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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
COMMISSION FILE NUMBER 000-19462
ARTISOFT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 86-0446453
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 CAMBRIDGE CENTER CAMBRIDGE, MA 02142
(Address of principal executive offices, Zip Code)
Registrant's telephone number, including area code (617) 354-0600
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE THE NASDAQ STOCK MARKET
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $141,995,375 based on the closing sale price as
reported by The Nasdaq Stock Market on September 18, 2000.
The number of shares outstanding of each of the registrant's classes of common
stock, as of September 18, 2000 was 15,561,137 shares of Common Stock, $.01 par
value.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Proxy Statement dated September 29, 2000, for the Annual
Meeting of Shareholders to be held on November 2, 2000, are incorporated by
reference into Part III.
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TABLE OF CONTENTS
Page
----
PART I
Item 1. Business .................................................... 3-9
Item 2. Properties .................................................. 9
Item 3. Legal Proceedings ........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders ......... 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ......................................... 11
Item 6. Selected Financial Data ..................................... 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation........................... 12-20
Item 7(a). Quantitative and Qualitative Disclosures about
Market Risk ................................................. 20
Item 8. Financial Statements and Supplementary Data ................. 21-38
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................... 38
PART III
Item 10. Directors and Executive Officers of the Registrant .......... 39
Item 11. Executive Compensation ...................................... 39
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 39
Item 13. Certain Relationships and Related Transactions .............. 39
PART IV
Item 14. Exhibits and Reports on Form 8-K .............................. 40-41
SIGNATURES ............................................................. 42
2
PART 1
ITEM 1. BUSINESS.
INTRODUCTION
Artisoft, Inc. ("Artisoft", the "Company" or the "Registrant") develops,
markets and sells computer telephony software application products and
associated services.
The Company's principal executive offices are located at 5 Cambridge
Center, Cambridge, Massachusetts 02142. The telephone number at that address is
(617) 354-0600. The Company was incorporated in November 1982 and reincorporated
by merger in Delaware in July 1991.
BACKGROUND AND GENERAL DEVELOPMENT OF BUSINESS
FISCAL 2000
Artisoft entered fiscal 2000 with three key objectives: first, to
accelerate the revenue growth of its TeleVantage software-based phone system and
take advantage of the emerging market opportunities in the software-based phone
system industry; second, to strengthen its position in the open systems
telephony market by establishing alliances with leading technology and
distribution vendors; and third, to minimize its investment in non-strategic
product lines.
The Company met its first objective by investing most of its resources in
the Company's TeleVantage product. TeleVantage is a software-based phone system
that runs on the Windows NT platform and is primarily sold to small- to
medium-sized businesses and corporate branch offices. TeleVantage has the
functionality of a stand-alone PBX plus additional call management features.
These features include graphical voice mail, multi-line call control,
"follow-me" call forwarding, email integration, call/message screening,
personalized call handling, automatic call distribution, web browser interface
and support for Internet Protocol (IP) telephony. The Company added 27 employees
during fiscal year 2000 primarily in TeleVantage sales, marketing, support and
development roles. Net sales from the Company's computer telephony products
increased 120% to $15.7 million from $7.1 million in fiscal 1999. The growth in
the Company's TeleVantage software revenues accelerated substantially late in
fiscal 2000 with a 76% growth rate from the March 31, 2000 to the June 30, 2000
quarters.
The Company met its second objective when it signed several strategic
partnership and Original Equipment Manufacturer (OEM) agreements during fiscal
2000. The Company entered into relationships with Dialogic (an Intel company),
to port TeleVantage to Intel's open, standards-based CT Media platform, and
Toshiba America Information Systems (TAIS) to deliver an integrated
communications server and software-PBX solution, as well as agreements with
Microsoft, IBM, Teleco, Goldmine, Olivetti, ALR, Midia and Affinity, amongst
others.
The Company met its third objective by reducing its investment in products
marketed by its Communications Software Group (CSG), which resulted in higher
profits from these products during the first half of fiscal 2000. Revenues from
CSG product decreased substantially in the third and fourth quarters of fiscal
2000, and the Company sold its CSG division to Prologue Software for
approximately $3.0 million (which includes $1.1 million in CSG accounts
receivable) effective June 30, 2000. Operating income from the CSG division was
$.9 million for fiscal 2000.
In December 1999, the Company announced the sale of its Visual Voice source
code to Dialogic (an Intel Company) for $2.7 million and $1.5 million in Visual
Voice professional services fees. The agreement allowed the Company to continue
to sell the Visual Voice product line until June 30, 2000. Effective July 1,
2000, the Company formally discontinued selling the Visual Voice product line.
As a result of the Company's decision to sell its CSG business, the Company
reclassified its CSG assets and operations as a discontinued operation. The
Company's financial statements for fiscal years 2000, 1999 and 1998 have been
prepared to reflect this reclassification.
FISCAL 1999
In fiscal year 1999, Artisoft accomplished two key objectives: it
accelerated the development of its Computer Telephony Product Group business,
and it increased the profitability of its CSG product line.
3
The Company accomplished its first objective by increasing its investment
and focus on the Company's TeleVantage product. The net revenues from the
Computer Telephony Product Group increased 50% to $7.1 million in fiscal 1999
from $4.8 million in fiscal 1998. The growth in the Computer Telephony Product
Group revenues accelerated late in the year, ending with a 96% increase in
Computer Telephony Product Group revenues between $1.2 million in revenues in
the fourth quarter of fiscal 1998 and $ 2.3 million in revenues in the fourth
quarter of fiscal 1999. The growth in Computer Telephony Product Group revenues
was principally attributable to increased sales of TeleVantage.
TeleVantage received numerous industry awards, including being named the #1
Product of the Year by CT Magazine in December 1998. The Company also added over
400 value added resellers (VAR's) and announced several distributor
relationships.
The Company accomplished its second objective of substantially improving
the profitability of the Communications Software Group by continuing to
implement expense reductions relative to the Communications Software Group. The
Communications Software Group achieved operating profitability, with an
operating profit exceeding $4.2 million in fiscal 1999. Communications Software
Group expenses decreased by 55% to $7.3 million in fiscal 1999 from $16.2
million in fiscal 1998. While this expense reduction was implemented, net
revenues from the Communications Software Group decreased by only 25% to $15.2
million in fiscal 1999 from $20.0 million in fiscal 1998. Most of the decrease
was attributable to lower sales of the Company's LANtastic product line.
PRODUCTS AND SERVICES
The Company sells, markets, supports and develops its computer telephony
products out of its Cambridge, Massachusetts headquarters. These products
included Visual Voice and TeleVantage during fiscal 2000 but will only include
TeleVantage after June 30, 2000. The Company's former Communications Software
Group was located in Tucson, Arizona (with a satellite development center in
Boynton Beach, Florida). This group was responsible for the Company's networking
and communications software products. Effective June 30, 2000 the Company sold
this product group.
Effective June 30, 2000, TeleVantage became the Company's sole product
line. TeleVantage is a complete software-based telephone system. The system
provides PBX-like call control functionality including voicemail, auto
attendant, call forwarding, phone directory and a number of other telephony
technologies, bundled into a single integrated solution. TeleVantage is built on
an open architecture that requires no proprietary hardware. It works with
standard computer servers, non-proprietary telephone handsets and standard Intel
(Dialogic) voice processing boards. TeleVantage is designed to allow
organizations to improve customer service, increase call productivity and
significantly decrease the cost of maintaining their telephone systems.
In December 1999, Artisoft released TeleVantage 3.0, which, in addition to
the features offered in TeleVantage 2.1, offered voice over IP (VoIP), ISDN and
a Web-browser interface that allows customers to check voicemails or manage
personal settings via the Internet. TeleVantage 3.0 also offers enhanced
scalability compared to TeleVantage 2.1 by supporting up to 96 trunks and 264
extensions along with support for digital T-1 lines and E-1 lines over a variety
of protocols including CAS/R2 and ISDN. Other new features include automatic
call distribution (ACD), handset Caller ID and message waiting support, call
recording, and voice mail synchronization with Microsoft Exchange to allow voice
and email messages to be unified.
In June 2000, Artisoft released TeleVantage 3.5 which, in addition to the
features offered in TeleVantage 3.0, provides: BRI ISDN support, international
language capabilities, IP gateway enhancements and increased application
programmability. In addition to supporting Microsoft Windows NT, TeleVantage 3.5
supports Windows 2000. Other features included in TeleVantage 3.5 are a
localization toolkit that allows users to make adjustments to their voice-guided
interfaces and choose the appropriate language for their phone system, support
for a low-cost four-port Voice over IP (VoIP) card and new IP Gateway
administration, a TeleVantage Software Development Kit (SDK) that allows
developers and resellers to customize and add functionality to TeleVantage to
meet the needs of specific customers and vertical markets, and an E-911 solution
for small to medium-sized businesses that allows compliance with 911 regulations
set forth by many state and local agencies in the United States.
The Company currently holds a registered trademark on its TeleVantage
product in the United States Trademark and Patent Office.
4
Prior to June 30, 2000 the Company sold the Visual Voice product line.
Visual Voice was a toolkit principally sold to software developers to create
interactive voice response applications.
See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" including the section entitled "Risk Factors" for
further discussion of new product introductions.
RAW MATERIALS, MANUFACTURING AND SUPPLIERS
The Company does not manufacture any of the hardware necessary to be used
in conjunction with its software-based phone system. The Company and its
distributors purchase Dialogic voice processing boards from Intel for sale with
its TeleVantage product. TeleVantage is designed to operate on PCs of multiple
manufacturers in conjunction with the Dialogic boards. The functionality of the
Company's telephony software products is dependent on the continued availability
of hardware assemblies from Dialogic (an Intel Company).
Future operating results could be adversely affected if the Company is
unable to procure subcontracted assemblies for its products needed to meet
anticipated customer demand. To date, customer returns of the Company's products
for defective workmanship have not been material.
MARKETING, SALES AND DISTRIBUTION
The Company's principal marketing strategy is to create reseller and
customer demand for the Company's products and to use distributors to fulfill
this demand. The Company's authorized resellers and distributors are selected
for their sales ability, technical expertise, reputation and financial
resources. The Company also sells direct to Toshiba as an Original Equipment
Manufacturer (OEM). The Company's selling efforts have been assisted by positive
product reviews, awards and recognition earned from computer telephony
publications.
The Company's marketing programs have three objectives: first, to create
brand name recognition of the Company and its products; second, to generate
sales leads for its resellers and distributors; and third, to support the sales
efforts of its resellers and distributors through sales tools and training.
Marketing activities that address the first two objectives include frequent
participation in industry trade shows and seminars, direct mail, advertising in
major trade publications, executive participation in press briefings and
industry seminars, sponsorship of seminars by the Company and on-going
communication with the Company's end users. To train and support resellers and
distributors, the Company provides mailings of product and technical updates,
seminar material and corporate presentations. The Company offers a TeleVantage
Partner Program, which provides enhanced training, services and support to its
TeleVantage resellers and distributors.
The Company is exposed to the risk of product returns and rotations from
its distributors and volume purchasers, which are recorded by the Company as a
reduction to sales. Although the Company attempts to monitor and manage the
volume of its sales to distributors and volume purchasers, overstocking by its
distributors and volume purchasers or changes in inventory level policies or
practices by distributors and volume purchasers may require the Company to
accept returns above historical levels. In addition, the risk of product returns
may increase if the demand for new products introduced by the Company is lower
than the Company anticipates at the time of introduction. Although the Company
believes that it provides an adequate allowance for sales returns, there can be
no assurance that actual sales returns will not exceed the Company's allowance.
Any product returns in excess of recorded allowances could result in a material
adverse effect on net sales and operating results. As the Company introduces
more products, timing of sales to end users and returns to the Company of unsold
products by distributors and volume purchasers become more difficult to predict
and could result in material fluctuations in quarterly operating results.
Substantially all of the Company's revenue in each fiscal quarter results
from orders booked in that quarter. A significant percentage of the Company's
bookings and sales to major customers on a quarterly basis historically has
occurred during the last month of the quarter and is usually concentrated in the
latter half of that month. Orders placed by major customers are typically based
upon the customers' forecasted sales level for Company products and inventory
levels of Company products desired to be maintained by the major customers at
the time of the orders. Major distribution customers may receive negotiated cash
rebates, market development funds and extended credit terms from the Company for
purchasing Company products, in accordance with industry practice. Changes in
purchasing patterns by one or more of the Company's major customers related to
customer forecasts of future sales of Company products, customer policies
pertaining to desired inventory levels of Company products, negotiations of
rebate and market development funds or in the ability of the Company to
5
anticipate the mix of customer orders or to ship large quantities of products
near the end of a fiscal quarter could result in material fluctuations in
quarterly operating results. The timing of new product announcements and
introductions by the Company or significant product returns by major customers
to the Company, could also result in material fluctuations in quarterly
operating results. Expedited outsourcing of production and component parts to
meet unanticipated demand could adversely affect gross margins.
Sales channels are supported directly through a variety of programs
designed to create demand for the products. The Company seeks to educate
individuals and key decision makers in small- to medium-size corporations,
branch offices, personal computer manufacturers and telecommunications equipment
vendors about the uses for and benefits of its telephony products. Programs
include the following: (i) targeted direct mail campaigns; (ii) telemarketing
and on-site sales visits; (iii) targeted worldwide advertising in industry
magazines and the internet; (iv) public relations campaigns; and (v)
custom-developed joint marketing programs with distributors and resellers.
