-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TeWuGyfu7GWaKs5zURNqlfTmMMKZJ6oaxhnHezm05HmSHfxBsFBv/vIRN0zmYSvE 7VB/DTP3mPxXF1O5h26SpA== /in/edgar/work/0001095811-00-004759/0001095811-00-004759.txt : 20001115 0001095811-00-004759.hdr.sgml : 20001115 ACCESSION NUMBER: 0001095811-00-004759 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMITH MICRO SOFTWARE INC CENTRAL INDEX KEY: 0000948708 STANDARD INDUSTRIAL CLASSIFICATION: [7372 ] IRS NUMBER: 330029027 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26536 FILM NUMBER: 765444 BUSINESS ADDRESS: STREET 1: 51 COLUMBIA STREET 2: STE 200 CITY: ALISO VIEJO STATE: CA ZIP: 92656 BUSINESS PHONE: 7143625800 MAIL ADDRESS: STREET 1: 51 COLUMBIA STREET 2: STE 200 CITY: ALISO VIEJO STATE: CA ZIP: 92656 10-Q 1 a67365e10-q.txt FORM 10-Q QUARTER ENDED SEPTEMBER 30, 2000 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-26536 SMITH MICRO SOFTWARE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 33-0029027 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 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 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 [ ] As of October 31, 2000, there were 16,231,791 shares of Common Stock outstanding. 2 SMITH MICRO SOFTWARE, INC. FORM 10-Q TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 2000 (Unaudited) and December 31, 1999 3 Unaudited Consolidated Statements of Operations For The Three and Nine Months Ended September 30, 2000 and September 30, 1999 4 Unaudited Consolidated Statements of Cash Flows For The Nine Months Ended September 30, 2000 and September 30, 1999 5 Notes To Unaudited Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 22 Part II. OTHER INFORMATION Item 1. Legal Proceedings 23 Item 2. Changes In Securities and Use of Proceeds 23 Item 3. Defaults Upon Senior Securities 23 Item 4. Submission of Matters To A Vote Of Security Holders 23 Item 5. Other Information 23 Item 6. Exhibits and Reports On Form 8-K 23 Signatures 26
3 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SMITH MICRO SOFTWARE, INC. CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share and Per Share Data)
September 30, December 31, 2000 1999 -------- -------- (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 7,174 $ 8,704 Accounts receivable, net of allowances for doubtful accounts and other adjustments of $2,076 (2000) and $1,944 (1999) 4,966 3,487 Inventories, net 349 502 Prepaid expenses and other current assets 189 253 -------- -------- Total current assets 12,678 12,946 EQUIPMENT AND IMPROVEMENTS, net 518 456 OTHER ASSETS 132 215 INTANGIBLE ASSETS, net 3,092 2,312 -------- -------- $ 16,420 $ 15,929 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,345 $ 747 Accrued liabilities 1,659 1,350 -------- -------- Total current liabilities 3,004 2,097 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 at September 30, 2000 and December 31, 1999, respectively 16 16 Additional paid-in capital 24,788 23,039 Accumulated deficit (11,388) (9,223) -------- -------- Total stockholders' equity 13,416 13,832 -------- -------- $ 16,420 $ 15,929 ======== ========
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 3 4 SMITH MICRO SOFTWARE, INC. UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Data)
For the Three Months For the Nine Months Ended Sept 30, Ended Sept 30, ----------------------- ----------------------- 2000 1999 2000 1999 -------- -------- -------- -------- NET REVENUES $ 3,374 $ 1,845 $ 9,670 $ 8,243 COST OF REVENUES 985 652 2,155 1,964 -------- -------- -------- -------- GROSS PROFIT 2,389 1,193 7,515 6,279 OPERATING EXPENSES: Selling and marketing 1,394 1,649 4,235 4,910 Research and development 969 1,009 2,910 2,938 General and administrative 986 1,162 2,803 3,071 -------- -------- -------- -------- Total operating expenses 3,349 3,820 9,948 10,919 -------- -------- -------- -------- OPERATING LOSS (960) (2,627) (2,433) (4,640) INTEREST INCOME, NET 94 111 321 350 -------- -------- -------- -------- LOSS BEFORE INCOME TAXES (866) (2,516) (2,112) (4,290) INCOME TAX EXPENSE 7 1,187 52 831 -------- -------- -------- -------- NET LOSS $ (873) $ (3,703) $ (2,164) $ (5,121) ======== ======== ======== ======== NET LOSS PER SHARE, basic and diluted $ (0.05) $ (0.24) $ (0.14) $ (0.33) ======== ======== ======== ======== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND DILUTED 16,030 15,504 15,898 15,347 ======== ======== ======== ========
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 4 5 SMITH MICRO SOFTWARE, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
For The Nine Months Ended September 30, ----------------------- 2000 1999 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (2,164) $ (5,121) Adjustments to reconcile net loss to net cash used in operating activities, net of the effects of the acquisition: Depreciation and amortization 768 680 Provision for doubtful accounts and other adjustments to accounts receivable 132 1,535 Deferred Income Taxes 1,187 Change in operating accounts, net of the effects of the acquisition: Accounts receivable (1,611) (992) Income taxes receivable 574 Inventories 153 331 Prepaid expenses and other assets 19 39 Accounts payable and accrued liabilities 769 (908) -------- -------- Net cash used in operating activities (1,934) (2,675) CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Touchstone (25) Acquisition of QuickStart (50) Acquisition of STF Technologies, Inc. (1,091) Capital expenditures (252) (149) -------- -------- Net cash used in investing activities (327) (1,240) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of bank line of credit (139) Proceeds from the exercise of stock options 731 58 -------- -------- Net cash provided by (used in) financing activities 731 (81) -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS (1,530) (3,996) CASH AND CASH EQUIVALENTS, beginning of period 8,704 12,732 -------- -------- CASH AND CASH EQUIVALENTS, end of period $ 7,174 $ 8,736 ======== ========
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 5 6 SMITH MICRO SOFTWARE, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (In Thousands)
For The Nine Months Ended September 30, ----------------------- 2000 1999 ------- ------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid (received) for income taxes $ 52 $(1,007) ======= ======= DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES: During Q3 2000, the Company acquired a product line (CheckIt Software) and a business (QuickStart Technologies - Consulting) in a transaction summarized as follows: CheckIt: Fair value of assets acquired (goodwill) $ 673 Common stock issued in acquisition (560) Cash paid for acquisition (25) ------- Liabilities assumed or created $ 88 ======= QuickStart: Fair value of assets acquired (goodwill) $ 558 Common stock issued in acquisition (458) Cash paid for acquisition (50) ------- Liabilities assumed or created $ 50 ======= During Q2 of 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 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 6 7 SMITH MICRO SOFTWARE, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation - The accompanying unaudited consolidated financial statements have been prepared by Smith Micro Software, Inc. ("Smith Micro" or the "Company") pursuant to Securities and Exchange Commission ("SEC") regulations and accounting principles generally accepted in the United States of America. The accompanying unaudited consolidated financial statements reflect the operating results and financial position of Smith Micro and its wholly-owned subsidiaries. On September 2, 2000, the Company completed its purchase of the eBusiness consulting practice of QuickStart Technologies, Inc., a provider of integrated Internet business services to middle market companies. This acquisition has been accounted for as a purchase and the periods presented in the financial statements include QuickStart Technologies, Inc. operations from the date of acquisition. On July 31, 2000 the Company acquired the CheckIt line of software products from Touchstone Software Corporation and eSupport.Com, Inc., a wholly owned subsidiary of TouchStone Software Corporation. Touchstone is the developer of the CheckIt(R) line of software which consist of general system utility products. This acquisition has been accounted for as a purchase and the periods presented in the financial statements include Touchstone Software Corporation operations from the date of acquisition. On September 3, 1999, the Company acquired Dolphin-Safe Software, Inc., a California corporation, dba Pacific Coast Software ("PCS"), which develops software and provides consulting and web hosting services that enable eCommerce. This merger has been accounted for as a pooling of interests and all prior periods' financial statements have been restated to reflect the historical financial statements of PCS. On April 9, 1999, the Company acquired STF Technologies, Inc. ("STF"), a Missouri corporation that develops communications software for Macintosh computers. This acquisition has been accounted for as a purchase and the periods presented in the financial statements include STF's operations from the date of acquisition. All significant intercompany amounts have been eliminated in consolidation. In the opinion of management, such information contains all adjustments necessary for a fair presentation of the results of such periods. The results of operations for the three and nine months ended September 30, 2000 are not necessarily indicative of the results to be expected for the full year ended December 31, 2000. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited financial statements included in the Company's report on Form 10-K for the year ended December 31, 1999 as footnotes and certain financial presentations are condensed or omitted from accounting principles generally accepted in the United States of America presentation requirements, pursuant to the SEC rules and regulations. Cash Equivalents - Cash equivalents are considered to be highly liquid investments with initial maturities 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 remaining 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 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 impairment to such value has occurred and has determined that there was no impairment at September 30, 2000. Goodwill and Other Intangibles - Goodwill represents the excess purchase cost over the fair value of net assets acquired and is amortized using the straight-line method over three to seven years using the straight-line method. Other intangible assets include acquired workforce value, acquired technology and translation costs, all of which are being amortized using the straight-line method over three to 7 8 seven years. The Company periodically evaluates the recoverability of goodwill based on a profitability analysis related to its product sales and evaluates the recoverability of other intangible assets based on the requirements of SFAS No. 121. Revenue Recognition - The Company recognizes revenues from sales of its software as completed products are shipped and from royalties generated as authorized customers duplicate the Company's software. The Company generally allows its retail distributors to exchange unsold products for other products and provides inventory price protection in the event of price reductions by the Company. Allowances for product returns and price protection are estimated based on previous experience and are recorded as a reduction of revenue at the time sales are recognized. The Company provides technical support and customer service to its customers. Such costs have historically been insignificant. 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 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 September 30, 2000, software has been substantially completed concurrently with the establishment of technological feasibility and, accordingly, no costs have been capitalized to date. 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. As of September 30, 2000 a full valuation allowance was provided for all deferred tax assets. Fair Value of Financial Instruments - Pursuant to SFAS No. 107, Disclosures about Fair Value of Financial Instruments, the Company is required to estimate the fair value of all financial instruments included on its balance sheet at September 30, 2000. 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 that 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 - Net loss per share is presented as "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. There was no difference between basic and diluted EPS for each period presented. Segment Information - During the nine months ended September 30, 2000, the Company restructured its reporting format to report revenues from three operating units as well as revenues from retail products. The reporting operating units are the Internet Solutions Division, the Macintosh Division and the Wireless and Broadband Division. Revenues reported in the Wireless and Broadband division also contain product sales of our analog products, which the Company will continue to provide. The Company's retail products are sold through a sales staff located at its corporate office. As these sales tend to be to major distribution warehouses, this group is responsible for selling all of the Company's retail products, which cover all three divisions. The following table shows a comparison of the revenues generated by each division: 8 9
For the Three Months Ended For the Nine Months Ended ----------------------------------- ----------------------------------- Division September 30, September 30, September 30, September 30, 2000 1999 2000 1999 ------------- ------------- ------------- ------------- Internet Solutions $ 923,000 $ 204,000 $2,449,000 $ 535,000 Macintosh 392,000 342,000 1,037,000 881,000 Wireless & Broadband 758,000 607,000 3,684,000 3,988,000 Retail Products 1,301,000 692,000 2,500,000 2,839,000 ---------- ---------- ---------- ---------- Total Revenues $3,374,000 $1,845,000 $9,670,000 $8,243,000 ========== ========== ========== ==========
