<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 June 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 each of the issuer's classes of common stock as
of July 31, 1998:
Class Number of Shares Outstanding
----------------------------- ----------------------------
Common Stock, par value $.01 per share 20,205,156
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BANYAN SYSTEMS INCORPORATED
INDEX
<TABLE>
<CAPTION>
Page Number
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations
Three and Six months ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows
Six months ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 13
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Matters 14
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 16
EXHIBIT INDEX 17
</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 and the Company's liquidity and capital resources for the next 12
months. 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, Item 2 of this Quarterly Report
on Form 10-Q.
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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 June 30, 1998 December 31, 1997
----------------------- -----------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 22,241 $ 6,674
Marketable securities 127 4,202
Accounts receivable, less allowances of $2,678 and $3,721 13,428 16,960
Inventories 1,071 1,023
Other current assets 3,423 3,113
-------- --------
Total current assets 40,290 31,972
Property and equipment:
Computers and peripherals 24,540 23,848
Equipment 9,907 9,587
Furniture and fixtures 2,715 2,725
Leasehold improvements 2,450 2,536
-------- --------
Total 39,612 38,696
Less accumulated depreciation and amortization 34,382 32,886
-------- --------
Property and equipment, net 5,230 5,810
Other assets, net of accumulated amortization of $1,988 and $3,770 3,288 5,146
-------- --------
Total assets $ 48,808 $ 42,928
======== ========
LIABILITIES
Current liabilities:
Accounts payable $ 2,137 $ 2,039
Accrued compensation 4,182 5,222
Accrued expenses 6,208 6,165
Accrued costs for restructuring and other charges 761 939
Income taxes payable 133 270
Note payable - 1,139
Deferred revenue 16,041 18,930
Long-term debt current portion 500 -
-------- --------
Total current liabilities 29,962 34,704
Software licenses payable, non-current - 590
Long-term debt 600 -
Minority interest in consolidated subsidiaries 2,166 2,557
STOCKHOLDERS' EQUITY
Convertible preferred stock, $.01 par value; authorized 1,000,000
shares; issued and outstanding 263,158 and none. 3 -
Common stock, $.01 par value; authorized 35,000,000 shares; issued
and outstanding 20,149,699 and 19,346,677 shares 203 193
Additional paid-in capital 77,356 66,020
Accumulated deficit (33,096) (32,700)
Treasury stock at cost; 1,848,000 common shares (28,564) (28,564)
Accumulated other comprehensive income 178 128
-------- --------
Total stockholders' equity 16,080 5,077
-------- --------
Total liabilities and stockholders' equity $ 48,808 $ 42,928
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE>
BANYAN SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
1998 1997 1998 1997
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Revenues:
Software $10,792 $ 13,857 $22,510 $ 30,235
Services 5,638 3,160 10,593 6,803
Internet advertising 1,706 56 2,786 66
------- -------- ------- --------
Total revenues 18,136 17,073 35,889 37,104
Cost of revenues:
Software 1,331 1,531 2,618 4,129
Services 3,603 2,476 6,736 5,093
Internet advertising 556 169 1,028 315
------- -------- ------- --------
Total cost of revenues 5,490 4,176 10,382 9,537
------- -------- ------- --------
Gross margin 12,646 12,897 25,507 27,567
Operating expenses:
Sales and marketing 7,664 10,196 15,860 23,178
Product development 2,915 4,351 5,762 9,079
General and administrative 1,597 2,343 3,078 5,691
Purchased research and development 1,400 - 1,400 -
Restructuring and other charges - 9,700 - 9,700
------- -------- ------- --------
Total operating expenses 13,576 26,590 26,100 47,648
------- -------- ------- --------
Loss from operations (930) (13,693) (593) (20,081)
Other income/(expense):
Interest income 195 134 345 276
Interest expense (11) (25) (33) (50)
Other, net 129 (10) 108 (41)
------- -------- ------- --------
Total other income/(expense) 313 99 420 185
------- -------- ------- --------
Loss before income taxes (617) (13,594) (173) (19,896)
Provision for income taxes 156 71 223 161
------- -------- ------- --------
Net loss $ (773) $(13,665) $ (396) $(20,057)
======= ======== ======= ========
Net loss per common share:
Basic $(0.04) $(0.79) $(0.02) $(1.16)
======= ======== ======= ========
Diluted $(0.04) $(0.79) $(0.02) $(1.16)
======= ======== ======= ========
Weighted average number of common shares:
Basic 18,055 17,306 17,863 17,279
======= ======== ======= ========
