<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 30, 1998 Commission File Number 000-20364
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 01581
WESTBORO, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
508-898-1000
(Registrant's telephone number, including area code)
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 ______
-----
Number of shares outstanding of the issuer's classes of common stock as of
October 31, 1998:
Class Number of Shares Outstanding
- - -------------------------------------- ----------------------------
Common Stock, par value $.01 per share 20,250,548
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BANYAN SYSTEMS INCORPORATED
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 3
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
CONSOLIDATED STATEMENTS OF OPERATIONS 4
THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
CONSOLIDATED STATEMENTS OF CASH FLOWS 5
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 9
CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURE 16
</TABLE>
This Quarterly Report on Form 10-Q contains forward-looking statements,
including information with respect to the Company's plans and strategy for its
business, the Company's anticipated future operating results, the sufficiency of
funds and available sources of financing. For this purpose, 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", "anticipates", "plans", "expects" and similar expressions are
intended to identify forward-looking statements. There are a number of
important factors that could cause actual events or the Company's actual results
to differ materially from those indicated by such forward-looking statements.
These factors include, without limitation, those set forth below under the
caption "Factors Affecting Future Operating Results" included under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Part I of this Quarterly Report on Form 10-Q and the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
--------------------
BANYAN SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 20,032 $ 6,674
Marketable securities 1,628 4,202
Accounts receivable, less allowances of $2,391 and $3,721 15,683 16,960
Inventories 1,011 1,023
Other current assets 3,133 3,113
-------- --------
Total current assets 41,487 31,972
Property and equipment:
Computers and peripherals 24,811 23,848
Equipment 10,454 9,587
Furniture and fixtures 2,733 2,725
Leasehold improvements 2,441 2,536
-------- --------
Total 40,439 38,696
Less accumulated depreciation and amortization 35,258 32,886
-------- --------
Property and equipment, net 5,181 5,810
Other assets, net of accumulated amortization of $2,282 and $3,770 2,994 5,146
-------- --------
Total assets $ 49,662 $ 42,928
======== ========
LIABILITIES
Current liabilities:
Accounts payable $ 2,440 $ 2,039
Accrued compensation 4,086 5,222
Accrued expenses 6,205 6,165
Accrued costs for restructuring and other charges 947 939
Income taxes payable 205 270
Note payable - 1,139
Deferred revenue 15,562 18,930
Long-term debt, current portion 529 -
-------- --------
Total current liabilities 29,974 34,704
Software licenses payable, non-current - 590
Long-term debt 600 -
Minority interest in consolidated subsidiary 2,083 2,557
STOCKHOLDERS' EQUITY
Convertible preferred stock, $.01 par value; authorized 1,000,000 shares; 3 -
issued and outstanding 263,158 and none
Common stock, $.01 par value; authorized 35,000,000 shares; issued and
outstanding 20,249,167 and 19,346,677 shares 202 193
Additional paid-in capital 77,601 66,020
Accumulated deficit (32,415) (32,700)
Treasury stock at cost; 1,848,000 common shares (28,564) (28,564)
Accumulated other comprehensive income 178 128
-------- --------
Total stockholders' equity 17,005 5,077
-------- --------
Total liabilities and stockholders' equity $ 49,662 $ 42,928
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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BANYAN SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Software $10,193 $14,846 $32,703 $ 45,081
Services 6,688 3,702 17,281 10,505
Internet advertising 1,970 294 4,756 360
------- ------- ------- --------
Total revenues 18,851 18,842 54,740 55,946
Cost of revenues:
Software 1,426 1,508 4,044 5,637
Services 4,336 2,195 11,072 7,288
Internet advertising 529 212 1,557 527
------- ------- ------- --------
Total cost of revenues 6,291 3,915 16,673 13,452
------- ------- ------- --------
Gross margin 12,560 14,927 38,067 42,494
Operating expenses:
Sales and marketing 7,612 8,880 23,472 32,058
Product development 2,826 3,548 8,588 12,627
General and administrative 1,472 1,611 4,550 7,302
Purchased research and development - - 1,400 -
Restructuring and other charges - - - 9,700
------- ------- ------- --------
Total operating expenses 11,910 14,039 38,010 61,687
------- ------- ------- --------
Income/(loss) from operations 650 888 57 (19,193)
Other income/(expense):
Interest income 234 113 579 389
Interest expense (57) (21) (90) (71)
Other, net 9 (139) 117 (180)
