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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, 1996
[ ] 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 33-0029027
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
51 COLUMBIA, SUITE 200, ALISO VIEJO, CA 92656
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 362-5800
COMMON STOCK, $.001 PAR VALUE NASDAQ NATIONAL MARKET
(Title of each class) (Name of each exchange on which
registered)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
Indicate by check mark 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 [ ].
The Registrant does not have different classes of Common Stock. As of
March 14, 1997, the aggregate market value of the Common Stock of the
Registrant held by non-affiliates was $18,716,373, based upon the closing sale
price of such stock on that date. For purposes of such calculation, only
executive officers, board members, and beneficial owners of more than 10% of
the Company's outstanding Common Stock are deemed to be affiliates.
As of March 14, 1997, there were 14,074,698 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders currently expected to be held on May 15, 1997, as filed with the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended, are incorporated by reference in Part III of this Report.
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SMITH MICRO SOFTWARE, INC.
1996 FORM 10-K ANNUAL REPORT
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TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C> <C>
PART I
Item 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS . . . . . . . . . . . . . . . . . . 25
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY RELATED STOCKHOLDER MATTERS . . . . . . . . . 26
Item 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . 28
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . 33
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . 33
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . 33
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . 33
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K . . . . . . . . . . . . 33
</TABLE>
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THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 PROVIDES A "SAFE
HARBOR" FOR FORWARD-LOOKING STATEMENTS. THIS ANNUAL REPORT CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE SECURITIES ACT OF 1933 AND
THE SECURITIES EXCHANGE ACT OF 1934. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT
OF THE FACTORS DESCRIBED UNDER "RISK FACTORS" AND ELSEWHERE IN THIS ANNUAL
REPORT. THESE FACTORS SHOULD BE CONSIDERED BY INVESTORS IN THE COMPANY'S
SECURITIES.
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PART I
ITEM 1. BUSINESS
GENERAL
Smith Micro Software, Inc. ("Smith Micro" or the "Company") provides
personal computer software that enables data, fax and voice communication. The
Company believes it is the leading provider of communication software to modem
manufacturers (based on units included with modems sold through resellers and
retailers in the United States). The Company intends to leverage its position
in the OEM market to address the retail, corporate and government markets for
its products. Moreover, in March 1996, the Company acquired Performance
Computing Incorporated ("PCI"), an audio/video software solutions provider.
Smith Micro focuses on designing integrated, easy to use software products that
incorporate the most advanced features of modem communication. The Company was
incorporated in California in November 1983 and reincorporated in Delaware in
July 1995.
INDUSTRY BACKGROUND
Businesses and consumers are using personal computers and modems for
an increasing number of communication applications. The ability to send and
receive facsimile transmissions with a personal computer has created
significant demand in recent years for modems with fax capabilities. Moreover,
modems are increasingly used to access vast information resources, share
information and transact business through on-line services and the Internet.
The flexibility necessitated by an increasingly mobile workforce has fueled
demand for products that facilitate remote connectivity between individuals and
their corporate networks. These applications have created a demand for
hardware and software products that facilitate communication between personal
computer users and their information sources.
Modem manufacturers produce hardware to enable personal computer
communication over land or wireless systems. By adopting technological
advances, driven primarily by advances in chip design, modem manufacturers have
been able to deliver products with increasing price performance, higher
transmission speeds and increased functionality. The rapid pace of these
changes, the need to support a variety of operating systems including DOS,
Windows, Windows 95, Windows NT, and Macintosh, and the desire to
differentiate products which incorporate identical chipsets, presents a
significant communication software challenge. Modem manufacturers generally
focus on hardware and do not find it cost effective to develop software
internally to meet the evolving needs of communication software for multiple
platforms. These modem manufacturers bundle software from outside providers
with their modems. This software is the technology that enables the modems to
communicate data, fax, voice, video and other forms of information.
Demand for personal computer communication software products is
generated by three distinct sources: OEM customers, consisting primarily of
modem and personal computer manufacturers, retail end-user consumers and
corporate / government customers, which purchase large quantities to install
over a large corporate network. OEMs purchase software and bundle or pre-load
it with their products. This software provides basic functionality and
effectively serves the needs of most users. Users with more complex
communication requirements typically seek software with more features in the
retail market.
As modem chip manufacturers develop and adopt emerging technology,
thereby expanding the functionality of modems, communication software must be
continually enhanced to provide integrated, easy to use solutions to enable
this functionality to be utilized. Historically, modems and the communication
software associated with such modems were used for the transmission and receipt
of data information only. Later, modem functionality was expanded to
incorporate the sending and receiving of facsimile transmissions, a function
which required increasingly sophisticated communication software. More
recently, modem chip manufacturers have designed chips with voice capabilities
that will allow manufacturers of modems and computers to replace the functions
of small office and home telephone systems. These emerging telephony
applications will provide full
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duplex speaker phones, complex voicemail functions, and a dramatically new
level of information management capabilities to the home and small office. In
addition, video conferencing, which traditionally has been a system available
only to high end corporate board rooms at a cost of thousands of dollars, has
reached the desktop, with solutions that are affordable for the home and small
office. The functionality of communication software must continue to evolve to
keep pace with consumer expectations, future hardware functions, and the
rapidly changing competitive environment.
As modem functionality increases, modem manufacturers and consumers
alike have increasingly sought an integrated, easy to use software solution to
enable modems to perform their functions. The Company believes that the
widespread use of personal computers in home and office environments will bring
with it an increasing number of new "nontechnical" users. In this environment,
it will be critically important to provide easy to use, fully integrated,
intuitive software solutions to both OEM manufacturers and end users alike.
SMITH MICRO STRATEGY AND PRODUCTS
The Company offers software products for DOS, Windows, Windows 95,
Windows NT and Macintosh operating systems. Smith Micro believes that its
strong engineering focus and close ties with modem and modem chip manufacturers
enable it to develop communication software in anticipation of changes in
product design and customizes its OEM software to meet specific customer
requirements.
To address the complexity of personal computer communication, Smith
Micro has consistently developed products that are intuitive and easy to use.
The Company believes that its experience in providing products to the OEM
industry, where software is required to enable a new modem to be put into
service quickly and relatively effortlessly, is a significant competitive
advantage. The Company's strategy is to build upon the easy-to-use reputation
of its OEM software products to encourage these new users to migrate to the
Company's retail products as they require higher levels of functionality.
To serve the market's evolving demands for connectivity, Smith Micro's
goal is to offer solutions beyond its core data and fax communication software.
The Company offers products that support remote access, modem sharing,
telephony, paging and video conferencing. In the emerging fields of personal
computer-based wireless and cellular communication, the Company's software for
PC Cards (PCMCIA) is currently being shipped by Motorola, US Robotics/MegaHertz
and IBM. In addition, modems able to support full duplex speakerphone and
other telephony applications are beginning to gain market acceptance and the
Company has developed software to support these emerging technologies.
Smith Micro traditionally has focused on the OEM and, more recently,
the retail channels. The Company's OEM products are bundled with the modems
of many of the world's leading modem manufacturers. In addition, the Company
currently offers a line of easy-to-use retail communication software products
that address the needs of the expanding base of personal computer users which
are sold to distributors and retail stores. The Company intends to broaden its
retail product line and expand the functionality of these products as well as
its OEM products with additional introductions of 32-bit products designed for
the Windows 95 and Windows NT operating systems. As a result of its acquisition
of PCI, the Company now also offers personal computer-based, video
teleconferencing products to its OEM customers and retail video
teleconferencing products for the personal computer. In addition, since the
beginning of 1997, the Company has begun to focus on a third channel, the
corporate and government market. The Company has released a volume purchase
program to address corporate site licensing needs and is developing products to
address vertical markets to be distributed through channels established by
corporate partners.
The Company believes that a key competitive feature of its products is
the ability to switch seamlessly among data, fax, voice, and video conferencing
functions without interruption to the user. The Company's principal products
automatically recognize whether an incoming call is a voice call, facsimile
transmission or data transmission. In addition, a user can send facsimile,
data, telephonic, or video conferencing transmissions without exiting one
application and entering another.
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OEM Products
The following chart lists the Company's current OEM products and OEM
products currently under development:
<TABLE>
<CAPTION>
FUNCTIONALITY MAJOR CUSTOMERS
PRODUCT NAME (PLATFORM) LANGUAGES (STATUS)
--------------------------- ------------------------ ---------------------- ----------------------------
<S> <C> <C> <C>
QuickLink II Fax Win/DOS Data and fax (Windows English U.S. Robotics, Practical
and DOS) Peripherals, Newcom, and
IBM
QuickLink II Fax Windows Data and fax (Windows) English, French, U.S. Robotics, Motorola,
German and Japanese IBM, Banksia Logicode and
Boca Research
QuickLink Message Center Data, fax and voicemail English, French, U.S. Robotics, IBM and Boca
for Windows (Windows) German and Japanese Research
QuickLink Mobile Data, fax and voicemail English, French, IBM and Motorola
(Windows, Windows 95 German and Japanese
and Windows NT)
QuickLink 3.0 Data and fax (Windows, English, English IBM
Windows 95 and Windows (UK), French, German,
NT) Japanese and Spanish
MacComCenter with Voice Data, fax and voice English and Japanese Hayes
(Macintosh)
MacComCenter Data and fax English and Japanese Hayes, Boca Research,
(Macintosh) Practical Peripherals,
Banksia and Zoom
VideoLink Video conferencing English US Robotics
(Windows, Windows 95
and Windows NT)
VideoLink 324 Video conferencing English Boca Research
(Windows 95 and Windows
NT)
VideoLink Net Video conferencing English Avermedia
(Windows 95 and Windows
NT)
VideoLink MessageCenter Video teleconferencing, English USR
data, fax and voice
(Windows, Windows 95
and Windows NT)
VideoLink Mail Video and Audio English Pending
messaging (Windows,
Windows 95 and Windows
NT)
</TABLE>
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QuickLink II Fax Win/DOS and QuickLink II Fax Windows, the Company's
flagship products, provide integrated data communication and fax capabilities
allowing users to send, receive and manage all fax activities in the background
or foreground. In addition, these products enable the broadcasting of faxes to
an unlimited number of locations. These products also offer data communication
functionality that allow users to transfer files between computers and call
electronic bulletin board systems and on-line services.
QuickLink MessageCenter for Windows provides integrated data
communication, fax and computer telephony functions, including voicemail and
full duplex speakerphone capabilities (when supported by the proper modem) in
one package. QuickLink MessageCenter features include multiple mailboxes and
remote retrieval of voicemail. In addition, sending and receiving faxes from
within any Windows application as well as data communication upload and
downloads can take place entirely in the background, allowing the users to
continue work in other applications. Users can call and request fax documents
with the fax-on-demand feature by using the touch-tone keypad on their fax
machine and can configure each mailbox individually and have the product send a
pager notification each time a voice message or fax is received. Moreover,
through alphanumeric pagers, users can be notified of the number of faxes,
voicemail and memos in the mailbox.
QuickLink Mobile is an integrated data communication and fax product
for Windows created for users operating in wireless and cellular mediums.
QuickLink Mobile allows users to toggle between automatic modem configurations
for mobile or land connection. QuickLink Mobile includes a unique Card Test
Utility, which confirms the proper installation of the modem and the Card and
Socket Services drivers, eliminating down-time and allowing the user to proceed
with the wireless fax and data communication functions provided by QuickLink
Mobile. This product makes it possible to send and receive faxes manually in
the foreground, or in the background while other applications are running.
QuickLink 3.0 is configured to be an integrated data communication and
fax product and provides substantially the same functionality as the Company's
QuickLink II Fax for Windows product and support both the Windows, Windows 95
and Windows NT operating systems.
MacComCenter with Voice is an integrated data communication and fax
product for the Macintosh which adds voice to the integrated data communication
and fax functionality developed specifically for the Macintosh environment and
will support multiple mailboxes, each configurable to receive voice, fax and
data into a specific mailbox. The Company has incorporated many of the
features found in the QuickLink MessageCenter product into MacComCenter with
voice.
MacComCenter is an integrated data communication and fax product for
the Macintosh. The product enables the broadcasting of faxes to multiple
locations. It also offers data communication functionality that allows users
to transfer files between computers and call electronic bulletin board systems
and on-line services.
VideoLink is a video conferencing product which is configured to
operate over plain old telephone service ("POTS") or ISDN. The product provides
for video and audio communication between two locations using a standard analog
modem connection.
VideoLink 324 is a video conferencing product supporting the ITU H.324
standard for interoperability over POTS.
VideoLink Net is a video conferencing product which is configured to
operate over the Internet and intranets. The product will allow the user to be
able to hold a video and audio conversation over the Internet through a third
party video server connection. It will also provide the means for holding a
video and audio conversation over a local or wide area network.
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VideoLink MessageCenter includes the video conferencing capabilities
provided by VideoLink and the data, fax and voice mail functionality provided
in QuickLink MessageCenter. All of these functions are incorporated in a
single, fully integrated application.
VideoLink Mail is an application that allows a recording of a video and
audio message to be saved as a highly compressed, self extracting file which can
then be sent via an email attachment over the Internet. The recipient of email
attaching such a file can then play the audio and video message just by double
clicking on the attachment. VideoLink Mail's is highly compressed video and
audio which makes it a much smaller file size.
Retail Products
The following chart lists the Company's current retail products and
retail products currently under development:
<TABLE>
<CAPTION>
PRODUCT NAME FUNCTIONALITY (PLATFORM) LANGUAGES
----------------------------- ------------------------------------------------ --------------------------
<S> <C> <C>
CrossConnect Outbound modem over a LAN and inbound remote English
control (Windows and DOS)
HotFax Menu Fax to application bridge (Windows) English
HotDisk Remote disk access and direct connection disk English
access (Windows and DOS)
HotFax DOS Data and fax (DOS) English
Database Products:
FaxUSA Fax database (any platform) English
National Directory Telephone and address database (any platform) English
HotLine for Windows Telephony application (Windows) English
HotLine for DOS Telephone dialer (DOS) English
HotFax for Windows, Windows Data and fax (Windows and Windows 95) English
95 and Windows NT
HotPage Paging software (Windows 95 and Windows NT) English
MacComCenter Plus with Voice Data, fax and voice (Macintosh) English and Japanese
(under development)
HotFax MessageCenter for Data, fax and voice (Windows, Windows 95 and English
Windows, Windows 95 and Windows NT)
Windows NT
AudioVision Video conferencing (Windows, Windows 95 and English
Windows NT)
VideoLink Mail Video and Audio messaging (Windows, Windows 95 English
and Windows NT)
</TABLE>
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CrossConnect is a modem-sharing product for local area networks.
CrossConnect expands the capability of the modems on both Novell IPX and
NetBIOS local area networks by providing an integrated outbound software
product for sharing modems connected anywhere on the LAN and by providing
remote access on the LAN for users away from the office. The outbound function
supports a mixed environment of DOS and Windows users on the same local area
network. The inbound function allows users away from the office LAN to dial
into the network environment and gain access to a node. After doing so, the
remote user can use CrossConnect for outbound communications, accessing private
or public telephone books, and communicating through a shared modem on the LAN
to bulletin boards, on-line services or any host computer. This remote process
occurs in the background, so that the personal computer with the shared modem
will not be interrupted during the communication.
HotFax Menu provides a bridge between fax software and word
processors, spreadsheet programs, office suites, utilities and graphics
applications. HotFax Menu adds a fax command to a Windows menu to invoke the
fax software and send a fax with a single keystroke or mouse command. HotFax
Menu works with the Company's fax software and with the fax software of the
Company's principal competitors.
HotDisk allows a user to access and use a remote computer's hard disk
and create virtual drives at the local site. HotDisk works in the background
so that the user at the host computer can continue to work without interference
from the caller. Unlike remote control products that require screen images to
be transmitted, HotDisk only transmits file data, greatly improving performance
and speed. Up to 10 virtual drives, including the mapping of network drives,
can be defined and accessed by the remote computer running HotDisk. HotDisk
allows a user to call into the office from a remote location and access a
document, make changes and then save the document on the host or remote
computer, all in the background without disrupting other host users.
