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 September 30, 1998
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 __
8,271,797 shares of the registrant's Common stock, $0.001 par value, were
outstanding as of November 1, 1998.
1
<PAGE>
INTERLINK COMPUTER SCIENCES, INC.
AND SUBSIDIARIES
CONTENTS
Page
----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets:
September 30, 1998 and June 30, 1998.........................4
Condensed Consolidated Statements of Operations:
Three months ended September 30, 1998 and 1997...............5
Condensed Consolidated Statements of Cash Flows:
Three months ended September 30, 1998 and 1997...............6
Notes to Condensed Consolidated Financial Statements.............7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................12
PART II: OTHER INFORMATION
Item 1 Legal Proceedings...................................................29
Item 6 Exhibits and Reports on Form 8-K....................................29
Signatures ................................................................30
2
<PAGE>
PART I: FINANCIAL INFORMATION
3
<PAGE>
<TABLE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
September 30, June 30,
1998 1998
-------- --------
(unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents .......................................................... $ 16,816 $ 18,189
Accounts receivable, net ........................................................... 9,243 8,876
Inventories ........................................................................ 366 380
Current deferred tax asset ......................................................... 7,499 7,497
Other current assets ............................................................... 704 492
-------- --------
Total current assets ............................................................. 34,628 35,434
Property and equipment, net ........................................................ 2,703 2,392
Long-term deferred tax asset ....................................................... 3,615 3,165
Purchased software products & other non-current assets ............................. 1,378 1,341
-------- --------
Total assets ..................................................................... $ 42,324 $ 42,782
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable ................................................................... 941 793
Current portion of long-term debt .................................................. 782 1,031
Accrued compensation ............................................................... 2,087 1,879
Accrued income taxes ............................................................... 1,304 1,328
Other accrued liabilities .......................................................... 3,381 3,544
Deferred maintenance and product revenue ........................................... 6,366 6,828
-------- --------
Total current liabilities ........................................................ 14,861 15,403
Long-term debt, less current portion ................................................... 123 132
Deferred maintenance revenue ........................................................... 1,622 1,421
Other liabilities ...................................................................... 1,630 1,692
Liabilities retained in connection with sale of HARBOR ................................. 987 1,109
-------- --------
Total liabilities ................................................................ 19,223 19,757
-------- --------
Commitments and contingencies (Note 5)
Common stock ........................................................................... 8 8
Additional paid-in capital ............................................................. 52,549 52,505
Cumulative translation adjustment ...................................................... (485) (525)
Accumulated deficit .................................................................... (28,971) (28,963)
-------- --------
Total stockholders' equity ....................................................... 23,101 23,025
-------- --------
Total liabilities and stockholders' equity ....................................... $ 42,324 $ 42,782
======== ========
<FN>
See accompanying notes to condensed consolidated financial statements
</FN>
</TABLE>
4
<PAGE>
<TABLE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<CAPTION>
September 30,
1998 1997
-------- --------
(unaudited)
<S> <C> <C>
Revenues:
Product ............................................................................ $ 4,523 $ 2,833
Maintenance and consulting ......................................................... 3,731 3,482
-------- --------
Total revenues ................................................................... 8,254 6,315
-------- --------
Cost of revenues:
Product ............................................................................ 208 392
Maintenance and consulting ......................................................... 923 1,217
-------- --------
Total cost of revenues ........................................................... 1,131 1,609
-------- --------
Gross profit ........................................................................... 7,123 4,706
-------- --------
Operating expenses:
Product development ................................................................ 2,732 2,318
Sales and marketing ................................................................ 3,693 2,778
General and administrative ......................................................... 1,100 1,324
Purchased research and development and product amortization ........................ 17 3,746
Loss (recovery) on sale of HARBOR .................................................. (271) --
-------- --------
Total operating expenses ......................................................... 7,271 10,166
-------- --------
Operating loss ......................................................................... (148) (5,460)
Interest and other income, net ......................................................... 136 265
-------- --------
Loss before provision for income taxes ................................................. (12) (5,195)
Benefit from income taxes .............................................................. 4 1,454
-------- --------
Net Loss ............................................................................... $ (8) $ (3,741)
======== ========
Net loss per share
Basic .............................................................................. $ (0.00) $ (0.50)
Diluted ............................................................................ $ (0.00) $ (0.50)
