Item 1. Business. - -----------------
Introduction and General Development of Business
Artisoft, Inc.(R) ("Artisoft" or "Company" or "Registrant") is a personal computer ("PC") software company providing cost-effective and easy-to-use local area network ("LAN"), PC communications and computer telephony solutions. The Company's executive offices are located at 2202 North Forbes Boulevard, Tucson, Arizona 85745. The telephone number at that address is (520) 670-7100. The Company was incorporated in Arizona in November 1982 and reincorporated by merger in Delaware in July 1991.
Background
Entering fiscal year 1997 (ended June 30, 1997), Artisoft had completed the acquisition and subsequent integration of three software companies acquired during fiscal year 1996. The Company's transformation to a PC software company with a broader technology portfolio was accelerated by these acquisitions. During fiscal year 1997, the Company's LANtastic(R) NOS product line came under increasing competitive pressures from the Microsoft Windows(R) 95 operating system, with its built-in networking capabilities. In addition, Microsoft Windows NT(R) made significant gains in the small business market place and further eroded the market share of the LANtastic product line. However, the computer telephony and remote control product group revenues partially offset the decreasing revenues from the LANtastic NOS products. The Company introduced several new products in fiscal 1997 as part of the strategy to diversify its product portfolio, as well. These products included i.Share(TM), XtraMail(TM), and InfoFast(TM). See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion of these new product introductions.
Entering fiscal year 1996 (ended June 30, 1996), Artisoft was exclusively engaged in the design, development, sales and support of LAN software, designed to enhance the productivity of PC users by enabling them to share networked resources and to communicate easily and cost-effectively with other users on the LAN. The typical end-users of the Company's LANtastic peer-to-peer network operating system ("NOS") are small and growing businesses, home offices, professional organizations, universities, work groups within larger businesses and government agencies. The Company estimates that as of June 30, 1996, it had shipped approximately 4,050,000 computer licenses of LANtastic products used in approximately 710,000 LANtastic LANs, since the initial version of the product began shipping in 1987.
During fiscal year 1996, the Company continued its transformation to a PC software company with a broader technology portfolio and a broader array of products and channels of distribution. Consistent with this strategy and the Company's technology vision -- to transform business communications by providing open solutions bringing together distributed data, voice and imaging resources at the desktop PC -- the Company successfully completed the acquisition and integration of three software companies during fiscal year 1996.
On November 22, 1995, the Company acquired for cash substantially all of the assets and certain liabilities of Synergy Solutions, Inc. ("Synergy"), a PC software company primarily engaged in the design, development, sales and support of modem and telephone line sharing software. Synergy's principal product at that time, Modem Assist Plus(R), was sold principally through retailers.
On December 21, 1995, the Company purchased all of the outstanding common stock of Triton Technologies, Inc. ("Triton"), a PC software company primarily engaged in the design, development, sales and support of PC remote control software. Triton's principal product at that time, CoSession Remote,(TM) was principally sold directly to original equipment manufacturers.
On February 13, 1996, the Company acquired for cash substantially all of the assets and certain liabilities of Stylus Innovation, Inc. ("Stylus"), a PC software company primarily engaged in the design, development, sales and support of computer telephony applications and tools software. Stylus' principal product, Visual Voice(R), was principally sold directly to software development groups within mid and larger sized enterprises.
Prior to fiscal year 1996, the Company manufactured network interface cards and other communication devices. In two separate transactions effected during the second half of the fiscal year ended June 30, 1995, the Company divested its hardware development and manufacturing operations. Currently, all of the hardware components included in existing product lines are purchased from third party manufacturers. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data" for further discussion of these transactions.
Products and Services
The Company is currently organized into three groups, each centered around the specific products and services being developed, marketed and sold. The three groups are: the Communication Software Group, located in Tucson, Arizona; the Computer Telephony Group, located in Cambridge, Massachusetts; and the Remote Control Group, located in Iselin, New Jersey (with a satellite development center in Boynton Beach, Florida). Following is a description of the products and services offered by each group.
Communication Software Group
The Communication Software Group strategy emphasizes offering a range of software products optimized for the networking and communication needs of small businesses and workgroups. First among these is LANtastic, NOS software designed to be powerful yet easy-to-use, and able to support a wide variety of PC operating systems. All current LANtastic software products have been designed to be compatible with each other, and with most PC industry standard operating systems, hardware platforms, applications software and NOS. The Communication Software Group products also include ModemShare v7.0 and i.Share v2.5.
The principal product in the LANtastic NOS family is LANtastic v7.0, an Internet-ready networking solution for small businesses. LANtastic v7.0, a full-featured, flexible, peer-to-peer PC LAN includes the LANtastic Internet Gateway, which uses i.Share technology (see below) to allow multiple-user access to one network Internet connection. Through licensing agreements, LANtastic v7.0 includes Internet access through CompuServe, Inc.'s SPRYNET(TM) sign-on service, and browsing capabilities with Netscape Communications Corporation's Netscape(TM) Navigator 2.0. LANtastic v7.0 supports the three most popular PC platforms - Windows 95, Windows and DOS. It also includes built-in modem and phone line sharing, providing online access without the need for extra modems or phone lines. With a new TCP/IP stack, the LANtastic system connects to UNIX(R) hosts and applications, enabling a small business to inexpensively build a wide area network (WAN). The LANtastic v7.0 network also includes remote-access software for remote dial-up technical support. LANtastic v7.0, first introduced in June 1996 as a successor to LANtastic v6.0, is available in the form of network starter kits, network add-on kits to connect additional PCs to a LANtastic network, or in software-only versions. LANtastic NOS products are available in certain foreign languages, including French, Italian, German, Spanish, Dutch, Portuguese and Japanese.
During fiscal 1997, 1996 and 1995, approximately 83%, 82%, and 62% respectively, of the LANtastic licenses (excluding upgrades) shipped by the Company consisted of software-only versions. The sales mix shift toward a higher percentage of software-only licenses in fiscal 1997 was a result of the Company's strategic decision to divest its hardware development and manufacturing operations during the second half of fiscal 1995. This decision was precipitated by increased price sensitivity in the Ethernet adapter market and a related willingness of resellers of the Company's products not to select the Company's Ethernet adapters.
Artisoft i.Share v2.5, Internet-access sharing software enables users on a Microsoft, Novell or LANtastic network to share one Internet connection as easily as they share files, applications and printers. i.Share enables networked PCs to simultaneously access the Internet from a single, secure, low-cost access point from a Windows 95 server. The client's software supports Windows 3.x, Windows 95, and Windows NT 3.51 Workstation.
Another product offered by the Communication Software Group is ModemShare v7.0. ModemShare v7.0 offers businesses an easy, affordable way to share modems and phone lines across a local area network. With ModemShare, everyone on the network can share one modem and one phone line to use a fax, Internet access programs and other online services, without leaving their desks. ModemShare offers total interoperability between Windows 95, Windows and DOS, making it easy to share resources in mixed operating environments.
Computer Telephony Group
The Computer Telephony ("CT") Group is focusing on two objectives: First, to increase its leadership in the CT software development toolkit market; and second, to deliver innovative CT software applications to small businesses and corporate departments.
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. With its latest release, Visual Voice 4.0, introduced in August 1997, the product offers an important additional benefit: performance. It is the first open-architecture telephony application development toolkit to support multi-threading for Visual Basic 5.0. This technology breakthrough allows a 96-line application to be run with only 15 MB of RAM - a 90% reduction in memory.
InfoFast, an automated information-on-demand system, represents the CT Group's first entry into the CT software application arena. InfoFast allows businesses to easily fulfill customer requests via phone or fax. With InfoFast, customers can call to retrieve specific documents, such as product brochures or bulletins, by choosing from a list of customizable voice menu options. InfoFast far surpasses manual fulfillment efforts by providing instant automated access, 24 hours a day. Customers utilizing the product, experience several benefits, including increased staff productivity, lower costs, and improved customer service. Its unique Web synchronization utility makes a Web site available via fax to customers who do not have Web access. With InfoFast 2.0, fulfilling customer information requests is no longer one-way communication from business to caller. Customers who need additional information can be transferred to a live operator or a specific extension. Callers can also leave messages in a specific mailbox chosen by extension, or perform a last name search for the correct mailbox. InfoFast's new advanced reporting features allow businesses to track the frequency of document requests, providing a better understanding of customer's interests. InfoFast has been built to be a channel-ready solution, and to date over 350 VARs have invested in not-for-resale copies.
A second CT application, TeleVantage(R), is currently under development. TeleVantage is designed to be a complete PC-based telephone system that is fully integrated with a LAN. The design calls for it to provide PBX-like call control functionality including voice mail, 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 dramatically improve customer service; increase call productivity; and significantly decrease the cost of maintaining their telephone system. 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.
Remote Control Group
The mission of the Remote Control Group is to provide key products for remote control, file transfer, configuration assist, and help desk services.
CoSession Remote 32 is a remote control software application that enables users running a Windows 95 or a Windows NT 4.0 PC to connect and control remote PCs running Windows NT 4.0 or Windows 95. First shipped in March 1997 on select IBM PC models, CoSession Remote 32 supports connections over analog modems, IPX/SPX, NetBIOS, NetBEUI and TCP/IP. CoSession Remote 32 also supports TAPI 2.0 and connections over IRDA and parallel ports.
CoSession Remote 32 uses shell extensions to enable ease of use in setting up and accessing remote PCs. Once connected, the users can do one or more of the following:
o Remote control o File transfer with differential update, synchronization and cloning capabilities o Keyboard chat with remote users o Simultaneous voice conversations using standard analog modems or network/Internet connections (with sound cards, speakers and microphones on the two PCs)
CoSession Remote version 7.0, first shipped in March of 1996, is for users of Windows 95 and Windows 3.1x systems. It is a 16-bit application that provides most of the functionality of the CoSession Remote 32 product except it does not support IRDA or parallel port connections, nor does it provide simultaneous voice conversations without the use of specialized DSVD modems.
CoSession PC2X provides UNIX to PC remote control capabilities. From a UNIX workstation, users can access and control PCs running Windows NT 4.0, Windows 95, Windows 3.1x and DOS. This product is primarily targeted toward corporate IS departments running enterprise and mission critical network management applications in the overall corporate computing environment.
ConfigSafe(TM) Support Edition is a configuration tracking and recovery utility that is licensed from imagine LAN, Inc. ConfigSafe supports Windows NT, Windows 95 and Windows 3.1x. It enables an easy recovery from PC crashes with one-step system restoration and advanced tracking features.
Financial Information about Industry Segments
All of the Company's products are considered part of a single industry segment. Information regarding domestic and international net sales and international assets are contained in Note 15, "Domestic and International Operations," in "Notes to Consolidated Financial Statements" included in "Item 8. Financial Statements and Supplementary Data."
Raw Materials, Manufacturing and Suppliers
The principal materials and components used in the Company's products include diskettes, user manuals and product display boxes, and are purchased directly from third-party vendors. The Company currently utilizes both internal and third-party contracted resources for the assembly, warehousing and fulfillment of its products. Outside vendors perform in accordance with Company specifications, and material quality is ensured prior to the assembly of its 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 products and that multiple sources are available for CD and diskette duplication, manual printing and final packaging.
Since the disposition of its manufacturing operations in the second half of fiscal 1995, the Company primarily utilizes the services of third-party manufacturers for production of its hardware products. The Company no longer purchases integrated circuits, circuit boards and components for its printed circuit boards, but rather, purchases finished boards and other hardware products from third-party manufacturers. The manufacturers deliver the products to the Company's Tucson facilities, where the Company tests, packages and ships finished products to customers. Most components that are used in the Company's products are readily available from a large number of both domestic and foreign equipment vendors. However, future operating results could be adversely affected if the Company is unable to procure subcontracted assemblies for its products
needed to meet anticipated customer demand. To date, customer returns of the Company's products for defective workmanship have not been material.
Marketing, Sales and Distribution
The Company's dominant marketing strategy is to create reseller and end user demand for the Company's products and principally use broad line distributors and volume purchasers to fulfill 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 computer publications.
The Company's marketing programs have three objectives: (i) create brand name recognition of the Company and its products; (ii) generate sales leads for its resellers and distributors; and (iii) support the sales efforts of its resellers and distributors through sales tools and training. Marketing activities that address the first two areas include frequent participation in industry trade shows and seminars, direct mail, advertising in major trade publications, executive participation in press briefings and industry seminars, sponsorship of seminars by the Company and on-going communication with the Company's end users. To train and support resellers and distributors, the Company provides mailings of product and technical updates, seminar materials, video training and corporate presentations. The Company's Advantage and Premier programs for U.S. resellers and distributors provide increased training, services and support.
The Company is exposed to the risk of product returns and rotations from its distributors and volume purchasers, which are recorded by the Company as a reduction to sales. Although the Company attempts to monitor and manage the volume of its sales to distributors and volume purchasers, overstocking by its distributors and volume purchasers or changes in inventory level policies or practices by distributors and volume purchasers may require the Company to accept returns above historical levels. In addition, the risk of product returns may increase if the demand for new products introduced by the Company is lower than the Company anticipates at the time of introduction. Although the Company believes that it provides an adequate allowance for sales returns, there can be no assurance that actual sales returns will not exceed the Company's allowance. Any product returns in excess of recorded allowances could result in a material adverse effect on net sales and operating results. As the Company introduces more products, timing of sales to end users and returns to the Company of unsold products by distributors and volume purchasers become more difficult to predict, and could result in material fluctuations in quarterly operating results.
