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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
OR
[ ] 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 000-19462
ARTISOFT, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 86-0446453
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
5 CAMBRIDGE CENTER, CAMBRIDGE, MASSACHUSETTS 02142
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (617) 354-0600
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
SHARES OUTSTANDING
TITLE OF CLASS OF COMMON STOCK AS OF NOVEMBER 13, 2002
------------------------------ -----------------------
COMMON STOCK, $.01 PAR VALUE PER SHARE 17,750,913
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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 that are subject to a number of risks and
uncertainties. All statements, other than statements of historical fact,
included in this Quarterly Report on Form 10-Q, including statements regarding
our strategy, future operations, financial position, estimated revenues,
projected costs, prospects, plans and objectives of management, are
forward-looking statements. When used in this Quarterly Report on Form 10-Q, the
words "will", "believe", "anticipate", "intend", "estimate", "expect", "project"
and similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain these identifying words. We
cannot guarantee future results, levels of activity, performance or
achievements, and you should not place undue reliance on our forward-looking
statements. Our forward-looking statements do not reflect the potential impact
of any future acquisitions, mergers, dispositions, joint ventures or strategic
alliances. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of various factors, including the
risks described in "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Risk Factors" and elsewhere in this Quarterly Report
on Form 10-Q. The forward-looking statements provided by Artisoft in this
Quarterly Report on Form 10-Q represent Artisoft's estimates as of the date this
report is filed with the SEC. We anticipate that subsequent events and
developments will cause our estimates to change. However, while we may elect to
update our forward-looking statements in the future, we specifically disclaim
any obligation to do so. Our forward-looking statements should not be relied
upon as representing our estimates as of any date subsequent to the date this
report is filed with the SEC.
ARTISOFT, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION.................................................3
Item 1. - Financial Statements............................................3
Condensed Consolidated Balance Sheets
as of September 30, 2002 (Unaudited) and June 30, 2002........3
Unaudited Condensed Consolidated Statements of Operations
Three months Ended September 30, 2002 and 2001................4
Unaudited Condensed Consolidated Statements of Cash Flows
Three months Ended September 30, 2002 and 2001................5
Notes to Unaudited Condensed Consolidated Financial Statements..6
Item 2. - Mangement's Discussion and Analysis of Financial Condition
and Results of Operations.....................................8
Item 3. - Quantitative and Qualitative Disclosures About Market Risk.....17
Item 4. - Controls and Procedures........................................17
PART II - OTHER INFORMATION...................................................17
Item 2. - Changes in Securities and Use of Proceeds......................17
Item 4. - Submission of Matters to a Vote of Security Holders............18
Item 5. - Other Information..............................................18
Item 6. - Exhibits and Reports on Form 8-K...............................18
SIGNATURES....................................................................20
CERTIFICATIONS................................................................21
2
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
ARTISOFT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
September 30, June 30,
2002 2002
--------- ---------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 6,749 $ 6,020
Receivables:
Trade accounts, net of allowances of $121 and $118
at September 2002 and June 2002, respectively 1,217 1,199
Other receivables 1 --
Inventories 2 14
Prepaid expenses 169 274
--------- ---------
Total current assets 8,138 7,507
--------- ---------
Property and equipment 3,510 3,480
Less accumulated depreciation and amortization (2,842) (2,682)
--------- ---------
Net property and equipment 668 798
--------- ---------
Other assets 203 257
--------- ---------
$ 9,009 $ 8,562
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 362 $ 376
Accrued liabilities 2,313 1,569
Deferred revenue 929 578
Reserve for stock rotation 954 940
--------- ---------
Total current liabilities 4,558 3,463
--------- ---------
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock, $1.00 par value. Authorized 11,433,600 shares;
Series A preferred stock, $1.00 par value. Authorized 50,000
Series A shares; no series A shares issued at September 30, 2002
and June 30, 2002 -- --
Series B preferred stock, $1.00 par value. Authorized 2,800,000
Series B shares; issued 2,800,000 series B shares at
September 30, 2002 and June 30, 2002 (aggregate liquidation
value $7 million) 2,800 2,800
Common stock, $.01 par value. Authorized 50,000,000 shares;
issued 31,071,413 common shares at September 30, 2002
and 29,166,613 at June 30, 2002 311 292
Additional paid-in capital 108,295 106,460
Accumulated deficit (37,171) (34,669)
Less treasury stock, at cost, 13,320,500 shares at September 30,
2002 and June 30, 2002 (69,784) (69,784)
--------- ---------
Net shareholders' equity 4,451 5,099
--------- ---------
$ 9,009 $ 8,562
========= =========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
ARTISOFT, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended
September 30
----------------------
2002 2001
--------- ---------
Net revenue:
Product $ 1,357 $ 1,398
Services -- 20
--------- ---------
Total net revenue 1,357 1,418
Cost of sales:
Product 36 221
Services -- 12
--------- ---------
Total cost of sales 36 233
Gross profit:
Product 1,321 1,177
Services -- 8
--------- ---------
Total gross profit 1,321 1,185
Operating expenses:
Sales and marketing 1,392 1,570
Product development 800 1,141
General and administrative 1,653 1,244
--------- ---------
Total operating expenses 3,845 3,955
--------- ---------
Loss from operations (2,524) (2,770)
Other income, net 22 58
--------- ---------
Net loss (2,502) (2,712)
--------- ---------
Dividend to series B preferred stockholders (2,006) (2,379)
Loss applicable to common stockholders $ (4,508) $ (5,091)
========= =========
Net loss applicable to common stockholders---basic and diluted $ (0.28) $ (0.32)
========= =========
Weighted average common shares outstanding---basic and diluted 15,929 15,731
--------- ---------
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
4
ARTISOFT, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended
September 30,
----------------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net loss $ (2,502) $ (2,712)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 173 204
Non-cash changes in accounts receivable,
rotation and inventory allowances:
Additions 15 --
Reductions (5) --
Changes in assets and liabilities:
Receivables
Trade accounts (28) 477
Other receivables (1) 19
Inventories 12 179
Prepaid expenses 105 258
Accounts payable (14) (417)
Accrued liabilities 744 344
Deferred revenue 351 26
Reserve for stock rotation 14 (218)
Other assets 41 (54)
--------- ---------
Net cash used in operating activities (1,095) (1,894)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (30) (2)
--------- ---------
Net cash used in investing activities (30) (2)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net of expenses -- 3,680
Proceeds from issuance of common stock, net of expenses 1,854 21
--------- ---------
Net cash provided by financing activities 1,854 3,701
--------- ---------
Net increase in cash and cash equivalents 729 1,805
Cash and cash equivalents at beginning of period 6,020 5,801
--------- ---------
Cash and cash equivalents at end of period 6,749 7,606
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Non cash dividend to series B preferred stockholders 2,006 2,379
========= =========
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
5
ARTISOFT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PERCENTAGES, SHARES AND PER SHARE AMOUNTS)
(1) BASIS OF PRESENTATION
Artisoft, Inc., ("Artisoft", the "Company" or the "Registrant") develops,
markets and sells computer telephony software application products and
associated services.
