Dear Shareholder:
Inside, you will find the year 2003 Annual Report for Smith Micro Software, Inc.
(Nasdaq: SMSI). Through the year we continued to grow our wireless business
and our strong position as the largest suppler of data connectivity software in the
wireless sector.
Research in both the trade and investment community suggests that the Wireless
Wide Area Network (WWAN), Wireless Local Area Network (WLAN) and Wi-
Fi markets have developed during 2003 and are primed to grow in the next few
years. I remain confident that our vision a few years ago to build wireless
products and solutions was the right choice for Smith Micro and our investors.
In 2003 we announced several exciting business events that helped contribute to our 2003 results. At the
beginning of the year we delivered the fifth product offering of the WebDNA™ family by adding the
Enterprise Edition. By mid-year we shipped the latest version of the WebDNA™ family of products, which
added many new features and functionality that our loyal developer community embraced.
We continue to have a strong number of Mac users many of which were waiting for a Mac OS X upgrade and
the release of our wireless Mac version of Quick Link® Mobile. First, we shipped the Jaguar version of
FaxSTF during the first part of the year and later shipped the Panther version. Smith Micro continues to be the
leading provider of fax and wireless software to the Mac community. During the year, we were awarded a
U.S. Patent for our Video e-Mail technology. We are also very excited that Cox Communications is offering
our pop-up ad blocker, CheckIt® 86 to their customers.
Throughout the year we made several wireless product announcements. Early in the year we added Bluetooth
technology to our Mac version of our popular QuickLink® Mobile wireless connectivity solution. We later
announced the addition of Wi-Fi to QuickLink® Mobile which then became the first COMBO product
supporting both WWAN and Wi-Fi.
Adding Wi-Fi functionality to QuickLink® Mobile proved to be beneficial to Smith Micro as we shortly
thereafter announced that Verizon Wireless selected Smith Micro to add Wi-Fi technology to their Mobile
Office connectivity solution which includes QuickLink® Mobile.
We also announced the addition of some prestigious new wireless customers. Verizon International ships
QuickLink® Mobile into Latin America, Thuraya out of the United Arab Emirates ships QuickLink® Mobile
for their satellite phones, and Kyocera includes QuickLink® Mobile with their data connectivity solution. We
also entered into an alliance with ipUnplugged to add additional seamless roaming capability between various
Wi-Fi hotpots and WWAN.
So as you can see, we were very busy last year and added some exciting new products, technology and
customers to help us continue to move forward in 2004 especially in the wireless sector. I invite you to
examine the attached Annual Report (Form 10-K) for a detailed analysis of our performance in 2003, and I
have confidence in our ability to deliver shareholder value in 2004. I also invite you to examine our products
on our Web site at www.smithmicro.com/products. Thank you for your continued support.
Sincerely,
William W. Smith, Jr.
Chairman of the Board,
President and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
_______________
[ X ]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2003
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-26536
SMITH MICRO SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
_____________________
Delaware
(State or other jurisdiction of incorporation or organization)
33-0029027
(I.R.S. Employer Identification Number)
51 Columbia, Suite 200, Aliso Viejo, CA
(Address of principal executive offices)
92656
(Zip Code)
Registrant's telephone number, including area code: (949) 362-5800
Common Stock, $.001 par value
(Title of each class)
Nasdaq SmallCap Market
(Name of each exchange on which registered)
_____________________
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
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 registrant's 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 [ X ].
Indicate by check mark if whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). YES [ ] NO [ X ]
As of June 30, 2003, the last business day of the registrant’s most recently completed second quarter, the aggregate
market value of the common stock of the registrant held by non-affiliates was $19,300,206, 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 registrant’s outstanding common stock are deemed to be
affiliates.
As of March 11, 2004, there were 17,044,695 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s 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.
2003 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Item 1.
PART I
BUSINESS ...............................................................................................................................
RISK FACTORS ......................................................................................................................
Item 2.
PROPERTIES...........................................................................................................................
Item 3.
LEGAL PROCEEDINGS .........................................................................................................
Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS ..............................
PART II
Item 5.
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..................................................................................................
Item 6.
SELECTED FINANCIAL DATA ............................................................................................
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS .................................................................................................
Item 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK…….
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................................
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ...............................................................
Item 9A. CONTROLS AND PROCEDURES .........................................................................................
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS........................................................................
Item 11.
EXECUTIVE COMPENSATION............................................................................................
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................
Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES…………………………………………..
Item 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
PART IV
FORM 8-K................................................................................................................................
SIGNATURES………………………………………………………………………………….
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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
In this document, the terms “Smith Micro,” “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, management's 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;
the intensity of the competition and our ability to successfully compete;
the pace at which the market for new products develop;
the response of competitors, many of whom are bigger and better financed than us;
our ability to successfully execute our business plan and control costs and expenses;
our ability to protect our intellectual property and our ability to not infringe on the rights of others;
our depressed market capitalization; and
those additional factors which are listed under the section “Risk Factors” at the end of Item 1 of this
report.
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.
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Item 1. BUSINESS
General
PART I
Smith Micro Software, Inc. is a diversified developer and marketer of wireless communication and
eBusiness software products and services. Our primary focus and strategy for our products and services is directed
to wireless communications including Wi-Fi, as well as eBusiness and utility software. We sell our products and
services to some of the world's leading companies as well as to consumers. The proliferation of wireless
technologies is providing new opportunities globally. The wireless infrastructures being implemented, such as
1xRTT, GPRS and ultimately 3G, offer wider bandwidth data services. This infrastructure combined with mobile
platforms such as the basic mobile phone, notebook computing devices (“PCs”) and personal communications
devices (“PDA's”) 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 telephony products targeted to the original
equipment manufacturers (“OEM”) market, particularly mobile phone manufacturers and wireless service providers,
as well as direct to the consumer. We offer software products for Windows XP, Windows 2000, Windows NT,
Windows 98, Windows CE, Pocket PC, Mac, Palm, Unix and Linux operating systems. The underlying design
concept is the long-standing Smith Micro criteria of "enhancing 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 40
million copies of products to OEM's seeking to better market their products by adding product features, customizing
existing features and translating applications into additional languages.
During the first quarter of 2003, we announced our latest additions to the QuickLink family, namely
Windows software solutions that take advantage of the demand for Wi-Fi (802.11) services. QuickLink Mobile Wi-
Fi provides notebook users with the ability to easily roam between wireless wide area networks (“WWAN”) and Wi-
Fi hot spots. QuickLink Wi-Fi allows users to seek out and select available hot spots in their area. We currently
maintain OEM relationships with many companies including: Verizon Wireless, Cingular Wireless, Telus,
Audiovox, LGIC, Kyocera, Apple, Philips Consumer Electronics and Tektronix. Smith Micro's complete line of
products is available through direct sales, retail stores, value-added resellers (“VAR”) and OEMs. Sales to
individual customers and their affiliates that amounted to more than 10% of the Company’s net revenues for 2003,
include Verizon Wireless, Cingular Wireless and Apple.
We also offer professional consulting services that help clients implement web-based projects. An extension
of our eBusiness activity includes the offering of fulfillment services for customer web stores. A portion of our sales
are made direct to hardware device and personal computer manufacturers under OEM agreements. We sell
communication and diagnostic utility products through independent distributors and retail channels. Our eBusiness
products enable websites to be created with standard HTML text and provide fully automated payment processing
and order accounting.
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 7 of Notes to Consolidated Financial
Statements for financial information related to our operating segments.
During the year ended December 31, 2003, we spent $2.5 million on research and development. 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.
Our business is primarily dependent upon the worldwide demand for wireless communications and the
resulting requirements for software and connectivity kits to support this demand. During the last three years, demand
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4
for these types of products has fluctuated dramatically, and there has been a significant increase in price competition
within our industry.
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 a part of the
Annual Report on Form 10-K.
Industry Backgrounds
Wireless Industry - The evolving types of wireless infrastructures being implemented, such as 1xRTT,
GPRS and ultimately 3G offer wider bandwidth data services. Wireless platforms include the basic cellular phone,
personal computing devices (PC’s) and personal communications devices including PDA’s and handheld’s. The
adoption of these new mobile and wireless communications services provides opportunities for new communications
software products.
Diagnostic/Utility Software Industry - Diagnostic and utility software products assist home or corporate
users, and hardware manufacturers or service companies to identify and repair computer system related errors and
problems.
Internet Industry – Businesses and consumers are using the Internet to communicate, transact business,
share information, and access vast information resources. This is driving the adoption of new technology, products
and services that enhance the Internet experience. Our cross-platform (Windows, Unix, Linux and Macintosh)
WebDNA(cid:212) product is targeted at this market.
Computer Consulting Industry - A corporation’s 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:
Software Products
QuickLink(cid:210) Mobile
Turns data capable wireless phones into wireless modems.
QuickLink(cid:210) Mobile
Phonebook
Enables users to be able to easily edit wireless phonebooks on a PC computer and
copy, email or PIM databases to the phone.
QuickLink(cid:210) Fax
Turns data capable wireless phones into wireless fax modems.
FAXstf(cid:212) X &
FAXstf(cid:212) X Pro
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.
HotFax(cid:210) MessageCenter
And HotFax(cid:210)
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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5
WebDNA(cid:212)
Provides the tools necessary to develop a Web site or an eBusiness site supporting
Windows, Mac, Unix and Linux. Wireless WebDNA(cid:212) is an additional function that
can be added to a Web site built using WebDNA(cid:1) that enables WAP capability.
