UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2005
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from __________ to __________
Commission File Number 0-26536
SMITH MICRO SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of incorporation or organization)
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33-0029027
(I.R.S. Employer Identification Number)
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51 Columbia, Suite 200, Aliso Viejo, CA
(Address of principal executive offices)
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92656
(Zip Code)
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Registrants telephone number, including area code:
(949) 362-5800
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Common Stock, $.001 par value
(Title of each class)
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Nasdaq SmallCap Market
(Name of each exchange on which registered)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value
Indicate by check mark if the
registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities
Act. Yes
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No
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If
this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports pursuant
to Section 13 or 15(d) of the Securities Exchange Act of
1934. Yes
o
No
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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
þ
No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the
Act). Yes
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No
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As of June 30, 2005, the last business day of the registrants most recently completed second
quarter, the aggregate market value of the common stock of the registrant held by non-affiliates
was $63,670,654 based upon the closing sale price of such stock as reported on the Nasdaq SmallCap
Market on that date. For purposes of such calculation, only executive officers, board members, and
beneficial owners of more than 10% of the registrants outstanding common stock are deemed to be
affiliates.
As of March 9, 2006, there were 22,434,369 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement for the Annual Meeting of Stockholders to be
filed with the Securities Exchange Act of 1934, are incorporated by reference in Part III of this
report.
SMITH MICRO SOFTWARE, INC.
2005 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
2
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
In this document, the terms Smith Micro, Allume Systems, Allume, Company, we, us,
and our refer to Smith Micro Software, Inc. and its subsidiaries.
This report contains forward-looking statements regarding Smith Micro which include, but are
not limited to, statements concerning projected revenues, expenses, gross profit and income, the
competitive factors affecting our business, market acceptance of products, customer concentration,
the success and timing of new product introductions, the protection of our intellectual property,
and the need for additional capital. These forward-looking statements are based on our current
expectations, estimates and projections about our industry, managements beliefs, and certain
assumptions made by us. Words such as anticipates, expects, intends, plans, predicts,
potential, believes, seeks, estimates, should, may, will and variations of these
words or similar expressions are intended to identify forward-looking statements. Forward-looking
statements also include the assumptions underlying or relating to any of the foregoing statements.
These statements are not guarantees of future performance and are subject to risks, uncertainties
and assumptions that are difficult to predict. Therefore, our actual results could differ
materially and adversely from those expressed in any forward-looking statements as a result of
various factors. Such factors include, but are not limited to the following:
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our ability to predict consumer needs, introduce new products, gain broad market
acceptance for such products and ramp up manufacturing in a timely manner;
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the intensity of the competition and our ability to successfully compete;
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the pace at which the market for new products develop;
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the response of competitors, many of whom are bigger and better financed than us;
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our ability to successfully execute our business plan and control costs and expenses;
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our ability to protect our intellectual property and our ability to not infringe
on the rights of others;
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our depressed market capitalization; and
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those additional factors which are listed under the section Risk Factors on
page 21 of this report.
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All forward looking statements included in this document are based on information available to
us on the date hereof. We do not undertake any obligation to revise or update publicly any
forward-looking statements for any reason.
3
PART I
Item 1. BUSINESS
General
Smith Micro Software, Inc. is a diversified developer and marketer of wireless communication
software products and services. Our primary focus and strategy for our products and services is
directed to wireless communications including wireless wide area network (WWAN) software, handset
phonebook management, managing the download of music to a handset, and Wi-Fi software. We sell our
products and services to some of the worlds leading companies as well as to consumers. Specific
Smith Micro wireless products include QuickLink Mobile, QuickLink Mobile Enterprise and QuickLink
Mobile Phonebook. The proliferation of wireless technologies is providing new opportunities
globally. The wireless infrastructures being implemented, such as 1xRTT, GPRS and the newer 3G
technology including EVDO UMTS and HSDPA, offer wider bandwidth wireless data services. This
infrastructure combined with mobile platforms such as the basic mobile phone, notebook computing
devices (PCs) and personal communications devices (PDAs) provide opportunities for new
communications software products. Our core communications technology is designed to address this
emerging wireless data market.
We manufacture, market and sell value-added wireless connectivity products targeted to the
original equipment manufacturers (OEM) market, particularly wireless service providers and mobile
phone manufacturers, as well as direct to the consumer. We offer software products for Windows, Mac
OSX, Unix and Linux operating systems. The underlying design concept is the long-standing Smith
Micro purpose to enhance the out-of-box experience for the customer. Our custom engineering
services bring more than 20 years of hardware and software experience, having shipped over 60
million copies of products to OEMs seeking to better market their products by adding product
features, customizing existing features and translating applications into additional languages.
QuickLink Mobile provides notebook users with the ability to easily roam between wireless wide
area networks (WWAN) and Wi-Fi hot spots. QuickLink Mobile allows users to seek out and select
available hot spots in their area. We currently maintain OEM relationships with many wireless
carrier companies, including Verizon Wireless, Vodafone, Telus, Alltel, UTStarcom, LG Electronics
and Kyocera. Sales to Verizon Wireless amounted to approximately 57.1% and 68.4% of the Companys
net revenues for 2005 and 2004, respectively. Sales to Verizon Wireless, Cingular Wireless and
Apple Computer amounted to approximately 27.0%, 10.7% and 10.2% of our net revenues for 2003,
respectively.
During the fourth quarter of 2004, we announced our latest addition to the QuickLink family,
namely QuickLink Mobile Enterprise, aimed at the enterprise marketplace to take advantage of the
demand for additional security built into our wireless application. This product was introduced in
the second quarter of 2005. In addition to addressing the latest technologies and concerns for
security in the wireless space, QuickLink Mobile Enterprise is a combination wireless wide area
network (WWAN) and Wi-Fi client application that provides the same easy to use interface and
functionality regardless of carrier or device. The application supports over 180 carriers
worldwide, hundreds of wireless devices and PDAs, many different PC Cards, and several integrated
WWAN devices in notebooks.
In the fourth quarter of 2005, we launched a new music product, the Music Essentials Kit for
Verizon Wireless. The Music Essentials kit allows users to download music from Verizon Wireless,
or transfer music files from a PC to a handset. This product first shipped in our fourth quarter
of 2005 and is expected to be a significant contributor to 2006 revenues.
A future initiative for our OEM group is launching StuffIt Wireless. StuffIt Wireless
incorporates our patent-pending JPEG compression technology that provides a superior compression of
multi-media data. This technology allows device manufacturers and wireless carriers to increase
storage space on devices, increase the
quality of images and optimize wireless bandwidth. We are currently in the prototype stage of
product development with potential customers and plan to fully market this product in 2007.
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Our Enterprise Solutions Group delivers wireless mobility solutions into medium and large
enterprise businesses. In addition to offering products designed to enhance security, lower help
desk costs and deliver a more fluid wireless experience, the Enterprise Solutions Group provides
architectural design and implementation services that guarantee to our customers that the applied
solution is the best possible combination for the target environment. Combined with our wireless
mobility business direction are our eBusiness applications and services initiative. This area of
business leverages our many years of providing web-based applications custom-tooled to meet the
needs of the growing business. From basic web design to complex solutions involving complete
customer management, online commerce and fulfillment services, the Enterprise Solutions Group helps
businesses refine their processes and implement cost-effective, empowering systems.
The Consumer Products Group offers products in the PC Utility, Fax and eBusiness markets.
Smith Micros complete line of consumer products is available through direct sales on its websites,
partner websites or its order desk and through traditional retail outlets. The Consumer group is
focused on the following market segments: Compression, Access and Transmission (CAT), Utilities
including Diagnosis, Performance, Security and Internet and Compilation and Lifestyle.
As a world leader and innovator in data and image compression field our StuffIt product line
helps users compress, encrypt and archive information. In January 2005 the company introduced its
revolutionary patent pending JPEG compression technology. This breakthrough technology can compress
JPEG photos and images up 30% without and additional loss in image quality. Combining our new
image compression with StuffIts traditional file compression accelerates the transmission of files
over the Internet. Plus, with built-in error protection and encryption (up to 512- bit encryption),
users can send StuffIt archives with peace of mind.
We currently operate in two
business segments: Products and services. We do not separately
allocate operating expenses to these segments, nor do we allocate specific assets to these
segments. Therefore, segment information reported includes only revenues and cost of revenues. See
Note 8 of Notes to Consolidated Financial Statements for financial information related to our
operating segments.
Research and development expenses amounted to $4.0 million, $2.6 million and $2.5 million for
the years ended December 31, 2005, 2004 and 2003, respectively. 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 wireless, diagnostic, utility and Internet software technologies.
We were incorporated in California in November 1983, and we reincorporated in Delaware in June
1995. Our principal executive offices are located at 51 Columbia, Suite 200, Aliso Viejo,
California 92656. Our telephone number is (949) 362-5800. Our website address is
www.smithmicro.com . We make our filings with the SEC available on the Investor Relations
page of our website. Information contained on our website is not part of this Annual Report on Form
10-K.
Industry Backgrounds
Wireless Industry
The evolving types of 3G wireless data infrastructures being implemented,
such as EV-DO, HSDPA, and UMTS wireless platforms have expanded to include the basic mobile phone,
personal computing devices (PCs) and personal communications devices including PDAs and various
handheld devices. The adoption of these new mobile and wireless communications services provides
opportunities for new communications software products. In addition, these devices are becoming
multimedia devices, which include digital cameras, portable music players and full motion video
cameras.
Compression, Access and
Transmission
Computer compression helps users solve fundamental
issues
that they all share: Sending information in a way that is fast, safe and secure, accessing and
archiving information and the maximization of storage capacity and Internet bandwidth.
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Diagnostic/Utility Software Industry
- Diagnostic and utility software products assist home
and corporate users, and hardware manufacturers and service companies to identify and repair
computer system related errors and problems. The company focuses on utilities covering two market
segments: Diagnosis and performance, and security and internet. These products are designed to
enhance, protect, clean, diagnose and help customers maximize their
computers performance and
secure from spam, spyware and computer hackers.
Computer Consulting Industry
- A corporations information technology department generally
evaluates whether to design, build or support computer applications internally or to contract some
or all of this work to outside specialists with technical expertise. Many corporations choose to
use outside consulting contractors for this work in order to focus their resources on their core
competencies and avoid the time and expense required to train their own employees. Our efforts are
focused on these outsourced services.
Products and Services
The following is a list of the software products and services we offer, as well as a brief
description of their principal features and functions:
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Software Products
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OEM & Wireless
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QuickLink
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Mobile
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(Windows and Mac) Turns data
capable wireless handsets, PDAs
and wireless integrated notebook
PCs into wireless data
connectivity devices.
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QuickLink
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Phone Manager
QuickLink
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Mobile Enterprise
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(Windows) Enables users to be
able to easily edit the phonebook
and calendar that reside on a
wireless handset on a PC
computer. This product enables
you to transfer PIM and calendar
data from your computer to your
handset and to move similar data
from your handset back to the PIM
on the computer.
(Windows) Expands QuickLink
Mobile by offering additional
features that are tailored
specifically for the enterprise
customer such as customizations
and 802.1x Wi-Fi security.
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Fax & Communication
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FAXstf
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FAXstf
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X Pro
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Enables users to exchange faxes
and data files with remote
modems, fax/modems, and fax
machines quickly and easily on
the Mac OS X operating
environment.
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HotFax
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MessageCenter
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An integrated voice, fax and data
communication software program
that lets users receive voice
mail and exchange faxes and data
files with remote modems,
fax/modems, and fax machines
quickly and easily.
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Compression, Access and Transmission
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StuffIt® Wireless
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A breakthrough image compression
technology that reduces the size
of a JPEG picture file up to 30%
without any additional loss in
image quality. This technology
allows device manufacturers and
wireless carriers to increase
storage space on devices,
increase the quality of images
and optimize wireless bandwidth.
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StuffIt® Image
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An evolving set of technologies
to handle image compression for
multiple image formats. Target
markets include digital camera
manufacturers, Enterprise Content
Management and medical imaging.
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StuffIt® Deluxe
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(Windows and Mac) A complete
compression, expansion, and
access solution. Providing easy
to use award winning archiving
and security from 512 bit
encryption, to Adobe and
Microsoft Office plug-ins to our
JPEG image compression.
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StuffIt® Standard Edition
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(Windows and Mac) Our basic
core product that provides basic
compression and decompression
functionality.
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StuffIt® Expander
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(Windows and Mac) A universal
expansion product that
decompresses and decodes all
major compression formats.
Expander is distributed free of
charge and encourages the wide
distribution of files in StuffIt
format and enhances the market for
our commercial products.
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Utilities
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CheckIt® Diagnosis
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(Windows) Provides end-users
the hardware information they
need to evaluate, fine-tune and
manage their system.
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CheckIt® System Performance Suite
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(Mac) Provides customers with
repair, cleaning and diagnosis
utilities for their Macintosh.
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Spring Cleaning®
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(Windows and Mac) Our
uninstaller and cleanup product
that removes the clutter that
accumulates on your computer from
unwanted and unused files. Spring
Cleaning cleans and improves the
performance of your computer.
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Internet Cleanup
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(Windows and Mac) An Internet
cleanup and privacy product,
which allows a user to remove
specific unwanted files gathered
by a Web browser every time you
surf the Internet. It increases
computer security by blocking
pop-ups and removing spyware.
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BoostXP
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(Windows) A complete collection
of all of the necessary tools to
keep your system running smooth,
faster and error-free.
Accelerate, clean, customize and
protect your PC.
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Lifestyle
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Aquazone®
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(Windows and Mac) A virtual
aquarium for your computer.
Offering multiple collections
which includes sharks, jellyfish,
turtles, and 40 fish species to
our expansion pack of goldfish,
jellyfish and deep sea divers.
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Personal Photo
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(Windows) Manage and share
photos. You can create custom
photo albums, edit your pictures,
print and create photo calendars
and postcards.
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Services
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Consulting
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Consulting services range from complete website design and
installation consulting services.
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Hosting
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We maintain a network operations facility that is monitored 24
x 7 to ensure maximum uptime. We offer a broad spectrum of
bandwidth and service options to customers. We host customers
on our servers or house their server at our location.
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Fulfillment
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An extension of our eBusiness activity includes order
fulfillment services for customer web stores.
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Sales and Marketing
Our products are available worldwide to customers through original equipment manufacturers.
We also sell products and product upgrades over the Internet through our own web store at
www.smithmicro.com
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Our OEM market continues to evolve as we continue to offer new communications products and
OEMs adopt new technologies and software bundling techniques. Our OEM customers include wireless
service providers, wireless phone manufacturers and other PC related equipment manufacturers.
These manufacturers bundle our software products with their own products. We have translated
selected products into as many as eighteen languages to allow our OEM customers the flexibility of
offering multi-language products that meet the needs of their worldwide markets.
Our three largest OEM customers (Verizon Wireless, Kyocera Wireless and Alltel in 2005), and
their respective affiliates, in each year, have accounted for 63.5 % of our net revenue in 2005,
77.8% of our net revenue in 2004 and 47.9% of our net revenues in 2003. Our major customers could
reduce their orders of our products in favor of a competitors product or for any other reason.
The loss of any of our major OEM customers or decisions by a significant OEM customer to
substantially reduce purchases could have a material adverse effect on our business.
We have historically operated with little backlog because we have generally shipped our
software products and recognized revenue shortly after we received orders because our production
cycle has traditionally been very short. As a result, our sales in any quarter were generally
dependent on orders that were booked and shipped in that quarter. As our wireless business has
evolved, production cycle time for items such as data kits has increased to the point that orders
received towards the end of a quarter may not ship until the subsequent quarter. Additionally,
customers may issue
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purchase orders that have extended delivery dates. These situations make it
difficult for us to predict what our revenues and operating results will be in any quarter.
Therefore, the level of backlog is not necessarily indicative of trends in our business. As of
December 31, 2005, we had a backlog of approximately $4.0 million, as compared to $1.0 million at
December 31, 2004.
Customer Service and Technical Support
We provide technical support and customer service through our web site, email, telephone and
fax. OEM customers generally provide their own primary customer support functions and rely on us
for back-up support for their own technical support personnel.
Product Development
The software industry, particularly the wireless market, is characterized by rapid and
frequent changes in technology and user needs. We work closely with industry groups and customers,
both current and potential, to help us anticipate changes in technology and determine future
customer needs. Software functionality depends upon the capabilities of the hardware. Accordingly,
we maintain engineering relationships with various hardware manufacturers and we develop our
software in tandem with their development. Our engineering relationships with manufacturers, as
well as with our major customers, are central to our product development efforts. We remain focused
on the development and expansion of our technology, particularly in the wireless space. Research
and development expenditures amounted to $4.0 million, $2.6 million and $2.5 million for the years
ended December 2005, 2004 and 2003, respectively.
