-----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, H0w7YcwOhmq2yZ7uAjMeXaD9CzN0xf2O1KeZbujpzZprxI5XHuCJwUVmMZqb107R Z2p/YbqP9jJcoS0+qbOlSg== 0001095811-01-504277.txt : 20010815 0001095811-01-504277.hdr.sgml : 20010815 ACCESSION NUMBER: 0001095811-01-504277 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMITH MICRO SOFTWARE INC CENTRAL INDEX KEY: 0000948708 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 330029027 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26536 FILM NUMBER: 1712012 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 a74998e10-q.txt FORM 10-Q PERIOD ENDED JUNE 30, 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 JUNE 30, 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 July 31, 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 June 30, 2001 (Unaudited) and December 31, 2000 3 Unaudited Consolidated Statements of Operations For The Three and Six Months Ended June 30, 2001 and June 30, 2000 4 Unaudited Consolidated Statements of Cash Flows For The Six Months Ended June 30, 2001 and June 30, 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)
June 30, December 31, 2001 2000 -------- ----------- (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 4,377 $ 6,178 Accounts receivable, net of allowances for doubtful accounts and other adjustments of $1,642 (2001) and $1,896 (2000) 1,649 4,750 Inventories, net 340 338 Prepaid expenses and other current assets 203 294 -------- -------- Total current assets 6,569 11,560 EQUIPMENT AND IMPROVEMENTS, net 645 737 OTHER ASSETS 39 89 INTANGIBLE ASSETS, net 2,493 2,928 -------- -------- $ 9,746 $ 15,314 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,011 $ 1,590 Accrued liabilities 1,755 1,297 -------- -------- Total current liabilities 2,766 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 June 30, 2001 and December 31, 2000, respectively 16 16 Additional paid-in capital 24,789 24,789 Accumulated deficit (17,825) (12,378) -------- -------- Total stockholders' equity 6,980 12,427 -------- -------- $ 9,746 $ 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 SIX MONTHS ENDED June 30, June 30, UNAUDITED UNAUDITED ----------------------------- ----------------------------- 2001 2000 2001 2000 -------- -------- -------- -------- NET REVENUES Software $ 213 $ 2,640 $ 2,842 $ 5,376 Consulting 868 582 1,484 920 -------- -------- -------- -------- Total Net Revenues 1,081 3,222 4,326 6,296 COST OF REVENUES Software 375 487 892 1,043 Consulting 566 70 1,087 127 -------- -------- -------- -------- Total Cost of Revenues 941 557 1,979 1,170 -------- -------- -------- -------- GROSS PROFIT 140 2,665 2,347 5,126 OPERATING EXPENSES: Selling and marketing 1,545 1,462 3,264 2,841 Research and development 832 1,004 1,839 1,941 General and administrative 1,264 940 2,322 1,817 Restructuring costs 345 345 -------- -------- -------- -------- Total operating expenses 3,986 3,406 7,770 6,599 -------- -------- -------- -------- OPERATING LOSS (3,846) (741) (5,423) (1,473) INTEREST INCOME, NET 33 115 65 227 -------- -------- -------- -------- LOSS BEFORE INCOME TAXES (3,813) (626) (5,358) (1,246) INCOME TAX EXPENSE 20 6 89 45 -------- -------- -------- -------- NET LOSS $ (3,833) $ (632) $ (5,447) $ (1,291) ======== ======== ======== ======== NET LOSS PER SHARE, basic and diluted $ (0.24) $ (0.04) $ (0.34) $ (0.08) ======== ======== ======== ======== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 16,232 15,895 16,232 15,828 ======== ======== ======== ========
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 4 5 SMITH MICRO SOFTWARE, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
For The Six Months Ended June 30, --------------------------- 2001 2000 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(5,447) $(1,291) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 666 469 Provision for doubtful accounts and other adjustments to accounts receivable (254) (182) Change in operating accounts: Accounts receivable 3,355 (632) Inventories (2) 213 Prepaid expenses and other assets 92 (8) Accounts payable and accrued liabilities (121) 478 ------- ------- Net cash used in operating activities (1,711) (953) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (90) (129) ------- ------- Net cash used in investing activities (90) (129) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the exercise of stock options -- 698 ------- ------- Net cash provided by financing activities -- 698 ------- ------- NET DECREASE IN CASH AND CASH EQUIVALENTS (1,801) (384) CASH AND CASH EQUIVALENTS, beginning of period 6,178 8,704 ------- ------- CASH AND CASH EQUIVALENTS, end of period $ 4,377 $ 8,320 ======= =======
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 5 6 SMITH MICRO SOFTWARE, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (In Thousands)
For The Six Months Ended June 30, -------------------- 2001 2000 ---- ---- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for income taxes $ 160 $ 45 ======= =======
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 - Smith Micro Software, Inc. ("Smith Micro" or the "Company") develops and sells eCommerce, diagnostic utilities and communications software for personal and business use and provides professional services consulting. The Company's software includes products developed for the Internet and broadband technologies, products that enable eCommerce, Internet communications (voice-over-IP - VoIP), video conferencing, wireless communications, general system utility products and network fax along with traditional computer telephony. The Company also offers professional services consulting which include methodologies to help clients focus, define and prioritize Internet investments; develop eCommerce sites and custom eBusiness applications; implement tools to increase revenue per online transaction and transactions per customer; warehouse, mine and integrate data for enhanced accessibility and effective decision support; and select the right technology infrastructure to support eBusiness. The Company's objective is to enhance human interaction by giving users the ability to communicate through multimedia technologies over analog and digital platforms. The Company's products enhance personal computing through telephony, fax, multimedia email, paging, wireless communications, desktop and Internet utilities, and video conferencing. The Company's professional services and products enable businesses to create and launch Internet solutions as well as enhance their corporate infrastructure. A portion of the Company's sales are made direct to hardware device and personal computer manufacturers under Original Equipment Manufacturer (OEM) agreements. The Company sells communication and diagnostic utility products through independent distributors and retail channels. 