CheckIt(cid:210) Utilities
Provides end-users the hardware information they need to evaluate, fine-tune and
manage their systems.
CheckIt(cid:210) NetOptimizer(cid:1) An Internet performance utility that actually speeds up Internet usage by adjusting
computer modem, port and software settings to accept data faster from the Internet.
CheckIt(cid:210) 86(cid:1)
VideoLink(cid:210) &
VideoLink(cid:210) Pro
VideoLink(cid:210)
Mail
Monitors web browsing traffic and blocks pop-up advertisements.
Enables video and audio communications over the Internet, intranet or ordinary
telephone lines using a standard analog modem connection.
Allows users to attach audio/video messages to emails as self-extracting files that can
be opened by recipients without special software.
Services
Consulting
Hosting
Fulfillment
Sales and Marketing
Consulting services range from supporting our WebDNA(cid:212) product to complete
website design and installation consulting services.
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.
An extension of our eBusiness activity includes order fulfillment services for
customer web stores.
Our products are available worldwide to customers through channels that include: original equipment
manufacturers; distributors; resellers and retail. We also sell products and product upgrades over the Internet
through our own web store at www.smithmicro.com.
Our OEM market continues to evolve as we continue to offer new communications products and OEM’s adopt
new technologies and software bundling techniques. Our OEM customers include: wireless phone manufacturers;
wireless service providers; camera 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.
The cycle from the placement of an OEM order to shipping is very short. OEM customers generally operate
under a just-in-time system, and we typically ship our products as we receive orders. An increasing percentage of our
OEM revenue is derived from royalties accrued by customers that are authorized to replicate or to preload our software
products.
Our three largest OEM customers (Verizon Wireless, Cingular Wireless and Apple in 2003), and their
respective affiliates, in each year, have accounted for 47.9% of our net revenues in 2003, 39.4% of our net revenues in
2002, and 23.4% of our net revenues in 2001. Our major customers could reduce their orders of our products in favor of
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a competitor's product or for any other reason. The loss of any of our major OEM customers, decisions by a significant
OEM customer to substantially reduce purchases or our inability to collect receivables from these customers could have
an adverse effect on our 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. As of December 31, 2003, however, we reported
a backlog of $1 million resulting from orders placed late in the fourth quarter but 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.
We sell product directly to retail customers as well as maintain distribution relationships with independent
distributors. During the period 2001 through 2003, the retail product sales mix has changed as the result of a reduced
emphasis on the retail channel and a renewed focus on our direct sales as we exited the distribution channel.
Our consulting service group assists customers in deploying and using computer operating systems,
applications, and communications products. This group is a part of our Internet Software & Solutions unit and helps
create enterprise-wide computing solutions for large corporate accounts.
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. We provide technical support to end users of OEM customers through the
technical support section of our web site.
Product Development
The software industry, particularly the Internet and wireless markets, 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 and silicon
chip 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. In addition, we
participate in software product developer programs sponsored by key industry companies such as Microsoft and Apple.
We remain focused on the development and expansion of our technology, particularly our wireless, diagnostic, utility
and Internet software technologies. Research and development expenditures amounted to $2.5 million, $2.2 million and
$3.0 million for the years ended December 2003, 2002 and 2001, 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 also permit
selected OEM customers to duplicate our products on their own CD-ROM’s and pay a royalty based on usage. This
method of sale does not require us to provide a CD or manual. Finally, we grant licenses to certain OEM customers that
enable those customers to preload a copy of our software onto a personal computer's hard drive. With the corporate
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 groups produce 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 steps that are subcontracted to outside vendors include the
replication of CD-ROM’s and the printing of documentation materials. Assembly of the final package is completed
by an outside vendor or in our Aliso Viejo, California facility.
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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 access to distribution channels and 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
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,
2003, four currently effective U.S. patents have been issued since December 1997 and three 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,
therefore, 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.
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Employees
As of December 31, 2003, we had a total of fifty-five employees: twenty-six engaged in engineering; ten in
management and administration; nine in sales and marketing; seven in customer support; and three in manufacturing.
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.
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 subsequent reports on Forms
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 revenues and operating results have fluctuated significantly in the past and may continue to vary
from quarter to quarter due to a number of factors, many of which are not within our control. If our operating results do
not meet the expectations of securities analysts or investors, our stock price may decline. Fluctuations in our operating
results may be due to a number of factors, including the following:
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the volume of our product sales and pricing concessions on volume sales;
the size and timing of orders from and shipments to our major customers;
the size and timing of any return product requests for our products;
our ability to maintain or increase gross margins;
general economic and market conditions;
variations in our sales channels or the mix of our product sales;
the gain or loss of a key customer;
our ability to specify, develop, complete, introduce, market and transition to volume production new
products and technologies in a timely manner;
the availability and pricing of competing products and technologies and the resulting effect on sales and
pricing of our products;
the effect of new and emerging technologies;
deferrals of orders by our customers in anticipation of new products, applications, product enhancements
or operating systems; and
the continued success of our cost-cutting measures.
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.
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Our business, financial condition and operating results could be adversely affected as a result of legal, business and
economic risks specific to international operations.
Approximately 14.8%, 15.1% and 10.1% of our revenues in the years ended December 31, 2003, 2002 and
2001, respectively, were derived from sales to customers outside the United States. We also frequently ship products to
our domestic customers’ international manufacturing divisions and subcontractors. In the future, we may expand these
international business activities. International operations are subject to many inherent risks, including:
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general political, social and economic instability;
trade restrictions;
the imposition of governmental controls;
exposure to different legal standards, particularly with respect to intellectual property;
burdens of complying with a variety of foreign laws;
import and export license requirements and restrictions of the United States and each other country in
which we operate;
unexpected changes in regulatory requirements;
foreign technical standards;
changes in tariffs;
difficulties in staffing and managing international operations;
difficulties in collecting receivables from foreign entities; and
potentially adverse tax consequences.
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.
Because we typically operate with little or no backlog, our ability to predict our revenues and operating results is
extremely limited.
We normally operate with little backlog because we generally ship our software products as we receive orders
and because our royalty revenue is based upon our customers’ actual usage in a given period. Accordingly, we
recognize revenue shortly after orders are received or royalty reports are generated. As a result, our sales in any quarter
are generally dependent on orders that we book and ship in that quarter. This makes it difficult for us to predict what our
revenues and operating results will be in any quarter. As of December 31, 2003, we reported a backlog of $1 million.
However, because we generally do not produce software in advance of anticipated orders, this atypical backlog does not
indicate similar future results.
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. In 2003, our three largest OEM customers accounted for
47.9% of our net revenues.
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,
we could lose the customer, or experience a decrease in orders from that customer or a delay in orders previously made
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10
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. 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.
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 Wi-Fi product provides notebook users with the ability to roam between
wireless wide area networks (“WWAN”) and Wi-Fi hot spots. Another product, QuickLink Wi-Fi, allows users to
seek out and select available hot spots in their area. Therefore, future sales and any future profits from this 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.
Acquisitions of companies or technologies may disrupt our business and divert management attention and cause our
current operations to suffer.
We have in the past made and we expect to continue to consider acquisitions of complementary companies,
products or technologies. If we make any additional acquisitions, we will be required to assimilate the operations,
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11
products and personnel of the acquired businesses and train, retain and motivate key personnel from the acquired
businesses. We may be unable to maintain uniform standards, controls, procedures and policies if we fail in these
efforts. Similarly, acquisitions may cause disruptions in our operations and divert management’s attention from our
company’s 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.
Technology and customer needs change rapidly in our market, which could render our products obsolete and
negatively affect our revenues.
Our future success will depend on our ability to anticipate and adapt to changes in technology and industry
standards. We will also need to continue to develop and introduce new and enhanced products to meet our customers’
changing demands, keep up with evolving industry standards, including changes in the Microsoft operating systems with
which our products are designed to be compatible, and to promote those products successfully. The communications
and utilities software markets in which we operate are characterized by rapid technological change, changing customer
needs, frequent new product introductions, evolving industry standards and short product life cycles. Any of these
factors could render our existing products obsolete and unmarketable. In addition, new products and product
enhancements can require long development and testing periods as a result of the complexities inherent in today’s
computing environments and the performance demanded by customers. If 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 revenues 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: CDs; 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 CD 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.
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.
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12
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:
quarter-to-quarter variations in our operating results;
announcements of technological innovations or new products by our competitors, customers or us;
•
•
• market conditions within our retail and OEM software markets;
•
•
•
•
general global economic and political instability;
changes in earnings estimates or investment recommendations by analysts;
changes in investor perceptions; or
changes in expectations relating to our products, plans and strategic position or those of our competitors or
customers.
In addition, the market prices of securities of high technology companies have been especially volatile. This
volatility has significantly affected the market prices of securities of many technology companies. Accordingly, you
may not be able to resell your shares of common stock at or above the price you paid. In the past, companies that have
experienced volatility in the market price of their securities have been the 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 management’s
attention and resources from other matters.
If we are unable to comply with NASDAQ’s continued listing requirements, our common stock could be delisted.
In June 2002, our common stock failed to meet the minimum bid price of $1.00 per share for 30 consecutive
days, which caused our stock price to fail to meet one of the minimum standards required by Nasdaq for continued
listing as a Nasdaq National Market security. Accordingly, in mid-2002, we voluntarily transferred from the Nasdaq
National Market to the Nasdaq SmallCap Market thereby allowing us additional time to comply with the core initial
listing standards of the Nasdaq SmallCap Market. In April 2003, our stock began trading at prices in excess of $1.00
and in early May we received official notification from the Nasdaq that we had regained compliance with the continued
listing requirements of the Nasdaq SmallCap Market. If however, our stock cannot maintain trading at prices over
$1.00, we may again become subject to the delisting process.
