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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 September 30, 1996
Commission file number 0-21289
CYBERMEDIA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4347239
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
3000 OCEAN PARK BLVD., SUITE 2001, SANTA MONICA, CALIFORNIA 90405
(Address of principal executive offices)
(Zip Code)
(310) 541-4700
(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 [ ] No [X]
As of October 31, 1996, 11,775,193 shares of the Registrant's Common
Stock, $0.01 par value were issued and outstanding.
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CYBERMEDIA, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Balance Sheets At September 30, 1996 and December 31, 1995 3
Statements of Operations Three and Nine months ended September 30,
1996 and 1995 4
Statements of Cash Flow Nine Months ended September 30, 1996 and 1995 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II. OTHER INFORMATION 22
Item 1. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
Index to Exhibits 24
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CYBERMEDIA, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
Unaudited Audited
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,727,000 $2,050,000
Trade accounts receivable, net 6,919,000 1,182,000
Inventory 1,295,000 412,000
Prepaid expenses 1,020,000 111,000
Other current assets 10,000 10,000
------ ------
Total current assets 10,971,000 3,765,000
Furniture, fixtures and equipment, net 813,000 90,000
------- ------
$11,784,000 $3,855,000
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,948,000 $1,620,000
Accrued expenses 1,067,000 419,000
Unearned income 3,884,000 677,000
Current portion of grant payable 795,000 607,000
Current portion of notes payable 0 0
Current portion of capital lease 12,000 8,000
------ -----
Total current liabilities 9,706,000 3,331,000
Lease obligation 12,000 17,000
Notes payable, less current portion 450,000 500,000
------- -------
Total liabilities 10,168,000 3,848,000
Stockholders' equity
Series A Preferred stock 30,000 30,000
Series B Preferred stock 64,000 64,000
Series C Preferred stock 11,000 0
Common stock 25,000 13,000
Additional paid-in capital 10,588,000 5,451,000
Accumulated deficit (9,102,000) (5,551,000)
---------- ----------
Net stockholders' equity 1,616,000 7,000
$11,784,000 $3,855,000
=========== ==========
</TABLE>
See accompanying notes to Financial Statements
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CYBERMEDIA, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $8,730,000 $1,046,000 $22,680,000 $2,770,000
Cost of revenues 2,391,000 356,000 7,280,000 718,000
--------- ------- --------- -------
Gross profit 6,339,000 690,000 15,400,000 2,052,000
Operating expenses:
Research and development 929,000 240,000 2,072,000 695,000
Sales and marketing 5,817,000 1,003,000 14,426,000 1,680,000
General and administrative 916,000 172,000 2,429,000 376,000
------- ------- --------- -------
Total operating expenses 7,662,000 1,415,000 18,927,000 2,751,000
--------- --------- ---------- ---------
Loss from operations (1,323,000) (725,000) (3,527,000) (699,000)
Other income (expense) 1,000 (14,000) (23,000) (98,000)
Loss before income taxes (1,322,000) (739,000) (3,550,000) (797,000)
--------- ------- --------- -------
Income tax expense - - - -
Net loss ($1,322,000) ($739,000) ($3,550,000) ($797,000)
============ ========== ============ ==========
Net loss per share ($0.17) ($0.09) ($0.45) ($0.10)
======= ======= ======= =======
Shares used in computing 7,889,000 7,864,000 7,872,000 7,860,000
net loss per share
</TABLE>
See accompanying notes to Financial Statements
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CYBERMEDIA, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss ($3,550,000) ($797,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 101,000 5,000
Royalty expense 188,000 54,000
Changes in assets and liabilities:
Trade accounts receivable, net (5,737,000) (1,381,000)
Inventory (883,000) (54,000)
Prepaid expenses (909,000) (74,000)
Other current assets - (10,000)
Accounts payable 2,327,000 790,000
Accrued expenses 648,000 (331,000)
Unearned revenues 3,207,000 242,000
----------- ---------
Net cash used in operating activities (4,608,000) (1,556,000)
----------- ---------
Cash flows used in investing activities - purchase of furniture,
fixtures and equipment (824,000) (50,000)
----------- ---------
Cash flows from financing activities:
Proceeds from the issuance of Series A Preferred Stock - 50,000
Proceeds from the issuance of Series B Preferred Stock - 4,016,000
Proceeds from the issuance of Series C Preferred Stock 5,000,000 -
Payments of capital lease obligation (1,000) -
Proceeds from the issuance of Common Stock 160,000 3,000
Proceeds from note payable - 471,000
Payment of note payable (50,000) -
----------- ---------
Net cash provided by financing activities 5,109,000 4,540,000
----------- ---------
Net increase (decrease) in cash and equivalents (323,000) 2,934,000
Cash and cash equivalents at beginning of period 2,050,000 102,000
----------- ---------
Cash and cash equivalents at end of period $1,727,000 $3,036,000
=========== ==========
</TABLE>
See accompanying notes to Financial Statements
5
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CYBERMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
September 30,1996
(unaudited)
1. Basis of Presentation
The financial statements for the three months and nine months ended
September 30, 1996 and 1995 are unaudited and reflect all adjustments,
consisting of normal recurring adjustments, which are, in the opinion
of management, necessary for a fair presentation of the financial
condition and results for the interim periods. These financial
statements should be read in conjunction with the financial statements
and notes thereto together with management's discussion and analysis of
financial condition and results of operations contained in CyberMedia's
Registration Statement on Form S-1(Registration Statement No.
333-11063) which was declared effective by the Securities and Exchange
Commission on October 22, 1996. The results for the three and nine
months ended September 30, 1996 are not necessarily indicative of the
results for the entire year ending December 31, 1996.
2. Earnings Per Share
Per share data is based on the weighted average number of common shares
and dilutive common stock equivalents outstanding for the period.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Actual results could differ materially from those set forth in such
forward-looking statements as a result of the factors set forth under "Factors
Affecting Operating Results" and other risks detailed in the Company's
Registration Statement on Form S-1 (Registration Statement No. 333-11063)
declared effective by the Securities and Exchange Commission on October 22,
1996 and detailed from time to time in the Company's reports filed with the
Securities and Exchange Commission.
The following information should be read in conjunction with the
consolidated financial statements and the notes thereto and in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations in CyberMedia's Form S-1 (Registration Statement No. 333-11063)
declared effective by the Securities and Exchange Commission on October 22,
1996. This analysis is provided pursuant to applicable Securities and
Exchange Commission regulations and is not intended to serve as a basis for
projections of future events.
Overview
CyberMedia is a leading provider of software products that provide automatic
service and support to PC users in the Windows environment. The Company
commenced operations in November 1991 and introduced its first automatic service
and support product, Win Win, in 1993. The Company introduced the first Windows
95 compatible version of its First Aid product line in September 1995. During
1995 and the first half of 1996, over 90% of the Company's net revenues were
attributable to sales of its First Aid products. Any decline in the demand for
First Aid products, failure to achieve market acceptance of upgrades to such
products or failure of net revenues derived from such products to meet the
Company's expectations, whether as a result of competition, technological change
or other factors, would have a material adverse effect on the Company's
business, results of operations and financial condition.
