UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended June 30, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from ____________ to ________________
Commission File Number 000-19462
ARTISOFT, INC.
(Exact name of registrant as specified in its charter)
Delaware 86-0446453
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2202 North Forbes Boulevard, Tucson, Arizona, 85745
(Address of principal executive offices, Zip Code)
Registrant's telephone number, including area code (520) 670-7100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value The Nasdaq Stock Market
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $31,774,844 based on the closing sale price as
reported by The Nasdaq Stock Market on September 22, 1997.
The number of shares outstanding of each of the registrant's classes of common
stock, as of September 22, 1997 was Common Stock, $.01 par value; 14,529,000
shares.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Proxy Statement dated September 24, 1997, for the Annual
Meeting of Shareholders to be held on November 3, 1997, are incorporated by
reference into Part III.
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TABLE OF CONTENTS
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PART I.............................................................................................. 1
Item 1. Business....................................................................... 1-8
Item 2. Properties....................................................................... 9
Item 3. Legal Proceedings................................................................ 9
Item 4. Submission of Matters to a Vote of Security Holders........................... 9-10
PART II............................................................................................ 11
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........... 11
Item 6. Selected Financial Data......................................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation......................................................... 11-22
Item 8. Financial Statements and Supplementary Data.................................. 22-39
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................................ 39
PART III........................................................................................... 40
Item 10. Directors and Executive Officers of the Registrant.............................. 40
Item 11. Executive Compensation.......................................................... 40
Item 12. Security Ownership of Certain Beneficial Owners and Management.................. 40
Item 13. Certain Relationships and Related Transactions.................................. 40
PART IV............................................................................................ 40
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............. 40-42
SIGNATURES......................................................................................... 42
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PART I
Item 1. Business.
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Introduction and General Development of Business
Artisoft, Inc.(R) ("Artisoft" or "Company" or "Registrant") is a personal
computer ("PC") software company providing cost-effective and easy-to-use local
area network ("LAN"), PC communications and computer telephony solutions. The
Company's executive offices are located at 2202 North Forbes Boulevard, Tucson,
Arizona 85745. The telephone number at that address is (520) 670-7100. The
Company was incorporated in Arizona in November 1982 and reincorporated by
merger in Delaware in July 1991.
Background
Entering fiscal year 1997 (ended June 30, 1997), Artisoft had completed the
acquisition and subsequent integration of three software companies acquired
during fiscal year 1996. The Company's transformation to a PC software company
with a broader technology portfolio was accelerated by these acquisitions.
During fiscal year 1997, the Company's LANtastic(R) NOS product line came under
increasing competitive pressures from the Microsoft Windows(R) 95 operating
system, with its built-in networking capabilities. In addition, Microsoft
Windows NT(R) made significant gains in the small business market place and
further eroded the market share of the LANtastic product line. However, the
computer telephony and remote control product group revenues partially offset
the decreasing revenues from the LANtastic NOS products. The Company introduced
several new products in fiscal 1997 as part of the strategy to diversify its
product portfolio, as well. These products included i.Share(TM), XtraMail(TM),
and InfoFast(TM). See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" for further discussion of these new product
introductions.
Entering fiscal year 1996 (ended June 30, 1996), Artisoft was exclusively
engaged in the design, development, sales and support of LAN software, designed
to enhance the productivity of PC users by enabling them to share networked
resources and to communicate easily and cost-effectively with other users on the
LAN. The typical end-users of the Company's LANtastic peer-to-peer network
operating system ("NOS") are small and growing businesses, home offices,
professional organizations, universities, work groups within larger businesses
and government agencies. The Company estimates that as of June 30, 1996, it had
shipped approximately 4,050,000 computer licenses of LANtastic products used in
approximately 710,000 LANtastic LANs, since the initial version of the product
began shipping in 1987.
During fiscal year 1996, the Company continued its transformation to a PC
software company with a broader technology portfolio and a broader array of
products and channels of distribution. Consistent with this strategy and the
Company's technology vision -- to transform business communications by providing
open solutions bringing together distributed data, voice and imaging resources
at the desktop PC -- the Company successfully completed the acquisition and
integration of three software companies during fiscal year 1996.
On November 22, 1995, the Company acquired for cash substantially all of the
assets and certain liabilities of Synergy Solutions, Inc. ("Synergy"), a PC
software company primarily engaged in the design, development, sales and support
of modem and telephone line sharing software. Synergy's principal product at
that time, Modem Assist Plus(R), was sold principally through retailers.
On December 21, 1995, the Company purchased all of the outstanding common stock
of Triton Technologies, Inc. ("Triton"), a PC software company primarily engaged
in the design, development, sales and support of PC remote control software.
Triton's principal product at that time, CoSession Remote,(TM) was principally
sold directly to original equipment manufacturers.
On February 13, 1996, the Company acquired for cash substantially all of the
assets and certain liabilities of Stylus Innovation, Inc. ("Stylus"), a PC
software company primarily engaged in the design, development, sales and support
of computer telephony applications and tools software. Stylus' principal
product, Visual Voice(R), was principally sold directly to software development
groups within mid and larger sized enterprises.
Prior to fiscal year 1996, the Company manufactured network interface cards and
other communication devices. In two separate transactions effected during the
second half of the fiscal year ended June 30, 1995, the Company divested its
hardware development and manufacturing operations. Currently, all of the
hardware components included in existing product lines are purchased from third
party manufacturers. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Item 8. Financial Statements
and Supplementary Data" for further discussion of these transactions.
Products and Services
The Company is currently organized into three groups, each centered around the
specific products and services being developed, marketed and sold. The three
groups are: the Communication Software Group, located in Tucson, Arizona; the
Computer Telephony Group, located in Cambridge, Massachusetts; and the Remote
Control Group, located in Iselin, New Jersey (with a satellite development
center in Boynton Beach, Florida). Following is a description of the products
and services offered by each group.
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Communication Software Group
The Communication Software Group strategy emphasizes offering a range of
software products optimized for the networking and communication needs of small
businesses and workgroups. First among these is LANtastic, NOS software designed
to be powerful yet easy-to-use, and able to support a wide variety of PC
operating systems. All current LANtastic software products have been designed to
be compatible with each other, and with most PC industry standard operating
systems, hardware platforms, applications software and NOS. The Communication
Software Group products also include ModemShare v7.0 and i.Share v2.5.
The principal product in the LANtastic NOS family is LANtastic v7.0, an
Internet-ready networking solution for small businesses. LANtastic v7.0, a
full-featured, flexible, peer-to-peer PC LAN includes the LANtastic Internet
Gateway, which uses i.Share technology (see below) to allow multiple-user access
to one network Internet connection. Through licensing agreements, LANtastic v7.0
includes Internet access through CompuServe, Inc.'s SPRYNET(TM) sign-on service,
and browsing capabilities with Netscape Communications Corporation's
Netscape(TM) Navigator 2.0. LANtastic v7.0 supports the three most popular PC
platforms - Windows 95, Windows and DOS. It also includes built-in modem and
phone line sharing, providing online access without the need for extra modems or
phone lines. With a new TCP/IP stack, the LANtastic system connects to UNIX(R)
hosts and applications, enabling a small business to inexpensively build a wide
area network (WAN). The LANtastic v7.0 network also includes remote-access
software for remote dial-up technical support. LANtastic v7.0, first introduced
in June 1996 as a successor to LANtastic v6.0, is available in the form of
network starter kits, network add-on kits to connect additional PCs to a
LANtastic network, or in software-only versions. LANtastic NOS products are
available in certain foreign languages, including French, Italian, German,
Spanish, Dutch, Portuguese and Japanese.
During fiscal 1997, 1996 and 1995, approximately 83%, 82%, and 62% respectively,
of the LANtastic licenses (excluding upgrades) shipped by the Company consisted
of software-only versions. The sales mix shift toward a higher percentage of
software-only licenses in fiscal 1997 was a result of the Company's strategic
decision to divest its hardware development and manufacturing operations during
the second half of fiscal 1995. This decision was precipitated by increased
price sensitivity in the Ethernet adapter market and a related willingness of
resellers of the Company's products not to select the Company's Ethernet
adapters.
Artisoft i.Share v2.5, Internet-access sharing software enables users on a
Microsoft, Novell or LANtastic network to share one Internet connection as
easily as they share files, applications and printers. i.Share enables networked
PCs to simultaneously access the Internet from a single, secure, low-cost access
point from a Windows 95 server. The client's software supports Windows 3.x,
Windows 95, and Windows NT 3.51 Workstation.
Another product offered by the Communication Software Group is ModemShare v7.0.
ModemShare v7.0 offers businesses an easy, affordable way to share modems and
phone lines across a local area network. With ModemShare, everyone on the
network can share one modem and one phone line to use a fax, Internet access
programs and other online services, without leaving their desks. ModemShare
offers total interoperability between Windows 95, Windows and DOS, making it
easy to share resources in mixed operating environments.
Computer Telephony Group
The Computer Telephony ("CT") Group is focusing on two objectives: First, to
increase its leadership in the CT software development toolkit market; and
second, to deliver innovative CT software applications to small businesses and
corporate departments.
Artisoft's Visual Voice is the industry's leading CT development toolkit.
Product attributes include affordability, ease of use, and compatibility with
Microsoft standards. Visual Voice is a 32-bit ActiveX control that converts any
ActiveX compatible software development environment, such as Microsoft Visual
Basic, Microsoft Visual C++, Borland Delphi, and Microsoft Visual FoxPro, into a
full-featured telephony application development toolkit. Visual Voice
applications include voice mail, audiotext, outbound calling, interactive voice
response (IVR), fax-on-demand, and international call-back. With its latest
release, Visual Voice 4.0, introduced in August 1997, the product offers an
important additional benefit: performance. It is the first open-architecture
telephony application development toolkit to support multi-threading for Visual
Basic 5.0. This technology breakthrough allows a 96-line application to be run
with only 15 MB of RAM - a 90% reduction in memory.
InfoFast, an automated information-on-demand system, represents the CT Group's
first entry into the CT software application arena. InfoFast allows businesses
to easily fulfill customer requests via phone or fax. With InfoFast, customers
can call to retrieve specific documents, such as product brochures or bulletins,
by choosing from a list of customizable voice menu options. InfoFast far
surpasses manual fulfillment efforts by providing instant automated access, 24
hours a day. Customers utilizing the product, experience several benefits,
including increased staff productivity, lower costs, and improved customer
service. Its unique Web synchronization utility makes a Web site available via
fax to customers who do not have Web access. With InfoFast 2.0, fulfilling
customer information requests is no longer one-way communication from business
to caller. Customers who need additional information can be transferred to a
live operator or a specific extension. Callers can also leave messages in a
specific mailbox chosen by extension, or perform a last name search for the
correct mailbox. InfoFast's new advanced reporting features allow businesses to
track the frequency of document requests, providing a better understanding of
customer's interests. InfoFast has been built to be a channel-ready solution,
and to date over 350 VARs have invested in not-for-resale copies.
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A second CT application, TeleVantage(R), is currently under development.
TeleVantage is designed to be a complete PC-based telephone system that is fully
integrated with a LAN. The design calls for it to provide PBX-like call control
functionality including voice mail, auto-attendant, call forwarding, phone
directory and a number of other telephony technologies bundled into a single
integrated solution. TeleVantage is designed to allow organizations to
dramatically improve customer service; increase call productivity; and
significantly decrease the cost of maintaining their telephone system. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations" including the section entitled "Risk Factors" for further discussion
of new product introductions.
Remote Control Group
The mission of the Remote Control Group is to provide key products for remote
control, file transfer, configuration assist, and help desk services.
CoSession Remote 32 is a remote control software application that enables users
running a Windows 95 or a Windows NT 4.0 PC to connect and control remote PCs
running Windows NT 4.0 or Windows 95. First shipped in March 1997 on select IBM
PC models, CoSession Remote 32 supports connections over analog modems, IPX/SPX,
NetBIOS, NetBEUI and TCP/IP. CoSession Remote 32 also supports TAPI 2.0 and
connections over IRDA and parallel ports.
CoSession Remote 32 uses shell extensions to enable ease of use in setting up
and accessing remote PCs. Once connected, the users can do one or more of the
following:
o Remote control
o File transfer with differential update, synchronization and cloning
capabilities
o Keyboard chat with remote users
o Simultaneous voice conversations using standard analog modems or
network/Internet connections (with sound cards, speakers and microphones on
the two PCs)
CoSession Remote version 7.0, first shipped in March of 1996, is for users of
Windows 95 and Windows 3.1x systems. It is a 16-bit application that provides
most of the functionality of the CoSession Remote 32 product except it does not
support IRDA or parallel port connections, nor does it provide simultaneous
voice conversations without the use of specialized DSVD modems.
CoSession PC2X provides UNIX to PC remote control capabilities. From a UNIX
workstation, users can access and control PCs running Windows NT 4.0, Windows
95, Windows 3.1x and DOS. This product is primarily targeted toward corporate IS
departments running enterprise and mission critical network management
applications in the overall corporate computing environment.
ConfigSafe(TM) Support Edition is a configuration tracking and recovery utility
that is licensed from imagine LAN, Inc. ConfigSafe supports Windows NT, Windows
95 and Windows 3.1x. It enables an easy recovery from PC crashes with one-step
system restoration and advanced tracking features.
Financial Information about Industry Segments
All of the Company's products are considered part of a single industry segment.
Information regarding domestic and international net sales and international
assets are contained in Note 15, "Domestic and International Operations," in
"Notes to Consolidated Financial Statements" included in "Item 8. Financial
Statements and Supplementary Data."
Raw Materials, Manufacturing and Suppliers
The principal materials and components used in the Company's products include
diskettes, user manuals and product display boxes, and are purchased directly
from third-party vendors. The Company currently utilizes both internal and
third-party contracted resources for the assembly, warehousing and fulfillment
of its products. Outside vendors perform in accordance with Company
specifications, and material quality is ensured prior to the assembly of its
products. Capacity shortages for components, assembly, warehousing and
fulfillment are not anticipated due to multiple third party resources available
for contract; however, if such shortages did occur, the Company's operating
results could be materially impacted. The Company believes there are adequate
supplies of and sources for the raw materials used in its products and that
multiple sources are available for CD and diskette duplication, manual printing
and final packaging.
Since the disposition of its manufacturing operations in the second half of
fiscal 1995, the Company primarily utilizes the services of third-party
manufacturers for production of its hardware products. The Company no longer
purchases integrated circuits, circuit boards and components for its printed
circuit boards, but rather, purchases finished boards and other hardware
products from third-party manufacturers. The manufacturers deliver the products
to the Company's Tucson facilities, where the Company tests, packages and ships
finished products to customers. Most components that are used in the Company's
products are readily available from a large number of both domestic and foreign
equipment vendors. However, future operating results could be adversely affected
if the Company is unable to procure subcontracted assemblies for its products
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needed to meet anticipated customer demand. To date, customer returns of the
Company's products for defective workmanship have not been material.
