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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 quarterly period ended March 31, 1997
Commission file number 0-21289
CYBERMEDIA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4347239
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
3000 OCEAN PARK BLVD., SUITE 2001, SANTA MONICA, CALIFORNIA 90405
(Address of principal executive offices)
(Zip Code)
(310) 581-4700
(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 Swcurities 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. (1) Yes [X] No [ ]; (2) Yes [ ] No [X]
As of April 30, 1997, 11,956,732 shares of the Registrant's Common
Stock, $0.01 par value were issued and outstanding.
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CYBERMEDIA, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Balance Sheets At March 31, 1997 and December 31, 1996 3
Statements of Operations Three months ended March 31,
1997 and 1996 4
Statements of Cash Flow Three Months ended March 31, 1997 and 1996 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
PART II. OTHER INFORMATION 22
Item 1. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
Index to Exhibits 24
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CYBERMEDIA, INC.
BALANCE SHEETS
March 31, December 31,
1997 1996
Unaudited Audited
--------- -------
ASSETS
Current assets:
Cash and cash equivalents $37,108,000 $39,322,000
Trade accounts receivable, net 16,747,000 12,318,000
Inventory 1,560,000 2,365,000
Prepaid expenses 713,000 1,270,000
Other current assets -- 185,000
----------- -----------
Total cureent assets 56,128,000 55,460,000
Furniture, fixtures and equipment 1,245,000 990,000
$57,373,000 $56,450,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 5,742,000 $ 7,004,000
Accrued expenses 2,599,000 1,247,000
Unearned revenue 3,729,000 4,024,000
Grant payable 413,000 413,000
Current portion of capital lease 42,000 45,000
----------- -----------
Total current liabilities 12,525,000 12,733,000
Capital lease obligation 49,000 49,000
----------- -----------
Total liabilities 12,574,000 12,782,000
Stockholders' equity
Common stock 120,000 119,000
Additional paid-in capital 52,344,000 52,583,000
Accumulated deficit (7,665,000) (9,034,000)
Total stockholders' equity 44,799,000 43,668,000
$57,373,000 $56,450,000
=========== ===========
See accompanying notes to Financial Statements
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CYBERMEDIA, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Qtr Ended Qtr Ended
March 31, 1997 March 31, 1996
-------------- --------------
Revenue $16,533,000 $ 6,058,000
COGS 4,213,000 2,101,000
----------- -----------
Gross Profit 12,320,000 3,957,000
Expenses
Research & Development 1,535,000 474,000
Sales & Marketing 8,155,000 3,879,000
General & Admin 943,000 611,000
----------- -----------
Total Operating Expenses 10,633,000 4,964,000
Operating Income (Loss) 1,687,000 (1,007,000)
Other Income (Expense) 521,000 (10,000)
----------- -----------
Profit (Loss) Before Income Taxes 2,208,000 (1,017,000)
Provision for Income Taxes 839,000 --
Net Income (Loss) $ 1,369,000 $(1,017,000)
=========== ===========
Net Income (Loss) per Share $ 0.10 $ (0.13)
=========== ===========
Shares used in computing
income (loss) per share 13,420,000 7,889,000
See accompanying notes to Financial Statements
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CYBERMEDIA, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
---------------------------------
1997 1996
---- ----
Cash flow from operating activities:
Net income (loss) $ 1,369,000 $ (1,017,000)
Adjustments to reconcile met loss to net cash used in
operating activities:
Depreciation 108,000 1,000
Royalty expense (adjustment) -- 188,000
Changes in assets and liabilities:
Trade accounts receivable, net (4,429,000) (1,207,000)
Inventory 804,000 (426,000)
Prepaid expenses 557,000 (201,000)
Other current assets 185,000 --
Accounts payable (1,262,000) 518,000
Accrued expenses 1,352,000 325,000
Unearned revenues (295,000) 1,267,000
------------ ------------
Net cash used in operating activities (1,611,000) (552,000)
Cash flows used in investing activities - purchase of
furniture, fixtures and equipment (362,000) (129,000)
Cash flows from financing activities:
Expenses associated with initial public offering (259,000) --
Proceeds from the issuance of common stock 21,000 21,000
Payment of capital lease obligations (3,000) --
------------ ------------
Net cash provide (used) by financing activities (241,000) 21,000
Net decrease in cash and cash equivalents (2,214,000) (660,000)
Cash and cash equivalents at beginning of year 39,322,000 2,050,000
------------ ------------
Cash and cash equivalents at end of period $ 37,108,000 $ 1,390,000
See accompanying notes to Financial Statements
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CYBERMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
March 31,1997
(unaudited)
1. Basis of Presentation
The financial statements for the three months ended March 31, 1997 and
1996 are unaudited and reflect all adjustments, consisting of normal
recurring adjustments, which are, in the opinion of management,
necessary for a fair presentation of the financial condition and results
for the interim periods. These financial statements should be read in
conjunction with the financial statements and notes thereto together
with management's discussion and analysis of financial condition and
results of operations contained in CyberMedia's Annual Report on Form
10-K for the fiscal year ended December 31, 1996. The results for the
three ended March 31, 1997 are not necessarily indicative of the results
for the entire year ending December 31, 1997.
2. Earnings Per Share
Per share data is based on the weighted average number of common shares
and dilutive common stock equivalents outstanding for the period.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Actual results could differ materially from those set forth in such
forward-looking statements as a result of the factors set forth under "Factors
Affecting Operating Results" and other risks detailed in the Company's
Registration Statement on Form S-1 (Reg. St. No. 333-11063) declared effective
by the Securities and Exchange Commission on October 22, 1996 and detailed from
time to time in the Company's reports filed with the Securities and Exchange
Commission.
The following information should be read in conjunction with the
consolidated financial statements and the notes thereto and in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations in CyberMedia's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996. This analysis is provided pursuant to applicable Securities
and Exchange Commission regulations and is not intended to serve as a basis for
projections of future events.
Overview
CyberMedia is a leading provider of software products that provide automatic
service and support to PC users in the Windows environment. The Company
commenced operations in November 1991 and introduced its first automatic service
and support product, Win Win, in 1993. The Company introduced the first Windows
95 compatible version of its First Aid product line in September 1995. During
1995, 1996 and the first three months of 1997, over 90% of the Company's net
revenues were attributable to sales of its First Aid products. Any decline in
the demand for First Aid products, failure to achieve market acceptance of
upgrades to such products or failure of net revenues derived from such products
to meet the Company's expectations, whether as a result of competition,
technological change or other factors, would have a material adverse effect on
the Company's business, results of operations and financial condition.