------- ------- ------- --------
Total other income/(expense) 186 (47) 606 138
------- ------- ------- --------
Income/(loss) before income taxes 836 841 663 (19,055)
Provision for income taxes 155 72 378 233
------- ------- ------- --------
Net income/(loss) $ 681 $ 769 $ 285 $(19,288)
======= ------- ======= ========
Net income/(loss) per common share:
Basic $ 0.04 $ 0.04 $ 0.02 $ (1.12)
======= ======= ======= ========
Diluted $ 0.03 $ 0.04 $ 0.01 $ (1.12)
======= ======= ======= ========
Weighted average number of common shares:
Basic 18,187 17,419 17,972 17,289
======= ======= ======= ========
Diluted 22,403 17,533 21,808 17,289
======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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BANYAN SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income/(loss) $ 285 $(19,288)
Adjustments to reconcile net loss to net cash provided by/(used in)
operating activities:
Depreciation and amortization 3,512 6,241
Purchased research and development charge 1,400 -
Restructuring and other charges, non-cash portion - 6,567
Changes in operating assets and liabilities:
Decrease in accounts receivable 1,220 7,483
Decrease in inventories 49 1,113
(Increase)/decrease in other current assets (47) 1,022
(Decrease) in other liabilities (649) (680)
(Decrease) in accounts payable and accrued
compensation and expenses (1,058) (4,610)
(Decrease) in accrued costs for restructuring and other charges (658) (1,906)
(Decrease) in software licenses payable, net - (244)
(Decrease)/increase in income taxes payable (140) 77
Decrease in other non-current assets - 147
Decrease in deferred revenue (3,346) (3,342)
-------- --------
Net cash provided by/(used in) operating activities 568 (7,420)
Cash flows from investing activities:
Capital expenditures ( 1,084) (890)
Minority interest equity investments - 50
Capitalization of software costs - (642)
Acquisition of software licenses - (150)
Proceeds from marketable securities, net 2,582 2,935
Acquisition of technology (500) -
-------- --------
Net cash provided by investing activities 998 1,303
Cash flows from financing activities:
Net proceeds from issuance of convertible preferred stock 9,500 -
Proceeds from stock plan purchases and stock options 2,093 895
-------- --------
Net cash provided by financing activities 11,593 895
Effect of exchange rate changes on cash and cash equivalents 199 (110)
-------- --------
Net increase/(decrease) in cash and cash equivalents 13,358 (5,332)
Cash and cash equivalents at beginning of the period 6,674 10,613
-------- --------
Cash and cash equivalents at end of the period $ 20,032 $ 5,281
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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BANYAN SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements include the
accounts of the Company and its subsidiaries as of September 30, 1998, and
have been prepared by the Company in accordance with generally accepted
accounting principals. In the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments,
consisting only of those of a normal recurring nature, necessary for a fair
presentation of the Company's financial position, results of operations and
cash flows at the dates and for the periods indicated, While the Company
believes that the disclosures presented are adequate to make the
information not misleading, these consolidated financial statements should
be read in conjunction with the consolidared financial statements and
related notes included in the Company's 1997 Annual Report to Stockholders
and Annual Report on Form 10-K. The results of operations for the periods
ended September 30, 1998 are not necessarily indicative of the results
expected for the full fiscal year or any future period.
B. INVENTORIES:
<TABLE>
<CAPTION>
Inventories consist of the following at:
(in thousands) September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Purchased part $ 346 $ 356
Work in process 180 270
Finished goods 485 397
----------- -----------
$ 1,011 $ 1,023
=========== ===========
</TABLE>
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C. REPORTING SEGMENTS:
Banyan Systems Incorporated has two reportable segments: Network software
and services, and Internet advertising. The Company's network software and
services segment designs, develops and markets standards-based networking
directory and messaging products that help people communicate across
enterprise networks, intranets and the Internet. In addition, the network
software and services segment delivers professional services including
technical support, education and consulting, including network performance,
integration and Year 2000 compliance services. The Company's Internet
advertising segment is organized as a majority-owned subsidiary,
Switchboard Incorporated, and generates advertising revenue through its
Internet people-to-people and business directory services. The Company's
reportable segments are managed separately because they market and
distribute distinct products and services.
