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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
[ ] 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 0-26536
SMITH MICRO SOFTWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 33-0029027
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
51 COLUMBIA, SUITE 200, ALISO VIEJO, CA 92656
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (949) 362-5800
COMMON STOCK, $.001 PAR VALUE NASDAQ NATIONAL MARKET
(Title of each class) (Name of each exchange on which registered)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK,
$.001 PAR VALUE
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 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 [ ].
The Registrant does not have different classes of Common Stock. As of
March 19, 2001, the aggregate market value of the Common Stock of the Registrant
held by non-affiliates was $13,308,789, based upon the closing sale price of
such stock on that date. For purposes of such calculation, only executive
officers, board members, and beneficial owners of more than 10% of the Company's
outstanding Common Stock are deemed to be affiliates.
As of March 19, 2001, there were 16,232,416 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders currently expected to be held on May 15, 2001, as filed with the
Securities Exchange Act of 1934, as amended, are incorporated by reference in
Part III of this Report.
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SMITH MICRO SOFTWARE, INC.
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
Item 1. BUSINESS...................................................................... 3
Item 2. PROPERTIES.................................................................... 13
Item 3. LEGAL PROCEEDINGS............................................................. 13
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS............................ 13
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..... 14
Item 6. SELECTED FINANCIAL DATA....................................................... 16
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................................................... 17
Item 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.................... 29
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................... 30
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................................... 31
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS.............................................. 32
Item 11. EXECUTIVE COMPENSATION........................................................ 32
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ............... 32
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................ 32
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K...................................................................... 33
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THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 PROVIDES A "SAFE
HARBOR" FOR FORWARD-LOOKING STATEMENTS. THE STATEMENTS CONTAINED IN THIS ANNUAL
REPORT ON FORM 10-K THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE FORWARD
LOOKING STATEMENTS. WORDS SUCH AS "ANTICIPATES," "BELIEVES," "EXPECTS,"
"INTENDS," "PLANS" OR SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES THAT COULD
CAUSE THE ACTUAL RESULTS OF THE COMPANY TO MATERIALLY DIFFER FROM THOSE
ANTICIPATED. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS THAT SPEAK ONLY AS THE DATE HEREOF. THE COMPANY
DISCLAIMS ANY OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO
THESE FORWARD LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT EVENTS OR
CIRCUMSTANCES OCCURRING SUBSEQUENT TO THE FILING OF THIS FORM 10-K WITH THE
SECURITIES AND EXCHANGE COMMISSION OR OTHERWISE TO REVISE OR UPDATE ANY ORAL OR
WRITTEN FORWARD LOOKING STATEMENT THAT MAY BE MADE FROM TIME TO TIME BY OR ON
BEHALF OF THE COMPANY. READERS ARE ALSO URGED TO CAREFULLY REVIEW AND CONSIDER
THE VARIOUS DISCLOSURES MADE BY THE COMPANY THAT DESCRIBE CERTAIN FACTORS WHICH
AFFECT THE COMPANY'S BUSINESS, INCLUDING THE "RISK FACTORS" COMMENCING ON PAGE
22 OF THIS ANNUAL REPORT, IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND SIMILAR DISCUSSIONS IN OUR OTHER
SECURITIES AND EXCHANGE COMMISSION FILINGS. YOU SHOULD CAREFULLY CONSIDER THOSE
FACTORS, IN ADDITION TO THE OTHER INFORMATION IN THIS ANNUAL REPORT, BEFORE
DECIDING TO INVEST IN OUR COMPANY OR TO MAINTAIN OR INCREASE YOUR INVESTMENT.
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PART I
ITEM 1. BUSINESS
GENERAL
We develop and sell diagnostic utilities, communications and eCommerce
software for personal and business use. We also offer and professional services
consulting which include methodologies to help clients focus, define and
prioritize Internet investments; develop eCommerce sites and custom eBusiness
applications; implement tools to increase revenue per online transaction and
transactions per customer; warehouse, mine and integrate data for enhanced
accessibility and effective decision support; and select the right technology
infrastructure to support eBusiness. Our objective is to enhance human
interaction by giving users the ability to communicate through multimedia
technologies over analog and digital platforms. Our products enable personal
communication through telephony, fax, multimedia email, data, paging, wireless
communications, desktop and Internet utilities, video security and video
conferencing. Our eCommerce, eBusiness and network faxing software and
professional services enable small, medium and large businesses to create and
launch online Internet storefronts and enhance their corporate infrastructure
which we believe allows these businesses to operate with greater efficiency.
We were first incorporated in California in 1983 and later
reincorporated in Delaware in 1995. In 1985, we shipped our first data
communication software product. At that time, we generated revenues primarily
form the market acceptance of our OEM fax and data communication software
products. We began providing video communication products in 1996 to both OEM
and retail customers. In January 1998, we purchased certain fax software assets
of Mitek Systems, Inc. to provide LAN, Internet and Internet fax transmission
solutions designed for the corporate market. In September 1998, we shipped our
first Internet communications software product. This multi-purpose product
provides for integrated telephony, multimedia e-mail, video surety, fax, video
conferencing and text based chat functionality over the Internet and other IP
protocol services such as LANs and WANs. Designed to take advantage of high
bandwidth technology, this product functions over a variety of IP connectivity
hardware including xDSL modems, cable modems, network interface devices and
analog modems.
In April 1999, we expanded our Macintosh division with the acquisition
of STF Technologies, Inc. This acquisition enhanced our ability to develop and
sell communications (primarily fax) software to the Macintosh market. Our
Macintosh division is currently working to provide Internet telephony products
for this market. In September 1999, we acquired Pacific Coast Software so that
we could offer eCommerce business solutions. In July 2000, we acquired the
TouchStone CheckIt product line (See Note 9 to the consolidated financial
statements). We market these products under the Smith Micro CheckIt(R) brand
including: CheckIt(R) NetOptimizer, CheckIt(R) Utilities; CheckIt(R)
FastMove(R); and CheckIt(R) Suite. CheckIt(R) NetOptimizer analyzes and
optimizes wireless, broadband and dialup Internet connections for maximum
performance. CheckIt(R) Utilities enables users to uncover potential problems,
check PC performance and assess system reliability. CheckIt(R) FastMove is a
file synchronization and transfer program for users who work on multiple PCs and
also includes file management utilities. In addition, these products will be
included as components in the CheckIt(R) Suite product. These products will also
be available in special versions for OEM customers along with CheckIt(R) Factory
Edition, targeted at PC manufacturers for factory testing and burn-in. Finally,
in September 2000 we acquired the consulting practice unit of QuickStart
Technologies, Inc., a provider of integrated Internet business services to
middle market companies (See Note 9 to the consolidated financial statements).
Our products for the consumer and business markets are available through
Internet sales, retail stores, direct sales, e-tailers and value-added resellers
(VARs). Retail outlets that sell our products include CompUSA, J&R Computer
World, Office Depot, Micro Center, Staples, Circuit City, PC Connections,
Multiplezones, Amazon, and Fry's Electronics. Our products can be purchased at
many online locations, including Buy.com, Beyond.com, Egghead.com. In the
original equipment manufacturers (or OEM) market we are a supplier of
communication and diagnostic utility software, having shipped over 40 million
copies of products. Our OEM customers include manufacturers of wireless devices
and services, personal computers, digital cameras, video capture cards, cable
modems and data modems. We currently maintain OEM relationships with several
companies including Verizon,
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Apple, Hewlett Packard, Gateway, Brother International, Philips Consumer
Electronics, Viking Components, Zoom, D-Link, Audiovox, LGIC, Kyrocea, USR and
3Com.
We have recently broadened our consulting capabilities with the
acquisition of the professional services business from QuickStart Technologies,
Inc. at the end of the third quarter of 2000. The majority of our solutions are
Internet-related, focusing on eCommerce and eBusiness, with consulting services
that range from supporting our WebCatalog product to complete website design and
installation and infrastructure consulting services. We also offer website
hosting and co-location services as well as application service provider
services for WebCatalog. Our eCommerce customers include Fabian Investment
Resources, Boomtown Casino, Biomatrix, Readycrest, Greenmarketplace.com among
others. Our infrastructure customers include Trust Company of the West,
Beckman-Coulter among others.
INDUSTRY BACKGROUNDS
Internet Industry - Businesses and consumers are using the Internet to
communicate, transact business, share information, and access vast information
resources. The increasing demand for Internet access is driving the adoption of
new technology that enhances the Internet experience. These advances are found
in multimedia personal computers and Internet access devices such as wireless
devices, analog modems, cable modems, xDSL modems, network interface cards and
software solutions.
Manufacturers of connectivity devices such as analog modems, cable
modems, xDSL modems, wireless devices and network interface cards enable
personal computer communication using direct connections, or connections over
the Internet, intranets, Local Area Networks and Wide Area Networks. By adopting
new technology, these manufacturers have been able to deliver products with
higher transmission speeds and increased functionality. The rapid pace of these
changes, the need to support a variety of operating systems, including Windows
95, Windows 98, Windows NT, Windows 2000, Windows ME, Windows CE, Unix, Linux
and Macintosh, and the desire to differentiate products, present a significant
communication software challenge. Manufacturers generally focus on hardware and
do not find it cost effective to internally develop software to meet the
evolving needs of communication software for multiple platforms. Instead, these
manufacturers typically bundle software from outside providers with their
hardware.
As technology develops and communication hardware device manufacturers
expand the functionality of communication devices, communication software must
be continually upgraded and improved in order for such devices to continue to
offer integrated, easy-to-use solutions to enable this functionality to the end
user. Emerging telephony applications can provide full duplex speakerphones,
complex voicemail functions, wireless Internet access and an enhanced level of
information management capabilities to the home and to offices of any size. In
addition, video conferencing, which traditionally has been available only to
high-end corporate boardrooms at a cost of thousands of dollars, has become
increasingly affordable even to home and small business users. Most recently,
communication hardware device manufacturers have introduced devices such as
cable and xDSL modems that enable high speed Internet access. These devices
improve the functionality and efficiency of voice, fax, data and video
transmissions over the Internet or intranets. The functionality of communication
software must continue to evolve to keep pace with consumer expectations, future
hardware functions and the rapidly changing competitive environment.
Diagnostic Software Industry - Diagnostic software products assist home
or corporate users as well as technical services departments of the hardware
manufacturers and hardware service companies identify and repair computer system
related errors and other problems. As the hardware manufacturers adopt new
technology, the diagnostic tools must be continuously improved in order to solve
new problems. The challenge is to provide tools that support both the novice and
technically savvy technical support personnel.
Computer Consulting Industry - Corporations continue to upgrade their
internal business operations that are dependent upon computer systems, such as
database management, accounting systems, computer relations management, sales
management, as well as other infrastructure requirements. A corporation's
information technology department generally will evaluate whether to design,
build or support these systems internally or to contract some or all of this
work to specialists with technical expertise. Many corporations choose to use
outside
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consulting contractors for this work in order to focus their resources on their
core competencies and avoid the time and expense required to train their own
employees.
SMITH MICRO STRATEGY AND PRODUCTS
In the past, we operated as one business segment in the development and
sales of software products. In 2000, we restructured our internal operations and
management into two business segments: software products and Internet solutions.
The software products operating segment develops and markets our software
products, except for eCommerce software. Within software products we further
concentrate on wireless and broadband products, Macintosh products and the
related retail products for each of these concentrations. The Internet solutions
segment provides eCommerce software solutions, eBusiness strategy and
integration of new infrastructure solutions into existing systems. The Internet
solutions segment also provides customer hosting. See Note 6 of Notes to
Consolidated Financial Statements for financial information related to our
operating segments.
In addition to our internal restructuring in 2000, we added key
technologies by acquiring TouchStone Software CheckIt software products and
QuickStart's consulting business. These acquisitions have enabled us to broaden
our market opportunities as well as our retail product offerings, and develop a
consulting service organization within our company.
SOFTWARE PRODUCTS
The following is a list of the software products we offer, as well as a
brief description of their principal features and functions:
WIRELESS & BROADBAND OEM SOFTWARE PRODUCTS
WIRELESS FAX/DATA PRODUCTS
QuickLink(R) Mobile 2000 Turns data capable wireless phones into wireless
modems
QuickLink(R) Mobile Enables users to be able to easily edit wireless
Phonebook phonebooks on a PC computer and copy email or PIM
databases to the phone
QuickLink(R) Fax 2000 Turns data capable wireless phones into wireless fax
modems
DESKTOP FAX/DATA VOICE PRODUCTS
QuickLink(R) Enables users to exchange faxes and data files with
remote modems, fax/modems and fax machines quickly
and easily
QuickLink(R) MessageCenter An integrated voice, fax and data
communication software program that lets users
receive voice mail and exchange faxes and data files
with remote modems, fax/modems, and fax machines
quickly and easily
UTILITY PRODUCTS
CheckIt(R) FE (Factory A diagnostic utility that is designed to meet the
Edition) demanding needs of PC manufacturers and hardware
OEM's
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WIRELESS & BROADBAND OEM SOFTWARE PRODUCTS (CONTINUED)
VIDEO AND AUDIO PRODUCTS
VideoLink(R) Enables video and audio communications over the
Internet, intranet or ordinary telephone lines using
a standard analog modem connection
VideoLink(R) Mail Allows users to attach audio/video messages to
emails as self-extracting files that can be opened by
recipients without special software
AudioLink(R) (conexs) Enables users to make audio calls anywhere in the
world with the convenience and cost-efficiency of the
Internet
MACINTOSH OEM SOFTWARE PRODUCTS
FAXstf(TM) Enables users to exchange faxes and data files with
remote modems, fax/modems, and fax machines quickly
and easily
VideoLink(R) Pro Enables users to converse with video and voice over a
standard telephone line, Internet Wide Area Networks
(WANs) and Local Area Networks (LANs)
RETAIL SOFTWARE PRODUCTS
WIRELESS DATA PRODUCTS
QuickLink(R) Mobile 2000 Turns data capable wireless phones into wireless
modems
UTILITY PRODUCTS
CheckIt(R) Utilities Provides end-users the hardware information they
need to evaluate, fine-tune and manage their systems
CheckIt(R)
NetOptimizer(TM) An Internet performance utility that
actually speeds up Internet usage by actually
adjusting computer modem, port and software settings
to accept data faster from the Internet
CheckIt(R) FastMove(TM) A program that lets users copy files,
folders or directories with the single simple click
of a button
CheckIt(R) Pro A full-featured diagnostic tool that is designed
to meet the demanding needs of today's PC Technicians
and Support Personnel
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RETAIL SOFTWARE PRODUCTS (CONTINUED)
DESKTOP & NETWORK FAX/DATA VOICE PRODUCTS
HotFax(R) MessageCenter An integrated voice, fax and data
communication software program that lets users
receive voice mail and exchange faxes and data files
with remote modems, fax/modems, and fax machines
quickly and easily
HotFax(R) MessageCenter An integrated voice, fax and data communication
Pro -- for the Mac software program that lets users receive voice mail
and exchange faxes and data files with remote modems,
fax/modems, and fax machines quickly and easily
HotFax(R) Enables users to exchange faxes and data files with
remote modems, fax/modems, and fax machines quickly
and easily
HotFax(R) Share A client/server net faxing solution that
eliminates the need for phone lines at every desktop,
which reduces cost and network management
VIDEO AND AUDIO PRODUCTS
VideoLink(R) Mail Allows users to attach audio/video messages to
emails as self-extracting files that can be opened by
recipients without special software
Internet CommSuite(TM) An all-in-one Internet communications product
enabling users to add voice and video to e-mail and
on-line chat
Wireless and Broadband Products. We manufacture, market and sell
value-added wireless telephony, video and audio Internet communications,
diagnostic utilities, and core fax and data telephone software products. We
offer software products for Windows 98, Windows 95, Windows NT, Windows 2000,
Windows ME, Unix and Linux operating systems. With our strong engineering focus
and our relationships with wireless device, cable modem, xDSL modem, camera,
personal computer, chip manufacturers and analog modem manufacturers, we strive
to develop communication and diagnostic utility software in anticipation of
changes in product design and to customize our OEM software to meet specific
customer requirements. To address the complexity of personal computer
communication and diagnostic utilities, we have consistently developed products
that we believe are intuitive and easy-to-use. Our strategy is to build upon the
easy-to-use reputation of our OEM software products to encourage new users to
migrate to our retail products, as they require higher levels of functionality.
