Dear Shareholder:
Inside, you will find the 2005 Annual Report for Smith Micro
Software, Inc. (Nasdaq:SMSI). The fiscal year 2005 was truly a
significant year for the evolution of our company. We began the
year with very high expectations after the strong turnaround we saw
during 2004, when we delivered increasing revenue and earnings
growth. We started fiscal 2005 with some significant internal goals
to achieve during the year. I am pleased to say we not only
achieved them but also exceeded them. We especially looked to
strengthen our balance sheet and broaden our products both
organically and through acquisitions, with the goal of diversifying our business both from a product
and customer concentration point of view. We continued on the growth path of aggressively
working with our carrier customers who are deploying their wireless high-speed, broadband data
services. We achieved these milestones while maintaining both strong revenue growth, as well as
earnings growth during the year.
During Fiscal 2005, we saw record results, where annual revenue increased 53% to $20.3
million, which compared to the $13.3 million reported in 2004. Pro forma net income (net income
factoring out amortization of intangible assets assumed by the Allume transaction) increased 60% to
a record $5.5 million, or $0.24 on 22.8 million shares; this compared to $3.5 million or $0.19 per
share on 18.5 million shares. We also finished the year with a record backlog of $4 million heading
into 2006.
With regard to strengthening our balance sheet, in February of 2005 we completed a $22.4
million private placement of common stock through the investment bank, C.E. Unterberg Towbin,
LLC. This significantly strengthened our balance sheet, brought in new institutional investors and
made it possible for us to pursue acquisition candidates. In July 2005, we announced the acquisition
of Allume Systems, Inc., a wholly owned subsidiary of International Microcomputer Software, Inc.
(IMSI).Allume is a leading provider of compression software solutions that enable state of the art
compression, security and archiving of data, including JPEG, with MPEG, and MP3 formats under
development. The company’s pioneering product suite, known as Stuffit® has been a de facto
business compression standard since 1986. Its most recent development was a new JPEG
compression technology that reduces the size of JPEG images up to 30% without any additional
reduction of the actual image quality. This technology, known as StuffIt® Wireless, becomes very
appealing to wireless carriers and for camera-enabled handset and PDA manufacturers since
customers will be able to store many more still images on their devices, require less bandwidth to
transfer photos over the wireless network and transfer the photos up to 30% faster due to the
reduced file size. At this time, we are heavily involved in prototype testing in the lab and field and
are very pleased with the progress.
Within our data connectivity solutions program, we continue to make significant progress.
Verizon Wireless, our largest customer, has continued to rollout its wireless Broadband Access or
EV-DO data service at a fast pace, adding hundreds of new cities as well as expanding its footprint
throughout 2005. We obviously remain optimistic and excited about this, and believe they will
continue rolling out their wireless broadband service to cover all of their service area.
During the year, we added some new high-speed connectivity customers. In February, we
added ALLTEL, which chose our QuickLink Mobile data connectivity solution to support its high-
speed data customers. ALLTEL has continued to expand its developing Axcess Broadband
network, and we are pleased to be working closely with them in this build-out. In September, we
signed on with Vodafone, which has the world’s largest mobile community, to develop a CDMA
based wireless data connectivity application for customers traveling to North America.
During 2005, we made strides with our new QuickLink Mobile Enterprise solution rollout.
We signed on our first customer, a large US insurance Company based in the southwest, and we
have developed a pipeline of strong prospects. We still maintain that this solution becomes much
more relevant during 2006 and 2007.
Throughout 2005, we added some significant depth to our management team. In June we
brought on Andy Schmidt as our new Chief Financial Officer, who brings a wealth of public
company experience to the team.
We also strengthened our Board of Directors by adding Ted L. Hoffman to help direct the
company’s business initiatives as well as provide independent oversight of Smith Micro’s wireless
data business. Mr. Hoffman recently retired as Vice President, technology development of Verizon
Wireless, where he was responsible for all network products and service development. He was
responsible for managing the company’s transition from analog to digital Code Multiple Access
(CDMA) Infrastructure. We are very excited to have Ted with us as he brings a wealth of wireless
market understanding and experience.
Overall, 2005 was a very busy and exciting time for Smith Micro Software. We added
several new technologies both through acquisitions as well as through internal R&D. We added
new customers, and most importantly, continued to show both record revenue and earnings growth.
As we look ahead to 2006, we expect to continue to achieve strong results and we believe we have
positioned the company extremely well to drive future growth. I invite you to examine the attached
Annual Report (Form 10-K) for a detailed analysis of our performance in 2005, and I look forward
to delivering a very successful 2006. I also invite you to examine our products on our web site at
http://www.smithmicro.com.
Thank you for your continued support.
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, 2005
[ ]
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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES [X] NO [ ]
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934 YES [X] NO [ ]
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 [ ].
Indicate by check mark if whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ X ]
As of June 30, 2005, 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 $63,670,654 based upon the closing sale price of such stock as reported on the
Nasdaq SmallCap Market on that date. For purposes of such calculation, only executive officers, board members, and beneficial owners of more
than 10% of the registrant’s outstanding common stock are deemed to be affiliates.
As of March 9, 2006, there were 22,434,369 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 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.
2005 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Item 1.
PART I
BUSINESS .....................................................................................................................................
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 CONSOLIDATED FINANCIAL DATA ...............................................................
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS......................................................................................................
RISK FACTORS ............................................................................................................................
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.
PART IV
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES..................................................
SIGNATURES………………………………………………………………………………….
_________________________
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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
In this document, the terms “Smith Micro,” “Allume Systems”, “Allume”, “Company,” “we,” “us,” and
“our” refer to Smith Micro Software, Inc. and its subsidiaries.
This report contains forward-looking statements regarding Smith Micro which include, but are not limited to,
statements concerning projected revenues, expenses, gross profit and income, the competitive factors affecting our
business, market acceptance of products, customer concentration, the success and timing of new product introductions,
the protection of our intellectual property, and the need for additional capital. These forward-looking statements are
based on our current expectations, estimates and projections about our industry, 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:
•
•
•
•
•
•
•
•
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” on page 21 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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PART I
Item 1. BUSINESS
General
Smith Micro Software, Inc. is a diversified developer and marketer of wireless communication software
products and services. Our primary focus and strategy for our products and services is directed to wireless
communications including wireless wide area network (WWAN) software, handset phonebook management,
managing the download of music to a handset, and Wi-Fi software. We sell our products and services to some of the
world's leading companies as well as to consumers. Specific Smith Micro wireless products include QuickLink
Mobile, QuickLink Mobile Enterprise and QuickLink Mobile Phonebook. The proliferation of wireless
technologies is providing new opportunities globally. The wireless infrastructures being implemented, such as
1xRTT, GPRS and the newer 3G technology including EVDO UMTS and HSDPA, offer wider bandwidth wireless
data services. This infrastructure combined with mobile platforms such as the basic mobile phone, notebook
computing devices (“PCs”) and personal communications devices (“PDAs”) provide opportunities for new
communications software products. Our core communications technology is designed to address this emerging
wireless data market.
We manufacture, market and sell value-added wireless connectivity products targeted to the original
equipment manufacturers (“OEM”) market, particularly wireless service providers and mobile phone manufacturers,
as well as direct to the consumer. We offer software products for Windows, Mac OSX, Unix and Linux operating
systems. The underlying design concept is the long-standing Smith Micro purpose to "enhance the out-of-box
experience" for the customer. Our custom engineering services bring more than 20 years of hardware and software
experience, having shipped over 60 million copies of products to OEM's seeking to better market their products by
adding product features, customizing existing features and translating applications into additional languages.
QuickLink Mobile provides notebook users with the ability to easily roam between wireless wide area
networks (“WWAN”) and Wi-Fi hot spots. QuickLink Mobile allows users to seek out and select available hot
spots in their area. We currently maintain OEM relationships with many wireless carrier companies, including
Verizon Wireless, Vodafone, Telus, Alltel, UTStarcom, LG Electronics and Kyocera. Sales to Verizon Wireless
amounted to approximately 57.1% and 68.4% of the Company’s net revenues for 2005 and 2004, respectively.
Sales to Verizon Wireless, Cingular Wireless and Apple Computer amounted to approximately 27.0%, 10.7% and
10.2% of our net revenues for 2003, respectively.
During the fourth quarter of 2004, we announced our latest addition to the QuickLink family, namely
QuickLink Mobile Enterprise, aimed at the enterprise marketplace to take advantage of the demand for additional
security built into our wireless application. This product was introduced in the second quarter of 2005. In addition
to addressing the latest technologies and concerns for security in the wireless space, QuickLink Mobile Enterprise is
a combination wireless wide area network (WWAN) and Wi-Fi client application that provides the same easy to use
interface and functionality regardless of carrier or device. The application supports over 180 carriers worldwide,
hundreds of wireless devices and PDA’s, many different PC Cards, and several integrated WWAN devices in
notebooks.
In the fourth quarter of 2005, we launched a new music product, the Music Essentials Kit for Verizon
Wireless. The Music Essentials kit allows users to download music from Verizon Wireless, or transfer music files
from a PC to a handset. This product first shipped in our fourth quarter of 2005 and is expected to be a significant
contributor to 2006 revenues.
A future initiative for our OEM group is launching StuffIt Wireless. StuffIt Wireless incorporates our
patent-pending JPEG compression technology that provides a superior compression of multi-media data. This
technology allows device manufacturers and wireless carriers to increase storage space on devices, increase the
4
quality of images and optimize wireless bandwidth. We are currently in the prototype stage of product development
with potential customers and plan to fully market this product in 2007.
Our Enterprise Solutions Group delivers wireless mobility solutions into medium and large enterprise
businesses. In addition to offering products designed to enhance security, lower help desk costs and deliver a more
fluid wireless experience, the Enterprise Solutions Group provides architectural design and implementation services
that guarantee to our customers that the applied solution is the best possible combination for the target environment.
Combined with our wireless mobility business direction are our eBusiness applications and services initiative. This
area of business leverages our many years of providing web-based applications custom-tooled to meet the needs of
the growing business. From basic web design to complex solutions involving complete customer management,
online commerce and fulfillment services, the Enterprise Solutions Group helps businesses refine their processes and
implement cost-effective, empowering systems.
The Consumer Products Group offers products in the PC Utility, Fax and eBusiness markets. Smith Micro's
complete line of consumer products is available through direct sales on its websites, partner websites or its order
desk and through traditional retail outlets. The Consumer group is focused on the following market segments:
Compression, Access and Transmission (CAT), Utilities including Diagnosis, Performance, Security and Internet
and Compilation and Lifestyle.
As a world leader and innovator in data and image compression field our StuffIt product line helps users
compress, encrypt and archive information. In January 2005 the company introduced its revolutionary patent
pending JPEG compression technology. This breakthrough technology can compress JPEG photos and images up
30% without and additional loss in image quality. Combining our new image compression with StuffIt's traditional
file compression accelerates the transmission of files over the Internet. Plus, with built-in error protection and
encryption (up to 512- bit encryption), users can send StuffIt archives with peace of mind.
We currently operate in two business segments: Products and services. We do not separately allocate
operating expenses to these segments, nor do we allocate specific assets to these segments. Therefore, segment
information reported includes only revenues and cost of revenues. See Note 8 of Notes to Consolidated Financial
Statements for financial information related to our operating segments.
Research and development expenses amounted to $4.0 million, $2.6 million and $2.5 million for the years
ended December 31, 2005, 2004 and 2003, respectively. Our research and development expenses consist primarily
of personnel and equipment costs required to conduct our software development efforts. We remain focused on the
development and expansion of our technology, particularly our wireless, diagnostic, utility and Internet software
technologies.
We were incorporated in California in November 1983, and we reincorporated in Delaware in June 1995.
Our principal executive offices are located at 51 Columbia, Suite 200, Aliso Viejo, California 92656. Our telephone
number is (949) 362-5800. Our website address is www.smithmicro.com. We make our filings with the SEC
available on the Investor Relations page of our website. Information contained on our website is not part of this
Annual Report on Form 10-K.
Industry Backgrounds
Wireless Industry - The evolving types of 3G wireless data infrastructures being implemented, such as EV-
DO, HSDPA, and UMTS wireless platforms have expanded to include the basic mobile phone, personal computing
devices (PC’s) and personal communications devices including PDA’s and various handheld devices. The adoption
of these new mobile and wireless communications services provides opportunities for new communications software
products. In addition, these devices are becoming multimedia devices, which include digital cameras, portable
music players and full motion video cameras.
Compression, Access and Transmission – Computer compression helps users solve fundamental issues that
5
they all share: Sending information in a way that is fast, safe and secure, accessing and archiving information and
the maximization of storage capacity and Internet bandwidth.
Diagnostic/Utility Software Industry - Diagnostic and utility software products assist home and corporate
users, and hardware manufacturers and service companies to identify and repair computer system related errors and
problems. The company focuses on utilities covering two market segments: Diagnosis and performance, and
security and internet. These products are designed to enhance, protect, clean, diagnose and help customers
maximize their computer’s performance and keep them secure from spam, spyware and computer hackers.
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:
OEM & Wireless
QuickLink® Mobile
QuickLink® Phone
Manager
QuickLink® Mobile
Enterprise
Fax & Communication
FAXstf™ X &
FAXstf™ X Pro
HotFax® MessageCenter
Software Products
(Windows and Mac) Turns data capable wireless handsets, PDA’s and wireless
integrated notebook PC’s into wireless data connectivity devices.
(Windows) Enables users to be able to easily edit the phonebook and calendar that
reside on a wireless handset on a PC computer. This product enables you to transfer
PIM and calendar data from your computer to your handset and to move similar data
from your handset back to the PIM on the computer.
(Windows) Expands QuickLink Mobile by offering additional features that are
tailored specifically for the enterprise customer such as customizations and 802.1x
Wi-Fi security.
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.
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.
Compression, Access and Transmission
StuffIt® Wireless
A breakthrough image compression technology that reduces the size of a JPEG
picture file up to 30% without any additional loss in image quality. This technology
allows device manufacturers and wireless carriers to increase storage space on
devices, increase the quality of images and optimize wireless bandwidth.
An evolving set of technologies to handle image compression for multiple image
formats. Target markets include digital camera manufacturers, Enterprise Content
Management and medical imaging.
