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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(MARK ONE)
{X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 .
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{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________.
0-20364
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(Commission file number)
BANYAN SYSTEMS INCORPORATED
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2798394
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
120 FLANDERS ROAD, WESTBORO, MASSACHUSETTS 01581
(Address and zip code of principal executive offices)
508-898-1000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on a per share fair market value of $5.688, was approximately
$90,829,288.73 as of March 23, 1998. For this purpose, any officer, director or
5% of the Company is deemed to be an affiliate.
On March 23, 1998, there were 17,942,860 shares of Common Stock and 263,158
shares of Series A Convertible Preferred Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Specifically identified portions of the Annual Report to Shareholders for
the fiscal year ended December 31, 1997 (the "Annual Report to
Shareholders") are incorporated by reference into Parts I and II.
(2) Specifically identified portions of the Company's Definitive Proxy Statement
to be filed in connection with the Company's 1998 annual meeting of
stockholders are incorporated by reference into Part III.
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Exhibits 13 and 23 to the Annual Report on Form 10-K of Banyan Systems
Incorporated for the fiscal year ended December 31, 1997, as filed with the
Securities and Exchange Commission on March 31, 1998 (the "Banyan 1997 Form
10-K"), are hereby amended and restated in their entirety as filed herewith, and
Item 1 of Part I, Item 8 of Part II and Item 14 of Part IV to the Banyan 1997
Form 10-K are hereby amended and restated in their entirety as follows:
PART I
ITEM 1. BUSINESS
GENERAL
Banyan Systems Incorporated ("Banyan" or the "Company") designs, develops and
markets standards-based networking directory and messaging products that help
people to communicate across enterprise networks, intranets and the Internet.
Since 1985, the Company has been a pioneer in the computer networking field, and
currently offers a wide range of software products and professional services.
The Company's primary software products include StreetTalk for Windows NT(R),
VINES(R), Intelligent Messaging(TM), BeyondMail(TM), and several intranet
solutions. In addition, the Company delivers professional services including
technical support, education and consulting, including network performance,
integration and Year 2000 compliance services. The Company's majority-owned
subsidiary, Switchboard Incorporated, hosts the Internet's leading people-to-
people and business directory services aimed at generating advertising revenues
from major domestic corporations. Banyan's products fall into two major
categories: network operating system products and intranet products.
The Company's flagship network operating system product is based on a global
directory service called StreetTalk(TM). This service allows users to find one
another and access network resources, such as printers, files, mail and
applications, regardless of physical location. Banyan's other enterprise
directory services include messaging, management and security. Together, these
services make up the foundation for Banyan's network operating system products.
These products integrate mainframes, minicomputers, workgroup networks and
personal computers into a unified computing environment that is easy for users
to navigate and administrators to manage.
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Banyan, the Banyan logo, StreetTalk, VINES and BeyondMail are registered
trademarks, and Intelligent Messaging, Switchboard Banyan Enterprise Network
Solutions and EBR are trademarks of Banyan Systems Incorporated. StreetTalk is
a product of Banyan Systems Incorporated and not a product of McCarthy, Crisanti
& Maffei, Inc. UNIX is a registered trademark of Novell, Inc. in the United
States and in other countries licensed exclusively through X/Open Company Ltd.
IBM and OS/2 are registered trademarks of International Business Machines
Corporation. Microsoft, Windows NT and Windows are registered trademarks of
Microsoft Corporation. Macintosh is a registered trademark of Apple Computer,
Inc. Other product, company or organization names cited in this Form 10-K are
trademarks or registered trademarks of their respective companies or
organizations.
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The Company delivers its network operating system products in several versions,
including StreetTalk for Windows NT(R) and VINES(R). Introduced in September
1996 and enhanced throughout 1997, Banyan's StreetTalk for Windows NT provides
Banyan's premier enterprise directory capabilities running natively on
Microsoft(R) Windows NT, an emerging standard for corporate networks. VINES is
Banyan's well proven, UNIX(R) based networking software, which combines file and
print sharing with the StreetTalk directory, messaging, network management and
security services. The Company's Intelligent Messaging(R) option, available for
both VINES and Windows NT environments, provides an enterprise solution for
reliably storing and transporting electronic messages.
Banyan's intranet products enable its customers to utilize Internet standards to
allow people to contact other people and information in a reliable and secure
manner over the Internet. The Intranet Access product brings all the
capabilities of the network operating system to a user of a browser on the
Internet. Banyan's Intranet Protect product helps customers authenticate users
and authorize the user access to web site pages. These are the first products
of Banyan's intranet product initiative.
The Company's service organization includes technical response centers,
education services and consulting. A critical element of the Company's strategy
is to assure that customers are provided with technical support, training and
consulting services required to build, manage and optimize the network
environment using Banyan products. Consulting services are generally offered as
customized consulting services and in certain cases as packaged services. When
combined with other third party product and services, they are positioned as
solution offerings. The Company provides services through regional offices
located in the Americas, Europe, Asia Pacific and Australia.
In February 1996, the Company launched Switchboard(TM) an Internet directory
service that allows people to locate residential and business listings. To
realize the potential of Switchboard, as well as to fund its future growth, the
Company established Switchboard Incorporated as a Banyan subsidiary.
Subsequently, in November 1996, the Company entered into an agreement with
America Online, Inc. (AOL) and Digital City Inc. (DCI) to sell minority
interests in Switchboard Incorporated to AOL and DCI. At December 31, 1997,
these companies held in the aggregate approximately a 10% equity interest in
Switchboard Incorporated. See Note P to the Company's Consolidated Financial
Statements, which is incorporated herein by reference to the Company's Annual
Report to Shareholders.
In the second quarter of 1997, the Company announced a reorganization of its
operations. As a result of the reorganization, the Company recorded net pre-tax
restructuring and other charges in 1997 of $8.0 million. The restructuring and
other charges are expected to reduce cash flow by approximately $3.1 million, of
which $2.7 million had been expended through December 31, 1997. During 1997,
the restructuring resulted in 78 employee separations.
In the third quarter of 1997, the Company entered into a $15.0 million line of
credit agreement (the "Credit Agreement") with Foothill Capital Corporation
("Foothill"), replacing the Company's prior $10.0 million credit facility which
expired in May 1997. In general, the Company's obligations under the Credit
Agreement bear interest at the variable base rate per annum of Norwest Bank
Minnesota, National Association. The Credit Agreement has a three-year initial
term and is renewable thereafter for successive one year periods. Each year
during the initial term of the Credit Agreement, Foothill will be granted
warrants to purchase 75,000 shares of the Company's common stock at the then
current fair market value. There were no amounts outstanding under the line of
credit agreements during the years ended December 31, 1997 and 1996.
On March 6, 1998, the Company received a $10.0 million equity investment from
HarbourVest Partners LLC. Under the terms of the purchase agreement, HarbourVest
purchased convertible preferred stock and warrants to acquire additional
convertible preferred stock. In the event the Company's stockholders do not
approve an increase in the number of shares of common stock authorized for
issuance from 25,000,000 to 35,000,000 by June 30, 1998, the Company may be
required to repurchase 40% of the HarbourVest preferred stock and warrants for
$4.0 million. On March 6, 1998, the Company received $10.0 million in proceeds
from the sale of preferred stock which are available for working capital
requirements.
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BANYAN ARCHITECTURE AND TECHNOLOGY
The Company bases its software products on a modular architecture, specifically
designed to serve computing environments with multiple servers in multiple
locations. This architecture enables the delivery of a set of sophisticated
network services that integrate workgroup LANs (Local Area Networks), the
Internet and other proprietary computer environments into a single enterprise
network.
Banyan's enterprise directory services consist of software modules, each
providing a different service that may be shared by users across the network.
At the core of these services is Banyan's StreetTalk directory. StreetTalk
enables network administrators to assign location-independent "StreetTalk" IDs
or names to each user, computer, printer, server or other resource in the
network. These names remain consistent throughout the network, allowing a user
to access any network resource without regard to the physical location of the
user or the resource. The name, network location and characteristics of each
resource are stored in the StreetTalk database. StreetTalk's database is used
by all of the other services and integrated applications to locate and
transparently access resources throughout the network.
Banyan has expanded this architecture to include the capability to easily access
these services through the Internet. From a browser, anywhere on the Internet,
a user can gain access to their printer, file and mail services. In addition,
for web servers in a corporate intranet, this architecture provides the means to
authenticate users and protect web pages.
All of Banyan's enterprise directory services are integrated with the StreetTalk
directory, including messaging, management, security, local and wide-area
communications, and host connectivity. As a result of this modular
architecture, integration of services throughout the network is easily
maintained even as individual services are enhanced or additional services are
added.
Banyan's integrated enterprise directory services create the "look and feel" of
a single system for users of a complex network of heterogeneous personal
computers, servers, minicomputers and mainframes. For example, users log on to
the network rather than individual servers, and thereby gain access to all of
the resources on the network rather than the resources available on an
individual server. Banyan believes its products supply users with a unified
view of the network, thereby shielding them from its underlying complexities.
Banyan believes its products provide network administrators with the ease-of-
access and centralized management capabilities previously associated only with
minicomputers and mainframe systems.
Banyan believes that its software architecture has enabled it to develop
networking products that offer advantages over other networking products that
have been designed to connect PCs within a workgroup LAN for the purpose of file
and print sharing. Through its integrated set of enterprise directory services,
Banyan seeks to meet the needs of the enterprise networking market with products
that:
- Provide consistency across the entire network in managing, administrating,
locating and controlling access to users, resources, applications and data;
- Permit the network to be easily reconfigured and expanded to include
additional users, computers, workgroup LANs and sites;
- Ensure the integrity and security of information distributed throughout the
network;
- Provide for integration with minicomputers and mainframes in the
organization; and
- Facilitate the development of client-server applications that support the
enterprise.
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The Company also believes that it was the first company to offer global
directory services and that it continues to offer among the most comprehensive
and technically advanced set of enterprise directory services in the industry.
Banyan is upgrading its product architecture to comply with Year 2000 standards.
Product changes are being made and delivery to customers is expected to occur
beginning in the first half of 1998. Failure to deliver these product changes
in a timely manner could have a material adverse effect on the Company.
WINDOWS NT INTEGRATION
With the emergence of Microsoft Corporation's Windows NT operating system, the
Company has released products that allow corporations to integrate Windows NT
into their existing corporate networks. In March 1996, the Company introduced
StreetTalk Access(TM) for Windows NT File and Print software, giving customers a
smooth growth path for deploying Windows NT.
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The capabilities of the StreetTalk Access product are now included among the
features of StreetTalk for Windows NT. Running natively in Windows NT
environments, StreetTalk for Windows NT is designed to integrate Microsoft's
Windows NT operating system into their existing corporate networks. In June
1997, the Company announced the availability of StreetTalk for Windows NT 7.5,
which offers improved support for TCP/IP standards, new management tools,
including additional support for remote management, speedier disaster recovery,
and a new version of Banyan's integrated messaging services. Additionally, the
Company offers Intelligent Messaging for Windows NT, which delivers highly
scalable enterprise message storage and transport capabilities, providing a
secure foundation for organizational communications.
KEY NETWORK OPERATING SYSTEM PRODUCTS
The Company's key network operating system products include StreetTalk for
Windows NT, VINES, Intelligent Messaging and BeyondMail. In addition, the
Company markets a broad range of complementary products and options for these
base products.
STREETTALK FOR WINDOWS NT
StreetTalk for Windows NT provides directory capabilities that extend beyond
individual server communities - encompassing every item and activity in the
enterprise. This simplifies access to all network resources, regardless of
location. The combination of Windows NT and StreetTalk for Windows NT supplies
an enterprise-wide application platform and networking solution that scales to
any size, including tens of thousands of users. StreetTalk also includes
numerous security features.
VINES
VINES integrates Banyan's StreetTalk directory and a full suite of enterprise
network services such as security and management into one package. VINES
installs on PC servers and clients and permits users of the leading PC desktop
systems - DOS, OS/2(R), Windows(R)95, Windows NT and Macintosh(R) -to share
information and computing resources with each other and with host computing
environments throughout the enterprise. In December 1997, the Company
introduced VINES 8.0, which offers improved performance and features.