Diluted 18,055 17,306 17,863 17,279
======= ======== ======= ========
</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>
Six Months Ended June 30,
--------------------------------------
1998 1997
--------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (396) $(20,057)
Adjustments to reconcile net loss to net cash provided by/(used in) operating activities:
Depreciation and amortization 2,447 4,350
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 3,434 8,113
(Increase)/decrease in inventories (59) 1,161
(Increase)/decrease in other current assets (341) 1,052
(Decrease) in other liabilities (566) (374)
(Decrease) in accounts payable and accrued compensation and expenses (1,162) (4,090)
(Decrease) in accrued costs for restructuring and other charges (328) (329)
(Decrease) in software licenses payable, net - (244)
(Decrease)/increase in income taxes payable (137) 78
Decrease in other non current assets - 99
(Decrease) in deferred revenue (2,862) (1,864)
------- --------
Net cash provided by/(used in) operating activities 1,430 (5,538)
Cash flows from investing activities:
Capital expenditures (921) (828)
Minority interest equity investments - 50
Capitalization of software costs - (613)
Acquisition of software licenses - (150)
Proceeds from marketable securities, net 4,083 2,765
Acquisition of technology (500) -
------- --------
Net cash provided by investing activities 2,662 1,224
Cash flows from financing activities:
Net proceeds from issuance of convertible preferred stock 9,500 -
Proceeds from stock plan purchases and stock options 1,849 591
------- --------
Net cash provided by financing activities 11,349 591
Effect of exchange rate changes on cash and cash equivalents 126 (191)
------- --------
Net increase/(decrease) in cash and cash equivalents 15,567 (3,914)
Cash and cash equivalents at beginning of the period 6,674 10,613
------- --------
Cash and cash equivalents at end of the period $22,241 $ 6,699
======= ========
</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 June 30, 1998, and have
been prepared by the Company in accordance with generally accepted
accounting principles. 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 consolidated 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 June 30, 1998 are not
necessarily indicative of the results expected for the full fiscal year or
for any future period.
B. INVENTORIES:
Inventories consist of the following at:
(in thousands) June 30, 1998 December 31, 1997
------------- -----------------
Purchased parts $ 370 $ 356
Work in process 210 270
Finished goods 491 397
------- -------
$1,071 $1,023
======= =======
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.
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SEGMENT INFORMATION FOR THE SIX-MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS)
Network Internet Total
Software & Services Advertising Company
------------------- ------------ ---------
Revenues
Network software $22,510 $ - $22,510
Network services 10,593 - 10,593
Internet advertising - 2,786 2,786
------- ------- -------
Total revenue 33,103 2,786 35,889
Cost of revenues 9,354 1,028 10,382
------- ------- -------
Gross margin 23,749 1,758 25,507
Operating expenses 20,595 5,505 26,100
------- ------- -------
Operating income/(loss) $ 3,154 $(3,747) $ (593)
======= ======= =======
Total assets $45,662 $ 3,146 $48,808
======= ======= =======
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, as their effect would have been anti-dilutive for the periods
ended June 30, 1998 and 1997. 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 Six Months Ended
June 30, June 30,
------------------ ---------------------
1998 1997 1998 1997
--------- -------- --------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Basic earnings per share
Numerator:
Net loss $ (773) $(13,665) $ (396) $(20,057)
Denominator:
Common shares outstanding 18,055 17,306 17,863 17,279
------- -------- ------- --------
Basic EPS $ (0.04) $ (0.79) $ (0.02) $ (1.16)
======= ======== ======= ========
Diluted earnings per share
Numerator:
Net loss $ (773) $(13,665) $ (396) $(20,057)
Denominator:
Common shares outstanding 18,055 17,306 17,863 17,279
Common stock equivalents - - - -
------- -------- ------- --------
Total shares 18,055 17,306 17,863 17,279
------- -------- ------- --------
Diluted EPS $ (0.04) $ (0.79) $ (0.02) $ (1.16)
======= ======== ======= ========
</TABLE>
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<PAGE>
Options and warrants to purchase 2,629,000 and 759,000 shares of Common
Stock outstanding during both the three-months and six-months ended June
30, 1998 and 1997, respectively, 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 the reporting and display of
comprehensive income and its components. SFAS 130 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.
