<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, 1999 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
Incorporation or Organization) Identification No.)
120 FLANDERS ROAD
WESTBORO, MASSACHUSETTS 01581
(Address of Principal Executive Offices) (Zip Code)
(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 October 31, 1999:
Class Number of Shares Outstanding
- -------------------------------------- -----------------------------
Common Stock, par value $.01 per share 24,392,779
1
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BANYAN SYSTEMS INCORPORATED
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations
Three and Nine months ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. OTHER INFORMATION
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURE 20
</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.
2
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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, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 21,999 $ 15,160
Marketable securities 49,795 4,052
Accounts receivable, less allowances of $2,904 and $2,917 15,356 21,392
Inventories 715 890
Other current assets 4,540 3,808
--------- ---------
Total current assets 92,405 45,302
Property and equipment:
Computers and peripherals 24,043 24,859
Equipment 10,807 10,455
Furniture and fixtures 2,696 2,659
Leasehold improvements 2,646 2,586
--------- ---------
Total 40,192 40,559
Less accumulated depreciation and amortization (36,039) (35,609)
--------- ---------
Property and equipment, net 4,153 4,950
Marketable securities 6,671 3,076
Other assets, net of accumulated amortization of $1,740 and $2,669 1,665 2,882
--------- ---------
Total assets $ 104,894 $ 56,210
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,426 $ 3,861
Accrued compensation 4,052 4,137
Accrued expenses 7,233 6,741
Accrued costs for restructuring and other charges 385 710
Other current liabilities 808 626
Long-term debt-current portion 618 548
Deferred revenue 9,424 18,430
--------- ---------
Total current liabilities 26,946 35,053
Software licenses payable, non-current -- 150
Long-term debt -- 600
Minority interest in consolidated subsidiary 2,938 2,008
STOCKHOLDERS' EQUITY
Convertible preferred stock, $.01 par value; authorized 1,000,000 -- 3
shares; none and 263,158 issued and outstanding
Common stock, $.01 par value; authorized 35,000,000 shares; issued
24,376,468 and 20,818,982 shares 244 208
Accumulated deficit (27,651) (31,585)
Additional paid in capital 89,067 79,485
Unearned compensation (607) (1,326)
Treasury stock at cost; 1,848,000 common shares (28,564) (28,564)
Accumulated other comprehensive income 42,521 178
--------- ---------
Total stockholders' equity 75,010 18,399
--------- ---------
Total liabilities and stockholders' equity $ 104,894 $ 56,210
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
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,
-------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Revenues:
Software $ 5,552 $10,193 $21,081 $32,703
Services 10,956 6,688 30,100 17,281
Internet advertising 2,514 1,970 6,126 4,756
------- ------- ------- -------
Total revenues 19,022 18,851 57,307 54,740
Cost of revenues:
Software 1,157 1,426 3,719 4,044
Services 7,598 4,336 20,515 11,072
Internet advertising 843 529 1,514 1,557
------- ------- ------- -------
Total cost of revenues 9,598 6,291 25,748 16,673
------- ------- ------- -------
Gross profit 9,424 12,560 31,559 38,067
Operating expenses:
Sales and marketing 7,220 7,612 20,021 23,472
Product development 2,258 2,826 7,097 8,588
General and administrative 1,874 1,472 5,441 4,550
Other charges - - - 1,400
------- ------- ------- -------
Total operating expenses 11,352 11,910 32,559 38,010
------- ------- ------- -------
(Loss)/income from operations (1,928) 650 (1,000) 57
Other income/(expense):
Gain on sale of investment - - 4,043 -
Interest income 403 234 935 579
Interest expense (35) (57) (101) (90)
Other, net 626 9 334 117
------- ------- ------- -------
Total other income/(expense) 994 186 5,211 606
------- ------- ------- -------
(Loss)/income before income taxes (934) 836 4,211 663
Provision for income taxes 51 155 277 378
------- ------- ------- -------
Net (loss)/income $ (985) $ 681 $ 3,934 $ 285
======= ======= ======= =======
Net (loss)/income per common share:
Basic $ (0.04) $ 0.04 $ 0.19 $ 0.02
======= ======= ======= =======
Diluted $ (0.04) $ 0.03 $ 0.16 $ 0.01
======= ======= ======= =======
Weighted average number of common shares:
Basic 22,380 18,187 20,613 17,972
======= ======= ======= =======
Diluted 22,380 22,403 24,843 21,808
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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BANYAN SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,934 $ 285
Adjustments to reconcile net income to net cash (used in)/provided by operating