The Company also has a number of new product development efforts under way,
including First Aid 97, an upgrade of its First Aid 95 products scheduled for
release in the fourth quarter of 1996, and a portion of future revenues is
dependent on the success of these activities. The rate of growth of sales into
the channel of First Aid 95 have declined somewhat since the public announcement
of the expected release of First Aid 97 which the Company believes is due to
such announcement. In order to enhance continued sales of First Aid 95, the
Company has introduced a rebate program for buyers of First Aid 95 and First Aid
95 Deluxe and has extended credit terms to certain customers. The First Aid 97
upgrades will not be available until mid to late fourth quarter 1996. Delays in
shipping such upgrades could have material adverse effect on the Company's
future business, results of operations and financial condition. In October 1996,
the Company introduced Oil Change, a product that automatically updates many
software applications and device drivers over the Internet. There can be no
assurance that Oil Change will achieve significant market acceptance and failure
of it to achieve such acceptance could have a material adverse effect on the
Company's future financial results.
The Company has a limited operating history upon which to base an evaluation
of its business and prospects. From inception to September 30, 1996, the Company
generated net sales of approximately $27.8 million, of which $22.7 million, or
82% of such amount, was generated in the nine months ended September 30, 1996.
The Company has incurred net losses in each of the last five fiscal years as
well as in the nine months ended September 30, 1996. At September 30, 1996, the
Company had an accumulated deficit of $9.1 million. With the introduction of
First Aid 95, the Company began focusing on building its product line and
establishing brand name awareness of its products, which has resulted in
significantly increased operating expenses. The Company anticipates that its
operating expenses will continue to
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increase significantly in the future as a result of efforts to expand its sales
and marketing operations, including international sales, to fund greater levels
of product development and to increase its administrative infrastructure. The
Company intends to fund increases in operating expenses primarily from cash
generated from operations and, to the extent necessary, funds available from the
Company's line of credit. In addition, during 1996, the Company's net revenues
and operating expenses increased rapidly as compared to prior periods. There can
be no assurance that the Company's net revenues will continue to remain at or
increase from the levels experienced in the first nine months of 1996 or that
net revenues will not decline. The Company's prospects must be considered in
light of the risks encountered by companies with limited operating histories,
particularly companies in new and rapidly evolving markets. Future operating
results will depend upon many factors, including the demand for the Company's
software products, the level of product and price competition, the Company's
success in expanding its direct and indirect distribution channels, the
Company's success in attracting and retaining motivated and qualified personnel,
the growth of activity on the Internet and the Web, the ability of the Company
to develop and market new products and to control costs and general economic
conditions. Many of these factors are beyond the Company's control. There can be
no assurance that the Company will be successful in addressing such risks.
The Company sells its First Aid products primarily to distributors for resale
to the retail channel as well as directly to consumers through direct mail. In
addition, the Company sells its products through software catalogs throughout
the United States and Canada. Sales to the Company's top three distributors,
Navarre, Ingram Micro and Micro Central, accounted for approximately 31%, 27%
and 10%, respectively, of the Company's net revenues in the nine months ended
September 30, 1996 and 9%, 16% and 19%, respectively, of net revenues in 1995.
Net revenues from direct mail sales in 1995 and the first nine months of 1996
represented approximately 40% of net revenues in each of these periods, with the
balance of net revenues attributable to sales through distributors. Net revenues
in prior periods were primarily attributable to sales through distributors.
Sales from direct mail have historically operated at lower profitability levels
than sales from distributors. Accordingly, quarterly shifts in the mix of sales
through distributors and through direct sales could cause fluctuations in the
Company's profitability. There can be no assurance that the mix of sales or the
relative profitability by distribution channel will remain at current levels in
the future.
The Company monitors the levels of purchases and returns on a customer by
customer basis and, to date, returns have been within management's expectations.
Sales are made subject to rights of return and reserves are established at time
of shipment for future return of product based on product history, analysis of
retail sell-through and other factors. In addition, the Company may allow
certain concessions, such as price protection, to maintain its relationship with
retailers and distributors and its access to distribution channels.
Revenues are recognized upon the shipment of products to distributors,
resellers and end users. With the introduction of First Aid 95 in September
1995, CyberMedia implemented a policy of offering customers updates to its First
Aid products over the Internet at no additional cost. Given this policy and
because updates are a fundamental and integral part of its First Aid products,
the Company defers a portion of all First Aid 95 and First Aid 95 Deluxe revenue
ratably over estimated update periods, generally one year from the date of sale.
At September 30, 1996 the Company's balance sheet included $3.9 million of
unearned revenues to reflect future support commitments and other unspecified
enhancements to First Aid products. To the extent that revenues from these
products continue to grow on a quarterly basis, the total amount of deferred
revenue will continue to increase and be reported on the balance sheet as
unearned revenue.
In accordance with Statement of Financial Accounting Standards No. 86, the
Company is required to capitalize eligible computer software development costs
upon the achievement of technological feasibility, subject to net realizable
value considerations. To date, the Company has charged all such costs to product
development expenses because such costs have not been material.
8
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Results of Operations
The following table sets forth, as a percentage of net revenues, statement of
operations data for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues.................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues.............. 34.0 27.4 25.9 32.1
----- ---- ---- ----
Gross profit................ 66.0 72.6 74.1 67.9
Operating expenses:
Research and development 22.9 10.6 25.1 9.2
Sales and marketing 95.9 66.6 60.6 63.6
General and administrative 16.4 10.5 13.6 10.7
---- ---- ---- ----
Total operating expenses 135.3 87.7 99.3 83.5
----- ---- ---- ----
Loss from operations (69.3) (15.1) (25.2) (15.6)
Interest, net................. (1.3) 0.0 (3.6) (0.1)
----- ------ ----- -----
Loss before income taxes (70.6) (15.1) (28.8) (15.7)
Income tax expense -- -- -- --
------ ------ ------ ------
Net loss................. (70.6)% (15.1)% (28.8)% (15.7)%
====== ====== ====== ======
</TABLE>
Net Revenues. Net revenues increased 735% to $8.7 million in the three months
ended September 30, 1996 from $1.0 million in the three months ended September
30, 1995. For the nine month period ended September 30, 1996, net revenues
increased 719% to $22.7 million from $2.8 million in the same period in 1995.
The Company's net revenues consist of license fees for its software products,
less provision for returns. The Company sells its products primarily to
distributors for resale to retailers as well as directly to consumers through
direct mail and through software catalogs. The growth in net revenues during
these periods was largely attributable to the introduction of First Aid 95 and
First Aid 95 Deluxe in September 1995 and March 1996, respectively, the
expansion of the Company's retail distribution channels and direct mail
marketing activities and increased unit volume as a result of the market's
growing awareness and acceptance of First Aid 95. The Company does not believe
that the historical growth rates of its net revenues will be sustainable or are
indicative of future results.
Net revenue from international sales accounted for approximately 15% and 5% of
net revenues for the three months ended September 30, 1996 and 1995,
respectively. For the nine month periods ended September 30, 1996 and 1995, the
percentage of net revenues from international sales was approximately 7% and 6%,
respectively. The increase in net revenues from international sales as a
percentage of net revenues between these periods was due to the expansion of the
Company's international operations and the introductions of localized German,
British and Australian versions of First Aid 95 during the most recent quarter.
As a result of the expansion of its international operations, the Company now
denominates certain international sales in local currencies, primarily in
Europe. As a result, the Company is subject to the risks associated with
fluctuations in currency exchange rates. The Company does not currently engage
in hedging transactions and there can be no assurance that it will not incur
significant losses related to currency fluctuations. Risks inherent in the
Company's international sales generally include the impact of fluctuating
exchange rates, longer payment cycles, greater difficulty in accounts receivable
collection, unexpected changes in regulatory requirements, seasonality due to
the slowdown in European business activity during the third quarter, and tariffs
and other trade barriers. There can be no assurance that these factors will not
have a material adverse effect on the Company's future business, financial
condition and results of operations.