Additionally, HotDisk supports both serial and parallel interfaces for direct
connect high speed data transfer and the product is shipped with its own
cables.
HotFax DOS is an integrated fax and data communication product for the
DOS operating environment. HotFax DOS provides the mobile user a fax host for
the remote retrieval of received faxes and unattended upload and broadcast of
faxes at a scheduled time. It also provides users with the ability to retrieve
faxes from a remote location, modify faxes with graphics intact, use a personal
computer as a data host and share data similar to a bulletin board service.
FaxUSA is an Xbase-compatible database. When used along with software
products like HotFax, it enables users to locate the names and fax numbers of
over 100,000 businesses across the United States. FaxUSA includes SIC codes
and is updated annually to provide users with current information for their
marketing, sales and other needs.
National Directory Electronic Edition is an Xbase-compatible database.
When used along with software products like HotLine, it enables users to locate
the names, telephone numbers and mailing addresses of over 100,000 businesses,
spanning over 1,300 industry categories, across the United States. National
Directory Electronic Edition includes SIC codes and provides current listings,
updated annually, in all area codes.
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HotLine for Windows and HotLine for DOS are telephony products for the
personal computer user. HotLine for Windows allows users to create unlimited
Xbase-compatible phone books that can be accessed from within any Windows
application. It supports Caller ID, which first displays the inbound caller's
phone number, and then pulls up caller information by auto-searching and
matching up the appropriate record from one of the program's user-defined
databases when used with appropriate hardware technology. HotLine for Windows
also supports modems with full-duplex speaker phone capabilities which
eliminate the echo and one-way communication limitations of conventional
speaker phones. Included with HotLine for Windows is the American Business
Sampler, a sample database of more than 2,500 business names, addresses and
telephone numbers. Other databases, like the Company's National Directory
Electronic Edition database, can be imported directly into HotLine for Windows.
The DOS version of HotLine is similar in its overall purpose, but has a more
limited set of features.
HotFax for Windows, Windows 95 and Windows NT is the Company's
integrated data, fax and voice retail product. HotFax for Windows, Windows 95
and Windows NT provides the mobile user with a fax host for the remote
retrieval of received faxes and the unattended upload and broadcast of faxes at
a scheduled time. It also provides users with the ability to retrieve faxes
from a remote location, modify faxes with graphics intact, use a personal
computer as a data host and share data like a bulletin board service, create
custom cover pages with imported graphics and preview faxes, including cover
pages.
HotPage is paging software that works in conjunction with Microsoft
Exchange, Messaging or Outlook in Windows 95 and Windows NT and as a
stand-alone application that will allow users to send messages to numeric or
alphanumeric pagers. With Microsoft Exchange, any incoming e- mail that is
placed into the in-box can be sent to an alphanumeric pager. Filters are built
in so that the user can define certain parameters under which HotPage will send
the message. The user can also compose a message and send it directly to an
alphanumeric pager.
MacComCenter Plus with Voice is configured to be the Company's retail
Macintosh data, fax and voice communication software product. It will, under
current design, allow the user to configure multiple mailboxes that will accept
voice, fax or data messages. It includes OCR for converting incoming
transmissions into text files and gives users the ability to send true WYSIWYG
faxes from an application that has print capabilities. Users also will be
able to create custom cover pages with imported graphics, preview entire faxes,
including cover pages, retrieve faxes from a remote location, and share data
similar to a bulletin board service with a data host.
HotFax MessageCenter for Windows, Windows 95 and Windows NT is a fully
integrated data, fax and voice mail application. The product includes all of
the features of HotFax for Windows, Windows 95 and Windows NT mentioned above.
It allows the user to configure multiple mailboxes that will accept voice, fax
or data messages. The product installs as a Windows 95, Windows NT or Windows
3.1 or 3.11 application. The application can send a pager notification each
time a voice message or fax is received. If configured for an alphanumeric
pager, the notification will specifically identify the number of faxes, voice
mail and memos in the mailbox.
AudioVision is a video conferencing software product that works over
the existing telephone lines or POTS (Plain Old Telephone Service), ISDN, the
Internet or intranets. It works with any digital camera plugged into the
parallel port on the computer or with an analog camera plugged into a video
capture card. It also supports the industry ITU H.324 standard for
interoperability over POTS. AudioVision includes a feature called VMail that
allows the user to record a video and audio message, save it as an executable
file and send it via email as an attachment to another individual who can then
play the message. The latest version also includes other features such as a
virtual VCR, a whiteboard, and plug-in multi-user games that can be played by
both parties while holding a video conference.
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VideoLink Mail is an application that allows the recording of a video
and audio message which can be saved in a highly compressed format as a self
extracting file which can then be sent via an email attachment over the
Internet. The recipient can then play the message just by double clicking on
the attachment.
SALES AND MARKETING
The Company sells its communication software products worldwide to OEM
customers that bundle or pre-load the Company's software with their hardware
products, and to distributors and retailers that sell the product to end user
customers. Since the beginning of 1997, the Company has begun to focus on a
third channel, the corporate and government market. The Company has released a
volume purchase program to address corporate site licensing needs and is
developing products to address vertical markets to be distributed through
channels established by corporate partners.
OEM Sales
The Company has OEM relationships with many of the major modem
manufacturers worldwide. The Company's customers include U.S. Robotics,
Practical Peripherals/Hayes, Motorola, IBM, GVC (Taiwan), Banksia
(Australia)and Boca Research. Each of these manufacturers bundles the
Company's software products with its own hardware products. Approximately 13%
of the Company's OEM revenues for the twelve months ended December 31, 1996
were derived from OEM customers outside of the United States. The Company has
products available in Japanese, French and German as well as in English and
approximately 9% of the Company's OEM revenues for the twelve months ended
December 31, 1996 were derived from the sale of foreign language versions of
the Company's products.
The OEM modem market continues to evolve. Personal computer
manufacturers have begun to bundle modems and communication software with their
products. In some cases, personal computer manufacturers are pre-loading
communication software onto hard disks. Moreover, modem chips are under
development which will put modem functionality on the motherboard of the
personal computer, eliminating the need for a separate modem. In light of
these trends, the Company has begun to focus on expanding its OEM relationships
with personal computer manufacturers.
The cycle from the placement of an OEM order to shipping is very
short. OEM customers generally operate under a just-in-time system and order
software to be delivered as needed by their manufacturing operations. The
Company generally ships its products as orders are received. As a result, the
Company has relatively little backlog at any given time, and does not consider
backlog to be a significant indicator of future performance. Moreover, the
Company does not generally produce software in advance of anticipated orders
and therefore has insignificant amounts of inventory. As a result of the
foregoing, revenues in any quarter are substantially dependent on orders booked
in that quarter.
During 1994, 1995 and 1996 the Company's three largest OEM customers,
including U.S. Robotics, accounted for 56.7% ,66.8% and 62.9%, respectively, of
net revenues. U.S. Robotics (including Megahertz with respect to 1995, which
was purchased by U.S. Robotics in February, 1995) accounted for more than 10%
of the Company's net revenues in 1995 and 1996. Motorola also accounted for
more than 10% of revenue in 1996. The Company's major customers could reduce
their orders of the Company's products in favor of a competitor's product or
for any other reason. The loss of any of the Company's major OEM customers
would have a material adverse effect on the Company's business, results of
operations and financial condition.
In April 1996, the Company entered into an OEM agreement having an
initial one year term with U.S. Robotics Access Corp., one of several
wholly-owned subsidiaries of U.S. Robotics Corporation. This OEM agreement
superseded the previous agreement between the parties. This agreement renews
automatically at the end of each one year term unless either party provides at
least 60 days notice of its intention to terminate the
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agreement at the end of the then-current term. Under the terms of the new
agreement, the Company granted certain pricing incentives to U.S. Robotics
Access Corp. in consideration for which the Company became the exclusive
provider of fax, data, voice and telephony communications software for certain
U.S. Robotics modems. In addition, under the terms of the agreement, U.S.
Robotics Access Corp. has agreed to place Smith Micro retail products and
commercials for such products on certain U.S. Robotics compact disks. The
agreement does not require U.S. Robotics Access Corp. or any other U.S.
Robotics-affiliated entity to purchase any minimum quantity of Smith Micro
products and may be terminated by either party at any time for any reason upon
90 days written notice.
In January 1996, the Company entered into a one-year agreement with
Motorola, Inc. under which Motorola's PCMCIA Products Division and Information
Systems Group will license Smith Micro's communications software for Motorola
retail and OEM products. The agreement is automatically renewable for
consecutive one-year periods at the end of each one-year term unless either
party provides the other with 60 days notice. The agreement does not require
Motorola to purchase any minimum quantity of Smith Micro products.
The Company sells directly to modem and personal computer
manufacturers using an in-house sales staff based in Aliso Viejo, California.
The Company allows its OEM customers to return unused software. To date,
however, such returns have been infrequent, constituting 0.5% of OEM revenues
for 1995.
Retail Sales
While historically the Company has generated its revenues primarily
from the OEM market, it also sells retail products which are designed to
complement or upgrade its OEM products. During the 12 months ended December 31,
1996, retail sales grew to 16% of total net revenues from 6% during the same
period in 1995.
The Company has a separate sales staff that handles retail sales and
works closely with Smith Micro's retail distributors on the management of
orders, inventory levels, sell-through to retailers, as well as promotions and
marketing activities. Domestically, the Company's retail products are sold by
independent distributors including Ingram Micro, Tech Data and Merisel. In
addition, the retail sales force is responsible for contacting major retail
customers to generate demand for the Company's retail products in the retail
distribution channel.
The Company allows distributors and retailers to return products
without charge or penalty. In addition, there are times when the Company
updates products and requests the distributors of the products to replace
inventory on the shelves with the new version in what is called a stock
rotation. During 1996 there were approximately $2 million in product returns
from the retail channel, or 40% of gross retail sales. A component of the
Company's revenue recognition policy is that the Company calculates an
allowance for product returns based on its historical experience with product
returns. If retail sales of the Company's products increase, the risk of
product returns will increase. While the Company's revenue recognition policy
contemplates this risk, it is possible that returns may occur in excess of the
Company's previous experience, causing the Company to revise its estimates and
increase the allowances for such returns.
The Company employs direct mail programs to offer end-users upgrades
to the Company's retail products. The Company advertises in selected computer
end-user and re-seller publications and periodically introduces promotions and
incentive offers such as special pricing for the purchase of upgrades. The
Company also participates in major trade shows, professional conferences and
personal computer user group events to reach its target markets.
Corporate and Government Sales
The Company historically has not focused specifically on the corporate
and government marketplaces. For the coming year, the Company plans to build
the infra-structure necessary to sell to these two customer bases. It intends
to add sales and marketing efforts to sell direct and work with third party
groups that specialize in
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selling to these customers. As sales in the corporate and government
marketplaces tend to be structured differently from the traditional OEM and
retail channels, the Company has established a separate pricing structure for
such sales. Sales in these marketplaces also tend to be made in single volume
orders, typically for site licenses. The Company's pricing structure for sales
made in these marketplaces currently accommodates multi-level, volume purchase
with discounts for larger orders. A maintenance program also is available to
provide technical support and automatic product upgrades under specifically
defined terms. In addition, the Company has started the development of products
to address vertical markets to be distributed through channels established by
corporate partners.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
The Company provides technical support and customer service by
telephone, mail, facsimile, modem, its customer bulletin board service, an
Internet Web site and through a forum that it operates on CompuServe. Certain
of the Company's OEM customers provide their own primary customer support
functions and rely on the Company for back-up customer support, while support
functions for other OEM customers are provided solely by the Company.
PRODUCT DEVELOPMENT
The software industry is characterized by frequent changes in
technology and evolving user needs. The Company works closely with its current
OEM customers to determine future user needs and to anticipate changes in
technology. Modem functionality is determined by the capabilities of the modem
chip and, accordingly, the Company maintains close relationships with the major
modem chip manufacturers and develops software in tandem with modem chip
development. These highly interactive development approaches extend to modem
manufacturers as well, where Smith Micro works with modem developers in an
attempt to provide fully tested software when new modems are released.
Engineering relationships with Rockwell, IBM Mwave, Cirrus Logic, Intel, Texas
Instruments and others as well as with the Company's major OEM modem customers
are central to the product development efforts of the Company. In addition,
the Company participates in software product developer programs sponsored by
Microsoft, IBM and Apple.
The Company believes that it must be responsive to the specific
customization requests of its OEM customers. With this need for flexibility in
mind, the Company has completely redeveloped the code base from which its
products are created. Its object-oriented C++ modular code base is designed to
allow significant customization and enhancements of features within tight
development schedules.
As of December 31, 1996, the Company had a product development staff
of 40 engineers and quality assurance and product testing specialists. The
Company plans to add additional software engineers and product testing
personnel in the future.
MANUFACTURING
The Company's software is sold in three forms. Primarily it is sold
in a kit which includes disks or a CD and a manual. In addition, the Company
permits certain of its OEM customers to duplicate their own disks and the
Company controls that process through the use of serialized labels sold to
those customers. This method of sale does not require the Company to provide a
disk or manual. Also, the Company grants licenses to certain OEM customers
that enable those customers to pre-load a copy of the Company's software onto a
personal computer's hard disk. With the corporate sales program, the Company
offers site licenses under which a corporate user is allowed to distribute
copies of the software to users within the corporate sites.
The Company relies on third party suppliers who provide the components
used in its kitted products. These components include disks and printed
manuals. Disk shortages have occurred in the past and there can be no
assurance that shortages will not recur. If the Company cannot obtain a
sufficient quantity of disks or other
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components, or cannot obtain disks or other components at prices at least
comparable to prices paid currently, the Company's business, results of
operations and financial condition could be adversely affected.
Modem manufacturers purchase chips from a relatively limited number of
chip manufacturers. Production problems or product quality problems
experienced by a chip manufacturer could reduce modem sales or slow the growth
of modem sales. The Company believes that chip suppliers currently lack
sufficient capacity to meet the demand for certain chips used by modem
manufacturers, including the Company's OEM customers. If this shortage
continues, it could adversely affect sales of the Company's OEM communication
software.
Where the Company is selling kitted product, it duplicates most of the
required disks at its Aliso Viejo, California facility. This facility is
capable of producing 25,000 duplicated disks in a single eight hour shift.
Operations are primarily conducted on a single shift basis, although the
Company operates a second shift from time to time to accommodate customer
delivery requirements. The Company has outside production alternatives in the
event of a disruption of its Aliso Viejo operations. The Company uses outside
vendors for printing of labels, manuals and packaging and uses outside kit
assembly companies for all but a limited number of orders.
In the first quarter of 1996, the Company began shipping a kitted
CD-ROM product. The Company relies on third party suppliers to provide CD-ROM
components. When CD-ROMs are required, the Company uses outside sources for
CD-ROM replication. The equipment to replicate CD-ROMs is very costly making
it unlikely that the Company will add this capability internally. This leaves
the Company dependent on CD-ROM replication facilities for both the timing and
pricing of the software produced in CD-ROM format. This could impair the
Company's ability to deliver products to customers and any price increases
could reduce gross margins which could have a material adverse effect on the
Company's business, results of operations and financial condition.
COMPETITION
The markets in which the Company operates are highly competitive and
subject to rapid changes in technology. The strategic directions of major
personal computer hardware manufacturers and operating system developers are
also subject to changes. The Company competes with other software vendors for
access to distribution channels, retail shelf space and the attention of
customers. The Company also competes with other software companies in its
efforts to acquire software technology developed by third parties and in
attracting qualified personnel. These actions may result in increased price
competition.
The Company believes that the principal competitive factors affecting
the market include product features and ease of use, willingness of the vendor
to customize the product to fit customer-specific needs, product reputation,
quality, performance, price, customer service and support, and the
effectiveness of sales and marketing efforts. Although the Company believes
that its products currently compete favorably with respect to such factors,
there can be no assurance that the Company can maintain its competitive
position against current and potential competitors, especially those with
significantly greater financial, marketing, service, support, technical and
other resources.
Because there are relatively low barriers to entry in the software
market and because rapidly changing technology is constantly creating new
opportunities, the Company expects additional competition from other
established and emerging software companies as fax and data applications merge
with video and audio applications and the emerging cellular, wireless and
telephony markets develop. Increased competition could result in price
reductions, reduced gross margins and loss of market share, any of which could
have a material adverse effect on the Company's business and results of
operations.
