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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, 1999
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 $88,587,024 based on the closing sale price as
reported by The Nasdaq Stock Market on September 23, 1999.
The number of shares outstanding of each of the registrant's classes of common
stock, as of September 23, 1999 was 14,841,805 shares of Common Stock, $.01 par
value.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Proxy Statement dated September 25, 1999, for the Annual
Meeting of Shareholders to be held on November 2, 1999, are incorporated by
reference into Part III.
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TABLE OF CONTENTS
Page
----
PART I
Item 1. Business.......................................................2
Item 2. Properties....................................................13
Item 3. Legal Proceedings.............................................13
Item 4. Submission of Matters to a Vote of Security Holders...........13
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
Item 7(a). Quanitative and Qualitative Disclosures about Market Risk.....30
Item 8. Financial Statements and Supplementary Data...................31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................51
PART III......................................................................51
Item 10. Directors and Executive Officers of the Registrant............51
Item 11. Executive Compensation........................................51
Item 12. Security Ownership of Certain Beneficial Owners
and Management..............................................51
Item 13. Certain Relationships and Related Transactions................51
PART IV.......................................................................52
Item 14. Exhibits and Reports on Form 8-K..............................52
SIGNATURES....................................................................54
1
PART I
ITEM 1. BUSINESS.
INTRODUCTION
Artisoft, Inc. ("Artisoft", the "Company" or the "Registrant") is a
computer software company, which develops, markets and sells computer telephony
products, communications software products and associated services.
The Company's principal executive offices are located at 5 Cambridge
Center, Cambridge, Massachusetts 02142. The telephone number at that address is
(617) 354-0600. The Company was incorporated in November 1982 and reincorporated
by merger in Delaware in July 1991.
BACKGROUND AND GENERAL DEVELOPMENT OF BUSINESS
FISCAL 1999
Entering fiscal year 1999, Artisoft had two key objectives: to continue and
accelerate the development of its Computer Telephony Product Group business and
to maximize the profitability of its Communications Software Group product line.
The Company met its first objective by focusing its resources on the
Company's TeleVantage product. TeleVantage is a complete software-based
telephone system that is fully integrated with a local area network ("LAN"). The
system provides PBX-like call control functionality and other ancillary
features. The Company expanded certain computer telephony marketing and
advertising programs, hired 30 new sales, support and development personnel and
expanded the Company's TeleVantage original equipment manufacturer ("OEM"),
international and field sales teams. The net revenues from the Computer
Telephony Product Group increased 48% to $7.1 million from $4.8 million in
fiscal 1998. The growth in the computer telephony revenues accelerated late in
the year, ending with a 96% increase in computer telephony revenues between the
fourth quarter of fiscal 1998 and the fourth quarter of fiscal 1999. The growth
in Computer Telephony Product Group revenues was principally attributable to
increased sales of TeleVantage.
TeleVantage received numerous "Best Of" awards including being named the #1
Product of the Year by CT Magazine in December 1998. The Company also added over
400 value added resellers (VAR's), national interconnects, international
distributors and OEM/licensing partners. Artisoft announced strategic
partnerships with WinStar, Affinity, ICG and Olivetti for sales and marketing of
TeleVantage.
The Company met its second objective of substantially improving the
profitability of the Communications Software Group by continuing to implement
expense reductions relative to the Communications Software Group and by
developing its portfolio of communications and networking products. The
Communications Software Group achieved operating profitability, with an
operating profit exceeding $4.2 million. By completing restructuring actions
commenced in 1997 and 1998, as described more fully below, Communications
Software Group expenses decreased by 48% to $7.3 million from $14.2 million in
fiscal 1998. While this expense reduction was implemented, net revenues from the
Communications Software Group decreased by only 25% to $15.2 million in fiscal
1999 from $20.0 million in fiscal 1998. Most of the decrease is attributable to
lower sales of the Company's LANtastic product line.
In addition to bringing the Communications Software Group to profitability
in fiscal 1999, the Company added to its Communications Software Group product
portfolio with new software products: BizFax, a fax sharing software solution,
and WinBeep, a paging software utility.
In fiscal year 2000, the company intends to further pursue the
reorganization and improvement of its Computer Telephony Products Group and
Communications Software Product Group. The Company may explore a variety of
strategic alternatives, including a spin-off of a product group, marketing or
other strategic alliances, or other corporate or business transactions. There
can be no assurance, however, that the Company will decide to pursue any such
alternative or that any such alternative will be successfully completed. Certain
risks associated with such transactions are discussed under "Risk Factors --
General -- Acquisitions and Divestitures" included in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
2
FISCAL 1998
In fiscal 1998, Artisoft implemented a major business restructuring plan
involving three key elements. First, the Company reduced 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 increased revenues
of 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 transforming the Company into a computer telephony company.
Finally, the Company introduced TeleVantage, the Company's software-based phone
system, in March 1998.
During fiscal 1998, the Company's revenues declined as the Company's
LANtastic 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, the Company reduced its operating
expenses. The Company's computer telephony and other communications and
networking product revenues partially offset the decreasing revenues from
LANtastic products. The Company also introduced several new products most
notably TeleVantage, as part of the strategy to diversify its product portfolio.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations" for further discussions of new product introductions.
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 to $20.2
million in fiscal 1998 from $38.9 million in fiscal 1997.
In fiscal 1998, the Company took steps to reorient its business development
strategy towards computer telephony products and released TeleVantage, which
received numerous industry awards. In June 1998, the Company moved its principal
executive offices to its computer telephony facilities in Cambridge,
Massachusetts. In May 1998, the Company combined its communications software and
remote computing groups, resulting in the closure of the Company's Iselin, New
Jersey office and the transfer of certain functions to the Company's Tucson,
Arizona facilities.
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
Computer Telephony Group, which is located in Cambridge, Massachusetts, is
responsible for the Company's computer telephony products, including TeleVantage
and Visual Voice. The Communications 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 communication
software products, including CoSession.
The Company currently holds registered trademarks on its LANtastic, Visual Voice
and BizFax products in the United States Trademark and Patent Office. In
addition, the Company currently has trademark applications pending approval on
its i.Share, ModemShare, XtraMail, CoSession Remote and TeleVantage products.
Following is a description of the products and services offered by each group.
3
COMPUTER TELEPHONY GROUP. The Computer Telephony ("CT") Group focuses on
two objectives: first, to deliver CT software applications to small and medium
sized businesses and corporate branch offices or departments; and second, to
increase its leadership in the CT software development toolkit market.
TeleVantage is a complete software 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.
In December 1998, Artisoft released TeleVantage 2.1 which, in addition to
the features offered in TeleVantage 2.0, offers: T1 support, DID (direct inward
dial), enhanced queues, personal information manager (PIM) integration, IVR
(inter-active voice response) toolkit support and telephony application
programming interface (TAPI) service.
Artisoft's Visual Voice is the industry's leading CT development toolkit.
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.
In December 1998, Artisoft released Visual Voice Pro 5.0, which, in
addition to the features offered in Visual Voice Pro 4.1, offers: voice over the
internet (VoIP) capabilities, multi-chassis call bridge/conferencing support,
enhanced network support and international telephone line support.
COMMUNICATIONS SOFTWARE GROUP. The Communications Software Group offers a
range of software products for the communication and networking needs of small
businesses and workgroups. LANtastic is a peer to peer local area network (LAN)
product designed to be powerful yet easy-to-use and able to support a variety of
PC operating systems. Other Communications Software Group products include
ModemShare 32, i.Share 3.0, CoSession Remote 32, BizFax and WinBeep.
In June 1998, Artisoft released LANtastic 8.0 which 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, printers, applications,
CD-ROMs, corporate resources (such as e-mail) and allows network administrators
to manage and control multiple operating systems, protocols, applications and
desktops.
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,
internet e-mail software and user access control (i.Watch).
Artisoft's BizFax is a client server network faxing application which
enables users to send faxes from any Windows application and includes such
features as broadcast faxing, the ability to track call costs and schedule fax
transmission.
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.
4
Artisoft's WinBeep and WinBeep 32 enables users to send messages from their
PC's to alphanumeric pagers or mobile PC's with pager cards. WinBeep 32 enables
users to send full-text messages to pagers from any Windows 95/NT computer.
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 Condition
and Results of Operations" including the section entitled "Risk Factors" for
further discussion of new product introductions.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company's products are considered part of two industry groups: computer
telephony software and communications software. Information regarding these two
industry segments is contained in Note 1, "Summary of Significant Accounting
Policies" included in "Notes to Consolidated Financial Statements" included in
"Item 8. Financial Statements and Supplementary Data." Information regarding
domestic and international net sales and international assets are contained in
Note 13, "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, product display boxes and third-party
product licenses. These 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 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. 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 it
products.
The Company's TeleVantage product is designed to be operated on PCs of
multiple manufacturers in conjunction with Intel (Dialogic) voice processing
boards. The Company purchases hardware components from certain telephony
hardware vendors, principally Intel (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 Intel (Dialogic) Corporation.
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.
5
MARKETING, SALES AND DISTRIBUTION
The Company's principal 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 objectives include frequent
participation in industry trade shows and seminars, direct mail, advertising in
major trade publications, executive participation in press briefings and
industry seminars, sponsorship of seminars by the Company and on-going
communication with the Company's end users. To train and support resellers and
distributors, the Company provides mailings of product and technical updates,
seminar material and corporate presentations. The Company's Computer Telephony
Products Group offers a TeleVantage Partner Program which provides enhanced
training, services and support to its Computer Telephony resellers and
distributors. 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 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 exposed to its major distributors for price protection for
list price reductions by the Company on its products held in such distributors'
inventories. 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 is usually concentrated in the
latter half of that month. Orders placed by major customers are typically based
upon the customers' forecasted sales level for Company products and inventory
levels of Company products desired to be maintained by the major customers at
the time of the orders. Major distribution customers may receive negotiated cash
rebates, market development funds and extended credit terms from the Company for
purchasing Company products, in accordance with industry practice. Changes in
purchasing patterns by one or more of the Company's major customers related to
customer forecasts of future sales of Company products, customer policies
pertaining to desired inventory levels of Company products, negotiations of
rebate and market development funds or in the ability of the Company to
6
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 an 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 Company's sales force specializes in educating corporate
end users, original equipment manufacturers and independent software vendors
about the Company's products. The Company's sales organization pursues prospects
in their geographic areas, and the main focus is on OEM customers. 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.
Although not a major focus 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.
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 $5.4 million, $7.1
million and $9.3 million in fiscal 1999, 1998 and 1997, respectively. The
Company has not engaged in customer-sponsored research activities, but may do so
in the future.
The Company utilizes a sales, marketing and distribution strategy with
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 sessions 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 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 manufacturers.