SEGMENT INFORMATION FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NETWORK INTERNET TOTAL COMPANY
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SOFTWARE AND SERVICES ADVERTISING
--------------------- -----------
<S> <C> <C> <C>
Revenues
Network software $ 32,703 $ - $ 32,703
Network services 17,281 - 17,281
Internet advertising - 4,756 4,756
-------- -------- --------
Total revenue 49,984 4,756 54,740
Cost of revenues 15,116 1,557 16,673
-------- -------- --------
Gross margin 34,868 3,199 38,067
Operating expenses 30,353 7,657 38,010
-------- -------- --------
Operating income/(loss) $ 4,515 $ (4,458) $ 57
======== ======== ========
Total assets $ 46,633 $ 3,029 $ 49,662
======== ======== ========
</TABLE>
D. EARNINGS PER SHARE
Basic earnings per share is based upon the weighted average number of
common shares outstanding during the period plus additional weighted
average common equivalent shares outstanding during the period. Common
equivalent shares have been excluded from the computation of diluted loss
per share for the period ended September 30, 1997, 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, and the conversion of preferred stock
using the if converted 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>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
(in thousands, except per share data)
Basic earnings per share
Numerator:
Net income/(loss) $ 681 $ 769 $ 285 $(19,288)
Denominator:
Common shares outstanding 18,187 17,419 17,972 17,289
------- ------- ------- --------
Basic EPS $ 0.04 $ 0.04 $ 0.02 $ (1.12)
======= ======= ======= ========
Diluted earnings per share
Numerator:
Net income/(loss) $ 681 $ 769 $ 285 $(19,288)
Denominator:
Common shares outstanding 18,187 17,419 17,972 17,289
Common stock equivalents 4,216 114 3,836 -
------- ------- ------- --------
Total shares 22,403 17,533 21,808 17,289
------- ------- ------- --------
Diluted EPS $ 0.03 $ 0.04 $ 0.01 $ (1.12)
======= ======= ======= ========
</TABLE>
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<PAGE>
Options and warrants to purchase 161,642 shares of Common Stock outstanding
during the nine months ended September 30, 1997 were excluded from the
calculation of diluted net loss per share as the effect of their inclusion
would have been anti-dilutive.
E. COMPREHENSIVE INCOME
In the quarter ended March 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 (SFAS 130) "Reporting Comprehensive
Income", SFAS 130 requires standards for reporting and display of
comprehensive income and its components. SFAS 310 requires unrealized
gains or losses on the Company's available-for-sale investments and foreign
currency translation adjustments, which prior to adoption were reported
separately in stockholders' equity, to be included in other comprehensive
income.
<TABLE>
<CAPTION>
Nine months ended
(in thousands)
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Net income/(loss) $285 $(19,288)
Other comprehensive income 50 78
---- --------
Comprehensive income/(loss) $335 $(19,210)
==== ========
</TABLE>
F. PURCHASED TECHNOLOGY
On May 18, 1998, Switchboard incorporated, a majority-owned subsidiary of
the Company, acquired the assets, technology and web site of the Maps On Us
Internet mapping operation from Lucent Technologies Inc. The purchase
price was first allocated to purchased technology related to the mapping
operation ($200,000) which is being amortized over two years. The Company
will incur ongoing research and development expenses for the development
and repositioning of the technology. A charge for purchased research and
development for technology which has yet to reach feasibility of $1,400,000
was recorded upon the closing of the acquisition.
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BANYAN SYSTEMS INCORPORATED
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
GENERAL
Total revenues for the three-month period ended September 30, 1998 were $18.9
million compared with $18.8 million for the corresponding period in 1997. This
increase was due primarily to an increase in revenues from services and Internet
advertising offset in part by a decrease in software revenues. Total revenues
for the nine-month period ended September 30, 1998 were $54.7 million, which
represented a 2.2% decrease when compared to the corresponding period in 1997.
This decrease was due primarily to lower software revenues which were offset in
part by increases in services and Internet advertising revenues. The Company's
software revenues for the three-month period ended September 30, 1998 decreased
by $4.7 million, or 31%, when compared to the corresponding period in 1997. The
Company's software revenues in the nine-month period ended September 30, 1998,
decreased by $12.4 million, or 27%, when compared to the corresponding period in
1997. The decline in software revenues in the three-month and nine-month
periods ended September 30, 1998 was attributable primarily to lower levels of
sales of the Company's VINES and messaging products, primarily as a result of
competitive product offerings, offset in part by an increase in sales of third-
party products. Services revenues increased by $3.0 million, or 81%, and $6.8
million, or 65%, for the three-month and nine-month periods ended September 30,
1998, when compared to the corresponding periods in 1997. The increase in
services revenues in 1998 was attributable primarily to additional revenues
generated from consulting services and an increase in customer support revenues.