The Company also has a number of new product development efforts under way,
including a corporate version First Aid 97 and Guard Dog, a personnel security
software product, scheduled for release during 1997, and a portion of future
revenues is dependent on the success of these activities. In April, 1997 the
Company acquired Microhelp Uninstaller, a product that automatically uninstalls
Windows applications. There can be no assurance that Microhelp Uninstaller,
Guard Dog or a corporate version of First Aid will achieve significant market
acceptance and failure of it to achieve such acceptance could have a material
adverse effect on the Company's future financial results.
The Company has a limited operating history upon which to base an evaluation
of its business and prospects. From inception to March 31, 1997, the Company
generated net sales of approximately $60.1 million, of which $55 million, or 92%
of such amount, was generated in the fifteen months ended March 31, 1997. The
Company has incurred net losses in each of the last five fiscal years. At March
31, 1997, the Company had an accumulated deficit of $7.7 million. With the
introduction of First Aid 95, the Company began focusing on building its product
line and establishing brand name awareness of its products, which has resulted
in significantly increased operating expenses. The Company anticipates that its
operating expenses will continue to increase significantly in the future as a
result of efforts to expand its sales and marketing operations, including
international sales, to fund greater levels of product development and to
increase its administrative infrastructure. The Company intends to fund
increases in operating expenses primarily from cash generated from operations
and, to the extent necessary, funds available from the Company's line of credit.
In addition, during 1996 and the first quarter of 1997, the Company's net
revenues and operating expenses increased rapidly as compared to prior periods.
There can be no assurance that the Company's net revenues will continue to
remain at or increase from the levels
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experienced in the first three months of 1997 or that net revenues will not
decline. The Company's prospects must be considered in light of the risks
encountered by companies with limited operating histories, particularly
companies in new and rapidly evolving markets. Future operating results will
depend upon many factors, including the demand for the Company's software
products, the level of product and price competition, the Company's success in
expanding its direct and indirect distribution channels, the Company's success
in attracting and retaining motivated and qualified personnel, the growth of
activity on the Internet and the Web, the ability of the Company to develop and
market new products and to control costs and general economic conditions. Many
of these factors are beyond the Company's control. There can be no assurance
that the Company will be successful in addressing such risks.
The Company sells its products primarily to distributors for resale to the
retail channel as well as directly to consumers through direct mail. In
addition, the Company sells its products through software catalogs throughout
the United States and Canada. Sales to the Company's top two distributors,
Navarre and Ingram Micro accounted for approximately 35% and 27%, respectively,
of the Company's net revenues in the three months ended March 31, 1997 and 25%
and 25%, respectively, of net revenues in 1996. No other single customer
accounted for more than 10% of net revenues during these periods. Net revenues
from direct mail sales in 1996 and the first three months of 1997 represented
approximately 30% and 10% of net revenues in each of these periods,
respectively, with the balance of net revenues attributable to sales through
distributors, directly to consumers over the internet and from OEM customers.
Net revenues in prior periods were primarily attributable to sales through
distributors. Sales from direct mail have historically operated at lower
profitability levels than sales from distributors. Accordingly, quarterly shifts
in the mix of sales through distributors and through direct sales could cause
fluctuations in the Company's profitability. There can be no assurance that the
mix of sales or the relative profitability by distribution channel will remain
at current levels in the future.
The Company monitors the levels of purchases and returns on a customer by
customer basis and, to date, returns have been within management's expectations.
Sales are made subject to rights of return and reserves are established at time
of shipment for future return of product based on product history, analysis of
retail sell-through and other factors. In addition, the Company may allow
certain concessions, such as price protection, to maintain its relationship with
retailers and distributors and its access to distribution channels.
Revenues are recognized upon the shipment of products to distributors,
resellers and end users. With the introduction of First Aid 95 in September
1995, CyberMedia implemented a policy of offering customers updates to its First
Aid products over the Internet at no additional cost. Given this policy and
because updates are a fundamental and integral part of its First Aid and Oil
Change products, the Company defers a portion of all First Aid and Oil Change
revenue ratably over estimated update periods, generally one year from the date
of sale. At March 31, 1997 the Company's balance sheet included $3.7 million of
unearned revenues to reflect future support commitments and other unspecified
enhancements to these products. To the extent that revenues from these products
continue to grow on a quarterly basis, the total amount of deferred revenue may
continue to increase and be reported on the balance sheet as unearned revenue.
In accordance with Statement of Financial Accounting Standards No. 86, the
Company is required to capitalize eligible computer software development costs
upon the achievement of technological feasibility, subject to net realizable
value considerations. To date, the Company has charged all such costs to product
development expenses because such costs have not been material.
Subsequent to end of the first quarter, on April 2, 1997, the Company
acquired worldwide distribution rights to Microhelp Uninstaller from Luckman
Interactive. The acquisition will be accounted for as an asset purchase paid for
on a royalty basis over the next eight quarters. In addition, effective April
14, 1997, CyberMedia acquired Walk Softly, Inc., an internet privacy software
developer based in Los Altos, California in exchange for CyberMedia Common
Stock. The acquisiton of Walk Softly will be accounted for on a pooling of
interests basis starting with the quarter ended June 30, 1997.
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Results of Operations
The following table sets forth, as a percentage of net revenues, statement of
operations data for the periods indicated:
THREE MONTHS ENDED
MARCH 31,
-------------------
1996 1997
---- ----
Net revenues............................. 100.0% 100.0%
Cost of revenues......................... 34.7 25.5
------ ----
Gross profit........................... 65.3 74.5
Operating expenses:
Research and development............... 7.8 9.3
Sales and marketing.................... 64.0 49.3
General and administrative............. 10.1 5.7
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Total operating expenses............ 81.9 64.3
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Income (loss) from operations....... (16.6) 10.2
Interest, net............................ (0.2) 3.2
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Income (loss) before income taxes... (16.8) 13.4
Income tax expense....................... -- 5.1
------ ----
Net income (loss)................... (16.8)% 8.3%
======= ====
Net Revenues. Net revenues increased 173% to $16.5 million in the three
months ended March 31, 1997 from $6.1 million in the three months ended March
31, 1996. The Company's net revenues consist of license fees for its software
products, less provision for returns. The Company sells its products primarily
to distributors for resale to retailers as well as directly to consumers through
direct mail, the internet and through software catalogs. The growth in net
revenues during these periods was largely attributable to the expansion of the
Company's retail distribution channels and interntional marketing activities and
increased unit volume as a result of the market's growing awareness and
acceptance of First Aid and the introduction of Oil Change in September 1996.