Our products are targeted to both original equipment manufacturers and
retail customers. Our OEM customers include cell phone manufacturers, digital
video camera manufactures, personal computer manufacturers, wireless service
providers, analog, cable and DSL modem manufacturers. In addition, our custom
engineering services bring more than 20 years of hardware and software
experience to OEMs seeking to better market their products by adding additional
product features, removing unwanted features, customizing existing features and
translating an application into additional languages.
Macintosh Products. With the acquisition of STF Technologies in 1999, we
became a major provider of communications software fax products for home and
business users of Apple's Macintosh. In 2000, we added the only industry
standard video conferencing technology.
Retail Products. Part of our focus within our software products segment
is selling our products, including our Macintosh and wireless and broadband
products, to the retail market. We sell our retail products to the larger North
American distributors and retailers, as well as the regional and smaller
national distributors, catalogs and
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Internet resellers. We also sell our products internationally with customers
ranging from distributors, value-added resellers and large resellers. We also
sell our retail products to value-added resellers through our VAR Plus program.
The VAR Plus program includes appropriate discounts on our retail products,
preferential technical support and marketing support.
INTERNET SOLUTIONS
The acquisition of Pacific Coast Software in 1999 marked our entry into
the professional services consulting eCommerce market. The third quarter 2000
acquisition of the professional services business from QuickStart Technologies,
Inc. expanded the consulting business that the division can offer to a complete
end-to-end corporate infrastructure consulting service. In addition, the
division develops and sells retail products and technologies for the Internet
commerce space.
The professional services are broken out into the following areas:
Business Intelligence helps clients to warehouse, extract, and integrate
data for enhanced accessibility and effective decision support
eBusiness Strategy--provides complete strategy consulting, as well as
research and development for companies in all stages of eBusiness
evolution from initial strategy and planning, through design and
development, to final hosting and maintenance
eCommerce Solutions utilizes the latest tools and technologies to
develop eBusiness sites
Infrastructure provides plan, design, integration and implementation of
new enterprise packages into our client's existing infrastructure.
Customer Relationship Management implements innovative ways to increase
revenue per transaction and transactions per customer by reducing sales
cycles and selling costs, shortening problem resolution, lowering
service and support costs, increasing customer satisfaction, increasing
campaign effectiveness, accurate forecasting and selling in context
staffing.
The following is a list of the products we offer in our Internet
Solutions segment:
WIRELESS PRODUCTS
Wireless WebDNA(TM) An additional function that can be added to a Web
site built using WebCatalog that enables WAP
capability.
WEB SITE BUILDING TOOLS
WebCatalog(TM) Provides the tools necessary to develop a Web site or
an eCommerce Web store supporting Windows, Mac, Unix
and Linux.
WebDNA(TM) Enables web sites to be created with standard HTML
text files.
WebCatalog(TM) Builder - Provides an easy-to-use process to design and Launch
for Windows a Web store on the Mac operating system.
WebCatalog(TM) Builder - Provides an easy-to-use process to design and Launch
for the Mac a Web store on the Mac operating system.
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ACQUISITIONS
In September 2000, the Company acquired the eBusiness consulting
practice of QuickStart Technologies, Inc. As a result of this acquisition, we
now have a comprehensive suite of services to assist middle market clients in
planning, implementing and supporting eBusiness initiatives. These services
include methodologies to help clients focus, define and prioritize Internet
investments; develop eCommerce sites and custom eBusiness applications;
implement tools to increase revenue per online transaction and transactions per
customer; warehouse, mine and integrate data for enhanced accessibility and
effective decision support; and select the right technology infrastructure to
support eBusiness.
In July 2000, we acquired the CheckIt(R) line of software products from
Touchstone Software Corporation and eSupport.Com, Inc., a wholly owned
subsidiary of TouchStone Software Corporation. We market these products under
the Smith Micro CheckIt brand including: CheckIt(R) NetOptimizer(TM), CheckIt(R)
Utilities; CheckIt(R) FastMove(TM); and CheckIt(R) Suite. CheckIt(R)
NetOptimizer(TM) analyzes and optimizes wireless, broadband and dialup Internet
connections for maximum performance. CheckIt(R) Utilities enables users to
uncover potential problems, check PC performance and assess system reliability.
CheckIt(R) FastMove(TM) is a file synchronization and transfer program for users
who work on multiple PC's and also includes file management utilities. These
products will also be included as components in the CheckIt(R) Suite product.
These products will also be available in special versions for OEM customers
along with CheckIt(R) Factory Edition, targeted at PC manufacturers for factory
testing and burn-in.
In September 1999, Smith Micro acquired all of the outstanding capital
stock of Pacific Coast Software. Headquartered in San Diego, California, PCS is
now a wholly owned subsidiary of Smith Micro. PCS is a developer and publisher
of eCommerce software products and provides development and web hosting services
to its customers.
In April 1999, Smith Micro acquired all of the outstanding capital stock
of STF Technologies, Inc. STF is a developer and publisher of fax and
communications software products for the Apple Macintosh computer. Headquartered
in Concordia, Missouri, STF is now a wholly owned subsidiary of Smith Micro.
SALES AND MARKETING
Our products are available worldwide to customers through channels that
include distributors, retail, mail order, corporate resellers, Internet-based
resellers or "e-tailers," value added resellers, original equipment
manufacturers and educational institutions. We also sell some of our products
and product upgrades over the Internet through our own webstore.
We maintain distribution relationships with major independent
distributors. These distributors stock our products for redistribution to
independent dealers, consultants and other resellers. We also maintain
relationships with major retailers, while marketing to these retailers through
independent distributors. Our sales force works closely with our major
distributor and reseller accounts to manage the flow of orders, inventory levels
and sell-through to customers. We also work closely with them to manage
promotions and other selling activities.
Our agreements with distributors are generally nonexclusive and may be
terminated by either party without cause. These distributors are not within our
control and are not obligated to purchase products from us. These distributors
also represent other vendors' product lines. For information with respect to
distributors that represent more than 10% of our revenues, see Note 6 of Notes
to Consolidated Financial Statements of this Form 10-K.
Our marketing activities include advertising in trade, technical and
business publications, on-line advertising, public relations, cooperative
marketing with distributors, resellers and dealers, direct mailings to existing
and prospective end-users and participation in trade and computer shows.
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We are exposed to the risk of product returns and markdown allowances
with respect to our distributors and retailers. We are generally not
contractually obligated to accept returns, except for defective and damaged
products. However, we may permit customers to return or exchange product and may
provide price protection on products unsold by a customer. In addition, we may
provide markdown allowances, which consist of credits given to customers to
induce them to lower the retail sales price of certain products in an effort to
increase sales to consumers and to help manage our customers' inventory levels
in the distribution channel. Although we maintain a reserve for returns and
markdown allowances, and we manage our returns and markdown allowances through
our authorization procedure, we could choose to accept substantial product
returns and provide markdown allowances to maintain our relationships with
retailers and our access to distribution channels. We consider return requests
on a case-by-case basis, taking into consideration factors such as the products
involved, the customer's historical sales volume and the customer's credit
status. As a percentage of our net revenues, retail sales represented 25.9% in
our revenues in 2000, 31.9% of our revenues in 1999 and 24.8% of 1998 revenues
For further discussion, see Summary of Significant Accounting Policies and Notes
to Consolidated Financial Statements in this Form 10-K.
Our OEM market continues to evolve as we continue to offer new
communications products and OEMs adopt new technologies and software bundling
techniques. Our OEM customers include cell phone manufacturers, personal
computer and camera manufacturers. These manufacturers bundle or pre-load our
software products with their own hardware products. We have translated our
products into as many as 18 languages to allow our OEM customers the flexibility
of offering multi-language products that meet the needs of their worldwide
markets.
The cycle from the placement of an OEM order to shipping is very short.
OEM customers generally operate under a just-in-time system and we generally
ship our products as we receive orders. Additionally, an increasing percentage
of our OEM revenue is derived from royalties accrued by customers that are
authorized to replicate our software products on a CD or to preload our software
on a personal computer. As a result of these factors, we have relatively little
backlog for our wireless and broadband products at any given time and we do not
consider backlog to be a significant indicator of future performance. Moreover,
we generally do not produce software in advance of anticipated orders and
therefore have insignificant amounts of inventory. As a result of the foregoing,
our revenues in any quarter are substantially dependent on orders booked in that
quarter.
The three largest OEM customers, and their respective affiliates, in
each year, have accounted for 20.6% of our net revenues in 2000, 26.8% of our
net revenues in 1999 and 33.0% in 1998. Our major customers could reduce their
orders of our products in favor of a competitor's product or for any other
reason. The loss of any of our major OEM customers, decisions by a significant
OEM customer to substantially decrease purchases or our inability to collect
receivables from these customers could have an adverse effect on our business.
We allow our OEM customers to return unused software. To date, however, such
returns have been insignificant.
Our consulting service assists customers in deploying and using computer
operating systems, applications, and communications products. This group works
out of our Internet solutions group and helps create enterprise-wide computing
solutions for large corporate accounts. We work with Microsoft Consulting
Services as a Certified Solutions Provider. Through this relationship we are
able to provide to our customers a wide range of Microsoft product-related
services and technology solutions implemented with our consultants' high levels
of technical skill and knowledge.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
We provide technical support and customer service through our web site,
email, telephone and fax. OEM customers generally provide their own primary
customer support functions and rely on us for back-up support for their own
technical support personnel. We provide technical support to end users of OEM
customers through the technical support section of our web site.
PRODUCT DEVELOPMENT
The software industry, particularly the Internet and wireless/broadband
markets, are characterized by rapid and frequent changes in technology and user
needs. We work closely with industry groups and customers, both current and
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potential, to help us anticipate changes in technology and determine future
customer needs. Software functionality depends upon the capabilities of the
hardware. Accordingly, we maintain engineering relationships with various
hardware and silicon chip manufacturers and we develop our software in tandem
with their development. Our engineering relationships with manufacturers, as
well as with our major customers, are central to our product development
efforts. In addition, we participate in software product developer programs
sponsored by key industry companies such as Microsoft, Intel and Apple.
MANUFACTURING
Our software is sold in three forms. Our software is sold in a package
that includes diskettes or a CD-ROM, a manual and certain other documentation or
marketing material. We also permit certain of our OEM customers to duplicate
their own diskettes or CD-ROMs and pay us a royalty based on usage. This method
of sale does not require us to provide a disk or manual. Finally, we grant
licenses to certain OEM customers that enable those customers to pre-load a copy
of our software onto a personal computer's hard drive. With the corporate sales
program, we offer site licenses under which a corporate user is allowed to
distribute copies of the software to users within the corporate sites.
Our product development groups produce a master set of CD-ROMs or
diskettes and documentation for each product that is then duplicated and
packaged into products by the manufacturing organization. Purchasing of all raw
materials is done by Smith Micro Software personnel in our Aliso Viejo,
California facility. The manufacturing steps that are subcontracted to outside
organizations include the replication of CD-ROMs, printing of documentation
materials and assembly of the final packages. We perform diskette duplication
and assembly of the final package in our Aliso Viejo, California manufacturing
facility.
COMPETITION
The markets in which we operate are highly competitive and subject to
rapid changes in technology. The strategic directions of major personal computer
hardware manufacturers and operating system developers are also subject to
change. We compete with other software vendors for access to distribution
channels, retail shelf space and the attention of customers. We also compete
with other software companies in our efforts to acquire software technology
developed by third parties and in attracting qualified personnel.
We believe that the principal competitive factors affecting the
communication and diagnostic utility software market include product features
and ease of use, willingness of the vendor to customize the product to fit
customer-specific needs, product reputation, product quality, product
performance, price, customer service and support and the effectiveness of sales
and marketing efforts. Although we believe that our products currently compete
favorably with respect to these factors, there can be no assurance that we can
maintain our competitive position against current and potential competitors,
especially those with significantly greater financial, marketing, service,
support, technical and other resources.
Because there are relatively low barriers to entry in the communication
and diagnostic utility software market and because rapidly changing technology
is constantly creating new opportunities in this market, we expect new
competitors to enter the market. We also believe that competition from
established and emerging software companies will continue to intensify as fax
and data applications merge with video and audio applications and the emerging
cellular, wireless and Internet telephony markets develop. The markets in which
we compete have been characterized by the consolidation of established
communication software suppliers and we believe that this trend may continue,
which may lead to the creation of additional large and better-financed
competitors. Increased competition could result in price reductions, reduced
gross margins and loss of market share, any of which could have a material
adverse effect on our business.
We face competition from Microsoft, which dominates the personal
computer software industry. Due to its market dominance and the fact that it is
the publisher of the most prevalent personal computer operating systems,
Windows, Microsoft represents a significant competitive threat to all personal
computer software vendors, including us. We also compete with Symantec, McAfee,
CUseeMe and AVT, among others, for communication software products.
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Some of our competitors have a retail emphasis and offer OEM products
with a reduced set of features. The opportunity for retail upgrade sales may
induce these and other competitors to make OEM products available at their own
cost or even at a loss. Such a pricing strategy could have an adverse effect on
our business.
Many of our other current and prospective competitors have significantly
greater financial, marketing, service, support, technical and other resources
than Smith Micro. Moreover, these companies may introduce additional products
that are competitive with ours, and our products may not compete effectively
with such products. We believe that our ability to compete depends on elements
both within and outside of our control, including the success and timing of new
product development and introduction, product performance, price, distribution
and customer support. We may not be able to compete successfully with respect to
these and other factors. We believe that the market for our software products
has been and will continue to be characterized by significant price competition.
A material reduction in the price of our products could negatively affect our
profitability.
Many of our existing and potential OEM customers have substantial
technological capabilities. These customers may currently be developing, or may
in the future develop, products that compete directly with our products. In such
event, these customers may discontinue purchases of our products. Our future
performance is substantially dependent upon the extent to which existing OEM
customers elect to purchase communication software from us rather then design
and develop their own software. In light of the fact that our customers are not
contractually obligated to purchase any of our products, they may cease to rely,
or fail to expand their reliance, on us as an external source for communication
software in the future.
PROPRIETARY RIGHTS AND LICENSES
Our success and ability to compete is dependent upon our software code
base, our programming methodologies and other intellectual properties. To
protect our proprietary technology, we rely on a combination of trade secret,
nondisclosure and patent, copyright and trademark law that may afford only
limited protection. We apply for various patents and trademarks to protect
intellectual property. We seek to avoid disclosure of our intellectual property
by requiring employees and consultants with access to our proprietary
information to execute confidentiality agreements with us and by restricting
access to our source code. Prior to becoming a publicly held entity, we did not
require our employees to execute confidentiality agreements with us. The steps
that we have taken to protect our proprietary technology may not be adequate to
deter misappropriation of our proprietary information or prevent the successful
assertion of an adverse claim to software utilized by us. In addition, we may
not be able to detect unauthorized use of our intellectual property rights or
take effective steps to enforce those rights.
In selling our products, we primarily rely on "shrink wrap" licenses
that are not signed by licensees and, therefore, may be unenforceable under the
laws of certain jurisdictions. In addition, the laws of some foreign countries
do not protect our proprietary rights to as great an extent as do the laws of
the United States. Accordingly, the means we use currently to protect our
proprietary rights may not be adequate. Moreover, our competitors may
independently develop similar technology to ours. We also license technology on
a non-exclusive basis from several companies for inclusion in our products and
anticipate that we will continue to do so in the future. If we are unable to
continue to license these technologies or to license other necessary
technologies for inclusion in our products, or if we experience substantial
increases in royalty payments under these third party licenses, our business
could be materially and adversely affected.
