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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended June 30, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number 000-19462
ARTISOFT, INC.
(Exact name of registrant as specified in its charter)
Delaware 86-0446453
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 Cambridge Center Cambridge, MA 02142
(Address of principal executive offices, Zip Code)
Registrant's telephone number, including area code (617) 354-0600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value The Nasdaq Stock Market
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $32,069,000 based on the closing sale price as
reported by The Nasdaq Stock Market on September 24, 1998.
The number of shares outstanding of each of the registrant's classes of common
stock, as of September 24, 1998 was 14,660,000 shares of Common Stock, $.01 par
value.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Proxy Statement dated September 25, 1998, for the
Annual Meeting of Shareholders to be held on November 10, 1998, are
incorporated by reference into Part III.
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TABLE OF CONTENTS
Page
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PART I ...............................................................................................3
Item 1. Business .........................................................................3-12
Item 2. Properties ......................................................................12-13
Item 3. Legal Proceedings ..................................................................13
Item 4. Submission of Matters to a Vote of Security Holders .............................13-14
PART II .............................................................................................15
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ..............15
Item 6. Selected Financial Data ............................................................15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation ..........................................................16-30
Item 7(a). Quanitative and Qualitative Disclosures about Market Risk...........................30
Item 8. Financial Statements and Supplementary Data .....................................31-51
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .............................................................51
PART III ............................................................................................52
Item 10. Directors and Executive Officers of the Registrant .................................52
Item 11. Executive Compensation .............................................................52
Item 12. Security Ownership of Certain Beneficial Owners and Management .....................52
Item 13. Certain Relationships and Related Transactions .....................................52
PART IV .............................................................................................53
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................53-54
SIGNATURES ..........................................................................................55
2
PART I
Item 1. Business
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Introduction
Artisoft, Inc. ("Artisoft", the "Company" or the "Registrant") is a
computer software company, which develops, markets and sells computer telephony,
networking and communications software and remote computing products and
services.
The Company's principal executive offices are located at 5 Cambridge
Center, Cambridge, Massachusetts 02142. The telephone number at that address is
(617) 354-0600. The Company was incorporated in November 1982 and reincorporated
by merger in Delaware in July 1991.
Background and General Development of Business
During fiscal year 1998, which ended June 30, 1998, Artisoft implemented
a major business restructuring plan involving three key elements. First, the
Company took action to reduce operating expenses worldwide in order to bring the
Company's cost structure to a level commensurate with its revenues and to
preserve cash. Second, the Company sought to grow revenue on new products and
technologies in order to offset the continued decline of the Company's LANtastic
products. Third, the Company reoriented its business development strategy
towards transforming the Company into a computer telephony company. This
reorientation emerged with the Company's introduction of TeleVantage, the
Company's software-based phone system, in March, 1998.
During fiscal year 1998, the Company's revenues declined as the
Company's LANtastic peer to peer network operating system ("NOS") product line
came under increased competitive pressures from the Microsoft operating systems,
Windows 95, Windows 98 and Windows NT, with their built in networking
capabilities. In response, in fiscal year 1998, the Company reduced its
operating expenses. In addition, the Company's computer telephony and other
communications and networking product revenues partially offset the decreasing
revenues from LANtastic NOS products. The Company also introduced several new
products in fiscal 1998 as part of the strategy to diversify its product
portfolio. A key new product was TeleVantage. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
further discussions of new product introductions.
Prior to fiscal 1996, Artisoft was exclusively engaged in the design,
development, sales and support of local area network ("LAN") software and
hardware, designed to enhance the productivity of PC users by enabling them to
share networked resources and to communicate easily and cost-effectively with
other users of the LAN. The typical end-user of the Company's LANtastic NOS
products are small and medium sized businesses, home offices, professional
organizations, universities, work groups within large businesses and government
agencies. The Company estimates it has shipped over 4,500,000 hardware and
software licenses of LANtastic products used in over 975,000 LANtastic LAN's,
since the initial version of the product began shipping in 1987.
In fiscal 1996, the Company's LANtastic product line began to face
substantial competitive pressures, principally as a result of the impact of
Microsoft's Windows 95 operating systems on the small business networking
market. These pressures increased during fiscal years 1997 and 1998,
particularly with Microsoft's release of Windows 98 and Windows NT in 1997 and
June 1998, respectively. Windows 95/98, which is preloaded on substantially all
Pentium processor-based PC's sold worldwide, includes peer-to-peer networking
capabilities similar to those offered by the Company's LANtastic products. The
impact of Windows 95/98 was compounded by the dominance and visibility of
Microsoft in the PC marketplace and the rapid upgrade by small businesses to
Pentium PCs.
As a result of those competitive pressures, sales of the Company's
LANtastic products declined to $50.1 million in fiscal 1996, a 40% decrease from
fiscal 1995, and to $20.2 million in fiscal 1997, constituting a 60% decrease
from fiscal 1996.
The Company responded to this change in business conditions in a number
of ways. First, during fiscal year 1996, the Company started its transformation
to a communications and computer telephony software company with a broader
technology portfolio and a broader array of products and channels of
distribution. This was achieved primarily with the successful acquisition and
integration of three software companies during fiscal year 1996. These companies
were Synergy Solutions, Inc. ("Synergy"), a company engaged in the design,
development, sale and support of modem and telephone line sharing software;
Triton Technologies, Inc. ("Triton"), which developed, sold and supported PC
remote control access and control software; and Stylus Innovation, Inc.
("Stylus"), a company that designed, developed, sold and supported computer
telephony applications and tools software.
3
Second, the Company took a series of restructuring actions in fiscal
1997 and 1998, in order to reduce the Company's cost structure to a level
commensurate with the level and mix of its operating revenues. The restructuring
actions taken during the 1997 and 1998 fiscal years included a reduction in work
force affecting approximately 180 employees involved with LANtastic products at
the Company's Tucson, Arizona facilities, the sale of the Company's Tucson land
and building in connection with the Company's relocation to a smaller facility,
and the closure of most of the Company's international sales and support
offices, which were involved almost entirely with sales of LANtastic products.
Partially as a result of these restructuring actions, the Company's sales and
marketing, product development and general and administrative expenses declined
from $39.2 million in fiscal 1996, to $38.9 million in fiscal 1997 and $20.2
million in fiscal 1998.
Third, in fiscal 1998, the Company took steps to reorient its business
development strategy towards computer telephony products. In 1998, the Company
released TeleVantage, receiving awards for the product at CT Expo in March 1998
and receiving favorable trade reviews including CTI Magazine Editors' Choice in
September 1998 and the 1998 Editors' Choice Award from Telemarketing & Call
Center Solutions Magazine. TeleVantage is an intelligent PC-based phone system
designed to provide PBX and other integrated features for small to medium sized
businesses and branch offices. TeleVantage is an open, standards-based system
that is designed to run on any PC, and uses standard voice processing boards
from Dialogic. In May 1998, the Company combined its communications software and
remote computing groups, resulting in the closure of the Company's Iselin, New
Jersey offices, and the transfer of certain functions to the Company's Tucson,
Arizona facilities. In September 1998, the Company moved its principal executive
offices to its computer telephony facilities in Cambridge, Massachusetts. In
response to favorable industry reviews of TeleVantage, the Company decided to
take a number of actions to increase its capacity to market and sell its
computer telephony products and, in particular, its TeleVantage product line.
These actions included the hiring of approximately 30 employees dedicated to the
development and marketing of TeleVantage and the commitment of funds for the
advertising and promotion of TeleVantage products.
Products and Services
The Company currently is organized into two groups, each centered around
the specific products and services being developed, marketed and sold. The two
groups are: the Computer Telephony Group, which is located in Cambridge,
Massachusetts and is responsible for the Company's computer telephony products,
including TeleVantage and Visual Voice; and the Communication Software Group,
located in Tucson, Arizona (with a satellite development center in Boynton
Beach, Florida), which is responsible for the Company's networking and
communications software products, including the LANtastic product line, as well
as its remote computing products, including CoSession.
The Company currently holds registered trademarks on its LANtastic and
Visual Voice products. In addition, the Company currently has trademark
applications pending approval on its i.Share, ModemShare, XtraMail, CoSession
Remote, TeleVantage and InfoFast products among others. Trademarks for LANtastic
and Visual Voice are registered in the U.S. Trademark and Patent Office.
Following is a description of the products and services offered by each group.
Computer Telephony Group. The Computer Telephony ("CT") Group focuses on
two objectives: first, to deliver CT software applications to small businesses
and corporate branch offices or departments; and second, to increase its
leadership in the CT software development toolkit market.
TeleVantage is a complete PC-based telephone system that is fully
integrated with a LAN. The system provides PBX-like call control functionality
including voicemail, auto attendant, call forwarding, phone directory and a
number of other telephony technologies bundled into a single integrated
solution. TeleVantage is designed to allow organizations to improve customer
service, increase call productivity and significantly decrease the cost of
maintaining their telephone systems.
