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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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)
2850 Ocean Park Blvd., Suite 100, 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 May 5, 1998, 12,773,606 shares of the Registrant's Common Stock,
$0.01 par value were issued and outstanding.
1
CYBERMEDIA, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets At March 31, 1998 and December 31, 1997 3
Consolidated Statements of Operations for the Three Months ended March 31,
1998 and 1997 4
Consolidated Statements of Cash Flows for the Three Months ended March 31, 5
1998 and 1997
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signature 26
Index to Exhibits 27
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CYBERMEDIA, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 1998 December 31, 1997
--------------------- ----------------------
Assets
Current assets:
Cash and cash equivalents $22,536,000 $25,059,000
Marketable securities --- 1,001,000
Trade accounts receivable, net 5,174,000 19,851,000
Inventory 3,667,000 3,590,000
Prepaid expenses 1,150,000 1,417,000
Deferred taxes 3,619,000 3,619,000
Other current assets 686,000 1,091,000
--------------------- ----------------------
Total current assets 36,832,000 55,628,000
Furniture, fixtures and equipment, net 4,200,000 4,191,000
Other assets 216,000 284,000
--------------------- ----------------------
Total assets $41,248,000 $60,103,000
===================== ======================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $9,443,000 $8,753,000
Accrued expenses 2,519,000 2,917,000
Related party payable --- 618,000
Income taxes payable 17,000 2,787,000
Unearned revenue 3,494,000 3,655,000
Grant payable 390,000 390,000
Current portion of capital lease --- 17,000
Deferred obligation for acquired R&D 2,663,000 2,913,000
--------------------- ----------------------
Total current liabilities 18,526,000 22,050,000
Capital lease obligation & deferred rent 270,000 284,000
Deferred obligation for acquired R&D 563,000 1,125,000
--------------------- ----------------------
Total liabilities 19,359,000 23,459,000
Stockholders' equity
Common stock 129,000 126,000
Additional paid-in capital 58,911,000 57,587,000
Accumulated deficit (36,823,000) (20,774,000)
Accumulated other comprehensive income (loss) (328,000) (295,000)
--------------------- ----------------------
Total stockholders' equity 21,889,000 36,644,000
Total liabilities and stockholders' equity $41,248,000 $60,103,000
===================== ======================
See accompanying notes to consolidated financial statements
3
CYBERMEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Quarter Ended Quarter Ended
March 31, 1998 March 31, 1997
---------------------- ---------------------
Revenue $4,697,000 $16,533,000
Cost of goods sold 1,281,000 4,213,000
---------------------- ---------------------
Gross profit 3,416,000 12,320,000
Operating expenses
Research and development 2,830,000 1,545,000
Sales and marketing 13,924,000 8,155,000
General and administrative 2,983,000 970,000
---------------------- ---------------------
Total operating expenses 19,737,000 10,670,000
---------------------- ---------------------
Operating income (loss) (16,321,000) 1,650,000
Other income 280,000 521,000
---------------------- ---------------------
Income (loss) before income taxes (16,041,000) 2,171,000
Provision for income taxes 8,000 839,000
---------------------- ---------------------
Net income (loss) $(16,049,000) $1,332,000
====================== =====================
Net income (loss) per share - basic $(1.27) $0.11
Net income (loss) per share - diluted $(1.27) $0.10
Shares used in computing net income (loss) per share - basic 12,655,000 11,932,000
Shares used in computing net income (loss) per share - diluted 12,655,000 13,420,000
See accompanying notes to consolidated financial statements
4
CYBERMEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
------------------------------------------
1998 1997
----------------- ---------------
Cash flow from operating activities:
Net income (loss) $(16,049,000) $1,332,000
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 452,000 108,000
Deferred rent (14,000) -
Accelerated vesting of option grants 776,000 -
Changes in assets and liabilities:
Trade accounts receivable, net 14,677,000 (4,429,000)
Inventory (77,000) 805,000
Prepaid expenses 267,000 557,000
Other current assets 405,000 185,000
Accounts payable 690,000 (1,212,000)
Accrued expenses and related party payable (1,016,000) 513,000
Income taxes payable (2,770,000) 839,000
Unearned revenues (161,000) (295,000)
Deferred obligation for acquired R&D (812,000) -
----------------- ---------------
Net cash used in operating activities (3,632,000) (1,597,000)
----------------- ---------------
Cash flows provided by (used in) investing activities -
Proceeds from marketable securities 1,001,000 -
Purchases of furniture, fixtures and equipment (424,000) (367,000)
Goodwill and other assets 31,000 -
----------------- ---------------
Net cash provided (used) by investing activities 608,000 (367,000)
----------------- ---------------
Cash flows provided by (used in) financing activities:
Payment of capital lease obligations (17,000) (3,000)
Proceeds from the issuance of common stock 551,000 21,000
Proceeds from the issuance of common stock
upon initial public offering - (259,000)
----------------- ---------------
Net cash provided (used) by financing activities 534,000 (241,000)
----------------- ---------------
Effect of Exchange Rate changes on cash (33,000) -
----------------- ---------------
Net decrease in cash and cash equivalents (2,523,000) (2,205,000)
Cash and cash equivalents at beginning of year 25,059,000 39,322,000
----------------- ---------------
Cash and cash equivalents at end of period $22,536,000 $37,117,000
================= ===============
See accompanying notes to consolidated financial statements
5
CYBERMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
1. Basis of Presentation
The consolidated statements of operations and cash flows for the three
months ended March 31, 1998 and 1997 and the consolidated balance sheet
as of March 31, 1998 are unaudited, however 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 are reflected. These
consolidated financial statements should be read in conjunction with
the consolidated 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, 1997. The results for the three
months ended March 31, 1998 are not necessarily indicative of the
results for the entire year ending December 31, 1998.
2. Accounts Receivable
Accounts receivable, net decreased between December 31, 1997 and March
31, 1998 primarily due to collections of monies owed to the Company by
distributors.
