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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 September 30, 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.
--------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 86-0446453
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(State or other jurisdiction of incorporation) (IRS employer identification number)
</TABLE>
One South Church Avenue, Suite 2200
Tucson, Arizona 85701
(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 (November 14, 1997).
Common stock, $.01 par value: 14,528,964 shares
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<PAGE>
Artisoft Inc. and Subsidiaries
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets-
September 30, 1997 and June 30, 1997 3
Consolidated Statements of Operations-
Three Months Ended
September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows-
Three Months Ended September 30, 1997
and 1996 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote by Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
EXHIBITS
11 Computation of Net Income Per Share 21
27 Financial Data Schedule 22
2
<PAGE>
Artisoft, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30, June 30,
ASSETS 1997 1997
---- ----
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,337 $ 14,673
Receivables:
Trade accounts, net 3,844 5,011
Income taxes 4,300 4,300
Notes and other 518 580
Inventories 1,786 1,860
Prepaid expenses 689 833
Property and equipment held for sale 2,499 2,543
-------- --------
Total current assets 26,973 29,800
-------- --------
Property and equipment 7,895 7,883
Less accumulated depreciation and amortization (5,322) (5,060)
-------- --------
Net property and equipment 2,573 2,823
-------- --------
Other assets 2,565 2,748
-------- --------
$ 32,111 $ 35,371
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 925 $ 1,345
Accrued liabilities 2,574 3,118
Accrued restructuring costs 2,539 4,950
Mortgage note payable 2,181 2,182
Current portion of capital lease obligations 468 458
-------- --------
Total current liabilities 8,687 12,053
-------- --------
Capital lease obligations,
net of current portion 582 714
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock, $1.00 par value. Authorized 11,433,600 shares; none issued -- --
Common stock, $.01 par value. Authorized 50,000,000 shares;
issued 27,849,464 shares at September 30,
1997 and June 30, 1997 278 278
Additional paid-in capital 96,227 96,227
Retained accumulated deficit (3,879) (4,117)
Less treasury stock, at cost, 13,320,500 shares at September 30,
1997 and June 30, 1997 (69,784) (69,784)
-------- --------
Total shareholders' equity 22,842 22,604
-------- --------
$ 32,111 $ 35,371
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Artisoft, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 1997 and 1996
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1997 1996
---- ----
<S> <C> <C>
Net sales $ 6,725 $ 11,120
Cost of sales 1,454 3,930
-------- --------
Gross profit 5,271 7,190
-------- --------
Operating expenses:
Sales and marketing 2,698 7,005
Product development 1,791 2,390
General and administrative 657 1,438
Restructuring costs -- 1,805
-------- --------
Total operating expenses 5,146 12,638
-------- --------
Income (loss) from operations 125 (5,448)
Other income, net 113 192
-------- --------
Income (loss) before income taxes 238 (5,256)
Income tax provision (benefit) -- (1,871)
-------- --------
Net income (loss) 238 (3,385)
-------- --------
Net income (loss) per common and common
equivalent share $ .02 $ (.23)
-------- --------
Shares used in per share calculation 14,555 14,524
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
Artisoft, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------------
1997 1996
---- -----
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss): $ 238 $ (3,385)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 499 718
Deferred income taxes -- (1,871)
(Gain) Loss from disposition of property, net 12 (1)
Change in accounts receivable and inventory allowances (1,982) (1,718)
Tax benefit of disqualifying dispositions -- 14
Changes in assets and liabilities,
Receivables
Trade accounts 2,776 4,482
Income taxes -- 929
Notes and other 62 530
Inventories 447 206
Prepaid expenses 144 (504)
Accounts payable and accrued liabilities (964) 1,861
Accrued restructuring costs (2,411) --
Income taxes payable -- (127)
Other assets -- (67)
-------- --------
Total adjustments (1,417) 4,452
-------- --------
Net cash provided by (used in) operating activities (1,179) 1,067
-------- --------
Cash flows from investing activities:
Proceeds from sale of property and equipment 26 13
Purchases of property and equipment (61) (550)
-------- --------
Net cash (used in) investing activities (35) (537)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options -- 23
Principal payments on long term debt (122) (26)
-------- --------
Net cash (used in) financing activities (122) (3)
-------- --------
Net increase (decrease) in cash and cash equivalents (1,336) 527
Cash and cash equivalents at beginning of period 14,673 15,325
-------- --------
Cash and cash equivalents at end of period 13,337 15,852
-------- --------
</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 1997 Annual Report on
Form 10-K. The results of operations for the three months ended September 30,
1997 are not necessarily indicative of the results to be expected for the full
year.