Shares used in per share calculation
Basic .............................................................................. 8,177 7,557
Diluted ............................................................................ 8,177 7,557
<FN>
See accompanying notes to condensed consolidated financial statements
</FN>
</TABLE>
5
<PAGE>
<TABLE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
Three months ended September 30,
1998 1997
-------- --------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................................................... $ (8) $ (3,741)
Adjustments to reconcile net loss to net cash used in operating activities:
Purchased research and development ....................................................... -- 3,599
Depreciation and amortization ............................................................ 328 503
Provision for excess and obsolete inventory .............................................. 91 101
Provision for (reduction in) doubtful accounts ........................................... 41 (7)
Exchange loss (gain) ..................................................................... (133) 65
Deferred income taxes .................................................................... (2) (1,080)
Changes in operating assets and liabilities:
Accounts receivable ................................................................... (408) 2,916
Inventories ........................................................................... 77 (100)
Other assets .......................................................................... (70) 343
Accounts payable ...................................................................... 147 (464)
Accrued liabilities ................................................................... 21 (3,170)
Deferred maintenance and product revenue .............................................. (261) (944)
Other liabilities ..................................................................... (62) (65)
-------- --------
Net cash used in operating activities ............................................ (393) (2,044)
-------- --------
Cash flows from investing activities:
Acquisition of NetLOCK network security technology ......................................... -- (1,175)
Acquisition of property and equipment ...................................................... (632) (1,269)
Capitalization of software development costs ............................................... (177) --
-------- --------
Net cash used in investing activities ............................................ (809) (2,444)
-------- --------
Cash flows from financing activities:
Payments on capital lease obligations ...................................................... (8) (68)
Payments on notes payable and other ........................................................ (372) (105)
Proceeds from issuance of common stock, net ................................................ 44 26
-------- --------
Net cash used in financing activities ............................................ (336) (147)
-------- --------
Net decrease in cash and cash equivalents ........................................ (1,538) (4,635)
-------- --------
Effect of exchange rate changes on cash ........................................................ 165 (49)
-------- --------
Cash and cash equivalents, beginning of period ................................................. 18,189 28,106
-------- --------
Cash and cash equivalents, end of period ....................................................... $ 16,816 $ 23,422
======== ========
<FN>
See accompanying notes to condensed consolidated financial statements
</FN>
</TABLE>
6
<PAGE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
These 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. The Notes to the Consolidated
Financial Statements contained in the fiscal year 1998 report on Form 10-K
should be read in conjunction with these Condensed Consolidated Financial
Statements. The consolidated results of operations for the three months ended
September 30, 1998 are not necessarily indicative of the results to be expected
for any subsequent period or for the entire fiscal year ending June 30, 1999.
The June 30, 1998 balance sheet was derived from audited financial statements,
but does not include all disclosures required by generally accepted accounting
principles.
For software arrangements entered into after July 1, 1998, the Company
recognizes revenue in accordance with Statement of Position ("SOP") 97-2,
"Software Revenue Recognition." SOP 97-2 supercedes SOP 91-1 "Software Revenue
Recognition" and requires that if an arrangement to deliver software or a
software system does not require significant production, modification, or
customization of software, then revenue should be recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the vendor's fee is
fixed or determinable, and collectibility is probable. Accordingly, the Company
will generally recognize license fee revenue upon product shipment provided
there are no contingencies and collection is probable.
Cost of revenues have been restated for the three months ended September 30,
1997, to include the freight and other cost of sales in product cost of
revenues. In prior periods these expenses were included in maintenance and
consulting cost of revenues.
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
September 30, 1998 and June 30, 1998.
3. Comprehensive Income:
Comprehensive income as defined by Statements of Financial Accounting Standards
No. 130, Reporting Comprehensive Income, is net income plus direct adjustments
to stockholders' equity.
7
<PAGE>
Three months ended
September 30,
1998 1997
------- -------
Comprehensive income::
Net loss ......................................... $ (8) $(3,741)
Cumulative translation adjustment ................ 40 (18)
------- -------
Total comprehensive income (loss) .............. $ 32 $(3,759)
======= =======
4. Computation of Net Income (Loss) Per Share:
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128 ("SFAS 128") effective December 31, 1997. SFAS 128 requires
the presentation of basic and diluted earnings per share. Basic EPS is computed
by dividing income available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted EPS is computed by
giving effect to all dilutive potential common shares that were outstanding
during the period. For the Company, dilutive potential common shares consist of
the incremental common shares issuable upon the exercise of stock options and
warrants for all periods. In accordance with SFAS 128, all prior period earnings
per share amounts have been restated to reflect this method of calculation.
