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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
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FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number 000 - 19462
ARTISOFT, INC.
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(Exact name of registrant as specified in its charter)
Delaware 86-0446453
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(State or other jurisdiction of (IRS employer identification
incorporation) number)
2202 North Forbes Boulevard
Tucson, Arizona 85745
(520) 670-7100
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(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days.
Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date (May 14, 1997).
Common stock, $.01 par value: 14,539,113 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, 1997 and June 30, 1996 3
Consolidated Statements of Operations-
Three Months and Nine Months Ended
March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows-
Nine Months Ended March 31, 1997
and 1996 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote by Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
EXHIBITS
11 Computation of Net Loss Per Share 19
27 Financial Data Schedule 20
2
<PAGE>
Artisoft, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, June 30,
ASSETS 1997 1996
-------- --------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,646 $ 15,325
Receivables:
Trade accounts, net 10,462 16,768
Income taxes -- 1,635
Notes and other 687 1,405
Inventories 2,225 2,998
Prepaid expenses 1,424 906
Deferred income taxes 4,521 4,426
-------- --------
Total current assets 36,965 43,463
-------- --------
Property and equipment 14,847 13,690
Less accumulated depreciation and amortization (7,641) (6,166)
-------- --------
Net property and equipment 7,206 7,524
-------- --------
Deferred income taxes 3,793 3,141
Other assets 3,079 3,584
-------- --------
$ 51,043 $ 57,712
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,259 $ 3,333
Accrued liabilities 2,935 2,640
Income taxes payable 321 577
Current portion of long-term debt 498 85
-------- --------
Total current liabilities 6,013 6,635
-------- --------
Long-term debt,
net of current portion 2,975 96
Commitments and Contingencies -- --
Shareholders' equity:
Common stock, $.01 par value. Authorized 50,000,000 shares;
issued 27,836,613 shares at March 31,
1997 and 27,807,890 shares at June 30, 1996 278 278
Additional paid-in capital 96,187 96,075
Retained earnings 15,310 24,308
Less treasury stock, at cost, 13,297,500 shares at March 31, (69,720) (69,680)
1997 and 13,287,500 shares at June 30, 1996 -------- --------
Total shareholders' equity 42,055 50,981
-------- --------
$ 51,043 $ 57,712
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
Artisoft, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months and Nine Months Ended March 31, 1997 and 1996
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $ 8,452 $ 15,171 $ 29,077 $ 44,476
Cost of sales 3,034 4,310 10,080 14,897
-------- -------- -------- --------
Gross profit 5,418 10,861 18,997 29,579
-------- -------- -------- --------
Operating expenses:
Sales and Marketing 5,620 6,789 18,258 19,856
Product development 2,305 2,005 6,961 4,598
General and administrative 1,327 1,621 4,195 4,233
Purchased in-process technology
and related costs -- 12,294 -- 26,744
Restructuring cost 1,334 -- 3,139 --
-------- -------- -------- --------
Total operating expenses 10,586 22,709 32,553 55,431
-------- -------- -------- --------
Loss from operations (5,168) (11,848) (13,556) (25,852)
Other income, net 118 404 488 1,238
-------- -------- -------- --------
Loss before income taxes (5,050) (11,444) (13,068) (24,614)
Income tax benefit (1,387) (4,937) (4,070) (5,337)
-------- -------- -------- --------
Net loss $ (3,663) $ (6,507) $ (8,998) $(19,277)
======== ======== ======== ========
Net loss per common and
equivalent share $ (.25) $ (.45) (.62) (1.33)
======== ======== ======== ========
Shares used in per share calculation 14,549 14,478 14,542 14,456
======== ======== ======== ========
</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,
---------
1997 1996
-------- --------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (8,998) $(19,277)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Purchased in process technology -- 21,700
Depreciation and amortization 2,074 1,694
Deferred income taxes (747) (5,553)
Loss (Gain)from disposition of property, net 17 (163)
Change in accounts receivable and inventory allowances (1,658) (156)
Tax benefit of disqualifying dispositions 22 70
Changes in assets and liabilities,
net of effects from acquisitions of businesses:
