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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, 1999
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 $88,587,024 based on the closing sale price as
reported by The Nasdaq Stock Market on September 23, 1999.
The number of shares outstanding of each of the registrant's classes of common
stock, as of September 23, 1999 was 14,841,805 shares of Common Stock, $.01 par
value.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Proxy Statement dated September 25, 1999, for the Annual
Meeting of Shareholders to be held on November 2, 1999, are incorporated by
reference into Part III.
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TABLE OF CONTENTS
Page
----
PART I
Item 1. Business.......................................................2
Item 2. Properties....................................................13
Item 3. Legal Proceedings.............................................13
Item 4. Submission of Matters to a Vote of Security Holders...........13
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
Item 7(a). Quanitative and Qualitative Disclosures about Market Risk.....30
Item 8. Financial Statements and Supplementary Data...................31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................51
PART III......................................................................51
Item 10. Directors and Executive Officers of the Registrant............51
Item 11. Executive Compensation........................................51
Item 12. Security Ownership of Certain Beneficial Owners
and Management..............................................51
Item 13. Certain Relationships and Related Transactions................51
PART IV.......................................................................52
Item 14. Exhibits and Reports on Form 8-K..............................52
SIGNATURES....................................................................54
1
PART I
ITEM 1. BUSINESS.
INTRODUCTION
Artisoft, Inc. ("Artisoft", the "Company" or the "Registrant") is a
computer software company, which develops, markets and sells computer telephony
products, communications software products and associated 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
FISCAL 1999
Entering fiscal year 1999, Artisoft had two key objectives: to continue and
accelerate the development of its Computer Telephony Product Group business and
to maximize the profitability of its Communications Software Group product line.
The Company met its first objective by focusing its resources on the
Company's TeleVantage product. TeleVantage is a complete software-based
telephone system that is fully integrated with a local area network ("LAN"). The
system provides PBX-like call control functionality and other ancillary
features. The Company expanded certain computer telephony marketing and
advertising programs, hired 30 new sales, support and development personnel and
expanded the Company's TeleVantage original equipment manufacturer ("OEM"),
international and field sales teams. The net revenues from the Computer
Telephony Product Group increased 48% to $7.1 million from $4.8 million in
fiscal 1998. The growth in the computer telephony revenues accelerated late in
the year, ending with a 96% increase in computer telephony revenues between the
fourth quarter of fiscal 1998 and the fourth quarter of fiscal 1999. The growth
in Computer Telephony Product Group revenues was principally attributable to
increased sales of TeleVantage.
TeleVantage received numerous "Best Of" awards including being named the #1
Product of the Year by CT Magazine in December 1998. The Company also added over
400 value added resellers (VAR's), national interconnects, international
distributors and OEM/licensing partners. Artisoft announced strategic
partnerships with WinStar, Affinity, ICG and Olivetti for sales and marketing of
TeleVantage.
The Company met its second objective of substantially improving the
profitability of the Communications Software Group by continuing to implement
expense reductions relative to the Communications Software Group and by
developing its portfolio of communications and networking products. The
Communications Software Group achieved operating profitability, with an
operating profit exceeding $4.2 million. By completing restructuring actions
commenced in 1997 and 1998, as described more fully below, Communications
Software Group expenses decreased by 48% to $7.3 million from $14.2 million in
fiscal 1998. While this expense reduction was implemented, net revenues from the
Communications Software Group decreased by only 25% to $15.2 million in fiscal
1999 from $20.0 million in fiscal 1998. Most of the decrease is attributable to
lower sales of the Company's LANtastic product line.
In addition to bringing the Communications Software Group to profitability
in fiscal 1999, the Company added to its Communications Software Group product
portfolio with new software products: BizFax, a fax sharing software solution,
and WinBeep, a paging software utility.
In fiscal year 2000, the company intends to further pursue the
reorganization and improvement of its Computer Telephony Products Group and
Communications Software Product Group. The Company may explore a variety of
strategic alternatives, including a spin-off of a product group, marketing or
other strategic alliances, or other corporate or business transactions. There
can be no assurance, however, that the Company will decide to pursue any such
alternative or that any such alternative will be successfully completed. Certain
risks associated with such transactions are discussed under "Risk Factors --
General -- Acquisitions and Divestitures" included in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
2
FISCAL 1998
In fiscal 1998, Artisoft implemented a major business restructuring plan
involving three key elements. First, the Company reduced 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 increased revenues
of 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 transforming the Company into a computer telephony company.
Finally, the Company introduced TeleVantage, the Company's software-based phone
system, in March 1998.
During fiscal 1998, the Company's revenues declined as the Company's
LANtastic 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, the Company reduced its operating
expenses. The Company's computer telephony and other communications and
networking product revenues partially offset the decreasing revenues from
LANtastic products. The Company also introduced several new products most
notably TeleVantage, as part of the strategy to diversify its product portfolio.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations" for further discussions of new product introductions.
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 to $20.2
million in fiscal 1998 from $38.9 million in fiscal 1997.
In fiscal 1998, the Company took steps to reorient its business development
strategy towards computer telephony products and released TeleVantage, which
received numerous industry awards. In June 1998, the Company moved its principal
executive offices to its computer telephony facilities in Cambridge,
Massachusetts. In May 1998, the Company combined its communications software and
remote computing groups, resulting in the closure of the Company's Iselin, New
Jersey office and the transfer of certain functions to the Company's Tucson,
Arizona facilities.
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
Computer Telephony Group, which is located in Cambridge, Massachusetts, is
responsible for the Company's computer telephony products, including TeleVantage
and Visual Voice. The Communications 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 communication
software products, including CoSession.
The Company currently holds registered trademarks on its LANtastic, Visual Voice
and BizFax products in the United States Trademark and Patent Office. In
addition, the Company currently has trademark applications pending approval on
its i.Share, ModemShare, XtraMail, CoSession Remote and TeleVantage products.
Following is a description of the products and services offered by each group.
3
COMPUTER TELEPHONY GROUP. The Computer Telephony ("CT") Group focuses on
two objectives: first, to deliver CT software applications to small and medium
sized businesses and corporate branch offices or departments; and second, to
increase its leadership in the CT software development toolkit market.
TeleVantage is a complete software 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.
In December 1998, Artisoft released TeleVantage 2.1 which, in addition to
the features offered in TeleVantage 2.0, offers: T1 support, DID (direct inward
dial), enhanced queues, personal information manager (PIM) integration, IVR
(inter-active voice response) toolkit support and telephony application
programming interface (TAPI) service.
Artisoft's Visual Voice is the industry's leading CT development toolkit.
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.