Although we believe that our products do not infringe on the
intellectual property rights of others, such a claim may be asserted against us
in the future. From time to time, we have received and may receive in the future
communications from third parties asserting that trademarks used by us or
features or content of certain of our products infringe upon intellectual
property rights held by such third parties. As the number of trademarks,
patents, copyrights and other intellectual property rights in our industry
increases, and as the coverage of these patents and rights and the functionality
of products in the market further overlap, we believe that our products, with
their existing technology, may increasingly become the subject of infringement
claims. Moreover, any of these proceedings could also result in
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an adverse decision as to the priority of our inventions. Such results would
materially and adversely affect us, and may also require us to obtain one or
more licenses from third parties. We may not be able to obtain any such required
licenses upon reasonable terms, if at all, and the failure by us to obtain such
licenses could prohibit us from selling some of our products or require us to
modify some of our existing products.
EMPLOYEES
As of December 31, 2000, Smith Micro had a total of 117 employees, of
which 51 were engaged in engineering, 38 were in sales and marketing, ten were
in customer support, 12 were in finance and administration and six were in
manufacturing. We utilize temporary labor to assist during periods of increased
manufacturing volume. We believe that our future success will depend in large
part upon our continuing ability to attract and retain highly skilled
managerial, sales, marketing, customer support, research and development
personnel and consulting staff. Like other software companies, we face intense
competition for such personnel, and we have at times experienced and continue to
experience difficulty in recruiting qualified personnel. There can be no
assurance that we will be successful in attracting, assimilating and retaining
other qualified personnel in the future. We are not subject to any collective
bargaining agreement and we believe that our relationships with our employees
are good.
ITEM 2. PROPERTIES
Our principal administrative, sales and marketing, customer support and
research and development facility is located in approximately 28,500 square feet
of space in Aliso Viejo, California. We have leased this facility through March
31, 2003. We also lease a facility of approximately 7,000 square feet in San
Diego, California pursuant to a lease that expires July 31, 2005. We operate our
Internet solutions segment out of our San Diego facility and a portion of our
Aliso Viejo facility, with the remaining facilities serving our software
products segment. Our other locations include a facility of approximately 3,100
square feet in Beaverton, Oregon pursuant to a lease which extends through
February 28, 2005, a facility of approximately 1,900 square feet in Boulder,
Colorado pursuant to a lease which extends through August 31, 2002, a facility
of approximately 3,000 square feet in Lee's Summit, Missouri pursuant to a lease
that expires August 31, 2004, and a facility of approximately 2,000 square feet
in Plano, Texas, pursuant to a lease which extends through August 31, 2003. We
believe that suitable additional or alternative space will be available in the
future on commercially reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS
There were no pending legal issues at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders during the quarter
ended December 31, 2000.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
Our common stock is traded on the Nasdaq National Market under the symbol
"SMSI." The high and low closing sale prices for our common stock as reported by
Nasdaq are set forth below for the periods indicated.
High Low
---- ---
YEAR ENDED DECEMBER 31, 2000:
First Quarter $32 2 3/4
Second Quarter 17 7/16 4 3/8
Third Quarter 7 1/2 3
Fourth Quarter 3 1/4 3/4
YEAR ENDED DECEMBER 31, 1999:
First Quarter 3 7/8 1 7/8
Second Quarter 3 7/8 1 13/16
Third Quarter 3 1 1/2
Fourth Quarter 11 3/4 5/8
YEAR ENDED DECEMBER 31, 1998:
First Quarter 5 9/16 1 9/16
Second Quarter 4 7/16 2 1/4
Third Quarter 2 3/4 1 1/4
Fourth Quarter 4 3/8 1 7/16
On March 19, 2001, the closing sale price for our common stock as reported by
Nasdaq was $2.0625.
HOLDERS
As of March 19, 2001, there were 116 holders of record of our common stock.
DIVIDENDS
We have never paid any cash dividends on our common stock and we have no current
plans to do so.
RECENT SALES OF UNREGISTERED SECURITIES
None.
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USE OF PROCEEDS FROM INITIAL PUBLIC OFFERING
The effective date of our first registration statement filed on Form S-1
(Registration No. 33-95096) under the Securities Act of 1933, as amended, was
September 18, 1995. The class of securities registered was common stock. The
offering commenced on September 19, 1995 and all securities were sold in the
offering. The managing underwriters for the offering were Hambrecht & Quist LLC
and Oppenheimer & Co., Inc.
Pursuant to the registration statement, we sold 1,700,000 shares of
common stock for an aggregate offering price of $20,400,000, and certain of our
stockholders sold 2,210,000 shares of our common stock for an aggregate offering
price of $26,520,000.
We incurred expenses of $2,262,000, of which $1,428,000 represented
underwriting discounts and commissions and $834,000 represented other expenses.
All such expenses were direct or indirect payments to others. The net offering
proceeds to us after total expenses were $18,138,000.
As of December 31, 2000, we had used the net proceeds from the offering
as follows: $4,188,000 to repay amounts due under a promissory note issued by us
to certain of our stockholders as a part of a distribution of retained earnings
in connection with our prior S corporation status, $3,011,000 for our
acquisition of Performance Computing Incorporated, which was consummated in
March 1996, $1,091,000 for our acquisition of STF which was consummated in April
1999, $458,000 for our acquisition of technology assets from Mitek Systems,
Inc., which was consummated in January 1998, $73,000 for our acquisition of the
CheckIt(R) products from TouchStone Software Corporation in July 2000, $94,000
for the consulting division of QuickStart Technologies in September 2000,
$190,000 in the acquisition of other technologies and $6,900,000 has been used
for working capital requirements. We have invested the remainder of the net
proceeds from the offering in U.S. Government obligations and corporate bonds.
The use of the proceeds from the offering does not represent a material change
in the use of the proceeds described in the prospectus that is part of the
registration statement.
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\
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Net Revenues:
Software $11,143 $10,700 $10,151 $12,229 $22,483
Consulting 2,595
------- ------- ------- ------- -------
Total Net Revenues 13,738 10,700 10,151 12,229 22,483
Cost of Revenues:
Software 2,499 2,476 2,911 3,868 6,808
Consulting 1,150
------- ------- ------- ------- -------
Total Cost of Revenues 3,649 2,476 2,911 3,868 6,808
------- ------- ------- ------- -------
Gross profit 10,089 8,224 7,240 8,361 15,675
Operating expenses:
Selling and marketing 5,578 6,135 3,984 3,725 3,275
Research and development 4,041 3,826 3,416 3,420 3,491
General and administrative 3,985 3,923 3,556 4,227 3,879
Acquired in-process research
and development 5,169
------- ------- ------- ------- -------
Total operating expenses 13,604 13,884 10,956 11,372 15,814
------- ------- ------- ------- -------
Operating loss (3,515) (5,660) (3,716) (3,011) (139)
Interest income, net 414 447 708 711 837
------- ------- ------- ------- -------
Income (loss) before income taxes (3,101) (5,213) (3,008) (2,300) 698
Income tax expense (benefit) 54 888 (1,112) (839) 2,435
------- ------- ------- ------- -------
Net loss $(3,155) $(6,101) $(1,896) $(1,461) $(1,737)
======= ======= ======= ======= =======
Net loss per share, basic and diluted $ (0.20) $ (0.40) $ (0.13) $ (0.10) $ (0.12)
======= ======= ======= ======= =======
Weighted average shares, basic
and diluted 15,984 15,292 15,075 15,075 14,992
======= ======= ======= ======= =======
AS OF DECEMBER 31,
--------------------------------------------------
2000 1999 1998 1997 1996
--------- -------- --------- --------- --------
Balance Sheet Data:
Total assets $ 15,314 $ 15,929 $20,947 $21,853 $ 24,158
Total liabilities 2,887 2,097 2,655 1,664 2,501
Retained earnings (accumulated deficit) (12,378) (9,223) (3,122) (1,226) 235
Total stockholders' equity 12,427 13,832 18,292 20,188 21,649
The table set forth above sets forth our selected consolidated financial
data. We prepared this information using the consolidated financial statements
of Smith Micro for the five years ended December 31, 2000 which have been
restated to include the operations of Pacific Coast Software on a
pooling-of-interests basis as if they had combined with Smith Micro prior to the
beginning of the periods from 1996 to 1999.
You should read this selected consolidated financial data along with the
consolidated financial statements and related Notes contained in this Report and
in our subsequent reports filed with the SEC, as well as the section of this
Report and our other reports titled "Managements Discussion and Analysis of
Financial Condition and Results of Operations".
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN STATEMENTS IN THIS REPORT, INCLUDING STATEMENTS REGARDING THE
COMPANY'S STRATEGY, FINANCIAL PERFORMANCE AND REVENUE SOURCES, ARE
FORWARD-LOOKING STATEMENTS WITH THE MEANING OF THE PRIVATES SECURITIES
LITIGATION REFORM ACT OF 1995, SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED, AND SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
ARE SUBJECT TO THE SAFE HARBORS CREATED BY THOSE SECTIONS. THESE FORWARD-LOOKING
STATEMENTS ARE BASED ON CURRENT EXPECTATIONS AND ENTAIL VARIOUS RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
EXPRESSED IN SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS REPORT. READERS ARE URGED TO CAREFULLY REVIEW AND CONSIDER THE
VARIOUS DISCLOSURES MADE BY THE COMPANY IN THIS REPORT AND IN THE COMPANY'S
OTHER REPORTS FILED WITH THE SEC, INCLUDING THE COMPANY'S ANNUAL REPORT ON FORM
10-K FOR THE YEAR ENDED DECEMBER 31, 2000 AND OUR SUBSEQUENT REPORTS ON FORMS
10-Q [AND 8-K], THAT ATTEMPT TO ADVISE INTERESTED PARTIES OF CERTAIN RISKS AND
FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS. READERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR
CIRCUMSTANCES OCCURRING AFTER THE DATE HEREOF. YOU SHOULD READ THE FOLLOWING
DISCUSSION AND ANALYSIS IN CONJUNCTION WITH THE COMPANY'S CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO CONTAINED ELSEWHERE IN THIS REPORT.
OVERVIEW
We are a developer and marketer of wireless, communications, diagnostic
utility and eCommerce software products and a provider of professional
consulting services. We design integrated, cross platform, easy-to-use software
for personal computing and business solutions and provide consulting services
consisting of integrated Internet business services to middle market companies.
Our software includes products developed for the Internet and broad-band
technologies, products that enable eCommerce, Internet communications
(voice-over-IP), video conferencing, wireless communications, general system
utility products and network fax along with traditional computer telephony.
We continue to develop new products that leverage off our core
technologies to address the consumer's use of the Internet and corporate
intranets. We intend to leverage our experience and position with original
equipment manufacturers, commonly known as OEMs, to deploy these new product
releases. Additionally, we are expanding our customer base to include
manufacturers that produce devices that take advantage of the high bandwidth
Internet connectivity such as cable and xDSL modems. Our corporate products are
designed to provide cost effective and efficient methods of communicating that
take advantage of corporate local and wide area networks, including the Internet
or intranets. Through our consulting services, we offer a comprehensive suite of
services to assist middle market clients in planning, implementing and
supporting eCommerce, eBusiness and infrastructure initiatives.
In April 1999, we expanded our Macintosh division with the STF
acquisition. Goodwill recorded in the acquisition of STF was $2,271,000 and is
amortized over seven years. In September 1999, we merged with PCS to provide
eCommerce business solutions. In July 2000, we acquired the TouchStone Checkit
product line (See Note 9 to the consolidated financial statements). Acquired
technology recorded in the acquisition of the TouchStone CheckIt asset was
$721,000 and is amortized over three years through charges against cost of
revenues. Also, in September 2000, we acquired the consulting practice unit of
QuickStart Technologies, Inc., a provider of integrated Internet business
services to middle market companies. (See Note 9 to the consolidated financial
statements). Goodwill recorded in the acquisition of the QuickStart unit was
$602,000 and is amortized over three years.
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We recognize revenues from sales of our software as completed products
are shipped and title passes, from royalties generated as authorized customers
duplicate our software, and collection is deemed probable. Revenues for
consulting services are recognized as such services are performed. (See Note 1
of the notes to our consolidated financial statements.) We continue to introduce
new products and our future success will depend in part on the continued
introduction of new and enhanced OEM, retail and corporate products that achieve
market acceptance. Revenues are net of estimated returns and other adjustments
at the time the products are shipped.
The OEM product ordering cycle beginning from placement of an order to
shipment is very short. OEM customers generally operate under a just-in-time
system and order software to be delivered as needed by their manufacturing
operations. We generally ship our products as we receive orders and,
accordingly, we have historically operated with little backlog. We do not
consider backlog to be a significant indication of future performance. As a
result, our sales in any quarter are dependent on orders booked and shipped in
that quarter and are not predictable with any degree of certainty. Moreover, we
generally do not produce software in advance of orders and, therefore, have not
maintained a material amount of software inventory.
Beginning in the third quarter of 1998, we renewed our commitment of
resources and efforts towards the retail channel. Our effort coincided with the
launch of our first retail Internet telephony product, Internet CommSuite. Our
strongest retail product continues to be HotFax MessageCenter, which provides
fax, answering machine and data communication functionality via the PC. Our
acquisition of the TouchStone product line in September 2000 has significantly
increased our retail product offering. We are in various retail outlets,
particularly office supply chains such as Staples, Office Depot and Office Max
and numerous Internet retail stores. As a result of this expansion, sales to
Ingram Micro, a retail distributor, were 20.4% of our net revenues in 2000,
23.4% of our net revenues in 1999 and 18.0% of our net revenues in 1998.
Inventory in the retail channel exposes us to product returns. We consider this
exposure when we establish allowances for product returns. While returns have
historically been estimatable, substantial returns of products from the retail
channel could have an adverse effect on our business, results of operations and
financial condition.
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RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operating data
as a percentage of total revenues for the periods indicated:
YEARS ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
----- ----- -----
Net Revenues:
Software 81.1% 100.0% 100.0%
Consulting services 18.9%
----- ----- -----
Total net revenues 100.0% 100.0% 100.0%
Cost of revenues:
Software 18.2% 23.1% 28.7%
Consulting services 8.4%
----- ----- -----
Total cost of revenues 26.6% 23.1% 28.7%
----- ----- -----
Gross profit 73.4% 76.9% 71.3%
Operating expenses:
Selling and marketing 40.6% 57.3% 39.3%
Research and development 29.4% 35.8% 33.7%
General and administrative 29.0% 36.7% 35.0%
----- ----- -----
Total operating expenses 99.0% 129.8% 108.0%
----- ----- -----
Operating loss -25.6% -52.9% -36.7%
Interest income, net 3.0% 4.2% 7.0%
----- ----- -----
Loss before income taxes -22.6% -48.7% -29.7%
Income tax expense (benefit) 0.4% 8.3% -11.0%
----- ----- -----
Net loss -23.0% -57.0% -18.7%
===== ===== =====
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
REVENUES
Total net revenues were $13.7 million, $10.7 million and $10.2 million
for 2000, 1999 and 1998, respectively, representing increases of $3 million, or
28.4%, from 1999 to 2000, and $500,000, or 5.4%, from 1998 to 1999. Ingram
Micro, a distribution customer, accounted for 20.4%, 23.4% and 18.0% of total
revenues for 2000, 1999 and 1998 respectively.
Software. Net software revenues were $11.1 million, $10.7 million and
$10.2 million in 2000, 1999 and 1998, respectively, representing increases of
$400,000, or 4.1%, from 1999 to 2000 and $500,000, or 5.4%, from 1998 to 1999.
The increase in net software revenue from 1999 to 2000 was due, in part, from
additional retail sales provided by the TouchStone acquisition which took place
in July 2000 and from sales of our new Quick Link Mobile software to cellular
phone manufacturers. Software revenues accounted for 81.1% of total revenues in
2000 and were not separately classified in the previous years being reported.
Our efforts to diversify our markets generated the growth in our net software
revenues with contributions to this increase coming from our retail product
sales, additional sales of Apple Macintosh products as a result of the
acquisition of STF in April 1999 and eCommerce products resulting from the
acquisition of PCS in September 1999.