(Windows and Mac) - A complete compression, expansion, and access solution.
Providing easy to use award winning archiving and security from 512 bit encryption,
to Adobe and Microsoft Office plug-ins to our JPEG image compression.
(Windows and Mac) - Our basic core product that provides basic compression and
decompression functionality.
(Windows and Mac) - A universal expansion product that decompresses and
StuffIt® Image
StuffIt® Deluxe
StuffIt® Standard Edition
StuffIt® Expander
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decodes all major compression formats. Expander is distributed free of charge and
encourages the wide distribution of files in StuffIt format and enhancess the market
for our commercial products.
(Windows) - Provides end-users the hardware information they need to evaluate,
fine-tune and manage their system.
(Mac) Provides customers with repair, cleaning and diagnosis utilities for their
Macintosh.
(Windows and Mac) - Our uninstaller and cleanup product that removes the clutter
that accumulates on your computer from unwanted and unused files. Spring
Cleaning cleans and improves the performance of your computer.
(Windows and Mac) - An Internet cleanup and privacy product, which allows a user
to remove specific unwanted files gathered by a Web browser every time you surf
the Internet. It increases computer security by blocking pop-ups and removing
spyware.
(Windows) - A complete collection of all of the necessary tools to keep your system
running smooth, faster and error-free. Accelerate, clean, customize and protect your
PC.
(Windows and Mac) - A virtual aquarium for your computer. Offering multiple
collections which includes sharks, jellyfish, turtles, and 40 fish species to our
expansion pack of goldfish, jellyfish and deep sea divers.
(Windows) - Manage and share photos. You can create custom photo albums, edit
your pictures, print and create photo calendars and postcards.
Services
Consulting services range from 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.
Utilities
CheckIt® Diagnosis
CheckIt® System
Performance Suite
Spring Cleaning®
Internet Cleanup
BoostXP
Lifestyle
Aquazone®
Personal Photo
Consulting
Hosting
Fulfillment
Sales and Marketing
Our products are available worldwide to customers through original equipment manufacturers. We also
sell products and product upgrades over the Internet through our own web store at www.smithmicro.com.
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 service providers,
wireless phone manufacturers and other PC related equipment manufacturers. These manufacturers bundle our
software products with their own products. We have translated selected products into as many as eighteen languages to
allow our OEM customers the flexibility of offering multi-language products that meet the needs of their worldwide
markets.
Our three largest OEM customers (Verizon Wireless, Kyocera Wireless and Alltel in 2005), and their
respective affiliates, in each year, have accounted for 63.5 % of our net revenue in 2005, 77.8% of our net revenue in
2004 and 47.9% of our net revenues in 2003. Our major customers could reduce their orders of our products in favor
of a competitor's product or for any other reason. The loss of any of our major OEM customers or decisions by a
significant OEM customer to substantially reduce purchases could have a material adverse effect on our business.
7
We have historically operated with little backlog because we have generally shipped our software products
and recognized revenue shortly after we received orders because our production cycle has traditionally been very short.
As a result, our sales in any quarter were generally dependent on orders that were booked and shipped in that quarter.
As our wireless business has evolved, production cycle time for items such as data kits has increased to the point that
orders received towards the end of a quarter may not ship until the subsequent quarter. Additionally, customers may
issue purchase orders that have extended delivery dates. These situations make it difficult for us to predict what our
revenues and operating results will be in any quarter. Therefore, the level of backlog is not necessarily indicative of
trends in our business. As of December 31, 2005, we had a backlog of approximately $4.0 million, as compared to
$1.0 million at December 31, 2004.
Customer Service and Technical Support
We provide technical support and customer service through our web site, email, telephone and fax. OEM
customers generally provide their own primary customer support functions and rely on us for back-up support for
their own technical support personnel.
Product Development
The software industry, particularly the wireless market, is characterized by rapid and frequent changes in
technology and user needs. We work closely with industry groups and customers, both current and potential, to help us
anticipate changes in technology and determine future customer needs. Software functionality depends upon the
capabilities of the hardware. Accordingly, we maintain engineering relationships with various hardware manufacturers
and we develop our software in tandem with their development. Our engineering relationships with manufacturers, as
well as with our major customers, are central to our product development efforts. We remain focused on the
development and expansion of our technology, particularly in the wireless space. Research and development
expenditures amounted to $4.0 million, $2.6 million and $2.5 million for the years ended December 2005, 2004 and
2003, respectively.
Manufacturing
Our software is sold in several forms. We offer a package or kit that may include: CD-ROM(s) for product
and hardware-specific drivers; a cable; a manual; and certain other documentation or marketing material. We offer
software on CD-ROMs. We also permit selected OEM customers to duplicate our products on their own CD-ROM’s
and pay a royalty based on usage. The majority of our OEM business requires that we provide a CD, which includes a
soft copy of a user guide. In other cases, we provide a complete data connectivity kit that includes a CD, manual and
cable. Finally, we grant licenses to certain OEM customers that enable those customers to preload a copy of our
software onto a personal computer. With the enterprise sales program, we offer site licenses under which a corporate
user is allowed to distribute copies of the software to users within the corporate sites.
Our product development group produces a product master for each product that is then duplicated and
packaged into products by the manufacturing organization. All product components are purchased by our personnel
in our Aliso Viejo, California facility. The manufacturing is subcontracted to outside vendors include the replication
of CD-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.
Competition
The markets in which we operate are highly competitive and subject to rapid changes in technology. Rapidly
changing technology combined with relatively low barriers to entry in the communication software market is constantly
creating new opportunities, and we expect new competitors to enter the market. We also believe that competition from
established and emerging software companies will continue to intensify as the emerging mobile, wireless and Internet
markets evolve. We compete with other software vendors for the attention of customers as well as in our efforts to
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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, 2005, six currently effective U.S. patents have been issued since December 1997 and five patent
applications are currently pending. These patents provide generalized protection to our intellectual property base, and
we will continue to apply for various patents and trademarks in the future.
We seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to
our proprietary information to execute confidentiality agreements with us and by restricting access to our source code.
The steps that we have taken to protect our proprietary technology may not be adequate to deter misappropriation of
our proprietary information or prevent the successful assertion of an adverse claim to software utilized by us. In
addition, we may not be able to detect unauthorized use of our intellectual property rights or take effective steps to
enforce those rights.
In selling our products, we primarily rely on "shrink wrap" licenses that are not signed by licensees and may
be unenforceable under the laws of certain jurisdictions. In addition, the laws of some foreign countries do not protect
our proprietary rights to as great an extent as do the laws of the United States. Accordingly, the means we use currently
to protect our proprietary rights may not be adequate. Moreover, our competitors may independently develop
technology similar to ours. We also license technology on a non-exclusive basis from several companies for inclusion
in our products and anticipate that we will continue to do so in the future. If we are unable to continue to license these
technologies or to license other necessary technologies for inclusion in our products, or if we experience substantial
increases in royalty payments under these third party licenses, our business could be materially and adversely affected.
Employees
As of December 31, 2005, we had a total of ninety-one employees: forty-eight engaged in engineering;
twenty-three in sales and marketing; twelve in management and administration; five in manufacturing and three in
customer support. We utilize temporary labor to assist during peak periods of manufacturing volume. We believe that
our future success will depend in large part upon our continuing ability to attract and retain highly skilled
managerial, sales, marketing, customer support, research and development personnel and consulting staff. Like
other software companies, we face intense competition for such personnel, and we have at times experienced and
continue to experience difficulty in recruiting qualified personnel. There can be no assurance that we will be
9
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.
10
Item 2. PROPERTIES
Our corporate headquarters, including our principal administrative, sales and marketing, customer support and
research and development facility, is located in Aliso Viejo, California, where we currently lease and occupy
approximately 23,500 square feet of space pursuant to a lease that expires May 31, 2009. We operate both our products
and services reporting segments within this facility.
We also lease approximately 7,700 square feet in Watsonville, California under a lease that expires September
30, 2010. We are currently working on a new operating lease for our facility in Lee’s Summit, Missouri to replace the
lease that expired in June 2005. During 2003, we terminated leases in San Diego, California and Beaverton, Oregon.
We believe that suitable additional or alternative space will be available in the future on commercially
reasonable terms as needed.
Item 3. LEGAL PROCEEDINGS
There are no pending material legal issues at this time although we may become subject to various legal
proceedings and claims that arise in the ordinary course of business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders during the quarter ended December 31, 2005.
11
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.
On March 9, 2006, the closing sale price for our common stock as reported by Nasdaq was $8.99.
Holders
As of March 9, 2006, there were approximately 144 holders of record of our common stock based on
information provided by our transfer agent.
Dividends
We have never paid any cash dividends on our common stock and we have no current plans to do so.
Recent Sales of Unregistered Securities
Not applicable.
12
HighLowYEAR ENDED DECEMBER 31, 2005:First Quarter$9.63 4.65 Second Quarter5.00 3.44 Third Quarter7.39 4.02 Fourth Quarter8.00 5.41 YEAR ENDED DECEMBER 31, 2004:First Quarter3.66 2.00 Second Quarter3.31 1.80 Third Quarter5.50 1.28 Fourth Quarter11.20 3.27
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial
statements and the related notes thereto appearing elsewhere in this Annual Report. The following selected
consolidated statement of operations data for the years ended December 31, 2005, 2004 and 2003, and the
consolidated balance sheet data at December 31, 2005 and 2004, have been derived from audited consolidated
financial statements included elsewhere in this Annual Report. The consolidated statement of operations data
presented below for the years ended December 31, 2002 and 2001, and the consolidated balance sheet data at
December 31, 2003, 2002 and 2001 are derived from audited consolidated financial statements that are not included
in this Annual Report.
13
20052004200320022001Consolidated Statement of Operations Data:Net Revenues: Products19,637$ 12,394$ 6,291$ 6,029$ 6,945$ Services621 922 925 1,102 2,544 Total Net Revenues20,258 13,316 7,216 7,131 9,489 Cost of Revenues: Products3,818 2,530 1,350 1,420 1,880 Services285 380 321 782 2,048 Total Cost of Revenues4,103 2,910 1,671 2,202 3,928 Gross profit16,155 10,406 5,545 4,929 5,561 Operating expenses: Selling and marketing3,410 1,519 1,666 2,175 4,571 Research and development3,963 2,556 2,506 2,162 2,997 General and administrative4,621 2,868 2,330 2,387 3,847 Restructuring Costs- - - - 380 Total operating expenses11,994 6,943 6,502 6,724 11,795 Operating income (loss)4,161 3,463 (957) (1,795) (6,234) Interest Income667 53 37 45 199 Income (Loss) before income taxes4,828 3,516 (920) (1,750) (6,035) Income tax expense (benefit) 104 71 3 (1,062) 90 Net Income (Loss)4,724$ 3,445$ (923)$ (688)$ (6,125)$ Net income (loss) per share, basic0.22$ 0.20$ (0.06)$ (0.04)$ (0.38)$ Weighted average shares, basic 21,351 17,267 16,511 16,235 16,232 Net income (loss) per share, fully diluted0.21$ 0.19$ (0.06)$ (0.04)$ (0.38)$ Weighted average shares, fully diluted22,806 18,412 16,511 16,235 16,232 20052004200320022001Consolidated Balance Sheet Data:Total assets42,716$ 12,828$ 6,587$ 6,766$ 9,257$ Total liabilities3,759 1,729 997 1,154 2,955 Accumulated deficit(11,945) (16,669) (20,114) (19,191) (18,503) Total stockholders' equity38,957$ 11,099$ 5,590$ 5,612$ 6,302$ Year Ended December 31,As of December 31,
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 wireless connectivity
software for use with wireless communication networks worldwide. Our products are utilized in major wireless
networks throughout the world that support data communications through the use of cell phones or other wireless
communication devices such as PC cards. Wireless network providers generally incorporate our products into their
accessory products sold directly to individual consumers to offer wireless PC data connectivity to their wireless
networks.
Our business is primarily dependent upon the demand for wireless communications and the corresponding
requirements for wireless connectivity software to support this demand. During the last three years, demand for
these types of products has fluctuated dramatically, and there has been a significant increase in price competition
within our industry.
We continue to invest in research and development of wireless software products, and we believe that we
have one the industry’s leading wireless product lines in terms of performance and features. We believe that our
“out-of-the-box” design technology further differentiates our products.
We also sell eBusiness and utility software and professional consulting services related to eBusiness
applications.
During 2005, we have maintained a sharp focus on our operating cost structure while ensuring that we
maintain our operating flexibility to support future growth in the industry. We measure success by monitoring our
net sales and gross margins and operating cash flow. We believe that there continues to be excellent growth
opportunities within the wireless communications software marketplace and we continue to focus on positioning
Smith Micro to benefit from these opportunities.
14
Results of Operations
The following table sets forth certain consolidated statement of operating data as a percentage of total
revenues for the periods indicated:
Revenues
Total net revenues were $20.3 million, $13.3 million and $7.2 million in 2005, 2004 and 2003, respectively,
with an increase of $6.9 million, or 52.1% from 2004 to 2005 and an increase of $6.1 million, or 84.5% from 2003 to
2004. The increase in our revenues from 2003 through 2005 is attributed to the growth in sales of our wireless products
and in 2005 also includes the acquisition of Allume. Sales to individual customers and their affiliates, which
amounted to more than 10% of the Company’s net revenues, included one OEM customer at 57.1% in 2005, one
OEM customer at 68.4% of revenues in 2004 and three OEM customers at 27.0%, 10.7% and 10.2% of revenues in
2003.
We currently operate in two business segments: products and services. In addition, product revenues are
broken down into three business units, Wireless and OEM, Retail and Distribution and Internet & Direct Sales. Our
Retail and Distribution sales represent the sales of Allume products to distributors, retail customers and individuals.
Allume was acquired on July 1, 2005 (See Note 2 of Notes to Consolidated Financial Statements). Internet & Direct
Sales unit includes legacy Smith Micro utility and fax software products as well as consulting, fulfillment and
hosting revenue.