Trade accounts receivable 7,149 6,465
Income taxes receivable 1,635 --
Notes and other receivables 718 --
Inventories 1,588 (1,356)
Prepaid expenses (518) 569
Accounts payable and accrued liabilities (779) (3,118)
Income taxes payable (256) 29
Other assets (63) 214
-------- --------
Net cash provided by operating activities 184 1,118
-------- --------
Cash flows from investing activities:
Purchases of investments -- (35,063)
Sales of investments -- 56,305
Cash paid for businesses acquired -- (24,794)
Proceeds from sale of property and equipment 35 2,966
Purchases of property and equipment (1,256) (2,018)
-------- --------
Net cash used in investing activities (1,221) (2,604)
-------- --------
Cash flows from financing activities:
Purchase of treasury stock (40) --
Proceeds from building mortgage 2,200 --
Proceeds from exercise of stock options 106 676
Proceeds from sale-leaseback transaction 1,368 --
Principal payments on long term debt (276) (28)
-------- --------
Net cash provided by financing activities 3,358 648
-------- --------
Net increase (decrease) in cash and cash equivalents 2,321 (838)
Cash and cash equivalents at beginning of period 15,325 16,551
-------- --------
Cash and cash equivalents at end of period $ 17,646 $ 15,713
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
Artisoft, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The consolidated financial statements include the accounts of Artisoft,
Inc. and its five wholly-owned subsidiaries: Triton Technologies, Inc., Artisoft
Europe B.V., Artisoft "FSC", Ltd. (which has elected to be treated as a foreign
sales corporation), NodeRunner, Inc., and Artisoft Japan, K.K. All significant
intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the accompanying financial statements
include all adjustments (of a normal recurring nature) which are necessary for a
fair presentation of the financial results for the interim periods presented.
Certain information and footnote disclosures normally included in financial
statements have been condensed or omitted pursuant to such rules and
regulations. Although the Company believes that the disclosures are adequate to
make the information presented not misleading, it is suggested that these
financial statements be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's 1996 Annual Report to
Shareholders and report on Form 10-K. The results of operations for the nine
months ended March 31, 1997 are not necessarily indicative of the results to be
expected for the full year.
(2) Computation of Net Loss Per Share
Net loss per common and equivalent share is computed based on the
weighted average number of common shares and the dilutive effects of stock
options during the period using the treasury stock method.
(3) Restructuring Cost
During the quarter ended September 30, 1996, primarily in response to
lower than expected sales of LANtastic network operating system (NOS) products
during the quarter and attendant uncertainty as to future sales levels of NOS
products, the Company elected to take two principal actions; first, to realign
the resources of the Company to accelerate the development, delivery and
potential customer adoption of new computer telephony and communications
products and, second, to reduce the Company's operating expense run rate. As a
result of these actions, the Company recorded a pre-tax restructuring charge of
$1.8 million in the quarter ended September 30, 1996 to cover severance costs
associated with a 50 person head count reduction and other related costs.
The Company recorded an additional pre-tax restructuring charge of $1.3
million during the quarter ended March 31, 1997 primarily due to severance and
other costs associated with the closing of the Company's Italian office and
additional headcount reduction in the U.S., principally at the Company's Tucson
and Cambridge locations, in response to the decline in sales of its LANtastic
NOS products.
6
<PAGE>
(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 engaged in the development, marketing and sales of modem and telephone
line sharing software. The aggregate cost of the acquisition was approximately
$1.5 million.
On December 21, 1995, the Company purchased all of the outstanding
common stock of Triton Technologies, Inc. ("Triton"), a software company
primarily engaged in the development, marketing and sales of 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 for cash substantially all
the assets and certain liabilities of Stylus Innovation Incorporated ("Stylus"),
a software company engaged in the development, marketing and sales of computer
telephony applications and tools software. The aggregate cost of the acquisition
was approximately $13.1 million.