The Company is also exposed to its distributors for price protection for list price reductions by the Company on its products held in such distributors' inventories. The Company provides its major distributors with price protection in the event that the Company reduces the list price of its products. Large distributors are usually offered credit for the impact of a list price reduction on the expected revenue from the Company's products in the distributors' inventories at the time of the price reduction. Although the Company believes that it has provided an adequate allowance for price protection, there can be no assurance that the impact of actual list price reductions by the Company will not exceed the Company's allowance. Any price protection in excess of recorded allowances could result in a material adverse effect on net sales and operating results.
Substantially all of the Company's revenue in each fiscal quarter results from orders booked in that quarter. A significant percentage of the Company's bookings and sales to major customers on a quarterly basis historically has occurred during the last month of the quarter and are usually concentrated in the latter half of that month. Orders placed by major customers are typically based upon the customers' forecasted sales level for Company products and inventory levels of Company products desired to be maintained by the major customers at the time of the orders. Major distribution customers may receive negotiated cash rebates, market development funds and extended credit terms from the Company for purchasing Company products, in accordance with industry practice. Changes in purchasing patterns by one or more of the Company's major customers related to customer forecasts of future sales of Company products, customer policies pertaining to desired inventory levels of Company products, negotiations of rebate and market development funds or in the ability of the Company to anticipate the mix of customer orders or to ship large quantities of products near the end of a fiscal quarter could result in material fluctuations in quarterly operating results. The Company believes that there is a trend among major distribution customers and volume purchasers to reduce their inventory levels of products, including the Company's products. This trend could have a significant adverse effect on the Company's operating results during the period or periods that such customers initiate such inventory reductions. The timing of new product announcements and introductions by the Company or significant product returns by major customers to the Company, could also result in material fluctuations in quarterly operating results. Expedited outsourcing of production and component parts to meet unanticipated demand could adversely affect gross margins.
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 products. InfoFast utilizes a two-tier distribution model. End users purchase the product from VARs, who purchase it from distributors. The Company works cooperatively with the distributors to generate awareness within the VAR community, and to develop programs for training, certifying and motivating the VARs. End user sales leads are passed along to the certified VARs.
The Remote Control Group currently uses multiple distribution channels to deliver its products worldwide, including software distributors and dealers, value added resellers, systems integrators, original equipment manufacturers, direct telemarketing and direct mail. The primary business model, however, includes the licensing of CoSession Remote and ConfigSafe technology through original equipment manufacturer (OEM) agreements and volume license agreements entered with corporations. Sales channels are supported directly through a variety of programs designed to create demand for the products. The Remote Control Group seeks to educate individuals and key decision makers in large corporations, independent software vendors, and original equipment manufacturers about the uses for and benefits of its products. Programs include the following: (i) targeted direct mail campaigns; (ii) telemarketing and on-site sales visits; (iii) targeted worldwide advertising in industry magazines, mail order catalogs and the Internet; (iv) public relations campaigns; and (v) custom-developed joint marketing programs with OEM customers. The sales force specializes in educating corporate end users, original equipment manufacturers and independent software vendors about the Company's products. The sales organization pursues prospects in their geographic areas, and the main focus is on OEM customers. This channel will continue to be the main focus of the business. In addition, direct sales to medium and large-sized corporations have historically made revenue contributions and continue to be a source of high profit revenue for the product group.
In order to ensure an orderly supply of CoSession Remote to end users, a modest presence in the worldwide wholesale distribution and mail order channel will be maintained. Coordination for all sales outside of the U.S., with the exception of Asia, will be handled from the U.S. The Remote Control Group has a strong 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. Core is closely aligned with IBM Japan, the product group's largest customer in Asia.
The Company supports its products through fee and non-fee-based telephonic technical services, on-line forums such as CompuServe, a World Wide Web site, bulletin board systems, CD-ROM databases and a fax-on-demand system. Because the Company's products operate in many disparate PC environments, the Company's technical services require wide expertise in network operating systems, network interface cards of other companies and other technologies.
The Company'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 $9.3 million, $7.1 million and $7.7 million in fiscal 1997, 1996 and 1995, respectively. The Company has not engaged in customer-sponsored research activities.
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
The PC industry is highly competitive and is characterized by rapidly changing technology and evolving industry standards. Competition is usually based upon brand recognition, scalability of products offered by a vendor, current and future perceived needs of customers, product features, ease of installation and maintenance, reliability of the software, price and product availability through consultant, reseller and retail channels. 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.
The Company expects that all of its products, existing and new, will face significant competition. Competition in the industry is likely to intensify as current competitors expand their product lines, include more features in operating systems, add new network application features into their NOS products and operating systems and as new companies enter the market, including companies offering capabilities via Internet browsers. Significant price competition, with its attendant adverse effects on profit margins, may result. Prolonged price competition could have a material adverse effect upon the Company's business, operating results and financial condition.
The Company's NOS products compete against Microsoft's Windows desktop operating systems, including Windows 95, which includes peer-to-peer networking capabilities as well as a group scheduler and electronic mail features. The Company believes that the viability of these products has severely impacted the Company's net sales and income from continuing operations. This impact has been difficult to estimate in advance. In August 1995, Microsoft introduced a new version of its Windows operating system, referred to as "Windows 95". This product includes networking features competitive with features found in products sold by the Company. Because of the dominance of Microsoft in the personal computer operating system market, the Company believes that Windows 95 has had a significant, detrimental impact on sales of the Company's products since its introduction. Part of the Company's business strategy is to provide a migration path for small businesses and workgroups to the Windows 95 operating system. The Company's LANtastic 7.0 product fully supports Windows 95 and enables the Company's customers to utilize Windows 95 features in an integrated network across all major operating system platforms. Another Microsoft NOS product that the Company believes has had and may in the future have, a detrimental impact on sales of LANtastic products, is Microsoft Windows NT network server. The Microsoft Windows NT 4.0 network server product is faster than previous versions and easier to use, and has a Windows 95-like interface. It also ships with all of the tools necessary to create and manage Internet or Intranet services and includes Internet browsing
capabilities with the inclusion of Microsoft Explorer 3.0. The Company does not have the product breadth or marketing and engineering resources of Microsoft, whose dominant position provides it with substantial competitive advantages in PC software.
The Company's NOS products also compete with Novell's NOS products. Novell released, at the end of 1996, a version of its NetWare NOS for the Small Office-Home Office market. This product, based on the next generation of NetWare, includes built-in Internet capabilities (gateway, browser and Webserver) remote access, E-mail, fax services and other bundled proprietary and third-party products. Novell has a significant if not dominant position in the LAN market and has significantly greater marketing, engineering and other resources than the Company.
There can be no assurance that the Company's NOS products will be able to compete successfully with other NOS products offered presently or in the future by Microsoft, Novell or other NOS competitors. Given the greater resources, higher brand name recognition and other substantial advantages enjoyed by these competitors, it is unlikely that the Company's NOS business can continue to be the primary source of its revenues and earnings over the long term. Accordingly, the future success of the Company will, in part, depend on its ability to expand non-NOS products and activities faster than the rate at which its opportunities and prospects in the NOS arena decline. Although the Company's NOS products are well known and established in the marketplace, in light of the competitive factors noted above, there can be no assurance that the Company will be able to maintain its share of the NOS market. In such event, its revenues and earnings may decline. 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. Proprietary environments have traditionally been favored for high-end applications while open toolkits have been used for lower-end applications. The enhanced performance capabilities of Visual Voice 4.0, however, could change this distinction. Visual Voice now has a significant cost advantage versus proprietary languages and a clear scalability advantage versus other open toolkits. However, given the recent introduction of Visual Voice 4.0, it is too early to know whether the product will enable the Company to compete more favorably for sales intended for proprietary telephony development environments.
Competition for InfoFast tends to fall into two categories: modem-based fax-on-demand applications, such as the Fax-It-Back product marketed by Castelle; high-end fax solutions, such as the FactsLine product line marketed by Castelle and the FaxBack product line marketed by FaxBack. Although InfoFast is more expensive than the modem-based products, it offers better performance, higher reliability, and a greater feature set. Compared to high-end systems, InfoFast offers fewer features, but at the same time provides significant price advantages and ease of use. Although the TeleVantage product remains under development, it is clear that it will face stiff competition in the marketplace at such time as the product may ship.
The PC remote control software industry is highly competitive. There are a number of companies that currently compete directly with the Company's PC remote control products. Many of these companies, including Symantec, Compaq/Microcom and others, have substantially greater resources and name recognition than the Company. Accordingly, there can be no assurance that current PC remote communications products will continue to generate revenues and earnings at current levels, or that this product group will be able to effectively develop and launch new competitive products in the future.
International Business
In fiscal 1997, 1996 and 1995, international sales accounted for 27%, 30%, and 38% respectively, of the Company's net sales. Sales to non-U.S. customers may be affected by fluctuations in exchange rates and by government regulations. To date, the Company's operations have not been materially impacted by currency fluctuations. Assets deployed to support the Company's international business represented approximately 3% of total assets at the end of fiscal 1997, 1996 and 1995. The Company's international operations consist of only sales, marketing and support services in limited geographic areas. The Company's international operations are in good standing and have not been denied any licenses to operate, but are subject to the normal risks associated with such international operations.
Significant Customers
The Company sells its products through a variety of channels of distribution, including distributors, volume purchasers and resellers. For fiscal 1996 and 1995, Ingram Micro, Inc. accounted for approximately 12% and 21% of the Company's net sales, respectively. For fiscal 1995, Merisel, Inc. accounted for approximately 10% of the Company's net sales. At June 30, 1997, Ingram Micro, Inc., accounted for 19% of the Company's outstanding trade accounts receivable. The loss of any of the major distributors of the Company's products or their failure to pay the Company for products purchased from the Company could have a material adverse effect on the Company's operating results. The Company's standard credit terms can be 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, 1997 was approximately $181,000, compared with approximately $221,000 at June 30, 1996.
Proprietary Rights and Licenses
The Company currently relies on a combination of trade secrets, copyright and trademark laws, nondisclosure and other contractual agreements and technical measures to protect the proprietary rights and security of its products. Despite these precautions, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information the Company regards as proprietary.
Although the Company has certain patents, patent protection is not considered essential to the Company's success. The Company believes that, because of the rapid pace of technological change in the industries in which the Company competes, the legal protections for its products are less significant factors in the Company's success than the knowledge, ability and experience of the Company's employees, the nature and frequency of product enhancements and the timeliness and quality of support services provided by the Company.
The Company believes that its products, trademarks and other proprietary rights do not infringe on the proprietary rights of third parties. However, the software and computer industry is characterized by frequent litigation regarding copyright, patent and other intellectual property rights. There can be no assurance that third parties will not assert infringement claims against the Company in the future or that licenses will be available on reasonable terms, or at all, with respect to any third-party technology. In the event of litigation to determine the validity of any third party claims, such litigation could result in substantial expense to the Company and adversely impact the efforts of the Company's management and technical employees. In the event of an adverse result in any such litigation, the Company could be required to expend significant resources to develop alternative, noninfringing technology or to obtain licenses to the technology. There can be no assurance that the Company would be successful in such development or that any such licenses would be available at all or at a reasonable cost to the Company. In addition, laws of certain countries in which the Company's products are or may be developed, manufactured or sold may not protect the Company's products and other intellectual property rights at all or to the same extent as the laws of the United States.
The Company pays royalties to Novell, Netscape Communications, Network TeleSystems, imagine LAN, PureSpeech Inc., Inso Corporation, AT&T Corporation, Digital Equipment Corporation, Learnout & Hauspie Speech Products, Voxware, Inc., International Business Machines and Atrium Software for its use of certain licensed technologies. The licensing by these entities of their products or brand name to competitors of the Company, or the withdrawal or termination of licensing rights to the Company's technologies, could adversely affect the Company's sale of products incorporating such licensed technologies and the Company's results of operations as a whole.
Environmental Laws
Compliance with federal, state and local laws and regulations for the protection of the environment has not had a material impact on the Company's capital expenditures, earnings or competitive position. Although the Company does not anticipate any material adverse impact in the future based on the nature of its operations and the scope of current environmental laws and regulations, no assurance can be provided that such laws or regulations or future laws or regulations enacted to protect the environment will not have a material adverse impact on the Company.
Employees
As of June 30, 1997, the Company employed a total of 270 regular employees, including approximately 135 in sales, marketing and customer support, 81 in engineering and product development, 21 in operations and 33 in administration. Due to the restructuring as more fully described in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations", as of September 15, 1997 the Company employed 164 regular employees. The future success of the Company will depend in large part on its continued ability to attract and retain highly skilled and qualified personnel. Competition for such personnel is intense. The Company has employment or change in control agreements with most of its executive officers and noncompetition and nondisclosure agreements with substantially all of its professional employees and executive officers. None of the Company's employees are represented by a labor union. The Company has experienced no work stoppages and believes that its relations with its employees are good.
Uncertainties in the Company's Business
In addition to the factors described above that could adversely affect the Company's business and results of operations, and, therefore, the market valuation of its Common Stock, the Company's future results of operations may be impacted by various trends and uncertainties that are beyond the Company's control, including adverse changes in general economic conditions, government regulations and foreign currency fluctuations.
