SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to ___________
COMMISSION FILE NUMBER 0-21999
-----------------------
APPIANT TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1360852
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6663 OWENS DRIVE
PLEASANTON, CALIFORNIA 94588
(Address of principal executive offices)
(925) 251-3200
(Registrant's telephone number)
----------------
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES [X] NO [ ]
As of January 31, 2002, there were 15,983,000 shares of Common Stock
outstanding.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at December 31,
2001 and September 30, 2001 3
Condensed Consolidated Statements of Operations and
Comprehensive Loss for the three months ended December
31, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows for the
three months ended December 31, 2001 and 2000 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market
Risk 32
PART II. OTHER INFORMATION 33
Item 1. Legal Proceedings 33
Item 2. Changes in Securities and Use of Proceeds 34
Item 3. Defaults on Senior Securities 35
Item 4. Submission of Matters to a Vote of Security Holders 35
Item 5. Exhibits and Reports on Form 8-K 35
Signatures 36
2
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, September 30,
2001 2001
-------------- ---------------
ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 1,678,000 $ 3,379,000
Restricted cash 112,000 117,000
Accounts receivable, less allowance for
doubtful accounts of $328,000 and $335,000 2,276,000 1,123,000
Inventory 1,239,000 890,000
Equipment at customers under integration 127,000 206,000
Prepaid expenses and other 541,000 418,000
-------------- ---------------
TOTAL CURRENT ASSETS 5,973,000 6,133,000
Property and equipment, net 4,305,000 5,381,000
Capitalized software, net 17,460,000 16,664,000
Goodwill and other intangible assets, net 8,981,000 10,255,000
Other assets 1,900,000 1,933,000
-------------- ---------------
TOTAL ASSETS $ 38,619,000 $ 40,366,000
============== ===============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit $ 300,000 $ 300,000
Accounts payable 9,112,000 8,834,000
Accrued liabilities 2,221,000 3,209,000
Deferred revenue 1,396,000 1,041,000
Income tax payable 302,000 302,000
Accrued liability related to warrants 812,000 1,818,000
Convertible promissory notes payable, net of
discounts 3,830,000 2,700,000
Notes payable 5,547,000 5,726,000
Capital lease obligations, current portion 294,000 4,085,000
-------------- ---------------
TOTAL CURRENT LIABILITIES 23,814,000 28,015,000
Long term notes payable 419,000 379,000
Capital lease obligations, net of
Current portion 112,000 93,000
Other 25,000 39,000
-------------- ---------------
TOTAL LIABILITIES 24,370,000 28,526,000
REDEEMABLE CONVERTIBLE PREFERRED STOCK 253,000 253,000
STOCKHOLDERS' EQUITY
Common stock 157,000 157,000
Additional paid-in capital 82,691,000 80,657,000
Unearned stock-based compensation (368,000) (401,000)
Accumulated deficit (68,160,000) (68,364,000)
Accumulated other comprehensive loss (324,000) (462,000)
-------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 13,326,000 11,587,000
-------------- ---------------
TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY $ 38,619,000 $ 40,366,000
============== ===============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(unaudited)
Three Months Ended
December 31,
2001 2000
------------ -------------
NET REVENUES:
Products and integration services $ 307,000 $ 1,273,000
Other services 3,076,000 4,842,000
------------ -------------
TOTAL NET REVENUES 3,383,000 6,115,000
Cost of revenues:
Products and integration services 195,000 1,490,000
Other services 2,073,000 2,871,000
------------ -------------
TOTAL COST OF REVENUES 2,268,000 4,361,000
GROSS PROFIT 1,115,000 1,754,000
OPERATING EXPENSES
Selling, general and administrative 1,074,000 4,483,000
Research and development 617,000 684,000
Amortization of goodwill and other intangibles 1,042,000 201,000
Release of capitalized lease obligation (2,839,000) --
------------ -------------
TOTAL OPERATING EXPENSES (106,000) 5,368,000
INCOME (LOSS) FROM OPERATIONS 1,221,000 (3,614,000)
OTHER INCOME (EXPENSE)
Interest income 391,000 108,000
Interest expense (1,556,000) (464,000)
Other 172,000 104,000
------------ -------------
Total other expense (993,000) (252,000)
Income (loss) from continuing operations before
income tax 228,000 (3,866,000)
Provision for income tax 24,000 115,000
------------ -------------
NET INCOME (LOSS) 204,000 (3,981,000)
Preferred dividends -- (7,626,000)
------------ -------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ 204,000 $(11,607,000)
============ =============
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE $ 0.01 $ (0.92)
============ =============
COMPREHENSIVE INCOME (LOSS)
Net income (loss) $ 204,000 $ (3,981,000)
Other comprehensive income
Translation gain 138,000 100,000
------------ -------------
COMPREHENSIVE INCOME (LOSS) $ 342,000 $ (3,881,000)
============ =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
December 31,
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITES
Net income (loss) $ 204,000 $(3,981,000)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 351,000 435,000
Accretion of discounts on notes payable 1,549,000 --
Amortization of goodwill and other intangible assets 1,019,000 201,000
Stock-based compensation relating to stock
options and warrants -- (1,445,000)
Release of capitalized lease obligation (2,839,000) --
Changes in operating assets and liabilities:
Accounts receivable (1,109,000) (45,000)
Inventory (271,000) (186,000)
Prepaid expenses and other (164,000) (378,000)
Other assets 123,000 16,000
Accounts payable and other current liabilities (1,138,000) 951,000
Income tax payable (1,000) 78,000
Deferred revenue 355,000 278,000
------------ ------------
CASH USED IN OPERATING ACTIVITIES (1,921,000) (4,076,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Restricted cash 5,000 (1,000)
Proceeds loaned to related party -- (250,000)
Capitalization of software development costs (1,210,000) (272,000)
Purchase of property and equipment (101,000) (260,000)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (1,306,000) (783,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment under line of credit -- (343,000)
Proceeds from issuance of notes, convertible notes
and warrants 1,390,000 --
Proceeds from issuance of Series B preferred
Stock, net of issuance costs -- 4,959,000
Proceeds from warrants and options exercised
for common stock -- 784,000
Principal payments on capital lease obligations -- (1,729,000)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,390,000 3,671,000
Effect of exchange rate changes on cash 136,000 100,000
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,701,000) (1,088,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,379,000 5,603,000
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,678,000 $ 4,515,000
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
--------------------------------------------------------------------------------
Supplemental disclosures for cash flow information:
Cash paid during the period for:
Interest $ 7,000 $ 441,000
Income taxes $ 24,000 $ 37,000
NONCASH TRANSACTIONS:
Beneficial conversion feature on convertible promissory
Notes payable $727,000 $ --
Reclassification of warrant liability to equity $670,000 $ --
Release of capitalized lease obligation and write-off
of related assets $682,000 $ --
Property and equipment acquired under capital leases $ -- $3,483,000
Deemed dividend on beneficial conversion feature of
Series B Preferred Stock $ $7,626,000
Issuance of warrants to underwriters in conjunction
with sale of Series B Preferred Stock $ -- $1,107,000
Modification of warrant exercise price in
conjunction with sale of Series B Preferred Stock $ -- $1,847,000
Liability for future issuance of common stock to
underwriters in conjunction with sale of Series B
Preferred Stock $ -- $ 573,000
Payable for purchases of property and equipment financed
under capital leases during quarter $ -- $1,503,000
Software assets acquired under capital leases $ -- $ 563,000
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
APPIANT TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, the Company believes that the
disclosures are adequate to make the information presented not misleading. The
balance sheet as of September 30, 2001 is derived from the Company's audited
financial statements included in its Form 10-K for the fiscal year ended
September 30, 2001 but does not include all disclosures required by generally
accepted accounting principles in the United States. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 2001.
The unaudited condensed consolidated financial statements included herein
reflect all adjustments (which include only normal recurring adjustments) which
are, in the opinion of management, necessary to state fairly the results for the
interim periods presented. The results of operations for the interim periods
presented are not necessarily indicative of the operating results to be expected
for any subsequent interim period or for the fiscal year ending September 30,
2002.
The consolidated financial statements include our results as well as the results
of our significant operating subsidiaries: Appiant Technologies North America,
Inc. ("Appiant NA") and Infotel Technologies (Pte) Ltd ("Infotel").
Appiant NA revenues were 28% and 39% of consolidated net revenues for the three
months ended December 31, 2001 and 2000. Infotel revenues were 72% and 61% of
consolidated net revenues for the three months ended December 31, 2001 and 2000.
No revenues have been recorded through December 31, 2001 from the Company's
hosted internet inUnison-TM- unified communication and unified information
portal services.
LIQUIDITY
The consolidated financial statements of the Company and its subsidiaries
contemplate the realization of assets and satisfaction of liabilities in the
normal course of business. The Company recorded a net profit of $204,000 on net
revenues of $3.4 million for three months ended December 31, 2001 and sustained
significant losses for the fiscal years ended 2000 and 1999. At December 31,
2001, the Company had an accumulative deficit of $68.2 million. As a result, the
Company will need to generate significantly higher revenue to reach
profitability as the organization of the new inUnison(TM) portal business is
built. In addition, the amortization of capitalized software and other assets
that the Company has purchased or developed for the new inUnison-TM- portal
commenced on December 17, 2001. The Company is developing other technologies and
amortization of the costs associated with these technologies will commence upon
the completion of development.
Management's plans to reverse the recent trend of losses are to increase
revenues and gross margins while controlling costs, primarily based on expected
revenues for the Company's inUnison-TM- portal services applications. Continued
existence of the Company is dependent on the Company's ability to obtain
adequate funding and eventually establish profitable operations. The Company
intends to obtain additional equity and/or debt financing in order to further
finance the market introduction of its inUnison-TM- portal services and to meet
working capital requirements. There remains significant uncertainly, however,
about the Company's ability to continue as going concern. The accompanying
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
2. NET INCOME (LOSS) PER SHARE
Net income (loss) per share for both basic net income (loss) per share, which is
the weighted-average number of common shares outstanding, and diluted net income
(loss) per share, which includes the weighted-average number of common shares
outstanding and all dilutive potential common shares outstanding, is calculated
using the treasury stock method. For the three months ended December 31, 2001
and 2000, dilutive potential common shares outstanding reflects convertible
promissory notes payable, convertible preferred stock, and shares and warrants
to purchase the Company's common stock. The following table summarizes the
Company's net income (loss) per share computations for the three months ended
December 31, 2001 and 2000 (in thousands, except per share amounts):
7
Three Months Ended
December 31,
--------------------------
2001 2000
----------- -------------
Net income (loss) $ 204,000 $ (3,981,000)
Preferred stock dividends -- (7,626,000)
----------- -------------
Basic net income (loss) applicable
to common stock $ 204,000 $(11,607,000)
=========== =============
Weighted average shares used in net
Income (loss) per share - basic and
diluted 15,983,000 12,575,500
----------- -------------
Incremental common shares attributed to
shares issuable under employee common
stock plans and warrants exercisable 363,000 --
Incremental common shares attributable
to shares issuable for convertible
preferred shares 69,000 --
----------- -------------
Weighted average shares used in diluted
net income (loss) per share 16,415,000 12,575,000
=========== =============
Net income (loss) per share - basic $ 0.01 $ (0.92)
=========== =============
Net income (loss) per share - diluted $ 0.01 $ (0.92)
=========== =============
3. INVENTORY
Inventory consists of systems and system components and is valued at the lower
of cost (first-in, first-out method) or market.
