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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
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FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number 000 - 19462
ARTISOFT, INC.
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(Exact name of registrant as specified in its charter)
Delaware 86-0446453
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(State or other jurisdiction of (IRS employer identification number
incorporation)
One South Church Avenue, Suite 2200
Tucson, Arizona 85701
(520) 670-7100
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(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days.
Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date (February 13, 1998).
Common stock, $.01 par value: 14,539,231 shares
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<PAGE>
Artisoft Inc. and Subsidiaries
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets-
December 31, 1997 and June 30, 1997 3
Consolidated Statements of Operations-
Three Months and Six Months Ended
December 31, 1997 and 1996 4
Consolidated Statements of Cash Flows-
Six Months Ended December 31, 1997
and 1996 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote by Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
EXHIBITS
11 Computation of Net Income (Loss) Per Share 21
27 Financial Data Schedule 22
2
<PAGE>
Artisoft, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1997 1997
---- ----
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 18,908 $ 14,673
Receivables:
Trade accounts, net 3,940 5,011
Income taxes -- 4,300
Notes and other 365 580
Inventories 1,167 1,860
Prepaid expenses 452 833
Property and equipment held for sale -- 2,543
-------- --------
Total current assets 24,832 29,800
-------- --------
Property and equipment 6,942 7,883
Less accumulated depreciation and amortization (4,828) (5,060)
-------- --------
Net property and equipment 2,114 2,823
-------- --------
Other assets 2,373 2,748
-------- --------
$ 29,319 $ 35,371
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 954 $ 1,345
Accrued liabilities 2,436 3,118
Accrued restructuring costs 824 4,950
Mortgage note payable -- 2,182
Current portion of capital lease obligations 473 458
-------- --------
Total current liabilities 4,687 12,053
-------- --------
Capital lease obligations,
net of current portion 474 714
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock, $1.00 par value. Authorized 11,433,600 shares; none issued -- --
Common stock, $.01 par value. Authorized 50,000,000 shares;
issued 27,859,731 shares at December 31,
1997 and 27,848,464 shares at June 30, 1997 279 278
Additional paid-in capital 96,244 96,227
Accumulated deficit (2,581) (4,117)
Less treasury stock, at cost, 13,320,500 shares at December 31,
1997 and June 30, 1997 (69,784) (69,784)
-------- --------
Total shareholders' equity 24,158 22,604
-------- --------
$ 29,319 $ 35,371
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
Artisoft, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1997 1996 1997 1996
------------------------ ------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $ 6,761 $ 9,505 $ 13,486 $ 20,625
Cost of sales 1,851 3,116 3,305 7,046
-------- -------- -------- --------
Gross profit 4,910 6,389 10,181 13,579
-------- -------- -------- --------
Operating Expenses:
Sales and marketing 2,332 5,633 5,030 12,638
Product development 1,823 2,266 3,614 4,656
General and administrative 734 1,430 1,391 2,868
Restructuring cost -- -- -- 1,805
-------- -------- -------- --------
Total operating expenses 4,889 9,329 10,035 21,967
-------- -------- -------- --------
Income (loss) from operations 21 (2,940) 146 (8,388)
Other income, net 1,386 178 1,499 370
-------- -------- -------- --------
Income (loss) before income tax
benefit and extraordinary item 1,407 (2,762) 1,645 (8,018)
Income tax benefit -- 812 -- 2,683
-------- -------- -------- --------
Income (loss) before extraordinary
item 1,407 (1,950) 1,645 (5,335)
Extraordinary loss from early
extinguishment of debt, net of
$0 income tax benefit (109) -- (109) --
-------- -------- -------- --------
Net income (loss) $ 1,298 $ (1,950) $ 1,536 $ (5,335)
-------- -------- -------- --------
Basic and diluted net income (loss)
per share $ .09 $ (.13) $ .11 $ (.37)
-------- -------- -------- --------
Weighted average common and
common equivalent shares outstanding 14,612 14,536 14,568 14,530
-------- -------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
Artisoft, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1997 1996
---- ----
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss): $ 1,536 $ (5,335)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Extraordinary loss 109 --
Depreciation and amortization 952 1,380
Deferred income taxes -- 640
Gain from disposition of property, net (1,492) (5)
Change in accounts receivable and inventory allowances (2,241) (1,103)
Tax benefit of disqualifying dispositions -- 22
Changes in assets and liabilities:
Receivables:
Trade accounts 2,902 5,031
Income taxes 4,300 1,635
Notes and other 215 332
Inventories 1,103 1,124
Prepaid expenses 381 (1,217)
Accounts payable and accrued liabilities (1,073) (765)
Accrued restructuring costs (4,126) --
Other assets 7 (80)
-------- --------
Net cash provided by operating activities 2,573 1,659
-------- --------
Cash flows from investing activities:
Proceeds from sale of property and equipment 4,201 35
Purchases of property and equipment (151) (972)
-------- --------
Net cash provided by (used in) investing activities 4,050 (937)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 18 47
Proceeds from sale-leaseback of equipment -- 1,368
Principal payments on long term debt (2,406) (147)
-------- --------
Net cash provided by (used in) financing activities (2,388) 1,268
-------- --------
Net increase in cash and cash equivalents 4,235 1,990
Cash and cash equivalents at beginning of period 14,673 15,325
-------- --------
Cash and cash equivalents at end of period $ 18,908 $ 17,315
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
Artisoft, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The consolidated financial statements include the accounts of Artisoft,
Inc. and its five wholly-owned subsidiaries: Triton Technologies, Inc., Artisoft
Europe B.V., Artisoft "FSC", Ltd. (which has elected to be treated as a foreign
sales corporation), NodeRunner, Inc., and Artisoft Japan, K.K. All significant
intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the accompanying financial statements
include all adjustments (of a normal recurring nature) which are necessary for a
fair presentation of the financial results for the interim periods presented.
Certain information and footnote disclosures normally included in financial
statements have been condensed or omitted pursuant to such rules and
regulations. Although the Company believes that the disclosures are adequate to
make the information presented not misleading, it is suggested that these
financial statements be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's 1997 Annual Report to
Shareholders and report on Form 10-K. The results of operations for the six
months ended December 31, 1997 are not necessarily indicative of the results to
be expected for the full year.
(2) Computation of Net Income (Loss) Per Share
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS No. 128). This statement establishes standards for computing and
presenting earnings per share ("EPS"), and supersedes APB Opinion No. 15. The
Statement replaces primary EPS with basic EPS and requires a dual presentation
of basic and diluted EPS. The Statement is effective for both interim and annual
periods ending after December 15, 1997. The Company has adopted the provisions
of SFAS No. 128 for the quarter and six-month periods ended December 31, 1997
and has restated the 1996 data.
(3) Restructuring Cost
The accrued restructuring costs in the accompanying consolidated
balance sheet at December 31, 1997 include the costs of involuntary employee
termination benefits, international sales and support office closures and
related costs associated with the restructuring actions effected during the
fiscal year ended June 30, 1997. Employee termination benefits include
severance, wage continuation, notice pay and medical and other benefits. Other
costs associated with the restructuring include international sales and support
office closures and related costs of premise and other lease terminations, legal
and other professional fees.
The accrued restructuring costs at December 31, 1997 principally consist of the
following:
6
<PAGE>
<TABLE>
<CAPTION>
Employee Termination Total Accrued
Benefits Office Closure Costs Restructuring Costs
-------- -------------------- -------------------
<S> <C> <C> <C>
Balance at June 30, 1997 $4,200,000 $ 750,000 $4,950,000
Cash paid for employee
termination benefits (3,112,000) - (3,112,000)
Cash paid for office closure costs - (750,000) (750,000)
Reduction in estimate of future
restructuring costs (264,000) - (264,000)
---------- --------- ----------
Unaudited balance at December 31, 1997 $ 824,000 $ - $ 824,000
---------- --------- ----------
</TABLE>
Additionally, separate from the restructuring costs identified above,
during the quarter ended September 30, 1996, primarily in response to lower than
expected sales of LANtastic network operating system (NOS) products during the
quarter and attendant uncertainty as to future sales levels of NOS products, the
Company elected to take two principal actions; first, to realign the resources
of the Company to accelerate the development, delivery and potential customer
adoption of new computer telephony and communications products and, second, to
reduce the Company's operating expense run rate. As a result of these actions,
the Company recorded a pre-tax restructuring charge of $1.8 million in the
quarter ended September 30, 1996 to cover severance costs associated with a 50
person head count reduction and other related costs.
