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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
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FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
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)
<TABLE>
<S> <C>
Delaware 86-0446453
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(State or other jurisdiction of incorporation) (IRS employer identification number
</TABLE>
5 Cambridge Center, 3rd Floor
Cambridge, MA 02142
(520) 670-7100
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(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days.
Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date (May 15, 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-
March 31, 1998 and June 30, 1997 3
Consolidated Statements of Operations-
Three Months and Nine-months Ended
March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows-
Nine-months Ended March 31, 1998
and 1997 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote by Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
EXHIBITS
11 Computation of Net Income (Loss) Per Share 21
27 Financial Data Schedule 22
<PAGE>
Artisoft, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31, June 30,
ASSETS 1998 1997
---- ----
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 18,962 $ 14,673
Receivables:
Trade accounts, net 3,726 5,011
Income taxes -- 4,300
Notes and other 296 580
Inventories 994 1,860
Prepaid expenses 319 833
Property and equipment held for sale -- 2,543
-------- --------
Total current assets 24,297 29,800
-------- --------
Property and equipment 7,222 7,883
Less accumulated depreciation and amortization (5,067) (5,060)
-------- --------
Net property and equipment 2,155 2,823
-------- --------
Other assets 2,173 2,748
-------- --------
$ 28,625 $ 35,371
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,428 $ 1,345
Accrued liabilities 1,898 3,118
Accrued restructuring costs 472 4,950
Mortgage note payable -- 2,182
Current portion of capital lease obligations 467 458
-------- --------
Total current liabilities 4,265 12,053
-------- --------
Capital lease obligations,
net of current portion 364 714
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 March 31,
1998 and 27,848,464 shares at June 30, 1997 279 278
Additional paid-in capital 96,244 96,227
Accumulated deficit (2,743) (4,117)
Less treasury stock, at cost, 13,320,500 shares at March 31,
1998 and June 30, 1997 (69,784) (69,784)
-------- --------
Total shareholders' equity 23,996 22,604
-------- --------
$ 28,625 $ 35,371
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
Artisoft, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine-months Ended
March 31, March 31,
1998 1997 1998 1997
--------------------- ---------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $ 6,215 $ 8,452 $ 19,701 $ 29,077
Cost of sales 1,659 3,034 4,964 10,080
-------- -------- -------- --------
Gross profit 4,556 5,418 14,737 18,997
-------- -------- -------- --------
Operating Expenses:
Sales and marketing 2,582 5,620 7,612 18,258
Product development 1,823 2,305 5,437 6,961
General and administrative 747 1,327 2,402 4,195
Restructuring cost (175) 1,334 (439) 3,139
-------- -------- -------- --------
Total operating expenses 4,977 10,586 15,012 32,553
-------- -------- -------- --------
Income (loss) from operations (421) (5,168) (275) (13,556)
Other income, net 259 118 1,758 488
-------- -------- -------- --------
Income (loss) before income tax
benefit and extraordinary item (162) (5,050) 1,483 (13,068)
Income tax benefit -- 1,387 -- 4,070
-------- -------- -------- --------
Income (loss) before extraordinary
item (162) (3,663) 1,483 (8,998)
Extraordinary loss from early
extinguishment of debt, net of
$0 income tax benefit -- -- (109) --
-------- -------- -------- --------
Net income (loss) $ (162) $ (3,663) $ 1,374 $ (8,998)
-------- -------- -------- --------
Basic and diluted net income (loss)
per share $ (.01) $ (.25) $ .09 $ (.62)
-------- -------- -------- --------
Weighted average common and
common equivalent shares outstanding 14,607 14,549 14,576 14,542
-------- -------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
Artisoft, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine-months Ended
March 31,
1998 1997
---- ----
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss): $ 1,374 $ (8,998)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Extraordinary loss 109 --
Depreciation and amortization 1,406 2,074
Deferred income taxes -- (747)
Gain from disposition of property, net (1,504) 17
Change in accounts receivable and inventory allowances (2,629) (1,658)
Tax benefit of disqualifying dispositions -- 22
Changes in assets and liabilities:
Receivables:
Trade accounts 3,480 7,149
Income taxes 4,300 1,635
Notes and other 284 718
Inventories 1,301 1,588
Prepaid expenses 514 (518)
Accounts payable and accrued liabilities (1,138) (779)
Accrued restructuring costs (4,478) --
