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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1998
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
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(State or other jurisdiction of (IRS employer identification
incorporation) 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 (February 10, 1999).
Common stock, $.01 par value: 14,769,817 shares
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ARTISOFT INC. AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets-
December 31, 1998 and June 30, 1998 3
Consolidated Statements of Operations-
Three Months and Six Months Ended
December 31, 1998 and 1997 4
Consolidated Statements of Cash Flows-
Six Months Ended December 31, 1998
and 1997 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 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
EXHIBITS
11 Computation of Net Income (Loss) Per Share 26
27 Financial Data Schedule 27
2
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ARTISOFT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
December 31, June 30,
ASSETS 1998 1998
-------- --------
(unaudited)
Current assets Cash and cash equivalents $ 17,491 $ 18,514
Receivables Trade accounts, net 1,897 2,813
Other receivables 179 279
Inventories 787 917
Prepaid expenses 394 283
-------- --------
Total current assets 20,748 22,806
-------- --------
Property and equipment 5,866 5,333
Less accumulated depreciation and
amortization (4,535) (4,198)
-------- --------
Net property and equipment 1,331 1,135
-------- --------
Other assets 1,326 1,567
-------- --------
$ 23,405 $ 25,508
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities Accounts payable $ 923 $ 1,598
Accrued liabilities 1,919 1,670
Accrued restructuring costs 434 1,536
Current portion of capital lease obligations 510 464
-------- --------
Total current liabilities 3,786 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 28,076,311 shares at December 31, 1998
and 27,980,602 shares at June 30, 1998 280 279
Additional paid-in capital 96,715 96,486
Accumulated deficit (7,592) (7,030)
Less treasury stock, at cost, 13,320,500 shares at
December 31, 1998 and June 30, 1998 (69,784) (69,784)
-------- --------
Total shareholders' equity 19,619 19,951
-------- --------
$ 23,405 $ 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)
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
-------- -------- -------- --------
(unaudited) (unaudited)
Net sales $ 5,402 $ 6,761 $ 10,496 $ 13,486
Cost of sales 1,608 1,851 2,964 3,305
-------- -------- -------- --------
Gross profit 3,794 4,910 7,532 10,181
-------- -------- -------- --------
Operating Expenses:
Sales and marketing 2,014 2,332 4,144 5,030
Product development 1,199 1,823 2,441 3,614
General and administrative 1,049 861 1,928 1,655
Restructuring cost -- (127) -- (264)
-------- -------- -------- --------
Total operating expenses 4,262 4,889 8,513 10,035
-------- -------- -------- --------
Income (loss) from operations (468) 21 (981) 146
Other income, net 238 1,386 419 1,499
-------- -------- -------- --------
Income (loss) before
extraordinary item (230) 1,407 (562) 1,645
Extraordinary loss from early
extinguishment of debt, net
of $0 income tax benefit -- (109) -- (109)
-------- -------- -------- --------
Net income (loss) $ (230) $ 1,298 $ (562) $ 1,536
-------- -------- -------- --------
Net income (loss) per common share--
basic and diluted $ (.02) $ .09 $ (.04) $ .11
-------- -------- -------- --------
Weighted average common shares
outstanding:
Basic 14,686 14,529 14,711 14,529
Diluted 14,686 14,612 14,711 14,568
-------- -------- -------- --------
See accompanying notes to consolidated financial statements.
4
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ARTISOFT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Six Months Ended
December 31,
1998 1997
-------- --------
(unaudited)
Cash flows from operating activities:
Net income (loss): $ (562) $ 1,536
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Extraordinary loss -- 109
Depreciation and amortization 713 952
Gain from disposition of property, net 1 (1,492)
Change in accounts receivable and inventory
allowances (327) (2,241)
Changes in assets and liabilities:
Receivables:
Trade accounts 1,097 2,902
Income taxes -- 4,300
Notes and other 100 215
Inventories 276 1,103
Prepaid expenses (111) 381
Accounts payable and accrued liabilities (426) (1,073)
Accrued restructuring costs (1,102) (4,126)
Other assets (43) 7
-------- --------
Net cash (used in) provided by
operating activities (384) 2,573
-------- --------
Cash flows from investing activities:
Proceeds from sale of property and equipment 9 4,201
Purchases of property and equipment (635) (151)
-------- --------
Net cash (used in) provided by
investing activities (626) 4,050
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 230 18
Principal payments on long term debt (243) (2,406)
-------- --------
Net cash used in financing activities (13) (2,388)
-------- --------
Net (decrease) increase in cash and cash equivalents (1,023) 4,235
Cash and cash equivalents at beginning of period 18,514 14,673
-------- --------
Cash and cash equivalents at end of period $ 17,491 $ 18,908
-------- --------
See accompanying notes to consolidated financial statements.