BEYONDMAIL
A full-featured e-mail product, the Company believes BeyondMail is among the
most advanced software available for managing electronic mail. With its unique
rules-based agent technology, BeyondMail helps people manage information with e-
mail, classifying messages intuitively in folders for instant recall and
filtering out junk mail. When BeyondMail's intelligent agents are combined with
easy-to-customize forms, businesses are able to automate complex procedures,
such as producing database reports and routing purchase orders for approval.
BeyondMail supports Windows clients and takes full advantage of StreetTalk and
Intelligent Messaging capabilities. In August 1997, the Company introduced
BeyondMail 3.0 for Intelligent Messaging, which offers improved performance and
features including enhanced mobile support.
INTELLIGENT MESSAGING
Intelligent Messaging is an enterprise-wide, client/server-based solution for
storing and transporting messages. Tightly integrated with StreetTalk directory
services, Intelligent Messaging eases use, reduces costs and facilitates the
deployment of large-scale messaging networks.
INTERNET PRODUCTS AND SERVICES
As a result of the Company's focus on Internet technology development, in 1997,
the Company released products for Internet users built on the Company's
traditional strengths in directory and messaging technology. The Internet
versions of BeyondMail offer full-featured messaging capabilities and time-
saving productivity enhancements.
In addition to its traditional, directory-based networking and messaging
solutions, the Company is developing a suite of intranet offerings that enable
organizations to create corporate intranets which broaden the scope of their
networks through the Internet. In the second quarter of 1997, the Company
introduced Banyan Intranet Connect, the first of the Company's new intranet
product initiatives, intranet server software that provides a flexible and cost-
effective way to access network files, printers and e-mail, using a standard web
browser. In the fourth quarter of 1997, the Company delivered Banyan Intranet
Protect, a web server solution that enables organizations to protect and share
intranet information.
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YEAR 2000 COMPLIANCE
In 1997, Banyan made investments in upgrading its products to be Year 2000
compliant. All the Company's current products are scheduled to be upgraded by
the end of 1998. In addition, the Company will offer customer services to
assist in the planning and implementing organizations' Year 2000 network
upgrades.
OTHER PRODUCTS AND SERVICES
UPGRADES AND SUBSCRIPTIONS
Banyan offers upgrade and subscription programs that enable its customers to
migrate cost-effectively to enhanced versions of StreetTalk for Windows NT,
VINES, BeyondMail and other product offerings as they become available.
Customers are encouraged to purchase, for a fixed annual fee, a subscription
contract for their installed Banyan products.
NETWORK APPLICATIONS
Banyan sells and supports several network applications programs that are
integrated with its enterprise network services. Electronic mail applications
for Intelligent Messaging are available for personal computers running DOS, OS/2
and the Macintosh operating system. A GUI-based management tool called
StreetTalk Explorer is available for StreetTalk for Windows NT and VINES
products. MNET, which is sold with Banyan's network management service, is a
utility program that monitors the network in real-time and allows for review of
network-wide operational and performance characteristics from any networked PC,
workstation or server. The VINES Assistant suite of utilities automates routine
tasks of network administration, such as renaming a user or changing security
privileges for a group of users or services.
THIRD-PARTY APPLICATION SOFTWARE
The Company actively encourages independent software vendors, system
integrators, system vendors and VARs to develop and market application software
for use with StreetTalk, VINES and BeyondMail. Banyan provides developers with
development tools, including documented APIs for enterprise network services, to
assist them in producing programs which are integrated with Banyan's enterprise
networking products. In addition, to aid these companies in marketing their
products to Banyan's customer base, the Company publishes an application
directory which includes more than 5,000 software programs that run in Banyan
environments. Through support for emerging industry standards, the Company
believes that it will greatly expand the number of applications available to its
customers.
SERVICES
A key element of the Company's strategy is to assure that customers are provided
with the technical support, training and consulting services required to build,
manage and optimize the network environment using Banyan products.
The Company maintains technical response centers in Westboro, Massachusetts;
Crawley, England; Tokyo, Japan; and Sydney, Australia. These centers provide
technical telephone support, on-line access and, to a lesser extent, on-site
support. In addition, pre-sales and post-sales support for partners and end
users is provided through field systems consultants.
The Professional Services organization includes the consulting services function
and the education services business. Consulting is a growing segment of
Banyan's business that offers customers and partners services for network
optimization, transition and implementation. These services are generally
offered as customized consulting services and in certain cases as packaged
services. When combined with other third party product and services, they are
positioned as solution offerings.
The Company offers a wide range of training programs for partners and end users.
Training is offered at the Westboro headquarters, as well as various regional
sites. On-site training classes are also offered at partner's sites as well as
end user locations. In addition, there are 56 worldwide Banyan Certified
Education Centers, which conduct training classes for users and administrators
of Banyan products.
CUSTOMERS
The Company estimates that it has approximately 7,000 customers with more than
8.0 million users worldwide. Banyan's customers, which include nearly one-half
of the Fortune 500 companies, typically are medium to large-size businesses,
financial institutions, professional organizations, universities, government
entities and not-for-profit organizations with multiple sites dispersed over
wide geographic areas.
For the year ended 1997, Ingram Micro Inc. accounted for approximately 11% of
the Company's revenues. For the years ended 1996 and 1995, Inacom Corporation
accounted for approximately 11% and 16% of the Company's revenues respectively.
In 1997, 1996 or 1995, no other customer or reseller accounted for more than
10% of the Company's revenues. The loss of any significant customer could have
a material adverse effect on the Company.
SWITCHBOARD INCORPORATED
The Company's majority-owned Switchboard subsidiary, the exclusive directory for
America Online's 11 million customers, reinforced its position as the Internet's
top-rated directory in 1997. Switchboard is an Internet-based directory service
that allows any individual with a web browser to look up the names and street
addresses of more than 106 million individuals and 11 million businesses in the
United States. This product is available at no charge to the user. Switchboard
generates revenues through display advertisements that are integrated with its
business listings, categorized to match a user's search criteria similar to
traditional Yellow Pages telephone directories.
During the year, Switchboard enhanced its functionality, traffic and advertising
base. To improve the Switchboard site's appeal, Switchboard added a unique web
site search capability called SideClick, software for creating customized
advertisements, and a suite of free software programs that includes e-mail and
web site design tools. Switchboard became the Internet's 10th most frequently
web site in January 1998, according to Media Metrix, an increase from #23 at the
end of 1996.
Today, leading businesses such as Sprint, IBM, Barnes & Noble, and Microsoft(R)
market their products and services on Switchboard. To build traffic in 1998,
Switchboard established a strategic relationship in late 1997 to attract users
of the popular AltaVista(TM) search engine to the Switchboard site.
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MARKETING, SALES AND DISTRIBUTION
The Company's marketing and distribution strategy focuses most of the Company's
field staff on direct consultative sales to key decision makers to create
product awareness and achieve design wins. Demand fulfillment is primarily
accomplished through Banyan's remarketing partners. The Company's remarketing
partners include aggregators (master value-added resellers that typically resell
to other resellers), system integrators (organizations that integrate third
party products into complete systems for sale to customers) and systems vendors
(hardware manufacturers that integrate third party products into their own
systems for sale to customers) that are qualified to install and support the
Company's products as part of a complete network solution for the customer.
Sales of products through remarketing partners accounted for approximately 60%,
80% and 90% of the Company's revenues in 1997, 1996 and 1995, respectively,
which when combined with certain services and Switchboard sales has increased
the share of the Company's direct business over each of the last two years. The
Company also sells products directly through its own sales force to certain
large end-user customers.
The Company's remarketing partners in the Americas as of December 31, 1997
include three aggregators and 865 channel partner sales sites. Banyan has
established authorization levels (Premier Network Integrator and Authorized
Network Integrator, as well as authorization levels for messaging resellers) to
distinguish each reseller organization's expertise in working with the Company's
products, as well as their overall network design, certified support centers,
training, and global support. The Company's aggregators are InaCom Corporation,
Ingram Micro and Information Access Inc.
In February 1997, the Company announced a new user-based pricing program, which
is designed to provide greater flexibility for platform deployment and a
simplified purchasing process. This user-based licensing provides an
alternative to Banyan's previous server-based licensing, allowing customers to
choose the most appropriate pricing model.
The Company's international sales currently are made primarily through
distributors in 75 countries. These distributors provide products, technical
support and follow-on service to local resellers, which in turn serve end-user
customers. The Company estimates that its resellers had approximately 300
international sales sites as of December 31, 1997. International sales
accounted for 29%, 24% and 23% of the Company's revenues in 1997, 1996 and 1995,
respectively. See Note O to the Company's Consolidated Financial Statements,
which are incorporated herein by reference to the Company's Annual Report to
Shareholders, for information as to the Company's revenues attributable to each
of the Company's geographic areas during the past three fiscal years.
During 1997, the Company's international distribution activities continued to be
augmented by a joint venture in Japan as well as two OEM agreements. During
1995, the Company had entered into a joint venture with Marubeni Corporation and
Nippon Telegraph and Telephone. At December 31, 1997, these Japanese companies
held a 33% equity interest in Nippon Banyan Systems Kabushiki Kaisha (NBSKK), a
majority-owned subsidiary of the Company. See Note P to the Company's
Consolidated Financial Statements, which are incorporated herein by reference
to the Company's Annual Report to Shareholders. In addition, the Company has
OEM relationships with Hitachi and Siemens Nixdorf, which includes development
and support.
The Company actively supports its resellers and other partners with its own
experienced sales and marketing organization. The Company's sales staff
solicits prospective customers, provides technical advice with respect to
Banyan's products and works closely with the particular Banyan reseller through
which the customer desires to purchase its networking products. The Company
believes that the active participation of its sales staff in the selling
process, in conjunction with the efforts of its resellers, is necessary in order
to provide customers with the level of support required for the implementation
of enterprise networks. Banyan conducts its sales and marketing
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activities from its principal offices in Westboro, Massachusetts as well as 26
other North American sales offices and 10 international offices located in
Australia, Belgium, France, Germany, Hong Kong, Japan, Malaysia, The Netherlands
and the United Kingdom. As of December 31, 1997, the Company's sales and
marketing organization consisted of 182 employees, of which 123 were in the
North American group and 59 were in the international group.
The Company also has entered into sales and support alliances with various
system vendors, including Wang, Hewlett Packard, NCR and Digital Equipment
Corporation. These vendors resell and support Banyan's products within their
customer base. Companies with which Banyan has established support arrangements
include NCR, Cabletron, Dell, Digital, Hewlett Packard, IBM, Proteon, Oracle,
Compaq, Cisco and Microsoft. Under these alliances, Banyan and its partners
exchange regularly updated technical information and offer mutual access to
technical support centers, training and advanced technical engineers in order to
facilitate problem resolution for customers with multi-vendor networks.
Delivery lead times for the Company's products are typically short and,
consequently, substantially all of the Company's revenues in each quarter result
from orders received in that quarter. Accordingly, the Company does not
maintain any significant backlog and believes that its backlog at any given
point in time is not a reliable indicator of future sales or earnings. The
absence of significant backlog may contribute to unpredictability in the
Company's results of operations. The Company's backlog of product orders at
December 31, 1997 and December 31, 1996 was immaterial.
PRODUCT DEVELOPMENT
The Company believes that its future success will depend in large part on its
ability to enhance and broaden its existing product lines to meet the evolving
needs of the enterprise network computing market and to continue developing and
delivering new open standards-based product offerings, including Internet-
related products. The Company's development efforts are currently focused on
enhancing the performance and functionality of its existing StreetTalk for
Windows
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NT, VINES, Intelligent Messaging and BeyondMail families of products, expanding
its offering of standards based enterprise network services, and new products
and applications for the Internet market, particularly Switchboard. In addition,
the Company anticipates expending significant resources in the continued
translation and localization of its product offerings in 1998.
As of December 31, 1997, Banyan had approximately 98 employees engaged in
research and development, test and quality assurance and technical
documentation. In 1997, 1996 and 1995, Banyan's product development expenditures
totaled $15.9 million, $21.9 million and $24.5 million, respectively. During
1998, the Company anticipates continued significant investment in product
development.
