================================================================================
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 MARCH 31, 2003
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
Incorporation or Organization) 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 MAY 14, 2003
------------------------------ -----------------
COMMON STOCK, $.01 PAR VALUE PER SHARE 2,974,102
================================================================================
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
Item 1. - Financial Statements............................................. 3
Unaudited Condensed Consolidated Balance Sheets as of
March 31, 2003 and June 30, 2002....................................... 3
Unaudited Condensed Consolidated Statements of Operations
Three and Nine months Ended March 31, 2003 and 2002 (restated)......... 4
Unaudited Condensed Consolidated Statements of Cash Flows
Nine months Ended March 31, 2003 and 2002 (restated)................... 5
Notes to Unaudited Condensed Consolidated Financial Statements........... 6
Item 2. - Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 11
Item 3. - Quantitative and Qualitative Disclosures About Market Risk....... 19
Item 4. - Controls and Procedures.......................................... 19
PART II - OTHER INFORMATION
Item 6. - Exhibits and Reports on Form 8-K................................. 20
SIGNATURES................................................................... 21
CERTIFICATIONS............................................................... 22
EXHIBIT INDEX................................................................ 24
2
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
All data should be read in conjunction with Note 2, "Restatement" of the Notes
to Consolidated Financial Statements as set forth in this amended Quarterly
Report.
ARTISOFT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
March 31, June 30,
2003 2002
---------- ----------
(RESTATED)
ASSETS
Current Assets:
Cash and cash equivalents $ 4,110 $ 6,020
Trade accounts receivables, net of allowances of $149
and $258 at March 2003 and June 2002, respectively 772 858
Prepaid expenses and other current assets 427 288
---------- ----------
Total current assets 5,309 7,166
---------- ----------
Property and equipment 3,699 3,480
Less accumulated depreciation and amortization (3,162) (2,682)
---------- ----------
Net property and equipment 537 798
Other assets 305 257
---------- ----------
$ 6,151 $ 8,221
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 408 $ 376
Accrued liabilities 1,938 1,569
Deferred revenue 1,583 1,723
Customer deposits 908 --
---------- ----------
Total current liabilities 4,837 3,668
---------- ----------
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 March 31, 2003 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 March 31, 2003 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 5,191,003 common shares at March 31, 2003
and 4,861,102 at June 30, 2002 52 48
Additional paid-in capital 108,481 106,704
Accumulated deficit (38,975) (33,697)
Deferred Toshiba equity costs (1,364) (1,518)
Less treasury stock, at cost, 2,216,783 shares at March 31,
2003 and 2,220,083 shares at June 30, 2002 (69,680) (69,784)
---------- ----------
Shareholders' equity 1,314 4,553
---------- ----------
$ 6,151 $ 8,221
========== ==========
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements, especially Note 2, "Restatement" of the Notes
to Consolidated Financial Statements as set forth in this amended Quarterly
Report
3
ARTISOFT, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(RESTATED) (RESTATED)
Net revenue:
Product $ 1,756 $ 1,388 $ 4,754 $ 4,450
Services -- -- -- 20
---------- ---------- ---------- ----------
Total net revenue 1,756 1,388 4,754 4,470
Cost of sales:
Product 92 115 182 787
Services -- -- -- 12
---------- ---------- ---------- ----------
Total cost of sales 92 115 182 799
Gross profit:
Product 1,664 1,273 4,572 3,663
Services -- -- -- 8
---------- ---------- ---------- ----------
Total gross profit 1,664 1,273 4,572 3,671
Operating expenses:
Sales and marketing 1,423 1,398 3,958 4,410
Product development 829 763 2,278 2,731
General and administrative 1,081 1,077 3,667 3,457
---------- ---------- ---------- ----------
Total operating expenses 3,333 3,238 9,903 10,598
---------- ---------- ---------- ----------
Loss from operations (1,669) (1,965) (5,331) (6,927)
Other income, net 12 34 53 159
---------- ---------- ---------- ----------
Net loss (1,657) (1,931) (5,278) (6,768)
Dividend to series B preferred shareholders -- -- (2,006) (2,766)
---------- ---------- ---------- ----------
Loss applicable to common shareholders $ (1,657) $ (1,931) $ (7,284) $ (9,534)
========== ========== ========== ==========
Loss applicable to common shareholders -
basic and diluted $ (0.56) $ (0.73) $ (2.55) $ (3.64)
========== ========== ========== ==========
Weighted average common shares outstanding -
basic and diluted 2,972 2,630 2,862 2,622
========== ========== ========== ==========
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements, especially Note 2, "Restatement" of the Notes
