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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 December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number 000 - 19462
ARTISOFT, INC.
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(Exact name of registrant as specified in its charter)
Delaware 86-0446453
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State or other jurisdiction of (IRS employer
incorporation) identification
number
2202 North Forbes Boulevard
Tucson, Arizona 85745
(520) 670-7100
-------------------------
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days.
Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date (February 14, 1997).
Common stock, $.01 par value: 14,549,113 shares
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<PAGE>
Artisoft Inc. and Subsidiaries
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets-
December 31, 1996 and June 30, 1996 3
Consolidated Statements of Operations-
Three Months and Six Months Ended
December 31, 1996 and 1995 4
Consolidated Statements of Cash Flows-
Six Months Ended December 31, 1996
and 1995 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote by Security Holders 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
EXHIBITS
11 Computation of Net Loss Per Share 18
27 Financial Data Schedule 19
2
<PAGE>
Artisoft, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1996 1996
----- ----
(unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 17,315 $ 15,325
Receivables:
Trade accounts, net 11,942 16,768
Income taxes -- 1,635
Notes and other 1,073 1,405
Inventories 2,772 2,998
Prepaid expenses 2,486 906
Deferred income taxes 3,104 4,426
-------- --------
Total current assets 38,692 43,463
-------- --------
Property and equipment 14,583 13,690
Less accumulated depreciation and amortization (6,967) (6,166)
-------- --------
Net property and equipment 7,616 7,524
-------- --------
Deferred income taxes 3,822 3,141
Other assets 3,286 3,584
-------- --------
$ 53,416 $ 57,712
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,122 $ 3,333
Accrued liabilities 2,327 2,640
Income taxes payable 336 577
Current portion of capital lease obligations 755 85
-------- --------
Total current liabilities 6,540 6,635
-------- --------
Long-term capital lease and other obligations,
net of current portion 1,119 96
Commitments and Contingencies -- --
Shareholders' equity:
Common stock, $.01 par value. Authorized 50,000,000 shares;
issued 27,836,613 shares at December 31,
1996 and 27,807,890 at June 30, 1996 278 278
Additional paid-in capital 96,186 96,075
Retained earnings 18,973 24,308
Less treasury stock, at cost, 13,287,500 shares (69,680) (69,680)
-------- --------
Total shareholders' equity 45,757 50,981
-------- --------
$ 53,416 $ 57,712
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
Artisoft, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months and Six Months Ended December 31, 1996 and 1995
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,_
-------------------- --------------------
1996 1995 1996 1995
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $ 9,505 $ 14,325 $ 20,625 $ 29,305
Cost of sales 3,116 5,039 7,046 10,587
-------- -------- -------- --------
Gross profit 6,389 9,286 13,579 18,718
-------- -------- -------- --------
Operating expenses:
Sales and Marketing 5,633 6,655 12,638 13,067
Product development 2,266 1,340 4,656 2,593
General and administrative 1,430 1,255 2,868 2,612
Purchased in-process technology
and related costs -- 14,450 -- 14,450
Restructuring cost -- -- 1,805 --
-------- -------- -------- --------
Total operating expenses 9,329 23,700 21,967 32,722
-------- -------- -------- --------
Loss from operations (2,940) (14,414) (8,388) (14,004)
Other income, net 178 495 370 834
-------- -------- -------- --------
Loss before income taxes (2,762) (13,919) (8,018) (13,170)
Income tax benefit (812) (685) (2,683) (400)
-------- -------- -------- --------
Net Loss $ (1,950) $(13,234) $ (5,335) $(12,770)
======== ======== ======== ========
Net Loss per common and
equivalent share $ (.13) $ (.91) (.37) (.86)
======== ======== ======== ========
Shares used in per share calculation 14,536 14,464 14,530 14,865
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
Artisoft, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities: (unaudited)
Net loss $ (5,335) $(12,770)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Purchased in-process technology -- 10,200
Depreciation and amortization 1,380 1,162
(Gain) Loss from disposition of property and equipment (5) 37
Deferred income taxes 640 (527)
Change in accounts receivable and inventory allowances (1,103) 730
Tax benefit of disqualifying dispositions 22 70
Changes in assets and liabilities,
Trade accounts receivable 5,031 1,542
Income taxes receivable 1,635 3,500
Notes and other receivables 332 1,258
Inventories 1,124 (371)
