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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, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number 000-19462
ARTISOFT, INC.
(Exact name of registrant as specified in its charter)
Delaware 86-0446453
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 Cambridge Center Cambridge, MA 02142
(Address of principal executive offices, Zip Code)
Registrant's telephone number, including area code (617) 354-0600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value The Nasdaq Stock Market
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $32,069,000 based on the closing sale price as
reported by The Nasdaq Stock Market on September 24, 1998.
The number of shares outstanding of each of the registrant's classes of common
stock, as of September 24, 1998 was 14,660,000 shares of Common Stock, $.01 par
value.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Proxy Statement dated September 25, 1998, for the
Annual Meeting of Shareholders to be held on November 10, 1998, 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 .........................................................................3-12
Item 2. Properties ......................................................................12-13
Item 3. Legal Proceedings ..................................................................13
Item 4. Submission of Matters to a Vote of Security Holders .............................13-14
PART II .............................................................................................15
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ..............15
Item 6. Selected Financial Data ............................................................15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation ..........................................................16-30
Item 7(a). Quanitative and Qualitative Disclosures about Market Risk...........................30
Item 8. Financial Statements and Supplementary Data .....................................31-51
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .............................................................51
PART III ............................................................................................52
Item 10. Directors and Executive Officers of the Registrant .................................52
Item 11. Executive Compensation .............................................................52
Item 12. Security Ownership of Certain Beneficial Owners and Management .....................52
Item 13. Certain Relationships and Related Transactions .....................................52
PART IV .............................................................................................53
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................53-54
SIGNATURES ..........................................................................................55
2
PART I
Item 1. Business
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Introduction
Artisoft, Inc. ("Artisoft", the "Company" or the "Registrant") is a
computer software company, which develops, markets and sells computer telephony,
networking and communications software and remote computing products and
services.
The Company's principal executive offices are located at 5 Cambridge
Center, Cambridge, Massachusetts 02142. The telephone number at that address is
(617) 354-0600. The Company was incorporated in November 1982 and reincorporated
by merger in Delaware in July 1991.
Background and General Development of Business
During fiscal year 1998, which ended June 30, 1998, Artisoft implemented
a major business restructuring plan involving three key elements. First, the
Company took action to reduce operating expenses worldwide in order to bring the
Company's cost structure to a level commensurate with its revenues and to
preserve cash. Second, the Company sought to grow revenue on new products and
technologies in order to offset the continued decline of the Company's LANtastic
products. Third, the Company reoriented its business development strategy
towards transforming the Company into a computer telephony company. This
reorientation emerged with the Company's introduction of TeleVantage, the
Company's software-based phone system, in March, 1998.
During fiscal year 1998, the Company's revenues declined as the
Company's LANtastic peer to peer network operating system ("NOS") product line
came under increased competitive pressures from the Microsoft operating systems,
Windows 95, Windows 98 and Windows NT, with their built in networking
capabilities. In response, in fiscal year 1998, the Company reduced its
operating expenses. In addition, the Company's computer telephony and other
communications and networking product revenues partially offset the decreasing
revenues from LANtastic NOS products. The Company also introduced several new
products in fiscal 1998 as part of the strategy to diversify its product
portfolio. A key new product was TeleVantage. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
further discussions of new product introductions.
Prior to fiscal 1996, Artisoft was exclusively engaged in the design,
development, sales and support of local area network ("LAN") software and
hardware, designed to enhance the productivity of PC users by enabling them to
share networked resources and to communicate easily and cost-effectively with
other users of the LAN. The typical end-user of the Company's LANtastic NOS
products are small and medium sized businesses, home offices, professional
organizations, universities, work groups within large businesses and government
agencies. The Company estimates it has shipped over 4,500,000 hardware and
software licenses of LANtastic products used in over 975,000 LANtastic LAN's,
since the initial version of the product began shipping in 1987.
In fiscal 1996, the Company's LANtastic product line began to face
substantial competitive pressures, principally as a result of the impact of
Microsoft's Windows 95 operating systems on the small business networking
market. These pressures increased during fiscal years 1997 and 1998,
particularly with Microsoft's release of Windows 98 and Windows NT in 1997 and
June 1998, respectively. Windows 95/98, which is preloaded on substantially all
Pentium processor-based PC's sold worldwide, includes peer-to-peer networking
capabilities similar to those offered by the Company's LANtastic products. The
impact of Windows 95/98 was compounded by the dominance and visibility of
Microsoft in the PC marketplace and the rapid upgrade by small businesses to
Pentium PCs.
As a result of those competitive pressures, sales of the Company's
LANtastic products declined to $50.1 million in fiscal 1996, a 40% decrease from
fiscal 1995, and to $20.2 million in fiscal 1997, constituting a 60% decrease
from fiscal 1996.
The Company responded to this change in business conditions in a number
of ways. First, during fiscal year 1996, the Company started its transformation
to a communications and computer telephony software company with a broader
technology portfolio and a broader array of products and channels of
distribution. This was achieved primarily with the successful acquisition and
integration of three software companies during fiscal year 1996. These companies
were Synergy Solutions, Inc. ("Synergy"), a company engaged in the design,
development, sale and support of modem and telephone line sharing software;
Triton Technologies, Inc. ("Triton"), which developed, sold and supported PC
remote control access and control software; and Stylus Innovation, Inc.
("Stylus"), a company that designed, developed, sold and supported computer
telephony applications and tools software.
3
Second, the Company took a series of restructuring actions in fiscal
1997 and 1998, in order to reduce the Company's cost structure to a level
commensurate with the level and mix of its operating revenues. The restructuring
actions taken during the 1997 and 1998 fiscal years included a reduction in work
force affecting approximately 180 employees involved with LANtastic products at
the Company's Tucson, Arizona facilities, the sale of the Company's Tucson land
and building in connection with the Company's relocation to a smaller facility,
and the closure of most of the Company's international sales and support
offices, which were involved almost entirely with sales of LANtastic products.
Partially as a result of these restructuring actions, the Company's sales and
marketing, product development and general and administrative expenses declined
from $39.2 million in fiscal 1996, to $38.9 million in fiscal 1997 and $20.2
million in fiscal 1998.
Third, in fiscal 1998, the Company took steps to reorient its business
development strategy towards computer telephony products. In 1998, the Company
released TeleVantage, receiving awards for the product at CT Expo in March 1998
and receiving favorable trade reviews including CTI Magazine Editors' Choice in
September 1998 and the 1998 Editors' Choice Award from Telemarketing & Call
Center Solutions Magazine. TeleVantage is an intelligent PC-based phone system
designed to provide PBX and other integrated features for small to medium sized
businesses and branch offices. TeleVantage is an open, standards-based system
that is designed to run on any PC, and uses standard voice processing boards
from Dialogic. In May 1998, the Company combined its communications software and
remote computing groups, resulting in the closure of the Company's Iselin, New
Jersey offices, and the transfer of certain functions to the Company's Tucson,
Arizona facilities. In September 1998, the Company moved its principal executive
offices to its computer telephony facilities in Cambridge, Massachusetts. In
response to favorable industry reviews of TeleVantage, the Company decided to
take a number of actions to increase its capacity to market and sell its
computer telephony products and, in particular, its TeleVantage product line.
These actions included the hiring of approximately 30 employees dedicated to the
development and marketing of TeleVantage and the commitment of funds for the
advertising and promotion of TeleVantage products.
Products and Services
The Company currently is organized into two groups, each centered around
the specific products and services being developed, marketed and sold. The two
groups are: the Computer Telephony Group, which is located in Cambridge,
Massachusetts and is responsible for the Company's computer telephony products,
including TeleVantage and Visual Voice; and the Communication Software Group,
located in Tucson, Arizona (with a satellite development center in Boynton
Beach, Florida), which is responsible for the Company's networking and
communications software products, including the LANtastic product line, as well
as its remote computing products, including CoSession.
The Company currently holds registered trademarks on its LANtastic and
Visual Voice products. In addition, the Company currently has trademark
applications pending approval on its i.Share, ModemShare, XtraMail, CoSession
Remote, TeleVantage and InfoFast products among others. Trademarks for LANtastic
and Visual Voice are registered in the U.S. Trademark and Patent Office.
Following is a description of the products and services offered by each group.
Computer Telephony Group. The Computer Telephony ("CT") Group focuses on
two objectives: first, to deliver CT software applications to small businesses
and corporate branch offices or departments; and second, to increase its
leadership in the CT software development toolkit market.
TeleVantage is a complete PC-based telephone system that is fully
integrated with a LAN. The system provides PBX-like call control functionality
including voicemail, auto attendant, call forwarding, phone directory and a
number of other telephony technologies bundled into a single integrated
solution. TeleVantage is designed to allow organizations to improve customer
service, increase call productivity and significantly decrease the cost of
maintaining their telephone systems.
Artisoft's Visual Voice is one of the industry's leading CT development
toolkits. Product attributes include affordability, ease of use and
compatibility with Microsoft standards. Visual Voice is a 32-bit ActiveX control
that converts any ActiveX compatible software development environment, such as
Microsoft Visual Basic, Microsoft Visual C++, Borland Delphi, and Microsoft
Visual FoxPro, into a full-featured telephony application development toolkit.
Visual Voice applications include voice mail, audiotext, outbound calling,
interactive voice response (IVR), fax-on-demand, and international call-back.
4
In June 1998, Artisoft released Visual Voice Pro 4.1 This latest version
of Visual Voice provides tightly integrated support for Microsoft Visual C++ and
Borland Delphi. It also supports enterprise connectivity and allows for expanded
flexibility and scalability in developing telephony applications.
Artisoft's Visual Voice Enterprise, an extension to its Visual Voice
telephony toolkit, allows software developers to create distributed telephony
applications that span multiple computers, running over the Internet or a LAN.
Visual Voice Enterprise offers application scalability, remote administration
and the ability to access computer telephony functionality from a Web browser.
Artisoft also offers InfoFast 2.0 for Windows NT and Windows 95.
InfoFast is a fax-on demand/audio text software solution that provides 24-hour
automatic access to fax documents, Web documents and voice recordings via fax or
phone. InfoFast 2.0 is compatible with both Windows 95 and Windows NT.
See "Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations" including the section entitled "Risk
Factors" for further discussion of new product introductions.
Communications Software Group. The Communication Software Group offers a
wide range of software products for the communication and networking needs of
small businesses and workgroups. First among these is LANtastic, a NOS software
designed to be powerful yet easy-to-use and able to support a wide variety of PC
operating systems. All current LANtastic software products have been designed to
be compatible with each other, and with most PC industry standard operating
systems, hardware platforms, applications software and NOS. Other Communications
Software Group products include ModemShare 32, i.Share 3.0, and CoSession Remote
32.
In June 1998, Artisoft released LANtastic 8.0. LANtastic 8.0 offers
users the same functionality as LANtastic 7.0 but is now compatible with Windows
NT 4.0 and Windows 98. LANtastic 8.0 enables PCs on Windows NT 4.0, Windows
95/98, Windows 3.1 and DOS to share files, corporate resources such as e-mail
and allows network administrators to manage and control multiple operating
systems, protocols, applications and desktops.
Artisoft's LANtastic for Windows NT enables users to integrate Windows
NT 4.0 into a new or existing LANtastic network. It allows users to share files,
printers, applications and CD-ROMs among Windows NT 4.0, Windows 95, Windows
3.x, and DOS PCs on a single network. LANtastic for Windows NT allows for
enhanced network administration and security while offering advanced
administrative features such as setting up user access, pop-up messaging and
chat.
Artisoft's ModemShare 32 enables all networked PCs (Windows 98 through
DOS) to share a single phone line and modem. ModemShare 32 is compatible with
Windows NT, Windows 95 and supports both Class 1 and Class 2 modems.
Artisoft's i.Share 3.0 enables up to 32 networked PC users to browse
different Web sites at the same time via one connection. This new version of
i.Share supports Windows NT 4.0, Windows 98, the latest 32-bit browsers and
Internet e-mail software. i.Share 3.0 also offers internet e-mail access and
user access control (i.Watch).
CoSession Remote 32 is a remote control software application that
enables users running a PC to connect and control remote PCs. CoSession Remote
32 supports connections over analog modems, IPX/SPX, NetBios, NetBEUI and
TCP/IP. CoSession Remote 32 uses shell extensions to enable ease of use in
setting up and accessing remote PC's. Once connected, the user has the ability
to perform remote control, file transfer with differential update,
synchronization and cloning capabilities, keyboard chat with remote users, and
simultaneous voice conversation using standard modems and network/Internet
connections.
Artisoft also offers ConfigSafe, a software product with one-step system
restoration and advanced tracking features for easy recovery from PC crashes.
See "Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations" including the section entitled "Risk
Factors" for further discussion of new product introductions.
5
Financial Information about Industry Segments
All of the Company's products are considered part of a single industry
segment. Information regarding domestic and international net sales and
international assets are contained in Note 15, "Domestic and International
Operations," in "Notes to Consolidated Financial Statements" included in "Item
8. Financial Statements and Supplementary Data."
Raw Materials, Manufacturing and Suppliers
The principal materials and components used in the Company's software
products include diskettes, user manuals and product display boxes and are
purchased directly from third-party vendors. The Company currently utilizes both
internal and third-party contracted resources for the assembly, warehousing and
fulfillment of its software products. Outside vendors perform in accordance with
Company specifications and material quality is ensured prior to the assembly of
the Company's products. Capacity shortages for components, assembly, warehousing
and fulfillment are not anticipated due to multiple third party resources
available for contract; however, if such shortages did occur, the Company's
operating results could be materially impacted. The Company believes there are
adequate supplies of and sources for the raw materials used in its software
products and that multiple sources are available for CD and diskette
duplication, manual printing and final packaging.
The Company primarily utilizes the services of third party manufacturers
for production of its hardware products. The Company does not purchase
integrated circuits, circuit boards and components for its printed circuit
boards, but rather, purchases finished boards and other hardware products from
third party manufacturers. The manufacturers deliver the products to the
Company's Tucson facilities, where the Company tests, packages and ships
finished products to customers. Most components that are used in the Company's
hardware products are readily available from a large number of both domestic and
foreign equipment vendors. In addition, the Company believes there are adequate
supplies of and sources for raw materials used in its Communications Software
Group hardware products. However, 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.
The Company's TeleVantage product is designed to be operated on PCs of
multiple manufacturers in conjunction with Dialogic voice processing boards. The
Company purchases hardware components from certain telephony hardware vendors,
principally Dialogic Corporation, for sale with its computer telephony software
products. The functionality of the Company's telephony software products is
dependent on the continued availability of hardware assemblies from Dialogic
Corporation. Future operating results could be adversely affected if the Company
is unable to procure such assemblies for its computer telephony products needed
to meet anticipated customer demands.
Marketing, Sales and Distribution
General. The Company's dominant marketing strategy is to create reseller
and end user demand for the Company's products and to use broad line
distributors and volume purchasers to fulfill the reseller and end user demand.
The Company's authorized resellers and distributors are selected for their sales
ability, technical expertise, reputation and financial resources. The Company
also sells direct to original equipment manufacturers, governmental units and
end users. The Company's selling efforts have been assisted by positive product
reviews, awards and recognition earned from personal computer and computer
telephony publications.
The Company's marketing programs have three objectives: first, to create
brand name recognition of the Company and its products; second, to generate
sales leads for its resellers and distributors; and third, to support the sales
efforts of its resellers and distributors through sales tools and training.
Marketing activities that address the first two areas include frequent
participation in industry trade shows and seminars, direct mail, advertising in
major trade publications, executive participation in press briefings and
industry seminars, sponsorship of seminars by the Company and on-going
communication with the Company's end users. To train and support resellers and
distributors, the Company provides mailings of product and technical updates,
seminar materials, video training and corporate presentations. The Company's
Communications Software Group offers Advantage and Premier reseller programs for
U.S. resellers and distributors which provide increased training, services and
support. The Company's Computer Telephony Products Group offers a TeleVantage
Partner Program which likewise provides enhanced training, services and support
to its Computer Telephony resellers and distributors.
6
The Company is exposed to the risk of product returns and rotations from
its distributors and volume purchasers, which are recorded by the Company as a
reduction to sales. Although the Company attempts to monitor and manage the
volume of its sales to distributors and volume purchasers, overstocking by its
distributors and volume purchasers or changes in inventory level policies or
practices by distributors and volume purchasers may require the Company to
accept returns above historical levels. In addition, the risk of product returns
may increase if the demand for new products introduced by the Company is lower
than the Company anticipates at the time of introduction. Although the Company
believes that it provides an adequate allowance for sales returns, there can be
no assurance that actual sales returns will not exceed the Company's allowance.
Any product returns in excess of recorded allowances could result in a material
adverse effect on net sales and operating results. As the Company introduces
more products, timing of sales to end users and returns to the Company of unsold
products by distributors and volume purchasers become more difficult to predict,
and could result in material fluctuations in quarterly operating results.
The Company is also exposed to its distributors for price protection for
list price reductions by the Company on its products held in such distributors'
inventories. The Company provides its major distributors with price protection
in the event that the Company reduces the list price of its products. Large
distributors are usually offered credit for the impact of a list price reduction
on the expected revenue from the Company's products in the distributors'
inventories at the time of the price reduction. Although the Company believes
that it has provided an adequate allowance for price protection, there can be no
assurance that the impact of actual list price reductions by the Company will
not exceed the Company's allowance. Any price protection in excess of recorded
allowances could result in a material adverse effect on net sales and operating
results.
Substantially all of the Company's revenue in each fiscal quarter
results from orders booked in that quarter. A significant percentage of the
Company's bookings and sales to major customers on a quarterly basis
historically has occurred during the last month of the quarter and are usually
concentrated in the latter half of that month. Orders placed by major customers
are typically based upon the customers' forecasted sales level for Company
products and inventory levels of Company products desired to be maintained by
the major customers at the time of the orders. Major distribution customers may
receive negotiated cash rebates, market development funds and extended credit
terms from the Company for purchasing Company products, in accordance with
industry practice. Changes in purchasing patterns by one or more of the
Company's major customers related to customer forecasts of future sales of
Company products, customer policies pertaining to desired inventory levels of
Company products, negotiations of rebate and market development funds or in the
ability of the Company to anticipate the mix of customer orders or to ship large
quantities of products near the end of a fiscal quarter could result in material
fluctuations in quarterly operating results. The Company believes that there is
a trend among major distribution customers and volume purchasers to reduce their
inventory levels of 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.