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported 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 nonowner sources. For each of the three and nine month periods ended September 30, 2000 and 1999, there was no difference between net loss, as reported, and comprehensive loss. Reclassifications - Certain reclassifications have been made to the 1999 financial statements to conform to the 2000 presentation. 2. 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, up to a maximum of $150,000 to be paid in accordance with an earn out provision expiring on November 30, 2000. The acquisition was treated under the purchase method of accounting and the excess of cost over fair value of net assets acquired 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 and $25,000 cash. Touchstone is the developer of the CheckIt(R) line of software which consist of general system utility products. The acquisition was treated under the purchase method of accounting and the excess of cost over fair value of net assets acquired was allocated to goodwill, which is amortized using the straight-line method over 3 years. On September 3, 1999, Smith Micro acquired all of the outstanding capital stock of PCS (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 acquisition 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 results for all periods reported. Direct expenses of the transaction amounted to $187,000 and were included in general and administrative expenses in the third quarter of 1999. On April 9, 1999, Smith Micro acquired all of the outstanding capital stock of STF (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 is 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 under the purchase method of accounting and the excess of cost over fair value of net assets acquired was allocated to goodwill, which is amortized using the straight-line method over 7 years. Unaudited pro forma consolidated results of operations for the three and nine months ended September 30, 1999 would have been as follows had the STF Acquisition occurred as of January 1, 1999 (in thousands, except per share data): 9 10
For the Three Months For the Nine Months Ended Sept. 30, 1999 Ended Sept. 30, 1999 -------------------- -------------------- Pro forma net revenues $ 1,845 $ 8,620 ======== ======== Pro forma net loss $ (3,703) $ (5,380) ======== ======== Pro forma net loss per share, basic and diluted $ (0.24) $ (0.35) ======== ======== Pro forma weighted average number of shares outstanding 15,504 15,496 ======== ========
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, 1999. The pro forma adjustment for amortization related to intangible assets acquired was $81,000 and $243,000 for the three and nine month pro forma periods ended September 30, 1999, respectively. 3. NEW 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 will be applied prospectively as of July 1, 2000. The adoption of this interpretation did not have an impact on the Company's consolidated financial statements. In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes new accounting and reporting standards for derivative financial instruments and for hedging activities. SFAS No. 133 requires the Company to measure all derivatives at fair value and to recognize them in the balance sheet as an asset or liability, depending on the Company's rights or obligations under the applicable derivative contract. In June 1999, the FASB issued SFAS No. 137, which deferred the effective date of adoption of SFAS No. 133 for one year. The Company will adopt SFAS No. 133 no later than the first quarter of fiscal year 2001. Adoption of the new method of accounting for derivatives and hedging activities is not expected to have a material impact on the Company's financial position. 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. Implementation of SAB 101, which was delayed by the issuance of SAB 101A on March 27, 2000 and SAB 101B on June 26, 2000, is required by the fourth quarter of 2000. The Company is currently evaluating the impact, if any, SAB 101 will have on its financial statements. 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT You should read the following discussion and analysis in conjunction with the Consolidated Financial Statements and related Notes thereto contained elsewhere in this Report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Report and in our other reports filed with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 1999 and our subsequent reports on Forms 10-Q and 8-K that discuss our business in greater detail. The section entitled "Risk Factors" set forth below, and similar discussions in our other SEC filings, discuss some of the important risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks, in addition to the other information in this Report and in our other filings with the SEC, before deciding to invest in our company or to maintain or increase your investment. This Report contains forward-looking statements which include, but are not limited to, statements concerning projected revenues, expenses, gross profit and income, the need for additional capital, market acceptance of our products, our ability to consummate acquisitions and integrate their operations successfully, the competitive nature of our markets, our ability to achieve further product integration, the status of evolving technologies and their growth potential and our production capacity. These forward-looking statements are based on our current expectations, estimates and projections about our industry, management's beliefs, and certain assumptions made by us. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "may," "will" and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. GENERAL Smith Micro Software, Inc. headquartered in Aliso Viejo, CA, is a developer and marketer of e-Commerce and communication software products and the provider of professional consulting services. Our satellite offices are located in Beaverton, OR: Boulder, CO; Lee's Summit, MO; Plano, TX; and San Diego, CA. Our Macintosh Division is headquartered in Lee's Summit, MO, the Internet Solutions Division is based out of San Diego, CA and our Wireless & Broadband Division and Retail Business Unit are located at our corporate offices in Aliso Viejo, CA. 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 e-commerce, Internet communications (voice-over-IP -- VoIP), video conferencing, wireless communications, general system utility products and network fax along with traditional computer telephony. Our products for the consumer and business markets are available through Internet sales, retail stores, direct sales, and value-added resellers (VARs). Retail outlets include CompUSA, OfficeMax, Office Depot, Micro Center, Staples, and Fry's Electronics. On the web, our products can be found at Buy.com, Beyond.com, Egghead.com and many others. In the OEM market, we supply wireless and communication software. OEM customers include: Internet portals and service providers; website designers and consultants; manufacturers of personal computers, wireless/cellular phones, digital cameras, video capture cards, broad-band DSL and cable modems and 56k modems. The Internet Solutions Division (ISD) provides a broad spectrum of services to assist middle market clients in planning, implementing and supporting eBusiness initiatives. Consulting services range from WebCatalog support to complete eBusiness implementation. We also provide website hosting and co-location services. We generate our revenues from OEM sources, sales from the retail channel and consultative sales from our eCommerce business. In the third quarter of 2000 we acquired the TouchStone Checkit product line (See Note 2 to the consolidated financial statements). We market these products under the Smith Micro CheckIt brand including: CheckIt(R) NetOptimizer, CheckIt(R) 11 12 Utilities; CheckIt(R) FastMove(R); and CheckIt(R) Suite. CheckIt NetOptimizer analyzes and optimizes wireless, broadband and dialup Internet connections for maximum performance. CheckIt Utilities enables users to uncover potential problems, check PC performance and assess system reliability. CheckIt FastMove 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 Suite product. These products will also be available in special versions for OEM customers along with CheckIt Factory Edition, targeted at PC manufacturers for factory testing and burn-in. Goodwill recorded in the acquisition of the TouchStone Checkit asset was $673,000 and will be amortized over three years. Also in the third quarter of 2000, we acquired the consulting practice unit of QuickStart Technologies, Inc., a provider of integrated Internet business services to middle market companies. (See Note 2 to the consolidated financial statements). Through the QuickStart Consulting 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. Goodwill recorded in the acquisition of the QuickStart unit was $558,000 and will be amortized over three years. In the first quarter of 2000 we introduced QuickLink Mobil 2000. This product allows PC users to use digital cell phones as a connectivity device for wireless access to the Internet, corporate data centers and other dial up connections. This product was originally introduced as an OEM product. In the second quarter of 2000, we introduced a retail version of QuickLink Mobil 2000. Also in the first quarter of 2000 we introduced Wireless Web DNA. This product allows websites to be accessed both by traditional PC based web browsers and by newly created micro browsers located on digital cell phones. In April 1999 we expanded our Macintosh division with the STF acquisition. STF develops and sells communications software, primarily fax, to the Macintosh market. Goodwill recorded in the acquisition of STF was $2,271,000 and will be amortized over seven years. Our Macintosh division provides Internet telephony products and video conferencing products for this market. In September 1999, we merged with PCS to provide eCommerce business solutions. In late 1995, PCS sold its first copy of the original version of WebCatalog, an Internet store development software designed for the Macintosh. PCS began selling a Windows version in early 1997 and released its Unix version in late 1999. We recognize revenues from sales of our software as completed products are shipped, consulting projects are completed and from royalties generated as authorized customers duplicate our software. We continue to introduce new products and our future success will depend in part on the continued introduction of new and enhanced OEM and retail products for the wireless and broadband market and eCommerce products that achieve market acceptance. Revenues are net of estimated returns and other adjustments at the time the products are shipped. We have allowed our customers to return unused software and to rotate stock for new versions of retail releases. As a percentage of our net revenues, returns constituted 18.1% in the nine months ended September 30, 2000, 27.6% for the year ended December 31,1999 and 4.8% for the year ended December 31, 1998. As a percentage of our net revenues, returns for stock rotation were 8.2% in the nine months ended September 30, 2000, 23.9% for the year 1999 and 0.6% for the year 1998. Although we have successfully expanded our OEM customer base during the past two years, a small number of OEM customers have historically accounted for a substantial portion of our revenues. Sales to 3Com, primarily U.S Robotics and its subsidiaries, accounted for the largest portion of this revenue source, although it has been substantially reduced from the preceding two years. Approximately 4.7% of our revenues came from 3Com in the nine months ended September 30, 2000, compared with 15.2% of our net revenues for the year 1999 and 23.3% of our net revenues for the year 1998. Our three largest OEM customers, including 3Com, accounted for the following portions of our net revenues: 19.1% in the nine months ended September 30, 2000, 26.8% for the year 1999 and 33.0% for the year 1998. 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. With the growth in our eCommerce business, we have begun to develop a backlog of consulting projects. This backlog is only representative of sales from the eCommerce business and is not representative of our total company. The backlog for eCommerce products at the end of the second quarter of 2000 was in excess of $1,000,000. We do not consider backlog to be a significant indication of future performance in the other areas of our business. As a result, our sales of non-consultative products 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. 12 13 Our strongest retail product continues to be HotFax MessageCenter, which provides fax, answering machine and data communication functionality via the PC. We began to ship the retail version of our Internet store software product, WebCatalog Builder in late 1999. With the acquisition of TouchStone on July 31, 2000, we have added the following products under the Smith Micro CheckIt brand: CheckIt(R) NetOptimizer, CheckIt(R) Utilities; CheckIt(R) FastMove(R); and CheckIt(R) Suite. We have expanded into new retail outlets, particularly office supply chains such as Staples, Office Depot and Office Max and into numerous Internet retail stores. As a result of this expansion, sales to Ingram Micro, a retail distributor, were 20.9% of our net revenues in the nine months ended September 30, 2000, 23.4% of our net revenues in the year 1999 and 18.0% of our net revenues in the year 1998. Inventory in the retail channel exposes us to product returns. We consider this exposure when we establish allowances for product returns. Substantial returns of products from the retail channel could have an adverse effect on our business, results of operations and financial condition. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain statement of operations data expressed as a percentage of total revenue.