In December 1998, Artisoft released Visual Voice Pro 5.0, which, in
addition to the features offered in Visual Voice Pro 4.1, offers: voice over the
internet (VoIP) capabilities, multi-chassis call bridge/conferencing support,
enhanced network support and international telephone line support.
COMMUNICATIONS SOFTWARE GROUP. The Communications Software Group offers a
range of software products for the communication and networking needs of small
businesses and workgroups. LANtastic is a peer to peer local area network (LAN)
product designed to be powerful yet easy-to-use and able to support a variety of
PC operating systems. Other Communications Software Group products include
ModemShare 32, i.Share 3.0, CoSession Remote 32, BizFax and WinBeep.
In June 1998, Artisoft released LANtastic 8.0 which 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, printers, applications,
CD-ROMs, corporate resources (such as e-mail) and allows network administrators
to manage and control multiple operating systems, protocols, applications and
desktops.
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,
internet e-mail software and user access control (i.Watch).
Artisoft's BizFax is a client server network faxing application which
enables users to send faxes from any Windows application and includes such
features as broadcast faxing, the ability to track call costs and schedule fax
transmission.
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.
4
Artisoft's WinBeep and WinBeep 32 enables users to send messages from their
PC's to alphanumeric pagers or mobile PC's with pager cards. WinBeep 32 enables
users to send full-text messages to pagers from any Windows 95/NT computer.
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 Condition
and Results of Operations" including the section entitled "Risk Factors" for
further discussion of new product introductions.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company's products are considered part of two industry groups: computer
telephony software and communications software. Information regarding these two
industry segments is contained in Note 1, "Summary of Significant Accounting
Policies" included in "Notes to Consolidated Financial Statements" included in
"Item 8. Financial Statements and Supplementary Data." Information regarding
domestic and international net sales and international assets are contained in
Note 13, "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, product display boxes and third-party
product licenses. These 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 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. 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 it
products.
The Company's TeleVantage product is designed to be operated on PCs of
multiple manufacturers in conjunction with Intel (Dialogic) voice processing
boards. The Company purchases hardware components from certain telephony
hardware vendors, principally Intel (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 Intel (Dialogic) Corporation.
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.
5
MARKETING, SALES AND DISTRIBUTION
The Company's principal 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 objectives include frequent
participation in industry trade shows and seminars, direct mail, advertising in
major trade publications, executive participation in press briefings and
industry seminars, sponsorship of seminars by the Company and on-going
communication with the Company's end users. To train and support resellers and
distributors, the Company provides mailings of product and technical updates,
seminar material and corporate presentations. The Company's Computer Telephony
Products Group offers a TeleVantage Partner Program which provides enhanced
training, services and support to its Computer Telephony resellers and
distributors. 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 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 exposed to its major distributors for price protection for
list price reductions by the Company on its products held in such distributors'
inventories. 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 is 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
6
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 an 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 Company's sales force specializes in educating corporate
end users, original equipment manufacturers and independent software vendors
about the Company's products. The Company's sales organization pursues prospects
in their geographic areas, and the main focus is on OEM customers. 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.
Although not a major focus 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.
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 $5.4 million, $7.1
million and $9.3 million in fiscal 1999, 1998 and 1997, respectively. The
Company has not engaged in customer-sponsored research activities, but may do so
in the future.
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 sessions 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 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 manufacturers.
The Company works with its distributors and mail order partners to ensure
that an adequate supply of TeleVantage, LANtastic, ModemShare, i.Share,
CoSession Remote and other communications software products is available to its
7
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 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. The Company believes 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 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 software based phone system
principally competes with proprietary PBXs and Key System Units offered by
companies such as Nortel, Cisco Systems, and Lucent Technologies. 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 software based phone systems. In addition,
TeleVantage competes with other software based phone systems provided by
InterActive Intelligence, Altigen, NetPhone, Picazo and Com2001. Certain of the
Company's competitors have entered into non-exclusive marketing and other
partnerships with certain PC manufacturers, software companies or telephony
hardware providers. While the company believes that its TeleVantage software
offers greater functionality and ease of use than these products, these
competitors may 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.
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 and Microsoft Windows NT network server. The Company believes that
the viability of Microsoft's products has and will continue to negatively impact
the Company's Communications Software Group net sales and income from continuing
operations. 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
8
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.
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 extremely likely that the Company's NOS business will
continue to decline in fiscal year 2000. 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.
The majority of the Company's sales of its remote control software,
CoSession Remote and ConfigSafe, are to a single customer, International
Business Machines (IBM). Consequently, the Company's ability to generate
revenues from these products is dependent upon the continuation of its OEM
relationship with IBM.
Artisoft's system recovery utility, ConfigSafe, is licensed from a third
party. This licensing arrangement is scheduled to terminate in the second
quarter of fiscal 2000. The Company plans to introduce an alternative system
recovery product obtained from other sources. However, there can be no assurance
that the Company will be able to obtain such an alternative product or to do so
on a timely basis. The failure to do so may have an adverse impact on the
Company's communications software product revenues in fiscal 2000.
INTERNATIONAL BUSINESS
The Company markets and sells its products in international as well as
domestic markets. In fiscal 1999, 1998 and 1997, international sales accounted
for 19%, 25% and 27%, respectively, of the Company's net sales. Less than 1% of
the Company's assets were deployed to support the Company's international
business at the end of fiscal 1999 and 1998. The decline in international net
sales during the fiscal years 1999 and 1998 was principally the result of lower
demand for the Company's Communications Software Group products (especially in
Europe and Latin America). The closure of the Company's international sales
offices in fiscal years 1998 and 1997 also contributed to the decline. Increases
in international sales of the Company's computer telephony products partially
offset the aforementioned decline.
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.
During fiscal 1999, the Company established several international
distributor relationships for its Computer Telephony products, and therefore,
computer telephony international sales should increase in fiscal 2000.
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.
9
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 1999, one customer (IBM) accounted for 15% of
the Company's annual net sales. In fiscal 1998, one customer (IBM) accounted for
10% of the Company's annual net sales. No customers accounted for more than 10%
of the Company's net sales in fiscal 1997. At June 30, 1999, IBM and Ingram
Micro, Inc. accounted for approximately 14% and 10%, respectively, of the
Company's outstanding trade accounts receivable. At June 30, 1998, Ingram Micro,
Inc. and IBM accounted for approximately 16% and 13%, respectively, of the
Company's outstanding trade accounts receivable. The loss of any of the major
distributors or OEM's or their failure to pay the Company for products purchased
from the Company could have an 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, 1999 was approximately $47,000, compared with
approximately $59,000 at June 30, 1998.
