UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD OF FROM__________________TO________________
Commission file number 0-21077
INTERLINK COMPUTER SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2990567
(State of incorporation) (IRS Employer Identification Number)
47370 Fremont Boulevard
Fremont, California 94538
(510) 657-9800
(Address and telephone number of principal executive offices)
-----------------
Indicate by check mark whether registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
7,386,810 shares of the registrant's Common stock, $0.001 par value, were
outstanding as of May 1, 1997.
1
<PAGE>
INTERLINK COMPUTER SCIENCES, INC.
AND SUBSIDIARIES
CONTENTS
Page
----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets:
March 31, 1997 and June 30, 1996....................... 4
Condensed Consolidated Statements of Operations:
Three and nine months ended March 31, 1997 and 1996.... 5
Condensed Consolidated Statements of Cash Flows:
Nine months ended March 31, 1997 and 1996.............. 6
Notes to Condensed Consolidated Financial Statements....... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 11
PART II: OTHER INFORMATION
Item 1 Legal Proceedings.............................................. 27
Item 4 Submission of Matters to a Vote of Security Holders............ 27
Item 6 Exhibits and Reports on Form 8-K............................... 27
Signatures ............................................................... 28
2
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PART I: FINANCIAL INFORMATION
3
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, June 30,
--------- --------
1997 1996
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ..................... $ 27,007 $ 6,121
Accounts receivable, net ...................... 11,072 9,445
Inventories ................................... 1,264 700
Other current assets .......................... 2,253 2,876
-------- --------
Total current assets ...................... 41,596 19,142
Property and equipment, net ........................ 1,619 1,281
Purchased software products ........................ 2,203 2,893
Other non-current assets ........................... 2,341 2,609
-------- --------
Total assets .............................. $ 47,759 $ 25,925
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank line of credit ........................... -- 5,000
Current portion of long-term debt ............. $ 343 3,100
Accounts payable .............................. 1,764 2,662
Accrued liabilities ........................... 7,250 6,630
Deferred maintenance and product revenue ...... 7,601 8,121
-------- --------
Total current liabilities ................. 16,958 25,513
Long-term debt, less current portion ............... 831 2,892
Deferred maintenance revenue ....................... 1,388 1,056
Other liabilities .................................. 1,080 1,049
-------- --------
Total liabilities ............................. 20,257 30,510
-------- --------
Commitments and contingencies (Note 5)
Preferred stock .................................... -- 6,310
Common stock ....................................... 50,157 14,602
Cumulative translation adjustment .................. (412) (581)
Accumulated deficit ................................ (22,243) (24,916)
-------- --------
Total stockholders' equity (deficit) .......... 27,502 (4,585)
-------- --------
Total liabilities and stockholders'
equity (deficit) ......................... $ 47,759 $ 25,925
======== ========
See accompanying notes to condensed consolidated financial statements.
4
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<TABLE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
(unaudited) (unaudited)
-------------------------------------------
1997 1996 1997 1996
-------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Product ................................. $ 7,546 $ 5,282 $ 18,338 $ 13,196
Maintenance and consulting .............. 3,611 3,691 11,177 10,506
-------- -------- -------- --------
Total revenues .................... 11,157 8,973 29,515 23,702
-------- -------- -------- --------
Cost of revenues:
Product ................................. 564 641 1,927 2,283
Maintenance and consulting .............. 1,139 1,171 3,585 3,319
-------- -------- -------- --------
Total cost of revenues ............ 1,703 1,812 5,512 5,602
-------- -------- -------- --------
Gross profit .................................. 9,454 7,161 24,003 18,100
Operating expenses:
Product development ..................... 1,957 1,487 5,827 3,781
Sales and marketing ..................... 4,142 3,422 10,400 8,960
General and administrative .............. 1,301 1,202 3,320 2,990
Purchased research and development and
product amortization ................. 127 160 428 10,318
-------- -------- -------- --------
Total operating expenses .......... 7,527 6,271 19,975 26,049
-------- -------- -------- --------
Operating income (loss) ....................... 1,927 890 4,028 (7,949)
Interest and other income (expense), net ...... 256 (261) 344 (220)
-------- -------- -------- --------
Income (loss) before provision for income taxes 2,183 629 4,372 (8,169)
Provision for (benefit from) income taxes ..... 851 245 1,698 (146)
-------- -------- -------- --------
Net income (loss) ............................. $ 1,332 $ 384 $ 2,674 ($ 8,023)
======== ======== ======== ========
Net income (loss) per share ................... $ 0.16 $ 0.08 $ 0.36 $ (2.57)
======== ======== ======== ========
Shares used in per share calculation .......... 8,331 5,016 7,348 3,125
======== ======== ======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
5
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<TABLE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
Nine months ended March 31,
1997 1996
---- ----
(unaudited)
-----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................. $ 2,674 ($ 8,023)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Purchased research and development ................... -- 10,158
Depreciation and amortization ........................ 1,210 832
Provision for excess and obsolete inventory .......... 30 218
Provision for (reduction in) doubtful accounts ...... (24) 200
Exchange loss ........................................ 311 104
Deferred income taxes ................................ -- (923)
Changes in operating assets and liabilities:
Accounts receivable .............................. (1,926) 717
Inventories ...................................... (592) (173)
Other assets ..................................... 1,041 244
Accounts payable ................................. (868) (901)
Accrued liabilities .............................. 747 (1,055)
Deferred maintenance and product revenue ......... (9) 1,873
Other liabilities ................................ 48 271
-------- --------
Net cash provided by operating activities .... 2,642 3,542
-------- --------
Cash flows from investing activities:
Acquisition of New Era, net of cash acquired .................. -- (10,168)
Proceeds from sale of available-for-sale securities ........... -- 2,525
Acquisition of property and equipment ......................... (957) (273)
Capitalization of software development costs .................. (183) --
-------- --------
Net cash used in investing activities ........ (1,140) (7,916)
-------- --------
Cash flows from financing activities:
Proceeds from term loan ....................................... -- 3,000
Proceeds from bank line of credit ............................. -- 5,000
Payments on capital lease obligations ......................... (190) (206)
Payments on notes payable and other ........................... (4,400) (299)
Payments on bank line of credit ............................... (5,000) (1,300)
Proceeds from issuance of common stock, net ................... 29,265 31
-------- --------
Net cash provided by financing activities .... 19,675 6,226
-------- --------
Net increase in cash and cash equivalents 21,177 1,852
Effect of exchange rate changes on cash ............................ (291) (90)
Cash and cash equivalents, beginning of period ..................... 6,121 4,148
-------- --------
Cash and cash equivalents, end of period ........................... $ 27,007 $ 5,910
======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
6
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INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation:
The unaudited condensed consolidated financial statements included herein have
been prepared by Interlink Computer Sciences, Inc. and its subsidiaries
(collectively, the "Company") in accordance with generally accepted accounting
principles and reflect all adjustments, consisting only of normal recurring
adjustments, which in the opinion of management are necessary to fairly present
the Company's consolidated financial position, results of operations, and cash
flows for the periods presented. The financial statements include the accounts
of the Company and its wholly owned subsidiaries after all material intercompany
balances and transactions have been eliminated. These financial statements
should be read in conjunction with the Company's June 30, 1996 audited
consolidated financial statements as included in the Company's Registration
Statement on Form S-1 as declared effective by the Securities and Exchange
Commission on August 15, 1996 (Reg. No. 333-05243). The consolidated results of
operations for the three and nine months ended March 31, 1997 are not
necessarily indicative of the results to be expected for any subsequent period
or for the entire fiscal year ending June 30, 1997. The June 30, 1996 balance
sheet was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
2. Inventories:
Inventories are stated at the lower of cost (determined on a first-in, first-out
basis) or market. Inventories are principally comprised of finished goods at
March 31, 1997 and June 30, 1996.
