----------
Net cash used in investing activities...................... (878) (697)
Cash flows from financing activities:
Proceeds from sale of common stock under stock option plan.............. 1,022 400
----------- -----------
Net cash provided by financing activities.................. 1,022 400
----------- -----------
Net increase(decrease) in cash and cash equivalents......................... 217 (357)
Cash and cash equivalents at beginning of period............................ 22,029 16,681
----------- -----------
Cash and cash equivalents at end of period.................................. $ 22,246 $ 16,324
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid........................................................... $ 1 $ 4
=========== ===========
Income taxes paid....................................................... $ 40 $ 1,604
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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STATE OF THE ART, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles and
with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
consolidated financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been included. The operating results for the three
month period ended March 31, 1997 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997. For further
information, refer to the consolidated financial statements and related notes
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
2. Net Income Per Share:
Net income per share was computed based on the weighted average number of
common shares and equivalents outstanding during the three month period ended
March 31, 1997, as well as the similar period ended March 31, 1996. Primary and
fully diluted net income per share are approximately the same. The number of
shares used in the calculations for these periods was 11,672,000 and 11,451,000,
respectively, which include incremental shares related to stock options granted
of 441,000 and 490,000, respectively. The Company has granted certain stock
options which have been treated as common share equivalents in computing net
income per share.
6
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PART I. ITEM 2.
STATE OF THE ART, INC., AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview:
Net income for the three month period ended March 31, 1997, was $435,000 or
$0.04 per share on net revenues of $12,682,000. This compares to net income of
$525,000 or $0.05 per share on net revenues of $11,182,000 for the three month
period ended March 31, 1996. Revenues for the three month period ended March
31, 1997 increased 13% over the similar quarter of the prior year.
Forward Looking Information:
This Quarterly Report on Form 10-Q contains forward looking statements,
including, without limitation, statements concerning the Company's product
development, future revenue patterns and future research and development, sales
and marketing and other expenditures. These forward looking statements involve
risks and uncertainties, which could cause actual results to differ from those
projected. These risks and uncertainties include technological risks involved
in the development and testing of new products, the impact of competitive
products and pricing, and the uncertainties of which operating systems and
hardware platforms will dominate, and which emerging technologies could impact
the demand for the Company's products.
Results of Operations:
Net revenues in the first quarter of 1997 increased 13% or $1,500,000 to
$12,682,000 over net revenues of $11,182,000 in the first quarter of 1996.
Revenue increased as a result of increased sales of software licenses, support
services and business forms. Software license revenues from the Company's
Acuity Financials(TM), MAS 90(R) for Windows, MAS 90 EVOLUTION/2 and
BusinessWorks(R) product lines increased $1,282,000 or 15% over similar revenues
in the first quarter of 1996. This increase was primarily due to increased
purchases of software in the Acuity Financials and MAS 90 for Windows product
lines. These two new product lines featuring graphic user interface were
introduced in 1996. Acuity Financials and MAS 90 for Windows produced $5,154,000
or 41% of the Company's revenue for the quarter. The increase was partially
offset by a decrease of $3,481,000 or 51% in the Company's flagship MAS 90
character based product line, which runs under a DOS operating system, when
compared to the first quarter of 1996. The Company believes that the new
generation graphic user interface product lines of Acuity Financials and MAS 90
for Windows will grow at a rate that will outpace the anticipated decline from
the older MAS 90 for DOS product line.
7
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The Acuity Financials product was released in the fourth quarter of 1996 and
contributed $597,000 in the first quarter of 1997 and accounted for 5% of the
Company's revenue. The MAS 90 product line increased $1,076,000 or 16% in the
first quarter of 1997 and accounted for 72% of the total dollar revenue increase
in the quarter when compared to the first quarter of 1996. Upgrade revenues in
the MAS 90 product line increased 68% in the quarter in comparison to similar
revenues in the first quarter of the prior year. The increase in upgrade
revenues resulted from the continued upgrade of customers to the MAS 90 for
Windows product. BusinessWorks software license revenues decreased 22% or
$391,000 for the first quarter of 1997 as compared to the first quarter 1996.
The Company attributes the decline in BusinessWorks software license revenue in
the first quarter of 1997 to reduced upgrade sales. The Company had a major
enhancement to the product in the second quarter of 1995 and there was no
similar enhancement in the current year. Revenue from the Apple product lines
decreased $154,000 or 100% for the first quarter of 1997 in comparison to the
first quarter of the prior year. The Company sold the Apple product lines in
the second quarter of 1996.
The Company's support services and business forms programs experienced revenue
gains in the first quarter of 1997. The Company's support revenue grew 29% or
$348,000 in the first quarter of 1997 as compared to the first quarter of 1996.
The Company attributes this increase to the implementation of a new MAS 90
software maintenance and support program that was released in March of 1997.
Business forms revenue in the first quarter of 1997 increased $24,000 or 2% over
comparable revenues in the first quarter of 1996.
Quarterly revenues can fluctuate significantly when compared to similar periods
of the prior year due to the timing of product introductions, enhancements,
product upgrade revenues, commencement of sales and marketing promotions,
seasonality of customer buying trends and general economic conditions. The
Company has historically operated with minimal backlog because orders are
generally shipped on an immediate basis. As a result, the Company's quarterly
revenues and operating results are difficult to forecast since they are
dependent upon the volume and timing of orders received during any period.
