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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, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from_________________ to _____________________
Commission File Number 000-19462
ARTISOFT, INC.
(Exact name of registrant as specified in its charter)
Delaware 86-0446453
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2202 North Forbes Boulevard, Tucson, Arizona, 85745
(Address of principal executive offices, Zip Code)
Registrant's telephone number, including area code (520) 670-7100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value The Nasdaq Stock Market
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $93,323,626 based on the closing sale price as
reported by The Nasdaq Stock Market on September 20, 1996.
The number of shares outstanding of each of the registrant's classes of common
stock, as of September 20, 1996 was Common Stock, $.01 par value; 14,498,000
shares.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Proxy Statement dated September 12, 1996, for the
Annual Meeting of Shareholders to be held on October 22, 1996, are
incorporated by reference into Part III.
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TABLE OF CONTENTS
Page
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PART I.................................................................................................................. 3
Item 1. Business.............................................................................................. 3
Item 2. Properties............................................................................................ 10
Item 3. Legal Proceedings..................................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders................................................... 10
PART II................................................................................................................. 13
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................. 13
Item 6. Selected Financial Data............................................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation.................................................................................. 14
Item 8. Financial Statements and Supplementary Data........................................................... 20
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................................................. 36
PART III................................................................................................................ 37
Item 10. Directors and Executive Officers of the Registrant.................................................... 37
Item 11. Executive Compensation................................................................................ 37
Item 12. Security Ownership of Certain Beneficial Owners and Management........................................ 37
Item 13. Certain Relationships and Related Transactions........................................................ 37
PART IV................................................................................................................. 38
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................................... 38
SIGNATURES.............................................................................................................. 40-41
2
PART I
Item 1. Business.
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Introduction and General Development of Business.
Artisoft, Inc.(R) ("Artisoft" or "Company" or "Registrant") is a personal
computer ("PC") software company providing cost-effective and easy-to-use local
area network ("LAN"), PC communications and computer telephony solutions.
Entering the fiscal year ended June 30, 1996, Artisoft was exclusively
engaged in the design, development, sales and support of LAN software, designed
to enhance the productivity of PC users by enabling such persons to share
networked resources and to communicate easily and cost-effectively with other
users on the LAN. The typical end-users of the Company's LANtastic(R)
peer-to-peer network operating system ("NOS") are small and growing businesses,
home offices, professional organizations, universities, work groups within
larger businesses and government agencies. The company estimates that as of June
30, 1996 it had shipped approximately 4,050,000 computer licenses of LANtastic
products used in approximately 710,000 LANtastic LANs, since the initial version
for the product began shipping in 1987.
Prior to the fiscal year ended June 30, 1996, the Company manufactured
network interface cards and certain other communication devices. In two separate
transactions effected during the second half of the fiscal year ended June 30,
1995, the Company divested its hardware development and manufacturing
operations. Currently, all of the hardware components included in existing
product lines are purchased from outside manufacturers. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Item 8. Financial Statements and Supplementary Data" for
further discussion of these transactions.
Acqusitions
During the fiscal year ended June 30, 1996, the Company has continued its
transformation to a PC software company with a broader technology portfolio and
a broader array of products and channels of distribution. Consistent with this
strategy and the Company's technology vision -- to transform business
communications by providing open solutions bringing together distributed data,
voice and imaging resources at the desktop PC -- the Company successfully
completed the acquisition and integration of three software companies during the
fiscal year.
On November 22, 1995, the Company acquired for cash substantially all of
the assets and certain liabilities of Synergy Solutions, Inc. ("Synergy"), a PC
software company primarily engaged in the design, development, sales and support
of modem and telephone line sharing software. Synergy's principal product at
that time, Modem Assist Plus, was sold principally through retailers.
On December 21, 1995, the Company purchased all of the outstanding common
stock of Triton Technologies, Inc ("Triton"), a PC software company primarily
engaged in the design, development, sales and support of PC remote control
software. Triton's principal product at that time, CoSession Remote, was
principally sold direct to original equipment manufacturers.
On February 13, 1996, the Company acquired for cash substantially all of
the assets and certain liabilities of Stylus Innovation, Inc. ("Stylus"), a PC
software company primarily engaged in the design, development, sales and support
of computer telephony applications and tools software. Stylus' principal
product, Visual Voice, was sold principally direct to software development
groups within mid and larger sized enterprises.
The Company's executive offices are located at 2202 North Forbes Boulevard,
Tucson, Arizona 85745. The telephone number at that address is (520) 670-7100.
The Company was incorporated in Arizona in November 1982 and reincorporated by
merger in Delaware in July 1991.
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Financial Information about Industry Segments.
All of the Company's products are considered part of a single industry
segment. Information regarding domestic and international net sales and
international assets are contained in note 15, "Domestic and International
Operations," in "Notes to Consolidated Financial Statements" included in "Item
8. Financial Statements and Supplementary Data."
Products and Services.
Networking Products
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The Company's NOS strategy emphasizes offering a range of software products
optimized for the networking and productivity needs of small and growing
businesses and workgroups. The NOS software is designed to be easy-to-use yet
powerful, and able to support a wide variety of PC operating systems. All
current LANtastic software products have been designed to be compatible with
each other, and with most PC industry standard operating systems, hardware
platforms, applications software and NOS.
The principal product in the LANtastic NOS family is LANtastic v7.0, an
Internet-ready networking solution for small and growing businesses. LANtastic
v7.0, a full-featured, flexible, peer-to-peer PC LAN includes the LANtastic
Internet Gateway, which uses i-Share(TM) technology to allow multiple-user
access to one network Internet connection. Through licensing agreements,
LANtastic v7.0 includes Internet access through CompuServe, Inc.'s SPRYNET(TM)
sign-on service, and browsing capabilities with Netscape Communications
Corporation's Netscape(TM) Navigator 2.0. LANtastic v7.0 supports the three most
popular PC platforms - Windows 95, Windows and DOS. It also includes built-in
modem and phone line sharing, providing online access without the need for extra
modems or phone lines. With a new TCP/IP stack, the LANtastic system connects to
UNIX(R) hosts and applications, enabling a small business to inexpensively build
a wide area network (WAN). The LANtastic v7.0 network also includes
remote-access software for remote dial-up technical support. LANtastic v7.0,
first introduced in June 1996 as a successor to LANtastic v6.0, is available in
the form of network starter kits, network add-on kits to connect additional PCs
to a LANtastic network, or in software-only versions.
Also currently offered in the LANtastic product line is LANtastic Dedicated
Server (released in the fourth quarter of fiscal year 1994), a 32-bit dedicated
server for the LANtastic NOS combining a licensed full-featured realtime version
of Novell Inc.'s NetWare 4 Network Operating System combined with a
high-performance LANtastic network NetWare Loadable Module.
LANtastic NOS products are available in certain foreign languages,
including French, Italian, German, Spanish, Dutch, Portuguese and Japanese.
During fiscal 1996, 1995 and 1994, approximately 82%, 62%, and 52%
respectively, of the LANtastic licenses (excluding upgrades and dedicated server
licenses) shipped by the Company consisted of software-only versions. The sales
mix shift toward a higher percentage of software-only licenses in fiscal 1996
was a result of the Company's strategic decision to divest its hardware
development and manufacturing operations during the second half of fiscal 1995.
This decision was precipitated by increased price sensitivity in the Ethernet
adapter market and a related willingness of resellers of the Company's products
not to select the Company's Ethernet adapters.
The Company supports its products through fee- and non-fee-based telephonic
technical services, on-line forums such as CompuServe, a World Wide Web site,
bulletin board systems, CD-ROM databases and a fax-on-demand system. Because the
Company's products operate in many disparate PC environments, the Company's
technical services require wide expertise in network operating systems, network
interface cards of other companies and other technologies. The Company intends
to broaden the fee-based technical support services it offers.
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 $7.1 million, $7.7
million and $5.9 million in fiscal 1996, 1995 and 1994, respectively. The
Company has not engaged in customer-sponsored research activities.
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PC Communications Products
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In the third quarter of fiscal 1996, the first communications software
products were released. These products, CoSession Remote v7.0 and ModemShare
v7.0, are enhanced versions of the principal products acquired in connection
with the acquisition of Triton and Synergy, respectively. CoSession Remote
enables PC users to access and take control of a second PC in a distant
location, as if sitting in front of it. CoSession Remote can run programs,
access data, print reports, transfer files, or observe the operations of another
PC user. It is the fastest product of its kind, and an Intelligent Transfer
feature saves time and money. CoSession Remote supports Windows 95, Windows and
DOS applications and connects PC's over modems or across Novell(R), LANtastic,
NetBIOS and TCP/IP networks, including the Internet.
ModemShare v7.0 offers businesses an easy, affordable way to share modems
and phone lines across a local area network. With ModemShare, everyone on the
network can share one modem and one phone line to use a fax, Internet access
programs and other online services, without ever leaving their desks. ModemShare
offers total interoperability between Windows 95, Windows and DOS, making it
easy to share resources in mixed operating environments.
Artisoft also offers voice communications software products, including
Visual Voice Pro 3.0 and Visual Voice for TAPI 2.0, both of which allow Windows
developers to easily build 32-bit computer telephony solutions, including
interactive voice response, fax- on-demand and voice mail.
The industry-standard Active X(TM) controls and graphical workbench of
Visual Voice Pro 3.0 transforms any popular Windows development environment,
including Visual Basic, Visual C++(TM) , Delphi(TM), PowerBuilder(R) and many
others, into a full-featured telephony toolkit. Features include scaleability to
72 phone lines per PC, caller identification, call progress analysis, and
digital network interface. It allows programs to be tailored for any need, from
a home office to a Fortune 500 company. Versions are available for Windows 95
and Windows NT, the definitive platform for complex telephony applications.
Visual Voice for TAPI 2.0 is designed to provide an easy-to-use interface
to any TAPI-compliant telephony device, including voice modems, professional
voice boards and PBXs. Visual Voice for TAPI provides high-level, direct access
to the programming interface, tight PBX integration, sophisticated caller ID
options and other industry-leading features.
Raw Materials, Manufacturing and Suppliers.
Since the disposition of its manufacturing operations in the second half of
fiscal 1995, the Company primarily utilizes the services of third-party
manufacturers for production of its remaining hardware products. The Company no
longer purchases integrated circuits, circuit boards and other components for
its printed circuit boards, but purchases finished boards and other hardware
products from manufacturers. The manufacturers deliver the products to the
Company's Tucson facilities, where the Company tests, packages and ships
finished products to customers. Most components that are used in the Company's
products are readily available from a large number of both domestic and foreign
equipment vendors.
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.
Seasonality.
Typically, the personal computer industry experiences some seasonal
variations in demand, with weaker sales in the summer months because of
customers' vacations and planned shutdowns. This seasonality is especially noted
in Europe.
5
Competition.
Networking Products
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The LAN industry is highly competitive and is characterized by rapidly
changing technology and evolving industry standards. NOS competition is usually
based upon brand recognition, scalability of products offered by a NOS vendor,
current and future perceived needs of customers, product features (such as
interconnectivity among various operating systems), ease of installation and
maintenance, reliability of the software, security of network management and
diagnostic tools, price and product availability through consultant, reseller
and retail channels.
The Company's NOS products compete with products available from numerous
companies including Novell, Microsoft Corporation ("Microsoft") and
International Business Machines Corporation ("IBM"), which have substantially
greater research and development, marketing and financial resources,
manufacturing capability, customer support organizations and brand recognition
than those of the Company.
Competition in the industry is likely to intensify as current competitors
expand their product lines, include more NOS features in operating systems, add
new network application features into their NOS products and operating systems
and as new companies enter the market, including companies offering capabilities
via Internet browsers. This product, based on the next generation of NetWare,
will purportedly include built-in Internet capabilities (Gateway, browser and
webserver) remote access, E-mail, fax services and other bundled proprietary and
third party products. Management believes that this product, as it will compete
directly with LANtastic v7.0 in the Company's primary market, could have a
detrimental impact on future sales of LANtastic products. Significant price
competition, with its attendant adverse effects on profit margins, may result.
Prolonged price competition could have a material adverse effect upon the
Company's business, operating results and financial condition.