For The Three Months For The Nine Months Ended September 30, Ended September 30, ---------------------- ---------------------- 2000 1999 2000 1999 ------ ------ ------ ------ Net revenues 100.0% 100.0% 100.0% 100.0% Cost of revenues 29.2% 35.3% 22.3% 23.8% ------ ------ ------ ------ Gross profit 70.8% 64.7% 77.7% 76.2% Operating expenses: Selling and marketing 41.4% 89.4% 43.8% 59.6% Research and development 28.7% 54.7% 30.1% 35.6% General and administrative 29.2% 63.0% 29.0% 37.3% ------ ------ ------ ------ Total operating expenses 99.3% 207.1% 102.9% 132.5% ------ ------ ------ ------ Operating loss -28.5% -142.4% -25.2% -56.3% Interest income 2.8% 6.0% 3.3% 4.3% ------ ------ ------ ------ Loss before income taxes -25.7% -136.4% -21.9% -52.0% Income tax expense 0.2% 64.3% 0.5% 10.1% ------ ------ ------ ------ Net loss -25.9% -200.7% -22.4% -62.1% ====== ====== ====== ======
Net Revenues During the current year, we have restructured our reporting format to report revenues from three operating units as well as revenues from retail products. The reporting operating units are the Internet Solutions Division, the Macintosh Division, the Wireless and Broadband Division and Retail Products. Our net revenues increased 82.9% to $3.4 million in the three months ended September 30, 2000 from $1.8 million in the three months ended September 30, 1999. Our net revenues increased 17.3% to $9.7 million in the nine months ended September 30, 2000 from $8.2 million in the nine months ended September 30, 1999. The following table shows a comparison of the revenues generated by each division: 13 14
For the Three Months Ended For the Nine Months Ended ----------------------------------- ----------------------------------- Division September 30, September 30, September 30, September 30, - -------- 2000 1999 2000 1999 ------------- ------------- ------------- ------------- Internet Solutions $ 923,000 $ 204,000 $2,449,000 $ 535,000 Macintosh 392,000 342,000 1,037,000 881,000 Wireless & Broadband 758,000 607,000 3,684,000 3,988,000 Retail Products 1,301,000 692,000 2,500,000 2,839,000 ---------- ---------- ---------- ---------- Total Revenues $3,374,000 $1,845,000 $9,670,000 $8,243,000 ========== ========== ========== ==========
The Internet solutions division is the result of the merger of PCS in September of 1999, which was accounted for as a pooling of interests. The net revenues for 1999 reflect PCS's sales in that period before we had acquired them and infused our capital and resources into this division. Also, in the third quarter, this division had $444,000 of revenue from the acquisition of the QuickStart consulting unit in September 2000 which was not included in the earlier period. The creation of our Macintosh division resulted from the purchase of STF in April of 1999. We did a limited amount of business in this market prior to the acquisition of STF. The Wireless and Broadband division increased revenues in the third quarter of 2000 over the third quarter of 1999 partially as a result of sales to new cellular phone manufacturer customers. The decrease in this division for the nine months ended September 2000 versus 1999 is due to the decline in the sales of analog modem software to OEM customers. We believe that this trend will continue through out 2000. Retail products had $780,000 of additional revenue in the third quarter 2000 over the third quarter 1999 from the acquisition of the TouchStone Checkit product line in July 2000 which was not included in the earlier period. Gross Profit Gross profit represents net revenues, less cost of revenues, which includes costs of materials, costs related to the operations of our kitting facilities, labor costs related to our consulting revenues, freight charges and royalties paid to licensors. Gross margins increased to 70.8% in the third quarter of 2000 from 64.7% in the third quarter of 1999. Gross profit dollars increased to $2.4 million in the third quarter of 2000 from $1.2 million in the third quarter of 1999. The gross profit dollars for the third quarter of 2000 include gross profit dollars from the acquisition of the QuickStart consulting unit and the assets of the TouchStone CheckIt product line which were not included in the gross margin dollars for the third quarter of 1999. The gross margin percentage increased to 77.7% in the nine months ended September 30, 2000 from 76.2% in the nine months ended September 30, 1999. Gross profit increased to $7.5 million in the nine months ended September 30, 2000 from $6.3 million in the nine months ended September 30, 1999. Gross margins were higher in the third quarter of 2000 compared to the third quarter of 1999 due to significant product returns which took place in the third quarter of 1999. The gross margin percentage for the third quarter is actually lower than the year to date gross margin percentage. This decrease is the result of an increase in the number of consulting projects in our sales mix. The QuickStart consulting practice which was acquired on September 2, 2000 has a sales mix predominately of time and material consulting engagements. Gross margins on these consulting sales are lower than the gross margins from project consulting sales which were the norm before the QuickStart consulting acquisition. As a result of this new addition, we believe the gross margin will continue to decrease in the future as we increase the sales from the consulting practice. Gross margin percentages have also been impacted by the addition of products from the TouchStone Checkit acquisition which took place on July 31, 2000. As we shipped initial product requirements to our 14 15 customers in the third quarter, we incurred additional cost of sales expense related to the packaging and kitting of these products. Retail products provide a lower margin than the gross margins achieved for OEM product sales. Our sales mix was more heavily weighted with retail product sales in the third quarter than it was in the previous two quarters of 2000 and has also created an adverse impact on our gross margin. We believe that our overall gross margin will continue to decrease in the future as we move further away from predominately OEM revenues towards a blended revenue stream of retail products, consulting sales and OEM revenues. We are attempting to mitigate this trend through various means, such as controlling royalty costs, improving manufacturing efficiencies and concentrating on our pricing methodologies. There can be no assurance that any efforts made by us in these and other areas will successfully offset decreasing margins. Selling and Marketing Expenses Our selling and marketing expenses consist primarily of personnel costs, advertising costs, sales commissions and trade show expenses. These expenses vary considerably from quarter to quarter based on the timing of trade shows, new product introductions and retail promotion programs. Selling and marketing expenses decreased by $255,000 in the third quarter of 2000 over the third quarter of 1999, a decrease to 41.3% from 89.4% of net revenues. Our selling and marketing expenses decreased $675,000 in the first nine months of 2000 over the first nine months of 1999, a decrease to 43.8% from 59.6% of net revenues. The decrease both during the third quarter and for the first nine months of 2000 was primarily due to reduced advertising, reduced promotional campaigns in the retail channel and related travel expense. These savings were partially offset by increases in employee-related expenses from additional staff being hired and as the result of personnel acquired through the QuickStart consulting acquisition. Research and Development Expenses Our research and development expenses consist primarily of personnel and supply costs required to conduct our software development activities and the amortization of acquired technology assets. Our research and development expenses remained unchanged at $1.0 million in the third quarter of 2000 and 1999, but decreased to 28.7% from 54.7% of net revenues, primarily due to the difference in revenues. Our research and development expenses also remained unchanged at $2.9 million for the nine month periods ended September 30, 2000 and 1999, but decreased to 30.1% from 35.6% of net revenues, again primarily due to the difference in revenues. We did increase our personnel costs, however, this increase was offset by reductions in contract programming costs. General and Administrative Expenses Our general and administrative expenses represent operating expenses that are not included as costs of sales, selling and marketing or research and development. Our general and administrative expenses decreased by $176,000 in the third quarter of 2000 from the third quarter of 1999, a decrease to 29.2% from 63% of net sales. Our general and administrative expenses decreased by $268,000 in the nine months ended September 30, 2000, a decrease to 29% from 37.3% of net revenues. General and administrative expenses decreased in the third quarter of 2000 compared to the third quarter of 1999 primarily as the result of reductions in employee-related expenses and savings from non-recurring legal and commission fees incurred during the acquisition of PCS in September of 1999. General and administrative expenses decreased in the first nine months of 2000 compared to the first nine months of 1999 primarily due to reductions in employee related expenses. The effects of these reductions were partially offset by increases in the amortization of goodwill due to the TouchStone Checkit and QuickStart consulting acquisitions and an increase in bad debt expense. It is management's intent to tightly control and keep relatively constant general and administrative costs; however, this is dependent upon the level of acquisition activity and our growth, among other things. Income Taxes Income tax expense was $52,000 for the nine months ended September 30, 2000 compared $831,000 for the nine months ended September 30, 1999. During the third quarter of 1999, we increased our income tax valuation allowance to offset all deferred tax assets. This decision was reached when it was determined that the recent historical results of operations provided insufficient evidence that the deferred tax assets would be realized. The current year tax expense of $52,000 relates to taxes on foreign income. Liquidity and Capital Resources Since our inception, we have financed operations primarily through cash generated from operations and from proceeds generated by our initial public offering in 1995. Net cash used in operating activities was $1.9 million in the nine months ended September 30, 2000 compared to $2.7 million in the nine months September 30, 1999. The primary operating use of cash during the both periods was the Company's net loss. 15 16 On September 2, 2000, we purchased the eBusiness consulting practice of QuickStart Technologies, Inc., for Common Stock valued at $458,000. 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, for 108,000 shares of Smith Micro Common Stock valued at $560,000 and $25,000 cash. On April 9, 1999, we used $1.1 million in cash and 409,164 shares of our Common Stock to acquire all of the outstanding capital stock of STF Technologies, Inc. (STF). At September 30, 2000, the Company had $7.2 million in cash and cash equivalents and $9.7 million of working capital. The Company had $5.0 million of accounts receivable, net of allowance for doubtful accounts and other adjustments. The Company has no significant capital commitments, and currently anticipates that growth in capital expenditures will not vary significantly from recent periods. RISK FACTORS This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties and our actual results may materially differ from the results anticipated in those statements. Factors that might cause such a difference include, without limitation, those discussed in this section, in the Management's Discussion and Analysis of Financial Condition and Results of Operations section and elsewhere in this Form 10-Q. All such factors should be considered in evaluating us and a decision to invest in us. Our Quarterly Operating Results are Subject to Significant Fluctuations that Could Adversely Impact Our Stock Price. Our quarterly operating results have fluctuated significantly in the past and may continue to vary from quarter to quarter. Accordingly, you should not rely on quarter-to-quarter comparisons of our operating results as an indication of our future performance. It is possible that in some future periods our results of operations may be below the expectations of public market analysts and investors. In that event, the price of our Common Stock would likely decline. There are a number of factors that could cause our quarterly operating results to fluctuate. Many of these factors are not in our control. These factors include: - the size and timing of orders from, and shipments to, our major customers; - our ability to maintain or increase gross margins; - changes in pricing policies or price reductions by us or our competitors; - variations in the our sales channels or the mix of our product sales; - the timing of new product announcements and introductions by us, our competitors or customers; - the availability and cost of supplies; - the financial stability of our major customers; - the market acceptance of our new products, applications and product enhancements; - our ability to develop, introduce and market new products, applications and product enhancements; - possible delays that we may face in the shipment of new products; - our success in expanding our sales and marketing programs; - deferrals of orders by our customers in anticipation of new products, applications, product enhancements or operating systems; - changes in our strategy; and - personnel changes. While we historically have not experienced significant fluctuations in our sales from season to season, we may face greater seasonality in our sales in the future. Many of our OEM customers experience seasonality in their sales, which may affect their buying patterns from us. In addition, as we increase our sales of retail products and consulting services, we expect to experience greater seasonality in our sales. 