15
200520042003Net Revenues: Products96.9%93.1%87.2% Services3.1%6.9%12.8%Total net revenues100.0%100.0%100.0%Cost of revenues: Products18.9%19.0%18.7% Services1.4%2.9%4.5%Total cost of revenues20.3%21.9%23.2%Gross profit79.7%78.1%76.8%Operating expenses: Selling and marketing16.8%11.4%23.1% Research and development19.6%19.2%34.7% General and administrative22.8%21.5%32.3%Total operating expenses59.2%52.1%90.1%Operating Income (Loss)20.5%26.0%-13.3%Interest Income3.3%0.4%0.5%Income (Loss) before income taxes23.8%26.4%-12.8%Income tax expense (benefit)0.5%0.5%0.0%Net Income (Loss)23.3%25.9%-12.8%Years Ended December 31,
The following table shows the net revenues and cost of revenues generated by each segment:
Products. Net revenues from sales of products were $19.6 million, $12.4 million and $6.3 million for 2005,
2004 and 2003, respectively, representing an increase of $7.2 million, or 58.4% from 2004 to 2005 and an increase of
$6.1 million, or 97.0% from 2003 to 2004. Product revenues accounted for 96.9% of total revenues in 2005, 93.1%
of total revenues in 2004 and 87.2% of total revenues in 2003. There are two key drivers to the increase in our
product revenues from 2004 to 2005. Our core wireless business increased from $11.4 million to $13.9 million.
The increase can be attributed to the continued success of the wireless broadband data rollouts by our carrier
customers. The second key contributor was the addition of the Retail and Distribution business unit this year
(Allume acquisition on July 1, 2005), which posted revenues of $4.9 million for 2005. Internet and Direct sales
continue to decrease reflecting a continued change in focus for the business. The change in our product revenue
from 2003 to 2004 is primarily due to the increase in our core wireless business, for which sales to Verizon were
$7.2 million consisting of sales of QuickLink Mobile and QuickLink Mobile Phonebook. Internet & Direct Sales
decreased, both in absolute dollars and as a percentage of our total revenues, reflecting a repositioning of our
business from the retail fax and utility software business to the wireless communications business.
We traditionally have relatively little backlog for our OEM products at any given time and we have not
considered backlog to be a significant indicator of future performance. However, as our wireless business has
evolved, production cycle time for items such as data kits has increased to the point that orders received towards the
end of a quarter may not ship until the subsequent quarter. Additionally, customers may issue purchase orders that
have extended delivery dates. Therefore, in 2004, we began tracking our quarterly backlog situation although the
level of backlog is not necessarily indicative of trends in our business. As of December 31, 2005 however, we had a
backlog of $4.0 million, comparing to $1.0 million at December 31, 2004 when we first began reporting backlog,
resulting from orders placed late in the fourth quarter and not shipped. Since we generally do not produce software in
advance of anticipated orders our revenues in any quarter are substantially dependent on orders booked in that quarter.
Services. Consulting services revenues were $621,000, $922,000 and $925,000 in 2005, 2004 and 2003,
respectively, representing a decrease of $301,000, or 32.7% from 2004 to 2005 and a decrease of $3,000, or 0.3%
from 2003 to 2004. Services revenue accounted for 3.1% of total revenues in 2005, 6.9% of total revenues in 2004
and 12.8% of total revenues in 2003. The decrease in service revenue is due to the reduced focus on consulting
services, which was announced in the first quarter of 2002, due to the decrease in demand for such services.
Cost of Revenues and Gross Margin
Cost of Product Revenues. Cost of product revenues was $3.8 million, $2.5 million and $1.4 million in
2005, 2004 and 2003, respectively, representing an increase of $1.3 million, or 50.9%, from 2004 to 2005 and an
increase of $1.1 million, or 87.4%, from 2003 to 2004. Gross margin as a percentage of net revenue was 79.7% for
2005 as compared to 78.1% for 2004 and 76.8% for 2003. Cost of Revenues for the current year includes $534,000
of amortization of intangibles associated with the acquisition of Allume which is not included in 2004 or 2003
expenses. Factoring out amortization of intangibles, gross margin for 2005 was 82.4%. The 4.3% pro-forma
16
ProductsServicesProductsServicesProductsServicesWireless & OEM13,954$ -$ 11,424$ -$ 4,711$ -$ Retail & Distribution4,886 - - - - - Internet & Direct797 621 970 922 1,580 925 Total Revenues19,637 621 12,394 922 6,291 925 Cost of revenues3,818 285 2,530 380 1,350 321 Gross Profit15,819$ 336$ 9,864$ 542$ 4,941$ 604$ 200520042003Year Ended December 31,
increase from the year earlier period is attributed to increased sales of higher margin PC card software product
versus lower margin Mobile Office Kit products.
Direct costs of revenues consist primarily of CD replication costs. We use a variety of providers located in
China, Korea and the United States. We consider CD replication to be a commodity with little or no risk to supplier
fluctuations. We also purchase proprietary cables from Motorola and generic OEM cables from a variety of
suppliers.
Cost of Service Revenues. Cost of service revenues was $285,000, $380,000 and $321,000 in 2005, 2004
and 2003, respectively, representing a decrease of $95,000, or 25.0% from 2004 to 2005 and an increase of $59,000,
or 18.4% from 2003 to 2004. Cost of Service revenue as a percentage of Service revenues was 54.1% for 2005,
41.2% for 2004 and 34.7% in 2003. Cost of service revenues includes the cost of our consulting personnel and the
cost of any outside consultants contracted to support our staff and vary by contract.
Operating Expenses
The following table presents a breakdown of our operating expenses by functional category and as a
percentage of total net revenues:
Selling and Marketing. Selling and marketing expenses were $3.4 million, $1.5 million and $1.7 million in
2005, 2004 and 2003, respectively, representing an increase of $1.9 million, or 124.5%, from 2004 to 2005 and a
decrease of $147,000 or 8.8%, from 2003 to 2004. Our selling and marketing expenses consist primarily of personnel
costs, advertising costs, sales commissions and trade show expenses. These expenses vary significantly from quarter to
quarter based on the timing of trade shows and product introductions. While most of the increases in selling and
marketing expenses in 2005 were due to the Allume acquisition, we also had a slight increase in headcount and
increases in costs related to product collateral concept and design. The decrease in costs from 2003 to 2004 is
directly attributable to the elimination of channel marketing expenses of approximately $100,000 and the elimination of
depreciation and other miscellaneous expenses of $95,000 relating to the San Diego sales office which was closed in
2003. These decreases were offset by an increase in salaries and related expenses of approximately $50,000 which
relates to the reallocation of resources from other departments to sales and marketing. Advertising expenses were
$223,000, $47,000 and $95,000 for the years ended December 31, 2005, 2004 and 2003, respectively. Selling and
marketing expenses were 16.8%, 11.4% and 23.1% of revenues in the years ended December 31, 2005, 2004 and
2003, respectively. Increases in selling and marketing expenses as a percentage of revenues in 2005 were caused by
the increase in costs as described above.
Research and Development. Research and development expenses were $4.0 million, $2.6 million and $2.5
million in 2005, 2004 and 2003, respectively, representing increases of $1.4 million, or 55.0%, from 2004 to 2005
and $50,000, or 2.0%, from 2003 to 2004. Our research and development expenses consist primarily of personnel and
equipment costs required to conduct our software development efforts. We remain focused on the development and
expansion of our technology, particularly our wireless, multi-media, and compression software technologies. The
increase in our research and development expenses in each year was primarily due to the development of new wireless
products that were released during the periods, with an accompanying increase in headcount and a refocus of
17
Operating expenses: Selling and marketing3,410$ 16.8%1,519$ 11.4%1,666$ 23.1% Research and development3,963 19.6%2,556 19.2%2,506 34.7% General and administrative4,621 22.8%2,868 21.5%2,330 32.3%Total operating expenses11,994$ 59.2%6,943$ 52.1%6,502$ 90.1%200520042003Years Ended December 31,
engineering resources from consulting projects to development. In 2005, the key driver to increased R&D expense was
the acquisition of Allume Systems on July 1, 2005 and the associated engineering staff which is focused on new
compression technology. Research and development expenses were 19.6%, 19.2% and 34.7% of revenues in the
years ended December 31, 2005, 2004 and 2003, respectively. The decrease in research and development expenses as
a percentage of revenues from 2003 to 2004 is due to the significant increase in revenues during the period.
General and Administrative. General and administrative expenses were $4.6 million, $2.9 million and $2.3
million in 2005, 2004 and 2003, respectively, representing increases of $1.8 million, or 61.1%, from 2004 to 2005
and $538,000, or 23.1%, from 2003 to 2004. The increase in General and Administrative costs from 2004 to 2005
was primarily due to the acquisition of Allume Systems on July 1, 2005 and the assumption of Allume G&A staff
and certain integration costs. The increase in General and Administrative costs from 2003 to 2004 consists of
increases in accounting, legal and consulting fees of approximately $120,000, travel expenses of approximately
$65,000 and compensation and benefit costs of approximately $320,000. General and administrative expenses were
22.8%, 21.5% and 32.3% of revenues in the years ended December 31, 2005, 2004 and 2003, respectively. The
decrease in general and administrative expenses as a percentage of revenues from 2003 to 2004 is due to the increase in
revenues, partially offset by the absolute dollar increase in expenses. Beginning in fiscal 2006, we will be adopting
FAS 123R, which requires the expensing of stock options. Taking into account options issued and outstanding at
December 31, 2005, we estimate that our 2006 stock compensation expense would be approximately $2.6 million.
New option issuances or restricted stock grants made in fiscal 2006 would increase the estimate.
Interest Income. Interest income was $667,000, $53,000 and $37,000 in 2005, 2004 and 2003, respectively,
representing increases of $614,000, or 1,158.5% from 2004 to 2005 and $16,000, or 43.2% from 2003 to 2004. The
differences in our interest income are directly related to the fluctuations in our cash balances during the periods and
changing interest rates. We have not changed our investment strategy during the periods being reported, with our
excess cash consistently being invested in short term marketable securities. (See “Liquidity and Capital Resources”
for further discussion elsewhere in this report.)
Provision for Income Taxes. The provision for income taxes was $104,000, $71,000 and $3,000 in 2005,
2004 and 2003, respectively. The provision in 2005 and 2004 relates to alternative minimum tax liability. The
provision in 2003 consists of minimum payments for state taxes. We have provided a valuation allowance on 100%
of our deferred tax assets. We will continue to evaluate the recoverability of our deferred tax asset and the need for
a valuation allowance against such asset. Factors that are considered in the evaluation of the recoverability of the
deferred tax asset are continued profitability and our ability to meet our future forecasts. In general, any realization
of our net deferred tax asset will reduce the effective rate in future periods. However, the realization of deferred tax
assets that are related to net operating losses that were generated by tax deductions resulting from the exercise of
non-qualified stock options, will result in a direct increase to stockholders’ equity.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through cash generated from operations and
from net proceeds of $18.1 million generated by our initial public offering in 1995. On February 18, 2005, we
entered into a Common Stock Purchase Agreement for the private placement of 3,500,000 shares of our common
stock, $0.001 par value, at a price of $6.40 per share, resulting in aggregate gross cash proceeds to the Company of
$22,400,000 before deducting commissions and other expenses. Offering costs related to the transaction totaled
$1,613,000, comprised of $1,344,000 in commissions and $269,000 cash payments for legal and investment
services, resulting in net proceeds to the Company of $20,786,000. The transaction closed simultaneously with the
execution of the Purchase Agreement on February 18, 2005. C.E. Unterberg, Towbin LLC, the placement agent for
the transaction, received a cash fee equal to 6% of the aggregate gross proceeds of the Private Placement.
Net cash provided by operations was $2.5 million in 2005 and $3.0 million in 2004. The primary source of
operating cash in both periods was the net income and the increase in accounts payable and accrued liabilities, offset by
the collection of accounts receivable.
18
Cash flows used in investing activities were $11 million in 2005 and $102,000 in 2004. This included $10.9
million for the purchase of Allume in July, 2005 as well as $142,000 for other capital expenditures. Our capital
expenditures in both periods consisted of the purchase of computers and other office equipment.
We received $369,000 in cash from the exercise of employee stock options in 2005 compared to $2.0
million in 2004.
At December 31, 2005, we had $21.2 million in cash and cash equivalents and $25.3 million of working
capital. We have no significant capital commitments, and currently anticipate that capital expenditures will not vary
significantly from recent periods. We believe that our existing cash, cash equivalent investment balances and cash flow
from operations will be sufficient to finance our working capital and capital expenditure requirements through at least
the next twelve months. We may require additional funds to support our working capital requirements or for other
purposes and may seek to raise additional funds through public or private equity or debt financing or from other
sources. If additional financing is needed, we cannot assure that such financing will be available to us at commercially
reasonable terms or at all.
Our corporate headquarters, which includes our principal administrative, sales and marketing, customer
support and research and development facilities, is located in Aliso Viejo, California. We have leased this space
through May 2009. We also lease approximately 7,700 square feet in Watsonville, California under a new lease that
expires September 30, 2010. We are currently working on a new operating lease for our facility in Lee’s Summit,
Missouri to replace the lease that expired in June 2005.
As of December 31, 2005, we had no debt and no long term liabilities. The following table summarizes our
contractual obligations as of December 31, 2005 (in thousands):
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
19
Less thanMore thanContractual obligations:Total1 year1-3 years3-5 years5 yearsOperating Lease Obligations1,934$ 509$ 1,025$ 400$ -$ Purchase Obligations2,202 2,202 Total4,136$ 2,711$ 1,025$ 400$ -$ Payments due by period
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 is fixed and determinable, and collectibility is probable. We recognize revenues
from sales of our software to OEM customers or end users as completed products are shipped and title passes; or
from royalties generated as authorized customers duplicate our software, if the other requirements of SOP 97-2 are
met. If the requirements of SOP 97-2 are not met at the date of shipment, revenue is not recognized until these
elements are known or resolved. Returns from OEM customers are limited to defective goods or goods shipped in
error. Historically, OEM customer returns have not exceeded the very nominal estimates and reserves.
Management reviews available retail channel information and makes a determination of a return provision for sales
made to distributors and retailers based on current channel inventory levels and historical return patterns. Certain
sales to distributors or retailers are made on a consignment basis. Revenue for consignment sales are not recognized
until sell through to the final customer is established.