Six months ended
(in thousands)
June 30, 1998 June 30, 1997
------------- -------------
Net loss $(396) $(20,057)
Other comprehensive income 50 14
----- --------
Comprehensive loss $(346) $(20,043)
===== ========
F. PURCHASED TECHNOLOGY
On May 18, 1998, Switchboard Incorporated, a majority-owned subsidiary of
the Company, acquired the assets, technology and website of the
MapsOnUs(TM) 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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<PAGE>
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 June 30, 1998 were $18.1
million, which represented a 6.2% increase when compared to the corresponding
period in 1997. This increase was due in part to incremental revenues from
services and Internet advertising offset by a decrease in software revenues.
Total revenues for the six-month period ended June 30, 1998 were $35.9 million,
which represented a 3.3% 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 June 30, 1998
decreased by $3.1 million, or 22%, when compared to the corresponding period in
1997. The Company's software revenues in the six-month period ended June 30,
1998, decreased by $7.7 million, or 26%, when compared to the corresponding
period in 1997. The decline in software revenues in 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
$2.5 million, or 78%, and $3.8 million, or 56%, for the three-month and six-
month periods ended June 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. Internet advertising
revenues increased to $1.7 million and $2.8 million for the three and six month
periods ended June 30, 1998 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 six-month periods ended June 30,
1998 were $5.7 million and $11.2 million, respectively, compared with $5.1
million and $11.3 million for the corresponding periods in 1997. The increase
for the three-month period ended June 30, 1998 was primarily due to additional
revenues from consulting services. The decrease for the six-month period ended
June 30, 1998 was primarily due to delayed purchasing decisions in Southeast
Asia due to continued uncertainty in the region as a result of financial market
instability. International revenues accounted for 32% and 31% for the three and
six month periods ended June 30, 1998, compared with 30% for both corresponding
periods in 1997.
Gross margins for software were 88%, or $9.5 million, and 88%, or $19.9 million,
for the three-month and six-month periods ended June 30, 1998, respectively,
compared with 89%, or $12.3 million, and 86%, or $26.1 million, for the
corresponding periods in 1997. The decrease in gross margin percentage for the
three-month period ended June 30, 1998 when compared to the corresponding period
last year was primarily related to higher levels of lower margin third party
product applications. The increase in gross margin percentage for the six-month
period ended June 30, 1998 when compared to the corresponding period last year
was primarily due to 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.
The decreases in gross margin dollars for the three-month and six-month periods
ended June 30, 1998 were primarily due to lower sales volume in the current year
periods.
Gross margins for services were 36%, or $2.0 million, and 36%, or $3.9 million,
for the three-month and six-month periods ended June 30, 1998, respectively,
compared with 22%, or $0.7 million, and 25%, or $1.7 million, for the
corresponding periods in 1997. The increase in gross
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margin percentage in 1998 was primarily due to increased revenues and better
utilization of delivery personnel. The increase in gross margin dollars in 1998
was due to increased revenues from consulting services.
