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PROSPECTUS
2,500,000 SHARES
LOGO
COMMON STOCK
All of the 2,500,000 shares of Common Stock offered hereby are being sold
by CyberMedia, Inc. (the "Company"). Prior to this offering, there has been no
public market for the Common Stock of the Company. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The Company's Common Stock has been approved for quotation on
the Nasdaq National Market under the symbol CYBR.
------------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
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Per Share......................... $16.00 $1.12 $14.88
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Total (3)......................... $40,000,000 $2,800,000 $37,200,000
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</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting estimated expenses payable by the Company estimated at
$1,100,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
375,000 additional shares of Common Stock solely to cover over-allotments,
if any. If all such shares are purchased, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $6,000,000, $420,000
and $5,580,000, respectively.
------------------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be ready for
delivery on or about October 28, 1996, at the office of the agent of Hambrecht &
Quist LLC in New York, New York.
HAMBRECHT & QUIST
LEHMAN BROTHERS
WESSELS, ARNOLD & HENDERSON
October 23, 1996
<PAGE> 2
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus. The shares of Common Stock offered hereby include a high
degree of risk. Investors should carefully consider the information set forth
under the heading "Risk Factors."
THE COMPANY
CyberMedia is a leading provider of automatic service and support software
products for Windows-based personal computer ("PC") users. The Company's First
Aid products enable PC users to diagnose and resolve problems automatically
without relying on costly and increasingly scarce technical support resources.
To date, the Company has sold over one million units of its First Aid family of
products. The Company's latest product, Oil Change, which was released in
October 1996, is designed to offer PC users a one-stop solution for
automatically updating their software applications and device drivers over the
Internet.
In today's typical Windows-based PC configuration, the integration of a
wide range of hardware and software components from different vendors has
resulted in an increase in both the number and types of system errors and
technical difficulties. PC users and software and hardware vendors share a
common need for the timely resolution of technical support problems. These
technical support problems are compounded by the complexity of today's PC
environment and a decline in the average technical sophistication of PC users.
Dataquest estimates that approximately 200 million calls are expected to be
received at technical support centers nationwide in 1996, resulting in
expenditures of nearly $4 billion. In response to cost pressures and an often
unmanageable level of technical support calls, many software and hardware
vendors are scaling back or completely eliminating the technical support that
they once provided free of charge.
The Company has developed an innovative, vendor-neutral, automated approach
to technical support that enables the Company to deliver among the most
comprehensive and easy to use software support solutions available today for
Windows-based PC users. The Company's products are based on its scalable
ActiveHelp architecture that allows for the support of a broad range of PC
products and related problems and enables the Company's products to be regularly
and automatically updated through the Internet. The Company's objective is to
capitalize on the growing need for technical support by being first to market
with innovative products and product upgrades that leverage the Company's
proprietary technology and incorporate feedback from its extensive user base.
The Company's First Aid products utilize a knowledge base of general and
system-specific information supporting a wide range of software applications,
multimedia cards, modems, video cards and networks that, in the aggregate,
resolve over 10,000 potential combinations of problems. The Company has
introduced several versions of First Aid, including First Aid 95 and First Aid
95 Deluxe in September 1995 and March 1996, respectively, for the retail
distribution channels and First Aid 95 Deluxe, Network Version in June 1996 for
the corporate market. The First Aid title ranked in the top ten of all Windows
95 business software applications sold in the United States (by number of units)
in each month from November 1995 to July 1996 (PC Data).
The Company believes that the Internet is emerging as a medium for vendors
to quickly and cost-effectively disseminate software updates and patches to
correct problems or resolve compatibility issues associated with their products.
Despite the potential benefits of the Internet, few PC users have the time or
technical knowledge required to identify, locate, download and install the
updates and patches that apply to their PCs.
CyberMedia's Oil Change is designed to enable PC users to keep their
systems up-to-date, thereby enhancing overall system performance and avoiding
problems frequently encountered as a result of outdated software and device
drivers. The Company seeks to establish Oil Change as the de facto standard for
PC users to obtain updates and patches to third-party software applications and
device drivers over the Internet.
The Company sells its products to individual and corporate users primarily
through retail distribution channels and direct mail. The Company is expanding
the marketing and sale of its products through the Internet, internationally and
through strategic relationships.
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THE OFFERING
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Common Stock offered by the Company..................... 2,500,000 shares
Common Stock to be outstanding after the offering....... 11,482,449 shares (1)(3)
Use of proceeds......................................... For working capital, repayment of
debt and other general corporate
purposes.
Nasdaq National Market symbol........................... CYBR
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
YEAR ENDED DECEMBER 31, -----------------
----------------------------------------------- 1995 1996
1991 1992 1993 1994 1995 (5) (5)
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STATEMENT OF OPERATIONS DATA:
Net revenues.................. $ -- $ 20 $ 55 $ 241 $ 4,797 $ 1,724 $13,949
Gross profit.................. -- 20 41 135 2,694 1,306 9,061
Total operating expenses...... 19 352 772 1,230 5,987 1,336 11,265
Loss from operations.......... (19) (332) (731) (1,095) (3,293) (30) (2,204)
Net loss...................... $ (19) $ (333) $ (732) $(1,115) $(3,352) $ (57) $(2,229)
Net loss per share (2)........ $ -- $ (0.04) $ (0.09) $ (0.14) $ (0.43) $ (0.01) $ (0.28)
Shares used in per share
calculation (2)............ 7,794 7,794 7,826 7,839 7,855 7,839 7,889
<CAPTION>
JUNE 30, 1996
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PRO
FORMA
PRO AS
ACTUAL FORMA ADJUSTED
(5) (3) (4)
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BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 569 $ 7,176 $42,031
Working capital (deficit).............................. (2,339) 4,268 39,968
Total assets........................................... 7,088 13,695 48,550
Note payable, long-term................................ 400 400 --
Total stockholders' equity (deficiency)................ (2,095) 4,512 40,612
</TABLE>
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(1) Based on shares outstanding at June 30, 1996. Excludes (i) 1,513,016 shares
of Common Stock subject to options outstanding as of June 30, 1996 at a
weighted average exercise price of $1.51 per share and (ii) an aggregate of
277,459 shares of Common Stock reserved for issuance and available for grant
under the Company's Amended 1993 Stock Plan, 1996 Director Option Plan and
1996 Employee Stock Purchase Plan. In August 1996, an additional 1,000,000
shares of Common Stock were authorized and reserved for issuance under the
Amended 1993 Stock Plan. See "Management -- Director Compensation,"
"-- Employee Benefit Plans," "Description of Capital Stock" and Notes 8, 9,
11 and 15 of Notes to Financial Statements.
(2) See Note 1 of Notes to Financial Statements for an explanation regarding per
share calculations.
(3) Reflects (i) the sale in July 1996 of 1,666,667 shares of Series C Preferred
Stock, convertible into approximately 833,334 shares of Common Stock, for
$5.0 million, (ii) the exercise of all outstanding warrants and (iii) the
conversion of each share of Preferred Stock into one-half share of Common
Stock upon the closing of this offering.
(4) As adjusted to reflect the sale of 2,500,000 shares of Common Stock offered
by the Company at the initial public offering price of $16.00 per share and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
(5) See Note 1 of Notes to Financial Statements for an explanation of the basis
of presentation for interim financial information.
------------------------
Unless otherwise indicated, all information in this Prospectus (a) reflects
the one-for-two reverse stock split of the Company's Common Stock effected in
August 1996 and the adjustment to the conversion ratio, such that upon the
closing of this offering, each outstanding share of Preferred Stock shall
automatically convert into one-half share of Common Stock, (b) gives effect to
the reincorporation of the Company from California to Delaware in October 1996,
and (c) assumes no exercise of the Underwriters' over-allotment option. See
"Description of Capital Stock," "Underwriting" and Notes 8 and 15 of Notes to
Financial Statements.
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<PAGE> 5
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. In addition
to the other information in this Prospectus, the following factors should be
considered carefully in evaluating an investment in the shares of Common Stock
offered by this Prospectus. This Prospectus contains forward-looking statements
that involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth below and elsewhere in this
Prospectus.
Limited Operating History and History of Operating Losses. The Company has
only a limited operating history upon which to base an evaluation of its
business and prospects. The Company commenced operations in November 1991 and
introduced its first automatic service and support product, Win Win, in 1993.
The Company introduced the first Windows 95 compatible version of its First Aid
product line in September 1995. During 1996, both the Company's net revenues and
operating expenses, particularly sales and marketing expenditures, increased
rapidly compared to prior periods. From inception to June 30, 1996, the Company
generated net revenues of $19.1 million, of which $13.9 million, or 73%, was
generated in the six months ended June 30, 1996. The Company has incurred net
losses in each of the last five fiscal years and for the six months ended June
30, 1996, resulting in an accumulated deficit of $7.8 million at June 30, 1996.
The Company's disproportionate increase in operating losses from 1992 through
June 30, 1996 were primarily due to its policy of deferring revenue with no
corresponding cost deferral. Approximately $3.0 million in net revenues were
deferred as of June 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 June 30, 1996. See Note 7 of Notes to Financial Statements
for further discussion of income taxes. There can be no assurance that the
Company's net revenues will continue to remain at or increase from the level
experienced in the first six months of 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 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," "-- Developing Market" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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
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<PAGE> 6
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. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Product Concentration; Risks Associated with First Aid Upgrades. 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. 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 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 upgradees 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
6
<PAGE> 7
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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business -- Products," and "-- Technology."
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 July 31, 1996, the number of Company
employees increased from approximately 20 to approximately 104 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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. See "Management."
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 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,
7
<PAGE> 8
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. See
"Business -- Industry Background."
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. See "Business -- Distribution and Marketing" and "-- Competition."
Dependence on Microsoft Windows. The Company's success is dependent on the
continued widespread use of the Windows operating systems for PCs. The Company's
First Aid products automatically detect, diagnose and resolve common software
conflicts and configuration errors arising in the Windows operating environment.
Although Windows operating systems are currently used by many PC users, other
companies, including International Business Machines Corporation and Apple
Computer, Inc., have developed or are developing other operating systems that
compete, or will compete, with Windows. In the event that any of these
alternative operating systems become widely accepted in the PC marketplace,
demand for the Company's products could be adversely affected, thereby
materially adversely affecting the Company's business, results of operations and
financial condition. In addition, Microsoft may introduce a new operating system
to replace Windows or could incorporate some or many of the key features of the
Company's First Aid products in new versions of its operating systems, thereby
eliminating the need for users to purchase the Company's products. The inability
to adapt current products or to develop new products for use with any new
operating systems on a timely basis would have a material adverse effect on the
Company's business, results of operations and financial condition.
In addition, the Company's ability to develop products based on Windows
operating systems and release these products immediately prior to, or at the
time of Microsoft's release of new and upgraded
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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. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations,"
"Business -- Industry Background" and "Business -- Products."
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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business -- Products," " -- Technology" and " -- Product Development."
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
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and thereby could materially adversely affect the Company's business, results of
operations and financial condition. See "Business -- Product Development."
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 22%, 20% and 11%, respectively, of the Company's net
revenues in the six months ended June 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. See
"Business -- Distribution and Marketing."
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
10
<PAGE> 11
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.
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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business -- Distribution and Marketing."
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. See "Business -- Products,"
"-- Technology" and "-- Distribution and Marketing."
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 nondisclo-
11
<PAGE> 12
sure agreements and other methods of protection common in the consumer software
industry to protect its proprietary rights. The Company licenses its products
primarily under "shrink wrap" license agreements that are not signed by
licensees and therefore may be unenforceable under the laws of certain
jurisdictions. In addition, the Company has two United States patent
applications pending and intends to seek international and further United States
patents on its technology. There can be no assurance that patents will issue
from the Company's pending applications or that any claims allowed from the
pending patent applications or those hereafter filed will be of sufficient scope
or strength, or be issued in all countries where the Company's products can be
sold, to provide meaningful protection or any commercial advantage to the
Company or that any patents which may be issued to the Company will not be
challenged and invalidated. In addition, existing copyright laws provide only
limited protection. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy or otherwise obtain and use the
Company's products or technology that the Company considers proprietary, and
third parties may develop similar technology independently. Policing
unauthorized use of the Company's products is difficult, and while the Company
is unable to determine the extent to which piracy of its software products
exists, software piracy can be expected to be a persistent problem. There can be
no assurance that the Company's means of protecting its proprietary rights will
be adequate. In addition, there can be no assurance that the Company's
competitors will not independently develop technologies and products that are
substantially equivalent or superior to those of the Company without violating
the Company's proprietary rights.
As the number of software products in the industry increases and the
functionality of these products increasingly overlaps, software developers may
become increasingly subject to infringement claims. From time to time, the
Company has received communications from third parties asserting that certain
products may infringe upon the intellectual property rights of others. To date,
no such claim has resulted in litigation or the payment of any damages. However,
there can be no assurance that existing or future infringement claims against
the Company with respect to current or future products will not result in costly
litigation or require the Company to enter into royalty bearing licenses with
third parties or to discontinue use of certain portions of the Company's
technology if licenses are not available on acceptable terms.
While to date the Company's international sales have been insignificant,
the Company intends to devote substantial resources in an effort to expand the
international distribution of its products. The laws of some foreign countries
either do not protect the Company's proprietary rights or offer only limited
protection for those rights. The Company has not registered its copyrights in
any foreign countries. While in most foreign countries registration is not
required in order to receive copyright protection, the ability to 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.
See "Business -- Proprietary Rights."
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
12
<PAGE> 13
Company's business, results of operations and financial condition. Computer
break-ins and other disruptions could jeopardize the security of information
stored in and transmitted through the computer systems of the individuals and
businesses utilizing the Company's products, which could result in significant
liability to the Company and also may deter customers and potential customers
from using the Company's services. Persistent problems continue to affect public
and private data networks. For example, in a number of networks, hackers have
bypassed network security and misappropriated confidential information.
Product Liability. Although the Company attempts to incorporate support for
most software conflicts and configuration errors in the Windows environment,
there can be no assurance that the Company's products will resolve any specific
problems encountered by a PC user. Furthermore, as a result of their complexity,
the Company's software products may contain undetected errors or failures, when
they are first introduced and as new versions are released. There can be no
assurance that, despite testing by the Company and testing and use by current
and potential customers, errors will not be found in new products after
commencement of commercial shipments or thereafter. The occurrence of any such
errors could result in the loss of, or a delay in, market acceptance of the
Company's products, which would have a material adverse effect on the Company's
business, results of operations and financial condition. The Company's license
agreements with its customers typically contain provisions designed to limit the
Company's exposure to potential claims for damages. It is possible, however,
that the limitation of liability provisions contained in the Company's license
agreement may not be effective under the laws of certain jurisdictions. Although
the Company has not experienced any such claims to date, the sale and support of
the Company's products may entail the risk of such claims. While the Company has
obtained insurance against product liability risks, there can be no assurance
that such insurance will provide adequate coverage. The Company does not
currently carry errors and omissions coverage which may protect against
allegations that the Company's products have failed to perform adequately. Any
such claims for damages brought against the Company could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Risks Associated With Global Operations. Since its inception, the Company
has derived less than 5% of its total net revenues in each year 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Distribution and Marketing."
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
13
<PAGE> 14
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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Distribution and Marketing."
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. See "Business -- Product Development" and "-- Operations."
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 "Business -- Legal Proceedings."
Control by Existing Management. Following this offering, the current
executive officers and directors of the Company and their affiliates will
beneficially own approximately 41.3% of the Company's outstanding Common Stock.
Accordingly, the current officers and directors of the Company will continue to
have the ability to significantly influence the outcome of elections of the
Company's directors and other matters presented to a vote of stockholders. See
"Principal Stockholders."
Benefits of the Offering to Existing Stockholders. As of June 30, 1996,
assuming the conversion of all outstanding shares of Preferred Stock into Common
Stock and the exercise of warrants to purchase 116,311 shares of Common Stock,
there were 8,982,449 shares of Common Stock outstanding held of record by
approximately 150 stockholders. These existing stockholders will recognize
significant benefits from this offering. These benefits include the creation of
a public market for the Company's Common Stock, which will afford existing
stockholders the ability to liquidate their investments, subject in certain
cases to volume limitations and other limitations and restrictions upon the sale
of their Common Stock. See "Shares Eligible For Future Sale." None of the
Company's stockholders are selling shares in this offering. The Company's
executive officers and directors as a group beneficially own 4,746,467 shares of
Common Stock, including shares subject to outstanding options exercisable within
60 days of June 30, 1996. Based on the initial public offering price of $16.00,
the value of such shares to the Company's executive officers and directors is
$75,943,472. The shares of Common
14
<PAGE> 15
Stock beneficially owned by the Company's executive officers and directors were
purchased at prices ranging from $0.08 to $6.00 per share. Accordingly, after
this offering, these stockholders will have substantial unrealized gains on
their shares. See "Dilution," "Principal Stockholders" and "Certain
Transactions."
Shares Eligible For Future Sale. Sales of a substantial number of shares of
Common Stock (including shares issued upon the exercise of outstanding options
and warrants) in the public market following this offering could adversely
affect the market price for the Company's Common Stock. Such sales could also
make it more difficult for the Company to sell its equity or equity-related
securities in the future at a time and price that the Company deems appropriate.
Upon completion of this offering, the Company will have an aggregate of
11,482,449 shares of Common Stock outstanding. The 2,500,000 shares offered
hereby will be immediately tradeable without restriction. As a result of lock-up
agreements between certain stockholders and the Representatives of the
Underwriters, approximately 8,946,309 shares will not be available for immediate
sale in the public market until 181 days after the effectiveness of this
offering, subject in some cases to the volume and other restrictions of Rule 144
and Rule 701 under the Securities Act of 1933, as amended (the "Securities
Act"). However, Hambrecht & Quist LLC may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
lock-up agreements. Shares eligible to be sold by affiliates pursuant to Rule
144 are subject to volume and other restrictions. Shortly after the
effectiveness of this offering, the Company intends to register approximately
2,790,475 shares of the Company's Common Stock reserved for issuance under its
stock option and stock purchase plans or currently subject to outstanding
options. See "Shares Eligible for Future Sale."
Anti-takeover Provisions. Immediately after the closing of this offering,
the Company's Board of Directors will have 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. The Company has no present plans to issue shares of Preferred
Stock. 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. See "Description of Capital
Stock."
No Prior Market For Common Stock. Prior to this offering, there has been no
public market for the Company's Common Stock, and there can be no assurance that
an active public market will develop or be sustained after this offering or that
investors will be able to sell the Common Stock should they desire to do so. The
initial public offering price has been determined by negotiations among the
Company and the Representatives of the Underwriters and may bear no relationship
to the price at which the Common Stock will trade upon completion of this
offering. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price.
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
15
<PAGE> 16
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.
Dilution. Purchasers of the Common Stock in this offering will suffer
immediate and substantial dilution of $12.46 per share in the net tangible book
value of the Common Stock from the initial public offering price. To the extent
that outstanding options to purchase the Company's Common Stock are exercised,
there may be further dilution. See "Dilution."
16
<PAGE> 17
THE COMPANY
The Company was incorporated in California in November 1991 and
reincorporated in Delaware in October 1996. As used in this Prospectus, unless
the context otherwise requires, the terms "CyberMedia" and the "Company" refer
to CyberMedia, Inc., a Delaware corporation and its predecessor CyberMedia,
Inc., a California corporation. The Company's executive offices are located at
3000 Ocean Park Boulevard, Suite 2001, Santa Monica, California 90405, its
telephone number at that location is (310) 581-4700.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock being offered hereby at the initial public offering price of $16.00
per share are estimated to be $36,100,000 ($41,680,000 if the Underwriters'
over-allotment option is exercised in full), after deducting estimated
underwriting discounts and commissions and estimated offering expenses. The
Company intends to use the net proceeds from this offering for working capital
and other general corporate purposes, including sales and marketing activities
and for the expansion of product development. In addition the Company plans to
use approximately $1,245,000 of the net proceeds from this offering to pay the
outstanding principal amount of a note and grant payable to the Industrial
Credit and Investment Corporation of India Limited ("ICICI"), plus accrued
interest thereon. The ICICI note bears interest at the rate of prime plus 2.25%,
with principal payable in equal quarterly installments of $50,000 from January
1997 through April 1999. At June 30, 1996, the outstanding balance of the note
was $450,000. The Company may also use a portion of the net proceeds of this
offering to acquire or invest in complementary businesses and products, or to
obtain the right to use complementary technologies. Currently, there are no
agreements or understandings with respect to any such acquisitions or
investments and there can be no assurance that any such acquisitions or
investments will be made. Pending the use of the net proceeds for the above
purposes, the Company intends to invest such funds in investment-grade financial
obligations, including short-term, interest-bearing money market funds and
certificates of deposit.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock and does not anticipate paying any cash dividends in the foreseeable
future. The Company currently intends to retain its earnings, if any, for use in
the operation of its business. In addition, an existing loan agreement prohibits
the Company from paying cash dividends on its capital stock without the lender's
written consent. See Note 8 of Notes to Financial Statements.
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<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996 (i) on a historical basis, (ii) on a pro forma basis as described in
footnote (1) below and (iii) as adjusted to give effect to the sale by the
Company of 2,500,000 shares of Common Stock offered hereby at the initial public
offering price of $16.00 per share and the application of the net proceeds
therefrom. See "Use of Proceeds." This table should be read in conjunction with
the Financial Statements and related Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA (1) AS ADJUSTED (1)(2)
------- ------------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Note payable, long-term............................... $ 400 $ 400 $ --
------- ------- -------
Stockholders' equity (deficiency):
Preferred Stock; $0.01 par value, issuable in
series; 12,835,654 shares authorized, 9,331,087
shares issued and outstanding, actual; 2,000,000
shares authorized, none issued and outstanding,
pro forma and pro forma as adjusted.............. 94 -- --
Common Stock; $0.01 par value; 10,833,334 shares
authorized; 2,484,025 shares issued and
outstanding, actual; 50,000,000 shares
authorized, 8,982,449 shares issued and
outstanding, pro forma; 11,482,449 shares issued
and outstanding, pro forma as adjusted........... 25 90 115
Additional paid-in capital.......................... 5,566 12,202 48,277
Accumulated deficit................................. (7,780) (7,780) (7,780)
------- ------- -------
Total stockholders' equity (deficiency).......... (2,095) 4,512 40,612
------- ------- -------
Total capitalization........................ $(1,695) $ 4,912 $ 40,612
======= ======= =======
</TABLE>
- ---------------
(1) Reflects (i) the sale in July 1996 of 1,666,667 shares of Series C Preferred
Stock, convertible into approximately 833,334 shares of Common Stock, for
$5.0 million, (ii) the exercise of all outstanding warrants, (iii) the
conversion of each share of Preferred Stock into one-half share of Common
Stock upon closing of this offering and (iv) the change in the number of
authorized shares of Preferred Stock from 12,835,654 shares to 2,000,000
shares.