4. RECENT ACCOUNTING PRONOUNCMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The Company believes that the adoption of SFAS 141 will not have a significant
impact on its financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is effective for
fiscal years beginning after March 15, 2001. SFAS 142 requires, among other
things, the discontinuance of goodwill amortization. In addition, the Standard
includes provisions upon adoption for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the testing for impairment of existing goodwill
and other intangibles. The Company is currently assessing but has not yet
determined the impact of SFAS 142 on its financial position and results of
operations.
In October 2001, the FASB issued SFAS 144 Accounting for the Impairment or
Disposal of Long-Lived Assets, which is required to be applied in fiscal years
beginning after December 15, 2001. SFAS 144 requires, among other things, the
application of one accounting model for long-lived assets that are impaired or
to be disposed of by sale. The Company believes that the adoption of SFAS 144
will not have a significant impact on its financial position or results of
operations.
In May 2000, the Emerging Issues Task Force (EITF) issued EITF Issue No. 00-14,
Accounting for Certain Sales Incentives. EITF Issue No. 00-14 addresses the
recognition, measurement, and income statement classification for sales
incentives that a vendor voluntarily offers to customers (without charge), which
the customer can use in, or exercise as a result of, a single exchange
8
transaction. Sales incentives that fall within the scope of EITF Issue No. 00-14
include offers that a customer can use to receive a reduction in the price of a
product or service at the point of sale. The EITF changed the transition date
for Issue 00-14, concluding that a company should apply this consensus no later
than the company s annual or interim financial statements for the periods
beginning after December 15, 2001. In June 2001, the EITF issued EITF Issue No.
00-25, Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor s Products, effective for periods beginning after
December 15, 2001. EITF Issue No. 00-25 addresses whether consideration from a
vendor to a reseller is (a) an adjustment of the selling prices of the vendor s
products and, therefore, should be deducted from revenue when recognized in the
vendor s statement of operations or (b) a cost incurred by the vendor for assets
or services received from the reseller and, therefore, should be included as a
cost or expense when recognized in the vendor s statement of operations. Upon
application of these EITFs, financial statements for prior periods presented for
comparative purposes should be reclassified to comply with the income statement
display requirements under these Issues. In September of 2001, the EITF issued
EITF Issue No. 01-09, Accounting for Consideration Given by Vendor to a Customer
or a Reseller of the Vendor s Products, which is a codification of EITF Issues
No. 00-14, No. 00-25 and No. 00-22 Accounting for Points and Certain Other
Time-or Volume-Based Sales Incentive Offers and Offers for Free Products or
Services to be Delivered in the Future. The Company is currently assessing the
impact of the adoption of these issues on its financial statements.
5. COMMITMENTS AND CONTINGENCIES
CAPITAL LEASES
In December 2001, the Company reached an agreement with a vendor under which the
vendor agreed to release the Company from capital lease obligations of $3.5
million. The agreement also provided for the return of equipment capitalized
under the capital lease obligations of $0.7 million. In June 2001, the Company
charged to operating expenses $3.7 million of consulting services related to its
first data center in Atlanta, Georgia, when its data center was relocated to
Sunnyvale, California, as such costs had no future value following the
relocation. According, the Company has recorded a gain of $2.8 million within
operating expenses equal to the difference between the capital lease obligation
and the book value of the capitalized equipment returned to the vendor.
At December 31, 2001, the Company leased other computer equipment and software
under capital leases. These leases extend for varying periods through 2004.
Equipment and software under capital leases included in property and equipment
are as follows:
December 31, September 30,
2001 2001
------------ ------------
Equipment and software $ 958,000 $ 2,112,000
Less: accumulated amortization (414,000) (614,000)
------------ ------------
$ 544,000 $ 1,498,000
============ ============
9
Future capital lease payments are as follows:
FISCAL YEAR
December 31,
2001
------------
2002 $ 324,000
2003 96,000
2004 27,000
------------
447,000
------------
Less amount representing interest (41,000)
------------
Present value of minimum future
payments 406,000
Less current portion 294,000
------------
$ 112,000
============
CONTINGENCIES
In January 2002, a default judgment was issued against the Company in favor of
an equipment vendor in the amount of $123,000. The Company was successful in
having that default judgment set aside on February 6, 2002. The Company is in
discussions to establish a mutually agreed upon payment plan and expects to
settle this issue.
In October 2001, a software vendor filed suit against the Company for breach of
contract totaling approximately $703,000 plus interest and attorney's fees. On
December 28, 2001, Appiant filed an answer denying this general demand, and is
preparing a counter-suit for return of over $600,000 paid to this vendor. The
Company will continue to otherwise vigorously pursue this matter.
In December 2001, a major customer tendered its internal defense costs and
expenses arising from its defense of a lawsuit involving claims of infringement
of certain patents. It is seeking reimbursement from Company of approximately
$53,000. As the Company is only a distributor of these systems, any liability
suffered by us is reimbursable by the supplier of these systems. The Company
will continue to vigorously defend this matter.
In January 2002, a note holder filed suit demanding payment on a Note in the
amount of $1.2 million. The Company is currently in negotiations toward an
agreement to extend the date of this note.
In January 2002, a services and equipment provider filed suit in Texas for
breach of contract totaling $117,000. The Company is currently in negotiations
to resolve this claim.
In February 2002, the Company resolved an arbitration matter and litigation
action involving a dispute over employment contract terms for two former Company
management employees. The settlement provides for payment of $88,000 to one
claimant over six months, and payment of $147,000 to the second claimant over a
total of twelve months. The Company and claimants are currently in negotiations
regarding Company common stock that may be due to the claimants under an
unrelated agreement, and the Company expects to resolve this issue. The company
has accrued $235,000 for this matter.
While management intends to defend these matters vigorously, there can be no
assurance that any of these complaints or other third party assertions will be
resolved without costly litigation, or in a manner that is not adverse to our
financial position, results of operations or cash flow. No estimate can be made
of the possible loss or possible range of loss associated with the resolution of
these matters in excess of amounts accrued.
6. CONVERTIBLE PROMISSORY NOTES PAYABLE AND WARRANTS
Between October 31, 2001 and December 20, 2001, the Company entered into several
Convertible Promissory Notes Payable (the "Convertible Notes") with certain
investors in the aggregate principal amount of $1,390,000, of which $400,000 was
10
with members of the board of directors or shareholders. The Notes accrue
interest at 8% per annum, which is payable in common stock at the time of
conversion and are collateralized by the Company's legacy business accounts
receivables, and the assets of the Infotel subsidiary, and mature on various
dates from December 27, 2001 to November 16, 2003. The conversion price is equal
to the lower of 90% of the closing price of the Company's common stock on the
trading day immediately preceding the maturity date, or 90% of any subsequent
interim financing that occurs between the issuance date of the notes and the
maturity date. Upon conversion, the Convertible Notes have no specific
registration rights.
In connection with these Convertible Notes, the Company issued warrants to
purchase 945,000 shares of the Company's common stock at an exercise price of
ranging from $1.20 per share to $1.77 per share. The estimated value of the
warrants of $1,269,000 was determined using the Black-Scholes option pricing
model and the following assumptions: contractual term of 5 years, a risk free
interest rate of 3.92%, a dividend yield of 0% and volatility of 148%. The
allocation of the Convertible Notes proceeds to the fair value of the warrants
of $663,000 was recorded as a discount on the Convertible Notes and as
additional paid in capital. Upon exercise of the warrants, the holder has no
specific registration rights.
The discount on the Convertible Notes related to the warrants is accreted over
the note maturity period and, as a result, $310,000 was recorded as non-cash
interest expense for the three months ended December 31, 2001.
In addition, as a result of the beneficial conversion feature described above
for the Convertible Notes, the Company recorded $726,000 additional paid-in
capital, and a discount on the notes payable which is accreted over the note
maturity period to interest expense. As a result, $361,000 was recorded as
interest expense for the three months ended December 31, 2001.
Under the June 8, 2001 Convertible Notes Payable purchase agreement, the common
stock issuable pursuant to the conversion of the notes and exercise of the
related warrants were to be registered within 30 days after the next round of
financing. Due to the registration requirement, the warrants were classified as
liabilities and remeasured at each reporting date. On December 1, 2001, certain
of the warrant agreements were amended to remove the requirement to register the
common stock under these warrants. Accordingly, the liability related to these
warrants on December 1, 2001 of $670,000 was reclassified to stockholders'
equity, additional paid-in capital.
7. SEGMENT REPORTING
The Company defines operating segments as components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. The operating segments
disclosed are managed separately, and each represents a strategic business unit
that offers different products and serves different markets.
The Company's reportable operating segments include Appiant Technologies Inc.
(Appiant NA) and Infotel. This represents a change in the Company's internal
organization. Accordingly, segment information for the quarter ending December
31, 2000 have been reclassed to conform to the current year presentation.
Appiant NA includes the Company's enterprise operations in the US. Appiant NA
enterprise operations include systems integration and distribution of voice
processing and multimedia messaging equipment, technical support, ongoing
maintenance and product development.
Infotel is a distributor and integrator of telecommunications and other
electronics products operating in Singapore and provides radar system
integration, turnkey project management, networking and test instrumentation
services. Infotel derives substantially all of its revenue from sales in
Singapore. There are no intersegment revenues.
11
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies in the Company's
Annual Report on Form 10-K for our fiscal year ended September 30, 2001.