Product sales directly to end-users are recognized upon delivery. End users have a thirty day right of
return, but such returns are reasonably estimable and have historically been immaterial. We also provide technical
support to our customers. Such costs have historically been insignificant.
Service revenues include sales of consulting services, website hosting and fulfillment. We recognize
service revenues as services are provided or as milestones are delivered and accepted by our customers.
Accounts Receivable – We sell our products worldwide. We perform ongoing credit evaluations of our
customers and adjust credit limits based upon payment history, the 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,
2005. Estimates of reporting unit fair value are based upon market capitalization and therefore are volatile being
20
sensitive to market fluctuations. To the extent that our market capitalization decreases significantly or the allocation
of value to our reporting units change, we could be required to write off some or all of our goodwill.
Deferred Income Taxes - We account for income taxes under SFAS No. 109, Accounting for Income Taxes.
This statement requires the recognition of deferred tax assets and liabilities for the future consequences of events
that have been recognized in our financial statements or tax returns. The measurement of the deferred items is based
on enacted tax laws. In the event the future consequences of differences between financial reporting bases and the
tax bases of our assets and liabilities result in a deferred tax asset, SFAS No. 109 requires an evaluation of the
probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a
deferred tax asset is recorded when it is more likely than not that some portion or all of the deferred tax asset will
not be realized. We currently have a full valuation allowance on our deferred tax assets. Based on our assessment
of all available evidence, we concluded that it is not more likely than not that our deferred tax assets will be realized.
This conclusion is based primarily on our history of net operating losses as compared to only a recent trend of
profitable operations, the potential for future stock option deductions to significantly reduce taxable income, annual
net operating loss limitations under Section 382 of the Code and the need to generate significant amounts of taxable
income in future periods on a consistent and prolonged basis in order to utilize the deferred tax assets. We will
continue to monitor all available evidence and reassess the potential realization of our deferred tax assets. If we
continue to meet our financial projections and improve our results of operations, or if circumstances otherwise
change, it is possible that we may release all or a portion of our valuation allowance in the future. Any such release
would result in recording a tax benefit that would increase net income in the period the valuation is released.
Recent Accounting Pronouncements
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets (SFAS NO.
156), which provides an approach to simplify efforts to obtain hedge-like (offset) accounting. This Statement
amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. The
Statement (1) requires an entity to recognize a servicing asset or servicing liability each time it undertakes an
obligation to service a financial asset by entering into a servicing contract in certain situations; (2) requires that a
separately recognized servicing asset or servicing liability be initially measured at fair value, if practicable; (3)
permits an entity to choose either the amortization method or the fair value method for subsequent measurement for
each class of separately recognized servicing assets or servicing liabilities; (4) permits at initial adoption a one-time
reclassification of available-for-sale securities to trading securities by an entity with recognized servicing rights,
provided the securities reclassified offset the entity’s exposure to changes in the fair value of the servicing assets or
liabilities; and (5) requires separate presentation of servicing assets and servicing liabilities subsequently measured
at fair value in the balance sheet and additional disclosures for all separately recognized servicing assets and
servicing liabilities. SFAS No. 156 is effective for all separately recognized servicing assets and liabilities as of the
beginning of an entity’s fiscal year that begins after September 15, 2006, with earlier adoption permitted in certain
circumstances. The Statement also describes the manner in which it should be initially applied. We do not believe
that SFAS No. 156 will have a material impact on our financial position, results of operations or cash flows.
In February 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 155,
Accounting for Certain Hybrid Financial Instruments, which amends SFAS No. 133, Accounting for Derivatives
Instruments and Hedging Activities and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities. SFAS No. 155 amends SFAS No. 133 to narrow the scope exception for interest-
only and principal-only strips on debt instruments to include only such strips representing rights to receive a
specified portion of the contractual interest or principle cash flows. SFAS No. 155 also amends SFAS No. 140 to
allow qualifying special-purpose entities to hold a passive derivative financial instrument pertaining to beneficial
interests that itself is a derivative instrument. We are currently evaluating the impact this new Standard but believe
that it will not have a material impact on our financial position, results of operations, or cash flows.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS No.
154), an amendment to Accounting Principles Bulletin Opinion No. 20, Accounting Changes (APB No. 20), and
21
SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. Though SFAS No. 154 carries
forward the guidance in APB No.20 and SFAS No.3 with respect to accounting for changes in estimates, changes in
reporting entity, and the correction of errors, SFAS No. 154 establishes new standards on accounting for changes in
accounting principles, whereby all such changes must be accounted for by retrospective application to the financial
statements of prior periods unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes and
error corrections made in fiscal years beginning after December 15, 2005, with early adoption permitted for changes
and corrections made in years beginning after May 2005. We will implement SFAS No. 154 in its fiscal year
beginning January 1, 2006. We are currently evaluating the impact of this new standard but believe that it will not
have a material impact on our financial position, results of operations, or cash flows.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, which replaces
SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB No. 25, Accounting for Stock Issued
to Employees. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair values, beginning with the first annual period
after June 15, 2005, with early adoption encouraged. In addition, SFAS No. 123R will cause unrecognized expense
(based on the amounts in our pro forma footnote disclosure) related to options vesting after the date of initial
adoption to be recognized as a charge to results of operations over the remaining vesting period. We are required to
adopt SFAS No. 123R in our first quarter of 2006, beginning January 1, 2006. Under SFAS No. 123R, we must
determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for
compensation cost and the transition method to be used at the date of adoption. The transition alternatives include
prospective and retroactive adoption methods. Under the retroactive methods, prior periods may be restated either as
of the beginning of the year of adoption or for all periods presented. The prospective method requires that
compensation expense be recorded for all unvested stock options and share awards at the beginning of the first
quarter of adoption of SFAS No. 123R, while the retroactive methods would record compensation expense for all
unvested stock options and share awards beginning with the first period restated. We are evaluating the requirements
of SFAS No. 123R and we expect that the adoption of SFAS No. 123R will have a material impact on our
consolidated results of operations and earnings per share. We have not determined the method of adoption or the
effect of adopting SFAS No. 123R.
RISK FACTORS
Our future operating results are highly uncertain. Before deciding to invest in our common stock or to
maintain or increase your investment, you should carefully consider the risks described below, in addition to the other
information contained in this report and in our other filings with the SEC, including our reports on Forms 10-K, 10-Q
and 8-K. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties
not presently known to us or that we currently deem immaterial may also affect our business operations. If any of these
risks actually occur, that could seriously harm our business, financial condition or results of operations. In that event,
the market price for our common stock could decline and you may lose all or part of your investment.
Our quarterly operating results may fluctuate and cause the price of our common stock to fall.
Our quarterly revenue and operating results have fluctuated significantly in the past and may continue to vary
from quarter to quarter due to a number of factors, many of which are not within our control. If our operating results do
not meet the expectations of securities analysts or investors, our stock price may decline. Fluctuations in our operating
results may be due to a number of factors, including the following:
•
•
•
the size and timing of orders from and shipments to our major customers;
the size and timing of any return product requests for our products;
our ability to maintain or increase gross margins;
22
•
•
•
•
•
•
•
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
general economic and market conditions.
A large portion of our operating expenses, including rent, depreciation and amortization is fixed and difficult
to reduce or change. Accordingly, if our total revenue does not meet our expectations, we may not be able to adjust our
expenses quickly enough to compensate for the shortfall in revenue. In that event, our business, financial condition and
results of operations would be materially and adversely affected.
Due to all of the foregoing factors, and the other risks discussed in this report, you should not rely on quarter-
to-quarter comparisons of our operating results as an indication of future performance.
Although we have begun reporting backlog, our ability to predict our revenues and operating results is extremely
limited.
We have historically operated with little backlog because we have generally shipped our software products
and recognized revenue shortly after we received orders because our production cycle has traditionally been very short.
As a result, our sales in any quarter were generally dependent on orders that were booked and shipped in that quarter.
As our wireless business has evolved, production cycle time for items such as data kits has increased to the point that
orders received towards the end of a quarter may not ship until the subsequent quarter. Additionally, customers may
issue purchase orders that have extended delivery dates that may cause the shipment to fall in a subsequent quarter.
These situations make it difficult for us to predict what our revenues and operating results will be in any quarter.
Therefore, the level of backlog is not necessarily indicative of trends in our business. As of December 31, 2005, we
had a backlog of approximately $4.0 million.
We depend upon a small number of customers for a significant portion of our revenues.
In the past we have derived a substantial portion of our revenues from sales to a small number of customers
and expect to continue to do so in the future. The agreements we have with these entities do not require them to
purchase any minimum quantity of our products and may be terminated by the entity or us at any time for any reason
upon minimal prior written notice. Accordingly, we cannot be certain that these customers will continue to place large
orders for our products in the future, or purchase our products at all. Our largest OEM customer accounted for 57.1%,
68.4% and 27.0% of our net revenues in the years ended December 31, 2005, December 31, 2004 and December 31,
2003, respectively. Our three largest OEM customers accounted for 63.5%, 77.8% and 47.9% in the years ended
December 31, 2005, December 31, 2004 and December 31, 2003, respectively.
Our customers may acquire products from our competitors or develop their own products that compete
23
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 by that customer. Further, although we maintain allowances for doubtful accounts, the
insolvency of one or more of our major customers could result in a substantial decrease in our revenues.
Competition within our product markets is intense and includes numerous established competitors, which could
negatively affect our revenues.
We operate in markets that are extremely competitive and subject to rapid changes in technology.
Specifically, Microsoft Corporation poses a significant competitive threat to us because Microsoft operating systems
may include some capabilities now provided by certain of our OEM and retail software products. If users are satisfied
relying on the capabilities of the Windows-based systems or other operating systems, or other vendors products, sales
of our products are likely to decline. In addition, because there are low barriers to entry into the software market, we
expect significant competition from both established and emerging software companies in the future. Furthermore,
many of our existing and potential OEM customers may acquire or develop products that compete directly with our
products.
Microsoft and many of our other current and prospective competitors have significantly greater financial,
marketing, service, support, technical and other resources than we do. As a result, they may be able to adapt more
quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the
promotion and sale of their products. There is also a substantial risk that announcements of competing products by
large competitors such as Microsoft or other vendors could result in the cancellation of orders by customers in
anticipation of the introduction of such new products. In addition, some of our competitors currently make
complementary products that are sold separately. Such competitors could decide to enhance their competitive position
by bundling their products to attract customers seeking integrated, cost-effective software applications. Some
competitors have a retail emphasis and offer OEM products with a reduced set of features. The opportunity for retail
upgrade sales may induce these and other competitors to make OEM products available at their own cost or even at a
loss. We also expect competition to increase as a result of software industry consolidations, which may lead to the
creation of additional large and well-financed competitors. Increased competition is likely to result in price reductions,
fewer customer orders, reduced margins and loss of market share.
Acquisitions of companies or technologies may disrupt our business and divert management attention and cause
our current operations to suffer.
We recently acquired all the outstanding capital stock of Allume, Inc. (See Note 2 of Notes to Condensed
Consolidated Financial Statements). We expect to continue to consider acquisitions of complementary companies,
products or technologies. As part of any such acquisition, including that of Allume, Inc., we will be required to
assimilate the operations, products and personnel of the acquired businesses and train, retain and motivate key
personnel from the acquired businesses. We may be unable to maintain uniform standards, controls, procedures and
policies if we fail in these efforts. Similarly, acquisitions may cause disruptions in our operations and divert
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.
24
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.
If the adoption of new technologies and services grows more slowly than anticipated in our product planning and
development, our future sales and profits may be negatively affected.
If the adoption of new technologies and services does not grow or grows more slowly than anticipated in
our product planning and development, demand for certain of our products and services will be reduced. For
example, our new QuickLink Mobile and QuickLink Enterprise products provide notebook users with the ability to
roam between wireless wide area networks (“WWAN”) and Wi-Fi hot spots. Therefore, future sales and any future
profits from these and related products are substantially dependent upon the widespread acceptance and use of Wi-Fi
as an effective medium of communication by consumers and businesses.
Our products may contain undetected software errors, which could negatively affect our revenues.
Our software products are complex and may contain undetected errors. In the past, we have discovered
software errors in certain of our products and have experienced delayed or lost revenues during the period it took to
correct these errors. Although we and our OEM customers test our products, it is possible that errors may be found in
our new or existing products after we have commenced commercial shipment of those products. These undetected
errors could result in adverse publicity, loss of revenues, delay in market acceptance of our products or claims against
us by customers.
Technology and customer needs change rapidly in our market, which could render our products obsolete and
negatively affect our revenue.
Our future success will depend on our ability to anticipate and adapt to changes in technology and industry
standards. We will also need to continue to develop and introduce new and enhanced products to meet our customers’
changing demands, keep up with evolving industry standards, including changes in the Microsoft operating systems
with which our products are designed to be compatible, and to promote those products successfully. The
communications and utilities software markets in which we operate are characterized by rapid technological change,
changing customer needs, frequent new product introductions, evolving industry standards and short product life
cycles. Any of these factors could render our existing products obsolete and unmarketable. In addition, new products
and product enhancements can require long development and testing periods as a result of the complexities inherent in
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 revenue to decline and harm our
results of operations.
We rely on third party suppliers to provide us with services and components for our product kits. These
components include: compact discs; cables; printed manuals; and boxes. We do not have long-term supply
arrangements with any vendor to obtain these necessary services and components for our products. If we are unable to
purchase components from these suppliers or if the compact disc replication services that we use do not deliver our
requirements on schedule, we may not be able to deliver products to our customers on a timely basis or enter into new
orders because of a shortage in components. Any delays that we experience in delivering our products to customers
could impair our customer relationships and adversely impact our reputation and our business. In addition, if our third
25
party suppliers raise their prices for components or services, our gross margins would be reduced.
A shortage in the supply of wireless communication devices such as PC cards could adversely affect our
revenues.
Our products are utilized with major wireless networks throughout the world that support data
communications through the use of wireless communication devices such as PC cards. Since wireless network
providers generally incorporate our products into the wireless communication devices that they sell directly to
individual consumers, our future success depends upon the availability of such devices to consumers at reasonable
prices. A shortage in the supply of wireless communication devices could put upward pressure on prices or limit the
quantities available to individual consumers which could materially affect the revenues that we generate from our
products.