Prepaid expenses (1,217) (226)
Other assets (80) 190
Accounts payable and accrued liabilities (524) (1,538)
Income taxes payable (241) --
-------- --------
Net cash provided by operating activities 1,659 3,257
-------- --------
Cash flows from investing activities:
Purchases of investments -- (35,063)
Sales of investments -- 56,305
Proceeds from sale of property and equipment 35 --
Cash paid for businesses acquired -- (1,646)
Purchases of property and equipment (972) (1,095)
-------- --------
Net cash provided by (used in) investing activities (937) 18,501
-------- --------
Cash flows from financing activities:
Proceeds from exercises of stock options 47 671
Proceeds from sale-leaseback of equipment 1,368 --
Principal payments on capital lease obligations (147) --
-------- --------
Net cash provided by financing activities 1,268 671
-------- --------
Net increase in cash and cash equivalents 1,990 22,429
Cash and cash equivalents at beginning of period 15,325 16,551
-------- --------
Cash and cash equivalents at end of period $ 17,315 $ 38,980
======== ========
</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 six
months ended December 31, 1996 are not necessarily indicative of the results to
be expected for the full year.
(2) 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 break-even point through
a reduction in operating expenses. As a result of these actions, the Company
recorded a pre-tax restructuring charge of $1.8 million in the six months ended
December 31, 1996 to cover severance costs associated with a 50 person headcount
reduction and other related costs.
(3) 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.
The Company incurred direct transaction costs of approximately $350,000
associated with 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 value on the date of the acquisitions, as follows (in
thousands):
6
<PAGE>
Cash $ 251
Trade receivables 810
Inventories 108
Property and equipment 123
Purchased software 2,011
Purchased in-process technology 10,200
Other 108
--------
13,611
Less cash acquired (251)
Less liabilities assumed (1,196)
---------
Net assets acquired, excluding cash $ 12,164
--------
The acquisitions were accounted for as purchase business combinations
and, accordingly, the results of operations of the acquired companies were
combined with those of the Company as of the respective dates of acquisition.
The proforma effects of the business combinations for the quarter and six-month
period ended December 31, 1995, would have been immaterial to the Company's
consolidated results of operations.
In conjunction with the acquisitions, the Company recorded a charge to
operations of $10.2 million relating to purchased in-process technology that had
not reached technological feasibility and had indeterminable alternative future
use. The remaining $2.0 million of the purchase price allocated to technology
was attributable to purchased software products and is being amortized over five
years. In addition, as a result of the acquisitions, the Company charged to
operations other related costs totaling $4.3 million. The other related costs
were principally attributable to costs associated with the product integration
of Triton and Synergy technology with the Company's technology and the
elimination of duplicate distribution arrangements in Europe. Other related
costs included increases in allowances for returns, rotations and inventory
obsolescence associated with the transition to new technology; organizational
costs for severance and outplacement; and facility costs relating to the
cancellation of leases in order to support consolidated technical support and
distribution.
(4) Inventories
Inventories consist of the following (in thousands):
December 31, June 30,
1996 1996
---- ----
Raw materials $ 1,364 $ 2,167
Work-in-process 535 584
Finished goods 1,540 1,812
------- ---------
3,439 4,563
Inventory allowances (667) (1,565)
------- ---------
$ 2,772 $ 2,998
======= =========
7
<PAGE>
(5) Property and Equipment
Property and Equipment consist of the following (in thousands):
December 31, June 30,
1996 1996
---- ----
Land $ 807 $ 807
Buildings and improvements 1,992 1,991
Furniture and fixtures 1,096 1,058
Computers and other equipment 10,513 9,741
Leasehold improvements 175 93
--------- ----------
14,583 13,690
Accumulated depreciation and
amortization 6,967 6,166
--------- ----------
$ 7,616 $ 7,524
========= ==========
(6) Other Assets
Other assets consist of the following (in thousands):
December 31, June 30,
1996 1996
Trademarks and patents, net of
accumulated amortization $ 253 $ 285
Purchased technology, net of
accumulated amortization 2,817 3,172
Recoverable deposits and other 216 127
-------- -------
$ 3,286 $ 3,584
======== =======
(7) Capital Lease Obligations
In December 1996 the Company entered into a $1.4 million
sales-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.
