<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ____to ____
Commission File No. 0-25297
--------------
SMITH-GARDNER & ASSOCIATES, INC.
FLORIDA 65-0090038
(State of Incorporation) (I.R.S. Employer Identification No.)
1615 SOUTH CONGRESS AVENUE, DELRAY BEACH, FL 33445-6368
TELEPHONE: (561) 265-2700
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 12,195,429 shares of the
Registrant's Common Stock, par value $0.01 per share, were outstanding as of
April 30, 1999.
===============================================================================
<PAGE> 2
SMITH-GARDNER & ASSOCIATES, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
a.) Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 1999 and 1998........ 3
b.) Condensed Consolidated Balance Sheets
as of March 31, 1999 and December 31, 1998................ 4
c.) Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1999 and 1998........ 5
d.) Notes to Condensed Consolidated Financial Statements...... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................................. 15
Item 2. Changes in Securities and Use of Proceeds........................... 15
Item 6. Exhibits and Reports on Form 8-K.................................... 15
Signatures.................................................................... 16
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Revenue:
Computer software $ 4,084 $ 2,077
Computer hardware 2,407 1,717
Support 1,627 1,220
Services 933 517
-------- --------
Total revenue 9,051 5,531
Cost of revenue:
Computer Software 586 571
Computer Hardware 1,688 1,312
Support 1,084 720
Services 711 427
-------- --------
Total cost of revenue 4,069 3,030
-------- --------
Gross margin 4,982 2,501
Operating expenses:
General and administrative 2,090 1,407
Sales and marketing 1,120 521
Research and development 654 485
-------- --------
Total operating expenses 3,864 2,413
-------- --------
Operating income 1,118 88
Other income (expense) 96 (434)
-------- --------
Income (loss) before income taxes 1,214 (346)
Income tax expense (183) --
-------- --------
Net income (loss) $ 1,031 $ (346)
======== ========
Basic net income (loss) per share $ 0.10 $ (0.07)
======== ========
Diluted net income (loss) per share $ 0.09 $ (0.07)
======== ========
Weighted average shares used in historical basic per share computation 9,827 5,263
======== ========
Weighted average shares used in historical diluted per share computation 11,132 5,263
======== ========
Income before pro forma income tax benefit (346)
Pro forma provision for income tax benefit 215
--------
Pro forma net loss (131)
========
Pro forma basic net loss per share $ (0.02)
========
Pro forma diluted net loss per share $ (0.02)
========
Weighted average shares used in pro forma basic per share computation 5,263
========
Weighted average shares used in pro forma diluted per share computation 5,263
========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE> 4
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $39,102 $1,577
Accounts receivable, net of allowance for doubtful accounts of
$459 at March 31, 1999 and December 31, 1998 4,839 5,855
Inventory 185 198
Deferred income taxes 467 --
Prepaid expenses and other current assets 460 195
------- --------
Total current assets 45,053 7,825
Property and equipment, net 1,315 985
Deferred offering costs -- 552
Other assets 72 108
------- --------
Total assets $46,440 $ 9,470
======= ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current Liabilities:
Accounts payable and accrued expenses $ 3,089 $2,755
Income tax payable 422
Deferred revenue 1,706 1,165
------- --------
Total current liabilities 5,217 3,920
Convertible debt and accrued interest -- 16,500
Deferred income taxes 78 --
------- --------
Total liabilities 5,295 20,420
Redeemable preferred stock -- --
Total stockholders' equity (deficit) 41,145 (10,950)
------- --------
Total liabilities, redeemable preferred stock and
stockholders' equity (deficit) $46,440 $ 9,470
======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE> 5
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31
--------------------------
1999 1998
------- ------
<S> <C> <C>
Cash flows provided by operating activities:
Net income (loss) $ 1,031 $ (346)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 98 64
Change in assets and liabilities:
Accounts receivable 1,017 163
Inventory 13 (966)
Deferred income taxes (389) --
Prepaid expenses and other current assets (262) (80)
Deferred offering costs 552 --
Other assets 33 (16)
Accounts payable 226 1,200
Accrued income taxes payable 422 --
Other accrued expenses 108 (27)
Deferred revenue 540 2,038
-------- -------
Net cash provided by operating activities 3,389 2,030
Cash flows used in investing activities:
Capital expenditures (428) (166)
-------- -------
Net cash used in investing activities (428) (166)
Cash flows provided by financing activities:
Issuance of Common Stock 50,865 --
Employee stock option exercises 200 --
Payment of convertible debt (16,500) 450
-------- -------
Net cash provided by financing activities 34,565 450
-------- -------
Net increase in cash and cash equivalents 37,526 2,314
Cash and cash equivalents at beginning of period 1,577 169
-------- -------
Cash and cash equivalents at end of period $ 39,102 $ 2,483
======== =======
Supplemental cash flow information:
Cash paid during the period for interest $ 4,665 $ --
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE> 6
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
March 31, 1999
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the results
for the periods presented have been included.