Consulting Services. Consulting services revenues were $2.6 million in
2000 and were not significant in 1998 or 1999. Consulting services revenues were
generated by the acquisition of PCS in September 1999, which we expanded upon in
2000, and the QuickStart acquisition which took place in September 2000.
Consulting services revenue accounted for 18.9% of total revenues in 2000.
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COST OF REVENUES
Cost of Software revenues. Cost of software revenues was $2.5 million,
$2.5 million and $2.9 million in 2000, 1999 and 1998, respectively, representing
no change from 1999 to 2000 and a decrease of $400,000, or 14.9%, from 1998 to
1999. Cost of software revenue as a percentage of software revenues was 22.4%,
23.1% and 28.7% for 2000, 1999 and 1998, respectively. The decrease in cost of
software revenue as a percentage of software revenues from 1999 to 2000 was due
primarily to the continuation of increased OEM business being derived from
royalties as opposed to kitted product. The decrease in cost of software revenue
as a percentage of software revenue from 1998 to 1999 was attributable primarily
to an increased amount of OEM business being derived from royalties and an
increase in the amount of retail sales in our overall sales mix.
Cost of Consulting Service revenues. Cost of consulting service revenues
was $1.2 million in 2000. Since we did not begin consulting services until
September 1999, cost of consulting service revenues was not significant in 1999
and non-existent in 1998. Cost of consulting services revenues includes the cost
of our consulting personnel and the cost of hiring outside contractors to
support our staff of consultants. Cost of consulting services revenues as a
percentage of consulting services revenues in 2000 was 44.3%.
OPERATING EXPENSES
Selling and Marketing. Selling and marketing expenses were $5.6 million,
$6.1 million and $4.0 million in 2000, 1999 and 1998, respectively, representing
a decrease of $500,000, or 9.1%, from 1999 to 2000 and an increase of $2.1
million, or 54.0%, from 1998 to 1999. Our selling and marketing expenses consist
primarily of personnel costs, advertising costs, sales commissions and trade
show expenses. These expenses vary significantly from quarter to quarter based
on the timing of trade shows and product introductions. The decrease in our
selling and marketing expenses in 2000 over 1999 was primarily the result of an
approximate $1.0 million reduction in spending for costs related to advertising
and trade shows. These savings were partially offset by increases in
hiring-related spending increases in our eCommerce business, including salaries
and related personnel expenses and facilities expenses which totaled
approximately $600,000. The increase in our selling and marketing expenses in
1999 over 1998 was primarily due to increased expenditures for our major retail
products, and our expansion efforts in the eCommerce and Macintosh markets.
Research and Development. Research and development expenses were $4.0
million, $3.8 million and $3.4 million in 2000, 1999 and 1998, respectively,
representing an increase of $200,000, or 5.6%, from 1999 to 2000, and an
increase of $400,000, or 12.0%, from 1998 to 1999. Our research and development
expenses consist primarily of personnel and equipment costs required to conduct
our software development efforts. We remain focused on the development and
expansion of our technology, particularly our Internet technology. Our
development efforts include work on our eCommerce products, Internet telephony
and videoconferencing products, including Macintosh versions, wireless products
and new digital cameras as they are developed. The increase in our research and
development expenses in 2000 over 1999 was primarily due to increases in
salaries and related expenses of approximately $287,000 which was offset by
reductions in purchased technologies of approximately $92,000. The increase in
our research and development expenses in 1999 over 1998 was primarily due to the
additional engineering resources acquired in the expansion of our Macintosh
Division through the acquisition of STF Technologies.
General and Administrative. General and administrative expenses were
$4.0 million, $3.9 million and $3.6 million in 2000, 1999 and 1998,
respectively, representing an increase of $100,000, or 1.6%, from 1999 to 2000,
and an increase of $300,000, or 10.3%, from 1998 to 1999. The increase in our
general and administrative expenses in 2000 over 1999 resulted when reductions
in salaries and related expenses of approximately $757,000 were offset by
increases in consulting fees for investor relations of approximately $108,000,
bad debt expense of approximately $545,000 primarily related to our eCommerce
business and increased amortization expense of approximately $188,000 related to
the acquisition of QuickStart in September 2000.
Interest Income. Interest income was $414,000, $447,000 and $708,000
million in 2000, 1999 and 1998, respectively, representing a decrease of
$33,000, or 7.4%, from 1999 to 2000, and a decrease of $261,000, or 36.9%, from
1998 to 1999. Deceases in our interest income, in each of years being reported,
are directly related
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to the reductions in our cash balance. We have not changed our investment
strategy during the periods being reported on, with our excess cash consistently
being invested in short term marketable securities. (See "Liquidity and Capital
Resources" for further discussion elsewhere in this annual report.)
Provision for Income Taxes. Provision for income taxes was $54,000,
$888,000 and a benefit of $1.1 million in 2000, 1999 and 1998, respectively. The
provision for income taxes in 2000 is primarily due to taxes on increased
foreign income. We increased the provision for income taxes in 1999 over 1998
because we increased our valuation allowance to offset all deferred tax assets.
This increase was taken because, we believed at that time, our results of
operations provided insufficient evidence that the deferred tax assets will be
realized. We may reduce our valuation allowance in the future at such time when
there is sufficient evidence that the deferred tax assets will be realized.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through cash
generated from operations and from proceeds generated by our initial public
offering in 1995. Net cash used in operations was $2.5 million in 2000 compared
to $3.2 million in 1999 and $869,000 in 1998. The primary use of cash in each
year was the Company's net loss.
We used $750,000 in 2000, $1.4 million in 1999, and $811,000 in 1998 for
investing activities. Our primary use of cash for investing activities in all
years related to our acquisitions, including our acquisition of STF
Technologies in 1999 for $1.1 million in cash and 409,164 shares of our Common
Stock. We also invested in property and equipment, including computers and
production equipment, during each of 2000, 1999 and 1998.
In 2000, $732,000 was generated from financing activities, primarily
from the exercise of stock options. This compared to $641,000 in 1999, which was
offset by the repayment of a loan assumed in the acquisition of STF.
At December 31, 2000, we had $6.2 million in cash and cash equivalents,
$8.7 million of working capital and $4.8 million in accounts receivable, net of
allowance for doubtful accounts and other adjustments. We believe that our
existing cash, cash equivalents and investment balances and cash flow from
operations will be sufficient to finance our working capital and capital
expenditure requirements through at least the next 12 months. We may require
additional funds to support our working capital requirements or for other
purposes and may seek to raise additional funds through public or private equity
or debt financing or from other sources. If additional financing is needed, we
cannot assure you that such financing will be available to us at commercially
reasonable terms or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44 of Accounting Principles Board Opinion No. 25, Accounting
for Certain Transactions Involving Stock Compensation, which, among other
things, addressed accounting consequences of a modification that reduces the
exercise price of a fixed stock option award (otherwise known as repricing). If
the exercise price of a fixed stock option award is reduced, the award must be
accounted for as variable price stock plan from the date of the modification to
the date the award is exercised, is forfeited, or expires unexercised. The
exercise price of an option award has been reduced if the fair value of the
consideration required to be paid by the grantee upon exercise is less than or
potentially less than the fair value of the consideration that was required to
be paid pursuant to the award's original terms. The requirements about
modifications to fixed stock option awards that directly or indirectly reduce
the exercise price of an award apply to modifications made after December 15,
1998, and was applied as of July 1, 2000. The adoption of this interpretation
did not have an impact on the Company's consolidated financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) 101,
Revenue Recognition in Financial Statements. SAB 101 summarizes the staff's
views in applying generally accepted accounting principles to selected revenue
recognition issues in financial statements. SAB 101 was adopted by the Company
in the fourth quarter of 2000 and did not have a significant impact on the
Company's consolidated financial statements.
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SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, is effective for all fiscal years beginning after June 15, 2000.
SFAS No. 133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. Under SFAS No. 133, certain
contracts that were not formerly considered derivatives may now meet the
definition of a derivative. The Company will adopt SFAS No. 133 effective
January 1, 2001. Management does not expect the adoption of SFAS No. 133 to have
a significant impact on the financial position, results of operations, or cash
flows of the Company.
RISK FACTORS
BEFORE DECIDING TO INVEST IN OUR COMPANY OR TO MAINTAIN OR INCREASE YOUR
INVESTMENT, YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, IN ADDITION
TO THE OTHER INFORMATION CONTAINED IN THIS REPORT AND IN OUR OTHER FILINGS WITH
THE SEC, INCLUDING OUR SUBSEQUENT REPORTS ON FORMS 10-Q AND 8-K. THE RISKS AND
UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING OUR COMPANY.
ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE
CURRENTLY DEEM IMMATERIAL MAY ALSO AFFECT OUR BUSINESS OPERATIONS. IF ANY OF
THESE RISKS ACTUALLY OCCUR, THAT COULD SERIOUSLY HARM OUR BUSINESS, FINANCIAL
CONDITION OR RESULTS OF OPERATIONS. IN THAT EVENT, THE MARKET PRICE FOR OUR
COMMON STOCK COULD DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
Our quarterly operating results may fluctuate and cause the price of our common
stock to fall.
Our quarterly revenues and operating results have fluctuated
significantly in the past and may continue to vary from quarter to quarter due
to a number of factors, many of which are not within our control. If our
operating results do not meet the expectations of securities analysts or
investors, our stock price may decline. Fluctuations in our operating results
may be due to a number of factors, including the following:
- - the volume of our product sales and pricing concessions on volume sales;
- - the size and timing of orders from and shipments to our major customers;
- - our ability to maintain or increase gross margins;
- - general economic and market conditions;
- - variations in the our sales channels or the mix of our product sales;
- - the gain or loss of a key customer;
- - our ability to specify, develop, complete, introduce, market and transition to
volume production new products and technologies in a timely manner;
- - the availability and pricing of competing products and technologies and the
resulting effect on sales and pricing of our products;
- - the timing of new product announcements and introductions by us, our
competitors or our customers;
- - the effect of new and emerging technologies; and
- - deferrals of orders by our customers in anticipation of new products,
applications, product enhancements or operating systems.
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A large portion of our operating expenses, including rent, salaries and
capital lease expenditures, is fixed and difficult to reduce or change.
Accordingly, if our total revenue does not meet our expectations, we probably
would not be able to adjust our expenses quickly enough to compensate for the
shortfall in revenue. In that event, our business, financial condition and
results of operations would be materially and adversely affected.
Due to all of the foregoing factors, and the other risks discussed in
this report, you should not rely on quarter-to-quarter comparisons of our
operating results as an indication of future performance.
We recently began offering new services and products with which have limited
prior experience.
We increased our eBusiness consulting services in September 2000 with
the acquisition of the eBusiness consulting practice of QuickStart Technologies,
Inc. In addition, we launched a new product line with the acquisition of the
CheckIt(R) line of software products from Touchstone Software Corporation and
its affiliates in July 2000. The consulting segment of our business accounted
for approximately 19% of our revenue in 2000. We expect sales from our
consulting practice and the CheckIt(R) product line to constitute an increasing
portion of our future revenue growth. However, we have limited prior experience
and expertise providing consulting services and in building, managing and
marketing a consulting practice. Similarly, although we have established
distribution channels and marketing plans for selling retail products, the
CheckIt(R) products are new to us and each new product line presents its own
unique issues and challenges. We are devoting significant resources to promoting
awareness of our consulting services and our consulting-related products, as
well as the new CheckIt(R) line of products. However, we cannot provide any
assurance that the consulting portion of our business or the CheckIt(R) products
will become or remain profitable. If we are unable to build market awareness of
the need for these products and services, our business, operating results and
financial condition will suffer.
Technology and customer needs change rapidly in our market which could render
our products obsolete.
Our future success will depend on our ability to anticipate and adapt to
changes in technology and industry standards. We will also need to continue to
develop and introduce new and enhanced products to meet our customers' changing
demands, keep up with evolving industry standards, including changes in the
Microsoft operating systems with which our products are designed to be
compatible, and to promote those products successfully. The communications and
utilities software markets in which we operate are characterized by rapid
technological change, changing customer needs, frequent new product
introductions, evolving industry standards and short product life cycles. Any of
these factors could render our existing products obsolete and unmarketable. In
addition, new products and product enhancements can require long development and
testing periods as a result of the complexities inherent in today's computing
environments and the performance demanded by customers. If the communications
software markets do not develop as we anticipate or our products do not gain
widespread acceptance in these markets, or if we are unable to develop new
versions of our software products that can operate on future operating systems,
our business, financial condition and results of operations could by materially
and adversely affected.
Competition within our product markets is intense and includes numerous
established competitors.
We operate in markets that are extremely competitive and subject to
rapid changes in technology. Microsoft Corporation poses a significant
competitive threat to us because the latest Microsoft operating systems, Windows
2000, Windows 98, Windows 95 and Windows NT, include capabilities now provided
by certain of our OEM and retail software products. If users are satisfied
relying on the communications capabilities of Windows 2000, Windows 98, Windows
95, Windows NT or other operating systems, sales of our products are likely to
decline. In addition, our principal fax related retail products,
HotFaxMessageCenter and HotFax, currently compete directly with Symantec's
WinFax Pro. Our new Internet communications software products, Internet
CommSuite and VideoLink pro, presently compete with product offerings by
Microsoft, Intel, White Pine and VocalTech, among others. Our new CheckIt(R)
products, CheckIt(R) NetOptimizer, CheckIt(R) Utilities, CheckIt(R) FastMove(R),
and CheckIt(R) Suite, compete currently with McAfee's Office Pro 2000,
Symantec's SystemWorks 2000 and Ontrack's SystemSuite 2000, among others. In
addition, because there are low barriers to entry into the software market, we
expect significant competition from other established and emerging software
companies in the future. Furthermore, many of our existing and potential OEM
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customers may acquire or develop products that compete directly with our
products.
Microsoft Corporation and many of our other current and prospective
competitors have significantly greater financial, marketing, service, support,
technical and other resources than we do. As a result, they may be able to adapt
more quickly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the promotion and sale of their
products. There is also a substantial risk that announcements of competing
products by large competitors such as Microsoft and Symantec could result in the
cancellation of orders by retailers, distributors or other customers in
anticipation of the introduction of such new products. In addition, some of our
competitors, such as Symantec, currently make complementary products that are
sold separately. Such competitors could decide to enhance their competitive
position by bundling their products to attract customers seeking integrated,
cost-effective software applications. Some competitors have a retail emphasis
and offer OEM products with a reduced set of features. The opportunity for
retail upgrade sales may induce these and other competitors to make OEM products
available at their own cost or even at a loss. We also expect competition to
increase as a result of software industry consolidations, which may lead to the
creation of additional large and well-financed competitors. Increased
competition is likely to result in price reductions, fewer customer orders,
reduced margins and loss of market share.
We rely on one distributor for a significant portion of our total revenues.
Sales to Ingram Micro, a retail distributor, represented 20.4% of our
net revenues for the year ended December 31, 2000, 23.4% of our net revenues for
the year ended December 31, 1999 and 18.0% of our net revenues for the year
ended December 31, 1998. We may not be able to control the factors influencing
whether and in what quantity Ingram purchases products from us. The loss of, or
a significant curtailment of, purchases by Ingram Micro could have a material
adverse effect on our business.
We may not be able to develop and maintain relationships with distributors and
retailers to sell our retail software products.
We depend on distributors, retailers (such as Staples, CompUSA, Office
Depot, and OfficeMax), Internet distributors and value added resellers, commonly
known as VARs, to market and distribute our retail software products. Our
relationships with our distributors and retailers depend upon a number of
factors, including our ability to meet certain minimum sales volume
requirements. In addition, with little or no advanced notice to us our retailers
and VARs may purchase fewer products from us in any given quarter for reasons
beyond our control and in many cases unrelated to end user demand, such as a
decision to change their inventory strategies. Our agreements with retailers and
VARs are not exclusive and in many cases may be terminated by either party
without cause. If this happens or if we are unable to develop and maintain
relationships with distributors and retailers to sell our retail software
products, our retail sales will be adversely affected.