MANUFACTURING
The Company's software products are distributed as object code on CD-ROM and
standard magnetic diskettes. Included with the software products are security
codes and documentation, which is available on CD-ROM as well as in print. In
general, the Company duplicates all software diskettes in house. Most of the
CD-ROM replication is done by outside vendors, with the ability to produce
smaller volume production runs in-house. From its Manufacturing & Distribution
facility in Westboro, Massachusetts, Banyan ships products worldwide through
authorized network integrators, resellers and international distributors.
COMPETITION
The networking software industry is highly competitive and is characterized by
rapidly changing technology and evolving industry standards. The Company
competes with a number of companies, including Microsoft, Netscape and Novell,
which have substantially greater development, marketing, sales and financial
resources, distribution infrastructure, customer support organizations and name
recognition than those of the Company. The services business is highly
fragmented with no dominant set of networking integration or consulting
competitors worldwide that the Company directly competes against.
The Company has invested significant resources to develop products to bring the
Company's directory capabilities to Internet users. In 1996, the Company,
through a majority-owned subsidiary, introduced Switchboard, a directory service
for Internet users. In the first quarter of 1998, Switchboard, was rated by
Media Metrix as the Internet's tenth most frequently visited web site.
Switchboard expects to increase promotion and seek additional strategic
partnerships. The Company success will depend in part on its ability to enter
into strategic alliances with other Internet providers.
The Company believes principal competitive factors affecting the market for its
products include product functionality, performance, quality, reliability and
ease of use; quality of customer training and support; vendor reputation, and
price. The Company believes that competition in the industry is likely to
intensify as current competitors expand their product lines and new companies
enter the market. The Company's future success will depend in part on its
ability to respond promptly and effectively to the challenges of technological
change, evolving standards and its competitors' innovations by continually
enhancing its own product and support offerings, as well as its marketing
programs.
PROPRIETARY RIGHTS AND LICENSES
The Company does not currently hold any patents and currently relies upon a
combination of copyright, trademark and trade secret laws and contractual
provisions to establish and maintain its proprietary rights to its products.
The Company believes that because of the rapid pace of technological change in
the networking and computer industries, the legal protections for its
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products are less significant factors in the Company's success than the
knowledge, ability and experience of the Company's employees, the frequency of
product enhancements, and the timeliness and quality of support services
provided by the Company.
EMPLOYEES
At December 31, 1997, the Company employed 410 persons, including 182 in sales,
marketing and related activities, 98 in research and development, 53 in
customer support and education, 15 in manufacturing, and 62 in finance,
administration, and human resources. The Company has no collective bargaining
agreement with its employees. The Company believes that its relations with its
employees are good.
-11-
<PAGE>
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this item may be found in the Annual Report to
Shareholders and in the consolidated financial statements and schedules referred
to in Item 14 and filed as part of this 10-K. Such information is incorporated
herein by reference.
-12-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of or are included in this Annual
Report on Form 10-K:
1. Financial Statements:
-- Consolidated Balance Sheets as of December 31, 1997 and 1996.
-- Consolidated Statements of Operations for the years ended December
31, 1997, 1996, and 1995.
-- Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995.
-- Consolidated Statements of Cash Flows for the years ended December
31, 1997, 1996 and 1995.
-- Notes to Consolidated Financial Statements.
-- Report of Independent Accountants for the years ended December
31, 1997, 1996 and 1995.
-- Selected Financial Data for the years ended December 31, 1997,
1996, 1995, 1994, and 1993.
2. Financial Statement Schedules:
-- Report of Independent Accountants for the years ended December 31,
1997, 1996 and 1995.
-- Schedule II -- Valuation and Qualifying Accounts.
-- Schedules other than the one listed above have been omitted since
they are either not required, not applicable or the information is
otherwise included.
3. Listing of Exhibits:
-- The Exhibits filed as part of this Annual Report on Form 10-K are
listed in the Exhibit Index immediately preceding such Exhibits
and are incorporated herein by reference.
-13-
<PAGE>
(b) Reports on Form 8-K: On December 8, 1997, the Company filed a Form 8-K
regarding the Company's continued listing on the Nasdaq National Market
pursuant to Item 5 of Form 8-K. No other reports on Form 8-K were filed by
the Company during the last quarter of the year ended December 31, 1997
SCHEDULE II
BANYAN SYSTEMS INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING OF CHARGED TO COSTS BALANCE AT
DESCRIPTION PERIOD AND EXPENSES DEDUCTIONS END OF PERIOD
----------- ------ --------------- ---------- -------------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Reserve for price, sales and $ 7,168 $ 2,448 $ 5,895 $ 3,721
doubtful account allowance
Year ended December 31, 1996:
Reserve for price, sales and $ 5,636 $ 8,712 $ 7,180 $ 7,168
doubtful account allowance
Year ended December 31, 1995:
Reserve for price, sales and $ 6,596 $ 4,965 $ 5,925 $ 5,636
doubtful account allowance
</TABLE>
-14-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Banyan Systems
Incorporated has been incorporated by reference in this Form 10-K from page 30
of the 1997 Annual Report to Shareholders of Banyan Systems Incorporated. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule in Item 14(a)2 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole
presents fairly, in all material respects, the information required to be
included therein.
/s/ Coopers & Lybrand L.L.P.
----------------------------
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
January 27, 1998
except as to the information presented in
Note Q, for which the date is March 6, 1998
-15-
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: April 8, 1998 BANYAN SYSTEMS INCORPORATED
/s/ Richard M. Spaulding
------------------------
By: Richard M. Spaulding
Vice President and Chief Financial Officer
-16-
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER TITLE OF DOCUMENT
- ------ -----------------
3.1(2) Second Amended and Restated Articles of Organization of the
Company.
3.2(1) Amended and Restated By-Laws of the Company.
3.3(10) Certificate of Vote of Directors Establishing a Class or Series of
Stock
10.1+* Second Amended and Restated 1984 Incentive Stock Option Plan.
10.2+* Second Amended and Restated 1984 Non-Qualified Stock Option Plan.
10.3(6)(8)+ 1992 Stock Incentive Plan, as amended.
10.4(1)(8)+ 1992 Director Stock Option Plan, as amended.
10.6(7)+ Consulting Services Agreement dated as of November 11, 1996
between the Company and Burton Technology Partners, Ltd.
10.7(7)(8)+ Employment Agreement dated February 4, 1997 between the Company
and William P. Ferry, as amended.
10.8(1) Real Estate Sublease dated June 19, 1991, as amended to date,
between the Company and Sytron Corporation.
10.9(1) Lease Agreement dated April 21, 1989, as amended to date, between
the Company and CB Westboro C Limited Partnership. a Texas Limited
Partnership.
10.9A(3) Amendment to Lease Agreement dated April 21, 1993 between the
Company and CB Westboro C Limited Partnership, a Texas Limited
Partnership.
10.9B(5) Amendment to Lease Agreement dated April 21, 1993 between the
Company and Commonwealth Westboro Limited Partnership, a
Massachusetts Limited Partnership (as successor in interest to CB
Westboro C Limited Partnership, a Texas Limited Partnership).
10.10(1) Lease Agreement dated November 14, 1986, as amended to date,
between the Company and Aetna Real Estate Associated, L.P. (as
assignee of Flanders Realty Trust).
10.10A(3) Amendment to Lease Agreement dated April 21, 1993 between the
Company and Aetna Real Estate, L.P. (as assignee of Flanders
Realty Trust).
10.10B* Fifth Lease Extension and Modification Agreement made as of
October 15, 1997 between Aetna Real Estate Associates and the
Company.
10.11(1) Lease dated July 26, 1989 among the Company, Banyan Systems (UK)
Limited and Grosvenor Square Properties Developments Limited.
10.13(4) Joint Venture Agreement dated March 22, 1995 between the Company
and Marubeni Corporation.
10.13A(5) Joint Venture Agreement dated June 15, 1995 between and among,
the Company, Marubeni Corporation and NTT Advanced Technology
Corporation.
-17-
<PAGE>
10.14+* Senior Executive Termination Benefits Agreement dated September
15, 1997 between the Company and Richard M. Spaulding.
10.15(9) Loan and Security Agreement dated as of September 4, 1997 by and
between Foothill Capital Corporation and the Company.
10.16* Consent and Amendment to Loan and Security Agreement dated as of
March 5, 1998 by and between Foothill Capital Corporation and the
Company.
10.17(9) Securities Issuance Agreement dated as of September 4 1997 by
and between Foothill Capital Corporation and the Company.
10.18(9) Form of Warrant issued by and to be issued by the Company to
Foothill Capital Corporation.
10.18(10) Preferred Stock and Warrant Purchase Agreement dated as of
March 5, 1998 between the Company and HarbourVest Partners
V--Direct Fund L.P. ("HarbourVest").
10.19(10) Warrant to purchase shares of Series B Convertible Preferred
Stock issued by the Company to HarbourVest as of March 5, 1998.
10.20(10) Warrant to purchase shares of Series C Convertible Preferred
Stock issued by the Company to HarbourVest as of March 5, 1998.
10.21+* Separation Agreement and Release and Waiver of Claims dated as of
May 31, 1997 between the Company and David C. Mahoney.
10.22+* Employment Letter dated as of May 31, 1997 between the Company and
Robert D. Burke.
10.23+* Employment Letter dated as of May 31, 1997 between the Company and
William E. Warner, Jr.
13** Selected portions of Annual Report to Shareholders for the year
ended December 31, 1997 (which is not deemed to be "filed" except
to the extent that portions thereof are expressly incorporated by
reference in this Annual Report on Form 10-K).
21* Subsidiaries of the Company.
23** Consent of Coopers & Lybrand L.L.P.
27.1* Financial Data Schedule.
27.2* Restated Financial Data Schedule for the nine months ended
September 30, 1997.
27.3* Restated Financial Data Schedule for the six months ended
June 30, 1997.
27.4* Restated Financial Data Schedule for the three months ended
March 31, 1997.
27.5* Restated Financial Data Schedule for the fiscal year ended
December 31, 1996.
27.6* Restated Financial Data Schedule for the nine months ended
September 30, 1996.
27.7* Restated Financial Data Schedule for the six months ended
June 30, 1996.
27.8* Restated Financial Data Schedule for the three months ended
March 31, 1996.
-18-
<PAGE>
+ Management contract or compensation plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
* Previously filed.
** Amended and restated as filed herewith.
(1) Incorporated herein by reference to the exhibits to the Company's
Registration statement on Form S-1 (File No. 33-49194).
(2) Incorporated herein by reference to the exhibits to the Company's
Registration statement on Form S-8 (File No. 33-54140).
(3) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 1993.
(4) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 1995.
(5) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 1995.
(6) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995.
(7) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
(8) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the fiscal year ended June 30, 1997.
(9) Incorporated herein by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the fiscal year ended September 30, 1997.
(10) Incorporated herein by reference to the exhibits to the Company's Current
Report on Form 8-K dated March 5, 1998.
-19-
<PAGE>
- ------------------
1997 Annual Report
- ------------------
Exhibit 13
<PAGE>
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
- --------
Overview
- --------
Banyan designs, develops and markets standards-based networking directory and
messaging products that help people to communicate across enterprise networks,
intranets and the Internet. Since 1985, the Company has been a pioneer in the
computer networking field, and currently offers a wide range of software
products and professional services. The Company's primary software products
include StreetTalk for Windows NT,(R) VINES,(R) Intelligent Messaging,(TM)
BeyondMail(R) and several intranet solutions. In addition, the Company delivers
professional services including technical support, education and consulting,
including network performance, integration and Year 2000 compliance services.
The Company's majority-owned subsidiary, Switchboard Incorporated, hosts the
Internet's leading people-to-people and business directory services aimed at
generating advertising revenues from major domestic corporations. In January
1998, Switchboard was rated by Media Metrix, the PC Meter Company, as the
Internet's tenth most frequently visited web site.
During 1997, Banyan broadened its networking software solutions through the
delivery of several enhanced product offerings and several new intranet
products. In the second quarter of 1997, the Company enhanced its platform
support for its directory and messaging services by delivering StreetTalk for
Windows NT 7.5 and Intelligent Messaging for Windows NT 7.5. Additionally, in
the second quarter of 1997, the Company introduced Banyan Intranet Connect, the
first of the Company's new intranet product initiatives, intranet server
software that provides a flexible and cost-effective way to access network
files, printers and e-mail, using a standard web browser. In the third quarter
of 1997, the Company announced the availability of BeyondMail 3.0 for
Intelligent Messaging which provides enhanced mobile support and extends rules-
based capabilities. In the fourth quarter of 1997, the Company delivered Banyan
Intranet Protect, a web server software solution that enables organizations to
protect and share intranet information securely over their enterprise networks.