Income taxes payable -- (256)
Other assets 23 (63)
-------- --------
Net cash provided by operating activities 3,042 _184
-------- --------
Cash flows from investing activities:
Proceeds from sale of property and equipment 4,228 35
Purchases of property and equipment (476) (1,256)
-------- --------
Net cash provided by (used in) investing activities 3,752 (1,221)
-------- --------
Cash flows from financing activities:
Purchase of treasury stock -- (40)
Proceeds (payments) from mortgage notes (2,182) 2,200
Proceeds from exercise of stock options -- 106
Proceeds from sale-leaseback of equipment -- 1,368
Proceeds from issuance of common stock 18 --
Principal payments on long term debt (341) (276)
-------- --------
Net cash provided by (used in) financing activities (2,505) 3,358
-------- --------
Net increase in cash and cash equivalents 4,289 2,321
Cash and cash equivalents at beginning of period 14,673 15,325
-------- --------
Cash and cash equivalents at end of period $ 18,962 $ 17,646
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements
<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 four wholly-owned subsidiaries: Triton Technologies, Inc., 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
consolidated 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 nine-months ended March 31, 1998 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 nine-month periods ended March 31, 1998 and
has restated the 1997 data.
(3) Restructuring Cost
The accrued restructuring costs in the accompanying consolidated
balance sheet at March 31, 1998 include the remaining 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. A majority of these payments were actually
incurred during the nine-month period ended March 31, 1998. 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 March 31, 1998 principally consist of the
following:
<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 (3,289,000) -- (3,289,000)
Cash paid for office closure costs -- (750,000) (750,000)
Reduction in estimate of future
restructuring costs (439,000) -- (439,000)
----------- ----------- -----------
Unaudited balance at March 31, 1998 $ 472,000 $ -- $ 472,000
----------- ----------- -----------
</TABLE>
Additionally, separate from the restructuring costs identified above,
the Company recorded pre-tax restructuring charges of $3.1 million in fiscal
year 1997 as described below.
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 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 pre-tax restructuring charges of $1.8 million in
the quarter ended September 30, 1996 to cover severance costs associated with a
50 person head count reduction and other related costs.
The Company recorded an additional pre-tax restructuring charge of $1.3
million during the quarter ended March 31, 1997 primarily due to severance and
other costs associated with the closing of the Company's Italian office and
additional head count reduction in the U.S., principally at the Company's Tucson
location, in response to the decline in sales of its LANtastic NOS products.
<PAGE>
(4) Inventories
Inventories at March 31, 1998 and June 30, 1997 consist of the
following (in thousands):
March 31, June 30,
1998 1997
--------- --------
(Unaudited)
Raw materials $ 848 $ 1,088
Work-in-process 183 261
Finished goods 254 1,236
----- --------
1,285 2,585
Inventory allowances (291) (725)
----- --------
$ 994 $ 1,860
===== ========
(5) Property and Equipment
Property and equipment at March 31, 1998 and June 30, 1997 consist of
the following (in thousands):
March 31, June 30,
1998 1997
--------- ----
(unaudited)
Furniture and fixtures $ 68 $ 892
Computers and other equipment 7,060 6,929
Leasehold improvements 94 62
------- -------
7,222 7,883
Accumulated depreciation and
amortization (5,067) (5,060)
------- -------
$ 2,155 $ 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 nine-month
period ended March 31, 1998, 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 nine-month period ended March 31,
1998.
<PAGE>
(6) Other Assets
Other assets at March 31, 1998 and June 30, 1997 consist of the
following (in thousands):
March 31, June 30,
1998 1997
---- ----
(unaudited)
Trademarks and patents, net of
accumulated amortization of $63 and $44 $ 61 $ 80
Purchased technology, net of
accumulated amortization of $1,502 and $984 1,953 2,471
Recoverable deposits and other 159 197
------ ------
$2,173 $2,748
====== ======
<PAGE>
Artisoft, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net Sales. The Company's net sales for the quarter ended March
31, 1998 were $6.2 million, a decrease of 27% from net sales of $8.5 million for
the corresponding quarter of fiscal 1997 and a decrease of 9% from the second
quarter of fiscal 1998 net sales of $6.8 million. For the nine-month period
ended March 31, 1998, the Company's net sales were $19.7 million, a decrease of
32% from net sales of $29.1 million for the corresponding period of fiscal 1997.