There can be no assurance that we will satisfy all requirements for continued listing of our common stock on
the Nasdaq SmallCap Market. If we are unable to meet the continued listing requirements in the future, our common
stock will be subject to delisting, which may have a material adverse effect on the price of our common stock and the
levels of liquidity currently available to our stockholders.
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13
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 company’s 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:
•
•
•
•
•
•
•
•
the market acceptance of our products;
the levels of promotion and advertising that will be required to launch our products and achieve and
maintain a competitive position in the marketplace;
our business, product, capital expenditure and research and development plans and product and
technology roadmaps;
the levels of inventory and accounts receivable that we maintain;
capital improvements to new and existing facilities;
technological advances;
our competitors’ response to our products; and
our relationships with suppliers and customers.
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 officers and directors could control matters submitted to our stockholders and affect the outcome of any vote.
As of March 11, 2004, William W. Smith Jr., the President, Chief Executive Officer and Chairman of the
Board of our company, and Rhonda L. Smith, the Secretary, Treasurer and Vice-Chairman of the Board of our company,
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14
combined beneficially owned approximately 54.4% of our outstanding shares of common stock. Acting together, they
would have the ability to elect our directors and determine the outcome of any corporate action requiring stockholder
approval, including a sale of the company, irrespective of how other stockholders may vote. This concentration of
ownership may discourage a potential acquirer from making an offer to buy our company, which, in turn, could
adversely affect the market price of our common stock.
Sales of substantial numbers of our common stock could adversely impact the price of our stock.
As of March 11, 2004, we had 17,044,695 shares of common stock outstanding. Of this amount, the
combined 9,276,970 shares held by William W. Smith, Jr. and Rhonda L. Smith are available for sale in the public
market (subject to the volume and other applicable restrictions of Rule 144). Overall, our trading volume fluctuates
widely and at times is relatively limited. Certain of our officers and directors, may implement 10b-5(1) selling plans
in the future. Sales of a substantial number of shares of our common stock by William W. Smith, Jr., Rhonda L.
Smith or any other person, including through any directed selling plan, either individually or when aggregated with
sales by other persons, could adversely affect the market price of our common stock.
Provisions of our charter and bylaws and Delaware law could make a takeover of our company difficult.
Our certificate of incorporation and bylaws contain provisions that may discourage or prevent a third party
from acquiring us, even if doing so would be beneficial to our stockholders. For instance, our certificate of
incorporation authorizes the board of directors to fix the rights and preferences of shares of any series of preferred stock,
without action by our stockholders. As a result, the board can authorize and issue shares of preferred stock, which could
delay or prevent a change of control because the rights given to the holders of such preferred stock may prohibit a
merger, reorganization, sale or other extraordinary corporate transaction. In addition, we are organized under the laws
of the State of Delaware and certain provisions of Delaware law may have the effect of delaying or preventing a change
in our control.
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 of business operations.
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 28,500 square feet of space. We have leased this facility on a monthly basis since April 1, 2003. We are
currently evaluating alternatives for the Aliso Viejo facility. We operate both our products and services reporting
segments within this facility.
We also have a facility of approximately 3,000 square feet in Lee’s Summit, Missouri, pursuant to a lease that
expires August 31, 2004. 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.
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15
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, 2003.
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
PART II
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.
YEAR ENDED DECEMBER 31, 2003:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
YEAR ENDED DECEMBER 31, 2002:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$
0.75
5.23
4.87
4.08
1.65
1.19
0.71
0.90
0.42
0.45
2.50
1.77
0.90
0.60
0.30
0.17
On March 11, 2004, the closing sale price for our common stock as reported by Nasdaq was $2.69.
Holders
As of March 11, 2004, there were approximately 152 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
None.
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16
Item 6. SELECTED FINANCIAL DATA
2003
Year Ended December 31,
2001
(in thousands, except per share data)
2002
2000
Statement of Operations Data:
Net Revenues:
Products
Services
Total Net Revenues
Cost of Revenues:
Products
Services
Total Cost of Revenues
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
Restructuring Costs
Total operating expenses
Operating loss
Interest Income
Interest and Other Expense
Loss before income taxes
Income tax expense (benefit)
Net loss
$
6,291
925
7,216
$
6,029
1,102
7,131
$
6,945
2,544
9,489
1,350
321
1,671
5,545
1,666
2,506
2,258
1,420
782
2,202
4,929
2,175
2,162
2,316
6,430
(885)
37
(72)
(920)
3
(923)
$
6,653
(1,724)
45
(71)
(1,750)
(1,062)
(688)
$
1,880
2,048
3,928
5,561
4,571
2,997
3,734
380
11,682
(6,121)
199
(113)
(6,035)
90
(6,125)
$
$
10,884
2,595
13,479
$
2,499
1,150
3,649
9,830
5,319
4,041
3,985
13,345
(3,515)
482
(68)
(3,101)
54
(3,155)
$
1999
$
8,841
8,841
2,476
2,476
6,365
4,276
3,826
3,923
12,025
(5,660)
502
(55)
(5,213)
888
(6,101)
$
Net loss per share, basic and diluted
$
(0.06)
$
(0.04)
$
(0.38)
$
(0.20)
$
(0.40)
Weighted average shares, basic and diluted
16,511
16,235
16,232
15,984
15,292
Balance Sheet Data:
Total assets
Total liabilities
Accumulated deficit
Total stockholders' equity
2003
2002
As of December 31,
2001
2000
1999
$
6,587
997
(20,114)
5,590
$
6,766
1,154
(19,191)
5,612
$
9,257
2,955
(18,503)
6,302
$
15,314
2,887
(12,378)
12,427
$
15,929
2,097
(9,223)
13,832
The table above sets forth our selected consolidated financial data. We derived this information from the
consolidated financial statements of Smith Micro for each of the five years in the period ended December 31,
2003.
You should read this selected consolidated financial data along with the consolidated financial statements
and related Notes contained in this report and in our other reports filed with the SEC, as well as the section of
this report and our other reports titled “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”
(cid:1)
17
Item 7. MANAGEMENT'S 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 software and connectivity
kits for use with wireless communication networks worldwide. Our products are utilized with 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 software and connectivity kits 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. These factors have led to swings in our revenues and contributed to the operating losses reported in our
financial results.
We continue to invest in research and development of wireless software products, and we believe that we
have one the industry’s leading wireless product lines in terms of performance and features. We believe that our
“out-of-the-box” design technology further differentiates for our products.
We also sell eBusiness and utility software and professional consulting services related to eBusiness
applications.
During 2003, 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 while striving to achieve profitability. 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.
Results of Operations
The following table sets forth certain consolidated statement of operating data as a percentage of total
revenues for the periods indicated:
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18
Years Ended December 31,
2002
2001
2003
Net Revenues:
Products
Services
Total net revenues
Cost of revenues:
Products
Services
Total cost of revenues
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
Restructuring
Total operating expenses
Operating loss
Interest income
Interest and other expense
Loss before income taxes
Income tax expense (benefit)
Net loss
87.2%
12.8%
100.0%
18.7%
4.5%
23.2%
76.8%
23.1%
34.7%
31.3%
89.1%
-12.3%
0.5%
-1.0%
-12.8%
0.0%
-12.8%
84.6%
15.4%
100.0%
19.9%
11.0%
30.9%
69.1%
30.5%
30.3%
32.5%
93.3%
-24.2%
0.6%
-1.0%
-24.6%
-15.0%
-9.6%
73.2%
26.8%
100.0%
19.8%
21.6%
41.4%
58.6%
48.2%
31.6%
39.3%
4.0%
123.1%
-64.5%
2.1%
-1.2%
-63.6%
1.0%
-64.6%
Revenues
Total net revenues were $7.2 million, $7.1 million and $9.5 million in 2003, 2002 and 2001, respectively, with
only a minor increase of $85,000, or 1.2%, from 2002 to 2003 and a decrease of $2.4 million, or 24.9%, from 2001 to
2002.
We currently operate in two business segments: products and services. In addition, revenues are broken
down into three markets, Wireless and Broadband products, Macintosh products and Internet & Software Solutions.
Our Internet Solutions market includes Internet based software products as well as consulting, fulfillment and hosting
revenue.
The following table shows the net revenues and cost of revenues generated by each segment:
2003
Year Ended December 31,
2002
2001
Products
Services
Products
Services
Products
Services
Wireless & Broadband
$
4,005
$
-
$
3,768
$
-
$
3,964
$
-
Macintosh
Internet & Software Solutions
Total Revenues
Cost of revenues
Gross Profit
1,365
921
6,291
1,350
4,941
$
925
925
321
604
$
1,508
753
6,029
1,420
4,609
$
1,102
1,102
782
320
$
1,364
1,617
6,945
1,880
5,065
$
2,544
2,544
2,048
496
$
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19
Products. Net revenues from sales of products were $6.3 million, $6.0 million and $6.9 million for 2003, 2002
and 2001, respectively, representing an increase of $262,000 or 4.4% from 2002 to 2003 and a decrease of $916,000 or
13.2% from 2001 to 2002. Product revenues accounted for 87.2% of total revenues in 2003, 84.6% of total revenues
in 2002 and 73.2% of total revenues in 2001. The primary change in our product revenue from 2001 to 2002 is the
result of a reduced emphasis on the retail channel. Internet & Software Solutions revenues were down reflecting the
reduction of retail product sales. Product revenues from 2002 to 2003, while fairly flat, reflect a significant change
from core fax technology products to new wireless communications products for Wireless & Broadband.
