<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
----------
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-25297
SMITH-GARDNER & ASSOCIATES, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
FLORIDA 65-0090038
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1615 SOUTH CONGRESS AVENUE
DELRAY BEACH, FLORIDA 33445-6368
(Address of Principal Executive Offices) (Zip Code)
(561) 265-2700
- --------------------------------------------------------------------------------
(Registrant telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE PER SHARE (NASDAQ NATIONAL MARKET)
- --------------------------------------------------------------------------------
(Title of Each Class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 15, 1999, the aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately $119,543,310 based on
the closing price on that date of $16.625 per share. As of that date, there were
12,191,504 shares of the registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable
<PAGE> 2
Smith-Gardner & Associates, Inc.
Annual Report on Form 10-K
Index
<TABLE>
<CAPTION>
PAGE
NUMBER
------
PART I
<S> <C>
Item 1. Business................................................................................ 2
Item 2. Properties.............................................................................. 14
Item 3. Legal Proceedings....................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders..................................... 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................... 16
Item 6. Selected Financial Data................................................................. 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................................... 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................. 31
Item 8. Financial Statements and Supplementary Data............................................. 31
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................................... 31
PART III
Item 10. Directors and Executive Officers of the Registrant...................................... 32
Item 11. Executive Compensation.................................................................. 35
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 38
Item 13. Certain Relationships and Related Transactions.......................................... 39
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 41
</TABLE>
<PAGE> 3
PART I
This report contains or incorporates by reference forward-looking
statements that are subject to risks and uncertainties. Forward-looking
statements include information concerning the financial condition, results of
operations, plans, objectives, future performance and business of Smith-Gardner
& Associates, Inc. (the "Company"). The Company includes forward-looking
statements in descriptions of future earnings and cash flows, anticipated
capital expenditures and management's strategies, plans and objectives.
Statements preceded by, followed by or that include the words "believes,"
"expects," "anticipates" or similar expressions are generally considered to be
forward-looking statements.
Forward-looking statements involve both known and unknown risks and
uncertainties and actual results or performance may therefore differ materially
from the expected results or performance expressed or implied by the
forward-looking statements. The following important factors, in addition to
factors the Company discusses elsewhere in this report could affect the
Company's actual results or performance:
o the Company's dependence on the development, introduction and
client acceptance of new and enhanced versions of its software
products;
o the Company's ability to control costs;
o the Company's dependence on new product development;
o the Company's reliance on a combination of trade secret,
copyright and trademark law, nondisclosure agreements and
technical measures to protect its proprietary technology;
o the Company's ability to sell its products in new markets
within the non-store marketing industry;
o the Company's dependence on proprietary technology licensed
from third parties;
o the Company's ability to continue to resell a variety of
hardware developed and manufactured by third parties;
o competitive pricing for the Company's products;
o customer concentration;
o fluctuations in demand for the Company's products which are
dependent upon the condition of the software and non-store
marketing industries;
o the Company's ability to collect receivables;
o changes in government regulation;
o the availability to the Company of expansion and acquisition
opportunities on attractive terms;
o the Company's ability to develop and implement systems to
manage its rapidly growing operations;
o the availability of capital to fund Company growth;
o the effect and costs of compliance with Year 2000 issues; and
o adverse conditions in the capital markets or in the general
economy.
In light of these risks and uncertainties, the forward-looking events
discussed in this report might not occur. The Company undertakes no obligation
to publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise.
<PAGE> 4
ITEM 1. BUSINESS.
GENERAL
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 manufacturers, fulfillment houses and retailers with significant non-store
sales channels. The Company's MACS family of software products ("MACS") 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.
Since its inception in 1988, management of the Company has concentrated
on providing software-based systems and services to leading non-store marketing
companies and to retailers, manufacturers and fulfillment houses with
significant non-store sales channels. By focusing on this market, management
believes that the Company has been able to develop a significant industry
expertise that has been incorporated in the functionality of the Company's
products and services. The Company's MACS II and MACS III products offer over
3,000 functional options, process up to 200,000 transactions per day and are
used primarily by companies with high-volume non-store commerce operations.
WebOrder, the Company's new Internet commerce solution, is a highly scalable
system that enables real-time interactive customer ordering, and automates
processing and back-office operations for companies selling products or services
over the Internet. WebOrder incorporates both the functionality and scalability
of MACS II and MACS III.
The Company's solutions are used by more than 200 clients located
primarily in North America, Europe and Australia. Smith-Gardner's client base
includes companies such as Barnes & Noble, Coldwater Creek, Cyberian Outpost,
Egghead.com, Hammacher Schlemmer, Hickory Farms, Lego, MicroWarehouse,
Nordstrom, QVC Network and Time Life.
The Company was incorporated as a Florida corporation in 1988. The
Company's principal offices are located at 1615 South Congress Avenue, Delray
Beach, Florida 33445-6368 and the telephone number at that location is
(561) 265-2700.
INDUSTRY BACKGROUND
Historically, the non-store marketing industry in the United States
principally consisted of companies engaged in marketing and selling their
products and services through traditional direct marketing channels, such as
catalogs, direct mailings, print ads, telemarketing, television or radio.
Typically, the selling process involved marketers contacting and soliciting
potential customers through these traditional direct marketing channels. Those
customers ordered their products by mail, paid by check and received purchased
products by carrier thereafter. This process normally took four to six weeks due
to lengthy processing times and slow delivery via postal service. As the
non-store marketing industry matured, the sales process evolved to include
toll-free telephone numbers for ordering and customer service, faster delivery
methods and customers' increasing preference to pay by credit card. Until the
mid 1980s, the non-store marketing industry remained dominated by companies
selling exclusively through traditional direct marketing channels.
In the last decade, many companies selling exclusively through
traditional direct marketing channels achieved significant success due to their
ability to address growing customer demand for greater convenience and more
personalized service. As a result, many retailers which had previously sold only
through retail outlets entered the non-store marketing industry. Examples of
such retailers include Macy's, Bloomingdale's, Nordstrom and Saks Fifth Avenue,
which currently market and sell their products through retail outlets as well as
catalogs, direct mailings and non-store marketing channels. The advantages of
non-store marketing for retailers include an increased ability to target
existing clients, better customer service and decreased costs of operations.
2
<PAGE> 5
With the emergence and acceptance of the Internet as a
business-to-business and business-to-consumer sales channel and the rapid
growth in interactive Internet commerce, the non-store marketing industry has
expanded to include a much broader range of companies. In addition to the
traditional non-store marketers, direct sales over the Internet has become a
new, important sales channel for a wide range of retailers and manufacturers who
traditionally relied predominantly on in-store sales, large in-house direct
sales organizations, independent distributors, or person-to-person solicitation.
Also, the emergence of Internet-only marketers has further expanded the
non-store marketing industry. Examples of these retailers, manufacturers and
Internet-only marketers include Amazon.com, Compaq, Outpost.com, Dell and
Egghead.com. The growth in interactive Internet commerce coupled with increasing
competition among store-based and non-store-based retailers and marketers have
significantly increased the use of non-store, direct marketing strategies and
expanded the range of marketers and retailers deploying such strategies.
THE NON-STORE MARKETING INDUSTRY TODAY
The non-store marketing industry encompasses those companies selling
products directly to customers through direct channels other than in-store
sales, such as catalogs, direct mail, TV infomercials, radio, print ads,
outbound telemarketing, the Internet and other non-store based channels.
According to a recent study sponsored by the Direct Marketing Association
("DMA"), these marketing channels accounted for approximately $1.2 trillion in
annual sales in the United States in 1997.
According to the DMA, the fastest growing segment within the non-store
marketing industry is interactive marketing over the Internet. Companies using
this marketing channel distribute advertising over the Internet via Web-sites or
paid advertisements on targeted third-party sites or browsers and frequently
offer customers the convenience of purchasing merchandise directly through
Internet commerce applications. Since 1994, the interactive marketing segment
has experienced compound annual revenue growth of almost 250%, from
approximately $44 million in 1994 to approximately $1.9 billion in 1997. The DMA
forecasts that interactive sales over the Internet will increase by 74.7% per
year to reach approximately $31.3 billion by 2002. Expenditures for interactive
marketing are expected to increase 66.1% annually to reach $3.5 billion in 2002.
THE NON-STORE MARKETING SOFTWARE MARKET
As a result of the growth in Internet commerce and the increased use of
non-store marketing channels, many marketers need to enhance their information
technology solutions to accommodate these new sales channels. The Company
believes that such companies seek information technology solutions that can help
them effectively manage their order flow from web pages and other non-store
channels while simultaneously centralizing and automating their back-office
operations and managing all aspects of their non-store marketing operations.
These solutions must be able to integrate seamlessly with the other systems or
applications that these companies currently use, and must enable real-time
information flow to help managers target potential customers, analyze sales and
product strategies, enhance and access customer service records and synchronize
key data. Non-store marketing companies, Internet-only retailers and companies
complementing their existing sales strategies with non-store marketing channels
require systems that are flexible and that support innovative new marketing
initiatives and methods of operation which may be implemented in the future.
Since certain non-store marketing segments, particularly the Internet commerce
segment, are growing rapidly, non-store marketing systems must also be highly
scalable and efficient.
Current technology alternatives for the non-store marketing and sales
function are typically comprised of general purpose or retail-oriented
enterprise resource planning ("ERP") software and electronic
3
<PAGE> 6
commerce add-on applications without real-time access to enterprise databases.
This technology solution is prevalent among companies that traditionally sell
through wholesalers, distributors, in-house sales forces or retail outlets.
Another common technology alternative consists of point solutions targeted to
the non-store marketing industry, but with limited breadth and depth of
functionality. These point solutions tend to be difficult to use and do not help
managers access and leverage the enterprise knowledge residing in company
databases. In-house technology solutions are also common in the non-store
marketing industry, especially among larger companies. These in-house solutions
are typically expensive to develop, modify and maintain and require a
sophisticated in-house software development staff. Also, technology development
is typically not the core strength of non-store marketing companies, and
in-house software often lacks the vision and perspective to keep up with
technological change. As a result, management of the Company believes that a
significant opportunity exists for third-party technology providers to offer
enterprise-wide, best-of-breed software solutions designed specifically for the
non-store marketing and sales function.
THE SMITH-GARDNER SOLUTION
The Company's principal software-based solution is MACS, which is an
enterprise-wide, mission-critical software solution developed specifically for
the non-store marketing industry. MACS helps managers of non-store commerce
companies operate their businesses more effectively and efficiently by
automating operations and making available real-time information relating to
nearly every facet of these companies' operations. MACS incorporates analytical
tools, best-of-breed methodologies, in-depth functionality and enterprise-wide
information flow. The Company also provides extensive customer support services,
custom development and integration services, consulting, installation and
training.
The Company's WebOrder product, a real-time interactive Internet
commerce solution first installed in November 1997, positions the Company to
benefit from the strong growth in the Internet commerce segment of the non-store
marketing industry. WebOrder provides all the back-office features needed to
manage sales transactions over the Internet including real-time customer access
to back office data such as inventory availability, order status and customer
service functions. WebOrder enables Internet marketers to effectively manage
order flow from Web pages and other non-store channels while simultaneously
integrating marketing, sales and back-office operations.
With the introduction of EuroMACS, the Company offers a solution
targeted at non-store marketing companies based abroad. EuroMACS is specifically
designed to address issues that are unique to these companies, such as
value-added tax requirements, multiple currencies, international document
formats, local banking and shipping carrier interfaces, and different mailing
and address formats.
The Company's solutions are designed to provide its clients with the
following benefits:
FULLY INTEGRATED AND HIGHLY FUNCTIONAL SOLUTIONS. MACS supports all of
the major areas of the non-store marketing and sales functions including
advertising analysis, merchandising, sales, purchasing, accounting,
telemarketing, ordering, electronic and Internet commerce, warehousing,
shipping, production and systems operation. MACS enables real-time information
flow that supports marketing and database analytics and sophisticated management
reports. MACS also eliminates potential errors arising from the maintenance of
multiple unsynchronized databases. In addition to approximately 3,000 standard
features, the Company's software solutions offer approximately 1,500
customization options and enable its users to tailor this solution to their
changing business needs and processes without disrupting the underlying data
model and interrupting the business.
4
<PAGE> 7
VERSATILITY AND OPEN TECHNOLOGY ENVIRONMENT. The MACS solutions use
open technology and readily integrate with many third-party systems and software
applications. While MACS runs on the HP3000, the solution is ODBC compliant,
which enables the exchange of data with other common computing platforms used by
manufacturers and retailers, such as IBM's AS400 and various other systems. MACS
has been successfully integrated with software solutions provided by third-party
vendors such as Island Pacific, Manhattan Associates, PeopleSoft and Great
Plains. The current MACS customer base is presently limited to buying MACS on
either HP 3000 computer systems or on any platform that supports Microsoft's NT
operating system. The development phase for MACS on UNIX operating system
platforms is expected to be completed by the end of 1999. The Company believes
that the entire non-store market can be addressed by its present platforms,
because NT platforms address the lower end of the market and the HP 3000
platform addresses the mid to large tier clients.
HIGH VOLUME INTERNET COMMERCE CAPABILITY. WebOrder provides an Internet
commerce solution which incorporates the scalability and functionality of MACS
II and MACS III and can accommodate the Internet commerce requirements of very
large retailers. WebOrder enables traditional retailers, manufacturers,
Internet-only marketers and other non-store marketing companies to add a high
volume Internet commerce channel to their marketing and sales activities without
changing their core ERP systems.
PROCESSING SCALABILITY AND REDUCED OPERATING COSTS. MACS enables
companies to process up to 200,000 non-store orders per day, minimize overhead
costs, enhance decision support and data analytics, improve the efficiency and
quality of customer services and streamline overall operations. MACS can also
reduce the operating costs that would otherwise be associated with the ongoing
maintenance and updating of legacy, batch and mainframe systems.
STRATEGY
The Company's objective is to become the world's leading provider of
software solutions for the non-store marketing industry. The Company's strategy
to achieve this objective includes the following:
CAPITALIZE ON INTERNET COMMERCE GROWTH. The Company intends to expand
its marketing and sales of WebOrder to existing customers, new Internet
retailers and other Internet commerce participants. WebOrder, which was first
installed in November 1997, offers a sophisticated, highly scalable technology
solution for Internet commerce activities. Internet commerce is the fastest
growing segment in the non-store marketing industry and experienced a compound
annual revenue growth of nearly 250% from 1994 to 1997. To date, the Company has
sold WebOrder to more than 35 clients including companies such as Outpost.com
and Hickory Farms.
DEVELOP NEW PRODUCT OFFERINGS. The Company has developed two new
products: Computer Telephony Interface ("CTI") and Data Mining System ("DMS").
CTI identifies customers as they call in with a caller ID feature. Upon such
identification, the order entry or customer service screen is populated with the
customer's account information virtually instantaneously, thus reducing call
time, expediting database searches and reducing the possibility of duplicate
accounts. CTI is expected to be available in the second quarter of 1999. The DMS
is a cost-effective, high performance data warehousing solution which leverages
the wealth of information in the MACS and WebOrder databases by providing
immediate access to important customer and business information and facilitating
management's decision support needs. The Company believes that DMS will assist
in increasing its users' profitability and provide a competitive business
advantage. Introduced in March 1999, DMS is available on HP3000, UNIX and NT
platforms.
5
<PAGE> 8
EXTEND PRODUCT OFFERINGS ACROSS NEW PLATFORMS. The Company is focusing
its product development resources on porting MACS functionality to UNIX. In
addition, the Company has developed interfaces with software solutions provided
by other companies such as PeopleSoft, Inc., Great Plains, Manhattan Associates,
Inc. and Island Pacific, and intends to continue to develop interfaces to
additional third-party software solutions.
DEVELOP GLOBAL MARKETS. The Company seeks to further develop its
international presence and sales. The Company opened offices in the United
Kingdom and Australia in mid-1997 and has since added approximately 25 employees
to its international operations. The Company plans to add additional offices in
Western Europe in the future. In January 1998, the Company first installed
EuroMACS, a MACS product specifically designed for non-store marketing companies
located abroad. The Company intends to leverage its strong domestic presence to
increase its sales in international markets, particularly in Europe and
Australia.
INCREASE SALES TO EXISTING CLIENTS. Historically, the Company has
focused primarily on sales to new clients and has not actively marketed its
optional product modules to existing clients. The Company has created a product
management team responsible for marketing and selling to its existing clients
new MACS modules such as Point of Sale and Assembly. This team also markets
professional services to existing clients to meet the changing needs of such
clients.
EXPAND DIRECT SALES FORCE. The Company intends to increase the size of
its current sales force in order to expand its marketing of existing products
and modules. In addition, the Company has created separate sales teams and
intends to hire additional sales personnel to market and sell new products, such
as nMACS and WebOrder. The Company also intends to add offices in Western Europe
and to hire additional sales personnel to service international markets.
EXPAND SERVICE OFFERINGS. The Company's consulting and service
offerings are critical components of its client-driven solution. The Company
will continue to expand its comprehensive consulting and client support services
to facilitate the timely installation, implementation and effective utilization
of its products. For example, the Company plans to offer regional training
seminars to its clients throughout the United States.
PURSUE STRATEGIC OPPORTUNITIES. The Company believes that the market
for software which automates non-store marketing operations is highly fragmented
and rapidly evolving, with many new product introductions and many large and
small industry participants. These factors create both the need and the
opportunity to effect strategic transactions, including acquisitions, alliances
or other partnerships, in order to increase the breadth of the Company's product
offerings, establish new sales and marketing channels and exploit evolving
market opportunities. While the Company presently has no commitments to effect
any such transactions, it intends to pursue such opportunities in order to
enhance further its competitive position as the marketplace evolves.
PRODUCTS
The MACS family of products offers an integrated, flexible, modular
solution for front and back- office operations, decision support analytics,
Internet commerce marketing and transaction processing functionality. MACS I,
the first version of MACS, was installed in 1990. The Company released MACS II
in June 1994, and completed the last version upgrade in July 1997. Compared to
MACS I, MACS II offered several new features and functions as well as an
expansion of its internal database. In June 1998, the Company released MACS III,
which incorporates approximately 300 new enhancements, and introduced
6
<PAGE> 9
several new products and optional modules. Other products included in the MACS
family are WebOrder, EuroMACS and nMACS, which were introduced by the Company in
November 1997, January 1998 and January 1999, respectively.
The following chart summarizes the current MACS products and typical
users:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION OF FUNCTIONS TYPICAL USERS
- ------- ------------------------ -------------
<S> <C> <C>
MACS II/ Capable of automating and integrating all major areas Non-store marketing companies and
MACS III of non-store marketing companies that sell through traditional retailers selling through
catalogs, direct mail, telemarketing, print ads non-store marketing channels, with
telephone, mail, television, radio and other daily transaction volumes of up to
non-store channels; includes over 3,000 200,000.
functions encompassing advertising, sales,
merchandising, purchasing, accounting,
telemarketing, ordering, electronic commerce,
warehousing, shipping, production and systems
operation; displays real-time management information
by maintaining mini data marts for each functional
area.
WEBORDER Web-based order fulfillment system that incorporates Non-store marketing companies,
all features and functions of MACS II/MACS III; retailers, wholesalers and
offers web customers real-time, secure information manufacturers selling through the
including inventory availability, order status Internet, with daily transaction
and customer service functions; helps Internet volumes of up to 200,000.
marketers integrate their marketing, sales and back
office operations and manage nearly all aspects of
non-store marketing operations.