The decreases in net sales for the quarter and nine-month period ended March 31,
1998, 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
ModemShare 32 software. The decrease in net sales from the previous quarter's
net sales was primarily the result of lower sales of the Company's CoSession
Remote OEM pre-loads (principally in Japan), and iShare 2.5, and lower European
networking and communications software revenues.
The Company distributes its products in both the U.S. and international
markets. U.S. sales decreased 29% to $4.4 million (71% of net sales) for the
quarter ended March 31, 1998, from $6.2 million (74% of net sales), for the same
quarter a year ago. U.S. sales decreased 29% to $ 14.3 million (73% of net
sales), for the nine-month period ended March 31, 1998 from $20.0. 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 nine-month periods ended March 31, 1998, as
compared to the corresponding periods in fiscal 1997, primarily resulted from
the decline in sales of LANtastic NOS products in U.S. distribution and retail
channels along with weaker sales of the Company's communications products,
especially iShare 2.5 and CoSession Remote 32.
International sales decreased 18% to $1.8 million (29% of net sales),
for the quarter ended March 31, 1998, from $2.2 million (26% of net sales), for
the same quarter a year ago and decreased 10% from the second quarter fiscal
1998 net sales of $2.0 million. International sales decreased 40% to $5.4
million (27% of net sales), for the nine-month period ended March 31, 1998 from
$9.0 million (31% of net sales) for the same period in fiscal 1997. The decrease
in international net sales for both the quarter and the nine-month periods ended
March 31, 1998, as compared to the corresponding periods in fiscal 1997,
principally resulted from the worldwide decline in sales of LANtastic NOS
products (especially in Europe) and weaker sales of the Company's CoSession
Remote software in Japan. The decrease in international net sales from the
previous quarter's international net sales is the result of lower sales of the
Company's networking and communications software products in Europe and the
Pacific Rim.
Channel Mix. The Company 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 quarters ended March
31, 1998 and 1997 were 66% and 68% of total revenues, respectively. Indirect
channel revenues for the nine-month periods ended March 31, 1998 and 1997 were
63% and 66%, respectively. The decrease in indirect channel revenues as a
percentage of total revenues for both the quarter and nine-month periods ended
March 31, 1998 as 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 and communications products) and a decrease in
international OEM revenues from the Company's CoSession Remote 32 software as
well as increased direct sales of the Company's ModemShare 32 software to
endusers.
Gross Profit. The Company's gross profit was $4.6 million and $5.4
million for the quarters ended March 31, 1998 and 1997, respectively (74% and
64% of net sales, respectively). Gross profit was $14.7 million and $19.0
million for the nine-month periods ended March 31, 1998, and 1997, respectively
(75% and 65% of net sales, respectively). The net increase in gross profit
margin percentages for both the quarter and the nine-month periods ended March
31, 1998, as compared to the corresponding periods in fiscal 1997, was
principally due to the following factors: cost efficiencies
<PAGE>
achieved at the Company's distribution center due to the restructuring actions
taken during fiscal year 1997, substantially reduced product translation costs,
lower inventory reserve requirements, and increased sales of higher margin
software only content such as ModemShare 32, LANtastic for NT and Visual Voice
4.0 software, partially offset by higher software licensing fees incurred on the
Company's configuration tracking and recovery utility (ConfigSafe). The net
decrease in aggregate dollars of gross profit margin for both the quarter and
nine-month periods ended March 31, 1998 is solely the result of the decline in
net sales (principally the LANtastic NOS products).