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. As of December 31, 2003 however, we reported
a backlog of $1 million 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 $925,000, $1.1 million and $2.5 million in 2003, 2002 and
2001, respectively, representing a decrease of $177,000 or 16.1% from 2002 to 2003 and a decrease of $1.4 million
or 56.7% from 2001 to 2002. Services revenue accounted for 12.8% of total revenues in 2003, 15.4% of total
revenues in 2002 and 26.8% of total revenues in 2001. The decrease in service revenue is due to the reduction in
consulting services, which was announced in the first quarter of 2002, due to the decrease in demand for such
services.
Cost of Revenues
Cost of Product Revenues. Cost of product revenues was $1.4 million, $1.4 million and $1.9 million in
2003, 2002 and 2001, respectively, remaining constant in 2002 and 2003 and with a decrease of $460,000 or 24.5%
from 2001 to 2002. The cost of product revenue as a percentage of product revenue was 21.5% in 2003, 23.6% in
2002 and 27.1% in 2001. During the period 2001 through 2003, the cost of product revenue has moved from being
heavily retail product driven to primarily wireless software kit related. Software kits often contain a hardware
element, such as a cable, which result in slightly lower margins.
Cost of Service Revenues. Cost of service revenues was $321,000, $782,000 and $2.0 million in 2003,
2002 and 2001, respectively, representing a decrease of $461,000, or 59.0% from 2002 to 2003 and a decrease of
$1.3 million, or 61.8% from 2001 to 2002. Cost of service revenues includes the cost of our consulting personnel
and the cost of any outside consultants contracted to support our staff. The decrease in the cost of service revenues
was due to headcount reductions related to the elimination of selected Microsoft products consulting services
announced in the first quarter of 2002. Cost of service revenues as a percentage of service revenues was 34.7% in
2003, 71.0% in 2002 and 80.5% in 2001. The decrease as a percentage of sales is primarily due to the
discontinuance of low margin consulting services related to Microsoft products, which was 84.6% of service
revenues in 2001.
Operating Expenses
The following table presents a breakdown of our operating expenses by functional category and as a
percentage of total net revenues:
(cid:1)
20
2003
Years Ended December 31,
2002
2001
Operating expenses:
Selling and marketing
Research and development
General and administrative
Restructuring
Total operating expenses
$
$
1,666
2,506
2,258
-
6,430
23.1%
34.7%
31.3%
89.1%
$
$
2,175
2,162
2,316
-
6,653
30.5%
30.3%
32.5%
93.3%
$
4,571
2,997
3,734
380
11,682
$
48.2%
31.6%
39.3%
4.0%
123.1%
Selling and Marketing. Selling and marketing expenses were $1.7 million, $2.2 million and $4.6 million in
2003, 2002 and 2001, respectively, representing decreases of $509,000 or 23.4%, from 2002 to 2003 and $2.4
million or 52.4%, from 2001 to 2002. Our selling and marketing expenses consist primarily of personnel costs,
advertising costs, sales commissions and trade show expenses. These expenses vary significantly from quarter to quarter
based on the timing of trade shows and product introductions. The decrease in these costs is attributable to cost
reduction measures in all the above expense areas as implemented by management, and a reduced emphasis on retail
channel marketing activities in 2003 and 2002 as compared to 2001. Advertising expenses were $95,000, $276,000
and $1.4 million for the years ended December 31, 2003, 2002 and 2001, respectively.
Research and Development. Research and development expenses were $2.5 million, $2.2 million and $3.0
million in 2003, 2002 and 2001, respectively, representing an increase of $344,000, or 15.9%, from 2002 to 2003
and a decrease of $835,000, or 27.9%, from 2001 to 2002. 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. The increase in our research and development expenses in the current year was primarily due to the
development of new wireless and Macintosh products that were released during the year, an increase in headcount and a
refocus of engineering resources from consulting projects to development. These increases were offset in prior years by
cost reduction efforts implemented by management, primarily headcount related, in 2001 and 2002.
General and Administrative. General and administrative expenses were $2.3 million, $2.3 million and $3.7
million in 2003, 2002 and 2001, respectively. The decrease of $1.4 million, or 38.0%, from 2001 to 2002, is due to
decreased bad debt expense of approximately $600,000 and the cessation of goodwill amortization of $522,000.
The decrease was also due to reductions in compensation and professional services implemented by management.
General and administrative costs in 2003 have been fairly consistent as we have aligned our general and
administrative cost base with current revenues.
Restructuring Costs. In the second quarter of 2001, we began implementing a restructuring plan to
consolidate facilities and reduce personnel costs. The plan was fully implemented by December 31, 2001. Total
expenses related to the restructuring amounted to $380,000, consisting of facility closure costs of $230,000 and
employee severance costs of $150,000. These reductions were made to correlate with revised revenue forecasts. As
of December 31, 2003, all amounts have been paid.
Interest Income. Interest income was $37,000, $45,000 and $199,000 in 2003, 2002 and 2001, respectively,
representing decreases of $8,000 or 17.8%, from 2002 to 2003 and $154,000 or 77.4%, from 2001 to 2002. The
decrease in our interest income is directly related to the fluctuations in our cash balances during the periods and
declining 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.)
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21
Interest and Other Expense. Interest and other expenses were $72,000, $71,000 and $113,000 in 2003, 2002
and 2001, respectively, representing an increase of $1,000, or 1.4%, from 2002 to 2003 and a decrease of $42,000, or
37.2%, from 2001 to 2002. Interest and other expense primarily consist of bank fees and credit card processing
charges. The decrease from 2001 primarily relates to the reduction in retail revenue and associated credit card
charges.
Provision for Income Taxes. In the years ended December 31, 2003 and December 31, 2001, we reported a
provision for income taxes in the amounts of $3,000 and $90,000, respectively. In the year ended December 31,
2002, we reported an income tax benefit in the amount of $1.1 million. This benefit is the result of a net operating
loss carry-back, which, pursuant to a change in federal tax law, allowed us to file for a refund of income taxes paid in
1996. Prior to the tax law change such amount was included in the net operating loss carry-forward, which had
carried a full valuation allowance. The provision in 2003 consists of minimum payments for state taxes. The
provision for income taxes in 2001 is primarily due to taxes on foreign income, which may vary significantly from
year to year. We completed a tax audit during the first quarter of 2001, resulting in a payment of $127,000. The
payment was offset by foreign tax credits in the amount of $69,000.
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. Our principal source of liquidity
as of December 31, 2003 consisted of cash and cash equivalents of $3.7 million.
Net cash used in operations was $767,000 in 2003 compared with net cash provided by operations of
$426,000 in 2002. This difference in operating cash flows is primarily due to the lower net loss in 2002, which
includes the effect of a significant income tax refund. Additionally, accounts receivable decreased dramatically in
2002 as a result of improved collections and a decrease in shipments to retail distributors but increased slightly in
2003. In 2002, this was partially offset by a decrease in accounts payable and accrued liabilities as a result of cost
cutting measures implemented by management.
Cash flows used in investing activities were $39,000 in 2003 and $23,000 in 2002, related to investments in
property and equipment, including computers and production equipment.
Cash flows from financing activities were $901,000 in 2003. This was the result of stock options being
exercised by employees, net of cash used in the first quarter to repurchase Company stock. Cash flows from
financing activities were insignificant in 2002.
At December 31, 2003, we had $3.7 million in cash and cash equivalents and $3.7 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 you that such financing will be available to us at commercially reasonable terms or
at all.
We are currently in the process of renegotiating a long-term facility lease to replace the lease on our corporate
headquarters, which expired at the end of March 2003. We have a non-cancelable operating lease for our facility in
Lee’s Summit, Missouri that expires in August 2004.
As of December 31, 2003, we had no debt and no long term liabilities. The following table summarizes our
contractual obligations as of December 31, 2003 (in thousands):
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22
Contractual obligations
Operating Lease Obligations
Purchase Obligations
Total
Payments due by period
Total
$ 30
170
$ 200
Less than 1
year
$ 30
170
$ 200
1-3 years
3-5 years
More than 5
years
$ 0
$ 0
$ 0
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
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 to seller 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.
We may permit reseller customers to return or exchange product and may provide price protection on
products unsold by a customer. As a result, revenue from resellers is recognized upon sell-through to the end
customer, rather than upon shipment. Product sales directly to end users are recognized upon delivery. End users
have a thirty day right of return, but such returns have historically been immaterial. We also provide technical
support to our customers. Such costs have historically been insignificant.
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23
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 customer’s 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,
2003. 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 changes, we could be required to write off some or all of our goodwill.
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. To the extent that it becomes
more likely than not that we will recover such assets, we would be required to reverse some or all of the valuation
allowance.
Recent Accounting Pronouncements
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities and
supersedes Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146
requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is
incurred. Under Issue 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an
entity's commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and
recorded at fair value. We will adopt the provisions of SFAS No. 146 for exit or disposal activities that are initiated
after December 31, 2002.