APPIANT NA INFOTEL OTHER(1) TOTAL
------------ ----------- ------------ -----------
THREE MONTHS ENDED December 31, 2001
Net sales to external customers $ 955,000 $ 2,428,000 $ -- $ 3,383,000
Income (loss) from operations 1,208,000 67,000 (54,000) 1,221,000
Total assets 24,784,000 4,198,000 7,637,000 38,619,000
THREE MONTHS ENDED December 31, 2000
Net sales to external customers $ 2,366,000 $ 3,749,000 $ -- $ 6,115,000
Income (loss) from operations (4,761,000) 224,000 923,000 (3,614,000)
Total assets 14,187,000 10,206,000 15,973,000 40,366,000
(1) Other includes corporate expenses. Additionally, management reports
include goodwill for Infotel in total assets.
8. SUBSEQUENT EVENTS
On January 24, 2002, the Company issued a convertible promissory note payable in
the principal amount of $500,000 to an investor and significant shareholder in
the Company. The notes accrue interest at 10% per annum, are convertible into
common stock and mature on October 15, 2002. The conversion price is equal to of
90% of the closing price of common stock on the trading day immediately
preceding maturity date. Upon conversion, the Company is required to attempt its
'best efforts' to have the common stock issuable upon conversion of the note
registered. In connection with these convertible notes, the Company has issued
warrants to purchase 277,778 shares of the Company's common stock at an exercise
price of $1.80. Upon exercise, the Company is required to attempt its 'best
efforts' to have the common stock issuable under the warrants registered.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this Report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding our
expectations, hopes, intentions or strategies regarding the future.
Forward-looking statements include statements regarding: future product or
product development; future research and development spending and our product
development strategies, including our new inUnison-TM- unified communications
and unified information applications; the levels of international sales; future
expansion or utilization of production capacity; future expenditures; and
statements regarding current or future acquisitions, and are generally
identifiable by the use of the words "may", "should", "expect", "anticipate",
"estimates", "believe", "intend", or "project" or the negative thereof or other
variations thereon or comparable terminology.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, performance or achievements (or
industry results, performance or achievements) expressed or implied by these
forward-looking statements to be materially different from those predicted. The
factors that could affect our actual results include, but are not limited to,
the following:
- general economic and business conditions, both nationally and in
the regions in which we operate;
12
- adoption of our new recurring revenue service model;
- competition;
- changes in business strategy or development plans;
- delays in the development or testing of our products;
- technological, manufacturing, quality control or other problems
that could delay the sale of our products;
- our inability to obtain appropriate licenses from third parties,
protect our trade secrets, operate without infringing upon the
proprietary rights of others, or prevent others from infringing
on our proprietary rights;
- our inability to retain key employees;
- our inability to obtain sufficient financing to continue to
expand operations; and
- changes in demand for products by our customers.
Certain of these factors are discussed in more detail elsewhere in this Report
and the Annual Report on Form 10-K for the fiscal year ended September 30, 2001,
including under the caption "Risk Factors; Factors That May Affect Operating
Results".
We do not undertake any obligation to publicly update or revise any
forward-looking statements contained in this Report or incorporated by
reference, whether as a result of new information, future events or otherwise.
Because of these risks and uncertainties, the forward-looking events and
circumstances discussed in this Report might not transpire.
OVERVIEW
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") should be read in conjunction with the condensed
consolidated financial statements included herein. In addition, you are urged to
read this report in conjunction with the risk factors described herein. The
discussion of financial condition includes changes taking place or believed to
be taking place in connection with: our execution of our new, unified
communications and unified information hosted business model; the software,
voice processing, data processing and communications industry in general and how
we expect these changes to influence future results of operations; and liquidity
and capital resources, including discussions of capital financing activities and
uncertainties that could affect future results.
We are a software applications and services company that has changed its
business model to specialize in unified communications and unified information
(UC/UI) solutions. Our new business model is to provide our hosted, IP-based
unified communications and unified information portal and applications branded
under the name "inUnison-TM-" in a recurring revenue model.
Our consolidated financial statements include our results as well as the results
of our significant operating subsidiaries: Appiant Technologies North America,
Inc. ("Appiant NA") and Infotel Technologies (Pte) Ltd ("Infotel").
While we have been and are in the process of launching our new, hosted unified
communications and unified information applications business model, our results
13
for the three months ended December 31, 2001 reflect generally the results of
our legacy business in North America, as well as that of Infotel. Our revenues
for the three months ended December 31, 2001 were derived solely from our legacy
businesses. During the first quarter of fiscal 2002, we received revenue from
beta testing and activation fees of our inUnison-TM- services which were
deferred in accordance with our revenue recognition policy, as described below.
Our new business model for providing unified communications and unified
information in a hosted, recurring revenue service model makes us one of the
first companies in this new market. We anticipate competition in this relatively
new market space to increase significantly. We will continue to invest heavily
in software development, the build out of our production operations and both
customer and subscriber acquisition.
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are as follows:
- revenue recognition;
- estimating the allowance for doubtful accounts and inventory, and accruals
for litigation;
- accounting for income taxes;
- valuation of long-lived and intangible assets and goodwill; and
- determining functional currencies for the purposes of consolidating our
international operations.
REVENUE RECOGNITION. For our legacy operations, the Company derives its revenue
primarily from Appiant NA and Infotel subsidiaries. Generally, revenue derived
from Appiant NA relates to the distribution and integration of voice processing
and multimedia messaging equipment manufactured by others and maintenance
services. The revenue derived from Infotel primarily relates to the distribution
and integration of telecommunications and other electronic products, and
providing services primarily for radar system integration, turnkey project
management and test instrumentation and networking. Equipment sales and related
integration services revenue is recognized upon acceptance and delivery if a
signed contract exists, the fee is fixed or determinable and collection of the
resulting receivable is reasonably assured. Acceptance occurs for the legacy
Appiant NA products and services when the Company receives an acceptance form
signed by its customer acknowledging the product has been installed and services
completed to the customer's satisfaction. Provisions for estimated warranty
costs are made when the related revenue is recognized. Revenue from maintenance
services related to ongoing customer support is recognized ratably over the
period of the maintenance contact. Maintenance service fees are generally
received in advance and are non-refundable. Service revenue is recognized as the
related services are performed. Revenues from projects undertaken for customers
under fixed price contracts are recognized under the percentage-of-completion
method of accounting for which the estimated revenue is based on the ratio of
cost incurred to costs incurred plus estimated costs to complete. The Company
uses its judgment to estimate total cost of a project based on facts and
circumstances at the time. These facts and circumstances can change over time.
When the Company's current estimates of total contract revenue and cost indicate
a loss, the Company records a provision for estimated loss on the contract.
Appiant will recognize revenue from its inUnison-TM- services upon delivery of
the services if a signed contract exists, the fee is fixed or determinable and
collection of the resulting receivables is reasonably assured. Generally, any
fees received in advance or up-front, such as activation fees, if any, billed
during the beta testing phases of the inUnison-TM- services for a specific
14
customer, will be recognized over the estimated life of the customer or the term
of the contract.
ALLOWANCE FOR DOUBTFUL ACCOUNTS, INVENTORY AND ACCRUALS FOR LITIGATION. The
preparation of financial statements requires our management to make estimates
and assumptions that affect the reported amount of assets and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Specifically, our management must make estimates of the uncollectability of our
accounts receivables. Management specifically analyzes accounts receivable and
analyzes historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in our customer payment
terms when evaluating the adequacy of the allowance for doubtful accounts. Our
accounts receivable balance was $2.3 million, net of allowance for doubtful
accounts of $0.3 million as of December 31, 2001. Appiant provides an allowance
for obsolescence or unmarketable inventory equal to the difference between the
cost of inventory and the estimated net realizable value based upon assumptions
about future demand and market conditions. If actual market conditions are less
favorable than those projected by management, additional inventory provisions
may be required and such provisions could be material to our financial position
and results of operations.
Management's current estimated range of liability related to some of the pending
litigation is based on claims for which our management can estimate the amount
and range of loss. We have recorded the minimum estimated liability related to
those claims, where there is a range of loss. Because of the uncertainties
related to both the amount and range of loss on the remaining pending
litigation, management is unable to make a reasonable estimate of the liability
that could result from an unfavorable outcome. As additional information becomes
available, we will assess the potential liability related to our pending
litigation and revise our estimates. Such revisions in our estimates of the
potential liability could materially impact our results of operation and
financial position.
ACCOUNTING FOR INCOME TAXES. As part of the process of preparing our
consolidated financial statements we are required to estimate our income taxes
in each of the jurisdictions in which we operate. This process involves us
estimating our actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as deferred
revenue, for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within our consolidated balance
sheet. We must then assess the likelihood that our deferred tax assets will be
recovered from future taxable income and to the extent we believe that recovery
is not likely, we must establish a valuation allowance.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We have recorded a full
valuation allowance against our United States deferred tax assets of $9.0
million as of December 31, 2001, due to uncertainties related to our ability to
utilize such deferred tax assets, primarily consisting of certain net operating
loss carried forwards and tax credits, before they expire. The valuation
allowance is based on our estimates of taxable income by jurisdiction in which
we operate and the period over which our deferred tax assets will be
recoverable.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS, INCLUDING CAPITALIZED SOFTWARE,
AND GOODWILL. We assess the impairment of identifiable intangibles, long-lived
assets, capitalized software and related goodwill and enterprise level goodwill
whenever events or changes in circumstances indicate that the carrying value may
15
not be recoverable. Factors we consider important which could trigger an
impairment review include the following:
- significant underperformance relative to expected historical or projected
future operating results;
- significant changes in the manner of our use of the acquired assets or
the strategy for our overall business;
- significant negative industry or economic trends;
- significant decline in our stock price for a sustained period; and
- our market capitalization relative to net book value.
When we determine that the carrying value of intangibles, long-lived assets,
capitalized software and related goodwill and enterprise level goodwill may not
be recoverable based upon the existence of one or more of the above indicators
of impairment, we measure any impairment based on a projected discounted cash
flow method using a discount rate determined by our management to be
commensurate with the risk inherent in our current business model. Net
intangible assets, capitalized software, long-lived assets, and goodwill
amounted to $26.4 million as of December 31, 2001.
Appiant is in the process of developing certain technologies. As of December 17,
2001, Appiant determined that one of these technologies, inUnison, was ready for
its intended use. Appiant assessed the period of benefit from this technology at
4 years. Amortization commenced upon December 17, 2001.
DETERMINING FUNCTIONAL CURRENCIES FOR THE PURPOSE OF CONSOLIDATION. We have a
foreign subsidiary which accounted for approximately 72% of our net revenues for
the three months ended December 31, 2001, and 11% of our assets and 17% of our
total liabilities as of December 31, 2001.