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 unaudited interim consolidated financial statements reflect adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of the Company at June 30, 2001, the results of its operations, for the three and six month periods ended June 30, 2001 and 2000 and its cash flows for the six month ended June 30, 2001 and 2000. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission ("SEC"), although the Company believes that the disclosures in the consolidated financial statements are adequate to ensure the information presented is not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 and the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. The results of operations for the interim periods are not necessarily indicative of the operating results for the year. 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 impairment to such value has occurred and have determined that there was no impairment at June 30, 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 7 8 other intangible assets based on the requirements of SFAS No. 121. The Company has determined that there was no impairment at June 30, 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 shipped and title passes and from royalties generated as authorized customers duplicate its 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. During the quarter ended June 30, 2001, the Company's largest distributor changed its order taking and stocking policies. As a result, the Company agreed to accept a significantly higher level of product returns than was anticipated in an effort to work with the distributor to reduce their inventory. The Company believes that this was a one-time return related to a policy change that will not significantly impact the historical and ongoing return rates from the distributor. 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. The Company adopted SAB 101 in the fourth quarter of 2000 without significant impact on its 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 June 30, 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 its 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 our 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 consolidated 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. 8 9 Segment Information - The Company operates in two business segments: software products and Internet solutions. The software products operating segment develops and markets our software products, except for eCommerce software. Within software products 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 and co-location revenue. The Company does not separately allocate operating expenses to these segments, nor does the Company 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. The following table shows the net revenues, cost of revenues and gross profit (in thousands) generated by each segment. THREE MONTHS ENDED JUNE 30, 2001 (Unaudited)
Software Products ------------------------------------------------------ Wireless Total Software Internet Total & Broadband Macintosh Retail Products Solutions Company ----------- --------- ------ -------------- --------- ------- Net Revenue $ 528 $ 242 $ (603) $ 167 $ 914 $1,081 Cost of Revenue 367 574 941 ------ ------ ------ Gross Profit $ (200) $ 340 $ 140 ====== ====== ======
SIX MONTHS ENDED JUNE 30, 2001 (Unaudited)
Software Products ------------------------------------------------------ Wireless Total Software Internet Total & Broadband Macintosh Retail Products Solutions Company ----------- --------- ------ -------------- --------- ------- Net Revenue $1,922 $ 520 $ 214 $2,656 $1,670 $4,326 Cost of Revenue 857 1,122 1,979 ------ ------ ------ Gross Profit $1,799 $ 548 $2,347 ====== ====== ======
THREE MONTHS ENDED JUNE 30, 2000 (Unaudited)
Software Products ------------------------------------------------------ Wireless Total Software Internet Total & Broadband Macintosh Retail Products Solutions Company ----------- --------- ------ -------------- --------- ------- Net Revenue $1,396 $266 $656 $2,318 $904 $3,222 Cost of Revenue 429 128 557 ------ ---- ------ Gross Profit $1,889 $776 $2,665 ====== ==== ======
SIX MONTHS ENDED JUNE 30, 2000 (Unaudited) Software Products ----------------------------------------------------------------- Wireless Total Software Internet Total & Broadband Macintosh Retail Products Solutions Company ----------- --------- ------ -------------- --------- ------- Net Revenue $2,927 $ 644 $1,199 $4,770 $1,526 $6,296 Cost of Revenue 927 243 1,170 ------ ------ ------ Gross Profit $3,843 $1,283 $5,126 ====== ====== ======
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. 9 10 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 June 30, 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. RESTRUCTURING COSTS In the second quarter of 2001 the Company implemented a restructuring plan to consolidate facilities and reduce personnel costs. Total expense related to the restructuring amounted to $345,000 consisting of facility closure costs of $230,000 and employee severance costs of $115,000. As of June 30, 2001, $62,000 had been paid and $283,000 was included in accrued liabilities. 4. 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 on January 1, 2001. Adoption of the new method of accounting for derivatives and hedging activities did not have a material impact on the Company's consolidated financial position because the Company does not have derivative instruments and does not engage in hedging activities. In June 2001, the FASB issued two new pronouncements: SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141 prohibits the use of the pooling-of-interest method for business combinations initiated after June 30, 2001 and also applies to all business combinations accounted for by the purchase method that are completed after June 30, 2001. There are also transition provisions that apply to business combinations completed before July 1, 2001, that were accounted for by the purchase method. SFAS 142 is effective for fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. The Company is currently evaluating the provisions of SFAS 141 and SFAS 142 and has not adopted such provisions in its June 30, 2001 financial statements. 