(2) PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company and
its two wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(3) COMPLETION OF INITIAL PUBLIC OFFERING AND CONVERSION
On January 29, 1999, the Company and selling shareholders sold 4,410,000 shares
of its common stock in an initial public offering from which the Company
received proceeds of $43,483,000, net of underwriter commissions and offering
costs. At that time, the Company's $12 million outstanding convertible
debentures (the "Convertible Debentures") were converted into redeemable
convertible preferred stock and redeemable participating preferred stock.
Contemporaneous with the offering, the holders of the Convertible Debentures
converted the redeemable convertible stock into 2,255,614 shares of common
stock.
On February 3, 1999, the Company redeemed in full the redeemable participating
preferred stock for $12,000,000 and paid accrued interest in the amount of
$4,665,000. On February 26, 1999, the underwriter exercised the option to
purchase 661,500 additional shares of the Company's common stock from which the
Company received net proceeds of $7,382,340.
(4) EARNINGS PER SHARE
Subsequent to the completion of the Company's initial public offering,
historical basic net income per share is calculated using the weighted average
number of common shares outstanding during the period. Historical diluted net
income per share is computed on the basis of the weighted average number of
common shares outstanding plus the dilutive effect of common equivalent shares
("CSE's") outstanding using the treasury stock method.
Pro forma basic and diluted net loss per share for the quarter ended March 31,
1998 was computed by dividing pro forma net loss by the weighted average number
of shares of common stock outstanding. CSE's were not used for the dilutive
calculation since their effect was antidilutive.
(5) REVENUE RECOGNITION
Prior to 1997, the Company followed the provisions of Statement of Position
(SOP) 91-1. Revenue from computer hardware and software sales was recognized
upon installation, substantial fulfillment of all obligations under the sales
contract and when collectibility was probable. Revenues related to consulting,
training and technical support were recognized upon completion of the services.
In October 1997, the American Institute of Certified Public Accountants (AICPA)
issued SOP 97-2, SOFTWARE REVENUE RECOGNITION, which superseded SOP 91-1. The
Company adopted SOP 97-2 for software transactions entered into in 1997. SOP
97-2 generally requires revenue earned on software arrangements involving
multiple elements to be allocated to each element based on vendor specific
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
6
<PAGE> 7
element not yet being sold separately, VSOE is determined using management's
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 have been delivered and installed, the fee is fixed and
determinable and the collectibility is probable. The revenue allocated to post
contract customer support is consistent with fees charged for renewals and is
recognized ratably over the term of the support. Revenue allocated to service
elements is recognized as the services are performed. The adoption of SOP 97-2
did not have a material impact on the Company's results of operations.
In March 1999, SOP 98-9 was issued which amends SOP 97-2 guidance on VSOE for
multiple element arrangements in which there is VSOE of fair value of all the
undelivered elements, and VSOE of fair value does not exist for one or more of
the delivered elements. This SOP does not currently apply to the Company since
VSOE of fair value exists for all elements in the Company's contracts.
(6) INCOME TAXES
On January 1, 1999, the Company terminated its S Corporation status. In
connection with this termination, the Company now records income taxes in
accordance with Statement of Financial Accounting Standards No. 109, ACCOUNTING
FOR INCOME TAXES.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
Income taxes as reported $ (183) $ --
Pro forma adjustment 215
-------
Income tax expense $ (183)
======== ------
Pro forma income tax benefit $ 215
======
</TABLE>
The pro forma income tax benefit presented on the condensed consolidated
statements of operations for the three months ended March 31, 1998 represent
the estimated taxes that would have been recorded had the Company been a C
corporation for income tax purposes for the three months ended March 31, 1998.
