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 December 31, 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__
8,287,914 shares of the registrant's Common stock, $0.001 par value, were
outstanding
as of February 1, 1999.
<PAGE>
<TABLE>
INTERLINK COMPUTER SCIENCES, INC.
AND SUBSIDIARIES
CONTENTS
<CAPTION>
Page
PART I: FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets:
December 31, 1998 and June 30, 1998 4
Condensed Consolidated Statements of Operations:
Three and six months ended December 31, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows:
Six months ended December 31, 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 30
Item 4 Submission of Matters to a Vote of Security Holders 30
Item 6 Exhibits and Reports on Form 8-K 30
Signatures 31
</TABLE>
<PAGE>
PART I: FINANCIAL INFORMATION
<PAGE>
<TABLE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
December 31, June 30,
1998 1998
----------- -----------
<S> (unaudited)
ASSETS:
<C> <C>
Cash and cash equivalents $ 19,224 $ 18,189
Accounts receivable, net 7,591 8,876
Inventories 387 380
Current deferred tax asset 4,782 7,497
Other current assets 1,748 492
----------- -----------
Total current assets 33,732 35,434
Property and equipment, net 2,095 2,392
Long-term deferred tax asset 3,615 3,615
Purchased software products & other non-
current assets 1,400 1,341
----------- -----------
Total assets $ 40,842 $ 42,782
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 782 $ 793
Current portion of long-term debt 530 1,031
Accrued compensation 1,582 1,879
Accrued income taxes 1,278 1,328
Other accrued liabilities 3,775 3,544
Deferred maintenance and product revenue 6,451 6,828
----------- -----------
Total current liabilities 14,398 15,403
Long-term debt, less current portion 114 132
Deferred maintenance revenue 1,566 1,421
Other liabilities 1,555 1,692
Liabilities retained in connection with
sale of HARBOR - 1,109
----------- -----------
Total liabilities 17,633 19,757
----------- -----------
Commitments and contingencies (Note 5)
Common stock 8 8
Additional paid-in capital 52,776 52,505
Accumulated other comprehensive deficit (492) (525)
Accumulated deficit (29,083) (28,963)
----------- -----------
Total stockholders' equity 23,209 23,025
----------- -----------
Total liabilities and
stockholders' equity $ 40,842 $ 42,782
=========== ===========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1998 1997 1998 1997
------- -------- -------- -------
(unaudited) (unaudited)
<C> <C> <C> <C>
<S>
Revenues:
Product $ 3,416 $ 3,388 $ 7,939 $ 6,221
Maintenance and consulting 3,832 3,360 7,563 6,842
------- -------- ------- -------
Total revenues 7,248 6,748 15,502 13,063
------- -------- ------- -------
Cost of revenues:
Product 256 472 464 864
Maintenance and consulting 1,172 1,052 2,095 2,269
------- -------- ------- -------
Total cost of revenues 1,428 1,524 2,559 3,133
------- -------- ------- -------
Gross profit 5,820 5,224 12,943 9,930
------- -------- ------- -------
Operating expenses:
Product development 2,869 3,233 5,601 5,551
Sales and marketing 3,520 3,020 7,213 5,798
General and
administrative 1,260 1,933 2,360 3,257
Purchased research and
development and product
amortization 17 117 34 3,863
Loss (recovery) on sale
of HARBOR (2,773) 2,171 (3,044) 2,171
NetLOCK Restructuring
Charge 1,234 - 1,234 -
------- -------- ------- -------
Total operating expenses 6,127 10,474 13,398 20,640
------- -------- ------- -------
Operating loss (307) (5,250) (455) (10,710)
Interest and other
income, net 153 255 289 520
------- -------- ------- -------
Loss before provision
for income taxes (154) (4,995) (166) (10,190)
Benefit from income
taxes 43 4,546 47 6,000
------- -------- ------- -------
Net Loss $ (111) $ (449) $ (119) $(4,190)
======= ======== ======= =======
Net loss per share
Basic $(0.01) $ (.06) $(0.01) $ (0.55)
Diluted $(0.01) $ (.06) $(0.01) $ (0.55)
Shares used in per share
calculation
Basic 8,247 7,615 8,212 7,586
Diluted 8,247 7,615 8,212 7,586
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
INTERLINK COMPUTER SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
Six months ended
December 31,
<S> 1998 1997
------- -------
(unaudited)
<C> <C>
Cash flows from operating activities:
Net loss $ (119) $(4,190)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Purchased research and development and
other - 3,599
NetLOCK restructuring charge 1,234 -
Loss (recovery) on sale of HARBOR product
line (2,062) 2,171
Depreciation and amortization 705 1,092
Provision for excess and obsolete inventory 34 122
Provision for doubtful accounts 56 43
Exchange loss (gain) (106) 50
Deferred income taxes 2,715 (6,161)
Changes in operating assets and