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 consultative sales and we only began building this backlog during the nine months ended September 30, 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 16 17 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. An Unexpected Shortfall in Revenue May Adversely and Disproportionately Affect Our Business Because Our Expenses are Largely Fixed. Our expense levels are based, in part, on our expectations of our future revenues and a significant portion of our expenses is fixed. As a result, we may not be able to adjust our spending rapidly enough to compensate for an unexpected shortfall in revenue. Therefore, if revenue levels fall below our expectations, our operating results and net income are likely to be adversely and disproportionately affected. We have Depended Upon a Small Number of OEM Customers. Sales to our three largest OEM customers accounted for approximately 19.1% of our net revenues in the nine months ended September 30, 2000, 26.8% of our net revenues for the year 1999 and 33.0% of our net revenues for the year 1998. Although we have begun to diversify our product lines, we expect that we will continue to be dependent upon orders from our major OEM customers for a significant portion of our revenues in future periods. However, none of these customers is obligated to purchase any of our products. Accordingly, we cannot be certain that these customers will continue to place large orders for our products in the future, or purchase our products at all. Our customers may acquire products from our competitors or develop their own products that compete directly with ours. Any substantial decrease or delay in our sales to one or more of these entities in any quarter would have an adverse effect on our results of operations. In addition, certain of our OEM customers have in the past and may in the future acquire competitors or be acquired by competitors, causing further industry consolidation. In the past, such acquisitions have caused the purchasing departments of the combined companies to reevaluate their purchasing decisions. If one of our major OEM customers engages in an acquisition in the future, it could change its current purchasing habits. In that event, we could lose the customer, experience a decrease in orders from that customer or a delay in orders previously made by that customer. Moreover, if one of our existing OEM customers acquires another existing OEM customer, the concentration of our revenues from the combined companies could increase if the combined companies continue to purchase our software products. Although we maintain allowances for doubtful accounts, the insolvency of one or more of our major customers could result in a substantial decrease in our revenues. Our Operating Results Have Been Substantially Dependent upon One Family of Products Sold to Original Equipment Manufacturers. In the past we have derived a significant portion of our revenues from a relatively small number of products. Sales of our QuickLink related products represented approximately 19.1% of our net revenues in the nine months ended September 30, 2000, 37.1% of our net revenues for the year 1999 and 55.3% of our net revenues for the year 1998. We have continued to diversify our product offerings and have less of a dependency on these products. However, as our revenues from these software products continue to decline, whether as a result of competition, technological change, price pressures or other factors and if our efforts to replace these sales through the addition of new products are not successful, our business could be seriously impaired. Our Efforts to Develop a Market for Our Retail Software Products Require Substantial Investments that May Adversely Affect Our Operating Margins. We are continuing our efforts to develop a market for our retail software products. With the acquisition of the TouchStone Checkit products on July 31, 2000, we have added the following products under the Smith Micro CheckIt brand: CheckIt(R) NetOptimizer, CheckIt(R) Utilities; CheckIt(R) FastMove(R); and CheckIt(R) Suite to our existing line of retail software products that includes WebCatalog Builder, Internet CommSuite, HotFaxMessageCenter, HotFax, VideoLink Mail, FAXstf, HotPage and HotFaxShare. Sales of our retail products represented approximately 25.6% of our net revenues in the nine months ended September 30, 2000, 32.1% of our net revenues for the year 1999 and 24.8% of our net revenues for the year 1998. In order to strengthen our product recognition and build distribution channels for our retail products, we will have to make significant investments in advertising, trade shows, public relations, distributor relationships and a dedicated sales force. 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. We May Not be Able to Develop and Maintain Relationships with Distributors and Retailers to Sell Our Retail Software Products. We rely on distributors, retailers, Internet distributors and value added resellers, commonly known as VARs, to market and distribute our retail software products. Our retailers include Staples, CompUSA, Office Depot, OfficeMax and numerous Internet retail stores, among others. As a result, net revenues to Ingram Micro, a retail distributor, were 20.9% of our net revenues in the nine months ended September 30, 2000, 23.4% of our net revenues for the year 1999 and 18.0% of our net revenues for the year 1998. Our ability to maintain distributor and retailer relationships is largely a function of our sales volume. If we do not meet certain minimum volume requirements, we may not be able to maintain our relationships with our current distributors and retailers. Our agreements with retailers and VARs are not exclusive and in many cases may be terminated by either party without cause. Many of our retailers and VARs carry product lines that are competitive with our retail software products. These retailers and VARs may not give a high priority to the 17 18 marketing of our products or may not continue to carry our products. In addition, our retailers and VARs may change their inventory strategies, with little or no warning to us. In many cases, such changes in inventory strategy may not be related to end user demand. If this happens our retail sales may be adversely affected. We may not be successful in recruiting new VARs and retailers to represent us. Our Risk of Product Returns Will Increase as Our Retail Sales Increase. We typically allow the retailers and VARs who sell our retail software products to return our products without charge or penalty. As part of our revenue recognition policy, we calculate an allowance for product returns based on our historical experience. If retail sales of our products increase, our risk of product returns will increase. While our revenue recognition policy contemplates this risk, it is possible that returns may occur in excess of our previous experience. If this happens, we would have to revise our estimates and increase our allowances for such returns. Excessive or unanticipated returns could adversely affect our results of operations. Our Future Success Will Partially Depend on the Level of Market Acceptance of Our Internet Communications Products, Video Related Products and eCommerce products and services. We continue to focus significant resources on the development and introduction of Internet telephony and video communications products and services, including our currently released products: Internet CommSuite and QuickLink Mobil 2000. Subsequent to our merger with PCS, we increased the level of resources directed at our eCommerce product group and we expect to continue to focus significant resources on the development, marketing and selling of eCommerce products and services, including our currently released products: WebCatalog and WebCatalog Builder. Lack of market acceptance for these products or other similar products could have an adverse impact on our business. In addition, we may experience delays in or non-completion of the development of new software for these products, which could adversely affect our competitive position in these markets. Such products compete in new and rapidly changing markets and we cannot be certain that our products will receive or gain market acceptance. Our first Internet communications software product was released in September 1998. This software product includes a number of Internet communications tools such as telephony, fax, multimedia e-mail, video conferencing, video security and others. Our initial sales of this product were made to retail channels and did not include significant orders from OEM customers. We introduced our first video communications software in 1996. Since that time, our sales volume for such product has achieved only modest growth and has not become a significant part of net revenues. Our first eCommerce software product was released in late 1995. The current version of this software product enables businesses of all sizes to create and operate online Internet storefronts and web sites. Sales of this product line have primarily been made through VARs and direct sales to businesses. Revenue from this product group has achieved modest growth and has not become a significant part of net revenues. Our Internet telephony and video communications software products compete against several competitors, including White Pine, Logitech, Intel, Microsoft and VocalTech and our eCommerce software products also compete against several competitors, including Intershop, Intel, IBM, Yahoo and others, some of whom have greater financial and other resources than we do. We cannot be certain that we will be able to compete successfully against these and any future competitors in the Internet communications, video conferencing software markets or eCommerce software market. Rapid Technological Change Could Render Our Products Obsolete. The communications software markets in which we operate are characterized by rapid technological change, changing customer needs, frequent product introductions and evolving industry standards. These factors make it difficult for us to estimate the life cycles of our products. Our future success will depend upon our ability to develop and introduce new software products, including new releases, applications and enhancements, on a timely basis that keep pace with technological developments and emerging industry standards and address the increasingly sophisticated needs of our customers. We may experience difficulties that could delay or prevent our development, introduction and marketing of new products. If we are unable to develop and introduce new products in a timely manner in response to changing market conditions or customer requirements, or technological or other reasons, our competitive positions in these markets would be adversely affected. Microsoft is the leading developer of operating systems for personal computers. We may not be able to successfully develop new versions of our software products that will operate on future Microsoft operating systems. Even if we are able to develop such new versions, we may not be able to do so concurrently with or prior to introductions by our competitors of communication software products for those new operating systems. Any such failure or delay could adversely affect our competitive position or lead to obsolescence of our products in the future. Microsoft Poses a Significant Competitive Threat to Us. We face competition from Microsoft, which is the publisher of the most prevalent personal computing operating platforms, Windows, Windows NT and DOS. Due to its market dominance, Microsoft represents a significant competitive threat to all personal computer software vendors, including us. 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, including our principal product, QuickLink. If the communications capabilities of Windows 2000, Windows 98, Windows 95, Windows NT or other operating systems are adopted by users, sales of our products could decline. 18 19 We Face Significant Competition from Other Companies. We operate in markets that are highly competitive and subject to rapid changes in technology. 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. Competitive pressures could reduce our market share or require us to reduce the prices of our products. We Face Significant Competition from Software Vendors in the Retail Market. Our principal fax related retail products, HotFaxMessageCenter and HotFax, compete directly with Symantec's WinFax Pro. Our new Internet communications software products, Internet CommSuite and VideoLink pro, compete with product offerings by Microsoft, Intel, White Pine and VocalTech, among others. Our new CheckIt products: CheckIt(R) NetOptimizer, CheckIt(R) Utilities; CheckIt(R) FastMove(R); and CheckIt(R) Suite, compete 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 customers may acquire or develop products that compete directly with our products. Many of our 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 or 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 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; - product performance; - price; - distribution; and - customer support. We cannot be certain that we will be able to compete successfully with respect to these and other factors or that the competitive pressures that we face will not adversely affect our results of operations. Our Future Success Will Depend on Our Ability to Develop and Introduce New Product Offerings. Our future success will depend, in significant part, on our ability to successfully develop and introduce new software products and improved versions of our existing software products on a timely basis and in a manner that will allow such products to achieve broad customer acceptance. We cannot be certain that we will be able to develop and introduce new products on a timely basis, if at all, or that any new products that we do develop will be accepted in the market. If new products are delayed or do not achieve market acceptance, our sales and results of operations will be adversely affected. In the past, we have experienced delays in purchases of our products by customers anticipating the launch of new products by us. Accordingly, it is possible that our customers may defer material orders in the future in anticipation of new product introductions. If this happens, our results of operations may be adversely affected. Our Efforts to Sell Our Products in the Corporate and Government Marketplaces May Not be Successful and May Adversely Affect Our Operating Margins. In the past, we have generated our revenues almost entirely from OEM sales. We began selling to the corporate/government marketplace while building the infrastructure necessary to sell to these two customer bases in 1997. In January 1998, we acquired the network fax software technology of Mitek Systems, Inc. Through this acquisition, we acquired software that is designed to address the fax requirements of the corporate/government customer. During 1998 we developed the acquired network fax product into the currently shipping product, HotFaxShare, and we released a newly developed IP Gateway module. In September 1999, we merged with PCS, which provided us with eCommerce products for this market. Although we continue to invest resources in the research and development of products for the corporate and government markets, and in building the additional infrastructure required to market and sell products in these markets, we cannot be certain that our efforts will yield any significant sales growth. In addition, 19 20 because we have had to make substantial investments to develop, market and sell products for these markets, sales of such products may not provide the operating margins historically achieved by us for OEM sales. 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 test our products along with our current and potential OEM customers, 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. Our Planned Expansion of Our International Business Activities May Make Us More Susceptible to Global Economic Factors, Foreign Business Practices and Currency Fluctuations. We presently operate in foreign markets and intend to expand our international presence. Export net revenues represented 14.5% of our net revenues in the nine months ended September 30, 2000, 17.8% of our net revenues for the year 1999 and 21.5% of our net revenues for the year 1998. We may not be able to continue to generate significant international sales. Our international business activities are subject to a number of risks, including: - difficulties in managing distributors; - difficulties in staffing and maintaining foreign operations; - foreign currency exchange fluctuations; - the possibility of difficulties in collecting accounts receivable; - varying technical standards; - substantially different regulatory requirements in different jurisdictions; - tariffs and trade barriers; - political and economic instability; - reduced protection for our intellectual property rights in certain countries; - potentially adverse tax consequences; and - burdens associated with complying with a wide variety of complex foreign laws and treaties. While we currently do not accept payment in foreign currencies and invoice all of our sales in U.S. dollars, we may not be able to continue this policy if we are able to grow international sales. If we begin to receive payment in foreign currencies, we are likely to be subject to the risks of foreign currency losses due to fluctuations in foreign currency exchange rates. In addition, if we are successful in growing our business outside of the United States, we may also face economic, political and foreign currency situations that are substantially more volatile than those commonly experienced in the United States. If this happens, our results of operations could be adversely affected. 