EUROMACS MACS modified to accommodate the needs of International-based non-store
clients located abroad in areas relating to value- marketing companies and traditional
added tax requirements, international mailing retailers selling through non-store
address formats, and interfacing with international marketing channels, with daily
shipping carriers and banking institutions. transaction volumes of up to 200,000
NMACS Provides only basic functions of MACS and runs Small non-store marketing companies
on a Windows NT platform. processing up to approximately 1,000
orders per day.
</TABLE>
The prices of MACS II, MACS III, WebOrder, EuroMACS and nMACS range
from $10,000 to $2.9 million, depending on the number of users and CPUs
required.
In addition to the current MACS products, there are a number of
optional modules available to MACS users. The following chart summarizes the
functions and benefits of the more widely used MACS modules:
<TABLE>
<CAPTION>
MODULE DESCRIPTION OF FUNCTIONS BENEFITS
- ------ ------------------------ --------
<S> <C> <C>
VISUALMACS Uses Windows-based, drag-and-drop, point- Ease and efficiency of use.
and-click technology with multi-tasking
capabilities in a client/server environment.
POINT OF SALE Interfaces with catalog customer Enables companies to run a store and
database and facilitates the display of a non-store marketing company via
separate store inventories; provides cash one centralized database.
register processing and optional drop
shipping of unavailable items.
Data Mining Provides access to customer and business Assists clients in increasing profitability
System ("DMS") information and facilitates decision support and provides clients a competitive business
needs. advantage.
</TABLE>
7
<PAGE> 10
<TABLE>
<S> <C> <C>
ASSEMBLY Facilitates the procurement of raw materials Enables non-store marketing
and creates bills of materials to track assembly companies to run light manufacturing
process; tracks costs of assembly (including operations.
labor and machine time) and forecasts demand
for raw materials.
CONTINUITY Enables negative option-type promotions and Streamlines operations of non-store
facilitates monthly club programs, customer marketing companies that sell books,
maintenance procedures and other incentive records, videos and other continuing-
programs. demand products.
INSTALLMENT BILLING Facilitates installment payments, returns Enables billing of customers' credit
and cancellations. cards in multiple installments.
OUTBOUND TELEMARKETING Uses existing selection criteria and MACS Enables companies to become more
database to create campaigns; automates proactive in selling to existing
customer service and solicitation functions. customers and prospects.
</TABLE>
Pricing for the MACS modules is based on individual user requirements
and needs.
MACS operates in a HP Series 3000, MPE/iX environment. The HP3000 is a
scalable, fully upward compatible computer system in which all hardware upgrades
are performed at the CPU site. The main programming language used for MACS is
COBOL, although some functionality is written in C++ and Visual Basic. The data
structure used is the fully SQL-compatible Turbo Image DBMS.
All HP3000 systems provide high online transaction processing
performance and functionality and support major networking protocols such as
OSI, TCP/IP, SNA, and OSF/DCE. The Company has developed its own TCP/IP
Application Program Interface ("API"), which serves as the foundation to
communicate directly between MACS and the Internet. This socket-based API also
has the ability to communicate with other Windows-based applications. WebOrder
requires a Microsoft Internet information server and communicates with the
HP3000 through the Company's own API. The API enables MACS to communicate with
other platforms through an exchange of data from the HP3000 to other databases
such as Oracle and Microsoft Access.
PRODUCTS UNDER DEVELOPMENT
The Company is currently developing a number of new products in
response to demands presented by companies in the non-store marketing industry
including:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION OF FUNCTIONS TYPICAL USERS
- ------- ------------------------ -------------
<S> <C> <C>
MACS FOR UNIX Full-featured version of MACS III that Non-store marketing companies and
runs on a UNIX platform. traditional retailers selling through
non-store marketing channels and
using a UNIX platform.
Computer Telephony Provides a caller ID feature which Non-store marketing companies and
Interface ("CTI") facilitates order entry and customer traditional retailers selling through
service functions non-store marketing channels and using
a UNIX platform.
</TABLE>
The Company expects to introduce these products during the next twelve
to eighteen months.
CLIENTS
The Company's clients include traditional direct marketing companies,
retailers and manufacturers with significant non-store marketing operations,
fulfillment houses and Internet-only retailers. The Company
8
<PAGE> 11
generally targets leading non-store marketing companies in their respective
industry segments. The Company has sold MACS to more than 200 clients. The
following is a representative list of the Company's clients as of December 31,
1998 generally categorized by industry segment:
<TABLE>
<S> <C>
APPAREL/SHOES GENERAL MERCHANDISE/GIFTS
Coldwater Creek, Inc. Brookstone, Inc.
dELiA*s Hammacher Schlemmer
Huntington Clothiers, Inc. Lego Direct Marketing, Inc.
Nine West Group Levenger Tools
Nordstrom, Inc. Miles Kimball Company
COMPUTER SOFTWARE/HARDWARE TV HOME SHOPPING
Broderbund Software Arcadia
Creative Computers The Shopping Channel
Cyberian Outpost, Inc. Littlewoods
Egghead.com, Inc. QVC Network, Inc.
Micro Warehouse
Multiple Zones International Inc. OTHERS
KAO Infosystems Co.
EDUCATIONAL SUPPLIES/BOOKS Genesis Direct, Inc.
Marboro Books Corp. (Barnes & Noble) Maritz, Inc.
Rodale Press, Inc. United Methodist Publishing House
Time Life, Inc. United States Mint
FOOD AND BEVERAGE
Cushman Fruit Company
Ethel M. Chocolates
Hickory Farms, Inc.
Wine Enthusiast
</TABLE>
None of the Company's clients accounted for more than 10% of the
Company's revenue in 1998 and 1997. For the year ended December 31, 1998, the
Company's two largest clients, United States Mint and Multiple Zones, in the
aggregate accounted for 16.8% of the Company's revenue. In 1997, the Company's
three largest clients, Genesis Direct, Inc., dELiA*s and KAO Infosystems Co., in
the aggregate accounted for 18.6% of the Company's revenue. In 1996, the
Company's three largest clients, QVC Network, Inc., Micro Warehouse and
Coldwater Creek, Inc. accounted for 21.2% of the revenue of the Company, with
QVC Network, Inc. accounting for 10.7% of such revenue.
CLIENT SERVICES
CLIENT SUPPORT
The Company believes that a high level of service and support is
critical to its success and an important competitive advantage. The Company's
installation teams consist of a project manager, a technical lead, two support
analysts and as many installers or trainers as are required for a given
installation. The installation teams configure the system for new clients,
install the software, set all the proper control switches, train the client's
executives and managers, and resolve all installation issues for up to three to
six months after the client begins processing orders through the system.
Thereafter, the Company transitions the client to its standard support services
provided by the Company. The Company's installation teams completed 32
installations of MACS in 1997 and 46 installations in 1998, based on the
Company's receipt of a signed contract or a letter of intent accompanied by a
cash deposit of at least 10% of the purchase price under the proposed contract.
The Company's client support function is responsible for servicing its
clients after the initial implementation project is complete. The Company has
client support operations in the United States and the
9
<PAGE> 12
United Kingdom and currently supports approximately 170 clients in over 16
countries. These operations enable the Company to respond more quickly and
effectively to the needs of its multinational and international clients.
Approximately 95% of current MACS users participate in the Company's support
services program.
The Company believes that a close and active service and support
relationship is important to client satisfaction and also provides the Company
with information regarding evolving client requirements. For example, the
Company assigns to each of its clients a client coordinator whose primary
responsibility is to act as a liaison between the client and the Company. In
addition, the Company provides telephone support from 8:00 a.m. to 9:00 p.m.
(EST) weekdays and 24 hours-a-day for emergencies and uses electronic bulletin
boards and other forms of electronic distribution to provide clients with the
latest information regarding the Company's products.
In general, the Company provides two kinds of support: standard and
major account. The Company's standard support services provide complete, full
time technical support. When a client calls the Company with a question or
issue, it is initially reviewed and analyzed by the client coordinator and then
sent on to the appropriate specialty team for resolution. More complex issues
can then be referred to one of the Company's technical support teams and, if
necessary, to the Company's programming unit. The Company provides its clients
with telephone support to give timely responses to systems issues. The Company
continually communicates with its clients through newsletters and seminars, and
client coordinators provide weekly reports to each client detailing the status
of the account. Event schedules, product enhancement requests and electronic
mail are available to clients on the Company's Internet web site as well.
The Company also offers major account support services, which provide
premier technical service for its larger clients through the assignment of a
dedicated account manager and team of support personnel. For these clients, the
Company maintains a copy of their production software environment on the
Company's client support system to enable the account manager to expedite the
resolution of all client issues. The Company believes that such services build a
strong strategic relationship which enhances the future business prospects of
the Company.
Support contracts are typically service agreements pursuant to which
clients pay a monthly fee based on a percentage of the total software license
fee. Installation and training are included in the initial license fee.
Depending on the services delivered, support services typically are priced at
17% of the total license fee per year and include, without charge, any new
version releases of software. Major account services are typically priced based
on the level of support services provided.
As of December 31, 1998, the Company employed 99 client support
services personnel, consisting of 26 implementation, 54 standard support and 19
major account support personnel.
CONSULTING AND CUSTOMIZATION
The Company's consultants conduct site examinations and assist clients
in developing and implementing advanced MACS strategies. With significant
experience in the non-store marketing industry, the Company's consultants
provide practical and proven direction in developing strategies which apply
best- practice MACS methodologies that meet the client's requirements. Depending
on the client's needs, the Company offers:
o Requirements analysis and MACS software evaluation services;
o Advanced MACS methodology consulting;
10
<PAGE> 13
o Benchmarking and other advanced strategy workshops involving
clients and industry experts;
o Integration services and technical consulting in areas such as
data conversion, system interfaces and database/network
tuning;
o Project management services intended to lead the client
through the implementation activities required to achieve
successfully the client's business objectives; and
o Custom programming for system enhancements and system
interfacing.
Consulting and customization services are delivered directly by the
Company but are also delivered in conjunction with third-party service providers
such as systems integrators and specialist consulting firms. Consulting and
customization services are typically delivered on a fixed price and
not-to-exceed basis or occasionally on a time and materials basis.
TRAINING AND EDUCATION
The Company offers a variety of standard and customized training and
education services at client sites, at the Company's headquarters in Delray
Beach, Florida, and selected regional sites throughout the country. Upon the
installation of MACS, the Company provides a two week training course for each
client's staff. The training curriculum is delivered by specialists who utilize
proven education techniques and advanced technology. The Company also offers 48
courses per year for training in the application of its MACS products through
the MACS Academy. The Company also offers a "train the trainer" program in which
the Company trains client employees designated as trainers within their
organization. These trainers are educated in both training techniques and the
optimal use of the Company's products. The Company believes its
train-the-trainer methodology is a crucial element in the success of its
implementations, which often span multiple departments, plants and countries.
Continuing education and training is delivered through standard courses with
package prices or can be contracted for on a time and materials basis.
SALES AND MARKETING
The Company markets and sells its products and services to new
prospects and existing clients primarily through its direct sales force. These
personnel are trained in the Company's products and service offerings and in the
operations of the Company's clients. The Company's personnel use a
"consultative" selling approach, because the sales process requires an
understanding of the non-store marketing industry as well as comprehensive
computer and systems expertise.
The Company's sales force is supported by marketing personnel who
generate and qualify leads through advertising and marketing campaigns, produce
product literature, periodic newsletters and direct mail campaigns, arrange
attendance at trade shows and conventions, and sponsor seminars. The marketing
department also supports the sales force with appropriate documentation or
presentation and demonstration materials for use during the sales process. The
Company also supports its direct sales and marketing force with a group of
systems engineering professionals, many of whom also possess vertical market and
practical MACS expertise.
As of December 31, 1998, the Company employed 36 sales and marketing
personnel (30 domestically and 6 internationally), consisting of 17 sales
representatives and 19 marketing and other support personnel.
The Company's method of marketing and selling to a new prospect
consists of identifying the prospect, qualifying the prospect and, if the
prospect is qualified, preparing and presenting a sales proposal. The
prospecting process includes placing advertisements in trade publications,
acquiring mailing lists,
11
<PAGE> 14
telemarketing, direct mailing, conducting seminars and participating in trade
shows to generate leads for the direct sales force. Once a prospect is
qualified, the appropriate direct sales personnel visit the prospect to
understand the prospect's specific requirements. This process usually results in
the preparation of a written proposal describing the hardware, software and
services that meet the prospect's requirements. While the Company's sales
personnel generally make the initial sales contact, large and complex
installations generally involve the use of the Company's professional services
group. This group works closely with the sales team to identify the optimal
configuration of MACS required for such prospects. This sales cycle typically
ranges from three to six months.
The Company has executed a hardware resale agreement with Client
Systems, Inc., a distributor of HP products. The Company also has a strategic
relationship with Hewlett-Packard consisting of cooperative marketing and sales
activities in the non-store market industry. Currently, the Company is one of
the leading resellers of the HP3000 products.
The MACS user community and the Company have organized an international
MACS users' group whose advisory committee plays an important role in helping
the Company develop and refine its MACS products and services strategies. In
addition, the Company hosts an annual MACS world conference which includes
presentations by the Company and clients concerning the features and
capabilities of the Company's products. The Company also participates in trade
conferences worldwide to promote global sales and use of the MACS products. All
of these conferences include workshops, round table discussions and special
sessions devoted to products, technologies and MACS methodologies. More than 250
attendees participated in the Company's 1998 MACS World Conference held in
Deerfield Beach, Florida.
RESEARCH AND DEVELOPMENT
The Company's research and development function is performed by the
business analysis, programming, quality control and advanced technologies teams.
The business analysis group performs the functional and technical requirements
for the enhancements that are requested either from the Company's clients or
internal product management group. The programming group is responsible for the
MACS software maintenance and enhancement process. The Company uses a version
and patch approach to software release control and uniformly maintains a current
version of each of its products, which is not subject to enhancements, and a
development version, which is regularly enhanced. The Company releases quarterly
patch updates of its current versions upon code corrections and believes that
this process maximizes the stability of its products, which is critical to the
day-to-day operations of a non-store marketing company. The quality control
group tests the software each time it passes through the business and
programming groups and performs regression testing prior to the release of any
patch updates or new releases. The advanced technologies group is responsible
for the identification and initial development of new technology opportunities.
The Company follows a structured development methodology to ensure the
timely and cost-effective production of high-quality software. The Company has a
formal process through which clients may have input as to modifications of the
Company's products and believes that this input helps it deliver a leading
industry solution to its current and prospective clients.
As of December 31, 1998, the research and development staff consisted
of 68 employees globally. From time to time, the Company has also engaged
outside consultants in its product development efforts. Total expenses for
research and development in the fiscal years ended December 31, 1996, 1997 and
1998 were approximately $2.3 million, $2.0 million and $2.3 million,
respectively. No software development
12
<PAGE> 15
costs were capitalized in fiscal 1996, 1997 or 1998. The Company anticipates
that it will continue to commit substantial resources to product development in
the future.
COMPETITION
The market for non-store commerce software is competitive, rapidly
evolving and highly sensitive to new product introductions and marketing efforts
by industry participants. This market is also highly fragmented and served by
ERP software providers, electronic commerce software providers, consulting firms
and point solution providers targeting the non-store marketing industry. The
Company's products also compete with information systems developed and serviced
internally by in-house MIS departments. Although the Company believes that none
of its competitors currently compete against the Company in all industry
segments, there can be no assurance that such competitors will not compete
against the Company in the future in additional industry segments. Many of the
Company's potential future competitors may have significantly greater financial,
technical and marketing resources, generate higher revenues and may have greater
name recognition than does the Company. In addition, as the Company expands into
new segments of the non-store marketing industry, such as Internet commerce, it
will face competition from other software companies, MIS departments and
unforeseen sources. Compared with the Company, these competitors may have
greater resources, operating experience, credibility and relationships in such
new segments. Although the Company believes that it currently competes favorably
in all industry segments and against all competitors, there can be no assurance
that it will do so in the future.
PROPRIETARY RIGHTS AND LICENSES
The Company primarily relies on a combination of copyright, trademark
and trade secret laws, unpatented proprietary know-how, license agreements,
non-disclosure and other contractual provisions and technical measures to
protect its proprietary rights in its products and technology. The Company
typically distributes its software products under software license agreements
which contain, among other things, provisions limiting the use, copying and
transfer of the licensed program. The licensees typically obtain a copy of the
Company's source code in connection with the licensee's use of the MACS
products. The Company has obtained a United States copyright registration for
the source code of its MACS II software.
The Company currently has operations in the United States, Australia
and the United Kingdom, and its products are licensed for use by clients in over
15 countries. The Company has registered MACS, MACSII, EUROMACS and THE MACSIMUM
as trademarks in the United States. The Company also has applied for the
registration as trademarks in the United States of MACSIII, MACSACCESS,
VISUALMACS and WEBORDER. The Company believes that international protection and
enforcement of intellectual property rights for software products in particular
may be more limited than in the United States. Specifically, intellectual
property laws in certain countries may not protect software companies from the
loss of intellectual property rights through reverse engineering.
The Company has entered into several agreements regarding the
integration of the intellectual property of third parties into its products.
Parties to such agreements include Cognos, First Logic, GTS and DISC.
The Company generally enters into confidentiality agreements with
employees and clients which limit rights and access to, and distribution of any
proprietary or confidential information. Furthermore, employees execute
agreements requiring disclosure and assignment to the Company of all of the
intellectual property rights associated with any ideas, concepts, techniques,
inventions, processes, or works of authorship
13
<PAGE> 16
relating to the business of the Company and developed or created during the
course of performing work for the Company or its clients.
The Company does not believe that any of its products infringe the
proprietary rights of third parties. There can be no assurance that the steps
taken by the Company to protect its proprietary rights will be adequate to
prevent misappropriation of its technology or development by others of similar
technology. Because the software development industry is characterized by rapid
technological change, however, the Company believes that factors such as the
technological and creative skills of its personnel, new product developments,
frequent product enhancements, industry reputation and client support are more
important to establishing and maintaining a leadership position than the various
legal protections available for its technology.
EMPLOYEES
As of December 31, 1998, the Company had a total of 245 full-time
employees in the United States: 63 in product development, 30 in sales and
marketing, 36 in training and professional services, 99 in client support
services and 17 in management, administration and finance. In addition, as of
December 31, 1998, the Company had 27 employees in the United Kingdom and 2
employees in Australia. None of the Company's employees are subject to a
collective bargaining agreement, and the Company has not experienced any work
stoppages. The Company believes that its employee relations are good.
ITEM 2. PROPERTIES.
The Company is headquartered in Delray Beach, Florida, where it leases
approximately 46,000 square feet of office space pursuant to a lease which
expires in July 2001. The annual rent under such lease is approximately
$390,000. The Company also leases office space in the United Kingdom and
Australia to house its operations abroad. The annual rent under such leases is
approximately $82,000 and $24,000, respectively. The Company also leases office
space in Boulder, Colorado and Plano, Texas for certain of its marketing and
sales activities. The annual rent under such leases is $3,600 and $4,500,
respectively. The aggregate annual facility lease payments of the Company during
the fiscal year ended December 31, 1998 was $493,296. The Company is currently
seeking additional facilities domestically and abroad to accommodate additional
marketing and sales activities, and believes that it will be able to obtain such
space on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS.