Artisoft's Visual Voice is one of the industry's leading CT development
toolkits. Product attributes include affordability, ease of use and
compatibility with Microsoft standards. Visual Voice is a 32-bit ActiveX control
that converts any ActiveX compatible software development environment, such as
Microsoft Visual Basic, Microsoft Visual C++, Borland Delphi, and Microsoft
Visual FoxPro, into a full-featured telephony application development toolkit.
Visual Voice applications include voice mail, audiotext, outbound calling,
interactive voice response (IVR), fax-on-demand, and international call-back.
4
In June 1998, Artisoft released Visual Voice Pro 4.1 This latest version
of Visual Voice provides tightly integrated support for Microsoft Visual C++ and
Borland Delphi. It also supports enterprise connectivity and allows for expanded
flexibility and scalability in developing telephony applications.
Artisoft's Visual Voice Enterprise, an extension to its Visual Voice
telephony toolkit, allows software developers to create distributed telephony
applications that span multiple computers, running over the Internet or a LAN.
Visual Voice Enterprise offers application scalability, remote administration
and the ability to access computer telephony functionality from a Web browser.
Artisoft also offers InfoFast 2.0 for Windows NT and Windows 95.
InfoFast is a fax-on demand/audio text software solution that provides 24-hour
automatic access to fax documents, Web documents and voice recordings via fax or
phone. InfoFast 2.0 is compatible with both Windows 95 and Windows NT.
See "Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations" including the section entitled "Risk
Factors" for further discussion of new product introductions.
Communications Software Group. The Communication Software Group offers a
wide range of software products for the communication and networking needs of
small businesses and workgroups. First among these is LANtastic, a NOS software
designed to be powerful yet easy-to-use and able to support a wide variety of PC
operating systems. All current LANtastic software products have been designed to
be compatible with each other, and with most PC industry standard operating
systems, hardware platforms, applications software and NOS. Other Communications
Software Group products include ModemShare 32, i.Share 3.0, and CoSession Remote
32.
In June 1998, Artisoft released LANtastic 8.0. LANtastic 8.0 offers
users the same functionality as LANtastic 7.0 but is now compatible with Windows
NT 4.0 and Windows 98. LANtastic 8.0 enables PCs on Windows NT 4.0, Windows
95/98, Windows 3.1 and DOS to share files, corporate resources such as e-mail
and allows network administrators to manage and control multiple operating
systems, protocols, applications and desktops.
Artisoft's LANtastic for Windows NT enables users to integrate Windows
NT 4.0 into a new or existing LANtastic network. It allows users to share files,
printers, applications and CD-ROMs among Windows NT 4.0, Windows 95, Windows
3.x, and DOS PCs on a single network. LANtastic for Windows NT allows for
enhanced network administration and security while offering advanced
administrative features such as setting up user access, pop-up messaging and
chat.
Artisoft's ModemShare 32 enables all networked PCs (Windows 98 through
DOS) to share a single phone line and modem. ModemShare 32 is compatible with
Windows NT, Windows 95 and supports both Class 1 and Class 2 modems.
Artisoft's i.Share 3.0 enables up to 32 networked PC users to browse
different Web sites at the same time via one connection. This new version of
i.Share supports Windows NT 4.0, Windows 98, the latest 32-bit browsers and
Internet e-mail software. i.Share 3.0 also offers internet e-mail access and
user access control (i.Watch).
CoSession Remote 32 is a remote control software application that
enables users running a PC to connect and control remote PCs. CoSession Remote
32 supports connections over analog modems, IPX/SPX, NetBios, NetBEUI and
TCP/IP. CoSession Remote 32 uses shell extensions to enable ease of use in
setting up and accessing remote PC's. Once connected, the user has the ability
to perform remote control, file transfer with differential update,
synchronization and cloning capabilities, keyboard chat with remote users, and
simultaneous voice conversation using standard modems and network/Internet
connections.
Artisoft also offers ConfigSafe, a software product with one-step system
restoration and advanced tracking features for easy recovery from PC crashes.
See "Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations" including the section entitled "Risk
Factors" for further discussion of new product introductions.
5
Financial Information about Industry Segments
All of the Company's products are considered part of a single industry
segment. Information regarding domestic and international net sales and
international assets are contained in Note 15, "Domestic and International
Operations," in "Notes to Consolidated Financial Statements" included in "Item
8. Financial Statements and Supplementary Data."
Raw Materials, Manufacturing and Suppliers
The principal materials and components used in the Company's software
products include diskettes, user manuals and product display boxes and are
purchased directly from third-party vendors. The Company currently utilizes both
internal and third-party contracted resources for the assembly, warehousing and
fulfillment of its software products. Outside vendors perform in accordance with
Company specifications and material quality is ensured prior to the assembly of
the Company's products. Capacity shortages for components, assembly, warehousing
and fulfillment are not anticipated due to multiple third party resources
available for contract; however, if such shortages did occur, the Company's
operating results could be materially impacted. The Company believes there are
adequate supplies of and sources for the raw materials used in its software
products and that multiple sources are available for CD and diskette
duplication, manual printing and final packaging.
The Company primarily utilizes the services of third party manufacturers
for production of its hardware products. The Company does not purchase
integrated circuits, circuit boards and components for its printed circuit
boards, but rather, purchases finished boards and other hardware products from
third party manufacturers. The manufacturers deliver the products to the
Company's Tucson facilities, where the Company tests, packages and ships
finished products to customers. Most components that are used in the Company's
hardware products are readily available from a large number of both domestic and
foreign equipment vendors. In addition, the Company believes there are adequate
supplies of and sources for raw materials used in its Communications Software
Group hardware products. However, future operating results could be adversely
affected if the Company is unable to procure subcontracted assemblies for its
products needed to meet anticipated customer demand. To date, customer returns
of the Company's products for defective workmanship have not been material.
The Company's TeleVantage product is designed to be operated on PCs of
multiple manufacturers in conjunction with Dialogic voice processing boards. The
Company purchases hardware components from certain telephony hardware vendors,
principally Dialogic Corporation, for sale with its computer telephony software
products. The functionality of the Company's telephony software products is
dependent on the continued availability of hardware assemblies from Dialogic
Corporation. Future operating results could be adversely affected if the Company
is unable to procure such assemblies for its computer telephony products needed
to meet anticipated customer demands.
Marketing, Sales and Distribution
General. The Company's dominant marketing strategy is to create reseller
and end user demand for the Company's products and to use broad line
distributors and volume purchasers to fulfill the reseller and end user demand.
The Company's authorized resellers and distributors are selected for their sales
ability, technical expertise, reputation and financial resources. The Company
also sells direct to original equipment manufacturers, governmental units and
end users. The Company's selling efforts have been assisted by positive product
reviews, awards and recognition earned from personal computer and computer
telephony publications.
The Company's marketing programs have three objectives: first, to create
brand name recognition of the Company and its products; second, to generate
sales leads for its resellers and distributors; and third, to support the sales
efforts of its resellers and distributors through sales tools and training.
Marketing activities that address the first two areas include frequent
participation in industry trade shows and seminars, direct mail, advertising in
major trade publications, executive participation in press briefings and
industry seminars, sponsorship of seminars by the Company and on-going
communication with the Company's end users. To train and support resellers and
distributors, the Company provides mailings of product and technical updates,
seminar materials, video training and corporate presentations. The Company's
Communications Software Group offers Advantage and Premier reseller programs for
U.S. resellers and distributors which provide increased training, services and
support. The Company's Computer Telephony Products Group offers a TeleVantage
Partner Program which likewise provides enhanced training, services and support
to its Computer Telephony resellers and distributors.
6
The Company is exposed to the risk of product returns and rotations from
its distributors and volume purchasers, which are recorded by the Company as a
reduction to sales. Although the Company attempts to monitor and manage the
volume of its sales to distributors and volume purchasers, overstocking by its
distributors and volume purchasers or changes in inventory level policies or
practices by distributors and volume purchasers may require the Company to
accept returns above historical levels. In addition, the risk of product returns
may increase if the demand for new products introduced by the Company is lower
than the Company anticipates at the time of introduction. Although the Company
believes that it provides an adequate allowance for sales returns, there can be
no assurance that actual sales returns will not exceed the Company's allowance.
Any product returns in excess of recorded allowances could result in a material
adverse effect on net sales and operating results. As the Company introduces
more products, timing of sales to end users and returns to the Company of unsold
products by distributors and volume purchasers become more difficult to predict,
and could result in material fluctuations in quarterly operating results.
The Company is also exposed to its distributors for price protection for
list price reductions by the Company on its products held in such distributors'
inventories. The Company provides its major distributors with price protection
in the event that the Company reduces the list price of its products. Large
distributors 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 believes
that it has provided an adequate allowance 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 recorded
allowances could result in a material adverse effect on net sales and operating
results.
