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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 000 - 19462
ARTISOFT, INC.
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(Exact name of registrant as specified in its charter)
Delaware 86-0446453
- ------------------------------- ------------------------------------
(State or other jurisdiction of (IRS employer identification number)
incorporation)
2202 North Forbes Boulevard
Tucson, Arizona 85745
(520) 670-7100
---------------------------------------------------
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days.
Yes x No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date (May 3, 1996).
Common stock, $.01 par value: 14,495,838 shares
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<PAGE>
Artisoft Inc. and Subsidiaries
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets-
March 31, 1996 and June 30, 1995 3
Consolidated Statements of Operations-
Three Months and Nine Months Ended
March 31, 1996 and 1995 4
Consolidated Statements of Cash Flows-
Nine Months Ended March 31, 1996
and 1995 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote by Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
<PAGE>
Artisoft, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, June 30,
ASSETS 1996 1995
--------- ----
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15,713 $ 16,551
Short-term investments - 19,312
Receivables:
Trade accounts, net 15,962 15,508
Income taxes 35 3,500
Notes and other 1,804 3,424
Inventories 3,572 2,665
Prepaid expenses 1,675 2,046
Deferred income taxes 8,433 2,880
-------- --------
Total current assets 47,194 65,886
-------- --------
Long-term investments - 1,930
-------- --------
Property and equipment 13,306 15,302
Less accumulated depreciation (5,723) (5,738)
-------- --------
Net property and equipment 7,583 9,564
-------- --------
Other assets 3,261 427
-------- --------
$ 58,038 $ 77,807
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,658 $ 5,248
Accrued liabilities 4,341 4,218
Income taxes payable 125 96
Current portion of capital lease obligations 78
-
-------- --------
Total current liabilities 8,202 9,562
-------- --------
Capital lease obligations, net of current portion 120 -
Shareholders' equity:
Common stock, $.01 par value. Authorized 50,000,000 shares;
issued 27,766,167 shares at March 31,
1996 and 27,671,680 at June 30, 1995
278 277
Additional paid-in capital 95,758 95,012
Retained earnings 23,360 42,636
Less treasury stock, at cost, 13,287,500 shares (69,680) (69,680)
-------- --------
Total shareholders' equity 49,716 68,245
-------- --------
$ 58,038 $ 77,807
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Artisoft, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months and Nine Months Ended March 31, 1996 and 1995
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Net sales $ 15,171 $ 14,595 $ 44,476 $ 69,734
Cost of sales 4,310 6,463 14,897 36,331
-------- -------- -------- --------
Gross margin 10,861 8,132 29,579 33,403
-------- -------- -------- --------
Operating expenses:
Marketing and sales 6,789 7,862 19,856 25,166
Product development 2,005 1,785 4,598 5,925
General and administrative 1,621 2,270 4,233 5,768
Costs to exit hardware business, net
of gain on disposition - 1,218 - 1,218
Purchased in-process technology
and related costs 12,294 - 26,744 -
-------- -------- -------- --------
Total operating expenses 22,709 13,135 55,431 38,077
-------- -------- -------- --------
Loss from operations (11,848) (5,003) (25,852) (4,674)
Other income, net 404 274 1,238 650
-------- -------- -------- --------
Loss before income taxes (11,444) (4,729) (24,614) (4,024)
Income tax benefit (4,937) (2,079) (5,337) (1,811)
-------- -------- -------- --------
Net loss $ (6,507) $ (2,650) $(19,277) $ (2,213)
======== ======== ======== ========
Net loss per common and
equivalent share $ (.45) $ (.18) $ (1.33) $ (.15)
======== ======== ======== ========
Shares used in per share calculation 14,478 14,405 14,456 14,463
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
Artisoft, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
------------------
1996 1995
------ ------
<S> <C> <C>
Cash flows from operating activities: (unaudited)
Net loss $(19,277) $ (2,213)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Purchased in process technology 21,700 -
Depreciation and amortization 1,694 2,270
Gain from disposition of property and equipment, net (163) (5,316)