The Company competes primarily with Symantec/Delrina, Cheyenne, White
Pine, Global Village and VDONet in the OEM market, and with Symantec/Delrina,
Global Village, Quarterdeck and Traveling Software in the retail market for
communication software products. Some of the Company's competitors have a
retail
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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. Such a
pricing strategy could have an adverse affect on the Company's business,
results of operations and financial condition.
The Company also believes that the market in which it competes has
been characterized by the consolidation of established communication software
suppliers and that this trend, which may lead to the creation of additional
large and better-financed competitors, may continue. Moreover, because there
are low barriers to entry into the software market, the Company believes that
competition will increase in the future.
Symantec/Delrina and many of the Company's other current and
prospective competitors have significantly greater financial, marketing,
service, support, technical and other resources than the Company. Moreover,
these companies may introduce additional products that are competitive with
those of the Company, and there can be no assurance that the Company's products
would compete effectively with such products. The Company believes that its
ability to compete depends on elements both within and outside its control,
including the success and timing of new product development and introduction by
the Company and its competitors, product performance and price, distribution
and customer support. There can be no assurance that the Company will be able
to compete successfully with respect to these and other factors. The Company
believes that the market for its software products has been and will continue
to be characterized by significant price competition. A material reduction in
the price of the Company's products could negatively affect the Company's
profitability.
Many of the Company's existing and potential OEM customers are major
manufacturers of modems and have substantial technological capabilities. These
customers may currently be developing, or may in the future develop, products
that compete directly with the Company's products and may, therefore,
discontinue purchases of the Company's products. The Company's future
performance is substantially dependent upon the extent to which existing OEM
customers elect to purchase communication software from the Company rather then
design and develop their own software. In light of the fact that the Company's
customers are not contractually obligated to purchase any of the Company's
products, there can be no assurance that the Company's existing OEM customers
will continue to rely, or expand their reliance, on the Company as an external
source for communication software.
The Company also faces competition from Microsoft, which dominates the
personal computer software industry. Due to its market dominance and the fact
that it is the publisher of the most prevalent personal computer operating
systems, DOS and Windows, Microsoft represents a significant competitive threat
to all personal computer software vendors, including the Company.
PROPRIETARY RIGHTS AND LICENSES
Although the Company believes that its products do not infringe on the
intellectual property rights of others, there can be no assurance that such a
claim will not be asserted against the Company in the future. The failure of
the Company to protect its proprietary information could have a material
adverse effect on the Company's business, results of operations and financial
condition.
From time to time, the Company has received and may receive in the
future communications from third parties asserting that trademarks used by the
Company or features or content of certain of the Company's products infringe
upon intellectual property rights held by such third parties. As the number of
trademarks, patents, copyrights and other intellectual property rights in the
Company's industry increases, and as the coverage of these patents and rights
and the functionality of products in the market further overlap, the Company
believes that products based on its technology may increasingly become the
subject of infringement claims. Moreover, any of these proceedings could also
result in an adverse decision as to the priority of the Company's inventions.
Such results would materially adversely affect the Company, and may also
require the Company to obtain one or more licenses from third parties. There
can be no assurance that the Company would be able to obtain any such
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required licenses upon reasonable terms, if at all, and the failure by the
Company to obtain such licenses could have a material adverse effect on its
business, results of operations and financial condition.
The Company's success is dependent upon its software code base, its
programming methodologies and other intellectual properties. To protect its
proprietary technology, the Company relies on a combination of trade secret,
nondisclosure and copyright and trademark law which may afford only limited
protection. Until recently, the Company did not require its employees to sign
proprietary information and inventions agreements stipulating, among other
things, software ownership rights. There can be no assurance that the steps
taken by the Company will be adequate to deter misappropriation of its
proprietary information, will prevent the successful assertion of an adverse
claim to software utilized by the Company or that the Company will be able to
detect unauthorized use and take effective steps to enforce its intellectual
property rights.
In selling its products, the Company relies primarily on "shrink wrap"
licenses that are not signed by licensees and, therefore, may be unenforceable
under the laws of certain jurisdictions. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to as great an extent
as do the laws of the United States. There can be no assurance that the
Company's means of protecting its proprietary rights will be adequate or that
the Company's competitors will not independently develop similar technology.
In addition, the Company licenses technology on a non-exclusive basis from
several companies for inclusion in its products and anticipates that it will
continue to do so in the future. The inability of the Company to continue to
license these technologies or to license other necessary technologies for
inclusion in its products, or substantial increases in royalty payments under
these third party licenses could have a material adverse effect on its
business, results of operations and financial condition.
EMPLOYEES
As of December 31, 1996, the Company had a total of 89 employees, of
which 40 were engaged in engineering, 16 were in sales and marketing, 12 were
in customer support, 14 were in finance and administration and 7 were in
manufacturing. None of the Company's employees is represented by a labor
union. The Company has not experienced any work stoppages, and considers its
relations with its employees to be good.
ACQUISITION OF PERFORMANCE COMPUTING INCORPORATED
On March 14, 1996, the Company completed its acquisition of PCI, an
audio/video software solutions provider. In connection with the acquisition,
all of the outstanding PCI shares were converted into the right to receive an
aggregate of 350,000 shares of the Company's Common Stock and $2.1 million in
cash. Of the shares issued and the cash paid, 135,000 shares of Common Stock
and $180,000 of cash were placed in a one-year escrow to secure the
indemnification obligations of the sellers in the transaction. This cash in
escrow was partially offset by claims against the escrow fund as of March 14,
1997 and the balance was paid in cash. Under an amendment to the terms of the
escrow arrangement, a portion of the escrowed shares are being kept as security
for future claims for an additional one-year period, through March 14, 1998, or
until such time as certain matters are fully resolved. In addition, certain
milestones as set forth in the acquisition agreement were met by March 14, 1997
and as required in the PCI acquisition agreement, $800,000 was paid to the
seller group or at its direction.
RISK FACTORS
Fluctuations in Quarterly Operating Results. The Company's operating
results have in the past fluctuated, and may in the future fluctuate, from
quarter to quarter as a result of a number of factors including, but not
limited to, the size and timing of orders from, and shipments to, major
customers; the ability of the Company's customers to obtain financing for the
purchase of the Company's products; changes in pricing policies or price
reductions by the Company or its competitors; variations in the Company's sales
channels or the mix of product sales; the timing of new product announcements
and introductions by the Company or its competitors; the
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availability and cost of supplies; the financial stability of major customers;
market acceptance of new products, applications and product enhancements; the
Company's ability to develop, introduce and market new products, applications
and product enhancements; the Company's ability to control costs; possible
delays in the shipment of new products; the Company's success in expanding its
sales and marketing programs; deferrals of customer orders in anticipation of
new products, applications, product enhancements or operating systems; changes
in Company strategy; personnel changes; and general economic factors. The
Company's software products are generally shipped as orders are received and
accordingly, the Company has historically operated with little backlog. As a
result, sales in any quarter are dependent on orders booked and shipped in that
quarter and are not predictable with any degree of certainty. In addition, the
Company's expense levels are based, in part, on its expectations as to future
revenues. If revenue levels are below expectations, operating results are
likely to be adversely affected. The Company's net income may be
disproportionately affected by a reduction in revenues because of fixed costs
related to generating its revenues. While the Company has not historically
experienced seasonality in its sales, many of the Company's OEM customers
experience seasonality in their sales, and the Company's sales may, in the
future, be subject to seasonality particularly as its sales of retail products
increase. Quarterly results in the future may be influenced by these or other
factors and, accordingly, there may be significant variations in the Company's
quarterly operating results. Further, the Company's historical operating
results are not necessarily indicative of future performance for any particular
period and there can be no assurance that the Company's recent revenue growth
or its profitability will continue on a quarterly or annual basis. Due to all
of the foregoing factors, it is possible that in some future quarter the
Company's operating results may be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would likely be materially adversely affected.
Reliance on U.S. Robotics. In 1994, 1995 and 1996, U.S. Robotics
(including, with respect to 1995, Megahertz, which U.S. Robotics acquired in
February 1995), represented 35.8%, 52.1% and 46.4%, respectively, of the
Company's net revenues. The Company expects that U.S. Robotics, which became a
customer in the fourth quarter of 1993, will continue to account for a
significant portion of the Company's revenues in future periods. In April
1996, the Company entered into an OEM agreement having an initial one year term
with U.S. Robotics Access Corp., one of several wholly-owned subsidiaries of
U.S. Robotics Corporation. This OEM agreement superseded the previous
agreement between the parties. The new agreement renews automatically at the
end of each one year term unless either party provides at least 60 days notice
of its intention to terminate the agreement at the end of the then-current
term. Under the terms of the agreement, the Company granted certain pricing
incentives to U.S. Robotics Access Corp. in consideration for which the Company
became the exclusive provider of fax, data, voice and telephony communications
software for certain U.S. Robotics modems. In addition, under the terms of the
agreement, U.S. Robotics Access Corp. has agreed to place Smith Micro retail
products and commercials for such products on certain U.S. Robotics compact
disks. Moreover, the agreement does not require U.S. Robotics Access Corp. or
any other U.S. Robotics-affiliated entity to purchase any minimum quantity of
Smith Micro products and moreover may be terminated by either party at any time
for any reason upon 90 days written notice. As a result, there can be no
assurance that U.S. Robotics will continue to purchase the Company's products.
While the Company believes that it has been the principal supplier of OEM
communication software products to U.S. Robotics (excluding Megahertz), there
can be no assurance that U.S. Robotics will not seek additional sources for
such products in the future. In addition, 3Com has announced its intention to
acquire U.S. Robotics. Accordingly, there can be no assurance that sales to
U.S. Robotics will reach or exceed historical levels in any future period. A
substantial decrease or delay in sales to U.S. Robotics would have a material
adverse effect on the Company's business, results of operations and financial
condition. Assuming the number of products sold to U.S. Robotics Access Corp.
were to remain at 1995 levels, in light of the pricing incentives provided in
the agreement, gross revenues from U.S. Robotics with respect to products
covered by the agreement could be adversely affected, although the Company
believes that net income attributable to such sales would not be impacted
negatively.
Concentration of Customer Revenues. In addition to its reliance on
U.S. Robotics, the Company has in the past derived, and expects in the future
to derive, a significant portion of its revenues from a relatively small number
of customers. Approximately 56.7%, 66.8%, and 62.9% of the Company's net
revenues in 1994,
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1995, and 1996, respectively, were derived from sales of products to the
Company's three largest OEM customers, including U.S. Robotics. The Company
expects that it will continue to be dependent upon relatively large orders from
these customers and a limited number of other OEM customers for a significant
portion of its revenues in future periods, although none of them is obligated
to purchase any products. Accordingly, there can be no assurance that any
sales to these entities, individually or as a group, will continue or, if
continued, will reach or exceed historical levels in any future period. Any
substantial decrease or delay in sales to one or more of these entities would
have a material adverse effect on the Company's business, results of operations
and financial condition. In addition, certain of the Company's OEM customers
have in the past and may in the future acquire competitors or be acquired by
competitors, causing further consolidation in the modem industry. Hayes
Microcomputer Products ("Hayes"), one of the Company's significant OEM
customers, previously acquired Practical Peripherals, another OEM customer of
the Company. Hayes (including Practical Peripherals) accounted for 15.4%,9.8%
and 3.8% of the Company's net revenues for 1994,1995 and 1996, respectively.
Previous acquisitions in the modem industry have often caused the purchasing
departments of the combined companies to reevaluate their purchasing decisions.
Finally, during February 1997, 3Com announced its intent to acquire U.S.
Robotics. There can be no assurance that any such acquisition will not result
in a change in the resulting entity's purchasing habits, a decrease in orders,
a delay in orders previously made by the customer or the loss of that customer
entirely. Moreover, acquisitions involving existing OEM customers may cause
the concentration of the Company's customer revenues to increase if the
combined companies continue to purchase the Company's software products.
During 1996, retail distributors became a more significant customer
base for the Company. Approximately 16% of net revenues during 1996 were
derived from sales of products to retail customers. The Company expects that
the retail distribution customers will continue to contribute a significant
portion of it's revenue in future periods, although no such customer is
obligated to purchase any products. Accordingly, there can be no assurance
that any sales to these entities, individually or as a group, will continue or,
if continued, will reach or exceed historical levels in any future period. Any
substantial decrease or delay in sales to one or more of these entities would
have a material adverse effect on the Company's business, results of operations
and financial condition. In addition, large distributors that carry the
Company's product line for the retail channel have longer payment patterns than
the OEM customers. This has increased the Company's receivable balance which
has resulted in decreased cash flow from operations. A significant increase in
business through the retail / distribution channel could continue to increase
the pressure on the cash flow from operations.
Product Concentration. The Company has in the past derived, and may in
the future derive, a significant portion of its revenues from a relatively small
number of products. In 1995 and 1996, respectively, 84% and 64%of the Company's
net revenues were derived from the sale of various versions of QuickLink II Fax
and 10% and 7%of the Company's net revenues were derived from MacComCenter,
which is the QuickLink II Fax equivalent for the Macintosh market. The Company
expects that revenues from these products will continue to account for a
substantial portion of the Company's total revenues in the foreseeable future.
The decline in QuickLink II Fax sales from 84% of net revenues in 1995 to 64% in
1996 was primarily due to the increased sales of retail products. Declines in
the revenues from these software products, whether as a result of competition,
technological change, price pressures or other factors, would have a material
adverse effect on the Company's business, results of operations and financial
condition. Further, life cycles of the Company's products are difficult to
estimate due in large measure to the recent emergence of the Company's market,
the effect of new products, applications or product enhancements, technological
changes in the communication software industry in which the Company operates and
future competition. The Company's future financial performance will depend in
part on the successful development, introduction and market acceptance of new
products, applications and product enhancements. There can be no assurance that
the Company will continue to be successful in marketing its current products or
any new products, applications or product enhancements.
Technological Change. The communication software market for personal
computers is characterized by rapid technological change, changing customer
needs, frequent product introductions and evolving industry
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standards. The introduction of products incorporating new technologies and the
emergence of new industry standards could render the Company's existing
products obsolete and unmarketable. The Company's future success will depend
upon its ability to develop and introduce new software products (including new
releases, applications and enhancements) on a timely basis that keep pace with
technological developments and emerging industry standards and address the
increasingly sophisticated needs of its customers. There can be no assurance
that the Company will be successful in developing and marketing new products
that respond to technological changes or evolving industry standards, that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these new products, or
that its new products will adequately meet the requirements of the marketplace
and achieve market acceptance. If the Company is unable, for technological or
other reasons, to develop and introduce new products in a timely manner in
response to changing market conditions or customer requirements, the Company's
business, results of operations and financial condition would be materially
adversely affected.
Microsoft is the leading developer of operating systems for personal
computers. While the Company has successfully developed software products for
current Microsoft operating systems, there can be no assurance that the
Company will successfully develop new versions of its software products that
will operate on future Microsoft operating systems, or that any such
development, even if successful, will be completed concurrently with or prior
to introductions by competitors of communication software products for those
operating systems. Any such failure or delay could affect the Company's
competitive position or lead to product obsolescence in the future.
While the Company ships software to a number of computer
manufacturers, its primary OEM customers are modem manufacturers. The Company
is aware that technology is being developed to enable the functions of the
modem to be performed by a chip embedded into the computer. This development,
if and when it comes to market, could impair the business of those of the
Company's customers that rely on the existence of a separate modem component
for their continued success. A downturn in the business of one or more of its
principal customers could adversely affect the Company's business, results of
operations and financial condition.
Competitive Threat from Microsoft Windows 95, Windows NT and Other
Operating Systems. The Company faces competition from Microsoft, which
dominates the personal computer software industry. Due to its market dominance
and the fact that it is the publisher of the most prevalent personal computer
operating platforms, DOS and Windows, Microsoft represents a significant
competitive threat to all personal computer software vendors, including the
Company. In addition, Windows 95 and Windows NT, the latest of the Microsoft
operating systems, include capabilities now provided by certain of the
Company's OEM and retail software products, including the Company's principal
product, QuickLink II Fax. If the communications capabilities of Windows 95,
Windows NT or other operating systems are adopted by users, sales of the
Company's products could decline.