In addition, as products become more complex, the Company could experience delays in product development and software "debugging" that are common in the computer industry. Significant delays in product development and release would adversely affect the Company's results of operations. There can be no assurance that the Company will respond effectively to technological changes or new product announcements by other companies or that the Company's product development efforts will be successful. Furthermore, introduction of new products 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". With OEM customers being responsible for a significant percentage of revenue, it is critical to maintain this business. Although the Company maintains good relationships with OEM customers, cost pressures and competitive products are persistent threats to the business. Certain of the Company's OEM relationships require the scheduled delivery of product revisions and new products. The failure to adhere to agreed-upon product delivery schedules could result in the termination of key relationships with major PC manufacturers, which could have a significant adverse impact on revenues and earnings.
Other characteristics of the Company and the computer software industry may adversely impact the Company. These include the ability of the Company to integrate future acquired businesses by retaining key technical personnel of acquired businesses and managing and integrating the business systems of acquired companies. The inability to retain key personnel or to manage and integrate business systems could substantially reduce the expected benefits of such acquisitions.
The PC communication software industry is highly competitive. There are a number of companies that currently compete directly with the Company's PC remote control, modem and telephone line sharing and computer telephony tools products. Many of these companies, including Symantec, MicroCom, Novell, Lucent Technologies and others have substantially greater resources and name recognition than the Company. Accordingly, there can be no assurance that current communication products will continue to generate revenues and earnings at current levels, or that the Company business will be able to effectively develop and launch new competitive products in the future.
As a result, past performance trends by the Company should not be used by investors in predicting or anticipating future results. The market price of the Company's Common stock has been, and may continue to be, extremely volatile. Factors identified in this and other captions, along with other factors that may arise in the future, quarterly fluctuations in the Company's operating results and general conditions or perceptions of securities analysts relating to the networking and data communications marketplace or to the Company specifically may have a significant impact on the market price of the Company's Common stock and could cause substantial market price fluctuations over short periods. See also "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" including the discussion of "Risk Factors."
Rights Plan
During fiscal 1995, the Board of Directors of the Company adopted a shareholder rights plan (the "Rights Plan") which is intended to protect and maximize the value of shareholders' interest in the Company and to assure that all Company shareholders will receive fair and equal treatment in the event of any unsolicited attempt to acquire the Company. The Rights Plan will not and is not intended to prevent a takeover of the Company on terms that are fair to, and in the best interests of, all shareholders. See "Note 10 of Notes to Consolidated Financial Statements" under "Item 8. Financial Statements and Supplementary Data."
Stock Repurchase Program
In February 1997, the Company extended a stock repurchase program (the "Program") under which the Company would be authorized to repurchase up to 1,000,000 shares of its outstanding Common Stock for general corporate purposes. Pursuant to the Program, management of the Company is authorized to pursue the Program in open market transactions from time-to-time, depending upon market conditions and other factors. To date, the Company has repurchased less than 100,000 shares in open market transactions pursuant to the Program.
Item 2.
Item 2. Properties - ------------------
The Company owns or leases property as detailed in the following table.
Aggregate monthly rental payments for the Company's facilities are approximately $58,000. The Company's current facilities are generally adequate for anticipated needs over the next 12 to 24 months.
Item 3.
Item 3. Legal Proceedings - -------------------------
The Company is a party to a number of legal proceedings arising in the ordinary course of its business. The Company believes that the ultimate resolution of these claims will not have a material adverse effect on its financial position or results of operations.
Item 4.
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, 1997 except as noted:
Mr. Keiper joined the Company in January 1993 as President and Chief Operating Officer. In June 1993, he became Chief Executive Officer and was appointed Chairman of the Board in October 1995. From 1986 through January 1993, Mr. Keiper held various positions at MicroAge,
Inc., and was serving as President and Chief Operating Officer until he joined the Company. MicroAge, Inc. is a company that distributes, markets and supports personal computer hardware and software.
Mr. Acord joined Artisoft in April 1996 as Vice President and Chief Financial Officer. Prior to joining Artisoft, Mr. Acord was Senior Vice President of Finance and Chief Financial Officer of Elsinore Corporation, a publicly-traded gaming company in Las Vegas, Nevada from April 1995 to April 1996. Elsinore Corporation filed a petition for reorganization under Chapter 11 of the federal bankruptcy code in October, 1995. Prior to his employment with Elsinore, he was with KPMG Peat Marwick LLP from 1979 through 1995, with his last position being Managing Partner of the Las Vegas office and Director of the firm's national gaming practice.
Mr. East joined Artisoft in January 1996 as Vice President, General Counsel, and Corporate Secretary. Prior to joining Artisoft, Mr. East was Vice President and General Counsel of Elsinore Corporation in Las Vegas, Nevada from October 1994 to January 1996. Elsinore Corporation filed a petition for reorganization under Chapter 11 of the federal bankruptcy code in October, 1995. He was Senior Vice President and General Counsel for Trump Hotels and Casino Resorts, New York City, from June 1991 to September 1994 and also served as an officer of Trump Castle, Trump Taj Mahal and Trump Plaza Casinos, Atlantic City, New Jersey at the time of their reorganizations under the federal bankruptcy laws in 1991 and 1992. Mr. East was Vice President, Secretary and General Counsel for Del Webb Corporation, Phoenix, Arizona from January 1984 to June 1991.
Mr. Mayes joined Artisoft in November 1994. In June 1997, Mr. Mayes was named Corporate Controller, and the Company's Principal Accounting Officer and in August 1997 was named Acting Principal Financial Officer. Mr. Mayes joined Artisoft from Arthur Andersen LLP.
Mr. McGee joined Artisoft in November 1995 as Director of North American Sales which was the result of Artisoft's acquisition of Synergy Solutions. In June 1997, he became Vice President of Sales and Marketing. Mr. McGee was the founder and President of Synergy Solutions, the developer of ModemAssist PLUS. Prior to founding Synergy, Mr. McGee successfully built channel sales and marketing organizations for Fresh FTechnology Company, Clyde Digital Systems, and WICAT systems International.
Mr. Shipp joined Artisoft in January 1989. Mr. Shipp joined Artisoft from Hughes Aircraft where he served in both engineering and management capacities. Mr. Shipp has been one of the key development team builders during his eight year tenure at Artisoft, Inc. Mr. Shipp has a Masters of Science in Computer Science and a Bachelors of Science in Systems and Industrial Engineering. Mr. Shipp is the Vice President of Engineering and Product Management and is currently acting as the manager of the Information Systems and Technology Department.
Mr. Thomas joined Artisoft in June 1997 as President of the Communication Software Group and was later named President and Chief Operating Officer of the Company. Thomas joined Artisoft from Sunquest Information Systems where he was Senior Vice President of Marketing. Earlier in his career, 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. Zitoun is a native of France who joined Artisoft in December 1991 and was responsible for establishing the Artisoft France office. Later he was named Director of Sales for France, Spain, Italy, Belgium, Luxembourg and the Netherlands. In February 1995, Mr. Zitoun became Vice President of Sales and Marketing for Europe. In March 1996, Mr. Zitoun became Senior Vice President and General Manager of Artisoft's Networking Product Group. Prior to Artisoft, from March 1987 to November 1991, he was the European Marketing Director for Kortex, one of Europe's leaders in the communication and modem industry.
NOTE: Messrs. Acord and Zitoun are no longer with the Company as of the filing of this document. Mr. McGee was promoted to Vice President, Sales and Marketing, subsequent to June 30, 1997. Mr. Keiper resigned as Chairman on September 12, 1997, and will no longer be employed by the Company as Chief Executive Officer effective September 30, 1997.
PART II
Item 5.
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. 1997 Annual Report to Shareholders, and are incorporated herein by reference. On June 30, 1997, the Company's Common Stock was held by approximately 400 shareholders of record.
The Company currently intends to retain future earnings to fund the development and growth of its business and, therefore, does not anticipate paying any cash dividends in the foreseeable future.
Item 6.
Item 6. Selected Financial Data. - --------------------------------
Artisoft, Inc. and Subsidiaries Selected Consolidated Financial Data (in thousands, except per share amounts)
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations. - --------------
Overview
During fiscal 1997 the Company's product lines experienced rapidly increasing competitive pressures from major software manufacturers. These marketplace conditions contributed to a substantial decline in sales of the Company's flagship LANtastic NOS product line. Revenues from the Company's Remote Control and Computer Telephony product lines partially offset some of these declines. In response to the lowered demand for its products the Company implemented substantial restructuring actions designed to bring the Company's cost structure to a level commensurate with the level and mix of operating revenues. The restructuring actions included the closure of seven of its international offices, and attendant headcount reductions at these offices but principally at its Tucson, Arizona headquarters. These actions were taken in order to move the Company toward improved operating results.
New Products
Communication Software Group
In the second quarter of fiscal 1997, the Company launched i.Share 2.0, an Internet access-sharing software product for networked PC's that enables multiple users to share a single Internet connection simultaneously. In the fourth quarter of fiscal 1997, Artisoft released version 2.5 of the Internet access-sharing software. i.Share is targeted at Microsoft, Novell and Artisoft network customers.
In the second quarter of fiscal 1997, the Company released XtraMail for Windows NT and Windows 95. XtraMail is an e-mail server software product that runs on Microsoft NT or Windows 95 servers and enables businesses to send or receive interoffice e-mail via their local area networks at the same time they transparently pass e-mail to and from the Internet. XtraMail runs on any TCP/IP network, including Microsoft, Novell and Artisoft LANtastic.
Artisoft's Communication Software Group product offering also includes LANtastic 7.0, the Company's flagship small business networking product. LANtastic 7.0 is the first Internet-ready networking solution for small and growing businesses, and supports the three most popular PC operating systems - Windows 95, Windows and DOS. It also allows multiple-user access to a single Internet connection, modem and telephone line sharing and capabilities to enable a small business to inexpensively build a wide area network (WAN).
Computer Telephony Product Group
The Company's computer telephony products include Visual Voice Pro 3.0 and Visual Voice for TAPI 2.0. In August 1997, Artisoft released Visual Voice Pro 4.0, which allows users to create a wide variety of 32-bit computer-based telephony solutions for Windows NT and Windows 95 platforms, including voice mail, audio text, outbound calling, interactive voice response, fax-on-demand, and international callback. Visual Voice Pro adds telephony and voice capabilities to any development environment that supports ActiveX controls, including Visual Basic, Visual C++, Delphi and Visual Fox Pro.
In the second quarter of 1997, the Company launched InfoFast 1.0, a fax-on-demand/audio text software solution jointly promoted with Dialogic Corporation. InfoFast 1.0 provides 24-hour automated access to fax documents, Web documents and voice recordings via fax or phone.
In August 1997, Artisoft launched InfoFast 2.0 for Windows NT and Windows 95. InfoFast 2.0 offers the same features as InfoFast 1.0 but is compatible with both Windows NT and Windows 95.
Remote Control Product Group
CoSession Remote 32 is a remote control software application that enables users running a Windows 95 or a Windows NT 4.0 PC to connect and control remote PCs running Windows NT 4.0 or Windows 95. First shipped in March 1997 on select IBM PC models, CoSession Remote 32 supports connections over analog modems, IPX/SPX, NetBIOS, NetBEUI and TCP/IP. CoSession Remote 32 also supports TAPI 2.0 and connections over IRDA and parallel ports.
CoSession Remote 32 uses shell extensions to enable ease of use in setting up and accessing remote PCs. Once connected, the users can do one or more of the following:
o Remote control
o File transfer with differential update, synchronization and cloning capabilities
o Keyboard chat with remote users
o Simultaneous voice conversations using standard analog modems or network/Internet connections (with a sound card, speakers and microphone on the two PCs)
CoSession Remote version 7.0, first shipped in March of 1996, is for users of Windows 95 and Windows 3.1x systems. It is a 16-bit application that provides most of the functionality of the CoSession Remote 32 product except it does not support IRDA or parallel port connections, nor does it provide simultaneous voice conversations without the use of specialized DSVD modems.
CoSession PC2X provides UNIX to PC remote control capabilities. From a UNIX workstation, users can access and control PCs running Windows NT 4.0, Windows 95, Windows 3.1x and DOS. This product is primarily targeted toward corporate IS departments running enterprise and mission critical network management applications in the overall corporate computing environment.
In the fourth quarter of fiscal 1997, the Company launched ConfigSafe Support Edition, a configuration tracking and recovery utility that is licensed from imagine LAN, Inc. ConfigSafe, which supports Windows 3.1x, Windows 95 and Windows NT enables users to recover from PC
crashes with one-step system restoration and tracking features. ConfigSafe restores systems to previously working configurations by monitoring changes to critical files, directories and the registry.
Net Sales
The Company's net sales decreased 45% to $33.4 million for the fiscal year ended June 30, 1997 from $61.0 million for fiscal 1996. The overall decrease in net sales was primarily due to an approximate 60% decline in sales of the Company's LANtastic network operating system (NOS) products during fiscal 1997. Management believes that the principal reason for the decline was the impact of Microsoft's Windows 95 and Windows NT personal computer (PC) operating systems (OS) on the small business networking market. More specifically, Windows 95, which is pre-loaded on substantially all Pentium processor-based PC's currently sold worldwide, includes peer-to-peer networking capabilities (printer, file and applications sharing). The impact of Windows 95 on the Company's business has been compounded by the dominance and visibility of Microsoft in the PC marketplace and the rapid upgrade by small businesses to Pentium PC's. In August 1996, Microsoft released Windows NT 4.0, a client-server network version of the Windows OS. Management believes that Windows NT 4.0, which like Windows 95, includes peer-to-peer networking capabilities in the workstation version, and is preloaded on certain Pentium PC's, has provided additional significant direct competition to the LANtastic NOS both as a peer-to-peer and client-server networking solution. Overall, sales of LANtastic software only licenses and kits have decreased approximately 56%, and hardware (networking interface cards and other components), 61%. The year-over-year declines were across all worldwide direct and indirect channels of distribution. For the fiscal years ended June 30, 1997 and 1996, net sales of LANtastic NOS products comprised approximately 60% and 83%, respectively, of consolidated net sales.