In November 2002, the FASB issued Interpretation (FIN) No. 45, Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57 and 107, and rescission of FIN No. 34, Disclosure of Indirect Guarantees of Indebtedness of
Others. FIN No. 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize,
(cid:1)
24
at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002; while, the provisions of the disclosure requirements are
effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN
No. 45 did not have a material impact on our results of operations or financial position.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation —
Transition and Disclosure — an amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends
the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation and the effect of the method used
on reported results. We are required to follow the prescribed disclosure format and have provided the additional
disclosures required by SFAS No. 148 for the years ended December 31, 2003 and 2002 (see Notes 1 and 9) and
also provided the disclosures in our quarterly reports containing condensed financial statements for interim periods
beginning with the quarterly period ended March 31, 2003.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities. In general, a
variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that
either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient
financial resources for the entity to support its activities. FIN No. 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The consolidation requirements of FIN No. 46 apply
immediately to variable interest entities created after January 31, 2003. We adopted the provisions of FIN 46
effective February 1, 2003 and such adoption did not have a material impact on our consolidated financial statements
since we currently have no variable interest entities. In December 2003, the FASB issued FIN 46R with respect to
variable interest entities created before January 31, 2003, which among other things, revised the implementation date
to the first fiscal year or interim period ending after March 15, 2004, with the exception of Special Purpose Entities
(“SPE”). The consolidation requirements apply to all SPE’s in the first fiscal year or interim period ending after
December 15, 2003. We adopted the provisions of FIN 46R effective December 31, 2003 and such adoption did not
have a material impact on our consolidated financial statements since we currently have no SPE’s.
Item 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and cash equivalents. At December 31, 2003, 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, 2003.
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.
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25
SUPPLEMENTARY FINANCIAL DATA
SELECTED QUARTERLY FINANCIAL DATA
STATEMENT OF OPERATIONS DATA
(UNAUDITED)
Three Months Ended:
2003
March 31,
June 30,
September 30,
December 31,
(in thousands, except per share amounts)
Net Revenues
Gross Profit
Operating (Loss) Income
Net (Loss) Income
$
$
$
$
1,867
1,462
(242)
(250)
2,286
1,771
137
124
1,501
1,132
(462)
(472)
1,562
1,180
(318)
(325)
$
$
$
$
Net (Loss) Income Per Share, Basic
$
(0.02)
$
0.01
$
(0.03)
$
(0.02)
Weighted Average Shares
Outstanding, Basic
16,223
16,257
16,610
16,946
Net (Loss) Income Per Share, Diluted
$
(0.02)
$
0.01
$
(0.03)
$
(0.02)
Weighted Average Shares
Outstanding, Diluted
16,223
17,822
16,610
16,946
2002
March 31,
June 30,
September 30,
December 31,
(in thousands, except per share amounts)
Three Months Ended:
Net Revenues
Gross Profit
Operating Loss
Net (Loss) Income
Net (Loss) Income Per Share,
Basic and Diluted
Weighted Average Shares Outstanding
Basic and Diluted
$
$
$
$
1,893
1,124
(570)
(582)
1,617
1,232
(477)
(495)
1,846
1,229
(392)
675
$
$
$
$
1,775
1,344
(285)
(286)
$
(0.04)
$
(0.03)
$
0.04
$
(0.01)
16,232
16,235
16,235
16,235
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26
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.
PART III
Certain information required by Part III is incorporated by reference from our definitive Proxy Statement to be
filed with the Securities and Exchange Commission in connection with the solicitation of proxies for our 2004 Annual
Meeting of Stockholders currently expected to be held on May 25, 2004 (“the Proxy Statement”).
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding our executive officers as of February 13, 2004.
Name
William W. Smith, Jr.
Rhonda L. Smith
Robert W. Scheussler
David P. Sperling
Age
56
53
57
35
Position
Chairman of the Board, President
and Chief Executive Officer
Vice-Chairman of the Board,
Secretary and Treasurer
Senior Vice President, Chief
Operating Officer, Chief Financial
Officer and Director
Vice President and Chief Technical
Officer
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.
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27
Ms. Smith co-founded Smith Micro and serves as our Vice-Chairman of the Board, Secretary and Treasurer.
She also served as Executive Vice President and Chief Operating Officer from inception until August 1998. Ms. Smith
holds an A.A. from Orange Coast College and she attended California State University Long Beach, majoring in
Business Administration.
Mr. Scheussler joined us in May 1995 and has served as our Chief Operating Officer since September 1999
and as our Chief Financial Officer since June 2001. Mr. Scheussler served as Senior Vice President-Engineering and
Chief Technical Officer from May 1995 until September 1999. From May 1995 to April 1997, he was also Vice
President of Operations. From February 1996 to the present, Mr. Scheussler has been a member of our Board of
Directors. Prior to joining us, from June 1973 to May 1995 Mr. Scheussler held positions with Rockwell International
Corporation, most recently as the Director-Architecture and Technology at its Information Systems Center.
Mr. Scheussler holds a B.S. in Industrial Engineering from Pennsylvania State University and an M.S. in Operations
Research from Polytechnic University in New York. He also completed the Executive Program at Stanford 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 from Mr. Scheussler 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.
Officers are elected by, and serve at the discretion of, the Board of Directors. William W. Smith Jr. and
Rhonda L. Smith are husband and wife, but are legally separated pending dissolution of their marriage. There is no
other family relationship among the Company's officers or directors.
Other information required by this section is incorporated by reference from the information in the sections
entitled “Election of Directors” and “Compliance with Section 16(a) of the Exchange Act” appearing in our Proxy
Statement.
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 is filed as Exhibit 14 to this Annual Report on Form 10-K. 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
incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section titled “Ownership of Securities” appearing in our Proxy Statement is incorporated herein by
reference.
Securities Authorized for Issuance Under Equity Compensation Plan
The following table provides information as of December 31, 2003 with respect to the shares of common
stock that may be issued under our existing equity compensation plan.
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28
(In thousands, except per share amounts)
Equity Compensation Plan Approved
by Shareholders (1)
Equity Compensation Plan Not Approved
by Shareholders
Total
Number of Shares to be
Issued Upon Exercise
of Outstanding Options
Weighted Average
Exercise Price of
Outstanding
Options
Number of Shares
Remaining
Available for Future
Issuance
1,911
0
1,911
$1.62
0
$1.62
1,486
0
1,486
(1) Consists of the 1995 Stock Option/Stock Issuance Plan
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this Item will be contained in our Proxy Statement under the heading "Related Party
Transactions" and is incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The response to this Item will be contained in the Proxy Statement under the heading "Ratification of
Appointment of Independent Auditors – Principal Accountant Fees and Services" and is incorporated herein by
reference.
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29
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Smith Micro’s financial statements appear in a separate section of this Annual Report on Form 10-K beginning
on the pages referenced below:
Page
Independent Auditors' Report................................................................................................................................... F-1
Consolidated Balance Sheets as of December 31, 2003 and 2002 .......................................................................... F-2
Consolidated Statements of Operations for each of the three years in
the period ended December 31, 2003.................................................................................................................... F-3
Consolidated Statements of Stockholders’ Equity for each of the three
years in the period ended December 31, 2003 ...................................................................................................... F-4
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 2003.......................................................................................................................... F-5
Notes to Consolidated Financial Statements for each of the three years
in the period ended December 31, 2003................................................................................................................ F-7
(2) Financial Statement Schedule
Smith Micro’s 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
Independent Auditors' Report on Schedule .............................................................................................................. S-1
Schedule II - Valuation and Qualifying Accounts for each of the three years in
the period ended December 31, 2003..................................................................................................................... S-2
(3) Exhibits
Exhibit
No.
3.1
3.1.1
3.2
4.1
Title
Method of Filing
Amended and Restated Certificate of
Incorporation of the Registrant.
Incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement No. 33-95096.
Amendment to the Amended and Restated
Certificate of Incorporation of the
Registrant.
Incorporated by reference to Exhibit 3.1.1 to the
Registrant’s Quarterly Report on Form 10-Q for the
period ended June 30, 2000.
Amended and Restated Bylaws of the
Registrant.
Incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement No. 33-95096.
Specimen certificate representing shares of
Common Stock of the Registrant.
Incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement No. 33-95096.
10.1
Form of Indemnification Agreement.
Incorporated by reference to Exhibit 10.1 to the
Registrant's Registration Statement No. 33-95096.
10.2*
1995 Stock Option/Stock Issuance Plan as
Amended and Restated through February 7,
Incorporated by reference to the Appendix attached
to the Definitive Proxy Statement for the 2001
(cid:1)
30
Exhibit
No.
Title
2001.
Office Building Lease, dated June 10, 1992,
by and between the Company and
Developers Venture Capital Corporation.
Amendment No. 1 To Office Building
Lease, dated July 9, 1993, by and between
the Company and Pioneer Bank.
Amendment No. 2 To Office Building
Lease, dated August 15, 1994, by and
between the Company and T&C
Development.
Fourth Addendum to Office Building Lease,
dated April 21, 1995, by and between the
Company and T&C Development.
Method of Filing
Annual Meeting of Stockholders filed on April 27,
2001.
Incorporated by reference to Exhibit 10.13 to the
Registrant's Registration Statement No. 33-95096.
Incorporated by reference to Exhibit 10.14 to the
Registrant's Registration Statement No. 33-95096.
Incorporated by reference to Exhibit 10.15 to the
Registrant's Registration Statement No. 33-95096.
Incorporated by reference to Exhibit 10.16 to the
Registrant's Registration Statement No. 33-95096.
Amendment No. 6 to Office Building Lease,
dated February 19, 1998, by and between
the Company and World Outreach Center.
Incorporated by reference to Exhibit 10.22 to the
Registrant’s Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
Amendment No. 7 to Office Building Lease,
dated November 5, 1999, by and between
the Company and World Outreach Center.
Incorporated by reference to Exhibit 10.25 to the
Registrant’s Annual Report on Form 10-K for the
fiscal year ended December 31, 1999.