Marketing, Sales and Distribution
The Company's dominant marketing strategy is to create reseller and end user
demand for the Company's products and principally use broad line distributors
and volume purchasers to fulfill the reseller and end user demand. The Company's
authorized resellers and distributors are selected for their sales ability,
technical expertise, reputation and financial resources. The Company also sells
direct to original equipment manufacturers, governmental units and end users.
The Company's selling efforts have been assisted by positive product reviews,
awards and recognition earned from computer publications.
The Company's marketing programs have three objectives: (i) create brand name
recognition of the Company and its products; (ii) generate sales leads for its
resellers and distributors; and (iii) support the sales efforts of its resellers
and distributors through sales tools and training. Marketing activities that
address the first two areas include frequent participation in industry trade
shows and seminars, direct mail, advertising in major trade publications,
executive participation in press briefings and industry seminars, sponsorship of
seminars by the Company and on-going communication with the Company's end users.
To train and support resellers and distributors, the Company provides mailings
of product and technical updates, seminar materials, video training and
corporate presentations. The Company's Advantage and Premier programs for U.S.
resellers and distributors provide increased training, services and support.
The Company is exposed to the risk of product returns and rotations from its
distributors and volume purchasers, which are recorded by the Company as a
reduction to sales. Although the Company attempts to monitor and manage the
volume of its sales to distributors and volume purchasers, overstocking by its
distributors and volume purchasers or changes in inventory level policies or
practices by distributors and volume purchasers may require the Company to
accept returns above historical levels. In addition, the risk of product returns
may increase if the demand for new products introduced by the Company is lower
than the Company anticipates at the time of introduction. Although the Company
believes that it provides an adequate allowance for sales returns, there can be
no assurance that actual sales returns will not exceed the Company's allowance.
Any product returns in excess of recorded allowances could result in a material
adverse effect on net sales and operating results. As the Company introduces
more products, timing of sales to end users and returns to the Company of unsold
products by distributors and volume purchasers become more difficult to predict,
and could result in material fluctuations in quarterly operating results.
The Company is 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 major distributors with price protection
in the event that the Company reduces the list price of its products. Large
distributors are usually offered credit for the impact of a list price reduction
on the expected revenue from the Company's products in the distributors'
inventories at the time of the price reduction. Although the Company believes
that it has provided an adequate allowance for price protection, there can be no
assurance that the impact of actual list price reductions by the Company will
not exceed the Company's allowance. Any price protection in excess of recorded
allowances could result in a material adverse effect on net sales and operating
results.
Substantially all of the Company's revenue in each fiscal quarter results from
orders booked in that quarter. A significant percentage of the Company's
bookings and sales to major customers on a quarterly basis historically has
occurred during the last month of the quarter and are usually concentrated in
the latter half of that month. Orders placed by major customers are typically
based upon the customers' forecasted sales level for Company products and
inventory levels of Company products desired to be maintained by the major
customers at the time of the orders. Major distribution customers may receive
negotiated cash rebates, market development funds and extended credit terms from
the Company for purchasing Company products, in accordance with industry
practice. Changes in purchasing patterns by one or more of the Company's major
customers related to customer forecasts of future sales of Company products,
customer policies pertaining to desired inventory levels of Company products,
negotiations of rebate and market development funds or in the ability of the
Company to anticipate the mix of customer orders or to ship large quantities of
products near the end of a fiscal quarter could result in material fluctuations
in quarterly operating results. The Company believes that there is a trend among
major distribution customers and volume purchasers to reduce their inventory
levels of 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 such customers initiate such inventory reductions. The timing of
new product announcements and introductions by the Company or significant
product returns by major customers to the Company, could also result in material
fluctuations in quarterly operating results. Expedited outsourcing of production
and component parts to meet unanticipated demand could adversely affect gross
margins.
The Company employs a team of telesales professionals to sell Visual Voice
directly to end users. Leads are generated through a variety of pull-through
marketing activities, such as advertising, press articles, direct mail and trade
shows. To achieve additional market coverage, particularly in areas outside of
North America, Visual Voice is sold through a number of independent distributors
that specialize in computer telephony products. InfoFast utilizes a two-tier
distribution model. End users purchase the product from VARs, who purchase it
from distributors. The Company works cooperatively with the distributors to
generate awareness within the VAR community, and to develop programs for
training, certifying and motivating the VARs. End user sales leads are passed
along to the certified VARs.
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The Remote Control Group currently uses multiple distribution channels to
deliver its products worldwide, including software distributors and dealers,
value added resellers, systems integrators, original equipment manufacturers,
direct telemarketing and direct mail. The primary business model, however,
includes the licensing of CoSession Remote and ConfigSafe technology through
original equipment manufacturer (OEM) agreements and volume license agreements
entered with corporations. Sales channels are supported directly through a
variety of programs designed to create demand for the products. The Remote
Control Group seeks to educate individuals and key decision makers in large
corporations, independent software vendors, and original equipment manufacturers
about the uses for and benefits of its products. Programs include the following:
(i) targeted direct mail campaigns; (ii) telemarketing and on-site sales visits;
(iii) targeted worldwide advertising in industry magazines, mail order catalogs
and the Internet; (iv) public relations campaigns; and (v) custom-developed
joint marketing programs with OEM customers. The sales force specializes in
educating corporate end users, original equipment manufacturers and independent
software vendors about the Company's products. The sales organization pursues
prospects in their geographic areas, and the main focus is on OEM customers.
This channel will continue to be the main focus of the business. In addition,
direct sales to medium and large-sized corporations have historically made
revenue contributions and continue to be a source of high profit revenue for the
product group.
In order to ensure an orderly supply of CoSession Remote to end users, a modest
presence in the worldwide wholesale distribution and mail order channel will be
maintained. Coordination for all sales outside of the U.S., with the exception
of Asia, will be handled from the U.S. The Remote Control Group has a strong
presence in Asia through a partnership with Core, Ltd., an engineering and
development organization based in Japan. Core has translated CoSession Remote
into Japanese and is currently selling the product at retail. Core is closely
aligned with IBM Japan, the product group's largest customer in Asia.
The Company supports its products through fee and non-fee-based telephonic
technical services, on-line forums such as CompuServe, a World Wide Web site,
bulletin board systems, CD-ROM databases and a fax-on-demand system. Because the
Company's products operate in many disparate PC environments, the Company's
technical services require wide expertise in network operating systems, network
interface cards of other companies and other technologies.
The Company's ability to compete is dependent upon the timely introduction of
new products to the marketplace and the timely enhancement of existing products.
Product development expenses totaled approximately $9.3 million, $7.1 million
and $7.7 million in fiscal 1997, 1996 and 1995, respectively. The Company has
not engaged in customer-sponsored research activities.
Seasonality
Typically, the personal computer industry experiences some seasonal variations
in demand, with weaker sales in the summer months because of customers'
vacations and planned shutdowns. This seasonality is especially noted in Europe.
Competition
The PC industry is highly competitive and is characterized by rapidly changing
technology and evolving industry standards. Competition is usually based upon
brand recognition, scalability of products offered by a vendor, current and
future perceived needs of customers, product features, ease of installation and
maintenance, reliability of the software, price and product availability through
consultant, reseller and retail channels. The Company's NOS products compete
with products available from numerous companies including Microsoft Corporation
("Microsoft"), Novell and International Business Machines Corporation ("IBM"),
which have substantially greater research and development, marketing and
financial resources, manufacturing capability, customer support organizations
and brand recognition than those of the Company.
The Company expects that all of its products, existing and new, will face
significant competition. Competition in the industry is likely to intensify as
current competitors expand their product lines, include more features in
operating systems, add new network application features into their NOS products
and operating systems and as new companies enter the market, including companies
offering capabilities via Internet browsers. Significant price competition, with
its attendant adverse effects on profit margins, may result. Prolonged price
competition could have a material adverse effect upon the Company's business,
operating results and financial condition.
The Company's NOS products compete against Microsoft's Windows desktop operating
systems, including Windows 95, which includes peer-to-peer networking
capabilities as well as a group scheduler and electronic mail features. The
Company believes that the viability of these products has severely impacted the
Company's net sales and income from continuing operations. This impact has been
difficult to estimate in advance. In August 1995, Microsoft introduced a new
version of its Windows operating system, referred to as "Windows 95". This
product includes networking features competitive with features found in products
sold by the Company. Because of the dominance of Microsoft in the personal
computer operating system market, the Company believes that Windows 95 has had a
significant, detrimental impact on sales of the Company's products since its
introduction. Part of the Company's business strategy is to provide a migration
path for small businesses and workgroups to the Windows 95 operating system. The
Company's LANtastic 7.0 product fully supports Windows 95 and enables the
Company's customers to utilize Windows 95 features in an integrated network
across all major operating system platforms. Another Microsoft NOS product that
the Company believes has had and may in the future have, a detrimental impact on
sales of LANtastic products, is Microsoft Windows NT network server. The
Microsoft Windows NT 4.0 network server product is faster than previous versions
and easier to use, and has a Windows 95-like interface. It also ships with all
of the tools necessary to create and manage Internet or Intranet services and
includes Internet browsing
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capabilities with the inclusion of Microsoft Explorer 3.0. The Company does not
have the product breadth or marketing and engineering resources of Microsoft,
whose dominant position provides it with substantial competitive advantages in
PC software.
The Company's NOS products also compete with Novell's NOS products. Novell
released, at the end of 1996, a version of its NetWare NOS for the Small
Office-Home Office market. This product, based on the next generation of
NetWare, includes built-in Internet capabilities (gateway, browser and
Webserver) remote access, E-mail, fax services and other bundled proprietary and
third-party products. Novell has a significant if not dominant position in the
LAN market and has significantly greater marketing, engineering and other
resources than the Company.
There can be no assurance that the Company's NOS products will be able to
compete successfully with other NOS products offered presently or in the future
by Microsoft, Novell or other NOS competitors. Given the greater resources,
higher brand name recognition and other substantial advantages enjoyed by these
competitors, it is unlikely that the Company's NOS business can continue to be
the primary source of its revenues and earnings over the long term. Accordingly,
the future success of the Company will, in part, depend on its ability to expand
non-NOS products and activities faster than the rate at which its opportunities
and prospects in the NOS arena decline. Although the Company's NOS products are
well known and established in the marketplace, in light of the competitive
factors noted above, there can be no assurance that the Company will be able to
maintain its share of the NOS market. In such event, its revenues and earnings
may decline. In the CT tools arena, Artisoft competes with two classes of
products: proprietary telephony development environments such as those offered
by Parity, Brooktrout, and Apex; and other open toolkits such as those offered
by Parity and Pronexus. Proprietary environments have traditionally been favored
for high-end applications while open toolkits have been used for lower-end
applications. The enhanced performance capabilities of Visual Voice 4.0,
however, could change this distinction. Visual Voice now has a significant cost
advantage versus proprietary languages and a clear scalability advantage versus
other open toolkits. However, given the recent introduction of Visual Voice 4.0,
it is too early to know whether the product will enable the Company to compete
more favorably for sales intended for proprietary telephony development
environments.
Competition for InfoFast tends to fall into two categories: modem-based
fax-on-demand applications, such as the Fax-It-Back product marketed by
Castelle; high-end fax solutions, such as the FactsLine product line marketed by
Castelle and the FaxBack product line marketed by FaxBack. Although InfoFast is
more expensive than the modem-based products, it offers better performance,
higher reliability, and a greater feature set. Compared to high-end systems,
InfoFast offers fewer features, but at the same time provides significant price
advantages and ease of use. Although the TeleVantage product remains under
development, it is clear that it will face stiff competition in the marketplace
at such time as the product may ship.
The PC remote control software industry is highly competitive. There are a
number of companies that currently compete directly with the Company's PC remote
control products. Many of these companies, including Symantec, Compaq/Microcom
and others, have substantially greater resources and name recognition than the
Company. Accordingly, there can be no assurance that current PC remote
communications products will continue to generate revenues and earnings at
current levels, or that this product group will be able to effectively develop
and launch new competitive products in the future.
International Business
In fiscal 1997, 1996 and 1995, international sales accounted for 27%, 30%, and
38% respectively, of the Company's net sales. Sales to non-U.S. customers may be
affected by fluctuations in exchange rates and by government regulations. To
date, the Company's operations have not been materially impacted by currency
fluctuations. Assets deployed to support the Company's international business
represented approximately 3% of total assets at the end of fiscal 1997, 1996 and
1995. The Company's international operations consist of only sales, marketing
and support services in limited geographic areas. The Company's international
operations are in good standing and have not been denied any licenses to
operate, but are subject to the normal risks associated with such international
operations.
Significant Customers
The Company sells its products through a variety of channels of distribution,
including distributors, volume purchasers and resellers. For fiscal 1996 and
1995, Ingram Micro, Inc. accounted for approximately 12% and 21% of the
Company's net sales, respectively. For fiscal 1995, Merisel, Inc. accounted for
approximately 10% of the Company's net sales. At June 30, 1997, Ingram Micro,
Inc., accounted for 19% of the Company's outstanding trade accounts receivable.
The loss of any of the major distributors of the Company's products or their
failure to pay the Company for products purchased from the Company could have a
material adverse effect on the Company's operating results. The Company's
standard credit terms can be net 30 days, although longer terms are provided to
various major customers on a negotiated basis from time to time.
Backlog
Substantially all of the Company's revenue in each quarter results from orders
booked in that quarter. Accordingly, the Company does not believe that its
backlog at any particular point is indicative of future sales. The Company's
backlog of orders at June 30, 1997 was approximately $181,000, compared with
approximately $221,000 at June 30, 1996.
6
<PAGE>
Proprietary Rights and Licenses
The Company currently relies on a combination of trade secrets, copyright and
trademark laws, nondisclosure and other contractual agreements and technical
measures to protect the proprietary rights and security of its products. Despite
these precautions, unauthorized parties may attempt to copy aspects of the
Company's products or to obtain and use information the Company regards as
proprietary.
Although the Company has certain patents, patent protection is not considered
essential to the Company's success. The Company believes that, because of the
rapid pace of technological change in the industries in which the Company
competes, the legal protections for its products are less significant factors in
the Company's success than the knowledge, ability and experience of the
Company's employees, the nature and frequency of product enhancements and the
timeliness and quality of support services provided by the Company.
The Company believes that its products, trademarks and other proprietary rights
do not infringe on the proprietary rights of third parties. However, the
software and computer industry is characterized by frequent litigation regarding
copyright, patent and other intellectual property rights. There can be no
assurance that third parties will not assert infringement claims against the
Company in the future or that licenses will be available on reasonable terms, or
at all, with respect to any third-party technology. In the event of litigation
to determine the validity of any third party claims, such litigation could
result in substantial expense to the Company and adversely impact the efforts of
the Company's management and technical employees. In the event of an adverse
result in any such litigation, the Company could be required to expend
significant resources to develop alternative, noninfringing technology or to
obtain licenses to the technology. There can be no assurance that the Company
would be successful in such development or that any such licenses would be
available at all or at a reasonable cost to the Company. In addition, laws of
certain countries in which the Company's products are or may be developed,
manufactured or sold may not protect the Company's products and other
intellectual property rights at all or to the same extent as the laws of the
United States.