(2) Excludes as of June 30, 1996 (i) 1,513,016 shares of Common Stock issuable
upon the exercise of stock options outstanding at a weighted average
exercise price of $1.51 per share and (ii) an aggregate of 277,459
additional shares of Common Stock reserved for issuance and available for
grant under the Company's Amended 1993 Stock Plan, 1996 Director Option Plan
and 1996 Employee Stock Purchase Plan. In August 1996, an additional
1,000,000 shares of Common Stock were authorized and reserved for issuance
under the Amended 1993 Stock Plan. See "Management -- Director
Compensation," "-- Employee Benefit Plans," "Description of Capital Stock"
and Notes 8, 9, 11 and 15 of Notes to Financial Statements.
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<PAGE> 19
DILUTION
The pro forma net tangible book value of the Company's Common Stock as of
June 30, 1996 was $4,512,000 or approximately $0.50 per share. Pro forma net
tangible book value per share represents the amount of the Company's
stockholders' equity, less intangible assets, divided by 8,982,449 shares of
Common Stock outstanding as of June 30, 1996 after giving effect to (i) the sale
in July 1996 of 1,666,667 shares of Series C Preferred Stock (see Note 15 of
Notes to Financial Statements), (ii) the exercise of all outstanding warrants
and (iii) the conversion of each share of Preferred Stock into one-half share of
Common Stock upon closing of this offering.
Net tangible book value dilution per share represents the difference
between the amount per share paid by purchasers of shares of Common Stock in the
offering made hereby and the pro forma net tangible book value per share of
Common Stock immediately after completion of the offering. After giving effect
to the sale by the Company of 2,500,000 shares of Common Stock in this offering
at the initial public offering price of $16.00 per share, after deduction of
estimated underwriting discounts and commissions and offering expenses, the pro
forma net tangible book value of the Company as of June 30, 1996 would have been
$40,612,000 or $3.54 per share. This represents an immediate increase in net
tangible book value of $3.04 per share to existing stockholders and an immediate
dilution in net tangible book value of $12.46 per share to purchasers of Common
Stock in this offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................................... $16.00
Pro forma net tangible book value per share at June 30, 1996.............. $0.50
Increase per share attributable to new investors.......................... 3.04
-----
Pro forma net tangible book value per share after this offering............. $ 3.54
-----
Dilution per share to new investors......................................... $12.46
=====
</TABLE>
The following table sets forth on a pro forma basis as of June 30, 1996 the
number of shares purchased from the Company, the total consideration paid and
the average price per share paid by the existing stockholders and by new
investors:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 8,982,449 78.2% $12,292,000 23.5% $ 1.37
New investors........................... 2,500,000 21.8% 40,000,000 76.5% 16.00
--------- ----- ----------- -----
Total......................... 11,482,449 100.0% $52,292,000 100.0%
========= ===== =========== =====
</TABLE>
The foregoing assumes no exercise of outstanding stock options. As of June
30, 1996, there were (i) 1,513,016 shares of Common Stock issuable upon exercise
of outstanding stock options at a weighted average exercise price of $1.51 per
share and (ii) an aggregate of 277,459 additional shares of Common Stock
reserved for issuance and available for grant under the Company's Amended 1993
Stock Plan, 1996 Director Option Plan and 1996 Employee Stock Purchase Plan. In
August 1996, an additional 1,000,000 shares of Common Stock were authorized and
reserved for issuance under the Amended 1993 Stock Plan. To the extent that
outstanding options are exercised, there will be further dilution to new
investors. See "Capitalization," "Management -- Director Compensation,"
"-- Employee Benefit Plans," "Description of Capital Stock" and Notes 8, 9, 11
and 15 of Notes to Financial Statements.
19
<PAGE> 20
SELECTED FINANCIAL DATA
The selected financial data presented below for, and as of the end of, each
of the years in the three-year period ended December 31, 1995 are derived from
the financial statements of the Company, which financial statements have been
audited by KPMG Peat Marwick LLP, independent certified public accountants. The
financial statements as of December 31, 1994 and 1995, and for each of the years
in the three-year period ended December 31, 1995, and the auditor's report
thereon, are included elsewhere in this Prospectus. Balance sheet data as of
December 31, 1993 is derived from audited financial statements not included
herein. The statements of operations data for the years ended December 31, 1991
and 1992 and the balance sheet data as of December 31, 1991 and 1992 have been
derived from the unaudited financial statements of the Company, which are not
included in this Prospectus. The selected financial data for the six months
ended June 30, 1995 and 1996 are unaudited but have been prepared on the same
basis as the audited financial statements and, in the opinion of management,
contain all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results of operations for such periods.
The results of operations for the six months ended June 30, 1996 are not
necessarily indicative of results to be expected for the year or for any future
period. The selected financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues............................. $ -- $ 20 $ 55 $ 241 $ 4,797 $ 1,724 $13,949
Cost of revenues......................... -- -- 14 106 2,103 418 4,888
------- ------- ------- ------- ------- ------- -------
Gross profit........................... -- 20 41 135 2,694 1,306 9,061
Operating expenses:
Research and development............... -- 250 468 544 964 455 1,143
Sales and marketing.................... -- 27 220 439 4,036 678 8,609
General and administrative............. 19 75 84 247 987 203 1,513
------- ------- ------- ------- ------- ------- -------
Total operating expenses............. 19 352 772 1,230 5,987 1,336 11,265
------- ------- ------- ------- ------- ------- -------
Loss from operations................. (19) (332) (731) (1,095) (3,293) (30) (2,204)
Interest, net............................ -- (1) -- (19) (58) (27) (25)
------- ------- ------- ------- ------- ------- -------
Loss before income taxes............. (19) (333) (731) (1,114) (3,351) (57) (2,229)
Income tax expense....................... -- -- 1 1 1 -- --
------- ------- ------- ------- ------- ------- -------
Net loss............................. $ (19) $ (333) $ (732) $(1,115) $(3,352) $ (57) $(2,229)
======= ======= ======= ======= ======= ======= =======
Net loss per share (1)................... $ -- $ (0.04) $ (0.09) $ (0.14) $ (0.43) $ (0.01) $ (0.28)
======= ======= ======= ======= ======= ======= =======
Shares used in per share calculation
(1).................................... 7,794 7,794 7,826 7,839 7,855 7,839 7,889
<CAPTION>
PRO
FORMA
JUNE
JUNE 30,
DECEMBER 31, 30, 1996
1991 1992 1993 1994 1995 1996 (2)
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 21 $ 148 $ 14 $ 102 $ 2,050 $ 569 $ 7,176
Working capital (deficit)............. (19) 94 (333) (671) 434 (2,339 ) 4,268
Total assets.......................... 54 178 25 189 3,855 7,088 13,695
Note payable, long-term............... -- -- -- 500 500 400 400
Total stockholders' equity
(deficiency)........................ 6 120 (610) (1,155) 7 (2,095 ) 4,512
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for per share calculations.
(2) Reflects (i) the sale in July 1996 of 1,666,667 shares of Series C Preferred
Stock (see Note 15 of Notes to Financial Statements), (ii) the exercise of
all outstanding warrants and (iii) the conversion of each share of Preferred
Stock into one-half share of Common Stock upon the closing of this offering.
20
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. See "Risk
Factors -- Product Concentration; Risks Associated with First Aid Upgrades."
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 upgradees 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. To date, Oil Change
has not generated any revenues, and the Company does not expect it to generate
significant net revenues for at least the near future.
The Company has a limited operating history upon which to base an
evaluation of its business and prospects. From inception to June 30, 1996, the
Company generated net sales of approximately $19.1 million, of which $13.9
million, or 73% of such amount, was generated in the six months ended June 30,
1996. The Company has incurred net losses in each of the last five fiscal years
as well as in the six months ended June 30, 1996. At June 30, 1996, the Company
had an accumulated deficit of $7.8 million. With the introduction of First Aid
95, the Company began focusing on building its product line and establishing
brand name awareness of its products, which has resulted in significantly
increased operating expenses. The Company anticipates that its operating
expenses will continue to increase significantly in the future as a result of
efforts to expand its sales and marketing operations, including international
sales, to fund greater levels of product development and to increase its
administrative infrastructure. The Company intends to fund increases in
operating expenses primarily from cash generated from operations and, to the
extent necessary, funds available from the Company's line of credit and this
offering. 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 half 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. See "Risk Factors
- -- Limited Operating History and History of Operating Losses" and "-- Potential
Fluctuations in Quarterly Results; Seasonality."
21
<PAGE> 22
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 22%, 20% and 11%, respectively, of the Company's net revenues in
the six months ended June 30, 1996 and 9%, 16% and 19%, respectively, of net
revenues in 1995. Net revenues from direct mail sales in 1995 and the first six
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. See Note 10
of Notes to Financial Statements.
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 June 30, 1996 the Company's balance sheet included $3.1 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.
22
<PAGE> 23
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net revenues, statement
of operations data for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- ----------------
1993 1994 1995 1995 1996
--------- ------ ------ ----- ------
<S> <C> <C> <C> <C> <C>
Net revenues................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................. 25.5 44.0 43.8 24.2 35.0
-------- ------ ------ ------ ------
Gross profit............................... 74.5 56.0 56.2 75.8 65.0
Operating expenses:
Research and development................... 850.9 225.7 20.1 26.4 8.2
Sales and marketing........................ 400.0 182.2 84.1 39.3 61.7
General and administrative................. 152.7 102.5 20.6 11.8 10.9
-------- ------ ------ ------ ------
Total operating expenses................ 1,403.6 510.4 124.8 77.5 80.8
-------- ------ ------ ------ ------
Loss from operations.................... (1,329.1) (454.4) (68.6) (1.7) (15.8)
Interest, net................................ -- (7.9) (1.2) (1.6) (0.2)
-------- ------ ------ ------ ------
Loss before income taxes................ (1,329.1) (462.3) (69.8) (3.3) (16.0)
Income tax expense........................... 1.8 0.4 -- -- --
-------- ------ ------ ------ ------
Net loss................................ (1,330.9)% (462.7)% (69.8)% (3.3)% (16.0)%
======== ====== ====== ====== ======
</TABLE>
Net Revenues. Net revenues were $55,000, $241,000 and $4.8 million in 1993,
1994 and 1995, respectively. For the six months ended June 30, 1996, net
revenues increased to $13.9 million from $1.7 million for the six months ended
June 30, 1995. The Company's net revenues consist of license fees for its
software products, less provision for returns. Substantially all of the
Company's net revenues have been derived from domestic sales in the United
States, with international sales representing less than 5% of net revenues in
each of these periods and less than 3% of net revenues in the first half of
1996. 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 in 1994 was primarily attributable
to the introduction of First Aid, as well as to the initiation of sales to major
software distributors. The growth in net revenues in 1995 was largely
attributable to the introduction of First Aid 95, 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 growth in net revenues in the first six months of 1996 was
largely attributable to increased market acceptance of First Aid 95 and the
introduction of First Aid 95 Deluxe in March 1996. The Company does not believe
that the historical growth rates of its net revenues will be sustainable or are
indicative of future results. See "Risk Factors -- Dependence on the Internet,"
"-- Dependence on Distribution Channels," "-- Risk of Product Returns" and
"-- Risks Associated with Global Operations."
Cost of Revenues. Cost of revenues were $14,000, $106,000 and $2.1 million
in 1993, 1994 and 1995, respectively. For the six months ended June 30, 1996,
cost of revenues increased to $4.9 million from $418,000 for the six months
ended June 30, 1995. Cost of revenues consists primarily of the cost of product
media, product duplication, documentation and order fulfillment and royalties
paid to ICICI in conjunction with a grant associated with early stage financing
of the Company. Royalties accrued at the rate of 5% of net revenues up to a
lifetime total of $477,000 and the amounts of accrued royalties were $13,000,
$276,000 and $188,000 in 1994, 1995 and for the six months ended June 30, 1996,
respectively. 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 June 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. See " -- Liquidity and Capital Resources."
Gross Margin. Gross margins were 75%, 56% and 56% in 1993, 1994 and 1995,
respectively, and 76% and 65% for the six months ended June 30, 1995 and June
30, 1996, respectively. Gross margins in the third and fourth quarters of 1995
and the first half 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 half of 1996 were also negatively affected by an increase in the
percentage of
23
<PAGE> 24
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
16% from $468,000 in 1993 to $544,000 in 1994 and by 77% to $964,000 in 1995,
representing 851%, 226% and 20% of net revenues in these years, respectively.
Research and development expenses increased from $455,000 for the six months
ended June 30, 1995 to $1.1 million for the six months ended June 30, 1996,
representing 26% and 8% 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 $220,000 in
1993 to $439,000 in 1994 and to $4.0 million in 1995, representing 400%, 182%
and 84% of net revenues in these years, respectively. Sales and marketing
expenses increased from $678,000 for the six months ended June 30, 1995 to $8.6
million for the six months ended June 30, 1996, representing 39% and 62% 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 $84,000 in 1993 to $247,000 in 1994 and to $1.0 million in 1995,
representing 153%, 103% and 21% of net revenues in these years, respectively.
General and administrative expenses increased from $203,000 for the six months
ended June 30, 1995 to $1.5 million for the six months ended June 30, 1996,
representing 12% 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 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 $0, $19,000 and $58,000 in 1993, 1994 and
1995, respectively. For the six months ended June 30, 1996, interest, net
decreased from $27,000 for the six months ended June 30, 1995 to $25,000.
Interest, net consists of interest income and interest expense.
Income Tax Expense. Due to the losses before income taxes for each of the
years ended December 31, 1993, 1994 and 1995, the Company recorded minimum state
franchise tax. The Company had federal and state net operating loss
carry-forwards of approximately $3.8 million at December 31, 1995 and
approximately $2.8 million at June 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 six months ended June
30, 1995 and 1996, the Company recorded no income tax expense during these
periods.
24
<PAGE> 25
QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited quarterly results of operations data
for each of the Company's last six fiscal quarters, as well as the percentage of
the Company's net revenues represented by each item. The unaudited financial
statements have been prepared on the same basis as the audited financial
statements appearing elsewhere in the Prospectus and in management's opinion
include all necessary adjustments (consisting only of normal recurring
adjustments) to present fairly the unaudited quarterly results when read in
conjunction with the audited Financial Statements of the Company and the Notes
thereto appearing elsewhere in this Prospectus. In view of the Company's recent
growth and other factors, the Company believes that quarter-to-quarter
comparisons of its financial results are not necessarily meaningful and should
not be relied upon as an indication of future performance. See "Risk
Factors -- Potential Fluctuations in Quarterly Results; Seasonality."
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1995 1995 1995 1995 1996 1996
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues................................. $ 712 $1,012 $ 1,046 $2,027 $6,058 $7,891
Cost of revenues............................. 193 225 356 1,329 2,101 2,787
---- ------ ------ ------- ------- -------
Gross profit............................... 519 787 690 698 3,957 5,104
---- ------ ------ ------- ------- -------
Operating expenses:
Research and development................... 235 220 240 269 474 669
Sales and marketing........................ 151 527 1,003 2,355 3,879 4,730
General and administrative................. 83 120 172 612 611 902
---- ------ ------ ------- ------- -------
Total operating expenses................. 469 867 1,415 3,236 4,964 6,301
---- ------ ------ ------- ------- -------
Income (loss) from operations............ 50 (80) (725) (2,538 ) (1,007) (1,197 )
Interest, net................................ (13) (14) (14) (17 ) (10) (15 )
---- ------ ------ ------- ------- -------
Income (loss) before income taxes........ 37 (94) (739) (2,555 ) (1,017) (1,212 )
Income tax expense........................... -- -- -- (1 ) -- --
---- ------ ------ ------- ------- -------
Net income (loss)........................ $ 37 $ (94) $ (739) $(2,556 ) $(1,017) $(1,212 )
==== ====== ====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET REVENUES
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues................................. 100.0% 100.0% 100.0% 100.0 % 100.0% 100.0 %
Cost of revenues............................. 27.1 22.2 34.0 65.6 34.7 35.3
--------- -------- --------- -------- --------- --------
Gross profit............................... 72.9 77.8 66.0 34.4 65.3 64.7
--------- -------- --------- -------- --------- --------
Operating expenses:
Research and development................... 33.0 21.7 22.9 13.3 7.8 8.5
Sales and marketing........................ 21.2 52.1 95.9 116.2 64.0 59.9
General and administrative................. 11.7 11.9 16.4 30.2 10.1 11.4
--------- -------- --------- -------- --------- --------
Total operating expenses................. 65.9 85.7 135.2 159.7 81.9 79.8
--------- -------- --------- -------- --------- --------
Income (loss) from operations............ 7.0 (7.9) (69.2) (125.3 ) (16.6) (15.1 )
Interest, net................................ (1.8) (1.4) (1.3) (0.8 ) (0.2) (0.2 )
--------- -------- --------- -------- --------- --------
Income (loss) before income taxes........ 5.2 (9.3) (70.5) (126.1 ) (16.8) (15.3 )
Income tax expense........................... -- -- -- -- -- --
--------- -------- --------- -------- --------- --------
Net income (loss)........................ 5.2% (9.3)% (70.5)% (126.1 )% (16.8)% (15.3 )%
========= ======== ======== ======== ========= ========
</TABLE>
The Company's quarterly operating results have fluctuated in the past and
are expected to fluctuate significantly in the future. These fluctuations may
arise from 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. 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. These seasonal elements,
25
<PAGE> 26
together with the other factors that affect quarterly results, can cause net
revenues and net income to vary. The Company's business may be affected by these
seasonal elements in the future.
The Company operates with little order backlog and historically
substantially all of its revenues in each quarter result from orders received in
that quarter. However, with the introduction of First Aid 95 in September 1995,
the Company implemented a policy of deferring a portion of the revenue
associated with its First Aid 95 products, and recognizing such revenue ratably.
At June 30, 1996, the Company's balance sheet included $3.1 million in unearned
revenues to reflect future support commitments and other unspecified
enhancements to First Aid products which will be recognized ratably over
estimated update periods, generally one year from the date of sale. Quarterly
revenues will continue to depend predominately on the volume of orders received
in a particular quarter, which is difficult to forecast.
Net revenues increased from the quarter ended September 30, 1995 to the
quarter ended December 31, 1995 due primarily to the introduction of First Aid
95 in September 1995. Net revenues continued to increase in the quarters ended
March 31, 1996 and June 30, 1996 as a result of sales of increasing unit volumes
of First Aid 95 and the introduction of First Aid 95 Deluxe in March 1996. The
substantial increases in cost of revenues and operating expenses in the fourth
quarter of 1995 and the resulting increase in the net losses reported for that
quarter were primarily attributable to expenditures related to the product
launch of First Aid 95, including manufacturing start-up costs, increased
product return reserves, increased sales and marketing expenses, the
implementation of a direct mail campaign as well as increased general and
administrative expenses required to establish the Company's finance,
administrative and operations groups to provide an adequate infrastructure to
support growth. In addition, the Company's operating results in the fourth
quarter of 1995 were affected by the implementation of the Company's revenue
recognition policy under which a portion of the Company's revenue for First Aid
95 was deferred. The substantial increase in cost of revenues and operating
expenses in the first two quarters of 1996 was primarily attributable to
increased sales and marketing expenses, including costs associated with direct
mail, expenses for the product launch of First Aid 95 Deluxe and increased
staffing levels, particularly in research and development. Beginning in the
second quarter of 1996, the Company has been engaged in an advertising campaign
using print and radio to increase end-user awareness and stimulate purchases.
The Company intends to continue to invest in its use of such advertising to
promote its products for the foreseeable future. See "Risk Factors -- Management
of Growth; Dependence on Key Personnel" and "Business -- Employees."
RECENT QUARTERLY RESULTS
The Company's third quarter ended on September 30, 1996. For the quarter,
the Company had net revenues of approximately $8.7 million and a net loss of
approximately $1.3 million.
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
$1.8 million and a grant of $318,000 administered by the ICICI. In 1993, 1994,
1995 and the first half of 1996, the Company used $651,000, $795,000, $2.5
million and $2.2 million of cash, respectively, in operating activities. In
1993, 1994, 1995 and the first half of 1996, 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 1993, 1994, 1995 and the first half of 1996, the Company's investing
activities consisted of purchases of furniture, fixtures and equipment,
primarily PCs and accessories in the amount of $2,000, $13,000, $67,000 and
$608,000, respectively. The Company expects that its capital expenditures will
increase as the Company's employee base continues to grow. At June 30, 1996, the
Company had no material commitments for capital expenditures.
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<PAGE> 27
To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk.
Management expects that in the future cash in excess of current requirements
will be invested in short-term, interest-bearing, investment grade securities.
At June 30, 1996, the Company had $569,000 in cash and cash equivalents and
a working capital deficit of $2.3 million. 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. See Note 6 of Notes to Financial Statements.
On July 3, 1996, the Company raised approximately $5.0 million through the
issuance of 1,666,667 shares of Series C Preferred Stock, currently convertible
into approximately 833,334 shares of Common Stock. The proceeds from the Series
C Preferred Stock are not included in the Company's Balance Sheet at June 30,
1996. The Company used a portion of the proceeds from this offering to pay down
the $1.3 million outstanding under its revolving line of credit.
The Company believes that the net proceeds from the sale of the Common
Stock offered by the Company hereby, together with 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. Although operating activities may
provide cash in certain periods, to the extent the Company experiences growth in
the future, the Company anticipates that its operating and investing activities
may use cash. Consequently, any such future growth may require the Company to
obtain additional equity or debt financing, which may not be available on
attractive terms, or at all, or may be dilutive.
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.
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<PAGE> 28
BUSINESS
CyberMedia is a leading provider of automatic service and support software
products for PC users in the Windows environment. The Company's products address
the growing technical support demands of PC users. Dataquest estimates that PC
users will make approximately 200 million calls for technical support in 1996.
The Company's products are designed to enable PC users to diagnose and resolve
problems automatically without relying on costly technical support resources.
The Company's products are based on the Company's scalable ActiveHelp
architecture that allows for the support of a broad range of PC products and
related problems and enables the Company's products to be regularly and
automatically updated through the Internet.
CyberMedia is recognized for its successful First Aid family of products
which has sold over one million units to date. The Company's First Aid products
automatically detect, diagnose and resolve common software conflicts and
configuration errors encountered by users in the Windows environment. The
Company has introduced several versions of First Aid, including First Aid 95 and
First Aid 95 Deluxe in September 1995 and March 1996, respectively, for the
retail distribution channels and First Aid 95 Deluxe, Network Version in June
1996 for the corporate market. The First Aid title ranked in the top ten of all
Windows 95 business software applications sold in the United States (by number
of units) in each month from November 1995 through July 1996 (PC Data).
CyberMedia's Oil Change, released in October 1996, is designed to enable PC
users to keep their systems up-to-date, thereby enhancing overall system
performance and avoiding problems frequently encountered as a result of outdated
software and device drivers. Oil Change provides a one-stop solution for PC
users to locate easily many of the most recent software updates and patches
applicable to their systems and download and install them automatically via the
Internet.
