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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 DECEMBER 31, 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
(State or Other Jurisdiction of 86-0446453
Incorporation or Organization) (I.R.S. Employer Identification No.)
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act. YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
SHARES OUTSTANDING AS OF
TITLE OF CLASS OF COMMON STOCK FEBRUARY 13, 2003
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COMMON STOCK, $.01 PAR VALUE PER SHARE 17,825,522
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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
December 31, 2002 (Unaudited) and June 30, 2002................. 3
Unaudited Condensed Consolidated Statements of Operations
Three and Six months Ended December 31, 2002 and 2001........... 4
Unaudited Condensed Consolidated Statements of Cash Flows
Six months Ended December 31, 2002 and 2001..................... 5
Notes to Unaudited Condensed Consolidated Financial Statements.... 6
Item 2. - Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 9
Item 3. - Quantitative and Qualitative Disclosures About Market Risk........ 17
Item 4. - Controls and Procedures........................................... 17
PART II - OTHER INFORMATION.......................................................... 18
Item 4. - Submission of Matters to a Vote of Security Holders............... 18
Item 6. - Exhibits and Reports on Form 8-K.................................. 18
SIGNATURES........................................................................... 19
CERTIFICATIONS....................................................................... 20
EXHIBIT INDEX........................................................................ 22
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)
December 31, June 30,
2002 2002
---------- ----------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 5,489 $ 6,020
Trade accounts receivables, net of allowances of $68
and $118 at December 2002 and June 2002, respectively 802 998
Prepaid expenses and other current assets 183 288
---------- ----------
Total current assets 6,474 7,306
---------- ----------
Property and equipment 3,662 3,480
Less accumulated depreciation and amortization (3,003) (2,682)
---------- ----------
Net property and equipment 659 798
Other assets 338 257
---------- ----------
$ 7,471 $ 8,361
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 242 $ 376
Accrued liabilities 1,865 1,569
Deferred revenue 544 377
Customer deposits 559 --
Reserve for stock rotation 1,326 940
---------- ----------
Total current liabilities 4,536 3,262
---------- ----------
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock, $1.00 par value per share
Authorized 11,433,600 shares;
Series A preferred stock, $1.00 par value per share
Authorized 50,000 Series A shares; no Series A shares
issued at December 31, 2002 and June 30, 2002 -- --
Series B preferred stock, $1.00 par value per share
Authorized 2,800,000 Series B shares; issued 2,800,000
Series B shares at December 31, 2002 and June 30, 2002
(aggregate liquidation value $7 million) 2,800 2,800
Common stock, $.01 par value per share. Authorized 50,000,000
shares; issued 31,146,022 common shares at December 31, 2002
and 29,166,613 at June 30, 2002 311 292
Additional paid-in capital 108,320 106,460
Accumulated deficit (38,712) (34,669)
Less treasury stock, at cost, 13,320,500 shares at December 31,
2002 and June 30, 2002 (69,784) (69,784)
---------- ----------
Shareholders' equity 2,935 5,099
---------- ----------
$ 7,471 $ 8,361
========== ==========
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
3
ARTISOFT, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net revenue:
Product $ 1,220 $ 2,499 $ 2,577 $ 3,897
Services -- -- -- 20
---------- ---------- ---------- ----------
Total net revenue 1,220 2,499 2,577 3,917
Cost of sales:
Product 54 451 90 672
Services -- -- -- 12
---------- ---------- ---------- ----------
Total cost of sales 54 451 90 684
Gross profit:
Product 1,166 2,048 2,487 3,225
Services -- -- -- 8
---------- ---------- ---------- ----------
Total gross profit 1,166 2,048 2,487 3,233
Operating expenses:
Sales and marketing 1,143 1,442 2,535 3,012
Product development 650 827 1,450 1,963
General and administrative 933 1,136 2,586 2,385
---------- ---------- ---------- ----------
Total operating expenses 2,726 3,405 6,571 7,360
---------- ---------- ---------- ----------
Loss from operations (1,560) (1,357) (4,084) (4,127)
Other income, net 19 67 41 125
---------- ---------- ---------- ----------
Net loss (1,541) (1,290) (4,043) (4,002)
Dividend to series B preferred stockholders -- (387) (2,006) (2,766)
---------- ---------- ---------- ----------
Loss applicable to common stockholders $ (1,541) $ (1,677) $ (6,049) $ (6,768)
========== ========== ========== ==========
Loss applicable to common stockholders -
basic and diluted $ (0.09) $ (0.11) $ (0.36) $ (0.43)
========== ========== ========== ==========
Weighted average common shares outstanding -
basic and diluted 17,751 15,738 16,840 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)
Six Months Ended
December 31,
------------------------
2002 2001
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Cash flows from operating activities:
Net loss $ (4,043) $ (4,002)
Adjustments to reconcile net loss to net
Cash used in operating activities:
Depreciation and amortization 354 395
Non-cash changes in accounts receivable allowances:
Bad debt allowances:
Additions 15 --
Reductions (9) --
Non-cash changes in returns allowances:
Additions -- --
Reductions (10) (25)
Changes in assets and liabilities:
Receivables
Trade accounts 200 (412)
Other receivables -- 20
Inventories
Prepaid expenses and other current assets 105 722
Accounts payable (134) (277)
Accrued liabilities 296 75
Deferred revenue 167 59
Customer deposits 559 --
Reserve for stock rotation 386 (323)
Other assets 40 41
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Net cash used in operating activities (2,074) (3,727)
---------- ----------
Cash flows from investing activities:
Capitalization of software (154) (108)
Purchases of property and equipment (182) (44)
---------- ----------
Net cash used in investing activities (336) (152)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net of expenses -- 6,773
Net proceeds from issuance of common stock, net of expenses 1,879 86
---------- ----------
Net cash provided by financing activities 1,879 6,859
---------- ----------
Net increase (decrease) in cash and cash equivalents (531) 2,980
Cash and cash equivalents at beginning of period 6,020 5,801
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Cash and cash equivalents at end of period $ 5,489 $ 8,781
========== ==========
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 and six months ended December 31, 2002 are not necessarily indicative of
the results to be expected for the full year or any other future periods.
