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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
Commission file number 0-21289
CYBERMEDIA, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4347239
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
2850 Ocean Park Blvd., Suite 100, Santa Monica, California 90405
(Address of principal executive offices)
(Zip Code)
(310) 581-4700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.(1) Yes [X] No [ ];(2) Yes [ X ] No [ ]
As of May 5, 1998, 12,773,606 shares of the Registrant's Common Stock,
$0.01 par value were issued and outstanding.
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CYBERMEDIA, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets At March 31, 1998 and December 31, 1997 3
Consolidated Statements of Operations for the Three Months ended March 31,
1998 and 1997 4
Consolidated Statements of Cash Flows for the Three Months ended March 31, 5
1998 and 1997
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signature 26
Index to Exhibits 27
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CYBERMEDIA, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 1998 December 31, 1997
--------------------- ----------------------
Assets
Current assets:
Cash and cash equivalents $22,536,000 $25,059,000
Marketable securities --- 1,001,000
Trade accounts receivable, net 5,174,000 19,851,000
Inventory 3,667,000 3,590,000
Prepaid expenses 1,150,000 1,417,000
Deferred taxes 3,619,000 3,619,000
Other current assets 686,000 1,091,000
--------------------- ----------------------
Total current assets 36,832,000 55,628,000
Furniture, fixtures and equipment, net 4,200,000 4,191,000
Other assets 216,000 284,000
--------------------- ----------------------
Total assets $41,248,000 $60,103,000
===================== ======================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $9,443,000 $8,753,000
Accrued expenses 2,519,000 2,917,000
Related party payable --- 618,000
Income taxes payable 17,000 2,787,000
Unearned revenue 3,494,000 3,655,000
Grant payable 390,000 390,000
Current portion of capital lease --- 17,000
Deferred obligation for acquired R&D 2,663,000 2,913,000
--------------------- ----------------------
Total current liabilities 18,526,000 22,050,000
Capital lease obligation & deferred rent 270,000 284,000
Deferred obligation for acquired R&D 563,000 1,125,000
--------------------- ----------------------
Total liabilities 19,359,000 23,459,000
Stockholders' equity
Common stock 129,000 126,000
Additional paid-in capital 58,911,000 57,587,000
Accumulated deficit (36,823,000) (20,774,000)
Accumulated other comprehensive income (loss) (328,000) (295,000)
--------------------- ----------------------
Total stockholders' equity 21,889,000 36,644,000
Total liabilities and stockholders' equity $41,248,000 $60,103,000
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See accompanying notes to consolidated financial statements
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CYBERMEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Quarter Ended Quarter Ended
March 31, 1998 March 31, 1997
---------------------- ---------------------
Revenue $4,697,000 $16,533,000
Cost of goods sold 1,281,000 4,213,000
---------------------- ---------------------
Gross profit 3,416,000 12,320,000
Operating expenses
Research and development 2,830,000 1,545,000
Sales and marketing 13,924,000 8,155,000
General and administrative 2,983,000 970,000
---------------------- ---------------------
Total operating expenses 19,737,000 10,670,000
---------------------- ---------------------
Operating income (loss) (16,321,000) 1,650,000
Other income 280,000 521,000
---------------------- ---------------------
Income (loss) before income taxes (16,041,000) 2,171,000
Provision for income taxes 8,000 839,000
---------------------- ---------------------
Net income (loss) $(16,049,000) $1,332,000
====================== =====================
Net income (loss) per share - basic $(1.27) $0.11
Net income (loss) per share - diluted $(1.27) $0.10
Shares used in computing net income (loss) per share - basic 12,655,000 11,932,000
Shares used in computing net income (loss) per share - diluted 12,655,000 13,420,000
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See accompanying notes to consolidated financial statements
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CYBERMEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
------------------------------------------
1998 1997
----------------- ---------------
Cash flow from operating activities:
Net income (loss) $(16,049,000) $1,332,000
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 452,000 108,000
Deferred rent (14,000) -
Accelerated vesting of option grants 776,000 -
Changes in assets and liabilities:
Trade accounts receivable, net 14,677,000 (4,429,000)
Inventory (77,000) 805,000
Prepaid expenses 267,000 557,000
Other current assets 405,000 185,000
Accounts payable 690,000 (1,212,000)
Accrued expenses and related party payable (1,016,000) 513,000
Income taxes payable (2,770,000) 839,000
Unearned revenues (161,000) (295,000)
Deferred obligation for acquired R&D (812,000) -
----------------- ---------------
Net cash used in operating activities (3,632,000) (1,597,000)
----------------- ---------------
Cash flows provided by (used in) investing activities -
Proceeds from marketable securities 1,001,000 -
Purchases of furniture, fixtures and equipment (424,000) (367,000)
Goodwill and other assets 31,000 -
----------------- ---------------
Net cash provided (used) by investing activities 608,000 (367,000)
----------------- ---------------
Cash flows provided by (used in) financing activities:
Payment of capital lease obligations (17,000) (3,000)
Proceeds from the issuance of common stock 551,000 21,000
Proceeds from the issuance of common stock
upon initial public offering - (259,000)
----------------- ---------------
Net cash provided (used) by financing activities 534,000 (241,000)
----------------- ---------------
Effect of Exchange Rate changes on cash (33,000) -
----------------- ---------------
Net decrease in cash and cash equivalents (2,523,000) (2,205,000)
Cash and cash equivalents at beginning of year 25,059,000 39,322,000
----------------- ---------------
Cash and cash equivalents at end of period $22,536,000 $37,117,000
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See accompanying notes to consolidated financial statements
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CYBERMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
1. Basis of Presentation
The consolidated statements of operations and cash flows for the three
months ended March 31, 1998 and 1997 and the consolidated balance sheet
as of March 31, 1998 are unaudited, however all adjustments, consisting
of normal recurring adjustments, which are, in the opinion of
management, necessary for a fair presentation of the financial
condition and results for the interim periods are reflected. These
consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto together with
management's discussion and analysis of financial condition and results
of operations contained in CyberMedia's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997. The results for the three
months ended March 31, 1998 are not necessarily indicative of the
results for the entire year ending December 31, 1998.
2. Accounts Receivable
Accounts receivable, net decreased between December 31, 1997 and March
31, 1998 primarily due to collections of monies owed to the Company by
distributors.
3. Inventories
Inventories, consisting of software product and related packaging
materials are stated at the lower of cost (first-in, first-out method)
or market as detailed below.
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March 31, December 31,
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1998 1997
Finished goods $3,018,000 $3,024,000
Components 723,000 640,000
Reserve for obsolete inventory (74,000) (74,000)
--------------- -----------------
Total inventories: $3,667,000 $3,590,000
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4. Income Taxes Payable
The decrease in income taxes payable which occurred between December
31, 1997 and March 31, 1998 relates to federal and state tax payments
made by the Company in February 1998 to the Internal Revenue Service
and the Franchise Tax Board respectively, related to 1997 taxes owed.
No benefit has been recognized in the consolidated statement of
operations for loss in the first three months of 1998 due to the lack
of history of operating profits.
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CYBERMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
5. Impact of Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No, 130, "Reporting Comprehensive Income," which establishes
standards for reporting and disclosure of comprehensive income.
Comprehensive income extends net earnings (loss) to include changes in
equity such as foreign currency translation adjustments and
mark-to-market adjustments on marketable securities. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997 and
requires reclassification of financial statements for earlier periods
to be provided for comparative purposes. The Company has not determined
the manner in which it will present the information required by SFAS
No. 130 in its annual consolidated financial statements for the year
ending December 31, 1998. The Company's total comprehensive income
(loss) for all periods presented herein would not have differed
materially from those amounts reported as net income (loss) in the
consolidated statements of operations.