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 are dependent on our ability to identify, hire, train, retain and motivate high quality personnel, especially highly skilled engineers involved in the ongoing research and development required to develop and enhance our communication software products and introduce enhanced future applications. We are also dependent on our ability to identify, hire, train, retain and motivate highly specialized consulting workforce in order to continue to service our consulting clients. A high level of employee mobility and an aggressive approach to the recruiting of skilled personnel characterize the software and consulting industry. Our inability to attract and retain the highly trained technical personnel that are essential to our product development, consulting service, marketing, service and support teams may limit the rate at which we can generate revenue and develop new products or product enhancements. In order to attract and retain key personnel, we may need to grant additional options and provide other forms of incentive compensation. Because We Rely on Third Party Suppliers, We Have Limited Control Over Component Costs and Product Delivery Schedules. We rely on third party suppliers to provide us with the components for our product kits. These components include disks, CDs and printed manuals. We also rely on third parties for CD-ROM replication. In the past, we have experienced disk shortages and may experience such shortages in the future. If we cannot obtain a sufficient quantity of disks or other components we may not be able to deliver products to our customers on a timely basis. Similarly, 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. Any delays that we experience in delivering our products to customers could impair our customer relationships and adversely impact our business. In 20 21 addition, if our third party suppliers raise their prices for disks or other components or CD-ROM replication services, our gross margins would be reduced. Our Customers May Continue to Switch to the Pre-Loaded or CD-ROM Versions of Our Products, Which May Adversely Affect Our Operating Results. We primarily sell our software in a kit that includes a disk or CD-ROM and a manual. However, some of our customers "pre-load" our software onto a CD, diskette or the hard drive of a personal computer and pay us a royalty based on units produced or shipped. These arrangements eliminate the need for us to provide a disk or CD-ROM and may eliminate the need for a manual. The pre-load arrangements produce smaller unit revenues for us and eliminate our ability to generate revenues from our production facilities. We believe that our production facilities contribute profits to our operations. Currently, we have the capability to produce our products in-house on 3 1/2-inch diskettes. However, we do not currently have the capability to produce CD-ROMs internally and the cost to develop such production capability may be prohibitive. As the size of software programs grows, CD-ROM is becoming a more prominent medium. We currently contract CD-ROM production to specialized CD-ROM facilities. If more of our customers request product pre-loads and CD-ROM versions of our products, our operating results could 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. Our Officers and Directors Could Control Matters Submitted to Our Stockholders. As of October 31, 2000, 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 60.3% 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. 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. 21 22 The Price of Our Stock Has Been Volatile and Could Continue to Fluctuate Substantially. The market price of our common stock has been volatile and could fluctuate substantially in response to a variety of factors that are out of our control, in addition to our financial performance. Furthermore, stock prices for many high technology companies, including our own fluctuate widely for reasons that may be unrelated to the operating performance. Future Sales of Our Common Stock Could Cause the Price of Our Shares to Decline. As of October 31, 2000, we had 16,231,791 shares of Common Stock outstanding. Of this amount, the 9,786,670 shares held by William Smith and Rhonda 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 Smith, Rhonda 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. NEW 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 will be applied prospectively as of July 1, 2000. The adoption of this interpretation did not have an impact on the Company's consolidated financial statements. In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes new accounting and reporting standards for derivative financial instruments and for hedging activities. SFAS No. 133 requires the Company to measure all derivatives at fair value and to recognize them in the balance sheet as an asset or liability, depending on the Company's rights or obligations under the applicable derivative contract. In June 1999, the FASB issued SFAS No. 137, which deferred the effective date of adoption of SFAS No. 133 for one year. The Company will adopt SFAS No. 133 no later than the first quarter of fiscal year 2001. Adoption of the new method of accounting for derivatives and hedging activities is not expected to have a material impact on the Company's financial position. 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. Implementation of SAB 101, which was delayed by the issuance of SAB 101A on March 27, 2000 and SAB 101B on June 26, 2000, is required by the fourth quarter of 2000. The Company is currently evaluating the impact, if any, SAB 101 will have on its financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Smith Micro's financial instruments include cash and cash equivalents. At September 30, 2000, the carrying values of our financial instruments approximated fair values based on current market prices and rates. 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 September 30, 2000. 22 23 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS In September 2000, the company acquired the eBusiness consulting practices of QuickStart Technologies,, Inc. for 100,000 shares of Smith Micro Common Stock, plus up to a maximum of $150,000 to be paid in accordance with an earn out provision expiring on November 30, 2000. In July 2000, the Company acquired the CheckIt line of software products from Touchstone Software Corporation and eSupport.Com, Inc., a wholly owned subsidiary of TouchStone Software Corporation for 108,000 shares of Smith Micro Common Stock and $25,000 in cash. None of the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any public offering and the company believes that each transaction was exempt from the registration requirements of the Securities Act by virtue of Section 4(2) thereof or Regulation D promulgated thereunder. The recipients in such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the share certificates issued in such transactions. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) 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
23 24
Exhibit No. Title Method of Filing ------- ----- ---------------- Registrant's Registration Statement No. 33-95096 10.2 1995 Stock Option/Stock Issuance Filed Herewith Plan, as amended. 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 No. 33-95096
24 25
Exhibit No. Title Method of Filing ------- ----- ---------------- the Company and Pioneer Bank. 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 between the Company and T&C No. 33-95096 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 to the
25 26
Exhibit No. Title Method of Filing ------- ----- ---------------- Lease, dated November 5, 1999, by Registrant's Annual Report on Form and between the Company and World 10-K for the fiscal year ended December Outreach Center. 31, 1999 27 Financial Data Schedule. Filed Herewith
(B) REPORTS ON FORM 8-K No such reports were filed during the three months ended September 30, 2000. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SMITH MICRO SOFTWARE, INC. November 13, 2000 By /s/ WILLIAM W. SMITH, JR. ------------------------- William W. Smith, Jr. Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) November 13, 2000 By /s/ RICHARD C. BJORKMAN ----------------------- Richard C. Bjorkman Chief Financial Officer (Principal Financial Officer) 26 27 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 Filed Herewith Plan, as amended. 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.
28
Exhibit No. Title Method of Filing ------- ----- ---------------- 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 between the Company and T&C No. 33-95096 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.
29
Exhibit No. Title Method of Filing ------- ----- ---------------- 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 27 Financial Data Schedule. Filed Herewith
EX-10.2 2 a67365ex10-2.txt EXHIBIT 10.2 1 Exhibit 10.2 SMITH MICRO SOFTWARE, INC. 1995 STOCK OPTION/STOCK ISSUANCE PLAN (AS AMENDED AND RESTATED THROUGH MARCH 31, 2000) ARTICLE ONE GENERAL I. PURPOSE OF THE PLAN A. This 1995 Stock Option/Stock Issuance Plan (the "Plan") is intended to promote the interests of Smith Micro Software, Inc., a Delaware corporation (the "Corporation"), by providing eligible individuals with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in the service of the Corporation (or its parent or subsidiary corporations). B. The Discretionary Option Grant and Stock Issuance Programs of the Plan became effective immediately upon the adoption of the Plan by the Corporation's Board of Directors. Such date is hereby designated the "Plan Effective Date." The Automatic Option Grant Program, however, became effective on the date of execution of the underwriting agreement in connection with the initial public offering of the Common Stock. Such date is hereby designated as the "Automatic Option Grant Program Effective Date." II. DEFINITIONS A. For purposes of the Plan, the following definitions shall be in effect: BOARD: the Corporation's Board of Directors. CHANGE IN CONTROL: a change in ownership or control of the Corporation effected through either of the following transactions: (i) the acquisition directly or indirectly by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders which the Board does not recommend such stockholders to accept; or (ii) a change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least 2 a majority of the Board members described in clause (A) who were still in office at the time such election or nomination was approved by the Board. CODE: the Internal Revenue Code of 1986, as amended. COMMON STOCK: shares of the Corporation's common stock. CORPORATE TRANSACTION: any of the following stockholder-approved transactions to which the Corporation is a party: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. DISABILITY: the inability of an individual to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which is expected to result in death or has lasted or can be expected to last for a continuous period of not less than twelve (12) months. However, for purposes of the Automatic Option Grant Program, Disability shall mean the inability of the non-employee Board member to perform his or her usual duties as a Board member by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. EMPLOYEE: an individual who performs services while in the employ of the Corporation or one or more parent or subsidiary corporations, subject to the control and direction of the employer entity not only as to the work to be performed but also as to the manner and method of performance. EXERCISE DATE: the date on which the Corporation shall have received written notice of the option exercise. FAIR MARKET VALUE: the Fair Market Value per share of Common Stock determined in accordance with the following provisions: - If the Common Stock is not at the time listed or admitted to trading on any national securities exchange but is traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market. If there is no reported closing selling price for the Common Stock on the date in question, then the closing selling price on the last preceding date for which such quotation exists shall be determinative of Fair Market Value. 2 3 - If the Common Stock is at the time listed or admitted to trading on any national securities exchange, then the Fair Market Value shall be the closing selling price per share on the date in question on the exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no reported sale of Common Stock on such exchange on the date in question, then the Fair Market Value shall be the closing selling price on the exchange on the last preceding date for which such quotation exists. - If the Common Stock is on the date in question neither listed nor admitted to trading on any national securities exchange nor traded on the Nasdaq National Market, then the Fair Market Value of the Common Stock on such date shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate. INCENTIVE OPTION: a stock option which satisfies the requirements of Code Section 422. INVOLUNTARY TERMINATION: the termination of the Service of any individual which occurs by reason of: (i) such individual's involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or (ii) such individual's voluntary resignation following (A) a change in his or her position with the Corporation which materially reduces his or her level of responsibility, (B) a reduction in his or her level of compensation (including base salary, fringe benefits and any non-discretionary and objective-standard incentive payment or bonus award) by more than fifteen percent (15%) or (C) a relocation of such individual's place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Corporation without the individual's consent. MISCONDUCT: the commission of any act of fraud, embezzlement or dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any parent or subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or any parent or subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any parent or subsidiary) may consider as grounds for the dismissal or discharge of any Optionee, Participant or other person in the Service of the Corporation (or any parent or subsidiary). 1934 ACT: the Securities Exchange Act of 1934, as amended from time to time. NON-STATUTORY OPTION: a stock option not intended to meet the requirements of Code Section 422. OPTIONEE: a person to whom an option is granted under the Discretionary Option Grant or Automatic Option Grant Program. 3 4 PARTICIPANT: a person who is issued Common Stock under the Stock Issuance Program. PLAN ADMINISTRATOR: the particular entity, whether the Primary Committee, the Board or the Secondary Committee, which is authorized to administer the Discretionary Option Grant and Stock Issuance Programs with respect to one or more classes of eligible persons, to the extent such entity is carrying out its administrative functions under those programs with respect to the persons under its jurisdiction. PRIMARY COMMITTEE: the committee of two (2) or more non-employee Board members appointed by the Board to administer the Discretionary Option Grant and Stock Issuance Programs with respect to Section 16 Insiders. SECONDARY COMMITTEE: a committee of one (1) or more Board members appointed by the Board to administer the Discretionary Option Grant and Stock Issuance Programs with respect to eligible persons other than Section 16 Insiders. SECTION 12(g) REGISTRATION DATE: the date on which the initial registration of the Common Stock under Section 12(g) of the 1934 Act became effective. SECTION 16 INSIDER: an officer or director of the Corporation subject to the short-swing profit liabilities of Section 16 of the 1934 Act. SERVICE: the performance of services on a periodic basis for the Corporation (or any parent or subsidiary corporation) in the capacity of an Employee, a non-employee member of the board of directors or an independent consultant or advisor, except to the extent otherwise specifically provided in the applicable stock option or stock issuance agreement. 