(2) REVENUE RECOGNITION
The Company has one family of products, TeleVantage, a shrink-wrap
software-based phone system that runs on Windows 2000/NT platform and Intel
communications hardware. TeleVantage has an optional Call Center module, and
add-ons, such as TeleVantage Call Center Scoreboard, TeleVantage Call
Classifier, TeleVantage Smart Dialer and TeleVantage persistent pager. All
modules are fully integrated and represent shrink-wrap software. The Company
does not provide training or installation services. However, we have provided
development services to Toshiba and Intel in the past as discussed below.
The Company follows the provisions of Statement of Position "SOP" 97-2,
SOFTWARE REVENUE RECOGNITION as amended by SOP 98-9, MODIFICATION OF SOP 97-2
SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS. The Company
recognizes revenue when it is realized or realizable and earned. The Company
considers revenue realized or realizable and earned when persuasive evidence of
an arrangement exists, the product has been shipped or the services have been
provided to the customer, the sales price is fixed or determinable and
collectability is reasonably assured. The Company reduces revenue for estimated
customer returns, rotations and sales rebates. Revenue from software license
agreements that have significant customizations and modification of the software
product are recognized in accordance with the provisions of SOP 97-2 as it
relates to contract accounting under SOP 81-1, ACCOUNTING FOR PERFORMANCE OF
CONSTRUCTION-TYPE AND CERTAIN PRODUCTION-TYPE CONTRACTS. In addition to the
aforementioned general policy, the following are the specific revenue
recognition policies for each major category of revenue. The same revenue
recognition criteria are used to account for sales through distributors as sales
to end users, with the exception of revenue from Toshiba which is discussed
below.
PRODUCT-SOFTWARE, NOT-FOR-RESALE KITS (NFR'S) AND HARDWARE. TeleVantage is
sold under a perpetual license agreement. As part of the product sales price,
the Company also provides second tier telephone support that is generally
utilized by the customer shortly after the sale. Telephone support is the only
undelivered element that is implicitly or explicity included in the sales price
of the license. The Company has concluded that the level of support it provides
occurs within one year after sale, unspecified upgrades/enhancements offered
have historically been minimal and are expected to continue to be minimal, and
the cost to provide this limited amount of service is insignificant and subject
to estimation and therefore the Company recognizes license revenue upon shipment
and meeting all other revenue recognition criteria and accrues the related costs
of telephone support.
VSOE is established through the use of established fixed price lists that
are strictly adhered to.
Upgrades for product enhancements are charged for separately based on
standard price lists in effect at the time the upgrade is purchased, or are
provided for under annual subscriptions. Annual subscriptions are sold
separately and are based upon standard price lists. Revenue for annual
6
subscriptions is recognized ratably over the length of the software subscription
period, typically twelve months.
The following discusses the Company's policies regarding its revenue
recognition criteria:
* Persuasive evidence of an arrangement exists: The Company's practice
requires that authorized purchase orders are received by the customer,
generally by either Fax or E-mail. Arrangements outside of standard
terms,for example the development arrangement with Toshiba, are
evidenced by a signed agreement.
* Delivery has occurred: The product is shipped by mail, outside
delivery service or E-Mail and ownership passes upon shipment
according to our standard sales terms. The Company has historically
entered into one contract with payment terms of six months. The
Company evaluated the payment terms and concluded that the contract
fee was fixed and determinable.
* The vendor's fee is fixed or determinable: Prices charged are based
upon established price lists and payment terms require payment
generally within 30 days.
* Collectibility is probable: Credit is granted based on the customer's
history with us or if a new customer, based upon credit checks such as
Dun and Bradstreet and/or bank and vendor references. Prepayment is
required if customer credit history is questionable.