(2) Computation of Net Income Per Share
Net income per common and common equivalent share is computed using the
weighted average number of common shares and dilutive common equivalent shares
outstanding during the period.
(3) Restructuring Cost
The accrued restructuring costs in the accompanying consolidated
balance sheet at September 30, 1997 include the costs of: involuntary employee
termination benefits, international sales and support office closures and
related costs associated with the restructuring actions effected during the
fiscal year ended June 30, 1997. Employee termination benefits include
severance, wage continuation, notice pay and medical and other benefits. Other
costs associated with the restructuring include international sales and support
office closures and related costs of premise and other lease terminations, legal
and other professional fees.
The accrued restructuring costs at September 30, 1997 principally consist of the
following:
6
<PAGE>
<TABLE>
<CAPTION>
Employee Termination Total Accrued
Benefits Office Closure Costs Restructuring Costs
-------- -------------------- -------------------
<S> <C> <C> <C>
Balance at June 30, 1997 $4,200,000 $750,000 $4,950,000
Cash paid for employee
termination benefits (1,859,000) - (1,859,000)
Cash paid for office closure costs - (415,000) (415,000)
Reduction in estimate of
future restructuring costs (137,000) - (137,000)
---------- -------- ----------
Balance at September 30, 1997 $2,204,000 $335,000 $2,539,000
---------- -------- ----------
</TABLE>
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.
(5) Inventories
Inventories at September 30, 1997 and June 30, 1997 consist of the
following (in thousands):
September 30, June 30,
1997 1997
---- ----
Raw materials $ 1,024 $ 1,088
Work-in-process 233 261
Finished goods 880 1,236
-------- --------
2,137 2,585
Inventory allowances (351) (725)
-------- --------
$ 1,786 $ 1,860
======== ========
7
<PAGE>
(6) Property and Equipment
Property and equipment at September 30, 1997 and June 30, 1997 consist
of the following (in thousands):
September 30, June 30,
1997 1997
---- ----
Land $ - $ -
Buildings and improvements - -
Furniture and fixtures 892 892
Computers and other equipment 6,941 6,929
Leasehold improvements 62 62
------- -------
7,895 7,883
Accumulated depreciation and
amortization (5,322) (5,060)
------- -------
$ 2,573 $ 2,823
======= =======
As more fully described in Note 3, the restructuring actions commenced
in June 1997 included a relocation of the Company's Tucson operations to a
smaller facility in October 1997 and the closure of a number of international
sales and support offices. Property and equipment held for sale in the
accompanying September 30, 1997 consolidated balance sheet is comprised of the
expected net realizable value of excess furniture and equipment and the net book
values of the Tucson land and buildings and improvements.
On October 31, 1997 the escrow on the sale of the Company's Tucson land and
buildings and improvements closed. The Company realized net cash proceeds of
$1.6 million and an associated net gain of approximately $1.3 million.