The Company works with its distributors and mail order partners to ensure
that an adequate supply of TeleVantage, LANtastic, ModemShare, i.Share,
CoSession Remote and other communications software products is available to its
7
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 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. The Company believes 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 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 software based phone system
principally competes with proprietary PBXs and Key System Units offered by
companies such as Nortel, Cisco Systems, and Lucent Technologies. While the
Company believes that its TeleVantage software offers superior functionality and
value than these products, there can be no assurances that these providers will
not choose to develop their own software based phone systems. In addition,
TeleVantage competes with other software based phone systems provided by
InterActive Intelligence, Altigen, NetPhone, Picazo and Com2001. Certain of the
Company's competitors have entered into non-exclusive marketing and other
partnerships with certain PC manufacturers, software companies or telephony
hardware providers. While the company believes that its TeleVantage software
offers greater functionality and ease of use than these products, these
competitors may 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.
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 and Microsoft Windows NT network server. The Company believes that
the viability of Microsoft's products has and will continue to negatively impact
the Company's Communications Software Group net sales and income from continuing
operations. 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
8
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.
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 extremely likely that the Company's NOS business will
continue to decline in fiscal year 2000. 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.
The majority of the Company's sales of its remote control software,
CoSession Remote and ConfigSafe, are to a single customer, International
Business Machines (IBM). Consequently, the Company's ability to generate
revenues from these products is dependent upon the continuation of its OEM
relationship with IBM.
Artisoft's system recovery utility, ConfigSafe, is licensed from a third
party. This licensing arrangement is scheduled to terminate in the second
quarter of fiscal 2000. The Company plans to introduce an alternative system
recovery product obtained from other sources. However, there can be no assurance
that the Company will be able to obtain such an alternative product or to do so
on a timely basis. The failure to do so may have an adverse impact on the
Company's communications software product revenues in fiscal 2000.
INTERNATIONAL BUSINESS
The Company markets and sells its products in international as well as
domestic markets. In fiscal 1999, 1998 and 1997, international sales accounted
for 19%, 25% and 27%, respectively, of the Company's net sales. Less than 1% of
the Company's assets were deployed to support the Company's international
business at the end of fiscal 1999 and 1998. The decline in international net
sales during the fiscal years 1999 and 1998 was principally the result of lower
demand for the Company's Communications Software Group products (especially in
Europe and Latin America). The closure of the Company's international sales
offices in fiscal years 1998 and 1997 also contributed to the decline. Increases
in international sales of the Company's computer telephony products partially
offset the aforementioned decline.
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.
During fiscal 1999, the Company established several international
distributor relationships for its Computer Telephony products, and therefore,
computer telephony international sales should increase in fiscal 2000.
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.
9
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 1999, one customer (IBM) accounted for 15% of
the Company's annual net sales. In fiscal 1998, one customer (IBM) accounted for
10% of the Company's annual net sales. No customers accounted for more than 10%
of the Company's net sales in fiscal 1997. At June 30, 1999, IBM and Ingram
Micro, Inc. accounted for approximately 14% and 10%, respectively, of the
Company's outstanding trade accounts receivable. At June 30, 1998, Ingram Micro,
Inc. and IBM accounted for approximately 16% and 13%, respectively, of the
Company's outstanding trade accounts receivable. The loss of any of the major
distributors or OEM's or their failure to pay the Company for products purchased
from the Company could have an adverse effect on the Company's operating
results. The Company's standard credit terms are net 30 days, although longer
terms are provided to various major customers on a negotiated basis from time to
time.
BACKLOG
Substantially all of the Company's revenue in each quarter results from
orders booked in that quarter. Accordingly, the Company does not believe that
its backlog at any particular point is indicative of future sales. The Company's
backlog of orders at June 30, 1999 was approximately $47,000, compared with
approximately $59,000 at June 30, 1998.
PROPRIETARY RIGHTS AND LICENSES
The Company currently relies on a combination of trade secret, copyright,
trademark and patent laws, nondisclosure and other contractual agreements and
other technical measures to establish and protect its proprietary rights in its
products and to protect its technologies from appropriation by others. Despite
these precautions, unauthorized parties may attempt to copy aspects of the
Company's products or to obtain and use information the Company regards as
proprietary. In addition, it may be possible for others to develop products
using technologies similar to the Company's but which do not infringe upon the
Company's proprietary rights.
While the Company's success will depend to a certain degree on its ability
to protect its technologies, the Company believes that, because of the rapid
pace of technological change in the industries in which the Company competes,
the legal protections for its products are less significant factors in the
Company's success than the knowledge, ability and experience of the Company's
employees, the nature and frequency of product enhancements and the timeliness
and quality of support services provided by the Company.
From time to time, the Company has received and may in the future receive
communications from third parties asserting that the Company's trade names or
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 have an adverse affect on
the Company and may also require the Company to obtain one or more licenses from
third parties. There can be no assurance that the Company would be able to
obtain any such required licenses upon reasonable terms, if at all, and the
failure by the Company to obtain such licenses could have an adverse effect on
its business, results of operations and financial condition. If the Company were
able to obtain such licenses, the licensing costs could materially effect the
Company's future financial results. In addition, the Company licenses technology
on a non-exclusive basis from several companies for inclusion in its products
and anticipates that it will continue to do so in the future. The inability of
the Company to continue to license these technologies or to license other
necessary technologies for inclusion in its products, or substantial increases
in royalty payments under these third party licenses, could have an adverse
effect on its business, results of operations and financial condition.
10
Litigation or threatened litigation in the software development industry
has increasingly been used as a competitive tactic both by established companies
seeking to protect their existing position in the market and by emerging
companies attempting to gain access to the market. If the Company is required to
defend itself against a claim, whether or not meritorious, the Company could be
forced to incur substantial expense and diversion of management attention, and
may encounter market confusion and reluctance of customers to purchase the
Company's software products. Such litigation, if determined adversely to the
Company, could have an adverse effect on its business, results of operations and
financial condition.
In the course of its product development efforts, the Company periodically
identifies certain technologies owned by others that either would be useful to
incorporate into its products or are necessary in order to remain competitive in
light of industry trends. In these cases the Company has in the past sought to
obtain licenses of such third-party technologies. The Company expects that it
will continue to find it desirable or necessary to obtain additional technology
licenses from others, but there can be no assurance that any particular license
will be available at all, or on acceptable terms, at any future time. The
royalties paid on future licensing arrangements may materially impact the
Company's operating results.
The Company pays royalties to imagine LAN, Inso Corporation, AT&T
Corporation, Digital Equipment Corporation, Learnout & Hauspie Speech Products
and International Business Machines for its use of certain licensed
technologies. The licensing by these entities of their products or brand name to
competitors of the Company, or the withdrawal or termination of licensing rights
to the Company's technologies, could have an adverse affect on the Company's
sale of products incorporating such licensed technologies to original equipment
manufacturers and the Company's results of operations as a whole.
ENVIRONMENTAL LAWS
Compliance with federal, state and local laws and regulations for the
protection of the environment has not had a material impact on the Company's
capital expenditures, operations or competitive position. Although the Company
does not anticipate any adverse impact in the future based on the nature of its
operations and the scope of current environmental laws and regulations, no
assurance can be provided that such laws or regulations or future laws or
regulations enacted to protect the environment will not have a material adverse
impact on the Company.
EMPLOYEES
As of June 30, 1999, the Company had 154 full-time employees, including
approximately 69 in sales, marketing and customer support, 48 in engineering and
product development, 19 in operations and 18 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. Certain of these trends and
uncertainties are discussed in detail under "Risk Factors" included in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In addition, various characteristics of the 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 software industry. Significant delays in product development and
11
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
manufacturers, which could have an adverse impact on revenues and earnings.
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
computer telephony and PC remote control products. Many of these companies,
including Lucent Technologies, Cisco Systems, Symantec, Novell, Microsoft 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, Novell and other companies which have
greater resources than the Company. Competition with Microsoft has had a
material adverse affect on the sales of the Company's LANtastic product line.
The Company expects this adverse effect to continue. In addition, the Company's
operating results may be adversely affected in other regards in the future if
Microsoft or other companies include in their operating systems or other
products features which compete directly with the Company's other 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 computer
telephony, 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 8 of Notes to Consolidated
Financial Statements" under "Item 8. Financial Statements and Supplementary
Data."
12
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
Aggregate monthly rental payments for the Company's facilities are
approximately $89,000. 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 proceedings will not have a material adverse effect on its
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning the executive
officers of the Company as of June 30, 1999:
NAME AGE POSITION
---- --- --------
T. Paul Thomas 39 President and Chief Executive Officer
Steven G. Manson 40 Senior Vice President and General Manager-
Computer Telephony Products Group
Christopher H. Brookins 35 Vice President and Chief Technology Officer
Scott S. Moule 33 Vice President and General Manager-
Communications Software Group
Julie M. Ronstadt 37 Vice President, Worldwide Operations and
Administration
Sheldon M. Schenkler 48 Vice President and Chief Financial Officer
Kirk D. Mayes 31 Controller
13
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. In October 1998, Mr. Thomas was named Chief Executive Officer. 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. In
October 1998, Mr. Manson was named Senior 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.
Mr. Brookins joined Artisoft in February 1996 as Vice President of
Development-Computer Telephony Division upon the acquisition of Stylus
Innovation by Artisoft. In June 1999, Mr. Brookins was named Chief Technology
Officer. Prior to joining Artisoft, Mr. Brookins served as Vice President of
Development at Stylus Innovation from March 1993 to February 1996. Mr. Brookins
has also held a senior management position at Easel Corporation.
Mr. Moule joined Artisoft in November 1995. In August 1998, Mr. 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. Before joining
Artisoft, Mr. Moule provided consulting and engineering support to Triton
Technologies from 1992-1995. Mr. Moule has also held other management positions
at EDS and Southern Bell.
Ms. Ronstadt joined Artisoft in July 1994 as Senior Planner. 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 management positions.
Mr. Schenkler joined Artisoft as Vice President and Chief Financial Officer
in September 1998. 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.
Mr. Mayes joined Artisoft in November 1994. In April 1996, Mr. Mayes was
named Assistant Corporate Controller and in June 1997 Corporate Controller. Mr.
Mayes joined Artisoft from Arthur Andersen LLP where he had worked from 1991 to
1994.
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. 1999 Annual Report
to Shareholders, and are incorporated herein by reference. On June 30, 1999, the
Company's Common Stock was held by approximately 332 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,
----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
STATEMENTS OF OPERATIONS DATA
Net sales $22,304 $24,793 $ 33,409 $ 60,972 $84,243
Operating loss (2,586) (4,375) (29,124) (24,838) (9,832)
Net loss (1,762) (2,913) (28,425) (18,328) (5,848)
Net loss per common share-basic and diluted $ (.12) $ (.20) $ (1.96) $ (1.27) $ (.41)
Weighted average common shares outstanding 14,720 14,554 14,529 14,463 14,315
AS OF JUNE 30,
---------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
BALANCE SHEET DATA
Working capital $16,046 $17,538 $ 17,747 $37,917 $56,324
Total assets 22,558 25,508 35,371 57,712 77,807
Long-term obligations, net of
current portion -- 289 714 96 --
Shareholders' equity 18,574 19,951 22,604 50,981 68,245
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
During fiscal 1999 the Company continued to focus the majority of its
resources on its Computer Telephony Products Group. The Company increased its
investment by strengthening its sales, marketing and support infrastructure for
its telephony products (especially TeleVantage). The Company also increased its
telephony research and development personnel headcount in advance of the release
of future versions of its flagship telephony product, TeleVantage. In addition,
the Company also continued to build upon and invest in its telephony
distribution and value added reseller network.