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.
From time to time, the Company has received and may in the future receive
communications from third parties asserting that the Company's trade names or
that features, content, or trademarks of certain of the Company's products
infringe upon intellectual property rights held by such third parties. As the
number of trademarks, patents, copyrights and other intellectual property rights
in the Company's industry increases, and as the coverage of these patents and
rights and the functionality of products in the market further overlap, the
Company believes that products based on its technology may increasingly become
the subject of infringement claims. Such claims could have an adverse affect on
the Company and may also require the Company to obtain one or more licenses from
third parties. There can be no assurance that the Company would be able to
obtain any such required licenses upon reasonable terms, if at all, and the
failure by the Company to obtain such licenses could have an adverse effect on
its business, results of operations and financial condition. If the Company were
able to obtain such licenses, the licensing costs could materially effect the
Company's future financial results. In addition, the Company licenses technology
on a non-exclusive basis from several companies for inclusion in its products
and anticipates that it will continue to do so in the future. The inability of
the Company to continue to license these technologies or to license other
necessary technologies for inclusion in its products, or substantial increases
in royalty payments under these third party licenses, could have an adverse
effect on its business, results of operations and financial condition.
10
Litigation or threatened litigation in the software development industry
has increasingly been used as a competitive tactic both by established companies
seeking to protect their existing position in the market and by emerging
companies attempting to gain access to the market. If the Company is required to
defend itself against a claim, whether or not meritorious, the Company could be
forced to incur substantial expense and diversion of management attention, and
may encounter market confusion and reluctance of customers to purchase the
Company's software products. Such litigation, if determined adversely to the
Company, could have an adverse effect on its business, results of operations and
financial condition.
In the course of its product development efforts, the Company periodically
identifies certain technologies owned by others that either would be useful to
incorporate into its products or are necessary in order to remain competitive in
light of industry trends. In these cases the Company has in the past sought to
obtain licenses of such third-party technologies. The Company expects that it
will continue to find it desirable or necessary to obtain additional technology
licenses from others, but there can be no assurance that any particular license
will be available at all, or on acceptable terms, at any future time. The
royalties paid on future licensing arrangements may materially impact the
Company's operating results.
The Company pays royalties to imagine LAN, Inso Corporation, AT&T
Corporation, Digital Equipment Corporation, Learnout & Hauspie Speech Products
and International Business Machines 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 have an adverse affect on 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, operations or competitive position. Although the Company
does not anticipate any 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, 1999, the Company had 154 full-time employees, including
approximately 69 in sales, marketing and customer support, 48 in engineering and
product development, 19 in operations and 18 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. Certain of these trends and
uncertainties are discussed in detail under "Risk Factors" included in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In addition, various characteristics of the 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 software industry. Significant delays in product development and
11
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
manufacturers, which could have an adverse impact on revenues and earnings.
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
computer telephony and PC remote control products. Many of these companies,
including Lucent Technologies, Cisco Systems, Symantec, Novell, Microsoft 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, Novell and other companies which have
greater resources than the Company. Competition with Microsoft has had a
material adverse affect on the sales of the Company's LANtastic product line.
The Company expects this adverse effect to continue. In addition, the Company's
operating results may be adversely affected in other regards in the future if
Microsoft or other companies include in their operating systems or other
products features which compete directly with the Company's other 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 computer
telephony, 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 8 of Notes to Consolidated
Financial Statements" under "Item 8. Financial Statements and Supplementary
Data."
12
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
Aggregate monthly rental payments for the Company's facilities are
approximately $89,000. 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 proceedings will not have a material adverse effect on its
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning the executive
officers of the Company as of June 30, 1999:
NAME AGE POSITION
---- --- --------
T. Paul Thomas 39 President and Chief Executive Officer
Steven G. Manson 40 Senior Vice President and General Manager-
Computer Telephony Products Group
Christopher H. Brookins 35 Vice President and Chief Technology Officer
Scott S. Moule 33 Vice President and General Manager-
Communications Software Group
Julie M. Ronstadt 37 Vice President, Worldwide Operations and
Administration
Sheldon M. Schenkler 48 Vice President and Chief Financial Officer
Kirk D. Mayes 31 Controller
13
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. In October 1998, Mr. Thomas was named Chief Executive Officer. 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. In
October 1998, Mr. Manson was named Senior 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.
Mr. Brookins joined Artisoft in February 1996 as Vice President of
Development-Computer Telephony Division upon the acquisition of Stylus
Innovation by Artisoft. In June 1999, Mr. Brookins was named Chief Technology
Officer. Prior to joining Artisoft, Mr. Brookins served as Vice President of
Development at Stylus Innovation from March 1993 to February 1996. Mr. Brookins
has also held a senior management position at Easel Corporation.
Mr. Moule joined Artisoft in November 1995. In August 1998, Mr. 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. Before joining
Artisoft, Mr. Moule provided consulting and engineering support to Triton
Technologies from 1992-1995. Mr. Moule has also held other management positions
at EDS and Southern Bell.
Ms. Ronstadt joined Artisoft in July 1994 as Senior Planner. 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 management positions.
Mr. Schenkler joined Artisoft as Vice President and Chief Financial Officer
in September 1998. 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.
Mr. Mayes joined Artisoft in November 1994. In April 1996, Mr. Mayes was
named Assistant Corporate Controller and in June 1997 Corporate Controller. Mr.
Mayes joined Artisoft from Arthur Andersen LLP where he had worked from 1991 to
1994.
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. 1999 Annual Report
to Shareholders, and are incorporated herein by reference. On June 30, 1999, the
Company's Common Stock was held by approximately 332 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,
----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
STATEMENTS OF OPERATIONS DATA
Net sales $22,304 $24,793 $ 33,409 $ 60,972 $84,243
Operating loss (2,586) (4,375) (29,124) (24,838) (9,832)
Net loss (1,762) (2,913) (28,425) (18,328) (5,848)
Net loss per common share-basic and diluted $ (.12) $ (.20) $ (1.96) $ (1.27) $ (.41)
Weighted average common shares outstanding 14,720 14,554 14,529 14,463 14,315
AS OF JUNE 30,
---------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
BALANCE SHEET DATA
Working capital $16,046 $17,538 $ 17,747 $37,917 $56,324
Total assets 22,558 25,508 35,371 57,712 77,807
Long-term obligations, net of
current portion -- 289 714 96 --
Shareholders' equity 18,574 19,951 22,604 50,981 68,245
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
During fiscal 1999 the Company continued to focus the majority of its
resources on its Computer Telephony Products Group. The Company increased its
investment by strengthening its sales, marketing and support infrastructure for
its telephony products (especially TeleVantage). The Company also increased its
telephony research and development personnel headcount in advance of the release
of future versions of its flagship telephony product, TeleVantage. In addition,
the Company also continued to build upon and invest in its telephony
distribution and value added reseller network.