The Company's principal executive offices are located at 5 Cambridge
Center, Cambridge, Massachusetts 02142. The telephone number at that address is
(617) 354-0600. The Company was incorporated in November 1982 and reincorporated
by merger in Delaware in July 1991.
The condensed consolidated financial statements include the accounts of
Artisoft, Inc., and its three wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company in accordance with accounting principles generally
accepted in the United States of America and pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). In the
opinion of management, the accompanying financial statements include all
adjustments (of a normal recurring nature), which are necessary for a fair
presentation of the financial results for the interim periods presented. Certain
information and footnote disclosures normally included in financial statements
have been condensed or omitted pursuant to such rules and regulations. Although
the Company believes that the disclosures are adequate to make the information
presented not misleading, it is suggested that these financial statements be
read in conjunction with the consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 2002, on file with the SEC. The results of operations for the
three months ended September 30, 2002 are not necessarily indicative of the
results to be expected for the full year or any other future periods.
(2) RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standards ("SFAS") No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS ("SFAS 143") which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS 143 requires an enterprise to record the
fair value of an asset retirement obligation as a liability in the period in
which it incurs a legal obligation associated with the retirement of a tangible
long-lived asset. SFAS 143 also requires the enterprise to record the contra to
the initial obligation as an increase to the carrying amount of the related
long-lived asset and to depreciate that cost over the remaining useful life of
the asset. The liability is changed at the end of each period to reflect the
passage of time and changes in the estimated future cash flows underlying the
initial fair value measurement. SFAS 143 is effective for fiscal years beginning
after June 15, 2002. The Company adopted this standard effective July 1, 2002.
Adoption of the standard did not have a material effect on the financial
position or results of operations of the Company.
In August 2001, FASB issued SFAS 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS ("SFAS 144"), which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
FASB Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
FOR LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS 144 retains many of the
fundamental provisions of that Statement. SFAS 144 also supersedes the
accounting and reporting provisions of Accounting Principle Board Opinion 30,
REPORTING THE RESULTS OF OPERATIONS--REPORTING THE EFFECTS OF DISPOSAL OF A
SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING
EVENTS AND TRANSACTIONS ("APB 30"), for the disposal of a segment of a business.
However, it retains the requirement in APB 30 to report separately discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. SFAS 144 is effective for fiscal years beginning
after December 15, 2001 and interim periods within those fiscal years. The
Company adopted this standard effective July 1, 2002. Adoption of the standard
did not have a material effect on the financial position or results of
operations of the Company.
6
The FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections, effective for
fiscal years beginning May 15, 2002 or later that rescinds FASB Statement No. 4,
Reporting Gains and Losses from Extinguishment of Debt, FASB Statement No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements, and FASB
Statement No. 44, ACCOUNTING FOR INTANGIBLE ASSETS OF MOTOR CARRIERS. This
Statement amends FASB Statement No. 4 and FASB Statement No. 13, ACCOUNTING FOR
LEASES, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The Company
adopted this standard effective July 1, 2002. Adoption of the standard did not
have a material effect on the financial position or results of operation of the
Company.
On July 30, 2002, the FASB issued Statement No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. Statement No. 146 is based on the
fundamental principle that a liability for a cost associated with an exit or
disposal activity should be recorded when it (1) is incurred, that is, when it
meets the definition of a liability in FASB Concepts Statement No. 6, ELEMENTS
OF FINANCIAL STATEMENTS, and (2) can be measured at fair value. Statement No.
146 notes that the principal reason for issuing Statement 146 is the FASB's
belief that some liabilities for costs associated with exit or disposal
activities that entities record under current accounting pronouncements, in
particular Issue 94-3, LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION
BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY ( INCLUDING CERTAIN COSTS INCURRED
IN A RESTRUCTURING),) do not meet the definition of a liability. Statement 146
nullifies Issue 94-3; thus, it will have a significant effect on practice
because commitment to an exit or disposal plan no longer will be a sufficient
basis for recording a liability for costs related to those activities. Statement
No. 146 is effective for exit and disposal activities initiated after December
31, 2002. An entity would continue to apply the provisions of Issue 94-3 to an
exit activity that it initiated under an exit plan that met the criteria of
Issue 94-3 before the entity initially applied Statement 146. The Company is
currently examining the effect of this pronouncement on the results of
operations and financial position of the Company, but currently believes the
effect will not be material.
(3) TAX EXPOSURE
In the course of a review of our stock option plan, it was determined that
due to a technical compliance issue, we have a tax exposure with respect to past
options exercised. Although we are still analyzing this issue, a reserve of $.7
million has been established for this exposure. The reserve is based on
currently available information and represents managements best estimate. The
impact of the ultimate resolution of this issue could differ materially from the
amount of the established reserve.
(4) COMPUTATION OF NET LOSS PER SHARE
Net loss per share-basic and -diluted are based upon the weighted average
number of common shares outstanding. Common equivalent shares, consisting of
outstanding stock options, convertible preferred shares and warrants to purchase
common stock are included in the diluted per share calculations where the effect
of their inclusion would be dilutive.
Three Months ended
September 30,
-------------------
2002 2001
------ ------
Antidilutive potential common shares
excluded from net loss per share 5,818 3,199
====== ======
(5) COMMON STOCK
On August 8, 2002, the Company entered into a purchase agreement under
which it agreed to issue and sell 1,904,800 shares of common stock at a per
share purchase price equal to $1.05 in a private placement financing. On
September 27, 2002 the Company received gross proceeds from the issuance and
7
sale of that common stock in the amount of $2,000,040. Under its registration
rights agreement with the investors in this September 2002 financing, the
Company is required to register these shares of common stock for resale by the
investors. The shares of common stock issued and sold to the investors are
subject to purchase price adjustments in certain events during the 24-month
period following the first effective date of a registration statement to be
filed by Artisoft covering the resale of those shares. In the event of a
purchase price adjustment, the Company will be required to issue additional
shares of common stock to the investors for no additional consideration and to
register those additional shares for resale by the investors. The investors in
the September 2002 financing have the right to designate one person for election
to the Company's board of directors, and the Company will be required to use its
best efforts to cause that person to be elected to the board of directors. The
investors have not yet exercised this right.
The investors in each of the 2001 and September 2002 financings have the
right to participate, up to their pro rata share in the respective financing, in
future non-public capital raising transactions by the Company. This right, as
held by the investors in the September 2002 financing, is not exercisable unless
and until the expiration or termination in full of the similar rights of the
investors in the 2001 financing.