Additionally, in the fourth quarter of 1997, the Company introduced the next
major revision of its VINES networking software, VINES 8.0, which provides
corporate networks with increased scalability, ease of management and lower cost
of ownership.
Although Banyan made progress in expanding its network solutions and further
establishing its Internet products identity with the introduction of its
intranet suite of products and expansion of its Switchboard business, the
Company's operating results for 1996 and 1997 were negatively impacted by a
number of factors, including delays in delivery of several products, as well as
translated versions of these products, the introduction of new competitive
product offerings by other vendors, and an effort by the Company to reduce its
worldwide channel inventories. To address these factors, the Company
restructured its operations in the quarter ended December 31, 1996 and
implemented a further reorganization in the quarter ended June 30, 1997,
following the hiring of a new chief executive officer in February 1997. The 1997
reorganization, which was intended to stabilize and rejuvenate the business, and
ultimately achieve sustainable, long-term profitable growth, resulted in a 22%
reduction of its work force, and consolidated facilities and product lines in
order to balance expenses with expected revenues. After incurring net losses in
the first half of 1997, the Company reported net income in the second half of
1997.
- --------
Revenues
- --------
Total revenues for 1997 decreased 29% to $74.3 million, compared with $105.4
million in 1996 and $129.7 million in 1995. The decrease in 1997 was primarily
due to lower software revenues. The decrease in 1996 was primarily due to lower
software revenues as well as declines in services revenues. The Company's
software revenues for 1997 decreased 34% to $57.8 million, compared with $87.3
million in 1996 and $105.2 million in 1995. The decline in software revenues in
1997 was primarily due to lower sales of the Company's VINES and messaging
products, as a result of competitive product offerings as well as delays in the
delivery of new versions of BeyondMail IM. In addition, the decline in software
revenues in 1997 was attributable to a decline in third-party products as a
result of the Company's focus on its core product set as part of its
restructuring and other activities in the quarter ended June 30, 1997. The
decline in software revenues in 1996 was attributable primarily to lower
revenues from the Company's VINES offerings and messaging products due to delays
in the delivery of extensions, and new and translated versions of VINES and
BeyondMail, as well as reduced shipments to reseller and other distribution
partners in an effort to reduce worldwide inventories by approximately $15.0
million in 1996. The Company's services revenues for 1997 decreased 4% to $15.8
million, compared with $16.5 million in 1996 and $21.1 million in 1995. The
decrease in services revenues in 1997 was attributable to lower revenues from
education services. The decrease was offset in part by increases in revenues
from consulting services delivered by the Company, particularly in the second
half of 1997. The decline in services revenues in 1996 was primarily
attributable to lower revenues from education services and end-user support
contracts. Hardware revenues declined 59% in 1997 to $0.7 million, compared with
$1.7 million in 1996 and $3.5 million in 1995, due to the phase-out of the
Company's hardware business.
<PAGE>
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
North American revenues for 1997 decreased 34% to $53.0 million, compared with
$79.9 million in 1996 and $100.0 million in 1995. The decreases in 1997 and 1996
were attributable primarily to lower revenues from the Company's VINES and
messaging products as well as reduced shipments to third-party distribution
partners in an effort to reduce channel inventories. International revenues for
1997 decreased 17% to $21.3 million, compared with $25.6 million in 1996 and
$29.7 million in 1995. The decrease in 1997 was due to lower revenues in Asia
Pacific/Japan primarily due to channel inventory reduction efforts, particularly
in Japan, and delayed purchasing decisions in Southeast Asia due to economic
uncertainty in the region as a result of financial market instability in the
fourth quarter of 1997. The decrease in 1996 was primarily due to lower revenues
in Europe particularly related to sales of VINES products.
- -------------
Gross Margins
- -------------
Gross margins for software in 1997 were 88.5%, or $51.2 million, compared with
87.7%, or $76.5 million, in 1996 and 86.9%, or $91.4 million, in 1995. The
increase in gross margin percentage in 1997 was primarily due to a lower
proportion of product revenues from sales of lower-margin, third-party products
as a result of the Company's focus on its core product set, as well as cost
reduction efforts. The decreases in gross margin dollars in 1997 and 1996 were
due to the decline in software revenues. The increase in gross margin percentage
in 1996 compared with 1995 was primarily due to lower manufacturing costs as a
result of the Company's restructuring in the quarter ended December 31, 1995,
which reduced staffing and related facility costs. Cost of software revenues
consist of product media, documentation, manufacturing costs and amortization of
capitalized software.
Gross margins for services in 1997 were 32.0%, or $5.1 million, compared with
18.1%, or $3.0 million, in 1996 and 34.8%, or $7.3 million, in 1995. The
increases in gross margin percentages and dollars in 1997 were primarily due to
lower personnel costs as a result of the reduction in force as part of the
Company's reorganizations in the quarters ended December 31, 1996 and June 30,
1997 and the growth in the Company's consulting revenues. The decreases in gross
margin percentages and dollars in 1996 were primarily due to lower revenues from
education classes and end-user support contracts. Cost of services revenues
consists primarily of customer support costs, including Technical Response
Centers, consulting staff and tools, third-party field service costs, costs of
training materials and staff.
- ------------------
Operating Expenses
- ------------------
Sales and marketing expenses decreased 34% to $40.2 million in 1997, compared
with $60.8 million in 1996 and $80.8 million in 1995. The decrease in 1997 was
primarily due to lower sales and marketing staffing and personnel costs as a
result of the reduction in work force as part of the Company's reorganization
efforts in the quarters ended December 31, 1996 and June 30, 1997, as well as a
redeployment of staff into the Company's expanding consulting activities. In
addition, variable sales costs, including commissions, decreased due to lower
revenues in 1997. The decrease in 1996 was primarily due to lower sales staffing
and facility costs as a result of the reduction in force as part of the
Company's reorganization in the quarter ended December 31, 1995. Sales and
marketing expenses as a percentage of revenues were 54%, 58% and 62% for 1997,
1996 and 1995, respectively.
Product development expenses decreased 27% to $15.9 million in 1997, compared
with $21.9 million in 1996 and $24.5 million in 1995. The decrease in 1997 was
primarily due to lower staffing and a focus on the Company's core product set as
a result of the Company's reorganization efforts in the quarters ended December
31, 1996 and June 30, 1997. The decrease in 1996 was primarily due to a
reduction in staffing as a result of the Company's reorganization in the quarter
ended December 31, 1995. The Company continues to focus its product development
resources on enhancing its existing product offerings. The Company has also
increased its investment in Internet-related product initiatives, including
remote access network capabilities, security protection capabilities, and
Switchboard Incorporated technology and services. Additionally, the Company is
also employing resources to ensure its product offerings will be year 2000
compliant. It is the Company's intention to modify and test all of its offerings
for year 2000 compliance by the end of 1998. During 1997, 1996 and 1995, the
Company capitalized $0.5 million, $2.3 million and $1.9 million of software
costs, which represented 3%, 10% and 7% of total product development
expenditures for the respective years. The decrease in the Company's capitalized
software costs in 1997 related primarily to the reduction in cost of delivering
current year product offerings. The increase in the Company's capitalized
software costs in 1996 related primarily to VINES 7.0 and Windows NT-based
products and localization of its product offerings. Product development expenses
as a percentage of revenues were 21%, 21% and 19% for 1997, 1996 and 1995,
respectively.
<PAGE>
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
General and administrative expenses decreased 21% to $9.1 million in 1997,
compared with $11.5 million in 1996 and $13.2 million in 1995. The decrease in
1997 was primarily due to lower administrative and personnel costs as a result
of the reduction in staffing as part of the Company's reorganization efforts in
the quarters ended December 31, 1996 and June 30, 1997. The decrease in 1996 was
primarily due to lower administrative and personnel costs as a result of the
reduction in force as part of the Company's reorganization in the quarter ended
December 31, 1995. General and administrative expenses as a percentage of
revenues were 12%, 11% and 10% for 1997, 1996 and 1995, respectively.
In 1997, the Company recorded net pre-tax restructuring and other charges of
$8.0 million composed primarily of $1.4 million for severance costs related to
the reduction of approximately 22% of the Company's work force, $1.7 million for
the write-off of idle assets related to the restructuring, and $4.9 million for
costs related to facility and product line consolidation. As of December 31,
1997, the 1997 restructuring resulted in 78 employee separations. The actions
were substantially completed in 1997.
In 1996, the Company recorded a pre-tax restructuring charge of $5.5 million
composed of $1.4 million for closure or consolidation of leased facilities, $3.2
million for severance and related costs and $0.9 million for the write-off of
idle assets related to the restructuring. During 1996, the restructuring action
resulted in 70 employee separations. The actions related to this restructuring
were substantially completed in 1997.
In 1995, the Company recorded total restructuring and other charges of $15.8
million in connection with the reorganization of its operations into a
divisional structure, a consolidation of distribution activities and a
simplification of product configurations. The Company recorded pre-tax
restructuring charges of $7.8 million related to the reorganization and other
charges of $8.0 million related to the consolidation of distribution activities
and the simplification of product configurations. During 1995, the restructuring
action resulted in 81 employee separations. Substantially all remaining actions,
which primarily included the elimination of certain channel partners, closure or
consolidation of leased facilities and 15 employee separations, were completed
in 1996.
- ----------------------
Other Income/(Expense)
- ----------------------
Other income/(expense) decreased to $(0.1) million in 1997 compared with $1.1
million in 1996 and $3.7 million in 1995. The decrease in 1997 was due primarily
to foreign exchange losses related to weakened local currencies in Asia
Pacific/Japan subsidiaries and lower levels of available funds invested in
marketable securities. The decrease in 1996 was due to lower levels of available
funds invested in marketable securities and the inclusion of a $2.0 million,
one-time gain on the sale of an unconsolidated affiliate in 1995.
- ------------
Income Taxes
- ------------
No tax provision, other than that required for foreign income and foreign
withholding taxes, was recorded for 1997 due to the Company's net operating
loss. Losses were not benefited in 1997. The effective tax provision for 1997
was 1.5% compared with a provision of 50% in 1996 and a benefit of 30% in 1995.
The effective tax rate for 1996 was principally affected by the establishment of
a valuation allowance for previously recorded deferred tax assets of $8.0
million based upon management's assessment of future realizability.
Additionally, losses were not benefited in 1996 and certain foreign taxes were
included in the tax provision. The effective tax rate for 1995 principally
reflects the benefit of the Company's net operating losses offset in part by
foreign losses which could not be benefited. Management has considered recent
results of operations and concluded that it is more likely than not that the
deferred tax assets will not be realizable.
- -------------
Other Matters
- -------------
During the fourth quarter of 1997, the Company was in discussions with The
Nasdaq Stock Market, Inc. ("NSM") concerning the continued listing of the
Company's common stock on the Nasdaq National Market ("NNM"). As a condition to
continued listing, NSM required that the Company achieve a specified minimum
level of net tangible assets. On February 2, 1998, the Company announced that it
was officially informed by NSM that the Company was in compliance with NSM's
continued listing requirements to remain on the NNM.
<PAGE>
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
In June 1997, Statement of Financial Accounting Standards ("SFAS") 130,
"Reporting Comprehensive Income," was issued which requires businesses to
disclose comprehensive income and its components in general purpose financial
statements, with reclassification of prior period financial statements. SFAS 130
is effective for fiscal periods beginning after December 15, 1997 and its
adoption is not expected to have a material impact on the Company's disclosures.
In June 1997, SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information" was issued which redefines how operating segments are determined
and requires disclosures of certain financial and descriptive information about
a company's operating segments. SFAS 131 is effective for fiscal periods
beginning after December 15, 1997 and its adoption may require additional
disclosure of the Company's historical financial data.
In October 1997, Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"), was issued which provides guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions. SOP 97-2
is effective for transactions entered into in fiscal years beginning after
December 15, 1997. The Company will adopt the guidelines of SOP 97-2 as of
January 1, 1998 and does not expect adoption to have a material impact on the
Company's financial results.