In preparing our consolidated financial statements, we are required to translate
the financial statements of this foreign subsidiary from the currency in which
they keep their accounting records, generally the local currency, into United
States dollars. This process results in exchange gains and losses which, under
the relevant accounting literature are either included as a separate part of our
net equity under the caption "cumulative translation adjustment."
Under the relevant accounting guidance the treatment of these translation gains
or losses is dependent upon our management's determination of the functional
currency of this subsidiary. The functional currency is determined based on
management judgment and involves consideration of all relevant economic facts
and circumstances affecting the subsidiary. Generally, the currency in which the
subsidiary transacts a majority of its transactions, including billings,
financing, payroll and other expenditures would be considered the functional
currency but any dependency upon the parent and the nature of the subsidiarys'
operations must also be considered.
If our subsidiary's functional currency is deemed to be the local currency, then
any gain or loss associated with the translation of the subsidiary's financial
statements is included in cumulative translation adjustments. However, if our
subsidiary's functional currency is deemed to be the United States dollar then
any gain or loss associated with the translation of these financial statements
would be included within our statement of operations. If we dispose of the
subsidiary, any cumulative translation gains or losses would be realized into
our statement of operations. If we determine that there has been a change in the
functional currency of the subsidiary to the United States dollar, any
translation gains or losses arising after the date of change would be included
within our statement of operations.
Based on our assessment of the factors discussed above, we considered our
subsidiary's local currency to be the functional currency. Accordingly we had
16
cumulative translation losses of approximately $324,000 and $462,000 which were
included as part of accumulated other comprehensive loss within our balance
sheet at December 31, 2001 and September 30, 2001, respectively. During the
three months ending December 31, 2001 and 2000, translation adjustments of
$135,000 and $100,000, respectively, were included under accumulated other
comprehensive loss. Had we determined that the functional currency of the
subsidiary was the United States dollar, these gains would have improved our
result for each of the periods presented.
The magnitude of these gains or losses is dependent upon movements in the
exchange rates of the foreign currencies in which we transact business against
the United States dollar. These currencies include the Singapore dollar. Any
future translation gains or losses could be significantly higher than those
noted in each of these years. In addition, if we determine that a change in the
functional currency of our subsidiary has occurred at any point in time we would
be required to include any translation gains or losses from the date of change
in our statement of operations.
RECENT ACCOUNING PRONOUNCEMENTS
In May 2000, the Emerging Issues Task Force (EITF) issued EITF Issue No. 00-14,
"Accounting for Certain Sales Incentives." EITF Issue No. 00-14 addresses the
recognition, measurement, and income statement classification for sales
incentives that a vendor voluntarily offers to customers (without charge), which
the customer can use in, or exercise as a result of, a single exchange
transaction. Sales incentives that fall within the scope of EITF Issue No.
00-14 include offers that a customer can use to receive a reduction in the price
of a product or service at the point of sale. The EITF agreed to change the
transition date for Issue No. 00-14, dictating that a company should apply this
consensus no later than the company's annual or interim financial statements for
the periods beginning after December 15, 2001. In June 2001, the EITF issued
EITF Issue No. 00-25, "Vendor Income Statement Characterization of Consideration
Paid to a Reseller of the Vendor's Products," effective for periods beginning
after December 15, 2001. EITF Issue No. 00-25 address whether consideration
from a vendor to a reseller is (a) an adjustment of the selling prices of the
vendor's products and, therefore, should be deducted from revenue when
recognized in the vendor's statement of operations or (b) a cost incurred by the
vendor for assets or services received from the reseller and, therefore, should
be included as a cost or expense when recognized in the vendor's statement of
operations. Upon application of these EITFs, financial statements for periods
presented for comparative purposes should be reclassified to comply with the
income statement display requirements under these Issues. In September of 2001,
the EITF issued EITF Issue No. 01-09, "Accounting for Consideration Given by
Vendor to Customer or a Reseller of the Vendor's Products", which is a
codification of Issues No. 00-14, No. 00-25 and No. 00-22 "Accounting for
'Points' and Certain Other Time- or Volume-Based Sales Incentive Offers and
Offers for Free Products or Services to be Delivered in the Future." We are
currently assessing the impact of the adoption of these issues on our financial
statements.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS No.
141 requires the purchase method of accounting for business combination
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
We believe that the adoption of SFAS No. 141 will not have a significant impact
on the financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets," which is effective
for fiscal years beginning after March 15, 2001. SFAS No. 142 requires, among
other things, the discontinuance of goodwill amortization. In addition, the
17
Standard includes provisions upon adoption for the reclassification of certain
existing recognized intangibles as goodwill, reassessment of the useful lives of
existing recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the testing for impairment of existing goodwill
and other intangibles. Upon adoption of SFAS No. 142, in our fiscal year 2003
we will cease to amortize goodwill, recorded at approximately $8.4 million at
December 31, 2001. We recorded approximately $1.0 million of amortization
during the three months ended December 31, 2001. In addition, we will be
required to perform an impairment review of our goodwill balance upon the
initial adoption of SFAS No. 142. The impairment review will involve a two-step
process as follows:
- Step 1 - We will compare the fair value of our reporting units to the
carrying value, including goodwill of each of those units. For each reporting
unit where the carrying value, including goodwill, exceeds the unit fair value,
we will move onto Step 2. If a unit's fair value exceeds the carrying value, no
further work is performed and no impairment charge is necessary.
- Step 2 - We will perform allocation of the fair value of the reporting unit
to its identifiable tangible and non-goodwill intangible assets and liabilities.
This will derive an implied fair value for the reporting unit's goodwill. We
will then compare the implied fair value of the reporting unit's goodwill with
the carrying amount of the reporting unit's goodwill. If the carrying amount of
the reporting unit's goodwill is greater than the implied fair value of its
goodwill, an impairment loss must be recognized for the excess.
We are currently assessing the impact of SFAS No. 142 on our financial position
and results of operation.
In October 2001, the FASB issued SFAS 144 Accounting for the Impairment or
Disposal of Long-Lived Assets, which is required to be applied in fiscal years
beginning after December 15, 2001. SFAS 144 requires, among other things, the
application of one accounting model for long-lived assets that are impaired or
to be disposed of by sale. The Company believes that the adoption of SFAS 144
will not have a significant impact on its financial position or results of
operations.
RESULTS OF OPERATIONS
The following table shows results of operations, as a percentage of net
revenues, for the three months ended December 31, 2001 and 2000:
Three Months Ended
December 31,
2001 2000
-------- --------
Net revenues 100.0% 100.0%
Cost of revenues 67.0% 71.3%
Gross profit 33.0% 28.7%
Selling, general and administrative 31.7% 73.3%
Research and development 18.2% 11.2%
Amortization of goodwill and
other intangibles 30.8% 3.3%
Release of capitalized lease
obligations (83.9%) --
Income (loss) from operations 36.1% (59.1%)
Other income (expense) (29.4%) (4.1%)
Income (loss) from operations before
income taxes 6.7% (63.2%)
Provision for income tax 0.7% 1.9%
Net income (loss) 6.0% (65.1%)
18
Net Revenues
For the three months ended December 31, 2001, our net revenues were $3.4 million
as compared to $6.1 million for the same period ending December 31, 2000,
representing a decrease of $2.7 million or 44.3%. Our net revenues for the three
months ended December 31, 2001 were affected by the transition to our new
business model of providing unified communications and unified information
applications in our inUnison-TM- portal in a hosted service, recurring revenue
model. The decline represents a decline in our legacy revenues in North America
occurring mainly because customers have delayed additional purchases of legacy
system in anticipation of the new inUnison-TM- product and a decision of
management to de-emphasize several legacy products, such as call centers and
proprietary voice messaging products.
Appiant NA's net revenues were $1.0 million for the three months ended December
31, 2001 as compared to $2.4 million for the period ending December 31, 2000.
The quarter-to-quarter decrease in Appiant NA net revenues came from reduced
enterprise information center product sales, as well as lower legacy system
sales within our existing customer base.
Net revenues for our Infotel subsidiary decreased to $2.4 million for the three
months ended December 31, 2001 as compared to $3.7 million for the three months
ended December 31, 2000. This decrease occurred primarily as a result of a
decrease in the sale of radio communications equipment which was unusually high
in 2000.
Our legacy business backlog decreased to $1.1 million at December 31, 2001 as
compared to $10.1 million as of December 31, 2000. Our inUnison-TM- backlog
increased to $2.5 million at December 31, 2001 while we had not yet offered
inUnison-TM- services as of December 31, 2000, and Infotel's backlog decreased
to $4.6 million at December 31, 2001 from $6.1 million at December 31, 2000.
Gross Margin
Our gross margin for the three months ended December 31, 2001 was $1.1 million
or 33.0% of net revenues, as compared to $1.8 million or 28.7% for the three
months ended December 31, 2000. Appiant NA's gross margin on a stand-alone basis
for the three months ended December 31, 2001 was $0.2 million or 19.9%, as
compared to $0.8 million or 33.6% for the three months ended December 31, 2000.
Infotel's gross margin percentage on a stand-alone basis was 29.8% for the three
months ended December 31, 2000 compared to 25.7% for the three months ended
December 31, 2000. This decrease in gross margin in Appiant NA was due to the
reduction in legacy revenues as we execute our new business model coupled with
the fixed nature of operating costs. The increase in Infotel's gross margin was
due to an emphasis on more profitable product lines.
Research and Development
Our industry is characterized by rapid technological change and product
innovation. We have changed our business model that requires significant focus
on developing new applications to be offered in our hosted inUnison-TM- portal,
as well as integrating third party applications. We are also conducting
research and development into our own advanced speech recognition to be offered
in our portal. We believe that continued timely development of products for
both existing and new markets is necessary to remain competitive. Therefore, we
devote significant resources to programs directed at developing new and enhanced
products, as well as new applications for existing products. Our capitalized
research and development expenditures increased to $0.9 million in three months
ended December 31, 2001 from $272,000 in the three months ended December 31,
2000, reflecting our increased investment in research and development. We have
adopted AICPA Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed and Obtained for Internal Use," ("SOP 98-1") and capitalize
our research and development costs related to software development. We began
19
amortizing $10.4 million of these costs on December 17, 2001 as the capitalized
software was substantially complete and ready for its intended use.