Manufacturing
Our software is sold in several forms. We offer a package or kit that may include: CD-ROM(s)
for product and hardware-specific drivers; a cable; a manual; and certain other documentation or
marketing material. We offer software on CD-ROMs. We also permit selected OEM customers to
duplicate our products on their own CD-ROMs and pay a royalty based on usage. The majority of our
OEM business requires that we provide a CD, which includes a soft copy of a user guide. In other
cases, we provide a complete data connectivity kit that includes a CD, manual and cable. Finally,
we grant licenses to certain OEM customers that enable those customers to preload a copy of our
software onto a personal computer. With the enterprise sales program, we offer site licenses under
which a corporate user is allowed to distribute copies of the software to users within the
corporate sites.
Our product development group produces a product master for each product that is then
duplicated and packaged into products by the manufacturing organization. All product components
are purchased by our personnel in our Aliso Viejo, California facility. The manufacturing is
subcontracted to outside vendors include the replication of CD-ROMs and the printing of
documentation materials. Assembly of the final package is completed by an outside vendor or in our
Aliso Viejo, California facility.
Competition
The markets in which we operate are highly competitive and subject to rapid changes in
technology. Rapidly changing technology combined with relatively low barriers to entry in the
communication software market is constantly creating new opportunities, and we expect new
competitors to enter the market. We also believe that competition from established and emerging
software companies will continue to intensify as the emerging mobile, wireless and Internet
markets evolve. We compete with other software vendors for the attention of customers as well
as in our efforts to acquire technology and qualified personnel.
We believe that the principal competitive factors affecting the communication software market
include: product features, ease of use, customization to customer-specific needs, product quality,
price, customer service and effective sales and marketing efforts. Although we believe that our
products currently compete favorably with respect to these factors, there can be no assurance that
we can maintain our competitive position against current and potential
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competitors. We believe
that the market for our software products has been and will continue to be characterized by
significant price competition. A material reduction in the price of our products could negatively
affect our profitability. We face competition from Microsoft due to its market dominance and the
fact that it is the publisher of the most prevalent personal computer operating system, Windows.
Microsoft represents a significant competitive threat to all personal computer software vendors,
including us.
Many existing and potential OEM customers have technological capabilities to develop products
that compete directly with our products. In such event, these customers may discontinue purchases
of our products. Our future performance is substantially dependent upon the extent to which
existing OEM customers elect to purchase communication software from us rather than design and
develop their own software. Because our customers are not contractually obligated to purchase any
of our products, they may cease to rely, or fail to expand their reliance on us as a source for
communication software in the future.
Proprietary Rights and Licenses
Our success and ability to compete is dependent upon our software code base, our programming
methodologies and other intellectual properties. To protect our proprietary technology, we rely on
a combination of trade secrets, nondisclosure and patent, copyright and trademark law that may
afford only limited protection. As of December 31, 2005, six currently effective U.S. patents have
been issued since December 1997 and five patent applications are currently pending. These patents
provide generalized protection to our intellectual property base, and we will continue to apply for
various patents and trademarks in the future.
We seek to avoid disclosure of our intellectual property by requiring employees and
consultants with access to our proprietary information to execute confidentiality agreements with
us and by restricting access to our source code. The steps that we have taken to protect our
proprietary technology may not be adequate to deter misappropriation of our proprietary information
or prevent the successful assertion of an adverse claim to software utilized by us. In addition,
we may not be able to detect unauthorized use of our intellectual property rights or take effective
steps to enforce those rights.
In selling our products, we primarily rely on shrink wrap licenses that are not signed by
licensees and may be unenforceable under the laws of certain jurisdictions. In addition, the laws
of some foreign countries do not protect our proprietary rights to as great an extent as do the
laws of the United States. Accordingly, the means we use currently to protect our proprietary
rights may not be adequate. Moreover, our competitors may independently develop technology similar
to ours. We also license technology on a non-exclusive basis from several companies for inclusion
in our products and anticipate that we will continue to do so in the future. If we are unable to
continue to license these technologies or to license other necessary technologies for inclusion in
our products, or if we experience substantial increases in royalty payments under these third party
licenses, our business could be materially and adversely affected.
Employees
As of December 31, 2005, we had a total of ninety-one employees: forty-eight engaged in
engineering; twenty-three in sales and marketing; twelve in management and administration; five in
manufacturing and three in customer support. We utilize temporary labor to assist during peak
periods of manufacturing volume. We believe that our future success will depend in large part upon
our continuing ability to attract and retain highly skilled managerial, sales, marketing, customer
support, research and development personnel and consulting staff. Like other software companies,
we face intense competition for such personnel, and we have at times experienced and
continue to experience difficulty in recruiting qualified personnel. There can be no assurance
that we will be successful in attracting, assimilating and retaining other qualified personnel in
the future. We are not subject to any collective bargaining agreement and we believe that our
relationships with our employees are good.
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Item 2. PROPERTIES
Our corporate headquarters, including our principal administrative, sales and marketing,
customer support and research and development facility, is located in Aliso Viejo, California,
where we currently lease and occupy approximately 23,500 square feet of space pursuant to a lease
that expires May 31, 2009. We operate both our products and services reporting segments within
this facility.
We also lease approximately 7,700 square feet in Watsonville, California under a lease that
expires September 30, 2010. We are currently working on a new operating lease for our facility in
Lees Summit, Missouri to replace the lease that expired in June 2005. During 2003, we terminated
leases in San Diego, California and Beaverton, Oregon.
We believe that suitable additional or alternative space will be available in the future on
commercially reasonable terms as needed.
Item 3. LEGAL PROCEEDINGS
There are no pending material legal issues at this time although we may become subject to
various legal proceedings and claims that arise in the ordinary course of business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders during the quarter ended December
31, 2005.
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PART II
Item 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our common stock is traded on the Nasdaq SmallCap Market under the symbol SMSI. The high
and low sale prices for our common stock as reported by Nasdaq are set forth below for the periods
indicated.
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High
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Low
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YEAR ENDED DECEMBER 31, 2005:
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First Quarter
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$
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9.63
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4.65
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Second Quarter
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5.00
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3.44
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Third Quarter
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7.39
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4.02
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Fourth Quarter
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8.00
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5.41
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YEAR ENDED DECEMBER 31, 2004:
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First Quarter
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3.66
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2.00
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Second Quarter
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3.31
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1.80
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Third Quarter
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5.50
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1.28
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Fourth Quarter
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11.20
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3.27
|
|
On March 9, 2006, the closing sale price for our common stock as reported by Nasdaq was $8.99.
Holders
As of March 9, 2006, there were approximately 144 holders of record of our common stock based
on information provided by our transfer agent.
Dividends
We have never paid any cash dividends on our common stock and we have no current plans to do
so.
Recent Sales of Unregistered Securities
Not
applicable.
11
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of Operations and our
consolidated financial statements and the related notes thereto appearing elsewhere in this Annual
Report. The following selected consolidated statement of operations data for the years ended
December 31, 2005, 2004 and 2003, and the consolidated balance sheet data at December 31, 2005 and
2004, have been derived from audited consolidated financial statements included elsewhere in this
Annual Report. The consolidated statement of operations data presented below for the years ended
December 31, 2002 and 2001, and the consolidated balance sheet data at December 31, 2003, 2002 and
2001 are derived from audited consolidated financial statements that are not included in this
Annual Report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
19,637
|
|
|
$
|
12,394
|
|
|
$
|
6,291
|
|
|
$
|
6,029
|
|
|
$
|
6,945
|
|
Services
|
|
|
621
|
|
|
|
922
|
|
|
|
925
|
|
|
|
1,102
|
|
|
|
2,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Revenues
|
|
|
20,258
|
|
|
|
13,316
|
|
|
|
7,216
|
|
|
|
7,131
|
|
|
|
9,489
|
|
Cost of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
3,818
|
|
|
|
2,530
|
|
|
|
1,350
|
|
|
|
1,420
|
|
|
|
1,880
|
|
Services
|
|
|
285
|
|
|
|
380
|
|
|
|
321
|
|
|
|
782
|
|
|
|
2,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Revenues
|
|
|
4,103
|
|
|
|
2,910
|
|
|
|
1,671
|
|
|
|
2,202
|
|
|
|
3,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
16,155
|
|
|
|
10,406
|
|
|
|
5,545
|
|
|
|
4,929
|
|
|
|
5,561
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
3,410
|
|
|
|
1,519
|
|
|
|
1,666
|
|
|
|
2,175
|
|
|
|
4,571
|
|
Research and development
|
|
|
3,963
|
|
|
|
2,556
|
|
|
|
2,506
|
|
|
|
2,162
|
|
|
|
2,997
|
|
General and administrative
|
|
|
4,621
|
|
|
|
2,868
|
|
|
|
2,330
|
|
|
|
2,387
|
|
|
|
3,847
|
|
Restructuring Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
11,994
|
|
|
|
6,943
|
|
|
|
6,502
|
|
|
|
6,724
|
|
|
|
11,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
4,161
|
|
|
|
3,463
|
|
|
|
(957
|
)
|
|
|
(1,795
|
)
|
|
|
(6,234
|
)
|
Interest Income
|
|
|
667
|
|
|
|
53
|
|
|
|
37
|
|
|
|
45
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before income taxes
|
|
|
4,828
|
|
|
|
3,516
|
|
|
|
(920
|
)
|
|
|
(1,750
|
)
|
|
|
(6,035
|
)
|
Income tax expense (benefit)
|
|
|
104
|
|
|
|
71
|
|
|
|
3
|
|
|
|
(1,062
|
)
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
4,724
|
|
|
$
|
3,445
|
|
|
$
|
(923
|
)
|
|
$
|
(688
|
)
|
|
$
|
(6,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, basic
|
|
$
|
0.22
|
|
|
$
|
0.20
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares, basic
|
|
|
21,351
|
|
|
|
17,267
|
|
|
|
16,511
|
|
|
|
16,235
|
|
|
|
16,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, fully diluted
|
|
$
|
0.21
|
|
|
$
|
0.19
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares, fully diluted
|
|
|
22,806
|
|
|
|
18,412
|
|
|
|
16,511
|
|
|
|
16,235
|
|
|
|
16,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
42,716
|
|
|
$
|
12,828
|
|
|
$
|
6,587
|
|
|
$
|
6,766
|
|
|
$
|
9,257
|
|
Total liabilities
|
|
|
3,759
|
|
|
|
1,729
|
|
|
|
997
|
|
|
|
1,154
|
|
|
|
2,955
|
|
Accumulated deficit
|
|
|
(11,945
|
)
|
|
|
(16,669
|
)
|
|
|
(20,114
|
)
|
|
|
(19,191
|
)
|
|
|
(18,503
|
)
|
Total stockholders equity
|
|
$
|
38,957
|
|
|
$
|
11,099
|
|
|
$
|
5,590
|
|
|
$
|
5,612
|
|
|
$
|
6,302
|
|
12
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction and Overview
Our business model is based primarily upon the design, production and sale of wireless
connectivity software for use with wireless communication networks worldwide. Our products are
utilized in major wireless networks throughout the world that support data communications through
the use of cell phones or other wireless communication devices such as PC cards. Wireless network
providers generally incorporate our products into their accessory products sold directly to
individual consumers to offer wireless PC data connectivity to their wireless networks.
Our business is primarily dependent upon the demand for wireless communications and the
corresponding requirements for wireless connectivity software to support this demand. During the
last three years, demand for these types of products has fluctuated dramatically, and there has
been a significant increase in price competition within our industry.
We continue to invest in research and development of wireless software products, and we
believe that we have one the industrys leading wireless product lines in terms of performance and
features. We believe that our out-of-the-box design technology further differentiates our
products.
We also sell eBusiness and utility software and professional consulting services related to
eBusiness applications.
During 2005, we have maintained a sharp focus on our operating cost structure while ensuring
that we maintain our operating flexibility to support future growth in the industry. We measure
success by monitoring our net sales and gross margins and operating cash flow. We believe that
there continues to be excellent growth opportunities within the wireless communications software
marketplace and we continue to focus on positioning Smith Micro to benefit from these
opportunities.
13
Results of Operations
The following table sets forth certain consolidated statement of operating data as a
percentage of total revenues for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Net Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
96.9
|
%
|
|
|
93.1
|
%
|
|
|
87.2
|
%
|
Services
|
|
|
3.1
|
%
|
|
|
6.9
|
%
|
|
|
12.8
|
%
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
18.9
|
%
|
|
|
19.0
|
%
|
|
|
18.7
|
%
|
Services
|
|
|
1.4
|
%
|
|
|
2.9
|
%
|
|
|
4.5
|
%
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
20.3
|
%
|
|
|
21.9
|
%
|
|
|
23.2
|
%
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
79.7
|
%
|
|
|
78.1
|
%
|
|
|
76.8
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
16.8
|
%
|
|
|
11.4
|
%
|
|
|
23.1
|
%
|
Research and development
|
|
|
19.6
|
%
|
|
|
19.2
|
%
|
|
|
34.7
|
%
|
General and administrative
|
|
|
22.8
|
%
|
|
|
21.5
|
%
|
|
|
32.3
|
%
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
59.2
|
%
|
|
|
52.1
|
%
|
|
|
90.1
|
%
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
20.5
|
%
|
|
|
26.0
|
%
|
|
|
-13.3
|
%
|
Interest Income
|
|
|
3.3
|
%
|
|
|
0.4
|
%
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before income taxes
|
|
|
23.8
|
%
|
|
|
26.4
|
%
|
|
|
-12.8
|
%
|
Income tax expense (benefit)
|
|
|
0.5
|
%
|
|
|
0.5
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
|
23.3
|
%
|
|
|
25.9
|
%
|
|
|
-12.8
|
%
|
|
|
|
|
|
|
|
|
|
|
Revenues
Total net revenues were $20.3 million, $13.3 million and $7.2 million in 2005, 2004 and 2003,
respectively, with an increase of $6.9 million, or 52.1% from 2004 to 2005 and an increase of $6.1
million, or 84.5% from 2003 to 2004. The increase in our revenues from 2003 through 2005 is
attributed to the growth in sales of our wireless products and in 2005 also includes the
acquisition of Allume. Sales to individual customers and their affiliates, which amounted to more
than 10% of the Companys net revenues, included one OEM customer at 57.1% in 2005, one OEM
customer at 68.4% of revenues in 2004 and three OEM customers at 27.0%, 10.7% and 10.2% of revenues
in 2003.
We currently operate in two business segments: products and services. In addition,
product revenues are broken down into three business units, Wireless and OEM, Retail and
Distribution and Internet & Direct Sales. Our Retail and Distribution sales represent the sales of
Allume products to distributors, retail customers and individuals. Allume was acquired on July 1,
2005 (See Note 2 of Notes to Consolidated Financial Statements). Internet & Direct Sales unit
includes legacy Smith Micro utility and fax software products as well as consulting, fulfillment
and hosting revenue.
14
The following table shows the net revenues and cost of revenues generated by each segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
Products
|
|
|
Services
|
|
|
Products
|
|
|
Services
|
|
|
Products
|
|
|
Services
|
|
Wireless & OEM
|
|
$
|
13,954
|
|
|
$
|
|
|
|
$
|
11,424
|
|
|
$
|
|
|
|
$
|
4,711
|
|
|
$
|
|
|
Retail & Distribution
|
|
|
4,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internet & Direct
|
|
|
797
|
|
|
|
621
|
|
|
|
970
|
|
|
|
922
|
|
|
|
1,580
|
|
|
|
925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
19,637
|
|
|
|
621
|
|
|
|
12,394
|
|
|
|
922
|
|
|
|
6,291
|
|
|
|
925
|
|
Cost of revenues
|
|
|
3,818
|
|
|
|
285
|
|
|
|
2,530
|
|
|
|
380
|
|
|
|
1,350
|
|
|
|
321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
$
|
15,819
|
|
|
$
|
336
|
|
|
$
|
9,864
|
|
|
$
|
542
|
|
|
$
|
4,941
|
|
|
$
|
604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products.
Net revenues from sales of products were $19.6 million, $12.4 million and $6.3
million for 2005, 2004 and 2003, respectively, representing an increase of $7.2 million, or 58.4%
from 2004 to 2005 and an increase of $6.1 million, or 97.0% from 2003 to 2004. Product revenues
accounted for 96.9% of total revenues in 2005, 93.1% of total revenues in 2004 and 87.2% of total
revenues in 2003. There are two key drivers to the increase in our product revenues from 2004 to
2005. Our core wireless business increased from $11.4 million to $13.9 million. The increase can
be attributed to the continued success of the wireless broadband data rollouts by our carrier
customers. The second key contributor was the addition of the Retail and Distribution business
unit this year (Allume acquisition on July 1, 2005), which posted revenues of $4.9 million for
2005. Internet and Direct sales continue to decrease reflecting a continued change in focus for
the business. The change in our product revenue from 2003 to 2004 is primarily due to the
increase in our core wireless business, for which sales to Verizon were $7.2 million consisting of
sales of QuickLink Mobile and QuickLink Mobile Phonebook. Internet & Direct Sales decreased, both
in absolute dollars and as a percentage of our total revenues, reflecting a repositioning of our
business from the retail fax and utility software business to the wireless communications business.