5
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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 financial statements
include all adjustments (of a normal recurring nature) which are necessary for a
fair presentation of the financial results for the interim periods presented.
Certain information and footnote disclosures normally included in financial
statements have been condensed or omitted pursuant to such rules and
regulations. Although the Company believes that the disclosures are adequate to
make the information presented not misleading, it is suggested that these
financial statements be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's 1998 Annual Report to
Shareholders and report on Form 10-K. The results of operations for the three or
six month periods ended December 31, 1998 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 six month
periods ended December 31, 1998, 85,769 and 46,096 common stock equivalent
shares consisting of stock options have been excluded because their inclusion
would have been anti-dilutive.
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(3) SEGMENTATION OF FINANCIAL RESULTS
The financial results for the three month and six month periods ended
December 31, 1998 are summarized below by product group (in thousands):
Three Months Ended Six Months Ended
December 31, 1998 December 31, 1998
----------------- -----------------
COMPUTER TELEPHONY GROUP:
Net sales $ 1,595 $ 2,952
Gross profit $ 849 $ 1,686
Gross profit margin 53% 57%
Operating (loss) $(1,604) $(3,165)
Net (loss) $(1,604) $(3,165)
Capital expenditures $ 283 $ 500
Depreciation and amortization expense $ 112 $ 195
COMMUNICATIONS SOFTWARE GROUP:
Net sales $ 3,807 $ 7,544
Gross profit $ 2,945 $ 5,846
Gross profit margin 76% 78%
Operating income $ 1,136 $ 2,184
Net income $ 1,374 $ 2,602
Capital expenditures $ 130 $ 135
Depreciation and amortization expense $ 259 $ 518
The Company's Computer Telephony Product Group principally includes
revenues from the InfoFast, TeleVantage and Visual Voice product lines. The
Company's Communications Software Group includes revenues from the BizFax,
CoSession Remote, i.Share, LANtastic NOS and ModemShare product lines.
(4) RESTRUCTURING COST
The accrued restructuring costs in the accompanying consolidated
balance sheet at December 31, 1998 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.
The accrued restructuring costs at December 31, 1998 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 (452)
-----
Unaudited balance at December 31, 1998 $ 434
-----
7
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(5) INVENTORIES
Inventories at December 31, 1998 and June 30, 1998 consist of the
following (in thousands):
December 31, June 30,
1998 1998
---- ----
(unaudited)
Raw materials $ 746 $ 938
Work-in-process 85 109
Finished goods 145 205
------- -------
976 1,252
Inventory allowances (189) (335)
------- -------
$ 787 $ 917
======= =======
(6) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and June 30, 1998 consist
of the following (in thousands):
December 31, June 30,
1998 1998
---- ----
(unaudited)
Furniture and fixtures $ 29 $ 6
Computers and other equipment 5,598 5,259
Leasehold improvements 239 68
------- -------
5,866 5,333
Accumulated depreciation and amortization (4,535) (4,198)
------- -------
$ 1,331 $ 1,135
======= =======
(7) OTHER ASSETS
Other assets at December 31, 1998 and June 30, 1998 consist of the
following (in thousands):
December 31, June 30,
1998 1998
---- ----
(unaudited)
Trademarks and patents, net of
accumulated amortization of $83 and $70 $ 42 $ 55
Purchased technology, net of
accumulated amortization of $1,586 and $1,323 1,124 1,387
Recoverable deposits and other 160 125
------ ------
$1,326 $1,567
====== ======
8
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(8) ACCRUED LIABILITIES
Accrued liabilities at December 31, 1998 and June 30, 1998 consist of
the following (in thousands):
December 31, June 30,
1998 1998
---- ----
(unaudited)
Compensation and benefits $1,007 $ 799
Payroll, sales and property taxes 87 88
Marketing 306 349
Royalties 285 227
Other 234 207
------ ------
$1,919 $1,670
====== ======
9
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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 December 31,
1998 were $5.4 million, a decrease of 21% from net sales of $6.8 million for the
corresponding quarter of fiscal 1998 and an increase of 6% from the first
quarter of fiscal 1999 net sales of $5.1 million. For the six-month period ended
December 31, 1998, the Company's net sales were $10.5 million, a decrease of 22%
from net sales of $13.5 million for the corresponding period of fiscal 1998. The
decreases in net sales for the quarter and six-month period ended December 31,
1998, 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. Lower sales of the Company's LANtastic network operating system
(NOS) products and to a lesser extent i.Share (especially in international
markets) were the major contributors to the overall decline in net sales. The
sequential increase in net sales from the previous quarter's net sales was
principally the result of increased sales of the Company's Computer Telephony
products. An increase in sales of the Company's TeleVantage products was the
major contributor.