During fiscal 1999, the Company's Communications Software Group product
lines experienced continued competitive pressures from major software
manufacturers. These market conditions had a 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 significantly less than in
recent years, the Company's overall net sales in fiscal 1999 declined from
fiscal 1998 as a result of these competitive pressures. Revenues from the
Company's Computer Telephony Group (Visual Voice and TeleVantage) product lines
partially offset the LANtastic NOS product revenue declines.
In response to the reduced demand for its LANtastic NOS product line, the
Company dedicated fewer of its internal resources toward the sale, support,
marketing and development of the LANtastic NOS product line than in recent
years. The Communications Software Group restructuring actions effected during
fiscal year 1998 brought the Company's Communications Software Group cost
structure in line with fiscal 1999 revenues resulting in significantly improved
operating results as compared to fiscal 1997 and 1998. These restructuring
actions included the closure of the Company's Iselin, New Jersey office, the
closure of the Company's United Kingdom sales and support office and the
termination of 23 Communications Software Group employees.
In December 1998, Artisoft released TeleVantage 2.1, which is an upgrade to
its original TeleVantage product released in March 1998. TeleVantage is an
intelligent software 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 March 1999 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. TeleVantage was also awarded Best of CTI Expo 1999 in Washington, D.C.
TeleVantage has received numerous other editors choice awards since its release
in March 1998.
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, 1999, the Company's computer
telephony products included TeleVantage 2.1, Visual Voice Pro 5.0, Visual Voice
for TAPI 2.1, Visual Fax 2.1, Visual Dialogic Fax 2.1, Visual Text-to-Speech
2.2, Visual Voice Recognition 2.1 and Visual Advanced Switching 2.1.
In August 1998, Artisoft released TeleVantage 2.0 which, in addition to the
features offered in TeleVantage 1.0, offered: 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.
16
In December 1998, Artisoft released TeleVantage 2.1 which in addition to
the features offered in TeleVantage 2.0, offers: T1 support, direct inward dial
(DID), enhanced queues, personal information manager (PIM) integration,
inter-active voice response (IVR) toolkit support and provides telephony
application programming interface (TAPI) service.
In December 1998, Artisoft released Visual Voice Pro 5.0 which in addition
to the features offered in Visual Voice Pro 4.1, offers: voice over the internet
(VoIP) capabilities, multi-chassis call bridge/conferencing support, enhanced
network support and international telephone line support.
In March 1999, Artisoft released Visual Dialogic Fax 2.1 which adds
advanced fax capability to Visual Voice Pro 5.0, Visual Text-to-Speech 2.2 which
adds speech synthesis to Visual Voice Pro 5.0, Visual Voice Recognition 2.1
which adds speech recognition capability to Visual Voice Pro 5.0 and Visual
Advanced Switching 2.1 which allows users of Visual Voice Pro 5.0 to build
sophisticated switching applications.
COMMUNICATIONS SOFTWARE PRODUCTS. As of June 30, 1999, the Company's
communications software products included LANtastic 8.0, POSConnect 1.0, i.Share
3.0, ModemShare 32, XtraMail 1.2, CoSession Remote 32 8.11, BizFax 1.1, i.Share
KoJack, ExtremeMail 1.2, WinBeep, WinBeep 32, Alfie 3.08 and Windows Messaging
for Microsoft Exchange Server (WMX).
In August 1998, Artisoft released i.Share 3.0 providing national language
support for French, Italian, German and Spanish.
In October 1998, Artisoft released POSConnect 1.0, a network for point-of
sale systems, which allows users to build networks connecting Windows NT 4.0,
Windows 95/98, Windows 3.x and DOS computers. POSConnect has remote booting
capabilities that start up the diskless workstations that control cash
registers, terminals and other devices in the point of sale environment.
In December 1998, Artisoft released BizFax 1.0, a client server network
faxing application that allows users to send faxes from any Windows application
and includes such features as broadcast faxing, the ability to track call costs
and scheduled fax transmission.
In March 1999, Artisoft released i.Share KoJack, is a home phone line
network starter kit that allows home users to network two PC's through existing
phone wires and share an internet connection. The i.Share KoJack Starter Kit
combines a two -user version of Artisoft's i.Share Internet sharing software
with the hardware needed to link two PC's.
In April 1999, Artisoft acquired WinBeep, WinBeep 32, Alfie 3.08 and
Windows Messaging for Microsoft Exchange Server (WMX) from Integra Technologies
(a wholly owned subsidiary of IKON Office Solutions). WinBeep allows users to
send messages from their PC's to alphanumeric pagers or mobile PC's with pager
cards. WinBeep 32 allows users to send full-text messages to pagers from any
Windows 95/NT computer. Windows Messaging for Microsoft Exchange Server (WMX)
allows users to send e-mail to any paging device.
In June 1999, Artisoft released an updated version of BizFax and
ExtremeMail 1.2. ExtremeMail 1.2 is a New Zealand version of XtraMail 1.2.
NET SALES
Net sales for the Company's Computer Telephony Product Group increased 48%
to $7.1 million for the fiscal year ended June 30, 1999 from $4.8 million for
fiscal 1998. The increase in net sales was principally due to increased sales of
the Computer Telephony Product Group's TeleVantage and Visual Voice products.
Net sales for the Company's Computer Telephony Group were materially unchanged
between fiscal 1998 and fiscal 1997.
17
Net sales for the Company's Communications Software Product Group decreased
24% to $15.2 million for the fiscal year ended June 30, 1999 from $20.0 million
for fiscal 1998. The decrease in net sales was principally the result of a
continued decline in the sales volume of the Communications Software Group's
LANtastic NOS products. Net sales for the Company's Communications Software
Group decreased 30% to $20.0 million for the fiscal year ended June 30, 1998
from $28.7 million for fiscal 1997. The decrease in net sales was principally
the result of the aforementioned decline in the sales of LANtastic.
The Company's overall net sales decreased 10% to $22.3 million for the
fiscal year ended June 30, 1999 from $24.8 million for fiscal 1998 principally
due to a continued decline in the sales volume of the Company's LANtastic NOS
products. Management believes that the principal reason for the decline was the
impact of Microsoft's Windows 95/98 and Windows NT operating systems on the
small business networking market.