3. Sale of Common Stock:
On August 15, 1996, the Company sold 2,200,000 shares of its Common Stock in an
initial public offering and on September 16, 1996, an additional 330,000 shares
of Common Stock were sold when the Company's underwriters exercised their
over-allotment option, which sales of Common Stock together were made at $10.00
per share and which generated approximately $22.1 million of cash, net of
underwriting discounts, commissions, and other offering costs. On August 16,
1996, the Common Stock began trading on the NASDAQ National Market under the
symbol INLK. Upon the completion of the offering, all of the Company's 1,230,000
shares of Series 1 Preferred Stock were converted into shares of Common Stock on
a one-for-one basis.
On January 27, 1997, the Company signed a definitive agreement with Cisco
Systems, Inc. ("Cisco") regarding a strategic alliance to jointly develop and
market Cisco IOS for S/390 ("S/390"), a software suite that extends Cisco's
Internetwork Operating System (IOS) networking technologies to IBM and
compatible MVS mainframes and mainframe applications. As part of the alliance,
on December 12, 1996, Cisco purchased 622,000 newly-issued shares of the
Company's Common Stock (approximately nine percent (9%) of the Company's then
outstanding shares) for approximately $6.8 million.
7
<PAGE>
4. Computation of Net Income (Loss) Per Share:
Net income (loss) per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares are included in the per share calculations where the effect of
their inclusion would be dilutive. Dilutive equivalent shares consist of the
incremental common shares issuable upon conversion of convertible preferred
stock (using the "if converted" method) and stock options and warrants, using
the modified treasury stock method in all periods. Pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 83, common and common
equivalent shares issued by the Company during the twelve months preceding the
filing of the Company's initial public offering, using the treasury stock method
and the public offering price per share, have been included in the calculation
of net income (loss) per share for all periods presented.
5. Contingencies
The Company and the Company's subsidiary in France are involved in a commercial
dispute with a former Italian distributor ("Claimant") of the Company's
TCPaccess products. The former distributor alleged in a letter sent to the
Company that the Company had breached and unlawfully terminated the agreement
pursuant to which the former distributor was appointed a distributor of the
Company's products in Italy and asserted other related claims against the
Company. The letter demanded the former distributor's reinstatement as a
distributor, the execution of a written distribution agreement setting forth the
distribution arrangements between the parties, and compensation in an
unspecified amount to be paid to the former distributor for the harm that it has
suffered. The Company's Canadian subsidiary, New Era Services Ltd., has also
previously used the former distributor as a distributor of the HARBOR products
in Italy pursuant to a separate agreement.
On January 27, 1997 the former distributor initiated a lawsuit in Milan, Italy
against New Era Services Ltd., a Canadian company and wholly owned subsidiary of
the Company, the Company, Interlink France S.A.R.L., a French company and wholly
owned subsidiary of the Company and the Company's current distributor in Italy.
The litigation is based on the Claimant's distribution of Company's HARBOR
products pursuant to a distributor agreement with New Era, which pre-dates the
Company's acquisition of New Era. The Company's distributor relationship with
Claimant for the distribution of the Company's HARBOR products in Italy and
Spain has terminated. This litigation does not involve the Company's TCPaccess
products. Pursuant to Claimant's court documents, Claimant alleges damages for
breach of contract and related tort claims in the amount of 2,500,000,000
Italian Lira (approximately $1,500,000) and requests that the defendants pay all
expenses resulting from the litigation.
On March 12, 1997 the former distributor initiated a separate lawsuit in Alameda
County, California against the Company, certain employees of the Company and the
Company's current Italian distributor. The litigation is based upon alleged
actions taken by the Company and certain employees of the Company. Pursuant to
Claimant's complaint, Claimants allege various tort claims, including fraud,
deceit, and unfair competition, in addition to statutory trade secret
misappropriation, and breach of confidential relationship. Claimants request
that the defendants pay compensatory damages in excess of $2,000,000,
unspecified punitive damages, interest, attorneys' fees, and costs of the
litigation. The Company believes it has meritorious defenses to these
allegations and intends to defend the matters vigorously. No provision for any
liability that may result upon resolution of these matters has been made in the
financial statements. Should the Claimant prevail on such
8
<PAGE>
claims, the Company's business, financial condition and results of operations
would be materially adversely affected.
<TABLE>
6. Supplemental Cash Flow Disclosures (in thousands)
<CAPTION>
Nine months ended March 31,
1997 1996
---- ----
<S> <C> <C>
Interest paid .............................................. $ 184 $ 329
Income taxes paid .......................................... $ 1,848 $ 228
Non cash transactions from financing activities:
Conversion of preferred stock to common
stock in connection with initial public offering .. $ 6,310 --
Issuance of preferred and common stock warrants ........ -- $ 67
Acquisition of New Era
Assets acquired, excluding cash ................... -- $ 2,330
Liabilities assumed ............................... -- (3,473)
Purchased software products ....................... -- 3,199
Purchased research and development ................ -- 10,158
Notes payable issued to former New Era stockholders -- (1,328)
Accrued liabilities for acquisition costs ......... -- (403)
Issuance of common stock warrants ................. -- (315)
-------- --------
Net cash payments ........................... -- $ 10,168
======== ========
</TABLE>
7. Subsequent Event
On April 23, 1997 the Board of Directors granted employees the right to convert
certain outstanding stock options into option grants with an exercise price of
$8.125 per share (the fair market value as of May 2, 1997, the date specified by
the Board's authorization). The converted option grants vest on a date that is
six months after the date such installment would have vested had the option not
been amended by the employee exercising this conversion right. Approximately
260,000 stock options (having exercise prices ranging from $9.00 to $16.25) were
repriced pursuant to this program.
8. Recent Pronouncements
During March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" (SFAS 121), which requires the Company to review the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. SFAS 121 will
become effective for the Company's 1997 fiscal year.
During October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which establishes
a fair value based method of accounting for stock based compensation plans.
While the Company is studying the impact of the pronouncement, it continues to
account for employee stock options under APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS 123 will be effective for fiscal years
beginning after December 15, 1995.