The decline in sales of LANtastic NOS products, was partially offset by increases in sales of the Company's computer telephony and PC communication products. Included in the computer telephony category are the Visual Voice and Visual Fax computer telephony toolkit products, Infofast, an information-on-demand solution, and computer telephony hardware. After consideration of the fact that the Company has recognized sales of the toolkit products and associated hardware since the acquisition of Stylus Innovation, Incorporated ("Stylus") on February 13, 1996, and, accordingly, for only a portion of fiscal 1996, sales of these products in fiscal 1997 are flat with the prior fiscal year. Infofast, which was released in November 1996, has not made a material contribution to the Company's consolidated net sales. For the fiscal years ended June 30, 1997 and 1996, net sales of computer telephony products comprised approximately 15% and 3%, respectively, of consolidated net sales.
Included in the PC communication product category are ModemShare, a modem and telephone line sharing product, CoSession Remote, a remote control product, i.Share, an Internet connection sharing product, XtraMail, an Internet e-mail product and ConfigSafe, a system reconfiguration solution. ModemShare and CoSession Remote have been sold by the Company since the respective acquisitions of Synergy Solutions, Inc. ("Synergy") on November 22, 1995, and Triton Technologies, Inc. ("Triton") on December 21, 1995. Accordingly, these products were only sold for a portion of fiscal 1996. While, these products have continued to sell at preacquisition levels or better in the direct sales channels (PC manufacturer OEM for CoSession Remote), they have performed below management's expectations in distribution and retail. i.Share and XtraMail were launched in December 1996. While not yet a significant contributor to consolidated net sales for the second half of fiscal 1997, i.Share experienced sequential growth in each of the two quarters following the launch. During fiscal 1997 XtraMail did not make a material contribution to consolidated net sales. For the fiscal years ended June 30, 1997 and 1996, net sales of PC communications products comprised approximately 20% and 11%, respectively, of consolidated net sales.
The Company's net sales decreased 28% to $61.0 million for the fiscal year ended June 30, 1996 from $84.2 million for fiscal 1995. The overall decrease in net sales was primarily due to the sale of substantially all of the assets of Eagle Technology and the consequent cessation of sales by the Company of Eagle Technology hardware products as of January 30, 1995. Worldwide net sales for the Eagle Technology business unit were approximately $24.4 million for the fiscal year ended June 30, 1995. Net sales for fiscal 1996 include sales attributable to the Company's acquisition of three software companies from the dates of their acquisitions. Net sales also reflect the Company's strategic decision to move to a software-centric financial model and a sales mix shift toward the software-only version of the Company's LANtastic network operating system (NOS). The shift to the software-only version of LANtastic was principally the result of increased price sensitivity in the Ethernet adapter market and a related willingness of local area network (LAN) resellers to select low-priced Ethernet adapters instead of the Company's Ethernet adapters that were sold in stand-alone versions or as part of starter and add-on kits. In the fourth quarter of fiscal 1996, the Company introduced LANtastic version 7.0. In connection with the transition to this newest version of the LANtastic NOS, the Company reduced worldwide channel inventories of previous versions of the product, as well as LANtastic Power Suite, and increased the allowances for returns and rotations. In the fourth quarter of fiscal 1995, the Company introduced LANtastic Power Suite. Sales for this product did not reach the levels anticipated by the Company when the product was introduced. Upon the release of LANtastic v7.0, the Company elected to de-emphasize Power Suite. As a consequence of the foregoing, the Company experienced higher than expected returns and rotations during fiscal 1996, which also contributed to the overall decrease in net sales.
The Company distributes its products internationally, and tracks sales by major geographic area. Non-U.S. sales represented 27%, 30% and 38% of net sales for fiscal 1997, 1996 and 1995, respectively. International sales decreased 51% to $8.9 million in fiscal 1997 from $18.3 million in fiscal 1996. The reasons for the decline are the same as those discussed above. International sales decreased 43% to $18.3 million in fiscal 1996 from $32.2 million in fiscal 1995. The decrease is principally the result of the cessation of sales of Eagle Technology hardware products as of January 30, 1995 and other factors described above.
Gross Profit
The Company's gross profit was $21.1 million, $41.1 million and $41.4 million in fiscal 1997, 1996 and 1995, respectively, or 63%, 67% and 49% of net sales, respectively. The decrease in gross profit percentage for fiscal 1997 was due to the fixed elements of cost of sales being spread over a much reduced level of net sales. The increase in gross profit for fiscal 1996 was primarily the result of an increased percentage of higher margin software sales, a reduced percentage of network starter and add-on kits (which include hardware), and the cessation of sales of Eagle Technology hardware products. Gross profit 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 $23.4 million, $26.2 million and $33.0 million for fiscal 1997, 1996 and 1995, respectively, representing 70%, 43% and 39% of net sales. The increase in sales and marketing expenses as a percentage of net sales for fiscal 1997 is principally due to the overall decrease in net sales driven by an approximate 60% decline in sales of the Company's LANtastic network operating system (NOS) products during fiscal 1997. The decrease in aggregate dollars for sales and marketing expenses for fiscal 1997 reflects expense reductions including a decrease in the Company's staffing levels. This decrease was implemented to bring sales and marketing costs more closely into alignment with the reduced sales level from fiscal 1996 to fiscal 1997. The increase in sales and marketing expenses as a percentage of net sales in fiscal 1996 is due primarily to the cost of promoting the Company's new and existing products. The decrease in aggregate dollars for sales and marketing expenses for fiscal 1996 reflects expense reductions including a decrease in the Company's staffing levels. This decrease was implemented to bring costs more closely into alignment with the reduced sales level from fiscal 1995 to fiscal 1996.
Product Development
Product development expenses were $9.3 million, $7.1 million and $7.7 million for fiscal 1997, 1996 and 1995, respectively, representing 28%, 12% and 9% of net sales. The increase in both the aggregate dollars for fiscal 1997 and the increase in product development expenses as a percentage of net sales for fiscal 1997, is principally attributable to the addition of product development resources in the Company's Computer Telephony and Remote Control Groups. The addition of new development personnel to these product groups is 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. The increase in product development expenses as a percentage of net sales for fiscal 1996 and 1995 is principally attributable to the addition of product development expenses associated with the companies acquired during fiscal 1996 and the addition of research and development personnel to meet planned future product introduction timetables. The decrease in aggregate dollars for fiscal 1996 reflects expense reductions across the board to bring Company costs more closely into alignment with the reduced level of sales.
General and Administrative
General and administrative expenses were $6.3 million, $6.0 million and $7.5 million for fiscal 1997, 1996 and 1995 respectively, representing 19%, 10% and 9% of net sales. The net increase in fiscal 1997 principally results from the full year's impact in fiscal 1997 of the acquisitions of the three businesses in fiscal 1996, and the subsequent expansion of the Company's computer telephony operations in Cambridge, Massachusetts (higher number of employees and larger facility). Another factor contributing to the net increase is an increase in the Company's allowance for doubtful accounts receivable. Bad debt expenses included in general and administrative expenses were $.5 million, $0 and $0 in fiscal 1997, 1996 and 1995, respectively. The aforementioned increase was substantially offset by a significant decrease in general and administrative expenses incurred at the Company's Tucson, Arizona headquarters. Significant reductions were realized in payroll and related costs as a consequence of involuntary employee terminations and other actions taken as part of restructuring actions effected in the September 1996 and March 1997 quarters and other cost-cutting programs to bring operating expenses more in line with the declining sales levels. The increase in general and administrative expenses as a percentage of net sales is principally attributable to the overall decrease in net sales as a result of an approximate 60% decline in sales of the Company's LANtastic network operating system (NOS) products during fiscal 1997. The decrease in general and administrative expenses for fiscal 1996 reflects expense reductions to bring Company costs more closely into alignment with the reduced sales levels. These expense reductions included a decrease in the Company's staffing levels in the general and administrative area.
Costs to Exit Hardware Business
The January 1995 sale of Eagle Technology for approximately $16.0 million resulted in a gain of $5.7 million before costs associated with the decision to cease hardware development and manufacturing activities, and wind down that business. These exit costs included severance, facility closings, inventory dispositions and other related items, and are included in "Costs to exit hardware development and manufacturing business, net of gain on disposition" in the Consolidated Statement of Operations for the fiscal year ended June 30, 1995. Also, as part of the Company's decision to exit the hardware business, the Company adjusted operating expenses to conform to the new business model. During the last half of fiscal 1995, the Company reduced staffing levels by over 280 employees, a 48% reduction. In addition, the Company disposed of its manufacturing operations to a contract manufacturer and began outsourcing the production of its hardware products on June 30, 1995.
Purchased In-Process Technology and Related Costs
In conjunction with the acquisition of Synergy, Triton and Stylus, the Company recorded a charge to operations during the second and third quarters of fiscal 1996 totaling $21.7 million. The charge related to purchased in-process technology that had not reached technological feasibility and had indeterminable alternative future use. In addition, as a result of the acquisitions, the Company recorded a charge to operations for other related costs totaling $5 million. The other related costs were principally attributable to costs associated with the integration of Triton, Synergy and Stylus technology with the Company's technology and the elimination of duplicate distribution arrangements in Europe. Other related costs also included increases in allowances for returns, rotations and inventory obsolescence associated with the transition to new technology, costs for severance and outplacement, and facility costs relating to the cancellation of leases in order to consolidate technical support and distribution. Although the Company expects the elimination of duplicative expenses, as well as other efficiencies related to the integration of the businesses acquired, there can be no assurance that such benefit will be achieved in the near term, or at all.
Restructuring Costs
Restructuring costs in the accompanying consolidated statement of operations for the fiscal year ended June 30, 1997 include the costs of: involuntary employee termination benefits, international sales and support office closures and related costs associated with the restructuring actions effected during that fiscal year. Employee termination benefits include severance, wage continuation, notice pay and medical and other benefits. International sales and support office closures and related costs include costs of premise and other lease terminations, losses on disposal of furniture and equipment, legal and other professional fees, and an increase in the allowance for bad debts resulting from the decision to reduce the number of international distributors, particularly in Europe. Other costs associated with the restructuring actions include an impairment loss on the expected disposition of excess computers and other equipment resulting from the significant reduction in workforce at the Company's corporate headquarters in Tucson, Arizona and lease termination costs for certain Tucson, Arizona facilities.
The restructuring actions were the result of substantially declining sales, principally LANtastic NOS products, and the attendant necessity to reduce the Company's cost structure to a level commensurate with the level and mix of operating revenues. The restructuring actions taken during the fiscal year ended June 30, 1997 included a reduction in workforce affecting approximately 160 employees at the Company's corporate headquarters location in Tucson, Arizona, the sale of the Company's Tucson headquarters land and building in connection with the planned relocation to a smaller facility 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)
For fiscal 1997, other income (expense), net, decreased to $.7 million from $1.5 million in fiscal 1996. This decrease resulted principally from lower investment income resulting from the reduction in cash and investment balances due to the acquisition of Synergy, Triton and Stylus for approximately $26.4 million in 1996. The Company also incurred increased interest expense in fiscal year 1997 due primarily to a $1.4 million sale-leaseback of computer equipment and related software in December 1996. Additionally, the Company entered into a $2.2 million mortgage loan transaction in February 1997.
For fiscal 1996, other income (expense), net, increased to $1.5 million from $(3,000) in fiscal 1995. This increase resulted primarily from investing cash balances in higher-yielding taxable securities, the inclusion of the net gains from the sale of property and equipment and the elimination of interest expense that was accrued under a note payable relating to the purchase of Eagle Technology that partially offset interest income in fiscal 1995.
Income Tax Benefit
The effective tax rates were 0%, (21)%, and (41)% for fiscal 1997, 1996 and 1995, respectively. For the fiscal year ended June 30, 1997, an immaterial amount of income tax benefit was recognized as the Company established a valuation allowance equal to the entire net deferred tax asset balance. In the assessment of the recognition of a valuation allowance, the Company considered recent operating losses experienced during the Company's transition from a company with primarily a hardware orientation focused solely on small business networking, to a PC software company with diversified technology and product portfolios; the expected future impact of the restructuring actions effected during the fiscal year; the uncertainty in estimating the magnitude and timing of the revenue contribution from products expected to be released over the next several quarters; and the expiration dates of state net operating loss carryforwards. The 21% effective tax rate benefit for fiscal 1996 is the result of the non-deductibility for federal income tax purposes of approximately $9.2 million of in-process technology written off for financial reporting purposes in connection with the Triton acquisition, which was effected as a purchase of stock. Other factors causing the effective tax rates to differ from the expected tax expense (benefit) calculated using the U.S. federal corporate income tax rate for those years are the inclusion of state and foreign income taxes partially offset by tax benefits from the Company's FSC and tax-exempt interest income. Income taxes receivable as of June 30, 1997 and 1996 are the result of carrying back all or a portion of the Federal net operating losses incurred in fiscal 1997 and 1996 for a refund of income taxes paid in prior years.
