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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission file number 0-21289
CYBERMEDIA, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 95-4347239
<S> <C>
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
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2850 OCEAN PARK BLVD., SUITE 100, SANTA MONICA, CALIFORNIA 90405
(Address of principal executive offices)
(Zip Code)
(310) 581-4700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. (1) Yes [X] No [ ]; (2) Yes [ X ]
No [ ]
As of August 3, 1998, 13,389,782 shares of the Registrant's Common
Stock, $0.01 par value were issued and outstanding.
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CYBERMEDIA, INC.
TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations for the three and six months ended 4
June 30, 1998 and 1997
Consolidated Statements of Cash Flows for the six months ended June 30, 5
1998 and 1997
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signature 26
Index to Exhibits 27
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2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CYBERMEDIA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
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(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 12,848,000 $ 25,059,000
Marketable securities -- 1,001,000
Trade accounts receivable, net 5,001,000 19,851,000
Inventory 2,104,000 3,590,000
Prepaid expenses 611,000 1,417,000
Deferred taxes 3,619,000 3,619,000
Other current assets 561,000 1,091,000
------------ ------------
Total current assets 24,744,000 55,628,000
Furniture, fixtures and equipment, net 4,191,000 4,191,000
Other assets 170,000 284,000
------------ ------------
Total assets $ 29,105,000 $ 60,103,000
============ ============
Liabilities and Stockholders' Equity
Current
liabilities
Accounts payable $ 9,016,000 $ 8,753,000
Accrued expenses 2,366,000 2,917,000
Related party payable -- 618,000
Income taxes payable 17,000 2,787,000
Unearned revenue 3,822,000 3,655,000
Grant payable 390,000 390,000
Current portion of capital lease -- 17,000
Deferred obligation for acquired R&D 2,750,000 2,913,000
------------ ------------
Total current liabilities 18,361,000 22,050,000
Capital lease obligation & deferred rent 255,000 284,000
Deferred obligation for acquired R&D -- 1,125,000
------------ ------------
Total liabilities 18,616,000 23,459,000
Stockholders' equity
Common stock, $0.01 par value. Authorized
50,000,000 shares issued and outstanding
13,351,858 and 12,511,654 respectively 134,000 126,000
Additional paid-in capital 59,307,000 57,587,000
Accumulated deficit (48,708,000) (20,774,000)
Accumulated other comprehensive loss (244,000) (295,000)
------------ ------------
Total stockholders' equity 10,489,000 36,644,000
Total liabilities and stockholders' equity $ 29,105,000 $ 60,103,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
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CYBERMEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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<CAPTION>
Quarter Ended Quarter Ended Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------ ------------ ------------ ------------
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Revenue $ 5,875,000 $ 20,447,000 $ 10,572,000 $ 36,980,000
Cost of goods sold 3,083,000 3,875,000 4,364,000 8,088,000
------------ ------------ ------------ ------------
Gross profit 2,792,000 16,572,000 6,208,000 28,892,000
Operating expenses
Research and development 2,446,000 2,740,000 5,276,000 4,285,000
Sales and marketing 8,902,000 9,584,000 22,826,000 17,739,000
General and administrative 3,309,000 1,679,000 6,292,000 2,649,000
One-time-in-process R&D and acquisition -- 9,091,000 -- 9,091,000
expenses
------------ ------------ ------------ ------------
Total operating expenses 14,657,000 23,094,000 34,394,000 33,764,000
------------ ------------ ------------ ------------
Operating loss (11,865,000) (6,522,000) (28,186,000) (4,872,000)
Other income (expense), net (19,000) 398,000 261,000 919,000
------------ ------------ ------------ ------------
Loss before income taxes (11,884,000) (6,124,000) (27,925,000) (3,953,000)
Provision for income taxes 1,000 582,000 9,000 1,421,000
------------ ------------ ------------ ------------
Net loss $(11,885,000) $ (6,706,000) $(27,934,000) $ (5,374,000)
============ ============ ============ ============
Net loss per share - basic and diluted $ (0.91) $ (0.55) $ (2.18) $ (0.45)
Shares used in computing net loss per share -
basic and diluted 13,008,000 12,178,000 12,823,000 12,050,000
</TABLE>
See accompanying notes to consolidated financial statements
4
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CYBERMEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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<CAPTION>
Six Months Ended June 30,
-----------------------------
1998 1997
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Cash flow from operating activities:
Net loss $(27,934,000) $ (5,374,000)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Depreciation 890,000 244,000
Deferred rent (29,000) --
Accelerated vesting of option grants 776,000 --
Changes in assets and liabilities:
Trade accounts receivable, net 14,850,000 (11,635,000)
Inventory 1,486,000 694,000
Prepaid expenses 806,000 347,000
Other current assets 530,000 (35,000)
Accounts payable 263,000 1,119,000
Accrued expenses and related party payable (1,169,000) 1,517,000
Income taxes payable (2,770,000) --
Unearned revenues 167,000 (362,000)
Deferred obligation for acquired R&D (1,288,000) 4,401,000
------------ ------------
Net cash used in operating activities (13,422,000) (9,084,000)
------------ ------------
Cash flows provided by (used in) investing activities -
Proceeds from purchase of marketable securities 1,001,000 (6,869,000)
Purchases of furniture, fixtures and equipment (890,000) (986,000)
Other assets 114,000 --
------------ ------------
Net cash provided (used) by investing activities 225,000 (7,855,000)
------------ ------------
Cash flows provided by financing activities:
Payment of capital lease obligations (17,000) (14,000)
Expenses associated with initial public offering -- (261,000)
Proceeds from the issuance of common stock 952,000 538,000
------------ ------------
Net cash provided by financing activities 935,000 263,000
------------ ------------
Effect of exchange rate changes on cash 51,000 --
------------ ------------
Net decrease in cash and cash equivalents (12,211,000) (16,676,000)
Cash and cash equivalents at beginning of period 25,059,000 39,322,000
------------ ------------
Cash and cash equivalents at end of period $ 12,848,000 $ 22,646,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
5
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CYBERMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
1. Basis of Presentation
The consolidated statements of operations for the three months and six
months ended June 30, 1998 and 1997, the consolidated statements of
cash flows for the six months ended June 30, 1998 and 1997 and the
consolidated balance sheet as of June 30, 1998 are unaudited, however
all adjustments, consisting of normal recurring adjustments, which
are, in the opinion of management, necessary for a fair presentation
of the financial condition and results for the interim periods are
reflected. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto together with management's discussion and analysis of
financial condition and results of operations contained in
CyberMedia's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997. The results for the three months and six months
ended June 30, 1998 are not necessarily indicative of the results for
the entire year ending December 31, 1998.
2. Accounts Receivable
Accounts receivable, net decreased between December 31, 1997 and June
30, 1998 primarily due to collections of monies owed to the Company by
distributors, and to a lesser extent by offsets from market development
funds owed by the Company to distributors or resellers.
3. Inventories
Inventories, consisting of software product and related packaging
materials are stated at the lower of cost (first-in, first-out method)
or market as detailed below.
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June 30, December 31,
1998 1997
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Components $ 552,000 $ 640,000
Finished goods 1,626,000 3,024,000
Reserve for obsolete inventory (74,000) (74,000)
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Total inventories: $ 2,104,000 $ 3,590,000
=========== ===========
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4. Income Taxes Payable
The decrease in income taxes payable which occurred between December
31, 1997 and June 30, 1998 relates to federal and state tax payments
made by the Company in February 1998 to the Internal Revenue Service
and the Franchise Tax Board respectively, related to 1997 taxes owed.
No benefit has been recognized in the consolidated statement of
operations for loss in the first six months of 1998 as realization of
the deferred tax asset is not more likely than not due to the lack of
a consistent history of operating profits.
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CYBERMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
5. Impact of Recent Accounting Pronouncements
The Company has adopted Statement of Financial Accounting Standards
("SFAS) No. 130, "Reporting Comprehensive Income," as of the first
quarter of 1998. SFAS No. 130 establishes new rules for the reporting
and display of comprehensive income and its components, however, it
has no impact on the Company's net income or stockholders' equity.
The components of comprehensive loss, net of tax, are as follows:
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Six Months Ended
June 30, June 30,
1998 1997
------------ ------------
<S> <C> <C>
Net loss $(27,934,000) $ (5,374,000)
Foreign currency translation (51,000) --
------------ ------------
Comprehensive income (loss) $(27,985,000) $ (5,374,000)
============ ============
</TABLE>
Accumulated other comprehensive loss presented on the accompanying
consolidated balance sheets consists of the accumulated foreign
currency translation adjustments.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard 131, "Disclosures About
Segments of an Enterprise and Related Information." The Statement
establishes standards for the manner in which public companies report
information about operating segments in annual financial statements
and requires those enterprises to report selected information about
operating segments in interim financial reports issued to
shareholders. This Statement is effective for annual financial
statements for periods beginning after December 15, 1997 and for
interim periods after the first year of adoption. The Company has not
yet determined the impact of adopting the disclosure requirements of
SFAS 131.
In October 1997, the American Institute of Certified Public
Accountants ("AICPA") released Statement of Position 97-2: "Software
Revenue Recognition" (SOP 97-2). Among other things, SOP 97-2
eliminates the distinction between significant and insignificant
vendor obligations promulgated by SOP 91-1 and requires each element
of a software arrangement to meet certain criteria in order to
recognize revenue allocated to that element. Additionally, SOP 97-2
requires that total fees under an arrangement be allocated to each
element in the arrangement based upon vendor specific objective
evidence, as defined. SOP 97-2 was effective for software
transactions entered into by the Company in 1998 and in subsequent
periods.