10% STOCKHOLDER: the owner of stock (as determined under Code Section 424(d)) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation or any parent or subsidiary corporation. B. The following provisions shall be applicable in determining the parent and subsidiary corporations of the Corporation: Any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation shall be considered to be a parent of the Corporation, provided each such corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Each corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation shall be considered to be a subsidiary of the Corporation, provided each such corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 4 5 III. STRUCTURE OF THE PLAN A. Stock Programs. The Plan shall be divided into three (3) separate components: the Discretionary Option Grant Program specified in Article Two, the Stock Issuance Program specified in Article Three and the Automatic Option Grant Program specified in Article Four. Under the Discretionary Option Grant Program, eligible individuals may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock in accordance with the provisions of Article Two. Under the Stock Issuance Program, eligible individuals may be issued shares of Common Stock directly, either through the immediate purchase of such shares at a price not less than one hundred percent (100%) of the Fair Market Value of the shares at the time of issuance or as a bonus for services rendered the Corporation or the Corporation's attainment of financial objectives. Under the Automatic Option Grant Program, each individual serving as a non-employee Board member on the Automatic Option Grant Program Effective Date and each individual who first joins the Board as a non-employee director at any time after such Effective Date shall at periodic intervals receive option grants to purchase shares of Common Stock in accordance with the provisions of Article Four, with the first such grants to be made on the Automatic Option Grant Program Effective Date. B. General Provisions. Unless the context clearly indicates otherwise, the provisions of Articles One and Five shall apply to the Discretionary Option Grant Program, the Automatic Option Grant Program and the Stock Issuance Program and shall accordingly govern the interests of all individuals under the Plan. IV. ADMINISTRATION OF THE PLAN A. The Board shall have the authority to administer the Discretionary Option Grant and Stock Issuance Programs with respect to Section 16 Insiders but may delegate such authority in whole or in part to the Primary Committee. B. Members of the Primary Committee shall serve for such period of time as the Board may determine and may be removed by the Board at any time. The Board may also at any time terminate the functions of any Secondary Committee and reassume all powers and authority previously delegated to such committee. C. Each Plan Administrator shall, within the scope of its administrative functions under the Plan, have full power and authority (subject to the provisions of the Plan) to establish rules and regulations for the proper administration of the Discretionary Option Grant and Stock Issuance Programs and to make such determinations under, and issue such interpretations of, the provisions of such programs and any outstanding options or stock issuances thereunder as it may deem necessary or advisable. Decisions of the Plan Administrator shall be final and binding on all parties who have an interest in the Discretionary Option Grant and Stock Issuance Programs or any option or share issuance thereunder. D. Service on the Primary Committee or the Secondary Committee shall constitute service as a Board member, and members of each such committee shall accordingly be entitled to full indemnification and reimbursement as Board members for their service on such committee. No member of the Primary Committee or the Secondary Committee shall be liable 5 6 for any act or omission made in good faith with respect to the Plan or any option grants or stock issuances under the Plan. E. Administration of the Automatic Option Grant Program shall be self-executing in accordance with the express terms and conditions of Article Four, and the Plan Administrator shall exercise no discretionary functions with respect to option grants made pursuant to that program. V. OPTION GRANTS AND STOCK ISSUANCES A. The persons eligible to participate in the Discretionary Option Grant Program under Article Two and the Stock Issuance Program under Article Three shall be limited to the following: (i) officers and other key employees of the Corporation (or its parent or subsidiary corporations) who render services which contribute to the management, growth and financial success of the Corporation (or its parent or subsidiary corporations); (ii) non-employee members of the Board; and (iii) those consultants or other independent advisors who provide valuable services to the Corporation (or its parent or subsidiary corporations). B. Only non-employee Board members shall be eligible to receive automatic option grants pursuant to Article Four. C. The Plan Administrator shall have full authority to determine, (i) with respect to the option grants made under the Discretionary Option Grant Program, which eligible individuals are to receive option grants, the time or times when such options are to be granted, the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time or times at which each granted option is to become exercisable and the maximum term for which the option may remain outstanding and (ii), with respect to stock issuances under the Stock Issuance Program, the number of shares to be issued to each Participant, the vesting schedule (if any) to be applicable to the issued shares and the consideration for which such shares are to be issued. VI. STOCK SUBJECT TO THE PLAN A. Shares of Common Stock shall be available for issuance under the Plan and shall be drawn from either the Corporation's authorized but unissued shares of Common Stock or from reacquired shares of Common Stock, including shares repurchased by the Corporation on the open market. The maximum number of shares of Common Stock which may be issued over the term of the Plan shall not exceed 2,750,000 shares, subject to adjustment from time to time in accordance with the provisions of this Section VI. 6 7 B. In no event shall the aggregate number of shares of Common Stock for which any one individual participating in the Plan may be granted stock options and direct stock issuances exceed 400,000 shares per calendar year. C. Should one or more outstanding options under this Plan expire or terminate for any reason prior to exercise in full (including any option cancelled in accordance with the cancellation-regrant provisions of Section IV of Article Two of the Plan), then the shares subject to the portion of each option not so exercised shall be available for subsequent option grants under the Plan. Unvested shares issued under the Plan and subsequently repurchased by the Corporation pursuant to its repurchase rights under the Plan, shall be added back to the number of shares of Common Stock available for subsequent issuance under the Plan. In addition, should the exercise price of an outstanding option under the Plan be paid with shares of Common Stock or should shares of Common Stock otherwise issuable under the Plan be withheld by the Corporation in satisfaction of the withholding taxes incurred in connection with the exercise of an outstanding option under the Plan or the vesting of a direct share issuance made under the Plan, then the number of shares of Common Stock available for issuance under the Plan shall be reduced by the gross number of shares for which the option is exercised or which vest under the share issuance, and not by the net number of shares of Common Stock actually issued to the holder of such option or share issuance. D. Should any change be made to the Common Stock issuable under the Plan by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, then appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plan, (ii) the maximum number and/or class of securities for which any one individual participating in the Plan may be granted stock options and direct stock issuances in the aggregate per calendar year, (iii) the number and/or class of securities for which automatic option grants are to be subsequently made per eligible non-employee Board member under the Automatic Option Grant Program and (iv) the number and/or class of securities and price per share in effect under each option outstanding under either the Discretionary Option Grant or Automatic Option Grant Program. Such adjustments to the outstanding options are to be effected in a manner which shall preclude the enlargement or dilution of rights and benefits under such options. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. 7 8 ARTICLE TWO DISCRETIONARY OPTION GRANT PROGRAM I. TERMS AND CONDITIONS OF OPTIONS Options granted pursuant to the Discretionary Option Grant Program shall be authorized by action of the Plan Administrator and may, at the Plan Administrator's discretion, be either Incentive Options or Non-Statutory Options. Individuals who are not Employees of the Corporation or its parent or subsidiary corporations may only be granted Non-Statutory Options. Each granted option shall be evidenced by one or more instruments in the form approved by the Plan Administrator; provided, however, that each such instrument shall comply with the terms and conditions specified below. Each instrument evidencing an Incentive Option shall, in addition, be subject to the applicable provisions of Section II of this Article Two. A. Exercise Price. 1. The exercise price per share shall be fixed by the Plan Administrator in accordance with the following provisions: (i) The exercise price per share of Common Stock subject to an Incentive Option shall in no event be less than one hundred percent (100%) of the Fair Market Value of such Common Stock on the grant date. (ii) The exercise price per share of Common Stock subject to a Non-Statutory Option shall in no event be less than eighty-five percent (85%) of the Fair Market Value of such Common Stock on the grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall, subject to the provisions of Section I of Article Five, be payable in cash or check made payable to the Corporation. Should the Corporation's outstanding Common Stock be registered under Section 12(g) of the 1934 Act at the time the option is exercised, then the exercise price may also be paid as follows: (i) in shares of Common Stock held by the Optionee for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or (ii) to the extent the option is exercised for vested shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable written instructions (a) to a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the 8 9 purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such purchase and (b) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale transaction. 3. Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. B. Term and Exercise of Options. Each option granted under this Discretionary Option Grant Program shall be exercisable at such time or times and during such period as is determined by the Plan Administrator and set forth in the instrument evidencing the grant. No such option, however, shall have a maximum term in excess of ten (10) years from the grant date. During the lifetime of the Optionee, Incentive Options shall be exercisable only by the Optionee and shall not be assignable or transferable by the Optionee other than by will or by the laws of descent and distribution following the Optionee's death. However, a Non-Statutory Option may be assigned in whole or in part during the Optionee's lifetime to one or more members of the Optionee's immediate family or to a trust established exclusively for one or more such family members. The assigned option may only be exercised by the person or persons who acquire a proprietary interest in the option pursuant to the assignment. The terms applicable to the assigned option (or portion thereof) shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. C. Termination of Service. 1. Except to the extent otherwise provided pursuant to subsection C.2 below, the following provisions shall govern the exercise period applicable to any options held by the Optionee at the time of cessation of Service or death: (i) Should the Optionee cease to remain in Service for any reason other than death or Disability, then the period during which each outstanding option held by such Optionee is to remain exercisable shall be limited to the three (3)-month period following the date of such cessation of Service. (ii) Should such Service terminate by reason of Disability, then the period during which each outstanding option held by the Optionee is to remain exercisable shall be limited to the twelve (12)-month period following the date of such cessation of Service. (iii) Should the Optionee die while holding one or more outstanding options, then the period during which each such option is to remain exercisable shall be limited to the twelve (12)-month period following the date of the Optionee's death. During such limited period, the option may be exercised by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. 9 10 (iv) Should the Optionee's Service be terminated for Misconduct, then all outstanding options held by the Optionee shall terminate immediately and cease to be outstanding. (v) Under no circumstances, however, shall any such option be exercisable after the specified expiration date of the option term. (vi) During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable on the date of the Optionee's cessation of Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be exercisable for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Service for any reason, terminate and cease to be outstanding with respect to any option shares for which the option is not at that time exercisable or in which the Optionee is not otherwise at that time vested. 2. The Plan Administrator shall have complete discretion, exercisable either at the time the option is granted or at any time while the option remains outstanding, - to extend the period of time for which the option is to remain exercisable following the Optionee's cessation of Service or death from the limited period in effect under subsection C.1 of this Article Two to such greater period of time as the Plan Administrator shall deem appropriate; provided, that in no event shall such option be exercisable after the specified expiration date of the option term; and/or - to permit one or more options held by the Optionee under this Article Two to be exercised, during the limited post-Service exercise period applicable under this paragraph C., not only with respect to the number of vested shares of Common Stock for which each such option is exercisable at the time of the Optionee's cessation of Service but also with respect to one or more subsequent installments in which the Optionee would otherwise have vested had such cessation of Service not occurred. D. Stockholder Rights. An Optionee shall have no stockholder rights with respect to any shares covered by the option until such individual shall have exercised the option, paid the exercise price and become the holder of record of the purchased shares. E. Unvested Shares. The Plan Administrator shall have the discretion to authorize the issuance of unvested shares of Common Stock under this Discretionary Option Grant Program. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase, at the exercise price paid per share, all or (at the discretion of the Corporation and with the consent of the Optionee) any of those unvested shares. The terms and conditions upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the agreement evidencing such repurchase right. 