We traditionally have relatively little backlog for our OEM products at any given time and we
have not considered backlog to be a significant indicator of future performance. However, as our
wireless business has evolved, production cycle time for items such as data kits has increased to
the point that orders received towards the end of a quarter may not ship until the subsequent
quarter. Additionally, customers may issue purchase orders that have extended delivery dates.
Therefore, in 2004, we began tracking our quarterly backlog situation although the level of backlog
is not necessarily indicative of trends in our business. As of December 31, 2005 however, we had a
backlog of $4.0 million, comparing to $1.0 million at December 31, 2004 when we first began
reporting backlog, resulting from orders placed late in the fourth quarter and not shipped. Since
we generally do not produce software in advance of anticipated orders our revenues in any quarter
are substantially dependent on orders booked in that quarter.
Services.
Consulting services revenues were $621,000, $922,000 and $925,000 in 2005, 2004 and
2003, respectively, representing a decrease of $301,000, or 32.7% from 2004 to 2005 and a decrease
of $3,000, or 0.3% from 2003 to 2004. Services revenue accounted for 3.1% of total revenues in
2005, 6.9% of total revenues in 2004 and 12.8% of total revenues in 2003. The decrease in service
revenue is due to the reduced focus on consulting services, which was announced in the first
quarter of 2002, due to the decrease in demand for such services.
Cost of Revenues and Gross Margin
Cost of Product Revenues
. Cost of product revenues was $3.8 million, $2.5 million and $1.4
million in 2005, 2004 and 2003, respectively, representing an increase of $1.3 million, or 50.9%,
from 2004 to 2005 and an increase of $1.1 million, or 87.4%, from 2003 to 2004. Gross margin as a
percentage of net revenue was 79.7% for 2005 as compared to 78.1% for 2004 and 76.8% for 2003.
Cost of Revenues for the current year includes $534,000 of amortization of intangibles associated
with the acquisition of Allume which is not included in 2004 or 2003 expenses. Factoring out
amortization of intangibles, gross margin for 2005 was 82.4%. The 4.3% pro-forma
increase from the year earlier period is attributed to increased sales of higher margin PC
card software product versus lower margin Mobile Office Kit products.
15
Direct costs of revenues consist primarily of CD replication costs. We use a variety of
providers located in China, Korea and the United States. We consider CD replication to be a
commodity with little or no risk to supplier fluctuations. We also purchase proprietary cables
from Motorola and generic OEM cables from a variety of suppliers.
Cost of Service Revenues.
Cost of service revenues was $285,000, $380,000 and $321,000 in
2005, 2004 and 2003, respectively, representing a decrease of $95,000, or 25.0% from 2004 to 2005
and an increase of $59,000, or 18.4% from 2003 to 2004. Cost of Service revenue as a percentage of
Service revenues was 54.1% for 2005, 41.2% for 2004 and 34.7% in 2003. Cost of service revenues
includes the cost of our consulting personnel and the cost of any outside consultants contracted to
support our staff and vary by contract.
Operating Expenses
The following table presents a breakdown of our operating expenses by functional category and
as a percentage of total net revenues:
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Years Ended December 31,
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2005
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|
2004
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|
|
2003
|
|
Operating expenses:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Selling and marketing
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|
$
|
3,410
|
|
|
|
16.8
|
%
|
|
$
|
1,519
|
|
|
|
11.4
|
%
|
|
$
|
1,666
|
|
|
|
23.1
|
%
|
Research and development
|
|
|
3,963
|
|
|
|
19.6
|
%
|
|
|
2,556
|
|
|
|
19.2
|
%
|
|
|
2,506
|
|
|
|
34.7
|
%
|
General and administrative
|
|
|
4,621
|
|
|
|
22.8
|
%
|
|
|
2,868
|
|
|
|
21.5
|
%
|
|
|
2,330
|
|
|
|
32.3
|
%
|
|
|
|
|
|
|
|
Total operating expenses
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|
$
|
11,994
|
|
|
|
59.2
|
%
|
|
$
|
6,943
|
|
|
|
52.1
|
%
|
|
$
|
6,502
|
|
|
|
90.1
|
%
|
|
|
|
|
|
|
|
Selling and Marketing.
Selling and marketing expenses were $3.4 million, $1.5 million and
$1.7 million in 2005, 2004 and 2003, respectively, representing an increase of $1.9 million, or
124.5%, from 2004 to 2005 and a decrease of $147,000 or 8.8%, from 2003 to 2004. 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. While most of the increases in selling and marketing
expenses in 2005 were due to the Allume acquisition, we also had a slight increase in headcount and
increases in costs related to product collateral concept and design. The decrease in costs from
2003 to 2004 is directly attributable to the elimination of channel marketing expenses of
approximately $100,000 and the elimination of depreciation and other miscellaneous expenses of
$95,000 relating to the San Diego sales office which was closed in 2003. These decreases were
offset by an increase in salaries and related expenses of approximately $50,000 which relates to
the reallocation of resources from other departments to sales and marketing. Advertising expenses
were $223,000, $47,000 and $95,000 for the years ended December 31, 2005, 2004 and 2003,
respectively. Selling and marketing expenses were 16.8%, 11.4% and 23.1% of revenues in the years
ended December 31, 2005, 2004 and 2003, respectively. Increases in selling and marketing expenses
as a percentage of revenues in 2005 were caused by the increase in costs as described above.
Research and Development.
Research and development expenses were $4.0 million, $2.6 million
and $2.5 million in 2005, 2004 and 2003, respectively, representing increases of $1.4 million, or
55.0%, from 2004 to 2005 and $50,000, or 2.0%, from 2003 to 2004. 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 wireless, multi-media, and compression software technologies. The
increase in our research and development expenses in each year was primarily due to the development
of new wireless products that were released during the periods, with an accompanying increase in
headcount and a refocus of engineering resources from consulting projects to development. In 2005,
the key driver to increased R&D expense was the acquisition of Allume Systems on July 1, 2005 and
the associated engineering staff which is focused on new
16
compression technology. Research and
development expenses were 19.6%, 19.2% and 34.7% of revenues in the years ended December 31, 2005,
2004 and 2003, respectively. The decrease in research and development expenses as a percentage of
revenues from 2003 to 2004 is due to the significant increase in revenues during the period.
General and Administrative.
General and administrative expenses were $4.6 million, $2.9
million and $2.3 million in 2005, 2004 and 2003, respectively, representing increases of $1.8
million, or 61.1%, from 2004 to 2005 and $538,000, or 23.1%, from 2003 to 2004. The increase in
General and Administrative costs from 2004 to 2005 was primarily due to the acquisition of Allume
Systems on July 1, 2005 and the assumption of Allume G&A staff and certain integration costs. The
increase in General and Administrative costs from 2003 to 2004 consists of increases in accounting,
legal and consulting fees of approximately $120,000, travel expenses of approximately $65,000 and
compensation and benefit costs of approximately $320,000. General and administrative expenses were
22.8%, 21.5% and 32.3% of revenues in the years ended December 31, 2005, 2004 and 2003,
respectively. The decrease in general and administrative expenses as a percentage of revenues from
2003 to 2004 is due to the increase in revenues, partially offset by the absolute dollar increase
in expenses. Beginning in fiscal 2006, we will be adopting FAS 123R, which requires the expensing
of stock options. Taking into account options issued and outstanding at December 31, 2005, we
estimate that our 2006 stock compensation expense would be approximately $2.6 million. New option
issuances or restricted stock grants made in fiscal 2006 would increase the estimate.
Interest Income.
Interest income was $667,000, $53,000 and $37,000 in 2005, 2004 and 2003,
respectively, representing increases of $614,000, or 1,158.5% from 2004 to 2005 and $16,000, or
43.2% from 2003 to 2004. The differences in our interest income are directly related to the
fluctuations in our cash balances during the periods and changing interest rates. We have not
changed our investment strategy during the periods being reported, with our excess cash
consistently being invested in short term marketable securities. (See Liquidity and Capital
Resources for further discussion elsewhere in this report.)
Provision for Income Taxes.
The provision for income taxes was $104,000, $71,000 and $3,000
in 2005, 2004 and 2003, respectively. The provision in 2005 and 2004 relates to alternative
minimum tax liability. The provision in 2003 consists of minimum payments for state taxes. We have
provided a valuation allowance on 100% of our deferred tax assets. We will continue to evaluate
the recoverability of our deferred tax asset and the need for a valuation allowance against such
asset. Factors that are considered in the evaluation of the recoverability of the deferred tax
asset are continued profitability and our ability to meet our future forecasts. In general, any
realization of our net deferred tax asset will reduce the effective rate in future periods.
However, the realization of deferred tax assets that are related to net operating losses that were
generated by tax deductions resulting from the exercise of non-qualified stock options, will result
in a direct increase to stockholders equity.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through cash generated from
operations and from net proceeds of $18.1 million generated by our initial public offering in 1995.
On February 18, 2005, we entered into a Common Stock Purchase Agreement for the private placement
of 3,500,000 shares of our common stock, $0.001 par value, at a price of $6.40 per share, resulting
in aggregate gross cash proceeds to the Company of $22,400,000 before deducting commissions and
other expenses. Offering costs related to the transaction totaled $1,613,000, comprised of
$1,344,000 in commissions and $269,000 cash payments for legal and investment services, resulting
in net proceeds to the Company of $20,786,000. The transaction closed simultaneously with the
execution of the Purchase Agreement on February 18, 2005. C.E. Unterberg, Towbin LLC, the
placement agent for the transaction, received a cash fee equal to 6% of the aggregate gross
proceeds of the Private Placement.
Net cash provided by operations was $2.5 million in 2005 and $3.0 million in 2004. The
primary source of operating cash in both periods was the net income and the increase in accounts
payable and accrued liabilities, offset by the collection of accounts receivable.
17
Cash flows used in investing activities were $11 million in 2005 and $102,000 in 2004. This
included $10.9 million for the purchase of Allume in July, 2005 as well as $142,000 for other
capital expenditures. Our capital expenditures in both periods consisted of the purchase of
computers and other office equipment.
We received $369,000 in cash from the exercise of employee stock options in 2005 compared to
$2.0 million in 2004.
At December 31, 2005, we had $21.2 million in cash and cash equivalents and $25.3 million of
working capital. We have no significant capital commitments, and currently anticipate that capital
expenditures will not vary significantly from recent periods. We believe that our existing cash,
cash equivalent investment balances and cash flow from operations will be sufficient to finance our
working capital and capital expenditure requirements through at least the next twelve 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 that such financing will be available
to us at commercially reasonable terms or at all.
Our corporate headquarters, which includes our principal administrative, sales and marketing,
customer support and research and development facilities, is located in Aliso Viejo, California.
We have leased this space through May 2009. We also lease approximately 7,700 square feet in
Watsonville, California under a new lease that expires September 30, 2010. We are currently
working on a new operating lease for our facility in Lees Summit, Missouri to replace the lease
that expired in June 2005.
As of December 31, 2005, we had no debt and no long term liabilities. The following table
summarizes our contractual obligations as of December 31, 2005 (in thousands):
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Payments due by period
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|
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|
|
Less than
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|
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|
|
|
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|
|
More than
|
|
Contractual obligations:
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
Operating Lease Obligations
|
|
$
|
1,934
|
|
|
$
|
509
|
|
|
$
|
1,025
|
|
|
$
|
400
|
|
|
$
|
|
|
Purchase Obligations
|
|
|
2,202
|
|
|
|
2,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,136
|
|
|
$
|
2,711
|
|
|
$
|
1,025
|
|
|
$
|
400
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During our normal course of business, we have made certain indemnities, commitments and
guarantees under which we may be required to make payments in relation to certain transactions.
These include: intellectual property indemnities to our customers and licensees in connection with
the use, sale and/or license of our products; indemnities to various lessors in connection with
facility leases for certain claims arising from such facility or lease; indemnities to vendors and
service providers pertaining to claims based on the negligence or willful misconduct; indemnities
involving the accuracy of representations and warranties in certain contracts; and indemnities to
directors and officers of the Company to the maximum extent permitted under the laws of the State
of Delaware. In addition, we have made contractual commitments to employees providing for severance
payments upon the occurrence of certain prescribed events. We may also issue a guarantee in the
form of a standby letter of credit as security for contingent liabilities under certain customer
contracts. The duration of these indemnities, commitments and guarantees varies, and in certain
cases, may be indefinite. The majority of these indemnities, commitments and guarantees may not
provide for any limitation of the maximum potential for future payments we could be obligated
to make. We have not recorded any liability for these indemnities, commitments and guarantees in
the accompanying consolidated balance sheets.
Critical Accounting Policies
Our discussion and analysis of results of operations, financial condition and liquidity are
based upon our consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of these
financial statements requires us to make estimates
18
and judgments 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 period.
We base our estimates on historical experience and on various other assumptions that are believed
to be reasonable under the circumstances. Actual results may materially differ from these estimates
under different assumptions or conditions. On an on-going basis, we review our estimates to ensure
that the estimates appropriately reflect changes in our business or new information as it becomes
available.
We believe the following critical accounting policies affect our more significant estimates
and assumptions used in the preparation of our consolidated financial statements:
Revenue Recognition
- Software revenue is recognized in accordance with the Statement of
Position (SOP) 97-2,
Software Revenue Recognition,
as amended, when persuasive evidence of an
arrangement exists, delivery has occurred, the price is fixed and determinable, and collectibility
is probable. We recognize revenues from sales of our software to OEM customers or end users as
completed products are shipped and title passes; or from royalties generated as authorized
customers duplicate our software, if the other requirements of SOP 97-2 are met. If the
requirements of SOP 97-2 are not met at the date of shipment, revenue is not recognized until these
elements are known or resolved. Returns from OEM customers are limited to defective goods or goods
shipped in error. Historically, OEM customer returns have not exceeded the very nominal estimates
and reserves. Management reviews available retail channel information and makes a determination of
a return provision for sales made to distributors and retailers based on current channel inventory
levels and historical return patterns. Certain sales to distributors or retailers are made on a
consignment basis. Revenue for consignment sales are not recognized until sell through to the
final customer is established.
Product sales directly to end-users are recognized upon delivery. End users have a thirty day
right of return, but such returns are reasonably estimable and have historically been immaterial.
We also provide technical support to our customers. Such costs have historically been
insignificant.
Service revenues include sales of consulting services, website hosting and
fulfillment. We recognize service revenues as services are provided or as milestones are delivered
and accepted by our customers.
Accounts Receivable
We sell our products worldwide. We perform ongoing credit evaluations
of our customers and adjust credit limits based upon payment history, the customers current credit
worthiness and various other factors, as determined by our review of their current credit
information. We continuously monitor collections and payments from our customers. We estimate
credit losses and maintain a bad debt reserve based upon these estimates. While such credit losses
have historically been within our estimated reserves, we cannot guarantee that we will continue to
experience the same credit loss rates that we have in the past. If not, this could have an adverse
effect on our consolidated financial statements.
Goodwill
We have adopted SFAS No. 142,
Goodwill and Other Intangible Assets,
effective
January 1, 2002 and no impairment was identified. As a result of the adoption, we are no longer
required to amortize goodwill. Prior to the adoption of SFAS 142, goodwill was amortized over 7
years. In accordance with SFAS No. 142, we review the recoverability of the carrying value of
goodwill at least annually or whenever events or circumstances indicate a potential impairment.
Our annual impairment testing date is December 31. Recoverability of goodwill is determined by
comparing the estimated fair value of our reporting units to the carrying value of the underlying
net assets in the reporting units. If the estimated fair value of a reporting unit is determined
to be less than the fair value
of its net assets, goodwill is deemed impaired and an impairment loss is recognized to the
extent that the carrying value of goodwill exceeds the difference between the estimated fair value
of the reporting unit and the fair value of its other assets and liabilities. We determined that we
did not have any impairment of goodwill at December 31, 2005. Estimates of reporting unit fair
value are based upon market capitalization and therefore are volatile being sensitive to market
fluctuations. To the extent that our market capitalization decreases significantly or the
allocation of value to our reporting units change, we could be required to write off some or all of
our goodwill.
19
Deferred Income Taxes
- We account 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 our 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. We currently have a full valuation allowance
on our deferred tax assets. Based on our assessment of all available evidence, we concluded that
it is not more likely than not that our deferred tax assets will be realized. This conclusion is
based primarily on our history of net operating losses as compared to only a recent trend of
profitable operations, the potential for future stock option deductions to significantly reduce
taxable income, annual net operating loss limitations under Section 382 of the Code and the need to
generate significant amounts of taxable income in future periods on a consistent and prolonged
basis in order to utilize the deferred tax assets. We will continue to monitor all available
evidence and reassess the potential realization of our deferred tax assets. If we continue to meet
our financial projections and improve our results of operations, or if circumstances otherwise
change, it is possible that we may release all or a portion of our valuation allowance in the
future. Any such release would result in recording a tax benefit that would increase net income in
the period the valuation is released.