We may be unable to adequately protect our intellectual property and other proprietary rights, which could
negatively impact our revenues.
Our success is dependent upon our software code base, our programming methodologies and other intellectual
properties and proprietary rights. In order to protect our proprietary technology, we rely on a combination of trade
secret, nondisclosure and copyright and trademark law. We currently own United States trademark registrations for
certain of our trademarks and United States patents for certain of our technologies, however, these measures afford us
only limited protection. Furthermore, we rely primarily on “shrink wrap” licenses that are not signed by the end user
and, therefore, may be unenforceable under the laws of certain jurisdictions. Accordingly, it is possible that third
parties may copy or otherwise obtain our rights without our authorization. It is also possible that third parties may
independently develop technologies similar to ours. It may be difficult for us to detect unauthorized use of our
intellectual property and proprietary rights.
We may be subject to claims of intellectual property infringement as the number of trademarks, patents,
copyrights and other intellectual property rights asserted by companies in our industry grows and the coverage of these
patents and other rights and the functionality of software products increasingly overlap. From time to time, we have
received communications from third parties asserting that our trade name or features, content, or trademarks of certain
of our products infringe upon intellectual property rights held by such third parties. We have also received
correspondence from third parties separately asserting that our fax products may infringe on certain patents held by
each of the parties. Although we are not aware that any of our products infringe on the proprietary rights of others,
third parties may claim infringement by us with respect to our current or future products. Infringement claims, whether
with or without merit, could result in time-consuming and costly litigation, divert the attention of our management,
cause product shipment delays or require us to enter into royalty or licensing agreements with third parties. If we are
required to enter into royalty or licensing agreements, they may not be on terms that are acceptable to us. Unfavorable
royalty or licensing agreements could seriously impair our ability to market our products.
Our stock price is highly volatile. Accordingly, you may not be able to resell your shares of common stock at or
above the price you paid for them.
The market price of our common stock has fluctuated substantially in the past and is likely to continue to be
highly volatile and subject to wide fluctuations. These fluctuations have occurred and may continue to occur in
response to various factors, many of which we cannot control, including:
•
•
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;
26
•
•
•
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 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;
27
•
•
•
•
•
•
•
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 business, financial condition and operating results could be adversely affected as a result of legal, business and
economic risks specific to international operations.
Each year, a percentage of our revenues are derived from sales to customers outside the United States. This
percentage can vary significantly from quarter to quarter and from year to year. We also frequently ship products to
our domestic customers’ international manufacturing divisions and subcontractors. In the future, we may expand these
international business activities. International operations are subject to many inherent risks, including:
•
•
•
•
•
•
•
•
•
•
•
•
•
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 securing and servicing international customers;
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.
The market price of our common stock may be adversely affected by the sale of significant numbers of shares of our
28
common stock by any of our principal stockholders.
A total of 3,500,000 shares of our common stock were sold in a private placement in February 2005. The
associated registration statement for such shares became effective on June 17, 2005 In addition, there are other large
blocks of shares held by individual stockholders which are eligible for resale under Rule 144, including William W.
Smith, Jr., our President and Chief Executive Officer, who held 3,522,115 shares at March 9, 2006, and Rhonda L.
Smith who held 2,314,115 shares. Overall, our trading volume fluctuates widely and at times is relatively limited. The
market price for our common stock could decline as a result of the sale of a large number of the shares or the
perception that such sales may occur. The sale of a large number of our common stock also might make it more
difficult for us to sell equity or equity-related securities in the future at a time and at the prices that we deem
appropriate.
We may be subject to regulatory scrutiny and may sustain a loss of public confidence if we are unable to satisfy
regulatory requirements relating to internal controls over financial reporting.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to perform an evaluation of our internal controls
over financial reporting and have our independent registered public accounting firm attest to such evaluation on an
annual basis. Compliance with these requirements can be expensive and time-consuming. While we believe that we
will be able to meet the required deadlines, no assurance can be given that we will meet the required deadlines in future
years. If we fail to timely complete this evaluation, or if our auditors cannot timely attest to our evaluation, we may be
subject to regulatory scrutiny and a loss of public confidence in our internal controls.
Provisions of our charter and bylaws and Delaware law could make a takeover of our company difficult.
Our certificate of incorporation and bylaws contain provisions that may discourage or prevent a third party
from acquiring us, even if doing so would be beneficial to our stockholders. For instance, our certificate of
incorporation authorizes the board of directors to fix the rights and preferences of shares of any series of preferred
stock, without action by our stockholders. As a result, the board can authorize and issue shares of preferred stock,
which could delay or prevent a change of control because the rights given to the holders of such preferred stock may
prohibit a merger, reorganization, sale or other extraordinary corporate transaction. In addition, we are organized under
the laws of the State of Delaware and certain provisions of Delaware law may have the effect of delaying or preventing
a change in our control.
We may be subject to additional risks.
The risks and uncertainties described above are not the only ones we face. Additional risks and uncertainties
not presently known to us or that we currently deem immaterial may also adversely affect our business operations.
Item 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and cash equivalents. At December 31, 2005, the carrying values of
our financial instruments approximated fair values based on current market prices and rates. Because of their short
duration, changes in market interest rates would not have a material effect on fair value.
It is our policy not to enter into derivative financial instruments. We do not currently have any significant
foreign currency exposure as we do not transact business in foreign currencies. As such, we do not have significant
currency exposure at December 31, 2005.
29
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.
30
31
SUPPLEMENTARY FINANCIAL DATA2005March 31,June 30,September 30,December 31,Net Revenues2,030$ 3,330$ 6,896$ 8,002$ Gross Profit1,685 2,785 5,731 5,954 Operating (Loss) Income (228) 558 1,763 2,068 Net (Loss) Income(128)$ 764$ 1,877$ 2,211$ Net (Loss) Income Per Share, Basic(0.01)$ 0.04$ 0.09$ 0.10$ Weighted Average Shares Outstanding, Basic 19,66521,58422,01622,106Net (Loss) Income Per Share, Diluted(0.01)$ 0.03$ 0.08$ 0.09$ Weighted Average Shares Outstanding, Diluted21,00922,71323,22223,9002004March 31,June 30,September 30,December 31,Net Revenues2,488$ 3,117$ 3,556$ 4,155$ Gross Profit1,798 2,385 2,883 3,340 Operating Income94 644 1,085 1,640 Net Income103$ 634$ 1,077$ 1,631$ Net Income Per Share, Basic0.01$ 0.04$ 0.06$ 0.09$ Weighted Average Shares Outstanding, Basic17,02417,07217,25417,706Net Income Per Share, Diluted0.01$ 0.04$ 0.06$ 0.09$ Weighted Average Shares Outstanding, Diluted18,04218,02218,61719,125Three Months Ended:(in thousands, except per share amounts)SELECTED QUARTERLY FINANCIAL DATA(UNAUDITED)Three Months Ended:(in thousands, except per share amounts)STATEMENT OF OPERATIONS DATA
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.
32
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding our executive officers as of February 15, 2005.
Name
William W. Smith, Jr.
Andrew C. Schmidt
David P. Sperling
Jonathan Kahn
William R. Wyand
Christopher G. Lippincott
Age
58
44
37
48
58
35
Position
Chairman of the Board, President
and Chief Executive Officer
Chief Financial Officer
Vice President and Chief Technical
Officer
Senior Vice President
Vice President, Wireless and OEM
Sales
Vice President, Internet and Direct
Sales
Mr. Smith co-founded Smith Micro and has served as our Chairman of the Board, President and Chief
Executive Officer since inception in 1982. Mr. Smith was employed by Rockwell International Corporation in a
variety of technical and management positions from 1975 to 1984. Mr. Smith served with Xerox Data Systems from
1972 to 1975 and RCA Computer Systems Division from 1969 to 1972 in mainframe sales and pre-sale technical roles.
Mr. Smith received a B.A. in Business Administration from Grove City College.
Mr. Schmidt joined the Company in June 2005 and serves as the Company’s Chief Financial Officer. Prior to
joining Smith Micro, Mr. Schmidt was the Chief Financial Officer of Genius Products, Inc., a publicly traded
entertainment company from August 2004 to June 2005. From April 2003 to June 2004, he was Vice President
(Finance) and acting Chief Accounting Officer of Peregrine Systems, Inc., a publicly held provider of enterprise level
software then in Chapter 11 reorganization. From July 2000 to January 2003, he was Executive Vice President and
Chief Financial Officer of Mad Catz Interactive, Inc., a publicly traded provider of console video game accessories. He
holds a B.B.A. from the University of Texas and an M.S. in Accountancy from San Diego State University.
Mr. Sperling joined us in April 1989 and has been our Director of Software Engineering since April 1992.
He assumed the Chief Technology Officer position in September 1999. Mr. Sperling began his professional career
as a software engineer with us and he currently has three patents pending for various telephony and Internet
technologies. Mr. Sperling earned a B.S. degree in Computer Science from the University of California, Irvine.
Mr. Kahn joined the company with the acquisition of Allume Systems, Inc. in July 2005. Prior to the
acquisition, Mr. Kahn was President of the company. Mr. Kahn was one of the co-founders of Aladdin Systems, Inc.
which later became Allume Systems. Mr. Kahn was Chairman, President and Chief Executive Officer of Monterey Bay
Tech, Inc (OTC BB:MBYI), a public company from 1999 to May 2005 until its merger with SecureLogic Inc. Mr.
Kahn is a member of the Digital River Advisory Board and is a graduate of the University of Rhode Island with a B.A.
in Economics.
Mr. Wyand joined us in 1999 when Smith Micro acquired STF Technologies where Mr. Wyand was
President and Chief Executive Officer. As General Manager he ran the Macintosh division sales, marketing,
33
engineering and customer support efforts. Later that year, Mr. Wyand moved into the newly created Wireless and
Broadband division as General Manager and in 2004 became Vice President, Wireless and OEM Sales. From 1995
to 1999, Mr. Wyand was President and Chief Executive Officer of STF Technologies. From 1984 to 1995, Mr.
Wyand held various interim management and consulting positions. From 1977 to 1984, he held various positions
with United Telecom Computer Group. From 1973 to 1977, he was a Consultant with Arthur Young & Co. He
graduated with a B.S. from Pennsylvania State University and an MBA from Rockhurst College.
Mr. Lippincott joined us in 1993 as a senior sales representative. In 1998 he was appointed Director of
North American Sales and in 2000 named General Manager of the Internet Solutions Division, then as Vice
President, Internet and Direct Sales in 2004. Prior to joining Smith Micro, Mr. Lippincott held several retail sales
positions. He attended the University of California at Berkeley majoring in business administration.
Officers are elected by, and serve at the discretion of, the Board of Directors.
Audit Committee; Audit Committee Financial Expert
Our Board of Directors has a standing Audit Committee. The members of the Audit Committee are
Messrs. Campbell, Gulko and Szabo. Our Board has determined that Mr. Gulko, Chairman of the Audit Committee,
is an audit committee financial expert as defined by Item 401(h) of Regulation S-K and that each member of the
Audit Committee is independent within the meaning of Nasdaq Marketplace Rule 4200(a)(15).
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires certain of the company’s executive officers, as well as its
directors and persons who own more than then percent (10%) of a registered class of the Company’s equity
securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission.
Based solely on its review of the copies of such forms received by the Company, or written representations
from certain reporting person, the Company believes that during the last fiscal year all executive officers and
directors complied with their filing requirements under Section 16(a) for all reportable transactions during the year.
Code of Ethics
We have adopted a Code of Ethics that applies to all of our employees, including our principal executive
officer, our principal financial officer, and all members of our finance department performing similar functions. Our
Code of Ethics was filed as Exhibit 14 to the Annual Report on Form 10-K for the year ended December 31, 2003
which was filed on March 25, 2004. In the event of an amendment to, or a waiver from, certain provisions of our Code
of Ethics, we intend, to the extent possible, to satisfy Form 8-K disclosure requirements by disclosing this information
on our website at www.smithmicro.com.
Item 11. EXECUTIVE COMPENSATION
The section titled “Executive Compensation and Related Information” appearing in our Proxy Statement is
hereby incorporated by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section titled “Ownership of Securities” appearing in our Proxy Statement is hereby incorporated by
reference.
34
Securities Authorized for Issuance Under An Equity Compensation Plan
The following table provides information as of December 31, 2005 with respect to the shares of common
stock that may be issued under our existing equity compensation plan.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section titled “Related Party Transactions” appearing in our Proxy Statement is incorporated herein by
reference.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The section titled “Ratification of Appointment of Independent Registered Public Accounting Firm –
Principal Accountant Fees and Services” appearing in our Proxy Statement is incorporated herein by reference.
35
(In thousands, except per share amounts)Number of Shares to be Issued Upon Exercise of Outstanding OptionsWeighted Average Exercise Price of Outstanding OptionsNumber of Shares Remaining Available for Future IssuanceEquity Compensation Plan Approved by Shareholders (1)3,856$3.572,764Equity Compensation Plan Not Approved by Shareholders000Total3,856$3.572,764 (1) The number of shares to be issued upson exercise includes options granted under both the 1995 Stock Option/Stock Issuance Plan and the 2005 Stock Option/Stock Issuance Plan. The number of shares remaining available for future issuance consists only of the 2005 Plan.
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(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
Report of Independent Registered Public Accounting Firm....................................................................................F-1
Consolidated Balance Sheets as of December 31, 2005 and 2004 ..........................................................................F-2
Consolidated Statements of Operations for each of the three years in
the period ended December 31, 2005 ....................................................................................................................F-3
Consolidated Statements of Stockholders’ Equity for each of the three
years in the period ended December 31, 2005 ......................................................................................................F-4
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 2005..........................................................................................................................F-5
Notes to Consolidated Financial Statements for each of the three years
in the period ended December 31, 2005................................................................................................................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
Schedule II - Valuation and Qualifying Accounts for each of the three years in
the period ended December 31, 2005.....................................................................................................................S-1
(3) Exhibits
Exhibit
No.
3.1
3.1.1
3.1.2
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.
Certificate of Amendment to Amended and
Restated Certificate of Incorporation of
Registrant as filed August 18, 2005 with
Delaware Secretary of State
Filed Herewith
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.
36
Exhibit
No.