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 December 31,
1996 were $9.5 million, a decrease of 34% from net sales of $14.3 million for
the corresponding quarter of fiscal 1996, and a decrease of 14% from the first
quarter of fiscal 1997 net sales of $11.1 million. For the six-month period
ended December 31, 1996, the Company's net sales were $20.6 million, a decrease
of 30% from net sales of $29.3 million for the corresponding period of fiscal
1996. The decreases in net sales for the quarter and six-month period ended
December 31, 1996, as compared to the corresponding periods in fiscal 1996, were
principally due to an increase in the provisions for product returns and bad
debts, and a reduction in sales of LANtastic network operating system (NOS)
products, partially offset 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 decrease in net sales from the first
quarter of fiscal 1997 was principally attributable to an increase in the
Company's provisions for product returns and allowances. The increase in the
provisions was principally attributable to lower than expected sales, and an
assessment of the Company's European distribution channel status.
The Company distributes its products in both the U.S. and international
markets. U.S. sales decreased 27% to $6.6 million (69% of net sales) for the
quarter ended December 31, 1996, from $8.8 million (62% of net sales), for the
same quarter a year ago. U.S. sales decreased 25% to $ 14.3 million (69% of net
sales), for the six-month period ended December 31, 1996 from $19.1 million (65%
of net sales), for the same period in fiscal 1996. The decrease in U.S. net
sales for both the second quarter of fiscal 1997 and the six-month period ended
December 31, 1996, as compared to the corresponding periods in fiscal 1996,
primarily resulted from an increase in the provisions for product returns, a
reduction in sales of LANtastic products in the U.S. distribution channels and
actions taken during the six-month period ended December 31, 1996 to reduce U.S.
channel inventories.
International sales decreased 47% to $2.9 million (31% of net sales),
for the quarter ended December 31, 1996, from $5.5 million (38% of net sales),
for the same quarter a year ago, and 15% from the first quarter of fiscal 1997
sales of $3.4 million. International sales decreased 38% to $6.4 million (31% of
net sales), for the six-month period ended December 31, 1996 from $10.2 million
(35% of net sales) for the same period in fiscal 1996. The decrease in
international net sales for both the quarter and the six-month period ended
December 31, 1996, as compared to the corresponding periods in fiscal 1996,
primarily resulted from a reduction in sales of LANtastic NOS products in
Europe, partially offset by sales of new products. The decrease in international
net sales from the quarter ended September 30, 1996, is primarily the result of
increased allowances for product returns and rotations in Europe necessitated by
continued market softness in the European distribution channel and the release
of the European language versions of LANtastic 7.0 early in the quarter. To a
lesser extent, net sales in Europe were also negatively impacted by an increase
in the allowance for bad debts.
Gross Profit. The Company's gross profit was $6.4 million and $9.3
million for the quarters ended December 31, 1996 and 1995, respectively (67% and
65% of net sales, respectively). Gross profit was $13.6 million and $18.7
million for the six-month periods ended December 31, 1996, and 1995,
respectively (66% and 64% of net sales, respectively). The net increase in gross
profit margin for both the quarter and the six-month period ended December 31,
9
<PAGE>
1996 as compared to the corresponding periods in fiscal 1996 was primarily the
result of higher average gross margins in the Company's product lines. The
higher average gross profit margins in the Company's existing product lines is
the result of higher margin software products acquired in connection with the
purchase of three software companies during fiscal 1996 and software components
comprising an increasing percentage of LANtastic NOS product sales. In addition,
an increasing percentage of U.S. software sales as a component of overall net
sales contributed to the improvement in gross profit margins. 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.