Recent Accounting Pronouncements
In March 2006, the FASB issued SFAS No. 156,
Accounting for Servicing of Financial Assets
(SFAS NO. 156), which provides an approach to simplify efforts to obtain hedge-like (offset)
accounting. This Statement amends FASB Statement No. 140,
Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities
, with respect to the accounting for
separately recognized servicing assets and servicing liabilities. The Statement (1) requires an
entity to recognize a servicing asset or servicing liability each time it undertakes an obligation
to service a financial asset by entering into a servicing contract in certain situations; (2)
requires that a separately recognized servicing asset or servicing liability be initially measured
at fair value, if practicable; (3) permits an entity to choose either the amortization method or
the fair value method for subsequent measurement for each class of separately recognized servicing
assets or servicing liabilities; (4) permits at initial adoption a one-time reclassification of
available-for-sale securities to trading securities by an entity with recognized servicing rights,
provided the securities reclassified offset the entitys exposure to changes in the fair value of
the servicing assets or liabilities; and (5) requires separate presentation of servicing assets and
servicing liabilities subsequently measured at fair value in the balance sheet and additional
disclosures for all separately recognized servicing assets and servicing liabilities. SFAS No. 156
is effective for all separately recognized servicing assets and liabilities as of the beginning of
an entitys fiscal year that begins after September 15, 2006, with earlier adoption permitted in
certain circumstances. The Statement also describes the manner in which it should be initially
applied. We do not believe that SFAS No. 156 will have a material impact on our financial
position, results of operations or cash flows.
In February 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 155,
Accounting for Certain Hybrid Financial Instruments
, which amends SFAS No. 133,
Accounting for
Derivatives Instruments and Hedging Activities
and SFAS No. 140,
Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities
. SFAS No. 155 amends SFAS No. 133
to narrow the scope exception for interest-only and principal-only strips on debt instruments to
include only such strips representing rights to receive a specified portion of the contractual
interest or principle cash flows. SFAS No. 155 also amends SFAS No. 140 to allow qualifying
special-purpose entities to hold a passive derivative financial instrument pertaining to beneficial
interests that itself is a derivative instrument. We are currently evaluating the impact this
new Standard but believe that it will not have a material impact on our financial position, results
of operations, or cash flows.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections
(SFAS No.
154), an amendment to Accounting Principles Bulletin Opinion No. 20,
Accounting Changes
(APB No.
20), and SFAS No. 3,
Reporting Accounting Changes in Interim Financial Statements
. Though SFAS No.
154 carries forward the guidance in APB No.20 and SFAS No.3 with respect to accounting for changes
in estimates, changes in reporting entity, and the correction of errors, SFAS No. 154 establishes
new standards on accounting for changes in accounting principles, whereby all such changes must be
accounted for by retrospective application to the financial statements of prior periods unless it
is impracticable to do so. SFAS No. 154 is effective for accounting changes and
20
error corrections
made in fiscal years beginning after December 15, 2005, with early adoption permitted for changes
and corrections made in years beginning after May 2005. We will implement SFAS No. 154 in its
fiscal year beginning January 1, 2006. We are currently evaluating the impact of this new standard
but believe that it will not have a material impact on our financial position, results of
operations, or cash flows.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
Share-Based Payment
, which
replaces SFAS No. 123,
Accounting for Stock-Based Compensation
and supersedes APB No. 25,
Accounting for Stock Issued to Employees
. SFAS No. 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the financial statements
based on their fair values, beginning with the first annual period after June 15, 2005, with early
adoption encouraged. In addition, SFAS No. 123R will cause unrecognized expense (based on the
amounts in our pro forma footnote disclosure) related to options vesting after the date of initial
adoption to be recognized as a charge to results of operations over the remaining vesting period.
We are required to adopt SFAS No. 123R in our first quarter of 2006, beginning January 1, 2006.
Under SFAS No. 123R, we must determine the appropriate fair value model to be used for valuing
share-based payments, the amortization method for compensation cost and the transition method to be
used at the date of adoption. The transition alternatives include prospective and retroactive
adoption methods. Under the retroactive methods, prior periods may be restated either as of the
beginning of the year of adoption or for all periods presented. The prospective method requires
that compensation expense be recorded for all unvested stock options and share awards at the
beginning of the first quarter of adoption of SFAS No. 123R, while the retroactive methods would
record compensation expense for all unvested stock options and share awards beginning with the
first period restated. We are evaluating the requirements of SFAS No. 123R and we expect that the
adoption of SFAS No. 123R will have a material impact on our consolidated results of operations and
earnings per share. We have not determined the method of adoption or the effect of adopting SFAS
No. 123R.
RISK FACTORS
Our future operating results are highly uncertain. Before deciding to invest in our common
stock 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 reports on Forms 10-K, 10-Q and 8-K. The risks and uncertainties described
below are not the only ones we face. 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 revenue 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 size and timing of orders from and shipments to our major customers;
|
|
|
|
|
the size and timing of any return product requests for our products;
|
|
|
|
|
our ability to maintain or increase gross margins;
|
|
|
|
|
variations in our sales channels or the mix of our product sales;
|
|
|
|
|
the gain or loss of a key customer;
|
21
|
|
|
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 effect of new and emerging technologies;
|
|
|
|
|
deferrals of orders by our customers in anticipation of new products, applications,
product enhancements or operating systems; and
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|
|
|
|
general economic and market conditions.
|
A large portion of our operating expenses, including rent, depreciation and amortization is
fixed and difficult to reduce or change. Accordingly, if our total revenue does not meet our
expectations, we may 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.
Although we have begun reporting backlog, our ability to predict our revenues and operating results
is extremely limited.
We have historically operated with little backlog because we have generally shipped our
software products and recognized revenue shortly after we received orders because our production
cycle has traditionally been very short. As a result, our sales in any quarter were generally
dependent on orders that were booked and shipped in that quarter. As our wireless business has
evolved, production cycle time for items such as data kits has increased to the point that orders
received towards the end of a quarter may not ship until the subsequent quarter. Additionally,
customers may issue purchase orders that have extended delivery dates that may cause the shipment
to fall in a subsequent quarter. These situations make it difficult for us to predict what our
revenues and operating results will be in any quarter. Therefore, the level of backlog is not
necessarily indicative of trends in our business. As of December 31, 2005, we had a backlog of
approximately $4.0 million.
We depend upon a small number of customers for a significant portion of our revenues.
In the past we have derived a substantial portion of our revenues from sales to a small number
of customers and expect to continue to do so in the future. The agreements we have with these
entities do not require them to purchase any minimum quantity of our products and may be terminated
by the entity or us at any time for any reason upon minimal prior written notice. Accordingly, we
cannot be certain that these customers will continue to place large orders for our products in the
future, or purchase our products at all. Our largest OEM customer accounted for 57.1%, 68.4% and
27.0% of our net revenues in the years ended December 31, 2005, December 31, 2004 and December 31,
2003, respectively. Our three largest OEM customers accounted for 63.5%, 77.8% and 47.9% in the
years ended December 31, 2005, December 31, 2004 and December 31, 2003, respectively.
Our customers may acquire products from our competitors or develop their own products that
compete directly with ours. Any substantial decrease or delay in our sales to one or more of these
entities in any quarter would have an adverse effect on our results of operations. In addition,
certain of our customers have in the past and may in the future acquire competitors or be acquired
by competitors, causing further industry consolidation. In the past, such acquisitions have caused
the purchasing departments of the combined companies to reevaluate their purchasing decisions. If
one of our major customers engages in an acquisition in the future, it could change its current
purchasing habits. In that event,
22
we could lose the customer, or experience a decrease in orders
from that customer or a delay in orders previously made by that customer. Further, although we
maintain allowances for doubtful accounts, the insolvency of one or more of our major customers
could result in a substantial decrease in our revenues.
Competition within our product markets is intense and includes numerous established competitors,
which could negatively affect our revenues.
We operate in markets that are extremely competitive and subject to rapid changes in
technology. Specifically, Microsoft Corporation poses a significant competitive threat to us
because Microsoft operating systems may include some capabilities now provided by certain of our
OEM and retail software products. If users are satisfied relying on the capabilities of the
Windows-based systems or other operating systems, or other vendors products, sales of our products
are likely to decline. In addition, because there are low barriers to entry into the software
market, we expect significant competition from both 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 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 or other vendors could result in the cancellation of orders by customers in anticipation
of the introduction of such new products. In addition, some of our competitors 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.
Acquisitions of companies or technologies may disrupt our business and divert management attention
and cause our current operations to suffer.
We recently acquired all the outstanding capital stock of Allume, Inc. (See Note 2 of Notes
to Condensed Consolidated Financial Statements). We expect to continue to consider acquisitions of
complementary companies, products or technologies. As part of any such acquisition, including that
of Allume, Inc., 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 managements
attention from our companys day-to-day operations, 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 existing stockholders. In addition, we expect our profitability
could be adversely affected because of acquisition-related accounting costs and write offs. In
consummating acquisitions, we are also subject to risks of entering geographic and business markets
in which we have had limited or no prior experience. If we are unable to fully integrate acquired
businesses, products or technologies within existing operations, we may not receive the intended
benefits of acquisitions.
23
If the adoption of new technologies and services grows more slowly than anticipated in our product
planning and development, our future sales and profits may be negatively affected.
If the adoption of new technologies and services does not grow or grows more slowly than
anticipated in our product planning and development, demand for certain of our products and
services will be reduced. For example, our new QuickLink Mobile and QuickLink Enterprise products
provide notebook users with the ability to roam between wireless wide area networks (WWAN) and
Wi-Fi hot spots. Therefore, future sales and any future profits from these and related products
are substantially dependent upon the widespread acceptance and use of Wi-Fi as an effective medium
of communication by consumers and businesses.
Our products may contain undetected software errors, which could negatively affect our revenues.
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.
Technology and customer needs change rapidly in our market, which could render our products
obsolete and negatively affect our revenue.
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 todays computing environments and the performance
demanded by customers. If our 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.
Delays or failure in deliveries from our component suppliers could cause our net revenue to decline
and harm our results of operations.
We rely on third party suppliers to provide us with services and components for our product
kits. These components include: compact discs; cables; printed manuals; and boxes. We do not have
long-term supply arrangements with any vendor to obtain these necessary services and components for
our products. If we are unable to purchase components from these suppliers or if the compact disc
replication services that we use do not deliver our
requirements on schedule, we may not be able to deliver products 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 services, our gross margins would be reduced.
A shortage in the supply of wireless communication devices such as PC cards could adversely affect
our revenues.
Our products are utilized with major wireless networks throughout the world that support data
communications through the use of wireless communication devices such as PC cards. Since wireless
network providers generally incorporate our products into the wireless communication devices that
they sell directly to individual consumers, our
24
future success depends upon the availability of
such devices to consumers at reasonable prices. A shortage in the supply of wireless communication
devices could put upward pressure on prices or limit the quantities available to individual
consumers which could materially affect the revenues that we generate from our products.
We may be unable to adequately protect our intellectual property and other proprietary rights,
which could negatively impact our revenues.
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. We currently
own United States trademark registrations for certain of our trademarks and United States patents
for certain of our technologies, however, these measures afford us only limited protection.
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, it is
possible that third parties may copy or otherwise obtain our rights without our authorization. It
is also possible that third parties may independently develop technologies similar to ours. It may
be difficult for us to detect unauthorized use of our intellectual property and proprietary rights.
We may be subject to claims of intellectual property infringement as the number of trademarks,
patents, copyrights and other intellectual property rights asserted by companies in our industry
grows and the coverage of these patents and other rights and the functionality of software products
increasingly overlap. From time to time, we have received communications from third parties
asserting that our trade name or features, content, or trademarks of certain of our products
infringe upon intellectual property rights held by such third parties. We have also received
correspondence from third parties separately asserting that our fax products may infringe on
certain patents held by each of the parties. Although we are not aware that any of our products
infringe on the proprietary rights of others, third parties may claim infringement by us with
respect to our current or future products. Infringement claims, whether with or without merit,
could result in time-consuming and costly litigation, divert the attention of our management, cause
product shipment delays or require us to enter into royalty or licensing agreements with third
parties. If we are required to enter into royalty or licensing agreements, they may not be on
terms that are acceptable to us. Unfavorable royalty or licensing agreements could seriously
impair our ability to market our products.
Our 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:
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quarter-to-quarter variations in our operating results;
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announcements of technological innovations or new products by our competitors, customers or us;
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market conditions within our retail and OEM software markets;
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general global economic and political instability;
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changes in earnings estimates or investment recommendations by analysts;
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changes in investor perceptions; or
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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 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
25
experienced volatility in the market
price of their securities have been the subjects of securities class action litigation. If we were
the object of a securities class action litigation, it could result in substantial losses and
divert managements attention and resources from other matters.
If we are unable to retain key personnel, the loss of their services could materially and adversely
affect our business, financial condition and results of operations.
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 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 remains
high 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 would have an adverse
effect on our business, financial condition and results of operations. Additionally, retaining key
employees during restructuring efforts is critical to our companys success.
We may need to raise additional capital in the future through the issuance of additional equity, or
convertible debt securities or by borrowing money, in order to meet our capital needs. Additional
funds may not be available on terms acceptable to us to allow us to meet our capital needs.
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 or choose to obtain additional financing to fund
our activities. We could raise these funds by selling more stock to the public or to selected
investors, or by borrowing money. 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 or other business activities 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. We currently have no established line of credit or other
business borrowing facility in place.
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:
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the market acceptance of our products;
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the levels of promotion and advertising that will be required to launch our products
and achieve and maintain a competitive position in the marketplace;
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our business, product, capital expenditure and research and development plans and
product and technology roadmaps;
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the levels of inventory and accounts receivable that we maintain;
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capital improvements to new and existing facilities;
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technological advances;
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our competitors response to our products; and
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our relationships with suppliers and customers.
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26
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 business, financial condition and operating results could be adversely affected as a result of
legal, business and economic risks specific to international operations
.
Each year, a percentage of our revenues are derived from sales to customers outside the United
States. This percentage can vary significantly from quarter to quarter and from year to year. 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:
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general political, social and economic instability;
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trade restrictions;
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the imposition of governmental controls;
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exposure to different legal standards, particularly with respect to intellectual property;
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burdens of complying with a variety of foreign laws;
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import and export license requirements and restrictions of the United States and
each other country in which we operate;
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unexpected changes in regulatory requirements;
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foreign technical standards;
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changes in tariffs;
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difficulties in staffing and managing international operations;
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difficulties in securing and servicing international customers;
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difficulties in collecting receivables from foreign entities; and
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potentially adverse tax consequences.
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These conditions may increase our cost of doing business. Moreover, as our customers are
adversely affected by these conditions, our business with them may be disrupted and our results of
operations could be adversely affected.
The market price of our common stock may be adversely affected by the sale of significant numbers
of shares of our common stock by any of our principal stockholders.
A total of 3,500,000 shares of our common stock were sold in a private placement in February
2005. The associated registration statement for such shares became effective on June 17, 2005 In
addition, there are other large blocks of shares held by individual stockholders which are eligible
for resale under Rule 144, including William W. Smith, Jr., our President and Chief Executive
Officer, who held 3,522,115 shares at March 9, 2006, and Rhonda L. Smith who held 2,314,115 shares.
Overall, our trading volume fluctuates widely and at times is relatively limited. The market price
for our common stock could decline as a result of the sale of a large number of the shares or the
perception that such sales may occur. The sale of a large number of our common stock also might
make it more difficult for us to sell equity or equity-related securities in the future at a time
and at the prices that we deem appropriate.
27
We may be subject to regulatory scrutiny and may sustain a loss of public confidence if we are
unable to satisfy regulatory requirements relating to internal controls over financial reporting.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to perform an evaluation of our
internal controls over financial reporting and have our independent registered public accounting
firm attest to such evaluation on an annual basis. Compliance with these requirements can be
expensive and time-consuming. While we believe that we will be able to meet the required
deadlines, no assurance can be given that we will meet the required deadlines in future years. If
we fail to timely complete this evaluation, or if our auditors cannot timely attest to our
evaluation, we may be subject to regulatory scrutiny and a loss of public confidence in our
internal controls.
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.
We may be subject to additional risks.
The risks and uncertainties described above are not the only ones we face. Additional risks
and uncertainties not presently known to us or that we currently deem immaterial may also adversely
affect our business operations.
Item 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and cash equivalents. At December 31, 2005, the
carrying values of our financial instruments approximated fair values based on current market
prices and rates. Because of their short duration, changes in market interest rates would not have
a material effect on fair value.