Liquidity and Capital Resources
The Company had cash and investments of $14.7 million at June 30, 1997, compared to $15.3 million at June 30, 1996, and working capital of $17.7 million at June 30, 1997 and $37.9 million at June 30, 1996. The decrease in cash and cash equivalents during fiscal 1997 of $.6 million was principally the result of net cash used in the operations of the business of $2.4 million and capital expenditures of $1.5 million offset substantially by the proceeds from two financings closed during the year: First, was the mortgage of the Tucson, Arizona headquarters building of $2.2 million, and second, a sale-leaseback transaction of $1.4 million for computer equipment. The decrease in working capital of $20.2 million was primarily the result of the following: decreases in trade accounts receivable of $11.0 million, inventories of $1.8 million, current deferred income taxes of $2.2 million and the accrual of restructuring costs of $5.0 million. The decreases in trade accounts receivable and inventories are principally the result of the substantial decline in net sales experienced during the fiscal year. Trade accounts receivable was further impacted by increases in the allowances for sales returns and bad debts in connection with the Company's decision to reduce U.S. distribution channel inventories to approximately six weeks on hand and to reduce international distribution channel inventories to approximately ten weeks on hand, and by provisions for bad debts recognized for certain international distributors in connection with the significant decline in international sell-through and the closure of all international sales and support offices, with the exception of the United Kingdom and Japan. The decline in current deferred income taxes is the result of the recognition of a valuation allowance for the entire balance of deferred tax assets as of June 30, 1997 (see discussion above under caption, "Income Tax Benefit"). Accrued restructuring costs of approximately $5.0 million are comprised of unpaid involuntary termination benefits and other expected but unpaid costs in connection with the restructuring actions (see discussion above under the caption, "Restructuring Costs"). These costs will largely, if not completely, be paid during the first two quarters of fiscal year 1998. Management anticipates that the amount of cash yet to be paid in connection with the restructuring actions will be offset by the estimated net proceeds from the expected sale of the Tucson headquarters land and building of approximately $1.5 million (see discussion above under the caption, "Restructuring Costs") and the refund of prior years' Federal income taxes resulting from the carryback of a portion of fiscal 1997's net operating loss of approximately $4.3 million. Management believes that the future reduction in operating expenses resulting from the restructuring actions will bring those expenses in line with the level and mix of expected future operating revenues.
The Company had cash and investments of $15.3 million at June 30, 1996, compared to $37.8 million at June 30, 1995, and working capital of $37.9 million at June 30, 1996 and $56.3 million at June 30, 1995. The decrease in cash and investments was primarily a result of the acquisition of Synergy, Triton and Stylus but was partially offset by the proceeds from the sale of certain assets and the receipt of a federal income tax refund.
The Company funds its working capital requirements primarily through cash flows from operations and existing cash balances. While the Company anticipates that existing cash balances and cash flows from operations will be adequate to meet the Company's current expected cash requirements for at least the next year, additional investments by the Company to acquire new technologies and products may necessitate that the Company seek additional debt or equity capital. There can be no assurance that the Company could successfully acquire additional debt or equity capital in the future.
Risk Factors
Competition.
The PC industry is highly competitive and is characterized by rapidly changing technology and evolving industry standards. The Company's products compete with products available from numerous companies, many of which have substantially greater financial, technological, production, sales and marketing and other resources, as well as greater name recognition and larger customer bases, than the Company. As a result, these competitors may be able to respond more quickly and effectively to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion, sales and support of their products than the Company. Competition in the PC industry is likely to intensify as current competitors expand their product lines, more features are included in operating systems (e.g., Windows 95), motherboards and microprocessors, and as new companies enter the markets or segments in which the Company currently competes. The industry is also characterized by a high degree of consolidation which favors companies with greater resources than those of the Company. Consequently, the Company expects to continue to experience increased competition, which could result in significant price reductions, loss of market share and lack of acceptance of new products, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. 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.
Networking.
The Company's major competitors in the small business networking market are Microsoft Corporation (Microsoft) and Novell, Inc. (Novell). Both of these companies have substantially greater financial, technological, production and sales and marketing resources than those of the Company. Management believes that the inclusion of networking capabilities (printer, file and application sharing) in Microsoft's Windows 95 operating system (released in August 1995) has had a detrimental impact on sales of the Company's LANtastic NOS products. Windows 95 is pre-loaded on virtually all Pentium processor-based personal computers currently sold worldwide. The impact of Windows 95 has been compounded by the dominance and visibility of Microsoft in the personal computer software market and the more rapid than expected upgrade
by small businesses to Pentium PC's. In August 1996, Microsoft released Windows NT 4.0, a client server network version of the Windows operating system. Management believes that the workstation version of Windows NT 4.0 which, like Windows 95, includes peer-to-peer networking capabilities and is pre-loaded on certain Pentium PC's, has provided significant direct competition to the LANtastic NOS in the small business networking market. Further, business applications software vendors appear to be rapidly adapting their products to Windows NT. Management believes that this trend, combined with the fact that DOS, Windows 3.x and Windows 95 clients are compatible with the NT server, has provided and will continue to provide substantial competitive pressure on sales of LANtastic NOS products. Recently, Microsoft released a small business server that runs on Microsoft NT 4.0. This client server network version of the Windows operating system is designed to meet the buying requirements of small businesses and could further substantially reduce opportunities for LANtastic technologies to add value for small business customers. This small business solution could further diminish demand for LANtastic. The Company expects Microsoft to launch the Windows 98 operating system as early as March 1998. Windows 98 may have additional networking features that further undermine the future sales of the Company's LANtastic NOS products. In addition, press reports suggest that Microsoft will be releasing Windows NT 5.0 in the next 12 to 18 months. Management believes that the features and functionality included in the Windows NT 5.0 client server network version of the Windows operating system, could detrimentally impact the future sales of LANtastic NOS, i.Share and ModemShare product lines.
In February 1997, Novell released a new version of its IntranetWare NOS, aimed at the small business market. The product, IntranetWare for Small Business, is targeted toward businesses with 25 or fewer users and priced lower than previous NetWare versions. There can be no assurance that the introduction of IntranetWare for Small Business, along with other new products from Novell, may not adversely affect the Company's competitive positioning and its financial results.
Finally, the movement of the networking industry toward the uniform use of Internet technologies in the construction of local area networks (so called Intranets) constitutes a risk that demand for more proprietary networks such as LANtastic, will decline further, and that competition will emerge from a new class of players, such as Netscape Communications, Sun Microsystems, and others. Due to the negative impact of competition on sales of the LANtastic NOS product line to date, and the likely further decline in the future, the Company is evaluating the strategic alternatives which might be available to optimize the asset value attendant to such product line.
PC Communications.
The principal distribution channel for the Company's remote control product, CoSession Remote, is through OEM arrangements with PC manufacturers. The Company is developing, but has not yet released in the U.S., a 32-bit version of the product to support the Windows 95 and Windows NT operating systems. As the Company's major competitors currently offer 32-bit remote control products, it is critical, for the continuance of the Company's current OEM relationships, that the Company successfully complete development of the 32-bit product in a timely manner and in accordance with any agreed-upon delivery schedules. The loss of one or more of these OEM relationships could have a significant impact on the Company's net sales and operating results. Microsoft, because of its dominant position in the PC operating systems and business applications markets, frequently offers value-added functionality to its products in the form of enhancements to its Windows operating systems, which are pre-loaded on new PC's, or by offering free products for download from its World Wide Web site. Microsoft has announced its intention to release a version of Windows NT Server with modem sharing capabilities. The inclusion of modem sharing capabilities in Windows NT could result in substantially increased competition for the Company's ModemShare product which could have a significant impact on the Company's sales and operating results (see caption above entitled, "Networking" for further discussion of Windows NT). Microsoft has also announced its intention to include remote control components in future versions of Windows operating systems, and currently distributes Net Meeting at no charge from its Web site. These actions could lead to diminished demand for the Company's CoSession remote control product, and consequently decreased net sales and operating results.
Computer Telephony.
The market for open, standards-based telephony tools, applications and system-level products is relatively new, and rapidly evolving. There can be no assurances that these markets will continue to expand, or if they do, that the Company's products will receive widespread acceptance. Further, the market for the Company's computer telephony products is characterized by the rapid evolution of telephony hardware and software standards, by changing customer requirements, and is highly competitive with respect to timely product introduction. These characteristics may render the Company's computer telephony products obsolete or unmarketable. The Company is currently investing significant resources in the development of computer telephony products. Due to the complexity of these tools and system level products, and the difficulty in gauging the engineering effort required to develop and bring these products to market, the Company's computer telephony product line is subject to significant risk. Software products as complex as those currently under development by the Company are subject to frequent and unpredictable delays during development. There can be no assurance that the Company will not encounter difficulties that could delay or prevent the successful and timely development, introduction and marketing of these products. Furthermore, the successful development of the Company's computer telephony products is dependent to a significant extent upon a number of key technical employees and technical contractors, the loss of one or more of whom could have a material adverse effect upon the Company's development schedule. The future success of the Company's computer telephony products will depend in large part on its ability to attract and retain talented and qualified technical personnel.
Other Competitive Factors. The Company believes that the principal competitive factors affecting the markets it serves include vendor and product reputation, product architecture, functionality and features, scalability, ease of use, quality of product and support, performance, price,
brand name recognition and effectiveness of sales and marketing efforts. There can be no assurances that the Company can maintain and grow its market position against current and potential competitors, especially those with significantly greater financial, marketing, service, support, technical and other competitive resources. Additionally, an integral part of the Company's sales strategy for the computer telephony products is the expansion into new distribution channels, including the recruitment of new value-added resellers and interconnects. Any failure by the Company to expand its distribution channel for telephony products or any failure to maintain and grow its competitive position would have a material adverse effect upon the Company's revenues and anticipated contribution from its telephony product line.
Customers. The Company relies on a network of distributors and value added resellers (VARs) for a significant portion of both its domestic and international networking and PC communication product revenues. In addition, a majority of the sales of CoSession Remote, the Company's remote control product, are to PC OEM's. Generally, there are no minimum purchase requirements for the Company's distributors, VARs and OEMs, and many of the Company's distributors and VARs sell competitive products. There can be no assurance that these customers will give priority to the marketing of the Company's products as compared to competing products or alternative solutions or that such customers will continue to offer the Company's products. Further, in light of the significant decline in sales experienced over the last several quarters, there can be no assurance that the Company's major domestic and international distributors will continue to purchase the Company's products at the same levels (relative to rates of resale) or under the same terms and conditions as in the past. In the event of the termination of the Company's relationship with one or more major distributors, the Company would have to find suitable alternative channels of distribution. The absence of such alternatives could have a material adverse effect on the Company's business, financial condition and results of operations. Certain of the Company's PC OEM relationships require the scheduled delivery of product revisions and new products. The failure to adhere to agreed-upon product delivery schedules could result in the termination of key relationships with major PC manufacturers, which could have a significant adverse impact on current and future revenues in the PC OEM channel.
The Company 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 manage the volume of its sales to distributors and other volume purchasers, overstocking by these customers or changes in their inventory policies or practices may require the Company to accept returns above historical levels. In addition, the risk of product returns and rotations may increase if the demand for existing products or new products introduced by the Company proves to be lower than anticipated. Although the Company believes that it provides adequate allowances for product returns and rotations, there can be no assurance that actual product returns and rotations will not exceed the Company's allowances. Any product returns and rotations in excess of recorded allowances could result in a material adverse effect on net sales and operating results. As the Company introduces more new products, the predictability and timing of sales to end users and the management of returns to the Company of unsold products by distributors and volume purchasers becomes more complex and could result in material fluctuations in quarterly sales and operating results.
The Company is also exposed to its distributors and other volume purchasers for price protection for list price reductions by the Company on its products held in such customers' inventories. The Company provides its distributors with price protection in the event that the Company reduces the list price of its products. Distributors and other volume purchasers are usually offered credit for the impact of a list price reduction on the expected revenue from the Company's products in the distributors' inventories at the time of the price reduction. Although the Company 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 the recorded allowance could result in a material adverse effect on sales and operating results.
Substantially all of the Company's revenue in each fiscal quarter results from orders booked in that quarter. A significant percentage of the Company's bookings and sales to distributors and other volume purchasers historically has occurred during the last month of the quarter and are concentrated in the latter half of that month. Orders placed by major customers are typically based upon customers' recent historical and forecasted sales levels for Company products and inventory levels of Company products desired to be maintained by those major customers at the time of the orders. Moreover, orders may also be based upon financial practices by major customers designed to increase the return on investment or yield on the sales of the Company's products to VARs or end-users. Major distribution customers receive market development funds from the Company for purchasing Company products and from time to time may also receive negotiated cash rebates or extended terms, in accordance with industry practice, depending upon competitive conditions. 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 rebates, or otherwise, or in the Company's ability to anticipate in advance the product mix of customer orders, or to ship large quantities of products near the end of a quarter, could result in material fluctuations in quarterly operating results. Expedited outsourcing of production and component parts to meet unanticipated demand could also adversely affect gross margins.
Product Concentration. The Company has in the past derived, and may in the future derive, a significant portion of its revenues from a relatively small number of products. Declines in the revenues from these software products, whether as a result of competition, technological change, price pressures or other factors, would have a material adverse effect on the Company's business, results of operations and financial condition. Further, life cycles of the Company's products are difficult to estimate due in part to the recent emergence of certain of the Company's markets, the effect of new products or product enhancements, technological changes in the communication software industry in which the Company operates and future competition. The Company's future financial performance will depend in part on the successful development, introduction and market acceptance of new products and product enhancements. There can be no assurance that the Company will continue to be successful in marketing its current products or any new products or product enhancements.
