SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to ___________
COMMISSION FILE NUMBER 0-21999
-----------------------
APPIANT TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1360852
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6663 OWENS DRIVE
PLEASANTON, CALIFORNIA 94588
(Address of principal executive offices)
(925) 251-3200
(Registrant's telephone number)
----------------
Check 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 past 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 [ ]
As of August 15, 2002, there were 16,229,900 shares of Common Stock outstanding.
1
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at June 30, 2002 and September
30, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations and Comprehensive
Loss for the three and nine months ended June 30, 2002 and 2001. . . . . 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended June 30, 2002 and 2001 . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . 7
Item 2.. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk. . . . . . . 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . . . . 36
Item 3. Defaults on Senior Securities . . . . . . . . . . . . . . . . . . . . . 40
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . 40
Item 5. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . 40
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
2
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, September 30,
2002 2001
------------- ---------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . $ 1,153,000 $ 3,379,000
Restricted cash . . . . . . . . . . . . . . . . . . 117,000 117,000
Accounts receivable, less allowance for doubtful
accounts of $288,000 and $328,000 . . . . . . . . 1,670,000 1,123,000
Inventory . . . . . . . . . . . . . . . . . . . . . 666,000 890,000
Equipment at customers under integration. . . . . . -- 206,000
Prepaid expenses and other. . . . . . . . . . . . . 1,119,000 418,000
------------- ---------------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . 4,725,000 6,133,000
Property and equipment, net . . . . . . . . . . . . 3,439,000 5,381,000
Capitalized software, net . . . . . . . . . . . . . 16,628,000 16,664,000
Goodwill and other intangible assets, net . . . . . 7,078,000 10,255,000
Other assets. . . . . . . . . . . . . . . . . . . . 234,000 1,933,000
------------- ---------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . $ 32,104,000 $ 40,366,000
============= ===============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit . . . . . . . . . . . . . . . . . . $ 300,000 $ 300,000
Accounts payable. . . . . . . . . . . . . . . . . . 6,888,000 8,834,000
Accrued liabilities . . . . . . . . . . . . . . . . 3,078,000 3,209,000
Deferred revenue. . . . . . . . . . . . . . . . . . 450,000 1,041,000
Income tax payable. . . . . . . . . . . . . . . . . 76,000 302,000
Accrued liability related to warrants . . . . . . . 64,000 1,818,000
Convertible promissory notes payable, net of
discounts . . . . . . . . . . . . . . . . . . . . 3,830,000 2,700,000
Notes payable . . . . . . . . . . . . . . . . . . . 10,262,000 5,726,000
Capital lease obligations, current portion. . . . . 350,000 4,085,000
------------- ---------------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . 25,298,000 28,015,000
Long term notes payable . . . . . . . . . . . . . . 419,000 379,000
Capital lease obligations, net of Current portion . 319,000 93,000
Other . . . . . . . . . . . . . . . . . . . . . . . 27,000 39,000
------------- ---------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . 26,063,000 28,526,000
REDEEMABLE CONVERTIBLE PREFERRED STOCK. . . . . . . 253,000 253,000
STOCKHOLDERS' EQUITY
Common stock. . . . . . . . . . . . . . . . . . . . 159,000 157,000
Additional paid-in capital. . . . . . . . . . . . . 86,679,000 80,657,000
Unearned stock-based compensation . . . . . . . . . (94,000) (401,000)
Accumulated deficit . . . . . . . . . . . . . . . . (81,077,000) (68,364,000)
Accumulated other comprehensive loss. . . . . . . . 121,000 (462,000)
------------- ---------------
TOTAL STOCKHOLDERS' EQUITY. . . . . . . . . . . . . 5,788,000 11,587,000
------------- ---------------
TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY. . . . . . . . . . $ 32,104,000 $ 40,366,000
============= ===============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------- ------------- -------------
NET REVENUES:
Products and integration services . $ -- $ 1,852,000 $ 687,000 $ 5,236,000
Other services. . . . . . . . . . . 2,693,000 4,272,000 7,825,000 13,503,000
------------ ------------- ------------- -------------
TOTAL NET REVENUES. . . . . . . . . 2,693,000 6,124,000 8,512,000 18,739,000
COST OF REVENUES:
Products and integration services . -- 1,609,000 2,131,000 4,790,000
Other services. . . . . . . . . . . 4,012,000 3,950,000 7,161,000 10,204,000
------------ ------------- ------------- -------------
TOTAL COST OF REVENUES. . . . . . . 4,012,000 5,559,000 9,292,000 14,994,000
------------ ------------- ------------- -------------
GROSS (LOSS) PROFIT . . . . . . . . (1,319,000) 565,000 (780,000) 3,745,000
OPERATING EXPENSES:
Selling, general and
administrative. . . . . . . . . . 1,955,000 3,746,000 4,758,000 13,766,000
Research and development. . . . . . 327,000 965,000 1,465,000 2,175,000
Amortization of goodwill and other
intangibles . . . . . . . . . . . 1,287,000 558,000 3,323,000 960,000
Impairment of equipment and
capitalized software intangibles -- 3,699,000 -- 3,699,000
Release of capitalized lease
obligation. . . . . . . . . . . . -- -- (2,839,000) --
------------ ------------- ------------- -------------
TOTAL OPERATING EXPENSES. . . . . . 3,569,000 8,968,000 6,707,000 20,600,000
LOSS FROM OPERATIONS. . . . . . . . (4,888,000) (8,403,000) (7,487,000) (16,855,000)
OTHER INCOME (EXPENSE):
Interest income . . . . . . . . . . 1,000 39,000 410,000 219,000
Interest expense. . . . . . . . . . (2,867,000) (7,576,000) (6,185,000) (8,929,000)
Other . . . . . . . . . . . . . . . 407,000 417,000 569,000 376,000
------------ ------------- ------------- -------------
Total other expense . . . . . . . . 2,459,000 (7,120,000) (5,206,000) (8,334,000)
Loss from continuing operations
before income tax . . . . . . . . (7,347,000) (15,523,000) (12,693,000) (25,189,000)
Provision for income tax. . . . . . -- 54,000 20,000 280,000
------------ ------------- ------------- -------------
NET LOSS. . . . . . . . . . . . . . (7,347,000) (15,577,000) (12,713,000) (25,469,000)
Preferred dividends . . . . . . . . -- -- -- 7,626,000
------------ ------------- ------------- -------------
NET LOSS AVAILABLE TO COMMON
STOCKHOLDERS. . . . . . . . . . . $(7,347,000) $(15,577,000) $(12,713,000) $(33,095,000)
============ ============= ============= =============
BASIC AND DILUTED NET LOSS PER
COMMON SHARE. . . . . . . . . . . $ (0.45) $ (1.05) $ (0.79) $ (2.42)
============ ============= ============= =============
COMPREHENSIVE LOSS
Net loss. . . . . . . . . . . . . . $(7,347,000) $(15,577,000) $(12,713,000) $(33,095,000)
Other comprehensive income
Translation gain (loss) . . . . . 433,000 (11,000) 583,000 (74,000)
------------ ------------- ------------- -------------
COMPREHENSIVE LOSS. . . . . . . . . $(6,914,000) $(15,588,000) $(12,130,000) $(33,169,000)
============ ============= ============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Month Ended
June 30,
----------------------------
2002 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . $(12,713,000) $(25,469,000)
Reduction in allowance for doubtful accounts . . . . . . . . . (40,000) (59,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . 3,298,000 1,755,000
Accretion of discounts on notes payable. . . . . . . . . . 4,091,000 --
Amortization of goodwill and other intangible assets . . . 3,269,000 960,000
Impairment of equipment and capitalized software . . . . . -- 3,699,000
Stock-based compensation relating to stock options and
warrants . . . . . . . . . . . . . . . . . . . . . . . . 95,000 (2,015,000)
Release of capitalized lease obligation. . . . . . . . . . (2,839,000) (157,000)
Deemed interest expense related to notes payable at a
discount . . . . . . . . . . . . . . . . . . . . . . . . -- 190,000
Deemed interest expense related to notes payable at a
discount . . . . . . . . . . . . . . . . . . . . . . . . -- 1,274,000
Amortization of discount on notes payable to related party -- 950,000
Cost of additional warrants issued to related party. . . . -- 3,799,000
Amortization of discount on notes payable. . . . . . . . . -- 171,000
Amortization of issuance costs on notes payable. . . . . . -- 17,000
Remeasurement of warrants due to registration requirements -- 1,120,000
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . (270,000) 1,121,000
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . 430,000 729,000
Prepaid expenses and other . . . . . . . . . . . . . . . . . (89,000) (812,000)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 957,000 (337,000)
Accounts payable and other current liabilities . . . . . . . (3,338,000) 3,491,000
Accrued liability related to warrants. . . . . . . . . . . . 65,000 2,402,000
Income tax payable . . . . . . . . . . . . . . . . . . . . . (230,000) 5,000
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . (591,000) (741,000)
------------- -------------
CASH USED IN OPERATING ACTIVITIES. . . . . . . . . . . . . . . (7,905,000) (7,907,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash. . . . . . . . . . . . . . . . . . . . . . . . -- 3,000
Cash acquired in connection with acquisition . . . . . . . . . 89,000 22,000
Capitalization of software development costs . . . . . . . . . (1,800,000) (2,198,000)
Purchase of property and equipment . . . . . . . . . . . . . . (382,000) (1,582,000)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES. . . . . . . . . . . . . (2,093,000) (3,755,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment under line of credit . . . . . . . . . . . . . . . . -- (343,000)
Proceeds from draw on equity line. . . . . . . . . . . . . . . -- 1,745,000
Proceeds from issuance of notes, convertible notes and
warrants . . . . . . . . . . . . . . . . . . . . . . . . . . 7,065,000 5,000,000
Proceeds from issuance of Series B preferred Stock, net of
issuance costs . . . . . . . . . . . . . . . . . . . . . . . -- 4,959,000
Proceeds from warrants and options exercised for common stock. -- 1,746,000
Principal payments on capital lease obligations. . . . . . . . 263,000 (2,798,000)
Principal payment on notes payable to stockholders . . . . . . (140,000) --
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES. . . . . . . . . . . 7,188,000 10,309,000
Effect of exchange rate changes on cash. . . . . . . . . . . . 584,000 (273,000)
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . (2,226,000) (1,626,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . 3,379,000 5,603,000
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . $ 1,153,000 $ 3,977,000
============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
June 31,
-----------------------
2002 2001
---------- -----------
Supplemental disclosures for cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . $ 28,000 $ 647,000
Income taxes . . . . . . . . . . . . . . . . . . . 24,000 89,000
NONCASH TRANSACTIONS:
Beneficial conversion feature on convertible
promissory Notes payable . . . . . . . . . . . . . 6,402,000 --
--Reclassification of warrant liability to equity. 670,000 --
Write-off of assets related to release of capital
lease liability. . . . . . . . . . . . . . . . . . 682,000 --
Property and equipment and software acquired under
capital leases . . . . . . . . . . . . . . . . . . -- 5,720,000
Deemed dividend on beneficial conversion feature
of Series B Preferred Stock. . . . . . . . . . . . -- 7,626,000
Recognition of beneficial conversion feature on
notes payable. . . . . . . . . . . . . . . . . . . -- 2,548,000
Allocation of proceeds to fair value of warrants
issued on notes payable. . . . . . . . . . . . . . -- 5,330,000
Issuance of warrants to strategic partner in
conjunction with convertible debentures. . . . . . -- 546,000
Issuance of warrants to underwriters in conjunction
with sale of Series B Preferred Stock. . . . . . . -- 1,107,000
Modification of warrant exercise price in
conjunction with sale of Series B Preferred Stock. -- 1,847,000
Liability for future issuance of common stock to
underwriters in conjunction with sale of Series B
Preferred Stock. . . . . . . . . . . . . . . . . . -- 573,000
Payable for purchases of property and equipment and
software . . . . . . . . . . . . . . . . . . . . . -- 4,974,000
Costs of borrowings on equity line. . . . . . . . . -- 1,745,000
Conversion of advances to Series B Preferred Stock -- 3,500,000
Issuance of common stock in Quaartz acquisition . . -- 8,310,000
Conversion of Series B Preferred Stock into Common
Stock. . . . . . . . . . . . . . . . . . . . . . . -- 4,678,000
---------- -----------
TOTAL NONCASH TRANSACTIONS . . . . . . . . . . . . . $7,754,000 $48,504,000
========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit or review, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. However, the
Company believes that the disclosures are adequate to make the information
presented not misleading. The balance sheet as of September 30, 2001 is derived
from the Company's audited financial statements included in its Form 10-K for
the fiscal year ended September 30, 2001 but does not include all disclosures
required by generally accepted accounting principles in the United States.
These condensed consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 2001.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal recurring adjustments), which
are, in the opinion of management, necessary to state fairly the results for the
interim periods presented. The results of operations for the interim periods
presented are not necessarily indicative of the operating results to be expected
for any subsequent interim period or for the fiscal year ending September 30,
2002.
The consolidated financial statements include our results as well as the results
of our significant operating subsidiaries: Appiant Technologies North America,
Inc. ("Appiant NA") and Infotel Technologies (Pte) Ltd ("Infotel").
Appiant NA revenues were 10.4% and 22.6% of consolidated net revenues for the
three and nine months ended June 30, 2002 and 2001, respectively. Infotel
revenues were 89.6% and 77.4% of consolidated net revenues for the nine months
ended June 30, 2002 and 2001, respectively.
LIQUIDITY
The consolidated financial statements of the Company and its subsidiaries
contemplate the realization of assets and satisfaction of liabilities in the
normal course of business. The Company recorded a net loss of $12.7 million on
net revenues of $8.5 million for the nine months ended June 30, 2002 and
sustained significant losses for the fiscal years ended 2001 and 2000. At June
30, 2002, the Company had an accumulative deficit of $81.0 million. As a result,
the Company will need to generate significantly higher revenue to reach
profitability as the organization of the new inUnison(SM) portal business is
built. In addition, the amortization of capitalized software and other assets
that the Company has purchased or developed for the new inUnison(SM) portal
commenced on December 17, 2001. The Company is developing other technologies and
amortization of the costs associated with these technologies will commence upon
the completion of development.