Basic and diluted earnings per share during the three month period ended
September 30, 1998 and 1997 are calculated as follows (in thousands except for
per share amounts):
Three months ended
September 30,
1998 1997
------- -------
Basic:
Weighted average shares .......................... 8,177 7,557
------- -------
Shares used in per share calculation ............. 8,177 7,557
------- -------
Net loss ......................................... $ (8) $(3,741)
======= =======
Net loss per share ............................... $ (0.00) $ (0.50)
======= =======
Diluted:
Weighted average shares .......................... 8,177 7,557
Common equivalent shares from stock options
and warrants ................................... -- --
------- -------
Shares used in per share calculation ............. 8,177 7,557
======= =======
Net loss ......................................... $ (8) $(3,741)
======= =======
Net loss per share ............................... $ (0.00) $ (0.50)
======= =======
Options and warrants to purchase the following shares of common stock at the
indicated range of price per share were outstanding during the three month
period ended September 30, 1998 and 1997, but were not included in the
computation of diluted earnings per share because the exercise price of the
options and warrants was greater than the average market price of the common
shares for each period or the inclusion of the options and warrants in the
diluted per share calculation was antidilutive (in thousands except for per
share amounts):
8
<PAGE>
Options and warrants Range of
excluded exercise prices
-------- ---------------
Three months ended:
September 30, 1998 2,038 $0.70-$14.00
September 30, 1997 1,909 $0.70-$16.25
5. Contingencies:
The Company is involved in a commercial dispute with a former Italian
distributor ("Claimant"), which has alleged that the Company and two of its
subsidiaries have breached and unlawfully terminated various distributorship
agreements for distribution of the Company's TCPaccess and HARBOR products in
Italy, and which has asserted various claims in two lawsuits against the
Company, its subsidiaries, and several officers of the Company.
In January 1997, the Claimant initiated a lawsuit in Milan, Italy against the
Company's Canadian Subsidiary, New Era Systems Services Ltd. ("New Era"); the
Company; the Company's French subsidiary, Interlink France S.A.R.L. ("Interlink
France"); and the Company's current distributor in Italy, an unrelated Italian
Corporation. The litigation is based on the Claimant's distribution of the
Company's HARBOR products pursuant to a distributor agreement with New Era
Systems Services Ltd., an affiliated Irish corporation ("New Era Ireland"),
which pre-dates the Company's acquisition of New Era. The distributor
relationship with the Claimant for the distribution of HARBOR products in Italy
and Spain has terminated. Pursuant to 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. New Era Ireland has filed a lawsuit
against the Claimant in Ireland for recovery of amounts due on outstanding
invoices and a declaration that the distributor relationship has terminated.
In March 1997 the Claimant initiated a separate lawsuit in Alameda County,
California against the Company, certain officers of the Company and of Interlink
France, and the Company's current Italian distributor. In the complaint,
Claimant alleges various tort claims related to the defendants' alleged actions
with respect to prior distribution agreements between Claimant, the Company, and
Interlink France for distribution of the Company's TCPaccess products in Italy.
The claims alleged include fraud, deceit, defamation, trade libel, unfair
competition, misappropriation, breach of confidential relationship, and
conversion. Claimant demands compensatory damages in excess of $2,000,000,
unspecified punitive damages, interest, attorneys' fees, and costs of the
litigation. The Company has successfully moved to compel arbitration of the
claims in accordance with the arbitration clauses in the earlier distributorship
agreements with the Claimant. The lawsuit was stayed as to all parties by the
Alameda County Superior Court pending arbitration of the claims against the
Company.
On or about March 9, 1998 the Claimant initiated arbitration proceedings in San
Francisco, California under the International Chamber of Commerce ("ICC") Rules
of Arbitration. The request for arbitration alleges claims for breach of
contract, fraudulent inducement, trade libel, use of trade secrets and
confidential information, unfair business practices, interference with
9
<PAGE>
customers and improper use of confidential information and ideas. The request
seeks damages in the amount of $3,000,000, plus punitive damages in an
unspecified amount, less an offset for amounts owed to Interlink France, and a
constructive trust.