Internet advertising revenues increased to $2.0 million and $4.8 million for the
three and nine month periods ended September 30, 1998 compared to $0.3 million
and $0.4 million for the corresponding periods in 1997, primarily due to
increased yellow pages advertising revenues related to major sponsorships
generated by Switchboard Incorporated, the Company's majority-owned Internet
subsidiary ("Switchboard").
International revenues for the three-month and nine-month periods ended
September 30, 1998 were $5.2 million and $16.4 million, respectively, compared
with $5.4 million and $16.7 million for the corresponding periods in 1997. The
decrease for the three and nine-month periods ended September 30, 1998 was
primarily due to delayed purchasing decisions in Southeast Asia related to
continued uncertainty in the region as a result of financial market instability,
offset in part by additional revenues from consulting services. International
revenues accounted for 28% and 30% for the three and nine month periods ended
September 30, 1998, compared to 29% and 30% for the corresponding periods in
1997.
Gross margins for software were 86%, or $8.8 million, and 88%, or $28.7 million,
for the three-month and nine-month periods ended September 30, 1998,
respectively, compared with 90%, or $13.3 million, and 88%, or $39.4 million,
for the corresponding periods in 1997. The decrease in gross margin dollars and
percentage for the three-month period ended September 30, 1998 when compared to
the corresponding period last year was primarily related to a decrease in the
Company's higher margin VINES and messaging products and higher levels of lower
margin third party product applications. The decrease in gross margin dollars
for the nine-month period ended September 30, 1998 when compared to the
corresponding period last year was primarily due to lower sales volume in the
current year period offset in part by reduced overhead costs as a result of the
reduction in force as part of the Company's restructuring in the quarter ended
June 30, 1997.
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Gross margins for services were 35%, or $2.4 million, and 36%, or $6.2 million,
for the three-month and nine-month periods ended September 30, 1998,
respectively, compared with 41%, or $1.5 million, and 31%, or $3.2 million, for
the corresponding periods in 1997. The increase in gross margin dollars for the
three-month period ended September 30, 1998 when compared to the same period in
1997 was due to an increase in consulting revenues. The decrease in gross
margin percentage for the three-month period ended September 30, 1998, when
compared to the corresponding period in 1997, was due to an increase in delivery
personnel and related costs to expand consulting revenues. The increase in
gross margin dollars and percentage for the nine-month period ended September
30, 1998 was primarily due to increased consulting revenues and more efficient
utilization of support services personnel.
Gross margins for Internet advertising were 73% or $1.4 million, and 67%, or
$3.2 million for the three-month and nine-month periods ended September 30,
1998, respectively, compared with $0.01 million and $(0.2) million for the
corresponding periods in 1997. The increase in gross margin dollars and
percentage was due to an increase in advertising revenues generated by
Switchboard, offset in part by an increase in variable costs. Cost of Internet
advertising revenues consists primarily of data communications, labor, and
depreciation expenses related to the operation of the Switchboard Internet
website, as well as fees for personal and business names and listings.
Sales and marketing expenses of $7.6 million and $23.5 million for the three-
month and nine-month periods ended September 30, 1998, respectively, represented
decreases of 14% and 27% compared to the corresponding periods in 1997. The
decreases were primarily due to lower sales staffing and personnel costs as a
result of the reduction in force as part of the Company's reorganization efforts
in the quarter ended June 30, 1997, as well as redeployment of staff into the
Company's expanded consulting service activities. Partially offsetting these
decreases was increased promotional investment in the Internet advertising
segment intended to increase site traffic. Sales and marketing expenses as a
percentage of revenues were 40% and 43% for the three-month and nine-month
periods ended September 30, 1998, as compared to 47% and 57% for the
corresponding periods in 1997.
