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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 000 - 19462
ARTISOFT, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 86-0446453
- ---------------------------- ---------------------
(State or other jurisdiction (IRS employer
of incorporation) identification number
5 CAMBRIDGE CENTER
CAMBRIDGE, MA 02142
(617) 354-0600
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(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO THE FILING
REQUIREMENTS FOR AT LEAST THE PAST 90 DAYS.
YES [X] NO [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE (MAY 10, 1999).
COMMON STOCK, $.01 PAR VALUE: 14,781,864 SHARES
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<PAGE>
ARTISOFT INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets-
March 31, 1999 and June 30, 1998 3
Consolidated Statements of Operations-
Three Months and Nine Months Ended
March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows-
Nine Months Ended March 31, 1999
and 1998 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote by Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
EXHIBITS
11 Computation of Net Income (Loss) Per Share 25
27 Financial Data Schedule 26
2
<PAGE>
ARTISOFT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
March 31, June 30,
ASSETS 1999 1998
-------- --------
(unaudited)
Current assets:
Cash and cash equivalents ......................... $ 17,183 $ 18,514
Receivables:
Trade accounts, net .......................... 1,879 2,813
Other receivables ............................ 143 279
Inventories ....................................... 1,169 917
Prepaid expenses .................................. 367 283
-------- --------
Total current assets .......................... 20,741 22,806
-------- --------
Property and equipment ................................. 6,024 5,333
Less accumulated depreciation and amortization .... (4,763) (4,198)
-------- --------
Net property and equipment .................... 1,261 1,135
-------- --------
Other assets ........................................... 1,148 1,567
-------- --------
$ 23,150 $ 25,508
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................. $ 1,348 $ 1,598
Accrued liabilities ............................... 2,019 1,670
Accrued restructuring costs ....................... 285 1,536
Current portion of capital lease obligations ...... 401 464
-------- --------
Total current liabilities ..................... 4,053 5,268
-------- --------
Capital lease obligations,
net of current portion ............................ -- 289
Commitments and contingencies .......................... -- --
Shareholders' equity:
Preferred stock, $1.00 par value. Authorized
11,433,600 shares; none issued .................. -- --
Common stock, $.01 par value. Authorized 50,000,000
shares; issued 28,098,223 shares at March 31,
1999 and 27,980,602 shares at June 30, 1998 ..... 280 279
Additional paid-in capital ........................ 96,773 96,486
Accumulated deficit ............................... (8,172) (7,030)
Less treasury stock, at cost, 13,320,500 shares
at March 31, 1999 and June 30, 1998 ............. (69,784) (69,784)
-------- --------
Total shareholders' equity .................... 19,097 19,951
-------- --------
$ 23,150 $ 25,508
======== ========
See accompanying notes to consolidated financial statements.
3
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ARTISOFT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales ................................. $ 5,751 $ 6,215 $ 16,247 $ 19,701
Cost of sales ............................. 1,907 1,659 4,871 4,964
-------- -------- -------- --------
Gross profit ............................ 3,844 4,556 11,376 14,737
-------- -------- -------- --------
Operating Expenses:
Sales and marketing ..................... 2,121 2,582 6,265 7,612
Product development ..................... 1,455 1,823 3,896 5,437
General and administrative .............. 1,035 747 2,963 2,402
Restructuring cost ...................... -- (175) -- (439)
-------- -------- -------- --------
Total operating expenses .............. 4,611 4,977 13,124 15,012
-------- -------- -------- --------
Income (loss) from operations ............. (767) (421) (1,748) (275)
Other income, net ......................... 187 259 606 1,758
-------- -------- -------- --------
Income (loss) before extraordinary item . (580) (162) (1,142) 1,483
Extraordinary loss from early
extinguishment of debt, net of
$0 income tax benefit ................... -- -- -- (109)
-------- -------- -------- --------
Net income (loss) ....................... $ (580) $ (162) $ (1,142) $ 1,374
-------- -------- -------- --------
Net income (loss) per common share -
basic and diluted ....................... $ (.04) $ (.01) $ (.08) $ .09
-------- -------- -------- --------
Weighted average common shares outstanding:
Basic ..................................... 14,764 14,539 14,705 14,529
-------- -------- -------- --------
Diluted ................................... 14,764 14,539 14,705 14,576
-------- -------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
ARTISOFT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine Months Ended
March 31,
--------------------
1999 1998
-------- --------
(unaudited)
Cash flows from operating activities:
Net income (loss): ................................... $ (1,142) $ 1,374
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Extraordinary loss ............................... -- 109
Depreciation and amortization .................... 1,088 1,406
Gain from disposition of property, net ........... 4 (1,504)
Change in accounts receivable and inventory
allowances ..................................... (399) (2,629)
Tax benefit of disqualifying dispositions ........ 34 --
Changes in assets and liabilities:
Receivables:
Trade accounts ............................... 1,130 3,480
Income taxes ............................... -- 4,300
Notes and other ............................ 136 284
Inventories ................................... (48) 1,301
Prepaid expenses .............................. (84) 514
Accounts payable and accrued liabilities ...... 99 (1,138)
Accrued restructuring costs ................... (1,251) (4,478)
Other assets .................................. (8) 23
-------- --------
Net cash (used in) provided by operating
activities ................................ (441) 3,042
-------- --------
Cash flows from investing activities:
Proceeds from sale of property and equipment ......... 12 4,228
Purchases of property and equipment .................. (804) (477)
-------- --------
Net cash (used in) provided by investing activities (792) 3,751
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock ............... 254 18
Principal payments on long term debt ............... (352) (2,522)
-------- --------
Net cash used in financing activities ............ (98) (2,504)
-------- --------
Net (decrease) increase in cash and cash equivalents ... (1,331) 4,289
Cash and cash equivalents at beginning of period ....... 18,514 14,673
-------- --------
Cash and cash equivalents at end of period ............. $ 17,183 $ 18,962
======== ========
See accompanying notes to consolidated financial statements.
5
<PAGE>
ARTISOFT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Artisoft,
Inc. and its three wholly-owned subsidiaries: Triton Technologies, Inc.,
Artisoft "FSC", Ltd. (which has elected to be treated as a foreign sales
corporation) and NodeRunner, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the accompanying unaudited
consolidated financial statements include all adjustments (of a normal recurring
nature) which are necessary for a fair presentation of the financial results for
the interim periods presented. Certain information and footnote disclosures
normally included in financial statements have been condensed or omitted
pursuant to such rules and regulations. Although the Company believes that the
disclosures are adequate to make the information presented accurate, it is
suggested that these financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's 1998 Annual Report to Shareholders and report on Form 10-K. The
results of operations for the three or nine month periods ended March 31, 1999
are not necessarily indicative of the results to be expected for the full year.
(2) COMPUTATION OF NET INCOME (LOSS) PER SHARE
Basic earnings per share is computed by dividing income attributable to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock that then shared in the earnings of the
Company. In calculating net loss per common share for the three and nine month
periods ended March 31, 1999, 318,209 and 84,919 common stock equivalent shares
consisting of stock options have been excluded because their inclusion would
have been anti-dilutive.
