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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITIONAL REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended June 30, 2002
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number 000-19462
ARTISOFT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 86-0446453
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 CAMBRIDGE CENTER, CAMBRIDGE, MA 02142
(Address of principal executive offices, Zip Code)
Registrant's telephone number, including area code: (617) 354-0600
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of common stock held by non-affiliates of the
registrant was approximately $8,122,114 based on the closing sale price as
reported by The Nasdaq Stock Market on September 27, 2002. Shares of common
stock held by each executive officer and director of the registrant and by each
entity known to the registrant to beneficially own 10% or more of the
registrant's common stock have been excluded from this calculation in that such
persons and entities may be deemed to be affiliates of the registrant. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes. The registrant has no shares of non-voting common stock
authorized or outstanding.
The number of shares outstanding of the registrant's sole class of common stock,
as of September 27, 2002 was 17,750,913 shares of common stock, $.01 par value
per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for its 2002 Annual
Meeting of Stockholders scheduled to be held on November 14, 2002 (the "2002
Proxy Statement"), which will be filed with the Securities and Exchange
Commission not later than 120 days after June 30, 2002, are incorporated by
reference into Part III of this Annual Report on Form 10-K. With the exception
of the portions of the 2002 Proxy Statement expressly incorporated into this
Annual Report on Form 10-K by reference, such document shall not be deemed filed
as part of this Annual Report on Form 10-K.
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2
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 that are subject to a number of risks and
uncertainties. All statements, other than statements of historical fact,
included in this Annual Report on Form 10-K, including statements regarding our
strategy, future operations, financial position, estimated revenues, projected
costs, prospects, plans and objectives of management, are forward-looking
statements. When used in this Annual Report on Form 10-K, the words "will",
"believe", "anticipate", "intend", "estimate", "expect", "project" and similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain these identifying words. We cannot
guarantee future results, levels of activity, performance or achievements, and
you should not place undue reliance on our forward-looking statements. Our
forward-looking statements do not reflect the potential impact of any future
acquisitions, mergers, dispositions, joint ventures or strategic alliances. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including the risks
described in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Risk Factors" and elsewhere in this Annual Report on
Form 10-K. The forward-looking statements provided by Artisoft in this Annual
Report on Form 10-K represent Artisoft's estimates as of the date this report is
filed with the SEC. We anticipate that subsequent events and developments will
cause our estimates to change. However, while we may elect to update our
forward-looking statements in the future, we specifically disclaim any
obligation to do so. Our forward-looking statements should not be relied upon as
representing our estimates as of any date subsequent to the date this report is
filed with the SEC.
3
TABLE OF CONTENTS
Page
PART I.........................................................................5
Item 1. Business.............................................................5
Item 2. Properties..........................................................14
Item 3. Legal Proceedings...................................................15
Item 4. Submission of Matters to a Vote of Security Holders.................15
PART II.......................................................................16
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...............................................16
Item 6. Selected Financial Data.............................................18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.........43
Item 8. Financial Statements and Supplementary Data.........................44
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..........................................68
PART III......................................................................68
Item 10. Directors and Executive Officers of the Registrant.................68
Item 11. Executive Compensation.............................................68
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters..................................68
Item 13. Certain Relationships and Related Transactions.....................68
Item 14. Controls and Procedures............................................68
PART IV.......................................................................69
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...69
SIGNATURES....................................................................70
CERTIFICATIONS................................................................71
4
PART I
ITEM 1. BUSINESS.
INTRODUCTION
Artisoft, Inc. ("Artisoft", the "Company" or the "Registrant") develops,
markets and sells computer telephony software application products and
associated services. The Company's principal product is TeleVantage.
The Company's principal executive offices are located at 5 Cambridge
Center, Cambridge, Massachusetts 02142. The telephone number at that address is
(617) 354-0600. The Company was incorporated in Arizona in November 1982 and
reincorporated by merger in Delaware in July 1991.
BACKGROUND AND GENERAL DEVELOPMENT OF BUSINESS
TeleVantage is a software-based phone system that runs on the Windows
2000/NT platform and Intel communications hardware. The product is primarily
sold to mid-sized businesses, corporate branch offices and call centers.
TeleVantage includes the functionality of a stand-alone private branch exchange,
or PBX, plus advanced call management features. These features include a
graphical interface, multi-line call control, "follow-me" call forwarding, email
integration, call/message screening, personalized call handling, call center
functionality, web browser capability, and support for Internet Protocol ("IP")
telephony and customer resource management ("CRM") integration.
In its 2002 fiscal year, Artisoft began shipping TeleVantage 4.0, which, in
addition to the features offered in TeleVantage 3.5, includes new call center
capabilities, such as queue routing, comprehensive trend reports, real-time
statistic tracking, remote IP agent support, and agent monitoring, coaching and
recording. In addition to these call center capabilities, TeleVantage 4.0
provides desktop call control and management, rules-based call handling,
graphical voice mail, comprehensive messaging, automated attendant, Web browser
access, and IP telephony. Industry-standard APIs enables development of
customized applications and tight integration with database systems such as CRM
applications.
TeleVantage 4.0 includes the introduction of the new TeleVantage Call
Center, an add-on module designed to meet the needs of the mid-size call center
market. TeleVantage Call Center offers a feature set that was previously out of
reach for most small to medium-sized businesses, including advanced queue
routing, comprehensive trend reports, real-time statistics tracking, remote IP
agent support and agent monitoring, coaching and recording.
5
During the course of its 2002 fiscal year, Artisoft also introduced
TeleVantage Small Office Edition, a turnkey bundled solution that provides small
businesses with a sophisticated phone system at an affordable price; TeleVantage
Call Classifier 2.0, which provides advanced call routing and agent scripting
based on customer data; and TeleVantage Call Center Scoreboard 1.0, a tool for
call center managers who need to closely monitor call center queue and agent
performance.
Artisoft has an original equipment manufacturer ("OEM") relationship with
Toshiba, which is selling and supporting a re-branded version of TeleVantage
4.0, called Strata CS, through its extensive dealer channel. During the fiscal
year, Artisoft completed the integration between TeleVantage and Toshiba's
popular Strata DK handsets, enhancing the companies' ability to pursue this
market opportunity. The companies have extended their OEM agreement through the
end of calendar year 2003.
Artisoft has formed an Open Communications Alliance. The Open
Communications Alliance is an effort to deliver standards-based communications
solutions with TeleVantage as the focal point. It includes relationships with
leading technology vendors in the CRM, call center, Voice over IP, business
automation and speech recognition fields. Digisoft Computers, iVoice, OnContact
Software, Open Solutions, Polycom, SBS Technologies, Sitara Networks, Spectrum
Corp., and ThinkDirectMarketing are each collaborating with Artisoft within the
Open Communications Alliance.
TeleVantage also continued to be honored for technical excellence during
the 2002 fiscal year with awards from industry leading publications, events and
associations. In fiscal 2002, TeleVantage received "Product of the Year" from
COMMUNICATIONS SOLUTIONS Magazine, "Editors Choice" from CUSTOMER INTER@CTION
SOLUTIONS Magazine, "Best of Show" for Communications Solutions Expo, and the
CompTIA "Technology Award for Convergence."
For the fiscal year ended June 30, 2002, Artisoft generated total net
revenue of $5.9 million compared to total net revenue in fiscal year 2001 of
$7.5 million. The decline in revenue for fiscal 2002 is attributable to a
reduction in net service revenue of $2.4 million. This reduction is partially
offset by an increase in net product revenue of $800,000. The decrease in net
service revenue in fiscal 2002 is the result of our completion in early fiscal
2002 of two product development agreements with each of Toshiba and Intel
entered into at the end of September 2001.
Net product revenue from TeleVantage increased in fiscal 2002 to $5.8
million and includes $1.0 million relating to Toshiba. The increase in net
product revenue was partially reduced by an increase in stock rotation reserves
of $800,000. The OEM agreement with Toshiba allows for the rotation of inventory
Toshiba holds for updated versions of the products. The stock rotation reserve
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was based on the estimated amount of TeleVantage 4.0 inventory that Toshiba
likely will rotate in connection with the expected release of TeleVantage 5.0
later this calendar year. Beginning in the fourth quarter of 2002, the Company
began deferring revenue until the product is resold to Toshiba's customers. The
deferral of revenue is due to increasing Toshiba inventory levels, which has
resulted in Artisoft not having the ability to reasonably estimate potential
future stock rotations resulting from future product releases and their effect
on future Toshiba revenue. For all other product sales, revenue is recognized at
the time of shipment because the Company has sufficient information, experience
and history to support its ability to estimate future stock rotations. In
addition, for the fiscal year ended Jun 30, 2001 there was approximately
$400,000 of net product relating primarily to discontinue sales of the Company's
Visual Product Line. The was no corresponding amount in fiscal year 2002.
In May 2001, Artisoft announced the first release of TeleVantage CTM Suite,
which delivers on the Company's joint engineering relationship with Intel.
TeleVantage CTM Suite is being pre-loaded on certain configurations of Intel's
Converged Communications Platform, an open, standards-based, application-ready
platform that supports a broad range of compatible telephony and business
applications, peripherals, and services from multiple vendors on a single
system. The Company delivered a final version of this product to Intel in May
2001 and has completed its development obligations under this agreement.
Although TeleVantage CTM Suite began initial shipments in August 2001, due to
changes in Intel release schedules, the Company has not realized any significant
revenues from the CTM suite.
During the course of fiscal year 2001, Artisoft entered into numerous
marketing and distribution alliances with other leading industry vendors,
including IBM, Hewlett Packard, and CDW. Membership in Artisoft's Open
Communications Alliance, launched in December 2000, grew to over 20 technology
vendors offering complementary solutions, including CRM, call center,
voice-over-IP, unified messaging, and speech recognition.
For the fiscal year ended June 30, 2001, Artisoft had net sales of $7.5
million, as compared to net sales of $15.7 million in its 2000 fiscal year. The
decline in revenue for fiscal year 2001 is attributable primarily to the
discontinuation of the Company's Visual Voice software product line. Also, the
results for fiscal year 2000 include one-time revenue of $2.7 million from the
sale of the Visual Voice source code and $1.5 million of related professional
service fees from Intel. However, revenue from TeleVantage products and services
increased in fiscal year 2001 compared to fiscal year 2000. The increase in 2001
is attributable to higher revenue from Toshiba and an increase in end user
software sales. The increase in 2001 was partially offset by the Company's
decision to discontinue selling add-on Dialogic hardware and a decrease in
distribution channel inventories.
7
During fiscal year 2000, the Company grew its revenues in the TeleVantage
product line, established alliances with technology and distribution vendors,
and minimized its investment in non-strategic product lines.
The Company signed several strategic alliances, marketing, distribution and
OEM agreements during fiscal year 2000. The Company entered into relationships
with Intel to port TeleVantage to Intel's open, standards-based CT Media
platform, and Toshiba to deliver an integrated communications server and
software-PBX solution, as well as agreements with Microsoft Corporation, Teleco,
Goldmine, Getronics Solutions Italia S.p.A., ALR AG, Midia Ltd. and Commlogik,
among others.