Master Software License and Distribution
Agreement (Contract No. 220-00-0134)
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
Registrant’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003.
Amendment of Master Software License and
Distribution Agreement (Contract No. 220-
00-0134)
Incorporated by reference to Exhibit 10.1.1 to the
Registrant’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003.
Amendment No. 2 to the Master Software
License and Distribution Agreement
(Contract No. 220-00-0134)
Incorporated by reference to Exhibit 10.1.2 to the
Registrant’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003.
10.3
10.3.1
10.3.2
10.3.3
10.3.4
10.3.5
10.4 †
10.4.1†
10.4.2†
14.1
Code of Ethics
14.1.1
Attachment 1 to Code of Ethics
Filed herewith
Filed herewith
21.1
Subsidiaries
Incorporated by reference to Exhibit 21.1 to the
Registrant’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.
Independent Auditors' Consent.
Certification of the Chief Executive Officer
pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
Filed herewith
Filed herewith
23.1
31.1
(cid:1)
31
Exhibit
No.
31.2
32.1
Title
Certification of the Chief Financial Officer
pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
Certifications of the Chief Executive Officer
and the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
Method of Filing
Filed herewith
Filed 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.
(b)
Exhibits on Form 8-K
A Current Report on Form 8-K was filed with the Securities and Exchange Commission on October 23,
2003 in connection with the earnings release for the fiscal quarter ended September 30, 2003.
(c)
Exhibits
The exhibits filed as part of this report are listed above in Item 15(a) (3) of this Form 10-K.
(d)
Financial Statement Schedules
The Financial Statement Schedules required by Regulation S-X and Item 8 of this Form are listed above in
Item 15(a)(2) of this Form 10-K.
(cid:1)
32
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.
SIGNATURES
SMITH MICRO SOFTWARE, INC.
Date: March 22, 2004
Date: March 22, 2004
By:/s/ William W. Smith, Jr.
William W. Smith, Jr.
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
By:/s/ Robert W. Scheussler
Robert W. Scheussler,
Chief Operating Officer and
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
/s/ William W. Smith, Jr.
William W. Smith, Jr.
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
Date
March 22, 2004
/s/ Rhonda L. Smith
Rhonda L. Smith
Vice-Chairman of the Board, Secretary,
Treasurer and Director
March 22, 2004
/s/ Robert W. Scheussler
Robert W. Scheussler
Senior Vice President, Chief Operating Officer,
Chief Financial Officer and Director
(Principal Financial and Accounting Officer)
March 22, 2004
/s/ Thomas G. Campbell
Thomas G. Campbell
Director
/s/ Gregory J. Szabo
Gregory J. Szabo
Director
/s/William C. Keiper
William C. Keiper
Director
(cid:1)
33
March 22, 2004
March 22, 2004
March 22, 2004
INDEPENDENT AUDITORS’ REPORT
To the Board of Directors and Stockholders of
Smith Micro Software, Inc.:
We have audited the accompanying consolidated balance sheets of Smith Micro Software, Inc. and
subsidiaries (the “Company”) as of December 31, 2003 and 2002, and the related consolidated statements of
operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31,
2003. These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America. 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 includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
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, 2003 and 2002, and the results of
their operations and their cash flows for each of the three years in the period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of
accounting for goodwill and other intangible assets as a result of adopting Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 22, 2004
F-1
SMITH MICRO SOFTWARE INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2003 AND 2002
(In thousands, except share and per share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Accounts receivable, net of allowances for doubtful accounts
and other adjustments of $33 (2003) and $565 (2002)
Inventories, net
Prepaid expenses and other current assets
Total current assets
EQUIPMENT AND IMPROVEMENTS, net
INTANGIBLE ASSETS, net
GOODWILL
OTHER ASSETS, net
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable
Accrued liabilities
Total current liabilities
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; 30,000,000 shares
authorized; 17,011,000 and 16,227,000 shares issued and outstanding
Additional paid-in capital
Accumulated deficit
Net stockholders’ equity
2003
2002
$
3,722
$
3,627
741
22
204
4,689
70
40
1,715
73
633
45
263
4,568
220
224
1,715
39
$
6,587
$
6,766
$
538
459
$
445
709
997
1,154
17
25,687
(20,114)
16
24,787
(19,191)
5,590
5,612
$
6,587
$
6,766
See notes to consolidated financial statements
F-2
SMITH MICRO SOFTWARE INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2003
(In thousands, except per share data)
NET REVENUES:
Products
Services
Total Net Revenues
COST OF REVENUES:
Products
Services
Total Cost of Revenues
GROSS PROFIT
OPERATING EXPENSES:
Selling and marketing
Research and development
General and administrative
Restructuring
Total operating expenses
OPERATING LOSS
INTEREST INCOM E
INTEREST AND OTHER EXPENSE
LOSS BEFORE INCOM E TAXES
INCOM E TAX EXPENSE (BENEFIT)
Years ended December 31,
2003
2002
2001
$
6,291
925
$
6,029
1,102
$
6,945
2,544
7,216
1,350
321
1,671
5,545
1,666
2,506
2,258
7,131
1,420
782
2,202
4,929
2,175
2,162
2,316
9,489
1,880
2,048
3,928
5,561
4,571
2,997
3,734
380
6,430
6,653
11,682
(885)
37
(72)
(920)
3
(1,724)
(6,121)
45
(71)
(1,750)
(1,062)
199
(113)
(6,035)
90
NET LOSS
$
(923)
$
(688)
$
(6,125)
NET LOSS PER SHARE, basic & diluted
$
(0.06)
$
(0.04)
$
(0.38)
WEIGHTED AVG SHARES OUTSTANDING,
basic & diluted
16,511
16,235
16,232
See notes to consolidated financial statements
F-3
SMITH MICRO SOFTWARE INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2003
(In thousands)
Common stock
Shares
Amount
Additional
paid-in
capital
Accumulated
deficit
Total
BALANCE, January 1, 2001
16,232
16$
$
24,789
$
(12,378)
$
12,427
Net loss
(6,125)
(6,125)
BALANCE, December 31, 2001
16,232
16
24,789
(18,503)
6,302
Exercise of common stock options
Repurchase and retirement
of common stock
Net loss
3
(8)
3
(5)
3
(5)
(688)
(688)
BALANCE, December 31, 2002
16,227
16
24,787
(19,191)
5,612
Exercise of common stock options
808
1
Repurchase and retirement
of common stock
(24)
913
(13)
914
(13)
Net loss
(923)
(923)
BALANCE, December 31, 2003
17,011
17$
$
25,687
$
(20,114)
$
5,590
See notes to consolidated financial statements
F-4
SMITH MICRO SOFTWARE INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2003
(In thousands)
Years ended December 31,
2002
2001
2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization
Provision for doubtful accounts
and other adjustments to accounts receivable
Change in operating accounts:
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable and accrued liabilities
Net cash (used in) provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock
Cash used in repurchase of common stock
Net cash provided by (used in) financing activities
NET CHANGE IN CASH & CASH EQUIVALENTS
$
(923)
$
(688)
$
(6,125)
410
132
(240)
23
(12)
(157)
(767)
(39)
(39)
914
(13)
901
95
605
486
1,605
250
(31)
(1,801)
1,255
1,412
614
43
(118)
68
426
(2,851)
(101)
(101)
(23)
(23)
3
(5)
(2)
401
(2,952)
CASH AND CASH EQUIVALENTS, beginning of year
3,627
3,226
6,178
CASH AND CASH EQUIVALENTS, end of year
$
3,722
$
3,627
$
3,226
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, 2003 (Continued)
(In thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION -
Cash paid (received) during the year for income taxes
2003
December 31,
2002
2001
$ 3
$ (1,062)
$ 155
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, 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Smith Micro Software, Inc. and subsidiaries (the “Company”) is a diversified
developer and marketer of wireless communication and eBusiness software products and services. We
manufacture, market and sell value-added wireless telephony products targeted to the original
equipment manufacturers (“OEM”) market, particularly mobile phone manufacturers and wireless
service providers, as well as direct to the consumer. We offer software products for Windows XP,
Windows 2000, Windows NT, Windows 98, Windows CE, Pocket PC, Mac, Palm, Unix and Linux
operating systems. We also offer professional consulting services that help clients implement web-
based projects. An extension of our eBusiness activity includes the offering of fulfillment services for
customer web stores. A portion of our sales are made direct to hardware device and personal computer
manufacturers under OEM agreements. We sell communication and diagnostic utility products through
independent distributors and retail channels. Our eBusiness products enable websites to be created
with standard HTML text and provide fully automated payment processing and order accounting.
Basis of Presentation - The accompanying consolidated financial statements reflect the operating
results and financial position of Smith Micro Software, Inc. and its wholly owned subsidiaries in
accordance with accounting principles generally accepted in the United States of America. All
intercompany amounts have been eliminated in consolidation.
Cash and Cash Equivalents - Cash and cash equivalents generally consist of cash, government
securities and money market funds. These securities are all held in one financial institution. All have
original maturity dates of three months or less.
Accounts Receivable - The Company sells its products worldwide. The Company performs ongoing
credit evaluations of its customers and generally does not require collateral. The Company maintains
reserves for estimated credit losses, and those losses have been within management’s expectations.
Allowances for product returns are included in other adjustments to accounts receivable on the
accompanying consolidated balance sheets. Product returns are estimated based on historical
experience and have also been within management’s expectations.
Inventories - Inventories consist principally of manuals and CDs 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
management’s 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.