It is our policy not to enter into derivative financial instruments. We do not currently have
any significant foreign currency exposure as we do not transact business in foreign currencies. As
such, we do not have significant currency exposure at December 31, 2005.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and schedule appear in a separate section of this Annual
Report on Form 10-K beginning on page F-1 and S-1, respectively.
28
SUPPLEMENTARY FINANCIAL DATA
SELECTED QUARTERLY FINANCIAL DATA
STATEMENT OF OPERATIONS DATA
(UNAUDITED)
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Three Months Ended:
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2005
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March 31,
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June 30,
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September 30,
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December 31,
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(in thousands, except per share amounts)
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Net Revenues
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$
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2,030
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$
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3,330
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$
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6,896
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$
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8,002
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Gross Profit
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1,685
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|
2,785
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5,731
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5,954
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Operating (Loss) Income
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(228
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)
|
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558
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1,763
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2,068
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Net (Loss) Income
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$
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(128
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)
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$
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764
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$
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1,877
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|
$
|
2,211
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Net (Loss) Income Per Share, Basic
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$
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(0.01
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)
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$
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0.04
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$
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0.09
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$
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0.10
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Weighted Average Shares
Outstanding, Basic
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19,665
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21,584
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|
22,016
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22,106
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Net (Loss) Income Per Share, Diluted
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$
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(0.01
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)
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$
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0.03
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$
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0.08
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$
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0.09
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Weighted Average Shares
Outstanding, Diluted
|
|
|
21,009
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|
|
|
22,713
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|
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|
23,222
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|
|
|
23,900
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Three Months Ended:
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2004
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March 31,
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June 30,
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September 30,
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December 31,
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(in thousands, except per share amounts)
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|
Net Revenues
|
|
$
|
2,488
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|
|
$
|
3,117
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|
|
$
|
3,556
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|
|
$
|
4,155
|
|
Gross Profit
|
|
|
1,798
|
|
|
|
2,385
|
|
|
|
2,883
|
|
|
|
3,340
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|
Operating Income
|
|
|
94
|
|
|
|
644
|
|
|
|
1,085
|
|
|
|
1,640
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|
Net Income
|
|
$
|
103
|
|
|
$
|
634
|
|
|
$
|
1,077
|
|
|
$
|
1,631
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
Net Income Per Share, Basic
|
|
$
|
0.01
|
|
|
$
|
0.04
|
|
|
$
|
0.06
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
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|
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|
Weighted Average Shares Outstanding,
Basic
|
|
|
17,024
|
|
|
|
17,072
|
|
|
|
17,254
|
|
|
|
17,706
|
|
|
|
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|
Net Income Per Share, Diluted
|
|
$
|
0.01
|
|
|
$
|
0.04
|
|
|
$
|
0.06
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares
Outstanding, Diluted
|
|
|
18,042
|
|
|
|
18,022
|
|
|
|
18,617
|
|
|
|
19,125
|
|
29
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
Item 9A. CONTROLS AND PROCEDURES
(a)
Evaluation of Disclosure Controls and Procedures
. Under the supervision and with the
participation of our management, including our Chief Executive Officer and our Chief Financial
Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act). Based upon that
evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the
end of the period covered by this report, our disclosure controls and procedures were effective in
timely alerting them to the material information related to us (or our consolidated subsidiaries)
required to be included in the reports we file or submit under the Exchange Act.
(b)
Changes in Internal Controls
. During the most recent fiscal quarter covered by this
report, there has been no change in our internal control over financial reporting (as defined in
Rule 13a-15(f) or 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
30
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding our executive officers as of
February 15, 2005.
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Name
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Age
|
|
Position
|
William W. Smith, Jr.
|
|
|
58
|
|
|
Chairman of the Board, President and
Chief Executive Officer
|
|
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|
Andrew C. Schmidt
|
|
|
44
|
|
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Chief Financial Officer
|
|
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|
|
|
|
|
David P. Sperling
|
|
|
37
|
|
|
Vice President and Chief Technical
Officer
|
|
|
|
|
|
|
|
Jonathan Kahn
|
|
|
48
|
|
|
Senior Vice President
|
|
|
|
|
|
|
|
William R. Wyand
|
|
|
58
|
|
|
Vice President, Wireless and OEM Sales
|
|
|
|
|
|
|
|
Christopher G. Lippincott
|
|
|
35
|
|
|
Vice President, Internet and Direct
Sales
|
Mr. Smith
co-founded Smith Micro and has served as our Chairman of the Board, President and
Chief Executive Officer since inception in 1982. Mr. Smith was employed by Rockwell International
Corporation in a variety of technical and management positions from 1975 to 1984. Mr. Smith served
with Xerox Data Systems from 1972 to 1975 and RCA Computer Systems Division from 1969 to 1972 in
mainframe sales and pre-sale technical roles. Mr. Smith received a B.A. in Business Administration
from Grove City College.
Mr. Schmidt
joined the Company in June 2005 and serves as the Companys Chief Financial
Officer. Prior to joining Smith Micro, Mr. Schmidt was the Chief Financial Officer of Genius
Products, Inc., a publicly traded entertainment company from August 2004 to June 2005. From April
2003 to June 2004, he was Vice President (Finance) and acting Chief Accounting Officer of Peregrine
Systems, Inc., a publicly held provider of enterprise level software then in Chapter 11
reorganization. From July 2000 to January 2003, he was Executive Vice President and Chief Financial
Officer of Mad Catz Interactive, Inc., a publicly traded provider of console video game
accessories. He holds a B.B.A. from the University of Texas and an M.S. in Accountancy from San
Diego State University.
Mr. Sperling
joined us in April 1989 and has been our Director of Software Engineering since
April 1992. He assumed the Chief Technology Officer position in September 1999. Mr. Sperling began
his professional career as a software engineer with us and he currently has three patents pending
for various telephony and Internet technologies. Mr. Sperling earned a B.S. degree in Computer
Science from the University of California, Irvine.
Mr. Kahn
joined the company with the acquisition of Allume Systems, Inc. in July 2005. Prior
to the acquisition, Mr. Kahn was President of the company. Mr. Kahn was one of the co-founders of
Aladdin Systems, Inc. which later became Allume Systems. Mr. Kahn was Chairman, President and Chief
Executive Officer of Monterey Bay Tech, Inc (OTC BB:MBYI), a public company from 1999 to May 2005
until its merger with SecureLogic Inc. Mr. Kahn is a member of the Digital River Advisory Board and
is a graduate of the University of Rhode Island with a B.A. in Economics.
Mr. Wyand
joined us in 1999 when Smith Micro acquired STF Technologies where Mr. Wyand was
President and Chief Executive Officer. As General Manager he ran the Macintosh division sales,
marketing,
engineering and customer support efforts. Later that year, Mr. Wyand moved into the newly
created Wireless and
31
Broadband division as General Manager and in 2004 became Vice President,
Wireless and OEM Sales. From 1995 to 1999, Mr. Wyand was President and Chief Executive Officer of
STF Technologies. From 1984 to 1995, Mr. Wyand held various interim management and consulting
positions. From 1977 to 1984, he held various positions with United Telecom Computer Group. From
1973 to 1977, he was a Consultant with Arthur Young & Co. He graduated with a B.S. from
Pennsylvania State University and an MBA from Rockhurst College.
Mr. Lippincott
joined us in 1993 as a senior sales representative. In 1998 he was appointed
Director of North American Sales and in 2000 named General Manager of the Internet Solutions
Division, then as Vice President, Internet and Direct Sales in 2004. Prior to joining Smith Micro,
Mr. Lippincott held several retail sales positions. He attended the University of California at
Berkeley majoring in business administration.
Officers are elected by, and serve at the discretion of, the Board of Directors.
Audit Committee; Audit Committee Financial Expert
Our Board of Directors has a standing Audit Committee. The members of the Audit Committee are
Messrs. Campbell, Gulko and Szabo. Our Board has determined that Mr. Gulko, Chairman of the Audit
Committee, is an audit committee financial expert as defined by Item 401(h) of Regulation S-K and
that each member of the Audit Committee is independent within the meaning of Nasdaq Marketplace
Rule 4200(a)(15).
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires certain of the companys executive officers, as
well as its directors and persons who own more than then percent (10%) of a registered class of the
Companys equity securities to file reports of ownership and changes in ownership with the
Securities and Exchange Commission.
Based solely on its review of the copies of such forms received by the Company, or written
representations from certain reporting person, the Company believes that during the last fiscal
year all executive officers and directors complied with their filing requirements under Section
16(a) for all reportable transactions during the year.
Code of Ethics
We have adopted a Code of Ethics that applies to all of our employees, including our principal
executive officer, our principal financial officer, and all members of our finance department
performing similar functions. Our Code of Ethics was filed as Exhibit 14 to the Annual Report on
Form 10-K for the year ended December 31, 2003 which was filed on March 25, 2004. In the event of
an amendment to, or a waiver from, certain provisions of our Code of Ethics, we intend, to the
extent possible, to satisfy Form 8-K disclosure requirements by disclosing this information on our
website at
www.smithmicro.com
.
Item 11. EXECUTIVE COMPENSATION
The section titled Executive Compensation and Related Information appearing in our Proxy
Statement is hereby incorporated by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section titled Ownership of Securities appearing in our Proxy Statement is hereby
incorporated by reference.
32
Securities Authorized for Issuance Under An Equity Compensation Plan
The following table provides information as of December 31, 2005 with respect to the shares of
common stock that may be issued under our existing equity compensation plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares to
|
|
|
|
|
|
|
|
|
|
be Issued Upon
|
|
|
Weighted Average
|
|
|
Number of Shares
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Remaining Available
|
|
(In thousands, except per share amounts)
|
|
Outstanding Options
|
|
|
Outstanding Options
|
|
|
for Future Issuance
|
|
|
|
|
Equity Compensation Plan Approved
by Shareholders (1)
|
|
|
3,856
|
|
|
$
|
3.57
|
|
|
|
2,764
|
|
Equity Compensation Plan Not Approved
by Shareholders
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
Total
|
|
|
3,856
|
|
|
$
|
3.57
|
|
|
|
2,764
|
|
|
|
|
(1) The number of shares to be issued upson exercise includes options granted under both the
1995 Stock Option/Stock Issuance Plan and the 2005 Stock Option/Stock Issuance Plan. The number of
shares remaining available for future issuance consists only of the 2005 Plan.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section titled Related Party Transactions appearing in our Proxy Statement is
incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The section titled Ratification of Appointment of Independent Registered Public
Accounting Firm Principal Accountant Fees and Services appearing in our Proxy Statement is
incorporated herein by reference.
33
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
Smith Micros financial statements appear in a separate section of this Annual Report on Form
10-K beginning on the pages referenced below:
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-1
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
(2) Financial Statement Schedule
Smith Micros financial statement schedule appears in a separate section of this Annual Report
on Form 10-K on the pages referenced below. All other schedules have been omitted as they are not
applicable, not required or the information is included in the consolidated financial statements or
the notes thereto.
|
|
|
|
|
|
|
Page
|
|
Schedule II Valuation and Qualifying Accounts for each of the three years in
the period ended December 31, 2005
|
|
|
S-1
|
|
(3) Exhibits
|
|
|
|
|
Exhibit
|
|
|
|
|
No.
|
|
Title
|
|
Method of Filing
|
3.1
|
|
Amended and Restated Certificate of
Incorporation of the Registrant.
|
|
Incorporated by
reference to Exhibit
3.1 to the
Registrants
Registration
Statement No.
33-95096.
|
|
|
|
|
|
3.1.1
|
|
Amendment to the Amended and Restated
Certificate of Incorporation of the
Registrant.
|
|
Incorporated by
reference to Exhibit
3.1.1 to the
Registrants
Quarterly Report on
Form 10-Q for the
period ended June
30, 2000.
|
|
|
|
|
|
3.1.2
|
|
Certificate of Amendment to Amended and
Restated Certificate of Incorporation
of Registrant as filed August 18, 2005
with Delaware Secretary of State
|
|
Filed Herewith
|
|
|
|
|
|
3.2
|
|
Amended and Restated Bylaws of the
Registrant.
|
|
Incorporated by
reference to Exhibit
3.2 to the
Registrants
Registration
Statement No.
33-95096.
|
|
|
|
|
|
4.1
|
|
Specimen certificate representing
shares of Common Stock of the
Registrant.
|
|
Incorporated by
reference to Exhibit
4.1 to the
Registrants
Registration
Statement No.
33-95096.
|
|
|
|
|
|
10.1
|
|
Form of Indemnification Agreement.
|
|
Incorporated by
reference to Exhibit
10.1 to the
Registrants
|
34
|
|
|
|
|
Exhibit
|
|
|
|
|
No.
|
|
Title
|
|
Method of Filing
|
|
|
|
|
Registration
Statement No.
33-95096.
|
|
|
|
|
|
10.2*
|
|
1995 Stock Option/Stock Issuance Plan
as Amended and Restated through
February 7, 2001.
|
|
Incorporated by
reference to the
Appendix attached to
the Definitive Proxy
Statement for the
2001 Annual Meeting
of Stockholders
filed on April 27,
2001.
|
|
|
|
|
|
10.3
|
|
2005 Stock Option / Stock Issuance Plan
|
|
Incorporated by
reference to
Appendix A attached
to the Definitive
Proxy Statement for
the 2005 Annual
Meeting as filed
June 10, 2005.
|
|
|
|
|
|
10.4
|
|
Master Software License and
Distribution Agreement (Contract No.
000-00-0000) effective as of December
1, 2000, between Cellco Partnership
(d/b/a Verizon Wireless) and the
Registrant
|
|
Incorporated by
reference to Exhibit
10.1 to the
Registrants
Quarterly Report on
Form 10-Q for the
quarter ended June
30, 2003.
|
|
|
|
|
|
10.4.1
|
|
Amendment of Master Software License
and Distribution Agreement (Contract
No. 000-00-0000)
|
|
Incorporated by
reference to Exhibit
10.1.1 to the
Registrants
Quarterly Report on
Form 10-Q for the
quarter ended June
30, 2003.
|
|
|
|
|
|
10.4.2
|
|
Amendment No. 2 to the Master Software
License and Distribution Agreement
(Contract No. 000-00-0000)
|
|
Incorporated by
reference to Exhibit
10.1.2 to the
Registrants
Quarterly Report on
Form 10-Q for the
quarter ended June
30, 2003.
|
|
|
|
|
|
14.1
|
|
Code of Ethics
|
|
Incorporated by
reference to Exhibit
14.1 to the
Registrants Annual
Report on Form 10-K
for the fiscal year
ended December 31,
2003.
|
|
|
|
|
|
14.1.1
|
|
Attachment 1 to Code of Ethics
|
|
Incorporated by
reference to Exhibit
14.1 to the
Registrants Annual
Report on Form 10-K
for the fiscal year
ended December 31,
2003.
|
|
|
|
|
|
21.1
|
|
Subsidiaries
|
|
Incorporated by
reference to Exhibit
21.1 to the
Registrants Annual
Report on Form 10-K
for the fiscal year
ended December 31,
2000.
|
|
|
|
|
|
23.1
|
|
Consent of Independent Registered
Public Accounting Firm.
|
|
Filed herewith
|
|
|
|
|
|
23.2
|
|
Consent of Independent Registered
Public Accounting Firm.
|
|
Filed herewith
|
|
|
|
|
|
31.1
|
|
Certification of the Chief Executive
Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
Filed herewith
|
|
|
|
|
|
31.2
|
|
Certification of the Chief Financial
Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
Filed herewith
|
|
|
|
|
|
32.1
|
|
Certifications of the Chief Executive
Officer and the Chief Financial Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
Furnished herewith
|
35
|
|
|
*
|
|
Indicates management contract or compensatory plan or arrangement.
|
|
|
|
Confidential treatment has been
granted with respect to certain
confidential portions of this
exhibit pursuant to Rule 24b-2
under the Securities Exchange Act
of 1934, which confidential
portions have been omitted from
the exhibit and filed separately
with the Securities and Exchange
Commission.
|
(b) Exhibits
The exhibits filed as part of this report are listed above in Item 15(a) (3) of this Form
10-K.
(c) Financial Statement Schedule
The Financial Statement Schedule required by Regulation S-X and Item 8 of this Form are listed
above in Item 15(a)(2) of this Form 10-K.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
SMITH MICRO SOFTWARE, INC.
|
|
|
|
|
|
|
|
Date: March 31, 2006
|
|
By:
|
|
/s/ William W. Smith, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
William W. Smith, Jr.
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
Date: March 31, 2006
|
|
By:
|
|
/s/ Andrew C. Schmidt
|
|
|
|
|
|
|
|
|
|
|
|
Andrew C. Schmidt,
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
/s/ William W. Smith, Jr.