9
<PAGE>
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 128 "Earnings Per Share". This statement replaces the
presentation of primary earnings per share with a presentation of basic earnings
per share. It also requires dual presentation of basic and diluted earnings per
share on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic earnings per share computation to the numerator and denominator of the
diluted earnings per share computation. This statement is effective for the
periods ending after December 15, 1997, including interim periods.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in the section below entitled
"Risk Factors That May Affect Future Results," as well as those risks discussed
in this section and elsewhere in this Report.
The following discussion should be read in conjunction with the management's
discussion included in the Company's Registration Statement on Form S-1 as
declared effective by the Securities and Exchange Commission on August 15, 1996
(Reg. No. 333-05243).
Overview
The Company offers a suite of high-performance, network transport products and
systems management applications which efficiently transport, store and protect
the integrity of mission-critical data and applications. The Company was
incorporated in December 1985 and initially focused its products and development
on providing interoperability between IBM mainframes and DECnet network
environments. In 1990, the Company acquired the core technology of its TCPaccess
suite of products. In December 1995 the Company acquired New Era Systems
Services, Ltd. ("New Era"), the developer of the HARBOR products, a software
product line providing enterprise systems management applications for
client/server networks. This transaction was accounted for as a purchase. Prior
to the acquisition, the Company distributed the HARBOR products in certain
countries in Europe for more than one year. New Era is a wholly-owned subsidiary
headquartered in Calgary, Alberta. In December 1996, the Company entered into a
strategic alliance with Cisco to jointly develop a product based upon the
Company's TCPaccess product and to be sold through Cisco's sales channels as
S/390.
11
<PAGE>
Results of Operations
<TABLE>
The following table sets forth, as a percentage of total revenues, certain
condensed consolidated statement of operations data for the periods indicated:
<CAPTION>
Three months Nine months
ended March 31, ended March 31
--------------- --------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Product.................................................. 67.6% 58.9% 62.1% 55.7%
Maintenance and consulting............................... 32.4 41.1 37.9 44.3
---- ---- ---- ----
Total revenues....................................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenues:
Product.................................................. 5.1 7.1 6.5 9.6
Maintenance and consulting............................... 10.2 13.1 12.2 14.0
---- ---- ---- ----
Total cost of revenues............................... 15.3 20.2 18.7 23.6
---- ---- ---- ----
Gross profit.................................................. 84.7 79.8 81.3 76.4
Operating expenses:
Product development...................................... 17.6 16.6 19.7 16.0
Sales and marketing...................................... 37.1 38.1 35.2 37.8
General and administrative............................... 11.7 13.4 11.3 12.6
Purchased research and development
and product amortization.............................. 1.1 1.8 1.5 43.5
--- --- --- ----
Total operating expenses............................. 67.5 69.9 67.7 109.9
---- ---- ---- -----
Operating income (loss)....................................... 17.2 9.9 13.6 (33.5)
Interest and other income (expense), net...................... 2.3 (2.9) 1.2 (0.9)
---- ----- ---- ----
Income (loss) before income taxes........................ 19.5 7.0 14.8 (34.4)
Provision for (benefit from) income taxes..................... 7.6 2.7 5.8 (.6)
--- --- --- ----
Net income (loss)........................................ 11.9% 4.3% 9.0% (33.8)%
===== ==== ==== =======
Cost of sales as a percentage of the related revenues:
Product.................................................. 7.5% 12.1% 10.5% 17.3%
Maintenance and consulting............................... 31.5% 31.7% 32.1% 31.6%
</TABLE>
As a result of the acquisition of New Era in December 1995, the Company's
operating results for the nine months ended March 31, 1997 and 1996 are not
directly comparable.
Revenues:
The Company's revenues are derived from product sales and related maintenance
and consulting contracts. Product revenues are derived from software license
fees and sales of related hardware to end users, resellers and distributors. The
Company's sales cycle, from the date the sales agent first contacts a
prospective customer to the date a customer ultimately purchases the Company's
product, is typically three to six months for the TCPaccess products and six to
nine months for the HARBOR products. Because licenses are noncancellable and do
not impose significant obligations on the Company, the Company recognizes
software license revenues upon completion of a trial period and receipt of a
signed contract. Fees for service revenues are charged separately from the
Company's product sales. The Company recognizes consulting revenues as services
are accepted. The Company recognizes maintenance revenues ratably over the term
of agreement. Maintenance agreements are typically one-year renewable contracts,
pursuant to which, historically, a substantial majority of the
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<PAGE>
Company's maintenance agreements have been renewed upon expiration. There can be
no assurance that customers will continue to renew expiring maintenance
agreements at the historical rate. The Company no longer actively markets its
DECnet product line. As a consequence, maintenance revenues from this product
line may continue to decline in the future.
Total revenues were $11.2 million and $9.0 million for the three months ended
March 31, 1997 and 1996, respectively, representing an increase of 24%. Total
revenues were $29.5 million and $23.7 million for the nine months ended March
31, 1997 and 1996, respectively, representing an increase of 25%. Product sales
were $7.5 million and $5.3 million for the three months ended March 31, 1997 and
1996, respectively, representing an increase of 42%. Product sales were $18.3
million and $13.2 million for the nine months ended March 31, 1997 and 1996,
respectively, representing an increase of 39%. These increases were primarily
due to an increase in average selling price of orders as well as an increase in
revenues from HARBOR products. The Company recognized $2.0 million in product
revenue for the pre-paid software licenses to Cisco for the nine months ended
March 31, 1997. $1.0 million was recognized in each of the quarters ended
December 31, 1996 and March 31, 1997. Maintenance and consulting revenues were
$3.6 million and $3.7 million for the three months ended March 31, 1997 and
1996, respectively, representing an decrease of 3%. Maintenance and consulting
revenues were $11.2 million and $10.5 million for the nine months ended March
31, 1997 and 1996, respectively, representing an increase of 7%. The increase in
the nine months ended March 31, 1997 over the nine months ended March 31, 1996
was primarily due to an increase in the number of customers purchasing
maintenance agreements. The decrease in the three months ended March 31, 1997
over the three months ended March 31, 1996 resulted principally from a decrease
in maintenance revenues from the DECnet product line.
Cost of Revenues:
Product. Cost of revenues from product sales consists primarily of hardware,
product media, documentation and packaging costs. Cost of revenues for product
sales was $564,000 and $641,000, representing 8% and 12% of total product
revenues for the three months ended March 31, 1997 and 1996, respectively. Cost
of revenues for product sales was $1,927,000 and $2,283,000, representing 11%
and 17% of total product revenues for the nine months ended March 31, 1997 and
1996, respectively. These percentage decreases were due to a reduction in
third-party revenue and a decline in hardware revenue, which carry higher
product costs as a percentage of their respective revenues.
Maintenance and Consulting. Cost of revenues from maintenance and consulting
consists primarily of personnel related costs incurred in providing telephone
support and software updates. Cost of revenues from maintenance and consulting
was $1.1 million and $1.2 million, representing 32% of total maintenance and
consulting revenues for the three months ended March 31, 1997 and 1996,
respectively. Cost of revenues for maintenance and consulting was $3.6 million
and $3.3 million, representing 32% of total maintenance and consulting revenues
for the nine months ended March 31, 1997 and 1996, respectively. The absolute
dollar increase in the nine month period comparison was due to staff additions
as a result of the acquisition of New Era.