We may have excessive, unanticipated product returns.
We are exposed to the risk of product returns and markdown allowances
with respect to our distributors and retailers. We are generally not
contractually obligated to accept returns, except for defective and damaged
products. However, we may permit customers to return or exchange product and may
provide price protection on products unsold by a customer. We consider return
requests on a case-by-case basis, taking into consideration factors such as the
products involved, the customer's historical sales volume and the customer's
credit status. In addition, we provide markdown allowances, which consist of
credits given to customers to induce them to lower the retail sales price of
certain products in an effort to increase sales to consumers and to help manage
our customers' inventory levels in the distribution channel. Although we
maintain a reserve for returns and markdown allowances, and although we manage
our returns and markdown allowances through our authorization procedure, we
could choose to accept substantial product returns and provide markdown
allowances to maintain our relationships with retailers and our access to
distribution channels. Product returns and markdown allowances that exceed our
reserves could have a material adverse effect on our business, operating results
and financial condition.
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Acquisitions of companies or technologies may result in disruptions to our
business and diversion of management attention.
We have in the past made and we expect to continue to make acquisitions
of complementary companies, products or technologies. If we make any additional
acquisitions, we will be required to assimilate the operations, products and
personnel of the acquired businesses and train, retain and motivate key
personnel from the acquired businesses. We may be unable to maintain uniform
standards, controls, procedures and policies if we fail in these efforts.
Similarly, acquisitions may cause disruptions in our operations and divert
management's attention from day-to-day operation, which could impair our
relationships with our current employees, customers and strategic partners.
Acquisitions may also subject us to liabilities and risks that are not known or
identifiable at the time of the acquisition. We may also have to incur debt or
issue equity securities in order to finance future acquisitions. The issuance of
equity securities for any acquisition could be substantially dilutive to our
stockholders. In addition, our profitability will be affected because of
acquisition-related costs or amortization of goodwill and other purchased
intangible assets. In consummating acquisitions, we are also subject to risks of
entering geographic and business markets in which we have not or limited prior
experience. If we are unable to fully integrate acquired businesses, products or
technologies with out existing operations, we may not receive the intended
benefits of acquisitions.
Our stock price is highly volatile. Accordingly, you may not be able to resell
your shares of common stock at or above the price you paid for them.
The market price of our common stock has fluctuated substantially in the
past and is likely to continue to be highly volatile and subject to wide
fluctuations. These fluctuations have occurred and may continue to occur in
response to various factors, many of which we cannot control, including:
- - quarter-to-quarter variations in our operating results;
- - announcements of technological innovations or new products by our competitors,
customers or us;
- - general economic conditions and conditions within the communications software
markets;
- - changes in earnings estimates or investment recommendations by analysts;
- - changes in investor perceptions; or
- - changes in expectations relating to our products, plans and strategic position
or those of our competitors or customers.
In addition, the market prices of securities of Internet-related and
other high technology companies have been especially volatile. This volatility
has significantly affected the market prices of securities of many technology
companies. Accordingly, you may not be able to resell your shares of common
stock at or above the price you paid. In the past, companies that have
experienced volatility in the market price of their securities have been the
subject of securities class action litigation. If we were the object of a
securities class action litigation, it could result in substantial losses and
divert management's attention and resources from other matters.
Our products may contain undetected software errors.
Our software products are complex and may contain undetected errors. In
the past, we have discovered software errors in certain of our products and have
experienced delayed or lost revenues during the period it took to correct these
errors. Although we and our OEM customers test our products, it is possible that
errors may be found in our new or existing products after we have commenced
commercial shipment of those products. These undetected errors could result in
adverse publicity, loss of revenues, delay in market acceptance of our products
or claims against us by customers.
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We may need to raise additional capital in the future through the issuance of
additional equity or convertible debt securities or by borrowing money, and
additional funds may not be available on terms acceptable to us.
We believe that the cash, cash equivalents and investments on hand and
the cash we expect to generate from operations will be sufficient to meet our
capital needs for at least the next twelve months. However, it is possible that
we may need to raise additional money to fund our activities beyond the next
year. We could raise these funds by selling more stock to the public or to
selected investors, or by borrowing money. In addition, even though we may not
need additional funds, we may still elect to sell additional equity securities
or obtain credit facilities for other reasons. We may not be able to obtain
additional funds on favorable terms, or at all. If adequate funds are not
available, we may be required to curtail our operations significantly or to
obtain funds through arrangements with strategic partners or others that may
require us to relinquish right to certain technologies or potential markets. If
we raise additional funds by issuing additional equity or convertible debt
securities, the ownership percentages of existing stockholders would be reduced.
In addition, the equity or debt securities that we issue may have rights,
preferences or privileges senior to those of the holders of our common stock.
It is possible that our future capital requirements may vary materially
from those now planned. The amount of capital that we will need in the future
will depend on many factors, including:
- - the market acceptance of our products;
- - the levels of promotion and advertising that will be required to launch our
products and achieve and maintain a competitive position in the marketplace;
- - our business, product, capital expenditure and research and development plans
and product and technology roadmaps;
- - the levels of inventory and accounts receivable that we maintain;
- - capital improvements to new and existing facilities;
- - technological advances;
- - our competitors' response to our products; and
- - our relationships with suppliers and customers.
In addition, we may require additional capital to accommodate planned
growth, hiring, infrastructure and facility needs or to consummate acquisitions
of other businesses, products or technologies.
Our efforts to develop a market for our retail software products require
substantial investments that may adversely affect our operating margins.
In order to strengthen recognition of and build distribution channels
for our retail software products, including our new CheckIt(R) line of products,
we have had to make significant investments in marketing and sales related to
these products. We expect to have to continue to incur these costs and perhaps
even to increase them in the future. Accordingly, our retail sales may not
provide us with the same contribution margin to operating income that we have
historically achieved on our OEM sales.
Inability or delays in deliveries from our component suppliers could damage our
reputation and could cause our net revenues to decline and harm our results of
operations.
We rely on third party suppliers to provide us with the components for
our product kits. These components include CDs and printed manuals. We also rely
on third parties for CD-ROM replication. We do not have long-term supply
arrangements with any vendor to obtain these necessary components for our
products. If we are unable to purchase components from these suppliers or if the
CD-ROM replication facilities that we use do not deliver our requirements on
schedule, we may not be able to deliver products in a CD-ROM format to our
customers on a timely basis or enter into new orders because of a shortage in
components. Any delays that we experience in delivering our
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products to customers could impair our customer relationships and adversely
impact our reputation and our business. In addition, if our third party
suppliers raise their prices for components or CD-ROM replication services, our
gross margins would be reduced.
Because we currently operate with little backlog, our revenues in each quarter
are substantially dependent on orders booked and shipped in that quarter.
We currently have backlog orders only in our Internet Solutions division
for our consulting related sales and we only began building this backlog during
the year ended December 31, 2000. In our other divisions, we operate with little
backlog because we generally ship our software products as we receive orders and
because our royalty revenue is based upon our customers' actual usage in a given
period. Accordingly, we recognize revenue shortly after orders are received or
royalty reports are generated. As a result, our sales in any quarter are
dependent on orders that we book and ship in that quarter. This makes it
difficult for us to predict what our revenues and operating results will be in
any quarter. If orders in the first month or two of a quarter fall short of
expectations, it is likely that we will not meet our revenue targets for that
quarter. If this happens, our quarterly operating results would be adversely
affected.
We may be unable to adequately protect our intellectual property and other
proprietary rights.
Our success is dependent upon our software code base, our programming
methodologies and other intellectual properties and proprietary rights. In order
to protect our proprietary technology, we rely on a combination of trade secret,
nondisclosure and copyright and trademark law. However, these measures afford us
only limited protection. We currently own United States trademark registrations
for certain of our trademarks, but we have not yet obtained registrations for
all of our trademarks in the United States or other countries. In addition,
prior to becoming a publicly held entity, we did not require our employees to
sign proprietary information and inventions agreements stipulating to our
software ownership rights. We only recently started the patent application
process for a number of technologies relating to our existing products and
products under development. Furthermore, we rely primarily on "shrink wrap"
licenses that are not signed by the end user and, therefore, may be
unenforceable under the laws of certain jurisdictions. Accordingly, despite the
precautions we have taken to protect our intellectual property and proprietary
rights, it is possible that third parties may copy or otherwise obtain our
rights without our authorization. It is also possible that third parties may
independently develop technologies similar to ours. It may be difficult for us
to detect unauthorized use of our intellectual property and proprietary rights.
We may be subject to claims of intellectual property infringement as the
number of trademarks, patents, copyrights and other intellectual property rights
asserted by companies in our industry grows and the coverage of these patents
and other rights and the functionality of software products increasingly
overlap. From time to time, we have received communications from third parties
asserting that our trade name or features, content, or trademarks of certain of
our products infringe upon intellectual property rights held by such third
parties. We have also received correspondence from third parties separately
asserting that our fax products may infringe on certain patents held by each of
the parties. Although we are not aware that any of our products infringe on the
proprietary rights of others, third parties may claim infringement by us with
respect to our current or future products. Infringement claims, whether with or
without merit, could result in time-consuming and costly litigation, divert the
attention of our management, cause product shipment delays or require us to
enter into royalty or licensing agreements with third parties. If we are
required to enter into royalty or licensing agreements, they may not be on terms
that are acceptable to us. Unfavorable royalty or licensing agreements could
seriously impair our ability to market our products.
We must continue to hire and retain key personnel in an intensely competitive
labor market.
Our future performance depends in significant part upon the continued
service of our senior management and other key technical and consulting
personnel. We do not have employment agreements with our key employees that
govern the length of their service. The loss of the services of our key
employees would likely materially and adversely affect our business, financial
condition and results of operations. Our future success also depends on our
ability to continue to attract, retain and motivate qualified personnel,
particularly highly skilled engineers involved in the ongoing research and
development required to develop and enhance our communication software products
as well those in our highly specialized consulting business. Competition for
these employees is intense and employee retention is a
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common problem in our industry. Our inability to attract and retain the highly
trained technical personnel that are essential to our product development,
consulting services, marketing, service and support teams may limit the rate at
which we can generate revenue, develop new products or product enhancements and
generally have an adverse effect on our business, financial condition and
results of operations.
If Internet usage fails to grow or declines, or if commerce conducted over the
Internet is not accepted by consumers and businesses, our future sales and
future profits will decline.
If eCommerce does not continue to grow or grows more slowly than
expected, demand for our products and services will be reduced. Our products
enhance companies' abilities to transact business and conduct Web-based
operations. As a result, our future sales and any future profits are
substantially dependent upon the widespread acceptance and use of the Internet
as an effective medium of commerce by consumers and businesses. To be successful
we must rely on consumers and businesses who have not historically used the
Internet to transact business and exchange information.
Consumers and businesses may reject the Internet as a viable commercial
medium for a number of reasons, including potentially inadequate network
infrastructure, slow development of enabling technologies, insufficient
commercial support or privacy concerns. The Internet's infrastructure may not be
able to support the demands placed on it by increased usage. In addition, delays
in the development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or increased government regulation, could
cause the Internet to lose its viability as a commercial medium. Even if the
required infrastructure, standards, protocols and complementary products,
services or facilities are developed, we may incur substantial expenses adapting
our solutions to changing or emerging technologies.
As our international business expands, our business, financial condition and
operating results could be adversely affected as a result of legal, business and
economic risks specific to international operations.
Approximately 18.9%, 17.8%, and 21.5% of our revenue for the years ended
December 31, 2000, 1999 and 1998 was derived from sales to customers outside the
United States. We also frequently ship products to our domestic customers'
international manufacturing divisions and subcontractors. In the future, we
intend to continue to expand these international business activities.
International operations are subject to many inherent risks, including:
- - political, social and economic instability;
- - trade restrictions;
- - the imposition of governmental controls;
- - exposure to different legal standards, particularly with respect to
intellectual property;
- - burdens of complying with a variety of foreign laws;
- - import and export license requirements and restrictions of the United States
and each other country in which we operate;
- - unexpected changes in regulatory requirements;
- - foreign technical standards;
- - changes in tariffs;
- - difficulties in staffing and managing international operations;
- - difficulties in collecting receivables from foreign entities; and
- - potentially adverse tax consequences.
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Our officers and directors could control matters submitted to our stockholders.
As of March 19, 2001, William W. Smith Jr., the President, Chief
Executive Officer and Chairman of the Board of our company, and Rhonda L. Smith,
the Secretary, Treasurer and Vice-Chairman of the Board of our company,
beneficially owned approximately 60.2% of our outstanding shares of common
stock. William W. Smith Jr. and Rhonda L. Smith are married to one another and,
acting together, will have the ability to elect our directors and determine the
outcome of any corporate action requiring stockholder approval, including a
merger or business combination, irrespective of how you may vote. This
concentration of ownership may discourage a potential acquirer from making an
offer to buy our company, which, in turn, could adversely affect the market
price of our common stock.
Future sales of our common stock could cause the price of our shares to decline.
As of March 19, 2001, we had 16,232,416 shares of Common Stock
outstanding. Of this amount, the 9,778,670 shares held by William W. Smith, Jr.
and Rhonda L. Smith became available for sale in the public market (subject to
the volume and other applicable restrictions of Rule 144) in September 1997,
following the expiration of a two year lock-up agreement with certain
representatives of the underwriters of our initial public offering, which
consummated in September 1995. Sales of a substantial number of shares of our
common stock by William W. Smith, Jr, Rhonda L. Smith or any other person,
either individually or when aggregated with sales by other persons, could
adversely affect the market price of our common stock.
Provisions of our charter and bylaws and Delaware law could make a takeover of
our company difficult.
Our certificate of incorporation and bylaws contain provisions that may
discourage or prevent a third party from acquiring us, even if doing so would be
beneficial to our stockholders. For instance, our certificate of incorporation
authorizes the board of directors to fix the rights and preferences of shares of
any series of preferred stock, without action by our stockholders. As a result,
the board can authorize and issue shares of preferred stock, which could delay
or prevent a change of control because the rights given to the holders of such
preferred stock may prohibit a merger, reorganization, sale or other
extraordinary corporate transaction. In addition, we are organized under the
laws of the State of Delaware and certain provisions of Delaware law may have
the effect of delaying or preventing a change in our control.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and cash equivalents. At December
31, 2000, the carrying values of our financial instruments approximated fair
values based on current market prices and rates. Because of their short
duration, changes in market interest rates would not have a material effect on
fair value.
It is our policy not to enter into derivative financial instruments. We
do not currently have any significant foreign currency exposure as we do not
transact business in foreign currencies. As such, we do not have significant
currency exposure at December 31, 2000.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and schedule appear in a
separate section of this Annual Report on Form 10-K beginning on page F-1 and
S-1, respectively.