Amortization for the quarter ended December 31, 2001 was $106,000. Unamortized,
capitalized costs of $7.3 million relate to those projects that are not as yet
ready for their intended use.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses ("SG&A"), including non-cash
charges related to options and warrants, as a percentage of net sales decreased
to 31.7% of net revenues for the three months ended December 31, 2001, as
compared to 73.3% for three months ended December 31, 2000. This decrease is due
to the reduction of United States sales and marketing personnel and related
expenses, coupled with the reduction in revenues in Appiant NA as we execute our
new business model. SG&A for Appiant NA on a stand-alone basis decreased to $0.7
million or 68.4% for the three months ended December 31, 2001 from $5.0 million
or 212.0% in the three months ended December 31, 2000. The decrease as a
percentage of net revenues was due primarily to a decrease in sales and
marketing and general and administrative personnel and related expenses coupled
with a decline in legacy system and maintenance revenue. On a stand-alone basis,
Infotel's SG&A as a percentage of revenues increased to 23.1% for the three
months ended December 31, 2001 as compared to 17.3% for the three months ended
December 31, 2000. During year three months ended December 31, 2001, we recorded
unearned stock-based compensation of $33,000 in connection with stock option
grants. We are amortizing this amount over the vesting periods of the
applicable options.
Amortization of goodwill and other intangibles
Our amortization of goodwill and other intangibles for the three months ended
December 31, 2001 increased to $1.0 million or 30.8% of net revenue from
$201,000 or 3.2% of net revenue for the three months ended December 31, 2000.
The increase is primarily due to $800,000 of amortization in relation to our
acquisition of Quaartz, Inc. in 2001.
Interest income and other
Our interest income and other increased to $563,000 or 16.6% of net revenues in
the three months ended December 31, 2001 from $212,000 or 3.5% in the three
months ended December 31, 2000. The increase in interest income and other
results primarily from the remeasurement of warrants with registration rights.
Interest expense
Our interest expense increased to $1.6 million or 46.0% of net revenues in the
three months ended December 31, 2001 from $464,000 or 7.6% in the three months
ended December 31, 2000. The increase in interest expense resulted from the
accrual of interest and the accretion of discount on the issuance of convertible
promissory notes payable issued with warrants on March 21, 2001, June 8, 2001,
and in the current quarter. See the Company's Form 10-K for the year ended
September 30, 2001 and Note 6 to this Form 10-Q.
Income taxes
We currently have approximately $41.0 million in United States federal net
operating loss carry-forwards. The use of certain of these net operating losses
are subject to an annual limitation of $250,000. At December 31, 2001, we
provided a full valuation allowance against our United States deferred tax
asset. We believe that since sufficient uncertainty exists regarding the
realization of the deferred tax asset, a full valuation allowance is required.
Income tax expense of $24,000 relates to the provision for income tax for
Infotel.
20
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our capital requirements through a combination
of sales of equity securities, convertible and other debt offerings, bank
borrowings, asset-based secured financing, structured financing and cash
generated from operations.
During the three months ended December 31, 2001 net cash used in operating
activities was $1.9 million. Net cash used to fund operating activities reflects
our net income, net of non-cash charges, offset by changes in operating assets
and liabilities. Net cash provided by investing and financing activities totaled
$180,000 consisting of proceeds from the issuance of convertible notes, which
were offset by purchases of property and equipment and development of software
assets.
Future payments due under debt and lease obligations as of December 31:
Convertible Non-Cancelable
Promissory Promissory Operating
Notes Payable Notes Payable Leases Total
-------------- -------------- --------------- -----------
2002 $ 1,290,000 $ 6,000,000 $ 515,000 $ 7,805,000
2003 5,200,000 -- 470,000 5,670,000
2004 -- -- 300,000 300,000
2005 -- -- 288,000 288,000
2006 -- -- 274,000 274,000
Thereafter -- -- 385,000 385,000
-------------- -------------- --------------- -----------
$ 6,490,000 $ 6,000,000 $ 2,232,000 $14,722,000
============== ============== =============== ===========
Our principal sources of liquidity at December 31, 2001 were as follows.
On December 7, 2001, we have a memorandum of understanding with a large
supplier, who agreed to accept as the forgiveness of approximately $4.5 million
in debt, the payments previously made from Appiant to them as payment in full
and final settlement of any obligations from Appiant.
In October 2001, we issued a warrant to purchase up to 59,524 shares of common
stock to Lucien Thomas Baldwin III, as set forth in a Promissory Note and
secured by the Company's Voice Plus Accounts Receivables, to raise operating
capital for us in a transaction exempt from registration under Section 4(2). The
warrant is immediately exercisable and may be exercised until October 31, 2006.
The exercise price per share of this warrant is $1.68.
In October 2001, we issued a warrant to purchase up to 59,524 of common stock to
Douglas Zorn, as set forth in a Promissory Note and secured by the Company's
Voice Plus Accounts Receivables, to raise operating capital for us in a
transaction exempt from registration under Section 4(2). The warrant is
immediately exercisable and may be exercised until October 31, 2006. The
exercise price per share of this warrant is $1.68.
In October 2001, we issued a warrant to purchase up to 59,524 shares of common
stock to Jim Gillespie, as set forth in a Promissory Note and secured by the
Company's Voice Plus Accounts Receivables, to raise operating capital for us in
a transaction exempt from registration under Section 4(2). The warrant is
immediately exercisable and may be exercised until October 31, 2006. The
exercise price per share of this warrant is $1.68.
In November 2001, we issued a warrant to purchase up to 150,000 shares of common
stock to Lucien Thomas Baldwin III, as set forth in a Promissory Note and
secured by the VoiceTel and Infotel assets, to raise operating capital for us in
a transaction exempt from registration under Section 4(2). The warrant is
21
immediately exercisable and may be exercised until November 28, 2006. The
exercise price per share of this warrant is $1.35.
In November 2001, we issued a warrant to purchase up to 77,519 shares of common
stock to Robert J. Schmier, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until November 28, 2006. The exercise price per share of this
warrant is $1.29.
In November 2001, we issued a warrant to purchase up to 143,885 shares of common
stock to Robert Gilman, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until November 29, 2006. The exercise price per share of this
warrant is $1.39.
In December 2001, we issued a warrant to purchase up to 38,462 shares of common
stock to Dr. Gabor Rubanyi, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until November 29, 2006. The exercise price per share of this
warrant is $1.30.
In December 2001, we issued a warrant to purchase up to 19,084 shares of common
stock to Dr. Robert L. Glass, as set forth in a Promissory Note and secured by
the Infotel assets, to raise operating capital for us in a transaction exempt
from registration under Section 4(2). The warrant is immediately exercisable and
may be exercised until December 7, 2006. The exercise price per share of this
warrant is $1.31.
In December 2001, we issued a warrant to purchase up to 33,333 shares of common
stock to Jeremy Judge, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until December 12, 2006. The exercise price per share of this
warrant is $1.20.
In December 2001, we issued a warrant to purchase up to 83,333 shares of common
stock to Wayne Saker, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
exercised until December 12, 2006. The exercise price per share of this warrant
is $1.20.
In December 2001, we issued a warrant to purchase up to 42,373 shares of common
stock to Dr. Harry Mittelman, as set forth in a Promissory Note and secured by
the Infotel assets, to raise operating capital for us in a transaction exempt
from registration under Section 4(2). The warrant is immediately exercisable and
may be exercised until December 20, 2006. The exercise price per share of this
warrant is $1.77.
In December 2001, we issued a warrant to purchase up to 56,497 of common stock
to Robert Gilman, as set forth in a Promissory Note and secured by the Infotel
assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until December 20, 2006. The exercise price per share of this
warrant is $1.77.
In December 2001, we issued a warrant to purchase up to 56,497 shares of common
stock to Wayne Saker, as set forth in a Promissory Note and secured by the
22
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until December 20, 2006. The exercise price per share of this
warrant is $1.77.
In December 2001, we issued a warrant to purchase up to 112,994 warrants to
purchase shares of common stock to Robert Gilman, as set forth in a Promissory
Note and secured by the Infotel assets, to raise operating capital for us in a
transaction exempt from registration under Section 4(2). The warrant is
immediately exercisable and may be exercised until December 20, 2006. The
exercise price per share of this warrant is $1.77.
Despite our negative working capital at December 31, 2001, we believe that our
anticipated cash flows from both operations and available to us through
financing arrangements that are presently in place are sufficient to meet our
operating and capital requirements for at least the next 12 months. Our capital
requirements in the next 12 months will mainly result from hardware and software
purchases and professional services to launch our hosted services, as well as
costs to develop and execute customer subscriber acquisition programs, marketing
and advertising. We anticipate financing hardware, software and related
consulting services through structured financing from our vendors and partners.
Other financing requirements for customer and subscriber acquisition marketing
will need to be financed through equity and debt offerings and cash generated
from operations. We could be required, or could elect, to raise additional funds
during that period, and we may need to raise additional capital in the future.
Additional capital may not be available at all, or may only be available on
terms unfavorable to us. Any additional issuance of equity or equity-related
securities will be dilutive to our stockholders.
RISK FACTORS; FACTORS THAT MAY AFFECT OPERATING RESULTS
The following risk factors may cause actual results to differ materially from
those in any forward-looking statements contained in the MD&A or elsewhere in
this report or made in the future by us or our representatives. Such
forward-looking statements involve known risks, unknown risks and uncertainties
and other factors which may cause the actual results, performance or
achievements expressed or implied by such forward-looking statements to differ
significantly from such forward-looking statements.
WE HAVE CURRENTLY RECORDED A NET LOSS, WE HAVE A HISTORY OF NET LOSSES AND WE
CANNOT BE CERTAIN OF FUTURE PROFITABILITY.
Although the Company recorded a net profit for the quarter ended December 31,
2001, we recorded a net loss of $29.9 million on net revenues of $21.7 million
for our fiscal year ended September 30, 2001. We also sustained significant
losses for the fiscal years ended September 30, 1999 and 2000. Although we
anticipate a net operating profit for our fiscal year ended September 30, 2002,
operating losses in the quarters could occur.
We anticipate continuing to incur significant sales and marketing, product
development and general and administrative expenses and, as a result, we will
need to generate significantly higher revenue to sustain profitability as we
build our organization for our new inUnison-TM- business model. In addition, we
anticipate beginning amortizing capitalized software and other assets that we
have purchased or developed for our new inUnison-TM- business model in our
fiscal year 2002. We cannot be certain that we will continue to realize
sufficient revenue to return to or sustain profitability.
Our financial condition and results of operations may be adversely affected if
we fail to produce positive operating results. This could also:
23
- adversely affect the future value of our common stock;
- adversely affect our ability to obtain debt or equity financing on
acceptable terms to finance our operations; and
- prevent us from engaging in acquisition activity.
OUR EQUITY AND DEBT FUNDING SOURCES MAY BE INADEQUATE TO FINANCE FUTURE
ACQUISITIONS.
