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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 June 30, 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 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. (1) Yes [X] No [ ]; (2) Yes [X] No [ ]
As of July 31, 1997, 12,183,640 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 June 30, 1997 and December 31, 1996 3
Statements of Operations Three and six months ended June 30,
1997 and 1996 4
Statements of Cash Flow Six Months ended June 30, 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 5. Other Information 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
June 30, 1997 December 31, 1996
Unaudited Audited
------------ -----------------
Assets
Current assets:
Cash and cash equivalents $ 22,646,000 $ 39,322,000
Marketable securities 6,869,000 -
Trade accounts receivable, net 23,953,000 12,318,000
Inventory 1,671,000 2,365,000
Prepaid expenses 923,000 1,270,000
Other current assets 220,000 185,000
------------ ------------
Total current assets 56,282,000 55,460,000
Goodwill, net 231,000 -
Furniture, fixtures and equipment, net 1,732,000 990,000
Total assets $ 58,245,000 $ 56,450,000
============ ============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 8,123,000 $ 7,004,000
Accrued expenses 2,764,000 1,247,000
Unearned revenue 3,662,000 4,024,000
Grant payable 4,000 413,000
Current portion of capital lease 31,000 45,000
Contractual obligation for acquired R&D 1,589,000 -
------------ ------------
Total current liabilities 16,173,000 12,733,000
Capital lease obligation 49,000 49,000
Contractual obligation for acquired R&D 2,812,000 -
------------ ------------
Total liabilities 19,034,000 12,782,000
Stockholders' equity
Common stock 122,000 119,000
Additional paid-in capital 53,607,000 52,583,000
Accumulated deficit (14,408,000) (9,034,000)
Currency Translation (110,000)
------------ ------------
Total Stockholders' Equity 39,211,000 43,668,000
Total liabilities and stockholders' equity $ 58,245,000 $ 56,450,000
============ ============
See accompanying notes to Financial Statements
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CYBERMEDIA, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Quarter Ended Quarter Ended Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ---------------- ----------------
Revenue $ 20,447,000 $ 7,891,000 $ 36,980,000 $ 13,949,000
Cost of goods sold 3,875,000 2,787,000 8,088,000 4,888,000
------------ ------------ ------------ ------------
Gross profit 16,572,000 5,104,000 28,892,000 9,061,000
Expenses
Research and development 2,740,000 669,000 4,285,000 1,143,000
Sales & marketing 9,584,000 4,730,000 17,739,000 8,609,000
General & administrative 1,679,000 902,000 2,649,000 1,513,000
One-time in-process R&D and acquisition
expenses 9,091,000 - 9,091,000 -
------------ ------------ ------------ ------------
Total Operating expenses 23,094,000 6,301,000 33,764,000 11,265,000
Operating income (loss) (6,522,000) (1,197,000) (4,872,000) (2,204,000)
Other income (expense) 398,000 (15,000) 919,000 (25,000)
------------ ------------ ------------ ------------
Profit (loss) before income taxes (6,124,000) (1,212,000) (3,953,000) (2,229,000)
Provision for income taxes 582,000 - 1,421,000 -
------------ ------------ ------------ ------------
Net income (loss) $ (6,706,000) $ (1,212,000) $ (5,374,000) $ (2,229,000)
============ ============ ============ ============
Net income (loss) per share $ (0.49) $ (0.15) $ (0.45) $ (0.28)
Shares used in computing net income
(loss) per share 12,178,000 7,889,000 12,050,000 7,889,000
See accompanying notes to Financial Statements
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CYBERMEDIA, INC.
STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
------------------------------
1997 1996
------------ ------------
Cash flow from operating activities:
Net income (loss) $ (5,374,000) $ (2,229,000)
Adjustments to reconcile met loss to net cash used in operating
activities:
Depreciation 244,000 42,000
Royalty expense (adjustment) - 188,000
Changes in assets and liabilities:
Trade accounts receivable, net (11,635,000) (2,786,000)
Inventory 694,000 (823,000)
Prepaid expenses 347,000 (542,000)
Other current assets (35,000) 3,000
Accounts payable 1,119,000 1,327,000
Accrued expenses 1,517,000 190,000
Unearned revenues (362,000) 2,385,000
Deferred obligation for acquired R&D 4,401,000 -
------------ ------------
Net cash used in operating activities (9,084,000) (2,245,000)
------------ ------------
Cash flows used in investing activities
Purchase of furniture, fixtures and equipment (986,000) (608,000)
Purchase of Marketable Securities (6,869,000) -
------------ ------------
Net cash used by investing activities (7,855,000) (608,000)
------------ ------------
Cash flows from financing activities:
Payment of capital lease obligations (14,000) (5,000)
Payment of notes payable (50,000)
Proceeds from notes payable to bank 1,300,000
Expenses associated with initial public offering (261,000)
Proceeds from the issuance of common stock 538,000 127,000
------------ ------------
Net cash used by financing activities 263,000 1,372,000
------------ ------------
Net decrease in cash and cash equivalents (16,676,000) (1,481,000)
Cash and cash equivalents at beginning of year 39,322,000 2,050,000
------------ ------------
Cash and cash equivalents at end of period $ 22,646,000 $ 569,000
============ ============
See accompanying notes to Financial Statements.