Product development expenses of $2.8 million and $8.6 million for the three-
month and nine-month periods ended September 30, 1998, respectively, represented
decreases of 20% and 32%, over the corresponding periods in 1997. These
decreases were primarily due to lower staffing levels when compared to the
corresponding periods in the prior year as a result of the Company's
reorganization in the quarter ended June 30, 1997. The Company continues to
focus its product development resources on enhancing its existing product
offerings, Internet-related product initiatives, and Switchboard technology and
services. Additionally, the Company continues to employ resources to ensure its
product offerings will be year 2000 compliant. The Company released year 2000
compliant versions of VINES and StreetTalk for Windows NT in April 1998. It is
the Company's intention to test and modify all of its remaining product
offerings for year 2000 compliance by the end of 1998. The process is
substantially complete. Product development expenses as a percentage of revenues
were approximately 15% and 16% for the three-month and nine-month periods ended
September 30, 1998, as compared to 19% and 23% for the corresponding periods in
1997. Software costs of $0.6 million were capitalized for the nine-month period
ended September 30, 1997. The amounts capitalized represented 5% of product
development expenditures for the nine-month period ended September 30, 1997.
There were no amounts capitalized during 1998.
General and administrative expenses of $1.5 million and $4.6 million for the
three-month and nine-month periods ended September 30, 1998, respectively,
represented decreases of 9% and 38% when compared to the corresponding periods
in 1997. The decrease for both the three-month and nine-month periods ended
September 30, 1998 was primarily due to lower administrative and personnel costs
and lower levels of depreciation as a result of the reduction in staffing as
part of the Company's reorganization efforts in the quarter ended June 30, 1997.
General and administrative expenses as a
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percentage of revenues were 8% for both the three-month and nine-month periods
ended September 30, 1998, as compared to 9% and 13% for the corresponding
periods in 1997.
On May 18, 1998, Switchboard Incorporated, a majority-owned subsidiary of the
Company, acquired the assets, technology and website of the MapsOnUs Internet
mapping operation from Lucent Technologies Inc. The purchase price was first
allocated to purchased technology related to the mapping operation ($200,000)
which is being amortized over two years. The Company will incur ongoing
research and development expenses for the development and repositioning of the
technology. A charge for purchased research and development for technology
which has yet to reach feasibility of $1,400,000 was recorded upon the closing
of the acquisition.
On April 21, 1997, the Company announced a reorganization of its operations. As
a result of this reorganization, the Company recorded pre-tax restructuring and
other charges of $9.7 million in the quarter ended June 30, 1997. Subsequently,
in the quarter ended December 31, 1997, the Company reversed previously recorded
restructuring and other charges of $1.7 million 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. The net pre-
tax restructuring and other charges of $8.0 million were composed of $1.4
million for severance costs related to the reduction of approximately 22% of the
Company's workforce, $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 restructuring resulted in 78
employee separations. The actions were substantially completed as of September
30, 1998.
Interest income was $234,000 and $579,000 for the three-month and nine-month
periods ended September 30, 1998, respectively, representing increases of 107%
and 49% from the corresponding periods in 1997. These increases were due to
higher levels of available funds invested in marketable securities primarily as
a result of the sale of preferred stock and warrants in the first quarter of
1998.
No tax provision, other than that required for foreign income or foreign
withholding taxes, was recorded for the three-month and nine month periods ended
September 30, 1998 and 1997, respectively.
FACTORS AFFECTING FUTURE OPERATING RESULTS
Certain of the information contained in this Form 10-Q, including information
with respect to the Company's plans and strategy for its business, statements
relating to the sufficiency of cash and cash equivalent balances, anticipated
expenditures and the intended effects of the Company's restructuring, sales and
marketing, product development efforts and the expected timetable and costs
relating to the Company's Year 2000 readiness (as described below under the
heading "Year 2000 Readiness Disclosure"), 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 factors listed under "Factors Affecting
Future Operating Results" in the Company's 10-K for the year ended December 31,
1997, which are incorporated herein by reference, the factors listed under "Year
2000 Readiness Disclosure", as well as the following factors:
In 1997 and the first nine months of 1998, a majority of the Company's network
sales were to existing customers for upgrade, expansion of their networks, or
consulting delivery. 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 and services. There can be no
assurance that the Company will be successful in its sales and marketing
efforts. In addition, in 1997 and the first nine months of 1998, the Company
experienced extended selling cycles due to competitive products introduced by
other vendors, an increase in multi-year customer agreements and longer
evaluations of
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<PAGE>
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 partially dependent on its ability to enhance existing
products and introduce new products on a timely basis, and to achieve market
acceptance for such enhanced new products. The Company's results in 1997 and
the first nine months of 1998 were adversely affected by delays in the
localization of certain products, and there can be no assurance that the Company
will not experience similar delays in the future. The Company introduced Year
2000 compliant versions of its VINES and StreetTalk for Windows NT products in
April 1998. In April 1998, the Company also introduced the Banyan Intranet
Messaging Suite, a product which when added to a customer's StreetTalk for
Windows NT network, can deploy a variety of standards-based mail clients while
maintaining a unified messaging back-end and enterprise directory service. In
June 1998, the Company introduced LDAP version 3.0 support for StreetTalk, a
year 2000-ready network service that provides access to Banyan's StreetTalk
directory services from LDAP-enabled applications. In August of 1998, the
Company entered into an agreement with Netegrity Incorporated to develop and
sell Banyan SiteMinder, a product that enables administrators to control user
access to web applications from a central location and provides end users with
single sign-on to personalized web content. Failure of any of these products to
achieve market acceptance could have a material adverse effect on the Company's
future results of operations.