activities:
Gain on sale of investments (4,043) --
Depreciation and amortization 2,708 3,512
Other charges -- 1,400
Amortization of unearned compensation 787 --
Loss on disposal of assets 59 --
Non-cash advertising and promotion 77 --
Changes in operating assets and liabilities:
Decrease in accounts receivable 6,022 1,220
Decrease in inventories 175 49
Decrease/(increase) in other current assets 289 (47)
(Decrease) in other liabilities (1,342) (649)
(Decrease) in accounts payable and accrued compensation and expenses (318) (1,198)
(Decrease) in accrued costs for restructuring and other charges (325) (658)
(Decrease) in software licenses payable, net (500) --
Decrease in other non current assets 251 --
(Decrease) in deferred revenue (9,033) (3,346)
-------- --------
Net cash (used in)/provided by operating activities (1,259) 568
Cash flows from investing activities:
Capital expenditures (1,443) (1,084)
Sale of equity in subsidiary 4,298 --
Proceeds from investment 4,743 --
(Purchases of)/proceeds from marketable securities, net (5,511) 2,582
Acquisition of technology -- (500)
-------- --------
Net cash (used in)/provided by investing activities (2,087) 998
Cash flows from financing activities:
Net proceeds from issuance of convertible preferred stock -- 9,500
Net proceeds from issuance of warrants 2,832 --
Proceeds from stock plan purchases and stock options 3,312 2,093
-------- --------
Net cash provided by financing activities 6,144 11,593
Effect of exchange rate changes on cash and cash equivalents (133) 199
-------- --------
Net increase in cash and cash equivalents 6,839 13,358
Cash and cash equivalents at beginning of the period 15,160 6,674
-------- --------
Cash and cash equivalents at end of the period $ 21,999 $ 20,032
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
5
<PAGE>
BANYAN SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements include the
accounts of Banyan Systems Incorporated ("Banyan Worldwide") and its
subsidiaries as of September 30, 1999, 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 1998 Annual Report to Stockholders and Annual Report
on Form 10-K.
The results of operations for the three-month period ended September 30, 1999
are not necessarily indicative of the results expected for the full fiscal year
or any future interim period.
B. REPORTABLE 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 solutions 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. Switchboard is an
Internet-based local merchant network interconnecting consumers, merchants and
national advertisers. Switchboard connects consumers searching for specific
products and services with the merchants that provide them. Switchboard offers
its users local information about people and businesses across the United
States. Switchboard's online network gives merchants a way to get their
businesses represented online and facilitates commerce by connecting them with
consumers. Switchboard provides an online lead generation engine for those
local merchants and for national advertisers that reaches consumers motivated to
buy products and services in specific geographic locations. The Company's
reportable segments are managed separately because they market and distribute
distinct products and services.
6
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SEGMENT INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, 1999
-------------------------------------------
Network Internet Total
Software & Services Advertising Company
------------------- ------------ ---------
<S> <C> <C> <C>
Revenues
Network software $ 21,081 $ -- $ 21,081
Network services 30,100 -- 30,100
Internet advertising -- 6,126 6,126
--------- --------- ---------
Total revenue 51,181 6,126 57,307
Cost of revenues 24,234 1,514 25,748
--------- --------- ---------
Gross profit 26,947 4,612 31,559
Operating expenses 25,706 6,853 32,559
--------- --------- ---------
Operating income/(loss) $ 1,241 $ (2,241) $ (1,000)
========= ========= =========
Total assets at
September 30, 1999 $ 95,451 $ 9,443 $ 104,894
========= ========= =========
Total assets at
December 31, 1998 $ 53,064 $ 3,146 $ 56,210
========= ========= =========
<CAPTION>
September 30, 1998
-------------------------------------------
Network Internet Total
Software & Services Advertising Company
------------------- ----------- --------
<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 profit 34,868 3,199 38,067
Operating expenses 30,353 7,657 38,010
------- ------- -------
Operating income/(loss) $ 4,515 $(4,458) $ 57
======= ======= =======
</TABLE>
7
<PAGE>
C. BASIC AND DILUTED EARNINGS PER SHARE:
Basic earnings per share is based upon the weighted average number of common
shares outstanding during the period. Diluted earnings per share includes the
dilutive effect of potential common stock outstanding during the period.