Substantially all of the Company's revenue in each fiscal quarter
results from orders booked in that quarter. A significant percentage of the
Company's bookings and sales to major customers on a quarterly basis
historically has occurred during the last month of the quarter and are usually
concentrated in the latter half of that month. Orders placed by major customers
are typically based upon the customers' forecasted sales level for Company
products and inventory levels of Company products desired to be maintained by
the major customers at the time of the orders. Major distribution customers may
receive negotiated cash rebates, market development funds and extended credit
terms from the Company for purchasing Company products, in accordance with
industry practice. Changes in purchasing patterns by one or more of the
Company's major customers related to customer forecasts of future sales of
Company products, customer policies pertaining to desired inventory levels of
Company products, negotiations of rebate and market development funds or in the
ability of the Company to anticipate the mix of customer orders or to ship large
quantities of products near the end of a fiscal quarter could result in material
fluctuations in quarterly operating results. The Company believes that there is
a trend among major distribution customers and volume purchasers to reduce their
inventory levels of computer products, including the Company's products. This
trend could have a significant, adverse effect on the Company's operating
results during the period or periods that such customers initiate such inventory
reductions. The timing of new product announcements and introductions by the
Company or significant product returns by major customers to the Company, could
also result in material fluctuations in quarterly operating results. Expedited
outsourcing of production and component parts to meet unanticipated demand could
adversely affect gross margins.
Sales channels are supported directly through a variety of programs
designed to create demand for the products. The Company seeks to educate
individuals and key decision makers in large corporations, independent software
vendors and original equipment manufacturers about the uses for and benefits of
its products. Programs include the following: (i) targeted direct mail
campaigns; (ii) telemarketing and on-site sales visits; (iii) targeted worldwide
advertising in industry magazines, mail order catalogs and the Internet; (iv)
public relations campaigns; and (v) custom-developed joint marketing programs
with OEM customers. The sales force specializes in educating corporate end
users, original equipment manufacturers and independent software vendors about
the Company's products. The sales organization pursues prospects in their
geographic areas, and the main focus is on OEM customers. This channel will
continue to be the main focus of the business. In addition, direct sales to
medium and large-sized corporations have historically made revenue contributions
and continue to be a source of high profit revenue for the product group.
Although not a major focus for the product group in the past, a highly focused
end-user sales strategy, including electronic commerce and upgrade sales to
existing users of OEM versions, is planned.
The Company supports its products through fee and non-fee-based
telephonic technical services, a World Wide Web site, bulletin board systems,
CD-ROM databases and a fax-on-demand system. Because the Company's products
operate in many disparate PC environments, the Company's technical services
require wide expertise in network operating systems, network interface cards of
other companies and other technologies.
7
The Company's ability to compete is dependent upon the timely
introduction of new products to the marketplace and the timely enhancement of
existing products. Product development expenses totaled approximately $7.1
million, $9.3 million and $7.1 million in fiscal 1998, 1997 and 1996,
respectively. The Company has not engaged in customer-sponsored research
activities.
Computer Telephony and Communications Software Groups. The Company
utilizes a sales, marketing and distribution strategy with respect to its
Computer Telephony and Communications Software Groups as described below:
The Company employs a team of telesales professionals to sell Visual
Voice directly to end users. Leads are generated through a variety of
pull-through marketing activities, such as advertising, press articles, direct
mail and trade shows. To achieve additional market coverage, particularly in
areas outside of North America, Visual Voice is sold through a number of
independent distributors that specialize in computer telephony.
The Company employs regional sales professionals to sell TeleVantage to
qualified resellers. The resellers attend training provided by the Company prior
to being certified as TeleVantage resellers. The Company also partners with
several computer telephony distributors to generate product awareness within the
VAR and end user community.
The Company also currently uses multiple distribution channels to
deliver its communications and networking products worldwide, including software
distributors and dealers, value added resellers, systems integrators, original
equipment manufacturers, direct telemarketing, and direct mail. The primary
business model for the remote control products, however, includes the licensing
of CoSession Remote and ConfigSafe technology through original equipment
manufacturer (OEM) agreements and volume license agreements that are sold direct
to corporations.
The Company works with its distributors and mail order partners to
ensure an adequate supply of TeleVantage, LANtastic, ModemShare, i.Share,
CoSession Remote and other communication software products is available to its
end users. Coordination for all sales outside of the U.S. is handled from either
the Company's offices in Cambridge or Tucson. The Company maintains distribution
relationships in Europe, Latin America, Canada, Australia/New Zealand, Japan and
Southeast Asia. The Company currently has an agency relationship with Upsizing
Corporation in Tokyo, Japan to facilitate the sales of its Communications
Software Group products in Japan, China and South Korea. In addition, the
Company maintains a presence in Asia through a partnership with Core, Ltd., an
engineering and development organization based in Japan. Core has translated
CoSession Remote into Japanese and is currently selling the product at retail
along with i.Share. They are also selling localized versions of CoSession
Remote, ConfigSafe and i.Share in China and South Korea. Core maintains a
relationship with International Business Machines Japan, the product group's
largest customer in Asia. Core is also well positioned to bring the product into
other major OEM accounts and translated versions of CoSession and ConfigSafe
will continue to be sold in Japan, China and Korea.
Seasonality
Typically, the personal computer industry experiences some seasonal
variations in demand, with weaker sales in the summer months because of
customers' vacations and planned shutdowns. This seasonality is especially noted
in Europe.
Competition
General. The PC industry is highly competitive and is characterized by
rapidly changing technology and evolving industry standards. Competition is
usually based upon brand recognition, scalability of products offered by a
vendor, current and future perceived needs of customers, product features, ease
of installation and maintenance, reliability of the software, price and product
availability through consultant, reseller and retail channels.
Computer Telephony. The Company's TeleVantage PC-based phone system
principally competes with proprietary PBXs and Key System Units offered by
companies such as Lucent and Nortel. While the Company believes that its
TeleVantage software offers superior functionality and value than these
products, there can be no assurances that these providers will not choose to
develop their own PC-based phone systems. In addition, TeleVantage competes with
other PC-based phone systems provided by Altigen, NetPhone, and Picazzo. While
the company believes that its TeleVantage software offers greater functionality
and ease of use than these products, certain PC manufacturers, software
companies or telephony hardware providers could choose to partner with any of
these competitors, which would adversely affect the Company's sales of
TeleVantage.
In the CT tools arena, Artisoft competes with two classes of products:
proprietary telephony development environments such as those offered by Parity,
Brooktrout, and Apex; and other open toolkits such as those offered by Parity
and Pronexus. The Company believes Visual Voice has a cost advantage versus
proprietary languages and has superior features than other open toolkits.
8
Competition for InfoFast tends to fall into two categories: modem-based
fax-on-demand applications, such as the Fax-It-Back product marketed by
Castelle; high-end fax solutions, such as the FactsLine product line marketed by
Castelle and the FaxBack product line marketed by FaxBack. Although InfoFast is
more expensive than the modem-based products, the Company believes it offers
better performance, higher reliability, and a greater feature set. Compared to
high-end systems, InfoFast offers fewer features, but at the same time provides
price advantages and ease of use.
Communications Software Group. The Company's NOS products compete with
products available from numerous companies including Microsoft Corporation
("Microsoft"), Novell and International Business Machines Corporation ("IBM"),
which have substantially greater research and development, marketing and
financial resources, manufacturing capability, customer support organizations
and brand recognition than those of the Company.
In particular, the Company's NOS products compete against Microsoft's
Windows desktop operating systems, including Windows 95/98, which includes
peer-to-peer networking capabilities as well as a group scheduler and electronic
mail features. The Company believes that the viability of Microsoft's products
has and will continue to severely impact the Company's Communications Software
Group net sales and income from continuing operations but this impact has proven
difficult to estimate in advance. In June 1998, Microsoft introduced a new
version of its Windows operating system, referred to as "Windows 98". This
introduction followed the August 1995 release of Microsoft's Windows 95
operating system. These products include networking features competitive with
features found in products sold by the Company. Because of the dominance of
Microsoft in the personal computer operating system market, the Company believes
that Windows 95/98 has had a detrimental impact on sales of the Company's NOS
products since its introduction. Another Microsoft NOS product that the Company
believes has had, and may in the future have, a detrimental impact on sales of
LANtastic products is Microsoft Windows NT network server. The Microsoft Windows
NT 4.0 network server product is faster than previous versions and easier to
use, with a Windows 98-like interface. It also ships with all of the tools
necessary to create and manage Internet or Intranet services and includes
Internet browsing capabilities with the inclusion of Microsoft Explorer 3.0. The
Company does not have the product breadth or marketing and engineering resources
of Microsoft, whose dominant position provides it with substantial competitive
advantages in PC software.
There can be no assurance that the Company's NOS products will be able
to compete successfully with other NOS products offered presently or in the
future by Microsoft, Novell or other NOS competitors. Given the greater
resources, higher brand name recognition and other substantial advantages
enjoyed by these competitors, it is very likely that the Company's NOS business
will continue to decline in fiscal year 1999. Accordingly, the future success of
the Company will depend on its ability to expand its other communications and
computer telephony products and activities much faster than the rate at which
its opportunities and prospects in the NOS arena decline. In particular, the
Company's ability to grow its computer telephony product line sales will be a
substantial determinate of future revenue levels.