Also in June 1997, the FASB issued SFAS 131, "Disclosures About
Segments of an Enterprise and Related Information." The Statement
establishes standards for the manner in which public companies report
information about operating segments in annual financial statements and
requires those enterprises to report selected information about
operating segments in interim financial reports issued to shareholders.
This Statement is effective for annual financial statements for periods
beginning after December 15, 1997 and for interim periods after the
first year of adoption. The Company has not yet determined the impact
of adopting the disclosure requirements of SFAS 131.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") released Statement of Position 97-2: "Software Revenue
Recognition" (SOP 97-2). Among other things, SOP 97-2 eliminates the
distinction between significant and insignificant vendor obligations
promulgated by SO 91-1 and requires each element of a software
arrangement to meet certain criteria in order to recognize revenue
allocated to that element. Additionally, SOP 97-2 requires that total
fees under an arrangement be allocated to each element in the
arrangement based upon vendor specific objective evidence, as defined.
SOP 97-2 was effective for software transactions entered into by the
Company in 1998 and in subsequent periods.
As a result of certain issues raised in applying SOP 97-2, the AICPA
issued a Statement of Position which will delay for one year, the
effective date of certain provisions of SOP 97-2 with respect to what
constitutes vendor-specific objective evidence of fair value of the
delivered software element in certain multiple element arrangements
entered into by entities that never sell such software elements
separately.
The Company expects that the adoption of SFAS 130 "Reporting
Comprehensive Income," SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information," and SOP 97-2, all of which are
effective for the full year 1998, will have a minimal impact on prior
year and current quarter consolidated statements of operations, cash
flows and financial position as the Company's reports are already
substantially in compliance with the new requirements. However the
ultimate resolution of the implementation issues referred to above, or
additional issues not yet raised or addressed by the AICPA could change
the Company's expectation.
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CYBERMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
6. Earnings Per Share
Per share data is based on the weighted average number of common shares
and dilutive common stock equivalents outstanding for the period. Due
to the loss in the first quarter of 1998, common stock equivalents are
not included in the computation of fully diluted earnings per share.
The earnings per share information presented for the three months ended
March 31, 1997 has been restated to conform with the requirements of
the SFAS 128, "Earnings per Share," and is detailed below.
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Computation of Per Share Income (Loss)
For the three months ended
March 31,
--------------------------------------
1998 1997
Net income (loss) $(16,049,000) $1,332,000
Common shares outstanding - basic
Weighted common shares outstanding during period - basic: 12,655,000 11,932,000
Net income (loss) per share - basic $(1.27) $0.11
Common shares outstanding - diluted
Common Stock options and warrants outstanding: --- 1,488,000
Weighted common shares outstanding during period - diluted 12,655,000 13,420,000
Net income (loss) per share - diluted $(1.27) $0.10
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7. Contingencies
During the first quarter of 1998, the Company was named and served as a
defendant in a number of shareholder class action lawsuits which assert
claims under the Securities Exchange Act of 1934, the California Civil
Code and the California Business and Professions Code. The Company
intends to defend against these actions vigorously.
During the first quarter of 1998 the Company filed a lawsuit against
Symantec Corporation, et al., alleging, inter alia, misappropriation of
the Company's trade secrets. A counterclaim has been filed against the
Company. The Company intends to defend against this action vigorously.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Actual results could differ materially from those set forth in such
forward-looking statements as a result of the factors set forth under "Factors
Affecting Operating Results" below, and other risks detailed in the Company's
Registration Statement on Form S-1 (Registration No. 333-11063) declared
effective by the Securities and Exchange Commission on October 22, 1996, the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997, and as detailed from time to time in the Company's reports filed with the
Securities and Exchange Commission.
The following information should be read in conjunction with the
consolidated financial statements and the notes thereto and in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations in CyberMedia's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997. This analysis is provided pursuant to applicable Securities
and Exchange Commission regulations and is not intended to serve as a basis for
projections of future events.
Overview
The Company is a leading provider of software products that provide
automatic service and support to PC users in the Windows environment. The
Company commenced operations in November 1991 and introduced its first automatic
service and support product, Win Win, in 1993. The Company introduced the first
Windows 95 compatible version of its First Aid product line in September 1995.
During 1996, 1997 and the first three months of 1998, over 90%, over 75%, and
over 50%, respectively, of the Company's net revenues were attributable to sales
of its First Aid products.
In October 1996, the Company introduced Oil Change, a product that updates
software applications and device drivers installed on a user's PC, over the
Internet. The Company also has a number of new product development and
introduction efforts under way, including its first enterprise product,
CyberMedia Support Server (CSS) Repair Engine which was released at the end of
1997.
On April 2, 1997, the Company acquired certain assets from Luckman
Interactive which included ownership in all intellectual property rights to
Microhelp Uninstaller. This acquisition was accounted for largely as a purchase
of in-process research and development and was expensed during the quarter ended
June 30, 1997. The technology from this product was incorporated in the
development of the Company's UnInstaller product which uninstalls Windows
applications, and was introduced in May of 1997.
Effective April 14, 1997, CyberMedia acquired Walk Softly, Inc., an internet
privacy software developer based in Los Altos, California in exchange for
CyberMedia Common Stock. The acquisition of Walk Softly was accounted for on a
pooling of interests basis and the consolidated financial statements for all
periods presented herein have been restated as required by such treatment. In
September, 1997 the Company released Guard Dog Deluxe, a personal security and
privacy product for internet users.
On September 30, 1997, the Company acquired certain rights from ServiceWare,
Inc. which included access and resale rights to certain ServiceWare technology.
This transaction was accounted for largely as in process research and
development and was expensed during the quarter ended September 30, 1997.
Revenues are generated from sales of software to distributors, resellers and
end-users and are recognized upon shipment of products, net of provisions for
estimated future returns and allowances, provided that no significant vendor
obligations remain and collection of accounts receivable is deemed to be
probable. With the introduction of First Aid 95 in September 1995, CyberMedia
implemented a policy of offering customers updates to certain of its products
over the Internet at no additional cost. The
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Company has for all periods deferred a portion of all First Aid, Oil Change,
UnInstaller Guard Dog Deluxe and CSS revenue ratably over estimated update
periods, generally one year from the date of sale. Under SOP 97-2, adopted by
the Company effective January 1, 1998, the Company will maintain this policy for
its First Aid, UnInstaller Guard Dog Deluxe and CSS products. Because Oil Change
has a subscription renewal program which is separately available one-year after
the initial purchase of the product, effective January 1, 1998, the Company
increased the deferral amount on sales of this product to more properly reflect
such subscription use. At March 31, 1998 the Company's balance sheet included
$3.5 million of unearned revenues which will be recognized ratably over the
estimated update or in the case of Oil Change, subscription periods, generally
one year. To the extent that revenues from these products continue to grow on a
quarterly basis, the total amount of deferred revenue may continue to increase
and be reported on the balance sheet as unearned revenue.
The Company monitors the levels of purchases and returns on a product by
product and customer by customer basis. Sales are made subject to certain rights
of return and reserves are established at time of shipment for potential future
return of product based on product history, analysis of retail sell-through and
other factors. In addition, the Company may on occasion grant price protection
to distributors to 1) enhance sell-through of an older version of its products,
prior to a new release, or 2) respond to market pressures on pricing where
appropriate.
During the first quarter of 1998, the Company worked with its major
distributors to adjust inventory levels and reduce their accounts receivable
balances. As a result, the Company authorized returns in the first quarter of
1998 of $11.5 million, of which $2.9 million was received by March 31, 1998 and
charged to the reserve for returns. After such returns and additional reserves
provided during the first quarter of 1998, the allowance for returns balance as
of March 31, 1998 was $11.9 million. To further facilitate the reduction of
accounts receivable balances, and channel inventory levels, the Company shipped
virtually no product to distributors during the first quarter of 1998. This
action reduced revenue for the first quarter of 1998 by a significant amount and
contributed to the significant loss reported in the quarter.