(3) SEGMENTATION OF FINANCIAL RESULTS
The financial results for the three month and nine month periods ended
March 31, 1999 are summarized below by product group (in thousands):
6
<PAGE>
Three Months Nine Months
Ended Ended
March 31, 1999 March 31, 1999
-------------- --------------
COMPUTER TELEPHONY GROUP:
Net sales $ 1,853 $ 4,805
Gross profit $ 995 $ 2,681
Gross profit margin 54% 56%
Operating (loss) $(1,807) $ (4,972)
Net (loss) $(1,807) $ (4,972)
Capital expenditures $ 109 $ 620
Depreciation and amortization expense $ 129 $ 322
COMMUNICATIONS SOFTWARE GROUP:
Net sales $ 3,898 $ 11,442
Gross profit $ 2,849 $ 8,695
Gross profit margin 73% 76%
Operating income $ 1,040 $ 3,224
Net income $ 1,227 $ 3,830
Capital expenditures $ 49 $ 184
Depreciation and amortization expense $ 248 $ 766
The Company's Computer Telephony Product Group principally includes
revenues from the TeleVantage and Visual Voice product lines. The Company's
Communications Software Group includes revenues from the LANtastic NOS,
CoSession Remote, i.Share and ModemShare product lines.
(4) RESTRUCTURING COST
The accrued restructuring costs in the accompanying consolidated balance
sheet at March 31, 1999 include the costs of involuntary employee termination
benefits for certain Communications Software Group employees, costs to close the
Company's United Kingdom and Iselin, New Jersey sales and support offices and
related costs associated with the restructuring actions effected during the
fiscal year ended June 30, 1998.
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<PAGE>
The accrued restructuring costs at March 31, 1999 principally consist of the
following (in thousands):
Total Accrued
Restructuring Costs
-------------------
Balance at June 30, 1998 $ 1,536
Cash paid for
employee
termination benefits (650)
Cash paid for office closure costs (601)
-------
Unaudited balance at March 31, 1999 $ 285
-------
(5) INVENTORIES
Inventories at March 31, 1999 and June 30, 1998 consist of the following
(in thousands):
March 31, June 30,
1999 1998
------- -------
(unaudited)
Raw materials $ 991 $ 938
Work-in-process 152 109
Finished goods 157 205
------- -------
1,300 1,252
Inventory allowances (131) (335)
------- -------
$ 1,169 $ 917
======= =======
(6) PROPERTY AND EQUIPMENT
Property and equipment at March 31, 1999 and June 30, 1998 consist of the
following (in thousands):
March 31, June 30,
1999 1998
------- -------
(unaudited)
Furniture and fixtures $ 36 $ 6
Computers and other equipment 5,721 5,259
Leasehold improvements 267 68
------- -------
6,024 5,333
Accumulated depreciation and
amortization (4,763) (4,198)
------- -------
$ 1,261 $ 1,135
======= =======
8
<PAGE>
(7) OTHER ASSETS
Other assets at March 31, 1999 and June 30, 1998 consist of the following
(in thousands):
March 31, June 30,
1999 1998
------ ------
(unaudited)
Trademarks and patents, net of
accumulated amortization of $90 and $70 $ 35 $ 55
Purchased technology, net of accumulated
amortization of $1,721 and $1,323 989 1,387
Recoverable deposits and other 124 125
------ ------
$1,148 $1,567
====== ======
(8) ACCRUED LIABILITIES
Accrued liabilities at March 31, 1999 and June 30, 1998 consist of the
following (in thousands):
March 31, June 30,
1999 1998
------ ------
(unaudited)
Compensation and benefits $ 877 $ 799
Payroll, sales and property taxes 109 88
Marketing 384 349
Royalties 310 227
Other 339 207
------ ------
$2,019 $1,670
====== ======
9
<PAGE>
ARTISOFT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET SALES. The Company's net sales for the quarter ended March 31, 1999
were $5.8 million, a decrease of 7% from net sales of $6.2 million for the
corresponding quarter of fiscal 1998 and an increase of 6% from the second
quarter of fiscal 1999 net sales of $5.4 million. For the nine-month period
ended March 31, 1999, the Company's net sales were $16.2 million, a decrease of
18% from net sales of $19.7 million for the corresponding period of fiscal 1998.
The decreases in net sales for the quarter and nine-month periods ended March
31, 1999, as compared to the corresponding periods in fiscal 1998, were
principally due to the decline in sales of certain of the Company's
Communications Software Group products, primarily lower sales of the Company's
LANtastic network operating system (NOS) products. This decline was partially
offset by increases in sales of the Company's Computer Telephony products. The
sequential increase in net sales from the previous quarter's net sales was
primarily the result of increased sales of the Company's Computer Telephony
products especially its TeleVantage PC-based PBX telephone system software and
related hardware.
The Company distributes its products in both the U.S. and international
markets. U.S. sales increased 7% to $4.7 million (81% of net sales) for the
quarter ended March 31, 1999, from $4.4 million (71% of net sales), for the same
quarter a year ago. U.S. sales decreased 8% to $ 13.1 million (81% of net sales)
for the nine-month period ended March 31, 1999 from $14.3 million (73% of net
sales), for the same period in fiscal 1998. The increase in aggregate U.S. net
sales and U.S. net sales as a percentage of total net sales for the quarter
ended March 31, 1999, as compared to the corresponding period in fiscal 1998,
principally resulted from an increase in U.S. net sales of the Company's
Computer Telephony products, particularly TeleVantage and an increase in U.S.
based Communications Software Group Original Equipment Manufacturer "OEM"
revenue. The decrease in aggregate U.S. net sales for the nine-month period
ended March 31, 1999, is primarily the result of the overall decline in sales of
the Company's LANtastic network operating system (NOS) products principally in
U.S. retail, mail order and distribution channels, partially offset by the
aforementioned increases in sales of the Company's Computer Telephony products
and U.S. based Communications Software Group OEM revenues. The increase in U.S.
net sales as a percentage of total net sales for the nine-month period ended
March 31, 1999, is principally the result of the increase in U.S. based Computer
Telephony revenues and U.S. based Communications Software Group OEM revenues
together with the decline in international sales.
International sales decreased 39% to $1.1 million (19% of net sales) for
the quarter ended March 31, 1999 from $1.8 million (29% of net sales) for the
same quarter a year ago. International sales decreased 43% to $3.1 million (19%
of net sales) for the nine-month period ended March 31, 1999 from $5.4 million
(27% of net sales) for the same period in fiscal 1998. The decrease in
international net sales as a percentage of total net sales for both the quarter
and the nine-month periods ended March 31, 1999, as compared to the
corresponding periods in fiscal 1998, primarily resulted from a decline in
worldwide sales of the Company's LANtastic network operating system (NOS)
products (particularly in Latin America and Asia) as well as a decline in net
sales of CoSession Remote preloads in Asia (especially Japan).