During its 2000 fiscal year, the Company significantly reduced its
investment in products marketed by its Communications Software Group ("CSG"),
which resulted in higher profits from these products during the first half of
fiscal year 2000. Revenues from CSG product decreased substantially in the third
and fourth quarters of fiscal year 2000, and the Company sold its CSG division
to Prologue Software for $3.0 million (which included $1.1 million in CSG
accounts receivable) effective June 30, 2000. Operating income from the CSG
division was $.9 million for fiscal year 2000.
In December 1999, the Company announced the sale of its Visual Voice source
code to Intel for $2.7 million and $1.5 million in Visual Voice professional
services fees. The agreement allowed the Company to continue to sell the Visual
Voice product line until June 30, 2000. Effective July 1, 2000, the Company
formally discontinued selling the Visual Voice product line.
PRODUCTS
As of June 30, 2002, the Company's products included TeleVantage 4.0,
TeleVantage Call Center module, and several add-ons, including TeleVantage Call
Center Scoreboard, TeleVantage Call Classifier, TeleVantage Smart Dialer and
TeleVantage Persistent Pager.
In September 2001, Artisoft began shipping TeleVantage 4.0, which, in
addition to the features offered in TeleVantage 3.5, includes new call center
capabilities, such as queue routing, comprehensive trend reports, real-time
statistic tracking, remote IP agent support, and agent monitoring, coaching and
recording. In addition to these call center capabilities, TeleVantage 4.0
provides desktop call control and management, rules-based call handling,
graphical voice mail, comprehensive messaging, automated attendant, Web browser
access, and IP telephony. Industry-standard APIs enables development of
customized applications and tight integration with database systems such as
customer relationship management applications.
8
TeleVantage 4.0 includes the introduction of the new TeleVantage Call
Center, an add-on module that addresses the needs of the mid-size call center
market. TeleVantage Call Center offers a feature set that was previously out of
reach for many small to medium-sized businesses, including advanced queue
routing, comprehensive trend reports, real-time statistics tracking, remote IP
agent support and agent monitoring, coaching and recording.
Also in fiscal year 2002, Artisoft introduced TeleVantage Small Office
Edition, a turnkey bundled solution that provides small businesses with a
sophisticated phone system at an affordable price; TeleVantage Call Classifier
2.0, which provides advanced call routing and agent scripting based on customer
data; and TeleVantage Call Center Scoreboard 1.0, a tool for call center
managers who need to closely monitor call center queue and agent performance.
TeleVantage 4.0 also represents the results of a joint-engineering project
with Toshiba to integrate TeleVantage with Toshiba digital handsets. Through an
OEM arrangement with Artisoft, Toshiba is marketing TeleVantage 4.0 under the
Strata CS brand, which is being distributed and supported through Toshiba's
established dealer channel.
RAW MATERIALS, MANUFACTURING AND SUPPLIERS
The Company does not manufacture any of the hardware necessary to be used
in conjunction with its software-based phone system. The Company and its
distributors purchase Intel voice processing boards for sale with its
TeleVantage product. TeleVantage is designed to operate on personal computers of
multiple manufacturers in conjunction with the Intel boards. The functionality
of the Company's telephony software products is dependent on the continued
availability of hardware assemblies from Intel. To date, customer returns of the
Company's products for defective workmanship have not been material.
MARKETING, SALES AND DISTRIBUTION
The Company's principal marketing strategy is to create reseller and
customer demand for the Company's products and to use distributors to fulfill
this demand. The Company's authorized resellers and distributors are selected
for their sales ability, technical expertise, reputation and financial
resources. The Company also sells direct to Toshiba as an OEM. The Company's
selling efforts have been assisted by product reviews, awards and recognition
earned from technology publications.
The Company's marketing programs have three objectives: first, to create
brand name recognition of the Company and its products; second, to generate
sales leads for its resellers and distributors; and third, to support the sales
efforts of its resellers and distributors through market development funding,
sales tools and training. Marketing activities that address the first two
9
objectives include frequent participation in industry trade shows and seminars,
direct mail, advertising in major trade publications, executive participation in
press briefings and industry seminars, sponsorship of seminars by the Company
and on-going communication with the Company's end users. To train and support
resellers and distributors, the Company provides electronic mailings of product
and technical updates, seminar material, presentations, and promotions. The
Company also conducts marketing and sales training to assist its TeleVantage
resellers and distributors with growing their business, and offers market
development funding to assist them in generating leads for TeleVantage systems.
The Company is exposed to the risk of product returns and rotations from
its distributors which are recorded by the Company as a reduction to sales.
Although the Company attempts to monitor and manage the volume of its sales to
distributors, overstocking by its distributors or changes in their inventory
level policies or practices by distributors may require the Company to accept
returns above historical levels. In addition, the risk of product returns may
increase if the demand for new products introduced by the Company is lower than
the Company anticipates at the time of introduction. Although the Company
believes that it provides an adequate allowance for sales returns, there can be
no assurance that actual sales returns will not exceed the Company's allowance.
Any product returns in excess of recorded allowances could result in a material
adverse effect on net sales and operating results. Beginning in the fourth
quarter of 2002, the Company began deferring revenue until the product is resold
to Toshiba's customers. The deferral of revenue is due to increasing Toshiba
inventory levels, which has resulted in Artisoft not having the ability to
reasonably estimate potential future stock rotations resulting from future
product releases and their effect on future Toshiba revenue. For all other
product sales, including those to distributors, value-added resellers, revenue
is recognized at the time of shipment because the Company has sufficient
information, experience and history to support its ability to estimate future
stock rotations and all other revenue criteria have been met upon shipment. As
the Company introduces more products, timing of sales to end users and returns
to the Company of unsold products by distributors become more difficult to
predict and could result in material fluctuations in quarterly operating
results. In the fourth quarter of 2001 and the third quarter of 2002, we
provided reserves of $500,000 and $800,000, respectively, for returns related to
estimated stock rotations associated with the release of a new version of
Televantage in fiscal years 2002 and 2003 respectively. Based upon our
monitoring of inventory in the distribution channel we have been able to
reasonably estimate these returns.
Substantially all of the Company's revenue in each fiscal quarter results
from orders booked in that quarter. A significant percentage of the Company's
bookings and sales to major distributors on a quarterly basis historically has
occurred during the last month of the quarter and is usually concentrated in the
latter half of that month. Orders placed by distributors are typically based
upon the distributors' forecasted sales level for Company products and inventory
levels of Company products desired to be maintained by the distributor at the
time of the orders. Changes in purchasing patterns by one or more of the
Company's distributors related to forecasts of future sales of Company products,
customer policies pertaining to desired inventory levels of Company products or
in the ability of the Company to anticipate the mix of customer orders or to
ship large quantities of products near the end of a fiscal quarter could result
in material fluctuations in quarterly operating results. The timing of new
product announcements and introductions by the Company or significant product
10
returns by major customers to the Company could also result in material
fluctuations in quarterly operating results.
The Company supports its products through non-fee-based phone support
provided to TeleVantage resellers and a web site. The resellers attend training
sessions provided by the Company prior to being certified as TeleVantage
resellers.
The Company's ability to compete is dependent upon the timely introduction
of new products to the marketplace and the timely enhancement of existing
products. Product development expenses totaled approximately $3.5 million, $3.7
million, and $3.1 million in fiscal year 2002, 2001 and 2000, respectively. The
Company entered into joint development agreements with Toshiba and Intel in
December 1999 and January 2000, respectively. These development obligations were
substantially completed in fiscal year 2001. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for further
discussion on these arrangements.
The Company utilizes a sales, marketing and distribution strategy with
regard to its TeleVantage product line as follows: The Company employs regional
sales managers to recruit and support qualified TeleVantage resellers.
TeleVantage software is sold to certain national distributors, principally
Paracon, Cygcom, and Alliance systems. These distributors then sell the
TeleVantage software and associated Intel hardware to the qualified TeleVantage
resellers as warranted by end-user demand.
SEASONALITY
Typically, the telecommunications and computer telephony industries
experience some seasonal variations in demand, with weaker sales in July and
August because of customers' vacations and planned international shutdowns. This
seasonality is especially notable in Europe. Sales of phone systems can also be
weak in the months of January and February following typically stronger sales in
the November-December time frame. Artisoft experiences fluctuations in the
demand for its products consistent with the fluctuations experienced in the
telecommunications and computer telephony industries overall.
COMPETITION
The Company's TeleVantage software-based phone system principally competes
with proprietary PBXs offered by companies such as Nortel, Siemens and Avaya,
proprietary IP-PBX products offered by Cisco and 3Com, proprietary PC-PBX
products offered by Altigen, and high end call center software offered by
Interactive Intelligence. There can be no assurance that the Company's products
will be able to compete effectively against these products.
11
INTERNATIONAL BUSINESS
The Company markets and sells its products in international as well as
domestic markets. In fiscal year 2002, 2001, and 2000, international sales
accounted for 8%, 9%, and 8%, respectively, of the Company's net sales. Less
than 1% of the Company's assets were deployed to support the Company's
international business at the end of fiscal year 2002 and 2001.
The Company's major international distribution relationships include the
following partners: Icon PLC (United Kingdom), Midia (Ireland), ALR
(Switzerland), Commlogik (Latin America), Boport Tele-Communication BV (The
Netherlands), ICG (Hong Kong) and Logic Phone (Spain).
Sales to non-U.S. customers are made primarily in U.S. dollars. These
customers may be affected by fluctuations in exchange rates and government
regulations. To date, the Company's operations have not been affected materially
by currency fluctuations.
SIGNIFICANT CUSTOMERS
The Company sells its products through a variety of channels of
distribution, including distributors, resellers and OEMs. In fiscal year 2002,
Paricon accounted for 32% of total net sales. In fiscal year 2001, Toshiba
accounted for approximately 21% of total net sales, Paricon accounted for
approximately 18% of net sales, and Intel accounted for 15% of net sales,
respectively. In fiscal year 2000, Intel accounted for 20% of the Company's
annual net sales as a result of its acquisition of the Visual Voice product
line.
At June 30, 2002 Paracon, Toshiba and Gold Kist, Inc. accounted for 30%,
16% and 14% of the Company's outstanding trade receivables, respectively. At
June 30, 2001, Toshiba accounted for approximately 41% and Paricon accounted for
approximately 16% of the Company's outstanding trade receivables. At June 30,
2000, Intel accounted for approximately 23% and Globaltron accounted for
approximately 10% of the outstanding trade accounts receivable. The loss of any
of our major distributors, resellers, OEMs or their failure to pay the Company
for products purchased from the Company would have an adverse effect on the
Company's operating results. The Company's standard credit terms are net 30
days.
BACKLOG
Substantially all of the Company's revenue in each quarter results from
orders booked in that quarter. Accordingly, the Company does not believe that
its backlog at any particular point is indicative of future sales.