liabilities:
Accounts receivable 1,229 2,319
Inventories (41) (70)
Other assets 30 (368)
Accounts payable (11) 107
Accrued liabilities (612) (1,878)
Deferred maintenance and product revenue (232) (551)
Other liabilities (234) (115)
------- -------
Net cash provided by (used in) operating
activities 2,586 (3,830)
------- -------
Cash flows from investing activities:
Acquisition of NetLOCK network security
technology - (1,175)
Acquisition of property and equipment (1,021) (2,007)
Capitalization of software development
costs (315) -
------- -------
Net cash used in investing activities (1,336) (3,182)
------- -------
Cash flows from financing activities:
Payments on capital lease obligations (18) (32)
Payments on notes payable and other (501) (147)
Proceeds from issuance of common stock, net 271 313
------- -------
Net cash provided by (used in) financing
activities (248) 134
------- -------
Net increase (decrease) in cash and cash
equivalents 1,002 (6,878)
Effect of exchange rate changes on cash 33 (113)
------- -------
Cash and cash equivalents, beginning of
period 18,189 28,106
------- -------
Cash and cash equivalents, end of period $19,224 $21,115
======= =======
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
<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 and six months
ended December 31, 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" as amended by SOP 98-9. 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 reclassified for the three and six months ended
December 31, 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
December 31, 1998 and June 30, 1998.
<TABLE>
3. Comprehensive Income (Loss):
Comprehensive income (loss) as defined by Statements of Financial Accounting
Standards No. 130, Reporting Comprehensive Income, is net income plus direct
adjustments to stockholders' equity. Comprehensive income (loss) for the three
and six months ended December 31, 1998 and 1997 is as follows: (in thousands)
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1998 1997 1998 1997
------ ------ ----- ------
<C> <C> <C> <C>
<S>
Comprehensive income
(loss):
Net loss $ (111) $ (449) $(119) $(4,190)
Cumulative translation
adjustment (7) 87 33 69
------ ------ ----- -------
Total comprehensive income
(loss) $ (118) $ (362) $ (86) $(4,121)
====== ====== ===== =======
</TABLE>
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.
<TABLE>
Basic and diluted earnings per share during the three and six month periods
ended December 31, 1998 and 1997 are calculated as follows (in thousands except
for per share amounts):
<CAPTION>
Three months Six months ended
ended December 31,
December 31,
1998 1997 1998 1997
------- ------- ------- -------
<C> <C> <C> <C>
<S>
Basic:
Weighted average shares 8,247 7,615 8,212 7,586
Shares used in per share calculation 8,247 7,615 8,212 7,586
Net loss $ (111) $ (449) $ (119) $(4,190)
====== ====== ====== =======
Net loss per share $(0.01) $(0.06) $(0.01) $ (0.55)
====== ====== ====== =======
Diluted:
Weighted average shares 8,247 7,615 8,212 7,586
Common equivalent shares from stock
options and warrants - - - -
------ ------ ------ -------
Shares used in per share
calculation 8,247 7,615 8,212 7,586
====== ====== ====== =======
Net loss $ (111) $ (449) $ (119) $(4,190)
====== ====== ====== =======
Net loss per share $(0.01) $(0.06) $(0.01) $ (0.55)
====== ====== ====== =======
</TABLE>
<PAGE>
Options and warrants to purchase the following shares of common stock at the
indicated range of price per share were outstanding during the three and six
month periods ended December 31, 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):
Options and warrants Range of
excluded exercise prices
-------- ---------------
Three months ended:
December 31, 1998 1,916 $0.70-$12.50
December 31, 1997 2,089 $0.70-$15.00
Six months ended:
December 31, 1998 1,916 $0.70-$12.50
December 31, 1997 2,089 $0.70-$15.00
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 prior officers of the Company, an
officer 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 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. NetLOCK Restructuring Charge:
The Company has recorded a restructuring charge of $1,234,000 in the second
quarter of fiscal 1999 for the planned exit from the NetLOCK business. The
charge includes $381,000 for anticipated employee termination benefits, $575,000
to reduce property and equipment to estimated sales prices, $116,000 to write
down leasehold improvements which will no longer be used, and other write downs
and reserves for unused prepaid expenses and facility lease costs. Management
anticipates final shutdown of the NetLOCK business in the March 1999 quarter.