Operating Expenses:
Total operating expenses were $7.5 million and $6.3 million, representing 68%
and 70% of total revenues for the three months ended March 31, 1997 and 1996,
respectively. Total operating expenses were $20.0 million and $26.0 million,
representing 68% and 110% of total revenues for the nine months ended March 31,
1997 and 1996, respectively.
13
<PAGE>
Product Development. Product development expenses consist primarily of personnel
related costs. Product development expenses were $2.0 million and $1.5 million,
representing 18% and 17% of total revenues for the three months ended March 31,
1997 and 1996, respectively. Product development expenses were $5.8 million and
$3.8 million, representing 20% and 16% of total revenues for the nine months
ended March 31, 1997 and 1996, respectively. These increases in product
development expenses resulted from the expansion of the Company's product line
as a result of the acquisition of New Era and ongoing product development
efforts.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries
and commissions for sales and marketing personnel, the fixed costs of worldwide
sales offices, and promotional costs. The Company sells through its direct sales
force, resellers and distributors. The direct channel produced 89% and 85% of
product revenues for the three months ended March 31, 1997 and 1996,
respectively, and 87% and 88% of product revenues for the nine months ended
March 31, 1997 and 1996, respectively. Sales and marketing expenses were $4.1
million and $3.4 million, representing 37% and 38% of total revenues for the
three months ending March 31, 1997 and 1996, respectively. Sales and marketing
expenses were $10.4 million and $9.0 million, representing 35% and 38% of total
revenues for the nine months ending March 31, 1997 and 1996, respectively. The
increase in absolute dollars was a result of commissions on higher revenues.
General and Administrative. General and administrative expenses include
personnel and other costs of the finance, human resources and administrative
departments of the Company. General and administrative expenses were $1.3
million and $1.2 million, representing 12% and 13% of total revenues for the
three months ended March 31, 1997 and 1996, respectively. General and
administrative expenses were $3.3 million and $3.0 million, representing 11% and
13% of total revenues for the nine months ended March 31, 1997 and 1996,
respectively.
Purchased Research and Development and Product Amortization. Purchased research
and development and product amortization was $127,000 and $160,000, representing
1% and 2% of total revenues for the three months ended March 31, 1997 and 1996,
respectively. Purchased research and development and product amortization was
$428,000 and $10.3 million, representing 2% and 44% of total revenues for the
nine months ended March 31, 1997 and 1996, respectively. The decrease for the
nine month comparison relates to a one-time write-off of $10.2 million of
purchased research and development related to the New Era acquisition in
December 1995.
Interest and Other Income (Expense) Net. Net interest and other income (expense)
was $256,000 and ($261,000) for the three months ended March 31, 1997 and 1996,
respectively. Net interest and other income (expense) was $344,000 and
($220,000) for the nine months ended March 31, 1997 and 1996, respectively. The
increase in interest income and decrease in interest expense was due primarily
to a reduction of bank borrowings related to the New Era Acquisition and
interest earned on funds received from the initial public offering and the Cisco
minority equity purchase.
Provision for (Benefit from) Income Taxes. The income tax provision was $851,000
and $245,000 for the three months ended March 31, 1997 and 1996, respectively.
The income tax provision (benefit) was $1,698,000 and ($146,000) for the nine
months ended March 31, 1997 and 1996, respectively. The effective tax rate for
both the three months and nine months ended March 31, 1997 was approximately
39%. Benefit from income taxes for the nine months ended March 31, 1996,
included write-off of purchased research and development related to the
acquisition of New Era and the recognition of the Company's deferred tax asset.
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Recent Pronouncements
During March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" (SFAS 121), which requires the Company to review the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. SFAS 121 will
become effective for the Company's 1997 fiscal year.
During October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which establishes
a fair value based method of accounting for stock based compensation plans.
While the Company is studying the impact of the pronouncement, it continues to
account for employee stock options under APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS 123 will be effective for fiscal years
beginning after December 15, 1995.
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 128 "Earnings Per Share". This statement replaces the
presentation of primary earnings per share with a presentation of basic earnings
per share. It also requires dual presentation of basic and diluted earnings per
share on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic earnings per share computation to the numerator and denominator of the
diluted earnings per share computation. This statement is effective for the
periods ending after December 15, 1997, including interim periods.
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Liquidity and Capital Resources
Working capital increased at March 31, 1997 over that at March 31, 1996
primarily due to the proceeds from the initial public offering, proceeds from
the equity investment from Cisco and net income.
For the nine months ended March 31, 1997, net cash provided by operating
activities resulted primarily from net income, depreciation and amortization,
increase in accrued liabilities and a decrease in other assets, partially offset
by an increase in accounts receivable, an increase in inventories and a decrease
in accounts payable. For the nine months ended March 31, 1996, net cash provided
by operations resulted primarily from a write-off of purchased research and
development, depreciation and amortization and an increase in deferred
maintenance and product revenue, partially offset by a net loss, increase in
deferred income taxes and a decrease in accounts payable and accrued
liabilities.
For the nine months ended March 31, 1997, the Company's investing activities
have consisted primarily of purchases of property and equipment. For the nine
months ended March 31, 1996, the Company's investing activities consisted
primarily of the acquisition of New Era and the redemption of available-for-sale
securities.
Net cash provided by financing activities for the nine months ended March 31,
1997 consisted primarily of proceeds from the initial public offering and the
equity investment by Cisco, partially offset by payments on the Company's bank
line of credit and notes payable. For the nine months ended March 31, 1996, the
Company's financing activities consisted of proceeds from a term loan and bank
line of credit and payments on bank line of credit.
At March 31, 1997, the Company had $27.0 million in cash and cash equivalents
and $24.6 million in working capital. The Company had $11.1 million in accounts
receivable, net of allowance for doubtful accounts, and $9.0 million of unearned
revenues, substantially all of which are expected to be earned over the 12 month
period following March 31, 1997.
The Company believes that its current cash balance and its cash flow from
operations, if any, will be sufficient to meet its anticipated working capital
and capital expenditure requirements for at least the next 12 months.
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RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves a number of
risks, some of which are beyond the Company's control, and include the
following:
Dependence on Strategic Relationships
Alliance with Cisco. In January 1997, the Company entered into a strategic
alliance with Cisco pursuant to which Cisco and the Company agreed to cooperate
to develop certain TCP/IP software (known as Cisco IOS for S/390 ("S/390")) that
operates with Cisco products and to have Cisco sell such products. This alliance
requires that the Company devote a substantial portion of the Company's software
development resources and personnel to the development of such products, that
the Company bundle a number of its existing products into the new Cisco
products, that Cisco and Interlink jointly market the products, and that Cisco
and Interlink share support obligations for customers of the products. The joint
marketing of these products is currently the only manner in which these products
are being marketed. This is a new marketing relationship for the Company which
previously sold its products through its direct sales force and distributors.
