10-Q 1 a72637e10-q.txt FORM 10-Q PERIOD ENDED MARCH 31, 2001 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 MARCH 31, 2001 [ ] 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 April 30, 2001, there were 16,232,416 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 March 31, 2001 (Unaudited) and December 31, 2000 3 Unaudited Consolidated Statements of Operations For The Three Months Ended March 31, 2001 and March 31, 2000 4 Unaudited Consolidated Statements of Cash Flows For The Three Months Ended March 31, 2001 and March 31, 2000 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
2 3 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SMITH MICRO SOFTWARE, INC. CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share and Per Share Data)
March 31, December 31, 2001 2000 -------- ------------ (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 5,709 $ 6,1789 Accounts receivable, net of allowances for doubtful accounts and other adjustments of $1,142 (2001) and $1,896 (2000) 3,755 4,750 Inventories, net 355 338 Prepaid expenses and other current assets 251 294 -------- -------- Total current assets 10,070 11,560 EQUIPMENT AND IMPROVEMENTS, net 696 737 OTHER ASSETS 52 89 INTANGIBLE ASSETS, net 2,704 2,928 -------- -------- $ 13,522 $ 15,314 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,062 $ 1,590 Accrued liabilities 1,647 1,297 -------- -------- Total current liabilities 2,709 2,887 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 shares issued and outstanding at March 31, 2001 and December 31, 2000, respectively 16 16 Additional paid-in capital 24,789 24,789 Accumulated deficit (13,992) (12,378) -------- -------- Total stockholders' equity 10,813 12,427 -------- -------- $ 13,522 $ 15,314 ======== ========
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 3 4 SMITH MICRO SOFTWARE, INC. UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Data)
THREE MONTHS ENDED March 31, UNAUDITED -------- -------- 2001 2000 NET REVENUES Software $ 2,629 $ 2,736 Consulting 616 338 -------- -------- Total Net Revenues 3,245 3,074 COST OF REVENUES Software 517 556 Consulting 521 57 -------- -------- Total Cost of Revenues 1,038 613 -------- -------- GROSS PROFIT 2,207 2,461 OPERATING EXPENSES: Selling and marketing 1,719 1,379 Research and development 1,007 937 General and administrative 1,058 877 -------- -------- Total operating expenses 3,784 3,193 -------- -------- OPERATING LOSS (1,577) (732) INTEREST INCOME, NET 32 112 -------- -------- LOSS BEFORE INCOME TAXES (1,545) (620) INCOME TAX EXPENSE 69 39 -------- -------- NET LOSS $ (1,614) $ (659) ======== ======== NET LOSS PER SHARE, basic and diluted $ (0.10) $ (0.04) ======== ======== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 16,232 15,759 ======== ========
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 4 5 SMITH MICRO SOFTWARE, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
For The Three Months Ended March 31, 2001 2000 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(1,614) $ (659) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 348 241 Provision for doubtful accounts and other adjustments to accounts receivable (754) 100 Change in operating accounts: Accounts receivable 1,749 (448) Inventories (17) 130 Prepaid expenses and other assets 44 31 Accounts payable and accrued liabilities (178) 293 ------- ------- Net cash used in operating activities (422) (312) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (47) (64) ------- ------- Net cash used in investing activities (47) (64) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the exercise of stock options -- 325 ------- ------- Net cash provided by financing activities -- 325 ------- ------- NET DECREASE IN CASH AND CASH EQUIVALENTS (469) (51) CASH AND CASH EQUIVALENTS, beginning of period 6,178 8,704 ------- ------- CASH AND CASH EQUIVALENTS, end of period $ 5,709 $ 8,653 ======= =======
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 5 6 SMITH MICRO SOFTWARE, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (In Thousands)
For The Three Months Ended March 31, 2001 2000 ---- ---- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for income taxes $ 4 $39 === ===
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 Description of Business - 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. Smith Micro develops and sells eCommerce, diagnostic utilities and communications software for personal and business use and provides professional services consulting. The Company's software includes products developed for the Internet and broadband technologies, products that enable eCommerce, Internet communications (voice-over-IP - VoIP), video conferencing, wireless communications, general system utility products and network fax along with traditional computer telephony. A substantial portion of the Company's sales are made direct to hardware connectivity device and personal computer manufacturers under Original Equipment Manufacturer (OEM) agreements. The Company sells its communication and diagnostic utility products through independent distributors and retail channels. As a result of the merger with Pacific Coast Software, Inc. (PCS), the Company entered into the eCommerce market. The Company's eCommerce products enable websites to be created with standard HTML text and provide fully automated payment processing and order accounting. Basis of Presentation - The accompanying consolidated financial statements reflect the operating results and financial position of Smith Micro Software, Inc. and its wholly owned subsidiaries in accordance with accounting principles generally accepted in the United States of America. All intercompany amounts have been eliminated in consolidation. Cash and Cash Equivalents - Cash and cash equivalents generally consist of cash, government securities and money market funds. All have original maturity dates of three months or less. Accounts Receivable - The Company sells its products worldwide. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses, and those losses have been within management's expectations. Allowances for product returns and price protection are included in other adjustments to accounts receivable on the accompanying consolidated balance sheets. Inventories - Inventories consist principally of manuals and diskettes and are stated at the lower of cost (determined by the first-in, first-out method) or market. Equipment and Improvements - Equipment and improvements are stated at cost. Depreciation is computed using the straight-line method based on the estimated useful lives of the assets, generally ranging from three to seven years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the lease term. Long Lived Assets - The Company accounts for the impairment and disposition of long-lived assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. In accordance with SFAS No. 121, long-lived assets to be held are reviewed for events or changes in circumstances which indicate that their carrying value may not be recoverable. The Company periodically reviews the carrying value of long-lived assets to determine whether or not an impairment to such value has occurred and has determined that there was no impairment at March 31, 2001. Goodwill and Other Intangibles - Goodwill represents the excess purchase cost over the net assets acquired and is amortized over seven years using the straight-line method. Other intangible assets include acquired workforce value, acquired technology and product translation costs which are being amortized using the straight-line method over three years. The Company periodically evaluates the recoverability of goodwill based on an undiscounted operating profitability analysis and evaluates the recoverability of other intangible assets based on the requirements of SFAS No. 121. The Company has determined that there was no impairment at March 31, 2001. Revenue Recognition - Software revenue is recognized in accordance with the Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended. SOP 97-2 provides guidance on when revenue should be recognized for licensing, selling, leasing or otherwise marketing computer software. The Company recognizes revenues from sales of its software as completed products are 7 8 shipped and title passes and from royalties generated as authorized customers duplicate the Company's software, assuming collectibility is reasonably assured. The Company is generally not contractually obligated to accept returns, except for defective and damaged products. However, the Company may permit customers to return or exchange product and may provide price protection on products unsold by a customer. In accordance with SFAS No. 48, Revenue Recognition when Right of Return Exists, revenue is recorded net of an allowance for estimated returns, exchanges, markdowns, price