Cost of Revenues. Cost of revenues were $2.4 million and $356,000 for the
three month periods ended September 30, 1996 and 1995, respectively. For the
nine months ended September 30, 1996, cost of revenues increased to $7.3
million from $718,000 for the nine months ended September 30, 1995. Cost of
revenues consists primarily of the cost of product media, product duplication,
documentation and order
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fulfillment and royalties paid to ICICI in conjunction with a grant associated
with early stage financing of the Company. Royalties payable to ICICI were fully
accrued at March 31, 1996. These royalties payable, together with the original
grant of $318,000, are reflected on the Company's balance sheet at September 30,
1996 as the $795,000 grant payable. The increases in cost of revenues were due
primarily to increased unit shipments of the Company's products.
Gross Margin. Gross margins were 73% and 66% in the three months ended
September 30, 1996 and 1995, respectively, and 68% and 74% for the nine months
ended September 30, 1996 and 1995, respectively. Gross margins in the third and
fourth quarters of 1995 and the first nine months of 1996 were negatively
affected by the deferral of a portion of First Aid 95 and First Aid 95 Deluxe
net revenues pursuant to the Company's revenue recognition policy, without a
deferral of associated costs. To the extent that revenues from these products
continue to grow on a quarterly basis, gross margins will continue to be
negatively affected. Gross margins in the first nine months of 1996 were also
negatively affected by an increase in the percentage of net revenues represented
by direct sales, which generated a lower gross margin than sales through
distributors during the period.
Research and Development. Research and development expenses increased by 287%
from $240,000 in the three months ended September 30, 1995 to $929,000 in the
same period in 1996, representing 23%, and 11% of net revenues in these
quarters, respectively. Research and development expenses increased from
$695,000 for the nine months ended September 30, 1995 to $2.1 million for the
nine months ended September 30, 1996, representing 25% and 9% of net revenues in
these periods, 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 in each of these periods was
primarily attributable to an increase in personnel as the Company increased its
product development efforts to accelerate the timing of new product
introductions and upgrades. The Company believes that significant investments in
product development are required to remain competitive. As a consequence, the
Company anticipates that it will continue to devote substantial resources to
research and development.
Sales and Marketing. Sales and marketing expenses grew from $1.0 million in
the three months ended September 30, 1995 to $5.8 million in the same period of
1996, representing 96% and 67% of net revenues in these periods, respectively.
Sales and marketing expenses increased from $1.7 million for the nine months
ended September 30, 1995 to $14.4 million for the nine months ended September
30, 1996, representing 61% and 64% of net revenues for these periods,
respectively. Sales and marketing expenses consist primarily of costs of all
sales and marketing personnel, sales commissions, co-op and other advertising
costs, postage and printing costs associated with direct mail sales, package
design costs, trade show costs and costs of preparing promotional materials. The
increases in the dollar amount of sales and marketing expenses in each of these
periods were due primarily to increases in direct mail marketing, costs
associated with new product introductions, increased co-op advertising and
increases in the number of sales and marketing personnel employed to address new
sales opportunities and to support the introduction of new products. The Company
expects that sales and marketing expenditures will increase in absolute dollars
in the future as it invests in expanding its third-party distribution channels,
introduces new products and expands its operations outside the United States.
General and Administrative. General and administrative expenses increased from
$172,000 in the three month period ended September 30, 1995 to $916,000 in the
same period in 1996, representing 16% and 11% of net revenues in these periods,
respectively. General and administrative expenses increased from $376,000 for
the nine months ended September 30, 1995 to $2.4 million for the nine months
ended September 30, 1996, representing 14% and 11% of net revenues for these
periods, respectively. General and administrative expenses consist primarily of
personnel costs for finance, administration, operations and general management,
as well as legal, accounting and facilities expenses. The increase in the dollar
amount of general and administrative expenses during these periods was due
principally to growth in the infrastructure of the Company's finance,
administrative and operations groups in order to support the Company's expanded
operations. The decrease in general and administrative expenses as a percentage
of
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net revenues during these periods was due primarily to the growth in net
revenues. The Company expects that its general and administrative expenses will
increase in absolute dollars in the future as it expands its staffing,
information systems and infrastructure and takes on additional responsibilities
related to being a publicly traded company.
Interest, Net. Interest, net was $1,000 and $(14,000) in the three month
periods ended September 30, 1996 and 1995, respectively. For the nine months
ended September 30, 1996, interest, net decreased from $(98,000) for the nine
months ended September 30, 1995 to $(23,000). Interest, net consists of interest
income and interest expense.
Income Tax Expense. Due to the losses before income taxes for each of the
periods ended September 30,, 1995 and 1996, the Company recorded no income tax.
The Company had federal and state net operating loss carry-forwards of
approximately $3.8 million at December 31, 1995 and approximately $3.1 million
at September 30, 1996 to offset future taxable income. 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. Due to the losses in the nine months ended September 30, 1995 and
1996, the Company recorded no income tax expense during these periods.
Liquidity and Capital Resources
Since inception, the Company has financed its operations primarily through
private sales of Preferred Stock totaling $10.5 million, borrowings totaling
$450,000 and a grant of $318,000 administered by the ICICI. In the first nine
months of 1995 and 1996, the Company used $1.6 million and $4.6 million of cash,
respectively, in operating activities. During these periods, the Company used
net cash in operating activities primarily to fund net losses and increases in
accounts receivable associated with increased net revenues, partially offset by
increases in accounts payable, accrued expenses and unearned revenues.
In the first nine months of 1995 and 1996, the Company's investing activities
consisted of purchases of furniture, fixtures and equipment, primarily PCs and
accessories in the amount of $50,000 and $824,000, respectively. The Company
expects that its capital expenditures will increase as the Company's employee
base continues to grow. At September 30, 1996, the Company had no material
commitments for capital expenditures.
To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk.
Management expects that in the future cash in excess of current requirements
will be invested in short-term, interest-bearing, investment grade securities.
At September 30, 1996, the Company had $1.7 million in cash and cash
equivalents and $1.3 million in working capital . The Company also had available
a $3.0 million revolving line of credit secured by the assets of the Company
which expires in April 1997 and a $250,000 collateralized equipment purchase
facility which expires in November 1996. Borrowings under the credit facility
are limited to the lesser of $3.0 million or a percentage of eligible accounts
receivable, as defined in the credit agreement.
On October 22, 1996, the Company raised approximately $42 million through the
issuance of 2,875,000 shares of Common Stock. The net proceeds from the Common
Stock are not included in the Company's Balance Sheet at September 30, 1996. The
Company used a portion of the proceeds from this offering to pay down the
$450,000 notes payable.
The Company believes that its current cash balances, cash available under its
line of credit and cash flows from operations, if any, will be sufficient to
meet its working capital and capital expenditure requirements for at least the
next 12 months.
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Impact of Recent Accounting Pronouncements
The Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," in
March 1995 which is effective for fiscal years beginning after December 15,
1995. SFAS No. 121 establishes accounting standards for the impairment of long-
lived assets, certain identifiable intangibles and goodwill related to these
assets and certain identifiable intangibles to be disposed of. Since the
Company's current accounting policy is consistent with the provisions of SFAS
No. 121, the Company's management does not anticipate that the new pronouncement
will impact its Financial Statements.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation." SFAS No.
123 established a fair value-based method of accounting for compensation cost
related to stock options and other forms of stock-based compensation plans.