Deferred income taxes (5,553) (1,930)
Allowance for doubtful accounts (821) 375
Allowance for inventory obsolescence 665 (488)
Tax benefit of disqualifying dispositions 70 -
Changes in assets and liabilities,
net of effects from acquisitions of businesses:
Receivables 6,465 4,065
Inventories (1,356) 14,483
Prepaid expenses 569 722
Income taxes receivable - (2,155)
Other assets and liabilities
214 311
Accounts payable and accrued liabilities (3,118) (4,772)
Income taxes payable 29 (3,010)
-------- --------
Net cash provided by operating activities 1,118 2,342
-------- --------
Cash flows from investing activities:
Purchases of investments (35,063) (9,349)
Sales of investments 56,305 -
Sales of property and equipment 2,966 -
Purchase of property and equipment (2,018) (2,353)
Proceeds from sale of Eagle Technology - 7,500
Cash paid for businesses acquired (24,794) -
-------- --------
Net cash provided by (used in) investing activities (2,604) (4,202)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options 676 682
Principal payments on capital lease obligations (28) -
Principal payments on long-term debt - (6,576)
-------- --------
Net cash provided by (used in) financing activities 648 (5,894)
-------- --------
Effects of exchange rates on cash - 41
-------- --------
Net decrease in cash and cash equivalents (838) (7,713)
Cash and cash equivalents at beginning of period 16,551 11,723
-------- --------
Cash and cash equivalents at end of period $ 15,713 $ 4,010
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
Artisoft, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying consolidated financial statements include the accounts
of Artisoft, Inc. (the "Company") and its wholly-owned subsidiaries (Artisoft
Europe B.V., Artisoft "FSC", Ltd., NodeRunner, Inc., Artisoft Japan, K.K., and
Triton Technologies, Inc.). All significant intercompany balances and
transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the accompanying financial statements
include all adjustments (of a normal recurring nature) which are necessary for a
fair presentation of the results for the interim periods presented. Certain
information and footnote disclosures normally included in financial statements
have been condensed or omitted pursuant to such rules and regulations. Although
the Company believes that the disclosures are adequate to make the information
presented not misleading, it is suggested that these financial statements be
read in conjunction with the consolidated financial statements and the notes
thereto included in the Company's 1995 Annual Report to Shareholders and report
on Form 10-K. The results of operations for the three months and nine months
ended March 31, 1996 are not necessarily indicative of the results to be
expected for the full year.
(2) Inventories
Inventories consist of the following (in thousands):
March 31, June 30,
1996 1995
-------- --------
Raw materials $ 2,092 $ 1,923
Work-in-process 820 653
Finished goods 1,925 689
-------- ---------
4,837 3,265
Less allowance for inventory obsolescence (1,265) (600)
-------- ---------
$ 3,572 $ 2,665
======== =========
(3) Income Taxes
Deferred taxes are provided in accordance with Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS No. 109").
Pursuant to SFAS No. 109, deferred tax assets are recognized for temporary
differences that will result in deductible amounts in future years and for
carryforwards.
The effective income tax rate for the three months ended March 31,
1996 was (43)% compared to (44)% for the same period in the prior year. The
effective income tax rate for the
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nine months ended March 31, 1996 was (22)% as compared to (45)% for the same
period in the prior year. The significant difference in the effective income tax
rate between these periods is due to non-deductible purchased in-process
technology incurred upon the acquisition of the outstanding stock of Triton
Technologies, Inc., in December 1995.
(4) Acquisitions
On November 22, 1995, the Company acquired substantially all the assets
and certain liabilities of Synergy Solutions, Inc. ("Synergy"), a software
company primarily in the business of developing, marketing and selling modem and
telephone line sharing software. The aggregate cost of acquiring all the assets
and certain liabilities of Synergy was approximately $1.5 million. The purchase
price was paid in cash from the Company's existing cash balances.