concessions, and warranty costs. Such reserves are based upon management's evaluation of historical experience, current industry trends and estimated costs. While returns and other concessions have historically been within management estimates, the amount of estimated reserves could change as new information becomes available. The Company also provides technical support to its customers. Such costs have historically been insignificant. Consulting services revenue is recognized as services are provided or as milestones are delivered and accepted by customers. In December 1999, the SEC issued Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements. SAB 101 summarizes the staff's views in applying generally accepted accounting principles to selected revenue recognition issues in financial statements. SAB 101 was adopted by the Company in the fourth quarter of 2000 and did not have a significant impact on the Company's consolidated financial statements. Software Development Costs - Development costs incurred in the research and development of new software products and enhancements to existing software products are expensed as incurred until 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 March 31, 2001, 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. Fair Value of Financial Instruments - Pursuant to SFAS No. 107, Disclosures about Fair Value of Financial Instruments, the Company is required to disclose the fair value of all financial instruments included on its consolidated balance sheets. The Company considers the carrying value of such amounts in the financial statements to approximate their fair value due to (1) the relatively short period of time between origination of the instruments and their expected realization, (2) interest rates which approximate current market rates, or (3) the overall immateriality of the amounts. Stock-Based Compensation - The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Net Loss per Share - Pursuant to SFAS No. 128, Earnings per Share, the Company is required to provide dual presentation of "basic" and "diluted" earnings (loss) per share (EPS). Basic EPS amounts are based upon the weighted average number of common shares outstanding. Diluted EPS amounts are based upon the weighted average number of common and common equivalent shares outstanding. Common equivalent shares include stock options using the treasury stock method. Common equivalent shares are excluded from the calculation of diluted EPS in loss years, as the impact is antidilutive. Therefore, there was no difference between basic and diluted EPS for each period presented. Segment Information - The Company operates in two business segments: software products and Internet solutions. The software products operating segment develops and markets the Company's software products, except for eCommerce software. Within software products the Company further concentrates on wireless and broadband products, Macintosh products and the related retail products for each of these concentrations. The Internet solutions segment provides eCommerce software solutions, eBusiness strategy and integration of new infrastructure solutions into existing systems. The Internet solutions segment also includes hosting revenue. The Company does not separately allocate operating expenses to these segments, nor does it allocate specific assets to these segments. Therefore, segment information reported includes only revenues, cost of sales and gross profit, as this information and the geographic information described below are the primary information provided to the chief executive officer. 8 9 The following table shows the net revenues, cost of revenues and gross profit (in thousands) generated by each segment.
March 31, 2001 (UNAUDITED) Software Products ------------------------------------------------ Wireless Total Software Internet Total & Broadband Macintosh Retail Products Solutions Company ----------- --------- ------ -------------- --------- ------- Net Revenue $1,394 $ 278 $ 817 $2,489 $ 756 $3,245 Cost of Revenue 490 548 1,038 ------------------------------ Gross Profit $1,999 $ 208 $2,207 ==============================
March 31, 2000 (UNAUDITED) Software Products ----------------------------------------------- Wireless Total Software Internet Total & Broadband Macintosh Retail Products Solutions Company ----------- --------- ------- -------------- --------- ------- Net Revenue $1,531 $ 378 $ 543 $2,452 $ 622 $3,074 Cost of Revenue 498 115 613 ------------------------------ Gross Profit $1,954 $ 507 $2,461 ==============================
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 periods ended March 31, 2001 and 2000, there was no difference between net loss, as reported, and comprehensive loss. Reclassifications - Certain reclassifications have been made to the 2000 financial statements to conform to the 2001 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 $94,000 in cash and $50,000 in accrued expenses, including acquisition costs. The acquisition was treated under the purchase method of accounting and the excess of cost over fair value of net assets acquired of $602,000 was allocated to goodwill, which is amortized using the straight-line method over 3 years. On July 31, 2000 the Company acquired the CheckIt(R) line of software products from Touchstone Software Corporation and eSupport.Com, Inc., a wholly owned subsidiary of TouchStone Software Corporation, (the "TouchStone Acquisition") for 108,000 shares of Smith Micro Common Stock valued at $560,000 plus $73,000 in cash and $88,000 in accrued expenses, including acquisition costs. Touchstone is the developer of the CheckIt(R) line of software which consist of general system utility products. The acquisition was considered a purchase of technology, which is being amortized using the straight-line method over 3 years. 3. NEW ACCOUNTING PRONOUNCEMENTS 9 10 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 adopted SFAS No. 133 during the first quarter of fiscal year 2001. Adoption of the new method of accounting for derivatives and hedging activities did not have a material impact on the Company's financial position because the Company does not have derivative instruments and does not engage in hedging activities. 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CERTAIN STATEMENTS IN THIS REPORT, INCLUDING STATEMENTS REGARDING THE COMPANY'S STRATEGY, FINANCIAL PERFORMANCE AND REVENUE SOURCES, ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATES SECURITIES LITIGATION REFORM ACT OF 1995, SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND ARE SUBJECT TO THE SAFE HARBORS CREATED BY THOSE SECTIONS. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS AND ENTAIL VARIOUS RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS REPORT. READERS ARE URGED TO CAREFULLY REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE BY THE COMPANY IN THIS REPORT AND IN THE COMPANY'S OTHER REPORTS FILED WITH THE SEC, INCLUDING THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000 AND OUR SUBSEQUENT REPORTS ON FORMS 10-Q AND 8-K, THAT ATTEMPT TO ADVISE INTERESTED PARTIES OF CERTAIN RISKS AND FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES OCCURRING AFTER THE DATE HEREOF. YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO CONTAINED ELSEWHERE IN THIS REPORT. OVERVIEW We are a developer and marketer of wireless, communications, diagnostic utility and eCommerce software products and a provider of professional consulting services. We design integrated, cross platform, easy-to-use software for personal computing and business solutions and provide consulting services consisting of integrated Internet business services to middle market companies. Our software includes products developed for the Internet and broad-band technologies, products that enable eCommerce, Internet communications (voice-over-IP), video conferencing, wireless communications, general system utility products and network fax along with traditional computer telephony. We continue to develop new products that leverage off our core technologies to address the consumer's use of the Internet and corporate intranets. We intend to leverage our experience and position with original equipment manufacturers, commonly known as OEMs, to deploy these new product releases. Additionally, we are expanding our customer base to include manufacturers that produce devices that take advantage of the high bandwidth Internet connectivity such as cable and xDSL modems. Our corporate products are designed to provide cost effective and efficient methods of communicating that take advantage of corporate local and wide area networks, including the Internet or intranets. Through our consulting services, we offer a comprehensive suite of services to assist middle market clients in planning, implementing