12
PROPRIETARY RIGHTS AND LICENSES
The Company currently relies on a combination of copyright, trademark and
patent laws, nondisclosure and other contractual agreements and other technical
measures to establish and protect its proprietary rights in its products and to
protect its technologies from appropriation by others. Despite these
precautions, unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information the Company regards as proprietary. In
addition, it may be possible for others to develop products using technologies
similar to the Company's but which do not infringe upon the Company's
proprietary rights.
While the Company's success will depend to a certain degree on its ability
to protect its technologies, the Company believes that, because of the rapid
pace of technological change in the industries in which the Company competes,
the legal protections for its products are less significant factors in the
Company's success than the knowledge, ability and experience of the Company's
employees, the nature and frequency of product enhancements and the timeliness
and quality of support services provided by the Company.
From time to time, the Company has received and may in the future receive
communications from third parties asserting that the Company's trade names or
features, content, or trademarks of certain of the Company's products infringe
upon intellectual property rights held by such third parties. Such claims could
have an adverse affect on the Company and may also require the Company to obtain
one or more licenses from third parties. There can be no assurance that the
Company would be able to obtain any such required licenses upon reasonable
terms, if at all, and the failure by the Company to obtain such licenses could
have an adverse effect on its business, results of operations and financial
condition. If the Company were able to obtain such licenses, the licensing costs
could materially affect the Company's future financial results. In addition, the
Company licenses technology on a non-exclusive basis from several companies for
inclusion in its products and anticipates that it will continue to do so in the
future. The inability of the Company to continue to license these technologies
or to license other necessary technologies for inclusion in its products, or
substantial increases in royalty payments under these third party licenses,
could have an adverse effect on its business, results of operations and
financial condition.
Litigation or threatened litigation in the software development industry
has increasingly been used as a competitive tactic both by established companies
seeking to protect their existing position in the market and by emerging
companies attempting to gain access to the market. If the Company is required to
defend itself against a claim, whether or not meritorious, the Company could be
forced to incur substantial expense and diversion of management attention, and
may encounter market confusion and reluctance of customers to purchase the
Company's software products. Such litigation, if determined adversely to the
13
Company, could have an adverse effect on its business, results of operations and
financial condition.
In the course of its product development efforts, the Company periodically
identifies certain technologies owned by others that either would be useful to
incorporate into its products or are necessary in order to remain competitive in
light of industry trends. In these cases the Company has in the past sought to
obtain licenses of such third-party technologies. The Company expects that it
will continue to find it desirable or necessary to obtain additional technology
licenses from others, but there can be no assurance that any particular license
will be available at all, or on acceptable terms, at any future time. The
royalties paid on future licensing arrangements may adversely impact the
Company's operating results.
The Company paid royalties to Lucent Technologies for its use of certain
licensed technologies during the Company's 2000 fiscal year. The Company is
required to pay additional royalties to Lucent Technologies should TeleVantage
software sales reach specified levels. The licensing by Lucent Technologies of
its products or brand name to competitors of the Company, or the withdrawal or
termination of licensing rights to the Company's technologies, could have an
adverse affect on the Company's sale of products incorporating such licensed
technologies and the Company's results of operations as a whole.
EMPLOYEES
As of June 30, 2002, the Company had 71 full-time employees, including
approximately 34 in sales, marketing and customer support, 24 in engineering and
product development, 4 in operations and 9 in administration. In September 2001,
the Company terminated the employment of 34 full-time employees due to the
completion of certain development projects and to reduce costs. The reductions
included 21 development personnel, 9 sales, marketing and support personnel and
4 administrative personnel. Future success of the Company will depend in large
part on its continued ability to retain highly skilled and qualified personnel.
None of the Company's employees are represented by a labor union. The Company
has experienced no work stoppages and believes that its relations with its
employees are good.
ITEM 2. PROPERTIES.
The Company leases property as detailed in the following table.
Approximate Owned or Expiration Lease
Location Size Leased Date Intended Use
-------- ---- ------ ---- ------------
Tucson, Arizona 14,928 sq. ft. Leased March 2003 Operations
Cambridge, Massachusetts 23,013 sq. ft. Leased September 2005 Office
Cambridge, Massachusetts 8,313 sq. ft. Leased July 2002 Office
14
Aggregate annual rental payments for the Company's facilities were
approximately $1,484,000 in fiscal year 2002.
The Company's current facilities are generally adequate for anticipated
needs over the next 12 to 24 months. The Company does not own any real property.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to legal proceedings arising in the ordinary course
of its business. The Company believes that the ultimate resolution of these
proceedings will not have a material adverse effect on its financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fiscal quarter ended June 30, 2002, there were no matters
submitted to a vote of the Company's securityholders, through the solicitation
of proxies or otherwise.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning the executive
officers of the Company as of September 15, 2002:
Name Age Position
- ---- --- --------
Steven G. Manson 43 President and Chief Executive Officer
Christopher H. Brookins 38 Vice President of Development and Chief
Technology Officer
Paul Gregory Burningham 45 Vice President of Sales
Michael J. O'Donnell 59 Chief Financial Officer
STEVEN G. MANSON has served as a Director, President and Chief Executive
Officer of Artisoft since July 2000. Mr. Manson joined Artisoft in 1996 as Vice
President of Product Management - Computer Telephony Division. Subsequently, he
15
was named Vice President and General Manger, and then Senior Vice President and
General Manager of the Computer Telephony Products Group. Earlier in his career,
Mr. Manson held various senior level marketing positions at Gensym Corporation,
Cadre Technologies, Inc. and Prime Computer Inc.
CHRISTOPHER H. BROOKINS joined Artisoft in 1996 as Vice President of
Development - Computer Telephony Division, upon the acquisition of Stylus
Innovation by Artisoft. In June 1999, Mr. Brookins was named Chief Technology
Officer and Vice President of Development of Artisoft. Prior to joining
Artisoft, Mr. Brookins served as Vice President of Development at Stylus
Innovation from 1993 to 1996. Mr. Brookins also held a senior management
position at Easel Corporation from 1989 to 1993.
PAUL GREGORY BURNINGHAM joined Artisoft in February 2000 as Vice President
of Business Development. Mr. Burningham was named Vice President of Sales in
September 2001. Mr. Burningham previously served as a management consultant from
September 1997 to February 2000 for a privately held computer telephony company.
Mr. Burningham served as President of AI/FOCS, a computer and
data-communications contract-manufacturing company, from 1995 to 1997. Mr.
Burningham also served as Vice President of Sales and Marketing at Molex, Inc.,
a provider of voice and data premise cabling equipment and services from 1992 to
1995.
MICHAEL J. O'DONNELL joined Artisoft in January 2001 as Chief Financial
Officer. Prior to joining Artisoft, Mr. O'Donnell served as Vice President and
Chief Financial Officer at Lily Transportation Company, a truck leasing and
logistics support services provider, from April 1999 to November 2000. Mr.
O'Donnell also served as Vice President and Chief Financial Officer at
SilverPlatter International, a developer of search and retrieval software
applications, from April 1995 to April 1999 and was Chief Financial Officer at
ChemDesign Corporation, a designer and manufacturer of chemical products, from
1992 to 1995.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The principal market for Artisoft common stock is the Nasdaq National
Market. The Company's common stock is traded on the Nasdaq National Market under
the symbol ASFT.
The following table presents the high and low sales prices of the Company's
common stock for each calendar quarter of the fiscal years ended June 30, 2002
and 2001, as reported by the Nasdaq Stock Market.
16
2002 2001
----------------- -----------------
High Low High Low
------ ------ ------ ------
First Quarter $ 4.80 $ 1.25 $12.31 $ 6.69
Second Quarter 2.35 1.35 8.00 2.41
Third Quarter 2.90 1.70 5.00 2.44
Fourth Quarter 2.08 1.06 4.75 1.75
There were 284 record holders of the Company's common stock at June 30,
2002. This number does not include stockholders who hold their shares in "street
name" or through broker or nominee accounts.
The Company paid no dividends in fiscal year 2002 or 2001. The Company
currently intends to retain future earnings to fund the development and growth
of its business and, therefore, does not anticipate paying any cash dividends in
the foreseeable future. In addition, if the Company were to pay dividends, such
dividends would be paid to holders of series B preferred stock, prior to any
such distribution to holders of common stock, on a per share basis equal to the
number of shares of common stock into which each share of series B preferred
stock is then convertible.
See Item 12 of Part III of this Annual Report on Form 10-K for the
information required by Item 201(d) of Regulation S-K.
Our common stock trades on the Nasdaq National Market. In order to continue
trading on the Nasdaq National Market, we must satisfy the continued listing
requirements for that market. Last year, the Nasdaq National Market enacted
changes to its continued listing requirements. The changes are effective for
Artisoft on November 1, 2002. We are not in compliance with the continued
listing requirements which are effective on November 1, 2002.
Under the continued listing requirement standard currently utilized by
Artisoft, we are required to have minimum net tangible assets of $4.0 million.
Under the continued listing requirements applicable to Artisoft on November 1,
2002, the minimum net tangible asset requirement is replaced with a minimum
shareholders' equity requirement of $10.0 million. At June 30, 2002 we had
shareholders' equity of $5.1 million. We do not anticipate that we will satisfy
the $10.0 million shareholders' equity requirement as of November 1, 2002 and
therefore expect that our common stock will be delisted from the Nasdaq National
Market. In addition, the minimum bid price of our common stock is currently
below the $1.00 per share minimum bid price continued listing requirement in
effect both now and on November 1, 2002. The listing of our common stock on the
Nasdaq National Market is currently being maintained under a grace period
permitted by Nasdaq Marketplace Rule 4450(e)(2).
17
In light of the foregoing, we expect to apply to transfer the listing of
our common stock from the Nasdaq National Market to the Nasdaq SmallCap Market.
There can be no assurance that our application will be approved, or if approved,
that we will be able to maintain compliance with the continued listing
requirements of the Nasdaq SmallCap Market. If our application is not approved
our common stock may trade on either the over-the-counter electronic bulletin
board or the Pink Sheets.
A delisting of our common stock from the Nasdaq National Market, including
a transfer of the listing of our common stock to the Nasdaq SmallCap Market,
would materially reduce the liquidity of our common stock and result in a
corresponding material reduction in the price of our common stock. In addition,
any such delisting would materially adversely affect our access to the capital
markets, and the limited liquidity and reduced price of our common stock would
materially adversely affect our ability to raise capital through alternative
financing sources on terms applicable to us or at all.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes included
in this Annual Report on Form 10-K.
The selected consolidated financial data set forth below as of June 30,
2002 and 2001 and for the years ended June 30, 2002, 2001 and 2000 are derived
from the audited consolidated financial statements of Artisoft included in this
Annual Report on Form 10-K. All other selected consolidated financial data set
forth below is derived from audited financial statements of Artisoft not
included in this Annual Report on Form 10-K. Artisoft's historical results are
not necessarily indicative of its results of operations to be expected in the
future.