Management's plans to reverse the recent trend of losses are to increase
revenues and gross margins while controlling costs, primarily based on expected
revenues for the Company's inUnison(SM) portal services applications. Continued
existence of the Company is dependent on the Company's ability to obtain
adequate funding and eventually establish profitable operations. The Company
intends to obtain additional equity and/or debt financing in order to further
finance the market introduction of its inUnison(SM) portal services and to meet
working capital requirements. There remains significant uncertainly, however,
about the Company's ability to continue as going concern. The accompanying
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
2. NET LOSS PER SHARE
Net loss per share for both basic net loss per share, which is the
weighted-average number of common shares outstanding, and diluted net loss per
share, which includes the weighted-average number of common shares outstanding
and all dilutive potential common shares outstanding, is calculated using the
treasury stock method. For the three and nine months ended June 30, 2002 and
2001, dilutive potential common shares outstanding reflects convertible
7
promissory notes payable, convertible preferred stock, and shares and warrants
to purchase the Company's common stock. The following table summarizes the
Company's net loss per share computations for the three and nine months ended
June 30, 2002 and 2001 (in thousands, except per share amounts):
Three Months Ended Nine Month Ended
June 30, June 30,
------------------- --------------------
2002 2001 2002 2001
-------- --------- --------- ---------
Net loss $(7,347) $(15,577) $(12,713) $(25,469)
Preferred stock dividends -- -- -- (7,626)
-------- --------- --------- ---------
Basic net loss applicable to common
stock $(7,347) $(15,577) $(12,713) $(33,095)
======== ========= ========= =========
Weighted average shares used in net
loss per share - basic and diluted 16,188 14,854 16,055 13,684
======== ========= ========= =========
Net income (loss) per share - basic
and diluted $ (0.45) $ (1.05) $ (0.79) $ (2.42)
======== ========= ========= =========
Antidilutive Securities:
Shares issuable under employee
common stock plans and warrants
exercisable 10,018 8,579 10,018 8,579
Convertible promissory notes 18,934 2,380 18,934 2,380
Shares issuable for convertible
preferred shares 69 36 69 36
-------- --------- --------- ---------
Antidilutive securities not
included in net loss per share
calculation 29,021 10,995 29,021 10,995
======== ========= ========= =========
3. INVENTORY
Inventory consists of systems and system components and is valued at the lower
of cost (first-in, first-out method) or market.
4. SOFTWARE DEVELOPMENT COSTS
The Company has adopted SOP 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" as it intends to offer its software
applications in a hosted service model. Software development costs, including
costs incurred to purchase third party software, are capitalized beginning when
the Company has determined factors are present, including among others, that
technology exists to achieve the performance requirements, buy versus internal
development decisions have been made and the Company's management has authorized
the funding for the project. Capitalization of software costs ceases when the
software is substantially complete and is ready for its intended use and is
amortized over its estimated useful life of two to seven years using the
straight-line method. To the extent that the Company were to license software,
any revenues net of any direct incremental costs such as marketing, commissions,
software reproduction costs, warranty, and service obligations, would be applied
against the capitalized cost of software, and no profit would be recognized from
such transactions unless and until net proceeds from licenses and amortization
have reduced the capitalized carrying amount of the software to zero.
Subsequent proceeds from licensing the software would be recognized as revenue.
When events or circumstances indicate the carrying value of internal use
software might not be recoverable, the Company will assess the recoverability of
these assets by determining whether the amortization of the asset balance over
its remaining life can be recovered through undiscounted future operating cash
flows. The amount of impairment, if any, is recognized to the extent that the
carrying value exceeds the projected discounted future operating cash flows and
is recognized as a write down of the asset. In addition, when it is no longer
8
probable that computer software being developed will be placed in service, the
asset will be recorded at the lower of its carrying value or fair value, if any,
less direct selling costs.
Our capitalized research and development expenditures were $1.7 million for the
nine months ended June 30, 2002 and $1.6 million in the nine months ended June
30, 2001. On December 17, 2001 the Company began amortizing $10.4 million of
these costs as the capitalized software was substantially complete and ready for
its intended use. Amortization for the quarter ended June 30, 2002 was $943,000
and $1.8 million since we began amortizing capitalized software in December
2001. Unamortized, capitalized costs of $7.4 million relate to those projects
that are not as yet ready for their intended use.
5. RECENT ACCOUNTING PRONOUNCMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The Company believes that the adoption of SFAS 141 will not have a significant
impact on its financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is effective for
fiscal years beginning after March 15, 2001. SFAS 142 requires, among other
things, the discontinuance of goodwill amortization. In addition, the Standard
includes provisions upon adoption for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the testing for impairment of existing goodwill
and other intangibles. The Company is currently assessing but has not yet
determined the impact of SFAS 142 on its financial position and results of
operations.
In October 2001, the FASB issued SFAS 144 Accounting for the Impairment or
Disposal of Long-Lived Assets, which is required to be applied in fiscal years
beginning after December 15, 2001. SFAS 144 requires, among other things, the
application of one accounting model for long-lived assets that are impaired or
to be disposed of by sale. The Company believes that the adoption of SFAS 144
will not have a significant impact on its financial position or results of
operations.
In May 2000, the Emerging Issues Task Force (EITF) issued EITF Issue No. 00-14,
Accounting for Certain Sales Incentives. EITF Issue No. 00-14 addresses the
recognition, measurement, and income statement classification for sales
incentives that a vendor voluntarily offers to customers (without charge), which
the customer can use in, or exercise as a result of, a single exchange
transaction. Sales incentives that fall within the scope of EITF Issue No. 00-14
include offers that a customer can use to receive a reduction in the price of a
product or service at the point of sale. The EITF changed the transition date
for Issue 00-14, concluding that a company should apply this consensus no later
than the company s annual or interim financial statements for the periods
beginning after December 15, 2001. In June 2001, the EITF issued EITF Issue No.
00-25, Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor s Products, effective for periods beginning after
December 15, 2001. EITF Issue No. 00-25 addresses whether consideration from a
vendor to a reseller is (a) an adjustment of the selling prices of the vendor s
products and, therefore, should be deducted from revenue when recognized in the
vendor s statement of operations or (b) a cost incurred by the vendor for assets
or services received from the reseller and, therefore, should be included as a
cost or expense when recognized in the vendor s statement of operations. Upon
application of these EITFs, financial statements for prior periods presented for
comparative purposes should be reclassified to comply with the income statement
display requirements under these Issues. In September of 2001, the EITF issued
EITF Issue No. 01-09, Accounting for Consideration Given by Vendor to a Customer
or a Reseller of the Vendor s Products, which is a codification of EITF Issues
No. 00-14, No. 00-25 and No. 00-22 Accounting for Points and Certain Other
Time-or Volume-Based Sales Incentive Offers and Offers for Free Products or
Services to be Delivered in the Future. The Company has adopted these issues in
fiscal year 2002 and during the nine months ended June 30, 2002, we recorded
$42,000 000 of revenues from our inUnison(SM) services, and offset an additional
$180,000 were offset by certain costs incurred in association with related
business-partner arrangements.
9
6. COMMITMENTS AND CONTINGENCIES
CAPITAL LEASES
In December 2001, the Company reached an agreement with a vendor under which the
vendor agreed to release the Company from capital lease obligations of $3.5
million. The agreement also provided for the return of equipment capitalized
under the capital lease obligations of $0.7 million. In June 2001, the Company
charged to operating expenses $3.7 million of consulting services related to its
first data center in Atlanta, Georgia, when its data center was relocated to
Sunnyvale, California, as such costs had no future value following the
relocation. According, the Company has recorded a gain of $2.8 million within
operating expenses equal to the difference between the capital lease obligation
and the book value of the capitalized equipment returned to the vendor.
At June 30, 2002, the Company leased other computer equipment and software under
capital leases. These leases extend for varying periods through 2004.
Equipment and software under capital leases included in property and equipment
are as follows:
June 30, September 30,
2002 2001
----------- ---------------
Equipment and software $1,193,000 $ 2,120,000
Less: accumulated amortization (480,000) (614,000)
----------- ---------------
$ 713,000 $ 1,506,000
=========== ===============
Future capital lease payments are as follows:
March 31,
2001
-----------
Fiscal Year
2002 $ 162,000
2003 363,000
2004 31,000
-----------
666,000
Less amount representing interest (99,000)
-----------
Present value of minimum future payments 567,000
Less current portion (350,000)
-----------
$ 217,000
===========
CONTINGENCIES
In October 2001, a software vendor filed suit against the Company for breach of
contract totaling approximately $703,000 plus interest and attorney's fees. On
December 28, 2001, Appiant filed an answer denying this general demand, and is
preparing a counter-suit for return of over $600,000 paid to this vendor. In
August 2002, the parties entered into a mutual settlement agreement and release
of claims wherein the Company has agreed to make cash payments totaling $200,000
between February 2003 and May 2003, and will issue warrants to purchase 50,000
shares of Appiant common stock at an exercise price of $0.37.
In January 2002, a default judgment was issued against the Company in favor of
an equipment vendor in the amount of $123,000. The Company was successful in
having that default judgment set aside on February 6, 2002. The Company
subsequently entered into a mutual settlement agreement and release of claims in
July 2002 wherein the Company has agreed to make payments totaling $69,000 over
the next four months.
In January 2002, a services and equipment provider filed suit in Texas for
breach of contract totaling $117,000. The Company is currently in negotiations
to resolve this claim.
10
In May 2002, a customer requested indemnification of its internal defense costs
and expenses arising from its defense of a lawsuit involving claims of
infringement of certain patents which Appiant has licensed and which are
included in Appiant's legacy voice mail product. In lieu of seeking
reimbursement from Company of future defense fees, the customer offered to
accept a subrogated assignment of the Company's indemnification rights form the
patent owner. The Company agreed to tender the indemnification claim on to the
patent owner and assign that claim to the customer to directly seek
indemnification. The Company believes that this assignment to the customer will
be the final resolution of this matter.
In May 2002, a note holder tendered notice of the Company's default on a
settlement agreement and release relating to a $2.75 million indebtedness
arising out of the cancelled notes. The Company is currently in negotiations
toward an agreement to cure the default and amend the payment plan called for in
the settlement agreement.
In June 2002, the Company's former trademark counsel tendered notice of its
claim for $51,260.26 in unpaid fees and indicated that it would file suit to
collect these fees. The Company disputes some of these fees, but intends to
work with counsel towards a mutually agreed resolution of the matter.
In June and July 2002, several holders of debentures issued in April 2002
provided formal notices of default by the company for failing to register the
shares underlying the debentures or receive shareholder approval of the issuance
of all underlying shares. The Company and the debenture holders are currently
in discussions regarding options for curing these defaults and/or otherwise
resolving the matter.
In July 2002, a former vendor tendered notice of a demand for payment of
approximately $200,000 alleging breach of contract and open book account. The
Company disputes the claims as stated, and intends to work with the vendor
towards a mutually agreed resolution of the matter.
In July 2002, counsel claiming to represent holders of certain Promissory Notes
due in June 2003 wrote the Company claiming that material information was
withheld from certain unidentified note holders by the Company when the Notes
were issued in June 2001. The Company is investigating this claim and has
requested information from the note holders, and intends to continue to
vigorously defend the matter.
In July 2002, a former supplier of equipment filed suit against the Company for
breach of contract and breach of guarantee totaling $419,581.95 plus interest
and attorney's fees. The Company's time to respond to the suit has not yet
passed. The Company is investigating the claim and intends to work with the
vendor towards a mutually agreed resolution of the matter.
While management intends to defend these matters vigorously, there can be no
assurance that any of these complaints or other third party assertions will be
resolved without costly litigation, or in a manner that is not adverse to our
financial position, results of operations or cash flow. No estimate can be made
of the possible loss or possible range of loss associated with the resolution of
these matters in excess of amounts accrued.
7. CONVERTIBLE PROMISSORY NOTES PAYABLE AND WARRANTS
Effective April 19, 2002, Appiant commenced a secured financing of up to
$4,025,000 with certain accredited investors ("Investors") pursuant to a
Debenture and Warrant Purchase Agreement (the "Agreement"), dated April 19,
2002. As of May 28, 2002, $3,525,000 of Convertible Debentures including
$105,750 of Debentures issued as a finder's fee had closed. Under the terms of
the Agreement, Appiant agreed to issue to the Investors Convertible Debentures
bearing an interest rate of 8%. The Convertible Debentures may be converted into
unregistered, restricted shares of Appiant Common Stock for a purchase price per
share equal to the lower of (a) $1.21, which was the deemed closing price and
was determined based on the closing bid prices of the Common Stock for the five
trading days immediately prior to the closing date of the initial sale of the
Debentures, or (b) the average of the two lowest closing bid prices of Appiant
shares for the 20-day period immediately preceding any conversion. The
Convertible Debenture can be converted, at the option of the holder, at any time
until one year after the Closing Date. In the event the Convertible Debentures
are not converted, Appiant has the option to repay the indebtedness. Appiant
also has the right to redeem the Convertible Debentures prior to maturity for an
amount per share equal to 110% to 125% of the principal amount of the
Convertible Debentures being redeemed, as determined by the date of redemption.
11
In addition, Appiant issued to Investors warrants to purchase up to an aggregate
of 1,456,612 shares of unregistered, restricted Appiant Common Stock on the
total financing of $3,525,000. Appiant has also agreed to issue warrants for
100,000 shares of unregistered, restricted Appiant Common Stock as part of the
finders fee for this financing. The warrants have a term of five years and are
exercisable at a warrant price equal to 110% of the closing price or $1.33 per
share. The estimated value of the warrants of $1,635,000 was determined using
the Black-Scholes option pricing model and the following assumptions:
contractual term of 5 years, a risk free interest rate of 3.375%, a dividend
yield of 0% and volatility of 133%. The allocation of the Convertible Notes
proceeds to the fair value of the warrants of $1,109,000 was recorded as a
discount on the Convertible Notes and as additional paid-in capital. In
addition, as a result of the beneficial conversion feature described above for
the Convertible Notes, the Company recorded $1,982,000 additional paid-in
capital, and a discount on the notes payable, which is accreted over the note
maturity period to interest expense. As a result, these discounts are accreted
over the note maturity period and $727,000 was recorded as non-cash interest
expense for the three months ended June 30, 2002.
Terms of the financing also provide that the Investors may nominate up to two
additional members to the Appiant Board of Directors, and provide the Investors
certain rights and options regarding possible future equity based financings by
Appiant. Appiant paid a cash finder's fee of 7% and Convertible Debentures of 3%
and warrants to purchase 100,000 shares of Common Stock, and other related
expenses. No underwriters were involved in this private placement.
The sale of the debentures and the warrants to the investors was exempt from the
registration provisions of the Securities Act, under Sections 4(2) and 4(6) of
the Securities Act, and the rules and regulations there under, because of the
nature of the offerees and Investors and the manner in which the offering was
conducted. The investors have acknowledged that the securities cannot be resold
unless registered or exempt from registration under the securities laws. Appiant
has agreed to register for resale on Form S-3 up to 12,000,000 shares of the
Common Stock (the "Registrable Shares") issued to the Shareholders as soon as
practicable following the Effective Date. Moreover, Appiant has agreed to seek
shareholder approval of the issuance of the Registrable Shares in excess of
19.99% of issued and outstanding Appiant Common Stock.
In addition, the Company entered into several Convertible Promissory Notes
Payable (the "Convertible Notes") in the aggregate principal amount of $125,000
with a related party. The Notes accrue interest at 10% per annum, which is
payable in common stock at the time of conversion and are collateralized by the
Company's legacy business accounts receivables, and the assets of the Infotel
subsidiary, and matured on various dates from April 30, 2002 through June 22,
2002. The conversion price is equal to the lower of 90% of the closing price of
the Company's common stock on the trading day immediately preceding the maturity
date, or 90% of any subsequent interim financing that occurs between the
issuance date of the notes and the maturity date. Upon conversion, the
Convertible Notes have no specific registration rights. As of June 30, 2002, the
aggregate amount of $90,000 of these Convertible Notes had been redeemed.