In accordance with Statement of Financial Accounting Standards No. 86, the
Company is required to capitalize eligible computer software development costs
upon the achievement of technological feasibility, subject to net realizable
value considerations. To date, the Company has charged all such costs to product
development expenses because such costs have not been material.
Results of Operations
The following table sets forth, as a percentage of net revenues, statement
of operations data for the periods indicated:
Three Months Ended
March 31,
1998 1997
Net revenues...................... 100.0% 100.0%
Cost of revenues.................. 27.3 25.5
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Gross profit.................... 72.7 74.5
Operating expenses:
Research and development........ 60.3 9.3
Sales and marketing............. 296.4 49.3
General and administrative...... 63.5 5.9
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Total operating expenses..... 420.2 64.5
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Profit (loss) from operations (347.5) 10.0
Other income ..................... 6.0 3.2
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Profit (loss) before income
taxes...................... (341.5) 13.2
Income tax expense................ 0.2 5.1
------- -------
Net profit (loss)............ (341.7)% 8.1%
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Net Revenues. Net revenues decreased 72% to $4.7 million in the three months
ended March 31, 1998 from $16.5 million in the three months ended March 31,
1997. The Company's net revenues consist of license fees for its software
products, less provision for returns and allowances. The Company sells its
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products primarily to distributors for resale to retailers as well as directly
to consumers through direct mail, the Internet and through software catalogs.
The decrease in net revenues during the period was largely attributable to
significantly fewer and smaller orders placed by the Company's distributors
during the first quarter of 1998, which was based upon the Company's continuing
work with its major distributors on analysis and assessment of inventories at
distribution, and sell-through of its products. Inventories of the Company's
products held by distributors as measured in number of days of sales at current
sell-through rates, at March 31, 1998 were significantly lower than at December
31, 1997. In addition, the Company provided price protection on its UnInstaller
product during the first quarter of 1998, which was charged to the provision for
returns and allowances.
Net revenue from international sales accounted for approximately 18% and 15%
of net revenues for the three months ended March 31, 1998 and 1997 respectively.
The increase in net revenues from international sales as a percentage of net
revenues between these periods resulted from a greater decrease in overall
revenue in the U.S. markets from the receivable and inventory reduction programs
described above. The decrease in international revenues in absolute dollars from
the first quarter of 1997 to the first quarter of 1998 resulted from fewer
orders placed by distributors resulting from inventory analysis and assessment
similar to that described above for the domestic business. As a result of its
international operations, the Company now denominates certain international
sales in local currencies, primarily in Europe and Japan. As a result, the
Company is subject to the risks associated with fluctuations in currency
exchange rates. The Company does not currently engage in hedging transactions
and there can be no assurance that it will not incur significant losses related
to currency fluctuations. Risks inherent in the Company's international sales
generally include the impact of such fluctuating exchange rates, longer payment
cycles, unexpected changes in regulatory requirements, seasonality due to the
slowdown in European business activity during the third quarter, and tariffs and
other trade barriers. There can be no assurance that these factors will not have
a material adverse effect on the Company's future business, financial condition
and results of operations.
Cost of Revenues. Cost of revenues were $1.3 million and $4.2 million for
the three month periods ended March 31, 1998 and 1997, respectively. Cost of
revenues consists primarily of the cost of product media, product duplication,
documentation and order fulfillment and royalties. The decreases in cost of
revenues were due primarily to decreased unit shipments of the Company's
products during the first quarter of 1998 as compared to the same period in
1997.
Gross Margin. Gross margins were 73% and 75% in the three months ended
March 31, 1998 and 1997, respectively.
Research and Development. Research and development expenses increased by
83.2% from $1.5 million in the three months ended March 31, 1997 to $2.8 million
in the same period in 1998, representing 9%, and 60% of net revenues in these
quarters, respectively. Research and development expenses consist primarily of
personnel costs and, to a lesser extent, payment to third parties for contract
services, required to conduct the Company's development efforts. The increase in
research and development expenses was primarily attributable to an increase in
personnel from 53 in the first three months of 1997 to 97 in the same period in
1998, as the Company increased its product development efforts to support new
product introductions and upgrades. The increase in research and development
expenses as a percent of revenue was primarily due to the decrease in revenue in
the three months ended March 31, 1998 as compared to the same period in 1997.
The Company believes that significant investments in product development are
required to remain competitive and anticipates that it will continue to devote
substantial resources to research and development.
Sales and Marketing. Sales and marketing expenses grew from $8.2 million in
the three months ended March 31, 1997 to $13.9 million in the same period of
1998, representing 71% and 296% of net revenues in these periods, respectively.
Sales and marketing expenses consist primarily of costs of all sales and
marketing personnel, sales commissions, co-op and other advertising costs,
postage and printing costs associated with direct mail solicitations, package
design costs, trade show costs and costs of preparing promotional materials. The
increases in the dollar amount of sales and marketing
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expenses were due primarily to increases in advertising, co-op programs, and
increases in the number of sales and marketing personnel employed to address new
sales opportunities and to support the introduction of new products. Sales and
marketing headcount grew from 62 to 101 between the first three months of 1997
and the same period in 1998. The increase in sales and marketing expenses as a
percent of revenue was due primarily to the decrease in revenue between the
first three months of 1997 and the same period in 1998. The Company expects that
sales and marketing expenditures will increase in absolute dollars in the future
as it invests in expanding its third-party distribution channels, and introduces
new products, such as CSS, and expands its operations outside the United States.
General and Administrative. General and administrative expenses increased
from $970,000 in the three month period ended March 31, 1997 to $3.0 million in
the same period in 1998, representing 6% and 64% of net revenues in these
periods, respectively. General and administrative expenses consist primarily of
personnel costs for finance, administration, operations and general management,
as well as legal and accounting expenses. The increase in the dollar amount of
general and administrative expenses was due principally to growth in the
infrastructure of the Company's finance, administrative and operations groups in
order to support the Company's expanded operations, and to a lesser extent to
compensation expense related to accelerated vesting of stock options to certain
founders and executives of the Company who resigned during the first quarter of
1998. Headcount in these areas increased from 27 to 59 from the first three
months of 1997 to the first three months of 1998. The increase in general and
administrative expenses as a percent of revenue was due primarily to the
decrease in revenue between the first three months of 1997 and the same period
in 1998. The Company expects that its general and administrative expenses will
increase in absolute dollars in the future as it expands its staffing,
information systems and infrastructure.
Other Income. Other income was $280,000 and $521,000 in the three month
periods ended March 31, 1998 and 1997, respectively. Other income consists of
interest income and interest expense and currency related losses and gains. The
decrease in other income from the first quarter of 1997 to the first quarter of
1998 was due primarily to a reduction in interest income due to a smaller
invested balance of cash during the latter period.
Provision for Income Taxes. The provision for income taxes includes
estimated foreign taxes attributable to activities during the three months ended
March 31, 1998. In addition, the provision for income taxes for the three month
period ended March 31, 1997 includes the provision recorded during the first
quarter of that year which was recorded at the Company's estimated effective tax
rate which was 38%. The Company had federal and state net operating loss
carry-forwards of approximately $3.1 million at December 31, 1997. These loss
carry-forwards expire at various dates beginning in the year 2006 and are
subject to certain limitations as prescribed by Section 382 of the Internal
Revenue Code of 1986, as amended. The Company has not reflected deferred tax
assets for its losses because of its lack of history of profitable operations.
Liquidity and Capital Resources
Initially, the Company financed its operations primarily through private
sales of Preferred Stock totaling $10.5 million. Furthermore, in October 1996,
the Company completed an initial public offering of 3,250,000 shares of Common
Stock at $16.00 per share. Net proceeds to the Company were approximately $41.5
million. In the first three months of 1997 and 1998, the Company used $1.6
million and $3.6 million of cash, respectively, in operating activities. During
the three months ended March 31, 1997, the Company used net cash in operating
activities principally to support increases in accounts receivable associated
with increased net revenues. During the three months ended March 31, 1998 the
Company's use of cash to support the loss in such period and to pay 1997 taxes
was partially offset by collections on outstanding accounts receivables.