18
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED JUNE 30,
--------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
STATEMENTS OF OPERATIONS DATA
Net revenue:
Product $ 5,832 $ 5,041 $ 13,283 $ 7,144 $ 4,771
Services 20 2,423 2,406 -- --
Total net revenue 5,852 7,464 15,689 7,144 4,771
Loss from operations (8,823) (13,286) (6,180) (6,835) (3,103)
Net loss from continuing operations (8,635) (12,756) (5,265) (6,011) (1,376)
Net loss (8,635) (12,756) (4,486) (1,762) (2,913)
Dividend to Series B Preferred
stockholders (2,766) -- -- -- --
Loss applicable to common stockholders (11,401) (12,756) (4,486) (1,762) (2,913)
Net loss per common share from
continuing operations-basic and diluted $ (.72) $ (.82) $ (.35) $ (.41) $ (.09)
Net loss per common share-basic and
diluted $ (.72) $ (.82) $ (.30) $ (.12) $ (.20)
Weighted average common shares
outstanding 15,760 15,476 15,171 14,720 14,554
AS OF JUNE 30,
--------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
BALANCE SHEET DATA
Working Capital $ 4,044 $ 5,216 $ 7,535 $ 15,870 $ 18,016
Total assets 8,562 9,549 21,494 20,751 21,445
Total liabilities 3,463 2,758 2,906 2,177 1,493
Shareholders' equity 5,099 6,791 18,588 18,574 19,952
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
You should read the following discussion together with the consolidated
financial statements and related notes appearing elsewhere in this Annual Report
on Form 10-K. This Item, including, without limitation, the information set
forth under the heading "Future Results", contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities and Exchange Act of 1934 that involve risks and uncertainties.
Actual results may differ materially from those included in such forward-looking
statements. Factors which could cause actual results to differ materially
include those set forth under "Risk Factors" commencing on page 34, as well as
those otherwise discussed in this section and elsewhere in this Annual Report on
Form 10-K. See "Forward-Looking Statements".
19
OVERVIEW
For the fiscal year ended June 30, 2002, Artisoft had total net revenue of
$5.9 million compared to total net revenue in fiscal year 2001 of $7.5 million.
The decline in revenue for fiscal 2002 is attributable to a reduction in net
service revenue of $2.4 million. This reduction is partially offset by an
increase in net product revenue of $800,000. The decrease in net service revenue
in fiscal 2002 is the result of our completion in early fiscal 2002 of two
product development agreements with each of Toshiba and Intel at the end of
September 2001. The Toshiba agreement shifted from a development services
agreement to a product contract entered into at the end of September 2001.
Net product revenue from TeleVantage increased to $5.8 million in fiscal
2002 from $4.7 million in fiscal 2001 and includes $1.0 million relating to
Toshiba. The increase in net product revenue was partially reduced by stock
rotation reserve of $800,000. The stock rotation reserve was based on the
estimated amount of TeleVantage 4.0 inventory that Toshiba likely will rotate
with the expected release of TeleVantage 5.0 later this calendar year. Also,
beginning in the fourth quarter of 2002, the Company began deferring revenue on
sales to Toshiba until the product is resold to Toshiba's customers. The
deferral of revenue is due to increasing Toshiba inventory levels, which has
resulted in Artisoft not having the ability to reasonably estimate potential
future stock rotations resulting from future product releases and their effect
on future Toshiba revenue. For all other product sales, including those to
distributors and value-added resellers, revenue is recognized at the time of
shipment because the Company has sufficient information, experience and history
to support its ability to estimate future stock rotations and all other revenue
recognition criteria have been met. In addition, for the fiscal year ended June
30, 2001 there was approximately $400,000 of net product relating primarily to
discontinued sales of the company's Visual Product Line. There was no
corresponding amount in fiscal year 2002.
For the fiscal year ended June 30, 2001, Artisoft reported net sales of
$7.5 million, as compared to net sales of $15.7 million in its 2000 fiscal year.
The decline in revenue for fiscal year 2001 is attributable primarily to the
discontinuation of sales of the Company's Visual Voice software product line.
Also, the fiscal year 2000 results include one-time revenue of $2.7 million from
the sale of the Visual Voice source code and $1.5 million of related
professional service fees from Intel. However, revenue from TeleVantage products
and services increased in fiscal year 2001 compared to fiscal year 2000. The
increase in 2001 is attributable to higher revenue from Toshiba and an increase
in end-user TeleVantage software sales. The increase in 2001 was partially
offset by the Company's decision to discontinue selling add-on Dialogic hardware
and a decrease in distribution channel inventories. Due to distributors selling
more product then they purchased.
The Company sold its Communication Software Group ("CSG") on June 30, 2000
and the Company reclassified its CSG operations as discontinued operations in
its Consolidated Statement of Operations and the Consolidated Statements of Cash
Flows.
20
The Company sold its Visual Voice source code to Intel in December 1999.
The terms of the asset sale agreement included provisions allowing the Company
to continue to sell the Visual Voice software until June 30, 2000. Intel
announced the discontinuation of the product in late June 2000. The Company
recognized $2.7 million in revenue from the sale of the software code and $1.5
million in professional services revenue associated with Visual Voice. In its
2000 fiscal year, the $2.7 million is classified as Product Revenue and the $1.5
million is classified as Services Revenue on the Consolidated Statement of
Operations. These revenues were recognized ratably over a 9-month period from
October 1999 through June 2000.
CRITICAL ACCOUNTING POLICIES
The Company follows the provisions of the statement of position "SOP" 97-2,
SOFTWARE REVENUE RECOGNITION as amended by SOP 98-9, Modification of SOP 97-2
Software Revenue Recognition, with Respect to Certain Transactions. Generally,
the Company recognizes revenue when it is realized or realizable and earned. The
Company considers revenue realized or realizable and earned when persuasive
evidence of an arrangement exists, the product has been shipped or the services
have been provided to the customer, the sales price is fixed or determinable and
collectability is reasonably assured. The Company reduces revenue for estimated
customer returns, rotations and sales rebates when such amounts can be
estimated. When these amounts cannot be estimated the Company defers revenue
until the product is sold to the end-user. Revenue from software license
agreements that have significant customizations and modification of the software
product is deferred and recognized in a manner that approximates the percentage
of completion method. As part of its product sales price, the Company provides
phone support which is generally utilized by the customer shortly after the
sale. The cost of the phone support is not significant but is accrued in the
financial statements. In addition to the aforementioned general policy, the
following are the specific revenue recognition policies for each major category
of revenue.
PRODUCTS-SOFTWARE, NOT-FOR-RESALE KITS (NFR'S) AND HARDWARE. Revenue from
delivered elements of one-time charge licensed software is recognized at the
inception of the license term, provided the Company has vendor-specific
objective evidence of the fair value of each undelivered element. Revenue is
deferred for undelivered elements. Revenue is also deferred for the entire
arrangement if vendor-specific evidence objective evidence does not exist for
each undelivered contract element. Examples of undelivered elements in which the
timing of delivery is uncertain include contractual elements that give customers
rights to any future upgrades at no additional charge or future maintenance that
is provided within the overall price. The revenue that is deferred for any
contract element is recognized when all of the revenue recognition criteria have
been met for that element. Revenue for annual software subscriptions is
recognized ratably over the length of the software subscription.
In January 2000, the Company executed a strategic alliance agreement with
Toshiba intended to allow the Company and Toshiba to deliver an integrated
communications server and software-PBX solution for small and midsize
businesses. TeleVantage 4.0 represents the results of a 1-1/2 year
joint-engineering project with Toshiba to integrate TeleVantage with Toshiba
digital handsets. Through an Original Equipment Manufacturer (OEM) arrangement
with Artisoft, Toshiba is marketing TeleVantage 4.0 under the Strata CS brand,
which is being distributed and supported through Toshiba's established dealer
channel. Under the terms of the agreement, Toshiba will purchase licenses of
TeleVantage for customized versions of the software product to be integrated
21
with its digital handsets and communications server product offerings. The costs
associated with this customization have been incurred and reported as an element
of cost of sales as part of this development agreement. At the end of September
2001 and upon completion of the development portion of this arrangement, we
began to account for product shipped to Toshiba as product sales. The OEM
agreement with Toshiba allows for the rotation of inventory it holds for updated
versions of the products. During the quarter ended March 31, 2002 revenue was
reduced by $800,000 to provide a reserve for the estimated amount of version 4.0
inventory that Toshiba has the right to rotate for version 5.0 when TeleVantage
5.0 is introduced later this calendar year. Also, beginning in the fourth
quarter of 2002, the Company began deferring revenue on current and future
shipments to Toshiba until the product is resold to Toshiba's customers The
deferral of revenue is due to increasing Toshiba inventory levels, which has
resulted in Artisoft not having the ability to reasonably estimate potential
future stock rotations resulting from future product releases and their effect
on future revenue. For all other product sales, revenue is recognized at the
time of shipment because as the Company has sufficient information, experience
and history to support its ability to estimate future stock rotations.
SERVICES. Revenue from time and material service contracts is recognized as
the services are provided. Revenue from fixed price, long-term service or
development contracts is recognized over the contract term based on the
percentage of services that are provided during the period compared with the
total estimated services to be provided over the entire contract. Losses on
fixed price contracts are recognized during the period in which the loss first
becomes apparent.
RESULTS OF OPERATIONS
NET REVENUE
PRODUCT REVENUE. Net product revenue increased 16% to $5.8 million for
fiscal year 2002 from $5.0 million for fiscal year 2001. Net product revenue
decreased 62% to $5.0 million for fiscal year 2001 from $13.3 million for fiscal
year 2000. The increase in net product revenue for the fiscal year ended June
30, 2002 was due primarily to the increase in TeleVantage revenue. Included in
product revenue is $1.0 million relating to Toshiba. Revenue from Toshiba
related to our development contract in fiscal year 2001 was reflected in service
revenue. In fiscal year 2002, the Company recorded a stock rotation reserve of
$800,000 as a reduction to revenue. The OEM agreement with Toshiba allows for
the rotation of inventory it holds for updated versions of the products. The
stock rotation reserve was recorded based on the estimated amount of TeleVantage
4.0 inventory that Toshiba likely will rotate with the expected release of
TeleVantage 5.0 later this calendar year. For Toshiba product sales commencing
on or after April 1, 2002, the Company began to defer revenue until the product
is resold by Toshiba to its customers. The deferral of revenue is due to
increasing Toshiba inventory levels, which has resulted in Artisoft not having
the ability to reasonably estimate potential future stock rotations resulting
from future product releases and their effect on future revenue. For all other
product sales, including sales to distributors and value-added resellers,
revenue is recognized at the time of shipment because the Company has sufficient
information, experience and history to support its ability to estimate future
stock rotations and all other revenue recognition criteria are met. In addition,
for the fiscal year ended June 30, 2001 there was approximately $400,000 of net
product relating primarily to discontinued sales of the Company's Visual Product
Line. There was no corresponding amount in fiscal year 2002.