The Company does not believe that the historical growth rates of its net
revenues will be sustainable or are indicative of future results.
Net revenue from international sales accounted for approximately 15% and 2%
of net revenues for the three months ended March 31, 1997 and 1996 respectively.
The increase in net revenues from international sales as a percentage of net
revenues between these periods was due to the expansion of the Company's
international operations and the introductions of localized German, British,
French, Italian and Australian versions of First Aid during the last twelve
months. As a result of the expansion of its international operations, the
Company now denominates certain international sales in local currencies,
primarily in Europe. As a result, the Company is subject to the risks associated
with fluctuations in currency exchange rates. The Company does not currently
engage in hedging transactions and there can be no assurance that it will not
incur significant losses related to currency fluctuations. Risks inherent in the
Company's international sales generally include the impact of fluctuating
exchange rates, longer payment cycles, greater difficulty in accounts receivable
collection, unexpected changes in regulatory requirements, seasonality due to
the slowdown in European business activity during the third quarter, and tariffs
and other trade barriers. There can be no assurance that these factors will not
have a material adverse effect on the Company's future business, financial
condition and results of operations.
Cost of Revenues. Cost of revenues were $4.2 million and $2.1 million for the
three month periods ended March 31, 1997 and 1996, respectively. Cost of
revenues consists primarily of the cost of product media, product duplication,
documentation and order fulfillment and royalties, including paid to ICICI in
conjunction with a grant associated with early stage financing of the Company.
Royalties payable to ICICI were fully accrued at March 31, 1996. These royalties
payable, together with the original grant of $318,000, are reflected on the
Company's balance sheet at March 31, 1997 as the $413,000 grant payable.
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The increases in cost of revenues were due primarily to increased unit shipments
of the Company's products.
Gross Margin. Gross margins were 75% and 65% in the three months ended March
31, 1997 and 1996, respectively. Gross margins in the first three months of 1997
were positively affected by a decrease in the percentage of net revenues
represented by direct sales, which generated a lower gross margin than sales
through distributors during the period.
Research and Development. Research and development expenses increased by 224%
from $474,000 in the three months ended March 31, 1996 to $1.5 million in the
same period in 1997, representing 8%, and 9% of net revenues in these quarters,
respectively. Research and development expenses consist primarily of personnel
costs and, to a lesser extent, payment to third parties for contract services,
required to conduct the Company's development efforts. The increase in research
and development expenses was primarily attributable to an increase in personnel
as the Company increased its product development efforts to support new product
introductions and upgrades. The Company believes that significant investments in
product development are required to remain competitive. As a consequence, the
Company anticipates that it will continue to devote substantial resources to
research and development.
Sales and Marketing. Sales and marketing expenses grew from $3.9 million in
the three months ended March 31, 1996 to $8.1 million in the same period of
1997, representing 64% and 49% of net revenues in these periods, respectively.
Sales and marketing expenses consist primarily of costs of all sales and
marketing personnel, sales commissions, co-op and other advertising costs,
postage and printing costs associated with direct mail sales, package design
costs, trade show costs and costs of preparing promotional materials. The
increases in the dollar amount of sales and marketing was due primarily to
increases in co-op advertising, increases in the number of sales and marketing
personnel employed to address new sales opportunities and to support the
introduction of new products and expansion of international sales and marketing
efforts. The Company expects that sales and marketing expenditures will increase
in absolute dollars in the future as it invests in expanding its third-party
distribution channels, introduces new products and expands its operations
outside the United States.
General and Administrative. General and administrative expenses increased
from $611,000 in the three month period ended March 31, 1996 to $943,000 in the
same period in 1997, representing 10% and 6% of net revenues in these periods,
respectively. General and administrative expenses consist primarily of personnel
costs for finance, administration, operations and general management, as well as
legal, accounting and facilities expenses. The increase in the dollar amount of
general and administrative expenses was due principally to growth in the
infrastructure of the Company's finance, administrative and operations groups in
order to support the Company's expanded operations. The decrease in general and
administrative expenses as a percentage of net revenues was due primarily to the
growth in net revenues. The Company expects that its general and administrative
expenses will increase in absolute dollars in the future as it expands its
staffing, information systems and infrastructure.
Interest, Net. Interest, net was $521,000 and $(10,000) in the three month
periods ended March 31, 1997 and 1996, respectively. Interest, net consists of
interest income and interest expense.
Provision for Income Taxes. The provision for income taxes is recorded at the
Company's estimated effective tax rate which, for the three month period ended
March 31, 1997 was 38%. The Company had federal and state net operating loss
carry-forwards of approximately $3.7 million at December 31, 1996. These loss
carry-forwards expire at various dates beginning in the year 2006 and are
subject to certain limitations as prescribed by Section 382 of the Internal
Revenue Code of 1986, as amended.
Liquidity and Capital Resources
Since inception, the Company has financed its operations primarily through
private sales of Preferred Stock totaling $10.5 million and a grant of $318,000
administered by the ICICI. Furthermore, in October
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1996, the Company completed an initial public offering of 2,875,000 shares of
Common Stock (including the underwriters' over-allotment of 375,000) at $16.00
per share. Net proceeds to the Company were approximately $41.5 million. In the
first three months of 1996 and 1997, the Company used $552,000 and $1.6 million
of cash, respectively, in operating activities. During these periods, the
Company used net cash in operating activities principally to support increases
in accounts receivable associated with increased net revenues.
In the first three months of 1996 and 1997, the Company's investing
activities consisted of purchases of furniture, fixtures and equipment,
primarily PCs and accessories in the amount of $129,000 and $362,000,
respectively. The Company expects that its capital expenditures will increase as
the Company's employee base continues to grow. At September 30, 1996, the
Company had no material commitments for capital expenditures.
To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk.
Management expects that in the future cash in excess of current requirements
will be invested in short-term, interest-bearing, investment grade securities.
At March 31, 1997, the Company had $37.1 million in cash and cash equivalents
and $43.6 million in working capital . The Company also had available a $3.0
million revolving line of credit secured by the assets of the Company which
expires in April 1997. Borrowings under the credit facility are limited to the
lesser of $3.0 million or a percentage of eligible accounts receivable, as
defined in the credit agreement.