However, SFAS No. 123 allows an entity to continue to measure compensation costs
using the principles of Accounting Principles Board Opinion 25 ("APB No. 25") if
certain pro forma disclosures are made. SFAS No. 123 is effective for fiscal
years beginning after December 15, 1995. While the Company is still evaluating
SFAS No. 123, it currently expects to elect to continue to measure and to
recognize costs under APB No. 25 and to comply with the pro forma disclosure
requirements of SFAS No. 123. If the Company makes this election, SFAS No. 123
will have no impact on the Company's Financial Statements.
Factors Affecting Operating Results
Limited Operating History and History of Operating Losses. The Company has
only a limited operating history upon which to base an evaluation of its
business and prospects. The Company commenced operations in November 1991 and
introduced its first automatic service and support product, Win Win, in 1993.
The Company introduced the first Windows 95 compatible version of its First Aid
product line in September 1995. During 1996, both the Company's net revenues and
operating expenses, particularly sales and marketing expenditures, increased
rapidly compared to prior periods. From inception to September 30, 1996, the
Company generated net revenues of $27.8 million, of which $22.7 million, or 82%,
was generated in the nine months ended September 30, 1996. The Company has
incurred net losses in each of the last five fiscal years and for the nine
months ended September 30, 1996, resulting in an accumulated deficit of $9.1
million at September 30, 1996. The Company's disproportionate increase in
operating losses from 1992 through September 30, 1996 were primarily due to its
policy of deferring revenue with no corresponding cost deferral. Approximately
$3.9 million in net revenues were deferred as of September 30, 1996. In
addition, since 1992, the Company's operating expenses have increased
significantly as a result of efforts to expand its sales and marketing
operations, including international sales, to fund greater levels of product
development and to increase its administrative infrastructure. Management
believes that it is not more likely than not that the Company will generate
future taxable income sufficient to realize the benefits of existing deferred
assets as of September 30, 1996. There can be no assurance that the Company's
net revenues will continue to remain at or increase from the level experienced
in the first nine months of 1996 or that net revenues will not decline. The
Company anticipates that in the future it will make significant investments in
its operations, particularly to support sales activities, and that as a result,
operating expenses will increase significantly. The Company intends to make such
investments on an ongoing basis, primarily from cash generated from operations
and, to the extent necessary, funds available from the Company's line of credit
and this offering, as the Company develops and introduces new products and
expands into new markets such as international, corporate and OEM markets. If
net revenues do not correspondingly increase, the Company is likely to continue
to incur net losses and its financial condition will be materially adversely
affected. The Company has not yet achieved profitability, and there can be no
assurance that the Company will achieve or sustain profitability on a quarterly
basis or annual basis. Furthermore, operating results for future periods are
subject to numerous uncertainties. The Company's prospects must be considered in
light of the risks encountered by companies with limited operating histories,
particularly companies in new and rapidly evolving markets. In addition, the
Company's future operating results will depend upon, among other factors, the
demand for the Company's software products, the level of product
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<PAGE> 13
and price competition, the Company's success in expanding its direct and
indirect distribution channels, the Company's success in attracting and
retaining motivated and qualified personnel, the ability of the Company to
expand its international sales, develop and market new products and product
upgrades and manage product transitions, the ability of the Company to control
costs, the growth of activity on the Internet and the World Wide Web (the
"Web"), and general economic conditions. Many of these factors are beyond the
Company's control. If the Company is not successful in addressing such risks,
the Company will be materially adversely affected. See "-- Potential
Fluctuations in Quarterly Results; Seasonality," "-- Product Concentration;
Risks Associated with First Aid Upgrades," and "-- Developing Market"
Potential Fluctuations in Quarterly Results; Seasonality. The Company's
quarterly operating results have fluctuated in the past and are expected to
fluctuate significantly in the future. These fluctuations may arise as a result
of a number of factors, including the number and timing of new product
introductions, upgrades and product enhancements by the Company or its
competitors, purchasing patterns of distributors and customers, marketing and
promotional programs, pricing and other competitive pressures, order deferrals
and product returns in anticipation of new products or upgrades to existing
products, the mix of distribution channels through which the Company's products
are sold, the Company's decisions regarding hiring and other expenses, market
acceptance of the Company's products, market acceptance of commerce over the
Internet, technological limitations of the Internet, the developing nature of
the market for the Company's products, general economic conditions and other
factors. The Company generally ships products as orders are received and,
accordingly, the Company has historically operated with relatively little
backlog. As a result, quarterly revenues will depend predominantly on the volume
and timing of orders received during a particular quarter, both of which are
difficult to forecast. With the introduction of First Aid 95, the Company
significantly increased its level of operating expenses. The Company anticipates
that its operating expenses will continue to increase substantially in the
future as a result of efforts to expand its sales and marketing operations,
including expanding its international sales, to fund greater levels of product
development, and to increase its administrative infrastructure. To the extent
that such expenses precede or are not subsequently followed by increased net
revenues, the Company's business, results of operations and financial condition
will be materially adversely affected. A relatively high percentage of the
Company's expenses is fixed in the short term and the Company is generally
unable to adjust spending in a timely manner to compensate for shortfalls in net
revenues. In addition, the consumer software industry in which the Company
operates has seasonal elements. In recent years, the consumer software industry
has experienced relatively higher demand for software products in the fourth
quarter due to year-end holiday buying and relatively lower demand in the summer
months. If net revenues fall below the Company's expectations, expenditure
levels as a percentage of total net revenues could be disproportionately high,
and operating results would be immediately and adversely affected. The Company
believes that period-to-period comparisons of its operating results are not
meaningful and should not be relied upon as any indication of future
performance. Due to the foregoing factors, among others, it is likely that the
Company's future quarterly operating results from time to time will not meet the
expectations of securities analysts or investors, which may have an adverse
effect on the price of the Company's Common Stock.
Product Concentration; Risks Associated with First Aid Upgrades. During 1995
and the first nine months of 1996, over 90% of the Company's net revenues were
attributable to sales of its First Aid products. The Company anticipates that
sales of its First Aid products will account for substantially all of the
Company's net revenues during 1996, and a substantial majority of its net
revenues in 1997. There can be no assurance that net revenues from the First Aid
products will continue to grow at historical rates or be sustainable at current
levels. The Company's future financial performance will depend in large part on
the successful development, introduction and customer acceptance of new product
offerings and enhanced versions of the First Aid products. The Company is
currently upgrading its First Aid products to incorporate new features to
respond to evolving technical support and competitive developments. These
upgrades are scheduled to be released in the fourth quarter of 1996 under the
First Aid 97 title. Distributors may delay or cancel orders and return or reduce
current inventory levels of First Aid 95 products in anticipation of the release
of these upgrades. Furthermore, any failure or delays in releasing First Aid 97
upgrades as announced could increase the risk of such actions by distributors.
The rate of growth of sales into the channel of First Aid 95 have declined
somewhat since the public announcement of the expected
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<PAGE> 14
release of First Aid 97 which the Company believes is due to such announcement.
In order to enhance continued sales of First Aid 95, the Company has introduced
a rebate program for buyers of First Aid 95 and First Aid 95 Deluxe and has
extended credit terms to certain customers. The First Aid 97 upgrades will not
be available until mid to late fourth quarter 1996. Delays in shipping such
upgrades could have material adverse effect on the Company's future business,
results of operations and financial condition. In addition, the Company recently
introduced a new product, Oil Change, in October 1996. To date, Oil Change has
not generated any net revenues and the Company does not expect it to generate
significant net revenues for at least the near future. There can be no assurance
that Oil Change will generate significant net revenues at any time in the
future. Any decline in the demand for First Aid products, failure to achieve
market acceptance of upgrades to such products or failure of net revenues
derived from such products to meet the Company's expectations, whether as a
result of competition, technological change or other factors, would have a
material adverse effect on the Company's business, results of operations and
financial condition.