The acquisition of complementary businesses, technologies and products has been
and may continue to be key to our business strategy. Our ability to engage in
acquisition activities depends on us obtaining debt or equity financing, neither
of which may be available or, if available, may not be on terms acceptable to
us. Our inability to obtain this financing may prevent us from executing
successfully our acquisition strategy.
Further, both debt and equity financing involve risks. Debt financing may
require us to pay significant amounts of interest and principal payments,
reducing our cash resources we need to expand or transform our existing
businesses. Equity financing may be dilutive to our stockholders' interest in
our assets and earnings.
A NUMBER OF FACTORS COULD CAUSE OUR FINANCIAL RESULTS TO BE WORSE THAN EXPECTED,
RESULTING IN A DECLINE IN OUR STOCK PRICE.
We plan to increase significantly our operating expenses to expand our sales and
marketing activities, broaden our customer support capabilities, develop new
distribution channels, fund increased levels of research and development, and
build our operational infrastructure. We base our operating expenses on
anticipated revenue trends and a high percentage of our expenses are fixed in
the short term. As a result, any delay in generating or recognizing revenue
could cause our quarterly operating results to be below the expectations of
public market analysts or investors, if any, which could cause the price of our
common stock to fall further.
We may experience a delay in generating or recognizing revenue because of a
number of reasons. We may experience delays in completing our production
environment for our new hosted inUnison-TM- unified communications and unified
information business. We are dependent on our business partners and vendors to
supply us with hardware, software, consulting services, hosting, and other
support to launch and operate our new business.
Our quarterly revenue and operating results have varied significantly in the
past and may vary significantly in the future due to a number of factors,
including:
- Fluctuations in demand for our products and services;
- Unexpected product returns or the cancellation or rescheduling of
significant orders;
- Our ability to develop, introduce, ship and support new products and
product enhancements, and to project manage orders and installations;
- Announcement and new product introductions by our competitors;
- Our ability to develop and support customer relationships with service
providers and other potential large customers;
- Our ability to achieve required cost reductions;
- Our ability to obtain sufficient supplies of sole or limited sourced
third party products;
- Unfavorable changes in the prices of the products and components we
purchase;
24
- Our ability to attain and maintain production volumes and quality
levels for our products;
- Our ability to retain key employees;
- The mix of products and services sold;
- Costs relating to possible acquisitions and integration of
technologies or businesses; and
- The effect of amortization of goodwill and purchased intangibles
resulting from existing or future acquisitions.
Due to the foregoing factors, we believe that period-to-period comparisons of
our operating results should not be relied upon as an indicator of our future
performance.
OUR NEW PRODUCTS AND STRATEGIC PARTNERING RELATIONSHIPS MAY NOT BE SUCCESSFUL.
We have launched our inUnison-TM- UC/UI product applications that are designed
to provide our customers with hosted unifying communications and unifying
information solutions. While we believe that our inUnison-TM- applications will
provide our customers with scaled, carrier grade IP-based solutions, we cannot
assure you that our customers will accept or adopt them on a large scale. Our
integration efforts with other third party software has and could continue to
result in product delays and cost overruns. We cannot assure you that other
software vendors whose software products we license or incorporate into our
inUnison-TM- portal will continue to support their products. If these vendors
discontinue their support, our business would be adversely affected.
Further, we expect to continue incur substantial expenditures for equipment,
systems, research and development, consultants and personnel to implement this
new business model. As a result, our operating results and cash flows may be
adversely affected. Although we anticipate a net operating profit for our fiscal
year ended September 30, 2002, significant working capital will be needed by the
Company to meet its business plan. Although we believe that this new product
offering will ultimately result in profitable operations, there can be no
assurance that the implementation of our new business model will be successful.
CONTINUED RAPID GROWTH WILL STRAIN OUR OPERATIONS AND REQUIRE US TO INCUR COSTS
TO UPGRADE OUR INFRASTRUCTURE.
With the development and launch of our new hosted inUnison-TM- business model,
we expect to experience periods of rapid growth can place, significant strain on
our resources. Unless we manage this growth effectively, we may make mistakes
in operating our business such as inaccurate sales forecasting, incorrect
production planning, managing headcount, or inaccurate financial reporting,
either or all of which may result in unanticipated fluctuations in our operating
results and adverse cash flow and financing requirements. We expect our
anticipated growth and expansion to strain our management, operational and
financial resources. Our management team has had limited experience managing
such rapidly growing companies on a public or private basis. To accommodate this
anticipated growth, we will be required among other things to:
- Improve existing and implement new operations, information and
financial systems, procedures and controls;
- Recruit, train, manage, and retain additional qualified personnel
including sales, marketing, research and development personnel;
- Manage multiple relationships with our customers, our customers'
customers, our strategic partners, suppliers and other third parties;
and
25
- Acquire additional office space and remote offices in numerous
locations within and without the United States that will require space
planning and infrastructure to support these additional locations.
We may not be able to install adequate control systems in an efficient and
timely manner, and our current or planned financial, operational and personnel
systems, procedures and controls may not be adequate to support our future
operations. We will need to install various new management information system
tools, processes and procedures, continue to modify and improve our existing
information technology infrastructure, and invest in training our people to meet
the increasing needs associated with our growth. The difficulties associated
with installing and implementing these new systems, procedures and controls may
place a significant burden on our management and our internal resources. In
addition, as we grow internationally, we will have to expand our worldwide
operations and enhance our communications infrastructure. Any delay in the
implementation of such new or enhanced systems, procedures or controls, or any
disruption in the transition to such new or enhanced systems, procedures or
controls, could adversely affect our ability to accurately forecast sales
demand, manage our hosted applications, and record and report financial and
management information on a timely and accurate basis.
THE UC/UI MARKET IS YOUNG AND UNTESTED. WE HAVE NOT COMMENCED PROVIDING UC/UI
SERVICES IN A HOSTED SERVICE MODEL TO OUR CUSTOMERS UNDER OUR NEW BUSINESS
MODEL.
The UC/UI market is in its infancy, and indeed we are one of the first companies
in unified information. Despite very positive and upbeat forecasts by a number
of leading industry analysts of the market potential for unified communications
and unified information applications, we have not yet commenced providing our
applications to our customers in a hosted service model. There is no assurance
that our UC/UI applications will be adopted or, if adopted, that they will be
successful in the marketplace. There is no assurance that our business model of
offering our applications in a hosted, recurring revenue model will be
successful. We are implementing a new business plan, and to the extent that we
fail to execute it successfully, compete with new entrants to this market space,
or otherwise are unable to build the complex network infrastructure necessary to
provide such services to our customers, our results and cash flows will be
negatively impacted and we could face serious needs for additional financing.
WE PRESENTLY RELY UPON LEGACY VOICEMAIL SYSTEMS AND ENTERPRISE INFORMATION
REVENUES.
For our fiscal quarter ended December 31, 2001, legacy voicemail systems
revenues (which includes customer premises equipment revenues) accounted for
approximately 28% of Company's total revenues and 100% of our North American
revenues. Revenue from the sales of enterprise information and call center
products accounted for approximately 63.3% of our North America revenue for the
fiscal year ended September 30, 2001. The Company discontinued its enterprise
information and call center products during fiscal year 2001 and did not record
revenues from these products in the quarter ended December 31, 2001. The
projected decline in our legacy business will have an adverse effect on our
revenues and financial performance. Management believes that future revenues
from legacy voicemail systems will steadily decline due to the introduction of
inUnison-TM-. Our ability to transition our product sales to our UC/UI hosted,
recurring revenue model will be critical to our future growth.
THE SALES CYCLE FOR OUR NEW HOSTED APPLICATIONS MAY BE LONG, AND WE MAY INCUR
SUBSTANTIAL NON-RECOVERABLE EXPENSES OR DEVOTE SIGNIFICANT RESOURCES TO SALES
THAT DO NOT OCCUR OR OCCUR WHEN ANTICIPATED.
26
Although, we have several thousand subscribers on our hosted inUnison service,
the timing of significant recurring revenues from our hosted inUnison-TM-unified
communications and unified information applications is difficult to predict
because the unified communications and unified information market is relatively
new. Our success will depend in large measure on market demand and acceptance of
these applications and technologies, our ability to create a brand for our
applications and technologies, our ability to target and sell customers and to
drive demand for our applications to their customers, our ability to develop
pricing models and to set pricing for our applications, and our ability to build
market share. We plan initially to provide our hosted applications to service
providers such as wireless service providers (WSPs), internet service providers
(ISPs), application service providers (ASPs) and competitive local exchange
carriers (CLECs). We will need to create sales tools, service provider
subscriber use models, methodologies and programs to work with our service
provider customers to help devise cooperative advertising and sales campaigns to
market and sell our inUnison-TM- applications to their customer. The sales
process and sale cycle may vary substantially from customer to customer, and our
ability to forecast accurately the sale opportunity for any customer, or to
drive adoption of our inUnison-TM- applications in our customers' subscribers
may be limited. There is no assurance that we will be successful in selling our
applications or achieving targeted subscriber adoption, and our operating and
cash flow requirements will be negatively impacted should we fail to achieve our
targets within the time frames that we forecast.
Our customers may require various testing and test markets of our hosted
applications before they decide to contract with us to provide our hosted
inUnison-TM- applications to their subscribers. We may incur substantial sales
and marketing and operational expenses and expend significant management effort
to carry out these tests. Consequently, if sales forecasted from a specific
customer for a particular quarter are not realized within the time frames that
we have forecasted, we may be unable to compensate for the shortfall, which
could harm our operating and cash flow results.
WE RELY UPON OUR DISTRIBUTOR AND SUPPLIER RELATIONSHIPS.
Our current North American legacy operations depend upon the integration of
hardware, software, and communications and data processing equipment
manufactured by others into systems designed to meet the needs of our customers.
Although we have agreements with a number of equipment manufacturers, a major
portion of our revenues has been generated from the sale of products
manufactured by three companies. We rely significantly on products manufactured
and services provided by ADC Telecommunications, Inc. (formerly Centigram
Communications Corporation), Baypoint Innovations, a division of Mitel, Inc.,
and Interactive Intelligence, Inc. Any disruption in our relationships with
these suppliers would have a significant adverse effect on our business for an
indeterminate period of time until new supplier relationships could be
established.
Some of our current suppliers may currently or, at some point, compete with us
as we roll out our inUnison-TM- UC/UI applications. Any potential competition
from our suppliers could have a material negative impact on our business and
financial performance.
WE ARE DEPENDENT UPON SIGNIFICANT CUSTOMERS.