Dependence on New Product Offerings. The Company's future success will depend, in significant part, on its ability to successfully develop and introduce new software products and improved versions of existing software products on a timely basis and in a manner that will allow such products to achieve broad customer acceptance. The Company expects to begin offering TeleVantage, a computer telephony integration product, in the future. There can be no assurance that this and other anticipated new products will be introduced on a timely basis, if at all. If new products are delayed or do not achieve market acceptance, the Company's business, results of operations and financial condition will be materially adversely affected. In the past, the Company has also experienced delays in purchases of its products by customers anticipating the launch of new products by the Company. There can be no assurance that material order deferrals in anticipation of new product introductions will not occur. There can also be no assurance that the Company will be successful in developing, introducing on a timely basis and marketing such software or that any such software will be accepted in the market.
Technological Change. The communication software market for personal computers 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 would be materially adversely affected.
Potential for Undetected Errors. Software products as complex as those offered by the Company may contain undetected errors. There can be no assurance that, despite testing by the Company and by current and potential customers, errors will not be found in new or existing products after commencement of commercial shipments, resulting in loss of or delay in market acceptance or the recall of such products, which could have a material adverse effect upon the Company's business, results of operations and financial condition. The Company provides customer support for most of its products. The Company will in the future offer new products. If these products are flawed, or are more difficult to use than traditional Company products, customer support costs could rise and customer satisfaction levels could fall. Duplication of Software. The Company duplicates nearly all of its software at its Tucson, Arizona facility. The Company believes that its internal duplication capability is economically advantageous because it eliminates the profit margin required by outside duplication sources and enables a high degree of scheduling and other control. This concentration of production does, however, expose the Company to the risk that production could be disrupted by natural disaster or other events, such as the presence of a virus in the Company's duplicators. The Company believes that it could retain outside duplication alternatives quickly, but there is no assurance that it could do so or, if such arrangements could be made, that duplication could take place in an economical or timely manner.
Pre-Load Software Market. The Company primarily sells its software in a form that includes a disk or disks and a manual. Some of its customers "pre-load" the Company's software onto a hard disk. These pre-load 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. Currently, the Company has the capability to produce its products in-house on 3 1/2-inch diskettes. The Company does not currently have the capability to produce CD-ROMs and the cost to develop such production capability may be prohibitive. As the size of software programs grow, CD-ROM is becoming a more prominent medium. The Company currently contracts CD-ROM production to specialized CD-ROM facilities. In the event of a shift of this kind, 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 on a combination of trade secret, nondisclosure and copyright and trademark law which may afford only limited protection. The Company owns United States trademark registrations for certain of its trademarks. There can be no assurance that the steps taken by the Company will be adequate to deter misappropriation of its proprietary information, will 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. In selling its products, the Company relies primarily on "shrink wrap" licenses that are not signed by licensees and, therefore, may be unenforceable under the laws of certain jurisdictions. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to as great an extent as do the laws of the United States. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that the Company's competitors will not independently develop similar technology. Further, although the Company believes that its services and products do not infringe on the intellectual property rights of others, there can be no assurance that such a claim will not be asserted against the Company in the future. The failure of the Company to protect its proprietary information could have a material adverse effect on the Company's business, results of operations and financial condition.
From time to time, the Company has received and may in the future receive communications from third parties asserting that the Company's trade name, or that features, content, or trademarks of certain of the Company's products infringe upon intellectual property rights held by such
third parties. As the number of trademarks, patents, copyrights and other intellectual property rights in the Company's industry increases, and as the coverage of these patents and rights and the functionality of products in the market further overlap, the Company believes that products based on its technology may increasingly become the subject of infringement claims. Such claims could materially adversely affect the Company, and may also require the Company to obtain one or more licenses from third parties. There can be no assurance that the Company would be able to obtain any such required licenses upon reasonable terms, if at all, and the failure by the Company to obtain such licenses could have a material adverse effect on its business, results of operations and financial condition. In addition, the Company licenses technology on a non-exclusive basis from several companies for inclusion in its products and anticipates that it will continue to do so in the future. The inability of the Company to continue to license these technologies or to license other necessary technologies for inclusion in its products, or substantial increases in royalty payments under these third party licenses, could have a material adverse effect on its business, results of operations and financial condition.
Litigation in the software development industry has increasingly been used as a competitive tactic both by established companies seeking to protect their existing position in the market and by emerging companies attempting to gain access to the market. If the Company is required to defend itself against a claim, whether or not meritorious, the Company could be forced to incur substantial expense and diversion of management attention, and may encounter market confusion and reluctance of customers to purchase the Company's software products.
Dependence Upon Key Personnel. The Company's future performance depends in significant part upon key technical and senior management personnel. The Company is dependent on its ability to identify, hire, train, retain and motivate high quality personnel, especially highly skilled engineers involved in the ongoing research and development required to develop and enhance the Company's communication software products and introduce enhanced future products. The industry is characterized by a high level of employee mobility and aggressive recruiting of skilled personnel. There can be no assurance that the Company's current employees will continue to work for the Company. Loss of the services of key employees could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, the Company may need to grant additional options and provide other forms of incentive compensation to attract and retain key personnel.
International Sales. The Company presently operates in foreign markets. For the twelve months ended June 30, 1997, the Company generated 27% of its revenue outside of the United States. International business is subject to risks in addition to those inherent in the Company's United States business, including substantially different regulatory requirements in different jurisdictions, varying technical standards, tariffs and trade barriers, political and economic instability, reduced protection for intellectual property rights in certain countries, difficulties in staffing and maintaining foreign operations, difficulties in managing distributors, potentially adverse tax consequences, foreign currency exchange fluctuations, the burden of complying with a wide variety of complex foreign laws and treaties and the possibility of difficulties in collecting accounts receivable. There can be no assurance that the Company will be able to continue to generate significant international sales. While the Company does not currently accept payment in foreign currencies and invoices all of its sales in U.S. Dollars, there can be no assurance that the Company will be able to continue this policy. If the Company begins to receive payment in foreign currencies, it is likely to be subjected to the risks of foreign currency losses due to fluctuations in foreign currency exchange rates. In addition, in the event the Company is successful in doing business outside of the United States, the Company may also face economic, political and foreign currency situations that are substantially more volatile than those commonly experienced in the United States. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business, results of operations and financial condition.
Potential Effect of Anti-Takeover Provisions. The Company's Certificate of Incorporation and Bylaws contain provisions that may discourage or prevent certain types of transactions involving an actual or potential change in control of the Company, including transactions in which the stockholders might otherwise receive a premium for their shares over then current market prices, and may limit the ability of the stockholders to approve transactions that they may deem to be in their best interest. In addition, the Board of Directors has the authority to fix the rights and preferences of shares of the Company's Preferred Stock and to issue such shares, which may have the effect of delaying or preventing a change in control of the Company, without action by the Company's stockholders. Certain provisions of Delaware law applicable to the Company, including Section 203 of the Delaware General Corporation Law, could also have the effect of delaying, deferring or preventing a change of control of the Company. It is possible that the provisions in the Company's Certificate of Incorporation and Bylaws, the ability of the Board of Directors to issue the Company's Preferred Stock, and Section 203 of the Delaware General Corporation Law may have the effect of delaying, deferring or preventing a change of control of the Company without further action by the stockholders, may discourage bids for the Company's Common Stock at a premium over the market price of the Common Stock and may adversely affect the market price of the Common Stock and the voting and other rights of the holders of Common Stock.
Fluctuations in Quarterly Operating Results. The Company's operating results have in the past fluctuated, and may in the future fluctuate, from quarter to quarter, as a result of a number of factors including, but not limited to, changes in pricing policies or price reductions by the Company or its competitors; variations in the Company's sales channels or the mix of product sales; the timing of new product announcements and introductions by the Company or its competitors; the availability and cost of supplies; the financial stability of major customers; market acceptance of new products and product enhancements; the Company's ability to develop, introduce and market new products 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 on orders booked and shipped in that quarter and are not predictable with any degree of certainty. In addition, the Company's expense levels are
based, in part, on its expectations as to future revenues. If revenue levels are below expectations, operating results are likely to be adversely affected. The Company's net income may be disproportionately affected by a reduction in revenues because of fixed costs related to generating its revenues. Quarterly results in the future may be influenced by these or other factors and, accordingly, there may be significant variations in the Company's quarterly operating results. Further, the Company's historical operating results are not necessarily indicative of future performance for any particular period. Due to all of the foregoing factors, it is possible that in some future quarter the Company's operating results may be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would likely be materially adversely affected.
Possible Volatility of Stock Price. The trading price of the Company's Common Stock is likely to be subject to significant fluctuations in response to variations in quarterly operating results, changes in management, announcements of technological innovations or new products by the Company, its customers or its competitors, legislative or regulatory changes, general trends in the industry and other events or factors. In addition, the stock market has experienced extreme price and volume fluctuations which have particularly affected the market price for many high technology companies similar to Artisoft, and which have often been unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. Further, factors such as announcements of new contracts or product offerings by the Company or its competitors and market conditions for stocks similar to that of the Company could have significant impact on the market price of the Common Stock.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). This statement establishes standards for computing and presenting earnings per share ("EPS"), and supersedes APB Opinion No. 15. The Statement replaces primary EPS with basic EPS and requires dual presentation of basic and diluted EPS. The Statement is effective for both interim and annual periods ending after December 15, 1997. Earlier application is not permitted. After adoption, all prior period EPS data shall be restated to conform to SFAS No. 128. The pro forma effect of the Company adopting Statement 128 is that basic and diluted EPS would have been $(1.95) and $(1.95) for the year ended June 30, 1997, $(1.27) and $(1.27) for the year ended June 30, 1996 and $(.41) and $(.41) for the year ended June 30, 1995.
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130 establishes requirements for disclosure of comprehensive income and becomes effective for the Company for the year ending June 30, 1999. Comprehensive income includes such items as foreign currency translation adjustments and unrealized holding gains and losses on available for sale securities that are currently being presented by the Company as a component of shareholders' equity.
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information"(SFAS No. 131). SFAS No. 131 establishes standards for disclosure about operating segments in annual financial statements and selected information in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." The new standard becomes effective for the Company for the year ending June 30, 1999, and requires that comparative information from earlier years be restated to conform to the requirements of this standard.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
This Annual Report may contain forward-looking statements that involve risks and uncertainties, including, but not limited to, the impact of competitive products and pricing, product demand and market acceptance risks, the presence of competitors with greater financial resources, product development and commercialization risks, costs associated with the integration and administration of acquired operations, capacity and supply constraints or difficulties, the results of financing efforts and other risks detailed from time to time in the Company's Securities and Exchange Commission filings.
Item 8.
Item 8. Financial Statements and Supplementary Data. - -----------------------------------------------------
ARTISOFT, INC. and Financial Statement Schedules (Item 14(a))
Page Reference Form 10-K ------------------------
Independent Auditors' Report 23
Consolidated Financial Statements:
Consolidated Balance Sheets 24
Consolidated Statements of Operations 25
Consolidated Statements of Changes in Shareholders' Equity 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 28-39
All schedules are omitted because they are not required, are not applicable, or the information is included in the financial statements or notes thereto.
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, 1997 and 1996 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, 1997. 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, 1997 and 1996 and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1997 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Phoenix, Arizona September 22, 1997
Artisoft, Inc. and Subsidiaries Consolidated Balance Sheets (in thousands, except per share amounts)
See accompanying notes to consolidated financial statements.
Artisoft, Inc. and Subsidiaries Consolidated Statements of Operations (in thousands, except per share amounts)
See accompanying notes to consolidated financial statements.
Artisoft, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity (in thousands, except per share amounts)
See accompanying notes to consolidated financial statements.
Artisoft, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands)
See accompanying notes to consolidated financial statements.
Artisoft, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (in thousands, except percentages, shares and per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Artisoft, Inc. ("Artisoft" or the "Company") is a software company providing easy-to-use, affordable networking, PC communications and computer telephony solutions principally to small businesses. Headquartered in Tucson, Arizona, Artisoft distributes its products in more than 100 countries through nearly 20,000 value-added resellers, distributors, OEMs and retailers.
Basis of Consolidation
The consolidated financial statements include the accounts of Artisoft, Inc. and its five wholly-owned subsidiaries: Triton Technologies, Inc., Artisoft Europe B.V., Artisoft "FSC", Ltd. (which has elected to be treated as a foreign sales corporation), NodeRunner, Inc., and Artisoft Japan, K.K. All significant intercompany balances and transactions have been eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid securities with original maturities of three months or less to be cash equivalents. As of June 30, 1997 and 1996, the Company has classified marketable securities of $13.8 million and $12.3 million with a maturity of less than three months as cash and cash equivalents. The Company intends to hold these securities to maturity.
Concentration of Credit Risk, Product Revenue and Major Customers
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of investments and trade receivables. The Company invests in securities with an investment credit rating of AA or better. The Company also places its investments for safekeeping with high-credit-quality financial institutions. Credit risk with respect to trade receivables is generally diversified due to the large number of entities comprising the Company's customer base and their dispersion across many different customer groups and geographies. The Company often sells its products through third-party distributors, and, as a result, may maintain individually significant receivable balances with major distributors. The Company believes that its credit evaluation, approval and monitoring processes substantially mitigate potential credit risks.