The Company pays royalties to Novell, Netscape Communications, Network
TeleSystems, imagine LAN, PureSpeech Inc., Inso Corporation, AT&T Corporation,
Digital Equipment Corporation, Learnout & Hauspie Speech Products, Voxware,
Inc., International Business Machines and Atrium Software for its use of certain
licensed technologies. The licensing by these entities of their products or
brand name to competitors of the Company, or the withdrawal or termination of
licensing rights to the Company's technologies, could adversely affect the
Company's sale of products incorporating such licensed technologies and the
Company's results of operations as a whole.
Environmental Laws
Compliance with federal, state and local laws and regulations for the protection
of the environment has not had a material impact on the Company's capital
expenditures, earnings or competitive position. Although the Company does not
anticipate any material adverse impact in the future based on the nature of its
operations and the scope of current environmental laws and regulations, no
assurance can be provided that such laws or regulations or future laws or
regulations enacted to protect the environment will not have a material adverse
impact on the Company.
Employees
As of June 30, 1997, the Company employed a total of 270 regular employees,
including approximately 135 in sales, marketing and customer support, 81 in
engineering and product development, 21 in operations and 33 in administration.
Due to the restructuring as more fully described in Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations", as of
September 15, 1997 the Company employed 164 regular employees. The future
success of the Company will depend in large part on its continued ability to
attract and retain highly skilled and qualified personnel. Competition for such
personnel is intense. The Company has employment or change in control agreements
with most of its executive officers and noncompetition and nondisclosure
agreements with substantially all of its professional employees and executive
officers. None of the Company's employees are represented by a labor union. The
Company has experienced no work stoppages and believes that its relations with
its employees are good.
Uncertainties in the Company's Business
In addition to the factors described above that could adversely affect the
Company's business and results of operations, and, therefore, the market
valuation of its Common Stock, the Company's future results of operations may be
impacted by various trends and uncertainties that are beyond the Company's
control, including adverse changes in general economic conditions, government
regulations and foreign currency fluctuations.
In addition, as products become more complex, the Company could experience
delays in product development and software "debugging" that are common in the
computer industry. Significant delays in product development and release would
adversely affect the Company's results of operations. There can be no assurance
that the Company will respond effectively to technological changes or new
product announcements by other companies or that the Company's product
development efforts will be successful. Furthermore, introduction of new
products involves substantial marketing risks because of the possibility of
product "bugs" or performance problems, in which event the Company could
experience significant product returns, warranty expenses and lower sales.
7
<PAGE>
The OEM marketplace is highly competitive, with a large number of vendors vying
for a limited amount of "preload dollars". With OEM customers being responsible
for a significant percentage of revenue, it is critical to maintain this
business. Although the Company maintains good relationships with OEM customers,
cost pressures and competitive products are persistent threats to the business.
Certain of the Company's OEM relationships require the scheduled delivery of
product revisions and new products. The failure to adhere to agreed-upon product
delivery schedules could result in the termination of key relationships with
major PC manufacturers, which could have a significant adverse impact on
revenues and earnings.
Other characteristics of the Company and the computer software industry may
adversely impact the Company. These include the ability of the Company to
integrate future acquired businesses by retaining key technical personnel of
acquired businesses and managing and integrating the business systems of
acquired companies. The inability to retain key personnel or to manage and
integrate business systems could substantially reduce the expected benefits of
such acquisitions.
The PC communication software industry is highly competitive. There are a number
of companies that currently compete directly with the Company's PC remote
control, modem and telephone line sharing and computer telephony tools products.
Many of these companies, including Symantec, MicroCom, Novell, Lucent
Technologies and others have substantially greater resources and name
recognition than the Company. Accordingly, there can be no assurance that
current communication products will continue to generate revenues and earnings
at current levels, or that the Company business will be able to effectively
develop and launch new competitive products in the future.
As a result, past performance trends by the Company should not be used by
investors in predicting or anticipating future results. The market price of the
Company's Common stock has been, and may continue to be, extremely volatile.
Factors identified in this and other captions, along with other factors that may
arise in the future, quarterly fluctuations in the Company's operating results
and general conditions or perceptions of securities analysts relating to the
networking and data communications marketplace or to the Company specifically
may have a significant impact on the market price of the Company's Common stock
and could cause substantial market price fluctuations over short periods. See
also "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations" including the discussion of "Risk Factors."
Rights Plan
During fiscal 1995, the Board of Directors of the Company adopted a shareholder
rights plan (the "Rights Plan") which is intended to protect and maximize the
value of shareholders' interest in the Company and to assure that all Company
shareholders will receive fair and equal treatment in the event of any
unsolicited attempt to acquire the Company. The Rights Plan will not and is not
intended to prevent a takeover of the Company on terms that are fair to, and in
the best interests of, all shareholders. See "Note 10 of Notes to Consolidated
Financial Statements" under "Item 8. Financial Statements and Supplementary
Data."
Stock Repurchase Program
In February 1997, the Company extended a stock repurchase program (the
"Program") under which the Company would be authorized to repurchase up to
1,000,000 shares of its outstanding Common Stock for general corporate purposes.
Pursuant to the Program, management of the Company is authorized to pursue the
Program in open market transactions from time-to-time, depending upon market
conditions and other factors. To date, the Company has repurchased less than
100,000 shares in open market transactions pursuant to the Program.
8
<PAGE>
Item 2. Properties
- ------------------
The Company owns or leases property as detailed in the following table.
<TABLE>
<CAPTION>
Lease
Approximate Owned or Expiration Intended
Location Size Leased Date Use
-------- ---- ------ ---- ---
<S> <C> <C> <C> <C>
Tucson, Arizona 2.7 acres Owned (Sale in escrow) Vacant Land
Tucson, Arizona 57,775 sq. ft. Owned (Sale in escrow) Office
Tucson, Arizona 2,700 sq. ft. Leased March 1998 Operations
Tucson, Arizona 28,800 sq. ft. Leased February 2001 Operations
Cambridge, Massachusetts 5,150 sq. ft. Leased January 1998 Office
Cambridge, Massachusetts 18,241 sq. ft. Leased August 2000 Office
Boynton Beach, Florida 1,171 sq. ft. Leased July 1998 Office
Iselin, New Jersey 5,352 sq. ft. Leased March 2000 Office
Tokyo, Japan 197 sq. ft. Leased February 1999 Office
Mexico City, Mexico 503 sq. ft. Leased October 1997 Office
Etobicoke, Ontario, Canada 1,632 sq. ft. Leased December 1997 Office
Neutral Bay, NSW Australia 990 sq. ft. Leased April 1999 Office
Amsterdam, Netherlands 1,938 sq. ft. Leased April 2000 Office
Windsor, England 1,800 sq. ft. Leased March 2001 Office
Paris, France 2,153 sq. ft. Leased September 1998 Office
Munich, Germany 269 sq. ft. Leased September 1997 Office
</TABLE>
Aggregate monthly rental payments for the Company's facilities are approximately
$58,000. The Company's current facilities are generally adequate for anticipated
needs over the next 12 to 24 months.
Item 3. Legal Proceedings
- -------------------------
The Company is a party to a number of legal proceedings arising in the ordinary
course of its business. The Company believes that the ultimate resolution of
these claims will not have a material adverse effect on its financial position
or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
Not applicable.
Executive Officers of the Registrant
The following table sets forth information concerning the executive officers of
the Company as of June 30, 1997 except as noted:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
William C. Keiper 46 Chairman of the Board and Chief Executive Officer
T. Paul Thomas 37 President and Chief Operating Officer
Gary R. Acord 44 Vice President and Chief Financial Officer
Ernest E. East 54 Vice President, General Counsel and Corporate Secretary
Kirk D. Mayes 29 Controller and Principal Accounting Officer
Rick L. McGee 39 Vice President, Sales and Marketing
L. Ned Shipp 42 Vice President, Engineering and Product Management
Olivier Zitoun 29 Senior Vice President and General Manager of the Networking Product Group
</TABLE>
Mr. Keiper joined the Company in January 1993 as President and Chief Operating
Officer. In June 1993, he became Chief Executive Officer and was appointed
Chairman of the Board in October 1995. From 1986 through January 1993, Mr.
Keiper held various positions at MicroAge,
9
<PAGE>
Inc., and was serving as President and Chief Operating Officer until he joined
the Company. MicroAge, Inc. is a company that distributes, markets and supports
personal computer hardware and software.
Mr. Acord joined Artisoft in April 1996 as Vice President and Chief Financial
Officer. Prior to joining Artisoft, Mr. Acord was Senior Vice President of
Finance and Chief Financial Officer of Elsinore Corporation, a publicly-traded
gaming company in Las Vegas, Nevada from April 1995 to April 1996. Elsinore
Corporation filed a petition for reorganization under Chapter 11 of the federal
bankruptcy code in October, 1995. Prior to his employment with Elsinore, he was
with KPMG Peat Marwick LLP from 1979 through 1995, with his last position being
Managing Partner of the Las Vegas office and Director of the firm's national
gaming practice.
Mr. East joined Artisoft in January 1996 as Vice President, General Counsel, and
Corporate Secretary. Prior to joining Artisoft, Mr. East was Vice President and
General Counsel of Elsinore Corporation in Las Vegas, Nevada from October 1994
to January 1996. Elsinore Corporation filed a petition for reorganization under
Chapter 11 of the federal bankruptcy code in October, 1995. He was Senior Vice
President and General Counsel for Trump Hotels and Casino Resorts, New York
City, from June 1991 to September 1994 and also served as an officer of Trump
Castle, Trump Taj Mahal and Trump Plaza Casinos, Atlantic City, New Jersey at
the time of their reorganizations under the federal bankruptcy laws in 1991 and
1992. Mr. East was Vice President, Secretary and General Counsel for Del Webb
Corporation, Phoenix, Arizona from January 1984 to June 1991.
Mr. Mayes joined Artisoft in November 1994. In June 1997, Mr. Mayes was named
Corporate Controller, and the Company's Principal Accounting Officer and in
August 1997 was named Acting Principal Financial Officer. Mr. Mayes joined
Artisoft from Arthur Andersen LLP.
Mr. McGee joined Artisoft in November 1995 as Director of North American Sales
which was the result of Artisoft's acquisition of Synergy Solutions. In June
1997, he became Vice President of Sales and Marketing. Mr. McGee was the founder
and President of Synergy Solutions, the developer of ModemAssist PLUS. Prior to
founding Synergy, Mr. McGee successfully built channel sales and marketing
organizations for Fresh FTechnology Company, Clyde Digital Systems, and WICAT
systems International.
Mr. Shipp joined Artisoft in January 1989. Mr. Shipp joined Artisoft from Hughes
Aircraft where he served in both engineering and management capacities. Mr.
Shipp has been one of the key development team builders during his eight year
tenure at Artisoft, Inc. Mr. Shipp has a Masters of Science in Computer Science
and a Bachelors of Science in Systems and Industrial Engineering. Mr. Shipp is
the Vice President of Engineering and Product Management and is currently acting
as the manager of the Information Systems and Technology Department.
Mr. Thomas joined Artisoft in June 1997 as President of the Communication
Software Group and was later named President and Chief Operating Officer of the
Company. Thomas joined Artisoft from Sunquest Information Systems where he was
Senior Vice President of Marketing. Earlier in his career, Thomas held the
position of Vice President of Marketing for Artisoft, as well as other senior
level positions with Apple Computer, Compaq Computer and MicroAge, Inc.
Mr. Zitoun is a native of France who joined Artisoft in December 1991 and was
responsible for establishing the Artisoft France office. Later he was named
Director of Sales for France, Spain, Italy, Belgium, Luxembourg and the
Netherlands. In February 1995, Mr. Zitoun became Vice President of Sales and
Marketing for Europe. In March 1996, Mr. Zitoun became Senior Vice President and
General Manager of Artisoft's Networking Product Group. Prior to Artisoft, from
March 1987 to November 1991, he was the European Marketing Director for Kortex,
one of Europe's leaders in the communication and modem industry.
NOTE: Messrs. Acord and Zitoun are no longer with the Company as of the filing
of this document. Mr. McGee was promoted to Vice President, Sales and Marketing,
subsequent to June 30, 1997. Mr. Keiper resigned as Chairman on September 12,
1997, and will no longer be employed by the Company as Chief Executive Officer
effective September 30, 1997.
10
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- ------------------------------------------------------------------------------
The principal market for Artisoft common stock is The Nasdaq Stock Market.
Market information and related shareholder matters are contained in "Securities
Information" on the inside back cover of the Artisoft, Inc. 1997 Annual Report
to Shareholders, and are incorporated herein by reference. On June 30, 1997, the
Company's Common Stock was held by approximately 400 shareholders of record.
The Company currently intends to retain future earnings to fund the development
and growth of its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future.
Item 6. Selected Financial Data.
- --------------------------------
Artisoft, Inc. and Subsidiaries
Selected Consolidated Financial Data
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended June 30,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Statements of Operations Data
Net sales $ 33,409 $ 60,972 $ 84,243 $107,430 $ 84,642
Operating income (loss) (29,124) (24,838) (9,832) 18,983 12,709
Net income (loss) (28,425) (18,328) (5,848) 13,613 9,410
Net income (loss) per common
and equivalent share $ (1.95) $ (1.27) $ (.41) $ .89 $ .52
Shares used in per share calculation 14,555 14,463 14,315 15,377 17,970
As of June 30,
1997 1996 1995 1994 1993
Balance Sheet Data
Working Capital $ 17,747 $ 37,917 $ 56,324 $ 52,462 $ 48,675
Total Assets 35,371 57,712 77,807 97,464 92,615
Long-term obligations, net of
current portion 714 96 -- 3,950 --
Shareholders' equity 22,604 50,981 68,245 72,847 82,915
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations.
- --------------
Overview
During fiscal 1997 the Company's product lines experienced rapidly increasing
competitive pressures from major software manufacturers. These marketplace
conditions contributed to a substantial decline in sales of the Company's
flagship LANtastic NOS product line. Revenues from the Company's Remote Control
and Computer Telephony product lines partially offset some of these declines. In
response to the lowered demand for its products the Company implemented
substantial restructuring actions designed to bring the Company's cost structure
to a level commensurate with the level and mix of operating revenues. The
restructuring actions included the closure of seven of its international
offices, and attendant headcount reductions at these offices but principally at
its Tucson, Arizona headquarters. These actions were taken in order to move the
Company toward improved operating results.
11
<PAGE>
New Products
Communication Software Group
In the second quarter of fiscal 1997, the Company launched i.Share 2.0, an
Internet access-sharing software product for networked PC's that enables
multiple users to share a single Internet connection simultaneously. In the
fourth quarter of fiscal 1997, Artisoft released version 2.5 of the Internet
access-sharing software. i.Share is targeted at Microsoft, Novell and Artisoft
network customers.
