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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE 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.
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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
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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
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SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
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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.
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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.
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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.
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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
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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.
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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
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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.
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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
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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
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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.
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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;
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- 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
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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
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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.
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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.
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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
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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.
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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,
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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.
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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.
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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.
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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
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(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)
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