Sales channels are supported directly through a variety of programs
designed to create demand for the products. The Company seeks to educate
individuals and key decision makers in large corporations, independent software
vendors and original equipment manufacturers about the uses for and benefits of
its products. Programs include the following: (i) targeted direct mail
campaigns; (ii) telemarketing and on-site sales visits; (iii) targeted worldwide
advertising in industry magazines, mail order catalogs and the Internet; (iv)
public relations campaigns; and (v) custom-developed joint marketing programs
with OEM customers. The sales force specializes in educating corporate end
users, original equipment manufacturers and independent software vendors about
the Company's products. The sales organization pursues prospects in their
geographic areas, and the main focus is on OEM customers. This channel will
continue to be the main focus of the business. In addition, direct sales to
medium and large-sized corporations have historically made revenue contributions
and continue to be a source of high profit revenue for the product group.
Although not a major focus for the product group in the past, a highly focused
end-user sales strategy, including electronic commerce and upgrade sales to
existing users of OEM versions, is planned.
The Company supports its products through fee and non-fee-based
telephonic technical services, 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.
7
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, $9.3 million and $7.1 million in fiscal 1998, 1997 and 1996,
respectively. The Company has not engaged in customer-sponsored research
activities.
Computer Telephony and Communications Software Groups. The Company
utilizes a sales, marketing and distribution strategy with respect to its
Computer Telephony and Communications Software Groups as described below:
The Company employs a team of telesales professionals to sell Visual
Voice directly to end users. Leads are generated through a variety of
pull-through marketing activities, such as advertising, press articles, direct
mail and trade shows. To achieve additional market coverage, particularly in
areas outside of North America, Visual Voice is sold through a number of
independent distributors that specialize in computer telephony.
The Company employs regional sales professionals to sell TeleVantage to
qualified resellers. The resellers attend training provided by the Company prior
to being certified as TeleVantage resellers. The Company also partners with
several computer telephony distributors to generate product awareness within the
VAR and end user community.
The Company also currently uses multiple distribution channels to
deliver its communications and networking products worldwide, including software
distributors and dealers, value added resellers, systems integrators, original
equipment manufacturers, direct telemarketing, and direct mail. The primary
business model for the remote control products, however, includes the licensing
of CoSession Remote and ConfigSafe technology through original equipment
manufacturer (OEM) agreements and volume license agreements that are sold direct
to corporations.
The Company works with its distributors and mail order partners to
ensure an adequate supply of TeleVantage, LANtastic, ModemShare, i.Share,
CoSession Remote and other communication software products is available to its
end users. Coordination for all sales outside of the U.S. is handled from either
the Company's offices in Cambridge or Tucson. The Company maintains distribution
relationships in Europe, Latin America, Canada, Australia/New Zealand, Japan and
Southeast Asia. The Company currently has an agency relationship with Upsizing
Corporation in Tokyo, Japan to facilitate the sales of its Communications
Software Group products in Japan, China and South Korea. In addition, the
Company maintains a presence in Asia through a partnership with Core, Ltd., an
engineering and development organization based in Japan. Core has translated
CoSession Remote into Japanese and is currently selling the product at retail
along with i.Share. They are also selling localized versions of CoSession
Remote, ConfigSafe and i.Share in China and South Korea. Core maintains a
relationship with International Business Machines Japan, the product group's
largest customer in Asia. Core is also well positioned to bring the product into
other major OEM accounts and translated versions of CoSession and ConfigSafe
will continue to be sold in Japan, China and Korea.
Seasonality
Typically, the personal computer industry experiences some seasonal
variations in demand, with weaker sales in the summer months because of
customers' vacations and planned shutdowns. This seasonality is especially noted
in Europe.
Competition
General. The PC industry is highly competitive and is characterized by
rapidly changing technology and evolving industry standards. Competition is
usually based upon brand recognition, scalability of products offered by a
vendor, current and future perceived needs of customers, product features, ease
of installation and maintenance, reliability of the software, price and product
availability through consultant, reseller and retail channels.
Computer Telephony. The Company's TeleVantage PC-based phone system
principally competes with proprietary PBXs and Key System Units offered by
companies such as Lucent and Nortel. While the Company believes that its
TeleVantage software offers superior functionality and value than these
products, there can be no assurances that these providers will not choose to
develop their own PC-based phone systems. In addition, TeleVantage competes with
other PC-based phone systems provided by Altigen, NetPhone, and Picazzo. While
the company believes that its TeleVantage software offers greater functionality
and ease of use than these products, certain PC manufacturers, software
companies or telephony hardware providers could choose to partner with any of
these competitors, which would adversely affect the Company's sales of
TeleVantage.
In the CT tools arena, Artisoft competes with two classes of products:
proprietary telephony development environments such as those offered by Parity,
Brooktrout, and Apex; and other open toolkits such as those offered by Parity
and Pronexus. The Company believes Visual Voice has a cost advantage versus
proprietary languages and has superior features than other open toolkits.
8
Competition for InfoFast tends to fall into two categories: modem-based
fax-on-demand applications, such as the Fax-It-Back product marketed by
Castelle; high-end fax solutions, such as the FactsLine product line marketed by
Castelle and the FaxBack product line marketed by FaxBack. Although InfoFast is
more expensive than the modem-based products, the Company believes it offers
better performance, higher reliability, and a greater feature set. Compared to
high-end systems, InfoFast offers fewer features, but at the same time provides
price advantages and ease of use.
Communications Software Group. The Company's NOS products compete with
products available from numerous companies including Microsoft Corporation
("Microsoft"), Novell and International Business Machines Corporation ("IBM"),
which have substantially greater research and development, marketing and
financial resources, manufacturing capability, customer support organizations
and brand recognition than those of the Company.
In particular, the Company's NOS products compete against Microsoft's
Windows desktop operating systems, including Windows 95/98, which includes
peer-to-peer networking capabilities as well as a group scheduler and electronic
mail features. The Company believes that the viability of Microsoft's products
has and will continue to severely impact the Company's Communications Software
Group net sales and income from continuing operations but this impact has proven
difficult to estimate in advance. In June 1998, Microsoft introduced a new
version of its Windows operating system, referred to as "Windows 98". This
introduction followed the August 1995 release of Microsoft's Windows 95
operating system. These products include 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 95/98 has had a detrimental impact on sales of the Company's NOS
products since its introduction. Another Microsoft NOS product that the Company
believes has had, and may in the future have, a detrimental impact on sales of
LANtastic products is Microsoft Windows NT network server. The Microsoft Windows
NT 4.0 network server product is faster than previous versions and easier to
use, with a Windows 98-like interface. It also ships with all of the tools
necessary to create and manage Internet or Intranet services and 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.
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 very likely that the Company's NOS business
will continue to decline in fiscal year 1999. Accordingly, the future success of
the Company will depend on its ability to expand its other communications and
computer telephony products and activities much faster than the rate at which
its opportunities and prospects in the NOS arena decline. In particular, the
Company's ability to grow its computer telephony product line sales will be a
substantial determinate of future revenue levels.
The Company's remote control software, CoSession Remote, competes
directly with product offerings from Symantec, Microcom, Compaq and Microsoft.
Microsoft distributes its Net Meeting remote communication software as a free
component in certain of its operating systems.
Certain of the Company's remote control software competitors have
recently announced strategic relationships with certain of the Company's
principal OEM partners. There can be no assurances that the Company will be
capable of maintaining its OEM relationships in light of the significantly
greater resources of the Company's remote communications software competitors.
Accordingly, there can be no assurance that the Company's current PC remote
communications software will continue to generate revenues and earnings at
current levels or that the Company will be able to effectively develop and
launch new competitive products in the future.
International Business
The Company markets and sells its products in international as well as
domestic markets. In fiscal 1998, 1997 and 1996, international sales accounted
for 25%, 27% and 30%, respectively, of the Company's net sales. Assets deployed
to support the Company's international business represented approximately 1% of
total assets at the end of fiscal 1998 and 3% of total assets at the end of
fiscal 1997 and 1996. The decline in 1998 and 1997 in international sales and
assets deployed to support the Company's international business is attributable
to the Company's restructuring actions and the decline in sales of LANtastic
products during such periods.
9
The Company's international sales historically have consisted almost
entirely of Communications Software Group products, principally the Company's
LANtastic products. In recent years, the Company has begun to market its
CoSession and i.Share products in Asian markets.
In connection with restructuring actions taken by the Company in fiscal
1998 and 1997, the Company has closed all of its foreign sales offices. As a
result, the Company's international sales, marketing and support services are
now conducted primarily through dealers, distributors and OEM's located in the
foreign markets where the Company's products are sold.
In order to sell its products in foreign markets, the Company often must
convert and adapt its products to foreign languages and products. The Company
relies on local software developers and distributors in the foreign countries to
perform these localization services.
Sales to non-U.S. customers may be affected by fluctuations in exchange
rates and government regulations. To date, the Company's operations have not
been affected materially by currency fluctuations.
Significant Customers
The Company sells its products through a variety of channels of
distribution, including distributors, volume purchasers, resellers and original
equipment manufacturers. In fiscal 1998 and 1996 one customer accounted for 10%
or more of the Company's annual net sales. No customers accounted for more than
10% of the Company's net sales in fiscal 1997. In fiscal 1998, IBM accounted for
10% of the Company's net sales, and in fiscal 1996 Ingram Micro, Inc., accounted
for 12% of the Company's net sales. At June 30, 1998, Ingram Micro, Inc. and IBM
accounted for approximately 16% and 13%, respectively, of the Company's
outstanding trade accounts receivable. At June 30, 1997, Ingram Micro, Inc.,
accounted for 16% of the Company's outstanding trade accounts receivable. The
loss of any of the major distributors of the Company's products or their failure
to pay the Company for products purchased from the Company could have a material
adverse effect on the Company's operating results. The Company's standard credit
terms are net 30 days, although longer terms are provided to various major
customers on a negotiated basis from time to time.
Backlog
Substantially all of the Company's revenue in each quarter results from
orders booked in that quarter. Accordingly, the Company does not believe that
its backlog at any particular point is indicative of future sales. The Company's
backlog of orders at June 30, 1998 was approximately $59,000, compared with
approximately $181,000 at June 30, 1997.
Proprietary Rights and Licenses
The Company currently relies on a combination of trade secret,
copyright, trademark and patent laws, nondisclosure and other contractual
agreements, and other technical measures to establish and protect its
proprietary rights in its products, and to protect its technologies from
appropriation by others. Despite these precautions, unauthorized parties may
attempt to copy aspects of the Company's products or to obtain and use
information the Company regards as proprietary. In addition, it may be possible
for others to develop products using technologies similar to the Company's but
which do not infringe upon the Company's proprietary rights.
While the Company's success will depend to a certain degree on its
ability to protect its technologies, the Company believes that, because of the
rapid pace of technological change in the industries in which the Company
competes, the legal protections for its products are less significant factors in
the Company's success than the knowledge, ability and experience of the
Company's employees, the nature and frequency of product enhancements and the
timeliness and quality of support services provided by the Company.
The Company believes that its products, technologies 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. 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, non-infringing 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.
10
In the course of its product development efforts, the Company
periodically identifies certain technologies owned by others that either would
be useful to incorporate into its products or are necessary in order to remain
competitive in light of industry trends. In these cases the Company has in the
past sought to obtain licenses of such third-party technologies. The Company
expects that it will continue to find it desirable or necessary to obtain
additional technology licenses from others, but there can be no assurance that
any particular license will be available at all, or on acceptable terms, at any
future time.
The Company pays royalties to imagine LAN, Inso Corporation, Cheyenne,
AT&T Corporation, Digital Equipment Corporation, Learnout & Hauspie Speech
Products, International Business Machines and Atrium Software for its use of
certain licensed technologies. The licensing by these entities of their products
or brand name to competitors of the Company, or the withdrawal or termination of
licensing rights to the Company's technologies, could materially adversely
affect the Company's sale of products incorporating such licensed technologies
to original equipment manufacturers and the Company's results of operations as a
whole.
Environmental Laws
Compliance with federal, state and local laws and regulations for the
protection of the environment has not had a material impact on the Company's
capital expenditures, 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, 1998, the Company had 148 full-time employees, including
approximately 62 in sales, marketing and customer support, 52 in engineering and
product development, 15 in operations and 19 in administration. The future
success of the Company will depend in large part on its continued ability to
attract and retain highly skilled and qualified personnel. Competition for such
personnel is intense. The Company has severance and change in control agreements
with most of its executive officers and noncompetition and nondisclosure
agreements with substantially all of its professional employees and executive
officers. None of the Company's employees are represented by a labor union. The
Company has experienced no work stoppages and believes that its relations with
its employees are good.
Uncertainties in the Company's Business
In addition to the factors described above that could adversely affect
the Company's business and results of operations, and, therefore, the market
valuation of its Common Stock, the Company's future results of operations may be
impacted by various trends and uncertainties that are beyond the Company's
control, including adverse changes in general economic conditions, government
regulations and foreign currency fluctuations.
In addition various characteristics of the PC software industry may
adversely affect the Company. As products become more complex, the Company could
experience delays in product development and software "debugging" that are
common in the computer industry. Significant delays in product development and
release would adversely affect the Company's results of operations. There can be
no assurance that the Company will respond effectively to technological changes
or new product announcements by other companies or that the Company's product
development efforts will be successful. Furthermore, introduction of new
products by the Company involves substantial marketing risks because of the
possibility of product "bugs" or performance problems, in which event the
Company could experience significant product returns, warranty expenses and
lower sales
The OEM marketplace is highly competitive, with a large number of
vendors vying for a limited amount of "preload" dollars. Although the Company
maintains good relationships with OEM customers on many levels, cost pressures
and competitive products are persistent threats to the business. Certain of the
Company's OEM relationships require the scheduled delivery of product revisions
and new products. The failure to adhere to agreed-upon product delivery
schedules could result in the termination of key relationships with major PC
manufacturers, which could have a significant adverse impact on revenues and
earnings.
11
The software industry is highly competitive. In addition, the Company
must develop and maintain channels for the distribution of its products other
than through OEM's. These channels include distributors and value added
resellers. These distribution channels are highly competitive, with a large
number of vendors seeking to be promoted by and sold through these channels. In
many cases it is important that the Company successfully train persons involved
in distribution channels with respect to the Company's products and services.
There are a number of companies that currently compete directly with the
Company's PC remote control, modem and telephone line sharing and computer
telephony 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
the Company's current products will continue to generate revenues and earnings
at current levels, or that the Company will be able to effectively develop and
launch new competitive products in the future.
The Company's communications software products, including its LANtastic
product line compete with Microsoft and other companies which have greater
resources than the Company. Competition with Microsoft has materially adversely
affected sales of the Company's LANtastic product line. The Company's operating
results may be adversely affected in the future if Microsoft or other companies
include in their operating systems or other products features which compete
directly with other of the Company's products.
As a result, past performance trends by the Company should not be used
by investors in predicting or anticipating future results. The market price of
the Company's Common stock has been, and may continue to be, extremely volatile.
Factors identified herein, along with other factors that may arise in the
future, quarterly fluctuations in the Company's operating results and general
conditions or perceptions of securities analysts relating to the networking and
data communications marketplace or to the Company specifically may have a
significant impact on the market price of the Company's Common stock and could
cause substantial market price fluctuations over short periods. See also "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations" including the discussion of "Risk Factors."
Rights Plan
During fiscal 1995, the Board of Directors of the Company adopted a
shareholder rights plan (the "Rights Plan") which is intended to protect and
maximize the value of shareholders' interest in the Company and to assure that
all Company shareholders will receive fair and equal treatment in the event of
any unsolicited attempt to acquire the Company. The Rights Plan will not and is
not intended to prevent a takeover of the Company on terms that are fair to, and
in the best interests of, all shareholders. See "Note 10 of Notes to
Consolidated Financial Statements" under "Item 8. Financial Statements and
Supplementary Data."
Stock Repurchase Program
In February 1997, the Company extended a stock repurchase program (the
"Program") under which the Company would be authorized to repurchase up to
1,000,000 shares of its outstanding Common Stock for general corporate purposes.
Pursuant to the Program, management of the Company was authorized to pursue the
Program in open market transactions from time-to-time, depending upon market
conditions and other factors. The Company repurchased shares in open market
transactions pursuant to the Program totaling less than 100,000. All such
repurchases occurred in fiscal year 1997 and the Program expired in February
1998.
Item 2. Properties
- ------------------
The Company leases property as detailed in the following table.
Lease
Approximate Owned or Expiration Intended
Location Size Leased Date Use
-------- ---- ------ ---- ---
Tucson, Arizona 2,446 sq. ft Leased April 2001 Office
Tucson, Arizona 14,086 sq. ft Leased April 2001 Office
Tucson, Arizona 28,800 sq. ft. Leased February 2001 Operations
Cambridge, Massachusetts 18,241 sq. ft. Leased August 2000 Office
Cambridge, Massachusetts 8,313 sq. ft. Leased July 2002 Office
Boynton Beach, Florida 2,342 sq. ft. Leased August 2000 Office
Iselin, New Jersey 5,352 sq. ft Leased March 2000 Office
Paris, France 2,153 sq. ft. Leased September 1998 Office
12
Aggregate monthly rental payments for the Company's facilities are
approximately $85,000. The Company's current facilities are generally adequate
for anticipated needs over the next 12 to 24 months. The Company does not own
any real property.
Item 3. Legal Proceedings
- -------------------------
The Company is a party to a number of legal proceedings arising in the
ordinary course of its business. The Company believes that the ultimate
resolution of these claims will not have a material adverse effect on its
financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
Not applicable.