3. Inventories
Inventories, consisting of software product and related packaging
materials are stated at the lower of cost (first-in, first-out method)
or market as detailed below.
March 31, December 31,
--------------- -----------------
1998 1997
Finished goods $3,018,000 $3,024,000
Components 723,000 640,000
Reserve for obsolete inventory (74,000) (74,000)
--------------- -----------------
Total inventories: $3,667,000 $3,590,000
=============== =================
4. Income Taxes Payable
The decrease in income taxes payable which occurred between December
31, 1997 and March 31, 1998 relates to federal and state tax payments
made by the Company in February 1998 to the Internal Revenue Service
and the Franchise Tax Board respectively, related to 1997 taxes owed.
No benefit has been recognized in the consolidated statement of
operations for loss in the first three months of 1998 due to the lack
of history of operating profits.
6
CYBERMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
5. Impact of Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No, 130, "Reporting Comprehensive Income," which establishes
standards for reporting and disclosure of comprehensive income.
Comprehensive income extends net earnings (loss) to include changes in
equity such as foreign currency translation adjustments and
mark-to-market adjustments on marketable securities. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997 and
requires reclassification of financial statements for earlier periods
to be provided for comparative purposes. The Company has not determined
the manner in which it will present the information required by SFAS
No. 130 in its annual consolidated financial statements for the year
ending December 31, 1998. The Company's total comprehensive income
(loss) for all periods presented herein would not have differed
materially from those amounts reported as net income (loss) in the
consolidated statements of operations.
Also in June 1997, the FASB issued SFAS 131, "Disclosures About
Segments of an Enterprise and Related Information." The Statement
establishes standards for the manner in which public companies report
information about operating segments in annual financial statements and
requires those enterprises to report selected information about
operating segments in interim financial reports issued to shareholders.
This Statement is effective for annual financial statements for periods
beginning after December 15, 1997 and for interim periods after the
first year of adoption. The Company has not yet determined the impact
of adopting the disclosure requirements of SFAS 131.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") released Statement of Position 97-2: "Software Revenue
Recognition" (SOP 97-2). Among other things, SOP 97-2 eliminates the
distinction between significant and insignificant vendor obligations
promulgated by SO 91-1 and requires each element of a software
arrangement to meet certain criteria in order to recognize revenue
allocated to that element. Additionally, SOP 97-2 requires that total
fees under an arrangement be allocated to each element in the
arrangement based upon vendor specific objective evidence, as defined.
SOP 97-2 was effective for software transactions entered into by the
Company in 1998 and in subsequent periods.
As a result of certain issues raised in applying SOP 97-2, the AICPA
issued a Statement of Position which will delay for one year, the
effective date of certain provisions of SOP 97-2 with respect to what
constitutes vendor-specific objective evidence of fair value of the
delivered software element in certain multiple element arrangements
entered into by entities that never sell such software elements
separately.
The Company expects that the adoption of SFAS 130 "Reporting
Comprehensive Income," SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information," and SOP 97-2, all of which are
effective for the full year 1998, will have a minimal impact on prior
year and current quarter consolidated statements of operations, cash
flows and financial position as the Company's reports are already
substantially in compliance with the new requirements. However the
ultimate resolution of the implementation issues referred to above, or
additional issues not yet raised or addressed by the AICPA could change
the Company's expectation.
7
CYBERMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
6. 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. Due
to the loss in the first quarter of 1998, common stock equivalents are
not included in the computation of fully diluted earnings per share.
The earnings per share information presented for the three months ended
March 31, 1997 has been restated to conform with the requirements of
the SFAS 128, "Earnings per Share," and is detailed below.
Computation of Per Share Income (Loss)
For the three months ended
March 31,
--------------------------------------
1998 1997
Net income (loss) $(16,049,000) $1,332,000
Common shares outstanding - basic
Weighted common shares outstanding during period - basic: 12,655,000 11,932,000
Net income (loss) per share - basic $(1.27) $0.11
Common shares outstanding - diluted
Common Stock options and warrants outstanding: --- 1,488,000
Weighted common shares outstanding during period - diluted 12,655,000 13,420,000
Net income (loss) per share - diluted $(1.27) $0.10
7. Contingencies
During the first quarter of 1998, the Company was named and served as a
defendant in a number of shareholder class action lawsuits which assert
claims under the Securities Exchange Act of 1934, the California Civil
Code and the California Business and Professions Code. The Company
intends to defend against these actions vigorously.
During the first quarter of 1998 the Company filed a lawsuit against
Symantec Corporation, et al., alleging, inter alia, misappropriation of
the Company's trade secrets. A counterclaim has been filed against the
Company. The Company intends to defend against this action vigorously.
8
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" below, and other risks detailed in the Company's
Registration Statement on Form S-1 (Registration No. 333-11063) declared
effective by the Securities and Exchange Commission on October 22, 1996, the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997, and as 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, 1997. 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
The Company 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, 1997 and the first three months of 1998, over 90%, over 75%, and
over 50%, respectively, of the Company's net revenues were attributable to sales
of its First Aid products.
In October 1996, the Company introduced Oil Change, a product that updates
software applications and device drivers installed on a user's PC, over the
Internet. The Company also has a number of new product development and
introduction efforts under way, including its first enterprise product,
CyberMedia Support Server (CSS) Repair Engine which was released at the end of
1997.
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 a purchase
of in-process research and development and was expensed during the quarter ended
June 30, 1997. The technology from this product was incorporated in the
development of the Company's UnInstaller product which uninstalls Windows
applications, and was introduced in May of 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 consolidated financial statements for all
periods presented herein have been restated as required by such treatment. In
September, 1997 the Company released Guard Dog Deluxe, a personal security and
privacy product for internet users.
On September 30, 1997, the Company acquired certain rights from ServiceWare,
Inc. which included access and resale rights to certain ServiceWare technology.
This transaction was accounted for largely as in process research and
development and was expensed during the quarter ended September 30, 1997.