The Company has denied that it breached any agreement with the Claimant or
engaged in any wrongful or fraudulent conduct as the Claimant alleges. In
addition, the Company has counterclaimed against the Claimant for breach of
contract, claiming damages in an unspecified amount to be determined according
to proof.
On or about June 12, 1998 the parties agreed to a sole arbitrator. Discovery is
proceeding. Arbitration hearings are currently scheduled to occur in March 1999.
The Company has accrued $350,000 for settlement of any liability that may result
upon resolution of these matters. No estimate of the ultimate liability that may
result upon the resolution of these matters is presently determinable. Should
the Company be unsuccessful in defending any of these claims, the Company's
business, financial condition and results of operations could be materially
adversely affected.
6. Supplemental Cash Flow Disclosures (in thousands):
Three months ended
September 30,
1998 1997
------ ------
Interest paid .............................................. $ 4 $ 5
Income taxes paid .......................................... -- 1,205
Non cash transactions from financing activities:
Liabilities assumed in connection with the purchase
of the NetLOCK network security technology ............ -- 1,876
7. Concentrations of Revenues:
During the three months ended September 30, 1998, 12% of the Company's total
revenues were derived from sales to a large telecommunications company. During
the three months ended September 30, 1997, 13% of the Company's total revenues
were derived from sales to and through Cisco Systems, Inc. ("Cisco").
8. Recent Pronouncements:
In June 1997, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), Disclosures about Segments of
an Enterprise and Related Information. This statement 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 Statement of Financial Accounting Standards
No. 14, Financial Reporting for Segments of a Business Enterprise. The new
standard became effective for the Company's fiscal year 1999. The Company will
adopt the requirements of
10
<PAGE>
SFAS 131 and provide all disclosures necessary in the Company's annual report
for fiscal year 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statements of financial position and measure those instruments at fair value.
Management has not yet evaluated the effects of this change on its financial
position and its results of operations. The Company will adopt SFAS No. 133 as
required for its first quarterly filing of fiscal 2000.
11
<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.
Overview
The Company offers a suite of high-performance solutions for enterprise systems
networking. Interlink provides software and services which enable customers to
use their IBM and IBM-compatible MVS mainframes as "enterprise servers" in
distributed, heterogeneous client/server network environments. The Company was
incorporated in December 1985 and registered its shares on the Nasdaq National
Market System on August 15, 1996.
In January 1997 the Company entered into a strategic alliance with Cisco
Systems, Inc. ("Cisco") pursuant to which Cisco and the Company agreed to
cooperate to develop certain TCP/IP software known as Cisco IOS for S/390
("IOS/390"). Pursuant to the agreement, Cisco had principal responsibility for
all TCP sales, with Interlink field personnel providing training and support.
Early experience with this sales structure was unsatisfactory and in August 1997
Cisco and Interlink restated the agreement to allow the Company to resell
IOS/390 and, once again, independently market and sell TCPaccess. Either Cisco
or the Company may terminate the current relationship upon 90 days written
notice.
In September 1997, the Company acquired the NetLOCK network security technology
from Hughes Electronics Corporation and recorded a charge in its first quarter
of fiscal year 1998 of approximately $3.1 million relating to in-process
software development. Revenue from the NetLOCK product commenced in January
1998. Revenue to date from this product line has not been a significant source
of revenue for the Company.
In December 1997, the Company sold its HARBOR product line , which was acquired
in conjunction with the acquisition of New Era Systems Services, Ltd. and
recorded a charge of $2.2 million, offset by a tax benefit of $3.2 million. The
sale of the HARBOR product line resulted in a charge to earnings because the
Company guaranteed a Canadian loan in the amount of $1.2 million, which was
assumed by the buyers, and because the notes receivable of $1.9 million from the
sale could not presently be recognized.
In January 1998, the Company purchased Networkers Engineering Limited and the
customer contracts of a related business, for a combined cost of approximately
$2.9 million, of which approximately $2.6 million was charged to purchased
research and development in the quarter ended March 31, 1998.