The Company incurred direct transaction costs of approximately $625,000
associated with the acquisitions of Synergy, Triton and Stylus ("the
acquisitions"). 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 purchase prices of the acquisitions were allocated
to the assets acquired and liabilities assumed based on their respective fair
values on the dates of the acquisitions, as follows (in thousands):
Cash $ 421
Trade receivables 604
Inventories 216
Property and equipment 271
Purchased technology 3,456
Purchased in-process technology 21,700
Other 198
---------
26,866
Less cash acquired (421)
Less liabilities assumed (1,651)
---------
Net assets acquired, excluding cash $ 24,794
=========
In conjunction with the acquisitions, the Company recorded aggregate
charges to operations of $21.7 million relating to purchased in-process
technology that had not reached technological feasibility and had indeterminable
alternative future use. The $3.5 million of the aggregate purchase price
attributable to purchased technology is being amortized over five years.
In addition, as a result of the acquisitions, the Company charged to
operations other related costs totaling $5.0 million. Other related costs
included increases in allowances for returns, rotations and inventory
obsolescence associated with the transition to the new technology; costs for
severance and outplacement; and facility costs relating to the cancellation of
leases in order to support consolidated technical support and distribution.
The acquisitions were accounted for as purchase business combinations
and, accordingly, the results of operations of the acquired companies have been
combined with those of the Company as of the respective dates of acquisition.
7
<PAGE>
The pro forma effects of the business combinations for the quarter and
nine-month period ended March 31, 1996 would have been immaterial to the
Company's consolidated results of operations for those periods.
(5) Inventories
Inventories consist of the following (in thousands):
March 31, June 30,
1997 1996
-------- --------
Raw materials $ 1,334 $ 2,167
Work-in-process 414 584
Finished goods 1,227 1,812
------- -------
2,975 4,563
Inventory allowances (750) (1,565)
------- -------
$ 2,225 $ 2,998
======= =======
(6) Property and Equipment
Property and Equipment consist of the following (in thousands):
March 31, June 30,
1997 1996
---- ----
Land $ 807 $ 807
Buildings and improvements 1,992 1,991
Furniture and fixtures 1,091 1,058
Computers and other equipment 10,809 9,741
Leasehold improvements 148 93
-------- --------
14,847 13,690
Accumulated depreciation and
amortization 7,641 6,166
-------- --------
$ 7,206 $ 7,524
======== ========
8
<PAGE>
(7) Other Assets
Other assets consist of the following (in thousands):
March 31, June 30,
1997 1996
---- ----
Trademarks and patents, net of
accumulated amortization $ 236 $ 285
Purchased technology, net of
accumulated amortization 2,644 3,172
Recoverable deposits and other 199 127
------- -------
$ 3,079 $ 3,584
======= =======
(8) Long Term Debt
In December 1996, the Company entered into a $1.4 million
sale-leaseback of computer equipment and software. The underlying capital lease
has a term of three years, requires monthly payments of approximately $42,000
and includes a 10% purchase option.
In February 1997, the Company entered into a $2.2 million
mortgage loan transaction. The underlying promissory note, secured by a deed of
trust on certain real property owned by the Company in Tucson, Arizona,
amortizes monthly over a 20 year term at an annual rate of 8.2% with a final
balloon payment due at the end of ten years. The note requires monthly payments
of approximately $19,000.
(9) Shareholders' Equity
In February 1997 the Company's Board of Directors readopted
and extended a stock repurchase program under which the Company is authorized to
repurchase up to 1,000,000 shares of its outstanding common stock for general
corporate purposes. Under the repurchase program, management is authorized, with
certain limitations, to repurchase the Company's common stock depending on
market conditions and other factors.
9
<PAGE>
Artisoft, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net Sales. The Company's net sales for the quarter ended March
31, 1997 were $8.5 million, a decrease of 44% from net sales of $15.1 million
for the corresponding quarter of fiscal 1996. For the nine-month period ended
March 31, 1997, the Company's net sales were $29.1 million, a decrease of 35%
from net sales of $44.5 million for the corresponding period of fiscal 1996. The
decreases in net sales for the quarter and nine-month period ended March 31,
1997, as compared to the corresponding periods in fiscal 1996, were principally
due to the decline in sales of the Company's LANtastic network operating
system(NOS) products, offset to a minor extent by sales of computer telephony
and PC communications products. Sales of computer telephony and PC
communications products commenced upon the acquisitions of three software
companies during the quarters ended December 31, 1995 and March 31, 1996.