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CERTAIN STATEMENTS IN THIS REPORT, INCLUDING STATEMENTS REGARDING OUR 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. OUR 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 US IN THIS REPORT AND IN OUR'S OTHER REPORTS FILED WITH THE SEC, INCLUDING OUR 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 OUR 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 OUR 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 and factory 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(R) product line. Acquired technology recorded in the acquisition of the TouchStone CheckIt(R) 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 generally 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. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain statement of operations data expressed as a percentage of total revenue.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 2001 2000 2001 2000 ------ ------ ------ ------ Net Revenues: Software 19.7% 81.9% 65.7% 85.4% Consulting services 80.3% 18.1% 34.3% 14.6% ------ ------ ------ ------ Total net revenues 100.0% 100.0% 100.0% 100.0% Cost of revenues: Software 34.7% 15.1% 20.6% 16.6% Consulting services 52.4% 2.2% 25.1% 2.0% ------ ------ ------ ------ Total cost of revenues 87.1% 17.3% 45.7% 18.6% ------ ------ ------ ------ Gross profit 12.9% 82.7% 54.3% 81.4% Operating expenses: Selling and marketing 142.9% 45.4% 75.5% 45.1% Research and development 77.0% 31.2% 42.5% 30.8% General and administrative 116.9% 29.2% 53.7% 28.9% Restructuring Costs 31.9% 0.0% 8.0% 0.0% ------ ------ ------ ------ Total operating expenses 368.7% 105.8% 179.7% 104.8% ------ ------ ------ ------ Operating loss -355.8% -23.1% -125.4% -23.4% Interest income, net 3.1% 3.6% 1.5% 3.6% ------ ------ ------ ------ Loss before income taxes -352.7% -19.5% -123.9% -19.8% Income tax expense (benefit) 1.9% 0.2% 2.1% 0.7% ------ ------ ------ ------ Net loss -354.6% -19.7% -126.0% -20.5% ====== ====== ====== ======
REVENUES Total net revenues were $1.1 million and $3.2 million for the three months ended June 30, 2001 and 2000, respectively, representing a decrease of $2.1 million, or 66.5%, from 2000 to 2001. Total net revenues were $4.3 million and $6.3 million for the six months ended June 30, 2001 and 2000, respectively, representing a decrease of $2.0 million or 31.3%, from 2000 to 2001. Ingram Micro, a distribution customer, accounted for 20.4% of total revenues for the twelve months ended December 31, 2000. As discussed below, during the six months ended June 30, 2001 product returns exceeded revenue from Ingram. Software. Net software revenues were $213,000 and $2.6 million in the three months ended June 30, 2001 and 2000, respectively, representing a decrease of $2.4 million, or 91.9%, from 2000 to 2001. The decrease in net software revenue in the comparable periods from 2000 to 2001 is primarily the result of a substantial and unexpected change in order taking and stocking policies by our largest distributor resulting from issues within their own business. In essence, ongoing distribution inventories will run at approximately 20% of previous levels. As a result of the inventory reduction program, new purchases from the distributor were unusually low during the quarter. Additionally, we agreed to accept a significantly higher level of product returns than we had anticipated, totaling approximately $1.1 million, in an effort to work with the distributor to reduce their inventory. This one-time return, coupled with lower than normal sales volume, resulted in product returns exceeding sales for the quarter and six months period. As net inventory at the distributor was nominal as of June 30, 2001, we do not anticipate any future financial impact related to this issue. Net software revenues were $2.8 million and $5.4 million in the six months ended June 30, 2001 and 2000, respectively, representing a decrease of $2.5 million, or 47.1%, from 2000 to 2001. The decrease in net software revenue over the six month periods is due to the distributor inventory reduction as well as the result of declining revenue from our legacy analog modem product lines and a decline in royalty revenue reported to us 12 13 from Apple. Sales of new cellular phone products, that were not present in the comparable period of 2000, helped to offset these differences. Consulting Services. Consulting services revenues were $868,000 and $582,000 in the three months ended June 30, 2001 and 2000, respectively, representing an increase of $286,000 or 49.1%, from 2000 to 2001. Consulting services revenue accounted for 80.3% of total revenues in the three months ended June 30, 2001 compared with 18.1% 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. The QuickStart acquisition took place in September 2000. Consulting services revenues were $1.5 million and $920,000 in the six months ended June 30, 2001 and 2000, respectively, representing an increase of $564,000 or 61.3%, from 2000 to 2001. Consulting services revenue accounted for 34.3% of total revenues in the six months ended June 30, 2001 compared with 14.6% of total revenues in the comparable period of 2000. COST OF REVENUES Cost of Software Revenues. Cost of software revenues was $375,000 and $487,000 in the three months ended June 30, 2001 and 2000, respectively, representing a decrease of $112,000, or 23.0%, from 2000 to 2001. Cost of software revenue as a percentage of software revenues was 176.0% and 18.4% for 2001 and 2000, respectively. The significant increase as a percent of revenue in the current period is principally due to the impact of sales returns and inventory write-downs on returned products. Cost of software revenues was $892,000 and $1.0 million in the six months ended June 30, 2001 and 2000, respectively, representing a decrease of $151,000, or 14.5%, from 2000 to 2001. Cost of software revenue as a percentage of software revenues was 31.4% and 19.4% for 2001 and 2000, respectively. Cost of Consulting Service revenues. Cost of consulting service revenues was $566,000 and $70,000 in the three months ended June 30, 2001 and 2000, respectively, representing an increase of $496,000 or 708.6% , from 2000 to 2001. Cost of consulting revenue as a percentage of consulting revenues was 65.2% and 12.0% 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 June 30, 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 June 30, 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 June 30, 2001. Cost of consulting service revenues was $1.1 million and $127,000 in the six months ended June 30, 2001 and 2000, respectively, representing an increase of $960,000 or 756%, from 2000 to 2001. Cost of consulting revenue as a percentage of consulting revenues was 73.3% and 13.8% for 2001 and 2000, respectively. OPERATING EXPENSES Selling and Marketing. Selling and marketing expenses remained constant at $1.5 million three months ended June 30, 2001 and 2000, respectively. 