In November 1995, Robelle Consulting Ltd. ("Robelle") filed suit
against the Company and Allan J. Gardner in United States District Court for the
Southern District of Florida. Robelle alleges copyright and trademark
infringement, breach of contract, and unfair competition arising out of the
Company's distribution of two of Robelle's software products which had been
incorporated as part of MACS. Robelle seeks, among other relief, an
indeterminate amount of damages. In January 1998, Robelle was granted summary
judgment with respect to its copyright infringement claim for one of the Robelle
products, but was denied summary judgment as to its claim for statutory damages
for such infringement and denied several of its damages claims. The matter is
scheduled to be tried in April 1999. The Company believes that the only matter
that remains to be litigated is the amount of actual damages, which the Company
believes is an immaterial amount. The Company is unable to predict the outcome
of the matter at this time. However, management
14
<PAGE> 17
believes that an unfavorable outcome in this matter would not have a material
adverse effect on the Company's business, financial condition or results of
operations.
In February 1998, the Company filed a suit against Robelle in Circuit
Court in Palm Beach County, Florida. The Company alleges that Robelle wrongfully
terminated its VAR License Agreement with the Company and breached the terms
thereof. Robelle has denied any wrongdoing and the matter is in preliminary
stages of discovery. The Company is unable to predict the outcome of the matter
at this time. However, management believes that an unfavorable outcome in this
matter would not have a material adverse effect on the Company's business,
financial condition or results of operations.
From time to time, the Company is involved in other legal proceedings
incidental to the conduct of its business. The Company believes that this other
litigation, individually or in the aggregate, to which it is currently a party
is not likely to have a material adverse effect on the Company's business,
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
15
<PAGE> 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock began trading in the NASDAQ National Market
under the symbol "SGAI" on January 29, 1999. Accordingly, the market price
information is not available for 1998. As of March 15, 1999, the high and low
sales prices for the Common Stock since the commencement of trading were $9.75
and $21.875, respectively.
As of March 15, 1999, there were 12,191,504 shares of Common Stock
outstanding, held by 44 stockholders of record. The Company believes that
certain holders of record hold a substantial number of shares of Common Stock as
nominees for a significant number of beneficial owners. The closing price for
the Company's Common Stock on March 15, 1999 was $ 16.625 per share.
The Company terminated its S Corporation election effective January 1,
1999. As an S Corporation, the Company has paid dividends to its shareholders
from time to time in part to partially fund or offset their tax liability with
respect to S Corporation earnings. In 1995, in connection with the sale of $12.0
million aggregate principal amount of convertible debentures (the "Convertible
Debentures"), the Company paid an aggregate dividend to its shareholders in the
amount of $12.0 million and an additional $3 million to offset its shareholders
1995 tax liability. In September 1998, the Company paid an aggregate dividend to
its shareholders in the aggregate amount of $70,610 to offset its shareholders
1997 tax liability. In connection with the Company's initial public offering
(the "Offering") the Company approved the issuance to its shareholders of
promissory notes representing the estimated income tax liability of each of them
for the period of January 1, 1998 through December 31, 1998, which is estimated
to be approximately $850,000 (subject to adjustment based on the Company's cash
earnings through the date of its conversion to C Corporation status). The
Company voluntarily revoked its S Corporation status effective January 1, 1999.
The payment of dividends is within the discretion of the Board of Directors. It
is the present intention of the Board of Directors following the Offering to
retain all future earnings for use in the Company's business operations and,
accordingly, the Board does not anticipate declaring any dividends in the
foreseeable future.
RECENT SALES OF REGISTERED SECURITIES
In connection with the Offering, the Company's Registration Statement
on Form S-1 (No. 333-63125) (the "Registration Statement") was declared
effective on January 28, 1999. Pursuant to such Registration Statement, on
February 3, 1999, the Company and certain selling shareholders sold 4,000,000
and 410,000 shares of Common Stock, respectively, at a price of $12 per share.
The managing underwriters for this sale of Common Stock were BT Alex. Brown
Incorporated and SoundView Technology Group (collectively, the "Underwriters").
On March 3, 1999, pursuant to the Underwriters' over-allotment option, the
Company sold an additional 661,500 shares of Common Stock at a price of $12 per
share. All of the securities offered by the Registration Statement were sold in
the Offering and thereafter the Offering terminated. The aggregate gross
proceeds to the Company in connection with the Offering were approximately $55.9
million. The total expenses incurred in connection with the Offering, including
underwriting discounts and commissions, and fees for registration, legal,
accounting, transfer agent, printing and other miscellaneous fees, are estimated
to be approximately $5.3 million, resulting in net offering proceeds of
approximately $50.6 million to the Company.
As of March 15, 1999, the net proceeds of the Offering have been used
as follows: (i) $12.0 million to redeem all of the 12,000 shares of redeemable
preferred stock, par value $.01 per share and $1,000 per share preference value
(the "Redeemable Preferred Stock"), issued to certain lenders (Advent VII L.P.,
Advent Atlantic and Pacific II L.P., Advent Industrial II L.P., Advent New York
L.P., Chestnut Capital International III Limited Partnership and TA Venture
Investors Limited Partners (each a "Lender" and collectively the "Lenders"))
upon the conversion of the Convertible Debentures, (ii) approximately $4.7
million to pay accrued interest due and payable on the Convertible Debentures.
The Company has agreed to make a distribution of approximately $850,000 of the
net proceeds to Wilburn Smith, Allan J. Gardner and Thomas Quigley, who were the
Company's sole shareholders prior to the Offering, in the aggregate amount
representing the estimate individual income tax liability of each of such
shareholders for the period
16
<PAGE> 19
effective date of beginning January 1, 1998 and ending on December 31, 1998, the
date immediately preceeding the Company's voluntary S Corporation revocation.
The remaining net proceeds will be used for working capital, capital
expenditures and for general corporate purposes.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below as of December
31, 1994, 1995, 1996, 1997 and 1998 and for each of the years in the five year
period ended December 31, 1998 are derived from the Consolidated Financial
Statements of the Company which have been audited by KPMG LLP, independent
public accountants. The Company's consolidated balance sheets as of December 31,
1997 and 1998, and consolidated statements of operations for each of the years
in the three year period ended December 31, 1998 appear elsewhere in this
report. The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the Consolidated Financial Statements and Notes thereto, included elsewhere in
this report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Computer software ...................................... $ 6,551 $ 6,594 $ 5,932 $ 5,084 $ 11,536
Computer hardware ...................................... 11,988 13,641 7,370 8,144 13,264
Support ................................................ 2,159 3,343 4,038 4,100 5,335
Services ............................................... 767 1,351 1,189 1,324 3,567
----------- ----------- ----------- ----------- -----------
Total revenue .................................... 21,465 24,929 18,529 18,652 33,702
Cost of sales and services:
Computer software ...................................... 1,082 808 585 1,504 2,500
Computer hardware ...................................... 8,586 10,607 5,805 6,010 9,786
Support ................................................ 1,956 2,491 3,141 3,271 3,222
Services ............................................... 727 1,016 902 1,104 2,271
----------- ----------- ----------- ----------- -----------
Total cost of sales and services ................. 12,351 14,922 10,433 11,889 17,779
----------- ----------- ----------- ----------- -----------
Gross Profit ............................................. 9,114 10,007 8,096 6,763 15,923
Operating expenses:
General and administrative ............................. 3,246 3,206 4,776 4,567 6,538
Research and development ............................... 1,609 2,166 2,254 2,011 2,254
Sales and marketing .................................... 508 523 980 1,482 2,430
----------- ----------- ----------- ----------- -----------
Total operating expenses ......................... 5,363 5,895 8,010 8,060 11,222
----------- ----------- ----------- ----------- -----------
Income (loss) from operations ............................ 3,751 4,112 86 (1,297) 4,700
Other income (expense):
Interest expense:
Interest on outstanding debt ........................... (39) (1,200) (1,200) (1,500) (1,800)
Amortization of original issue discount(1) ............. (45) (1,378) (1,378) (680) --
Interest income .......................................... 50 129 42 109 102
----------- ----------- ----------- ----------- -----------
Total interest income (expense), net ............. (34) (2,449) (2,536) (2,071) (1,697)
----------- ----------- ----------- ----------- -----------
Net income (loss) ........................................ $ 3,717 $ 1,663 $ (2,450) $ (3,368) $ 3,003
=========== =========== =========== =========== ===========
Net income (loss) per share:
Basic .................................................. $ 0.71 $ 0.32 $ (0.47) $ (0.64) $ 0.57
=========== =========== =========== =========== ===========
Diluted ................................................ $ 0.49 $ 0.32 $ (0.47) $ (0.64) $ 0.50
=========== =========== =========== =========== ===========
Weighted average shares used in calculating
net income (loss) per share:
Basic ................................................ 5,263 5,263 5,263 5,263 5,263
=========== =========== =========== =========== ===========
Diluted .............................................. 7,519 7,519 5,263 5,263 8,131
=========== =========== =========== =========== ===========
Pro forma data:
Net income (loss) before income tax (expense) benefit .. $ 3,717 $ 1,663 $ (2,450) $ (3,368) $ 3,003
Pro forma income tax (expense) benefit (unaudited)(2) .... (1,425) (1,155) 360 948 (1,215)
----------- ----------- ----------- ----------- -----------
Pro forma net income (loss) (unaudited)(2) ............... $ 2,292 $ 508 $ (2,090) $ (2,420) $ 1,788
=========== =========== =========== =========== ===========
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Pro forma net income per share (unaudited):
Basic................................................. $ 0.34
==========
Diluted............................................... $ 0.34
==========
Weighted average number of shares used in calculating
pro forma net income per share (unaudited):
Basic.................................................. 5,263
==========
Diluted................................................ 5,263
==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ................... $ 12,187 $ -- $ 60 $ 169 $ 1,577
Working capital ............................. 13,614 1,175 1,233 16 3,904
Total assets ................................ 18,580 4,717 3,666 3,135 9,470
Convertible debt and accrued interest(1) .... 8,603 9,942 12,520 14,700 16,500
Stockholders' equity (deficit)(1) ........... 5,488 (8,099) (10,550) (13,918) (10,951)
</TABLE>
- ---------------------
(1) The fair value of the conversion features of the Convertible Debentures has
been determined to be $3.5 million based on the difference between the
stated interest rates and the estimated market rate of such Convertible
Debentures on the date of issuance. The amount is included in additional
paid-in capital in the accompanying consolidated balance sheets, with the
resulting OID on the convertible debt being amortized from the date of
issuance (December 19, 1994) to the date the security first became
convertible (June 30, 1997). This interest expense is a non-cash item.
(2) Prior to completing its initial public offering of Common Stock and as a
result of its election to be treated as an S Corporation for income tax
purposes, the Company was not subject to federal or certain state income
taxes. Upon the Company's voluntary revocation of its S Corporation
effective January 1, 1999, the Company is subject to federal and certain
state taxes at applicable rates for a C Corporation. The unaudited pro
forma income tax (expense) benefit presented in the consolidated statements
of operations represents the estimated taxes that would have been recorded
had the Company been a C Corporation for income tax purposes for each of
the periods presented.
18
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO INCLUDED
ELSEWHERE HEREIN.
OVERVIEW
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.
Since its inception in 1988, management of the Company has concentrated
on providing software-based systems and services to leading non-store marketing
companies and to retailers, wholesalers and fulfillment houses with significant
non-store sales channels. By focusing on this market, management believes that
the Company has been able to develop a significant industry expertise that has
been incorporated in the functionality of the Company's products and services.
The Company's MACS II and MACS III products offer over 3,000 functional options,
process up to 200,000 transactions per day and are used primarily by companies
with high-volume non-store commerce operations. WebOrder, the Company's new
Internet commerce solution, is a highly scalable system that enables real-time
interactive customer ordering, and automates processing and back-office
operations for companies selling products or services over the Internet.
WebOrder incorporates both the functionality and scalability of MACS II and MACS
III.
During 1996, the Company effected an internal reorganization which
included adding support, development and sales resources to generate future
increases in new customer installations, improve client services and develop new
software products such as WebOrder, MACS for UNIX and MACS for NT. This
reorganization was precipitated by a decline in new customer sales which began
in 1995 and continued in 1996. Primarily because of this reorganization, the
Company experienced losses in 1996 and 1997.
In 1997, new client revenue increased by 107.2% while upgrade revenue
declined by 40.9%, resulting in virtually no change in the Company's total
revenue from 1996 to 1997. The decline in upgrade revenue was primarily a result
of lower new client sales in 1995 and 1996. In 1997, the Company's net loss was
attributable to a number of factors, including the Company's continued
investment in infrastructure. To accommodate its new client sales and to fuel
potential future revenue growth, the Company increased its number of
installation and support personnel, added salespeople, continued the development
of its UNIX and Windows NT products, and started the development of WebOrder. In
addition, the Company opened offices in the United Kingdom and Australia to
expand its presence abroad.
Since the end of 1997, the Company has experienced a continued increase
in new client sales. Total revenue increased 80.7% during the year ended
December 31, 1998, compared to the same period in 1997, which resulted in
increased income from operations for year ended December 31, 1998. The revenue
growth in 1998 is attributable to a number of factors, including clients seeking
to replace systems that are not Year 2000 compliant, the Company's greater focus
on services revenue, increasing sales of WebOrder and
19
<PAGE> 22
increasing demand for MACS in Europe. The Company's expanding client base also
contributed to revenue growth during 1998 through purchases of upgrades and
additional services.
The Company generates revenue from four principal sources: (i) license
fees for its software products; (ii) sales of related computer hardware
components; (iii) software support; and (iv) services consisting of consulting,
training and custom programming. System revenue, which includes software license
fees and hardware components, is generated by sales to new and existing clients.
The Company's revenue and long-term growth are largely dependent on the
sale of its systems to new clients. These new system sales have a fairly
predictable implementation cycle. System sales to new clients represented 36.5%
of total revenue during the year ended December 31, 1998, and increased 64.0%
from the year ended December 31, 1997. System upgrades represented 37.1% of
total revenue for the year ended December 31, 1998. System upgrades consist
primarily of additional software user license fees and central processing unit
("CPU") upgrades for its existing clients. System upgrades typically have short
sales cycles and therefore are fairly unpredictable.
The Company believes that computer hardware upgrades are generally
performed during the one to two-year period following a new sale. During 1993
and 1994, the Company experienced a high level of new customer revenue,
resulting in substantial upgrades in 1995 and 1996. In 1995 and 1996, new
customer revenue declined substantially, thus causing hardware and software
upgrade revenue to decline in fiscal year 1997. Increased new customer revenue
in 1997 and additional upgrades from existing clients contributed to higher
upgrade sales in 1998. The Company believes that upgrades are dictated solely by
the business requirements of individual clients and, therefore, the Company is
unable to accurately predict or explain the actual mix between software and
hardware upgrades.
The Company recognizes revenue in accordance with Statement of Position
("SOP") 97-2, Software Revenue Recognition. Under this provision, hardware and
software license fees for new systems are recognized as revenue when the
hardware and software has been delivered and installed, the fee is fixed and
determinable and the collectibility is probable. Revenue relating to system
upgrades is recognized upon installation, provided that all significant
obligations have been met. Revenue from hardware and software components sold
separately is recognized upon receipt by the client.
Each new system client executes a contract which identifies the number
of licensed MACS users, hardware configuration, and pricing for the software
license and support services. The contract also contains pricing provisions for
supplemental software user licenses and CPU upgrades. The Company typically
receives a deposit equal to 25% of the system selling price upon contract
signing and an additional 25% prior to installation of the system. The balance
is generally payable in two installments, one of which is payable upon
installation of the software and the balance upon operation of the installed
system. The differences between amounts received and amounts recognized are
recorded as deferred revenue.
Support services are billed monthly, in advance, and revenue from such
services is recognized ratably over the contract term. The Company's software
support agreements typically have one-year terms, are automatically renewed
annually and may be terminated at the discretion of the client. Historically,
more than 95% of all clients utilizing the Company's software have renewed their
support agreements.
Training and consulting services are performed on a time-and-materials
basis and revenue is recognized as the services are completed. Contract
programming services are generally short-term in nature and performed on a
fixed-fee basis. When performed in conjunction with a sale to a new client,
contract
20
<PAGE> 23
programming revenue is recognized upon delivery and receipt of a signed client
acknowledgment that hardware and software have been installed. Programming
services performed for existing clients are recognized upon receipt of final
payment.
In accordance with Statement of Financial Accounting Standards No. 86,
software development costs are expensed as incurred until technological
feasibility of the software is established, after which any additional costs are
capitalized. To date, the Company has expensed all software development costs
because development costs incurred subsequent to the establishment of
technological feasibility have been minimal.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage relationship of certain statement of operations items to total
revenue:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Revenue:
Computer software 32.0% 27.2% 34.2%
Computer hardware 39.8 43.7 39.4
Support 21.8 22.0 15.8
Services 6.4 7.1 10.6
------- ------- -------
Total revenue 100.0 100.0 100.0
Cost of sales and services:
Computer software 3.2 8.1 7.4
Computer hardware 31.3 32.2 29.0
Support 17.0 17.5 9.6
Services 4.9 5.9 6.7
------- ------- -------
Total cost of sales and services 56.4 63.7 52.7
------- ------- -------
Gross profit 43.6 36.3 47.3
Operating expenses:
General and administrative 25.8 24.5 19.4
Research and development 12.2 10.8 6.7
Sales and marketing 5.3 7.9 7.2
------- ------- -------
Total operating expenses 43.3 43.2 33.3
Income (loss) from operations 0.3 (6.9) 14.0
Other income (expense):
Interest expense:
Interest on outstanding debt (6.5) (8.0) (5.3)
Amortization of original issue discount (7.4) (3.6) --
Interest income 0.2 0.6 .3
------- ------- -------
Total interest expense, net (13.7) (11.0) (5.0)
------- ------- -------
Net income (loss) before pro forma income
tax (expense) Benefit
(13.4) (17.9) 9.0
Pro forma provision for income tax (expense) benefit 1.9 5.1 (3.6)
------- ------- -------
Pro forma net income (loss) (11.5)% (12.8)% 5.4%
======= ======= =======
</TABLE>
21
<PAGE> 24
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
COMPUTER SOFTWARE. Sales of computer software licenses accounted for
approximately 34.2% of the Company's total revenue for the year ended December
31, 1998. Computer software license fees consist of license fees for the new
installation of the Company's MACS software and related modules and additional
user license fees, and CPU upgrades for its existing clients. Computer software
license fees are based on the number of users and type and number of CPUs. The
Company periodically updates or modifies its software pricing in response to
changes in market conditions or costs of sale. Effective July 1, 1998, the
Company changed its MACS software pricing from a tier-based (by CPU and number
of users) to a user based structure with a provision for additional license fees
for multiple CPUs. This was done to enable the Company's clients to more
accurately forecast future license upgrade costs and facilitate new client
sales. The Company cannot predict what effect, if any, this pricing change will
have on MACS software license revenues. Computer software license fees increased
126.9% to $11.5 million during the year ended December 31, 1998 compared to $5.1
in 1997. This increase resulted from an increase in computer software sales to
both new and existing clients including material contracts with United States
Mint and Multiple Zones in 1998. Total sales from these two customers amounted
to 16.8% of revenue for 1998. New client computer software sales increased from
$3.0 million for the year ended December 31, 1997 to $5.9 million in 1998, and
computer software upgrades increased from $2.0 million to $5.6 million for the
same period.