The Company believes that its current cash balances, cash available under its
line of credit and cash flows from operations, if any, will be sufficient to
meet its working capital and capital expenditure requirements for at least the
next 12 months.
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Impact of Recent Accounting Pronouncements
The Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," in
March 1995 which is effective for fiscal years beginning after December 15,
1995. SFAS No. 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles and goodwill related to
these assets and certain identifiable intangibles to be disposed of. Since the
Company's current accounting policy is consistent with the provisions of SFAS
No. 121, the Company's management does not anticipate that the new pronouncement
will impact its Financial Statements.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation." SFAS No.
123 established a fair value-based method of accounting for compensation cost
related to stock options and other forms of stock-based compensation plans.
However, SFAS No. 123 allows an entity to continue to measure compensation costs
using the principles of Accounting Principles Board Opinion 25 ("APB No. 25") if
certain pro forma disclosures are made. SFAS No. 123 is effective for fiscal
years beginning after December 15, 1995. While the Company is still evaluating
SFAS No. 123, it currently expects to elect to continue to measure and to
recognize costs under APB No. 25 and to comply with the pro forma disclosure
requirements of SFAS No. 123. If the Company makes this election, SFAS No. 123
will have no impact on the Company's Financial Statements.
Factors Affecting Operating Results
Limited Operating History and History of Operating Losses. The Company has
only a limited operating history upon which to base an evaluation of its
business and prospects. The Company commenced operations in November 1991 and
introduced its first automatic service and support product, Win Win, in 1993.
The Company introduced the first Windows 95 compatible version of its First Aid
product line in September 1995. During 1996, both the Company's net revenues and
operating expenses, particularly sales and marketing expenditures, increased
rapidly compared to prior periods. From inception to March 31, 1997 the Company
generated net sales of approximately $60.1 million, of which $55 million, or 92%
of such amount, was generated in the fifteen months ended March 31, 1997. The
Company has incurred net losses in each of the last five fiscal years, resulting
in an accumulated deficit of $7.7 million at March 31, 1997. In addition, since
1992, the Company's operating expenses have increased significantly as a result
of efforts to expand its sales and marketing operations, including international
sales, to fund greater levels of product development and to increase its
administrative infrastructure. Management believes that it is not more likely
than not that the Company will generate future taxable income sufficient to
realize the benefits of existing deferred assets as of December 31, 1997. There
can be no assurance that the Company's net revenues will continue to remain at
or increase from the level experienced in the first three months of 1997 or that
net revenues will not decline. The Company anticipates that in the future it
will make significant investments in its operations, particularly to support
sales activities, and that as a result, operating expenses will increase
significantly. The Company intends to make such investments on an ongoing basis,
primarily from cash generated from operations and, to the extent necessary,
funds available from the Company's line of credit, as the Company develops and
introduces new products and expands into new markets such as international,
corporate and OEM markets. If net revenues do not correspondingly increase, the
Company is likely to continue to incur net losses and its financial condition
will be materially adversely affected. The Company has not yet achieved
profitability on an annual basis, and there can be no assurance that the Company
will achieve or sustain profitability on a quarterly basis or annual basis.
Furthermore, operating results for future periods are subject to numerous
uncertainties. The Company's prospects must be considered in light of the risks
encountered by companies with limited operating histories, particularly
companies in new and rapidly evolving markets. In addition, the Company's future
operating results will depend upon, among other factors, the demand for the
Company's software products, the level of product and price competition, the
Company's success in expanding its direct and indirect distribution channels,
the Company's success in attracting and retaining motivated and qualified
personnel, the ability of the Company to expand its
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international sales, develop and market new products and product upgrades and
manage product transitions, the ability of the Company to control costs, the
growth of activity on the Internet and the World Wide Web (the "Web"), and
general economic conditions. Many of these factors are beyond the Company's
control. If the Company is not successful in addressing such risks, the Company
will be materially adversely affected. See "-- Potential Fluctuations in
Quarterly Results; Seasonality," "-- Product Concentration; Risks Associated
with First Aid Upgrades," and "-- Developing Market"
Potential Fluctuations in Quarterly Results; Seasonality. The Company's
quarterly operating results have fluctuated in the past and are expected to
fluctuate significantly in the future. These fluctuations may arise as a result
of a number of factors, including the number and timing of new product
introductions, upgrades and product enhancements by the Company or its
competitors, purchasing patterns of distributors and customers, marketing and
promotional programs, pricing and other competitive pressures, order deferrals
and product returns in anticipation of new products or upgrades to existing
products, the mix of distribution channels through which the Company's products
are sold, the Company's decisions regarding hiring and other expenses, market
acceptance of the Company's products, market acceptance of commerce over the
Internet, technological limitations of the Internet, the developing nature of
the market for the Company's products, general economic conditions and other
factors. The Company generally ships products as orders are received and,
accordingly, the Company has historically operated with relatively little
backlog. As a result, quarterly revenues will depend predominantly on the volume
and timing of orders received during a particular quarter, both of which are
difficult to forecast. With the introduction of First Aid 95, the Company
significantly increased its level of operating expenses. The Company anticipates
that its operating expenses will continue to increase substantially in the
future as a result of efforts to expand its sales and marketing operations,
including expanding its international sales, to fund greater levels of product
development, and to increase its administrative infrastructure. To the extent
that such expenses precede or are not subsequently followed by increased net
revenues, the Company's business, results of operations and financial condition
will be materially adversely affected. A relatively high percentage of the
Company's expenses is fixed in the short term and the Company is generally
unable to adjust spending in a timely manner to compensate for shortfalls in net
revenues. In addition, the consumer software industry in which the Company
operates has seasonal elements. In recent years, the consumer software industry
has experienced relatively higher demand for software products in the fourth
quarter due to year-end holiday buying and relatively lower demand in the summer
months. If net revenues fall below the Company's expectations, expenditure
levels as a percentage of total net revenues could be disproportionately high,
and operating results would be immediately and adversely affected. The Company
believes that period-to-period comparisons of its operating results are not
meaningful and should not be relied upon as any indication of future
performance. Due to the foregoing factors, among others, it is likely that the
Company's future quarterly operating results from time to time will not meet the
expectations of securities analysts or investors, which may have an adverse
effect on the price of the Company's Common Stock.