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CYBERMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997
(unaudited)
1. Basis of Presentation
The financial statements for the three months and six months ended
June 30, 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 months and six months
ended June 30, 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
1996, and the first six months of 1997, over 90% and 60% respectively, 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 First Aid 98, a corporate version of First Aid 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, First Aid 98 or a corporate version of First
Aid will achieve significant market acceptance and failure of any of these
products 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 June 30, 1997, the Company
generated net sales of approximately $80.5 million, of which $75.4 million, or
94% of such amount, was generated in the eighteen months ended June 30, 1997.
The Company has incurred net losses in each of the last five fiscal years. At
June 30, 1997, the Company had an accumulated deficit of $14.4 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 half of 1997, the
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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 experienced in the first six
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 26% and 34%, respectively,
of the Company's net revenues in the six months ended June 30, 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 six months of 1997 represented approximately
30% and 7% 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. Sales from direct mail have
historically operated at lower profitability levels than sales through
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,
UnInstaller and Oil Change products, the Company defers a portion of all First
Aid, UnInstaller and Oil Change revenue ratably over estimated update periods,
generally one year from the date of sale. At June 30, 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.
On April 2, 1997, the Company acquired certain assets from Luckman
Interactive which included ownership in all intellectual property rights to
Microhelp Uninstaller. This acquisition was accounted for largely as in process
research and development and was expensed during the quarter ended June 30,
1997. 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 acquisition of
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Walk Softly was accounted for on a pooling of interests basis and the financial
statements for all periods presented herein have been restated as required by
such treatment.
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1996 1997 1996 1997
----- ----- ----- -----
Net revenues.................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues.............. 35.3 19.0 35.0 21.9
----- ----- ----- -----
Gross profit................ 64.7 81.0 65.0 78.1
Operating expenses:
Research and development.... 8.5 13.4 8.2 11.6
Sales and marketing......... 60.0 46.9 61.7 48.0
General and administrative.. 11.4 8.2 10.9 7.1
One-time-in-process R&D and
acquisition expenses ....... 0.0 44.4 0.0 24.6
----- ----- ----- -----
Total operating expenses. 79.9 112.9 80.8 91.3
----- ----- ----- -----
Loss from operations..... (15.2) (31.9) (15.8) (13.2)
Interest, net................. (0.2) 1.9 (0.2) 2.5
----- ----- ----- -----
Loss before income taxes. (15.4) (30.0) (16.0) (10.7)
Income tax expense............ -- 2.8 -- 3.8
-- ----- -- -----
Net loss................. (15.4)% (32.8)% (16.8)% (14.5)%
===== ===== ===== =====
Net Revenues. Net revenues increased 159% to $20.4 million in the three
months ended June 30, 1997 from $7.9 million in the three months ended June 30,
1996. For the six month period ended June 30, 1997, net revenues increased 165%
to $37.0 million from $13.9 million in the same period in 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 launch of Uninstaller 4.5, the expansion of the
Company's retail distribution channels and international 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 21% and 2%
of net revenues for the three months ended June 30, 1997 and 1996 respectively.
For the six month periods ended June 30, 1997 and 1996, the percentageof net
revenues from international sales was approximately 18% and 2%, 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, Japanese,
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 and Japan. 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.
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Cost of Revenues. Cost of revenues were $3.9 million and $2.8 million for
the three month periods ended June 30, 1997 and 1996, respectively. For the six
months ended June 30, 1997, cost of revenues increased to $8.1 million from $
$4.9 million for the same period in 1996. Cost of revenues consists primarily of
the cost of product media, product duplication, documentation and order
fulfillment and royalties. The increases in cost of revenues were due primarily
to increased unit shipments of the Company's products.
Gross Margin. Gross margins were 81% and 65% in the three months ended June
30, 1997 and 1996, respectively. For the six month periods ended June 30, 1997
and 1996, gross margins were 78% and 65%, respectively. Gross margins in 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 and a reduction in net deferrals of
revenue in 1997 versus 1996 associated with post sale obligations to customers.