The Company distributes its products in both the U.S. and international
markets. U.S. sales decreased 39% to $6.2 million (73% of net sales) for the
quarter ended March 31, 1997, from $10.1 million (67% of net sales), for the
same quarter a year ago. U.S. sales decreased 32% to $20.0 million (69% of net
sales), for the nine-month period ended March 31, 1997 from $29.3 million (66%
of net sales), for the same period in fiscal 1996. The decrease in U.S. net
sales for both the quarter and the nine-month period ended March 31, 1997, as
compared to the corresponding periods in fiscal 1996, primarily resulted from
the decline in sales of LANtastic NOS products in the U.S. distribution channels
and actions taken during the nine-month period ended March 31, 1997 to reduce
U.S. distribution channel inventories.
International sales decreased 57% to $2.2 million (26% of net sales),
for the quarter ended March 31, 1997, from $5.1 million (34% of net sales), for
the same quarter a year ago. International sales decreased 41% to $9.0 million
(31% of net sales), for the nine-month period ended March 31, 1997 from $15.2
million (34% of net sales) for the same period in fiscal 1996. The decrease in
international net sales for both the quarter and the nine-month period ended
March 31, 1997, as compared to the corresponding periods in fiscal 1996,
primarily resulted from the decline in sales of LANtastic NOS products in
Europe, offset to a minor extent by sales of new products.
Gross Profit. The Company's gross profit was $5.4 million and $10.9
million for the quarters ended March 31, 1997 and 1996, respectively (64% and
72% of net sales, respectively). Gross profit was $19.0 million and $29.6
million for the nine-month periods ended March 31, 1997, and 1996, respectively
(65% and 67% of net sales, respectively). The net decrease in gross profit
margin for both the quarter and the nine-month period ended March 31, 1997, as
compared to the corresponding periods in fiscal 1996, was primarily the result
of the decline in net sales and consequent lower sales dollars absorbing the
fixed elements of cost of goods sold. To a lesser extent, the Company's product
mix sold in the quarter ended March 31, 1997 included a higher percentage of
LANtastic 7.0 starter and adapter kits which because of their hardware content,
have lower gross margins than software-only products. The decrease in margins
was to a minor extent offset by higher margin software products acquired in
10
<PAGE>
connection with the purchase of three software companies during fiscal 1996.
Gross profit margins may fluctuate from quarter to quarter due to changes in net
sales, product mix, pricing actions and changes in sales and inventory
allowances.
Sales and Marketing. Sales and marketing expenses were $5.6 million and
$6.8 million for the quarters ended March 31, 1997 and 1996, respectively, (66%
and 45% of net sales, respectively). Sales and marketing expenses were $18.3
million and $19.9 million for the nine-month periods ended March 31, 1997 and
1996, respectively, (63% and 45% of net sales, respectively). The decrease in
aggregate dollars for sales and marketing expenses for the quarter and the
nine-month period ended March 31, 1997, as compared to the corresponding periods
in fiscal 1996, are due primarily to the Company's restructuring actions
undertaken during the quarters ended September 30, 1996 and March 31, 1997 that
reduced operating expenses, offset by the cost of activities related to the
launch of LANtastic 7.0. The increases in sales and marketing expenses as a
percentage of net sales for the quarter and the nine-month period ended March
31, 1997 as compared to the corresponding periods in fiscal 1996, are due to the
decreases in net sales experienced during those periods.
Product Development. Product development expenses were $2.3 million and
$2.0 million for the quarters ended March 31, 1997 and 1996, respectively, (27%
and 13% of net sales, respectively). Product development expenses were $7.0
million and $4.6 million for the nine-month periods ended March 31, 1997 and
1996, respectively, (24% and 10% of net sales, respectively). The increase in
aggregate dollars for product development expenses for the quarter and nine
month period ended March 31, 1997 as compared to the corresponding periods in
fiscal 1996 is principally attributable to the addition of product development
personnel in the computer telephony and PC communications segments, both in
connection with the acquisitions of the three software companies in fiscal 1996
and subsequent thereto the expansion and acceleration of development efforts in
those segments. The increase in product development expenses as a percentage of
net sales for the quarter and the nine-month period ended March 31, 1997 as
compared to the corresponding periods in fiscal 1996, are primarily due to the
decreases in net sales experienced during those periods.