In the first three months of 1997 and 1998, the Company's investing
activities consisted of purchases of furniture, fixtures and equipment,
primarily PCs, and accessories in the amount of $362,000 and $424,000,
respectively. In addition, during the first three months of 1998, $1.0 million
of marketable securities matured and were transferred to cash and cash
equivalents. The Company expects that its capital
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expenditures may increase as the Company's employee base continues to grow. At
March 31, 1998, the Company had no material commitments for capital
expenditures.
To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk.
Management expects that in the future cash in excess of current requirements
will be invested in short-term, interest-bearing, investment grade securities.
At March 31, 1998, the Company had $22.5 million in cash and cash
equivalents, and $18.3 million in working capital. The Company also had
available a $1.0 million unsecured revolving line of credit which expires in May
1998. At March 31, 1998 the Company had commitments for cash outlays of
approximately $3.2 million associated with the acquisition of MicroHelp
UnInstaller and technology from ServiceWare Inc., payable over the next 21
months. Subsequent to March 31, 1998 approximately $600,000 of this obligation
has been paid. The Company believes that its current cash balances, cash
available under its line of credit and cash flow from operations, if any, will
be sufficient to meet these needs as well as its other working capital and
capital expenditure requirements for at least the next 12 months. The Company
also believes that additional debt or equity financing will be available to it
should the need arise. The Company does expect its cash and cash equivalent
balances to decrease in the next few quarters due to the lower levels of
revenues generated in both the fourth quarter of 1997 and the first quarter of
1998, and the reduced amounts of cash collections which will result.
The Company recognizes that some of its internally used computer systems and
programs have not yet been certified by supplying vendors as being Year 2000
compliant. The Company has appointed a Year 2000 compliance committee to
determine the extent to which it is vulnerable to such date truncation problems.
There can be no guarantee that the systems of the Company's suppliers,
distributors and others upon which the Company's systems and/or personnel rely
will be timely converted, or that a failure to convert or an incompatible
conversion by one of these parties would not have a material adverse effect on
the Company. The Company does not yet have an estimate of the costs associated
with Year 2000 compliance work.
New releases of the Company's software products have been designed to
address processing for the year 2000 to the extent it has been required. The
Company's Year 2000 compliance committee intends to have then current versions
of its software Year 2000 compliant by the end of 1998. However, to the extent
that third party products bundled with the Company's products by system
integrators are not compliant, the Company may have no knowledge as to the year
2000 readiness of those third party products. In addition, it is possible that
claims could be asserted against the Company or its customers concerning year
2000 issues and regardless of their merits or lack thereof, these claims could
be material.
Factors Affecting Operating Results
Limited Operating History and History of Operating Losses. The Company has
only a limited operating history upon which to base an evaluation of its
business and prospects. The Company commenced operations in November 1991 and
introduced its first automatic service and support product, Win Win, in 1993.
The Company introduced the first Windows 95 compatible version of its First Aid
product line in September 1995. During 1996, both the Company's net revenues and
operating expenses, particularly sales and marketing expenditures, increased
rapidly compared to prior periods. From inception to March 31, 1998 the Company
generated net sales of approximately $119.5 million, of which $114.5 million, or
96% of such amount, was generated in the twenty-seven months ended March 31,
1998. The Company has incurred net losses in each of the last five fiscal years,
resulting in an accumulated deficit of $36.8 million at March 31, 1998. In
addition, since 1992, the Company's operating expenses have increased
significantly as a result of efforts to expand its sales and marketing
operations, including international sales, to fund greater levels of product
development and to increase its administrative infrastructure. The Company's net
revenues in 1997 increased 85% over the net revenues for the same period in
1996. This increase was attributable in part, to sales of software products, the
rights to which were Company acquisitions in 1997. There can be no assurance
that the Company's net revenues will continue to remain at or increase from the
level experienced in 1997 or that net revenues will not decline sequentially as
they did in the fourth quarter of 1997 and the first quarter of 1998. The
Company anticipates that in the future it will make significant investments in
its operations, particularly to develop and introduce new products, to support
sales activities,
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to expand into new markets such as enterprise, international and OEM and that as
a result, operating expenses will increase significantly. If net revenues do not
increase correspondingly, the Company is likely to continue to incur net losses
and its financial condition will be materially adversely affected. The Company
has not yet achieved profitability on an annual basis, and there can be no
assurance that the Company will achieve or sustain profitability on a quarterly
or annual basis. Furthermore, operating results for future periods are subject
to numerous uncertainties. The Company's prospects must be considered in light
of the risks encountered by companies with limited operating histories,
particularly companies in new and rapidly evolving markets. While the Company
believes that it has sufficient cash resources to meet its obligations for the
next twelve months, no assurance exists that current cash and cash equivalent
balances, and cash from operations, if any, and existing credit lines will be
sufficient to fund future operations of the Company or that outside sources of
funds will be available when and if such funds are needed. In addition, the
Company's future operating results will depend upon, among other factors, the
demand for the Company's software products, the level of product and price
competition, the Company's success in expanding its direct and indirect
distribution channels, in attracting and retaining motivated and qualified
personnel, the ability of the Company to expand its international sales, develop
and market new products and product upgrades and manage product transitions, the
ability of the Company to control costs, the growth of activity on the Internet
and the World Wide Web (the "Web"), and general economic conditions. Many of
these factors are beyond the Company's control. If the Company is not successful
in addressing such risks, the Company will be materially adversely affected.
Risk of Product Returns. The Company's business includes a substantial risk
of product returns from distributors, retailers and end users, either through
the exercise of contractual return rights or as a result of the Company's policy
of assisting customers in balancing and updating inventories. Individual end
users may return products within 60 days of the date of purchase for a full
refund. Most retailers and distributors also have the ability to return products
for a full refund. The rate of product returns may increase because of a variety
of factors, including competitors' promotional or other activities, an increase
in the proportion of the Company's business attributable to mass merchandisers,
overstocking by the Company's distributors or retailers due to unrealized demand
for new products, or a decline in demand for the Company's products as compared
to historical levels. As the Company introduces new products and enters new
markets where the Company has had limited experience, the risk of product
returns may increase. In particular, the Company has recently released First Aid
98, Guard Dog Deluxe and UnInstaller Deluxe. In addition, in the event that the
Company's packaging is claimed to infringe on the intellectual property rights
of third parties, the Company could be required to recall its distributed
products for repackaging, or to cease shipping product in its current packaging,
which could materially adversely affect the business, results of operations and
financial condition of the Company. In particular, the Company agreed to change
the packaging of its UnInstaller product after February 1998. To the extent this
product is returned after that date, such product may not be resold.
Although the Company establishes reserves based on estimated future returns
of products, taking into account the timing of new product introductions,
promotional activities, distributor and retailer inventories of the Company's
products and other factors, there can be no assurance that actual levels of
returns will not significantly exceed amounts anticipated by the Company. There
can be no assurance that the level of returns will not significantly increase in
the future. Particularly in light of recent new product introductions, any
material increase in the level of returns could materially adversely affect the
Company's business, results of operations and financial condition.
During the first quarter of 1998, the Company worked with its major
distributors to adjust inventory levels and reduce their accounts receivable
balances. As a result, the Company authorized returns in the first quarter of
1998 of $11.5 million, of which $2.9 million was received by March 31, 1998 and
charged to the reserve for returns. After returns and additional reserves
provided during the first quarter of 1998, the allowance for returns balance as
of March 31, 1998 was $11.9 million. To further facilitate the reduction of
accounts receivable balances, and channel inventory levels, the Company shipped
virtually no product to distributors during the first quarter of 1998. This
action reduced revenue for the first quarter of 1998 by a significant amount and
contributed to the significant loss reported in the quarter.