The decrease in net product revenues for the fiscal year ended June 30,
2001 as compared to the fiscal year ended June 30, 2000 was due primarily to the
discontinuation of the Company's Visual Voice software product line and the
Company's decision to discontinue selling add-on Dialogic hardware to its value
added resellers late in fiscal year 2000. However, the decrease was partially
22
offset by an increase in TeleVantage end-user software revenue. Reflected in the
revenues for the fourth quarter of fiscal year 2001 is a reduction in revenues
of approximately $500,000 to reserve for channel inventory rotations estimated
to be associated with fourth quarter 2001 shipments. With the introduction of
TeleVantage 4.0 distributors were expected to rotate the TeleVantage 3.5
inventory they had on hand in September 2001. The $500,000 reserve for stock
rotation was substantially offset by a corresponding amount in revenue recorded
in fiscal year 2002 upon delivery of TeleVantage 4.0. Also, in the fourth
quarter of fiscal year 2001, revenues were increased $400,000 by the reversal of
a previously established returns reserve relating to the Company's discontinued
product line. The Company concluded that this reserve was no longer needed.
Additionally, the Company recognized $ 2.7 million in revenues from the sale of
the Visual Voice software code to Intel during fiscal year 2000. This revenue
was recognized ratably as product revenue between October 1, 1999 and June 30,
2000.
SERVICES REVENUE. Net service revenue was $20,000 in fiscal year 2002
compared with $2.4 million in fiscal year 2001. The decline in service revenue
was primarily a result of the Company completing the development phase of its
agreements with Toshiba and Intel at the end of September 2001. The Toshiba
agreement shifted from a development services to a product contract at the end
of September 2001. No additional service revenue is anticipated under these
agreements. For the fiscal year ended June 30, 2002, the Company had no service
revenue from Toshiba and $20,000 of service revenue from Intel. In fiscal year
2001, service revenue from Toshiba was $1.6 million and $.8 million from Intel.
Net service revenue remained unchanged at $2.4 million for the fiscal years
ended June 30, 2001 and 2000. The following factors contributed to the amount of
net service revenues recognized during the fiscal years ended June 30, 2001 and
2000. The Company recognized $1.5 million in professional services fees from
Intel upon the sale of the Visual Voice source code in December 1999. Under the
terms of this arrangement, the Company provided certain sales and support
services for the Visual Voice product line to Intel through June 30, 2000. An
increase in service revenues recognized from Toshiba and Intel during fiscal
year 2001 offset the loss of the $1.5 million in Visual Voice service revenues
in fiscal year 2001.
The Company distributes its products internationally. International product
revenue was 8%, 9% and 8% of total net revenue for fiscal years 2002, 2001 and
2000 respectively. International revenue decreased 30 % to $500,000 in fiscal
year 2002 from $700,000 in fiscal year 2001 which was a decreased 42% from $1.2
million in fiscal year 2000. The decline in international revenue can be
expected to change as the Company strengthens distribution in these geographic
regions and there is an increase in capital spending in the global
telecommunications industry.
23
GROSS PROFIT
PRODUCT. The Company's gross profit from net product revenue was $5.0
million, $3.5 million and $8.0 million in fiscal year 2002, 2001 and 2000,
respectively, or 85%, 69% and 61% of net product revenue, respectively. The
increase on gross profit percentage and aggregate dollars from net product
revenue for fiscal year 2002 as compared to fiscal year 2001 was due primarily
to an increase in higher margin TeleVantage sales coupled with a decrease in the
percentage of revenue derived from lower margin Dialogic add-on hardware. The
increase in gross profit percentage from net product revenues for fiscal year
2001 as compared to fiscal year 2000 was due to an increase in higher margin
TeleVantage software sales and the Company's decision to discontinue selling low
margin add-on Dialogic hardware in April 2000. In addition, fiscal year 2000
gross profit margins were favorably impacted by the sale of the Visual Voice
source code. The net decrease in aggregate dollars of gross profit margin from
product revenues for fiscal year 2001 as compared to fiscal year 2000 was
principally due to the recognition of $2.7 million in revenues from the sale of
the Company's Visual Voice source code as net product revenue between October 1,
1999 and June 30, 2000 and the discontinuation of Visual Voice product sales in
fiscal year 2001. Gross profit may fluctuate on a quarterly and yearly basis
because of product mix, pricing actions and changes in sales and inventory
allowances.
SERVICES. The Company's gross profit from net services revenues was nominal
in fiscal year 2002. In fiscal years 2001 and 2000, gross profit was $ 700,000
and $1.7 million respectively, or 30% and 72% of net services revenues,
respectively. The decrease in both aggregate dollars of gross profit from net
services revenues and gross profit percentage for fiscal year 2001 as compared
to fiscal year 2000 was principally the result of the inclusion of $1.5 million
in professional service fees earned as an element of the Visual Voice software
code sale and recognized in fiscal year 2000. Upon the sale of its Visual Voice
source code in fiscal year 2000, the Company agreed to provide service and sales
support to Intel from October 1, 1999 to June 30, 2000.
SALES AND MARKETING
Sales and marketing expenses were $5.9 million, $8.9 million and $10.0
million for fiscal year 2002, 2001 and 2000, respectively, representing 100%,
119% and 64% of total net revenue, respectively. The decrease in sales and
marketing expenses in aggregate dollars and as a percentage of total net revenue
for fiscal year 2002 compared to fiscal year 2001 was due primarily to a
reduction in marketing and sales personnel costs as a result of workforce
reductions implemented in April 2000 and September 2001 and a reduction in
marketing program expense. The decreases in sales and marketing expenses in
aggregate dollars for fiscal year 2001 as compared to fiscal year 2000 was due
principally to the recognition of a non-cash charge of $2.3 million during the
quarter ended March 31, 2000 associated with Artisoft common stock and a warrant
issued to Toshiba. This decrease was partially offset by an increase in sales,
support and marketing personnel costs between fiscal year 2000 and 2001 to
24
support anticipated revenue streams from the release of TeleVantage 4.0, and the
Company's arrangements with Toshiba and Intel. In January 2000, Toshiba acquired
100,000 shares of Artisoft common stock at a price of $6.994 per share and has
the right to acquire an additional 50,000 shares pursuant to a warrant agreement
at a strike price of $6.994. The fair market value of the Artisoft common stock
on the date of execution of the definitive agreement was $21.50. The difference
between the issuance price and fair market value of the Artisoft common stock,
and the fair value of the warrants (which were priced based on the Black Scholes
Options Pricing Model) was charged to selling expense in the quarter ended March
31, 2000. The Company received proceeds from Toshiba of $700,000 from this
transaction and a total of $2.3 million was charged to selling expense. $3.0
million was recorded as an addition to paid-in-capital.
Sales and marketing expenses as a percentage of total revenue decreased to
100% in fiscal year 2002 from 119% in fiscal year 2001. The decrease is
primarily a result of lower marketing expenses partially offset by lower net
service revenue. Sales and marketing expense as a percentage of total revenue
increased to 119% in fiscal year 2001 from 64% in fiscal year 2000. The increase
in sales and marketing expenses as a percentage of total revenue for fiscal year
2001 as compared to fiscal year 2000 is primarily the result of the overall
decrease in total net revenue during fiscal year 2001 and the aforementioned
increase in sales and marketing costs.
PRODUCT DEVELOPMENT
Product development expenses were $3.5 million, $3.7 million and $3.1
million for fiscal year 2002, 2001 and 2000, respectively, representing 60%, 49%
and 20% of total net revenue, respectively. For the fiscal year ended June 30,
2001 approximately $1.7 million of development effort related to service revenue
and was classified to cost of sales compared to $700,000 in fiscal year 2000. In
both the 2001 and 2000 fiscal years, these costs were associated with the Intel
and Toshiba development projects, which were completed in the quarter ended
September 30, 2001. The Company reduced its development personnel headcount in
September 2001 primarily as a result of the completion of the Intel and Toshiba
development contracts. The increase in the ratio of development expense to total
net revenue for fiscal year 2002 compared to fiscal year 2001 is due primarily
to a lower allocation of development effort to cost of sales resulting from a
reduction in net service revenue.
The increase in aggregate product development expenses in fiscal year 2001
as compared to fiscal year 2000 is primarily attributable to the addition of
resources to work on the development of TeleVantage. The addition of new
development personnel during the fiscal year ended June 30, 2001 was required to
meet product introduction timetables. The increase in development expenses as a
percentage of total net sales in fiscal year 2001 as compared to fiscal year
2000 is principally the result of the overall decrease in Visual Voice sales
during these periods and the aforementioned additional development personnel
25
costs. The Company believes that continued development and introduction of new
versions of TeleVantage to the market in a timely manner is critical to its
future success.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $4.4 million, $4.9 million and
$2.9 million for fiscal 2002, 2001 and 2000, respectively, representing 75%, 66%
and 18% of total net revenue, respectively. The decrease in general and
administrative expenses in aggregate dollars in fiscal year 2002 as compared to
fiscal year 2001 is principally the result of reduced headcount for
administrative personnel and other expense reductions. The increase in general
and administrative expenses in aggregate dollars in fiscal year 2001 as compared
to fiscal year 2000 is principally the result of additional occupancy cost
incurred as the result of the expansion of the Company's Cambridge,
Massachusetts-based headquarters and increased depreciation expense on the
Company's fixed assets. The increase in general and administrative expenses as a
percentage of total net sales in fiscal year 2002 as compared to fiscal year
2001 is principally attributable to a reduction in net service revenue. The
increase in general and administrative expenses as a percentage of total net
sales in fiscal 2001 compared to fiscal year 2000 is principally attributable to
the overall decrease in net sales of Visual Voice products between fiscal year
2001 and fiscal year 2000 and the aforementioned increase in occupancy and
depreciation expense.
OTHER INCOME (EXPENSE)
Other income (expense), net was $200,000, $500,000 and $900,000 for fiscal
year 2002, 2001 and 2000, respectively. The decrease in other income between
fiscal years 2002 and 2001 and fiscal years 2001 and 2000 was the result of a
lower level of interest rates combined with lower average cash and invested
balances throughout the year.
INCOME TAX EXPENSE
The effective tax rates for the Company were 0% for fiscal years 2002, 2001
and 2000. No income tax benefit was recognized for fiscal years 2002, 2001 or
2000, as the Company has fully utilized all federal net operating loss carryback
potential.
FUTURE RESULTS
The Company intends to continue investing in the sales, marketing and
development of its software-based phone system, TeleVantage. The Company expects
operating expenditures for fiscal year 2003 to be at approximately the same
levels as in fiscal year 2002.
26
The Company believes that future TeleVantage revenues will increase and
thereby reduce future operating losses. However, the rate at which these
revenues may increase will be highly dependent on the overall telecom industry
capital spending environment, the rate of market acceptance of TeleVantage and
the success of the Company's strategic relationships including Toshiba and
Intel. See "Risk Factors" below.
Specifically, through an OEM development arrangement with Artisoft, Toshiba
is marketing TeleVantage 4.0 under the Strata CS brand, which is being
distributed and supported through Toshiba's established dealer channel. Under
the terms of the agreement, Toshiba will purchase licenses of customized
versions of the TeleVantage software product to be integrated with its digital
handsets and communications server product offerings. Any significant delay,
cancellation, or termination of this arrangement with Toshiba will have a
material adverse effect on the Company's future results of operations. However,
any such events will be mitigated to the extent of the minimum revenue
guarantees provided to us by Toshiba for a total remaining amount of $1.8
million through September 30, 2003. The agreement expires in December 2003.