The closing of the issuance and sale of shares of common stock in the
September 2002 financing resulted in anti-dilution adjustments to the Series B
Preferred Stock and the warrants issued in Artisoft's 2001 financing. As a
result of these anti-dilution adjustments, each share of Series B Preferred
Stock is convertible into approximately 2.38 shares of common stock. Prior to
the issuance and sale of shares of common stock in the September 2002 financing,
each share of Series B Preferred Stock was convertible into one share of common
stock. In addition, the per share exercise price of each warrant has been
reduced from $3.75 to $1.05, as a result of the September 2002 financing. These
adjustments were accounted for as a $2.0 million non cash dividend to the series
B preferred stockholders and are included in the computation of the loss
available to common stockholders and in the loss per share for the quarter ended
September 30, 2002. The excess of the aggregate fair value of the beneficial
conversion feature over the proceeds received amounted to $9.7 million and has
not been reflected in the results of operations or financial position of the
Company for the periods presented.
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION TOGETHER WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS QUARTERLY
REPORT ON FORM 10-Q. THIS ITEM, INCLUDING, WITHOUT LIMITATION, THE INFORMATION
SET FORTH UNDER THE HEADING "FUTURE RESULTS", CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND
SECTION 21E OF THE SECURITIES AND EXCHANGE ACT OF 1934 THAT INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE INCLUDED IN SUCH
FORWARD-LOOKING STATEMENTS. FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY INCLUDE THOSE SET FORTH UNDER "RISK FACTORS" COMMENCING ON PAGE 12,
AS WELL AS THOSE OTHERWISE DISCUSSED IN THIS SECTION AND ELSEWHERE IN THIS
QUARTERLY REPORT ON FORM 10-Q. SEE "FORWARD-LOOKING STATEMENTS".
Our discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amount of assets and
liabilities at the date of the financial statements and revenues and expenses
during the reporting period. Areas where significant judgments are made include,
but are not limited to revenue recognition. Actual results could differ
materially from these estimates. For a more detailed explanation of the
judgments made in these areas, please refer to our Annual Report on Form 10-K
for the year ended June 30, 2002, as filed with the Securities and Exchange
Commission on September 30, 2002.
In the course of a review of our stock option plan, we determined that due
to a technical compliance issue, we have a tax exposure with respect to past
options exercised. Although we are still analyzing this issue, a reserve of $.7
million has been established for this exposure. The reserve is based on
currently available information and represents managements best estimate. The
impact of the ultimate resolution of this issue could differ materially from the
amount of the established reserve for reasons which include our estimates as to
applicable tax rates and taxes already paid.
RESULTS OF OPERATIONS
NET REVENUES
PRODUCT REVENUE. Net product revenue was $1.4 million for each of the
quarters ended September 30, 2002 and 2001. In the first quarter of fiscal year
2003, sales of TeleVantage licenses, excluding Not-For-Resale Kits (NFRs),
8
increased by approximately 75%. This increase is offset by a decrease from the
first quarter of fiscal 2002 in revenue from upgrades for NFRs and the planned
decrease in revenue from Dialogic hardware. The first quarter of fiscal year
2002 contained approximately $.3 million of revenue associated with the reversal
of sales reserves upon the rotation of TeleVantage version 3.5 to the version
4.0. Also reflected in the first quarter of fiscal year 2002 was approximately
$.1 million of revenue from Toshiba. There were no comparable amounts in the
first quarter of fiscal year 2003. The OEM agreement with Toshiba allows for the
rotation of inventory it holds for updated versions of the products. Beginning
in the fourth quarter of 2002, the Company began deferring revenue on current
and future shipments to Toshiba until the product is resold to Toshiba's
customers. For all other product sales, revenue is recognized at the time of
shipment.
SERVICE REVENUE. We had no service revenue for the quarter ended September
30, 2002 compared with revenue of $20,000 recognized from Intel Corporation for
the quarter ended September 30, 2001. We have completed our development
obligations under our agreement with Intel at the end of September 2001. No
additional service revenue is anticipated under this service agreement.
We distribute our products both domestically and internationally.
International product revenue was $.1 million for the quarters ended September
30, 2002 and 2001, respectively, or 4% and 7% of total net revenue,
respectively. Domestic revenue was $1.3 million for the quarters ended September
30 2002 and 2001, respectively.
GROSS PROFIT
PRODUCT. Gross profit from net product revenue was $1.3 million and $1.2
million for the quarters ended September 30, 2002 and 2001, respectively, or
97.3% and 83.6% of net product revenue. The increase in gross profit percentage
and aggregate dollars from net product revenue for the quarter ended September
30, 2002 compared to the quarter ended September 30, 2001 was due primarily to
an increase in revenue from higher margin TeleVantage software sales coupled
with a planned decrease in revenue from lower margin Dialogic hardware and
completion of amortizing the costs associated with certain licensed
technologies. Gross profit may fluctuate on a quarterly and yearly basis because
of product mix, pricing actions and changes in sales and inventory allowances.
SERVICES. We had no service revenues for the quarter ended September 30,
2002. Gross profit from net service revenue for the quarter ended September 30,
2001 was nominal at $8,000.
SALES AND MARKETING
Sales and marketing expenses were $1.4 million and $1.6 million for the
quarters ended September 30, 2002 and 2001, respectively, or 102.6% and 110.7%
of total net revenue, respectively. The decrease in sales and marketing expenses
in aggregate dollars and as a percentage of total net revenue for the quarter
ended September 30, 2002 compared to the quarter ended September 30, 2001 was
due primarily to a restructuring in personnel costs as a result of workforce
reductions implemented in September 2001.
PRODUCT DEVELOPMENT
Product development expenses were $.8 million and $1.1 million for the
quarters ended September 30, 2002 and 2001, respectively, or 59.0% and 80.5% of
total net revenue, respectively. The decrease in product development expense in
aggregate dollars and as a percentage of total net sales for the quarter ended
September 30, 2002 compared to the quarter ended September 30, 2001 is due to a
reduction in personnel headcount in September 2001 primarily the result of the
completion of the Intel and Toshiba development contracts. The current level of
development resources are adequate to support our development plans. We believe
that continued development and introduction of new versions of TeleVantage to
the market in a timely manner is critical to our future success.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $1.7 million and $1.2 million for
the quarters ended September 30, 2002 and 2001, respectively, or 121.8% and
87.7% of total net revenue, respectively. In the course of a review of our stock
option plan, it was determined that due to a technical compliance issue, we
have a tax exposure with respect to past options exercised. Although we are
9
still analyzing this issue a reserve of $.7 million has been established for
this exposure and is reflected in general and administrative expenses for the
quarter ended September 30, 2002. While we believe this amount is the best
estimate of the exposure, the ultimate liability could be materially higher or
lower. The increase in general and administrative expense in aggregate dollars
and as a percentage of total net sales for the quarter ended September 30, 2002
compared to the quarter ended September 30, 2001 is due to the reserve of $.7
million established for a tax exposure due to a technical compliance issue
related to our stock option plan and past option exercises under that plan. The
increase is offset, in part, by reduced headcount for administrative personnel
and other expense reductions.