The Company supports its products through fee-based and non-fee-based
technical services and a World Wide Web site.
The Company's ability to compete is dependent upon the timely introduction
of new products to the marketplace and the timely enhancement of existing
products. Product development expenses totaled approximately $3.7 million, $2.6
million and $2.3 million in fiscal 2000, 1999 and 1998, respectively. The
Company has not engaged in customer-sponsored research activities, but may do so
in the future.
The Company utilizes a sales, marketing and distribution strategy with
regard to its TeleVantage product line as described below:
The Company employs regional sales managers to recruit and support
qualified TeleVantage resellers. TeleVantage software is sold to certain
national distributors principally Catalyst Telecom, Tech Data, Alliance Systems,
Cygcom and Teleco. These distributors then sell the TeleVantage software and
associated Dialogic hardware to the qualified TeleVantage resellers as warranted
by end user demand. The resellers attend training sessions provided by the
Company prior to being certified as TeleVantage resellers.
SEASONALITY
Typically, the telecommunications and computer telephony industries
experience some seasonal variations in demand, with weaker sales in July and
August because of customers' vacations and planned international shutdowns. This
seasonality is especially noted in Europe. Sales of phone systems can also be
weak in the months of January and February due to strong retail sales in the
November-December time frame.
COMPETITION
The Company's TeleVantage software-based phone system principally competes
with proprietary PBXs offered by companies such as Nortel, Siemens and Avaya,
IP-PBX products offered by Cisco and 3Com, and PC-PBX products offered by
Altigen. While the Company believes that its TeleVantage software offers
superior functionality and value than these products, there can be no assurances
that these providers will not choose to develop their own software-based phone
systems that will be competitive with the Company's products.
INTERNATIONAL BUSINESS
The Company markets and sells its products in international as well as
domestic markets. In fiscal 2000, 1999 and 1998, international sales accounted
for 8%, 12% and 12%, respectively, of the Company's net sales. Less than 1% of
the Company's assets were deployed to support the Company's international
business at the end of fiscal 2000 and 1999. The decline in international net
sales as a percentage of total net sales during fiscal year 2000 was principally
the result of the recognition of revenue from the sale of the Company's Visual
Voice source code to Dialogic (an Intel Company).
During fiscal 2000, the Company established distribution relationships with
the following international partners: Icon PLC (United Kingdom), Midia
(Ireland), ALR (Switzerland), Affinity (Latin America), Premier Technologies
(Australia), Aeronaut Industries (Australia), Data Link Telecommunications
(Denmark) and A&C Comm'sultancy (Belgium) for its Computer Telephony products,
and therefore, computer telephony international sales should increase further in
fiscal 2001.
6
Sales to non-U.S. customers may be affected by fluctuations in exchange
rates and government regulations. To date, the Company's operations have not
been affected materially by currency fluctuations.
SIGNIFICANT CUSTOMERS
The Company sells its products through a variety of channels of
distribution, including distributors, resellers and OEMs. In fiscal 2000,
Dialogic (an Intel Company) accounted for 20% of the Company's annual net sales
as a result of its acquisition of the Visual Voice product line. In fiscal 1999,
no customer accounted for more than 10% of the Company's annual net sales. At
June 30, 2000, Dialogic (an Intel Company) accounted for approximately 23% of
the Company's outstanding trade accounts receivable and Globaltron accounted for
approximately 10% of the outstanding trade accounts receivable. At June 30,
1999, two customers accounted for approximately 8% and 7%, respectively, of the
Company's outstanding trade accounts receivable. The loss of any of the major
distributors, resellers, OEMs or their failure to pay the Company for products
purchased from the Company could have an adverse effect on the Company's
operating results. The Company's standard credit terms are net 30 days, although
longer terms are provided to various major customers on a negotiated basis from
time to time.
BACKLOG
Substantially all of the Company's revenue in each quarter results from
orders booked in that quarter. Accordingly, the Company does not believe that
its backlog at any particular point is indicative of future sales. The Company's
backlog of orders at June 30, 2000 was approximately $48,000, compared with
approximately $11,000 at June 30, 1999.
PROPRIETARY RIGHTS AND LICENSES
The Company currently relies on a combination of trade secret, copyright,
trademark and patent laws, nondisclosure and other contractual agreements and
other technical measures to establish and protect its proprietary rights in its
products and to protect its technologies from appropriation by others. Despite
these precautions, unauthorized parties may attempt to copy aspects of the
Company's products or to obtain and use information the Company regards as
proprietary. In addition, it may be possible for others to develop products
using technologies similar to the Company's but which do not infringe upon the
Company's proprietary rights.
While the Company's success will depend to a certain degree on its ability
to protect its technologies, the Company believes that, because of the rapid
pace of technological change in the industries in which the Company competes,
the legal protections for its products are less significant factors in the
Company's success than the knowledge, ability and experience of the Company's
employees, the nature and frequency of product enhancements and the timeliness
and quality of support services provided by the Company.
From time to time, the Company has received and may in the future receive
communications from third parties asserting that the Company's trade names or
features, content, or trademarks of certain of the Company's products infringe
upon intellectual property rights held by such third parties. As the number of
trademarks, patents, copyrights and other intellectual property rights in the
Company's industry increases, and as the coverage of these patents and rights
and the functionality of products in the market further overlap, the Company
believes that products based on its technology may increasingly become the
subject of infringement claims. Such claims could have an adverse affect on the
Company and may also require the Company to obtain one or more licenses from
third parties. There can be no assurance that the Company would be able to
obtain any such required licenses upon reasonable terms, if at all, and the
failure by the Company to obtain such licenses could have an adverse effect on
its business, results of operations and financial condition. If the Company were
able to obtain such licenses, the licensing costs could materially affect the
Company's future financial results. In addition, the Company licenses technology
on a non-exclusive basis from several companies for inclusion in its products
and anticipates that it will continue to do so in the future. The inability of
the Company to continue to license these technologies or to license other
necessary technologies for inclusion in its products, or substantial increases
in royalty payments under these third party licenses, could have an adverse
effect on its business, results of operations and financial condition.
Litigation or threatened litigation in the software development industry
has increasingly been used as a competitive tactic both by established companies
seeking to protect their existing position in the market and by emerging
companies attempting to gain access to the market. If the Company is required to
defend itself against a claim, whether or not meritorious, the Company could be
forced to incur substantial expense and diversion of management attention, and
7
may encounter market confusion and reluctance of customers to purchase the
Company's software products. Such litigation, if determined adversely to the
Company, could have an adverse effect on its business, results of operations and
financial condition.
In the course of its product development efforts, the Company periodically
identifies certain technologies owned by others that either would be useful to
incorporate into its products or are necessary in order to remain competitive in
light of industry trends. In these cases the Company has in the past sought to
obtain licenses of such third-party technologies. The Company expects that it
will continue to find it desirable or necessary to obtain additional technology
licenses from others, but there can be no assurance that any particular license
will be available at all, or on acceptable terms, at any future time. The
royalties paid on future licensing arrangements may adversely impact the
Company's operating results.
The Company pays royalties to Lucent Technologies and Microsoft Corporation
for its use of certain licensed technologies. The licensing by these entities of
their products or brand name to competitors of the Company, or the withdrawal or
termination of licensing rights to the Company's technologies, could have an
adverse affect on the Company's sale of products incorporating such licensed
technologies to original equipment manufacturers and the Company's results of
operations as a whole.
ENVIRONMENTAL LAWS
Compliance with federal, state and local laws and regulations for the
protection of the environment has not had a material impact on the Company's
capital expenditures, operations or competitive position. Although the Company
does not anticipate any adverse impact in the future based on the nature of its
operations and the scope of current environmental laws and regulations, no
assurance can be provided that such laws or regulations or future laws or
regulations enacted to protect the environment will not have a material adverse
impact on the Company.
EMPLOYEES
As of June 30, 2000, the Company had 126 full-time employees, including
approximately 54 in sales, marketing and customer support, 44 in engineering and
product development, 13 in operations and 15 in administration. The future
success of the Company will depend in large part on its continued ability to
attract and retain highly skilled and qualified personnel. Competition for such
personnel is intense. The Company has severance or change in control agreements
with certain of its executive officers and non-competition and nondisclosure
agreements with substantially all of its professional employees and executive
officers. None of the Company's employees are represented by a labor union. The
Company has experienced no work stoppages and believes that its relations with
its employees are good.
UNCERTAINTIES IN THE COMPANY'S BUSINESS
In addition to the factors described above that could adversely affect the
Company's business and results of operations, and, therefore, the market
valuation of its Common Stock, the Company's future results of operations may be
impacted by various trends and uncertainties that are beyond the Company's
control, including adverse changes in general economic conditions, government
regulations and foreign currency fluctuations. Certain of these trends and
uncertainties are discussed in detail under "Risk Factors" included in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In addition, various characteristics of the computer telephony software
industry may adversely affect the Company. As computer telephony software
product offerings become more widespread, the Company could experience
significantly greater competitive pressures. Significant delays in product
development and release would adversely affect the Company's results of
operations. There can be no assurance that the Company will respond effectively
to technological changes or new product announcements by other companies or that
the Company's product development efforts will be successful. Furthermore,
introduction of new products by the Company involves substantial marketing risks
because of the possibility of product "bugs" or performance problems, in which
event the Company could experience significant product returns, warranty
expenses and lower sales.
Sales of the Company's telephony software products are dependent on the
availability and reliability of certain voice processing hardware. Currently,
the Company relies on Dialogic as its sole supplier of voice processing
hardware. The interruption of this supply could materially adversely impact the
sales of the Company's software-based phone system TeleVantage. In addition,
should this hardware become technologically unreliable or no longer be
compatible with the Company's software-based phone system, the Company's results
of operations could be materially adversely impacted.
8
Certain of the Company's personal computer manufacturer and
telecommunications equipment provider 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 telecommunications equipment providers or personal
computer manufacturers, which could have an adverse impact on revenues and
earnings.
The Company must develop and maintain distributor and value added reseller
channels for its products. These distribution channels are highly competitive,
with a large number of vendors seeking to be promoted by and sold through these
channels. In many cases it is important that the Company successfully train
persons involved in distribution channels with respect to the Company's products
and services. There are a number of companies that currently compete directly
with the Company's software-based phone system product line. Many of these
companies, including Avaya, Cisco, 3Com and others have substantially greater
resources and name recognition than the Company. Accordingly, there can be no
assurance that the Company's current products will continue to generate revenues
and earnings at current levels or that the Company will be able to effectively
develop and launch new competitive products in the future.
As a result, past performance trends by the Company should not be used by
investors in predicting or anticipating future results. The market price of the
Company's common stock has been, and may continue to be, extremely volatile.
Factors identified herein, along with other factors that may arise in the
future, quarterly fluctuations in the Company's operating results and general
conditions or perceptions of securities analysts relating to the computer
telephony marketplace or to the Company specifically may have a significant
impact on the market price of the Company's Common stock and could cause
substantial market price fluctuations over short periods. See also "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations", including the discussion of "Risk Factors."
RIGHTS PLAN
During fiscal 1995, the Board of Directors of the Company adopted a
shareholder rights plan (the "Rights Plan") which is intended to protect and
maximize the value of shareholders' interest in the Company and to assure that
all Company shareholders will receive fair and equal treatment in the event of
any unsolicited attempt to acquire the Company. The Rights Plan will not and is
not intended to prevent a takeover of the Company on terms that are fair to, and
in the best interests of, all shareholders. See "Note 7 of Notes to Consolidated
Financial Statements" under "Item 8. Financial Statements and Supplementary
Data."
ITEM 2. PROPERTIES.
The Company leases property as detailed in the following table.
Lease
Approximate Owned or Expiration Intended
Location Size Leased Date Use
-------- ---- ------ ---- ---
Tucson, Arizona 28,800 sq. ft. Leased June 2001 Operations
Cambridge, Massachusetts 18,241 sq. ft. Leased September 2005 Office
Cambridge, Massachusetts 8,313 sq. ft. Leased July 2002 Office
Boynton Beach, Florida 2,342 sq. ft. Leased August 2000 Office
Aggregate monthly rental payments for the Company's facilities are
approximately $75,000. The Company subleases a portion of its Tucson, Arizona
based Operations facility to a third party. The Company's current facilities are
generally adequate for anticipated needs over the next 12 to 24 months. The
Company does not own any real property.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to a number of legal proceedings arising in the
ordinary course of its business. The Company believes that the ultimate
resolution of these proceedings will not have a material adverse effect on its
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
9
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning the executive
officers of the Company as of July 1, 2000:
Name Age Position
- ---- --- --------
Steven G. Manson 41 President and Chief Executive Officer
Christopher H. Brookins 36 Vice President of Development
and Chief Technology Officer
Paul Gregory Burningham 43 Vice President of Business Development
Carol J. Meier 42 Vice President of Marketing
Jonathan P. Ross 43 Vice President of Sales
Kirk D. Mayes 32 Controller and Interim Chief Financial Officer
Mr. Manson joined Artisoft in October 1996 as Vice President of Product
Management - Computer Telephony Division. In October 1997, Mr. Manson was named
Vice President and General Manager of the Computer Telephony Products Group. In
October 1998, Mr. Manson was named Senior Vice President and General Manager of
the Computer Telephony Products Group. Mr. Manson was named President and Chief
Executive Officer on June 30, 2000. Mr. Manson joined Artisoft from Gensym
Corporation where he was Director of Corporate Marketing. Earlier in his career,
Mr. Manson held other senior level marketing positions at Cadre Technologies,
Inc., and Prime Computer, Inc.