As a result of certain issues raised in applying SOP 97-2, the AICPA
issued a Statement of Position which will delay for one year, the
effective date of certain provisions of SOP 97-2 with respect to what
constitutes vendor-specific objective evidence of fair value of the
delivered software element in certain multiple element arrangements
entered into by entities that never sell such software elements
separately.
7
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CYBERMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
The Company expects that the adoption of SFAS 131, "Disclosures About
Segments of an Enterprise and Related Information," and SOP 97- 2, all
of which are effective for the full year 1998, will have a minimal
impact on prior year and current quarter consolidated statements of
operations, cash flows and financial position as the Company's reports
are already substantially in compliance with the new requirements.
However the ultimate resolution of the implementation issues referred
to above, or additional issues not yet raised or addressed by the
AICPA could change the Company's expectation.
6. Earnings Per Share
Per share data is based on the weighted average number of common
shares outstanding for the period. Due to the loss in the first three
months and six months of 1998 and 1997, common stock equivalents are
not included in the computation of diluted earnings per share because
they were anti-dilutive.
7. Contingencies
During the first half of 1998, the Company was named and served as a
defendant in a number of shareholder class action lawsuits which
assert claims under the Securities Exchange Act of 1934, the
California Civil Code and the California Business and Professions
Code. The Company intends to defend against these actions vigorously.
During the first quarter of 1998 the Company filed a lawsuit against
Symantec Corporation, et al., alleging, inter alia, misappropriation
of the Company's trade secrets. A counterclaim has been filed against
the Company. The Company intends to defend against this counterclaim
vigorously.
8. Subsequent Events
On July 28, 1998, the Company signed a note for a $10 million loan
from Networks Associates ("Network Associates"). The note has a term
of two years with an interest rate of LIBOR plus 2%, paid quarterly,
and is convertible into 1,501,501 shares of the Company's common
stock.
Subsequently, the Company and Network Associates entered into a
definitive tender offer and merger agreement whereby a subsidiary of
Network Associates has agreed to purchase for $9.50 per share in cash
all outstanding shares of CyberMedia Common stock. The merger
agreement was unanimously approved by the Boards of Directors of both
companies.
In accordance with the agreement, Network Associates commenced a
tender offer on Monday, August 3, 1998. The tender offer is scheduled
to expire at midnight EDT, August 28, 1998, unless extended. Pursuant
to the merger agreement, if the tender offer is consummated, Network
Associates will be obligated to acquire any remaining CyberMedia
shares in a cash merger at the same price as the tender offer.
On July 28, 1998, an individual claiming to be a stockholder
of the Company filed a Class Action Complaint alleging, among other
things, a breach of fiduciary duties by the Company Board in approving
a merger agreement with Network Associates, Inc., and naming the
members of the Company Board, the Company, and Network Associates as
defendants. The Complaint, Stanley Schneider v. Suhas Patil, et al,
No. 16565-NC filed in the Delaware Court of Chancery in New Castle
County, seeks an injunction restraining the consummation of the merger
and unspecified compensatory damages. The Company believes that the
Complaint is without merit and intends to vigorously defend against
it.
8
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. Actual results could differ materially from those set forth
in such forward-looking statements as a result of the factors set forth under
"Factors Effecting Operating Results" below, and other risks detailed in the
Company's Registration Statement on Form S-1 (Registration No. 333-11063)
declared effective by the Securities and Exchange Commission on October 22,
1996, the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, and as detailed from time to time in the Company's reports
filed with the Securities and Exchange Commission.
The following information should be read in conjunction with the
consolidated financial statements and the notes thereto and in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations in CyberMedia's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997. This analysis is provided pursuant to applicable Securities
and Exchange Commission regulations and is not intended to serve as a basis for
projections of future events.
Overview
The Company is a leading provider of software products that provide automatic
service and support to PC users in the Windows environment. The Company
commenced operations in November 1991 and introduced its first automatic
service and support product, Win Win, in 1993. The Company introduced the first
Windows 95 compatible version of its First Aid product line in September 1995.
During 1996, 1997 and the first six months of 1998, over 90%, over 75%, and
over 32%, respectively, of the Company's net revenues were attributable to
sales of its First Aid products.
In October 1996, the Company introduced Oil Change, a product that updates
software applications and device drivers installed on a user's PC, over the
Internet. The Company also has a number of new product development and
introduction efforts under way, including its first enterprise product,
CyberMedia Support Server (CSS) Repair Engine which was released at the end of
1997.
On April 2, 1997, the Company acquired certain assets from Luckman
Interactive which included ownership in all intellectual property rights to
Microhelp Uninstaller. This acquisition was accounted for largely as a purchase
of in-process research and development and was expensed during the quarter
ended June 30, 1997. The technology from this purchase was incorporated in the
development of the Company's UnInstaller product which uninstalls Windows
applications, and was introduced in May of 1997.
Effective April 14, 1997, CyberMedia acquired Walk Softly, Inc., an internet
privacy software developer based in Los Altos, California in exchange for
CyberMedia Common Stock. The acquisition of Walk Softly was accounted for as a
pooling of interests and the consolidated financial statements for all periods
presented herein have been restated as required under pooling rules. In
September, 1997 the Company released Guard Dog Deluxe, a personal security and
privacy product for internet users.
On September 30, 1997, the Company acquired certain rights from ServiceWare,
Inc. which included access and resale rights to certain ServiceWare technology.
This transaction was accounted for largely as in process research and
development and was expensed during the quarter ended September 30, 1997.
Revenues are generated from sales of software to distributors, resellers and
end-users and are recognized upon shipment of products, net of provisions for
estimated future returns and price protection, provided that no significant
vendor obligations remain and collection of accounts receivable is deemed to be
probable. With the introduction of First Aid 95 in September 1995, CyberMedia
implemented a policy of offering customers updates to certain of its products
over the Internet at no additional cost. The Company has for all periods
deferred a portion of all First Aid, Oil Change, UnInstaller Guard Dog Deluxe
and CSS revenue
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ratably over estimated update periods, generally one year from the date of
sale. Under SOP 97-2, adopted by the Company effective January 1, 1998, the
Company will maintain this policy for its First Aid, UnInstaller Guard Dog
Deluxe and CSS products. Because Oil Change has a subscription renewal program
which is separately available one-year after the initial purchase of the
product, effective January 1, 1998, the Company increased the deferral amount
on sales of this product to more properly reflect such subscription use. At
June 30, 1998 the Company's balance sheet included $3.8 million of unearned
revenues which will be recognized ratably over the estimated update or in the
case of Oil Change, subscription periods, generally one year. To the extent
that revenues from these products grow on a quarterly basis, the total amount
of deferred revenue may increase and be reported on the balance sheet as
unearned revenue.
The Company monitors the levels of purchases and returns on a product by
product and customer by customer basis. Sales are made subject to certain
rights of return and reserves are established at time of shipment for potential
future return of product based on product history, analysis of retail
sell-through and other factors. In addition, the Company may on occasion grant
price protection to distributors to 1) enhance sell-through of an older version
of it's products, prior to a new release, or 2) respond to market pressures on
pricing where appropriate.
During the first quarter of 1998, the Company worked with its major
distributors to adjust inventory levels and reduce their accounts receivable
balances. As a result, the Company authorized returns in the first quarter of
1998 of $11.5 million all of which was received by June 30, 1998 and charged to
the reserve for returns. After such returns and additional reserves provided
during the first six months of 1998, the allowance for returns balance as of
June 30, 1998 was $7.4 million. To further facilitate the reduction of
accounts receivable balances, and channel inventory levels, the Company shipped
only minimal amounts of product to distributors during the first two quarters
of 1998. This reduced revenue for the first and second quarters of 1998 by
significant amounts and contributed to the significant losses reported in both
quarters.
In accordance with Statement of Financial Accounting Standards No. 86, the
Company is required to capitalize eligible computer software development costs
upon the achievement of technological feasibility, subject to net realizable
value considerations. To date, the Company has charged all such costs to
product development expenses because such costs have not been material.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net revenues, statement of
operations data for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -----------------
1998 1997 1998 1997
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Net revenues ........................................ 100.0% 100.0% 100.0% 100.0%
Cost of revenues .................................... 52.5 19.0 41.3 21.9
----- ----- ----- -----
Gross profit ...................................... 47.5 81.0 58.7 78.1
Operating expenses:
Research and development .......................... 41.6 13.4 49.9 11.6
Sales and marketing ............................... 151.5 46.9 215.9 48.0
General and administrative ........................ 56.3 8.2 59.5 7.1
One-time-in-process R&D and acquisition expenses... 0.0 44.4 0.0 24.6
------ ----- ------ -----
Total operating expenses ....................... 249.4 112.9 325.3 91.3
------ ----- ------ -----
Loss from operations ........................... (201.9) (31.9) (266.6) (13.2)
Other income (expense) .............................. (0.3) 1.9 2.5 2.5
------ ----- ------ -----
Loss before income taxes ....................... (202.2) (30.0) (264.1) (10.7)
Income tax expense .................................. -- 2.8 .1 3.8
------ ----- ------ -----
Net loss ....................................... (202.2)% (32.8)% (264.2)% (14.5)%
====== ===== ====== =====
</TABLE>
Net Revenues. Net revenues decreased 71% to $5.9 million in the three months
ended June 30, 1998 from $20.4 million in the three months ended June 30, 1997.