Title
10.1
Form of Indemnification Agreement.
10.2*
1995 Stock Option/Stock Issuance Plan as
Amended and Restated through February 7,
2001.
10.3
2005 Stock Option / Stock Issuance Plan
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
10.4 †
10.4.1†
10.4.2†
Method of Filing
Incorporated by reference to Exhibit 10.1 to the
Registrant's Registration Statement No. 33-95096.
Incorporated by reference to the Appendix attached
to the Definitive Proxy Statement for the 2001
Annual Meeting of Stockholders filed on April 27,
2001.
Incorporated by reference to Appendix A attached to
the Definitive Proxy Statement for the 2005 Annual
Meeting as filed June 10, 2005.
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.
14.1
Code of Ethics
14.1.1
Attachment 1 to Code of Ethics
21.1
Subsidiaries
Incorporated by reference to Exhibit 14.1 to the
Registrant’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2003.
Incorporated by reference to Exhibit 14.1 to the
Registrant’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2003.
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.
23.1
23.2
31.1
31.2
32.1
Consent of Independent Registered Public
Accounting Firm.
Filed herewith
Consent of Independent Registered Public
Accounting Firm.
Filed herewith
Certification of the Chief Executive Officer
pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
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
Filed herewith
Filed herewith
Furnished herewith
37
Exhibit
No.
Title
2002
Method of Filing
___________________
*
Indicates management contract or compensatory plan or arrangement.
†
Confidential treatment has been granted with respect to certain confidential portions of this exhibit pursuant to
Rule 24b-2 under the Securities Exchange Act of 1934, which confidential portions have been omitted from
the exhibit and filed separately with the Securities and Exchange Commission.
(b)
Exhibits
The exhibits filed as part of this report are listed above in Item 15(a) (3) of this Form 10-K.
(c)
Financial Statement Schedule
The Financial Statement Schedule required by Regulation S-X and Item 8 of this Form are listed above in
Item 15(a)(2) of this Form 10-K.
38
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 31, 2006
Date: March 31, 2006
By:/s/ William W. Smith, Jr.
William W. Smith, Jr.
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
By:/s/ Andrew C. Schmidt
Andrew C. Schmidt,
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ William W. Smith, Jr.
William W. Smith, Jr.
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
March 31, 2006
/s/ Andrew C. Schmidt
Andrew C. Schmidt
Chief Financial Officer (Principal Financial
and Accounting Officer)
March 31, 2006
/s/ Thomas G. Campbell
Thomas G. Campbell
Director
/s/ Samuel Gulko
Samuel Gulko
/s/ Ted Hoffman
Ted Hoffman
Director
Director
/s/ William C. Keiper
William C. Keiper
Director
/s/Gregory J. Szabo
Gregory J. Szabo
Director
39
March 31, 2006
March 31, 2006
March 31, 2006
March 31, 2006
March 31, 2006
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Smith Micro Software, Inc.:
We have audited the accompanying consolidated balance sheet of Smith Micro Software, Inc. and subsidiaries
(the “Company”) as of December 31, 2004, and the related consolidated statements of operations,
stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2004. Our
audits also included the financial statement schedule listed in the Index at Item 15(a)(2) for each of the two
years in the period ended December 31, 2004. These consolidated financial statements and the financial
statement schedule are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial
position of Smith Micro Software, Inc. and subsidiaries as of December 31, 2004, and the results of their
operations and their cash flows for each of the two years in the period ended December 31, 2004 in
conformity with accounting principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the information set forth therein for each
of the two years in the period ended December 31, 2004.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 30, 2005
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Smith Micro Software, Inc.:
We have audited the accompanying consolidated balance sheet of Smith Micro Software, Inc. and subsidiaries
(the “Company”) as of December 31, 2005, and the related consolidated statements of operations,
stockholders’ equity and cash flows for year then ended. Our audit also included the financial statement
schedule listed in the Index at Item 15(a)(2). These consolidated financial statements and the financial
statement schedule are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements and the financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial
position of Smith Micro Software, Inc. and subsidiaries as of December 31, 2005, and the results of their
operations and their cash flows for the year then ended, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
February 20, 2006
F-2
SMITH MICRO SOFTWARE INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2005 AND 2004
(In thousands, except share and per share data)
See notes to consolidated financial statements
F-3
20052004ASSETS CURRENT ASSETS: Cash and cash equivalents21,215$ 8,634$ Accounts receivable, net of allowances for doubtful accounts and other adjustments of $439 (2005) and $137 (2004)6,786 2,024 Income tax receivable-- 35 Inventories, net530 47 Prepaid expenses and other current assets556 203 Total current assets 29,087 10,943 EQUIPMENT AND IMPROVEMENTS, net241 113 INTANGIBLE ASSETS, net4,093 -- GOODWILL9,288 1,715 OTHER ASSETS, net7 57 42,716$ 12,828$ LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable 2,383$ 939$ Accrued liabilities 1,376 790 Total current liabilities3,759 1,729 COMMITMENTS AND CONTINGENCIES (Note 6)STOCKHOLDERS’ EQUITY:Preferred stock, par value $0.001 per share; 5,000,000 shares authorized; none issued and outstandingCommon stock, par value $0.001 per share; 50,000,000 shares authorized; 22,147,000 and 18,011,000 shares issued and outstanding22 18 Additional paid-in capital 50,880 27,750 Accumulated deficit(11,945) (16,669) Net stockholders’ equity38,957 11,099 42,716$ 12,828$
SMITH MICRO SOFTWARE INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
(In thousands, except per share data)
See notes to consolidated financial statements
F-4
200520042003NET REVENUES: Products19,637$ 12,394$ 6,291$ Services621 922 925 Total Net Revenues20,258 13,316 7,216 COST OF REVENUES: Products3,818 2,530 1,350 Services285 380 321 Total Cost of Revenues4,103 2,910 1,671 GROSS PROFIT16,155 10,406 5,545 OPERATING EXPENSES: Selling and marketing3,410 1,519 1,666 Research and development3,963 2,556 2,506 General and administrative4,621 2,868 2,330 Total operating expenses11,994 6,943 6,502 OPERATING INCOME (LOSS)4,161 3,463 (957) INTEREST INCOME667 53 37 INCOME (LOSS) BEFORE INCOME TAXES4,828 3,516 (920) INCOME TAX EXPENSE104 71 3 NET INCOME (LOSS)4,724$ 3,445$ (923)$ NET INCOME (LOSS) PER SHARE, basic0.22$ 0.20$ (0.06)$ WEIGHTED AVG SHARES OUTSTANDING, basic 21,351 17,267 16,511 NET INCOME (LOSS) PER SHARE, fully diluted0.21$ 0.19$ (0.06)$ WEIGHTED AVG SHARES OUTSTANDING, fully diluted22,806 18,412 16,511 Years ended December 31,
SMITH MICRO SOFTWARE INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
(In thousands)
See notes to consolidated financial statements
F-5
Additional Common stock paid-in Accumulated Shares Amount capital deficitTotal BALANCE, December 31, 200216,227 16$ 24,787$ (19,191)$ 5,612$ Exercise of common stock options808 1913 914 Repurchase and retirement of common stock (24) (13) (13) Net loss (923) (923) BALANCE, December 31, 200317,011 17 25,687 (20,114) 5,590 Exercise of common stock options1,000 1 1,995 1,996 Tax benefit related to the exercise of stock options68 68 Net income 3,445 3,445 BALANCE, December 31, 200418,011 18 27,750 (16,669) 11,099 Issuance of common stock in private placement3,500 4 20,782 20,786 Issuance of common stock in Allume acquisition398 1,858 1,858 Exercise of common stock options238 369 369 Tax benefit related to the exercise of stock options20 20 Non cash compensation recognized on stock options101 101 Net income 4,724 4,724 BALANCE, December 31, 200522,147 22$ 50,880$ (11,945)$ 38,957$
SMITH MICRO SOFTWARE INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
(In thousands)
See notes to consolidated financial statements
F-6
Years ended December 31,200520042003CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)4,724$ 3,445$ (923)$ Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization901 146 410 Provision for doubtful accounts and other adjustments to accounts receivable573 112 132 Tax benefit related to the exercise of stock options20 68 -- Non cash option expense101 -- -- Change in operating accounts: Accounts receivable(4,513) (1,395) (240) Income tax receivable35 (35) -- Inventories(246) (25) 23 Prepaid expenses and other assets(109) (30) (12) Accounts payable and accrued liabilities978 732 (157) Net cash provided by (used in) operating activities2,464 3,018 (767) CASH FLOWS FROM INVESTING ACTIVITIES:Acquisition of Allume Systems, Inc.(10,896) -- -- Capital expenditures(142) (102) (39) Net cash used in investing activities(11,038) (102) (39) CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of common stock, net of offering costs20,786 1,996 914 Proceeds from exercise of stock options369 -- -- Cash used in repurchase of common stock-- -- (13) Net cash provided by financing activities21,155 1,996 901 NET CHANGE IN CASH & CASH EQUIVALENTS12,581 4,912 95 CASH AND CASH EQUIVALENTS, beginning of year8,634 3,722 3,627 CASH AND CASH EQUIVALENTS, end of year21,215$ 8,634$ 3,722$
SMITH MICRO SOFTWARE INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005 (Continued)
(In thousands)
Year ended December 31,
2004
2003
2005
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION -
Cash paid during the year for income taxes
$ 42
$ 38
$ 3
See notes to consolidated financial statements
F-7
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Smith Micro Software, Inc. and subsidiaries (the “Company”) is a
diversified developer and marketer of communications and utilities software products and
services. The Company’s strategic focus is to market and sell value-added wireless products
targeted to the original equipment manufacturers (“OEM”) market, particularly wireless
service providers and mobile phone manufacturers as well as direct to corporations and
consumers. The Company offers software products for Windows, Mac OSX, Unix and Linux
operating systems. The Company also offers wireless communication software products and
services to the enterprise market that include enhanced wireless security features.
On July 1, 2005, the Company acquired Allume Systems (“Allume”), which was a wholly
owned subsidiary of International Microcomputer Software, Inc. (see Note 4). Allume
develops and publishes award-winning software solutions that empower users in the area of
information access, removal, recovery, security, productivity and online distribution.
Allume’s flagship product is StuffIt® Deluxe. StuffIt Wireless, a new and advanced
technology that is patent pending by Allume Systems, will compress an already compressed
JPEG file by up to 30% more without loosing any of the picture quality. This technology is
particularly important to mobile phone manufactures who now can store up to 30% more
images and carriers who are interested in the reduction of utilized bandwidth. Other award
winning products include icSpyware Suite® and Internet Cleanup® which targets spyware
and phishing intrusions, and Spring Cleaning® which cleans and optimizes computer
operating systems.
Basis of Presentation - The accompanying consolidated financial statements reflect the
operating results and financial position of Smith Micro Software, Inc. and its wholly owned
subsidiaries in accordance with accounting principles generally accepted in the United States
of America. All intercompany amounts have been eliminated in consolidation.
Cash and Cash Equivalents - Cash and cash equivalents generally consist of cash,
government securities and money market funds. These securities are primarily held in one
financial institution and are uninsured except for minimum FDIC coverage. As of December
31, 2005 and December 31, 2004, balances totaling approximately $21.4 million and $8.5
million, respectively, were uninsured. All have original maturity dates of three months or
less.
Accounts Receivable - The Company sells its products worldwide. The Company performs
ongoing credit evaluations of its customers and generally does not require collateral. The
Company maintains allowances for estimated credit losses, and those losses have been within
management’s estimates. Allowances for product returns are included in other adjustments to
F-8
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
accounts receivable on the accompanying consolidated balance sheets. Product returns are
estimated based on historical experience and have also been within management’s estimates.
Inventories - Inventories consist principally of cables, CDs, boxes and manuals and are stated
at the lower of cost (determined by the first-in, first-out method) or market. The Company
regularly reviews its inventory quantities on hand and records a provision for excess and
obsolete inventory based primarily on 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.
Long Lived Assets - The Company accounts for the impairment and disposition of long-lived
assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets. This statement addresses
financial accounting and reporting for the impairment of long-lived assets and for the disposal
of long-lived assets. In accordance with SFAS No. 144, long-lived assets to be held are
reviewed for events or changes in circumstances which indicate that their carrying value may
not be recoverable. The Company periodically reviews the carrying value of long-lived
assets to determine whether or not an impairment to such value has occurred. The Company
has determined that there was no impairment at December 31, 2005.
Goodwill - The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets,
effective January 1, 2002 and no impairment was identified. As a result of the adoption, the
Company is no longer required to amortize goodwill. In accordance with SFAS No. 142, the
Company reviews the recoverability of the carrying value of goodwill at least annually or
whenever events or circumstances indicate a potential impairment. The 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, 2005.
F-9
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
Revenue Recognition - Software revenue is recognized in accordance with the Statement of
Position (“SOP”) 97-2, Software Revenue Recognition, as amended, when persuasive
evidence of an arrangement exists, delivery has occurred, the price is fixed and determinable,
and collection is probable. The Company recognizes revenues from sales of its software to
Retail and OEM customers or end users as completed products are shipped and title passes, or
from royalties generated as authorized customers duplicate its software, if the other
requirements of SOP 97-2 are met. If the requirements of SOP 97-2 are not met at the date of
shipment, revenue is not recognized until these elements are known or resolved. Returns from
Retail and OEM customers are limited to defective goods or goods shipped in error.
Historically, OEM customer returns have not been significant. The Company reviews
available retail channel information and makes a determination of a return provision for sales
made to distributors and retailers based on current channel inventory levels and historical
return patterns. Certain sales to distributors are made on a consignment basis. Revenue for
consignment sales is not recognized until sell through to the final customer has occurred.
Product sales directly to end users are recognized upon delivery. End users have a thirty day
right of return, but such returns are reasonably estimable and have historically been
immaterial. The Company also provides technical support to its customers. Such costs have
historically been insignificant.
Service revenues include sales of consulting services, web site hosting and fulfillment.
Service revenues are recognized as services are provided or as milestones are delivered and
accepted by our customers.
