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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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 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 October 31, 1997, 12,339,419 shares of the Registrant's Common
Stock, $0.01 par value were issued and outstanding.
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2
CYBERMEDIA, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Balance Sheets At September 30, 1997 and December 31, 1996 3
Statements of Operations for the Three and Nine months ended
September 30, 1997 and 1996 4
Statements of Cash Flows for the Nine Months ended September 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 21
Item 1. Legal Proceedings 21
Item 2. Change in Securities and Use of Proceeds 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
Index to Exhibits 23
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CYBERMEDIA, INC.
BALANCE SHEETS
September 30, December 31,
1997 1996
Unaudited Audited
------------ -----------
Assets
Current assets:
Cash and cash equivalents .............. $ 28,164,000 $ 39,322,000
Marketable securities .................. 6,927,000 --
Trade accounts receivable, net ......... 25,089,000 12,318,000
Inventory .............................. 1,268,000 2,365,000
Prepaid expenses ....................... 1,077,000 1,270,000
Deferred taxes ......................... 2,060,000 --
Other current assets ................... 343,000 185,000
------------ ------------
Total current assets ................. 64,928,000 55,460,000
Goodwill, net .......................... 195,000 --
Furniture, fixtures and equipment, net . 2,846,000 990,000
Other assets ........................... 125,000 --
------------ ------------
Total assets ................................... $ 68,094,000 $ 56,450,000
============ ============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable ....................... $ 8,318,000 $ 7,004,000
Accrued expenses ....................... 4,117,000 1,247,000
Income tax payable ..................... 3,184,000 --
Unearned revenue ....................... 4,103,000 4,024,000
Grant payable .......................... 390,000 413,000
Current portion of capital lease ....... 20,000 45,000
Deferred obligation for acquired R&D ... 4,526,000 --
------------ ------------
Total current liabilities ............ 24,658,000 12,733,000
Capital lease obligation & deferred rent 178,000 49,000
Deferred obligation for acquired R&D ... 1,687,000 --
------------ ------------
Total liabilities .................... 26,523,000 12,782,000
Stockholders' equity
Common stock ........................... 124,000 119,000
Additional paid-in capital ............. 54,499,000 52,583,000
Accumulated deficit .................... (12,760,000) (9,034,000)
Currency Translation ................... (292,000) --
------------ ------------
Total Stockholders' Equity ........... 41,571,000 43,668,000
Total liabilities and stockholders' equity ..... $ 68,094,000 $ 56,450,000
============ ============
See accompanying notes to Financial Statements
4
CYBERMEDIA, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Quarter Ended Quarter Ended Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996 September 30, 1997 September 30, 1996
------------ ------------ ------------ ------------
Revenue ..................................... $ 22,457,000 $ 8,730,000 $ 59,437,000 $ 22,680,000
Cost of goods sold .......................... 3,950,000 2,391,000 12,038,000 7,280,000
------------ ------------ ------------ ------------
Gross profit ................................ 18,507,000 6,339,000 47,399,000 15,400,000
Operating Expenses
Research and Development .................... 2,861,000 929,000 7,146,000 2,072,000
Sales & Marketing ........................... 10,130,000 5,817,000 27,869,000 14,426,000
General & ................................... 2,095,000 916,000 4,744,000 2,429,000
Administrative
One-time in-process R&D and
acquisition expenses ........................ 2,250,000 -- 11,341,000 --
------------ ------------ ------------ ------------
Total operating ............................. 17,336,000 7,662,000 51,100,000 18,927,000
expenses
------------ ------------ ------------ ------------
Operating income ............................ 1,171,000 (1,323,000) (3,701,000) (3,527,000)
(loss)
Other income ................................ 477,000 1,000 1,396,000 (23,000)
(expense)
------------ ------------ ------------ ------------
Profit (loss) before income ................. 1,648,000 (1,322,000) (2,305,000) (3,550,000)
taxes
Provision for income taxes .................. -- -- 1,421,000 --
------------ ------------ ------------ ------------
Net income (loss) ........................... $ 1,648,000 $ (1,322,000) $ (3,726,000) $ (3,550,000)
============ ============ ============ ============
Net income (loss) per share ................. $ 0.12 $ (0.17) $ (0.31) $ (0.45)
Shares used in computing
net income (loss) per share ................. 13,803,000 7,889,000 12,090,000 7,872,000
See accompanying notes to Financial Statements
5
CYBERMEDIA, INC.
STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
------------------------------------
1997 1996
-------------- -------------
Cash flow from operating activities:
Net income (loss) ................................................................... $ (3,726,000) $ (3,550,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization........................................................ 517,000 101,000
Deferred taxes ...................................................................... (2,060,000) --
Deferred rent ....................................................................... 129,000 --
Royalty expense (adjustment) ........................................................ 386,000 188,000
Warrants issued for acquired R&D .................................................... 750,000 --
Changes in assets and liabilities:
Trade accounts receivable, net ...................................................... (12,771,000) (5,737,000)
Inventory ........................................................................... 1,097,000 (883,000)
Prepaid expenses .................................................................... 193,000 (909,000)
Other current assets ................................................................ (158,000) --
Accounts payable .................................................................... 1,314,000 2,327,000
Accrued expenses .................................................................... 2,870,000 648,000
Income taxes payable ................................................................ 3,184,000 --
Unearned revenues ................................................................... 79,000 3,207,000
Grant payable ....................................................................... (409,000)
Deferred obligation for acquired R&D ................................................ 6,213,000 --
------------ ------------
Net cash used in operating activities .................................... (2,392,000) (4,608,000)
------------ ------------
Cash flows used in investing activities - purchases of
Marketable securities ............................................................... (6,927,000) --
Furniture, fixtures and equipment ................................................... (2,299,000) (824,000)
Goodwill and other assets ........................................................... (393,000) --
------------ ------------
Net cash used by investing activities .................................... (9,619,000) (824,000)
------------ ------------
Cash flows from financing activities:
Payment of capital lease obligations ................................................ (25,000) (1,000)
Payment of notes payable ............................................................ -- (50,000)
Proceeds from notes payable to bank ................................................. -- --
Proceeds from the issuance of series C preferred stock .............................. -- 5,000,000
Expenses associated with initial public offering .................................... (261,000) --
Proceeds from the issuance of common stock .......................................... 1,431,000 160,000
------------ ------------
Net cash used by financing activities .................................... 1,145,000 5,109,000
------------ ------------
Effect of Exchange Rate changes on cash .................................................... (292,000) --
------------ ------------
Net decrease in cash and cash equivalents ................................ (11,158,000) (323,000)
Cash and cash equivalents at beginning of year ............................................. 39,322,000 2,050,000
------------ ------------
Cash and cash equivalents at end of period ................................................. $ 28,164,000 $ 1,727,000
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest .............................................................................. $ 5,000 $ 68,000
Income taxes .......................................................................... -- 440,000
Supplemental disclosure of noncash investing and financing activities:
Acquisition of equipment through capital lease agreements ............................. $ -- $ 94,000
See accompanying notes to Financial Statements
6
CYBERMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(unaudited)
1. Basis of Presentation
The financial statements for the three months and nine months ended
September 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 nine months ended September 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.
7
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 nine months of 1997, over 90% and over 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 international versions of First Aid 98 and a corporate version of
First Aid 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 and in September, 1997 the Company released First Aid 98, a major
upgrade of First Aid 97, and Guard Dog, a personal security and privacy program
for internet users.. 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 September 30, 1997, the Company
generated net sales of approximately $103.0 million, of which $97.9 million, or
95% of such amount, was generated in the twenty-one months ended September 30,
1997. The Company has incurred net losses in each of the last five fiscal years.
At September 30, 1997, the Company had an accumulated deficit of $12.8 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 nine months of 1997, the
8
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 nine
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 27% and 37%, respectively,
of the Company's net revenues in the nine months ended September 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 nine months of 1997 represented
approximately 30% and 6% 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, Guard Dog and Oil Change products, the Company defers a portion of
all First Aid, UnInstaller Guard Dog and Oil Change revenue ratably over
estimated update periods, generally one year from the date of sale. At September
30, 1997 the Company's balance sheet included $4.1 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. 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 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. On September
30, 1997, the Company acquired certain rights from ServiceWare, Inc. which
included access and resale rights to certain ServiceWare technology. This
9
transaction was accounted for largely as in process research and development and
was expensed during the quarter ended September 30, 1997.