Competition. The markets in which the Company operates are highly
competitive and subject to rapid changes in technology. The strategic
directions of major personal computer hardware manufacturers and operating
system developers are also subject to changes. The Company competes with other
software vendors for access to distribution channels, retail shelf space and
the attention of customers. The Company also competes with other software
companies in its efforts to acquire software technology developed by third
parties. These factors may result in increased price competition.
Additionally, there can be no assurance that competitors will not develop or
acquire products that are superior to the Company's products or that achieve
greater market acceptance.
The Company's retail products face significant competition. In the
retail market, HotFax, the Company's principal retail product, competes
directly with Symantec/Delrina's WinFax Pro 7.5. Symantec/Delrina is well
established in the retail distribution channel. There can be no assurance that
HotFax will capture a significant share of the retail market for communication
software. In addition, the Company's newly released retail video conferencing
product, AudioVision, competes in a new and rapidly changing software market.
Some of the current competitors in the video conferencing software market are
White Pine, Connectix, and VDONet, and there can be no assurance that the
Company will compete successfully with these and any
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future competitors in the retail video conferencing software market. In the
OEM distribution channel, the Company has several strong competitors, among
them Symantec/Delrina, Global Village, White Pine and VDONet. Some of the
Company's 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. Such a pricing strategy could have an adverse affect on the
Company's business, results of operations and financial condition.
Symantec/Delrina currently make certain products that are
complementary with products sold by each other. The combined entity may be
able to enhance its competitive position by bundling certain of these products
to attract customers seeking integrated, cost-effective software applications.
The Company also believes that the market in which it competes has been
characterized by the consolidation of established communication software
suppliers and that this trend, which may lead to the creation of additional
large and well-financed competitors, may continue. In addition, other
competitors have entered the market. Moreover, because there are low barriers
to entry into the software market, the Company believes that competition will
increase in the future. To remain competitive, the Company believes that it
will need to make continuing investments in research and development and sales
and marketing. There can be no assurance that the Company will have sufficient
resources to make such investments, or that it will be successful in its
research and development or sales and marketing efforts.
Symantec/Delrina and many of the Company's current and prospective
competitors have significantly greater financial, marketing, service, support,
technical and other resources than the Company. Moreover, these companies may
introduce additional products that are competitive with those of the Company,
and there can be no assurance that the Company's products would compete
effectively with such products. The Company believes that its ability to
compete depends on elements both within and outside its control, including the
success and timing of new product development, product performance and price,
distribution and customer support and introduction by the Company and its
competitors of new products. There can be no assurance that the Company will
be able to compete successfully with respect to these and other factors. The
Company believes that the market for its software products has been and will
continue to be characterized by significant price competition. A material
reduction in the price of the Company's products could negatively affect the
Company's profitability.
Many of the Company's existing and potential OEM customers are major
manufacturers of modems and have substantial technological capabilities. These
customers may currently be developing, or may in the future develop, products
that compete directly with the Company's products and may, therefore,
discontinue purchases of the Company's products. The Company's future
performance is substantially dependent upon the extent to which existing OEM
customers elect to purchase communication software from the Company rather than
design and develop their own software. In light of the fact that the Company's
customers are not contractually obligated to purchase any of the Company's
products, there can be no assurance that the Company's existing OEM customers
will continue to rely, or expand their reliance, on the Company as an external
source for communication software.
Dependence on New Product Offerings. The Company's future success
will depend, in significant part, on its ability to successfully develop and
introduce new software products and improved versions of existing software
products on a timely basis and in a manner that will allow such products to
achieve broad customer acceptance. There can be no assurance that new products
will be introduced on a timely basis, if at all. If new products are delayed
or do not achieve market acceptance, the Company's business, results of
operations and financial condition will be materially adversely affected. In
the past, the Company has also experienced delays in purchases of its products
by customers anticipating the launch of new products by the Company or the
Company's customers. There can be no assurance that material order deferrals
in anticipation of new product introductions will not occur. There can also be
no assurance that the Company will be successful in developing, introducing on
a timely basis and marketing such software or that any such software will be
accepted in the market.
Retail Product Strategy Unproven. The Company's revenues have
increased during the past five years almost entirely on the strength of its OEM
sales. The Company is developing retail products with expanded
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<PAGE> 20
functionality from its OEM products, and the Company expects to introduce other
products in the retail distribution channel as well. Sales in the retail
channel have grown to approximately 16% of net revenues for the year ended
1996, from 6% during the same period in 1995. The ability to maintain
distributor and retailer relationships is largely a function of volumes. If
the Company does not meet certain minimum volume requirements, it will not be
able to maintain its relationships. With unproven products and its
distribution system at early stages, there can be no assurance that the
Company's retail marketing plan will succeed. Further, while retail products
provide higher unit revenues than OEM products, retail distribution entails
significantly higher costs. These costs include advertising, trade shows,
public relations and the expenses related to the development and maintenance of
a sales force dedicated to the retail distribution effort. Accordingly, there
can be no assurance that retail sales will provide the margins that the Company
has been able to achieve on its OEM sales or that distributor and retailer
minimum volume requirements will be met.
In implementing its retail sales strategy, the Company relies on
distributors, retailers and value added resellers (collectively, "resellers")
for the marketing and distribution of HotFax, HotFax MessageCenter, HotPage,
AudioVision and its other retail products. The Company's agreements with
resellers are not exclusive and in many cases may be terminated by either party
without cause. Many of the Company's resellers carry product lines that are
competitive with those of the Company. There can be no assurance that these
resellers will give a high priority to the marketing of the Company's products
or that resellers will continue to carry the Company's products. In addition,
these resellers typically are allowed to return products without charge or
penalty. A component of the Company's revenue recognition policy is that the
Company calculates an allowance for product returns based on its historical
experience. If retail sales of the Company's products increase, the risk of
product returns will increase. While the Company's revenue recognition policy
contemplates this risk, it is possible that returns may occur in excess of the
Company's previous experience, causing the Company to revise its estimates and
increase the allowances for such returns. Excessive or unanticipated returns
could materially adversely affect the Company's business, results of operations
and financial condition. The Company's results of operations could also be
materially adversely affected by changes in reseller inventory strategies,
which could occur rapidly, and in many cases, may not be related to end user
demand. There can be no assurance that the Company will retain its current
resellers or will be successful in recruiting other resellers to represent it.
Any of these anticipated changes in the Company's distribution channels could
materially adversely affect the Company's business, results of operations and
financial condition.
Corporate and Government Product and Marketing Strategy Unproven. The
Company's revenues have increased during the past five years almost entirely on
the strength of its OEM sales, and more recently, retail sales. During 1997 the
Company plans to add the infrastructure necessary to support a focus on the
corporate and government market. The corporate market includes vertical
applications that are industry specific and require the investment of
engineering resources. There can be no assurance that the additional
infrastructure required in sales and marketing to the corporate and government
markets, or the investment in engineering resources for applications specific to
such markets, will yield significant sales growth for the Company or provide the
margins the Company has achieved historically on its OEM sales.
Potential for Undetected Errors. Software products as complex as
those offered by the Company may contain undetected errors. The Company has in
the past discovered software errors in certain of its products and has
experienced delayed or lost revenues during the period required to correct
these errors. There can be no assurance that, despite testing by the Company
and by current and potential customers, errors will not be found in new or
existing products after commencement of commercial shipments, resulting in loss
of or delay in market acceptance or the recall of such products, which could
have a material adverse effect upon the Company's business, results of
operations and financial condition. The Company provides customer support for
most of its products. The Company is preparing to launch several new products.
If these products are flawed or are more difficult to use than traditional
Company products, customer support costs could rise and customer satisfaction
levels could fall.
Pre-Load and Royalty Based Software Market. The Company primarily
sells its software in a form that includes a disk and a manual. Some of its
customers "pre-load" the Company's software onto a hard disk or pay a royalty
based on units produced or shipped. These arrangements eliminate the need
for a disk and may eliminate
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<PAGE> 21
the need for a manual. The pre-load arrangements produce smaller unit revenues
for the Company and eliminate the Company's ability to generate revenues from
its production facilities. The Company believes these facilities contribute
profits to the Company. Currently, the Company has the capability to produce
its products in-house on 3 1/2-inch diskettes. The Company does not currently
have the capability to produce CD-ROMs and the cost to develop such production
capability may be prohibitive. As the size of software programs grow, CD-ROM
is becoming a more prominent medium. The Company currently contracts CD-ROM
production to specialized CD-ROM facilities. In the event of a shift of this
kind, more of the Company's relationships would involve product pre-loads and
CD-ROM production and the Company's business, results of operations and
financial condition could be adversely affected.
Dependence Upon Key Personnel. The Company's future performance
depends in significant part upon the continued service of William Smith and
Rhonda Smith, the Company's co-founders, and other key technical and senior
management personnel. The Company is dependent on its ability to identify,
hire, train, retain and motivate high quality personnel, especially highly
skilled engineers involved in the ongoing research and development required to
develop and enhance the Company's communication software products and introduce
enhanced future applications. The industry is characterized by a high level of
employee mobility and aggressive recruiting of skilled personnel. There can be
no assurance that the Company's current employees will continue to work for the
Company. Loss of services of key employees could have a material adverse
effect on the Company's business, results of operations and financial
condition. In addition, the Company may need to grant additional options and
provide other forms of incentive compensation to attract and retain key
personnel.
Acquisition of Performance Computing, Inc. The Company acquired
Performance Computing, Inc. (PCI) in March 1996. The Company's future
financial results will depend in part on its ability to successfully integrate
PCI's business with its own, and there can be no assurance that the Company
will be able to successfully coordinate its business activities with those of
PCI. Furthermore, there can be no assurance that the Company will be
successful in integrating PCI products with those of the Company or that the
results of PCI's operations will not have an adverse effect upon the Company's
operating results.
The Company has sold only a limited amount of PCI products to date.
PCI products compete in a new and rapidly changing market and there can be no
assurance that such products will receive or gain market acceptance. Lack of
market acceptance of such products, or delays in or non-completion of the
development of new PCI products, could have an adverse impact on the Company's
business, results of operations and financial condition. In addition, PCI
products compete against those of several competitors, including White Pine,
Connectix, Intel and VDONet, some of whom have greater financial and other
resources than the Company, and there can be no assurance that the Company will
be able to compete successfully against these and any future competitors in the
video conferencing software market.
Management of Growth. The Company has recently experienced a period
of significantly expanding operations and headcount, which has placed, and will
continue to place, a significant strain on the Company's limited personnel and
other resources. The Company's ability to manage any future increases in the
scope of its operations or headcount, should they occur, will depend on
significant expansion of its manufacturing, research and development, marketing
and sales, management and financial and administrative capabilities. The
failure of the Company's management to effectively manage any expansion in its
business could have a material adverse effect on the Company's business,
results of operations and financial condition.
Duplication of Software. The Company duplicates a substantial amount
of its software at its Aliso Viejo, California facility. The Company believes
that its internal duplication capability provides it with a competitive
advantage since it eliminates the profit margin required by outside duplication
sources and enables a high degree of scheduling control. This concentration of
production does, however, expose the Company to the risk that production could
be disrupted by natural disaster or other events, such as the presence of a
virus in the Company's duplicators. The Company believes that it could retain
outside duplication alternatives quickly, but there is no assurance that it
could do so or, if such arrangements could be made, that duplication could take
place in an
21
<PAGE> 22
economical or timely manner. When CD-ROMs are required, the Company uses outside
third parties for CD-ROM replication. The equipment to replicate CD-ROMs is
very costly making it unlikely that the Company will add this capability
internally. Because the Company is dependent on CD-ROM replication facilities
for both the timing and pricing of the software produced in CD-ROM format, any
adverse changes in the timing of such replication could impair the Company's
ability to deliver products to customers and any price increases could reduce
gross margins which, in each case, could have a material adverse effect on the
Company's business, results of operations and financial condition.
Reliance on Third Party Suppliers; Shortage of Modem Chips. The
Company relies on third party suppliers who provide the components used in its
kitted products. These components include disks and printed manuals. Disk
shortages have occurred in the past and there can be no assurance that
shortages will not recur. If the Company cannot obtain a sufficient quantity
of disks or other components, or cannot obtain disks or other components at
prices at least comparable to prices paid currently, the Company's business,
results of operations and financial condition could be adversely affected.
Modem manufacturers purchase chips from a relatively limited number of
chip manufacturers. Production problems or product quality problems
experienced by a chip manufacturer could reduce modem sales or slow the growth
of modem sales. Chip manufacturers have a limited capacity to produce chips.
This capacity cannot be quickly expanded and the capital investment to expand
capacity is high. If chip suppliers are unable to meet demand, the growth of
modem sales will slow. The Company believes that chip suppliers currently lack
sufficient capacity to meet the demand for certain chips used by modem
manufacturers, including the Company's OEM customers. If this shortage
continues, it could adversely affect sales of the Company's OEM communication
software.
International Sales. The Company presently operates in foreign
markets and intends to expand its international presence. For the twelve
months ended December 31, 1996 net revenues generated outside the U.S. grew
6.6% to $3.2 million. As a percentage of total net revenues, international
sales decreased to 14.4% during 1996 from 16.6% for the twelve months ended
December 31, 1995. International business is subject to risks in addition to
those inherent in the Company's United States business including substantially
different regulatory requirements in different jurisdictions, varying technical
standards, tariffs and trade barriers, political and economic instability,
reduced protection for intellectual property rights in certain countries,
difficulties in staffing and maintaining foreign operations, difficulties in
managing distributors, potentially adverse tax consequences, foreign currency
exchange fluctuations, the burden of complying with a wide variety of complex
foreign laws and treaties and the possibility of difficulties in collecting
accounts receivable. There can be no assurance that the Company will be able
to continue to generate significant international sales. While the Company
does not currently accept payment in foreign currencies and invoices all of its
sales in U.S. Dollars, there can be no assurance that the Company will be able
to continue this policy if it is able to grow international sales. If the
Company begins to receive payment in foreign currencies, it is likely to be
subjected to the risks of foreign currency losses due to fluctuations in
foreign currency exchange rates. In addition, in the event the Company is
successful in doing business outside of the United States, the Company may also
face economic, political and foreign currency situations that are substantially
more volatile than those commonly experienced in the United States. There can
be no assurance that any of these factors will not have a material adverse
effect on the Company's business, results of operations and financial
condition.
Intellectual Property Rights. The Company's success is dependent upon
its software code base, its programming methodologies and other intellectual
properties. To protect its proprietary technology, the Company relies on a
combination of trade secret, nondisclosure and copyright and trademark law
which may afford only limited protection. The Company owns United States
trademark registrations for certain of its trademarks, including QUICKLINK
GOLD, but has not yet obtained registrations for all of its trademarks in the
United States or other countries, such as for the mark QUICKLINK II FAX. Until
recently, the Company did not require its employees to sign proprietary
information and inventions agreements stipulating, among other things, software
ownership rights In addition, the company has recently started the patent
application process for a
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<PAGE> 23
number of technologies that could provide additional protection for existing
products and products under development.. There can be no assurance that the
steps taken by the Company will be adequate to deter misappropriation of its
proprietary information, will prevent the successful assertion of an adverse
claim to software utilized by the Company or that the Company will be able to
detect unauthorized use and take effective steps to enforce its intellectual
property rights. In selling its products, the Company relies primarily on
"shrink wrap" licenses that are not signed by licensees and, therefore, may be
unenforceable under the laws of certain jurisdictions. In addition, the laws
of some foreign countries do not protect the Company's proprietary rights to as
great an extent as do the laws of the United States. There can be no assurance
that the Company's means of protecting its proprietary rights will be adequate
or that the Company's competitors will not independently develop similar
technology. Further, although the Company believes that its services and
products do not infringe on the intellectual property rights of others, there
can be no assurance that such a claim will not be asserted against the Company
in the future. The failure of the Company to protect its proprietary
information could have a material adverse effect on the Company's business,
results of operations and financial condition.