(4) Inventories
Inventories at December 31, 1997 and June 30, 1997 consist of the
following (in thousands):
December 31, June 30,
1997 1997
----------- ----------
(Unaudited)
Raw materials $ 750 $ 1,088
Work-in-process 170 261
Finished goods 562 1,236
------ ---------
1,482 2,585
Inventory allowances (315) (725)
------ ---------
$1,167 $ 1,860
====== =========
7
<PAGE>
(5) Property and Equipment
Property and equipment at December 31, 1997 and June 30, 1997 consist
of the following (in thousands):
December 31, June 30,
1997 1997
----------- ----
(unaudited)
Furniture and fixtures $ 68 $ 892
Computers and other equipment 6,780 6,929
Leasehold improvements 94 62
------- -------
6,942 7,883
Accumulated depreciation and
amortization (4,828) (5,060)
------- -------
$ 2,114 $ 2,823
======= =======
As described in Note 3, the restructuring actions commenced in June
1997 included a relocation of the Company's Tucson operations to a smaller
facility in October 1997. The property and equipment held for sale in the
accompanying June 30, 1997 consolidated balance sheet was comprised of the
expected net realizable value of excess furniture and equipment and the net book
values of the Tucson land, buildings and improvements. During the six month
period ended December 31, 1997, all of the property and equipment held for sale
was disposed of.
On October 31, 1997 the Company closed escrow on the sale of its Tucson
building. The Company received gross proceeds of $4.1 million on the sale, net
cash proceeds of $1.6 million after the pre-payment of a $2.2 million mortgage
and other associated closing costs. The Company recognized a net gain of $1.3
million on the sale of the building for the quarter ended December 31, 1997.
(6) Other Assets
Other assets at December 31, 1997 and June 30, 1997 consist of the
following (in thousands):
December 31, June 30,
1997 1997
---- ----
(unaudited)
Trademarks and patents, net of
accumulated amortization of $58 and $44 $ 67 $ 80
Purchased technology, net of
accumulated amortization of $1,329 and $984 2,126 2,471
Recoverable deposits and other 180 197
------ ------
$2,373 $2,748
====== ======
(7) Subsequent Events
On January 28, 1998 the Company entered into a software licensing
agreement with GFI Communications. The Company paid GFI Communications $275,000
in exchange for a one-time source code drop of a certain communications software
technology. The technology purchase will be capitalized and amortized over its
useful life.
8
<PAGE>
Artisoft, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net Sales. The Company's net sales for the quarter ended
December 31, 1997 were $6.8 million, a decrease of 28% from net sales of $9.5
million for the corresponding quarter of fiscal 1997 and a increase of 1% from
the first quarter of fiscal 1998 net sales of $6.7 million. For the six-month
period ended December 31, 1997, the Company's net sales were $13.5 million, a
decrease of 34% from net sales of $20.6 million for the corresponding period of
fiscal 1997. The decreases in net sales for the quarter and six-month period
ended December 31, 1997, as compared to the corresponding periods in fiscal
1997, were principally due to the decline in sales of the Company's LANtastic
network operating system (NOS) products, offset to a minor extent by increased
sales of the Company's iShare 2.5, ModemShare 32, and CoSession Remote 32
version 8 software products. The sequential increase in net sales from the
previous quarter's net sales was principally the result of the release of the
Company's CoSession Remote 32 version 8 software.
The Company distributes its products in both the U.S. and international
markets. U.S. sales decreased 27% to $4.8 million (71% of net sales) for the
quarter ended December 31, 1997, from $6.6 million (69% of net sales), for the
same quarter a year ago. U.S. sales decreased 31% to $ 9.9 million (73% of net
sales), for the six-month period ended December 31, 1997 from $14.3 million (69%
of net sales), for the same period in fiscal 1997. The decrease in U.S. net
sales for both the quarter and the six-month periods ended December 31, 1997, as
compared to the corresponding periods in fiscal 1997, primarily resulted from
the factors affecting total sales described above. In addition, U.S. sales
during such three and six-month periods of fiscal 1997 declined as a result of
channel inventory reserves taken to maintain U.S. distribution channel
inventories at a level commensurate with U.S. distribution sell through levels
partially offset by increased sales of the Company's remote computing software.
International sales decreased 31% to $2.0 million (29% of net sales),
for the quarter ended December 31, 1997, from $2.9 million (31% of net sales),
for the same quarter a year ago and increased 25% from the first quarter fiscal
1998 sales of $1.6 million. International sales decreased 43% to $3.6 million
(27% of net sales), for the six-month period ended December 31, 1997 from $6.3
million (31% of net sales) for the same period in fiscal 1997. The decrease in
international net sales for both the quarter and the six-month periods ended
December 31, 1997, as compared to the corresponding periods in fiscal 1997,
primarily resulted from the decline in sales of LANtastic NOS products in
Europe, offset to a minor extent by sales of new products. The increase in
international net sales from the previous quarter's net sales is principally due
to an increase in demand for the Company's iShare 2.5 and Visual Voice software
in Europe (particularly the United Kingdom) and an increase in OEM sales in
Japan.