GROSS PROFIT. The Company's gross profit was $3.8 million and $4.6 million
for the quarters ended March 31, 1999 and 1998, respectively (67% and 73% of net
sales, respectively). Gross profit was $11.4 million and $14.7 million for the
nine-month periods ended March 31, 1999, and 1998, respectively (70% and 75% of
net sales, respectively). The net decrease in gross profit margin percentages
for both the quarter and the nine-month periods ended March 31, 1999, as
compared to the corresponding periods in fiscal 1998, was principally due to the
following factors: substantially higher software licensing fees on the Company's
10
<PAGE>
configuration tracking and recovery utility(ConfigSafe) and increased sales of
lower margin Computer Telephony hardware products and TeleVantage NFR's (Not For
Resale Kits). The decline was partially offset by lower software amortization
costs and lower inventory reserve requirements. The net decrease in aggregate
dollars of gross profit margin for both the quarter and nine-month periods ended
March 31, 1999 is principally the result of the decline in net sales and the
aforementioned product mix changes.
Gross profit margins may fluctuate from quarter to quarter due to changes
in net sales, product mix, pricing actions and changes in sales and inventory
allowances.
OPERATING EXPENSES. Operating expenses were $4.6 million and $5.0 million
for the quarters ended March 31, 1999 and 1998 respectively, (80% of net sales).
Total operating expenses were $13.1 million and $15.0 million for the nine-month
periods ended March 31, 1999 and 1998, respectively, (81% and 76% of net sales,
respectively). The decrease in absolute dollars was due to the restructuring
actions implemented by the Company in its Communications Software Group during
the fiscal year ended June 30, 1998, substantially offset by increased operating
expenditures in its Computer Telephony Group. The increase in total operating
expenses as a percentage of net sales for the nine-month period ended March 31,
1999 as compared to the corresponding period in fiscal year 1998, was due to the
aforementioned worldwide decline in the Company's Communications Software Group
LANtastic network operating system (NOS) products, offset by the reductions in
the Communications Software group operating expenditures effected during the
June 30, 1998 restructuring actions.
SALES AND MARKETING. Sales and marketing expenses were $2.1 million and
$2.6 million for the quarters ended March 31, 1999 and 1998, respectively, (37%
and 42% of net sales, respectively). Sales and marketing expenses were $6.3
million and $7.6 million for the nine-month periods ended March 31, 1999 and
1998, respectively, (39% of net sales). The decrease in aggregate dollars for
sales and marketing expenses for the quarter and the nine-month periods ended
March 31, 1999, as compared to the corresponding periods in fiscal 1998, are due
principally to the restructuring actions undertaken in the Company's
Communications Software Group during the fiscal year ended June 30, 1998. These
actions included the termination of certain Communications Software Group sales,
marketing and support personnel and the elimination of costs associated with the
Company's Communications Software Group Japanese and United Kingdom sales and
support offices during the quarter ended June 30, 1998. These decreases were
offset to a minor extent by increased sales and marketing costs associated with
the Company's Computer Telephony products (especially TeleVantage). The decrease
in sales and marketing expenses as a percentage of net sales for the quarter
ended March 31, 1999 as compared to the corresponding period in fiscal year
1998, was principally attributable to the aforementioned restructuring actions
taken in the Company's Communications Software Group during the quarter ended
June 30, 1998.
PRODUCT DEVELOPMENT. Product development expenses were $1.5 million and
$1.8 million for the quarters ended March 31, 1999 and 1998, respectively, (25%
and 29% of net sales, respectively). Product development expenses were $3.9
million and $5.4 million for the nine-month periods ended March 31, 1999 and
1998, respectively, (24% and 28% of net sales, respectively). The decrease in
product development expenses in both aggregate dollars and as a percentage of
net sales for the quarter and nine-month periods ended March 31, 1999, as
compared to the corresponding periods in fiscal 1998, is principally
attributable to certain restructuring actions taken during the quarter ended
June 30, 1998 which reduced product development staffing levels in the Company's
Communications Software Group. The decrease in product development expenses in
the Company's Communications Software Group was partially offset by higher costs
associated with increased product development staffing levels in the Company's
Computer Telephony Group.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $1.0
million and $.7 million for the quarters ended March 31, 1999, and 1998,
respectively, (18% and 12% of net sales, respectively). General and
administrative expenses were $3.0 million and $2.4 million for the nine-month
periods ended March 31, 1999 and 1998, respectively (18% and 12% of net sales,
respectively). The increase in aggregate dollars for general and administrative
expenses and general administrative expenses as a percentage of total net sales
for both the quarter and nine-month periods ended March 31, 1999, as compared to
11
<PAGE>
the corresponding periods in fiscal 1998, is attributable to the addition of
certain corporate administrative personnel and increased depreciation expense on
certain equipment purchases and improvements made to the Company's corporate
offices in Cambridge, Massachusetts, along with increased depreciation expense
on the Company's new financial software package. Additionally, the Company
incurred increased occupancy costs in its Cambridge, Massachusetts-based
headquarters due to increased staffing levels during the quarter and nine-month
periods ended March 31, 1999 as compared to the corresponding periods in fiscal
1998.
RESTRUCTURING COST. For the quarter and nine-month periods ended March 31,
1998, the Company reduced by $ .2 million and $ .4 million, respectively, its
restructuring accruals due to lower than anticpated costs in closing its
Communications Software Group international sales and support offices. No such
reductions were recorded for the quarter and nine-month periods ended March 31,
1999.
OTHER INCOME, NET. For the quarter ended March 31, 1999, other income, net,
decreased to $ .2 million, from $ .3 million in the corresponding quarter of
fiscal 1998. For the nine-month period ended March 31, 1999, other income, net,
decreased to $ .6 million, from $ 1.8 million in the corresponding period of
fiscal 1998. The decrease in other income, net, for the quarter ended March 31,
1999, as compared to the corresponding quarter in fiscal year 1998, is the
result of lower interest income received on the Company's cash balances. The
decrease in other income, net, for the nine-month period ended March 31, 1999,
as compared to the corresponding period in fiscal year 1998, was principally
attributable to the recognition of a gain on the sale of the Company's Tucson,
Arizona headquarters of $1.3 million for the nine-month period ended March 31,
1998.
EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT. In October 1997, the
Company incurred a $ .1 million prepayment penalty upon the sale of its Tucson,
Arizona headquarters and the subsequent repayment of a $2.2 million mortgage on
that facility. The Company utilized proceeds received from the sale of its
Tucson, Arizona headquarters to prepay the mortgage obligation. There is no
income tax effect from the transaction. The per share amount of extraordinary
loss net of income tax effects is $(.01) for the quarter and nine-month periods
ended March 31, 1998.
FUTURE RESULTS
The Company is currently and will continue to focus a substantial majority
of its business resources on its computer telephony products. Concurrent with
the expanded investment in computer telephony products, the Company has
substantially reduced its investment in its communications software products.
There can be no assurances that with the reduced sales, marketing and
development investment in the communications software products, that revenue
levels for these products will continue at their current levels in the future.
The Company intends to continue to increase its investments and
expenditures in sales, marketing and development of computer telephony products
(especially TeleVantage). There can be no assurance that the Company will be
able to market or sell such products successfully or at particular levels within
particular time-frames. Accordingly, the Company could experience a slower than
anticipated increase in computer telephony revenues as it attempts to build a
distribution and reseller network that may build market awareness for computer
telephony products. A slow increase in the Company's computer telephony
revenues, particularly if combined with increased investment in computer
telephony product development and marketing along with declining communications
software product revenues, may cause the Company to experience increased
operating losses in the future.