During fiscal 1999, the Company's Communications Software Group product
lines experienced continued competitive pressures from major software
manufacturers. These market conditions had a 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 significantly less than in
recent years, the Company's overall net sales in fiscal 1999 declined from
fiscal 1998 as a result of these competitive pressures. Revenues from the
Company's Computer Telephony Group (Visual Voice and TeleVantage) product lines
partially offset the LANtastic NOS product revenue declines.
In response to the reduced demand for its LANtastic NOS product line, the
Company dedicated fewer of its internal resources toward the sale, support,
marketing and development of the LANtastic NOS product line than in recent
years. The Communications Software Group restructuring actions effected during
fiscal year 1998 brought the Company's Communications Software Group cost
structure in line with fiscal 1999 revenues resulting in significantly improved
operating results as compared to fiscal 1997 and 1998. These restructuring
actions included the closure of the Company's Iselin, New Jersey office, the
closure of the Company's United Kingdom sales and support office and the
termination of 23 Communications Software Group employees.
In December 1998, Artisoft released TeleVantage 2.1, which is an upgrade to
its original TeleVantage product released in March 1998. TeleVantage is an
intelligent software 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 March 1999 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. TeleVantage was also awarded Best of CTI Expo 1999 in Washington, D.C.
TeleVantage has received numerous other editors choice awards since its release
in March 1998.
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, 1999, the Company's computer
telephony products included TeleVantage 2.1, Visual Voice Pro 5.0, Visual Voice
for TAPI 2.1, Visual Fax 2.1, Visual Dialogic Fax 2.1, Visual Text-to-Speech
2.2, Visual Voice Recognition 2.1 and Visual Advanced Switching 2.1.
In August 1998, Artisoft released TeleVantage 2.0 which, in addition to the
features offered in TeleVantage 1.0, offered: 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.
16
In December 1998, Artisoft released TeleVantage 2.1 which in addition to
the features offered in TeleVantage 2.0, offers: T1 support, direct inward dial
(DID), enhanced queues, personal information manager (PIM) integration,
inter-active voice response (IVR) toolkit support and provides telephony
application programming interface (TAPI) service.
In December 1998, Artisoft released Visual Voice Pro 5.0 which in addition
to the features offered in Visual Voice Pro 4.1, offers: voice over the internet
(VoIP) capabilities, multi-chassis call bridge/conferencing support, enhanced
network support and international telephone line support.
In March 1999, Artisoft released Visual Dialogic Fax 2.1 which adds
advanced fax capability to Visual Voice Pro 5.0, Visual Text-to-Speech 2.2 which
adds speech synthesis to Visual Voice Pro 5.0, Visual Voice Recognition 2.1
which adds speech recognition capability to Visual Voice Pro 5.0 and Visual
Advanced Switching 2.1 which allows users of Visual Voice Pro 5.0 to build
sophisticated switching applications.
COMMUNICATIONS SOFTWARE PRODUCTS. As of June 30, 1999, the Company's
communications software products included LANtastic 8.0, POSConnect 1.0, i.Share
3.0, ModemShare 32, XtraMail 1.2, CoSession Remote 32 8.11, BizFax 1.1, i.Share
KoJack, ExtremeMail 1.2, WinBeep, WinBeep 32, Alfie 3.08 and Windows Messaging
for Microsoft Exchange Server (WMX).
In August 1998, Artisoft released i.Share 3.0 providing national language
support for French, Italian, German and Spanish.
In October 1998, Artisoft released POSConnect 1.0, a network for point-of
sale systems, which allows users to build networks connecting Windows NT 4.0,
Windows 95/98, Windows 3.x and DOS computers. POSConnect has remote booting
capabilities that start up the diskless workstations that control cash
registers, terminals and other devices in the point of sale environment.
In December 1998, Artisoft released BizFax 1.0, a client server network
faxing application that allows users to send faxes from any Windows application
and includes such features as broadcast faxing, the ability to track call costs
and scheduled fax transmission.
In March 1999, Artisoft released i.Share KoJack, is a home phone line
network starter kit that allows home users to network two PC's through existing
phone wires and share an internet connection. The i.Share KoJack Starter Kit
combines a two -user version of Artisoft's i.Share Internet sharing software
with the hardware needed to link two PC's.
In April 1999, Artisoft acquired WinBeep, WinBeep 32, Alfie 3.08 and
Windows Messaging for Microsoft Exchange Server (WMX) from Integra Technologies
(a wholly owned subsidiary of IKON Office Solutions). WinBeep allows users to
send messages from their PC's to alphanumeric pagers or mobile PC's with pager
cards. WinBeep 32 allows users to send full-text messages to pagers from any
Windows 95/NT computer. Windows Messaging for Microsoft Exchange Server (WMX)
allows users to send e-mail to any paging device.
In June 1999, Artisoft released an updated version of BizFax and
ExtremeMail 1.2. ExtremeMail 1.2 is a New Zealand version of XtraMail 1.2.
NET SALES
Net sales for the Company's Computer Telephony Product Group increased 48%
to $7.1 million for the fiscal year ended June 30, 1999 from $4.8 million for
fiscal 1998. The increase in net sales was principally due to increased sales of
the Computer Telephony Product Group's TeleVantage and Visual Voice products.
Net sales for the Company's Computer Telephony Group were materially unchanged
between fiscal 1998 and fiscal 1997.
17
Net sales for the Company's Communications Software Product Group decreased
24% to $15.2 million for the fiscal year ended June 30, 1999 from $20.0 million
for fiscal 1998. The decrease in net sales was principally the result of a
continued decline in the sales volume of the Communications Software Group's
LANtastic NOS products. Net sales for the Company's Communications Software
Group decreased 30% to $20.0 million for the fiscal year ended June 30, 1998
from $28.7 million for fiscal 1997. The decrease in net sales was principally
the result of the aforementioned decline in the sales of LANtastic.
The Company's overall net sales decreased 10% to $22.3 million for the
fiscal year ended June 30, 1999 from $24.8 million for fiscal 1998 principally
due to a continued decline in the sales volume of the Company's LANtastic NOS
products. Management believes that the principal reason for the decline was the
impact of Microsoft's Windows 95/98 and Windows NT operating systems on the
small business networking market.
The Company acquired the WinBeep product line from IKON Office Solutions in
April 1999. During fiscal 1999, WinBeep did not make a material contribution to
consolidated net sales. For the fiscal years ended June 30, 1999 and 1998, net
sales of the communications software products (excluding LANtastic) comprised
approximately 36% and 41%, respectively, of consolidated net sales.
The Company's net sales decreased 26% to $24.8 million for fiscal 1998 from
$33.4 million for fiscal 1997. The overall decrease in net sales was principally
due to an approximate 33% decline in sales of the Company's LANtastic NOS
products. 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 19%, 25% and 27% of net sales
for fiscal 1999, 1998 and 1997, respectively. International sales decreased 32%
to $4.2 million in fiscal 1999 from $6.2 million in fiscal 1998 which was a
decrease of 30% from $8.9 million in fiscal 1997. A majority of the Company's
international sales during fiscal 1999, 1998 and 1997 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.
GROSS PROFIT
The Company's gross profit was $15.4 million, $18.3 million and $21.1
million in fiscal 1999, 1998 and 1997, respectively, or 69%, 74% and 63% of net
sales, respectively. The decrease in gross profit percentage for fiscal 1999 was
due to a shift in product mix. Specifically, sales of the Company's lower margin
Visual Voice hardware products and sales of the Company's lower margin
TeleVantage Not For Resale kits (NFR's) associated with the Company's increasing
expenditures on in its TeleVantage reseller channel increased as a percentage of
total net sales. Also contributing to the decline in gross profit percentage was
increases in royalty expenses on ConfigSafe Support Edition sales. The increase
in the gross profit percentage for fiscal 1998 as compared to fiscal 1997 is
principally the result of higher sales levels of the Company's higher margin
CoSession, i.Share and ModemShare products. The decrease in gross profit dollars
was the result of progressively lower sales in each of fiscal 1999, 1998 and
1997. Gross profit may fluctuate on a quarterly basis because of product mix,
pricing actions and changes in sales and inventory allowances.
SALES AND MARKETING
Sales and marketing expenses were $8.8 million, $10.0 million and $23.4
million for fiscal 1999, 1998 and 1997, respectively, representing 39%, 41% and
70% of net sales, respectively. The decrease in sales and marketing expenses as
18
both a percentage of net sales and in aggregate dollars for fiscal 1999 and 1998
is principally due to a significant decrease in the Company's Communications
Software Group sales and marketing staffing levels. These decreases were offset
somewhat by increased expenditures on the sales and marketing infrastructure in
the Company's Computer Telephony Products Group.
PRODUCT DEVELOPMENT
Product development expenses were $5.4 million, $7.1 million and $9.3
million for fiscal 1999, 1998 and 1997, respectively, representing 24%, 28% and
28% of net sales, respectively. The decrease in aggregate product development
expenses for fiscal 1999 and 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 addition of new development
personnel to the Computer Telephony Group in fiscal 1999 was 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 $3.9 million, $3.1 million and
$6.3 million for fiscal 1999, 1998 and 1997 respectively, representing 17%, 13%
and 19% of net sales, respectively. The increase in both the aggregate general
and administrative costs and the increase in general and administrative costs as
a percentage of net sales in fiscal 1999 compared to fiscal 1998 is principally
the result of additional occupancy costs incurred subsequent to the expansion of
the Company's Cambridge, Massachusetts-based headquarters, the addition of
certain executive administrative personnel and increased depreciation expense on
the Company's fixed assets in its Cambridge, Massachusetts headquarters. The
decrease in general and administrative costs in both aggregate dollars and as a
percentage of net sales in fiscal 1998 compared to fiscal 1997 is due to 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.
WRITE OFF OF ABANDONED TECHNOLOGY
Subsequent to the acquisition of Stylus Innovation in fiscal year 1996, the
Company recorded a charge to operations during the fourth quarter of fiscal 1998
totaling $393,000. These charges related to the cost to purchase certain
technologies in which development efforts were abandoned in fiscal 1998 and hold
no future realizable value to the Company.
RESTRUCTURING COSTS
Restructuring costs in the accompanying consolidated statement of
operations for fiscal 1999 are comprised solely of a reversal of approximately
$77,000 in excess restructuring costs accrued at June 30, 1998. The Company
completed the restructuring of its Communications Software Group during fiscal
1999 and identified this excess of the $2.0 million charge recorded in fiscal
1998. The Company does not anticipate any future need for these restructuring
accruals.