The Company acquired the WinBeep product line from IKON Office Solutions in
April 1999. During fiscal 1999, WinBeep did not make a material contribution to
consolidated net sales. For the fiscal years ended June 30, 1999 and 1998, net
sales of the communications software products (excluding LANtastic) comprised
approximately 36% and 41%, respectively, of consolidated net sales.
The Company's net sales decreased 26% to $24.8 million for fiscal 1998 from
$33.4 million for fiscal 1997. The overall decrease in net sales was principally
due to an approximate 33% decline in sales of the Company's LANtastic NOS
products. 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 19%, 25% and 27% of net sales
for fiscal 1999, 1998 and 1997, respectively. International sales decreased 32%
to $4.2 million in fiscal 1999 from $6.2 million in fiscal 1998 which was a
decrease of 30% from $8.9 million in fiscal 1997. A majority of the Company's
international sales during fiscal 1999, 1998 and 1997 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.
GROSS PROFIT
The Company's gross profit was $15.4 million, $18.3 million and $21.1
million in fiscal 1999, 1998 and 1997, respectively, or 69%, 74% and 63% of net
sales, respectively. The decrease in gross profit percentage for fiscal 1999 was
due to a shift in product mix. Specifically, sales of the Company's lower margin
Visual Voice hardware products and sales of the Company's lower margin
TeleVantage Not For Resale kits (NFR's) associated with the Company's increasing
expenditures on in its TeleVantage reseller channel increased as a percentage of
total net sales. Also contributing to the decline in gross profit percentage was
increases in royalty expenses on ConfigSafe Support Edition sales. The increase
in the gross profit percentage for fiscal 1998 as compared to fiscal 1997 is
principally the result of higher sales levels of the Company's higher margin
CoSession, i.Share and ModemShare products. The decrease in gross profit dollars
was the result of progressively lower sales in each of fiscal 1999, 1998 and
1997. Gross profit may fluctuate on a quarterly basis because of product mix,
pricing actions and changes in sales and inventory allowances.
SALES AND MARKETING
Sales and marketing expenses were $8.8 million, $10.0 million and $23.4
million for fiscal 1999, 1998 and 1997, respectively, representing 39%, 41% and
70% of net sales, respectively. The decrease in sales and marketing expenses as
18
both a percentage of net sales and in aggregate dollars for fiscal 1999 and 1998
is principally due to a significant decrease in the Company's Communications
Software Group sales and marketing staffing levels. These decreases were offset
somewhat by increased expenditures on the sales and marketing infrastructure in
the Company's Computer Telephony Products Group.
PRODUCT DEVELOPMENT
Product development expenses were $5.4 million, $7.1 million and $9.3
million for fiscal 1999, 1998 and 1997, respectively, representing 24%, 28% and
28% of net sales, respectively. The decrease in aggregate product development
expenses for fiscal 1999 and 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 addition of new development
personnel to the Computer Telephony Group in fiscal 1999 was 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 $3.9 million, $3.1 million and
$6.3 million for fiscal 1999, 1998 and 1997 respectively, representing 17%, 13%
and 19% of net sales, respectively. The increase in both the aggregate general
and administrative costs and the increase in general and administrative costs as
a percentage of net sales in fiscal 1999 compared to fiscal 1998 is principally
the result of additional occupancy costs incurred subsequent to the expansion of
the Company's Cambridge, Massachusetts-based headquarters, the addition of
certain executive administrative personnel and increased depreciation expense on
the Company's fixed assets in its Cambridge, Massachusetts headquarters. The
decrease in general and administrative costs in both aggregate dollars and as a
percentage of net sales in fiscal 1998 compared to fiscal 1997 is due to 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.
WRITE OFF OF ABANDONED TECHNOLOGY
Subsequent to the acquisition of Stylus Innovation in fiscal year 1996, the
Company recorded a charge to operations during the fourth quarter of fiscal 1998
totaling $393,000. 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 fiscal 1999 are comprised solely of a reversal of approximately
$77,000 in excess restructuring costs accrued at June 30, 1998. The Company
completed the restructuring of its Communications Software Group during fiscal
1999 and identified this excess of the $2.0 million charge recorded in fiscal
1998. The Company does not anticipate any future need for these restructuring
accruals.
Restructuring costs in the accompanying consolidated statement of
operations for fiscal 1998 include the costs associated with the involuntary
employee termination benefits of certain Communications 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.
19
The June 1998 restructuring actions were made in response to 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 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 in Iselin, New Jersey. The
Company also closed 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 $900,000 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 fiscal 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.
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 fiscal 1997 restructuring actions were made in response to
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 fiscal 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.
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)
Other income (expense), net, was $.8 million, $1.7 million and $.7 million
for fiscal 1999, 1998 and 1997, respectively. Fiscal 1998 includes the
recognition of a $1.3 million gain on the sale of the Company's Tucson, Arizona
headquarters in October 1997.
INCOME TAX EXPENSE
The effective tax rates for the Company were 0%, 6%, and 0% for fiscal
1999, 1998 and 1997, respectively. For fiscal 1998, $156,000 of income tax
expense was recorded related to certain income taxes payable by the Company's
former Dutch subsidiary and branch. For fiscal 1997, essentially no 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
the 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. No income tax benefit was recognized for fiscal years 1998 or
1999, as the Company has fully utilized all federal net operating loss carryback
potential.
20
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, non-information technology systems,
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 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. This review includes testing
and analysis of Company products and inquiries of third parties supplying
information technology and non-information technology systems, computer hardware
and software products and components and other equipment to the Company.
The Company has divided its Year 2000 review into three phases. The first
addresses the Company's core information technology systems and products
currently sold by the Company. The second phase addresses non-core information
technology systems and non-information technology systems. In addition, the
Company will implement required Year 2000 upgrades and replacements during the
second phase. The third phase addresses third party suppliers of products,
supplies and services necessary to the Company's ongoing operations. The Company
completed the first phase of its review in September 1998. The Company completed
to a significant degree the second and third phases of its review in June 1999.
The Company anticipates that all of its Year 2000 remediation efforts will be
completed by September 30, 1999.
In the first phase of its Year 2000 review, the Company tested software
products currently manufactured and shipped by the Company and determined that
most products are Year 2000 compliant. Certain of the Company's products that
were discontinued prior to fiscal 1998 are not Year 2000 compliant. In cases
where such non-Y2K compliant products are still sold on a replacement basis
only, the Company requires the customer to sign a release of liability for all
damages potentially caused by such non-Y2K compliant products. The Company
maintains a section on its web site that identifies all products the Company
sells and ships and lists their Y2K status. The Company also responds via direct
mail, e-mail or telephone, as appropriate, to customer and supplier requests for
information on Y2K compliance of its products. The Company has notified its
distributors, resellers and end users of cases of non-compliance where possible
and has authorized returns and replacement of these products where possible. The
Company believes the cost of these returns or product replacements to be
immaterial and that the Company's reserves are adequate to cover such returns
and replacements. The Company also has made inquiries of third parties supplying
the Company with computer hardware and software products and components
currently sold by the Company and is in the process of receiving responses to
these inquires. The Company has not received notice of any material problems.