The Company's NOS products compete against Microsoft's Windows desktop
operating systems, which includes peer-to-peer networking capabilities as well
as a group scheduler and electronic mail features. The Company believes that the
viability of these products has impacted the Company's net sales and income from
continuing operations but this impact has been difficult to quantify. In August
1995, Microsoft introduced a new version of its Windows operating system,
referred to as "Windows 95". This product includes networking features
competitive with features found in products sold by the Company. Because of the
dominance of Microsoft in the personal computer operating system market, the
Company believes that Windows 95 has had a detrimental impact on sales of the
Company's products since its introduction. Part of the Company's business
strategy is to provide the best migration path for small and growing businesses
to the Windows 95 operating system. The Company's LANtastic 7.0 product fully
supports Windows 95 and enables the Company's customers to utilize Windows 95
features in an integrated network across all key operating system platforms.
Another Microsoft NOS product that the Company believes may have a detrimental
impact on future sales of LANtastic products is Microsoft Windows NT 4.0 network
server. This product is faster than previous versions and easier to use with a
Windows 95 like interface. It also ships with all of the tools necessary to
create and manage Internet or Intranet services and also includes Internet
browsing capabilities with the inclusion of Microsoft Explorer 3.0. The Company
does not have the product breadth or marketing and engineering resources of
Microsoft, whose dominant position provides it with substantial competitive
advantages in PC software.
The Company's NOS products also compete with Novell's Personal NetWare(TM)
and other Novell NOS products. This product, based on the next generation of
NetWare, will purportedly include built-in Internet capabilities (gateway,
browser and webserver) remote access, E-mail, fax services and other bundled
proprietary and third-party products. Management believes that this product, as
it will compete directly with LANtastic v7.0 in the Company's primary market,
could have a detrimental impact on future sales of LANtastic products. Novell
has a dominant position in the LAN market and has significantly more marketing,
engineering and other resources than the Company.
There can be no assurance that the Company's NOS products will be able to
compete successfully with other NOS products offered presently or in the future
by Microsoft, Novell or other NOS competitors. Given the greater resources,
higher brand name recognition and other substantial advantages enjoyed by these
competitors, it is unlikely that the Company's NOS business can continue to be
the primary source of its revenues and earnings over the long term. Accordingly,
the future success of the Company may depend on its ability to expand non-NOS
products and activities much faster than the rate at which its opportunities and
prospects in the NOS arena decline. Although the Company's NOS products are well
known and established in the marketplace, in light of the competitive factors
noted above, there can be no assurance that the Company will be able to maintain
its share of the NOS market. In such event, its revenues and earnings may
decline rapidly.
PC Communication Products
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The PC communications software industry is highly competitive. There are a
number of companies that currently compete directly with the Company's PC remote
control, modem and telephone line sharing and computer telephony tools products.
Many of these companies, including Symantec, MicroCom, Novell, Lucent
Technologies and others have substantially greater resources and name
recognition than the Company. Accordingly, there can be no assurance that
current PC communications products will continue to generate revenues and
earnings at current levels, or that this PC communications business will be able
to effectively develop and successfully launch new competitive products in the
future.
Marketing, Sales and Distribution.
The Company's dominant marketing strategy is to create reseller and end
user demand for the Company's products and principally use broad line
distributors and volume purchasers to fulfill reseller and end user demand. The
Company's authorized resellers and distributors are selected for their sales
ability, technical expertise, reputation and financial resources. The Company
also sells direct to original equipment manufacturers, governmental units and
end users. The Company's selling efforts have been assisted by positive product
reviews, awards and recognition earned from computer publications.
The Company's marketing programs have three objectives: (i) create brand
name recognition of the Company and its products; (ii) generate sales leads for
its resellers and distributors; and (iii) support the sales efforts of its
resellers and distributors through sales tools and training. Marketing
activities that address the first two areas include frequent participation in
industry trade shows and seminars, direct mail, advertising in major trade
publications, executive participation in press
6
briefings and industry seminars, sponsorship of seminars by the Company and
on-going communication with the Company's end users. To train and support
resellers and distributors, the Company provides mailings of product and
technical updates, seminar materials, video training and corporate
presentations. The Company's Advantage and Premier programs for U.S. resellers
and distributors provide increased training, services and support.
The Company is exposed to the risk of product returns and rotations from
its distributors and volume purchasers, which are recorded by the Company as a
reduction to sales. Although the Company attempts to monitor and manage the
volume of its sales to distributors and volume purchasers, overstocking by its
distributors and volume purchasers or changes in inventory level policies or
practices by distributors and volume purchasers may require the Company to
accept returns above historical levels. In addition, the risk of product returns
may increase if the demand for new products introduced by the Company is lower
than the Company anticipates at the time of introduction. Although the Company
believes that it provides an adequate allowance for sales returns, there can be
no assurance that actual sales returns will not exceed the Company's allowance.
Any product returns in excess of recorded allowances could result in a material
adverse effect on net sales and operating results. As the Company introduces
more products, timing of sales to end users and returns to the Company of unsold
products by distributors and volume purchasers become more difficult to predict
and could result in material fluctuations in quarterly operating results.
The Company is also exposed to its distributors for price protection for
list price reductions by the Company on its products held in such distributors'
inventories. The Company provides its major distributors with price protection
in the event that the Company reduces the list price of its products. Large
distributors are usually offered credit for the impact of a list price reduction
on the expected revenue from the Company's products in the distributors'
inventories at the time of the price reduction. Although the Company believes
that it has provided an adequate allowance for price protection, there can be no
assurance that the impact of actual list price reductions by the Company will
not exceed the Company's allowance. Any price protection in excess of recorded
allowances could result in a material adverse effect on net sales and operating
results.
Substantially all of the Company's revenue in each fiscal quarter results
from orders booked in that quarter. A significant percentage of the Company's
bookings and sales to major customers on a quarterly basis historically has
occurred during the last month of the quarter and are usually concentrated in
the latter half of that month. Orders placed by major customers are typically
based upon the customers' forecasted sales level for Company products and
inventory levels of Company products desired to be maintained by the major
customers at the time of the orders. Major distribution customers typically
receive negotiated cash rebates, market development funds and extended credit
terms from the Company for purchasing Company products, in accordance with
industry practice. Changes in purchasing patterns by one or more of the
Company's major customers related to customer forecasts of future sales of
Company products, customer policies pertaining to desired inventory levels of
Company products, negotiations of rebate and market development funds or in the
ability of the Company to anticipate in advance the mix of customer orders or to
ship large quantities of products near the end of a fiscal quarter could result
in material fluctuations in quarterly operating results. The Company believes
that there is a trend among major distribution customers and volume purchasers
to reduce their inventory levels of computer products, including the Company's
products. This trend could have a significant, adverse effect on the Company's
operating results during the period or periods that such customers initiate such
inventory reductions. The timing of new product announcements and introductions
by the Company or significant product returns by major customers to the Company,
could also result in material fluctuations in quarterly operating results.
Expedited outsourcing of production and component parts to meet unanticipated
demand could adversely affect gross margins.
International Business.
In fiscal 1996, 1995 and 1994, international sales accounted for 30%, 38%,
and 37% respectively, of the Company's net sales. The Company believes that a
higher proportion of net sales to international customers is desirable because
of the expected high growth rates of computerization of small and growing
businesses outside the United States and the result and demand for the Company's
products, principally networking and PC communications. Sales to non-U.S.
customers may be affected by fluctuations in exchange rates and by government
regulations. To date, the Company's operations have not been materially impacted
by currency fluctuations.
Assets deployed to support the Company's international business represented
approximately 3% of total assets at the end of fiscal 1996, 3% at the end of
fiscal 1995 and 8% at the end of fiscal 1994. The decrease in such assets was
principally the
7
result of the outsourcing of the Company's manufacturing operations in Europe
and the disposition of the Company's hardware development and manufacturing
operations in the second half of fiscal 1995. The Company's international
operations now consist of only sales, marketing and support services. The
Company's international operations are in good standing and have not been denied
any licenses to operate, but are subject to the normal risks associated with
such international operations.
Significant Customers.
The Company sells its products primarily through distributors, volume
purchasers and resellers. For fiscal 1996, 1995 and 1994, Ingram Micro, Inc.
accounted for approximately 12%, 21% and 22% of the Company's net sales,
respectively. For fiscal 1996, 1995 and 1994, Merisel, Inc. accounted for
approximately 8%, 10% and 15% of the Company's net sales, respectively. At June
30, 1996, Ingram Micro, Inc. and Merisel, Inc. accounted for 19% and 5%,
respectively, of the Company's outstanding net trade accounts receivable. The
loss of any of the major distributors of the Company's products or their failure
to pay the Company for products purchased from the Company could have a material
adverse effect on the Company's operating results. The Company's standard credit
terms are net 30 days, although longer terms are provided to various major
customers on a negotiated basis.
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, 1996 was approximately $221,000, compared with
approximately $515,000 at June 30, 1995.
Proprietary Rights and Licenses.
The Company currently relies on a combination of trade secrets, copyright
and trademark laws, nondisclosure and other contractual agreements and technical
measures to protect the proprietary rights and security of its products. Despite
these precautions, unauthorized parties may attempt to copy aspects of the
Company's products or to obtain and use information the Company regards as
proprietary.
Although the Company has patents, patent protection is not considered
essential to the Company's success. The Company believes that, because of the
rapid pace of technological change in the industries in which the Company
competes, the legal protections for its products are less significant factors in
the Company's success than the knowledge, ability and experience of the
Company's employees, the nature and frequency of product enhancements and the
timeliness and quality of support services provided by the Company.
The Company believes that its products, trademarks and other proprietary
rights do not infringe on the proprietary rights of third parties. However, the
software and computer industry is characterized by frequent litigation regarding
copyright, patent and other intellectual property rights. There can be no
assurance that third parties will not assert infringement claims against the
Company in the future or that licenses will be available on reasonable terms, or
at all, with respect to any third party technology. In the event of litigation
to determine the validity of any third party claims, such litigation could
result in substantial expense to the Company and adversely impact the efforts of
the Company's management and technical employees. In the event of an adverse
result in any such litigation, the Company could be required to expend
significant resources to develop alternative, noninfringing technology or to
obtain licenses to the technology. There can be no assurance that the Company
would be successful in such development or that any such licenses would be
available at all or at a reasonable cost to the Company.
In addition, laws of certain countries in which the Company's products are
or may be developed, manufactured or sold may not protect the Company's products
and other intellectual property rights at all or to the same extent as the laws
of the United States.
The Company pays royalties to Novell, Netscape Communications, Network Tele
Systems, Instant Information and Microcom 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
8
adversely affect the Company's sale of products incorporating such licensed
technologies and the Company's results of operations as a whole.
Environmental Laws.
Compliance with federal, state and local laws and regulations for the
protection of the environment has not had a material impact on the Company's
capital expenditures, earnings or competitive position. Although the Company
does not anticipate any material adverse impact in the future based on the
nature of its operations and the scope of current environmental laws and
regulations, no assurance can be provided that such laws or regulations or
future laws or regulations enacted to protect the environment will not have a
material adverse impact on the Company.
Employees.
As of June 30, 1996, the Company employed a total of 363 regular and 41
temporary persons, including approximately 194 in sales, marketing and customer
support, 86 in engineering and product development, 33 in operations and 50 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 employment
or change in control agreements with most of its executive officers and
noncompetition and nondisclosure agreements with substantially all of its
professional employees and executive officers. None of the Company's employees
are represented by a labor union. The Company has experienced no work stoppages
and believes that its relations with its employees are good.
Uncertainties in the Company's Business.
In addition to 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.
Other characteristics of the Company and the computer software industry may
adversely impact the Company. These include the ability of the Company to
integrate future acquired businesses by retaining key technical personnel of
acquired businesses and managing and integrating the business systems of
acquired companies. The inability to retain key personnel or to manage and
integrate business systems could substantially reduce the expected benefits of
such acquisitions. In addition, as networking products become more complex, the
Company could experience delays in product development and software "debugging"
that are common in the computer industry. Significant delays in product
development and release would adversely affect the Company's results of
operations. There can be no assurance that the Company will respond effectively
to technological changes or new product announcements by other companies or that
the Company's product development efforts will be successful. Furthermore,
introduction of new products involves substantial marketing risks because of the
possibility of product "bugs" or performance problems, in which event the
Company could experience significant product returns, warranty expenses and
lower sales.