Mr. Brookins joined Artisoft in February 1996 as Vice President of
Development - Computer Telephony Division upon the acquisition of Stylus
Innovation by Artisoft. In June 1999, Mr. Brookins was named Chief Technology
Officer and Vice President of Development of Artisoft. Prior to joining
Artisoft, Mr. Brookins served as Vice President of Development at Stylus
Innovation from March 1993 to February 1996. Mr. Brookins has also held a senior
management position at Easel Corporation.
Mr. Burningham joined Artisoft in February 2000 as Vice President of
Business Development. Mr. Burningham has 13 years of general management,
executive level sales and marketing, business development and management
consulting experience with companies in the communications industry, including:
MCI WorldCom, Molex and AI/FOCS.
Ms. Meier joined Artisoft in January 2000 as Vice President of Marketing.
Prior to Artisoft, she was Vice President of Marketing at GN Netcom, Inc., a
telecommunications manufacturer in Nashua, New Hampshire. Ms. Meier has also
been responsible for the marketing program at Boston Technology, Inc., a
developer of network services platforms, from its startup years to its
acquisition by Comverse Network Systems in 1998.
Mr. Ross joined Artisoft in January 2000 as the Vice President of Sales.
Mr. Ross has been in the communications industry for twenty years with a voice,
video, and data background and has held various senior level sales and sales
management positions. Mr. Ross has been responsible for developing and
implementing sales strategies for companies such as OctoCom, Windata, Jupiter
Technology and Rolm Systems.
Mr. Mayes joined Artisoft in November 1994. In April 1996, Mr. Mayes was
named Assistant Corporate Controller and in June 1997 Corporate Controller. Mr.
Mayes joined Artisoft from Arthur Andersen LLP.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The principal market for Artisoft common stock is The Nasdaq Stock Market.
Market information and related shareholder matters are contained in "Securities
Information" on the inside back cover of the Artisoft, Inc. 2000 Annual Report
to Shareholders, and are incorporated herein by reference. On June 30, 2000,
approximately 276 shareholders of record held the Company's Common Stock.
The Company currently intends to retain future earnings to fund the
development and growth of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
ARTISOFT, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
YEARS ENDED JUNE 30,
---------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
STATEMENTS OF OPERATIONS DATA
Net sales $15,689 $ 7,144 $ 4,771 $ 4,734 $ 1,152
Loss from operations (6,180) (6,835) (3,103) (1,396) (372)
Net income (loss) from continuing operations (5,265) (6,011) (1,376) (745) 1,145
Net loss (4,486) (1,762) (2,913) (28,425) (18,328)
Net income (loss) per common share from
continuing operations-basic and diluted $ (.35) $ (.41) $ (.09) $ (.05) $ .08
Net loss per common share-basic and diluted $ (.30) $ (.12) $ (.20) $ (1.96) $ (1.27)
Weighted average common shares outstanding 15,171 14,720 14,554 14,529 14,463
AS OF JUNE 30,
--------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
BALANCE SHEET DATA
Working capital $ 7,535 $15,870 $18,016 $ 18,700 $ 15,325
Total assets 21,494 20,751 21,445 24,773 28,425
Shareholders' equity 18,588 18,574 19,952 22,605 50,981
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
During fiscal 2000 the Company focused its resources on developing,
marketing, selling and supporting its software-based phone system TeleVantage.
The Company also increased its investment in its sales, marketing and support
infrastructure for TeleVantage. Furthermore, the Company continued to build upon
and invest in its telephony distribution and value added reseller network. The
Company de-emphasized its Communication Software Group and closed on the sale of
this division effective June 30, 2000.
As a result of the Company's decision to sell its CSG business, the Company
reclassified its CSG assets and operations as discontinued operations. The
Company's financial statements for fiscal years 2000, 1999 and 1998 have been
prepared to reflect this reclassification.
Overall, the Company achieved increases in the sales of TeleVantage, during
fiscal 2000 and fiscal 1999. Sales of the Company's Visual Voice tool kit in
fiscal 2000 remained relatively consistent with sales levels in fiscal 1999. The
Company sold its Visual Voice source code to Intel in December 1999. The terms
of the asset sale agreement included provisions allowing the Company to continue
to sell the Visual Voice software until June 30, 2000. Intel announced the
discontinuation of the product in late June 2000. The Company recognized $2.7
million in revenue from the sale of the software code and $1.5 million in
professional services revenue associated with Visual Voice. These revenues were
recognized ratably over a 9-month period from October 1999 through June 2000.
In December 1999, Artisoft released TeleVantage 3.0, which is an upgrade to
the previous version of its TeleVantage product released in December 1998. In
June 2000, Artisoft released TeleVantage 3.5, an upgrade to TeleVantage 3.0
released in December 1999. TeleVantage was awarded Best of Show at CT Expo in
March 2000 for the fifth consecutive year and has received numerous favorable
trade reviews during the course of fiscal 2000, including the 2000 CRM
Excellence Award from Technology Marketing Corporation and Editor's Choice by
Communications Solution Magazine. TeleVantage was also awarded Best of Show at
Communications Solution Expo in the spring of 2000.
NEW PRODUCTS
COMPUTER TELEPHONY PRODUCTS. As of June 30, 2000, the Company's products
included TeleVantage 3.5 and TeleVantage Call Center Reporter.
In December 1999, Artisoft released TeleVantage 3.0, which, in addition to
the features offered in TeleVantage 2.1, offers voice over IP (a built-in IP
gateway), ISDN and a Web-browser interface. TeleVantage 3.0 offers web
capabilities that allow customers to check voicemails or manage personal
settings via the Internet. TeleVantage 3.0 also offers enhanced scalability
versus TeleVantage 2.1 by supporting up to 96 trunks and 264 extensions along
with support for digital T-1 lines and E-1 lines over a variety of protocols
including CAS/R2 and ISDN. Other new features include automatic call
distribution (ACD), handset Caller ID and message waiting support, call
recording, and voice mail synchronization with Microsoft Exchange to allow voice
and email messages to be unified.
In June 2000, Artisoft released TeleVantage 3.5 which, in addition to the
features offered in TeleVantage 3.0, offers: BRI ISDN support, international
language capabilities, IP gateway enhancements and increased application
programmability. In addition to supporting Microsoft Windows NT, TeleVantage 3.5
supports Windows 2000. Other features included in TeleVantage 3.5 are a
localization toolkit that allows users to make adjustments to their voice-guided
interfaces and choose the appropriate language for their phone system, support
for a low-cost four-port Voice over IP (VoIP) card and new IP Gateway
administration, a TeleVantage Software Development Kit (SDK) that allows
developers and resellers to customize and add functionality to TeleVantage to
meet the needs of specific customers and vertical markets, and an E-911 solution
for small to medium-sized businesses that allows compliance with 911 regulations
set forth by many state and local agencies in the United States.
NET SALES
Net sales increased 120% to $15.7 million for the fiscal year ended June
30, 2000 from $7.1 million for fiscal 1999. Net sales increased 50% to $7.1
million for the fiscal year ended June 30, 1999 from $4.8 million for fiscal
1998. The increase in net sales for fiscal 1999 was due to increased sales of
the Company's TeleVantage and Visual Voice product lines. The increase in net
sales for the fiscal year ended June 30, 2000 was principally due to two
factors: First, an increase in sales of the Company's TeleVantage product line
12
and secondly, the sale of the Company's Visual Voice source code to Intel
Corporation during the quarter ended December 31, 1999. During the quarter ended
December 31, 1999, Intel Corporation purchased the Company's Visual Voice source
code for $2.7 million. Intel Corporation also agreed to pay the Company $1.5
million in professional service fees associated with support and services
provided to Intel Corporation and the existing Visual Voice customers between
October 1, 1999 and June 30, 2000. These revenues were recognized ratably
between October 1, 1999 and June 30, 2000. Net Visual Voice product sales were
materially unchanged between fiscal 1999 and fiscal 2000.
The Company distributes its products internationally and tracks sales by
major geographic area. Non-U.S. sales represented 8%, 12% and 12% of net sales
for fiscal 2000, 1999 and 1998, respectively. International sales increased 33%
to $1.2 million in fiscal 2000 from $.9 million in fiscal 1999, which reflected
an increase of 50% from $.6 million in fiscal 1998. The increases in
international sales in absolute dollars are a result of increased sales of the
Company's TeleVantage software-based phone system, especially in Europe and
Latin America. The decrease in international sales as a percentage of total net
sales is principally the result of the recognition of $4.2 million in domestic
revenue on the sale of the Company's Visual Voice source code to Dialogic (an
Intel Company) in December 1999.
GROSS PROFIT
The Company's gross profit was $10.4 million, $3.9 million and $3.4 million
in fiscal 2000, 1999 and 1998, respectively, or 67%, 55% and 70% of net sales,
respectively. The increase in gross profit percentage for fiscal 2000 as
compared to fiscal 1999 was due to a shift to higher margin TeleVantage software
sales and the Visual Voice source code sale instead of lower margin TeleVantage
Not For Resale kits (NFR's). The net increase in aggregate dollars of gross
profit margin for fiscal 2000 as compared to fiscal 1999 and 1998 is due to
higher net sales from the Company's TeleVantage product line and the recognition
of revenues associated with the sale of the Company's Visual Voice source code.
The decrease in gross profit percentage for fiscal 1999 as compared to fiscal
1998 was primarily due to a higher sales of the lower margin TeleVantage Not For
Resale kits. Additionally, sales of the Company's lower margin Visual Voice
hardware increased between fiscal 1998 and 1999. Gross profit may fluctuate on a
quarterly and yearly basis because of product mix, pricing actions and changes
in sales and inventory allowances.
SALES AND MARKETING
Sales and marketing expenses were $10.0 million, $4.8 million and $2.4
million for fiscal 2000, 1999 and 1998, respectively, representing 64%, 67% and
49% of net sales, respectively. The increases in sales and marketing expenses in
aggregate dollars for fiscal 2000 as compared to fiscal 1999 and for fiscal 1999
compared to fiscal 1998 were due principally to the recognition of a non-cash
charge of $2.3 million during the quarter ended March 31, 2000 associated with
Artisoft common stock and warrants granted to Toshiba America Information
Systems "TAIS". In January 2000, the Company granted 100,000 shares of Artisoft
common stock and 50,000 warrants to TAIS at a strike price of $6.994 (the fair
market value of the Artisoft common stock on the date of the execution of the
letter of intent). The fair market value of the Artisoft common stock on the
date of execution of the definitive agreement was $21.50. The difference between
the strike price and fair market value of the Artisoft common stock was charged
to selling expense in the quarter ended March 31, 2000. Higher sales and
marketing staffing levels also contributed significantly to the increases in
sales and marketing expenses in aggregate dollars for fiscal 2000 as compared to
fiscal 1999 and for fiscal 1999 compared to fiscal 1998. Sales and marketing
expenses as a percentage of total revenues decreased to 64% in fiscal 2000 from
67% in fiscal 1999. The decrease in sales and marketing expenses as a percentage
of total revenues for fiscal 2000 as compared to fiscal 1999 is principally the
result of the increased net sales levels. This increase in sales and marketing
expenses as a percentage of total revenues for fiscal 1999 as compared to fiscal
1998 was primarily the result of expenses incurred due to the addition of
marketing, sales and support personnel associated with the Company's TeleVantage
software-based phone system.
PRODUCT DEVELOPMENT
Product development expenses were $3.7 million, $2.6 million and $2.3
million for fiscal 2000, 1999 and 1998, respectively, representing 24%, 36% and
47% of net sales, respectively. The increase in aggregate product development
expenses in fiscal 2000 as compared to fiscal 1999 and for fiscal 1999 compared
to fiscal 1998 is principally attributable to the addition of product
development resources to work on future versions of TeleVantage. The addition of
new development personnel during the fiscal year ended June 30, 2000 was
required to meet planned future product introduction timetables. Specifically,
the Company has added development and quality assurance personnel as a result of
its entry into two development and distribution agreements, one with Intel
Corporation, pursuant to which the Company is to make modifications to the
TeleVantage code to ensure compatibility with Intel's CT Media Server, and the
13
second with Toshiba America Information Systems (TAIS), pursuant to which the
Company will be required to meet certain development milestones. The decrease in
development expenses as a percentage of total net sales in fiscal 2000 as
compared to fiscal 1999 and for fiscal 1999 compared to fiscal 1998 is
principally the result of the overall increase in sales during these periods.