Product Concentration; Risks Associated with First Aid Upgrades. During 1996
and the first three months of 1997, over 90% of the Company's net revenues were
attributable to sales of its First Aid products. The Company anticipates that
sales of its First Aid products will account a substantial majority of its net
revenues in 1997. There can be no assurance that net revenues from the First Aid
products will continue to grow at historical rates or be sustainable at current
levels. The Company's future financial performance will depend in large part on
the successful development, introduction and customer acceptance of new product
offerings and enhanced versions of the First Aid products. Any decline in the
demand for First Aid products, failure to achieve market acceptance of upgrades
to such products or failure of net revenues derived from such products to meet
the Company's expectations, whether as a result of competition, technological
change or other factors, would have a material adverse effect on the Company's
business, results of operations and financial condition.
Management of Growth; Dependence on Key Personnel. The Company's business has
grown rapidly during the past year and such growth has placed and, if sustained,
will continue to place, significant demands on the Company's management and
resources. Recently, the Company has significantly
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increased the scale of its operations to support increased sales volumes and to
address critical infrastructure and other requirements. This increase included
substantial investments in sales and marketing to support sales activities and
the hiring of a number of new employees, which have resulted in higher operating
expenses. Between December 1, 1995 and March 31, 1997, the number of Company
employees increased from approximately 20 to approximately 150 and the Company
currently expects to hire many additional employees during 1997. The Company's
ability to manage any future growth, should it occur, will continue to depend
upon the successful expansion of its sales, marketing, research and development,
customer support and administrative infrastructure and the ongoing
implementation and improvement of a variety of internal management systems,
procedures and controls. There can be no assurance that the Company will be able
to attract, manage and retain additional personnel to support any future growth
or will not experience significant problems with respect to any infrastructure
expansion or the attempted implementation of systems, procedures and controls.
Any failure in one or more of these areas would have a material adverse effect
on the Company's business, results of operations and financial condition.
The Company's future success also depends on its continuing ability to
attract and retain highly qualified technical personnel. Competition for such
personnel is intense and there can be no assurance that the Company will be able
to retain its key technical employees or that it will be able to attract and
retain additional highly qualified technical personnel in the future. Any
inability to attract and retain the necessary technical personnel could have a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company is dependent upon certain of its executive officers and has
entered into employment agreements with certain of its executive officers in
order to help assure their retention by the Company. However, there can be no
assurance that any such employment agreements will sufficiently incentivize such
executive officers to remain with the Company. The Company does not maintain any
key person insurance policies on the lives of any of its executive officers. The
loss of or inability to retain these key executive officers for any reason could
have a material adverse effect upon the Company's business, results of
operations and financial condition.
Competition. The PC software industry is intensely competitive and
characterized by short product life cycles and frequent new product
introductions. The Company competes with software companies of varying sizes and
resources, including SystemSoft Corporation, Quarterdeck Corporation, Symantec
Corp., McAfee Associates, Inc. and others. The Company believes that a number of
software companies will be introducing automatic service and support software
products in the near future that will compete with the Company's products. The
Company expects that potential future competitors may include other software
vendors, including Internet software vendors. Many of the Company's existing and
potential competitors have substantially greater financial, technical and
marketing resources than the Company. Moreover, there are no proprietary
barriers to entry that could keep existing and potential competitors from
developing similar products or selling competing products in the Company's
markets. To the extent that the Company's competitors bundle their software
products with leading hardware, application software or operating system
vendors, or if one or more of the operating system vendors, such as Microsoft
Corporation ("Microsoft"), developed its own technical support software and
incorporated such functionality into its products, the Company's business,
results of operation and financial condition could be materially adversely
affected. There can be no assurance that the Company will be able to compete
successfully with existing or potential competitors. Increased competition may
result in the loss of shelf space or a reduction in demand or sell-through of
the Company's products, any of which could have a material adverse effect on the
Company's business, results of operations and financial condition.
Microsoft's position as a large, well-capitalized software company with a
dominant share of the market for PC operating system software could enable it to
develop products that compete effectively with those of the Company. In
particular, Microsoft is incorporating "Plug and Play" capabilities into future
versions of its operating systems. Plug and Play capabilities are designed to
allow PC users to add on any computer peripheral (such as a modem, video or
sound card) to a Windows-based system and enable that peripheral
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to work immediately, without concern for software configuration errors or driver
conflicts. In addition, to the extent that Microsoft incorporates functionality
comparable, or perceived as comparable, to that offered by the Company into its
Windows products (or separately offers comparable products), sales of the
Company's products could be materially adversely affected. There can be no
assurance that any such action by Microsoft or others would not render the
Company's products noncompetitive or obsolete.
The Company's products also compete indirectly against alternative sources of
technical support, such as the technical support departments of hardware and
software vendors. Additionally, the Internet provides hardware and software
vendors with a new medium to offer technical support services. The Company
expects that many vendors will provide Internet-based technical support services
to support their existing and future products. The availability of these
technical support services could materially dilute the value of the Company's
products and have a material adverse effect on the Company's market position,
business, results of operations and financial condition.
In addition, the Company may face increasing pricing pressures from current
and future competitors and, accordingly, there can be no assurance that
competitive pressures will not require the Company to reduce its prices. Any
material reduction in the price of the Company's products would negatively
affect the Company's business, results of operations and financial condition,
and would require the Company to increase unit sales in order to maintain
historic levels of net revenues. There can be no assurance that competitors will
not develop products that are superior to the Company's products or that achieve
greater market acceptance and thereby negatively affect sales of the Company's
products.
Dependence on Microsoft Windows. The Company's success is dependent on the
continued widespread use of the Windows operating systems for PCs. The Company's
First Aid products automatically detect, diagnose and resolve common software
conflicts and configuration errors arising in the Windows operating environment.
Although Windows operating systems are currently used by many PC users, other
companies, including International Business Machines Corporation and Apple
Computer, Inc., have developed or are developing other operating systems that
compete, or will compete, with Windows. In the event that any of these
alternative operating systems become widely accepted in the PC marketplace,
demand for the Company's products could be adversely affected, thereby
materially adversely affecting the Company's business, results of operations and
financial condition. In addition, Microsoft may introduce a new operating system
to replace Windows or could incorporate some or many of the key features of the
Company's First Aid products in new versions of its operating systems, thereby
eliminating the need for users to purchase the Company's products. The inability
to adapt current products or to develop new products for use with any new
operating systems on a timely basis would have a material adverse effect on the
Company's business, results of operations and financial condition.