Management of Growth; Dependence on Key Personnel. The Company's business has
grown rapidly during the past year and such growth has placed and, if sustained,
will continue to place, significant demands on the Company's management and
resources. Recently, the Company has significantly increased the scale of its
operations to support increased sales volumes and to address critical
infrastructure and other requirements. This increase included substantial
investments in sales and marketing to support sales activities and the hiring of
a number of new employees, which have resulted in higher operating expenses.
Between December 1, 1995 and September 30, 1996, the number of Company employees
increased from approximately 20 to approximately 118 and the Company currently
expects to hire many additional employees during 1996. The Company's ability to
manage any future growth, should it occur, will continue to depend upon the
successful expansion of its sales, marketing, research and development, customer
support and administrative infrastructure and the ongoing implementation and
improvement of a variety of internal management systems, procedures and
controls. There can be no assurance that the Company will be able to attract,
manage and retain additional personnel to support any future growth or will not
experience significant problems with respect to any infrastructure expansion or
the attempted implementation of systems, procedures and controls. Any failure in
one or more of these areas would have a material adverse effect on the Company's
business, results of operations and financial condition.
The Company's future success also depends on its continuing ability to attract
and retain highly qualified technical personnel. Competition for such personnel
is intense and there can be no assurance that the Company will be able to retain
its key technical employees or that it will be able to attract and retain
additional highly qualified technical personnel in the future. Any inability to
attract and retain the necessary technical personnel could have a material
adverse effect on the Company's business, results of operations and financial
condition.
The Company is dependent upon certain of its executive officers and has
entered into employment agreements with certain of its executive officers in
order to help assure their retention by the Company. However, there can be no
assurance that any such employment agreements will sufficiently incentivize such
executive officers to remain with the Company. The Company does not maintain any
key person insurance policies on the lives of any of its executive officers. The
loss of or inability to retain these key executive officers for any reason could
have a material adverse effect upon the Company's business, results of
operations and financial condition.
Competition. The PC software industry is intensely competitive and
characterized by short product life cycles and frequent new product
introductions. The Company competes with software companies of varying sizes and
resources, including SystemSoft Corporation, Quarterdeck Corporation, Symantec
Corp. and others. The Company believes that a number of software companies will
be introducing automatic service and support software products in the near
future that will compete with the Company's products. The Company expects that
potential future competitors may include other software vendors, including
Internet software vendors. Many of the Company's existing and potential
competitors have substantially greater financial, technical and marketing
resources than the Company. Moreover, there are no proprietary
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<PAGE> 15
barriers to entry that could keep existing and potential competitors from
developing similar products or selling competing products in the Company's
markets. To the extent that the Company's competitors bundle their software
products with leading hardware, application software or operating system
vendors, or if one or more of the operating system vendors, such as Microsoft
Corporation ("Microsoft"), developed its own technical support software and
incorporated such functionality into its products, the Company's business,
results of operation and financial condition could be materially adversely
affected. There can be no assurance that the Company will be able to compete
successfully with existing or potential competitors. Increased competition may
result in the loss of shelf space or a reduction in demand or sell-through of
the Company's products, any of which could have a material adverse effect on the
Company's business, results of operations and financial condition.
Microsoft's position as a large, well-capitalized software company with a
dominant share of the market for PC operating system software could enable it to
develop products that compete effectively with those of the Company. In
particular, Microsoft is incorporating "Plug and Play" capabilities into future
versions of its operating systems. Plug and Play capabilities are designed to
allow PC users to add on any computer peripheral (such as a modem, video or
sound card) to a Windows-based system and enable that peripheral to work
immediately, without concern for software configuration errors or driver
conflicts. In addition, to the extent that Microsoft incorporates functionality
comparable, or perceived as comparable, to that offered by the Company into its
Windows products (or separately offers comparable products), sales of the
Company's products could be materially adversely affected. There can be no
assurance that any such action by Microsoft or others would not render the
Company's products noncompetitive or obsolete.
The Company's products also compete indirectly against alternative sources of
technical support, such as the technical support departments of hardware and
software vendors. Additionally, the Internet provides hardware and software
vendors with a new medium to offer technical support services. The Company
expects that many vendors will provide Internet-based technical support services
to support their existing and future products. The availability of these
technical support services could materially dilute the value of the Company's
products and have a material adverse effect on the Company's market position,
business, results of operations and financial condition.
In addition, the Company may face increasing pricing pressures from current
and future competitors and, accordingly, there can be no assurance that
competitive pressures will not require the Company to reduce its prices. Any
material reduction in the price of the Company's products would negatively
affect the Company's business, results of operations and financial condition,
and would require the Company to increase unit sales in order to maintain
historic levels of net revenues. There can be no assurance that competitors will
not develop products that are superior to the Company's products or that achieve
greater market acceptance and thereby negatively affect sales of the Company's
products.
Dependence on Microsoft Windows. The Company's success is dependent on the
continued widespread use of the Windows operating systems for PCs. The Company's
First Aid products automatically detect, diagnose and resolve common software
conflicts and configuration errors arising in the Windows operating environment.
Although Windows operating systems are currently used by many PC users, other
companies, including International Business Machines Corporation and Apple
Computer, Inc., have developed or are developing other operating systems that
compete, or will compete, with Windows. In the event that any of these
alternative operating systems become widely accepted in the PC marketplace,
demand for the Company's products could be adversely affected, thereby
materially adversely affecting the Company's business, results of operations and
financial condition. In addition, Microsoft may introduce a new operating system
to replace Windows or could incorporate some or many of the key features of the
Company's First Aid products in new versions of its operating systems, thereby
eliminating the need for users to purchase the Company's products. The inability
to adapt current products or to develop new products for use with any new
operating systems on a timely basis would have a material adverse effect on the
Company's business, results of operations and financial condition.
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<PAGE> 16
In addition, the Company's ability to develop products based on Windows
operating systems and release these products immediately prior to, or at the
time of Microsoft's release of new and upgraded Windows products is
substantially dependent on its ability to gain pre-release access to, and to
develop expertise in, current and future versions of Windows. There can be no
assurance that the Company will be able to provide products that are compatible
with future Windows releases on a timely basis, with or without the cooperation
of Microsoft.
Developing Market. The Company's products address the new and rapidly evolving
market for automatic service and support software. The market for automatic
service and support software products has only recently begun to develop and is
characterized by an increasing number of existing and potential market entrants
who are in the process of introducing or developing automatic service and
support software. As is typical in the case of a new and rapidly evolving
market, the demand and market acceptance for recently introduced products are
subject to a high level of uncertainty and risk. It is difficult to predict the
future growth rate and size of this market. There can be no assurance that the
market for the Company's products will develop, that demand for the Company's
products or for automatic service and support software products in general will
increase or that the rate of growth of this demand will be sustainable or will
not decrease. The Company's ability to develop and successfully market
additional products depends substantially on the acceptance of automatic service
and support software by individual and corporate users as an effective means of
addressing their technical support requirements. If the market fails to develop,
develops more slowly than expected or becomes saturated with competitors, or if
the Company's products do not achieve or sustain market acceptance, the
Company's business, results of operations and financial condition will be
materially adversely affected.