For the six month period ended June 30, 1998, net revenues decreased 71% to
$10.6 million from $37.0 million in the same period in 1997. The
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Company's net revenues consist of license fees for its software products, less
provision for returns and allowances. The Company sells its products primarily
to distributors for resale to retailers as well as directly to consumers
through direct mail, the Internet and through software catalogs. The decrease
in net revenues during the period was largely attributable to significantly
smaller orders placed by the Company's distributors during the first and second
quarters of 1998. During the second quarter, the Company continued to work
with its major distributors on analysis and assessment of inventories at
distribution, and sell-through of its products. Inventories of the Company's
products held by distributors as measured in number of days of sales at current
sell-through rates, at March 31, 1998 and June 30, 1998 were significantly
lower than at December 31, 1997. In addition, the Company provided price
protection on its UnInstaller product during the first and second quarters of
1998, which increased the provision for returns and allowances. Also in the
second quarter of 1998, the software industry in general, experienced a
slowdown of product moving from retailers to end-users which the Company
believes was in part caused by uncertainty related to the launch of Microsoft
Windows '98. While the slowdown in sales from retail to end-users doesn't have
an immediate effect on orders placed, it does impact analysis of inventory
levels and therefore, reserve and provision levels.
Net revenue from international sales accounted for approximately 0% and 21% of
net revenues for the three months ended June 30, 1998 and 1997 respectively. For
the six month periods ended June 30, 1998 and 1997, the percentage of net
revenues from international sales was approximately 7.5% and 18.5%,
respectively. The decrease in international revenues from the second quarter of
1997 to the second quarter of 1998 was due to increases to the reserve for
returns resulting from inventory and reserve analysis in Europe as well as a
significant reduction in Japanese business. The Company denominates certain
international sales in local currencies, primarily in Europe. As a result, the
Company is subject to the risks associated with fluctuations in currency
exchange rates. The Company does not currently engage in hedging transactions
and there can be no assurance that it will not incur significant losses related
to currency fluctuations. Risks inherent in the Company's international sales
generally include the impact of such fluctuating exchange rates, longer payment
cycles, unexpected changes in regulatory requirements, seasonality due to the
slowdown in European business activity during the third quarter, and tariffs and
other trade barriers. There can be no assurance that these factors will not have
a material adverse effect on the Company's future business, financial condition
and results of operations.
Cost of Revenues. Cost of revenues were $3.1 million and $3.9 million for the
three month periods ended June 30, 1998 and 1997, respectively. For the six
months ended June 30, 1998, cost of revenues decreased to $4.4 million from
$8.1 million for the same period in 1997. Cost of revenues consists primarily
of the cost of product media, product duplication, documentation and order
fulfillment and royalties. The decreases in cost of revenues were due primarily
to decreased unit shipments of the Company's products during the first half of
1998 as compared to the same period in 1997.
Gross Margin. Gross margins were 47.5% and 81% in the three months ended June
30, 1998 and 1997, respectively. For the six month periods ended June 30, 1998
and 1997, gross margins were 58.7% and 78%, respectively. Gross margin
decreased significantly during the quarter and six months ended June 30, 1998
compared to the same period a year ago, due to greater than anticipated scrap
from the large product returns the Company accepted in the period, slightly
higher than normal bill of material costs related to free add-in items for
certain of the Company's products, and the effect of higher per unit costs
associated with fulfillment and assembly on lower volumes and revenues.
Research and Development. Research and development expenses decreased by
10.7% from $2.7 million in the three months ended June 30, 1997 to $2.4 million
in the same period in 1998, representing 13%, and 42% of net revenues in these
quarters, respectively. For the six months ended June 30, 1998, research and
development expenses were $5.3 million (50% of net revenues) compared to $4.3
million (12% of net revenue) for the same period in 1997. 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 decrease in research and development
expenses was primarily attributable to a decrease in usage of outside
consultants partially offset by an increase in personnel from 84 in the second
quarter of 1997 to 89 in the same period in 1998. The increase in research and
development expenses as a percent of revenue was primarily due to the decrease
in revenue in the three and six months
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ended June 30, 1998 as compared to the same periods in 1997. The Company
believes that significant investments in product development are required to
remain competitive.
Sales and Marketing. Sales and marketing expenses decreased slightly from $9.6
million in the three months ended June 30, 1997 to $8.9 million in the same
period of 1998, representing 47% and 152% of net revenues in these periods,
respectively. Sales and marketing expenses for the six months June 30, 1998
were $22.8 million (216% of net revenues) compared to $17.7 million (48% of net
revenues) for the same period of 1997. Sales and marketing expenses consist
primarily of costs of all sales and marketing personnel, sales commissions,
co-op and other advertising costs, postage and printing costs associated with
direct mail solicitations, package design costs, trade show costs and costs of
preparing promotional materials. The decreases in the dollar amount of sales and
marketing expenses in the three months ended June 30, 1998, compared to the same
period in 1997, were due primarily to decreases in sales promotion programs and
commissions earned by sales people during the second quarter of 1998 partially
offset by an increase in personnel. The increase in sales and marketing
expenses from the six months ending in June of 1997 to the six months ending in
June of 1998 was primarily due to increases in sales and marketing personnel and
programs between the first quarter of 1997 and 1998. Sales and marketing
headcount grew from 62 to 101 between the first quarter of 1997 and the first
quarter of 1998, then was reduced to 81 at the end of the second quarter of
1998. The increase in sales and marketing expenses as a percent of revenue was
due primarily to the decrease in revenue between the respective periods in 1997
and 1998.
General and Administrative. General and administrative expenses increased
from $1.7 million in the three month period ended June 30, 1997 to $3.3
million in the same period in 1998, representing 8% and 56% of net revenues in
these periods, respectively. General and administrative expenses consist
primarily of personnel costs for finance, administration, operations and
general management, as well as legal and accounting expenses. The increase in
the dollar amount of general and administrative expenses from the second
quarter of 1997 to the second quarter of 1998 was due primarily to an increase
in legal expenses related to pending lawsuits. In addition, the Company
continued to experience growth in the infrastructure of the Company's finance,
administrative and operations groups in order to support the Company's
operations. Headcount in these areas increased from 45 to 51 from the second
quarter of 1997 to the second quarter of 1998. The increase in general and
administrative expenses as a percent of revenue was due both to the decrease in
revenue between the second quarter of 1997 and the same period in 1998 and an
increase in expenses for these same periods. General and administrative
expenses increased from $2.6 million in the six months ended June 30, 1997 to
$6.3 million in the same period in 1998. The increase was due to legal
expenses incurred due to pending lawsuits, recognized compensation expense
related to accelerated vesting of stock options to certain founders and
executives of the Company who resigned during the first quarter of 1998 and
growth in the Company's infrastructure.
Other Income(expense), net. Other income (expense), net was $(19,000) and
$398,000 in the three month periods ended June 30, 1998 and 1997, respectively.
For the six month periods ended June 30, 1998 and 1997, other income (expense)
net was $261,000 and $919,000, respectively. Other income (expense), net
consists of interest income and interest expense and currency related losses and
gains. The decrease in other income (expense), net from the second quarter of
1997 to the second quarter of 1998 and six months ended June 30, 1997 and 1998,
were due primarily to a reduction in interest income due to a smaller invested
balance of cash during the latter period and to a lesser extent, foreign
currency losses and the loss on the sale of the Company's Japanese subsidiary
during these three months ended June 30, 1998.
Provision for Income Taxes. The provision for income taxes includes estimated
foreign taxes attributable to activities during the six months ended June 30,
1998. In addition, the provision for income taxes for the three month period
ended June 30, 1997 includes the foreign tax provision recorded on a large sale
of product by the Company's Japanese subsidiary. The Company had federal and
state net operating loss carry- forwards of approximately $3.1 million at
December 31, 1997. These loss carry-forwards expire at various dates beginning
in the year 2006 and are subject to certain limitations as prescribed by
Section 382 of the Internal Revenue Code of 1986, as amended. The Company has
not reflected deferred tax assets for these losses as realization of the
deferred tax asset is not more likely than not due to the lack of a consistent
history of profitable operations. The recorded deferred tax assets relate to
refunds associated with loss carryback provisions of the tax code which will be
due the Company for previous taxes paid.
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Liquidity and Capital Resources
Initially, the Company financed its operations primarily through private
sales of Preferred Stock totaling $10.5 million. Furthermore, in October 1996,
the Company completed an initial public offering of 3,250,000 shares of Common
Stock at $16.00 per share. Net proceeds to the Company were approximately $41.5
million. In the first six months of 1997 and 1998, the Company used $9.1
million and $13.4 million of cash, respectively, in operating activities.
During the six months ended June 30, 1997, the Company used net cash in
operating activities principally to support increases in accounts receivable
associated with increased net revenues. During the six months ended June 30,
1998 the Company's use of cash to support the loss in such period and to pay
1997 taxes was partially offset by collections on outstanding accounts
receivables.
In the first six months of 1997 and 1998, the Company's investing activities
consisted of purchases of furniture, fixtures and equipment, primarily PCs, and
accessories in the amount of $986,000 and $890,000, respectively. In addition,
during the first six months of 1998, $1.0 million of marketable securities
matured and were transferred to cash and cash equivalents. At June 30, 1998,
the Company had no material commitments for capital expenditures.
To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk.
Management expects that in the future cash in excess of current requirements
will be invested in short-term, interest-bearing, investment grade securities.