The Company believes the introduction of new products to the market in a timely
manner is critical to its future success.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $2.9 million, $3.5 million and
$1.5 million for fiscal 2000, 1999 and 1998 respectively, representing 18%, 48%
and 30% of net sales, respectively. The decrease in general and administrative
expenses in aggregate dollars in fiscal 2000 as compared to fiscal 1999 is
principally due to reduced senior administrative personnel costs during the
latter half of fiscal 2000. The increase in general and administrative expenses
in aggregate dollars in fiscal 1999 as compared to fiscal 1998 is primarily the
result of additional occupancy costs incurred subsequent to the expansion of the
Company's Cambridge, Massachusetts-based headquarters, the addition of certain
executive administrative personnel and increased depreciation expense on the
Company's fixed assets in its Cambridge, Massachusetts headquarters. The
decrease in general and administrative expenses as a percentage of total net
sales in fiscal 2000 compared to fiscal 1999 is principally attributable to the
overall increase in net sales between fiscal 1999 and fiscal 2000. The increase
in general and administrative expenses as a percentage of net sales in fiscal
1999 as compared to fiscal 1998 is primarily the result of the aforementioned
higher occupancy costs, depreciation expenses and administrative salaries.
WRITE OFF OF ABANDONED TECHNOLOGY
Subsequent to the acquisition of Stylus Innovation in fiscal 1996, the
Company recorded a charge to operations during the fourth quarter of fiscal 1998
totaling $393,000. These charges related to the cost to purchase certain
technologies in which development efforts were abandoned in fiscal 1998 and hold
no future realizable value to the Company.
OTHER INCOME (EXPENSE)
Other income (expense), net, was $.9 million, $.8 million and $1.7 million
for fiscal 2000, 1999 and 1998, respectively. Other income (expense), net for
fiscal 1998 includes the recognition of a $1.3 million gain on the sale of the
Company's former Tucson, Arizona headquarters in October 1997.
INCOME TAX EXPENSE
The effective tax rates for the Company were 0% for fiscal 2000, 1999 and
1998. No income tax benefit was recognized for fiscal 2000, 1999 or 1998, as the
Company has fully utilized all federal net operating loss carryback potential.
FUTURE RESULTS
The Company intends to continue to increase its investments and
expenditures in sales, marketing and development of its software-based phone
system, TeleVantage. The Company will likely see increased operating
expenditures over the next several quarters as it completes planned development,
marketing and sales personnel expansion efforts in its Computer Telephony
Product Group. With these planned headcount increases and increases in rental
rates, the Company will see increased occupancy expenses associated with its
Cambridge, Massachusetts corporate headquarters.
In December 1999, the Company executed an Intellectual Property (IP)
Purchase Agreement with Dialogic (an Intel Company). The Company agreed to sell
its Visual Voice source code to Dialogic (an Intel Company) for consideration of
$2.7 million. The $2.7 million was paid to Artisoft upon execution of the
agreement on December 30, 1999. Dialogic (an Intel Company) also agreed to allow
the Company to continue to sell its Visual Voice software until June 30, 2000
royalty free up to a maximum of $1.4 million in sales per quarter. Subsequent to
June 30, 2000 the Company will be required to pay a royalty to Intel Corporation
on all sales of Visual Voice software. Intel also agreed to pay the Company $1.5
million in professional services revenue. The Company recognized $1.4 million of
Visual Voice source code sale and professional services revenue during each of
the quarters ended December 31, March 31 and June 30. Effective June 30, 2000,
Dialogic (an Intel Company) has formally discontinued Visual Voice and the
Company is no longer authorized to sell, market or support the product line.
Approximately 50% of the Company's revenues in fiscal 2000 were attributable to
Visual Voice sales or Visual Voice source code acquisition revenue or Visual
14
Voice professional fees. The loss of this revenue stream along with expected
increases in operating expenses will likely lead to increased operating losses
and lower gross profits during fiscal 2001.
In December 1999, the Company executed a strategic partnership with
Dialogic (an Intel Company). Under the terms of the agreement, the Company is
required to provide Dialogic (an Intel Company) with a software-based phone
system that is compatible with Intel Corporation's CT Media Server.
In January 2000, the Company executed a strategic partnership with TAIS
intended to allow the Company and TAIS to deliver an integrated communications
server and software-PBX solution for small and midsized businesses. Under the
terms of the agreement, TAIS will invest in licenses of TeleVantage for
customized versions of the software product to be integrated with its computer
telephony systems and communications server product offerings. The Company will
be required to meet certain development milestones in providing the customized
software to TAIS. TAIS acquired 100,000 shares of Artisoft common stock at a
price of $6.994 per share and has the right to acquire an additional 50,000
shares pursuant to a warrant agreement. Additionally, the Company authorized
TAIS to purchase an additional 1,350,000 shares of the Company's common stock on
the open market. Toshiba is not contractually or in any other way required to
purchase shares on the open market. The Company incurred a charge of
approximately $2.3 million dollars on the issuance of these securities, which
was recognized as selling expense during the quarter ended March 31, 2000.
The failure of the Company to successfully meet its development milestones
on either one of these key strategic agreements may have an adverse effect on
the Company's anticipated future revenues from TeleVantage. The Company's
ability to significantly expand its selling and marketing of TeleVantage to a
broad customer base may depend on its ability to successfully execute these two
key strategic agreements. The failure of one or both of these partnerships or
the Company's inability to continue to develop future strategic partnerships
could adversely effect the Company's operating 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; business and technological developments in the emerging and
rapidly changing software-based PBX market; competitive pressures, acceptance of
new products and price pressures; availability of third party compatible
products at reasonable prices; risk of nonpayment of accounts receivable; risk
of product line or inventory obsolescence due to shifts in technologies or
market demand; timing of software introductions; and litigation.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $5.1 million at June 30, 2000
compared to $16.1 million at June 30, 1999 and working capital of $7.5 million
at June 30, 2000 compared to $15.9 million at June 30, 1999. The decrease in
cash and cash equivalents of $11.0 million was principally the result of the
Company's purchase of certain investment securities during fiscal 2000. In
addition, to a lesser extent the operating losses incurred during fiscal 2000
also contributed to the decrease in cash and cash equivalents. The Company's
cash and investment balances at June 30, 1999 were $16.1 million compared to
$15.4 million at June 30, 2000. The decrease was principally due to the
operating losses incurred during fiscal 2000. The decrease in the Company's
working capital of $8.4 million was primarily the result of the aforementioned
purchase of investment securities. Increases in the Company's inventory and
accounts receivable balances partially offset the decrease in working capital.
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 or equity
capital 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.
SHORT TERM AND LONG TERM INVESTMENTS
The Company had short and long term investment balances of $10.3 million at
June 30, 2000 compared to $0 at June 30, 1999. The Company purchased various AAA
rated intermediate term securities during fiscal 2000. All of these securities
mature by December 31, 2005. Securities with maturities between 91 days and 1
year are classified as short term. Those securities with maturities of 366 days
or greater are classified as long term investments at June 30, 2000.
15
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation (an interpretation of APB Opinion No. 25). This interpretation
provides guidance regarding the application of APB Opinion 25 to Stock
Compensation involving employees. This interpretation is effective July 1, 2000
and is not expected to have a material effect on the Company.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Form 10-K 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. The
Company filed its 1999 Form 10-K on September 23, 1999.
RISK FACTORS
GENERAL
COMPETITION. The computer telephony industry is highly competitive and is
characterized by rapidly evolving industry standards. The Company competes with
other phone system 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. 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 or even accepted.
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.
NEW INDUSTRY DEVELOPMENT. The Company's principal product, TeleVantage,
competes in the newly emerging software-based phone system market.
Software-based phone systems operate in conjunction with and are affected by
developments in other related industries. These industries include highly
developed product markets, such as PCs, PC operating systems and servers,
proprietary PBX and related telephone hardware and software products, and
telephone, data and cable transmission systems, as well as new emerging products
and industries, such as Internet communications and Internet Protocol ("IP")
telephony. All of these industries and product markets are currently undergoing
rapid changes, market evolution and consolidation. The manner, in which these
industries and products evolve, including the engineering- and market-based
decisions that are made regarding the interconnection of the products and
industries, will affect the opportunities and prospects for TeleVantage.
TeleVantage competes directly with other software-based phone system solutions
as well as existing traditional, proprietary hardware solutions offered by
companies such as Avaya Communications, Nortel and Siemens. While the Company
anticipates a migration toward software-based phone system solutions, there can
be no assurances that this will occur at the rate that the Company anticipates.
PRODUCT RETURNS AND ROTATIONS. The Company is exposed to the risk of
product returns and rotations from its distributors and value added resellers,
which are estimated and recorded by the Company as a reduction in sales.
Although the Company attempts to monitor its reseller and distributor
inventories to be consistent with current levels of sell through, localized
overstocking may occur with TeleVantage 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.
16
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 value added
resellers historically have occurred during the last month of the quarter and
are concentrated in the latter half of that month. Orders placed by distributors
are typically based upon distributors' recent historical and forecasted sales
levels for Company products and inventory levels of Company products desired to
be maintained by those distributors at the time of the orders. Moreover, orders
may also be based upon financial practices by distributors designed to increase
the return on investment or yield on the sales of the Company's products to
value-added resellers 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 distributors, changes in distributor
policies pertaining to desired inventory levels of Company products,
negotiations of market development funds and changes in the Company's ability to
anticipate in advance the product mix of distributor orders could result in
material fluctuations in quarterly operating results.
PRODUCT CONCENTRATION. The Company has in the past derived, and anticipates
that it will in the future derive, a significant portion of its revenues from
one product line. Declines in the revenues from this software product, whether
as a result of competition, technological change, price pressures or other
factors, could have a material adverse effect on the Company's business, results
of operations and financial condition. Further, life cycles of the Company's
products are difficult to estimate due in part to the recent emergence of
certain of the Company's products, the effect of new products or product
enhancements, technological changes in the software industry in which the
Company operates and future competition. There can be no assurance that the
Company will be successful in maintaining market acceptance of its key current
products or any new products or product enhancements.
TECHNOLOGICAL CHANGE. The markets for computer telephony solutions are
characterized by rapid technological change, changing customer needs, frequent
product introductions and evolving industry standards. The introduction of
products incorporating new technologies and the emergence of new industry
standards could render the Company's existing products obsolete and
unmarketable. The Company's future success will depend upon its ability to
develop and introduce new computer telephony products (including new releases
and enhancements) on a timely basis that keep pace with technological
developments and emerging industry standards and address the increasingly
sophisticated needs of its customers. There can be no assurance that the Company
will be successful in developing and marketing new computer telephony products
that respond to technological changes or evolving industry standards, that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these new products, or
that its new products will adequately meet the requirements of the marketplace
and achieve market acceptance. If the Company is unable, for technological or
other reasons, to develop and introduce new computer telephony products in a
timely manner in response to changing market conditions or customer
requirements, the Company's business, results of operations and financial
condition could be adversely affected.
POTENTIAL FOR UNDETECTED ERRORS. Software products as complex as those
offered by the Company may contain undetected errors. There can be no assurance
that, despite testing by the Company and by current and potential customers,
errors will not be found in new or existing products after commencement of
commercial shipments, resulting in loss of or delay in market acceptance or the
recall of such products, which could have a material adverse effect upon the
Company's business, results of operations and financial condition. The Company
provides customer support for most of its products. The Company will in the
future offer new products. If these products are flawed, or are more difficult
to use than traditional Company products, customer support costs could rise and
customer satisfaction levels could fall.
HARDWARE AVAILABILITY AND QUALITY. The Company's computer telephony
software requires the availability of certain hardware. Specifically, the
TeleVantage software-based phone system operates on certain voice processing
boards manufactured by Dialogic (an Intel Company). To the extent that these
boards become unavailable or in short supply the Company could experience delays
in shipping software-based phone systems to its customers, which may have a
material adverse affect on the Company's future operating results. In addition,
the Company is dependent on the reliability of this hardware and to the extent
the hardware has defects it will impact the performance of its own
software-based phone system. To the extent, that the hardware becomes unreliable
or does not perform in a manner that is acceptable to the Company's customers,
the Company could experience a material adverse impact on its future operating
results. Such delays or quality problems if encountered could also cause damage
to the Company's reputation for delivering high quality, reliable computer
telephony solutions.
17
INTELLECTUAL PROPERTY RIGHTS. The Company's success is dependent upon its
software code base, its programming methodologies and other intellectual
properties. To protect its proprietary technology, the Company relies primarily
on a combination of trade secret laws and nondisclosure, confidentiality, and
other agreements and procedures, as well as copyright and trademark laws. These
laws and actions may afford only limited protection. There can be no assurance
that the steps taken by the Company will be adequate to deter misappropriation
of its proprietary information, or to prevent the successful assertion of an
adverse claim to software utilized by the Company, or that the Company will be
able to detect unauthorized use and take effective steps to enforce its
intellectual property rights. The Company owns United States and foreign
trademark registrations for certain of its trademarks. In addition, the Company
has applied for trademark protection on a number of its recently introduced new
technologies. In selling its products, the Company relies primarily on "shrink
wrap" licenses that are not signed by licensees and, therefore, may be
unenforceable under the laws of certain jurisdictions. In addition, the laws of
some foreign countries provide substantially less protection to the Company's
proprietary rights than do the laws of the United States. Trademark or patent
challenges in such foreign countries could, if successful, materially disrupt or
even terminate the Company's ability to sell its products in such markets. There
can be no assurance that the Company's means of protecting its proprietary
rights will be adequate or that the Company's competitors will not independently
develop similar technology. Although the Company believes that its services and
products do not infringe on the intellectual property rights of others, such
claims have been and in the future may be asserted against the Company. The
failure of the Company to protect its proprietary property, or the infringement
of the Company's proprietary property on the rights of others, could have a
negative impact on the Company's business, results of operations and financial
condition.