The Company does not typically have bundled contract elements for which
revenue is deferred. For bundled contract arrangements, the Company has
separately stated and substantive renewal rates and as a result, the Company has
followed the residual method as defined in SOP 98-9.
Also, in January 2000, the Company executed a strategic alliance agreement
with Toshiba intended to allow the Company and Toshiba to deliver an integrated
communications server and software-PBX solution for small and midsize
businesses. TeleVantage 4.0 represents the results of a 1-1/2 year
joint-engineering project with Toshiba to integrate TeleVantage with Toshiba
digital handsets. Through an Original Equipment Manufacturer (OEM) 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
TeleVantage for customized versions of the software product to be integrated
with its digital handsets and communications server product offerings. The costs
associated with this customization have been incurred and reported as an element
of cost of sales as part of this development agreement. At the end of September
2001 and upon completion of the development portion of this arrangement, we
began to account for product shipped to Toshiba as product sales. The OEM
agreement with Toshiba allows for the rotation of inventory it holds for updated
versions of the products. During the quarter ended March 31, 2002 revenue was
reduced by $800,000 to provide a reserve for the estimated amount of version 4.0
inventory that Toshiba has the right to rotate for version 5.0 when TeleVantage
5.0 is introduced early in calendar year 2003. Also, 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. 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. For all other
product sales, revenue is recognized at the time of shipment because the Company
has sufficient information, experience and history to support its ability to
estimate future stock rotations.
SERVICES. Revenue from time and material service contracts is recognized as
the services are provided. Revenue from fixed price, long-term service or
development contracts is recognized over the contract term based on the
percentage of services that are provided during the period compared with the
total estimated services to be provided over the entire contract. Losses on
fixed price contracts are recognized during the period in which the loss first
becomes apparent. Deferred revenue represents cash received for services that
have not yet been provided. Customer deposits represent cash received for
products not yet shipped.
(3) 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
7
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.
On July 30, 2002, the FASB issued Statement No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES ("SFAS 146"). SFAS 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. SFAS 146 notes
that the principal reason for issuing SFAS 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. SFAS 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. SFAS 146 is effective for exit and disposal
activities initiated after December 31, 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 December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION-TRANSITION AND DISCLOSURE ("SFAS 148"). SFAS 148 amends FASB
Statement No. 123 ("SFAS 123") to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures of both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
transition guidance and annual disclosure provisions of SFAS 148 are effective
for fiscal years ending after December 15, 2002. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. As the Company did not
make a voluntary change to the fair value based method of accounting for
stock-based compensation in 2002, the adoption of SFAS No. 148 did not have a
material impact on the Company's financial position and results of operations.
The Company will adopt the interim disclosure provisions for the period ending
March 31, 2003.
(4) CONTENGENCY
In September 2002, the Company recorded an accrual of $.7 million related
to potential tax exposure associated with a technical compliance issue involving
its employee stock option plan and past incentive stock options exercised under
the plan. The Company continues to evaluate the facts and circumstances
surrounding this technical compliance issue and the ultimate resolution of this
issue could differ materially from the amount of the established actual.
(5) 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 Six Months Ended
December 31, December 31,
----------------- -----------------
2002 2001 2002 2001
------ ------ ------ ------
Antidilutive potential common shares
excluded from net loss per share 6,617 4,360 6,785 3,001
(6) 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
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
8
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 the September 2002 and 2001 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 was 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 noncash 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 six months
ended December 31, 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 13,
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.
The Company has one family of products, TeleVantage, a shrink-wrap
software-based phone system that runs on Windows 2000 /NT platform and Intel
communications hardware. TeleVantage has an optional Call Center module, and
add-ons, such as TeleVantage Call Center Scoreboard, TeleVantage Call
Classifier, TeleVantage Smart Dialer and TeleVantage persistent pager. All
modules are fully integrated and represent shrink-wrap software. The Company
does not provide training or installation services.
In September 2002, the Company recorded an accrual of $.7 million related
to potential tax exposure associated with a technical compliance issue involving
its employee stock option plan and past incentive stock options exercised under
the plan. The Company continues to evaluate the facts and circumstances
surrounding this technical compliance issue and the ultimate resolution of this
issue could differ materially from the amount of the established actual.
9
RESULTS OF OPERATIONS
NET REVENUES
PRODUCT REVENUE. Net product revenue was $1.2 million for the quarter ended
December 31, 2002 and $2.5 million for the quarter ended 2001, representing a
decrease of 51.2%. Net product revenue was $2.6 million for the six months ended
December 31, 2002 and $3.9 million for the six months ended December 31, 2001,
representing a decrease of 34.2%. The decreases in the quarter and six months
ended December 31, 2002, as compared to the comparable periods in 2001, were
primarily due to a change made in recognizing revenue under our major OEM
agreement in fiscal year 2002. The Company stopped recognizing revenue from
Toshiba upon shipment to Toshiba and instead will be recognizing revenue when
Toshiba resells our products. This change resulted in a decline of approximately
$1.0 in revenue.. Also contributing to the decline was the strategic decision to
discontinue selling voice processing hardware, the elimination of all channel
inventories, and the impact of rotation reserves.