Channel Mix. Artisoft distributes substantially all of its products
through a combination of direct channels (principally telesales), and indirect
channels which include OEMs, systems integrators, value-added resellers ("VARs")
and software retailers. Indirect channel revenues for the quarter ended December
31, 1997 and 1996 were 76% and 84% of total revenues, respectively. Indirect
channel revenues for the six month period ended December 31, 1997 and 1996 were
81% and 83% respectively. The decrease in indirect channel revenues for both the
quarter and six month periods ended December 31, 1997 compared to the
corresponding periods in fiscal 1997 is principally the result of a decrease in
retail channel revenues (relating to the Company's LANtastic NOS products)
partially offset by an increase in OEM revenues from the Company's CoSession
Remote 32 Version 8, ConfigSafe and iShare 2.5 software.
10
<PAGE>
Gross Profit. The Company's gross profit was $4.9 million and $6.4
million for the quarters ended December 31, 1997 and 1996, respectively (72% and
67% of net sales, respectively). Gross profit was $10.2 million and $13.6
million for the six-month periods ended December 31, 1997, and 1996,
respectively (76% and 66% of net sales, respectively). The net increase in gross
profit margin percentages for both the quarter and the six-month periods ended
December 31, 1997, as compared to the corresponding periods in fiscal 1997, was
principally due to the following factors: cost efficiencies achieved at the
Company's distribution center due to the restructuring actions taken during
fiscal year 1997, decreased product translation costs and increased sales of
higher margin-software only content such as iShare 2.5, CoSession Remote 32
Version 8 and to a lesser extent Visual Voice 4.0. The net decrease in aggregate
dollars of gross profit margin for both the quarter and six month periods ended
December 31, 1997 is the result of the decline in net sales (principally the
LANtastic NOS products).
The sequential decrease in gross profit margin from 79% for the
quarter ended September 30, 1997, to 72% for the quarter ended December 31, 1997
is the result of higher software licensing fees incurred on the Company's
configuration tracking and recovery utility (ConfigSafe) licensed from imagine
LAN, Inc. and to a lesser extent inventory reserves recorded during the quarter
ended December 31, 1997.
Gross profit margins may fluctuate from quarter to quarter due to
changes in net sales, product mix, pricing actions and changes in sales and
inventory allowances.
Operating Expenses. Operating expenses were $4.9 million and $9.3
million for the quarters ended December 31, 1997 and 1996 respectively, (72% and
98% of net sales, respectively). Total operating expenses were $10.0 million and
$22.0 million for the six-month periods ended December 31, 1997 and 1996,
respectively, (74% and 107% of net sales, respectively). The decrease in
absolute dollars was due to the restructuring actions implemented by the Company
during the fiscal year ended June 30, 1997. The decrease in total operating
expenses as a percentage of net sales for both the quarter and six month periods
ended December 31, 1997 was due to the aforementioned expense reductions
associated with these restructuring actions offset to a significant degree by
the decline in net sales.
Sales and Marketing. Sales and marketing expenses were $2.3 million and
$5.6 million for the quarters ended December 31, 1997 and 1996, respectively,
(34% and 59% of net sales, respectively). Sales and marketing expenses were $5.0
million and $12.6 million for the six-month periods ended December 31, 1997 and
1996, respectively, (37% and 61% of net sales, respectively). The decrease in
aggregate dollars for sales and marketing expenses and as a percentage of net
sales for the quarter and the six-month periods ended December 31, 1997, as
compared to the corresponding periods in fiscal 1997, are due principally to the
Company's restructuring actions undertaken during the fiscal year ended June 30,
1997. These actions included the closure of six of the Company's eight
international sales offices and marketing headcount reductions at the Company's
Tucson headquarters. Additionally, the Company reduced certain other marketing
and promotional expenses associated with its LANtastic NOS product lines
primarily as a response to the decline in sales. These reductions in sales and
marketing expenses were offset to a minor extent by increased sales and
marketing expenditures on the Company's iShare 2.5, CoSession Remote 32 Version
8, and Visual Voice software.