Restructuring costs in the accompanying consolidated statement of
operations for fiscal 1998 include the costs associated with the involuntary
employee termination benefits of certain Communications 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.
19
The June 1998 restructuring actions were made in response to 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 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 in Iselin, New Jersey. The
Company also closed 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 $900,000 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 fiscal 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.
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 fiscal 1997 restructuring actions were made in response to
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 fiscal 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.
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)
Other income (expense), net, was $.8 million, $1.7 million and $.7 million
for fiscal 1999, 1998 and 1997, respectively. Fiscal 1998 includes the
recognition of a $1.3 million gain on the sale of the Company's Tucson, Arizona
headquarters in October 1997.
INCOME TAX EXPENSE
The effective tax rates for the Company were 0%, 6%, and 0% for fiscal
1999, 1998 and 1997, respectively. For fiscal 1998, $156,000 of income tax
expense was recorded related to certain income taxes payable by the Company's
former Dutch subsidiary and branch. For fiscal 1997, essentially no 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
the 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. No income tax benefit was recognized for fiscal years 1998 or
1999, as the Company has fully utilized all federal net operating loss carryback
potential.
20
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, non-information technology systems,
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 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. This 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 has divided its Year 2000 review into three phases. The first
addresses the Company's core information technology systems and products
currently sold by the Company. The second phase addresses non-core information
technology systems and non-information technology systems. In addition, the
Company will implement required Year 2000 upgrades and replacements during the
second phase. The third phase addresses third party suppliers of products,
supplies and services necessary to the Company's ongoing operations. The Company
completed the first phase of its review in September 1998. The Company completed
to a significant degree the second and third phases of its review in June 1999.
The Company anticipates that all of its Year 2000 remediation efforts will be
completed by September 30, 1999.
In the first phase of its Year 2000 review, the Company tested software
products currently manufactured and shipped by the Company and determined that
most products are Year 2000 compliant. Certain of the Company's products that
were discontinued prior to fiscal 1998 are not Year 2000 compliant. In cases
where such non-Y2K compliant products are still sold on a replacement basis
only, the Company requires the customer to sign a release of liability for all
damages potentially caused by such non-Y2K compliant products. The Company
maintains a section on its web site that identifies all products the Company
sells and ships and lists their Y2K status. The Company also responds via direct
mail, e-mail or telephone, as appropriate, to customer and supplier requests for
information on Y2K compliance of its products. The Company has notified its
distributors, resellers and end users of cases of non-compliance where 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 adequate to cover such returns
and replacements. The Company also has made inquiries of third parties supplying
the Company with computer hardware and software products and components
currently sold by the Company and is in the process of receiving responses to
these inquires. The Company has not received notice of any material problems.
The Company has followed up with third party suppliers and vendors who did not
respond to the Company's initial inquiries via telephone, mail or e-mail as
appropriate. The Company will review supplier/vendor replacement options as
necessary. With respect to core information technology, the Company has made
inquires of third parties supplying computer hardware and software operating
systems to the Company and has received assurances that, except as discussed
below, such hardware and software systems are or will be Year 2000 compliant.
21
As a result of its review, the Company determined that certain of its
internal financial software systems were inadequate for the Company's future
business needs and needed to be replaced because of various considerations,
including Year 2000 non-compliance. In certain cases the timing of replacement
systems was 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 successfully completed its migration to this new
software package in May 1999. The Company has spent less than $300,000 to
implement and migrate to this new software package. These costs will be
capitalized over the life of the purchased software package. The Company does
not expect the amounts to be expensed over the life of the software package to
have a material effect on its financial position or results of operations. In
addition to the aforementioned software implementation and migration costs the
Company has redirected certain personnel to handle Year 2000 remediation
efforts. The total cost to the Company for all Year 2000 remediation efforts as
of June 30, 1999 was approximately $.5 million. The Company anticipates that its
total Year 2000 remediation costs will not exceed $.6 million.
The Company has also identified certain other internal sales, marketing and
support management software packages that were not fully Year 2000 compliant.
The Company has completed the evaluation of these internal systems and has
completed the necessary programming to ensure Year 2000 compliancy.
The Company has developed certain Year 2000 contingency plans. In addition
to the review and remedial actions described above the Company intends to take
the following steps: First, the Company will set up a Year 2000 task force
consisting of programmers, Information Systems and Technology personnel and key
developers who will remain `on call' between December 25, 1999 and January 10,
2000 to resolve any Year 2000 problems. Second, the Company is in the process of
identifying key alternative suppliers in the event its primary suppliers
experience Year 2000 problems which interrupt their ability to supply key raw
materials or services to the Company. The Company will contact each of these
alternative suppliers in advance and record all pertinent information to
facilitate a smooth transition should it be warranted. Finally, the Company will
increase its inventories on hand for certain key raw materials to insure against
potential shortages caused by third party Year 2000 problems. The Company
maintains and deploys contingency plans designed to address various other
potential business interruptions. These plans may also 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 could encounter disruptions to its business that could have a
material adverse effect on its business, financial position and results of
operations. The Company could also be materially and adversely impacted by
widespread economic or financial market disruption.
FUTURE RESULTS
The Company is currently and will continue to focus a substantial majority
of its business resources on its computer telephony products. Concurrent with
the expanded investment in computer telephony products, the Company has
substantially reduced its expenditures on its communications software products.
It is unlikely that, with the reduced sales, marketing and development
expenditures on its communications software products, revenue levels for these
products will continue at their current levels in the future.
The Company intends to continue to increase its investments and
expenditures in sales, marketing and development of computer telephony products
(especially TeleVantage). There can be no assurance that the Company will be
able to market or sell such products successfully or at particular levels within
particular time-frames. Accordingly, the Company could experience a slower than
anticipated increase in computer telephony revenues as it attempts to build a
distribution and reseller network that may build market awareness for computer
22
telephony products. A slow increase in the Company's computer telephony
revenues, particularly if combined with increased expenditures on its computer
telephony product development and marketing and declining communications
software product revenues, may cause the Company to experience substantially
higher operating losses in the future.
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 receivable; 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $16.1 million at June 30, 1999
compared to $18.5 million at June 30, 1998 and working capital of $16.0 million
at June 30, 1999 compared to $17.5 million at June 30, 1998. The decrease in
cash and cash equivalents of $2.4 million was the result of the following
factors: employee termination benefit payments to certain Communications
Software Group employees and payments associated with the closure of the
Company's United Kingdom sales and support office, increased development, sales
force expansion and marketing investments in the Company's Computer Telephony
Products Group and increased research and development personnel costs in the
Company's Computer Telephony Products Group. The decrease in the Company's
working capital of $1.5 million was primarily the result of the Company's
operating loss and the increased cash expenditures for property and equipment
during fiscal 1999 as compared to fiscal 1998 as well as the net decrease in
accounts receivable balances of $.5 million partially offset by increased
inventory balances at June 30, 1999 as compared to June 30, 1998.
The Company funds its working capital requirements primarily through cash
flows from operations and existing cash balances. While the Company anticipates
that existing cash balances and cash flows from operations will be adequate to
meet the Company's current and expected cash requirements for at least the next
year, additional investments by the Company to acquire new technologies and
products may necessitate that the Company seek additional debt or equity
capital. There can be no assurance that such additional financing or equity
capital will be available when needed or, if available, will be on satisfactory
terms. In order to raise capital, the Company may issue debt or equity
securities and may incur substantial dilution.
RECENT ACCOUNTING PRONOUNCEMENTS
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
became effective for the Company for the year ended June 30, 1999, and requires
that comparative information from earlier years be restated to conform to the
requirements of this standard.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Form 10-K may contain forward-looking statements that involve risks
and uncertainties, including, but not limited to, the impact of competitive
products and pricing, product demand and market acceptance risks, the presence
of competitors with greater financial resources, product development and
commercialization risks, costs associated with the integration and
administration of acquired operations, capacity and supply constraints or
difficulties, the results of financing efforts, year 2000 issues and other risks
detailed from time to time in the Company's Securities and Exchange Commission
filings.
23
RISK FACTORS
GENERAL
COMPETITION. The communications 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.
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 or should the Company's competitors obtain
advantages in developing compatible products for such dominant operating
systems, the Company's revenues from such products could be materially adversely
impacted. In addition, the Company's revenues could be adversely affected if
software solutions similar to the Company's Communications Software Group
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 Communications Software Group products.
NEW INDUSTRY DEVELOPMENT. The Company's principal new computer telephony
product, TeleVantage, competes in the newly emerging software based PBX market.
Software based PBX products operate in conjunction with and are affected by
developments in other related industries. These industries include highly
developed product markets, such as PCs, PC operating systems and servers,
proprietary PBX and related telephone hardware and software products, and
telephone, data and cable transmission systems, as well as new emerging products
and industries, such as internet communications and Internet Protocol ("IP")
telephony. All of these industries and product markets are currently undergoing
rapid changes, market evolution and consolidation. The manner in which these
industries and products evolve, including the engineering- and market-based
decisions that are made regarding the interconnection of the products and
industries, will affect the opportunities and prospects for the Company's
computer telephony products, including Televantage.
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 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.
24
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.
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 value added resellers or end-users. Major distribution
customers occasionally receive market development funds from the Company for
purchasing Company products and from time to time extended terms, in accordance
with industry practice, depending upon competitive conditions. The Company
currently does not offer any cash rebates to its U.S. distribution partners.
Changes in purchasing patterns by one or more of the Company's 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, could have a material adverse effect on the Company's business,
results of operations and financial condition. Further, life cycles of the
Company's products are difficult to estimate due in part to the recent emergence
of certain of the Company's products, the effect of new products or product
enhancements, technological changes in the software industry in which the
Company operates and future competition. There can be no assurance that the
Company will be successful in maintaining market acceptance of its current
products or any new products or product enhancements.
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 condition could be adversely affected.
POTENTIAL FOR UNDETECTED ERRORS. Software products as complex as those
offered by the Company may contain undetected errors. There can be no assurance
that, despite testing by the Company and by current and potential customers,
errors will not be found in new or existing products after commencement of
commercial shipments, resulting in loss of or delay in market acceptance or the
25
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. However, with the expansion of the size of most
software programs, CD-ROM has surpassed diskettes as the most prominent medium.
Many of the Company's 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. The Company expects continued rapidly expanding growth 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.
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 provide
substantially less protection to the Company's proprietary rights than do the
laws of the United States. Trademark or patent challenges in such foreign
countries could, if successful, materially disrupt or even terminate the
Company's ability to sell its products in such markets. There can be no
assurance that the Company's means of protecting its proprietary rights will be
adequate or that the Company's competitors will not independently develop
similar technology. Although the Company believes that its services and products
do not infringe on the intellectual property rights of others, such claims have
been and in the future may be asserted against the Company. The failure of the
Company to protect its proprietary property, or the infringement of the
Company's proprietary property on the rights of others, could have a material
adverse effect on the Company's business, results of operations and financial
condition.