In addition, the Company's ability to develop products based on Windows
operating systems and release these products immediately prior to, or at the
time of Microsoft's release of new and upgraded Windows products is
substantially dependent on its ability to gain pre-release access to, and to
develop expertise in, current and future versions of Windows. There can be no
assurance that the Company will be able to provide products that are compatible
with future Windows releases on a timely basis, with or without the cooperation
of Microsoft.
Developing Market. The Company's products address the new and rapidly
evolving market for automatic service and support software. The market for
automatic service and support software products has only recently begun to
develop and is characterized by an increasing number of existing and potential
market entrants who are in the process of introducing or developing automatic
service and support software. As is typical in the case of a new and rapidly
evolving market, the demand and market acceptance for recently introduced
products are subject to a high level of uncertainty and risk. It is difficult to
predict the future growth rate and size of this market. There can be no
assurance that the market for the Company's products will develop, that demand
for the Company's products or for automatic service and support software
products in general will increase or that the rate of growth of this demand will
be sustainable or will not decrease. The Company's ability to develop and
successfully market additional
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products depends substantially on the acceptance of automatic service and
support software by individual and corporate users as an effective means of
addressing their technical support requirements. If the market fails to develop,
develops more slowly than expected or becomes saturated with competitors, or if
the Company's products do not achieve or sustain market acceptance, the
Company's business, results of operations and financial condition will be
materially adversely affected.
New Product Development and Technological Change. Substantially all of the
Company's net revenues have been derived, and substantially all of the Company's
future net revenues are expected to be derived, from the sale of its automatic
service and support software products. The market for automatic service and
support software products is characterized by rapid technological advances,
evolving industry standards in computer hardware and software technology and
frequent new product introductions and enhancements. The Company's products must
be continually updated to address the new and evolving technical support
requirements of third-party hardware and software. Failure to anticipate
technical difficulties that arise from use of these third-party products and
incorporate solutions to such difficulties into the Company's products would
have a material adverse effect on continued market acceptance of the Company's
products. The Company's ability to design, develop, test and support on a timely
basis new software products, updates and enhancements that respond to
technological developments and emerging industry standards is critical to the
Company's future success. The Company is currently upgrading its First Aid
products and expects these upgrades to be released in the fourth quarter of
1997. There can be no assurance that the Company will be successful in such
efforts or that the Company will not experience difficulties that could delay or
prevent the successful development, introduction and marketing of new products
and enhancements, or that its new products, upgrades and enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance. The introduction of new products, upgrades or enhanced versions of
existing products is subject to the risk of development delays due to resource
constraints, technological change and other reasons. If the Company is unable to
develop on a timely basis new software products, upgrades or enhancements to
existing products or if such new products, upgrades or enhancements do not
achieve market acceptance, the Company's business, results of operations and
financial condition would be materially adversely affected.
The Company currently employs software engineers in India on a work-for-hire
basis. These engineers are primarily responsible for updating the Company's
knowledge bases for current applications and upgrades. Any loss of the services
of these engineers due to political or economic instability or for any other
reason could adversely affect the Company's product development efforts and
thereby could materially adversely affect the Company's business, results of
operations and financial condition.
Dependence on Distribution Channels. The Company currently sells its First
Aid products primarily through distributors for resale to the retail channel and
through direct mail. Sales to such distributors and sales through direct mail
accounted for approximately 69% and 30%, respectively, of the Company's net
revenues in 1996. Sales from direct mail have historically operated at lower
profitability levels than sales from distributors. Accordingly, quarterly shifts
in the mix of sales through distributors and through direct mail could cause
fluctuations in the Company's profitability. There can be no assurance that the
mix or relative profitability of such sales will remain at current levels in the
future. The Company is evaluating the use of alternative distribution channels
for its products and began distributing Oil Change through the Internet in
October 1996.
Sales to a limited number of distributors have constituted and are expected
to continue to constitute a substantial portion of the Company's net revenues.
Sales to the Company's top three distributors, Navarre Corporation ("Navarre"),
Ingram Micro, Inc. ("Ingram Micro") and Micro Central, Inc. ("Micro Central"),
accounted for approximately 25%, 25% and 9%, respectively, of the Company's net
revenues in 1996. The loss of, or reduction in, orders from any of these
distributors could have a material adverse effect on the Company's business,
results of operations and financial condition. Historically, margins for
distributors in the PC software industry have been low, competition has been
intense and distributors have relied on timely payments from their customers.
Financial difficulties of any distributors could render the Company's associated
accounts receivable uncollectible, which could have a material adverse effect on
the
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Company's business, results of operations and financial condition. In addition,
any special distribution arrangements or product pricing arrangements that the
Company may implement for strategic purposes in one or more of its distribution
channels could materially adversely affect its margins.
The distribution channels through which consumer software products are sold
have been characterized by rapid change, including consolidations and financial
difficulties of certain distributors and retailers and the emergence of new
retailers such as general mass merchandisers. In addition, due to an increase in
the number of software applications, there are an increasing number of companies
competing for access to these channels. Retailers of the Company's products
typically have a limited amount of shelf space and promotional resources, and
there is intense competition for high quality and adequate levels of shelf space
and promotional support from the retailers. The Company believes this
competition for shelf space will increase in the near term as competitors
introduce new automatic service and support software. There can be no assurance
that retailers will continue to purchase the Company's products or provide the
Company's products with adequate levels of shelf space and promotional support,
the lack of which would have a material adverse effect on the Company's
business, results of operations and financial condition.
Risk of Product Returns. The Company's business includes a substantial risk
of product returns from distributors, retailers and end users, either through
the exercise of contractual return rights or as a result of the Company's policy
of assisting customers in balancing and updating inventories. Individual end
users may return products within 60 days of the date of purchase for a full
refund. Most retailers, distributors and end users also have the ability to
return products for a full refund. In addition, competitors' promotional or
other activities could cause returns to increase sharply at any time. Further,
the rate of product returns could increase if general mass merchandisers become
a larger percentage of the Company's business or other changes in the Company's
distribution channel occur. Large shipments in anticipation of unrealized demand
can lead to overstocking by the Company's distributors or retailers and result
in substantial product returns. Furthermore, the risk of product returns will
increase if demand for the Company's products declines.