SUPPLEMENTARY FINANCIAL DATA
SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)
FOR THE THREE MONTHS ENDED:
--------------------------------------------------------
2000 MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
-------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Net Revenues $ 3,074 $ 3,222 $ 3,374 $ 4,068
Gross Margin 2,461 2,665 2,389 2,574
Operating Loss (732) (741) (960) (1,082)
Net Loss $ (659) $ (632) $ (873) $ (991)
Net Loss Per Share, Basic and Diluted $ (0.04) $ (0.04) $ (0.05) $ (0.07)
Weighted Average Shares
Outstanding 15,759 15,895 16,030 16,232
FOR THE THREE MONTHS ENDED:
--------------------------------------------------------
1999 MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
-------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Net Revenues $ 3,036 $ 3,362 $ 1,845 $ 2,457
Gross Margin 2,307 2,779 1,193 1,945
Operating Loss (1,165) (848) (2,627) (1,020)
Net Loss $ (675) $ (743) $ (3,703) $ (980)
Net Loss Per Share, Basic and Diluted $ (0.04) $ (0.05) $ (0.24) $ (0.07)
Weighted Average Shares
Outstanding 15,075 15,462 15,504 15,558
30
31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
31
32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The sections titled "Executive Officers of the Company," "Directors and
Nominees" and "Compliance with Section 16(a) of the Exchange Act" appearing in
our Proxy Statement for the 2001 Annual Meeting of Stockholders is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The section titled "Executive Compensation and Related Information" appearing in
our Proxy Statement for the 2001 Annual Meeting of Stockholders is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section titled "Principal Stockholders" appearing in our Proxy Statement for
the 2001 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
32
33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
Smith Micro's financial statements appear in a separate section of this
Annual Report on Form 10-K beginning on the pages referenced below:
PAGE
----
Independent Auditors' Report..........................................................F-1
Consolidated Balance Sheets as of December 31, 2000 and 1999..........................F-2
Consolidated Statements of Operations for each of the three years in
the period ended December 31, 2000.................................................F-3
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended December 31, 2000........................................F-4
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 2000.....................................................F-5
Notes to Consolidated Financial Statements for each of the three years
in the period ended December 31, 2000..............................................F-7
(2) FINANCIAL STATEMENT SCHEDULE
Smith Micro's financial statement schedule appears in a separate section
of this Annual Report on Form 10-K on the pages referenced below. All other
schedules have been omitted as they are not applicable, not required or the
information is included in the consolidated financial statements or the notes
thereto.
PAGE
----
Independent Auditors' Report on Schedule..............................................S-1
Schedule II - Valuation and Qualifying Accounts for each of the three years in
the period ended December 31, 2000..................................................S-2
(3) EXHIBITS
Exhibit
No. Title Method of Filing
- ------- ----- ----------------
3.1 Amended and Restated Certificate of Incorporated by reference to Exhibit 3.1
Incorporation of the Company. to the Registrant's Registration Statement
No. 33-95096.
3.1.1 Amendment to the Amended and Incorporated by reference to Exhibit 3.1.1
Restated Certificate of to the Registrant's Quarterly Report on
Incorporation of the Company. Form 10-Q for the period ended June 30,
2000.
3.2 Amended and Restated Bylaws of the Incorporated by reference to Exhibit 3.2
Company. to the Registrant's Registration Statement
No. 33-95096.
4.1 Specimen certificate representing Incorporated by reference to Exhibit 4.1
shares of Common Stock of the to the Registrant's Registration Statement
Company. No. 33-95096.
10.1 Form of Indemnification Agreement. Incorporated by reference to Exhibit 10.1
to the Registrant's Registration Statement
No. 33-95096.
10.2 1995 Stock Option/Stock Issuance Incorporated by reference to Exhibit 10.2
Plan. to the Registrant's Registration Statement
No. 33-95096.
33
34
Exhibit
No. Title Method of Filing
- ------- ----- ----------------
10.3 Form of Notice of Grant of Stock Incorporated by reference to Exhibit 10.3
Option under 1995 Stock Option/Stock to the Registrant's Registration Statement
Issuance Plan. No. 33-95096.
10.4 Form of 1995 Stock Option Agreement Incorporated by reference to Exhibit 10.4
under 1995 Stock Option /Stock to the Registrant's Registration Statement
Issuance Plan. No. 33-95096.
10.5 Form of 1995 Stock Purchase Incorporated by reference to Exhibit 10.5
Agreement under 1995 Stock to the Registrant's Registration Statement
Option/Stock Issuance Plan. No. 33-95096.
10.6 Distribution License Agreement dated Incorporated by reference to Exhibit 10.6
September 30, 1991, by and between to the Registrant's Registration Statement
the Company and Crandell Development No. 33-95096.
Corporation.
10.7 Application Program Interface Retail Incorporated by reference to Exhibit 10.7
License Agreement July 28, 1992 by to the Registrant's Registration Statement
and between the Company and Rockwell No. 33-95096.
International Corporation.
10.8 Application Program Interface Incorporated by reference to Exhibit 10.8
License Agreement July 28, 1992 by to the Registrant's Registration Statement
and between the Company and Rockwell No. 33-95096.
International Corporation.
10.9 Rockwell High Speed Interface Incorporated by reference to Exhibit 10.9
License Agreement dated June 2, to the Registrant's Registration Statement
1994, by and between the Company and No. 33-95096.
Rockwell International Corporation.
10.10 Letter Agreement dated February 22, Incorporated by reference to Exhibit 10.10
1994, by and between the Company and to the Registrant's Registration Statement
Rockwell International Corporation. No. 33-95096.
10.11 Letter Agreement dated April 22, Incorporated by reference to Exhibit 10.11
1993, by and between the Company and to the Registrant's Registration Statement
Rockwell International Corporation. No. 33-95096.
10.12 Software Distribution Agreement Incorporated by reference to Exhibit 10.12
dated May 8, 1995, by and between to the Registrant's Registration Statement
the Company and International No. 33-95096.
Business Machines Corporation.
10.13 Office Building Lease, dated June Incorporated by reference to Exhibit 10.13
10, 1992, by and between the Company to the Registrant's Registration Statement
and Developers Venture Capital No. 33-95096.
Corporation.
10.14 Amendment No. 1 To Office Building Incorporated by reference to Exhibit 10.14
Lease, dated July 9, 1993, by and to the Registrant's Registration Statement
between the Company and Pioneer Bank. No. 33-95096.
10.15 Amendment No. 2 To Office Building Incorporated by reference to Exhibit 10.15
Lease, dated August 15, 1994, by and to the Registrant's Registration Statement
No. 33-95096.
34
35
Exhibit
No. Title Method of Filing
- ------- ----- ----------------
between the Company and T&C
Development.
10.16 Fourth Addendum to Office Building Incorporated by reference to Exhibit 10.16
Lease, dated April 21, 1995, by and to the Registrant's Registration Statement
between the Company and T&C No. 33-95096.
Development.
10.17 Form of Promissory Note related to S Incorporated by reference to Exhibit 10.17
Corporation Distribution. to the Registrant's Registration Statement
No. 33-95096.
10.18 Smith Micro Software, Inc. Amended Incorporated by reference to Exhibit 10.21
and Restated Software Licensing and to the Registrant's Quarterly Report on
Distribution Agreement, dated April Form 10-Q for the quarter ended September
18, 1996, by and between the Company 30, 1996.
and U.S. Robotics Access Corp.
10.19 Office Building Lease, dated March Incorporated by reference to Exhibit 10.19
1, 1994, by and between Performance to the Registrant's Annual Report on Form
Computing Incorporated and Petula 10-K for the fiscal year ended December
Associates, Ltd./KC Woodside. 3l, 1995.
10.20 Agreement and Plan of Merger by and Incorporated by reference to Exhibit 2 to
between Smith Micro Software, Inc., the Registrant's Current Report on Form
Performance Computing Incorporated 8-K filed with the Commission on March 28,
and PCI Video Products, Inc. dated 1996.
as of March 14, 1996.
10.21 Amendment No. 1, dated as of March Incorporated by reference to Exhibit 10.21
10, 1997, to Agreement and Plan of to the Registrant's Annual Report on Form
Merger by and between Smith Micro 10-K for the fiscal year ended December
Software, Inc., Performance 31, 1996.
Computing Incorporated and PCI Video
Products, Inc. dated as of March 14,
1996.
10.22 Amendment No. 6 to Office Building Incorporated by reference to Exhibit 10.22
Lease, dated February 19, 1998, by to the Registrant's Annual Report on Form
and between the Company and World 10-K for the fiscal year ended December
Outreach Center. 31, 1997.
10.23 Software Licensing and Distribution Incorporated by reference to Exhibit 10.23
Agreement dated December 1, 1998, by to the Registrant's Annual Report on Form
and between the Company and 3Com 10-K for the fiscal year ended December
Corporation 31, 1998.
10.24 Stock Purchase Agreement dated as of Incorporated by reference to Exhibit 2 to
April 9, 1999 by and among Smith the Registrant's Current Report on Form
Micro Software, Inc., STF 8-K filed with the Commission on April 23,
Technologies, Inc. and the 1999.
Shareholders of STF Technologies,
Inc.
10.25 Amendment No. 7 to Office Building Incorporated by reference to Exhibit 10.25
Lease, dated November 5, 1999, by to the Registrant's Annual Report on Form
and between the Company and World 10-K for the fiscal year ended December
Outreach Center. 31, 1999.
21.1 Subsidiaries Filed herewith
23.1 Independent Auditors' Consent. Filed herewith
35
36
(b) EXHIBITS ON FORM 8-K
No such reports were filed during the year ended December 31, 2000.
36
37
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.
SMITH MICRO SOFTWARE, INC.
Date: March 29, 2001 By:/s/ William W. Smith, Jr.
--------------------------
William W. Smith, Jr.
Chairman of the Board,
President and Chief Executive
Officer
Date: March 29, 2001 By /s/ Richard C. Bjorkman
--------------------------
Richard C. Bjorkman
Chief Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ William W. Smith, Jr. Chairman of the Board, March 29, 2001
- ------------------------- President and Chief Executive Officer
William W. Smith, Jr. (principal executive officer)
/s/ Rhonda L. Smith Vice-Chairman of the Board, March 29, 2001
- ------------------------- Secretary, Treasurer and Director
Rhonda L. Smith
/s/ Robert W. Scheussler Senior Vice President, Chief March 29, 2001
- ------------------------ Operating Officer and Director
Robert W. Scheussler
/s/ Richard C. Bjorkman Vice President of Finance and Chief March 29, 2001
- ------------------------ Financial Officer (principal
Richard C. Bjorkman financial and accounting officer)
/s/ David Sperling Vice President, Chief Technical March 29, 2001
- ----------------------- Officer
David Sperling
/s/ Thomas G. Campbell Director March 29, 2001
- -----------------------
Thomas G. Campbell
/s/ David M. Stastny Director March 29, 2001
- -----------------------
David M. Stastny
37
38
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Smith Micro Software, Inc.:
We have audited the accompanying consolidated balance sheets of Smith Micro
Software, Inc. and subsidiaries (the Company) as of December 31, 2000 and 1999,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Smith Micro Software, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America.
DELOITTE & TOUCHE, LLP
Costa Mesa, California
February 7, 2001
F-1
39
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2000 1999
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,178 $ 8,704
Accounts receivable, net of allowances for doubtful accounts
and other adjustments of $1,896 (2000) and $1,944 (1999) 4,750 3,487
Inventories 338 502
Prepaid expenses and other current assets 294 253
-------- --------
Total current assets 11,560 12,946
EQUIPMENT AND IMPROVEMENTS, net 737 456
OTHER ASSETS 89 215
INTANGIBLE ASSETS, net 2,928 2,312
-------- --------
$ 15,314 $ 15,929
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,590 $ 747
Accrued liabilities 1,297 1,350
-------- --------
Total current liabilities 2,887 2,097
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.001 per share; 5,000,000 shares
authorized; none issued and outstanding
Common stock, par value $0.001 per share; 30,000,000 shares
authorized; 16,232,000 and 15,724,000 shares issued and outstanding 16 16
Additional paid-in capital 24,789 23,039
Accumulated deficit (12,378) (9,223)
-------- --------
Total stockholders' equity 12,427 13,832
-------- --------
$ 15,314 $ 15,929
======== ========
See notes to consolidated financial statements
F-2
40
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2000
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
NET REVENUES
Software $ 11,143 $ 10,700 $ 10,151
Consulting 2,595 0 0
-------- -------- --------
Total Net Revenues 13,738 10,700 10,151
COST OF REVENUES
Software 2,499 2,476 2,911
Consulting 1,150 0 0
-------- -------- --------
Total Cost of Revenues 3,649 2,476 2,911
-------- -------- --------
GROSS PROFIT 10,089 8,224 7,240
OPERATING EXPENSES:
Selling and marketing 5,578 6,135 3,984
Research and development 4,041 3,826 3,416
General and administrative 3,985 3,923 3,556
-------- -------- --------
Total operating expenses 13,604 13,884 10,956
-------- -------- --------
OPERATING LOSS (3,515) (5,660) (3,716)
INTEREST INCOME 414 447 708
-------- -------- --------
LOSS BEFORE INCOME TAXES (3,101) (5,213) (3,008)
INCOME TAX EXPENSE (BENEFIT) 54 888 (1,112)
-------- -------- --------
NET LOSS $ (3,155) $ (6,101) $ (1,896)
======== ======== ========
NET LOSS PER SHARE, basic and diluted $ (0.20) $ (0.40) $ (0.13)
======== ======== ========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 15,984 15,292 15,075
======== ======== ========
See notes to consolidated financial statements
F-3
41
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2000
- --------------------------------------------------------------------------------
(IN THOUSANDS)
RETAINED
COMMON STOCK ADDITIONAL EARNINGS
-------------------- PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
------ ------- ---------- ------------ -------
BALANCE, January 1, 1998 15,075 $ 15 $21,399 $ (1,226) $20,188
Net loss (1,896) (1,896)
------ ------- ------- -------- -------
BALANCE, December 31, 1998 15,075 15 21,399 (3,122) 18,292
Issuance of common stock
in acquisitions 409 1 999 1,000
Exercise of common stock options 240 641 641
Net loss (6,101) (6,101)
------ ------- ------- -------- -------
BALANCE, December 31, 1999 15,724 16 23,039 (9,223) 13,832
Issuance of common stock
in acquisitions 208 1,018 1,018
Exercise of common stock options 300 732 732
Net loss (3,155) (3,155)
------ ------- ------- -------- -------
BALANCE, December 31, 2000 16,232 $ 16 $24,789 $(12,378) $12,427
====== ======= ======= ======== =======
See notes to consolidated financial statements
F-4
42
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2000
- --------------------------------------------------------------------------------
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------------
2000 1999 1998
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,155) $ (6,101) $ (1,896)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,112 916 833
Net change in allowance for doubtful accounts and
other adjustments to accounts receivable 48 (689) (158)
Deferred income taxes 805 (200)
Loss on disposal of equipment and improvements 23
Change in operating accounts, net of amounts acquired:
Accounts receivable (1,311) 1,563 (185)
Income taxes receivable 956 196
Inventories 164 199 (76)
Prepaid expenses and other assets (41) 192 (373)
Accounts payable and accrued liabilities 652 (1,015) 990
------- -------- --------
Net cash used in operating activities (2,508) (3,174) (869)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (583) (265) (164)
Cash paid for acquisition of business, net of cash received (94) (1,091)
Cash paid for acquisition of technologies, net of cash received (73) (647)
------- -------- --------
Net cash used in investing activities (750) (1,356) (811)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 732 641
Repayment of notes payable (139)
------- -------- --------
Net cash provided by financing activities 732 502
------- -------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,526) (4,028) (1,680)
CASH AND CASH EQUIVALENTS, beginning of year 8,704 12,732 14,412
------- -------- --------
CASH AND CASH EQUIVALENTS, end of year $ 6,178 $ 8,704 $ 12,732
======= ======== ========
See notes to consolidated financial statements
F-5
43
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2000 (CONTINUED)
- --------------------------------------------------------------------------------
(IN THOUSANDS)
DECEMBER 31,
-------------------------------
2000 1999 1998
---- ------ --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION -
Cash paid (received) during the year for income taxes $54 $(996) $(1,198)
==== ====== =======
DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
During 2000, the Company acquired a product line (CheckIt Software)
and a business (QuickStart Technologies - Consulting)
in transactions summarized as follows:
CheckIt Software:
Fair value of purchased technology $ 721
Common stock issued in acquisition (560)
Cash paid for acquisition (73)
-------
Liabilities assumed or created $ 88
=======
QuickStart Technologies - Consulting:
Fair value of goodwill $ 602
Common stock issued in acquisition (458)
Cash paid for acquisition (94)
-------
Liabilities assumed or created $ 50
=======
During 1999, the Company acquired a business (STF Technologies)
in a transaction summarized as follows:
Fair value of assets acquired, including goodwill of $2,271 $ 2,686
Common stock issued in acquisition (1,000)
Cash paid for acquisition (1,091)
-------
Liabilities assumed or created $ 595
=======
See notes to consolidated financial statements
F-6
44
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2000
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Smith Micro Software, Inc. and subsidiaries (the
Company) develops and sells eCommerce, diagnostic utilities and
communications software for personal and business use and provides
professional services consulting. The Company's software includes products
developed for the Internet and broadband technologies, products that
enable eCommerce, Internet communications (voice-over-IP - VoIP), video
conferencing, wireless communications, general system utility products and
network fax along with traditional computer telephony. A substantial
portion of the Company's sales are made direct to hardware connectivity
device and personal computer manufacturers under Original Equipment
Manufacturer (OEM) agreements. The Company sells its communication and
diagnostic utility products through independent distributors and retail
channels. As a result of the merger with Pacific Coast Software, Inc.