26
DEPENDENCE UPON KEY PERSONNEL. The Company's future performance depends in
significant part upon key technical and senior management personnel. The Company
is dependent on its ability to identify, hire, train, retain and motivate high
quality personnel, especially highly skilled engineers involved in the ongoing
research and development required to develop and enhance the Company's software
products and introduce enhanced future products. 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. The Company may need to grant additional options and
provide other forms of incentive compensation to attract and retain key
personnel. The Company has experienced and expects to continue to experience
difficulty in hiring key technical personnel in certain of its key development
offices. These difficulties could lead to higher compensation costs and may
adversely effect the Company's future results of operations.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's operating
results have in the past fluctuated, and may in the future fluctuate, from
quarter to quarter, as a result of a number of factors including, but not
limited to, changes in pricing policies or price reductions by the Company or
its competitors; variations in the Company's sales channels or the mix of
product sales; the timing of new product announcements and introductions by the
Company or its competitors; the availability and cost of supplies; the financial
stability of major customers; market acceptance of new products and product
enhancements; the Company's ability to develop, introduce and market new
products, applications and product enhancements; the Company's ability to
control costs; possible delays in the shipment of new products; the Company's
success in expanding its sales and marketing programs; deferrals of customer
orders in anticipation of new products, product enhancements or operating
systems; changes in Company strategy; personnel changes; and general economic
factors. The Company's software products are generally shipped as orders are
received and accordingly, the Company has historically operated with little
backlog. As a result, sales in any quarter are dependent primarily on orders
booked and shipped in that quarter and are not predictable with any degree of
certainty. In addition, the Company's expense levels are based, in part, on its
expectations as to future revenues. If revenue levels are below expectations,
operating results are likely to be adversely affected. The Company's net income
may be disproportionately affected by a reduction in revenues because of fixed
costs related to generating its revenues. 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. The Company's
historical operating results are not necessarily indicative of future
performance for any particular period. Due to all of the foregoing factors, it
is possible that in some future quarter the Company's operating results may be
below the expectations of public market analysts and investors. In such event,
the price of the Company's Common Stock could be adversely affected.
POSSIBLE VOLATILITY OF STOCK PRICE. The trading price of the Company's
Common Stock is likely to be subject to significant fluctuations in response to
variations in quarterly operating results, changes in management, announcements
of technological innovations or new products by the Company, its customers or
its competitors, legislative or regulatory changes, general trends in the
industry and other events or factors. The stock market has experienced extreme
price and volume fluctuations which have particularly affected the market price
for many high technology companies similar to the Company and which have often
been unrelated to the operating performance of these companies. These broad
market fluctuations may adversely affect the market price of the Company's
Common Stock. Further, factors such as announcements of new 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.
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 or operating groups, should conditions warrant, particularly in light
of the Company's strategy of focusing its resources on its Computer Telephony
group. Although the Company may periodically discuss such potential transactions
27
with a number of companies, there can be no assurance that suitable acquisition,
alliance or purchaser candidates can be identified, or that, if identified,
acceptable terms can be agreed upon or adequate and acceptable financing sources
will be available to the Company or purchaser that would enable them to
consummate such transactions. Even if an acquisition or alliance is consummated,
there can be no assurance that the Company will be able to integrate
successfully such acquired companies or product lines into its existing
operations, which could increase the Company's operating expenses in the
short-term and adversely affect the Company's results of operations. Moreover,
certain acquisitions by the Company could result in potentially dilutive
issuances of equity securities, the incurrence of additional debt and
amortization of expenses related to goodwill and intangible assets, all of which
could adversely affect the Company's profitability. Divestitures of product
lines or operating groups could adversely affect the Company's profitability by
reducing the Company's revenues without a corresponding reduction in expenses.
Acquisitions, alliances and divestitures involve numerous risks, such as the
diversion of the attention of the Company's management from other business
concerns, the entrance of the Company into markets in which it has had no or
only limited experience, unforeseen consequences of exiting from product markets
and the potential loss of key employees, 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 assurance that the
Company can maintain and grow its market position against current and potential
competitors, especially those with significantly greater financial, marketing,
service, support, technical and other competitive resources. Any failure by the
Company to maintain and grow its competitive position could have a material
adverse effect upon the Company's revenues from its computer telephony product
line.
TeleVantage is a telephone system designed for small and medium sized
businesses and branch offices. The Company believes 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
sold in high volume. Additionally, there can be no assurances that competitors
with substantially greater financial resources than that of the Company will not
develop their own software based PBX solutions and subsequently adversely affect
the Company's ability to market or sell its software based PBX solution,
TeleVantage.
The Company's software based PBX solution (TeleVantage) could also face
direct competition from companies with significantly greater financial,
marketing, service, support and technical resources. In addition to the
possibility that these companies may release a software based PBX solution, they
have signaled their intentions to develop "IP" (Internet Protocol) based
applications. Several of the Company's potential competitors with substantially
greater financial resources have recently announced partnerships designed to
develop, market and sell IP-based and software based telephony solutions which
could put the Company at a competitive disadvantage and adversely affect the
Company's ability to sell and market its own software based PBX solution,
TeleVantage. The Company anticipates certain competitors with greater financial
resources will continue to make substantial new investments in developing
IP-based telephony solutions and may form further partnerships that will put the
Company at a competitive disadvantage, thus there can be no assurances that the
Company will be able to successfully market or sell its own competing IP-based
or software based telephony solutions.
28
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 sized businesses. The Company's existing network of qualified
VARs 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 VARs to sell its computer telephony products. There can be no
assurance 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 VARs and interconnects on the features and functionality of these
emerging technologies.
The Company's computer telephony products compete in a relatively immature
industry with as yet unproven technologies. The Company believes that there will
be a gradual evolution toward open server-based telephony enabled applications
from the traditional proprietary PBX environment and that in such an environment
software based PBX systems will be widely accepted. The Company also believes
that there may be an eventual gravitation toward Internet Protocol architectures
and/or voice over wire applications. However, there can be no assurance that the
current technological innovations in the computer telephony industry will be
widely adopted by small to medium sized businesses or that telephony standards
will evolve in a manner that is advantageous to or anticipated by the Company.
COMMUNICATIONS AND NETWORKING SOFTWARE
NETWORKING AND COMMUNICATIONS SOFTWARE CUSTOMERS. The Company relies on a
network of distributors and VARs for a significant portion of both its domestic
and international networking and communications software product revenues. A
majority of the sales of CoSession Remote, the Company's remote communications
software product, are to PC original equipment manufacturers. Generally, there
are no minimum purchase requirements for the Company's distributors, VARs or
OEMs and many of the Company's distributors and VARs sell competitive products.
There can be no assurance that these customers will give priority to the
marketing of the Company's products 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 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. Some of the Company's
OEM product offerings involve the bundling of licensed technologies with its own
technologies. The failure of the Company and/or one of its licensors to adhere
to agreed-upon product delivery schedules could result in the termination of key
relationships with major PC manufacturers, which could have an 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 an 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, the
industry's principal operating system provider and Novell, the industry's
leading network operating system provider. 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. In April 1999, Microsoft released
29
Windows 2000 Beta 3.0. Management believes that Microsoft will release Windows
NT 5.0 (Windows 2000) in mid 1999. Windows NT 5.0 (Windows 2000) will likely
combine the enhanced security features of Windows NT 4.0 with the functionality
of Windows 98. This release may further erode the market share of the Company's
LANtastic NOS product line. The Company believes that Windows NT 5.0 (Windows
2000) server will 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.
REMOTE COMMUNICATIONS AND OTHER OEM SOFTWARE CUSTOMERS. 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 95/98 and Windows NT 4.0 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 continue expanding the
market for 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.
REMOTE COMMUNICATIONS AND OTHER OEM 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 could
lead to diminished demand for the Company's CoSession remote control product,
and consequently decreased net sales and operating results.
ITEM 7(a). QUANITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
MARKET RISK. During the normal course of business Artisoft is routinely
subjected to a variety of market risks, examples of which include, but are not
limited to, interest rate movements and collectibility of accounts receivable.
Artisoft currently assesses these risks and has established policies and
practices to protect against the adverse effects of these and other potential
exposures. Although Artisoft does not anticipate any material losses in these
risk areas, no assurances can be made that material losses will not be incurred
in these areas in the future.
INTEREST RATE RISK. Artisoft may be exposed to interest rate risk on
certain of its cash equivalents. The value of certain of the Company's cash
equivalents may be adversely impacted in a rising interest rate investment
environment. Although Artisoft does not anticipate any material losses from such
a movement in interest rates, no assurances can be made that material losses
will not be incurred in the future.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ARTISOFT, INC.
INDEX TO FINANCIAL STATEMENTS
(ITEM 14(A))
Page Reference
Form 10-K
--------------
Independent Auditors' Report 32
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 1999 and 1998 33
Consolidated Statements of Operations for the years ended
June 30, 1999, 1998 and 1997 34
Consolidated Statements of Changes in Shareholders' Equity
for the years ended June 30, 1999, 1998 and 1997 35
Consolidated Statements of Cash Flows for the years ended
June 30, 1999, 1998 and 1997 36
Notes to Consolidated Financial Statements 37-50
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, 1999 and 1998 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, 1999. 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, 1999 and 1998 and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 1999 in conformity with generally accepted accounting principles.