and supporting eCommerce, eBusiness and infrastructure initiatives. In July 2000, we acquired the TouchStone Checkit product line. Acquired technology recorded in the acquisition of the TouchStone CheckIt asset was $721,000 and is amortized over three years through charges against cost of revenues. Also, in September 2000, we acquired the consulting practice unit of QuickStart Technologies, Inc., a provider of integrated Internet business services to middle market companies. Goodwill recorded in the acquisition of the QuickStart unit was $602,000 and is amortized over three years. We recognize revenues from sales of our software as completed products are shipped and title passes, from royalties generated as authorized customers duplicate our software, and collection is deemed probable. Revenues for consulting services are recognized as such services are performed. (See Note 1 of the notes to our unaudited consolidated financial statements.) We continue to introduce new products and our future success will depend in part on the continued introduction of new and enhanced OEM, retail and corporate products that achieve market acceptance. Revenues are net of estimated returns and other adjustments at the time the products are shipped. The OEM product ordering cycle beginning from placement of an order to shipment is very short. OEM customers generally operate under a just-in-time system and order software to be delivered as needed by their manufacturing operations. We generally ship our products as we receive orders and, accordingly, we have historically operated with little backlog. We do not consider backlog to be a significant indication of future performance. As a result, our sales in any quarter are dependent on orders booked and shipped 11 12 in that quarter and are not predictable with any degree of certainty. Moreover, we generally do not produce software in advance of orders and, therefore, have not maintained a material amount of software inventory. Beginning in the third quarter of 1998, we renewed our commitment of resources and efforts towards the retail channel. Our effort coincided with the launch of our first retail Internet telephony product, Internet CommSuite. Our strongest retail product continues to be HotFax MessageCenter, which provides fax, answering machine and data communication functionality via the PC. Our acquisition of the TouchStone product line in September 2000 has significantly increased our retail product offering. We are in various retail outlets, particularly office supply chains such as Staples, Office Depot and Office Max and numerous Internet retail stores. As a result of this expansion, sales to Ingram Micro, a retail distributor, were 22.2% of our net revenues for the three months ended March 31, 2001 and 20.4% of our net revenues for the twelve months ended December 31, 2000. Inventory in the retail channel exposes us to product returns. We consider this exposure when we establish allowances for product returns. While returns have historically been estimatable, substantial returns of products from the retail channel could have an adverse effect on our business, results of operations and financial condition. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain statement of operations data expressed as a percentage of total revenue.
QUARTERS ENDED MARCH 31, 2001 2000 -------- --------- Net Revenues: Software 81.0% 89.0% Consulting services 19.0% 11.0% -------- --------- Total net revenues 100.0% 100.0% Cost of revenues: Software 15.9% 18.1% Consulting services 16.1% 1.8% -------- --------- Total cost of revenues 32.0% 19.9% -------- --------- Gross profit 68.0% 80.1% Operating expenses: Selling and marketing 53.0% 44.9% Research and development 31.0% 30.5% General and administrative 32.6% 28.5% -------- --------- Total operating expenses 116.6% 103.9% -------- --------- Operating loss -48.6% -23.8% Interest income, net 1.0% 3.6% -------- --------- Loss before income taxes -47.6% -20.2% Income tax expense (benefit) 2.1% 1.3% -------- --------- Net loss -49.7% -21.5% ======== =========
THREE MONTHS ENDED MARCH 31, 2001 AND 2000 REVENUES Total net revenues were $3.3 million and $3.1 million for the three months ended March 31, 2001 and 2000, respectively, representing an increase of $171,000, or 5.6%, from 2000 to 2001. Ingram Micro, a distribution customer, accounted for 22.2% and 20.4% of total revenues for the three months ended March 31, 2001, and for the twelve months ended December 31, 2000, respectively. Software. Net software revenues were $2.6 million and $2.7 million in the three months ended March 31, 2001 and 2000, respectively, representing a decrease of $107,000, or 3.9%, from 2000 to 2001. The decrease in net software revenue in the comparable 12 13 periods from 2000 to 2001 is primarily the result of declining revenue from our legacy analog modem product lines and a decline in royalty revenue reported to us from Apple. Sales of approximately $790,000 to new cellular phone manufacturer customers that were not present in the comparable period of 2000 combined with increased sales of our retail software offset most of the declines. Consulting Services. Consulting services revenues were $616,000 and $338,000 in the three months ended March 31, 2001 and 2000, respectively, representing an increase of $278,000 or 82.2%, from 2000 to 2001. Consulting services revenues were generated by the acquisition of PCS in September 1999, which we expanded upon in 2000, and the QuickStart acquisition which took place in September 2000. Consulting services revenue accounted for 19% of total revenues in the three months ended March 31, 2001 compared with 11% of total revenues in the comparable period of 2000. The increase was primarily from revenues generated by QuickStart consulting business which was not present in the comparable period of 2000. COST OF REVENUES Cost of Software Revenues. Cost of software revenues was $517,000 and $556,000 in the three months ended March 31, 2001 and 2000, respectively, representing a decrease of $39,000, or 7.0%, from 2000 to 2001. Cost of software revenue as a percentage of software revenues was 19.7% and 20.3% for 2001 and 2000, respectively. The decrease in cost of software revenue in the three months ended March 31, 2001 was directly related to the decline in software revenue in the same period. Cost of software revenue as a percentage of software revenues remained relatively constant, in the periods being compared, with a change of 0.6 percentage points. Cost of Consulting Service revenues. Cost of consulting service revenues was $521,000 and $57,000 in the three months ended March 31, 2001 and 2000, respectively, representing an increase of $464,000 or 814% , from 2000 to 2001. Cost of consulting revenue as a percentage of consulting revenues was 84.6% and 16.7% for 2001 and 2000, respectively. Cost of consulting services revenues includes the cost of our consulting personnel and the cost of hiring outside contractors to support our staff of consultants. The increase in the cost of consulting service revenues was primarily the result of fixed fee contracts during the three months ended March 31, 2000 that were repetitive of previous projects which carried a much higher margin compared with the time and material billing type of consulting that made up the majority of the contracts performed in the three months ended March 31, 2001. In addition, with many of our consulting projects being deferred by our customers, our consulting workforce was under utilized in the three months ended March 31, 2001. OPERATING EXPENSES Selling and Marketing. Selling and marketing expenses were $1.7 million and $1.4 million in the three months ended March 31, 2001 and 2000, respectively, representing an increase of $340,000, or 24.7%, from 2000 to 2001. Our selling and marketing expenses consist primarily of personnel costs, advertising costs, sales commissions and trade show expenses. These expenses vary significantly from quarter to quarter based on the timing of trade shows and product introductions. The increase in our selling and marketing expenses in the three months ended March 31, 2001 over the comparable period of 2000 was primarily the result of increases in our eCommerce business, including salaries and related personnel expenses of approximately $307,000 and facilities expenses of approximately $27,000. Both of these increases came as a result of the additional expense of the QuickStart acquisition and the overall increase in size of our Internet Solutions Division. Research and Development. Research and development expenses were $1.0 million and $937,000 in the three months ended March 31, 2001 and 2000, respectively, representing an increase of $70,000, or 7.5%, from 2000 to 2001. Our research and development expenses consist primarily of personnel and equipment costs required to conduct our software development efforts. We remain focused on the development and expansion of our technology, particularly our Internet technology. Our development efforts include work on our eCommerce products, Internet telephony and videoconferencing products, including Macintosh versions, wireless products and new digital cameras as they are developed. The increase in our research and development expenses in the three months ended March 31, 2001 over 2000 was primarily due to increases in salaries and related expenses of approximately $36,000, increases in recruiting costs of $21,000 and approximately $14,000 in increased purchased services expenses. General and Administrative. General and administrative expenses were $1.1 million and $877,000 in the three months ended March 31, 2001 and 2000, respectively, representing an increase of $181,000, or 20.6%, from 2000 to 2001. The increase in our general and administrative expenses in the three months ended March 31, 2001 over 2000 came from an increase in our allowance for doubtful accounts of $100,000, $55,000 of amortization expense relating to the acquisition of QuickStart which was not present in the comparable period of 2000 and increased facilities expense of approximately $15,000. 