The Company's remote control software, CoSession Remote, competes
directly with product offerings from Symantec, Microcom, Compaq and Microsoft.
Microsoft distributes its Net Meeting remote communication software as a free
component in certain of its operating systems.
Certain of the Company's remote control software competitors have
recently announced strategic relationships with certain of the Company's
principal OEM partners. There can be no assurances that the Company will be
capable of maintaining its OEM relationships in light of the significantly
greater resources of the Company's remote communications software competitors.
Accordingly, there can be no assurance that the Company's current PC remote
communications software will continue to generate revenues and earnings at
current levels or that the Company will be able to effectively develop and
launch new competitive products in the future.
International Business
The Company markets and sells its products in international as well as
domestic markets. In fiscal 1998, 1997 and 1996, international sales accounted
for 25%, 27% and 30%, respectively, of the Company's net sales. Assets deployed
to support the Company's international business represented approximately 1% of
total assets at the end of fiscal 1998 and 3% of total assets at the end of
fiscal 1997 and 1996. The decline in 1998 and 1997 in international sales and
assets deployed to support the Company's international business is attributable
to the Company's restructuring actions and the decline in sales of LANtastic
products during such periods.
9
The Company's international sales historically have consisted almost
entirely of Communications Software Group products, principally the Company's
LANtastic products. In recent years, the Company has begun to market its
CoSession and i.Share products in Asian markets.
In connection with restructuring actions taken by the Company in fiscal
1998 and 1997, the Company has closed all of its foreign sales offices. As a
result, the Company's international sales, marketing and support services are
now conducted primarily through dealers, distributors and OEM's located in the
foreign markets where the Company's products are sold.
In order to sell its products in foreign markets, the Company often must
convert and adapt its products to foreign languages and products. The Company
relies on local software developers and distributors in the foreign countries to
perform these localization services.
Sales to non-U.S. customers may be affected by fluctuations in exchange
rates and government regulations. To date, the Company's operations have not
been affected materially by currency fluctuations.
Significant Customers
The Company sells its products through a variety of channels of
distribution, including distributors, volume purchasers, resellers and original
equipment manufacturers. In fiscal 1998 and 1996 one customer accounted for 10%
or more of the Company's annual net sales. No customers accounted for more than
10% of the Company's net sales in fiscal 1997. In fiscal 1998, IBM accounted for
10% of the Company's net sales, and in fiscal 1996 Ingram Micro, Inc., accounted
for 12% of the Company's net sales. At June 30, 1998, Ingram Micro, Inc. and IBM
accounted for approximately 16% and 13%, respectively, of the Company's
outstanding trade accounts receivable. At June 30, 1997, Ingram Micro, Inc.,
accounted for 16% of the Company's outstanding trade accounts receivable. The
loss of any of the major distributors of the Company's products or their failure
to pay the Company for products purchased from the Company could have a material
adverse effect on the Company's operating results. The Company's standard credit
terms are net 30 days, although longer terms are provided to various major
customers on a negotiated basis from time to time.
Backlog
Substantially all of the Company's revenue in each quarter results from
orders booked in that quarter. Accordingly, the Company does not believe that
its backlog at any particular point is indicative of future sales. The Company's
backlog of orders at June 30, 1998 was approximately $59,000, compared with
approximately $181,000 at June 30, 1997.
Proprietary Rights and Licenses
The Company currently relies on a combination of trade secret,
copyright, trademark and patent laws, nondisclosure and other contractual
agreements, and other technical measures to establish and protect its
proprietary rights in its products, and to protect its technologies from
appropriation by others. Despite these precautions, unauthorized parties may
attempt to copy aspects of the Company's products or to obtain and use
information the Company regards as proprietary. In addition, it may be possible
for others to develop products using technologies similar to the Company's but
which do not infringe upon the Company's proprietary rights.
While the Company's success will depend to a certain degree on its
ability to protect its technologies, the Company believes that, because of the
rapid pace of technological change in the industries in which the Company
competes, the legal protections for its products are less significant factors in
the Company's success than the knowledge, ability and experience of the
Company's employees, the nature and frequency of product enhancements and the
timeliness and quality of support services provided by the Company.
The Company believes that its products, technologies and other
proprietary rights do not infringe on the proprietary rights of third parties.
However, the software and computer industry is characterized by frequent
litigation regarding copyright, patent and other intellectual property rights.
There can be no assurance that third parties will not assert infringement claims
against the Company in the future. In the event of litigation to determine the
validity of any third party claims, such litigation could result in substantial
expense to the Company and adversely impact the efforts of the Company's
management and technical employees. In the event of an adverse result in any
such litigation, the Company could be required to expend significant resources
to develop alternative, non-infringing technology or to obtain licenses to the
technology. There can be no assurance that the Company would be successful in
such development or that any such licenses would be available at all or at a
reasonable cost to the Company. In addition, laws of certain countries in which
the Company's products are or may be developed, manufactured or sold may not
protect the Company's products and other intellectual property rights at all or
to the same extent as the laws of the United States.
10
In the course of its product development efforts, the Company
periodically identifies certain technologies owned by others that either would
be useful to incorporate into its products or are necessary in order to remain
competitive in light of industry trends. In these cases the Company has in the
past sought to obtain licenses of such third-party technologies. The Company
expects that it will continue to find it desirable or necessary to obtain
additional technology licenses from others, but there can be no assurance that
any particular license will be available at all, or on acceptable terms, at any
future time.
The Company pays royalties to imagine LAN, Inso Corporation, Cheyenne,
AT&T Corporation, Digital Equipment Corporation, Learnout & Hauspie Speech
Products, International Business Machines and Atrium Software for its use of
certain licensed technologies. The licensing by these entities of their products
or brand name to competitors of the Company, or the withdrawal or termination of
licensing rights to the Company's technologies, could materially adversely
affect the Company's sale of products incorporating such licensed technologies
to original equipment manufacturers and the Company's results of operations as a
whole.
Environmental Laws
Compliance with federal, state and local laws and regulations for the
protection of the environment has not had a material impact on the Company's
capital expenditures, earnings or competitive position. Although the Company
does not anticipate any material adverse impact in the future based on the
nature of its operations and the scope of current environmental laws and
regulations, no assurance can be provided that such laws or regulations or
future laws or regulations enacted to protect the environment will not have a
material adverse impact on the Company.
Employees
As of June 30, 1998, the Company had 148 full-time employees, including
approximately 62 in sales, marketing and customer support, 52 in engineering and
product development, 15 in operations and 19 in administration. The future
success of the Company will depend in large part on its continued ability to
attract and retain highly skilled and qualified personnel. Competition for such
personnel is intense. The Company has severance and change in control agreements
with most of its executive officers and noncompetition and nondisclosure
agreements with substantially all of its professional employees and executive
officers. None of the Company's employees are represented by a labor union. The
Company has experienced no work stoppages and believes that its relations with
its employees are good.
Uncertainties in the Company's Business
In addition to the factors described above that could adversely affect
the Company's business and results of operations, and, therefore, the market
valuation of its Common Stock, the Company's future results of operations may be
impacted by various trends and uncertainties that are beyond the Company's
control, including adverse changes in general economic conditions, government
regulations and foreign currency fluctuations.
In addition various characteristics of the PC software industry may
adversely affect the Company. As products become more complex, the Company could
experience delays in product development and software "debugging" that are
common in the computer industry. Significant delays in product development and
release would adversely affect the Company's results of operations. There can be
no assurance that the Company will respond effectively to technological changes
or new product announcements by other companies or that the Company's product
development efforts will be successful. Furthermore, introduction of new
products by the Company involves substantial marketing risks because of the
possibility of product "bugs" or performance problems, in which event the
Company could experience significant product returns, warranty expenses and
lower sales
The OEM marketplace is highly competitive, with a large number of
vendors vying for a limited amount of "preload" dollars. Although the Company
maintains good relationships with OEM customers on many levels, cost pressures
and competitive products are persistent threats to the business. Certain of the
Company's OEM relationships require the scheduled delivery of product revisions
and new products. The failure 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 revenues and
earnings.
11
The software industry is highly competitive. In addition, the Company
must develop and maintain channels for the distribution of its products other
than through OEM's. These channels include distributors and value added
resellers. These distribution channels are highly competitive, with a large
number of vendors seeking to be promoted by and sold through these channels. In
many cases it is important that the Company successfully train persons involved
in distribution channels with respect to the Company's products and services.
There are a number of companies that currently compete directly with the
Company's PC remote control, modem and telephone line sharing and computer
telephony products. Many of these companies, including Symantec, MicroCom,
Novell, Lucent Technologies and others have substantially greater resources and
name recognition than the Company. Accordingly, there can be no assurance that
the Company's current products will continue to generate revenues and earnings
at current levels, or that the Company will be able to effectively develop and
launch new competitive products in the future.