(7) Other Assets
Other assets at September 30, 1997 and June 30, 1997 consist of the
following (in thousands):
September 30, June 30,
1997 1997
---- ----
Trademarks and patents, net of
accumulated amortization of $50 and $44 $ 75 $ 80
Purchased technology, net of
accumulated amortization of $1,157 and $984 2,298 2,471
Recoverable deposits and other 192 197
------- -------
$ 2,565 $ 2,748
======= =======
(8) Subsequent Event
On September 30, 1997 William C. Keiper resigned as Chief Executive
Officer of the Company. The Company paid Mr. Keiper severance and other
performance related benefits of $681,000 on October 1, 1997.
8
<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
September 30, 1997 were $6.7 million, a decrease of 40% from net sales of $11.1
million for the corresponding quarter of fiscal 1997. Net sales for the quarter
ended September 30, 1997 increased 56% from the previous quarter's net sales of
$4.3 million. The decrease in net sales as compared to the corresponding quarter
in fiscal 1997 was principally due to the decline in sales of the Company's
LANtastic network operating system(NOS) products. The sequential increase in net
sales as compared to the previous quarter's net sales was principally the result
of the effect of channel inventory reserves recorded during the quarter ended
June 30, 1997. Also contributing to the increase in net sales was the release of
Visual Voice Pro 4.0 in August 1997.
The Company distributes its products in both the U.S. and international
markets. U.S. sales decreased 35% to $5.1 million (76% of net sales) for the
quarter ended September 30, 1997, from $7.9 million (71% of net sales), for the
same quarter a year ago. The decrease in U.S. net sales for the quarter ended
September 30, 1997, as compared to the corresponding period in fiscal 1997,
primarily resulted from the decline in sales of LANtastic NOS products in the
U.S. distribution channels and actions taken during the quarter ended September
30, 1997 to maintain U.S. distribution channel inventories at a level
commensurate with U.S. sell through levels partially offset by increases in U.S.
sales of the Company's computer telephony products.
International sales decreased 50% to $1.6 million (24% of net sales),
for the quarter ended September 30, 1997, from $3.2 million (29% of net sales),
for the same quarter a year ago. The decrease in international net sales for the
quarter ended September 30, 1997, as compared to the corresponding period in
fiscal 1997, primarily resulted from the decline in sales of LANtastic NOS
products in Europe, offset to a minor extent by sales of new products. Also
contributing to the decline in international sales was the closure of several of
the Company's international sales and support offices and the attendant
disruption to customer relationships.
Gross Profit. The Company's gross profit was $5.3 million and $7.2
million for the quarters ended September 30, 1997 and 1996, respectively (79%
and 65% of net sales, respectively). The net decrease in aggregate dollars of
gross profit margin for the quarter ended September 30, 1997, as compared to the
corresponding period in fiscal 1997, was primarily the result of the decline in
net sales. The increase in gross profit margin percentage was due to the
following factors: cost efficiencies achieved at the Company's distribution
center due to the restructuring actions taken during the quarter ended June 30,
1997, decreased software licensing fees and product translation costs and
increased sales of higher margin software-only content products during the
quarter ended September 30, 1997. 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 $2.7 million and
$7.0 million for the quarters ended September 30, 1997 and 1996, respectively,
(40% and 63% of net sales, respectively). The decrease in sales and marketing
expenses in both aggregate dollars and as a percentage of net sales for the
quarter ended September 30, 1997 as compared to the corresponding quarter in
fiscal 1997, is principally due to the cost efficiencies achieved following the
termination of sales, marketing and support personnel during the quarter ended
June 30, 1997. In addition, the closure of several of the Company's
international sales and support offices contributed to the decrease in sales and
marketing expenses.
9
<PAGE>
Product Development. Product development expenses were $1.8 million and
$2.4 million for the quarters ended September 30, 1997 and 1996, respectively,
(27% and 21% of net sales, respectively). The decrease in aggregate dollars for
product development expenses for the quarter ended September 30, 1997 as
compared to the corresponding quarter in fiscal 1997 is principally attributable
to certain restructuring actions taken during the quarter ended June 30, 1997
which reduced product development staffing levels at the Company's Tucson,
Arizona headquarters. The increase in product development expenses as a
percentage of net sales for the quarter ended September 30, 1997 as compared to
the corresponding quarter in fiscal 1997 is due principally 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 reduction in net sales for the
quarter ended September 30, 1997 as compared to the corresponding quarter in
fiscal 1997 also contributed to the increase in product development expenses as
a percentage of net sales.