Executive Officers of the Registrant
- ------------------------------------
The following table sets forth information concerning the executive
officers of the Company as of June 30, 1998 except as noted:
Name Age Position
- ----------------------------------------------------------------------------------------------------
T. Paul Thomas 38 President and Chief Operating Officer
Steven G. Manson 39 Vice President and General Manager-Computer Telephony
Products Group
Julie M. Ronstadt 36 Vice President, Worldwide Operations and Administration
Kirk D. Mayes 30 Controller, Chief Accounting Officer, and Secretary
Rick McGee 40 Vice President and General Manager-Communications Software
Group
Mr. Thomas joined Artisoft in June 1997, as President of the
Communications Software Group and was later named President and Chief Operating
Officer of the Company. Mr. Thomas joined Artisoft from Sunquest Information
Systems where he was Senior Vice President of Marketing. Earlier in his career,
Mr. Thomas held the position of Vice President of Marketing for Artisoft, as
well as other senior level positions with Apple Computer, Compaq Computer and
MicroAge, Inc.
Mr. Manson joined Artisoft in October 1996, as Vice President of Product
Management-Computer Telephony Division. In October 1997, Mr. Manson was named
Vice President and General Manager of the Computer Telephony Products Group. Mr.
Manson joined Artisoft from Gensym Corporation where he was Director of
Corporate Marketing. Earlier in his career, Mr. Manson held other senior level
marketing positions at Cadre Technologies, Inc., and Prime Computer, Inc.
Ms. Ronstadt joined Artisoft in July 1994, as Senior Planner at the
Company's Tucson, Arizona headquarters. In December 1994, Ms. Ronstadt was named
Director of Materials and in October 1996 Director of Operations. In April 1998,
Ms. Ronstadt was named Vice President of Worldwide Operations and
Administration. Ms. Ronstadt joined Artisoft after ten years with Allied Signal
Aerospace where she served in various senior level positions.
Mr. Mayes joined Artisoft in November 1994. In April 1996, Mr. Mayes was
named Assistant Corporate Controller and in June 1997 Corporate Controller. In
August 1997, Mr. Mayes was named Chief Accounting Officer and Secretary. Mr.
Mayes joined Artisoft from Arthur Andersen LLP where he had worked from 1991 to
1994.
13
Mr. McGee joined Artisoft in November 1995 as Director of North American
Sales which was the result of Artisoft's acquisition of Synergy Solutions. In
June 1996, he became Vice President of Sales and Marketing. Mr. McGee founded
Synergy Solutions, the developer of ModemAssist PLUS and served as its president
until Synergy Solution's acquisition by Artisoft in November 1995. Prior to
founding Synergy Solutions, Mr. McGee successfully built channel sales and
marketing organizations for Fresh Technology Company, Clyde Digital Systems, and
WICAT systems International. Mr. McGee terminated his employment with the
Company effective July 1, 1998.
On September 8, 1998, Sheldon M. Schenkler joined Artisoft as Vice
President and Chief Financial Officer. Before joining Artisoft, Mr. Schenkler
served as Vice President and Chief Financial Officer at Cambex Corporation from
1988 to 1998. Prior to joining Cambex, Mr. Schenkler held senior financial
management positions at Instron Corporation and Evans Products Company.
On August 24, 1998, Scott Moule was named the Vice President and General
Manager of the Company's Communications Software Group. Mr. Moule had previously
served as the Director of Product Development for the Company's Remote Control
Products Group. Mr. Moule joined Artisoft in November 1995. Before joining
Artisoft, Mr. Moule provided consulting and engineering support to Triton
Technologies from 1992-1995. Mr. Moule has also held senior level development
positions at EDS and Southern Bell.
14
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. 1998
Annual Report to Shareholders, and are incorporated herein by reference. On June
30, 1998, the Company's Common Stock was held by approximately 375 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,
- -------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
Statements of Operations Data
Net sales $ 24,793 $ 33,409 $ 60,972 $ 84,243 $107,430
Operating income (loss) (4,375) (29,124) (24,838) (9,832) 18,983
Net income (loss) (2,913) (28,425) (18,328) (5,848) 13,613
Net income (loss) per common share
Basic and Diluted $ (.20) $ (1.96) $ (1.27) $ (.41) $ .89
Weighted average common shares outstanding 14,554 14,529 14,463 14,315 15,377
As of June 30,
- -------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
Balance Sheet Data
Working capital $ 17,538 $ 17,747 $ 37,917 $ 56,324 $ 52,462
Total assets 25,508 35,371 57,712 77,807 97,464
Long-term obligations, net of
current portion 289 714 96 -- 3,950
Shareholders' equity 19,951 22,604 50,981 68,245 72,847
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
Overview
During fiscal 1998, the Company responded to changing business
conditions by implementing two strategies designed to improve the Company's
operating results. First, the Company responded to declining sales of its
networking and communications product lines by reducing the cost structure
associated with such product lines. Second, the Company acted to reorient its
product development, sales and marketing efforts towards products, particularly
computer telephony products, with a perceived potential for revenue growth.
During fiscal 1998, the Company's Communications Software Group product
lines experienced continued competitive pressures from major software
manufacturers. These market conditions had a particularly negative effect on the
sales levels of the Company's LANtastic NOS product line. Although the rate of
decline in sales of the Company's LANtastic NOS products was less than in recent
years, the Company's overall net sales in fiscal 1998 declined from fiscal year
1997. Revenues from the Company's Computer Telephony Group product lines
partially offset some of the LANtastic NOS product revenue declines.
During the second half of fiscal 1998, the Company experienced an
accelerated decline in the LANtastic NOS products revenue, particularly in
international markets. Revenues from sales of the Company's networking products
were especially weak in Asia and Latin America. This weakness was to a minor
extent offset by the introduction of the Company's TeleVantage PC-based PBX
solution in March 1998, along with revenues from the Visual Voice products.
In response to the lowered demand for its LANtastic NOS product line,
the Company implemented several actions designed to bring the Company's cost
structure in line with current and anticipated future revenue levels. The first
restructuring action was the March 1998 closure of the Company's Japanese sales
office and liquidation of the Company's Japanese subsidiary. Second, the Company
closed its United Kingdom sales office and consolidated its Remote Control
Product Group into the Communications Software Group. This action also involved
the closure of the Company's Iselin, New Jersey office. Third, in June 1998, the
Company reduced its Communications Software Group headcount. The Company
recorded a restructuring charge in its fourth fiscal quarter due to these office
closure costs and severance costs on the attendant headcount reductions at these
offices. These actions were taken in order to move the Company toward improved
operating results.
In March 1998, Artisoft released TeleVantage 1.0 which is an intelligent
PC-based phone system designed for small- to medium-sized businesses and branch
offices. TeleVantage was awarded Best of Show at CT Expo in March 1998 and has
received favorable trade reviews following its release, including CTI Magazine
Editors Choice in September 1998 and the 1998 Editors' Choice Award given by
Telemarketing & Call Center Solutions Magazine.
In April 1998, the Company announced its intention to focus the majority
of its resources on its computer telephony products. In September 1998, the
Company moved its principal executive offices to the facilities of its Computer
Telephony Group in Cambridge, Massachusetts. The Company has made, and plans to
continue to make, additional investments in sales, marketing and development in
order to build awareness, market and channels for its computer telephony
products.
New Products
Computer Telephony Products. As of June 30, 1998, the Company's computer
telephony products included TeleVantage 2.0, Visual Voice Pro 4.1, Visual Voice
for TAPI 2.0, Visual Voice Enterprise, and InfoFast 2.0.
In August 1997, Artisoft launched InfoFast 2.0 for Windows NT and
Windows 95. InfoFast is a fax-on demand/audio text software solution that
provides 24-hour automatic access to fax documents, Web documents and voice
recordings via fax or phone. InfoFast 2.0 is compatible with both Windows 95 and
Windows NT.
In August 1997, Artisoft released Visual Voice Pro 4.0, which allows
users to create a wide variety of 32-bit computer-based telephony solutions for
Windows NT and Windows 95 platforms, including voice mail, audio text, outbound
calling, interactive voice response, fax-on-demand, and international callback.
Visual Voice Pro adds telephony and voice capabilities to any development
environment that supports ActiveX controls, including Visual Basic, Visual C++,
Delphi and Visual Fox Pro. Visual Voice 4.0 is a set of 32-bit ActiveX controls
that turn any Windows ActiveX compatible development environment, such as
Microsoft Visual Basic, Microsoft Visual C++, Borland Delphi, and Sybase
PowerBuilder, into a full-featured telephony application development tool kit.
16
In March 1998, Artisoft released TeleVantage 1.0, which is an
intelligent PC based phone system designed for small- to medium-sized businesses
and branch offices. TeleVantage is an open, standards-based system that is
designed to run on any PC, and uses standard voice processing boards from
Dialogic. TeleVantage offers, among other features, a Windows-based graphical
interface, multi-line call control, full featured voice mail, call and message
screening, "follow me" call forwarding, personalized call handling, e-mail
integration, a voice-guided interface, call logging and reporting, least call
routing, a multi-level auto attendant and graphical system administration.
In March 1998, Artisoft released Visual Voice Enterprise, an extension
to its Visual Voice telephony toolkit. Visual Voice Enterprise allows software
developers to create distributed telephony applications that span multiple
computers, running over the Internet or a LAN. Visual Voice Enterprise offers
application scalability, remote administration and the ability to access
computer telephony functionality from a Web browser.
In June 1998, Artisoft released Visual Voice Pro 4.1 This latest version
of Visual Voice provides tightly integrated support for Microsoft Visual C++ and
Borland Delphi. It also supports enterprise connectivity and allows for expanded
flexibility and scalability in developing telephony applications.
In August 1998, Artisoft released TeleVantage 2.0, which in addition to
the features offered in TeleVantage 1.0, offers: Group call distribution,
international support, expanded scalability to 48 trunks and 144 extensions,
Centrex and PBX support, remote call screening, audio import and export, voice
mail/Email synchronization, automatic hold feature, voice title playback and
capture, automatic callback, standardized call waiting functions, selected trunk
access and auto attendant bypass among other enhanced features.
Communications Software Products. As of June 30, 1998, the Company's
communication software products included LANtastic 8.0, LANtastic for Windows
NT, i.Share 3.0, ModemShare 32, XtraMail, CoSession Remote 32 and ConfigSafe
Support Edition.
In December 1997, Artisoft released CoSession Remote 32. CoSession
Remote 32 enables users running a Windows 95 or Windows NT 4.0 PC to connect and
control remote PCs running Windows NT 4.0 or Windows 95. CoSession Remote 32
supports connections over analog modems, IPX/SPX, NetBIOS, NetBEUI and TCP/IP.
CoSession Remote 32 also supports TAPI 2.0 and connections over IRDA and
parallel ports.
CoSession Remote 32 uses shell extensions to enable ease of use in
setting up and accessing remote PCs. Once connected, the users can do one or
more of the following:
*Remote control
*File transfer with differential update, synchronization and cloning
capabilities
*Keyboard chat with remote users
*Simultaneous voice conversations using standard analog modems or
network/Internet connections (with a sound card, speakers and microphone on the
two PCs).
In January 1998, Artisoft released LANtastic for Windows NT. LANtastic
for Windows NT enables users to integrate Windows NT 4.0 into a new or existing
LANtastic network. It allows users to share files, printers, applications and
CD-ROMs among Windows NT 4.0, Windows 95, Windows 3.x, and DOS PCs on a single
network. LANtastic for Windows NT allows for enhanced network administration and
security while offering advanced administrative features such as setting up user
access, pop-up messaging and chat.
In February 1998, Artisoft released ModemShare 32. ModemShare 32 enables
all networked PCs (Windows through DOS) to share a single phone line and modem.
ModemShare 32 is compatible with Windows NT, Windows 95 and supports both Class
1 and Class 2 modems.
In May 1998, Artisoft released i.Share 3.0, which enables up to 32
networked PC users to browse different Web sites at the same time via one
connection. This new version of i.Share supports Windows NT 4.0, Windows 98, the
latest 32-bit browsers and Internet e-mail software. i.Share 3.0 also offers
internet e-mail access and user access control (i.Watch)
In June 1998, Artisoft released LANtastic 8.0. LANtastic 8.0 offers
users the same functionality as LANtastic 7.0 but is now compatible with Windows
NT 4.0 and Windows 98. LANtastic enables PCs on Windows NT 4.0, Windows 95/98,
Windows 3.1 and DOS to share files, corporate resources e-mail and allows
network administrators to manage and control multiple operating systems,
protocols, applications and desktops.
17
Net Sales
The Company's net sales decreased 26% to $24.8 million for the fiscal
year ended June 30, 1998 from $33.4 million for fiscal 1997. The overall
decrease in net sales was principally due to a continued decline in the sales of
the Company's LANtastic NOS products. Although the rate of the domestic revenue
decline in the Company's LANtastic NOS products slowed in fiscal year 1998 as
compared to fiscal year 1997, there was an accelerated rate of decline in
certain international markets, principally Latin America and Asia. Management
believes that the principal reason for the decline in LANtastic NOS product
sales was the impact of Microsoft's Windows 95/98 and Windows NT operating
systems on the small business networking market. For the fiscal years ended June
30, 1998 and 1997, net sales of LANtastic NOS products comprised approximately
40% and 60%, respectively, of consolidated net sales.
The decline in sales of LANtastic NOS products, was partially offset by
increases in sales of the Company's computer telephony and other communications
products. Included in the computer telephony category are Visual Voice 4.1,
Visual Voice for TAPI 2.0, InfoFast, and TeleVantage. For the fiscal years ended
June 30, 1998 and 1997, net sales of computer telephony products comprised
approximately 19% and 15%, respectively, of consolidated net sales.
Along with LANtastic, included in the Company's communication and
networking software product category are ModemShare 32, a modem and telephone
line sharing product, CoSession Remote 32, a remote control product, i.Share
3.0, an Internet connection sharing product, XtraMail, an Internet e-mail
product and ConfigSafe, a system reconfiguration solution. Sales of the
Company's i.Share and ModemShare 32 communications software increased in fiscal
year 1998 compared to fiscal year 1997, partially offsetting the decline in
sales of the Company's LANtastic NOS products. In particular, ModemShare 32
sales increased 67% in fiscal year 1998 from fiscal year 1997. i.Share 3.0 was
released in May 1998 and XtraMail was released in November 1996. During fiscal
1998 XtraMail did not make a material contribution to consolidated net sales and
has not met the expectations of management since its introduction. For the
fiscal years ended June 30, 1998 and 1997, net sales of the communications
software products (excluding LANtastic) comprised approximately 37% and 20%,
respectively, of consolidated net sales.
The Company's net sales decreased 45% to $33.4 million for the fiscal
year ended June 30, 1997 from $60.1 million for fiscal 1996. The overall
decrease in net sales was principally due to an approximate 60% decline in sales
of the Company's LANtastic NOS products during fiscal 1997. These sales declines
were partially offset by increased sales of the Company's communications
products (excluding LANtastic) and telephony products. The year-over-year
declines were across all worldwide direct and indirect channels of distribution.
The Company distributes its products internationally and tracks sales by
major geographic area. Non-U.S. sales represented 25%, 27% and 30% of net sales
for fiscal 1998, 1997 and 1996, respectively. International sales decreased 31%
to $6.2 million in fiscal 1998 from $8.9 million in fiscal 1997. International
sales decreased 51% to $8.9 million in fiscal 1997 from $18.3 million in fiscal
1996. Substantially all of the Company's international sales during fiscal 1998,
1997 and 1996 were comprised of LANtastic and other communications software
products. Management believes that the reasons for the declines in international
sales are the same as those for declines in overall sales. Management believes
that penetration of Microsoft Windows 95/98 and Windows NT personal computer
operating system in many of its international markets have negatively impacted
sales in these regions. The Company believes that if the adoption rate of
Windows 95/98 and Windows NT continues at its recent pace, there will be
additional significant declines in the Company's international revenues. In
addition to the factors mentioned above, sales of the Company's communication
products to Asia and Latin America declined significantly in fiscal 1998 due to
recently poor local economic conditions.
Gross Profit
The Company's gross profit was $18.3 million, $21.1 million and $41.1
million in fiscal 1998, 1997 and 1996, respectively, or 74%, 63% and 67% of net
sales, respectively. The increase in gross profit percentage for fiscal 1998 was
due to changes in product mix sold. Specifically, sales of the Company's higher
margin CoSession Remote 32, ModemShare 32 and i.Share communications software
comprised a higher percentage of overall net sales in fiscal 1998. In addition,
sales of the Company's lower margin LANtastic network starter and add-on kits
(which include hardware) declined in fiscal 1998. The increase in gross profit
percentage was offset to a minor extent by the sale of lower margin Not For
Resale kits (NFR's) associated with the Company's launch of its TeleVantage
software. The decrease in the gross profit percentage for fiscal 1997 as
compared to fiscal 1996 is principally the result of higher royalty expenses
incurred on certain of the Company's communication software products,
particularly ConfigSafe Support Edition. The decrease in gross profit dollars
was the result of progressively lower sales in each of fiscal 1998, 1997 and
1996. Gross profit may fluctuate on a quarterly basis because of product mix,
pricing actions and changes in sales and inventory allowances.
18
Sales and Marketing
Sales and marketing expenses were $10.0 million, $23.4 million and $26.2
million for fiscal 1998, 1997 and 1996, respectively, representing 41%, 70% and
43% of net sales. The decrease in sales and marketing expenses as both a
percentage of net sales and in aggregate dollars for fiscal 1998 is principally
due to a significant decrease in the Company's Communications Software Group
sales and marketing staffing levels. In addition, marketing expenses decreased
in fiscal 1998 due to a more focused vertical marketing strategy for the
Company's communication software products. These expense reductions were
partially offset by increased investments in the sales and marketing of the
Company's computer telephony products, principally TeleVantage and Visual Voice.
The increase in sales and marketing expenses as a percentage of net sales for
fiscal 1997 is principally due to the overall decrease in net sales, driven by
an approximate 60% decline in sales of the Company's LANtastic NOS products
during fiscal 1997, without offsetting decreases in sales and marketing
expenses. The decrease in aggregate dollars for sales and marketing expenses for
fiscal 1997 reflects expense reductions including a decrease in the Company's
staffing levels. This decrease was implemented to bring sales and marketing
costs more closely into alignment with the reduced sales level from fiscal 1996
to fiscal 1997.