The sequential increase in gross profit margin from 65% for the quarter
ended September 30, 1996, to 67% for the quarter ended December 31, 1996 is the
result of an increase in sales of the Company's higher margin remote
communications software products (especially PC OEM sales).
Sales and Marketing. Sales and marketing expenses were $5.6 million and
$6.7 million for the quarters ended December 31, 1996 and 1995, respectively,
(59% and 46% of net sales, respectively). Sales and marketing expenses were
$12.6 million and $13.1 million for the six-month period ended December 31, 1996
and 1995, respectively, (61% and 45% of net sales, respectively). The decrease
in aggregate dollars for sales and marketing expenses for the quarter and the
six-month periods ended December 31, 1996, as compared to the corresponding
periods in fiscal 1996, are due primarily to the Company's restructuring actions
undertaken during the quarter ended September 30, 1996 that reduced operating
expenses, offset by the cost of activities related to the introduction of
LANtastic 7.0 to the Company's existing VAR network. The increase in sales and
marketing expenses as a percentage of net sales for the quarter and the
six-month period ended December 31, 1996 as compared to the corresponding
periods in fiscal 1996, are due to the decrease in net sales.
Product Development. Product development expenses were $2.3 million and
$1.3 million for the quarters ended December 31, 1996 and 1995, respectively,
(24% and 9% of net sales, respectively). Product development expenses were $4.7
million and $2.6 million for the six-month periods ended December 31, 1996 and
1995, respectively, (23% and 9% of net sales, respectively). The increase in
both aggregate dollars for product development expenses and as a percentage of
net sales for the quarter and six-month period ended December 31, 1996 as
compared to the corresponding periods in fiscal 1996 is principally attributable
to the addition of product development personnel in the Computer Telephony and
Communications product group, both in connection with the acquisitions of the
three software companies in fiscal 1996 and subsequent thereto to accelerate
development efforts in this segment.
General and Administrative. General and administrative expenses were
$1.4 million and $1.3 million for the quarters ended December 31, 1996 and 1995,
respectively, (15% and 9% of net sales, respectively). General and
administrative expenses were $2.9 million and $2.6 million for the six-month
periods ended December 31, 1996 and 1995, respectively, (14% and 9%,
respectively). The increase in general and administrative expenses as a
percentage of net sales for the quarter and the six-month period ended December
31, 1996 as compared to the corresponding periods in fiscal 1996 is solely the
result of the decrease in net sales. The increase in aggregate dollars for
general and administrative expenses for the quarter and the six-month period
ended December 31, 1996, as compared to the corresponding periods in fiscal
1996, is principally attributable to the addition of administrative personnel in
the acquired software companies referenced above, partially offset by reductions
in existing administrative personnel costs in the quarter ended December 31,
1996 associated with the realignment of Company resources completed in the first
quarter of fiscal 1997.
Restructuring Cost. During the quarter ended September 30, 1996,
primarily in response to lower than expected sales of LANtastic network
operating system (NOS) products and attendant uncertainty as to future
10
<PAGE>
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 significantly reduce the Company's operating break-even
point through a reduction in 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. As a result of these actions, the Company recorded a
pre-tax restructuring charge of $1.8 million in the six months ended December
31, 1996 to cover severance costs associated with a 50 person headcount
reduction and other related costs.
Purchased In-Process Technology And Related Costs. On November 22,
1995, the Company acquired substantially all the assets and certain liabilities
of Synergy Solutions, Inc. ("Synergy") a software company primarily in the
business of developing, marketing and selling modem and telephone sharing
software. The aggregate cost of acquiring all the assets and certain liabilities
of Synergy was approximately $1.5 million. The purchase price was paid in cash
from the Company's existing cash balances. On December 21, 1995, the Company
completed the acquisition of the outstanding stock of Triton Technologies, Inc.