General and Administrative. General and administrative expenses were
$.7 million and $1.4 million for the quarters ended September 30, 1997 and 1996,
respectively, (10% and 13% of net sales, respectively). The decrease in
aggregate dollars for general and administrative expenses for the quarter ended
September 30, 1997, as compared to the corresponding quarter in fiscal 1997 is
principally attributable to reductions in personnel effected during the quarter
ended September 30, 1996 and additional cost reductions achieved in the quarters
ended March 31, 1997 and June 30, 1997 resulting from further administrative
staff reductions The decrease in general and administrative expenses as a
percentage of net sales for the quarter ended September 30, 1997, as compared to
the corresponding quarter in fiscal 1997, is principally the result of the
aforementioned administrative staffing reductions partially offset by the
reduction 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. The restructuring costs recorded
for the quarter ended September 30, 1996 was $1.8 million.
Other Income, Net. For the quarter ended September 30, 1997, other
income, net, decreased to $113,000, from $192,000 in the corresponding quarter
of fiscal 1997. The decrease for the quarter ended September 30, 1997, resulted
principally from interest expense incurred during the quarter ended September
30, 1997 due primarily to a $1.4 million sale-leaseback of computer equipment
and related software in December 1996. Additionally, the Company entered into a
$2.2 million mortgage loan transaction in February 1997.
Income Tax Provision (Benefit). The Company's effective income tax rate
for the quarter ended September 30, 1997, was 0% compared to an effective rate
of (36%) in the corresponding quarter of fiscal 1997. The Company did not
recognize tax expense for the quarter ended September 30, 1997 due to the
carryforward of federal and state net operating losses.
Liquidity and Capital Resources
The Company had cash and cash equivalents of $13.3 million at September
30, 1997, compared to $14.7 million at June 30, 1997, and working capital of
$18.3 million at September 30, 1997 compared to $17.7 million at June 30,
10
<PAGE>
1997. The decrease in cash and cash equivalents was principally the result of
severance payments associated with the Company's restructuring actions effected
during the quarter ended June 30, 1997.
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.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"(SFAS
No. 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. The proforma effect of the Company adopting Statement 128 is that basic and
diluted EPS would have been $ .02 and $ .02 for the quarter ended September 30,
1997 and $ (.23) and $ (.23) for the quarter ended September 30, 1996.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS No. 130). SFAS No. 130 establishes requirements for disclosure of
comprehensive income and becomes effective for the Company for the year ending
June 30, 1999.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131
establishes standards for disclosure about operating segments in annual
financial statements and selected information in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise". The new standard
becomes effective for the Company for the year ending June 30, 1999, and
requires that comparative information from earlier years be restated to conform
to the requirements of this standard.
Risk Factors
Competition. The computer software and telephony 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 and Windows NT), 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
11
<PAGE>
assurance that the Company's products will be able to compete successfully with
other products offered presently or in the future by other vendors.
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) has 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 pre-loaded 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 provided and will
continue to provide substantial competitive pressure on sales of LANtastic NOS
products. In the spring of 1997, Microsoft released a small business server that
runs on Microsoft NT 4.0. This client server network version of the Windows
operating system is designed to meet the buying requirements of small businesses
and could further substantially reduce opportunities for LANtastic technologies
to add value for small business customers. This small business solution could
further diminish demand for LANtastic.