Revenues are generated from sales of software to distributors, resellers and
end-users and are recognized upon shipment of products, net of provisions for
estimated future returns and allowances, provided that no significant vendor
obligations remain and collection of accounts receivable is deemed to be
probable. With the introduction of First Aid 95 in September 1995, CyberMedia
implemented a policy of offering customers updates to certain of its products
over the Internet at no additional cost. The
9
Company has for all periods deferred a portion of all First Aid, Oil Change,
UnInstaller Guard Dog Deluxe and CSS revenue ratably over estimated update
periods, generally one year from the date of sale. Under SOP 97-2, adopted by
the Company effective January 1, 1998, the Company will maintain this policy for
its First Aid, UnInstaller Guard Dog Deluxe and CSS products. Because Oil Change
has a subscription renewal program which is separately available one-year after
the initial purchase of the product, effective January 1, 1998, the Company
increased the deferral amount on sales of this product to more properly reflect
such subscription use. At March 31, 1998 the Company's balance sheet included
$3.5 million of unearned revenues which will be recognized ratably over the
estimated update or in the case of Oil Change, subscription periods, generally
one year. 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.
The Company monitors the levels of purchases and returns on a product by
product and customer by customer basis. Sales are made subject to certain rights
of return and reserves are established at time of shipment for potential future
return of product based on product history, analysis of retail sell-through and
other factors. In addition, the Company may on occasion grant price protection
to distributors to 1) enhance sell-through of an older version of its products,
prior to a new release, or 2) respond to market pressures on pricing where
appropriate.
During the first quarter of 1998, the Company worked with its major
distributors to adjust inventory levels and reduce their accounts receivable
balances. As a result, the Company authorized returns in the first quarter of
1998 of $11.5 million, of which $2.9 million was received by March 31, 1998 and
charged to the reserve for returns. After such returns and additional reserves
provided during the first quarter of 1998, the allowance for returns balance as
of March 31, 1998 was $11.9 million. To further facilitate the reduction of
accounts receivable balances, and channel inventory levels, the Company shipped
virtually no product to distributors during the first quarter of 1998. This
action reduced revenue for the first quarter of 1998 by a significant amount and
contributed to the significant loss reported in the quarter.
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.
Results of Operations
The following table sets forth, as a percentage of net revenues, statement
of operations data for the periods indicated:
Three Months Ended
March 31,
1998 1997
Net revenues...................... 100.0% 100.0%
Cost of revenues.................. 27.3 25.5
------- -------
Gross profit.................... 72.7 74.5
Operating expenses:
Research and development........ 60.3 9.3
Sales and marketing............. 296.4 49.3
General and administrative...... 63.5 5.9
------- -------
Total operating expenses..... 420.2 64.5
------- -------
Profit (loss) from operations (347.5) 10.0
Other income ..................... 6.0 3.2
------- -------
Profit (loss) before income
taxes...................... (341.5) 13.2
Income tax expense................ 0.2 5.1
------- -------
Net profit (loss)............ (341.7)% 8.1%
======= =======
Net Revenues. Net revenues decreased 72% to $4.7 million in the three months
ended March 31, 1998 from $16.5 million in the three months ended March 31,
1997. The Company's net revenues consist of license fees for its software
products, less provision for returns and allowances. The Company sells its
10
products primarily to distributors for resale to retailers as well as directly
to consumers through direct mail, the Internet and through software catalogs.
The decrease in net revenues during the period was largely attributable to
significantly fewer and smaller orders placed by the Company's distributors
during the first quarter of 1998, which was based upon the Company's continuing
work with its major distributors on analysis and assessment of inventories at
distribution, and sell-through of its products. Inventories of the Company's
products held by distributors as measured in number of days of sales at current
sell-through rates, at March 31, 1998 were significantly lower than at December
31, 1997. In addition, the Company provided price protection on its UnInstaller
product during the first quarter of 1998, which was charged to the provision for
returns and allowances.
Net revenue from international sales accounted for approximately 18% and 15%
of net revenues for the three months ended March 31, 1998 and 1997 respectively.
The increase in net revenues from international sales as a percentage of net
revenues between these periods resulted from a greater decrease in overall
revenue in the U.S. markets from the receivable and inventory reduction programs
described above. The decrease in international revenues in absolute dollars from
the first quarter of 1997 to the first quarter of 1998 resulted from fewer
orders placed by distributors resulting from inventory analysis and assessment
similar to that described above for the domestic business. As a result 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 such fluctuating exchange rates, longer payment
cycles, 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 $1.3 million and $4.2 million for
the three month periods ended March 31, 1998 and 1997, respectively. Cost of
revenues consists primarily of the cost of product media, product duplication,
documentation and order fulfillment and royalties. The decreases in cost of
revenues were due primarily to decreased unit shipments of the Company's
products during the first quarter of 1998 as compared to the same period in
1997.
Gross Margin. Gross margins were 73% and 75% in the three months ended
March 31, 1998 and 1997, respectively.
Research and Development. Research and development expenses increased by
83.2% from $1.5 million in the three months ended March 31, 1997 to $2.8 million
in the same period in 1998, representing 9%, and 60% of net revenues in these
quarters, respectively. Research and development expenses consist primarily of
personnel costs and, to a lesser extent, payment to third parties for contract
services, required to conduct the Company's development efforts. The increase in
research and development expenses was primarily attributable to an increase in
personnel from 53 in the first three months of 1997 to 97 in the same period in
1998, as the Company increased its product development efforts to support new
product introductions and upgrades. The increase in research and development
expenses as a percent of revenue was primarily due to the decrease in revenue in
the three months ended March 31, 1998 as compared to the same period in 1997.
The Company believes that significant investments in product development are
required to remain competitive and anticipates that it will continue to devote
substantial resources to research and development.
Sales and Marketing. Sales and marketing expenses grew from $8.2 million in
the three months ended March 31, 1997 to $13.9 million in the same period of
1998, representing 71% and 296% of net revenues in these periods, respectively.