- ------------------------------------------
Factors Affecting Future Operating Results
- ------------------------------------------
Certain of the information contained in this Annual Report, including, without
limitation, information with respect to the Company's plans and strategy for its
business, statements relating to the sufficiency of cash and cash equivalent
balances, available sources of financing, anticipated expenditures and the
intended effects of the Company's restructuring, sales and marketing, and
product development efforts, consists of forward-looking statements. Any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "expects," "anticipates," "plans" and similar expressions are
intended to identify forward-looking statements. Important factors that could
cause actual results to differ materially from the forward-looking statements
include the following:
A majority of the Company's product sales are to existing customers for upgrade
or expansion of their networks. The Company's results will depend on its ability
both to continue to sell products for use in networks of existing customers and
to attract new customers for the Company's products. There can be no assurance
the Company will be successful in its sales and marketing efforts. In addition,
the Company has experienced extended selling cycles due to competitive products
introduced by other vendors, an increase in multi-year customer agreements and
longer evaluation of operating systems and hardware platforms by potential
customers. The Company expects that extended selling cycles will continue to
affect the Company's operating results for the foreseeable future.
The Company's results are dependent on its ability to enhance existing products
and introduce new products on a timely basis, and to achieve market acceptance
for such enhanced and new products. The Company's results in 1996 and 1997 were
adversely affected by delays in the release and localization of certain
products, and there can be no assurance that the Company will not experience
similar delays in the future. In June 1997, the Company introduced StreetTalk
for Windows NT 7.5, which integrates the Windows NT operating system into a
VINES network while providing improved support for TCP/IP standards. In June
1997, the Company introduced Banyan Intranet Connect, the first of the Company's
new intranet product initiatives, intranet server software that provides a
flexible and cost-effective way to access network files, printers and e-mail,
using a standard web browser. In August 1997, the Company introduced BeyondMail
3.0 for Intelligent Messaging which provides enhanced mobile support. In October
1997, the Company delivered Banyan Intranet Protect, a web server software
solution that enables organizations to protect and share intranet information
securely over their enterprise networks. In December 1997, the Company
introduced the next major revision of its VINES networking software, VINES 8.0,
which provides corporate networks with increased scalability, ease of management
and lower cost of ownership. Failure of these products to achieve market
acceptance could have a material adverse effect on the Company's future results
of operations.
<PAGE>
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
The Company has invested significant resources to develop products and services
to bring the Company's directory and messaging capabilities to Internet users.
In 1996, the Company, through a majority-owned subsidiary, introduced
Switchboard, a directory service for Internet users. The Company has limited
experience in developing or selling products for the Internet, and the success
of the Company will depend in part on its ability to enter into strategic
alliances with other Internet providers. Any delay in developing additional or
enhanced products and services for the Internet or failure of its Internet
products and services to achieve increased market acceptance could have a
material adverse effect on the Company's future results of operations.
The markets for the Company's products are highly competitive and characterized
by rapidly changing technology. There can be no assurance that current or
potential competitors will not introduce products that offer performance or
other features that are more attractive than those of the Company's products.
Many of the Company's competitors have greater name recognition, larger
installed bases and greater financial resources than the Company and therefore
may be able to adapt more quickly to new or emerging technologies and changes in
customer requirements. Other factors that may affect the Company's future
operating results include its ability to expand its international sales, its
dependence on indirect reseller channels, declines in purchases by any major
reseller, and fluctuations in currency exchange rates.
During the past three years, the Company's operating results were negatively
impacted by a number of factors, including delays in delivery of several
products, as well as translated versions of these products, the introduction of
new competitive product offerings by other vendors, and an effort by the Company
to reduce its worldwide channel inventories. To address these factors, the
Company has undertaken a series of restructuring and other activities. In 1996,
the Company announced a reorganization of its operations, including the search
for a new president and chief executive officer and a reduction of approximately
15% of its work force. The Company also reduced worldwide channel inventories of
its distribution partners by approximately $9.0 million in the quarter ended
December 31, 1996, which contributed to a decline in software revenues and a net
operating loss in the quarter ended December 31, 1996. In the second quarter of
1997, following the hiring of the new president and chief executive officer, the
Company announced a further reorganization of its operations. As a result of the
reorganization, the Company recorded net pre-tax restructuring and other charges
of $8.0 million for the year ended December 31, 1997. The restructuring and
other charges provided for severance costs related to the reduction of
approximately 22% of the Company's work force and costs related to facility and
product line consolidations. There can be no assurance the steps taken by the
Company to reorganize its operations will produce the intended benefits. In
addition, the Company's future success will depend on its ability to retain its
key employees and attract new employees, and there can be no assurance it will
be able to do so.
The Company is currently engaged in a significant product development investment
to ensure its product offerings will be year 2000 compliant. It is the Company's
intention to modify and test all of its offerings for year 2000 compliance by
the end of 1998. Failure to timely deliver this capability could have a material
adverse effect on the Company's future results of operations. The Company is
also engaged in ensuring its internal operating systems are year 2000 compliant.
The Company has a formal plan to address the matter and believes costs
associated with this effort are immaterial.
Because of the foregoing factors, the Company believes that period-to-period
comparisons of its financial results are not necessarily meaningful and expects
that its results of operations may fluctuate from period-to-period in the
future.
<PAGE>
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
- -------------------------------
Liquidity and Capital Resources
- -------------------------------
At December 31, 1997, cash and cash equivalents combined with marketable
securities were $10.9 million, compared with $19.2 million at December 31, 1996.
Cash and cash equivalents decreased $3.9 million from December 31, 1996,
resulting in a cash balance of $6.7 million at December 31, 1997. The decrease
was due principally to the net loss from operations for the year, a $4.1 million
decrease in accounts payable and accrued compensation and expenses, and a $3.5
million decrease in accrued costs for restructuring and other charges, offset by
$7.8 million of depreciation and amortization, $5.8 million in non-cash
restructuring charges, $4.4 million of proceeds from marketable securities, a
$2.5 million decrease in accounts receivable, and various other operating,
financing and investing activities. Working capital decreased from a $1.5
million deficit at December 31, 1996 to a $2.7 million deficit at December 31,
1997.
In April 1997, the Company announced a reorganization of its operations. As a
result of the reorganization, the Company recorded net pre-tax restructuring and
other charges of $8.0 million. The restructuring and other charges are expected
to reduce cash flow by approximately $3.1 million, of which $2.7 million had
been expended through December 31, 1997. In the quarter ended December 31, 1996,
the Company recorded a restructuring charge of $5.5 million. The restructuring
charge is expected to reduce cash flow by approximately $3.8 million, of which
$3.3 million had been expended through December 31, 1997. Management believes
that remaining accrued balances are adequate to cover future expenditures
associated with the 1997 and 1996 restructuring and other changes.
On September 4, 1997, the Company entered into a $15.0 million line of credit
agreement (the "Credit Agreement") with Foothill Capital Corporation
("Foothill"), replacing the Company's prior $10.0 million credit facility which
expired in May 1997. In general, the Company's obligations under the Credit
Agreement bear interest at the variable base rate per annum of Norwest Bank
Minnesota, National Association. The Credit Agreement has a three-year initial
term and is renewable thereafter for successive one year periods. Each year
during the initial term of the Credit Agreement, Foothill will be granted
warrants to purchase 75,000 shares of the Company's common stock at the then
current fair market value. There were no amounts outstanding under the line of
credit agreements during the years ended December 31, 1997 and 1996.
On March 6, 1998, the Company received a $10.0 million equity investment from
HarbourVest Partners LLC. Under the terms of the purchase agreement, HarbourVest
purchased convertible preferred stock and has warrants to acquire additional
convertible preferred stock. In the event the Company's stockholders do not
approve an increase in the number of shares of common stock authorized for
issuance from 25,000,000 to 35,000,000 by June 30, 1998, the Company may be
required to repurchase 40% of the HarbourVest preferred stock and warrants for
$4.0 million. On March 6, 1998, the Company received $10.0 million in proceeds
from the sale of preferred stock which are available for working capital
requirements.
The Company believes that existing cash and marketable securities, combined with
cash expected to be generated from operations and the availability of the line
of credit, will be sufficient to fund the Company's operations through at least
December 31, 1998.
<PAGE>
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
(in thousands, except share amounts)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 6,674 $ 8,314
Restricted cash and cash equivalents (Note P) - 2,299
Marketable securities 4,202 4,139
Accounts receivable, less allowances of $3,721 and $7,168 16,960 19,754
Inventories 1,023 2,863
Software licenses - 3,016
Other current assets 3,113 3,368
------------------------------------------------------------------------------------------------------------------
Total current assets 31,972 43,753
Property and equipment, net 5,810 13,565
Marketable securities - 4,436
Other assets, net of accumulated amortization of $3,770 and $5,661 5,146 7,778
- ----------------------------------------------------------------------------------------------------------------------
Total assets $ 42,928 $ 69,532
===========================================================================================================
Liabilities
Current liabilities:
Accounts payable $ 2,039 $ 3,633
Accrued compensation 5,222 6,338
Accrued expenses 6,165 7,629
Accrued costs for restructuring and other charges (Note F) 939 4,908
Income taxes payable 270 212
Software license payable, current portion - 1,581
Note payable 1,139 1,079
Deferred revenue 18,930 19,886
------------------------------------------------------------------------------------------------------------------
Total current liabilities 34,704 45,266
Commitments and contingencies (Notes H and P)
Software license payable, non-current 590 590
Minority interests in consolidated subsidiaries 2,557 3,354
Shareholders' Equity
Common stock, $.01 par value; authorized 25,000,000 shares;
issued and outstanding 19,346,677 and 18,996,882 shares, respectively 193 190
Preferred stock, $.01 par value; authorized 1,000,000 shares;
none issued and outstanding - -
Additional paid-in capital 66,020 64,581
Accumulated deficit (32,700) (15,792)
Treasury stock at cost; 1,848,000 shares (28,564) (28,564)
Foreign currency translation adjustment 136 (23)
Unrealized loss on investments (8) (70)
--------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 5,077 20,322
-------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 42,928 $ 69,532
===========================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
- --------------------------------------------------------------------------------
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Revenues:
Software $ 57,849 $ 87,281 $ 105,160
Services 15,796 16,456 21,059
Hardware 697 1,687 3,464
------------------------------------------------------------------------------------------------------------
Total revenues 74,342 105,424 129,683
Cost of Revenues:
Software 6,664 10,758 13,771
Services 10,741 13,470 13,727
Hardware 275 574 2,064
------------------------------------------------------------------------------------------------------------
Total cost of revenues 17,680 24,802 29,562
----------------------------------------------------------------------------------------------------------
Gross margin 56,662 80,622 100,121
Operating Expenses:
Sales and marketing 40,236 60,811 80,810
Product development 15,909 21,875 24,502
General and administrative 9,069 11,521 13,208
Restructuring and other charges (Note F) 8,000 5,500 15,802
------------------------------------------------------------------------------------------------------------
Total operating expenses 73,214 99,707 134,322
----------------------------------------------------------------------------------------------------------
Loss from operations (16,552) (19,085) (34,201)
Other (Expense)/Income
Gain on sale of equity investment -- -- 2,036
Interest income 482 1,088 1,812
Minority interest 847 571 594
Interest expense (96) (80) (90)
Other, net (1,334) (511) (666)
------------------------------------------------------------------------------------------------------------
Total other (expense)/income (101) 1,068 3,686
----------------------------------------------------------------------------------------------------------
Loss before taxes (16,653) (18,017) (30,515)
Provision/(benefit) for income taxes 255 9,013 (9,155)
- --------------------------------------------------------------------------------------------------------------
Net loss $ (16,908) $ (27,030) $ (21,360)
==============================================================================================================
Net Loss Per Share:
Basic and diluted $ (0.97) $ (1.59) $ (1.27)
==========================================================================================================
Weighted average number of common shares outstanding:
Basic and diluted 17,367 16,947 16,797
==========================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
- --------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three years ended December 31, 1997
---------------------------------------------------------------------------------------------
Common Stock Treasury Stock (Accumulated Foreign