The Company's communications software products, including its LANtastic
product line compete with Microsoft and other companies which have greater
resources than the Company. Competition with Microsoft has materially adversely
affected sales of the Company's LANtastic product line. The Company's operating
results may be adversely affected in the future if Microsoft or other companies
include in their operating systems or other products features which compete
directly with other of the Company's products.
As a result, past performance trends by the Company should not be used
by investors in predicting or anticipating future results. The market price of
the Company's Common stock has been, and may continue to be, extremely volatile.
Factors identified herein, along with other factors that may arise in the
future, quarterly fluctuations in the Company's operating results and general
conditions or perceptions of securities analysts relating to the networking and
data communications marketplace or to the Company specifically may have a
significant impact on the market price of the Company's Common stock and could
cause substantial market price fluctuations over short periods. See also "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations" including the discussion of "Risk Factors."
Rights Plan
During fiscal 1995, the Board of Directors of the Company adopted a
shareholder rights plan (the "Rights Plan") which is intended to protect and
maximize the value of shareholders' interest in the Company and to assure that
all Company shareholders will receive fair and equal treatment in the event of
any unsolicited attempt to acquire the Company. The Rights Plan will not and is
not intended to prevent a takeover of the Company on terms that are fair to, and
in the best interests of, all shareholders. See "Note 10 of Notes to
Consolidated Financial Statements" under "Item 8. Financial Statements and
Supplementary Data."
Stock Repurchase Program
In February 1997, the Company extended a stock repurchase program (the
"Program") under which the Company would be authorized to repurchase up to
1,000,000 shares of its outstanding Common Stock for general corporate purposes.
Pursuant to the Program, management of the Company was authorized to pursue the
Program in open market transactions from time-to-time, depending upon market
conditions and other factors. The Company repurchased shares in open market
transactions pursuant to the Program totaling less than 100,000. All such
repurchases occurred in fiscal year 1997 and the Program expired in February
1998.
Item 2. Properties
- ------------------
The Company leases property as detailed in the following table.
Lease
Approximate Owned or Expiration Intended
Location Size Leased Date Use
-------- ---- ------ ---- ---
Tucson, Arizona 2,446 sq. ft Leased April 2001 Office
Tucson, Arizona 14,086 sq. ft Leased April 2001 Office
Tucson, Arizona 28,800 sq. ft. Leased February 2001 Operations
Cambridge, Massachusetts 18,241 sq. ft. Leased August 2000 Office
Cambridge, Massachusetts 8,313 sq. ft. Leased July 2002 Office
Boynton Beach, Florida 2,342 sq. ft. Leased August 2000 Office
Iselin, New Jersey 5,352 sq. ft Leased March 2000 Office
Paris, France 2,153 sq. ft. Leased September 1998 Office
12
Aggregate monthly rental payments for the Company's facilities are
approximately $85,000. The Company's current facilities are generally adequate
for anticipated needs over the next 12 to 24 months. The Company does not own
any real property.
Item 3. Legal Proceedings
- -------------------------
The Company is a party to a number of legal proceedings arising in the
ordinary course of its business. The Company believes that the ultimate
resolution of these claims will not have a material adverse effect on its
financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
Not applicable.
Executive Officers of the Registrant
- ------------------------------------
The following table sets forth information concerning the executive
officers of the Company as of June 30, 1998 except as noted:
Name Age Position
- ----------------------------------------------------------------------------------------------------
T. Paul Thomas 38 President and Chief Operating Officer
Steven G. Manson 39 Vice President and General Manager-Computer Telephony
Products Group
Julie M. Ronstadt 36 Vice President, Worldwide Operations and Administration
Kirk D. Mayes 30 Controller, Chief Accounting Officer, and Secretary
Rick McGee 40 Vice President and General Manager-Communications Software
Group
Mr. Thomas joined Artisoft in June 1997, as President of the
Communications Software Group and was later named President and Chief Operating
Officer of the Company. Mr. Thomas joined Artisoft from Sunquest Information
Systems where he was Senior Vice President of Marketing. Earlier in his career,
Mr. Thomas held the position of Vice President of Marketing for Artisoft, as
well as other senior level positions with Apple Computer, Compaq Computer and
MicroAge, Inc.
Mr. Manson joined Artisoft in October 1996, as Vice President of Product
Management-Computer Telephony Division. In October 1997, Mr. Manson was named
Vice President and General Manager of the Computer Telephony Products Group. Mr.
Manson joined Artisoft from Gensym Corporation where he was Director of
Corporate Marketing. Earlier in his career, Mr. Manson held other senior level
marketing positions at Cadre Technologies, Inc., and Prime Computer, Inc.
Ms. Ronstadt joined Artisoft in July 1994, as Senior Planner at the
Company's Tucson, Arizona headquarters. In December 1994, Ms. Ronstadt was named
Director of Materials and in October 1996 Director of Operations. In April 1998,
Ms. Ronstadt was named Vice President of Worldwide Operations and
Administration. Ms. Ronstadt joined Artisoft after ten years with Allied Signal
Aerospace where she served in various senior level positions.
Mr. Mayes joined Artisoft in November 1994. In April 1996, Mr. Mayes was
named Assistant Corporate Controller and in June 1997 Corporate Controller. In
August 1997, Mr. Mayes was named Chief Accounting Officer and Secretary. Mr.
Mayes joined Artisoft from Arthur Andersen LLP where he had worked from 1991 to
1994.
13
Mr. McGee joined Artisoft in November 1995 as Director of North American
Sales which was the result of Artisoft's acquisition of Synergy Solutions. In
June 1996, he became Vice President of Sales and Marketing. Mr. McGee founded
Synergy Solutions, the developer of ModemAssist PLUS and served as its president
until Synergy Solution's acquisition by Artisoft in November 1995. Prior to
founding Synergy Solutions, Mr. McGee successfully built channel sales and
marketing organizations for Fresh Technology Company, Clyde Digital Systems, and
WICAT systems International. Mr. McGee terminated his employment with the
Company effective July 1, 1998.
On September 8, 1998, Sheldon M. Schenkler joined Artisoft as Vice
President and Chief Financial Officer. Before joining Artisoft, Mr. Schenkler
served as Vice President and Chief Financial Officer at Cambex Corporation from
1988 to 1998. Prior to joining Cambex, Mr. Schenkler held senior financial
management positions at Instron Corporation and Evans Products Company.
On August 24, 1998, Scott Moule was named the Vice President and General
Manager of the Company's Communications Software Group. Mr. Moule had previously
served as the Director of Product Development for the Company's Remote Control
Products Group. Mr. Moule joined Artisoft in November 1995. Before joining
Artisoft, Mr. Moule provided consulting and engineering support to Triton
Technologies from 1992-1995. Mr. Moule has also held senior level development
positions at EDS and Southern Bell.
14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------------------
The principal market for Artisoft common stock is The Nasdaq Stock
Market. Market information and related shareholder matters are contained in
"Securities Information" on the inside back cover of the Artisoft, Inc. 1998
Annual Report to Shareholders, and are incorporated herein by reference. On June
30, 1998, the Company's Common Stock was held by approximately 375 shareholders
of record.
The Company currently intends to retain future earnings to fund the
development and growth of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future.
Item 6. Selected Financial Data
- -------------------------------
Artisoft, Inc. and Subsidiaries
Selected Consolidated Financial Data
(in thousands, except per share amounts)
Years Ended June 30,
- -------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
Statements of Operations Data
Net sales $ 24,793 $ 33,409 $ 60,972 $ 84,243 $107,430
Operating income (loss) (4,375) (29,124) (24,838) (9,832) 18,983
Net income (loss) (2,913) (28,425) (18,328) (5,848) 13,613
Net income (loss) per common share
Basic and Diluted $ (.20) $ (1.96) $ (1.27) $ (.41) $ .89
Weighted average common shares outstanding 14,554 14,529 14,463 14,315 15,377
As of June 30,
- -------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
Balance Sheet Data
Working capital $ 17,538 $ 17,747 $ 37,917 $ 56,324 $ 52,462
Total assets 25,508 35,371 57,712 77,807 97,464
Long-term obligations, net of
current portion 289 714 96 -- 3,950
Shareholders' equity 19,951 22,604 50,981 68,245 72,847
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
Overview
During fiscal 1998, the Company responded to changing business
conditions by implementing two strategies designed to improve the Company's
operating results. First, the Company responded to declining sales of its
networking and communications product lines by reducing the cost structure
associated with such product lines. Second, the Company acted to reorient its
product development, sales and marketing efforts towards products, particularly
computer telephony products, with a perceived potential for revenue growth.
During fiscal 1998, the Company's Communications Software Group product
lines experienced continued competitive pressures from major software
manufacturers. These market conditions had a particularly negative effect on the
sales levels of the Company's LANtastic NOS product line. Although the rate of
decline in sales of the Company's LANtastic NOS products was less than in recent
years, the Company's overall net sales in fiscal 1998 declined from fiscal year
1997. Revenues from the Company's Computer Telephony Group product lines
partially offset some of the LANtastic NOS product revenue declines.