On December 21, 1995, the Company completed the acquisition of the
outstanding stock of Triton Technologies, Inc. ("Triton"), a software company
that develops and markets PC remote control software. The aggregate cost of
acquiring the stock of Triton was approximately $11.8 million. The purchase
price was paid in cash and notes payable, which notes were paid in full in
January 1996.
On February 13, 1996, the Company acquired substantially all the assets
and certain liabilities of Stylus Innovation Incorporated ("Stylus"), a
developer of computer telephony software applications and tools. The aggregate
cost of acquiring the assets and certain liabilities of Stylus was approximately
$13.1 million. The purchase price was paid in cash from the Company's existing
cash balances.
The Company incurred direct transaction costs of approximately $350,000
associated with the acquisitions of Synergy and Triton. These costs consisted of
fees for financial, legal and accounting services and were included in the
allocation of the acquisition costs. The direct costs and the purchase price of
the acquisitions were allocated to the assets acquired and liabilities assumed
based on their respective fair value on the date of the acquisitions, as follows
(in thousands):
Cash $ 251
Trade receivables 810
Inventories 108
Property and equipment 123
Purchased software 2,011
Purchased in-process technology 10,200
Other 108
--------
13,611
Less cash acquired (251)
Less liabilities assumed (1,196)
--------
Net assets acquired, excluding cash $ 12,164
--------
In conjunction with the purchase of Synergy and Triton, the Company
recorded a charge to operations of $10.2 million relating to purchased
in-process technology that had not reached the working model stage and had
indeterminable alternative future use. The remaining $2.0
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<PAGE>
million of the purchase price allocated to technology was attributable to
purchased software products and will be amortized over five years.
The Company incurred direct transaction costs of approximately $275,000
associated with the acquisition of Stylus. These costs consisted of fees for
financial, legal and accounting services and are included in the allocation of
the acquisition costs. The direct costs and purchase price of the acquisitions
have been allocated to the assets acquired and liabilities assumed based on
their respective fair value on the date of the acquisition as follows (in
thousands):
Cash $ 170
Trade receivables 204
Inventories 108
Property and equipment 148
Purchased software 1,035
Purchased in-process technology 11,500
Other 90
-------
13,255
Less cash acquired (170)
Less liabilities assumed (455)
-------
Net assets acquired, excluding cash $12,630
-------
In conjunction with the purchase of Stylus, the Company recorded a
charge to operations of $11.5 million relating to purchased in-process
technology that had not reached the working model stage and has indeterminable
alternative future use. The remaining $1.1 million of the purchase price
allocated to technology was attributable to purchased software products and will
be amortized over five years.
These acquisitions were accounted for as purchases. The results of
operations of the acquired companies have been combined with the results of the
Company as of their respective dates of acquisition. Had the business
combinations occurred prior to July 1, 1995, the Company's net sales, net income
and net income per common and equivalent share (excluding purchased in-process
technology and related costs) for the nine months ended March 31, 1996 would
have been $49.9 million, $850,000 and $.06, respectively. The proforma effects
of the business combinations for the nine months ended March 31, 1995 would have
been immaterial to the Company's results of operations for that period.