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 $5.0 million and $10.6
million for the quarters ended March 31, 1998 and 1997 respectively, (81% and
125% of net sales, respectively). Total operating expenses were $15.0 million
and $32.6 million for the nine-month periods ended March 31, 1998 and 1997,
respectively, (76% and 112% of net sales, respectively). The decrease in
absolute dollars for both the quarter and nine-month periods ending March 31,
1998 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 nine-month periods ended March
31, 1998 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 $2.6 million and
$5.6 million for the quarters ended March 31, 1998 and 1997, respectively, (42%
and 66% of net sales, respectively). Sales and marketing expenses were $7.6
million and $18.3 million for the nine-month periods ended March 31, 1998 and
1997, respectively, (39% and 63% 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 nine-month periods ended March 31, 1998, 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 and sales 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 newly introduced TeleVantage computer
telephony software and Visual Voice 4.0 . The sequential increase in sales and
marketing expenditures between the quarter ended December 31, 1997 and the
quarter ended March 31, 1998 was principally due to the marketing costs
associated with the launch of the Company's TeleVantage computer telephony
software.
Product Development. Product development expenses were $1.8 million and
$2.3 million for the quarters ended March 31, 1998 and 1997, respectively, (29%
and 27% of net sales, respectively). Product development expenses were $5.4
million and $7.0 million for the nine-month periods ended March 31, 1998 and
1997, respectively, (27% and 24% of net sales, respectively). The decrease in
aggregate dollars for product development expenses for the quarter and
nine-month period ended March 31, 1998, 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 nine-month periods ended March 31, 1998, as
compared with corresponding periods in fiscal 1997 was offset to a significant
degree by the addition of product development personnel in the Company's
computer telephony development group principally associated with the development
of the Company's TeleVantage computer telephony software and Visual Voice 4.0.
The increase in product development expenses as a percentage of net sales for
both the quarter and nine-month period ended March 31, 1998 as compared to the
corresponding periods in fiscal 1997 is primarily due to the decrease in sales
of the Company's LANtastic (NOS) products.
<PAGE>
General and Administrative. General and administrative expenses were
$.6 million and $1.3 million for the quarters ended March 31, 1998 and 1997,
respectively, (10% and 15% of net sales, respectively). General and
administrative expenses were $2.0 million and $4.2 million for the nine-month
periods ended March 31, 1998 and 1997, respectively (10% and 14% of net sales,
respectively). The decrease in aggregate dollars for general and administrative
expenses for the quarter and nine-month periods ended March 31, 1998 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 and the associated reductions in depreciation expense on
these facilities. The decrease in general and administrative expenses as a
percentage of net sales for the quarter and the nine-month periods ended March
31, 1998, 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 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.
During the quarter ended March 31, 1997, primarily in response to
continued substantial weakness in sales of LANtastic network operating system
NOS products, the Company elected to further reduce its operating expenses in
Europe, principally through the closure of the Italian sales office, and certain
personnel costs in the U.S., principally at the Tucson facility. The Company
recorded a $1.3 million restructuring charge for the quarter ended March 31,
1997 to cover severance costs associated with these actions, along with other
related expenses.
In March 1998, the Company closed its Japanese sales office and plans
to complete the liquidation of its Japanese subsidiary by June 30, 1998. This
action was taken primarily in response to increased costs associated with
operating the subsidiary.
Other Income, Net. For the quarter ended March 31, 1998, other income,
net, increased to $.3 million, from $.1 million in the corresponding quarter of
fiscal 1997. For the nine-month period ended March 31, 1998, other income, net,
increased to $1.8 million, from $.5 million in the corresponding period of
fiscal 1997. The increase in other income, net, for the quarter ended March 31,
1998 and the nine-month period ended March 31, 1998, was principally
attributable to the recognition of a gain on the sale of the Company's Tucson,
Arizona headquarters of $1.3 million and increased investment income.
Income Tax Benefit. The Company's effective income tax rate for the
quarter ended March 31, 1998, was 0% compared to an effective rate of (27.5%) in
the corresponding quarter of fiscal 1997. The Company's effective income tax
rate for the nine-month period ended March 31, 1998, was 0% compared to an
effective rate of (29.0%) in the corresponding period of fiscal 1997. The
Company did not recognize tax expense for the quarter or nine-month periods
ended March 31, 1998 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 nine-month period ended March
31, 1998.