--------------------------------------------- Additional Deficit)/ Currency
Number of Par Number of Paid-in Retained Translation
Shares Value Shares Cost Capital Earnings Adjustment
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(in thousands, except share amounts)
Balance, December 31, 1994 18,030,643 $180 (1,000,000) $(15,878) $57,432 $32,598 $(378)
Issuance of stock under
stock and option
plans including
related tax benefits 592,511 6 4,915
Purchase of treasury stock (848,000) (12,686)
Net loss (21,360)
Foreign currency
translation adjustment (490)
Change in net
unrealized gain/(loss)
on investments
--------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 18,623,154 186 (1,848,000) (28,564) 62,347 11,238 (868)
Issuance of stock under
stock and option plans 373,728 4 2,234
Net loss (27,030)
Foreign currency
translation adjustment 845
Change in net
unrealized gain/(loss)
on investments
--------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 18,996,882 190 (1,848,000) (28,564) 64,581 (15,792) (23)
Issuance of stock under
stock and option plans 349,795 3 1,439
Net loss (16,908)
Foreign currency
translation adjustment 159
Change in net
unrealized gain/(loss)
on investments
--------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 19,346,677 $193 (1,848,000) $(28,564) $66,020 $(32,700) $136
====================================================================================================================================
<CAPTION>
Three years ended December 31, 1997
------------------------------------
Net
Unrealized Total
Gain/(Loss) on Shareholders'
Investments Equity
------------------------------------
<S> <C> <C>
(in thousands, except share amounts)
Balance, December 31, 1994 $ (75) $ 73,879
Issuance of stock under
stock and option
plans including
related tax benefits 4,921
Purchase of treasury stock (12,686)
Net loss (21,360)
Foreign currency
translation adjustment (490)
Change in net
unrealized gain/(loss)
on investments 78 78
---------------------------------------------------------------------------
Balance, December 31, 1995 3 44,342
Issuance of stock under
stock and option plans 2,238
Net loss (27,030)
Foreign currency
translation adjustment 845
Change in net
unrealized gain/(loss)
on investments (73) (73)
---------------------------------------------------------------------------
Balance, December 31, 1996 (70) 20,322
Issuance of stock under
stock and option plans 1,442
Net loss (16,908)
Foreign currency
translation adjustment 159
Change in net
unrealized gain/(loss)
on investments 62 62
---------------------------------------------------------------------------
Balance, December 31, 1997 $ (8) $ 5,077
===============================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(16,908) $(27,030) $(21,360)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 7,847 8,928 9,957
Restructuring and other charges, noncash portion 5,835 1,852 5,457
Gain on sale of investments - - (2,036)
Changes in operating assets and liabilities:
Decrease in accounts receivable 2,475 4,521 9,156
Decrease/(increase) in inventories 1,335 (292) (883)
Decrease/(increase) in income tax receivable - 6,042 (6,042)
Decrease/(increase) in other current assets 1,214 (576) (1,468)
(Decrease) in accounts payable and accrued
compensation and expenses (4,056) (2,893) (1,496)
(Decrease)/increase in accrued costs for restructuring
and other charges (3,549) (5,149) 9,007
Decrease/(increase) in software license payable, net (244) 964 586
Increase/(decrease) in income taxes payable 58 121 (1,712)
Decrease/(increase) in deferred taxes - 9,926 (3,078)
(Decrease)/increase in deferred revenue (921) (2,448) 872
(Decrease)/increase in other liabilities (787) (211) 124
Decrease in other noncurrent assets 195 68 500
------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) operating activities (7,506) (6,177) (2,416)
Cash Flows from Investing Activities:
Capital expenditures (1,328) (5,683) (9,616)
(Purchases of)/proceeds from investments in unconsolidated affiliates - (2,001) 2,536
Acquisition of software licenses (150) (1,125) (1,314)
Capitalization of software costs (549) (2,314) (1,919)
Proceeds from marketable securities, net 4,435 10,217 9,675
----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by/(used in) investing activities 2,408 (906) (638)
Cash Flows from Financing Activities:
Proceeds from stock plan purchases, stock options
and warrants and related tax benefits 944 2,238 4,921
Minority interest equity investments 50 3,095 1,444
Purchase of treasury stock - - (12,686)
----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by/(used in) financing activities 994 5,333 (6,321)
Effect of exchange rate changes on cash and cash equivalents 165 (35) (460)
- ------------------------------------------------------------------------------------------------------------------------------------
Net (decrease) in cash and cash equivalents (3,939) (1,785) (9,835)
Cash and cash equivalents at beginning of the year 10,613 12,398 22,233
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the year $ 6,674 $ 10,613 $ 12,398
====================================================================================================================================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 36 $ 20 $ 30
Income taxes $ 522 $ 688 $ 3,308
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- ------------------------
A. Nature of Business
- ------------------------
Banyan designs, develops and markets standards-based networking directory
and messaging products that help people to communicate across enterprise
networks, intranets and the Internet. Since 1985, the Company has been a
pioneer in the computer networking field, and currently offers a wide range
of software products and professional services.
- ------------------------------------------------
B. Summary of Significant Accounting Policies
- ------------------------------------------------
Basis of Presentation
---------------------------------------------------------------------------
The consolidated financial statements comprise those of the Company and its
subsidiaries. Intercompany accounts and transactions have been eliminated.
Certain previously reported amounts have been reclassified to conform to
the current method of presentation.
Cash Equivalents and Marketable Securities
---------------------------------------------------------------------------
The Company classifies all of its marketable debt and marketable equity
securities as available for sale securities. These securities are valued at
their fair value. Unrealized holding gains and losses are reported as a net
amount in a separate component of stockholders' equity (see Note K).
The Company considers all highly liquid investments with a maturity of
three months or less to be cash equivalents. Those instruments with
maturities between three and twelve months are considered to be short-term
marketable securities, and investments with maturities of greater than one
year at the date of purchase are classified as long-term marketable
securities. Cash equivalents and marketable securities are carried at
market, and consist primarily of U.S. government securities, corporate and
municipal issues, and interest bearing deposits with major banks. These
investments generally mature within twelve months.
Inventories
---------------------------------------------------------------------------
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Property and Equipment
---------------------------------------------------------------------------
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the following estimated asset lives:
Computers and peripherals 3 years
Equipment 2-5 years
Furniture and fixtures 5 years
Maintenance and repairs are charged to expense when incurred, while
betterments are capitalized. Leasehold improvements are amortized over the
lesser of the lease term or the life of the asset. When property is retired
or otherwise disposed of, the related cost and accumulated depreciation are
removed from the respective amounts and any gain or loss is reflected in
operations.
Software Development Costs
---------------------------------------------------------------------------
The Company capitalizes costs for internally developed software after
technological feasibility of the product has been established. Costs
incurred prior to the establishment of technological feasibility are
charged to research and development expense. Software costs are amortized,
on a product by product basis, ratably over the estimated economic life of
the product (generally three years), or the ratio of current gross revenues
to total current and expected future gross revenues of the product,
whichever is greater.
The Company evaluates the net realizable value of capitalized software on
an ongoing basis, relying on a number of factors including operating
results, business plans, budgets and economic projections and undiscounted
cash flows. In addition, the Company's evaluation considers non-financial
data such as market trends, project development cycles and changes in
management's market emphasis.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Software Licenses
---------------------------------------------------------------------------
The Company has purchased various software licenses for technology that is
incorporated in the Company's products. The cost of these licenses,
included in other assets, is amortized on a straight-line basis over their
estimated useful lives, not to exceed three years (see Note E). Certain of
these licenses require royalty payments based on future sales. Such amounts
are expensed as incurred.
The Company has entered into agreements with various third parties to
develop or license products. Under the terms of these agreements, the
Company is generally required to pay minimum annual royalties commencing
upon first customer shipment. Such amounts are expensed as incurred. The
committed royalties are included in current and noncurrent assets and
liabilities.
Revenue Recognition
---------------------------------------------------------------------------
Revenues from software licenses and hardware products are recognized upon
shipment. Subscription, support and training revenues are recognized as the
services are performed or ratably over the contract period. Reserves for
sales returns and allowances are recorded in the same period as the related
revenues.
Foreign Currency Translation
---------------------------------------------------------------------------
The Company's subsidiaries generally use the U.S. dollar as the functional
currency, and transaction gains and losses are included in other income and
expenses in the statement of operations. Two of the Company's foreign
subsidiaries, Nihon Banyan Systems Kabushiki Kaisha (NBSKK) and Banyan
Systems Australia Pty. use the local currency as functional currency.
Assets and liabilities are translated into U.S. dollars at period-end
exchange rates, and income and expense accounts are translated at average
rates of exchange prevailing during the period. Adjustments resulting from
translation are recorded as a separate component of shareholders' equity.
Minority Interests
---------------------------------------------------------------------------
Minority interests in consolidated subsidiaries represent minority
shareholders' proportionate shares of the equities in the Company's
subsidiaries, NBSKK and Switchboard Incorporated. At December 31, 1997, the
Company owned 67% of the capital stock of NBSKK and 92.5% of the capital
stock of Switchboard Incorporated (see Note P).
Risks and Uncertainties
---------------------------------------------------------------------------
The Company invests its cash and cash equivalents primarily in deposits and
money market funds with a single commercial bank. The Company has not
experienced any losses to date on its invested cash.
The Company sells its products principally through a direct sales force and
distributors domestically and through distributors outside of the United
States to customers in a broad range of industries. The Company performs
ongoing credit evaluations of its customers but does not require collateral
or other security to support customer receivables. The Company maintains
reserves for credit losses and, to date, such losses have been within
management's expectations.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- -----------------
C. Inventories
- -----------------
Inventories consist of the following at:
December 31, 1997 1996
---------------------------------------------------------------------------
(in thousands)
Purchased parts $ 356 $ 989
Work in process 270 313
Finished goods 397 1,561
---------------------------------------------------------------------------
$ 1,023 $ 2,863
==============================
- ----------------------------
D. Property and Equipment
- ----------------------------
Property and equipment consists of the following at:
December 31, 1997 1996
---------------------------------------------------------------------------
(in thousands)
Computer and peripherals $ 23,848 $ 24,885
Equipment 9,587 11,434
Furniture and fixtures 2,725 4,645
Leasehold improvements 2,536 4,655
---------------------------------------------------------------------------
Total cost $ 38,696 $ 45,619
Accumulated depreciation and amortization (32,886) (32,054)
---------------------------------------------------------------------------
$ 5,810 $ 13,565
==============================
Depreciation expense for 1997, 1996 and 1995 was $6,340,000, $7,022,000 and
$8,274,000, respectively.
- ------------------
E. Other Assets
- ------------------
Other assets consist of the following at:
December 31, 1997 1996
---------------------------------------------------------------------------
(in thousands)
Capitalized software costs, net $ 991 $ 2,685
Investment in unconsolidated affiliate 2,001 2,001
Software licenses, net 2,154 2,690
Other - 402
---------------------------------------------------------------------------
$ 5,146 $ 7,778
==============================
During 1997, 1996 and 1995, the Company capitalized $549,000, $2,314,000
and $1,919,000 of software costs, respectively. Amortization expense for
capitalized software costs was $1,453,000, $1,796,000 and $1,683,000 for
1997, 1996 and 1995, respectively. Included in software licenses is
purchased software related to the acquisition of Beyond Incorporated in
February 1994. The Company amortized $114,000, $683,000 and $683,000 of
these purchased software costs during 1997, 1996 and 1995, respectively.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- -------------------------------------
F. Restructuring and Other Charges
- -------------------------------------
On April 21, 1997, the Company announced a reorganization of its
operations. As a result of the reorganization, the Company recorded net
pre-tax restructuring and other charges of approximately $9,700,000. The
restructuring and other charges were composed of $1,700,000 for severance
costs, $2,100,000 for the write-off of idle assets related to restructuring
and $5,900,000 for costs related to facility and product line
consolidations. These restructuring charges provided for the reduction of
approximately 22% of the Company's work force. In the fourth quarter of
1997, the Company reversed $1,700,000 of previously recorded restructuring
and other charges related to the Company's better-than-expected progress in
consolidating facilities and product lines, completing its severance
programs and selling and redeploying fixed assets.
At December 31, 1997, the Company's cash expenditures for employee
separations related to the 1997 restructuring were approximately
$1,250,000. During 1997, the restructuring action resulted in approximately
78 employee separations. The restructuring and other actions were
substantially completed in 1997. The restructuring and other charges
related to the 1997 restructuring are expected to use cash of $3,100,000 of
which $2,700,000 had been expended through December 31, 1997 while
providing an annual cash flow benefit beginning in 1998.