The income tax (expense) benefit is as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
--------- ---------
Pro forma
<S> <C> <C>
Current:
Federal $ (476) $ 130
Foreign -- --
State (96) 23
Deferred:
Federal 389 57
State -- 5
------- ------
Total income tax expense and pro forma income
tax benefit $ (183) $ 215
======= ======
</TABLE>
7
<PAGE> 8
A reconciliation of income tax expense and pro forma income tax benefit using
the statutory federal income tax rate to income tax expense and pro forma tax
benefit is as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
--------- ----------
Pro forma
<S> <C> <C>
Income tax (expense) benefit using statutory tax
rate $ (413) $ 117
Effect of:
State and local income taxes, net of federal
income tax (63) 12
Change to C Corporation 330 --
Change in valuation allowance (31) (4)
Change in effective tax rates (4) 93
Other, net (2) (3)
------ -----
Income tax expense and pro forma benefit $ (183) $ 215
====== ======
</TABLE>
The tax effects of temporary differences that give rise to a significant
portion of the deferred tax assets and liabilities at March 31, 1999 include
the establishment of the deferred tax assets and liabilities on January 1, 1999
at which time the Company converted to a C Corporation, resulting in a one time
benefit of $330,000 in the quarter ended March 31, 1999. The tax effects of the
temporary differences are as follows at March 31, 1999:
Deferred tax assets:
Allowance for doubtful accounts $ 178
Accrued bonuses 51
Sales tax reserve 238
------
$ 467
======
Deferred tax liabilities:
Section 481(a) adjustment $ 1
Fixed asset depreciation 77
------
$ 78
======
In connection with the Company's conversion from an S Corporation to a C
Corporation, the Company agreed to issue promissory notes to its existing S
Corporation shareholders, estimated to be in an aggregate amount of $850,000
representing the individual tax liability for each of the existing shareholders
for the period beginning January 1, 1998 and ending on December 31, 1998,
subject to the determination of a final amount. The amount has not been
recorded as a liability in the accompanying condensed consolidated financial
statements because it has not been finalized per the promissory note agreement.
(7) YEAR 2000
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.
8
<PAGE> 9
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in thousands):
March 31, December 31,
1999 1998
--------- ------------
Accounts payable $ 1,161 $ 1,161
Sales tax payable 113 145
Sales tax contingencies 615 615
Deferred rent 193 205
Accrued payroll 192 76
Accrued legal 135 127
Accrued vacation 213 193
Other 467 233
-------- --------
$ 3,089 $ 2,755
======== ========
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The Company is a leading provider of mission-critical, enterprise-wide software
solutions, and related hardware and services, to the non-store marketing
industry. The Company's clients in the non-store marketing industry are
traditional direct marketing companies and Internet-only retailers, as well as
wholesalers, fulfillment houses and retailers with significant non-store sales
channels. The Company's MACS family of software products is designed to
automate non-store commerce activities, including advertising analysis, sales,
telemarketing, ordering, merchandising, procurement, electronic and Internet
commerce, warehousing, shipping, accounting and systems operation. The MACS
products also provide managers and sales personnel with real-time operations,
inventory and customer data to improve both management decision making and
customer service.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
COMPUTER SOFTWARE. Sales of computer software licenses accounted for
approximately 45.1% of the Company's total revenue for the three months ended
March 31, 1999. Computer software license fees consist of license fees for the
new installation of the Company's MACS software and related modules and
additional user license fees, and CPU upgrades for its existing clients.
Computer software license fees are based on the number of users and type and
number of CPUs. Computer software license fees increased 96.6% to $4.1 million
during the three months ended March 31, 1999 compared to $2.1 million in 1998.
This increase resulted from an increase in computer software sales to both new
and existing clients. New client computer software sales increased from
$948,000 for the three months ended March 31, 1998 to $1.9 million in 1999, and
computer software upgrades increased from $1.1 million to $2.2 million for the
same period. The increase in 1999 resulted from an expanded client base and
several of the Company's larger clients performing major system upgrades.