to Consolidated Financial Statements as set forth in this amended Quarterly
Report
4
ARTISOFT, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine Months Ended
March 31,
------------------------
2003 2002
---------- ----------
(RESTATED)
Cash flows from operating activities:
Net loss $ (5,278) $ (6,768)
Adjustments to reconcile net loss to net
Cash used in operating activities:
Depreciation and amortization 545 590
Amortization of Deferred Toshiba equity costs 154 272
Stock-based compensation expense 6 --
Non-cash changes in Accounts Receivable allowances:
Bad debt allowances:
Additions 27 41
Reductions (9) --
Returns and Rotation allowances:
Additions 114 --
Reductions (55) (99)
Non-cash changes in Inventory
Additions -- 133
Reductions -- --
Changes in assets and liabilities:
Receivables
Trade accounts 9 52
Other receivables -- 21
Prepaid expenses and other current assets (98) 757
Accounts payable 32 (325)
Accrued liabilities 369 177
Deferred revenue (140) 519
Customer deposits 908 --
---------- ----------
Net cash used in operating activities (3,416) (4,630)
---------- ----------
Cash flows from investing activities:
Capitalization of developed software (154) (108)
Purchases of property and equipment (219) (94)
---------- ----------
Net cash used in investing activities (373) (202)
---------- ----------
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 (1,910) 2,027
Cash and cash equivalents at beginning of period 6,020 5,801
---------- ----------
Cash and cash equivalents at end of period $ 4,110 $ 7,828
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash dividend to series B preferred shareholders $ 2,006 $ 2,766
========== ==========
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements, especially Note 2, "Restatement" of the Notes
to Consolidated Financial Statements as set forth in this amended Quarterly
Report
5
ARTISOFT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(TABLES 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, as amended by the Company's Form 10-K/A for the fiscal year
ended June 30, 2002 on file with the SEC. The results of operations for the
three and nine months ended March 31, 2003 are not necessarily indicative of the
results to be expected for the full year or any other future periods.
(2) RESTATEMENT
In January 2000, Artisoft entered into an OEM and Reseller Agreement with
Toshiba. Also in January 2000, Artisoft entered into an agreement with Toshiba
under which Toshiba acquired 16,666 shares of Artisoft common stock at a price
of $41.964 per share and was issued warrants for an additional 8,333 shares of
Artisoft common stock at an exercise price of $41.964 per share. The fair market
value of the Artisoft common stock on the date of execution of the definitive
agreement was $129 per share. The difference between the issuance price and fair
market value of the Artisoft common stock, and the fair value of the warrants
(which were valued based upon the Black-Scholes Options Pricing Model) amounted
to $2.3 million and was charged to selling expense in the quarter ended March
31, 2000.
In May 2003, in response to comments Artisoft received from the SEC on its
accounting for this $2.3 million expense, Artisoft determined that the $2.3
million expense should be reflected as a reduction in revenue during the term of
the agreement, rather than a selling expense recognized at the time of the
signing of the definitive agreement. This cost of equity is being amortized as a
reduction of product revenues in proportion to revenue recognized relating to
the OEM and Reseller Agreement. In May 2003, Artisoft also determined that
revenue it had previously recognized as service revenue in 2000 and 2001 on the
basis of specific product development deliverables within its OEM and Reseller
Agreement with Toshiba should be recognized as product revenue. Related costs of
service revenue should also have been recognized as product development expense.
On May 8, 2003, Artisoft announced its preliminary financial results for the
third quarter of fiscal 2003. Those preliminary results were subject to the
final preparation and review of financial statements for the third quarter of
fiscal 2003 and an analysis of the financial restatements also announced on May
8, 2003. The preliminary results announced on May 8, 2003 reflected an
amortization of the cost of equity under Artisoft's agreement with Toshiba as a
reduction of product revenues at a rate of approximately $191,000 per quarter
over the term of the Toshiba OEM and Reseller agreement. After further analysis
in connection with preparing final financial statements for the third quarter of
fiscal 2003, Artisoft has amortized the cost of equity as a reduction of product
revenues in proportion to revenues recognized relating to the Toshiba OEM and
Reseller agreement. It is this treatment that is reflected in the financial
statements reported in this report. Under this treatment, as of March 31, 2003,
approximately $1.364 million of the cost of equity remains unamortized and will
be applied as a reduction of future product revenues under the Toshiba OEM and
Reseller agreement during the term of that agreement.