In connection with these Convertible Notes, the Company issued warrants to
purchase 123,174 shares of the Company's common stock at an exercise price of
ranging from $0.90 per share to $1.26 per share. The estimated value of the
warrants of $40,000 was determined using the Black-Scholes option pricing model
and the following assumptions: contractual term of 5 years, a risk free interest
rate of 3.375%, a dividend yield of 0% and volatility of 133%. The allocation of
the Convertible Notes proceeds to the fair value of the warrants of $ 39,000 was
recorded as a discount on the Convertible Notes and as additional paid-in
capital. Upon exercise of the warrants, the holder has no specific registration
rights. In addition, as a result of the beneficial conversion feature described
above for the Convertible Notes, the Company recorded $70,000 additional paid-in
capital, and a discount on the notes payable, which is accreted over the note
maturity period to interest expense. As a result, these discounts are accreted
over the note maturity period and $26,000 was recorded as non-cash interest
expense for the three months ended June 30, 2002.
12
During the three months ended March 31, 2002, the Company entered into several
Convertible Promissory Notes Payable (the "Convertible Notes") with certain
investors in the aggregate principal amount of $2,025,000, of which $1,550,000
was with members of the board of directors or shareholders. The Notes accrue
interest at 10% per annum, which is payable in common stock at the time of
conversion and are collateralized by the Company's legacy business accounts
receivables, and the assets of the Infotel subsidiary, and mature on various
dates from April 30, 2002 through October 15, 2002. The conversion price is
equal to the lower of 90% of the closing price of the Company's common stock on
the trading day immediately preceding the maturity date, or 90% of any
subsequent interim financing that occurs between the issuance date of the notes
and the maturity date. Upon conversion, the Convertible Notes have no specific
registration rights.
In connection with these Convertible Notes, the Company issued warrants to
purchase 1,315,000 shares of the Company's common stock at an exercise price of
ranging from $1.32 per share to $1.80 per share. The estimated value of the
warrants of $1,878,000 was determined using the Black-Scholes option pricing
model and the following assumptions: contractual term of 5 years, a risk free
interest rate of 3.375%, a dividend yield of 0% and volatility of 145%. The
allocation of the Convertible Notes proceeds to the fair value of the warrants
of $974,000 was recorded as a discount on the Convertible Notes and as
additional paid-in capital. Upon exercise of the warrants, the holder has no
specific registration rights. In addition, as a result of the beneficial
conversion feature described above for the Convertible Notes, the Company
recorded $1,051,000 additional paid-in capital, and a discount on the notes
payable, which is accreted over the note maturity period to interest expense.
As a result, these discounts are accreted over the note maturity period and
$826,000 and $ 1,324,000 were recorded as non-cash interest expense for the
three months and nine months ended June 30, 2002, respectively.
Between October 31, 2001 and December 20, 2001, the Company entered into several
Convertible Promissory Notes Payable (the "Convertible Notes") with certain
investors in the aggregate principal amount of $1,390,000, of which $400,000 was
with members of the board of directors or shareholders. The Notes accrue
interest at 8% per annum, which is payable in common stock at the time of
conversion and are collateralized by the Company's legacy business accounts
receivables, and the assets of the Infotel subsidiary, and mature on various
dates from December 27, 2001 to November 16, 2003. The conversion price is equal
to the lower of 90% of the closing price of the Company's common stock on the
trading day immediately preceding the maturity date, or 90% of any subsequent
interim financing that occurs between the issuance date of the notes and the
maturity date. Upon conversion, the Convertible Notes have no specific
registration rights.
In connection with these Convertible Notes, the Company issued warrants to
purchase 945,000 shares of the Company's common stock at an exercise price of
ranging from $1.20 per share to $1.77 per share. The estimated value of the
warrants of $1,269,000 was determined using the Black-Scholes option pricing
model and the following assumptions: contractual term of 5 years, a risk free
interest rate of 3.92%, a dividend yield of 0% and volatility of 148%. The
allocation of the Convertible Notes proceeds to the fair value of the warrants
of $663,000 was recorded as a discount on the Convertible Notes and as
additional paid in capital. Upon exercise of the warrants, the holder has no
specific registration rights. In addition, as a result of the beneficial
conversion feature described above for the Convertible Notes, the Company
recorded $726,000 additional paid-in capital, and a discount on the notes
payable. These discounts are accreted over the note maturity period and $82,917
and $1,325,000 were recorded as non-cash interest expense for the three months
and nine months ended June 30, 2002, respectively.
Under the June 8, 2001 Convertible Notes Payable purchase agreement, the common
stock issuable pursuant to the conversion of the notes and exercise of the
related warrants were to be registered within 30 days after the next round of
financing. Due to the registration requirement, the warrants were classified as
liabilities and re-measured at each reporting date. On December 1, 2001,
certain of the warrant agreements were amended to remove the requirement to
register the common stock under these warrants. Accordingly, the liability
related to these warrants on December 1, 2001 of $670,000 was reclassified to
stockholders' equity, additional paid-in capital.
Under the April 19, 2002, Debenture and Warrant Purchase Agreement, the
conversion price is not fixed. Due to this uncertainty in price, EITF Issue No.
00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock" applies. In accordance with the
provisions of EITF 00-19, the Company estimated the fair value of all
outstanding warrants as of June 30, 2002, using the Black-Scholes option-pricing
model with the following assumptions: Volatility of 133%; dividend yield of 0%;
risk-free interest rate of 4.080%; and expected lives of 5 years. The value of
all warrants as of June 30, 2002, was estimated at $1,496,000, which was
recorded as a reclassification from additional paid-in capital to notes payable.
For future quarters, the value of these warrants will be re-calculated based on
their market value at quarter end.
13
8. SEGMENT REPORTING
The Company defines operating segments as components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. The operating segments
disclosed are managed separately, and each represents a strategic business unit
that offers different products and serves different markets.
The Company's reportable operating segments include Appiant Technologies Inc.
(Appiant NA) and Infotel. Appiant NA includes the Company's enterprise
operations in the US. Appiant NA enterprise operations include systems
integration and distribution of voice processing and multimedia messaging
equipment, technical support, ongoing maintenance and product development.
Infotel is a distributor and integrator of telecommunications and other
electronics products operating in Singapore and provides radar system
integration, turnkey project management, networking and test instrumentation
services. Infotel derives substantially all of its revenue from sales in
Singapore. There are no inter-segment revenues.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies in the Company's
Annual Report on Form 10-K for fiscal year ended September 30, 2001.
APPIANT NA(1) INFOTEL TOTAL
-------------- ------------ -------------
THREE MONTHS ENDED June 30, 2002
Net revenues to external customers $ 281,000 $ 2,412,000 $ 2,693,000
Loss from operations (4,790,000) (98,000) (4,888,000)
Non-current assets 27,207,000 170,000 27,377,000
THREE MONTHS ENDED June 30, 2001
Net revenues to external customers $ 2,531,000 $ 3,593,000 $ 6,124,000
Income (loss) from operations (15,735,000) 158,000 (15,577,000)
Non-current assets 42,097,000 10,014,000 52,111,000
NINE MONTHS ENDED June 30, 2002
Net revenues to external customers $ 1,924,000 $ 6,588,000 $ 8,512,000
Loss from operations (7,146,000) (341,000) (7,487,000)
Non-current assets 27,207,000 170,000 27,377,000
NINE MONTHS ENDED June 30, 2001
Net revenues to external customers $ 7,711,000 $11,028,000 $ 18,739,000
Income (loss) from operations (26,240,000) 771,000 (25,469,000)
Non-current assets 42,097,000 10,014,000 52,111,000
(1) Includes corporate expenses. Additionally, management reports include
goodwill for Infotel in total assets.
9. SUBSEQUENT EVENTS
On July 2, 2002, the Company received notice from the Nasdaq Stock Market,
Inc. ("Nasdaq") that, for the previous 30 consecutive trading days, the price of
the Company's common stock had closed below the minimum $1.00 per share
requirement for continued inclusion under Marketplace Rule 4310(c)(4) (the
"Rule"). Therefore, in accordance with Rule 4310(c)(8)(D), the Company has 180
calendar days, or until December 30, 2002, to regain compliance. If compliance
with the Rule cannot be demonstrated by that date and if the Company meets the
initial listing requirements for inclusion on the Nasdaq SmallCap Market it will
be given an addition 180 days to regain compliance or Company's securities will
be delisted from the Nasdaq SmallCap Market. The Company is considering its
alternatives with respect to regaining compliance with the Rule. The delisting
of the Company's common stock would have a significant adverse effect on the
stock's liquidity.
14
As of July 19, 2002, two members of the Appiant Technologies, Inc. Board of
Directors, Allen F. Jacobson and Robert J. Schmier, resigned their positions due
to personal and business reasons unrelated to Appiant. On August 2, 2002 the
company received notice from the Nasdaq Stock Market, Inc. that because of the
resignation of the two outside board members, the company does not meet the
independent director and audit committee requirements for continue listing on
the Nasdaq Stock Market under Marketplace Rules 4350(c) and 4350(d)(2) (the
"Rules"). On August 15, 2002, Robert Landis and Fred E. Tannous became outside
members of the Company's Board of Directors. Both Mr. Landis and Mr. Tannous
have been appointed to the audit and compensation committees of the Company.
These changes are not expected to have a material impact on the operation of the
Company and result in the Company regaining compliance with the Nasdaq Market
Rules for continued listing.
On August 9, 2002, Appiant and the primary reseller of Appiant's
inUnison(SM) unified communication system, InPhonic, Inc., entered into a series
of agreements. In the first part of the agreements, InPhonic agreed to purchase
certain Appiant assets, including the Company's data processing center, and
lease them back to Appiant. The three-year equipment lease agreement provides
for sub-market rate payments for the first six months. Lease payments
subsequently increase to market rate for the following 30 months. This
transaction represents a $600,000 net cash benefit to Appiant over the next two
fiscal quarters. In the second part of the agreements, InPhonic purchased a
broader license for Appiant's inUnison(SM) product resulting in a $900,000 cash
benefit to Appiant. In the third and final part of the agreements, Appiant and
InPhonic agreed that InPhonic would make minimum monthly payments to Appiant
based on an assumed minimum of 10,000 paying subscribers. This provides Appiant
consistent and predicable revenue as it continues to build sales of
inUnison(SM). The total cash benefit of this transaction will be determined from
the number of actual subscribers in any given period. As additional
consideration for these agreements, the Company granted InPhonic additional
warrants to purchase a number of common shares of Appiant stock equal to 19.9%
of all outstanding shares. The warrant exercise price for 200,000 warrants
granted in 2001 is $2.00, while the additional warrants issued August 9, 2002
are exercisable at $0.01 per share. For twelve months after August 9, 2002, the
number of warrants issued to InPhonic may increase proportional to any increase
in the total number of outstanding common shares, such that InPhonic will
continue to maintain rights to purchase 19.99% of all outstanding shares during
that period. The Company expects that these agreements will benefit the
Company's cash flow and marketing positions.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this Report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding our
expectations, hopes, intentions or strategies regarding the future.
Forward-looking statements include statements regarding: future product or
product development; future research and development spending and our product
development strategies, including our new inUnison(SM) unified communications
and unified information applications; the levels of international sales; future
expansion or utilization of production capacity; future expenditures; and
statements regarding current or future acquisitions, and are generally
identifiable by the use of the words "may", "should", "expect", "anticipate",
"estimates", "believe", "intend", or "project" or the negative thereof or other
variations thereon or comparable terminology.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, performance or achievements (or
industry results, performance or achievements) expressed or implied by these
forward-looking statements to be materially different from those predicted. The
factors that could affect our actual results include, but are not limited to,
the following:
- general economic and business conditions, both nationally and in the
regions in which we operate;
- adoption of our new recurring revenue service model;
- competition;
15
- changes in business strategy or development plans;
- delays in the development or testing of our products;
- technological, manufacturing, quality control or other problems that
could delay the sale of our products;
- our inability to obtain appropriate licenses from third parties,
protect our trade secrets, operate without infringing upon the
proprietary rights of others, or prevent others from infringing on our
proprietary rights;
- our inability to retain key employees;
- our inability to obtain sufficient financing to continue to expand
operations; and
- changes in demand for products by our customers.
Certain of these factors are discussed in more detail elsewhere in this Report
and the Annual Report on Form 10-K for the fiscal year ended September 30, 2001,
including under the caption "Risk Factors; Factors That May Affect Operating
Results".
We do not undertake any obligation to publicly update or revise any
forward-looking statements contained in this Report or incorporated by
reference, whether as a result of new information, future events or otherwise.
Because of these risks and uncertainties, the forward-looking events and
circumstances discussed in this Report might not transpire.
OVERVIEW
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") should be read in conjunction with the condensed
consolidated financial statements included herein. In addition, you are urged to
read this report in conjunction with the risk factors described herein. The
discussion of financial condition includes changes taking place or believed to
be taking place in connection with: our execution of our new, unified
communications and unified information hosted business model; the software,
voice processing, data processing and communications industry in general and how
we expect these changes to influence future results of operations; and liquidity
and capital resources, including discussions of capital financing activities and
uncertainties that could affect future results.
We are a software applications and services company that has changed its
business model to specialize in unified communications and unified information
(UC/UI) solutions. Our new business model is to provide our hosted, IP-based
unified communications and unified information portal and applications branded
under the name "inUnison(SM)" in a recurring revenue model.
Our consolidated financial statements include our results as well as the results
of our significant operating subsidiaries: Appiant Technologies North America,
Inc. ("Appiant NA") and Infotel Technologies (Pte) Ltd ("Infotel").
On June 24, 2002, in an insignificant dollar value transaction, the Company sold
certain assets of VoicePlus, Inc., to Intermedia Technologies, Inc. of Reno,
Nevada. VoicePlus was a discontinued legacy division of Appiant providing
support and maintenance to installed voicemail systems. In exchange for
registered trademarks, use of the VoicePlus' customer list and certain assets,
the terms of the agreement provide for Appiant to be relieved of certain debts
and obligations and for five Appiant employees to be outplaced and available for
hire by Intermedia. Management believes this divestiture will not have a
materially adverse effect on the company's operations.
While we have been and are in the process of launching our new, hosted unified
communications and unified information applications business model, our results
for the three and nine months ended June 30, 2002 reflect generally the results
of our legacy business in North America, as well as that of Infotel.
16
Our revenues for the three and nine months ended June 30, 2002 were derived
primarily from our legacy businesses. During the three and nine months ended
June 30, 2002, we received revenue from beta testing and activation fees of our
inUnison(SM) services totaling $200,000 and $541,000 which was deferred in
accordance with our revenue recognition policy. During the second quarter of
fiscal 2002, we began recognizing the beta revenue. During the nine months
ended June 30, 2002, we recorded $42,000 000 of revenues from our inUnison(SM)
services, and offset an additional $180,000 were offset by certain costs
incurred in association with related business-partner arrangements.
Our new business model for providing unified communications and unified
information in a hosted, recurring revenue service model makes us one of the
first companies in this new market. We anticipate competition in this relatively
new market space to increase significantly. We will continue to invest heavily
in software development, the build out of our production operations and both
customer and subscriber acquisition.