Product Development
Product development expenses were $7.1 million, $9.3 million and $7.1
million for fiscal 1998, 1997 and 1996, respectively, representing 28%, 28% and
12% of net sales. The decrease in aggregate product development expenses for
fiscal 1998 is principally attributable to the reduction in development staffing
levels associated with the Company's LANtastic NOS product line, partially
offset by the addition of product development resources in the Company's
Computer Telephony Group. The increase in both the aggregate dollars for fiscal
1997, and the increase in product development expenses as a percentage of net
sales for fiscal 1997, are principally due to the addition of product
development resources in the Company's Computer Telephony Group. The addition of
new development personnel to the Computer Telephony Group in fiscal 1999 will be
required to meet planned future product introduction timetables. The Company
believes the introduction of new products to the market in a timely manner is
critical to its future success.
General and Administrative
General and administrative expenses were $3.1 million, $6.3 million and
$6.0 million for fiscal 1998, 1997 and 1996 respectively, representing 13%, 19%
and 10% of net sales. The decrease in both the aggregate general and
administrative costs and the decrease in general and administrative costs as a
percentage of net sales in fiscal 1998 compared to fiscal 1997 is principally
the result of cost efficiencies achieved in August 1997 associated with certain
administrative personnel reductions. These efficiencies and reductions commenced
with the Company's adoption of a restructuring plan in June 1997 which included
the sale of the Company's Tucson, Arizona headquarters in July 1997, the
subsequent relocation of the Company's Tucson operations to a smaller, less
costly facility in October 1997 and personnel reductions. The net increase in
aggregate general and administrative costs in fiscal 1997 compared to fiscal
1996 principally results from the full year's impact in fiscal 1997 of costs
associated with the acquisition of three businesses in fiscal 1996, and the
subsequent expansion of the Company's computer telephony operations in
Cambridge, Massachusetts, including a higher number of employees and larger
facility. Another factor contributing to the net increase in fiscal 1997 was an
increase in the Company's allowance for doubtful accounts receivable. These
factors were substantially offset by a significant decrease in general and
administrative expenses incurred at the Company's Tucson, Arizona headquarters.
Significant reductions were realized in payroll and related costs as a
consequence of involuntary employee terminations and other actions taken as part
of restructuring actions effected in the September 1996 and March 1997 quarters
of fiscal 1997 and other cost-cutting programs to bring operating expenses more
in line with declining sales levels. The increase in general and administrative
expenses as a percentage of net sales in fiscal 1997 is principally attributable
to the overall decrease in net sales as a result of an approximate 60% decline
in sales of the Company's LANtastic NOS products, without offsetting decreases
in general and administrative expenses.
19
Purchased In-Process Technology and Related Costs
In conjunction with the acquisition of Synergy, Triton and Stylus, the
Company recorded a charge to operations during the second and third quarters of
fiscal 1996 totaling $21.7 million. The charge related to purchased in-process
technology that had not reached technological feasibility and had indeterminable
alternative future use. In addition, as a result of the acquisitions, the
Company recorded a charge to operations for other related costs totaling $5
million. The other related costs were principally attributable to costs
associated with the integration of Triton, Synergy and Stylus technology with
the Company's technology and the elimination of duplicate distribution
arrangements in Europe. Other related costs also included increases in
allowances for returns, rotations and inventory obsolescence associated with the
transition to new technology, costs for severance and outplacement and facility
costs relating to the cancellation of leases in order to consolidate technical
support and distribution.
Write Off Of Abandoned Technology
Subsequent to the acquisition of Stylus, the Company recorded a charge
to operations during the fourth quarter of fiscal 1998 totaling $.4 million.
These charges related to the cost to purchase certain technologies in which
development efforts were abandoned in fiscal 1998 and hold no future realizable
value to the Company.
Restructuring Costs
Restructuring costs in the accompanying consolidated statement of
operations for the fiscal year ended June 30, 1998 include the costs associated
with the involuntary employee termination benefits of certain Communication
Software Group personnel, and the costs associated with the closure of the
Company's Iselin, New Jersey, United Kingdom and Japanese Communications
Software Group sales offices. Employee termination benefits include severance,
wage continuation, notice pay and other benefits. Office closure costs include
costs of premise and other lease terminations, losses on disposal of furniture
and equipment and legal and other professional fees.
The June 1998 restructuring actions were the result of a continued
decline in sales of the Company's LANtastic NOS products (especially
internationally), and the necessity to bring the cost structure of the
Communications Software Group to a level commensurate with the current and
anticipated future revenues from these products. The restructuring action
included a workforce reduction of approximately 23 employees at the Company's
Tucson, Arizona facility, a consolidation of the Company's Remote Control Group
into the Communications Software Group and associated staffing reductions of
approximately 15 employees in Iselin, New Jersey. The Company also implemented a
workforce reduction affecting 4 employees in its United Kingdom office.
Accrued restructuring costs in the accompanying June 30, 1998
consolidated balance sheet are principally comprised of accrued employee
termination benefits of approximately $.9 million and expected costs to be
incurred in connection with the closure of the Company's Communication Software
Group sales and support offices in Japan, the United Kingdom and Iselin, New
Jersey.
The restructuring costs in the accompanying consolidated statement of
operations for the fiscal year ended June 30, 1997 include the costs of
involuntary employee termination benefits, international sales and support
office closures and related costs associated with the restructuring actions
effected during that fiscal year. Employee termination benefits include
severance, wage continuation, notice pay and medical and other benefits.
International sales and support office closures and related costs include costs
of premise and other lease terminations, losses on disposal of furniture and
equipment, legal and other professional fees, and an increase in the allowance
for bad debts resulting from the decision to reduce the number of international
distributors, particularly in Europe. Other costs associated with the
restructuring actions include an impairment loss on the expected disposition of
excess computers and other equipment resulting from the significant reduction in
workforce at the Company's corporate headquarters in Tucson, Arizona and lease
termination costs for certain Tucson, Arizona facilities.
The restructuring actions were the result of substantially declining
sales, principally LANtastic NOS products, and the attendant necessity to reduce
the Company's cost structure to a level commensurate with the level and mix of
operating revenues. The restructuring actions taken during the fiscal year ended
June 30, 1997 included a reduction in workforce affecting approximately 160
employees at the Company's corporate headquarters location in Tucson, Arizona
and the closure of all international sales and support offices with the
exception of the United Kingdom and Japan.
20
Accrued restructuring costs in the accompanying June 30, 1997
consolidated balance sheet are principally comprised of accrued employee
termination benefits of approximately $4.2 million and expected costs to be
incurred in connection with the closure of the international sales and support
offices.
Other Income (Expense)
For fiscal 1998, other income (expense), net, increased to $1.7 million
from $.7 million in fiscal 1997. This increase resulted principally from the
recognition of a $1.3 million gain on the sale of the Company's Tucson, Arizona
headquarters in October 1997. This gain was partially offset by higher interest
expenses in fiscal 1998 along with the recognition of foreign exchange losses
principally related to the Company's Japanese subsidiary.
For fiscal 1997, other income (expense), net, decreased to $.7 million
from $1.5 million in fiscal 1996. This decrease resulted principally from lower
investment income resulting from the reduction in cash and investment balances
due to the acquisition of Synergy, Triton and Stylus for approximately $26.4
million in fiscal 1996. The Company also incurred increased interest expense in
fiscal year 1997 due primarily to a $1.4 million sale-leaseback of computer
equipment and related software in December 1996. Additionally, the Company
entered into a $2.2 million mortgage loan transaction in February 1997.
Income Tax Expense (Benefit)
The effective tax rates for the Company were 6%, 0%, and (21)% for
fiscal 1998, 1997 and 1996, respectively. For the fiscal year ended June 30,
1998, $.2 million of income tax expense was recorded related to certain income
taxes payable by the Company's former Dutch subsidiary and branch. For the
fiscal year ended June 30, 1997, an immaterial amount of income tax benefit was
recognized as the Company established a valuation allowance in fiscal 1997 equal
to its entire net deferred tax asset balance. In the assessment of the
recognition of a valuation allowance, the Company considered recent operating
losses experienced during the Company's transition from a company with primarily
a hardware orientation focused solely on small business networking to a software
company with diversified technology and product portfolios, the expected future
impact of the restructuring actions effected during the fiscal year, the
uncertainty in estimating the magnitude and timing of the revenue contribution
from products expected to be released over the next several quarters and the
expiration dates of state net operating loss carryforwards. The 21% effective
tax rate benefit for fiscal 1996 is the result of the non-deductibility for
federal income tax purposes of approximately $9.2 million of in-process
technology written off for financial reporting purposes in connection with the
Triton acquisition, which was effected as a purchase of stock. Other factors
causing the effective tax rates to differ from the expected tax expense
(benefit) calculated using the U.S. federal corporate income tax rate for those
years are the inclusion of state and foreign income taxes partially offset by
tax benefits from the Company's FSC and tax-exempt interest income. The income
tax receivable as of June 30, 1997 is the result of carrying back all or a
portion of the Federal net operating losses incurred in fiscal 1997 for a refund
of income taxes paid in prior years. No income tax benefit was recognized for
the fiscal year ended June 30, 1998, as the Company has fully utilized all
federal net operating loss carryback potential.
Extraordinary Loss from Early Extinguishment of Debt
In October 1997, the Company incurred a $109,000 prepayment penalty upon
the sale of its former Tucson, Arizona headquarters and the subsequent repayment
of a $2.2 million mortgage on that facility. The Company utilized proceeds
received from the sale of its Tucson, Arizona facility to prepay the mortgage
obligation. There is no income tax effect from the transaction. The per share
amount of extraordinary loss net of income tax effects is $(.01) for the fiscal
year ended June 30, 1998.
Year 2000
The Company recognizes the potential business impacts related to the
Year 2000 computer system issue and is implementing a plan to assess and improve
the Company's state of readiness with respect to such issues. The Year 2000
issue is one where computer systems may recognize the designation "00" as 1900
when it means 2000, resulting in system failure or miscalculations.
Commencing in 1997, the Company initiated a comprehensive review of its
core information technology systems, which the Company is dependent upon for the
conduct of day to day business operations, in order to determine the adequacy of
those systems in light of future business requirements. Year 2000 readiness was
one of a variety of factors to be considered in the review of core systems.
21
In recognition of the Year 2000 issue, the Company in September 1997,
began a comprehensive review of all information technology and non-information
technology systems used by the Company, computer hardware and software products
sold by the Company, and computer hardware and software products and components
and other equipment supplied to the Company by third parties. Such review
includes testing and analysis of Company products and inquiries of third parties
supplying information technology and non-information technology systems,
computer hardware and software products and components, and other equipment to
the Company.
The Company will divide its Year 2000 review into two phases. The first
will address the Company's core information technology systems and products
currently sold by the Company. The second phase will address non-core
information technology systems, non-information technology systems, and
products, components and equipment supplied to the Company from third parties.
In addition, the Company will implement required Year 2000 upgrades and
replacements during the second phase. The Company is currently in the first
phase of its review. The Company believes it will complete the second phase by
March 1999.
In the first phase of its Year 2000 review, the Company tested all
software products currently manufactured and shipped by the Company, and
determined that such products are Year 2000 compliant. Certain of the Company's
products that were discontinued prior to fiscal 1998 are not Year 2000
compliant. The Company has notified its distributors, resellers and end users of
this non-compliance to the extent possible and has authorized returns and
replacement of these products where possible. The Company believes the cost of
these returns or product replacements to be immaterial and that the Company's
reserves are likely adequate to cover such returns and replacements. The Company
also made inquiries of various third parties supplying the Company with computer
hardware and software products and components currently sold by the Company, and
received assurances that such products and components are Year 2000 compliant.
With respect to core information technology, the Company made inquires of third
parties supplying computer hardware and software operating systems to the
Company, and received assurances that, except as discussed below, such hardware
and software systems are Year 2000 compliant.
As a result of its review to date, the Company has determined that
certain of its internal financial software systems are inadequate for the
Company's future business needs, and need to be replaced, because of various
considerations, including Year 2000 non-compliance. In certain cases the timing
of replacement systems is being accelerated because of Year 2000 issues,
although the Company believes replacement would have been necessary in the near
future regardless of such issues. The Company initiated a comprehensive search
to replace these Year 2000 non-compliant systems. The Company expects to select
replacement systems by September 1998, and to fully incorporate such systems by
March 1999. The Company expects to expend approximately $300,000 to $500,000 to
replace, implement and migrate to new systems, none of which expenditures have
been made to date. These costs will be capitalized over the life of the
purchased software packages. The Company does not expect the amounts to be
expensed over the life of the software packages to have a material effect on its
financial position or results of operations. The Company does not believe that
any specific information technology projects have been deferred as a result of
Year 2000 issues.
The Company has not developed a "worst case" scenario with respect to
Year 2000 issues, but instead has focused its resources on identifying material,
remediable problems and reducing uncertainties generally, through the Year 2000
review described above.
At this time, he Company has not developed Year 2000 contingency plans,
other than the review and remedial actions described above, and does not intend
to do so unless the Company believes such plans are merited by the results of
its continuing Year 2000 review. The Company maintains and deploys contingency
plans designed to address various other potential business interruptions. These
plans may be applicable to address the interruption of support provided by third
parties resulting from their failure to be Year 2000 ready.
If the Company or the third parties with which it has relationships were
to cease or not successfully complete its or their Year 2000 remediation
efforts, the Company would encounter disruptions to its business that could have
a material adverse effect on its business, financial position and results of
operations. The Company could be materially and adversely impacted by widespread
economic or financial market disruption or by Year 2000 computer system failures
at third parties with which it has relationships.
22
Liquidity and Capital Resources
The Company had cash of $18.5 million at June 30, 1998, compared to
$14.7 million at June 30, 1997, and working capital of $17.5 million at June 30,
1998 compared to $17.7 million at June 30, 1997. The increase in cash and cash
equivalents during fiscal year 1998 of $3.8 million is principally the result of
the receipt of a $4.2 million federal income tax refund in December 1997 and the
receipt of approximately $1.5 million in proceeds from the sale of its Tucson,
Arizona headquarters and associated furniture and equipment, partially offset by
mortgage payments and severance payments as a result of the Company's
restructuring actions effected during the quarters ended June 30, 1997 and June
30, 1998. The decrease in working capital of $.2 million during fiscal year 1998
was principally the result of decreases in trade accounts receivable balances of
$2.2 million and inventories of $.9 million. The decreases in trade accounts
receivable and inventories is principally the result of the decline in net sales
experienced during the fiscal year. Accrued restructuring costs of approximately
$1.5 million at June 30, 1998 are comprised of unpaid involuntary termination
benefits and other expected but unpaid costs in connection with the
restructuring actions (see discussion above under the caption, "Restructuring
Costs"). These costs will largely, if not completely, be paid during the first
two quarters of the fiscal year ended June 30, 1999. Management anticipates that
the amount of cash yet to be paid in connection with the restructuring actions
will not exceed $1.3 million and will be paid from cash flows from operations.
Management believes that the future reduction in operating expenses resulting
from the restructuring actions will bring those expenses in line with the level
and mix of expected future operating revenues.
The Company funds its working capital requirements primarily through
cash flows from operations and existing cash balances. While the Company
anticipates that existing cash balances and cash flows from operations will be
adequate to meet the Company's current expected cash requirements for at least
the next year, additional investments by the Company to acquire new technologies
and products may necessitate that the Company seek additional debt or equity
capital.
Future Results
On April 23, 1998, the Company announced its intention to focus the
majority of its resources on its computer telephony products and consolidate its
remote computing products group into its communications software products group
located in Tucson, Arizona and Boynton Beach, Florida. The Company will make
additional significant investments in sales, marketing and development in order
to build awareness, market and channels for its computer telephony products.
The Company is currently increasing its investments and expenditures in
sales, marketing and development of computer telephony products including
TeleVantage. There can be no assurance that the Company will be able to develop,
market and sell such products successfully or at particular levels or within
particular time-frames. Accordingly, the Company could experience a slow
increase in computer telephony revenues as it attempts to build a distribution
channel and reseller programs that may build market awareness for computer
telephony products. A slow increase in the Company's computer telephony
revenues, particularly if combined with future revenue declines from the
Company's networking and communications software products, could cause the
Company to experience losses.
The Company's future results of operations involve a number of risks and
uncertainties. Among the factors that could cause future results to differ
materially from historical results are the following: business conditions and
the general economy; competitive pressures, acceptance of new products and price
pressures; availability of third-party compatible products at reasonable prices;
risk of nonpayment of accounts or notes receivable; risks associated with
foreign operations (especially those in Japan and other Asian countries); risk
of product line or inventory obsolescence due to shifts in technologies or
market demand; timing of software introductions and litigation. These and other
risk factors are outlined below.
Risk Factors
General
Competition. The software and computer telephony industries are highly
competitive and are characterized by rapidly changing technology and evolving
industry standards. The Company competes with other software companies many of
which have substantially greater financial, technological, production, sales and
marketing and other resources, as well as greater name recognition and larger
customer bases, than the Company. As a result, these competitors may be able to
respond more quickly and effectively to new or emerging technologies and changes
in customer requirements or to devote greater resources to the development,
promotion, sales and support of their products than the Company. Competition in
the software industry is likely to intensify as current competitors expand their
product lines, more features are included in operating systems (e.g., Windows NT
5.0), new applications are developed, and as new companies enter the markets or
segments in which the Company currently competes. The software industry is also
characterized by a high degree of consolidation which favors companies with
greater resources than those of the Company. Consequently, the Company expects
its products to experience increased competition which could result in
significant price reductions, loss of market share and lack of acceptance of new
products, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's new
product introductions can be subject to severe price and other competitive
pressures. While the Company endeavors to introduce its products to the
marketplace in a timely manner there can be no assurances that due to the
greater financial resources of the Company's competitors that these products
will be successful or even accepted. There can be no assurance that the
Company's products will be able to compete successfully with other products
offered presently or in the future by other vendors.
23
Connectivity and Dependence. The Company's ability to successfully sell
certain of its products is to a significant degree dependent on operating system
connectivity, principally with Microsoft's operating systems. Should the
Company's products become non-compatible with the dominant operating systems
currently in use in the PC industry, the Company's revenues from such products
could be materially adversely impacted. In addition, the Company's revenues will
be adversely affected if software solutions similar to the Company's products
are bundled with or incorporated into dominant operating systems, as has
occurred and can be expected to occur in the future with respect to the
Company's products.