The Company's future results of operations involve a number of risks and
uncertainties. Among the factors that could cause future results to differ
materially from historical results are the following: business conditions and
the general economy; competitive pressures, acceptance of new products and price
pressures; availability of third party compatible products at reasonable prices;
risk of nonpayment of accounts receivable; risk of product line or inventory
obsolescence due to shifts in technologies or market demand; timing of software
introductions and litigation. These and other risk factors are outlined below.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $17.2 million at March 31,
1999 compared to $18.5 million at June 30, 1998 and working capital of $16.7
million at March 31, 1999 compared to $17.5 million at June 30, 1998. The
decrease in cash and cash equivalents was the result of the following factors:
employee termination benefit payments to certain Communications Software Group
employees and payments associated with the closure of the Company's United
Kingdom sales and support office and increased development, sales force
expansion and marketing investments in the Company's Computer Telephony Products
Group. The decrease in the Company's working capital was primarily the result of
the Company's operating loss and the net increase in property and equipment
balances at March 31, 1999 offset by increased inventory balances at March 31,
1999.
The Company funds its working capital requirements primarily through cash
flows from operations and existing cash balances. While the Company anticipates
that existing cash balances and cash flows from operations will be adequate to
meet the Company's current and expected cash requirements for at least the next
year, additional investments by the Company to acquire new technologies and
products may necessitate that the Company seek additional debt or equity
capital. There can be no assurance that such additional financing will be
available when needed or, if available, will be on satisfactory terms. In order
to raise capital, the Company may issue debt or equity securities and may incur
substantial dilution.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS No. 130). SFAS No. 130 establishes requirements for disclosure of
comprehensive income and becomes effective for the Company for the year ending
June 30, 1999. Comprehensive income includes such items as foreign currency
translation adjustments and unrealized holding gains and losses on available for
sale securities that are currently being presented by the Company as a component
of shareholders' equity. The adoption does not have an impact on the Company's
financial results.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise and Related Information"(SFAS No. 131). SFAS No. 131
establishes standards for disclosure about operating segments in annual
financial statements and selected information in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." The new standard
becomes effective for the Company for the year ending June 30, 1999, and
requires that comparative information from earlier years be restated to conform
to the requirements of this standard.
In February 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits (an amendment of
FASB Statements No. 87, 88, and 106). This statement standardizes employers'
disclosure requirements about pensions and other postretirement benefit plans
and requires additional information on changes in the benefit obligations and
fair values of plan assets that will facilitate financial analysis. This
statement supersedes the disclosure requirements in SFAS No. 87, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits", and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions". The new standard becomes effective
for the Company for the fiscal year ending June 30, 1999. The adoption does not
have an impact on the Company's financial results.
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YEAR 2000
The Company recognizes the potential business impacts related to the Year
2000 computer system issue and is implementing a plan to assess and improve the
Company's state of readiness with respect to such issues. The Year 2000 issue is
one where computer systems may recognize the designation "00" as 1900 when it
means 2000, resulting in system failure or miscalculations.
Commencing in 1997, the Company initiated a comprehensive review of its
core information technology systems, which the Company is dependent upon for the
conduct of day to day business operations, in order to determine the adequacy of
those systems in light of future business requirements. Year 2000 readiness was
one of a variety of factors to be considered in the review of core systems.
In recognition of the Year 2000 issue, the Company in September 1997, began
a comprehensive review of its information technology and non-information
technology systems used by the Company, computer hardware and software products
sold by the Company, and computer hardware and software products and components
and other equipment supplied to the Company by third parties. Such review
includes testing and analysis of Company products and inquiries of third parties
supplying information technology and non-information technology systems,
computer hardware and software products and components, and other equipment to
the Company.
The Company has divided its Year 2000 review into three phases. The first
addresses the Company's core information technology systems and products
currently sold by the Company. The second phase addresses non-core information
technology systems and non-information technology systems. In addition, the
Company will implement required Year 2000 upgrades and replacements during the
second phase. The third phase addresses third party suppliers of products,
supplies and services necessary to the Company's ongoing operations. The Company
substantially completed the first phase of its review in September 1998. The
Company believes it will complete the second and third phases by September 1999.
In the first phase of its Year 2000 review, the Company tested software
products currently manufactured and shipped by the Company, and determined that
most such products are Year 2000 compliant. Certain of the Company's products
that were discontinued prior to fiscal 1998 are not Year 2000 compliant. In
cases where such non-Y2K compliant products are still sold on a replacement
basis only, the Company requires the customer to sign a release of liability for
all damages potentially caused by such non-Y2K compliant products. The Company
maintains a section on its web site that identifies all products the Company
sells and ships and lists their Y2K status. The Company also responds via direct
mail, e-mail or telephone, as appropriate, to customer and supplier requests for
information on Y2K compliancy of its products. The Company has notified its
distributors, resellers and end users of cases of non-compliance where possible
and has authorized returns and replacement of these products where possible. The
Company believes the cost of these returns or product replacements to be
immaterial, and that the Company's reserves are adequate to cover such returns
and replacements. The Company also has made inquiries of third parties supplying
the Company with computer hardware and software products and components
currently sold by the Company, and has received assurances that such products
and components are or will be Year 2000 compliant. The Company has followed up
with third party suppliers and vendors who did not respond to the Company's
initial inquiries via telephone, mail or e-mail as appropriate. The Company will
review supplier/vendor replacement options as necessary. With respect to core
information technology, the Company has made inquires of third parties supplying
computer hardware and software operating systems to the Company, and has
received assurances that, except as discussed below, such hardware and software
systems are or will be Year 2000 compliant.
As a result of its review to date, the Company has determined that certain
of its internal financial software systems are inadequate for the Company's
future business needs and need to be replaced because of various considerations,
including Year 2000 non-compliance. In certain cases the timing of replacement
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systems is being accelerated because of Year 2000 issues, although the Company
believes replacement would have been necessary in the near future regardless of
such issues. The implementation of this new software package occurred on April
1, 1999 and the Company continues to perform diagnostic evaluation of the new
software before finalizing the migration. The Company expects final migration to
occur prior to June 1, 1999. The Company has spent less than $.3 million to
implement and migrate to this new software package. These costs will be
capitalized over the life of the purchased software package. The Company does
not expect the amounts to be expensed over the life of the software package to
have a material effect on its financial position or results of operations.
The Company has also identified certain other internal sales, marketing and
support management software packages that are not fully Year 2000 compliant. The
Company has completed the evaluation of these internal systems and is currently
re-allocating internal resources to complete the necessary programming to ensure
Year 2000 compliancy. The Company anticipates that these programming changes and
subsequent testing will be completed by September 1999.
At this time, the Company has not developed Year 2000 contingency plans,
other than the review and remedial actions described above, and does not intend
to do so unless the Company believes such plans are merited by the results of
its continuing Year 2000 review. The Company maintains and deploys contingency
plans designed to address various other potential business interruptions. These
plans may be applicable to address the interruption of support provided by third
parties resulting from their failure to be Year 2000 ready.