The Company distributes its products in both the U.S. and international
markets. U.S. sales decreased 10% to $4.3 million (80% of net sales) for the
quarter ended December 31, 1998, from $4.8 million (71% of net sales), for the
same quarter a year ago. U.S. sales decreased 14% to $ 8.5 million (81% of net
sales) for the six-month period ended December 31, 1998 from $9.9 million (73%
of net sales), for the same period in fiscal 1998. The decrease in aggregate
U.S. net sales for both the quarter and the six-month periods ended December 31,
1998, as compared to the corresponding periods in fiscal 1998, primarily
resulted from the overall decline in sales of the Company's LANtastic network
operating system (NOS) products and to a lesser extent i.Share products,
principally in U.S. retail, mail order and distribution channels, partially
offset by increases in sales of the Company's Computer Telephony products.
International sales decreased 45% to $1.1 million (20% of net sales)
for the quarter ended December 31, 1998 from $2.0 million (29% of net sales) for
the same quarter a year ago and increased 22% from the first quarter fiscal 1999
sales of $.9 million. International sales decreased 44% to $2.0 million (19% of
net sales) for the six-month period ended December 31, 1998 from $3.6 million
(27% of net sales) for the same period in fiscal 1998. The decrease in
international net sales for both the quarter and the six-month periods ended
December 31, 1998, as compared to the corresponding periods in fiscal 1998,
primarily resulted from a decline in worldwide sales of the Company's LANtastic
NOS products as well as a substantial decline in net sales of CoSession Remote
preloads in Asia (especially Japan). The increase in international net sales
from the previous quarter's net sales is principally due to an increase in the
Company's sales of its Computer Telephony products in certain European and Asian
markets.
GROSS PROFIT. The Company's gross profit was $3.8 million and $4.9
million for the quarters ended December 31, 1998 and 1997, respectively (70% and
72% of net sales, respectively). Gross profit was $7.5 million and $10.2 million
for the six-month periods ended December 31, 1998, and 1997, respectively (71%
and 76% of net sales, respectively). The net decrease in gross profit margin
percentages for both the quarter and the six-month periods ended December 31,
1998, as compared to the corresponding periods in fiscal 1998, was principally
due to the following factors: higher software licensing fees on the Company's
configuration tracking and recovery utility(ConfigSafe) and increased sales of
lower margin Computer Telephony hardware products and TeleVantage NFR's (Not For
Resale). The decline was partially offset by lower software amortization costs
and lower inventory reserve requirements. The net decrease in aggregate dollars
10
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of gross profit margin for both the quarter and six-month periods ended December
31, 1998 is the result of the decline in net sales.
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 $4.3 million and $4.9
million for the quarters ended December 31, 1998 and 1997 respectively, (79% and
72% of net sales, respectively). Total operating expenses were $8.5 million and
$10.0 million for the six-month periods ended December 31, 1998 and 1997,
respectively, (81% and 74% 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,
partially offset by increased operating expenditures in its Computer Telephony
group. The increase in total operating expenses as a percentage of net sales for
both the quarter and six month periods ended December 31, 1998 was due to the
aforementioned worldwide decline in the Company's product sales, offset to a
minor extent 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 $2.0 million and
$2.3 million for the quarters ended December 31, 1998 and 1997, respectively,
(37% and 34% of net sales, respectively). Sales and marketing expenses were $4.1
million and $5.0 million for the six-month periods ended December 31, 1998 and
1997, respectively, (39% and 37% of net sales, respectively). The decrease in
aggregate dollars for sales and marketing expenses for the quarter and the
six-month periods ended December 31, 1998, 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
marketing costs associated with the Company's Computer Telephony products
(especially TeleVantage). The increase in sales and marketing expenses as a
percentage of net sales for both the quarter and the six-month periods ended
December 31, 1998, was principally attributable to the decline in the Company's
net sales.