Historically, the revenue volume for the first, second and third quarters of the
year have been lower than the fourth quarter. The historically higher revenue
volume in the fourth quarter has been largely due to two factors: higher end-
user demand for the Company's software products and the release of the Company's
annual payroll tax update program. Management believes this pattern will
continue in 1997.
Cost of revenues in the first quarter of 1997, as a percentage of net revenues,
decreased one percentage point to 19% as compared to 20% for the same period in
1996. The decrease in cost of revenues as a percentage of net revenues is
primarily due to higher pricing on the Acuity Financials and MAS 90 for Windows
product lines. The Company continues to pursue cost reduction opportunities
whenever practicable; however, there can be no assurance that the Company will
be able to maintain its current level of cost of revenues when expressed as a
percentage of net revenues for the remainder of 1997.
8
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Operating expenses for the first quarter ended March 31, 1997 were 80% of net
revenues as compared to 76% of net revenues in the first quarter of 1996. Total
operating expenses for the first quarter of 1997 increased 20% or $1,716,000
over the comparable period of the prior year. The increase in operating
expenses as compared with the comparable periods of the prior year can be
attributed to sales and marketing expense increase of 31% or $1,356,000;
research and development expense increase of 2% or $46,000; and general and
administrative expense increase of 25% or $314,000 over comparable departmental
expenses incurred in the first quarter of the prior year.
The increase in sales and marketing expenses can be attributed to higher
personnel related costs in addition to increased direct marketing, advertising
and lead generation activities as a result of the Company's launch of two major
product lines, Acuity Financials and MAS 90 for Windows, both of which began to
ship in 1996. The increase in research and development expenses is attributable
to higher personnel related costs incurred in the launch of two new major
product lines, Acuity Financials and MAS 90 for Windows which began shipping in
the second and third quarters of 1996. The increase in general and
administrative expense is primarily the result of a one time charge for expenses
associated with employees who have left the Company.
The Company continues to project a trend toward higher personnel and related
costs in future quarters. The Company's introduction of Acuity Financials and
MAS 90 for Windows will result in additional expenditures in future quarters in
the areas of product support, sales and marketing and research and development.
In addition, the Company plans to aggressively increase advertising and
marketing plans in future periods to promote and launch the Company's new
products to market. If the Company is not able to increase its revenue over the
first quarter 1997 level, the projected increase in expenditures could result in
lower profitability.
Interest income for the first quarter of 1997 increased $114,000 or 33% to
$460,000 or 4% of net revenues as compared to $346,000 or 3% of net revenues in
the first quarter of 1996 primarily due to higher cash balances.
Liquidity and Capital Resources:
Working capital at March 31, 1997, totaled $42.0 million, an increase of $1.7
million or 4% over working capital of $40.3 million as of December 31, 1996.
On February 22, 1995, the Company entered into an agreement whereby it may
borrow, on a revolving credit line basis, up to $10,000,000. The revolving line
is unsecured. The Company has the option to pay interest on the revolving
credit line at the bank's prime interest rate, or at the LIBO rate plus 1.5
percent. The agreement requires the Company to maintain certain financial
ratios. The agreement expires in April, 1998. As of March 31, 1997 there are
no outstanding balances on this revolving credit line.
9
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The Company has historically funded its operations primarily through positive
cash flows from operations. The Company believes that funds generated from
operations and existing cash balances and the available bank credit lines will
be sufficient to finance the Company's operations for at least the next twelve
months.
10
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PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
See the Company's Annual Report on Form 10-K for the year ended December 31,
1996, for a description of certain litigation.
As discussed in detail in the Company's Form 10-K for the year ended December
31, 1996, the Company is engaged in litigation with the Company's former
president, Charles Milden, and his wife, Susan Milden. As of the end of 1996,
all parties to the Mildens' bankruptcy had settled all claims with the
bankruptcy trustee. The bankruptcy court had confirmed the settlement and made
related orders. The Mildens had appealed the settlement and orders to the
United States District Court for the Central District of California, which
affirmed the settlement and orders. The Mildens had then appealed to the United
States Court of Appeals for the Ninth Circuit. In April, 1997, a unanimous
panel of that court also affirmed the settlement and orders. Later in April,
1997, the Mildens petitioned that court for a rehearing.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
1) 27 - Financial Data Schedule
(b) Reports on Form 8-K: The Company has not filed any reports on
Form 8-K during the quarter for which this report is filed.
11
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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.
STATE OF THE ART, INC.
----------------------
Registrant
Date: May 14, 1997 By: /s/ JAMES R. ECKSTAEDT
------------ -----------------------------
James R. Eckstaedt
Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 22,246
<SECURITIES> 15,255
<RECEIVABLES> 6119
<ALLOWANCES> 100
<INVENTORY> 1414
<CURRENT-ASSETS> 46,350
<PP&E> 11,625
<DEPRECIATION> 6,153
<TOTAL-ASSETS> 53,316
<CURRENT-LIABILITIES> 4,350
<BONDS> 0
0
0
<COMMON> 19,609
<OTHER-SE> 29,117
<TOTAL-LIABILITY-AND-EQUITY> 53,316
<SALES> 12,682
<TOTAL-REVENUES> 12,682
<CGS> 2,368
<TOTAL-COSTS> 2,368
<OTHER-EXPENSES> 10,168
<LOSS-PROVISION> 15
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 606
<INCOME-TAX> 171
<INCOME-CONTINUING> 435
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 435
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