(5) Supplemental Schedule of Cash Flow Information
Through the third quarter of fiscal 1996, in connection with three
business acquisitions, assets were acquired and liabilities were assumed as
follows (in thousands):
Cash $ 421
Trade receivables 1,014
Inventories 216
Property and equipment 271
8
<PAGE>
Purchased software 3,046
Purchased in-process technology 21,700
Other 198
--------
26,866
Less cash acquired (421)
Less liabilities assumed (1,651)
--------
Cash paid for businesses acquired, excluding cash $ 24,794
========
(6) Other Assets
Other assets consist of the following (in thousands):
March 31, June 30,
1996 1995
------- -------
Trademarks and patents, net $ 339 $ 279
Purchased software, net 2,811 -
Recoverable deposits and other 111 148
------ ------
$3,261 $ 427
====== ======
9
<PAGE>
Artisoft, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net Sales. Net sales for the Company's third quarter ended
March 31, 1996 were $15.2 million, an increase of 4% from sales of $14.6 million
for the corresponding quarter last year, and an increase of 6% from the previous
quarter's revenues of $14.3 million. For the nine months ended March 31, 1996,
the Company's net sales were $44.5 million, a decrease of 36% from sales of
$69.7 million for the same period last year. The increase in net sales for the
three months ended March 31, 1996, as compared to the corresponding quarter in
fiscal 1995, was primarily due to the Company's recent acquisition of Synergy
Solutions, Inc. ("Synergy"), Triton Technologies, Inc. ("Triton"), and Stylus
Innovation Incorporated ("Stylus"). The decrease in net sales in the nine months
ended March 31, 1996, as compared to the corresponding period in fiscal 1995,
was primarily due to the sale of substantially all of the assets of Eagle
Technology and the consequent cessation of sales by the Company of Eagle
Technology products as of January 30, 1995. Worldwide net sales for the Eagle
Technology business unit were approximately $700,000 for the three months ended
March 31, 1995, and $25.1 million for the nine months ended March 31, 1995.
Net sales for both the three months and nine months ended
March 31, 1996, as compared to the corresponding periods in fiscal 1995 include
sales attributable to the Company's recent acquisitions, and also reflect the
Company's strategic decision to redirect the organization to a software centric
business model and a sales mix shift toward the software only version of the
Company's LANtastic(R) network operating system ("NOS"). The shift to the
software only version of LANtastic was principally because of increased price
sensitivity in the Ethernet adapter market and a related willingness of local
area network ("LAN") resellers to select low-priced Ethernet adapters instead of
the Company's Ethernet adapters that are sold in standalone versions or as part
of starter and add-on kits. Also, in the fourth quarter of fiscal 1995 the
Company introduced LANtastic Power Suite(TM), a product with an advanced NOS and
communication software. Sales for this product have not reached the levels
anticipated by the Company when the product was introduced, especially in the
VAR channel. Also as a consequence the company has experienced higher than
expected returns and rotations.
The Company distributes its products in both the U.S. and international
markets. U.S. sales decreased 6% to $10.1 million, or 67% of net sales, for the
third quarter ended March 31, 1996 from $10.8 million, or 74% of net sales, for
the same quarter last year. U.S. sales decreased 27% to $29.2 million, or 66% of
net sales, for the nine months ended March 31, 1996 from $39.7 million, or 57%
of net sales, for the same period in fiscal 1995. The decrease in U.S. net sales
for both the third quarter of fiscal 1996 and the nine months ended March 31,
1996, as compared to the corresponding periods in fiscal 1995, resulted
primarily from the elimination of Eagle Technology product sales. In addition,
the decrease in net sales was a result of the Company's implementation of a net
reduction in the U.S. distribution channel inventory.
10
<PAGE>
International sales increased 34% to $5.1 million, or 33% of net sales,
for the third quarter ended March 31, 1996 from $3.8 million, or 26% of net
sales, for the same quarter last year. International sales decreased 49% to
$15.2 million, or 34% of net sales, for the nine months ended March 31, 1996
from $30 million, or 43% of net sales, for the same period in fiscal 1995. The
decrease in international sales for the nine months ended March 31, 1996, as
compared to the corresponding period in fiscal 1995, resulted primarily from the
elimination of Eagle Technology international product sales.
Gross Margins. The Company's gross margins were $10.9 million and $8.1
million for the three months ended March 31, 1996 and 1995, respectively, or 72%
and 56% of net sales, respectively, for those periods. Gross margins were $29.6
million and $33.4 million for the nine months ended March 31, 1996 and 1995,
respectively, or 67% and 48% of net sales, respectively, for those periods. The
increase in gross margin percentage for the third quarter of fiscal 1996 and the
nine months ended March 31, 1996, as compared to the corresponding periods in
fiscal 1995, was primarily the result of an increased percentage of higher
margin software sales and the elimination of sales of the lower margin Eagle
Technology hardware products. Gross margins may fluctuate from quarter to
quarter due to changes in product mix, pricing actions and changes in sales and
inventory allowances.