13 14 Interest Income, net Interest income, net was $32,000 and $112,000 in the three months ended March 31, 2001 and 2000, respectively, representing an decrease of $80,000, or 71.4%, from 2000 to 2001. The decrease in our interest income, net was the result of a lower cash balance, on which we earn interest, for the three months ended March 31, 2001 compared to the same period in 2000. In addition, we accrued $38,000 of interest expense due as the result of a tax assessment. (See comments below under Provision for Income Taxes.) We have not changed our investment strategy during the periods being reported on, with our excess cash consistently being invested in short term marketable securities. Provision for Income Taxes. Provision for income taxes was $69,000 and $39,000 in the three months ended March 31 of 2001 and 2000, respectively, representing a increase of $30,000, or 76.9%, from 2000 to 2001. The tax expense for the three months ended March 31, 2001 relates to amount due as the result of a tax audit. The provision for income taxes in 2000 is primarily due 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 $422,000 in the three months ended March 31, 2001 compared to $312,000 in the comparable period of 2000. The primary operating use of cash during the both periods was funding our net loss. During the three months ended March 31, 2001, we used $47,000 in investing activities compared to $64,000 in the comparible period of 2000. At March 31, 2001, we had $5.7 million in cash and cash equivalents and $7.4 million of working capital. Our accounts receivable balance, net of allowance for doubtful accounts and other adjustments was $3.8 million at March 31, 2001. We have no significant capital commitments, and currently anticipate that growth in capital expenditures will not vary significantly from recent periods. We believe that our existing cash, cash equivalents and investment balances and cash flow from operations will be sufficient to finance our working capital and capital expenditure requirements through at least the next 12 months. We may require additional funds to support our working capital requirements or for other purposes and may seek to raise additional funds through public or private equity or debt financing or from other sources. If additional financing is needed, we cannot assure you that such financing will be available to us at commercially reasonable terms or at all. RISK FACTORS BEFORE DECIDING TO INVEST IN OUR COMPANY OR TO MAINTAIN OR INCREASE YOUR INVESTMENT, YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS REPORT AND IN OUR OTHER FILINGS WITH THE SEC, INCLUDING OUR SUBSEQUENT REPORTS ON FORMS 10-Q AND 8-K. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO AFFECT OUR BUSINESS OPERATIONS. IF ANY OF THESE RISKS ACTUALLY OCCUR, THAT COULD SERIOUSLY HARM OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS. IN THAT EVENT, THE MARKET PRICE FOR OUR COMMON STOCK COULD DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. Our quarterly operating results may fluctuate and cause the price of our common stock to fall. Our quarterly revenues and operating results have fluctuated significantly in the past and may continue to vary from quarter to quarter due to a number of factors, many of which are not within our control. If our operating results do not meet the expectations of securities analysts or investors, our stock price may decline. Fluctuations in our operating results may be due to a number of factors, including the following: - the volume of our product sales and pricing concessions on volume sales; - the size and timing of orders from and shipments to our major customers; 14 15 - our ability to maintain or increase gross margins; - general economic and market conditions; - variations in the our sales channels or the mix of our product sales; - the gain or loss of a key customer; - our ability to specify, develop, complete, introduce, market and transition to volume production new products and technologies in a timely manner; - the availability and pricing of competing products and technologies and the resulting effect on sales and pricing of our products; - the timing of new product announcements and introductions by us, our competitors or our customers; - the effect of new and emerging technologies; and - deferrals of orders by our customers in anticipation of new products, applications, product enhancements or operating systems. A large portion of our operating expenses, including rent, salaries and capital lease expenditures, is fixed and difficult to reduce or change. Accordingly, if our total revenue does not meet our expectations, we probably would not be able to adjust our expenses quickly enough to compensate for the shortfall in revenue. In that event, our business, financial condition and results of operations would be materially and adversely affected. Due to all of the foregoing factors, and the other risks discussed in this report, you should not rely on quarter-to-quarter comparisons of our operating results as an indication of future performance. We recently began offering new services and products with which have limited prior experience. We increased our eBusiness consulting services in September 2000 with the acquisition of the eBusiness consulting practice of QuickStart Technologies, Inc. In addition, we launched a new product line with the acquisition of the CheckIt(R) line of software products from Touchstone Software Corporation and its affiliates in July 2000. The consulting segment of our business accounted for approximately 19% of our revenue in 2000. We expect sales from our consulting practice and the CheckIt(R) product line to constitute an increasing portion of our future revenue growth. However, we have limited prior experience and expertise providing consulting services and in building, managing and marketing a consulting practice. Similarly, although we have established distribution channels and marketing plans for selling retail products, the CheckIt(R) products are new to us and each new product line presents its own unique issues and challenges. We are devoting significant resources to promoting awareness of our consulting services and our consulting-related products, as well as the new CheckIt(R) line of products. However, we cannot provide any assurance that the consulting portion of our business or the CheckIt(R) products will become or remain profitable. If we are unable to build market awareness of the need for these products and services, our business, operating results and financial condition will suffer. Technology and customer needs change rapidly in our market which could render our products obsolete. Our future success will depend on our ability to anticipate and adapt to changes in technology and industry standards. We will also need to continue to develop and introduce new and enhanced products to meet our customers' changing demands, keep up with evolving industry standards, including changes in the Microsoft operating systems with which our products are designed to be compatible, and to promote those products successfully. The communications and utilities software markets in which we operate are characterized by rapid technological change, changing customer needs, frequent new product introductions, evolving industry 15 16 standards and short product life cycles. Any of these factors could render our existing products obsolete and unmarketable. In addition, new products and product enhancements can require long development and testing