From time to time, the Company has received and may receive in the
future communications from third parties asserting that the Company's trade
name or that features, content, or trademarks of certain of the Company's
products infringe upon intellectual property rights held by such third parties.
For example, the Company has received correspondence from a third party
asserting that the use by the Company of the mark QUICKLINK in the United
States and Canada constitutes trademark infringement and unfair competition.
The Company believes that it has meritorious defenses to the claims asserted,
particularly in light of the length of time the Company has continuously used
its QUICKLINK-based marks. While no litigation has been initiated by this
party, the Company is attempting to resolve all such assertions. Should there
be a successful challenge to the Company's use of the QUICKLINK mark or any
other mark, the Company could incur significant expenses in connection with
changing the name and experience a loss of goodwill related to its QUICKLINK
product line. As the number of trademarks, patents, copyrights and other
intellectual property rights in the Company's industry increases, and as the
coverage of these patents and rights and the functionality of products in the
market further overlap, the Company believes that products based on its
technology may increasingly become the subject of infringement claims. Such
claims could materially adversely affect the Company, and may also require the
Company to obtain one or more licenses from third parties. There can be no
assurance that the Company would be able to obtain any such required licenses
upon reasonable terms, if at all, and the failure by the Company to obtain such
licenses could have a material adverse effect on its business, results of
operations and financial condition. In addition, the Company licenses
technology on a non-exclusive basis from several companies for inclusion in its
products and anticipates that it will continue to do so in the future. The
inability of the Company to continue to license these technologies or to
license other necessary technologies for inclusion in its products, or
substantial increases in royalty payments under these third party licenses,
could have a material adverse effect on its business, results of operations and
financial condition.
Litigation in the software development industry has increasingly been
used as a competitive tactic both by established companies seeking to protect
their existing position in the market and by emerging companies attempting to
gain access to the market. If the Company is forced to defend itself against a
claim, whether or not meritorious, the Company could be forced to incur
substantial expense and diversion of management attention, and may encounter
market confusion and reluctance of customers to purchase the Company's software
products.
Concentration of Ownership. As of March 14, 1997, William Smith and
Rhonda Smith beneficially own, as community property, approximately 69.5% of
the outstanding shares of the Company. William Smith and Rhonda Smith are
married to one another and, acting together, will have the ability to elect the
Company's directors and determine the outcome of any corporate action requiring
stockholder approval, irrespective of how other stockholders of the Company may
vote. This concentration of ownership may have the effect of delaying or
preventing a change in control of the Company.
Potential Effect of Anti-Takeover Provisions. The Company's
Certificate of Incorporation and Bylaws contain provisions that may discourage
or prevent certain types of transactions involving an actual or potential
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<PAGE> 24
change in control of the Company, including transactions in which the
stockholders might otherwise receive a premium for their shares over then
current market prices, and may limit the ability of the stockholders to approve
transactions that they may deem to be in their best interest. In addition, the
Board of Directors has the authority to fix the rights and preferences of
shares of the Company's Preferred Stock and to issue such shares, which may
have the effect of delaying or preventing a change in control of the Company,
without action by the Company's stockholders. Certain provisions of Delaware
law applicable to the Company, including Section 203 of the Delaware General
Corporation Law, could also have the effect of delaying, deferring or
preventing a change of control of the Company. It is possible that the
provisions in the Company's Certificate of Incorporation and Bylaws, the
ability of the Board of Directors to issue the Company's Preferred Stock, and
Section 203 of the Delaware General Corporation Law may have the effect of
delaying, deferring or preventing a change of control of the Company without
further action by the stockholders, may discourage bids for the Company's
Common Stock at a premium over the market price of the Common Stock and may
adversely affect the market price of the Common Stock and the voting and other
rights of the holders of Common Stock.
Possible Volatility of Stock Price. The trading price of the Common
Stock is likely to be subject to significant fluctuations in response to
variations in quarterly operating results, the gain or loss of significant
orders, changes in management, announcements of technological innovations or
new products by the Company, its customers or its competitors, legislative or
regulatory changes, general trends in the industry and other events or factors.
In addition, the stock market has experienced extreme price and volume
fluctuations which have particularly affected the market price for many high
technology companies similar to Smith Micro, and which have often been
unrelated to the operating performance of these companies. These broad market
fluctuations may adversely affect the market price of the Company's Common
Stock. Further, factors such as announcements of new contracts or product
offerings by the Company or its competitors and market conditions for stocks
similar to that of the Company could have significant impact on the market
price of the Common Stock.
Shares Eligible for Future Sale. No prediction can be made as to the
effect, if any, that future sales of Company Common Stock or the availability
of such Common Stock for future sales will have on the market price of the
Company's Common Stock. As of March 14, 1997, the Company had 14,074,698
shares of Common Stock outstanding. Of this amount, the 9,781,670 shares held
by William Smith and Rhonda Smith will be available for sale in the public
market (subject to the volume and other applicable restrictions of Rule 144)
following the expiration in September 1997 of a two year lock-up agreement with
certain representatives of the underwriters of the Company's initial public
offering which consummated in September 1995. However, this lock-up agreement
does not preclude William Smith and Rhonda Smith from selling shares in an
underwritten offering meeting certain parameters commencing no sooner than 180
days after September 19, 1995. Sales of a substantial number of shares of
Common Stock by William Smith, Rhonda Smith or any other person, either
individually or when aggregated with sales by other persons, could adversely
affect the market price of the Common Stock.
ITEM 2. PROPERTIES
The Company's principal administrative, sales and marketing, customer
support and research and development facility is located in approximately
28,000 square feet of space in Aliso Viejo, California. This facility is
leased by the Company through March 31, 1998. The Company also leases another
facility of approximately 3,000 square feet in Boulder, Colorado pursuant to a
lease which extends through May 31, 1997, a facility of approximately 900
square feet in Plano, Texas, pursuant to a lease which extends through June 30,
1997, and a facility of approximately 3,600 square feet in Beaverton, Oregon
which extends through February 28, 2000. The Company believes that
suitable additional or alternative space will be available in the future on
commercially reasonable terms as needed.
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<PAGE> 25
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to litigation in the normal course of business,
none of which management believes will have a material adverse effect on the
Company's financial condition or results of operations.
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, 1996.
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<PAGE> 26
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "SMSI." The high and low closing sale prices for the
Company's Common Stock as reported by Nasdaq are set forth below for the
periods indicated.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
Third Quarter (from September 19, 1995) . . . . . . . . . $14 1/2 $9 7/8
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . 13 1/2 5 1/4
YEAR ENDING DECEMBER 31, 1996:
First Quarter . . . . . . . . . . . . . . . . . . . . . . 9 3/4 5 1/2
Second Quarter . . . . . . . . . . . . . . . . . . . . . . 16 7/8 8 3/8
Third Quarter . . . . . . . . . . . . . . . . . . . . . . 12 1/4 5 1/8
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . 6 1/4 4 3/4
</TABLE>
On March 14, 1997, the closing sale price for the Company's Common
Stock as reported by Nasdaq was $4.375.
HOLDERS
As of March 14, 1997, there were 70 holders of record of the Company's
Common Stock.
DIVIDENDS
The Company has never paid any cash dividends on its Common Stock and
has no current plans to do so.
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<PAGE> 27
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data with respect to the Company's
consolidated statements of operations and consolidated balance sheets as of and
for the years ended December 31, 1994, 1995 and 1996 are derived from the
audited Consolidated Financial Statements of the Company. The following
information should be read in conjunction with the Consolidated Financial
Statements of the Company and the related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
-------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,372 $ 18,012 $ 22,091
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,128 5,887 6,795
--------- --------- ---------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,244 12,125 15,296
Operating expenses:
Sales and marketing 1,559 1,995 2,939
Research and development 1,126 1,621 3,324
General and administrative 1,956 2,555 3,796
Acquired Research & Development 5,169
--------- --------- ---------
Total operating expenses . . . . . . . . . . . . . . . . . . . . . 4,641 6,171 15,228
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . 2,603 5,954 68
Other income (expense), net . . . . . . . . . . . . . . . . . . . . 13 308 849
--------- --------- ---------
Income before income tax expense . . . . . . . . . . . . . . . . . 2,616 6,262 917
Income tax expense (1) . . . . . . . . . . . . . . . . . . . . . . 49 810 2,436
--------- --------- ---------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,567 $ 5,452 $ (1,519)
========= ========= =========
Net loss per share $ (.11)
=========
Pro forma net income (1) . . . . . . . . . . . . . . . . . . . . . $ 3,757
=========
Pro forma net income per share (1) . . . . . . . . . . . . . . . . $ .30
=========
Shares used in computation . . . . . . . . . . . . . . . . . . . . 12,627 13,992
========= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------
1994 1995 1996
-------- -------- ------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,240 $ 23,662 $ 24,107
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 608 3,417 2,277
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . 2,610 2,085 566
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . 2,632 20,245 21,830
- --------------------------
</TABLE>
(1) Prior to the effective date of the initial public offering, the Company was
treated as an S corporation pursuant to the Internal Revenue Code.
Subsequent to the effective date of the initial public offering, the
Company's tax status reverted back to that of a C corporation.
The pro forma information presented on the statement of operations data
reflect a provision for income taxes in 1995 as if the Company had been
taxed as a C corporation for the entire year, assuming effective tax rates
that would have been in effect at such time. The principal difference
between the effective pro forma tax rate and the statutory federal tax rate
relates to state taxes and research and development tax credits.
27
<PAGE> 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Smith Micro was founded in March 1982 to design and market financial
software. In the mid-1980s, the Company shifted its focus to communication
software for modem manufacturers. The Company shipped its first data
communication software product in 1985 and, since that time, the Company's
growth in revenues has been the result of the market acceptance of its OEM data
and fax communication software products.
The Company recognizes revenues from sales of its software as
completed products are shipped and from royalties from customers who are
authorized to duplicate the Company's software. Any material reduction in
demand for the Company's products would have a material adverse effect on the
Company's business, results of operations and financial condition. The Company
has continued to expand its business by introducing new products and its future
success will depend in part on the continued introduction of new and enhanced
OEM and retail products that achieve market acceptance. Revenues are net of
estimated returns and other adjustments at the time the products are shipped.
The Company has allowed its customers to return unused software, constituting
3.7%,2.3% and 16.8% of the Company's net revenues for 1994, 1995 and 1996,
respectively.
From November 1, 1992 through September 21, 1995 (the closing date of
the Company's initial public offering), the Company elected to be treated as an
S corporation for federal income tax purposes. As a consequence, the Company
generally did not have, during this period, an income tax liability and the
Company's earnings have been treated as being distributed to the existing
stockholders for income tax reporting purposes.
A small number of customers have historically accounted for a
substantial portion of the Company's revenues. Sales to U.S. Robotics
(including, for 1995, sales to Megahertz which U.S. Robotics acquired in
February 1995), in particular, which became a customer in the fourth quarter of
1993, accounted for approximately 35.8%, 52.1% and 46.4% of the Company's net
revenues for 1994, 1995, and 1996, respectively. During 1994, 1995, and 1996
the Company's three largest OEM customers, including U.S. Robotics, accounted
for 56.7%, 66.8%, and 62.9%, respectively, of net revenues. During 1994, 1995,
and 1996 the Company's net revenues form the three largest retail customers
accounted for 2.5%, 2.8% and 15.8%, respectively, of net revenues. Any
reduction, delay or change in orders from such customers could have a material
adverse affect on the Company's business, results of operations and financial
condition.
In April 1996, the Company entered into an OEM agreement having an
initial one year term with U.S. Robotics Access Corp., one of several
wholly-owned subsidiaries of U.S. Robotics Corporation which agreement
superseded the previous agreement between the parties. The new agreement renews
automatically at the end of each one year term unless either party provides at
least 60 days notice of its intention to terminate the agreement at the end of
the then-current term. Under the terms of the agreement, the Company granted
certain pricing incentives to U.S. Robotics Access Corp. in consideration for
which the Company became the exclusive provider of fax, data, voice and
telephony communications software for certain U.S. Robotics modems. In
addition, under the terms of the agreement, U.S. Robotics Access Corp. has
agreed to place Smith Micro retail products and commercials
28
<PAGE> 29
for such products on certain U.S. Robotics compact disks. Moreover, the
agreement does not require U.S. Robotics Access Corp. or any other U.S.
Robotics-affiliated entity to purchase any minimum quantity of Smith Micro
products and may be terminated by either party at any time for any reason upon
90 days written notice. As a result, there can be no assurance that U.S.
Robotics will continue to purchase the Company's products. While the Company
believes that it has been the principal supplier of OEM communication software
products to U.S. Robotics (excluding Megahertz), there can be no assurance that
U.S. Robotics will not seek additional sources for such products in the future.
Accordingly, there can be no assurance that sales to U.S. Robotics will reach
or exceed historical levels in any future period. A substantial decrease or
delay in sales to U.S. Robotics would have a material adverse effect on the
Company's business, results of operations and financial condition. Assuming
the number of products sold to U.S. Robotics Access Corp. were to remain at
1995 levels, in light of the pricing incentives provided in the agreement,
gross revenues from U.S. Robotics with respect to products covered by the
agreement could be adversely affected, although the Company believes that net
income attributable to such sales would not be impacted negatively. During
February 1997, 3Com announced its intent to acquire U.S. Robotics. Upon
completion, there can be no assurance that the acquisition will not result in a
change in the resulting entity's purchasing habits, a decrease in orders, or
delays in orders previously made by U.S. Robotics, or the loss of that customer
entirely.
The Company entered into an agreement having an initial one-year term
with Motorola in January 1996 to provide retail and OEM products to Motorola's
PCMCIA Division and Information Systems Group. This agreement is automatically
renewable for consecutive one-year terms, but either party may terminate the
agreement at the end of the then-current term by providing 60 days notice to
the other party. Moreover, as with the U.S. Robotics Access Corp. agreement,
the Motorola agreement does not require Motorola to purchase any minimum
quantity of Smith Micro products and, as a result, there can be no assurance
that Motorola will order any additional products or that it will develop into a
substantial customer of the Company.
The OEM product ordering cycle beginning from placement of an order to
shipping is very short. OEM customers generally operate under a just-in-time
system and order software to be delivered as needed by their manufacturing
operations. The Company's products are generally shipped as orders are
received and, accordingly, the Company has historically operated with little
backlog, and does not consider backlog to be a significant indication of future
performance. As a result, sales in any quarter are dependent on orders booked
and shipped in that quarter and are not predictable with any degree of
certainty. Moreover, the Company does not generally produce software in
advance of orders and therefore has not maintained a material amount of
inventory.
On March 14, 1996, the Company acquired Performance Computing
Incorporated. In connection with the acquisition, all of the outstanding PCI
shares were converted into the right to receive an aggregate of 350,000 shares
of the Company's common stock, valued at $2,944,000 and $2,100,000 in cash with
an additional $800,000 payable to the seller group or at its direction
contingent on the achievement of certain milestones. Such amount was accrued
as a part of the purchase price; all of the milestones have subsequently been
met and the entire amount was paid subsequent to year-end. The Company also
incurred direct costs of approximately $111,000 related to the acquisition.
The Company obtained an independent valuation of the net assets
acquired in the purchase transaction which resulted in the allocation of the
purchase price to $996,000 of identified assets, $321,000 of liabilities and
$5,169,000 of in-process research and development. As the technological
feasibility of the in-process research and development had not been established
and such technology had no alternative future use, the acquired in-process
research and development was expensed in accordance with Interpretation 4 of
APB Opinion No. 16.
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Financial Statements and related notes
thereto included elsewhere. Historical results of operations, percentage
relationships and any trends that may be inferred from the discussion below are
not necessarily indicative of the operating results for any future period.
29
<PAGE> 30
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, the
percentages of net revenues represented by each item in the Company's statement
of income.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Cost of sales 30.2% 32.7% 30.8%
------ ------ ------
Gross profit 69.8% 67.3% 69.2%
Operating expenses:
Sales and marketing 15.0% 11.1% 13.3%
Research and development 10.8% 9.0% 15.0%
General and administrative 18.9% 14.2% 17.2%
Acquired Research & Development 23.4%
------ ------ ------
Total operating expenses 44.7% 34.3% 68.9%
------ ------ ------
Operating income 25.1% 33.0% .3%
Other income, net .1% 1.7% 3.8%
------ ------ ------
Income before income tax expense 25.2% 34.7% 4.1%
Income tax expense 0.5% 4.5% 11.0%
------ ------ ------
Net income 24.7% 30.2% (6.9)%
====== ====== =======
</TABLE>
Net Revenues
Net revenues increased 22.6% from $18.0 million for 1995 to $22.1
million for 1996. This increase was due to increased retail and OEM sales.