If the Company or the third parties with which it has relationships were to
cease or not successfully complete its or their Year 2000 remediation efforts,
the Company could encounter disruptions to its business that could have a
material adverse effect on its business, financial position and results of
operations. The Company could be materially and adversely impacted by widespread
economic or financial market disruption or by Year 2000 computer system failures
at third parties with which it has relationships.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Form 10-Q may contain forward-looking statements that involve risks
and uncertainties, including, but not limited to, the impact of competitive
products and pricing, product demand and market acceptance risks, the presence
of competitors with greater financial resources, product development and
commercialization risks, costs associated with the integration and
administration of acquired operations, capacity and supply constraints or
difficulties, the results of financing efforts, Year 2000 issues and other risks
detailed from time to time in the Company's Securities and Exchange Commission
filings. The Company filed its 1998 Form 10-K on September 25, 1998 and its 1999
Second Quarter Form 10-Q on February 11, 1999. Please refer to these documents
for a more detailed discussion of the risks and uncertainties associated with
the Company's future operations.
RISK FACTORS
GENERAL
COMPETITION. The communications software and computer telephony industries
are highly competitive and are characterized by rapidly changing technology and
evolving industry standards. The Company competes with other software companies,
many of which have substantially greater financial, technological, production,
sales and marketing and other resources, as well as greater name recognition and
larger customer bases, than the Company. As a result, these competitors may be
able to respond more quickly and effectively to new or emerging technologies and
changes in customer requirements or to devote greater resources to the
development, promotion, sales and support of their products than the Company.
Competition in the software industry is likely to intensify as current
competitors expand their product lines, more features are included in operating
systems (e.g., Windows NT 5.0), new applications are developed, and as new
companies enter the markets or segments in which the Company currently competes.
The software industry is also characterized by a high degree of consolidation
which favors companies with greater resources than those of the Company.
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Consequently, the Company expects its products to experience increased
competition which could result in significant price reductions, loss of market
share and lack of acceptance of new products, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's new product introductions can be subject to severe
price and other competitive pressures. While the Company endeavors to introduce
its products to the marketplace in a timely manner there can be no assurances
that due to the greater financial resources of the Company's competitors that
these products will be successful or even accepted. There can be no assurance
that the Company's products will be able to compete successfully with other
products offered presently or in the future by other vendors.
CONNECTIVITY AND DEPENDENCE. The Company's ability to successfully sell
certain of its products is to a significant degree dependent on operating system
connectivity, principally with Microsoft's operating systems. Should the
Company's products become non-compatible with the dominant operating systems
currently in use in the PC industry, the Company's revenues from such products
could be materially adversely impacted. In addition, the Company's revenues will
be adversely affected if software solutions similar to the Company's
Communications Software Group products are bundled with or incorporated into
dominant operating systems, as has occurred and can be expected to occur in the
future with respect to the Company's Communications Software Group products.
RETURNS AND PRICE PROTECTION. The Company is exposed to the risk of product
returns and rotations from its distributors and other volume purchasers, which
are estimated and recorded by the Company as a reduction in sales. Although the
Company attempts to monitor and if necessary adjust its channel inventories to
be consistent with current levels of sell through, localized overstocking may
occur with certain products due to rapidly evolving market conditions. In
addition, the risk of product returns and rotations may increase if the demand
for its existing products should rapidly decline due to regional economic
troubles or increased competition. Although the Company believes that it
provides adequate allowances for product returns and rotations, there can be no
assurance that actual product returns and rotations will not exceed the
Company's allowances. Any product returns and rotations in excess of recorded
allowances could result in a material adverse effect on net sales and operating
results. As the Company introduces more new products, the predictability and
timing of sales to end users and the management of returns to the Company of
unsold products by distributors and volume purchasers becomes more complex and
could result in material fluctuations in quarterly sales and operating results.
FACTORS AFFECTING PRICING. Substantially all of the Company's revenue in
each fiscal quarter results from orders booked in that quarter. A significant
percentage of the Company's bookings and sales to distributors and other volume
purchasers historically have occurred during the last month of the quarter and
are concentrated in the latter half of that month. Orders placed by major
customers are typically based upon customers' recent historical and forecasted
sales levels for Company products and inventory levels of Company products
desired to be maintained by those major customers at the time of the orders.
Moreover, orders may also be based upon financial practices by major customers
designed to increase the return on investment or yield on the sales of the
Company's products to value added resellers ("VAR's") or end-users. Major
distribution customers occasionally receive market development funds from the
Company for purchasing Company products and from time to time extended terms, in
accordance with industry practice, depending upon competitive conditions. The
Company currently does not offer any cash rebates to its U.S. distribution
partners. Changes in purchasing patterns by one or more of the Company's major
customers, changes in customer policies pertaining to desired inventory levels
of Company products, negotiations of market development funds and changes in the
Company's ability to anticipate in advance the product mix of customer orders
could result in material fluctuations in quarterly operating results.
PRODUCT CONCENTRATION. The Company has in the past derived, and may in the
future derive, a significant portion of its revenues from a relatively small
number of products. Declines in the revenues from these software products,
whether as a result of competition, technological change, price pressures or
other factors, would have a material adverse effect on the Company's business,
results of operations and financial condition. Further, life cycles of the
Company's products are difficult to estimate due in part to the recent emergence
of certain of the Company's products, the effect of new products or product
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enhancements, technological changes in the software industry in which the
Company operates and future competition. There can be no assurance that the
Company will be successful in maintaining market acceptance of its current
products or any new products or product enhancements.
DEPENDENCE ON NEW PRODUCT OFFERINGS. The Company's future success will
depend, in significant part, on its ability to successfully develop and
introduce new software products and improved versions of existing software
products on a timely basis and in a manner that will allow such products to
achieve broad customer acceptance. There can be no assurance that new products
will be introduced on a timely basis, if at all. If new products are delayed or
do not achieve market acceptance, the Company's business, results of operations
and financial condition will be materially adversely affected. In the past, the
Company has also experienced delays in purchases of its products by customers
anticipating the launch of new products by the Company or the Company's
customers. There can be no assurance that material order deferrals in
anticipation of new product introductions will not occur. There can also be no
assurance that the Company will be successful in developing, introducing on a
timely basis and marketing such software or that any such software will be
accepted in the market.
TECHNOLOGICAL CHANGE. The markets for computer software applications is
characterized by rapid technological change, changing customer needs, frequent
product introductions and evolving industry standards. The introduction of
products incorporating new technologies and the emergence of new industry
standards could render the Company's existing products obsolete and
unmarketable. The Company's future success will depend upon its ability to
develop and introduce new software products (including new releases and
enhancements) on a timely basis that keep pace with technological developments
and emerging industry standards and address the increasingly sophisticated needs
of its customers. There can be no assurance that the Company will be successful
in developing and marketing new products that respond to technological changes
or evolving industry standards, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these new products, or that its new products will
adequately meet the requirements of the marketplace and achieve market
acceptance. If the Company is unable, for technological or other reasons, to
develop and introduce new products in a timely manner in response to changing
market conditions or customer requirements, the Company's business, results of
operations and financial condition could be adversely affected.