DEPENDENCE UPON KEY PERSONNEL. The Company's future performance depends in
significant part upon key technical and senior management personnel. The Company
is dependent on its ability to identify, hire, train, retain and motivate high
quality personnel, especially highly skilled engineers involved in the ongoing
research and development required to develop and enhance the Company's software
products and introduce enhanced future products. A high level of employee
mobility and aggressive recruiting of skilled personnel characterize the
industry. There can be no assurance that the Company's current employees will
continue to work for the Company or that the Company will be able to hire
additional employees on a timely basis. Loss of services of existing key
employees or failure to timely hire new key employees could have a negative
impact on the Company's business, results of operations and financial condition.
The Company expects to grant additional stock options and provide other forms of
incentive compensation to attract and retain key technical and executive
personnel. These additional incentives will lead to higher compensation costs in
the future and may adversely effect the Company's future results of operations.
The Company has experienced and expects to continue to experience difficulty in
hiring key technical personnel in certain of its key development offices. These
difficulties could lead to higher compensation costs and may adversely effect
the Company's future results of operations.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's operating
results have in the past fluctuated, and may in the future fluctuate, from
quarter to quarter, as a result of a number of factors including, but not
limited to, changes in pricing policies or price reductions by the Company or
its competitors; variations in the Company's sales channels or the mix of
product sales; the timing of new product announcements and introductions by the
Company or its competitors; the availability and cost of supplies; the financial
stability of major customers; market acceptance of new products and product
enhancements; the Company's ability to develop, introduce and market new
products, applications and product enhancements; the Company's ability to
control costs; possible delays in the shipment of new products; the Company's
success in expanding its sales and marketing programs; deferrals of customer
orders in anticipation of new products, product enhancements or operating
systems; changes in Company strategy; personnel changes; and general economic
factors. The Company's software products are generally shipped as orders are
received and accordingly, the Company has historically operated with little
backlog. As a result, sales in any quarter are dependent primarily on orders
booked and shipped in that quarter and are not predictable with any degree of
certainty. In addition, the Company's expense levels are based, in part, on its
expectations as to future revenues. If revenue levels are below expectations,
operating results are likely to be adversely affected. The Company's net income
may be disproportionately affected by a reduction in revenues because of fixed
costs related to generating its revenues. These or other factors may influence
quarterly results in the future and, accordingly, there may be significant
variations in the Company's quarterly operating results. The Company's
historical operating results are not necessarily indicative of future
performance for any particular period. Due to all of the foregoing factors, it
is possible that in some future quarter the Company's operating results may be
below the expectations of public market analysts and investors. In such event,
the price of the Company's Common Stock could be adversely affected.
POSSIBLE VOLATILITY OF STOCK PRICE. The trading price of the Company's
Common Stock is likely to be subject to significant fluctuations in response to
variations in quarterly operating results, changes in management, announcements
of technological innovations or new products by the Company, its customers or
its competitors, legislative or regulatory changes, general trends in the
industry and other events or factors. The stock market has experienced extreme
price and volume fluctuations which have particularly affected the market price
18
for many high technology companies similar to the Company and which have often
been unrelated to the operating performance of these companies. These broad
market fluctuations may adversely affect the market price of the Company's
Common Stock. Further, factors such as announcements of new strategic
partnerships or product offerings by the Company or its competitors and market
conditions for stocks similar to that of the Company could have significant
impact on the market price of the Common Stock.
POSSIBLE ACQUISITIONS OR DIVESTITURES. From time to time, the Company may
consider acquisitions of or alliances with other companies that could complement
the Company's existing business, including acquisitions of complementary product
lines. Although the Company may periodically discuss such potential transactions
with a number of companies, there can be no assurance that suitable acquisition,
alliance or purchase candidates can be identified, or that, if identified,
acceptable terms can be agreed upon or adequate and acceptable financing sources
will be available to the Company or purchasers that would enable them to
consummate such transactions. Even if an acquisition or alliance is consummated,
there can be no assurance that the Company will be able to integrate
successfully such acquired companies or product lines into its existing
operations, which could increase the Company's operating expenses in the
short-term and materially and adversely affect the Company's results of
operations. Moreover, certain acquisitions by the Company could result in
potentially dilutive issuances of equity securities, the incurrence of
additional debt and amortization of expenses related to goodwill and intangible
assets, all of which could adversely affect the Company's profitability.
Acquisitions, alliances and divestitures involve numerous risks, such as the
diversion of the attention of the Company's management from other business
concerns, the entrance of the Company into markets in which it has had no or
only limited experience, unforeseen consequences of exiting from product markets
and the potential loss of key employees of the acquired company, all of which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
COMPUTER TELEPHONY
COMPUTER TELEPHONY PRODUCT MARKET. The market for open, standards-based
computer telephony products is relatively new and is characterized by the rapid
evolution of hardware and software standards, emerging technologies and changing
customer requirements. These characteristics may render the Company's computer
telephony products unmarketable or may make the expansion, timing and direction
of product development unpredictable. As a result of these factors, there can be
no assurance that computer telephony markets will continue to expand, or that
the Company's products will achieve market acceptance.
The Company believes that the principal competitive factors affecting the
computer 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 assurance 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 maintain and grow its competitive position could have a material
adverse effect upon the Company's revenues from its computer telephony product
line.
TeleVantage is a telephone system designed for small- and medium-sized
businesses and branch offices. The Company believes TeleVantage offers
functionality superior to that of a traditional standalone PBX. There can be no
assurances that competitors with substantially greater financial resources than
that of the Company will not develop their own software-based phone system
solutions and subsequently adversely affect the Company's ability to market or
sell its software-based phone system solution, TeleVantage.
TeleVantage could also face direct competition from companies with
significantly greater financial, marketing, service, support and technical
resources. Although the Company has recently partnered with TAIS, Dialogic (an
Intel Company), Compaq and IBM amongst others to deliver its software-based
phone system to small and medium sized businesses there can be no assurances
these partnerships will substantially expand the market presence of the
Company's software-based PBX, TeleVantage. The Company anticipates certain
competitors with greater financial resources will continue to make substantial
new investments in developing IP based and software based telephony solutions.
Thus there can be no assurance that the Company will be able to successfully
market or sell its own competing IP based or software-based telephony solutions.
COMPUTER TELEPHONY HARDWARE SUPPLIER DEPENDENCIES. The Company's
software-based phone system, TeleVantage, is designed to operate in conjunction
with voice processing boards manufactured by Dialogic, an Intel Company.
Additionally, Dialogic, an Intel Company is currently the Company's only
supplier of the voice processing boards that are necessary for the operation of
19
TeleVantage. If Intel Corporation becomes unable to continue to manufacture and
supply these boards in the volume, price and technical specifications the
Company requires, then the Company would have to adapt its products to a
substitute supplier. Introducing a new supplier of voice processing boards could
result in unforeseen additional product development or customization costs and
could introduce hardware and software operating or compatibility problems. These
problems could affect product shipments, be costly to correct or damage the
Company's reputation in the markets in which it operates, and could have a
material adverse affect on its business, financial condition or results of
operations.
Additionally, Dialogic (an Intel Company) hardware failures could adversely
affect the Company's ability to ship and sell its own software products, damage
its reputation in the markets in which it operates, and could have a material
adverse affect on its business, financial condition or results of operations.
COMPUTER TELEPHONY CUSTOMERS AND MARKET ACCEPTANCE. The Company is
currently and will continue to invest significant resources in the development,
marketing and sales of TeleVantage, a software-based phone system. There can be
no assurance that the Company will achieve market acceptance of these products
whose PBX and related telephone needs have traditionally been served through
proprietary PBX and key system distributors and interconnects. The Company's
potential customer base for its TeleVantage product, small, medium sized
businesses and branch offices, have well established histories of buying
existing telecommunications products, including proprietary PBXs and related
products, and have found such products to be generally reliable. Moreover, large
companies such as Avaya Communications and Nortel have invested substantial
resources in the development and marketing of existing proprietary PBXs and
related products and maintain well-developed distribution channels. Accordingly,
the Company will face substantial market barriers and competitive pressures in
achieving market acceptance of its new software based PBX products. There can be
no assurance that the Company will be successful in establishing a critical mass
of qualified computer telephony resellers or that such resellers will be able to
successfully market TeleVantage in the volumes that the Company anticipates. The
Company's success in selling these products will likely be influenced by its
ability to attract and inform the highest qualified VARs and distributors 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. The Company believes that there will
be an evolution toward open server-based telephony enabled applications from the
traditional proprietary PBX environment and that, in such a new environment,
software-based PBX systems will be widely accepted. The Company also believes
that there may be an eventual gravitation toward Internet Protocol
architectures. However, there can be no assurance that the current technological
innovations in the computer telephony industry will be widely adopted by small
to medium sized businesses or that telephony standards will evolve in a manner
that is advantageous to or anticipated by the Company.
TeleVantage currently runs only on Microsoft Windows NT servers. In
addition, the Company's products use other Microsoft Corporation technologies,
including Microsoft SQL Server. A decline in market acceptance for Microsoft
technologies or the increased acceptance of other server technologies could
cause the Company to incur significant development costs and could have a
material adverse effect on our ability to market our current products. Although,
the Company believes Microsoft technologies will continue to be widely used by
businesses, there nonetheless can be no assurance that businesses will adopt
these technologies as anticipated or will not migrate to other competing
technologies that the Company's telephony products do not currently support.
Additionally, since the operation of the Company's software-based phone
system solution is dependent upon certain Microsoft technologies, there can be
no assurances that in the event of a price increase by Microsoft that the
Company will be able to continue to successfully sell and market its
software-based phone system.
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
MARKET RISK. During the normal course of business Artisoft is routinely
subjected to a variety of market risks, examples of which include, but are not
limited to, interest rate movements and collectibility of accounts receivable.
Artisoft currently assesses these risks and has established policies and
practices to protect against the adverse effects of these and other potential
exposures. Although Artisoft does not anticipate any material losses in these
risk areas, no assurances can be made that material losses will not be incurred
in these areas in the future.
INTEREST RATE RISK. Artisoft may be exposed to interest rate risk on
certain of its cash equivalents. The value of certain of the Company's cash
equivalents may be adversely impacted in a rising interest rate investment
environment. Although Artisoft does not anticipate any material losses from such
a movement in interest rates, no assurances can be made that material losses
will not be incurred in the future.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ARTISOFT, INC.
INDEX TO FINANCIAL STATEMENTS
(ITEM 14(a))
Page Reference
Form 10-K
---------
Independent Auditors' Report 22
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2000 and 1999 23
Consolidated Statements of Operations for the years ended
June 30, 2000, 1999 and 1998 24
Consolidated Statements of Changes in
Shareholders' Equity for the years ended June 30, 2000, 1999
and 1998 25
Consolidated Statements of Cash Flows for the years ended
June 30, 2000, 1999 and 1998 26
Notes to Consolidated Financial Statements 27-38
All schedules are omitted because they are not required, are not applicable, or
the information is included in the financial statements or notes thereto.
21
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Artisoft, Inc.:
We have audited the accompanying consolidated balance sheets of Artisoft, Inc.
and subsidiaries as of June 30, 2000 and 1999 and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the years in the three-year period ended June 30, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Artisoft, Inc. and
subsidiaries as of June 30, 2000 and 1999 and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 2000 in conformity with accounting principles generally accepted in the
United States of America.
/s/ KPMG LLP
Phoenix, Arizona
August 2, 2000
22
ARTISOFT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30, JUNE 30,
ASSETS 2000 1999
--------- --------
Current assets:
Cash and cash equivalents $ 5,120 $ 16,148
Short term investments 2,490 --
Receivables:
Trade accounts, net of allowances of $1,084
and $1,356 in 2000 and 1999, respectively 1,511 1,055
Other receivables 146 47
Inventories 808 496
Prepaid expenses 366 301
--------- --------
Total current assets 10,441 18,047
--------- --------
Long term investments 7,797 --
Property and equipment 2,353 1,537
Less accumulated depreciation and amortization (1,140) (615)
--------- --------
Net property and equipment 1,213 922
--------- --------
Other assets 179 266
Net assets from discontinued operations 1,864 1,516
--------- --------
$ 21,494 $ 20,751
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 928 $ 931
Accrued liabilities 1,937 1,237
Deferred revenue 41 9
--------- --------
Total current liabilities 2,906 2,177
--------- --------
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 28,742,744 shares at June 30,
2000 and 28,144,477 shares at June 30, 1999 287 281
Additional paid-in capital 101,363 96,869
Accumulated deficit (13,278) (8,792)
Less treasury stock, at cost, 13,320,500 shares at
June 30, 2000 and June 30, 1999 (69,784) (69,784)
--------- --------
Net shareholders' equity 18,588 18,574
--------- --------
$ 21,494 $ 20,751
========= ========
See accompanying notes to consolidated financial statements.