The Company sells its products to individual and corporate users primarily
through a combination of retail distribution channels and direct mail. The
Company is expanding the marketing and sale of its products through the
Internet, internationally and through strategic relationships.
INDUSTRY BACKGROUND
The PC industry has grown rapidly during the last decade, with Microsoft
Windows emerging as the dominant operating system. As a result of technological
advances and increased functionality, combined with price decreases for entry
level systems, the PC has become a mass market consumer electronics product.
According to International Data Corporation, the worldwide installed base of PCs
at the end of 1995 had grown to approximately 225 million units. The mass market
appeal of PCs has resulted in an average PC user today who is less
technologically sophisticated than the average PC user of the early 1990s. As
evidence of this trend, Dataquest estimates that between mid-1995 and March 1996
approximately 58% of PCs sold in the United States were purchased by first-time
users.
At the same time that PCs have become more widely adopted, the hardware and
software content of the average PC has become more complex, largely due to the
open environment of the Intel PC-compatible platform. Many PCs today incorporate
high speed processors, hard disk drives, high resolution monitors, sound cards,
graphics boards, CD-ROM drives and other peripherals, which together provide
significantly enhanced processing, storage and multimedia capabilities. The
widespread availability of these increasingly powerful computers has in turn
driven demand for increasingly complex software operating systems and
applications that can take advantage of these enhanced hardware capabilities.
In today's typical Windows-based PC configuration, the integration of a
wide range of hardware and software components from different vendors has
resulted in an increase in both the number and types of system errors and
technical difficulties. The Company believes that a significant portion of
problems commonly encountered by PC users are configuration errors and software
conflicts that
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occur when users add new software applications or devices to their computers.
One typical problem affects Dynamic Link Library ("DLL") files and subroutines,
which perform important printing, spell checking and other widely used
functions. When a new software program is installed, these files are sometimes
moved without the user's knowledge, thereby causing existing applications to no
longer function properly. Other problems can occur for a variety of reasons,
including incorrectly removing applications and accidentally deleting shared
files. The likelihood of such problems is increased in a multimedia environment
where changes in system configurations occur frequently due to the addition of
new games, sound cards, CD-ROM drives and video cards. The complexities
introduced by the accelerating adoption of the Internet has created additional
difficulties, including modem and network configuration problems. Even
experienced PC users can encounter difficulty installing and using new devices
and software because the existing system often must be reconfigured in order to
eliminate the resulting internal conflicts. Additionally, a large number of PC
technical problems are related to new versions of software that are incompatible
with software and device drivers that are already installed on the PC.
Due to the dramatic increase in the complexity of today's PC environment
and the growth in the number of PC users, approximately 200 million calls are
expected to be received at technical support centers nationwide in 1996,
resulting in expenditures of nearly $4 billion (Dataquest). At the same time, in
response to cost pressures in a competitive environment and an often
unmanageable level of technical support calls, many software and hardware
vendors are scaling back or completely eliminating the technical support that
they once provided free of charge with their products. Many vendors now offer
fee-based technical support services, such as 900 telephone numbers and
per-incident support plans. However, customers who select such services often
obtain busy signals or encounter lengthy delays before receiving assistance,
resulting in widespread dissatisfaction among users. Further, such support is
typically vendor-specific and is not designed to resolve compatibility issues or
conflicts between products from multiple vendors.
PC software and hardware vendors have typically released updated software
and device drivers to correct bugs discovered since the latest product release,
improve existing features, ensure compatibility with new devices or add new
features. These updates and "patches" have traditionally been provided free of
charge to users who request them and are distributed via the mail or posted to a
vendor's bulletin board. However, most vendors have been unwilling to incur the
costs of tracking, notifying and shipping product to all users who require such
updates or patches. As a result, PC users are frequently unaware of the
existence or location of vendor-provided updates and patches that can
significantly enhance the performance of their systems.
The Internet is emerging as a medium for vendors to quickly and
cost-effectively distribute software updates and patches. Today, many types of
software updates, from the Windows 95 Service Pack to new hardware device
drivers and bug fixes, are available free over the Internet from a wide range of
vendors. The accessibility of the Internet is enabling new releases of software
to be made available with such rapidity that software is becoming almost
"versionless." However, despite the potential benefits of the Internet as a
distribution medium, to date there is no central, vendor-neutral source for
locating software updates and patches. PC users must still manually log-on to
each vendor's Web site and check for new updates or patches. Few PC users have
the time or technical knowledge required to identify, locate, download and
install the updates and patches that apply to their PCs.
PC users and software and hardware vendors share a common need for the
timely resolution of technical support problems. PC users need a readily
accessible, vendor-neutral, easy-to-use solution that automatically identifies
and fixes their most commonly experienced problems. Software and hardware
vendors need to reduce their technical support burden and costs and to find
channels to rapidly and cost-effectively disseminate updates and patches.
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<PAGE> 30
THE CYBERMEDIA SOLUTION
The CyberMedia solution provides automatic service and support for PC users
and reduces support costs for software and hardware vendors. The Company has
developed an innovative, vendor-neutral, automated approach to technical support
that enables the Company to deliver among the most comprehensive and easy-to-use
software support solutions available today for Windows-based PC users. The
Company's products are based on its scalable ActiveHelp architecture that allows
for the support of a broad range of PC products and related problems and enables
the Company's products to be regularly and automatically updated through the
Internet.
CyberMedia's First Aid products automatically detect, diagnose and resolve
common software conflicts and configuration errors arising in the Windows
environment. The First Aid products are designed to reduce the need for
time-consuming technical support calls. The First Aid products employ a
rule-based engine to compare a PC's current configuration with a set of rules
determining how each application or device should be configured under ideal
conditions. The First Aid products access the Company's HelpCentral knowledge
base of general and system-specific information supporting a wide range of
software applications, multimedia cards, modems, video cards and networks that,
in the aggregate, resolve over 10,000 potential combinations of problems. This
knowledge base is regularly updated by the Company and is accessible to First
Aid users over the Internet.
CyberMedia's Oil Change, released in October 1996, is designed to enable PC
users to keep their systems up-to-date, thereby enhancing overall system
performance and avoiding problems frequently encountered as a result of outdated
software and device drivers. Oil Change provides a one-stop solution for PC
users to easily locate many of the most recent software updates and patches
applicable to their systems and download and install them automatically via the
Internet. Oil Change develops a profile of installed software applications and
device drivers on a user's PC and compares this profile with a local knowledge
base residing on the user's PC and the Company's HelpCentral knowledge base of
information on updates and patches available at vendor Web sites. Upon the
user's request, Oil Change retrieves and installs the selected updates and
patches. As of September 16, 1996, the Company's HelpCentral knowledge base
contained information on over 400 updates and patches from approximately 200
vendors, including Microsoft, Hewlett-Packard Company ("Hewlett-Packard") and
Creative Labs, Inc. ("Creative Labs").
THE CYBERMEDIA STRATEGY
The Company's objective is to be the leading provider of automatic service
and support software products. Key elements of the Company's business strategy
include:
Maintain Market Leadership in Automatic Service and Support Software. With
the broad market acceptance of its First Aid products, the Company is widely
recognized as a leader in providing automatic service and support for PC users.
The Company seeks to maintain its leadership by being first to market with
innovative products and product upgrades that leverage the Company's proprietary
technology and incorporate feedback from its extensive user base.
Offer Comprehensive, Scalable Solutions. The Company's goal is to offer
comprehensive products that address most common technical support problems faced
by PC users and that are regularly updated to support their evolving needs.
These products are designed to enable PC users to diagnose and resolve problems
automatically without relying on costly technical support resources. The Company
maintains and regularly updates comprehensive knowledge bases of information on
a wide range of PC hardware and software products and related technical support
problems and on available updates and patches for commonly used software
applications and device drivers. These knowledge bases are easily accessible to
users of CyberMedia's products at the Company's Internet site.
Leverage the Internet. The Company believes that the Internet represents an
efficient medium for the delivery of automatic service and support and seeks to
develop products that can be continually updated and delivered over this medium.
The Company seeks to establish Oil Change as the de facto
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<PAGE> 31
standard for PC users to obtain updates and patches to third-party software
applications and device drivers over the Internet. The Company's open
architecture approach enables it to easily and rapidly incorporate support for
new updates, patches and other technical support information as they become
available on vendor Web sites. The Company is exploring potential revenue
opportunities using the unique information and access provided through the Oil
Change platform, including the sale of new full product releases of third-party
software and ancillary products and targeted advertising.
Pursue Strategic Alliances. The Company intends to pursue strategic
alliances with third-party hardware and software vendors to enhance the
functionality and increase the distribution of its automatic service and support
products. The Company is pursuing OEM relationships with leading PC and
peripherals vendors, operating systems software companies and other software
vendors to bundle full and limited versions of its products. The Company has
recently entered into an agreement with Phoenix Technologies Ltd. ("Phoenix"), a
leading provider of system-level software for PCs, to market its products on an
OEM basis to manufacturers of PCs and PC-compatible hardware devices. The
Company has also established a Medallion Partnership program for its Oil Change
product to encourage hardware and software vendors to communicate information
about new updates and patches to the Company as soon as they become available.
The Company also intends to provide third-party hardware and software vendors
with CyberScript, its powerful scripting language under commercial development,
to enable them to incorporate technical support information on new products
directly into the Company's HelpCentral knowledge bases. The Company believes
that these relationships will increase brand recognition of its products, expand
its customer base and provide early access to leading edge software, multimedia
and Internet/on-line technologies.
Promote Brand Awareness. The Company believes that brand awareness is a key
factor in software purchase decisions and, to that end, the Company strives to
develop products that achieve strong customer appeal, customer loyalty and long
life cycles. The Company seeks to reinforce and strengthen CyberMedia, First Aid
and Oil Change as leading brand names in automatic service and support by
increasing its level of public relations, advertising and direct marketing
activities and by establishing strategic relationships with hardware and
software vendors.
Expand International Presence. The Company intends to invest significant
resources to adapt its automatic service and support products to international
markets and expand its sales and marketing efforts overseas. The Company
currently sells its products internationally through authorized distributors in
the United Kingdom and Australia and is developing localized versions of certain
of its First Aid products for the French, German and Japanese markets. The
Company recently introduced the French and German versions of its First Aid
products and expects to introduce the Japanese version in 1997.
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PRODUCTS
The Company's products are designed to enable PC users to diagnose and
resolve problems automatically without relying on costly technical support
resources. The Company's scalable ActiveHelp architecture allows the Company's
products to support a broad range of PC products and related problems and to be
regularly and automatically updated through the Internet. The Company's products
also protect system integrity by creating a backup of all changes to critical
configuration files, enabling a user to restore their PC to a prior
configuration if desired. Each of the Company's products includes a 60-day
unconditional money-back guarantee. CyberMedia has developed the following
ActiveHelp products:
ACTIVEHELP PRODUCTS
<TABLE>
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------
SUGGESTED
PRODUCT DATE INTRODUCED STREET PRICE* DESCRIPTION
---------------------------------------------
------------------------------------------------------------------------------------------------------------
First Aid 95 Ver 2.0 - Sep. 95 $39.95 Automated technical support for
configuration errors and software conflicts
occurring on Windows-based PCs
------------------------------------------------------------------------------------------------------------
First Aid 95 Deluxe Ver 3.0 - Mar. 96 $59.95 Incorporates the core features of First Aid
95 and PC911 with the ability to obtain
automatic updates through the Internet
------------------------------------------------------------------------------------------------------------
First Aid 95 Deluxe, Ver 3.0 - Jun. 96 $32 per user** First Aid 95 Deluxe designed for corporate
Network Version local area networks
------------------------------------------------------------------------------------------------------------
PC911 Ver 1.0 - Sep. 94 $19.95 Automatically backs up all important
configuration files and parameters on a PC
and creates and updates an emergency disk
------------------------------------------------------------------------------------------------------------
Tech Support Ver 1.0 - Jun. 96 $19.95 Reference book and CD-ROM with contact
Yellow Pages information for 2,000 software and hardware
vendors
------------------------------------------------------------------------------------------------------------
Oil Change Ver 1.0 - Oct. 96 $39.95 Automatically downloads and installs
updates and patches to commonly used
software applications and device drivers
via the Internet
------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
* Actual prices vary depending on local conditions, distribution channels and
other factors.
** Based on a ten-user site license.
First Aid
The Company is recognized for its First Aid family of products with over
one million units sold to date. The First Aid family of products is designed to
detect, diagnose and resolve a wide range of software conflicts and
configuration problems associated with Windows-based PCs, using the Company's
knowledge base of product and vendor-specific technical support information.
This knowledge base, which is installed locally on a PC when First Aid is
installed, can be updated by connecting to CyberMedia's HelpCentral Internet
site, which houses a regularly updated knowledge base.
In 1994, 1995 and the first half of 1996, virtually all of the Company's
sales have been from the First Aid family, which includes First Aid, First Aid
95, First Aid 95 Deluxe and PC911. The First Aid title has ranked in the top ten
of all Windows 95 software applications sold in the United States (by number of
units) in each month from November 1995 through June 1996 (PC Data). First Aid
products are currently available for Windows 3.1, Windows 95 and Windows for
Workgroups 3.11.
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LOGO
First Aid 95. The Company's flagship product, First Aid 95, has won
numerous awards, including the Windows Sources Stellar Award (December 1995) and
the PC Pro 4 Stars Award. Key features of First Aid 95 include the following:
- Fixes configuration and setup problems with Windows applications by
ensuring that all DLL files required by an application at startup are
present in the correct directories. Locates and copies misplaced DLLs to
the correct directories when needed.
- Performs thorough feature-by-feature checks on many popular
applications. Detects and fixes problems caused by misplaced DLLs and
invalid entries in Windows configuration files.
- Detects setup problems with many popular multimedia cards and CD-ROM
drives. Corrects problems by installing proper drivers and modifying
configuration files as needed.
- Identifies and resolves many setup problems with modems, on-line access
services and local area networks.
- Intercepts most General Protection Faults and other crashes. Returns
users to their original application where they can save their work.
Enables users to save their work that may have been lost otherwise.
- Verifies whether disk caches, memory buffers and other parameters on a
PC have been set for optimal performance. Makes recommendations that can
help boost PC performance.
- Allows users to recover hard disk space by removing and archiving
infrequently used features in many popular applications.
First Aid 95 Deluxe. Released in March 1996, First Aid 95 Deluxe is an
enhanced version of First Aid 95. First Aid 95 Deluxe includes all the features
of First Aid 95 and adds the following functions:
- Automatically monitors changes in a PC's configuration files and
maintains a history of the last 50 changes. Enables users to restore the
PC to a prior working configuration if the PC fails to work properly.
- Creates an emergency disk that backs up all critical files and
parameters. The emergency disk can be used to reboot and restore a PC's
setup files in the event these files are destroyed.
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<PAGE> 34
- Enables users to update the First Aid knowledge base on their PCs
through automatic downloads from HelpCentral, an up-to-date knowledge
base residing on the Company's Internet server.
- Provides contact information for over 2,000 hardware and software
vendors, including direct "hot-links" to their Web sites.
The Company has implemented a marketing program to allow registered users
of First Aid 95 to upgrade to First Aid 95 Deluxe for $19.95 (plus shipping and
handling).
First Aid 95 Deluxe, Network Version. First Aid 95 Deluxe, Network Version
is specifically designed for use in Windows-based network environments. The
Network Version is designed to minimize internal support costs in an
organization by enabling PC users to fix many common problems without the
intervention of technical support professionals. The Network Version is
currently available on Windows 3.1, Windows 95 and Windows for Workgroups 3.11
and the Company expects to release a Windows NT version in the fourth quarter of
1996. The Network Version incorporates the following additional capabilities to
the stand-alone version of First Aid 95 Deluxe:
- Enables network administrators to install First Aid 95 Deluxe directly
from a network server.
- Automatically notifies network administrators of problems on users' PCs.
- Enables administrators to set preferences and security levels.
First Aid 97. First Aid 97, scheduled for introduction in the fourth
quarter of 1996, is an upgrade to the existing First Aid products. First Aid 97
combines all of the features of First Aid 95 Deluxe with additional diagnostic
checks and a simplified user interface. In addition, First Aid 97 incorporates
the following new features:
- Allows users to get instant, up-to-date help and advice by clicking on a
picture of a PC component or selecting from a list of common problems or
questions.
- Searches the Internet in the event of a crash to find updates and
patches that may prevent future crashes.
- Helps resolve hard disk problems and makes safety backups of a user's
work with Windows 95 disk repair tools.
- Helps resolve hardware configuration conflicts.
- Fixes additional problems associated with multimedia, Internet/on-line
and software applications.
PC911. PC911 helps users recover from problems caused by changes in
configuration files resulting from the installation or removal of hardware and
software. Upon startup, PC911 automatically detects and logs any changes it
finds in the PC's configuration files. In the event of problems following
installation or removal of hardware or software, users can use PC911 to restore
a prior working setup, or review all changes that occurred since installation or
removal. Many critical configuration files and parameters, if lost or corrupted,
can also prevent a PC from booting up. PC911 also creates an emergency disk that
backs up all such files and parameters, enabling them to be restored in case of
catastrophic failure.
PC911 was first introduced in September 1994. In order to promote the First
Aid brand name, the Company has incorporated the main features of PC911 into
First Aid 95 Deluxe and discontinued sales of PC911 through the retail
distribution channels. At present, PC911 is sold only through direct mail and
third-party catalogs.
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<PAGE> 35
Tech Support Yellow Pages
Tech Support Yellow Pages is an easy-to-use reference book and CD-ROM that
allows users to access contact information for over 2,000 hardware and software
vendors. Users can receive updates to the Tech Support Yellow Pages CD-ROM via
downloads from the Company's HelpCentral. The CD-ROM provides users with
Internet access with "hot links" to connect directly to any vendor Web site.
Oil Change
Oil Change is an Internet-based software product under development that is
designed to provide a one-stop solution for PC users to locate easily the most
recent software updates and patches applicable to their systems and download and
install them automatically via the Internet. Oil Change is designed to enable PC
users to keep their systems up-to-date, thereby enhancing overall system
performance and avoiding problems frequently encountered as a result of outdated
software and device drivers.
Oil Change examines a user's PC and develops a profile of the installed
software applications and hardware device drivers. Oil Change first checks a
local knowledge base, then connects to CyberMedia's HelpCentral server through
the Internet to compare this profile with the Company's regularly updated
central knowledge base of information on updates and patches available at
various vendor Web sites. Oil Change offers the user a list of available updates
and patches and the problems that these updates and patches are intended to
resolve. Upon the user's request, Oil Change retrieves and installs selected
updates and patches.
Oil Change currently supports many of the best selling software
applications and device drivers. The Company has also established a Medallion
Partnership program to encourage hardware and software vendors to communicate
information about new updates and patches to the Company as soon as they become
available. As of September 16, 1996, the Company's HelpCentral knowledge base
contained information on over 400 updates and patches from approximately 200
vendors, including Microsoft, Hewlett-Packard and Creative Labs.
LOGO
Oil Change was released in October 1996 and made available through the
CyberMedia Web site at www.cybermedia.com. The initial version of Oil Change is
designed to run on the Windows 95 platform. The street price for Oil Change is
approximately $39.95 for a one-year subscription, which includes an initial
setup fee.
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<PAGE> 36
TECHNOLOGY
The Company's proprietary ActiveHelp technology consists of three
components, Agents, HelpCentral and CyberScript, which together provide an open,
scalable architecture for developing and continually updating the Company's
automatic service and support software products. The Company's ActiveHelp
architecture is illustrated below.
LOGO
Each of the Company's products incorporates Agents, client-level software
that detects and solves problems locally at the user's PC. These Agents connect
to CyberMedia's HelpCentral server through the Internet to access centralized
knowledge bases of up-to-date technical support information. Information on
HelpCentral is inputted and continually updated using CyberScript, the Company's
powerful proprietary scripting language. CyberScript enables technical support
information to be easily defined and added to HelpCentral in a standardized
format.
The technology components of CyberMedia's principal product lines, First
Aid and Oil Change, are described below.
First Aid
Agent. The First Aid Agent's primary function is to detect and solve
software conflicts and configuration problems locally at the user's PC. The
Agent can be activated directly by the user or set to run in the background to
be activated automatically upon the occurrence of certain events such as General
Protection Faults or system crashes. Once activated, the First Aid Agent gathers
data from the PC and then utilizes a rule-based diagnostic engine to compare a
PC's current configuration with a set of rules determining how each application
or device should be configured under ideal conditions. The First Aid Agent
includes a local version of the Company's HelpCentral knowledge base of systems,
software and hardware-related configuration information. If a problem cannot be
resolved locally, the First Aid Agent can connect to CyberMedia's HelpCentral
server through the Internet to update the local knowledge base with the
Company's up-to-date central knowledge base. Once a problem has been diagnosed,
the Agent displays the likely cause and proposed solution and presents the user
with
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<PAGE> 37
an "AutoFix" button. If the user selects this option, the Agent will then
automatically implement the solution.
HelpCentral. To support the First Aid Agent, CyberMedia's HelpCentral
knowledge base maintains up-to-date general and system-specific information
supporting a wide range of software applications, multimedia cards, modems,
video cards, and networks that, in the aggregate, resolve over 10,000 potential
combinations of problems. Hardware and software products are described in terms
of the configuration required for them to function properly. For example, a
software application is described in terms of the program files and DLLs that it
requires, and a multimedia card is described by the drivers and configuration
entries it requires. Vendor-specific information is also maintained on the
HelpCentral knowledge base, including addresses, telephone numbers and Web
addresses for over 2,000 hardware and software vendors. The information
maintained at HelpCentral is currently updated on a regular basis to support new
products and changes in vendor information.
Oil Change
Agent. The Oil Change Agent scans a user's PC to determine the installed
software applications and device drivers and builds a profile of every software
file, its location and current revision level. Once the profile has been
developed, the Oil Change Agent first contacts a local knowledge base residing
on the user's PC, then contacts CyberMedia's HelpCentral server through the
Internet to compare this profile with the Company's regularly updated knowledge
base of information on updates and patches available at various vendor Web
sites. The Agent displays all newer updates or patches and downloads those that
the user selects directly from the vendor's Web site. The Agent then unpacks and
installs the downloaded updates and patches. To ensure safety, the Agent creates
a backup of all changes, enabling a user to restore to the prior configuration
if desired.
HelpCentral. To support the Oil Change Agent, HelpCentral maintains
up-to-date information on new updates and patches for commonly used software
applications and device drivers. Information provided for each update and patch
is described in terms of its on-line location, the revision levels it represents
and its installation instructions. The information maintained at HelpCentral is
updated regularly by Company programmers who monitor new postings of upgrades
and patches on the Internet. The Company's Medallion Partners also communicate
information about new updates and patches to the Company via the Internet as
soon as they become available at their Web sites. The information is then
authenticated by the Company and added to the HelpCentral knowledge base. As of
September 16, 1996, the Company's HelpCentral knowledge base contained
information on over 400 updates and patches from approximately 200 vendors,
including Microsoft, Hewlett-Packard and Creative Labs.