As a result, past performance trends by the Company should not be used by
investors in predicting or anticipating future results. The market price of the
Company's common stock has been, and may continue to be, extremely volatile.
Factors identified in this and the above captions, along with other factors that
may arise in the future, quarterly fluctuations in the Company's operating
results and general conditions or perceptions of securities analysts relating to
the networking and data communications marketplace or to the Company
specifically may have a significant impact on the market price of the Company's
common stock and could cause substantial market price fluctuations over short
periods.
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 Artisoft and to assure that all
Artisoft shareholders will receive fair and equal treatment in the event of any
unsolicited attempt to acquire the Company. The Rights Plan will not and is not
intended to prevent a takeover of the Company on terms that are fair to, and in
the best interests of, all shareholders. See "Note 10 of Notes to Consolidated
Financial Statements" under "Item 8. Financial Statements and Supplementary
Data."
9
Stock Repurchase Program.
In February 1995, the Company approved a stock repurchase program (the
"Program") under which the Company would be authorized to repurchase up to
1,000,000 shares of its outstanding Common Stock for general corporate purposes.
Pursuant to the Program, management of the Company is authorized to pursue the
repurchase program in open market transactions from time-to-time, depending upon
market conditions and other factors. To date, the Company has not repurchased
any shares in open market transactions pursuant to the Program.
Item 2. Properties.
- --------------------
The Company owns or leases property as detailed in the following table. The
owned properties are not subject to any liens or encumbrances.
Lease
Approximate Owned or Expiration Intended
Location Size Leased Date Use
-------- ----------- -------- ---------- --------
Tucson, Arizona 2.7 acres Owned - Vacant Land
Tucson, Arizona 57,775 sq. ft. Owned - Office
Tucson, Arizona 2,700 sq. ft. Leased March 1998 Operations
Tucson, Arizona 28,800 sq. ft. Leased February 2001 Operations
Cambridge, Massachusetts 5,150 sq. ft. Leased January 1998 Office
Cambridge, Massachusetts 18,241 sq. ft. Leased August 2000 Office
Boynton Beach, Florida 1,171 sq. ft. Leased July 1997 Office
Iselin, New Jersey 7,852 sq. ft. Leased August 1997 Office
Tokyo, Japan 544 sq. ft. Leased June 1997 Office
Tokyo, Japan 294 sq. ft. Leased September 1996 Office
Mexico City, Mexico 1,076 sq. ft. Leased July 1997 Office
Etobicoke, Ontario, Canada 1,632 sq. ft. Leased March 1997 Office
Neutral Bay, NSW Australia 990 sq. ft. Leased April 1999 Office
Amsterdam, Netherlands 1,938 sq. ft. Leased April 1997 Office
Windsor, England 1,800 sq. ft. Leased March 2001 Office
Paris, France 2,153 sq. ft. Leased September 1998 Office
Milan, Italy 900 sq. ft. Leased September 1996 Office
Munich, Germany 269 sq. ft. Leased September 1996 Office
Aggregate monthly rental payments for the Company's facilities are
approximately $58,000. The Company's current facilities are generally adequate
for anticipated needs over the next 12 to 24 months.
Item 3. Legal Proceedings.
- ---------------------------
The Company is a party to a number of legal proceedings arising in the
ordinary course of its business. The Company believes that the ultimate
resolution of these claims will not have a material adverse effect on its
financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
Not applicable.
10
Executive Officers of the Registrant.
- -------------------------------------
The following table sets forth information concerning the executive
officers of the Company as of June 30, 1996 except as noted:
Name Age Position
- ----------------------------------------------------------------------------------------------------------------------
William C. Keiper 45 Chairman of the Board
and Chief Executive Officer
Joel J. Kocher 40 President and Chief Operating Officer
Gary R. Acord 43 Vice President and Chief Financial Officer
Michael P. Cassidy 33 Senior Vice President and
General Manager of the Computer Telephony Product Group
Ernest E. East 53 Vice President, General Counsel and Corporate Secretary
Gordon P. Grover 58 Vice President of Worldwide Operations
Bryan J. Moynahan 33 Vice President of Sales, Americas and Pacific Rim
William T. Peterson III 34 Vice President of Corporate Marketing
Justin Priestley 35 Vice President of Worldwide Sales Operations
David J. Saphier 40 Senior Vice President and
General Manager of the Remote Communications Product Group
Walker T. Williams 52 Vice President of Human Resources
Olivier Zitoun 28 Senior Vice President and
General Manager of the Networking Product Group
Mr. Keiper joined the Company in January 1993 as President and Chief
Operating Officer. In June 1993, he became Chief Executive Officer and was
appointed Chairman of the Board in October 1995. From 1986 through January 1993,
Mr. Keiper held various positions at MicroAge, Inc., and was serving as
President and Chief Operating Officer until he joined the Company. MicroAge,
Inc. is a company that distributes, markets and supports personal computer
hardware and software.
Mr. Kocher joined the Company in October 1994 as Executive Vice President
and Chief Operating Officer and was promoted to President and Chief Operating
Officer in October 1995. Prior to his employment with the Company, Mr. Kocher
was Senior Vice President of Dell Computer Corporation as well as President of
its Worldwide Sales, Marketing & Services division. He served Dell Computer
Corporation in various capacities from April 1990 to September 1994.
Mr. Acord joined Artisoft in April 1996 as Vice President and Chief
Financial Officer. Prior to joining Artisoft, Mr. Acord was Senior Vice
President of Finance and Chief Financial Officer of Elsinore Corporation, a
publicly-traded gaming company in Las Vegas, Nevada from April 1995 to April
1996. Elsinore Corporation filed a petition for reorganization under Chapter 11
of the federal bankruptcy code in October, 1995. Prior to his employment with
Elsinore, he was with KPMG Peat Marwick from 1979 through 1995, with his last
position being Managing Partner of the Las Vegas office and Director of the
firm's national gaming practice.
11
Mr. Cassidy joined Artisoft in February of 1996 when Stylus Innovation,
Inc. was acquired by Artisoft. Mr. Cassidy was President and one of the primary
shareholders of Stylus. In March of 1996, Mr. Cassidy became Senior Vice
President and General Manager of Artisoft's Computer Telephony Product Group.
From 1992 to 1993 he served as Director of Marketing at Databeam Corporation and
from 1991 to 1992 was Product Manager at Easel Corporation.
Mr. East joined Artisoft in January 1996 as Vice President, General
Counsel, and Corporate Secretary. Prior to joining Artisoft, Mr. East was Vice
President and General Counsel of Elsinore Corporation in Las Vegas, Nevada from
October 1994 to January 1996. Elsinore Corporation filed a petition for
reorganization under Chapter 11 of the federal bankruptcy code in October, 1995.
He was Senior Vice President and General Counsel for Trump Hotels and Casino
Resorts, New York City, from June 1991 to September 1994 and also served as an
officer of Trump Castle, Trump Taj Mahal and Trump Plaza Casinos, Atlantic City,
New Jersey at the time of their reorganizations under the federal bankruptcy
laws in 1991 and 1992. Mr. East was Vice President, Secretary and General
Counsel for Del Webb Corporation, Phoenix, Arizona from January 1984 to June
1991.
Mr. Grover joined Artisoft in December of 1993 and became Senior Director
of Operations in May of 1994. He was promoted to Vice President of Worldwide
Operations in March of 1996. Prior to joining Artisoft, Mr. Grover was General
Manager of Desert Mazda Hyundai from October 1992 to December 1993. He was a
private consultant from August 1991 to October 1992 and was General Manager of
SFE WestCap, a passive electronics component manufacturer, from January 1990 to
August 1991.
Mr. Moynahan joined Artisoft in April of 1994 and became Vice President of
Sales, Americas and Pacific Rim, in July of 1996. Mr. Moynahan is responsible
for all sales and channel development activity in the Americas and Pacific Rim.
He came to the Company from Ingram Micro, Inc. where he was Director of Western
Field Sales from 1987 to 1994. Mr. Moynahan's tenure at Ingram Micro included
positions managing teams focused on developing strategic relationships with
retailers, original equipment manufacturers, value-added resellers, and system
integrators.
Mr. Peterson joined Artisoft in February 1995 as Vice President of
Worldwide Marketing and became Vice President of Corporate Marketing in April of
1996. Prior to Artisoft, Mr. Peterson was Director of Commercial Accounts at
Compaq Computer Corporation from September 1994 to February 1995. He was
Director of Portable Marketing at Compaq from September 1993 to September 1994
and Product Manager from September 1988 to September 1993.
Mr. Priestley joined Artisoft in February 1995 as Director of Sales
Operations and became Vice President of Worldwide Sales Operations in June 1995.
Prior to joining Artisoft, Mr. Priestley was Director of Sales Operations at
Ingram Micro from 1987 to 1995 as well as Manager of Sales Administration from
1988 to 1989.
Mr. Saphier joined Artisoft in December of 1995 when Triton Technologies,
Inc. was acquired by Artisoft. In March of 1996 Mr. Saphier became Senior Vice
President and General Manager of Artisoft's Remote Communications Product Group.
He was President of Triton Technologies, Inc. Mr. Saphier resigned from Artisoft
on September 5, 1996.
Mr. Williams joined Artisoft in June 1996 as Vice President of Human
Resources. Prior to Artisoft, Mr. Williams was employed as Vice President of
Human Resources at Ampre, Inc. from July 1992 to August 1995. He was Senior Vice
President of Human Resources for Metromedia Steakhouses, Inc. from March 1991 to
September 1991 and Senior Vice President of Human Resources for Greyhound Lines,
Inc. from November 1987 to December 1990.
Mr. Zitoun is a native of France who joined Artisoft in December 1991 and
was responsible for establishing the Artisoft France office. Later he was named
Director of Sales for France, Spain, Italy, Belgium, Luxembourg and the
Netherlands. In February 1995, Mr. Zitoun became Vice President of Sales and
Marketing for Europe. In March 1996, Mr. Zitoun became Senior Vice President and
General Manager of Artisoft's Networking Product Group. Prior to Artisoft, from
March 1987 to November 1991, he was the European Marketing Director for Kortex,
one of Europe's leaders in the communication and modem industry.
12
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. 1996 Annual Report
to Shareholders, and are incorporated herein by reference. On June 30, 1996, the
Company's Common Stock was held by approximately 400 shareholders of record.
The Company currently intends to retain future earnings to fund the
development and growth of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future.
Item 6. Selected Financial Data.
- ---------------------------------
ARTISOFT, INC. AND SUBSIDIARIES
Selected Consolidated Financial Data
(in thousands, except per share amounts)
Years Ended June 30,
- ----------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
Statements Of Operations Data
Net sales $ 60,972 $ 84,243 $ 107,430 $ 84,642 $ 73,235
Operating income (loss) (24,838) (9,832) 18,983 12,709 19,640
Net income (loss) (18,328) (5,848) 13,613 9,410 13,202
Net income (loss) per common
and equivalent share $ (1.27) $ (.41) $ .89 $ .52 $ .76
Shares used in per share calculation 14,463 14,315 15,377 17,970 17,475
As of June 30,
- ----------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Working capital $36,828 $56,324 $52,462 $48,675 $53,176
Total assets 57,712 77,807 97,464 92,615 79,241
Long-term obligations, less
current portion 96 - 3,950 - -
Shareholders' equity 50,981 68,245 72,847 82,915 72,853
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations.
- --------------
Overview
During fiscal 1996 the Company continued its transformation to a
software-centric financial model with a broader technology portfolio, and a
broader array of products and channels. This is best evidenced by the
improvement in gross margin from 49% to 67%, year over year, and by the use of
$26.4 million in capital to complete three acquisitions for cash. The
acquisitions of three software companies during the year broadened the Company's
technology portfolio to include PC communications and computer telephony
solutions in addition to small business networking. Networking, PC
communications and computer telephony each represent a key element in the
convergence of computing and communications resources at the desktop and on the
PC network.
Acquisitions
On November 22, 1995, the Company acquired substantially all the assets and
certain liabilities of Synergy Solutions, Inc. (Synergy), a software company
that developed and sold modem and telephone line sharing software. The aggregate
cost of acquiring Synergy was approximately $1.5 million, paid in cash from the
Company's existing balances.