PRODUCT DEVELOPMENT. Product development expenses were $1.2 million and
$1.8 million for the quarters ended December 31, 1998 and 1997, respectively,
(22% and 26% of net sales, respectively). Product development expenses were $2.4
million and $3.6 million for the six-month periods ended December 31, 1998 and
1997, respectively, (23% and 27% 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 six month period ended December 31, 1998, 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 increased
product development expenses in the Company's Computer Telephony Group.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$1.0 million and $.9 million for the quarters ended December 31, 1998, and 1997,
respectively, (19% and 13% of net sales, respectively). General and
administrative expenses were $1.9 million and $1.7 million for the six-month
periods ended December 31, 1998 and 1997, respectively (18% and 12% of net
sales, respectively). The increase in aggregate dollars for general and
administrative expenses for the quarter and six month periods ended December 31,
1998, as compared to 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
11
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Company's corporate offices in Cambridge, Massachusetts. The increase in general
and administrative expenses as a percentage of net sales for the quarter and the
six-month periods ended December 31, 1998, as compared to the corresponding
periods in fiscal 1998, is primarily the result of the aforementioned increased
costs and lower sales of the Company's Communications Software Group products.
RESTRUCTURING COST. For the quarter and six-month periods ended
December 31, 1997, the Company reduced by $ .1 million and $ .3 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 six-month periods
ended December 31, 1998.
OTHER INCOME, NET. For the quarter ended December 31, 1998, other
income, net, decreased to $ .2 million, from $ 1.4 million in the corresponding
quarter of fiscal 1998. For the six-month period ended December 31, 1998, other
income, net, decreased to $ .4 million, from $ 1.5 million in the corresponding
period of fiscal 1998. The decrease in other income, net, for the quarter ended
December 31, 1998 and the six-month period ended December 31, 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 quarter and
six-month periods ended December 31, 1997.
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 six-month periods
ended December 31, 1997.
FUTURE RESULTS
The Company is currently focusing a substantial majority of its
financial resources on its computer telephony products. Concurrent with the
expanded investment in computer telephony products, the Company has 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
anticpated 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
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LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $17.5 million at
December 31, 1998 compared to $18.5 million at June 30, 1998 and working capital
of $17.0 million at December 31, 1998 compared to $17.5 million at June 30,
1998. The decrease in cash and cash equivalents was principally the result of
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. The payments are the result of the Company's
restructuring actions effected during the quarter ended June 30, 1998. 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 December 31, 1998.
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 of this pronouncement will not have a
material 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. Management does not
believe that the adoption of SFAS No. 132 will have a material impact on the
Company's financial results.
13
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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 June 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 to
the extent 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
plans to follow up with third party suppliers and vendors who have not responded
to the Company's inquiries and 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
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considerations, including Year 2000 non-compliance. In certain cases the timing
of replacement 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 Company initiated a comprehensive search
to replace these Year 2000 non-compliant systems. The Company has selected a
replacement software package and is currently in the process of migrating to the
new package. The expected implementation date is April 1, 1999. The Company
expects to spend approximately $350,000 to purchase and implement the new
software. 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 does not believe that any
specific information technology projects have been deferred as a result of Year
2000 issues.
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
First Quarter Form 10-Q on November 9, 1998. 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
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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. 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 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 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.
The Company is also occasionally exposed to its distributors and other
volume purchasers for price protection for list price reductions by the Company
on its products held in such customers' inventories. The Company provides its
distributors with price protection in the event that the Company reduces the
list price of its products due to uncontrollable competitive pressures.
Distributors and other volume purchasers are usually offered credit for the
impact of a list price reduction on the expected revenue from the Company's
products in the distributors' inventories at the time of the price reduction.