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Potential Fluctuations in Quarterly Results. The Company's quarterly
operating results have fluctuated in the past and are expected to fluctuate
significantly in the future. These fluctuations may arise as a result of a
number of factors, including the number and timing of new product introductions,
upgrades and product enhancements by the Company or its competitors, purchasing
patterns of distributors and customers, marketing and promotional programs,
pricing and other competitive pressures, order deferrals and product returns in
anticipation of new products or upgrades to existing products, the mix of
distribution channels through which the Company's products are sold, the
Company's decisions regarding hiring and other expenses, market acceptance of
the Company's products, market acceptance of commerce over the Internet,
technological limitations of the Internet, the developing nature of the market
for the Company's products, general economic conditions and other factors. The
Company generally ships products as orders are received and, accordingly, the
Company has historically operated with relatively little backlog. As a result,
quarterly revenues will depend predominantly on the volume and timing of orders
received during a particular quarter, both of which are difficult to forecast.
In fact, the Company typically generates a large percentage of its quarterly
revenues during the last few weeks of the quarter. A significant portion of the
Company's operating expenses are relatively fixed in the short term, and planned
expenditures are based on sales forecasts. To the extent that such expenses
precede forecasted net revenues, the Company's business, results of operations
and financial condition will be materially adversely affected. In addition, the
consumer software industry in which the Company operates has seasonal elements.
In recent years, the consumer software industry has experienced lower demand in
the summer months relative to other periods. If net revenues fall below the
Company's expectations, expenditure levels as a percentage of total net revenues
could be disproportionately high, and operating results would be immediately and
adversely affected. The Company believes that period-to-period comparisons of
its operating results are not meaningful and should not be relied upon as any
indication of future performance. Due to the foregoing factors, among others, it
is likely that the Company's future quarterly operating results from time to
time will not meet the expectations of securities analysts or investors, which
may have an adverse effect on the price of the Company's common stock.
Management of Growth; Dependence on Key Personnel. The Company's business
has grown rapidly during the past two years and such growth has placed and, if
sustained, will continue to place, significant demands on the Company's
management and resources. Recently, the Company has significantly increased the
scale of its operations to support increased sales volumes and to address
critical infrastructure and other requirements. This increase included
substantial investments in sales and marketing to support sales activities and
the hiring of a number of new employees, which have resulted in higher operating
expenses. Between December 1, 1995 and March 31, 1998, the number of Company
employees increased from approximately 20 to approximately 257, and the Company
currently expects to hire additional employees during 1998. Subsequent to
December 31, 1997 the Company's Chief Executive Officer and Chief Financial
Officer resigned. The Company has found replacements for these positions and has
entered into employment agreements with these executive officers in order to
help assure their retention by the Company. However, there can be no assurance
that any such employment agreements will sufficiently incent such executive
officers to remain with the Company. The Company does not maintain any key
person insurance policies on the lives of any of its executive officers. The
Company's ability to manage any future growth, should it occur, will depend upon
the Company's ability to retain these individuals and other executives, as well
as the successful expansion of its sales, marketing, research and development,
customer support and administrative infrastructure. There can be no assurance
that the Company will be able to attract, manage and retain additional personnel
to support any future growth or will not experience significant problems with
respect to any infrastructure expansion or the attempted implementation of
systems, procedures and controls. Any failure in one or more of these areas
would have a material adverse effect on the Company's business, results of
operations and financial condition.
The Company's future success also depends on its continuing ability to
attract and retain highly qualified technical personnel. Competition for such
personnel is intense and there can be no assurance that the Company will be able
to retain its key technical employees or that it will be able to attract and
retain additional highly qualified technical personnel in the future. Any
inability to attract and retain the necessary technical personnel could have a
material adverse effect on the Company's business, results of operations and
financial condition.
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Product Concentration; Risks Associated with First Aid Upgrades. During 1996
and 1997, over 90% and over 75%, respectively, of the Company's net revenues
were attributable to sales of its First Aid products. Although the Company
anticipates that sales of its First Aid products will account for a substantial
portion of its net revenues in the future, the Company believes that sales of
its new products such as Oil Change, UnInstaller, Guard Dog Deluxe and CSS also
will contribute significantly. There can be no assurance that net revenues from
the First Aid products will continue to grow at historical rates or sustain
current levels. The Company's future financial performance will depend in large
part on the successful development, introduction and customer acceptance of
UnInstaller, Guard Dog Deluxe, Oil Change and other new product offerings and
enhanced versions of the Company's products including CyberMedia Support Server,
the first offering in the Company's enterprise product line. A decline in the
demand for First Aid or other ActiveHelp products, failure to achieve market
acceptance of upgrades to such products or failure of net revenues derived from
such products to meet the Company's expectations, whether as a result of
competition, technological change or other factors, would have a material
adverse effect on the Company's business, results of operations and financial
condition.
Competition. The PC software industry is intensely competitive and
characterized by short product life cycles and frequent new product
introductions. The Company competes with software companies of varying sizes and
resources, including Network Associates Inc., Symantec Corp., Quarterdeck
Corporation, SystemSoft Corporation and others. Furthermore, the Company may
compete with other companies that introduce automatic service and support,
security and anti-virus protection software products. Moreover, there are no
proprietary barriers to entry that could keep existing and potential competitors
from developing similar products or selling competing products in the Company's
markets. To the extent that the Company's competitors bundle their software
products with leading hardware, application software or operating system
vendors, or if one or more of the operating system vendors, such as Microsoft,
IBM, Intel or others succeeds in incorporating functionality comparable, or
perceived as comparable, to that offered by the Company in its products, (or
separately offers comparable products), the Company's business, results of
operation and financial condition could be materially adversely affected. There
can be no assurance that the Company will be able to compete successfully with
existing or potential competitors. In particular, Microsoft's "Zero
Administration for Windows" initiative is a collection of technologies from
Microsoft that make the Windows family of systems easier to use for the consumer
and easier to manage for IS administrators. There can be no assurance that any
such initiative by Microsoft or others would not render the Company's products
uncompetitive or obsolete. Furthermore there can be no assurance that other
current or potential competitors with longer operating histories, significantly
greater financial, technical, marketing or other resources, significantly
greater name recognition or a larger installed base of customers than the
Company will not introduce products comparable, or perceived as comparable to
those of the Company. Increased competition may result in the loss of shelf
space or a reduction in demand or sell-through of the Company's products, any of
which could have a material adverse effect on the Company's business, results of
operations and financial condition.
The Company also expects that competition will increase as a result of software
industry consolidations. In addition, current and potential competitors have
established, or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products to address the needs of
the Company's prospective customers. Accordingly, it is possible that current
and potential competitors or alliances among competitors may emerge and rapidly
acquire significant market share. Increased competition may result in price
reductions, reduced gross margins, and loss of market share, any of which could
have a material adverse effect on the Company's business, operating results and
financial condition. In addition, the Company provides price protection to its
distributors in the event the Company reduces its prices. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors or that competitive pressures faced by the Company will
not materially and adversely affect its business, financial condition or results
of operations.
The enterprise software market targeted by the CyberMedia Support Server product
line is expected to be subject to intense competition from a number of sources
including solutions currently being utilized by IS administrators. There can be
no assurance that the CSS product line will gain acceptance in the enterprise
market or that, if accepted, competitors with longer operating histories,
significantly greater financial technical, marketing and other resources,
significantly greater name recognition and a larger installed base
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of customers than the Company will not introduce products comparable, or
perceived as comparable to those of the Company.