The Company does not know at this time what effect this marketing relationship
will have on the sales cycle and on obtaining current sales information for
planning purposes. In addition, customer price quotes are managed by Cisco.
To date, all of the Company's core technologies have been acquired and have not
been developed internally. There can be no assurance that the Company's software
development can be completed successfully, in a timely manner, or at all. The
products being sold are being used in larger multi-sites than the Company's
former TCPaccess product. This usage pattern requires greater investment by the
Company to address compatibility, reliability and performance problems. In
addition, the Cisco quality assurance process is stringent, and this process can
create delays in delivery of new versions and enhancements. The alliance may
divert the Company from developing other stand-alone products or enhancing
existing stand-alone products which could result in loss of sales and
maintenance revenue, which would have a material adverse effect on the Company's
business, financial condition, and results of operations.
Furthermore, the timing of software development cannot be predicted with
accuracy, and the Company's software development efforts for the Cisco products
will be subject to technological risks including the possibility that the
software will not operate with Cisco's products in a manner acceptable to
customers, that the software may not be compatible with customers' networks,
that the bundling of the Company's software will result in unforeseen technical
obstacles, that Cisco and the Company may disagree about the development
objectives, or that competitors, including International Business Machines
Corporation ("IBM"), will develop competing products that make the jointly
developed products obsolete. In addition, Cisco may not be successful in
marketing the jointly developed software once the products are completed, and
the Company is not guaranteed any minimum sales revenues from the alliance.
Because the Company is not permitted to sell the jointly developed products
independently of Cisco, the Company, after incurring the substantial costs of
development and diversion of resources away from developing other products, may
not receive sufficient revenues from Cisco sales, which would have a material
adverse effect on the Company's business, financial condition, and results of
operations. There can be no assurance that Cisco will be successful in selling
the jointly developed products or that the Company will receive any revenues
from such products.
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The Company has no significant experience working with Cisco, and the alliance
with Cisco is subject to all the risks inherent in such strategic relationships
including the failure of the parties to meet their respective obligations under
the terms of the alliance, the risk of loss of rights to important intellectual
property either jointly developed in connection with the alliance or otherwise,
and the risk of a dispute over key provisions of the alliance. There can be no
assurance that the parties will meet their objectives under the terms of the
alliance. The failure of either the Company or Cisco to meet their obligations
under the terms of the alliance would have a material adverse effect on the
Company's business, financial condition, and results of operations. In addition,
either Cisco or the Company may terminate the relationship upon 90 days written
notice.
The Company is currently investing, and plans to continue to invest, significant
resources to develop additional strategic relationships, such investments could
adversely affect the Company's operating margins. The Company believes that its
success in penetrating markets for its products depends in large part on its
ability to maintain these relationships, to cultivate additional relationships
and to cultivate alternative relationships if distribution channels change.
There can be no assurance that any distributor, system integrator or strategic
partner will not discontinue its relationship with the Company, form competing
arrangements with the Company's competitors, or disrupt the Company's other
strategic relationships.
Alliance with Legato. In May 1996 the Company entered into a strategic marketing
agreement with Legato. The Company has no historical relationship with Legato,
and there can be no assurance that the Company will be able to sell its products
through Legato.
Changes in Sales Structure; Continued Dependence on Distributors
Historically, the Company's sales were primarily made through the Company's
direct sales force and the Company's distributors in some international markets.
The Company has redirected its sales force in connection with the Cisco alliance
so that the Company's sales force is working jointly to sell S/390. The
Company's direct sales team is now selling through the Cisco sales channel. The
sales force is also continuing to sell applications and other new products. This
transition in the responsibilities of the direct sales force may not result in
successful sales or a successful sales relationship with Cisco.
The loss of, or a significant reduction in revenues from, the Company's
international distributors through which the Company sells certain of its
products could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, if one of the
Company's distributors declares bankruptcy, becomes insolvent, or is declared
bankrupt before the distributor remits to the Company the payments for the
Company's products, the Company may not be able to obtain the revenues to which
it would be entitled for sales made by such distributor prior to the bankruptcy
or insolvency proceeding. In addition, the Company's distributors generally
offer other products and these distributors may give higher priority to sales of
such other products.
A former distributor of the Company's TCPaccess products in Italy, Selesta
Integrazioni SRL ("Selesta"), has initiated legal actions over a distributor
agreement and alleged actions taken by the Company and certain employees of the
Company. Selesta has requested in excess of $3,500,000 in damages in two
lawsuits filed in Milan, Italy and Alameda County, CA. No provision for any
liability that may result upon resolution of these matters has been made in the
financial statements. Should Selesta prevail on its claims, the Company's
business, financial condition and results of operations would be materially
adversely affected.
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Dependence on Current Products
During the three months ended March 31, 1997 and 1996, sales of the TCPaccess
products, excluding maintenance and hardware, accounted for approximately 45%
and 42%, and, including related maintenance and hardware, accounted for
approximately 71% and 64%, respectively, of the Company's total revenues. The
Company's operating results have historically been significantly dependent upon
sales of the TCPaccess products. A portion of the maintenance revenues are from
historical customers of the Company's DECnet product. The Company no longer
actively markets the DECnet product, and maintenance revenues from DECnet
customers have declined each year since the fiscal year ended June 30, 1993, and
are expected to continue to decline. The Company's operating results are
expected to become increasingly dependent upon sales of the S/390 product
jointly marketed with Cisco.
The Company cannot estimate with certainty the total number of potential sites
where the S/390 product could be installed. The Company's business, financial
condition and results of operations could be materially adversely affected by
the failure of anticipated orders to materialize and by deferrals or
cancellations of orders as a result of changes in customer requirements. In
addition, the Company's future success depends upon the viability of the
Internetwork Operating System ("IOS") market and the relationship with Cisco.
The Company's operating results may be subject to substantial period-to-period
fluctuations as a consequence of capital spending in the IOS market.
The Company has experienced difficulty in deriving significant sales from the
HARBOR products since the acquisition of New Era and the HARBOR product line in
December 1995. The Company's operating results are currently dependent upon
continued HARBOR sales. Failure to maintain sales levels of the HARBOR products
could adversely affect the Company's results of operations.
Reliance on IBM and Emergence of Mainframe as Enterprise Server
The Company's current software products and the S/390 product are designed for
use with IBM and IBM-compatible mainframe computers. Specifically, these
software products target users of the MVS operating system, the Customer
Information Control System communications subsystem and the IMS and DB2 database
management systems. As a result, future sales of the Company's existing products
and associated recurring maintenance revenues are dependent upon continued use
of mainframes and their related systems software. In addition, because the
Company's products operate in conjunction with IBM systems software, changes to
IBM systems software may require the Company to adapt its products to these
changes, and any inability to do so, or delays in doing so, may adversely affect
the Company's business, financial condition and results of operations.