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, 2003 (Continued)
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, 2003.
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. Prior to the adoption of SFAS 142, goodwill was amortized over
7 years. Total amortization expense related to goodwill was $522,000 for fiscal year 2001. Had the
non-amortization provisions of SFAS 142 been in effect for fiscal year 2001, the net loss would have
been reduced by $0.03 per share to $0.35. 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 Company’s annual impairment testing date is
December 31. Recoverability of goodwill is determined by comparing the fair value of the Company’s
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, 2003.
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 to seller is fixed and determinable, and collection
is probable. The Company recognizes revenues from sales of its software to 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 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.
The Company may permit reseller customers to return or exchange product and may provide price
protection on products unsold by a customer. As a result, revenue from resellers is recognized upon
sell-through to the end customer, rather than upon shipment. Product sales directly to end users are
recognized upon delivery. End users have a thirty day right of return, but such returns have
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, 2003 (Continued)
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
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, 2003, 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 Vendor’s 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
$95,000, $276,000 and $1.4 million for the years ended December 31, 2003, 2002 and 2001,
respectively.
Income Taxes - The Company accounts for income taxes under SFAS No. 109, Accounting for Income
Taxes. This statement requires the recognition of deferred tax assets and liabilities for the future
consequences of events that have been recognized in the Company’s financial statements or tax
returns. The measurement of the deferred items is based on enacted tax laws. In the event the future
consequences of differences between financial reporting bases and the tax bases of the Company’s
assets and liabilities result in a deferred tax asset, SFAS No. 109 requires an evaluation of the
probability of being able to realize the future benefits indicated by such asset. A valuation allowance
related to a deferred tax asset is recorded when it is more likely than not that some portion or all of the
deferred tax asset will not be realized. During the year ended December 31, 2002, the Company
recognized a tax benefit of $1,070,000 related to a carryback of losses previously included in fully
reserved net operating loss carryforwards, as a result of a tax law change (Note 5). The related refund
was received in September 2002.
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.
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, 2003 (Continued)
SFAS No. 123, Accounting for Stock-Based Compensation, requires the disclosure of pro forma net
loss and 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 Company’s 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 Company’s calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: expected life, 48 months following vesting (ranging from
four to eight years); stock volatility, 125%, 133% and 167% for grants issued in 2003, 2002 and 2001,
respectively; risk-free interest rates, ranging from 2.39% to 2.89%, 2.65% to 4.47% and 3.91% to
4.93% for 2003, 2002 and 2001, respectively; and no dividends during the expected term. The
Company’s 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 2003, 2002 and 2001
awards had been amortized to expense over the vesting period of the awards, pro forma net loss would
have been as follows:
Year Ended December 31,
2003
2002
2001
(in thousands, except per share data)
Net Loss:
Net loss, as reported
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects
$
(923)
$
(688)
$
(6,125)
(286)
(240)
(339)
Pro forma net loss
$
(1,209)
$
(928)
$
(6,464)
Loss per Common Share
Basic and diluted, as reported
Basic and diluted, pro forma
$
$
(0.06)
(0.07)
$
$
(0.04)
(0.06)
$
$
(0.38)
(0.40)
Net Loss per Share - Pursuant to SFAS No. 128, Earnings per Share, the Company is required to
provide dual presentation of “basic” and “diluted” earnings (loss) per share (EPS). Basic EPS amounts
are based upon the weighted average number of common shares outstanding. Diluted EPS amounts are
based upon the weighted average number of common and common equivalent shares outstanding.
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, 2003 (Continued)
Common equivalent shares include stock options using the treasury stock method. Common
equivalent shares are excluded from the calculation of diluted EPS in loss years, as the impact is
antidilutive. Potential common shares of 955,000, 444,000 and 65,000 have been excluded from
diluted weighted average common shares for the years ended December 31, 2003, 2002 and 2001,
respectively.
Fulfillment Services - The Company currently holds approximately $500,000 of 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 sheet. 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 are held for the benefit of this
fulfillment customer.
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 - 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, 2003, 2002 and
2001, there was no difference between net loss and comprehensive loss.
Fair Value of Financial Instruments - The Company’s 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 July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs
associated with exit or disposal activities and supersedes EITF 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in
a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost as
defined in EITF 94-3 was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146
also establishes that the liability should initially be measured and recorded at fair value. The Company
has adopted the provisions of SFAS No. 146 for exit or disposal activities that are initiated after
December 31, 2002.
In November 2002, the FASB issued FIN No. 45, Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an
interpretation of FASB Statements No. 5, 57 and 107, and rescission of FASB Interpretation No. 34,
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, 2003 (Continued)
Disclosure of Indirect Guarantees of Indebtedness of Others. FIN No. 45 elaborates on the disclosures
to be made by the guarantor in its interim and annual financial statements about its obligations under
certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of this interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002; while, the provisions of the disclosure
requirements are effective for financial statements of interim or annual periods ending after December
15, 2002. The adoption of FIN No. 45 has not had a material impact on the Company's results of
operations or financial position.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation —
Transition and Disclosure — an amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method used on reported
results. The Company has followed the prescribed disclosure format and has provided the additional
disclosures required by SFAS No. 148.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities. In general,
a variable interest entity is a corporation, partnership, trust, or any other legal structure used for
business purposes that either (a) does not have equity investors with voting rights or (b) has equity
investors that do not provide sufficient financial resources for the entity to support its activities. FIN
No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the
entity if the investors in the entity do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The consolidation requirements of FIN No. 46
apply immediately to variable interest entities created after January 31, 2003. The Company adopted
the provisions of FIN 46 effective February 1, 2003 and such adoption did not have a material impact
on its consolidated financial statements since the Company currently has no variable interest entities.
In December 2003, the FASB issued FIN 46R with respect to variable interest entities created before
January 31, 2003, which among other things, revised the implementation date to the first fiscal year or
interim period ending after March 15, 2004, with the exception of Special Purpose Entities (“SPE”).
The consolidation requirements apply to all SPE’s in the first fiscal year or interim period ending after
December 15, 2003. The Company adopted the provisions of FIN 46R effective December 31, 2003
and such adoption did not have a material impact on its consolidated financial statements since it
currently has no SPE’s.
Reclassifications - Certain reclassifications have been made to the prior years’ consolidated financial
statements to conform to the current year presentation.
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, 2003 (Continued)
2. EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consist of the following (in thousands):
Machinery and equipment
Leasehold improvements
Office furniture and fixtures
Less accumulated depreciation and amortization
December 31,
2003
2002
$
753
304
111
$
913
304
111
1,168
1,328
(1,098)
(1,108)
$
70
$
220
3. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table sets forth the acquired intangible assets by major asset class:
Useful
Life
(Years)
December 31, 2003
Accumulated
Amortization
Gross
Net Book
Value
December 31, 2002
Accumulated
Amortization
Net Book
Value
Gross
(in thousands)
Amortizing:
Purchased and
Licensed Technology
3
$
2,260
$
(2,220)
$
40
$
2,260
$
(2,036)
$
224
Aggregate amortization expense on intangible assets was approximately $184,000 and $284,000 for
the years ended December 31, 2003 and 2002, respectively. Amortization expense in 2004 will be
$40,000 at which time all amortizing intangible assets that exist at December 31, 2003 will be fully
amortized.
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, 2003 (Continued)
The carrying amount of the Company’s goodwill was $1,715,000 as of December 31, 2003 and 2002.
The Company’s reporting units are equivalent to its operating segments. At December 31, 2003 and
2002, the amount of goodwill allocated to the products segment is $1,380,000 and the amount of
goodwill allocated to the services segment is $335,000.
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
Salaries and benefits
Accrued lease payments (restructuring costs)
Royalties
Other
December 31,
2003
2002
$
432
18
9
$
416
139
43
111
$
459
$
709
5. INCOME TAXES
A summary of the income tax expense (benefit) is 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, 2003 (Continued)
Year ended December 31,
2002
2003
2001
Current:
Federal
State
Foreign
Deferred:
Federal
State
Change in valuation allowance
$
3
$
(1,071)
3
6
$
57
3
30
3
(1,062)
90
(324)
(22)
346
0
507
(93)
(414)
0
(2,295)
(290)
2,585
0
$
3
$
(1,062)
$
90
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 loss before income
taxes is as follows:
Federal statutory rate
State tax, net of federal benefit
Nondeductible expense related to acquired intangibles
Other
Federal benefit for NOL carryback law change
Change in valuation allowance
December 31,
2002
2003
2001
(35)% (35)% (35)%
(2)
2
35
1
1
(61)
33
1
2
2
32
0 %
(
61)%
2 %
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, 2003 (Continued)
The major components of the Company’s deferred tax assets and liabilities are as follows (in
thousands):
Various reserves
Nondeductible accruals
State taxes
Prepaid expenses
Credit carryforwards
Net operating loss carryforwards
Amortization
Fixed assets
Subtotal
Valuation allowance
December 31,
2003
2002
$
60
68
(539)
(71)
1,280
7,468
295
56
8,617
(8,617)
$
298
203
1
(575)
1,274
6,004
273
64
7,542
(7,542)
$
0
$
0
The Company has federal and state net operating loss carryforwards of approximately $18,148,000
and $14,834,000, respectively, at December 31, 2003. These federal and state net operating loss
carryforwards will begin to expire in 2021 and 2004, respectively. During the year ended December
31, 2002, the Company carried back its December 31, 2001 federal net operating loss of $4,181,000 to
the year ended December 31, 1996 resulting in a refund of $1,071,000. The carryback became
allowable under the provisions of the Job Creation and Workers Assistance Act of 2002, which
extended the carryback period to five years for tax years ending in 2001 and 2002. Net operating
losses, for federal purposes, were allowed to be carried back for two years prior to this enactment. In
addition, the Company has federal and state tax credit carryforwards of approximately $1,077,000 and
$203,000, respectively, at December 31, 2003.