General and Administrative. General and administrative expenses were
$1.3 million and $1.6 million for the quarters ended March 31, 1997 and 1996,
respectively, (15% and 11% of net sales, respectively). General and
administrative expenses were $4.2 million for both the nine-month periods ended
March 31, 1997 and 1996, respectively, (14% and 10% of net sales, respectively).
The decrease in aggregate dollars for general and administrative expenses for
the quarter ended March 31, 1997, as compared to the corresponding quarter in
fiscal 1996 is principally attributable to reductions in personnel effected
during the quarter ended September 30, 1996 and additional cost reductions
achieved in the quarter ended March 31, 1997 resulting from further
administrative staff reductions. The increase in general and administrative
expenses as a percentage of net sales for the quarter and the nine-month period
ended March 31, 1997, as compared to the corresponding periods in fiscal 1996,
is principally the result of the decrease in net sales.
Restructuring Cost. During the quarter ended September 30, 1996,
primarily in response to lower than expected sales of LANtastic NOS products
during the quarter and attendant uncertainty as to future sales levels of NOS
products, the Company elected to take two principal actions; first, to realign
the resources of the Company to accelerate the development, delivery and
customer adoption of new computer telephony and communications products and,
second, to reduce the Company's operating expenses. The effect of the
realignment was to increase the Company's investment in product development,
marketing and channel development in the high growth computer telephony and
communications segments of the business and thereby bring more focus to the
delivery of products in these areas, as well as to support continuing
differentiation for LANtastic in the future.
11
<PAGE>
During the quarter ended March 31, 1997, primarily in response to
continued weakness in sales of LANtastic network operating system NOS products,
the Company elected to further reduce its operating expenses in Europe,
principally through the closure of the Italian sales office, and certain
personnel costs in the U.S., principally at the Tucson and Cambridge facilities.
The Company recorded a $1.3 million restructuring charge for the quarter ended
March 31, 1997 to cover severance costs associated with these actions, along
with other related expenses.
Purchased In-Process Technology And Related Costs. In conjunction with
the acquisitions of Synergy, Triton and Stylus, the Company recorded a charge to
operations during the second and third quarters of fiscal 1996 totaling $21.7
million. The charge related to purchased in-process technology that had not
reached technological feasibility and had indeterminable alternative future use.
In addition, as a result of the acquisitions, the Company recorded a charge to
operations for other related costs totaling $5 million. Other related costs
included increases in allowances for returns, rotations and inventory
obsolescence associated with the transition to new technology, costs for
severance and outplacement, and facility costs relating to the cancellation of
leases in order to consolidate technical support and distribution.
Other Income, Net. For the quarter ended March 31, 1997, other income,
net, decreased to $118,000, from $404,000, in the corresponding quarter of
fiscal 1996. For the nine-month period ended March 31, 1997, other income, net,
decreased to $488,000, from $1,238,000 in the corresponding period of fiscal
1996. The decrease in other income, net, for the quarter ended March 31, 1997
and the nine-month period ended March 31, 1997, resulted principally from a
decrease in investment income resulting from the reduction in cash and
investment balances due to the acquisitions for cash of the three software
companies in fiscal 1996.
The Company's effective income tax rate for the quarter ended March 31,
1997, was (27.5%) compared to an effective rate of (43.1%) in the corresponding
quarter of fiscal 1996. The decrease in the effective income tax rate for the
quarter ended March 31, 1997, as compared to the corresponding quarter in fiscal
1996 is principally the result of adjustments to the tax benefit recognized for
state net operating loss carryforwards.