On December 21, 1995, the Company completed the acquisition of the
outstanding stock of Triton Technologies, Inc. (Triton), a software company that
developed and sold PC remote control software. The aggregate cost of acquiring
Triton was approximately $11.8 million, paid in cash from the Company's existing
balances.
On February 13, 1996, the Company acquired substantially all of the assets
and certain liabilities of Stylus Innovation, Inc. (Stylus), a software company
that developed and sold computer telephony software tools and applications. The
aggregate cost of acquiring Stylus was approximately $13.1 million, paid in cash
from the Company's existing balances.
The Company incurred direct transaction costs of approximately $625,000
associated with these acquisitions during the second and third quarters of
fiscal 1996. These costs consisted of fees for financial, legal and accounting
services and were included in the allocation of the acquisition costs. The
direct costs and purchase prices of the acquisitions have been allocated to the
assets acquired and liabilities assumed based on their respective fair values on
the dates of the acquisitions. The acquisitions were accounted for as purchases.
The results of operations of each of the acquired companies were combined with
the results of the Company as of their respective dates of acquisition.
New Products
In the third quarter of fiscal 1996, the Company launched its first PC
communications products under the INSYNC brand name: CoSession Remote v7.0, a
remote control product allowing users to access and take control of a PC from a
remote location; and ModemShare v7.0, a modem and telephone line sharing product
allowing users on a network to share a single modem and telephone line.
In the fourth quarter of fiscal 1996, Artisoft released version 7.0 of the
LANtastic network operating system. This new version of the Company's flagship
small business networking product represents the first Internet-ready networking
solution for small and growing businesses, and supports the three most popular
PC operating systems -- Windows 95, Windows and DOS. It also allows
multiple-user access to a single Internet connection, modem and telephone line
sharing and capabilities to enable a small business to inexpensively build a
wide area network (WAN).
The Company's computer-telephony products include Visual Voice Pro 3.0 and
Visual Voice for TAPI 2.0, both of which allow Windows developers to easily
build 32-bit computer telephony solutions, including interactive voice response,
fax-on-demand and voice mail.
Although the Company has focused its strategy toward a software centric
financial model, existing and new products or product enhancements from
competitors, or from software companies not presently competing in the Company's
markets, could have an adverse impact on the Company's operating results. The
operating results for fiscal 1996 reflect the consequences of the decisions made
by management to achieve its strategic objectives of broadening the Company's
technology and product portfolios,
14
leveraging its diverse global distribution channels, and establishing share
leadership in targeted growth markets. The following discussion and analysis
should be read in conjunction with the consolidated financial statements and
related information included herein.
Net Sales
The Company's net sales decreased 28% to $61.0 million for the fiscal year
ended June 30, 1996 from $84.2 million for fiscal 1995. The overall decrease in
net sales was primarily due to the sale of substantially all of the assets of
Eagle Technology and the consequent cessation of sales by the Company of Eagle
Technology hardware products as of January 30, 1995. Worldwide net sales for the
Eagle Technology business unit were approximately $24.4 million for the fiscal
year ended June 30, 1995. Net sales for fiscal 1996 include sales attributable
to the Company's acquisition of three software companies from the dates of their
acquisitions. Net sales also reflect the Company's strategic decision to move to
a software-centric financial model and a sales mix shift toward the
software-only version of the Company's LANtastic network operating system (NOS).
The shift to the software- only version of LANtastic was principally the result
of increased price sensitivity in the Ethernet adapter market and a related
willingness of local area network (LAN) resellers to select low-priced Ethernet
adapters instead of the Company's Ethernet adapters that were sold in
stand-alone versions or as part of starter and add-on kits. In the fourth
quarter of fiscal 1996, the Company introduced LANtastic version 7.0. In
connection with the transition to this newest version of the LANtastic NOS, the
Company reduced worldwide channel inventories of previous versions of the
product, as well as for LANtastic Power Suite, and increased allowances for
returns and rotations. In the fourth quarter of fiscal 1995, the Company
introduced LANtastic Power Suite. Sales for this product did not reach the
levels anticipated by the Company when the product was introduced. Upon the
release of LANtastic v7.0, the Company elected to de-emphasize Power Suite. As a
consequence of the foregoing, the Company experienced higher than expected
returns and rotations during fiscal 1996, which also contributed to the overall
decrease in net sales.
Net sales in fiscal 1995 decreased 22% to $84.2 million from net sales of
$107.4 million in fiscal 1994. The decrease in net sales was primarily
attributable to the sales mix shift from Ethernet adapters toward the
software-only version of the Company's LANtastic NOS. The software-only version
of the Company's NOS (excluding upgrades and dedicated server licenses)
represented 62% of total licenses sold in fiscal 1995 compared to approximately
52% in fiscal 1994. The shift in sales mix occurred principally because of
increased price sensitivity in the Ethernet adapter market, the elimination of
adapter dependent versions of the Company's NOS upon the introduction of
LANtastic version 6.0 in fiscal 1994, and a related willingness of LAN resellers
to select low-priced Ethernet adapters instead of the Company's Ethernet
adapters. A decline in average selling prices during the year for Ethernet
adapters of more than 45% also adversely affected sales of the Company's
higher-revenue network starter and add-on kits. Moreover, the Company's
disposition of its Eagle Technology business unit in January 1995 resulted in a
9% decrease in Eagle worldwide net sales during fiscal 1995 to $24.4 million
from $26.7 million in fiscal 1994. In addition, the decrease in net sales in
fiscal 1995 as compared to fiscal 1994 was in part a result of the net reduction
in worldwide distribution channel inventory and increases in the allowances for
returns and rotations for certain products.
The Company distributes its products internationally, and tracks sales by
major geographic area. Non-U.S. sales represented 30%, 38% and 37% of net sales
for fiscal 1996, 1995 and 1994, respectively. International sales decreased 43%
to $18.3 million in fiscal 1996 from $32.2 million in fiscal 1995. The decrease
is principally the result of the cessation of sales of Eagle Technology hardware
products as of January 30, 1995 and other factors described above. Non-U.S.
sales decreased 19% to $32.2 million for fiscal 1995 from $39.9 million for
fiscal 1994. The decrease in non-U.S. sales for fiscal 1995 when compared to
fiscal 1994 was principally a result of the decline in average selling prices in
the overall Ethernet adapter market and the Company's implementation of a net
reduction in non-U.S. distribution channel inventory.
Gross Profit
The Company's gross profit was $41.1 million, $41.4 million and $60.2
million in fiscal 1996, 1995 and 1994, respectively, or 67%, 49% and 56% of net
sales, respectively. The increase in gross profit for fiscal 1996 was primarily
the result of an increased percentage of higher margin software sales, a reduced
percentage of network starter and add-on kits (which include hardware), and the
cessation of sales of Eagle Technology hardware products.
Gross profit decreased in fiscal 1995 as compared to 1994 principally
because a higher percentage of sales were of Ethernet adapter products which
produced a lower gross profit than most of the Company's software products, a
decline in average
15
selling prices in the overall Ethernet adapter market and because of additions
to the Company's accounts receivable and inventory allowances.
Gross profit may fluctuate on a quarterly basis because of product mix,
pricing actions and changes in sales and inventory allowances.
Sales and Marketing
Sales and marketing expenses were $26.2 million and $33.0 million for
fiscal 1996 and 1995, respectively, representing 43% and 39% of net sales. The
increase in sales and marketing expenses as a percentage of net sales is due
primarily to the cost of promoting the Company's new and existing products. The
decrease in aggregate dollars for sales and marketing expenses for fiscal 1996
reflects expense reductions including a decrease in the Company's staffing
levels. This decrease was implemented to bring costs more closely into alignment
with the reduced sales level from fiscal 1995 to fiscal 1996.
Sales and marketing expenses increased to $33.0 million, or 39% of net
sales, in fiscal 1995 from $28.1 million, or 26% of net sales, in fiscal 1994.
The increase in sales and marketing expenses reflected Eagle Technology expenses
and the Company's decision to significantly increase its marketing efforts, both
in the U.S. and internationally, in order to strengthen the Company's market
visibility and presence. The increase in sales and marketing expenses as a
percentage of net sales was due primarily to the decrease in net sales.
Product Development
Product development expenses were $7.1 million and $7.7 million for fiscal
1996 and 1995, respectively, representing 12% and 9% of net sales. The increase
in product development expenses as a percentage of net sales is principally
attributable to the addition of product development expenses associated with the
companies acquired during fiscal 1996 and the addition of research and
development personnel to meet planned future product introduction timetables.
The Company believes the introduction of new products to the market in a timely
manner is crucial to its success. The decrease in aggregate dollars for fiscal
1996 reflects expense reductions across the board to bring Company costs more
closely into alignment with the reduced level of sales.
Product development expenses increased to $7.7 million, or 9% of net sales,
in fiscal 1995 from $5.9 million, or 5% of net sales, in fiscal 1994. The
increase in product development expenses in the aggregate and as a percentage of
net sales was due principally to the decrease in net sales, the increase in
hardware development costs associated with Eagle Technology and the Company's
investment in the development of new software products.
General and Administrative
General and administrative expenses were $6.0 million and $7.5 million,
representing 10% and 9% of net sales, for fiscal 1996 and 1995, respectively.
The decrease in general and administrative expenses for fiscal 1996 reflects
expense reductions to bring Company costs more closely into alignment with the
reduced sales level. These expense reductions included a decrease in the
Company's staffing levels in the general and administrative area.
General and administrative expenses increased slightly to $7.5 million, or
9% of net sales, in fiscal 1995 from $7.3 million, or 7% of net sales, in fiscal
1994. The increase in general and administrative expenses reflected costs
associated with professional fees and employee search and relocation partially
offset by reductions in staffing and other administrative expenses. The increase
in general and administrative expenses as a percentage of net sales was due
primarily to the decrease in net sales.
Costs to Exit Hardware Business
The January 1995 sale of Eagle Technology for approximately $16.0 million
resulted in a gain of $5.7 million before costs associated with the decision to
cease hardware development and manufacturing activities, and wind down that
business. These exit costs included severance, facility closings, inventory
dispositions and other related items, and are included in "Costs to exit
hardware business, net of gain on disposition" in the Consolidated Statement of
Operations for the fiscal year ended June 30, 1995. Also, as part of the
Company's decision to exit the hardware business, the Company adjusted operating
expenses to
16
conform to the new business model. During the last half of fiscal 1995, the
Company reduced staffing levels by over 280 employees, a 48% reduction. In
addition, the Company disposed of its manufacturing operations to a contract
manufacturer and began outsourcing the production of its hardware products on
June 30, 1995.
Purchased In-Process Technology and Related Costs
In conjunction with the acquisitions of Synergy, Triton and Stylus, the
Company recorded a charge to operations during the second and third quarters of
fiscal 1996 totaling $21.7 million. The charge related to purchased in-process
technology that had not reached technological feasibility and had indeterminable
alternative future use. In addition, as a result of the acquisitions, the
Company recorded a charge to operations for other related costs totaling $5
million. The other related costs were principally attributable to costs
associated with the integration of Triton, Synergy and Stylus technology with
the Company's technology and the elimination of duplicate distribution
arrangements in Europe. Other related costs also included increases in
allowances for returns, rotations and inventory obsolescence associated with the
transition to new technology, costs for severance and outplacement, and facility
costs relating to the cancelation of leases in order to consolidate technical
support and distribution. Although the Company expects the elimination of
duplicative expenses, as well as other efficiencies related to the integration
of the businesses acquired, there can be no assurance that such benefit will be
achieved in the near term, or at all.
Other Income (Expense)
For fiscal 1996, other income (expense), net, increased to $1.5 million
from $(3,000) in fiscal 1995. This increase resulted primarily from investing
cash balances in higher-yielding taxable securities, the inclusion of the net
gains from the sale of property and equipment and the elimination of interest
expense that was accrued under a note payable relating to the purchase of Eagle
Technology that partially offset interest income in fiscal 1995.
Other income (expense), net, decreased to $(3,000) in fiscal 1995 from $1.7
million in 1994. The decrease in interest income resulted primarily from
investing cash balances at lower yields consistent with market conditions.