Sales and marketing expenses consist primarily of costs of all sales and
marketing personnel, sales commissions, co-op and other advertising costs,
postage and printing costs associated with direct mail solicitations, package
design costs, trade show costs and costs of preparing promotional materials. The
increases in the dollar amount of sales and marketing
11
expenses were due primarily to increases in advertising, co-op programs, and
increases in the number of sales and marketing personnel employed to address new
sales opportunities and to support the introduction of new products. Sales and
marketing headcount grew from 62 to 101 between the first three months of 1997
and the same period in 1998. The increase in sales and marketing expenses as a
percent of revenue was due primarily to the decrease in revenue between the
first three months of 1997 and the same period in 1998. 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, and introduces
new products, such as CSS, and expands its operations outside the United States.
General and Administrative. General and administrative expenses increased
from $970,000 in the three month period ended March 31, 1997 to $3.0 million in
the same period in 1998, representing 6% and 64% of net revenues in these
periods, respectively. General and administrative expenses consist primarily of
personnel costs for finance, administration, operations and general management,
as well as legal and accounting 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, and to a lesser extent to
compensation expense related to accelerated vesting of stock options to certain
founders and executives of the Company who resigned during the first quarter of
1998. Headcount in these areas increased from 27 to 59 from the first three
months of 1997 to the first three months of 1998. The increase in general and
administrative expenses as a percent of revenue was due primarily to the
decrease in revenue between the first three months of 1997 and the same period
in 1998. 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.
Other Income. Other income was $280,000 and $521,000 in the three month
periods ended March 31, 1998 and 1997, respectively. Other income consists of
interest income and interest expense and currency related losses and gains. The
decrease in other income from the first quarter of 1997 to the first quarter of
1998 was due primarily to a reduction in interest income due to a smaller
invested balance of cash during the latter period.
Provision for Income Taxes. The provision for income taxes includes
estimated foreign taxes attributable to activities during the three months ended
March 31, 1998. In addition, the provision for income taxes for the three month
period ended March 31, 1997 includes the provision recorded during the first
quarter of that year which was recorded at the Company's estimated effective tax
rate which was 38%. The Company had federal and state net operating loss
carry-forwards of approximately $3.1 million at December 31, 1997. 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. The Company has not reflected deferred tax
assets for its losses because of its lack of history of profitable operations.
Liquidity and Capital Resources
Initially, the Company financed its operations primarily through private
sales of Preferred Stock totaling $10.5 million. Furthermore, in October 1996,
the Company completed an initial public offering of 3,250,000 shares of Common
Stock at $16.00 per share. Net proceeds to the Company were approximately $41.5
million. In the first three months of 1997 and 1998, the Company used $1.6
million and $3.6 million of cash, respectively, in operating activities. During
the three months ended March 31, 1997, the Company used net cash in operating
activities principally to support increases in accounts receivable associated
with increased net revenues. During the three months ended March 31, 1998 the
Company's use of cash to support the loss in such period and to pay 1997 taxes
was partially offset by collections on outstanding accounts receivables.
In the first three months of 1997 and 1998, the Company's investing
activities consisted of purchases of furniture, fixtures and equipment,
primarily PCs, and accessories in the amount of $362,000 and $424,000,
respectively. In addition, during the first three months of 1998, $1.0 million
of marketable securities matured and were transferred to cash and cash
equivalents. The Company expects that its capital
12
expenditures may increase as the Company's employee base continues to grow. At
March 31, 1998, the Company had no material commitments for capital
expenditures.
To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk.
Management expects that in the future cash in excess of current requirements
will be invested in short-term, interest-bearing, investment grade securities.
At March 31, 1998, the Company had $22.5 million in cash and cash
equivalents, and $18.3 million in working capital. The Company also had
available a $1.0 million unsecured revolving line of credit which expires in May
1998. At March 31, 1998 the Company had commitments for cash outlays of
approximately $3.2 million associated with the acquisition of MicroHelp
UnInstaller and technology from ServiceWare Inc., payable over the next 21
months. Subsequent to March 31, 1998 approximately $600,000 of this obligation
has been paid. The Company believes that its current cash balances, cash
available under its line of credit and cash flow from operations, if any, will
be sufficient to meet these needs as well as its other working capital and
capital expenditure requirements for at least the next 12 months. The Company
also believes that additional debt or equity financing will be available to it
should the need arise. The Company does expect its cash and cash equivalent
balances to decrease in the next few quarters due to the lower levels of
revenues generated in both the fourth quarter of 1997 and the first quarter of
1998, and the reduced amounts of cash collections which will result.
The Company recognizes that some of its internally used computer systems and
programs have not yet been certified by supplying vendors as being Year 2000
compliant. The Company has appointed a Year 2000 compliance committee to
determine the extent to which it is vulnerable to such date truncation problems.
There can be no guarantee that the systems of the Company's suppliers,
distributors and others upon which the Company's systems and/or personnel rely
will be timely converted, or that a failure to convert or an incompatible
conversion by one of these parties would not have a material adverse effect on
the Company. The Company does not yet have an estimate of the costs associated
with Year 2000 compliance work.
New releases of the Company's software products have been designed to
address processing for the year 2000 to the extent it has been required. The
Company's Year 2000 compliance committee intends to have then current versions
of its software Year 2000 compliant by the end of 1998. However, to the extent
that third party products bundled with the Company's products by system
integrators are not compliant, the Company may have no knowledge as to the year
2000 readiness of those third party products. In addition, it is possible that
claims could be asserted against the Company or its customers concerning year
2000 issues and regardless of their merits or lack thereof, these claims could
be material.
Factors Affecting Operating Results
Limited Operating History and History of Operating Losses. The Company has
only a limited operating history upon which to base an evaluation of its
business and prospects. The Company commenced operations in November 1991 and
introduced its first automatic service and support product, Win Win, in 1993.