William W. Smith, Jr.
|
|
Chairman of the Board,
President and Chief
Executive Officer
(Principal
Executive Officer)
|
|
March 31, 2006
|
|
|
|
|
|
/s/ Andrew C. Schmidt
Andrew C. Schmidt
|
|
Chief Financial Officer
(Principal Financial and
Accounting Officer)
|
|
March 31, 2006
|
|
|
|
|
|
/s/ Thomas G. Campbell
Thomas G. Campbell
|
|
Director
|
|
March 31, 2006
|
|
|
|
|
|
/s/ Samuel Gulko
Samuel Gulko
|
|
Director
|
|
March 31, 2006
|
|
|
|
|
|
/s/ Ted Hoffman
Ted Hoffman
|
|
Director
|
|
March 31, 2006
|
|
|
|
|
|
/s/ William C. Keiper
William C. Keiper
|
|
Director
|
|
March 31, 2006
|
|
|
|
|
|
/s/ Gregory J. Szabo
Gregory J. Szabo
|
|
Director
|
|
March 31, 2006
|
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Smith Micro Software, Inc.:
We have audited the accompanying consolidated balance sheet of Smith Micro Software, Inc. and
subsidiaries (the Company) as of December 31, 2004, and the related consolidated statements of
operations, stockholders equity and cash flows for each of the two years in the period ended
December 31, 2004. Our audits also included the financial statement schedule listed in the Index
at Item 15(a)(2) for each of the two years in the period ended December 31, 2004. These
consolidated financial statements and the financial statement schedule are the responsibility of
the Companys management. Our responsibility is to express an opinion on these consolidated
financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Smith Micro Software, Inc. and subsidiaries as of December 31, 2004, and
the results of their operations and their cash flows for each of the two years in the period ended
December 31, 2004 in conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein for each of the two years in the period ended December
31, 2004.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 30, 2005
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Smith Micro Software, Inc.:
We have audited the accompanying consolidated balance sheet of Smith Micro Software, Inc. and
subsidiaries (the Company) as of December 31, 2005, and the related consolidated statements of
operations, stockholders equity and cash flows for year then ended. Our audit also included the
financial statement schedule listed in the Index at Item 15(a)(2). These consolidated financial
statements and the financial statement schedule are the responsibility of the Companys management.
Our responsibility is to express an opinion on these consolidated financial statements and the
financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Smith Micro Software, Inc. and subsidiaries as of December 31, 2005, and
the results of their operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the information set forth
therein.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
February 20, 2006
F-2
SMITH MICRO SOFTWARE INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2005 AND 2004
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
21,215
|
|
|
$
|
8,634
|
|
Accounts receivable, net of allowances for doubtful accounts
and other adjustments of $439 (2005) and $137 (2004)
|
|
|
6,786
|
|
|
|
2,024
|
|
Income tax receivable
|
|
|
|
|
|
|
35
|
|
Inventories, net
|
|
|
530
|
|
|
|
47
|
|
Prepaid expenses and other current assets
|
|
|
556
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
29,087
|
|
|
|
10,943
|
|
|
|
|
|
|
|
|
|
|
EQUIPMENT AND IMPROVEMENTS, net
|
|
|
241
|
|
|
|
113
|
|
INTANGIBLE ASSETS, net
|
|
|
4,093
|
|
|
|
|
|
GOODWILL
|
|
|
9,288
|
|
|
|
1,715
|
|
OTHER ASSETS, net
|
|
|
7
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
$
|
42,716
|
|
|
$
|
12,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,383
|
|
|
$
|
939
|
|
Accrued liabilities
|
|
|
1,376
|
|
|
|
790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,759
|
|
|
|
1,729
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (Note 6)
|
|
|
|
|
|
|
|
|
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; 50,000,000 shares
authorized; 22,147,000 and 18,011,000 shares issued and outstanding
|
|
|
22
|
|
|
|
18
|
|
Additional paid-in capital
|
|
|
50,880
|
|
|
|
27,750
|
|
Accumulated deficit
|
|
|
(11,945
|
)
|
|
|
(16,669
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net stockholders equity
|
|
|
38,957
|
|
|
|
11,099
|
|
|
|
|
|
|
|
|
|
|
$
|
42,716
|
|
|
$
|
12,828
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
F-3
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
NET REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
19,637
|
|
|
$
|
12,394
|
|
|
$
|
6,291
|
|
Services
|
|
|
621
|
|
|
|
922
|
|
|
|
925
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Revenues
|
|
|
20,258
|
|
|
|
13,316
|
|
|
|
7,216
|
|
COST OF REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
3,818
|
|
|
|
2,530
|
|
|
|
1,350
|
|
Services
|
|
|
285
|
|
|
|
380
|
|
|
|
321
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Revenues
|
|
|
4,103
|
|
|
|
2,910
|
|
|
|
1,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
16,155
|
|
|
|
10,406
|
|
|
|
5,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
3,410
|
|
|
|
1,519
|
|
|
|
1,666
|
|
Research and development
|
|
|
3,963
|
|
|
|
2,556
|
|
|
|
2,506
|
|
General and administrative
|
|
|
4,621
|
|
|
|
2,868
|
|
|
|
2,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
11,994
|
|
|
|
6,943
|
|
|
|
6,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
4,161
|
|
|
|
3,463
|
|
|
|
(957
|
)
|
INTEREST INCOME
|
|
|
667
|
|
|
|
53
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
4,828
|
|
|
|
3,516
|
|
|
|
(920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE
|
|
|
104
|
|
|
|
71
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
4,724
|
|
|
$
|
3,445
|
|
|
$
|
(923
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) PER SHARE, basic
|
|
$
|
0.22
|
|
|
$
|
0.20
|
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVG SHARES OUTSTANDING,
basic
|
|
|
21,351
|
|
|
|
17,267
|
|
|
|
16,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) PER SHARE, fully diluted
|
|
$
|
0.21
|
|
|
$
|
0.19
|
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVG SHARES OUTSTANDING,
fully diluted
|
|
|
22,806
|
|
|
|
18,412
|
|
|
|
16,511
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
F-4
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
deficit
|
|
|
Total
|
|
BALANCE,
December 31, 2002
|
|
|
16,227
|
|
|
$
|
16
|
|
|
$
|
24,787
|
|
|
$
|
(19,191
|
)
|
|
$
|
5,612
|
|
Exercise of common stock options
|
|
|
808
|
|
|
|
1
|
|
|
|
913
|
|
|
|
|
|
|
|
914
|
|
Repurchase and retirement
of common stock
|
|
|
(24
|
)
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(923
|
)
|
|
|
(923
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2003
|
|
|
17,011
|
|
|
|
17
|
|
|
|
25,687
|
|
|
|
(20,114
|
)
|
|
|
5,590
|
|
Exercise of common stock options
|
|
|
1,000
|
|
|
|
1
|
|
|
|
1,995
|
|
|
|
|
|
|
|
1,996
|
|
Tax benefit related to the exercise
of stock options
|
|
|
|
|
|
|
|
|
|
|
68
|
|
|
|
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,445
|
|
|
|
3,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2004
|
|
|
18,011
|
|
|
|
18
|
|
|
|
27,750
|
|
|
|
(16,669
|
)
|
|
|
11,099
|
|
Issuance of common stock in
private placement
|
|
|
3,500
|
|
|
|
4
|
|
|
|
20,782
|
|
|
|
|
|
|
|
20,786
|
|
Issuance of common stock in
Allume acquisition
|
|
|
398
|
|
|
|
|
|
|
|
1,858
|
|
|
|
|
|
|
|
1,858
|
|
Exercise of common stock options
|
|
|
238
|
|
|
|
|
|
|
|
369
|
|
|
|
|
|
|
|
369
|
|
Tax benefit related to the exercise
of stock options
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
20
|
|
Non cash compensation recognized
on stock options
|
|
|
|
|
|
|
|
|
|
|
101
|
|
|
|
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,724
|
|
|
|
4,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2005
|
|
|
22,147
|
|
|
$
|
22
|
|
|
$
|
50,880
|
|
|
$
|
(11,945
|
)
|
|
$
|
38,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
F-5
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,724
|
|
|
$
|
3,445
|
|
|
$
|
(923
|
)
|
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
901
|
|
|
|
146
|
|
|
|
410
|
|
Provision for doubtful accounts
and other adjustments to accounts receivable
|
|
|
573
|
|
|
|
112
|
|
|
|
132
|
|
Tax benefit related to the exercise of stock options
|
|
|
20
|
|
|
|
68
|
|
|
|
|
|
Non cash option expense
|
|
|
101
|
|
|
|
|
|
|
|
|
|
Change in operating accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(4,513
|
)
|
|
|
(1,395
|
)
|
|
|
(240
|
)
|
Income tax receivable
|
|
|
35
|
|
|
|
(35
|
)
|
|
|
|
|
Inventories
|
|
|
(246
|
)
|
|
|
(25
|
)
|
|
|
23
|
|
Prepaid expenses and other assets
|
|
|
(109
|
)
|
|
|
(30
|
)
|
|
|
(12
|
)
|
Accounts payable and accrued liabilities
|
|
|
978
|
|
|
|
732
|
|
|
|
(157
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
2,464
|
|
|
|
3,018
|
|
|
|
(767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Allume Systems, Inc.
|
|
|
(10,896
|
)
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(142
|
)
|
|
|
(102
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(11,038
|
)
|
|
|
(102
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net of offering costs
|
|
|
20,786
|
|
|
|
1,996
|
|
|
|
914
|
|
Proceeds from exercise of stock options
|
|
|
369
|
|
|
|
|
|
|
|
|
|
Cash used in repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
21,155
|
|
|
|
1,996
|
|
|
|
901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH & CASH EQUIVALENTS
|
|
|
12,581
|
|
|
|
4,912
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of year
|
|
|
8,634
|
|
|
|
3,722
|
|
|
|
3,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of year
|
|
$
|
21,215
|
|
|
$
|
8,634
|
|
|
$
|
3,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION -
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for income taxes
|
|
$
|
42
|
|
|
$
|
38
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
F-6
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
|
Description of Business
- Smith Micro Software, Inc. and subsidiaries (the Company) is a
diversified developer and marketer of communications and utilities software products and
services. The Companys strategic focus is to market and sell value-added wireless products
targeted to the original equipment manufacturers (OEM) market, particularly wireless
service providers and mobile phone manufacturers as well as direct to corporations and
consumers. The Company offers software products for Windows, Mac OSX, Unix and Linux
operating systems. The Company also offers wireless communication software products and
services to the enterprise market that include enhanced wireless security features.
|
|
|
|
On July 1, 2005, the Company acquired Allume Systems (Allume), which was a wholly owned
subsidiary of International Microcomputer Software, Inc. (see Note 4). Allume develops and
publishes award-winning software solutions that empower users in the area of information
access, removal, recovery, security, productivity and online distribution. Allumes flagship
product is StuffIt
®
Deluxe. StuffIt Wireless, a new and advanced technology that is patent
pending by Allume Systems, will compress an already compressed JPEG file by up to 30% more
without loosing any of the picture quality. This technology is particularly important to
mobile phone manufactures who now can store up to 30% more images and carriers who are
interested in the reduction of utilized bandwidth. Other award winning products include
icSpyware Suite
®
and Internet Cleanup
®
which targets spyware and phishing intrusions, and
Spring Cleaning
®
which cleans and optimizes computer operating systems.
|
|
|
|
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. These securities are primarily held in one financial
institution and are uninsured except for minimum FDIC coverage. As of December 31, 2005 and
December 31, 2004, balances totaling approximately $21.4 million and $8.5 million,
respectively, were uninsured. 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 allowances for estimated credit losses, and those losses have been within
managements estimates. Allowances for product returns are included in other adjustments
|
F-7
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
|
|
to accounts receivable on the accompanying consolidated balance sheets. Product returns are
estimated based on historical experience and have also been within managements estimates.
|
|
|
|
Inventories
- Inventories consist principally of cables, CDs, boxes and manuals and are
stated at the lower of cost (determined by the first-in, first-out method) or market.
The Company regularly reviews its inventory quantities on hand and records a provision
for excess and obsolete inventory based primarily on managements estimated forecast of
product demand and production requirements.
|
|
|
|
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. 144,
Accounting for Impairment or Disposal of Long-Lived Assets
. This statement addresses
financial accounting and reporting for the impairment of long-lived assets and for the
disposal of long-lived assets. In accordance with SFAS No. 144, 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. The Company has
determined that there was no impairment at December 31, 2005.
|
|
|
|
Goodwill
- The Company adopted SFAS No. 142,
Goodwill and Other Intangible Assets,
effective
January 1, 2002 and no impairment was identified. As a result of the adoption, the Company
is no longer required to amortize goodwill. In accordance with SFAS No. 142, the Company
reviews the recoverability of the carrying value of goodwill at least annually or whenever
events or circumstances indicate a potential impairment. The Companys annual impairment
testing date is December 31. Recoverability of goodwill is determined by comparing the fair
value of the Companys reporting units to the carrying value of the underlying net assets in
the reporting units. If the fair value of a reporting unit is determined to be less than the
carrying value of its net assets, goodwill is deemed impaired and an impairment loss is
recognized to the extent that the carrying value of goodwill exceeds the difference between
the fair value of the reporting unit and the fair value of its other assets and liabilities.
The Company determined that it did not have any impairment of goodwill at December 31, 2005.
|
|
|
|
Revenue Recognition
- Software revenue is recognized in accordance with the Statement of
Position (SOP) 97-2,
Software Revenue Recognition,
as amended, when persuasive
|
F-8
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
|
|
evidence of an arrangement exists, delivery has occurred, the price is fixed and
determinable, and collection is probable. The Company recognizes revenues from sales of its
software to Retail and OEM customers or end users as completed products are shipped and title
passes, or from royalties generated as authorized customers duplicate its software, if the
other requirements of SOP 97-2 are met. If the requirements of SOP 97-2 are not met at the
date of shipment, revenue is not recognized until these elements are known or resolved.
Returns from Retail and OEM customers are limited to defective goods or goods shipped in
error. Historically, OEM customer returns have not been significant. The Company reviews
available retail channel information and makes a determination of a return provision for
sales made to distributors and retailers based on current channel inventory levels and
historical return patterns. Certain sales to distributors are made on a consignment basis.
Revenue for consignment sales is not recognized until sell through to the final customer has
occurred.
|
|
|
|
Product sales directly to end users are recognized upon delivery. End users have a thirty
day right of return, but such returns are reasonably estimable and have historically been
immaterial. The Company also provides technical support to its customers. Such costs have
historically been insignificant.
|
|
|
|
Service revenues include sales of consulting services, web site hosting and fulfillment.
Service revenues are recognized as services are provided or as milestones are delivered and
accepted by our customers.
|
|
|
|
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 December 31, 2005,
software has been substantially completed concurrently with the establishment of
technological feasibility; and, accordingly, no costs have been capitalized to date.
|
|
|
|
Sales Incentives
- Pursuant to the consensus of EITF 01-09,
Accounting for Consideration
Given by a Vendor to a Customer (Including a Reseller of the Vendors Product),
effective
January 1, 2002, the cost of sales incentives the Company offers without charge to customers
that can be used in, or that are exercisable by a customer as a result of, a single exchange
transaction is accounted for as a reduction of revenue.
|
|
|
|
Advertising Expense
- Advertising costs are expensed as incurred. Advertising expenses were
$223,000, $47,000 and $95,000 for the years ended December 31, 2005, 2004 and 2003,
respectively.
|
F-9
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
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 Companys 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 Companys 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. The federal and state current provision relates to alternative minimum
tax liability.
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
and related interpretations. SFAS No. 123
,
Accounting for Stock-Based Compensation,
requires the disclosure of pro forma net income
(loss) and income (loss) per share had the Company adopted the fair value method as of the
beginning of fiscal 1995. Under SFAS No. 123, the fair value of stock-based awards to
employees is calculated through the use of option pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from the Companys stock option
awards. These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated values.
The Companys calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: expected life, 12 to 48 months following grant date;
stock volatility, 85%, 127% and 125% for grants issued in 2005, 2004 and 2003, respectively;
risk-free interest rates of 3.98%, 3.47% and 2.63% for 2005, 2004 and 2003, respectively; and
no dividends during the expected term. The Companys calculations are based on a
single-option valuation approach, and forfeitures or cancellations are recognized as they
occur. If the computed fair values of the 2005, 2004 and 2003 awards had been amortized to
expense over the vesting period of the awards, pro forma net income (loss) would have been as
follows:
F-10
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), as reported
|
|
$
|
4,724
|
|
|
$
|
3,445
|
|
|
$
|
(923
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects
|
|
|
(1,582
|
)
|
|
|
(308
|
)
|
|
|
(286
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$
|
3,142
|
|
|
$
|
3,137
|
|
|
$
|
(1,209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported, Basic
|
|
$
|
0.22
|
|
|
$
|
0.20
|
|
|
$
|
(0.06
|
)
|
As reported, Diluted
|
|
$
|
0.21
|
|
|
$
|
0.19
|
|
|
$
|
(0.06
|
)
|
Pro forma, Basic
|
|
$
|
0.15
|
|
|
$
|
0.18
|
|
|
$
|
(0.07
|
)
|
Pro forma, Diluted
|
|
$
|
0.14
|
|
|
$
|
0.17
|
|
|
$
|
(0.07
|
)
|
Beginning in fiscal 2006, we will be adopting FAS 123R, which requires the expensing of stock
options. Taking into account options issued and outstanding at December 31, 2005, we
estimate that our 2006 stock compensation expense would be approximately $2.6 million. New
option issuances or restricted stock grants made in fiscal 2006 would increase the estimate.