KPMG LLP
Phoenix, Arizona
July 23, 1999
32
ARTISOFT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
June 30, June 30,
1999 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 16,148 $ 18,514
Receivables:
Trade accounts, net of allowances of $1,356
and $1,592 in 1999 and 1998, respectively 2,267 2,813
Other receivables 66 279
Inventories 1,214 917
Prepaid expenses 335 283
-------- --------
Total current assets 20,030 22,806
-------- --------
Property and equipment 6,349 5,333
Less accumulated depreciation and amortization (4,984) (4,198)
-------- --------
Net property and equipment 1,365 1,135
-------- --------
Other assets 1,163 1,567
-------- --------
$ 22,558 $ 25,508
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,229 $ 1,215
Accrued liabilities 2,466 2,053
Accrued restructuring costs -- 1,536
Current portion of capital lease obligations 289 464
-------- --------
Total current liabilities 3,984 5,268
-------- --------
Capital lease obligations,
net of current portion -- 289
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock, $1.00 par value. Authorized
11,433,600 shares; none issued -- --
Common stock, $.01 par value. Authorized
50,000,000 shares; issued 28,144,477 shares
at June 30, 1999 and 27,980,602 shares at
June 30, 1998 281 279
Additional paid-in capital 96,869 96,486
Accumulated deficit (8,792) (7,030)
Less treasury stock, at cost, 13,320,500 shares
at June 30, 1999 and June 30, 1998 (69,784) (69,784)
-------- --------
Net shareholders' equity 18,574 19,951
-------- --------
$ 22,558 $ 25,508
======== ========
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,
--------------------------------
1999 1998 1997
-------- -------- --------
Net sales $ 22,304 $ 24,793 $ 33,409
Cost of sales 6,855 6,509 12,348
-------- -------- --------
Gross profit 15,449 18,284 21,061
-------- -------- --------
Operating expenses:
Sales and marketing 8,778 10,046 23,384
Product development 5,385 7,053 9,300
General and administrative 3,949 3,127 6,255
Write off of abandoned technology -- 393 --
Restructuring costs (77) 2,040 11,246
-------- -------- --------
Total operating expenses 18,035 22,659 50,185
-------- -------- --------
Loss from operations (2,586) (4,375) (29,124)
-------- -------- --------
Other income (expense):
Interest income 910 887 819
Interest expense (50) (315) (155)
Gain (loss) on disposition of
property and equipment 10 1,237 (23)
Other (46) (82) 10
-------- -------- --------
Total other income 824 1,727 651
-------- -------- --------
Loss before income tax expense
(benefit) and extraordinary item (1,762) (2,648) (28,473)
Income tax expense (benefit) -- 156 (48)
-------- -------- --------
Loss before extraordinary item (1,762) (2,804) (28,425)
Extraordinary loss from early extinguishment
of debt, net of $0 income tax benefit -- (109) --
-------- -------- --------
Net loss $ (1,762) $ (2,913) $(28,425)
======== ======== ========
Net loss per common share-basic and diluted $ (.12) $ (.20) $ (1.96)
======== ======== ========
Weighted average common shares
outstanding-basic and diluted 14,720 14,554 14,529
======== ======== ========
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
---------- ---------- ---------- ---------- ---------- ----------
Balances 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)
---------- ---------- ---------- ---------- ---------- ----------
Balances at June 30, 1997 27,848,464 278 96,227 (4,117) (69,784) 22,604
Common stock issued
for compensation 100,000 1 187 -- -- 188
Exercise of common stock
options 10,078 -- 24 -- -- 24
Issuance of common stock
under employee stock
purchase plan 22,060 -- 44 -- -- 44
Tax benefit of disqualifying
dispositions -- -- 4 -- -- 4
Net loss -- -- -- (2,913) -- (2,913)
---------- ---------- ---------- ---------- ---------- ----------
Balances at June 30, 1998 27,980,602 279 96,486 (7,030) (69,784) 19,951
Exercise of common stock
options 116,065 1 250 -- -- 251
Issuance of common stock
under employee stock
purchase plan 47,810 1 106 -- -- 107
Tax benefit of disqualifying
dispositions -- -- 27 -- -- 27
Net loss -- -- -- (1,762) -- (1,762)
---------- ---------- ---------- ---------- ---------- ----------
Balances at June 30, 1999 28,144,477 $ 281 $ 96,869 $ (8,792) $ (69,784) $ 18,574
========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
35
ARTISOFT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended June 30,
--------------------------------
1999 1998 1997
-------- -------- --------
Cash flows from operating activities:
Net loss $ (1,762) $ (2,913) $(28,425)
-------- -------- --------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Extraordinary loss -- 109 --
Depreciation and amortization 1,473 1,823 2,736
Deferred income taxes -- -- 4,252
(Gain) loss from disposition of property and equipment, net (10) (1,237) 23
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 (428) (2,788) (109)
Tax benefit of disqualifying dispositions 27 4 22
Changes in assets and liabilities:
Receivables-
Trade accounts 782 4,596 11,026
Income taxes -- 4,300 650
Other receivables 213 301 825
Inventories (105) 1,333 1,978
Prepaid expenses (52) 550 73
Accounts payable and accrued liabilities 427 (1,195) (1,510)
Accrued restructuring costs (1,536) (3,414) 4,950
Income taxes payable -- -- (577)
Other assets and liabilities (159) 61 79
-------- -------- --------
Net cash provided by (used in) operating activities (1,130) 1,923 (2,421)
-------- -------- --------
Cash flows from investing activities:
Proceeds from sales of property and equipment 12 4,819 40
Purchases of property and equipment (1,142) (556) (1,469)
-------- -------- --------
Net cash used in investing activities (1,130) (4,263) (1,429)
-------- -------- --------
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 358 256 130
Principal payments on long-term debt (464) (419) (396)
-------- -------- --------
Net cash provided by (used in) financing activities (106) (2,345) 3,198
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (2,366) 3,841 (652)
Cash and cash equivalents, beginning of year 18,514 14,673 15,325
-------- -------- --------
Cash and cash equivalents, end of year $ 16,148 $ 18,514 $ 14,673
======== ======== ========
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 50 $ 300 $ 155
======== ======== ========
Income taxes $ 11 $ 296 $ 166
======== ======== ========
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
6,000 value-added resellers, telephony VARs, 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.
USE OF ESTIMATES
Management of the Company has made estimates and assumptions relating to
the reporting of assets and liabilities and the disclosure of contingent assets
and liabilities to prepare these consolidated financial statements in conformity
with generally accepted accounting principles. Actual results could differ from
those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid securities with original maturities
of three months or less to be cash equivalents. As of June 30, 1999 and 1998,
the Company has classified securities of $15.4 million and $13.3 million,
respectively, with a maturity of less than three months as cash and cash
equivalents. The Company intends to hold these securities to maturity and has
presented them at their carrying value.
CONCENTRATION OF CREDIT RISK, PRODUCT REVENUE AND MAJOR CUSTOMERS
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of investments and trade
receivables. The Company invests in securities with an investment credit rating
of AA or better. The Company also places its investments for safekeeping with
high-credit-quality financial institutions. Credit risk with respect to trade
receivables is generally diversified due to the large number of entities
comprising the Company's customer base and their dispersion across many
different customer groups and geographies. The Company often sells its products
through third-party distributors, and, as a result, may maintain individually
significant receivable balances with major distributors. The Company believes
that its credit evaluation, approval and monitoring processes substantially
mitigate potential credit risks.
The Company sells its products through a variety of channels of
distribution, including distributors, volume purchasers, resellers and original
equipment manufacturers. For fiscal 1999, one customer accounted for
approximately 15% of the Company's net sales. For fiscal 1998, one customer
accounted for approximately 10% of the Company's net sales. At June 30, 1999,
two companies accounted for approximately 14% and 10% of the Company's
outstanding trade account receivable. At June 30, 1998, these two companies
accounted for approximately 16% and 13% of the Company's outstanding trade
accounts receivable. 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.
37
SEGMENTATION OF FINANCIAL RESULTS
The financial results for the fiscal years ended June 30, 1999, 1998 and
1997 are summarized below by product group:
Years Ended June 30,
------------------------------------
1999 1998 1997
-------- -------- --------
COMPUTER TELEPHONY GROUP:
Net sales $ 7,144 $ 4,771 $ 4,733
Gross profit $ 3,930 $ 3,350 $ 3,231
Gross profit margin 55% 70% 68%
Operating loss $ (6,835) $ (2,710) $ (1,396)
Net loss $ (6,835) $ (2,710) $ (1,396)
Capital expenditures $ 901 $ 161 $ 478
Depreciation and amortization $ 463 $ 403 $ 267
COMMUNICATIONS SOFTWARE GROUP:
Net sales $ 15,160 $ 20,022 $ 28,676
Gross profit $ 11,519 $ 14,934 $ 17,830
Gross profit margin 76% 75% 62%
Operating income (loss) $ 4,249 $ (1,665) $(27,728)
Net income (loss) $ 5,073 $ (203) $(27,029)
Capital expenditures $ 241 $ 395 $ 991
Depreciation and amortization $ 1,010 $ 1,420 $ 2,469
The Company's Computer Telephony Product Group principally includes
revenues from the TeleVantage and Visual Voice product lines. The Company's
Communications Software Group principally includes revenues from the LANtastic
NOS, CoSession Remote, i.Share and ModemShare product lines.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment held under capital
leases are stated at the lower of fair market value or the present value of
minimum lease payments at the inception of the lease. Depreciation of property
and equipment is calculated using the straight-line method over the estimated
useful lives of three to seven years for furniture and equipment and the life of
the lease in the case of leasehold improvements. Equipment held under capital
leases is amortized over the shorter of the lease term or estimated useful life
of the asset.
On October 31, 1997, the Company closed escrow on the sale of its Tucson
building and land. The Company received gross proceeds of $4.1 million on the
sale and net cash proceeds of $1.6 million after the pre-payment of a $2.2
million mortgage and other associated closing costs. The Company recognized a
net gain of $1.3 million on the sale of the building and land for the fiscal
year ended June 30, 1998.
OTHER ASSETS
Other assets are stated at cost and are comprised of purchased technology,
trademarks and patents, goodwill and recoverable deposits. Amortization of
purchased technology is calculated using the straight-line method over a five
year life. Amortization of trademarks and patents is calculated using the
straight-line method over the life of the trademark or patent which, in most
cases, is ten years. Amortization of goodwill is calculated using the
straight-line method over a five year life.
INCOME TAXES
Income taxes have been accounted for under the asset and liability method.
Under the asset and liability method deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
38
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
REVENUE RECOGNITION
The Company recognizes revenue from product sales at the time of shipment,
net of allowances for returns and price protection. Other product revenue,
consisting of training and support services, is recognized when the services are
provided. Gross sales for the fiscal years ended June 30, 1999, 1998, and 1997,
respectively, were $24.5 million, $27.9 million, and $44.3 million.
PRODUCT DEVELOPMENT
Development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established. After technological feasibility is established, any additional
costs would be capitalized. Because the Company believes its current process for
developing software is essentially completed concurrently with the establishment
of technological feasibility, no product development costs have been capitalized
to date.
COMPUTATION OF NET LOSS PER SHARE
Basic loss per share is computed by dividing loss attributable to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted loss per share reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock that then shared in the earnings (loss) of the
Company. In calculating net loss per common share for the fiscal years ended
June 30, 1999, 1998 and 1997, the Company had 203,639, 95,000 and 31,000 shares
of anti-dilutive common stock equivalent shares consisting of stock options that
have been excluded because their inclusion would have been anti-dilutive.
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's former non-U.S. subsidiaries and
branches was the U.S. dollar. The Company periodically incurs liabilities to
foreign customers and vendors. The payment of these liabilities is typically
made in U.S. dollars and translated into foreign currency at the prevailing
exchange rate. Foreign exchange gain (loss) is recognized as incurred. For these
entities, inventories, equipment and other property were translated at the
prevailing exchange rate when acquired. All other assets and liabilities are
translated at year-end exchange rates. Inventories charged to cost of sales and
depreciation are remeasured at historical rates. All other income and expense
items are translated at average rates of exchange prevailing during the year.
Gains and losses which result from remeasurement are included in net loss.