COMPUTER HARDWARE. Sales of computer hardware accounted for approximately 26.6%
of the Company's total revenue for the three months ended March 31, 1999. Sales
of computer hardware consist of sales of computer systems, peripheral
components and third-party software. Computer hardware revenue increased 40.2%
to $2.4 million for the three months ended March 31, 1999, compared to $1.7
million for the three months ended March 31, 1998. Computer hardware revenue
relating to new client sales decreased 30.8% to $827,000 for the three months
ended March 31, 1999, compared to $1.2 million for the same period in 1998. The
decrease resulted from a shift in the quarter to leasing transactions whereby
the Company only records a commission on the sale rather than the total sale
amount, which is based on the difference between the Company's cost and selling
price to the client. Computer hardware upgrades increased by 203.1% to $1.6
million for the three months ended March 31, 1999, compared to $521,000 for the
same period in 1998. The increase in 1999 resulted from an expanded client base
and several of the Company's larger clients performing major system upgrades.
SUPPORT. Support revenue accounted for approximately 18.0% of the Company's
total revenue during the three months ended March 31, 1999. 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 33.4% to $1.6 million during the three months ended
March 31, 1999, compared to $1.2 million for the three months ended March 31,
1998. The increase resulted from the addition of new clients during 1998 and
1999, as well as support fee increases related to software user license
upgrades.
SERVICES. Services revenue accounted for approximately 10.3% of the Company's
revenue for the three months ended March 31, 1999. Services revenue consists
principally of revenue derived from training, consulting, and custom
programming. Services revenue increased 80.4% to $934,000 in the three months
ended March 31, 1999, compared to $517,000 in 1998. This increase was due to
increases in consulting and training services, new client software
modifications, and custom interfaces to third-party products.
TOTAL REVENUE. Total revenue increased 63.7% to $9.1 million for the three
months ended March 31, 1999, compared to $5.5 million in 1998. New client sales
increased 30.0% to $2.8 million from $2.1 million for the three months ended
March 31, 1998. The increase was due to higher average revenue per installation
than during the three months ended
10
<PAGE> 11
March 31, 1998. Also contributing to the increase were sales of systems modules
and sales of WebOrder and the MACS for NT product. Revenue from client system
and component upgrades increased by 124.6% to $3.7 million for the three months
ended March 31, 1999, compared to $1.6 million in 1998 due to an expanding
client base and increased sales efforts directed toward existing clients.
COST OF COMPUTER SOFTWARE. Cost of computer software, which includes
installation and training salaries directly related to new software sales and
subcontractor fees, increased 2.7% to $586,000 during the three months ended
March 31, 1999, compared to $571,000 for the three months ended March 31, 1998.
The increase is attributable to the addition of personnel for training and
installation. Cost of computer software as a percentage of total revenue
decreased to 6.5% from 10.3% for the three months ended March 31, 1998. Cost of
computer software as a percentage of software license fees decreased to 14.4%
from 27.5% for the three months ended March 31, 1998. These decreases are due
to greater efficiencies and increased utilization of personnel resources in
1999 as well as increased software license upgrades which have no cost
associated with the sale.
COST OF COMPUTER HARDWARE. Cost of computer hardware, which consists of
purchases of computer systems, peripheral components and third party software,
increased 28.7% to $1.7 million for the three months ended March 31, 1999,
compared to $1.3 million in 1998. This increase was related to the 40.2%
increase in computer hardware revenue for the three months ended March 31, 1999
compared to 1998. Costs of computer hardware as a percentage of total revenue
decreased to 18.7% in 1999 from 23.7% in 1998, due primarily to a shift in
sales mix reducing the relative contribution of computer hardware sales. Costs
of computer hardware as a percentage of computer hardware revenue was 70.1% and
76.4% for the three months ended March 31, 1999 and 1998, respectively. The
decrease resulted from leasing transactions whereby the Company had no cost
associated with the sale. In such situations, the Company records only a
commission, which is based on the difference between the Company's cost and
selling price to the client.