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. Selling and marketing expenses were $3.3 million and $2.8 million in the six months ended June 30, 2001 and 2000, respectively, representing an increase of $423,000, or 14.9%, from 2000 to 2001. The increase in our selling and marketing expenses in the six months ended June 30, 2001 over the comparable period of 2000 was primarily the result of increases in our eCommerce business, including salaries and related personnel expenses and facilities expenses. 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. These costs were partially offset by cost reduction measures undertaken early in the second quarter of 2001. Research and Development. Research and development expenses were $832,000 and $1.0 million in the three months ended June 30, 2001 and 2000, respectively, representing a decrease of $172,000, or 17.1%, 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. Efforts include work on our eCommerce products, Internet telephony and videoconferencing products, including Macintosh versions and wireless products. The decrease in our research and development expenses in the three months ended June 30, 2001 over 2000 was primarily due to cost reduction efforts. Research and development expenses were $1.8 million and $1.9 in the six months ended June 30, 2001 and 2000, respectively, representing a decrease of $102,000, or 5.3%, from 2000 to 2001. 13 14 General and Administrative. General and administrative expenses were $1.3 million and $940,000 in the three months ended June 30, 2001 and 2000, respectively, representing an increase of $324,000, or 34.5%, from 2000 to 2001. The increase in our general and administrative expenses in the three months ended June 30, 2001 over 2000 primarily came from an increase in our allowance for doubtful accounts of $256,000 due to the bankruptcy of a significant customer, and $55,000 of amortization expense relating to the acquisition of QuickStart which was not present in the comparable period of 2000. General and administrative expenses were $2.3 million and $1.8 million in the six months ended June 30, 2001 and 2000, respectively, representing an increase of $505,000, or 27.8%, from 2000 to 2001. Restructuring Costs. In the three months ended June 30, 2001, we reported a restructuring charge in the amount of $345,000. This amount includes a $230,000 lease payment commitment on the office space in Beaverton, Oregon, which was closed, and personnel costs incurred as a result of the reduction in staff, of 37 people or 31%. Interest Income, net. Net interest income was $33,000 and $115,000 in the three months ended June 30, 2001 and 2000, respectively, representing an decrease of $82,000, or 71.3%, from 2000 to 2001. Net interest income was $65,000 and $227,000 in the six months ended June 30, 2001 and 2000, respectively, representing an decrease of $162,000, 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 June 30, 2001 compared to the same period in 2000. 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 $20,000 and $6,000 in the three months ended June 30, 2001 and 2000, respectively, representing an increase of $14,000, or 233.3%, from 2000 to 2001. The tax expense for the three months ended June 30, 2001 and 2000 is due to taxes on foreign income. Provision for income taxes was $89,000 and $45,000 in the six months ended June 30, 2001 and 2000, respectively, representing a increase of $44,000, or 77.8%, from 2000 to 2001. Tax expense for the six months ended June 30, 2001 related to foreign income as well as adjustments related to 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 $1.7 million in the six months ended June 30, 2001 compared to $1.0 million in the comparable period of 2000. The primary operating use of cash during the both periods was funding our net loss. During the six months ended June 30, 2001, we used $90,000 in investing activities compared to $129,000 in the comparable period of 2000. At June 30, 2001, we had $4.4 million in cash and cash equivalents and $3.8 million of working capital. Our accounts receivable balance, net of allowance for doubtful accounts and other adjustments was $1.6 million at June 30, 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, investment balances and cash flow from operations will be sufficient to finance our working capital and capital expenditure requirements through 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. 14 15 RISK FACTORS BEFORE DECIDING TO INVEST IN OUR COMPANY OR TO MAINTAIN OR INCREASE YOUR INVESTMENT, YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS REPORT AND IN OUR OTHER FILINGS WITH THE SEC, INCLUDING OUR SUBSEQUENT REPORTS ON FORMS 10-Q AND 8-K. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO AFFECT OUR BUSINESS OPERATIONS. IF ANY OF THESE RISKS ACTUALLY OCCUR, THAT COULD SERIOUSLY HARM OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS. IN THAT EVENT, THE MARKET PRICE FOR OUR COMMON STOCK COULD DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. Our quarterly operating results may fluctuate and cause the price of our common stock to fall. Our quarterly revenues and operating results have fluctuated significantly in the past and may continue to vary from quarter to quarter due to a number of factors, many of which are not within our control. If our operating results do not meet the expectations of securities analysts or investors, our stock price may decline. Fluctuations in our operating results may be due to a number of factors, including the following: - the volume of our product sales and pricing concessions on volume sales; - the size and timing of orders from and shipments to our major customers; - our ability to maintain or increase gross margins; - general economic and market conditions; - variations in the our sales channels or the mix of our product sales; - the gain or loss of a key customer; - our ability to specify, develop, complete, introduce, market and transition to volume production new products and technologies in a timely manner; - the availability and pricing of competing products and technologies and the resulting effect on sales and pricing of our products; - the timing of new product announcements and introductions by us, our competitors or our customers; - the effect of new and emerging technologies; - deferrals of orders by our customers in anticipation of new products, applications, product enhancements or operating systems; and - Customer policy and or procedural changes regarding stocking. A large portion of our operating expenses, including rent, depreciation, amortization, 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. 