(PCS) (Note 9), the Company entered into the eCommerce market. The
Company's eCommerce products enable websites to be created with standard
HTML text and provides fully automated payment processing and order
accounting.
Basis of Presentation - The accompanying consolidated financial statements
reflect the operating results and financial position of Smith Micro
Software, Inc. and its wholly owned subsidiaries in accordance with
accounting principles generally accepted in the United States of America.
All intercompany amounts have been eliminated in consolidation.
Cash and Cash Equivalents - Cash and cash equivalents generally consist of
cash, government securities and money market funds. All have original
maturity dates of three months or less.
Accounts Receivable - The Company sells its products worldwide. The
Company performs ongoing credit evaluations of its customers and generally
does not require collateral. The Company maintains reserves for potential
credit losses, and those losses have been within management's
expectations. Allowances for product returns and price protection are
included in other adjustments to accounts receivable on the accompanying
consolidated balance sheets.
Inventories - Inventories consist principally of manuals and diskettes and
are stated at the lower of cost (determined by the first-in, first-out
method) or market.
Equipment and Improvements - Equipment and improvements are stated at
cost. Depreciation is computed using the straight-line method based on the
estimated useful lives of the assets, generally ranging from three to
seven years. Leasehold improvements are amortized using the straight-line
method over the shorter of the estimated useful life of the asset or the
lease term.
Long Lived Assets - The Company accounts for the impairment and
disposition of long-lived assets in accordance with Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. In
accordance with SFAS No. 121, long-lived assets to be held are reviewed
for events or changes in circumstances which
F-7
45
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2000 (CONTINUED)
- --------------------------------------------------------------------------------
indicate that their carrying value may not be recoverable. The Company
periodically reviews the carrying value of long-lived assets to determine
whether or not an impairment to such value has occurred and has determined
that there was no impairment at December 31, 2000.
Goodwill and Other Intangibles - Goodwill represents the excess purchase
cost over the net assets acquired and is amortized over seven years using
the straight-line method. Other intangible assets include acquired
workforce value, acquired technology and product translation costs which
are being amortized using the straight-line method over three years.
Accumulated amortization on goodwill and other intangible assets amounted
to $2.1 million and $1.4 million as of December 31, 2000 and 1999,
respectively. The Company periodically evaluates the recoverability of
goodwill based on an undiscounted operating profitability analysis and
evaluates the recoverability of other intangible assets based on the
requirements of SFAS No. 121. The Company has determined that there was no
impairment at December 31, 2000.
Revenue Recognition - Software revenue is recognized in accordance with
the Statement of Position (SOP) 97-2, Software Revenue Recognition, as
amended. SOP 97-2 provides guidance on when revenue should be recognized
for licensing, selling, leasing or otherwise marketing computer software.
The Company recognizes revenues from sales of its software as completed
products are shipped and title passes and from royalties generated as
authorized customers duplicate the Company's software, assuming
collectibility is reasonably assured. The Company is generally not
contractually obligated to accept returns, except for defective and
damaged products. However, the Company may permit customers to return or
exchange product and may provide price protection on products unsold by a
customer. In accordance with SFAS No. 48, Revenue Recognition when Right
of Return Exists, revenue is recorded net of an allowance for estimated
returns, exchanges, markdowns, price concessions, and warranty costs. Such
reserves are based upon management's evaluation of historical experience,
current industry trends and estimated costs. While returns and other
concessions have historically been within management estimates, the amount
of estimated reserves could change as new information becomes available.
The Company also provides technical support to its customers. Such costs
have historically been insignificant.
Consulting services revenue is recognized as services are provided or as
milestones are delivered and accepted by customers.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) 101,
Revenue Recognition in Financial Statements. SAB 101 summarizes the
staff's views in applying generally accepted accounting principles to
selected revenue recognition issues in financial statements. SAB 101 was
adopted by the Company in the fourth quarter of 2000 and did not have a
significant impact on the Company's consolidated financial statements.
Software Development Costs - Development costs incurred in the research
and development of new software products and enhancements to existing
software products are expensed as incurred until
F-8
46
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2000 (CONTINUED)
- --------------------------------------------------------------------------------
technological feasibility has been established. The Company considers
technological feasibility to be established when all planning, designing,
coding and testing has been completed according to design specifications.
After technological feasibility is established, any additional costs are
capitalized. Through December 31, 2000, software has been substantially
completed concurrently with the establishment of technological
feasibility; and, accordingly, no costs have been capitalized to date.
Advertising Expense - Advertising costs are expensed as incurred.
Advertising expenses were $1.9 million, $2.4 million and $926,000
for the years ended December 31, 2000, 1999 and 1998, respectively.
Income Taxes - The Company accounts for income taxes under SFAS No. 109,
Accounting for Income Taxes. This statement requires the recognition of
deferred tax assets and liabilities for the future consequences of events
that have been recognized in the Company's financial statements or tax
returns. The measurement of the deferred items is based on enacted tax
laws. In the event the future consequences of differences between
financial reporting bases and the tax bases of the Company's assets and
liabilities result in a deferred tax asset, SFAS No. 109 requires an
evaluation of the probability of being able to realize the future benefits
indicated by such asset. A valuation allowance related to a deferred tax
asset is recorded when it is more likely than not that some portion or all
of the deferred tax asset will not be realized.
Fair Value of Financial Instruments - Pursuant to SFAS No. 107,
Disclosures about Fair Value of Financial Instruments, the Company is
required to disclose the fair value of all financial instruments included
on its consolidated balance sheets. The Company considers the carrying
value of such amounts in the financial statements to approximate their
fair value due to (1) the relatively short period of time between
origination of the instruments and their expected realization, (2)
interest rates which approximate current market rates, or (3) the overall
immateriality of the amounts.
Stock-Based Compensation - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees.
Net Loss per Share - Pursuant to SFAS No. 128, Earnings per Share, the
Company is required to provide dual presentation of "basic" and "diluted"
earnings (loss) per share (EPS). Basic EPS amounts are based upon the
weighted average number of common shares outstanding. Diluted EPS amounts
are based upon the weighted average number of common and common equivalent
shares outstanding. Common equivalent shares include stock options using
the treasury stock method. Common equivalent shares are excluded from the
calculation of diluted EPS in loss years, as the impact is antidilutive.
Therefore, there was no difference between basic and diluted EPS for each
period presented.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported
F-9
47
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2000 (CONTINUED)
- --------------------------------------------------------------------------------
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting years. Actual
results could differ from those estimates.
Comprehensive Income - The Company has adopted SFAS No. 130, Reporting
Comprehensive Income. This statement establishes standards for the
reporting of comprehensive income and its components. Comprehensive
income, as defined, includes all changes in equity (net assets) during a
period from non-owner sources. For each of the years ended December 31,
2000, 1999 and 1998, there was no difference between net loss and
comprehensive loss.
New Accounting Pronouncements - SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, is effective for all fiscal years
beginning after June 15, 2000. SFAS No. 133, as amended, establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities. Under SFAS No. 133, certain contracts that were not formerly
considered derivatives may now meet the definition of a derivative. The
Company will adopt SFAS No. 133 effective January 1, 2001. Management does
not expect the adoption of SFAS No. 133 to have a significant impact on
the financial position, results of operations, or cash flows of the
Company because the Company does not have derivative instruments and does
not engage in hedging activities.
Reclassifications and Restatements - Certain reclassifications have been
made to the prior years' financial statements to conform to the current
year presentation. In addition, all 1999 and 1998 amounts have been
restated for the merger with PCS in September 1999, which was accounted
for as a pooling of interests (Note 9).
F-10
48
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2000 (CONTINUED)
- --------------------------------------------------------------------------------
2. EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consist of the following (in thousands):
DECEMBER 31,
---------------------
2000 1999
------- -------
Machinery and equipment $ 2,442 $ 2,030
Leasehold improvements 273 170
Office furniture and fixtures 287 246
------- -------
3,002 2,446
Less accumulated depreciation and amortization (2,265) (1,990)
------- -------
$ 737 $ 456
======= =======
3. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
DECEMBER 31,
------------------
2000 1999
------ ------
Salaries and benefits $ 581 $ 466
Cooperative advertising and rebates 313 410
Royalties 282 191
Manufacturers' representative commissions 21 32
Other 100 251
------ ------
$1,297 $1,350
====== ======
F-11
49
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2000 (CONTINUED)
- --------------------------------------------------------------------------------
4. INCOME TAXES
A summary of the income tax expense (benefit) is as follows (in
thousands):
YEAR ENDED DECEMBER 31,
-----------------------------------
2000 1999 1998
------- ------- -------
Current:
Federal $ $ 19 $(1,071)
State 4 7 74
Foreign 50 57 85
------- ------- -------
54 83 (912)
Deferred:
Federal (1,508) (2,433) 26
State (328) (297) (226)
Change in valuation allowance 1,836 3,535
------- ------- -------
805 (200)
------- ------- -------
$ 54 $ 888 $(1,112)
======= ======= =======
A reconciliation of the provision (benefit) for income taxes to the
amount of income tax expense that would result from applying the federal
statutory rate (35%) to income before provision for taxes is as follows:
DECEMBER 31,
---------------------------
2000 1999 1998
----- ------ ------
Federal statutory rate (35)% (35)% (35)%
State tax, net of federal benefit 1 6 (3)
Nondeductible expense related to acquired intangibles 6 2 3
Other 1 3 (1)
Change in valuation allowance 29 41 0
--- --- ----
2 % 17 % (36)%
=== === ====
F-12
50
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2000 (CONTINUED)
- --------------------------------------------------------------------------------
The major components of the Company's deferred tax assets and
liabilities are as follows (in thousands):
DECEMBER 31,
---------------------
2000 1999
------- -------
Various reserves $ 908 $ 785
Nondeductible accruals 74 74
State taxes 1 1
Prepaid expenses (362) (52)
Credit carryforwards 681 481
Net operating loss carryforwards 4,222 2,172
Fixed Assets (153) 74
------- -------
Subtotal $ 5,371 $ 3,535
Valuation Allowance (5,371) (3,535)
------- -------
$ 0 $ 0
======= =======
The Company has federal and state net operating loss carryforwards of
approximately $10,390,000 and $7,875,000, respectively, at December 31,
2000. These federal and state net operating loss carryforwards will
begin to expire in 2020 and 2003, respectively. In addition, the Company
has federal and state tax credit carryforwards of approximately $464,000
and $217,000, respectively, at December 31, 2000.
As of December 31, 2000, a valuation allowance of approximately
$5,371,000 has been provided based upon the Company's assessment that it
is more likely than not that sufficient taxable income will not be
generated to realize the tax benefits of these temporary differences.
Additionally, as of December 31, 2000, approximately $912,000 of the
valuation allowance was attributable to the potential tax benefit of
stock option transactions that will be credited directly to additional
paid in capital, if realized.
F-13
51
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2000 (CONTINUED)
- --------------------------------------------------------------------------------
5. COMMITMENTS AND CONTINGENCIES
Leases - The Company has non-cancelable operating leases for its building
facilities which expire on various dates through July 31, 2005. Future
minimum rental commitments under leases with terms of one year or more
consist of the following (in thousands):
Year ending December 31:
2001 $ 802
2002 805
2003 412
2004 278
2005 122
$2,419
======
Total rent expense was $802,000, $707,000 and $636,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.
Litigation - The Company is subject to litigation in the normal course of
business, none of which management believes will have a material adverse
effect on the Company's financial condition or results of operations.
6. SEGMENT INFORMATION
In the past, the Company operated as one business segment in the
development and sales of software products. In 2000, the Company
restructured its internal operations and management into two business
segments: software products and Internet solutions.
The software products operating segment develops and markets the Company's
software products, except for eCommerce software. Within software products
the Company further concentrates on wireless and broadband products,
Macintosh products and the related retail products for each of these
concentrations.
The Internet solutions segment provides eCommerce software solutions,
eBusiness strategy and integration of new infrastructure solutions into
existing systems. The Internet solutions segment also includes hosting
revenue.
The Company does not separately allocate operating expenses to these
segments, nor does it allocate specific assets to these segments.
Therefore, segment information reported includes only revenues,
F-14
52
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2000 (CONTINUED)
- --------------------------------------------------------------------------------
cost of sales and gross profit, as this information and the geographic
information described below are the primary information provided to the
chief executive officer.
Comparisons to 1999 and 1998 have not been made, as the Internet solutions
segment was insignificant in 1999 and 1998. The following table shows the
net revenues, cost of revenues and gross profit (in thousands) generated
by each segment.
December 31, 2000
Software Products
-------------------------------------------------------
Wireless Total Software Internet Total
& Broadband Macintosh Retail Products Solutions Company
----------- --------- ------ -------------- --------- -------
Net Revenue $4,996 $1,634 $3,553 $10,183 $3,555 $13,738
Cost of Revenue 2,329 1,320 3,649
------- ------ -------
Gross Profit $ 7,854 $2,235 $10,089
======= ====== =======
OEM product sales were 43.2%, 58.0% and 67.2% of net revenues in 2000,
1999, and 1998, respectively. Sales of retail products were 25.9%, 31.9%,
and 24.8% of net revenues in 2000, 1999 and 1998, respectively. Consulting
revenues represented 18.9% of the new revenues in 2000. Sales of other
products accounted for approximately 10% of net revenues in each of the
three year periods.
Sales to individual customers and their affiliates which amounted to more
than 10% of the Company's net revenues in the year indicated were as
follows:
DECEMBER 31,
--------------------------
2000 1999 1998
---- ---- ----
Customer:
1 -- (OEM) 6.5% 15.2% 23.3%
2 -- (Retail) 20.4 23.4 18.0
---- ---- ----
26.9% 38.6% 41.3%
==== ==== ====
Accounts receivable from these two customers were $180,000 and $1,978,000
at December 31, 2000 and $452,000 and $1,862,000 at December 31, 1999,
respectively.
The Company has historically derived a significant portion of its revenues
from a relatively small number of customers. A decision by a significant
customer to substantially decrease or delay
F-15
53
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2000 (CONTINUED)
- --------------------------------------------------------------------------------
purchases from the Company or the Company's inability to collect
receivables from these customers could have a material adverse effect on
the Company's financial condition and results of operations.
The Company also has export sales representing 18.9%, 17.8%, and 21.5% of
its net revenues for the years ended December 31, 2000, 1999 and 1998,
respectively. Sales to customers in the Asia Pacific region were 5.5%,
11.7%, and 15.1% of net revenues for the years ended December 31, 2000,
1999 and 1998, respectively. All export sales have been denominated in
U.S. dollars.
7. PROFIT SHARING
The Company offers its employees a 401(k) plan, in which the Company
matches the employee contribution at a rate of 20%, subject to a vesting
schedule. Total employer contributions amounted to $68,000, $71,000 and
$42,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
8. STOCK-BASED COMPENSATION
In 1995, the Company adopted the 1995 Stock Option/Stock Issuance Plan
(the Plan). The Plan, as amended, provides for issuance of, or options to
be granted for the purchase of, an aggregate of 2,750,000 shares of common
stock. Under the terms of the Plan, incentive and nonqualified options may
be granted at an exercise price not less than 100% and 85%, respectively,
of the fair market value on the grant date, with terms of up to 10 years,
and with vesting to be determined by the Board of Directors.