Potential common stock results 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 shares 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,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(in thousands, except per share data)
Basic earnings per share
Numerator:
Net (loss)/income $ (985) $ 681 $ 3,934 $ 285
Denominator:
Weighted average common shares outstanding 22,380 18,187 20,613 17,972
-------- -------- -------- --------
Basic earnings per share $ (0.04) $ 0.04 $ 0.19 $ 0.02
======== ======== ======== ========
Diluted earnings per share
Numerator:
Net (loss)/income $ (985) $ 681 $ 3,934 $ 285
Denominator:
Weighted average common shares outstanding 22,380 18,187 20,613 17,972
Dilutive potential common stock -- 4,216 4,230 3,836
-------- -------- -------- --------
Total shares 22,380 22,403 24,843 21,808
-------- -------- -------- --------
Diluted earnings per share $ (0.04) $ 0.03 $ 0.16 $ 0.01
======== ======== ======== ========
</TABLE>
Options and warrants to purchase 497,000 shares of common stock outstanding
during the nine-months ended September 30, 1999, and 2,594,068 during both the
three-months and nine-months ended September 30, 1998 were excluded from the
calculation of diluted net income per share because the exercise price of those
options and warrants exceeded the average market price of the Company's common
stock during the period. Options and warrants to purchase 6,336,313 shares of
common stock outstanding during the three-months ended September 30, 1999, were
excluded from the calculation of diluted net income per share as the effect of
their inclusion would have been anti-dilutive.
8
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D. COMPREHENSIVE INCOME
Other comprehensive income includes unrealized gains or losses on the Company's
available-for-sale investments and foreign currency translation adjustments.
<TABLE>
<CAPTION>
Nine months ended
--------------------------------------
September 30, 1999 September 30, 1998
------------------ ------------------
(in thousands)
<S> <C> <C>
Net income $ 3,934 $ 285
Other comprehensive income:
Unrealized gains on available-for-sale investments 42,326 8
Foreign currency translation adjustment 17 42
------- -------
Total other comprehensive income 42,343 50
------- -------
Comprehensive income $46,277 $ 335
======= =======
</TABLE>
E. SALE OF INVESTMENT
In 1996, the Company made an equity investment of approximately $2,001,000 in
Software.com, a company which supplies Internet messaging solutions to service
providers (ISPs, telcos, cable companies, and Web portals). In the second
quarter of 1999, as part of Software.com's initial public offering, the Company
sold 339,985 shares of common stock of Software.com resulting in net proceeds of
$4,743,000 and a realized net gain of approximately $4,043,000. Additionally,
the Company held 1,021,202 shares of common stock of Software.com at September
30, 1999 which were valued at $42.875 per share, for a total value of
$43,784,000. The investment is classified as available for sale in accordance
with FAS123. The net unrealized gain of approximately $42,304,000 is included in
other comprehensive income within stockholders' equity. These remaining shares
of common stock of Software.com held by the Company are subject to a six-month
trading restriction which ends in December 1999.
F. CBS ALLIANCE
On June 30, 1999, the Company and CBS consummated their agreement for CBS to
acquire a 35% equity stake in Switchboard. In exchange, Switchboard received
$5,000,000 in cash and will receive promotion and branding over terms of seven
and ten years, respectively, across the full range of CBS media properties, as
well as those of its radio and outdoor subsidiary, Infinity Broadcasting
Corporation. CBS, the Company and Switchboard Incorporated entered into an
Advertising and Promotion Agreement dated June 30, 1999, which provides
advertising with a future value of $95,000,000 to Switchboard over seven years.