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are as follows:
- revenue recognition;
- estimating the allowance for doubtful accounts and inventory, and
accruals for litigation;
- accounting for income taxes;
- valuation of long-lived and intangible assets and goodwill; and
- determining functional currencies for the purposes of consolidating
our international operations.
REVENUE RECOGNITION. For our legacy operations, the Company derives its revenue
primarily from Appiant NA and Infotel subsidiaries. Generally, revenue derived
from Appiant NA relates to the distribution and integration of voice processing
and multimedia messaging equipment manufactured by others and maintenance
services. The revenue derived from Infotel primarily relates to the distribution
and integration of telecommunications and other electronic products, and
providing services primarily for radar system integration, turnkey project
management and test instrumentation and networking. Equipment sales and related
integration services revenue is recognized upon acceptance and delivery if a
signed contract exists, the fee is fixed or determinable and collection of the
resulting receivable is reasonably assured. Acceptance occurs for the legacy
Appiant NA products and services when the Company receives an acceptance form
signed by its customer acknowledging the product has been installed and services
completed to the customer's satisfaction. Provisions for estimated warranty
costs are made when the related revenue is recognized. Revenue from maintenance
services related to ongoing customer support is recognized ratably over the
period of the maintenance contact. Maintenance service fees are generally
received in advance and are non-refundable. Service revenue is recognized as the
related services are performed. Revenues from projects undertaken for customers
under fixed price contracts are recognized under the percentage-of-completion
method of accounting for which the estimated revenue is based on the ratio of
cost incurred to costs incurred plus estimated costs to complete. The Company
uses its judgment to estimate total cost of a project based on facts and
circumstances at the time. These facts and circumstances can change over time.
When the Company's current estimates of total contract revenue and cost indicate
a loss, the Company records a provision for estimated loss on the contract.
Appiant will recognize revenue from its inUnison(TM) services upon delivery of
the services if a signed contract exists, the fee is fixed or determinable and
collection of the resulting receivables is reasonably assured. Generally, any
fees received in advance or up-front, such as activation fees, if any, billed
during the beta testing phases of the inUnison(TM) services for a specific
customer, will be recognized over the estimated life of the customer or the term
of the contract.
ALLOWANCE FOR DOUBTFUL ACCOUNTS, INVENTORY AND ACCRUALS FOR LITIGATION. The
preparation of financial statements requires our management to make estimates
and assumptions that affect the reported amount of assets and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Specifically, our management must make estimates of the uncollectability of our
accounts receivables. Management specifically analyzes accounts receivable and
analyzes historical bad debts, customer concentrations, customer
17
credit-worthiness, current economic trends and changes in our customer payment
terms when evaluating the adequacy of the allowance for doubtful accounts. Our
accounts receivable balance was $1,499,845, net of allowance for doubtful
accounts of $288,459 as of June 30, 2002. Appiant provides an allowance for
obsolescence or unmarketable inventory equal to the difference between the cost
of inventory and the estimated net realizable value based upon assumptions about
future demand and market conditions. If actual market conditions are less
favorable than those projected by management, additional inventory provisions
may be required and such provisions could be material to our financial position
and results of operations.
Management's current estimated range of liability related to some of the pending
litigation is based on claims for which our management can estimate the amount
and range of loss. We have recorded the minimum estimated liability related to
those claims, where there is a range of loss. Because of the uncertainties
related to both the amount and range of loss on the remaining pending
litigation, management is unable to make a reasonable estimate of the liability
that could result from an unfavorable outcome. As additional information becomes
available, we will assess the potential liability related to our pending
litigation and revise our estimates. Such revisions in our estimates of the
potential liability could materially impact our results of operation and
financial position.
ACCOUNTING FOR INCOME TAXES. As part of the process of preparing our
consolidated financial statements we are required to estimate our income taxes
in each of the jurisdictions in which we operate. This process involves us
estimating our actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as deferred
revenue, for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within our consolidated balance
sheet. We must then assess the likelihood that our deferred tax assets will be
recovered from future taxable income and to the extent we believe that recovery
is not likely, we must establish a valuation allowance.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We have recorded a full
valuation allowance against our United States deferred tax assets of $9 million
as of June 30, 2002, due to uncertainties related to our ability to utilize such
deferred tax assets, primarily consisting of certain net operating loss carried
forwards and tax credits, before they expire. The valuation allowance is based
on our estimates of taxable income by jurisdiction in which we operate and the
period over which our deferred tax assets will be recoverable.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS, INCLUDING CAPITALIZED SOFTWARE,
AND GOODWILL. We assess the impairment of identifiable intangibles, long-lived
assets, capitalized software and related goodwill and enterprise level goodwill
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Factors we consider important which could trigger an
impairment review include the following:
- significant underperformance relative to expected historical or
projected future operating results;
- significant changes in the manner of our use of the acquired assets or
the strategy for our overall business;
- significant negative industry or economic trends;
- significant decline in our stock price for a sustained period; and
- our market capitalization relative to net book value.
When we determine that the carrying value of intangibles, long-lived assets,
capitalized software and related goodwill and enterprise level goodwill may not
be recoverable based upon the existence of one or more of the above indicators
of impairment, we measure any impairment based on a projected discounted cash
flow method using a discount rate determined by our management to be
commensurate with the risk inherent in our current business model. Net
intangible assets, capitalized software, long-lived assets, and goodwill
amounted to $23.9 million as of June 30, 2002.
Appiant is in the process of developing certain technologies. As of December 17,
2001, Appiant determined that one of these technologies, inUnison(TM), was ready
for its intended use. Appiant assessed the period of benefit from this
technology at seven years. Amortization commenced upon December 17, 2001.
18
DETERMINING FUNCTIONAL CURRENCIES FOR THE PURPOSE OF CONSOLIDATION. We have a
foreign subsidiary which accounted for approximately 89.6% of our net revenues
for the nine months ended June 30, 2002, and 9% of our total assets and 12.7% of
our total liabilities as of June 30, 2002.
In preparing our consolidated financial statements, we are required to translate
the financial statements of this foreign subsidiary from the currency in which
they keep their accounting records, generally the local currency, into United
States dollars. This process results in exchange gains and losses which, under
the relevant accounting literature are either included as a separate part of our
net equity under the caption "cumulative translation adjustment."
Under the relevant accounting guidance the treatment of these translation gains
or losses is dependent upon our management's determination of the functional
currency of this subsidiary. The functional currency is determined based on
management judgment and involves consideration of all relevant economic facts
and circumstances affecting the subsidiary. Generally, the currency in which the
subsidiary transacts a majority of its transactions, including billings,
financing, payroll and other expenditures would be considered the functional
currency but any dependency upon the parent and the nature of the subsidiary's
operations must also be considered.
If our subsidiary's functional currency is deemed to be the local currency, then
any gain or loss associated with the translation of the subsidiary's financial
statements is included in cumulative translation adjustments. However, if our
subsidiary's functional currency is deemed to be the United States dollar then
any gain or loss associated with the translation of these financial statements
would be included within our statement of operations. If we dispose of the
subsidiary, any cumulative translation gains or losses would be realized into
our statement of operations. If we determine that there has been a change in the
functional currency of the subsidiary to the United States dollar, any
translation gains or losses arising after the date of change would be included
within our statement of operations.
Based on our assessment of the factors discussed above, we considered our
subsidiary's local currency to be the functional currency. Accordingly we had
cumulative translation gain of $121,000 as of June 30, 2002 and translation
losses of approximately $462,000 as of September 30, 2001, which were included
as part of accumulated other comprehensive loss within our balance sheet at June
30, 2002 and September 30, 2001, respectively. During the nine months ending
June 30, 2002 and 2001, translation adjustments of $583,000 and ($270,000),
respectively, were included under accumulated other comprehensive loss. Had we
determined that the functional currency of the subsidiary was the United States
dollar, these gains would have improved our result for each of the periods
presented.
The magnitude of these gains or losses is dependent upon movements in the
exchange rates of the foreign currencies in which we transact business against
the United States dollar. These currencies include the Singapore dollar. Any
future translation gains or losses could be significantly higher than those
noted in each of these years. In addition, if we determine that a change in the
functional currency of our subsidiary has occurred at any point in time we would
be required to include any translation gains or losses from the date of change
in our statement of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities'" ("SFAS 146"). SFAS 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for under EITF No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The scope of SFAS 146 also includes costs
related to terminating a contract that is not a capital lease and termination
benefits that employees who are involuntarily terminated receive under the terms
of a one-time benefit arrangement that is not an ongoing benefit arrangement or
an individual deferred-compensation contract. SFAS 146 will be effective for
exit or disposal activities that are initiated after December 31, 2002 and early
application is encouraged. We will adopt SFAS 146 during the fourth quarter
ending March 31, 2003. The provisions of EITF No. 94-3 shall continue to apply
for an exit activity initiated under an exit plan that met the criteria of EITF
No. 94-3 prior to the adoption of SFAS 146. The effect on adoption of SFAS 146
will change on a prospective basis the timing of when restructuring charges are
recorded from a commitment date approach to when the liability is incurred.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS No.
141 requires the purchase method of accounting for business combination
initiated after June 30, 2001 and eliminates the pooling-of-interests method. We
believe that the adoption of SFAS No. 141 will not have a significant impact on
the financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets," which is effective
for fiscal years beginning after March 15, 2001. SFAS No. 142 requires, among
other things, the discontinuance of goodwill amortization. In addition, the
Standard includes provisions upon adoption for the reclassification of certain
existing recognized intangibles as goodwill, reassessment of the useful lives of
existing recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the testing for impairment of existing goodwill
and other intangibles. Upon adoption of SFAS No. 142, in our fiscal year 2003
we will cease to amortize goodwill, recorded at approximately $6.3 million at
June 30, 2002. We recorded approximately $1.3 of amortization during nine
months ended June 30, 2002, respectively. In addition, we will be required to
perform an impairment review of our goodwill balance upon the initial adoption
of SFAS No. 142. The impairment review will involve a two-step process as
follows:
19
- Step 1: We will compare the fair value of our reporting units to the
carrying value, including goodwill of each of those units. For each
reporting unit where the carrying value, including goodwill, exceeds
the unit fair value, we will move onto Step 2. If a unit's fair value
exceeds the carrying value, no further work is performed and no
impairment charge is necessary.
- Step 2: We will perform allocation of the fair value of the reporting
unit to its identifiable tangible and non-goodwill intangible assets
and liabilities. This will derive an implied fair value for the
reporting unit's goodwill. We will then compare the implied fair value
of the reporting unit's goodwill with the carrying amount of the
reporting unit's goodwill. If the carrying amount of the reporting
unit's goodwill is greater than the implied fair value of its
goodwill, an impairment loss must be recognized for the excess.
We are currently assessing the impact of SFAS No. 142 on our financial position
and results of operation.
In October 2001, the FASB issued SFAS 144 Accounting for the Impairment or
Disposal of Long-Lived Assets, which is required to be applied in fiscal years
beginning after December 15, 2001. SFAS 144 requires, among other things, the
application of one accounting model for long-lived assets that are impaired or
to be disposed of by sale. The Company believes that the adoption of SFAS 144
will not have a significant impact on its financial position or results of
operations.
In May 2000, the Emerging Issues Task Force (EITF) issued EITF Issue No. 00-14,
"Accounting for Certain Sales Incentives." EITF Issue No. 00-14 addresses the
recognition, measurement, and income statement classification for sales
incentives that a vendor voluntarily offers to customers (without charge), which
the customer can use in, or exercise as a result of, a single exchange
transaction. Sales incentives that fall within the scope of EITF Issue No.
00-14 include offers that a customer can use to receive a reduction in the price
of a product or service at the point of sale. The EITF agreed to change the
transition date for Issue No. 00-14, dictating that a company should apply this
consensus no later than the company's annual or interim financial statements for
the periods beginning after December 15, 2001. In June 2001, the EITF issued
EITF Issue No. 00-25, "Vendor Income Statement Characterization of Consideration
Paid to a Reseller of the Vendor's Products," effective for periods beginning
after December 15, 2001. EITF Issue No. 00-25 address whether consideration
from a vendor to a reseller is (a) an adjustment of the selling prices of the
vendor's products and, therefore, should be deducted from revenue when
recognized in the vendor's statement of operations or (b) a cost incurred by the
vendor for assets or services received from the reseller and, therefore, should
be included as a cost or expense when recognized in the vendor's statement of
operations. Upon application of these EITFs, financial statements for periods
presented for comparative purposes should be reclassified to comply with the
income statement display requirements under these Issues. In September of 2001,
the EITF issued EITF Issue No. 01-09, "Accounting for Consideration Given by
Vendor to Customer or a Reseller of the Vendor's Products", which is a
codification of Issues No. 00-14, No. 00-25 and No. 00-22 "Accounting for
'Points' and Certain Other Time- or Volume-Based Sales Incentive Offers and
Offers for Free Products or Services to be Delivered in the Future." We have
adopted these issues in fiscal year 2002 and during the nine months ended June
30, 2002, we recorded $42,000 000 of revenues from our inUnison(SM) services,
and an additional $180,000 were offset by certain costs incurred in association
with related business-partner arrangements.
RESULTS OF OPERATIONS
The following table shows results of operations, as a percentage of net
revenues, for the three and nine months ended June 30, 2002 and 2001:
20
Three Months Ended Nine Month Ended
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 149.0% 90.8% 109.2% 80.0%
-------- -------- -------- --------
Gross (loss) profit (49.0%) 9.2% (9.2%) 20.0%
Selling, general and administrative 72.6% 61.2% 55.9% 73.5%
Research and development 12.2% 15.82% 17.2% 11.6%
Amortization of goodwill and other
intangibles 47.8% 9.1% 39.0% 5.1%
Release of capitalized lease
obligations -- 60.4% (33.4%) 19.7%
-------- -------- -------- --------
Loss from operations (181.5%) (137.2%) (88.0%) (89.9%)
Other expense (91.3%) (116.3%) (61.2%) (44.5%)
-------- -------- -------- --------
Loss from operations before income
taxes (272.8%) (253.5%) (149.1%) (134.4%)
Provision for income tax -- 0.9% 0.2% 1.5%
-------- -------- -------- --------
Net loss (272.8%) (254.4%) (149.3%) (135.9%)
======== ======== ======== ========
Net Revenues
Our net revenues were $2.7 million and $8.5 million for the three and nine
months ended June 30, 2002, respectively, as compared to $6.1 million and $18.7
for the same period ending June 30, 2001,respectively, representing a decrease
of $3.4 million and $10.2 million or 56.0% and 54.6%, respectively. Our net
revenues for the three and nine months ended June 30, 2002 were affected by the
transition to our new business model of providing unified communications and
unified information applications in our inUnison(SM) portal in a hosted service,
recurring revenue model. The decline represents a decline in our legacy revenues
in North America occurring mainly because customers have delayed additional
purchases of legacy system in anticipation of the new inUnison(SM) product and a
decision of management to de-emphasize several legacy products, such as call
centers and proprietary voice messaging products.