The Company has followed up with third party suppliers and vendors who did not
respond to the Company's initial inquiries via telephone, mail or e-mail as
appropriate. The Company will review supplier/vendor replacement options as
necessary. With respect to core information technology, the Company has made
inquires of third parties supplying computer hardware and software operating
systems to the Company and has received assurances that, except as discussed
below, such hardware and software systems are or will be Year 2000 compliant.
21
As a result of its review, the Company determined that certain of its
internal financial software systems were inadequate for the Company's future
business needs and needed to be replaced because of various considerations,
including Year 2000 non-compliance. In certain cases the timing of replacement
systems was 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 successfully completed its migration to this new
software package in May 1999. The Company has spent less than $300,000 to
implement and migrate to this new software package. These costs will be
capitalized over the life of the purchased software package. The Company does
not expect the amounts to be expensed over the life of the software package to
have a material effect on its financial position or results of operations. In
addition to the aforementioned software implementation and migration costs the
Company has redirected certain personnel to handle Year 2000 remediation
efforts. The total cost to the Company for all Year 2000 remediation efforts as
of June 30, 1999 was approximately $.5 million. The Company anticipates that its
total Year 2000 remediation costs will not exceed $.6 million.
The Company has also identified certain other internal sales, marketing and
support management software packages that were not fully Year 2000 compliant.
The Company has completed the evaluation of these internal systems and has
completed the necessary programming to ensure Year 2000 compliancy.
The Company has developed certain Year 2000 contingency plans. In addition
to the review and remedial actions described above the Company intends to take
the following steps: First, the Company will set up a Year 2000 task force
consisting of programmers, Information Systems and Technology personnel and key
developers who will remain `on call' between December 25, 1999 and January 10,
2000 to resolve any Year 2000 problems. Second, the Company is in the process of
identifying key alternative suppliers in the event its primary suppliers
experience Year 2000 problems which interrupt their ability to supply key raw
materials or services to the Company. The Company will contact each of these
alternative suppliers in advance and record all pertinent information to
facilitate a smooth transition should it be warranted. Finally, the Company will
increase its inventories on hand for certain key raw materials to insure against
potential shortages caused by third party Year 2000 problems. The Company
maintains and deploys contingency plans designed to address various other
potential business interruptions. These plans may also be applicable to address
the interruption of support provided by third parties resulting from their
failure to be Year 2000 ready.
If the Company or the third parties with which it has relationships were to
cease or not successfully complete its or their Year 2000 remediation efforts,
the Company could encounter disruptions to its business that could have a
material adverse effect on its business, financial position and results of
operations. The Company could also be materially and adversely impacted by
widespread economic or financial market disruption.
FUTURE RESULTS
The Company is currently and will continue to focus a substantial majority
of its business resources on its computer telephony products. Concurrent with
the expanded investment in computer telephony products, the Company has
substantially reduced its expenditures on its communications software products.
It is unlikely that, with the reduced sales, marketing and development
expenditures on its communications software products, revenue levels for these
products will continue at their current levels in the future.
The Company intends to continue to increase its investments and
expenditures in sales, marketing and development of computer telephony products
(especially TeleVantage). There can be no assurance that the Company will be
able to market or sell such products successfully or at particular levels within
particular time-frames. Accordingly, the Company could experience a slower than
anticipated increase in computer telephony revenues as it attempts to build a
distribution and reseller network that may build market awareness for computer
22
telephony products. A slow increase in the Company's computer telephony
revenues, particularly if combined with increased expenditures on its computer
telephony product development and marketing and declining communications
software product revenues, may cause the Company to experience substantially
higher operating losses in the future.
The Company's future results of operations involve a number of risks and
uncertainties. Among the factors that could cause future results to differ
materially from historical results are the following: business conditions and
the general economy; competitive pressures, acceptance of new products and price
pressures; availability of third party compatible products at reasonable prices;
risk of nonpayment of accounts receivable; risk of product line or inventory
obsolescence due to shifts in technologies or market demand; timing of software
introductions; and litigation. These and other risk factors are outlined below.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $16.1 million at June 30, 1999
compared to $18.5 million at June 30, 1998 and working capital of $16.0 million
at June 30, 1999 compared to $17.5 million at June 30, 1998. The decrease in
cash and cash equivalents of $2.4 million was the result of the following
factors: employee termination benefit payments to certain Communications
Software Group employees and payments associated with the closure of the
Company's United Kingdom sales and support office, increased development, sales
force expansion and marketing investments in the Company's Computer Telephony
Products Group and increased research and development personnel costs in the
Company's Computer Telephony Products Group. The decrease in the Company's
working capital of $1.5 million was primarily the result of the Company's
operating loss and the increased cash expenditures for property and equipment
during fiscal 1999 as compared to fiscal 1998 as well as the net decrease in
accounts receivable balances of $.5 million partially offset by increased
inventory balances at June 30, 1999 as compared to June 30, 1998.
The Company funds its working capital requirements primarily through cash
flows from operations and existing cash balances. While the Company anticipates
that existing cash balances and cash flows from operations will be adequate to
meet the Company's current and expected cash requirements for at least the next
year, additional investments by the Company to acquire new technologies and
products may necessitate that the Company seek additional debt or equity
capital. There can be no assurance that such additional financing or equity
capital will be available when needed or, if available, will be on satisfactory
terms. In order to raise capital, the Company may issue debt or equity
securities and may incur substantial dilution.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise and Related Information"(SFAS No. 131). SFAS No. 131
establishes standards for disclosure about operating segments in annual
financial statements and selected information in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." The new standard
became effective for the Company for the year ended June 30, 1999, and requires
that comparative information from earlier years be restated to conform to the
requirements of this standard.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Form 10-K may contain forward-looking statements that involve risks
and uncertainties, including, but not limited to, the impact of competitive
products and pricing, product demand and market acceptance risks, the presence
of competitors with greater financial resources, product development and
commercialization risks, costs associated with the integration and
administration of acquired operations, capacity and supply constraints or
difficulties, the results of financing efforts, year 2000 issues and other risks
detailed from time to time in the Company's Securities and Exchange Commission
filings.