In the second quarter of fiscal 1997, the Company released XtraMail for Windows
NT and Windows 95. XtraMail is an e-mail server software product that runs on
Microsoft NT or Windows 95 servers and enables businesses to send or receive
interoffice e-mail via their local area networks at the same time they
transparently pass e-mail to and from the Internet. XtraMail runs on any TCP/IP
network, including Microsoft, Novell and Artisoft LANtastic.
Artisoft's Communication Software Group product offering also includes LANtastic
7.0, the Company's flagship small business networking product. LANtastic 7.0 is
the first Internet-ready networking solution for small and growing businesses,
and supports the three most popular PC operating systems - Windows 95, Windows
and DOS. It also allows multiple-user access to a single Internet connection,
modem and telephone line sharing and capabilities to enable a small business to
inexpensively build a wide area network (WAN).
Computer Telephony Product Group
The Company's computer telephony products include Visual Voice Pro 3.0 and
Visual Voice for TAPI 2.0. In August 1997, Artisoft released Visual Voice Pro
4.0, which allows users to create a wide variety of 32-bit computer-based
telephony solutions for Windows NT and Windows 95 platforms, including voice
mail, audio text, outbound calling, interactive voice response, fax-on-demand,
and international callback. Visual Voice Pro adds telephony and voice
capabilities to any development environment that supports ActiveX controls,
including Visual Basic, Visual C++, Delphi and Visual Fox Pro.
In the second quarter of 1997, the Company launched InfoFast 1.0, a
fax-on-demand/audio text software solution jointly promoted with Dialogic
Corporation. InfoFast 1.0 provides 24-hour automated access to fax documents,
Web documents and voice recordings via fax or phone.
In August 1997, Artisoft launched InfoFast 2.0 for Windows NT and Windows 95.
InfoFast 2.0 offers the same features as InfoFast 1.0 but is compatible with
both Windows NT and Windows 95.
Remote Control Product Group
CoSession Remote 32 is a remote control software application that enables users
running a Windows 95 or a Windows NT 4.0 PC to connect and control remote PCs
running Windows NT 4.0 or Windows 95. First shipped in March 1997 on select IBM
PC models, CoSession Remote 32 supports connections over analog modems, IPX/SPX,
NetBIOS, NetBEUI and TCP/IP. CoSession Remote 32 also supports TAPI 2.0 and
connections over IRDA and parallel ports.
CoSession Remote 32 uses shell extensions to enable ease of use in setting up
and accessing remote PCs. Once connected, the users can do one or more of the
following:
o Remote control
o File transfer with differential update, synchronization and cloning
capabilities
o Keyboard chat with remote users
o Simultaneous voice conversations using standard analog modems or
network/Internet connections (with a sound card, speakers and microphone on
the two PCs)
CoSession Remote version 7.0, first shipped in March of 1996, is for users of
Windows 95 and Windows 3.1x systems. It is a 16-bit application that provides
most of the functionality of the CoSession Remote 32 product except it does not
support IRDA or parallel port connections, nor does it provide simultaneous
voice conversations without the use of specialized DSVD modems.
CoSession PC2X provides UNIX to PC remote control capabilities. From a UNIX
workstation, users can access and control PCs running Windows NT 4.0, Windows
95, Windows 3.1x and DOS. This product is primarily targeted toward corporate IS
departments running enterprise and mission critical network management
applications in the overall corporate computing environment.
In the fourth quarter of fiscal 1997, the Company launched ConfigSafe Support
Edition, a configuration tracking and recovery utility that is licensed from
imagine LAN, Inc. ConfigSafe, which supports Windows 3.1x, Windows 95 and
Windows NT enables users to recover from PC
12
<PAGE>
crashes with one-step system restoration and tracking features. ConfigSafe
restores systems to previously working configurations by monitoring changes to
critical files, directories and the registry.
Net Sales
The Company's net sales decreased 45% to $33.4 million for the fiscal year ended
June 30, 1997 from $61.0 million for fiscal 1996. The overall decrease in net
sales was primarily due to an approximate 60% decline in sales of the Company's
LANtastic network operating system (NOS) products during fiscal 1997. Management
believes that the principal reason for the decline was the impact of Microsoft's
Windows 95 and Windows NT personal computer (PC) operating systems (OS) on the
small business networking market. More specifically, Windows 95, which is
pre-loaded on substantially all Pentium processor-based PC's currently sold
worldwide, includes peer-to-peer networking capabilities (printer, file and
applications sharing). The impact of Windows 95 on the Company's business has
been compounded by the dominance and visibility of Microsoft in the PC
marketplace and the rapid 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 OS. Management believes that Windows NT 4.0, which like Windows 95,
includes peer-to-peer networking capabilities in the workstation version, and is
preloaded on certain Pentium PC's, has provided additional significant direct
competition to the LANtastic NOS both as a peer-to-peer and client-server
networking solution. Overall, sales of LANtastic software only licenses and kits
have decreased approximately 56%, and hardware (networking interface cards and
other components), 61%. The year-over-year declines were across all worldwide
direct and indirect channels of distribution. For the fiscal years ended June
30, 1997 and 1996, net sales of LANtastic NOS products comprised approximately
60% and 83%, respectively, of consolidated net sales.
The decline in sales of LANtastic NOS products, was partially offset by
increases in sales of the Company's computer telephony and PC communication
products. Included in the computer telephony category are the Visual Voice and
Visual Fax computer telephony toolkit products, Infofast, an
information-on-demand solution, and computer telephony hardware. After
consideration of the fact that the Company has recognized sales of the toolkit
products and associated hardware since the acquisition of Stylus Innovation,
Incorporated ("Stylus") on February 13, 1996, and, accordingly, for only a
portion of fiscal 1996, sales of these products in fiscal 1997 are flat with the
prior fiscal year. Infofast, which was released in November 1996, has not made a
material contribution to the Company's consolidated net sales. For the fiscal
years ended June 30, 1997 and 1996, net sales of computer telephony products
comprised approximately 15% and 3%, respectively, of consolidated net sales.
Included in the PC communication product category are ModemShare, a modem and
telephone line sharing product, CoSession Remote, a remote control product,
i.Share, an Internet connection sharing product, XtraMail, an Internet e-mail
product and ConfigSafe, a system reconfiguration solution. ModemShare and
CoSession Remote have been sold by the Company since the respective acquisitions
of Synergy Solutions, Inc. ("Synergy") on November 22, 1995, and Triton
Technologies, Inc. ("Triton") on December 21, 1995. Accordingly, these products
were only sold for a portion of fiscal 1996. While, these products have
continued to sell at preacquisition levels or better in the direct sales
channels (PC manufacturer OEM for CoSession Remote), they have performed below
management's expectations in distribution and retail. i.Share and XtraMail were
launched in December 1996. While not yet a significant contributor to
consolidated net sales for the second half of fiscal 1997, i.Share experienced
sequential growth in each of the two quarters following the launch. During
fiscal 1997 XtraMail did not make a material contribution to consolidated net
sales. For the fiscal years ended June 30, 1997 and 1996, net sales of PC
communications products comprised approximately 20% and 11%, respectively, of
consolidated net sales.
The Company's net sales decreased 28% to $61.0 million for the fiscal year ended
June 30, 1996 from $84.2 million for fiscal 1995. The overall decrease in net
sales was primarily due to the sale of substantially all of the assets of Eagle
Technology and the consequent cessation of sales by the Company of Eagle
Technology hardware products as of January 30, 1995. Worldwide net sales for the
Eagle Technology business unit were approximately $24.4 million for the fiscal
year ended June 30, 1995. Net sales for fiscal 1996 include sales attributable
to the Company's acquisition of three software companies from the dates of their
acquisitions. Net sales also reflect the Company's strategic decision to move to
a software-centric financial model and a sales mix shift toward the
software-only version of the Company's LANtastic network operating system (NOS).
The shift to the software-only version of LANtastic was principally the result
of increased price sensitivity in the Ethernet adapter market and a related
willingness of local area network (LAN) resellers to select low-priced Ethernet
adapters instead of the Company's Ethernet adapters that were sold in
stand-alone versions or as part of starter and add-on kits. In the fourth
quarter of fiscal 1996, the Company introduced LANtastic version 7.0. In
connection with the transition to this newest version of the LANtastic NOS, the
Company reduced worldwide channel inventories of previous versions of the
product, as well as LANtastic Power Suite, and increased the allowances for
returns and rotations. In the fourth quarter of fiscal 1995, the Company
introduced LANtastic Power Suite. Sales for this product did not reach the
levels anticipated by the Company when the product was introduced. Upon the
release of LANtastic v7.0, the Company elected to de-emphasize Power Suite. As a
consequence of the foregoing, the Company experienced higher than expected
returns and rotations during fiscal 1996, which also contributed to the overall
decrease in net sales.
The Company distributes its products internationally, and tracks sales by major
geographic area. Non-U.S. sales represented 27%, 30% and 38% of net sales for
fiscal 1997, 1996 and 1995, respectively. International sales decreased 51% to
$8.9 million in fiscal 1997 from $18.3 million in fiscal 1996. The reasons for
the decline are the same as those discussed above. International sales decreased
43% to $18.3 million in fiscal 1996 from $32.2 million in fiscal 1995. The
decrease is principally the result of the cessation of sales of Eagle Technology
hardware products as of January 30, 1995 and other factors described above.
13
<PAGE>
Gross Profit
The Company's gross profit was $21.1 million, $41.1 million and $41.4 million in
fiscal 1997, 1996 and 1995, respectively, or 63%, 67% and 49% of net sales,
respectively. The decrease in gross profit percentage for fiscal 1997 was due to
the fixed elements of cost of sales being spread over a much reduced level of
net sales. The increase in gross profit for fiscal 1996 was primarily the result
of an increased percentage of higher margin software sales, a reduced percentage
of network starter and add-on kits (which include hardware), and the cessation
of sales of Eagle Technology hardware products. Gross profit may fluctuate on a
quarterly basis because of product mix, pricing actions and changes in sales and
inventory allowances.
Sales and Marketing
Sales and marketing expenses were $23.4 million, $26.2 million and $33.0 million
for fiscal 1997, 1996 and 1995, respectively, representing 70%, 43% and 39% of
net sales. The increase in sales and marketing expenses as a percentage of net
sales for fiscal 1997 is principally due to the overall decrease in net sales
driven by an approximate 60% decline in sales of the Company's LANtastic network
operating system (NOS) products during fiscal 1997. The decrease in aggregate
dollars for sales and marketing expenses for fiscal 1997 reflects expense
reductions including a decrease in the Company's staffing levels. This decrease
was implemented to bring sales and marketing costs more closely into alignment
with the reduced sales level from fiscal 1996 to fiscal 1997. The increase in
sales and marketing expenses as a percentage of net sales in fiscal 1996 is due
primarily to the cost of promoting the Company's new and existing products. The
decrease in aggregate dollars for sales and marketing expenses for fiscal 1996
reflects expense reductions including a decrease in the Company's staffing
levels. This decrease was implemented to bring costs more closely into alignment
with the reduced sales level from fiscal 1995 to fiscal 1996.
Product Development
Product development expenses were $9.3 million, $7.1 million and $7.7 million
for fiscal 1997, 1996 and 1995, respectively, representing 28%, 12% and 9% of
net sales. The increase in both the aggregate dollars for fiscal 1997 and the
increase in product development expenses as a percentage of net sales for fiscal
1997, is principally attributable to the addition of product development
resources in the Company's Computer Telephony and Remote Control Groups. The
addition of new development personnel to these product groups is required to
meet planned future product introduction timetables. The Company believes the
introduction of new products to the market in a timely manner is critical to its
future success. The increase in product development expenses as a percentage of
net sales for fiscal 1996 and 1995 is principally attributable to the addition
of product development expenses associated with the companies acquired during
fiscal 1996 and the addition of research and development personnel to meet
planned future product introduction timetables. The decrease in aggregate
dollars for fiscal 1996 reflects expense reductions across the board to bring
Company costs more closely into alignment with the reduced level of sales.
General and Administrative
General and administrative expenses were $6.3 million, $6.0 million and $7.5
million for fiscal 1997, 1996 and 1995 respectively, representing 19%, 10% and
9% of net sales. The net increase in fiscal 1997 principally results from the
full year's impact in fiscal 1997 of the acquisitions of the three businesses in
fiscal 1996, and the subsequent expansion of the Company's computer telephony
operations in Cambridge, Massachusetts (higher number of employees and larger
facility). Another factor contributing to the net increase is an increase in the
Company's allowance for doubtful accounts receivable. Bad debt expenses included
in general and administrative expenses were $.5 million, $0 and $0 in fiscal
1997, 1996 and 1995, respectively. The aforementioned increase was substantially
offset by a significant decrease in general and administrative expenses incurred
at the Company's Tucson, Arizona headquarters. Significant reductions were
realized in payroll and related costs as a consequence of involuntary employee
terminations and other actions taken as part of restructuring actions effected
in the September 1996 and March 1997 quarters and other cost-cutting programs to
bring operating expenses more in line with the declining sales levels. The
increase in general and administrative expenses as a percentage of net sales is
principally attributable to the overall decrease in net sales as a result of an
approximate 60% decline in sales of the Company's LANtastic network operating
system (NOS) products during fiscal 1997. The decrease in general and
administrative expenses for fiscal 1996 reflects expense reductions to bring
Company costs more closely into alignment with the reduced sales levels. These
expense reductions included a decrease in the Company's staffing levels in the
general and administrative area.
Costs to Exit Hardware Business
The January 1995 sale of Eagle Technology for approximately $16.0 million
resulted in a gain of $5.7 million before costs associated with the decision to
cease hardware development and manufacturing activities, and wind down that
business. These exit costs included severance, facility closings, inventory
dispositions and other related items, and are included in "Costs to exit
hardware development and manufacturing business, net of gain on disposition" in
the Consolidated Statement of Operations for the fiscal year ended June 30,
1995. Also, as part of the Company's decision to exit the hardware business, the
Company adjusted operating expenses to conform to the new business model. During
the last half of fiscal 1995, the Company reduced staffing levels by over 280
employees, a 48% reduction. In addition, the Company disposed of its
manufacturing operations to a contract manufacturer and began outsourcing the
production of its hardware products on June 30, 1995.
Purchased In-Process Technology and Related Costs
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In conjunction with the acquisition of Synergy, Triton and Stylus, the Company
recorded a charge to operations during the second and third quarters of fiscal
1996 totaling $21.7 million. The charge related to purchased in-process
technology that had not reached technological feasibility and had indeterminable
alternative future use. In addition, as a result of the acquisitions, the
Company recorded a charge to operations for other related costs totaling $5
million. The other related costs were principally attributable to costs
associated with the integration of Triton, Synergy and Stylus technology with
the Company's technology and the elimination of duplicate distribution
arrangements in Europe. Other related costs also included increases in
allowances for returns, rotations and inventory obsolescence associated with the
transition to new technology, costs for severance and outplacement, and facility
costs relating to the cancellation of leases in order to consolidate technical
support and distribution. Although the Company expects the elimination of
duplicative expenses, as well as other efficiencies related to the integration
of the businesses acquired, there can be no assurance that such benefit will be
achieved in the near term, or at all.