At June 30, 1998, the Company had $12.8 million in cash and cash equivalents,
and $6.4 million in working capital. The Company also has available a
non-recourse financing arrangement under which it has borrowed no money since
September 1997 and no balances have been outstanding since January 1998. At
June 30, 1998 the Company had commitments for cash outlays of approximately
$2.7 million associated with the acquisition of MicroHelp UnInstaller and
technology from ServiceWare Inc., payable over the next 12 months. Subsequent
to June 30, 1998 approximately $350,000 of this obligation has been paid. On
July 28, 1998, a $10 million loan was provided by Network Associates to the
Company. The Company believes that its current cash balances including the $10
million loan, cash available under its current financing arrangement and cash
flow from operations, if any, will be sufficient to meet these needs as well as
its other working capital and capital expenditure requirements for at least the
next 12 months. The Company also believes that additional debt or equity
financing will be available to it should the need arise. The Company does
expect its cash and cash equivalent balances to decrease in the next few
quarters due to the lower levels of revenues generated in the fourth quarter of
1997 and the first and second quarters of 1998, and the reduced amounts of cash
collections which will result.
The Company recognizes that some of its internally used computer systems and
programs have not yet been certified by supplying vendors as being Year 2000
compliant. The Company has appointed a Year 2000 compliance committee to
determine the extent to which it is vulnerable to such date truncation
problems. The committee provides updates on a monthly basis with respect to
each software program used by the Company and its current compliance status.
Currently, 60% of the Company's existing software is in the testing stage, 22%
is compliant and 18% is compliant with minor issues. There can be no guarantee
that the systems of the Company's suppliers, distributors and others upon which
the Company's systems and/or personnel rely will be timely converted, or that a
failure to convert or an incompatible conversion by one of these parties might
not have a material adverse effect on the Company. The Company does not yet
have an estimate of the future costs associated with Year 2000 compliance work,
although costs incurred to date have not been material.
New releases of the Company's software products have been designed to address
processing for the year 2000 to the extent it has been required. The Company's
Year 2000 compliance committee intends to have then current versions of its
software Year 2000 compliant by the end of 1998. However, to the extent that
third party products bundled with the Company's products by system integrators
are not compliant, the Company may have no knowledge as to the year 2000
readiness of those third party products. In addition, it is possible that
claims could be asserted against the Company or its customers concerning year
2000 issues and regardless of their merits or lack thereof, these claims could
be material.
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The Company currently does not have a contingency plan in the unlikely event
existing software is not Year 2000 compliant by the year 2000. The Company
believes a contingency plan could be created by December 31, 1999, should the
need arise.
Factors Effecting Operating Results
Limited Operating History and History of Operating Losses. The Company has
only a limited operating history upon which to base an evaluation of its
business and prospects. The Company commenced operations in November 1991 and
introduced its first automatic service and support product, Win Win, in 1993.
The Company introduced the first Windows 95 compatible version of its First Aid
product line in September 1995. During 1996, both the Company's net revenues
and operating expenses, particularly sales and marketing expenditures,
increased rapidly compared to prior periods. From inception to June 30, 1998
the Company generated net sales of approximately $125.4 million, of which
$120.3 million, or 96% of such amount, was generated in the thirty months ended
June 30, 1998. The Company has incurred net losses in each of the last five
fiscal years, resulting in an accumulated deficit of $48.7 million at June 30,
1998. In addition, since 1992, the Company's operating expenses have increased
significantly as a result of efforts to expand its sales and marketing
operations, including international sales, to fund greater levels of product
development and to increase its administrative infrastructure. The Company's
net revenues in 1997 increased 85% over the net revenues for the same period in
1996. This increase was attributable in part, to sales of software products,
the rights to which were Company acquisitions in 1997. There can be no
assurance that the Company's net revenues will increase from the level
experienced in 1997 or that net revenues will not decline sequentially as they
did in the fourth quarter of 1997 and the first half of 1998. The Company
anticipates that in the future it may make significant investments in its
operations, particularly to develop and introduce new products, to support
sales activities, to expand into new markets such as enterprise, international
and OEM and that as a result, operating expenses may increase significantly. If
net revenues do not increase correspondingly, the Company is likely to continue
to incur net losses and its financial condition could be materially adversely
effected. The Company has not yet achieved profitability on an annual basis,
and there can be no assurance that the Company will achieve or sustain
profitability on a quarterly or annual basis. Furthermore, operating results
for future periods are subject to numerous uncertainties. The Company's
prospects must be considered in light of the risks encountered by companies
with limited operating histories, particularly companies in new and rapidly
evolving markets. While the Company believes that it has sufficient cash
resources to meet its obligations for the next twelve months, no assurance
exists that current cash and cash equivalent balances, and cash from
operations, if any, and existing credit lines will be sufficient to fund future
operations of the Company or that outside sources of funds will be available
when and if such funds are needed. In addition, the Company's future
operating results will depend upon, among other factors, the demand for the
Company's software products, the level of product and price competition, the
Company's success in expanding its direct and indirect distribution channels,
in attracting and retaining motivated and qualified personnel, the ability of
the Company to expand its international sales, develop and market new products
and product upgrades and manage product transitions, the ability of the Company
to control costs, the growth of activity on the Internet and the World Wide Web
(the "Web"), and general economic conditions. Many of these factors are beyond
the Company's control. If the Company is not successful in addressing such
risks, the Company could be materially adversely effected.
Risk of Product Returns. The Company's business includes a substantial risk
of product returns from distributors, retailers and end users, either through
the exercise of contractual return rights or as a result of the Company's
policy of assisting customers in balancing and updating inventories. Individual
end users may return products within 60 days of the date of purchase for a full
refund. Most retailers and distributors also have the ability to return
products for a full refund. The rate of product returns may increase because of
a variety of factors, including competitors' promotional or other activities,
an increase in the proportion of the Company's business attributable to mass
merchandisers, overstocking by the Company's distributors or retailers due to
unrealized demand for new products, or a decline in demand for the Company's
products as compared to historical levels. As the Company introduces new
products and enters new markets where the Company has had limited experience,
the risk of product returns may increase. In particular, the Company has
recently released First Aid 98, Guard Dog Deluxe and UnInstaller Deluxe. In
addition, in the event that
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the Company's packaging is claimed to infringe on the intellectual property
rights of third parties, the Company could be required to recall its
distributed products for repackaging, or to cease shipping product in its
current packaging, which could materially adversely effect the business,
results of operations and financial condition of the Company. In particular,
the Company agreed to change the packaging of its UnInstaller product after
February 1998. To the extent this product is returned after that date, such
product may not be resold.
Although the Company establishes reserves based on estimated future returns
of products and price protection, taking into account the timing of new product
introductions, promotional activities, distributor and retailer inventories of
the Company's products and other factors, there can be no assurance that actual
levels of returns and price protection will not significantly exceed amounts
anticipated by the Company. There can be no assurance that the level of
returns will not significantly increase in the future. Particularly in light
of recent new product introductions, any material increase in the level of
returns could materially adversely effect the Company's business, results of
operations and financial condition.
During the first half of 1998, the Company worked with its major distributors
to adjust inventory levels and reduce their accounts receivable balances. As a
result, the Company authorized returns in the first quarter of 1998 of $11.5
million, all of which was received by June 30, 1998 and charged to the reserve
for returns. After returns and additional reserves provided during the first
six months of 1998, the allowance for returns balance as of June 30, 1998 was
$7.4 million. To further facilitate the reduction of accounts receivable
balances, and channel inventory levels, the Company shipped only small amounts
of product to distributors during the first quarter of 1998. These actions
reduced revenue for the first six months of 1998 and contributed to the
significant losses reported in both quarters.
Potential Fluctuations in Quarterly Results. The Company's quarterly
operating results have fluctuated in the past and are expected to fluctuate
significantly in the future. These fluctuations may arise as a result of a
number of factors, including the number and timing of new product
introductions, upgrades and product enhancements by the Company or its
competitors, purchasing patterns of distributors and customers, marketing and
promotional programs, pricing and other competitive pressures, order deferrals
and product returns in anticipation of new products or upgrades to existing
products, the mix of distribution channels through which the Company's products
are sold, the Company's decisions regarding hiring and other expenses, market
acceptance of the Company's products, market acceptance of commerce over the
Internet, technological limitations of the Internet, the developing nature of
the market for the Company's products, general economic conditions and other
factors. The Company generally ships products as orders are received and,
accordingly, the Company has historically operated with relatively little
backlog. As a result, quarterly revenues will depend predominantly on the
volume and timing of orders received during a particular quarter, both of which
are difficult to forecast. In fact, the Company typically generates a large
percentage of its quarterly revenues during the last few weeks of the quarter.
A significant portion of the Company's operating expenses are relatively fixed
in the short term, and planned expenditures are based on sales forecasts. To
the extent that such expenses precede forecasted net revenues, the Company's
business, results of operations and financial condition could be materially
adversely effected. In addition, the consumer software industry in which the
Company operates has seasonal elements. In recent years, the consumer software
industry has experienced lower demand in the summer months relative to other
periods. If net revenues fall below the Company's expectations, expenditure
levels as a percentage of total net revenues could be disproportionately high,
and operating results could be immediately and adversely effected. The Company
believes that period- to-period comparisons of its operating results are
difficult and should not be relied upon as any indication of future
performance. Due to the foregoing factors, among others, it is likely that the
Company's future quarterly operating results from time to time will not meet
the expectations of securities analysts or investors, which may have an adverse
effect on the price of the Company's common stock.