("Triton") a software company that develops and markets PC remote control
software. The aggregate cost of acquiring the stock of Triton was approximately
$11.8 million. The purchase price was paid in cash and notes payable as of
December 31, 1995 and the majority of the note payable was paid from the
Company's existing cash balances in January 1996. The Company incurred direct
transaction costs of approximately $350,000 associated with these 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 price of the acquisitions have been allocated to the assets acquired
and liabilities assumed based on their respective fair value on the date of the
acquisitions. The acquisitions were accounted for as purchases. The results of
each of the acquired companies have been combined with the results of the
Company as of the respective dates of acquisition.
In conjunction with the purchase of Synergy and Triton, the Company
recorded a charge to operations of $10.2 million relating to purchased
in-process technology that had not reached the working model stage and has
indeterminable alternative future use. In addition, as a result of the
acquisitions, the Company charged to operations other related costs totaling
$4.3 million. The other related costs are principally attributable to costs
associated with the product integration of Triton and Synergy technology with
the Company's technology and the elimination of a layer of distribution in
Europe. Other related costs also included increases in allowances for returns,
rotations and inventories associated with the transition to a new technology;
organizational costs for severance and outplacement; and facility costs relating
to the cancellation of leases in order to consolidate technical support and
distribution. Although the Company expects that the elimination of duplicative
expenses as well as other efficiencies related to the integration of the
businesses acquired may offset additional expenses over time, there can be no
assurance that such benefit will be achieved in the near term, or at all.
Other Income, Net. For the quarter ended December 31, 1996 other
income, net, decreased to $178,000 from $495,000 in the corresponding quarter of
fiscal 1996. For the six-month period ended December 31, 1996, other income,
net, decreased to $370,000 from $834,000 in the corresponding period of fiscal
1996. The decrease in other income, net, for the quarter ended December 31, 1996
and the six months ended December 31, 1996 resulted principally from a reduction
in investment income. Investment and cash balances decreased from $39 million at
December 31, 1995 to $17.3 million at December 31, 1996 principally due to the
acquisition of three software companies in fiscal 1996.
The Company's effective income tax rate for the quarter ended December
31, 1996, was (29.3%) compared to an effective rate of (5%) in the corresponding
quarter of fiscal 1996. The increase in the effective income tax rate for the
quarter ended December 31, 1996, as compared the corresponding quarter in fiscal
1996 is principally the result of the non-deductibility of purchased in-process
technology recognized in connection with the purchase of Triton during the
quarter ended December 31, 1995 and to a lesser extent adjustments to the tax
benefit recognized for state net operating loss carryforwards.
Liquidity and Capital Resources
The Company had cash and cash equivalents of $17.3 million at December
31, 1996, compared to $15.3 million at June 30, 1996 and working capital of
$32.1 million at December 31, 1996 and $36.8 million at June 30, 1996. The
increase in cash and cash equivalents was principally the result of the receipt
of an aggregate federal income tax refund
11
<PAGE>
of approximately $4.9 million and from cash received from a sale-leaseback of
computer and related equipment of approximately $1.4 million partially offset by
severance payments associated with the Company's organizational realignment
effected at the end of the quarter ended September 30, 1996 (See caption
entitled Restructuring Cost above). Days sales outstanding in trade accounts
receivable at December 31, 1996 increased to 113 days from 97 days at June 30,
1996 due principally to the quarter over quarter decrease in net sales. The
Company believes that its allowances for returns and doubtful accounts are
adequate.
The Company funds its working capital requirements primarily through
cash flows from operations and existing cash balances. 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.
Risk Factors
The PC industry is highly competitive and is characterized by rapidly
changing technology and evolving industry standards. The Company's products
compete with products available from numerous companies, many of which have
substantially greater financial, technological, production and marketing
resources than those of the Company. Competition in the PC industry is likely to
intensify as current competitors expand their product lines, more features are
included in operating systems (e.g., Windows 95), and as new companies enter the
markets or segments in which the Company currently competes. The industry is
also characterized by a high degree of consolidation which favors companies with
greater resources than those of the Company. There can be no assurance that the
Company's products will be able to compete successfully with other products
offered presently or in the future by other vendors.