Net revenues from retail sales increased approximately 212% to $3.4 million in
1996 from $1.1 million in 1995. As a consequence, retail sales grew as a
percentage of net revenues from 5.8% for 1995 to 15.8% for 1996. In addition,
net revenues from sales to U.S. Robotics increased approximately 9% from $9.4
million in 1995 to $10,2 million in 1996. However, as a percentage of net
revenues, sales to U.S. Robotics decreased from 52.1% during 1995 to 46.4%
during 1996. Sales to Motorola increased 220% from $.9 million in 1995 to $2.8
million in 1996.
Net revenues increased 73.7% from $10.4 million in 1994 to $18.0
million in 1995. This increase was due primarily to increased sales to the
Company's largest customer, U.S. Robotics, and increased international sales,
primarily to Canada, France, and Australia. Net revenues from sales to U.S.
Robotics (including sales to Megahertz for 1995), increased 154.0% from $3.7
million for 1994 to $9.4 million for 1995. In addition, international sales,
which includes all sales outside of the United States, increased 127.0% from
$1.3 million for 1994 to $3.0 million for 1995 and grew from 12.7% of net
revenues to 16.6 % of net revenues over the same periods. Sales of the
Company's retail products remained relatively constant, consisting of $1.1
million for each of 1994 and 1995, and, as a consequence, retail sales fell as
a percentage of net revenues from 10.8 % for 1994 to 5.8% for 1995.
Gross Profit
Gross profit represents net revenues, less cost of sales, which
includes cost of materials, costs related to the operations of the Company's
duplication facilities, freight charges and royalties to licensors.
Gross profit increased 26.2% from $12.1 million in 1995 to $15.3
million in 1996 and increased as a percentage of net revenues to 69.2% from
67.3% over the same periods. The increase in gross
30
<PAGE> 31
margins as a percentage of net revenues for 1996 was primarily due to the fact
that retail sales as a percent of net revenues increased and, in addition,
during 1996 the Company made arrangements with several of it's large OEM
customers to charge for products on a royalty schedule instead of producing
kitted products for them.
Gross profit increased 67.3% from $7.2 million in 1994 to $12.1
million in 1995, but decreased as a percentage of net revenues from 69.3% to
67.3% over the same period. This decline in gross margins as a percentage of
net revenues for 1995 was primarily due to the fact that retail sales as a
percent of net revenues declined and the fact that price concessions were
granted to U.S. Robotics under the terms of the former agreement between the
parties. The price concessions, coupled with U.S. Robotics' growth as a
percent of Smith Micro's revenues for 1995 increased pressure on the gross
margin.
Sales and Marketing Expenses
Sales 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.
Sales and marketing expenses increased 47.3% from $2.0 million in 1995
to $2.9 million in 1996. As a percent of net revenues, sales and marketing
increased from 11.1% in 1995 to 13.3% in 1996. Sales and marketing
expenditures increased due to additional personnel, increased presence in trade
shows, increased channel marketing programs, and increased print advertising
campaigns. Additional channel marketing programs have been necessary as the
company expands in the retail channel.
Sales and marketing expenses increased 27.9% from $1.6 million in 1994
to $2.0 million in 1995. As a percent of net revenues, sales and marketing
decreased from 15.0% in 1994 to 11.1% in 1995. Sales and marketing
expenditures increased in actual terms due to the additional personnel,
increased presence at trade shows, and increased print advertising campaigns.
Research and Development Expenses
Research and development expenses consist primarily of personnel and
equipment costs required to conduct the Company's software development efforts.
The Company anticipates that it will continue to increase spending in absolute
dollars on research and development for the foreseeable future. To date, the
Company has not capitalized any software development expenses, since the
Company's development efforts have been completed concurrently with the
establishment of technological feasibility. However, significant new products
developed in the future may require the capitalization of certain software
development expenses.
Research and development expenses increased 105% from $1.6 million for
1995 to $3.3 million in 1996. As a percentage of net revenues, research and
development expenditures also increased from 9% in 1995 to 15% in 1996. This
increase is attributed primarily to the additional personnel related to the
acquisition of Performance Computing, Inc. in the first quarter of 1996.
Research and development expenses increased 43.9% from $1.1 million in
1994 to $1.6 million in 1995. As a percentage of net revenues, research and
development expenditures decreased from 10.9% in 1994 to 9.0% in 1995. The
increase in expenditures from 1994 is attributed to added personnel in the
Company's Colorado and California offices, the opening of the Company's Plano,
Texas office, and the Dove software purchase in the second quarter. The
additional personnel in the satellite offices reflect the focus on the
development of non-Windows based application software.
31
<PAGE> 32
General and Administrative Expenses
General and administrative expenses include expenses related to the
general operations of the Company.
General and administrative expenses increased 48.6% from $2.6 million
in 1995 to $3.8 million in 1996. As a percentage of net revenues, general and
administrative expenditures increased from 14.2% in 1995 to 17.2% in 1996. The
increase in expenditures is due to the additional personnel in technical
support, accounting and administrative functions who were added throughout the
year.
General and administrative expenses increased 30.6% from $2.0 million
in 1994 to $2.6 million in 1995. The increase in expenditures is due to the
additional personnel in technical support, accounting and administrative
functions who were added throughout the year.
Income Taxes
Prior to the Company's initial public offering in September, 1995, the
Company had been treated as an S corporation for federal and certain state
income tax purposes. Income tax expense was $49,000, $810,000 and $2.4 million
for 1994, 1995, and 1996, respectively. Concurrent with the closing of the
public offering, the Company recorded a deferred tax asset of $122,800 to
reflect the deferred taxes of the Company as a C corporation. The pro forma
net income for 1995 reflects a provision for income taxes assuming effective
tax rates in effect for each period presented. This effective tax rate differs
from the statutory federal rate of 34.0% principally because of state taxes and
research and development credits.
Liquidity and Capital Resources
Since inception, the Company has financed its operations primarily
through cash generated from operations. Net cash provided by operating
activities was $2.1 million and $4.5 million for 1994 and 1995, respectively.
Net cash used in operations in 1996 was $288,000. The decrease in cash provided
from operations in 1996 was primarily the result of increased accounts
receivable and income taxes receivable, and the increased operating costs,
primarily in research and development expenditures. Net cash provided by
operating activities for 1994 and 1995 consisted primarily of net income and
for 1995, an increase in accrued liabilities, offset by increases in accounts
receivable.
Cash used in investing activities was $270,000, $384,000 and $2.5
million for 1994, 1995 and 1996, respectively. The increase in cash used in
investing activities during 1996 was primarily related to the purchase of
Performance Computing, Inc. in the first quarter of 1996. The balance of the
investing activities have consisted primarily of the acquisition of property
and equipment including the purchase of computers and production equipment.
Net cash used in financing activities was $1.7 million and $1.8
million for 1994 and 1996, respectively, which was related to distributions and
repayment of notes to stockholders and founders. For 1995, net cash provided
by financing activities was $14.3 million. This was related to the Company's
initial public offering and was partially offset by distributions to the S
corporation stockholders during the same period in 1995.
At December 31, 1996, the Company had $14.5 million in cash and cash
equivalents and $20.7 million of working capital. The Company had $6.0 million
in accounts receivable, net of allowance for doubtful accounts and other
adjustments. The Company has no significant capital commitments and currently
anticipates that growth in capital expenditures will not vary significantly
from recent periods.
At December 31, 1995, the Company had $19.0 million in cash and cash
equivalents and $19.7 million of working capital. The Company had $3.4 million
in accounts receivable, net of allowance for doubtful accounts and other
adjustments. The Company has no significant capital commitments and currently
anticipates that growth in capital expenditures will not vary significantly
from recent periods.
32
<PAGE> 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and schedule, as
listed under Item 14, appear in a separate section of this Annual Report on
Form 10-K beginning on page F-1 and S-1, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the two years prior to the date of the most recent financial
statements and the subsequent interim period, the Company has not had a change
in its independent auditors nor have there been any disagreements between the
Company and its independent auditors.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The sections titled "Executive Officers of the Company," "Directors
and Nominees" and "Compliance with Section 16(a) of the Exchange Act" appearing
in the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders is
incorporated herein by reference
ITEM 11. EXECUTIVE COMPENSATION
The section titled "Executive Compensation and Related Information"
appearing in the Company's Proxy Statement for the 1997 Annual Meeting of
Stockholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section titled "Principal Stockholders" appearing in the Company's
Proxy Statement for the 1997 Annual Meeting of Stockholders is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS:
The Company's financial statements appear in a separate section of
this Annual Report on Form 10-K beginning on the pages referenced below:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheets as of December 31, 1995 and 1996 . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations for each of the three years in
the period ended December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
</TABLE>
33
<PAGE> 34
<TABLE>
<S> <C>
Consolidated Statements of Stockholders Equity for each of the three
years in the period ended December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements for each of the three years
in the period ended December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
(2) FINANCIAL STATEMENT SCHEDULE
The Company'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 financial statements or the
notes thereto.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Schedule II Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . S-2
</TABLE>
(3) EXHIBITS:
<TABLE>
<CAPTION>
Exhibit
No. Title Method of Filing
------- ----- ----------------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporated by reference to Exhibit 3.1
Incorporation of the Company to the Registrant's Registration Statement
No. 33-95096
3.2 Amended and Restated Bylaws of the Incorporated by reference to Exhibit 3.2
Company. to the Registrant's Registration Statement
No. 33-95096
4.1 Specimen certificate representing shares Incorporated by reference to Exhibit 4.1
of Common Stock of the Company. to the Registrant's Registration Statement
No. 33-95096
10.1 Form of Indemnification Agreement. Incorporated by reference to Exhibit 10.1
to the Registrant's Registration Statement
No. 33-95096
10.2 1995 Stock Option/Stock Issuance Plan. Incorporated by reference to Exhibit 10.2
to the Registrant's Registration Statement
No. 33-95096
10.3 Form of Notice of Grant of Stock Option Incorporated by reference to Exhibit 10.3
under 1995 Stock Option/Stock Issuance to the Registrant's Registration Statement
Plan. No. 33-95096
10.4 Form of 1995 Stock Option Agreement under Incorporated by reference to Exhibit 10.4
1995 Stock Option /Stock Issuance Plan. to the Registrant's Registration Statement
No. 33-95096
10.5 Form of 1995 Stock Purchase Agreement Incorporated by reference to Exhibit 10.5
under 1995 Stock Option/Stock Issuance to the Registrant's Registration Statement
Plan. No. 33-95096
</TABLE>
34
<PAGE> 35
<TABLE>
<CAPTION>
Exhibit
No. Title Method of Filing
------- ----- ----------------
<S> <C> <C>
10.6 Distribution License Agreement dated Incorporated by reference to Exhibit 10.6
September 30, 1991, by and between the to the Registrant's Registration Statement
Company and Crandell Development No. 33-95096
Corporation.
10.7 Application Program Interface Retail Incorporated by reference to Exhibit 10.7
License Agreement July 28, 1992 by and to the Registrant's Registration Statement
between the Company and Rockwell No. 33-95096
International Corporation.
10.8 Application Program Interface License Incorporated by reference to Exhibit 10.8
Agreement July 28, 1992 by and between the to the Registrant's Registration Statement
Company and Rockwell International No. 33-95096
Corporation.
10.9 Rockwell High Speed Interface License Incorporated by reference to Exhibit 10.9
Agreement dated June 2, 1994, by and to the Registrant's Registration Statement
between the Company and Rockwell No. 33-95096
International Corporation.
10.10 Letter Agreement dated February 22, 1994, Incorporated by reference to Exhibit 10.10
by and between the Company and Rockwell to the Registrant's Registration Statement
International Corporation. No. 33-95096
10.11 Letter Agreement dated April 22, 1993, by Incorporated by reference to Exhibit 10.11
and between the Company and Rockwell to the Registrant's Registration Statement
International Corporation. No. 33-95096
10.12 Software Distribution Agreement dated May Incorporated by reference to Exhibit 10.12
8, 1995, by and between the Company and to the Registrant's Registration Statement
International Business Machines No. 33-95096
Corporation.
10.13 Office Building Lease, dated June 10, Incorporated by reference to Exhibit 10.13
1992, by and between the Company and to the Registrant's Registration Statement
Developers Venture Capital Corporation. No. 33-95096
10.14 Amendment No. 1 To Office Building Lease, Incorporated by reference to Exhibit 10.14
dated July 9, 1993, by and between the to the Registrant's Registration Statement
Company and Pioneer Bank. No. 33-95096
10.15 Amendment No. 2 To Office Building Lease, Incorporated by reference to Exhibit 10.15
dated August 15, 1994, by and between the to the Registrant's Registration Statement
Company and T&C Development. No. 33-95096
10.16 Fourth Addendum to Office Building Lease, Incorporated by reference to Exhibit 10.16
dated April 21, 1995, by and between the to the Registrant's Registration Statement
Company and T&C Development. No. 33-95096
10.17 Form of Promissory Note related to S Incorporated by reference to Exhibit 10.17
Corporation Distribution. to the Registrant's Registration Statement
No. 33-95096
</TABLE>
35
<PAGE> 36
<TABLE>
<CAPTION>
Exhibit
No. Title Method of Filing
------- ----- ----------------
<S> <C> <C>
10.18 Smith Micro Software, Inc. Amended and Incorporated by reference to Exhibit 10.21
Restated Software Licensing and to the Registrant's Quarterly Report on
Distribution Agreement, dated April 18, Form 10-Q for the quarter ended September 30,
1996, by and between the Company and 1996
U.S. Robotics Access Corp.
10.19 Office Building Lease, dated March 1, Incorporated by reference to Exhibit 10.19
1994, by and between Performance Computing to the Registrant's Annual Report on Form
Incorporated and Petula Associates, 10-K for the fiscal year ended December
Ltd./KC Woodside. 31, 1995
10.20 Agreement and Plan of Merger by and Incorporated by reference to Exhibit 2 to
between Smith Micro Software, Inc., the Registrant's Current Report on Form 8-K
Performance Computing Incorporated and PCI filed with the Commission on March 28,
Video Products, Inc. dated as of March 14, 1996
1996.
10.21 Amendment No. 1, dated as of March 10, Filed Herewith
1997, to Agreement and Plan of Merger by
and between Smith Micro Software, Inc.,
Performance Computing Incorporated and PCI
Video Products, Inc. dated as of March 14,
1996.
23.1 Independent Auditors' Consent. Filed Herewith
27 Financial Data Schedule. Filed Herewith
</TABLE>
(B) EXHIBITS ON FORM 8-K
No Current Reports on Form 8-K were filed during the quarter ended
December 31, 1996.
36
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
SMITH MICRO SOFTWARE, INC.
Date: March 28, 1997 By: /s/ William W. Smith, Jr.
-------------------------------------
William W. Smith, Jr.