The Company introduced the first Windows 95 compatible version of its First Aid
product line in September 1995. During 1996, both the Company's net revenues and
operating expenses, particularly sales and marketing expenditures, increased
rapidly compared to prior periods. From inception to March 31, 1998 the Company
generated net sales of approximately $119.5 million, of which $114.5 million, or
96% of such amount, was generated in the twenty-seven months ended March 31,
1998. The Company has incurred net losses in each of the last five fiscal years,
resulting in an accumulated deficit of $36.8 million at March 31, 1998. 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. The Company's net
revenues in 1997 increased 85% over the net revenues for the same period in
1996. This increase was attributable in part, to sales of software products, the
rights to which were Company acquisitions in 1997. There can be no assurance
that the Company's net revenues will continue to remain at or increase from the
level experienced in 1997 or that net revenues will not decline sequentially as
they did in the fourth quarter of 1997 and the first quarter of 1998. The
Company anticipates that in the future it will make significant investments in
its operations, particularly to develop and introduce new products, to support
sales activities,
13
to expand into new markets such as enterprise, international and OEM and that as
a result, operating expenses will increase significantly. If net revenues do not
increase correspondingly, 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
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. While the Company
believes that it has sufficient cash resources to meet its obligations for the
next twelve months, no assurance exists that current cash and cash equivalent
balances, and cash from operations, if any, and existing credit lines will be
sufficient to fund future operations of the Company or that outside sources of
funds will be available when and if such funds are needed. 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, 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.
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 and distributors also have the ability to return products
for a full refund. The rate of product returns may increase because of a variety
of factors, including competitors' promotional or other activities, an increase
in the proportion of the Company's business attributable to mass merchandisers,
overstocking by the Company's distributors or retailers due to unrealized demand
for new products, or a decline in demand for the Company's products as compared
to historical levels. As the Company introduces new products and enters new
markets where the Company has had limited experience, the risk of product
returns may increase. In particular, the Company has recently released First Aid
98, Guard Dog Deluxe and UnInstaller Deluxe. In addition, in the event that the
Company's packaging is claimed to infringe on the intellectual property rights
of third parties, the Company could be required to recall its distributed
products for repackaging, or to cease shipping product in its current packaging,
which could materially adversely affect the business, results of operations and
financial condition of the Company. In particular, the Company agreed to change
the packaging of its UnInstaller product after February 1998. To the extent this
product is returned after that date, such product may not be resold.
Although the Company establishes reserves based on estimated future returns
of products, taking into account the timing of new product introductions,
promotional activities, 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. There
can be no assurance that the level of returns will not significantly increase in
the future. Particularly in light of recent new product introductions, any
material increase in the level of returns could materially adversely affect the
Company's business, results of operations and financial condition.
During the first quarter of 1998, the Company worked with its major
distributors to adjust inventory levels and reduce their accounts receivable
balances. As a result, the Company authorized returns in the first quarter of
1998 of $11.5 million, of which $2.9 million was received by March 31, 1998 and
charged to the reserve for returns. After returns and additional reserves
provided during the first quarter of 1998, the allowance for returns balance as
of March 31, 1998 was $11.9 million. To further facilitate the reduction of
accounts receivable balances, and channel inventory levels, the Company shipped
virtually no product to distributors during the first quarter of 1998. This
action reduced revenue for the first quarter of 1998 by a significant amount and
contributed to the significant loss reported in the quarter.
14
Potential Fluctuations in Quarterly Results. 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.
In fact, the Company typically generates a large percentage of its quarterly
revenues during the last few weeks of the quarter. A significant portion of the
Company's operating expenses are relatively fixed in the short term, and planned
expenditures are based on sales forecasts. To the extent that such expenses
precede forecasted net revenues, the Company's business, results of operations
and financial condition will be materially adversely affected. In addition, the
consumer software industry in which the Company operates has seasonal elements.
In recent years, the consumer software industry has experienced lower demand in
the summer months relative to other periods. 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.
Management of Growth; Dependence on Key Personnel. The Company's business
has grown rapidly during the past two years 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 March 31, 1998, the number of Company
employees increased from approximately 20 to approximately 257, and the Company
currently expects to hire additional employees during 1998. Subsequent to
December 31, 1997 the Company's Chief Executive Officer and Chief Financial
Officer resigned. The Company has found replacements for these positions and has
entered into employment agreements with these 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
Company's ability to manage any future growth, should it occur, will depend upon
the Company's ability to retain these individuals and other executives, as well
as the successful expansion of its sales, marketing, research and development,
customer support and administrative infrastructure. 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.
15
Product Concentration; Risks Associated with First Aid Upgrades. During 1996
and 1997, over 90% and over 75%, respectively, of the Company's net revenues
were attributable to sales of its First Aid products. Although the Company
anticipates that sales of its First Aid products will account for a substantial
portion of its net revenues in the future, the Company believes that sales of
its new products such as Oil Change, UnInstaller, Guard Dog Deluxe and CSS also
will contribute significantly. There can be no assurance that net revenues from
the First Aid products will continue to grow at historical rates or sustain
current levels. The Company's future financial performance will depend in large
part on the successful development, introduction and customer acceptance of
UnInstaller, Guard Dog Deluxe, Oil Change and other new product offerings and
enhanced versions of the Company's products including CyberMedia Support Server,
the first offering in the Company's enterprise product line. A decline in the
demand for First Aid or other ActiveHelp 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.
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 Network Associates Inc., Symantec Corp., Quarterdeck
Corporation, SystemSoft Corporation and others. Furthermore, the Company may
compete with other companies that introduce automatic service and support,
security and anti-virus protection software products. 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,
IBM, Intel or others succeeds in incorporating functionality comparable, or
perceived as comparable, to that offered by the Company in its products, (or
separately offers comparable 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. In particular, Microsoft's "Zero
Administration for Windows" initiative is a collection of technologies from
Microsoft that make the Windows family of systems easier to use for the consumer
and easier to manage for IS administrators. There can be no assurance that any
such initiative by Microsoft or others would not render the Company's products
uncompetitive or obsolete. Furthermore there can be no assurance that other
current or potential competitors with longer operating histories, significantly
greater financial, technical, marketing or other resources, significantly
greater name recognition or a larger installed base of customers than the
Company will not introduce products comparable, or perceived as comparable to
those of the Company. 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.