12
<PAGE>
Results of Operations
The following table sets forth, as a percentage of total revenues, certain
condensed consolidated statement of operations data for the periods indicated:
Three months ended
September 30,
1998 1997
----- -----
Revenues:
Product .......................................... 54.8% 44.9%
Maintenance and consulting ....................... 45.2 55.1
----- -----
Total revenues .............................. 100.0 100.0
----- -----
Cost of revenues:
Product .......................................... 2.5 6.2
Maintenance and consulting ....................... 11.2 19.3
----- -----
Total cost of revenues ...................... 13.7 25.5
----- -----
Gross profit ............................................. 86.3 74.5
----- -----
Operating expenses:
Product development .............................. 33.1 36.7
Sales and marketing .............................. 44.7 44.0
General and administrative ....................... 13.3 21.0
Purchased research and development
and product amortization ..................... 0.2 59.3
Loss (recovery) on sale of HARBOR ............... -3.3 --
----- -----
Total operating expenses .................... 88.1 161.0
----- -----
Operating loss ........................................... -1.8 -86.5
Interest and other income, net ........................... 1.7 4.2
----- -----
Loss before income taxes ......................... -0.1 -82.3
----- -----
Benefit from income taxes ................................ 0.0 23.0
----- -----
Net loss ......................................... -0.1% -59.3%
===== =====
Cost of sales as a percentage of the related revenues:
Product .......................................... 4.6% 13.8%
Maintenance and consulting ....................... 24.7% 35.0%
Revenues:
Total revenues were $8.3 million and $6.3 million for the three months ended
September 30, 1998 and 1997, respectively, representing an increase of 32%.
Product sales were $4.5 million and $2.8 million for the three months ended
September 30, 1998 and 1997, respectively, representing an increase of 61%. This
increase resulted primarily from sales of the new e-Control product which
contributed $1.7 million in product revenue for the first quarter of fiscal
13
<PAGE>
1999. Maintenance and consulting revenues were $3.7 million and $3.5 million for
the three months ended September 30, 1998 and 1997, respectively, representing
an increase of 6%.
Cost of Revenues:
Product. Cost of revenues from product sales consists primarily of hardware,
product media, documentation, shipping and packaging costs. Cost of revenues for
product sales was $208,000 and $392,000, representing 4% and 14% of total
product revenues for the three months ended September 30, 1998 and 1997,
respectively. This resulted primarily from decreases in hardware and third-party
product sales which carry higher costs of product revenue.
Maintenance and Consulting. Cost of revenues from maintenance and consulting
consists primarily of personnel related costs incurred in providing telephone
support, consulting and software updates. Cost of revenues from maintenance and
consulting was $923,000 and $1.2 million for the three months ended September
30, 1998 and 1997, representing 25% and 35% of total maintenance and consulting
revenues, respectively. This decrease in maintenance and consulting costs as a
percentage of the related revenue is due to lower support headcount which
resulted from the sale of the HARBOR product line, which had a smaller
maintenance revenue base relative to the Company's other products.
Operating Expenses:
Total operating expenses were $7.3 million and $10.2 million, representing 88%
and 161% of total revenues for the three months ended September 30, 1998 and
1997, respectively. The decrease in total operating expenses is primarily due to
the purchased research and development expense relating to the acquisition of
NetLOCK incurred in the quarter ended September 30, 1997. See further discussion
below.
Product Development. Product development expenses consist primarily of personnel
related costs. Product development expenses were $2.7 million and $2.3 million,
representing 33% and 37% of total revenues for the three months ended September
30, 1998 and 1997, respectively. This increase in product development expenses
resulted from the expansion of the Company's product line as a result of the
acquisition of Networkers Engineering Limited and the NetLOCK network security
technology and ongoing product development efforts, offset partially by the
reduction of product development related to the sale of the HARBOR product line.
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 77% of
product revenues for the three months ended September 30, 1998 and 1997,
respectively. Sales and marketing expenses were $3.7 million and $2.8 million,
representing 45% and 44% of total revenues for the three months ending September
30, 1998 and 1997, respectively. The increase was the result of increased
headcount in both sales and marketing and increased marketing expenses related
to the introduction of the Company's new products.
14
<PAGE>
General and Administrative. General and administrative expenses include
personnel and other costs of the finance, human resources, legal and
administrative departments of the Company and includes gains and losses on
foreign currency transactions. General and administrative expenses were $1.1
million and $1.3 million, representing 13% and 21% of total revenues for the
three months ended September 30, 1998 and 1997, respectively. The decrease
primarily relates to foreign currency transaction gains of $133,000 recognized
during the three months ending September 30, 1998 and foreign currency
transaction losses of $65,000 recognized during the three months ending
September 30, 1997.