COMPUTER HARDWARE. Sales of computer hardware accounted for
approximately 39.4% of the Company's total revenue for the year ended December
31, 1998. Sales of computer hardware consists of sales of computer systems,
peripheral components and third-party software. Computer hardware revenue
increased 62.9% to $13.3 million for the year ended December 31, 1998, compared
to $8.1 million for the year ended December 31, 1997. Computer hardware revenue
relating to new client sales increased 42.1% to $6.4 million for the year ended
December 31, 1998, compared to $4.5 million for the same period in 1997. This
increase resulted from increases in new system sales. Computer hardware upgrades
increased by 88.3% to $6.9 million for the year ended December 31, 1998,
compared to $3.7 million for the same period in 1997. The increase in 1998
resulted from many of the Company's larger clients performing major system
upgrades.
SUPPORT. Support revenue accounted for approximately 15.8% of the
Company's total revenue during the year ended December 31, 1998. Support revenue
consists of fees for technical support services and product enhancements for the
MACS software and integrated third-party software utilities. Support revenue
typically represents 17% of the underlying license fee each year. Support
revenue increased 30.1% to $5.3 million during the year ended December 31, 1998,
compared to $4.1 million for the year ended December 31, 1997. The increase
resulted from the addition of new clients in the last half of 1997 and during
1998, as well as support fee increases related to software user license
upgrades.
22
<PAGE> 25
SERVICES. Services revenue accounted for approximately 10.6% of the
Company's revenue for the year ended December 31, 1998. Services revenue
consists principally of revenue derived from training, consulting, and custom
programming. Services revenue increased 169.4% to $3.6 million in the year ended
December 31, 1998, compared to $1.3 in 1997. This increase was due to increases
in new client software modifications, custom interfaces to third-party products,
and consulting services.
TOTAL REVENUE. Total revenue increased 80.7% to $33.7 million for the
year ended December 31, 1998, compared to $18.7 million in 1997. New client
sales increased 64.0% to $12.3 million from $7.5 million for the year ended
December 31, 1997. The increase was due to more installations and higher average
revenue per installation than during the twelve months ended December 31, 1997
as a result of material contracts with the United States Mint and Multiple
Zones. Also contributing to the revenue increase were sales of $3.1 million in
1998 from the Company's United Kingdom subsidiary. Revenue from client system
and component upgrades increased by 118.3% to $12.5 million for the year ended
December 31, 1998, compared to $5.7 million in 1997 due to increased new client
sales in 1997 and clients performing major system upgrades.
COST OF COMPUTER SOFTWARE. Cost of computer software, which includes
installation and training salaries directly related to new software sales and
subcontractor fees, increased 66.3% to $2.5 million during the year ended
December 31, 1998, compared to $1.5 for the year ended December 31, 1997. The
increase resulted from higher personnel costs related to increased installations
of new systems and sales to new clients. Cost of computer software as a
percentage of total revenue decreased to 7.4% from 8.1% for the year ended
December 31, 1997. Cost of computer software as a percentage of software license
fees decreased to 21.7% from 29.6% for the year ended December 31, 1997. These
decreases are due to greater efficiencies and increased utilization of personnel
resources in 1998.
COST OF COMPUTER HARDWARE. Cost of computer hardware, which consists of
purchases of computer systems, peripheral components and third party software,
increased 62.8% to $9.8 million for the year ended December 31, 1998, compared
to $6.0 million in 1997. This increase was related to the 62.9% increase in
computer hardware revenue in 1998 compared to 1997. Costs of computer hardware
as a percentage of total revenue decreased to 29.0% in 1998 from 32.2% in 1997,
due primarily to a shift in sales mix reducing the relative contribution of
computer hardware sales. Costs of computer hardware as a percentage of computer
hardware revenue was 73.8% for the years ended December 31, 1998 and 1997.
COST OF SUPPORT. Cost of support consists primarily of personnel costs
associated with the support of the Company's MACS product and third-party
computer software packages and the cost of MACS user documentation distributed
to clients. Cost of support decreased 1.5% to $3.2 million for the year ended
December 31, 1998 from $3.3 million in 1997. The decrease was due to lower
personnel costs and greater efficiencies in delivering support services. Cost of
support as a percentage of total revenue decreased to 9.6% for the year ended
December 31, 1998 from 17.5% in 1997. This decrease occurred because total
revenue increased while support costs remained relatively constant between
years. Cost of support as a percentage of support revenue decreased to 60.4% for
the year ended December 31, 1998 from 79.8% in 1997. The reduction resulted from
additional support fees from new clients and increased utilization of existing
support personnel.
COST OF SERVICES. Cost of services, which consists of salaries for
professional services employees, and allocated salaries for training and
programming personnel, increased 105.6% to $2.3 million during the year ended
December 31, 1998, compared to $1.1 million in 1997. The increase was due to the
addition of professional services employees and a greater allocation of
programming personnel related to the
23
<PAGE> 26
increases in custom programming revenue. Cost of services as a percentage of
total revenue increased to 6.7% from 5.9% for the year ended December 31, 1997.
Cost of services as a percentage of services revenue decreased to 63.6% for the
year ended December 31, 1998 from 83.4% in 1997. The decrease was related to
increased utilization of available resources and higher pricing for professional
services..
TOTAL COST OF SALES AND SERVICES. Total cost of sales and services
increased by 49.5% to $17.8 million for the year ended December 31, 1998,
compared to $11.9 million in 1997. The increase in total cost of sales and
services is attributable to higher hardware cost in the amount of $3.8 million,
and an increase of $1.9 million in personnel cost associated with higher sales
volume in 1998.
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 43.2% to
$6.5 million for the year ended December 31, 1998, compared to $4.6 million in
1997. This increase was primarily due to $753,000 of expenses associated with
new offices in the United Kingdom and Australia which were opened during the
second half of 1997, $280,000 in additional salaries and benefits due to
increases in administrative personnel related to an expanding workforce and
client base, and approximately $833,000 of additional communication, recruiting,
insurance, travel, equipment and office expenses as a result of more employees.
General and administrative expenses as a percentage of total revenue decreased
to 19.4% for the year ended December 31, 1998 from 24.5% in 1997.
RESEARCH AND DEVELOPMENT. Research and development expenses include
costs associated with the development of new products and enhancements of
existing 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 12.1% to $2.3 million during the year ended
December 31, 1998, compared to $2.0 in 1997. This increase was primarily due to
ongoing development of the WebOrder, UNIX and Windows NT products and existing
product enhancements. Research and Development expenses as a percentage of
computer software license fees were 19.5% for the year ended December 31, 1998
and 39.6% in 1997. This decrease is due to license revenues increasing at a
faster rate than development costs.
SALES AND MARKETING. Sales and marketing expenses include personnel
costs, sales commissions related to the sale 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 64.0% to $2.4 million for the year ended December 31,
1998, compared to $1.5 in 1997. This increase resulted from increased sales,
modifications to the Company's sales commission plan and expanded marketing and
advertising programs. Sales and marketing expenses as a percentage of total
revenue decreased to 7.2% for the year ended December 31, 1998 from 7.9% for the
year ended December 31, 1997.
INCOME (LOSS) FROM OPERATIONS. As a result of the foregoing factors,
the Company's income from operations increased by $6.0 million to $4.7 million
for the year ended December 31, 1998 as compared to a loss of $1.3 million for
the year ended December 31, 1997.
OTHER INCOME (EXPENSE), NET. Net interest expense, which includes
interest on the $12.0 million aggregate principal amount of Convertible
Debentures held by the Lenders, amortization of original discount ("OID")
related to the conversion feature of the Convertible Debentures and interest
income on available cash, decreased 18.0% to $1.7 million for the year ended
December 31, 1998, compared to $2.1 million in 1997. The decrease was due to a
reduction of OID which was fully amortized as of June 30, 1997. No OID
24
<PAGE> 27
amortization was recorded for the year ended December 31, 1998. See "Liquidity
and Capital Resources" and Notes 6(a) and 6(b) of Notes to Consolidated
Financial Statements.
PRO FORMA INCOME TAX (EXPENSE) BENEFIT. The pro forma effective tax
rate for the year ended December 31, 1998 was a provision of 40.5% compared to a
benefit of 28.2% in 1997. Effective pro forma income tax rates differ from the
federal statutory rates because of the following: (i) OID is not deductible for
federal and state income tax purposes; (ii) the effect of state income taxes;
and (iii) the full valuation of net losses of foreign subsidiaries. Also, pro
forma effective rates vary between periods because of the differing effects the
OID and net losses of foreign subsidiaries have on pro forma income before
income taxes.
PRO FORMA NET INCOME (LOSS). As a result of the above factors, the
Company's pro forma net income increased by $4.2 million to $1.8 million for the
year ended December 31, 1998 from a loss of $2.4 million in 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
COMPUTER SOFTWARE. Computer software fees decreased 14.3% to $5.1
million for the year ended December 31, 1997, compared to $5.9 million for the
year ended December 31, 1996. This change was due to a decrease in revenue from
system upgrades of $2.0 million from $4.1 million in 1996 to $2.1 million in
1997, and an increase in new client sales of $1.1 million from $1.9 million in
1996 to $3.0 million in 1997. This increase in new client sales during 1997 was
due to changes in the Company's sales process and the addition of new sales
resources.
COMPUTER HARDWARE. Computer hardware revenue increased 10.5% to $8.1
million in 1997, compared to $7.4 million in 1996. Computer hardware revenue
relating to new client sales increased 157.6% to $4.5 million for the year ended
December 31, 1997, compared to $1.7 million in 1996. Revenue from hardware
upgrades decreased by 34.9% to $3.7 million for the year ended December 31,
1997, compared to $5.6 million in 1996.
SUPPORT. Support revenue increased 1.5% to $4.1 million during the year
ended December 31, 1997, compared to $4.0 million in 1996. This increase
primarily resulted from the addition of new clients.
SERVICES. Services revenue increased 11.4% to $1.3 million in 1997,
compared to $1.2 million in 1996. This increase was primarily due to additional
software modifications for new and existing clients and a greater demand for
consulting services.
TOTAL REVENUE. Total revenue increased 0.7% to $18.7 million in 1997,
compared to $18.5 million in 1996. New client sales increased 107.2% to $7.5
million in 1997 from $3.6 million for the year ended December 31, 1996. Revenue
from client system and component upgrades decreased by 40.9% to $5.7 million for
the year ended December 31, 1997, compared to $9.7 million for 1996.
COST OF COMPUTER SOFTWARE. Cost of computer software increased 157.3%
to $1.5 million in 1997, compared to $584,000 in 1996. This increase resulted
from the addition of personnel required to support new client sales volume. Cost
of computer software as a percentage of total revenue increased to 8.1% from
3.2% for the year ended December 31, 1996. Cost of computer software as a
percentage of computer software revenue increased to 29.6% from 9.9% in 1996.
This increase was primarily due to the increase in personnel during 1997 to
accommodate future anticipated sales.
25
<PAGE> 28
COSTS OF COMPUTER HARDWARE. Cost of computer hardware increased 3.5% to
$6.0 million during the year ended December 31, 1997, compared to $5.8 million
in 1996. This increase was related to the 10.5% increase in computer hardware
revenue from 1996. Cost of computer hardware as a percentage of total revenue
increased to 32.2% from 31.3% in 1996. Cost of computer hardware as a percentage
of computer hardware revenue decreased to 73.8% from 78.8% for the year ended
December 31, 1996. This decrease primarily resulted from an increase in new
client sales, which generally provide higher computer hardware gross margins
than those for upgrade sales, and the sale of third-party computer software
utilities, which are sold at higher margins than computer hardware system
components.
COST OF SUPPORT. Cost of support increased 4.1% to $3.3 million in
1997, compared to $3.1 million in 1996, due to the addition of personnel to
support new clients and the cost of MACS user documentation distributed to
clients during 1997. Cost of support as a percentage of total revenue increased
to 17.5% from 17.0% in 1996. Cost of support as a percentage of support revenue
increased to 79.8% from 77.8% in 1996.
COST OF SERVICES. Cost of services increased 22.4% to $1.1 million in
1997, compared to $902,000 in 1996. This increase was primarily due to the
hiring of additional professional services personnel during 1997 and a greater
allocation of programming personnel utilized for custom programming. Cost of
services as a percentage of total revenue increased to 5.9% in 1997 from 4.9% in
1996. Cost of services as a percentage of services revenue increased to 83.4%
from 75.9% in 1996. The increase was due to utilization of newly trained
professional services personnel in 1997.
TOTAL COST OF SALES AND SERVICES. Total cost of sales and services
increased by 14.0% to $11.9 million for the year ended December 31, 1997,
compared to $10.4 million in 1996. This increase resulted primarily from the
increase in new clients during 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased 4.4% to $4.6 million for the year ended December 31, 1997, compared to
$4.8 million during 1996. This was related to a decrease in bad debt expense of
$285,000 offset by increased expenses associated with new offices in the United
Kingdom and Australia totaling $300,000, and $185,000 relating to other
administrative expenses. The significant account receivable write-offs in 1997
were primarily attributable to (i) a $382,000 write off of remaining outstanding
invoices and advances to a former distributor of the Company's products and (ii)
an additional $103,000 write off based on a year-end analysis of outstanding
accounts receivable. General and administrative expenses as a percentage of
total revenue decreased to 24.5% in 1997 from 25.8% in 1996.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased
10.8% to $2.0 million in 1997, compared to $2.3 million in 1996. As a percentage
of computer software license fee revenue, research and development expenses
increased to 39.6% in 1997, compared to 38.0% in 1996, as a result of reduced
computer software license fee revenue.
SALES AND MARKETING. Sales and marketing expenses increased 51.2% to
$1.5 million in 1997, compared to $980,000 in 1996, primarily as a result of
increases in sales personnel and commissions associated with the increase in new
client computer software revenue. Also in 1997, the Company incurred additional
expenses associated with establishing a separate marketing department. The
marketing function was formerly performed by the sales department. As a
percentage of total revenue, sales and marketing expenses increased to 7.9% in
1997, compared to 5.3% in 1996.
INCOME (LOSS) FROM OPERATIONS. As the result of the above factors, the
Company's income (loss) from operations declined by $1.4 million resulting in a
$1.3 million loss from operations in 1997, compared
26
<PAGE> 29
to income from operations of $86,000 in 1996. The loss in 1997 resulted from the
decline in revenue from system upgrades, as well as expenses associated with
opening new offices in the United Kingdom and Australia, and hiring additional
support, sales and marketing personnel.
OTHER INCOME (EXPENSE), NET. Net interest expense decreased by 18.4% to
$2.1 million in 1997, compared to $2.5 million in 1996. This decrease was due to
a reduction of OID which was fully amortized as of June 30, 1997. See "Liquidity
and Capital Resources" and Notes 6(a) and 6(b) of Notes to Consolidated
Financial Statements.
PRO FORMA INCOME TAX (EXPENSE) BENEFIT. The pro forma effective tax
rate for the year ended December 31, 1997 was a benefit of 28.2% compared to a
benefit of 14.7% for the year ended December 31, 1996. Effective pro forma
income tax rates differ from the federal statutory rates because of the
following: (i) OID is not deductible for federal and state income tax purposes;
(ii) the effect of state income taxes; and (iii) the full valuation of net
losses of foreign subsidiaries. Also, pro forma effective rates vary between
periods because of the differing effects the OID and net losses of foreign
subsidiaries have on pro forma income before income taxes.
PRO FORMA NET INCOME (LOSS). As a result of the above factors, the
Company's pro forma net loss for the year ended December 31, 1997 increased by
$329,000 to $2.4 million from $2.1 million in 1996.
SEASONALITY
The Company generally has realized lower revenue in the fourth quarter
of the year than in the other quarters. The Company believes that this has been
due primarily to the tendency of many of the Company's clients to avoid
implementing a new system or an upgrade of an existing system during the holiday
season, typically the busiest time of year for substantially all of the
Company's clients. Due to all of the foregoing factors, the Company believes
that period to period comparisons of its operating results are not necessarily
meaningful and that such comparisons cannot be relied upon as indicators of
future performance.
LIQUIDITY AND CAPITAL RESOURCES
On December 19, 1994, the Company entered into a Debenture Purchase
Agreement (the "Debenture Agreement") with the Lenders in connection with the
Convertible Debentures. Principal on the Convertible Debentures was payable in
two equal installments of $6.0 million on December 1, 1999 and December 1, 2000,
and bore interest at 10% through June 30, 1997 and began accruing interest at
15% thereafter. Interest was payable quarterly in arrears and commenced on March
31, 1995. The Debenture Agreement provided for a default rate of interest of 20%
on all principal amounts not paid within 15 days of the date due. At December
31, 1998, the Company was not in compliance with certain debt covenants. The
Lenders waived all applicable default remedies pertaining to the interest
payments they were entitled to enforce against the Company under the Debenture
Agreement and waived compliance by the Company with respect to such covenants
through the consummation of an initial public offering. In order to maintain
sufficient working capital for the Company's needs, the Company agreed with the
Lenders to defer all interest and principal payments due or payable through
consummation of an initial public offering.
On June 30, 1997, the Convertible Debentures became convertible at the
option of a majority in interest of the Lenders into the 22,556.14 shares of
convertible participating preferred stock, par value $0.01 per share (the
"Convertible Preferred Stock") and the Redeemable Preferred Stock. The fair
value of the conversion features of the Convertible Debentures was determined to
be $3.5 million based on the difference between the stated interest rates and
the estimated market rate of such Debentures upon the date of issuance. This
amount is included in additional paid-in capital in the accompanying
consolidated balance sheets, with the resulting OID on the loan being amortized
from the date of issuance through June 30, 1997. Non-cash interest expense
related to the amortization of the OID was $1,378,276 and $679,697 in 1996 and
1997, respectively. See Note 6(b) of Notes to Consolidated Financial Statements.
27
<PAGE> 30
During the past three fiscal years, the Company has financed its
operations and growth with funds generated by operations. At December 31, 1998,
the Company's primary sources of liquidity consisted of cash, cash equivalents
and short-term investments totaling $1.6 million.
The Company's operating activities have provided cash for years ended
December 31, 1998, 1997 and 1996, of $2.7 million, $543,000, and $86,000,
respectively. For the year ended December 31, 1998, the Company's operating cash
was provided by net income, continued deferral of interest payments due under
the Convertible Debentures, client deposits received in advance of recognized
revenue, and increased accounts payable and accrued expenses partially offset by
increases to accounts receivable. In 1997 and 1996, the Company's primary source
of operating cash was provided by the deferral of interest payments due under
the Convertible Debentures.
Cash used in investing activities was approximately $585,000, $234,000,
and $251,000, for years ended December 31, 1998, 1997, and 1996, respectively.
This cash was used for capital expenditures in the ordinary course of business.
The Company's capital expenditures 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 will increase as its employee base grows.
For the year ended December 31, 1998, cash used in financing activities
totaled $623,000, which consisted of distributions to stockholders and deferred
offering costs. Cash used in financing activities totaled $200,000 in 1997,
which consisted of repayment of advances from officers made during 1996. During
1996, financing activities provided $225,000 through advances from officers and
repayment of employee loans.