In 1997, and the nine-month period ended September 30, 1998, international
revenues accounted for 30% of the Company's total revenues. The Company's
results of operations in 1998 have been adversely affected by the global
economic uncertainty, and in particular, the financial market instability in
Asia. There can be no assurance such uncertainty will not continue to adversely
affect the Company's operating results.
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 its majority-owned subsidiary, Switchboard
Incorporated, 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. A substantial
percentage of the traffic on the Switchboard Internet website is attributable to
the Company's marketing arrangements with America Online, Inc. ("AOL"), a
minority owner of Switchboard Incorporated. Accordingly, a substantial
percentage of Switchboard Internet advertising revenues are generally dependent
on the marketing arrangements with AOL. In August of 1998, the Company announced
that the White Pages contract between Switchboard Incorporated and AOL would not
be renewed at the end of November 1998. The Company estimates that AOL's white
pages customers account for approximately 35 percent of its overall traffic and
20 percent of its total advertising revenues. This action, or any subsequent
termination of other marketing arrangements between Switchboard Incorporated and
AOL, could have a material adverse effect on the Company. In May 1998,
Switchboard Incorporated acquired the assets, technology and Internet website of
the MapsOnUs Internet mapping operation from Lucent Technologies Incorporated.
Any delay in integrating the MapsOnUs technology into Switchboard, or 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 participating member countries of the European Union have agreed to adopt
the Euro as the common legal currency on January 1, 1999. On that same date they
will establish the fixed conversion rates between their existing sovereign
currencies and the Euro. The Company has formed a task force and has begun to
assess the potential impact on the Company that may result from the Euro
conversion. The Company cannot predict the impact of the Euro conversion, though
believes it will not be material to its operations.
In 1997 and the nine-month period ended September 30, 1998, international
revenues accounted for 29% and 28%, respectively, of the Company's total
revenues. The Company's results of operations in 1998 have been adversely
affected by the global economic uncertainty, and in particular, the financial
market instability in Asia. There can be non assurance such uncertainty will
not continue to adversely affect the Company's operating results.
Because of the foregoing factors and the factors incorporated herein by
reference, the Company believes that period-to-period comparisons of its
financial results are not necessarily meaningful and it expects that its results
of operations may fluctuate from period-to-period in the future.
YEAR 2000 READINESS DISCLOSURE
The following statement shall be considered a Year 2000 readiness disclosure to
the maximum extent allowed under the Year 2000 Information and Readiness
Disclosure Act.
In the past, many information technology products were designed with two digit
year codes that did not recognize century and millenium fields. As a result,
these hardware and software products may not function or may give incorrect
results beginning in the year 2000. In order to address this issue, such
hardware and software products must be upgraded or replaced in order to
correctly process dates beginning in the year 2000.
-12-
<PAGE>
The Company has created a company-wide year 2000 team to identify and resolve
year 2000 issues. The Company's year 2000 compliance program has identified
three potential areas of impact for review: (i) the software, information and
non-information systems used in the Company's internal business systems; (ii)
the Company's software and hardware products offered to customers; and (iii)
third party vendors, manufacturers and suppliers of products used in the
Company's internal systems or distributed with the Company's products. The
Company has identified and is testing its main internal systems and expects to
complete testing by mid 1999. Currently, the testing is approximately 25%
complete. Throughout 1998 and 1999 the Company expects to complete
implementation of any needed year 2000-related modifications to its information
systems.