7. Recovery on Sale of HARBOR Product Line:
In December 1998, the then current owners of the HARBOR business resold the
business to another party, following restructuring and additional investment.
As a result of the sale in December 1998, the Company received or will receive
payment for the remaining notes receivable and the guaranteed Canadian loan was
repaid by the new buyer. As a result the Company recognized a recovery of
$2,773,000 in the second quarter of fiscal 1999.
8. Concentrations of Revenues:
During the three and six months ended December 31, 1998, 14% and 7%,
respectively, of the Company's total revenues were derived from sales to a large
telecommunications company. During the three and six months ended December 31,
1997, 11% and 13%, respectively, of the Company's total revenues were derived
from sales to and through Cisco Systems, Inc. ("Cisco").
9. 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 SFAS 131 and provide all
disclosures necessary in the Company's annual report for fiscal year 1999.
<PAGE>
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.
On December 31, 1998 AcSec issued SOP 98-9 "Modification of SOP 97-2 Software
Revenue Recognition". SOP 98-9 amends paragraphs 11 and 12 of SOP 97-2 to
require revenue recognition using the "residual method" under certain
circumstances. This statement will be effective for transactions entered into
for fiscal years beginning after March 15, 1998 and will be adopted by the
Company in fiscal year 2000. Management does not anticipate that the adoption of
this SOP will have a material impact on the Company's financial position or the
results of its operations.
<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 significant. In
December 1998, the Company announced plans to exit the NetLOCK product line.
The Company is currently in discussions for the sale of the product line but no
offers have been received. The Company plans to sell or wind up the NetLOCK
business in its fiscal third quarter. Consistent with its plans announced in
December, the Company has reserved the anticipated shutdown expenses of
$1,234,000 relating primarily to employee termination benefits, impairment of
asset values and certain other non-recoverable costs.
In December 1997, the Company sold its HARBOR product line , 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 be recognized. In September 1998 the Company collected and recognized a
recovery of $271,000. In December 1998, the then current owners of the HARBOR
business resold the business to another party, following restructuring and
additional investment. As a result of the sale in December 1998, the Company
received or will receive payment for the remaining notes receivable and the
guaranteed Canadian loan was repaid by the new buyer. As a result the Company
recognized a recovery of $2,773,000 in the second quarter of fiscal 1999.
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.
<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 Six months ended
ended December 31,
December 31,
1998 1997 1998 1997
----- ----- ----- -----
<C> <C> <C> <C>
<S>
Revenues:
Product 47.1% 50.2% 51.2% 47.6%
Maintenance and consulting 52.9 49.8 48.8 52.4
------ ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
------ ----- ----- -----
Cost of revenues:
Product 3.5 7.0 3.0 6.6
Maintenance and consulting 16.2 15.6 13.5 17.4
----- ----- ----- -----
Total cost of revenues 19.7 22.6 16.5 24.0
----- ----- ----- -----
Gross profit 80.3 77.4 83.5 76.0
----- ----- ----- -----
Operating expenses:
Product development 39.6 47.9 36.1 42.5
Sales and marketing 48.6 44.8 46.5 44.4
General and administrative 17.4 28.6 15.2 24.9
Purchased research and development
and product amortization 0.2 1.7 0.2 29.6
Loss (recovery) on sale of HARBOR -38.3 32.2 -19.6 16.6
NetLOCK restructuring charge 17.0 - 8.0 -
----- ----- ----- -----
Total operating expenses 84.5 155.2 86.4 158.0
----- ----- ----- -----
Operating loss -4.2 -77.8 -2.9 -82.0
Interest and other income, net 2.1 3.8 1.8 4.0
----- ----- ----- -----
Loss before income taxes -2.1 -74.0 -1.1 -78.0
----- ----- ----- -----
Benefit from income taxes 0.6 67.4 0.3 45.0
----- ----- ----- -----
Net loss -1.5% -6.6% -0.8% -32.1%
===== ===== ===== =====
Cost of sales as a percentage of
the related revenues:
Product 7.5% 13.9% 5.8% 13.9%
Maintenance and consulting 30.6% 31.3% 27.7% 33.2%
</TABLE>
Revenues:
Total revenues were $7.2 million and $6.7 million for the three months and $15.5
million $13.1 million for the six months ended December 31, 1998 and 1997,
respectively, representing a year over year increase of 7% and 18%,
respectively. Product revenues were $3.4 million for both the three months
ended December 31, 1998 and 1997. Product revenues were $7.9 million and $6.2
million for the six months ended December 31, 1998 and 1997, respectively,
representing a year over year increase of 27%. This increase resulted primarily
from sales of the new e-Control product which contributed $1.7 million in
product revenue for the first half of fiscal 1999. Maintenance and consulting
revenues were $3.8 million and $3.4 million for the three months and $7.6
million and $6.8 million for the six months ended December 31, 1998 and 1997,
respectively, representing a year over year increase of 12% for both three and
six month periods.