Stock option activity under the Plan is as follows:
F-16
54
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2000 (CONTINUED)
- --------------------------------------------------------------------------------
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
---------- ---------
OUTSTANDING, January 1, 1998 (164,000 shares,
exercisable at weighted average exercise price of $6.01) 808,000 $ 3.72
Granted (weighted average fair value of $1.34) 507,000 1.61
Canceled (152,000) 3.38
---------
OUTSTANDING, December 31, 1998 (382,000 shares,
exercisable at weighted average exercise price of $4.23) 1,163,000 2.85
Granted (weighted average fair value of $1.12) 373,000 1.72
Exercised (240,000) 2.67
Canceled (225,000) 2.88
---------
OUTSTANDING, December 31, 1999 (488,000 shares,
exercisable at weighted average exercise price of $3.67) 1,071,000 2.85
Granted (weighted average fair value of $1.90) 928,000 2.44
Exercised (300,000) 2.42
Canceled (157,000) 4.68
---------
OUTSTANDING, December 31, 2000 1,542,000 $ 2.55
=========
Additional information regarding options outstanding as of December 31,
2000 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------- ----------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- -------------- ----------- ---------------- -------- ----------- --------
$0.91 - $ 2.25 848,000 9.2 $1.24 152,000 $1.65
$2.88 - $ 3.81 583,000 8.4 $3.50 184,000 $3.05
$5.16 - $ 7.10 51,000 7.0 $6.03 30,000 $6.52
$7.25 - $14.00 60,000 4.9 $8.78 60,000 $8.78
--------- -------
1,542,000 8.6 $2.54 426,000 $3.60
========= =======
F-17
55
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2000 (CONTINUED)
- --------------------------------------------------------------------------------
At December 31, 2000, 643,000 shares were available for future grants
under the Stock Option Plan.
Additional Stock Plan Information - As discussed in Note 1, the Company
continues to account for its stock-based awards using the intrinsic value
method in accordance with APB Opinion No. 25 and its related
interpretations. No compensation expense has been recognized in the
consolidated financial statements for employee stock arrangements as all
grants have been made with an exercise price equal to the fair market
value of the underlying shares at the date of grant.
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44 of Accounting Principles Board Opinion No. 25,
Accounting for Certain Transactions Involving Stock Compensation, which,
among other things, addressed accounting consequences of a modification
that reduces the exercise price of a fixed stock option award (otherwise
known as repricing). If the exercise price of a fixed stock option award
is reduced, the award must be accounted for as variable price stock plan
from the date of the modification to the date the award is exercised, is
forfeited, or expires unexercised. The exercise price of an option award
has been reduced if the fair value of the consideration required to be
paid by the grantee upon exercise is less than or potentially less than
the fair value of the consideration that was required to be paid pursuant
to the award's original terms. The requirements about modifications to
fixed stock option awards that directly or indirectly reduce the exercise
price of an award apply to modifications made after December 15, 1998, and
was applied as of July 1, 2000. The adoption of this interpretation did
not have an impact on the Company's consolidated financial statements.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net loss and loss per share had the Company
adopted the fair value method as of the beginning of fiscal 1995. Under
SFAS No. 123, the fair value of stock-based awards to employees is
calculated through the use of option pricing models, even though such
models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values.
The Company's calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions: expected
life, 48 months following vesting (ranging from four to eight years);
stock volatility, 120%, 105% and 89% for grants issued in 2000, 1999 and
1998, respectively; risk-free interest rates, ranging from 5.17% to 6.69%,
5.5% and 5.2% in 2000, 1999 and 1998, respectively; and no dividends
during the expected term. The Company's calculations are based on a
single-option valuation approach, and forfeitures or cancellations are
recognized as they occur. If the computed fair values of the 2000, 1999
and 1998 awards had been amortized to expense over the vesting period of
the awards, pro forma net loss would have been $(3,489,000), or $(.22)
diluted per share in 2000, $(6,420,000), or $(.42) diluted per share, in
1999 and $(2,267,000), or $(.15) diluted per share, in 1998.
F-18
56
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2000 (CONTINUED)
- --------------------------------------------------------------------------------
9. ACQUISITIONS
On September 2, 2000, the Company acquired the eBusiness consulting
practice of QuickStart Technologies, Inc., (the "QuickStart Acquisition")
a provider of integrated Internet business services to middle market
companies for 100,000 shares of Smith Micro Common Stock valued at
$458,000 plus $94,000 in cash and $50,000 in accrued expenses, including
acquisition costs. The acquisition was treated under the purchase method
of accounting and the excess of cost over fair value of net assets
acquired of $602,000 was allocated to goodwill, which is amortized using
the straight-line method over 3 years.
On July 31, 2000 the Company acquired the CheckIt(R) line of software
products from Touchstone Software Corporation and eSupport.Com, Inc., a
wholly owned subsidiary of TouchStone Software Corporation, (the
"TouchStone Acquisition") for 108,000 shares of Smith Micro Common Stock
valued at $560,000 plus $73,000 in cash and $88,000 in accrued expenses,
including acquisition costs. Touchstone is the developer of the CheckIt(R)
line of software which consist of general system utility products. The
acquisition was considered a purchase of technology, which is being
amortized using the straight-line method over 3 years.
On September 3, 1999, Smith Micro acquired all of the outstanding capital
stock of Pacific Coast Software, Inc. (the "PCS Merger") in exchange for
one million shares of Smith Micro common stock. PCS is a developer and
publisher of eCommerce software products and provides development and web
hosting services to its customers. PCS is headquartered in San Diego,
California and as a result of the PCS Merger, PCS became a wholly owned
subsidiary of Smith Micro. The merger was treated as a pooling of
interests for accounting purposes and the Company's historical financial
statements and footnotes have been restated to reflect the combined
amounts for all periods reported. Direct expenses of the transaction
amounted to $187,000 and are included in general and administrative
expenses for the year ended December 31, 1999.
The following table shows the separate historical results of the Company
and PCS for the six months ended June 30, 1999 and the year ended December
31, 1998. Amounts are shown in thousands.
F-19
57
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2000 (CONTINUED)
- --------------------------------------------------------------------------------
Six Months Year
Ended Ended
June 30, 1999 December 31, 1998
------------- -----------------
(unaudited)
Revenues:
Smith Micro $ 6,067 $ 9,547
PCS 331 604
------- -------
Total $ 6,398 $10,151
======= =======
Net income (loss):
Smith Micro $(1,376) $(1,998)
PCS (42) 102
------- -------
Total $(1,418) $(1,896)
======= =======
On April 9, 1999, Smith Micro acquired all of the outstanding capital
stock of STF Technologies, Inc. (the "STF Acquisition") in exchange for
$1.1 million in cash, including acquisition costs, and 409,164 shares of
Smith Micro Common Stock valued at $1,000,000. STF is a developer and
publisher of fax and communications software products for the Apple
Macintosh computer. STF was headquartered in Concordia, Missouri and, as a
result of the STF Acquisition, STF became a wholly owned subsidiary of
Smith Micro. The acquisition was treated as a purchase and the excess of
cost over fair value of net assets acquired of $2,271,000 was allocated to
goodwill, which is amortized using the straight-line method over seven
years.
Unaudited pro forma consolidated results of operations for the years ended
December 31, 1999 and 1998 would have been as follows had the STF
Acquisition occurred as of January 1 of each year (in thousands, except
per share data):
For the Years
Ended December 31,
1999 1998
------- -------
Pro forma net revenues $11,077 $12,615
======= =======
Pro forma net loss $(6,360) $(2,235)
======= =======
Pro forma net loss per share, basic and diluted $ (0.42) $ (0.14)
======= =======
Pro forma weighted average number of shares outstanding 15,292 15,484
======= =======
F-20
58
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2000 (CONTINUED)
- --------------------------------------------------------------------------------
Pro forma adjustments have been applied to reflect the addition of
amortization related to the intangible assets acquired and reduction in
interest income as if the acquisition had occurred on January 1, 1998. The
pro forma adjustment for amortization related to intangible assets
acquired was $81,000 for the period ended December 31, 1999 and $324,000
for the period ended December 31, 1998.
In January 1998, the Company acquired certain fax technology assets from
Mitek Systems, Inc. for $458,000 in cash which was allocated to purchased
technologies. The fax software acquired provides fax functionality over
Local Area Networks, the Internet and intranets.
F-21
59
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
To the Stockholders of
Smith Micro Software, Inc.:
We have audited the consolidated financial statements of Smith Micro
Software, Inc. and subsidiaries as of December 31, 2000 and 1999 and for
each of the three years in the period ended December 31, 2000, and have
issued our report thereon dated February 7, 2001, which is included
elsewhere in this Annual Report on Form 10-K. Our audits also included
the financial statement schedule listed in Item 14a(2). This financial
statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In our
opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole presents
fairly, in all material respects, the information set forth therein.
DELOITTE & TOUCHE, LLP
Costa Mesa, California
February 7, 2001
S-1
60
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2000
- --------------------------------------------------------------------------------
(IN THOUSANDS)
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
Allowance for doubtful accounts and
other adjustments (1):
2000 $1,944 $1,067 $ (1,115) $ 1,896
1999 1,255 1,723 (1,034) 1,944
1998 1,413 2,227 (2,385) 1,255
(1) Other adjustments relate principally to sales returns.
S-2
61
EXHIBIT INDEX
Exhibit
No. Title Method of Filing
- ------- ----- ----------------
3.1 Amended and Restated Certificate of Incorporated by reference to Exhibit 3.1
Incorporation of the Company. to the Registrant's Registration Statement
No. 33-95096.
3.1.1 Amendment to the Amended and Incorporated by reference to Exhibit 3.1.1
Restated Certificate of to the Registrant's Quarterly Report on
Incorporation of the Company. Form 10-Q for the period ended June 30,
2000.
3.2 Amended and Restated Bylaws of the Incorporated by reference to Exhibit 3.2
Company. to the Registrant's Registration Statement
No. 33-95096.
4.1 Specimen certificate representing Incorporated by reference to Exhibit 4.1
shares of Common Stock of the to the Registrant's Registration Statement
Company. No. 33-95096.
10.1 Form of Indemnification Agreement. Incorporated by reference to Exhibit 10.1
to the Registrant's Registration Statement
No. 33-95096.
10.2 1995 Stock Option/Stock Issuance Incorporated by reference to Exhibit 10.2
Plan. to the Registrant's Registration Statement
No. 33-95096.
62
Exhibit
No. Title Method of Filing
- ------- ----- ----------------
10.3 Form of Notice of Grant of Stock Incorporated by reference to Exhibit 10.3
Option under 1995 Stock Option/Stock to the Registrant's Registration Statement
Issuance Plan. No. 33-95096.
10.4 Form of 1995 Stock Option Agreement Incorporated by reference to Exhibit 10.4
under 1995 Stock Option /Stock to the Registrant's Registration Statement
Issuance Plan. No. 33-95096.
10.5 Form of 1995 Stock Purchase Incorporated by reference to Exhibit 10.5
Agreement under 1995 Stock to the Registrant's Registration Statement
Option/Stock Issuance Plan. No. 33-95096.
10.6 Distribution License Agreement dated Incorporated by reference to Exhibit 10.6
September 30, 1991, by and between to the Registrant's Registration Statement
the Company and Crandell Development No. 33-95096.
Corporation.
10.7 Application Program Interface Retail Incorporated by reference to Exhibit 10.7
License Agreement July 28, 1992 by to the Registrant's Registration Statement
and between the Company and Rockwell No. 33-95096.
International Corporation.
10.8 Application Program Interface Incorporated by reference to Exhibit 10.8
License Agreement July 28, 1992 by to the Registrant's Registration Statement
and between the Company and Rockwell No. 33-95096.
International Corporation.
10.9 Rockwell High Speed Interface Incorporated by reference to Exhibit 10.9
License Agreement dated June 2, to the Registrant's Registration Statement
1994, by and between the Company and No. 33-95096.
Rockwell International Corporation.
10.10 Letter Agreement dated February 22, Incorporated by reference to Exhibit 10.10
1994, by and between the Company and to the Registrant's Registration Statement
Rockwell International Corporation. No. 33-95096.
10.11 Letter Agreement dated April 22, Incorporated by reference to Exhibit 10.11
1993, by and between the Company and to the Registrant's Registration Statement
Rockwell International Corporation. No. 33-95096.
10.12 Software Distribution Agreement Incorporated by reference to Exhibit 10.12
dated May 8, 1995, by and between to the Registrant's Registration Statement
the Company and International No. 33-95096.
Business Machines Corporation.
10.13 Office Building Lease, dated June Incorporated by reference to Exhibit 10.13
10, 1992, by and between the Company to the Registrant's Registration Statement
and Developers Venture Capital No. 33-95096.
Corporation.
10.14 Amendment No. 1 To Office Building Incorporated by reference to Exhibit 10.14
Lease, dated July 9, 1993, by and to the Registrant's Registration Statement
between the Company and Pioneer Bank. No. 33-95096.
10.15 Amendment No. 2 To Office Building Incorporated by reference to Exhibit 10.15
Lease, dated August 15, 1994, by and to the Registrant's Registration Statement
No. 33-95096.
63
Exhibit
No. Title Method of Filing
- ------- ----- ----------------
between the Company and T&C
Development.
10.16 Fourth Addendum to Office Building Incorporated by reference to Exhibit 10.16
Lease, dated April 21, 1995, by and to the Registrant's Registration Statement
between the Company and T&C No. 33-95096.
Development.
10.17 Form of Promissory Note related to S Incorporated by reference to Exhibit 10.17
Corporation Distribution. to the Registrant's Registration Statement
No. 33-95096.
10.18 Smith Micro Software, Inc. Amended Incorporated by reference to Exhibit 10.21
and Restated Software Licensing and to the Registrant's Quarterly Report on
Distribution Agreement, dated April Form 10-Q for the quarter ended September
18, 1996, by and between the Company 30, 1996.
and U.S. Robotics Access Corp.
10.19 Office Building Lease, dated March Incorporated by reference to Exhibit 10.19
1, 1994, by and between Performance to the Registrant's Annual Report on Form
Computing Incorporated and Petula 10-K for the fiscal year ended December
Associates, Ltd./KC Woodside. 3l, 1995.
10.20 Agreement and Plan of Merger by and Incorporated by reference to Exhibit 2 to
between Smith Micro Software, Inc., the Registrant's Current Report on Form
Performance Computing Incorporated 8-K filed with the Commission on March 28,
and PCI Video Products, Inc. dated 1996.
as of March 14, 1996.
10.21 Amendment No. 1, dated as of March Incorporated by reference to Exhibit 10.21
10, 1997, to Agreement and Plan of to the Registrant's Annual Report on Form
Merger by and between Smith Micro 10-K for the fiscal year ended December
Software, Inc., Performance 31, 1996.
Computing Incorporated and PCI Video
Products, Inc. dated as of March 14,
1996.
10.22 Amendment No. 6 to Office Building Incorporated by reference to Exhibit 10.22
Lease, dated February 19, 1998, by to the Registrant's Annual Report on Form
and between the Company and World 10-K for the fiscal year ended December
Outreach Center. 31, 1997.
10.23 Software Licensing and Distribution Incorporated by reference to Exhibit 10.23
Agreement dated December 1, 1998, by to the Registrant's Annual Report on Form
and between the Company and 3Com 10-K for the fiscal year ended December
Corporation 31, 1998.
10.24 Stock Purchase Agreement dated as of Incorporated by reference to Exhibit 2 to
April 9, 1999 by and among Smith the Registrant's Current Report on Form
Micro Software, Inc., STF 8-K filed with the Commission on April 23,
Technologies, Inc. and the 1999.
Shareholders of STF Technologies,
Inc.
10.25 Amendment No. 7 to Office Building Incorporated by reference to Exhibit 10.25
Lease, dated November 5, 1999, by to the Registrant's Annual Report on Form
and between the Company and World 10-K for the fiscal year ended December
Outreach Center. 31, 1999.
21.1 Subsidiaries Filed herewith
23.1 Independent Auditors' Consent. Filed herewith