COST OF SUPPORT. Cost of support consists primarily of personnel costs
associated with the support of the Company's MACS product and third-party
computer software packages and the cost of MACS user documentation distributed
to clients. Cost of support increased 50.5% to $1.1 million for the three
months ended March 31, 1999 from $720,000 million in 1998. The increase was due
to a significant increase in support personnel necessary to meet the growing
client base. Cost of support as a percentage of total revenue decreased to
12.0% for the three months ended March 31, 1999 from 13.0% in 1998. Cost of
support as a percentage of support revenue increased to 66.6% for the three
months ended March 31, 1999 from 59.1% in 1998.
COST OF SERVICES. Cost of services, which consists of salaries for professional
services employees, and allocated salaries for training and programming
personnel, increased 66.4% to $711,000 during the three months ended March 31,
1999, compared to $427,000 in 1998. The increase was due to the addition of
professional service employees and a greater allocation of programming
personnel related to the increases in custom programming revenue. Cost of
services as a percentage of total revenue increased to 7.9% from 7.7% for the
three months ended March 31, 1998. Cost of services as a percentage of services
revenue decreased to 76.1% for the three months ended March 31, 1999 from 82.5%
in 1998. 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
34.3% to $4.1 million for the three months ended March 31, 1999, compared to
$3.0 million in 1998. The increase in total cost of sales and services is
attributable to higher hardware cost in the amount of $376,000, and an increase
of $663,000 in personnel cost.
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 48.6%
to $2.1 million for the three months ended March 31, 1999, compared to $1.4
million in 1998. This increase was primarily due to $317,000 in additional
salaries and benefits resulting from increases in administrative personnel
related to an expanding workforce and client base, and approximately $367,000
of additional communication, recruiting, insurance, travel, professional fees,
equipment and office expenses related to the expanded workforce. General and
administrative expenses as a percentage of total revenue decreased to 23.1% for
the three months ended March 31, 1999 from 25.4% in 1998.
11
<PAGE> 12
SALES AND MARKETING. Sales and marketing expenses include personnel costs,
sales commissions related to sales and marketing of the Company's products and
services, and the cost of advertising, public relations and participation in
industry conferences and trade shows. Sales and marketing expenses increased by
115.1% to $1.1 million for the three months ended March 31, 1999, compared to
$521,000 in 1998. This increase resulted from additional personnel costs,
increased trade show expenses, and expanded marketing and advertising programs.
Sales and marketing expenses as a percentage of total revenue increased to
12.4% for the three months ended March 31, 1999 from 9.4% for the three months
ended March 31, 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses include costs
associated with the development of new products. Such expenses consist
primarily of employee salaries and benefits, consulting expenses (including
amounts paid to subcontractors for development work), and the cost of
development software and hardware. Research and development expenses increased
35.1% to $655,000 during the three months ended March 31, 1999, compared to
$485,000 in 1998. This increase was primarily due to improvements to existing
products and ongoing development of new products such as various new modules
and MACS for UNIX.
INCOME FROM OPERATIONS. As a result of the foregoing factors, the Company's
income from operations increased by $1.0 million to $1.1 million for the three
months ended March 31, 1999 as compared to income of $89,000 for the three
months ended March 31, 1998.
OTHER INCOME (EXPENSE) NET. Net interest income, which includes interest expense
associated with the $12.0 million aggregate principal amount of Convertible
Debentures held by certain lenders (the "Lenders"), and interest income on
available cash, increased 122.2% to $96,000 for the three months ended March 31,
1999, compared to net interest expense of $434,000 for the same period in 1998.
The increase was due to an interest income earned on proceeds received from the
Company's initial public offering on January 29, 1999, and the underwriter
exercising the overallotment option to purchase additional shares from the
Company on February 26, 1999. This was offset by interest on the Convertible
Debentures, which were converted on January 29, 1999, concurrent with the
closing of the initial public offering.
INCOME TAX (EXPENSE) BENEFIT. The effective tax rate for the three months ended
March 31, 1999 was 15.1%. The low tax rate for the first quarter of 1999 was
due to a one-time tax benefit of $330,000 which resulted from the Company
recording its beginning deferred tax assets in connection with the Company
becoming a C Corporation as of January 1, 1999. The effective income tax rate
differs from the federal statutory rates because of the following: (i) the
effect of state income taxes; (ii) the full valuation of net losses of foreign
subsidiaries and (iii) the set up of the beginning deferred tax assets. Also,
effective rates vary between periods because of the differing effects the net
losses of foreign subsidiaries have on income before income taxes.