Net Sales produced by the Company's Communication Software Group were approximately $21.4 million, $50.0 million, and $84.2 million or 64%, 82%, and 100% of the Company's total net sales for the fiscal years ended June 30, 1997, 1996 and 1995, respectively. The Company's Communication Software Group principally includes revenues from the LANtastic NOS, i.Share, and ModemShare product lines.
Sales to one significant computer hardware and software distributor (Ingram Micro, Inc.) accounted for approximately 12% and 21% of net sales for the fiscal years ended June 30, 1996 and 1995, respectively. Sales to another significant computer hardware and software distributor (Merisel) accounted for 10% on net sales for the fiscal year ended June 30, 1995. The Company's trade accounts receivable from Ingram Micro, Inc. approximated 19% and 32% of total trade accounts receivable at June 30, 1996 and 1995, respectively. The Company's trade accounts receivable from Merisel approximated 8% at June 30, 1995.
Inventories
Inventories are stated at the lower of cost or market. Cost is principally determined using the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost. Equipment held under capital leases are stated at the lower of fair market value or the present value of minimum lease payments at the inception of the lease. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of three to seven years for furniture and equipment and 31.5 years for buildings. Equipment held under capital leases is amortized over the shorter of the lease term or estimated useful life of the asset.
Other Assets
Other assets are stated at cost and are comprised of purchased technology, trademarks and patents, goodwill and recoverable deposits. Amortization of purchased technology is calculated using the straight-line method over a five year life. Amortization of trademarks and patents is calculated using the straight-line method over the life of the trademark or patent which in most cases is ten years. Amortization of goodwill is calculated using the straight-line method over a five year life.
Income Taxes
Income taxes have been accounted for under the asset and liability method in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Revenue Recognition
The Company recognizes revenue from product sales at the time of shipment, net of allowances for returns and price protection. Other product revenue, consisting of training and support services, is recognized when the services are provided. Gross Sales for the fiscal years ended June 30, 1997, 1996, and 1995, respectively, were $44.3 million, $68.2 million, and $96.3 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 in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." Because the Company believes its current process for developing software is essentially completed concurrently with the establishment of technological feasibility, no product development costs have been capitalized to date.
Computation of Net Loss Per Common and Common Equivalent Share
Net loss per common and common equivalent share is computed using the weighted average number of common shares and dilutive common equivalent shares outstanding during the period.
Foreign Currency Translation
The functional currency for the Company's non-U.S. subsidiaries and branches is the U.S. dollar. For these entities, inventories, equipment and other property are translated at the prevailing exchange rate when acquired. All other assets and liabilities are translated at year-end exchange rates. Inventories charged to cost of sales and depreciation are remeasured at historical rates. All other income and expense items are translated at average rates of exchange prevailing during the year. Gains and losses which result from remeasurement are included in net income (loss). Prior to July 1, 1995, the functional currency was the local currency and translation adjustments were recorded as a separate component of shareholders equity. The change to the U.S. dollar as the functional currency was not material to the consolidated financial statements.
Stock Based Compensation
Prior to July 1, 1996, the Company accounted 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, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in fiscal 1996 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
Impact of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" (SFAS No. 128). This statement establishes standards for computing and presenting earnings per share ("EPS"), and supersedes APB Opinion No. 15. The Statement replaces primary EPS with basic EPS and requires a dual presentation of basic and diluted EPS. The Statement is effective for both interim and annual periods ending after December 15, 1997. Earlier application is not permitted. After adoption, all prior period EPS data shall be restated to conform to SFAS No. 128. Pro forma basic and diluted EPS, as calculated under Statement 128 would have been $(1.95), $(1.27), and $(.41) for the fiscal years ended June 30, 1997, 1996, and 1995, respectively.
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130 establishes requirements for disclosure of comprehensive income and becomes effective for the Company for the year ending June 30, 1999. Comprehensive income includes such items as foreign currency
translation adjustments and unrealized holding gains and losses on available for sale securities that are currently being presented by the Company as a component of shareholders' equity.
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosure about Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 establishes standards for disclosure about operating segments in annual financial statements and selected information in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." The new standard becomes effective for the Company for the year ending June 30, 1999, and requires that comparative information from earlier years be restated to conform to the requirements of this standard.
Use of Estimates
Management of the Company has made estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on July 1, 1996. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future 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 more fully described in Note 2, the Company recorded an impairment loss on the expected 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.
The carrying value of the Company's mortgage note payable approximates fair value due to the recent date of issuance of the note (February 1997) and its payoff in connection with the expected sale of the underlying security, the Tucson, Arizona headquarters building and real estate, expected in October 1997.
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 consolidated financial statements to conform to the 1997 presentation.
(2) RESTRUCTURING COSTS
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 at the Company's corporate headquarters location in Tucson, Arizona, the sale of the Company's Tucson headquarters land and building in connection with the planned relocation to a smaller facility 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.
(3) ACQUISITION AND DISPOSITION OF HARDWARE MANUFACTURING OPERATIONS
On January 5, 1994, the Company acquired a significant portion of the operating assets of Eagle Technology (a business unit of Anthem Electronics, Inc.) for $9,877. The Company's Eagle Technology business unit manufactured and marketed network communication devices for local area networks. The acquisition was accounted for in accordance with the purchase method of accounting for business combinations.
As a result of the Company's decision to focus on software development and cease its hardware development and manufacturing activities, the Company completed the sale of substantially all of the operating assets of the Eagle Technology business unit to Microdyne Corporation for $16,026 on January 30, 1995. The purchase price was paid in cash and notes payable which notes were paid in full on September 30, 1995.
The gain of $5,735 on the sale of Eagle Technology was offset by costs associated with closing the business unit and costs associated with the decision to cease hardware development and manufacturing activities. These exit costs included severance, facility closings, inventory dispositions and other related items, and are included in "Costs to exit hardware development and manufacturing business, net of gain on disposition" in the consolidated statement of operations for the fiscal year ended June 30, 1995. Net sales and net income for the Eagle Technology business unit were $24,397 and $13, respectively, for the fiscal year ended June 30, 1995.
On June 30, 1995, the Company executed an agreement to sell its Tucson, Arizona-based local area network components manufacturing operations to a third-party manufacturer. The loss on disposition was not material to the consolidated financial statements.
(4) ACQUISITIONS
On November 22, 1995, the Company acquired for cash substantially all the assets and certain liabilities of Synergy Solutions, Inc. ("Synergy"), a software company primarily engaged in the development, marketing and sales of modem and telephone line sharing software. The aggregate cost of the acquisition was approximately $1.5 million.
On December 21, 1995, the Company purchased all of the outstanding common stock of Triton Technologies, Inc. ("Triton"), a software company primarily engaged in the development, marketing and sales of PC remote control software. The aggregate cost of acquiring the stock of Triton was approximately $11.8 million. The purchase price was paid in cash and notes payable, which notes were paid in full in January 1996.
On February 13, 1996, the Company acquired for cash substantially all the assets and certain liabilities of Stylus Innovation Incorporated ("Stylus"), a software company engaged in the development, marketing and sales of computer telephony applications and tools software. The aggregate cost of the acquisition was approximately $13.1 million.
The Company incurred direct transaction costs of approximately $625 associated with the acquisitions of Synergy, Triton and Stylus ("the acquisitions"). These costs consisted of fees for financial, legal and accounting services and were included in the allocation of the acquisition costs. The direct costs and the purchase prices of the acquisitions were allocated to the assets acquired and liabilities assumed based on their respective fair values on the dates of the acquisitions, as follows:
Cash $ 421 Trade receivables 604 Inventories 216 Property and equipment 271 Purchased technology 3,456 Purchased in-process technology 21,700 Other 198 -------- 26,866 Less cash acquired (421) Less liabilities assumed (1,651) -------- Net assets acquired, excluding cash $ 24,794 ========
In conjunction with the acquisitions, the Company recorded aggregate charges to operations of $21.7 million relating to purchased in-process technology that had not reached technological feasibility and had indeterminable alternative future use. The $3.5 million of the aggregate purchase price attributable to purchased software is being amortized over five years.
In addition, as a result of the acquisitions, the Company charged to operations other related costs totaling $5.0 million. The other related costs were principally attributable to costs associated with the product integration of Triton and Synergy technology with the Company's technology
and the elimination of duplicate distribution arrangements in Europe. Other related costs included increases in allowances for returns, rotations and inventory obsolescence associated with the transition to the new technology; costs for severance and outplacement; and facility costs related to the cancellation of leases in order to support consolidated technical support and distribution.
The acquisitions were accounted for as purchase business combinations and, accordingly, the results of operations of the acquired companies have been combined with those of the Company as of the respective dates of acquisition. Had the business combinations occurred prior to July 1, 1995, the Company's net sales, net income and net income per common and equivalent share (excluding purchased in-process technology and related costs) for the fiscal year ended June 30, 1996 would have been $66.4 million, $2,360 and $.16, respectively. The pro forma effects of the business combinations for the fiscal year ended June 30, 1995 would have been immaterial to the Company's consolidated results of operations.
(5) INVENTORIES
Inventories at June 30, 1997 and 1996 consist of the following:
1997 1996 Raw materials $ 1,088 $2,167 Work-in-process 261 584 Finished goods 1,236 1,812 2,585 4,563 Inventory allowances (725) (1,565) $ 1,860 $2,998
(6) PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1997 and 1996 consist of the following:
1997 1996 Land $ -- $ 807 Buildings and improvements -- 1,991 Furniture and fixtures 892 1,058 Computers and other equipment 6,929 9,741 Leasehold improvements 62 93 7,883 13,690 Accumulated depreciation and amortization (5,060) (6,166) $ 2,823 $ 7,524
As more fully described in Note 2, the restructuring actions commenced in June 1997 include: a substantial reduction in the Company's workforce, principally at the Company's Tucson, Arizona location; the relocation of the Tucson operations to a smaller facility and the closure of a number of international sales and support offices. As consequences of these actions, the Tucson headquarters land and building and excess furniture and equipment will be sold or disposed of. Property and equipment held for sale in the accompanying June 30, 1997 consolidated balance sheet is comprised of the expected net realizable value of excess furniture and equipment and the net book values of the Tucson land and buildings and improvements, which is expected to be sold at a net gain of approximately $1.4 million.
(7) OTHER ASSETS
Other assets at June 30, 1997 and 1996 consist of the following:
1997 1996 Purchased technology, net of accumulated amortization of $984 and $283 $ 2,471 $3,172 Trademarks and patents, net of accumulated amortization of $44 and $228 80 285 Recoverable deposits and other 197 127 $ 2,748 $3,584
(8) ACCRUED LIABILITIES
Accrued liabilities at June 30, 1997 and 1996 consist of the following:
1997 1996 Compensation and benefits $ 798 $1,061 Payroll, sales and property taxes 423 884 Marketing 1,107 360 Royalties 460 93 Other 330 242 $3,118 $2,640
(9) MORTGAGE NOTE PAYABLE
Mortgage note payable at June 30, 1997 consists of an 8.2% mortgage note payable secured by a deed of trust on the Company's corporate headquarters' land and building in Tucson, Arizona. The mortgage note has a 20 year amortization with a final balloon payment due at the end of 10 years.
One of the actions to be taken in connection with the restructuring of the Company's operations commenced in June 1997 (See Note 2) is the relocation of the Company's Tucson operations to a smaller facility. On July 9, 1997, the Company accepted an offer to sell the corporate headquarters land and building and two adjacent parcels for $4.1 million. As this transaction is expected to close escrow in the second quarter of the fiscal year ended June 30, 1998, the outstanding balance on the mortgage note is classified as a current liability in the accompanying June 30, 1997 consolidated balance sheet.
(10) SHAREHOLDERS' EQUITY
Preferred Stock
The Company has authorized for issuance 11,433,600 shares of $1.00 par value undesignated preferred stock, of which no shares have been issued. On December 6, 1994, the Board of Directors of the Company authorized for issuance 50,000 shares of preferred stock, $1.00 par value, to be designated "Series A Participating Preferred Stock," subject to a Rights Agreement dated December 23, 1994 (see Rights Plan) to be reserved out of the Company's authorized but unissued shares of preferred stock. The reserved shares are automatically adjusted to reserve such number of shares as may be required in accordance with the provisions of the Series A Participating Preferred Stock and the Rights Agreement.
Rights Plan
On December 6, 1994, the Board of Directors of the Company authorized and declared a dividend of one preferred share purchase right (a "Right") for each common share of the Company outstanding as of the close of business on December 27, 1994. The Rights Agreement is designed to protect and maximize the value of the outstanding equity interests in the Company in the event of an unsolicited attempt by an acquirer to take over the Company in a manner or on terms not approved by the Board of Directors. Each Right, under certain circumstances, may be exercised to purchase one one-thousandth of a share of the Company's Series A Participating Preferred Stock at a price of $50.00 per share (subject to adjustment). Under certain circumstances, following (i) the acquisition of 15% or more of the Company's outstanding common stock by an Acquiring Person (as defined in the Rights Agreement) or (ii) the commencement of a tender offer or exchange offer which would result in a person or group owning 15% or more of the Company's outstanding common stock, each Right may be exercised to purchase common stock of the Company or a successor company with a market value of twice the $50.00 exercise price. The Rights, which are redeemable by the Company at $.001 per Right, expire in December 2001.