The net present value of the advertising has been recorded as a subscription
receivable and an offsetting amount as paid-in capital in the Switchboard equity
accounts. The subscription equity account will be amortized as marketing
expense over the advertising period. The objectives of the Advertising and
Promotion Agreement include (i) the promotion through CBS of the Switchboard
site to be accessed via the domain name www.cbs.switchboard.com or
www.switchboard.com; (ii) the establishment of co-branded interfaces between CBS
sites and the Switchboard site; (iii) the development of vertical guides for CBS
sites and CBS associated sites; and (iv) the utilization of CBS's cross-media
sales group, CBS PLUS, in selling Switchboard advertisements and e-commerce
services. Switchboard will be required to pay CBS a commission on the net
advertising revenues derived from the sale of advertising on the co-branded
interfaces or vertical guides during the term of the agreement. CBS received
warrants to purchase an additional 5% of Switchboard at a per share exercise
price of $1.00, which would increase its ownership position in the subsidiary to
40%. The warrants are not exercisable by CBS until the earlier of (i) June 30,
2001 or (ii) the closing of an initial public offering of Switchboard's
9
<PAGE>
common stock. CBS and Switchboard Incorporated entered into a License Agreement
dated as of June 30, 1999 which provides a ten year license to Switchboard for
the utilization of the CBS Marks. Two representatives of CBS have joined
Switchboard's Board of Directors. Additionally, the Company issued a common
stock purchase warrant to CBS on June 30, 1999, whereby CBS received warrants to
purchase 250,000 shares of the Company's common stock at $11.27 per share.
G. SUBSEQUENT EVENTS
On October 27, 1999, the Company announced the Board of Directors approved a
plan to exit the software business. While the Company plans to continue to
provide consulting services and technical support to its customers over the next
one to two years, it will exit its software business. Effective in the fourth
quarter of 1999, the Company will reclassify its network software business as
discontinued operations. The Company expects to record an after-tax charge of
approximately $4,000,000 to $5,000,000 in the fourth quarter of 1999 to account
for the unrealizable value of certain software assets, excess facilities and a
personnel reduction of approximately 45 employees. In the fourth quarter of
1999, the Company also announced plans to sell its WorkTop software product, a
browser-based productivity tool.
On October 29, 1999, the Company's majority-owned subsidiary Switchboard
Incorporated filed a registration statement with the Securities and Exchange
Commission for an initial public offering of its common stock.
10
<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 September 30, 1999 were $19.0
million, which represented a 1% increase when compared to the corresponding
period in 1998. Total revenues for the nine-month period ended September 30,
1999 were $57.3 million, which represented a 5% increase when compared to the
corresponding period in 1998. These increases were due to incremental revenues
from services and Internet advertising offset in part by a decrease in software
revenues. The Company's software revenues for the three-month period ended
September 30, 1999 decreased by $4.6 million, or 46%, when compared to the
corresponding period in 1998. The Company's software revenues in the nine-month
period ended September 30, 1999, decreased by $11.6 million, or 36%, when
compared to the corresponding period in 1998. The decline in software revenues
in 1999 was attributable primarily to lower levels of sales of the Company's
VINES and messaging products, primarily as a result of competitive product
offerings. On October 27, 1999, the Company announced a plan to exit the
software business and, accordingly, expects that software revenues will decline
in a more rapid rate in the future. Services revenues increased by $4.3 million,
or 64%, and $12.8 million, or 74%, for the three-month and nine-month periods
ended September 30, 1999, when compared to the corresponding periods in 1998.
The increase in services revenues in 1999 was attributable primarily to
additional revenues generated from consulting services and technical support
services. Internet advertising revenues increased by $0.5 million, or 28%, and
$1.4 million, or 29% for the three and nine month periods ended September 30,
1999 when compared to the corresponding periods in 1998. The increase in
Internet advertising revenues in 1999, generated by the Company's majority-owned
subsidiary Switchboard Incorporated ("Switchboard"), was due to an increase in
syndication and license revenue as well as revenue from the merchant aggregation
program which was launched in the first quarter of 1999. For the nine-months
ended September 30, 1999, the increase was partially offset by declines in
national advertising revenues as a result of the termination of Switchboard's
marketing relationship with America Online, Inc. ("AOL").