23
ARTISOFT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED JUNE 30,
--------------------------------------
2000 1999 1998
-------- -------- --------
Net sales $ 15,689 $ 7,144 $ 4,771
Cost of sales 5,242 3,214 1,421
-------- -------- --------
Gross profit 10,447 3,930 3,350
-------- -------- --------
Operating expenses:
Sales and marketing 10,014 4,760 2,358
Product development 3,743 2,555 2,252
General and administrative 2,870 3,450 1,450
Write off of abandoned technology -- -- 393
-------- -------- --------
Total operating expenses 16,627 10,765 6,453
-------- -------- --------
Loss from operations (6,180) (6,835) (3,103)
-------- -------- --------
Other income (expense):
Interest income 919 910 887
Interest expense (12) (50) (315)
Gain on disposition of property and equipment -- 10 1,237
Other 8 (46) (82)
-------- -------- --------
Total other income 915 824 1,727
-------- -------- --------
Net loss from continuing operations (5,265) (6,011) (1,376)
Income (loss) from discontinued operations,
net of tax 880 4,249 (1,537)
Loss on sale of discontinued operations (101) -- --
-------- -------- --------
Net loss $ (4,486) $ (1,762) $ (2,913)
======== ======== ========
Net loss per common share from continuing
operations - Basic and Diluted $ (.35) $ (.41) $ (.09)
-------- -------- --------
Net loss per common share-Basic and Diluted $ (.30) $ (.12) $ (.20)
======== ======== ========
Weighted average common shares outstanding -
Basic and Diluted 15,171 14,720 14,554
======== ======== ========
See accompanying notes to consolidated financial statements.
24
ARTISOFT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK
-------------------- ADDITIONAL NET
$.01 PAR PAID-IN ACCUMULATED TREASURY SHAREHOLDERS'
SHARES VALUE CAPITAL DEFICIT STOCK EQUITY
------ ----- ------- ------- ----- ------
Balances at June 30, 1997 27,848,464 $278 $ 96,227 $ (4,117) $(69,784) $ 22,604
Common stock issued for compensation 100,000 1 187 -- -- 188
Exercise of common stock options 10,078 -- 24 -- -- 24
Issuance of common stock under employee
stock purchase plan 22,060 -- 44 -- -- 44
Tax benefit of disqualifying dispositions -- -- 4 -- -- 4
Net loss -- -- -- (2,913) -- (2,913)
---------- ---- -------- -------- -------- --------
Balances at June 30, 1998 27,980,602 279 96,486 (7,030) (69,784) 19,951
Exercise of common stock options 116,065 1 250 -- -- 251
Issuance of common stock under employee
stock purchase plan 47,810 1 106 -- -- 107
Tax benefit of disqualifying dispositions -- -- 27 -- -- 27
Net loss -- -- -- (1,762) -- (1,762)
---------- ---- -------- -------- -------- --------
Balances at June 30, 1999 28,144,477 281 96,869 (8,792) (69,784) 18,574
Issuance of common stock to a third
party for services 100,000 1 2,988 -- -- 2,989
Exercise of common stock options 459,111 5 1,269 -- -- 1,274
Issuance of common stock under employee
stock purchase plan 39,156 -- 237 -- -- 237
Net loss -- -- -- (4,486) -- (4,486)
---------- ---- -------- -------- -------- --------
Balances at June 30, 2000 28,742,744 $287 $101,363 $(13,278) $(69,784) $ 18,588
========== ==== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
25
ARTISOFT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED JUNE 30,
--------------------------------------
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net loss $ (4,486) $ (1,762) $ (2,913)
-------- -------- --------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 617 465 397
Loss from disposition of property and equipment, net 32 -- --
Write off of abandoned technology -- -- 393
Change in accounts receivable and inventory allowances (186) 1,109 (899)
Common stock issued for services 2,989 -- --
Tax benefit of disqualifying dispositions -- 27 4
Changes in assets and liabilities:
Receivables-
Trade accounts (184) (1,716) 621
Income taxes -- -- 4,300
Other receivables (99) (11) (11)
Inventories (398) (201) 917
Prepaid expenses (65) (85) 270
Current liabilities 729 (674) (674)
Net (increase) decrease in assets from discontinued
operations (348) 1,066 1,338
Other assets and liabilities -- (34) 14
-------- -------- --------
Net cash provided by (used in) operating activities (1,399) (1,816) 3,757
-------- -------- --------
Cash flows from investing activities:
Purchases of investment securities (10,287) -- --
Purchases of property and equipment (853) (908) (172)
-------- -------- --------
Net cash used in investing activities (11,140) (908) (172)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,511 358 256
-------- -------- --------
Net cash provided by financing activities 1,511 358 256
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (11,028) (2,366) 3,841
Cash and cash equivalents, beginning of year 16,148 18,514 14,673
-------- -------- --------
Cash and cash equivalents, end of year $ 5,120 $ 16,148 $ 18,514
======== ======== ========
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 12 $ 50 $ 300
======== ======== ========
Income taxes $ 17 $ 11 $ 296
======== ======== ========
See accompanying notes to consolidated financial statements.
26
ARTISOFT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PERCENTAGES, SHARES AND PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Artisoft, Inc. ("Artisoft" or the "Company") is a computer telephony
software company that is a recognized leader in providing advanced computer
telephony software products that enhance how businesses communicate with their
customers. Headquartered in Cambridge, Massachusetts, Artisoft distributes its
products worldwide through over 500 value-added resellers, distributors and
OEM's.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Artisoft,
Inc. and its three wholly-owned subsidiaries: Triton Technologies, Inc.,
Artisoft "FSC", Ltd. (which has elected to be treated as a foreign sales
corporation) and NodeRunner, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
Management of the Company has made estimates and assumptions relating to
the reporting of assets and liabilities and the disclosure of contingent assets
and liabilities to prepare these consolidated financial statements in conformity
with generally accepted accounting principles. Actual results could differ from
those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid securities with original maturities
of three months or less to be cash equivalents. As of June 30, 2000 and 1999,
the Company has classified securities of $4.1 million and $15.4 million,
respectively, with a maturity of less than three months as cash and cash
equivalents. The Company intends to hold these securities to maturity and has
presented them at their carrying value.
CONCENTRATION OF CREDIT RISK, PRODUCT REVENUE AND MAJOR CUSTOMERS
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of investments and trade
receivables. The Company invests in securities with an investment credit rating
of AA or better. The Company also places its investments for safekeeping with
high-credit-quality financial institutions. Credit risk with respect to trade
receivables is generally diversified due to the large number of entities
comprising the Company's customer base and their dispersion across many
different customer groups and geographies. The Company often sells its products
through third-party distributors, and, as a result, may maintain individually
significant receivable balances with major distributors. The Company believes
that its credit evaluation, approval and monitoring processes substantially
mitigate potential credit risks.
The Company sells its products through a variety of channels of
distribution, including distributors, resellers and OEMs. In fiscal 2000,
Dialogic (an Intel Company) accounted for 20% of the Company's annual net sales
as a result of its acquisition of the Visual Voice product line. In fiscal 1999
and 1998, no customer accounted for more than 10% of the Company's annual net
sales. At June 30, 2000, Dialogic (an Intel Company) accounted for approximately
23% of the Company's outstanding trade accounts receivable and Globaltron
accounted for approximately 10% of the outstanding trade accounts receivable. At
June 30, 1999, two customers accounted for approximately 8% and 7%,
respectively, of the Company's outstanding trade accounts receivable. The loss
of any of the major distributors, resellers, OEMs or their failure to pay the
Company for products purchased from the Company could have an adverse effect on
the Company's operating results. The Company's standard credit terms are net 30
days, although longer terms are provided to various major customers on a
negotiated basis from time to time.
27
DISCONTINUED OPERATIONS
In September 1999, the Company announced its intention to investigate the
potential separation of its two business units: the Communications Software
Group (CSG) and the Computer Telephony Group (CTG). On June 2, 2000, the Company
signed a definitive agreement to sell the CSG assets to Prologue Software Group
for approximately $1.9 million. The sale was closed effective June 30, 2000.
Thus the Company has reclassified the accompanying consolidated balance sheets,
statements of operations and statements of cash flows of CSG to Discontinued
Operations.
The components of Net Assets of Discontinued Operations as of June 30, 2000
and June 30, 1999 are as follows (in thousands):
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
Accounts receivable $ 1,025 $ 1,231
Inventories 467 718
Prepaid expenses 39 34
Property and equipment, net 269 443
Other assets 360 897
Accounts payable (58) (298)
Accrued liabilities (238) (1,220)
Current portion of capital lease obligation -- (289)
------- -------
Net Assets of Discontinued Operations $ 1,864 $ 1,516
======= =======
The following is a summary of the operating results of the Discontinued
Operations for the fiscal years ended June 30, 2000, 1999 and 1998 (in
thousands):
YEARS ENDED JUNE 30,
-------------------------------------
2000 1999 1998
------ ------- --------
Net sales $9,862 $15,160 $ 20,022
Cost of sales 2,382 3,641 5,088
------ ------- --------
Gross profit 7,480 11,519 14,934
------ ------- --------
Operating expenses 6,600 7,270 16,471
------ ------- --------
Net income (loss) $ 880 $ 4,249 $ (1,537)
====== ======= ========
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment held under capital
leases are stated at the lower of fair market value or the present value of
minimum lease payments at the inception of the lease. Depreciation of property
and equipment is calculated using the straight-line method over the estimated
useful lives of three to seven years for furniture and equipment and the life of
the lease in the case of leasehold improvements. Equipment held under capital
leases is amortized over the shorter of the lease term or estimated useful life
of the asset.
On October 31, 1997, the Company closed escrow on the sale of its Tucson
building and land. The Company received gross proceeds of $4.1 million on the
sale and net cash proceeds of $1.6 million after the pre-payment of a $2.2
28
million mortgage and other associated closing costs. The Company recognized a
net gain of $1.3 million on the sale of the building and land for the fiscal
year ended June 30, 1998.
OTHER ASSETS
Other assets are stated at cost and are comprised of purchased technology,
trademarks and patents, goodwill and recoverable deposits. Amortization of
purchased technology is calculated using the straight-line method over a five
year life. Amortization of trademarks and patents is calculated using the
straight-line method over the life of the trademark or patent, which, in most
cases, is ten years. Amortization of goodwill is calculated using the
straight-line method over a five year life.
INCOME TAXES
Income taxes have been accounted for under the asset and liability method.
Under the asset and liability method deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
REVENUE RECOGNITION
The Company recognizes revenue from product sales at the time of shipment,
net of allowances for returns and price protection. Other product revenue,
consisting of training and support services, is recognized when the services are
provided. Gross sales for the fiscal years ended June 30, 2000, 1999, and 1998,
respectively, were $17.7 million, $7.6 million, and $5.1 million.
PRODUCT DEVELOPMENT
Development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established. After technological feasibility is established, any additional
costs would be capitalized. Because the Company believes its current process for
developing software is essentially completed concurrently with the establishment
of technological feasibility, no product development costs have been capitalized
to date.
COMPUTATION OF NET LOSS PER SHARE
Basic loss per share is computed by dividing loss attributable to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted loss per share reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock that then shared in the earnings (loss) of the
Company. In calculating net loss per common share for the fiscal years ended
June 30, 2000, 1999 and 1998, the Company had 1,170,924, 203,639 and 95,000
shares of anti-dilutive common stock equivalent shares consisting of stock
options that have been excluded because their inclusion would have been
anti-dilutive.
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's former non-U.S. subsidiaries and
branches was the U.S. dollar. The Company periodically incurs liabilities to
foreign customers and vendors. The payment of these liabilities is typically
made in U.S. dollars and translated into foreign currency at the prevailing
exchange rate. Foreign exchange gain(loss) is recognized as incurred. For these
entities, inventories, equipment and other property were translated at the
prevailing exchange rate when acquired. All other assets and liabilities are
translated at year-end exchange rates. Inventories charged to cost of sales and
depreciation are remeasured at historical rates. All other income and expense
items are translated at average rates of exchange prevailing during the year.
Gains and losses, which result from remeasurement, are included in net loss.
29
STOCK BASED COMPENSATION
The Company accounts for stock options granted under its stock incentive
plans in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On July 1, 1996, Statement of Financial Accounting Standards
(SFAS) No. 123 "Accounting for Stock-Based Compensation," was issued which
permits entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net earnings (loss) and pro forma earnings (loss) per share
disclosures for employee stock option grants made in fiscal 1996 and future
years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amounts of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or net realizable value (fair value less costs to sell).
SEGMENTATION OF FINANCIAL RESULTS
The Company has presented its financial results as a single segment due to
the sale of the Communications Software Group (CSG) effective June 30, 2000.
During 1998, the Company adopted the provisions of SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. SFAS 131
establishes annual and interim reporting standards for operating segments of a
company. The statement requires disclosures of selected segment-related
financial information about products, major customers, and geographic areas.
Subsequent to the sale of the Communications Software Group (CSG) effective June
30, 2000, the Company has one operating segment because it is not organized by
multiple segments for purposes of making operating decisions or assessing
performance. The chief operating decision maker evaluates performance, makes
operating decisions, and allocates resources based on financial data consistent
with the presentation in the accompanying financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of receivables, accounts payable and accrued
liabilities approximate fair value because of the short maturity of these
instruments.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 and 1998 consolidated
financial statements to conform to the 2000 presentation.