Artisoft further determined in May 2003 that Toshiba product sales should have
been recognized as revenue when Toshiba shipped products to its customers (upon
"sell-through"). The Company had recorded service revenue based on the minimum
purchase commitments from inception through fiscal 2001. Product revenue
commencing on July 1, 2001 and through March 31, 2002 was based on product
shipments to Toshiba (upon "sell-in") and product revenue commencing on April 1,
2002 was based upon sell-through.
6
The Company has also restated its financial statements for the fiscal quarters
ended September 30, 2002 and December 31, 2002 to reflect the restatements
described above.
The principal adjustments to restate the financial statements for the three and
nine month periods ending March 31, 2002:
EQUITY TRANSACTIONS
The difference between the issuance price and fair market value of the Artisoft
common stock, and the fair value of the warrants (which were valued based upon
the Black-Scholes Options Pricing Model) amounted to $2.3 million. This cost of
equity is being amortized as a reduction of product revenues in proportion to
revenue recognized relating to the OEM and Reseller Agreement entered into by
the two companies at the same time as the equity investment agreement. The
unamortized portion of this amount is reported as deferred Toshiba equity costs
in the shareholders' equity section of the consolidated balance sheets.
REVENUE RECOGNITION ON SALE TO TOSHIBA
In further response to the SEC comments received by Artisoft, Artisoft
determined that Toshiba product sales should have been recognized as revenue
with Toshiba's shipment of products to its customers ("sell-through"). The
Company had recorded service revenue based on the minimum purchase commitments
from inception through fiscal 2001, product revenue commencing on July 1, 2001
through March 31, 2002 based on sell-in to Toshiba and product revenue
commencing on April 1, 2002 based upon sell-through. Accordingly, $411,000 of
revenue in 2000, $1.59 million of revenue in 2001 and $1.03 million of revenue
in 2002 based on sales to Toshiba were reversed. The amounts reversed relating
to the three and nine month periods ending March 31, 2002 were $30,000 and $1.03
million respectively.
The Toshiba sell-through revenue net of equity costs recognized in its place was
$81,000 in 2000, $386,000 in 2001 and $448,000 in 2002, as well as $85,000 in
first quarter fiscal 2003 and $63,000 in second quarter fiscal 2003. The amounts
recognized net of equity costs relating to the three and nine month periods
ending March 31st, 2002 were $157,000 and $322,000 respectively. In addition,
stock rotation reserves of $800,000 in Q3 of 2002 and $274,000 in Q2 of fiscal
2003 were reversed as a consequence of the restatement.
The following tables outline the effected line items as previously reported and
restated of these adjustments for the quarter and nine months ending March 31,
2002:
Consolidated Statement of
Operations for the
Quarter Ended March 31, 2002
----------------------------
As Reported As Restated
----------- -----------
(In thousands)
Product Revenue ............................. $ 461 $ 1,388
Net Revenue.................................. $ 461 $ 1,388
Product Gross Profit ........................ $ 346 $ 1,273
Total Gross Profit .......................... $ 346 $ 1,273
Loss from Operations ........................ $ (2,892) $ (1,965)
Net Loss .................................... $ (2,858) $ (1,931)
Loss applicable to common shareholders....... $ (2,858) $ (1,931)
Basic and Diluted loss per common share:..... $ (1.09) $ (.73)
Consolidated Statement of
Operations for the
Nine Months Ended March 31, 2002
--------------------------------
As Reported As Restated
----------- -----------
(In thousands)
Product Revenue ............................. $ 4,358 $ 4,450
Net Revenue ................................. $ 4,378 $ 4,470
Product Gross Profit ........................ $ 3,571 $ 3,663
Total Gross Profit .......................... $ 3,579 $ 3,671
Loss from Operations ........................ $ (7,019) $ (6,927)
Net Loss .................................... $ (6,860) $ (6,768)
Loss applicable to common shareholders ...... $ (9,626) $ (9,534)
Basic and Diluted loss per common share: .... $ (3.67) $ (3.64)
7
Consolidated Balance Sheet
At June 30, 2002
--------------------------
As Reported As Restated
----------- -----------
Receivables $ 1,199 $ 858
Total assets.............................. $ 8,562 $ 8,221
Deferred revenue ............................ $ 578 $ 1,723
Reserve for stock rotation .................. $ 940 $ --
Total liabilities......................... $ 3,463 $ 3,668
Deferred Toshiba equity costs ............... $ -- $ (1,518)
Accumulated Deficit ......................... $(34,669) $(33,697)
Total shareholders' equity................... $ 5,099 $ 4,553