As of December 31, 1998, the Company had working capital of
approximately $3.9 million as compared to working capital of approximately
$16,000 at December 31, 1997. The change in working capital from December 31,
1997 to December 31, 1998, resulted primarily from an increase in current assets
of $5.5 million due to cash generated from operations and increases in accounts
receivable and inventory, offset by an increase in current liabilities of $1.6
million due to increases in accounts payable, accrued expenses and deferred
revenue. Accounts receivable increased by approximately $4.0 million from
December 31, 1997 to December 31, 1998. This increase was primarily attributable
to $5.4 million increase in sales between the fourth quarter of 1998 and the
fourth quarter of 1997. Deferred revenue increased by approximately $782,000
from December 31, 1997 to December 31,1998. The increase for the year ended
December 31, 1998 compared to 1997 was primarily due to higher new client sales
activity in 1998. Deferred revenue represents amounts billed to clients for
which revenue may not be recognized
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 $44,640,000 net of underwriter commissions. At
that time, the Debentures were converted into the Convertible Preferred Stock
and the Redeemable Preferred Stock. Contemporaneous with the offering and
pursuant to the terms of the Convertible Preferred Stock, the Lenders converted
the Convertible Preferred Stock into 2,255,614 shares of Common Stock.
On February 3, 1999, the Company redeemed in full the Redeemable
Preferred Stock for $12,000,000 and paid accrued interest in the amount of
$4,665,000.
28
<PAGE> 31
On February 26, 1999, the underwriter exercised the option to purchase
661,500 additional shares of the Company's common stock from which the Company
received proceeds of $7,382,340.
Based on the IBO proceeds, payment of outstanding convertible debt,
increased sales in 1998 and the Company's anticipated operating results,
management believes there is sufficient funding to meet its operating
expenditures.
The Company may, in the future, acquire businesses or products
complementary to the Company's business, or otherwise obtain the right to use
complementary technologies, although there can be no assurance that any such
acquisitions will be made. The need for cash to finance additional working
capital or to make acquisitions may cause the Company to seek additional equity
or debt financing. There can be no assurance that such financing will be
available, or that the Company's need for higher levels of working capital will
not have a material adverse effect on the Company's business, financial
condition or results of operations.
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 programs developed by a third-party provider and
incorporated into MACS to provide general ledger and accounts payable functions.
The Company's MACS products have been determined to be fully Year 2000
compliant, except for the GTS program. The Company performed tests of all major
functionality within the MACS family of software products, specifically those
areas which utilize date fields. GTS provided Year 2000 compliant code to the
Company in September 1998. With respect to the GTS programs, the Company has
identified all changes necessary to integrate the Year 2000 compliant code into
MACS. The Company completed the internal functional integration and made
available compliant code for supported MACS versions in March 1999. Total
expenditures for time and materials to implement such changes were less than
$40,000.
The Company has also reviewed all material vendor systems for Year 2000
compliance and, except as indicated below, either confirmed that these systems
are Year 2000 compliant or obtained Year 2000 compliance statements from the
respective vendor. All of the Company's network software is Year 2000 compliant
except NT Server 4.0, Backoffice Server and Raptor Firewall. All of the
Company's desktop software is Year 2000 complaint except Windows 95, Visual C++,
Visual Basic and Word 6.0. With respect to such noncompliant software, the
Company expects to obtain updated revisions which are compliant early in 1999.
The Company anticipates total expenditures for time and materials to make such
systems Year 2000 compliant to be approximately $10,000. In addition, the
Company has reviewed all of its internal systems including its hardware and
software systems, its embedded systems, networks, accounting systems, and
development, testing, training and demonstration platforms for Year 2000
compliance. The Company has upgraded all internal systems to Year 2000 compliant
operating system versions where compliance statements were not provided for such
systems. There were no material costs incurred by the Company in connection with
testing its vendor or internal systems. All of the Company's non-IT systems are
Year 2000
29
<PAGE> 32
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.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997 and establishes standards for reporting
and displaying comprehensive income and its components in a full set of general
purpose financial statements. SFAS No. 130 requires all items to be recognized
under accounting standards as components of comprehensive income to be reported
in a separate financial statement. The adoption of SFAS No. 130 did not have a
significant impact on the Company's financial reporting.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997. SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
those enterprises to report selected information about operating segments in
interim financial reports issued to shareholders. The adoption of SFAS No. 131
did not have a significant impact on the Company's financial reporting.
In March 1998, the American Institute of Certified Public Accountants
(the "AICPA") issued Statement of Position 98-5 (SOP 98-5) "Reporting on the
Costs of Start-Up Activities." Pursuant to the provisions of SOP 98-5, all costs
associated with start-up activities, including organizational costs, should be
expensed as incurred. Companies that previously capitalized such costs are
required to write-off the unamortized portion of such costs as a cumulative
effect of a change of accounting principle. The Company had an immaterial amount
of these costs and the adoption of SOP 98-5 did not have a significant impact on
the Company's financial statements.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires an entity to recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The Company does not believe that the adoption
of SFAS No. 133 will have a significant impact on the Company's financial
reporting.
30
<PAGE> 33
ITEM 7A. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial statements as of December 31, 1998
and 1997 and for each of the years in the three year period ended December 31,
1998, and the respective notes thereto, are set forth elsewhere in this report.
An index of these financial statements appears in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
31
<PAGE> 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers and directors of the Company, their ages and
their positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Allan J. Gardner................................. 53 Co-Chairman of the Board and Executive Vice
President--Chief Technology Officer
Wilburn W. Smith................................. 58 Co-Chairman of the Board and Executive Vice
President--Sales
Gary G. Hegna.................................... 58 President, Chief Executive Officer and Director
Martin K. Weinbaum............................... 37 Chief Financial Officer, Vice President--Finance
Timothy Edkin.................................... 46 Vice President--Product Development
Sharon Gardner................................... 32 Vice President--Marketing
Deborah L. Longo................................. 39 Vice President--Client Support Services
Francis H. Zenie................................. 64 Director
Jacqueline C. Morby.............................. 61 Director
James J. Felcyn.................................. 56 Director
</TABLE>
ALLAN J. GARDNER, a co-founder of the Company, has served in a variety
of capacities during his tenure with the Company. From December 1988 to April
1996, Mr. Gardner served as Vice President and Secretary. From January 1997 to
the present, Mr. Gardner has served as Executive Vice President--Advanced
Technologies. From December 1994 until the present, Mr. Gardner has served as a
director of the Company, becoming Co-Chairman of the Board in May 1996. During
his tenure with the Company, Mr. Gardner has also been the chief architect of
the Company's software products. From 1980 to 1988, Mr. Gardner was President of
BSA Incorporated ("BSA"), a catalog management software company. BSA was
acquired by Acxiom Corp. in 1986. Mr. Gardner served on Acxiom's Board of
Directors from 1986 to 1988. Since 1966, Mr. Gardner has worked in the data
processing industry, and since 1980 exclusively in the direct marketing segment
of the non-store marketing industry. Sharon Gardner, the Company's Vice
President--Marketing, is Mr. Gardner's daughter.
WILBURN W. SMITH, a co-founder of the Company, has served in a variety
of capacities during his tenure with the Company. From December 1988 to April
1996, Mr. Smith has served as President and Treasurer of the Company. From
November 1996 to the present, Mr. Smith has served as Executive Vice President -
Sales. From December 1994 to the present, he has served as a director of the
Company, becoming Co-Chairman of the Board in May 1996. Since his tenure with
Bell Labs, now known as Lucent Technologies, in the early 1960's, Mr. Smith has
worked exclusively in the direct marketing industry. Prior to his tenure with
the Company, Mr. Smith was a founder of Brook Smith Associates, the predecessor
company of BSA, and owned and managed several other direct marketing companies.
GARY G. HEGNA has served as the President, Chief Executive Officer and
a director of the Company since April 1996. Mr. Henna also serves as Chairman of
Smith-Gardner UK and Smith-Gardner Australia. From January 1992 to February
1996, Mr. Henna served as the Chairman, President and Chief Executive Officer of
OpenConnect Systems, Inc., a software company based in Dallas, Texas. From
January 1987 to January 1992, Mr. Henna served as President and Chief Executive
Officer of ICL North America, a Dallas
32
<PAGE> 35
based manufacturer of computer systems and telecommunications equipment. Mr.
Henna has also served in various management and executive roles for Xerox
Corporations, Data General Corporation, Prime Computer Incorporated and Encore
Computer.
MARTIN K. WEINBAUM has served as the Company's Vice President--Finance
and Chief Financial Officer since January 1997, and the Company's Secretary and
Treasurer since May 1996. Since October 1997, Mr. Weinbaum has served as a
director of Smith-Gardner UK and Smith-Gardner Australia. From October 1994 to
March 1995, Mr. Weinbaum served as Controller of MediBar Medical Industries, a
diagnostic medical services provider located in Boca Raton, Florida. From
January 1994 to October 1994, Mr. Weinbaum served as the Chief Financial Officer
of Interactive Technologies Company, a pet food wholesale company located in
Fort Lauderdale, Florida. From November 1989 to December 1993, Mr. Weinbaum
served as the Vice President -- Finance and Chief Financial Officer of Aspen
Marine Group/Hawk Marine Power, a high performance engine and boat manufacturer
located in Greenback, Tennessee. From 1984 to 1988, Mr. Weinbaum, who is a
certified public accountant, engaged in public accounting with the firms of
Levitsky & Berney, P.C. and Coopers & Lybrand.
TIMOTHY EDKIN has served as the Company's Vice President -- Product
Development since July 1996. Mr. Edkin's responsibilities include coordinating
the design, development, testing and delivery of the Company's MACS software.
Prior to joining the Company, Mr. Edkin was a consultant to Computer Perfection,
a software support company located in Boca Raton, Florida, from October 1994 to
April 1996. From December 1982 to October 1994, Mr. Edkin served as the Director
of MIS-Support and Development of Business Application Software for Siemens, AG,
a telephone interconnect company located in Boca Raton, Florida.
SHARON GARDNER has served as the Vice President -- Marketing of the
Company since September 1997. Ms. Gardner's responsibilities include
coordinating the Company's marketing, communications, advertising, training,
documentation, professional services and product management functions. From
September 1990 to September 1997, Ms. Gardner was the Company's Vice President
- -- Client Services. From September 1985 to September 1990, Ms. Gardner served in
marketing and client services capacities in a catalog fulfillment house. Allan
J. Gardner, the Company's Co-Chairman, is Ms. Gardner's father.
DEBORAH L. LONGO has served as the Company's Vice President -- Client
Support Services since August 1997. Ms. Longo's responsibilities include
coordinating the Company's client support and installation functions. From May
1994 to September 1997, Ms. Longo served as Director of Client Services for
MorTech, a software company located in Little Rock, Arkansas. From July 1986 to
May 1994, Ms. Longo held various positions including Group Director, Client
Services, with Acxiom Corp., a software company located in Ocean, New Jersey.
FRANCIS H. ZENIE became a director of the Company in December 1998.
From 1981 to September 1996, Mr. Zenie served as President, Chief Executive
Officer and a director of Zymark Corporation, a provider of laboratory
automation solutions. Mr. Zenie presently serves as a director of CogniToy LLC,
InSite Marketing Technology, Inc., Kinematix Incorporated, Process Packaging &
Control, Inc., Sensors for Medicine and Science, Inc. and SEQ Ltd.
JACQUELINE C. MORBY became a director of the Company in February 1999.
Since 1978, Ms. Morby has served as Associate, General Partner and now Managing
Director of TA Associates, Inc., the managing general partner of various venture
capital entities which provided financing to the Company in the past and
currently hold in the aggregate approximately 18% of the Company's outstanding
Common Stock. Ms. Morby presently serves as a director
33
<PAGE> 36
of ANSYS, Inc., Boron, LePore & Associates, Inc., NxTrend Technologies, Inc.,
HVL, Inc. and Pacific Life Insurance Company.
JAMES J. FELCYN, JR. became a director of the Company in March 1999.
Since July 1994, Mr. Felcyn has served as the Chief Financial Officer and
Treasurer of Citrix Systems, Inc. ("Citrix"), a leading provider of thin
client/server system software. Prior to joining Citrix, beginning in April 1994,
Mr. Felcyn served as Chief Financial Officer of NDL Products, Inc. ("NDL"), a
manufacturer of sporting goods. Mr. Felcyn accepted the position of Chief
Financial Officer at the request of the secured lender of NDL, and as a
condition to debtor-in-possession financing for NDL, which filed a Chapter 11
bankruptcy proceeding in the United States Bankruptcy Court for the Southern
District of Florida. Mr. Felcyn served as Vice President -- Finance of Boca
Research, Inc., a manufacturer of computer peripheral products, from April 1992
to December 1993. From January 1992 to April 1992, Mr. Felcyn served as
Controller of Boca Research, Inc. From April 1991 to January 1992, Mr. Felcyn
was employed by World Omni Financial Corp., an automobile finance and leasing
company, where he served as Director of Operations Accounting. Mr. Felcyn is a
Certified Public Accountant. Mr. Felcyn currently serves on the Board of
Directors of Equinox Systems, Inc. (NASDAQ:EQNX), a designer and marketer of
server-based communications products.
The Board is divided into three classes, each of whose members will
serve for a staggered three-year term. The Board consists of two Class I
Directors (Ms. Morby and Mr. Zenie), two Class II Directors (Mr. Henna and Mr.
Felcyn) and two Class III Directors (Messrs. Smith and Gardner). At each annual
meeting of shareholders, a class of directors will be elected for a three-year
term to succeed the director or directors of the same class whose terms are then
expiring. The initial terms of the Class I Directors, Class II Directors and
Class III Directors expire upon the election and qualification of successor
directors at the annual meeting of shareholders held during the calendar years
2000, 2001 and 2002, respectively. Each officer of the Company serves at the
discretion of the Board.
BOARD COMMITTEES
In February 1999, the Board established an Audit Committee and a
Compensation Committee, each of which is comprised of two of the Board's
independent directors, Mr. Zenie and Ms. Morby. The Audit Committee and the
Compensation Committee have yet to meet in 1999. The Audit Committee has
responsibility for reviewing audit plans and discussing audit work, internal
controls and related matters with the Company's independent public accountants,
reviewing the annual audit report and any accompanying recommendations and
nominating independent public accountants to perform the annual audit. The
Compensation Committee has responsibility for reviewing the compensation of the
Company's executive officers, making recommendations to the Board and
administering the Plans.
The Board may from time to time establish certain other committees to
facilitate the management of the Company.
DIRECTOR COMPENSATION
As compensation for serving on the Board, directors who are not also
employees of the Company will receive an annual fee of $5,000, $750 for each
meeting of the Board or any committee thereof in which they participate in
person, an initial grant of options to purchase 15,000 shares of Common Stock
pursuant to the 1998 Stock Option Plan, and options to purchase 5,000 shares of
Common Stock to be awarded annually thereafter.
34
<PAGE> 37
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1998, the Company had no
Compensation Committee or other committee of the Board performing similar
functions. Decisions concerning compensation of executive officers were made by
the Board of Directors of the Company consisting of Messrs. Gardner, Henna and
Smith.
ITEM 11. EXECUTIVE COMPENSATION.
The following table presents certain information concerning
compensation paid or accrued by the Company for services rendered during the
fiscal years ended December 31, 1998 and 1997 by the Company's Chief Executive
Officer and the four other most highly compensated executive officers of the
Company (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL --------------
COMPENSATION(1) SECURITIES
---------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(2)
- --------------------------- ---- -------- -------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Gary G. Henna ...................................... 1998 $225,000 $ 82,000 200,000 $ --
President and Chief Executive Officer
Allan J. Gardner ................................... 1998 250,000 -- -- --
Executive Vice President--Chief Technology Officer
Wilburn W. Smith ................................... 1998 250,000 -- -- --
Executive Vice President--Sales
Timothy Edkin ...................................... 1998 112,875 -- 77,017(3) 3,787
Vice President--Product Development
Sharon Gardner ..................................... 1998 108,792 -- 110,021(4) 3,658
Vice President-- Marketing
</TABLE>
- ------------------
(1) The column for "Other Annual Compensation" has been omitted because there
is no compensation required to be reported in such column. The aggregate
amount of perquisites and other personal benefits provided to each Named
Executive Officer is less than 10% of the total annual salary and bonus of
such officer.
(2) Represents cash payments to the respective Names Executive Officer under
the Company's Profit Sharing Plan.
(3) Consists of 113 options issued at an exercise price of $2.53 per share,
and 76,904 options issued at $12.00 per share.
(4) Consists of 105 options issued at an exercise price of $2.53 per share,
and 109,916 options issued at $12.00 per share.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information for the fiscal year
ended December 31, 1998, with respect to grants of stock options to each of the
Named Executive Officers.
35
<PAGE> 38
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
% OF TOTAL STOCK PRICE
NUMBER OF OPTIONS APPRECIATION FOR
SECURITIES GRANTED TO EXERCISE OPTION TERM(2)
UNDERLYING EMPLOYEES OR BASE EXPIRATION ---------------------------
NAME OPTIONS IN FISCAL YEAR PRICE(1) DATE 5% 10%
- ---- ---------- -------------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Gary G. Hegna ........... 200,000 29% -- (3) $3,855,427 $6,181,323
Allan J. Gardner ........ -- -- -- -- -- --
Wilburn W. Smith ........ -- -- -- -- -- --
Timothy Edkin ........... 77,017 12% (4) (5) 1,484,667 2,380,335
Sharon Gardner .......... 110,021 16% (6) (7) 2,120,890 3,400,376
</TABLE>
- ----------
(1) Except as otherwise indicated, the exercise price of all outstanding
options granted in the fiscal year ended December 31, 1998 is $12.00 per
share.
(2) The dollar amounts under these columns represent the potential realizable
value of each option granted, assuming that the market price of the Common
Stock appreciates in value from the date of grant at the 5.0% and 10.0%
annual rates of appreciation presented and therefore are not intended to
forecast possible future appreciation, if any, of the price of the Common
Stock. The initial public offering price of $12.00 per share is used as
the starting point in calculating the referenced 5% and 10% rates of
appreciation.
(3) All 200,000 options expire on June 29, 2008.
(4) The exercise price for 113 shares of Common Stock subject to options
granted in the fiscal year ended December 31, 1998 is $2.53 per share.
(5) Of the 77,017 options, 158 expire on December 14, 2008, 113 expire on
April 14, 2008, 116 expire on July 14, 2008, 118 expire on October 14,
2008 and 76,512 expire on June 29, 2008.
(6) The exercise price for 105 shares of Common Stock subject to options
granted in the fiscal year ended December 31, 1998 is $2.53 per share.
(7) Of the 110,021 options, 105 expire on April 14, 208, 109,534 expire on
June 29, 2008, 108 expire on July 14, 2008, 118 expire on October 14, 2008
and 156 expire on December 14, 2008.
OPTION HOLDINGS AND FISCAL YEAR END OPTION VALUES
The following table sets forth information regarding stock options held
by the Named Executive Officers at December 31, 1998.
OPTION HOLDINGS AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT DECEMBER 31, 1998 AT DECEMBER 31, 1998(1)
------------------------------ -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gary G. Hegna............................... 339,708 354,413 $2,197,908 $2,293,049
Allan J. Gardner............................ -- -- -- --
Wilburn W. Smith............................ -- -- -- --
Timothy Edkin............................... 12,202 88,190 78,945 570,591
Sharon Gardner.............................. 27,634 122,749 178,789 794,183
</TABLE>
- ----------
(1) There was no public trading market for the Common Stock as of December 31,
1998. Accordingly, these values are based on the estimated fair market
value of the Common Stock of $4.53 per share for options issued before
June 30, 1998, and the initial public offering price of $12.00 per share
for options issued thereafter.
36
<PAGE> 39
STOCK OPTION PLANS
Under the 1996 Stock Option Plan, 850,000 shares of Common Stock are
reserved for issuance upon the exercise of stock options granted thereunder.