Currently, TCP/IP is the communications protocol for the Internet and is being
adopted by some organizations as the communications protocol for their
client/server local area networks and wide area networks. This adoption has
allowed IBM MVS mainframe computers to act as enterprise servers on such
networks. The use of mainframes as enterprise servers is relatively new and
still emerging. The Company's future financial performance will depend in large
part on the acceptance and growth in the market for centralized network
management. Adoption of another communications protocol on client/server
networks could make TCP/IP communication not viable, which would undermine the
demand for the Company's TCPaccess and S/390 product, and have a material
adverse effect on the Company's business, financial condition and results of
operations.
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Competition
General. The market in which the Company operates is intensely competitive and
is characterized by extreme price competition and rapid technological change.
The competitive factors influencing the markets for the Company's products
include product performance, price, reliability, features, scalability,
interoperability across multiple platforms, adherence to industry standards, and
the provision of support and maintenance services. The Company competes with a
number of companies, principally IBM, that specialize in one or more of the
Company's product lines, and such competitors may have greater financial,
technical sales and marketing resources to devote to the development, promotion
and sale of their products, and may have longer operating histories, greater
name recognition, and greater market acceptance for their products and services
compared to those of the Company. There can be no assurance that the Company's
current competitors or any new market entrants will not develop networked
systems management products or other technologies that offer significant
performance, price or other advantages over the Company's technologies, the
occurrence of which would have a material adverse effect on the Company's
business, financial condition and results of operations.
Network Transport Products. The Company historically sold its TCPaccess suite of
products principally to customers who had installed IBM mainframes using the MVS
operating system. The Company and Cisco will begin jointly marketing with S/390
product. The Company's main competition for its TCPaccess products is IBM and
that is expected to continue with the S/390 product. IBM sells TCP/IP and
associated products for its MVS mainframe systems that compete directly with the
S/390 product. IBM has continued to enhance the functionality and performance of
its TCP/IP product In addition, IBM's OS/390 operating system, which includes
TCP/IP communications software in a bundle of software provided to purchasers of
OS/390, has been and is aggressively marketed by IBM, and the Company believes
it has lost sales of the Company's TCPaccess products as a result and may lose
sales of the S/390 product for the same reason. IBM has in some cases included
and may continue to include its TCP/IP product in the bundle of software
provided to purchasers of its OS/390 operating system without charge. The
Company believes that any general reduction in price of the IBM TCP/IP products,
or the widespread bundling of those products without charge in its OS/390
operating system, would make marketing of the S/390 product difficult which
would have a material adverse effect on the Company's business, financial
condition and results of operations.
System Management Applications. The primary competitors for the Company's HARBOR
Backup and HARBOR Distributed Storage Server products are IBM and Storage
Technology. The Company's competition for the HARBOR Distribution product
includes IBM, Novadigm, Inc. ("Novadigm") and Tangram Enterprises Solutions,
Inc. IBM is aggressively marketing its ADSM backup product, which is included in
the System View package on IBM's UNIX system, AIX. There can be no assurance
that IBM will not include the ADSM backup products in a software "bundle" with
the sale of its mainframe hardware systems. The bundling of competing software
products with mainframe hardware systems could have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company also competes with a number of software vendors who develop and market
products for UNIX and Windows NT operating systems. Although the Company
recently signed a strategic marketing agreement with Legato, the Company is
still a competitor of Legato in the storage management market. Competition from
these companies could increase due to an expansion of their product lines or a
change in their approaches to enterprise systems management or networking
products. The bundling of network transport software with a network controller
by these competitors could prevent the Company from selling S/390 to the
customers of these competitors, which would have a material adverse effect on
the Company's business, financial condition and results of operations.
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Other Factors. The Company's ability to compete successfully depends on many
factors, including the Company's success in developing new products that
implement new technologies, performance, price, product quality, reliability,
success of competitors' products, general economic conditions, and protection of
Interlink products by effective utilization of intellectual property laws. In
particular, competitive pressures from existing or new competitors who offer
lower prices or other incentives or introduce new products could result in price
reductions which would adversely affect the Company's profitability. There can
be no assurance that the Company's current or other new competitors will not
develop enhancements to, or future generations of, competitive products that
offer superior price or performance features, that the Company will be able to
compete successfully in the future, or that the Company will not be required to
incur substantial additional investment costs in connection with its
engineering, research, development, marketing and customer service efforts in
order to meet any competitive threat. The Company expects competition to
intensify, and increased competitive pressure could cause the Company to lower
prices for its products, or result in reduced profit margins or loss of market
share, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on Key Personnel
The Company is highly dependent on the continued service of, and on its ability
to attract and retain, qualified technical, sales, marketing and managerial
personnel. The Company's Vice President of Sales has resigned effective June 30,
1997, and the Company has yet to fill the position of Vice President of
Marketing. While the Company intends to fill these positions, experienced
executive-level sales and marketing professionals in the Company's industry are
in high demand and may not be attracted and retained on terms advantageous to
the Company. The competition for qualified personnel in the software industry
(including engineers skilled in MVS operating systems) is intense, and the loss
of any such persons, as well as the failure to recruit additional key personnel
in a timely manner, 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 will be able to continue to attract and retain the
qualified personnel necessary for the development of its business. The Company
has employment agreements with certain executive officers, but such agreements
do not ensure their continued service to the Company or prevent their
competition with the Company following a termination of employment. The Company
does not maintain key man life insurance on the lives of its key employees.
New TCP/IP Products and Rapid Technological Change
The markets for the Company's network transport products and systems management
applications are characterized by rapidly changing technologies, evolving
industry standards, frequent new product introductions and rapid changes in
customer requirements. The Company believes that its future success will depend
upon its ability to develop, manufacture and market products which meet changing
user needs, to continue to enhance its products and to develop and introduce in
a timely manner new products that take advantage of technological advances, keep
pace with emerging industry standards, and address the increasingly
sophisticated needs of its customers. There can be no assurance whether TCP/IP
will continue to be accepted as a communications protocol on client/server
networks. Furthermore, there can be no assurance that the Company will be
successful in developing and marketing, on a timely basis, product enhancements
or new products, (including the S/390 product) either independently or with
strategic partners, that respond to technological change or evolving industry
standards, that the Company will not experience difficulties that could delay or
prevent the successful development, introduction and sale of these products, or
that any such new products or product enhancements will adequately meet the
requirements of the marketplace and achieve market acceptance. The Company's
failure or inability to
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adapt its products to technological changes or to develop new products
successfully would have a material adverse effect on the Company's business,
financial condition and results of operations.
The introduction or announcement of products by the Company or one or more of
its competitors, including, but not limited to IBM, embodying new technologies,
or changes in customer requirements or the emergence of new industry standards
and practices could render the Company's existing products obsolete and
unmarketable. There can be no assurance that the introduction or announcement of
new product offerings by the Company or one or more of its competitors will not
cause customers to defer purchasing the existing products of the Company or that
the Company will successfully manage the transition from older products. Such
deferment of purchases or inability to manage the transition of products could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, there can be no assurance that the
Company will successfully identify new product opportunities, develop and bring
to market in a timely manner such new products, or that products or technologies
developed by others will not render the Company's products or technologies
noncompetitive or obsolete.