New Product Development and Technological Change. Substantially all of the
Company's net revenues have been derived, and substantially all of the Company's
future net revenues are expected to be derived, from the sale of its automatic
service and support software products. The market for automatic service and
support software products is characterized by rapid technological advances,
evolving industry standards in computer hardware and software technology and
frequent new product introductions and enhancements. The Company's products must
be continually updated to address the new and evolving technical support
requirements of third-party hardware and software. Failure to anticipate
technical difficulties that arise from use of these third-party products and
incorporate solutions to such difficulties into the Company's products would
have a material adverse effect on continued market acceptance of the Company's
products. The Company's ability to design, develop, test and support on a timely
basis new software products, updates and enhancements that respond to
technological developments and emerging industry standards is critical to the
Company's future success. The Company is currently upgrading its First Aid
products and expects these upgrades to be released in the fourth quarter of
1996. There can be no assurance that the Company will be successful in such
efforts or that the Company will not experience difficulties that could delay or
prevent the successful development, introduction and marketing of new products
and enhancements, or that its new products, upgrades and enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance. The introduction of new products, upgrades or enhanced versions of
existing products is subject to the risk of development delays due to resource
constraints, technological change and other reasons. If the Company is unable to
develop on a timely basis new software products, upgrades or enhancements to
existing products or if such new products, upgrades or enhancements do not
achieve market acceptance, the Company's business, results of operations and
financial condition would be materially adversely affected.
The Company currently employs software engineers in India on a work-for-hire
basis. These engineers are primarily responsible for updating the Company's
knowledge bases for current applications and upgrades. Certain of these
engineers are responsible for adapting the Company's First Aid products to
Windows NT. 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.
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<PAGE> 17
Dependence on Distribution Channels. The Company currently sells its First Aid
products primarily through distributors for resale to the retail channel and
through direct mail. Sales to such distributors and sales through direct mail
accounted for approximately 60% and 40%, respectively, of the Company's net
revenues in the first six months of 1996. Sales from direct mail have
historically operated at lower profitability levels than sales from
distributors. Accordingly, quarterly shifts in the mix of sales through
distributors and through direct mail could cause fluctuations in the Company's
profitability. There can be no assurance that the mix or relative profitability
of such sales will remain at current levels in the future. The Company is
evaluating the use of alternative distribution channels for its products and
began distributing Oil Change through the Internet in October 1996.
Sales to a limited number of distributors have constituted and are expected to
continue to constitute a substantial portion of the Company's net revenues.
Sales to the Company's top three distributors, Navarre Corporation ("Navarre"),
Ingram Micro, Inc. ("Ingram Micro") and Micro Central, Inc. ("Micro Central"),
accounted for approximately 31%, 27% and 10%, respectively, of the Company's net
revenues in the nine months ended September 30, 1996. The loss of, or reduction
in, orders from any of these distributors could have a material adverse effect
on the Company's business, results of operations and financial condition.
Historically, margins for distributors in the PC software industry have been
low, competition has been intense and distributors have relied on timely
payments from their customers. In September 1996, NeoStar Retail Group, Inc.
("NeoStar"), a major PC software retailer and a reseller of the Company's
products, filed for Chapter 11 bankruptcy protection. In the event that NeoStar
is unable to come to a satisfactory resolution with its creditors, it may cause
financial difficulties for one or more PC software distributors, including those
of the Company. Financial difficulties of any distributors could render the
Company's associated accounts receivable uncollectible, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, any special distribution arrangements or
product pricing arrangements that the Company may implement for strategic
purposes in one or more of its distribution channels could materially adversely
affect its margins.
The distribution channels through which consumer software products are sold
have been characterized by rapid change, including consolidations and financial
difficulties of certain distributors and retailers and the emergence of new
retailers such as general mass merchandisers. In addition, due to an increase in
the number of software applications, there are an increasing number of companies
competing for access to these channels. Retailers of the Company's products
typically have a limited amount of shelf space and promotional resources, and
there is intense competition for high quality and adequate levels of shelf space
and promotional support from the retailers. The Company believes this
competition for shelf space will increase in the near term as competitors
introduce new automatic service and support software. There can be no assurance
that retailers will continue to purchase the Company's products or provide the
Company's products with adequate levels of shelf space and promotional support,
the lack of which would have a material adverse effect on the Company's
business, results of operations and financial condition.
Risk of Product Returns. The Company's business includes a substantial risk of
product returns from distributors, retailers and end users, either through the
exercise of contractual return rights or as a result of the Company's policy of
assisting customers in balancing and updating inventories. Individual end users
may return products within 60 days of the date of purchase for a full refund.
Most retailers, distributors and end users also have the ability to return
products for a full refund. In addition, competitors' promotional or other
activities could cause returns to increase sharply at any time. Further, the
rate of product returns could increase if general mass merchandisers become a
larger percentage of the Company's business or other changes in the Company's
distribution channel occur. Large shipments in anticipation of unrealized demand
can lead to overstocking by the Company's distributors or retailers and result
in substantial product returns. In addition, the inventory transition resulting
from the introduction of product upgrades, including the currently planned
introduction of First Aid 97, could result in an increased level of returns for
prior versions. Furthermore, the risk of product returns will increase if demand
for the Company's products declines.
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<PAGE> 18
Although the Company establishes reserves based on estimated future returns of
products, taking into account promotional activities, the timing of new product
introductions, distributor and retailer inventories of the Company's products
and other factors, there can be no assurance that actual levels of returns will
not significantly exceed amounts anticipated by the Company. In addition, the
Company provides price protection to its distributors in the event the Company
reduces its prices. While to date, the number of products returned to the
Company has been immaterial, there can be no assurance that the number of
returns will not significantly increase in the future. Any material increase in
the level of returns could materially adversely affect the Company's business,
results of operations and financial condition.
Dependence on the Internet. The commercial viability of Oil Change and the
Company's ability to execute its strategy to leverage Oil Change as an
Internet-based platform for other products and services are dependent upon the
continued development and acceptance of the Internet as a delivery medium for
third-party software programs. In addition, the Company's future success may be
dependent upon continued growth in the use of the Internet in order to support
the distribution of products and future upgrades. The use of the Internet as a
distribution channel is new and unproven and represents a significant departure
from traditional distribution methods employed by software companies. Critical
issues concerning the commercial use of the Internet (including security,
reliability, cost, ease of use and access and speed) remain unresolved and may
affect the use of the Internet as a medium to distribute software. There can be
no assurance that the use of the Internet as a distribution channel will be
effective for either current or future products. The failure of the Internet to
be an effective distribution channel could have a material adverse effect on the
Company's business and prospects. The Company's future success depends, in part,
upon the future growth of the Internet for commercial transactions. There can be
no assurance that communication or commerce over the Internet will become
widespread and it is not known whether this market will develop to the extent
necessary for demand for the Company's products to emerge and become
sustainable. The Internet may not prove to be a viable commercial marketplace
for a number of reasons, including inadequate communications bandwidth and a
lack of secure payment mechanisms. To the extent that the Internet continues to
experience significant growth in the number of users and level of use, there can
be no assurance that the Internet infrastructure will continue to be able to
support the demands placed upon it. Moreover, the Internet could lose its
viability due to delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet activity or due to
increased governmental regulation. Changes in or insufficient availability of
telecommunications services to support the Internet also could result in slower
response times which might adversely affect customers' ability or willingness to
access the Company's products or upgrades over the Internet. In addition, the
security and privacy concerns of existing and potential customers, as well as
concerns related to computer viruses, may inhibit the growth of the Internet
marketplace generally and the customer base for the Company's Oil Change product
in particular. The viability of Oil Change also depends upon the continuation of
the current practice of publishing new updates and patches to commonly used
software applications and device drivers on vendors' Web sites.