On November 7, 1996, the Company announced a reorganization of its
operations. As a result of the reorganization, the Company recorded a
pre-tax restructuring charge of approximately $5,500,000 in the fourth
quarter ended December 31, 1996. This reorganization charge was composed of
$1,400,000 for the closure or consolidation of leased facilities,
$3,200,000 for severance and costs related to the reduction of
approximately 15% of the Company's work force and $900,000 for the
write-off of idle assets related to the restructuring. The November 1996
restructuring resulted in 70 employee separations. The restructuring and
other charges relating to the November 1996 restructuring are expected to
use cash of $3,800,000, of which $3,300,000 had been expended through
December 31, 1997.
For the year ended December 31, 1997, the Company's cash expenditures for
employee separations related to the 1996 restructuring were approximately
$1,800,000. The restructuring and other charges reduced cash flow by
approximately $2,600,000 in 1997 while providing an expected annual cash
flow benefit beginning in 1998.
In 1995, the Company reorganized its operations into a divisional structure
and, as a result, recorded pre-tax restructuring charges of $7,849,000 in
the quarter ended December 31, 1995. These charges were composed primarily
of $2,032,000 for closure or consolidation of leased facilities, $2,969,000
for severance and related costs, and $2,848,000 for idle assets related to
the restructuring. The restructuring action resulted in 96 employee
separations. As part of the 1995 reorganization, the Company also
implemented a consolidation of distribution activities and a simplification
of product configurations, packaging and related asset write-offs, which
led to a pre-tax charge of approximately $7,953,000 in the quarter ended
December 31, 1995. These other charges were composed primarily of
$5,495,000 for costs associated with eliminating certain channel partners
and $2,458,000 for write-offs of intangible assets and inventory with no
future value as a result of the reorganization. These activities were
completed by December 31, 1996.
Restructuring costs are accrued and charged to expense in accordance with
an approved management plan, supported by an appropriate level of
specificity for the planned actions. Actual restructuring costs are
recognized as a reduction in the accrued liability in the period incurred.
The remaining reserve balance of approximately $939,000 is adequate to
cover the remaining restructuring and other actions.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------
G. Line of Credit
- --------------------
In September 1997, the Company entered into a $15,000,000 line of credit
agreement with a commercial lender, replacing the Company's prior
$10,000,000 credit facility which expired in May 1997. There were no
borrowings under the agreement or prior line of credit facility in 1997 or
in 1996. This agreement has a three-year initial term and is renewable
thereafter for successive one-year periods. Each year during the initial
term of the credit agreement, the lender will be granted warrants to
purchase 75,000 shares of the Company's common stock at the then current
fair market value. Outstanding borrowings drawn under this line are
restricted to (a) 85% of the Company's eligible accounts receivable plus
(i) the lower of $2,000,000 or 75% of eligible foreign accounts plus (ii)
the lowest of $3,000,000 or 80% of the aggregate depreciated equipment
value or 50% of the amount of credit availability by the sum of clauses (i)
and (ii), or (b) $15,000,000. The Company is in compliance with all
covenants per the line of credit agreement.
- -----------------------------------
H. Commitments and Contingencies
- -----------------------------------
The Company leases its facilities and certain equipment under
non-cancelable lease agreements which expire at various dates through March
2014. Rental expense under these leases totaled $2,857,000, $4,872,000 and
$4,986,000 in 1997, 1996 and 1995, respectively. Under these agreements,
the Company is obligated to pay for utilities, taxes, insurance and
maintenance. The total of sublease income is $376,000 for the year ending
December 31, 1997.
At December 31, 1997, future minimum lease payments under operating leases
with initial terms exceeding one year are as follows:
---------------------------------------------------------------------------
(in thousands)
1998 $ 3,397
1999 2,463
2000 1,896
2001 1,638
2002 1,657
Thereafter 3,822
---------------------------------------------------------------------------
Total future minimum lease payments $ 14,873
===========================================================================
The total of future minimum rentals to be received under non-cancellable
subleases related to the above leases is $1,085,000, $994,000 and $636,000
for the years ending 1998, 1999 and 2000, respectively.
- ------------------
I. Income Taxes
- ------------------
The components of the (benefit)/provision for income taxes are as follows:
Years Ended December 31, 1997 1996 1995
---------------------------------------------------------------------------
(in thousands)
Currently payable:
U.S. Federal $ - $ (1,598) $ (5,723)
State - - (319)
Foreign 255 974 (35)
---------------------------------------------------------------------------
255 (624) (6,077)
Deferred:
U.S. Federal - 9,637 (2,335)
State - - (743)
---------------------------------------------------------------------------
$ 255 $ 9,013 $ (9,155)
========================================
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Management of the Company has evaluated the positive and negative evidence
bearing upon the realizability of its deferred tax assets. Management has
considered the Company's recent results of operations and concluded that it
is more likely than not that the deferred tax assets will not be
realizable. Accordingly, deferred tax assets as of December 31, 1997 and
1996 have been fully reserved. Management reevaluates the positive and
negative evidence on a quarterly basis. Temporary differences which give
rise to deferred tax assets and liabilities for the years ended December
31, 1997 and 1996 are as follows:
December 31, 1997 1996
---------------------------------------------------------------------------
(in thousands)
Deferred tax assets:
Net operating loss and other carryforwards $ 10,823 $ 6,322
Purchased research and development 6,072 5,426
Depreciation and amortization 1,801 967
Capitalized software - 2,223
Benefit plans 986 277
Bad debt allowances 663 718
Other 922 1,807
---------------------------------------------------------------------------
Gross deferred tax asset 21,267 17,740
Deferred tax liabilities:
Capitalized software (1,012) (3,395)
-------------------------------------------------------------------------
Gross deferred tax liability (1,012) (3,395)
Less: valuation allowance (20,255) (14,345)
---------------------------------------------------------------------------
Net deferred tax asset $ 0 $ 0
===========================
At December 31, 1997, the Company had net operating loss, research and
experimentation credits and general business carryforwards expiring between
2007 and 2012.
A reconciliation of the statutory U.S. Federal income tax rate and the
effective tax rate is as follows:
Years Ended December 31, 1997 1996 1995
---------------------------------------------------------------------------
Statutory rate (35.0)% (35.0)% (35.0)%
State income taxes, net of U.S. Federal benefit 1.3 - (1.0)
Foreign operations 4.3 5.4 6.6
Valuation allowance 35.5 79.6 -
Research and development credits - - (1.5)
Other (4.6) - 0.9
---------------------------------------------------------------------------
Effective tax rate 1.5% 50.0% (30.0)%
===========================================================================
- ---------------------
J. Preferred Stock
- ---------------------
In July 1992, the shareholders of the Company approved the creation of a
new class of undesignated preferred stock and authorized 1,000,000 shares
of $.01 par value, in one or more series, with voting rights and
preferences to be determined by the Board of Directors. At December 31,
1997, there were no shares issued or outstanding.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- ---------------------------
K. Marketable Securities
- ---------------------------
Marketable securities consisted of the following at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------------------------
Aggregate Amortized Aggregate Amortized
Security Type Fair Value Cost Fair Value Cost
----------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Maturing within one year:
U.S. Treasury Notes $ 4,202 $ 4,210 $ 2,981 $ 3,011
Tax-free municipal bond - - 1,158 1,158
----------------------------------------------------------------------------------------------------------------------
4,202 4,210 4,139 4,169
Maturing after one year through five years:
U.S. Treasury Notes - - 4,296 4,336
Certificate of deposit - - 140 140
----------------------------------------------------------------------------------------------------------------------
- - 4,436 4,476
Totals $ 4,202 $ 4,210 $ 8,575 $ 8,645
======================================================================================================================
</TABLE>
Realized and unrealized gains and losses were immaterial for the years
ended December 31, 1997, 1996 and 1995.
- ------------------------
L. Stock Option Plans
- ------------------------
Under the Company's 1984 stock option plans, the Company granted incentive
and non-qualified stock options to purchase up to an aggregate of 5,113,841
shares of common stock, of which 183,115 options were outstanding at
December 31, 1997. In June 1992, the Board of Directors voted that no
further options be granted under the 1984 stock option plans. Generally,
options outstanding are immediately exercisable and ownership rights in the
underlying shares vest ratably over a four-year period and expire ten years
from the date of grant.
Under the Company's 1992 Stock Incentive Plan, as amended, the Company may
grant incentive stock options and non-statutory options for the purchase of
an aggregate of 2,700,000 shares of common stock to employees or
consultants. At December 31, 1997, 1,732,069 options were outstanding under
this plan. The plan provides that incentive stock options may not be
granted at less than the fair market value of the Company's common stock at
the grant date, and options generally vest ratably over a four-year period
and expire ten years from the date of grant.
In February 1997, the Company, after approval by the Board of Directors,
offered to reprice all outstanding employee options, other than options
held by certain executive officers, to a price equal to 10% above fair
market value at that date. These options continued to vest according to
their original vesting schedules.
In May 1997, the Company, after approval by the Board of Directors, offered
to cancel all outstanding employee stock options issued under the 1984 and
1992 plans and grant new stock options at a price equal to 20% above fair
market value at that date. The options continued to vest according to their
original vesting schedules, provided that, in exchange for accepting the
new exercise price, the employees were not allowed to exercise any vesting
options until January 1, 1998.
Under the Company's 1992 Director Stock Option Plan (the "1992 Director
Plan"), the Company may grant non-statutory stock options for the purchase
of up to an aggregate of 200,000 shares of common stock to directors of the
Company who are not officers or employees of the Company or any subsidiary
of the Company. Under the terms of the 1992 Director Plan, initial options
shall be granted to each eligible director upon his or her initial election
as a director that cover 15,000 shares of common stock and annual options
shall be granted on the date of each Annual Meeting of Shareholders of the
Company that cover 3,000 shares of common stock. The Plan provides that
options shall be granted at the fair market value of the Company's common
stock at the grant date. Annual options generally vest twelve months after
the date and initial options vest ratably over a four-year period. At
December 31, 1997, 78,000 options had been granted under the 1992 Director
Plan.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Under the Company's 1995 Employee Stock Purchase Plan, 750,000 shares of
common stock are available to all full-time employees through semi-annual
offerings. At December 31, 1997, 581,100 shares of common stock have been
purchased under this Plan.
During 1997, in addition to the options described above, options to
purchase an aggregate of 1,300,000 shares were issued to four executive
officers of the Company. The underlying shares were registered with the SEC
and were issued at fair market value. The options generally vest over a
four-year period.
The Company adopted the disclosure provisions of SFAS 123 in 1996.
Accordingly, no compensation cost has been recognized for its stock-based
compensation plans. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant
dates as calculated in accordance with SFAS 123, the Company's net income
and earnings per share for the years ended December 31, 1997 and 1996 would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Net loss $ (16,908) $(21,270) $ (27,030) $ (30,562) $(21,360) $ (23,053)
Basic and diluted net loss per share $ (0.97) $ (1.22) $ (1.59) $ (1.80) $ (1.27) $ (1.37)
</TABLE>
The fair value of each option grant is estimated on the date of grant,
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997, 1996 and 1995,
respectively: dividend yield of 0%, 0% and 0%; expected volatility of 70%,
62% and 62%; risk-free interest rates of 6.4%, 6.4% and 6.0%; and expected
lives of 5.0, 5.5 and 5.0 years. The effects of applying SFAS 123 in this
pro forma disclosure are not likely to be representative of the effects on
reported net income for future years. Additional awards in future years are
anticipated. SFAS 123 does not apply to awards granted prior to 1995.
A summary of the status of the Company's stock options as of December 31,
1997, 1996 and 1995, and changes during the years ending on those dates is
presented below.