Product Development. Product development expenses were $1.8 million and
$2.3 million for the quarters ended December 31, 1997 and 1996, respectively,
(26% and 24% of net sales, respectively). Product development expenses were $3.6
million and $4.7 million for the six-month periods ended December 31, 1997 and
1996, respectively, (27% and 23% of net sales, respectively). The decrease in
aggregate dollars for product development expenses for the quarter and six month
period ended December 31, 1997, as compared to the corresponding periods in
fiscal 1997 is principally attributable to the headcount reductions associated
with the restructuring actions taken during the fiscal year ended June 30, 1997.
The reduction in product development personnel occurred principally in the
Company's LANtastic NOS product line and was the result of declining sales. The
reduction in aggregate dollars for product development expenses for the quarter
and six month periods ended December 31, 1997, as compared with corresponding
periods in fiscal 1997 was offset to a significant degree by the addition of
product development personnel in the computer telephony and remote computing
product segments associated with the development of Visual Voice 4.0, CoSession
Remote 32 Version 8 and TeleVantage. The increase in product development
expenses as a percentage of net sales for both the quarter and six month period
ended December 31, 1997 as compared to the corresponding periods in fiscal 1997
is primarily due to the decrease in sales of the Company's LANtastic (NOS)
products.
11
<PAGE>
General and Administrative. General and administrative expenses were
$.7 million and $1.4 million for the quarters ended December 31, 1997 and 1996,
respectively, (10% and 15% of net sales, respectively). General and
administrative expenses were $1.4 million and $2.9 million for the six-month
periods ended December 31, 1997 and 1996, respectively (10% and 14% of net
sales, respectively). The decrease in aggregate dollars for general and
administrative expenses for the quarter and six month periods ended December 31,
1997 as compared to the corresponding periods in fiscal 1997, is attributable to
reductions in administrative personnel effected during the fiscal year ended
June 30, 1997 as a part of the Company's restructuring plan. To a lesser extent,
the decrease is also the result of lower occupancy and maintenance expenses
principally due to the sale of the Company's Tucson, Arizona headquarters and
the relocation to a lower cost facility. The decrease in general and
administrative expenses as a percentage of net sales for the quarter and the
six-month periods ended December 31, 1997, as compared to the corresponding
periods in fiscal 1997, is primarily the result of the aforementioned reductions
partially offset by the decline in sales of the Company's LANtastic (NOS)
products.
Restructuring Cost. During the quarter ended September 30, 1996,
primarily in response to lower than expected sales of LANtastic NOS products
during the quarter and attendant uncertainty as to future sales levels of NOS
products, the Company elected to take two principal actions; first, to realign
the resources of the Company to accelerate the development, delivery and
customer adoption of new computer telephony and communications products and,
second, to reduce the Company's operating expenses. The effect of the
realignment was to increase the Company's investment in product development,
marketing and channel development in the high growth computer telephony and
communications segments of the Company's business and thereby bring more focus
to the delivery of products in these areas, as well as to support continuing
differentiation for LANtastic in the future.
Other Income, Net. For the quarter ended December 31, 1997, other
income, net, increased to $1.4 million, from $.2 million in the corresponding
quarter of fiscal 1997. For the six-month period ended December 31, 1997, other
income, net, increased to $1.5 million, from $.4 million in the corresponding
period of fiscal 1997. The increase in other income, net, for the quarter ended
December 31, 1997 and the six-month period ended December 31, 1997, was
principally attributable to the recognition of a gain on the sale of the
Company's Tucson, Arizona headquarters of $1.3 million.
Income Tax Benefit. The Company's effective income tax rate for the
quarter ended December 31, 1997, was 0% compared to an effective rate of (29.4%)
in the corresponding quarter of fiscal 1997. The Company's effective income tax
rate for the six month period ended December 31, 1997, was 0% compared to an
effective rate of (32.7%) in the corresponding period of fiscal 1997. The
Company did not recognize tax expense for the quarter or six-month periods ended
December 31, 1997 due to the carryforward of federal and state net operating
losses and the reversal of certain book-tax timing differences.
Extraordinary loss from early extinguishment of debt. In October 1997,
the Company incurred a $109,000 prepayment penalty upon the sale of its Tucson,
Arizona headquarters and the subsequent repayment of a $2.2 million mortgage on
that facility. The Company utilized proceeds received from the sale of its
Tucson, Arizona headquarters to prepay the mortgage obligation. There is no
income tax effect from the transaction. The per share amount of extraordinary
loss net of income tax effects is $(.01) for the quarter and six-month periods
ended December 31, 1997.