Returns and Price Protection. The Company is exposed to the risk of
product returns and rotations from its distributors and other volume purchasers,
which are estimated and recorded by the Company as a reduction in sales.
Although the Company attempts to monitor and if necessary adjust its channel
inventories to be consistent with current levels of sell through, localized
overstocking may occur with certain products due to rapidly evolving market
conditions. In addition, the risk of product returns and rotations may increase
if the demand for its existing products should rapidly decline due to regional
economic troubles or increased competition. Although the Company believes that
it provides adequate allowances for product returns and rotations, there can be
no assurance that actual product returns and rotations will not exceed the
Company's allowances. Any product returns and rotations in excess of recorded
allowances could result in a material adverse effect on net sales and operating
results. As the Company introduces more new products, the predictability and
timing of sales to end users and the management of returns to the Company of
unsold products by distributors and volume purchasers becomes more complex and
could result in material fluctuations in quarterly sales and operating results.
The Company is also occasionally exposed to its distributors and other
volume purchasers for price protection for list price reductions by the Company
on its products held in such customers' inventories. The Company provides its
distributors with price protection in the event that the Company reduces the
list price of its products due to uncontrollable competitive pressures.
Distributors and other volume purchasers are usually offered credit for the
impact of a list price reduction on the expected revenue from the Company's
products in the distributors' inventories at the time of the price reduction.
Although the Company maintains allowances against the effects of such price
protections, and believes that it has provided adequate allowances for price
protection, there can be no assurance that the impact of actual list price
reductions by the Company will not exceed the Company's allowance. Any price
protection in excess of the recorded allowance could result in a material
adverse effect on sales and operating results.
Factors Affecting Pricing. Substantially all of the Company's revenue in
each fiscal quarter results from orders booked in that quarter. A significant
percentage of the Company's bookings and sales to distributors and other volume
purchasers historically have occurred during the last month of the quarter and
are concentrated in the latter half of that month. Orders placed by major
customers are typically based upon customers' recent historical and forecasted
sales levels for Company products and inventory levels of Company products
desired to be maintained by those major customers at the time of the orders.
Moreover, orders may also be based upon financial practices by major customers
designed to increase the return on investment or yield on the sales of the
Company's products to VAR's or end-users. Major distribution customers
occasionally receive market development funds from the Company for purchasing
Company products and from time to time extended terms, in accordance with
industry practice, depending upon competitive conditions. The Company currently
does not offer any cash rebates to its U.S. distribution partners. Changes in
purchasing patterns by one or more of the Company's major customers, changes in
customer policies pertaining to desired inventory levels of Company products,
negotiations of market development funds and changes in the Company's ability to
anticipate in advance the product mix of customer orders could result in
material fluctuations in quarterly operating results.
Product Concentration. The Company has in the past derived, and may in
the future derive, a significant portion of its revenues from a relatively small
number of products. Declines in the revenues from these software products,
whether as a result of competition, technological change, price pressures or
other factors, would have a material adverse effect on the Company's business,
results of operations and financial condition. Further, life cycles of the
Company's products are difficult to estimate due in part to the recent emergence
of certain of the Company's products, the effect of new products or product
enhancements, technological changes in the software industry in which the
Company operates and future competition. There can be no assurance that the
Company will be successful in maintaining market acceptance of its current
products or any new products or product enhancements.
24
Dependence on New Product Offerings. The Company's future success will
depend, in significant part, on its ability to successfully develop and
introduce new software products and improved versions of existing software
products on a timely basis and in a manner that will allow such products to
achieve broad customer acceptance. There can be no assurance that new products
will be introduced on a timely basis, if at all. If new products are delayed or
do not achieve market acceptance, the Company's business, results of operations
and financial condition will be materially adversely affected. In the past, the
Company has also experienced delays in purchases of its products by customers
anticipating the launch of new products by the Company or the Company's
customers. There can be no assurance that material order deferrals in
anticipation of new product introductions will not occur. There can also be no
assurance that the Company will be successful in developing, introducing on a
timely basis and marketing such software or that any such software will be
accepted in the market.
Technological Change. The markets for computer software applications is
characterized by rapid technological change, changing customer needs, frequent
product introductions and evolving industry standards. The introduction of
products incorporating new technologies and the emergence of new industry
standards could render the Company's existing products obsolete and
unmarketable. The Company's future success will depend upon its ability to
develop and introduce new software products (including new releases and
enhancements) on a timely basis that keep pace with technological developments
and emerging industry standards and address the increasingly sophisticated needs
of its customers. There can be no assurance that the Company will be successful
in developing and marketing new products that respond to technological changes
or evolving industry standards, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these new products, or that its new products will
adequately meet the requirements of the marketplace and achieve market
acceptance. If the Company is unable, for technological or other reasons, to
develop and introduce new products in a timely manner in response to changing
market conditions or customer requirements, the Company's business, results of
operations and financial could be materially adversely affected.
Potential for Undetected Errors. Software products as complex as those
offered by the Company may contain undetected errors. There can be no assurance
that, despite testing by the Company and by current and potential customers,
errors will not be found in new or existing products after commencement of
commercial shipments, resulting in loss of or delay in market acceptance or the
recall of such products, which could have a material adverse effect upon the
Company's business, results of operations and financial condition. The Company
provides customer support for most of its products. The Company will in the
future offer new products. If these products are flawed, or are more difficult
to use than traditional Company products, customer support costs could rise and
customer satisfaction levels could fall.
Duplication of Software. The Company duplicates nearly all of its
software at its Tucson, Arizona facility. The Company believes that its internal
duplication capability is economically advantageous because it eliminates the
profit margin required by outside duplication sources and enables a high degree
of scheduling and other control. This concentration of production does, however,
expose the Company to the risk that production could be disrupted by natural
disaster or other events, such as the presence of a virus in the Company's
duplicators. The Company believes that it could retain outside duplication
alternatives quickly, but there is no assurance that it could do so or, if such
arrangements could be made, that duplication could take place in an economical
or timely manner.
Pre-Load Software Market;CD ROM's. The Company primarily sells its
communications software in a form that includes a disk or disks and a manual.
Currently, the Company has the capability to produce its products in-house only
on 3 1/2 -inch diskettes. As the sizes of software programs grow, CD-ROM is
becoming a more prominent medium. Some of its customers "pre-load" the Company's
software onto a hard disk. These arrangements eliminate the need for a disk and
may eliminate the need for a manual. The pre-load arrangements produce smaller
unit revenues for the Company and eliminate the Company's ability to generate
revenues from its production facilities. The Company does not currently have the
capability to produce CD-ROMs and the cost to develop such production capability
may be prohibitive. The Company currently contracts CD-ROM production to
specialized CD-ROM facilities. In the likely event that growth continues in the
pre-load and CD-ROM usage mediums, more of the Company's relationships would
involve product pre-loads and CD-ROM production and the Company's business,
results of operations and financial condition could be adversely affected.
25
Intellectual Property Rights. The Company's success is dependent upon
its software code base, its programming methodologies and other intellectual
properties. To protect its proprietary technology, the Company relies primarily
on a combination of trade secret laws and nondisclosure, confidentiality, and
other agreements and procedures, as well as copyright and trademark laws. These
laws and actions may afford only limited protection. There can be no assurance
that the steps taken by the Company will be adequate to deter misappropriation
of its proprietary information, or to prevent the successful assertion of an
adverse claim to software utilized by the Company, or that the Company will be
able to detect unauthorized use and take effective steps to enforce its
intellectual property rights. The Company owns United States trademark
registrations for certain of its trademarks. In addition, the Company has
applied for trademark protection on a number of its recently introduced new
technologies. Certain of the Company's trademark applications are still pending
and no assurances can be made that the trademark applications will be accepted
by the U.S. Trademark and Patent Office. A rejection of one or more of these
trademark applications could have a material adverse affect on the Company's
ability to successfully sell and market these new products. In selling its
products, the Company relies primarily on "shrink wrap" licenses that are not
signed by licensees and, therefore, may be unenforceable under the laws of
certain jurisdictions. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to as great an extent as do the laws of
the United States. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology. Further, although
the Company believes that its services and products do not infringe on the
intellectual property rights of others, such claims have been, are now and in
the future maybe asserted against the Company. The failure of the Company to
protect its proprietary property, or the infringement of the Company's
proprietary property on the rights of others, could have a material adverse
effect on the Company's business, results of operations and financial condition.
From time to time, the Company has received and may in the future
receive communications from third parties asserting that the Company's trade
names or that features, content, or trademarks of certain of the Company's
products infringe upon intellectual property rights held by such third parties.
As the number of trademarks, patents, copyrights and other intellectual property
rights in the Company's industry increases, and as the coverage of these patents
and rights and the functionality of products in the market further overlap, the
Company believes that products based on its technology may increasingly become
the subject of infringement claims. Such claims could materially adversely
affect the Company, and may also require the Company to obtain one or more
licenses from third parties. There can be no assurance that the Company would be
able to obtain any such required licenses upon reasonable terms, if at all, and
the failure by the Company to obtain such licenses could have a material adverse
effect on its business, results of operations and financial condition. In
addition, the Company licenses technology on a non-exclusive basis from several
companies for inclusion in its products and anticipates that it will continue to
do so in the future. The inability of the Company to continue to license these
technologies or to license other necessary technologies for inclusion in its
products, or substantial increases in royalty payments under these third party
licenses, could have a material adverse effect on its business, results of
operations and financial condition.
Litigation in the software development industry has increasingly been
used as a competitive tactic both by established companies seeking to protect
their existing position in the market and by emerging companies attempting to
gain access to the market. If the Company is required to defend itself against a
claim, whether or not meritorious, the Company could be forced to incur
substantial expense and diversion of management attention, and may encounter
market confusion and reluctance of customers to purchase the Company's software
products. Such litigation, if determined adversely to the Company, could have a
material adverse affect on its business, results of operations and financial
condition.
Dependence Upon Key Personnel. The Company's future performance depends
in significant part upon key technical and senior management personnel. The
Company is dependent on its ability to identify, hire, train, retain and
motivate high quality personnel, especially highly skilled engineers involved in
the ongoing research and development required to develop and enhance the
Company's communication software products and introduce enhanced future
products. The industry is characterized by a high level of employee mobility and
aggressive recruiting of skilled personnel. There can be no assurance that the
Company's current employees will continue to work for the Company. Loss of
services of key employees could have a material adverse effect on the Company's
business, results of operations and financial condition. In addition, the
Company may need to grant additional options and provide other forms of
incentive compensation to attract and retain key personnel.
International Sales. The Company presently operates in foreign markets.
For the twelve months ended June 30, 1998, the Company generated 25% of its
revenue outside of the United States. International business is subject to risks
in addition to those inherent in the Company's United States business, including
substantially different regulatory requirements in different jurisdictions,
varying technical standards, tariffs and trade barriers, political and economic
instability, reduced protection for intellectual property rights in certain
countries, difficulties in staffing and maintaining foreign operations,
difficulties in managing distributors, potentially adverse tax consequences,
foreign currency exchange fluctuations, the burden of complying with a wide
variety of complex foreign laws and treaties and the possibility of difficulties
in collecting accounts receivable. There can be no assurance that the Company
will be able to continue to generate significant international sales. While the
Company does not currently accept payment in foreign currencies and invoices all
of its sales in U.S. Dollars, there can be no assurance that the Company will be
able to continue this policy. The Company has in the past and may again in the
future hold bank accounts denominated in foreign currencies and while it is the
practice of the Company to keep non-U.S. dollar cash balances to a minimum there
is nevertheless risk of foreign exchange loss on foreign currency denominated
cash accounts. If the Company begins to receive payment in foreign currencies,
it is likely to be subjected to the risks of foreign currency losses due to
fluctuations in foreign currency exchange rates. In addition, in the event the
Company is successful in doing business outside of the United States, the
Company may also face economic, political and foreign currency situations that
are substantially more volatile than those commonly experienced in the United
States. There can be no assurance that any of these factors will not have a
material adverse effect on the Company's business, results of operations and
financial condition.
26
Foreign Conditions. The Company is exposed to certain risks associated
with poor economic conditions in the foreign markets in which it sells its
products. Currently, adverse economic conditions in the Pacific Rim region are
having a negative impact upon the currencies and economies of Australia, Japan
and other Pacific Rim countries. Although the Company has liquidated its
Japanese subsidiary, revenues from Japan and other Pacific Rim countries
accounted for approximately 11% of its net revenues for the fiscal year ended
June 30, 1998. While the Company believes that its sales from the Pacific Rim
countries will not be materially impacted by this current financial turmoil
there can be no assurances that continued severe economic disruption in these
economies would not adversely affect future operating results.
Potential Effect of Anti-Takeover Provisions. The Company's Certificate
of Incorporation and Bylaws contain provisions that may discourage or prevent
certain types of transactions involving an actual or potential change in control
of the Company, including transactions in which the stockholders might otherwise
receive a premium for their shares over then current market prices, and may
limit the ability of the stockholders to approve transactions that they may deem
to be in their best interest. In addition, the Board of Directors has the
authority to fix the rights and preferences of shares of the Company's Preferred
Stock and to issue such shares, which may have the effect of delaying or
preventing a change in control of the Company, without action by the Company's
stockholders. Certain provisions of Delaware law applicable to the Company,
including Section 203 of the Delaware General Corporation Law, could also have
the effect of delaying, deferring or preventing a change of control of the
Company. It is possible that the provisions in the Company's Certificate of
Incorporation and Bylaws, the ability of the Board of Directors to issue the
Company's Preferred Stock, and Section 203 of the Delaware General Corporation
Law may have the effect of delaying, deferring or preventing a change of control
of the Company without further action by the stockholders, may discourage bids
for the Company's Common Stock at a premium over the market price of the Common
Stock and may adversely affect the market price of the Common Stock and the
voting and other rights of the holders of Common Stock.
Fluctuations in Quarterly Operating Results. The Company's operating
results have in the past fluctuated, and may in the future fluctuate, from
quarter to quarter, as a result of a number of factors including, but not
limited to, changes in pricing policies or price reductions by the Company or
its competitors; variations in the Company's sales channels or the mix of
product sales; the timing of new product announcements and introductions by the
Company or its competitors; the availability and cost of supplies; the financial
stability of major customers; market acceptance of new products and product
enhancements; the Company's ability to develop, introduce and market new
products, applications and product enhancements; the Company's ability to
control costs; possible delays in the shipment of new products; the Company's
success in expanding its sales and marketing programs; deferrals of customer
orders in anticipation of new products, product enhancements or operating
systems; changes in Company strategy; personnel changes; and general economic
factors. The Company's software products are generally shipped as orders are
received and accordingly, the Company has historically operated with little
backlog. As a result, sales in any quarter are dependent primarily on orders
booked and shipped in that quarter and are not predictable with any degree of
certainty. In addition, the Company's expense levels are based, in part, on its
expectations as to future revenues. If revenue levels are below expectations,
operating results are likely to be adversely affected. The Company's net income
may be disproportionately affected by a reduction in revenues because of fixed
costs related to generating its revenues. Quarterly results in the future may be
influenced by these or other factors and, accordingly, there may be significant
variations in the Company's quarterly operating results. Further, the Company's
historical operating results are not necessarily indicative of future
performance for any particular period. Due to all of the foregoing factors, it
is possible that in some future quarter the Company's operating results may be
below the expectations of public market analysts and investors. In such event,
the price of the Company's Common Stock would likely be materially adversely
affected.
Possible Volatility of Stock Price. The trading price of the Company's
Common Stock is likely to be subject to significant fluctuations in response to
variations in quarterly operating results, changes in management, announcements
of technological innovations or new products by the Company, its customers or
its competitors, legislative or regulatory changes, general trends in the
industry and other events or factors. In addition, the stock market has
experienced extreme price and volume fluctuations which have particularly
affected the market price for many high technology companies similar to
Artisoft, and which have often been unrelated to the operating performance of
these companies. These broad market fluctuations may adversely affect the market
price of the Company's Common Stock. Further, factors such as announcements of
new contracts or product offerings by the Company or its competitors and market
conditions for stocks similar to that of the Company could have significant
impact on the market price of the Common Stock.
27
Possible Acquisitions or Divestitures. From time to time, the Company
may consider acquisitions of or alliances with other companies that could
complement the Company's existing business, including acquisitions of
complementary product lines. The Company may also consider the divestiture of
certain of its product segments should conditions warrant. Although the Company
may periodically discuss such potential transactions with a number of companies,
there can be no assurance that suitable acquisition or joint venture candidates
can be identified, or that, if identified, adequate and acceptable financing
sources will be available to the Company that would enable it to consummate such
transactions. Even if an acquisition or joint venture is consummated, there can
be no assurance that the Company will be able to integrate successfully such
acquired companies or product lines into its existing operations, which could
increase the Company's operating expenses in the short-term and materially and
adversely affect the Company's results of operations. Moreover, any acquisition
by the Company may result in potentially dilutive issuances of equity
securities, the incurrence of additional debt, and amortization of expenses
related to goodwill and intangible assets, all of which could adversely affect
the Company's profitability. Acquisitions involve numerous risks, such as the
diversion of the attention of the Company's management from other business
concerns, the entrance of the Company into markets in which it has had no or
only limited experience, and the potential loss of key employees of the acquired
company, all of which could have a material adverse effect on the Company's
business, financial condition, and results of operations.
Computer Telephony
Computer Telephony Product Market. The market for open, standards-based
computer telephony tools, applications and system-level products is relatively
new and is characterized by the rapid evolution of computer telephony hardware
and software standards, emerging technologies and changing customer
requirements. These characteristics may render the Company's computer telephony
products unmarketable or may make the expansion, timing and direction of product
development unpredictable. As a result of these factors, there can be no
assurance that computer telephony markets will continue to expand, or that the
Company's products will achieve market acceptance.