15 16 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 may offer new services and products with which have limited prior experience. We devote significant resources our consulting services as well as the OEM and Retail lines of products. However, we cannot provide any assurance that new services and products in these areas will become or remain profitable. If we are unable to build market awareness of the need for these products and services, our business, operating results and financial condition will suffer. Technology and customer needs change rapidly in our market which could render our products obsolete. Our future success will depend on our ability to anticipate and adapt to changes in technology and industry standards. We will also need to continue to develop and introduce new and enhanced products to meet our customers' changing demands, keep up with evolving industry standards, including changes in the Microsoft operating systems with which our products are designed to be compatible, and to promote those products successfully. The communications and utilities software markets in which we operate are characterized by rapid technological change, changing customer needs, frequent new product introductions, evolving industry standards and short product life cycles. Any of these factors could render our existing products obsolete and unmarketable. In addition, new products and product enhancements can require long development and testing periods as a result of the complexities inherent in today's computing environments and the performance demanded by customers. If the communications software markets do not develop as we anticipate or our products do not gain widespread acceptance in these markets, or if we are unable to develop new versions of our software products that can operate on future operating systems, our business, financial condition and results of operations could be 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 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. 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. 16 17 We rely primarily on one distributor for a significant portion of our total revenues. Sales to Ingram Micro, a retail distributor, represented (5.0)% of our net revenues for the six months ended June 30, 2001 and 20.4% of our net revenues for the twelve months ended December 31, 2000. We are not able to control the factors influencing whether and in what quantity Ingram purchases products from us. The significant curtailment of purchases and increase in product returns by Ingram Micro, as experienced by us in the six months ended June 30, 2001, has had a [material] adverse effect on our business during such period. There can be no assurance that sales to Ingram will improve and, in fact, we could lose Ingram as a distributor of our products altogether. We have entered into an agreement with another distributor to help mitigate this situation; however, we cannot assure you that it will. 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, etc.), eCommerce distributors and value added resellers, commonly known as VARs, to market and distribute our retail software products. Our relationships with our distributors and retailers depend upon a number of factors, including our ability to meet certain minimum sales volume requirements. In addition, with little or no advanced notice to us our retailers and VARs may purchase fewer products from us in any given quarter for reasons beyond our control and in many cases unrelated to end user demand, such as a decision to change their inventory strategies. Our agreements with retailers and VARs are not exclusive and in many cases may be terminated by either party without cause. If this happens or if we are unable to develop and maintain relationships with distributors and retailers to sell our retail software products, our retail sales will be adversely affected. We may have excessive, unanticipated product returns. We are exposed to the risk of product returns, markdown allowances and stock rotations with respect to our distributors and retailers. We accept returns for defective and damaged products and provide price protection on products unsold by a customer. 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. We also allow distributors to rotate stock, where they may substitute one product for another. Although we maintain a reserve for these situations, and manage these allowances through our returns authorization procedure, we could choose to accept substantial allowances to maintain our relationships with retailers and our access to distribution channels. During the second quarter of 2001 we agreed to accept a significantly higher level of product returns than we had anticipated in an effort to work with a distributor to reduce their inventory. As a result, ongoing distribution inventories will run at approximately 20% of previous levels, significantly reducing our exposure to future unexpected returns. 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. 17 18 Our stock price is highly volatile. Accordingly, you may not be able to resell your shares of common stock at or above the price you paid for them. The market price of our common stock has fluctuated substantially in the past and is likely to continue to be highly volatile and subject to wide fluctuations. These fluctuations have occurred and may continue to occur in response to various factors, many of which we cannot control, including: - quarter-to-quarter variations in our operating results; - announcements of technological innovations or new products by our competitors, customers or us; - general economic conditions and conditions within the communications software markets; - changes in earnings estimates or investment recommendations by analysts; - changes in investor perceptions; or - changes in expectations relating to our products, plans and strategic position or those of our competitors or customers. In addition, the market prices of securities of Internet-related and other high technology companies have been especially volatile. This volatility has significantly affected the market prices of securities of many technology companies. Accordingly, you may not be able to resell your shares of common stock at or above the price you paid. In the past, companies that have experienced volatility in the market price of their securities have been the subject of securities class action litigation. If we were the object of a securities class action litigation, it could result in substantial losses and divert management's attention and resources from other matters. Our products may contain undetected software errors. Our software products are complex and may contain undetected errors. In the past, we have discovered software errors in certain of our products and have experienced delayed or lost revenues during the period it took to correct these errors. Although we and our OEM customers test our products, it is possible that errors may be found in our new or existing products after we have commenced commercial shipment of those products. These undetected errors could result in adverse publicity, loss of revenues, delay in market acceptance of our products or claims against us by customers. 