Restructuring Costs
Restructuring costs in the accompanying consolidated statement of operations for
the fiscal year ended June 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 that
fiscal year. Employee termination benefits include severance, wage continuation,
notice pay and medical and other benefits. International sales and support
office closures and related costs include costs of premise and other lease
terminations, losses on disposal of furniture and equipment, legal and other
professional fees, and an increase in the allowance for bad debts resulting from
the decision to reduce the number of international distributors, particularly in
Europe. Other costs associated with the restructuring actions include an
impairment loss on the expected disposition of excess computers and other
equipment resulting from the significant reduction in workforce at the Company's
corporate headquarters in Tucson, Arizona and lease termination costs for
certain Tucson, Arizona facilities.
The restructuring actions were the result of substantially declining sales,
principally LANtastic NOS products, and the attendant necessity to reduce the
Company's cost structure to a level commensurate with the level and mix of
operating revenues. The restructuring actions taken during the fiscal year ended
June 30, 1997 included a reduction in workforce affecting approximately 160
employees at the Company's corporate headquarters location in Tucson, Arizona,
the sale of the Company's Tucson headquarters land and building in connection
with the planned relocation to a smaller facility and the closure of all
international sales and support offices with the exception of the United Kingdom
and Japan.
Accrued restructuring costs in the accompanying June 30, 1997 consolidated
balance sheet are principally comprised of accrued employee termination benefits
of approximately $4.2 million and expected costs to be incurred in connection
with the closure of the international sales and support offices.
Other Income (Expense)
For fiscal 1997, other income (expense), net, decreased to $.7 million from $1.5
million in fiscal 1996. This decrease resulted principally from lower investment
income resulting from the reduction in cash and investment balances due to the
acquisition of Synergy, Triton and Stylus for approximately $26.4 million in
1996. The Company also incurred increased interest expense in fiscal year 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.
For fiscal 1996, other income (expense), net, increased to $1.5 million from
$(3,000) in fiscal 1995. This increase resulted primarily from investing cash
balances in higher-yielding taxable securities, the inclusion of the net gains
from the sale of property and equipment and the elimination of interest expense
that was accrued under a note payable relating to the purchase of Eagle
Technology that partially offset interest income in fiscal 1995.
Income Tax Benefit
The effective tax rates were 0%, (21)%, and (41)% for fiscal 1997, 1996 and
1995, respectively. For the fiscal year ended June 30, 1997, an immaterial
amount of income tax benefit was recognized as the Company established a
valuation allowance equal to the entire net deferred tax asset balance. In the
assessment of the recognition of a valuation allowance, the Company considered
recent operating losses experienced during the Company's transition from a
company with primarily a hardware orientation focused solely on small business
networking, to a PC software company with diversified technology and product
portfolios; the expected future impact of the restructuring actions effected
during the fiscal year; the uncertainty in estimating the magnitude and timing
of the revenue contribution from products expected to be released over the next
several quarters; and the expiration dates of state net operating loss
carryforwards. The 21% effective tax rate benefit for fiscal 1996 is the result
of the non-deductibility for federal income tax purposes of approximately $9.2
million of in-process technology written off for financial reporting purposes in
connection with the Triton acquisition, which was effected as a purchase of
stock. Other factors causing the effective tax rates to differ from the expected
tax expense (benefit) calculated using the U.S. federal corporate income tax
rate for those years are the inclusion of state and foreign income taxes
partially offset by tax benefits from the Company's FSC and tax-exempt interest
income. Income taxes receivable as of June 30, 1997 and 1996 are the result of
carrying back all or a portion of the Federal net operating losses incurred in
fiscal 1997 and 1996 for a refund of income taxes paid in prior years.
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Liquidity and Capital Resources
The Company had cash and investments of $14.7 million at June 30, 1997, compared
to $15.3 million at June 30, 1996, and working capital of $17.7 million at June
30, 1997 and $37.9 million at June 30, 1996. The decrease in cash and cash
equivalents during fiscal 1997 of $.6 million was principally the result of net
cash used in the operations of the business of $2.4 million and capital
expenditures of $1.5 million offset substantially by the proceeds from two
financings closed during the year: First, was the mortgage of the Tucson,
Arizona headquarters building of $2.2 million, and second, a sale-leaseback
transaction of $1.4 million for computer equipment. The decrease in working
capital of $20.2 million was primarily the result of the following: decreases in
trade accounts receivable of $11.0 million, inventories of $1.8 million, current
deferred income taxes of $2.2 million and the accrual of restructuring costs of
$5.0 million. The decreases in trade accounts receivable and inventories are
principally the result of the substantial decline in net sales experienced
during the fiscal year. Trade accounts receivable was further impacted by
increases in the allowances for sales returns and bad debts in connection with
the Company's decision to reduce U.S. distribution channel inventories to
approximately six weeks on hand and to reduce international distribution channel
inventories to approximately ten weeks on hand, and by provisions for bad debts
recognized for certain international distributors in connection with the
significant decline in international sell-through and the closure of all
international sales and support offices, with the exception of the United
Kingdom and Japan. The decline in current deferred income taxes is the result of
the recognition of a valuation allowance for the entire balance of deferred tax
assets as of June 30, 1997 (see discussion above under caption, "Income Tax
Benefit"). Accrued restructuring costs of approximately $5.0 million are
comprised of unpaid involuntary termination benefits and other expected but
unpaid costs in connection with the restructuring actions (see discussion above
under the caption, "Restructuring Costs"). These costs will largely, if not
completely, be paid during the first two quarters of fiscal year 1998.
Management anticipates that the amount of cash yet to be paid in connection with
the restructuring actions will be offset by the estimated net proceeds from the
expected sale of the Tucson headquarters land and building of approximately $1.5
million (see discussion above under the caption, "Restructuring Costs") and the
refund of prior years' Federal income taxes resulting from the carryback of a
portion of fiscal 1997's net operating loss of approximately $4.3 million.
Management believes that the future reduction in operating expenses resulting
from the restructuring actions will bring those expenses in line with the level
and mix of expected future operating revenues.
The Company had cash and investments of $15.3 million at June 30, 1996, compared
to $37.8 million at June 30, 1995, and working capital of $37.9 million at June
30, 1996 and $56.3 million at June 30, 1995. The decrease in cash and
investments was primarily a result of the acquisition of Synergy, Triton and
Stylus but was partially offset by the proceeds from the sale of certain assets
and the receipt of a federal income tax refund.
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 expected cash requirements for at least the next year,
additional investments by the Company to acquire new technologies and products
may necessitate that the Company seek additional debt or equity capital. There
can be no assurance that the Company could successfully acquire additional debt
or equity capital in the future.
Risk Factors
Competition.
The PC industry is highly competitive and is characterized by rapidly changing
technology and evolving industry standards. The Company's products compete with
products available from numerous companies, many of which have substantially
greater financial, technological, production, sales and marketing and other
resources, as well as greater name recognition and larger customer bases, than
the Company. As a result, these competitors may be able to respond more quickly
and effectively to new or emerging technologies and changes in customer
requirements or to devote greater resources to the development, promotion, sales
and support of their products than the Company. Competition in the PC industry
is likely to intensify as current competitors expand their product lines, more
features are included in operating systems (e.g., Windows 95), motherboards and
microprocessors, and as new companies enter the markets or segments in which the
Company currently competes. The industry is also characterized by a high degree
of consolidation which favors companies with greater resources than those of the
Company. Consequently, the Company expects to continue to experience increased
competition, which could result in significant price reductions, loss of market
share and lack of acceptance of new products, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company's products will be able
to compete successfully with other products offered presently or in the future
by other vendors.
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
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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
certain 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. Recently, 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 as early as March 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 12 to 18 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.
The principal distribution channel for the Company's remote control product,
CoSession Remote, is through OEM arrangements with PC manufacturers. The Company
is developing, but has not yet released in the U.S., a 32-bit version of the
product to support the Windows 95 and Windows NT operating systems. As the
Company's major competitors currently offer 32-bit remote control products, it
is critical, for the continuance of the Company's current OEM relationships,
that the Company successfully complete development of the 32-bit product in a
timely manner and in accordance with any agreed-upon delivery schedules. The
loss of one or more of these OEM relationships could have a significant impact
on the Company's net sales and operating results. Microsoft, because of its
dominant position in the PC operating systems and business applications markets,
frequently offers value-added functionality to its products in the form of
enhancements to its Windows operating systems, which are pre-loaded on new PC's,
or by offering free products for download from its World Wide Web site.
Microsoft has announced its intention to release a version of Windows NT Server
with modem sharing capabilities. The inclusion of modem sharing capabilities in
Windows NT could result in substantially increased competition for the Company's
ModemShare product which could have a significant impact on the Company's sales
and operating results (see caption above entitled, "Networking" for further
discussion of Windows NT). Microsoft has also announced its intention to include
remote control components in future versions of Windows operating systems, and
currently distributes Net Meeting at no charge from its Web site. These actions
could lead to diminished demand for the Company's CoSession remote control
product, and consequently decreased net sales and operating results.
Computer Telephony.
The market for open, standards-based telephony tools, applications and
system-level products is relatively new, and rapidly evolving. There can be no
assurances that these markets will continue to expand, or if they do, that the
Company's products will receive widespread acceptance. Further, the market for
the Company's computer 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 computer telephony
products obsolete or unmarketable. The Company is currently investing
significant resources in the development of computer 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,
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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 communication 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 are no minimum purchase requirements for the
Company's distributors, VARs and OEMs, and many of the Company's distributors
and VARs sell competitive products. There can be no assurance that these
customers will give priority to the marketing of the Company's products as
compared to competing products or alternative solutions or that such customers
will continue to offer the Company's products. Further, in light of the
significant decline in sales experienced over the last several quarters, there
can be no assurance that the Company's major domestic and international
distributors will continue to purchase the Company's products at the same levels
(relative to rates of resale) or under the same terms and conditions as in the
past. In the event of the termination of the Company's relationship with one or
more major distributors, the Company would have to find suitable alternative
channels of distribution. The absence of such alternatives could have a material
adverse effect on the Company's business, financial condition and results of
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.
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 markets, 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.
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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 anticipated 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. 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 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 pre-load 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 name, or
that features, content, or trademarks of certain of the Company's products
infringe upon intellectual property rights held by such
19
<PAGE>
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 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 the 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
twelve months ended June 30, 1997, the Company generated 27% 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 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 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
20
<PAGE>
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.
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 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 SFAS No.
128. The pro forma effect of the Company adopting Statement 128 is that basic
and diluted EPS would have been $(1.95) and $(1.95) for the year ended June 30,
1997, $(1.27) and $(1.27) for the year ended June 30, 1996 and $(.41) and $(.41)
for the year ended June 30, 1995.
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. Comprehensive income includes such items as foreign currency
translation adjustments and unrealized holding gains and losses on available for
sale securities that are currently being presented by the Company as a component
of shareholders' equity.
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.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
This Annual Report 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.
21
<PAGE>
Item 8. Financial Statements and Supplementary Data.
- -----------------------------------------------------
ARTISOFT, INC.
Index to Financial Statements
and Financial Statement Schedules
(Item 14(a))
Page Reference Form 10-K
------------------------
Independent Auditors' Report 23
Consolidated Financial Statements:
Consolidated Balance Sheets 24
Consolidated Statements of Operations 25
Consolidated Statements of Changes in
Shareholders' Equity 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 28-39
All schedules are omitted because they are not required, are not applicable, or
the information is included in the financial statements or notes thereto.
22
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Artisoft, Inc.:
We have audited the accompanying consolidated balance sheets of Artisoft, Inc.