CyberScript. A key component of CyberMedia's technology is CyberScript, a
powerful proprietary scripting language that enables product-specific knowledge
and other technical support information to be defined and added to HelpCentral
in a standardized format. In the future, the Company intends to publish the
specifications for CyberScript and make it available to third-party hardware and
software vendors to enable them to incorporate technical support information on
new products directly into the Company's HelpCentral knowledge bases. The
Company intends to develop easy-to-use interfaces and other development tools
for CyberScript so that it can be used by third parties with only minimal
training.
DISTRIBUTION AND MARKETING
Distribution
The Company sells its products to individual and corporate users primarily
through a combination of retail distribution channels and direct mail. The
Company is expanding the marketing and sale of its products through the
Internet, internationally and through certain strategic partners.
Domestic. The Company's principal domestic channels of distribution are
through software distributors for resale to the retail sales channel and through
direct mail. In addition, the Company's products can be ordered through the
Company's Web site. Sales to the Company's top three
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distributors, Navarre, Ingram Micro and Micro Central, accounted for
approximately 22%, 20% and 11%, respectively, of the Company's net revenues in
the six months ended June 30, 1996, and 9%, 16% and 19%, respectively, of net
revenues in 1995. The Company's products are currently available at more than
9,000 locations through major retailers, including CompUSA Inc., Sam's Club,
Micro Center, Egghead Software, Computer City, Fry's Electronics, Inc., Office
Depot, Inc., Best Buy and Price Costco Inc.
The Company maintains a stock balancing policy that allows distributors and
retailers to return products for credit. In addition, the Company provides price
protection to its distributors in the event the Company reduces its prices. The
Company establishes reserves, including reserves under the Company's stock
balancing policy, 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. Product returns or obligations resulting from the Company's price
protection policy that exceed the Company's reserves could adversely affect the
Company's business, results of operations and financial condition.
During 1995 and the first half of 1996, direct sales accounted for
approximately 40% of net revenues. Sales through direct mail are outsourced to
third-party mailing and fulfillment houses. The Company sells First Aid 95
Deluxe, Network Version through a limited direct sales organization comprised of
telesales, catalog and sales representatives to corporate customers.
International. Internationally, the Company markets its products through
authorized distributors in the United Kingdom and Australia who resell to retail
stores and through retailers. To date, international sales have accounted for
less than 5% of the Company's net revenues. The Company is developing localized
versions of certain of its First Aid products for the French, German and
Japanese markets. The Company recently introduced the French and German versions
of its First Aid products and expects to introduce the Japanese version in 1997.
Marketing
The Company's marketing strategy in retail distribution channels has
typically focused on high impact product packaging, end-caps and rebate coupons.
In addition, the Company seeks to increase market share and brand recognition
through public relations activities involving introducing its products to local
user groups and obtaining press coverage in regional and national trade and
technical publications. From time to time, the Company utilizes aggressive
direct mail campaigns targeted specifically at Windows-based PC users. Beginning
in the second quarter of 1996, the Company has been engaged in an advertising
campaign using print and radio to increase end-user awareness and stimulate
purchases. The Company intends to continue to invest in its use of such
advertising to promote its products for the foreseeable future.
CyberMedia's marketing activities also include participation in trade and
computer shows and cooperative advertising programs directly with certain
distributors and retailers, whereby the Company receives marketing opportunities
through advertisements, brochures, and catalogs initially paid for by the
distributors. The Company provides for expenses related to these programs in
amounts established in the individual distributor agreements or in modifications
thereto. Additionally, the Company from time to time offers rebates to end users
who purchase the Company's products.
The Company's sales and marketing force as of July 31, 1996 consisted of 34
people, all of whom receive salaries, commissions, and/or incentive bonus
compensation. The Company's in-house marketing department coordinates most of
the design and development of the Company's product packaging, advertisements
and promotional items.
Strategic Alliances
CyberMedia seeks to establish strategic alliances with third-party hardware
and software vendors to enhance the functionality and increase the distribution
of its automatic service and support
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products. The Company is pursuing OEM relationships with leading PC and
peripherals vendors, operating systems software companies and other software
vendors to bundle full and limited versions of its products.
In September 1996, CyberMedia entered into a Distribution Agreement with
Phoenix. Under the terms of the Agreement, the Company granted Phoenix the
exclusive right to distribute First Aid 95 Deluxe and a limited version of Oil
Change, together with any upgrades, updates, enhancements and future releases
and versions thereof, to manufacturers of PCs. The Company also granted Phoenix
non-exclusive distribution rights to distribute and sublicense the
above-mentioned products to all other PC-compatible hardware device
manufacturers. The Company believes that Phoenix's worldwide OEM relationships
with leading PC manufacturers will enhance distribution of the Company's new and
existing products.
CyberMedia and Phoenix are negotiating an agreement to develop add-on
products to First Aid for resale and distribution into the OEM and other
channels. The Company expects to enter into a definitive agreement during the
fourth quarter of 1996.
The Company has also recently entered into an OEM relationship with Diamond
Multimedia Systems, Inc. to provide a limited version of First Aid 95 Deluxe for
bundling with all of its products and license agreements with NEC Technologies,
Inc. and Fujitsu PC Corporation to provide a full version of First Aid 95 Deluxe
for bundling with certain of their products. The Company has also established a
Medallion Partnership program for its Oil Change product to encourage hardware
and software vendors to communicate information about new updates and patches to
the Company as soon as they become available. The Company also intends to make
CyberScript available to third-party hardware and software vendors to enable
them to incorporate technical support information on new products directly into
the Company's HelpCentral knowledge bases. The Company believes that these
relationships will increase brand recognition of its products, expand its
customer base and provide early access to leading edge software, multimedia and
Internet/on-line technologies.
TECHNICAL SUPPORT
The Company provides free telephone support to purchasers of its software
products during its regular business hours. End users are able to consult
directly with software support personnel with respect to software use, hardware
problems and peripheral needs or receive on-line support. The Company provides a
substantial amount of its technical support through on-line forums, such as
America Online, Inc. and CompuServe. In addition, the Company plans to offer its
corporate clients a variety of fee-based options, providing a range of service
levels designed to meet their technical support requirements. In Europe,
technical support is provided through third parties. As of July 31, 1996, the
Company had 17 professionals in technical support.
PRODUCT DEVELOPMENT
The Company believes that significant investment in product development is
required in order to remain competitive, accelerate the rate of product
introductions, incorporate new technologies, and sustain and improve the quality
of its products. In addition to engineering and quality assurance, the Company's
product development activities include the identification and validation of a
product's potential commercial success, as well as the incorporation of new
technologies in new products. The Company seeks to gain pre-release access to
and develop expertise in current and future versions of Windows and other
leading hardware and software products in order to develop and release such
products on a timely basis. The Company incorporates market research into the
design and development of its products to anticipate the evolving technical
support needs of PC users. In addition, the Company works closely with hardware
and software manufacturers to identify their technical support requirements and
to incorporate this feedback into the development of the Company's products.
These efforts are critical in enabling the Company to be competitive, improve
quality and consistency, update its current products and bring new products to
market quickly.
The Company's principal current product development efforts include: (i)
developing new releases of its First Aid product line, including First Aid 97
scheduled for release in the fourth quarter of 1996, (ii) enhancing its
HelpCentral knowledge bases to provide support for new third-party
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products and updates and patches to current applications, (iii) completing the
commercial development of Oil Change, (iv) broadening the appeal of First Aid
products in the corporate and international markets by providing support for the
Windows NT operating system and developing localized products for international
markets, (v) developing additional products that address evolving automatic
service and support requirements, and (vi) developing CyberScript for use by
third parties to incorporate information about their products into the Company's
knowledge base.
The Company utilizes work-for-hire software engineers in India to update
its knowledge bases to support new third-party products, updates and patches and
to develop a Windows NT version of its First Aid 95 Deluxe, Network Version. The
Company has exclusive ownership of all products developed by such engineers and
has no royalty obligations to these engineers.
Research and development expenses during 1993, 1994, 1995 and the first
half of 1996 were approximately $468,000, $544,000, $964,000 and $1.1 million,
respectively. As of July 31, 1996, the Company had 30 full-time employees in
research and development. See "Risk Factors -- New Product Development and
Technological Change."
COMPETITION
The PC software industry is intensely competitive and characterized by
short product life cycles and 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 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, developed its own technical support software and incorporated such
functionality into its products, the Company's business, results of operations
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
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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. See "-- Industry Background."
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.
The Company believes that the principal competitive factors in the software
industry are product features and quality, reliability, ease of use, brand name
recognition, access to distribution channels and price. Although the Company
believes it competes favorably with respect to these factors, there can be no
assurance that the Company will continue to do so. See "Risk
Factors -- Competition."
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 industry to protect its proprietary rights. The Company licenses its
products primarily under "shrink wrap" license agreements that are not signed by
licensees and therefore may be unenforceable under the laws of certain
jurisdictions. In addition, the Company has two United States patent
applications pending and intends to seek international and further United States
patents on its technology. There can be no assurance that patents will issue
from the Company's pending applications or that any claims allowed from the
pending patent applications or those hereafter filed will be of sufficient scope
or strength, or be issued in all countries where the Company's products can be
sold, to provide meaningful protection or any commercial advantage to the
Company or that any patents which may be issued to the Company will not be
challenged and invalidated. In addition, existing copyright laws provide only
limited protection. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy or otherwise obtain and use
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
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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.
OPERATIONS
The production of the Company's software products includes diskette
duplication, purchased component assembly, printing of user manuals and final
packaging. The Company contracts with outside parties to perform these functions
to the Company's specifications and quality standards. The Company currently
does not have long-term agreements with any of these parties. 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 could
adversely affect the Company's business, results of operations and financial
condition until replacement sources are established. In addition, any material
changes in product and service quality and pricing or failure to adhere to the
Company's specifications by these outside parties could adversely affect the
Company's business, results of operations and financial condition. The Company
has attempted to mitigate the risk of any such disruption by maintaining certain
levels of "safety stock" inventories and using second source vendors in certain
limited situations. In the past, the Company has experienced material
difficulties and delays in the manufacture and assembly of its products. There
can be no assurance that the Company will not continue to experience such
difficulties in the future. As of July 31, 1996, the Company had a total of
three employees in operations. See "Risk Factors -- Reliance on Outside
Resources."
BACKLOG
The Company normally ships products within one week after receipt of an
order. As a result, the Company has relatively little backlog at any time and
does not consider backlog to be a significant indicator of future performance.
EMPLOYEES
At July 31, 1996, the Company employed a total of 104 full-time employees,
including three in operations, 34 in sales and marketing, 17 in technical
support, 30 in research and development and 20 in finance and administration.
The Company also employs, from time to time, a number of temporary and part-time
employees as well as consultants on a contract basis. The Company has
experienced rapid growth in the past year and intends to hire additional
personnel during the next twelve months in each of these areas. The Company's
future success will depend in part on its ability to attract, train, retain and
motivate highly qualified employees, who are in great demand. There can be no
assurance that the Company will be successful in attracting and retaining such
personnel. The Company's employees are not represented by a collective
bargaining organization, and the Company has never experienced a work stoppage
or strike. The Company considers its employee relations to be good. See "Risk
Factors -- Management of Growth; Dependence on Key Personnel."
FACILITIES
The Company leases approximately 16,000 square feet of office space in
Santa Monica, California. These facilities serve as the Company's headquarters
and include all Company functions except outside sales. The Company believes
that its facilities are adequate for its current needs and that suitable
additional or alternative space will be available in the future on commercially
reasonable terms as needed.
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LEGAL PROCEEDINGS
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, 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. 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.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company as of September 25,
1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- --- --------------------------------------------
<S> <C> <C>
Unni S. Warrier 42 President, Chief Executive Officer and
Chairman of the Board
Leonard L. Backus 43 Vice President, International Sales
Jeffrey W. Beaumont 44 Vice President, Finance and Chief Financial
Officer
Srikanth Chari 44 Vice President, Marketing
Brad Kingsbury 32 Vice President, Engineering
Anne T. Lam 38 Vice President, Business Development
Charles M. Valentine 58 Vice President, Sales
Paul Dali(1) 54 Director
Peter Morris(1) 40 Director
Suhas Patil(1) 52 Director
Ronald S. Posner(2) 54 Director
Kanwal Rekhi(2) 49 Director
James R. Tolonen(2) 47 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Each director will hold office until the next Annual Meeting of
Stockholders and until his successor is elected and qualified or until his
earlier resignation or removal. Each officer serves at the discretion of the
Board of Directors (the "Board").
Mr. Warrier has served as President, Chief Executive Officer and Chairman
of the Board of the Company since co-founding the Company in November 1991. From
February 1991 to November 1991, he served as an independent consultant. From May
1989 to February 1991, he served as President and Chief Executive Officer of
NetLabs, Inc., a maker of UNIX network management products, which Mr. Warrier
co-founded. Mr. Warrier holds a B. Tech. in Physics from the Indian Institute of
Technology of Kanpur, India and a M. Tech. in Computer Science from the Indian
Institute of Technology of Madras, India. Mr. Warrier has also completed
coursework for a Ph.D in Computer Science from the University of California, Los
Angeles.
Mr. Backus has served as Vice President, International Sales of the Company
since April 1996. Prior to joining the Company, from October 1995 to April 1996,
he served as a Principal for Technology Marketing Alliance, a consulting
company. Prior to that, Mr. Backus served as Vice President, International Sales
and Marketing, of MediaVision Technology, Inc., a computer hardware manufacturer
from July 1994 to October 1995, and as Director of International Sales of
MediaVision Technology, Inc. from February 1991 to July 1994. Mr. Backus holds a
B.S. in Electrical Engineering from the University of Washington and an M.S. in
Electrical Engineering from the University of Southern California.
Mr. Beaumont has served as Vice President, Finance and Chief Financial
Officer of the Company since December 1995. From June 1995 to December 1995, he
served as an independent consultant to various companies. Prior to joining the
Company, from October 1994 to June 1995, he served as Chief Financial Officer of
Blyth Holdings, Inc., a software development company. From August 1989 to
October 1994, Mr. Beaumont served as Chief Financial Officer at Davidson &
Associates, Inc., an educational software development company. Mr. Beaumont
holds a B.A. in History from Hamilton College and an M.B.A. from the University
of Michigan.
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Dr. Chari has served as Vice President, Marketing since co-founding the
Company in November 1991. From November 1991 to August 1996, Dr. Chari also
served as a director of the Company. From July 1990 to October 1991, he served
as Director of Marketing for NetLabs, Inc. Dr. Chari holds a B. Tech. in
Electrical Engineering from the Indian Institute of Technology of Delhi, India,
an M.B.A. from the Indian Institute of Management of Ahmedabad, India and a
Ph.D. in Business from the University of California, Los Angeles.
Mr. Kingsbury has served as Vice President, Engineering of the Company
since April 1996. Prior to joining the Company, from July 1985 to April 1996, he
served in various positions at Symantec Corporation, a software utilities
company, most recently as Chief Technologist and General Manager of the
Anti-Virus Business Unit. Mr. Kingsbury holds a B.S. in Computer Science from
California State University, Northridge.
Ms. Lam has served as Vice President, Business Development since
co-founding the Company in November 1991. From November 1991 to August 1996, Ms.
Lam also served as a director of the Company. From May 1989 to October 1991, she
served as Director, Strategic Sales of NetLabs, Inc, a company which she
co-founded. Ms. Lam holds a B.S. and an M.S. in Computer Science from the
University of California, Los Angeles.
Mr. Valentine has served as Vice President, Sales of the Company since
September 1996. Prior to joining the Company, from June 1992 to September 1996,
he served as Strategic Accounts Director of Microsoft, a software company. From
April 1990 to June 1992, Mr. Valentine served as Vice President, Sales of Fox
Software, Inc., a database software company. Mr. Valentine holds a B.S. in
Industrial Management from the Georgia Institute of Technology.
Mr. Dali has served as a director of the Company since September 1995.
Since December 1991, he has served as a general partner at Nazem & Company, a
venture capital investment firm. Prior to this, he served as Chief Executive
Officer of Regis McKenna, Inc., a marketing consulting company, and as General
Manager of Apple Computer, Inc. Mr. Dali holds a B.S. in Finance from California
State University, Northridge.
Mr. Morris has served as a director of the Company since September 1995.
Since January 1993, he has served as a partner at New Enterprise Associates, a
venture capital firm. From January 1991 to December 1992, he served as an
Associate at New Enterprise Associates. From February 1990 to December 1990, he
served as General Manager at Telebit, a communications company. Mr. Morris holds
a B.S. in Electrical Engineering and an M.B.A. from Stanford University.
Dr. Patil has served as a director of the Company since September 1995.
Since February 1984, he has served as Chairman of the Board of Cirrus Logic,
Inc., a manufacturer of advanced integrated circuits for personal computing,
communications, industrial and consumer markets, which Dr. Patil founded. Dr.
Patil holds a B. Tech and an M.S. in Electronics and Electrical Communication
from the Indian Institute of Technology of Kharagpur, India and a Sc.D. in
Electrical Engineering from Massachusetts Institute of Technology.
Mr. Posner has served as a director of the Company since September 1995.
Since January 1996, he has served as Chairman of the Board of Graphix Zone,
Inc., a CD-ROM publishing company, and since October 1993 he served as a
co-founder and Chairman of the Board of StarPress Multimedia, Inc., a CD-ROM
publishing company that merged with Graphix Zone, Inc. in July 1996. From
September 1990 to October 1993, he served as Chairman of the Board and Chief
Executive Officer of WordStar International, Inc., a PC software company. Mr.
Posner holds a B.S. in Mathematics from Renssalaer Polytechnic Institute and an
M.B.A. from Harvard University.
Mr. Rekhi has served as a director of the Company since September 1995.
From June 1989 to January 1995, Mr. Rekhi served as an Executive Vice President
and Chief Technology Officer of Novell, Inc. ("Novell"), a local area network
and software company. Mr. Rekhi also served as a director of Novell from June
1989 to September 1995. Mr. Rekhi currently serves as a director of Castelle,
Inc., a communications company, and Gupta, Inc., a database software company.
Mr. Rekhi holds a B. Tech. from
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the Indian Institute of Technology of Bombay, India and an M.S. in Electrical
Engineering from Michigan Technological University.
Mr. Tolonen has served as a director of the Company since August 1996.
Since June 1989 he has served as an Executive Vice President and Chief Financial
Officer of Novell. Mr. Tolonen also served as Chief Financial Officer of
Excelan, Inc., a networking company, from July 1983 through June 1989 before it
was acquired by Novell. Mr. Tolonen is a Certified Public Accountant and holds
both a B.S. in Mechanical Engineering and an M.B.A. from the University of
Michigan. Mr. Tolonen is currently the Chair of the Issuer Affairs Committee of
the Nasdaq.
BOARD COMMITTEES
The Board of Directors has a Compensation Committee, consisting of Messrs.
Dali, Morris and Patil and an Audit Committee, consisting of Messrs. Posner,
Rekhi and Tolonen. The Compensation Committee makes recommendations to the Board
concerning salaries and incentive compensation for the Company's officers and
employees and administers the Company's Amended 1993 Stock Plan and 1996
Employee Stock Purchase Plan. The Audit Committee reviews the results and scope
of the audit and other accounting related services and reviews and evaluates the
Company's internal control functions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee of the Board is an
officer or employee of the Company. No interlocking relationship exists between
the Company's Board or Compensation Committee and the Board of Directors or
compensation committee of any other company, nor has such an interlocking
relationship existed in the past.
The Company has entered into indemnification agreements with each of its
directors and officers. Such agreements require the Company to indemnify such
individuals to the fullest extent permitted by law. See
"Management -- Limitation of Liability and Indemnification Matters."
DIRECTOR COMPENSATION
The Company reimburses its directors for the out-of-pocket expenses
incurred in the performance of their duties as directors of the Company. The
Company does not currently pay fees to its directors for attendance at board
meetings. In October 1995, Messrs. Rekhi, Patil and Posner each received, in
recognition for their services to the Company as consultants, a nonstatutory
option exercisable to purchase 75,000 shares of the Company's Common Stock at an
exercise price of $0.14 per share. These options have a term of ten years and
vest over four years from the date of grant, assuming continued service by such
individuals as consultants of the Company. During the six months ended June 30,
1996, each of Messrs. Rekhi, Patil and Posner have exercised such options in
full, subject to the Company's right of repurchase which lapses over four years
from the date of the original option grants. In August 1996, in recognition of
his services to the Company as a consultant, Mr. Tolonen received a nonstatutory
option exercisable to purchase 75,000 shares of the Company's Common Stock at an
exercise price of $6.00 per share. This option has a term of ten years and vests
over four years from the date of grant, assuming continued service by Mr.
Tolonen as a consultant to the Company. See "-- Employee Benefit
Plans -- Amended 1993 Stock Plan" and "Certain Transactions."
1996 Director Option Plan. The Company's 1996 Director Option Plan (the
"Director Plan") provides for the automatic and nondiscretionary grant of
nonstatutory stock options to nonemployee directors of the Company who are first
elected to the Board after the adoption of the Director Plan ("Outside
Directors"). The Director Plan was approved by the Board in June 1996 and
stockholders in August 1996. A total of 50,000 shares of Common Stock are
reserved for issuance thereunder. Each Outside Director will automatically be
granted an option to purchase 5,000 shares on the date on which such person
first becomes an Outside Director ("First Option") at the fair market value of
the Company's Common Stock on the date of grant. Each First Option will become
exercisable as to one-
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fourth ( 1/4) of the shares subject to the option on the first anniversary of
the date of grant and as to one-forty-eighth ( 1/48) of the shares subject to
the option each month thereafter, subject to continued service as an Outside
Director. In addition, each Outside Director will be automatically granted an
option to purchase 5,000 shares on December 1 of each year beginning in 1997,
provided he or she has served on the Board for at least six months ("Subsequent
Option"). Each Subsequent Option shall have an exercise price equal to the fair
market value of the Company's Common Stock as of the date of grant and shall
become exercisable as to one-fourth ( 1/4) of the shares subject to the
Subsequent Option three years and one month after the date of grant and as to
one-forty-eighth ( 1/48) of the shares on the last day of each month thereafter,
subject to continued service as an Outside Director.
In the event of the merger of the Company with or into another corporation
or sale of substantially all of the assets of the Company, each option shall
immediately become fully exercisable.
Options granted under the Director Plan have a term of ten years unless
terminated sooner upon termination of the optionee's status as a director or
otherwise pursuant to the Director Plan. Such options may not be transferred
other than by will or the laws of descent and are exercisable during the
lifetime of an Outside Director only by such Outside Director. Unless terminated
sooner, the Director Plan will terminate in 2006. The Board has the right to
amend or terminate the Director Plan, provided no such action may impair the
rights of any optionee without the optionee's consent.
EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation awarded, earned
or paid for services rendered to the Company in all capacities during the fiscal
year ended December 31, 1995 by the Company's Chief Executive Officer and each
of the Company's other executive officers whose total annual compensation
exceeded $100,000 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS
- ------------------------------------------------------------ -------- ----- ----------
<S> <C> <C> <C>
Unni S. Warrier............................................. $123,461 $500 79,550
President, Chief Executive Officer and Chairman of the
Board
Srikanth Chari.............................................. 104,654 500 42,775
Vice President, Marketing
Anne T. Lam................................................. 104,654 500 41,650
Vice President, Business Development
</TABLE>
The following table sets forth certain information concerning grants of
stock options to each of the Named Executive Officers during fiscal 1995. No
stock appreciation rights were granted to these individuals during such year.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
INDIVIDUAL GRANTS (1) AT ASSUMED ANNUAL
-------------------------------------------------------- RATES OF STOCK
NUMBER OF % OF TOTAL PRICE APPRECIATION
SHARES OPTIONS FOR OPTION TERM
UNDERLYING GRANTED TO EXERCISE (2)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ------------------
NAME GRANTED FISCAL YEAR SHARE (3) DATE (3) 5% 10%
- --------------------------- ---------- -------------- ------------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Unni S. Warrier............ 79,550 9.5% $0.14 12/06/05 $7,004 $17,750
Srikanth Chari............. 42,775 5.1 0.14 12/06/05 3,678 9,321
Anne T. Lam................ 41,650 5.0 0.14 12/06/05 3,667 9,293
</TABLE>
- ---------------
(1) The stock options granted to the Named Executive Officers in fiscal year
1995 were fully vested and exercisable on the date of grant.
(2) The potential realizable value is based on the term of the option at the
time of grant (ten years). Assumed stock price appreciation of five percent
and ten percent is used pursuant to the rules
47
<PAGE> 48
promulgated by the Securities and Exchange Commission (the "Commission") and
does not represent the Company's estimate or projection of future Common
Stock prices. The potential realizable value is calculated by assuming that
the deemed fair value of the Company's Common Stock for financial statement
presentation purposes on the date of grant appreciates at the indicated rate
for the entire term of the option and that the option is exercised at the
exercise price and sold on the last day of its term at the appreciated
price.
(3) All options are granted at an exercise price equal to the fair market value
of the Company's Common Stock, as determined by the Board on the date of
grant, and have a term of 10 years.
The above table does not reflect options granted in January 1996 as
follows: Messrs. Warrier and Chari and Ms. Lam were granted options to purchase
150,050, 100,050 and 90,050 shares of Common Stock, respectively, at an exercise
price of $1.20 per share.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
No named officer exercised a stock option during 1995. The following table
sets forth certain information with respect to the stock options held by each of
the Named Executive Officers as of December 31, 1995.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1995 DECEMBER 31, 1995
----------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------- ----------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Unni S. Warrier......................... 292,050 -- $4,644,663 --
Srikanth Chari.......................... 142,775 -- 2,270,412 --
Anne T. Lam............................. 166,650 -- 2,648,903 --
</TABLE>
- ---------------
(1) Based upon an assumed initial public offering price of $16.00 per share less
the exercise price of the option.
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS
The Company has entered into employment agreements with each of its
founders, including Srikanth Chari, Anne T. Lam and Unni S. Warrier with the
following terms: (i) in the event any founder is terminated without cause on or
after the date six months from September 29, 1995, the Closing of the Series B
Preferred Stock financing (the "Series B Closing") and prior to twelve months
from the date of the Series B Closing, the Company shall continue to pay such
founder's salary and provide benefits to such founder for a period of eighteen
months from the effective date of termination; (ii) in the event any founder is
terminated without cause on or after the date one year from the Series B Closing
and prior to eighteen months from the Series B Closing, the Company shall
continue to pay such founder's salary and provide benefits for a period of
twelve months from the date of termination; and (iii) in the event any founder
is terminated without cause on or after the date eighteen months from the Series
B Closing, the Company shall continue to pay such founder's salary and provide
benefits for a period of six months from the date of termination. All options to
purchase stock held by such founder shall continue to vest for one year from the
date of a termination under (i) or (ii) above and for six months from the date
of termination under (iii) above. In addition, the Company has entered into an
agreement with each of Mr. Chari and Ms. Lam that provides for the immediate
vesting of all of such individual's outstanding options in the event that the
Company terminates such individual without cause. Mr. Kingsbury and Mr.
Valentine have also entered into Employment Agreements with the Company which
provide for accelerated vesting of certain options upon termination without
cause following a change in control.
The Director Plan provides for accelerated vesting of all outstanding
options granted to directors thereunder upon a change in control in certain
circumstances. No options have been granted under the 1996 Director Plan prior
to this offering. See "-- Director Compensation -- 1996 Director Option Plan."
48
<PAGE> 49
EMPLOYEE BENEFIT PLANS
Amended 1993 Stock Plan. The Company's 1993 Stock Plan was adopted by the
Board in February 1993 and approved by the Company's stockholders in June 1993.
The 1993 Stock Plan was amended by the Board in June 1996 and approved by the
Company's stockholders in August 1996 (the "Amended 1993 Plan"). As of June 30,
1996, options to purchase an aggregate of 1,513,016 shares of Common Stock were
outstanding under the Company's Amended 1993 Plan at a weighted average exercise
price of $1.51 per share and 127,459 shares of Common Stock were reserved for
future issuance. The aggregate maximum number of shares that may be issued under
the Amended 1993 Plan is currently 3,902,000 shares of Common Stock, which
number includes an additional 1,000,000 shares authorized and reserved for
issuance under the Amended 1993 Plan in August 1996. Additionally, contingent
and effective upon the closing of this offering, the Board and stockholders have
approved an amendment to the Amended 1993 Plan that provides for an annual
increase in the maximum aggregate number of shares of Common Stock which may be
optioned and sold under the Amended 1993 Plan to the lesser of (i) 500,000
shares of Common Stock, (ii) six percent of the shares of Common Stock
outstanding on such date or (iii) an amount determined by the Board. The Amended
1993 Plan provides for (i) the granting to employees (including officers and
employee directors) of "incentive stock options" within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), (ii) the
granting to employees and consultants of nonstatutory stock options and (iii)
the granting of restricted stock purchase rights ("SPRs") to employees and
consultants.
The Amended 1993 Plan may be administered by the Board or a committee of
the Board (the "Administrator") and is currently administered by the Company's
Compensation Committee. Generally, options granted under the Amended 1993 Plan
become exercisable, assuming continued service with the Company, with respect to
one-fourth ( 1/4) of the shares covered by the option twelve months after the
date of grant and thereafter vest and become exercisable at a rate of
one-forty-eighth ( 1/48) of the shares subject to the option each month, with
the option being fully exercisable four years after the date of the grant. Each
option is fully exercisable upon grant subject to the Company's right to
repurchase the shares received upon exercise. This repurchase right lapses over
the same term as the option would have vested. To the extent that the aggregate
fair market value of the shares with respect to which options designated as
incentive stock options are exercisable for the first time by any optionee
during any calendar year exceeds $100,000, such excess options shall be treated
as nonstatutory stock options. The Administrator determines the terms of options
and SPRs granted under the Amended 1993 Plan, including the number of shares
subject to the option or SPR, exercise price, term and the rate at which the
options become exercisable. The exercise price of all incentive stock options or
SPRs granted under the Amended 1993 Plan must be at least equal to the fair
market value of the Common Stock of the Company on the date of grant. The
exercise price of any incentive stock option or SPR granted to an optionee who
owns stock representing more than 10% of the voting power of all classes of
stock of the Company must equal at least 110% of the fair market value of the
Common Stock on the date of grant. With respect to any participant who owns
stock possessing more than 10% of the voting power of all classes of stock of
the Company, the term of an incentive stock option is limited to five years or
less. The term of all other options may not exceed ten years. In the case of
SPRs, unless the Administrator determines otherwise, the Company has a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with the Company for any reason (including death or
disability). The aforementioned repurchase option lapses at a rate determined by
the Administrator. The purchase price for shares so repurchased by the Company
is the original price paid by the purchaser and may be paid by cancellation of
any indebtedness of the purchaser to the Company. The exercise price may be paid
in such consideration as determined by the Administrator, including cash and
promissory notes. If not terminated earlier, the Amended 1993 Plan will
terminate in 2003. Subject to certain limitations, the Board has the authority
to amend or terminate the Amended 1993 Plan as long as such action does not
adversely affect any outstanding option.
In the event of a proposed sale of all or substantially all of the
Company's assets, or a merger of the Company with or into another corporation,
each option and SPR may be assumed or an equivalent option or right substituted
by the successor corporation. In the absence of assumption or substitution
49
<PAGE> 50
of such options or SPRs, an optionee will have the right to exercise such option
or SPR as to all of the shares of stock covered by the option or SPR.
1996 Employee Stock Purchase Plan. The Company's 1996 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board in June 1996 and
approved by the Company's stockholders in August 1996. A total of 100,000 shares
of Common Stock are reserved for issuance under the Purchase Plan. The Purchase
Plan is intended to qualify as an employee stock purchase plan under Section 423
of the Internal Revenue Code of 1986, as amended, and is administered by the
Board or by a committee appointed by the Board. Employees (including officers
and employee directors of the Company) are eligible to participate if they are
employed by the Company (or a subsidiary of the Company designated by the Board)
for at least 20 hours per week, and for more than five months per calendar year.
The Purchase Plan permits eligible employees to purchase Common Stock through
payroll deductions, which may not exceed 10% of an employee's compensation. No
employee may purchase more than $25,000 worth of stock in any calendar year. The
Purchase Plan is divided into 24-month offering periods, each of which contains
four, six month purchase periods. The Purchase Plan is implemented through
consecutive, overlapping offering periods, with new exercise periods within each
offering period commencing on the first trading day on or after July 31 and
January 31 of each year. The initial offering period under the Purchase Plan
will begin on the effective date of this offering and end on August 31, 1998.
Subsequent offering periods will begin on the first trading day following
termination of an exercise period within a prior offering period and shall
terminate 24 months later. Each participant will be granted an option on the
first day of each offering period and such option will be automatically
exercised on the last day of each six month exercise period within such offering
period. The price of shares purchased under the Purchase Plan is 85% of the
lower of the fair market value of the Common Stock of the Company at (i) the
beginning of the offering period or (ii) the end of the applicable six month
exercise period. Employees may end their participation in the offering at any
time during the offering period, and participation ends automatically on
termination of employment with the Company. In the event of a merger of the
Company with or into another corporation, each option under the Purchase Plan
shall be assumed or an equivalent option shall be substituted by the surviving
entity, unless the Board determines, in lieu of such assumption or substitution,
to shorten the offering period in progress and set a new option exercise date.
If the Board shortens the offering period then in progress, each participant
shall be notified at least ten business days prior to the new exercise date, and
unless such participant ends his or her participation, the option will be
exercised automatically on the new exercise date. The Purchase Plan will
terminate in 2006, unless sooner terminated by the Board.
401(k). The Company sponsors a 401(k) Plan under which eligible employees
may contribute, on a pre-tax basis, up to 15% of the employee's total annual
income from the Company, excluding bonuses, subject to certain IRS limitations.
The Company may make discretionary contributions to the plan. All full-time
employees who have attained age 18 are eligible to participate in the plan. All
contributions are allocated to the employee's individual account and, at the
employee's election, are invested in one or more investment funds available
under the plan. Employee contributions are fully vested and nonforfeitable.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company intends to reincorporate in the State of Delaware immediately
prior to the effectiveness of this Prospectus. The Company decided to
reincorporate in the State of Delaware, in part, to take advantage of certain
provisions in the Delaware General Corporation Law (the "Delaware Code")
relating to limitations on liability of corporate officers and directors. The
Company believes that its reincorporation in Delaware, the provisions of its
Amended and Restated Certificate of Incorporation, Bylaws and the separate
indemnification agreements outlined below are all necessary to attract and
retain qualified persons as directors and officers.
At the time of reincorporation, the Company's Amended and Restated
Certificate of Incorporation will limit the liability of directors to the
maximum extent permitted by Delaware law. This provision in the Amended and
Restated Certificate of Incorporation does not eliminate directors' fiduciary
duty
50
<PAGE> 51
and in appropriate circumstances equitable remedies, such as injunctive or other
forms of non-monetary relief. Delaware law provides that directors of a
corporation will not be personally liable for monetary damages for breach of
their fiduciary duties as directors, except for liability (i) for any breach of
their duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law, (iii) for unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the Delaware Code, or
(iv) for any transaction from which the director derived an improper personal
benefit. This provision does not limit or eliminate the rights of the Company or
any stockholder to seek non-monetary relief such as injunction or rescission in
the event of a breach of a director's duty of care, nor does it affect the right
of a party to sue (or to recover monetary damages) under federal securities
laws.
At the time of reincorporation, the Company's Bylaws will provide that the
Company shall indemnify its directors and executive officers and may indemnify
its other officers, employees and agents to the fullest extent permitted by law.
The Company's Bylaws also permit the Company to secure insurance on behalf of
any officer, director, employee or agent for any liability arising out of his or
her actions in such capacity, regardless of whether the Bylaws would permit
indemnification.
In addition to indemnification provided for in the Company's Bylaws, the
Company will also enter into indemnification agreements with its directors and
officers. These agreements may require the Company, among other things, to
indemnify the Company's directors and officers for certain expenses (including
attorneys' fees), judgments, fines and settlement amounts incurred by any such
person in any action or proceeding, including any action by or in the right of
the Company, arising out of such person's services as a director or officer of
the Company, any subsidiary of the Company or any other company or enterprise to
which the person provides services at the request of the Company. The Company
believes that these provisions and agreements are necessary to attract and
retain qualified directors and officers.
The Company has obtained an insurance policy providing directors' and
officers' liability coverage. At present, there is no pending litigation or
proceeding involving any director, officer, employee or agent of the Company
where indemnification will be required or permitted. The Company is not aware of
any threatened litigation or proceeding that might result in a claim for such
indemnification.
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<PAGE> 52
CERTAIN TRANSACTIONS
Since its inception, the Company has issued, in private placement
transactions, shares of Preferred Stock as follows: 2,959,658 shares of Series A
Preferred Stock at $0.35 per share, 6,371,429 shares of Series B Preferred Stock
at $0.70 per share and 1,666,667 shares of Series C Preferred Stock at $3.00 per
share. In addition, the Company issued to the purchasers of the Series A
Preferred Stock warrants to purchase an aggregate of 1,766,471 shares of Series
A Preferred Stock at a weighted average exercise price of $0.35 and $0.45 per
share during 1994 and 1995, respectively. The holders of Common Stock into which
such shares of Preferred Stock are convertible are entitled to certain
registration rights with respect to such Common Stock. See "Description of
Capital Stock -- Registration Rights." Each share of the Company's Preferred
Stock automatically converts into one-half share of Common Stock upon the
closing of this offering. The following table sets forth the series of Preferred
Stock and number of shares purchased by the Company's executive officers,
directors, five percent stockholders and their respective affiliates:
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS, WARRANTS TO
DIRECTORS AND SERIES A PURCHASE SERIES A SERIES B SERIES C TOTAL
5% STOCKHOLDERS PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK CONSIDERATION
- ------------------------ --------------- ----------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Unni S. Warrier......... 28,571 47,619 -- 31,000 $ 119,667
Anne T. Lam............. 28,571 47,619 -- 45,255 162,432
Srikanth Chari(1)....... 12,000 47,619 -- 28,000 104,867
Brad Kingsbury.......... -- -- -- 33,333 99,999
Leonard L. Backus....... -- -- -- -- --
Jeffrey W. Beaumont..... -- -- -- -- --
Charles M. Valentine.... -- -- -- -- --
Suhas Patil............. 1,400,093 1,207,714 1,000,000 33,333 1,429,202
Kanwal Rekhi(2)......... 142,857 -- 122,857 167,745 639,235
Paul Dali(3)............ -- -- 1,428,571 118,190 1,354,570
Ronald S. Posner........ -- -- 357,143 37,255 361,765
Peter Morris............ -- -- -- 8,333 24,999
James R. Tolonen........ -- -- -- -- --
Entities affiliated with
Draper
Associates(4)......... -- -- 1,071,428 63,644 940,932
Entities affiliated with
New Enterprise
Associates(5)......... -- -- 1,800,000 140,254 1,680,762
Entities affiliated with
Nazem & Company IV,
L.P.(3)............... -- -- 1,428,571 118,190 1,354,570
</TABLE>
- ---------------
(1) Includes 12,000 shares purchased by Srikanth Chari and Padma Chari, Trustees
of the Chari Family Trust U/D/T dated June 10, 1996.
(2) Includes 75,671 shares purchased by Kanwal Rekhi, Ann Holt Rekhi and
Navinder Jain, Trustees of the Benjamin Rekhi Trust dated 12/15/89, 75,672
shares purchased by Kanwal Rekhi, Ann Holt Rekhi and Navindera Jain,
Trustees of the Raj-Ann Kaur Rekhi Trust dated 12/15/89 and 155,615 shares
purchased by Kanwal Rekhi as Trustee of the Rekhi Family Trust dated
12/15/89.
(3) Includes 1,546,761 shares purchased by Nazem & Company IV, L.P. Mr. Dali is
a director of the Company and a general partner of Nazem & Company IV, L.P.
Mr. Dali disclaims beneficial ownership of such shares except to the extent
of his pecuniary interest therein.
(4) Includes 567,536 shares purchased by Draper Associates II, L.P., 31,822
shares purchased by Draper International India, L.P. and 535,714 shares held
by Draper International Holdings, L.P.
(5) Includes 14,286 shares and 1,925,968 shares purchased by NEA Ventures 1995,
L.P. and New Enterprise Associates VI, Limited Partnership, respectively.
Mr. Morris is a director of the
52
<PAGE> 53
Company and is a partner at New Enterprise Associates. Because Mr. Morris
does not have voting or dispository control over such shares, other than the
8,333 shares that Mr. Morris purchased, he disclaims beneficial ownership
over the shares of which he has no pecuniary interest.
In May 1992, the Company entered into a promissory note for $200,000 with
Suhas Patil, a director of the Company, at an interest rate of 6%. In October
1994, pursuant to the Series A Preferred Stock financing, Dr. Patil converted
$175,000 of the note into 500,000 shares of Series A Preferred Stock. The
balance of $25,000 was paid in cash to Dr. Patil in February 1995.
In September 1993, the Company entered into a promissory note at an
interest rate of 8% for $152,500 with Suhas Patil, a director of the Company,
and a certain other Investor. In February 1994, pursuant to the Company's Series
A Preferred Stock financing, the note and all accrued interest was converted
into shares of Series A Preferred Stock.
In June 1994, the Company obtained a $500,000 loan from the Industrial
Credit Development and Investment Corporation of India at an interest rate of
U.S. Prime Rate, plus 2.25%. The principal is payable to ICICI in ten quarterly
installments. The Company has repaid $50,000 of the loan to date and will
commence repayment of the remaining outstanding principal as of January 1997. In
order to secure the loan, Dr. Patil was required to personally guarantee
$300,000 of the loan amount. The remaining $200,000 was personally guaranteed by
certain founders of the Company, including Messrs. Warrier and Chari and Ms.
Lam. In consideration for their personal guarantees, the Company issued warrants
to purchase up to an aggregate of 900,000 shares of the Company's Series A
Preferred Stock at an exercise price of $0.35 per share. Messrs. Warrier and
Chari and Ms. Lam received warrants to purchase 47,619, 42,857 and 47,619 shares
of the Company Series A Preferred Stock, respectively.
In June 1995, the Company borrowed $500,000 as a Bridge Loan at an interest
rate of 8% from various investors of the Company including Kanwal Rekhi, a
director of the Company. The Company issued Mr. Rekhi warrants to purchase 7,143
shares of Common Stock at $1.40 per share in connection with this loan. This
Bridge Loan was repaid in full in September 1995. All warrants for common stock
will expire if not exercised prior to the closing of this offering.
In September 1995, Dr. Patil invested $700,000 in the Series B Preferred
Stock financing, $250,000 of which was represented by the conversion of a series
of loans to the Company at an interest rate of 8% which were made in order for
the Company to meet then-existing financial requirements. The Company and Dr.
Patil agreed that these advances would be converted into shares of Series B
Preferred Stock. In consideration for the loans provided to the Company, Dr.
Patil received warrants to purchase 17,857 shares of the Company's Common Stock
at an exercise price of $1.40 per share.
In connection with the sale of the Series B Preferred Stock, the Founders,
the holders of the Series A Preferred Stock and holders of the Series B
Preferred Stock (the holders of Series A Preferred Stock and Series B Preferred
Stock are hereafter "Investors") entered into a Key Employees' Right of First
Refusal, Co-Sale and Voting Agreement (the "Voting Agreement"), pursuant to
which, among other things, the Company agreed to take all actions to (i) cause
the nomination of one person designated by Nazem & Company IV, L.P. ("Nazem")
(the "Nazem Director") and one person designated by New Enterprise Associates
VI, L.P. ("NEA") (the "NEA Director") for election as directors of the Company
for so long as the holders of Series B Preferred Stock hold at least 20% of the
outstanding shares of capital stock, (ii) cause the nomination of up to three
individuals designated by the holders of shares of Common Stock and Series A
Preferred Stock of the Company (the "Series A Directors") voting together as a
single class, on an as converted basis, one of whom will be the Chief Executive
Officer of the Company, and (iii) to cause the nomination of up to four
additional directors ("Additional Directors") each of which must be (A)
nominated by any one of such aforementioned directors, (B) approved by the
remainder of such aforementioned directors and (C) elected by the holders of a
majority of the shares of Common Stock, Series A Preferred Stock and Series B
Preferred Stock voting together as a single class, on an as converted basis. The
current NEA Director is Mr. Morris, the current Nazem Director is Mr. Dali, the
current Series A Director is Mr. Warrier and the current Additional Directors
are Messrs. Rekhi, Patil, Tolonen and Posner. The Company's obligations
53
<PAGE> 54
to nominate a Nazem Director and NEA Director do not terminate upon the
effectiveness of this offering.
The Voting Agreement provides that in the event a Founder proposes to sell
or transfer to a third party any Common Stock of the Company, then the Founder
must first offer the Company the right to purchase such securities at the same
price and on the same terms and conditions as the Founder has received from such
third party for a period of 15 days during which the Founder cannot sell or
transfer any Common Stock. Notice of the Company's election to accept, in whole
or in part, must be made in writing by an officer of the Company prior to the
expiration of the 15 day period. If the Company does not elect to purchase all
of such securities, the Company shall give notice to the Investors and shall
offer to sell to each Investor a portion of securities not elected to be
purchased by the Company on the same terms for a period of 20 days ("Investment
Offer").