periods as a result of the complexities inherent in today's computing environments and the performance demanded by customers. If the communications software markets do not develop as we anticipate or our products do not gain widespread acceptance in these markets, or if we are unable to develop new versions of our software products that can operate on future operating systems, our business, financial condition and results of operations could by materially and adversely affected. Competition within our product markets is intense and includes numerous established competitors. We operate in markets that are extremely competitive and subject to rapid changes in technology. Microsoft Corporation poses a significant competitive threat to us because the latest Microsoft operating systems, Windows 2000, Windows 98, Windows 95 and Windows NT, include capabilities now provided by certain of our OEM and retail software products. If users are satisfied relying on the communications capabilities of Windows 2000, Windows 98, Windows 95, Windows NT or other operating systems, sales of our products are likely to decline. In addition, our principal fax related retail products, HotFaxMessageCenter and HotFax, currently compete directly with Symantec's WinFax Pro. Our new Internet communications software products, Internet CommSuite and VideoLink pro, presently compete with product offerings by Microsoft, Intel, White Pine and VocalTech, among others. Our new CheckIt(R) products, CheckIt(R) NetOptimizer, CheckIt(R) Utilities, CheckIt(R) FastMove(R), and CheckIt(R) Suite, compete currently with McAfee's Office Pro 2000, Symantec's SystemWorks 2000 and Ontrack's SystemSuite 2000, among others. In addition, because there are low barriers to entry into the software market, we expect significant competition from other established and emerging software companies in the future. Furthermore, many of our existing and potential OEM customers may acquire or develop products that compete directly with our products. Microsoft Corporation and many of our other current and prospective competitors have significantly greater financial, marketing, service, support, technical and other resources than we do. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the promotion and sale of their products. There is also a substantial risk that announcements of competing products by large competitors such as Microsoft and Symantec could result in the cancellation of orders by retailers, distributors or other customers in anticipation of the introduction of such new products. In addition, some of our competitors, such as Symantec, currently make complementary products that are sold separately. Such competitors could decide to enhance their competitive position by bundling their products to attract customers seeking integrated, cost-effective software applications. Some competitors have a retail emphasis and offer OEM products with a reduced set of features. The opportunity for retail upgrade sales may induce these and other competitors to make OEM products available at their own cost or even at a loss. We also expect competition to increase as a result of software industry consolidations, which may lead to the creation of additional large and well-financed competitors. Increased competition is likely to result in price reductions, fewer customer orders, reduced margins and loss of market share. We rely on one distributor for a significant portion of our total revenues. Sales to Ingram Micro, a retail distributor, represented 22.2% of our net revenues for the three months ended March 31, 2001 and 20.4% of our net revenues for the twelve months ended December 31, 2000. We may not be able to control the factors influencing whether and in what quantity Ingram purchases products from us. The loss of, or a significant curtailment of, purchases by Ingram Micro could have a material adverse effect on our business. We may not be able to develop and maintain relationships with distributors and retailers to sell our retail software products. We depend on distributors, retailers (such as Staples, CompUSA, Office Depot, and OfficeMax), Internet distributors and value added resellers, commonly known as VARs, to market and distribute our retail software products. Our relationships with our distributors and retailers depend upon a number of factors, including our ability to meet certain minimum sales volume requirements. In addition, with little or no advanced notice to us our retailers and VARs may purchase fewer products from us in any given quarter for reasons beyond our control and in many cases unrelated to end user demand, such as a decision to change their inventory 16 17 strategies. Our agreements with retailers and VARs are not exclusive and in many cases may be terminated by either party without cause. If this happens or if we are unable to develop and maintain relationships with distributors and retailers to sell our retail software products, our retail sales will be adversely affected. We may have excessive, unanticipated product returns. We are exposed to the risk of product returns and markdown allowances with respect to our distributors and retailers. We are generally not contractually obligated to accept returns, except for defective and damaged products. However, we may permit customers to return or exchange product and may provide price protection on products unsold by a customer. We consider return requests on a case-by-case basis, taking into consideration factors such as the products involved, the customer's historical sales volume and the customer's credit status. In addition, we provide markdown allowances, which consist of credits given to customers to induce them to lower the retail sales price of certain products in an effort to increase sales to consumers and to help manage our customers' inventory levels in the distribution channel. Although we maintain a reserve for returns and markdown allowances, and although we manage our returns and markdown allowances through our authorization procedure, we could choose to accept substantial product returns and provide markdown allowances to maintain our relationships with retailers and our access to distribution channels. Product returns and markdown allowances that exceed our reserves could have a material adverse effect on our business, operating results and financial condition. Acquisitions of companies or technologies may result in disruptions to our business and diversion of management attention. We have in the past made and we expect to continue to make acquisitions of complementary companies, products or technologies. If we make any additional acquisitions, we will be required to assimilate the operations, products and personnel of the acquired businesses and train, retain and motivate key personnel from the acquired businesses. We may be unable to maintain uniform standards, controls, procedures and policies if we fail in these efforts. Similarly, acquisitions may cause disruptions in our operations and divert management's attention from day-to-day operation, which could impair our relationships with our current employees, customers and strategic partners. Acquisitions may also subject us to liabilities and risks that are not known or identifiable at the time of the acquisition. We may also have to incur debt or issue equity securities in order to finance future acquisitions. The issuance of equity securities for any acquisition could be substantially dilutive to our stockholders. In addition, our profitability will be affected because of acquisition-related costs or amortization of goodwill and other purchased intangible assets. In consummating acquisitions, we are also subject to risks of entering geographic and business markets in which we have not or limited prior experience. If we are unable to fully integrate acquired businesses, products or technologies with out existing operations, we may not receive the intended benefits of acquisitions. Our stock price is highly volatile. Accordingly, you may not be able to resell your shares of common stock at or above the price you paid for them. The market price of our common stock has fluctuated substantially in the past and is likely to continue to be highly volatile and subject to wide fluctuations. These fluctuations have occurred and may continue to occur in response to various factors, many of which we cannot control, including: - quarter-to-quarter variations in our operating results; - announcements of technological innovations or new products by our competitors, customers or us; - general economic conditions and conditions within the communications software markets; - changes in earnings estimates or investment recommendations by analysts; - changes in investor perceptions; or - changes in expectations relating to our products, plans and strategic position or those of our competitors or customers. 