<PAGE>
Future Results
On April 23, 1998, the Company announced its intention to focus the
majority of its resources on its computer telephony products and consolidate its
communications and networking products into a wholly-owned subsidiary located in
Tucson, Arizona and close its Iselin, New Jersey sales and development office
and its United Kingdom sales office by June 30, 1998. The Company will make
additional investments in sales, marketing and development in order to build
awareness, market and channels for its computer telephony products.
The Company intends to increase its investments and expenditures in
sales, marketing and development of computer telephony products including
TeleVantage. There can be no assurance that the Company will be able to develop,
market and sell such products successfully or at particular levels or within
particular time-frames. Accordingly, the Company could experience a slow
increase in computer telephony revenues as it attempts to build a distribution
channel and reseller programs that may build market awareness for computer
telephony products. A slow increase in the Company's computer telephony
revenues, particularly if combined with future revenue declines from the
Company's networking and communicating software products, could cause the
Company to experience losses.
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.
Year 2000
The Company recognizes the potential business impacts related to the
Year 2000 computer system issue. The issue is one where computer systems may
recognize the designation "00" as 1900 when it means 2000, resulting in system
failure or miscalculations. The Company is utilizing resources to identify,
correct, reprogram and test its internal systems for Year 2000 compliance. It is
anticipated that all internal systems reprogramming and correction efforts will
be completed by December 31, 1998. The Company has tested all of its currently
shipping software and determined its software products to be Year 2000 compliant
in all respects.
Liquidity and Capital Resources
The Company had cash and cash equivalents of $19.0 million at March 31,
1998, compared to $14.7 million at June 30, 1997, and working capital of $20.0
million at March 31, 1998 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 and 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
<PAGE>
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.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS No. 130). SFAS No. 130 establishes requirements for disclosure of
comprehensive income and becomes effective for the Company for the year ending
June 30, 1999.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131
establishes standards for disclosure about operating segments in annual
financial statements and selected information in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise". The new standard
becomes effective for the Company for the year ending June 30, 1999, and
requires that comparative information from earlier years be restated to conform
to the requirements of this standard.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2").
SOP 97-2 provides guidance on when revenue should be recognized and in what
amounts for licensing, selling, leasing, or otherwise marketing computer
software. SOP 97-2 is effective for financial statements for fiscal years
beginning after December 15, 1997. Earlier application for financial statements
or information that has not been issued is encouraged. The Company does not
believe that the adoption of SOP 97-2 will have a material impact on its
software revenue recognition practices.
During the quarter ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
No. 128"), as issued by the Financial Accounting Standards Board. SFAS No. 128
simplifies the standards for computing earnings per share. The effect of the
Company adopting Statement No. 128 is that basic and diluted EPS was $(.01) and
$(.01) for the quarter ended March 31, 1998 and $.09 and $.09 for the
nine-months ended March 31, 1998. Basic and diluted EPS was $(.25) and $(.25)
for the quarter ended March 31, 1997 and $(.62) and $(.62) for the nine-months
ended March 31, 1997.
RISK FACTORS
General
Competition. The PC and computer telephony industries are highly
competitive and are characterized by rapidly changing technology and evolving
industry standards. The Company competes with other software 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 and computer telephony industries is likely to intensify as current
competitors expand their product lines, more features are included in operating
systems (e.g., Windows 98), new computer telephony applications are developed,
and as new companies enter the markets or segments in which the Company
currently competes. The PC 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 it products 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.
<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 recent financial conditions in the Pacific Rim region that are having a
negative impact upon the currencies and economies of Australia, Japan and other
Pacific Rim countries. The Company has operations in Japan that accounted for
approximately 4% of its net revenues for the quarter ended March 31, 1998. While
the Company believes that its sales from the Pacific rim countries 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.
Computer Telephony
Computer Telephony Product Competition. 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 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.
<PAGE>
The Company released its newest telephony product TeleVantage in late
March 1998. TeleVantage is a phone system designed for small and medium sized
businesses and branch offices. The Company believes this product offers
functionality superior to that of a traditional standalone PBX. However, due to
the complexity of this software and the mission critical systems it is designed
to operate, there can be no assurances that the software will be successfully
introduced, launched, marketed or sold.