During the second half of fiscal 1998, the Company experienced an
accelerated decline in the LANtastic NOS products revenue, particularly in
international markets. Revenues from sales of the Company's networking products
were especially weak in Asia and Latin America. This weakness was to a minor
extent offset by the introduction of the Company's TeleVantage PC-based PBX
solution in March 1998, along with revenues from the Visual Voice products.
In response to the lowered demand for its LANtastic NOS product line,
the Company implemented several actions designed to bring the Company's cost
structure in line with current and anticipated future revenue levels. The first
restructuring action was the March 1998 closure of the Company's Japanese sales
office and liquidation of the Company's Japanese subsidiary. Second, the Company
closed its United Kingdom sales office and consolidated its Remote Control
Product Group into the Communications Software Group. This action also involved
the closure of the Company's Iselin, New Jersey office. Third, in June 1998, the
Company reduced its Communications Software Group headcount. The Company
recorded a restructuring charge in its fourth fiscal quarter due to these office
closure costs and severance costs on the attendant headcount reductions at these
offices. These actions were taken in order to move the Company toward improved
operating results.
In March 1998, Artisoft released TeleVantage 1.0 which is an intelligent
PC-based phone system designed for small- to medium-sized businesses and branch
offices. TeleVantage was awarded Best of Show at CT Expo in March 1998 and has
received favorable trade reviews following its release, including CTI Magazine
Editors Choice in September 1998 and the 1998 Editors' Choice Award given by
Telemarketing & Call Center Solutions Magazine.
In April 1998, the Company announced its intention to focus the majority
of its resources on its computer telephony products. In September 1998, the
Company moved its principal executive offices to the facilities of its Computer
Telephony Group in Cambridge, Massachusetts. The Company has made, and plans to
continue to make, additional investments in sales, marketing and development in
order to build awareness, market and channels for its computer telephony
products.
New Products
Computer Telephony Products. As of June 30, 1998, the Company's computer
telephony products included TeleVantage 2.0, Visual Voice Pro 4.1, Visual Voice
for TAPI 2.0, Visual Voice Enterprise, and InfoFast 2.0.
In August 1997, Artisoft launched InfoFast 2.0 for Windows NT and
Windows 95. InfoFast is a fax-on demand/audio text software solution that
provides 24-hour automatic access to fax documents, Web documents and voice
recordings via fax or phone. InfoFast 2.0 is compatible with both Windows 95 and
Windows NT.
In August 1997, Artisoft released Visual Voice Pro 4.0, which allows
users to create a wide variety of 32-bit computer-based telephony solutions for
Windows NT and Windows 95 platforms, including voice mail, audio text, outbound
calling, interactive voice response, fax-on-demand, and international callback.
Visual Voice Pro adds telephony and voice capabilities to any development
environment that supports ActiveX controls, including Visual Basic, Visual C++,
Delphi and Visual Fox Pro. Visual Voice 4.0 is a set of 32-bit ActiveX controls
that turn any Windows ActiveX compatible development environment, such as
Microsoft Visual Basic, Microsoft Visual C++, Borland Delphi, and Sybase
PowerBuilder, into a full-featured telephony application development tool kit.
16
In March 1998, Artisoft released TeleVantage 1.0, which is an
intelligent PC based phone system designed for small- to medium-sized businesses
and branch offices. TeleVantage is an open, standards-based system that is
designed to run on any PC, and uses standard voice processing boards from
Dialogic. TeleVantage offers, among other features, a Windows-based graphical
interface, multi-line call control, full featured voice mail, call and message
screening, "follow me" call forwarding, personalized call handling, e-mail
integration, a voice-guided interface, call logging and reporting, least call
routing, a multi-level auto attendant and graphical system administration.
In March 1998, Artisoft released Visual Voice Enterprise, an extension
to its Visual Voice telephony toolkit. Visual Voice Enterprise allows software
developers to create distributed telephony applications that span multiple
computers, running over the Internet or a LAN. Visual Voice Enterprise offers
application scalability, remote administration and the ability to access
computer telephony functionality from a Web browser.
In June 1998, Artisoft released Visual Voice Pro 4.1 This latest version
of Visual Voice provides tightly integrated support for Microsoft Visual C++ and
Borland Delphi. It also supports enterprise connectivity and allows for expanded
flexibility and scalability in developing telephony applications.
In August 1998, Artisoft released TeleVantage 2.0, which in addition to
the features offered in TeleVantage 1.0, offers: Group call distribution,
international support, expanded scalability to 48 trunks and 144 extensions,
Centrex and PBX support, remote call screening, audio import and export, voice
mail/Email synchronization, automatic hold feature, voice title playback and
capture, automatic callback, standardized call waiting functions, selected trunk
access and auto attendant bypass among other enhanced features.
Communications Software Products. As of June 30, 1998, the Company's
communication software products included LANtastic 8.0, LANtastic for Windows
NT, i.Share 3.0, ModemShare 32, XtraMail, CoSession Remote 32 and ConfigSafe
Support Edition.
In December 1997, Artisoft released CoSession Remote 32. CoSession
Remote 32 enables users running a Windows 95 or Windows NT 4.0 PC to connect and
control remote PCs running Windows NT 4.0 or Windows 95. CoSession Remote 32
supports connections over analog modems, IPX/SPX, NetBIOS, NetBEUI and TCP/IP.
CoSession Remote 32 also supports TAPI 2.0 and connections over IRDA and
parallel ports.
CoSession Remote 32 uses shell extensions to enable ease of use in
setting up and accessing remote PCs. Once connected, the users can do one or
more of the following:
*Remote control
*File transfer with differential update, synchronization and cloning
capabilities
*Keyboard chat with remote users
*Simultaneous voice conversations using standard analog modems or
network/Internet connections (with a sound card, speakers and microphone on the
two PCs).
In January 1998, Artisoft released LANtastic for Windows NT. LANtastic
for Windows NT enables users to integrate Windows NT 4.0 into a new or existing
LANtastic network. It allows users to share files, printers, applications and
CD-ROMs among Windows NT 4.0, Windows 95, Windows 3.x, and DOS PCs on a single
network. LANtastic for Windows NT allows for enhanced network administration and
security while offering advanced administrative features such as setting up user
access, pop-up messaging and chat.
In February 1998, Artisoft released ModemShare 32. ModemShare 32 enables
all networked PCs (Windows through DOS) to share a single phone line and modem.
ModemShare 32 is compatible with Windows NT, Windows 95 and supports both Class
1 and Class 2 modems.
In May 1998, Artisoft released i.Share 3.0, which enables up to 32
networked PC users to browse different Web sites at the same time via one
connection. This new version of i.Share supports Windows NT 4.0, Windows 98, the
latest 32-bit browsers and Internet e-mail software. i.Share 3.0 also offers
internet e-mail access and user access control (i.Watch)
In June 1998, Artisoft released LANtastic 8.0. LANtastic 8.0 offers
users the same functionality as LANtastic 7.0 but is now compatible with Windows
NT 4.0 and Windows 98. LANtastic enables PCs on Windows NT 4.0, Windows 95/98,
Windows 3.1 and DOS to share files, corporate resources e-mail and allows
network administrators to manage and control multiple operating systems,
protocols, applications and desktops.
17
Net Sales
The Company's net sales decreased 26% to $24.8 million for the fiscal
year ended June 30, 1998 from $33.4 million for fiscal 1997. The overall
decrease in net sales was principally due to a continued decline in the sales of
the Company's LANtastic NOS products. Although the rate of the domestic revenue
decline in the Company's LANtastic NOS products slowed in fiscal year 1998 as
compared to fiscal year 1997, there was an accelerated rate of decline in
certain international markets, principally Latin America and Asia. Management
believes that the principal reason for the decline in LANtastic NOS product
sales was the impact of Microsoft's Windows 95/98 and Windows NT operating
systems on the small business networking market. For the fiscal years ended June
30, 1998 and 1997, net sales of LANtastic NOS products comprised approximately
40% and 60%, respectively, of consolidated net sales.
The decline in sales of LANtastic NOS products, was partially offset by
increases in sales of the Company's computer telephony and other communications
products. Included in the computer telephony category are Visual Voice 4.1,
Visual Voice for TAPI 2.0, InfoFast, and TeleVantage. For the fiscal years ended
June 30, 1998 and 1997, net sales of computer telephony products comprised
approximately 19% and 15%, respectively, of consolidated net sales.
Along with LANtastic, included in the Company's communication and
networking software product category are ModemShare 32, a modem and telephone
line sharing product, CoSession Remote 32, a remote control product, i.Share
3.0, an Internet connection sharing product, XtraMail, an Internet e-mail
product and ConfigSafe, a system reconfiguration solution. Sales of the
Company's i.Share and ModemShare 32 communications software increased in fiscal
year 1998 compared to fiscal year 1997, partially offsetting the decline in
sales of the Company's LANtastic NOS products. In particular, ModemShare 32
sales increased 67% in fiscal year 1998 from fiscal year 1997. i.Share 3.0 was
released in May 1998 and XtraMail was released in November 1996. During fiscal
1998 XtraMail did not make a material contribution to consolidated net sales and
has not met the expectations of management since its introduction. For the
fiscal years ended June 30, 1998 and 1997, net sales of the communications
software products (excluding LANtastic) comprised approximately 37% and 20%,
respectively, of consolidated net sales.