OTHER INCOME, NET
For the quarter ended September 30, 2002 other income, net decreased to
$22,000 from $58,000 in the quarter ended September 30, 2001. The decrease was
the result of a lower level of interest rates combined with lower average cash
and invested balances.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
We had cash and cash equivalents of $6.7 million at September 30, 2002
compared to $6.0 million at June 30, 2002. Working capital was $3.6 million at
September 30, 2002 compared to $4.0 million at June 30, 2002, a decrease of $.4
million. The decrease in working capital reflects an increase of $.4 and $.7 in
deferred revenue and other liabilities, respectively, offset, in part, by an
increase in cash and cash equivalents of $.7 million. The increase in cash and
cash equivalents of $.7 is primarily a result of receipt of $1.9 million, net
from the sale of common stock on September 27, 2002, less cash of $1.1 million
used in operations and for the purchase of property and equipment.
We used cash of $1.1 million to fund operating activities during the
quarter ended September 30, 2002. The cash used in operating activities was
principally the result of $2.5 million in net loss offset by depreciation and
amortization of $.2 million, net non-cash changes in accrued liabilities and
deferred revenue of $1.1 million.
In the course of a review of our stock option plan, it was determined that
due to a technical compliance issue, we have a tax exposure with respect to past
options exercised. Although we are still analyzing this issue, a reserve of $.7
million has been established for this exposure. The final resolution of this
issue could have a material adverse impact on our cash balances.
We lease office, product packaging, storage space and equipment under
noncancelable operating lease agreements expiring through fiscal year 2006.
The approximate minimum rental commitments under noncancelable operating
leases that have remaining noncancelable lease terms in excess of one year at
September 30, 2002 were as follows:
YEARS ENDING FUTURE MINIMUM
JUNE 30 LEASE PAYMENTS (IN THOUSANDS)
------- -----------------------------
2003 $ 905
2004 1,151
2005 1,151
2006 236
------
Total $3,443
======
On August 8, 2002, we entered into a purchase agreement under which we
agreed to issue and sell 1,904,800 shares of common stock at a per share
purchase price equal to $1.05 in a private placement financing. On September 27,
2002 we received gross proceeds from the issuance and sale of that common stock
in the amount of $2,000,040. Under its registration rights agreement with the
investors in this September 2002 financing, the Company is required to register
these shares of common stock for resale by the investors. The shares of common
stock issued and sold to the investors are subject to purchase price adjustments
in certain events during the 24-month period following the first effective date
of a registration statement to be filed by Artisoft covering the resale of those
shares. In the event of a purchase price adjustment, the Company will be
required to issue additional shares of common stock to the investors for no
additional consideration and to
10
register those additional shares for resale by the investors. The investors in
the September 2002 financing have the right to designate one person for election
to our board of directors, and we will be required to use our best efforts to
cause that person to be elected to the board of directors. The investors have
not yet exercised this right.
The closing of the issuance and sale of shares of common stock in the
September 2002 financing resulted in anti-dilution adjustments to the series B
preferred stock and the warrants issued in Artisoft's 2001 financing. As a
result of these anti-dilution adjustments, each share of series B preferred
stock is convertible into approximately 2.38 shares of common stock. Prior to
the issuance and sale of shares of common stock under this agreement each share
of series B preferred stock was convertible into one share of common stock. In
addition, the per share exercise price of each warrant has been reduced from
$3.75 to $1.05.
We anticipate that based on our anticipated pipeline and forecasts from
strategic partners that existing cash balances at September 30, 2002 including
gross proceeds of $2.0 million received by the Company in the September 2002
financing will be adequate to meet the Company's current and expected cash
requirements for the next year, including the impact of the technical compliance
issue related to our option plan discussed above. However, a change in
circumstance, such as a reduction in the growth of demand for our products,
could necessitate that the Company seek additional debt or equity capital. See
"Risk Factors" below. In addition, the Company may also from time to time seek
debt or equity financing for various business reasons. In the event the Company
seeks and successfully receives additional equity capital, such additional
financing may result in significant shareholder dilution. There can be no
assurance that any such additional financing will be available when needed or on
acceptable terms to allow the Company to successfully achieve its operating plan
or fund future investment in its TeleVantage product line.
The investors in our September 2002 financing, as well as the investors in
our 2001 financing, have the right to participate, up to their pro rata share in
the respective financing, in future non-public capital raising transactions by
Artisoft. This right, as held by the investors in the September 2002 financing,
is not exercisable unless and until the expiration or termination in full of the
similar rights of the investors in the 2001 financing. The existence of this
right may substantially reduce the Company's ability to establish terms with
respect to, or enter into, any such financing with parties other than the
investors.
Our common stock trades on the NASDAQ SmallCap Market. In order to continue
trading on the NASDAQ SmallCap Market, we must satisfy the continued listing
requirements for that market. The minimum bid price of our common stock is
currently below the $1.00 per share minimum bid price continued listing
requirement of the NASDAQ SmallCap Market. The listing of our common stock on
the NASDAQ SmallCap is currently being maintained under a grace period permitted
by applicable NASDAQ Marketplace rules.
If our common stock is delisted from the NASDAQ SmallCap Market, due to the
expiration of the grace period with respect to the minimum bid price of our
common stock or otherwise, the listing of our common stock may be transferred to
the over-the-counter electronic bulletin board, also referred to as the OTCBB,
or the Pink Sheets. The listing of our common stock on the OTCBB or the Pink
Sheets would materially reduce the liquidity of our common stock and result in a
corresponding material reduction in the price of our common stock. In addition,
such delisting would materially adversely affect our access to the capital
markets, and the limited liquidity and reduced price of our common stock would
materially adversely affect our ability to raise capital through alternative
financing sources on terms applicable to us or at all.
FUTURE RESULTS
The Company intends to continue investing in the sales, marketing and
development of its software-based phone system, TeleVantage. The Company expects
operating expenditures will increase from the amounts incurred in the first
quarter of fiscal year 2003 and for the entire year will approximate the same
levels as in fiscal year 2002.
The Company believes that future TeleVantage revenues will increase and
thereby reduce future operating losses. However, the rate at which these
revenues may increase will be highly dependent on the overall telecommunications
industry capital spending environment, the rate of market acceptance of
TeleVantage and the success of the Company's strategic relationships including
Toshiba and Intel. See "Risk Factors" below.
Specifically, through an original equipment manufacturer development
arrangement with Artisoft, Toshiba is marketing TeleVantage 4.0 under the Strata
CS brand, which is being distributed and supported through Toshiba's established
dealer channel. Under the terms of the agreement, Toshiba will purchase licenses
of customized versions of the TeleVantage software product to be integrated with
its digital handsets and communications server product offerings. Any
significant delay, cancellation, or termination of this arrangement with Toshiba
will have a material adverse effect on the Company's future results of
operations. However, any such events will be mitigated to the extent of the
minimum revenue guarantees provided to us by Toshiba for a total remaining
amount of $1.4 million through September 30, 2003. The agreement expires in
December 2003.