Interest expense in fiscal 1995 and 1994 reflected interest expense accrued
under a note payable relating to the purchase of Eagle Technology. The note was
paid in December 1994. The loss on disposition of equipment of $770,000 in
fiscal 1995 resulted from the disposition of equipment that was no longer in use
by the Company. Other amounts result from gains and losses from foreign currency
transactions and other non-operating items.
Income Taxes (Benefit)
The effective tax rates (benefit) were (21)%, (41)% and 34% for fiscal
1996, 1995 and 1994, respectively. The 21% effective tax rate benefit for fiscal
1996 is the result of the non-deductibility for federal income tax purposes of
approximately $9.2 million of in-process technology written off for financial
reporting purposes in connection with the Triton acquisition, which was effected
as a purchase of stock. Other factors causing the effective tax rates to differ
from the expected tax expense (benefit) calculated using the U.S. federal
corporate income tax rate for those years are the inclusion of state and foreign
income taxes partially offset by tax benefits from the Company's FSC and
tax-exempt interest income. Income taxes receivable as of June 30, 1996 and 1995
are the result of carrying back the net operating losses incurred for fiscal
1996 and 1995 for a refund of income taxes paid in prior years.
Liquidity and Capital Resources
The Company had cash and investments of $15.3 million at June 30, 1996,
compared to $37.8 million at June 30, 1995, and working capital of $36.8 million
at June 30, 1996 and $56.3 million at June 30, 1995. The decrease in cash and
investments was primarily a result of the acquisition of Synergy, Triton and
Stylus but was partially offset by the proceeds from the sale of certain assets
and the receipt of a federal income tax refund. Trade accounts receivable
average days sales outstanding at June 30, 1996 increased to 97 days from 90
days at June 30, 1995 due to extended terms given to certain international
customers and the effect on the calculation of the loss of Eagle Technology
revenue. The Company believes that its allowances for returns and doubtful
accounts are adequate.
The Company funds its working capital requirements primarily through cash
flows from operations and existing cash balances. While the Company anticipates
that existing cash balances and cash flows from operations will be adequate to
meet
17
the Company's current expected cash requirements for at least the next year,
additional investments by the Company to acquire new technologies and products
may necessitate that the Company seek additional debt or equity capital.
Risk Factors
The PC industry is highly competitive and is characterized by rapidly
changing technology, evolving industry standards, and the relentless entry of
new competitive threats. The Company's technologies and products compete with
technologies and products available from numerous companies, many of which have
substantially greater financial, technological, production and marketing
resources than those of the Company. Competition in the PC industry is likely to
intensify as current competitors expand their product lines, more features are
included in PC operating systems and in Internet browsers and related products,
and as new companies enter the markets or segments in which the Company
currently competes. The industry is also characterized by a high degree of
consolidation which favors companies with greater resources and access to
capital than those of the Company. There can be no assurance that the Company's
technologies and products will be able to compete successfully with those
offered presently or in the future by other vendors.
The Company is exposed to the risk of product returns and rotations from
its distributors and volume purchasers, which are recorded by the Company as a
reduction in sales. Although the Company attempts to monitor and manage the
volume of its sales to and by distributors and volume purchasers, overstocking
by such distributors and volume purchasers, or changes in their inventory
policies or practices, may require the Company to accept product 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, or if competitors exert leverage on
such distributors and volume purchasers to prefer their products over those of
the Company. Although the Company believes that it provides an adequate
allowance for sales returns and rotations, there can be no assurance that actual
sales returns and rotations will not exceed the Company's allowances. Any
product returns in excess of recorded allowances could result in a material
adverse effect on net sales and operating results. As the Company introduces
more new products, the predictability and timing of sales to end users and the
management of returns to the Company of unsold products by distributors and
volume purchasers becomes more complex and could result in material fluctuations
in quarterly sales and operating results.
The Company is also exposed to its distributors for price protection for
list price reductions by the Company on its products held in such distributors'
inventories. The Company provides its distributors with price protection in the
event that the Company reduces the list price of its products. Distributors and
volume purchasers are usually offered some credit for the impact of a list price
reduction on the expected revenue from the Company's products in the
distributors' inventories at the time of the price reduction. Although the
Company believes that it has provided an adequate allowance for price
protection, there can be no assurance that the impact of actual list price
reductions by the Company will not exceed the Company's allowance. Any price
protection in excess of recorded allowances could result in a material adverse
effect on sales and operating results.
Substantially all of the Company's revenue in each fiscal quarter results
from orders booked in that quarter. A significant percentage of the Company's
bookings and sales to major customers on a quarterly basis historically has
occurred during the last month of the quarter and are concentrated in the latter
half of that month. Orders placed by major customers are typically based upon
customers' forecasted sales levels for Company products and inventory levels of
Company products desired to be maintained by those major customers at the time
of the orders. Moreover, orders may also be based upon financial practices by
major customers designed to increase the return on investment or yield on the
sales of the Company's products to VARs or end users. Major distribution
customers receive market development funds from the Company for purchasing
Company products and from time to time may also receive negotiated cash rebates
or extended terms. 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 market development funds and rebates, or
otherwise, or in the Company's ability to anticipate in advance 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. Expedited outsourcing of production and component parts to meet
unanticipated demand could also adversely affect gross margins.
The Company believes that there is a trend among major distribution
customers and volume purchasers to reduce their inventory levels of computer
products, including the Company's products. This trend could have a significant,
adverse effect
18
on the Company's operating results during the period or periods that customers
initiate such inventory reductions or at such times as customers elect to
further reduce channel inventories.
Microsoft, a significant competitor of the Company, today offers, and is
expected in the future to offer, Windows- and NT-based products which include
features competitive with certain features found in products offered by the
Company. Because of the dominance and market visibility of Microsoft in the
personal computer software market, the presence of the Microsoft products in the
market may affect the sales of the Company's products and, depending upon the
degree of such effect, could have a significant adverse effect on the Company's
operating results. In addition, as a result of its dominant position in the
market for personal computer operating systems, other Microsoft products are
frequently installed at no additional charge on the hard drives of new personal
computers and thereby placed directly into the hands of the end-user customer.
Such distribution provides a favorable market advantage for Microsoft products,
to the potential detriment of the Company's product sales.
During the third fiscal quarter of 1996, the Company announced its INSYNC
brand of remote communications products, which includes CoSession Remote, a
remote control software product, and ModemShare, a modem and telephone line
sharing software product. These products were introduced to the Company's
worldwide sales channels late in the third quarter. These products have not
previously been broadly distributed through these channels. Currently, several
competitors offer similar products through similar sales channels. Although the
Company believes these new products to be functionally comparable and
competitively priced relative to competitors products, there can be no assurance
of the future success of these products.
Due to the foregoing, and other factors affecting the Company's operating
results, past financial performance should not be considered to be a reliable
indicator of future performance, and investors should not use historical trends
to anticipate results or trends in future periods.
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". The statement requires that such assets be reviewed
for impairment whenever events or changes in circumstances indicate that their
carrying value may not be recoverable and that such assets be reported at the
lower of their carrying amount or fair value. The Company will adopt the
provisions of the statement in their first quarter of fiscal 1997 and estimates
that the impact of such adoption will not be material to the consolidated
financial statements. Also in October 1995, Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" was issued. This
statement, effective for fiscal years beginning after December 15, 1995,
requires disclosure of the pro forma impact on net earnings and earnings per
share of the compensation cost that would have been recognized if the fair value
of the Company's stock-based awards were recorded in the statement of
operations. The Company will adopt the disclosure provisions in fiscal 1997. The
Company will not adopt the recognition and measurement criteria of SFAS No. 123
and therefore the impact on the Company's financial statements will not be
material.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
This Annual Report may contain forward-looking statements that involve
risks and uncertainties, including, but not limited to, the impact of
competitive products and pricing, product demand and market acceptance risks,
the presence of competitors with greater financial resources, product
development and commercialization risks, costs associated with the integration
and administration of acquired operations, capacity and supply constraints or
difficulties, the results of financing efforts and other risks detailed from
time to time in the Company's Securities and Exchange Commission filings.
19
Item 8. Financial Statements and Supplementary Data.
- -----------------------------------------------------
ARTISOFT, INC.
Index to Financial Statements
and Financial Statement Schedules
(Item 14(a))
Page Reference
Form 10-K
- ------------------------------------------------------------------------------
Independent Auditors' Report 21
Consolidated Financial Statements:
Consolidated Balance Sheets 22
Consolidated Statements of Operations 23
Consolidated Statements of Changes in
Shareholders' Equity 24
Consolidated Statements of Cash Flows 25
Notes to Consolidated Financial Statements 26 - 36
All schedules are omitted because they are not required, are not applicable, or
the information is included in the financial statements or notes thereto.
20
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, 1996 and 1995 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, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Artisoft, Inc. and
subsidiaries as of June 30, 1996 and 1995 and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 1996 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Phoenix, Arizona
August 1, 1996
21
ARTISOFT, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share amounts)
June 30,
1996 1995
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 15,325 $ 16,551
Short-term investments (Note 5) -- 19,312
Receivables:
Trade accounts, less allowances of $3,261
and $2,800 in 1996 and 1995,
respectively 16,768 15,508
Income taxes (Note 12) 1,635 3,500
Notes and other 1,405 3,424
Inventories (Note 6) 2,998 2,665
Prepaid expenses 906 2,046
Deferred income taxes (Note 12) 4,426 2,880
-------- --------
Total current assets 43,463 65,886
-------- --------
Long-term investments (Note 5) -- 1,930
Long-term deferred income taxes (Note 12) 3,141 --
Property and equipment, net (Note 7) 7,524 9,564
Other assets (Note 8) 3,584 427
-------- --------
$ 57,712 $ 77,807
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,333 $ 5,248
Accrued liabilities (Note 9) 2,640 4,218
Income taxes payable (Note 12) 577 96
Current portion of capital lease obligations 85 --
-------- --------
Total current liabilities 6,635 9,562
-------- --------
Capital lease obligations, net of current portion 96 --
Commitments and contingencies (Notes 13 and 14) -- --
Shareholders' equity (Note 10):
Common stock, $.01 par value. Authorized 50,000,000 shares;
issued 27,807,890 shares at June 30, 1996 and
27,671,680 shares at June 30, 1995 278 277
Additional paid-in capital 96,075 95,012
Retained earnings 24,308 42,636
Less treasury stock, at cost, 13,287,500 shares (69,680) (69,680)
-------- --------
Net shareholders' equity 50,981 68,245
-------- --------
$ 57,712 $ 77,807
======== ========
See accompanying notes to consolidated financial statements.
22
ARTISOFT, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share amounts)
Years Ended June 30,
1996 1995 1994
---- ---- ----
Net sales $ 60,972 $ 84,243 $107,430
Cost of sales 19,846 42,796 47,224
-------- -------- --------
Gross profit 41,126 41,447 60,206
-------- -------- --------
Operating expenses:
Sales and marketing 26,178 33,010 28,063
Product development 7,092 7,655 5,888
General and administrative 5,950 7,495 7,272
Costs to exit hardware business,
net of gain on disposition (Notes 2 and 3) -- 3,119 --
Purchased in-process technology
and related costs (Note 4) 26,744 -- --
-------- -------- --------
Total operating expenses 65,964 51,279 41,223
-------- -------- --------
Income (loss) from operations (24,838) (9,832) 18,983
-------- -------- --------
Other income (expense):
Interest income 1,266 931 1,137
Interest expense (36) (255) (226)
Gain (loss) on disposition of equipment 125 (770) --
Other 162 91 823
-------- -------- --------
Total other income (expense) 1,517 (3) 1,734
-------- -------- --------
Income (loss) before income taxes (23,321) (9,835) 20,717
Income taxes (benefit) (Note 12) (4,993) (3,987) 7,104
-------- -------- --------
Net income (loss) $(18,328) $ (5,848) $ 13,613
======== ======== ========
Net income (loss) per common and
equivalent share $ (1.27) $ (.41) $ .89
======== ======== ========
Shares used in per share calculation 14,463 14,315 15,377
======== ======== ========
See accompanying notes to consolidated financial statements.