Stock Incentive Plans
On October 20, 1994, the shareholders approved the Company's 1994 Stock Incentive Plan (the "1994 Plan"). The 1994 Plan provides for the grant of Incentive Stock Options, Non-qualified Stock Options, Stock Appreciation Rights (Tandem and Free-standing), Restricted Stock, Deferred Stock, Performance Units and Performance Shares to officers, key employees, non-employee directors and certain consultants of the Company.
The 1994 Plan provides that the maximum number of options that can be granted shall be 2,000,000 shares, plus 1.5% of the number of shares of common stock issued and outstanding as of January 1 of each year commencing on January 1, 1995. The maximum number of options available for grant each year shall be all previously ungranted options plus all expired and canceled options. Stock options are generally granted at a price not less than 100% of the fair market value of the common shares at the date of grant. Options become exercisable over a four-year period commencing on the date of grant. Options vest 25% at the first anniversary of the date of grant and the remaining 75% vest in equal monthly increments over the remaining three years of the vesting period. No 1994 Plan options may be exercised more than ten years from the date of grant. The 1994 Plan will terminate on the earlier of June 15, 2004, or the date upon which all awards available for issuance have been issued or canceled.
The 1994 Plan contains an automatic option grant program limited to those persons who serve as non-employee members of the Board of Directors, including any non-employee Chairman of the Board ("Eligible Directors"). After October 20, 1994, each individual who first becomes an Eligible Director shall automatically be granted a Nonqualified Option to purchase 15,000 shares of common stock. At the date of each annual shareholders' meeting, beginning with the 1995 annual shareholders' meeting, each person who is at that time serving as an Eligible Director will automatically be granted a Nonqualified Option to purchase 5,000 shares of common stock (and an additional 10,000 shares for the Eligible Director serving as Chairman of the Board), provided that such person has served as a member of the Board of Directors for at least six months. There is no limit on the number of automatic option grants that any one Eligible Director may receive. All grants to an Eligible Director under the 1994 Plan will have a maximum term of ten years from the automatic grant date. Each automatic grant will vest in three equal and successive annual installments. At June 30, 1997, there were 1,092,866 additional shares available for grant under the 1994 Plan.
Subsequent to the approval date of the 1994 Plan, the Company ceased granting of options under the Amended 1990 Stock Incentive Plan and the 1991 Director Options Plan. All options presently outstanding under these plans continue to be governed by the terms of those plans and the numbers of shares of common stock issueable upon exercise by the Company.
The per share weighted-average fair value of stock options granted during the fiscal years ended June 30, 1997 and 1996 was $.64 and $.45 on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions. 1997 - expected dividend yield 0%, volatility factor of 57%, risk-free interest rate of 6.1%, and an expected life of six years: 1996 - expected dividend yield 0%, volatility factor of 58%, risk-free interest rate of 6.3%, and an expected life of six years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
The Company applies APB Opinion No. 25 in accounting for its stock incentive plan and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss and net loss per common and common equivalent share for the fiscal years ended June 30, 1997 and 1996 would have been increased to the pro forma amounts indicated below:
1997 1996 ---- ----
Net loss As reported $(28,425) $(18,328) Pro forma $(28,810) $(18,965)
Net loss per common As reported $ (1.95) $ (1.27) and common equivalent share Pro forma $ (1.98) $ (1.31)
Pro forma net income reflects only options granted during the fiscal years ended June 30, 1997 and 1996 . Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above
because compensation cost is reflected over the options' vesting period of four years, or three years for options granted after June 1, 1997, and compensation cost for options granted prior to July 1, 1995 is not considered. Stock option activity during the periods indicated is as follows:
Number of Weighted-Average Shares Exercise Price
Balance at June 30, 1994 1,926,550 $12.40 Granted 1,745,350 10.22 Exercised (148,734) 4.98 Forfeited (1,147,052) 12.71
Balance at June 30, 1995 2,376,114 $10.33 Granted 1,423,250 8.96 Exercised (112,848) 7.48 Forfeited (443,944) 10.81
Balance at June 30, 1996 3,242,572 $10.04 Granted 601,000 4.56 Exercised (15,292) 3.12 Forfeited (1,508,108) 8.90
Balance at June 30, 1997 2,320,172 $ 9.44
The following table summarizes information about the stock options outstanding at June 30, 1997:
At June 30, 1997 and 1996, the number of options exerciseable was 1,139,212 and 1,018,338, respectively, and the weighted-average exercise price of those options was $10.78 and $10.43, respectively.
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, 1997, 1996 and 1995, 25,282, 23,362 and 8,733 shares of common stock were purchased, respectively, at prices ranging from $2.02 to $6.75 per share. At June 30, 1997, 142,623 shares of common stock were available for issuance under the plan. The plan provides for eligible participants to purchase common stock semi-annually at the lower of 85% of the market price at the beginning or end of the semi-annual period.
Stock Repurchase Program
In February 1997, the Company's Board of Directors readopted and extended a stock repurchase program under which the Company is authorized to repurchase up to 1,000,000 shares of its outstanding common stock for general corporate purposes. The Board of Directors authorized Company management to pursue the repurchase program in open market transactions periodically, depending upon market conditions and other factors.
(11) EMPLOYEE BENEFIT PLANS
The Company has a qualified 401(k) profit-sharing plan (defined contribution plan) which became effective July 1, 1991. The plan covers substantially all employees having at least six months of service. Participants may voluntarily contribute to the plan up to the maximum limits imposed by Internal Revenue Service regulations. The Company will match up to 50% of the participants' annual contributions up to 3% of the participants' compensation. Participants are immediately vested in the amount of their direct contributions and vest over a five-year period, as defined by the plan, with respect to the Company's contribution. The Company's profit-sharing plan expense for this plan was $138, $198, and $242 for the fiscal years ended June 30, 1997, 1996 and 1995, respectively.
During 1992, the Company established a defined contribution plan covering certain of its non-U.S. employees. The plan provides for contributions by the Company based on a percentage of the employees' compensation. The plan provides for voluntary contributions by employees in addition to those of the Company. The Company's profit-sharing plan expense for non-U.S. employees was not material for the fiscal years ended June 30, 1997, 1996 and 1995.
(12) INCOME TAXES
Components of the income tax benefit for the fiscal years ended June 30 follow:
Current Deferred Total
1997: Federal $ (4,300) $ 3,509 $( 791) State -- 743 743 Total $ (4,300) $ 4,252 $( 48)
1996: Federal $ (5,008) $ -- $(5,008) State -- ( 35) ( 35) Foreign 50 -- 50 Total $ (4,958) $ ( 35) $(4,993)
1995: Federal $ (3,386) $ (41) $(3,427) State -- (560) (560) Total $ (3,386) $ (601) $(3,987)
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:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at June 30, 1997 and 1996 are presented below:
1997 1996
Deferred tax assets: Purchased technology $ 504 $ 1,559 Allowances for doubtful accounts and returns 1,596 1,033 Allowances for inventory obsolescence, direct labor and overhead capitalization 356 727 Accrued compensation and benefits 208 440 Accrued restructuring costs 1,869 -- Other accrued liabilities 571 168 Federal net operating loss carryforwards 2,983 -- State net operating loss carryforwards 2,701 810 Gross deferred tax assets 10,788 4,737 Less valuation allowance (10,641) -- Net deferred tax assets 147 4,737
Deferred tax liabilities: Prepaid expenses 147 176 Depreciation and amortization -- 317 Gross deferred tax liabilities 147 493 Net deferred tax assets $ -- $ 4,244
As of June 30, 1997, the valuation allowance has increased $10,641 to equal the entire net deferred tax asset balance. In the assessment of the recognition of a valuation allowance, the Company considered recent operating losses experienced during the Company's transition from a company with primarily a hardware orientation, focused solely on small business networking to a PC software company with a more diversified technology and product portfolio, the expected future impact of the restructuring actions affected during the fiscal year, the uncertainty in estimating the magnitude and timing of the revenue contribution from products expected to be released over the next several quarters and the expiration dates of State net operating loss carryforwards.
As of June 30, 1997, the Company has federal net operating losses available for carryforward of $8.8 million, which expire in the year 2012.
(13) LEASE COMMITMENTS
Operating Leases
The Company leases office, manufacturing and storage space, vehicles, and equipment under noncancelable operating lease agreements expiring through 2002. 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 $955, $699, and $1,690 for the fiscal years ended June 30, 1997, 1996 and 1995, respectively.
The approximate minimum rental commitments under noncancelable operating leases that have remaining noncancelable lease terms in excess of one year at June 30, 1997 were as follows:
Years Ending Future Minimum June 30 Lease Payments
1998 $1,048 1999 856 2000 560 2001 240 2002 4
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, 1997 and 1996, the gross amount of plant and equipment held under capital leases were as follows:
1997 1996
Equipment $1,536 $ 158 Less accumulated amortization $ 332 $ 26 $1,204 $ 134
Amortization of assets held under capital leases is included with depreciation expense.
The following is a schedule of future minimum lease payments under all capital leases together with the present value of net minimum leases payments, as of June 30, 1997:
Year Ended June 30
1998 $ 544 1999 506 2000 258 Total minimum lease payments $1,308
Less; amount representing interest (at rates ranging from 8.25% to 9.0%) 136 Present value of net minimum lease payments including current portion of $458 $1,172
(14) CONTINGENCIES
The Company is subject to lawsuits and other claims arising in the ordinary course of its operations. In the opinion of management, based on consultation with legal counsel, the effect of such matters will not have a material adverse effect on the Company's financial position.
(15) DOMESTIC AND INTERNATIONAL OPERATIONS
A summary of domestic and international net sales and international assets for the fiscal years ended June 30 follows:
1997 1996 1995
Domestic $24,472 $42,705 $52,051 International 8,937 18,267 32,192 Net sales $33,409 $60,972 $84,243
International assets $ 1,095 $ 1,795 $ 2,135
(16) QUARTERLY RESULTS (UNAUDITED)
The following table presents selected unaudited quarterly operating results for the Company's eight quarters ended June 30, 1997. The Company believes that all necessary adjustments have been made to present fairly the related quarterly results.
(17) SUPPLEMENTAL FINANCIAL INFORMATION
A summary of additions and deductions related to the allowances for accounts receivable and inventories for the fiscal years ended June 30, 1997, 1996 and 1995 follows:
18. SUBSEQUENT EVENTS
In July 1997, the Company entered into an agreement to sell its Tucson headquarters land and building for approximately $4.1 million. The Company anticipates a gain on the sale of the building and land of approximately $1.5 million. The escrow is expected to close in the second quarter of fiscal 1998.
Item 9.
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 "1997 Proxy Statement") relating to the Company's Annual Shareholders' Meeting to be held November 3, 1997. Certain information included in the 1997 Proxy Statement is incorporated herein by reference. The Company disseminated the 1997 Proxy Statement to shareholders beginning on September 24, 1997.
Item 10.
Item 10. Directors and Executive Officers of the Registrant. - -------------------------------------------------------------
The information concerning the Company's directors required by this item is contained in "Election of Directors" and "Nominees for Election," page 3, "Incumbent Directors," pages 3-4, "Meetings and Committees of the Board of Directors," page 5 of the 1997 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.
Item 11. Executive Compensation. - ---------------------------------
The information required by this item is contained in "Executive Compensation," "Summary Compensation Table," "Option Grants in Last Fiscal Year," "Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values," "Director Compensation," "Employment Agreements and Termination of Employment and Change in Control Arrangements," "Compensation Committee Interlocks and Insider Participation," "Report of the Compensation Committee," and "Comparison of Stock Performance," pages 6-14, of the 1997 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 1997 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.
Item 12. Security Ownership of Certain Beneficial Owners and Management. - -------------------------------------------------------------------------
The information required by this item is contained in "Security Ownership of Certain Beneficial Owners and Management," page 15 -16 of the 1997 Proxy Statement, and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions. - ---------------------------------------------------------
The information required by this item is contained in "Certain Relationships and Related Transactions," page 10 of the 1997 Proxy Statement, and is incorporated herein by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. - ---------------------------------------------------------------------------
(a) Financial Statements and Financial Statement Schedules. -------------------------------------------------------
An Index to financial statements and financial statement schedules is located on page 24 hereof.
(b) Reports on Form 8-K. --------------------
The Company filed a report on Form 8-K dated November 12, 1996, announcing the resignation of Joel J. Kocher as President and Chief Operating Officer effective November 8, 1996.
The Company filed a report on Form 8-K dated August 27, 1997, announcing the departure of Gary R. Acord as Vice President and Chief Financial Officer effective August 28, 1997 and the appointment of the Company's Controller, Kirk D. Mayes as Acting Principal Financial Officer.
The Company filed a report on Form 8-K dated September 17, 1997, announcing the resignation of William C. Keiper as Chairman of the Board of Directors effective September 12, 1997 and resignation as Chief Executive Officer effective September 30, 1997. The Company appointed Jerry Goldress as Chairman of the Board of Directors and Principal Executive Officer.
(c) Exhibits. ---------
(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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ARTISOFT, INC.
Date: September 22, 1997 By /s/ William C. Keiper William C. Keiper, Chief Executive Officer
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and appoints WILLIAM C. KEIPER and KIRK D. MAYES, and each of them, his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Form 10-K Annual Report, and to file the same with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents, or each of them, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX
Sequentially Numbered Exhibit Description Page
11.01 Computation of net income (loss) per share. 44
22.01 Subsidiaries of the Registrant. 45
23.01 Consent of Independent Public Accountants. 46