Purchased Research and Development and Product Amortization. Purchased research
and development and product amortization was $17,000 and $3.7 million,
representing less than 1% and 59% of total revenues for the three months ended
September 30, 1998 and 1997, respectively. A charge of $3.1 million was recorded
for purchased research and development related to the NetLOCK acquisition in
September 1997. A write-down of $550,000 relating to purchased research and
development in connection with the HARBOR acquisition was recorded in September
1997.
Loss (Recovery) on Sale of HARBOR Product Line. The loss (recovery) on sale of
the HARBOR product line was ($271,000), representing 3% of total revenues for
the three months ended September 30, 1998. The sale of the HARBOR product line
occurred in December 1997 and included the establishment of a valuation
allowance related to certain assets and liabilities and the continuing guarantee
by the Company of a Canadian loan in the amount of $1.2 million, which was
assumed by the buyers. The recovery is a result of payments on the Canadian loan
by the buyer and collections on a note receivable which had a full valuation
allowance against it.
Interest and Other Income, Net. Net interest and other income was $136,000 and
$265,000 for the three months ended September 30, 1998 and 1997, respectively.
The decrease in net interest and other income was due primarily to less interest
earned as a result of lower cash balances.
Benefit from Income Taxes. The benefit from income taxes was $4,000 and $1.5
million for the three months ended September 30, 1998 and 1997, respectively.
The effective tax rate was approximately 33% and 28% for the three months ended
September 30, 1998 and 1997, respectively.
Liquidity and Capital Resources
Working capital was $19.8 million and $20.0 million at September 30, 1998 and
June 30, 1998, respectively.
For the three months ended September 30, 1998, net cash used in operating
activities resulted primarily from an increase in accounts receivable, a
decrease in deferred maintenance and product revenue, and an exchange gain,
partially offset by depreciation and amortization, and an increase in accounts
payable. For the three months ended September 30, 1997, net cash used in
operating activities resulted primarily from a net loss, decrease in accrued
liabilities, decrease in
15
<PAGE>
deferred maintenance and product revenue, and an increase in the deferred tax
asset, partially offset by a decrease in accounts receivable and a write-off of
purchased research and development.
For the three months ended September 30, 1998, the Company's investing
activities consisted primarily of purchases of property and equipment and
capitalization of software development costs. For the three months ended
September 30, 1997, the Company's investing activities consisted primarily of
the acquisition of NetLOCK network security technology and purchases of property
and equipment.
For the three months ended September 30, 1998, the Company's financing
activities consisted primarily of payments on notes payable. For the three
months ended September 30, 1997, the Company's financing activities consisted
primarily of payments on capital lease obligations and payments on notes
payable.
At September 30, 1998, the Company had $16.8 million in cash and cash
equivalents. The Company had $9.2 million in accounts receivable, net of
allowance for doubtful accounts, and $8.0 million of unearned revenues, the
majority of which are expected to be earned over the 12 month period following
September 30, 1998.
The Company believes that its current cash and cash equivalents balances as well
as 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.
16
<PAGE>
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
New Products and Rapid Technological Change
The markets for the Company's network transport products, system management
products and network security products 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 acquiring, developing or marketing, on a timely basis,
product enhancements or new products (including the IOS/390 product, e-Control
product and NetLOCK), 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
adapt its products to technological changes or to acquire or 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.
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
17
<PAGE>
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, as well as 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 sells its IOS/390 and TCPaccess suite of
products to customers who have installed mainframes using the MVS operating
system. The Company's main competition for its IOS/390 and TCPaccess products is
IBM. IBM sells TCP/IP and associated products for its MVS mainframe systems that
compete directly with the Company's IOS/390 and TCPaccess product line. IBM has
continued to enhance the functionality and performance of its TCP/IP product,
which enhancements may require the Company to update its IOS/390 and TCPaccess
product to remain competitive. There can be no assurance that the Company will
be able to make the improvements in its IOS/390 and TCPaccess products necessary
to remain competitive with IBM or that any such improvements by IBM would not
have a material adverse effect on the Company's business, financial condition or
results of operations. In addition, IBM includes TCP/IP communications software
in a bundle of software provided to purchasers of their OS/390 operating system.