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 $256,000 and $472,000, representing 7% and 14% of total
product revenues for the three months ended December 31, 1998 and 1997,
respectively. Cost of revenues for product sales was $464,000 and $864,000,
representing 6% and 14% of total product revenues for the six months ended
December 31, 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 $1.2 million and $1.1 million for the three months ended December
31, 1998 and 1997, representing 31% of total maintenance and consulting
revenues, respectively. Cost of revenues from maintenance and consulting was
$2.1 million and $2.3 million for the six months ended December 31, 1998 and
1997, representing 28% and 33% 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 $6.1 million and $10.5 million, representing 85%
and 155% of total revenues for the three months ended December 31, 1998 and
1997, respectively. Total operating expenses were $13.4 million and $20.6
million, representing 86% and 158% of total revenues for the six months ended
December 31, 1998 and 1997, respectively. The decrease in total operating
expenses is primarily due a $2.2 million loss on sale of HARBOR in the quarter
ending December 31, 1997 and a $2.8 million recovery on that sale in the quarter
ending December 31, 1998. See further discussion below.
Product Development. Product development expenses consist primarily of
personnel related costs. Product development expenses were $2.9 million and $3.2
million, representing 40% and 48% of total revenues for the three months ended
December 31, 1998 and 1997, respectively. The decrease in product development
expenses is due to the reduction of product development related to the sale of
the HARBOR product line. Product development expenses were $5.6 million for the
six months ended December 31, 1998 and 1997, representing 36% and 43%,
respectively of total revenues.
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 86% and
87% of product revenues for the three months ended December 31, 1998 and 1997,
respectively, and 88% and 89% of product revenues for the six months ended
December 31, 1998 and 1997, respectively. Sales and marketing expenses were
$3.5 million and $3.0 million, representing 49% and 45% of total revenues for
the three months ending December 31, 1998 and 1997, respectively. Sales and
marketing expenses were $7.2 million and $5.8 million, representing 47% and 44%
of total revenues for the six months ending December 31, 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.
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 $1.3
million and $1.9 million, representing 17% and 29% of total revenues for the
three months ended December 31, 1998 and 1997, respectively. General and
administrative expenses were $2.4 million and $3.3 million, representing 15% and
25% of total revenues for the six months ended December 31, 1998 and 1997,
respectively.
<PAGE>
The decreases were a result of higher legal costs, recruiting costs, severance
costs and consulting expenses of approximately $500,000 in the three months
ended December 31, 1997.
Purchased Research and Development and Product Amortization. Purchased research
and development and product amortization was $17,000 and $117,000, representing
less than 1% and 2% of total revenues for the three months ended December 31,
1998 and 1997, respectively. Purchased research and development and product
amortization was $34,000 and $3.9 million, representing less than 1% and 30% of
total revenues for the six months ended December 31, 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 ($2.8 million) and $2.2 million, representing (38%)
and 32% of total revenues for the three months ended December 31, 1998 and 1997,
respectively. The loss (recovery) on sale of the HARBOR product line was ($3.0
million) and $2.2 million, representing (20%) and 17% of total revenues for the
six months ended December 31, 1998 and 1997, respectively. The loss on 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 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 a payoff
on the Canadian loan by the buyer and collections on notes receivable which had
been fully reserved.
NetLOCK Restructuring Charge. The NetLOCK restructuring charge was $1.2
million for the three and six months ended December 31, 1998. The restructuring
charge includes employee termination benefits, impairment of asset values and
certain other non-recoverable costs. See Note 6 to the Notes to Condensed
Consolidated Financial Statements for further discussion.
Interest and Other Income, Net. Net interest and other income was $153,000 and
$255,000 for the three months ended December 31, 1998 and 1997, respectively.
Net interest and other income was $289,000 and $520,000 for the six months ended
December 31, 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 and higher interest expense in the six months ended December 31, 1998
relating to the amortization of a discount for the minimum royalties in
connection with the NetLOCK acquisition.
Benefit from Income Taxes. The benefit from income taxes was $43,000 and $4.5
million for the three months ended December 31, 1998 and 1997, respectively.