Chairman of the Board,
President and Chief Executive 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ William W. Smith, Jr. Chairman of the Board, March 28, 1997
---------------------------------- President and Chief Executive Officer
William W. Smith, Jr. (principal executive officer)
/s/ Rhonda L. Smith Executive Vice President, Chief Operating March 28, 1997
---------------------------------- Officer, Secretary, Treasurer and Director
Rhonda L. Smith (principal accounting officer)
/s/ Robert W. Scheussler Senior Vice President, Chief Technical March 28, 1997
---------------------------------- Officer, and Director
Robert W. Scheussler
/s/ Robert E. Grice Chief Financial Officer (principal financial March 28, 1997
---------------------------------- officer)
Robert E. Grice
/s/ Thomas G. Campbell Director March 28, 1997
----------------------------------
Thomas G. Campbell
/s/ F. Terry Eger Director March 28, 1997
----------------------------------
F. Terry Eger
</TABLE>
37
<PAGE> 38
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Smith Micro Software, Inc.:
We have audited the accompanying consolidated balance sheets of Smith Micro
Software, Inc. and subsidiary as of December 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Smith Micro Software, Inc. and
subsidiary as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
February 17, 1997
F-1
<PAGE> 39
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $19,020 $14,487
Accounts receivable, net of allowances for doubtful accounts
and other adjustments of $518 (1995) and $1,822 (1996) 3,400 6,017
Income taxes receivable 520
Deferred tax asset (Note 6) 40 850
Inventories 443 561
Prepaid expenses and other current assets 207 415
------- -------
Total current assets 23,110 22,850
EQUIPMENT AND IMPROVEMENTS, net (Note 3) 552 548
INTANGIBLE ASSETS (Note 12) 709
------- -------
$23,662 $24,107
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 908 $ 892
Accrued liabilities (Note 4) 495 1,223
Income taxes payable (Note 6) 79
Note payable to stockholders (Note 5) 1,935
------- -------
Total current liabilities 3,417 2,115
DEFERRED TAX LIABILITY (Note 6) 162
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY (Notes 2 and 10):
Preferred stock, par value $0.001 per share; 5,000,000 shares
authorized; none issued and outstanding
Common stock, par value $0.001 per share; 20,000,000 shares
authorized; 13,700,000 shares (1995) and 14,074,000 shares (1996)
issued and outstanding 14 14
Additional paid-in capital 18,146 21,250
Retained earnings 2,085 566
------- -------
Total stockholders' equity 20,245 21,830
------- -------
$23,662 $24,107
======= =======
</TABLE>
See notes to consolidated
financial statements. F-2
<PAGE> 40
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
<S> <C> <C> <C>
NET REVENUES (Note 8) $10,372 $18,012 $22,091
COST OF REVENUES 3,128 5,887 6,795
------- ------- -------
GROSS PROFIT 7,244 12,125 15,296
OPERATING EXPENSES:
Selling and marketing 1,559 1,995 2,939
Research and development 1,126 1,621 3,324
Acquired in-process research and development (Note 12) 5,169
General and administrative 1,956 2,555 3,796
------- ------- -------
Total operating expenses 4,641 6,171 15,228
------- ------- -------
OPERATING INCOME 2,603 5,954 68
INTEREST INCOME, net 13 308 849
------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE 2,616 6,262 917
INCOME TAX EXPENSE (Note 6) 49 810 2,436
------- ------- -------
NET INCOME (LOSS) $ 2,567 $ 5,452 $(1,519)
======= ======= =======
NET LOSS PER SHARE $ (0.11)
=======
PRO FORMA INFORMATION (unaudited) (Note 2):
Historical income before income tax expense $ 6,262
Pro forma income tax expense 2,505
-------
PRO FORMA NET INCOME $ 3,757
=======
PRO FORMA NET INCOME PER SHARE $0.30
=======
WEIGHTED AVERAGE SHARES USED IN
COMPUTATION 12,627 13,992
======= ======
</TABLE>
See notes to consolidated
financial statements. F-3
<PAGE> 41
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1994 12,000 $12 $ 10 $ 1,776 $ 1,798
Distributions to stockholders (1,733) (1,733)
Net income 2,567 2,567
------ --- ------- ------- -------
BALANCE, December 31, 1994 12,000 12 10 2,610 2,632
Distributions to stockholders (5,977) (5,977)
Issuance of common stock 1,700 2 18,136 18,138
Net income 5,452 5,452
------ --- ------- ------- -------
BALANCE, December 31, 1995 13,700 14 18,146 2,085 20,245
Issuance of common stock
in acquisition 350 2,944 2,944
Exercise of common stock options 24 160 160
Net loss (1,519) (1,519)
------ --- ------- ------- -------
BALANCE, December 31, 1996 14,074 $14 $21,250 $ 566 $21,830
====== === ======= ======= =======
</TABLE>
See notes to consolidated
financial statements. F-4
<PAGE> 42
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,567 $ 5,452 $(1,519)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 132 218 452
Write-off of in-process research and development 5,169
Provision for doubtful accounts and other adjustments
to accounts receivable 260 122 1,304
Deferred income taxes (40) (648)
Change in operating accounts, net of amounts acquired:
Accounts receivable (956) (1,755) (3,723)
Income taxes receivable (520)
Inventories (70) (225) (118)
Prepaid expenses and other current assets (11) (172) (197)
Accounts payable 34 604 (157)
Accrued liabilities 129 191 (252)
Income taxes payable 79 (79)
------- ------- -------
Net cash provided by (used in) operating activities 2,085 4,474 (288)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (270) (384) (259)
Acquisition of Performance Computing, Inc. (2,100)
Direct costs of acquisition (111)
------- ------- -------
Net cash used in investing activities (270) (384) (2,470)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 18,138 160
Distributions to stockholders (1,733) (3,840)
Repayment of notes payable to founders (1,935)
------- ------- -------
Net cash (used in) provided by financing activities (1,733) 14,298 (1,775)
------- ------- -------
</TABLE>
See notes to consolidated
financial statements. F-5
<PAGE> 43
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ 82 $18,388 $(4,533)
CASH AND CASH EQUIVALENTS, beginning of year 550 632 19,020
---- ------- -------
CASH AND CASH EQUIVALENTS, end of year $632 $19,020 $14,487
==== ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION -
Cash paid during the year for income taxes $ 66 $ 771 $ 1,142
==== ======= =======
</TABLE>
During 1996, the Company acquired a business in a transaction summarized as
follows:
<TABLE>
<S> <C>
Acquired in-process research and development $ 5,169
Fair value of assets acquired 996
Value of common stock issued in transaction (2,944)
Liabilities assumed or created (1,121)
-------
Cash paid, net of cash acquired $ 2,100
=======
</TABLE>
See Notes 3 and 5 for other noncash activity.
See notes to consolidated
financial statements. F-6
<PAGE> 44
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Smith Micro Software, Inc. (the Company)
develops, manufactures and distributes personal computer software to
enable data, fax and voice communications using modems. In 1996, the
Company also introduced a video teleconferencing software product. A
substantial majority of the Company's sales are directly to modem and
personal computer manufacturers under OEM agreements. The Company also
sells its products through independent distributors and retail channels.
The Company completed an initial public offering of its common stock on
September 18, 1995.
Basis of Presentation - The accompanying consolidated financial
statements reflect the operating results and financial position of Smith
Micro Software, Inc. and its wholly-owned subsidiary, Performance
Computing, Inc. (PCI), acquired in March 1996 (Note 12). All
significant intercompany amounts have been eliminated in consolidation.
Cash Equivalents - Cash equivalents are considered to be highly-liquid
investments with initial maturities of three months or less.
Accounts Receivable - The Company sells its products worldwide. The
Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains reserves
for potential credit losses, and those losses have been within
management's expectations. Allowances for product returns and price
protection are included in other adjustments to accounts receivable on
the accompanying balance sheets.
Inventories - Inventories consist principally of manuals and diskettes
and are stated at the lower of cost (determined by the first-in,
first-out method) or market.
Equipment and Improvements - Equipment and improvements are stated at
cost. Depreciation is computed using the straight-line method based on
the estimated useful lives of the assets, generally ranging from three
to seven years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful life of
the asset or the lease term.
Intangible Assets - Intangible assets relate primarily to goodwill,
existing technology and noncompete agreements, which are amortized over
periods ranging from three to five years.
Revenue Recognition - The Company recognizes revenues from sales of its
software as completed products are shipped and from royalties from
customers who are authorized to duplicate the Company's software as the
individual duplication rights are granted. The Company generally allows
its retail distributors to exchange unsold products for other products
and provides inventory price protection in the event of price reductions
by the Company. Allowances for product returns and price
F-7
<PAGE> 45
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
protection are estimated based on previous experience and are recorded
as a reduction of revenue at the time sales are recognized. The Company
provides technical support and customer services to its customers. Such
costs have historically been insignificant.
Income Taxes - The Company accounts for income taxes under Statement of
Financial Accounting Standards (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.
Prior to the effective date of its initial public offering, the Company
had elected to be treated as an S corporation under Subchapter S of the
Internal Revenue Code of 1986, as amended, and comparable state tax
laws. As a result of the termination of S corporation status in
conjunction with the initial public offering, the Company became subject
to federal and state income taxes at statutory C corporation rates,
changed from a cash to accrual tax reporting basis and recorded a
deferred tax asset of $123,000 to reflect the deferred tax items
accruing to the Company as of the termination date (Note 6).
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, 1996, software has been substantially
completed concurrently with the establishment of technological
feasibility; and, accordingly, no costs have been capitalized to date.
Fair Value of Financial Instruments - Pursuant to SFAS No. 107,
Disclosures about Fair Value of Financial Instruments, the Company is
required to estimate the fair value of all financial instruments
included on its balance sheet at December 31, 1996. The Company
considers the carrying value of such amounts in the financial statements
to approximate their fair value due to (1) the relatively short period
of time between origination of the instruments and their expected
realization, (2) interest rates which approximate current market rates,
or (3) the overall immateriality of the amounts.
Stock-Based Compensation - The Company accounts for stock-based awards
to employees using the intrinsic value method in accordance with
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees.
F-8
<PAGE> 46
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
Per Share Information - Net loss and pro forma (Note 2) net income per
share are based on the weighted average number of shares of common stock
and common stock equivalents (stock options) outstanding during the
period. For the year ended December 31, 1995, the dilutive effect of
common stock equivalents is computed using the treasury stock method.
For purposes of such computation, options granted within one year of the
initial public offering have been treated as outstanding for the entire
year. For the year ended December 31, 1996, common stock equivalents
were excluded from the computation as the effect was anti-dilutive.
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.
2. UNAUDITED PRO FORMA INFORMATION
Prior to the effective date of the initial public offering, the Company
was treated as an S corporation pursuant to the Internal Revenue Code.
Subsequent to the effective date of the initial public offering, the
Company's tax status reverted back to that of a C corporation.
The pro forma information presented on the statements of income reflect
a provision for income taxes as if the Company had been taxed as a C
corporation for the entire year, assuming effective tax rates that would
have been in effect at such time. The principal difference between the
effective pro forma tax rate and the statutory federal tax rate relates
to state taxes and research and development tax credits.
F-9
<PAGE> 47
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
3. EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
<S> <C> <C>
Machinery and equipment $ 654 $ 814
Leasehold improvements 93 130
Office furniture and fixtures 249 475
----- ------
996 1,419
Less accumulated depreciation and amortization (444) (871)
----- ------
$ 552 $ 548
===== ======
</TABLE>
In July 1995, the Company distributed two automobiles with a net book
value and an estimated fair market value of $202,000 to the Company's
existing stockholders as part of a distribution of previously
undistributed S corporation earnings (Note 5).
4. ACCRUED LIABILITIES
Accrued liabilities consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
<S> <C> <C>
PCI acquisition costs (Note 12) $ - $ 800
Salaries and benefits 250 371
Profit sharing 100 22
Royalties 60 18
Other 85 12
---- ------
$495 $1,223
==== ======
</TABLE>
F-10
<PAGE> 48
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
5. NOTE PAYABLE TO STOCKHOLDERS
In conjunction with the initial public offering, the Company made S
corporation distributions to its existing stockholders equal to all the
previously undistributed S corporation earnings through the termination
of the Company's S corporation status. The distribution of $2,137,000
was made in the form of two automobiles with a net book value of
$202,000 and a promissory note payable of $1,935,000. The note payable
was fully repaid in 1996.
6. INCOME TAXES
A summary of income tax expense is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995 1996
<S> <C> <C> <C>
Federal:
Current $ 8 $660 $2,471
Deferred (30) (552)
--- ---- ------
8 630 1,919
State:
Current 41 190 613
Deferred (10) (96)
--- ---- ------
41 180 517
--- ---- ------
$49 $810 $2,436
=== ==== ======
</TABLE>
F-11
<PAGE> 49
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
A reconciliation of the effective tax rate from the federal statutory
tax rate (35%) is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1994 1995 1996
<S> <C> <C> <C>
Federal statutory rate $ 916 $ 2,192 $ 321
State tax, net of federal benefit 41 128 336
Nondeductible acquired in-process research and
development costs 1,810
Re-establishment of deferred taxes due to change
in tax status (123)
Reduction on tax rate due to S corporation status (881) (1,437)
Other (27) 50 (31)
----- ------- ------
$ 49 $ 810 $2,436
===== ======= ======
</TABLE>
The major components of the Company's net deferred tax asset consist of
the following at December 31, 1996 (in thousands):
<TABLE>
<S> <C>
Accounts receivable reserves $ 801
Nondeductible accruals 55
Accrual to cash adjustment (281)
State taxes 174
Prepaid expenses (61)
-----
$ 688
=====
</TABLE>
F-12
<PAGE> 50
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
7. COMMITMENTS AND CONTINGENCIES
Leases - The Company has noncancelable operating leases for its building
facilities. Future minimum rental commitments under leases with terms
of one year or more consist of the following (in thousands):
<TABLE>
<S> <C>
Year ending December 31:
1997 $460
1998 168
1999 72
2000 12
----
$712
====
</TABLE>
Total rent expense was $180,000, $302,000 and $492,000 for the years
ended December 31, 1994, 1995 and 1996, respectively.
Litigation - The Company is subject to litigation in the normal course
of business, none of which management believes will have a material
adverse effect on the Company's financial condition or results of
operations as of December 31, 1996.
8. MAJOR CUSTOMERS AND EXPORT SALES
Sales to individual customers or customers under common control which
amounted to more than 10% of the Company's net revenues in the year
indicated were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
CUSTOMER 1994 1995 1996
<S><C> <C> <C> <C>
1 - (OEM) 35.8% 52.1% 46.4%
2 - (OEM) 4.8 12.6
3 - (Retail) 11.8
4 - (OEM) 15.4
---- ---- ----
51.2% 56.9% 70.8%
==== ==== ====
</TABLE>
F-13
<PAGE> 51
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
The Company has historically derived a significant portion of its
revenues from a relatively small number of customers. 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
financial condition and results of operations.
The Company also has international sales representing 12.7%, 16.6% and
14.4% of its net revenues for the years ended December 31, 1994, 1995
and 1996, respectively, of which 5.5%, 4.8% and 1.6%, respectively,
represented sales to Taiwan for the corresponding periods. All export
sales have been denominated in U.S. dollars.
9. PROFIT SHARING
The Company sponsors a profit sharing plan (the Profit Sharing Plan) for
the benefit of all employees meeting certain age and service
requirements. The Company may make discretionary annual contributions
to the Profit Sharing Plan. Such contributions amounted to
approximately $130,200, $100,000 and $68,000 for the years ended
December 31, 1994, 1995 and 1996, respectively. During 1996, the
Company converted the Profit Sharing Plan to a 401(k) plan, in which the
Company matches the employee contribution at a rate of 20%, subject to a
vesting schedule.
10. STOCK-BASED COMPENSATION
In 1995, the Company adopted the 1995 Stock Option/Stock Issuance Plan
(the Plan). The Plan provides for issuance of, or options to be granted
for the purchase of, an aggregate of 1,000,000 shares of common stock.
Under the terms of the Plan, incentive and nonqualified options may be
granted at an exercise price not less than 100% and 85%, respectively,
of the fair market value on the grant date, with terms of up to 10
years, and with vesting to be determined by the Board of Directors.
F-14
<PAGE> 52
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
Stock option activity under the Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE
PRICE
<S> <C> <C>
OUTSTANDING, January 1, 1995 -- $ -
Granted (weighted average fair value of $2.55) 508,000 8.06
Canceled (57,000) 7.85
--------
OUTSTANDING, December 31, 1995 (0 exercisable) 451,000 8.08
Granted (weighted average fair value of $4.28 ) 335,000 7.70
Exercised (24,000) 6.40
Canceled (135,000) 8.64
--------
OUTSTANDING, December 31, 1996 627,000 $7.85
======== =====
</TABLE>
Additional information regarding options outstanding as of December 31,
1996 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------- ------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
<S> <C> <C> <C> <C> <C>
$5.50 - $ 6.40 211,000 8.5 $ 6.27 67,000 $6.40
$6.75 - $ 8.75 218,000 9.2 $ 7.39 12,000 $6.75
$9.07 - $14.00 198,000 8.7 $10.03 59,000 $9.85
------- -------
627,000 8.8 $ 7.85 138,000 $7.90
======= =======
</TABLE>
At December 31, 1996, 348,000 shares were available for future grants
under the Stock Option Plan.