11
In May 2001, Artisoft announced the first release of TeleVantage CTM Suite,
which delivers on the Company's joint engineering relationship with Intel.
TeleVantage CTM Suite is being pre-loaded on certain configurations of Intel's
Converged Communications Platform, an open, standards-based, application-ready
platform that supports a broad range of compatible telephony and business
applications, peripherals, and services from multiple vendors on a single
system. The Company delivered a final version of this product to Intel in May
2001 and has completed its development obligations under this agreement.
Although TeleVantage CTM Suite began shipping in August 2001, due to changes in
Intel release schedules, the Company expects that any significant revenues from
the CTM Suite will be delayed until calendar year 2003. Any significant further
delay or cancellation or termination of this arrangement with Intel will have a
material adverse effect on the Company's future revenue growth.
RISK FACTORS
WE CAUTION YOU THAT THE FOLLOWING IMPORTANT FACTORS, AMONG OTHERS, IN THE
FUTURE COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED
IN FORWARD-LOOKING STATEMENTS MADE BY OR ON BEHALF OF US IN FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION, PRESS RELEASES, COMMUNICATIONS WITH
INVESTORS AND ORAL STATEMENTS. ANY OR ALL OF OUR FORWARD-LOOKING STATEMENTS IN
THIS QUARTERLY REPORT ON FORM 10-Q, AND IN ANY OTHER PUBLIC STATEMENTS WE MAKE
MAY TURN OUT TO BE WRONG. THEY CAN BE AFFECTED BY INACCURATE ASSUMPTIONS WE
MIGHT MAKE OR BY KNOWN OR UNKNOWN RISKS AND UNCERTAINTIES. MANY FACTORS
MENTIONED IN THE DISCUSSION BELOW ARE IMPORTANT IN DETERMINING FUTURE RESULTS.
WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE ANY FORWARD-LOOKING STATEMENTS,
WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. YOU ARE
ADVISED, HOWEVER, TO CONSULT ANY FURTHER DISCLOSURES WE MAKE IN OUR REPORTS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
OUR REVENUES ARE DEPENDENT UPON SALES OF A SINGLE PRODUCT.
Our revenues are derived from sales of a single family of products,
TeleVantage. TeleVantage is a relatively new product in the emerging market for
software-based phone systems and it is difficult to predict when or if sales of
TeleVantage will increase substantially or at all. We face a substantial risk
that our sales will continue to not cover our operating expenses and that we
will continue to incur operating losses. Our business will fail if we are unable
to substantially increase our revenues from sales of TeleVantage, whether as a
result of competition, technological change, price pressures or other factors.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR FUTURE LOSSES.
We had operating losses for the quarter ended September 30, 2002 and for
the fiscal year ended June 30, 2002 and in each of the last eight fiscal years,
and negative cash flow from operating activities in four out of the last eight
fiscal years including the fiscal year ended June 30, 2002. The Company intends
to continue investing in the sales, marketing and development of its
software-based phone system, TeleVantage. The Company expects operating
expenditures for fiscal year 2003 to be at approximately the same levels as in
fiscal year 2002.
We expect to incur significant future operating losses and negative cash
flows. If our revenues do not increase significantly we may never achieve
profitability, on a sustained basis or at all, or generate positive cash flow in
the future. In that case our business will fail.
OUR OPERATING RESULTS VARY, MAKING FUTURE OPERATING RESULTS DIFFICULT TO
PREDICT.
Our 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 extent and timing of sales and operating expense increases and
decreases;
* changes in pricing policies or price reductions by us or our competitors;
* variations in our sales channels or the mix of product sales;
* the timing of new product announcements and introductions by us or our
competitors;
* the availability and cost of supplies;
* the financial stability of major customers;
12
* market acceptance of new products and product enhancements;
* our ability to develop, introduce and market new products, applications and
product enhancements;
* our ability to control costs;
* possible delays in the shipment of new products;
* our success in our sales and marketing efforts;
* deferrals of orders by our customers in anticipation of new products,
product enhancements or operating systems;
* changes in our strategy;
* personnel changes; and
* general economic factors.
Our software products are generally shipped as orders are received and
accordingly, we have historically operated with little backlog. As a result,
sales in any quarter are dependent primarily on orders booked and shipped in
that quarter and are not predictable with any degree of certainty. Sales may
also be affected by the level of returns beyond those estimated and provided for
at any point in time. In addition, our expense levels are based, in part, on our
expectations as to future revenues. If revenue levels are below expectations,
operating results are likely to be adversely affected. Our net loss may be
disproportionately affected by a reduction in revenues because of fixed costs
related to generating our revenues. These or other factors may influence
quarterly results in the future and, accordingly, there may be significant
variations in our quarterly operating results. Our historical operating results
are not necessarily indicative of future performance for any particular period.
Due to all of the foregoing factors, it is possible that in some future quarter
our operating results may be below the expectations of public market analysts
and investors. In such event, the price of our common stock could be adversely
affected.
The Company delivered a final version of TeleVantage CTM Suite to Intel in
May 2001 and has completed its development obligations under our agreement with
them. Although TeleVantage CTM Suite began shipping in August 2001, the Company
expects that significant revenues from the CTM Suite will be delayed until
calendar year 2003. In addition, the Company's pricing of TeleVantage CTM Suite
varies based on configuration. There can be no guarantee that sales of Intel's
Converged Communication Platform will ship in sufficient volume or produce
revenues that meet the Company's expectations. Any significant delay or,
cancellation or termination of this arrangement with Intel will have a material
adverse affect on the Company's future results of operations.
OUR COMMON STOCK MAY BE DELISTED FROM THE NASDAQ SMALLCAP MARKET.
Our common stock trades on the NASDAQ SmallCap Market. In order to continue
trading on the NASDAQ SmallCap Market, we must satisfy the continued listing
requirements for that market. The minimum bid price of our common stock is
currently below the $1.00 per share minimum bid price continued listing
requirement of the NASDAQ SmallCap Market. The listing of our common stock on
the NASDAQ SmallCap is currently being maintained under a grace period permitted
by applicable NASDAQ Marketplace rules.
If our common stock is delisted from the NASDAQ SmallCap Market, due to the
expiration of the grace period with respect to the minimum bid price of our
common stock or otherwise, the listing of our common stock may be transferred to
the over-the-counter electronic bulletin board, also referred to as the OTCBB,
or the Pink Sheets. The listing of our common stock on the OTCBB or the Pink
Sheets would materially reduce the liquidity of our common stock and result in a
corresponding material reduction in the price of our common stock. In addition,
such delisting would materially adversely affect our access to the capital
markets, and the limited liquidity and reduced price of our common stock would
materially adversely affect our ability to raise capital through alternative
financing sources on terms applicable to us or at all.