Appiant NA's net revenues on a stand-alone basis were $281,400 and $1.9 million
for the three and nine months ended June 30, 2002,respectively, as compared to
$2.5 million and $7.7 million for the same periods ending June 30, 2001,
respectively. The decrease in Appiant NA net revenues came from reduced
enterprise information center product sales, as well as lower legacy system
sales within our existing customer base. Revenues for our new, hosted service
offering are being offset against the costs of acquiring new customers. The
majority of these customer acquisition costs are non-cash.
Net revenues for our Infotel subsidiary decreased to $2.4 million and $6.6
million for the three and nine months ended June 30, 2002, respectively, as
compared to $3.6 million and $11.0 million for the three and nine months ended
June 30, 2001, respectively. This decrease occurred primarily as a result of a
decrease in the sale of radio communications equipment, which were unusually
high in 2001, as well as a decline in overall revenues due to weak Singapore
economy.
Gross Margin
Our gross margin for the three and nine months ended June 30, 2002 was
($1,320,000) and ($780,000) or (49.0%) and (9.2)% of net revenues, respectively,
as compared to $565,000 and $3.7 million or 9.2% and 20.0% for the three and
nine months ended June 30, 2001, respectively.
Appiant NA's gross margin on a stand-alone basis for the three and nine months
ended June 30, 2002 was ($2.1) million and ($2.8) million or (748.6%) and
(143.6%), respectively, as compared to ($193,000) or (7.6%) and $866,000 or
11.2% for the three and nine months ended June 31, 2001, respectively. This
decrease in gross margin was due to the reduction in legacy revenues as we
execute our new business model coupled with the build up of operating costs
related to the new product.
21
Infotel's gross margin on a stand-alone basis was $787,000 and $2.0 million or
32.6% and 30.1% for the three and nine months ended June 30, 2002, respectively,
compared to $758,000 and $2.9 million or 21.1% and 26.1% for the three and nine
months ended June 30, 2001, respectively. The decrease in gross margin dollars
in 2002 was due to an economic slowdown in Asia while the increase in gross
margin in 2001 was due to an emphasis on more profitable product lines.
Research and Development
Our industry is characterized by rapid technological change and product
innovation. We have changed our business model that requires significant focus
on developing new applications to be offered in our hosted inUnison(SM) portal,
as well as integrating third party applications. We are also conducting
research and development into our own advanced speech recognition to be offered
in our portal. We believe that continued timely development of products for
both existing and new markets is necessary to remain competitive. Therefore, we
devote significant resources to programs directed at developing new and enhanced
products, as well as new applications for existing products. Our capitalized
research and development expenditures for the three and nine months ended June
30, 2002 amounted to $297,000 and $1.7 million compared to $0.6 million and $2.2
million in the three and nine months ended June 30, 2001, respectively. We have
adopted AICPA Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed and Obtained for Internal Use," ("SOP 98-1") and capitalize
our research and development costs related to software development. We began
amortizing $10.7 million of these costs on December 17, 2001 as the capitalized
software was substantially complete and ready for its intended use. We calculate
amortization using the straight-line method based on estimated useful lives of 2
to 7 years. Amortization for the quarter ended June 30, 2002 was $943,000 and
$1.8 million since we began amortizing capitalized software in December 2001.
Unamortized, capitalized costs of $7.4 million relate to those projects that are
not as yet ready for their intended use.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses ("SG&A") excluding research and
development, but including goodwill amortization and impairment charge, as a
percentage of net revenues, decreased to 120.3% and 61.6% for the three and nine
months ended June 30, 2002, respectively, as compared to 130.7% and 98.3% for
same period in 2001, respectively.
SG&A expenses for Appiant NA and Infotel on a stand-alone basis was as follows:
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ---------- -----------
Appiant NA $2,356,000 $7,365,000 $2,916,000 $16,430,000
Infotel 885,000 638,000 2,326,000 1,995,000
---------- ---------- ---------- -----------
Total SG&A Expense $3,241,000 $8,003,000 $5,242,000 $18,425,000
========== ========== ========== ===========
On a stand-alone basis, Appiant NA's SG&A decreased to $2.3 million and $2.9
million for the three and nine months ended June 30, 2002, respectively,
compared to $7.4 million and $16.4 million for the same period in 2001,
respectively. Appiant NA's SG&A increased as a percentage of Appiant NA's net
revenues to 837.3% for the three months ended June 30, 2002 and decreased to
151.5% nine months ended June 30, 2002, respectively, from 291.1% and 213.1% for
the same period in 2001, respectively, the increase for the quarter was mainly
because of the significant decrease in North American revenues and expenditures
in Sales and Marketing related to the inUnison(SM) service offering. The
decrease for the nine months ended June 30, 2002 was mainly due to a $2.8
million release of a capital lease obligation.
22
On a stand-alone basis, Infotel's SG&A increased to $885,000 and $2.3 million
from $638,000 and $2.0 million for the three and nine months ended June 30, 2002
and 2001, respectively. Infotel's SG&A increased as a percentage of Infotel's
net revenues to 36.7% and 35.3% for the three and nine months ended June 30,
2002, respectively, from 17.8% and 18.1% for the same period in 2001,
respectively, mainly because of the decrease in Infotel's revenues due to a
decrease in the sale of radio communications equipment which was unusually high
in 2001, as well as a decline in overall revenues due to weak Singapore economy.
Additionally, the goodwill amortization charges have almost doubled, compared to
the same periods last year.
Amortization of goodwill and other intangibles
Our amortization of goodwill and other intangibles for the three and nine months
ended June 30, 2002 increased to $1.3 million and $3.3 million or 47.8% and
39.0% of net revenue, respectively, from $558,000 and $960,000 or 9.1% and 5.1%
of net revenue for the three and nine months ended June 30, 2001, respectively.
The increase is primarily due to $867,000 and $2.6 million of amortization for
the three and nine months ended June 30, 2002, respectively, in relation to our
acquisition of Quaartz, Inc. in 2001.
Interest income and other
Our interest income and other decreased to $408,000 or 15.2% of net revenues for
the three months ended June 30, 2002 from $456,000 or 7.4% for the three and
nine months ended June 30, 2001. Our interest income and other increased to
$979,000 or 11.5% of net revenues in the nine months ended June 30, 2002 from
$594,000 or 3.2% for the nine months ended June 30, 2001. These changes in
interest income and other results primarily from the remeasurement of warrants
with registration rights and concessions from our creditors.
Interest expense
Our interest expense decreased to $2.9 million and $6.2 million or 106.5% and
72.7% of net revenues in the three and nine months ended June 30, 2002,
respectively, from $7.6 million and $8.9 million or 123.7% and 47.6% in the
three and nine months ended June 30, 2001, respectively. The decrease in
interest expense resulted from the recording of $7.5 million of deemed interest
related to warrants and beneficial conversion charges and the accretion of
discount on the issuance of convertible promissory notes payable in the quarter
ended June 30, 2001, deemed interest for the three and nine months ended June
30, 2002 were $201 million and 4.8 million, respectively.
Income taxes
We currently have approximately $53.7 million in United States federal net
operating loss carry-forwards. The use of certain of these net operating losses
are subject to an annual limitation of $250,000. At June 30, 2002, we provided a
full valuation allowance against our United States deferred tax asset. We
believe that since sufficient uncertainty exists regarding the realization of
the deferred tax asset, a full valuation allowance is required. All income tax
expense incurred for the nine months ended June 30, 2002 relates to our Infotel
subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our capital requirements through a combination
of sales of equity securities, convertible and other debt offerings, bank
borrowings, asset-based secured financing, structured financing and cash
generated from operations.
During the nine months ended June 30, 2002 net cash used in operating activities
was $3.9 million. Net cash used to fund operating activities reflects our net
loss, net of non-cash charges, offset by changes in operating assets and
liabilities. Net cash provided by investing and financing activities totaled
$5.1 million consisting of proceeds from the issuance of convertible notes,
which were offset by purchases of property and equipment and development of
software assets.
Future payments due under debt and lease obligations as of June 30:
23
Convertible Non-Cancelable Capital
Promissory Promissory Operating Lease
Fiscal Year Notes Payable Notes Payable Leases Obligations Total
- ----------- -------------- -------------- --------------- ------------ -----------
2002 $ 4,265,000 $ 6,000,000 $ 194,000 $ 162,000 $10,621,000
2003 4,235,000 -- 420,000 363,000 5,018,000
2004 -- -- 300,000 141,000 441,000
2005 -- -- 288,000 -- 288,000
2006 -- -- 273,000 -- 273,000
Thereafter -- -- 333,000 -- 333,000
-------------- -------------- --------------- ------------ -----------
$ 8,500,000 $ 6,000,000 $ 1,806,000 $ 666,000 $16,974,000
============== ============== =============== ============ ===========
Our principal sources of liquidity at June 30, 2002 were as follows.
In October 2001, we issued a warrant to purchase up to 59,524 shares of common
stock to Lucien Thomas Baldwin III, as set forth in a Promissory Note and
secured by the Company's Voice Plus Accounts Receivables, to raise operating
capital for us in a transaction exempt from registration under Section 4(2). The
warrant is immediately exercisable and may be exercised until October 31, 2006.
The exercise price per share of this warrant is $1.68.
In October 2001, we issued a warrant to purchase up to 59,524 of common stock to
Douglas Zorn, as set forth in a Promissory Note and secured by the Company's
Voice Plus Accounts Receivables, to raise operating capital for us in a
transaction exempt from registration under Section 4(2). The warrant is
immediately exercisable and may be exercised until October 31, 2006. The
exercise price per share of this warrant is $1.68.
In October 2001, we issued a warrant to purchase up to 59,524 shares of common
stock to Jim Gillespie, as set forth in a Promissory Note and secured by the
Company's Voice Plus Accounts Receivables, to raise operating capital for us in
a transaction exempt from registration under Section 4(2). The warrant is
immediately exercisable and may be exercised until October 31, 2006. The
exercise price per share of this warrant is $1.68.
In November 2001, we issued a warrant to purchase up to 150,000 shares of common
stock to Lucien Thomas Baldwin III, as set forth in a Promissory Note and
secured by the VoiceTel and Infotel assets, to raise operating capital for us in
a transaction exempt from registration under Section 4(2). The warrant is
immediately exercisable and may be exercised until November 28, 2006. The
exercise price per share of this warrant is $1.35.
In November 2001, we issued a warrant to purchase up to 77,519 shares of common
stock to Robert J. Schmier, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until November 28, 2006. The exercise price per share of this
warrant is $1.29.
In November 2001, we issued a warrant to purchase up to 143,885 shares of common
stock to Robert Gilman, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until November 29, 2006. The exercise price per share of this
warrant is $1.39.
In December 2001, we issued a warrant to purchase up to 38,462 shares of common
stock to Dr. Gabor Rubanyi, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until November 29, 2006. The exercise price per share of this
warrant is $1.30.
In December 2001, we issued a warrant to purchase up to 19,084 shares of common
stock to Dr. Robert L. Glass, as set forth in a Promissory Note and secured by
the Infotel assets, to raise operating capital for us in a transaction exempt
from registration under Section 4(2). The warrant is immediately exercisable and
may be exercised until December 7, 2006. The exercise price per share of this
warrant is $1.31.
In December 2001, we issued a warrant to purchase up to 33,333 shares of common
stock to Jeremy Judge, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until December 12, 2006. The exercise price per share of this
warrant is $1.20.
24
In December 2001, we issued a warrant to purchase up to 83,333 shares of common
stock to Wayne Saker, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
exercised until December 12, 2006. The exercise price per share of this warrant
is $1.20.
In December 2001, we issued a warrant to purchase up to 37,500 shares of common
stock to Chris Eickman, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
exercised until December 12, 2006. The exercise price per share of this warrant
is $1.20.
In December 2001, we issued a warrant to purchase up to 42,373 shares of common
stock to Dr. Harry Mittelman, as set forth in a Promissory Note and secured by
the Infotel assets, to raise operating capital for us in a transaction exempt
from registration under Section 4(2). The warrant is immediately exercisable and
may be exercised until December 20, 2006. The exercise price per share of this
warrant is $1.77.
In December 2001, we issued a warrant to purchase up to 56,497 of common stock
to Robert Gilman, as set forth in a Promissory Note and secured by the Infotel
assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until December 20, 2006. The exercise price per share of this
warrant is $1.77.
In December 2001, we issued a warrant to purchase up to 56,497 shares of common
stock to Wayne Saker, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until December 20, 2006. The exercise price per share of this
warrant is $1.77.
In December 2001, we issued a warrant to purchase up to 112,994 warrants to
purchase shares of common stock to Robert Gilman, as set forth in a Promissory
Note and secured by the Infotel assets, to raise operating capital for us in a
transaction exempt from registration under Section 4(2). The warrant is
immediately exercisable and may be exercised until December 20, 2006. The
exercise price per share of this warrant is $1.77.
In January 2002, we issued a warrant to purchase up to 301,205 shares of common
stock to Lucien Thomas Baldwin III, as set forth in a Promissory Note and
secured by the Infotel assets, to raise operating capital for us in a
transaction exempt from registration under Section 4(2). The warrant is
immediately exercisable and may be exercised until January 17, 2007. The
exercise price per share of this warrant is $1.66.
In January 2002, we issued a warrant to purchase up to 277,778 shares of common
stock to Lucien Thomas Baldwin III, as set forth in a Promissory Note and
secured by the Infotel assets, to raise operating capital for us in a
transaction exempt from registration under Section 4(2). The warrant is
immediately exercisable and may be exercised until January 24, 2007. The
exercise price per share of this warrant is $1.80.
In February 2002, we issued a warrant to purchase up to 214,286 shares of common
stock to Lucien Thomas Baldwin III, as set forth in a Promissory Note and
secured by the Infotel assets, to raise operating capital for us in a
transaction exempt from registration under Section 4(2). The warrant is
immediately exercisable and may be exercised until February 8, 2007. The
exercise price per share of this warrant is $1.40.
In February 2002, we issued a warrant to purchase up to 4,086 shares of common
stock to Paul Teck Cheong Lim, as set forth in a Promissory Note and secured by
the Infotel assets, to raise operating capital for us in a transaction exempt
from registration under Section 4(2). The warrant is immediately exercisable and
may be exercised until February 8, 2007. The exercise price per share of this
warrant is $1.40.
In February 2002, we issued a warrant to purchase up to 35,714 shares of common
stock to Esmond T. Goei, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until February 8, 2007. The exercise price per share of this
warrant is $1.40.
In February 2002, we issued a warrant to purchase up to 74,143 shares of common
stock to Ang Kong Hua, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until February 8, 2007. The exercise price per share of this
warrant is $1.40.
25
In February 2002, we issued a warrant to purchase up to 14,003 shares of common
stock to Koh Kwee Ngee, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until February 8, 2007. The exercise price per share of this
warrant is $1.40.
In February 2002, we issued a warrant to purchase up to 9,787 shares of common
stock to Lee Thian Soon, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until February 8, 2007. The exercise price per share of this
warrant is $1.40.
In February 2002, we issued a warrant to purchase up to 9,741 shares of common
stock to Keng Tee Low, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until February 8, 2007. The exercise price per share of this
warrant is $1.40.