Product Errors; Product Liability
Software products as complex as those offered and being developed by the Company
often contain undetected errors or failures when first introduced or as new
versions are released. Testing of the Company's products is particularly
challenging because it is difficult to simulate the wide variety of computing
environments in which the Company's customers may deploy its products.
Accordingly, there can be no assurance that, despite testing by the Company,
Cisco and by current and potential customers, errors will not be found after
commencement of commercial shipments, resulting in lost revenues, loss of or
delay in market acceptance and negative publicity about the Company and its
products, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's license agreements with customers typically contain provisions
designed to limit the Company's exposure to potential product liability claims.
The limitation of liability provisions contained in such license agreements may
not be effective under the laws of some jurisdictions, particularly if the
Company in the future relies on "shrink wrap" licenses that are not signed by
licensees. The Company's products are generally used to manage data critical to
organizations, and as a result, the sale and support of products by the Company
may entail the risk of product liability claims. A successful liability claim
brought against the Company could have a material adverse effect on the
Company's business, financial condition and results of operations.
Fluctuations in Operating Results; Absence of Backlog; Seasonality
The Company's operating results have historically been subject to quarterly
fluctuations due to a variety of factors. The impact of revenues, if any, from
the Cisco alliance cannot be estimated at this time. The Company has typically
sold its products through a trial process to allow customers to evaluate the
effectiveness of the Company's products before determining whether to proceed
with broader deployment of such products. The Company is not certain whether the
S/390 product will require customer trials or what the trial process will be if
one is required. The Company's sales cycle, from the date the sales agent first
contacts a prospective customer to the date a customer ultimately purchases the
Company's product, has typically been three to six months for the TCPaccess
products and six to nine months for the HARBOR products. The sales cycle for the
S/390 product has not been established due to lack of selling and revenue
experience with the S/390 product. There can be no assurance that
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customers will purchase the Company's products after a trial period or that the
Company's sales cycle will not lengthen, exposing it to the possibility of
shortfalls in quarterly revenues, which could have a material adverse effect on
the Company's business, financial condition or results of operations and cause
results to vary from period to period. The Company's operating results will also
be affected by the seasonality on fluctuations of Cisco sales of the S/390
product. The Company's operating results will also be affected by general
economic and other conditions affecting the timing of customer orders and
capital spending, and order cancellations or rescheduling.
The Company operates with very little backlog and most of its product revenues
in each quarter result from orders closed in that quarter, and a substantial
majority of those orders are completed at the end of that quarter. The Company
establishes its expenditure levels for sales, marketing, product development and
other operating expenses based in large part on its expectations as to future
revenues, and revenue levels below expectations could cause expenses to be
disproportionately high. If revenues fall below expectations in a particular
quarter, operating results and net income are likely to be materially adversely
affected. Any inability of the Company to adjust spending to compensate for
failure to meet sales forecasts or to collect accounts receivable, or any
unexpected increase in product returns or other costs, could magnify the adverse
impact of such events on the Company's operating results.
The Company's business has historically experienced and is expected to continue
to experience significant seasonality. The Company has had higher sales of its
software products in the quarters ending in December and June and weaker sales
in the quarters ending in September and March. The decrease in product revenues
in the quarters ending in September is due to the international customer
seasonal buying patterns. The quarters ending in March are historically weak due
to government and large organization annual budgeting cycles. The impact of
S/390 revenues, if any, on this pattern is not certain. This includes timing of
different fiscal periods with Cisco. Due to the foregoing factors, quarterly
revenue and operating results are likely to vary significantly in the future and
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
Further, it is likely that in some future quarters the Company's revenue or
operating results will 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.
Integration of Acquisition; History of Acquired Technologies
To date, the Company's core technologies for its principal network transport
products and systems management applications have been acquired and have not
been developed internally. There can be no assurance that the Company will have
the opportunity to successfully acquire or develop new technologies in the
future or that such technology, if acquired, can be successfully integrated and
commercialized by the Company. An inability to acquire, develop or commercialize
new technologies would have a material adverse effect on the Company's business,
financial condition and results of operations. The Company may also seek to
acquire or invest in businesses, products or technologies that expand,
complement or otherwise relate to the Company's current business or product
line. There can be no assurance that such acquisitions will be successfully or
cost-effectively integrated into the Company's current operations, or that the
acquired technologies will provide the necessary complement to the Company's
current products. If the Company consummates additional acquisitions in the
future that must be accounted for under the purchase method of accounting, such
acquisitions would likely increase the Company's amortization expenses. In
addition, any such acquisitions would be subject to the risks of integration
mentioned above. The Company does not currently have any understandings,
commitments or agreements with respect to any potential acquisition or corporate
partnering arrangements, nor is it currently engaged in any discussions or
negotiations with respect to any such transaction.
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Reliance on and Risks Associated with International Sales
During the three months ended March 31, 1997 and 1996, 34% and 41%,
respectively, of the Company's total revenues were derived from sales to
international customers. The Company's international sales have been primarily
to European markets, and sales are generally denominated in local currencies.
The Company expects that international revenue will decline as a percentage of
total revenue but continue to represent a significant portion of its total
revenue. Some of the Company's international subsidiaries have been restructured
to act as resellers of the S/390 product. To the extent this restructuring is
unsuccessful, the Company's results of operations could be adversely affected.
Sales to international customers are subject to additional risks including
longer receivables collection periods, greater difficulty in accounts receivable
collection, failure of distributors to report sales of the Company's products,
political and economic instability, nationalization, trade restrictions, the
impact of possible recessionary environments in economies outside the United
States, reduced protection for intellectual property rights in some countries,
currency fluctuations and tariff regulations and requirements for export
licenses. There can be no assurance that foreign intellectual property laws will
adequately protect the Company's intellectual property rights. In addition,
effective copyright and trade secret protection may be unavailable or limited in
certain foreign countries. Substantially all of the Company's distribution and
other agreements with international distributors require any dispute between the
Company and any distributor to be settled by arbitration. Under these
agreements, the party bringing the action, suit or claim is required to conduct
the arbitration in the domicile of the defendant. The result is that, if the
Company has a cause of action against a party, it may not be feasible for the
Company to pursue such action, as arbitration in a foreign country could prove
to be excessively costly and have a less certain outcome depending on the laws
and customs in the foreign country. These international factors could have a
material adverse effect on future sales of the Company's products to
international end users and, consequently, the Company's business, financial
condition and results of operations.
Most of the Company's international sales are denominated in local currencies.
The Company hasn't historically attempted to reduce the risk of currency
fluctuations by hedging except in certain limited circumstances where the
Company has held an account receivable expected to be outstanding for a period
of at least 6 months. The Company may be disadvantaged with respect to its
competitors operating in foreign countries by foreign currency exchange rate
fluctuations that make the Company's products more expensive relative to those
of local competitors. The Company may attempt to reduce these risks by
continuing to hedge in certain limited transactions in the future. Accordingly,
changes in the exchange rates or exchange controls may adversely affect the
Company's results of operations. There can be no assurance that the Company's
current or any future currency exchange strategy will be successful in avoiding
exchange related losses or that any of the factors listed above will not have a
material adverse effect on the Company's future international sales and,
consequently, on the Company's business, financial condition and results of
operations.