STOCK BASED COMPENSATION
The Company accounts for stock options granted under its stock incentive
plans in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On July 1, 1996, Statement of Financial Accounting Standards
(SFAS) No. 123 "Accounting for Stock-Based Compensation," was issued which
permits entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net earnings (loss) and pro forma earnings (loss) per share
disclosures for employee stock option grants made in fiscal 1996 and future
years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
39
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
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 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 became effective for
the Company for the year ended June 30, 1999, and requires that comparative
information from earlier years be restated to conform to the requirements of
this standard.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying 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.
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 1998 consolidated financial
statements to conform to the 1999 presentation.
(2) RESTRUCTURING COSTS
A reconciliation of the accrued restructuring costs for the year ended June
30, 1999 follows:
Total Accrued
Restructuring Costs
-------------------
Balance at June 30, 1998 $ 1,536
Cash paid for employee
termination benefits (731)
Cash paid for office closure costs (692)
Reversal of June 1998 restructuring costs (77)
Other (36)
-------
Balance at June 30, 1999 $ --
=======
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 for 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
40
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
Office and equipment lease buyouts 400
Professional fees and other office closure costs 547
Other restructuring charges 90
Reversal of June 1997 restructuring costs (439)
-------
Accrued restructuring costs at June 30, 1998 $ 1,536
=======
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.
(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"). 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.
41
(4) INVENTORIES
Inventories at June 30, 1999 and 1998 consist of the following:
1999 1998
------ ------
Raw materials $1,177 $ 938
Work-in-process 7 109
Finished goods 173 205
------ ------
1,357 1,252
Inventory allowances (143) (335)
------ ------
$1,214 $ 917
------ ------
(5) PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1999 and 1998 consist of the following:
1999 1998
------ ------
Furniture and fixtures $ 36 $ 6
Computers and other equipment 6,046 5,259
Leasehold improvements 267 68
------ ------
6,349 5,333
Accumulated depreciation
and amortization (4,984) (4,198)
------ ------
$1,365 $1,135
------ ------
(6) OTHER ASSETS
Other assets at June 30, 1999 and 1998 consist of the following:
1999 1998
------ ------
Purchased technology, net of
accumulated amortization of $1,880 and $1,323 $1,009 $1,387
Trademarks and patents, net of
accumulated amortization of $95 and $70 29 55
Recoverable deposits and other 125 125
------ ------
$1,163 $1,567
------ ------
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 Innovation, Inc. in February 1996.
(7) ACCRUED LIABILITIES
Accrued liabilities at June 30, 1999 and 1998 consist of the following:
1999 1998
------ ------
Compensation and benefits $1,183 $ 990
Payroll, sales and property taxes 258 280
Marketing 427 349
Royalties 216 227
Other 382 207
------ ------
$2,466 $2,053
------ ------
42
(8) 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.
RIGHTS PLAN
On December 6, 1994, the Board of Directors of the Company authorized and
declared a dividend of one preferred share purchase right (a "Right") for each
common share of the Company outstanding as of the close of business on December
27, 1994. The Rights Agreement is designed to protect and maximize the value of
the outstanding equity interests in the Company in the event of an unsolicited
attempt by an acquirer to take over the Company in a manner or on terms not
approved by the Board of Directors, as amended in August 1998. Each Right, under
certain circumstances, may be exercised to purchase one one-thousandth of a
share of the Company's Series A Participating Preferred Stock at a price of
$50.00 per share (subject to adjustment). Under certain circumstances, following
(i) the acquisition of 25% or more of the Company's outstanding common stock by
an Acquiring Person (as defined in the Rights Agreement) or (ii) the
commencement of a tender offer or exchange offer which would result in a person
or group owning 25% or more of the Company's outstanding common stock, each
Right may be exercised to purchase common stock of the Company or a successor
company with a market value of twice the $50.00 exercise price. The Rights,
which are redeemable by the Company at $.001 per Right, expire in December 2001.
STOCK INCENTIVE PLANS
On October 20, 1994, the shareholders approved the Company's 1994 Stock
Incentive Plan (the "1994 Plan"). The 1994 Plan provides for the grant of
Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights
(Tandem and Free-standing), Restricted Stock, Deferred Stock, Performance Units
and Performance Shares to officers, key employees, non-employee directors and
certain consultants of the Company.
The 1994 Plan provides that the maximum number of options that can be
granted shall be 2,000,000 shares, plus 1.5% of the number of shares of common
stock issued and outstanding as of January 1 of each year commencing on January
1, 1995. The maximum number of options available for grant each year shall be
all previously ungranted options plus all expired and cancelled options. Stock
options are generally granted at a price not less than 100% of the fair market
value of he common shares at the date of grant. Generally, options become
exercisable over a four year period commencing on the date of grant. Generally,
options vest 25% at the first anniversary of the date of grant and the remaining
75% vest in equal monthly increments over the remaining three years of the
vesting period. No 1994 Plan options may be exercised more than ten years from
the date of grant. The 1994 Plan will terminate on the earlier of June 15, 2004,
or the date upon which all awards available for issuance have been issued or
cancelled.
The 1994 Plan contains an automatic option grant program limited to those
persons who serve as non-employee members of the Board of Directors, including
any non-employee Chairman of the Board ("Eligible Directors"). After October 20,
1994, each individual who first becomes an Eligible Director shall automatically
be granted a Nonqualified Option to purchase 15,000 shares of common stock. At
the date of each annual shareholders' meeting, beginning with the 1995 annual
shareholders' meeting, each person who is at that time serving as an Eligible
Director will automatically be granted a Nonqualified Option to purchase 5,000
43
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, 1999,
there were 1,078,191 additional shares available for grant under the 1994 Plan.
Subsequent to the approval date of the 1994 Plan, the company ceased
granting of options under the amended 1990 Stock Incentive Plan and the 1991
Director Options Plan. All options presently outstanding under these plans
continue to be governed by the terms of those plans and the number of shares of
common stock issueable upon exercise by the Company.
The per share weighted average fair value of stock options granted during
the fiscal years ended June 30, 1999, 1998 and 1997 was $2.42, $2.87, and $.64
on the date of grant using the Black Scholes option-pricing model with the
following weighted average assumptions.
1999 1998 1997
-------- -------- --------
Expected Dividend Yield 0% 0% 0%
Volatility Factor 63% 63% 57%
Risk Free Interest Rate 5.9% 5.5% 6.1%
Expected Life 6 years 6 years 6 years
The Black Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The Company applies APB Opinion No. 25 in accounting for its stock
incentive plan and accordingly, no compensation cost has been recognized for its
stock options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net loss and net loss per common
equivalent share for the fiscal years ended June 30, 1999, 1998 and 1997 would
have been increased to the pro forma amounts indicated below:
1999 1998 1997
------- ------- --------
Net loss As reported $(1,762) $(2,913) $(28,425)
Pro forma $(2,179) $(2,913) $(28,810)
Basic and diluted As reported $ (0.12) $ (0.20) $ (1.96)
net loss per share Pro forma $ (0.15) $ (0.20) $ (1.98)
Pro forma net loss reflects only options granted during the fiscal years
ended June 30, 1999, 1998 and 1997. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in the
pro forma net loss amounts presented above because compensation cost is
reflected over the options' vesting period of three to four years and
compensation cost for options granted prior to July 1, 1996 is not considered.
Stock option activity during the periods indicated is as follows:
44
Weighted Average
Number of Shares Exercise Price
---------------- --------------
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
Granted 838,050 3.83
Exercised (116,065) 2.17
Forfeited (441,497) 3.71
---------- ----------
Balance at June 30, 1999 1,912,700 $ 4.54
========== ==========
The following table summarizes information about the stock options
outstanding at June 30, 1999:
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Options Contractual Exercise Options Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ----------- -------- ----------- --------
$2.00 - $2.13 340,756 8.45 $ 2.10 156,860 $ 2.11
$2.22 - $2.59 397,250 8.63 2.49 100,396 2.50
$2.69 - $2.88 361,848 8.64 2.72 141,627 2.71
$3.00 - $4.13 340,750 9.18 3.82 76,523 3.81
$4.38 - $6.06 396,300 9.51 5.00 16,354 4.97
$6.25 - $7.94 31,746 5.86 7.20 28,955 7.24
$8.13 -$14.69 44,050 5.85 11.36 42,791 11.40
--------- ------ ------ --------- ------
$2.00 -$14.69 1,912,700 8.77 $ 3.71 563,506 $ 4.54
========= ====== ====== ========= ======
At June 30, 1999, 1998 and 1997 the number of options exercisable was
563,506, 469,475 and 1,139,212 respectively, and the weighted average exercise
price of those options was $4.54, $6.22 and $10.78, respectively.
On July 29, 1997, January 14, 1998, and April 23 1998, the Board of
Directors of the Company approved the repricing of certain employee stock
options. The original grant prices ranged from $3.00 to $8.81. The new prices
ranged from $2.03 to $4.13. There were 419,000 options repriced during fiscal
1998.
Common stock received through the exercise of incentive stock options which
are sold by the optionee within two years of grant or one year of exercise,
result in a tax deduction for the Company equivalent to the taxable gain
recognized by the optionee. For financial reporting purposes, the tax effect of
this deduction is accounted for as a credit to additional paid in capital rather
than as a reduction of income tax expense.
EMPLOYEE STOCK PURCHASE PLAN
On October 20, 1994, the shareholders approved the establishment of an
Employee Stock Purchase Plan and authorized for issuance 200,000 shares of
common stock. During the fiscal years ended June 30, 1999, 1998 and 1997,
47,810, 22,060 and 25,282 shares of common stock were purchased, respectively,
at prices ranging from $1.70 to $6.75 per share. At June 30, 1999, 72,753 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.
45
(9) EMPLOYEE BENEFIT PLANS
The Company has a qualified 401(k) profit-sharing plan (defined
contribution plan) which became effective July 1, 1991. The plan covers
substantially all employees having at least six months of service. Participants
may voluntarily contribute to the plan up to the maximum limits imposed by
Internal Revenue Service regulations. The Company will match up to 50% of the
participants' annual contributions up to 3% of the participants' compensation.
Participants are immediately vested in the amount of their direct contributions
and vest over a five-year period, as defined by the plan, with respect to the
Company's contribution.
The Company established a pension plan for its United Kingdom associates in
December 1997. The pension plan (which terminated in July 1998) covered all
United Kingdom associates and allowed participants to contribute up to the
maximum limits imposed by Inland Revenue regulations. The Company matched up to
50% of the participants' annual contributions up to 6% of the participant's
compensation. All contributions including the employer match were immediately
vested.
The Company's profit-sharing plan expense for these plans was $187, $226,
and $138 for the fiscal years ended June 30, 1999, 1998 and 1997, respectively.