Marketing and Sales. Marketing and sales expenses were $6.8 million and
$7.9 million for the third quarter of fiscal 1996 and 1995, respectively,
representing 45% of net sales and 54% of net sales. For the nine months ended
March 31, 1996 and 1995, marketing and sales expenses were $19.9 million and
$25.2 million, respectively, representing 45% of net sales and 36% of net sales.
The change in marketing and sales expenses as a percentage of net sales for the
third quarter of fiscal 1996 and the nine months ended March 31, 1996,
respectively, as compared to the corresponding periods in fiscal 1995, is due
primarily to the change in net sales in fiscal 1996 over fiscal 1995. The
decrease in aggregate dollars for marketing and sales expenses for both the
third quarter of fiscal 1996 and the nine months ended March 31, 1996, as
compared to the corresponding periods in fiscal 1995, reflects the elimination
of costs associated with Eagle Technology and cost reductions that reflect the
Company's strategy to redirect the business to a more software centric business
model. These expense reductions included a decrease in the Company's staffing
levels.
Product Development. Product development expenses were $2.0 million and
$1.8 million for the third quarter of fiscal 1996 and 1995, respectively,
representing 13% of net sales and 12% of net sales, respectively. For the nine
months ended March 31, 1996 and 1995, product development expenses were $4.6
million and $5.9 million, respectively, representing 10% of net sales and 8% of
net sales, respectively. The change in product development expenses as a
percentage of net sales for both the third quarter of fiscal 1996 and the nine
months ended March 31, 1996, as compared to the corresponding periods in fiscal
1995, is due primarily to the change in net sales in fiscal 1996 over fiscal
1995. The increase in aggregate dollars for the third quarter of fiscal 1996 as
compared to the corresponding period in fiscal 1995 is principally attributable
to the addition of product development expenses associated with the companies
acquired. The decrease in aggregate dollars for the nine months ended March 31,
1996 as compared to the corresponding period in fiscal 1995, reflects the
elimination of costs associated with Eagle Technology and cost reductions that
reflect the Company's strategy to redirect the business to a more software
centric business model. These expense reductions included a decrease in the
Company's staffing levels.
11
<PAGE>
General and Administrative. General and administrative expenses were
$1.6 million and $2.3 million for the third quarter of fiscal 1996 and 1995,
respectively, representing 11% and 16% of net sales, respectively. For the nine
months ended March 31, 1996 and 1995, general and administrative expenses were
$4.2 million and $5.8 million, respectively, representing 10% of net sales and
8% of net sales, respectively. General and administrative expenses as a
percentage of net sales for the third quarter of fiscal 1996 and the nine months
ended March 31, 1996, as compared to the corresponding periods in fiscal 1995,
decreased and increased, respectively, as a result of the changes in net sales
for the comparable periods. The decrease in aggregate dollars for general and
administrative expenses for both the third quarter of fiscal 1996 and the nine
months ended March 31, 1996, as compared to the corresponding periods in fiscal
1995, reflects the elimination of costs associated with Eagle Technology and
cost reductions that reflect the Company's strategy to redirect the business to
a more software centric business model. These expense reductions included a
decrease in the Company's staffing levels.
Purchased In-Process Technology And Related Costs. On November 22,
1995, the Company acquired substantially all the assets and certain liabilities
of Synergy Solutions, Inc., a software company primarily in the business of
developing, marketing and selling modem and telephone line sharing software. The
aggregate cost of acquiring all the assets and certain liabilities of Synergy
was approximately $1.5 million. The purchase price was paid in cash from the
Company's existing cash balances. On December 21, 1995, the Company completed
the acquisition of the outstanding stock of Triton Technologies, Inc., a
software company that develops and markets PC remote control software. The
aggregate cost of acquiring the stock of Triton was approximately $11.8 million.