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 Nine Months Ended
September 30, September 30,
1996 1997 1996 1997
---- ---- ---- ----
Net revenues ............................................ 100.0% 100.0% 100.0% 100.0%
Cost of revenues ........................................ 27.4 17.6 32.1 20.2
---- ---- ---- ----
Gross profit .......................................... 72.6 82.4 67.9 79.8
Operating expenses:
Research and development .............................. 10.6 12.7 9.2 12.0
Sales and marketing ................................... 66.6 45.1 63.6 46.9
General and administrative ............................ 10.5 9.3 10.7 8.0
One-time-in-process R&D and
acquisition expenses .................................. -- 10.0 -- 19.1
---- ---- ---- ----
Total operating expenses ........................... 87.7 77.2 83.5 86.0
---- ---- ---- ----
Profit (loss) from operations....................... (15.1) 5.2 (15.6) (6.2)
Other income (expense) .................................. -- 2.1 (0.1) 2.3
---- ---- ---- ----
Profit (loss) before income ........................ (15.1) 7.3 (15.7) (3.9)
taxes
Income tax expense ...................................... -- -- -- 2.4
---- ---- ---- ----
Net profit (loss) .................................. (15.1)% 7.3% (15.7)% (6.3)%
Net Revenues. Net revenues increased 157% to $22.5 million in the three
months ended September 30, 1997 from $8.7 million in the three months ended
September 30, 1996. For the nine month period ended September 30, 1997, net
revenues increased 162% to $59.4 million from $22.7 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 in May 1997 and Guard Dog in September 1997, 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 12% and 15%
of net revenues for the three months ended September 30, 1997 and 1996
respectively. For the nine month periods ended September 30, 1997 and 1996, the
percentage of net revenues from international sales was approximately 16% and
7%, 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 International English versions of many of
its products 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.
Cost of Revenues. Cost of revenues were $4.0 million and $2.4 million for
the three month periods ended September 30, 1997 and 1996, respectively. For the
10
nine months ended September 30, 1997, cost of revenues increased to $12.0
million from $7.3 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 82% and 73% in the three months ended
September 30, 1997 and 1996, respectively. For the nine month periods ended
September 30, 1997 and 1996, gross margins were 80% and 68%, 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
208% from $929,000 in the three months ended September 30, 1996 to $2.9 million
in the same period in 1997, representing 11%, and 13% of net revenues in these
quarters, respectively. For the nine month periods ended September 30, 1997 and
1996 research and development expenses increased by 245% from $2.1 million to
$7.1 million, representing 9% 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 $5.8 million in
the three months ended September 30, 1996 to $10.1 million in the same period of
1997, representing 67% and 45% of net revenues in these periods, respectively.
For the nine month periods ended September 30, 1997 and 1996 sales and marketing
expenses increased from $14.4 million to $27.9 million, representing 64% and 47%
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 were 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 $929,000 in the three month period ended September 30, 1996 to $2.1 million
in the same period in 1997, representing 11% and 9% of net revenues in these
periods, respectively. For the nine month period ended September 30, 1997
general and administrative expenses increased from $2.4 million in 1996 to $4.7
million in 1997, representing 11% and 8% 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.
One-time in-process R&D and acquisition expenses. On September 30, 1997,
the Company acquired certain rights from ServiceWare, Inc. which included access
and resale rights to certain ServiceWare technology. This technology was
considered to have no alternative future use and was expensed during the quarter
ended September 30, 1997 as one-time in-process R&D and acquisition expense.
Also reflected in the nine month period ended September 30, 1997 is the April
11
1997 acquisition of 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.
Other Income (Expense). Other income (expense) was $477,000 and $1,000 in
the three month periods ended September 30, 1997 and 1996, respectively. For the
nine month periods ended September 30, 1997 and 1996, other income (expense) was
$1,396,000 and $(23,000), respectively. Other income (expense) consists of
interest income and interest expense and currency related losses and gains..
Provision for Income Taxes. The provision for income taxes includes
estimated foreign taxes attributable to activities during the nine months ended
September 30, 1997. In addition, the provision for income taxes for the nine
month period ended September 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 nine months of 1996
and 1997, the Company used $4.6 million and $2.4 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 nine 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 $824,000 and $2.3 million,
respectively. In addition, during the first nine months of 1997, the Company
invested net amounts of $6.9 million in marketable securities and $393,000 of
goodwill and other assets in connection with the acquisition of in-process
research and development. The Company expects that its capital expenditures will
increase as the Company's employee base continues to grow. At September 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 September 30, 1997, the Company had $35.1 million in cash, cash
equivalents and marketable securities and $42.1 million in working capital. The
Company also had available a $1.0 million unsecured revolving line of credit
which expires in May 1998. In addition, the Company has, from time to time,
utilized accounts receivable based financing made available by commercial banks
including sales of trade accounts receivable to such commercial banks. Such
arrangements are non-recourse, except for sales returns and marketing credits.