Consolidated Statement
of Cash Flows
Nine Months Ended March 31, 2002
--------------------------------
As Reported As Restated
----------- -----------
Net Loss .................................... $ (6,860) $ (6,768)
Amortization of deferred Toshiba
equity costs ........................... -- $ 272
Changes in accounts receivables
allowances:
Additions ................................ $ 974 $ 41
Reductions ............................... $ (103) $ (99)
Trade Receivables ........................... $ 418 $ 52
Other assets $ (108) $ --
Deferred revenue ............................ $ 83 $ 519
Reserve for stock rotation .................. $ (366) $ --
Net cash used in operating activities ....... $ (4,738) $ (4,630)
Capitalization of developed software ........ $ -- $ (108)
Net cash used in investing activities ....... $ (94) $ (202)
(3) 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 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
8
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 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
Company defers revenue on shipments to Toshiba until the product is resold to
Toshiba's customers. The deferral of revenue is the result of Artisoft's
inability to reasonably estimate potential future returns or stock rotations.
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 returns or 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. Customer deposits represent cash received for products not yet
shipped.
(4) 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.
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
9
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 January 1, 2003. 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 has adopted the interim disclosure provisions for the period ending
March 31, 2003.
The Company applies APB Opinion No. 25 in accounting for its stock incentive
plan and accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net loss and net loss per common equivalent share for the
three and nine month periods ended March 31, 2003 and 2002 would have been
increased to the pro forma amounts indicated below (in thousands, except per
share prices):
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- --------------------
2003 2002 2003 2002
RESTATED RESTATED
-------- -------- -------- --------
Reported Net Loss $ (1,657) $ (1,931) $ (5,278) $ (6,768)
Stock Based Compensation $ (437) $ (543) $ (1,397) $ (1,630)
Adjusted Net Loss $ (2,094) $ (2,474) $ (6,675) $ (8,398)
Reported Loss Applicable to Common Stock $ (1,657) $ (1,931) $ (7,284) $ (9,534)
Adjusted Loss Applicable to Common Stock $ (2,094) $ (2,474) $ (8,681) $(11,164)
Reported Loss per Share Applicable to Common Stock $ (0.56) $ (0.73) $ (2.55) $ (3.64)
Adjusted Loss per Share Applicable to Common Stock $ (0.70) $ (0.94) $ (3.03) $ (4.26)
The adjusted net loss and adjusted net loss applicable to common stock reflects
options granted during the previous 4 years. Generally, options become
excercisable over a 4 year period commencing on the date of the grant and
options vest 25% at the first anniversary of the grant date and the remaining
75% vest in equal monthly increments over the remaining three years of the
vesting period. The fair value of options granted was calculated using the
Black-Scholes option-pricing model with the following weighted average
assumptions.
2003 2002
---- ----
Expected Dividend Yield 0% 0%
Volatility Factor 84% 79%
Risk Free Interest Rate 3.34% 4.2%
Expected Life 6 Years 6 years
(5) CONTINGENCY
In September 2002, the Company recorded an accrual of $700,000 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. In March 2003 the Company reduced the accrual downward by $322,000 to
reflect a reduction in our estimate of the potential tax exposure. 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.
10
(6) COMMON STOCK
On August 8, 2002, the Company entered into a purchase agreement under which it
agreed to issue and sell 317,466 shares of common stock at a per share purchase
price equal to $6.30, shares and price before the effect of the reverse split
approved April 22, 2003 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 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 Company's 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 .3967 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-sixth of a share of common stock. In
addition, the per-share exercise price of each warrant was reduced from $22.50
to $6.30, 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
shareholders and are included in the computation of the loss available to common
shareholders 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.
(7) REVERSE STOCK SPLIT
On April 22, 2003, the Company's completed a 1-for-6 reverse split of the common
stock. On April 23, 2003 the stock began trading in the new post-split shares.