Substantially all of the purchase price was paid in cash from the Company's
existing cash balances in December 1995 and January 1996. On February 13, 1996,
the Company acquired substantially all of the assets and certain liabilities of
Stylus Innovation Incorporated ("Stylus") a developer of computer telephony
software tools and applications. The aggregate cost of acquiring the assets and
certain liabilities of Stylus was approximately $13.1 million. The purchase
price was paid in cash from the Company's existing cash balances. The Company
incurred direct transaction costs of approximately $525,000 associated with
these acquisitions during the second and third quarters of fiscal 1996. These
costs consist of fees for financial, legal and accounting services and are
included in the allocation of the acquisition costs. The direct costs and
purchase price of the acquisitions have been allocated to the assets acquired
and liabilities assumed based on their respective fair value on the dates of the
acquisitions. The acquisitions were accounted for as purchases. The results of
each of the acquired companies have been combined with the results of the
Company as of their respective dates of acquisition.
In conjunction with the purchase of Synergy, Triton and Stylus, the
Company recorded a charge to operations during the second and third quarters of
fiscal 1996, totaling $21.7 million relating to purchased in-process technology
that had not reached the working model stage and has indeterminable alternative
future use. In addition, as a result of the Synergy and Triton acquisitions, the
Company charged to operations other related costs totaling $5 million. The other
related costs are principally attributable to costs associated with the
integration of Triton, Synergy and Stylus technology with the Company's
technology and the elimination of a layer of distribution in Europe. Other
related costs also include increases in allowances for returns, rotations and
inventories associated with the transition to new technology; organizational
costs for severance and outplacement; and facility costs relating to the
cancellation of leases in order to consolidate technical support and
distribution. Although the Company expects that the elimination of duplicative
expenses as well as other efficiencies related to the integration of the
12
<PAGE>
businesses acquired may offset additional expenses over time, there can be no
assurance that such benefit will be achieved in the near term, or at all.
Other Income, Net. Other income, net, primarily resulted from
the one time gain on the sale of a Company building. For the nine months ended
March 31, 1996 other income, net, increased to $1.2 million from $650,000 in the
same period in fiscal 1995. This increase resulted primarily from investing cash
balances in higher yielding taxable securities, the inclusion of the net gains
from the sale of property and equipment and the elimination of interest expense
that was accrued under a note payable relating to the purchase of Eagle
Technology that partially offset interest income in both the third quarter and
nine months ended March 31, 1995. The note was paid in December 1994.
Liquidity and Capital Resources
The Company had cash and investments of $15.7 million at March 31, 1996
compared to $37.8 million at June 30, 1995 and working capital of $39.0 million
at March 31, 1996 and $56.3 million at June 30, 1995. The decrease in cash and
investments was primarily a result of the costs associated with the acquisition
of Synergy, Triton and Stylus but was partially offset by the proceeds from the
sale of certain assets and the receipt of a federal income tax refund. Trade
accounts receivable average days sales outstanding at March 31, 1996 increased
to 95 days from 89 days at June 30, 1995 due to extended terms given to certain
international customers and the effect on the calculation of the loss of Eagle
Technology revenue. The Company believes that its allowances for returns and
doubtful accounts are adequate.
The Company funds its working capital requirements primarily through
cash flows from operations and existing cash balances. The Company anticipates
that existing cash balances and cash flows from operations will be adequate to
meet the Company's cash requirements for at least the next year.
Risk Factors
The PC industry is highly competitive and is characterized by rapidly
changing technology and evolving industry standards. The Company's products
compete with products available from numerous companies, many of which have
substantially greater financial, technological, production and marketing
resources than those of the Company. Competition in the PC industry is likely to
intensify as current competitors expand their product lines, more features are
included in operating systems (e.g., Windows 95), and as new companies enter the
markets or segments in which the Company currently competes. The industry is
also characterized by a high degree of consolidation which favors companies with
greater resources than those of the Company. 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.
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 in 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 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
13
<PAGE>
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.
The Company is also exposed to its distributors for price protection
for list price reductions by the Company on its products held in such
distributors' inventories. The Company provides its distributors with price
protection in the event that the Company reduces the list price of its products.