The Company is exposed to the risk of product returns and rotations
from its distributors and volume purchasers, which are recorded by the Company
as a reduction in sales. Although the Company attempts to monitor and manage the
volume of its sales to distributors and volume purchasers, overstocking by its
distributors and volume purchasers or changes in inventory policies or practices
by distributors and volume purchasers may require the Company to accept returns
above historical levels. In addition, the risk of product returns may increase
if the demand for new products introduced by the Company is lower than the
Company anticipates at the time of introduction. Although the Company believes
that it provides an adequate allowance for sales returns, there can be no
assurance that actual sales returns will not exceed the Company's allowance. Any
product returns in excess of recorded allowances could result in a material
adverse effect on net sales and operating results. As the Company introduces
more 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 for price protection
for list price reductions by the Company on its products held in such
distributors' inventories. The Company provides its distributors with price
protection in the event that the Company reduces the list price of its products.
Distributors and volume purchasers are usually offered some credit for the
impact of a list price reduction on the expected revenue from the Company's
products in the distributors' inventories at the time of the price reduction.
Although the Company believes that it has provided an adequate allowance for
price protection, there can be no assurance that the impact of actual list price
reductions by the Company will not exceed the Company's allowance. Any price
protection in excess of recorded allowances could result in a material adverse
effect on sales and operating results. As the Company introduces new products,
the predictability and timing of sales to end-users and returns to the Company
of unsold products by distributors and volume purchasers becomes more complex
and could result in material fluctuations in quarterly sales and operating
results.
Substantially all of the Company's revenue in each fiscal quarter
results from orders booked in that quarter. A significant percentage of the
Company's bookings and sales to major customers on a quarterly basis
historically has occurred during the last month of the quarter and are
concentrated in the latter half of that month. Orders placed by
12
<PAGE>
major customers are typically based upon customers' forecasted sales levels for
Company products and inventory levels of Company products desired to be
maintained by those major customers at the time of the orders. Moreover, orders
may also be based upon financial practices by major customers designed to
increase the return on investment or yield on the sales of the Company's
products to VARs or end-users. Major distribution customers receive market
development funds from the Company for purchasing Company products and from
time-to-time may also receive negotiated cash rebates or extended terms, in
accordance with industry practice, depending upon competitive conditions.
Changes in purchasing patterns by one or more of the Company's major customers,
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.
The Company believes that there is a trend among major distribution
customers and volume purchasers to reduce their inventory levels of computer
products, including the Company's products. This trend could have a significant,
adverse effect on the Company's operating results during the period or periods
that customers initiate such inventory reductions or at such times as customers
elect to further reduce their inventory levels of the Company's products.
Microsoft, a significant competitor of the Company, today offers, and
is expected in the future to offer, Windows- and NT-based products which include
features competitive with certain features found in products offered by the
Company. Because of the dominance and market visibility of Microsoft in the
personal computer software market, the presence of the Microsoft products in the
market may affect the sales of the Company's products and, depending upon the
degree of such effect, could have a significant adverse effect on the Company's
operating results. In addition, as a result of its dominant position in the
market for personal computer operating systems, the Microsoft operating system
and other products are frequently installed at no additional charge on new
personal computers and thereby placed directly into the hands of the end-user
customer. Such distribution provides a favorable market advantage for the
features of its products, to the potential detriment of the Company's product
sales. Novell, also a significant competitor of the Company, has recently
announced a February 1997 release of a new version of its IntraNetWare NOS,
aimed at small businesses, the Company's principal NOS market. The product,
IntranetWare for Small Business, is targeted toward small businesses with 25 or
fewer users and priced lower than previous NetWare versions, including a user
based licensing model similar to LANtastic's, whereby a user can add new users
to the network in smaller increments. Novell has substantially greater
financial, technological, production and marketing resources than those of the
Company, and introduction of its new products could adversely affect the
Company's competitive positioning, and its financial results.
During the quarter ended December 31, 1996, the Company announced and
released two new Internet software products, XtraMail and i.Share 2.0, both of
which are targeted at Microsoft, Novell, and Artisoft network customers.