17 18 In addition, the market prices of securities of Internet-related and other high technology companies have been especially volatile. This volatility has significantly affected the market prices of securities of many technology companies. Accordingly, you may not be able to resell your shares of common stock at or above the price you paid. In the past, companies that have experienced volatility in the market price of their securities have been the subject of securities class action litigation. If we were the object of a securities class action litigation, it could result in substantial losses and divert management's attention and resources from other matters. Our products may contain undetected software errors. Our software products are complex and may contain undetected errors. In the past, we have discovered software errors in certain of our products and have experienced delayed or lost revenues during the period it took to correct these errors. Although we and our OEM customers test our products, it is possible that errors may be found in our new or existing products after we have commenced commercial shipment of those products. These undetected errors could result in adverse publicity, loss of revenues, delay in market acceptance of our products or claims against us by customers. We may need to raise additional capital in the future through the issuance of additional equity or convertible debt securities or by borrowing money, and additional funds may not be available on terms acceptable to us. We believe that the cash, cash equivalents and investments on hand and the cash we expect to generate from operations will be sufficient to meet our capital needs for at least the next twelve months. However, it is possible that we may need to raise additional money to fund our activities beyond the next year. We could raise these funds by selling more stock to the public or to selected investors, or by borrowing money. In addition, even though we may not need additional funds, we may still elect to sell additional equity securities or obtain credit facilities for other reasons. We may not be able to obtain additional funds on favorable terms, or at all. If adequate funds are not available, we may be required to curtail our operations significantly or to obtain funds through arrangements with strategic partners or others that may require us to relinquish right to certain technologies or potential markets. If we raise additional funds by issuing additional equity or convertible debt securities, the ownership percentages of existing stockholders would be reduced. In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to those of the holders of our common stock. It is possible that our future capital requirements may vary materially from those now planned. The amount of capital that we will need in the future will depend on many factors, including: - the market acceptance of our products; - the levels of promotion and advertising that will be required to launch our products and achieve and maintain a competitive position in the marketplace; - our business, product, capital expenditure and research and development plans and product and technology roadmaps; - the levels of inventory and accounts receivable that we maintain; - capital improvements to new and existing facilities; - technological advances; - our competitors' response to our products; and - our relationships with suppliers and customers. 18 19 In addition, we may require additional capital to accommodate planned growth, hiring, infrastructure and facility needs or to consummate acquisitions of other businesses, products or technologies. Our efforts to develop a market for our retail software products require substantial investments that may adversely affect our operating margins. In order to strengthen recognition of and build distribution channels for our retail software products, including our new CheckIt(R) line of products, we have had to make significant investments in marketing and sales related to these products. We expect to have to continue to incur these costs and perhaps even to increase them in the future. Accordingly, our retail sales may not provide us with the same contribution margin to operating income that we have historically achieved on our OEM sales. Inability or delays in deliveries from our component suppliers could damage our reputation and could cause our net revenues to decline and harm our results of operations. We rely on third party suppliers to provide us with the components for our product kits. These components include CDs and printed manuals. We also rely on third parties for CD-ROM replication. We do not have long-term supply arrangements with any vendor to obtain these necessary components for our products. If we are unable to purchase components from these suppliers or if the CD-ROM replication facilities that we use do not deliver our requirements on schedule, we may not be able to deliver products in a CD-ROM format to our customers on a timely basis or enter into new orders because of a shortage in components. Any delays that we experience in delivering our products to customers could impair our customer relationships and adversely impact our reputation and our business. In addition, if our third party suppliers raise their prices for components or CD-ROM replication services, our gross margins would be reduced. Because we currently operate with little backlog, our revenues in each quarter are substantially dependent on orders booked and shipped in that quarter. We currently have backlog orders only in our Internet Solutions division for our consulting related sales and we only began building this backlog during the year ended December 31, 2000. In our other divisions, we operate with little backlog because we generally ship our software products as we receive orders and because our royalty revenue is based upon our customers' actual usage in a given period. Accordingly, we recognize revenue shortly after orders are received or royalty reports are generated. As a result, our sales in any quarter are dependent on orders that we book and ship in that quarter. This makes it difficult for us to predict what our revenues and operating results will be in any quarter. If orders in the first month or two of a quarter fall short of expectations, it is likely that we will not meet our revenue targets for that quarter. If this happens, our quarterly operating results would be adversely affected. We may be unable to adequately protect our intellectual property and other proprietary rights. Our success is dependent upon our software code base, our programming methodologies and other intellectual properties and proprietary rights. In order to protect our proprietary technology, we rely on a combination of trade secret, nondisclosure and copyright and trademark law. However, these measures afford us only limited protection. We currently own United States trademark registrations for certain of our trademarks, but we have not yet obtained registrations for all of our trademarks in the United States or other countries. In addition, prior to becoming a publicly held entity, we did not require our employees to sign proprietary information and inventions agreements stipulating to our software ownership rights. We only recently started the patent application process for a number of technologies relating to our existing products and products under development. Furthermore, we rely primarily on "shrink wrap" licenses that are not signed by the end user and, therefore, may be unenforceable under the laws of certain jurisdictions. Accordingly, despite the precautions we have taken to protect our intellectual property and proprietary rights, it is possible that third parties may copy or otherwise obtain our rights without our authorization. It is also possible that third parties may independently 19 20 develop technologies similar to ours. It may be difficult for us to detect unauthorized use of our intellectual property and proprietary rights. We may be subject to claims of intellectual property infringement as the number of trademarks, patents, copyrights and other intellectual property rights asserted by companies in our industry grows and the coverage of these patents and other rights and the functionality of software products increasingly overlap. From time to time, we have received communications from third parties asserting that our trade name or features, content, or trademarks of certain of our products infringe upon intellectual property rights held by such third parties. We have also received correspondence from third parties separately asserting that our fax products may infringe on certain patents held by each of the parties. Although we are not aware that any of our products