Research and Development. Research and development expenses increased by
310% from $669,000 in the three months ended June 30, 1996 to $2.7 million in
the same period in 1997, representing 9%, and 13% of net revenues in these
quarters, respectively. For the six month periods ended June 30, 1997 and 1996
research and development expenses increased by 275% from $1.1 million to $4.3
million, representing 8% and 12% of revenue, 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 $4.7 million in
the three months ended June 30, 1996 to $9.6 million in the same period of 1997,
representing 60% and 47% of net revenues in these periods, respectively. For the
six month periods ended June 30, 1997 and 1996 sales and marketing expenses
increased from $8.6 million to $17.7 million, representing 62% and 48% of net
revenues, 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 $902,000 in the three month period ended June 30, 1996 to $1.7 million in
the same period in 1997, representing 11% and 8% of net revenues in these
periods, respectively. For the six month period ended June 30, 1997 general and
administrative expenses increased from $1.5 million in 1996 to $2.6 million in
1997, representing 11% and 7% of net revenues, 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.
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Interest, Net. Interest, net was $398,000 and $(15,000) in the three month
periods ended June 30, 1997 and 1996, respectively. For the six month periods
ended June 30, 1997 and 1996, interest, net was $919,000 and $(25,000),
respectively. Interest, net consists of interest income and interest expense.
Provision for Income Taxes. The provision for income taxes includes
estimated foreign taxes attributable to activities during the quarter ended June
30, 1997. In addition, the provision for income taxes for the six month period
ended June 30, 1997 includes the provision recorded during the first quarter
which was 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 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 six months of 1996
and 1997, the Company used $2.2 million and $9.1 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 six 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 $608,000 and $986,000, respectively. The Company
expects that its capital expenditures will increase as the Company's employee
base continues to grow. At June 30, 1997, 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 June 30, 1997, the Company had $29.5 million in cash, cash equivalents
and marketable securities and $40.1 million in working capital. The Company also
had available a $1.0 million unsecured revolving line of credit which expires in
May 1998.
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 February 1997, FASB issued Statement of Financial Accounting Standards
No. 128, Earnings Per Share ("SFAS No. 128"). SFAS No. 128 requires dual
presentation of newly defined basic and diluted earnings per share on the face
of the income statement for all entities with complex capital structures. SFAS
No. 128 is effective for financial statements issued for periods ending after
December 15, 1997, and earlier application is not permitted. The Company has not
yet determined the impact of SFAS No.128.
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 June 30, 1997 the Company
generated net sales of approximately $80.5 million, of which $75.4 million, or
94% of such amount, was generated in the eighteen months ended June 30, 1997.
The Company has incurred net losses in each of the last five fiscal years,
resulting in an accumulated deficit of $14.4 million at June 30, 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 there can be no guarantee 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
six 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
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
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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 six months of 1997, over 90% and 60%, repectively, 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 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
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higher operating expenses. Between December 1, 1995 and June 30, 1997, the
number of Company employees increased from approximately 20 to approximately 200
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 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
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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 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
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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
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 two distributors, Navarre Corporation ("Navarre") and
Ingram Micro, Inc. ("Ingram Micro"), accounted for approximately 26% and 34%,
respectively, of the Company's net revenues in the first six months of 1997. 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 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.
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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 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
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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 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
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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 half of 1997,
approximately 18% 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
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
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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 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
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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 June 1997, the Company filed a lawsuits in the U.S. District Court for
the Northern District of Georgia against MicroBasic GmbH ("MicroBasic") and
Roderick Manhattan Group, Ltd. ("RMG") demanding that they cease copying and
distributing MicroHelp UnInstaller. In addition, in June 1997, the Company filed
a lawsuit in the Birmingham Mercantile Court, Great Britan, against RMG
demanding payment for past due invoices.
Item 4. Submission of Matters to Vote of Security Holders
On June 4, 1997 the Annual Meeting of Stockholders of the Company was
held in Santa Monica, California. An election of Directors was held with a slate
of seven candidates, Unni Warrier, Paul Dali, Peter Morris, Suhas Patil, Ronald
Posner, Kanwal Rekhi and James Tolonen being elected to the Board of Directors
of the Company. Of shares represented and voting, Mr. Warrier received 6,038,152
affirmative votes and 638,353 votes against, Mr. Posner received 6,037,352
affirmative votes and 639,153 votes against and each of the other directors
received 6,038,352 affirmative votes and 638,153 votes against.
The stockholders also ratified the appointment of KPMG Peat Marwick, LLP
as independent auditors, to audit the financial statements of the Company for
the fiscal year ending December 31, 1997. There were 6,673,255 shares voted in
favor of the ratification, 1,200 shares voted against ratification and 2,050
shares abstained.
Item 5. Other Information
Paul Dali, a member of the Board of Directors of the Company, resigned
his position as a director in July 1997, for personal business reasons.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Asset Purchase Agreement between CyberMedia, inc.
and Luckman Interactive, Inc. dated April 2, 1997
11.2 Statement Regarding Computation of Net Income
Per Share
27.3 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: August 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
10.1 Asset Purchase Agreement between CyberMedia, inc. and Luckman 25
Interactive, Inc. dated April 2, 1997
11.1 Statement Regarding Computation of Net Income Per Share 160
27.1 Financial Data Schedule 161
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