Management of Growth; Dependence on Key Personnel. The Company's business has
changed rapidly during the past two years and such changes have placed and, if
sustained, will continue to place, significant demands on the Company's
management and resources. 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
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activities and the hiring of a number of new employees, which have resulted in
higher operating expenses. Between December 1, 1995 and June 30, 1998, the
number of Company employees increased from approximately 20 to approximately
221. Subsequent to December 31, 1997 the Company's Chief Executive Officer and
Chief Financial Officer resigned. The Company has found replacements for these
positions and has entered into employment agreements with these executive
officers in order to help assure their retention by the Company. However, there
can be no assurance that any such employment agreements will sufficiently
incent such executive officers to remain with the Company. The Company does
not maintain any key person insurance policies on the lives of any of its
executive officers. The Company's ability to manage any future growth, should
it occur, will depend upon the Company's ability to retain these individuals
and other executives, as well as the successful expansion of its sales,
marketing, research and development, customer support and administrative
infrastructure. There can be no assurance that the Company will be able to
attract, manage and retain additional personnel to support any future growth or
will not experience significant problems with respect to any infrastructure
expansion or the attempted implementation of systems, procedures and controls.
Any failure in one or more of these areas could have a material adverse effect
on the Company's business, results of operations and financial condition.
The Company's future success also depends on its continuing ability to
attract and retain highly qualified technical personnel. Competition for such
personnel is intense and there can be no assurance that the Company will be
able to retain its key technical employees or that it will be able to attract
and retain additional highly qualified technical personnel in the future. Any
inability to attract and retain the necessary technical personnel could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Product Concentration; Risks Associated with First Aid Upgrades. During 1996,
1997 and the first six months of 1998, over 90% over 75% and over 32%,
respectively, of the Company's net revenues were attributable to sales of its
First Aid products. Although the Company anticipates that sales of its First
Aid products will account for a substantial portion of its net revenues in the
future, the Company believes that sales of its new products such as Oil Change,
UnInstaller, Guard Dog Deluxe and CSS also will contribute significantly. The
Company's future financial performance will depend in large part on the
successful development, introduction and customer acceptance of UnInstaller,
Guard Dog Deluxe, Oil Change and other new product offerings and enhanced
versions of the Company's products including CyberMedia Support Server, the
first offering in the Company's enterprise product line. A decline in the
demand for First Aid or other ActiveHelp products, failure to achieve market
acceptance of upgrades to such products or failure of net revenues derived from
such products to meet the Company's expectations, whether as a result of
competition, technological change or other factors, could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Competition. The PC software industry is intensely competitive and
characterized by short product life cycles and frequent new product
introductions. The Company competes with software companies of varying sizes
and resources, including Network Associates Inc., Symantec Corp., Quarterdeck
Corporation, SystemSoft Corporation and others. Furthermore, the Company may
compete with other companies that introduce automatic service and support,
security and anti-virus protection software products. Moreover, there are no
proprietary barriers to entry that could keep existing and potential
competitors from developing similar products or selling competing products in
the Company's markets. To the extent that the Company's competitors bundle
their software products with leading hardware, application software or
operating system vendors, or if one or more of the operating system vendors,
such as Microsoft, IBM, Intel or others succeeds in incorporating functionality
comparable, or perceived as comparable, to that offered by the Company in its
products, (or separately offers comparable products), the Company's business,
results of operation and financial condition could be materially adversely
effected. There can be no assurance that the Company will be able to compete
successfully with existing or potential competitors. In particular, Microsoft's
"Zero Administration for Windows" initiative is a collection of technologies
from Microsoft that make the Windows family of systems easier to use for the
consumer and easier to manage for IS administrators. There can be no
assurance that any such initiative by Microsoft or others would not render the
Company's products uncompetitive or obsolete. Furthermore there can be no
assurance that other current or potential competitors with longer operating
histories, significantly greater financial, technical, marketing or other
resources, significantly greater name recognition or a larger installed base of
customers
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than the Company will not introduce products comparable, or perceived as
comparable to those of the Company. Increased competition may result in the
loss of shelf space or a reduction in demand or sell-through of the Company's
products, any of which could have a material adverse effect on the Company's
business, results of operations and financial condition.
The Company also expects that competition will increase as a result of software
industry consolidations. In addition, current and potential competitors have
established, or may establish cooperative relationships among themselves or
with third parties to increase the ability of their products to address the
needs of the Company's prospective customers. Accordingly, it is possible that
current and potential competitors or alliances among competitors may emerge and
rapidly acquire significant market share. Increased competition may result in
price reductions, reduced gross margins, and loss of market share, any of which
could have a material adverse effect on the Company's business, operating
results and financial condition. In addition, the Company provides price
protection to its distributors in the event the Company reduces its prices.
There can be no assurance that the Company will be able to compete successfully
against current and future competitors or that competitive pressures faced by
the Company will not materially and adversely effect its business, financial
condition or results of operations.
The enterprise software market targeted by the CyberMedia Support Server
product line is expected to be subject to intense competition from a number of
sources including solutions currently being utilized by IS administrators.
There can be no assurance that the CSS product line will gain acceptance in the
enterprise market or that, if accepted, competitors with longer operating
histories, significantly greater financial technical, marketing and other
resources, significantly greater name recognition and a larger installed base
of customers than the Company will not introduce products comparable, or
perceived as comparable to those of the Company.
In addition to software company competitors, the Company also competes
indirectly against alternative sources of technical support, such as the
technical support departments of hardware and software vendors. Additionally,
the Internet provides hardware and software vendors with a new medium to offer
technical support services. The Company expects that many vendors will provide
Internet-based technical support services to support their existing and future
products. The availability of these technical support services could materially
dilute the value of the Company's products and have a material adverse effect
on the Company's market position, business, results of operations and financial
condition.
Dependence on Distribution Channels. The Company currently sells its products
primarily through distributors for resale to the retail channel. Sales to such
distributors accounted for approximately 69%, 66% and 56%, respectively, of the
Company's net revenues in 1996, 1997, and the first six months of 1998.
Sales to a limited number of distributors have constituted and are expected
to continue to constitute a substantial portion of the Company's net revenues.
Sales to the Company's top two distributors accounted for approximately 25% and
25%, respectively, of the Company's net revenues in 1996, 25% and 25%,
respectively, of the Company's net revenues in 1997 and approximately 30% and
20% of the Company's net revenues in the six months ended June 30, 1998. No
other single customer accounted for more than 10% of net revenues in any of the
periods discussed above. The loss of, or reduction in, orders from any of
these distributors could have a material adverse effect on the Company's
business, results of operations and financial condition. Historically, margins
for distributors in the PC software industry have been low, competition has
been intense and distributors have relied on timely payments from their
customers. Financial difficulties of any distributors could render the
Company's associated accounts receivable uncollectible, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, any special distribution arrangements or
product pricing arrangements that the Company may implement for strategic
purposes in one or more of its distribution channels could materially adversely
effect 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
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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 could have a
material adverse effect on the Company's business, results of operations and
financial condition. The Company has entered into and seeks to continue to
establish strategic alliances with third-party vendors to increase and vary the
distribution of its automatic service and support products. To date, none of
these agreements or strategic alliances has generated significant revenue and
there can be no assurance that any of these agreements or strategic alliances
will be a material source of revenues for the Company. In addition, there can
be no assurance that these agreements and alliances will not be amended or
terminated prior to their expiration due to changed commercial conditions or
other such reasons.
Net revenues from direct mail sales in 1997 and the second half of 1998
represented approximately 8% and 3% of net revenues in each of these periods,
respectively. Sales from direct mail, which comprise a large proportion of
direct sales, have historically operated at lower profitability levels than
sales through distributors. Accordingly, quarterly shifts in the mix of sales
through distributors and through direct sales could cause fluctuations in the
Company's profitability. There can be no assurance that the mix of sales or the
relative profitability by distribution channel will remain at current levels in
the future.
Dependence on Microsoft Windows and Windows NT. The Company's success is
dependent on the continued widespread use of the Windows and Windows NT
operating systems for PCs. The Company's ActiveHelp products are designed to
automatically detect, diagnose and resolve common problems in the Windows and
Windows NT operating environment. Although Windows operating systems are
currently used by many PC users, other companies, including International
Business Machines Corporation and Apple Computer, Inc., and Sun Microsystems,
Inc., have developed or are developing other operating systems that compete, or
will compete, with Windows. In the event that any of these alternative
operating systems become widely accepted in the PC marketplace, demand for the
Company's products could be adversely effected, thereby materially adversely
effecting the Company's business, results of operations and financial
condition. In addition, Microsoft may introduce a new operating system to
replace Windows or could incorporate some or many of the key features of the
Company's products in new versions of its operating systems, thereby
eliminating the need for users to purchase the Company's products.
Specifically, the Company expects Microsoft to release Windows '98 in calendar
1998. To the extent that the Company's products are not compatible with
Windows '98, the Company may need to significantly update its products. In
addition the Company may experience significant returns of older versions of
its products. The inability to adapt current products or to develop new
products for use with any new operating systems on a timely basis, or the delay
in the introduction of new Microsoft operating systems or new versions of
operating systems, could have a material adverse effect on the Company's
business, results of operations and financial condition.
In addition, the Company's ability to develop products based on Windows and
Windows NT operating systems and release these products immediately prior to,
or at the time of Microsoft's release of new and upgraded Windows and Windows
NT products is substantially dependent on its ability to gain pre-release
access to, and to develop expertise in, current and future versions of Windows
and Windows NT . There can be no assurance that the Company will be able to
provide products that are compatible with future Windows and Windows NT
releases on a timely basis, with or without the cooperation of Microsoft.