12
<PAGE>
Liquidity and Capital Resources
The Company had cash and cash equivalents of $17.6 million at March 31,
1997, compared to $15.3 million at June 30, 1996, and working capital of $31
million at March 31, 1997 compared to $36.8 million at June 30, 1996. The
increase in cash and cash equivalents was principally the result of the receipt
of aggregate federal income tax refunds of approximately $4.9 million, cash
received from a sale-leaseback of computer and related equipment of
approximately $1.4 million, and cash received from a mortgage of certain real
property owned by the Company of approximately $2.1 million, partially offset by
severance payments associated with the Company's restructuring actions effected
at the end of the quarters ended September 30, 1996 and March 31, 1997 (See
caption entitled Restructuring Cost above). Days sales outstanding in trade
accounts receivable at March 31, 1997 increased to 113 days from 97 days at June
30, 1996, due principally to the decrease in net sales. The Company believes
that its allowances for product returns and doubtful accounts are adequate.
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.
In February 1997, the Company's Board of Directors readopted and
extended a stock repurchase program under which the Company is authorized to
repurchase up to 1,000,000 shares of its outstanding common stock for general
corporate purposes. The Board of Directors authorized Company management to
pursue the repurchase program in open market transactions periodically,
depending upon market conditions and other factors.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement of Accounting Standards No. 128, "Earnings per Share" (Statement 128).
This statement establishes standards for computing and presenting earnings per
share ("EPS"), and supersedes APB Opinion No. 15. The Statement replaces primary
EPS with basic EPS and requires a dual presentation of basic and diluted EPS.
The Statement is effective for both interim and annual periods ending after
December 15, 1997. Earlier application is not permitted. After adoption, all
prior period EPS data shall be restated to conform to Statement 128. Basic and
diluted EPS, as calculated under Statement 128 would have been $(.25) and $(.62)
for the three month and nine month periods ended March 31, 1997.
Risk Factors
Competition. 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, 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 PC industry is likely to intensify as current competitors expand their
product lines, more features are included in operating systems (e.g., Windows
95), motherboards and microprocessors, 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. Consequently, the Company expects
to continue 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. 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.
Customers. The Company relies on a network of distributors and value added
resellers (VARs) for a significant portion of both its domestic and
international networking and PC communications product revenues. In addition, a
majority of the sales of CoSession Remote, the Company's PC remote control
product, are to PC OEM's. Generally, there are no minimum purchase requirements
for the Company's distributors, VARs and OEMs and many of the Company's
distributors and VARs sell competitive products. There can be no assurance that
these customers will give priority to the marketing of the Company's products as
compared to competing products or alternative solutions or that such customers
will continue to offer the Company's products. Further, in light of the
significant decline in sales experienced over the last several quarters, there
can be no assurance that the Company's major domestic and international
distributors will continue to purchase the Company's products at the same levels
(relative to rates of resale) or under the same terms and conditions as in the
past. In the event of the termination of the Company's relationship with one or
more major distributors, the Company would have to find suitable alternative
channels of distribution. The absence of such alternatives could have a material
adverse effect on the Company's business, financial condition and results of
operation. Certain of the Company's PC OEM relationships require the scheduled
delivery of product revisions and new products. The failure to adhere to
agreed-upon product delivery schedules could result in the termination of key
relationships with major PC manufacturers, which could have a significant
adverse impact on current and future revenues in the PC OEM channel.
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 manage the volume of its sales to distributors and other volume
purchasers, overstocking by these customers or changes in their inventory
policies or practices may require the Company to accept returns above historical
levels. In addition, the risk of product returns and rotations may increase if
the demand for existing products or new products introduced by the Company
proves to be lower than anticipated. Although the Company believes that it
provides adequate allowances for product returns and rotations, there can be no
assurance that actual product returns and rotations will not exceed the
Company's allowances. Any product returns and rotations in excess of recorded
allowances could result in a material adverse effect on net sales and operating
results. As the Company introduces more new products, the predictability and
timing of sales to end users and the management of returns to the Company of
unsold products by distributors and volume purchasers becomes more complex and
could result in material fluctuations in quarterly sales and operating results.