In addition to software company competitors, the Company also competes
indirectly against alternative sources of technical support, such as the
technical support departments of hardware and software vendors. Additionally,
the Internet provides hardware and software vendors with a new medium to offer
technical support services. The Company expects that many vendors will provide
Internet-based technical support services to support their existing and future
products. The availability of these technical support services could materially
dilute the value of the Company's products and have a material adverse effect on
the Company's market position, business, results of operations and financial
condition.
Dependence on Distribution Channels. The Company currently sells its
products primarily through distributors for resale to the retail channel. Sales
to such distributors accounted for approximately 69% and 66%, respectively, of
the Company's net revenues in 1996 and 1997.
Sales to a limited number of distributors have constituted and are expected
to continue to constitute a substantial portion of the Company's net revenues.
Sales to the Company's top two distributors accounted for approximately 25% and
25%, respectively, of the Company's net revenues in 1996, 25% and 25%,
respectively, of the Company's net revenues in 1997 and 25% and 11% of the
Company's net revenues in the three months ended March 31, 1998. No other single
customer accounted for more that 10% of net revenues in any of the periods
discussed above. The loss of, or reduction in, orders from any of these
distributors could have a material adverse effect on the Company's business,
results of operations and financial condition. Historically, margins for
distributors in the PC software industry have been low, competition has been
intense and distributors have relied on timely payments from their customers.
Financial difficulties of any distributors could render the Company's associated
accounts receivable uncollectible, which could have a material adverse effect on
the Company's business, results of operations and financial condition. In
addition, any special distribution arrangements or product pricing arrangements
that the Company may implement for strategic purposes in one or more of its
distribution channels could materially adversely affect its margins.
The distribution channels through which consumer software products are sold
have been characterized by rapid change, including consolidations and financial
difficulties of certain distributors and retailers and the emergence of new
retailers such as general mass merchandisers. In addition, due to an increase in
the number of software applications, there are an increasing number of companies
competing for access to these channels. Retailers of the Company's products
typically have a limited amount of shelf space and promotional resources, and
there is intense competition for high quality and adequate levels of shelf space
and promotional support from the retailers. The Company believes this
competition for shelf space will increase in the near term as competitors
introduce new automatic service and support software. There can be no assurance
that retailers will continue to purchase the Company's products or provide the
Company's products with adequate levels of shelf space and promotional support,
the lack of which would have a material adverse effect on the Company's
business, results of operations and financial condition. The Company has entered
into and seeks to continue to establish strategic alliances with third-party
vendors to increase and vary the distribution of its automatic service and
support products. To date, none of these agreements or strategic alliances has
generated significant revenue and there can be no assurance that any of these
agreements or strategic alliances will be a material source of revenues for the
Company. In addition, there can be no assurance that these agreements and
alliances will not be amended or terminated prior to their expiration due to
changed commercial conditions or other such reasons.
Net revenues from direct mail sales in 1997 and the first three months of
1998 represented approximately 8% and 18% of net revenues in each of these
periods, respectively. Sales from direct mail, which comprise a large proportion
of direct sales, have historically operated at lower profitability levels than
sales through distributors. Accordingly, quarterly shifts in the mix of sales
through distributors and through direct sales could cause fluctuations in the
Company's profitability. There can be no assurance that the mix of sales or the
relative profitability by distribution channel will remain at current levels in
the future.
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Dependence on Microsoft Windows and Windows NT. The Company's success is
dependent on the continued widespread use of the Windows and Windows NT
operating systems for PCs. The Company's ActiveHelp products are designed to
automatically detect, diagnose and resolve common problems in the Windows and
Windows NT operating environment. Although Windows operating systems are
currently used by many PC users, other companies, including International
Business Machines Corporation and Apple Computer, Inc., and Sun Microsystems,
Inc., have developed or are developing other operating systems that compete, or
will compete, with Windows. In the event that any of these alternative operating
systems become widely accepted in the PC marketplace, demand for the Company's
products could be adversely affected, thereby materially adversely affecting the
Company's business, results of operations and financial condition. In addition,
Microsoft may introduce a new operating system to replace Windows or could
incorporate some or many of the key features of the Company's products in new
versions of its operating systems, thereby eliminating the need for users to
purchase the Company's products. Specifically, the Company expects Microsoft to
release Windows '98 in calendar 1998. To the extent that the Company's products
are not compatible with Windows '98, the Company may need to significantly
update its products. In addition the Company may experience significant returns
of older versions of its products. The inability to adapt current products or to
develop new products for use with any new operating systems on a timely basis,
or the delay in the introduction of Microsoft Windows '98, would have a
material adverse effect on the Company's business, results of operations and
financial condition.
In addition, the Company's ability to develop products based on Windows and
Windows NT operating systems and release these products immediately prior to, or
at the time of Microsoft's release of new and upgraded Windows and Windows NT
products is substantially dependent on its ability to gain pre-release access
to, and to develop expertise in, current and future versions of Windows and
Windows NT . There can be no assurance that the Company will be able to provide
products that are compatible with future Windows and Windows NT releases on a
timely basis, with or without the cooperation of Microsoft.
Developing Market. The Company's products address the new and rapidly
evolving market for automatic service and support software. The market for
automatic service and support software products has only recently begun to
develop and is characterized by an increasing number of existing and potential
market entrants who are in the process of introducing or developing automatic
service and support software. As is typical in the case of a new and rapidly
evolving market, the demand and market acceptance for recently introduced
products are subject to a high level of uncertainty and risk. It is difficult to
predict the future growth rate and size of this market. There can be no
assurance that the market for the Company's products will develop, that demand
for the Company's products or for automatic service and support and Internet
privacy and security software products in general will increase or that the rate
of growth of this demand will be sustainable or will not decrease. The Company's
ability to develop and successfully market additional products depends
substantially on the acceptance of automatic service and support software by
individual and corporate users as an effective means of addressing their
technical support requirements and the acceptance of Internet privacy and
security software as an effective means of protecting their critical and
sensitive information. If the market fails to develop, develops more slowly than
expected or becomes saturated with competitors, or if the Company's products do
not achieve or sustain market acceptance, the Company's business, results of
operations and financial condition will be materially adversely affected.
New Product Development and Technological Change. Substantially all of the
Company's net revenues have been derived, and substantially all of the Company's
future net revenues are expected to be derived, from the sale of its automatic
service and support software products. The market for automatic service and
support software products is characterized by rapid technological advances,
evolving industry standards in computer hardware and software technology and
frequent new product introductions and enhancements. The Company's products must
be continually updated to address the new and evolving technical support
requirements of third-party hardware and software. Failure to anticipate
technical difficulties that arise from use of these third-party products and
incorporate solutions to such difficulties into the Company's products would
have a material adverse effect on continued market acceptance of the Company's
products. The Company's ability to design, develop, test and support on a timely
basis new software products, updates and enhancements that respond to
technological developments and emerging industry standards in the Company's
current market as well as new markets such as the enterprise market is critical
to the Company's future success. There can be no assurance that the Company will
be successful
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in such efforts or that the Company will not experience difficulties that could
delay or prevent the successful development, introduction and marketing of new
products and enhancements, or that its new products, upgrades and enhancements
will adequately meet the requirements of the marketplace and achieve market
acceptance. The introduction of new products, upgrades or enhanced versions of
existing products is subject to the risk of development delays due to resource
constraints, technological change and other factors. In addition, the Company
may encounter difficulties or delays in developing products for the enterprise
market in which the technical and functional requirements for products are
different from and often more complex than those in the retail market. If the
Company is unable to develop on a timely basis, new software products, upgrades
or enhancements to existing products or if such new products, upgrades or
enhancements do not achieve market acceptance, the Company's business, results
of operations and financial condition would be materially adversely affected.
The Company supplements its in-house product development by engaging
work-for-hire software engineers in India. In addition, the Company from time to
time engages other software engineers on a contract basis. Any loss of the
services of these engineers due to political or economic instability or for any
other reason could adversely affect the Company's product development efforts
and thereby could materially adversely affect the Company's business, results of
operations and financial condition.