The Company is also in the process of communicating with its main suppliers of
technology products and services used in its internal systems regarding the year
2000 status of such products or services. The Company is also currently
assessing its internal non-information technology systems, and expects to
complete testing and any needed modifications to these systems in 1999. The
Company has not yet developed a comprehensive contingency plan to address
situations that may result if the Company is unable to achieve year 2000
readiness of its critical operations. The Company expects in mid-1999 to
finalize its assessment of and contingency planning for potential operational or
performance problems related to year 2000-related issues with its information
systems.
The Company's total cost relating to these activities has not been and is not
expected to be material to the Company's financial position, results of
operations, or cash flows. The Company's preliminary assessment is that the cost
of completing the Company's year 2000 compliance program will be approximately
$250,000 which such approximate total does not include amounts related to the
diversion of internal resources including, without limitation, employee
salaries, which amount the Company has yet to fully quantify. The Company has
and expects to continue to fund this program from operating cash flows and does
not expect to separately account for these costs. The Company believes that
necessary modifications to its systems and products will be made on a timely
basis. However, there can be no assurance that there will not be a delay in, or
increased costs associated with, the implementation of such modifications, or
that the Company's suppliers will adequately prepare for the year 2000 issue. It
is possible that any such delays, increased costs, or supplier failures could
have a material adverse impact on the Company's operations and financial
results, by, for example, impacting the Company's ability to deliver products or
services to its customers.
The Company's year 2000 effort has included testing products currently or
recently on the Company's price list for year 2000 issues. Products have been
and are expected to continue to be tested internally. Generally, for products
that were identified as needing updates to address year 2000 issues, the Company
has prepared or is preparing updates, or has discontinued or will discontinue
the product. Currently, this testing is approximately 95% complete. Some of the
Company's customers are using product versions that the Company will not support
for year 2000 issues; the Company is attempting to notify customers of these
year 2000 issues and encouraging these customers to migrate to current product
versions that are year 2000 ready. There can be no assurance the Company will
be successful in migrating these customers to the year 2000-compliant products
of the Company.
For third party products that the Company distributes with its products, the
Company has sought information from the product manufacturers regarding the
products' year 2000 readiness status. Customers who use the third-party products
are directed to the product manufacturer for detailed year 2000 status
information. On its year 2000 website at www.Banyan.com, the Company provides
information regarding which of its products are year 2000 ready and other
general information related to the Company's year 2000 efforts. The Company's
total costs relating to these activities has not been and is not expected to be
material to the Company's financial position or results of operations.
The Company believes its current products, with any applicable updates, are
well-prepared for year 2000 data issues, and the Company plans to support these
products for data issues that may arise related to the year 2000. However,
there can be no guarantee that one or more Company products do not contain year
2000 date issues. Because the Company is in the business of selling software
products, the Company's risk of being subjected to lawsuits relating to year
2000 issues with its software products is likely to be greater than that of
companies in other industries. Because computer systems may involve different
hardware, firmware and software components from different manufacturers, it may
be difficult to determine which component in a computer system may cause a year
2000 issue. As a result, the Company may be subjected to year 2000-related
lawsuits independent of whether its products and services are year 2000 ready.
The outcome of any such lawsuit and the impact on the Company cannot be
determined at this time. Any year 2000 problems in the Company's products could
also result in delay or loss of revenue, diversion of developent resources,
damage to the Company's reputation, or increased service or warranty costs, any
of which could have a material adverse effect on the Company's business,
financial condition and results of operations.
The foregoing discussion of the Company's Year 2000 readiness contains
forward-looking statements including estimates of the timeframes and costs for
addressing the known Year 2000 issues confronting the Company and is based on
management's current estimates, which were derived using numerous assumptions.
There can be no assurance that these estimates will be achieved and actual
events and results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not limited
to, the availability of personnel with required remediation skills, the ability
of the Company to identify and correct all relevant computer code and the
success of third parties with whom the Company does business in addressing their
Year 2000 issues.
-13-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased from $(2.7) million at December 31, 1997 to $11.5
million September 30, 1998. At September 30, 1998, cash and cash equivalents
combined with short-term marketable securities were $21.7 million, compared with
$10.9 million at December 31, 1997. Cash and cash equivalents increased $13.4
million resulting in a cash balance of $20.0 million at September 30, 1998.