An IBM customer can request to have the IBM TCP/IP product removed from the
software bundle provided by IBM and thereby reduce the purchase price of the
system purchased. The reduction in the purchase price related to the exclusion
of IBM's TCP/IP for MVS product from its software bundle, in certain model
groups, is substantially lower than the price the customer would have to pay to
purchase the Company's corresponding IOS/390 and TCPaccess products. Because
IBM's TCP/IP product may be less expensive to purchase than the Company's
corresponding IOS/390 and TCPaccess products there could be substantial erosion
of the Company's margins if the Company reduces the price of its IOS/390 and
TCPaccess products in order to compete against IBM, which erosion would have a
material adverse effect on the Company's business, financial condition and
results of operations. Principle competition for the Company's X.25 product is
from IBM's specialized front end processors which process X.25 protocol
communications from the network to the mainframe. CICS Programmers Toolkit is a
specialized application and has no direct competition as a product. However, the
benefits provided by CPT can also be provided by IBM's CICS Sockets, which are
part of the OS/390 operating system.
Systems Management Products. The primary competitors for e-Control include
Tivoli Systems (an IBM company) with its various framework products including
NetView, Sterling Software, Inc. with its NetMaster for TCP/IP product, Applied
Expert Systems and TDSLink. Many other companies in the computer industry have
announced products and plans to compete in the market for management and control
of computer systems and networks. The Company's Enterprise Print Services
competes principally with IBM's IP-PrintWay & NetSpool, as well as Levi, Ray &
Shoup, Inc. with their VPS product.
18
<PAGE>
Network Security Products. The primary competitors for the NetLOCK products are
Snare Networks, Kyberpass, Cylink, Time Step, Red Creek Communications Inc., and
V-One Technologies, Inc. In addition, security products comparable to NetLOCK
are currently available and are already incorporated into some operating
systems, thereby significantly diminishing the market for NetLOCK.
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,
and the 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 Current Products
During the three months ended September 30, 1998 and 1997, sales of the network
transport products, excluding maintenance and consulting revenues and hardware
sales, accounted for approximately 51% and 67%, respectively, of the Company's
total revenues. The Company's operating results have historically been
significantly dependent upon sales of the network transport products. A portion
of the maintenance revenues are from 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.
Since its availability on May 13, 1997, the Company has experienced increased
revenues from sales by Cisco or the Company of the IOS/390 product and other
products. The Company's operating results are currently dependent upon continued
product sales by both Cisco and the Company. The failure by either Cisco or the
Company to increase sales levels of the IOS/390 product or collaborate on sales
opportunities for other products could adversely affect the Company's results of
operations.
Reliance on IBM and Emergence of the Mainframe as an Enterprise Server
The Company's current software products are designed for use with IBM and
IBM-compatible mainframe computers. Specifically, these software products target
users of the MVS operating
19
<PAGE>
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 products, and 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 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.
Customer Acceptance and Scalability of New Products; History of Acquired
Technologies
The Company has acquired a significant portion of the technology associated with
its e-Control and NetLOCK products. There can be no assurance that the Company
will be successful in integrating the operations and personnel associated with
its recent acquisitions of the NetLOCK technology and Networkers Engineering,
Ltd. There can be no assurance that the Company will be successful in deriving
significant future sales from the products developed from these technologies, or
establishing and maintaining uniform standards, controls, procedures and
policies. To the extent that the Company is unable to accomplish the foregoing,
the Company's business, financial condition and results of operations may be
materially adversely affected.
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
20
<PAGE>
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 nor is it currently engaged in any discussions or
negotiations with respect to any such transaction.
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 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.
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 the IOS/390 product, which has been available since May 13, 1997. The
Company restructured this agreement with Cisco in August 1997. Cisco has not
guaranteed the Company any minimum sales revenues in connection with its sales
of the IOS/390 product, and there can be no assurance that the Company will
continue to receive any revenues therefrom. The Company markets and sells its
software products and services primarily through its direct sales organization
and to a lesser
21
<PAGE>
extent, through international resellers and distributors to domestic and
international customers, including original equipment manufacturers.
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, and 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.
Dependence on Distributors
The Company's sales are primarily made through the Company's direct sales force
and the Company's distributors in some international markets. The Company is
currently investing, and plans to continue to invest, significant resources to
develop new strategic marketing relationships, which 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 its existing marketing and distribution relationships, to cultivate
additional relationships and to cultivate alternative relationships if
distribution channels change. There can be no assurance that any distributor,
systems integrator or strategic partner will not discontinue its relationship
with the Company, form competing arrangements with the Company's competitors, or
dispute the Company's other strategic relationships.