23
ARTISOFT, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
(in thousands, except share amounts)
Common Stock Additional Cumulative Net
------------------- Paid-in Retained Treasury Translation Shareholders'
Shares Amount Capital Earnings Stock Adjustment Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1993 27,260,700 $ 273 $ 92,138 $ 34,871 $ (44,396) $ 29 $ 82,915
Purchase of treasury stock -- -- -- -- (25,284) -- (25,284)
Exercise of common stock
options 253,513 2 975 -- -- -- 977
Tax benefit of disqualifying
dispositions -- -- 899 -- -- -- 899
Translation adjustment -- -- -- -- -- (273) (273)
Net income -- -- -- 13,613 -- -- 13,613
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1994 27,514,213 275 94,012 48,484 (69,680) (244) 72,847
Exercise of common stock
options 148,734 2 708 -- -- -- 710
Issuance of common stock
under employee stock
purchase plan 8,733 -- 59 -- -- -- 59
Tax benefit of disqualifying
dispositions -- -- 233 -- -- -- 233
Translation adjustment -- -- -- -- -- 244 244
Net loss -- -- -- (5,848) -- -- (5,848)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1995 27,671,680 277 95,012 42,636 (69,680) -- 68,245
========== ========== ========== ========== ========== ========== ==========
Exercise of common stock
options 112,848 1 850 -- -- -- 851
Issuance of common stock
under employee stock
purchase plan 23,362 -- 130 -- -- -- 130
Tax benefit of disqualifying
dispositions -- -- 83 -- -- -- 83
Net loss -- -- -- (18,328) -- -- (18,328)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1996 27,807,890 $ 278 $ 96,075 $ 24,308 $ (69,680) $ -- $ 50,981
========== ========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
24
Artisoft, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Years Ended June 30
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income (loss) $(18,328) $ (5,848) $ 13,613
-------- -------- --------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 2,445 2,939 2,871
Purchased in-process technology 21,700 -- --
Gain from disposition of assets, net (125) (3,669) --
Change in receivable and inventory allowances 1,426 95 (326)
Deferred income taxes (4,687) (601) (10)
Tax benefit of disqualifying dispositions 83 233 899
Changes in assets and liabilities, net of
effects from acquisitions of businesses:
Receivables-
Trade accounts (1,117) 10,178 (12,875)
Income taxes 1,865 (3,500) --
Notes and other 2,019 (1,585) (380)
Inventories (1,082) 16,401 (1,815)
Prepaid expenses 1,140 (238) (1,099)
Accounts payable and accrued liabilities (4,603) (5,453) 8,340
Other assets 113 (2,609) 157
-------- -------- --------
Total adjustments 19,177 12,191 (4,238)
-------- -------- --------
Net cash provided by operating activities 849 6,343 9,375
-------- -------- --------
Cash flows from investing activities:
Purchase of investments (35,063) (13,015) (47,026)
Sales of investments 56,305 11,976 78,849
Sales of property and equipment 2,972 -- --
Purchase of property and equipment (2,428) (2,426) (3,577)
Sale (purchase) of assets of Eagle Technology -- 7,500 (2,000)
Cash paid for businesses acquired (24,794) -- --
-------- -------- --------
Net cash provided by (used in) investing activities (3,008) 4,035 26,246
-------- -------- --------
Cash flows from financing activities:
Principal payments on long-term debt -- (6,563) (743)
Principal payments on capital lease obligations (48) -- --
Proceeds from issuance of common stock 981 769 977
Purchase of treasury stock -- -- (25,284)
-------- -------- --------
Net cash provided by (used in) financing activities 933 (5,794) (25,050)
-------- -------- --------
Effect of exchange rates on cash -- 244 (273)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (1,226) 4,828 10,298
Cash and cash equivalents, beginning of year 16,551 11,723 1,425
-------- -------- --------
Cash and cash equivalents, end of year $ 15,325 $ 16,551 $ 11,723
======== ======== ========
Supplemental cash flow information: Cash paid during the year for:
Interest $ 36 $ 249 $ 221
======== ======== ========
Income taxes $ 170 $ 50 $ 4,984
======== ======== ========
Issuance of note payable for purchase of assets of Eagle Technology $ -- $ -- $ 7,877
======== ======== ========
See accompanying notes to consolidated financial statements
25
Artisoft, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except percentages, shares and per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Artisoft, Inc. ("Artisoft" or the "Company") is a software company
providing easy-to-use, affordable networking, PC communications and computer
telephony solutions principally to small businesses. Headquartered in Tucson,
Arizona, Artisoft distributes its products in more than 100 countries through
nearly 20,000 value-added resellers, distributors, OEMs and retailers.
Basis of Consolidation
The consolidated financial statements include the accounts of Artisoft,
Inc. and its five wholly-owned subsidiaries: Triton Technologies, Inc., Artisoft
Europe B.V., Artisoft "FSC", Ltd. (which has elected to be treated as a foreign
sales corporation), NodeRunner, Inc., and Artisoft Japan, K.K. All significant
intercompany balances and transactions have been eliminated in consolidation.
Cash Equivalents and Investments
All highly liquid securities with original maturities of three months or
less at the date of purchase are considered to be cash equivalents. Investments
with maturities greater than three months and less than one year are classified
as short-term investments. Investments with maturities greater than one year are
classified as long-term investments. Effective June 30, 1994, the Company
adopted the provisions of Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity Securities." The
effect of this change was not material. In accordance with SFAS No. 115, the
Company has classified its securities into two categories: available-for-sale
and held-to-maturity. Held-to-maturity securities are those securities in which
the Company has the ability and intent to hold the security until maturity. All
other securities have been classified as available-for-sale.
Available-for-sale securities are recorded at fair value. Held-to-maturity
securities are recorded at amortized cost. Unrealized holding gains and losses,
net of the related tax effect, on available-for-sale securities are reported as
a separate component of shareholders' equity.
Cash equivalents at June 30, 1996 are comprised of money market funds,
commercial paper and mutual funds.
Concentration of Credit Risk 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.
Sales to two significant computer hardware and software distributors
accounted for approximately 20%, 31% and 37% of net sales for the fiscal years
ended June 30, 1996, 1995 and 1994, respectively. The Company's trade accounts
receivable from these distributors totaled approximately $4.8 million at June
30, 1996 and $7.3 million at June 30, 1995, which approximated 24% and 40% of
total trade accounts receivable at June 30, 1996, and 1995, respectively.
Inventories
Inventories are stated at the lower of cost or market. Cost is principally
determined using the first-in, first-out method.
26
Property and Equipment
Property and equipment are stated at cost. Equipment held under capital
leases is stated at the lower of fair market value or the present value of
minimum lease payments at the inception of the lease. Depreciation of property
and equipment is calculated using the straight-line method over the estimated
useful lives of three to seven years for furniture and equipment and 31.5 years
for buildings. Equipment held under capital leases is amortized over the shorter
of the lease terms or estimated useful lives of the related assets.
Income Taxes
Income taxes have been provided using the asset and liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes." Under the asset and
liability method of SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
SFAS No. 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
Revenue Recognition
The Company recognizes revenue from product sales at the time of shipment,
net of allowances for returns and price protection. Other product revenue,
consisting of training and support services, is recognized when the services are
provided.
Product Development
Development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established. After technological feasibility is established, any additional
costs would be capitalized in accordance with SFAS No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." Because
the Company believes its current process for developing software is essentially
completed concurrently with the establishment of technological feasibility, no
costs have been capitalized to date.
Computation of Net Income (Loss) Per Common and Equivalent Share
Net income (loss) per common and equivalent share is computed using the
weighted average number of common shares and dilutive common equivalent shares
outstanding during the period. Dilutive common equivalent shares consist of
stock options (computed using the treasury stock method).
Foreign Currency Translation
The functional currency for the Company's non-U.S. subsidiaries and
branches is the U.S. dollar. For these entities, inventories, equipment and
other property are translated at the prevailing exchange rate when acquired. All
other assets and liabilities are translated at year-end exchange rates.
Inventories charged to cost of sales and depreciation are remeasured at
historical rates. All other income and expense items are translated at average
rates of exchange prevailing during the year. Gains and losses which result from
remeasurement are included in net income (loss). Prior to July 1, 1995, the
functional currency was the local currency and translation adjustments were
recorded as a separate component of shareholdersO equity. The change to the U.S.
dollar as the functional currency was not material to the consolidated financial
statements.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price generally equal to the fair value of the shares at the
date of grant. The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and, accordingly, recognizes no compensation expense for the stock
option grants.
27
Impact of Recently Issued Accounting Standards
In March, 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. SFAS No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company will adopt SFAS No. 121 in the first quarter of the fiscal year ended
June 30, 1997 and, based on current circumstances, does not believe the effect
of adoption will be material to the consolidated financial statements.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No.123 is effective for
transactions entered into in fiscal years beginning after December 15, 1995. The
Company will not be adopting the recognition and measurement criteria of SFAS
No. 123 and thus, the impact of SFAS No. 123 on the Company's consolidated
financial statements will not be material.
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.
Fair Value of Financial Instruments
The carrying amount of account receivables and payables approximates fair
value because of the short-term maturity of these instruments.
Reclassifications
Certain reclassifications have been made to the 1995 and 1994 consolidated
financial statements to conform to the 1996 presentation.
(2) ACQUISITION AND DISPOSITION OF EAGLE TECHNOLOGY
On January 5, 1994, the Company acquired a significant portion of the
operating assets of Eagle Technology (a business unit of Anthem Electronics,
Inc.) for $9,877. The Company's Eagle Technology business unit manufactured and
marketed network communication devices for local area networks. The acquisition
was accounted for in accordance with the purchase method of accounting for
business combinations.
Following is a summary of the pro forma consolidated results of operations
(unaudited) of the Company and Eagle Technology for the fiscal year ended June
30, 1994 as if the acquisition had occurred at the beginning of that fiscal year
after giving effect to certain adjustments including amortization of goodwill,
increased interest expense on the acquisition debt, and related income tax
effects. This pro forma summary does not necessarily reflect the results of
operations that would have been achieved if the Company and Eagle Technology had
been combined during such period.
Net sales $134,882
--------
Net income $ 7,998
--------
Net income per common
and equivalent share $ .52
--------
As a result of the Company's decision to focus on software development and
cease its hardware development and manufacturing activities, the Company
completed the sale of substantially all of the operating assets of the Eagle
Technology business unit to Microdyne Corporation for $16,026 on January 30,
1995. The purchase price was paid in cash and notes payable which notes were
paid in full on September 30, 1995.
28
The gain of $5,735 on the sale of Eagle Technology was offset by costs
associated with closing the business unit and costs associated with the decision
to cease hardware development and manufacturing activities. These exit costs
included severance, facility closings, inventory dispositions and other related
items, and are included in "Costs to exit hardware business, net of gain on
disposition" in the consolidated statement of operations for the fiscal year
ended June 30, 1995.
Net sales for the Eagle Technology business unit were $24,397 and $26,667
for the fiscal years ended June 30, 1995 and 1994, respectively. Net income for
Eagle Technology was $13 for the fiscal year ended June 30, 1995 and $2,036, or
$.14 per share, for the fiscal year ended June 30, 1994.
(3) DISPOSITION OF MANUFACTURING OPERATIONS
On June 30, 1995, the Company executed an agreement to dispose of its
manufacturing operations to a third-party manufacturer and outsource the
production of its hardware products. Pursuant to the agreement, the manufacturer
agreed to purchase certain manufacturing equipment and inventories, to employ
certain Company employees, and assume certain outstanding purchase orders for
raw materials. The loss on disposition was not material to the consolidated
financial statements.
(4) ACQUISITIONS
On November 22, 1995, the Company acquired for cash substantially all the
assets and certain liabilities of Synergy Solutions, Inc. ("Synergy"), a
software company primarily engaged in the development, marketing and sales of
modem and telephone line sharing software. The aggregate cost of the acquisition
was approximately $1.5 million.
On December 21, 1995, the Company purchased all of the outstanding common
stock of Triton Technologies, Inc. ("Triton"), a software company primarily
engaged in the development, marketing and sales of PC remote control software.
The aggregate cost of acquiring the stock of Triton was approximately $11.8
million. The purchase price was paid in cash and notes payable, which notes were
paid in full in January 1996.
On February 13, 1996, the Company acquired for cash substantially all the
assets and certain liabilities of Stylus Innovation Incorporated ("Stylus"), a
software company engaged in the development, marketing and sales of computer
telephony applications and tools software. The aggregate cost of the acquisition
was approximately $13.1 million.