Dependence on the Internet. The commercial viability of the Company's
products and the Company's ability to execute its strategy to leverage the
Internet as a platform for its products and services are dependent upon the
continued development and acceptance of the Internet. In addition, the Company's
future success may be dependent upon continued growth in the use of the Internet
in order to support the distribution of products and future upgrades. The use of
the Internet as a distribution channel is new and unproven and represents a
significant departure from traditional distribution methods employed by software
companies. Critical issues concerning the commercial use of the Internet
(including security, reliability, cost, ease of use, accessibility, speed and
potential tax or other government regulation) remain unresolved and may affect
the use of the Internet as a medium to support the functionality of the
Company's products as well as to distribute software. There can be no assurance
that the use of the Internet will remain effective for either current or future
products. The failure of the development and acceptance of the Internet would
have a material adverse effect on the Company's business, results of operations
and financial condition. The Company's future success depends, in part, upon the
future growth of the Internet for commercial transactions. There can be no
assurance that communication or commerce over the Internet will become
widespread and it is not known whether this market will develop to the extent
necessary to sustain or increase the demand for the Company's products sold via
electronic commerce. The Internet may not prove to be a viable commercial
marketplace for a number of reasons, including inadequate communications
bandwidth and a lack of secure payment mechanisms. To the extent that the
Internet continues to experience significant growth in the number of users and
level of use, there can be no assurance that the Internet infrastructure will
continue to be able to support the demands placed upon it. Moreover, the
Internet could lose its viability due to delays in the development or adoption
of new standards and protocols required to handle increased levels of Internet
activity or due to increased governmental regulation. Changes in or insufficient
availability of telecommunications services to support the Internet also could
result in slower response times which might adversely affect customers' ability
or willingness to access the Company's products or upgrades over the Internet.
In addition, the security and privacy concerns of existing and potential
customers, as well as concerns related to computer viruses, may inhibit the
growth of the Internet marketplace generally and the customer base for the
Company's products in particular. If use of the Internet does not continue to
grow, if the Internet infrastructure does not effectively support customer
demand or if hardware and software vendors do not continue to post updates and
patches on the Internet, the Company's business, results of operations and
financial condition could be materially adversely affected.
Limited Protection of Proprietary Rights. The Company's success is heavily
dependent upon its proprietary software. The Company relies primarily on a
combination of copyright, trademark and trade secret laws, employee
confidentiality and nondisclosure agreements, third-party nondisclosure
agreements and other methods of protection common in the consumer software
industry to protect its proprietary rights. The Company licenses its products
primarily under "shrink wrap" license agreements that are not signed by
licensees and therefore may be unenforceable under the laws of certain
jurisdictions. In addition, the
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Company has two United States patent applications pending and intends to seek
international and additional United States patents on its technology. There can
be no assurance that patents will issue from the Company's pending applications
or that any claims allowed from the pending patent applications or those
hereafter filed will be of sufficient scope or strength, or be issued in all
countries where the Company's products can be sold, to provide meaningful
protection or any commercial advantage to the Company or that any patents which
may be issued to the Company will not be challenged and invalidated. Although
from time to time the Company obtains copyright registrations on certain items
of its technology, existing copyright laws provide only limited protection.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use the Company's products
or technology that the Company considers proprietary, and third parties may
develop similar technology independently. Furthermore, there can be no assurance
that others will not infringe the Company's intellectual property rights.
Policing unauthorized use of the Company's products is difficult, and while the
Company is unable to determine the extent to which piracy of its software
products exists, software piracy can be expected to be a persistent problem.
There can be no assurance that the Company can meaningfully protect its
proprietary rights. A failure by the Company to meaningfully protect its
intellectual property rights could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
also relies in part, on technology licenses from third parties. In the event
that such licenses are terminated, the Company would need to license similar
technology from alternative sources or develop its own technology. In the event
that the Company could not license such similar technology on commercially
viable terms or otherwise successfully develop its own technology, the Company's
business, results of operations and financial condition could be materially
adversely affected. In addition, there can be no assurance that the Company's
competitors will not independently develop technologies and products that are
substantially equivalent or superior to those of the Company without violating
the Company's proprietary rights, the commercialization of which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
As the number of software products in the industry increases and the
functionality of these products increasingly overlaps, software developers may
become increasingly subject to infringement claims. From time to time, the
Company has received communications from third parties asserting that certain
products may infringe upon the intellectual property rights of others. To date,
no such claim has resulted in litigation or the payment of any damages. However,
there can be no assurance that existing or future infringement claims against
the Company with respect to current or future products will not result in costly
litigation or require the Company to enter into royalty bearing licenses with
third parties or to discontinue use of certain portions of the Company's
technology if licenses are not available on acceptable terms.
The Company intends to continue expansion of the international distribution
of its products. The laws of some foreign countries either do not protect the
Company's proprietary rights or offer only limited protection for those rights.
The Company has not registered its copyrights in any foreign countries. While in
most foreign countries registration is not required in order to receive
copyright protection, the ability to bring an enforcement action and obtain
certain remedies depends on compliance with that country's copyright laws.
Consequently, the Company's failure to register its copyrights abroad may make
enforcement of these rights more difficult or reduce the available remedies in
any enforcement action. The Company is currently pursuing further foreign
registrations of its trademarks on a limited basis, but due to the substantial
costs involved and potential prior existing rights, unfavorable laws or other
obstacles to obtaining trademark protection, the Company may not be able to
prevent a third party from using its trademarks in a foreign jurisdiction.
System Interruption and Security Risks. The Company's ability to provide
product functionality through the Internet is dependent on its ability to
protect its system from interruption, whether by damage from fire, earthquake,
power loss, telecommunications failure, unauthorized entry or other events
beyond the Company's control. Most of the Company's computer equipment,
including its processing equipment, is currently located at a single site. While
the Company believes that its existing and planned precautions of redundant
systems, regular data backups and other procedures are adequate to prevent any
significant system outage or data loss, there can be no assurance that
unanticipated problems will not cause such a failure or loss. Despite the
implementation of security measures, the Company's infrastructure may also be
vulnerable to computer viruses, hackers or similar disruptive problems caused by
its customers, employees
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or other Internet users. Any damage or failure that causes interruptions in the
Company's operations could have a material adverse effect on the Company's
business, results of operations and financial condition. Computer break-ins and
other disruptions could jeopardize the security of information stored in and
transmitted through the computer systems of the individuals and businesses
utilizing the Company's products, which could result in significant liability to
the Company and also may deter customers and potential customers from using the
Company's services. Persistent problems continue to affect public and private
data networks. For example, in a number of networks, hackers have bypassed
network security and misappropriated confidential information.
Volatility of Stock Price. The market price of the shares of the Company's
Common Stock is likely to be highly volatile and could be subject to wide
fluctuations in response to factors such as actual or anticipated variations in
the Company's operating results, announcements of technological innovations, new
products or new contracts by the Company or its competitors, third party reviews
or awards on the Company's or its competitor's products, developments with
respect to patents, copyrights or proprietary rights, changes in financial
estimates by securities analysts, conditions and trends in the software and
other technology industries, adoption of new accounting standards affecting the
software industry, general market conditions and other factors. Further, the
stock market has experienced extreme price and volume fluctuations that have
particularly affected the market prices of equity securities of many high
technology companies and that often have been unrelated or disproportionate to
the operating performance of such companies. Declines in market prices generally
may adversely affect the market price of the Company's Common Stock. The Company
has been named as a defendant in a number of class action litigations which
could result in substantial costs and a diversion of management attention and
resources, which would have a material adverse effect on the Company's business,
results of operations and financial condition. There can be no assurance that
additional actions will not be brought against the Company. On March 22, 1998,
an amended complaint was filed, adding the Company as a defendant to a lawsuit
filed on March 2, 1998 in Los Angeles Superior Court, against defendant Luckman
Interactive Inc. by plaintiffs Mark Novisoff, Timothy O'Pry, Janet Van Pelt and
Thomas Lynch. Prior to this, the Company was not a party to this lawsuit. These
actions, as well as general economic, political and market conditions, such as
recessions or international currency fluctuations, may adversely affect the
market price of the Common Stock.