These revenue declines were offset by strong growth in TeleVantage software
sales of licenses for use by end users and TeleVantage dealers.
We distribute our products both domestically and internationally.
International product revenue was $.2 million for each of the quarters ended
December 31, 2002 and 2001, representing 17% of total net revenue in the 2002
quarter and 9% of total net revenue in the 2001 quarter. International revenue
was $.3 million for each of the six-month periods ended December 31, 2002 and
2001, representing 13% of total net revenue in the 2002 period and 7% of total
net revenue in the 2001 period.
SERVICE REVENUE. We had no service revenue for the quarters ended December
31, 2002 and 2001. For the six months ended December 31, 2002 we had no service
revenue compared with $20,000 of service revenue recognized from Intel
Corporation for the six months ended December 31, 2001. We have completed our
development obligations under our agreement with Intel and no additional service
revenue is anticipated under that agreement.
GROSS PROFIT
PRODUCT. Gross profit on product revenue was $1.2 million for the quarter
ended December 31, 2002 and $2.0 million for the quarter ended December 31,
2001, representing 95.6% of net product revenue in the 2002 quarter and 82.0% of
net product revenue in the 2001 quarter. Gross profit for the six months ended
December 31, 2002 was $2.5 million for the six months ended December 31, 2002
and $3.2 million for the six months ended December 31, 2001, representing 96.5%
of net product revenue for the 2002 period and 82.8% of net product revenue for
the 2001 period. The decreases in aggregate dollars for the quarter and six
months ended December 31, 2002 and 2001 are primarily a result of lower sales to
Toshiba, as discussed above. The increases in gross profit percentage for the
quarter and six months ended December 31, 2002 compared to the comparable
periods in 2001 are the result of a higher percentage of total product revenue
derived from TeleVantage software with lesser amounts from lower margin Dialogic
hardware.
SALES AND MARKETING
Sales and marketing expenses were $1.1 million for the quarter ended
December 31, 2002 and $1.4 million for the quarter ended December 31, 2001,
representing 93.7% of total net sales for the 2002 quarter and 57.7% of total
net sales for the 2001 quarter. Sales and marketing expenses were $2.5 million
for the six months ended December 31, 2002 and $3.0 million for the six months
ended December 31, 2001, representing 98.4% of total net sales for the 2002
period and 76.9% of the total net sales for the 2001 period. The increases in
the percentage of sales and marketing expenses to total revenue for the quarter
and six month periods ended December 31, 2002, as compared to the comparable
period in 2001, are primarily attributable to the reduction in revenue from
Toshiba as discussed above. The decreases in sales and marketing expense in
aggregate dollars for the quarter and six months ended December 31, 2002, as
compared to the comparable period in 2001, reflect a reduction in spending for
marketing programs and other expenses. In addition, the decrease in sales and
marketing expenses in aggregate dollars for the six month period ended December
31, 2002, as compared to the comparable period in 2001, reflects the impact of a
restructuring in personnel costs as a result of workforce reductions implemented
in September 2001.
PRODUCT DEVELOPMENT
Product development expenses were $.7 million for the quarter ended
December 31, 2002 and $.8 million for the quarter ended December 31, 2001,
representing 53.2% of total net revenue for the 2002 quarter and 33.1% of total
net revenue for the 2001 quarter. Product development expenses were $1.5 million
for the six months ended December 31, 2002 and $2.0 million for the six months
ended December 31, 2001, representing 56.3% of the total net revenue for the
2002 period and 50.2% of total net revenue for the 2001 period. The increase in
the percentage of development expense to total net revenue for the quarter ended
December 31, 2002, as compared to the comparable period in 2001, is primarily
attributable to the reduction in revenue from Toshiba as discussed above offset
by the capitalization of approximately $.2 million of expense attributable to
10
the development of TeleVantage 5.0. In accordance with established accounting
policy, product development costs are capitalized after technological
feasibility is established and until the products are available for sale.