If use of the Internet does not continue to grow, if the Internet
infrastructure does not effectively support customer demand or if hardware and
software vendors do not continue to post updates and patches on the Internet,
the Company's business, results of operations and financial condition could be
materially adversely affected. If users fail to accept Oil Change as a technical
support solution, the Company may have to expend significant resources to
educate users and create demand for Oil Change.
Limited Protection of Proprietary Rights. The Company's success is heavily
dependent upon its proprietary software. The Company relies primarily on a
combination of copyright, trademark and trade secret laws, employee
confidentiality and nondisclosure agreements and third-party nondisclosure
agreements and other methods of protection common in the consumer software
industry to protect its proprietary rights. The Company licenses its products
primarily under "shrink wrap" license agreements that are not signed by
licensees and therefore may be unenforceable under the laws of certain
jurisdictions. In addition, the Company has two United States patent
applications pending and intends to seek international and further United States
patents on its technology. There can be no assurance that patents will issue
from the Company's pending applications or that any claims allowed from the
pending patent
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applications or those hereafter filed will be of sufficient scope or strength,
or be issued in all countries where the Company's products can be sold, to
provide meaningful protection or any commercial advantage to the Company or that
any patents which may be issued to the Company will not be challenged and
invalidated. In addition, existing copyright laws provide only limited
protection. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use the
Company's products or technology that the Company considers proprietary, and
third parties may develop similar technology independently. Policing
unauthorized use of the Company's products is difficult, and while the Company
is unable to determine the extent to which piracy of its software products
exists, software piracy can be expected to be a persistent problem. There can be
no assurance that the Company's means of protecting its proprietary rights will
be adequate. In addition, there can be no assurance that the Company's
competitors will not independently develop technologies and products that are
substantially equivalent or superior to those of the Company without violating
the Company's proprietary rights.
As the number of software products in the industry increases and the
functionality of these products increasingly overlaps, software developers may
become increasingly subject to infringement claims. From time to time, the
Company has received communications from third parties asserting that certain
products may infringe upon the intellectual property rights of others. To date,
no such claim has resulted in litigation or the payment of any damages.
However, there can be no assurance that existing or future infringement claims
against the Company with respect to current or future products will not result
in costly litigation or require the Company to enter into royalty bearing
licenses with third parties or to discontinue use of certain portions of the
Company's technology if licenses are not available on acceptable terms.
While to date the Company's international sales have been insignificant, the
Company intends to devote substantial resources in an effort to expand the
international distribution of its products. The laws of some foreign countries
either do not protect the Company's proprietary rights or offer only limited
protection for those rights. The Company has not registered its copyrights in
any foreign countries. While in most foreign countries registration is not
required in order to receive copyright protection, the ability to bring an
enforcement action and obtain certain remedies depends on compliance with that
country's copyright laws. Consequently, the Company's failure to register its
copyrights abroad may make enforcement of these rights more difficult or reduce
the available remedies in any enforcement action. In addition, the Company has
not to date pursued foreign registration of its trademarks due to the
significant costs involved and, as a result, the Company may not be able to
prevent a third party from using its trademarks in many foreign jurisdictions.
System Interruption and Security Risks. The Company's ability to provide
product functionality through the Internet is dependent on its ability to
protect its system from interruption, whether by damage from fire, earthquake,
power loss, telecommunications failure, unauthorized entry or other events
beyond the Company's control. Most of the Company's computer equipment,
including its processing equipment, is currently located at a single site. While
the Company believes that its existing and planned precautions of redundant
systems, regular data backups and other procedures are adequate to prevent any
significant system outage or data loss, there can be no assurance that
unanticipated problems will not cause such a failure or loss. Despite the
implementation of security measures, the Company's infrastructure may also be
vulnerable to computer viruses, hackers or similar disruptive problems caused by
its customers, employees or other Internet users. Any damage or failure that
causes interruptions in the Company's operations could have a material adverse
effect on the Company's business, results of operations and financial condition.
Computer break-ins and other disruptions could jeopardize the security of
information stored in and transmitted through the computer systems of the
individuals and businesses utilizing the Company's products, which could result
in significant liability to the Company and also may deter customers and
potential customers from using the Company's services. Persistent problems
continue to affect public and private data networks. For example, in a number of
networks, hackers have bypassed network security and misappropriated
confidential information.
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Product Liability. Although the Company attempts to incorporate support for
most software conflicts and configuration errors in the Windows environment,
there can be no assurance that the Company's products will resolve any specific
problems encountered by a PC user. Furthermore, as a result of their complexity,
the Company's software products may contain undetected errors or failures, when
they are first introduced and as new versions are released. There can be no
assurance that, despite testing by the Company and testing and use by current
and potential customers, errors will not be found in new products after
commencement of commercial shipments or thereafter. The occurrence of any such
errors could result in the loss of, or a delay in, market acceptance of the
Company's products, which would have a material adverse effect on the Company's
business, results of operations and financial condition. The Company's license
agreements with its customers typically contain provisions designed to limit the
Company's exposure to potential claims for damages. It is possible, however,
that the limitation of liability provisions contained in the Company's license
agreement may not be effective under the laws of certain jurisdictions. Although
the Company has not experienced any such claims to date, the sale and support of
the Company's products may entail the risk of such claims. While the Company has
obtained insurance against product liability risks, there can be no assurance
that such insurance will provide adequate coverage. The Company does not
currently carry errors and omissions coverage which may protect against
allegations that the Company's products have failed to perform adequately. Any
such claims for damages brought against the Company could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Risks Associated With Global Operations. While the Company has derived less
than 5% of its total net revenues in each year from sales to customers outside
of the United States, during the third quarter of 1996, approximately 15% of
total revenues were from sales to customers outside of the United States. The
Company is expanding its sales operations outside of the United States which
will require significant management attention and financial resources. The
Company's ability to expand its product sales internationally is dependent on
the successful development of localized versions of the Company's products,
acceptance of such products and the acceptance of the Internet internationally.
The Company expects to commit significant resources to customizing its products
for selected international markets and to developing international sales and
support channels. The Company's First Aid products rely on a knowledge base that
contains detailed information based on specific English language versions of
third-party hardware and software applications. This knowledge base must be
recreated for each foreign language version that is developed to support foreign
releases of such products, many of which have been modified from their United
States releases. There can be no assurance that this task can be completed in a
timely or cost-effective manner or that enough products can be supported to
ensure customer acceptance. The Company believes that successful execution of a
global strategy is critical to maintaining its current market position and
competitive advantage. Failure to successfully expand its products to
international markets could cause the Company to lose business to global
competitors or prevent the development of strategic relationships with global
hardware and software vendors.
International operations are subject to a number of risks, including costs of
customizing products for foreign countries, dependence on independent resellers,
multiple and conflicting regulations regarding communications, use of data and
control of Internet access, longer payment cycles, unexpected changes in
regulatory requirements, import and export restrictions and tariffs,
difficulties in staffing and managing foreign operations, greater difficulty or
delay in accounts receivable collection, potentially adverse tax consequences,
the burdens of complying with a variety of foreign laws, the impact of possible
recessionary environments in economies outside the United States and political
and economic instability. Furthermore, the Company's export sales are currently
denominated predominantly in United States dollars. An increase in the value of
the United States dollar relative to foreign currencies could make the Company's
products more expensive and, therefore, potentially less competitive in foreign
markets. If the Company increases its international sales, its net revenues may
also be affected to a greater extent by seasonal fluctuations resulting from
lower sales that typically occur during the summer months in Europe and other
parts of the world.