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; 18 19 - the levels of promotion and advertising that will be required to launch our products and achieve and maintain a competitive position in the marketplace; - our business, product, capital expenditure and research and development plans and product and technology roadmaps; - the levels of inventory and accounts receivable that we maintain; - capital improvements to new and existing facilities; - technological advances; - our competitors' response to our products; and - our relationships with suppliers and customers. In addition, we may require additional capital to accommodate planned growth, hiring, infrastructure and facility needs or to consummate acquisitions of other businesses, products or technologies. Marketing efforts for our retail software products require substantial investments that may adversely affect our operating margins. Maintaining product recognition distribution channels for our retail software products, including our new CheckIt(R) line of products, requires 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. 19 20 We may be unable to adequately protect our intellectual property and other proprietary rights. Our success is dependent upon our software code base, our programming methodologies and other intellectual properties and proprietary rights. In order to protect our proprietary technology, we rely on a combination of trade secret, nondisclosure and copyright and trademark law. However, these measures afford us only limited protection. We currently own United States trademark registrations for certain of our trademarks, but we have not yet obtained registrations for all of our trademarks in the United States or other countries. In addition, prior to becoming a publicly held entity, we did not require our employees to sign proprietary information and inventions agreements stipulating to our software ownership rights. We only recently started the patent application process for a number of technologies relating to our existing products and products under development. Furthermore, we rely primarily on "shrink wrap" licenses that are not signed by the end user and, therefore, may be unenforceable under the laws of certain jurisdictions. Accordingly, despite the precautions we have taken to protect our intellectual property and proprietary rights, it is possible that third parties may copy or otherwise obtain our rights without our authorization. It is also possible that third parties may independently develop technologies similar to ours. It may be difficult for us to detect unauthorized use of our intellectual property and proprietary rights. We may be subject to claims of intellectual property infringement as the number of trademarks, patents, copyrights and other intellectual property rights asserted by companies in our industry grows and the coverage of these patents and other rights and the functionality of software products increasingly overlap. From time to time, we have received communications from third parties asserting that our trade name or features, content, or trademarks of certain of our products infringe upon intellectual property rights held by such third parties. We have also received correspondence from third parties separately asserting that our fax products may infringe on certain patents held by each of the parties. Although we are not aware that any of our products infringe on the proprietary rights of others, third parties may claim infringement by us with respect to our current or future products. Infringement claims, whether with or without merit, could result in time-consuming and costly litigation, divert the attention of our management, cause product shipment delays or require us to enter into royalty or licensing agreements with third parties. If we are required to enter into royalty or licensing agreements, they may not be on terms that are acceptable to us. Unfavorable royalty or licensing agreements could seriously impair our ability to market our products. We must continue to 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. Additionally, retaining key employees during restructuring efforts is critical to company success. 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. 20 21 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. Our business, financial condition and operating results could be adversely affected as a result of legal, business and economic risks specific to international operations. Approximately 12.4% of our revenue for the six 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 may 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 July 31, 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. 21 22 Future sales of our common stock could cause the price of our shares to decline. As of July 31, 2001, we had 16,232,416 shares of Common Stock outstanding. Of this amount, the 9,778,670 shares held by William W. Smith, Jr. and Rhonda L. Smith became available for sale in the public market (subject to the volume and other applicable restrictions of Rule 144) in September 1997, following the expiration of a two year lock-up agreement with certain representatives of the underwriters of our initial public offering, which consummated in September 1995. Sales of a substantial number of shares of our common stock by William W. Smith, Jr., Rhonda L. Smith or any other person, either individually or when aggregated with sales by other persons, could adversely affect the market price of our common stock. Provisions of our charter and bylaws and Delaware law could make a takeover of our company difficult. Our certificate of incorporation and bylaws contain provisions that may discourage or prevent a third party from acquiring us, even if doing so would be beneficial to our stockholders. For instance, our certificate of incorporation authorizes the board of directors to fix the rights and preferences of shares of any series of preferred stock, without action by our stockholders. As a result, the board can authorize and issue shares of preferred stock, which could delay or prevent a change of control because the rights given to the holders of such preferred stock may prohibit a merger, reorganization, sale or other extraordinary corporate transaction. In addition, we are organized under the laws of the State of Delaware and certain provisions of Delaware law may have the effect of delaying or preventing a change in our control. 