In addition, the Voting Agreement provides investors with the right to
participate in any sale or transfer by a Founder to a proposed transferee upon
the same terms and conditions as set forth in an Investment Offer, provided that
(i) the Founder proposes to sell more than 5% of the total shares of Common
Stock held by such Founder during any twelve-month period or (ii) such sale or
transfer would result in a proposed transferee acquiring more than 5% of the
total outstanding capital stock of the Company on a fully diluted and converted
basis. The Voting Agreement provides that in instances where Investors have the
right to participate in sales or transfer by a Founder, each Investor shall have
the right to sell up to that number of shares of Common Stock equal to the
product of (i) the amount of securities offered by the transferring Founder
multiplied by (ii) a fraction, the numerator of which is the number of shares of
Common Stock owned or entitled to be received upon conversion of any Preferred
Stock owned by each Investor at the time of such sale or transfer, and the
denominator of which is the total number of shares of Common Stock owned or
entitled to be received upon conversion of any Preferred Stock owned by the
Founder and the Investors as a group, at the time of such sale or transfer. See
"Risk Factors -- Control by Existing Stockholders" and " -- Anti-takeover
Provisions."
In March 1995, the Company entered into employment agreements with each of
its founders, including Srikanth Chari, Anne T. Lam and Unni S. Warrier, with
the following terms: (i) in the event any founder is terminated without cause on
or after the date six months from September 29, 1995, the Closing of the Series
B Preferred Stock financing, (the "Series B Closing"), and prior to twelve
months from the date of the Series B Closing, the Company shall continue to pay
such founder's salary and provide benefits to such founder for a period of
eighteen months from the effective date of termination; (ii) in the event any
founder is terminated without cause on or after the date one year from the date
of Closing and prior to eighteen months from the date of Closing, the Company
shall continue to pay such founder's salary and provide benefits for a period of
twelve months from the date of termination; and (iii) in the event any founder
is terminated without cause on or after the date eighteen months from the date
of Closing, the Company shall continue to pay such founder's salary and provide
benefits for a period of six months from the date of termination. All options to
purchase stock held by such founder shall continue to vest for one year from the
date of a termination under (i) or (ii) above and for six months from the date
of termination under (iii) above. In addition, the Company has entered into an
agreement with each of Mr. Chari and Ms. Lam that provides for the immediate
vesting of all of such individual's outstanding options in the event that the
Company terminates such individual without cause. Mr. Kingsbury and Mr.
Valentine have also entered into Employment Agreements with the Company which
provide for accelerated vesting of certain options upon termination without
cause following a change of control.
In October 1995, each of Messrs. Rekhi, Patil and Posner received, in
recognition for their services to the Company as consultants, a nonstatutory
option exercisable to purchase 75,000 shares of the Company's Common Stock at an
exercise price of $0.14 per share. These options have a term of ten years and
vest over four years from the date of grant, assuming continued service by such
individuals as consultants of the Company. Each of Messrs. Rekhi, Patil and
Posner have exercised such options in full subject to the Company's right of
purchase which lapses over four years from the date of the
54
<PAGE> 55
original option grants. In August 1996, in recognition of his services to the
Company as a consultant, Mr. Tolonen received a nonstatutory option exercisable
to purchase 75,000 shares of the Company's Common Stock at an exercise price of
$6.00 per share. This option has a term of ten years and vests over four years
from the date of grant, assuming continued service by Mr. Tolonen as a
consultant to the Company. See "Management -- Director Compensation."
The Company has entered into indemnification agreements with each of its
directors and executive officers. These agreements require the Company to
indemnify such individuals to the fullest extent allowed by Delaware law for
certain liabilities to which they may be subject as a result of their
affiliation with the Company. See "Management -- Limitation of Liability and
Indemnification Matters."
The Company believes that all transactions set forth above were made on
terms no less favorable to the Company than would have been obtained from
unaffiliated third parties. The Company has adopted a policy whereby all future
transactions between the Company and its officers, directors and affiliates will
be on terms no less favorable to the Company than could be obtained from
unrelated third parties and will be approved by a majority of the disinterested
members of the Company's Board of Directors.
55
<PAGE> 56
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of June 30, 1996 and as
adjusted to reflect the sale of the shares of Common Stock offered hereby by (i)
each stockholder who is a beneficial owner of more than 5% of the Company's
Common Stock, (ii) each director, (iii) each executive officer (see
"Management -- Executive Compensation") and (iv) all executive officers and
directors as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(1)
---------------------
NUMBER OF BEFORE AFTER
BENEFICIAL OWNER SHARES BENEFICIALLY OWNED OFFERING OFFERING
- -------------------------------------------------- ------------------------- -------- --------
<S> <C> <C> <C>
Suhas Patil(2).................................... 1,963,427 21.9% 17.1%
c/o Cirrus Logic, Inc.
3100 West Warren Avenue
Fremont, CA 94538
New Enterprise Associates(3)...................... 970,127 10.8 8.4
2490 Sand Hill Road
Menlo Park, CA 94025
Paul Dali(4)...................................... 773,381 8.6 6.7
3000 Sand Hill Road
Menlo Park, CA 94025
Nazem & Company IV, L.P.(4)....................... 773,381 8.6 6.7
3000 Sand Hill Road
Menlo Park, CA 94025
Unni S. Warrier(5)................................ 695,695 7.7 6.1
c/o CyberMedia, Inc.
3000 Ocean Park Blvd.
Suite 2001
Santa Monica, CA 90405
Draper Entities(6)................................ 567,536 6.3 4.9
50 Fremont Street, Suite 3500
San Francisco, CA 94105
Anne T. Lam(7).................................... 427,423 4.8 3.7
Kanwal Rekhi(8)................................... 298,873 3.3 2.6
Srikanth Chari(9)................................. 294,635 3.3 2.6
Ronald S. Posner(10).............................. 272,199 3.0 2.4
Brad Kingsbury(11)................................ 16,667 * *
Peter Morris(12).................................. 4,167 * *
James R. Tolonen(13).............................. -- -- --
Jeffrey W. Beaumont(14)........................... -- -- --
Leonard L. Backus(15)............................. -- -- --
Charles M. Valentine(16).......................... -- -- --
All Executive Officers and Directors as a Group
(13 persons)(17)................................ 4,746,467 52.8 41.3
</TABLE>
- ---------------
* Less than 1%.
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
Shares of Common Stock subject to options or warrants that are currently
exercisable or exercisable within 60 days of June 30, 1996 are deemed to be
outstanding and to be beneficially owned by the person holding such options
or warrants for the purpose of computing the percentage ownership of such
person but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
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<PAGE> 57
(2) Includes 75,000 shares of Common Stock subject to the Company's repurchase
option which lapses over time. See "Management -- Director Compensation."
(3) Represents 14,286 shares and 1,925,968 shares held by NEA Ventures 1995,
L.P. and New Enterprise Associates VI, Limited Partnership, respectively.
Mr. Morris is a director of the Company and is a partner at New Enterprise
Associates. Because Mr. Morris does not have voting or dispositive control
over such shares, other than the 4,167 shares that Mr. Morris holds, he
disclaims beneficial ownership over the shares of which he has no pecuniary
interest.
(4) Represents 1,546,761 shares held of record by Nazem & Company IV, L.P. Mr.
Dali, a general partner of Nazem & Company IV, L.P., is a director of the
Company. Mr. Dali disclaims beneficial ownership of such shares except to
the extent of his pecuniary interest therein.
(5) Includes 50 shares subject to options that are currently exercisable or
exercisable within 60 days of June 30, 1996.
(6) Represents 567,536 shares held by Draper Associates II, L.P., 31,822 shares
held by Draper International India, L.P. and 535,714 shares held by Draper
International Holdings, L.P. William Draper is a general partner of Draper
International LLC and may be deemed to beneficially own the shares held by
Draper International India, L.P. and Draper International Holdings, L.P.
Mr. Draper disclaims beneficial ownership of all such shares except to the
extent of his pecuniary interest therein arising from his general
partnership interest. Timothy C. Draper is a general partner of Draper
Associates II, L.P. and may be deemed to beneficially own the shares held
by such entity. Mr. Draper disclaims beneficial ownership of all such
shares except to the extent of his pecuniary interest therein arising from
his general partnership interest.
(7) Includes 50 shares subject to options that are currently exercisable or
exercisable within 60 days of June 30, 1996.
(8) Represents 75,671 shares held by Kanwal Rekhi, Ann Holt Rekhi and Navinder
Jain, Trustees of the Benjamin Rekhi Trust dated 12/15/89, 75,672 shares
held by Kanwal Rekhi, Ann Holt Rekhi and Navindera Jain, Trustees of the
Raj-Ann Kaur Rekhi Trust dated 12/15/89 and 141,058 shares held by Kanwal
Rekhi as Trustee of the Rekhi Family Trust dated 12/15/89 and 7,143 shares
held by Mr. Rekhi. Includes 75,000 shares subject to the Company's
repurchase option which lapses over time. See "Management -- Director
Compensation."
(9) Includes 256,775 shares held by Srikanth Chari and Padma Chari, Trustees of
the Chari Family Trust U/D/T dated June 10, 1996. Includes 50 shares
subject to options that are currently exercisable or exercisable within 60
days of June 30, 1996.
(10) Includes 75,000 shares subject to the Company's repurchase option which
lapses over time. See "Management -- Director Compensation."
(11) In April, 1996, Mr. Kingsbury was granted an option to purchase for 172,500
shares of Common Stock. None of such shares are subject to options that are
currently exercisable or exercisable within 60 days of June 30, 1996.
(12) Mr. Morris is a director of the Company and is a partner at New Enterprise
Associates. Because Mr. Morris does not have voting or dispositive control
over such shares, other than the 4,167 shares that Mr. Morris holds, he is
not deemed to beneficially own such shares except for his pecuniary
interest therein.
(13) Mr. Tolonen was elected to the Board in August 1996 and granted an option
to purchase for 75,000 shares of Common Stock. None of such shares are
subject to options that are currently exercisable or exercisable within 60
days of June 30, 1996.
(14) In December 1995, Mr. Beaumont was granted an option to purchase for 75,000
shares of Common Stock. None of such shares are subject to options that are
currently exercisable or exercisable within 60 days of June 30, 1996.
(15) In April 1996, Mr. Backus was granted an option to purchase for 50,000
shares of Common Stock. None of such shares are subject to options that are
currently exercisable or exercisable within 60 days of June 30, 1996.
(16) In September 1996, Mr. Valentine joined the Company and was granted an
option to purchase 150,000 shares of Common Stock. Of such options, options
to purchase 37,500 shares were immediately exercisable.
(17) Includes the shares and options referenced in footnotes (2), (4), (5) and
(7) through (12).
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<PAGE> 58
DESCRIPTION OF CAPITAL STOCK
Upon the closing of the sale of the shares offered hereby, the authorized
capital stock of the Company will consist of 50,000,000 shares of Common Stock,
$0.01 par value, and 2,000,000 shares of Preferred Stock, $0.01 par value. As of
June 30, 1996, and assuming the sale of Series C Preferred Stock, the exercise
of all outstanding warrants and the conversion of each outstanding share of
Preferred Stock into one-half share of Common Stock upon the closing of this
offering, there were outstanding 8,982,449 shares of Common Stock held of record
by approximately 150 stockholders and options to purchase 1,513,016 shares of
Common Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board out of funds legally available therefor. See "Dividend
Policy." In the event of a liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior rights of Preferred
Stock, if any, then outstanding. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions available to the Common Stock. All outstanding shares of
Common Stock are fully paid and non-assessable, and the shares of Common Stock
to be issued upon completion of this offering will be fully paid and non-
assessable.
PREFERRED STOCK
Upon the closing of this offering, the Company will be authorized to issue
2,000,000 shares of undesignated Preferred Stock. The Board of Directors will
have the right to issue the undesignated Preferred Stock in one or more series
and to determine the powers, preferences and rights and the qualifications,
limitations or restrictions granted to or imposed upon any wholly unissued
shares of undesignated Preferred Stock and to fix the number of shares
constituting any series and the designation of such series, without any further
vote or action by the Company's stockholders. The issuance of Preferred Stock
may have the effect of delaying or preventing a change in control of the Company
without further action by the stockholders and may adversely affect the market
price of, and the voting and other rights of the holders of Common Stock. Upon
the closing of this offering, the Company will have no shares of Preferred Stock
outstanding. At present, the Company has no plans to issue any shares of
Preferred Stock. See "Antitakeover Effects of Delaware Law."
WARRANTS
As of June 30, 1996, warrants to purchase 116,311 shares of Common Stock
were outstanding at prices ranging from $1.40 to $4.50 per share. In addition,
warrants to purchase 1,766,471 shares of Series A Preferred Stock were
outstanding, at prices ranging from $0.35 to $0.70 per share, respectively.
These warrants will terminate if not exercised upon the closing of this
offering. The Company anticipates that all of the warrants will be exercised
prior to the closing of this offering. Certain of the warrants provide that the
warrant holder may exercise the warrant without payment of cash by surrendering
the warrants and receiving shares of Common Stock or Preferred Stock, as
appropriate, equal to the value of the warrants surrendered.
In April 1996, in connection with obtaining its line of credit, the Company
issued to Imperial Bank a warrant (the "Bank Warrant") to purchase 66,667 shares
of the Company's Common Stock at an exercise price of $4.50 per share, which
warrant is exercisable for six years, expiring in April 2002. The Bank Warrant
provides that the holder may exercise the Bank Warrant without payment of cash
by surrendering the Bank Warrant at the time of exercise and receiving a number
of shares of Common Stock reduced by the fair market value of the warrants
surrendered at the time of exercise.
58
<PAGE> 59
REGISTRATION RIGHTS
Pursuant to the Amended and Restated Registration Rights Agreement dated as
of July 3, 1996 among the Company and certain holders of its securities (the
"Rights Agreement"), the holders of 6,498,424 shares of Common Stock
("Registrable Securities") or their transferees are entitled to certain rights
with respect to the registration of such shares under the Securities Act of 1933
as amended (the "Securities Act"). Subject to certain limitations contained in
the Rights Agreement, the holders of at least 33% of the Registrable Securities
may require, on two occasions at least six months from the effective date of an
offering after December 31, 1997, that the Company use its best efforts to
register the Registrable Securities for public resale. If the Company registers
any of its Common Stock either for its own account or for the account of other
security holders, the holders of Registrable Securities are entitled to include
their shares of Common Stock in the registration. A holder's right to include
shares in an underwritten registration is subject to certain conditions,
including the right of the underwriters to limit the number of shares included
in the offering. The holders of Registrable Securities may also require the
Company, on no more than one occasion in any calendar year, to register all or a
portion of their Registrable Securities on Form S-3 under the Securities Act if
use of such form is available to the Company. All expenses other than
underwriting discounts and commissions incurred in connection with such
registrations must be borne by the Company.
ANTITAKEOVER EFFECTS OF DELAWARE LAW
Upon the completion of the Company's reincorporation in the State of
Delaware prior to closing of this offering, the Company will be subject to
Section 203 of the Delaware General Corporation Law ("Section 203"), which,
subject to certain exceptions, prohibits a Delaware corporation from engaging in
any business combination with any interested stockholder for a period of three
years following the date that such stockholder became an interested stockholder,
unless: (i) prior to such date, the Board of Directors of the corporation
approved either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder; (ii) upon consummation of the
transaction that resulted in the stockholder becoming an interested stockholder,
the interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding those shares owned (a)
by persons who are directors and also officers and (b) by employee stock plans
in which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer; or (iii) on or subsequent to such date, the business combination is
approved by the board of directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative vote of
at least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
The Company's Certificates of Incorporation continues to entitle
stockholders to use cumulative voting in the election of directors and to take
action by written consent.
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<PAGE> 60
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is First National
Bank of Boston.
LISTING
The Company's Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "CYBR." The Company has not applied to list its
Common Stock on any other exchange or quotation system. See "Risk Factors -- No
Prior Market for Common Stock" and "-- Volatility of Stock Price."
60
<PAGE> 61
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of
the Company. Therefore, future sales of substantial amounts of Common Stock in
the public market could adversely affect market prices prevailing from time to
time. Furthermore, since only a limited number of shares will be available for
sale shortly after this offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock of the Company in the public market after the restrictions lapse
could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future.
Upon completion of this offering, the Company will have 11,482,449
outstanding shares of Common Stock (assuming no exercise of options outstanding
under the Amended 1993 Plan after June 30, 1996, and the conversion of all
outstanding shares of Series A, Series B, and Series C Preferred Stock into
Common Stock and the exercise of warrants to purchase 116,311 shares of Common
Stock). Of these shares, the 2,500,000 shares sold in this offering will be
freely tradeable without restriction under the Securities Act. The remaining
8,982,449 shares of Common Stock held by existing shareholders are "restricted"
securities within the meaning of Rule 144 under the Securities Act. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rules 144, 144(k), 144A or 701
promulgated under the Securities Act, which rules are summarized below.
All officers, directors and certain other holders of Common Stock have
entered into contractual "lock-up" agreements providing that they will not
offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of Common Stock, or options to purchase Common Stock of the Company for
180 days after the effectiveness of this offering without the prior written
consent of the Representatives of the Underwriters. As a result of these
contractual restrictions, notwithstanding possible earlier eligibility for sale
under the provisions of Rules 144, 144(k) and 701, shares subject to lock-up
agreements will not be saleable until the agreements expire. Taking into account
the lock-up agreements, the number of shares that will be available for sale in
the public market will be as follows: (i) 10,000 shares of Common Stock, in
addition to the 2,500,000 shares sold in this offering, will be eligible for
sale as of the effectiveness of this offering, (ii) 28,881 additional shares of
Common Stock will be eligible for sale beginning 90 days after the effectiveness
of this offering and (iii) approximately 3,863,000 additional shares of Common
Stock will be eligible for sale beginning 181 days after the effectiveness of
this offering. The approximately 5,080,600 remaining restricted shares will not
be eligible for sale pursuant to Rule 144 until the expiration of their two-year
holding periods.
Additionally, pursuant to Rules 144 and 701, beginning 90 days after the
effectiveness of this offering and beginning 181 days after the effectiveness of
this offering upon the expiration of contractual lock-up arrangements with the
Company, an aggregate of approximately 28,881 shares and 562,078 shares,
respectively, will be vested and eligible for sale upon the exercise of
outstanding stock options.
In general, under Rule 144 as currently in effect, an affiliate of the
Company, or person (or persons whose shares are aggregated) who has beneficially
owned restricted shares for at least two years but less than three years, will
be entitled to sell in any three-month period a number of shares that does not
exceed the greater of (i) 1% of the then outstanding shares of Common Stock
(approximately 114,825 shares immediately after this offering) or (ii) the
average weekly trading volume during the four calendar weeks immediately
preceding the date on which notice of the sale is filed with the Commission.
Sales pursuant to Rule 144 are subject to certain requirements relating to
manner of sale, notice and availability of current public information about the
Company. A person (or person whose shares are aggregated) who is not deemed to
have been an affiliate of the Company at any time during the 90 days immediately
preceding the sale and who has beneficially owned his or her shares for at least
three years is entitled to sell such shares pursuant to Rule 144(k) without
regard to the limitations described above. Rule 144A under the Securities Act as
currently in effect permits the immediate sale of restricted shares to certain
qualified institutional buyers without regard to volume restrictions. In
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<PAGE> 62
general, under Rule 701 under the Securities Act as currently in effect, any
employee, consultant or advisor of the Company who purchases shares from the
Company in connection with a compensatory stock or option plan or other written
agreement related to compensation is eligible to resell such shares 90 days
after the effective date of this offering in reliance on Rule 144, but without
compliance with certain restrictions contained in Rule 144. Rule 701 is
available for shareholders of the Company as to all shares issued pursuant to
stock option exercises occurring on or after May 20, 1988 (the effective date of
the rule) of options granted prior to this offering.
The Company has agreed not to offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, or otherwise transfer or dispose
of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock, or enter into
any swap or similar agreement that transfers, in whole or in part, the economic
risk of ownership of the Common Stock, for a period of 180 days after the
effectiveness of this offering, without the prior written consent to Hambrecht &
Quist LLC, subject to certain limited exceptions.
At June 30, 1996, the Company had reserved (i) 2,902,000 shares of Common
Stock for issuance pursuant to the Amended 1993 Plan, 1,513,016 shares of which
were outstanding, (ii) 50,000 shares of Common Stock reserved for issuance
pursuant to the 1996 Director Plan, no shares of which were outstanding (the
"Option Plans") and (iii) 100,000 shares of Common Stock reserved for issuance
pursuant to the Purchase Plan. In August 1996, the Company increased the shares
reserved for issuance under the Amended 1993 Stock Plan to 3,902,000. The
Company intends to file a registration statement on Form S-8 under the
Securities Act shortly after the effectiveness of this offering to register
shares to be issued pursuant the Option Plans and Purchase Plan. Shares of
Common Stock issued under the Option Plans and Purchase Plan after the effective
date of such registration statement will be freely tradeable in the public
market, subject to lock-up agreements and subject in the case of sales by
affiliates to the amount, manner of sale, notice and public information
requirements of Rule 144. See "Underwriting."
There has been no prior market for the Common Stock and there is no
assurance a significant public market for the Common Stock will develop or be
sustained after the offering. Sales of substantial amounts of Common Stock in
the public market could adversely affect the market price of the Common Stock.
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<PAGE> 63
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives, Hambrecht & Quist LLC,
Lehman Brothers, and Wessels, Arnold & Henderson, L.L.C., have severally agreed
to purchase from the Company the following respective numbers of shares of
Common Stock:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
------------------------------------------------------------- ----------------
<S> <C>
Hambrecht & Quist LLC........................................ 510,000
Lehman Brothers.............................................. 510,000
Wessels, Arnold & Henderson, L.L.C. ......................... 510,000
Bear Stearns & Co. Inc ...................................... 80,000
Alex. Brown & Sons........................................... 80,000
Cowen & Co. ................................................. 80,000
Donaldson, Lufkin & Jenrette................................. 80,000
Montgomery Securities........................................ 80,000
Morgan Stanley & Co. Incorporated............................ 80,000
Oppenheimer & Co., Inc. ..................................... 80,000
UBS.......................................................... 80,000
Adams Harkness & Hill, Inc. ................................. 30,000
William Blair & Company...................................... 30,000
Equitable Securities......................................... 30,000
Fechtor, Detwiler & Inc. .................................... 30,000
First Albany................................................. 30,000
Interstate Johnson Lane Corporation.......................... 30,000
Punk, Zeigel & Knoell........................................ 30,000
Raymond James & Associates................................... 30,000
Soundview Financial Group.................................... 30,000
Unterberg, Harris............................................ 30,000
Van Kasper & Co. ............................................ 30,000
------
Total........................................................ 2,500,000
======
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $0.62 per share. The Underwriters may allow and such dealers may
re-allow a concession not in excess of $0.10 per share to certain other dealers.