TeleVantage 5.0 reached technical feasibility during the quarter ended December
31, 2002 and was shipped on December 27 of that quarter. Development expenses,
including those capitalized, were flat in the quarter ended December 31, 2002
compared with the quarter ended December 31, 2001. In addition, the reduction in
the ratio of product development costs to total net revenue and aggregate
dollars for the six months ended December 31, 2002 reflect a reduction in
development personnel headcount in September 2001 due to the completion of the
Intel and Toshiba development agreements.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $.9 million for the quarter ended
December 31, 2002 and $1.1 million for the quarter ended December 31, 2001,
representing 76.5% of total net revenue for the 2002 quarter and 45.5% of total
net revenue for the 2001 quarter. General and administrative expenses were $2.6
million for the six months ended December 31, 2002 and $2.4 million for the six
months ended December 31, 2001, representing 100.4% of the total net revenue for
the 2002 period and 60.8% of total net revenue for the 2001 period. The increase
in the percentage of general and administrative expenses to total net revenue
for the quarter ended December 31, 2002, as compared to the comparable period in
2001, is primarily attributable to the reduction in revenue from Toshiba as
discussed above. The reduction in general and administrative expenses in
aggregate dollars for the three months ended December 31, 2002, as compared to
the comparable period in 2001, reflects a net decrease in overall expense
levels, including a reduction of approximately $.1 million in sales tax reserves
no longer needed. In addition the increases in the percentage of general and
administrative expense to total net revenue and aggregate dollars for the six
months ended December 31, 2002 reflect an accrual established in the quarter
ended September 30, 2002 of $.7 million for a tax exposure due to a technical
compliance issue related to our stock option plan and past option exercises
under the plan. The Company believes that that if a tax is assessed it has
reasonable defenses to pursue an appeal and minimize the impact of this
contingency on our financial position. However, the impact of the ultimate
resolution of this issue could differ materially from the amount of the
established reserve partially offseting the impact of this $.7 million accrual
were decreases in administrative payroll and other expenses.
OTHER INCOME, NET
Other Income, Net represents interest income and was $19,000 for the
quarter ended December 31, 2002 and $67,000 for the quarter ended December 31,
2001. Other Income, Net was $41,000 for the six months ended December 31, 2002
and $125,000 for the six months ended December 31, 2001. The decreases for the
quarter and six-month period ended December 31, 2002, as compared to the
comparable periods in 2001, were the result of lower interest rates combined
with lower average cash and invested balances.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
We had cash and cash equivalents of $5.5 million at December 31, 2002
compared to $6.0 million at June 30, 2002. Working capital was $1.9 million at
December 31, 2002 compared to $4.0 million at June 30, 2002, a decrease of $2.1
million. The decrease in working capital, excluding cash, reflects a decrease in
current assets of $.3 million primarily in trade accounts receivable and prepaid
expenses. Current liabilities increased $1.3 million due to an increase of $.2
million in deferred revenue reflecting an increase in subscriptions booked but
unearned for which upgrades will be provided in the future, and an increase of
$.6 million in customer deposits received from Toshiba under our OEM agreement.
Future product shipments and resale by Toshiba to its customers (sell-through)
is required to satisfy the deposit amounts. In addition, reserve for stock
rotations increased by $.4 million to reflect our obligation, primarily to
Toshiba, to replace existing TeleVantage 4.0 version with the TeleVantage 5.0
version. This exchange will have no cash impact. Accounts payable and accrued
expenses increased $.2 million, net. Included in accrued liabilities is a
reserve of $.7 million for a tax exposure due to a technical compliance issue
related to our stock option plan and past option exercises. The decrease in cash
and cash equivalents of $.5 million primarily results from the receipt of $1.9
million, net of issuance costs, from the sale of common stock in a private
placement on September 27, 2002, and $25,000 from the sale of common stock on
December 31, 2002 under the Employee Stock Purchase Plan, less cash of $2.2
million used in operations and for the purchase of property and equipment.
We used cash of $2.2 million to fund operating activities during the six
months ended December 31, 2002. The cash used in operating activities was
principally the result of $4.0 million in net loss offset by depreciation and
amortization of $.4 million and a net changes in current assets, excluding cash,
and liabilities of $1.4 million.
In September 2002, the Company recorded an accrual of $.7 million related
to potential tax exposure associated with a technical compliance issue involving
its employee stock option plan and past incentive stock options exercised under
the plan. The Company continues to evaluate the facts and circumstances
surrounding this technical compliance issue and the ultimate resolution of this
issue could differ materially from the amount of the established actual.
11
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, Artisoft 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, Artisoft 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 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 existing cash balances at December 31, 2002, together
with cash generated from sales of our product, 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
anticipated growth of demand for our products, could necessitate that the
Company seek additional debt or equity capital. 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 relationship with Toshiba. 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 2001 and 2002 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 Artisoft'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. The grace period expires March 11, 2003.
In order to retain our current listing status on the NASDAQ SmallCap, our common
stock must close at $1.00 per share or more for a minimum of 10 consecutive
trading days on or before March 11, 2003. We must also maintain compliance with
the other criteria for continued inclusion on the NASDAQ SmallCap Market, with
which we are currently in compliance.
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.
12
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 six
months of fiscal year 2003 but will not exceed levels incurred 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 relationship with
Toshiba. See "Risk Factors" below.
Specifically, through an original equipment manufacturer development
arrangement with Artisoft, Toshiba is marketing TeleVantage 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.
Toshiba is obligated to satisfy the minimum revenue guarantees in
accordance with the following terms and conditions:
* At the end of each of the last calendar quarter of 2002, the first
calendar quarter of 2003 and the second calendar quarter of 2003,
Toshiba will pay the greater of the royalties for products licensed in
that quarter, less any unused prepayments from the previous period, or
$375,000. If royalties for that period are less than $375,000, the
difference will be considered a prepayment of future royalties.