and subsidiaries as of June 30, 1997 and 1996 and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the years in the three-year period ended June 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Artisoft, Inc. and
subsidiaries as of June 30, 1997 and 1996 and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 1997 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Phoenix, Arizona
September 22, 1997
23
<PAGE>
Artisoft, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30,
ASSETS 1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 14,673 $ 15,325
Receivables:
Trade accounts, less allowances of $3,990 and $3,261
in 1997 and 1996, respectively 5,011 16,768
Income taxes 4,300 4,958
Notes and other 580 1,405
Inventories 1,860 2,998
Prepaid expenses 833 906
Property and equipment held for sale 2,543 --
Deferred income taxes -- 2,192
-------- --------
Total current assets 29,800 44,552
-------- --------
Property and equipment, net 2,823 7,524
Long-term deferred income taxes -- 2,052
Other assets 2,748 3,584
-------- --------
$ 35,371 $ 57,712
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,345 $ 3,333
Accrued liabilities 3,118 2,640
Accrued restructuring costs 4,950 --
Income taxes payable -- 577
Mortgage note payable 2,182 --
Current portion of capital lease obligations 458 85
-------- --------
Total current liabilities 12,053 6,635
-------- --------
Capital lease obligations, net of current portion 714 96
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 27,848,464, shares at June 30, 1997 and
27,807,890, shares at June 30, 1996 278 278
Additional paid-in capital 96,227 96,075
Retained earnings (accumulated deficit) (4,117) 24,308
Less treasury stock, at cost, 13,320,500 shares at June 30, 1997
and 13,287,500 shares at June 30, 1996 (69,784) (69,680)
-------- --------
Net shareholders' equity 22,604 50,981
-------- --------
$ 35,371 $ 57,712
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
Artisoft, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended June 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales $ 33,409 $ 60,972 $ 84,243
Cost of sales 12,348 19,846 42,796
-------- -------- --------
Gross profit 21,061 41,126 41,447
-------- -------- --------
Operating expenses:
Sales and marketing 23,384 26,178 33,010
Product development 9,300 7,092 7,655
General and administrative 6,255 5,950 7,495
Costs to exit hardware development and manufacturing
business, net of gain on disposition -- -- 3,119
Purchased in-process technology
and related costs -- 26,744 --
Restructuring costs 11,246 -- --
-------- -------- --------
Total operating expenses 50,185 65,964 51,279
-------- -------- --------
Loss from operations (29,124) (24,838) (9,832)
-------- -------- --------
Other income (expense):
Interest income 819 1,266 931
Interest expense (155) (36) (255)
Gain (loss) on disposition of property and equipment (23) 125 (770)
Other 10 162 91
-------- -------- --------
Total other income (expense) 651 1,517 (3)
-------- -------- --------
Loss before income taxes (28,473) (23,321) (9,835)
Income tax benefit (48) (4,993) (3,987)
-------- -------- --------
Net loss $(28,425) $(18,328) $ (5,848)
======== ======== ==========
Net loss per common and common equivalent share $ (1.95) $ (1.27) $ (.41)
======== ======== ==========
Shares used in per share calculation 14,555 14,463 14,315
======== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
Artisoft, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings Cumulative Net
------------------------- Paid-in (Accumulated Treasury Translation Shareholders'
Shares $.01 Par Value Capital Deficit) Stock Adjustment Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994 27,514,213 $ 275 $ 94,012 $ 48,484 $ (69,680) $ (244) $ 72,847
Exercise of common stock
options 148,734 2 708 -- -- -- 710
Issuance of common stock
under employee stock
purchase plan 8,733 -- 59 -- -- -- 59
Tax benefit of disqualifying
dispositions -- -- 233 -- -- -- 233
Translation adjustment -- -- -- -- -- 244 244
Net loss -- -- -- (5,848) -- -- (5,848)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1995 27,671,680 $ 277 $ 95,012 $ 42,636 $ (69,680) $ -- $ 68,245
========== ========== ========== ========== ========== ====== ==========
Exercise of common stock
options 112,848 1 850 -- -- -- 851
Issuance of common stock
under employee stock
purchase plan 23,362 -- 130 -- -- -- 130
Tax benefit of disqualifying
dispositions -- -- 83 -- -- -- 83
Net loss -- -- -- (18,328) -- -- (18,328)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1996 27,807,890 $ 278 $ 96,075 $ 24,308 $ (69,680) $ -- $ 50,981
========== ========== ========== ========== ========== ====== ==========
Purchase of treasury stock -- -- -- -- (104) -- (104)
Exercise of common stock
options 15,292 -- 47 -- -- -- 47
Issuance of common stock
under employee stock
purchase plan 25,282 -- 83 -- -- -- 83
Tax benefit of disqualifying
dispositions -- -- 22 -- -- -- 22
Net loss -- -- -- (28,425) -- -- (28,425)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1997 27,848,464 $ 278 $ 96,227 $ (4,117) $ (69,784) $ -- $ 22,604
========== ========== ========== ========== ========== ====== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
Artisoft, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Years Ended June 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(28,425) $(18,328) $ (5,848)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Purchased in-process technology -- 21,700 --
Depreciation and amortization 2,736 2,445 2,939
Deferred income taxes 4, 252 (1,364) (601)
Gain from disposition of property and equipment, net 23 (125) (3,669)
Write down of property and equipment to net realizable value 1,586 -- --
Change in accounts receivable and inventory allowances (109) 1,426 95
Tax benefit of disqualifying dispositions 22 83 233
Changes in assets and liabilities, net of effects from
acquisitions of businesses:
Receivables-
Trade accounts 11,026 (1,117) 10,178
Income taxes 650 (1,458) (3,500)
Notes and other 825 2,019 (1,585)
Inventories 1,978 (1,082) 16,401
Prepaid expenses 73 1,140 (238)
Accounts payable and accrued liabilities (1,510) (4,603) (5,453)
Accrued restructuring costs 4,950 -- --
Income taxes payable (577)
Other assets and liabilities 79 113 (2,609)
-------- -------- --------
Total adjustments 26,004 19,177 12,191
-------- -------- --------
Net cash provided by (used in) operating activities (2,421) 849 6,343
-------- -------- --------
Cash flows from investing activities:
Purchase of investments -- (35,063) (13,015)
Sales of investments -- 56,305 11,976
Sale of assets of Eagle Technology -- -- 7,500
Cash paid for businesses acquired -- (24,794) --
Proceeds from sales of property and equipment 40 2,972 --
Purchases of property and equipment (1,469) (2,428) (2,426)
-------- -------- --------
Net cash provided by (used in) investing activities (1,429) (3,008) 4,035
-------- -------- --------
Cash flows from financing activities:
Purchases of common stock (104) -- --
Proceeds from issuance of mortgage note payable 2,200 -- --
Proceeds from sale-leaseback transaction 1,368 -- --
Proceeds from issuance of common stock 130 981 769
Principal payments on long-term debt (396) (48) (6,563)
-------- -------- --------
Net cash provided by (used in) financing activities 3,198 933 (5,794)
-------- -------- --------
Effect of exchange rates on cash -- -- 244
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (652) (1,226) 4,828
Cash and cash equivalents, beginning of year 15,325 16,551 11,723
-------- -------- --------
Cash and cash equivalents, end of year $ 14,673 $ 15,325 $ 16,551
======== ======== ========
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 155 $ 36 $ 249
======== ======== ========
Income taxes $ 166 $ 170 $ 50
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
Artisoft, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except percentages, shares and per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Artisoft, Inc. ("Artisoft" or the "Company") is a software company providing
easy-to-use, affordable networking, PC communications and computer telephony
solutions principally to small businesses. Headquartered in Tucson, Arizona,
Artisoft distributes its products in more than 100 countries through nearly
20,000 value-added resellers, distributors, OEMs and retailers.
Basis of Consolidation
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.
Cash Equivalents
The Company considers all highly liquid securities with original maturities of
three months or less to be cash equivalents. As of June 30, 1997 and 1996, the
Company has classified marketable securities of $13.8 million and $12.3 million
with a maturity of less than three months as cash and cash equivalents. The
Company intends to hold these securities to maturity.
Concentration of Credit Risk, Product Revenue and Major Customers
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of investments and trade receivables. The
Company invests in securities with an investment credit rating of AA or better.
The Company also places its investments for safekeeping with high-credit-quality
financial institutions. Credit risk with respect to trade receivables is
generally diversified due to the large number of entities comprising the
Company's customer base and their dispersion across many different customer
groups and geographies. The Company often sells its products through third-party
distributors, and, as a result, may maintain individually significant receivable
balances with major distributors. The Company believes that its credit
evaluation, approval and monitoring processes substantially mitigate potential
credit risks.
Net Sales produced by the Company's Communication Software Group were
approximately $21.4 million, $50.0 million, and $84.2 million or 64%, 82%, and
100% of the Company's total net sales for the fiscal years ended June 30, 1997,
1996 and 1995, respectively. The Company's Communication Software Group
principally includes revenues from the LANtastic NOS, i.Share, and ModemShare
product lines.
Sales to one significant computer hardware and software distributor (Ingram
Micro, Inc.) accounted for approximately 12% and 21% of net sales for the fiscal
years ended June 30, 1996 and 1995, respectively. Sales to another significant
computer hardware and software distributor (Merisel) accounted for 10% on net
sales for the fiscal year ended June 30, 1995. The Company's trade accounts
receivable from Ingram Micro, Inc. approximated 19% and 32% of total trade
accounts receivable at June 30, 1996 and 1995, respectively. The Company's trade
accounts receivable from Merisel approximated 8% at June 30, 1995.
Inventories
Inventories are stated at the lower of cost or market. Cost is principally
determined using the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost. Equipment held under capital leases
are stated at the lower of fair market value or the present value of minimum
lease payments at the inception of the lease. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of three to seven years for furniture and equipment and 31.5 years for
buildings. Equipment held under capital leases is amortized over the shorter of
the lease term or estimated useful life of the asset.
Other Assets
Other assets are stated at cost and are comprised of purchased technology,
trademarks and patents, goodwill and recoverable deposits. Amortization of
purchased technology is calculated using the straight-line method over a five
year life. Amortization of trademarks and patents is calculated using the
straight-line method over the life of the trademark or patent which in most
cases is ten years. Amortization of goodwill is calculated using the
straight-line method over a five year life.
28
<PAGE>
Income Taxes
Income taxes have been accounted for under the asset and liability method in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." Under the asset and liability method of SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Revenue Recognition
The Company recognizes revenue from product sales at the time of shipment, net
of allowances for returns and price protection. Other product revenue,
consisting of training and support services, is recognized when the services are
provided. Gross Sales for the fiscal years ended June 30, 1997, 1996, and 1995,
respectively, were $44.3 million, $68.2 million, and $96.3 million.
Product Development
Development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established. After technological feasibility is established, any additional
costs would be capitalized in accordance with SFAS No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." Because
the Company believes its current process for developing software is essentially
completed concurrently with the establishment of technological feasibility, no
product development costs have been capitalized to date.
Computation of Net Loss Per Common and Common Equivalent Share
Net loss 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.
Foreign Currency Translation
The functional currency for the Company's non-U.S. subsidiaries and branches is
the U.S. dollar. For these entities, inventories, equipment and other property
are translated at the prevailing exchange rate when acquired. All other assets
and liabilities are translated at year-end exchange rates. Inventories charged
to cost of sales and depreciation are remeasured at historical rates. All other
income and expense items are translated at average rates of exchange prevailing
during the year. Gains and losses which result from remeasurement are included
in net income (loss). Prior to July 1, 1995, the functional currency was the
local currency and translation adjustments were recorded as a separate component
of shareholders equity. The change to the U.S. dollar as the functional currency
was not material to the consolidated financial statements.
Stock Based Compensation
Prior to July 1, 1996, the Company accounted for stock options granted under its
stock incentive plans in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price. On July 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows entities to continue
to apply the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option grants
made in fiscal 1996 and future years as if the fair-value-based method defined
in SFAS No. 123 had been applied. The Company has elected to continue to apply
the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
Impact of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 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 SFAS
No. 128. Pro forma basic and diluted EPS, as calculated under Statement 128
would have been $(1.95), $(1.27), and $(.41) for the fiscal years ended June 30,
1997, 1996, and 1995, respectively.
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 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. Comprehensive income includes such items as foreign currency
29
<PAGE>
translation adjustments and unrealized holding gains and losses on available for
sale securities that are currently being presented by the Company as a component
of shareholders' equity.
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 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.
Use of Estimates
Management of the Company has made estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these consolidated financial statements in conformity
with generally accepted accounting principles. Actual results could differ from
those estimates.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on
July 1, 1996. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or net realizable value
(fair value less costs to sell). In connection with the restructuring actions
more fully described in Note 2, the Company recorded an impairment loss on the
expected disposition of excess computers and other equipment of $1.6 million
which is included in the restructuring costs.
Fair Value of Financial Instruments
The carrying amounts of receivables, accounts payable and accrued liabilities
approximate fair value because of the short maturity of these instruments.
The carrying value of the Company's mortgage note payable approximates fair
value due to the recent date of issuance of the note (February 1997) and its
payoff in connection with the expected sale of the underlying security, the
Tucson, Arizona headquarters building and real estate, expected in October 1997.
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 consolidated
financial statements to conform to the 1997 presentation.
(2) RESTRUCTURING COSTS
Restructuring costs in the accompanying consolidated statement of operations for
the fiscal year ended June 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 that
fiscal year. Employee termination benefits include severance, wage continuation,
notice pay and medical and other benefits. International sales and support
office closures and related costs include costs of premise and other lease
terminations, losses on disposal of furniture and equipment, legal and other
professional fees, and an increase in the allowance for bad debts resulting from
the decision to reduce the number of international distributors, particularly in
Europe. Other costs associated with the restructuring actions include expected
losses on the disposition of excess computers and other equipment resulting from
the significant reduction in workforce at the Company's corporate headquarters
in Tucson, Arizona and lease termination costs for certain Tucson, Arizona
facilities.
The restructuring actions were the result of substantially declining sales,
principally LANtastic NOS products, and the attendant necessity to reduce the
Company's cost structure to a level commensurate with the level and mix of
operating revenues.
The restructuring actions taken during the fiscal year ended June 30, 1997
included a reduction in workforce affecting approximately 160 employees at the
Company's corporate headquarters location in Tucson, Arizona, the sale of the
Company's Tucson headquarters land and building in connection with the planned
relocation to a smaller facility and the closure of all international sales and
support offices with the exception of the United Kingdom and Japan.
30
<PAGE>
Accrued restructuring costs in the accompanying June 30, 1997 consolidated
balance sheet are principally comprised of accrued employee termination benefits
of approximately $4.2 million and expected costs to be incurred in connection
with the closure of the international sales and support offices.
(3) ACQUISITION AND DISPOSITION OF HARDWARE MANUFACTURING OPERATIONS
On January 5, 1994, the Company acquired a significant portion of the operating
assets of Eagle Technology (a business unit of Anthem Electronics, Inc.) for
$9,877. The Company's Eagle Technology business unit manufactured and marketed
network communication devices for local area networks. The acquisition was
accounted for in accordance with the purchase method of accounting for business
combinations.
As a result of the Company's decision to focus on software development and cease
its hardware development and manufacturing activities, the Company completed the
sale of substantially all of the operating assets of the Eagle Technology
business unit to Microdyne Corporation for $16,026 on January 30, 1995. The
purchase price was paid in cash and notes payable which notes were paid in full
on September 30, 1995.
The gain of $5,735 on the sale of Eagle Technology was offset by costs
associated with closing the business unit and costs associated with the decision
to cease hardware development and manufacturing activities. These exit costs
included severance, facility closings, inventory dispositions and other related
items, and are included in "Costs to exit hardware development and manufacturing
business, net of gain on disposition" in the consolidated statement of
operations for the fiscal year ended June 30, 1995. Net sales and net income for
the Eagle Technology business unit were $24,397 and $13, respectively, for the
fiscal year ended June 30, 1995.
On June 30, 1995, the Company executed an agreement to sell its Tucson,
Arizona-based local area network components manufacturing operations to a
third-party manufacturer. The loss on disposition was not material to the
consolidated financial statements.
(4) ACQUISITIONS
On November 22, 1995, the Company acquired for cash substantially all the assets
and certain liabilities of Synergy Solutions, Inc. ("Synergy"), a software
company primarily engaged in the development, marketing and sales of modem and
telephone line sharing software. The aggregate cost of the acquisition was
approximately $1.5 million.
On December 21, 1995, the Company purchased all of the outstanding common stock
of Triton Technologies, Inc. ("Triton"), a software company primarily engaged in
the development, marketing and sales of PC remote control software. The
aggregate cost of acquiring the stock of Triton was approximately $11.8 million.
The purchase price was paid in cash and notes payable, which notes were paid in
full in January 1996.
On February 13, 1996, the Company acquired for cash substantially all the assets
and certain liabilities of Stylus Innovation Incorporated ("Stylus"), a software
company engaged in the development, marketing and sales of computer telephony
applications and tools software. The aggregate cost of the acquisition was
approximately $13.1 million.
The Company incurred direct transaction costs of approximately $625 associated
with the acquisitions of Synergy, Triton and Stylus ("the acquisitions"). These
costs consisted of fees for financial, legal and accounting services and were
included in the allocation of the acquisition costs. The direct costs and the
purchase prices of the acquisitions were allocated to the assets acquired and
liabilities assumed based on their respective fair values on the dates of the
acquisitions, as follows:
Cash $ 421
Trade receivables 604
Inventories 216
Property and equipment 271
Purchased technology 3,456
Purchased in-process technology 21,700
Other 198
--------
26,866
Less cash acquired (421)
Less liabilities assumed (1,651)
--------
Net assets acquired, excluding cash $ 24,794
========
In conjunction with the acquisitions, the Company recorded aggregate charges to
operations of $21.7 million relating to purchased in-process technology that had
not reached technological feasibility and had indeterminable alternative future
use. The $3.5 million of the aggregate purchase price attributable to purchased
software is being amortized over five years.
In addition, as a result of the acquisitions, the Company charged to operations
other related costs totaling $5.0 million. The other related costs were
principally attributable to costs associated with the product integration of
Triton and Synergy technology with the Company's technology
31
<PAGE>
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 the new technology;
costs for severance and outplacement; and facility costs related to the
cancellation of leases in order to support consolidated technical support and
distribution.