13
<PAGE>
The Company is also exposed to its distributors and other volume
purchasers for price protection for list price reductions by the Company on its
products held in such customers' inventories. The Company provides its
distributors with price protection in the event that the Company reduces the
list price of its products. Distributors and other volume purchasers are usually
offered credit for the impact of a list price reduction on the expected revenue
from the Company's products in the distributors' inventories at the time of the
price reduction. Although the Company 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 the recorded allowance could result
in a material adverse effect on 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 distributors and other volume purchasers
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' 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 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,
changes in 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 product mix of customer
orders, or to ship large quantities of products near the end of a 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.
Networking. The Company's major competitors in the small business
networking market are Microsoft Corporation (Microsoft) and Novell, Inc.
(Novell). Both of these companies have substantially greater financial,
technological, production and sales and marketing resources than those of the
Company.
Management believes that the inclusion of networking capabilities
(printer, file and application sharing) in Microsoft's Windows 95 operating
system (released in August 1995) have had a detrimental impact on sales of the
Company's LANtastic NOS products. Windows 95 is pre-loaded on virtually all
Pentium processor-based personal computers currently sold worldwide. The impact
of Windows 95 has been compounded by the dominance and visibility of Microsoft
in the personal computer software market and the more rapid than expected
upgrade by small businesses to Pentium PC's. In August 1996, Microsoft released
Windows NT 4.0, a client server network version of the Windows operating system.
Management believes that the workstation version of Windows NT 4.0 which, like
Windows 95, includes peer-to-peer networking capabilities and is preloaded on
Pentium PC's, has provided significant direct competition to the LANtastic NOS
in the small business networking market. Further, business applications software
vendors appear to be rapidly adapting their products to Windows NT. Management
believes that this trend combined with the fact that DOS, Windows 3.x and
Windows 95 clients are compatible with the NT server has and will continue to
provide substantial competitive pressure on sales of LANtastic NOS products.
Press reports suggest that Microsoft is planning a direct assault on small
business with versions of NT and BackOffice specially designed to meet the
buying requirements of small businesses, and potentially reducing opportunities
for LANtastic technologies to add value for small business customers. Such a
solution from Microsoft could further diminish demand for LANtastic.
In February 1997, Novell, released a new version of its IntranetWare
NOS, aimed at the small business market. The product, IntranetWare for Small
Business, is targeted toward businesses with 25 or fewer users and priced lower
than previous NetWare versions. There can be no assurance that the introduction
of IntranetWare for Small Business along with other new products from Novell may
not adversely affect the Company's competitive positioning, and its financial
results.
14
<PAGE>
Finally, the movement of the networking industry towards the uniform
use of Internet technologies in the construction of local area networks (so
called intranets) constitutes a risk that demand for more proprietary networks,
such as LANtastic, will decline further, and that competition will emerge from a
new class of players, such as Netscape Communications, Sun Microsystems, and
others. Due to the negative impact of competition on sales of the LANtastic NOS
product line to date, and the likely further decline in the future, the Company
is evaluating the strategic alternatives which might be available to optimize
the asset value attendant to such product line.
PC Communications. The principal distribution channel for the Company's
remote control product, CoSession Remote, is through OEM arrangements with PC
manufacturers. The Company is developing, but has not yet released a 32-bit
version of the product to support the Windows 95 and Windows NT operating
systems. As the Company's major competitors currently offer 32-bit remote
control products, it is critical, for the continuance of the OEM relationships,
that the Company successfully complete development of the 32 bit products in a
timely manner and in accordance with any agreed-upon delivery schedules. The
loss of one or more of these OEM relationships could have a significant impact
on the Company's net sales and operating results. Microsoft, because of its
dominant position, in the PC operating systems and business applications
markets, frequently offers value-added functionality to its products in the form
of enhancements to its Windows operating systems, which are pre-loaded on new
PC's, or by offering free products for download from its World Wide Web site.
Microsoft has announced its intention to release a version of Windows NT Server
with modem sharing capabilities. The inclusion of modem sharing capabilities in
Windows NT could result in substantially increased competition for the Company's
ModemShare product which could have a significant impact on the Company's sales
and operating results (see caption above entitled, "Networking" for further
discussion of Windows NT). Microsoft has also announced its intention to include
remote control components in future versions of Windows operating systems, and
currently distributes Net Meeting at no charge from its Web site. These actions
could lead to diminished demand for the Company's CoSession remote control
product, and consequently decreased net sales and operating results.