Under the 1998 Stock Option Plan (together with the 1996 Stock Option Plan, the
"Plans"), 1,500,000 shares of Common Stock are reserved for issuance upon the
exercise of stock options granted thereunder. The Plans are designed as a means
to attract, retain and motivate directors and key employees. The Board has
established a Compensation Committee consisting of two of its independent
directors, Ms. Morby and Mr. Zenie, to administer and interpret the Plans.
Options are granted under the respective Plans on such terms and at
such prices as determined by the Board or the Compensation Committee. Each
option is for a term of not less than five years or more than ten years, as
determined by the Board or the Compensation Committee. However, in the event of
a change of control (as such term is defined in the respective Plans), all
outstanding options become immediately exercisable. Options granted under the
Plans are not transferable other than by will or by the laws of descent and
distribution.
The Company has outstanding options to purchase an aggregate of 811,413
shares of Common Stock under the 1996 Stock Option Plan at January 15, 1999. The
exercise price of options to purchase 776,300 shares of such Common Stock is
$2.53 per share, while the exercise price of options to purchase the remaining
35,113 shares of such Common Stock is $12.00 per share.
Under the 1998 Stock Option Plan, 1,500,000 shares of Common Stock are
reserved for issuance upon the exercise of stock options granted thereunder. As
of January 15, 1999, the Company has granted under the 1998 Stock Option Plan
options to purchase an aggregate of 802,041 shares of Common Stock at an
exercise price of $12.00 per share. Options to purchase an aggregate of 538,003
shares of Common Stock have been granted to executive officers of the Company as
follows: 200,000 options to Mr. Henna, 72,124 options to Mr. Weinbaum, 109,534
options to Ms. Gardner, 76,512 options to Mr. Edkin and 79,833 options to Ms.
Longo. Such options become exercisable at the rate of 25% on the first
anniversary of the date of grant and at the rate of 6.25% per quarter
thereafter.
401(k) PLAN AND PROFIT SHARING PLAN
The Company currently maintains a 401(k) employee savings retirement
plan (the "401(k) Plan") which is intended to qualify under Section 401(k) of
the Internal Revenue Code of 1986, as amended. The 401(k) Plan covers Company
employees who, as of the enrollment eligibility dates under the 401(k) Plan, are
at least 21 years of age and elect to participate in the 401(k) Plan. All
Company contributions to the 401(k) Plan vest immediately. Benefits will
normally be distributed to an employee upon (i) the employee reaching age 59
1/2; (ii) the employee's retirement; (iii) the employee's death or disability;
(iv) the termination of the employee's employment with the Company; (v) the
termination of the 401(k) Plan or (vi) a requested withdrawal due to financial
hardship. The Company also maintains a profit sharing plan (the "Profit Sharing
Plan"). Pursuant to the Profit Sharing Plan, the Company has discretion to issue
cash awards and/or stock options to employees at the end of each quarter based
on a percentage of their salary.
EMPLOYMENT CONTRACTS
The Company has no employment agreements with any of its executive
officers. However, the Company has entered into standard non-competition
agreements with each of its executive officers except
37
<PAGE> 40
for Messrs. Smith and Gardner who have executed separate non-competition
agreements. The standard agreements provide that during such executive officer's
employment with the Company, such executive officer will not (i) engage,
directly or indirectly, in activities which are competitive with the business of
the Company or (ii) solicit, directly or indirectly, any employees or customers
of the Company to terminate their relationship with the Company. As to Messrs.
Smith and Gardner, each has agreed to not compete with the Company or solicit
any employees of the Company for three years following termination of employment
with the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information with respect to the
beneficial ownership of shares of the Company's Common Stock as of March 15,
1999, and as adjusted to reflect the sale of the shares in the Offering, and the
conversion of all of the outstanding shares of Redeemable Preferred Stock of the
Company into shares of Common Stock, by: (i) each person known by the Company to
own beneficially more than 5% of the outstanding shares of the Common Stock;
(ii) each director of the Company; (iii) each Named Executive Officer; and (iv)
all executive officers and directors of the Company as a group. Unless otherwise
indicated below, to the knowledge of the Company, all persons listed below have
sole voting and investment power with respect to their shares of Common Stock,
except to the extent authority is shared by spouses under applicable law.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(2)
----------------------
NAME AND ADDRESS(1) NUMBER PERCENT
- ------------------- ---------- -------
<S> <C> <C>
Allan J. Gardner ................................................ 2,300,000 15.9%
Wilburn W. Smith ................................................ 2,300,000 15.9%
Gary G. Hegna (3) ............................................... 329,412 2.6%
Martin K. Weinbaum (4) .......................................... 16,397 *
Timothy Edkin (5) ............................................... 13,691 *
Sharon Gardner (6) .............................................. 30,182 *
Deborah L. Longo (7) ............................................ 8,800 *
Francis H. Zenie ................................................ 0 *
Jacqueline C. Morby ............................................. 2,447 *
James J. Felcyn (8) ............................................. 0 *
TA Associates, Inc. (9) ......................................... 2,171,028 15.1%
Chestnut Capital International III Limited Partnership(9) ....... 84,586 *
All directors and executive officers as a group (7 persons) ..... 5,000,929 41.1%
</TABLE>
- ----------
* Less than 1.0% of outstanding shares.
(1) Unless otherwise indicated, the address of each of the parties listed is
1615 South Congress Avenue, Delray Beach, Florida 33445-6368.
(2) Pursuant to the rules of the Commission, certain shares of the Company's
Common Stock that a beneficial owner has the right to acquire within 60
days of the date hereof pursuant to the exercise of stock options or
warrants are deemed to be outstanding for the purpose of computing the
percentage ownership of such owner but are not deemed outstanding for the
purpose of computing the percentage ownership of any other person.
38
<PAGE> 41
(3) Consists of 339,708 shares of Common Stock subject to options which are
exercisable prior to May 15, 1999.
(4) Consists of 14,637 shares of Common Stock subject to options which are
exercisable prior to May 15, 1999.
(5) Consists of 12,202 shares of Common Stock subject to options which are
exercisable prior to May 15, 1999.
(6) Consists of 27,634 shares of Common Stock subject to options which are
exercisable prior to May 15, 1999.
(7) Consists of 7,521 shares of Common Stock subject to options which are
exercisable prior to May 15, 1999.
(8) In connection with becoming a Director of the Company, Mr. Felcyn was
granted options to purchase 15,000 shares of Common Stock, 25% of which
are exercisable one year from the date of grant, and the remaining 75%
vest in twelve equal successive quarterly installments thereafter.
(9) Includes (i)1,127,807 shares of Common Stock owned by Advent VII L.P.,
(ii) 671,420 shares of Common Stock owned by Advent Atlantic and Pacific
II Limited Partnership, (iii) 242,103 shares of Common Stock owned by
Advent Industrial II Limited Partnership, (iv) 112,781 shares of Common
Stock owned by Advent New York L.P., and (v) 16,917 shares of Common Stock
owned by TA Venture Investors, L.P. Advent VII L.P., Advent Atlantic and
Pacific II Limited Partnership, Advent Industrial II Limited Partnership,
Advent New York L.P., and TA Venture Investors, L.P. are part of an
affiliated group of investment partnerships referred to, collectively, as
the TA Associates Group. The general partner of Advent VII, L.P. is TA
Associates VII, L.P. The general partner of each of Advent New York L.P.,
and Advent Industrial II Limited Partnership is TA Associates VI, L.P. The
general partner of Advent Atlantic and Pacific II Limited Partnership is
TA Associates AAP II Partners, L.P. The general partner of each of TA
Associates VII, L.P., TA Associates VI, L.P. and TA Associates AAP II
Partners, L.P. is TA Associates, Inc. In such capacity, TA Associates,
Inc. exercises sole voting and investment power with respect to all of the
shares held of record by the named investment partnerships, with the
exception of those shares held by TA Venture Investors, L.P.; individually
no stockholder, director or officer of TA Associates, Inc. is deemed to
have or share such voting or investment power. Principals and employees of
TA Associates, Inc. (including Ms. Morby, a director of the Company)
comprise the general partners of TA Venture Investors, L.P. In such
capacity, Ms. Morby may be deemed to share voting and investment power
with respect to the 16,917 shares held of record by TA Venture Investors,
L.P. Ms. Morby disclaims beneficial ownership of all shares held of record
by TA Venture Investors, L.P. with the exception of 2,447 shares. The
address of TA Associates, Inc. is 125 High Street, Boston, Massachusetts
02110.
(10) Includes 84,586 shares of Common Stock held by Chestnut Capital
International III Limited Partnership. Messrs. Jonathan J. Flemming,
Michael F. Schiaro, Peter A. Schober and John A. Turner are the general
partners of MVP Capital Limited Partnership ("MVP"). MVP has voting and
investment power to act for Chestnut Capital International III L.P. The
address of Chestnut Capital International III Limited Partnership is 175
High Street, Boston, Massachusetts 02110.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CONVERTIBLE DEBENTURES
On December 19, 1994, the Company sold Convertible Debentures in an
aggregate principal amount of $12.0 million to the Lenders.
39
<PAGE> 42
Under the terms of the Debenture Agreement, interest accrued on the unpaid
principal balance of the Convertible Debentures at the rate of 10% per annum
through June 30, 1997, and thereafter at the rate of 15% per annum until
December 1, 2000 (the "Maturity Date"), or such earlier date on which the
Convertible Debentures are converted into shares of Convertible Preferred Stock
of the Company. Interest was payable on the last day of each calendar quarter
and the principal balance was payable in two equal installments of $6.0 million
on December 1, 1999 and the Maturity Date. The Debenture Purchase Agreement also
provided for mandatory prepayment of the entire outstanding principal balance
and accrued interest upon certain specified events including the consummation of
an initial public offering of the Company's Common Stock.
Pursuant to the Debenture Agreement, and in connection with
the Offering on January 29, 1999, the Lenders converted all of the Convertible
Debentures into Convertible Preferred Stock and the Redeemable Preferred Stock.
Accordingly, the Lenders received (i) in the aggregate 2,255,614 shares of
Common Stock upon the conversion of the Convertible Preferred Stock, and (ii)
$12.0 million plus accrued interest upon the redemption of all of the Redeemable
Preferred Stock upon the closing of the Offering on February 3, 1999. Jacqueline
C. Morby, a director of the Company, is a Managing Director of T.A. Associates,
Inc., which serves as a general partner, directly or indirectly, of each of the
Lenders. See Note 9 of "Principal and Selling Shareholders."
In connection with the sale of the Convertible Debentures, Mr. Smith
and Mr. Gardner each received a $5.7 million distribution and Mr. Quigley
received a $600,000 distribution from the Company in 1995.
OTHER RELATED PARTY TRANSACTIONS
On December 31, 1996, Wilburn Smith and Allan Gardner each loaned
$100,000 to the Company. These loans, including all accrued interest, were
repaid in full in 1997.
The Company has agreed to issue Promissory Notes to each of Wilburn W.
Smith, Allan J. Gardner and Thomas Quigley (the "Founding Shareholders") in an
aggregate amount of $850,000, representing the estimated individual income tax
liability for the period beginning January 1, 1998 and ending on December 31,
1998. The Company voluntarily revoked its S Corporation status on January 1,
1999 (the "Termination Date").
In addition, the Founding Shareholders and the Company have entered
into an Agreement for Tax Indemnification (the "Tax Indemnification Agreement")
dated January 25, 1999. The Tax Indemnification Agreement provides that the
Founding Shareholders will indemnify the Company from and against any and all
taxes of the Company (i) for any periods ending prior to the Termination Date
for which it is determined that the Company was not an S Corporation, and (ii)
for any and all taxes arising from adjustments to the Company's tax returns
which increase the Company's tax liability for a taxable period ending after
such Termination Date and decrease the Founding Shareholders' tax liability for
a taxable period ending prior to such Termination Date.
Any future transactions between the Company and its officers, directors
and affiliates will be on terms no less favorable to the Company than can be
obtained from unaffiliated third parties. Such transactions with such persons
will be subject to approval by a majority of the Company's outside directors or
will be consistent with policies approved by such outside directors.
40
<PAGE> 43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) The following consolidated financial statements are filed as part of this
Form 10-K:
Smith-Gardner & Associates, Inc. Consolidated Financial Statements:
Independent Auditors Report
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Operations for each of the years in the
three year period ended December 31, 1998
Consolidated Statements of Redeemable Preferred Stock and
Stockholders' Deficit for each of the years in the three year period
ended December 31, 1998
Consolidated Statements of Cash Flows for each of the years in the
three year period ended December 31, 1998
Notes to Consolidated Financial Statements.
(2) The following financial statement schedules are filed as part of this
Form 10-K:
Schedule I of Valuation and Qualifying Accounts.
(3) See Exhibit Index included elsewhere herein.
(b) Reports on Form 8-K:
None.
41
<PAGE> 44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 30, 1999
SMITH-GARDNER & ASSOCIATES, INC.
(Registrant)
By: /s/ Gary C. Hegna
------------------------------
Gary C. Hegna
Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf by the Registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Gary G. Hegna President, Chief Executive Officer and Director March 30, 1999
- --------------------------------- (Principal Executive Officer)
Gary G. Henna
/s/ Martin K. Weinbaum Vice President - Finance, Chief Financial March 30, 1999
- --------------------------------- Officer, Secretary and Treasurer
Martin K. Weinbaum (Principal Financial and Accounting Officer)
/s/ Allan Gardner Executive Vice President - Advanced March 30, 1999
- --------------------------------- Technologies and Co-Chairman of the Board
Allan Gardner
/s/ Wilburn Smith Executive Vice President - Sales and Co- March 30, 1999
- --------------------------------- Chairman of the Board
Wilburn Smith
/s/ Francis H. Zenie Director March 30, 1999
- ---------------------------------
Francis H. Zenie
/s/ Jacqueline C. Morby Director March 30, 1999
- ---------------------------------
Jacqueline C. Morby
/s/ James J. Felcyn, Jr. Director March 30, 1999
- ---------------------------------
James J. Felcyn, Jr.
</TABLE>
42
<PAGE> 45
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company, as amended (4).
3.2 By-Laws of the Company, as amended (5).
4.1 Form of Certificate of Common Stock (2).
10.1 Smith-Gardner & Associates, Inc.'s Stock Option Plan (1).+
10.2 Form of Stock Option Agreement pursuant to Smith-Gardner & Associates, Inc.'s Stock
Option Plan (1).+
10.3 Smith-Gardner & Associates, Inc.'s Amended and Restated 1998 Stock Option Plan (3).+
10.4 Form of Stock Option Agreement pursuant to Smith-Gardner & Associates, Inc.'s 1998
Stock Option Plan (1).+
10.5 Smith-Gardner & Associates, Inc.'s 401(k)/Profit Sharing Plan (2).+
10.6 Debenture Purchase Agreement dated December 19, 1994 (1).
10.7 Form of Convertible Debenture Due 2000 issued to Advent VII L.P. (1).
10.8 Form of Convertible Debenture Due 2000 issued to Advent Atlantic and Pacific II L.P. (1).
10.9 Form of Convertible Debenture Due 2000 issued to Advent Industrial II L.P. (1).
10.10 Form of Convertible Debenture Due 2000 issued to Advent New York L.P. (1).
10.11 Form of Convertible Debenture Due 2000 issued to Chestnut Capital International.(1).
10.12 Form of Convertible Debenture Due 2000 issued to TA Venture Investors Limited. (1).
10.13 Registration Rights Agreement dated December 19, 1994 (1).
10.14 Non-Competition Agreement by and between Smith-Gardner & Associates, Inc. and
Wilburn Smith (1).
10.15 Non-Competition Agreement by and between Smith-Gardner & Associates, Inc. and Allan
Gardner (1).
10.16 Form of Non-Compete Agreement executed by Smith-Gardner & Associates, Inc.'s key
employees (1).
10.17 Lease Agreement dated July 1, 1994, by and between Arbors Associates, Ltd. and Smith-
Gardner & Associates, Inc. (2).
</TABLE>
43
<PAGE> 46
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
10.18 Agreement dated March 17, 1998, by and between Client Systems, Inc. and Smith-Gardner
& Associates, Inc. (1).
10.19 Agreement dated February 8, 1994, by and between Cognos Corporation and Smith-
Gardner & Associates, Inc. (1).
10.20 Agreement dated December 29, 1989, by and between Dynamic
Information Systems Corporation and Smith-Gardner & Associates,
Inc. (1).
10.21 Tax Indemnification Agreement (1).
11 Per Share Computations*
21.1 Subsidiaries of Smith-Gardner & Associates, Inc. (2).
23.1 Consent of KPMG LLP.*
27.1 Financial Data Schedule.*
</TABLE>
- ----------
* Filed herewith.
+ Compensatory plan or arrangement.
(1) Incorporated by reference to the exhibit of like number to Amendment No. 1
to Registrant's Registration Statement on Form S-1, File No. 333-63125,
filed with the Commission on December 18, 1998.
(2) Incorporated by reference to the exhibit of like number to Amendment No. 2
to Registrant's Registration Statement on Form S-1, File No. 333-63125,
filed with the Commission on January 11, 1999.
(3) Incorporated by reference to the exhibit of like number to Amendment No. 3
to Registrant's Registration Statement on Form S-1, File No. 333-63125,
filed with the Commission on January 27, 1999.
(4) Incorporated by reference to Exhibit 3.2 of the Amendment No. 2
to Registrant's Registration Statement on Form S-1, File No. 333-63125,
filed with the Commission on January 11, 1999.
(5) Incorporated by reference to Exhibit 3.4 of the Amendment No. 2
to Registrant's Registration Statement on Form S-1, File No. 333-63125,
filed with the Commission on January 11, 1999.