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 us to measure all derivatives at fair value and to recognize them in the balance sheet as an asset or liability, depending on our 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. We adopted SFAS No. 133 on January 1, 2001. Adoption of the new method of accounting for derivatives and hedging activities did not have a material impact on our financial position because we do not have derivative instruments and do not engage in hedging activities. In June 2001, the FASB issued two new pronouncements: SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141 prohibits the use of the pooling-of-interest method for business combinations initiated after June 30, 2001 and also applies to all business combinations accounted for by the purchase method that are completed after June 30, 2001. There are also transition provisions that apply to business combinations completed before July 1, 2001, that were accounted for by the purchase method. SFAS 142 is effective for fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. We are currently evaluating the provisions of SFAS 141 and SFAS 142 and have not adopted such provisions in its June 30, 2001 financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Smith Micro's financial instruments include cash and cash equivalents. At June 30, 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 June 30, 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 An Annual Meeting of the Stockholders of the Company was held on May 15, 2001. At the Annual Meeting, the Stockholders voted as follows: (a) The Stockholders elected the following nominee as director, to hold office until the 2004 Annual Meeting, or until her successor is elected and qualified. The vote was as follows:
------------------------------------------------------------------------ Nominee Votes For Votes Against Withhold Authority ------------------------------------------------------------------------ Rhonda L. Smith 9,790,480 259,212 60,000 ------------------------------------------------------------------------
In addition to Ms. Smith, the following directors will continue to hold office: William Smith, Robert Scheussler, Tom Campbell, David Stastny and Greg Szabo. (b) The Stockholders elected to approve amendments to the Company's 1995 Stock Option/Stock Issuance Plan to (i) increase the number of shares of Common Stock authorized for issuance under the Plan from 2,750,000 shares to 3,150,000, and (ii) add an automatic share increase feature pursuant to which the number of shares of the Common Stock reserved for issuance under the 1995 Plan will automatically increase during each calendar year by an amount not to exceed five percent (5%) of the total number of shares of the Common Stock outstanding on the last trading day in December of the immediately preceding calendar year, but in no event shall any such annual increase exceed 2,000,000 shares (with 9,849,780 shares voting for, 259,912 shares voting against, and no shares abstaining). (c) The Stockholders elected to ratify the appointment of Deloitte and Touche LLP as the Company's independent auditor of the fiscal year ending December 31, 2001 (with 10,109,692 shares voting for, no shares voting against, and no abstentions). 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 Incorporated by reference to of Incorporation of the Company Exhibit 3.1 to the Registrant's Registration Statement No. 33-95096
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Exhibit No. Title Method of Filing - ------- ----- ---------------- 3.1.1 Amendment to the Amended and Incorporated by reference to Restated Certificate of Exhibit 3.1.1 to the Registrant's Incorporation of the Company Quarterly Report on Form 10-Q for the period ended June 30, 2000. 3.2 Amended and Restated Bylaws of Incorporated by reference to the Company. Exhibit 3.2 to the Registrant's Registration Statement No. 33-95096 4.1 Specimen certificate Incorporated by reference to representing shares of Common Exhibit 4.1 to the Registrant's Stock of the Company. Registration Statement No. 33-95096 10.1 Form of Indemnification Incorporated by reference to Agreement. Exhibit 10.1 to the Registrant's Registration Statement No. 33-95096 10.2 1995 Stock Option/Stock Issuance Incorporated by reference to an Plan, as amended. attachment to the Registrant's Definitive Proxy Statement filed with the SEC on April 25, 2001 10.3 Form of Notice of Grant of Stock Incorporated by reference to Option under 1995 Stock Exhibit 10.3 to the Registrant's Option/Stock Issuance Plan. Registration Statement No. 33-95096 10.4 Form of 1995 Stock Option Incorporated by reference to Agreement under 1995 Stock Exhibit 10.4 to the Registrant's Option /Stock Issuance Plan. Registration Statement No. 33-95096 10.5 Form of 1995 Stock Purchase Incorporated by reference to Agreement under 1995 Stock Exhibit 10.5 to the Registrant's Option/Stock Issuance Plan. Registration Statement No. 33-95096 10.6 Distribution License Agreement Incorporated by reference to dated September 30, 1991, by and Exhibit 10.6 to the Registrant's between the Company and Crandell Registration Statement No. 33-95096 Development Corporation. 10.7 Application Program Interface Incorporated by reference to Retail License Agreement July Exhibit 10.7 to the Registrant's 28, 1992 by and between the Registration Statement No. 33-95096 Company and Rockwell International Corporation. 10.8 Application Program Interface Incorporated by reference to License Agreement July 28, 1992 Exhibit 10.8 to the Registrant's by and between the Company and Registration Statement No. 33-95096 Rockwell International Corporation. 10.9 Rockwell High Speed Interface Incorporated by reference to License Agreement dated June 2, Exhibit 10.9 to the Registrant's 1994, by and between the Company Registration Statement No. 33-95096 and Rockwell International Corporation. 10.10 Letter Agreement dated February Incorporated by reference to 22, 1994, by and between the Exhibit 10.10 to the Registrant's Company and Rockwell Registration Statement No. 33-95096 International Corporation. 10.11 Letter Agreement dated April 22, Incorporated by reference to 1993, by and between the Company Exhibit 10.11 to the Registrant's and Rockwell International Registration Statement No. 33-95096 Corporation.