The Company believes that the principal competitive factors affecting
the computer telephony markets it serves include vendor and product reputation,
product architecture, functionality and features, scalability, ease of use,
quality of product and support, performance, price, brand name recognition and
effectiveness of sales and marketing efforts. There can be no assurances that
the Company can maintain and grow its market position against current and
potential competitors, especially those with significantly greater financial,
marketing, service, support, technical and other competitive resources. Any
failure by the Company to maintain and grow its competitive position could have
a material adverse effect upon the Company's revenues from its computer
telephony product line
The Company released its newest telephony product, TeleVantage 2.0, in
August 1998. TeleVantage is a phone system designed for small and medium sized
businesses and branch offices. The Company believes this product offers
functionality superior to that of a traditional standalone PBX. However, due to
the complexity of this software and the mission critical systems it is designed
to operate, there can be no assurances that the software will be successfully
marketed or sold. Additionally, there can be no assurances that competitors with
substantially greater financial resources than that of the Company will not
develop their own PC based PBX solution and subsequently adversely affect the
Company's ability to introduce, launch, market, or sell its own PC based PBX
solution.
The Company believes its principal competitors in the PC-based PBX
market are product offering from Altigen, Netphone and Picazzo. These privately
held concerns have differing funding sources than those of the Company and as
such may put the Company at a competitive disadvantage.
Computer Telephony Customers and Market Acceptance. The Company is
currently and will continue to invest significant resources in the development,
marketing and selling of new computer telephony products. There can be no
assurance that the Company will achieve market acceptance of these products.
Additionally, these new computer telephony products are principally targeted at
small to medium size businesses. The Company's existing network of qualified
resellers has historically sold the Company's networking and communications
products. Therefore the Company anticipates the need to recruit and train a new
network of qualified value added resellers to sell its computer telephony
products. There can be no assurances that the Company will be successful in
establishing a critical mass of qualified computer telephony resellers. The
Company's success in selling these products will likely be influenced by its
ability to attract and inform qualified value added resellers and interconnects
on the features and functionality of these emerging technologies.
28
The Company's computer telephony products compete in a relatively
immature industry with as yet unproven technologies. There can be no assurance
that the current technological innovations in the computer telephony industry
will be widely adopted by small to medium size businesses or that telephony
standards will evolve in a manner that is advantageous to the Company's
telephony products.
Communications and Networking Software
Networking and Communications Software Customers. The Company relies on
a network of distributors and value added resellers (VAR's) for a significant
portion of both its domestic and international networking and communications
software product revenues. In addition, a majority of the sales of CoSession
Remote, the Company's remote communications software product, are to PC OEM's.
Generally, there are no minimum purchase requirements for the Company's
distributors, OEMs and many of the Company's distributors and VAR's sell
competitive products. There can be no assurance that these customers will give
priority to the marketing of the Company's products compared to competing
products or alternative solutions or that such customers will continue to offer
the Company's products. In the event of the termination of the Company's
relationship with one or more major distributors, the Company would have to find
suitable alternative channels of distribution. The absence of such alternatives
could have a material adverse affect on the Company's business, financial
condition and results of operation. Certain of the Company's OEM relationships
require the scheduled delivery of product revisions and new products. The
failure to adhere to agreed-upon product delivery schedules could result in the
termination of key relationships with major PC manufacturers, which could have a
significant adverse impact on current and future revenues in the OEM channel.
The Company's OEM revenue streams are dependent upon the maintenance of one or
more key OEM relationships. The termination of any one of these relationships
may have a material adverse affect on the Company's current and future revenues.
Networking and Communications Software Competitors. The Company's major
competitors in the small business networking market are Microsoft Corporation
and Novell, Inc. Both of these companies have substantially greater financial,
technological, production and sales and marketing resources than those of the
Company.
Management believes that the inclusion of networking capabilities
(printer, file and application sharing) in Microsoft's Windows 95/98 operating
system (released in August 1995 and June 1998, respectively) has had and will
continue to have a significant detrimental impact on sales of the Company's
LANtastic NOS products. Windows 95/98 is pre-loaded on virtually all Pentium
processor-based personal computers currently sold worldwide. The impact of
Windows 95/98 on the Company's business has been compounded by the dominance and
visibility of Microsoft in the PC marketplace and the rapid upgrade by small
businesses to Pentium PC's. In August 1996, Microsoft released Windows NT 4.0, a
client-server network version of the Windows OS. Management believes that
Windows NT 4.0, which like Windows 95/98, includes peer-to-peer networking
capabilities in the workstation version, and is pre-loaded on certain Pentium
PC's has provided additional significant direct competition to the LANtastic NOS
both as a peer-to-peer and client-server networking solution. Management
believes that Microsoft will release Windows NT 5.0 in early 1999. Microsoft,
because of its dominant position in the PC operating systems and business
applications markets, frequently offers value-added functionality to its
products in the form of enhancements to its Windows operating systems, which are
pre-loaded on new PC's or by offering free products for download from its World
Wide Web site. The Company believes that Windows NT 5.0, Microsoft's next
version of its Windows NT Server may include both modem sharing and internet
sharing capabilities. The inclusion of modem sharing and internet sharing
capabilities in Windows NT could result in substantially increased competition
for the Company's ModemShare and i.Share products which could have a significant
impact on the Company's sales and operating results.
Finally, the movement of the networking industry towards the uniform use
of Internet technologies in the construction of local area networks (so called
intranets) constitutes a risk that demand for more proprietary networks, such as
LANtastic, will decline further, and that competition will emerge from a new
class of players, such as Netscape Communications, Sun Microsystems, and others.
Remote Communications Software. The principal distribution channel for
the Company's remote computing product, CoSession Remote 32 version 8, is
through OEM arrangements with PC manufacturers. In December 1997, the Company
released a 32-bit version of the product to support the Windows 95 and Windows
NT operating systems. As the Company's major competitors also offer 32-bit
remote computing products, it is critical, for the continuance of the OEM
relationships, that the Company successfully market the 32-bit product and meet
major OEM customer e-commerce and other promotional requirements. The Company's
ability to grow its remote computing software revenues will likely depend on its
success in leveraging existing OEM relationships to develop new sources of
revenue such as e-commerce. The loss of one or more of these OEM relationships
could have a significant impact on the Company's net sales and operating
results.
The Company currently is in negotiations with a company from which it
obtains a licensed product. The failure to extend the licensing arrangement
could have a material adverse impact on the Company's future operating results.
29
Remote Communications Software Competitors. Microsoft has included a
remote computing component in its Windows 98 OS released in June 1998 and
currently distributes Net Meeting at no charge from its Web site. Additionally,
Symantec's PC Anywhere remote computing software may provide additional
competition to the Company's CoSession Remote 32 software with respect to
certain of the Company's major OEM customers. These actions will likely lead to
diminished demand for the Company's CoSession remote control product, and
consequently decreased net sales and operating results.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS No. 130). SFAS No. 130 establishes requirements for disclosure of
comprehensive income and becomes effective for the Company for the year ending
June 30, 1999. Comprehensive income includes such items as foreign currency
translation adjustments and unrealized holding gains and losses on available for
sale securities that are currently being presented by the Company as a component
of shareholders' equity. The adoption of this pronouncement will have no
material impact on its financial results.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise and Related Information"(SFAS No. 131). SFAS No. 131
establishes standards for disclosure about operating segments in annual
financial statements and selected information in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." The new standard
becomes effective for the Company for the year ending June 30, 1999, and
requires that comparative information from earlier years be restated to conform
to the requirements of this standard.
In February 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits (an amendment of
FASB Statements No. 87, 88, and 106). This statement standardizes employers'
disclosure requirements about pensions and other postretirement benefit plans
and requires additional information on changes in the benefit obligations and
fair values of plan assets that will facilitate financial analysis. This
statement supersedes the disclosure requirements in SFAS No. 87, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits", and SFAS No. 106 Employers' Accounting for
Postretirement Benefits Other Than Pensions". The new standard becomes effective
for the Company for the fiscal year ending June 30, 1999. The Company does not
believe that the adoption of SFAS No. 132 will have a material impact on its
financial results.
"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, Year 2000 issues and other risks
detailed from time to time in the Company's Securities and Exchange Commission
filings.
Item 7(a). Quanitative and Qualitative Disclosures about Market Risk.
Not Applicable
30
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 32
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 1998 and 1997 33
Consolidated Statements of Operations for the years ended
June 30, 1998, 1997 and 1996 34
Consolidated Statements of Changes in Shareholders' Equity
for the years ended June 30, 1998, 1997 and 1996 35
Consolidated Statements of Cash Flows for the years ended
June 30, 1998, 1997 and 1996 36
Notes to Consolidated Financial Statements 37 - 51
All schedules are omitted because they are not required, are not
applicable, or the information is included in the financial statements or notes
thereto.
31
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, 1998 and 1997 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, 1998. 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, 1998 and 1997 and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 1998 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Phoenix, Arizona
August 4, 1998
32
Artisoft, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
June 30, June 30,
ASSETS 1998 1997
-------- --------
Current assets:
Cash and cash equivalents $ 18,514 $ 14,673
Receivables:
Trade accounts, net of allowances of $1,592 and $3,990
in 1998 and 1997, respectively 2,813 5,011
Income taxes -- 4,300
Other receivables 279 580
Inventories 917 1,860
Prepaid expenses 283 833
Property and equipment held for sale -- 2,543
-------- --------
Total current assets 22,806 29,800
-------- --------
Property and equipment 5,333 7,883
Less accumulated depreciation and amortization (4,198) (5,060)
-------- --------
Net property and equipment 1,135 2,823
-------- --------
Other assets 1,567 2,748
-------- --------
$ 25,508 $ 35,371
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,598 $ 1,345
Accrued liabilities 1,670 3,118
Accrued restructuring costs 1,536 4,950
Mortgage note payable -- 2,182
Current portion of capital lease obligations 464 458
-------- --------
Total current liabilities 5,268 12,053
-------- --------
Capital lease obligations,
net of current portion 289 714
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock, $1.00 par value. Authorized 11,433,600 shares; none issued -- --
Common stock, $.01 par value. Authorized 50,000,000 shares;
issued 27,980,602 shares at June 30,
1998 and 27,848,464 shares at June 30, 1997 279 278
Additional paid-in capital 96,486 96,227
Accumulated deficit (7,030) (4,117)
Less treasury stock, at cost, 13,320,500 shares at June 30,
1998 and June 30, 1997 (69,784) (69,784)
-------- --------
Net shareholders' equity 19,951 22,604
-------- --------
$ 25,508 $ 35,371
======== ========
See accompanying notes to consolidated financial statements.
33
Artisoft, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share amounts)
Years Ended June 30,
1998 1997 1996
-------- -------- --------
Net sales $ 24,793 $ 33,409 $ 60,972
Cost of sales 6,509 12,348 19,846
-------- -------- --------
Gross profit 18,284 21,061 41,126
-------- -------- --------
Operating expenses:
Sales and marketing 10,046 23,384 26,178
Product development 7,053 9,300 7,092
General and administrative 3,127 6,255 5,950
Purchased in-process technology
and related costs -- -- 26,744
Write off of abandoned technology 393 -- --
Restructuring costs 2,040 11,246 --
-------- -------- --------
Total operating expenses 22,659 50,185 65,964
-------- -------- --------
Loss from operations (4,375) (29,124) (24,838)
-------- -------- --------
Other income (expense):
Interest income 887 819 1,266
Interest expense (315) (155) (36)
Gain (loss) on disposition of property and equipment 1,237 (23) 125
Other (82) 10 162
-------- -------- --------
Total other income 1,727 651 1,517
-------- -------- --------
Loss before income tax expense (benefit) and
extraordinary item (2,648) (28,473) (23,321)
Income tax expense (benefit) 156 (48) (4,993)
-------- -------- --------
Loss before extraordinary item (2,804) (28,425) (18,328)
Extraordinary loss from early extinguishment of debt,
net of $0 income tax benefit (109) -- --
-------- -------- --------
Net loss $ (2,913) $(28,425) $(18,328)
======== ======== ========
Net loss per common share $ (.20) $ (1.96) $ (1.27)
======== ======== ========
Weighted average common shares outstanding 14,554 14,529 14,463
======== ======== ========
See accompanying notes to consolidated financial statements.
34
Artisoft, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
(in thousands, except share amounts)
Retained
Common Stock Additional Earnings Net
------------------------- Paid-in (Accumulated Treasury Shareholders'
Shares $.01 Par Value Capital Deficit) Stock Equity
- -----------------------------------------------------------------------------------------------------------------
Balance at June 30, 1995 27,671,680 $ 277 $ 95,012 $ 42,636 $ (69,680) $ 68,245
Exercise of common stock
options 112,848 1 850 -- -- 851
Issuance of common stock
under employee stock
purchase plan 23,362 -- 130 -- -- 130
Tax benefit of disqualifying
dispositions -- -- 83 -- -- 83
Net loss -- -- -- (18,328) -- (18,328)
---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1996 27,807,890 $ 278 $ 96,075 $ 24,308 $ (69,680) $ 50,981
Purchase of treasury stock -- -- -- -- (104) (104)
Exercise of common stock
options 15,292 -- 47 -- -- 47
Issuance of common stock
under employee stock
purchase plan 25,282 -- 83 -- -- 83
Tax benefit of disqualifying
dispositions -- -- 22 -- -- 22
Net loss -- -- -- (28,425) -- (28,425)
---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1997 27,848,464 $ 278 $ 96,227 $ (4,117) $ (69,784) $ 22,604
Common stock issued for
compensation 100,000 1 187 -- -- 188
Exercise of common stock --
options 10,078 -- 24 -- -- 24
Issuance of common stock
under employee stock
purchase plan 22,060 -- 44 -- -- 44
Tax benefit of disqualifying
dispositions -- -- 4 -- -- 4
Net loss -- -- -- (2,913) -- (2,913)
---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1998 27,980,602 $ 279 $ 96,486 $ (7,030) $ (69,784) $ 19,951
========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
35
Artisoft, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Years Ended June 30,
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net loss $ (2,913) $(28,425) $(18,328)
-------- -------- --------
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Purchased in-process technology -- -- 21,700
Extraordinary loss 109 -- --
Depreciation and amortization 1,823 2,736 2,445
Deferred income taxes -- 4,252 (1,364)
(Gain) loss from disposition of property and equipment, net (1,237) 23 (125)
Write off of abandoned technology 393 -- --
Write down of property and equipment to net realizable value -- 1,586 --
Change in accounts receivable and inventory allowances (2,788) (109) 1,426
Tax benefit of disqualifying dispositions 4 22 83
Changes in assets and liabilities, net of effects from
acquisitions of businesses:
Receivables-
Trade accounts 4,596 11,026 (1,117)
Income taxes 4,300 650 (1,458)
Other receivables 301 825 2,019
Inventories 1,333 1,978 (1,082)
Prepaid expenses 550 73 1,140
Accounts payable and accrued liabilities (1,195) (1,510) (4,603)
Accrued restructuring costs (3,414) 4,950 --
Income taxes payable -- (577) --
Other assets and liabilities 61 79 113
-------- -------- --------
Net cash provided by (used in) operating activities 1,923 (2,421) 849
-------- -------- --------
Cash flows from investing activities:
Purchase of investments -- -- (35,063)
Sales of investments -- -- 56,305
Cash paid for businesses acquired -- -- (24,794)
Proceeds from sales of property and equipment 4,819 40 2,972
Purchases of property and equipment (556) (1,469) (2,428)
-------- -------- --------
Net cash provided by (used in) investing activities 4,263 (1,429) (3,008)
-------- -------- --------
Cash flows from financing activities:
Purchases of common stock -- (104) --
Proceeds from (repayment) of mortgage note payable (2,182) 2,200 --
Proceeds from sale-leaseback transaction -- 1,368 --
Proceeds from issuance of common stock 256 130 981
Principal payments on long-term debt (419) (396) (48)
-------- -------- --------
Net cash provided by (used in) financing activities (2,345) 3,198 933
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 3,841 (652) (1,226)
Cash and cash equivalents, beginning of year 14,673 15,325 16,551
-------- -------- --------
Cash and cash equivalents, end of year $ 18,514 $ 14,673 $ 15,325
======== ======== ========
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 300 $ 155 $ 36
======== ======== ========
Income taxes $ 296 $ 166 $ 170
======== ======== ========
See accompanying notes to consolidated financial statements.
36
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 that
is a recognized leader in providing advanced computer telephony products that
enhance how businesses communicate with their customers. The Company also
provides easy-to-use, affordable networking and communications solutions
principally to small businesses. Headquartered in Cambridge, Massachusetts,
Artisoft distributes its products in more than 100 countries through nearly
20,000 value-added resellers, telephony VAR's, distributors, OEMs and retailers.
Basis of Consolidation
The consolidated financial statements include the accounts of Artisoft,
Inc. and its three wholly-owned subsidiaries: Triton Technologies, Inc.,
Artisoft "FSC", Ltd. (which has elected to be treated as a foreign sales
corporation) and NodeRunner, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid securities with original
maturities of three months or less to be cash equivalents. As of June 30, 1998
and 1997, the Company has classified marketable securities of $13.3 million and
$13.8 million with a maturity of less than three months as cash and cash
equivalents. The Company intends to hold these securities to maturity.
Concentration of Credit Risk, Product Revenue and Major Customers
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of investments and trade
receivables. The Company invests in securities with an investment credit rating
of AA or better. The Company also places its investments for safekeeping with
high-credit-quality financial institutions. Credit risk with respect to trade
receivables is generally diversified due to the large number of entities
comprising the Company's customer base and their dispersion across many
different customer groups and geographies. The Company often sells its products
through third-party distributors, and, as a result, may maintain individually
significant receivable balances with major distributors. The Company believes
that its credit evaluation, approval and monitoring processes substantially
mitigate potential credit risks.
Net sales in fiscal 1998 was comprised of $20.1 million (or 80% of total
net sales) from the Communications Software Group and $4.7 million (or 20% of
total net sales) from the Computer Telephony Products Group. The operating loss
for the fiscal year ended June 30, 1998 was comprised of $(1.7) million (or 39%
of total operating losses) from the Communications Software Group and $(2.7)
million (or 61% of total operating losses) from the Computer Telephony Products
Group. Operating income (loss) before restructuring charges was $.4 million for
the Communications Software Group and $(2.7) million for the Computer Telephony
Products Group.
The Company's Communication Software Group principally includes revenues
from the LANtastic NOS, i.Share, ModemShare and CoSession Remote product lines.