23
RISK FACTORS
GENERAL
COMPETITION. The communications software and computer telephony industries
are highly competitive and are characterized by rapidly changing technology and
evolving industry standards. The Company competes with other software companies,
many of which have substantially greater financial, technological, production,
sales and marketing and other resources, as well as greater name recognition and
larger customer bases, than the Company. As a result, these competitors may be
able to respond more quickly and effectively to new or emerging technologies and
changes in customer requirements or to devote greater resources to the
development, promotion, sales and support of their products than the Company.
Competition in the software industry is likely to intensify as current
competitors expand their product lines, more features are included in operating
systems (e.g., Windows NT 5.0), new applications are developed, and as new
companies enter the markets or segments in which the Company currently competes.
The software industry is also characterized by a high degree of consolidation
which favors companies with greater resources than those of the Company.
Consequently, the Company expects its products to experience increased
competition which could result in significant price reductions, loss of market
share and lack of acceptance of new products, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's new product introductions can be subject to severe
price and other competitive pressures. While the Company endeavors to introduce
its products to the marketplace in a timely manner there can be no assurances
that due to the greater financial resources of the Company's competitors that
these products will be successful or even accepted. There can be no assurance
that the Company's products will be able to compete successfully with other
products offered presently or in the future by other vendors.
CONNECTIVITY AND DEPENDENCE. The Company's ability to successfully sell
certain of its products is to a significant degree dependent on operating system
connectivity, principally with Microsoft's operating systems. Should the
Company's products become non-compatible with the dominant operating systems
currently in use in the PC industry or should the Company's competitors obtain
advantages in developing compatible products for such dominant operating
systems, the Company's revenues from such products could be materially adversely
impacted. In addition, the Company's revenues could be adversely affected if
software solutions similar to the Company's Communications Software Group
products are bundled with or incorporated into dominant operating systems, as
has occurred and can be expected to occur in the future with respect to the
Company's Communications Software Group products.
NEW INDUSTRY DEVELOPMENT. The Company's principal new computer telephony
product, TeleVantage, competes in the newly emerging software based PBX market.
Software based PBX products operate in conjunction with and are affected by
developments in other related industries. These industries include highly
developed product markets, such as PCs, PC operating systems and servers,
proprietary PBX and related telephone hardware and software products, and
telephone, data and cable transmission systems, as well as new emerging products
and industries, such as internet communications and Internet Protocol ("IP")
telephony. All of these industries and product markets are currently undergoing
rapid changes, market evolution and consolidation. The manner in which these
industries and products evolve, including the engineering- and market-based
decisions that are made regarding the interconnection of the products and
industries, will affect the opportunities and prospects for the Company's
computer telephony products, including Televantage.
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 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.
24
Any product returns and rotations in excess of recorded allowances could result
in a material adverse effect on net sales and operating results. As the Company
introduces more new products, the predictability and timing of sales to end
users and the management of returns to the Company of unsold products by
distributors and volume purchasers becomes more complex and could result in
material fluctuations in quarterly sales and operating results.
FACTORS AFFECTING PRICING. Substantially all of the Company's revenue in
each fiscal quarter results from orders booked in that quarter. A significant
percentage of the Company's bookings and sales to distributors and other volume
purchasers historically have occurred during the last month of the quarter and
are concentrated in the latter half of that month. Orders placed by major
customers are typically based upon customers' recent historical and forecasted
sales levels for Company products and inventory levels of Company products
desired to be maintained by those major customers at the time of the orders.
Moreover, orders may also be based upon financial practices by major customers
designed to increase the return on investment or yield on the sales of the
Company's products to value added resellers 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, could 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.
TECHNOLOGICAL CHANGE. The markets for computer software applications is
characterized by rapid technological change, changing customer needs, frequent
product introductions and evolving industry standards. The introduction of
products incorporating new technologies and the emergence of new industry
standards could render the Company's existing products obsolete and
unmarketable. The Company's future success will depend upon its ability to
develop and introduce new software products (including new releases and
enhancements) on a timely basis that keep pace with technological developments
and emerging industry standards and address the increasingly sophisticated needs
of its customers. There can be no assurance that the Company will be successful
in developing and marketing new products that respond to technological changes
or evolving industry standards, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these new products, or that its new products will
adequately meet the requirements of the marketplace and achieve market
acceptance. If the Company is unable, for technological or other reasons, to
develop and introduce new products in a timely manner in response to changing
market conditions or customer requirements, the Company's business, results of
operations and financial condition could be adversely affected.
POTENTIAL FOR UNDETECTED ERRORS. Software products as complex as those
offered by the Company may contain undetected errors. There can be no assurance
that, despite testing by the Company and by current and potential customers,
errors will not be found in new or existing products after commencement of
commercial shipments, resulting in loss of or delay in market acceptance or the
25
recall of such products, which could have a material adverse effect upon the
Company's business, results of operations and financial condition. The Company
provides customer support for most of its products. The Company will in the
future offer new products. If these products are flawed, or are more difficult
to use than traditional Company products, customer support costs could rise and
customer satisfaction levels could fall.
DUPLICATION OF SOFTWARE. The Company duplicates nearly all of its software
at its Tucson, Arizona facility. The Company believes that its internal
duplication capability is economically advantageous because it eliminates the
profit margin required by outside duplication sources and enables a high degree
of scheduling and other control. This concentration of production does, however,
expose the Company to the risk that production could be disrupted by natural
disaster or other events, such as the presence of a virus in the Company's
duplicators. The Company believes that it could retain outside duplication
alternatives quickly, but there is no assurance that it could do so or, if such
arrangements could be made, that duplication could take place in an economical
or timely manner.
PRE-LOAD SOFTWARE MARKET;CD ROM'S. The Company primarily sells its
communications software in a form that includes a disk or disks and a manual.
Currently, the Company has the capability to produce its products in-house only
on 3 1/2 -inch diskettes. However, with the expansion of the size of most
software programs, CD-ROM has surpassed diskettes as the most prominent medium.
Many of the Company's customers "pre-load" the Company's software onto a hard
disk. These arrangements eliminate the need for a disk and may eliminate the
need for a manual. The pre-load arrangements produce smaller unit revenues for
the Company and eliminate the Company's ability to generate revenues from its
production facilities. The Company does not currently have the capability to
produce CD-ROMs and the cost to develop such production capability may be
prohibitive. The Company currently contracts CD-ROM production to specialized
CD-ROM facilities. The Company expects continued rapidly expanding growth in the
pre-load and CD-ROM usage mediums, more of the Company's relationships would
involve product pre-loads and CD-ROM production and the Company's business,
results of operations and financial condition could be adversely affected.