The Company also expects that competition will increase as a result of software
industry consolidations. In addition, current and potential competitors have
established, or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products to address the needs of
the Company's prospective customers. Accordingly, it is possible that current
and potential competitors or alliances among competitors may emerge and rapidly
acquire significant market share. Increased competition may result in price
reductions, reduced gross margins, and loss of market share, any of which could
have a material adverse effect on the Company's business, operating results and
financial condition. In addition, the Company provides price protection to its
distributors in the event the Company reduces its prices. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors or that competitive pressures faced by the Company will
not materially and adversely affect its business, financial condition or results
of operations.
The enterprise software market targeted by the CyberMedia Support Server product
line is expected to be subject to intense competition from a number of sources
including solutions currently being utilized by IS administrators. There can be
no assurance that the CSS product line will gain acceptance in the enterprise
market or that, if accepted, competitors with longer operating histories,
significantly greater financial technical, marketing and other resources,
significantly greater name recognition and a larger installed base
16
of customers than the Company will not introduce products comparable, or
perceived as comparable to those of the Company.
In addition to software company competitors, the Company also competes
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.
Dependence on Distribution Channels. The Company currently sells its
products primarily through distributors for resale to the retail channel. Sales
to such distributors accounted for approximately 69% and 66%, respectively, of
the Company's net revenues in 1996 and 1997.
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 accounted for approximately 25% and
25%, respectively, of the Company's net revenues in 1996, 25% and 25%,
respectively, of the Company's net revenues in 1997 and 25% and 11% of the
Company's net revenues in the three months ended March 31, 1998. No other single
customer accounted for more that 10% of net revenues in any of the periods
discussed above. 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. The Company has entered
into and seeks to continue to establish strategic alliances with third-party
vendors to increase and vary the distribution of its automatic service and
support products. To date, none of these agreements or strategic alliances has
generated significant revenue and there can be no assurance that any of these
agreements or strategic alliances will be a material source of revenues for the
Company. In addition, there can be no assurance that these agreements and
alliances will not be amended or terminated prior to their expiration due to
changed commercial conditions or other such reasons.
Net revenues from direct mail sales in 1997 and the first three months of
1998 represented approximately 8% and 18% of net revenues in each of these
periods, respectively. Sales from direct mail, which comprise a large proportion
of direct sales, 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.
17
Dependence on Microsoft Windows and Windows NT. The Company's success is
dependent on the continued widespread use of the Windows and Windows NT
operating systems for PCs. The Company's ActiveHelp products are designed to
automatically detect, diagnose and resolve common problems in the Windows and
Windows NT operating environment. Although Windows operating systems are
currently used by many PC users, other companies, including International
Business Machines Corporation and Apple Computer, Inc., and Sun Microsystems,
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. Specifically, the Company expects Microsoft to
release Windows '98 in calendar 1998. To the extent that the Company's products
are not compatible with Windows '98, the Company may need to significantly
update its products. In addition the Company may experience significant returns
of older versions of its products. The inability to adapt current products or to
develop new products for use with any new operating systems on a timely basis,
or the delay in the introduction of Microsoft Windows '98, 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 and
Windows NT operating systems and release these products immediately prior to, or
at the time of Microsoft's release of new and upgraded Windows and Windows NT
products is substantially dependent on its ability to gain pre-release access
to, and to develop expertise in, current and future versions of Windows and
Windows NT . There can be no assurance that the Company will be able to provide
products that are compatible with future Windows and Windows NT 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 and Internet
privacy and security 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 and the acceptance of Internet privacy and
security software as an effective means of protecting their critical and
sensitive information. If the market fails to develop, develops more slowly than
expected or becomes saturated with competitors, or if the Company's products do
not achieve or sustain market acceptance, the Company's business, results of
operations and financial condition will be materially adversely affected.
New Product Development and Technological Change. Substantially all of the
Company's net revenues have been derived, and substantially all of the Company's
future net revenues are expected to be derived, from the sale of its automatic
service and support software products. The market for automatic service and
support software products is characterized by rapid technological advances,
evolving industry standards in computer hardware and software technology and
frequent new product introductions and enhancements. The Company's products must
be continually updated to address the new and evolving technical support
requirements of third-party hardware and software. Failure to anticipate
technical difficulties that arise from use of these third-party products and
incorporate solutions to such difficulties into the Company's products would
have a material adverse effect on continued market acceptance of the Company's
products. The Company's ability to design, develop, test and support on a timely
basis new software products, updates and enhancements that respond to
technological developments and emerging industry standards in the Company's
current market as well as new markets such as the enterprise market is critical
to the Company's future success. There can be no assurance that the Company will
be successful
18
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 factors. In addition, the Company
may encounter difficulties or delays in developing products for the enterprise
market in which the technical and functional requirements for products are
different from and often more complex than those in the retail market. 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 supplements its in-house product development by engaging
work-for-hire software engineers in India. In addition, the Company from time to
time engages other software engineers on a contract basis. 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 the Internet. The commercial viability of the Company's
products and the Company's ability to execute its strategy to leverage the
Internet as a platform for its products and services are dependent upon the
continued development and acceptance of the Internet. 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, accessibility, speed and
potential tax or other government regulation) remain unresolved and may affect
the use of the Internet as a medium to support the functionality of the
Company's products as well as to distribute software. There can be no assurance
that the use of the Internet will remain effective for either current or future
products. The failure of the development and acceptance of the Internet would
have a material adverse effect on the Company's business, results of operations
and financial condition. 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 to sustain or increase the demand for the Company's products sold via
electronic commerce. 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 products in particular. 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.