XtraMail is an e-mail server software product that runs on Microsoft NT or
Windows 95 servers and enables businesses to send and receive interoffice e-mail
via their local area networks at the same time they transparently pass e-mail to
and from the Internet. i.Share 2.0 is an Internet access-sharing software
product for networked PCs and enables multiple users to share a single Internet
connection simultaneously. While industry sources consistently report growth in
the adoption of the Internet in all sizes of businesses, the industry is also
experiencing similar growth in the number of well-known companies and new
entrants with similar products into the Internet and intranet application
market. While the Company believes its products are comparable and competitively
priced relative to current and anticipated new products, there can be no
assurance of the success of these products.
During the six-month period ended December 31, 1996, the Company
experienced significantly lower than expected net sales of its LANtastic NOS
products. The principal cause of the lower than expected net sales were higher
than anticipated returns and rotations from the European distribution channel
along with seasonal market softness in Europe and in the U.S. during the first
fiscal quarter of 1997. In addition, the Company did not experience the sales
improvement in Europe that historically occurs in the December quarter compared
to the September quarter. There can be no assurance that LANtastic sales will
substantially improve or that European distribution channels will not continue
to experience returns and rotations in excess of historical norms.
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.
13
<PAGE>
"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.
14
<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
(a) The Company's Annual Shareholders' Meeting was held on
October 22, 1996.
(b) At the Annual Shareholders' Meeting, proposals were
considered for, (i) the election of Kathryn A. Braun as
a Class II director to serve until the annual meeting of
shareholders' in 1999, (ii) the election of Gary E.
Liebl as a Class II director to serve until the annual
meeting of shareholders' in 1999, and (iii) the
ratification of the selection of KPMG Peat Marwick LLP
as the auditors of the Company for the 1997 fiscal year.
The director-nominees were elected and the ratification
of KPMG Peat Marwick LLP was approved with the voting
results as follows:
<TABLE>
<CAPTION>
Proposal Votes For Votes Against Votes Withheld Abstained Not-Voted
- -------- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Election of Kathryn
A. Braun as a Class
II Director 13,236,106 - 382,013 - -
Election of Gary
E. Liebl as a Class
II Director 13,230,506 - 386,066 - -
Ratification of
selection of KPMG
Peat Marwick as
auditors of the
Company for fiscal
year 1997 13,523,109 57,013 - 37,997 -
</TABLE>
15
<PAGE>
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
No. 11 - Computation of Net Income Per Share
No. 27 - Financial Data Schedule for Form 10-Q dated February 14,
1997
(c) Reports on Form 8-K
The Company filed a report on Form 8-K, dated November 8, 1996
announcing the resignation of Joel J. Kocher as President and
Chief Operating Officer effective November 8, 1996.
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: February 14, 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 Six Months Ended
December 31, December 31,
-------------------- --------------------
1996 1996 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Loss $ (1,950) $ (13,234) $ (5,335) $(12,770)
======== ========= ======== ========
Weighted Average Shares:
Common shares outstanding 14,536 14,464 14,530 14,452
Common Equivalent shares representing
shares issuable upon exercise of stock
options (1) -- -- -- 413
-------- --------- -------- --------
Total weighted average shares -
primary 14,536 14,464 14,530 14,865
Primary net loss per common and
equivalent share (2) $ (.13) $ (.91) $ (.37) $ (.86)
======== ========= ======== ========
</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 shares are
the same
18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 17,315
<SECURITIES> 0
<RECEIVABLES> 11,942
<ALLOWANCES> 0
<INVENTORY> 2,772
<CURRENT-ASSETS> 38,692
<PP&E> 14,583
<DEPRECIATION> 6,967
<TOTAL-ASSETS> 53,416
<CURRENT-LIABILITIES> 6,540
<BONDS> 0
0
0
<COMMON> 278
<OTHER-SE> 45,479
<TOTAL-LIABILITY-AND-EQUITY> 53,416
<SALES> 20,625
<TOTAL-REVENUES> 20,995
<CGS> 7,046
<TOTAL-COSTS> 7,046
<OTHER-EXPENSES> 21,967
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (8,018)
<INCOME-PRETAX> (2,683)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,335)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