In May 2001, Artisoft announced the first release of TeleVantage CTM Suite,
which delivers on the Company's joint engineering relationship with Intel.
TeleVantage CTM Suite is being pre-loaded on certain configurations of Intel's
Converged Communications Platform, an open, standards-based, application-ready
platform that supports a broad range of compatible telephony and business
applications, peripherals, and services from multiple vendors on a single
system. The Company delivered a final version of this product to Intel in May
2001 and has completed its development obligations under this agreement.
Although TeleVantage CTM Suite began shipping in August 2001, due to changes in
Intel release schedules, the Company expects that any significant revenues from
the CTM Suite will be delayed until calendar year 2003. Any significant further
delay or cancellation or termination of this arrangement with Intel will have a
material adverse effect on the Company's future revenue growth.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $6.0 million at June 30, 2002
compared to $5.8 million at June 30, 2001. Working capital was $4.0 million at
June 30, 2002 compared to $5.2 million at June 30, 2001, a decrease of $1.2
million. The decrease in working capital reflects a reduction in inventory of
$600,000 and an increase of $400,000 and $500,000 in deferred revenue and
reserve for stock rotation respectively. The increase in cash and cash
equivalents of $200,000 is primarily a result of receipt of $6.8 million from
the sale of Series B Preferred Stock on August 8, 2001 and on November 14, 2001
and $168,000 in proceeds received from the exercise of stock options and the
purchase of common stock under the Company's Employee Stock Purchase Plan, less
cash of $6.6 million used in operations and the purchase of property and
equipment of $100,000. In fiscal year 2001 the Company liquidated its
investments of $10.3 million and used the proceeds in operating activities.
There were no investments at the end of fiscal year 2002.
27
The Company used cash of $6.6 million to fund operating activities during
the fiscal year ended June 30, 2002. The cash used in operating activities was
principally the result of $8.6 million in net loss offset by depreciation and
amortization of $775,000, net non-cash changes in accounts receivable, rotation
and inventory allowances of $877,000, net decrease in other working capital
items of $400,000.
The Company leases office, product packaging, storage space and equipment
under noncancelable operating lease agreements expiring through 2003.
The approximate minimum rental commitments under noncancelable operating
leases that have remaining noncancelable lease terms in excess of one year at
June 30, 2002 were as follows:
YEARS ENDING FUTURE MINIMUM
JUNE 30 LEASE PAYMENTS (IN THOUSANDS)
------- -----------------------------
2003 $1,221
2004 1,151
2005 1,151
2006 236
------
Total $3,759
======
On August 8, 2001, the Company entered into an agreement for a $7 million
private placement financing to issue an aggregate of 2,800,000 shares of its
Series B Convertible Preferred Stock ("Series B Preferred"). $3.9 million of the
financing was received on August 8, 2001 upon the issuance of 1,560,000 shares
of Series B Preferred. The remaining $3.1 million was received on November 14,
2001 upon the issuance of the remaining 1,240,000 shares of Series B Preferred.
Under the terms of the agreement, each share of Series B Preferred was issued at
a price of $2.50. At the election at any time of the holder thereof, each share
of Series B Preferred initially could be converted into one share of the
Company's common stock, subject to adjustment in certain events. As a result of
the Company's September 2002 financing (discussed below) each share of Series B
Preferred is now convertible into approximately 2.38 shares of common stock.
Under certain circumstances, the Company has the right to effect the automatic
conversion of the Series B Preferred to common stock in the event the closing
per share bid price of the common stock exceeds $5.00 per share for 30
consecutive trading days. The Series B Preferred, in general, votes with the
common stock as one class, with Series B Preferred shares voting on a basis
equal to the number of shares of common stock into which they convert. In
addition, the holders of the Series B Preferred, as a class, are entitled to
elect up to two directors of the Company and have a preference in liquidation
over the common stockholders. On August 28, 2002, the holders of Series B
Preferred exercised their right to elect Robert J. Majteles to our board of
28
directors. The holders of Series B Preferred have not yet exercised their right
to elect an additional director. The shares of Series B Preferred are entitled
to receive dividends only when and if declared by the Board of Directors of the
Company. Such dividends shall be paid to holders of Series B Preferred, prior to
any such distribution to holders of common stock, on a per share basis equal to
the number of shares of common stock into which each share of Series B Preferred
is then convertible.
In addition, pursuant to the agreement for the financing, the Company
issued to the holders of the Series B Preferred, warrants to purchase up to
1,560,000 and 1,240,000 shares of the Company's common stock on August 8, 2001
and November 14, 2001, respectively. The warrants expire on September 30, 2006
and were initially exercisable at a per share price of $3.75. As a result of the
Company's September 2002 financing (discussed below) the warrants are now
exercisable at a per share price of $1.05. The warrants have a call provision
that provides that if the closing per share bid price of the common stock
exceeds $7.50 per share for 30 consecutive trading days and certain other
conditions are met, the Company has the right to require the warrant holders to
exercise their warrants for common stock. Both the per share exercise price and
the number of shares issuable upon exercise of the warrants are subject to
adjustment in certain events.
The fair market value of the warrants issued on August 8, 2001, as
calculated using a Black Scholes pricing model, was estimated at $3.7 million
and was recorded as a credit to additional paid-in capital. The value of the
beneficial conversion feature embedded in the outstanding shares of Series B
Preferred issued on August 8, 2001 was estimated to be $2.4 million and was
recorded as an immediate non-cash dividend to the Series B Preferred
stockholders with a corresponding credit to additional paid-in-capital. This
dividend, which represents a purchase discount to the Series B Preferred
stockholders for shares that may be converted into common shares, was included
in the computation of the loss available to common stockholders and in the loss
per share for the fiscal year ended June 30, 2002. The excess of the aggregate
fair value of the beneficial conversion feature over the proceeds received
amounted to $1 million and it was not reflected in the results of operations or
financial position of the Company at June 30, 2002.
The fair market value of the warrants issued on November 14, 2001, as
calculated using a Black Scholes pricing model, was estimated at $1.2 million
and was recorded as a credit to additional paid-in capital. The value of the
beneficial conversion feature embedded in the outstanding shares of Series B
Preferred issued on November 14, 2001 was estimated to be $.4 million and was
recorded as an immediate non-cash dividend to the Series B Preferred
stockholders with a corresponding a credit to additional paid-in-capital. The
dividend, which represents a purchase discount to the preferred stockholders for
shares that may be converted into common shares, was included in the computation
29
of the loss available to common stockholders and in the loss per share for the
fiscal year ended June 30, 2002.
The Company has registered for resale by the investors in the 2001
financing the shares of common stock originally issuable upon conversion of the
Series B Preferred and upon exercise of the warrants. Under its registration
rights agreement with those investors, the Company is required to register for
resale by the investors the additional shares of common stock issuable upon
conversion of the Series B Preferred as a result of the Company's September 2002
financing (discussed below).
On August 8, 2002, we entered into a purchase agreement under which we
agreed to issue and sell 1,904,800 shares of common stock at a per share
purchase price equal to $1.05 in a private placement financing. On September 27,
2002 we received gross proceeds from the issuance and sale of that common stock
in the amount of $2,000,040. Under its registration rights agreement with the
investors in this September 2002 financing, the Company is required to register
these shares of common stock for resale by the investors. The shares of common
stock issued and sold to the investors are subject to purchase price adjustments
in certain events during the 24-month period following the first effective date
of a registration statement to be filed by Artisoft covering the resale of those
shares. In the event of a purchase price adjustment, the Company will be
required to issue additional shares of common stock to the investors for no
additional consideration and to register those additional shares for resale by
the investors. The investors in the September 2002 financing have the right to
designate one person for election to our board of directors, and we will be
required to use our best efforts to cause that person to be elected to the board
of directors. The investors have not yet exercised this right.
The investors in each of the 2001 and September 2002 financings have the
right to participate, up to their pro rata share in the respective financing, in
future non-public capital raising transactions by the Company. This right, as
held by the investors in the September 2002 financing, is not exercisable unless
and until the expiration or termination in full of the similar rights of the
investors in the 2001 financing.
The closing of the issuance and sale of shares of common stock in the
September 2002 financing resulted in anti-dilution adjustments to the series B
preferred stock and the warrants issued in Artisoft's 2001 financing. As a
result of these anti-dilution adjustments, each share of series B preferred
stock is convertible into approximately 2.38 shares of common stock. Prior to
the issuance and sale of shares of common stock under this agreement each share
of series B preferred stock was convertible into one share of common stock. In
addition, the per share exercise price of each warrant has been reduced from
$3.75 to $1.05. These adjustments will result in a significant increase in
potential common shares outstanding and a significant non cash dividend to the
Series B preferred shareholders and therefore will result in an estimated $2
million increase in our loss per share available to common shareholders in the
first quarter and fiscal year ended 2003 as well as the cumulative periods
results for the second, third and fourth quarters of fiscal 2002.
30
The Company anticipates that based on its anticipated pipeline and
forecasts from strategic partners that existing cash balances at June 30, 2002
combined with gross proceeds of $2.0 million received by the Company in the
September 2002 financing will be adequate to meet the Company's current and
expected cash requirements for the next year. However, a change in circumstance,
such as a reduction in the demand for our products, could necessitate that the
Company seek additional debt or equity capital. See "Risk Factors" below. In
addition, the Company may also from time to time seek debt or equity financing
for various business reasons. In the event the Company seeks and successfully
receives additional equity capital, such additional financing may result in
significant shareholder dilution. There can be no assurance that any such
additional financing will be available when needed or on acceptable terms to
allow the Company to successfully achieve its operating plan or fund future
investment in its TeleVantage product line.
Our common stock trades on the Nasdaq National Market. In order to continue
trading on the Nasdaq National Market, we must satisfy the continued listing
requirements for that market. Last year, the Nasdaq National Market enacted
changes to its continued listing requirements. The changes are effective for
Artisoft on November 1, 2002. We are not in compliance with the continued
listing requirements which are effective on November 1, 2002.
Under the continued listing requirement standard currently utilized by
Artisoft, we are required to have minimum net tangible assets of $4.0 million.
Under the continued listing requirements applicable to Artisoft on November 1,
2002, the minimum net tangible asset requirement is replaced with a minimum
shareholders' equity requirement of $10.0 million. At June 30, 2002, we had
shareholders' equity of $5.1 million. We do not anticipate that we will satisfy
the $10.0 million shareholders' equity requirement as of November 1, 2002 and
therefore expect that our common stock will be delisted from the Nasdaq National
Market. In addition, the minimum bid price of our common stock is currently
below the $1.00 per share minimum bid price continued listing requirement in
effect both now and on November 1, 2002. The listing of our common stock on the
Nasdaq National Market is currently being maintained under a grace period
permitted by Nasdaq Marketplace Rule 4450(e)(2).