Although the Company establishes reserves based on estimated future returns
of products, taking into account promotional activities, the timing of new
product introductions, distributor and retailer inventories of the Company's
products and other factors, there can be no assurance that actual levels of
returns will not significantly exceed amounts anticipated by the Company. In
addition, the Company provides price protection to its distributors in the event
the Company reduces its prices. While to date, the number of products returned
to the Company has been immaterial, there can be no assurance that the number of
returns will not significantly increase in the future. Any material increase in
the level of returns could materially adversely affect the Company's business,
results of operations and financial condition.
Dependence on the Internet. The commercial viability of Oil Change and the
Company's ability to execute its strategy to leverage Oil Change as an
Internet-based platform for other products and services are dependent upon the
continued development and acceptance of the Internet as a delivery medium for
third-party software programs. In addition, the Company's future success may be
dependent upon continued growth in the use of the Internet in order to support
the distribution of products and future upgrades. The use of the Internet as a
distribution channel is new and unproven and represents a significant departure
from traditional distribution methods employed by software companies. Critical
issues concerning the commercial use of the Internet (including security,
reliability, cost, ease of use and access and speed) remain unresolved and may
affect the use of the Internet as a medium to distribute software. There can be
no assurance that the use of the Internet as a distribution channel will be
effective for either current or future products. The failure of the Internet to
be an effective distribution channel could have a material adverse effect on the
Company's business and prospects. The Company's future success depends, in part,
upon the future growth of the Internet for commercial transactions. There can be
no assurance that communication or commerce over the Internet will become
widespread and it is not known whether this market will develop to the extent
necessary for demand for the Company's products to emerge and become
sustainable. The Internet may not prove to be a viable commercial marketplace
for a number of reasons, including inadequate communications bandwidth and a
lack of secure payment
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mechanisms. To the extent that the Internet continues to experience significant
growth in the number of users and level of use, there can be no assurance that
the Internet infrastructure will continue to be able to support the demands
placed upon it. Moreover, the Internet could lose its viability due to delays in
the development or adoption of new standards and protocols required to handle
increased levels of Internet activity or due to increased governmental
regulation. Changes in or insufficient availability of telecommunications
services to support the Internet also could result in slower response times
which might adversely affect customers' ability or willingness to access the
Company's products or upgrades over the Internet. In addition, the security and
privacy concerns of existing and potential customers, as well as concerns
related to computer viruses, may inhibit the growth of the Internet marketplace
generally and the customer base for the Company's Oil Change product in
particular. The viability of Oil Change also depends upon the continuation of
the current practice of publishing new updates and patches to commonly used
software applications and device drivers on vendors' Web sites.
If use of the Internet does not continue to grow, if the Internet
infrastructure does not effectively support customer demand or if hardware and
software vendors do not continue to post updates and patches on the Internet,
the Company's business, results of operations and financial condition could be
materially adversely affected. If users fail to accept Oil Change as a technical
support solution, the Company may have to expend significant resources to
educate users and create demand for Oil Change.
Limited Protection of Proprietary Rights. The Company's success is heavily
dependent upon its proprietary software. The Company relies primarily on a
combination of copyright, trademark and trade secret laws, employee
confidentiality and nondisclosure agreements and third-party nondisclosure
agreements and other methods of protection common in the consumer software
industry to protect its proprietary rights. The Company licenses its products
primarily under "shrink wrap" license agreements that are not signed by
licensees and therefore may be unenforceable under the laws of certain
jurisdictions. In addition, the Company has two United States patent
applications pending and intends to seek international and further United States
patents on its technology. There can be no assurance that patents will issue
from the Company's pending applications or that any claims allowed from the
pending patent applications or those hereafter filed will be of sufficient scope
or strength, or be issued in all countries where the Company's products can be
sold, to provide meaningful protection or any commercial advantage to the
Company or that any patents which may be issued to the Company will not be
challenged and invalidated. In addition, existing copyright laws provide only
limited protection. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy or otherwise obtain and use the
Company's products or technology that the Company considers proprietary, and
third parties may develop similar technology independently. Policing
unauthorized use of the Company's products is difficult, and while the Company
is unable to determine the extent to which piracy of its software products
exists, software piracy can be expected to be a persistent problem. There can be
no assurance that the Company's means of protecting its proprietary rights will
be adequate. In addition, there can be no assurance that the Company's
competitors will not independently develop technologies and products that are
substantially equivalent or superior to those of the Company without violating
the Company's proprietary rights.
As the number of software products in the industry increases and the
functionality of these products increasingly overlaps, software developers may
become increasingly subject to infringement claims. From time to time, the
Company has received communications from third parties asserting that certain
products may infringe upon the intellectual property rights of others. To date,
no such claim has resulted in litigation or the payment of any damages. However,
there can be no assurance that existing or future infringement claims against
the Company with respect to current or future products will not result in costly
litigation or require the Company to enter into royalty bearing licenses with
third parties or to discontinue use of certain portions of the Company's
technology if licenses are not available on acceptable terms.
While to date the Company's international sales have been insignificant, the
Company intends to devote substantial resources in an effort to expand the
international distribution of its products. The laws
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of some foreign countries either do not protect the Company's proprietary rights
or offer only limited protection for those rights. The Company has not
registered its copyrights in any foreign countries. While in most foreign
countries registration is not required in order to receive copyright protection,
the ability to bring an enforcement action and obtain certain remedies depends
on compliance with that country's copyright laws. Consequently, the Company's
failure to register its copyrights abroad may make enforcement of these rights
more difficult or reduce the available remedies in any enforcement action. In
addition, the Company has not to date pursued foreign registration of its
trademarks due to the significant costs involved and, as a result, the Company
may not be able to prevent a third party from using its trademarks in many
foreign jurisdictions.
System Interruption and Security Risks. The Company's ability to provide
product functionality through the Internet is dependent on its ability to
protect its system from interruption, whether by damage from fire, earthquake,
power loss, telecommunications failure, unauthorized entry or other events
beyond the Company's control. Most of the Company's computer equipment,
including its processing equipment, is currently located at a single site. While
the Company believes that its existing and planned precautions of redundant
systems, regular data backups and other procedures are adequate to prevent any
significant system outage or data loss, there can be no assurance that
unanticipated problems will not cause such a failure or loss. Despite the
implementation of security measures, the Company's infrastructure may also be
vulnerable to computer viruses, hackers or similar disruptive problems caused by
its customers, employees or other Internet users. Any damage or failure that
causes interruptions in the Company's operations could have a material adverse
effect on the Company's business, results of operations and financial condition.