44
<PAGE> 47
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1998 and 1997
<PAGE> 48
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Smith-Gardner & Associates, Inc.:
We have audited the accompanying consolidated balance sheets of Smith-Gardner &
Associates, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, redeemable preferred stock and
stockholders' deficit and cash flows for each of the years in the three-year
period ended December 31, 1998. In connection with our audits of the
consolidated financial statements, we have also audited the financial statement
schedule for each of the years in the three-year period ended December 31, 1998,
as listed in item 14(a)2 of the Company's 1998 Annual Report on Form 10-K. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Smith-Gardner &
Associates, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule for each of the years in the three-year period ended December 31, 1998,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
February 12, 1999
<PAGE> 49
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,576,804 $ 168,590
Accounts receivable, net of allowance for doubtful accounts
of $459,000 in 1998 and $469,227 in 1997 5,855,140 1,845,225
Inventory 197,465 219,963
Prepaid expenses and other current assets 195,173 135,382
------------ ------------
Total current assets 7,824,582 2,369,160
Deferred offering costs 551,946 --
Property and equipment, net 984,780 685,319
Other assets 108,195 80,576
------------ ------------
$ 9,469,503 $ 3,135,055
============ ============
Liabilities, Redeemable Preferred Stock
and Stockholders' Deficit
Current liabilities:
Accounts payable $ 1,160,773 $ 548,350
Accrued expenses 1,594,197 1,420,990
Deferred revenue 1,165,275 383,378
------------ ------------
Total current liabilities 3,920,245 2,352,718
Convertible debt 12,000,000 12,000,000
Accrued interest payable 4,500,000 2,700,000
------------ ------------
Total liabilities 20,420,245 17,052,718
Redeemable preferred stock, 10,000,000 shares authorized:
Redeemable convertible participating preferred stock,
$.01 par value; none issued -- --
Redeemable preferred stock, $1,000 par value, none issued -- --
Commitments and contingencies (notes 4 and 12)
Stockholders' deficit:
Common stock, $0.01 par value. Authorized 50,000,000
shares; issued and outstanding 5,263,100 shares 52,631 52,631
Additional paid-in capital 3,516,258 3,481,562
Accumulated deficit (14,519,631) (17,451,856)
------------ ------------
Total stockholders' deficit (10,950,742) (13,917,663)
------------ ------------
$ 9,469,503 $ 3,135,055
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 50
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For each of the years in the three-year period ended December 31, 1998
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Computer software $ 11,536,185 $ 5,083,442 $ 5,932,255
Computer hardware 13,263,909 8,144,206 7,370,088
Support 5,334,728 4,100,488 4,037,966
Services 3,567,450 1,324,074 1,188,468
------------ ------------ ------------
Total revenue 33,702,272 18,652,210 18,528,777
------------ ------------ ------------
Cost of sales and services:
Computer software 2,500,452 1,504,002 584,493
Computer hardware 9,786,288 6,009,813 5,804,615
Support 3,222,259 3,271,268 3,141,395
Services 2,270,564 1,104,195 902,077
------------ ------------ ------------
Total cost of sales and services 17,779,563 11,889,278 10,432,580
------------ ------------ ------------
Gross profit 15,922,709 6,762,932 8,096,197
Operating expenses:
General and administrative 6,538,097 4,567,292 4,775,430
Research and development 2,253,663 2,010,858 2,254,206
Sales and marketing 2,430,460 1,482,061 980,371
------------ ------------ ------------
Total operating expenses 11,222,220 8,060,211 8,010,007
------------ ------------ ------------
Income (loss) from operations 4,700,489 (1,297,279) 86,190
Other (expense) income:
Interest expense:
Interest on outstanding debt (1,800,000) (1,500,000) (1,200,000)
Amortization of original issue discount -- (679,697) (1,378,276)
Interest income 102,346 109,067 41,814
------------ ------------ ------------
Net income (loss) $ 3,002,835 $ (3,367,909) $ (2,450,272)
============ ============ ============
Net income (loss) per share:
Basic $ 0.57 $ (0.64) $ (0.47)
============ ============ ============
Diluted $ 0.50 $ (0.64) $ (0.47)
============ ============ ============
Weighted average shares used in calculating net income (loss)
per share:
Basic 5,263,100 5,263,100 5,263,100
============ ============ ============
Diluted 8,131,344 5,263,100 5,263,100
============ ============ ============
Pro forma data:
Net income (loss) before income tax (expense) benefit 3,002,835 (3,367,909) (2,450,272)
Pro forma provision for income tax (expense) benefit (unaudited) (1,214,770) 948,427 359,819
------------ ------------ ------------
Pro forma net income (loss) (unaudited) $ 1,788,065 $ (2,419,482) $ (2,090,453)
============ ============ ============
Pro forma net income per share (unaudited):
Basic 0.34
============
Diluted 0.34
============
Weighted average shares outstanding used in calculating
pro forma net income per share (unaudited):
Basic 5,263,100
============
Diluted 5,263,100
============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 51
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
Consolidated Statements of Redeemable Preferred Stock and Stockholders' Deficit
For each of the years in the three-year period ended December 31, 1998
<TABLE>
<CAPTION>
STOCKHOLDERS' DEFICIT
----------------------------------------------------------------------------
RETAINED
REDEEMABLE COMMON STOCK EARNINGS TOTAL
PREFERRED --------------------------- ADDITIONAL (ACCUMULATED STOCKHOLDERS'
STOCK SHARES AMOUNT PAID-IN CAPITAL DEFICIT) DEFICIT
----------- ---------- ----------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ -- 5,263,100 $ 52,631 $ 3,481,562 $(11,633,675) $(8,099,482)
Net loss -- -- -- -- (2,450,272) (2,450,272)
----------- ---------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 -- 5,263,100 52,631 3,481,562 (14,083,947) (10,549,754)
Net loss -- -- -- -- (3,367,909) (3,367,909)
----------- ---------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 -- 5,263,100 52,631 3,481,562 (17,451,856) (13,917,663)
Net income -- -- -- -- 3,002,835 3,002,835
Non-cash compensation expense -- -- -- 34,696 -- 34,696
Shareholders distributions -- -- -- -- (70,610) (70,610)
----------- ---------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 $ -- 5,263,100 $ 52,631 $ 3,516,258 $(14,519,631) $(10,950,742)
=========== ========== =========== =========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 52
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSDIAIRES
Consolidated Statements of Cash Flows
For each of the years in the three-year period ended December 31, 1998
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows provided by operating activities:
Net income (loss) $ 3,002,835 $(3,367,909) $(2,450,272)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 285,314 232,548 184,772
Amortization of original issue discount -- 679,697 1,378,276
Non-cash compensation expense 34,696 -- --
Bad debt expense 458,330 485,185 771,567
Change in assets and liabilities:
Accounts receivable (4,468,245) 359,329 (156,777)
Inventory 22,498 (207,097) 292,086
Prepaid expenses and other current assets (59,791) 30,067 249,524
Other assets (27,619) (26,246) (4,330)
Accrued interest payable 1,800,000 1,500,000 1,200,000
Accounts payable 612,423 268,323 (581,374)
Accrued expenses 173,207 552,243 (194,900)
Deferred revenue 781,897 36,510 (602,363)
----------- ----------- -----------
Net cash provided by operating activities 2,615,545 542,650 86,209
----------- ----------- -----------
Cash flows used in investing activities:
Capital expenditures (584,775) (234,277) (251,192)
----------- ----------- -----------
Net cash used in investing activities (584,775) (234,277) (251,192)
----------- ----------- -----------
Cash flows (used in) provided by financing activities:
Distributions to stockholders (70,610) -- --
Advances from officers -- -- 200,000
Proceeds from repayment of employees loans -- -- 24,600
Repayment of advances from officers -- (200,000) --
Deferred offering costs (551,946) -- --
----------- ----------- -----------
Net cash (used in) provided by financing
activities (622,556) (200,000) 224,600
----------- ----------- -----------
Net increase in cash and cash equivalents 1,408,214 108,373 60,217
Cash and cash equivalents at beginning of year 168,590 60,217 --
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,576,804 $ 168,590 $ 60,217
=========== =========== ===========
Supplemental cash flow information:
Cash paid during the year for interest $ -- $ -- $ --
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 53
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
Smith-Gardner & Associates, Inc. (the "Company") was incorporated
on December 13, 1988 under the laws of the state of Florida. The
Company primarily licenses a computer software package it designed
and developed to automate companies that sell through catalogs,
media advertisement, direct mail or broadcast advertisements, and
also sells the computer hardware required to use the software. The
Company also provides consulting, training, programming and
technical support services.
The Company opened two satellite offices in Sydney Australia (SGA
Pty.) and Cambridge, England (SGA Ltd.) in September 1997 and June
1997, respectively. These offices are separately incorporated and
are wholly owned subsidiaries of the Company.
(b) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with
an original maturity of three months or less to be cash
equivalents.
(c) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its two wholly owned subsidiaries SGA Pty. and SGA
Ltd. All significant intercompany balances and transactions have
been eliminated in consolidation.
(d) INVENTORY
Inventory consists of computer hardware. It is stated at the lower
of cost or market as determined on a specific identification
basis.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated on
the straight-line basis over the estimated useful lives of the
assets which range from five to seven years. Leasehold
improvements are amortized on the straight-line basis over the
shorter of the lease term or estimated useful life of the asset.
(Continued)
<PAGE> 54
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The Company implemented the provisions of Statement of Financial
Accounting Standards No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
effective January 1, 1996. The Company reviews its long-lived
assets (property and equipment) for impairment whenever events or
circumstances indicate that the carrying amount of an asset may
not be recoverable. If the sum of the expected cash flows,
undiscounted and without interest, is less than the carrying
amount of the asset, an impairment loss is recognized as the
amount by which the carrying amount of the asset exceeds its fair
value. The Company has no material impaired assets.
(f) SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs under
Statement of Financial Accounting Standards No. 86, "Accounting
for Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed" ("FAS 86"). Under FAS 86, the costs associated with
software development are required to be capitalized after
technological feasibility has been established. Technological
feasibility was established when the product design and working
model of the software product was completed and confirmed by
testing the software product. Costs incurred by the Company
subsequent to the establishment of technological feasibility have
been insignificant and, as a result, the Company has not
capitalized any development costs.
(g) REVENUE RECOGNITION
Prior to 1997, the Company followed the provisions of Statement of
Position (SOP) 91-1. Revenue from computer hardware and software
sales was recognized upon installation, substantial fulfillment of
all obligations under the sales contract and when collectibility
was probable. Revenues related to consulting, training and
technical support were recognized upon completion of the services.
In October 1997, the American Institute of Certified Public
Accountants (AICPA) issued SOP 97-2, SOFTWARE REVENUE RECOGNITION,
which superseded SOP 91-1. The Company adopted SOP 97-2 for
software transactions entered into in 1997. SOP 97-2 generally
requires revenue earned on software arrangements involving
multiple elements to be allocated to each element based on vendor
specific objective evidence (VSOE) of the relative fair values of
the elements. VSOE is determined by the price charged when the
element is sold separately. For an element not yet being sold
separately, VSOE is determined using managements best estimate
based on development costs to date of the element. The revenue
allocated to hardware and software products generally is
recognized when the hardware and software has been delivered and
installed, the fee is fixed and determinable and the
collectibility is probable. The revenue allocated to postcontract
customer support is consistent with fees charged for renewals and
is recognized ratably over the term of the support. Revenue
allocated to service elements is recognized as the services are
performed. The adoption of SOP 97-2 did not have a material impact
on the Company's results of operations.
(Continued)
<PAGE> 55
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
At December 31, 1998 and 1997, the Company had deferred revenue
recorded in the accompanying consolidated balance sheets related
to systems, customer support and services paid in advance.
(h) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures
About Fair Value of Financial Instruments," requires disclosure of
fair value of certain financial instruments. Cash and cash
equivalents, accounts receivable, inventory and prepaid expenses
and other current assets, as well as accounts payable, accrued
expenses and other current liabilities, as reflected in the
consolidated financial statements, approximate fair value because
of the short-term maturity of these instruments. The fair value of
the conversion feature of the long-term debt instrument was
determined in note 6(b).
Fair value estimates are made at a specific point in time, based
on relevant market information and information about the financial
instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
(i) INCOME TAXES
The Company has elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code (the "Code").
Accordingly, the taxable income (loss) of the Company is reported
on the individual income tax returns of the stockholders. The only
states in which the Company does business in, who do not recognize
S corporation status are California and New Jersey. The Company
started doing business in these states in 1997. The California and
New Jersey income tax expense is immaterial to the consolidated
financial statements for the years ended December 31, 1998 and
1997. Therefore, the consolidated statements of operations do not
include federal or state income tax expense.
For the foreign entities, there is no charge for corporation tax
or provision for deferred tax, due to the availability of
accumulated tax losses of $413,594 as of December 31, 1998.
Subsequent to year-end, the Company terminated its S corporation
status due to the initial public offering discussed in note 2. In
connection with this termination, the Company will record income
taxes in accordance with Statement of Financial Accounting
Standards No. 109, ACCOUNTING FOR INCOME TAXES.
(Continued)
<PAGE> 56
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The unaudited pro forma net income (loss) presented in the
consolidated statements of operations reflects the pro forma
effects for income taxes as if the Company had been a taxable
entity for all periods presented.
(j) BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
The Company has presented net income (loss) per share pursuant to
SFAS No. 128, Earnings Per Share and the Securities and Exchange
Commission Staff Accounting Bulletin No. 98.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS 128),
EARNINGS PER SHARE. SFAS 128 specifies new standards designed to
improve the earnings per share ("EPS") information provided in
financial statements by simplifying the existing computational
guidelines, revising the disclosure requirements and increasing
the comparability of EPS data on an international basis. SFAS 128
is effective for financial statements issued for periods ending
after December 15, 1997. The adoption of SFAS 128 in 1997 did not
have a significant impact on the Company's reported EPS.
In accordance with Securities and Exchange Commission ("SEC")
Staff Accounting Bulletin No. 98, certain common stock and common
stock equivalents issued for nominal consideration prior to the
initial filing of a registration statement relating to an Offering
are treated as outstanding for the entire period. The Company had
no nominal issuances during this period.
Basic net income (loss) per share was computed by dividing net
income (loss) by the weighted average number of shares of common
stock outstanding for each period presented. Diluted net income
per share was computed by giving effect to common stock
equivalents and assuming conversion of debt to redeemable
preferred stock. Incremental shares and adjustments to net income
are determined using the if converted and treasury stock methods
for the year ended December 31, 1998 as follows:
<TABLE>
<S> <C>
Net income as reported $ 3,002,835
Plus: interest expense on convertible debt assuming
conversion 1,800,000
Less: preferred stock dividends assuming conversion of debt
to redeemable preferred stock (719,541)
-----------
Net income available to common stockholders, as adjusted $ 4,083,294
===========
Weighted average shares outstanding 5,263,100
Common stock equivalents 2,868,244
-----------
8,131,344
===========
Basic net income per share $ .57
===========
Diluted net income per share $ .50
===========
</TABLE>
(Continued)
<PAGE> 57
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Common stock equivalents were not considered for the years ended
December 31, 1996 and 1997 since their effect would be
antidilutive.
(k) PRO FORMA NET INCOME (LOSS) AND PRO FORMA NET INCOME PER SHARE
COMPUTATIONS (UNAUDITED)
The pro forma net income (loss) presented in the consolidated
statements of operations reflects the pro forma effects for income
taxes as if the Company had been a taxable entity for the periods
presented.
Pro forma basic and diluted net income per share for the year
ended December 31, 1998 was computed by dividing pro forma net
income by the weighted average number of shares of common stock
outstanding.
<TABLE>
<CAPTION>
1998
----------
<S> <C>
Pro forma net income $1,788,065
==========
Weighted average shares outstanding 5,263,100
==========
Basic and diluted pro forma net income per share $ .34
==========
</TABLE>
Common stock equivalents in the diluted proforma net income per
share calculation were not considered for the year ended December
31, 1998 since their effect would be antidilutive.
(l) FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's foreign subsidiaries,
which began operations in 1997, is their respective local
currencies. The translation of the applicable foreign currencies
into U.S. dollars is performed for balance sheet accounts using
current exchange rates in effect at the balance sheet date and for
revenue and expense accounts using average rates of exchange
prevailing during the year. Adjustments resulting from the
translation of foreign currency financial statements for the years
ended December 31, 1998 and 1997 were $(1,136) and ($5,000),
respectively. Such amounts were recorded in the consolidated
statements of operations for each period.
The Company does not enter into transactions that may result in
foreign currency risk. All transactions are made based on the
Company's local currency. Therefore, the Company does not utilize
hedging instruments.
(Continued)
<PAGE> 58
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(m) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare
these consolidated financial statements in conformity with
generally accepted accounting principles. Actual results could
differ from those estimates.
(n) YEAR 2000 (UNAUDITED)
Management believes their internal computer systems are Year 2000
compliant. The Year 2000 issue results from computer programs
being written using two digits rather than four to define the
applicable year. The Company's products have been determined by
the Company to be Year 2000 compliant.
The Company has also reviewed its internal support systems and to
the extent possible, its vendors' systems to confirm Year 2000
compliance. Any failure of the Company or its suppliers or clients
to be "Year 2000" compliant could have a material adverse effect
on the Company's business, financial condition or results of
operations. The Company has expensed all costs associated with
these systems changes as the costs are incurred.
(o) SEGMENT REPORTING
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS No. 131"). SFAS No. 131 is effective
for financial statements for periods beginning after December 15,
1997. SFAS No. 131 establishes standards for the way public
business enterprises report information about operating segments
in annual financial statements and requires those enterprises to
report selected information about operating segments in interim
financial reports issued to shareholders. The adoption of SFAS No.
131 did not have a significant impact on the Company's financial
reporting as of and for the three year period ended December 31,
1998.
(p) START-UP COSTS
In March 1998, the AICPA issued Statement of Position 98-5 (SOP
98-5) "REPORTING ON THE COSTS OF START-UP ACTIVITIES." Pursuant to
the provisions of SOP 98-5, all costs associated with start-up
activities, including organization costs, should be expensed as
incurred. Companies that previously capitalized such costs are
required to write-off the unamortized portion of such costs as a
cumulative effect of a change of accounting principle. The Company
had an insignificant amount of these costs and the adoption of SOP
98-5 did not have a significant impact on the Company's financial
statements.
(Continued)
<PAGE> 59
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(2) LIQUIDITY
The Company has been developing its software and new products and has
expanded its operations internationally which resulted in losses for the
years ended December 31, 1996 and 1997.
On January 29, 1999, the Company and selling shareholders sold 4,410,000
shares of its common stock in an Initial Public Offering (Offering) from
which the Company received proceeds of $44,640,000 after payment of
underwriter commissions.
On February 3, 1999, the Company redeemed in full the redeemable
participating preferred stock for $12,000,000 and paid accrued interest
in the amount of $4,665,000 (see note 6).
On February 26, 1999, the underwriter exercised the option to purchase
661,500 additional shares of the Company's common stock from which the
Company received proceeds of $7,382,340.
Based on the Offering proceeds, payment of outstanding convertible debt,
increased sales in 1998 and the Company's anticipated operating results,
management believes there is sufficient funding to meet its operating
expenditures.
(3) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Office equipment $1,655,823 $1,144,364
Office furnishings and fixtures 199,953 131,553
Leasehold improvements 77,328 32,179
---------- ----------
1,933,104 1,308,096
Less accumulated depreciation and
amortization 948,324 622,777
---------- ----------
$ 984,780 $ 685,319
========== ==========
</TABLE>
(4) OPERATING LEASES
The Company entered into an agreement to lease office facilities under a
noncancelable operating lease commencing January 1995 and expiring
December 2001 with an option to renew for one five-year term. The lease
contains certain incentives including rent abatements, rent discounts,
leasehold improvement reimbursements, cash allowances and scheduled base
rent increases over the term of the lease. Generally accepted accounting
principles require that the full costs of a lease be recognized ratably
over the term of the lease. Accordingly, the Company has recorded a
deferred credit ($205,060 and $235,440 at December 31, 1998 and 1997,
respectively) to reflect the excess of rent expense over cash payments
(see note 5). In addition to the base rent payment, the Company pays a
monthly allocation of the building's operating expenses. During 1997, the
Company also entered into lease agreements for office facilities in the
United Kingdom and Sydney which expire in 2003.
(Continued)
<PAGE> 60
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Future minimum lease payments under these office facilities leases as
well as equipment leases as of December 31, 1998 are as follows:
Year ending December 31,
1999 $ 597,435
2000 552,822
2001 542,348
2002 96,938
2003 18,849
------------
Total minimum lease payments $ 1,808,392
============
Rental expense, including operating leases with lease terms of less than
one year, was $1,237,607, $669,543 and $597,905 during 1998, 1997 and
1996, respectively.