The Company incurred direct transaction costs of approximately $625,000
associated with the acquisitions of Synergy, Triton and Stylus ("the
acquisitions"). These costs consisted of fees for financial, legal and
accounting services and were included in the allocation of the acquisition
costs. The direct costs and the purchase prices of the acquisitions were
allocated to the assets acquired and liabilities assumed based on their
respective fair values on the dates of the acquisitions, as follows:
Cash $ 421
Trade receivables 604
Inventories 216
Property and equipment 271
Purchased technology 3,456
Purchased in-process technology 21,700
Other 198
--------
26,866
Less cash acquired (421)
Less liabilities assumed (1,651)
--------
Net assets acquired, excluding cash $ 24,794
========
In conjunction with the acquisitions, the Company recorded aggregate
charges to operations of $21.7 million relating to purchased in-process
technology that had not reached technological feasibility and had indeterminable
alternative future use. The $3.5 million of the aggregate purchase price
attributable to purchased software will be amortized over five years.
29
In addition, as a result of the acquisitions, the Company charged to
operations other related costs totaling $5.0 million. The other related costs
are principally attributable to costs associated with the product integration of
Triton and Synergy technology with the Company's technology and the elimination
of duplicate distribution arrangements in Europe. Other related costs include
increases in allowances for returns, rotations and inventory obsolescence
associated with the transition to the new technology; costs for severance and
outplacement; and facility costs relating to the cancelation of leases in order
to support consolidated technical support and distribution.
The acquisitions were accounted for as purchase business combinations and,
accordingly, the results of operations of the acquired companies have been
combined with those of the Company as of the respective dates of acquisition.
Had the business combinations occurred prior to July 1, 1995, the Company's net
sales, net income and net income per common and equivalent share (excluding
purchased in-process technology and related costs) for the fiscal year ended
June 30, 1996 would have been $66.4 million, $2,360 and $.16, respectively. The
pro forma effects of the business combinations for the fiscal year ended June
30, 1995 would have been immaterial to the Company's consolidated results of
operations.
(5) INVESTMENTS
A summary of investments by major security type at June 30, 1995 follows:
Amortized Gross Unrealized Gross Unrealized
June 30, 1995 Cost Holding Gains Holding Losses Fair Value
- --------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
Municipal Bonds $ 21,242 $ 17 $ (15) $ 21,244
- --------------------------------------------------------------------------------------------------------------------
Maturities of securities at June 30, 1995 follow:
Available-for-sale:
Due within one year $ -- $ -- $ -- $ --
- --------------------------------------------------------------------------------------------------------------------
Held-to-maturity:
Due within one year $ 19,312 $ -- $ -- $ 19,303
Due after one year $ 1,930 $ -- $ -- $ 1,941
- --------------------------------------------------------------------------------------------------------------------
$ 21,242 $ -- $ -- $ 21,244
- --------------------------------------------------------------------------------------------------------------------
At June 30, 1995, the Company held municipal bonds, including mutual
funds investing primarily in municipal bonds, expiring at various dates through
August 1996 at rates ranging form 3.2% to 9.4% with a combined carrying value of
$29,936 (including $8,694 classified as cash equivalents). Gross realized gains
or losses were not material for the years ended June 30, 1996 and 1995.
(6) INVENTORIES
Inventories at June 30, 1996 and 1995 consist of the following:
1996 1995
- --------------------------------------------------------------------------------
Raw materials $ 2,167 $ 1,923
Work-in-process 584 653
Finished goods 1,812 689
- --------------------------------------------------------------------------------
4,563 3,265
Inventory allowances (1,565) (600)
- --------------------------------------------------------------------------------
$ 2,998 $ 2,665
- --------------------------------------------------------------------------------
30
(7) PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1996 and 1995 consist of the
following:
1996 1995
- --------------------------------------------------------------------------------
Land $ 807 $ 861
Buildings and improvements 1,991 4,097
Furniture and fixtures 1,058 1,045
Computers and other equipment 9,741 9,163
Leasehold improvements 93 136
- --------------------------------------------------------------------------------
13,690 15,302
Accumulated depreciation
and amortization (6,166) (5,738)
- --------------------------------------------------------------------------------
$ 7,524 $ 9,564
- --------------------------------------------------------------------------------
(8) OTHER ASSETS
Other assets at June 30, 1996 and 1995 consist of the following:
1996 1995
- --------------------------------------------------------------------------------
Purchased technology, net of
accumulated amortization $3,172 $ --
Trademarks and patents, net of
accumulated amortization 285 279
Recoverable deposits and other 127 148
- --------------------------------------------------------------------------------
$3,584 $ 427
- --------------------------------------------------------------------------------
(9) ACCRUED LIABILITIES
Accrued liabilities at June 30, 1996 and 1995 consist of the following:
1996 1995
- --------------------------------------------------------------------------------
Compensation and benefits $1,061 $1,290
Payroll, sales and property taxes 884 930
Marketing 360 666
Royalties 93 437
Lease terminations -- 567
Other 242 328
- --------------------------------------------------------------------------------
$2,640 $4,218
- --------------------------------------------------------------------------------
(10) SHAREHOLDERS' EQUITY
Preferred Stock
The Company has authorized for issuance 11,433,600 shares of $1.00 par
value undesignated preferred stock, of which no shares have been issued. On
December 6, 1994, the Board of Directors of the Company authorized for issuance
50,000 shares of preferred stock, $1.00 par value, to be designated "Series A
Participating Preferred Stock," subject to a Rights Agreement dated December 23,
1994 (see Rights Plan) to be reserved out of the Company's authorized but
unissued shares of preferred stock. The reserved shares are automatically
adjusted to reserve such number of shares as may be required in accordance with
the provisions of the Series A Participating Preferred Stock and the Rights
Agreement.
31
Rights Plan
On December 6, 1994, the Board of Directors of the Company authorized and
declared a dividend of one preferred share purchase right (a "Right") for each
common share of the Company outstanding as of the close of business on December
27, 1994. The Rights Agreement is designed to protect and maximize the value of
the outstanding equity interests in the Company in the event of an unsolicited
attempt by an acquirer to take over the Company in a manner or on terms not
approved by the Board of Directors. Each Right, under certain circumstances, may
be exercised to purchase one one-thousandth of a share of the Company's Series A
Participating Preferred Stock at a price of $50.00 per share (subject to
adjustment). Under certain circumstances, following (i) the acquisition of 15%
or more of the Company's outstanding common stock by an Acquiring Person (as
defined in the Rights Agreement) or (ii) the commencement of a tender offer or
exchange offer which would result in a person or group owning 15% or more of the
Company's outstanding common stock, each Right may be exercised to purchase
common stock of the Company or a successor company with a market value of twice
the $50.00 exercise price. The Rights, which are redeemable by the Company at
$.001 per Right, expire in December 2001.
Settlement with Former Chief Executive Officer
In September 1993, the Company entered into a comprehensive settlement
agreement with its former Chief Executive Officer pursuant to which the parties
mutually released all claims which they had against one another. Under the
agreement, the Company granted rights in certain technology, acquired 3,487,500
shares of the Company's common stock and executed a noncompetition agreement
with the former executive for $25,500 in cash.
Stock Option Plans
On October 20, 1994, the shareholders approved the Company's 1994 Stock
Incentive Plan (the "1994 Plan"). The 1994 Plan provides granting Incentive
Stock Options, Non-Dqualified Options, Stock Appreciation Rights (Tandem and
Free-Dstanding), Restricted Stock, Deferred Stock, Performance Units and
Performance Shares to officers, key employees, non-Demployee directors and
certain consultants of the Company. The Company will not grant any options under
the Amended 1990 Stock Incentive Plan or the 1991 Director Option Plan after
October 20, 1994. All stock options presently outstanding under the Amended 1990
Stock Incentive Plan and the 1991 Director Option Plan will continue to be
governed by the terms of their respective plans, and the Company will continue
to reserve that number of shares of common stock issuable upon exercise of such
outstanding stock options.
The 1994 Plan provides that the maximum number of options that can be
granted shall be 2,000,000 shares, plus 1.5% of the number of shares of common
stock issued and outstanding as of January 1 of each year commencing on January
1, 1995. The maximum number of options available for grant each year shall be
all previously ungranted options plus all expired and canceled options. Stock
options are generally granted at a price not less than 100% of the fair market
value of the common shares at the date of grant. Options become exercisable over
a four-year period commencing on the date of grant. Options vest 25% at the end
of the first year after the date of grant and the remaining 75% of the options
vest in equal monthly increments over the next thirty-six months. No 1994 Plan
options may be exercised more than ten years from the date of grant. The 1994
Plan will terminate on the earlier of June 15, 2004, or the date upon which all
awards available for issuance have been issued or canceled.
The 1994 Plan contains an automatic option grant program limited to those
persons who serve as non-employee members of the Board of Directors, including
any non-employee Chairman of the Board ("Eligible Directors"). After October 20,
1994, each individual who first becomes an Eligible Director shall automatically
be granted a Nonqualified Option to purchase 15,000 shares of common stock. At
the date of each annual shareholders' meeting, beginning with the 1995 annual
shareholders' meeting, each person who is at that time serving as an Eligible
Director will automatically be granted a Nonqualified Option to purchase 5,000
shares of common stock (and an additional 10,000 shares for the Eligible
Director serving as Chairman of the Board), provided that such person has served
as a member of the Board of Directors for at least six months. There is no limit
on the number of automatic option grants that any one Eligible Director may
receive. All grants to an Eligible Director under the 1994 Plan will have a
maximum term of ten years from the automatic grant date. Each automatic grant
will vest in three equal and successive annual installments.
32
A summary of stock option activity with respect to the above plans for
the three-year period ended June 30, 1996 follows:
Options
Available Options Price
for Grant Outstanding Per Share
- --------------------------------------------------------------------------------
Balance, June 30, 1993 1,081,072 1,462,628 $3.00 - 25.75
Increase in options available 14,200 -- --
Granted (1,117,228) 1,117,228 6.50 - 22.63
Exercised -- (253,513) 3.00 - 16.75
Canceled 399,793 (399,793) 3.00 - 25.75
- --------------------------------------------------------------------------------
Balance, June 30, 1994 377,837 1,926,550 $3.00 - 25.75
Increase in options available 1,253,319 -- --
Granted (1,745,350) 1,745,350 7.50 - 15.00
Exercised -- (148,734) 3.00 - 11.13
Canceled 1,147,052 (1,147,052) 3.00 - 22.63
- --------------------------------------------------------------------------------
Balance, June 30, 1995 1,032,858 2.376,114 $3.00 - 25.75
Increase in options available 217,169 -- --
Granted (1,423,250) 1,423,250 6.00 - 12.38
Exercised -- (112,848) 3.00 - 9.75
Canceled(a)(b) 298,837 (443,944) 7.00 - 25.75
- --------------------------------------------------------------------------------
Balance, June 30, 1996 120,614 3.242,572 $3.00 - 18.06
(a) On April 1, 1996, the Compensation Committee of the Board of Directors
authorized a program to replace option grants under the 1990 Stock
Incentive Plan which were originally granted at an exercise price of $15.00
per share or more. This program did not include officers. Optionees who
elected to participate in this program forfeited 20% of their shares
subject to option, including 20% of vested shares in return for a reduction
in the exercise price per share to $8.50. The offer was made to 39
optionees involving 78,500 options and was effected on May 22, 1996. The
20% consideration resulted in 15,700 options canceled in the 1990 Plan and
62,800 options were repriced.
(b) Canceled options under the Amended 1990 Stock Incentive Plan are not
available for future grants.
At June 30, 1996, options for 1,018,338 shares were exercisable at prices
ranging from $3.00 to $18.06 per share.
Common stock received through the exercise of incentive stock options which
are sold by the optionee within two years of grant or one year of exercise
result in a tax deduction for the Company equivalent to the taxable gain
recognized by the optionee. For financial reporting purposes, the tax effect of
this deduction is accounted for as a credit to additional paid-in capital rather
than as a reduction of income tax expense.
Employee Stock Purchase Plan
On October 20, 1994, the shareholders approved the establishment of an
Employee Stock Purchase Plan and authorized for issuance 200,000 shares of
common stock. During the fiscal years ended June 30, 1996 and 1995, 23,362 and
8,733 shares of common stock were purchased, respectively, at prices ranging
from $5.37 to $6.75 per share. At June 30, 1996, 167,905 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.