13
WE MAY HAVE A NEED TO PROCURE ADDITIONAL THIRD PARTY FINANCING, BUT FINANCING
MAY NOT BE AVAILABLE WHEN NEEDED OR UPON TERMS ACCEPTABLE TO US. IF A FINANCING
IS CONSUMMATED, CURRENT STOCKHOLDERS MAY EXPERIENCE SUBSTANTIAL DILUTION OF
THEIR OWNERSHIP IN ARTISOFT.
In the past, we have funded our continuing operations and working capital
requirements primarily through cash from operations and the sale of our
securities. In order to obtain the funds to continue our operations and meet our
working capital requirements, we may require additional equity financing or debt
financing. We may also from time to time seek additional equity financing or
debt financing in order to fund other business initiatives, including the
acquisition of other businesses. Additional financing may place significant
limits on our financial and operating flexibility, and any future financing
could result in substantial dilution to our stockholders. The holders of our
Series B Preferred Stock and the holders of common stock issued pursuant to our
September 2002 financing have price-related anti-dilution protection in the
event of future issuances of securities by us. These provisions could
substantially dilute your interest in Artisoft in the event of a future
financing transaction. In addition, those same investors all have the right to
participate, up to their pro rata share in their respective financing, in future
capital raising transactions by the Company. The existence of this right may
substantially reduce the Company's ability to establish terms with respect to,
or enter into, any such financing with parties other than the investors. There
can be no assurance that any such additional equity financing or debt financing
will be available to us when needed or on terms acceptable to us. If we are not
able to successfully obtain additional equity financing or debt financing, if
needed, the business, financial condition and results of operations of Artisoft
will be materially and adversely affected.
OUR MARKET IS HIGHLY COMPETITIVE, AND WE MAY NOT HAVE THE RESOURCES TO COMPETE
ADEQUATELY.
The computer telephony industry is highly competitive and is characterized
by rapidly evolving industry standards. We believe that the principal
competitive factors affecting the markets we serve include:
* vendor and product reputation;
* product architecture, functionality and features;
* scalability, ease of use and performance;
* quality of product and support;
* price;
* brand name recognition; and
* effectiveness of sales and marketing efforts.
We compete with other phone system companies, many of which have
substantially greater financial, technological, production, sales and marketing
and other resources, as well as greater name recognition and larger customer
bases, than does Artisoft. As a result, these competitors may be able to respond
more quickly and effectively than can Artisoft to new or emerging technologies
and changes in customer requirements or to devote greater resources than can
Artisoft to the development, promotion, sales and support of their products. In
addition, our competitors could develop products compatible with the Intel
SoftSwitch Framework that could displace TeleVantage CTM Suite. Also, any new
product introductions by Artisoft may be subject to severe price and other
competitive pressures. Given the greater financial resources of many of our
competitors, there can be no assurance that our products will be successful or
even accepted. There can be no assurance that our products will be able to
compete successfully with other products offered presently or in the future by
other vendors.
IF SOFTWARE-BASED PHONE SYSTEMS DO NOT ACHIEVE WIDESPREAD ACCEPTANCE, WE MAY NOT
BE ABLE TO CONTINUE OUR OPERATIONS.
Our sole product line, TeleVantage, competes in the newly emerging
software-based phone system market. Software-based phone systems operate in
conjunction with and are affected by developments in other related industries.
These industries include highly developed product markets, such as personal
computers, personal computer operating systems and servers, proprietary private
branch exchanges and related telephone hardware and software products, and
telephone, data and cable transmission systems, as well as new emerging products
and industries, such as Internet communications and Internet Protocol telephony.
These industries and product markets are currently undergoing rapid changes,
market evolution and consolidation. The manner, in which these industries and
products evolve, including the engineering- and market-based decisions that are
14
made regarding the interconnection of the products and industries, will affect
the opportunities and prospects for TeleVantage. TeleVantage competes directly
with other software-based phone system solutions as well as existing
traditional, proprietary hardware solutions offered by companies such as Avaya
Communications, Nortel Networks Corporation and Siemens Corporation. There can
be no assurance that the markets will migrate toward software-based phone system
solutions. If software-based phone systems do not achieve widespread acceptance,
sales of TeleVantage will not increase and may decline and our revenues will
suffer.
WE SELL OUR PRODUCTS THROUGH DISTRIBUTORS AND VALUE-ADDED RESELLERS, WHICH LIMIT
OUR ABILITY TO CONTROL THE TIMING OF OUR SALES, AND THIS MAKES IT DIFFICULT TO
PREDICT OUR REVENUE.
We are exposed to the risk of product returns from our distributors and
value-added resellers, which are estimated and recorded by us as a reduction in
sales. In addition, we are exposed to the risk of fluctuations in quarterly
sales if resellers and distributors purchase and hold excessive amounts of
inventory at any time or otherwise change their purchasing patterns. Although we
monitor our distributor inventories and current and projected levels of sales,
overstocking may occur with TeleVantage because of rapidly evolving market
conditions. In addition, the risk of product returns may increase if the demand
for TeleVantage were to rapidly decline due to regional economic troubles or
increased competition. All of these risks are exacerbated as TeleVantage is our
sole product line and the market for TeleVantage and similar products is newly
emerging. There can be no assurance that actual product returns will not exceed
our allowances for these returns. Any overstocking by resellers or distributors
or any product returns in excess of recorded allowances could adversely affect
our revenues. To the extent we may, in the future, introduce new products, the
predictability and timing of sales to end-users and the management of returns to
us of unsold products by distributors and volume purchasers may become more
complex and could result in material fluctuations in quarterly sales and
operating results. In fiscal year 2002, the Company recorded a stock rotation
reserve of $800,000 as a reduction to revenue. The original equipment
manufacturer agreement with Toshiba allows for the rotation of inventory it
holds for updated versions of the products. The stock rotation reserve was
recorded based on the estimated amount of TeleVantage 4.0 inventory that Toshiba
likely will rotate with the expected release of TeleVantage 5.0 later this
calendar year. For Toshiba product sales commencing on or after April 1, 2002,
the Company began to defer revenue beginning in the fourth quarter of fiscal
year 2002 until the product is resold by Toshiba to its customers. The deferral
of revenue is due to increasing Toshiba inventory levels, which has resulted in
Artisoft not having the ability to reasonably estimate potential future stock
rotations resulting from future product releases and their effect on further
Toshiba revenue.
OUR MARKET IS SUBJECT TO CHANGING PREFERENCES AND TECHNOLOGICAL CHANGE; FAILURE
TO KEEP UP WITH THESE CHANGES WOULD RESULT IN OUR LOSING MARKET SHARE.