Computer break-ins and other disruptions could jeopardize the security of
information stored in and transmitted through the computer systems of the
individuals and businesses utilizing the Company's products, which could result
in significant liability to the Company and also may deter customers and
potential customers from using the Company's services. Persistent problems
continue to affect public and private data networks. For example, in a number of
networks, hackers have bypassed network security and misappropriated
confidential information.
Product Liability. Although the Company attempts to incorporate support for
most software conflicts and configuration errors in the Windows environment,
there can be no assurance that the Company's products will resolve any specific
problems encountered by a PC user. Furthermore, as a result of their complexity,
the Company's software products may contain undetected errors or failures, when
they are first introduced and as new versions are released. There can be no
assurance that, despite testing by the Company and testing and use by current
and potential customers, errors will not be found in new products after
commencement of commercial shipments or thereafter. The occurrence of any such
errors could result in the loss of, or a delay in, market acceptance of the
Company's products, which would have a material adverse effect on the Company's
business, results of operations and financial condition. The Company's license
agreements with its customers typically contain provisions designed to limit the
Company's exposure to potential claims for damages. It is possible, however,
that the limitation of liability provisions contained in the Company's license
agreement may not be effective under the laws of certain jurisdictions. Although
the Company has not experienced any such claims to date, the sale and support of
the Company's products may entail the risk of such claims. While the Company has
obtained insurance against product liability risks, there can be no assurance
that such insurance will provide adequate coverage. The Company does not
currently carry errors and omissions coverage which may protect against
allegations that the Company's products have failed to perform adequately. Any
such claims for damages brought against the Company could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Risks Associated With Global Operations. During the first quarter of 1997,
approximately 15% of total revenues were from sales to customers outside of the
United States. The Company is expanding its sales operations outside of the
United States which will require significant management attention and financial
resources. The Company's ability to expand its product sales internationally is
dependent on the successful development of localized versions of the Company's
products, acceptance of such products and the acceptance of the Internet
internationally. The Company expects to commit significant resources to
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customizing its products for selected international markets and to developing
international sales and support channels. The Company's First Aid products rely
on a knowledge base that contains detailed information based on specific English
language versions of third-party hardware and software applications. This
knowledge base must be recreated for each foreign language version that is
developed to support foreign releases of such products, many of which have been
modified from their United States releases. There can be no assurance that this
task can be completed in a timely or cost-effective manner or that enough
products can be supported to ensure customer acceptance. The Company believes
that successful execution of a global strategy is critical to maintaining its
current market position and competitive advantage. Failure to successfully
expand its products to international markets could cause the Company to lose
business to global competitors or prevent the development of strategic
relationships with global hardware and software vendors.
International operations are subject to a number of risks, including costs of
customizing products for foreign countries, dependence on independent resellers,
multiple and conflicting regulations regarding communications, use of data and
control of Internet access, longer payment cycles, unexpected changes in
regulatory requirements, import and export restrictions and tariffs,
difficulties in staffing and managing foreign operations, greater difficulty or
delay in accounts receivable collection, potentially adverse tax consequences,
the burdens of complying with a variety of foreign laws, the impact of possible
recessionary environments in economies outside the United States and political
and economic instability. Furthermore, the Company's export sales are currently
denominated predominantly in United States dollars. An increase in the value of
the United States dollar relative to foreign currencies could make the Company's
products more expensive and, therefore, potentially less competitive in foreign
markets. If the Company increases its international sales, its net revenues may
also be affected to a greater extent by seasonal fluctuations resulting from
lower sales that typically occur during the summer months in Europe and other
parts of the world.
Reliance on Outside Resources. The Company relies upon independent
contractors to perform a number of tasks, including product duplication and
packaging, reproduction of manuals and brochures and order fulfillment. The
Company depends on these outside parties to perform such functions to the
Company's specifications and quality standards. The Company currently does not
have long-term agreements with any of these outside parties. The Company also
employs software engineers in India on a work-for-hire basis to assist in its
product development efforts. Although the Company believes that alternative
resources exist or can be obtained, a disruption of the Company's relationship
with any of these outside parties or the failure of these outside parties to
continue to provide quality supplies and services on a timely basis could
materially adversely affect the Company's business, results of operations and
financial condition.
Litigation. From time to time, the Company may be involved in litigation
relating to claims arising out of its products or operations in the normal
course of business. See " Part II, Item 1. Legal Proceedings."
Volatility of Stock Price. The market price of the shares of Common Stock is
likely to be highly volatile and could be subject to wide fluctuations in
response to factors such as actual or anticipated variations in the Company's
operating results, announcements of technological innovations, new products or
new contracts by the Company or its competitors, developments with respect to
patents, copyrights or proprietary rights, changes in financial estimates by
securities analysts, conditions and trends in the software and other technology
industries, adoption of new accounting standards affecting the software
industry, general market conditions and other factors. Further, the stock market
has experienced extreme price and volume fluctuations that have particularly
affected the market prices of equity securities of many high technology
companies and that often have been unrelated or disproportionate to the
operating performance of such companies. Declines in market prices generally may
adversely affect the market price of the Company's Common Stock. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against such
company. Such litigation, if instituted, could result in substantial costs and a
diversion of management attention and
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resources, which would have a material adverse effect on the Company's business,
results of operations and financial condition. These market fluctuations, as
well as general economic, political and market conditions, such as recessions or
international currency fluctuations, may adversely affect the market price of
the Common Stock.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings:
In April 1997, the Company filed a lawsuit in the U.S. District Court,
Northern District of California against McAfee Associates, Inc alleging that
McAfee's packaging materials included false and misleading statements about the
Company that constituted unfair competition and false advertising. In addition,
CyberMedia has asserted claims of trade dress infrigement against McAfee. McAfee
has indicated that they will be filing unspecified counterclaims. However, no
such claims have been filed.
Item 4. Submission of Matters to Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K
( a ) Exhibits
11.1 Statement Regarding Computation of Net Income Per Share
27.2 Financial Data Schedule
( b ) Reports on form 8-K
No reports on Form 8-K have been filed during the period for
which the report is filed.
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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 thereto duly authorized.
CYBERMEDIA, INC.
(Registrant)
Date: May 12, 1997 By: /s/ Jeffrey W. Beaumont
------------------------
Chief Financial Officer
(Principal Financial and Principal
Accounting Officer)
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INDEX TO EXHIBITS
Exhibit Page
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11.1 Statement Regarding Computation of Net Income Per Share 25
27.1 Financial Data Schedule 26
24