International revenues for the three-month and nine-month periods ended
September 30, 1999 were $5.6 million and $17.9 million, respectively, compared
with $5.2 million and $16.4 million for the corresponding periods in 1998. The
increases for both the three-month and nine-month periods ended September 30,
1999 were primarily due to additional revenues from consulting services offset
in part by a decline in software revenues. International revenues accounted for
29% and 31% for the three and nine month periods ended September 30, 1999,
compared with 28% and 30% for the corresponding periods in 1998.
Gross profits for software were 79%, or $4.4 million, and 82%, or $17.4 million,
for the three-month and nine-month periods ended September 30, 1999,
respectively, compared with 86%, or $8.8 million, and 88%, or $28.7 million, for
the corresponding periods in 1998. The decrease in both gross profit dollars and
percentage for the three-month and nine-month periods ended September 30, 1999
when compared to the corresponding periods last year was primarily due to the
impact of lower sales volumes being spread over fixed costs and a higher mix of
lower margin third-party product sales. Based on the Company's announced plans
to not pursue its network software business, the Company expects gross margin
dollars and percentages to decrease in future periods.
Gross profits for services were 31%, or $3.4 million, and 32%, or $9.6 million,
for the three-month and nine-month periods ended September 30, 1999,
respectively, compared with 35%, or $2.4
11
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million, and 36%, or $6.2 million, for the corresponding periods in 1998. The
increase in gross profit dollars was primarily due to an increase in revenues
from consulting services and technical support, offset in part by an increase in
delivery personnel and related costs to expand consulting services. The decrease
in gross profit percentage was primarily due to the hiring of additional
delivery personnel and related costs to expand consulting services.
Gross profits for Internet advertising were 66% or $1.7 million, and 75%, or
$4.6 million for the three-month and nine-month periods ended September 30,
1999, respectively, compared with 73%, or $1.4 million and 67%, or $3.2 million,
for the corresponding periods in 1998. The increases in gross dollars and
percentage for the nine-months ended September 30, 1999 and the three-month and
nine- month periods ended September 30, 1998 were due to an increase in
revenues. The decrease in gross margin percentage in the three-months ended
September 30, 1999 was due to a hardware component of a licensing agreement
completed in the third quarter of 1999.
Sales and marketing expenses of $7.2 million and $20.0 million for the three-
month and nine-month periods ended September 30, 1999, respectively, represented
decreases of 5% and 15% compared to the corresponding periods in 1998. The
decreases were primarily due to redeployment of staff into the Company's
expanding consulting service activities as well as a cessation of promotional
fees paid to AOL under the former marketing relationship between Switchboard and
AOL, offset in part by additional advertising expenses incurred by Switchboard
under its agreements with CBS Corporation ("CBS"). Sales and marketing expenses
as a percentage of revenues were 38% and 35% for the three-month and nine-month
periods ended September 30, 1999, as compared to 40% and 43% for the
corresponding periods in 1998.
Product development expenses of $2.3 million and $7.1 million for the three-
month and nine-month periods ended September 30, 1999, respectively, represented
decreases of 20% and 17%, respectively, over the corresponding periods in 1998.
These decreases were primarily due to lower headcount committed to the Company's
traditional software products and less costs associated with Year 2000
compliance when compared to the corresponding periods in 1998. Product
development expenses as a percentage of revenues were approximately 12% for both
the three-month and nine-month periods ended September 30, 1999, as compared to
15% and 16% for the corresponding periods in 1998, respectively. There were no
software development amounts capitalized during the nine-month periods ended
September 30, 1999 and 1998. On October 27, 1999 the Company announced a plan to
exit its software business, which is expected to significantly lower levels of
product development expense in future quarters.
General and administrative expenses of $1.9 million and $5.4 million for the
three-month and nine-month periods ended September 30, 1999, respectively,
represented increases of 27% and 20% when compared to the corresponding periods
in 1998. The increases were due to an increase in staffing related to the
Switchboard business segment as well as additional provisions for bad debts.