The Company's net sales decreased 45% to $33.4 million for the fiscal
year ended June 30, 1997 from $60.1 million for fiscal 1996. The overall
decrease in net sales was principally due to an approximate 60% decline in sales
of the Company's LANtastic NOS products during fiscal 1997. These sales declines
were partially offset by increased sales of the Company's communications
products (excluding LANtastic) and telephony products. The year-over-year
declines were across all worldwide direct and indirect channels of distribution.
The Company distributes its products internationally and tracks sales by
major geographic area. Non-U.S. sales represented 25%, 27% and 30% of net sales
for fiscal 1998, 1997 and 1996, respectively. International sales decreased 31%
to $6.2 million in fiscal 1998 from $8.9 million in fiscal 1997. International
sales decreased 51% to $8.9 million in fiscal 1997 from $18.3 million in fiscal
1996. Substantially all of the Company's international sales during fiscal 1998,
1997 and 1996 were comprised of LANtastic and other communications software
products. Management believes that the reasons for the declines in international
sales are the same as those for declines in overall sales. Management believes
that penetration of Microsoft Windows 95/98 and Windows NT personal computer
operating system in many of its international markets have negatively impacted
sales in these regions. The Company believes that if the adoption rate of
Windows 95/98 and Windows NT continues at its recent pace, there will be
additional significant declines in the Company's international revenues. In
addition to the factors mentioned above, sales of the Company's communication
products to Asia and Latin America declined significantly in fiscal 1998 due to
recently poor local economic conditions.
Gross Profit
The Company's gross profit was $18.3 million, $21.1 million and $41.1
million in fiscal 1998, 1997 and 1996, respectively, or 74%, 63% and 67% of net
sales, respectively. The increase in gross profit percentage for fiscal 1998 was
due to changes in product mix sold. Specifically, sales of the Company's higher
margin CoSession Remote 32, ModemShare 32 and i.Share communications software
comprised a higher percentage of overall net sales in fiscal 1998. In addition,
sales of the Company's lower margin LANtastic network starter and add-on kits
(which include hardware) declined in fiscal 1998. The increase in gross profit
percentage was offset to a minor extent by the sale of lower margin Not For
Resale kits (NFR's) associated with the Company's launch of its TeleVantage
software. The decrease in the gross profit percentage for fiscal 1997 as
compared to fiscal 1996 is principally the result of higher royalty expenses
incurred on certain of the Company's communication software products,
particularly ConfigSafe Support Edition. The decrease in gross profit dollars
was the result of progressively lower sales in each of fiscal 1998, 1997 and
1996. Gross profit may fluctuate on a quarterly basis because of product mix,
pricing actions and changes in sales and inventory allowances.
18
Sales and Marketing
Sales and marketing expenses were $10.0 million, $23.4 million and $26.2
million for fiscal 1998, 1997 and 1996, respectively, representing 41%, 70% and
43% of net sales. The decrease in sales and marketing expenses as both a
percentage of net sales and in aggregate dollars for fiscal 1998 is principally
due to a significant decrease in the Company's Communications Software Group
sales and marketing staffing levels. In addition, marketing expenses decreased
in fiscal 1998 due to a more focused vertical marketing strategy for the
Company's communication software products. These expense reductions were
partially offset by increased investments in the sales and marketing of the
Company's computer telephony products, principally TeleVantage and Visual Voice.
The increase in sales and marketing expenses as a percentage of net sales for
fiscal 1997 is principally due to the overall decrease in net sales, driven by
an approximate 60% decline in sales of the Company's LANtastic NOS products
during fiscal 1997, without offsetting decreases in sales and marketing
expenses. The decrease in aggregate dollars for sales and marketing expenses for
fiscal 1997 reflects expense reductions including a decrease in the Company's
staffing levels. This decrease was implemented to bring sales and marketing
costs more closely into alignment with the reduced sales level from fiscal 1996
to fiscal 1997.
Product Development
Product development expenses were $7.1 million, $9.3 million and $7.1
million for fiscal 1998, 1997 and 1996, respectively, representing 28%, 28% and
12% of net sales. The decrease in aggregate product development expenses for
fiscal 1998 is principally attributable to the reduction in development staffing
levels associated with the Company's LANtastic NOS product line, partially
offset by the addition of product development resources in the Company's
Computer Telephony Group. The increase in both the aggregate dollars for fiscal
1997, and the increase in product development expenses as a percentage of net
sales for fiscal 1997, are principally due to the addition of product
development resources in the Company's Computer Telephony Group. The addition of
new development personnel to the Computer Telephony Group in fiscal 1999 will be
required to meet planned future product introduction timetables. The Company
believes the introduction of new products to the market in a timely manner is
critical to its future success.
General and Administrative
General and administrative expenses were $3.1 million, $6.3 million and
$6.0 million for fiscal 1998, 1997 and 1996 respectively, representing 13%, 19%
and 10% of net sales. The decrease in both the aggregate general and
administrative costs and the decrease in general and administrative costs as a
percentage of net sales in fiscal 1998 compared to fiscal 1997 is principally
the result of cost efficiencies achieved in August 1997 associated with certain
administrative personnel reductions. These efficiencies and reductions commenced
with the Company's adoption of a restructuring plan in June 1997 which included
the sale of the Company's Tucson, Arizona headquarters in July 1997, the
subsequent relocation of the Company's Tucson operations to a smaller, less
costly facility in October 1997 and personnel reductions. The net increase in
aggregate general and administrative costs in fiscal 1997 compared to fiscal
1996 principally results from the full year's impact in fiscal 1997 of costs
associated with the acquisition of three businesses in fiscal 1996, and the
subsequent expansion of the Company's computer telephony operations in
Cambridge, Massachusetts, including a higher number of employees and larger
facility. Another factor contributing to the net increase in fiscal 1997 was an
increase in the Company's allowance for doubtful accounts receivable. These
factors were substantially offset by a significant decrease in general and
administrative expenses incurred at the Company's Tucson, Arizona headquarters.
Significant reductions were realized in payroll and related costs as a
consequence of involuntary employee terminations and other actions taken as part
of restructuring actions effected in the September 1996 and March 1997 quarters
of fiscal 1997 and other cost-cutting programs to bring operating expenses more
in line with declining sales levels. The increase in general and administrative
expenses as a percentage of net sales in fiscal 1997 is principally attributable
to the overall decrease in net sales as a result of an approximate 60% decline
in sales of the Company's LANtastic NOS products, without offsetting decreases
in general and administrative expenses.
19
Purchased In-Process Technology and Related Costs
In conjunction with the acquisition of Synergy, Triton and Stylus, the
Company recorded a charge to operations during the second and third quarters of
fiscal 1996 totaling $21.7 million. The charge related to purchased in-process
technology that had not reached technological feasibility and had indeterminable
alternative future use. In addition, as a result of the acquisitions, the
Company recorded a charge to operations for other related costs totaling $5
million. The other related costs were principally attributable to costs
associated with the integration of Triton, Synergy and Stylus technology with
the Company's technology and the elimination of duplicate distribution
arrangements in Europe. Other related costs also included increases in
allowances for returns, rotations and inventory obsolescence associated with the
transition to new technology, costs for severance and outplacement and facility
costs relating to the cancellation of leases in order to consolidate technical
support and distribution.
Write Off Of Abandoned Technology
Subsequent to the acquisition of Stylus, the Company recorded a charge
to operations during the fourth quarter of fiscal 1998 totaling $.4 million.
These charges related to the cost to purchase certain technologies in which
development efforts were abandoned in fiscal 1998 and hold no future realizable
value to the Company.
Restructuring Costs
Restructuring costs in the accompanying consolidated statement of
operations for the fiscal year ended June 30, 1998 include the costs associated
with the involuntary employee termination benefits of certain Communication
Software Group personnel, and the costs associated with the closure of the
Company's Iselin, New Jersey, United Kingdom and Japanese Communications
Software Group sales offices. Employee termination benefits include severance,
wage continuation, notice pay and other benefits. Office closure costs include
costs of premise and other lease terminations, losses on disposal of furniture
and equipment and legal and other professional fees.
The June 1998 restructuring actions were the result of a continued
decline in sales of the Company's LANtastic NOS products (especially
internationally), and the necessity to bring the cost structure of the
Communications Software Group to a level commensurate with the current and
anticipated future revenues from these products. The restructuring action
included a workforce reduction of approximately 23 employees at the Company's
Tucson, Arizona facility, a consolidation of the Company's Remote Control Group
into the Communications Software Group and associated staffing reductions of
approximately 15 employees in Iselin, New Jersey. The Company also implemented a
workforce reduction affecting 4 employees in its United Kingdom office.