In February 2002, we issued a warrant to purchase up to 35,714 shares of common
stock to Ming Jen Hsu, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until February 8, 2007. The exercise price per share of this
warrant is $1.40.
In February 2002, we issued a warrant to purchase up to 35,714 shares of common
stock to Lee Gim Teik, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until February 8, 2007. The exercise price per share of this
warrant is $1.40.
In February 2002, we issued a warrant to purchase up to 63,071 shares of common
stock to NatSteel Technology Investment Pte Ltd., as set forth in a Promissory
Note and secured by the Infotel assets, to raise operating capital for us in a
transaction exempt from registration under Section 4(2). The warrant is
immediately exercisable and may be exercised until February 8, 2007. The
exercise price per share of this warrant is $1.40.
In February 2002, we issued a warrant to purchase up to 4,086 shares of common
stock to Phillip Securities, as set forth in a Promissory Note and secured by
the Infotel assets, to raise operating capital for us in a transaction exempt
from registration under Section 4(2). The warrant is immediately exercisable and
may be exercised until February 8, 2007. The exercise price per share of this
warrant is $1.40.
In March 2002, we issued a warrant to purchase up to 64,935 shares of common
stock to Douglas Zorn, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until March 8, 2007. The exercise price per share of this warrant
is $1.54.
In March 2002, we issued a warrant to purchase up to 37,879 shares of common
stock to Allen F. Jacobson, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until March 22, 2007. The exercise price per share of this warrant
is $1.32.
In March 2002, we issued a warrant to purchase up to 37.879 shares of common
stock to Dr. Gabor Rubanyi, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until March 22, 2007. The exercise price per share of this warrant
is $1.32.
In March 2002, we issued a warrant to purchase up to 37,879 shares of common
stock to Robert J. Schmier, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until March 22, 2007. The exercise price per share of this warrant
is $1.32.
26
In March 2002, we issued a warrant to purchase up to 18,939 shares of common
stock to Edward Silberman, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until March 22, 2007. The exercise price per share of this warrant
is $1.32.
In March 2002, we issued a warrant to purchase up to 37,879 shares of common
stock to Douglas Zorn, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until March 22, 2007. The exercise price per share of this warrant
is $1.32.
In April 2002, we issued two warrants to purchase up to 42,268 shares of common
stock to Douglas Zorn, as set forth in two Promissory Notes and secured by Voice
Plus Accounts Receivables and the Infotel assets, to raise operating capital for
us in a transaction exempt from registration under Section 4(2). The warrants
are immediately exercisable and may be exercised until April 26, 2007. The
exercise price per share of this warrant is $1.25.
In April 2002, we issued warrants to purchase up to 1,556,612 shares of common
stock to an investor group, as set forth in a Promissory Note and secured by the
all the assets of Appiant, to raise operating capital for us in a transaction
exempt from registration under Section 4(2). The warrants is immediately
exercisable and may be exercised until April 22, 2009. The exercise price per
share of this warrant is $1.33.
In May 2002, we issued a warrant to purchase up to 83,333 shares of common stock
to Douglas Zorn, as set forth in a Promissory Note and secured by the Voice Plus
Accounts Receivables and Infotel assets, to raise operating capital for us in a
transaction exempt from registration under Section 4(2). The warrant is
immediately exercisable and may be exercised until May 22, 2007. The exercise
price per share of this warrant is $1.00.
Our capital requirements in the next 12 months will mainly result from hardware
and software purchases and professional services to scale our hosted services,
as well as costs to develop and execute customer subscriber acquisition
programs, marketing and advertising. We anticipate financing hardware, software
and related consulting services through structured financing from our vendors
and partners. Other financing requirements for customer and subscriber
acquisition marketing will need to be financed through equity and debt offerings
and cash generated from operations. We will be required to raise additional
funds during that period, and we may need to raise additional capital in the
future. Additional capital may not be available at all, or may only be available
on terms unfavorable to us. Any additional issuance of equity or equity-related
securities will be dilutive to our stockholders.
ITEM 3. RISK FACTORS; FACTORS THAT MAY AFFECT OPERATING RESULTS
The following risk factors may cause actual results to differ materially from
those in any forward-looking statements contained in the MD&A or elsewhere in
this report or made in the future by us or our representatives. Such
forward-looking statements involve known risks, unknown risks and uncertainties
and other factors which may cause the actual results, performance or
achievements expressed or implied by such forward-looking statements to differ
significantly from such forward-looking statements.
WE HAVE CURRENTLY RECORDED A NET LOSS, WE HAVE A HISTORY OF NET LOSSES AND WE
CANNOT BE CERTAIN OF FUTURE PROFITABILITY.
The Company recorded a net loss for the nine months ended June 30, 2002 and a
net loss of $29.9 million on net revenues of $21.7 million for our fiscal year
ended September 30, 2001. We also sustained significant losses for the fiscal
years ended September 30, 2000 and 1999. Although we anticipate a net operating
profit for our fiscal year ended September 30, 2002, operating losses in the
quarters could occur.
We anticipate continuing to incur significant sales and marketing, product
development and general and administrative expenses and, as a result, we will
need to generate significantly higher revenue to sustain profitability as we
build our organization for our new inUnison(SM) business model. In addition, we
have begun amortizing capitalized software and other assets that we have
purchased or developed for our new inUnison(SM) business model in our fiscal
year 2002. We cannot be certain that we will continue to realize sufficient
revenue to return to or sustain profitability.
27
Our financial condition and results of operations may be adversely affected if
we fail to produce positive operating results. This could also:
- adversely affect the future value of our common stock;
- adversely affect our ability to obtain debt or equity financing on
- acceptable terms to finance our operations; and
- prevent us from engaging in acquisition activity.
OUR EQUITY AND DEBT FUNDING SOURCES MAY BE INADEQUATE TO FINANCE FUTURE
ACQUISITIONS.
The acquisition of complementary businesses, technologies and products has been
and may continue to be key to our business strategy. Our ability to engage in
acquisition activities depends on us obtaining debt or equity financing, neither
of which may be available or, if available, may not be on terms acceptable to
us. Our inability to obtain this financing may prevent us from executing
successfully our acquisition strategy.
Further, both debt and equity financing involve risks. Debt financing may
require us to pay significant amounts of interest and principal payments,
reducing our cash resources we need to expand or transform our existing
businesses. Equity financing may be dilutive to our stockholders' interest in
our assets and earnings.
A NUMBER OF FACTORS COULD CAUSE OUR FINANCIAL RESULTS TO BE WORSE THAN EXPECTED,
RESULTING IN A DECLINE IN OUR STOCK PRICE.
The company has experienced several cost reductions and is currently controlling
costs and concentrating on early customers for its inUnison(SM) services. To
add new customers and to increase revenues significantly we must increase
significantly our operating expenses to expand our sales and marketing
activities, broaden our customer support capabilities, develop new distribution
channels, fund increased levels of research and development, and build our
operational infrastructure. Our operating expenses are based on anticipated
revenue trends and a high percentage of our expenses are fixed in the short
term. As a result, any delay in generating or recognizing revenue could cause
our quarterly operating results to be below the expectations of public market
analysts or investors, if any, which could cause the price of our common stock
to fall further.
We may experience a delay in generating or recognizing revenue because of a
number of reasons. We may experience delays in completing our production
environment for our new-hosted inUnison(SM) unified communications and unified
information business. We are dependent on our business partners and vendors to
supply us with hardware, software, consulting services, hosting, and other
support to launch and operate our new business.
Our quarterly revenue and operating results have varied significantly in the
past and may vary significantly in the future due to a number of factors,
including:
- Fluctuations in demand for our products and services;
- Unexpected product returns or the cancellation or rescheduling of
significant orders;
- Our ability to develop, introduce, ship and support new products and
product enhancements, and to project manage orders and installations;
- Announcement and new product introductions by our competitors;
- Our ability to develop and support customer relationships with service
providers and other potential large customers;
- Our ability to achieve required cost reductions;
- Our ability to obtain sufficient supplies of sole or limited sourced
third party products;
- Unfavorable changes in the prices of the products and components we
purchase;
- Our ability to attain and maintain production volumes and quality
levels for our products;
- Our ability to retain key employees;
- The mix of products and services sold;
- Costs relating to possible acquisitions and integration of
technologies or businesses; and
- The effect of amortization of goodwill and purchased intangibles
resulting from existing or future acquisitions.
28
Due to the foregoing factors, we believe that period-to-period comparisons of
our operating results should not be relied upon as an indicator of our future
performance.
OUR NEW PRODUCTS AND STRATEGIC PARTNERING RELATIONSHIPS MAY NOT BE SUCCESSFUL.
We have launched our inUnison(SM) UC/UI product applications that are designed
to provide our customers with hosted unifying communications and unifying
information solutions. While we believe that our inUnison(SM) applications will
provide our customers with scaled, carrier grade IP-based solutions, we cannot
assure you that our customers will accept or adopt them on a large scale. Our
integration efforts with other third party software has and could continue to
result in product delays and cost overruns. We cannot assure you that other
software vendors whose software products we license or incorporate into our
inUnison(SM) portal will continue to support their products. If these vendors
discontinue their support, our business would be adversely affected.
Further, we expect to continue incur substantial expenditures for equipment,
systems, research and development, consultants and personnel to implement this
new business model. As a result, our operating results and cash flows may be
adversely affected. Significant working capital will be needed by the Company to
meet its business plan. Although we believe that this new product offering will
ultimately result in profitable operations, there can be no assurance that the
implementation of our new business model will be successful.
CONTINUED RAPID GROWTH WILL STRAIN OUR OPERATIONS AND REQUIRE US TO INCUR COSTS
TO UPGRADE OUR INFRASTRUCTURE.
With the development and launch of our new-inUnison(SM) business model, we may
experience periods of rapid growth which can place significant strain on our
resources. Unless we manage this growth effectively, we may make mistakes in
operating our business such as inaccurate sales forecasting, incorrect
production planning, managing headcount, or inaccurate financial reporting,
either or all of which may result in unanticipated fluctuations in our operating
results and adverse cash flow and financing requirements. We expect our
anticipated growth and expansion to strain our management, operational and
financial resources. Our management team has had limited experience managing
such rapidly growing companies on a public or private basis. To accommodate this
anticipated growth, we will be required among other things to:
- Improve existing and implement new operations, information and
financial systems, procedures and controls;
- Recruit, train, manage, and retain additional qualified personnel
including sales, marketing, research and development personnel;
- Manage multiple relationships with our customers, our customers'
customers, our strategic partners, suppliers and other third parties;
and
- Acquire additional office space and remote offices in numerous
locations within and without the United States that will require space
planning and infrastructure to support these additional locations.
We may not be able to install adequate control systems in an efficient and
timely manner, and our current or planned financial, operational and personnel
systems, procedures and controls may not be adequate to support our future
operations. We will need to install various new management information system
tools, processes and procedures, continue to modify and improve our existing
information technology infrastructure, and invest in training our people to meet
the increasing needs associated with our growth. The difficulties associated
with installing and implementing these new systems, procedures and controls may
place a significant burden on our management and our internal resources. In
addition, as we grow internationally, we will have to expand our worldwide
operations and enhance our communications infrastructure. Any delay in the
implementation of such new or enhanced systems, procedures or controls, or any
disruption in the transition to such new or enhanced systems, procedures or
controls, could adversely affect our ability to accurately forecast sales
demand, manage our hosted applications, and record and report financial and
management information on a timely and accurate basis.
29
THE UC/UI MARKET IS YOUNG AND UNTESTED. WE HAVE NOT COMMENCED PROVIDING UC/UI
SERVICES IN A HOSTED SERVICE MODEL TO OUR CUSTOMERS UNDER OUR NEW BUSINESS
MODEL.
The UC/UI market is in its infancy, and indeed we are one of the first companies
in unified information. Despite very positive and upbeat forecasts by a number
of leading industry analysts of the market potential for unified communications
and unified information applications, we have not yet commenced providing our
applications to our customers in a hosted service model. There is no assurance
that our UC/UI applications will be adopted or, if adopted, that they will be
successful in the marketplace. There is no assurance that our business model of
offering our applications in a hosted, recurring revenue model will be
successful. We are implementing a new business plan, and to the extent that we
fail to execute it successfully, compete with new entrants to this market space,
or otherwise are unable to build the complex network infrastructure necessary to
provide such services to our customers, our results and cash flows will be
negatively impacted and we could face serious needs for additional financing.
WE PRESENTLY RELY UPON LEGACY VOICEMAIL SYSTEMS AND ENTERPRISE INFORMATION
REVENUES.
For our nine months ended June 30, 2002, legacy voicemail systems revenues
(which includes customer premises equipment revenues) accounted for 100% of our
revenues. Revenue from the sales of enterprise information and call center
products accounted for approximately 63.3% of our North America revenue for the
fiscal year ended September 30, 2001. The Company discontinued its enterprise
information and call center products during fiscal year 2001 and did not record
revenues from these products after December 31, 2001. The projected decline in
our legacy business will have an adverse effect on our revenues and financial
performance. Management believes that future revenues from legacy voicemail
systems will steadily decline due to the introduction of inUnison(SM). Our
ability to transition our product sales to our UC/UI hosted, recurring revenue
model will be critical to our future growth.
THE SALES CYCLE FOR OUR NEW HOSTED APPLICATIONS MAY BE LONG, AND WE MAY INCUR
SUBSTANTIAL NON-RECOVERABLE EXPENSES OR DEVOTE SIGNIFICANT RESOURCES TO SALES
THAT DO NOT OCCUR OR OCCUR WHEN ANTICIPATED.
Although, we have over ten thousand subscribers on our hosted inUnison service,
the timing of significant recurring revenues from our hosted inUnison(SM)
unified communications and unified information applications is difficult to
predict because the unified communications and unified information market is
relatively new. Our success will depend in large measure on market demand and
acceptance of these applications and technologies, our ability to create a brand
for our applications and technologies, our ability to target and sell customers
and to drive demand for our applications to their customers, our ability to
develop pricing models and to set pricing for our applications, and our ability
to build market share. We plan initially to provide our hosted applications to
service providers such as wireless service providers (WSPs), internet service
providers (ISPs), application service providers (ASPs) and competitive local
exchange carriers (CLECs). We will need to create sales tools, service provider
subscriber use models, methodologies and programs to work with our service
provider customers to help devise cooperative advertising and sales campaigns to
market and sell our inUnison(SM) applications to their customer. The sales
process and sale cycle may vary substantially from customer to customer, and our
ability to forecast accurately the sale opportunity for any customer, or to
drive adoption of our inUnison(SM) applications in our customers' subscribers
may be limited. There is no assurance that we will be successful in selling our
applications or achieving targeted subscriber adoption, and our operating and
cash flow requirements will be negatively impacted should we fail to achieve our
targets within the time frames that we forecast.
Our customers may require various testing and test markets of our hosted
applications before they decide to contract with us to provide our hosted
inUnison(SM) applications to their subscribers. We may incur substantial sales
and marketing and operational expenses and expend significant management effort
to carry out these tests. Consequently, if sales forecasted from a specific
customer for a particular quarter are not realized within the time frames that
we have forecasted, we may be unable to compensate for the shortfall, which
could harm our operating and cash flow results.