General and administrative expenses as a percentage of revenues were 10% and 9%
for the three-month and nine-month periods ended September 30, 1999,
respectively, compared to 8% for both the corresponding periods in 1998.
On June 24, 1999, the Company sold 339,985 shares of common stock of
Software.com as part of Software.com's initial public offering. As a result of
the transaction, the Company recorded a net gain of approximately $4.0 million.
Interest income was $403,000 and $935,000 for the three-month and nine-month
periods ended September 30, 1999, respectively, and represented increases of 72%
and 61% from the corresponding
12
<PAGE>
periods in 1998. 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 nine month periods ended
September 30, 1999 and 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased from $10.2 million at December 31, 1998 to $65.5
million September 30, 1999. At September 30, 1999, cash and cash equivalents
combined with marketable securities were $78.5 million, compared with $22.3
million at December 31, 1998. Cash and cash equivalents increased $6.8 million
resulting in a cash balance of $22.0 million September 30, 1999. This increase
was primarily due to a decrease in accounts receivable of $6.0 million, $5.9
million in cash received from Microsoft Corporation, $4.7 million in net
proceeds from the sale of shares of Software.com in its initial public offering,
$4.3 million in cash net of related expenses received from CBS Corporation for
an investment in the Company's Switchboard subsidiary, $3.3 million in proceeds
from stock plan purchases and stock option exercises and other various
operating, financing and investing activities. This was offset in part by a
$12.0 million decrease in VINES related deferred revenues and $5.5 million in
net purchases of marketable securities.
On June 30, 1999, the Company and CBS consummated their agreement for CBS to
acquire a 35% equity stake in Switchboard. In exchange, Switchboard received
$5.0 million in cash and is entitled to promotion and branding over terms of
seven and ten years, respectively, across the full range of CBS media
properties, as well as those of its radio and outdoor subsidiary, Infinity
Broadcasting Corporation. The agreement provides advertising with a future value
of $95.0 million to Switchboard over a seven-year period. CBS also received
warrants to purchase an additional 5% of Switchboard, which would increase its
ownership position to 40%. Two representatives of CBS have joined Switchboard's
Board of Directors. Additionally, CBS received warrants to purchase 250,000
shares of the Company's common stock at $11.27 per share.
In the second quarter of 1999, as part of Software.com's initial public
offering, the Company sold 339,985 shares of Software.com's common stock
resulting in net proceeds of approximately $4.7 million and a realized net gain
of approximately $4.0 million. Additionally, the Company held 1,021,202 of
Software.com's common stock shares at September 30, 1999 which were marked to
market at $42.875 per share with a total value of $43.8 million. The net
unrealized gain of $42.3 million is included in other comprehensive income
within stockholder's equity. The remaining shares of Software.com's common stock
held by the Company are subject to a six-month lock-up period that expires in
December 1999.
On January 11, 1999, the Company announced a strategic alliance with Microsoft.
As part of the agreement, Microsoft has committed to contributing $10.0 million
to the Company over a three-year period to fund the training of at least 500
professionals, marketing and development costs as well as the purchase of a
warrant to purchase 1.75 million shares of the Company's common stock. The
first of three payments to be made by Microsoft to the Company was received in
January 1999 in the amount of $5.9 million. The remaining two payments totaling
$4.1 million are scheduled to be received on or before December 31, 1999 and
2000.
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.
Foothill was granted warrants to purchase 75,000, 50,000 and 25,000 shares of
the Company's common stock
13
<PAGE>
at the then current fair market value on September 4, 1997, 1998 and 1999,
respectively. On January 13, 1999, Foothill exercised its warrants to purchase
75,000 shares of the Company's common stock pursuant to a "cashless" exercise
resulting in the issuance of 58,603 shares to Foothill. On May 14, 1999,
Foothill exercised its warrants to purchase 50,000 shares of the Company's
common stock pursuant to a "cashless" exercise resulting in the issuance of
32,098 shares to Foothill. There were no amounts outstanding under the line of
credit agreement during the period ended September 30, 1999.