Computer Telephony Customers and Market Acceptance. The Company is
currently and will continue to invest significant resources in the development,
marketing and launch of new telephony products. Due to the complexity of these
tools and system level products 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 small to medium size
businesses. The Company's existing network of qualified resellers has
historically sold the Company's networking and communications products.
Therefore the Company anticipates the need to recruit and train a new network of
qualified value added resellers in launching its computer telephony products.
There can be no assurances that the Company will be successful in establishing a
base of qualified resellers to sell its telephony products. 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's computer telephony products compete in a relatively
immature industry with as yet unproven technologies. There can be no assurance
that the current technological innovations in the computer telephony industry
will be widely adopted by small to medium size businesses or that telephony
standards will evolve in a manner that is advantageous to the Company's
telephony products.
Networking and Communications
Networking and Communications Software 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.
<PAGE>
Networking Software Competition. 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 and will continue to have a
significant 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 has announced the release of the new
Windows 98 operating system for late June 1998. Management believes that this
new operating system will further erode its LANtastic (NOS) install base. These
events will likely further diminish the future revenue potential of LANtastic.
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 Software Competition. 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 (scheduled for release in late
June 1998) and currently distributes Net Meeting at no charge from its Web site.
These actions will likely lead to diminished demand for the Company's CoSession
remote control product, and consequently decreased net sales and operating
results.
Communications Software Competition. 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 Software" for further
discussion of Windows NT).
<PAGE>
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.
<PAGE>
Artisoft, Inc. and Subsidiaries
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is subject to lawsuits and other claims arising in the
ordinary course of its operations. In the opinion of management, based on
consultation with legal counsel, the effects of such matters will not have a
materially adverse effect on the Company's financial position.
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE BY SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
No. 11 - Computation of Net Income (Loss) Per Share
No. 27 - Financial Data Schedule for Form 10-Q dated May 15, 1998
(c) Reports on Form 8-K
There were no reports filed on Form 8-K during the three months
ended March 31, 1998
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ARTISOFT, INC.
Date: May 15, 1998 By /s/ T. Paul Thomas
--------------------------------------
T. Paul Thomas
President and Chief Operating Officer
By /s/ Kirk D. Mayes
--------------------------------------
Kirk D. Mayes
Corporate Controller, Chief Accounting Officer
(Acting Principal Financial Officer)
Artisoft, Inc. and Subsidiaries
EXHIBIT 11. COMPUTATION OF NET INCOME (LOSS) PER SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine-months Ended
March 31, March 31,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ (162) $ (3,663) $ 1,374 $ (8,998)
======== ======== ======== ========
Weighted average common shares outstanding 14,539 14,546 14,529 14,531
Common equivalent shares representing
shares issuable upon exercise of stock
options (1) N/A N/A 47 N/A
-------- -------- -------- --------
Diluted weighted average shares outstanding 14,539 14,546 14,576 14,531
======== ======== ======== ========
Basic net income (loss) per share $ (.01) $ (.25) $ .09 $ (.62)
======== ======== ======== ========
Diluted net income (loss) per share $ (.01) $ (.25) $ .09 $ (.62)
======== ======== ======== ========
</TABLE>
- ------
Notes:
(1) Amount calculated using the treasury stock method and fair market values
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 18,962
<SECURITIES> 0
<RECEIVABLES> 4,022
<ALLOWANCES> 0
<INVENTORY> 994
<CURRENT-ASSETS> 24,297
<PP&E> 7,222
<DEPRECIATION> 5,067
<TOTAL-ASSETS> 28,625
<CURRENT-LIABILITIES> 4,265
<BONDS> 0
0
0
<COMMON> 279
<OTHER-SE> 23,717
<TOTAL-LIABILITY-AND-EQUITY> 28,625
<SALES> 19,701
<TOTAL-REVENUES> 21,459
<CGS> 4,964
<TOTAL-COSTS> 4,964
<OTHER-EXPENSES> 15,012
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,483
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (109)
<CHANGES> 0
<NET-INCOME> 1,374
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