NET INCOME (LOSS). As a result of the above factors, the Company's net income
increased by $1.2 million to $ 1.0 million for the three months ended March 31,
1999 from a loss of $130,000 in 1998.
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.
On June 30, 1997, the Convertible Debentures became convertible at the option
of a majority in interest of the Lenders into 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.
12
<PAGE> 13
On January 29, 1999, the Company and selling shareholders sold 4,410,000 shares
of its common stock in an initial public offering from which the Company
received proceeds of $43,483,000 net of underwriter commissions and offering
costs. At that time, the debentures were converted into the Redeemable
Convertible Preferred Stock and the Redeemable Participating Preferred Stock.
Contemporaneous with the offering, the Lenders converted the Redeemable
Convertible Stock into 2,255,614 shares of common stock.
On February 3, 1999, the Company redeemed in full the Redeemable Participating
Preferred Stock for $12,000,000 and paid accrued interest in the amount of
$4,665,000. On February 26, 1999, the underwriter exercised the option to
purchase 661,500 additional shares of the Company's common stock from which the
Company received net proceeds of $7,382,340.
At March 31, 1999, the Company's primary sources of liquidity consisted of cash
and cash equivalents totaling $39.1 million.
The Company's operating activities have provided cash for three months ended
March 31, 1999 and 1998, of $3.4 million and $2.0 million, respectively. For
the three months ended March 31, 1999, the Company's operating cash was
provided by operations, proceeds from the Company's initial public offering,
underwriter's overallotment option, and client deposits received in advance of
recognized revenue.
Cash used in investing activities was approximately $428,000 and $166,000, for
the three months ended March 31, 1999 and 1998, 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 to increase as its employee base grows.
For the three months ended March 31, 1999, cash provided by financing
activities totaled $34.6 million, which consisted of proceeds received from the
Company's initial public offering and the underwriters option to purchase
additional shares, offset by repayment in full of the Convertible Debentures
and accrued interest. Cash used in financing activities totaled $450,000 in
1998, which consisted of accrued interest on the Convertible Debenture.
As of March 31, 1999, the Company had working capital of approximately $39.8
million as compared to working capital of approximately $3,400 at March 31,
1998. The change in working capital from March 31, 1998 to March 31, 1999,
resulted primarily from an increase in current assets of $39.0 million due to
cash proceeds from the Company's initial public offering, the underwriters
exercising their option to purchase additional shares from the Company, and
income from operations.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the Year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, prior to
January 1, 2000, computer systems and/or software used by many companies may
need to be upgraded to comply with such Year 2000 requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance. The original design of MACS featured a
four-position century field, which provided century independence. The only
exception to this feature was the GTS program developed by a third-party
provider and incorporated into MACS to provide general ledger and accounts
payable functions.
The Company's MACS products have been determined to be fully Year 2000
compliant, except for the GTS program. The Company performed tests of all major
functionality within the MACS family of software products; specifically those
areas which utilize date fields. GTS provided Year 2000 compliant code to the
Company in September 1998. With respect to the GTS programs, the Company has
identified all changes necessary to integrate the Year 2000 compliant code into
MACS. The Company completed the internal functional integration and made
available compliant code for supported MACS versions in March 1999. Total
expenditures for time and materials to implement such changes were less than
$40,000.
13
<PAGE> 14
The Company has also reviewed all material vendor systems for Year 2000
compliance and either confirmed that these systems are Year 2000 compliant or
obtained Year 2000 compliance statements from the respective vendor. All of the
Company's mission-critical network and desktop software is Year 2000 compliant.
The Company anticipates total expenditures for time and materials to make such
systems Year 2000 compliant was approximately $16,000. In addition, the Company
has reviewed all of its internal systems including its hardware and software
systems, its embedded systems, networks, accounting systems, and development,
testing, training and demonstration platforms for Year 2000 compliance. The
Company has upgraded all internal systems to Year 2000 compliant operating
system versions where compliance statements were not provided for such systems.