Although the Company maintains allowances against the effects of such price
protections, and believes that it has provided adequate allowances for price
protection, there can be no assurance that the impact of actual list price
reductions by the Company will not exceed the Company's allowance. Any price
protection in excess of the recorded allowance could result in a material
adverse effect on 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
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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
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.
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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
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. In the likely event that growth continues 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
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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. 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 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.
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
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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.
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.
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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 phone 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
marketed or sold. 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. These PC-based PBX and IP-based telephony solutions 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.
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.
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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 traditonal 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 Microsoft Corporation
and Novell, Inc. 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 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
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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.
Finally, the movement of the networking industry towards the uniform
use of internet technologies in the construction of local area networks (so
called intranets) constitutes a risk that demand for more proprietary networks,
such as LANtastic, will decline further, and that competition will emerge from a
new set of companies, such as Netscape Communications, Sun Microsystems and
others.
In December 1998, the Company released its network faxing software
solution, BizFax. BizFax supports the Windows NT 40 and Windows 95/98 operating
systems. As the Company's major competitors also offer network faxing software
that has previously been introduced to the small business faxing software
market, there can be no assurances that the Company will successfully introduce,
launch, market or sell BizFax.
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 is in negotiations with a company which it
obtains a licensed product. The failure to extend the 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.
23
<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
(a) The Company's Annual Shareholders' Meeting was held on November 10,
1998.
(b) At the Annual Shareholders' Meeting, proposals were considered for
(i) the election of Michael P. Downey as a Class I director to serve
until the annual meeting of shareholders in 2001 and (ii) the
ratification of the selection of KPMG LLP as the independent public
accountants of the Company for the 1999 fiscal year.
The director--nominee was elected and the ratification of KPMG LLP
was approved with the voting results as follows:
<TABLE>
<CAPTION>
Proposal Votes For Votes Against Votes Withheld Abstained Not Voted
- -------- -------------------------------------------------------------------
<S> <C> <C> <C>
Election of
Michael P. Downey
as a Class I Director 12,824,029 -- 170,583 -- 1,665,490
Ratification of selection of
KPMG LLP as independent
public accountants of the
Company for fiscal year 1999 12,867,747 72,460 54,405 -- 1,665,490
</TABLE>
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
February 10, 1999
(b) Reports on Form 8--K
There were no reports filed on Form 8--K during the three
months ended December 31, 1998
24
<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: February 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
25
ARTISOFT, INC. AND SUBSIDIARIES
EXHIBIT 11. COMPUTATION OF NET INCOME (LOSS) PER SHARE
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
------- ------ -------- --------
Net income (loss) $ (230) $1,298 $ (562) $ 1,536
======= ====== ======== ========
Basic EPS--Weighted average common
shares outstanding 14,686 14,529 14,711 14,529
======= ====== ======== ========
Basic net income (loss) per share $ (.02) $ .09 $ (.04) $ .11
======= ====== ======== ========
Effect of diluted securities:
Stock options --(1) 83 --(1) 39
------- ------ -------- --------
Diluted EPS--Weighted average
shares outstanding 14,686 14,612 14,711 14,568
======= ====== ======== ========
Stock options not included in diluted
EPS since anti--dilutive 86 -- 46 --
======= ====== ======== ========
Diluted net income (loss) per share $ (.02) $ .09 $ (.04) $ .11
======= ====== ======== ========
Notes:
(1) Common share equivalents are anti-dilutive for the three and six-month
periods ended December 31, 1998, therefore, basic and diluted net loss per share
is the same.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 17,491
<SECURITIES> 0
<RECEIVABLES> 2,076
<ALLOWANCES> 0
<INVENTORY> 787
<CURRENT-ASSETS> 20,748
<PP&E> 5,866
<DEPRECIATION> (4,535)
<TOTAL-ASSETS> 23,405
<CURRENT-LIABILITIES> 3,786
<BONDS> 0
0
0
<COMMON> 280
<OTHER-SE> 19,339
<TOTAL-LIABILITY-AND-EQUITY> 23,405
<SALES> 10,496
<TOTAL-REVENUES> 10,734
<CGS> 1,608
<TOTAL-COSTS> 1,608
<OTHER-EXPENSES> 4,262
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (230)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (230)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