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.
22
<PAGE>
The Company is involved in a commercial dispute and litigation with a former
distributor. Should the distributor prevail on its claims, the Company's
business, financial condition and results of operations could be materially
adversely affected. See "Legal Proceedings."
Reliance on and Risks Associated with International Sales
During the three months ended September 30, 1998 and 1997, 33% and 28%,
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 continue to represent a
significant portion of its total revenue. 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 has not 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.
23
<PAGE>
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 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'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
nine months. There can be no assurance that 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 may also be affected by the
seasonality on fluctuations of Cisco sales, if any, of the IOS/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, with a substantial
majority of those orders being 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 March and June and weaker sales in
the quarters ending in September and December. The decrease in product revenues
in the quarters ending in September is due to the international customer
seasonal buying patterns. 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, the Company's results have been and 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.
24
<PAGE>
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 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.
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. 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
25
<PAGE>
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.
Year 2000 Issues
In the computer industry many systems were not designed to handle any dates
beyond the year 1999, and such computer hardware and software will need to be
modified prior to the year 2000 in order to remain functional. The Company is
concerned that many enterprises will be devoting a substantial portion of their
information systems spending to resolving this upcoming year 2000 problem. This
may result in spending being diverted over the next two years. The Company has
completed its assessment and testing of its product lines and has established
that the current versions of its products are all year 2000 compliant. The
Company is in the process of completing the assessment and testing of year 2000
compliance for its internal information and non-IT systems. The Company
anticipates that addressing the year 2000 problem for its internal information
and non-IT systems and current and future products will not have a material
impact on its operations or financial results and expects to complete its
assessment by the end of fiscal 1999. However, there can be no assurance that
these costs will not be greater than anticipated, or that corrective actions
undertaken will be completed before any year 2000 problems could occur. The year
2000 issue could lower demand for the Company's products while increasing the
Company's costs. These combining factors, while not quantified, could have a
material adverse impact on the Company's financial results. The Company uses
certain products from and has certain key relationships with suppliers,
including Cisco. If these suppliers fail to adequately address the year 2000
issue for the products this could have a material adverse impact on the
Company's operations and financial results. The Company is still assessing the
effect the year 2000 issue will have and, at this time, cannot determine the
impact it will have, if any.
Issues Related to the European Monetary Conversion
The Company is aware of the issues associated with the forthcoming changes in
Europe aimed at forming a European economic and monetary union (the "EMU"). One
of the changes resulting from this union will require EMU member states to
irrevocably fix their respective currencies to
26
<PAGE>
a new currency, the Euro, on January 1, 1999. On that day, the Euro will become
a functional legal currency within these countries. During the next three years,
business in the EMU member states will be conducted in both the 25 existing
national currencies, such as the Franc or Deutsche Mark, and the Euro. As a
result, companies operating in or conducting business in EMU member states will
need to ensure that their financial and other software systems are capable of
processing transactions and properly handling these currencies, including the
Euro. The Company is still assessing the impact the EMU formation will have on
both its internal systems and the products it sells. The Company will take
appropriate corrective actions based on the results of such assessment. The
Company has not yet determined the cost related to addressing this issue and
there can be no assurance that this issue and its related costs will not have a
materially adverse affect on the company's business, operating results and
financial condition.
27
<PAGE>
PART II: OTHER INFORMATION
28
<PAGE>
ITEM 1. Legal Proceedings
Incorporated by reference from the Notes to Condensed Consolidated
Financial Statements-Item 6. Contingencies, provided in Part I hereto.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 Financial Data Schedule
(EDGAR version only)
(b) Reports on Form 8-K No reports on Form 8-K were
filed during the quarter ended
September 30, 1998.
29
<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: November 12, 1998 INTERLINK COMPUTER SCIENCES INC.
AND SUBSIDIARIES
(Registrant)
By: /s/ James A. Barth
----------------------------
James A. Barth
Chief Financial Officer and
Secretary
By: /s/ Augustus J. Berkeley
----------------------------
Augustus J. Berkeley
President and Chief
Executive Officer
30
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<INCOME-CONTINUING> (8)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8)
<EPS-PRIMARY> (0.00)
<EPS-DILUTED> (0.00)
</TABLE>