We have serviced approximately 1,000 customers worldwide. However, the revenues
from our four largest customers accounted for approximately 20%, 17%, 16%, and
8% of total revenues during the fiscal quarter ended December 31, 2001. No other
customer accounted for over 5% of total revenues during this period. This
concentration of revenue has resulted in additional risk to our operations, and
27
any disruption of orders from our largest customers would adversely affect on
our results of operations and financial condition.
Our Singapore subsidiary, Infotel Technologies (Pte) Ltd., offers a wide range
of infrastructure communications equipment products. It has an established
business providing test measuring instrumentation and testing environments, and
is the regional distributor and test and repair center for Rohde & Schwarz test
instruments. Infotel is also a networking service provider, and manages data
networks for various customers. Infotel's financial performance depends in part
on a steady stream of revenues relating to the services performed for Rohde
&Schwarz test instruments. Infotel's revenues constituted approximately 72% of
our total revenues for the quarter ended December 31, 2001. Any material change
in our relationship with our manufacturers, including but not limited to Rohde &
Schwarz, would materially adversely affect our results of operations and
financial condition.
OUR MARKET IS HIGHLY COMPETITIVE, AND IF WE DO NOT COMPETE EFFECTIVELY, WE MAY
SUFFER PRICE REDUCTIONS, REDUCED GROSS MARGINS AND LOSS OF MARKET SHARE.
The markets for our legacy voice processing and enterprise information software
businesses are highly competitive, and competition in this industry is expected
to further intensify with the introduction of new product enhancements and new
competitors. With such competition may come more aggressive pricing and reduced
margins. We currently compete with a number of larger integrated companies that
provide competitive voice-processing products and services as subsets of larger
product offerings. Our existing and potential competitors include many large
domestic and international companies that have better name and product
recognition in the market for our products and services and related software, a
larger installed base of customers, and substantially greater financial,
marketing and technical resources than ourselves.
With the launch of our inUnison-TM- UC/UI hosted applications, we anticipate a
decline in our legacy business revenues and related gross margins as we focus on
our UC/UI business. Any delays in the anticipated launch of our
inUnison-TM-business plan, coupled with a decline in our legacy business, would
have a significant adverse impact on our financial performance and financing
requirements.
Infotel competes against several large companies in Singapore that are better
capitalized. Although Infotel has in the past managed to compete successfully
against these larger companies on the basis of its engineering, systems and
product management expertise, no assurances can be given that this expertise
will allow Infotel to compete effectively with these larger companies in the
future. Further, various large manufacturers headquartered outside of Singapore
have established their own branch offices in Singapore and also compete with
Infotel.
WE RELY HEAVILY ON OUR STRATEGIC PARTNERS IN OUR NEW BUSINESS MODEL, AND WITHOUT
SUPPORT FROM OUR PARTNERS OUR BUSINESS COULD SUFFER.
We have built significant, valuable strategic partnering relationships with a
number of partners including Cisco Systems, and these partnering relationships
are important to our success. In the case of CISCO, they have committed to
introducing customers to us. Hewlett-Packard also was an important strategic
partner that was to assist us in designing, implementing and operating our
backend solution to provide our UC/UI applications in a hosted, carrier grade
environment. Hewlett-Packard was to provide consulting services in the design,
build out and operation of our backend architecture. We were to host our
applications in their data centers and to provide various levels of customer
support. The deterioration of our relationships with Hewlett-Packard during
fiscal 2001 had a material adverse affect on our UC/UI business and financial
28
performance. While we believe that our partnering relationships with CISCO and
other third parties are strong, we cannot assure you that these relationships
will continue or that they will have a positive impact on our success.
OUR REVENUES WILL LIKELY DECLINE IF WE DO NOT DEVELOP AND INTEGRATE THE
COMPANIES WE ACQUIRE.
We have in the past pursued, and may continue to pursue, acquisition
opportunities. Acquisitions involve a number of special risks, including, but
not limited to:
- adverse short-term effects on our operating results;
- the disruption of our ongoing business;
- the risk of reduced management attention to existing operations;
- our dependence on the retention, hiring and training of key personnel
and the potential risk of loss of such personnel;
- our potential inability to integrate successfully the personnel,
operations, technology and products of acquired companies;
- unanticipated problems or unknown legal liabilities; and
- adverse tax or financial consequences.
Two of our prior acquisitions, namely the acquisition of Voice Plus (now known
as Appiant Technologies North America, Inc.) and Advantis Network & Systems Sdn
Bhd, a Malaysian company, in the past yielded operating results that were
significantly lower than expected. In fact, the poor performance of Advantis led
to its divestiture less than one year after we acquired the company.
The legacy business of Triad Marketing has declined as we have focused the
people and technologies of the Triad business on our new inUnison-TM- UC/UI
business and we discontinued its legacy operations.
Accordingly, no assurances can be given that the future performance of our
subsidiaries will be commensurate with the consideration paid to acquire these
companies. If we fail to establish the needed controls to manage growth
effectively, our operating results, cash flows and overall financial condition
will be adversely affected.
OUR INTERNATIONAL OPERATIONS INVOLVE RISKS THAT MAY ADVERSELY AFFECT OUR
OPERATING RESULTS.
Infotel, our Singapore subsidiary, accounted for approximately 72% of our
revenues for the fiscal quarter ended December 31, 2001. Infotel accounted for
approximately 60% of our revenues for the quarter ended September 30, 2001, and
approximately 45% of our revenues for the fiscal year ended September 30, 2001.
There are risks associated with our international operations, including, but not
limited to:
- our dependence on members of management of Infotel and the risk of
loss of customers in the event of the departure of key personnel;
- unexpected changes in or impositions of legislative or regulatory
requirements;
- potentially adverse taxes and tax consequences;
- the burdens of complying with a variety of foreign laws;
- political, social and economic instability;
- changes in diplomatic and trade relationships; and
- foreign exchange and translation risks.
Any one or more of these factors could negatively affect the performance of
Infotel and result in a material adverse change in our business, results of
operations and financial condition.
29
We anticipate that the market for our inUnison-TM- UC/UI business is global. We
anticipate that we will be expanding our business operations for our UC/UI
applications outside the United States, and project that we will launch our
UC/UI business in Asia from our existing Singapore operations in the second
quarter of our fiscal year 2002. However, we do not yet have established
operations for our UC/UI applications outside of the United States, and our
business could suffer material adverse results if we cannot build an
international organization to launch our UC/UI applications outside of the
United States in time to meet market demand or alternative solutions or
standards.
OUR STOCK PRICE COULD EXPERIENCE PRICE AND VOLUME FLUCTUATIONS.
The markets for securities such as our common stock historically have
experienced extreme price and volume fluctuations. Factors that may adversely
affect the market price of our common stock include, but are not limited to, the
following:
- new product developments and our ability to innovate, develop and
deliver on schedule our inUnison-TM- UC/UI applications;
- technological and other changes in the voice-messaging, unified
communications, and unified information;
- fluctuations in the financial markets;
- general economic conditions;
- competition; and
- quarterly variations in our results of operations.
OUR MANAGEMENT TEAM IS CRUCIAL TO OUR SUCCESS.
Our business depends heavily upon the services of its executives and certain key
personnel, including Douglas S. Zorn, our President and Chief Executive Officer.
Management changes often have a disruptive impact on businesses and can lead to
the loss of key employees because of the uncertainty inherent in change. Within
the last several years, we had significant changes in our key personnel. We
cannot be certain that we will be successful in attracting and retaining key
personnel worldwide - particularly in the Silicon Valley, greater San Francisco
Bay and San Diego areas where we operate - as the employment markets there are
intensely competitive. The loss of the services of any one or more of such key
personnel, if not replaced, or the inability to attract such key personnel,
could harm our business. While hiring efforts are underway to fill the vacancies
created by the departure of other key employees, there is no assurance that
these posts will be filled in the near future. The loss of these or other key
employees could have a material adverse impact on our operations. Furthermore,
the recent changes in management may not be adequate to sustain our
profitability or to meet our future growth targets.
FAILURE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS WILL HARM OUR
ABILITY TO COMPETE.
We have a number trademarks and copyrights, and while we are in the process of
filing for trademark and patent protection on selected product names,
technologies and processes which we have developed, we currently rely and have
relied on general common law and confidentiality and non-disclosure agreements
with our key employees to protect our trade secrets. We also have recently
applied for trademark protection for the names Appiant Technologies and
inUnison. Our success depends on our ability to protect our intellectual
property rights. Our efforts to protect our intellectual property may not be
sufficient against unauthorized third-party copying or use or the application of
reverse engineering, and existing laws afford only limited protection. In
addition, existing laws may change in a manner that adversely affects our
30
proprietary rights. Furthermore, policing the unauthorized use of our product is
difficult, and expensive litigation may be necessary in the future to enforce
our intellectual property rights.
OUR PRODUCTS COULD INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS,
RESULTING IN COSTLY LITIGATION AND THE LOSS OF SIGNIFICANT RIGHTS.
We may be subject to legal proceedings and claims for alleged infringement of
proprietary rights of others, particularly as the number of products and
competitors in our industry grow and functionalities of products overlap. This
risk may be higher in a new market in which a large number of patent
applications have been filed but are not yet publicly disclosed. We have limited
ability to determine which patents our products may infringe and to take
measures to avoid infringement. Any litigation could result in substantial costs
and diversion of management's attention and resources. Further, parties making
infringement claims against us may be able to obtain injunctive or other
equitable relief, which could prevent us from selling our products or require us
to enter into royalty or license agreements which are not advantageous to us.
IF WE FAIL TO ADEQUATELY RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR EXISTING
PRODUCTS WILL BECOME OBSOLETE OR UNMARKETABLE.
Advances in technology could render our products and applications obsolete and
unmarketable. We believe that to succeed we must enhance our existing software
products and underlying technologies, develop new products and technologies on a
timely basis, and satisfy the increasingly sophisticated requirements of our
customers. We may not respond successfully to technological change, evolving
industry standards or customer requirements. If we are unable to respond
adequately to these changes, our revenues could decline. In connection with the
introduction of new products and enhancements, we have in the past experienced
development delays and unfavorable development cost variances that are not
unusual in the software industry. To date, these delays have not had a material
impact on our revenues. If new releases or products are delayed or do not
achieve broad market acceptance, we could experience a delay or loss of revenues
and customer dissatisfaction.
IF OUR SOFTWARE CONTAINS DEFECTS, WE COULD LOSE CUSTOMERS AND REVENUES.