The Company's Computer Telephony Products Group principally includes revenues
from the Visual Voice, InfoFast and TeleVantage product lines.
37
The Company sells its products through a variety of channels of
distribution, including distributors, volume purchasers, resellers and original
equipment manufacturers. For fiscal 1998 and 1996, one customer accounted for
approximately 10% and 12% of the Company's net sales, respectively. At June 30,
1998, two companies accounted for approximately 16% and 13% of the Company's
outstanding trade accounts receivable. At June 30, 1997, one company accounted
for 16%, of the Company's outstanding trade accounts receivable. The loss of any
of the major distributors of the Company's products or their failure to pay the
Company for products purchased from the Company could have a material adverse
effect on the Company's operating results. The Company's standard credit terms
are net 30 days, although longer terms are provided to various major customers
on a negotiated basis from time to time.
Inventories
Inventories are stated at the lower of cost or market. Cost is
principally determined using the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost. Equipment held under capital
leases are stated at the lower of fair market value or the present value of
minimum lease payments at the inception of the lease. Depreciation of property
and equipment is calculated using the straight-line method over the estimated
useful lives of three to seven years for furniture and equipment. Equipment held
under capital leases is amortized over the shorter of the lease term or
estimated useful life of the asset.
Other Assets
Other assets are stated at cost and are comprised of purchased
technology, trademarks and patents, goodwill and recoverable deposits.
Amortization of purchased technology is calculated using the straight-line
method over a five year life. Amortization of trademarks and patents is
calculated using the straight-line method over the life of the trademark or
patent which in most cases is ten years. Amortization of goodwill is calculated
using the straight-line method over a five year life.
Income Taxes
Income taxes have been accounted for under the asset and liability
method in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes." Under the asset and liability method of
SFAS No. 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Revenue Recognition
The Company recognizes revenue from product sales at the time of
shipment, net of allowances for returns and price protection. Other product
revenue, consisting of training and support services, is recognized when the
services are provided. Gross sales for the fiscal years ended June 30, 1998,
1997, and 1996, respectively, were $27.9 million, $44.3 million, and $68.2
million.
Product Development
Development of new software products and enhancements to existing
software products are expensed as incurred until technological feasibility has
been established. After technological feasibility is established, any additional
costs would be capitalized in accordance with SFAS No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." Because
the Company believes its current process for developing software is essentially
completed concurrently with the establishment of technological feasibility, no
product development costs have been capitalized to date.
Computation of Net Loss Per Common and Common Equivalent Share
Net loss per common share is computed using the weighted average number
of common shares and dilutive common equivalent shares outstanding during the
period. The Company had 95,000, 31,000 and 231,000 shares of anti-dilutive
common stock equivalents as of June 30, 1998, 1997 and 1996, respectively.
38
Foreign Currency Translation
The functional currency for the Company's former non-U.S. subsidiaries
and branches was the U.S. dollar. The Company periodically incurs liabilities to
foreign customers and vendors. The payment of these liabilities is typically
made in U.S. dollars and translated into foreign currency at the prevailing
exchange rate. Foreign exchange gain or (loss) is recognized as incurred. For
these entities, inventories, equipment and other property were translated at the
prevailing exchange rate when acquired. All other assets and liabilities are
translated at year-end exchange rates. Inventories charged to cost of sales and
depreciation are remeasured at historical rates. All other income and expense
items are translated at average rates of exchange prevailing during the year.
Gains and losses which result from remeasurement are included in net income
(loss).
Stock Based Compensation
The Company accounts for stock options granted under its stock incentive
plans in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On July 1, 1996, SFAS No. 123 "Accounting for Stock-Based
Compensation," was issued which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. SFAS No. 123 also allows entities to continue to apply the provisions of
APB Opinion No. 25 and provide pro forma net income and pro forma earnings per
share disclosures for employee stock option grants made in fiscal 1996 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
Impact of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share"
(SFAS No. 128). This statement establishes standards for computing and
presenting earnings per share ("EPS"), and supersedes APB Opinion No. 15. The
Statement replaces primary EPS with basic EPS and requires a dual presentation
of basic and diluted EPS. The Statement is effective for both interim and annual
periods ending after December 15, 1997. All prior period EPS data has been
restated to conform to SFAS No. 128.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income" (SFAS No. 130). SFAS No. 130 establishes requirements for
disclosure of comprehensive income and becomes effective for the Company for the
year ending June 30, 1999. Comprehensive income includes such items as foreign
currency translation adjustments and unrealized holding gains and losses on
available for sale securities that are currently being presented by the Company
as a component of shareholders' equity. The Company does not believe that the
adoption of SFAS No. 130 will have a material impact on its financial results.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosure about
Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131
establishes standards for disclosure about operating segments in annual
financial statements and selected information in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." The new standard
becomes effective for the Company for the year ending June 30, 1999, and
requires that comparative information from earlier years be restated to conform
to the requirements of this standard. Upon adoption of SFAS No. 131, the Company
will be required to disclose product, service and geographical financial
information for both its Communications Software Group and Computer Telephony
Products Group segments.
In February 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits (an amendment of
FASB Statements No. 87,88, and 106). This statement standardizes employers'
disclosure requirements about pensions and other postretirement benefit plans
and requires additional information on changes in the benefit obligations and
fair values of plan assets that will facilitate financial analysis. This
statement supersedes the disclosure requirements in SFAS No. 87, "Employers'
Accounting for Pensions", SFAS No. 88, "Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for Termination Benefits",
and SFAS No. 106 Employers' Accounting for Postretirement Benefits Other Than
Pensions". The new standard becomes effective for the Company for the fiscal
year ending June 30, 1999. The Company does not believe that the adoption of
SFAS No. 132 will have a material impact on its financial results
39
Use of Estimates
Management of the Company has made estimates and assumptions relating to
the reporting of assets and liabilities and the disclosure of contingent assets
and liabilities to prepare these consolidated financial statements in conformity
with generally accepted accounting principles. Actual results could differ from
those estimates.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on
July 1, 1996. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or net realizable
value (fair value less costs to sell). In connection with the restructuring
actions implemented at June 30, 1997 as more fully described in Note 2, the
Company recorded an impairment loss on the disposition of excess computers and
other equipment of $1.6 million which is included in the restructuring costs. No
impairment loss was recognized in association with the restructuring charges
recorded for the period ended June 30, 1998.
Fair Value of Financial Instruments
The carrying amounts of receivables, accounts payable and accrued
liabilities approximate fair value because of the short maturity of these
instruments.
Reclassifications
Certain reclassifications have been made to the 1996 consolidated
financial statements to conform to the 1997 and 1998 presentation.
(2) RESTRUCTURING COSTS
In June 1998, the Company announced a headcount reduction of 23
employees in its Tucson, Arizona based Communications Software Group.
Restructuring costs in the accompanying consolidated statement of operations for
the fiscal year ended June 30, 1998 include the involuntary employee termination
benefits associated with the aforementioned headcount reductions and costs
associated with the closure of the Company's Communications Software Group sales
and marketing offices in Japan, United Kingdom and Iselin, New Jersey. Employee
termination benefits include severance and fringe benefit costs on the
terminated employees. Costs incurred as a result of the closure of the United
Kingdom and Japan international sales offices include office lease termination,
office equipment lease buyouts, losses on disposals of furniture, equipment and
leasehold improvements, legal and other accounting fees, subsidiary liquidation
costs and the write off of certain uncollectible Japanese receivables. The
restructuring costs also include certain other losses on the disposal of
computer hardware and software, lease termination costs on the Company's Iselin,
New Jersey facility and the disposal of certain intangibles with no future
value.
The restructuring costs of $2.0 million in the accompanying consolidated
statement of operations for the fiscal year ended June 30, 1998 are net of $.4
million in reductions of future restructuring costs recorded during the first
three fiscal quarters of the fiscal year ended June 30, 1998.
The accrued restructuring costs at June 30, 1998 principally consist of the
following:
Employee termination benefits $ 938,000
Office and equipment lease buyouts 400,000
Professional fees and other office closure costs 547,000
Other restructuring charges 90,000
Reversal of June 1997 restructuring costs (439,000)
-----------
Accrued restructuring costs at June 30, 1998 $ 1,536,000
===========
40
Restructuring costs in the accompanying consolidated statement of
operations for the fiscal year ended June 30, 1997 include the costs of:
involuntary employee termination benefits, international sales and support
office closures and, related costs associated with the restructuring actions
effected during that fiscal year. Employee termination benefits include
severance, wage continuation, notice pay and medical and other benefits.
International sales and support office closures and related costs include costs
of premise and other lease terminations, losses on disposal of furniture and
equipment, legal and other professional fees, and an increase in the allowance
for bad debts resulting from the decision to reduce the number of international
distributors, particularly in Europe. Other costs associated with the
restructuring actions include expected losses on the disposition of excess
computers and other equipment resulting from the significant reduction in
workforce at the Company's corporate headquarters in Tucson, Arizona and lease
termination costs for certain Tucson, Arizona facilities.
The restructuring actions were the result of substantially declining
sales, principally LANtastic NOS products, and the attendant necessity to reduce
the Company's cost structure to a level commensurate with the level and mix of
operating revenues.
The restructuring actions taken during the fiscal year ended June 30,
1997 included a reduction in workforce affecting approximately 160 employees in
the Company's Communications Software Group located principally in Tucson,
Arizona, the sale of the Company's Tucson land and building in connection with
the Company's relocation of its Communications Software Group to a smaller
facility and the closure of most of its Communications Software Group
international sales and support offices.
Accrued restructuring costs in the accompanying June 30, 1997
consolidated balance sheet are principally comprised of accrued employee
termination benefits of approximately $4.2 and expected costs to be incurred in
connection with the closure of the international sales and support offices.
(3) WRITE OFF OF ABANDONED TECHNOLOGY
In June 1998, the Company wrote off approximately $.4 million of
capitalized purchased software costs associated with the acquisition of Stylus
Innovation Incorporated ("Stylus") as more fully described in Note 4. These
charges related to the cost to purchase certain technologies in which
development efforts have been subsequently abandoned and hold no future
realizable value to the Company.
(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, a software
company engaged in the development, marketing and sales of computer telephony
applications and tools software. The aggregate cost of the acquisition was
approximately $13.1 million.
The Company incurred direct transaction costs of approximately $625
associated with the acquisitions of Synergy, Triton and Stylus ("the
acquisitions"). These costs consisted of fees for financial, legal and
accounting services and were included in the allocation of the acquisition
costs. The direct costs and the purchase prices of the acquisitions were
allocated to the assets acquired and liabilities assumed based on their
respective fair values on the dates of the acquisitions, as follows:
41
Cash $ 421
Trade receivables 604
Inventories 216
Property and equipment 271
Purchased technology 3,456
Purchased in-process technology 21,700
Other 198
--------
26,866
Less cash acquired (421)
Less liabilities assumed (1,651)
--------
Net assets acquired, excluding cash $ 24,794
========
In conjunction with the acquisitions, the Company recorded aggregate
charges to operations of $21.7 million relating to purchased in-process
technology that had not reached technological feasibility and had indeterminable
alternative future use. The $3.5 million of the aggregate purchase price
attributable to purchased software is being amortized over five years.
In addition, as a result of the acquisitions, the Company charged to
operations other related costs totaling $5.0 million. The other related costs
were principally attributable to costs associated with the product integration
of Triton and Synergy technology with the Company's technology and the
elimination of duplicate distribution arrangements in Europe. Other related
costs included increases in allowances for returns, rotations and inventory
obsolescence associated with the transition to the new technology; costs for
severance and outplacement; and facility costs related to the cancellation of
leases in order to support consolidated technical support and distribution.
The acquisitions were accounted for as purchase business combinations
and, accordingly, the results of operations of the acquired companies have been
combined with those of the Company as of the respective dates of acquisition.
Had the business combinations occurred prior to July 1, 1995, the Company's net
sales, net income and net income per common and equivalent share (excluding
purchased in-process technology and related costs) for the fiscal year ended
June 30, 1996 would have been $66.4 million, $2,360 and $.16, respectively.
(5) INVENTORIES
Inventories at June 30, 1998 and 1997 consist of the following:
1998 1997
- --------------------------------------------------------------------------------
Raw materials $ 938 $ 1,088
Work-in-process 109 261
Finished goods 205 1,236
- --------------------------------------------------------------------------------
1,252 2,585
Inventory allowances (335) (725)
- --------------------------------------------------------------------------------
$ 917 $ 1,860
- --------------------------------------------------------------------------------
(6) PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1998 and 1997 consist of the
following:
1998 1997
- --------------------------------------------------------------------------------
Furniture and fixtures $ 6 $ 892
Computers and other equipment 5,259 6,929
Leasehold improvements 68 62
- --------------------------------------------------------------------------------
5,333 7,883
Accumulated depreciation
and amortization (4,198) (5,060)
- --------------------------------------------------------------------------------
$ 1,135 $ 2,823
- --------------------------------------------------------------------------------
42
(7) OTHER ASSETS
Other assets at June 30, 1998 and 1997 consist of the following:
1998 1997
- --------------------------------------------------------------------------------
Purchased technology, net of
accumulated amortization of $1,323 and $984 $1,387 $2,471
Trademarks and patents, net of
accumulated amortization of $70 and $44 55 80
Recoverable deposits and other 125 197
- --------------------------------------------------------------------------------
$1,567 $2,748
- --------------------------------------------------------------------------------
As more fully described in Note 3, in 1998 the Company wrote off approximately
$.4 million of abandoned purchased technology associated with the purchase of
Stylus Innovations, Incorporated in February 1996.
(8) ACCRUED LIABILITIES
Accrued liabilities at June 30, 1998 and 1997 consist of the following:
1998 1997
- --------------------------------------------------------------------------------
Compensation and benefits $ 799 $ 798
Payroll, sales and property taxes 88 423
Marketing 349 1,107
Royalties 227 460
Other 207 330
- --------------------------------------------------------------------------------
$1,670 $3,118
- --------------------------------------------------------------------------------
(9) MORTGAGE NOTE PAYABLE
The mortgage note payable at June 30, 1997 consisted of an 8.2% mortgage
note payable secured by a deed of trust on the Company's former land and
building in Tucson, Arizona. The mortgage note had a 20 year amortization with a
final balloon payment due at the end of 10 years.
One of the actions taken in connection with the restructuring of the
Company's operations in June 1997 (See Note 2) was the relocation of the
Company's Tucson operations to a smaller facility. On July 9, 1997, the Company
accepted an offer to sell the corporate headquarters land and building and two
adjacent parcels for $4.1 million.
On October 31, 1997, the Company closed escrow on the sale of its Tucson
building and land. The Company received gross proceeds of $4.1 million on the
sale, net cash proceeds of $1.6 million after the pre-payment of a $2.2 million
mortgage and other associated closing costs. The Company recognized a net gain
of $1.3 million on the sale of the building and land for the fiscal year ended
June 30, 1998.
(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.
43
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. In August
1998, the Rights Agreement was amended to increase the percentage of common
stock that an individual or group of affiliated individuals could own before
triggering the provisions of the Rights Agreement from 15% to 25%.
Stock Incentive Plans
On October 20, 1994, the shareholders approved the Company's 1994 Stock
Incentive Plan (the "1994 Plan"). The 1994 Plan provides for the grant of
Incentive Stock Options, Non-qualified Stock Options, Stock Appreciation Rights
(Tandem and Free-standing), Restricted Stock, Deferred Stock, Performance Units
and Performance Shares to officers, key employees, non-employee directors and
certain consultants of the Company.
The 1994 Plan provides that the maximum number of options that can be
granted shall be 2,000,000 shares, plus 1.5% of the number of shares of common
stock issued and outstanding as of January 1 of each year commencing on January
1, 1995. The maximum number of options available for grant each year shall be
all previously ungranted options plus all expired and canceled options. Stock
options are generally granted at a price not less than 100% of the fair market
value of the common shares at the date of grant. Generally, options become
exercisable over a four-year period commencing on the date of grant. Generally,
options vest 25% at the first anniversary of the date of grant and the remaining
75% vest in equal monthly increments over the remaining three years of the
vesting period. No 1994 Plan options may be exercised more than ten years from
the date of grant. The 1994 Plan will terminate on the earlier of June 15, 2004,
or the date upon which all awards available for issuance have been issued or
canceled.
The 1994 Plan contains an automatic option grant program limited to
those persons who serve as non-employee members of the Board of Directors,
including any non-employee Chairman of the Board ("Eligible Directors"). After
October 20, 1994, each individual who first becomes an Eligible Director shall
automatically be granted a Nonqualified Option to purchase 15,000 shares of
common stock. At the date of each annual shareholders' meeting, beginning with
the 1995 annual shareholders' meeting, each person who is at that time serving
as an Eligible Director will automatically be granted a Nonqualified Option to
purchase 5,000 shares of common stock (and an additional 10,000 shares for the
Eligible Director serving as Chairman of the Board), provided that such person
has served as a member of the Board of Directors for at least six months. There
is no limit on the number of automatic option grants that any one Eligible
Director may receive. All grants to an Eligible Director under the 1994 Plan
will have a maximum term of ten years from the automatic grant date. Each
automatic grant will vest in three equal and successive annual installments. At
June 30, 1998, there were 1,137,342 additional shares available for grant under
the 1994 Plan.
Subsequent to the approval date of the 1994 Plan, the Company ceased
granting of options under the Amended 1990 Stock Incentive Plan and the 1991
Director Options Plan. All options presently outstanding under these plans
continue to be governed by the terms of those plans and the numbers of shares of
common stock issueable upon exercise by the Company.
The per share weighted-average fair value of stock options granted
during the fiscal years ended June 30, 1998, 1997 and 1996 was $2.87, $.64 and
$.45 on the date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions. 1998 - expected dividend yield 0%,
volatility factor of 63%, risk-free interest rate of 5.5%, and an expected life
of six years: 1997 - expected dividend yield 0%, volatility factor of 57%,
risk-free interest rate of 6.1%, and an expected life of six years: 1996 -
expected dividend yield 0%, volatility factor of 58%, risk-free interest rate of
6.3%, and an expected life of six years.