Dependence Upon Proprietary Technology; Risk of Third-Party Claims of
Infringement
The Company's success and ability to compete is dependent in part upon its
proprietary information. The Company relies primarily on a combination of
copyright and trademark laws, trade secrets, software security measures, license
agreements and nondisclosure agreements to protect its proprietary technology
and software products. There can be no assurance, however, that such protection
will be adequate to deter misappropriation, deter unauthorized third parties
from copying aspects of, or otherwise obtaining and using, the Company's
software products and technology without authorization, or that the rights
secured thereby will provide competitive advantages to the Company.
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There can be no assurance that others will not independently develop similar
products or duplicate the Company's products. There can be no assurance that the
steps taken by the Company to protect its proprietary technology will prevent
misappropriation of such technology, and such protections may not preclude
competitors from developing products with functionality or features similar to
or superior to the Company's products. A substantial amount of the Company's
sales are in international markets, and the laws of other countries may afford
the Company little or no effective protection of its intellectual property.
While the Company believes that its products and trademarks do not infringe upon
the proprietary rights of third parties, there can be no assurance that the
Company will not receive future communications from third parties asserting that
the Company's products infringe, or may infringe, on the proprietary rights of
third parties. The Company was denied a trademark registration of the name
"Interlink" based on the use of similar names by other companies in the computer
industry. The Company expects that software product developers will be
increasingly subject to infringement claims as the number of products and
competitors in the Company's industry segments grow and the functionalities of
products in different industry segments overlap. Any such claims, with or
without merit, could be time consuming, result in costly litigation and
diversion of technical and management personnel, cause product shipment delays
or require the Company to develop non-infringing technology or enter into
royalty or licensing agreements, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Moreover, an adverse outcome in litigation or similar adversarial proceedings
could subject the Company to significant liabilities to third parties, require
expenditure of significant resources to develop non-infringing technology,
require disputed rights to be licensed from others or require the Company to
cease the marketing or use of certain products, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Possible Volatility of Share Price
There can be no assurance that the market price of the Company's Common Stock
will not decline or remain below the initial public offering price. The trading
prices of the Company's Common Stock may be subject to wide fluctuations in
response to a number of factors, including variations in operating results,
alliances, changes in earnings estimates by securities analysts, announcements
of extraordinary events such as litigation, alliances, or acquisitions,
announcements of technological innovations or new products or new contracts by
the Company or its competitors, announcements and reports about the declining
number of mainframe computers shipped, press releases or reports of IBM or other
competitors introducing competitive or substitute products, as well as general
economic, political and market conditions. In addition, the stock market has
from time-to-time experienced significant price and volume fluctuations that
have particularly affected the market prices for the common stocks of technology
companies and that have often been unrelated to the operating performance of
particular companies. These broad market fluctuations may also adversely affect
the market price of the Company's Common Stock. In the past, following periods
of volatility in the market price of a company's securities, securities class
action litigation has occurred against the issuing company. There can be no
assurance that such litigation will not occur in the future with respect to the
Company. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which would have a material adverse effect
on the Company's business, financial condition and results of operations. Any
adverse determination in such litigation could also subject the Company to
significant liabilities.
25
<PAGE>
PART II: OTHER INFORMATION
26
<PAGE>
ITEM 1. Legal Proceedings
Incorporated by reference into Part II from the Notes to Condensed
Consolidated Financial Statements provided in Part I hereto.
ITEM 4. Submission of Matters to a Vote of Security Holders
On March 6, 1997, the Company held an Annual Meeting of Stockholders
(the "Annual Meeting"). At the Annual Meeting, Charles W. Jepson,
Thomas H. Bredt, Ronald W. Braniff, D. Benedict Dulley, and Andrew J.
Fillat were reelected to the Company's Board of Directors.
Director Votes For Votes Against Votes Abstaining
-------- ---------- ------------- ----------------
Ronald W. Braniff 4,098,136 112,000 2,863,113
Thomas H. Bredt 4,098,136 112,000 2,863,113
D. Benedict Dulley 4,097,840 112,296 2,863,113
Andrew J. Fillat 4,098,136 112,000 2,863,113
Charles W. Jepson 4,098,136 112,000 2,863,113
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11.1 Statement Regarding Computation of Net Income
(Loss) Per Share
(b) Exhibit 27 Financial Data Schedule
(EDGAR version only)
(c) Reports on Form 8-K The Company filed a current report on Form
8-K on April 21, 1997 and May 1, 1997
27
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Date: May 14, 1997 INTERLINK COMPUTER SCIENCES INC.
AND SUBSIDIARIES
(Registrant)
By: /s/ Gloria M. Purdy
-------------------
Gloria M. Purdy
Chief Financial Officer and Secretary
28
EXHIBIT 11.1
<TABLE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER SHARE (1)
(in thousands, except per share data)
<CAPTION>
Three months ended Nine months ended
------------------------------- -------------------------------
March 31, 1997 March 31, 1996 March 31, 1997 March 31, 1996
-------------- -------------- -------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Primary and fully diluted:
Weighted average shares:
Common...................................... 7,177 2,445 6,219 2,445
Preferred................................... 1,230
Common equivalent shares from stock options
and warrants................................ 1,154 661 1,129 -
Common and common equivalent shares pursuant
to Staff Accounting Bulletin No. 83......... - 680 - 680
------ ------ ------ ------
Shares used in per share calculation................. 8,331 5,016 7,348 3,125
====== ====== ====== ========
Net income (loss).................................... $1,332 $384 $2,674 $(8,023)
====== ====== ====== ========
Net income (loss) per share.......................... $ 0.16 $ 0.08 $ 0.36 $ (2.57)
====== ====== ====== ========
<FN>
(1) There is no difference between primary and fully diluted net income per
share for all periods presented.
</FN>
</TABLE>
29
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 27,007
<SECURITIES> 0
<RECEIVABLES> 11,587
<ALLOWANCES> (515)
<INVENTORY> 1,264
<CURRENT-ASSETS> 41,596
<PP&E> 1,619
<DEPRECIATION> 102
<TOTAL-ASSETS> 47,759
<CURRENT-LIABILITIES> 16,958
<BONDS> 0
0
0
<COMMON> 50,157
<OTHER-SE> (22,655)
<TOTAL-LIABILITY-AND-EQUITY> 47,759
<SALES> 7,546
<TOTAL-REVENUES> 11,157
<CGS> 564
<TOTAL-COSTS> 1,703
<OTHER-EXPENSES> 7,527
<LOSS-PROVISION> (24)
<INTEREST-EXPENSE> 28
<INCOME-PRETAX> 2,183
<INCOME-TAX> 851
<INCOME-CONTINUING> 1,927
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,332
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