Developing Market. The Company's products address the new and rapidly
evolving market for automatic service and support software. The market for
automatic service and support software products has only recently begun to
develop and is characterized by an increasing number of existing and potential
market entrants who are in the process of introducing or developing automatic
service and support software. As is typical in the case of a new and rapidly
evolving market, the demand and market acceptance for recently introduced
products are subject to a high level of uncertainty and risk. It is difficult
to predict the future growth rate and size of this market. There can be no
assurance that the market for the Company's products will develop, that demand
for the Company's products or for automatic service and support and
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Internet privacy and security software products in general will increase or
that the rate of growth of this demand will be sustainable or will not
decrease. The Company's ability to develop and successfully market additional
products depends substantially on the acceptance of automatic service and
support software by individual and corporate users as an effective means of
addressing their technical support requirements and the acceptance of Internet
privacy and security software as an effective means of protecting their
critical and sensitive information. If the market fails to develop, develops
more slowly than expected or becomes saturated with competitors, or if the
Company's products do not achieve or sustain market acceptance, the Company's
business, results of operations and financial condition could be materially
adversely effected.
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 could have a material adverse effect on continued market acceptance of
the Company's products. The Company's ability to design, develop, test and
support on a timely basis new software products, updates and enhancements that
respond to technological developments and emerging industry standards in the
Company's current market as well as new markets such as the enterprise market
is critical to the Company's future success. There can be no assurance that the
Company will be successful in such efforts or that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of new products and enhancements, or that its new
products, upgrades and enhancements will adequately meet the requirements of
the marketplace and achieve market acceptance. The introduction of new
products, upgrades or enhanced versions of existing products is subject to the
risk of development delays due to resource constraints, technological change
and other factors. In addition, the Company may encounter difficulties or
delays in developing products for the enterprise market in which the technical
and functional requirements for products are different from and often more
complex than those in the retail market. If the Company is unable to develop
on a timely basis, new software products, upgrades or enhancements to existing
products or if such new products, upgrades or enhancements do not achieve
market acceptance, the Company's business, results of operations and financial
condition could be materially adversely effected.
The Company supplements its in-house product development by engaging
work-for-hire software engineers in India. In addition, the Company from time
to time engages other software engineers on a contract basis. Any loss of the
services of these engineers due to political or economic instability or for any
other reason could adversely effect the Company's product development efforts
and thereby could materially adversely effect the Company's business, results
of operations and financial condition.
Dependence on the Internet. The commercial viability of the Company's
products and the Company's ability to execute its strategy to leverage the
Internet as a platform for its products and services are dependent upon the
continued development and acceptance of the Internet. In addition, the
Company's future success may be dependent upon continued growth in the use of
the Internet in order to support the distribution of products and future
upgrades. The use of the Internet as a distribution channel is new and unproven
and represents a significant departure from traditional distribution methods
employed by software companies. Critical issues concerning the commercial use
of the Internet (including security, reliability, cost, ease of use,
accessibility, speed and potential tax or other government regulation) remain
unresolved and may effect the use of the Internet as a medium to support the
functionality of the Company's products as well as to distribute software.
There can be no assurance that the use of the Internet will remain effective
for either current or future products. The failure of the development and
acceptance of the Internet could have a material adverse effect on the
Company's business, results of operations and financial condition. The
Company's future success depends, in part, upon the future growth of the
Internet for commercial transactions. There can be no assurance that
communication or commerce over the Internet will become widespread and it is
not known whether this market will develop to the extent necessary to sustain
or increase the demand for the Company's products sold via electronic commerce.
The Internet may not prove
19
<PAGE> 20
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 effect customers' ability or willingness to access the
Company's products or upgrades over the Internet. In addition, the security and
privacy concerns of existing and potential customers, as well as concerns
related to computer viruses, may inhibit the growth of the Internet marketplace
generally and the customer base for the Company's products in particular. If
use of the Internet does not continue to grow, if the Internet infrastructure
does not effectively support customer demand or if hardware and software
vendors do not continue to post updates and patches on the Internet, the
Company's business, results of operations and financial condition could be
materially adversely effected.
Limited Protection of Proprietary Rights. The Company's success is heavily
dependent upon its proprietary software. The Company relies primarily on a
combination of copyright, trademark and trade secret laws, employee
confidentiality and nondisclosure agreements, third-party nondisclosure
agreements and other methods of protection common in the consumer software
industry to protect its proprietary rights. The Company licenses its products
primarily under "shrink wrap" license agreements that are not signed by
licensees and therefore may be unenforceable under the laws of certain
jurisdictions. In addition, the Company has two United States patent
applications pending and intends to seek international and additional United
States patents on its technology. There can be no assurance that patents will
issue from the Company's pending applications or that any claims allowed from
the pending patent applications or those hereafter filed will be of sufficient
scope or strength, or be issued in all countries where the Company's products
can be sold, to provide meaningful protection or any commercial advantage to
the Company or that any patents which may be issued to the Company will not be
challenged and invalidated. Although from time to time the Company obtains
copyright registrations on certain items of its technology, existing copyright
laws provide only limited protection. Despite the Company's efforts to protect
its proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use the Company's products or technology that the Company considers
proprietary, and third parties may develop similar technology independently.
Furthermore, there can be no assurance that others will not infringe the
Company's intellectual property rights. Policing unauthorized use of the
Company's products is difficult, and while the Company is unable to determine
the extent to which piracy of its software products exists, software piracy can
be expected to be a persistent problem. There can be no assurance that the
Company can meaningfully protect its proprietary rights. A failure by the
Company to meaningfully protect its intellectual property rights could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company also relies in part, on technology licenses
from third parties. In the event that such licenses are terminated, the
Company would need to license similar technology from alternative sources or
develop its own technology. In the event that the Company could not license
such similar technology on commercially viable terms or otherwise successfully
develop its own technology, the Company's business, results of operations and
financial condition could be materially adversely effected. In addition, there
can be no assurance that the Company's competitors will not independently
develop technologies and products that are substantially equivalent or superior
to those of the Company without violating the Company's proprietary rights, the
commercialization of which could have a material adverse effect on the
Company's business, results of operations and financial condition.
As the number of software products in the industry increases and the
functionality of these products increasingly overlaps, software developers may
become increasingly subject to infringement claims. From time to time, the
Company has received communications from third parties asserting that certain
products may infringe upon the intellectual property rights of others. To date,
no such claim has resulted in litigation or the payment of any damages.
However, there can be no assurance that existing or future infringement claims
against the Company with respect to current or future products will not result
in costly litigation or require the Company to enter into royalty bearing
licenses with third parties or to discontinue use of certain portions of the
Company's technology if licenses are not available on acceptable terms.
20
<PAGE> 21
The Company intends to continue expansion of the international distribution
of its products. The laws of some foreign countries either do not protect the
Company's proprietary rights or offer only limited protection for those rights.
The Company has not registered its copyrights in any foreign countries. While
in most foreign countries registration is not required in order to receive
copyright protection, the ability to bring an enforcement action and obtain
certain remedies depends on compliance with that country's copyright laws.
Consequently, the Company's failure to register its copyrights abroad may make
enforcement of these rights more difficult or reduce the available remedies in
any enforcement action. The Company is currently pursuing further foreign
registrations of its trademarks on a limited basis, but due to the substantial
costs involved and potential prior existing rights, unfavorable laws or other
obstacles to obtaining trademark protection, the Company may not be able to
prevent a third party from using its trademarks in a foreign jurisdiction.
System Interruption and Security Risks. The Company's ability to provide
product functionality through the Internet is dependent on its ability to
protect its system from interruption, whether by damage from fire, earthquake,
power loss, telecommunications failure, unauthorized entry or other events
beyond the Company's control. Most of the Company's computer equipment,
including its processing equipment, is currently located at a single site.
While the Company believes that its existing and planned precautions of
redundant systems, regular data backups and other procedures are adequate to
prevent any significant system outage or data loss, there can be no assurance
that unanticipated problems will not cause such a failure or loss. Despite the
implementation of security measures, the Company's infrastructure may also be
vulnerable to computer viruses, hackers or similar disruptive problems caused
by its customers, employees or other Internet users. Any damage or failure that
causes interruptions in the Company's operations could have a material adverse
effect on the Company's business, results of operations and financial
condition. Computer break-ins and other disruptions could jeopardize the
security of information stored in and transmitted through the computer systems
of the individuals and businesses utilizing the Company's products, which could
result in significant liability to the Company and also may deter customers and
potential customers from using the Company's services. Persistent problems
continue to effect public and private data networks. For example, in a number
of networks, hackers have bypassed network security and misappropriated
confidential information.
Volatility of Stock Price. The market price of the shares of the Company's
Common Stock is likely to be highly volatile and could be subject to wide
fluctuations in response to factors such as actual or anticipated variations in
the Company's operating results, announcements of technological innovations,
new products or new contracts by the Company or its competitors, third party
reviews or awards on the Company's or its competitor's products, developments
with respect to patents, copyrights or proprietary rights, changes in financial
estimates by securities analysts, conditions and trends in the software and
other technology industries, adoption of new accounting standards effecting the
software industry, general market conditions and other factors. Further, the
stock market has experienced extreme price and volume fluctuations that have
particularly effected 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 effect the market price of the Company's Common Stock.
The Company has been named as a defendant in a number of class action
litigations which could result in substantial costs and a diversion of
management attention and resources, which could have a material adverse effect
on the Company's business, results of operations and financial condition.