Distributors and volume purchasers are usually offered some 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 sales and operating results. As the Company introduces new products,
the predictability and timing of sales to end-users and 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.
Substantially all of the Company's revenue in each fiscal quarter
results from orders booked in that quarter. A significant percentage of the
Company's bookings and sales to major customers on a quarterly basis
historically has occurred during the last month of the quarter and are
concentrated in the latter half of that month. Orders placed by major customers
are typically based upon customers' 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 VARs or end-users.
Major distribution customers receive market development funds from the Company
for purchasing Company products and from time-to-time may also receive
negotiated cash rebates or extended terms, in accordance with industry practice,
depending upon competitive conditions. 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 market development funds and
rebates, or otherwise, or in the Company's ability to anticipate in advance 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. Expedited outsourcing of production and component parts to meet
unanticipated demand could also adversely affect gross margins.
The Company believes that there is a trend among major distribution
customers and volume purchasers to reduce their inventory levels of computer
products, including the Company's products. This trend could have a significant,
adverse effect on the Company's operating results during the period or periods
that customers initiate such inventory reductions or at such times as customers
elect to further reduce channel inventories.
Microsoft, a significant competitor of the Company, introduced a new
product, Windows 95, in August 1995. This product includes features competitive
with certain features found in products offered by the Company. Because of the
dominance and market visibility of Microsoft in the personal computer software
market, the presence of the Windows 95 product in the market may affect the
sales of the Company's products and, depending upon the degree of such effect,
could have a significant adverse effect on the Company's operating results. In
14
<PAGE>
addition, as a result of its dominant position in the market for personal
computer operating systems, the Microsoft operating system products are
frequently installed at no additional charge on the hard drives of new personal
computers and thereby placed directly into the hands of the end-user customer.
Such distribution provides a favorable market advantage for the features of its
products, to the potential detriment of the Company's product sales.
During the third fiscal quarter of 1996, the Company announced its
INSYNC brand of remote communications products, which includes CoSession Remote,
a remote control software product, and Modem Share, a telephone line sharing
software product. These products were introduced to the Company's worldwide
sales channels late in the third quarter. These products have not previously
been broadly distributed through these channels. Currently, several competitors
offer similar products through similar sales channels. Although the Company
believes these new products to be functionally comparable and competitively
priced relative to competitors products, there can be no assurance of the future
success of these products.
Due to the foregoing, and other factors affecting the Company's
operating results, past financial performance should not be considered to be a
reliable indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future periods.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
This Form 10-Q may contain forward-looking statements that involve
risks and uncertainties, including, but not limited to, the impact of
competitive products and pricing, product demand and market acceptance risks,
the presence of competitors with greater financial resources, product
development and commercialization risks, costs associated with the integration
and administration of acquired operations, capacity and supply constraints or
difficulties, the results of financing efforts and other risks detailed from
time to time in the Company's Securities and Exchange Commission filings.
15
<PAGE>
Artisoft, Inc. and Subsidiaries
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is subject to lawsuits and other claims arising in the
ordinary course of its operations. In the opinion of management, based on
consultation with legal counsel, the effects of such matters will not have a
materially adverse effect on the Company's financial position.
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE BY SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
No. 10 - Incorporated by reference to Exhibit (1) of Form 8-K dated
February 13, 1996
No. 27 - Financial Data Schedule for Form 10-Q dated May 3, 1996
(c) Reports on Form 8-K
The Company filed a report on Form 8 dated January 5, 1996 amending
the Form 8-K dated December 21, 1995 to include the financial
statements and pro forma financial information of Triton
Technologies, Inc.
The Company filed a report on Form 8-K, dated February 13, 1996
announcing pursuant to item 2 thereof, that it had acquired
substantially all of the assets of Stylus Innovation Incorporated.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ARTISOFT, INC.
Date: May 3, 1996 By_________________________________
William C. Keiper
Chairman and Chief
Executive Officer
By_________________________________
Gary R. Acord
Vice President and Chief
Financial Officer
(Principal Financial Officer)
17
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