(10) INCOME TAXES
Components of the income tax expense (benefit) for the fiscal years ended
June 30 follow:
Current Deferred Total
------- ------- -------
1999:
Federal $ -- $ -- $ --
State -- -- --
Foreign -- -- --
------- ------- -------
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)
======= ======= =======
The income tax (benefit) differs from the amount computed by applying the
statutory Federal income tax rate to the loss before income taxes. The sources
and tax effects are as follows:
1999 1998 1997
------- ------- -------
Computed "expected" tax benefit $ (599) $ (937) $(9,681)
State and foreign income taxes -- 156 --
Change in beginning of year
valuation allowance -- -- 4,244
Allowance for current net operating losses 599 937 5,389
------- ------- -------
Total income tax expense (benefit) $ -- $ 156 $ (48)
======= ======= =======
46
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
1999 and 1998 are presented below:
1999 1998
-------- --------
Deferred tax assets:
Purchased technology $ 434 $ 469
Allowances for doubtful accounts and returns 542 637
Allowances for inventory obsolescence 95 169
Accrued compensation and benefits 118 243
Accrued restructuring costs -- 634
Other accrued liabilities 369 295
Depreciation and amortization 680 349
Federal net operating loss carryforwards 7,139 6,317
State net operating loss carryforwards 3,331 3,186
-------- --------
Gross deferred tax assets 12,708 12,299
Less valuation allowance (12,628) (12,226)
-------- --------
Net deferred tax assets 80 73
======== ========
Deferred tax liabilities:
Prepaid expenses 80 73
-------- --------
Gross deferred tax liabilities 80 73
-------- --------
Net deferred tax assets $ -- $ --
======== ========
As of June 30, 1999, the valuation allowance had increased by $402 to
account for the changes in net deferred tax asset balances. In the assessment of
the recognition of a valuation allowance, the Company considered recent
operating losses experienced during the Company's transition from a company with
primarily a networking and communications software orientation to a software
company with its principal focus on computer telephony solutions, 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, 1999, the Company has federal net operating losses available
for carryforward of $21 million, which will expire in the years beginning July
1, 2012.
(11) LEASE COMMITMENTS
OPERATING LEASES
The Company leases office, manufacturing and storage space, vehicles, and
equipment under noncancelable operating lease agreements expiring through 2003.
These leases contain renewal options and the Company is responsible for certain
executory costs, including insurance, maintenance, taxes and utilities. Total
rent expense for these operating leases was approximately $971, $1,204, and $955
for the fiscal years ended June 30, 1999, 1998 and 1997, respectively.
47
The approximate minimum rental commitments under noncancelable operating
leases that have remaining noncancelable lease terms in excess of one year at
June 30, 1999 were as follows:
Years Ending Future Minimum
June 30 Lease Payments
------------ --------------
2000 $ 1,069
2001 585
2002 245
2003 20
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, 1999 and 1998, the gross amount of plant and equipment held
under capital leases were as follows:
1999 1998
---- ----
Equipment $ 142 $ 148
Less accumulated amortization 65 45
----- -----
$ 77 $ 103
===== =====
Amortization of assets held under capital leases is included with
depreciation expense. Future minimum lease payments under all capital leases
total $297 for the year ended June 30, 2000 and the present value of net minimum
lease payments is $289.
(12) 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.
48
(13) DOMESTIC AND INTERNATIONAL OPERATIONS
A summary of domestic and international net sales and international assets
for the fiscal years ended June 30 follows:
1999 1998 1997
------- ------- -------
Domestic $18,120 $18,621 $24,472
International 4,184 6,172 8,937
------- ------- -------
Net sales $22,304 $24,793 $33,409
------- ------- -------
International assets $ 2 $ 176 $ 1,095
------- ------- -------
(14) QUARTERLY RESULTS (UNAUDITED)
The following table presents selected unaudited quarterly operating results
for the Company's eight quarters ended June 30, 1999. The Company believes that
all necessary adjustments have been made to present fairly the related quarterly
results.
First Second Third Fourth
Fiscal 1999 Quarter Quarter Quarter Quarter Total
- ----------- ------- ------- ------- ------- -------
Net sales $ 5,094 $ 5,402 $ 5,751 $ 6,057 $22,304
Gross profit 3,738 3,794 3,844 4,073 15,449
Operating loss (513) (468) (767) (838) (2,586)
Net loss (332) (230) (580) (620) (1,762)
Basic and diluted net
loss per share (.02) (.02) (.04) (.04) (.12)
Fiscal 1998
- -----------
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)
49
(15) 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, 1999,
1998 and 1997 follows:
Balance at Balance at
Beginning End of
of Year Additions Deductions Year
-------- -------- -------- --------
Allowances for doubtful
accounts and returns:
Year Ended June 30, 1999 $ 1,592 $ 1,757 $ (1,993) $ 1,356
-------- -------- -------- --------
Year ended June 30, 1998 $ 3,990 $ 3,139 $ (5,537) $ 1,592
-------- -------- -------- --------
Year ended June 30, 1997 $ 3,261 $ 12,321 $(11,592) $ 3,990
-------- -------- -------- --------
Allowances for inventory
obsolescence:
Year Ended June 30, 1999 $ 335 $ 87 $ (279) $ 143
-------- -------- -------- --------
Year ended June 30, 1998 $ 725 $ 200 $ (590) $ 335
-------- -------- -------- --------
Year ended June 30, 1997 $ 1,565 $ 884 $ (1,724) $ 725
-------- -------- -------- --------
50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
Certain information required by Part III is omitted from this Report by
virtue of the fact that the Company has filed with the Securities and Exchange
Commission, pursuant to Regulation 14A, within 120 days after the end of the
fiscal year covered by this Report, a definitive proxy statement (the "1998
Proxy Statement") relating to the Company's Annual Shareholders' Meeting to be
held November 2, 1999. Certain information included in the 1999 Proxy Statement
is incorporated herein by reference. The Company disseminated the 1999 Proxy
Statement to shareholders beginning on September 25, 1999.
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," pages 4-5,
"Incumbent Directors," page 6, "Section 16(a) Beneficial Ownership," page 14,
and "Meetings and Committees of the Board of Directors," pages 6-7 of the 1999
Proxy Statement, and is incorporated herein by reference.
The information concerning the Company's executive officers required by
this item is contained in Part I, Item 4 of this Report under the caption
"Executive Officers of the Registrant," and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in "Executive
Compensation," "Summary Compensation Table," "Officer Severance," "Option Grants
in Last Fiscal Year," "Ten Year Option Repricings," "Aggregate Option Exercises
in Last Fiscal Year and Fiscal Year-End Option Values," "Director
Compensation","Change in Control and Severance Agreements," "Compensation
Committee Interlocks and Insider Participation," "Report of the Compensation
Committee," and "Comparison of Stock Performance," pages 10-19, of the 1999
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 1999 Proxy Statement shall not be incorporated by reference
into any such filings, and such information shall be entitled to the benefits
provided in Item 402(a)(9) of Regulation S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in "Security Ownership
of Certain Beneficial Owners and Management," page 16 of the 1999 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 1999 Proxy Statement, and is
incorporated herein by reference.
51
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules.
An Index to financial statements and financial statement schedules is
located on page 30 hereof.
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K dated August 27, 1998,
announcing the resignation of Bank One Arizona as the Company's rights
agent effective July 1, 1998 and the appointment of Harris Trust and
Savings Bank as successor rights agent. The Company also amended its
December 1994 Preferred Shares Rights Agreement 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%.
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, and the promotion of Scott Moule to Vice
President and General Manager of the Communications Software Group in
Tucson, Arizona. The Company also announced its plans to relocate its
corporate headquarters to Cambridge, Massachusetts.
The Company filed a report on Form 8-K dated October 6, 1998,
announcing the resignation of Jerry E. Goldress as Chairman of the
Board of Directors and the appointment of Michael P. Downey as
Chairman of the Board of Directors. The Company also announced the
promotion of T. Paul Thomas to Chief Executive Officer and President.
The Company also announced the appointment of Frank Girard to the
Board of Directors.
(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, (6)
between Artisoft, Inc. and Bank One, Arizona, NA,
including the Certificate of Designation of
Rights Preferences and Privileges of Series A
Participating Preferred Stock, the Form of Rights
Certificate and the Summary of Rights attached
thereto as Exhibits A, B and C, respectively.
10.01 Amended 1990 Stock Incentive Plan of the (1)
Registrant.
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, (11)
between William C. Keiper and the Registrant.
10.06 Employment Agreement, dated as of October 26, 1995, (11)
between Joel J. Kocher and the Registrant.
10.07 Form of Indemnification Agreement entered into (1)
between the Registrant and its Directors.
52
Page or
Designation Description Method of Filing
- ----------- ----------- ----------------
10.08 International Distributorship Agreement, dated (2)
July 31, 1992, between the Registrant and Canon
System Globalization, Inc.
10.09 Asset Purchase Agreement between Artisoft, Inc. (4)
and Anthem Electronics, Inc.
10.10 Asset Purchase Agreement between Artisoft, Inc. (7)
and Microdyne Corporation dated as of January
6, 1995.
10.11 Outsource Manufacturing Agreement dated June (8)
30, 1995 between ECS, Inc. and the Registrant.
10.12 Stock Purchase Agreement dated December 21, 1995 (9)
among Artisoft, Inc. and David J. Saphier, Floyd
Roberts and Peter Byer regarding the purchase of
all of the outstanding common stock of Triton
Technologies, Inc.
10.13 Asset Purchase Agreement dated February 13, 1996 (10)
between Artisoft, Inc. and Stylus Innovation
Incorporated and Michael Cassidy, John W. Barrus,
Laura Macfarlane, Robert H. Rines and Krisztina
Holly (the Stylus Shareholders).
10.14 Amendment to the 1994 Preferred Shares Rights (12)
Agreement
11.01 Computation of net loss per share Page 56
22.01 Subsidiaries of the Registrant Page 57
23.01 Consent of KPMG LLP Page 58
24.01 Powers of Attorney. See Signature Page
27 Financial Data Schedule Page 59
(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.
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ARTISOFT, INC.
Date: September 25, 1999 By /s/ T. Paul Thomas
-------------------------------------
T. Paul Thomas, President
and Chief Executive Officer
(Principal Executive Officer)
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints T. PAUL THOMAS and SHELDON M. SCHENKLER, 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 Executive September 25, 1999
- -------------------------- Officer, Director (Principal
T. Paul Thomas Executive Officer)
/s/ Sheldon M. Schenkler Vice President and Chief September 25, 1999
- -------------------------- Financial Officer (Principal
Sheldon M. Schenkler Financial Officer)
/s/ Michael P. Downey Chairman of the Board September 25, 1999
- --------------------------
Michael P. Downey
/s/ Kathryn B. Lewis Director September 25, 1999
- --------------------------
Kathryn B. Lewis
/s/ Francis E.Girard Director September 25, 1999
- --------------------------
Francis E. Girard
/s/ James L. Zucco, Jr. Director September 25, 1999
- --------------------------
James L. Zucco, Jr.
54
EXHIBIT INDEX
Sequentially
Numbered
Exhibit Description Page
- ------- ----------- ------------
11.01 Computation of net loss per share. 56
22.01 Subsidiaries of the Registrant. 57
23.01 Consent of Independent Public Accountants. 58
27 Financial Data Schedule 59
55