All financial statements and notes thereto filed with the SEC subsequent to that
date have been reported in post-split shares for common stock or common stock
equivalents and all data included herein has been retroactively adjusted to
reflect the split.
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 15,
AS WELL AS THOSE OTHERWISE DISCUSSED IN THIS SECTION AND ELSEWHERE IN THIS
QUARTERLY REPORT ON FORM 10-Q. SEE "FORWARD-LOOKING STATEMENTS".
RESTATEMENT
Our previously issued consolidated balance sheets as of June 30, 2002, and the
related consolidated statements of operations for the three and nine month
periods ended March 31, 2002 and cash flows for the nine months ended March 31,
2002 have been restated.
The following "Management's Discussion and Analysis has been restated to reflect
the changes more fully described within note 2 of the notes to restated
consolidated financial statements.
On May 8, 2003, Artisoft announced its preliminary financial results for the
third quarter of fiscal 2003. Those preliminary results were subject to the
final preparation and review of financial statements for the third quarter of
fiscal 2003 and an analysis of the financial restatements also announced on May
8, 2003. The preliminary results announced on May 8, 2003 reflected an
amortization of the cost of equity under Artisoft's agreement with Toshiba as a
reduction of product revenues at a rate of approximately $191,000 per quarter
over the term of the Toshiba OEM and Reseller agreement. After further analysis
in connection with preparing final financial statements for the third quarter of
fiscal 2003, Artisoft determined that the more appropriate treatment is to
amortize the cost of equity as a reduction of product revenues in proportion to
revenues recognized relating to the Toshiba OEM and Reseller agreement. See note
2 of the notes to consolidated financial statements herein. It is this treatment
that is reflected in the financial statements reported in this report. Under
this treatment, as of March 31, 2003, approximately $1.2 million of the cost of
equity remains unamortized and will be applied as a reduction of future product
revenues under the Toshiba OEM and Reseller agreement during the term of that
agreement.
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
11
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 Amendment No. 1 on Form 10-K/A to
our Annual Report for the year ended June 30, 2002, as filed with the Securities
and Exchange Commission on May 15, 2003.
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 $700,000 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. In March 2003 the Company reduced the accrual downward by $322,000 to
reflect a reduction in our estimate of the potential tax exposure which now does
not exceed $378,000. 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.
RESULTS OF OPERATIONS
NET REVENUES
PRODUCT REVENUE. Net product revenue was $1.8 million for the quarter ended
March 31, 2003 and $1.4 million for the quarter ended March 31, 2002,
representing an increase of 27%. Net product revenue was $4.8 million for the
nine months ended March 31, 2003 and $4.5 million for the nine months ended
March 31, 2002, representing an increase of 7%. The increases in the quarter and
nine months ended March 31, 2003, as compared to the comparable periods in 2002,
were primarily due to an increase in sales of our TeleVantage products.
We distribute our products both domestically and internationally. International
product revenue was $.2 million for the quarter ending March 31, 2003 and $.1
million for the quarter ended March 31, 2002, representing 11% of total net
revenue in the 2003 quarter and 8% of total net revenue in the 2002 quarter.
International revenue was $.5 million and $.2 million for the nine-month periods
ended March 31, 2003 and 2002, representing 10% of total net revenue in the 2003
period and 5% of total net revenue in the 2002 period.
SERVICE REVENUE. We had no service revenue for the quarters ended March 31, 2003
and 2002. For the nine months ended March 31, 2003 we had no service revenue
compared with $20,000 of service revenue recognized from Intel Corporation for
the nine months ended March 31, 2002. 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 $1.7 million for the quarter ended
March 31, 2003 and $1.3 million for the quarter ended March 31, 2002,
representing 95% of net product revenue in the 2003 quarter and 92% of net
product revenue in the 2002 quarter. Gross profit on product revenue was $4.6
million for the nine months ended March 31, 2003 and $3.4 million for the nine
months ended March 31, 2002, representing 96% of net product revenue for the
2003 period and 82% of net product revenue for the 2002 period. The increases in
aggregate dollars for the quarter and nine months ended March 31, 2003 compared
to the same period in 2002 are primarily a result of increased sales of our
TeleVantage products, as discussed above. The increases in gross profit
percentage for the quarter and nine months ended March 31, 2003 compared to the
comparable periods in 2002 are the result of a higher percentage of total
product revenue derived from TeleVantage software with lesser amounts from lower
margin Intel/Dialogic hardware.