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, 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
19
Company has two United States patent applications pending and intends to seek
international and additional 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. Although
from time to time the Company obtains copyright registrations on certain items
of its technology, 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. Furthermore, there can be no assurance
that others will not infringe the Company's intellectual property rights.
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 can meaningfully protect its
proprietary rights. A failure by the Company to meaningfully protect its
intellectual property rights could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
also relies in part, on technology licenses from third parties. In the event
that such licenses are terminated, the Company would need to license similar
technology from alternative sources or develop its own technology. In the event
that the Company could not license such similar technology on commercially
viable terms or otherwise successfully develop its own technology, the Company's
business, results of operations and financial condition could be materially
adversely affected. 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, the commercialization of which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
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.
The Company intends to continue expansion of 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. The Company is currently pursuing further foreign
registrations of its trademarks on a limited basis, but due to the substantial
costs involved and potential prior existing rights, unfavorable laws or other
obstacles to obtaining trademark protection, the Company may not be able to
prevent a third party from using its trademarks in a foreign jurisdiction.
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
20
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.
Volatility of Stock Price. The market price of the shares of the Company's
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, third party reviews
or awards on the Company's or its competitor's products, 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. The Company
has been named as a defendant in a number of class action litigations which
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. There can be no assurance that
additional actions will not be brought against the Company. On March 22, 1998,
an amended complaint was filed, adding the Company as a defendant to a lawsuit
filed on March 2, 1998 in Los Angeles Superior Court, against defendant Luckman
Interactive Inc. by plaintiffs Mark Novisoff, Timothy O'Pry, Janet Van Pelt and
Thomas Lynch. Prior to this, the Company was not a party to this lawsuit. These
actions, 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.
Product Liability. The Company's software products may contain errors or
failures. 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. 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 Recent Acquisitions; Potential Future Acquisitions. In
April 1997, the Company acquired certain assets of Luckman Interactive, Inc. and
acquired Walk Softly, Inc. The integration of acquired assets, groups and
product lines is typically difficult, time consuming and subject to a number of
inherent risks. The integration of product lines requires the coordination of
the research and development and sales and marketing efforts of the acquired
groups and the Company. Such combinations have and will continue to require
substantial attention from management. The diversion of the attention of
management and any difficulties encountered in the transition process could have
a material adverse impact on the Company's business, financial condition and
results of operations. In addition, the process of assimilating and managing the
acquisitions could cause the interruption of, or a loss of momentum in, the
activities of
21
the Company's business which could have a material adverse effect on the
Company. There can be no assurance that the Company will realize the anticipated
benefits of any of these acquisitions.
Future acquisitions by the Company may result in the diversion of
management's attention from the day-to-day operations of the Company's business
and may include numerous other risks, including difficulties in the integration
of the operations, products and personnel of the acquired companies. Further
acquisitions by the Company also have the potential to result in dilutive
issuances of equity securities, the incurrence of debt and amortization expense
related to goodwill and other intangible assets. Company management frequently
evaluates the strategic opportunities available to it and may in the near or
long-term pursue acquisitions of complementary businesses, products or
technologies.
Risks Associated With Global Operations. During the first three months of
1998, approximately 18% 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, establishment of distribution channels, 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 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
third-party 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, 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. Moreover, the laws of certain foreign countries in which the
Company's products may be sold may not protect the Company's intellectual
property rights to the same extent as do the laws of the United States, thus
increasing the possibility of piracy of the Company's products.
In addition, the European Monetary Union is embarking on a multi-year
introduction and conversion to a common currency called the Euro. There can be
no assurance that the Company can adopt or modify its systems and processes in a
timely and cost effective manner to accept this new currency. Any delays or
inability to conduct business using the Euro could materially affect the
Company's business, results of operations and financial condition.
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
supplements its in-house product development by engaging work-
22
for-hire software engineers in India. In addition the Company from time to time
engages other software engineers on a contract basis. 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.
Anti-takeover Provisions. The Company's Board of Directors has the authority to
issue up to 2,000,000 shares of Preferred Stock and to determine the price,
rights, preferences, privileges, and restrictions, including voting rights, of
those shares without any further vote or action by the stockholders. The rights
of the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock may delay, defer or prevent a change in
control of the Company. In addition, Section 203 of the Delaware General
Corporation Law, to which the Company is subject, restricts certain business
combinations with any "interested stockholder" as defined by such statute.
The statute may delay, defer or prevent a change in control of the Company.
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. MicroBasic filed a counterclaim in November
1997 alleging breach of contract, copyright infringement, unfair trade proctices
and unfair competition. The Company intends to vigorously defend against
any and all such claims and allegations. 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.
The Company and an individual officer of the Company have been named and
served as defendants in a civil complaint filed in the Los Angeles County
Superior Court on December 22, 1997 by Brad Kingsbury. Mr. Kingsbury is a former
employee of the Company. The complaint, as filed, alleges against the Company
certain causes of action including breach of contract, breach of good faith and
fair dealing, fraud and negligent misrepresentation arising from an alleged
grant of stock options and alleged accelerated vesting of such options. The
Company intends to vigorously defend against any and all such claims and
allegations.
On February 4, 1998, CyberMedia filed a lawsuit against Symantec Corporation
in United States District Court for the Northern District of California. Also
named as defendants in the CyberMedia's Complaint are ZebraSoft, Inc. and three
individual officers and directors of ZebraSoft (Timothy O'Pry, Thomas Lynch and
Snehal Vashi). The Complaint alleges that the defendants violated the federal
copyright laws and misappropriated CyberMedia's trade secrets in developing and
distributing a computer software program, known as Norton Uninstall Deluxe, that
is competitive with CyberMedia's UnInstaller program. The Complaint seeks money
damages and injunctive relief against the defendants.
On March 11, 1998, defendants Symantec and ZebraSoft filed Counterclaims
against CyberMedia for slander, libel, product disparagement and related state
law claims. The defendants' Counterclaims seek unspecified money damages and
injunctive relief. Discovery is on going and the Court has not set a trial date.