20
<PAGE> 21
Reliance on Outside Resources. The Company relies upon independent contractors
to perform a number of tasks, including product duplication and packaging,
reproduction of manuals and brochures and order fulfillment. The Company depends
on these outside parties to perform such functions to the Company's
specifications and quality standards. The Company currently does not have
long-term agreements with any of these outside parties. The Company also employs
software engineers in India on a work-for-hire basis to assist in its product
development efforts. Although the Company believes that alternative resources
exist or can be obtained, a disruption of the Company's relationship with any of
these outside parties or the failure of these outside parties to continue to
provide quality supplies and services on a timely basis could materially
adversely affect the Company's business, results of operations and financial
condition.
Litigation. From time to time, the Company may be involved in litigation
relating to claims arising out of its products or operations in the normal
course of business. In July 1996, the Company filed a lawsuit in the U.S.
District Court, Northern District of California against Vertisoft Systems, Inc.
("Vertisoft"), a wholly-owned subsidiary of Quarterdeck Corporation, alleging
that Vertisoft's packaging materials included false and misleading statements
about the Company that constituted unfair competition and false advertising.
Vertisoft has filed counterclaims against the Company alleging that the
Company's packaging materials included false and misleading statements. Pending
trial, the court has granted a preliminary injunction in favor of the Company
and against Vertisoft which prevents Vertisoft from shipping products with
existing packaging unless certain statements are "stickered" over. The court has
also denied Vertisoft's request for a preliminary injunction to stop the Company
from shipping its First Aid 95 and First Aid 95 Deluxe products, or even to
require a form of "sticker" be placed on the Company's products. The court's
rejection of Vertisoft's request does not preclude Vertisoft from filing other
or additional motions in the suit, including requests for injunctive relief or
damages. See " Legal Proceedings."
Volatility of Stock Price. The market price of the shares of Common Stock is
likely to be highly volatile and could be subject to wide fluctuations in
response to factors such as actual or anticipated variations in the Company's
operating results, announcements of technological innovations, new products or
new contracts by the Company or its competitors, developments with respect to
patents, copyrights or proprietary rights, changes in financial estimates by
securities analysts, conditions and trends in the software and other technology
industries, adoption of new accounting standards affecting the software
industry, general market conditions and other factors. Further, the stock market
has experienced extreme price and volume fluctuations that have particularly
affected the market prices of equity securities of many high technology
companies and that often have been unrelated or disproportionate to the
operating performance of such companies. Declines in market prices generally may
adversely affect the market price of the Company's Common Stock. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against such
company. Such litigation, if instituted, could result in substantial costs and a
diversion of management attention and resources, which would have a material
adverse effect on the Company's business, results of operations and financial
condition. These market fluctuations, as well as general economic, political and
market conditions, such as recessions or international currency fluctuations,
may adversely affect the market price of the Common Stock.
21
<PAGE> 22
PART II: OTHER INFORMATION
Item 1. Legal Proceedings:
In July 1996, the Company filed a lawsuit in the U.S. District Court,
Northern District of California against Vertisoft, a wholly-owned subsidiary of
Quarterdeck Corporation alleging that Vertisoft's packaging materials included
false and misleading statements about the Company that constituted unfair
competition and false advertising. Vertisoft has filed counterclaims against the
Company alleging that the Company's packaging materials included false and
misleading statements. Pending trial, the court has granted a preliminary
injunction in favor of the Company and against Vertisoft which prevents
Vertisoft from shipping products with its existing packaging unless certain
statements are "stickered" over. The court has also denied Vertisoft's request
for a preliminary injunction to stop the Company from shipping its First Aid 95
and First Aid 95 Deluxe products, or even to require a form of "sticker" be
placed on the Company's products.
Item 4. Submission of Matters to Vote of Security Holders
During the quarter ended September 30, 1996 and prior to the closing of the
Company's initial public offering, the company's stockholders, acting by written
consent without a meeting, approved proposals to: 1. (i) effect a 1-for-2
reverse stock split of the Company's shares of Common Stock, (ii) amend the
1993 Stock Plan, (iii) adopt the 1996 Employee Stock Purchase Plan, and (iv)
adopt the 1996 Director Option Plan. These proposals were approved by written
consent effective August 13, 1996. And, 2. (i) merge the Company's California
predecessor with and into the Company, (ii) amend the Company's certificate of
incorporation, and (iii) approve the form of Indemnification Agreement to be
entered into with each of the Company's executive officers and directors. These
proposals were approved by written consent effective October 3, 1996.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statement Regarding Computation of Net Income Per Share
27.1 Financial Data Schedule
(b) Reports on form 8-K
No reports on Form 8-K have been filed during the period for
which the report is filed.
22
<PAGE> 23
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: November 11, 1996 By: /s/ Jeffrey W. Beaumont
------------------------
Chief Financial Officer
(Principal Financial and
Principal Accounting Officer)
23
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Page
<S> <C> <C>
11.1 Statement Regarding Computation of NET Income Per Share 25
27.1 Financial Data Schedule 26
</TABLE>
24
<PAGE> 1
Exhibit 11.1 Statement Regarding Computation of NET Income Per Share
Computation of Per Share Loss
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
--------------------------- --------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings per Common and
Common Equivalent Share:
Initial Public Offering Price $16.00 $16.00 $16.00 $16.00
Weighted Average Common
Shares Outstanding During Period: 1,223,000 1,198,000 1,206,000 1,194,000
Shares of Common stock issued
within the last twelve months
preceding the initial filing date 1,272,000 1,272,000 1,272,000 1,272,000
--------- --------- --------- ---------
2,495,000 2,470,000 2,478,000 2,466,000
Common Stock Equivalents:
Common Stock options and warrants
granted within the last twelve months
preceding the initial filing date 1,375,000 1,375,000 1,375,000 1,375,000
Preferred Stock convertible into Common
Stock and sold within the last twelve months
preceding the initial filing date 4,019,000 4,019,000 4,019,000 4,019,000
--------- --------- --------- ---------
5,394,000 5,394,000 5,394,000 5,394,000
Weighted average Common and Common
Equivalent Shares 7,889,000 7,864,000 7,872,000 7,860,000
Net loss for period ($1,322,000) ($739,000) ($3,550,000) ($797,000)
Loss per Share ($0.17) ($0.09) ($0.45) ($0.10)
</TABLE>
25
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,727,000
<SECURITIES> 0
<RECEIVABLES> 8,689,000
<ALLOWANCES> 1,770,000
<INVENTORY> 1,295,000
<CURRENT-ASSETS> 10,971,000
<PP&E> 958,000
<DEPRECIATION> 145,000
<TOTAL-ASSETS> 11,784,000
<CURRENT-LIABILITIES> 9,706,000
<BONDS> 0
0
10,500,000
<COMMON> 218,000
<OTHER-SE> (9,102,000)
<TOTAL-LIABILITY-AND-EQUITY> 11,784,000
<SALES> 22,680,000
<TOTAL-REVENUES> 22,680,000
<CGS> 7,280,000
<TOTAL-COSTS> 7,280,000
<OTHER-EXPENSES> 18,927,000
<LOSS-PROVISION> 1,003,000
<INTEREST-EXPENSE> 68,000
<INCOME-PRETAX> (3,550,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,550,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,550,000)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