WE RELY UPON OUR DISTRIBUTOR AND SUPPLIER RELATIONSHIPS.
30
We are dependent on our business partners and vendors to supply us with
hardware, software, consulting services, hosting, and other support to launch
and operate our new-hosted inUnison(SM) unified communications and unified
information business. Although we have agreements with a number of services
providers, we have significant reliance on three suppliers. Equinix, Inc. our
hosting center partner for our inUnison(SM) unified communications and unified
information systems. Qwest Communications which supplies our inbound voice
circuits. Genuity Solutions, Inc. which supplies our outbound voice over IP
circuits. Any disruption in our relationships with these suppliers would have a
significant adverse effect on our business for an indeterminate period of time
until new supplier relationships could be established.
Some of our current suppliers may currently or, at some point, compete with us
as we roll out our inUnison(SM) UC/UI applications. Any potential competition
from our suppliers could have a material negative impact on our business and
financial performance.
WE ARE DEPENDENT UPON SIGNIFICANT CUSTOMERS.
We have serviced approximately hundreds of customers worldwide. However, the
revenues from our four largest customers accounted for approximately 14.7%,
13.9%, 9.1% and 7.3% of total revenues during the nine months ended June 30,
2002. No other customer accounted for over 5% of total revenues during this
period. This concentration of revenue has resulted in additional risk to our
operations, and any disruption of orders from our largest customers would
adversely affect on our results of operations and financial condition.
Our Singapore subsidiary, Infotel Technologies (Pte) Ltd., offers a wide range
of infrastructure communications equipment products. It has an established
business-providing test measuring instrumentation and testing environments, and
is the regional distributor and test and repair center for Rohde & Schwarz test
instruments. Infotel is also a networking service provider, and manages data
networks for various customers. Infotel's financial performance depends in part
on a steady stream of revenues relating to the services performed for Rohde
&Schwarz test instruments. Infotel's revenues constituted approximately 77% of
our total revenues for the nine months ended June 30, 2002. Any material change
in our relationship with our manufacturers, including but not limited to Rohde &
Schwarz, would materially adversely affect our results of operations and
financial condition.
OUR MARKET IS HIGHLY COMPETITIVE, AND IF WE DO NOT COMPETE EFFECTIVELY, WE MAY
SUFFER PRICE REDUCTIONS, REDUCED GROSS MARGINS AND LOSS OF MARKET SHARE.
With the launch of our inUnison(SM) UC/UI hosted applications, we anticipate a
decline in our legacy business revenues and related gross margins as we focus on
our UC/UI business. The Company has indeed discontinued operations or disposed
of all its legacy businesses as of June 30, 2002. Therefore, any delays in the
anticipated launch of our inUnison(SM) business plan, coupled with a decline in
our legacy business, would have a significant adverse impact on our financial
performance and financing requirements.
Infotel competes against several large companies in Singapore that are better
capitalized. Although Infotel has in the past managed to compete successfully
against these larger companies on the basis of its engineering, systems and
product management expertise, no assurances can be given that this expertise
will allow Infotel to compete effectively with these larger companies in the
future. Further, various large manufacturers headquartered outside of Singapore
have established their own branch offices in Singapore and also compete with
Infotel.
WE RELY HEAVILY ON OUR STRATEGIC PARTNERS IN OUR NEW BUSINESS MODEL, AND WITHOUT
SUPPORT FROM OUR PARTNERS OUR BUSINESS COULD SUFFER.
We have built significant, valuable strategic partnering relationships with a
number of partners including Cisco Systems, and these partnering relationships
are important to our success. In the case of CISCO, they have committed to
introducing customers to us. Hewlett-Packard also was an important strategic
partner that was to assist us in designing, implementing and operating our
backend solution to provide our UC/UI applications in a hosted, carrier grade
environment. Hewlett-Packard was to provide consulting services in the design,
build out and operation of our backend architecture. We were to host our
applications in their data centers and to provide various levels of customer
support. The deterioration of our relationships with Hewlett-Packard during
fiscal 2001 had a material adverse affect on our UC/UI business and financial
performance. While we believe that our partnering relationships with CISCO and
other third parties are strong, we cannot assure you that these relationships
will continue or that they will have a positive impact on our success.
31
OUR REVENUES WILL LIKELY DECLINE IF WE DO NOT DEVELOP AND INTEGRATE THE
COMPANIES WE ACQUIRE.
We have in the past pursued, and may continue to pursue, acquisition
opportunities. Acquisitions involve a number of special risks, including, but
not limited to:
- adverse short-term effects on our operating results;
- the disruption of our ongoing business;
- the risk of reduced management attention to existing operations;
- our dependence on the retention, hiring and training of key personnel
and the potential risk of loss of such personnel;
- our potential inability to integrate successfully the personnel,
operations, technology and products of acquired companies;
- unanticipated problems or unknown legal liabilities; and
- adverse tax or financial consequences.
Two of our prior acquisitions, namely the acquisition of Voice Plus (now known
as Appiant Technologies North America, Inc.) and Advantis Network & Systems Sdn
Bhd, a Malaysian company, in the past yielded operating results that were
significantly lower than expected. In fact, the poor performance of Advantis led
to its divestiture less than one year after we acquired the company. The
de-emphasizing of our US legacy business has resulted in the disposal of that
business in the June 30, 2002 quarter.
The legacy business of Triad Marketing has declined as we have focused the
people and technologies of the Triad business on our new inUnison(SM) UC/UI
business and we discontinued its legacy operations several years ago.
Accordingly, no assurances can be given that the future performance of our
subsidiaries will be commensurate with the consideration paid to acquire these
companies. If we fail to establish the needed controls to manage growth
effectively, our operating results, cash flows and overall financial condition
will be adversely affected.
OUR INTERNATIONAL OPERATIONS INVOLVE RISKS THAT MAY ADVERSELY AFFECT OUR
OPERATING RESULTS.
Infotel, our Singapore subsidiary, accounted for approximately 72% of our
revenues for the nine months ended June 30, 2002. Infotel accounted for
approximately 45% of our revenues for the fiscal year ended September 30, 2001.
There are risks associated with our international operations, including, but not
limited to:
- our dependence on members of management of Infotel and the risk of
loss of customers in the event of the departure of key personnel;
- unexpected changes in or impositions of legislative or regulatory
requirements;
- potentially adverse taxes and tax consequences;
- the burdens of complying with a variety of foreign laws;
- political, social and economic instability;
- changes in diplomatic and trade relationships; and
- foreign exchange and translation risks.
Any one or more of these factors could negatively affect the performance of
Infotel and result in a material adverse change in our business, results of
operations and financial condition.
We anticipate that the market for our inUnison(SM) UC/UI business is global. We
anticipate that we will be expanding our business operations for our UC/UI
applications outside the United States, and project that we will launch our
UC/UI business in Asia from our existing Singapore operations in the second
quarter of our fiscal year 2002. However, we do not yet have established
operations for our UC/UI applications outside of the United States, and our
business could suffer material adverse results if we cannot build an
international organization to launch our UC/UI applications outside of the
United States in time to meet market demand or alternative solutions or
standards.
32
OUR STOCK PRICE COULD EXPERIENCE PRICE AND VOLUME FLUCTUATIONS.
The markets for securities such as our common stock historically have
experienced extreme price and volume fluctuations. Factors that may adversely
affect the market price of our common stock include, but are not limited to, the
following:
- new product developments and our ability to innovate, develop and
deliver on schedule our inUnison(SM) UC/UI applications;
- technological and other changes in the voice-messaging, unified
communications, and unified information;
- fluctuations in the financial markets;
- general economic conditions;
- competition; and
- quarterly variations in our results of operations.
OUR MANAGEMENT TEAM IS CRUCIAL TO OUR SUCCESS.
Our business depends heavily upon the services of its executives and certain key
personnel, including Douglas S. Zorn, our President and Chief Executive Officer.
Management changes often have a disruptive impact on businesses and can lead to
the loss of key employees because of the uncertainty inherent in change. Within
the last several years, we had significant changes in our key personnel. We
cannot be certain that we will be successful in attracting and retaining key
personnel worldwide - particularly in the Silicon Valley, greater San Francisco
Bay and San Diego areas where we operate - as the employment markets there are
intensely competitive. The loss of the services of any one or more of such key
personnel, if not replaced, or the inability to attract such key personnel,
could harm our business. While hiring efforts are underway to fill the vacancies
created by the departure of other key employees, there is no assurance that
these posts will be filled in the near future. The loss of these or other key
employees could have a material adverse impact on our operations. Furthermore,
the recent changes in management may not be adequate to sustain our
profitability or to meet our future growth targets.
FAILURE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS WILL HARM OUR
ABILITY TO COMPETE.
We have a number trademarks and copyrights, and while we are in the process of
filing for trademark and patent protection on selected product names,
technologies and processes which we have developed, we currently rely and have
relied on general common law and confidentiality and non-disclosure agreements
with our key employees to protect our trade secrets. We also have recently
applied for trademark protection for the names Appiant Technologies and
inUnison. Our success depends on our ability to protect our intellectual
property rights. Our efforts to protect our intellectual property may not be
sufficient against unauthorized third party copying or use or the application of
reverse engineering, and existing laws afford only limited protection. In
addition, existing laws may change in a manner that adversely affects our
proprietary rights. Furthermore, policing the unauthorized use of our product is
difficult, and expensive litigation may be necessary in the future to enforce
our intellectual property rights.
OUR PRODUCTS COULD INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS,
RESULTING IN COSTLY LITIGATION AND THE LOSS OF SIGNIFICANT RIGHTS.
We may be subject to legal proceedings and claims for alleged infringement of
proprietary rights of others, particularly as the number of products and
competitors in our industry grow and functionalities of products overlap. This
risk may be higher in a new market in which a large number of patent
applications have been filed but are not yet publicly disclosed. We have limited
ability to determine which patents our products may infringe and to take
measures to avoid infringement. Any litigation could result in substantial costs
and diversion of management's attention and resources. Further, parties making
infringement claims against us may be able to obtain injunctive or other
equitable relief, which could prevent us from selling our products or require us
to enter into royalty or license agreements which are not advantageous to us.
IF WE FAIL TO ADEQUATELY RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR EXISTING
PRODUCTS WILL BECOME OBSOLETE OR UNMARKETABLE.
33
Advances in technology could render our products and applications obsolete and
unmarketable. We believe that to succeed we must enhance our existing software
products and underlying technologies, develop new products and technologies on a
timely basis, and satisfy the increasingly sophisticated requirements of our
customers. We may not respond successfully to technological change, evolving
industry standards or customer requirements. If we are unable to respond
adequately to these changes, our revenues could decline. In connection with the
introduction of new products and enhancements, we have in the past experienced
development delays and unfavorable development cost variances that are not
unusual in the software industry. To date, these delays have not had a material
impact on our revenues. If new releases or products are delayed or do not
achieve broad market acceptance, we could experience a delay or loss of revenues
and customer dissatisfaction.
IF OUR SOFTWARE CONTAINS DEFECTS, WE COULD LOSE CUSTOMERS AND REVENUES.
Software applications that are as complex as ours often contain unknown and
undetected errors or performance problems. Many defects are frequently found
during the period immediately following the introduction of new software or
enhancements to existing software. Furthermore, software which we may license
from third parties for inclusion in our inUnison(SM) portal may also have
undetected errors or may require significant integration, testing or
re-engineering work to operate properly and as represented to our customers.
Although we attempt to resolve all errors that we believe would be considered
serious by our customers, both our software and any third party software that we
license may not be error-free. Undetected errors or performance problems may be
discovered in the future, and errors that were considered minor by us may be
considered serious by our customers. This could result in lost revenues or
delays in customer acceptance, and would be detrimental to our reputation, which
could harm our business.
FLUCTUATIONS IN OPERATING RESULTS COULD CONTINUE IN THE FUTURE.
Our operating results may vary from period to period as a result of the length
of our sales cycle, purchasing patterns of potential customers, the timing of
the introduction of new products, software applications and product enhancements
by us and our competitors, technological factors, variations in sales by
distribution channels, timing of stocking orders by resellers, competitive
pricing, and generally nonrecurring system sales. For our legacy business, sales
order cycles range generally from one to twelve months, depending on the
customer, the type of solution being sold, and whether we will perform
installation, integration and customization services. The period from the
execution of a purchase order until delivery of system components to us,
assembly, configuration, testing and shipment, may range from approximately one
to several months. These factors may cause significant fluctuations in operating
results in the future. The sales order cycle for our inUnison(SM) UC/UI
applications in a hosted services model can only be projected at this time as we
are presently negotiating our first contracts with prospective customers. To the
extent that we do not sign up customers to our inUnison(SM) UC/UI applications
according to our plan, our financial performance and results from operations
could suffer.
WE NEED SIGNIFICANT CAPITAL TO OPERATE OUR BUSINESS AND MAY REQUIRE ADDITIONAL
FINANCING. IF WE CANNOT OBTAIN SUCH ADDITIONAL FINANCING, WE MAY NOT BE ABLE TO
CONTINUE OUR OPERATIONS.
We need significant capital to design, develop and commercialize our products.
Currently available funds may be insufficient to fund operations. We may be
required to seek additional financing sooner than currently anticipated or maybe
required to curtail our activities. Based on our past financial performance,
coupled with our return to incurring operating losses with our transition to our
new business model, our ability to obtain conventional credit has been
substantially limited. Our ability to raise capital may also be limited or, if
available, be very costly and possibly dilutive to our shareholders.
CERTAIN PROVISIONS OF OUR CHARTER AND DELAWARE LAW MAY HAVE ANTI-TAKEOVER
EFFECTS.
The terms of our Certificate of Incorporation, as amended, and our ability to
issue up to 2,000,000 shares of "blank check" preferred stock may have the
effect of discouraging proposals by third parties to acquire a controlling
interest in us, which could deprive stockholders and of the opportunity to
consider an offer to acquire their shares at a premium. In addition, under
certain conditions, Section 203 of the Delaware General Corporate Law would
impose a three-year moratorium on certain business combinations between us and
an "interested stockholder" (in general, a stockholder owning 15% or more of our
outstanding voting stock). The existence of such provisions may have a
depressive effect on the market price of our common stock in certain situations.
34
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes in
interest rates and changes in foreign currency exchange rates.
INTEREST RATE RISK. The Company's exposure to market risk for changes in
interest rates relates to our short-term investments and line of credit. At
June 30, 2002, our cash and cash equivalents consisted of demand deposits and
commercial paper held by large institutions in the U.S. As of June 30, 2002
there was $300,000 balance outstanding under the line of credit. We believe
that a 10% change in the long-term interest rates would not have a material
effect on our financial condition, results of operations or cash flows.
FOREIGN CURRENCY RISK. International revenues from the Company's foreign
subsidiary accounted for approximately 89.6% of total revenues for the nine
months ended June 30, 2002. International sales are made from the Company's
foreign subsidiary in its respective country.
This subsidiary also incurs most of its expenses in the local currency.