Additional Stock Plan Information - As discussed in Note 1, the Company
continues to account for its stock-based awards using the intrinsic
value method in accordance with APB Opinion No. 25 and its related
interpretations. Accordingly, no compensation expense has been
recognized in the financial statements for employee stock arrangements
as all grants have been made at the fair market value of the underlying
shares at the date of grant.
F-15
<PAGE> 53
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net income and earnings per share had the
Company adopted the fair value method as of the beginning of fiscal
1995. Under SFAS No. 123, the fair value of stock-based awards to
employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely
tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These
models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the
calculated values. The Company's calculations were made using the
Black-Scholes option pricing model with the following weighted average
assumptions: expected life, 48 months following vesting; stock
volatility, 0% prior to the Company's initial public offering in
September 1995 and 50.1% thereafter; risk-free interest rates, 6.0% in
1996 and 6.2% in 1995; and no dividends during the expected term. The
Company's calculations are based on a single option valuation approach,
and forfeitures are recognized as they occur. If the computed fair
values of the 1995 and 1996 awards had been amortized to expense over
the vesting period of the awards, pro forma net income (loss) would have
been $3,652,000 ($.29 per share) in 1995 and $(1,846,000) ($(.13) per
share) in 1996. However, the impact of outstanding stock options
granted prior to 1995 has been excluded from the pro forma calculation;
accordingly, the 1995 and 1996 pro forma adjustments are not indicative
of future period pro forma adjustments, when the calculation will apply
to all applicable stock options.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <<C>
Year ended December 31, 1995:
Net revenues $ 3,495 $ 4,528 $ 5,054 $ 4,935
Gross profit 2,427 3,113 3,350 3,235
Income before income tax
expense 1,084 1,365 1,853 1,960
Net income 1,069 1,346 1,711 1,326
Pro forma income data:
Pro forma net income $ 670 $ 843 $ 1,112 $ 1,132
Pro forma net income per share $ 0.05 $ 0.07 $ 0.09 $ 0.08
Weighted average shares used in
pro forma calculation 12,500 12,500 12,678 13,787
</TABLE>
F-16
<PAGE> 54
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Net revenues $ 7,290 $6,016 $3,841 $4,944
Gross profit 4,391 4,152 3,063 3,690
Income (loss) before income tax
expense (2,487) 1,854 649 901
Net income (loss) (3,560) 1,111 390 541
</TABLE>
12. ACQUISITION
On March 14, 1996, the Company completed its acquisition of PCI, an
audio/video software solutions provider. In connection with the
acquisition, all of the outstanding PCI shares were converted into the
right to receive an aggregate of 350,000 shares of the Company's common
stock, valued at $2,944,000 and $2,100,000 in cash with an additional
$800,000 payable to the seller group contingent on the achievement of
certain milestones. Such amount was accrued as part of the purchase
price; all of the milestones have subsequently been met and the entire
amount was paid subsequent to year-end. The Company also incurred
direct costs of approximately $111,000 related to the acquisition.
The Company obtained an independent valuation of the net assets acquired
in the purchase transaction which resulted in the allocation of the
purchase price to $996,000 of identified assets, $321,000 of liabilities
and $5,169,000 of in-process research and development. As the
technological feasibility of the in-process research and development had
not been established and such technology had no alternative future use,
the acquired in-process research and development was expensed in
accordance with Interpretation 4 of APB Opinion No. 16.
In order to secure certain indemnification obligations of the sellers in
the transaction, 135,000 of the shares of common stock issued are being
held in an escrow account. The shares in escrow are being kept as
security for future claims through March 14, 1998, or until such time as
certain matters are fully resolved. The acquisition was accounted for
using the purchase method of accounting, and PCI's operating results
have been included in the accompanying consolidated statements of
operations from the date of acquisition.
F-17
<PAGE> 55
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1996 (CONTINUED)
- --------------------------------------------------------------------------------
The following unaudited pro forma information presents the consolidated
results of operations for the year ended December 31, 1995 had the
acquisition been consummated as of the beginning of 1995. Similar
amounts for 1996 are not presented as the pro forma impact was
insignificant. The pro forma information is not necessarily indicative
of the results of operations that would have occurred nor of future
results of the combined enterprise.
<TABLE>
<S> <C>
Pro forma net revenues $20,079,000
Pro forma net income $ 5,361,000
Pro forma net income per share $0.28
</TABLE>
F-18
<PAGE> 56
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Smith Micro Software, Inc.:
We have audited the consolidated financial statements of Smith Micro Software,
Inc. as of December 31, 1995 and 1996 and for each of the three years in the
period ended December 31, 1996, and have issued our report thereon dated
February 17, 1997, included elsewhere in this Annual Report on Form 10-K. Our
audits also included the financial statement schedule listed in Item 14a(2).
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, such 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.
Costa Mesa, California
February 17, 1997
S-1
<PAGE> 57
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
1994 $ 70 $177 $ (1) $246
1995 246 22 (58) 210
1996 210 561 (494) 277
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING OF CHARGED TO END OF
PERIOD REVENUE DEDUCTIONS PERIOD
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for other adjustments(1):
1994 $ 67 $ 468 $(385) $ 150
1995 150 573 (415) 308
1996 308 2,195 (958) 1,545
</TABLE>
- --------------
(1) Other adjustments relate principally to sales returns.
S-2
<PAGE> 58
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Title Method of Filing
------- ----- ----------------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporated by reference to Exhibit 3.1
Incorporation of the Company to the Registrant's Registration Statement
No. 33-95096
3.2 Amended and Restated Bylaws of the Incorporated by reference to Exhibit 3.2
Company. to the Registrant's Registration Statement
No. 33-95096
4.1 Specimen certificate representing shares Incorporated by reference to Exhibit 4.1
of Common Stock of the Company. to the Registrant's Registration Statement
No. 33-95096
10.1 Form of Indemnification Agreement. Incorporated by reference to Exhibit 10.1
to the Registrant's Registration Statement
No. 33-95096
10.2 1995 Stock Option/Stock Issuance Plan. Incorporated by reference to Exhibit 10.2
to the Registrant's Registration Statement
No. 33-95096
10.3 Form of Notice of Grant of Stock Option Incorporated by reference to Exhibit 10.3
under 1995 Stock Option/Stock Issuance to the Registrant's Registration Statement
Plan. No. 33-95096
10.4 Form of 1995 Stock Option Agreement under Incorporated by reference to Exhibit 10.4
1995 Stock Option /Stock Issuance Plan. to the Registrant's Registration Statement
No. 33-95096
10.5 Form of 1995 Stock Purchase Agreement Incorporated by reference to Exhibit 10.5
under 1995 Stock Option/Stock Issuance to the Registrant's Registration Statement
Plan. No. 33-95096
10.6 Distribution License Agreement dated Incorporated by reference to Exhibit 10.6
September 30, 1991, by and between the to the Registrant's Registration Statement
Company and Crandell Development No. 33-95096
Corporation.
10.7 Application Program Interface Retail Incorporated by reference to Exhibit 10.7
License Agreement July 28, 1992 by and to the Registrant's Registration Statement
between the Company and Rockwell No. 33-95096
International Corporation.
10.8 Application Program Interface License Incorporated by reference to Exhibit 10.8
Agreement July 28, 1992 by and between the to the Registrant's Registration Statement
Company and Rockwell International No. 33-95096
Corporation.
10.9 Rockwell High Speed Interface License Incorporated by reference to Exhibit 10.9
Agreement dated June 2, 1994, by and to the Registrant's Registration Statement
between the Company and Rockwell No. 33-95096
International Corporation.
10.10 Letter Agreement dated February 22, 1994, Incorporated by reference to Exhibit 10.10
by and between the Company and Rockwell to the Registrant's Registration Statement
International Corporation. No. 33-95096
</TABLE>
<PAGE> 59
<TABLE>
<CAPTION>
Exhibit
No. Title Method of Filing
------- ----- ----------------
<S> <C> <C>
10.11 Letter Agreement dated April 22, 1993, by Incorporated by reference to Exhibit 10.11
and between the Company and Rockwell to the Registrant's Registration Statement
International Corporation. No. 33-95096
10.12 Software Distribution Agreement dated May Incorporated by reference to Exhibit 10.12
8, 1995, by and between the Company and to the Registrant's Registration Statement
International Business Machines No. 33-95096
Corporation.
10.13 Office Building Lease, dated June 10, Incorporated by reference to Exhibit 10.13
1992, by and between the Company and to the Registrant's Registration Statement
Developers Venture Capital Corporation. No. 33-95096
10.14 Amendment No. 1 To Office Building Lease, Incorporated by reference to Exhibit 10.14
dated July 9, 1993, by and between the to the Registrant's Registration Statement
Company and Pioneer Bank. No. 33-95096
10.15 Amendment No. 2 To Office Building Lease, Incorporated by reference to Exhibit 10.15
dated August 15, 1994, by and between the to the Registrant's Registration Statement
Company and T&C Development. No. 33-95096
10.16 Fourth Addendum to Office Building Lease, Incorporated by reference to Exhibit 10.16
dated April 21, 1995, by and between the to the Registrant's Registration Statement
Company and T&C Development. No. 33-95096
10.17 Form of Promissory Note related to S Incorporated by reference to Exhibit 10.17
Corporation Distribution. to the Registrant's Registration Statement
No. 33-95096
10.18 Smith Micro Software, Inc. Amended and Incorporated by reference to Exhibit 10.21
Restated Software Licensing and to the Registrant's Quarterly Report on
Distribution Agreement, dated April 18, Form 10-Q for the quarter ended September 30,
1986, by and between the Company and 1996
U.S. Robotics Access Corp.
10.19 Office Building Lease, dated March 1, Incorporated by reference to Exhibit 10.19
1994, by and between Performance Computing to the Registrant's Annual Report on Form
Incorporated and Petula Associates, 10-K for the fiscal year ended December
Ltd./KC Woodside. 31, 1995
10.20 Agreement and Plan of Merger by and Incorporated by reference to Exhibit 2 to
between Smith Micro Software, Inc., the Registrant's Current Report on Form 8-K
Performance Computing Incorporated and PCI filed with the Commission on March 28,
Video Products, Inc. dated as of March 14, 1996
1996.
10.21 Amendment No. 1, dated as of March 10, Filed Herewith
1997, to Agreement and Plan of Merger by
and between Smith Micro Software, Inc.,
Performance Computing Incorporated and PCI
Video Products, Inc. dated as of March 14,
1996.
23.1 Independent Auditors' Consent. Filed Herewith
27 Financial Data Schedule. Filed Herewith
</TABLE>
<PAGE> 1
Exhibit 10.21
AMENDMENT NO. 1
TO
AGREEMENT AND PLAN OF MERGER
THIS AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER ("the
Amendment"), is entered into as of this 10th day of March, 1997, among Smith
Micro Software, Inc., a Delaware corporation ("Buyer"), PCI Video Products,
Inc., a Delaware corporation and a wholly owned subsidiary of Buyer ("the
Merger Subsidiary") and Performance Computing, Inc., an Oregon corporation
("the Company"), and shall serve to amend that certain Agreement and Plan of
Merger dated as of March 14, 1996, among the parties as follows:
RECITALS
WHEREAS, the parties hereto entered into the Agreement and
Plan of Merger dated as of March 14, 1996 ("the Agreement") providing for the
Merger of the Company into the Merger Subsidiary on the Effective Time; and
WHEREAS, the parties desire to modify the terms of payments
due 365 days following the Closing as set forth in Sections 7.4 and 8.4 of the
Agreement;
INTENDING TO BE LEGALLY BOUND and in consideration of the
premises and mutual covenants and agreements contained herein and in the
Agreement, Buyer, Merger Subsidiary and the Company hereby agree as follows:
AMENDMENT
The Agreement shall be amended to clarify the intentions and
agreements of the parties thereto in the manner and to the extent set forth
below. All defined terms contained in this Agreement shall have the same
meaning as provided in the Agreement, unless otherwise specifically provided
herein. All Section numbers set forth herein shall correspond to the Section
number of the Agreement being amended hereby.
7.4 Milestones. Section 7.4 of the Agreement shall be amended and
restated in its entirety as follows:
If all the targets set forth in Exhibit B hereto are achieved
during the 365 days following the Closing, then within ten
business days after March 14, 1997, Buyer shall pay to former
Company employees who are then current employees of Buyer or
the Merger Subsidiary Business (the "Current Employees")
$200,000 in the aggregate in cash. Subject to the last
sentence of this Section 7.4, the payments pursuant to this
Section 7.4 will be paid to such
1
<PAGE> 2
Current Employees that are so designated by Buyer, after
consultation with the Sellers who are then employed by Buyer;
provided, that in all events, if all milestones are met, Buyer
shall pay out to such current Employees the entire $200,000.
If some, but less than all, of the targets set forth in
Exhibit B are achieved during the 365 days following the
Closing, then within ten business days after March 14, 1997,
Buyer shall pay to the Current Employees, in the same
percentages, form and manner set forth above, payments with an
aggregate value equal to the product of (i) $200,000 and (ii)
the aggregate of the percentages assigned to each of the
targets set forth on Exhibit B that are actually achieved
during such period.
8.4 Earn Out. Section 8.4 of the Agreement shall be amended and
restated in its entirety as follows:
If all of the targets set forth on Exhibit B hereto are
achieved during the 365 days following the Closing, then
within ten business days after March 14, 1997, Buyer shall pay
to Sellers Six Hundred Thousand Dollars ($600,000) in cash pro
rata based on each Seller's proportionate equity interest in
the Company immediately prior to the Closing. If some, but
less than all of the targets set forth on Exhibit B are
achieved during the 365 days following the Closing, then
within ten business days after March 14, 1997, Buyer shall pay
to Sellers in the same percentages and manner set forth above,
the product of (i) Six Hundred Thousand Dollars ($600,000)
and (ii) the aggregate of the percentages assigned to each of
the targets set forth on Exhibit B that are actually achieved
during such period.
Except as specifically provided hereinabove, all other
provisions of the Agreement shall remain in full force and effect and are
hereby ratified and confirmed by the parties.
2
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed by their respective authorized officers as of the
day and year first above written.
Buyer: Smith Micro Software, Inc.
By: /s/ William W. Smith, Jr.
--------------------------------------------
William W. Smith, Jr.
Title: President and Chief Executive Officer
Merger Subsidiary: PCI Video Products, Inc.
By: /s/ William W. Smith, Jr.
--------------------------------------------
William M. Smith, Jr.
Title: President and Chief Executive Officer
The Company: Performance Computing Inc.
By: /s/ Daniel C. Budge
--------------------------------------------
Daniel C. Budge
Title: President
Sellers (executing solely for purposes of those
provisions applicable to them):
/s/ Daniel C. Budge
-------------------------------------------------
Daniel C. Budge
/s/ David N. Glass
-------------------------------------------------
David N. Glass
/s/ Carol E.G. Vallens
-------------------------------------------------
Carol E.G. Vallens
3
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-02418 of Smith Micro Software, Inc. on Form S-8 of our report dated
February 17, 1997, appearing in this Annual Report on Form 10-K of Smith Micro
Software, Inc. for the year ended December 31, 1996.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
March 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 14,487
<SECURITIES> 0
<RECEIVABLES> 7,839
<ALLOWANCES> 1,822
<INVENTORY> 561
<CURRENT-ASSETS> 22,850
<PP&E> 548
<DEPRECIATION> 871
<TOTAL-ASSETS> 24,107
<CURRENT-LIABILITIES> 2,115
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 21,250
<TOTAL-LIABILITY-AND-EQUITY> 24,107
<SALES> 22,091
<TOTAL-REVENUES> 22,091
<CGS> 6,795
<TOTAL-COSTS> 6,795
<OTHER-EXPENSES> 15,228
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 917
<INCOME-TAX> 2,436
<INCOME-CONTINUING> 917
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,519)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