The acquisitions were accounted for as purchase business combinations and,
accordingly, the results of operations of the acquired companies have been
combined with those of the Company as of the respective dates of acquisition.
Had the business combinations occurred prior to July 1, 1995, the Company's net
sales, net income and net income per common and equivalent share (excluding
purchased in-process technology and related costs) for the fiscal year ended
June 30, 1996 would have been $66.4 million, $2,360 and $.16, respectively. The
pro forma effects of the business combinations for the fiscal year ended June
30, 1995 would have been immaterial to the Company's consolidated results of
operations.
(5) INVENTORIES
Inventories at June 30, 1997 and 1996 consist of the following:
1997 1996
Raw materials $ 1,088 $2,167
Work-in-process 261 584
Finished goods 1,236 1,812
2,585 4,563
Inventory allowances (725) (1,565)
$ 1,860 $2,998
(6) PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1997 and 1996 consist of the following:
1997 1996
Land $ -- $ 807
Buildings and improvements -- 1,991
Furniture and fixtures 892 1,058
Computers and other equipment 6,929 9,741
Leasehold improvements 62 93
7,883 13,690
Accumulated depreciation
and amortization (5,060) (6,166)
$ 2,823 $ 7,524
As more fully described in Note 2, the restructuring actions commenced in June
1997 include: a substantial reduction in the Company's workforce, principally at
the Company's Tucson, Arizona location; the relocation of the Tucson operations
to a smaller facility and the closure of a number of international sales and
support offices. As consequences of these actions, the Tucson headquarters land
and building and excess furniture and equipment will be sold or disposed of.
Property and equipment held for sale in the accompanying June 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, which is expected to be sold at a net gain of
approximately $1.4 million.
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<PAGE>
(7) OTHER ASSETS
Other assets at June 30, 1997 and 1996 consist of the following:
1997 1996
Purchased technology, net of
accumulated amortization of $984 and $283 $ 2,471 $3,172
Trademarks and patents, net of
accumulated amortization of $44 and $228 80 285
Recoverable deposits and other 197 127
$ 2,748 $3,584
(8) ACCRUED LIABILITIES
Accrued liabilities at June 30, 1997 and 1996 consist of the following:
1997 1996
Compensation and benefits $ 798 $1,061
Payroll, sales and property taxes 423 884
Marketing 1,107 360
Royalties 460 93
Other 330 242
$3,118 $2,640
(9) MORTGAGE NOTE PAYABLE
Mortgage note payable at June 30, 1997 consists of an 8.2% mortgage note payable
secured by a deed of trust on the Company's corporate headquarters' land and
building in Tucson, Arizona. The mortgage note has a 20 year amortization with a
final balloon payment due at the end of 10 years.
One of the actions to be taken in connection with the restructuring of the
Company's operations commenced in June 1997 (See Note 2) is the relocation of
the Company's Tucson operations to a smaller facility. On July 9, 1997, the
Company accepted an offer to sell the corporate headquarters land and building
and two adjacent parcels for $4.1 million. As this transaction is expected to
close escrow in the second quarter of the fiscal year ended June 30, 1998, the
outstanding balance on the mortgage note is classified as a current liability in
the accompanying June 30, 1997 consolidated balance sheet.
(10) SHAREHOLDERS' EQUITY
Preferred Stock
The Company has authorized for issuance 11,433,600 shares of $1.00 par value
undesignated preferred stock, of which no shares have been issued. On December
6, 1994, the Board of Directors of the Company authorized for issuance 50,000
shares of preferred stock, $1.00 par value, to be designated "Series A
Participating Preferred Stock," subject to a Rights Agreement dated December 23,
1994 (see Rights Plan) to be reserved out of the Company's authorized but
unissued shares of preferred stock. The reserved shares are automatically
adjusted to reserve such number of shares as may be required in accordance with
the provisions of the Series A Participating Preferred Stock and the Rights
Agreement.
Rights Plan
On December 6, 1994, the Board of Directors of the Company authorized and
declared a dividend of one preferred share purchase right (a "Right") for each
common share of the Company outstanding as of the close of business on December
27, 1994. The Rights Agreement is designed to protect and maximize the value of
the outstanding equity interests in the Company in the event of an unsolicited
attempt by an acquirer to take over the Company in a manner or on terms not
approved by the Board of Directors. Each Right, under certain circumstances, may
be exercised to purchase one one-thousandth of a share of the Company's Series A
Participating Preferred Stock at a price of $50.00 per share (subject to
adjustment). Under certain circumstances, following (i) the acquisition of 15%
or more of the Company's outstanding common stock by an Acquiring Person (as
defined in the Rights Agreement) or (ii) the commencement of a tender offer or
exchange offer which would result in a person or group owning 15% or more of the
Company's outstanding common stock, each Right may be exercised to purchase
common stock of the Company or a successor company with a market value of twice
the $50.00 exercise price. The Rights, which are redeemable by the Company at
$.001 per Right, expire in December 2001.
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<PAGE>
Stock Incentive Plans
On October 20, 1994, the shareholders approved the Company's 1994 Stock
Incentive Plan (the "1994 Plan"). The 1994 Plan provides for the grant of
Incentive Stock Options, Non-qualified Stock Options, Stock Appreciation Rights
(Tandem and Free-standing), Restricted Stock, Deferred Stock, Performance Units
and Performance Shares to officers, key employees, non-employee directors and
certain consultants of the Company.
The 1994 Plan provides that the maximum number of options that can be granted
shall be 2,000,000 shares, plus 1.5% of the number of shares of common stock
issued and outstanding as of January 1 of each year commencing on January 1,
1995. The maximum number of options available for grant each year shall be all
previously ungranted options plus all expired and canceled options. Stock
options are generally granted at a price not less than 100% of the fair market
value of the common shares at the date of grant. Options become exercisable over
a four-year period commencing on the date of grant. Options vest 25% at the
first anniversary of the date of grant and the remaining 75% vest in equal
monthly increments over the remaining three years of the vesting period. No 1994
Plan options may be exercised more than ten years from the date of grant. The
1994 Plan will terminate on the earlier of June 15, 2004, or the date upon which
all awards available for issuance have been issued or canceled.
The 1994 Plan contains an automatic option grant program limited to those
persons who serve as non-employee members of the Board of Directors, including
any non-employee Chairman of the Board ("Eligible Directors"). After October 20,
1994, each individual who first becomes an Eligible Director shall automatically
be granted a Nonqualified Option to purchase 15,000 shares of common stock. At
the date of each annual shareholders' meeting, beginning with the 1995 annual
shareholders' meeting, each person who is at that time serving as an Eligible
Director will automatically be granted a Nonqualified Option to purchase 5,000
shares of common stock (and an additional 10,000 shares for the Eligible
Director serving as Chairman of the Board), provided that such person has served
as a member of the Board of Directors for at least six months. There is no limit
on the number of automatic option grants that any one Eligible Director may
receive. All grants to an Eligible Director under the 1994 Plan will have a
maximum term of ten years from the automatic grant date. Each automatic grant
will vest in three equal and successive annual installments. At June 30, 1997,
there were 1,092,866 additional shares available for grant under the 1994 Plan.
Subsequent to the approval date of the 1994 Plan, the Company ceased granting of
options under the Amended 1990 Stock Incentive Plan and the 1991 Director
Options Plan. All options presently outstanding under these plans continue to be
governed by the terms of those plans and the numbers of shares of common stock
issueable upon exercise by the Company.
The per share weighted-average fair value of stock options granted during the
fiscal years ended June 30, 1997 and 1996 was $.64 and $.45 on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions. 1997 - expected dividend yield 0%, volatility factor of 57%,
risk-free interest rate of 6.1%, and an expected life of six years: 1996 -
expected dividend yield 0%, volatility factor of 58%, risk-free interest rate of
6.3%, and an expected life of six years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The Company applies APB Opinion No. 25 in accounting for its stock incentive
plan and, accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net loss and net loss per common and common equivalent
share for the fiscal years ended June 30, 1997 and 1996 would have been
increased to the pro forma amounts indicated below:
1997 1996
---- ----
Net loss As reported $(28,425) $(18,328)
Pro forma $(28,810) $(18,965)
Net loss per common As reported $ (1.95) $ (1.27)
and common equivalent share Pro forma $ (1.98) $ (1.31)
Pro forma net income reflects only options granted during the fiscal years ended
June 30, 1997 and 1996 . Therefore, the full impact of calculating compensation
cost for stock options under SFAS No. 123 is not reflected in the pro forma net
income amounts presented above
34
<PAGE>
because compensation cost is reflected over the options' vesting period of four
years, or three years for options granted after June 1, 1997, and compensation
cost for options granted prior to July 1, 1995 is not considered. Stock option
activity during the periods indicated is as follows:
Number of Weighted-Average
Shares Exercise Price
Balance at June 30, 1994 1,926,550 $12.40
Granted 1,745,350 10.22
Exercised (148,734) 4.98
Forfeited (1,147,052) 12.71
Balance at June 30, 1995 2,376,114 $10.33
Granted 1,423,250 8.96
Exercised (112,848) 7.48
Forfeited (443,944) 10.81
Balance at June 30, 1996 3,242,572 $10.04
Granted 601,000 4.56
Exercised (15,292) 3.12
Forfeited (1,508,108) 8.90
Balance at June 30, 1997 2,320,172 $ 9.44
The following table summarizes information about the stock options outstanding
at June 30, 1997:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
Range of Options Remaining Exercise Options Exercise
Exercise Prices Outstanding Contractual Life Price Exerciseable Price
<S> <C> <C> <C> <C> <C>
$ 2.39-$3.13 455,500 9.78 $ 2.98 6,000 $ 2.98
$ 4.36-$6.63 203,476 8.71 $ 6.10 52,587 $ 5.84
$ 7.00-$7.94 286,169 7.88 $ 7.49 147,125 $ 7.55
$ 8.13-$8.50 277,678 8.43 $ 8.19 146,746 $ 8.19
$ 8.75-$9.94 324,616 8.12 $ 9.38 150,772 $ 9.40
$10.34-$12.25 495,600 5.79 $11.12 471,115 $11.12
$14.69-$18.00 277,133 6.80 $17.29 164,867 $17.29
$ 2.39-$18.00 2,320,172 7.93 $ 9.44 1,139,212 $10.78
</TABLE>
At June 30, 1997 and 1996, the number of options exerciseable was 1,139,212 and
1,018,338, respectively, and the weighted-average exercise price of those
options was $10.78 and $10.43, respectively.
Common stock received through the exercise of incentive stock options which are
sold by the optionee within two years of grant or one year of exercise, result
in a tax deduction for the Company equivalent to the taxable gain recognized by
the optionee. For financial reporting purposes, the tax effect of this deduction
is accounted for as a credit to additional paid-in capital rather than as a
reduction of income tax expense.
Employee Stock Purchase Plan
On October 20, 1994, the shareholders approved the establishment of an Employee
Stock Purchase Plan and authorized for issuance 200,000 shares of common stock.
During the fiscal years ended June 30, 1997, 1996 and 1995, 25,282, 23,362 and
8,733 shares of common stock were purchased, respectively, at prices ranging
from $2.02 to $6.75 per share. At June 30, 1997, 142,623 shares of common stock
were available for issuance under the plan. The plan provides for eligible
participants to purchase common stock semi-annually at the lower of 85% of the
market price at the beginning or end of the semi-annual period.
Stock Repurchase Program
In February 1997, the Company's Board of Directors readopted and extended a
stock repurchase program under which the Company is authorized to repurchase up
to 1,000,000 shares of its outstanding common stock for general corporate
purposes. The Board of Directors authorized Company management to pursue the
repurchase program in open market transactions periodically, depending upon
market conditions and other factors.
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<PAGE>
(11) EMPLOYEE BENEFIT PLANS
The Company has a qualified 401(k) profit-sharing plan (defined contribution
plan) which became effective July 1, 1991. The plan covers substantially all
employees having at least six months of service. Participants may voluntarily
contribute to the plan up to the maximum limits imposed by Internal Revenue
Service regulations. The Company will match up to 50% of the participants'
annual contributions up to 3% of the participants' compensation. Participants
are immediately vested in the amount of their direct contributions and vest over
a five-year period, as defined by the plan, with respect to the Company's
contribution. The Company's profit-sharing plan expense for this plan was $138,
$198, and $242 for the fiscal years ended June 30, 1997, 1996 and 1995,
respectively.
During 1992, the Company established a defined contribution plan covering
certain of its non-U.S. employees. The plan provides for contributions by the
Company based on a percentage of the employees' compensation. The plan provides
for voluntary contributions by employees in addition to those of the Company.
The Company's profit-sharing plan expense for non-U.S. employees was not
material for the fiscal years ended June 30, 1997, 1996 and 1995.
(12) INCOME TAXES
Components of the income tax benefit for the fiscal years ended June 30 follow:
Current Deferred Total
1997:
Federal $ (4,300) $ 3,509 $( 791)
State -- 743 743
Total $ (4,300) $ 4,252 $( 48)
1996:
Federal $ (5,008) $ -- $(5,008)
State -- ( 35) ( 35)
Foreign 50 -- 50
Total $ (4,958) $ ( 35) $(4,993)
1995:
Federal $ (3,386) $ (41) $(3,427)
State -- (560) (560)
Total $ (3,386) $ (601) $(3,987)
The income tax benefit differs from the amount computed by applying the
statutory Federal income tax rate to the loss before income taxes. The sources
and tax effects are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Computed "expected" tax benefit $ (9,681) $ (7,929) $ (3,442)
State and foreign income taxes -- 50 114
Non-deductible in-process technology write-offs -- 3,040 --
Change in beginning of year valuation allowance 4,244 -- --
Nontaxable interest income -- -- (311)
Other 5,389 -- --
Total income tax benefit $ ( 48) $ (4,993) $ (3,987)
</TABLE>
36
<PAGE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at June 30, 1997 and
1996 are presented below:
1997 1996
Deferred tax assets:
Purchased technology $ 504 $ 1,559
Allowances for doubtful accounts and returns 1,596 1,033
Allowances for inventory obsolescence, direct labor
and overhead capitalization 356 727
Accrued compensation and benefits 208 440
Accrued restructuring costs 1,869 --
Other accrued liabilities 571 168
Federal net operating loss carryforwards 2,983 --
State net operating loss carryforwards 2,701 810
Gross deferred tax assets 10,788 4,737
Less valuation allowance (10,641) --
Net deferred tax assets 147 4,737
Deferred tax liabilities:
Prepaid expenses 147 176
Depreciation and amortization -- 317
Gross deferred tax liabilities 147 493
Net deferred tax assets $ -- $ 4,244
As of June 30, 1997, the valuation allowance has increased $10,641 to equal the
entire net deferred tax asset balance. In the assessment of the recognition of a
valuation allowance, the Company considered recent operating losses experienced
during the Company's transition from a company with primarily a hardware
orientation, focused solely on small business networking to a PC software
company with a more diversified technology and product portfolio, the expected
future impact of the restructuring actions affected during the fiscal year, the
uncertainty in estimating the magnitude and timing of the revenue contribution
from products expected to be released over the next several quarters and the
expiration dates of State net operating loss carryforwards.