The Underwriters have informed the Company that they do not intend to confirm
sales to any accounts over which they exercise discretionary authority. After
the initial public offering of the shares of Common Stock offered hereby, the
offering price and other selling terms may be changed by the Representatives of
the Underwriters.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 375,000
additional shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent the Underwriters exercise such option, each of the Underwriters will have
a firm commitment to purchase approximately the same percentage thereof which
the number of shares of Common Stock to be purchased by it shown in the table
above bears to the total number of shares of
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<PAGE> 64
Common Stock offered hereby. The Company will be obligated, pursuant to the
option, to sell shares to the Underwriters to the extent the option is
exercised. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
The Company has agreed that it will not, without the prior written consent
of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of
Common Stock, options, rights or warrants to acquire shares of Common Stock, or
securities exchangeable for or convertible into shares of Common Stock during
the 180-day period commencing on the effectiveness of this offering, except that
the Company may grant additional options under its stock option plans, provided
that, without the Representatives' prior written consent, such additional
options shall not be exercisable during such period.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock has been
determined by negotiation among the Company and the Representatives. Among the
factors considered in determining the initial public offering price were
prevailing market and economic conditions, revenues and earnings of the Company,
market valuations of other companies engaged in activities similar to the
Company, estimates of the business potential and prospects of the Company, the
present state of the Company's business operations, the Company's management and
other factors deemed relevant.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional
Corporation ("WSGR"), Palo Alto, California. Certain legal matters in connection
with the offering will be passed upon for the Underwriters by Brobeck, Phleger &
Harrison LLP, Palo Alto, California. As of the date of this Prospectus, certain
members of WSGR and an investment partnership of which such persons are partners
beneficially own 25,343 shares of the Company's Common Stock. Arthur F.
Schneiderman, a member of WSGR, is Assistant Secretary of the Company.
EXPERTS
The financial statements of CyberMedia, Inc. as of December 31, 1994 and
1995, and for each of the years in the three-year period ended December 31,
1995, have been included herein and in the registration statement in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement, of which this Prospectus constitutes a
part, under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus omits certain information set forth in the Registration
Statement and reference is made to the Registration Statement and the exhibits
and schedules thereto for further information with respect to the Company and
the Common Stock offered
64
<PAGE> 65
hereby. Statements contained herein concerning the provisions of any documents
are not necessarily complete, and in each instance reference is made to the copy
of such document filed as an exhibit to the Registration Statement. Each such
statement is qualified in all respects by such reference. The Registration
Statement, including exhibits and schedules thereto, may be inspected by anyone
without charge at the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
at 75 Park Place, Room 1400, New York, New York 10007 and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such materials may be obtained from the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street N.W., Washington,
D.C. 20549, and its principal reference facilities in New York, New York and
Chicago, Illinois, at a prescribed rate. The Commission maintains a World Wide
Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the site is http://www.sec.gov.
65
<PAGE> 66
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-1
Balance Sheets........................................................................ F-2
Statements of Operations.............................................................. F-3
Statements of Stockholders' Equity (Deficiency)....................................... F-4
Statements of Cash Flows.............................................................. F-5
Notes to Financial Statements......................................................... F-6
</TABLE>
66
<PAGE> 67
INDEPENDENT AUDITORS' REPORT
The Board of Directors
CyberMedia, Inc.:
We have audited the accompanying balance sheets of CyberMedia, Inc. as of
December 31, 1995 and 1994 and the related statements of operations,
stockholders' equity (deficiency) and cash flows for each of the years in the
three-year period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CyberMedia, Inc. as of
December 31, 1995 and 1994 and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1995 in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Long Beach, California
June 26, 1996, except for
Note 15, which is as of
August 14, 1996
F-1
<PAGE> 68
CYBERMEDIA, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- JUNE 30,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 102,000 $ 2,050,000 $ 569,000
Trade accounts receivable, net.................... 39,000 1,182,000 3,968,000
Inventory......................................... 5,000 412,000 1,235,000
Prepaid expenses.................................. 27,000 111,000 653,000
Other current assets.............................. -- 10,000 7,000
---------- ---------- ----------
Total current assets........................... 173,000 3,765,000 6,432,000
Furniture, fixtures and equipment, net.............. 16,000 90,000 656,000
---------- ---------- ----------
$ 189,000 $ 3,855,000 $ 7,088,000
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable.................................. $ 258,000 $ 1,620,000 $ 2,947,000
Accrued expenses.................................. 230,000 419,000 596,000
Unearned revenues................................. -- 677,000 3,062,000
Grant payable..................................... 331,000 607,000 795,000
Notes payable to bank............................. -- -- 1,300,000
Note payable, current............................. -- -- 50,000
Other liabilities................................. 25,000 8,000 21,000
---------- ---------- ----------
Total current liabilities...................... 844,000 3,331,000 8,771,000
Note payable, long-term............................. 500,000 500,000 400,000
Other liabilities................................... -- 17,000 12,000
---------- ---------- ----------
Total liabilities.............................. 1,344,000 3,848,000 9,183,000
---------- ---------- ----------
Stockholders' equity (deficiency):
Series A Preferred Stock, $0.01 par value.
Authorized 4,726,129 shares; issued and
outstanding 2,816,801 shares in 1994, 2,959,658
shares in 1995, and 2,959,658 shares
(unaudited) in 1996............................ 28,000 30,000 30,000
Series B Preferred Stock, $0.01 par value.
Authorized 6,442,858 shares; issued and
outstanding 6,371,429 shares in 1995, 6,371,429
shares (unaudited) in 1996..................... -- 64,000 64,000
Series C Preferred Stock, $0.01 par value.
Authorized 1,666,667 (unaudited) shares in
1996, no shares issued and outstanding in
1996........................................... -- -- --
Common Stock, $0.01 par value. Authorized
10,000,000 shares in 1994 and 1995 and
10,833,334 shares (unaudited) in 1996; issued
and outstanding 1,172,500 shares in 1994,
1,222,500 shares in 1995 and 2,484,025 shares
(unaudited) in 1996............................ 12,000 13,000 25,000
Additional paid-in capital........................ 1,004,000 5,451,000 5,566,000
Accumulated deficit............................... (2,199,000) (5,551,000) (7,780,000)
---------- ---------- ----------
Stockholders' equity (deficiency).............. (1,155,000) 7,000 (2,095,000)
---------- ---------- ----------
Commitments and contingencies
$ 189,000 $ 3,855,000 $ 7,088,000
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 69
CYBERMEDIA, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1993 1994 1995 1995 1996
---------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues...................... $ 55,000 $ 241,000 $ 4,797,000 $1,724,000 $13,949,000
Cost of revenues.................. 14,000 106,000 2,103,000 418,000 4,888,000
--------- ----------- ----------- ---------- -----------
Gross profit................. 41,000 135,000 2,694,000 1,306,000 9,061,000
--------- ----------- ----------- ---------- -----------
Research and development.......... 468,000 544,000 964,000 455,000 1,143,000
Sales and marketing............... 220,000 439,000 4,036,000 678,000 8,609,000
General and administrative........ 84,000 247,000 987,000 203,000 1,513,000
--------- ----------- ----------- ---------- -----------
772,000 1,230,000 5,987,000 1,336,000 11,265,000
--------- ----------- ----------- ---------- -----------
Loss from operations......... (731,000) (1,095,000) (3,293,000) (30,000) (2,204,000)
--------- ----------- ----------- ---------- -----------
Interest income................... -- -- 22,000 -- 21,000
Interest expense.................. -- (19,000) (80,000) (27,000) (46,000)
--------- ----------- ----------- ---------- -----------
Loss before income taxes..... (731,000) (1,114,000) (3,351,000) (57,000) (2,229,000)
Income tax expense................ 1,000 1,000 1,000 -- --
--------- ----------- ----------- ---------- -----------
Net loss..................... $ (732,000) $(1,115,000) $(3,352,000) $ (57,000) $(2,229,000)
Net loss per share
(See Note 1)............... $ (.09) $ (.14) $ (.43) $ (0.01) $ (.28)
--------- ----------- ----------- ---------- -----------
Weighted average common stock and
common stock equivalents
outstanding (See Note 1)........ 7,826,000 7,839,000 7,855,000 7,839,000 7,889,000
========= =========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 70
CYBERMEDIA, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(SIX MONTHS ENDED JUNE 30, 1996 IS UNAUDITED)
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK STOCKHOLDERS'
------------------- ------------------- ------------------- ADDITIONAL ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL DEFICIT (DEFICIENCY)
--------- ------- --------- ------- --------- ------- ---------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1992.......... 1,192,232 $12,000 -- $ -- 1,127,500 $11,000 $ 448,000 $ (352,000 ) $ 119,000
Issuance of
Common
Stock......... -- -- -- -- 45,000 1,000 2,000 -- 3,000
Net loss........ -- -- -- -- -- -- -- (732,000 ) (732,000 )
--------- ------- --------- ------- --------- ------- ---------- ----------- -----------
Balance at
December 31,
1993.......... 1,192,232 12,000 -- -- 1,172,500 12,000 450,000 (1,084,000 ) (610,000 )
Conversion of
notes payable
into Series A
Preferred
Stock......... 781,428 8,000 -- -- -- -- 267,000 -- 275,000
Issuance of
Series A
Preferred
Stock in
exchange for
cash.......... 843,141 8,000 -- -- -- -- 287,000 -- 295,000
Net loss........ -- -- -- -- -- -- -- (1,115,000 ) (1,115,000 )
--------- ------- --------- ------- --------- ------- ---------- ----------- -----------
Balance at
December 31,
1994.......... 2,816,801 28,000 -- -- 1,172,500 12,000 1,004,000 (2,199,000 ) (1,155,000 )
Issuance of
Series A
Preferred
Stock in
exchange for
cash.......... 142,857 2,000 -- -- -- -- 48,000 -- 50,000
Issuance of
Common Stock
upon exercise
of stock
options....... -- -- -- -- 50,000 1,000 2,000 -- 3,000
Conversion of
notes payable
into Series B
Preferred
Stock......... -- -- 635,714 6,000 -- -- 439,000 -- 445,000
Issuance of
Series B
Preferred
Stock in
exchange for
cash.......... -- -- 5,735,715 58,000 -- -- 3,958,000 -- 4,016,000
Net loss........ -- -- -- -- -- -- -- (3,352,000 ) (3,352,000 )
--------- ------- --------- ------- --------- ------- ---------- ----------- -----------
Balance at
December 31,
1995.......... 2,959,658 30,000 6,371,429 64,000 1,222,500 13,000 5,451,000 (5,551,000 ) 7,000
Issuance of
Common Stock
upon exercise
of stock
options
(unaudited)... -- -- -- -- 1,261,525 12,000 115,000 -- 127,000
Net loss
(unaudited)... -- -- -- -- -- -- -- (2,229,000 ) (2,229,000 )
--------- ------- --------- ------- --------- ------- ---------- ----------- -----------
Balance at June
30, 1996
(unaudited)... 2,959,658 $30,000 6,371,429 $64,000 2,484,025 $25,000 $5,566,000 $(7,780,000) $(2,095,000 )
========= ======= ========= ======= ========= ======= ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 71
CYBERMEDIA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- -----------------------
1993 1994 1995 1995 1996
--------- ----------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................... $(732,000) $(1,115,000) $(3,352,000) $ (57,000) $(2,229,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation............................................. 5,000 9,000 19,000 27,000 42,000
Royalty expense.......................................... -- 13,000 276,000 40,000 188,000
Changes in assets and liabilities:
Trade accounts receivable, net......................... -- (39,000) (1,143,000) (642,000) (2,786,000)
Inventory.............................................. -- (5,000) (407,000) (17,000) (823,000)
Prepaid expenses....................................... 4,000 (27,000) (84,000) (71,000) (542,000)
Other current assets................................... -- -- (10,000) (10,000) 3,000
Accounts payable....................................... (10,000) 258,000 1,362,000 31,000 1,327,000
Accrued expenses....................................... 82,000 111,000 189,000 639,000 177,000
Unearned revenues...................................... -- -- 677,000 -- 2,385,000
Other liabilities...................................... -- -- (25,000) (25,000) 13,000
--------- ----------- ----------- --------- -----------
Net cash used in operating activities............... (651,000) (795,000) (2,498,000) (85,000) (2,245,000)
--------- ----------- ----------- --------- -----------
Cash flows used in investing activities - purchase of
furniture, fixtures and equipment.......................... (2,000) (13,000) (67,000) (32,000) (608,000)
--------- ----------- ----------- --------- -----------
Cash flows from financing activities:
Proceeds from the issuance of Series A Preferred Stock..... -- 295,000 50,000 50,000 --
Proceeds from the issuance of Series B Preferred Stock..... -- -- 4,016,000 -- --
Proceeds from notes to shareholders........................ 228,000 71,000 -- -- --
Payments of capital lease obligation....................... -- -- (1,000) -- (5,000)
Proceeds from the issuance of Common Stock................. 3,000 -- 3,000 -- 127,000
Proceeds from note payable................................. -- 500,000 445,000 -- --
Payment of note payable.................................... -- -- -- -- (50,000)
Proceeds from notes payable to bank........................ -- -- -- -- 1,300,000
Proceeds from the receipt of grant......................... 288,000 30,000 -- -- --
--------- ----------- ----------- --------- -----------
Net cash provided by financing activities........... 519,000 896,000 4,513,000 50,000 1,372,000
--------- ----------- ----------- --------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... (134,000) 88,000 1,948,000 (67,000) (1,481,000)
Cash and cash equivalents at beginning of period............. 148,000 14,000 102,000 102,000 2,050,000
--------- ----------- ----------- --------- -----------
Cash and cash equivalents at end of period................... $ 14,000 $ 102,000 $ 2,050,000 $ 35,000 $ 569,000
========= =========== =========== ========= ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest............................................... $ -- $ -- $ 80,000 $ -- $ --
Income taxes........................................... $ -- $ 1,000 $ 1,000 $ -- $ --
Supplemental disclosure of noncash investing and financing
activities:
Conversion of notes payable to stockholders into Series A
Preferred Stock.......................................... $ -- $ 275,000 $ -- $ -- $ --
Conversion of notes payable into Series B Preferred
Stock.................................................... $ -- $ -- $ 445,000 $ -- $ --
Acquisition of equipment through capital lease
agreements............................................... $ -- $ -- $ 26,000 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 72
CYBERMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1995 AND JUNE 30, 1996 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
CyberMedia, Inc. (the "Company"), a California corporation, develops and
markets software products that provide automatic service and support to PC users
in the Windows environment. Products are principally sold to distributors and
directly to consumers. In addition, the Company's products are sold directly to
catalog companies throughout the United States and Canada. The Company also
markets its products internationally through distribution and licensing
agreements. The Company is in the process of reincorporating in the State of
Delaware.
Interim Financial Information
The unaudited balance sheet as of June 30, 1996, and the unaudited
statements of operations and cash flows for the six months ended June 30, 1995
and 1996 and the unaudited statements of stockholders' equity (deficiency) for
the six months ended June 30, 1996 include, in the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the Company's financial position, results of operations, and cash flows.
Operating results for the six months ended June 30, 1996 are not necessarily
indicative of the results that may be expected for the fiscal year ending
December 31, 1996.
Cash Equivalents
The Company considers all highly liquid investments having original
maturities of three months or less to be cash equivalents.
Inventory
Inventory, consisting of software product and related packaging materials,
is stated at the lower of cost (first-in, first-out method) or market.
Unearned Revenues
The Company offers customers update rights for certain products at no
additional cost. As a result, ratable revenue recognition is appropriate for a
portion of the license fees for such products. Accordingly, unearned revenues on
the accompanying balance sheets represent Internet and other product updates and
other unspecified future support commitments which will be recognized ratably
over the estimated update periods.
Revenue Recognition
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 price protection, provided that no significant
vendor obligations remain and collection of accounts receivable is deemed to be
probable. On sales of products having remaining vendor obligations, a portion of
related revenue is deferred based upon the relative retail value of future
obligations and recognized ratably over the estimated period for which
obligations exist, generally one year from the date of sale.
F-6
<PAGE> 73
CYBERMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1995 AND JUNE 30, 1996 IS UNAUDITED)
The Company provides routine telephone customer support as an accommodation
to purchasers of its products for a limited time. Costs associated with such
post-sale customer support were immaterial.
Revenue Related Reserves
Reserves for sales returns and doubtful accounts are established based upon
historical experience and management's estimates as shipments are made. The
allowance for sales returns and doubtful accounts aggregated $12,000, $767,000
and $1,715,000 at December 31, 1994 and 1995 and June 30, 1996, respectively,
and is shown as a reduction of accounts receivable on the accompanying balance
sheets. Reserves for sales returns include the Company's estimation of costs
related to its price protection policy. As of June 30, 1996, such costs have
historically been immaterial.
Research and Development
Costs relating to designing, developing and testing new software products
are expensed as research and development as incurred. Although costs incurred
subsequent to establishing technological feasibility of software products are
permitted capitalization pursuant to Statement of Financial Accounting Standards
("SFAS") No. 86 (Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed), the Company has not capitalized any software
development costs since the impact to the financial statements for all periods
presented has been immaterial.
Depreciation and Amortization
Furniture, fixtures and equipment are stated at cost. Depreciation of
furniture, fixtures and equipment is calculated on the straight-line
depreciation method over the estimated useful lives as follows:
<TABLE>
<S> <C>
Computer equipment and software..... 3 years
Furniture, fixtures and equipment... 4 years
Assets under capital lease.......... Shorter of lease term or the
estimated useful life of asset
</TABLE>
Income Taxes
The Company accounts for income taxes using SFAS No. 109 (Accounting for
Income Taxes). SFAS No. 109 requires that deferred income taxes be recognized
for the tax consequences of temporary differences. This is achieved by applying
enacted statutory rates applicable to future years to differences between the
financial statement carrying amounts and the tax basis of existing assets and
liabilities.
F-7
<PAGE> 74
CYBERMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1995 AND JUNE 30, 1996 IS UNAUDITED)
Computation of Net Loss per Share
Net loss per share of Common Stock and Common Stock equivalents has been
computed using the weighted average number of shares of Common Stock and Common
Stock equivalents outstanding using the treasury stock method and is summarized
as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
-------------------------------------- -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average shares of Common
Stock outstanding............... 2,432,000 2,445,000 2,461,000 2,445,000 2,495,000
Weighted average shares of Common
Stock equivalents issued during
the twelve months preceding the
initial public offering date.... 5,394,000 5,394,000 5,394,000 5,394,000 5,394,000
---------- ---------- ---------- ---------- ---------
Shares used in net loss per
share calculation............... 7,826,000 7,839,000 7,855,000 7,839,000 7,889,000
======== ======== ======== ======== ========
</TABLE>
Pursuant to the requirements of the Securities and Exchange Commission,
Common Stock, stock options, warrants and Convertible Preferred Stock issued by
the Company during the twelve months immediately preceding the initial public
offering date have been included in the calculation of the weighted average
shares outstanding for all periods presented using the treasury stock method
based on the estimated initial public offering price for stock options and
warrants and using the if converted method for Convertible Preferred Stock.
Accordingly, weighted average Common Stock outstanding includes 1,272,000 shares
of Common Stock issued during 1996 shown as outstanding for all periods
presented. In addition, weighted average Common Stock equivalents outstanding
includes 1,375,000 Common Stock equivalents for Common Stock options and
warrants issued during 1995 and 1996 and 4,019,000 shares assumed to be issued
upon the conversion of the Series B and Series C Preferred Stock into Common
Stock, shown as outstanding for all periods presented.
For all loss periods presented, stock options, warrants, and Series A
Preferred Stock issued prior to the twelve months preceding the initial public
offering date are excluded from the computation for loss periods as their
inclusion would be anti-dilutive. On a pro forma basis, the loss per share for
the year ended December 31, 1995 and for the six months ended June 30, 1996
assuming the inclusion of all series of Convertible Preferred Stock, including
Series A Preferred Stock issued prior to the twelve months preceding the initial
public offering date as Common Stock equivalents outstanding is $(0.36) and
$(0.24), respectively.
Financial Instruments
The Financial Accounting Standards Board's SFAS No. 107 (Disclosures about
Fair Value of Financial Instruments) defines fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties. The Company's carrying value of accounts
receivable, accounts payable, accrued expenses, grant payable and notes payable
approximates fair value because the instrument has a short-term maturity or
because the applicable interest rates are comparable to current borrowing rates.
F-8
<PAGE> 75
CYBERMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1995 AND JUNE 30, 1996 IS UNAUDITED)
Long-Lived Assets
In March 1995, SFAS No. 121 (Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of) was issued. This statement
provides guidelines for recognition of impairment losses related to long-term
assets and is effective for fiscal years beginning after December 15, 1995. The
Company's management does not believe that the adoption of this new standard
will have a material effect on the Company's financial statements.
Accounting for Stock Options
In October 1995, SFAS No. 123 (Accounting for Stock-Based Compensation) was
issued. This statement encourages, but does not require, a fair value based
method of accounting for employee stock options and will be 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 compensation costs under APB Opinion No. 25 (Accounting for Stock
Issued to Employees) 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.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(2) FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment, stated at cost, are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30, 1996
1994 1995 -------------
-------- -------- (UNAUDITED)
<S> <C> <C> <C>
Office furniture and equipment........... $ 4,000 $ 3,000 $ 243,000
Computer equipment....................... 37,000 131,000 499,000
-------- -------- --------
41,000 134,000 742,000
Less accumulated depreciation............ (25,000) (44,000) (86,000)
-------- -------- --------
$ 16,000 $ 90,000 $ 656,000
======== ======== ========
</TABLE>
Assets acquired under capitalized leases, which are principally included in
computer equipment above, at December 31, 1995 and June 30, 1996 aggregated
$26,000 for both periods. Accumulated depreciation related to these assets
aggregated $1,000 and $4,000 at December 31, 1995 and June 30, 1996,
respectively.
F-9
<PAGE> 76
CYBERMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1995 AND JUNE 30, 1996 IS UNAUDITED)
(3) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30, 1996
1994 1995 -------------
-------- -------- (UNAUDITED)
<S> <C> <C> <C>
Accrued compensation and related
expenses............................... $213,000 $268,000 $ 427,000
Other.................................... 17,000 151,000 169,000
-------- -------- --------
$230,000 $419,000 $ 596,000
======== ======== ========
</TABLE>
(4) GRANT PAYABLE
In August 1992, the Company received a grant under the Program for the
Advancement of Commercial Technology Provided by the United States Agency for
International Development and administered by the Industrial Credit and
Investment Corporation of India Limited ("ICICI"). As of December 31, 1994, the
Company had received $318,000 which had been allocated to the Company,
concurrent with the development of its products. Under the terms of the
agreement, the Company repays the grant at a rate of 250% of the amount of grant
received, or $795,000, through royalties based on 5% of product sales. The
Company incurred royalty expense related to this grant of $13,000 and $276,000
during the years ended December 31, 1994 and 1995, respectively, and $188,000
for the six months ended June 30, 1996. As of June 30, 1996, the Company's
maximum obligation of $795,000 has been fully accrued, and the entire amount is
due and payable by December 31, 1996.