The Company believes that existing cash and marketable securities, combined with
cash expected to be generated from operations and the available line of credit,
will be sufficient to fund the Company's operations through at least the next
twelve months.
14
<PAGE>
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, year 2000
readiness, anticipated expenditures and the intended effects of the Company's
discontinuation of the software business and 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 factors:
The Company continues to evolve its strategic focus, seeking to decrease its
reliance on its traditional software products while devoting additional
resources to its services and Internet business initiatives. On October 27,
1999, the Company announced a plan to exit its software business. Until the
fourth quarter of 1998, a majority of the Company's revenues were attributable
to its software business. While the Company will continue to provide consulting
services and technical support to its customers, it will no longer advance its
technology through product development. The Company's future success will depend
in part upon its ability to continue to grow its network services business,
acquire additional network services customers and adapt to changing technologies
and customer requirements. Any failure to do so could have a material adverse
effect on the Company. There can be no assurance the Company will be successful
in its new strategic focus.
As part of its strategic focus on network services, on January 11, 1999, the
Company announced a global alliance with Microsoft to deliver integrated
messaging, networking and Internet solutions and the collaboration on the design
and implementation of packaged services, solutions and support offerings based
on Microsoft's enterprise platform. The agreement contains various obligations
and milestones that must be met by the Company, including the certification of
500 Microsoft-trained professionals. The failure of the Company to meet such
obligations and milestones could result in a termination of the agreement, which
could have a material adverse effect on the Company.
On June 30, 1999, CBS acquired a 35% equity stake in Switchboard in exchange for
cash and promotion and branding to be delivered over terms of seven and ten
years, respectively. CBS also received warrants to purchase an additional 5% of
Switchboard at a per share exercise price of $1.00, which would increase its
ownership position in the subsidiary to 40%. Two representatives of CBS have
joined Switchboard's Board of Directors. Accordingly, CBS will have considerable
influence over the management of Switchboard. In connection with CBS'
investment in Switchboard, CBS and Switchboard entered into a license agreement
under which CBS licenses the "CBS" trademark and "Eye" design to Switchboard
which include broad restrictions on use and implementation. Switchboard's
failure to effectively utilize these promotional and branding capabilities could
have a material adverse impact on the Company's future operations. Moreover, a
breach by Switchboard of any of its agreements with CBS could result in the
termination of CBS' obligations to provide these promotional and branding
capabilities. In the event of such a termination, CBS would retain its
Switchboard securities. The failure of the CBS alliance to provide the
anticipated benefits to Switchboard, including increased visitation to its Web
site, could have a material adverse effect on the Company.
In 1996, the Company, through a majority-owned subsidiary, introduced
Switchboard, a directory service for Internet users. A substantial percentage
of the traffic on the Switchboard Internet Web site in 1998 was attributable to
the Company's marketing arrangements with AOL, a minority owner of Switchboard
Incorporated. Accordingly, a substantial percentage of Switchboard Internet
advertising revenues in 1998 were dependent on the marketing arrangements with
AOL. In August 1998, the Company announced that the White Pages contract between
Switchboard and AOL would not be
15
<PAGE>
renewed at the end of November 1998. In December 1998, the Company announced
that the Yellow Pages contract between Switchboard and AOL would not be renewed
at the end of 1998. The Company estimates that AOL's customers accounted for
approximately 45 percent of its overall traffic and 30 percent of its total
advertising revenues in 1998. There can be no assurance that termination of
these arrangements with AOL will not have any further material adverse effect on
the Company.
In February 1999, Switchboard launched its local merchant program to
substantially increase its business with local merchants through display
advertising, Web site hosting and other on-line services. This launch included
strategic partnerships with Discover Financial Services, Comcast Online
Communications, Qwest Communications International, Inc., Cox Interactive Media
and Advance Internet Inc. In March 1999, Switchboard entered into an agreement
with the At Hand Network Yellow Pages which calls for Switchboard to fulfill the
yellow page searches conducted primarily in the Northeast region of the United
States on the At Hand Network Yellow Pages and provide e-mail address searches
for the entire At Hand Network. The success of the Company will depend in part
on the success of this and Switchboard's other strategic alliances and the
Switchboard's ability to enter into new strategic alliances with other Internet
providers.