POTENTIAL FOR UNDETECTED ERRORS. Software products as complex as those
offered by the Company may contain undetected errors. There can be no assurance
that, despite testing by the Company and by current and potential customers,
errors will not be found in new or existing products after commencement of
commercial shipments, resulting in loss of or delay in market acceptance or the
recall of such products, which could have a material adverse effect upon the
Company's business, results of operations and financial condition. The Company
provides customer support for most of its products. The Company will in the
future offer new products. If these products are flawed, or are more difficult
to use than traditional Company products, customer support costs could rise and
customer satisfaction levels could fall.
DUPLICATION OF SOFTWARE. The Company duplicates nearly all of its software
at its Tucson, Arizona facility. The Company believes that its internal
duplication capability is economically advantageous because it eliminates the
profit margin required by outside duplication sources and enables a high degree
of scheduling and other control. This concentration of production does, however,
expose the Company to the risk that production could be disrupted by natural
disaster or other events, such as the presence of a virus in the Company's
duplicators. The Company believes that it could retain outside duplication
alternatives quickly, but there is no assurance that it could do so or, if such
arrangements could be made, that duplication could take place in an economical
or timely manner.
PRE-LOAD SOFTWARE MARKET; CD ROM'S. The Company primarily sells its
communications software in a form that includes a disk or disks and a manual.
Currently, the Company has the capability to produce its products in-house only
on 3 1/2-inch diskettes. However, with the expansion of the size of most
software programs, CD-ROM has surpassed diskettes as the most prominent medium.
Many of the Company's customers "pre-load" the Company's software onto a hard
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disk. These arrangements eliminate the need for a disk and may eliminate the
need for a manual. The pre-load arrangements produce smaller unit revenues for
the Company and eliminate the Company's ability to generate revenues from its
production facilities. The Company does not currently have the capability to
produce CD-ROMs and the cost to develop such production capability may be
prohibitive. The Company currently contracts CD-ROM production to specialized
CD-ROM facilities. The Company expects continued rapidly expanding growth in the
pre-load and CD-ROM usage mediums, more of the Company's relationships would
involve product pre-loads and CD-ROM production and the Company's business,
results of operations and financial condition could be adversely affected.
INTELLECTUAL PROPERTY RIGHTS. The Company's success is dependent upon its
software code base, its programming methodologies and other intellectual
properties. To protect its proprietary technology, the Company relies primarily
on a combination of trade secret laws and nondisclosure, confidentiality, and
other agreements and procedures, as well as copyright and trademark laws. These
laws and actions may afford only limited protection. There can be no assurance
that the steps taken by the Company will be adequate to deter misappropriation
of its proprietary information, or to prevent the successful assertion of an
adverse claim to software utilized by the Company, or that the Company will be
able to detect unauthorized use and take effective steps to enforce its
intellectual property rights. The Company owns United States trademark
registrations for certain of its trademarks. In addition, the Company has
applied for trademark protection on a number of its recently introduced new
technologies. Certain of the Company's trademark applications are still pending
and no assurances can be made that the trademark applications will be accepted
by the U.S. Trademark and Patent Office. A rejection of one or more of these
trademark applications could have a material adverse affect on the Company's
ability to successfully sell and market these new products. In selling its
products, the Company relies primarily on "shrink wrap" licenses that are not
signed by licensees and, therefore, may be unenforceable under the laws of
certain jurisdictions. In addition, the laws of some foreign countries provide
substantially less protection to the Company's proprietary rights than do the
laws of the United States. Trademark or patent challenges in such foreign
countries could, if successful, materially disrupt or even terminate the
Company's ability to sell its products in such markets. There can be no
assurance that the Company's means of protecting its proprietary rights will be
adequate or that the Company's competitors will not independently develop
similar technology. Further, although the Company believes that its services and
products do not infringe on the intellectual property rights of others such
claims have been and in the future may be asserted against the Company. The
failure of the Company to protect its proprietary property, or the infringement
of the Company's proprietary property on the rights of others, could have a
material adverse effect on the Company's business, results of operations and
financial condition.
From time to time, the Company has received and may in the future receive
communications from third parties asserting that the Company's trade names or
that features, content, or trademarks of certain of the Company's products
infringe upon intellectual property rights held by such third parties. As the
number of trademarks, patents, copyrights and other intellectual property rights
in the Company's industry increases, and as the coverage of these patents and
rights and the functionality of products in the market further overlap, the
Company believes that products based on its technology may increasingly become
the subject of infringement claims. Such claims could materially adversely
affect the Company, and may also require the Company to obtain one or more
licenses from third parties. There can be no assurance that the Company would be
able to obtain any such required licenses upon reasonable terms, if at all, and
the failure by the Company to obtain such licenses could have a material adverse
effect on its business, results of operations and financial condition. If the
Company were able to obtain such licenses, the licensing costs could materially
effect the Company's future financial results. In addition, the Company licenses
technology on a non-exclusive basis from several companies for inclusion in its
products and anticipates that it will continue to do so in the future. The
inability of the Company to continue to license these technologies or to license
other necessary technologies for inclusion in its products, or substantial
increases in royalty payments under these third party licenses, could have a
material adverse effect on its business, results of operations and financial
condition.
Litigation or threatened litigation in the software development industry
has increasingly been used as a competitive tactic both by established companies
seeking to protect their existing position in the market and by emerging
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companies attempting to gain access to the market. If the Company is required to
defend itself against a claim, whether or not meritorious, the Company could be
forced to incur substantial expense and diversion of management attention, and
may encounter market confusion and reluctance of customers to purchase the
Company's software products. Such claims have been asserted against certain of
the Company's technologies. Such litigation, if determined adversely to the
Company, could have a substantial material adverse effect on its business,
results of operations and financial condition.
DEPENDENCE UPON KEY PERSONNEL. The Company's future performance depends in
significant part upon key technical and senior management personnel. The Company
is dependent on its ability to identify, hire, train, retain and motivate high
quality personnel, especially highly skilled engineers involved in the ongoing
research and development required to develop and enhance the Company's software
products and introduce enhanced future products. The industry is characterized
by a high level of employee mobility and aggressive recruiting of skilled
personnel. There can be no assurance that the Company's current employees will
continue to work for the Company. Loss of services of key employees could have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, the Company may need to grant additional
options and provide other forms of incentive compensation to attract and retain
key personnel. The Company has experienced and expects to continue to experience
difficulty in hiring key technical personnel in certain of its key development
offices. These difficulties could lead to higher compensation costs and may
adversely effect the Company's future results of operations.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's operating
results have in the past fluctuated, and may in the future fluctuate, from
quarter to quarter, as a result of a number of factors including, but not
limited to, changes in pricing policies or price reductions by the Company or
its competitors; variations in the Company's sales channels or the mix of
product sales; the timing of new product announcements and introductions by the
Company or its competitors; the availability and cost of supplies; the financial
stability of major customers; market acceptance of new products and product
enhancements; the Company's ability to develop, introduce and market new
products, applications and product enhancements; the Company's ability to
control costs; possible delays in the shipment of new products; the Company's
success in expanding its sales and marketing programs; deferrals of customer
orders in anticipation of new products, product enhancements or operating
systems; changes in Company strategy; personnel changes; and general economic
factors. The Company's software products are generally shipped as orders are
received and accordingly, the Company has historically operated with little
backlog. As a result, sales in any quarter are dependent primarily on orders
booked and shipped in that quarter and are not predictable with any degree of
certainty. In addition, the Company's expense levels are based, in part, on its
expectations as to future revenues. If revenue levels are below expectations,
operating results are likely to be adversely affected. The Company's net income
may be disproportionately affected by a reduction in revenues because of fixed
costs related to generating its revenues. Quarterly results in the future may be
influenced by these or other factors and, accordingly, there may be significant
variations in the Company's quarterly operating results. Further, the Company's
historical operating results are not necessarily indicative of future
performance for any particular period. Due to all of the foregoing factors, it
is possible that in some future quarter the Company's operating results may be
below the expectations of public market analysts and investors. In such event,
the price of the Company's Common Stock could be adversely affected.