Accrued restructuring costs in the accompanying June 30, 1998
consolidated balance sheet are principally comprised of accrued employee
termination benefits of approximately $.9 million and expected costs to be
incurred in connection with the closure of the Company's Communication Software
Group sales and support offices in Japan, the United Kingdom and Iselin, New
Jersey.
The restructuring costs in the accompanying consolidated statement of
operations for the fiscal year ended June 30, 1997 include the costs of
involuntary employee termination benefits, international sales and support
office closures and related costs associated with the restructuring actions
effected during that fiscal year. Employee termination benefits include
severance, wage continuation, notice pay and medical and other benefits.
International sales and support office closures and related costs include costs
of premise and other lease terminations, losses on disposal of furniture and
equipment, legal and other professional fees, and an increase in the allowance
for bad debts resulting from the decision to reduce the number of international
distributors, particularly in Europe. Other costs associated with the
restructuring actions include an impairment loss on the expected disposition of
excess computers and other equipment resulting from the significant reduction in
workforce at the Company's corporate headquarters in Tucson, Arizona and lease
termination costs for certain Tucson, Arizona facilities.
The restructuring actions were the result of substantially declining
sales, principally LANtastic NOS products, and the attendant necessity to reduce
the Company's cost structure to a level commensurate with the level and mix of
operating revenues. The restructuring actions taken during the fiscal year ended
June 30, 1997 included a reduction in workforce affecting approximately 160
employees at the Company's corporate headquarters location in Tucson, Arizona
and the closure of all international sales and support offices with the
exception of the United Kingdom and Japan.
20
Accrued restructuring costs in the accompanying June 30, 1997
consolidated balance sheet are principally comprised of accrued employee
termination benefits of approximately $4.2 million and expected costs to be
incurred in connection with the closure of the international sales and support
offices.
Other Income (Expense)
For fiscal 1998, other income (expense), net, increased to $1.7 million
from $.7 million in fiscal 1997. This increase resulted principally from the
recognition of a $1.3 million gain on the sale of the Company's Tucson, Arizona
headquarters in October 1997. This gain was partially offset by higher interest
expenses in fiscal 1998 along with the recognition of foreign exchange losses
principally related to the Company's Japanese subsidiary.
For fiscal 1997, other income (expense), net, decreased to $.7 million
from $1.5 million in fiscal 1996. This decrease resulted principally from lower
investment income resulting from the reduction in cash and investment balances
due to the acquisition of Synergy, Triton and Stylus for approximately $26.4
million in fiscal 1996. The Company also incurred increased interest expense in
fiscal year 1997 due primarily to a $1.4 million sale-leaseback of computer
equipment and related software in December 1996. Additionally, the Company
entered into a $2.2 million mortgage loan transaction in February 1997.
Income Tax Expense (Benefit)
The effective tax rates for the Company were 6%, 0%, and (21)% for
fiscal 1998, 1997 and 1996, respectively. For the fiscal year ended June 30,
1998, $.2 million of income tax expense was recorded related to certain income
taxes payable by the Company's former Dutch subsidiary and branch. For the
fiscal year ended June 30, 1997, an immaterial amount of income tax benefit was
recognized as the Company established a valuation allowance in fiscal 1997 equal
to its entire net deferred tax asset balance. In the assessment of the
recognition of a valuation allowance, the Company considered recent operating
losses experienced during the Company's transition from a company with primarily
a hardware orientation focused solely on small business networking to a software
company with diversified technology and product portfolios, the expected future
impact of the restructuring actions effected during the fiscal year, the
uncertainty in estimating the magnitude and timing of the revenue contribution
from products expected to be released over the next several quarters and the
expiration dates of state net operating loss carryforwards. The 21% effective
tax rate benefit for fiscal 1996 is the result of the non-deductibility for
federal income tax purposes of approximately $9.2 million of in-process
technology written off for financial reporting purposes in connection with the
Triton acquisition, which was effected as a purchase of stock. Other factors
causing the effective tax rates to differ from the expected tax expense
(benefit) calculated using the U.S. federal corporate income tax rate for those
years are the inclusion of state and foreign income taxes partially offset by
tax benefits from the Company's FSC and tax-exempt interest income. The income
tax receivable as of June 30, 1997 is the result of carrying back all or a
portion of the Federal net operating losses incurred in fiscal 1997 for a refund
of income taxes paid in prior years. No income tax benefit was recognized for
the fiscal year ended June 30, 1998, as the Company has fully utilized all
federal net operating loss carryback potential.
Extraordinary Loss from Early Extinguishment of Debt
In October 1997, the Company incurred a $109,000 prepayment penalty upon
the sale of its former 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 facility 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 fiscal
year ended June 30, 1998.
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.
21
In recognition of the Year 2000 issue, the Company in September 1997,
began a comprehensive review of all 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 will divide its Year 2000 review into two phases. The first
will address the Company's core information technology systems and products
currently sold by the Company. The second phase will address non-core
information technology systems, non-information technology systems, and
products, components and equipment supplied to the Company from third parties.
In addition, the Company will implement required Year 2000 upgrades and
replacements during the second phase. The Company is currently in the first
phase of its review. The Company believes it will complete the second phase by
March 1999.
In the first phase of its Year 2000 review, the Company tested all
software products currently manufactured and shipped by the Company, and
determined that such products are Year 2000 compliant. Certain of the Company's
products that were discontinued prior to fiscal 1998 are not Year 2000
compliant. The Company has notified its distributors, resellers and end users of
this 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 likely adequate to cover such returns and replacements. The Company
also made inquiries of various third parties supplying the Company with computer
hardware and software products and components currently sold by the Company, and
received assurances that such products and components are Year 2000 compliant.
With respect to core information technology, the Company made inquires of third
parties supplying computer hardware and software operating systems to the
Company, and received assurances that, except as discussed below, such hardware
and software systems are 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 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 expects to select
replacement systems by September 1998, and to fully incorporate such systems by
March 1999. The Company expects to expend approximately $300,000 to $500,000 to
replace, implement and migrate to new systems, none of which expenditures have
been made to date. These costs will be capitalized over the life of the
purchased software packages. The Company does not expect the amounts to be
expensed over the life of the software packages 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.
The Company has not developed a "worst case" scenario with respect to
Year 2000 issues, but instead has focused its resources on identifying material,
remediable problems and reducing uncertainties generally, through the Year 2000
review described above.
At this time, he 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 would 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.
22
Liquidity and Capital Resources
The Company had cash of $18.5 million at June 30, 1998, compared to
$14.7 million at June 30, 1997, and working capital of $17.5 million at June 30,
1998 compared to $17.7 million at June 30, 1997. The increase in cash and cash
equivalents during fiscal year 1998 of $3.8 million is principally the result of
the receipt of a $4.2 million federal income tax refund in December 1997 and the
receipt of approximately $1.5 million in proceeds from the sale of its Tucson,
Arizona headquarters and associated furniture and equipment, partially offset by
mortgage payments and severance payments as a result of the Company's
restructuring actions effected during the quarters ended June 30, 1997 and June
30, 1998. The decrease in working capital of $.2 million during fiscal year 1998
was principally the result of decreases in trade accounts receivable balances of
$2.2 million and inventories of $.9 million. The decreases in trade accounts
receivable and inventories is principally the result of the decline in net sales
experienced during the fiscal year. Accrued restructuring costs of approximately
$1.5 million at June 30, 1998 are comprised of unpaid involuntary termination
benefits and other expected but unpaid costs in connection with the
restructuring actions (see discussion above under the caption, "Restructuring
Costs"). These costs will largely, if not completely, be paid during the first
two quarters of the fiscal year ended June 30, 1999. Management anticipates that
the amount of cash yet to be paid in connection with the restructuring actions
will not exceed $1.3 million and will be paid from cash flows from operations.
Management believes that the future reduction in operating expenses resulting
from the restructuring actions will bring those expenses in line with the level
and mix of expected future operating revenues.
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 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.
Future Results
On April 23, 1998, the Company announced its intention to focus the
majority of its resources on its computer telephony products and consolidate its
remote computing products group into its communications software products group
located in Tucson, Arizona and Boynton Beach, Florida. The Company will make
additional significant investments in sales, marketing and development in order
to build awareness, market and channels for its computer telephony products.
The Company is currently increasing its investments and expenditures in
sales, marketing and development of computer telephony products including
TeleVantage. There can be no assurance that the Company will be able to develop,
market and sell such products successfully or at particular levels or within
particular time-frames. Accordingly, the Company could experience a slow
increase in computer telephony revenues as it attempts to build a distribution
channel and reseller programs that may build market awareness for computer
telephony products. A slow increase in the Company's computer telephony
revenues, particularly if combined with future revenue declines from the
Company's networking and communications software products, could cause the
Company to experience losses.
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 or notes receivable; risks associated with
foreign operations (especially those in Japan and other Asian countries); 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.
Risk Factors
General
Competition. The 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. 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.
23
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
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 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.
24
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 could be materially 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.