The markets for computer telephony solutions are characterized by rapid
technological change, changing customer needs, frequent product introductions
and evolving industry standards. The introduction of products incorporating new
technologies and the emergence of new industry standards could render our
existing products obsolete and unmarketable. Our future success will depend upon
our ability to develop and introduce new computer telephony products (including
new releases and enhancements) on a timely basis that keep pace with
technological developments and emerging industry standards and address the
increasingly sophisticated needs of our customers. There can be no assurance
that we will be successful in developing and marketing new computer telephony
products that respond to technological changes or evolving industry standards,
that we will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these new products, or
that our new products will adequately meet the requirements of the marketplace
and achieve market acceptance. If we were unable, for technological or other
reasons, to develop and introduce new computer telephony products in a timely
manner in response to changing market conditions or customer requirements, our
market share would likely be reduced.
SOFTWARE ERRORS MAY SERIOUSLY HARM OUR BUSINESS AND DAMAGE OUR REPUTATION,
CAUSING LOSS OF CUSTOMERS AND REVENUES.
Software products as complex as TeleVantage may contain undetected errors.
There can be no assurance that, despite testing by Artisoft and by current and
potential customers, errors will not be found in TeleVantage or any new products
after commencement of commercial shipments, resulting in loss of or delay in
market acceptance or the recall of such products. We provide customer support
for most of our products. We may in the future offer new products. If these
products are flawed, or are more difficult to use than TeleVantage, customer
support costs could rise and customer satisfaction levels could fall.
WE RELY ON THIRD-PARTY TECHNOLOGY AND HARDWARE PRODUCTS; IF THIS TECHNOLOGY IS
NOT AVAILABLE OR CONTAINS UNDETECTED ERRORS, OUR BUSINESS MAY SUFFER.
Our computer telephony software requires the availability of certain
hardware. Specifically, the TeleVantage software-based phone system operates on
voice processing boards manufactured by Intel. To the extent that these boards
15
become unavailable or in short supply we could experience delays in shipping
software-based phone systems to our customers, which may have a material adverse
affect on our future operating results. In addition, we are dependent on the
reliability of this hardware and to the extent the hardware has defects it will
affect the performance of our own software-based phone system. If the hardware
becomes unreliable or does not perform in a manner that is acceptable to our
customers, sales of TeleVantage could fall. Such delays or quality problems if
encountered could also cause damage to our reputation. Additionally, there can
be no assurances that, in the event of a price increase by Intel, we will be
able to sell and market our software-based phone system.
TeleVantage currently runs only on Microsoft Windows NT servers. In
addition, our products use other Microsoft Corporation technologies, including
the Microsoft Data Engine. A decline in market acceptance for Microsoft
technologies or the increased acceptance of other server technologies could
cause us to incur significant development costs and could have a material
adverse effect on our ability to market our current products. There can be no
assurance that businesses will adopt Microsoft technologies as anticipated or
will not migrate to other competing technologies that our telephony products do
not currently support. Additionally, since the operation of our software-based
phone system solution is dependent upon Microsoft technologies, there can be no
assurances that, in the event of a price increase by Microsoft, we will be able
to sell and market our software-based phone system.
Our TeleVantage CTM Suite software operates on voice processing hardware,
computer hardware, CT Media software, and SoftSwitch Framework software
manufactured by Intel. To the extent that these technologies become unavailable
or in short supply we could experience delays in shipping TeleVantage CTM Suite
to our customers, which may have a material adverse affect on our future
operating results. In addition, we are dependent on the reliability of these
technologies and to the extent they have defects it will affect the performance
of our own software. If the Intel technologies become unreliable or do not
perform in a manner that is acceptable to our customers, sales of TeleVantage
CTM Suite could fall. Such delays or quality problems if encountered could also
cause damage to our reputation. Additionally, there can be no assurances that,
in the event of a price increase by Intel, we will be able to sell and market
our software-based phone system.
ANY FAILURE BY US TO PROTECT OUR INTELLECTUAL PROPERTY COULD HARM OUR BUSINESS
AND COMPETITIVE POSITION.
Our success is dependent upon our software code base, our programming
methodologies and other intellectual properties. To protect our proprietary
technology, we rely primarily on a combination of trade secret laws and
nondisclosure, confidentiality, and other agreements and procedures, as well as
copyright and trademark laws. These laws and actions may afford only limited
protection. There can be no assurance that the steps taken by us will be
adequate to deter misappropriation of our proprietary information, or to prevent
the successful assertion of an adverse claim to software utilized by us, or that
we will be able to detect unauthorized use and take effective steps to enforce
our intellectual property rights. We own United States and foreign trademark
registrations for certain of our trademarks. In selling our products, we rely
primarily on "shrink wrap" licenses that are not signed by licensees and,
therefore, may be unenforceable under the laws of some jurisdictions. In
addition, the laws of some foreign countries provide substantially less
protection to our proprietary rights than do the laws of the United States.
Trademark or patent challenges in these foreign countries could, if successful,
materially disrupt or even terminate our ability to sell our products in those
markets. There can be no assurance that our means of protecting our proprietary
rights will be adequate or that our competitors will not independently develop
similar technology. Although we believe that our services and products do not
infringe on the intellectual property rights of others, claims to that effect
have been and in the future may be asserted against us. The failure of Artisoft
to protect its proprietary property, or the infringement of its proprietary
property on the rights of others, could harm its business and competitive
position.
WE NEED QUALIFIED PERSONNEL TO MAINTAIN AND EXPAND OUR BUSINESS.
Our future performance depends in significant part upon key technical and
senior management personnel. We are dependent on our 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 our software products and introduce enhanced future products. A high
level of employee mobility and aggressive recruiting of skilled personnel
characterize our industry. There can be no assurance that our current employees
will continue to work for us or that we will be able to hire additional
employees on a timely basis or at all. We expect to grant additional stock
options and provide other forms of incentive compensation to attract and retain
key technical and executive personnel. These additional incentives will lead to
higher compensation costs in the future and may adversely affect our future
results of operations.
POSSIBLE ACQUISITIONS OR DIVESTITURES BY US INVOLVE RISKS THAT MAY HARM OUR
BUSINESS.
From time to time, we may consider acquisitions of or alliances with other
companies that could complement our existing business, including acquisitions of
complementary product lines. Although we may periodically discuss potential
transactions with a number of companies, there can be no assurance that suitable
acquisition, alliance or purchase candidates can be identified, or that, if
16
identified, acceptable terms can be agreed upon or adequate and acceptable
sources will be available to finance these transactions. Even if an acquisition
or alliance is consummated, there can be no assurance that we will be able to
integrate successfully acquired companies or product lines into our existing
operations, which could increase our operating expenses in the short-term.
Moreover, acquisitions by Artisoft could result in potentially dilutive
issuances of equity securities, the incurrence of additional debt and
amortization of expenses related to goodwill and intangible assets, all of which
could adversely affect our ability to achieve profitability. Acquisitions,
alliances and divestitures involve numerous risks, such as the diversion of the
attention of our management from other business concerns, the entrance of
Artisoft into markets in which it has had no or only limited experience,
unforeseen consequences of exiting from product markets and the potential loss
of key employees of the acquired company.
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK. During the normal course of business Artisoft is routinely
subjected to a variety of market risks, examples of which include, but are not
limited to, interest rate movements and collectability of accounts receivable.