POSSIBLE VOLATILITY OF STOCK PRICE. The trading price of the Company's
Common Stock is likely to be subject to significant fluctuations in response to
variations in quarterly operating results, changes in management, announcements
of technological innovations or new products by the Company, its customers or
its competitors, legislative or regulatory changes, general trends in the
industry and other events or factors. In addition, the stock market has
experienced extreme price and volume fluctuations which have particularly
affected the market price for many high technology companies similar to the
Company, and which have often been unrelated to the operating performance of
these companies. These broad market fluctuations may adversely affect the market
price of the Company's Common Stock. Further, factors such as announcements of
new contracts or product offerings by the Company or its competitors and market
conditions for stocks similar to that of the Company could have significant
impact on the market price of the Common Stock.
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POSSIBLE ACQUISITIONS OR DIVESTITURES. From time to time, the Company may
consider acquisitions of or alliances with other companies that could complement
the Company's existing business, including acquisitions of complementary product
lines. The Company may also consider the divestiture of certain of its product
segments should conditions warrant. Although the Company may periodically
discuss such potential transactions with a number of companies, there can be no
assurance that suitable acquisition or joint venture candidates can be
identified, or that, if identified, adequate and acceptable financing sources
will be available to the Company that would enable it to consummate such
transactions. Even if an acquisition or joint venture is consummated, there can
be no assurance that the Company will be able to integrate successfully such
acquired companies or product lines into its existing operations, which could
increase the Company's operating expenses in the short-term and materially and
adversely affect the Company's results of operations. Moreover, any acquisition
by the Company may result in potentially dilutive issuances of equity
securities, the incurrence of additional debt, and amortization of expenses
related to goodwill and intangible assets, all of which could adversely affect
the Company's profitability. Acquisitions involve numerous risks, such as the
diversion of the attention of the Company's management from other business
concerns, the entrance of the Company into markets in which it has had no or
only limited experience, and the potential loss of key employees of the acquired
company, all of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
COMPUTER TELEPHONY
COMPUTER TELEPHONY PRODUCT MARKET. The market for open, standards-based
computer telephony tools, applications and system-level products is relatively
new and is characterized by the rapid evolution of computer telephony hardware
and software standards, emerging technologies and changing customer
requirements. These characteristics may render the Company's computer telephony
products unmarketable or may make the expansion, timing and direction of product
development unpredictable. As a result of these factors, there can be no
assurance that computer telephony markets will continue to expand, or that the
Company's products will achieve market acceptance.
The Company believes that the principal competitive factors affecting the
computer telephony markets it serves include vendor and product reputation,
product architecture, functionality and features, scalability, ease of use,
quality of product and support, performance, price, brand name recognition and
effectiveness of sales and marketing efforts. There can be no assurance that the
Company can maintain and grow its market position against current and potential
competitors, especially those with significantly greater financial, marketing,
service, support, technical and other competitive resources. Any failure by the
Company to maintain and grow its competitive position could have a material
adverse effect upon the Company's revenues from its computer telephony product
line.
TeleVantage is a telephone system designed for small and medium sized
businesses and branch offices. The Company believes this product offers
functionality superior to that of a traditional standalone PBX. However, due to
the complexity of this software and the mission critical systems it is designed
to operate, there can be no assurances that the software will be successfully
sold in high volume. Additionally, there can be no assurances that competitors
with substantially greater financial resources than that of the Company will not
develop their own PC-based PBX solutions and subsequently adversely affect the
Company's ability to market or sell its PC-based PBX solution, TeleVantage.
The Company's PC-based PBX solution (TeleVantage) could also face direct
competition from companies with significantly greater financial, marketing,
service, support and technical resources. In addition to the possibility that
these companies may release a PC-based PBX solution, they have signaled their
intentions to develop "IP" (Internet Protocol) based applications. Several of
the Company's potential competitors with substantially greater financial
resources have recently announced partnerships designed to develop, market and
sell IP-based telephony solutions which could put the Company at a competitive
disadvantage and adversely affect the Company's ability to sell and market its
own PC-based PBX solution, TeleVantage. The Company anticipates certain
competitors with greater financial resources will continue to make substantial
new investments in developing IP-based telephony solutions and may form further
partnerships that will put the Company at a competitive disadvantage, thus there
can be no assurances that the Company will be able to successfully develop,
market or sell its own competing IP-based telephony solution.
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COMPUTER TELEPHONY CUSTOMERS AND MARKET ACCEPTANCE. The Company is
currently and will continue to invest significant resources in the development,
marketing and selling of new computer telephony products. There can be no
assurance that the Company will achieve market acceptance of these products.
Additionally, these new computer telephony products are principally targeted at
small to medium sized businesses. The Company's existing network of qualified
VAR's has historically sold the Company's networking and communications
products. Therefore, the Company anticipates the need to recruit and train a new
network of qualified VAR's to sell its computer telephony products. There can be
no assurance that the Company will be successful in establishing a critical mass
of qualified computer telephony resellers. The Company's success in selling
these products will likely be influenced by its ability to attract and inform
qualified VAR's and interconnects on the features and functionality of these
emerging technologies.
The Company's computer telephony products compete in a relatively immature
industry with as yet unproven technologies. The Company believes that there will
be a gradual evolution toward open server-based telephony enabled applications
from the traditional proprietary PBX environment and that in such an environment
PC-based PBX systems will be widely accepted. The Company also believes that
there may be an eventual gravitation toward Internet Protocol architectures
and/or voice over wire applications. However, there can be no assurance that the
current technological innovations in the computer telephony industry will be
widely adopted by small to medium sized businesses or that telephony standards
will evolve in a manner that is advantageous to or anticipated by the Company.