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,631 $ 7.02 2,537 $ 8.34 2,497 $ 7.04
Granted 2,289 2.37 1,080 6.32 1,081 12.34
Exercised (31) 2.18 (111) 4.16 (458) 4.59
Cancelled (1,596) 4.84 (875) 9.30 (583) 13.09
----------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 3,293 $ 2.77 2,631 $ 7.02 2,537 $ 8.34
----------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 705 $ 4.31
-------------------
Weighted-average fair value of options granted
during the year $ 1.69 $ 3.93 $ 5.80
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table summarizes information about the stock options at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Outstanding at Remaining Exercise Exercisable at Exercise
Range of Exercise Prices December 31, 1997 Contractual Life Price December 31, 1997 Price
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.15 - $ 2.25 2,503 8.6 years $ 2.18 268 $ 2.08
$ 2.26 - $ 3.99 348 8.7 years $ 3.28 113 $ 3.76
$ 4.00- $ 7.00 359 6.6 years $ 4.04 241 $ 4.04
$ 7.01 - $ 16.25 83 6.1 years $12.95 83 $ 12.94
----------------------------------------------------------------------------------------------------------------------
3,293 705
========================================================================================
</TABLE>
- -----------------------------------------
M. Basic and Diluted Earnings Per Share
- -----------------------------------------
The Company computes basic and diluted earnings per share in accordance
with SFAS 128, "Earnings Per Share," which the Company adopted as of
December 31, 1997. Basic earnings per share is based upon the weighted
average number of common shares outstanding during the period. Common
equivalent shares have been excluded from the computation of diluted loss
per share, as their effect would have been anti-dilutive. Common equivalent
shares result from the assumed exercise of outstanding stock options and
warrants, the proceeds of which are then assumed to have been used to
repurchase outstanding common stock using the treasury stock method. The
following table reconciles the numerator and denominator of the basic and
diluted earnings per share computations shown on the Consolidated
Statements of Operations:
<TABLE>
<CAPTION>
For the years ended December 31, 1997 1996 1995
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic Earnings per Share
Numerator:
Net loss $ (16,908) $ (27,030) $ (21,360)
Denominator:
Common shares outstanding 17,367 16,947 16,797
---------------------------------------------------------------------------------------------------------------------------
Basic EPS $ (0.97) $ (1.59) $ (1.27)
===========================================================================================================================
Diluted Earnings per Share
Numerator:
Net loss $ (16,908) $ (27,030) $ (21,360)
Denominator:
Common shares outstanding 17,367 16,947 16,797
---------------------------------------------------------------------------------------------------------------------------
Diluted EPS $ (0.97) $ (1.59) $ (1.27)
===========================================================================================================================
</TABLE>
Options to purchase 3,293,000, 2,631,000 and 2,537,000 shares of common
stock outstanding during the years ended December 31, 1997, 1996 and 1995,
respectively, were excluded from the year-to-date calculation of diluted
net loss per share as the effect of their inclusion would have been
anti-dilutive. Earnings per share data have been restated for all periods
presented to reflect the adoption of SFAS 128.
- --------------------------
N. Employee Benefit Plan
- --------------------------
In 1989, the Company established a savings and profit sharing plan covering
substantially all U.S. employees. The plan is qualified under Section
401(a) of the Internal Revenue Code of 1986, as amended. Effective January
1, 1994, the Company elected to match an employee's elective deferrals to
the plan based upon a prescribed formula. The maximum matching contribution
was 2% of an employee's annual compensation. Vesting is over a four-year
period and begins on the date of hire. The Company contributed $377,000,
$549,000 and $620,000 in 1997, 1996 and 1995, respectively.
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- ------------------------
Q. Segment Information
- ------------------------
The Company is engaged in one industry segment: the development, marketing
and service of enterprise networking software and related hardware products
and services. The Company distributes its products worldwide and revenue
can be grouped into geographic areas as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands)
Revenues from unaffiliated customers:
North America
United States $ 47,409 $ 69,746 $ 89,116
Canada 5,616 10,116 10,875
---------------------------------------------------------------------------------------------------------------------------
53,025 79,862 99,991
International
Europe 17,244 17,757 20,833
Other 4,073 7,805 8,859
---------------------------------------------------------------------------------------------------------------------------
21,317 25,562 29,692
----------------------------------------------------
Total revenues $ 74,342 $ 105,424 $ 129,683
===========================================================================================================================
</TABLE>
One customer accounted for 11%, 11% and 16% of revenues in 1997, 1996 and
1995, respectively. The customers included in this percentage vary from
year to year.
- -----------------------
P. Minority Interests
- -----------------------
In 1995, the Company entered into an agreement with Marubeni Corporation to
sell a minority interest in the Company's Japanese subsidiary, Nihon Banyan
Systems Kabushiki Kaisha (NBSKK). Subsequently, in 1995, the Company and
Marubeni Corporation entered into an agreement with NTT Technology
Corporation to sell a minority interest in NBSKK. Pursuant to these
agreements, the Japanese companies hold a 33 percent equity interest in
NBSKK. All assets, liabilities, revenues and expenses of NBSKK are included
in the consolidated financial statements for the years ended December 31,
1997, 1996 and 1995. The minority interest in the net loss of NBSKK is
deducted from net income. For the year ended December 31, 1997, revenue and
expenses for NBSKK were approximately $1,020,000 and $1,621,000,
respectively. For the year ended December 31, 1996, revenue and expenses
for NBSKK were approximately $1,321,000 and $3,328,000, respectively. For
the year ended December 31, 1995, revenue and expenses for NBSKK were
approximately $1,408,000 and $2,944,000, respectively. The Japanese
companies' minority interest in NBSKK's assets and liabilities is shown net
in the consolidated balanced sheet. At December 31, 1997, assets and
liabilities for NBSKK were approximately $1,540,000 and $2,876,000,
respectively. At December 31, 1996, assets and liabilities for NBSKK were
approximately $2,567,000 and $2,233,000, respectively.
In 1996, the Company entered into an agreement with America Online Inc.
(AOL) and Digital City Inc. (DCI) to sell minority interests in the
Company's subsidiary, Switchboard Incorporated, to AOL and DCI. Pursuant to
this agreement, AOL and DCI invested a total of $3,000,000 in Switchboard
Incorporated and currently hold a combined equity interest of 10%. At
December 31, 1996, $2,299,000 in cash and cash equivalents in the
consolidated balance sheet were restricted for use in funding Switchboard
activities. These funds were expended in 1997. AOL and DCI's collective
minority interest in the net loss of Switchboard is deducted from net
income on a pro rata basis. For the year ended December 31, 1997, revenue
and expenses were approximately $709,000 and $5,112,000, respectively. For
the year ended December 31, 1996, revenue and expenses were approximately
$170,000 and $1,479,000, respectively. AOL and DCI's collective minority
interest in Switchboard's assets and liabilities is shown net in the
consolidated balance sheet. At December 31, 1997, assets and liabilities
for Switchboard Incorporated were approximately $1,510,000 and $3,790,000,
respectively. At December 31, 1996, assets and liabilities were
approximately $3,792,000 and $871,000, respectively.
- ---------------------
Q. Subsequent Event
- ---------------------
On March 6, 1998, the Company sold, for proceeds of $10,000,000, 263,158
shares of Series A convertible preferred stock at a price of $38.00 per
share, which represents, at a conversion rate of ten common shares for each
Series A convertible preferred share, a 13 percent ownership interest in
the Company. The Company also granted to the investor warrants to acquire
65,790 shares of Series B convertible preferred stock and 65,790 shares of
Series C convertible preferred stock at an exercise price of $45.00 and
$50.00 per share, respectively, at the same ten-to-one conversion rate.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Banyan Systems Incorporated:
---------------------------------------------------------------------------
We have audited the accompanying consolidated balance sheets of Banyan
Systems Incorporated as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Banyan
Systems Incorporated as of December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
January 27, 1998,
except as to the information presented in
Note Q, for which the date is March 6, 1998
<PAGE>
-----------------------
Selected Financial Data
-----------------------
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995 1994 1993
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share amounts)
Statement of operations data:
Revenues:
Software $ 57,849 $ 87,281 $ 105,160 $ 118,899 $ 94,231
Services 15,796 16,456 21,059 20,444 18,559
Hardware 697 1,687 3,464 10,770 14,980
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues 74,342 105,424 129,683 150,113 127,770
(Loss)/income from operations (16,552) (19,085) (34,201) 5,541 19,630
Net (loss)/income (16,908) (27,030) (21,360) 4,987 12,962
Net (loss)/income per share:/1/
Basic $ (0.97) $ (1.59) $ (1.27) $ 0.29 $ 0.76
Diluted $ (0.97) $ (1.59) $ (1.27) $ 0.27 $ 0.70
Balance sheet data:
Working capital $ (2,732) $ (1,513) $ 9,534 $ 30,602 $ 50,477
Total assets 42,928 69,532 106,309 124,960 121,984
Long-term obligations, less current maturities - - - 61 -
Total shareholders' equity 5,077 20,322 44,342 73,879 79,412
<CAPTION>
-------------------------------------------
Quarterly Financial Information (unaudited)
-------------------------------------------
1997 Quarter Ended Dec. 31 Sept. 30 June 30 March 31
---------------------------------------------------------------------------------------------------------------------------
Revenues:
Software $ 13,278 $ 14,614 $ 13,692 $ 16,265
Services 4,931 3,996 3,216 3,653
Hardware 187 232 165 113
---------------------------------------------------------------------------------------------------------------------------
Total revenues 18,396 18,842 17,073 20,031
Income/(loss) from operations/2/,/3/ 2,641 888 (13,693) (6,388)
Net income/(loss)/2/,/3/ 2,380 769 (13,665) (6,392)
Net income/(loss) per share:/1/
Basic $ 0.14 $ 0.04 $ (0.79) $ (0.37)
Diluted $ 0.13 $ 0.04 $ (0.79) $ (0.37)
Stock prices:/4/
High $ 3.94 $ 2.75 $ 2.38 $ 5.56
Low $ 2.44 $ 1.97 $ 1.22 $ 2.06
1996 Quarter Ended Dec. 31 Sept. 30 June 30 March 31
---------------------------------------------------------------------------------------------------------------------------
Revenues:
Software $ 12,688 $ 23,917 $ 25,745 $ 24,931
Services 4,297 3,795 3,895 4,469
Hardware 177 417 561 532
---------------------------------------------------------------------------------------------------------------------------
Total revenues 17,162 28,129 30,201 29,932
(Loss)/income from operations/5/ (18,127) (1,442) 135 349
Net (loss)/income/5/ (26,802) (783) 186 369
Net (loss)/income per share:/1/
Basic $ (1.56) $ (0.05) $ 0.01 $ 0.02
Diluted $ (1.56) $ (0.05) $ 0.01 $ 0.02
Stock prices:/4/
High $ 6.16 $ 7.56 $ 10.44 $ 11.25
Low $ 3.63 $ 5.13 $ 6.50 $ 7.38
</TABLE>
1. Earnings per share data have been restated for all periods presented to
reflect the adoption of SFAS 128, "Earnings per Share," as of December 31,
1997.
2. In the second quarter of 1997, the Company recorded a charge of $9,700
related to restructuring the Company.
3. In the fourth quarter of 1997, the Company recorded a benefit, reversing
$1,700 of unneeded restructuring reserves from prior charges.
4. The Company's common stock is traded on the over-the-counter market and is
quoted on the Nasdaq National Market under the symbol "BNYN." The common
stock prices are based on the Nasdaq National Market daily closing stock
price.
5. In the fourth quarter of 1996, the Company recorded a charge of $5,500
related to restructuring the Company, and wrote off deferred tax assets of
$8,038.
The Company has not paid cash dividends on its common stock and has
historically retained earnings for use in its business. The Company's
current line of credit prohibits the payment of cash dividends without the
consent of the lender. The Company has no present intention to pay
dividends. The Company intends to review its policy with respect to the
payment of dividends from time to time; however, there can be no assurance
that any dividends will be paid in the future.
On December 31, 1997, the Company had 9,517 shareholders.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
Banyan Systems Incorporated on Form S-8 (File Nos. 33-50860, 33-50862, 33-50864,
33-54140, 33-57734, 33-78804, 33-92312, 33-95288, 333-22631, 333-26857, 333-
28745, 333-28675, 333-40671 and 333-46259) of our reports dated January 27,
1998, except as to the information presented in Note Q, for which the date is
March 6, 1998, on our audits of the consolidated financial statements and
financial statement schedule of Banyan Systems Incorporated as of December 31,
1997 and 1996, and for each of the three years in the period ended December 31,
1997, which reports are included or incorporated by reference in this Annual
Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 30, 1998