The Company expects Microsoft to launch the Windows 98 operating system in
May 1998. Windows 98 may have additional networking features that further
undermine the future sales of the Company's LANtastic NOS products. In addition,
press reports suggest that Microsoft will be releasing Windows NT 5.0 in the
next 9 to 15 months. Management believes that the features and functionality
included in the Windows NT 5.0 client server network version of the Windows
operating system, could detrimentally impact the future sales of LANtastic NOS,
i.Share and ModemShare product lines.
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.
Finally, the movement of the networking industry toward 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.
12
<PAGE>
The principal distribution channel for the Company's remote control
product, CoSession Remote, is through OEM arrangements with PC manufacturers.
The Company has announced the November 1997 release of the 32-bit retail version
of CoSession Remote 8.1, a product supporting 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 Company's
current OEM relationships, that the Company successfully introduce this product
to the marketplace. 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 computer
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 computer 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 computer telephony products will depend in large part
on its ability to attract and retain talented and qualified technical personnel.
Other Competitive Factors. 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 computer 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 and anticipated contribution
from its telephony product line.
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 remote control product,
are to PC OEM's. Generally, there
13
<PAGE>
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 in fiscal year 1997, 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 operations. 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.
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.
14
<PAGE>
Product Concentration. The Company has in the past derived, and may in the
future derive, a significant portion of its revenues from a relatively small
number of products. Declines in the revenues from these software products,
whether as a result of competition, technological change, price pressures or
other factors, would have a material adverse effect on the Company's business,
results of operations and financial condition. Further, life cycles of the
Company's products are difficult to estimate due in part to the recent emergence
of certain of the Company's market, the effect of new products or product
enhancements, technological changes in the communication software industry in
which the Company operates and future competition. The Company's future
financial performance will depend in part on the successful development,
introduction and market acceptance of new products and product enhancements.
There can be no assurance that the Company will continue to be successful in
marketing its current products or any new products or product enhancements.
Dependence on New Product Offerings. The Company's future success will
depend, in significant part, on its ability to successfully develop and
introduce new software products and improved versions of existing software
products on a timely basis and in a manner that will allow such products to
achieve broad customer acceptance. The Company expects to begin offering
TeleVantage, a computer telephony integration product, in the future. There can
be no assurance that this and other new products will be introduced on a timely
basis, if at all. If new products are delayed or do not achieve market
acceptance, the Company's business, results of operations and financial
condition will be materially adversely affected. In the past, the Company has
also experienced delays in purchases of its products by customers anticipating
the launch of new products by the Company or the Company's customers. There can
be no assurance that material order deferrals in anticipation of new product
introductions will not occur. There can also be no assurance that the Company
will be successful in developing, introducing on a timely basis and marketing
such software or that any such software will be accepted in the market.
Technological Change. The communication software market for personal
computers 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 would be materially adversely affected.
Potential for Undetected Errors. Software products as complex as those
offered by the Company may contain undetected errors. There can be no assurance
that, despite testing by the Company and by current and potential customers,
errors will not be found in new or existing products after commencement of
commercial shipments, resulting in loss of or delay in market acceptance or the
recall of such products, which could have a material adverse effect upon the
Company's business, results of operations and financial condition. The Company
provides customer support for most of its products. The Company will in the
future offer new products. If these products are flawed, or are more difficult
to use than traditional Company products, customer support costs could rise and
customer satisfaction levels could fall.
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
15
<PAGE>
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. The Company primarily sells its software in a
form that includes a disk or disks and a manual. Some of its 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.