Net Income (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
potential common shares outstanding. Potential common shares include stock options using the
treasury stock method. Potential common shares are excluded from the calculation of diluted
EPS in loss years, as the impact is antidilutive. Potential common shares of 955,000 have
been excluded from diluted weighted average common shares for the year ended December 31,
2003.
Fulfillment Services
- The Company currently holds consigned inventory from a customer, which
is used to fulfill orders. As the Company does not hold title to the inventory, it is not
recorded in the accompanying consolidated balance sheets. In addition, the Company receives
cash for fulfillment orders, which is paid out to the fulfillment customer on a monthly
basis. Such cash and the related payable are recorded on a net basis as the amounts
F-11
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
are held for the benefit of this fulfillment customer. Revenue is recognized for fulfillment
services as services are performed.
Use of Estimates
- The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assumptions that
affect the reported 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(Loss)
- Comprehensive income, as defined, includes all changes in equity
(net assets) during a period from non-owner sources. For each of the years ended December
31, 2005, 2004 and 2003, there was no difference between net income (loss) and comprehensive
income (loss).
Fair Value of Financial Instruments
The Companys financial instruments consist of cash,
cash equivalents and trade receivables and payables. The carrying amounts of these
instruments approximate fair value because of their short-term maturities.
New Accounting Pronouncements
- In March 2006, the FASB issued SFAS No. 156,
Accounting for Servicing of Financial Assets
(SFAS No. 156), which provides an approach to
simplify efforts to obtain hedge-like (offset) accounting. This Statement amends FASB
Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
, with respect to the accounting for separately recognized
servicing assets and servicing liabilities. The Statement (1) requires an entity to
recognize a servicing asset or servicing liability each time it undertakes an obligation to
service a financial asset by entering into a servicing contract in certain situations; (2)
requires that a separately recognized servicing asset or servicing liability be initially
measured at fair value, if practicable; (3) permits an entity to choose either the
amortization method or the fair value method for subsequent measurement for each class of
separately recognized servicing assets or servicing liabilities; (4) permits at initial
adoption a one-time reclassification of available-for-sale securities to trading securities
by an entity with recognized servicing rights, provided the securities reclassified offset
the entitys exposure to changes in the fair value of the servicing assets or liabilities;
and (5) requires separate presentation of servicing assets and servicing liabilities
subsequently measured at fair value in the balance sheet and additional disclosures for all
separately recognized servicing assets and servicing liabilities. SFAS No. 156 is effective
for all separately recognized servicing assets and liabilities as of the beginning of an
entitys fiscal year that begins after September 15, 2006, with earlier adoption permitted in
certain circumstances. The Statement also describes the manner in which it should be
initially applied. The Company does not believe that SFAS No. 156 will have a material
impact on its financial position, results of operations or cash flows.
F-12
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
In February 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
155,
Accounting for Certain Hybrid Financial Instruments
, which amends SFAS No. 133,
Accounting for Derivatives Instruments and Hedging Activities
and SFAS No. 140,
Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities
. SFAS No.
155 amends SFAS No. 133 to narrow the scope exception for interest-only and principal-only
strips on debt instruments to include only such strips representing rights to receive a
specified portion of the contractual interest or principle cash flows. SFAS No. 155 also
amends SFAS No. 140 to allow qualifying special-purpose entities to hold a passive derivative
financial instrument pertaining to beneficial interests that itself is a derivative
instrument. The Company is currently evaluating the impact this new Standard but believe
that it will not have a material impact on the Companys financial position, results of
operations, or cash flows.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections
(SFAS No.
154), an amendment to Accounting Principles Bulletin Opinion No. 20,
Accounting Changes
(APB
No. 20), and SFAS No. 3,
Reporting Accounting Changes in Interim Financial Statements
. Though
SFAS No. 154 carries forward the guidance in APB No.20 and SFAS No.3 with respect to
accounting for changes in estimates, changes in reporting entity, and the correction of
errors, SFAS No. 154 establishes new standards on accounting for changes in accounting
principles, whereby all such changes must be accounted for by retrospective application to
the financial statements of prior periods unless it is impracticable to do so. SFAS No. 154
is effective for accounting changes and error corrections made in fiscal years beginning
after December 15, 2005, with early adoption permitted for changes and corrections made in
years beginning after May 2005. The Company will implement SFAS No. 154 in its fiscal year
beginning January 1, 2006. The Company is currently evaluating the impact of this new
standard but believes that it will not have a material impact on the Companys financial
position, results of operations, or cash flows.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
Share-Based Payment
, which
replaces SFAS No. 123,
Accounting for Stock-Based Compensation
and supersedes APB No. 25,
Accounting for Stock Issued to Employees
. SFAS No. 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the financial
statements based on their fair values, beginning with the first annual period after June 15,
2005, with early adoption encouraged. In addition, SFAS No. 123R will cause unrecognized
expense (based on the amounts in our pro forma footnote disclosure) related to options
vesting after the date of initial adoption to be recognized as a charge to results of
operations over the remaining vesting period. The Company is required to adopt SFAS No. 123R
in the first quarter of 2006, beginning January 1, 2006. Under SFAS No. 123R, the Company
will determine the appropriate fair value model to be used for valuing share-based payments,
the amortization method for compensation cost and the transition method to be
F-13
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
used at the date of adoption. The transition alternatives include prospective and retroactive
adoption methods. Under the retroactive methods, prior periods may be restated either as of
the beginning of the year of adoption or for all periods presented. The prospective method
requires that compensation expense be recorded for all unvested stock options and share
awards at the beginning of the first quarter of adoption of SFAS No. 123R, while the
retroactive methods would record compensation expense for all unvested stock options and
share awards beginning with the first period restated. The Company is evaluating the
requirements of SFAS No. 123R and expects that the adoption of SFAS No. 123R will have a
material impact on its consolidated results of operations and earnings per share. The Company
has not determined the method of adoption or the effect of adopting SFAS No. 123R.
2. ACQUISITION OF ALLUME INC.
On July 1, 2005, the Company acquired 100% of the issued and outstanding capital stock of
Allume, Inc. from International Microcomputer Software, Inc. (IMSI) for $10.6 million in cash
and 397,547 restricted shares of its common stock. Allume, Inc. is a leading developer of
compression software solutions for JPEG, MPEG and MP3 platforms. A portion of the purchase
price, including $1,250,000 cash and shares of common stock having a market value of $750,000
were deposited in an indemnity escrow to secure certain representations and warranties
included in the Stock Purchase Agreement. The aggregate purchase price was approximately
$12.8 million, which includes $10.6 million cash paid, the
397,547 shares issued, which have
been valued using the average closing market price of the Companys common stock over the
two-day period before and after the sale was announced, and $316,000 of direct acquisition
costs. The direct acquisition costs incurred to date include $116,000 for legal and
professional services, as well as a transaction fee of $200,000.
The results of operations of the business acquired have been included in the Companys
consolidated financial statements from the date of acquisition. Depreciation and
amortization related to the acquisition were calculated based on the estimated fair market
values and estimated lives for property and equipment and an independent valuation for
certain identifiable intangibles acquired.
The total purchase price is summarized as follows (in thousands):
F-14
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
|
|
|
|
|
Cash consideration
|
|
$
|
10,626
|
|
Common stock
|
|
|
1,858
|
|
Acquisition related costs
|
|
|
316
|
|
|
|
|
|
Total purchase price
|
|
$
|
12,800
|
|
|
|
|
|
The purchase price is contingent upon a final calculation of Allumes net assets.
If the final net asset calculation is less than the minimum amount specified in the purchase
agreement, the purchase price will be adjusted downward accordingly. Any such adjustment will
be recorded as an adjustment to the cost of Allume Systems, Inc. and reflected in the final
purchase price allocation.
The Companys preliminary allocation of the purchase price is summarized as follows (in
thousands):
|
|
|
|
|
Assets:
|
|
|
|
|
Cash
|
|
$
|
46
|
|
Accounts Receivable, net
|
|
|
822
|
|
Inventories, net
|
|
|
237
|
|
Property & Equipment
|
|
|
67
|
|
Other Assets
|
|
|
244
|
|
Intangible Assets
|
|
|
4,863
|
|
Goodwill
|
|
|
7,573
|
|
|
|
|
|
Total Assets
|
|
|
13,852
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Accounts Payable
|
|
|
659
|
|
Accrued Liabilities
|
|
|
393
|
|
|
|
|
|
Total Liabilities
|
|
|
1,052
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
12,800
|
|
|
|
|
|
Unaudited pro forma consolidated results of operations for the years ended December 31, 2005
and 2004 as if the acquisition had occurred as of January 1, 2004 are as follows (in
thousands, except per share data):
F-15
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
|
Historical
|
|
|
Proforma
|
|
|
Historical
|
|
|
Proforma
|
|
Net Revenues
|
|
$
|
20,258
|
|
|
$
|
24,647
|
|
|
$
|
13,316
|
|
|
$
|
22,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
4,724
|
|
|
$
|
4,288
|
|
|
$
|
3,445
|
|
|
$
|
2,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per share, basic
|
|
$
|
0.22
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per share, diluted
|
|
$
|
0.21
|
|
|
$
|
0.19
|
|
|
$
|
0.19
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding, basic
|
|
|
21,351
|
|
|
|
21,549
|
|
|
|
17,267
|
|
|
|
17,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding, diluted
|
|
|
22,806
|
|
|
|
23,004
|
|
|
|
18,412
|
|
|
|
18,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma adjustments have been applied to reflect the addition of amortization related
to the intangible assets and the fixed assets acquired and reduction in interest income as if
the acquisition had occurred at the beginning of such period presented. The pro forma
adjustment for amortization related to intangible assets acquired was $$1.5 million and
$608,000 for the proforma periods ending December 31, 2004 and 2005, respectively .
3. EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consist of the following (in thousands):
F-16
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
Machinery and equipment
|
|
$
|
906
|
|
|
$
|
745
|
|
Leasehold improvements
|
|
|
362
|
|
|
|
315
|
|
Office furniture and fixtures
|
|
|
72
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,340
|
|
|
|
1,167
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
(1,099
|
)
|
|
|
(1,054
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
241
|
|
|
$
|
113
|
|
|
|
|
|
|
|
|
4. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table sets forth the acquired intangible assets by major asset class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
|
Life
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
(Years)
|
|
|
Gross
|
|
|
Amortization
|
|
|
Value
|
|
|
Gross
|
|
|
Amortization
|
|
|
Value
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased and
Licensed Technology
|
|
|
3
|
|
|
$
|
2,260
|
|
|
$
|
(2,260
|
)
|
|
$
|
|
|
|
$
|
2,260
|
|
|
$
|
(2,260
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized Software
|
|
|
5
|
|
|
|
2,649
|
|
|
|
(534
|
)
|
|
|
2,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Rights
|
|
|
5
|
|
|
|
482
|
|
|
|
(76
|
)
|
|
|
406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Lists
|
|
|
5
|
|
|
|
923
|
|
|
|
(92
|
)
|
|
|
831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
10
|
|
|
|
809
|
|
|
|
(68
|
)
|
|
|
741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
|
|
$
|
7,123
|
|
|
$
|
(3,030
|
)
|
|
$
|
4,093
|
|
|
$
|
2,260
|
|
|
$
|
(2,260
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
Aggregate amortization expense on intangible assets was approximately $770,000, $40,000
and $184,000 for the years ended December 31, 2005, 2004 and 2003, respectively.
Expected future amortization expense is as follows: $1,378,000 for the year 2006,
$1,074,000 for the year 2007, $743,000 for the year 2008, $449,000 for the year 2009 and
$449,000 thereafter.
The carrying amount of the Companys goodwill was $9,288,000 as of December 31, 2005 and
$1,715,000 as of December 31, 2004. The Companys reporting units are equivalent to its
operating segments. At December 31, 2005 and 2004, the amount of goodwill allocated to the
products segment is $8,953,000 and $1,380,000, respectively and the amount of goodwill
allocated to the services segment is $335,000.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
Salaries and benefits
|
|
$
|
1,055
|
|
|
$
|
783
|
|
Royalties
|
|
|
180
|
|
|
|
1
|
|
Marketing expenses and rebates
|
|
|
103
|
|
|
|
|
|
Other
|
|
|
38
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,376
|
|
|
$
|
790
|
|
|
|
|
|
|
|
|
F-18
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
6. INCOME TAXES
A summary of the income tax expense (benefit) is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
100
|
|
|
$
|
68
|
|
|
$
|
|
|
State
|
|
|
4
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104
|
|
|
|
71
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,286
|
|
|
|
1,025
|
|
|
|
(324
|
)
|
State
|
|
|
(197
|
)
|
|
|
427
|
|
|
|
(22
|
)
|
Change in valuation allowance
|
|
|
(1,089
|
)
|
|
|
(1,452
|
)
|
|
|
346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
104
|
|
|
$
|
71
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
F-19
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
A reconciliation of the provision (benefit) for income taxes to the amount of income tax
expense (benefit) that would result from applying the federal statutory rate (35%) to the
income (loss) before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Federal statutory rate
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
(35
|
)%
|
State tax, net of federal benefit
|
|
|
3
|
|
|
|
|
|
|
|
|
|
Nondeductible expense related to acquired intangibles
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
Other
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
2
|
|
Change in valuation allowance
|
|
|
(35
|
)
|
|
|
(32
|
)
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
The major components of the Companys deferred tax assets and liabilities are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
Various reserves
|
|
$
|
107
|
|
|
$
|
91
|
|
Nondeductible accruals
|
|
|
204
|
|
|
|
112
|
|
State taxes
|
|
|
(587
|
)
|
|
|
(523
|
)
|
Prepaid expenses
|
|
|
(99
|
)
|
|
|
(71
|
)
|
Credit carryforwards
|
|
|
1,687
|
|
|
|
1,320
|
|
Net operating loss carryforwards
|
|
|
6,118
|
|
|
|
7,652
|
|
Fixed Assets
|
|
|
48
|
|
|
|
36
|
|
Amortization
|
|
|
265
|
|
|
|
258
|
|
Other
|
|
|
43
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
7,786
|
|
|
|
8,875
|
|
Valuation allowance
|
|
|
(7,786
|
)
|
|
|
(8,875
|
)
|
|
|
|
|
|
|
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
The Company has federal and state net operating loss carryforwards of approximately
$14,896,000 and $12,034,000, respectively, at December 31, 2005. These federal and state
net operating loss carryforwards will expire in 2006 through 2025. In addition, the
Company has federal and state tax credit carryforwards of approximately $1,128,000 and
$559,000, respectively, at December 31, 2005. These tax credits will begin to expire in
2010.
As of December 31, 2005 and 2004 a valuation allowance of approximately $7,786,000 and
$8,875,000 respectively, has been provided based on the Companys assessment that it is
more likely than not that sufficient taxable income will not be generated to realize the
tax benefits of these temporary differences. For the years ended December 31, 2005 and
2004, the net change in the valuation allowance was a decrease of $1,089,000 and
$1,452,000, respectively.
As of December 31, 2005, a valuation allowance of approximately $7,786,000 has been
provided based upon the Companys assessment that it is more likely than not that
sufficient taxable income will not be generated to realize the tax benefits of these
temporary differences.
F-21
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
The increases in the valuation allowance for 2005 and 2004 includes $401,000 and
$1,710,000, respectively, related to the increases in the Companys Net Operating Loss
Carryforwards as a result of tax deductions derived from the exercise of stock options.
Cumulatively, as of December 31, 2005, approximately $3,752,000 of the valuation allowance
was attributable to such potential tax benefit of stock option transactions that will be
credited directly to additional paid in capital, if realized.
7. COMMITMENTS AND CONTINGENCIES
Leases
- The Company has non-cancelable operating leases for its building facilities in Aliso
Viejo, California and Watsonville, California, which expire in May 2009 and September 2010,
respectively. The Company also leases space for its facility in Lees Summit, Missouri on a
month to month basis. Future minimum rental commitments consist of the following (in
thousands):
|
|
|
|
|
Year ending December 31:
|
|
|
|
|
2006
|
|
$
|
509
|
|
2007
|
|
|
512
|
|
2008
|
|
|
514
|
|
2009
|
|
|
295
|
|
2010
|
|
|
104
|
|
|
|
|
|
Total
|
|
$
|
1,934
|
|
|
|
|
|
Total rent expense was $492,000, $480,000 and $590,000 for the years ended December 31, 2005,
2004 and 2003, respectively.