12
<PAGE>
Future Results
The Company's future results of operations involve a number of risks
and uncertainties. Among the factors that could cause future results to differ
materially from historical results are the following: business conditions and
the general economy; competitive pressures, acceptance of new products and price
pressures; availability of third party compatible products at reasonable prices;
risk of nonpayment of accounts or notes receivable; risks associated with
foreign operations (especially those in Japan and other Asian countries); risk
of product line or inventory obsolescence due to shifts in technologies or
market demand; timing of software introductions; litigation. These and other
risk factors are outlined below.
The Company is addressing the issues associated with the "year 2000."
The Company is utilizing resources to identify, correct, reprogram and test both
its systems used internally as well as the products it sells for year 2000
compliance. It is anticipated that all reprogramming and correction efforts will
be completed by December 31, 1998.
Liquidity and Capital Resources
The Company had cash and cash equivalents of $18.9 million at December
31, 1997, compared to $14.7 million at June 30, 1997, and working capital of
$20.1 million at December 31, 1997 compared to $17.7 million at June 30, 1997.
The increase in cash and cash equivalents was principally the result of the
receipt of a federal income tax refund of approximately $4.2 million, cash
received from the sale of its Tucson, Arizona headquarters and associated
furniture and equipment, partially offset by severance payments as a result of
the Company's restructuring actions effected during the quarter ended June 30,
1997 and the prepayment of the mortgage on the Tucson facility. The increase in
the Company's working capital was primarily the result of the increases in cash
balances as described above.
The Company funds its working capital requirements primarily through
cash flows from operations and existing cash balances. While the Company
anticipates that existing cash balances and cash flows from operations will be
adequate to meet the Company's current and expected cash requirements for at
least the next year, additional investments by the Company to acquire new
technologies and products may necessitate that the Company seek additional debt
or equity capital. There can be no assurance that such additional financing will
be available when needed or, if available, will be on satisfactory terms. In
order to raise capital, the Company may issue debt or equity securities and may
incur substantial dilution.
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. The Company's new
product introductions can be subject to severe price and other competitive
pressures. While the Company endeavors to introduce its products to the
marketplace in a timely manner there can be no assurances that due to the
greater financial resources of the Company's competitors that these products
will be successful. There can be no assurance that the Company's products will
be able to compete successfully with other products offered presently or in the
future by other vendors.
Customers. The Company relies on a network of distributors and value
added resellers (VARs) for a significant portion of both its domestic and
international networking and PC communications product revenues. In addition, a
majority of the sales of CoSession Remote, the Company's PC remote computing
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. In the event of the termination
of the Company's relationship with one or more major distributors, the Company
would have to find suitable alternative channels of distribution. The absence of
such alternatives could have a material adverse effect on the Company's
business, financial condition and results of operation. Certain of the Company's
PC OEM relationships require the scheduled delivery of product revisions and new
products. The failure to adhere to agreed-upon product delivery schedules could
result in the termination of key relationships with major PC manufacturers,
which could have a significant adverse impact on current and future revenues in
the PC OEM channel. The Company's OEM revenue streams are dependent upon the
maintenance of one or more key PC OEM relationships. The termination of any one
of these relationships may materially adversely effect the Company's current and
future revenues.
13
<PAGE>
Returns and Price Protection. 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 if necessary adjust its channel
inventories to be consistent with current levels of sell through, localized
overstocking may occur with certain products due to rapidly evolving market
conditions. In addition, the risk of product returns and rotations may increase
if the demand for its existing products should rapidly decline due to regional
economic troubles or increased competition. 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 occasionally 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 due to uncontrollable competitive pressures.
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 maintains allowances against the effects of such price
protections, and believes that it has provided adequate allowances 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.
Foreign Conditions. The Company is exposed to certain risks associated
with the current financial conditions in Southeast Asia that are having a
negative impact upon the currencies and economies of Australia, Japan and other
Asian countries. The Company has operations in Japan that accounted for
approximately 5% of its net revenues for the quarter ended December 31, 1997.
While the Company believes that its operations in Japan and other revenues from
Asia will not be materially impacted by this current financial turmoil there can
be no assurances that continued severe economic disruption in these economies
would not adversely affect future operating results.
Factors Affecting Pricing. 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 have 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
occasionally receive market development funds from the Company for purchasing
Company products and from time to time extended terms, in accordance with
industry practice, depending upon competitive conditions. The Company currently
does not offer any cash rebates to its U.S. distribution partners. 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, or otherwise, or in the Company's
ability to anticipate in advance the product mix of customer orders could result
in material fluctuations in quarterly operating results.