At September 30, 1997, the Company had sold $4.8 million of trade accounts
receivable without recourse (subject to sales returns and marketing credits)
which remained outstanding at that date.
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.
12
Impact of Recent Accounting Pronouncements
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.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2: "Software Revenue Recognition" (SOP 97-2)
which is effective for transactions occurring after December 15, 1997. The
Company has not yet determined the impact of SOP 97-2, but believes that its
current revenue recognition policies are substantially in compliance with the
provisions of such statement.
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 September 30, 1997 the
Company generated net sales of approximately $103.0 million, of which $97.9
million, or 95% of such amount, was generated in the twenty-one months ended
September 30, 1997. The Company has incurred net losses in each of the last five
fiscal years, resulting in an accumulated deficit of $12.8 million at September
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,
which are fully reserved as of December 31, 1996. 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 nine 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
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
13
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 nine months of 1997, over 90% and over 60%, respectively, 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 for a
substantial portion 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 higher operating
expenses. Between December 1, 1995 and September 30, 1997, the number of Company
employees increased from approximately 20 to approximately 240 and the Company
currently expects to hire 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.
14
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 incent 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 has incorporated "Plug and Play" capabilities into current
versions and expected to continue to incorporate in 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 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.
15
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 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 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
16
technological developments and emerging industry standards is critical to the
Company's future success. 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 27% and 37%,
respectively, of the Company's net revenues in the first nine months of 1996 and
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.
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
17
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 within the Company's expectations, 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 Guard
Dog 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 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.
18
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 relatively small,
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 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
19
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 nine months of
1997, approximately 16% of total net 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 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.. 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.
20
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 conditions, such as recessions or international currency fluctuations,
may adversely affect the market price of the Common Stock.
21
PART II: OTHER INFORMATION
Item 1. Legal Proceedings:
In June 1997, the Company filed 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 Britain, against RMG
demanding payment for past due invoices.
Item 2. Changes in Securities and Use of Proceeds
In October 1996, the Company completed an initial public offering, pursuant
to a registration statement on Form S-1, of 2,875,000 shares of Common Stock
(including the underwriters' overallotment of 375,000 shares) at $16.00 per
share. The managing underwriters were Hambrecht and Quist, Lehman Brothers and
Wessels Arnold and Henderson. The offering has been terminated and all of the
shares were sold. The Company received approximately $41.5 million, net of
underwriters' discounts, commissions and other offering costs. The offering
costs were approximately $1.1 million. The principal purpose of the offering was
to raise cash for working capital and other general corporate purposes, to pay
outstanding notes and grants payable, and if opportunities became available, to
invest in complementary businesses and products. The Company invested the
proceeds in short term, investment grade interest bearing securities. During the
three and nine month periods ended September 30, 1997 the Company continued to
invest the proceeds in such securities in addition to using the proceeds to fund
on-going working capital requirements and acquire the rights to MicroHelp
Uninstaller. None of the expenses incurred in the offering constituted direct or
indirect payments to directors, officers or general partners of the issuer or to
their associates or persons owning 10% or more of any class of equity security
of the issuer or to any affiliate of the issuer.
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 Software License and Distribution Agreement between
CyberMedia, Inc. and ServiceWare, Inc., dated
September 30, 1997
11.1 Statement Regarding Computation of Net Income Per
Share
27.1 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.
22
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: December 4, 1997 By: /s/ Jeffrey W. Beaumont
------------------------
Chief Financial Officer
(Principal Financial and Principal Accounting Officer)
23
INDEX TO EXHIBITS
Exhibit ......... Page
----
10.1 Software License and Distribution Agreement between 24
CyberMedia, Inc. and ServiceWare, Inc., dated September 30, 1997(1)
11.1 Statement Regarding Computation of Net Income Per Share 40
27.1 Financial Data Schedule 41
(1) confidential treatment requested.