SALES AND MARKETING
Sales and marketing expenses were $1.4 million for the quarter ended March 31,
2003 and $1.4 million for the quarter ended March 31, 2002, representing 81% of
total net sales for the 2003 quarter and 101% of total net sales for the 2002
quarter. Sales and marketing expenses were $4.0 million for the nine months
ended March 31, 2003 and $4.4 million for the nine months ended March 31, 2002,
representing 83% of total net sales for the 2003 period and 99% of the total net
sales for the 2002 period. The decreases in the percentage of sales and
marketing expenses to total revenue for the quarter and nine month periods ended
March 31, 2003, as compared to the comparable periods in 2002, are primarily
attributable to an increase in sales of TeleVantage products, and in the case of
the nine month period a reduction in spending for marketing programs and other
expenses. The decreases in sales and marketing expense in aggregate dollars for
the nine months ended March 31, 2003, as compared to the comparable period in
2002, 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 nine month period ended March 31, 2003, as compared to the comparable
period in 2002, reflects the impact of a restructuring in personnel costs as a
result of workforce reductions implemented in September 2001.
12
PRODUCT DEVELOPMENT
Product development expenses were $.8 million for the quarter ended March 31,
2003 and $.8 million for the quarter ended March 31, 2002, representing 47% of
total net revenue for the 2003 quarter and 55% of total net revenue for the 2002
quarter. Product development expenses were $2.3 million for the nine months
ended March 31, 2003 and $2.7 million for the nine months ended March 31, 2002,
representing 48% of the total net revenue for the 2003 period and 61% of total
net revenue for the 2002 period. The decrease in the percentage of development
expense to total net revenue for the quarter ended March 31, 2003, as compared
to the comparable period in 2002, is primarily attributable to increased sales
of TeleVantage products.
Development expenses, including those capitalized, were flat in the quarter
ended March 31, 2003 compared with the quarter ended March 31, 2002. In
addition, the reduction in the ratio of product development costs to total net
revenue and in aggregate dollars for the nine months ended March 31, 2003
reflect a reduction in development personnel headcount in September 2001 due to
the completion of the Intel development agreement and completion of work on the
Toshiba OEM product.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $1.1 million for the quarter ended
March 31, 2003 and $1.1 million for the quarter ended March 31, 2002,
representing 62% of total net revenue for the 2003 quarter and 78% of total net
revenue for the 2002 quarter. General and administrative expenses were $3.7
million for the nine months ended March 31, 2003 and $3.5 million for the nine
months ended March 31, 2002, representing 77% of the total net revenue for both
periods. The decrease in the percentage of general and administrative expenses
to total net revenue for the quarter ended March 31, 2003, as compared to the
comparable period in 2002, was primarily attributable to the increase in sales
of TeleVantage products. The increases in the aggregate dollars for the nine
months ended March 31, 2003 reflect approximately $250,000 in expenses related
to the separation of our former CFO, and an accrual established in the quarter
ended September 30, 2002 of $700,000, $322,000 of which was reversed in the
quarter ended March 31, 2003, 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.
OTHER INCOME, NET
Other Income, Net represents interest income and was $12,000 for the quarter
ended March 31, 2003 and $34,000 for the quarter ended March 31, 2002. Other
Income, Net was $53,000 for the nine months ended March 31, 2003 and $159,000
for the nine months ended March 31, 2002. The decreases for the quarter and
nine-month period ended March 31, 2003, as compared to the comparable periods in
2002, 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 $4.1 million at March 31, 2003 compared to
$6.0 million at June 30, 2002. Working capital was $.5 million at March 31, 2003
compared to $3.5 million at June 30, 2002, a decrease of $3 million. Current
liabilities increased $1.2 million due to an increase in accrued liabilities of
$.4 million reflecting an accrual for a tax exposure due to a technical
compliance issue related to our stock option plan and past option exercises
under the plan and an increase of $.9 million in customer deposits received from
Toshiba under our OEM agreement. Future product shipments to Toshiba are
required to satisfy the deposit amounts. This was offset by a decrease of $.1
million in deferred revenue, due to an increase in Toshiba sell-through against
sell-in of $.3 million and an increase of subscriptions booked but unearned for
which upgrades will be provided in the future. The decrease in cash and cash
equivalents of $1.9 million primarily results from the receipt of $1.8 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 $3.8 million used in
operations and investing activities.