As of December 31, 2003, a valuation allowance of approximately $8,617,000 has been provided
based upon the Company’s 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.
The increase in the valuation allowance in 2003 includes $729,000 related to the potential benefit of
stock option transactions. As of December 31, 2003, approximately $1,641,000 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.
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, 2003 (Continued)
6. COMMITMENTS AND CONTINGENCIES
Leases - The Company has a non-cancelable operating lease for its building facility in Lee’s Summit,
Missouri, which expires on August 31, 2004. The lease on the corporate headquarters in Aliso Viejo,
California expired on March 31, 2003. The company is currently evaluating alternative solutions for this
facility and has entered into a month-to-month arrangement for the current facility. Future minimum
rental commitments amount to $30,000, all of which is payable in 2004.
Total rent expense was $590,000, $593,000 and $792,000 for the years ended December 31, 2003, 2002
and 2001, respectively.
Litigation – From time to time the Company is subject to litigation in the normal course of business,
none of which management believes will have a material adverse effect on the Company’s
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
Company’s 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 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.
7. SEGMENT INFORMATION
The Company currently operates in two business segments: products and services. In addition,
revenues are broken down into three markets, Wireless and Broadband products, Macintosh products
and Internet & Software Solutions. Our Internet Solutions market includes Internet based software
products as well as consulting, fulfillment and hosting revenue.
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, 2003 (Continued)
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:
2003
Year Ended December 31,
2002
2001
Products
Services
Products
Services
Products
Services
Wireless & Broadband
$
4,005
$
-
$
3,768
$
-
$
3,964
$
-
MacIntosh
Internet & Software Solutions
Total Revenues
Cost of revenues
Gross Profit
1,365
921
6,291
1,350
4,941
$
925
925
321
604
$
1,508
753
6,029
1,420
4,609
$
1,102
1,102
782
320
$
1,364
1,617
6,945
1,880
5,065
$
2,544
2,544
2,048
496
$
Sales to individual customers and their affiliates, which amounted to more than 10% of the Company’s
net revenues included three OEM customers at 27.0%, 10.7% and 10.2% of revenues in 2003 and two
OEM customers at 19.0% and 10.7% of revenues in 2002. No customers exceeded 10% in 2001.
Accounts receivable from these customers were $477,000, $55,000 and $0 at December 31, 2003 and
$516,000 and $0 at December 31, 2002. A decision by a significant customer to substantially
decrease or delay purchases from the Company or the Company’s inability to collect receivables from
these customers could have a material adverse effect on the Company’s consolidated financial
condition and results of operations.
The Company also has export sales representing 14.8%, 15.1% and 10.1% of its net revenues for the
years ended December 31, 2003, 2002 and 2001, respectively. All export sales have been denominated
in U.S. dollars.
8. 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
$45,000, $45,000, and $78,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
9. STOCK-BASED COMPENSATION
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, 2003 (Continued)
In 1995, the Company adopted the 1995 Stock Option/Stock Issuance Plan (the Plan). The Plan, as
amended, provides for issuance of, or options to be granted for the purchase of, an aggregate of
4,773,000 shares of common stock. Under the terms of the Plan, incentive and nonqualified options
may be granted at an exercise price not less than 100% and 85%, respectively, of 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.
Stock option activity under the Plan is as follows:
OUTSTANDING, January 1, 2001 (426,000 shares,
exercisable at weighted average exercise price of $3.60)
Granted (weighted average fair value of $0.89)
Canceled
OUTSTANDING, December 31, 2001 (777,000 shares,
exercisable at weighted average exercise price of $3.01)
Granted (weighted average fair value of $0.33)
Exercised
Canceled
OUTSTANDING, December 31, 2002 (1,535,000 shares,
exercisable at weighted average exercise price of $2.15)
Granted (weighted average fair value of $2.22)
Exercised
Canceled
OUTSTANDING, December 31, 2003
Weighted
average
exercise
price
Number
of shares
1,542,000
476,000
(281,000)
$
2.55
1.10
2.34
1,737,000
1,176,000
(3,000)
(145,000)
2,765,000
38,000
(808,000)
(84,000)
1,911,000
2.55
0.38
1.01
1.35
1.46
2.46
1.13
1.43
1.62
Additional information regarding options outstanding as of December 31, 2003 is as follows:
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, 2003 (Continued)
Range of
exercise
prices
Number
outstanding
$0.10 - $ 0.90
$0.91 - $ 3.50
$3.51 - $ 7.10
$7.25 - $14.00
983,000
550,000
318,000
60,000
1,911,000
Options outstanding
Options exercisable
Weighted average Weighted
average
exercise
price
remaining
contractual
life (years)
Weighted
average
exercise
price
Number
exercisable
8.6
6.2
5.9
1.9
7.3
$
$
$
$
0.35
1.71
4.07
8.78
248,000
535,000
297,000
60,000
$
$
$
$
0.46
1.72
4.08
8.77
$
1.62
1,140,000
$
2.43
At December 31, 2003, 1,486,000 shares were available for future grants under the Stock Option Plan.
F-20
INDEPENDENT AUDITORS’ REPORT ON SCHEDULE
To the Stockholders of
Smith Micro Software, Inc.:
We have audited the consolidated financial statements of Smith Micro Software, Inc. and
subsidiaries (the Company) as of December 31, 2003 and 2002 and for each of the three
years in the period ended December 31, 2003, and have issued our report thereon dated
March 22, 2004, which report expresses an unqualified opinion and includes an
explanatory paragraph referring to a change in method of accounting for goodwill and
other intangible assets in 2002. Such consolidated financial statements are included
elsewhere in this Annual Report on Form 10-K. Our audits also included the consolidated
financial statement schedule listed in Item 15a(2). This financial statement schedule is the
responsibility of the Company’s management. Our responsibility is to express an opinion
based on our audits. In our opinion, such consolidated 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.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 22, 2004
S-1
SMITH MICRO SOFTWARE INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2003
(In thousands)
Balance at
beginning of
period
Additions
charged to
costs and
expenses
Deductions
Balance at
end of
period
Allowance for doubtful accounts and
other adjustments (1):
2003
2002
2001
$
565
533
1,896
$
132
486
1,412
$
(664)
(454)
(2,775)
$
33
565
533
(1) Other adjustments relate principally to sales returns.
S-2
INDEPENDENT AUDITORS’ CONSENT
EXHIBIT 23.1
INDEPENDENT AUDITORS’ CONSENT
We consent to the incorporation by reference in Registration Statement Nos. 333-02418, 333-40106
and 333-62134 of Smith Micro Software, Inc. on Form S-8 of our reports dated March 22, 2004,
(which reports express an unqualified opinion and include or refer to an explanatory paragraph
referring to a change in method of accounting for goodwill and other intangible assets in 2002),
appearing in this Annual Report on Form 10-K of Smith Micro Software, Inc. for the fiscal year ended
December 31, 2003.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 22, 2004
OFFICERS & DIRECTORS
ANNUAL REPORT
William W. Smith, Jr.
Chairman of the Board
President and CEO
Director
Robert Scheussler
Sr. Vice President
COO and CFO
Director
Thomas G. Campbell
Director
William C. Keiper
Director
Greg Szabo
Director
CORPORATE HEADQUARTERS
51 Columbia
Aliso Viejo, CA 92656
(949) 362-5800
STOCK EXCHANGE LISTING
Smith Micro’s common stock trades on The
Nasdaq Stock Market under the symbol SMSI
TRANSFER AGENT AND REGISTRAR
Mellon Investment Service LLC
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
(800) 522-6645
www.chasemellon.com
LEGAL COUNSEL
Dorsey & Whitney LLP
Irvine, California
AUDITORS
Deloitte & Touche, LLP
Costa Mesa, California
Additional copies of this Annual Report are available
without charge by contacting the company at:
51 Columbia
Aliso Viejo, CA 92656
(949) 362-5800
TRADEMARKS
The following Smith Micro Software, Inc. trademarks or
registered trademarks appear in this annual report:
CheckIt, CheckIt Fastmove, CheckIt Netoptimizer,
CheckIt Firewall, CheckIt Speed & Security, CheckIt
Diagnostics, FAXstf, FAXstf PRO, FAXstf X, HotFax,
HotFax MessageCenter, HotFax MessageCenter Pro,
HotFax Share, QuickLink, QuickLink Mobile,
QuickLink Phonebook, QuickLink Mobile Wi-Fi,
VideoLink, VideoLink Mail, VideoLink Pro, and
WebDNA.
Apple, Mac and Macintosh are registered trademarks of
Apple Computer, Inc. Microsoft and Windows are
registered trademarks of Microsoft Corp. All other
trademarks and product names are the property of their
respective companies. All rights reserved.
ADDITONAL INFORMATION
Smith Micro maintains an active investor relations
program. If you have any questions, or would like
additional information concerning the operations or
financial statements, please contact either:
Bruce T. Quigley
Vice President of Business Development and Investor
Relations
Smith Micro Software, Inc.
51 Columbia
Aliso Viejo, CA 92656
(949) 362-5800
bquigley@smithmicro.com
or
Steve Simon
S&S Public Relations
100 Village Green
Suite 220
Lincolnshire, Ill 60069
steve@sspr.com