Software applications that are as complex as ours often contain unknown and
undetected errors or performance problems. Many defects are frequently found
during the period immediately following the introduction of new software or
enhancements to existing software. Furthermore, software which we may license
from third parties for inclusion in our inUnison-TM- portal may also have
undetected errors or may require significant integration, testing or
re-engineering work to operate properly and as represented to our customers.
Although we attempt to resolve all errors that we believe would be considered
serious by our customers, both our software and any third party software that we
license may not be error-free. Undetected errors or performance problems may be
discovered in the future, and errors that were considered minor by us may be
considered serious by our customers. This could result in lost revenues or
delays in customer acceptance, and would be detrimental to our reputation, which
could harm our business.
FLUCTUATIONS IN OPERATING RESULTS COULD CONTINUE IN THE FUTURE.
Our operating results may vary from period to period as a result of the length
of our sales cycle, purchasing patterns of potential customers, the timing of
the introduction of new products, software applications and product enhancements
by us and our competitors, technological factors, variations in sales by
distribution channels, timing of stocking orders by resellers, competitive
31
pricing, and generally nonrecurring system sales. For our legacy business, sales
order cycles range generally from one to twelve months, depending on the
customer, the type of solution being sold, and whether we will perform
installation, integration and customization services. The period from the
execution of a purchase order until delivery of system components to us,
assembly, configuration, testing and shipment, may range from approximately one
to several months. These factors may cause significant fluctuations in operating
results in the future. The sales order cycle for our inUnison-TM- UC/UI
applications in a hosted services model can only be projected at this time as we
are presently negotiating our first contracts with prospective customers. To the
extent that we do not sign up customers to our inUnison-TM- UC/UI applications
according to our plan, our financial performance and results from operations
could suffer.
WE NEED SIGNIFICANT CAPITAL TO OPERATE OUR BUSINESS AND MAY REQUIRE ADDITIONAL
FINANCING. IF WE CANNOT OBTAIN SUCH ADDITIONAL FINANCING, WE MAY NOT BE ABLE TO
CONTINUE OUR OPERATIONS.
We need significant capital to design, develop and commercialize our products.
Currently available funds may be insufficient to fund operations. We may be
required to seek additional financing sooner than currently anticipated or maybe
required to curtail our activities. Based on our past financial performance,
coupled with our return to incurring operating losses with our transition to our
new business model, our ability to obtain conventional credit has been
substantially limited. Our ability to raise capital may also be limited or, if
available, be very costly and possibly dilutive to our shareholders.
CERTAIN PROVISIONS OF OUR CHARTER AND DELAWARE LAW MAY HAVE ANTI-TAKEOVER
EFFECTS.
The terms of our Certificate of Incorporation, as amended, and our ability to
issue up to 2,000,000 shares of "blank check" preferred stock may have the
effect of discouraging proposals by third parties to acquire a controlling
interest in us, which could deprive stockholders and of the opportunity to
consider an offer to acquire their shares at a premium. In addition, under
certain conditions, Section 203 of the Delaware General Corporate Law would
impose a three-year moratorium on certain business combinations between us and
an "interested stockholder" (in general, a stockholder owning 15% or more of our
outstanding voting stock). The existence of such provisions may have a
depressive effect on the market price of our common stock in certain situations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes in
interest rates and changes in foreign currency exchange rates.
INTEREST RATE RISK. The Company's exposure to market risk for changes in
interest rates relates to our short-term investments and line of credit. At
December 31, 2001, our cash and cash equivalents consisted of demand deposits
and commercial paper held by large institutions in the U.S. As of December 31,
2001 there was $300,000 balance outstanding under the line of credit. We
believe that a 10% change in the long-term interest rates would not have a
material effect on our financial condition, results of operations or cash flows.
FOREIGN CURRENCY RISK. International revenues from the Company's foreign
subsidiary accounted for approximately 72% of total revenues for the three-month
period ended December 31, 2001. International sales are made from the Company's
foreign subsidiary in its respective country.
32
This subsidiary also incurs most of its expenses in the local currency.
Accordingly, our foreign subsidiary uses the local currency as its functional
currency. The Company's international business is subject to risks typical of an
international business, including, but not limited to differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Accordingly,
the Company's future results could be materially adversely impacted by changes
in these or other factors.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In January 2002, a default judgment was issued against the Company in favor of
an equipment vendor in the amount of $123,000. The Company was successful in
having that default judgment set aside on February 6, 2002. The Company is in
discussions to establish a mutually agreed upon payment plan and expects to
settle this issue.
In October 2001, a software vendor filed suit against the Company for breach of
contract totaling approximately $703,000 plus interest and attorney's fees. On
December 28, 2001, Appiant filed an answer denying this general demand, and is
preparing a counter-suit for return of over $600,000 paid to this vendor. The
Company will continue to otherwise vigorously pursue this matter.
In December 2001, a major customer tendered its internal defense costs and
expenses arising from its defense of a lawsuit involving claims of infringement
of certain patents. It is seeking reimbursement from Company of approximately
$53,000. As the Company is only a distributor of these systems, any liability
suffered by us is reimbursable by the supplier of these systems. The Company
will continue to vigorously defend this matter.
In January 2002, a note holder filed suit demanding payment on a Note in the
amount of $1.2 million. The Company is currently in negotiations toward an
agreement to extend the date of this note.
In January 2002, a services and equipment provider filed suit in Texas for
breach of contract totaling $117,000. The Company is currently in negotiations
to resolve this claim.
In February 2002, the Company resolved an arbitration matter and litigation
action involving a dispute over employment contract terms for two former Company
management employees. The settlement provides for payment of $88,000 to one
claimant over six months, and payment of $147,000 to the second claimant over a
total of twelve months. The Company and claimants are currently in negotiations
regarding Company common stock that may be due to the claimants under an
unrelated agreement, and the Company expects to resolve this issue. The company
has accrued $235,000 for this matter.
33
While management intends to defend these matters vigorously, there can be no
assurance that any of these complaints or other third party assertions will be
resolved without costly litigation, or in a manner that is not adverse to our
financial position, results of operations or cash flow. No estimate can be made
of the possible loss or possible range of loss associated with the resolution of
these matters in excess of amounts accrued.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In October 2001, we issued a warrant to purchase up to 59,524 shares of common
stock to Lucien Thomas Baldwin III, as set forth in a Promissory Note and
secured by the Company's Voice Plus Accounts Receivables, to raise operating
capital for us in a transaction exempt from registration under Section 4(2). The
warrant is immediately exercisable and may be exercised until October 31, 2006.
The exercise price per share of this warrant is $1.68.
In October 2001, we issued a warrant to purchase up to 59,524 of common stock to
Douglas Zorn, as set forth in a Promissory Note and secured by the Company's
Voice Plus Accounts Receivables, to raise operating capital for us in a
transaction exempt from registration under Section 4(2). The warrant is
immediately exercisable and may be exercised until October 31, 2006. The
exercise price per share of this warrant is $1.68.
In October 2001, we issued a warrant to purchase up to 59,524 shares of common
stock to Jim Gillespie, as set forth in a Promissory Note and secured by the
Company's Voice Plus Accounts Receivables, to raise operating capital for us in
a transaction exempt from registration under Section 4(2). The warrant is
immediately exercisable and may be exercised until October 31, 2006. The
exercise price per share of this warrant is $1.68.
In November 2001, we issued a warrant to purchase up to 150,000 shares of common
stock to Lucien Thomas Baldwin III, as set forth in a Promissory Note and
secured by the VoiceTel and Infotel assets, to raise operating capital for us in
a transaction exempt from registration under Section 4(2). The warrant is
immediately exercisable and may be exercised until November 28, 2006. The
exercise price per share of this warrant is $1.35.
In November 2001, we issued a warrant to purchase up to 77,519 shares of common
stock to Robert J. Schmier, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until November 28, 2006. The exercise price per share of this
warrant is $1.29.
In November 2001, we issued a warrant to purchase up to 143,885 shares of common
stock to Robert Gilman, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until November 29, 2006. The exercise price per share of this
warrant is $1.39.
In December 2001, we issued a warrant to purchase up to 38,462 shares of common
stock to Dr. Gabor Rubanyi, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until November 29, 2006. The exercise price per share of this
warrant is $1.30.
In December 2001, we issued a warrant to purchase up to 19,084 shares of common
stock to Dr. Robert L. Glass, as set forth in a Promissory Note and secured by
34
the Infotel assets, to raise operating capital for us in a transaction exempt
from registration under Section 4(2). The warrant is immediately exercisable and
may be exercised until December 7, 2006. The exercise price per share of this
warrant is $1.31.
In December 2001, we issued a warrant to purchase up to 33,333 shares of common
stock to Jeremy Judge, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until December 12, 2006. The exercise price per share of this
warrant is $1.20.
In December 2001, we issued a warrant to purchase up to 83,333 shares of common
stock to Wayne Saker, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
exercised until December 12, 2006. The exercise price per share of this warrant
is $1.20.
In December 2001, we issued a warrant to purchase up to 42,373 shares of common
stock to Dr. Harry Mittelman, as set forth in a Promissory Note and secured by
the Infotel assets, to raise operating capital for us in a transaction exempt
from registration under Section 4(2). The warrant is immediately exercisable and
may be exercised until December 20, 2006. The exercise price per share of this
warrant is $1.77.
In December 2001, we issued a warrant to purchase up to 56,497 of common stock
to Robert Gilman, as set forth in a Promissory Note and secured by the Infotel
assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until December 20, 2006. The exercise price per share of this
warrant is $1.77.
In December 2001, we issued a warrant to purchase up to 56,497 shares of common
stock to Wayne Saker, as set forth in a Promissory Note and secured by the
Infotel assets, to raise operating capital for us in a transaction exempt from
registration under Section 4(2). The warrant is immediately exercisable and may
be exercised until December 20, 2006. The exercise price per share of this
warrant is $1.77.
In December 2001, we issued a warrant to purchase up to 112,994 warrants to
purchase shares of common stock to Robert Gilman, as set forth in a Promissory
Note and secured by the Infotel assets, to raise operating capital for us in a
transaction exempt from registration under Section 4(2). The warrant is
immediately exercisable and may be exercised until December 20, 2006. The
exercise price per share of this warrant is $1.77.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the three months
ended December 31, 2001.
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT INDEX
-------------------------------------------------------------------------------
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
35
Incorporated by reference to the identically numbered exhibit in the Company's
Annual Report on Form 10-K as filed with the Securities and Exchange Commission
on January 14, 2002.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 19, 2002
By: /s/ DOUGLAS S. ZORN
-------------------------------------
Douglas S. Zorn
President and Chief Executive Officer
36