Currently, the Company has the capability to produce its products in-house on 3
1/2-inch diskettes. The Company does not currently have the capability to
produce CD-ROMs and the cost to develop such production capability may be
prohibitive. As the size of software programs grow, CD-ROM is becoming a more
prominent medium. The Company currently contracts CD-ROM production to
specialized CD-ROM facilities. In the event of a shift of this kind, 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 on a
combination of trade secret, nondisclosure and copyright and trademark law which
may afford only limited protection. The Company owns United States trademark
registrations for certain of its trademarks. There can be no assurance that the
steps taken by the Company will be adequate to deter misappropriation of its
proprietary information, will 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. 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 do not protect the Company's proprietary rights to as
great an extent as do the laws of the United States. There can be no assurance
that the Company's means of protecting its proprietary rights will be adequate
or that the Company's competitors will not independently develop similar
technology. Further, although the Company believes that its services and
products do not infringe on the intellectual property rights of others, there
can be no assurance that such a claim will not be asserted against the Company
in the future. The failure of the Company to protect its proprietary information
could have a material adverse effect on the Company's business, results of
operations and financial condition.
From time to time, the Company has received and may in the future receive
communications from third parties asserting that the Company's trade names or
that features, content, or trademarks of certain of the Company's products
infringe upon intellectual property rights held by such third parties. As the
number of trademarks, patents, copyrights and other intellectual property rights
in the Company's industry increases, and as the coverage of these patents and
rights and the functionality of products in the market further overlap, the
Company believes that products based on its technology may increasingly become
the subject of infringement claims. Such claims could materially adversely
affect the Company, and may also require the Company to obtain one or more
licenses from third parties. There can be no assurance that the Company would be
able to obtain any such required licenses upon reasonable terms, if at all, and
the failure by the Company to obtain such licenses could have a material adverse
effect on its business, results of operations and financial condition. In
addition, the Company licenses technology on a non-exclusive basis from several
companies for inclusion in its products and anticipates that it will continue to
do so in the future. The inability of the Company to continue to license these
technologies or to license other necessary technologies for inclusion in its
products, or substantial increases in royalty payments under these third party
licenses, could have a material adverse effect on its business, results of
operations and financial condition.
Litigation 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
16
<PAGE>
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.
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
communication software products and introduce enhanced future products. The
industry is characterized by a high level of employee mobility and aggressive
recruiting of skilled personnel. There can be no assurance that the Company's
current employees will continue to work for the Company. Loss of services of key
employees could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, the Company may need
to grant additional options and provide other forms of incentive compensation to
attract and retain key personnel.
International Sales. The Company presently operates in foreign markets. For
the three months ended September 30, 1997, the Company generated 29% of its
revenue outside of the United States. International business is subject to risks
in addition to those inherent in the Company's United States business, including
substantially different regulatory requirements in different jurisdictions,
varying technical standards, tariffs and trade barriers, political and economic
instability, reduced protection for intellectual property rights in certain
countries, difficulties in staffing and maintaining foreign operations,
difficulties in managing distributors, potentially adverse tax consequences,
foreign currency exchange fluctuations, the burden of complying with a wide
variety of complex foreign laws and treaties and the possibility of difficulties
in collecting accounts receivable. There can be no assurance that the Company
will be able to continue to generate significant international sales. While the
Company does not currently accept payment in foreign currencies and invoices all
of its sales in U.S. Dollars, there can be no assurance that the Company will be
able to continue this policy. If the Company begins to receive payment in
foreign currencies, it is likely to be subjected to the risks of foreign
currency losses due to fluctuations in foreign currency exchange rates. In
addition, in the event the Company is successful in doing business outside of
the United States, the Company may also face economic, political and foreign
currency situations that are substantially more volatile than those commonly
experienced in the United States. There can be no assurance that any of these
factors will not have a material adverse effect on the Company's business,
results of operations and financial condition.