44
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The Company applies APB Opinion No. 25 in accounting for its stock
incentive plan and, accordingly, no compensation cost has been recognized for
its stock options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net loss and net loss per common and
common equivalent share for the fiscal years ended June 30, 1998, 1997 and 1996
would have been increased to the pro forma amounts indicated below:
1998 1997 1996
---- ---- ----
Net loss As reported $(2,913) $(28,425) $(18,328)
Pro forma $(2,913) $(28,810) $(18,965)
Basic and Diluted As reported $ (.20) $ (1.96) $ (1.27)
Net loss per share Pro forma $ (.20) $ (1.98) $ (1.31)
Pro forma net loss reflects only options granted during the fiscal years
ended June 30, 1998, 1997 and 1996. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in the
pro forma net income amounts presented above because compensation cost is
reflected over the options' vesting period of three to four years and
compensation cost for options granted prior to July 1, 1995 is not considered.
Stock option activity during the periods indicated is as follows:
Number of Weighted-Average
Shares Exercise Price
- --------------------------------------------------------------------------------
Balance at June 30, 1995 2,376,114 $10.33
Granted 1,423,250 8.96
Exercised (112,848) 7.48
Forfeited (443,944) 10.81
- --------------------------------------------------------------------------------
Balance at June 30, 1996 3,242,572 $10.04
Granted 601,000 4.56
Exercised (15,292) 3.12
Forfeited (1,508,108) 8.90
================================================================================
Balance at June 30, 1997 2,320,172 $9.44
Granted 1,455,700 2.49
Exercised (10,078) 2.31
Forfeited (2,133,582) 5.54
================================================================================
Balance at June 30, 1998 1,632,212 $4.72
================================================================================
45
The following table summarizes information about the stock options
outstanding at June 30, 1998:
Weighted Weighted Weighted
Average Average Average
Range of Options Remaining Exercise Options Exercise
Exercise Prices Outstanding Contractual Life Price Exerciseable Price
- -------------------------------------------------------------------------------------------------------------
$2.03-$2.06 129,388 9.58 2.04 33,493 2.03
$2.13 439,342 9.08 2.13 125,851 2.13
$2.25-$2.50 216,500 8.95 2.48 53,750 2.48
$2.69-$3.13 486,665 9.50 2.80 80,246 2.86
$4.13-$6.63 207,042 9.50 5.25 49,062 5.86
$7.00-$8.81 108,575 6.83 7.78 94,566 7.76
$9.63-$14.69 44,700 6.70 11.97 32,507 11.99
- -------------------------------------------------------------------------------------------------------------
$2.03-$14.69 1,632,212 9.07 $4.72 469,475 $6.22
- -------------------------------------------------------------------------------------------------------------
At June 30, 1998, 1997 and 1996, the number of options exerciseable was
469,475, 1,139,212 and 1,018,338 respectively, and the weighted-average exercise
price of those options was $6.22, $10.78 and $10.43, respectively.
On July 29, 1997, January 14, 1998 and April 23, 1998 the Board of
Directors of the Company approved the repricing of certain employee stock
options. The original grant prices ranged from $3.00 to $8.81. The new prices
ranged from $2.03 to $4.13. There were 419,000 options repriced during fiscal
year 1998.
Common stock received through the exercise of incentive stock options
which are sold by the optionee within two years of grant or one year of
exercise, result in a tax deduction for the Company equivalent to the taxable
gain recognized by the optionee. For financial reporting purposes, the tax
effect of this deduction is accounted for as a credit to additional paid-in
capital rather than as a reduction of income tax expense.
Employee Stock Purchase Plan
On October 20, 1994, the shareholders approved the establishment of an
Employee Stock Purchase Plan and authorized for issuance 200,000 shares of
common stock. During the fiscal years ended June 30, 1998, 1997 and 1996,
22,060, 25,282 and 23,362 shares of common stock were purchased, respectively,
at prices ranging from $1.70 to $6.75 per share. At June 30, 1998, 121,563
shares of common stock were available for issuance under the plan. The plan
provides for eligible participants to purchase common stock semi-annually at the
lower of 85% of the market price at the beginning or end of the semi-annual
period.
Stock Repurchase Program
In February 1997, the Company's Board of Directors readopted and
extended a stock repurchase program under which the Company was authorized to
repurchase up to 1,000,000 shares of its outstanding common stock for general
corporate purposes. The Board of Directors authorized Company management to
pursue the repurchase program in open market transactions periodically,
depending upon market conditions and other factors. The stock repurchase program
expired in February 1998 and has not been renewed. A total of 62,500 shares were
repurchased under this program in fiscal 1997.
(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 established a pension plan for its United Kingdom associates
in December 1997. The pension plan covered all United Kingdom associates and
allowed participants to contribute up to the maximum limits imposed by Inland
Revenue regulations. The Company will matched up to 50% of the participants'
annual contributions up to 6% of the participant's compensation. All
contributions including the employer match were immediately vested.
The Company's profit-sharing plan expense for these plans was $226,
$138, and $198 for the fiscal years ended June 30, 1998, 1997 and 1996,
respectively.
46
(12) INCOME TAXES
Components of the income tax expense (benefit) for the fiscal years
ended June 30 follow:
Current Deferred Total
- --------------------------------------------------------------------------------
1998:
Federal $ -- $ -- $ --
State -- -- --
Foreign 156 -- 156
- --------------------------------------------------------------------------------
Total $ 156 $ -- $ 156
- --------------------------------------------------------------------------------
1997:
Federal $(4,300) $ 3,509 $ (791)
State -- 743 743
- --------------------------------------------------------------------------------
Total $(4,300) $ 4,252 $ (48)
- --------------------------------------------------------------------------------
1996:
Federal $(5,008) $ (30) $(5,038)
State -- (5) (5)
Foreign 50 -- 50
- --------------------------------------------------------------------------------
Total $(4,958) $ (35) $(4,993)
================================================================================
The income tax expense (benefit) differs from the amount computed by
applying the statutory Federal income tax rate to the loss before income taxes.
The sources and tax effects are as follows:
1998 1997 1996
- --------------------------------------------------------------------------------
Computed "expected" tax benefit $(937) $(9,681) $(7,929)
State and foreign income taxes 156 -- 50
Non-deductible in-process
technology write-offs -- -- 3,040
Change in beginning of year valuation allowance -- 4,244 --
Allowance for current net operating losses 937 5,389 --
Non-taxable interest income -- -- (154)
- --------------------------------------------------------------------------------
Total income tax expense (benefit) $ 156 $ (48) $(4,993)
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
1998 and 1997 are presented below:
1998 1997
- --------------------------------------------------------------------------------
Deferred tax assets:
Purchased technology $ 469 $ 504
Allowances for doubtful accounts and returns 637 1,596
Allowances for inventory obsolescence, direct
labor and overhead capitalization 169 356
Accrued compensation and benefits 243 208
Accrued restructuring costs 634 1,869
Other accrued liabilities 295 571
Depreciation and amortization 349 --
Federal net operating loss carryforwards 6,317 2,983
State net operating loss carryforwards 3,186 2,701
- --------------------------------------------------------------------------------
Gross deferred tax assets 12,299 10,788
Less valuation allowance (12,226) (10,641)
- --------------------------------------------------------------------------------
Net deferred tax assets 73 147
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Prepaid expenses 73 147
- --------------------------------------------------------------------------------
Gross deferred tax liabilities 73 147
- --------------------------------------------------------------------------------
Net deferred tax assets $ -- $ --
- --------------------------------------------------------------------------------
47
As of June 30, 1998, the valuation allowance had increased by $1,585 to
account for the changes in net deferred tax asset balances. In the assessment of
the recognition of a valuation allowance, the Company considered recent
operating losses experienced during the Company's transition from a company with
primarily a networking and communications software orientation to a software
company with its principal focus on computer telephony solutions, the expected
future impact of the restructuring actions affected during the fiscal year, the
uncertainty in estimating the magnitude and timing of the revenue contribution
from products expected to be released over the next several quarters and the
expiration dates of State net operating loss carryforwards.
As of June 30, 1998, the Company has federal net operating losses
available for carryforward of $18.6 million, which will expire in the years
beginning July 1, 2012.
(13) LEASE COMMITMENTS
Operating Leases
The Company leases office, manufacturing and storage space, vehicles,
and equipment under noncancelable operating lease agreements expiring through
2001. 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 $1,204, $955,
and $699 for the fiscal years ended June 30, 1998, 1997 and 1996, respectively.
48
The approximate minimum rental commitments under noncancelable
operating leases that have remaining noncancelable lease terms in excess of one
year at June 30, 1998 were as follows:
Years Ending Future Minimum
June 30 Lease Payments
- --------------------------------------------------------------------------------
1999 $ 984
2000 970
2001 392
2002 --
Capital Leases
In December 1996, the Company entered into a sale-leaseback transaction
for computer equipment and software with an aggregate value of approximately
$1,350. The underlying lease, classified as a capital lease, includes a 10%
purchase option and requires monthly payments of approximately $42 during its
three-year term. At June 30, 1998 and 1997, the gross amount of plant and
equipment held under capital leases were as follows:
1998 1997
- --------------------------------------------------------------------------------
Equipment $ 148 $ 1,536
Less accumulated amortization 45 332
- --------------------------------------------------------------------------------
$ 103 $ 1,204
- --------------------------------------------------------------------------------
Amortization of assets held under capital leases is included with
depreciation expense.
The following is a schedule of future minimum lease payments under all
capital leases together with the present value of net minimum leases payments,
as of June 30, 1998:
Years Ended June 30
- --------------------------------------------------------------------------------
1999 $512
2000 296
2001 --
- --------------------------------------------------------------------------------
Total minimum lease payments 808
Less amount representing interest
(at rates ranging from 8.25%
to 9%) 55
- --------------------------------------------------------------------------------
Present value of net minimum lease
payments including current
portion of $464 $753
- --------------------------------------------------------------------------------
(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.
49
(15) DOMESTIC AND INTERNATIONAL OPERATIONS
A summary of domestic and international net sales and international
assets for the fiscal years ended June 30 follows:
1998 1997 1996
- --------------------------------------------------------------------------------
Domestic $18,621 $24,472 $42,705
International 6,172 8,937 18,267
- --------------------------------------------------------------------------------
Net sales $24,793 $33,409 $60,972
- --------------------------------------------------------------------------------
International assets $ 176 $ 1,095 $ 1,795
- --------------------------------------------------------------------------------
(16) QUARTERLY RESULTS (UNAUDITED)
The following table presents selected unaudited quarterly operating
results for the Company's eight quarters ended June 30, 1998. The Company
believes that all necessary adjustments have been made to present fairly the
related quarterly results.
First Second Third Fourth
Fiscal 1998 Quarter Quarter Quarter Quarter Total
- ------------------------------------------------------------------------------------------------------
Net Sales $ 6,725 $ 6,761 $ 6,215 $ 5,092 $ 24,793
Gross Profit 5,271 4,910 4,556 3,547 $ 18,284
Operating income (loss) 125 21 (421) (4,100) $ (4,375)
Net income (loss) 238 1,298 (162) (4,287) $ (2,913)
Basic and diluted net
income (loss) per share .02 .09 (.01) (.30) $ (.20)
Fiscal 1997
- ------------------------------------------------------------------------------------------------------
Net Sales $ 11,120 $ 9,505 $ 8,452 $ 4,332 $ 33,409
Gross Profit 7,190 6,389 5,418 2,064 $ 21,061
Operating loss (5,448) (2,940) (5,168) (15,568) $(29,124)
Net loss (3,385) (1,950) (3,663) (19,427) $(28,425)
Basic and diluted net
loss per share (.23) (.13) (.25) (1.34) $ (1.96)
50
(17) SUPPLEMENTAL FINANCIAL INFORMATION
A summary of additions and deductions related to the allowances for
accounts receivable and inventories for the fiscal years ended June 30, 1998,
1997 and 1996 follows:
Balance at Balance at
Beginning End of
of Year Additions Deductions Year
- --------------------------------------------------------------------------------------------------------
Allowances for doubtful accounts
and returns:
Year ended June 30, 1998 $3,990 $ 3,139 $ (5,537) $1,592
- --------------------------------------------------------------------------------------------------------
Year ended June 30, 1997 $3,261 $12,321 $(11,592) $3,990
- --------------------------------------------------------------------------------------------------------
Year ended June 30, 1996 $2,800 $11,160 $(10,699) $3,261
- --------------------------------------------------------------------------------------------------------
Allowances for inventory obsolescence:
Year ended June 30, 1998 $ 725 $ 200 $ (590) $ 335
- --------------------------------------------------------------------------------------------------------
Year ended June 30, 1997 $1,565 $ 884 $ (1,724) $ 725
- --------------------------------------------------------------------------------------------------------
Year ended June 30, 1996 $ 600 $ 3,015 $ (2,050) $1,565
- --------------------------------------------------------------------------------------------------------
(18) SUBSEQUENT EVENTS
In August 1998, the Company modified certain terms of its 1994
Preferred Shares Rights Agreement (See "Note 10 of Notes to Consolidated
Financial Statements" under "Item 8. Financial Statements and Supplementary
Data."). The effect of this amendment was to increase the percentage of common
stock that an individual or group of affiliated individuals could own before
triggering the provisions of the 1994 Preferred Shares Rights Agreement from 15%
to 25%.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure.
- ---------------------
Not applicable
51
PART III
Certain information required by Part III is omitted from this Report by
virtue of the fact that the Company will file 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 "1998
Proxy Statement") relating to the Company's Annual Shareholders' Meeting to be
held November 10, 1998. Certain information included in the 1998 Proxy Statement
is incorporated herein by reference. The Company intends to disseminate the 1998
Proxy Statement to shareholders beginning on or about October 5, 1998.
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," "Incumbent
Directors," "Section 16(a) Beneficial Ownership," and "Meetings and Committees
of the Board of Directors" of the 1998 Proxy Statement, and is incorporated
herein by reference.
The information concerning the Company's executive officers required by
this item is contained in Part I, Item 4 of this Report under the caption
"Executive Officers of the Registrant," and is incorporated herein by reference.
Item 11. Executive Compensation
- -------------------------------
The information required by this item is contained in "Executive
Compensation," "Summary Compensation Table," "Officer Severance," "Option Grants
in Last Fiscal Year," "Ten Year Option Repricings," "Aggregate Option Exercises
in Last Fiscal Year and Fiscal Year-End Option Values," "Director
Compensation,"Change in Control and Severance Agreements," "Compensation
Committee Interlocks and Insider Participation," "Report of the Compensation
Committee," and "Comparison of Stock Performance" of the 1998 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 1998 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" of the 1998 Proxy
Statement, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
The information required by this item is contained in "Certain
Relationships and Related Transactions" of the 1998 Proxy Statement, and is
incorporated herein by reference.
52
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 32 hereof.
(b) Reports on Form 8-K.
--------------------
The Company filed a report on Form 8-K dated August 27,
1997, announcing the departure of Gary R. Acord as Vice
President and Chief Financial Officer effective August 28, 1997
and the appointment of the Company's Controller, Kirk D. Mayes
as Chief Accounting Officer and Acting Principal Financial
Officer.
The Company filed a report on Form 8-K dated September
17, 1997, announcing the resignation of William C. Keiper as
Chairman of the Board of Directors effective September 12, 1997
and resignation as Chief Executive Officer effective September
30, 1997. The Company appointed Jerry Goldress as Chairman of
the Board of Directors and Principal Executive Officer.
The Company filed a report on Form 8-K dated August 28,
1998, amending certain provisions of the Company's 1994
Preferred Shares Rights Agreement.
The Company filed a report on Form 8-K dated September
18, 1998, announcing the appointment of Sheldon M. Schenkler as
Vice President and Chief Financial Officer, Scott Moule as Vice
President and General Manager of the Company's Communications
Software Group and announcing the movement of the Company's
corporate headquarters and principal executive offices to
Cambridge, Massachusetts.
(c) Exhibits.
---------
Page or
Designation Description Method of Filing
- ----------- ----------- ----------------
3.01 Certificate of Incorporation. (1)
3.02 Bylaws. (1)
4.01 Specimen Common Stock Certificate. (1)
4.02 Rights Agreement, dated as of December 23, 1994, between 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 (11)
William C. Keiper and the Registrant.
10.06 Employment Agreement, dated as of October 26, 1995, between Joel J. (11)
Kocher and the Registrant.
10.07 Form of Indemnification Agreement entered into between the Registrant (1)
and its Directors.
53
Page or
Designation Description Method of Filing
- ----------- ----------- ----------------
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 (8)
ECS, Inc. and the Registrant.
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).
10.14 Amendment to the 1994 Preferred Shares Rights Agreement (12)
11.01 Computation of net loss per share.
22.01 Subsidiaries of the Registrant. Page 71
23.01 Consent of Independent Public Accountants. Page 72
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.
(11) Incorporated by reference to the Company's Annual Report on Form 10-K
for fiscal 1996 ended June 30, 1996.
(12) Incorporated by reference to the Company's Form 8-K dated August 28,
1998.
54
SIGNATURES
Pursuantto 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 25, 1998 By /s/ T. Paul Thomas
----------------------------------
T. Paul Thomas, President
and Chief Operating Officer
(Principal Executive Officer)
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints T. PAUL THOMAS and KIRK D. MAYES, and each of them, his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Form 10-K
Annual Report, and to file the same with all exhibits thereto, and all documents
in connection therewith, with the Securities and Exchange Commission, granting
such attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully and to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ T. Paul Thomas President and Chief Officer Officer, September 25, 1998
- ----------------------------- Director (Principal Executive Officer)
T. Paul Thomas
/s/ Kirk D. Mayes Corporate Controller and September 25, 1998
- ----------------------------- Principal Accounting Officer
Kirk D. Mayes
/s/ Jerry E. Goldress Chairman of the Board September 25, 1998
- -----------------------------
Jerry E. Goldress
/s/ Kathryn A. Braun Director September 25, 1998
- -----------------------------
Kathryn A. Braun
/s/ Michael P. Downey Director September 25, 1998
- -----------------------------
Michael P. Downey
55
EXHIBIT INDEX
Sequentially
Numbered
Exhibit Description Page
- --------------------------------------------------------------------------------
11.01 Computation of net loss per share. 57
22.01 Subsidiaries of the Registrant. 58
23.01 Consent of Independent Public Accountants. 59
56