* At the end of the third calendar quarter of 2003, Toshiba shall pay
the greater of (i) the royalties for products licensed in that
quarter, less any unused prepayments from the previous period; or (ii)
$250,000. If the royalties for that period are less than $250,000, the
difference will be considered a prepayment of future royalties.
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 FAMILY OF PRODUCTS, AND OUR
BUSINESS WILL FAIL, IF WE DO NOT INCREASE SALES OF THOSE PRODUCTS.
Our revenues are derived from sales of a single family of products,
TeleVantage. If we are not able to increase sales of these products, our
business will fail. 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.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR FUTURE LOSSES.
We had operating losses 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. 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. We expect to incur significant
future operating losses and negative cash flows.
13
OUR OPERATING RESULTS VARY, MAKING FUTURE OPERATING RESULTS DIFFICULT TO PREDICT
AND ADVERSELY AFFECTING THE PRICE OF OUR COMMON STOCK.
Our operating results have in the past fluctuated, and may in the future
fluctuate, from quarter to quarter. The resulting continued unpredictability of
our operating results could depress the market price of our common stock,
particularly if operating results do not meet the expectations of public market
analysts or investors. Factors that contribute to fluctuations in our operating
results include:
* the extent and timing of sales to significant customers, particularly
Toshiba;
* our ability to develop, introduce and market enhancements to our
TeleVantage family of products;
* changes in pricing policies or price reductions by us or our
competitors;
* variations in sales by our value-added resellers and distributors; and
* variations in product returns.
Sales in any quarter are dependent primarily on orders booked and shipped
in that quarter and are not predictable with any degree of certainty. In
addition, our expense levels are based, in part, on our expectations as to
future revenues. If revenue levels are below our expectations, net loss may be
disproportionately affected due to fixed costs related to generating our
revenues.
WE RELY UPON THE AVAILABILITY TO MARKET TELEVANTAGE OF DISTRIBUTORS, RESELLERS
AND ORIGINAL EQUIPMENT MANUFACTURERS AND THE ABILITY OF THESE ORGANIZATIONS TO
PAY FOR THE PRODUCTS THEY PURCHASE FROM US.
If distributors, resellers and original equipment manufacturers in the
software industry choose not to focus their marketing efforts on software-based
phone systems or on products competitive with TeleVantage, our sales efforts
will be materially adversely affected. In fiscal year 2002, our distributor,
Paracon, accounted for 32% of our total net sales. In fiscal year 2001, our
original equipment manufacturer, Toshiba, accounted for approximately 21% of our
total net sales, Paracon accounted for approximately 18% of total net sales, and
our original equipment manufacturer, Intel, accounted for 15% of total net
sales. We depend upon the availability of distribution outlets similar to these
relationships to market TeleVantage. In addition, our operating results would be
adversely affected if one of our major distributors, resellers or original
equipment manufacturers fails to pay us for the products they purchase from us.
At June 30, 2002, Paracon represented approximately 30% of our outstanding trade
receivables and Toshiba represented approximately 16% of our outstanding trade
receivables. At June 30, 2001, Toshiba represented approximately 41% and Paracon
represented approximately 16% of our outstanding trade receivables.
OUR COMMON STOCK MAY BE DELISTED FROM THE NASDAQ SMALLCAP MARKET AND TRANSFERRED
TO THE OVER-THE-COUNTER ELECTRONIC BULLETIN BOARD OR THE PINK SHEETS, WHICH
WOULD REDUCE THE LIQUIDITY OF OUR COMMON STOCK AND MAY DEPRESS THE PRICE OF OUR
COMMON STOCK.
If our common stock is delisted from the NASDAQ SmallCap Market, 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.
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 Market is currently being maintained under a grace
period permitted by applicable NASDAQ Marketplace rules. This grace period
expires on March 11, 2003. In order to retain our current listing status on the
NASDAQ SmallCap, our common stock must close at $1.00 per share or more for a
minimum of 10 consecutive trading days on or before March 11, 2003. We must also
maintain compliance with the other criteria for continued inclusion on the
NASDAQ SmallCap Market, with which we are currently in compliance.
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 order to obtain the funds to continue our operations and meet our
working capital requirements, we may require additional equity financing or debt
financing. Any additional financing may not be available to us on terms
acceptable to us or at all. The holders of our Series B Preferred Stock and the
14
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. The terms of any additional financing we may enter
into may impose substantial constraint on our ability to operate our business as
we deem appropriate.
OUR MARKET IS HIGHLY COMPETITIVE; IF WE FAIL TO COMPETE SUCCESSFULLY, OUR
PRODUCTS WILL NOT BE SUCCESSFUL.
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. Given the greater financial resources of many of our
competitors, our products may not be successful or even accepted. 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:
* product architecture, functionality and features;
* price;
* vendor and product reputation;
* quality of product and support; and
* effectiveness of sales and marketing efforts.
Our 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. For example, our
competitors could develop products compatible with the Intel SoftSwitch
Framework that could displace TeleVantage CTM Suite.