Potential Effect of Anti-Takeover Provisions. The Company's Certificate of
Incorporation and Bylaws contain provisions that may discourage or prevent
certain types of transactions involving an actual or potential change in control
of the Company, including transactions in which the stockholders might otherwise
receive a premium for their shares over then current market prices, and may
limit the ability of the stockholders to approve transactions that they may deem
to be in their best interest. In addition, the Board of Directors has the
authority to fix the rights and preferences of shares of the Company's Preferred
Stock and to issue such shares, which may have the effect of delaying or
preventing a change in control of the Company, without action by the Company's
stockholders. Certain provisions of Delaware law applicable to the Company,
including Section 203 of the Delaware General Corporation Law, could also have
the effect of delaying, deferring or preventing a change of control of the
Company. It is possible that the provisions in the Company's Certificate of
Incorporation and Bylaws, the ability of the Board of Directors to issue the
Company's Preferred Stock, and Section 203 of the Delaware General Corporation
Law may have the effect of delaying, deferring or preventing a change of control
of the Company without further action by the stockholders, may discourage bids
for the Company's Common Stock at a premium over the market price of the Common
Stock and may adversely affect the market price of the Common Stock and the
voting and other rights of the holders of Common Stock.
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
17
<PAGE>
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 on orders booked and shipped in that quarter and are
not predictable with any degree of certainty. In addition, the Company's expense
levels are based, in part, on its expectations as to future revenues. If revenue
levels are below expectations, operating results are likely to be adversely
affected. The Company's net income may be disproportionately affected by a
reduction in revenues because of fixed costs related to generating its revenues.
Quarterly results in the future may be influenced by these or other factors and,
accordingly, there may be significant variations in the Company's quarterly
operating results. Further, the Company's historical operating results are not
necessarily indicative of future performance for any particular period. Due to
all of the foregoing factors, it is possible that in some future quarter the
Company's operating results may be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would likely be materially adversely affected.
Possible Volatility of Stock Price. The trading price of the Company's
Common Stock is likely to be subject to significant fluctuations in response to
variations in quarterly operating results, changes in management, announcements
of technological innovations or new products by the Company, its customers or
its competitors, legislative or regulatory changes, general trends in the
industry and other events or factors. In addition, the stock market has
experienced extreme price and volume fluctuations which have particularly
affected the market price for many high technology companies similar to
Artisoft, 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.
"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.
18
<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 November 14,
1997
(c) Reports on Form 8-K
The Company filed a report on Form 8-K dated August 27, 1997,
announcing the departure of Gary R. Acord as Vice President and
Chief Financial Officer effective August 28, 1997 and the
appointment of the Company's Controller Kirk D. Mayes as Acting
Principal Financial Officer.
The Company filed a report on Form 8-K dated September 17, 1997,
announcing the resignation of William C. Keiper as Chairman of the
Board of Directors effective September 12, 1997 and resignation as
Chief Executive Officer effective September 30, 1997. The Company
appointed Jerry Goldress as Chairman of the Board of Directors and
Principal Executive Officer.
19
<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: November 14, 1997 By /s/ Jerry E. Goldress
-------------------------------------
Jerry E. Goldress
Chairman and Principal Executive
Officer
By /s/ Kirk D. Mayes
-------------------------------------
Kirk D. Mayes
Corporate Controller, Principal
Accounting Officer
(Acting Principal Financial Officer)
20
Artisoft, Inc. and Subsidiaries
EXHIBIT 11. COMPUTATION OF NET INCOME (LOSS) PER SHARE
(in thousands, except per share amounts)
Three Months Ended
September 30,
-----------------------
1997 1996
Net Income (loss) $ 238 $(3,385)
====== =======
Weighted Average Shares:
Common shares outstanding 14,555 14,524
Total weighted average shares -
primary 14,555 14,524
====== ======
Primary Net Income (loss) per common and
common equivalent share (1) $ .02 $ (.23)
====== ======
- ------
Notes:
(1) Primary and fully diluted net income (loss) per common and common
equivalent share are the same
21
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<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
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<CASH> 13,337
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<PP&E> 7,895
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<TOTAL-ASSETS> 32,111
<CURRENT-LIABILITIES> 8,687
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0
0
<COMMON> 278
<OTHER-SE> 22,564
<TOTAL-LIABILITY-AND-EQUITY> 32,111
<SALES> 6,725
<TOTAL-REVENUES> 6,838
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<INCOME-PRETAX> 238
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