(5) ACCRUED EXPENSES
Accrued expenses consists of the following:
1998 1997
---------- ----------
Sales tax payable $ 145,409 $ 92,011
Sales tax contingencies 614,783 614,783
Deferred rent 205,060 235,440
Accrued payroll 75,980 95,215
Accrued legal 127,000 109,000
Accrued vacation 192,610 132,162
Other 233,355 142,379
---------- ----------
$1,594,197 $1,420,990
========== ==========
(6) CONVERTIBLE DEBT
(a) DEBENTURE PURCHASE AGREEMENT
On December 19, 1994, the Company entered into a Debenture
Purchase Agreement (the "Agreement") with various partnerships
(the "Lenders") in connection with the private placement of
$12,000,000 convertible subordinated debentures (the
"Debentures"). Principal on the Debentures was payable in two
equal installments of $6,000,000 on December 1, 1999 and December
1, 2000, and bore interest at 10 percent through June 30, 1997 and
bore interest at 15 percent through maturity. A portion of this
borrowing was attributed to its conversion feature due to the
difference between the stated rates and the estimated market rate
at the time of issuance. [See note 6(b).] Interest was payable
quarterly in arrears and commenced on March 31, 1995. The
Agreement provided for a default rate of interest of 20 percent on
all principal amounts not paid within 15 days of the date due. At
December 31, 1998, the Company
(Continued)
<PAGE> 61
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
was not in compliance with certain debt covenants. The Lenders
waived any remedies on default against the Company as outlined in
the Agreement and waived compliance by the Company with respect to
such covenants through the consummation of an Offering. The
Company agreed with the Lenders to defer all quarterly interest
and principal payments due or payable in order to maintain
sufficient working capital for the Company's needs through the
consummation of an Offering.
On June 30, 1997 the Debentures became convertible at the option
of a majority in interest of the Lenders into 22,556.14 shares of
the Company's redeemable convertible participating preferred stock
and one share of redeemable participating preferred stock for each
$1,000 of principal outstanding. The redeemable convertible
participating preferred stock is convertible to common stock at
the rate of 100 shares of common stock for each share of preferred
stock. See note 6(b) for valuation of conversion features. See
redemption features of preferred stock in note 7.
An Offering was consummated on January 29, 1999. As discussed in
note 2, the Company repaid all principal and interest outstanding
related to the debentures. On January 29, 1999, the debentures
were converted into two classes of preferred stock.
Contemporaneous with the offering, the lenders converted the
redeemable convertible participating preferred stock into
2,255,614 shares of common stock.
(b) ORIGINAL ISSUE DISCOUNT
The fair value of the conversion feature of the $12,000,000
debentures discussed in note 6(a) was determined to be $3,481,562
based on the difference between the stated interest rates and the
market rate of such debentures estimated to be 18 percent on the
date of issuance. The amount is included in additional paid-in
capital in the accompanying consolidated balance sheets. The
resulting original issue discount (OID) on the convertible debt
was amortized from the issue date (December 19, 1994) to the date
it first became convertible (June 30, 1997) to achieve an 18
percent effective interest rate. At December 31, 1998 and 1997,
the OID was fully amortized.
(7) PREFERRED STOCK
In connection with the issuance of $12,000,000 of Debentures [see note
6(a)], the Company amended its Articles of Incorporation by designating
22,556.14 shares of authorized preferred stock as redeemable convertible
participating preferred stock (the "redeemable convertible preferred
stock"). Holders of the redeemable convertible preferred stock are
entitled to receive (i) dividends at the same rate as dividends are paid
with respect to the common stock based on the number of shares of common
stock into which such shares of redeemable convertible preferred stock is
then convertible; and (ii) $31.90 per share cumulative dividend per year
through November 30, 1999 ($15.95 per share for the year ended December
1, 2000) less the amount of common stock dividends paid.
The redeemable convertible stock is redeemable at the option of the
Company between December 1, 2000 and December 1, 2001 at the fair market
value per share.
(Continued)
<PAGE> 62
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Each share of redeemable convertible preferred stock entitles the holder
to such number of votes per share as shall equal the number of shares of
common stock into which such share of redeemable convertible preferred
stock is then convertible. Shares of redeemable convertible preferred
stock were convertible into shares of common stock automatically upon the
closing of the Offering discussed in note 2. Shares of redeemable
convertible preferred stock were converted into shares of common stock at
an initial conversion rate of 100 shares of common stock for each share
of preferred stock, whereby each share of convertible preferred stock was
valued for conversion purposes at $532.00 per share.
In addition, as part of the aforementioned amendment to its articles of
incorporation, the Company designated 12,000 shares of authorized
preferred stock as redeemable preferred stock. The holders of the
redeemable preferred stock are not entitled to receive any cash dividends
nor any voting rights or powers. The redeemable preferred stock was
subject to mandatory redemption upon the closing date of the Offering
(February 3, 1999). All redeemable preferred stock was redeemed at a
redemption price of $1,000 per share.
The redeemable preferred stockholders have liquidation preference of
$1,000 per share to any convertible preferred and common stockholder. The
convertible preferred and common stockholders share ratably in the
proceeds from any liquidation of assets.
(8) EMPLOYEE BENEFIT AND STOCK OPTIONS PLANS
The Company maintains an employee retirement savings plan (the "Plan")
under Internal Revenue Code Section 401(k). The Plan is available to all
full-time employees over 21 years of age with more than three months of
employment. Effective April 1994, the Company provides matching
contributions which vest to the employees immediately and range from 10
percent to 35 percent, depending on years of service of the matchable
deferrals of each participant entitled to matching contributions, not to
exceed 2.8 percent of the participant's compensation. There was $102,713,
$46,573 and $39,069 provided by the Company in matching contributions for
the years ended December 31, 1998, 1997 and 1996, respectively.
SGA Ltd., also maintains an employee benefit plan (the "Ltd. Plan"). This
is an employee-directed plan which allows the employee to set aside from
1 to 5 percent of their salary to be deposited to a fund of their choice.
SGA Ltd. will match the employee's contribution up to 5 percent.
Provisions of the Ltd. Plan are substantially the same as the Plan.
On April 1, 1996 the Company adopted a stock-option plan. Under this
plan, the Company may grant options for up to 850,000 shares of common
stock. An option's maximum term is ten years. Each option vests as
follows: 25 percent one year after the date of grant and the balance in
successive equal quarterly installments of 6.25 percent each, at the end
of each of the next 12 calendar quarters subsequent to the date of grant.
During 1998, 1997 and 1996, 65,720, 155,000 and 214,000 options,
respectively, were granted to employees. Of these options, 142,314 were
exercisable at December 31, 1998. In addition, on April 1, 1996, under
the stock-option plan 494,120 options to purchase common stock were
granted to an executive officer of the Company. The options vest as
follows: 82,353 shares
(Continued)
<PAGE> 63
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
one year after the grant date; 20,588 shares at the end of each of the
next 12 calendar quarters subsequent to the vesting commencement date;
82,355 shares upon the earlier to occur of (a) March 21, 2006, or (b) the
market value of the Company's outstanding stock has equaled or exceeded
$100 million for 30 days; and the remaining 82,356 shares upon the
earlier to occur of (a) March 21, 2006 or (b) the market value of the
Company's outstanding stock has equaled or exceeded $150 million for 30
days. At December 31, 1998, the officer had 226,469 of exercisable
options, none of which were exercised.
At June 30, 1998, the Company adopted an additional stock-option plan
(1998 Stock-Option Plan). Under this plan the Company may grant options
for up to 1,500,000 shares of common stock. At December 31, 1998, the
Company has granted 602,041 options under the 1998 Stock-Option Plan at
an exercise price of $12.00 per share which represents the Offering
price. None of these options were exercised at December 31, 1998. Each
option vests based on the same schedule as the 1996 stock option plan.
The fair market value of the underlying stock related to these options
was estimated to be $2.53 - $12.00 as of grant dates from 1996 through
1998. The Company applies APB Opinion No. 25 in accounting for its
stock-option plan. Stock compensation expense is recognized at the date
options are vested when the exercise price is lower than fair market
value at the date of grant. There was no compensation expense recorded in
1996 and 1997. Stock compensation expense for the year ended December 31,
1998 was $34,696. Had the Company determined compensation cost based on
fair value at the grant date for its stock options under Statement No.
123, there would have been no effect for the year ended December 31,
1996. The Company's net loss for the year ended December 31, 1997 would
have increased by $311,525. The Company's net income for the year ended
December 31, 1998 would have decreased by $347,834.
The weighted-average fair market value per share of options granted to
employees was estimated at $1.62 and $1.60, for the years ended December
31, 1998 and 1997, respectively. The fair value of each option was
estimated at the date of grant using the minimum value method with the
following assumptions used:
Expected life 5 years
Dividends None
Interest rate 5.65% in 1998
and 5.45% in 1997
(Continued)
<PAGE> 64
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Stock option activity since inception is indicated as follows:
<TABLE>
<CAPTION>
Weighted
Weighted average
Average remaining
Exercise contractual
Shares Price life (years)
--------- ---------- -----------
<S> <C> <C> <C>
Outstanding at inception --
Granted 708,120 $ 2.53
Forfeited (77,000) 2.53
---------
Balance outstanding at December 31, 1996 631,120 2.53
Granted 155,000 2.53
Forfeited (34,000) 2.53
---------
Balance outstanding at December 31, 1997 752,120 2.53
Granted 30,607 2.53
Granted 637,154 12.00
Forfeited (6,427)
---------
Balance outstanding at December 31, 1998 1,413,454
=========
Exercisable at December 31, 1998 357,908 $ 2.53 8.79
=========
</TABLE>
Subsequent to December 31, 1998, an additional 200,000 shares were
granted at $12.00 per share.
The amount of stock compensation expense recognized at the date options
are vested for options granted as of December 31, 1998 when the exercise
price was lower than fair market value at the date of grant is as
follows:
(Unaudited)
Years ending December 31,
--------------------------
1999 $43,612
2000 34,447
2001 23,494
2002 1,513
(9) RELATED PARTY TRANSACTIONS
In connection with the issuance of convertible debt (see note 6), certain
of the Company's senior executives entered into noncompete agreements,
which expire upon the third anniversary date of the termination of the
executives' employment.
(Continued)
<PAGE> 65
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(10) INCOME TAXES
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Income taxes as reported $ -- -- --
Pro forma adjustment (unaudited) (1,214,770) $ 948,427 $ 359,819
----------- ----------- -----------
Pro forma income tax (expense) benefit
(unaudited) $(1,214,770) $ 948,427 $ 359,819
=========== =========== ===========
</TABLE>
The unaudited proforma income tax (expense) benefit presented on the
consolidated statements of operations represent the estimated taxes that
would have been recorded had the Company been a C corporation for income
tax purposes for each of the periods presented. The proforma income tax
(expense) benefit is as follows (unaudited):
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Pro forma (unaudited):
Current:
Federal $(1,004,126) $ 897,416 $ 62,798
Foreign -- -- --
State (203,627) 187,580 12,609
Deferred:
Federal (4,045) (108,897) 229,124
State (2,972) (27,672) 55,288
----------- ----------- -----------
Total pro forma $(1,214,770) $ 948,427 $ 359,819
=========== =========== ===========
</TABLE>
A reconciliation of income tax (expense) benefit calculated using the
statutory federal income tax rate and the pro forma income tax (expense)
benefit is as follows (unaudited):
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Income tax (expense) benefit using statutory
tax rate $(1,020,964) $ 1,145,089 $ 833,092
Effect of:
State and local income taxes, net of federal
income tax $ (136,356) $ 105,539 $ 44,812
Change in valuation allowance $ (56,274) $ (61,263) $ --
Difference between US and non-US tax rates $ 7,298 $ (27,221) --
Original issue discount amortization $ -- $ (231,097) $ (468,614)
Change in effective tax rates $ 9,761 $ 22,256 $ (43,379)
Other, net $ (18,235) $ (4,876) $ (6,092)
----------- ----------- -----------
Pro forma income tax (expense) benefit $(1,214,770) $ 948,427 $ 359,819
=========== =========== ===========
</TABLE>
<PAGE> 66
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The Company will issue promissory notes to its existing shareholders in
an aggregate amount representing the individual tax liability for each of
the existing shareholders for the period beginning January 1, 1998 and
ending on December 31, 1998. Amount is estimated to be $850,000.
(11) BUSINESS AND CREDIT CONCENTRATIONS
The Company currently derives substantially all of its revenue from sales
of its MACS family of products and related services and hardware. Any
factor adversely affecting the sale of the Company's MACS products or
other new products, could have a material affect on the Company's
business, financial condition and results of operations.
The Company sells its products primarily to customers located in the
United States. Continuing relationships are maintained with most
customers through product-support arrangements and sales of system
upgrades.
During 1997 and 1996, the Company purchased approximately 65 percent and
74 percent, respectively, of its computer hardware from Hewlett Packard.
At December 31, 1997, the Company owed this supplier approximately
$98,000. In 1998, the Company began purchasing its hardware from a
distributor of Hewlett Packard due to a change in Hewlett Packards
distribution channels. 59 percent of its computer hardware was purchased
from this distributor and Hewlett Packard for the year ended December 31,
1998. The Company owed this supplier $259,102 at December 31, 1998.
Accordingly, any adverse change in the product pricing or the operations
of Hewlett Packard could significantly effect the operating results of
the Company. However, the Company is currently in the process of
engineering its product to operate on multiple platforms.
No single customer accounted for more than 10 percent of total revenue
for the year ended December 31, 1998 and 1997. One customer accounted for
10.7 percent of total revenue for the year ended December 31, 1996. In
addition, there were accounts receivable from three customers at December
31, 1998, each of which exceeded 10 percent of total accounts receivable
for approximately $2,325,000.
The Company estimates an allowance for doubtful accounts generally based
on an analysis of collections in prior years, the credit worthiness of
its customers as well as general economic conditions. Consequently, an
adverse change in those factors could effect the Company's estimate of
its bad debts.
<PAGE> 67
SMITH-GARDNER & ASSOCIATES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(12) COMMITMENTS AND CONTINGENCIES
(a) LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions
arising in the ordinary course of business. If the plaintiff's
claims are probable, the appropriate amount is accrued in the
consolidated financial statements. In the opinion of management,
the ultimate disposition of matters not accrued will not have a
material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.
(b) COMMITMENTS
The Company has committed to fund the operations of SGA Ltd. and
SGA Pty. for a period of at least one year. The Company does not
believe this to be a risk since the costs associated with
operating these subsidiaries are not significant.
(c) TAX LIABILITY
The Internal Revenue Service ("IRS") is currently auditing the
Company's tax returns for fiscal 1995. One issue the IRS is
reviewing is whether the issuance of the Convertible Debentures in
December 1994 resulted in the Company failing to qualify as an S
Corporation. In the event the IRS determines that the Company did
not qualify as an S Corporation for fiscal 1995 or any fiscal year
thereafter, the Company would be subject to a significant tax
liability. The shareholders have agreed to indemnify the Company
for any tax liability to the Company. To the extent the
shareholders are unable to fulfill such indemnification and
satisfy all outstanding tax liability to which the Company is
subject, the Company's business, financial condition or results of
operations could be materially adversely affected.
(13) AUTHORIZATION OF COMMON AND PREFERRED STOCK
In September 1998, the Company increased the capital stock to 50,000,000
shares of common stock at $.01 par value per share and 10,000,000 shares
of preferred stock at $.01 par value per share. The consolidated
financial statements retroactively effect these increases in authorized
capital stock.
(14) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES"
("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It
requires an entity to recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair
value. The Company does not believe that the adoption of SFAS No. 133
will have a significant impact on the Company's financial reporting.
<PAGE> 68
Schedule I
SMITH-GARDNER & ASSOCIATES, INC.
Valuation and Qualifying Accounts
For each of the years in the three-year period ended December 31, 1998
<TABLE>
<CAPTION>
BALANCE AT BALANCE
BEGINNING (a) (b) AT END
OF YEAR CHARGES DEDUCTIONS OF YEAR
-------- ------- ---------- --------
<S> <C> <C> <C> <C>
Description:
Reserves and allowances deducted from
assets accounts:
1996:
Allowance for doubtful accounts $332,410 765,676 (161,739) 936,347
======== ======== ======== ========
Description:
Reserves and allowances deducted from
assets accounts:
1997:
Allowance for doubtful accounts $936,347 102,816 (569,936) 469,227
======== ======== ======== ========
Description
Reserves and allowances deducted from
assets accounts:
1998:
Allowance for doubtful accounts $469,227 413,624 423,851 459,000
======== ======== ======== ========
</TABLE>
(a) Charges to the reserve account represent increase in reserve levels and
establishment of specific reserves.
(b) Deductions to the reserve account represent amounts written off and
recoveries which occurred during the year.
<PAGE> 1
Exhibit 11
SMITH-GARDNER & ASSOCIATES, INC.
Per Share Computations
For each of the years in the three year period ended December 31, 1998
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
BASIC NET INCOME (LOSS):
Weighted average common shares outstanding, exclusive of
nominal issuances prior to the Offering $ 5,263,100 5,263,100 5,263,100
Nominal common shares and equivalents issued prior to the
Offering assumed to be outstanding for the entire period -- -- --
----------- ---------- ----------
Weighted average common shares outstanding, exclusive
at end of year 5,263,100 5,263,100 5,263,100
=========== ========== ==========
Net income (loss) $ 3,002,835 (3,367,909) (2,450,272)
=========== ========== ==========
Basic net income (loss) per share $ 0.57 (0.64) (0.47)
=========== ========== ==========
DILUTED NET INCOME (LOSS):
Weighted average shares outstanding exclusive of nominal 5,263,100 5,263,100 5,263,100
issuance
Nominal common shares and equivalents issued prior to the Offering
assumed to be outstanding for the entire period -- -- --
Common stock equivalents 2,868,244 -- --
----------- ---------- ----------
Weighted average common share outstanding, exclusive at
end of year 8,131,344 5,263,100 5,263,100
=========== ========== ==========
Net income (loss) $ 3,002,835 (3,367,909) (2,450,272)
Plus: interest expense 1,800,000 -- --
Less: preferred stock dividends (719,541) -- --
----------- ---------- ----------
$ 4,083,294 (3,367,909) (2,450,272)
=========== ========== ==========
Diluted net income (loss) per share 0.50 (0.64) (0.47)
=========== ========== ==========
PRO FORMA DATA:
Weighted average common shares outstanding, exclusive of
nominal issuance prior to the Offering 5,263,100
===========
Pro forma net income (unaudited) $ 1,788,065
===========
Pro forma basic and diluted net income per share (unaudited) $ 0.34
===========
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Smith Gardner and Associates, Inc.
We consent to incorporation by reference in the registration statement on Form
S-8 (Regis. No. 333-71669) of Smith Gardner and Associates, Inc. of our report
dated February 12, 1999, relating to the consolidated balance sheets of Smith
Gardner and Associates, Inc. and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of operations, redeemable preferred
stock and stockholders' equity (deficit), and cash flows for each of the years
in the three-year period ended December 31, 1998, and the related financial
statement schedule, which report appears in the Company's 1998 Annual Report on
Form 10-K.
/s/ KPMG LLP
Ft. Lauderdale, Florida
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,576,804
<SECURITIES> 0
<RECEIVABLES> 6,314,140
<ALLOWANCES> 459,000
<INVENTORY> 197,465
<CURRENT-ASSETS> 7,824,582
<PP&E> 1,933,104
<DEPRECIATION> 948,324
<TOTAL-ASSETS> 9,469,503
<CURRENT-LIABILITIES> 3,920,245
<BONDS> 0
0
0
<COMMON> 52,631
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 9,469,503
<SALES> 33,702,272
<TOTAL-REVENUES> 33,702,272
<CGS> 17,779,563
<TOTAL-COSTS> 17,779,563
<OTHER-EXPENSES> 11,222,220
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,697,654
<INCOME-PRETAX> 3,002,835
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,002,835
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,002,835
<EPS-PRIMARY> .57
<EPS-DILUTED> .50
</TABLE>