In light of the foregoing, we expect to apply to transfer the listing of
our common stock from the Nasdaq National Market to the Nasdaq SmallCap Market.
There can be no assurance that our application will be approved, or if approved,
that we will be able to maintain compliance with the continued listing
requirements of the Nasdaq SmallCap Market. If our application is not approved
our common stock may trade on either the over-the-counter electronic bulletin
board or the Pink Sheets.
A delisting of our common stock from the Nasdaq National Market, including
a transfer of the listing of our common stock to the Nasdaq SmallCap Market,
would materially reduce the liquidity of our common stock and result in a
31
corresponding material reduction in the price of our common stock. In addition,
any such delisting would materially adversely affect our access to the capital
markets, and the limited liquidity and reduced price of our common stock would
materially adversely affect our ability to raise capital through alternative
financing sources on terms applicable to us or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standards ("SFAS") No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS ("SFAS 143)" which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS 143 requires an enterprise to record the
fair value of an asset retirement obligation as a liability in the period in
which it incurs a legal obligation associated with the retirement of a tangible
long-lived asset. SFAS 143 also requires the enterprise to record the contra to
the initial obligation as an increase to the carrying amount of the related
long-lived asset and to depreciate that cost over the remaining useful life of
the asset. The liability is changed at the end of each period to reflect the
passage of time and changes in the estimated future cash flows underlying the
initial fair value measurement. SFAS 143 is effective for fiscal years beginning
after June 15, 2002. The Company is currently examining the effect of this
pronouncement on the results of operations and financial position of the
Company, but currently believes the effect will not be material.
In August 2001, FASB issued SFAS 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS ("SFAS 144), which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
FASB Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
FOR LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS 144 retains many of the
fundamental provisions of that Statement. SFAS 144 also supersedes the
accounting and reporting provisions of Accounting Principle Board Opinion 30,
REPORTING THE RESULTS OF OPERATIONS--REPORTING THE EFFECTS OF DISPOSAL OF A
SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING
EVENTS AND TRANSACTIONS ("APB 30"), for the disposal of a segment of a business.
However, it retains the requirement in APB 30 to report separately discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. SFAS 144 is effective for fiscal years beginning
after December 15, 2001 and interim periods within those fiscal years. The
Company is currently examining the effect of this pronouncement on the results
of operations and financial position of the Company, but currently believes the
effect will not be material.
The FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections, effective for
fiscal years beginning May 15, 2002 or later that rescinds FASB Statement No. 4,
32
Reporting Gains and Losses from Extinguishment of Debt, FASB Statement No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements, and FASB
Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This
Statement Amends FASB Statement No. 4 and FASB Statement No. 13, Accounting for
Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The Company
is currently examining the effect of this pronouncement on the results of
operations and financial position of the Company, but currently believes the
effect will not be material.
On July 30, 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. Statement No. 146 is based on the
fundamental principle that a liability for a cost associated with an exit or
disposal activity should be recorded when it (1) is incurred, that is, when it
meets the definition of a liability in FASB Concepts Statement No. 6, "Elements
of Financial Statements", and (2) can be measured at fair value. The principal
reason for issuing Statement 146 is the Board's belief that some liabilities for
costs associated with exit or disposal activities that entities record under
current accounting pronouncements, in particular Issue 94-3, do not meet the
definition of a liability. Statement 146 nullifies Issue 94-3; thus, it will
have a significant effect on practice because commitment to an exit or disposal
plan no longer will be a sufficient basis for recording a liability for costs
related to those activities. Statement No. 146 is effective for exit and
disposal activities initiated after December 31, 2002. An entity would continue
to apply the provisions of Issue 94-3 to an exit activity that it initiated
under an exit plan that met the criteria of Issue 94-3 before the entity
initially applied Statement 146. The Company is currently examining the effect
of this pronouncement on the results of operations and financial position of the
Company, but currently believes the effect will not be material.
RISK FACTORS
We caution you that the following important factors, among others, in the
future could cause our actual results to differ materially from those expressed
in forward-looking statements made by or on behalf of us in filings with the
Securities and Exchange Commission, press releases, communications with
investors and oral statements. Any or all of our forward-looking statements in
this Annual Report on Form 10-K, and in any other public statements we make may
turn out to be wrong. They can be affected by inaccurate assumptions we might
make or by known or unknown risks and uncertainties. Many factors mentioned in
the discussion below are important in determining future results. We undertake
no obligation to publicly update any forward-looking statements, whether as a
result of new information, future events or otherwise. You are advised, however,
33
to consult any further disclosures we make in our reports filed with the
Securities and Exchange Commission.
OUR REVENUES ARE DEPENDENT UPON SALES OF A SINGLE PRODUCT.
Our revenues are derived from sales of a single family of products,
TeleVantage. TeleVantage is a relatively new product in the emerging market for
software-based phone systems and it is difficult to predict when or if sales of
TeleVantage will increase substantially or at all. We face a substantial risk
that our sales will continue to not cover our operating expenses and that we
will continue to incur operating losses. Our business will fail if we are unable
to substantially increase our revenues from sales of TeleVantage, whether as a
result of competition, technological change, price pressures or other factors.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR FUTURE LOSSES.
We had operating losses for the year ended June 30, 2002 and in each of the
last eight fiscal years, and negative cash flow from operating activities in
four out of the last eight fiscal years including the year ended June 30, 2002.
The Company intends to continue investing in the sales, marketing and
development of its software-based phone system, TeleVantage. The Company expects
operating expenditures for fiscal year 2003 to be at approximately the same
levels as in as fiscal year 2002.
The Company believes that future TeleVantage revenues will increase and
thereby reduce future operating losses. However, the rate at which these
revenues increase will be highly dependent on the overall telecom industry
capital spending environment, the rate of market acceptance of TeleVantage and
the success of the Company's strategic relationships with Toshiba and Intel
However, we still expect to incur significant future operating losses and
negative cash flows. If our revenues do not increase significantly we may never
achieve profitability, on a sustained basis or at all, or generate positive cash
flow in the future. In that case our business will fail.
OUR OPERATING RESULTS VARY, MAKING FUTURE OPERATING RESULTS DIFFICULT TO
PREDICT.
Our operating results have in the past fluctuated, and may in the future
fluctuate, from quarter to quarter, as a result of a number of factors
including, but not limited to
* the extent and timing of sales and operating expense increases and
decreases;
* changes in pricing policies or price reductions by us or our competitors;
34
* variations in our sales channels or the mix of product sales;
* the timing of new product announcements and introductions by us or our
competitors;
* the availability and cost of supplies;
* the financial stability of major customers;
* market acceptance of new products and product enhancements;
* our ability to develop, introduce and market new products, applications and
product enhancements;
* our ability to control costs;
* possible delays in the shipment of new products;
* our success in our sales and marketing efforts;
* deferrals of orders by our customers in anticipation of new products,
product enhancements or operating systems;
* changes in our strategy;
* personnel changes; and
* general economic factors.
Our software products are generally shipped as orders are received and
accordingly, we have historically operated with little backlog. As a result,
sales in any quarter are dependent primarily on orders booked and shipped in
that quarter and are not predictable with any degree of certainty. Sales may
also be affected by the level of returns beyond those estimated and provided for
at any point in time. In addition, our expense levels are based, in part, on our
expectations as to future revenues. If revenue levels are below expectations,
operating results are likely to be adversely affected. Our net loss may be
disproportionately affected by a reduction in revenues because of fixed costs
related to generating our revenues. These or other factors may influence
quarterly results in the future and, accordingly, there may be significant
variations in our quarterly operating results. Our historical operating results
are not necessarily indicative of future performance for any particular period.
Due to all of the foregoing factors, it is possible that in some future quarter
our operating results may be below the expectations of public market analysts
and investors. In such event, the price of our common stock could be adversely
affected.
35
The Company delivered a final version of TeleVantage CTM Suite to Intel in
May 2001 and has completed its development obligations under our agreement with
them. Although TeleVantage CTM Suite began shipping in August 2001, the Company
expects that significant revenues from the CTM Suite will be delayed until
calendar year 2003. In addition, the Company's pricing of TeleVantage CTM Suite
varies based on configuration. There can be no guarantee that sales of Intel's
Converged Communication Platform will ship in sufficient volume or produce
revenues that meet the Company's expectations. Any significant delay or,
cancellation or termination of this arrangement with Intel will have a material
adverse affect on the Company's future results of operations.
OUR COMMON STOCK WILL BE DELISTED FROM THE NASDAQ NATIONAL MARKET.
Our common stock trades on the Nasdaq National Market. In order to continue
trading on the Nasdaq National Market, we must satisfy the continued listing
requirements for that market. Last year, the Nasdaq National Market enacted
changes to its continued listing requirements. The changes are effective for
Artisoft on November 1, 2002. We are not in compliance with the continued
listing requirements which are effective on November 1, 2002.
Under the continued listing requirement standard currently utilized by
Artisoft, we are required to have minimum net tangible assets of $4.0 million.
Under the continued listing requirements applicable to Artisoft on November 1,
2002, the minimum net tangible asset requirement is replaced with a minimum
shareholders' equity requirement of $10.0 million. At June 30, 2002 we had
shareholders' equity of $5.1 million. We do not anticipate that we will satisfy
the $10.0 million shareholders' equity requirement as of November 1, 2002 and
therefore expect that our common stock will be delisted from the Nasdaq National
Market. In addition, the minimum bid price of our common stock is currently
below the $1.00 per share minimum bid price continued listing requirement in
effect both now and on November 1, 2002. The listing of our common stock on the
Nasdaq National Market is currently being maintained under a grace period
permitted by Nasdaq Marketplace Rule 4450(e)(2).
In light of the foregoing, we expect to apply to transfer the listing of
our common stock from the Nasdaq National Market to the Nasdaq SmallCap Market.
There can be no assurance that our application will be approved, or if approved,
that we will be able to maintain compliance with the continued listing
requirements of the Nasdaq SmallCap Market. If our application is not approved
our common stock may trade on either the over-the-counter electronic bulletin
board or the Pink Sheets.
36
A delisting of our common stock from the Nasdaq National Market, including
a transfer of the listing of our common stock to the Nasdaq SmallCap Market,
would materially reduce the liquidity of our common stock and result in a
corresponding material reduction in the price of our common stock. In addition,
any such delisting would materially adversely affect our access to the capital
markets, and the limited liquidity and reduced price of our common stock would
materially adversely affect our ability to raise capital through alternative
financing sources on terms applicable to us or at all.
WE MAY HAVE A NEED TO PROCURE ADDITIONAL THIRD PARTY FINANCING, BUT FINANCING
MAY NOT BE AVAILABLE WHEN NEEDED OR UPON TERMS ACCEPTABLE TO US. IF A FINANCING
IS CONSUMMATED, CURRENT STOCKHOLDERS MAY EXPERIENCE SUBSTANTIAL DILUTION OF
THEIR OWNERSHIP IN ARTISOFT.