Gross margins for Internet advertising were 67% or $1.2 million, and 63%, or
$1.8 million for the three-month and six-month periods ended June 30, 1998,
respectively, compared with $(0.1) 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 revenues 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 $7.7 million and $15.9 million for the three-
month and six-month periods ended June 30, 1998, respectively, represented
decreases of 25% and 32% 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 expanding consulting service activities. Partially offsetting these
decreases was increased promotional investment in the Internet advertising
segment required to increase site traffic. Sales and marketing expenses as a
percentage of revenues were 42% and 44% for the three-month and six-month
periods ended June 30, 1998, as compared to 60% and 62% for the corresponding
periods in 1997.
Product development expenses of $2.9 million and $5.8 million for the three-
month and six-month periods ended June 30, 1998, respectively, represented
decreases of 33% and 37%, respectively, over the corresponding periods in 1997.
These decreases were primarily due to lower staff 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. Product development
expenses as a percentage of revenues were approximately 16% for both the three-
month and six-month periods ended June 30, 1998, as compared to 25% and 24% for
the corresponding periods in 1997. Software costs of $100,000 and $424,000 were
capitalized for the three-month and six-month periods ended June 30, 1997. The
amounts capitalized represented 2% and 4% of product development expenditures
for the three-month and six-month periods ended June 30, 1997, respectively.
There were no amounts capitalized during the same periods in 1998.
General and administrative expenses of $1.6 million and $3.1 million for the
three-month and six-month periods ended June 30, 1998, respectively, represented
decreases of 32% and 46% when compared to the corresponding periods in 1997.
The decreases were 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 quarter ended June 30, 1997. General and administrative expenses as a
percentage of revenues were 9% for both the three-month and six-month periods
ended June 30, 1998, as compared to 14% and 15% for the corresponding periods in
1997.
On May 18, 1998, Switchboard Incorporated, the 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
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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, 1998, 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 was 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 June 30,
1998.
Interest income was $195,000 and $345,000 for the three-month and six-month
periods ended June 30, 1998, respectively, and represented increases of 46% and
25% from the corresponding periods in 1997. These increases were due to higher
levels of available funds invested in marketable securities.
No tax provision, other than that required for foreign income or foreign
withholding taxes, was recorded for the three-month and six month periods ended
June 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, 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 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, as well as the following
factors:
In 1997 and the first six 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 six 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 to 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 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 six months of 1998 were adversely affected by delays in the
localization of certain products, and there can be no assurance that the
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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. Failure of any of these
products to achieve market acceptance could have a material adverse effect on
the Company's future 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, 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 significant
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 significant
percentage of Switchboard's Internet advertising revenues are generally
dependent on the marketing arrangements with AOL. These marketing arrangements
can be terminated on short notice by AOL. Any such termination by AOL, or any
other adverse change in the Company's relationship with 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased from $(2.7) million at December 31, 1997 to $10.3
million June 30, 1998. At June 30, 1998, cash and cash equivalents combined
with short-term marketable securities were $22.4 million, compared with $10.9
million at December 31, 1997. Cash and cash equivalents increased $15.6 million
resulting in a cash balance of $22.2 million June 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
$4.1 million, a $3.4 million decrease in accounts receivable, proceeds from
stock plan purchases and stock options of $1.8 million, and other various
operating, financing and investing activities. This was partially offset by
decreases in deferred revenues of $2.9 million, a decrease in accounts payable
and accrued compensation and expenses of $1.2 million, and capital expenditures
of $0.9 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. The restructuring and other charges are expected
to reduce cash flow by approximately $3.1 million, of which $2.8 million had
been expended through June 30, 1998. 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
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<PAGE>
$3.5 million had been expended through June 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 June 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.
-13-
<PAGE>
BANYAN SYSTEMS INCORPORATED
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the Company's Annual Meeting of Stockholders held on May 12, 1998,
the following proposals were adopted by the vote specified below:
<TABLE>
<CAPTION>
Against or Broker
Proposal For Withheld Abstain Non-votes
-------- --- -------- ------- ---------
<S> <C> <C> <C> <C>
1. Election of two Class III Directors:
William P. Ferry 17,352,597 1,072,084 --- ---
David N. Strohm 17,352,597 1,073,284 --- ---
2. Ratification and approval of 7,909,355 2,590,749 49,635 7,874,942
amendments to the Company's
1992 Stock Incentive Plan
3. Ratification and approval of 9,935,940 576,795 37,004 7,874,942
amendment to the Company's
1995 Employee Stock Purchase Plan
4. Approval of amendment to the 17,900,567 486,476 37,638 ---
Company's Second Restated
Articles of Incorporation
5. Ratification of the selection of 18,349,093 57,623 17,965 ---
Coopers & Lybrand L.L.P.