We used cash of $3.4 million to fund operating activities during the nine months
ended March 31, 2003. The cash used in operating activities was principally the
result of $7.3 million in net loss applicable to common shareholders offset by
depreciation and amortization of $.7 million, a non-cash dividend of $2 million
relating to Series B preferred stock and a net change in current assets,
excluding cash, and liabilities of $1.2 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. In March 2003 the Company reduced the accrual downward by $322,000 to
reflect a reduction in our estimate that the potential tax exposure now does not
exceed $378,000. 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 accrual.
On August 8, 2002, we entered into a purchase agreement under which we agreed to
issue and sell 317,466 shares of common stock at a per share purchase price
equal to $6.30, after the effects of the recent reverse stock split, in a
13
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 a registration rights agreement we entered into with the investors in this
September 2002 financing, we are required to register the shares of common stock
we issued in the financing for resale by the investors. In the event our
registration statement covering that resale was not effective by January 25,
2003, the registration rights agreement provides that we pay the investors in
the financing liquidated damages in the aggregate amount of $30,000 for any
month, or pro rata for any portion of any month, following that date during
which the registration statement should have been effective. The registration
statement we filed covering the resale by the investors in this financing of the
shares of common stock they purchased in the financing is not yet effective.
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 .3967 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 sixth of one share of common stock. In addition,
the per share exercise price of each warrant has been reduced from $22.50 to
$6.30, after the effect of the recent reverse stock split.
We anticipate that existing cash balances at March 31, 2003, 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 twelve months, 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. The Company does not presently meet the minimum
stockholder equity requirement of $2.5 million for continued listing on the
NASDAQ SmallCap Market. The Company may seek equity financing to increase its
shareholders' equity in order to satisfy this requirement. In addition, the
Company may from time to time seek debt or equity financing for various business
reasons. There can be no assurance that any additional financing will be
available when needed or on acceptable terms to allow the Company to
successfully achieve its operating plan or to fund future investment in its
TeleVantage product line. In the event the Company seeks and successfully
receives additional equity capital, such additional financing may result in
significant stockholder dilution. See "Risk Factors" below.
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 Small Cap Market, we must satisfy the continued listing
requirements for that market.
In March 2003, the minimum bid price of our common stock had been below the
$1.00 per share minimum bid price continued listing requirement of the NASDAQ
SmallCap Market for a period of over 180 days. As a consequence, the NASDAQ
Staff determined that we failed to meet the market's continued listing
requirements. Subsequently, our shareholders approved a 1-for-6 reverse split of
the common stock on April 22, 2003, which has, as of the date of this report,
lifted the stock's bid price above the $1.00 per share minimum bid price. The
NASDAQ listing qualifications hearings panel, which reviewed our situation, is
considering our post-split bid price.
In addition, the NASDAQ listing qualifications hearings panel is reviewing our
non-compliance with the minimum $2.5 million shareholders' equity continued
listing requirement. We will be required by the panel to address the state and
direction of our shareholders' equity before the panel reaches a decision on our
request for continued listing. The listing of our common stock on the NASDAQ
SmallCap Market is currently being maintained on an exception basis as permitted
by applicable NASDAQ Marketplace rules.
The NASDAQ listing qualifications hearings panel may determine to delist our
common stock from the NASDAQ SmallCap Market for failure to meet the
shareholders' equity or minimum bid price continued listing requirements or for
other reasons it may raise.
If our common stock is delisted from the NASDAQ SmallCap Market due to our
non-compliance with the shareholders' equity requirement, minimum bid price
requirement or otherwise, the listing of our common stock may be transferred to
14
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 nine
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.
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, the nine months
ended March 31, 2003 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. We also had negative cash flow
from operating activities for the nine months ended March 31, 2003. 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.