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 as well as existing traditional, proprietary
hardware solutions offered by companies such as Avaya Communications, Nortel
Networks Corporation and Siemens Corporation. We do not know if markets will
migrate toward software-based phone system solutions. If software-based phone
systems do not achieve widespread acceptance or widespread acceptance is
delayed, sales of TeleVantage will not increase and may decline. We may then be
unable to continue our operations.
VARIABILITY IN PRODUCT RETURNS 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. Actual returns in any period may exceed our estimates, thereby making it
difficult to predict 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.
OUR MARKET IS SUBJECT TO CHANGING PREFERENCES AND TECHNOLOGICAL CHANGE; OUR
FAILURE TO KEEP UP WITH THESE CHANGES WOULD RESULT IN OUR LOSING MARKET SHARE.
The introduction of products incorporating new technologies and the
emergence of new industry standards could render TeleVantage obsolete and
unmarketable. If this occurs, we would likely lose market share. The markets for
computer telephony solutions are characterized by rapid technological change,
changing customer needs, frequent product introductions and evolving industry
standards within the markets for computer technology solutions. 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.
15
SOME OF OUR STOCKHOLDERS HAVE ACQUIRED A SUBSTANTIAL INTEREST IN ARTISOFT AND
MAY BE ABLE TO EXERT SUBSTANTIAL INFLUENCE OVER ARTISOFT'S ACTIONS.
Based upon their substantial stock ownership and their director rights,
Austin W. Marxe and David M. Greenhouse may be able to exert substantial
influence over matters submitted to our stockholders for approval and our
management and affairs, including the election and removal of directors and any
merger, consolidation or sale of all or substantially all of our assets. As of
December 31, 2002, Austin W. Marxe and David M. Greenhouse beneficially owned
approximately 45.9% of our common stock. In addition, Austin W. Marxe and David
M. Greenhouse, through their affiliates, have the right to elect two directors
and the right to designate an additional director. Effective as of August 28,
2002, the holders of our series B preferred stock elected Robert J. Majteles to
our board of directors. Mr. Majteles was selected for election by an affiliate
of Austin W. Marxe and David M. Greenhouse under an agreement among the holders
of the series B preferred stock.
Austin W. Marxe and David M. Greenhouse may elect to sell all or a
substantial portion of their Artisoft securities to one or more third parties.
In that case, a third party with whom we have no prior relationship could
exercise the same degree of control over us as Austin W. Marxe and David M.
Greenhouse presently do. In this regard, this prospectus covers the resale by
affiliates of Austin W. Marxe and David M. Greenhouse of shares of our common
stock representing a 36% ownership interest in Artisoft, in the aggregate.
IF THE EMPLOYMENT OF ANY OF OUR EXECUTIVE OFFERS IS TERMINATED PRIOR TO OCTOBER
2004 WITHOUT CAUSE OR BY THE EXECUTIVE FOR GOOD REASON, WE WILL BE REQUIRED TO
PROVIDE SUBSTANTIAL BENEFITS TO THAT OFFICER.
We have change in control agreements with each of our executive officers
that provide that in the event of termination of employment of an executive
officer within two years of the change in control either without cause or by the
executive for "good reason," such as a reduction in duties and responsibilities:
* all of the executive's unvested options vest and become exercisable in
full; and
* Artisoft will pay the executive a lump sum equal to one year's, or two
years' in the case of the Chief Executive Officer, base salary plus
bonus.
Due to open market purchases of our common stock, a change in control
within the meaning of the change in control agreements occurred in October 2002.
Therefore, each of the executives set forth in the table below will receive
benefits under its change in control agreement in the event his employment at
Artisoft is terminated prior to 2004 either without cause or for good reason.
The salary and bonus of each executive for Artisoft's 2002 fiscal year ended
June 30, 2002 is also set forth on the table below.
Name Title Fiscal 2002 Salary Fiscal 2002 Bonus
- ---- ----- ------------------ -----------------
Steven G. Manson........... President and Chief Executive
Officer $210,861 --
Christopher Brookins....... Vice President of Development
and Chief Technology Officer $166,575 --
Paul Gregory Burningham.... Vice President of Sales $135,343 $37,935
Michael J. O'Donnell....... Chief Financial Officer $152,923 --
SOFTWARE ERRORS MAY DAMAGE OUR REPUTATION, CAUSE LOSS OF CUSTOMERS AND INCREASE
CUSTOMER SUPPORT COSTS.
Software products as complex as TeleVantage may contain undetected errors.
This could result in damage to our reputation, loss of customers, delay of
market acceptance of our products or all of these consequences. We or our
customers may find errors in TeleVantage or any new products after commencement
of commercial shipments. In addition, if our products are flawed, or are
difficult to use, customer support costs could rise.
WE RELY ON THIRD-PARTY TECHNOLOGY AND HARDWARE PRODUCTS. THIS TECHNOLOGY MAY
CONTAIN UNDETECTED ERRORS, BE SUPERSEDED OR MAY BECOME UNAVAILABLE, THEREBY
LIMITING OUR ABILITY TO SELL, AND THE PERFORMANCE OF, OUR PRODUCTS.