(2) WRITE OFF OF ABANDONED TECHNOLOGY
In June 1998, the Company wrote off approximately $.4 million of
capitalized purchased software costs associated with the acquisition of Stylus
Innovation Incorporated ("Stylus"). These charges related to the cost to
purchase certain technologies in which development efforts have been
subsequently abandoned and hold no future realizable value to the Company.
30
(3) INVENTORIES
Inventories at June 30, 2000 and 1999 consist of the following:
2000 1999
---- ----
Raw materials $ 487 $ 625
Finished goods 550 14
------- -------
1,037 639
Inventory obsolescence allowances (229) (143)
------- -------
$ 808 $ 496
======= =======
(4) PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2000 and 1999 consist of the following:
2000 1999
---- ----
Furniture and fixtures $ 39 $ 35
Computers and other equipment 2,035 1,267
Leasehold improvements 279 235
------- -------
2,353 1,537
Accumulated depreciation and amortization (1,140) (615)
------- -------
$ 1,213 $ 922
======= =======
(5) OTHER ASSETS
Other assets at June 30, 2000 and 1999 consist of the following:
2000 1999
---- ----
Purchased technology, net of accumulated
amortization of $374 and $287 $ 63 $150
Recoverable deposits 116 116
---- ----
$179 $266
==== ====
As more fully described in Note 2, in 1998 the Company wrote off approximately
$.4 million of abandoned purchased technology associated with the purchase of
Stylus Innovation, Inc. in February 1996.
(6) ACCRUED LIABILITIES
Accrued liabilities at June 30, 2000 and 1999 consist of the following:
2000 1999
---- ----
Compensation and benefits $1,032 $ 765
Payroll, sales and property taxes 33 59
Marketing 374 162
Royalties 334 16
Other 164 235
------ ------
$1,937 $1,237
====== ======
(7) SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Company has authorized for issuance 11,433,600 shares of $1.00 par
value undesignated preferred stock, of which no shares have been issued. On
December 6, 1994, the Board of Directors of the Company authorized for issuance
50,000 shares of preferred stock, $1.00 par value, to be designated "Series A
31
Participating Preferred Stock," subject to a Rights Agreement dated December 23,
1994 (see Rights Plan) to be reserved out of the Company's authorized but
unissued shares of preferred stock. The reserved shares are automatically
adjusted to reserve such number of shares as may be required in accordance with
the provisions of the Series A Participating Preferred Stock and the Rights
Agreement.
RIGHTS PLAN
On December 6, 1994, the Board of Directors of the Company authorized and
declared a dividend of one preferred share purchase right (a "Right") for each
common share of the Company outstanding as of the close of business on December
27, 1994. The Rights Agreement is designed to protect and maximize the value of
the outstanding equity interests in the Company in the event of an unsolicited
attempt by an acquirer to take over the Company in a manner or on terms not
approved by the Board of Directors, as amended in August 1998. Each Right, under
certain circumstances, may be exercised to purchase one one-thousandth of a
share of the Company's Series A Participating Preferred Stock at a price of
$50.00 per share (subject to adjustment). Under certain circumstances, following
(i) the acquisition of 25% or more of the Company's outstanding common stock by
an Acquiring Person (as defined in the Rights Agreement) or (ii) the
commencement of a tender offer or exchange offer which would result in a person
or group owning 25% or more of the Company's outstanding common stock, each
Right may be exercised to purchase common stock of the Company or a successor
company with a market value of twice the $50.00 exercise price. The Rights,
which are redeemable by the Company at $.001 per Right, expire in December 2001.
STOCK INCENTIVE PLANS
On October 20, 1994, the shareholders approved the Company's 1994 Stock
Incentive Plan (the "1994 Plan"). The 1994 Plan provides for the grant of
Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights
(Tandem and Free-standing), Restricted Stock, Deferred Stock, Performance Units
and Performance Shares to officers, key employees, non-employee directors and
certain consultants of the Company.
The 1994 Plan provides that the maximum number of options that can be
granted shall be 2,000,000 shares, plus 1.5% of the number of shares of common
stock issued and outstanding as of January 1 of each year commencing on January
1, 1995. The maximum number of options available for grant each year shall be
all previously ungranted options plus all expired and cancelled options. Stock
options are generally granted at a price not less than 100% of the fair market
value of the common shares at the date of grant. Generally, options become
exercisable over a four year period commencing on the date of grant. Generally,
options vest 25% at the first anniversary of the date of grant and the remaining
75% vest in equal monthly increments over the remaining three years of the
vesting period. No 1994 Plan options may be exercised more than ten years from
the date of grant. The 1994 Plan will terminate on the earlier of June 15, 2004,
or the date upon which all awards available for issuance have been issued or
cancelled.
The 1994 Plan contains an automatic option grant program limited to those
persons who serve as non-employee members of the Board of Directors, including
any non-employee Chairman of the Board ("Eligible Directors"). After October 20,
1994, each individual who first becomes an Eligible Director shall automatically
be granted a Nonqualified Option to purchase 15,000 shares of common stock. At
the date of each annual shareholders' meeting, beginning with the 1995 annual
shareholders' meeting, each person who is at that time serving as an Eligible
Director will automatically be granted a Nonqualified Option to purchase 5,000
shares of Common Stock (and an additional 10,000 shares for the Eligible
Director serving as Chairman of the Board), provided that such person has served
as a member of the Board of Directors for at least six months. There is no limit
on the number of automatic option grants that any one eligible director may
receive. All grants to an Eligible Director under the 1994 Plan will have a
maximum term of ten years from the automatic grant date. Each automatic grant
will vest in three equal and successive annual installments. At June 30, 2000,
there were 1,822,766 additional shares available for grant under the 1994 Plan.
Subsequent to the approval date of the 1994 Plan, the Company ceased
granting of options under the amended 1990 Stock Incentive Plan and the 1991
Director Options Plan. All options presently outstanding under these plans
continue to be governed by the terms of those plans and the number of shares of
common stock issueable upon exercise by the Company.
32
The per share weighted average fair value of stock options granted during
the fiscal years ended June 30, 2000, 1999 and 1998 was $11.25, $2.42, and $2.87
on the date of grant using the Black Scholes option-pricing model with the
following weighted average assumptions.
2000 1999 1998
---- ---- ----
Expected Dividend Yield 0% 0% 0%
Volatility Factor 69% 63% 63%
Risk Free Interest Rate 6.3% 5.9% 5.5%
Expected Life 6 YEARS 6 years 6 years
The Black Scholes option-pricing model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The Company applies APB Opinion No. 25 in accounting for its stock
incentive plan and accordingly, no compensation cost has been recognized for its
stock options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net loss and net loss per common
equivalent share for the fiscal years ended June 30, 2000, 1999 and 1998 would
have been increased to the pro forma amounts indicated below:
2000 1999 1998
---- ---- ----
Net loss As reported $(4,486) $(1,762) $(2,913)
Pro forma $(5,315) $(2,179) $(2,913)
Basic and diluted As reported $(0.30) $ (0.12) $ (.20)
net loss per share Pro forma $(0.35) $ (0.15) $ (.20)
Pro forma net loss reflects only options granted during the fiscal years
ended June 30, 2000, 1999 and 1998. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in the
pro forma net loss amounts presented above because compensation cost is
reflected over the options' vesting period of three to four years and
compensation cost for options granted prior to July 1, 1996 is not considered.
Stock option activity during the periods indicated is as follows:
Weighted Average
Number of Shares Exercise Price
---------------- --------------
Balance at June 30, 1997 2,320,172 $ 9.44
Granted 1,455,700 2.49
Exercised (10,078) 2.31
Forfeited (2,133,582) 5.54
---------- ------
Balance at June 30, 1998 1,632,212 4.72
Granted 838,050 3.83
Exercised (116,065) 2.17
Forfeited (441,497) 3.71
---------- ------
Balance at June 30, 1999 1,912,700 4.54
Granted 984,250 16.75
Exercised (459,111) 2.78
Forfeited (944,231) 12.05
---------- ------
Balance at June 30, 2000 1,493,608 $ 4.39
========== ======
33
The following table summarizes information about the stock options
outstanding at June 30, 2000:
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Options Contractual Exercise Options Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ---- ----- ----------- -----
$2.00 - $2.59 256,020 7.80 $2.25 161,992 $ 2.17
$2.69 - $2.88 228,106 7.57 2.72 176,789 2.71
$3.13 - $5.00 239,774 8.01 3.89 137,549 3.92
$5.06 -$10.63 248,258 8.38 6.65 103,869 7.19
$11.50-$14.69 329,950 9.58 13.41 15,200 14.56
$16.75-$21.50 191,500 9.58 19.75 18,276 20.40
- ------------- --------- ---- ----- ------- ------
$2.00 -$21.50 1,493,608 8.51 $4.86 613,675 $ 4.39
============= ========= ==== ===== ======= ======
At June 30, 2000, 1999 and 1998 the number of options exercisable was
613,675, 563,506 and 469,475 respectively, and the weighted average exercise
price of those options was $4.39, $4.54 and $6.22, respectively.
On July 29, 1997, January 14, 1998, and April 23, 1998, the Board of
Directors of the Company approved the repricing of certain employee stock
options. The original grant prices ranged from $3.00 to $8.81. The new prices
ranged from $2.03 to $4.13. There were 419,000 options repriced during fiscal
1998.
Common stock received through the exercise of incentive stock options,
which are sold by the optionee within two years of grant or one year of
exercise, result in a tax deduction for the Company equivalent to the taxable
gain recognized by the optionee. For financial reporting purposes, the tax
effect of this deduction is accounted for as a credit to additional paid in
capital rather than as a reduction of income tax expense.
EMPLOYEE STOCK PURCHASE PLAN
On October 20, 1994, the shareholders approved the establishment of an
Employee Stock Purchase Plan and authorized for issuance 200,000 shares of
common stock. On November 2, 1999, the shareholders authorized the issuance of
an additional 200,000 shares of common stock, thus increasing the total for the
plan to 400,000 shares of common stock. During the fiscal years ended June 30,
2000, 1999, and 1998, 39,156, 47,810, and 22,060 shares of common stock were
purchased, respectively, at prices ranging from $1.70 to $10.31 per share. At
June 30, 2000, 233,597 shares of common stock were available for issuance under
the plan. The plan provides for eligible participants to purchase common stock
semi-annually at the lower of 85% of the market price at the beginning or end of
the semi-annual period.
(8) EMPLOYEE BENEFIT PLANS
The Company has a qualified 401(k) profit-sharing plan (defined
contribution plan) which became effective July 1, 1991. The plan covers
substantially all employees having at least six months of service. Participants
may voluntarily contribute to the plan up to the maximum limits imposed by
Internal Revenue Service regulations. The Company will match up to 50% of the
participants' annual contributions up to 3% of the participants' compensation.
Participants are immediately vested in the amount of their direct contributions
and vest over a five-year period, as defined by the plan, with respect to the
Company's contribution.
The Company established a pension plan for its United Kingdom associates in
December 1997. The pension plan (which terminated in July 1998) covered all
United Kingdom associates and allowed participants to contribute up to the
maximum limits imposed by Inland Revenue regulations. The Company matched up to
50% of the participants' annual contributions up to 6% of the participant's
compensation. All contributions including the employer match were immediately
vested.
The Company's profit-sharing plan expense for these plans was $113,000,
$121,000 and $68,000 for the fiscal years ended June 30, 2000, 1999 and 1998,
respectively.
34
(9) INCOME TAXES
No income tax (benefit) was recorded in fiscal 2000 or fiscal 1999 as the
Company has fully utilized all net operating loss carryback potential. Foreign
taxes of $156 were recorded in fiscal 1998. The income tax (benefit) differs
from the amount computed by applying the statutory Federal income tax rate to
the loss before income taxes. The sources and tax effects are as follows:
2000 1999 1998
------- ----- -----
Computed "expected" tax benefit $(1,525) $(599) $(937)
Foreign income taxes -- -- 156
Allowance for current net operating losses 1,525 599 937
------- ----- -----
Total income tax expense $ -- $ -- $ 156
======= ===== =====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets (liabilities) at June 30, 2000 and 1999 are
presented below:
2000 1999
-------- --------
Deferred tax assets (liabilities):
Purchased technology $ 398 $ 434
Allowances for doubtful accounts and returns 434 542
Allowances for inventory obsolescence 119 95
Accrued compensation and benefits 234 376
Other accrued liabilities 449 410
Depreciation and amortization 88 680
Federal net operating loss carryforwards 9,408 7,139
State net operating loss carryforwards 3,731 3,331
Prepaid expenses (129) (90)
-------- --------
Net deferred tax assets 14,732 12,917
Less valuation allowance (14,732) (12,917)
-------- --------
Net deferred tax assets $ -- $ --
======== ========
As of June 30, 2000 and June 30, 1999 the valuation allowance had increased
by $1,815 and $402 to account for the changes in net deferred tax asset
balances. In the assessment of the recognition of a valuation allowance, the
Company considered recent operating losses experienced during the Company's
transition from a company with primarily a networking and communications
software orientation to a computer telephony solutions company, the uncertainty
in estimating the magnitude and timing of the revenue contribution from products
expected to be released over the next several quarters and the expiration dates
of state net operating loss carryforwards.