infringe on the proprietary rights of others, third parties may claim infringement by us with respect to our current or future products. Infringement claims, whether with or without merit, could result in time-consuming and costly litigation, divert the attention of our management, cause product shipment delays or require us to enter into royalty or licensing agreements with third parties. If we are required to enter into royalty or licensing agreements, they may not be on terms that are acceptable to us. Unfavorable royalty or licensing agreements could seriously impair our ability to market our products. We must continue to hire and retain key personnel in an intensely competitive labor market. Our future performance depends in significant part upon the continued service of our senior management and other key technical and consulting personnel. We do not have employment agreements with our key employees that govern the length of their service. The loss of the services of our key employees would likely materially and adversely affect our business, financial condition and results of operations. Our future success also depends on our ability to continue to attract, retain and motivate qualified personnel, particularly highly skilled engineers involved in the ongoing research and development required to develop and enhance our communication software products as well those in our highly specialized consulting business. Competition for these employees is intense and employee retention is a common problem in our industry. Our inability to attract and retain the highly trained technical personnel that are essential to our product development, consulting services, marketing, service and support teams may limit the rate at which we can generate revenue, develop new products or product enhancements and generally have an adverse effect on our business, financial condition and results of operations. If Internet usage fails to grow or declines, or if commerce conducted over the Internet is not accepted by consumers and businesses, our future sales and future profits will decline. If eCommerce does not continue to grow or grows more slowly than expected, demand for our products and services will be reduced. Our products enhance companies' abilities to transact business and conduct Web-based operations. As a result, our future sales and any future profits are substantially dependent upon the widespread acceptance and use of the Internet as an effective medium of commerce by consumers and businesses. To be successful we must rely on consumers and businesses who have not historically used the Internet to transact business and exchange information. Consumers and businesses may reject the Internet as a viable commercial medium for a number of reasons, including potentially inadequate network infrastructure, slow development of enabling technologies, insufficient commercial support or privacy concerns. The Internet's infrastructure may not be able to support the demands placed on it by increased usage. In addition, delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity, or increased government regulation, could cause the Internet to lose its viability as a commercial medium. Even if the required infrastructure, standards, protocols and complementary products, services or facilities are developed, we may incur substantial expenses adapting our solutions to changing or emerging technologies. As our international business expands, our business, financial condition and operating results could be adversely affected as a result of legal, business and economic risks specific to international operations. 20 21 Approximately 7.0% of our revenue for the three months of 2001 and 18.9% for the twelve months ended December 31, 2000 was derived from sales to customers outside the United States. We also frequently ship products to our domestic customers' international manufacturing divisions and subcontractors. In the future, we intend to continue to expand these international business activities. International operations are subject to many inherent risks, including: - political, social and economic instability; - trade restrictions; - the imposition of governmental controls; - exposure to different legal standards, particularly with respect to intellectual property; - burdens of complying with a variety of foreign laws; - import and export license requirements and restrictions of the United States and each other country in which we operate; - unexpected changes in regulatory requirements; - foreign technical standards; - changes in tariffs; - difficulties in staffing and managing international operations; - difficulties in collecting receivables from foreign entities; and - potentially adverse tax consequences. Our officers and directors could control matters submitted to our stockholders. As of April 30, 2001, William W. Smith Jr., the President, Chief Executive Officer and Chairman of the Board of our company, and Rhonda L. Smith, the Secretary, Treasurer and Vice-Chairman of the Board of our company, beneficially owned approximately 60.2% of our outstanding shares of common stock. William W. Smith Jr. and Rhonda L. Smith are married to one another and, acting together, will have the ability to elect our directors and determine the outcome of any corporate action requiring stockholder approval, including a merger or business combination, irrespective of how you may vote. This concentration of ownership may discourage a potential acquirer from making an offer to buy our company, which, in turn, could adversely affect the market price of our common stock. Future sales of our common stock could cause the price of our shares to decline. As of April 30, 2001, we had 16,232,416 shares of Common Stock outstanding. Of this amount, the 9,778,670 shares held by William W. Smith, Jr. and Rhonda L. Smith became available for sale in the public market (subject to the volume and other applicable restrictions of Rule 144) in September 1997, following the expiration of a two year lock-up agreement with certain representatives of the underwriters of our initial public offering, which consummated in September 1995. Sales of a substantial number of shares of our common stock by William W. Smith, Jr., Rhonda L. Smith or any other person, either individually or when aggregated with sales by other persons, could adversely affect the market price of our common stock. Provisions of our charter and bylaws and Delaware law could make a takeover of our company difficult. Our certificate of incorporation and bylaws contain provisions that may discourage or prevent a third party from acquiring us, even if doing so would be beneficial to our stockholders. For instance, our certificate of incorporation authorizes the board of directors to fix the rights and preferences of shares of any series of preferred stock, without action by our stockholders. As a result, 21 22 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. NEW ACCOUNTING PRONOUNCEMENTS 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 adopted SFAS No. 133 during the first quarter of fiscal year 2001. Adoption of the new method of accounting for derivatives and hedging activities did not have a material impact on the Company's financial position because the Company does not have derivative instruments and does not engage in hedging activities. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Smith Micro's financial instruments include cash and cash equivalents. At March 31, 2001, 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 March 31, 2001. 22 23 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None 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 to the Incorporation of the Company. Registrant's Registration Statement No. 33-95096 3.1.1 Amendment to the Amended and Restated Incorporated by reference to Exhibit 3.1.1 to the Certificate of Incorporation of the Registrant's Quarterly Report on Form 10-Q for the Company. period ended June 30, 2000. 3.2 Amended and Restated Bylaws of the Incorporated by reference to Exhibit 3.2 to the Company. Registrant's Registration Statement No. 33-95096 4.1 Specimen certificate representing shares of Incorporated by reference to Exhibit 4.1 to the Common Stock of the Company. Registrant's Registration Statement 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 Plan, as Incorporated by reference to Exhibit 10.2 to the amended. Registrant's Registration Statement No. 33-95096 10.3 Form of Notice of Grant of Stock Option Incorporated by reference to Exhibit 10.3 to the under 1995 Stock Option/Stock Issuance Registrant's Registration Statement No. 33-95096 Plan. 10.4 Form of 1995 Stock Option Agreement Incorporated by reference to Exhibit 10.4 to the under 1995 Stock Option/Stock Issuance Registrant's Registration Statement No. 33-95096 Plan.