There can be no assurance that additional actions will not be brought against
the Company. On March 22, 1998, an amended complaint was filed, adding the
Company as a defendant to a lawsuit filed on March 2, 1998 in Los Angeles
Superior Court, against defendant Luckman Interactive Inc. by plaintiffs Mark
Novisoff, Timothy O'Pry, Janet Van Pelt and Thomas Lynch. Prior to this, the
Company was not a party to this lawsuit. These or other legal actions, as well
as general economic, political and market conditions, such as recessions or
international currency fluctuations, may adversely effect the market price of
the Common Stock.
Product Liability. The Company's software products may contain errors or
failures. There can be no assurance that, despite testing by the Company and
testing and use by current and potential customers, errors will not be found in
new products after commencement of commercial shipments. The occurrence of any
such errors could result in the loss of, or a delay in, market acceptance of
the Company's products,
21
<PAGE> 22
which could have a material adverse effect on the Company's business, results
of operations and financial condition. The Company's license agreements with
its customers typically contain provisions designed to limit the Company's
exposure to potential claims for damages. It is possible, however, that the
limitation of liability provisions contained in the Company's license agreement
may not be effective under the laws of certain jurisdictions. Although the
Company has not experienced any such claims to date, the sale and support of
the Company's products may entail the risk of such claims. While the Company
has obtained insurance against product liability risks, there can be no
assurance that such insurance will provide adequate coverage. The Company does
not currently carry errors and omissions coverage which may protect against
allegations that the Company's products have failed to perform adequately. Any
such claims for damages brought against the Company could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Risks Associated with Recent Acquisitions; Potential Future Acquisitions. In
April 1997, the Company acquired certain assets of Luckman Interactive, Inc.
and acquired Walk Softly, Inc. The integration of acquired assets, groups and
product lines is typically difficult, time consuming and subject to a number of
inherent risks. The integration of product lines requires the coordination of
the research and development and sales and marketing efforts of the acquired
groups and the Company. Such combinations have and will continue to require
substantial attention from management. The diversion of the attention of
management and any difficulties encountered in the transition process could
have a material adverse impact on the Company's business, financial condition
and results of operations. In addition, the process of assimilating and
managing the acquisitions could cause the interruption of, or a loss of
momentum in, the activities of the Company's business which could have a
material adverse effect on the Company. There can be no assurance that the
Company will realize the anticipated benefits of any of these acquisitions.
Future acquisitions of or by the Company may result in the diversion of
management's attention from the day-to-day operations of the Company's business
and may include numerous other risks, including difficulties in the integration
of the operations, products and personnel of the acquired companies. Further
acquisitions by the Company also have the potential to result in dilutive
issuances of equity securities, the incurrence of debt and amortization expense
related to goodwill and other intangible assets. Company management frequently
evaluates the strategic opportunities available to it and may in the near or
long-term pursue acquisitions of complementary businesses, products or
technologies.
In July, 1998, a tender offer was initiated by Network Associates to acquire
the Company. Should the tender offer not be completed, there is no assurance
that such activities will not have an material adverse effect on the Company's
ongoing business.
Risks Associated With Global Operations. The Company is expanding its sales
operations outside of the United States which will require significant
management attention and financial resources, however, during the second
quarter of 1998, net sales outside of the United States were zero due to
increases in sales reserves. The Company's ability to expand its product sales
internationally is dependent on the successful development of localized
versions of the Company's products, establishment of distribution channels,
acceptance of such products and the acceptance of the Internet internationally.
The Company's products rely on a knowledge base that contains detailed
information based on specific English language versions of third-party hardware
and software applications. This knowledge base must be recreated for each
foreign language version that is developed to support foreign releases of such
third-party products, many of which have been modified from their United States
releases. There can be no assurance that this task can be completed in a timely
or cost-effective manner or that enough products can be supported to ensure
customer acceptance. The Company believes that successful execution of a global
strategy is critical to maintaining its current market position and competitive
advantage. Failure to successfully expand its products to international markets
could cause the Company to lose business to global competitors or prevent the
development of strategic relationships with global hardware and software
vendors.
International operations are subject to a number of risks, including costs of
customizing products for foreign countries, dependence on independent
resellers, multiple and conflicting regulations regarding communications, use
of data and control of Internet access, longer payment cycles, unexpected
changes in regulatory requirements, import and export restrictions and tariffs,
difficulties in staffing and managing
22
<PAGE> 23
foreign operations, potentially adverse tax consequences, the burdens of
complying with a variety of foreign laws, the impact of possible recessionary
environments in economies outside the United States and political and economic
instability. An increase in the value of the United States dollar relative to
foreign currencies could make the Company's products more expensive and,
therefore, potentially less competitive in foreign markets. If the Company
increases its international sales, its net revenues may also be effected to a
greater extent by seasonal fluctuations resulting from lower sales that
typically occur during the summer months in Europe and other parts of the
world. Moreover, the laws of certain foreign countries in which the Company's
products may be sold may not protect the Company's intellectual property rights
to the same extent as do the laws of the United States, thus increasing the
possibility of piracy of the Company's products.
In addition, the European Monetary Union is embarking on a multi-year
introduction and conversion to a common currency called the Euro. There can be
no assurance that the Company can adopt or modify its systems and processes in
a timely and cost effective manner to accept this new currency. Any delays or
inability to conduct business using the Euro could materially effect the
Company's business, results of operations and financial condition.
Reliance on Outside Resources. The Company relies upon independent
contractors to perform a number of tasks, including product duplication and
packaging, reproduction of manuals and brochures and order fulfillment. The
Company depends on these outside parties to perform such functions to the
Company's specifications and quality standards. The Company currently does not
have long-term agreements with any of these outside parties. The Company
supplements its in-house product development by engaging work-for-hire
software engineers in India. In addition the Company from time to time engages
other software engineers on a contract basis. Although the Company believes
that alternative resources exist or can be obtained, a disruption of the
Company's relationship with any of these outside parties or the failure of
these outside parties to continue to provide quality supplies and services on a
timely basis could materially adversely effect the Company's business, results
of operations and financial condition.
Anti-takeover Provisions. The Company's Board of Directors has the authority
to issue up to 2,000,000 shares of Preferred Stock and to determine the price,
rights, preferences, privileges, and restrictions, including voting rights, of
those shares without any further vote or action by the stockholders. The
rights of the holders of Common Stock will be subject to, and may be adversely
effected by, the rights of holders of any Preferred Stock that may be issued in
the future. The issuance of Preferred Stock may delay, defer or prevent a
change in control of the Company. In addition, Section 203 of the Delaware
General Corporation Law, to which the Company is subject, restricts certain
business combinations with any "interested stockholder" as defined by such
statute. The statute may delay, defer or prevent a change in control of the
Company.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings:
In June 1997, the Company filed lawsuits in the U.S. District Court for the
Northern District of Georgia against MicroBasic GmbH ("MicroBasic") and
Roderick Manhattan Group, Ltd. ("RMG") demanding that they cease copying and
distributing MicroHelp UnInstaller. MicroBasic filed a counterclaim in November
1997 alleging breach of contract, copyright infringement, unfair trade
practices and unfair competition. The Company intends to defend against any
and all claims and allegations. In addition, in June 1997, the Company filed a
lawsuit in the Birmingham Mercantile Court, Great Britain, against RMG
demanding payment for past due invoices.
The Company and an individual officer of the Company have been named and
served as defendants in a civil complaint filed in the Los Angeles County
Superior Court on December 22, 1997 by Brad Kingsbury. Mr. Kingsbury is a
former employee of the Company. The complaint, as filed, alleges against the
Company certain causes of action including breach of contract, breach of good
faith and fair dealing, fraud and negligent misrepresentation arising from an
alleged grant of stock options and alleged accelerated vesting of such options.
The Company intends to vigorously defend against any and all such claims and
allegations.
23
<PAGE> 24
On February 4, 1998, CyberMedia filed a lawsuit against Symantec Corporation
in United States District Court for the Northern District of California. Also
named as defendants in the CyberMedia's Complaint are ZebraSoft, Inc. and three
individual officers and directors of ZebraSoft (Timothy O'Pry, Thomas Lynch
and Snehal Vashi). The Complaint alleges that the defendants violated the
federal copyright laws and misappropriated CyberMedia's trade secrets in
developing and distributing a computer software program, known as Norton
Uninstall Deluxe, that is competitive with CyberMedia's UnInstaller program.
The Complaint seeks money damages and injunctive relief against the defendants.
On March 11, 1998, defendants Symantec and ZebraSoft filed counterclaims
against CyberMedia for slander, libel, product disparagement and related state
law claims. Additionally, on June 4, 1998, the individual officers and
directors filed counterclaims against the Company for defamation. The
defendants' counterclaims seek unspecified money damages and injunctive relief.
The Company believes that the claims asserted in the Counterclaims are without
merit and intends to defend against them vigorously.
On March 12, 1998, a shareholder class action complaint was filed against the
Company and certain of its current and former officers and directors. The
complaint, Ong v. CyberMedia, et al., No. 98-1811, was filed in the United
States District Court for the Central District of California. The complaint
alleges a class period between July 22, 1997 and January 30, 1998. The
complaint asserts claims under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934. The allegations underlying the complaint surround an
alleged scheme by defendants to disseminate false and misleading statements
and/or to omit to state facts concerning the present and future finances and
business prospects of the Company during the class period. Plaintiff seeks an
unspecified amount of damages in excess of $75,000. On March 16, 1998,
plaintiff filed an amended class action complaint. The amended complaint added
an additional director defendant and extended the class period to March 13,
1998.
On March 19, 1998, a second class action complaint was filed against the
Company and certain of its officers and directors alleging facts nearly
identical to those alleged in the Ong complaint. The complaint, Brown v.