Accordingly, our foreign subsidiary uses the local currency as its functional
currency. The Company's international business is subject to risks typical of an
international business, including, but not limited to differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Accordingly,
the Company's future results could be materially adversely impacted by changes
in these or other factors.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 2001, a software vendor filed suit against the Company for breach of
contract totaling approximately $703,000 plus interest and attorney's fees. On
December 28, 2001, Appiant filed an answer denying this general demand, and is
preparing a counter-suit for return of over $600,000 paid to this vendor. In
August 2002, the parties entered into a mutual settlement agreement and release
of claims wherein the Company has agreed to make cash payments totaling $200,000
between February 2003 and May 2003, and will issue warrants to purchase 50,000
shares of Appiant common stock at an exercise price of $0.37.
In January 2002, a default judgment was issued against the Company in favor of
an equipment vendor in the amount of $123,000. The Company was successful in
having that default judgment set-aside on February 6, 2002. The Company
subsequently entered into a mutual settlement agreement and release of claims in
July 2002 wherein the Company has agreed to make payments totaling $69,000 over
the next four months.
In January 2002, a services and equipment provider filed suit in Texas for
breach of contract totaling $117,000. The Company is currently in negotiations
to resolve this claim.
In February 2002, the Company resolved an arbitration matter and litigation
action involving a dispute over employment contract terms for two former Company
management employees. The settlement provides for payment of $88,000 to one
claimant over six months, and payment of $147,000 to the second claimant over a
total of twelve months. The company has accrued $235,000 for this matter. Also
in February 2002, these same claimants filed suit against the Company regarding
the Company's calculation of additional common stock due to the claimants under
an unrelated agreement. The Company disputes these claims and intends to
continue to vigorously defend the matter.
In May 2002, a customer requested indemnification of its internal defense costs
and expenses arising from its defense of a lawsuit involving claims of
infringement of certain patents which Appiant has licensed and which are
included in Appiant's legacy voice mail product. In lieu of seeking
reimbursement from Company of future defense fees, the customer offered to
accept a subrogated assignment of the Company's indemnification rights form the
patent owner. The Company agreed to tender the indemnification claim on to the
patent owner and assign that claim to the customer to directly seek
indemnification. The Company believes that this assignment to the customer will
be the final resolution of this matter.
35
In May 2002, a note holder tendered notice of the Company's default on a
settlement agreement and release relating to a $2.75 million indebtedness
arising out of the cancelled notes. The Company is currently in negotiations
toward an agreement to cure the default and amend the payment plan called for in
the settlement agreement.
In June 2002, the Company's former trademark counsel tendered notice of its
claim for $51,260.26 in unpaid fees and indicated that it would file suit to
collect these fees. The Company disputes some of these fees, but intends to
work with counsel towards a mutually agreed resolution of the matter.
In June and July 2002, several holders of debentures issued in April 2002
provided formal notices of default by the company for failing to register the
shares underlying the debentures or receive shareholder approval of the issuance
of all underlying shares. The Company and the debenture holders are currently
in discussions regarding options for curing these defaults and/or otherwise
resolving the matter.
In July 2002, a former vendor tendered notice of a demand for payment of
approximately $200,000 alleging breach of contract and open book account. The
Company disputes the claims as stated, and intends to work with the vendor
towards a mutually agreed resolution of the matter.
In July 2002, counsel claiming to represent holders of certain Promissory Notes
due in June 2003 wrote the Company claiming that material information was
withheld from certain unidentified note holders by the Company when the Notes
were issued in June 2001. The Company is investigating this claim and has
requested information from the note holders, and intends to continue to
vigorously defend the matter.
In July 2002, a former supplier of equipment filed suit against the Company for
breach of contract and breach of guarantee totaling $419,581.95 plus interest
and attorney's fees. The Company's time to respond to the suit has not yet
passed. The Company is investigating the claim and intends to work with the
vendor towards a mutually agreed resolution of the matter.
While management intends to defend these matters vigorously, there can be no
assurance that any of these complaints or other third party assertions will be
resolved without costly litigation, or in a manner that is not adverse to our
financial position, results of operations or cash flow. No estimate can be made
of the possible loss or possible range of loss associated with the resolution of
these matters in excess of amounts accrued.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In October 2001, we issued a warrant to purchase up to 59,524 shares of common
stock to Lucien Thomas Baldwin III, as set forth in a Promissory Note and
secured by the Company's Voice Plus Accounts Receivables, to raise operating
capital for us in a transaction exempt from registration under Section 4(2). The
warrant is immediately exercisable and may be exercised until October 31, 2006.
The exercise price per share of this warrant is $1.68.
In October 2001, we issued a warrant to purchase up to 59,524 of common stock to
Douglas Zorn, as set forth in a Promissory Note and secured by the Company's
Voice Plus Accounts Receivables, to raise operating capital for us in a
transaction exempt from registration under Section 4(2). The warrant is
immediately exercisable and may be exercised until October 31, 2006. The
exercise price per share of this warrant is $1.68.
In October 2001, we issued a warrant to purchase up to 59,524 shares of common
stock to Jim Gillespie, as set forth in a Promissory Note and secured by the
Company's Voice Plus Accounts Receivables, to raise operating capital for us in
a transaction exempt from registration under Section 4(2). The warrant is
immediately exercisable and may be exercised until October 31, 2006. The
exercise price per share of this warrant is $1.68.
In November 2001, we issued a warrant to purchase up to 150,000 shares of common
stock to Lucien Thomas Baldwin III, as set forth in a Promissory Note and
secured by the VoiceTel and Infotel assets, to raise operating capital for us in
a transaction exempt from registration under Section 4(2). The warrant is
immediately exercisable and may be exercised until November 28, 2006. The
exercise price per share of this warrant is $1.35.
36
In November 2001, we issued a warrant to purchase up to 77,519 shares of common
stock to Robert J. Schmier, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until November 28, 2006. The exercise price per share of this
warrant is $1.29.
In November 2001, we issued a warrant to purchase up to 143,885 shares of common
stock to Robert Gilman, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until November 29, 2006. The exercise price per share of this
warrant is $1.39.
In December 2001, we issued a warrant to purchase up to 38,462 shares of common
stock to Dr. Gabor Rubanyi, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until November 29, 2006. The exercise price per share of this
warrant is $1.30.
In December 2001, we issued a warrant to purchase up to 19,084 shares of common
stock to Dr. Robert L. Glass, as set forth in a Promissory Note and secured by
the Infotel assets, to raise operating capital for us in a transaction exempt
from registration under Section 4(2). The warrant is immediately exercisable and
may be exercised until December 7, 2006. The exercise price per share of this
warrant is $1.31.
In December 2001, we issued a warrant to purchase up to 33,333 shares of common
stock to Jeremy Judge, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until December 12, 2006. The exercise price per share of this
warrant is $1.20.
In December 2001, we issued a warrant to purchase up to 83,333 shares of common
stock to Wayne Saker, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
exercised until December 12, 2006. The exercise price per share of this warrant
is $1.20.
In December 2001, we issued a warrant to purchase up to 37,500 shares of common
stock to Chris Eickman, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
exercised until December 12, 2006. The exercise price per share of this warrant
is $1.20.
In December 2001, we issued a warrant to purchase up to 42,373 shares of common
stock to Dr. Harry Mittelman, as set forth in a Promissory Note and secured by
the Infotel assets, to raise operating capital for us in a transaction exempt
from registration under Section 4(2). The warrant is immediately exercisable and
may be exercised until December 20, 2006. The exercise price per share of this
warrant is $1.77.
In December 2001, we issued a warrant to purchase up to 56,497 of common stock
to Robert Gilman, as set forth in a Promissory Note and secured by the Infotel
assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until December 20, 2006. The exercise price per share of this
warrant is $1.77.
In December 2001, we issued a warrant to purchase up to 56,497 shares of common
stock to Wayne Saker, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until December 20, 2006. The exercise price per share of this
warrant is $1.77.
In December 2001, we issued a warrant to purchase up to 112,994 warrants to
purchase shares of common stock to Robert Gilman, as set forth in a Promissory
Note and secured by the Infotel assets, to raise operating capital for us in a
transaction exempt from registration under Section 4(2). The warrant is
immediately exercisable and may be exercised until December 20, 2006. The
exercise price per share of this warrant is $1.77.
37
In January 2002, we issued a warrant to purchase up to 301,205 shares of common
stock to Lucien Thomas Baldwin III, as set forth in a Promissory Note and
secured by the Infotel assets, to raise operating capital for us in a
transaction exempt from registration under Section 4(2). The warrant is
immediately exercisable and may be exercised until January 17, 2007. The
exercise price per share of this warrant is $1.66.
In January 2002, we issued a warrant to purchase up to 277,778 shares of common
stock to Lucien Thomas Baldwin III, as set forth in a Promissory Note and
secured by the Infotel assets, to raise operating capital for us in a
transaction exempt from registration under Section 4(2). The warrant is
immediately exercisable and may be exercised until January 24, 2007. The
exercise price per share of this warrant is $1.80.
In February 2002, we issued a warrant to purchase up to 214,286 shares of common
stock to Lucien Thomas Baldwin III, as set forth in a Promissory Note and
secured by the Infotel assets, to raise operating capital for us in a
transaction exempt from registration under Section 4(2). The warrant is
immediately exercisable and may be exercised until February 8, 2007. The
exercise price per share of this warrant is $1.40.
In February 2002, we issued a warrant to purchase up to 4,086 shares of common
stock to Paul Teck Cheong Lim, as set forth in a Promissory Note and secured by
the Infotel assets, to raise operating capital for us in a transaction exempt
from registration under Section 4(2). The warrant is immediately exercisable and
may be exercised until February 8, 2007. The exercise price per share of this
warrant is $1.40.
In February 2002, we issued a warrant to purchase up to 35,714 shares of common
stock to Esmond T. Goei, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until February 8, 2007. The exercise price per share of this
warrant is $1.40.
In February 2002, we issued a warrant to purchase up to 74,143 shares of common
stock to Ang Kong Hua, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until February 8, 2007. The exercise price per share of this
warrant is $1.40.
In February 2002, we issued a warrant to purchase up to 14,003 shares of common
stock to Koh Kwee Ngee, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until February 8, 2007. The exercise price per share of this
warrant is $1.40.
In February 2002, we issued a warrant to purchase up to 9,787 shares of common
stock to Lee Thian Soon, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until February 8, 2007. The exercise price per share of this
warrant is $1.40.
In February 2002, we issued a warrant to purchase up to 9,741 shares of common
stock to Keng Tee Low, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until February 8, 2007. The exercise price per share of this
warrant is $1.40.
In February 2002, we issued a warrant to purchase up to 35,714 shares of common
stock to Ming Jen Hsu, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until February 8, 2007. The exercise price per share of this
warrant is $1.40.
In February 2002, we issued a warrant to purchase up to 35,714 shares of common
stock to Lee Gim Teik, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until February 8, 2007. The exercise price per share of this
warrant is $1.40.
38
In February 2002, we issued a warrant to purchase up to 63,071 shares of common
stock to NatSteel Technology Investment Pte Ltd., as set forth in a Promissory
Note and secured by the Infotel assets, to raise operating capital for us in a
transaction exempt from registration under Section 4(2). The warrant is
immediately exercisable and may be exercised until February 8, 2007. The
exercise price per share of this warrant is $1.40.
In February 2002, we issued a warrant to purchase up to 4,086 shares of common
stock to Phillip Securities, as set forth in a Promissory Note and secured by
the Infotel assets, to raise operating capital for us in a transaction exempt
from registration under Section 4(2). The warrant is immediately exercisable and
may be exercised until February 8, 2007. The exercise price per share of this
warrant is $1.40.
In March 2002, we issued a warrant to purchase up to 64,935 shares of common
stock to Douglas Zorn, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until March 8, 2007. The exercise price per share of this warrant
is $1.54.
In March 2002, we issued a warrant to purchase up to 37,879 shares of common
stock to Allen F. Jacobson, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until March 22, 2007. The exercise price per share of this warrant
is $1.32.
In March 2002, we issued a warrant to purchase up to 37.879 shares of common
stock to Dr. Gabor Rubanyi, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until March 22, 2007. The exercise price per share of this warrant
is $1.32.
In March 2002, we issued a warrant to purchase up to 37,879 shares of common
stock to Robert J. Schmier, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until March 22, 2007. The exercise price per share of this warrant
is $1.32.
In March 2002, we issued a warrant to purchase up to 18,939 shares of common
stock to Edward Silberman, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until March 22, 2007. The exercise price per share of this warrant
is $1.32.
In March 2002, we issued a warrant to purchase up to 37,879 shares of common
stock to Douglas Zorn, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until March 22, 2007. The exercise price per share of this warrant
is $1.32.
In April 2002, we issued two warrants to purchase up to 42,268 shares of common
stock to Douglas Zorn, as set forth in two Promissory Notes and secured by Voice
Plus Accounts Receivables and the Infotel assets, to raise operating capital for
us in a transaction exempt from registration under Section 4(2). The warrants
are immediately exercisable and may be exercised until April 26, 2007. The
exercise price per share of this warrant is $1.25.
In April 2002, we issued warrants to purchase up to 1,556,612 shares of common
stock to an investor group, as set forth in a Promissory Note and secured by the
all the assets of Appiant, to raise operating capital for us in a transaction
exempt from registration under Section 4(2). The warrants is immediately
exercisable and may be exercised until April 22, 2009. The exercise price per
share of this warrant is $1.33.
In May 2002, we issued a warrant to purchase up to 83,333 shares of common stock
to Douglas Zorn, as set forth in a Promissory Note and secured by the Voice Plus
Accounts Receivables and Infotel assets, to raise operating capital for us in a
transaction exempt from registration under Section 4(2). The warrant is
immediately exercisable and may be exercised until May 22, 2007. The exercise
price per share of this warrant is $1.00.
39
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the three months
ended June 30, 2002.
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT INDEX
- --------------------------------------------------------------------------------------------
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- --------------------------------------------------------------------------------------------
10.1 Debenture and Warrant Purchase Agreement, dated April 19, 2002,
incorporated by reference to 8-k filed May 3, 2002.
- --------------------------------------------------------------------------------------------
10.2 Secured Convertible Debenture, dated April 19, 2002, incorporated by
reference to 8-k filed May 3, 2002.
- --------------------------------------------------------------------------------------------
10.3 Warrant to Purchase Shares of Common Stock, issued April 19, 2002,
incorporated by reference to 8-k filed May 3, 2002.
- --------------------------------------------------------------------------------------------
10.4 Registration Rights agreement, dated April 19, 2002, incorporated by
reference to 8-k filed May 3, 2002.
- --------------------------------------------------------------------------------------------
10.5 Security Agreement, dated April 19, 2002, incorporated by reference to 8-k
filed May 3, 2002.
- --------------------------------------------------------------------------------------------
99.1 Sarbanes-Oxley Act Certification
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Incorporated by reference to the identically numbered exhibit in the Company's
Annual Report on Form 10-K as filed with the Securities and Exchange Commission
on January 14, 2002.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 19, 2002
By: /s/ DOUGLAS S. ZORN
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Douglas S. Zorn
President and Chief Executive Officer
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