23 24
Exhibit No. Title Method of Filing ------- ----- ---------------- 10.5 Form of 1995 Stock Purchase Agreement Incorporated by reference to Exhibit 10.5 to the under 1995 Stock Option/Stock Issuance Registrant's Registration Statement No. 33-95096 Plan. 10.6 Distribution License Agreement dated Incorporated by reference to Exhibit 10.6 to the September 30, 1991, by and between the Registrant's Registration Statement No. 33-95096 Company and Crandell Development Corporation. 10.7 Application Program Interface Retail Incorporated by reference to Exhibit 10.7 to the License Agreement July 28, 1992 by and Registrant's Registration Statement No. 33-95096 between the Company and Rockwell International Corporation. 10.8 Application Program Interface License Incorporated by reference to Exhibit 10.8 to the Agreement July 28, 1992 by and between Registrant's Registration Statement No. 33-95096 the Company and Rockwell International Corporation. 10.9 Rockwell High Speed Interface License Incorporated by reference to Exhibit 10.9 to the Agreement dated June 2, 1994, by and Registrant's Registration Statement No. 33-95096 between the Company and Rockwell International Corporation. 10.10 Letter Agreement dated February 22, 1994, Incorporated by reference to Exhibit 10.10 to the by and between the Company and Rockwell Registrant's Registration Statement No. 33-95096 International Corporation. 10.11 Letter Agreement dated April 22, 1993, by Incorporated by reference to Exhibit 10.11 to the and between the Company and Rockwell Registrant's Registration Statement No. 33-95096 International Corporation. 10.12 Software Distribution Agreement dated Incorporated by reference to Exhibit 10.12 to the May 8, 1995, by and between the Company Registrant's Registration Statement No. 33-95096 and International Business Machines Corporation. 10.13 Office Building Lease, dated June 10, Incorporated by reference to Exhibit 10.13 to the 1992, by and between the Company and Registrant's Registration Statement No. 33-95096 Developers Venture Capital Corporation. 10.14 Amendment No. 1 To Office Building Incorporated by reference to Exhibit 10.14 to the Lease, dated July 9, 1993, by and between Registrant's Registration Statement No. 33-95096 the Company and Pioneer Bank. 10.15 Amendment No. 2 To Office Building Incorporated by reference to Exhibit 10.15 to the Lease, dated August 15, 1994, by and Registrant's Registration Statement No. 33-95096 between the Company and T&C Development. 10.16 Fourth Addendum to Office Building Incorporated by reference to Exhibit 10.16 to the Lease, dated April 21, 1995, by and Registrant's Registration Statement No. 33-95096 between the Company and T&C Development.
24 25
Exhibit No. Title Method of Filing ------- ----- ---------------- 10.17 Form of Promissory Note related to S Incorporated by reference to Exhibit 10.17 to the Corporation Distribution. Registrant's Registration Statement No. 33-95096 10.18 Smith Micro Software, Inc. Amended and Incorporated by reference to Exhibit 10.21 to the Restated Software Licensing and Registrant's Quarterly Report on Form 10-Q for the Distribution Agreement, dated April 18, quarter ended September 30, 1996 1996, by and between the Company and U.S. Robotics Access Corp. 10.19 Office Building Lease, dated March 1, Incorporated by reference to Exhibit 10.19 to the 1994, by and between Performance Registrant's Annual Report on Form 10-K for the Computing Incorporated and Petula fiscal year ended December 3l, 1995 Associates, Ltd./KC Woodside. 10.20 Agreement and Plan of Merger by and Incorporated by reference to Exhibit 2 to the between Smith Micro Software, Inc., Registrant's Current Report on Form 8-K filed with Performance Computing Incorporated and the Commission on March 28, 1996 PCI Video Products, Inc. dated as of March 14, 1996. 10.21 Amendment No. 1, dated as of March 10, Incorporated by reference to Exhibit 10.21 to the 1997, to Agreement and Plan of Merger by Registrant's Annual Report on Form 10-K for the and between Smith Micro Software, Inc., fiscal year ended December 31, 1996 Performance 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 to the Lease, dated February 19, 1998, by and Registrant's Annual Report on Form 10-K for the between the Company and World Outreach fiscal year ended December 31, 1997 Center. 10.23 Software licensing and Distribution Incorporated by reference to Exhibit 10.23 to the Agreement dated December 1, 1998, by Registrant's Annual Report on Form 10-K for the and between the Company and 3Com fiscal year ended December 31, 1998 Corporation 10.24 Stock Purchase Agreement dated as of Incorporated by reference to Exhibit 2 to the April 9, 1999 by and among Smith Micro Registrant's Current Report on Form 8-K filed with Software, Inc. STF Technologies, Inc. and the Commission on April 23, 1999 the Shareholders of STF Technologies, Inc. 10.25 Amendment No. 7 to Office Building Incorporated by reference to Exhibit 10.25 to the Lease, dated November 5, 1999, by and Registrant's Annual Report on Form 10-K for the between the Company and World Outreach fiscal year ended December 31, 1999 Center. 21.1 Subsidiaries Incorporated by reference to Exhibit 21.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000
25 26 (B) REPORTS ON FORM 8-K No such reports were filed during the three months ended March 31, 2001. 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. May 14, 2001 By /s/ WILLIAM W. SMITH, JR. William W. Smith, Jr. Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) May 14, 2001 By /s/ RICHARD C. BJORKMAN Richard C. Bjorkman Chief Financial Officer (Principal Financial Officer) 26