Software Development Costs - Development costs incurred in the research and development
of new software products and enhancements to existing software products are expensed as
incurred until technological feasibility has been established. The Company considers
technological feasibility to be established when all planning, designing, coding and testing
has been completed according to design specifications. After technological feasibility is
established, any additional costs are capitalized. Through December 31, 2005, software has
been substantially completed concurrently with the establishment of technological feasibility;
and, accordingly, no costs have been capitalized to date.
Sales Incentives - Pursuant to the consensus of EITF 01-09, Accounting for Consideration
Given by a Vendor to a Customer (Including a Reseller of the 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.
F-10
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
Advertising Expense - Advertising costs are expensed as incurred. Advertising expenses were
$223,000, $47,000 and $95,000 for the years ended December 31, 2005, 2004 and 2003,
respectively.
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. The federal and state current provision relates to alternative minimum tax liability.
Stock-Based Compensation - The Company accounts for stock-based awards to employees
using the intrinsic value method in accordance with Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations. SFAS
No. 123, Accounting for Stock-Based Compensation, requires the disclosure of pro forma net
income (loss) and income (loss) per share had the Company adopted the fair value method as
of the beginning of fiscal 1995. Under SFAS No. 123, the fair value of stock-based awards to
employees is calculated through the use of option pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully transferable options without
vesting restrictions, which significantly differ from the 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, 12 to 48 months following grant
date; stock volatility, 85%, 127% and 125% for grants issued in 2005, 2004 and 2003,
respectively; risk-free interest rates of 3.98%, 3.47% and 2.63% for 2005, 2004 and 2003,
respectively; and no dividends during the expected term. The 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 2005, 2004 and 2003 awards had been
amortized to expense over the vesting period of the awards, pro forma net income (loss)
would have been as follows:
F-11
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
Beginning in fiscal 2006, we will be adopting FAS 123R, which requires the expensing of stock
options. Taking into account options issued and outstanding at December 31, 2005, we estimate
that our 2006 stock compensation expense would be approximately $2.6 million. New option
issuances or restricted stock grants made in fiscal 2006 would increase the estimate.
Net Income (Loss) per Share - Pursuant to SFAS No. 128, Earnings per Share, the Company
is required to provide dual presentation of “basic” and “diluted” earnings (loss) per share
(EPS). Basic EPS amounts are based upon the weighted average number of common shares
outstanding. Diluted EPS amounts are based upon the weighted average number of common
and potential common shares outstanding. Potential common shares include stock options
using the treasury stock method. Potential common shares are excluded from the calculation
of diluted EPS in loss years, as the impact is antidilutive. Potential common shares of
955,000 have been excluded from diluted weighted average common shares for the year
ended December 31, 2003.
Fulfillment Services - The Company currently holds consigned inventory from a customer,
which is used to fulfill orders. As the Company does not hold title to the inventory, it is not
recorded in the accompanying consolidated balance sheets. In addition, the Company
receives cash for fulfillment orders, which is paid out to the fulfillment customer on a
monthly basis. Such cash and the related payable are recorded on a net basis as the amounts
F-12
200520042003(in thousands, except per share data)Net income (loss):Net income (loss), as reported4,724$ 3,445$ (923)$ Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects(1,582) (308) (286) Pro forma net income (loss)3,142$ 3,137$ (1,209)$ Income (loss) per Common Share As reported, Basic0.22$ 0.20$ (0.06)$ As reported, Diluted0.21$ 0.19$ (0.06)$ Pro forma, Basic0.15$ 0.18$ (0.07)$ Pro forma, Diluted0.14$ 0.17$ (0.07)$ Year Ended December 31,
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
are held for the benefit of this fulfillment customer. Revenue is recognized for fulfillment
services as services are performed.
Use of Estimates - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting years. Actual results could differ from those estimates.
Comprehensive Income(Loss) - Comprehensive income, as defined, includes all changes in
equity (net assets) during a period from non-owner sources. For each of the years ended
December 31, 2005, 2004 and 2003, there was no difference between net income (loss) and
comprehensive income (loss).
Fair Value of Financial Instruments - The 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 March 2006, the FASB issued SFAS No. 156,
Accounting for Servicing of Financial Assets (SFAS No. 156), which provides an approach to
simplify efforts to obtain hedge-like (offset) accounting. This Statement amends FASB
Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, with respect to the accounting for separately recognized
servicing assets and servicing liabilities. The Statement (1) requires an entity to recognize a
servicing asset or servicing liability each time it undertakes an obligation to service a financial
asset by entering into a servicing contract in certain situations; (2) requires that a separately
recognized servicing asset or servicing liability be initially measured at fair value, if
practicable; (3) permits an entity to choose either the amortization method or the fair value
method for subsequent measurement for each class of separately recognized servicing assets
or servicing liabilities; (4) permits at initial adoption a one-time reclassification of available-
for-sale securities to trading securities by an entity with recognized servicing rights, provided
the securities reclassified offset the entity’s exposure to changes in the fair value of the
servicing assets or liabilities; and (5) requires separate presentation of servicing assets and
servicing liabilities subsequently measured at fair value in the balance sheet and additional
disclosures for all separately recognized servicing assets and servicing liabilities. SFAS No.
156 is effective for all separately recognized servicing assets and liabilities as of the beginning
of an entity’s fiscal year that begins after September 15, 2006, with earlier adoption permitted
in certain circumstances. The Statement also describes the manner in which it should be
initially applied. The Company does not believe that SFAS No. 156 will have a material
impact on its financial position, results of operations or cash flows.
F-13
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
In February 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”)
No. 155, Accounting for Certain Hybrid Financial Instruments, which amends SFAS No. 133,
Accounting for Derivatives Instruments and Hedging Activities and SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.
SFAS No. 155 amends SFAS No. 133 to narrow the scope exception for interest-only and
principal-only strips on debt instruments to include only such strips representing rights to
receive a specified portion of the contractual interest or principle cash flows. SFAS No. 155
also amends SFAS No. 140 to allow qualifying special-purpose entities to hold a passive
derivative financial instrument pertaining to beneficial interests that itself is a derivative
instrument. The Company is currently evaluating the impact this new Standard but believe
that it will not have a material impact on the Company’s financial position, results of
operations, or cash flows.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections
(SFAS No. 154), an amendment to Accounting Principles Bulletin Opinion No. 20,
Accounting Changes (APB No. 20), and SFAS No. 3, Reporting Accounting Changes in
Interim Financial Statements. Though SFAS No. 154 carries forward the guidance in APB
No.20 and SFAS No.3 with respect to accounting for changes in estimates, changes in
reporting entity, and the correction of errors, SFAS No. 154 establishes new standards on
accounting for changes in accounting principles, whereby all such changes must be accounted
for by retrospective application to the financial statements of prior periods unless it is
impracticable to do so. SFAS No. 154 is effective for accounting changes and error
corrections made in fiscal years beginning after December 15, 2005, with early adoption
permitted for changes and corrections made in years beginning after May 2005. The Company
will implement SFAS No. 154 in its fiscal year beginning January 1, 2006. The Company is
currently evaluating the impact of this new standard but believes that it will not have a
material impact on the Company’s financial position, results of operations, or cash flows.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment,
which replaces SFAS No. 123, Accounting for Stock-Based Compensation and supersedes
APB No. 25, Accounting for Stock Issued to Employees. SFAS No. 123R requires all share-
based payments to employees, including grants of employee stock options, to be recognized in
the financial statements based on their fair values, beginning with the first annual period after
June 15, 2005, with early adoption encouraged. In addition, SFAS No. 123R will cause
unrecognized expense (based on the amounts in our pro forma footnote disclosure) related to
options vesting after the date of initial adoption to be recognized as a charge to results of
operations over the remaining vesting period. The Company is required to adopt SFAS No.
123R in the first quarter of 2006, beginning January 1, 2006. Under SFAS No. 123R, the
Company will determine the appropriate fair value model to be used for valuing share-based
payments, the amortization method for compensation cost and the transition method to be
F-14
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
used at the date of adoption. The transition alternatives include prospective and retroactive
adoption methods. Under the retroactive methods, prior periods may be restated either as of
the beginning of the year of adoption or for all periods presented. The prospective method
requires that compensation expense be recorded for all unvested stock options and share
awards at the beginning of the first quarter of adoption of SFAS No. 123R, while the
retroactive methods would record compensation expense for all unvested stock options and
share awards beginning with the first period restated. The Company is evaluating the
requirements of SFAS No. 123R and expects that the adoption of SFAS No. 123R will have a
material impact on its consolidated results of operations and earnings per share. The Company
has not determined the method of adoption or the effect of adopting SFAS No. 123R.
2. ACQUISITION OF ALLUME INC.
On July 1, 2005, the Company acquired 100% of the issued and outstanding capital stock of
Allume, Inc. from International Microcomputer Software, Inc. (IMSI) for $10.6 million in
cash and 397,547 restricted shares of its common stock. Allume, Inc. is a leading developer of
compression software solutions for JPEG, MPEG and MP3 platforms. A portion of the
purchase price, including $1,250,000 cash and shares of common stock having a market value
of $750,000 were deposited in an indemnity escrow to secure certain representations and
warranties included in the Stock Purchase Agreement. The aggregate purchase price was
approximately $12.8 million, which includes $10.6 million cash paid, the 397,547 shares
issued, which have been valued using the average closing market price of the Company's
common stock over the two-day period before and after the sale was announced, and
$316,000 of direct acquisition costs. The direct acquisition costs incurred to date include
$116,000 for legal and professional services, as well as a transaction fee of $200,000.
The results of operations of the business acquired have been included in the Company’s
consolidated financial statements from the date of acquisition. Depreciation and amortization
related to the acquisition were calculated based on the estimated fair market values and
estimated lives for property and equipment and an independent valuation for certain
identifiable intangibles acquired.
The total purchase price is summarized as follows (in thousands):
F-15
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
The purchase price is contingent upon a final calculation of Allume’s net assets. If the final
net asset calculation is less than the minimum amount specified in the purchase agreement, the
purchase price will be adjusted downward accordingly. Any such adjustment will be recorded
as an adjustment to the cost of Allume Systems, Inc. and reflected in the final purchase price
allocation.
The Company’s preliminary allocation of the purchase price is summarized as follows (in
thousands):
Unaudited pro forma consolidated results of operations for the years ended December 31,
2005 and 2004 as if the acquisition had occurred as of January 1, 2004 are as follows (in
thousands, except per share data):
F-16
Cash consideration$10,626Common stock1,858 Acquisition related costs316 Total purchase price$12,800Assets:Cash46$ Accounts Receivable, net822 Inventories, net237 Property & Equipment67 Other Assets244 Intangible Assets4,863 Goodwill7,573 Total Assets13,852 Liabilities:Accounts Payable659 Accrued Liabilities393 Total Liabilities1,052 Total purchase price12,800$
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
Pro forma adjustments have been applied to reflect the addition of amortization related to the
intangible assets and the fixed assets acquired and reduction in interest income as if the
acquisition had occurred at the beginning of such period presented. The pro forma adjustment
for amortization related to intangible assets acquired was $$1.5 million and $608,000 for the
proforma periods ending December 31, 2004 and 2005, respectively.
3. EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consist of the following (in thousands):
F-17
HistoricalProformaHistoricalProformaNet Revenues20,258$ 24,647$ 13,316$ 22,902$ Net Income 4,724$ 4,288$ 3,445$ 2,810$ Net Income per share, basic0.22$ 0.20$ 0.20$ 0.16$ Net Income per share, diluted0.21$ 0.19$ 0.19$ 0.15$ Weighted average shares outstanding, basic21,351 21,549 17,267 17,665 Weighted average shares outstanding, diluted22,806 23,004 18,412 18,810 Year EndedDecember 31, 2005Year EndedDecember 31, 2004
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
4. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table sets forth the acquired intangible assets by major asset class:
F-18
December 31,20052004Machinery and equipment906$ 745$ Leasehold improvements 362 315 Office furniture and fixtures 72 107 1,340 1,167 Less accumulated depreciation and amortization (1,099) (1,054) 241$ 113$ UsefulLifeNet BookNet Book(Years)GrossValueGrossValue(in thousands)Amortizing:Purchased and Licensed Technology32,260$ (2,260)$ -$ 2,260$ (2,260)$ -$ Capitalized Software52,649 (534) 2,115 - - - Distribution Rights5482 (76) 406 - - - Customer Lists5923 (92) 831 - - - Trademarks10809 (68) 741 - - - Totals7,123$ (3,030)$ 4,093$ 2,260$ (2,260)$ -$ AmortizationAccumulated AmortizationDecember 31, 2005December 31, 2004Accumulated
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
Aggregate amortization expense on intangible assets was approximately $770,000, $40,000 and
$184,000 for the years ended December 31, 2005, 2004 and 2003, respectively. Expected future
amortization expense is as follows: $1,378,000 for the year 2006, $1,074,000 for the year
2007, $743,000 for the year 2008, $449,000 for the year 2009 and $449,000 thereafter.
The carrying amount of the Company’s goodwill was $9,288,000 as of December 31, 2005
and $1,715,000 as of December 31, 2004. The Company’s reporting units are equivalent to
its operating segments. At December 31, 2005 and 2004, the amount of goodwill allocated to
the products segment is $8,953,000 and $1,380,000, respectively and the amount of goodwill
allocated to the services segment is $335,000.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
F-19
December 31, 20052004Salaries and benefits1,055$ 783$ Royalties180 1 Marketing expenses and rebates103 - Other38 6 1,376$ 790$
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
6. INCOME TAXES
A summary of the income tax expense (benefit) is as follows (in thousands):
F-20
Year ended December 31, 200520042003 Current: Federal100$ 68$ $ - State4 3 3 104 71 3 Deferred: Federal1,286 1,025 (324) State(197) 427 (22) Change in valuation allowance(1,089) (1,452) 346 0 0 0 104$ 71$ 3$
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
A reconciliation of the provision (benefit) for income taxes to the amount of income tax
expense (benefit) that would result from applying the federal statutory rate (35%) to the
income (loss) before income taxes is as follows:
F-21
December 31, 200520042003 Federal statutory rate35%35%(35)%State tax, net of federal benefit3 -- --Nondeductible expense related to acquired intangibles -- --(2) Other(1)(1) 2 Change in valuation allowance(35) (32) 35 2% 2% 0%
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
The major components of the Company’s deferred tax assets and liabilities are as follows (in
thousands):
The Company has federal and state net operating loss carryforwards of approximately
$14,896,000 and $12,034,000, respectively, at December 31, 2005. These federal and state
net operating loss carryforwards will expire in 2006 through 2025. In addition, the Company
has federal and state tax credit carryforwards of approximately $1,128,000 and $559,000,
respectively, at December 31, 2005. These tax credits will begin to expire in 2010.