Defendants O'Pry, Lynch and Vashi have filed a motion to dismiss for lack of
personal jurisdiction which has been briefed and is pending before the court.
The Company believes that the claims asserted in the Counterclaims are without
merit and intends to defend against them vigorously.
On March 12, 1998, a shareholder class action complaint was filed against
the Company and certain of its current and former officers and directors. The
complaint, Ong v. CyberMedia, et al., No. 98-1811, was filed in the United
States District Court for the Central District of California. The complaint
alleges a class period between July 22, 1997 and January 30, 1998. The complaint
asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of
1934. The allegations underlying the complaint surround an
23
alleged scheme by defendants to disseminate false and misleading statements
and/or to omit to state facts concerning the present and future finances and
business prospects of the Company during the class period. Plaintiff seeks an
unspecified amount of damages in excess of $75,000. On March 16, 1998, plaintiff
filed an amended class action complaint. The amended complaint added an
additional director defendant and extended the class period to March 13, 1998.
On March 19, 1998, a second class action complaint was filed against the
Company and certain of its officers and directors alleging facts nearly
identical to those alleged in the Ong complaint. The complaint, Brown v.
CyberMedia, et al., No. B C187898, was filed in the Superior Court of Los
Angeles County. It alleges a class period from March 31, 1997 through March 12,
1998, and asserts claims under Sections 25400 and 25500 of the California
Corporations Code, Sections 1709-1710 of the California Civil Code, and Sections
17200 and 17500 of the California Business and Professions Code. Plaintiff seeks
damages of an unspecified amount.
On March 24, 1998 a third shareholder class action complaint was filed
against the Company and certain of its current and former officers and
directors. The complaint, St. John v. CyberMedia, et al., No. 98-2085 MRP(SHx),
was filed in the United States District Court for the Central District of
California. The complaint alleges a class period between March 31, 1997 and
March 13, 1998. The complaint asserts claims under Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934. Like the previously filed complaints, the
basic allegations concern an alleged scheme by defendants to disseminate false
and misleading statements and/or to omit to state facts concerning the present
and future finances and activities of the Company during the class period.
Plaintiff seeks an unspecified amount of damages in excess of $75,000.
On March 26, 1998 another shareholder class action complaint was filed
against the Company and certain of its current and former officers and
directors. The complaint, Zier v. CyberMedia, et al., No. 98-2210 CM(Mcx), was
filed in the United States District Court for the Central District of
California. The complaint alleges a class period between March 31, 1997 and
March 12, 1998. The complaint asserts claims under Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934. Like the previously filed complaints, the
basic allegations concern an alleged scheme by defendants to disseminate false
and misleading statements and/or to omit to state facts concerning the present
and future finances and activities of the Company during the class period.
Plaintiff seeks an unspecified amount of damages in excess of $75,000.
On March 31, 1998 a shareholder class action complaint was filed against the
Company and certain of its current and former officers and directors. The
complaint, Smith v. CyberMedia, et al., No. BC 188527, was filed in the Superior
Court of Los Angeles County. The complaint alleges a class period between March
31, 1997 and March 13, 1998. The complaint asserts claims under Sections 25400,
25402, 25500 and 1507 of the California Corporations Code, and Sections
1709-1710 of the California Civil Code. The allegations underlying the complaint
are nearly identical to the allegations asserted in the other class action
complaints.Plaintiff seeks damages of an unspecified amount.
On April 8, 1998 a shareholder class action complaint was filed against the
Company and certain of its current and former officers and directors. The
complaint, Stockwell v. CyberMedia, No. BC 189020, was filed in the Superior
Court of Los Angeles County. The complaint alleges a class period between March
31, 1997 and March 12, 1998. The complaint asserts claims under Sections 25400
and 25500 of the California Corporations Code, Sections 1709-1710 of the
California Civil Code and Sections 17200 and 17500 of the California Business
and Professions Code. The allegations underlying the complaint are nearly
identical to the allegations asserted in the other class action complaints.
Plaintiff seeks damages of an unspecified amount.
On April 8, 1998 a shareholder class action complaint was filed against the
Company and certain of its current and former officers and directors. The
complaint, Liu v. CyberMedia, et al., No. 98-2617, was filed in the United
States District Court for the Central District of California. The complaint
alleges a class period between March 31, 1997 and March 13, 1998. The complaint
asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of
1934. The allegations underlying the complaint are nearly
24
identical to the allegations asserted in the other class action complaints.
Plaintiff seeks an unspecified amount of damages in excess of $75,000.
On April 23, 1998 a shareholder class action complaint was filed against the
Company and certain of its current and former officers and directors. The
complaint, Kerr v. CyberMedia, et al., No. 98-3104 RJK(ANx), was filed in the
United States District Court for the Central District of California. The
complaint alleges a class period between July 22, 1997 and March 13, 1998. The
complaint asserts claims under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934. The allegations underlying the complaint are nearly
identical to the allegations asserted in the other class action complaints.
Plaintiff seeks damages of an unspecified amount.
The Company intends to defend against these actions vigorously.
Item 5. Other Information
Peter Morris, a member of the Board of Directors of the Company, resigned
his position as a director in January 1998, for personal business reasons.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
...10.12(2) Form of employment agreement between the Company and Kanwal Rekhi
...10.12(3) Form of employment agreement between the Company and James Tolonen
...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.
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
CYBERMEDIA, INC.
(Registrant)
Date: May 15, 1997 By: /s/ James R. Tolonen
---------------------
President and Chief Operating Officer
By: /s/ Jane E. Wike
---------------------
Vice-President, Finance
(Chief Accounting Officer)
26
INDEX TO EXHIBITS
Exhibit Page
10.12 (2) Employment agreement between the Company and Kanwal Rekhi 28
10.12 (3) Employment agreement between the Company and James R. Tolonen 37
27.1 Financial Data Schedule 46
27