Litigation
From time to time the Company is subject to litigation in the normal course of
business, none of which management believes will likely have a material adverse effect on the
Companys consolidated financial condition or results of operations.
Other Contingent Contractual Obligations
During its normal course of business, the Company
has made certain indemnities, commitments and guarantees under which it may be required to
make payments in relation to certain transactions. These include: intellectual property
indemnities to the Companys customers and licensees in connection with the use, sale and/or
license of Company products; indemnities to various lessors in connection with facility
leases for certain claims arising from such facility or lease; indemnities to vendors and
service providers pertaining to claims based on the negligence or willful misconduct of the
Company; indemnities involving the accuracy of representations and warranties in certain
contracts; and indemnities to directors and officers of the Company to the maximum extent
F-22
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
contracts; and indemnities to directors and officers of the Company to the maximum
extent permitted under the laws of the State of Delaware. In addition, the Company has made
contractual commitments to employees providing for severance payments upon the occurrence of
certain prescribed events. The Company may also issue a guarantee in the form of a standby
letter of credit as security for contingent liabilities under certain customer contracts. The
duration of these indemnities, commitments and guarantees varies, and in certain cases, may
be indefinite. The majority of these indemnities, commitments and guarantees may not provide
for any limitation of the maximum potential for future payments the Company could be
obligated to make. The Company has not recorded any liability for these indemnities,
commitments and guarantees in the accompanying consolidated balance sheets.
8. SEGMENT INFORMATION
The Company currently operates in two business segments: products and services. In addition,
revenues are classified into three markets, Wireless and OEM sales, Retail and Distribution
sales, and Internet and Direct sales. Our Internet market includes Internet based software
products as well as consulting, fulfillment and 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 and cost of revenues.
The following table shows the net revenues and cost of revenues generated by each segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
Products
|
|
|
Services
|
|
|
Products
|
|
|
Services
|
|
|
Products
|
|
|
Services
|
|
Wireless & OEM
|
|
$
|
13,954
|
|
|
$
|
|
|
|
$
|
11,424
|
|
|
$
|
|
|
|
$
|
4,711
|
|
|
$
|
|
|
Retail & Distribution
|
|
|
4,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internet & Direct
|
|
|
797
|
|
|
|
621
|
|
|
|
970
|
|
|
|
922
|
|
|
|
1,580
|
|
|
|
925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
19,637
|
|
|
|
621
|
|
|
|
12,394
|
|
|
|
922
|
|
|
|
6,291
|
|
|
|
925
|
|
Cost of revenues
|
|
|
3,818
|
|
|
|
285
|
|
|
|
2,530
|
|
|
|
380
|
|
|
|
1,350
|
|
|
|
321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
$
|
15,819
|
|
|
$
|
336
|
|
|
$
|
9,864
|
|
|
$
|
542
|
|
|
$
|
4,941
|
|
|
$
|
604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to individual customers and their affiliates, which amounted to more than 10% of
the Companys net revenues, included one OEM customer at 57.1% in 2005, one OEM customer
F-23
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
at 68.4% of revenues in 2004 and three OEM customers at 27.0%, 10.7% and 10.2% of revenues in
2003. Accounts receivable from these customers were $4.6 million at December 31, 2005, $1.7
million at December 31, 2004 and $477,000, $55,000 and $0 at December 31,
2003. A decision by a significant customer to substantially decrease or delay purchases
from the Company or the Companys inability to collect receivables from these customers could
have a material adverse effect on the Companys consolidated financial condition and results
of operations.
9. PROFIT SHARING
The Company offers its employees a 401(k) plan, in which the Company matches the employee
contribution at a rate of 20%, subject to a vesting schedule. Total employer contributions
amounted to $65,000, $54,000 and $45,000 for the years ended December 31, 2005, 2004 and
2003, respectively.
10. STOCK-BASED COMPENSATION
On July 28, 2005, the Shareholders approved the 2005 Stock Option / Stock Issuance Plan. The
Plan, which became effective the same date, replaced the 1995 Stock Option / Stock Issuance
Plan which expired on May 24, 2005. All outstanding options under the 1995 Plan will remain
outstanding, but no further grants will be made under that Plan. The maximum number of shares of the Companys Common Stock available for issuance over the term of the 2005 Plan
may not exceed 5,000,000 shares, plus that number of additional shares equal to 2.5% of the
number of shares of Common Stock outstanding on the last trading day of the calendar year
commencing with calendar year 2006 (but not in excess of 750,000 shares). Under the terms of
the Plan, incentive and nonqualified options may be granted at an exercise price not less
than the fair market value on the grant date, with terms of up to 10 years, and with vesting
to be determined by the Board of Directors.
F-24
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
Stock option activity under the Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
average
|
|
|
|
Number
|
|
|
exercise
|
|
|
|
of options
|
|
|
price
|
|
OUTSTANDING, December 31, 2002 (1,535,000 options,
exercisable at weighted average exercise price of $2.15)
|
|
|
2,765,000
|
|
|
$
|
1.46
|
|
Granted (weighted average fair value of $2.22)
|
|
|
38,000
|
|
|
$
|
2.46
|
|
Exercised
|
|
|
(808,000
|
)
|
|
$
|
1.13
|
|
Canceled
|
|
|
(84,000
|
)
|
|
$
|
1.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OUTSTANDING, December 31, 2003 (1,140,000 options,
exercisable at weighted average exercise price of $2.43)
|
|
|
1,911,000
|
|
|
$
|
1.62
|
|
Granted (weighted average fair value of $1.70)
|
|
|
922,000
|
|
|
$
|
1.95
|
|
Exercised
|
|
|
(1,000,000
|
)
|
|
$
|
2.00
|
|
Canceled
|
|
|
(34,000
|
)
|
|
$
|
1.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OUTSTANDING, December 31, 2004 (479,000 options,
exercisable at weighted average exercise price of $2.12)
|
|
|
1,799,000
|
|
|
$
|
1.58
|
|
Granted (weighted average fair value of $2.75)
|
|
|
2,371,000
|
|
|
$
|
4.94
|
|
Exercised
|
|
|
(238,000
|
)
|
|
$
|
1.55
|
|
Canceled
|
|
|
(76,000
|
)
|
|
$
|
5.22
|
|
|
|
|
|
|
|
|
|
OUTSTANDING, December 31, 2005 (898,000 options,
exercisable at weighted average exercise price of $1.85)
|
|
|
3,856,000
|
|
|
$
|
3.57
|
|
|
|
|
|
|
|
|
|
F-25
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
Additional information regarding options outstanding as of December 31, 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding
|
|
|
Options exercisable
|
|
|
|
|
|
|
|
Weighted average
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
Range of
|
|
|
|
|
|
remaining
|
|
|
average
|
|
|
|
|
|
|
average
|
|
exercise
|
|
Number
|
|
|
contractual
|
|
|
exercise
|
|
|
Number
|
|
|
exercise
|
|
prices
|
|
outstanding
|
|
|
life (years)
|
|
|
price
|
|
|
exercisable
|
|
|
price
|
|
$0.24-$ 0.50
|
|
|
433,000
|
|
|
|
6.9
|
|
|
$
|
0.24
|
|
|
|
245,000
|
|
|
$
|
0.24
|
|
$0.51-$ 1.00
|
|
|
123,000
|
|
|
|
6.3
|
|
|
$
|
0.93
|
|
|
|
121,000
|
|
|
$
|
0.94
|
|
$1.01-$ 2.00
|
|
|
881,000
|
|
|
|
8.2
|
|
|
$
|
1.84
|
|
|
|
315,000
|
|
|
$
|
1.73
|
|
$2.01-$ 4.00
|
|
|
159,000
|
|
|
|
8.7
|
|
|
$
|
3.62
|
|
|
|
155,000
|
|
|
$
|
3.65
|
|
$4.01-$ 5.00
|
|
|
2,160,000
|
|
|
|
9.6
|
|
|
$
|
4.95
|
|
|
|
36,000
|
|
|
$
|
4.95
|
|
$5.01-$14.00
|
|
|
100,000
|
|
|
|
8.4
|
|
|
$
|
6.78
|
|
|
|
26,000
|
|
|
$
|
7.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,856,000
|
|
|
|
8.8
|
|
|
$
|
3.57
|
|
|
|
898,000
|
|
|
$
|
1.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005, 2,764,000 shares were available for future grants under the Stock
Option Plan.
11. RELATED PARTY TRANSACTIONS
In October 2004, the Company entered into a Master Software Services Agreement with Arrange
Technology LLC, providing for the development of certain software applications and
integration services. A member of the Companys Board of Directors was a principal
beneficial owner of Arrange Technology LLC, however, that relationship terminated in 2005.
$118,000 and $19,000 was expensed under the terms of the agreement in the years ended
December 31, 2005 and 2004, respectively.
In conjunction with the severance agreement, entered into in June 2005, with Robert
Scheussler, the former CFO, the Company recognized approximately $230,000 in severance
related costs which is included in general and administrative expenses in the consolidated
statement of operations for the year ended December 31, 2005. As per the agreement, Mr.
Scheussler will continue to provide services to the Company as a consultant and, under the
terms of the Companys Stock Option Plan, will continue to vest in his existing, unvested
option grants (which were not modified) totaling 108,333 options. The unvested
portion of these option grants were valued by the Company at approximately
F-26
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
$424,000 on July
1, 2005, utilizing the Black Scholes option pricing model. The Company expensed
approximately $101,000 in the year ended December 31, 2005 with respect to Mr.
Scheusslers employee stock option agreements.
In September 2004, the Company entered into a severance agreement with a principal
stockholder and former officer and director of the Company. The Company has discharged its
obligation under the agreement by purchasing a single premium annuity in the amount of
$192,000 which is included in general and administrative expenses in the consolidated
statement of operations for the year ended December 31, 2004.
12. EQUITY TRANSACTIONS
On February 18, 2005, the Company entered into a Securities Purchase Agreement with certain
institutional investors related to the private placement of 3,500,000 shares of our common
stock, par value $0.001 per share. The transaction closed on February 18, 2005 and the
Company realized gross proceeds of $22.4 million from the financing before deducting
commissions and other expenses. Offering costs related to the transaction totaled
$1,613,000, comprised of $1,344,000 in commissions and $269,000 cash payments for legal and
investment services, resulting in net proceeds of $20,786,000. The Company agreed to
register for resale the shares of Common Stock issued in the private placement. Such
registration statement became effective on June 17, 2005. The agreement provides for
penalties of one percent (1%) of the purchase price per month should effectiveness of the
registration not be maintained.
C.E. Unterberg, Towbin LLC, the placement agent for the transaction, received a cash fee
equal to 6% of the aggregate gross proceeds of the Private Placement.
On July 28, 2005, the Shareholders approved a proposal to amend the Amended and restated
Certificate of Incorporation to increase the number of authorized Common Shares from
30,000,000 to 50,000,000. Increasing the number of authorized shares of Common Stock is expected to
provide the Company with additional capital resources to finance the long-term growth of
the Company and with sufficient shares of Common Stock for stock splits. The additional shares of Common Stock could be issued for acquisitions and in public or private offerings,
the proceeds of which could be used to finance the Companys growth through increased
working capital, expansion of existing businesses and other corporate purposes.
F-27
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
Balance at
|
|
charged to
|
|
|
|
|
|
Balance at
|
|
|
beginning of
|
|
costs and
|
|
|
|
|
|
end of
|
|
|
period
|
|
expenses
|
|
Deductions
|
|
period
|
Allowance for doubtful accounts and
other adjustments (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
137
|
|
|
$
|
573
|
|
|
$
|
(271
|
)
|
|
$
|
439
|
|
2004
|
|
|
33
|
|
|
|
112
|
|
|
|
(8
|
)
|
|
|
137
|
|
2003
|
|
|
565
|
|
|
|
132
|
|
|
|
(664
|
)
|
|
|
33
|
|
|
|
|
(1)
|
|
Other adjustments relate principally to sales returns.
|
S-1
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
|
|
No.
|
|
Title
|
|
Method of Filing
|
3.1
|
|
Amended and Restated Certificate of
Incorporation of the Registrant.
|
|
Incorporated by
reference to
Exhibit 3.1 to the
Registrants
Registration
Statement No.
33-95096.
|
|
|
|
|
|
3.1.1
|
|
Amendment to the Amended and Restated
Certificate of Incorporation of the
Registrant.
|
|
Incorporated by
reference to
Exhibit 3.1.1 to
the Registrants
Quarterly Report on
Form 10-Q for the
period ended June
30, 2000.
|
|
|
|
|
|
3.1.2
|
|
Certificate of Amendment to Amended
and Restated Certificate of
Incorporation of Registrant as filed
August 18, 2005 with Delaware
Secretary of State
|
|
Filed Herewith
|
|
|
|
|
|
3.2
|
|
Amended and Restated Bylaws of the
Registrant.
|
|
Incorporated by
reference to
Exhibit 3.2 to the
Registrants
Registration
Statement No.
33-95096.
|
|
|
|
|
|
4.1
|
|
Specimen certificate representing
shares of Common Stock of the
Registrant.
|
|
Incorporated by
reference to
Exhibit 4.1 to the
Registrants
Registration
Statement No.
33-95096.
|
|
|
|
|
|
10.1
|
|
Form of Indemnification Agreement.
|
|
Incorporated by
reference to
Exhibit 10.1 to the
|
|
|
|
|
|
Exhibit
|
|
|
|
|
No.
|
|
Title
|
|
Method of Filing
|
|
|
|
|
Registrants
Registration
Statement No.
33-95096.
|
|
|
|
|
|
10.2*
|
|
1995 Stock Option/Stock Issuance Plan
as Amended and Restated through
February 7, 2001.
|
|
Incorporated by
reference to the
Appendix attached
to the Definitive
Proxy Statement for
the 2001 Annual
Meeting of
Stockholders filed
on April 27, 2001.
|
|
|
|
|
|
10.3
|
|
2005 Stock Option / Stock Issuance Plan
|
|
Incorporated by
reference to
Appendix A attached
to the Definitive
Proxy Statement for
the 2005 Annual
Meeting as filed
June 10, 2005.
|
|
|
|
|
|
10.4
|
|
Master Software License and
Distribution Agreement (Contract No.
000-00-0000) effective as of December
1, 2000, between Cellco Partnership
(d/b/a Verizon Wireless) and the
Registrant
|
|
Incorporated by
reference to
Exhibit 10.1 to the
Registrants
Quarterly Report on
Form 10-Q for the
quarter ended June
30, 2003.
|
|
|
|
|
|
10.4.1
|
|
Amendment of Master Software License
and Distribution Agreement (Contract
No. 000-00-0000)
|
|
Incorporated by
reference to
Exhibit 10.1.1 to
the Registrants
Quarterly Report on
Form 10-Q for the
quarter ended June
30, 2003.
|
|
|
|
|
|
10.4.2
|
|
Amendment No. 2 to the Master Software
License and Distribution Agreement
(Contract No. 000-00-0000)
|
|
Incorporated by
reference to
Exhibit 10.1.2 to
the Registrants
Quarterly Report on
Form 10-Q for the
quarter ended June
30, 2003.
|
|
|
|
|
|
14.1
|
|
Code of Ethics
|
|
Incorporated by
reference to
Exhibit 14.1 to the
Registrants Annual
Report on Form 10-K
for the fiscal year
ended December 31,
2003.
|
|
|
|
|
|
14.1.1
|
|
Attachment 1 to Code of Ethics
|
|
Incorporated by
reference to
Exhibit 14.1 to the
Registrants Annual
Report on Form 10-K
for the fiscal year
ended December 31,
2003.
|
|
|
|
|
|
21.1
|
|
Subsidiaries
|
|
Incorporated by
reference to
Exhibit 21.1 to the
Registrants Annual
Report on Form 10-K
for the fiscal year
ended December 31,
2000.
|
|
|
|
|
|
23.1
|
|
Consent of Independent Registered
Public Accounting Firm.
|
|
Filed herewith
|
|
|
|
|
|
23.2
|
|
Consent of Independent Registered
Public Accounting Firm.
|
|
Filed herewith
|
|
|
|
|
|
31.1
|
|
Certification of the Chief Executive
Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
Filed herewith
|
|
|
|
|
|
31.2
|
|
Certification of the Chief Financial
Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
Filed herewith
|
|
|
|
|
|
32.1
|
|
Certifications of the Chief Executive
Officer and the Chief Financial
Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
Furnished herewith
|
|
|
|
*
|
|
Indicates management contract or compensatory plan or arrangement.
|
|
|
|
Confidential treatment has been granted with respect to certain confidential portions of this
exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, which confidential
portions have been omitted from the exhibit and filed separately with the Securities and
Exchange Commission.
|