As of December 31, 2005 and 2004 a valuation allowance of approximately $7,786,000 and
$8,875,000 respectively, has been provided based on the 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. For the years ended December 31, 2005 and 2004,
the net change in the valuation allowance was a decrease of $1,089,000 and $1,452,000,
respectively.
As of December 31, 2005, a valuation allowance of approximately $7,786,000 has been
provided based upon the Company’s assessment that it is more likely than not that sufficient
taxable income will not be generated to realize the tax benefits of these temporary
differences.
F-22
20052004Various reserves107$ 91$ Nondeductible accruals204 112 State taxes(587) (523) Prepaid expenses(99) (71) Credit carryforwards1,687 1,320 Net operating loss carryforwards6,118 7,652 Fixed Assets48 36 Amortization265 258 Other43 0 Subtotal7,786 8,875 Valuation allowance(7,786) (8,875) 0$ 0$ December 31,
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
The increases in the valuation allowance for 2005 and 2004 includes $401,000 and
$1,710,000, respectively, related to the increases in the Company’s Net Operating Loss
Carryforwards as a result of tax deductions derived from the exercise of stock options.
Cumulatively, as of December 31, 2005, approximately $3,752,000 of the valuation
allowance was attributable to such potential tax benefit of stock option transactions that will
be credited directly to additional paid in capital, if realized.
7. COMMITMENTS AND CONTINGENCIES
Leases - The Company has non-cancelable operating leases for its building facilities in Aliso
Viejo, California and Watsonville, California, which expire in May 2009 and September
2010, respectively. The Company also leases space for its facility in Lee’s Summit, Missouri
on a month to month basis. Future minimum rental commitments consist of the following (in
thousands):
Total rent expense was $492,000, $480,000 and $590,000 for the years ended December 31,
2005, 2004 and 2003, respectively.
Litigation – From time to time the Company is subject to litigation in the normal course of
business, none of which management believes will likely have a material adverse effect on
the Company’s consolidated financial condition or results of operations.
Other Contingent Contractual Obligations - During its normal course of business, the
Company has made certain indemnities, commitments and guarantees under which it may be
required to make payments in relation to certain transactions. These include: intellectual
property indemnities to the Company’s customers and licensees in connection with the use,
sale and/or license of Company products; indemnities to various lessors in connection with
facility leases for certain claims arising from such facility or lease; indemnities to vendors
and service providers pertaining to claims based on the negligence or willful misconduct of
the Company; indemnities involving the accuracy of representations and warranties in certain
F-23
Year ending December 31:2006509$ 2007512 2008514 2009295 2010104 Total1,934$
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
contracts; and indemnities to directors and officers of the Company to the maximum extent
permitted under the laws of the State of Delaware. In addition, the Company has made
contractual commitments to employees providing for severance payments upon the
occurrence of certain prescribed events. The Company may also issue a guarantee in the
form of a standby letter of credit as security for contingent liabilities under certain customer
contracts. The duration of these indemnities, commitments and guarantees varies, and in
certain cases, may be indefinite. The majority of these indemnities, commitments and
guarantees may not provide for any limitation of the maximum potential for future payments
the Company could be obligated to make. The Company has not recorded any liability for
these indemnities, commitments and guarantees in the accompanying consolidated balance
sheets.
8. SEGMENT INFORMATION
The Company currently operates in two business segments: products and services. In
addition, revenues are classified into three markets, Wireless and OEM sales, Retail and
Distribution sales, and Internet and Direct sales. Our Internet market includes Internet based
software products as well as consulting, fulfillment and hosting revenue.
The Company does not separately allocate operating expenses to these segments, nor does it
allocate specific assets to these segments. Therefore, segment information reported includes
only revenues and cost of revenues.
The following table shows the net revenues and cost of revenues generated by each segment:
Sales to individual customers and their affiliates, which amounted to more than 10% of the
Company’s net revenues, included one OEM customer at 57.1% in 2005, one OEM customer
F-24
ProductsServicesProductsServicesProductsServicesWireless & OEM13,954$ -$ 11,424$ -$ 4,711$ -$ Retail & Distribution4,886$ - - - - - Internet & Direct797 621 970 922 1,580 925 Total Revenues19,637 621 12,394 922 6,291 925 Cost of revenues3,818 285 2,530 380 1,350 321 Gross Profit15,819$ 336$ 9,864$ 542$ 4,941$ 604$ 200520042003Year Ended December 31,
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
at 68.4% of revenues in 2004 and three OEM customers at 27.0%, 10.7% and 10.2% of
revenues in 2003. Accounts receivable from these customers were $4.6 million at December
31, 2005, $1.7 million at December 31, 2004 and $477,000, $55,000 and $0 at December 31,
2003. A decision by a significant customer to substantially decrease or delay purchases from
the Company or the 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.
9. PROFIT SHARING
The Company offers its employees a 401(k) plan, in which the Company matches the
employee contribution at a rate of 20%, subject to a vesting schedule. Total employer
contributions amounted to $65,000, $54,000 and $45,000 for the years ended December 31,
2005, 2004 and 2003, respectively.
10. STOCK-BASED COMPENSATION
On July 28, 2005, the Shareholders approved the 2005 Stock Option / Stock Issuance Plan.
The Plan, which became effective the same date, replaced the 1995 Stock Option / Stock
Issuance Plan which expired on May 24, 2005. All outstanding options under the 1995 Plan
will remain outstanding, but no further grants will be made under that Plan. The maximum
number of shares of the Company’s Common Stock available for issuance over the term of
the 2005 Plan may not exceed 5,000,000 shares, plus that number of additional shares equal
to 2.5% of the number of shares of Common Stock outstanding on the last trading day of the
calendar year commencing with calendar year 2006 (but not in excess of 750,000 shares).
Under the terms of the Plan, incentive and nonqualified options may be granted at an exercise
price not less than the fair market value on the grant date, with terms of up to 10 years, and
with vesting to be determined by the Board of Directors.
Stock option activity under the Plan is as follows:
F-25
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
F-26
Weighted average Number exercise of optionsprice OUTSTANDING, December 31, 2002 (1,535,000 options, exercisable at weighted average exercise price of $2.15)2,765,000 1.46$ Granted (weighted average fair value of $2.22)38,000 2.46$ Exercised(808,000) 1.13$ Canceled(84,000) 1.43$ OUTSTANDING, December 31, 2003 (1,140,000 options, exercisable at weighted average exercise price of $2.43)1,911,000 1.62$ Granted (weighted average fair value of $1.70)922,000 1.95$ Exercised(1,000,000) 2.00$ Canceled(34,000) 1.74$ OUTSTANDING, December 31, 2004 (479,000 options, exercisable at weighted average exercise price of $2.12)1,799,000 1.58$ Granted (weighted average fair value of $2.75)2,371,000 4.94$ Exercised(238,000) 1.55$ Canceled(76,000) 5.22$ OUTSTANDING, December 31, 2005 (898,000 options, exercisable at weighted average exercise price of $1.85)3,856,000 3.57$
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
Additional information regarding options outstanding as of December 31, 2005 is as follows:
At December 31, 2005, 2,764,000 shares were available for future grants under the Stock
Option Plan.
11. RELATED PARTY TRANSACTIONS
In October 2004, the Company entered into a Master Software Services Agreement with
Arrange Technology LLC, providing for the development of certain software applications and
integration services. A member of the Company’s Board of Directors was a principal
beneficial owner of Arrange Technology LLC, however, that relationship terminated in 2005.
$118,000 and $19,000 was expensed under the terms of the agreement in the years ended
December 31, 2005 and 2004, respectively.
the former CFO, the Company recognized approximately $230,000
In conjunction with the severance agreement, entered into in June 2005, with Robert
Scheussler,
in
severance related costs which is included in general and administrative expenses in the
consolidated statement of operations for the year ended December 31, 2005. As per the
agreement, Mr. Scheussler will continue to provide services to the Company as a consultant
and, under the terms of the Company's Stock Option Plan, will continue to vest in his
existing, unvested option grants (which were not modified) totaling 108,333 options. The
F-27
Options outstandingOptions exercisable Weighted average Weighted Weighted Range of remaining average average exercise Number contractual exercise Number exercise prices outstanding life (years) price exercisable price $0.24 - $ 0.50433,000 6.9 0.24$ 245,000 0.24$ $0.51 - $ 1.00123,000 6.3 0.93$ 121,000 0.94$ $1.01 - $ 2.00881,000 8.2 1.84$ 315,000 1.73$ $2.01 - $ 4.00159,000 8.7 3.62$ 155,000 3.65$ $4.01 - $ 5.002,160,000 9.6 4.95$ 36,000 4.95$ $5.01 - $14.00100,000 8.4 6.78$ 26,000 7.44$ 3,856,000 8.8 3.57$ 898,000 1.85$
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
unvested portion of these option grants were valued by the Company at approximately
$424,000 on July 1, 2005, utilizing the Black Scholes option pricing model. The Company
expensed approximately $101,000 in the year ended December 31, 2005 with respect to Mr.
Scheussler's employee stock option agreements.
In September 2004, the Company entered into a severance agreement with a principal
stockholder and former officer and director of the Company. The Company has discharged
its obligation under the agreement by purchasing a single premium annuity in the amount of
$192,000 which is included in general and administrative expenses in the consolidated
statement of operations for the year ended December 31, 2004.
12. EQUITY TRANSACTIONS
On February 18, 2005, the Company entered into a Securities Purchase Agreement with
certain institutional investors related to the private placement of 3,500,000 shares of our
common stock, par value $0.001 per share. The transaction closed on February 18, 2005 and
the Company realized gross proceeds of $22.4 million from the financing before deducting
commissions and other expenses. Offering costs related to the transaction totaled
$1,613,000, comprised of $1,344,000 in commissions and $269,000 cash payments for legal
and investment services, resulting in net proceeds of $20,786,000. The Company agreed to
register for resale the shares of Common Stock issued in the private placement. Such
registration statement became effective on June 17, 2005. The agreement provides for
penalties of one percent (1%) of the purchase price per month should effectiveness of the
registration not be maintained
C.E. Unterberg, Towbin LLC, the placement agent for the transaction, received a cash fee
equal to 6% of the aggregate gross proceeds of the Private Placement.
On July 28, 2005, the Shareholders approved a proposal to amend the Amended and
restated Certificate of Incorporation to increase the number of authorized Common Shares
from 30,000,000 to 50,000,000. Increasing the number of authorized shares of Common
Stock is expected to provide the Company with additional capital resources to finance the
long-term growth of the Company and with sufficient shares of Common Stock for stock
splits. The additional shares of Common Stock could be issued for acquisitions and in
public or private offerings, the proceeds of which could be used to finance the Company’s
growth through increased working capital, expansion of existing businesses and other
corporate purposes. .
F-28
SMITH MICRO SOFTWARE INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2005
(In thousands)
(1) Other adjustments relate principally to sales returns.
S-1
Additions Balance at charged to Balance at beginning of costs and end of period expenses Deductions period Allowance for doubtful accounts and other adjustments (1): 2005137$ 573$ (271)$ 439$ 200433 112 (8) 137 2003565 132 (664) 33
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-02418, 333-40106,
333-62134, 333-121330, 333-123042 and 333-129132 on Form S-8 and Registration Statement Nos.
333-123821 and 333-128695 on Form S-3 of our report dated March 30, 2005, relating to the
consolidated financial statements and financial statement schedule of Smith Micro Software, Inc. as
of December 31, 2004 and for each of the two years in the period ended December 31, 2004,
appearing in this Annual Report on Form 10-K of Smith Micro Software, Inc. for the year ended
December 31, 2005.
.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 31, 2006
EXHIBIT 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement (Nos. 333-02418, 333-
40106, 333-62134, 333-121330 and 333-123042 and 333-129132) on Form S-8 and Registration
Statement (Nos. 333-123821 and 333-128695) on Form S-3 of Smith Micro Software, Inc. of our
report dated February 20, 2006 relating to our audit of the financial statements and the financial
statement schedule, which appear in this Annual Report on Form 10-K of Smith Micro Software,
Inc. for the year ended December 31, 2005.
SINGER, LEWAK, GREENBAUM & GOLDSTEIN, LLP
Los Angeles, California
March 31, 2006
OFFICERS & DIRECTORS
OFFICERS
William W. Smith, Jr.
Chairman of the Board, President and CEO
Director
Thomas G. Campbell
Director
William C. Keiper
Director
Gregory Szabo
Director
Samuel Gulko
Director
Ted Hoffman
Director
Andrew Schmidt
Vice President, CFO
David P. Sperling
Vice President, CTO
Bruce T. Quigley
Vice President of Business Development and Investor Relations
Robert Elliot
Vice President of Corporate Marketing
W. Rick Wyand
Vice President of OEM Sales
Jonathan Kahn
Senior Vice President, General Manager Consumer Products
Chris Lippincott
Vice President of Enterprise Sales
Jeff Costello
Vice President of Channel Sales
Darryl Lovato
Vice President of Advance Technology
CORPORATE HEADQUARTERS
ANNUAL REPORT
51 Columbia
Aliso Viejo, CA 92656
(949) 362-5800
TRANSFER AGENT AND REGISTRAR
Mellon Investor Services LLC
480 Washington Blvd
Jersey City, NJ 07310
(800) 356-2017
(800) 356-2017
www.melloninvestor.com
LEGAL COUNSEL
Dorsey & Whitney LLP
Irvine, California 92618
AUDITORS
Singe Lewak Greenbaum & Goldstein LLP
Los Angeles, California 90024
Additional copies of this Annual Report are available without charge
by contacting the company at:
51 Columbia
Aliso Viejo, CA 92656
(949) 362-5800
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
Charles Messman / Todd Kehrli
MKR Group LLC
323 N. San Fernando
Burbank, CA 92502
(818) 556-3700
ir@mkr-group.com