(5) NOTE PAYABLE
At December 31, 1994 and 1995 and June 30, 1996, the Company had a note
payable to ICICI, bearing interest at the U.S. prime rate plus 2.25% and payable
quarterly, with principal payable in equal quarterly installments of $50,000
from January 1997 through April 1999. To secure the loan, certain directors and
founders of the Company provided personal guarantees for the total loan amount.
In consideration for the personal guarantees, the guarantors received warrants
to purchase up to an aggregate of 900,000 shares of the Company's Series A
Preferred Stock at an exercise price of $0.35 per share.
Annual principal payments due subsequent to December 31, 1995 are as
follows:
<TABLE>
<S> <C>
Year ending December 31,
1996............................ $ --
1997............................ 200,000
1998............................ 200,000
1999............................ 100,000
--------
$500,000
========
</TABLE>
At December 31, 1994 and 1995, the Company was not in compliance with
certain financial loan covenants under the $500,000 note payable agreement. The
lender has waived compliance with these covenants through December 31, 1996.
During the six months ended June 30, 1996, the Company opted to make a
voluntary payment of $50,000. Accordingly, at June 30, 1996, the outstanding
balance of the note was $450,000.
F-10
<PAGE> 77
CYBERMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1995 AND JUNE 30, 1996 IS UNAUDITED)
(6) NOTES PAYABLE TO BANK
During the year ended December 31, 1995, the Company obtained two credit
facilities consisting of a $1,500,000 collateralized revolving line of credit
bearing interest at the prime rate plus 1% and a $250,000 collateralized
equipment purchase facility bearing interest at the prime rate plus 2%. The
collateralized equipment purchase facility expires in November 1996. No amounts
had been drawn against these lines of credit as of December 31, 1995.
On April 29, 1996, the Company secured an increase in its revolving line of
credit from $1,500,000 to $3,000,000, as available, based on eligible accounts
receivable. The line of credit bears interest at the prime rate (8.25% per annum
at June 30, 1996) plus 1% and expires in April 1997. As of June 30, 1996, the
Company had outstanding borrowings of $1,300,000 on the revolving line of
credit. The line of credit is collateralized by all assets of the Company. The
Company is restricted under the revolving line of credit from declaring or
paying a dividend on any of its capital stock without bank consent.
(7) INCOME TAXES
The provision for income taxes, all current, for the years ended December
31, 1993, 1994 and 1995 consists solely of the annual minimum California
franchise tax of approximately $1,000. No provision for income taxes for the six
months ended June 30, 1996 has been recorded.
The provision for income taxes differs from the expected tax benefit
computed by applying the federal corporate tax rate of 34% to loss before income
taxes principally due to the effect of net operating loss carryforwards.
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------- JUNE 30, 1996
1993 1994 1995 -------------
--------- --------- ----------- (UNAUDITED)
<S> <C> <C> <C> <C>
Deferred tax assets:
Accounts receivable.................. $ -- $ -- $ 307,000 $ 686,000
Accrued expenses..................... -- 90,000 32,000 84,000
Unearned revenues.................... -- -- 243,000 1,225,000
Grant payable........................ 115,000 132,000 127,000 --
Net operating losses................. 295,000 546,000 1,506,000 1,138,000
Other................................ -- 88,000 -- --
--------- --------- ----------- -----------
Total gross deferred tax assets... 410,000 856,000 2,215,000 3,133,000
Less valuation allowance.......... (410,000) (856,000) (2,215,000) (3,133,000)
--------- --------- ----------- -----------
Net deferred tax assets........... $ -- $ -- $ -- $ --
========= ========= =========== ===========
</TABLE>
The net change in the valuation allowance for the years ended December 31,
1993, 1994 and 1995 and for the six months ended June 30, 1996 was an increase
of $410,000, $446,000, $1,359,000 and $918,000, respectively. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers projected future taxable
income and tax planning strategies in making this assessment.
F-11
<PAGE> 78
CYBERMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1995 AND JUNE 30, 1996 IS UNAUDITED)
Based on the level of historical taxable income and projections for future
taxable income over the periods in which the level of deferred tax assets are
deductible, management believes that it is not more likely than not that the
Company will realize the benefits of these deductible differences at December
31, 1995 and June 30, 1996. Accordingly, a valuation allowance has been provided
for the total gross deferred tax assets.
The Company had available at December 31, 1995 and June 30, 1996
approximately $3,765,000 and $2,845,000, respectively, of net operating losses
to offset future taxable income that expire beginning in the year 2006. Use of
these net operating losses will be limited under rules governing changes in
ownership of the Company. These rules restrict the amount of the net operating
loss carryforwards which may be used in a particular year. The maximum amount of
net operating loss carryforwards which are available on an annual basis for use
subsequent to the year ended December 31, 1996 is approximately $214,000.
(8) STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred Stock
During 1994, the Company issued 843,141 shares of Series A Preferred Stock
for cash consideration and issued 781,428 shares of Series A Preferred Stock
upon conversion of certain notes payable.
During 1995, the Company issued 5,735,715 shares of Series B Preferred
Stock for cash consideration and issued 635,714 shares of Series B Preferred
Stock upon conversion of certain notes payable. The Company also issued 142,857
shares of Series A Preferred Stock for cash consideration in 1995.
Each share of Series A Preferred Stock and Series B Preferred Stock is
automatically converted into one-half share of Common Stock upon the earlier of
the affirmative vote of the holders of at least 66 2/3% of the outstanding
shares of the Preferred Stock, or immediately upon the closing of a firm
commitment underwritten public offering pursuant to an effective registration
statement under the Securities Act of 1933, in which the aggregate gross
proceeds exceed $10,000,000 and the price per share is not less than $7.00 per
share. At June 30, 1996, the conversion of all Series A Preferred Stock and
Series B Preferred Stock shares would yield 1,479,829 and 3,185,714 shares of
Common Stock, respectively.
When, and if, declared by the Board of Directors, the holders of Series A
Preferred Stock and Series B Preferred Stock are entitled to receive dividends
at an annual rate of $0.028 per share and $0.056 per share, respectively. Such
dividends are not cumulative. No dividends were declared during the years ended
December 31, 1994 and 1995 or the six months ended June 30, 1996. Furthermore,
the Company is restricted under the revolving line of credit from declaring or
paying any dividend on any of its capital stock without bank consent.
Preferred Stock has certain limited voting rights, is not callable by the
Company and has no redemption date.
In the event of any liquidation or dissolution of the Company, either
voluntary or involuntary, the holders of Preferred Stock are entitled to
receive, prior and in preference to any distribution of any of the assets of the
Company to the holders of Common Stock by reason of their ownership, an amount
per share equal to $0.35 for each outstanding share of Series A Preferred Stock
held by them and an amount per share equal to $0.70 for each outstanding share
of Series B Preferred Stock held by them, plus a further amount equal to any
dividends declared but unpaid on such shares. In the event the
F-12
<PAGE> 79
CYBERMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1995 AND JUNE 30, 1996 IS UNAUDITED)
assets of the Company are insufficient to provide for preferential payment, then
all such assets will be distributed ratably among the holders of the Preferred
Stock in proportion to the full preferential amount each such holder is
otherwise entitled to receive. After the payment to the holders of Preferred
Stock of the preferential amounts payable to them, the holders of Common Stock
will be entitled to receive pro rata the remaining assets of the Company.
On the closing of the Company's contemplated initial public offering all of
the 10,997,754(1) outstanding shares of Preferred Stock will be converted into
5,498,877 shares of Common Stock. The following table presents the Company's pro
forma unaudited stockholders' equity as if all such conversions had occurred at
June 30, 1996 and all outstanding warrants had been exercised and converted, as
applicable, to Common Stock at June 30, 1996:
<TABLE>
<CAPTION>
JUNE 30, 1996 (1)
-----------------
<S> <C>
Pro Forma Stockholders' Equity:
Series A Preferred Stock, $0.01 par value
Authorized 4,726,129 shares........................ $ --
Series B Preferred Stock, $0.01 par value
Authorized 6,442,858 shares........................ --
Series C Preferred Stock, $0.01 par value
Authorized 1,666,667 shares........................ --
Common Stock, $0.01 par value. Authorized 10,833,334
shares; issued and outstanding 8,965,782 shares.... 90,000
Additional paid-in capital........................... 12,202,000
Accumulated deficit.................................. (7,780,000)
-----------
$ 4,512,000
===========
</TABLE>
- ---------------
(1) Gives effect to the July 3, 1996 sale of Series C Preferred Stock shares
(see note 15).
Common Stock
During the year ended December 31, 1993, the Company issued 45,000 shares
of Common Stock for cash consideration of $3,000.
During the year ended December 31, 1995, an option holder exercised stock
options to purchase 50,000 shares of Common Stock at an exercise price of $0.05
per share.
During the six months ended June 30, 1996, certain option holders exercised
stock options to purchase 1,261,525 shares of Common Stock at exercise prices
ranging from $0.08 to $0.14 per share.
In June 1996, the Board of Directors approved the increase in the
authorized number of shares of Common Stock from 10,000,000 to 10,833,334.
Dividends are payable when, and if, declared by the Board of Directors only
after payment of any unpaid dividends to holders of Preferred Stock.
Furthermore, the Company is restricted under the revolving line of credit from
declaring or paying any dividend on any of its capital stock without bank
consent.
F-13
<PAGE> 80
CYBERMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1995 AND JUNE 30, 1996 IS UNAUDITED)
Stock Warrants
The Company issued warrants for the purchase of 833,141 shares of Series A
Preferred Stock and 933,330 shares of Series A Preferred Stock at exercise
prices ranging from $0.35 to $0.70 per share during the years ended December 31,
1994 and 1995, respectively. No value was ascribed to the warrants because
management is of the opinion that the impact of any such value is negligible to
the accompanying financial statements. No warrants expired or were exercised in
the years ended December 31, 1994 and 1995 or during the six months ended June
30, 1996. Warrants for the purchase of 833,141 shares of Series A Preferred
Stock were outstanding as of December 31, 1994 and warrants for the purchase of
1,766,471 shares of Series A Preferred Stock were outstanding as of December 31,
1995 and June 30, 1996. The warrants expire on the earlier of five years from
the date of issue or the closing of an initial public offering if not exercised.
The Company issued warrants for the purchase of 49,644 shares of Common
Stock at $1.40 per share during the year ended December 31, 1995 and issued
warrants for the purchase of 66,667 shares of Common Stock at an exercise price
of $4.50 per share during the six months ended June 30, 1996. The warrants for
the number of shares of Common Stock and the related exercise price are subject
to adjustments under certain circumstances as described more fully in the
warrant agreement. No value was ascribed to the warrants because management is
of the opinion that the impact of any such value is negligible to the
accompanying financial statements. Warrants for the purchase of 49,644 and
116,311 shares of Common Stock were outstanding as of December 31, 1995 and June
30, 1996, respectively. The warrants for the purchase of 49,644 shares of Common
Stock outstanding as of December 31, 1995 expire on the earlier of five years
from the date of issue or the closing of an initial public offering if not
exercised. The warrants for the purchase of 66,667 shares of Common Stock issued
during the six months ended June 30, 1996 expire in April 2002.
(9) STOCK OPTIONS
The Company has a 1992 Stock Plan and an Amended 1993 Stock Plan in which
various options have been issued which allow the option holder to purchase
shares of the Company's Common Stock at the fair market value at the date of
grant, as determined by the Company's Board of Directors. As of December 31,
1995, the Board of Directors had reserved 1,750,000 shares of Common Stock for
issuance under the Amended 1993 Stock Plan. As of June 30, 1996, the Board of
Directors approved the increase in the number of shares of Common Stock reserved
for issuance under the Amended 1993 Stock Plan to 2,902,000. Stock option
activity under the plans is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------- SIX MONTHS ENDED
1993 1994 1995 JUNE 30, 1996
---------------- ---------------- -------------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance at beginning of
period..................... 50,000 95,000 821,500 1,846,025
Granted.................... 45,000 726,500 1,074,525 1,031,715
Exercised.................. -- -- (50,000) (1,261,525)
Canceled................... -- -- -- (103,199)
------------- ------------- ----------- -----------
Balance at end of period..... 95,000 821,500 1,846,025 1,513,016
------------- ------------- ----------- -----------
Exercisable stock options.... 95,000 821,500 1,213,692 1,266,015
------------- ------------- ----------- -----------
Price range of options....... $ 0.05 and 0.08 $ 0.05 and 0.08 $ 0.05 - 0.14 $0.08 - 4.50
============= ============= =========== ===========
</TABLE>
Options granted vest immediately or over periods as determined by the
Company's Board of Directors, generally 4 years. During the six months ended
June 30, 1996, the Company issued Common
F-14
<PAGE> 81
CYBERMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1995 AND JUNE 30, 1996 IS UNAUDITED)
Stock to certain directors who exercised unvested options to purchase 206,250
shares of Common Stock, subject to the terms of their respective stock option
agreements. As defined more fully in the stock option agreements, the Company
retains the right to purchase such stock at the original exercise price.
In June 1996, the Company's Board of Directors approved the 1996 Director
Option Plan. The Plan provides for the automatic and nondiscretionary grant of
nonstatutory stock options to nonemployee directors of the Company who are first
elected to the Board after the adoption of the Director Option Plan ("Outside
Directors"). A total of 50,000 shares of Common Stock have been reserved for
issuance under the Director Option Plan. Each Outside Director elected after the
adoption of the Plan will automatically be granted an option to purchase 5,000
shares on the date on which such person first becomes an Outside Director
("First Option") at the fair market value of the Company's Common Stock at the
date of grant. Each First Option granted vests ratably over specified periods,
approximately four years, subject to continued service as an Outside Director.
Thereafter, each Outside Director will be automatically granted an option to
purchase 5,000 shares on December 1 of each year beginning in 1997, provided he
or she shall have served on the Board for at least six months ("Subsequent
Option"). Each Subsequent Option shall have an exercise price equal to the fair
value of the Company's Common Stock as of the date of grant and shall be
exercisable ratably over four years, beginning three years and one month from
the date of grant, subject to continued service as an Outside Director.
(10) SIGNIFICANT CUSTOMERS, CONCENTRATION OF CREDIT RISK AND OTHER
CONCENTRATIONS
Significant Customers
Sales to certain customers represented 10% or more of the Company's net
revenues for certain periods during the years ended December 31, 1994 and 1995,
and for the six months ended June 30, 1995 and 1996. Sales to these customers
were as follows:
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE YEAR ENDED MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------------- -------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Company A......................................... -- 16% 19% 14% 11%
Company B......................................... -- -- 16% 12% 20%
Company C......................................... -- -- 9% 2% 22%
Company D......................................... -- 2% 5% 14% --
Company E......................................... -- 8% 5% 13% --
Company F......................................... -- -- 4% 11% --
Company G......................................... -- 13% 1% 3% --
</TABLE>
Concentration of Credit Risk
Certain financial instruments potentially subject the Company to credit
risk. These financial instruments consist primarily of trade receivables. The
Company sells to distributors, resellers and directly to end-users. The Company
performs ongoing credit evaluations of its customers and maintains reserves,
including reserves to estimate the potential for future product returns. The
Company's three major customers in 1995, each of whom accounted for more than
10% of net revenues, represented 41%, 26% and 21%, respectively, of trade
accounts receivable, net at Decem-
F-15
<PAGE> 82
CYBERMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1995 AND JUNE 30, 1996 IS UNAUDITED)
ber 31, 1995. The Company's three major customers for the six months ended June
30, 1996 represented 32%, 28% and 13%, respectively, of trade accounts
receivable, net at June 30, 1996.
Other Concentrations
One product line constitutes over 90% of the Company's net revenues for the
years ended December 31, 1994 and 1995 and for the six months ended June 30,
1995 and 1996. Any technical difficulties or other factors affecting sales of
this product line could adversely affect operating results.
As of June 30, 1996, the Company received approximately 90% of its
fulfillment services from one fulfillment firm. A delay in product shipments
from this fulfillment company could result in a possible loss of sales, which
could adversely affect operating results.
(11) EMPLOYEE BENEFIT PLANS
On May 1, 1996, the Company adopted a 401(k) Plan. All full-time employees
who have reached age 18 and who have been employed for at least 30 days are
eligible to participate in the Plan. The Company may make discretionary
contributions to the Plan. As of June 30, 1996, the Company had not made any
contributions to the Plan.
On June 26, 1996, the Company's Board of Directors and stockholders
approved the 1996 Employee Stock Purchase Plan, which is intended to qualify
under Section 423 of the Internal Revenue Code. A total of 100,000 shares of
Common Stock have been reserved for issuance under the Employee Stock Purchase
Plan. Employees are entitled to participate if they satisfy certain criteria, as
defined, in the Employee Stock Purchase Plan agreement.
(12) RELATED PARTY TRANSACTIONS
In connection with the sale of the Series B Preferred Stock, the Company's
founders and the holders of the Series A Preferred Stock and the Series B
Preferred Stock entered into a Key Employees' Right of First Refusal, Co-Sale
and Voting Agreement ("Voting Agreement"). Pursuant to the Voting Agreement, the
Company is obligated to designate certain directors. In addition, in the event a
Company founder proposes to sell or transfer any Common Stock, the founder must
first offer such securities to the Company at comparable terms and conditions.
If the Company does not elect to purchase all of such securities, the Company
must provide the holders of the Series A Preferred Stock and Series B Preferred
Stock with the right to purchase such securities at the same terms.
In October 1995, three of the Company's directors each received options to
purchase 75,000 shares of the Company's Common Stock. The options have an
exercise price equal to the fair market value of the stock at the date of grant
and vest over four years from the date of grant, subject to providing continued
consulting services to the Company. During the six months ended June 30, 1996,
each of the directors exercised such options, including the unvested options,
and such shares are subject to repurchase on the same four-year vesting
schedule. See Note 9.
In September 1995, a director of the Company advanced a series of loans to
the Company to meet then-existing financial requirements. The loans were
converted into Series B Preferred Stock in consideration for the loans to the
Company. The director received warrants to purchase 17,857 shares of the
Company's Common Stock at an exercise price of $1.40 which expire on the earlier
of five years from the date of issue or the closing of an initial public
offering.
F-16
<PAGE> 83
CYBERMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1995 AND JUNE 30, 1996 IS UNAUDITED)
(13) COMMITMENTS AND CONTINGENCIES
The Company leases office facilities under operating leases which expire on
July 9, 2000. Rent expense for the years ended December 31, 1993, 1994 and 1995
and for the six months ended June 30, 1995 and 1996 aggregated $72,000, $39,000,
$79,000, $27,000 and $214,000, respectively. Future minimum lease payments under
noncancelable operating leases as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1996................................ $ 302,000
1997................................ 322,000
1998................................ 341,000
1999................................ 358,000
2000................................ 179,000
----------
Total minimum lease payments... $1,502,000
=========
</TABLE>
The Company has entered into employment agreements with Company founders
which include terms whereby the founders are to receive full payment of salary
and benefits for specified periods, as set forth more fully in the employment
agreements, in the event of early termination.
(14) SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT END
DESCRIPTION PERIOD EXPENSES DELETIONS OF PERIOD
- ------------------------------------------ ------------ ---------- --------- --------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended:
December 31, 1993.................... $ -- $ -- $ -- $ --
December 31, 1994.................... $ -- $ 3,000 $ -- $ 3,000
December 31, 1995.................... $ 3,000 $ 97,000 $ -- $ 100,000
Six months ended:
June 30, 1996
(unaudited).......................... $100,000 $ 100,000 $ -- $ 200,000
Reserve for sales returns
Year ended:
December 31, 1993.................... $ -- $ -- $ -- $ --
December 31, 1994.................... $ -- $ 9,000 $ -- $ 9,000
December 31, 1995.................... $ 9,000 $ 921,000 $(263,000)(1) $ 667,000
Six months ended:
June 30, 1996
(unaudited).......................... $667,000 $1,561,000 $(713,000)(1) $1,515,000
</TABLE>
- ---------------
(1) Actual product returns.
(15) SUBSEQUENT EVENTS
On July 3, 1996, the Company issued 1,666,667 shares of Series C Preferred
Stock at a price of $3.00 per share, convertible into approximately 833,334
shares of Common Stock. Each share of Series C Preferred Stock is automatically
converted into one-half of a share of Common Stock upon the earlier of the
affirmative vote of the holders of at least 66 2/3% of the outstanding shares of
the Preferred Stock,
F-17
<PAGE> 84
CYBERMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO THE SIX MONTHS ENDED
JUNE 30, 1995 AND JUNE 30, 1996 IS UNAUDITED)
or immediately upon the closing of a firm commitment underwritten public
offering pursuant to an effective registration statement under the Securities
Act of 1933, in which the aggregate gross proceeds exceed $10,000,000 and the
price per share is not less than $7.00.
On July 17, 1996, the Board of Directors approved a one-for-two reverse
stock split of the Company's Common Stock. Accordingly, all references to the
number of shares authorized, issued and outstanding and per share information
for all periods presented have been adjusted to give effect to the
aforementioned reverse stock split. The reverse stock split became effective on
August 14, 1996.
On July 23, 1996, the Company filed a lawsuit against a competitor which
alleged that the competitor's packaging materials include false and misleading
statements about the Company. The competitor has filed counterclaims against the
Company alleging the Company's packaging materials include false and misleading
statements. Pending trial, the U.S. District Court has granted a preliminary
injunction in favor of the Company and against the competitor. The Company
believes that it has meritorious defenses to such counterclaims and intends to
vigorously defend itself if suit is subsequently filed.
On August 13, 1996, the Company's Board of Directors approved the increase
in the number of shares of Common Stock reserved under the Amended 1993 Stock
Plan to 3,902,000.
The Company is in the process of reincorporating in the State of Delaware.
The Company anticipates that the reincorporation will result in an increase in
the number of shares of authorized Common Stock to 50,000,000.
F-18
<PAGE> 85
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 5
The Company............................... 17
Use of Proceeds........................... 17
Dividend Policy........................... 17
Capitalization............................ 18
Dilution.................................. 19
Selected Financial Data................... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 21
Business.................................. 28
Management................................ 44
Certain Transactions...................... 52
Principal Stockholders.................... 56
Description of Capital Stock.............. 58
Shares Eligible for Future Sale........... 61
Underwriting.............................. 63
Legal Matters............................. 64
Experts................................... 64
Additional Information.................... 64
Index to Financial Statements............. 66
</TABLE>
------------------------
UNTIL NOVEMBER 17, 1996 (25 DAYS AFTER THE
DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK
OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,500,000 SHARES
LOGO
COMMON STOCK
-----------------------
PROSPECTUS
-----------------------
HAMBRECHT & QUIST
LEHMAN BROTHERS
WESSELS, ARNOLD & HENDERSON
OCTOBER 23, 1996
- ------------------------------------------------------
- ------------------------------------------------------