INTELLECTUAL PROPERTY RIGHTS. The Company's success is dependent upon its
software code base, its programming methodologies and other intellectual
properties. To protect its proprietary technology, the Company relies primarily
on a combination of trade secret laws and nondisclosure, confidentiality, and
other agreements and procedures, as well as copyright and trademark laws. These
laws and actions may afford only limited protection. There can be no assurance
that the steps taken by the Company will be adequate to deter misappropriation
of its proprietary information, or to prevent the successful assertion of an
adverse claim to software utilized by the Company, or that the Company will be
able to detect unauthorized use and take effective steps to enforce its
intellectual property rights. The Company owns United States trademark
registrations for certain of its trademarks. In addition, the Company has
applied for trademark protection on a number of its recently introduced new
technologies. Certain of the Company's trademark applications are still pending
and no assurances can be made that the trademark applications will be accepted
by the U.S. Trademark and Patent Office. A rejection of one or more of these
trademark applications could have a material adverse affect on the Company's
ability to successfully sell and market these new products. In selling its
products, the Company relies primarily on "shrink wrap" licenses that are not
signed by licensees and, therefore, may be unenforceable under the laws of
certain jurisdictions. In addition, the laws of some foreign countries provide
substantially less protection to the Company's proprietary rights than do the
laws of the United States. Trademark or patent challenges in such foreign
countries could, if successful, materially disrupt or even terminate the
Company's ability to sell its products in such markets. There can be no
assurance that the Company's means of protecting its proprietary rights will be
adequate or that the Company's competitors will not independently develop
similar technology. Although the Company believes that its services and products
do not infringe on the intellectual property rights of others, such claims have
been and in the future may be asserted against the Company. The failure of the
Company to protect its proprietary property, or the infringement of the
Company's proprietary property on the rights of others, could have a material
adverse effect on the Company's business, results of operations and financial
condition.
26
DEPENDENCE UPON KEY PERSONNEL. The Company's future performance depends in
significant part upon key technical and senior management personnel. The Company
is dependent on its ability to identify, hire, train, retain and motivate high
quality personnel, especially highly skilled engineers involved in the ongoing
research and development required to develop and enhance the Company's software
products and introduce enhanced future products. The industry is characterized
by a high level of employee mobility and aggressive recruiting of skilled
personnel. There can be no assurance that the Company's current employees will
continue to work for the Company. Loss of services of key employees could have a
material adverse effect on the Company's business, results of operations and
financial condition. The Company may need to grant additional options and
provide other forms of incentive compensation to attract and retain key
personnel. The Company has experienced and expects to continue to experience
difficulty in hiring key technical personnel in certain of its key development
offices. These difficulties could lead to higher compensation costs and may
adversely effect the Company's future results of operations.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's operating
results have in the past fluctuated, and may in the future fluctuate, from
quarter to quarter, as a result of a number of factors including, but not
limited to, changes in pricing policies or price reductions by the Company or
its competitors; variations in the Company's sales channels or the mix of
product sales; the timing of new product announcements and introductions by the
Company or its competitors; the availability and cost of supplies; the financial
stability of major customers; market acceptance of new products and product
enhancements; the Company's ability to develop, introduce and market new
products, applications and product enhancements; the Company's ability to
control costs; possible delays in the shipment of new products; the Company's
success in expanding its sales and marketing programs; deferrals of customer
orders in anticipation of new products, product enhancements or operating
systems; changes in Company strategy; personnel changes; and general economic
factors. The Company's software products are generally shipped as orders are
received and accordingly, the Company has historically operated with little
backlog. As a result, sales in any quarter are dependent primarily on orders
booked and shipped in that quarter and are not predictable with any degree of
certainty. In addition, the Company's expense levels are based, in part, on its
expectations as to future revenues. If revenue levels are below expectations,
operating results are likely to be adversely affected. The Company's net income
may be disproportionately affected by a reduction in revenues because of fixed
costs related to generating its revenues. Quarterly results in the future may be
influenced by these or other factors and, accordingly, there may be significant
variations in the Company's quarterly operating results. The Company's
historical operating results are not necessarily indicative of future
performance for any particular period. Due to all of the foregoing factors, it
is possible that in some future quarter the Company's operating results may be
below the expectations of public market analysts and investors. In such event,
the price of the Company's Common Stock could be adversely affected.
POSSIBLE VOLATILITY OF STOCK PRICE. The trading price of the Company's
Common Stock is likely to be subject to significant fluctuations in response to
variations in quarterly operating results, changes in management, announcements
of technological innovations or new products by the Company, its customers or
its competitors, legislative or regulatory changes, general trends in the
industry and other events or factors. The stock market has experienced extreme
price and volume fluctuations which have particularly affected the market price
for many high technology companies similar to the Company and which have often
been unrelated to the operating performance of these companies. These broad
market fluctuations may adversely affect the market price of the Company's
Common Stock. Further, factors such as announcements of new contracts or product
offerings by the Company or its competitors and market conditions for stocks
similar to that of the Company could have significant impact on the market price
of the Common Stock.
POSSIBLE ACQUISITIONS OR DIVESTITURES. From time to time, the Company may
consider acquisitions of or alliances with other companies that could complement
the Company's existing business, including acquisitions of complementary product
lines. The Company may also consider the divestiture of certain of its product
segments or operating groups, should conditions warrant, particularly in light
of the Company's strategy of focusing its resources on its Computer Telephony
group. Although the Company may periodically discuss such potential transactions
27
with a number of companies, there can be no assurance that suitable acquisition,
alliance or purchaser candidates can be identified, or that, if identified,
acceptable terms can be agreed upon or adequate and acceptable financing sources
will be available to the Company or purchaser that would enable them to
consummate such transactions. Even if an acquisition or alliance is consummated,
there can be no assurance that the Company will be able to integrate
successfully such acquired companies or product lines into its existing
operations, which could increase the Company's operating expenses in the
short-term and adversely affect the Company's results of operations. Moreover,
certain acquisitions by the Company could result in potentially dilutive
issuances of equity securities, the incurrence of additional debt and
amortization of expenses related to goodwill and intangible assets, all of which
could adversely affect the Company's profitability. Divestitures of product
lines or operating groups could adversely affect the Company's profitability by
reducing the Company's revenues without a corresponding reduction in expenses.
Acquisitions, alliances and divestitures involve numerous risks, such as the
diversion of the attention of the Company's management from other business
concerns, the entrance of the Company into markets in which it has had no or
only limited experience, unforeseen consequences of exiting from product markets
and the potential loss of key employees, all of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
COMPUTER TELEPHONY
COMPUTER TELEPHONY PRODUCT MARKET. The m