There were no material costs incurred by the Company in connection with testing
its vendor or internal systems. All of the Company's non-IT systems are Year
2000 compliant. Any failure of the Company or its suppliers or clients to be
Year 2000 compliant, however, could result in a material adverse effect on the
Company's business, financial condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Management believes the risk of loss arising from adverse changes in interest
rates, foreign currency exchange rates, commodity prices and other relevant
market rates and prices, such as equity prices, if any, is immaterial.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is involved in legal proceedings incidental to
the conduct of its business. Other than as disclosed in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, the Company
believes that litigation, individually or in the aggregate, to which it is
currently a party, is not likely to have a material adverse affect on the
Company's business, financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 29, 1999, the Company and selling shareholders sold 4,410,000 shares
of its common stock in an initial public offering from which the Company
received proceeds of $43,483,000 net of underwriter commissions and offering
costs. At that time, the outstanding Convertible Debentures were converted into
Redeemable Convertible Preferred Stock and Redeemable Participating Preferred
Stock. Contemporaneous with the offering, the Lenders converted the Redeemable
Convertible Stock into 2,255,614 shares of common stock.
On February 3, 1999, the Company redeemed in full the Redeemable Participating
Preferred Stock for $12,000,000 and paid accrued interest in the amount of
$4,665,000. On February 26, 1999, the underwriter exercised the option to
purchase 661,500 additional shares of the Company's common stock from which the
Company received net proceeds of $7,382,340.
As of May 14, 1998, the proceeds of the Offering have been used as follows: (i)
to redeem in full the Company's outstanding Redeemable Participating Preferred
Stock ($12.0 million) and (ii) to repay accrued interest related to the
Convertible Debentures ($4.7 million). The balance of the net proceeds of the
Offering will be utilized to finance potential future acquisitions and for
general corporate purposes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(11) Statement on computation of per share earnings
(27) Financial Data Schedule
(b) Reports on Form 8-K
None.
FORWARD LOOKING STATEMENTS
Certain matters discussed in this Form 10-Q may be "forward-looking statements"
as defined in the Private Securities Litigation Reform Act of 1995, including
but not limited to statements related to plans for future business development
activities, anticipated costs of revenues, product mix and service revenues,
research and development and selling, general and administrative activities,
and liquidity and capital needs and resources. Such forward-looking statements
are subject to risks, uncertainties and other factors, which could cause actual
results to differ materially from future results expressed or implied by such
forward-looking statements. Investors are cautioned that any forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
contemplated by such forward-looking statements.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 1999 SMITH-GARDNER & ASSOCIATES, INC.
By: /s/ Martin K. Weinbaum
----------------------------------
Martin K. Weinbaum
Vice President Finance and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
16
<PAGE> 1
SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES
EXHIBIT 11
EARNINGS PER SHARE COMPUTATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 1998
------- ------
<S> <C> <C>
BASIC NET INCOME (LOSS):
Weighted average common shares outstanding 9,827 5,263
======= ======
Net income (loss) $ 1,031 $ (346)
======= ======
Basic net income (loss) per share $ .10 $ (.07)
======= ======
DILUTED NET INCOME (LOSS):
Weighted average common shares outstanding 9,827 5,263
Common stock equivalents 1,305 --
======= ======
Equivalent Shares 11,132 5,263
======= ======
Net income (loss) $ 1,031 $ (346)
======= ======
Diluted net income (loss) per share $ .09 $ (.07)
======= ======
PRO FORMA DATA:
Weighted average common shares outstanding 5,263
======
Pro forma net loss $ (131)
======
Pro forma basic and diluted net loss per share $ (.02)
======
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEET AT MARCH 31, 1999 AND CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 39,102
<SECURITIES> 0
<RECEIVABLES> 5,298
<ALLOWANCES> 459
<INVENTORY> 185
<CURRENT-ASSETS> 45,052
<PP&E> 2,361
<DEPRECIATION> 1,047
<TOTAL-ASSETS> 46,440
<CURRENT-LIABILITIES> 5,217
<BONDS> 0
0
0
<COMMON> 122
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 46,440
<SALES> 9,051
<TOTAL-REVENUES> 9,051
<CGS> 4,069
<TOTAL-COSTS> 7,933
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 96
<INCOME-PRETAX> 1,214
<INCOME-TAX> 183
<INCOME-CONTINUING> 1,031
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,031
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.09
</TABLE>