In the past, we have funded our continuing operations and working capital
requirements primarily through cash from operations and the sale of our
securities. In order to obtain the funds to continue our operations and meet our
working capital requirements, we may require additional equity financing or debt
financing. We may also from time to time seek additional equity financing or
debt financing in order to fund other business initiatives, including the
acquisition of other businesses. Additional financing may place significant
limits on our financial and operating flexibility, and any future financing
could result in substantial dilution to our stockholders. The holders of our
Series B Preferred Stock and the holders of common stock issued pursuant to our
September 2002 financing have anti-dilution protection in the event of a future
dilutive issuance of our stock. In addition, those same investors all have the
right to participate, up to their pro rata share in their respective financing,
in future capital raising transactions by the Company. The existence of this
right may substantially reduce the Company's ability to establish terms with
respect to, or enter into, any such financing with parties other than the
investors. There can be no assurance that any such additional equity financing
or debt financing will be available to us when needed or on terms acceptable to
us. If we are not able to successfully obtain additional equity financing or
debt financing, if needed, the business, financial condition and results of
operations of Artisoft will be materially and adversely affected.
OUR MARKET IS HIGHLY COMPETITIVE, AND WE MAY NOT HAVE THE RESOURCES TO COMPETE
ADEQUATELY.
The computer telephony industry is highly competitive and is characterized
by rapidly evolving industry standards. We believe that the principal
competitive factors affecting the markets we serve include:
* vendor and product reputation;
* product architecture, functionality and features;
37
* scalability, ease of use and performance;
* quality of product and support;
* price;
* brand name recognition; and
* effectiveness of sales and marketing efforts.
We compete with other phone system companies, many of which have
substantially greater financial, technological, production, sales and marketing
and other resources, as well as greater name recognition and larger customer
bases, than does Artisoft. As a result, these competitors may be able to respond
more quickly and effectively than can Artisoft to new or emerging technologies
and changes in customer requirements or to devote greater resources than can
Artisoft to the development, promotion, sales and support of their products. In
addition, our competitors could develop products compatible with the Intel
SoftSwitch Framework that could displace TeleVantage CTM Suite. Also, any new
product introductions by Artisoft may be subject to severe price and other
competitive pressures. Given the greater financial resources of many of our
competitors, there can be no assurance that our products will be successful or
even accepted. There can be no assurance that our products will be able to
compete successfully with other products offered presently or in the future by
other vendors.
38
IF SOFTWARE-BASED PHONE SYSTEMS DO NOT ACHIEVE WIDESPREAD ACCEPTANCE, WE MAY NOT
BE ABLE TO CONTINUE OUR OPERATIONS.
Our sole product, TeleVantage, competes in the newly emerging
software-based phone system market. Software-based phone systems operate in
conjunction with and are affected by developments in other related industries.
These industries include highly developed product markets, such as personal
computers, personal computer operating systems and servers, proprietary private
branch exchanges and related telephone hardware and software products, and
telephone, data and cable transmission systems, as well as new emerging products
and industries, such as Internet communications and Internet Protocol telephony.
These industries and product markets are currently undergoing rapid changes,
market evolution and consolidation. The manner, in which these industries and
products evolve, including the engineering- and market-based decisions that are
made regarding the interconnection of the products and industries, will affect
the opportunities and prospects for TeleVantage. TeleVantage competes directly
with other software-based phone system solutions as well as existing
traditional, proprietary hardware solutions offered by companies such as Avaya
Communications, Nortel Networks Corporation and Siemens Corporation. There can
be no assurance that the markets will migrate toward software-based phone system
solutions. If software-based phone systems do not achieve widespread acceptance,
sales of TeleVantage will not increase and may decline and our revenues will
suffer.
WE SELL OUR PRODUCTS THROUGH DISTRIBUTORS AND VALUE-ADDED RESELLERS, WHICH LIMIT
OUR ABILITY TO CONTROL THE TIMING OF OUR SALES, AND THIS MAKES IT DIFFICULT TO
PREDICT OUR REVENUE.
We are exposed to the risk of product returns from our distributors and
value-added resellers, which are estimated and recorded by us as a reduction in
sales. In addition, we are exposed to the risk of fluctuations in quarterly
sales if resellers and distributors purchase and hold excessive amounts of
inventory at any time or otherwise change their purchasing patterns. Although we
monitor our distributor inventories and current and projected levels of sales,
overstocking may occur with TeleVantage because of rapidly evolving market
conditions. In addition, the risk of product returns may increase if the demand
for TeleVantage were to rapidly decline due to regional economic troubles or
increased competition. All of these risks are exacerbated as TeleVantage is our
sole product line and the market for TeleVantage and similar products is newly
emerging. There can be no assurance that actual product returns will not exceed
our allowances for these returns. Any overstocking by resellers or distributors
or any product returns in excess of recorded allowances could adversely affect
our revenues. To the extent we may, in the future, introduce new products, the
predictability and timing of sales to end-users and the management of returns to
us of unsold products by distributors and volume purchasers may become more
complex and could result in material fluctuations in quarterly sales and
operating results. In fiscal year 2002, the Company recorded a stock rotation
reserve of $800,000 as a reduction to revenue. The OEM agreement with Toshiba
39
llows for the rotation of inventory it holds for updated versions of the
products. The stock rotation reserve was recorded based on the estimated amount
of TeleVantage 4.0 inventory that Toshiba likely will rotate with the expected
release of TeleVantage 5.0 later this calendar year. For Toshiba product sales
commencing on or after April 1, 2002, the Company began to defer revenue
beginning in the fourth quarter of fiscal year 2002 until the product is resold
by Toshiba to its customers. The deferral of revenue is due to increasing
Toshiba inventory levels, which has resulted in Artisoft not having the ability
to reasonably estimate potential future stock rotations resulting from future
product releases and their effect on further Toshiba revenue.
OUR MARKET IS SUBJECT TO CHANGING PREFERENCES AND TECHNOLOGICAL CHANGE; FAILURE
TO KEEP UP WITH THESE CHANGES WOULD RESULT IN OUR LOSING MARKET SHARE.
The markets for computer telephony solutions are characterized by rapid
technological change, changing customer needs, frequent product introductions
and evolving industry standards. The introduction of products incorporating new
technologies and the emergence of new industry standards could render our
existing products obsolete and unmarketable. Our future success will depend upon
our ability to develop and introduce new computer telephony products (including
new releases and enhancements) on a timely basis that keep pace with
technological developments and emerging industry standards and address the
increasingly sophisticated needs of our customers. There can be no assurance
that we will be successful in developing and marketing new computer telephony
products that respond to technological changes or evolving industry standards,
that we will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these new products, or
that our new products will adequately meet the requirements of the marketplace
and achieve market acceptance. If we were unable, for technological or other
reasons, to develop and introduce new computer telephony products in a timely
manner in response to changing market conditions or customer requirements, our
market share would likely be reduced.
SOFTWARE ERRORS MAY SERIOUSLY HARM OUR BUSINESS AND DAMAGE OUR REPUTATION,
CAUSING LOSS OF CUSTOMERS AND REVENUES.
Software products as complex as TeleVantage may contain undetected errors.
There can be no assurance that, despite testing by the Company and by current
and potential customers, errors will not be found in TeleVantage or any new
products after commencement of commercial shipments, resulting in loss of or
delay in market acceptance or the recall of such products. We provide customer
support for most of our products. We may in the future offer new products. If
these products are flawed, or are more difficult to use than TeleVantage,
customer support costs could rise and customer satisfaction levels could fall.
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WE RELY ON THIRD-PARTY TECHNOLOGY AND HARDWARE PRODUCTS; IF THIS TECHNOLOGY IS
NOT AVAILABLE OR CONTAINS UNDETECTED ERRORS, OUR BUSINESS MAY SUFFER.
Our computer telephony software requires the availability of certain
hardware. Specifically, the TeleVantage software-based phone system operates on
voice processing boards manufactured by Intel. To the extent that these boards
become unavailable or in short supply we could experience delays in shipping
software-based phone systems to our customers, which may have a material adverse
affect on our future operating results. In addition, we are dependent on the
reliability of this hardware and to the extent the hardware has defects it will
affect the performance of our own software-based phone system. If the hardware
becomes unreliable or does not perform in a manner that is acceptable to our
customers, sales of TeleVantage could fall. Such delays or quality problems if
encountered could also cause damage to our reputation. Additionally, there can
be no assurances that, in the event of a price increase by Intel, we will be
able to sell and market our software-based phone system.
TeleVantage currently runs only on Microsoft Windows NT servers. In
addition, our products use other Microsoft Corporation technologies, including
the Microsoft Data Engine (MSDE). A decline in market acceptance for Microsoft
technologies or the increased acceptance of other server technologies could
cause us to incur significant development costs and could have a material
adverse effect on our ability to market our current products. There can be no
assurance that businesses will adopt Microsoft technologies as anticipated or
will not migrate to other competing technologies that our telephony products do
not currently support. Additionally, since the operation of our software-based
phone system solution is dependent upon Microsoft technologies, there can be no
assurances that, in the event of a price increase by Microsoft, we will be able
to sell and market our software-based phone system.
Our TeleVantage CTM Suite software operates on voice processing hardware,
computer hardware, CT Media software, and SoftSwitch Framework software
manufactured by Intel. To the extent that these technologies become unavailable
or in short supply we could experience delays in shipping TeleVantage CTM Suite
to our customers, which may have a material adverse affect on our future
operating results. In addition, we are dependent on the reliability of these
technologies and to the extent they have defects it will affect the performance
of our own software. If the Intel technologies become unreliable or do not
perform in a manner that is acceptable to our customers, sales of TeleVantage
CTM Suite could fall. Such delays or quality problems if encountered could also
cause damage to our reputation. Additionally, there can be no assurances that,
in the event of a price increase by Intel, we will be able to sell and market
our software-based phone system.
41
ANY FAILURE BY US TO PROTECT OUR INTELLECTUAL PROPERTY COULD HARM OUR BUSINESS
AND COMPETITIVE POSITION.
Our success is dependent upon our software code base, our programming
methodologies and other intellectual properties. To protect our proprietary
technology, we rely primarily on a combination of trade secret laws and
nondisclosure, confidentiality, and other agreements and procedures, as well as
copyright and trademark laws. These laws and actions may afford only limited
protection. There can be no assurance that the steps taken by us will be
adequate to deter misappropriation of our proprietary information, or to prevent
the successful assertion of an adverse claim to software utilized by us, or that
we will be able to detect unauthorized use and take effective steps to enforce
our intellectual property rights. We own United States and foreign trademark
registrations for certain of our trademarks. In selling our products, we rely
primarily on "shrink wrap" licenses that are not signed by licensees and,
therefore, may be unenforceable under the laws of some jurisdictions. In
addition, the laws of some foreign countries provide substantially less
protection to our proprietary rights than do the laws of the United States.
Trademark or patent challenges in these foreign countries could, if successful,
materially disrupt or even terminate our ability to sell our products in those
markets. There can be no assurance that our means of protecting our proprietary
rights will be adequate or that our competitors will not independently develop
similar technology. Although we believe that our services and products do not
infringe on the intellectual property rights of others, claims to that effect
have been and in the future may be asserted against u