As of June 30, 1997, the Company has federal net operating losses available for
carryforward of $8.8 million, which expire in the year 2012.
(13) LEASE COMMITMENTS
Operating Leases
The Company leases office, manufacturing and storage space, vehicles, and
equipment under noncancelable operating lease agreements expiring through 2002.
These leases contain renewal options, and the Company is responsible for certain
executory costs, including insurance, maintenance, taxes and utilities. Total
rent expense for these operating leases was approximately $955, $699, and $1,690
for the fiscal years ended June 30, 1997, 1996 and 1995, respectively.
The approximate minimum rental commitments under noncancelable operating leases
that have remaining noncancelable lease terms in excess of one year at June 30,
1997 were as follows:
Years Ending Future Minimum
June 30 Lease Payments
1998 $1,048
1999 856
2000 560
2001 240
2002 4
Capital Leases
In December 1996, the Company entered into a sale-leaseback transaction for
computer equipment and software with an aggregate value of approximately $1,350.
The underlying lease, classified as a capital lease, includes a 10% purchase
option and requires monthly payments of approximately $42 during its three-year
term. At June 30, 1997 and 1996, the gross amount of plant and equipment held
under capital leases were as follows:
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<PAGE>
1997 1996
Equipment $1,536 $ 158
Less accumulated amortization $ 332 $ 26
$1,204 $ 134
Amortization of assets held under capital leases is included with depreciation
expense.
The following is a schedule of future minimum lease payments under all capital
leases together with the present value of net minimum leases payments, as of
June 30, 1997:
Year Ended June 30
1998 $ 544
1999 506
2000 258
Total minimum lease payments $1,308
Less; amount representing interest
(at rates ranging from 8.25% to 9.0%) 136
Present value of net minimum lease
payments including current portion of $458 $1,172
(14) CONTINGENCIES
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 effect of such matters will not have a material adverse
effect on the Company's financial position.
(15) DOMESTIC AND INTERNATIONAL OPERATIONS
A summary of domestic and international net sales and international assets for
the fiscal years ended June 30 follows:
1997 1996 1995
Domestic $24,472 $42,705 $52,051
International 8,937 18,267 32,192
Net sales $33,409 $60,972 $84,243
International assets $ 1,095 $ 1,795 $ 2,135
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<PAGE>
(16) QUARTERLY RESULTS (UNAUDITED)
The following table presents selected unaudited quarterly operating results for
the Company's eight quarters ended June 30, 1997. The Company believes that all
necessary adjustments have been made to present fairly the related quarterly
results.
<TABLE>
<CAPTION>
First Second Third Fourth
Fiscal 1997 Quarter Quarter Quarter Quarter Total
<S> <C> <C> <C> <C> <C>
Net Sales $ 11,120 $ 9,505 $ 8,452 $ 4,332 $ 33,409
Gross Profit 7,190 6,389 5,418 2,064 21,061
Operating loss (5,448) (2,940) (5,168) (15,568) (29,124)
Net loss (3,385) (1,950) (3,663) (19,427) (28,425)
Net loss per common and
common equivalent share $ (.23) $ (.13) $ (.25) $ (1.34) $ (1.95)
Fiscal 1996
Net Sales $ 14,980 $ 14,325 $ 15,171 $ 16,496 $ 60,972
Gross Profit 9,432 9,286 10,861 11,547 41,126
Operating income (loss) 410 (14,414) (11,848) 1,014 (24,838)
Net income (loss) 464 (13,234) (6,507) 949 (18,328)
Net income (loss) per common and
common equivalent share $ .03 $ (.91) $ (.45) $ (.06) $ (1.27)
</TABLE>
(17) SUPPLEMENTAL FINANCIAL INFORMATION
A summary of additions and deductions related to the allowances for accounts
receivable and inventories for the fiscal years ended June 30, 1997, 1996 and
1995 follows:
<TABLE>
<CAPTION>
Balance at Balance at
Beginning End of
of Year Additions Deductions Year
<S> <C> <C> <C> <C>
Allowances for doubtful accounts and returns:
Year ended June 30, 1997 $ 3,261 $12,321 $(11,592) $3,990
Year ended June 30, 1996 $ 2,800 $11,160 $(10,699) $3,261
Year ended June 30, 1995 $ 2,217 $13,802 $(13,219) $2,800
Allowances for inventory obsolescence:
Year ended June 30, 1997 $ 1,565 $ 884 $ (1,724) $ 725
Year ended June 30, 1996 $ 600 $ 3,015 $ (2,050) $ 1,565
Year ended June 30, 1995 $ 1,088 $ 6,671 $ (7,159) $ 600
</TABLE>
18. SUBSEQUENT EVENTS
In July 1997, the Company entered into an agreement to sell its Tucson
headquarters land and building for approximately $4.1 million. The Company
anticipates a gain on the sale of the building and land of approximately $1.5
million. The escrow is expected to close in the second quarter of fiscal 1998.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure.
- ---------------------
Not applicable
39
<PAGE>
PART III
Certain information required by Part III is omitted from this Report by virtue
of the fact that the Company has filed with the Securities and Exchange
Commission, pursuant to Regulation 14A, within 120 days after the end of the
fiscal year covered by this Report, a definitive proxy statement (the "1997
Proxy Statement") relating to the Company's Annual Shareholders' Meeting to be
held November 3, 1997. Certain information included in the 1997 Proxy Statement
is incorporated herein by reference. The Company disseminated the 1997 Proxy
Statement to shareholders beginning on September 24, 1997.
Item 10. Directors and Executive Officers of the Registrant.
- -------------------------------------------------------------
The information concerning the Company's directors required by this item is
contained in "Election of Directors" and "Nominees for Election," page 3,
"Incumbent Directors," pages 3-4, "Meetings and Committees of the Board of
Directors," page 5 of the 1997 Proxy Statement, and is incorporated herein by
reference. The information concerning the Company's executive officers required
by this item is contained in Part I, Item 4 of this Report under the caption
"Executive Officers of the Registrant," and is incorporated herein by reference.
Item 11. Executive Compensation.
- ---------------------------------
The information required by this item is contained in "Executive Compensation,"
"Summary Compensation Table," "Option Grants in Last Fiscal Year," "Aggregate
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values,"
"Director Compensation," "Employment Agreements and Termination of Employment
and Change in Control Arrangements," "Compensation Committee Interlocks and
Insider Participation," "Report of the Compensation Committee," and "Comparison
of Stock Performance," pages 6-14, of the 1997 Proxy Statement, and is
incorporated herein by reference. Notwithstanding anything to the contrary set
forth in any of the Company's previous filings under the Securities Act of 1933,
as amended, or the Exchange Act that might incorporate future filings, including
this Annual Report on Form 10-K, the "Report of the Compensation Committee" and
"Comparison of Stock Performance" in the 1997 Proxy Statement shall not be
incorporated by reference into any such filings, and such information shall be
entitled to the benefits provided in Item 402(a)(9) of Regulation S-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- -------------------------------------------------------------------------
The information required by this item is contained in "Security Ownership of
Certain Beneficial Owners and Management," page 15 -16 of the 1997 Proxy
Statement, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
- ---------------------------------------------------------
The information required by this item is contained in "Certain Relationships and
Related Transactions," page 10 of the 1997 Proxy Statement, and is incorporated
herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- ---------------------------------------------------------------------------
(a) Financial Statements and Financial Statement Schedules.
-------------------------------------------------------
An Index to financial statements and financial statement schedules is
located on page 24 hereof.
(b) Reports on Form 8-K.
--------------------
The Company filed a report on Form 8-K dated November 12, 1996,
announcing the resignation of Joel J. Kocher as President and Chief
Operating Officer effective November 8, 1996.
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.
40
<PAGE>
(c) Exhibits.
---------
<TABLE>
<CAPTION>
Designation Description Page or Method of Filing
<S> <C> <C>
3.01 Certificate of Incorporation. (1)
3.02 Bylaws. (1)
4.01 Specimen Common Stock Certificate. (1)
4.02 Rights Agreement, dated as of December 23, 1994, between Artisoft, Inc. and Bank
One, Arizona, NA, including the Certificate of Designation of Rights Preferences
and Privileges of Series A Participating Preferred Stock, the Form of Rights Certificate
and the Summary of Rights attached thereto as Exhibits A, B and C, respectively. (6)
10.01 Amended 1990 Stock Incentive Plan of the Registrant. (1)
10.02 1991 Director Option Plan of the Registrant. (1)
10.03 Artisoft, Inc. 1994 Stock Incentive Plan. (5)
10.04 Artisoft, Inc. Employee Stock Purchase Plan. (5)
10.05 Employment Agreement, dated as of October 23, 1995, between
William C. Keiper and the Registrant. (11)
10.06 Employment Agreement, dated as of October 26, 1995, between
Joel J. Kocher and the Registrant (11)
10.07 Form of Indemnification Agreement entered into between the
Registrant and its Directors. (1)
10.08 International Distributorship Agreement, dated July 31, 1992, between
the Registrant and Canon System Globalization, Inc. (2)
10.09 Asset Purchase Agreement between Artisoft, Inc. and Anthem
Electronics, Inc. (4)
10.10 Asset Purchase Agreement between Artisoft, Inc. and Microdyne
Corporation dated as of January 6, 1995. (7)
10.11 Outsource Manufacturing Agreement dated June 30, 1995 between
ECS, Inc. and the Registrant. (8)
10.12 Stock Purchase Agreement dated December 21, 1995 among Artisoft, Inc.
and David J. Saphier, Floyd Roberts and Peter Byer regarding the purchase
of all of the outstanding common stock of Triton Technologies, Inc. (9)
10.13 Asset Purchase Agreement dated February 13, 1996 between Artisoft, Inc.
and Stylus Innovation Incorporated and Michael Cassidy, John W. Barrus,
Laura Macfarlane, Robert H. Rines and Krisztina Holly (the Stylus Shareholders). (10)
11.01 Computation of net loss per share. Page 44
22.01 Subsidiaries of the Registrant. Page 44
23.01 Consent of Independent Public Accountants. Page 44
24.01 Powers of Attorney. See Signature Page
</TABLE>
41
<PAGE>
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 33-42046) or amendments thereto, filed with the Securities and
Exchange Commission on August 5, 1991.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
fiscal 1992 ended June 30, 1992.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
fiscal 1993 ended June 30, 1993.
(4) Incorporated by reference to the Company's Form 8-K dated January 4, 1994.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
fiscal 1994 ended June 30, 1994.
(6) Incorporated by reference to the Company's Form 8-K dated December 22,
1994.
(7) Incorporated by reference to the Company's Form 8-K dated February 10,
1995.
(8) Incorporated by reference to the Company's Annual Report on Form 10-K for
fiscal 1995 ended June 30, 1995.
(9) Incorporated by reference to the Company's Form 8-K dated December 21,
1995.
(10) Incorporated by reference to the Company's Form 8-K dated February 13,
1996.
(11) Incorporated by reference to the Company's Annual Report on Form 10-K for
fiscal 1996 ended June 30, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ARTISOFT, INC.
Date: September 22, 1997 By /s/ William C. Keiper
William C. Keiper, Chief Executive Officer
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and appoints
WILLIAM C. KEIPER and KIRK D. MAYES, and each of them, his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Form 10-K
Annual Report, and to file the same with all exhibits thereto, and all documents
in connection therewith, with the Securities and Exchange Commission, granting
such attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully and to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ William C. Keiper Chief Executive Officer September 22, 1997
William C. Keiper
/s/ Kirk D. Mayes Corporate Controller, Principal Accounting Officer and
Kirk D. Mayes (Acting Principal Financial Officer) September 22, 1997
/s/ Kathryn A. Braun Director September 22, 1997
Kathryn A. Braun
/s/ Michael P. Downey Director September 22, 1997
Michael P. Downey
/s/ Jerry E. Goldress Director September 22, 1997
Jerry E. Goldress
/s/ Jock Patton Director September 22, 1997
Jock Patton
/s/ T. Paul Thomas Director September 22, 1997
T. Paul Thomas
</TABLE>
42
<PAGE>
EXHIBIT INDEX
Sequentially
Numbered
Exhibit Description Page
11.01 Computation of net income (loss) per share. 44
22.01 Subsidiaries of the Registrant. 45
23.01 Consent of Independent Public Accountants. 46
43
Exhibit 11.01
Statement Regarding Computation of
Net Loss per Share
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended June 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Income (loss) $(28,425) $(18,328) $ (5,848)
Weighted average shares:
Common shares outstanding 14,555 14,463 14,315
Total weighted average shares - primary 14,555 14,463 14,315
Primary net income (loss) per common and common
equivalent share (1) (1.95) $ (1.27) $ (.41)
</TABLE>
(1) Primary and fully diluted net income (loss) per common and common
equivalent shares are the same.
44
Exhibit 22.01
Subsidiaries of the Company
1. Artisoft Japan, K.K. was incorporated in January 1992 in Japan, and does
business under the same name "Artisoft Japan."
2. Artisoft "FSC", Ltd. was incorporated in March 1992 in Guam, and does
business as a foreign sales corporation under the name "Artisoft FSC."
3. Artisoft Europe B.V. was incorporated in October 1992 in the Netherlands,
and does business under the name "Artisoft Europe B.V." This Company is
currently inactive.
4. NodeRunner, Inc. was incorporated in April 1993 in the State of Delaware,
and does business under the name "NodeRunner, Inc." This Company is
currently inactive.
5. Triton Technologies, Inc. was incorporated in April 1985 in the State of
Delaware, and operates as the Company's Remote Control Product Group.
45
Exhibit 23.01
Consent of Independent Public Accountants
The Board of Directors
Artisoft, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-78482, 33-78484, 33-88842, 33-89268) on Form S-8 of Artisoft, Inc. of our
report dated September 22, 1997, relating to the consolidated balance sheets of
Artisoft, Inc. and subsidiaries as of June 30, 1997 and 1996, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended June 30, 1997, which
report appears in the June 30, 1997 annual report on Form 10-K of Artisoft, Inc.
KPMG Peat Marwick LLP
Phoenix, Arizona
September 22, 1997
46
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 14,673
<SECURITIES> 0
<RECEIVABLES> 9,001
<ALLOWANCES> (3,990)
<INVENTORY> 1,860
<CURRENT-ASSETS> 29,800
<PP&E> 7,883
<DEPRECIATION> (5,060)
<TOTAL-ASSETS> 35,371
<CURRENT-LIABILITIES> 12,053
<BONDS> 0
0
0
<COMMON> 278
<OTHER-SE> 22,326
<TOTAL-LIABILITY-AND-EQUITY> 35,371
<SALES> 33,409
<TOTAL-REVENUES> 34,060
<CGS> 12,348
<TOTAL-COSTS> 12,348
<OTHER-EXPENSES> 50,185
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 155
<INCOME-PRETAX> (28,473)
<INCOME-TAX> (48)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,425)
<EPS-PRIMARY> (1.95)
<EPS-DILUTED> (1.95)
</TABLE>