Computer Telephony. The market for open, standards-based telephony
tools, applications and system-level products is relatively new, and rapidly
evolving. There can be no assurances that these markets will continue to expand
or if they do, that the Company's products will receive widespread acceptance.
Further, the market for the Company's telephony products is characterized by the
rapid evolution of telephony hardware and software standards, by changing
customer requirements, and is highly competitive with respect to timely product
introduction. These characteristics may render the Company's telephony products
obsolete or unmarketable.
The Company is currently investing significant resources in the
development of telephony products. Due to the complexity of these tools and
system level products, and the difficulty in gauging the engineering effort
required to develop and bring these products to market, the Company's telephony
product line is subject to significant risk. Software products as complex as
those currently under development by the company are subject to frequent and
unpredictable delays during development. There can be no assurance that the
Company will not encounter difficulties that could delay or prevent the
successful and timely development, introduction and marketing of these products.
Furthermore, the successful development of the Company's telephony products is
dependent to a significant extent upon a number of key technical employees and
technical contractors, the loss of one or more of whom could have a material
adverse effect upon the Company's development schedule. The future success of
the Company's telephony products will depend in large part on its ability to
attract and retain talented and qualified technical personnel.
The Company believes that the principal competitive factors affecting
the markets it serves include vendor and product reputation, product
architecture, functionality and features, scalability, ease of use, quality of
product and support, performance, price, brand name recognition and
effectiveness of sales and marketing efforts. There can be no assurances that
the Company can maintain and grow its market position against current and
potential competitors, especially those with significantly greater financial,
marketing, service, support, technical and other competitive resources.
Additionally, an integral part of the Company's sales strategy for the telephony
products is the expansion into new distribution channels, including the
recruitment of new value-added resellers and interconnects. Any failure by the
Company to expand its distribution channel for telephony products or any failure
to maintain and grow its competitive position would have a material adverse
effect upon the Company's revenues from its telephony product line.
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. 11 - Computation of Net Loss Per Share
No. 27 - Financial Data Schedule for Form 10-Q dated May 15, 1997
(c) Reports on Form 8-K
There were no reports filed on Form 8-K during the three months
ended March 31, 1997.
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 15, 1997 By /s/ William C. Keiper
------------------------------------------
William C. Keiper
Chairman and Chief Executive Officer
By /s/ Gary R. Acord
------------------------------------------
Gary R. Acord
Vice President and Chief Financial Officer
(Principal Financial Officer)
17
Artisoft, Inc. and Subsidiaries
EXHIBIT 11. COMPUTATION OF NET LOSS PER SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ ----------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Loss $(3,663) $(6,507) $ (8,998) $(19,277)
======= ======= ======== ========
Weighted Average Shares:
Common shares outstanding 14,546 14,478 14,531 14,456
Common Equivalent shares representing
shares issuable upon exercise of stock
options (1) 3 11
------- ------- -------- --------
Total weighted average shares -
primary (2) 14,549 14,478 14,542 14,456
======= ======= ======== ========
Primary Net Loss per common and
equivalent share $ (.25) $ (.45) $ (.62) $ (1.33)
======= ======= ======== ========
</TABLE>
- ------
Notes:
(1) Amount calculated using the treasury stock method and fair market values.
(2) Primary and fully diluted net income per common and equivalent share are the
same.
18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 17,646
<SECURITIES> 0
<RECEIVABLES> 11,149
<ALLOWANCES> 0
<INVENTORY> 2,225
<CURRENT-ASSETS> 36,965
<PP&E> 14,847
<DEPRECIATION> 7,641
<TOTAL-ASSETS> 51,043
<CURRENT-LIABILITIES> 6,013
<BONDS> 0
0
0
<COMMON> 278
<OTHER-SE> 41,777
<TOTAL-LIABILITY-AND-EQUITY> 51,043
<SALES> 8,452
<TOTAL-REVENUES> 8,570
<CGS> 3,034
<TOTAL-COSTS> 3,034
<OTHER-EXPENSES> 10,586
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,050)
<INCOME-TAX> (1,387)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,663)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