as the Company's independent accountants
</TABLE>
In addition to the Directors elected at the Annual Meeting, the term of
office of the following Directors also continued following the meeting:
G. Leonard Baker, Jr., John F. Burton, David C. Mahoney, Fontaine K.
Richardson and Robert M. Wadsworth.
ITEM 5. Other Information
-----------------
Stockholder Proposals for 1999 Annual Meeting
As set forth in the Company's Proxy Statement for its 1998 Annual Meeting
of Stockholders, stockholder proposals submitted pursuant to Rule 14a-8
under the Securities Exchange Act of 1934, as amended, for inclusion in
the Company's proxy materials for its 1999 Annual Meeting of Stockholders
must be received by the Secretary of the Company at the principal offices
of the Company no later than December 7, 1998.
In addition, in accordance with recent amendments to Rules 14a-4, 14a-5
and 14a-8 under the Exchange Act, written notice of stockholder proposals
submitted outside the processes of Rule 14a-8 for consideration at the
1999 Annual Meeting of Stockholders must be received by the Company on or
before February 20, 1999 in order to be considered timely for purposes of
Rule 14a-4. The persons designated in the Company's proxy statement and
management
-14-
<PAGE>
proxy card will be granted discretionary authority with respect to any
stockholder proposal with respect to which the Company does not receive
timely notice.
Management Changes
Effective August 13, 1998, Alexander D. Crosett III, Vice President,
Internet Engineering and Chief Technology Officer of the Company, has
been promoted to Vice President, Development. Mr. Crosett succeeds
William E. Warner Jr., Senior Vice President, Product Management and
Development of the Company, who has resigned his position with the
Company, effective August 31, 1998.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. The exhibits listed in the Exhibit Index filed as part of this
report are filed as part of or are included in this report.
b. The Company filed no reports on Form 8-K during the quarter for
which this report 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: August 14, 1998 By: /s/ Richard M. Spaulding
------------------------
Richard M. Spaulding
Chief Financial Officer,
Vice President, Finance and Treasurer
(principal financial and accounting officer)
-16-
<PAGE>
OTHER EXHIBITS
EXHIBIT NUMBER TITLE OF DOCUMENT
- -------------- -----------------
10 1992 Stock Incentive Plan, as amended.
27 Financial Data Schedule.
(1) Incorporated herein by reference to the exhibits to the
Company's Registration Statement on Form S-8 (File No. 333-
53705).
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 22,241 6,674
<SECURITIES> 127 4,202
<RECEIVABLES> 16,106 20,681
<ALLOWANCES> 2,678 3,721
<INVENTORY> 1,071 1,023
<CURRENT-ASSETS> 40,290 31,972
<PP&E> 39,612 38,696
<DEPRECIATION> 34,382 32,886
<TOTAL-ASSETS> 48,808 42,928
<CURRENT-LIABILITIES> 29,962 34,704
<BONDS> 0 0
0 0
3 0
<COMMON> 203 193
<OTHER-SE> 15,874 4,884
<TOTAL-LIABILITY-AND-EQUITY> 48,808 42,928
<SALES> 25,296 30,301
<TOTAL-REVENUES> 35,889 37,104
<CGS> 3,646 4,444
<TOTAL-COSTS> 36,482 57,185
<OTHER-EXPENSES> (453) (235)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 33 50
<INCOME-PRETAX> (173) (19,896)
<INCOME-TAX> 223 161
<INCOME-CONTINUING> (396) (20,057)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (396) (20,057)
<EPS-PRIMARY> (0.02) (1.16)
<EPS-DILUTED> (0.02) (1.16)
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