The benefit from income taxes was $47,000 and $6.0 million for the six months
ended December 31, 1998 and 1997, respectively. Included in the three and six
months ended December 31, 1997 is a tax benefit of $3.2 million relating to the
sale of HARBOR product line. The effective tax rate was approximately 28% for
the three and six months ended December 31, 1998 and 1997, respectively.
Liquidity and Capital Resources
Working capital was $19.3 million and $20.0 million at December 31, 1998 and
June 30, 1998, respectively.
For the six months ended December 31, 1998, net cash provided by operating
activities resulted primarily from collection of a tax refund, decrease in
accounts receivable, partially offset by recovery on the sale of the HARBOR
product line and decrease in accrued liabilities. For the six months ended
December 31, 1997, net cash used in operating activities resulted primarily from
a net loss, decrease in accrued liabilities and deferred maintenance and product
revenue, partially offset by a decrease in accounts receivable, a write-off of
purchased research and development, and sale of HARBOR product line.
For the six months ended December 31, 1998, the Company's investing activities
consisted primarily of purchases of property and equipment and capitalization of
software development costs. For the six months ended December 31, 1997, the
Company's investing activities consisted primarily of the acquisition of NetLOCK
network security technology and purchases of property and equipment including
$1.1 million purchased in the NetLOCK acquisition.
For the six months ended December 31, 1998, the Company's financing activities
consisted primarily of payments on notes payable and proceeds from the issuance
of common stock. For the six months ended December 31, 1997, the Company's
financing activities consisted primarily of payments on notes payable and
proceeds from the issuance of common stock.
At December 31, 1998, the Company had $19.2 million in cash and cash
equivalents. The Company had $7.6 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
December 31, 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.
<PAGE>
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
New Products and Rapid Technological Change
The markets for the Company's network transport products and system management
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 and the e-Control
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 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 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.
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 December 31, 1998 and 1997, sales of the network
transport products, excluding maintenance and consulting revenues and hardware
sales, accounted for approximately 34% and 30%, 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.
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 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 forcentralized 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 product. There can be no assurance that the Company will be
successful in integrating the operations and personnel associated with its
recent acquisition of Networkers Engineering, Ltd. There can be no assurance
that the Company will be successful in deriving significant future sales from
the products developed from this technology, 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 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 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.
The Company is involved in a commercial dispute and litigation with a former
distributor. Should the distributor prevail on its claims, the Company's
<PAGE>
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 December 31, 1998 and 1997, 42% and 40%,
respectively, of the Company's total revenues were derived from sales to
international customers. During the six months ended December 31, 1998 and
1997, 37% and 36%, 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 attempted to reduce the risk of currency fluctuations by hedging
in certain circumstances. 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.
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.
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 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
<PAGE>
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 changes in Europe with
the European economic and monetary union (the "EMU"). One of the changes
resulting from this union required EMU member states to irrevocably fix their
respective currencies to a new currency, the Euro, on January 1, 1999. On that
day, the Euro became 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.
<PAGE>
PART II: OTHER INFORMATION
<PAGE>
ITEM 1. Legal Proceedings
Incorporated by reference from the Notes to Condensed Consolidated
Financial Statements- Note 5. Contingencies, provided in Part I
hereto.
ITEM 4: Submission of Matters to a Vote of Security Holders
(i) On November 5, 1998, the Company held an Annual Meeting
of stockholders (the "Annual Meeting"). At the Annual
Meeting Augustus J. Berkeley, Thomas H. Bredt,
Ronald W. Braniff, Andrew I. Fillat, and Ralph B. Godfrey
were reelected to the Company's Board of Directors.
Director Votes for Votes withheld
Augustus Berkeley 5,785,143 296,454
Ronald W. Braniff 5,783,168 298,429
Thomas H. Bredt 5,862,700 218,897
Andrew J. Fillat 5,785,265 296,332
Ralph B. Godfrey 5,859,933 221,664
(ii) Approval of an Votes for Votes against Votes Abstained
amendment to the 4,817,382 1,062,568 14,051
1992 stock option
plan
(iii)Approval of an Votes for Votes against Votes Abstained
amendment to the 5,237,716 822,797 21,084
1996 employee stock
purchase plan
(iv) Appointment of the Votes for Votes against Votes Abstained
selection of 6,042,503 20,715 18,379
PricewaterhouseCoopers,
LLP as independent
accountants for the
1999 fiscal year
The foregoing matters are described in more detail in the
Registrants' definitive proxy statement dated September 24, 1998.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 Financial Data Schedule
(EDGAR version only)
(b Reports on The Company filed a current report
Form 8-K on Form 8-K on December 21, 1998.
<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: February 9, 1999 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
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<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
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