14
<PAGE>
Networking. The Company's major competitors in the small business
networking market are Microsoft Corporation (Microsoft) and Novell, Inc.
(Novell). Both of these companies have substantially greater financial,
technological, production and sales and marketing resources than those of the
Company.
Management believes that the inclusion of networking capabilities
(printer, file and application sharing) in Microsoft's Windows 95 operating
system (released in August 1995) have had a detrimental impact on sales of the
Company's LANtastic NOS products. Windows 95 is pre-loaded on virtually all
Pentium processor-based personal computers currently sold worldwide. The impact
of Windows 95 has been compounded by the dominance and visibility of Microsoft
in the personal computer software market and the upgrade by small businesses to
Pentium PC's. In August 1996, Microsoft released Windows NT 4.0, a client server
network version of the Windows operating system. Management believes that the
workstation version of Windows NT 4.0 which, like Windows 95, includes
peer-to-peer networking capabilities and is pre-loaded on Pentium PC's, has
provided significant direct competition to the LANtastic NOS in the small
business networking market. Further, business applications software vendors
appear to be rapidly adapting their products to Windows NT. Management believes
that this trend combined with the fact that DOS, Windows 3.x and Windows 95
clients are compatible with the NT server has and will continue to provide
substantial competitive pressure on sales of LANtastic NOS products. Microsoft
recently announced a plan to target the small business market with versions of
NT and BackOffice specially designed to meet the buying requirements of small
businesses, and therefore potentially reducing opportunities for LANtastic
technologies to add value for small business customers. This solution will
likely further diminish the demand for LANtastic in the small business market
(1-100 users).
Finally, the movement of the networking industry towards the uniform
use of Internet technologies in the construction of local area networks (so
called intranets) constitutes a risk that demand for more proprietary networks,
such as LANtastic, will decline further, and that competition will emerge from a
new class of players, such as Netscape Communications, Sun Microsystems, and
others.
Remote Computing. The principal distribution channel for the Company's
remote computing product, CoSession Remote 32 version 8, is through OEM
arrangements with PC manufacturers. In December 1997, the Company released a
32-bit version of the product to support the Windows 95 and Windows NT operating
systems. As the Company's major competitors also offer 32-bit remote computing
products, it is critical, for the continuance of the OEM relationships, that the
Company successfully market the 32-bit product and meet major OEM customer
e-commerce and other promotional requirements. The Company's ability to grow its
remote computing software revenues will likely depend on its success in
leveraging existing OEM relationships to develop new sources of revenue such as
e-commerce. 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
has announced its intention to include a remote computing component in its
Windows 98 operating systems (tentatively scheduled for release in the Spring of
1998) 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.
Communications. 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. The Company believes that
Microsoft's next version of its Windows NT Server (tentatively scheduled for
release in either late 1998 or early 1999) may include both modem sharing and
internet sharing capabilities. The inclusion of modem sharing and internet
sharing capabilities in Windows NT could result in substantially increased
competition for the Company's ModemShare and iShare products 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).
15
<PAGE>
Computer Telephony. The market for open, standards-based telephony
tools, applications and system-level products is relatively new, and rapidly
evolving. There can be no assurances that these markets will continue to expand,
or if they do, that the Company's products will receive widespread acceptance.
Further, the market for the Company's telephony products is characterized by the
rapid evolution of telephony hardware and software standards, by changing
customer requirements, and is highly competitive with respect to timely product
introduction. These characteristics may render the Company's telephony products
obsolete or unmarketable.
The Company is currently investing significant resources in the
development, marketing and launch of new telephony products. Due to the
complexity of these tools and system level products, and the difficulty in
gauging the engineering effort required to develop and bring these products to
market, the Company's telephony product line is subject to significant risk.
Software products as complex as those currently under development by the Company
are often subject to market acceptance challenges. There can be no assurance
that the Company will not encounter difficulties in successfully introducing,
marketing and promoting these products. Additionally, these new telephony
products are principally targeted at medium to large size businesses. The
Company's existing network of qualified resellers has historically sold the
Company's products to small businesses. The Company's success in launching these
products will likely be influenced by its ability to attract and inform
qualified value added resellers and interconnects on the features and
functionality of these emerging technologies.
The Company believes that the principal competitive factors affecting
the telephony markets it serves include vendor and product reputation, product
architecture, functionality and features, scalability, ease of use, quality of
product and support, performance, price, brand name recognition and
effectiveness of sales and marketing efforts. There can be no assurances that
the Company can maintain and grow its market position against current and
potential competitors, especially those with significantly greater financial,
marketing, service, support, technical and other competitive resources. Any
failure by the Company to expand its distribution channel for telephony products
or any failure to maintain and grow its competitive position would have a
material adverse effect upon the Company's revenues from its telephony product
line.