10 11 F. First Refusal Rights. Until such time as the Corporation's outstanding shares of Common Stock are first registered under Section 12(g) of the 1934 Act, the Corporation shall have the right of first refusal with respect to any proposed sale or other disposition by the Optionee (or any successor in interest by reason of purchase, gift or other transfer) of any shares of Common Stock issued under this Discretionary Option Grant Program. Such right of first refusal shall be exercisable in accordance with the terms and conditions established by the Plan Administrator and set forth in the agreement evidencing such right. II. INCENTIVE OPTIONS Incentive Options may only be granted to individuals who are Employees, and the terms and conditions specified below shall be applicable to all Incentive Options granted under the Plan. Except as modified by the provisions of this Section II, all the provisions of Articles One, Two and Five shall be applicable to Incentive Options. Any Options specifically designated as Non-Statutory shall not be subject to such terms and conditions. A. Dollar Limitation. The aggregate Fair Market Value (determined as of the respective date or dates of grant) of the Common Stock for which one or more options granted to any Employee under this Plan (or any other option plan of the Corporation or its parent or subsidiary corporations) may for the first time become exercisable as incentive stock options under the Federal tax laws during any one calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as incentive stock options under the Federal tax laws shall be applied on the basis of the order in which such options are granted. Should the number of shares of Common Stock for which any Incentive Option first becomes exercisable in any calendar year exceed the applicable One Hundred Thousand Dollar ($100,000) limitation, then that option may nevertheless be exercised in that calendar year for the excess number of shares as a Non-Statutory Option under the Federal tax laws. B. 10% Stockholder. If any individual to whom an Incentive Option is granted is a 10% Stockholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the grant date, and the option term shall not exceed five (5) years measured from the grant date. III. CORPORATE TRANSACTION/CHANGE IN CONTROL A. In the event of any Corporate Transaction, each outstanding option shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. However, an outstanding option shall not so accelerate if and to the extent: (i) such option is, in connection with the Corporate Transaction, either to be assumed by the successor corporation (or parent thereof) or to be replaced with a comparable option to purchase shares of the capital stock of the successor corporation (or parent thereof), (ii) such option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing on the unvested option shares at the time of the 11 12 Corporate Transaction and provides for subsequent payout in accordance with the same vesting schedule applicable to such option or (iii) the acceleration of such option is subject to other limitations imposed by the Plan Administrator at the time of the option grant. The determination of option comparability under clause (i) above shall be made by the Plan Administrator, and its determination shall be final, binding and conclusive. B. All outstanding repurchase rights shall also terminate automatically, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent: (i) those repurchase rights are to be assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued. C. Immediately following the consummation of the Corporate Transaction, all outstanding options shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof). D. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments to reflect such Corporate Transaction shall also be made to (i) the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same, (ii) the maximum number and/or class of securities available for issuance under the remaining term of the Plan and (iii) the maximum number and/or class of securities for which any one person may be granted stock options and direct stock issuances under the Plan per calendar year. E. The Plan Administrator shall have full power and authority to grant options under the Discretionary Option Grant Program which will automatically accelerate in the event the Optionee's Service subsequently terminates by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Corporate Transaction in which those options are assumed or replaced and do not otherwise accelerate. Any options so accelerated shall remain exercisable for fully-vested shares until the earlier of (i) the expiration of the option term or (ii) the expiration of the one (1)-year period measured from the effective date of the Involuntary Termination. In addition, the Plan Administrator may provide that one or more of the Corporation's outstanding repurchase rights with respect to shares held by the Optionee at the time of such Involuntary Termination shall immediately terminate, and the shares subject to those terminated repurchase rights shall accordingly vest in full. F. The Plan Administrator shall have full power and authority to grant options under the Discretionary Option Grant Program which will automatically accelerate in the event the Optionee's Service subsequently terminates by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Change in Control. Each option so accelerated shall remain exercisable for fully-vested shares until the earlier of (i) the expiration of the option term or (ii) the expiration of the one (1)-year 12 13 period measured from the effective date of the Involuntary Termination. In addition, the Plan Administrator may provide that one or more of the Corporation's outstanding repurchase rights with respect to shares held by the Optionee at the time of such Involuntary Termination shall immediately terminate, and the shares subject to those terminated repurchase rights shall accordingly vest in full. G. The portion of any Incentive Option accelerated in connection with a Corporate Transaction or Change in Control shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar limitation is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such option shall be exercisable as a Non-Statutory Option under the Federal tax laws. H. The outstanding options shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. IV. CANCELLATION AND REGRANT OF OPTIONS The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected Optionees, the cancellation of any or all outstanding options under this Article Two and to grant in substitution new options under the Plan covering the same or different numbers of shares of Common Stock but with an exercise price per share not less than (i) one hundred percent (100%) of the Fair Market Value per share of Common Stock on the new grant date in the case of a grant of an Incentive Option, (ii) one hundred ten percent (110%) of such Fair Market Value in the case of a grant to a 10% Stockholder or (iii) eighty-five percent (85%) of such Fair Market Value in the case of all other grants. 14 14 ARTICLE THREE STOCK ISSUANCE PROGRAM I. TERMS AND CONDITIONS OF STOCK ISSUANCES Shares of Common Stock may be issued under the Stock Issuance Program directly without any intervening option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement which complies with the terms specified below. A. The shares shall be issued for such valid consideration under the Delaware General Corporation Law as the Plan Administrator may deem appropriate, but the value of such consideration as determined by the Plan Administrator shall not be less than one hundred percent (100%) of the Fair Market Value of the issued shares of Common Stock on the issuance date. B. The Plan Administrator shall have full power and authority to issue shares of Common Stock under the Stock Issuance Program as a bonus for past services rendered to the Corporation (or any parent or subsidiary). All such bonus shares shall be fully and immediately vested upon issuance. C. All other shares of Common Stock authorized for issuance under the Stock Issuance Program by the Plan Administrator shall have a minimum vesting schedule determined in accordance with the following requirements: (i) For any shares which are to vest solely by reason of Service to be performed by the Participant, the Plan Administrator shall impose a minimum Service period of at least two (2) years measured from the issue date of such shares. (ii) For any shares which are to vest upon the Participant's completion of a designated Service requirement and the Corporation's attainment of one or more prescribed performance milestones, the Plan Administrator shall impose a minimum Service period of at least one (1) year measured from the issue date of such shares. D. Any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) which the Participant may have the right to receive with respect to the Participant's unvested shares of Common Stock by reason of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration shall be issued subject to (i) the same vesting requirements applicable to the Participant's unvested shares of Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate. E. The Participant shall have full stockholder rights with respect to any shares of Common Stock issued to the Participant under the Stock Issuance Program, whether or not the 14 15 Participant's interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. F. Should the Participant cease to remain in Service while holding one or more unvested shares of Common Stock issued under the Stock Issuance Program or should the performance objectives not be attained with respect to one or more such unvested shares of Common Stock, then those shares shall be immediately surrendered to the Corporation for cancellation, and the Participant shall have no further stockholder rights with respect to those shares. To the extent the surrendered shares were previously issued to the Participant for consideration paid in cash or cash equivalent (including the Participant's purchase-money indebtedness), the Corporation shall repay to the Participant the cash consideration paid for the surrendered shares and shall cancel the unpaid principal balance of any outstanding purchase-money note of the Participant attributable to such surrendered shares. G. The Plan Administrator shall have full power and authority, exercisable upon a Participant's termination of Service, to waive the surrender and cancellation of any or all unvested shares of Common Stock (or other assets attributable thereto) at the time held by that Participant, if the Plan Administrator determines such waiver to be an appropriate severance benefit for the Participant. II. CORPORATE TRANSACTION/CHANGE IN CONTROL A. All of the Corporation's outstanding repurchase/cancellation rights under the Stock Issuance Program shall terminate automatically, and all the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent (i) those rights are assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed in the Stock Issuance Agreement. B. The Plan Administrator shall have the discretionary authority to structure one or more of the Corporation's repurchase/cancellation rights under the Stock Issuance Program in such manner that those rights shall automatically terminate, and all the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event the Participant's Service should subsequently terminate by reason of an Involuntary Termination within eighteen (18) months following the effective date of any Corporate Transaction in which those rights are assigned to the successor corporation (or parent thereof). C. The Plan Administrator shall have the discretionary authority to structure one or more of the Corporation's repurchase/cancellation rights under the Stock Issuance Program in such manner that those rights shall automatically terminate, and all the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event the Participant's Service should subsequently terminate by reason of an Involuntary Termination within eighteen (18) months following the effective date of any Change in Control. 15 16 III. SHARE ESCROW/LEGENDS Unvested shares may, in the Plan Administrator's discretion, be held in escrow by the Corporation until the Participant's interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing those unvested shares. 16 17 ARTICLE FOUR AUTOMATIC OPTION GRANT PROGRAM I. ELIGIBILITY The individuals eligible to receive automatic option grants pursuant to the provisions of this Article Four program shall be limited to those individuals who are serving as non-employee Board members on the Automatic Option Grant Program Effective Date or who are first elected or appointed as non-employee Board members on or after such Effective Date, whether through appointment by the Board or election by the Corporation's stockholders. II. TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS A. Grant Dates. Option grants shall be made under this Article Four on the dates specified below: 1. Initial Grant. Each individual serving as a non-employee Board member on the Automatic Option Grant Program Effective Date and each individual who is first elected or appointed as a non-employee Board member after such Effective Date shall automatically be granted, on the Automatic Option Grant Program Effective Date or on the date of such initial election or appointment (as the case may be), a Non-Statutory Option to purchase 10,000 shares of Common Stock upon the terms and conditions of this Article Four. In no event, however, shall a non-employee Board member be eligible to receive such an initial option grant if such individual has at any time been in the prior employ of the Corporation (or any parent or subsidiary corporation). 2. Annual Grant. On the date of each Annual Stockholders Meeting, beginning with the first Annual Meeting held after the Section 12(g) Registration Date, each individual who will continue to serve as a non-employee Board member shall automatically be granted, whether or not such individual is standing for re-election as a Board member at that Annual Meeting, a Non-Statutory Option to purchase an additional 2,500 shares of Common Stock upon the terms and conditions of this Article Four, provided he or she has served as a non-employee Board member for at least six (6) months prior to the date of such Annual Meeting. Non-employee Board members who have previously been in the employ of the Corporation (or any parent or subsidiary) shall be eligible to receive such annual option grants over their continued period of Board service through one or more Annual Stockholders Meetings. 3. No Limitation. There shall be no limit on the number of shares for which any one non-employee Board member may be granted stock options under this Article Four over his or her period of Board service. B. Exercise Price. The exercise price per share of Common Stock subject to each automatic option grant made under this Article Four shall be equal to one hundred percent (100%) of the Fair Market Value per share of Common Stock on the automatic grant date. 17 18 C. Payment. The exercise price shall be payable in one of the alternative forms specified below: (i) full payment in cash or check drawn to the Corporation's order; (ii) full payment in shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date (as such term is defined below); (iii) full payment in a combination of shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date and cash or check drawn to the Corporation's order; or (iv) to the extent the option is exercised for vested shares, full payment through a sale and remittance procedure pursuant to which the Optionee shall provide irrevocable written instructions to (I) a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares and (II) the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale transaction. Except to the extent the sale and remittance procedure specified above is used for the exercise of the option for vested shares, payment of the exercise price for the purchased shares must accompany the exercise notice. D. Option Term. Each automatic grant under this Article Four shall have a maximum term of ten (10) years measured from the automatic grant date. E. Exercisability/Vesting. Each automatic grant shall be immediately exercisable for any or all of the option shares. However, any shares purchased under the option shall be subject to repurchase by the Corporation, at the exercise price paid per share, upon the Optionee's cessation of Board service prior to vesting in those shares in accordance with the applicable schedule below: Initial Grant. Each initial 10,000-share automatic grant shall vest, and the Corporation's repurchase right shall lapse, in a series of four (4) equal and successive annual installments over the Optionee's period of continued service as a Board member, with the first such installment to vest upon Optionee's completion of one (1) year of Board service measured from the automatic grant date. Annual Grant. Each additional 2,500-share automatic grant shall vest, and the Corporation's repurchase right shall lapse, upon the Optionee's completion of one (1) year of Board service measured from the automatic grant date. 18 19 F. Limited Transferability. During the lifetime of the Optionee, each automatic option grant may be assigned in whole or in part to one or more members of the Optionee's immediate family or to a trust established exclusively for one or more such family members. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the option pursuant to the assignment. The terms applicable to the assigned option (or portion thereof) shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. G. Effect of Termination of Board Membership. The following provisions shall govern the exercise of any outstanding options held by the Optionee under this Article Four at the time the Optionee ceases to serve as a Board member: (i) The Optionee (or, in the event of Optionee's death, the personal representative of the Optionee's estate or the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution) shall have a twelve (12)-month period following the date of such cessation of Board service in which to exercise each such option. However, each option shall, immediately upon the Optionee's cessation of Board service, terminate and cease to remain outstanding with respect to any option shares in which the Optionee is not vested on the date of such cessation of Board service. (ii) During the twelve (12)-month exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable at the time of the Optionee's cessation of Board service. However, should the Optionee cease to serve as a Board member by reason of death or Permanent Disability, then all shares at the time subject to the option shall immediately vest so that such option may, during the twelve (12)-month exercise period following such cessation of Board service, be exercised for all or any portion of such shares as fully-vested shares. (iii) In no event shall the option remain exercisable after the expiration of the option term. H. Stockholder Rights. The holder of an automatic option grant under this Article Three shall have none of the rights of a stockholder with respect to any shares subject to such option until such individual shall have exercised the option, paid the exercise price and become the holder of record of the purchased shares. I. Remaining Terms. The remaining terms and conditions of each automatic option grant shall be the same as the terms for option grants made under the Discretionary Option Grant Program. III. CORPORATE TRANSACTION/CHANGE IN CONTROL A. In the event of any Corporate Transaction, the shares of Common Stock at the time subject to each outstanding option under this Article Four but not otherwise vested shall 19 20 automatically vest in full so that each such option shall, immediately prior to the specified effective date for the Corporate Transaction, become fully exercisable for all of the shares of Common Stock at the time subject to that option and may be exercised for all or any portion of those shares as fully vested shares of Common Stock. Immediately following the consummation of the Corporate Transaction, all automatic option grants under this Article Four shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation or parent thereof. B. Each outstanding option under this Article Four which is assumed in connection with a Corporate Transaction outstanding shall be appropriately adjusted, immediately after such Corporate Transaction, to apply and pertain to the number and class of securities which would have been issuable to the Optionee in the consummation of such Corporate Transaction, had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to (i) the class and number of securities available for issuance under the Plan following the consummation of such Corporate Transaction, and (ii) the exercise price payable per share, provided the aggregate exercise price payable for such securities shall remain the same. C. In connection with any Change in Control of the Corporation, the shares of Common Stock at the time subject to each outstanding option under this Article Four but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the specified effective date for the Change in Control, become fully exercisable for all of the shares of Common Stock at the time subject to that option and may be exercised for all or any portion of those shares as fully vested shares of Common Stock. Each such option shall remain so exercisable for all the option shares following the Change in Control, until the expiration or sooner termination of the option term. D. The automatic option grants outstanding under this Article Four shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 20 21 ARTICLE FIVE MISCELLANEOUS I. LOANS OR INSTALLMENT PAYMENTS A. The Plan Administrator may, in its discretion, assist any Optionee or Participant (including an Optionee or Participant who is an officer of the Corporation) in the exercise of one or more options granted to such Optionee under the Discretionary Option Grant Program or the purchase of one or more shares issued to such Participant under the Stock Issuance Program, including the satisfaction of any Federal, state and local income and employment tax obligations arising therefrom, by (i) authorizing the extension of a loan from the Corporation to such Optionee or Participant or (ii) permitting the Optionee or Participant to pay the exercise price or purchase price for the purchased Common Stock in installments over a period of years. The terms of any loan or installment method of payment (including the interest rate and terms of repayment) shall be upon such terms as the Plan Administrator specifies in the applicable option or issuance agreement or otherwise deems appropriate at the time such exercise price or purchase price becomes due and payable. Loans or installment payments may be authorized with or without security or collateral. In all events, the maximum credit available to the Optionee or Participant may not exceed the option or purchase price of the acquired shares (less the par value of such shares) plus any Federal, state and local income and employment tax liability incurred by the Optionee or Participant in connection with the acquisition of such shares. B. The Plan Administrator may, in its absolute discretion, determine that one or more loans extended under this financial assistance program shall be subject to forgiveness in whole or in part upon such terms and conditions as the Plan Administrator may deem appropriate. II. AMENDMENT OF THE PLAN AND AWARDS A. The Board has complete and exclusive power and authority to amend or modify the Plan (or any component thereof) in any or all respects whatsoever. However, no such amendment or modification shall adversely affect rights and obligations with respect to options at the time outstanding under the Plan, nor adversely affect the rights of any Participant with respect to Common Stock issued under the Stock Issuance Program prior to such action, unless the Optionee or Participant consents to such amendment. In addition, certain amendments to the Plan may require stockholder approval pursuant to applicable laws or regulations. B. (i) Options to purchase shares of Common Stock may be granted under the Discretionary Option Grant Program and (ii) shares of Common Stock may be issued under the Stock Issuance Program, which are in both instances in excess of the number of shares then available for issuance under the Plan, provided any excess shares actually issued under the Discretionary Option Grant Program or the Stock Issuance Program are held in escrow until stockholder approval is obtained for a sufficient increase in the number of shares available for issuance under the Plan. If such stockholder approval is not obtained within twelve (12) months after the date the first such excess option grants or excess share issuances are made, then (I) any 21 22 unexercised excess options shall terminate and cease to be exercisable and (II) the Corporation shall promptly refund the purchase price paid for any excess shares actually issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow. III. TAX WITHHOLDING A. The Corporation's obligation to deliver shares of Common Stock upon the exercise of stock options for such shares or the vesting of such shares under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income tax and employment tax withholding requirements. B. The Plan Administrator may, in its discretion and in accordance with the provisions of this Section III of this Article Five and such supplemental rules as the Plan Administrator may from time to time adopt (including the applicable safe-harbor provisions of Rule 16b-3 of the Securities and Exchange Commission), provide any or all holders of Non-Statutory Options (other than the automatic grants made pursuant to Article Four of the Plan) or unvested shares under the Plan with the right to use shares of Common Stock in satisfaction of all or part of the Federal, state and local income and employment tax liabilities incurred by such holders in connection with the exercise of their options or the vesting of their shares (the "Taxes"). Such right may be provided to any such holder in either or both of the following formats: - The holder of the Non-Statutory Option or unvested shares may be provided with the election to have the Corporation withhold, from the shares of Common Stock otherwise issuable upon the exercise of such Non-Statutory Option or the vesting of such shares, a portion of those shares with an aggregate Fair Market Value equal to the percentage of the applicable Taxes (not to exceed one hundred percent (100%)) designated by the holder. - The Plan Administrator may, in its discretion, provide the holder of the Non-Statutory Option or the unvested shares with the election to deliver to the Corporation, at the time the Non-Statutory Option is exercised or the shares vest, one or more shares of Common Stock previously acquired by such individual (other than in connection with the option exercise or share vesting triggering the Taxes) with an aggregate Fair Market Value equal to the percentage of the Taxes incurred in connection with such option exercise or share vesting (not to exceed one hundred percent (100%)) designated by the holder. IV. EFFECTIVE DATE AND TERM OF PLAN A. The Plan was initially adopted by the Board on May 25, 1995, the Plan Effective Date, and was subsequently approved by the Corporation's stockholders on July 10, 1995. B. On March 27, 1998, the Board amended the Plan to (i) increase the maximum number of shares of Common Stock authorized for issuance over the term of the Plan from 1,000,000 to 1,750,000 shares and (ii) render all Board members eligible to receive option grants under the Discretionary Option Grant Program and direct stock issuances under the Stock Issuance Program in effect under the Plan, (iii) allow unvested shares issued under the Plan and 22 23 subsequently repurchased by the Corporation at the option exercise or direct issue price paid per share to be reissued under the Plan, (iv) remove certain restrictions on the eligibility of non-employee Board members to serve as Plan Administrator and (v) effect a series of additional changes to the provisions of the Plan (including the stockholder approval requirements) in order to take advantage of amendments effected in 1996 to Rule 16b-3 of the Securities and Exchange Commission which exempts certain officer and director transactions under the Plan from the short-swing liability provisions of the federal securities laws. The stockholders approved such changes to the Plan at the May 14, 1998 Annual Meeting. The Automatic Option Grant Program of this Plan shall in no event become effective, and no grants shall be made under such program, until the Automatic Option Grant Program Effective Date. C. On March 31, 2000, the Board amended the Plan to increase the maximum number of shares of Common Stock authorized for issuance over the term of the Plan from 1,750,000 to 2,750,000 shares and to increase the limitation on the number of shares of Common Stock which may be granted to any one individual as stock options or direct stock issuances from 250,000 to 400,000 shares per calendar year. The stockholders approved such changes to the Plan at the May __, 2000 Annual Meeting. D. The Plan shall terminate upon the earlier of (i) May 24, 2005 or (ii) the date on which all shares available for issuance under the Plan shall have been issued pursuant to the exercise of the options granted under the Plan or the issuance of shares (whether vested or unvested) under the Stock Issuance Program. If the date of termination is determined under clause (i) above, then all option grants and unvested share issuances outstanding on such date shall thereafter continue to have force and effect in accordance with the provisions of the instruments evidencing such grants or issuance. V. REGULATORY APPROVALS The implementation of the Plan, the granting of any option under the Plan, the issuance of any shares under the Stock Issuance Program, and the issuance of Common Stock upon the exercise of the option grants made hereunder shall be subject to the Corporation's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options granted under it, and the Common Stock issued pursuant to it. VI. USE OF PROCEEDS Any cash proceeds received by the Corporation from the sale of shares pursuant to option grants or share issuances under the Plan shall be used for general corporate purposes. VII. NO EMPLOYMENT/SERVICE RIGHTS Neither the action of the Corporation in establishing the Plan, nor any action taken by the Plan Administrator hereunder, nor any provision of the Plan shall be construed so as to grant any individual the right to remain in the employ or service of the Corporation (or any parent or subsidiary corporation) for any period of specific duration, and the Corporation (or any parent or subsidiary corporation retaining the services of such individual) may terminate such individual's employment or service at any time and for any reason, with or without cause. 23 24 VIII. MISCELLANEOUS PROVISIONS A. Except as otherwise expressly provided under the Plan, the right to acquire Common Stock or other assets under the Plan may not be assigned, encumbered or otherwise transferred by any Optionee or Participant. B. The provisions of the Plan relating to the exercise of options and the vesting of shares shall be governed by the laws of the State of California as such laws are applied to contracts entered into and performed in such State. C. The provisions of the Plan shall inure to the benefit of, and be binding upon, the Corporation and its successors or assigns, whether by Corporate Transaction or otherwise, and the Participants and Optionees, the legal representatives of their respective estates, their respective heirs or legatees and their permitted assignees. 24 EX-27 3 a67365ex27.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-2000 JUL-01-2000 SEP-30-2000 7,174 0 4,966 2,076 349 12,678 518 2,180 16,420 3,004 0 0 0 16 24,788 16,420 3,374 3,374 985 985 3,349 0 0 (866) 7 (873) 0 0 0 (873) (0.05) (0.05)
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