As of June 30, 2000, the Company has federal net operating losses available
for carryforward of $27.7 million, which will expire in the years beginning July
1, 2012.
(10) LEASE COMMITMENTS
OPERATING LEASES
The Company leases office, manufacturing and storage space, vehicles, and
equipment under noncancelable operating lease agreements expiring through 2003.
These leases contain renewal options and the Company is responsible for certain
executory costs, including insurance, maintenance, taxes and utilities. Total
rent expense for these operating leases was approximately $913, $773, and $566
for the fiscal years ended June 30, 2000, 1999 and 1998, respectively.
35
The approximate minimum rental commitments under noncancelable operating
leases that have remaining noncancelable lease terms in excess of one year at
June 30, 2000 were as follows:
YEARS ENDING FUTURE MINIMUM
JUNE 30 LEASE PAYMENTS
------- --------------
2001 $ 1,450
2002 1,396
2003 1,157
2004 1,151
2005 1,151
Thereafter 237
-------
Total $ 6,542
=======
CAPITAL LEASES
In December 1996, the Company entered into a sale-leaseback transaction for
computer equipment and software with an aggregate value of approximately $1,350.
The underlying lease, classified as a capital lease, included a 10% purchase
option and required monthly payments of approximately $42 during its three-year
term. In December 1999, the Company exercised its 10% purchase option. At June
30, 1999, the net amount of plant and equipment held under capital leases was
$65, which is net of $55 of accumulated amortization.
(11) CONTINGENCIES
The Company is subject to lawsuits and other claims arising in the ordinary
course of its operations. In the opinion of management, based on consultation
with legal counsel, the effect of such matters will not have a material adverse
effect on the Company's financial position.
(12) DOMESTIC AND INTERNATIONAL OPERATIONS
A summary of domestic and international net sales and international assets
for the fiscal years ended June 30 follows:
2000 1999 1998
------- ------ ------
Domestic $14,495 $6,282 $4,198
International 1,194 862 573
------- ------ ------
Net sales $15,689 $7,144 $4,771
------- ------ ------
International assets $ 2 $ 2 $ 2
------- ------ ------
36
(13) QUARTERLY RESULTS (UNAUDITED)
The following tables present selected unaudited quarterly operating results
for the Company's eight quarters ended June 30, 2000 for continuing and
discontinued operations. The Company believes that all necessary adjustments
have been made to present fairly the related quarterly results.
First Second Third Fourth
Fiscal 2000 Quarter Quarter Quarter Quarter Total
- ----------- ------- ------- ------- ------- -----
Net sales $ 2,721 $ 3,653 $ 4,309 $ 5,006 $15,689
Gross profit 1,453 2,413 2,845 3,736 10,447
Operating loss (1,656) (932) (3,331) (261) (6,180)
Net income (loss) from
continuing operations (1,469) (669) (3,147) 20 (5,265)
Net income (loss) (483) 111 (3,467) (647) (4,486)
Basic and diluted net
Income (loss) per common share
from continuing operations (.10) (.04) (.21) .00 (.35)
Basic and diluted net
income (loss) per common share (.04) .01 (.23) (.04) (.30)
Fiscal 1999
- -----------
Net sales $ 1,358 $ 1,595 $ 1,852 $ 2,339 $ 7,144
Gross profit 837 849 995 1,249 3,930
Operating loss (1,561) (1,604) (1,807) (1,863) (6,835)
Net loss from continuing
operations (1,380) (1,366) (1,620) (1,645) (6,011)
Net loss (332) (230) (580) (620) (1,762)
Basic and diluted net loss per
common share from continuing
operations (.09) (.09) (.11) (.11) (.41)
Basic and diluted net
loss per common share (.02) (.02) (.04) (.04) (.12)
37
(14) SUPPLEMENTAL FINANCIAL INFORMATION
A summary of additions and deductions related to the allowances for
accounts receivable and inventories for the fiscal years ended June 30, 2000,
1999 and 1998 follows:
Balance at Balance at
Beginning End of
of Year Additions Deductions Year
------ ------ ------- ------
Allowances for doubtful accounts and returns:
YEAR ENDED JUNE 30, 2000 $1,356 $2,184 $(2,456) $1,084
------ ------ ------- ------
Year ended June 30, 1999 $1,592 $1,757 $(1,993) $1,356
------ ------ ------- ------
Year ended June 30, 1998 $3,990 $3,139 $(5,537) $1,592
------ ------ ------- ------
Allowances for inventory obsolescence:
YEAR ENDED JUNE 30, 2000 $ 143 $ 307 $ (221) $ 229
------ ------ ------- ------
Year ended June 30, 1999 $ 335 $ 87 $ (279) $ 143
------ ------ ------- ------
Year ended June 30, 1998 $ 725 $ 200 $ (590) $ 335
------ ------ ------- ------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
38
PART III
Certain information required by Part III is omitted from this Report by
virtue of the fact that the Company has filed with the Securities and Exchange
Commission, pursuant to Regulation 14A, within 120 days after the end of the
fiscal year covered by this Report, a definitive proxy statement (the "2000
Proxy Statement") relating to the Company's Annual Shareholders' Meeting to be
held November 2, 2000. Certain information included in the 2000 Proxy Statement
is incorporated herein by reference. The Company disseminated the 2000 Proxy
Statement to shareholders beginning on September 29, 2000.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this item is
contained in "Election of Directors" and "Nominees for Election," page 3,
"Incumbent Directors," pages 3-4, "Section 16(a) Beneficial Ownership," pages
11-12, and "Meetings and Committees of the Board of Directors," page 4 of the
2000 Proxy Statement, and is incorporated herein by reference.
The information concerning the Company's executive officers required by
this item is contained in Part I, Item 4 of this Report under the caption
"Executive Officers of the Registrant," and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in "Executive
Compensation," "Summary Compensation Table," "Officer Severance," "Option Grants
in Last Fiscal Year," "Ten Year Option Repricings," "Aggregate Option Exercises
in Last Fiscal Year and Fiscal Year-End Option Values," "Director
Compensation","Change in Control and Severance Agreements," "Compensation
Committee Interlocks and Insider Participation," "Report of the Compensation
Committee," and "Comparison of Stock Performance," pages 7-16, of the 2000 Proxy
Statement, and is incorporated herein by reference.
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the Exchange
Act that might incorporate future filings, including this Annual Report on Form
10-K, the "Audit Committee Charter", "Independence of Audit Committee Members",
"Report of Audit Committee", the "Report of the Compensation Committee" and
"Comparison of Stock Performance" and Annex A in the 2000 Proxy Statement shall
not be incorporated by reference into any such filings, and such information
shall be entitled to the benefits provided in Item 306(c) and Item 402(a)(9) of
Regulation S-K and Item 7(e)(3)(r) of Schedule 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in "Security Ownership
of Certain Beneficial Owners and Management," page 17 of the 2000 Proxy
Statement, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in "Certain
Relationships and Related Transactions," of the 2000 Proxy Statement, and is
incorporated herein by reference.
39
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules.
An Index to financial statements and financial statement schedules is
located on page 21 hereof.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
Page or
Designation Description Method of Filing
- ----------- ----------- ----------------
3.01 Certificate of Incorporation. (1)
3.02 Bylaws. (1)
4.01 Specimen Common Stock Certificate. (1)
4.02 Rights Agreement, dated as of December 23, 1994, between (6)
Artisoft, Inc. and Bank One, Arizona, NA, including the
Certificate of Designation of Rights Preferences and
Privileges of Series A Participating Preferred Stock, the
Form of Rights Certificate and the Summary of Rights
attached thereto as Exhibits A, B and C, respectively.
10.01 Amended 1990 Stock Incentive Plan of the Registrant. (1)
10.02 1991 Director Option Plan of the Registrant. (1)
10.03 Artisoft, Inc. 1994 Stock Incentive Plan. (5)
10.04 Artisoft, Inc. Employee Stock Purchase Plan. (5)
10.05 Employment Agreement, dated as of October 23, 1995, between (11)
William C. Keiper and the Registrant.
10.06 Employment Agreement, dated as of October 26, 1995, between (11)
Joel J. Kocher and the Registrant.
10.07 Form of Indemnification Agreement entered into between the (1)
Registrant and its Directors.
10.08 International Distributorship Agreement, dated July 31, (2)
1992, between the Registrant and Canon System Globalization,
Inc.
10.09 Asset Purchase Agreement between Artisoft, Inc. and Anthem (4)
Electronics, Inc.
10.10 Asset Purchase Agreement between Artisoft, Inc. and (7)
Microdyne Corporation dated as of January 6, 1995.
10.11 Outsource Manufacturing Agreement dated June 30, 1995 (8)
between ECS, Inc. and the Registrant.
40
Page or
Designation Description Method of Filing
- ----------- ----------- ----------------
10.12 Stock Purchase Agreement dated December 21, 1995 among (9)
Artisoft, Inc. and David J. Saphier, Floyd Roberts and Peter
Byer regarding the purchase of all of the outstanding common
stock of Triton Technologies, Inc.
10.13 Asset Purchase Agreement dated February 13, 1996 between (10)
Artisoft, Inc. and Stylus Innovation Incorporated and
Michael Cassidy, John W. Barrus, Laura Macfarlane, Robert H.
Rines and Krisztina Holly (the Stylus Shareholders).
10.14 Amendment to the 1994 Preferred Shares Rights Agreement (11)
10.15 Mortgage Loan to T. Paul Thomas Page 44
10.16 Asset Purchase Agreement dated June 2, 2000 between Page 48
Artisoft, Inc., Triton Technologies, SpartaCom Technologies
and Spartacom Inc. (For Purposes of Articles IV, VI, XI
and XIII Thereof)
10.17 First Amendment to Asset Purchase Agreement between Page 96
Artisoft, Inc., Triton Technologies, SpartaCom Technologies
and Spartacom Inc.
11.01 Computation of net loss per share Page 99
22.01 Subsidiaries of the Registrant Page 100
23.01 Consent of KPMG LLP Page 101
24.01 Powers of Attorney. See Signature Page
27 Financial Data Schedule
- --------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 33-42046) or amendments thereto, filed with the Securities and
Exchange Commission on August 5, 1991.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
fiscal 1992 ended June 30, 1992.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
fiscal 1993 ended June 30, 1993.
(4) Incorporated by reference to the Company's Form 8-K dated January 4, 1994.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
fiscal 1994 ended June 30, 1994.
(6) Incorporated by reference to the Company's Form 8-K dated December 22,
1994.
(7) Incorporated by reference to the Company's Form 8-K dated February 10,
1995.
(8) Incorporated by reference to the Company's Annual Report on Form 10-K for
fiscal 1995 ended June 30, 1995.
(9) Incorporated by reference to the Company's Form 8-K dated December 21,
1995.
(10) Incorporated by reference to the Company's Form 8-K dated February 13,
1996.
(11) Incorporated by reference to the Company's Annual Report on Form 10-K for
fiscal 1996 ended June 30, 1996.
(12) Incorporated by reference to the Company's Form 8-K dated August 28, 1998.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ARTISOFT, INC.
Date: September 22, 2000 By /s/ Steven G. Manson
---------------------------------
Steven G. Manson, President
and Chief Executive Officer
(Principal Executive Officer)
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints STEVEN G. MANSON and KIRK D. MAYES, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Form 10-K Annual Report, and to file the same with all exhibits thereto,
and all documents in connection therewith, with the Securities and Exchange
Commission, granting such attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that such attorneys-in-fact and agents, or each of them, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Steven G. Manson President and Chief Executive September 22, 2000
- ------------------------ Officer, Director (Principal
Steven G. Manson Executive Officer)
/s/ Kirk D. Mayes Controller and Interim Chief
- ------------------------ Financial Officer (Principal September 22, 2000
Kirk D. Mayes Financial Officer)
/s/ Michael P. Downey Chairman of the Board September 22, 2000
- ------------------------
Michael P. Downey
/s/ Kathryn B. Lewis Director September 22, 2000
- ------------------------
Kathryn B. Lewis
/s/ Francis E. Girard Director September 22, 2000
- ------------------------
Francis E. Girard
/s/ James L. Zucco, Jr. Director September 22, 2000
- ------------------------
James L. Zucco, Jr.
/s/ Robert H. Goon Director September 22, 2000
- ------------------------
Robert H. Goon
42
EXHIBIT INDEX
Sequentially
Numbered
Exhibit Description Page
- ------- ----------- ----
10.15 Mortgage Loan to T. Paul Thomas 44
10.16 Asset Purchase Agreement dated June 2, 2000 between 48
Artisoft, Inc., Triton Technologies, SpartaCom Technologies
and Spartacom Inc. (For Purposes of Articles IV, VI, XI
and XIII Thereof)
10.17 First Amendment to Asset Purchase Agreement between 96
Artisoft, Inc., Triton Technologies, SpartaCom Technologies
and Spartacom Inc.
11.01 Computation of net loss per share. 99
22.01 Subsidiaries of the Registrant. 100
23.01 Consent of Independent Auditors. 101
27 Financial Data Schedule 102