Due to the foregoing, and other factors affecting the Company's
operating results, past financial performance should not be considered to be a
reliable indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future periods.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
This Form 10-Q may contain forward-looking statements that involve
risks and uncertainties, including, but not limited to, the impact of
competitive products and pricing, product demand and market acceptance risks,
the presence of competitors with greater financial resources, product
development and commercialization risks, costs associated with the integration
and administration of acquired operations, capacity and supply constraints or
difficulties, the results of financing efforts and other risks detailed from
time to time in the Company's Securities and Exchange Commission filings.
16
<PAGE>
Artisoft, Inc. and Subsidiaries
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is subject to lawsuits and other claims arising in the
ordinary course of its operations. In the opinion of management, based on
consultation with legal counsel, the effects of such matters will not have a
materially adverse effect on the Company's financial position.
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE BY SECURITY HOLDERS
(a) The Company's Annual Shareholders' Meeting was held on
November 3, 1997.
(b) At the Annual Shareholders' Meeting, proposals were
considered for, (i) the election of Jerry E. Goldress as a
Class II director to serve until the annual meeting of
shareholders' in 2000, (ii) the election of T. Paul Thomas as
a Class II director to serve until the annual meeting of
shareholders' in 2000, and (iii) the ratification of the
selection of KPMG Peat Marwick LLP as the auditors of the
Company for the 1998 fiscal year.
The director-nominees were elected and the ratification of
KPMG Peat Marwick was approved with the voting results as
follows:
<TABLE>
<CAPTION>
Proposal Votes For Votes Against Votes Withheld Abstained Not Voted
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Election of Jerry
E. Goldress as a
Class II Director 13,489,196 - 211,700 - 828,068
Election of T.
Paul Thomas as
a Class II Director 12,214,836 - 1,486,060 - 828,068
Ratification of
selection of KPMG
Peat Marwick as
auditors of the
Company for fiscal
year 1998 13,602,104 70,561 28,231 - 828,068
</TABLE>
17
<PAGE>
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
No. 11 - Computation of Net Income (Loss) Per Share
No. 27 - Financial Data Schedule for Form 10-Q dated February 13,
1998
(c) Reports on Form 8-K
There were no reports filed on Form 8-K during the three months
ended December 31, 1997
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ARTISOFT, INC.
Date: February 13, 1998 By /s/ T. Paul Thomas
-----------------------------------
T. Paul Thomas
President and Chief Operating
Officer
By /s/ Kirk D. Mayes
-----------------------------------
Kirk D. Mayes
Corporate Controller, Principal
Accounting Officer
(Acting Principal Financial Officer)
19
Artisoft, Inc. and Subsidiaries
EXHIBIT 11. COMPUTATION OF NET INCOME (LOSS) PER SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ 1,298 $ (1,950) $ 1,536 $ (5,335)
======== ======== ======== ========
Weighted average common shares outstanding 14,529 14,536 14,529 14,530
Common equivalent shares representing
shares issuable upon exercise of stock
options (1) 83 N/A 39 N/A
-------- -------- -------- --------
Diluted weighted average shares outstanding 14,612 14,536 14,568 14,530
======== ======== ======== ========
Basic net income (loss) per share $ .09 $ (.13) $ .11 $ (.37)
======== ======== ======== ========
Diluted net income (loss) per share $ .09 $ (.13) $ .11 $ (.37)
======== ======== ======== ========
</TABLE>
- ------
Notes:
(1) Amount calculated using the treasury stock method and fair market values
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 18,908
<SECURITIES> 0
<RECEIVABLES> 4,305
<ALLOWANCES> 0
<INVENTORY> 1,167
<CURRENT-ASSETS> 24,380
<PP&E> 6,942
<DEPRECIATION> 4,828
<TOTAL-ASSETS> 29,319
<CURRENT-LIABILITIES> 4,687
<BONDS> 0
0
0
<COMMON> 279
<OTHER-SE> 23,879
<TOTAL-LIABILITY-AND-EQUITY> 29,319
<SALES> 6,761
<TOTAL-REVENUES> 8,147
<CGS> 1,851
<TOTAL-COSTS> 1,851
<OTHER-EXPENSES> 4,889
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 21
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 109
<CHANGES> 0
<NET-INCOME> 1,298
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