33
(11) EMPLOYEE BENEFIT PLANS
The Company has a qualified 401(k) profit-sharing plan (defined
contribution plan) which became effective July 1, 1991. The plan covers
substantially all employees having at least six months of service. Participants
may voluntarily contribute to the plan up to the maximum limits imposed by
Internal Revenue Service regulations. The Company will match up to 50% of the
participants' annual contributions up to 3% of the participants' compensation.
Participants are immediately vested in the amount of their direct contributions
and vest over a five-year period, as defined by the plan, with respect to the
Company's contribution. The Company's profit-sharing plan expense for this plan
was $198, $242, and $219 for the fiscal years ended June 30, 1996, 1995 and
1994, respectively.
During 1992, the Company established a defined contribution plan
covering certain of its non-U.S. employees. The plan provides for contributions
by the Company based on a percentage of the employees' compensation. The plan
provides for voluntary contributions by employees in addition to those of the
Company. The Company's profit-sharing plan expense for non-U.S. employees was
not material for the fiscal years ended June 30, 1996, 1995 and 1994.
(12) INCOME TAXES
Components of income tax expense (benefit) for the fiscal years ended
June 30, 1996, 1995 and 1994 follow:
Current Deferred Total
- --------------------------------------------------------------------------------
1996:
Federal $ (356) $(3,424) $(3,780)
State -- (1,263) (1,263)
Foreign 50 -- 50
- --------------------------------------------------------------------------------
Total $ (306) $(4,687) $(4,993)
- --------------------------------------------------------------------------------
1995:
Federal $(3,386) $ (41) $(3,427)
State -- (560) (560)
- --------------------------------------------------------------------------------
Total $(3,386) $ (601) $(3,987)
- --------------------------------------------------------------------------------
1994:
Federal $ 5,540 $ (10) $ 5,530
State 1,574 -- 1,574
- --------------------------------------------------------------------------------
Total $ 7,114 $ (10) $ 7,104
- --------------------------------------------------------------------------------
The provision (benefit) for income taxes differs from the amount
computed by applying the statutory federal income tax rate to income (loss)
before income taxes. The sources and tax effects are as follows:
1996 1995 1994
- --------------------------------------------------------------------------------
Computed "expected" tax
expense (benefit) $(7,929) $(3,442) $ 7,251
State and foreign income taxes 50 114 1,023
Non-deductible in-process
technology write-offs 3,128 -- --
Foreign sales corporation benefit -- -- (385)
Nontaxable interest income (154) (311) (350)
Reversal of prior years' accruals -- (348) (742)
Other (88) -- 307
- --------------------------------------------------------------------------------
Total income tax expense (benefit) $(4,993) $(3,987) $ 7,104
- --------------------------------------------------------------------------------
34
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
1996 and 1995 are presented below:
1996 1995
- --------------------------------------------------------------------------------
Deferred tax assets:
Technology asset $4,882 $ --
Allowances for doubtful accounts and returns 1,033 939
Inventory allowances and overhead capitalization 727 336
Accrued compensation and benefits 440 319
State net operating loss carryforwards 810 1,093
Other accrued liabilities 168 592
- --------------------------------------------------------------------------------
Gross deferred tax assets 8,060 3,279
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Prepaid expenses 176 61
Depreciation and amortization 317 338
- --------------------------------------------------------------------------------
Gross deferred tax liabilities 493 399
- --------------------------------------------------------------------------------
Net deferred tax assets $7,567 $2,880
- --------------------------------------------------------------------------------
Management believes that it is more likely than not that the results of
future operations will generate sufficient taxable income to realize the net
deferred tax assets.
(13) COMMITMENTS
The Company leases office, manufacturing and storage space, vehicles, and
equipment under noncancelable operating lease agreements expiring through 2000.
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 $699, $1,690, and
$1,368 for the fiscal years ended June 30, 1996, 1995 and 1994, respectively.
A summary of future minimum lease payments under operating leases that have
remaining noncancelable lease terms in excess of one year at June 30, 1996
follows:
Years Ending Future Minimum
June 30, Lease Payments
- --------------------------------------------------------------------------------
1997 $1,064
1998 832
1999 673
2000 631
2001 159
- --------------------------------------------------------------------------------
Total $3,359
- --------------------------------------------------------------------------------
(14) CONTINGENCIES
The Company is subject to lawsuits and other claims arising in the ordinary
course of its operations. In the opinion of management, based on consultation
with legal counsel, the effect of such matters will not have a material adverse
effect on the Company's financial position.
35
(15) DOMESTIC AND INTERNATIONAL OPERATIONS
A summary of domestic and international net sales and international assets
for the fiscal years ended June 30, 1996, 1995 and 1994 follows:
1996 1995 1994
- --------------------------------------------------------------------------------
Domestic $ 42,705 $ 52,051 $ 67,506
International 18,267 32,192 39,924
- --------------------------------------------------------------------------------
Net sales $ 60,972 $ 84,243 $107,430
- --------------------------------------------------------------------------------
International assets $ 1,795 $ 2,135 $ 7,380
- --------------------------------------------------------------------------------
(16) SUPPLEMENTAL FINANCIAL INFORMATION
A summary of additions and deductions related to the allowances for
accounts receivable and inventories for the years ended June 30, 1996, 1995 and
1994 follows:
Balance at Balance at
Beginning End of
of Year Additions Deductions Year
- --------------------------------------------------------------------------------
Allowances for doubtful accounts
and returns:
Year ended June 30, 1996 $ 2,800 $ 11,160 $(10,699) $ 3,261
- --------------------------------------------------------------------------------
Year ended June 30, 1995 $ 2,217 $ 13,802 $(13,219) $ 2,800
- --------------------------------------------------------------------------------
Year ended June 30, 1994 $ 2,215 $ 7,078 $ (7,076) $ 2,217
- --------------------------------------------------------------------------------
Allowances for inventory obsolescence:
Year ended June 30, 1996 $ 600 $ 3,015 $ (2,050) $ 1,565
- --------------------------------------------------------------------------------
Year ended June 30, 1995 $ 1,088 $ 6,671 $ (7,159) $ 600
- --------------------------------------------------------------------------------
Year ended June 30, 1994 $ 1,706 $ 1,186 $ (1,804) $ 1,088
- --------------------------------------------------------------------------------
Item 9. Changes in and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure.
- ---------------------
Not applicable
36
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 "1996
Proxy Statement") relating to the Company's Annual Shareholders' Meeting to be
held October 22, 1996. Certain information included in the 1996 Proxy Statement
is incorporated herein by reference. The Company disseminated the 1996 Proxy
Statement to shareholders beginning on September 12, 1996.
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 2,
"Incumbent Directors," pages 2-3, "Meetings and Committees of the Board of
Directors," page 4 of the 1996 Proxy Statement, and is incorporated herein by
reference.
The information concerning the Company's executive officers required by
this item is contained in Part I, Item 4 of this Report under the caption
"Executive Officers of the Registrant," and is incorporated herein by reference.
Item 11. Executive Compensation.
- ---------------------------------
The information required by this item is contained in "Executive
Compensation," "Summary Compensation Table," "Option Grants in Last Fiscal
Year," "Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End
Option Values," "Director Compensation," "Employment Agreements and Termination
of Employment and Change in Control Arrangements," "Compensation Committee
Interlocks and Insider Participation," "Report of the Compensation Committee,"
and "Comparison of Stock Performance," pages 5-14, of the 1996 Proxy Statement,
and is incorporated herein by reference.
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the Exchange
Act that might incorporate future filings, including this Annual Report on Form
10-K, the "Report of the Compensation Committee" and "Comparison of Stock
Performance" in the 1996 Proxy Statement shall not be incorporated by reference
into any such filings, and such information shall be entitled to the benefits
provided in Item 402(a)(9) of Regulation S-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- -------------------------------------------------------------------------
The information required by this item is contained in "Security Ownership
of Certain Beneficial Owners and Management," page 15 of the 1996 Proxy
Statement, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
- ---------------------------------------------------------
The information required by this item is contained in "Certain
Relationships and Related Transactions," page 11 of the 1996 Proxy Statement,
and is incorporated herein by reference.
37
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- ---------------------------------------------------------------------------
(a) Financial Statements and Financial Statement Schedules.
-------------------------------------------------------
An Index to financial statements and financial statement
schedules is located on page 20 hereof.
(b) Reports on Form 8-K.
--------------------
The Company filed a report on Form 8-K dated April 11, 1996
disclosing that it had appointed Mr. Gary Acord as Chief
Financial Officer effective April 16, 1996.
(c) Exhibits.
---------
Designation Description Page or
----------- ----------- 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 Artisoft, (6)
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 Pages 43-55
William C. Keiper and the Registrant.
10.06 Employment Agreement, dated as of October 26, 1995, between Joel J. Pages 56-68
Kocher and the Registrant.
10.07 Form of Indemnification Agreement entered into between the Registrant (1)
and its Directors.
10.08 International Distributorship Agreement, dated July 31, 1992, between (2)
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 Microdyne (7)
Corporation dated as of January 6, 1995.
10.11 Outsource Manufacturing Agreement dated June 30, 1995 between ECS, (8)
Inc. and the Registrant.
38
Designation Description Page or
----------- ----------- Method of Filing
----------------
10.12 Stock Purchase Agreement dated December 21, 1995 among Artisoft, (9)
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 Artisoft, (10)
Inc. and Stylus Innovation Incorporated and Michael Cassidy, John W.
Barrus, Laura Macfarlane, Robert H. Rines and Krisztina Holly (the
Stylus Shareholders).
11.01 Computation of net income (loss) per share. Page 69
22.01 Subsidiaries of the Registrant. Page 70
23.01 Consent of Independent Public Accountants. Page 71
24.01 Powers of Attorney. See Signature Page
- -------------------
(1) Incorporated by reference to the Company's Registration Statement on Form S-1 (No. 33-42046) or
amendments thereto, filed with the Securities and Exchange Commission on August 5, 1991.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for fiscal 1992 ended June 30,
1992.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for fiscal 1993 ended June 30,
1993.
(4) Incorporated by reference to the Company's Form 8-K dated January 4, 1994.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for fiscal 1994 ended June 30,
1994.
(6) Incorporated by reference to the Company's Form 8-K dated December 22, 1994.
(7) Incorporated by reference to the Company's Form 8-K dated February 10, 1995.
(8) Incorporated by reference to the Company's Annual Report on Form 10-K for fiscal 1995 ended June 30,
1995.
(9) Incorporated by reference to the Company's Form 8-K dated December 21, 1995.
(10) Incorporated by reference to the Company's Form 8-K dated February 13, 1996.
39
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 26, 1996 By /s/ William C. Keiper
----------------------------
William C. Keiper, Chairman
and Chief Executive Officer
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints WILLIAM C. KEIPER and GARY R. ACORD, 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/ William C. Keiper Chief Executive Officer, Director September 26, 1996
- ------------------------------------- (Principal Executive Officer)
William C. Keiper
/s/ Gary R. Acord Vice President and Chief Financial September 26, 1996
- ------------------------------------- Officer (Principal Financial and
Gary R. Acord Accounting Officer)
/s/ Joel J. Kocher President and Chief Operating September 26, 1996
- ------------------------------------- Officer, Director
Joel J. Kocher
/s/ Kathryn A. Braun Director September 26, 1996
- --------------------------------------
Kathryn A. Braun
40
/s/ Gary E. Liebl
- --------------------------------------
Gary E. Liebl Director, Vice Chairman of the September 26, 1996
Board
/s/ Jock Patton Director September 26, 1996
- --------------------------------------
Jock Patton
41
EXHIBIT INDEX
Sequentially
Numbered
Exhibit Description Page
- ------- ---------------------------------------------------------------------
10.05 Employment Agreement, dated as of October 23, 1995, between
William C. Keiper and the Registrant. 43-55
10.06 Employment Agreement, dated as of October 26, 1995, between
Joel J. Kocher and the Registrant. 56-68
11.01 Computation of net income (loss) per share. 69
22.01 Subsidiaries of the Registrant. 70
23.01 Consent of Independent Public Accountants. 71
42