Artisoft currently assesses these risks and has established policies and
practices to protect against the adverse effects of these and other potential
exposures. Although Artisoft does not anticipate any material losses in these
risk areas, no assurances can be made that material losses will not be incurred
in these areas in the future.
INTEREST RATE RISK. Artisoft may be exposed to interest rate risk on
certain of its cash equivalents. The value of certain of our investments may be
adversely impacted in a rising interest rate investment environment. Although
Artisoft does not anticipate any material losses from such a movement in
interest rates, no assurances can be made that material losses will not be
incurred in the future.
ITEM 4. - CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their
evaluation of the Company's disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a
date within 90 days of the filing date of this Quarterly Report on Form 10-Q,
our chief executive officer and chief financial officer have concluded that our
disclosure controls and procedures are designed to ensure that information
required to be disclosed by Artisoft in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms and are operating in an effective
manner.
(b) CHANGES IN INTERNAL CONTROLS. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their most recent evaluation.
PART II - OTHER INFORMATION
ITEM 2. - CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 27, 2002, Artisoft issued and sold to Special Situations Funds
III, L.P., Special Situations Cayman Fund, L.P., Special Situations Private
Equity Fund, L.P. and Special Situations Technology Fund, L.P. an aggregate of
1,904,800 shares of common stock at a per share purchase price equal to $1.05.
The aggregate offering price for the sale of these securities was $2,000,040. No
underwriters were involved in the foregoing sale of securities. Such sale was
made in reliance upon an exemption from the registration provisions of the
Securities Act set forth in Section 4(2) thereof, relative to sales by an issuer
not involving any public offering, and the rules and regulations thereunder.
17
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 26, 2002, the Company held a special meeting of stockholders.
At the meeting, the votes cast for and against the matter presented to the
Company's stockholders, as well as the number of abstentions and broker
non-votes, were as follows:
To authorize the issuance and sale under the terms of a purchase agreement
dated August 8, 2002 of 1,904,800 shares of Artisoft's common stock at a
per share price equal to $1.05.
FOR AGAINST ABSTAIN BROKER NON-VOTES
--------- --------- ------- ----------------
6,660,502 3,880,266 577,883 0
ITEM 5. - OTHER INFORMATION
Artisoft has entered into change in control agreements with all of its
executive officers. These agreements provide that in the event of a change in
control of Artisoft and a termination of employment within two years without
cause or by the executive for "good reason," such as a reduction in duties and
responsibilities, (1) all of the officer's unvested options vest and become
exercisable in full and (2) Artisoft will pay the executive a lump sum equal to
one year's base salary (two years for the Chief Executive Officer) plus bonus.
In addition, the executive will be entitled to other employee benefits that he
or she would otherwise have received for a one-year period (two years for the
Chief Executive Officer) after the termination of employment.
We have been advised that an affiliate of Austin W. Marxe and David M.
Greenhouse has purchased shares of our common stock on the open market, and that
immediately after this purchase Austin W. Marxe and David M. Greenhouse have
beneficial ownership of greater than thirty percent (30%) of the combined voting
power of Artisoft's then outstanding voting securities. The described
acquisition of common stock on the open market falls within the definition of
"change in control" for purpose of the severance agreements.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The Exhibits filed as part of this Quarterly Report on Form 10-Q are listed
on the Exhibit Index immediately preceding such Exhibits, which Exhibit Index is
incorporated herein by reference. Documents listed on such Exhibit Index, except
for documents identified by footnotes, are being filed as exhibits herewith.
Documents identified by footnotes are not being filed herewith and, pursuant to
Rule 12b-32 under the Securities Exchange Act of 1934, reference is made to such
documents as previously filed as exhibits filed with the Securities and Exchange
Commission. Artisoft's file number under the Securities Exchange Act of 1934 is
000-19462.
b. Reports on Form 8-K
On August 8, 2002, Artisoft filed a Current Report on Form 8-K dated August
8, 2002 pursuant to Rule 135c under the Securities Act, for the purpose of
filing under Item 5 (Other Events) with the Securities and Exchange Commission
as an exhibit thereto, the Company's press release dated August 8, 2002,
announcing that it has entered into an agreement for a common stock financing by
means of a private placement. The Company also filed this Current Report on Form
8-K for the purpose of filing with the Securities and Exchange Commission as an
exhibit thereto the Voting Agreement dated February 28, 2002 entered into among
the Company and the holders of the Company's series B convertible preferred
Stock.
On August 9, 2002, Artisoft filed a Current Report on Form 8-K dated August
9, 2002 for the purpose of filing under Item 1 (Other Events) with the
Securities and Exchange Commission as an exhibit thereto Artisoft's press
release dated August 8, 2002, announcing certain financial results for the
fiscal year and fourth quarter ended June 30, 2002.
On October 1, 2002, Artisoft filed a Current Report on Form 8-K dated
October 1, 2002 for the purpose of reporting under Item 1 (Change in Control of
the Registrant) with the Securities and Exchange Commission that a change in
control of the Company may be deemed to have occurred following to the issuance
18
and sale of an aggregate of 1,904,800 shares of common stock of the Company to
Special Situations Fund III, L.P., Special Situations Cayman Fund, L.P., Special
Situations Private Equity Fund, L.P. and Special Situations Technology Fund,
L.P. on September 27, 2002.
On October 25, 2002, Artisoft filed a Current Report on Form 8-K dated
October 25, 2002 for the purpose of filing under Item 5 (Other Events) with the
Securities and Exchange Commission as an exhibit thereto Artisoft's press
release dated October 24, 2002, announcing certain financial results for the
first quarter ended September 30, 2002.
On October 25, 2002, Artisoft filed a Current Report on Form 8-K dated
October 25, 2002 for the purpose of filing under Item 5 (Other Events) with the
Securities and Exchange Commission a description of the capital stock of the
Company.
19
SIGNATURES
Pursuant to the requirements 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.
ARTISOFT, INC.
Date: November 14, 2002 By /s/ STEVEN G. MANSON
-------------------------------------
Steven G. Manson
President and Chief Executive Officer
Date: November 14, 2002 By /s/ MICHAEL J. O'DONNELL
-------------------------------------
Michael J. O'Donnell
Chief Financial Officer (Principal
Financial Officer and Chief
Accounting Officer)
20
CERTIFICATIONS
I, Steven G. Manson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Artisoft, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: November 14, 2002 /s/ STEVEN G. MANSON
----------------------------------------
Steven G. Manson
Chief Executive Officer (Principal
Executive Officer)
21
I, Michael J. O'Donnell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Artisoft, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: November 14, 2002 /s/ MICHAEL J. O'DONNELL
-----------------------------------
Michael J. O'Donnell
Chief Financial Officer (Principal
Financial Officer)
22
EXHIBIT INDEX
Designation Description
- ----------- -----------
99.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C.ss.1350
99.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C.ss.1350
23