This increase was due primarily to net proceeds of $9.5 million from an equity
investment by HarbourVest Partners LLC, net proceeds from the sale of marketable
securities of $2.6 million, proceeds from stock plan purchases and stock options
of $2.1 million and a $1.2 million decrease in accounts receivable. This was
partially offset by decreases in deferred revenues of $3.3 million, a decrease
in accounts payable and accrued compensation and expenses of $1.1 million, and
capital expenditures of $1.1 million.
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 in 1997. The restructuring and other charges are
expected to reduce cash flow by approximately $3.1 million, of which $2.9
million had been expended through September 30, 1998. Management believes that
remaining accrued balances are adequate to cover future expenditures associated
with the 1997 and 1996 restructuring and other charges.
On September 4, 1997, the Company entered into a $15.0 million line of credit
agreement (the "Credit Agreement") with Foothill Capital Corporation
("Foothill"). 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
agreement during the period ended September 30, 1998.
The Company believes that existing cash and marketable securities, combined with
cash expected to be generated from operations and an available line of credit,
will be sufficient to fund the Company's operations through at least the next
twelve months.
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
----------------------------------------------------------
Not Applicable.
-14-
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) The exhibits used in the Exhibit Index filed as part of this
Quarterly Report on Form 10-Q are filed as part of or are
included in this Quarterly Report on Form 10-Q.
(b) The Company filed no Current Reports on Form 8-K during the
quarter for which this Quarterly Report on Form 10-Q is filed.
-15-
<PAGE>
BANYAN SYSTEMS INCORPORATED
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANYAN SYSTEMS INCORPORATED
Date: November 16, 1998 By: /s/ Richard M. Spaulding
------------------------
Richard M. Spaulding
Chief Financial Officer,
Vice President, Finance and Treasurer
(principal financial and accounting officer)
-16-
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER TITLE OF DOCUMENT
- - -------------- -----------------
10 Amendment No. 1 to Separation Agreement and Release and
Waiver of Claims dated as of September 21, 1998 by and
between the Company and David C. Mahoney.
27 Financial Data Schedule.
<PAGE>
EXHIBIT 10
AMENDMENT NO. 1 TO SEPARATION AGREEMENT
AND RELEASE AND WAIVER OF CLAIMS
This Amendment No. 1 to the Separation Agreement and Release and Waiver of
Claims (the "Agreement") dated as of May 31, 1997, by and between Banyan Systems
Incorporated, a Massachusetts corporation ("Banyan") and David C. Mahoney (the
"Undersigned"), is entered into as of September 21, 1998.
For good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged by the parties hereto, Banyan and the Undersigned agree
as follows:
1. The Stock Option to purchase 50,000 shares of Common Stock of Banyan
(originally granted on January 1, 1991), which is referenced in
Section 3(b) of Exhibit A to the Agreement, may be exercised by the
Undersigned through the period ending on April 1, 1999.
2. All other provisions of the Agreement shall remain unchanged and in
full force and effect in accordance with their terms.
Executed by the parties hereto as of the date first set forth above.
BANYAN SYSTEMS INCORPORATED
By: /s/ William P. Ferry
--------------------
Name: William P. Ferry
Title: Chairman and Chief Executive Officer
/s/ David C. Mahoney
--------------------
David C. Mahoney
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<PAGE>
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<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 20,032 6,674
<SECURITIES> 1,628 4,202
<RECEIVABLES> 18,074 20,681
<ALLOWANCES> 2,391 3,721
<INVENTORY> 1,011 1,023
<CURRENT-ASSETS> 41,487 31,972
<PP&E> 40,439 38,696
<DEPRECIATION> 35,258 32,886
<TOTAL-ASSETS> 49,662 42,928
<CURRENT-LIABILITIES> 29,974 34,704
<BONDS> 0 0
0 0
3 0
<COMMON> 202 193
<OTHER-SE> 16,800 4,884
<TOTAL-LIABILITY-AND-EQUITY> 49,662 42,928
<SALES> 37,459 45,441
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<CGS> 5,601 6,164
<TOTAL-COSTS> 54,683 75,139
<OTHER-EXPENSES> 696 209
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 90 71
<INCOME-PRETAX> 663 (19,055)
<INCOME-TAX> 378 233
<INCOME-CONTINUING> 285 (19,288)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 285 (19,288)
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