COMMUNICATIONS AND NETWORKING SOFTWARE
NETWORKING AND COMMUNICATIONS SOFTWARE CUSTOMERS. The Company relies on a
network of distributors and VAR's for a significant portion of both its domestic
and international networking and communications software product revenues. In
addition, a majority of the sales of CoSession Remote, the Company's remote
communications software product, are to PC original equipment manufacturers
("OEM's"). Generally, there are no minimum purchase requirements for the
Company's distributors, VARs or OEMs and many of the Company's distributors and
VAR's sell competitive products. There can be no assurance that these customers
will give priority to the marketing of the Company's products compared to
competing products or alternative solutions or that such customers will continue
to offer the Company's products. In the event of the termination of the
Company's relationship with one or more major distributors, the Company would
have to find suitable alternative channels of distribution. The absence of such
alternatives could have a material adverse affect on the Company's business,
financial condition and results of operation. Certain of the Company's OEM
relationships require the scheduled delivery of product revisions and new
products. Some of the Company's OEM product offerings involve the bundling of
licensed technologies with its own technologies. The failure of the Company
and/or one of its licensors to adhere to agreed-upon product delivery schedules
could result in the termination of key relationships with major PC
manufacturers, which could have a significant adverse impact on current and
future revenues in the OEM channel. The Company's OEM revenue streams are
dependent upon the maintenance of one or more key OEM relationships. The
termination of any one of these relationships may have a material adverse affect
on the Company's current and future revenues.
NETWORKING AND COMMUNICATIONS SOFTWARE COMPETITORS. The Company's major
competitors in the small business networking market are the industry's principal
operating system provider and network operating system provider. Both of these
companies have substantially greater financial, technological, production and
sales and marketing resources than those of the Company.
Management believes that the inclusion of networking capabilities (printer,
file and application sharing) in Microsoft's Windows 95/98 operating system
(released in August 1995 and June 1998, respectively) has had and will continue
to have a significant detrimental impact on sales of the Company's LANtastic NOS
products. Windows 95/98 is pre-loaded on virtually all Pentium processor-based
personal computers currently sold worldwide. The impact of Windows 95/98 on the
Company's business has been compounded by the dominance and visibility of
21
<PAGE>
Microsoft in the PC marketplace and the rapid upgrade by small businesses to
Pentium PC's. In August 1996, Microsoft released Windows NT 4.0, a client-server
network version of the Windows operating system. Management believes that
Windows NT 4.0, which, like Windows 95/98, includes peer-to-peer networking
capabilities in the workstation version, and is pre-loaded on certain Pentium
PC's, has provided additional significant direct competition to the LANtastic
NOS both as a peer-to-peer and client-server networking solution. Management
believes that Microsoft will release Windows NT 5.0 (Windows 2000) in mid 1999.
Windows NT 5.0 will likely combine the enhanced security features of Windows NT
4.0 with the functionality of Windows 98. This release may further erode the
market share of the Company's LANtastic NOS product line. Microsoft, because of
its dominant position in the PC operating systems and business applications
markets, frequently offers value-added functionality to its products in the form
of enhancements to its Windows operating systems, which are pre-loaded on new
PC's or by offering free products for download from its World Wide Web site. The
Company believes that Windows NT 5.0 (Windows 2000) server may include both
modem sharing and internet sharing capabilities. The inclusion of modem sharing
and internet sharing capabilities in Windows NT could result in substantially
increased competition for the Company's ModemShare and i.Share products which
could have a significant impact on the Company's sales and operating results.
REMOTE COMMUNICATIONS AND OTHER OEM SOFTWARE CUSTOMERS. The principal
distribution channel for the Company's remote computing product, CoSession
Remote 32 version 8, is through OEM arrangements with PC manufacturers. In
December 1997, the Company released a 32-bit version of the product to support
the Windows 95/98 and Windows NT 4.0 operating systems. As the Company's major
competitors also offer 32-bit remote computing products, it is critical, for the
continuance of the OEM relationships, that the Company continue expanding the
market for the 32-bit product and meet major OEM customer e-commerce and other
promotional requirements. The Company's ability to grow its remote computing
software revenues will likely depend on its success in leveraging existing OEM
relationships to develop new sources of revenue such as e-commerce. The loss of
one or more of these OEM relationships could have a significant impact on the
Company's net sales and operating results.
The Company currently licenses a configuration tracking and recovery
utility (ConfigSafe) which is preloaded by certain of the Company's key OEM
partners. The Company's licensing arrangement for this product terminates in
late 1999 and the failure to extend this licensing arrangement could have a
material adverse impact on the Company's future operating results.
REMOTE COMMUNICATIONS AND OTHER OEM SOFTWARE COMPETITORS. Microsoft has
included a remote computing component in its Windows 98 OS released in June 1998
and currently distributes Net Meeting at no charge from its Web site.
Additionally, Symantec's PC Anywhere remote computing software may provide
additional competition to the Company's CoSession Remote 32 software with
respect to certain of the Company's major OEM customers. These actions will
likely lead to diminished demand for the Company's CoSession remote control
product, and consequently decreased net sales and operating results.
22
<PAGE>
ARTISOFT, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to lawsuits and other claims arising in the ordinary
course of its operations. In the opinion of management, based on consultation
with legal counsel, the effects of such matters will not have a materially
adverse effect on the Company's financial position.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE BY SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
No. 11 - Computation of Net Income (Loss) Per Share
No. 27 - Financial Data Schedule for Form 10-Q dated May 10, 1999
(c) Reports on Form 8-K
There were no reports filed on Form 8-K during the three months ended March
31, 1999
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ARTISOFT, INC.
Date: May 10, 1999 By /s/ T. Paul Thomas
------------------------------------------
T. Paul Thomas
President and Chief Executive Officer
By /s/ Sheldon M. Schenkler
------------------------------------------
Sheldon M. Schenkler
Vice President and Chief Financial Officer
24
ARTISOFT, INC. AND SUBSIDIARIES
EXHIBIT 11. COMPUTATION OF NET INCOME (LOSS) PER SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ (580) $ (162) $ (1,142) $ 1,374
======== ======== ======== =======
Basic EPS-Weighted average common
shares outstanding 14,764 14,539 14,705 14,529
======== ======== ======== =======
Basic net income (loss) per share $ (.04) $ (.01) $(.08) $.09
======== ======== ======== =======
Effect of diluted securities:
Stock options --(1) --(1) --(1) 47
-------- -------- -------- -------
Diluted EPS-Weighted average shares
outstanding 14,764 14,539 14,705 14,576
======== ======== ======== =======
Stock options not included in diluted
EPS since anti-dilutive 318 68 85 --
======== ======== ======== =======
Diluted net income (loss) per share $ (.04) $ (.01) $ (.08) $ .09
======== ======== ======== =======
</TABLE>
Notes:
(1) Common share equivalents are anti-dilutive for the three month periods
ended March 31, 1998 and 1999, respectively, and the nine-month period
ended March 31, 1999, therefore, basic and diluted net loss per share is
the same.
25
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 17,183
<SECURITIES> 0
<RECEIVABLES> 2,022
<ALLOWANCES> 0
<INVENTORY> 1,169
<CURRENT-ASSETS> 20,741
<PP&E> 6,024
<DEPRECIATION> 4,763
<TOTAL-ASSETS> 23,150
<CURRENT-LIABILITIES> 4,053
<BONDS> 0
0
0
<COMMON> 280
<OTHER-SE> 18,817
<TOTAL-LIABILITY-AND-EQUITY> 23,150
<SALES> 16,247
<TOTAL-REVENUES> 16,853
<CGS> 4,871
<TOTAL-COSTS> 4,871
<OTHER-EXPENSES> 13,124
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,142)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,142)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