TeleVantage operates on hardware manufactured by Intel. To the extent that
this hardware becomes unavailable or in short supply we could experience delays
in shipping TeleVantage to our customers. 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 TeleVantage. If the hardware becomes unreliable, does
not perform in a manner that is acceptable to our customers or becomes more
expensive, sales of TeleVantage could fall.
16
Because our products run only on Microsoft Windows NT servers and 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.
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. If we are unable to protect
these properties, we will not be able to remain technologically competitive and
our business will suffer. 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. We
may not be able to deter misappropriation of our proprietary information or to
prevent the successful assertion of an adverse claim to software utilized by us.
In addition, we may not be able to detect unauthorized use and take effective
steps to enforce our intellectual property rights. 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.
IF WE ARE NOT ABLE TO HIRE AND RETAIN QUALIFIED PERSONNEL, WE WILL BE HINDERED
IN OUR EFFORTS TO MAINTAIN AND EXPAND OUR BUSINESS.
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. If we are not able to
hire and retain qualified personnel, we will be hindered in our efforts to
maintain and expand our business. The computer telephony industry is
characterized by rapid technological change, changing customer needs, frequent
product introduction and evolving industry standards. These characteristics
require a high degree of industry-specific technological and operational
understanding. 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.
OUR STOCK PRICE MAY BE ADVERSELY AFFECTED BY OUR ANTITAKEOVER DEFENSES.
Provisions of our certificate of incorporation and bylaws and of Delaware
law could have the effect of delaying, deferring or preventing an acquisition of
our company. These provisions may deprive you of the opportunity to sell your
shares to potential acquirors at a premium over prevailing prices. This
potential inability to obtain a control premium could reduce the market price of
our common stock. Our board of directors (except for directors elected by the
holders of our series B preferred stock) is divided into three classes, each of
which serves a three year term, and our stockholders do not have the ability to
call special stockholder meetings. Therefore, a two-year period is required to
elect directors representing a majority of our non-series B preferred stock
directors. Gaining control of our board of directors is further complicated by
the presence of one director elected solely by the holders of our series B
preferred stock and right of those holders to elect an additional director.
These issues relating to the election of our directors are an example of our
antitakeover provisions that may frustrate potential acquirors.
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,
17
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 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 14, 2002, the Company held its 2002 annual meeting of
stockholders. At the meeting, the votes cast for and against the matters
presented to the Company's stockholders, as well as the number of abstentions
and broker non-votes, were as follows:
1. Election of two class III directors to serve for the ensuing three
years and until their respective successors are elected and qualified:
Robert H. Goon
VOTES FOR VOTES WITHHELD
---------- --------------
19,366,736 548,002
Kathryn B. Lewis
VOTES FOR VOTES WITHHELD
---------- --------------
19,180,272 734,466
2. Approval of an amendment to Artisoft's Employee Stock Purchase Plan
increasing from 400,000 to 900,000 the number of shares of common
stock authorized for issuance under that plan.
VOTES FOR VOTES AGAINST VOTES ABSTAINING BROKER NON-VOTES
---------- ------------- ---------------- ----------------
19,158,430 681,698 74,610 0
3. Ratification of the appointment of KPMG LLP as Artisoft's independent
auditors for the current fiscal year.
VOTES FOR VOTES AGAINST VOTES ABSTAINING BROKER NON-VOTES
---------- ------------- ---------------- ----------------
19,492,146 286,600 135,992 0
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
Previously reported.
18
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: February 14, 2003 By: /s/ Steven G. Manson
-------------------------------------
Steven G. Manson
President and Chief Executive Officer
Date: February 14, 2003 By: /s/ Michael J. O'Donnell
-------------------------------------
Michael J. O'Donnell
Chief Financial Officer (Principal
Financial Officer and Chief
Accounting Officer)
19
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.
Date: February 14, 2003 By: /s/ Steven G. Manson
------------------------------------
Steven G. Manson
Chief Executive Officer
(Principal Executive Officer)
20
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.
Date: February 14, 2003 By: /s/ Michael J. O'Donnell
------------------------------------
Michael J. O'Donnell
Chief Financial Officer
(Principal Financial Officer)
21
EXHIBIT INDEX
Designation Description
- ----------- -----------
10.1 Patent License Agreement between Lucent Technologies GRL
Corporation and the Registrant effective June 30, 2000, was filed
with the Commission on December 20, 2002 as an exhibit to the
Registrant's Registration Statement of Form S-3 (File No.
333-100756) and is herein incorporated by reference.
10.2 Second Addendum to OEM/Reseller Agreement dated January 18, 2000
by and between the Registrant and Telecommunications Systems
Division of Toshiba America Information Systems, Inc., was filed
with the Commission on February 10, 2003 as an exhibit to the
Registrant's Registration Statement of Form S-3 (File No.
333-100756) and is herein incorporated by reference.
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
22