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:
15
* 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 the nine months ended March 31, 2003, our
distributor, Paracon, accounted for 42% of our total net sales. In fiscal year
2002, Paracon accounted for 32% of our total net sales. In fiscal year 2001,
Paracon accounted for approximately 21% of total net sales, and our original
equipment manufacturer, Intel, accounted for 14% of total net sales. No
additional services revenue is anticipated under our joint development agreement
with Intel. 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 March 31, 2003, Paracon represented approximately 37% of our
outstanding trade receivables. At June 30, 2002, Paracon represented
approximately 36% of our outstanding trade receivables. At June 30, 2001,
Toshiba represented approximately 41% and Paracon represented approximately 21%
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 March 2003, the minimum bid price of our common stock had been below the
$1.00 per share minimum bid price continued listing requirement of the NASDAQ
SmallCap Market for a period of over 180 days. As a consequence, the NASDAQ
Staff determined that we failed to meet the market's continued listing
requirements. Subsequently, our shareholders approved a 1-for-6 reverse split of
the common stock on April 22, 2003, which has, as of the date of this report,
lifted the stock's bid price above the $1.00 per share minimum bid price. The
NASDAQ listing qualifications hearings panel, which reviewed our situation, is
considering our post-split bid price.
In addition, the NASDAQ listing qualifications hearings panel is reviewing our
non-compliance with the minimum $2.5 million shareholders' equity continued
listing requirement. We will be required by the panel to address the state and
direction of our shareholders' equity before the panel reaches a decision on our
request for continued listing. The listing of our common stock on the NASDAQ
SmallCap Market is currently being maintained on an exception basis, as
permitted by applicable NASDAQ Marketplace rules.
The NASDAQ listing qualifications hearings panel may determine to delist our
common stock from the NASDAQ SmallCap Market for failure to meet the
shareholders' equity or minimum bid price continued listing requirements or for
other reasons it may raise.
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 SHAREHOLDERS 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. In addition, we require additional equity financing to satisfy the
$2.5 million minimum shareholders' equity continued listing requirement on the
16
NASDAQ SmallCap Market. 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 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.
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.
17
SOME OF OUR SHAREHOLDERS 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 shareholders 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 CHIEF EXECUTIVE OFFICER, OUR CHIEF TECHNOLOGY
OFFICER OR OUR VICE PRESIDENT OF SALES 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 three 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
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.
18
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 shareholders 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, our
chief executive officer and chief financial officer have concluded that our
disclosure controls and procedures are designed to ensure that information
19
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 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 February 24, 2003, Artisoft filed a Current Report on Form 8-K dated February
24, 2003 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 February 24, 2003, announcing the appointment of Duncan Perry as
Chief Financial Officer of the Company and the promotion of Azmi Jafarey as Vice
President of Customer Services and Information Technology (IT).
On March 21, 2003, Artisoft filed a Current Report on Form 8-K dated March 21,
2003 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
March 21, 2003, announcing that it had received a NASDAQ Staff Determination
indicating that the Company failed to regain compliance with the bid price
minimum requirement for continued listing set forth in Marketplace Rule
4310(c)(4) during the 180 calendar day compliance period afforded to the Company
in accordance with NASDAQ rules.
On April 22, 2003, Artisoft filed a Current Report on Form 8-K dated April 22,
2003 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
April 22, 2003 announcing its implementation of a six-for-one reverse split of
its outstanding shares of common stock.
On May 13, 2003, Artisoft filed a Current Report on Form 8-K dated May 8, 2003
for the purpose of filing under Item 12 (Disclosure of Results of Operations and
Financial Condition) with the Securities and Exchange Commission as an exhibit
thereto Artisoft's press release dated May 8, 2003, announcing its financial
results for the quarter ended March 31, 2003 and the restatement of its
financial statements for certain periods.
20
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: MAY 20, 2003 BY: /s/ STEVEN G. MANSON
-------------------------------------
STEVEN G. MANSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DATE: MAY 20, 2003 BY: /s/ DUNCAN G. PERRY
-------------------------------------
DUNCAN G. PERRY
CHIEF FINANCIAL OFFICER (PRINCIPAL
FINANCIAL OFFICER AND CHIEF
ACCOUNTING OFFICER)
21
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: May 20, 2003 By: /s/ Steven G. Manson
------------------------------------
Steven G. Manson
Chief Executive Officer
(Principal Executive Officer)
22
I, Duncan G. Perry, 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: May 20, 2003 By: /s/ Duncan G. Perry
------------------------------------
Duncan G. Perry
Chief Financial Officer
(Principal Financial Officer)
23
EXHIBIT INDEX
Designation Description
- ----------- -----------
3.1 The Registrant's Certificate of Incorporation, as amended.
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.
10.3 Distribution Agreement by and between the Registrant and
ScanSource, Inc. (d/b/a Catalyst Telecom effective as of
September 5, 2001.
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
24