CyberMedia, et al., No. B C187898, was filed in the Superior Court of Los
Angeles County. It alleges a class period from March 31, 1997 through March
12, 1998, and asserts claims under Sections 25400 and 25500 of the California
Corporations Code, Sections 1709-1710 of the California Civil Code, and
Sections 17200 and 17500 of the California Business and Professions Code.
Plaintiff seeks damages of an unspecified amount.
On March 24, 1998 a third shareholder class action complaint was filed
against the Company and certain of its current and former officers and
directors. The complaint, St. John v. CyberMedia, et al., No. 98-2085
MRP(SHx), was filed in the United States District Court for the Central
District of California. The complaint alleges a class period between March 31,
1997 and March 13, 1998. The complaint asserts claims under Sections 10(b) and
20(a) of the Securities Exchange Act of 1934. Like the previously filed
complaints, the basic allegations concern an alleged scheme by defendants to
disseminate false and misleading statements and/or to omit to state facts
concerning the present and future finances and activities of the Company during
the class period. Plaintiff seeks an unspecified amount of damages in excess
of $75,000.
On March 26, 1998 another shareholder class action complaint was filed
against the Company and certain of its current and former officers and
directors. The complaint, Zier v. CyberMedia, et al., No. 98-2210 CM(Mcx), was
filed in the United States District Court for the Central District of
California. The complaint alleges a class period between March 31, 1997 and
March 12, 1998. The complaint asserts claims under Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934. Like the previously filed complaints, the
basic allegations concern an alleged scheme by defendants to disseminate false
and misleading statements and/or to omit to state facts concerning the present
and future finances and activities of the Company during the class period.
Plaintiff seeks an unspecified amount of damages in excess of $75,000.
On March 31, 1998 a shareholder class action complaint was filed against the
Company and certain of its current and former officers and directors. The
complaint, Smith v. CyberMedia, et al., No. BC 188527,
24
<PAGE> 25
was filed in the Superior Court of Los Angeles County. The complaint alleges a
class period between March 31, 1997 and March 13, 1998. The complaint asserts
claims under Sections 25400, 25402, 25500 and 1507 of the California
Corporations Code, and Sections 1709-1710 of the California Civil Code. The
allegations underlying the complaint are nearly identical to the allegations
asserted in the other class action complaints. Plaintiff seeks damages of an
unspecified amount.
On April 8, 1998 a shareholder class action complaint was filed against the
Company and certain of its current and former officers and directors. The
complaint, Stockwell v. CyberMedia, No. BC 189020, was filed in the Superior
Court of Los Angeles County. The complaint alleges a class period between
March 31, 1997 and March 12, 1998. The complaint asserts claims under Sections
25400 and 25500 of the California Corporations Code, Sections 1709-1710 of the
California Civil Code and Sections 17200 and 17500 of the California Business
and Professions Code. The allegations underlying the complaint are nearly
identical to the allegations asserted in the other class action complaints.
Plaintiff seeks damages of an unspecified amount.
On April 8, 1998 a shareholder class action complaint was filed against the
Company and certain of its current and former officers and directors. The
complaint, Liu v. CyberMedia, et al., No. 98-2617, was filed in the United
States District Court for the Central District of California. The complaint
alleges a class period between March 31, 1997 and March 13, 1998. The
complaint asserts claims under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934. The allegations underlying the complaint are nearly
identical to the allegations asserted in the other class action complaints.
Plaintiff seeks an unspecified amount of damages in excess of $75,000.
On April 23, 1998 a shareholder class action complaint was filed against the
Company and certain of its current and former officers and directors. The
complaint, Kerr v. CyberMedia, et al., No. 98-3104 RJK(ANx), was filed in the
United States District Court for the Central District of California. The
complaint alleges a class period between July 22, 1997 and March 13, 1998. The
complaint asserts claims under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934. The allegations underlying the complaint are nearly
identical to the allegations asserted in the other class action complaints.
Plaintiff seeks damages of an unspecified amount.
On May 6, 1998 a shareholder class action complaint was filed against the
Company and certain of its current and former officers and directors. The
complaint, Barker v. CyberMedia, Inc., et al., No. SA CV98-401 AHS (Anx), was
filed in the United States District Court for the Central District of
California. The complaint alleges a class period between March 31, 1997 and
March 12, 1998. The complaint asserts claims under Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934. Plaintiff seeks an unspecified amount of
damages in excess of $75,000, exclusive of interest and cost.
On July 7, 1998 a derivative action was filed against certain of Company's
current and former officers and directors. The derivative action, Orr v.
Kanwal S. Rekhi, et al., No. CV98-5319 CM (CWx), was filed in the United States
District Court for the Central District of California. The action asserts
claims on behalf of the Company for intentional breach of fiduciary duties,
negligent breach of duty, contribution, indemnification, unjust enrichment, and
abuse of control. Plaintiff seeks an unspecified amount of damages in excess
of $75,000, exclusive of interest and costs.
On June 25, 1998, a shareholder class action complaint was filed against the
Company and certain of its current and former officers and directors. The
complaint, Daughtry v. CyberMedia, Inc., et al., No. 98-5584, was filed in the
Circuit Court for Pulaski County, Arkansas. The complaint alleges a class
period between March 31, 1997 and March 12, 1998. The complaint asserts claims
under Ark. Stat. Ann. Sec. 23-42-106 and the "securities laws afforded by the
remaining 49 states". Plaintiff seeks an unspecified amount of compensatory
damages in excess of $75,000 as well as punitive damages.
On August 10, 1998, another shareholder class action complaint was filed
against the Company and certain of its current officers by the plaintiff in the
above listed Arkansas case. The complaint, Daughtry v. CyberMedia, Inc., et
al., No. BC195733, was filed in the Los Angeles Superior Court. The complaint
alleges a class period between March 13, 1998 and July 28, 1998. The complaint
asserts claims for breach
25
<PAGE> 26
of fiduciary duties and violations of California Corporations Code Secs. 25400
and 25500. Plaintiff seeks an unspecified amount of compensatory damages.
The Company intends to defend against these actions vigorously.
On April 22, 1998, plaintiffs in an ongoing lawsuit, Mark Novisoff, et al v.
Luckman Interactive, No. BC170552 filed May 20, 1997 in Los Angeles Superior
Court, filed a second amended complaint adding the Company to the lawsuit, and
asserting claims against the Company for fraudulent transfer, recovery of claim
under the Bulk Sales Law, and civil conspiracy. Generally, the relief that the
plaintiffs are seeking from the Company is an order that the assets the Company
acquired from Luckman be set aside to the extent necessary to satisfy the
shareholders' claims against Luckman, and an order requiring that all money
still owed by the Company to Luckman or Luckman's assignees be held in a
constructive trust for the shareholders. The Company intends to defend against
these actions vigorously.
On June 18, 1998, a former Company employee filed a complaint in Los Angeles
Superior Court alleging employment discrimination and other related complaints.
The action, Wendell Brown v. CyberMedia, Inc., et. al., names certain current
and former employees of the Company. The Company intends to file a demurrer to
most or all of the causes of action on behalf of all the defendants who have
then been served on or before August 22, 1998.
On July 28, 1998, an individual claiming to be a stockholder of the Company
filed a Class Action Complaint alleging, among other things, a breach of
fiduciary duties by the Company Board in approving a merger agreement with
Network Associates, Inc., and naming the members of the Company Board, the
Company, and Network Associates as defendants. The Complaint, Stanley
Schneider v. Suhas Patil, et al, No. 16565-NC filed in the Delaware Court of
Chancery in New Castle County, seeks an injunction restraining the consummation
of the merger and unspecified compensatory damages. The Company believes that
the Complaint is without merit and intends to vigorously defend against it.
Item 5. Other Information
Peter Morris, a member of the Board of Directors of the Company,
resigned his position as a director in January 1998, for personal business
reasons.
Item 6. Exhibits and Reports on Form 8-K
( a ) Exhibits
27.1 Financial Data Schedule
( b ) Reports on form 8-K
No reports on Form 8-K have been filed during the period for
which the report is filed.
26
<PAGE> 27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
CYBERMEDIA, INC.
(Registrant)
Date: August 13, 1998 By: /s/ James R. Tolonen
-------------------------------------
President and Chief Operating Officer
By: /s/ Jane E. Wike
-------------------------------------
Vice-President, Finance
(Chief Accounting Officer)
27
<PAGE> 28
INDEX TO EXHIBITS
Exhibit Page
27.1 Financial Data Schedule 29
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998 AND THE RELATED CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE SIX MONTHS IN THE PERIOD ENDED JUNE 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 12,848
<SECURITIES> 0
<RECEIVABLES> 12,767
<ALLOWANCES> 7,766
<INVENTORY> 2,104
<CURRENT-ASSETS> 24,744
<PP&E> 6,049
<DEPRECIATION> 1,858
<TOTAL-ASSETS> 29,105
<CURRENT-LIABILITIES> 18,361
<BONDS> 0
0
0
<COMMON> 59,441
<OTHER-SE> (48,952)
<TOTAL-LIABILITY-AND-EQUITY> 29,105
<SALES> 5,875
<TOTAL-REVENUES> 5,875
<CGS> 3,083
<TOTAL-COSTS> 3,083
<OTHER-EXPENSES> 14,657
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19
<INCOME-PRETAX> (11,884)
<INCOME-TAX> 1
<INCOME-CONTINUING> (11,885)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,885)
<EPS-PRIMARY> (0.91)<F1>
<EPS-DILUTED> (0.91)
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