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Exhibit No. Title Method of Filing - ------- ----- ---------------- 10.12 Software Distribution Agreement Incorporated by reference to dated May 8, 1995, by and Exhibit 10.12 to the Registrant's between the Company and Registration Statement No. 33-95096 International Business Machines Corporation. 10.13 Office Building Lease, dated Incorporated by reference to June 10, 1992, by and between Exhibit 10.13 to the Registrant's the Company and Developers Registration Statement No. 33-95096 Venture Capital Corporation. 10.14 Amendment No. 1 To Office Incorporated by reference to Building Lease, dated July 9, Exhibit 10.14 to the Registrant's 1993, by and between the Company Registration Statement No. 33-95096 and Pioneer Bank. 10.15 Amendment No. 2 To Office Incorporated by reference to Building Lease, dated August 15, Exhibit 10.15 to the Registrant's 1994, by and between the Company Registration Statement No. 33-95096 and T&C Development. 10.16 Fourth Addendum to Office Incorporated by reference to Building Lease, dated April 21, Exhibit 10.16 to the Registrant's 1995, by and between the Company Registration Statement No. 33-95096 and T&C Development. 10.17 Form of Promissory Note related Incorporated by reference to to S Corporation Distribution. Exhibit 10.17 to the Registrant's Registration Statement No. 33-95096 10.18 Smith Micro Software, Inc. Incorporated by reference to Amended and Restated Software Exhibit 10.21 to the Registrant's Licensing and Distribution Quarterly Report on Form 10-Q for Agreement, dated April 18, 1996, the quarter ended September 30, by and between the Company and 1996 U.S. Robotics Access Corp. 10.19 Office Building Lease, dated Incorporated by reference to March 1, 1994, by and between Exhibit 10.19 to the Registrant's Performance Computing Annual Report on Form 10-K for the Incorporated and Petula fiscal year ended December 3l, 1995 Associates, Ltd./KC Woodside. 10.20 Agreement and Plan of Merger by Incorporated by reference to and between Smith Micro Exhibit 2 to the Registrant's Software, Inc., Performance Current Report on Form 8-K filed Computing Incorporated and PCI with the Commission on March 28, Video Products, Inc. dated as of 1996 March 14, 1996. 10.21 Amendment No. 1, dated as of Incorporated by reference to March 10, 1997, to Agreement and Exhibit 10.21 to the Registrant's Plan of Merger by and between Annual Report on Form 10-K for the 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 Incorporated by reference to Building Lease, dated February Exhibit 10.22 to the Registrant's 19, 1998, by and between the Annual Report on Form 10-K for the Company and World Outreach fiscal year ended December 31, 1997 Center.
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Exhibit No. Title Method of Filing - ------- ----- ---------------- 10.23 Software licensing and Incorporated by reference to Distribution Agreement dated Exhibit 10.23 to the Registrant's December 1, 1998, by and between Annual Report on Form 10-K for the the Company and 3Com Corporation fiscal year ended December 31, 1998 10.24 Stock Purchase Agreement dated Incorporated by reference to as of April 9, 1999 by and among Exhibit 2 to the Registrant's Smith Micro Software, Inc. STF Current Report on Form 8-K filed Technologies, Inc. and the with the Commission on April 23, Shareholders of STF 1999 Technologies, Inc. 10.25 Amendment No. 7 to Office Incorporated by reference to Building Lease, dated November Exhibit 10.25 to the Registrant's 5, 1999, by and between the Annual Report on Form 10-K for 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
(B) REPORTS ON FORM 8-K No such reports were filed during the three months ended June 30, 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. August 13, 2001 By /s/ WILLIAM W. SMITH, JR. William W. Smith, Jr. Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) August 13, 2001 By /s/ ROBERT W. SCHEUSSLER Robert W. Scheussler Chief Operating Officer and Acting Chief Financial Officer (Principal Financial Officer) 26 -----END PRIVACY-ENHANCED MESSAGE-----