The Company currently owns 1,021,202 shares of Software.com. The Company is
restricted from trading these shares until December 25, 1999. Any devaluation
of the market price of Software.com's common stock prior to a sale by us could
have a material adverse effect on the Company's liquidity and capital resources.
See "Year 2000 Readiness Disclosure" below.
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.
EURO CONVERSION DISCLOSURE
On January 1, 1999, the participating member countries of the European Union
adopted the Euro as the common legal currency and fixed conversion rates between
their existing sovereign currencies and the Euro. The Company does not believe
that the Euro conversion will have a material impact on the Company's
operations.
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. This Year 2000 readiness disclosure does not constitute a
warranty of any kind, or extend the terms of any existing warranty.
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 may need to be upgraded or replaced in order to
correctly process dates beginning in the Year 2000.
The Company has created a Company-wide Year 2000 team to identify and address
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 offered to customers; and (iii) third-party vendors,
manufacturers and suppliers of products used in the Company's internal systems
or distributed with
16
<PAGE>
the Company's products. The Company has identified and tested its main internal
systems. By December 31, 1999, the Company expects to complete implementation of
any needed Year 2000 related modifications to its critical information systems.
The Company has completed a 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. Based upon these communications,
the Company has considered the suppliers' Year 2000 preparedness in the
Company's decision to continue to deploy or migrate from these technology
products or services. In addition, the Company has assessed its internal non-
information technology systems, and completed testing. The Company expects to
complete any needed modifications to these systems by December 31, 1999. To
date, the Company has not 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. Based upon the current state of
preparedness, the Company believes a comprehensive contingency planning for
potential operational or performance problems related to Year 2000-related
issues with its information systems is not required.
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 current assessment is that the cost of
completing the Company's Year 2000 compliance program will be approximately
$250,000, which has been substantially expended as of September 30, 1999. These
cash estimates do not include amounts related to the diversion of internal
resources including, without limitation, employee salaries, which amount the
Company is not separately tracking. The Company has and expects to continue to
fund its Year 2000 compliance program from operating cash flows and does not
expect to separately account for these costs. There can be no assurance that
there will not be a delay in, or increased costs associated with, the
implementation of any necessary 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. This testing is complete. 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. Some of the Company's customers are using product
versions that the Company will not support for Year 2000 issues. The Company
has completed a process of notification to its customers of these Year 2000
issues and has encouraged 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 Year 2000
status information. On its Year 2000 Web site at www.banyan.com, the Company
provides information regarding which of its products have been tested to be 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 Year
2000 ready when used in a system and with other components that are Year 2000
compliant. However, there can be no guarantee that one or more of the Company's
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
17
<PAGE>
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 predicted. Any Year 2000 problems in the Company's products could also
result in delay or loss of revenue, diversion of development 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 most reasonably likely worst case scenarios, as a result of year 2000
issues, would include (i) corruption of data contained in the Company's
information systems, (ii) hardware failure and (iii) the failure of
infrastructure services provided by third parties (e.g. electricity, phone
service, etc.)
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
NOT APPLICABLE.
18
<PAGE>
BANYAN SYSTEMS INCORPORATED
PART II - OTHER INFORMATION
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On June 21, 1999, the Company announced that it would begin doing business under
the name "Banyan Worldwide." the company's corporate name, and the name under
which it will file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission, remains "Banyan
Systems Incorporated".
On November 2, 1999, the Company announced the addition of a member to its Board
of Directors.
On November 9, 1999, the Company announced the addition of a member to its Board
of Directors and the resignation of two members of its Board of Directors.
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 FISCAL QUARTER FOR
WHICH THIS REPORT IS FILED.
19
<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 15, 1999 BY: /S/ RICHARD M. SPAULDING
------------------------
RICHARD M. SPAULDING
CHIEF FINANCIAL OFFICER, TREASURER AND CLERK
(PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL
ACCOUNTING OFFICER)
20
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER TITLE OF DOCUMENT
- -------
27 FINANCIAL DATA SCHEDULE.
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