Product Liability. The Company's software products may contain errors or
failures. There can be no assurance that, despite testing by the Company and
testing and use by current and potential customers, errors will not be found in
new products after commencement of commercial shipments. The occurrence of any
such errors could result in the loss of, or a delay in, market acceptance of the
Company's products, which would have a material adverse effect on the Company's
business, results of operations and financial condition. The Company's license
agreements with its customers typically contain provisions designed to limit the
Company's exposure to potential claims for damages. It is possible, however,
that the limitation of liability provisions contained in the Company's license
agreement may not be effective under the laws of certain jurisdictions. Although
the Company has not experienced any such claims to date, the sale and support of
the Company's products may entail the risk of such claims. While the Company has
obtained insurance against product liability risks, there can be no assurance
that such insurance will provide adequate coverage. The Company does not
currently carry errors and omissions coverage which may protect against
allegations that the Company's products have failed to perform adequately. Any
such claims for damages brought against the Company could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Risks Associated with Recent Acquisitions; Potential Future Acquisitions. In
April 1997, the Company acquired certain assets of Luckman Interactive, Inc. and
acquired Walk Softly, Inc. The integration of acquired assets, groups and
product lines is typically difficult, time consuming and subject to a number of
inherent risks. The integration of product lines requires the coordination of
the research and development and sales and marketing efforts of the acquired
groups and the Company. Such combinations have and will continue to require
substantial attention from management. The diversion of the attention of
management and any difficulties encountered in the transition process could have
a material adverse impact on the Company's business, financial condition and
results of operations. In addition, the process of assimilating and managing the
acquisitions could cause the interruption of, or a loss of momentum in, the
activities of
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the Company's business which could have a material adverse effect on the
Company. There can be no assurance that the Company will realize the anticipated
benefits of any of these acquisitions.
Future acquisitions by the Company may result in the diversion of
management's attention from the day-to-day operations of the Company's business
and may include numerous other risks, including difficulties in the integration
of the operations, products and personnel of the acquired companies. Further
acquisitions by the Company also have the potential to result in dilutive
issuances of equity securities, the incurrence of debt and amortization expense
related to goodwill and other intangible assets. Company management frequently
evaluates the strategic opportunities available to it and may in the near or
long-term pursue acquisitions of complementary businesses, products or
technologies.
Risks Associated With Global Operations. During the first three months of
1998, approximately 18% of total net revenues were from sales to customers
outside of the United States. The Company is expanding its sales operations
outside of the United States which will require significant management attention
and financial resources. The Company's ability to expand its product sales
internationally is dependent on the successful development of localized versions
of the Company's products, establishment of distribution channels, acceptance of
such products and the acceptance of the Internet internationally. The Company
expects to commit significant resources to customizing its products for selected
international markets and to developing international sales and support
channels. The Company's products rely on a knowledge base that contains detailed
information based on specific English language versions of third-party hardware
and software applications. This knowledge base must be recreated for each
foreign language version that is developed to support foreign releases of such
third-party products, many of which have been modified from their United States
releases. There can be no assurance that this task can be completed in a timely
or cost-effective manner or that enough products can be supported to ensure
customer acceptance. The Company believes that successful execution of a global
strategy is critical to maintaining its current market position and competitive
advantage. Failure to successfully expand its products to international markets
could cause the Company to lose business to global competitors or prevent the
development of strategic relationships with global hardware and software
vendors.
International operations are subject to a number of risks, including costs
of customizing products for foreign countries, dependence on independent
resellers, multiple and conflicting regulations regarding communications, use of
data and control of Internet access, longer payment cycles, unexpected changes
in regulatory requirements, import and export restrictions and tariffs,
difficulties in staffing and managing foreign operations, potentially adverse
tax consequences, the burdens of complying with a variety of foreign laws, the
impact of possible recessionary environments in economies outside the United
States and political and economic instability. An increase in the value of the
United States dollar relative to foreign currencies could make the Company's
products more expensive and, therefore, potentially less competitive in foreign
markets. If the Company increases its international sales, its net revenues may
also be affected to a greater extent by seasonal fluctuations resulting from
lower sales that typically occur during the summer months in Europe and other
parts of the world. Moreover, the laws of certain foreign countries in which the
Company's products may be sold may not protect the Company's intellectual
property rights to the same extent as do the laws of the United States, thus
increasing the possibility of piracy of the Company's products.
In addition, the European Monetary Union is embarking on a multi-year
introduction and conversion to a common currency called the Euro. There can be
no assurance that the Company can adopt or modify its systems and processes in a
timely and cost effective manner to accept this new currency. Any delays or
inability to conduct business using the Euro could materially affect the
Company's business, results of operations and financial condition.
Reliance on Outside Resources. The Company relies upon independent
contractors to perform a number of tasks, including product duplication and
packaging, reproduction of manuals and brochures and order fulfillment. The
Company depends on these outside parties to perform such functions to the
Company's specifications and quality standards. The Company currently does not
have long-term agreements with any of these outside parties. The Company
supplements its in-house product development by engaging work-
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for-hire software engineers in India. In addition the Company from time to time
engages other software engineers on a contract basis. Although the Company
believes that alternative resources exist or can be obtained, a disruption of
the Company's relationship with any of these outside parties or the failure of
these outside parties to continue to provide quality supplies and services on a
timely basis could materially adversely affect the Company's business, results
of operations and financial condition.
Anti-takeover Provisions. The Company's Board of Directors has the authority to
issue up to 2,000,000 shares of Preferred Stock and to determine the price,
rights, preferences, privileges, and restrictions, including voting rights, of
those shares without any further vote or action by the stockholders. The rights
of the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock may delay, defer or prevent a change in
control of the Company. In addition, Section 203 of the Delaware General
Corporation Law, to which the Company is subject, restricts certain business
combinations with any "interested stockholder" as defined by such statute.
The statute may delay, defer or prevent a change in control of the Company.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings:
In June 1997, the Company filed lawsuits in the U.S. District Court for
the Northern District of Georgia against MicroBasic GmbH ("MicroBasic") and
Roderick Manhattan Group, Ltd. ("RMG") demanding that they cease copying and
distributing MicroHelp UnInstaller. MicroBasic filed a counterclaim in November
1997 alleging breach of contract, copyright infringement, unfair trade proctices
and unfair competition. The Company intends to vigorously defend against
any and all such claims and allegations. In addition, in June 1997, the Company
filed a lawsuit in the Birmingham Mercantile Court, Great Britain, against
RMG demanding payment for past due invoices.
The Company and an individual officer of the Company have been named and
served as defendants in a civil complaint filed in the Los Angeles County
Superior Court on December 22, 1997 by Brad Kingsbury. Mr. Kingsbury is a former
employee of the Company. The complaint, as filed, alleges against the Company
certain causes of action including breach of contract, breach of good faith and
fair dealing, fraud and negligent misrepresentation arising from an alleged
grant of stock options and alleged accelerated vesting of such options. The
Company intends to vigorously defend against any and all such claims and
allegations.
On February 4, 1998, CyberMedia filed a lawsuit against Symantec Corporation
in United States District Court for the Northern District of California. Also
named as defendants in the CyberMedia's Complaint are ZebraSoft, Inc. and three
individual officers and directors of ZebraSoft (Timothy O'Pry, Thomas Lynch and
Snehal Vashi). The Complaint alleges that the defendants violated the federal
copyright laws and misappropriated CyberMedia's trade secrets in developing and
distributing a computer software program, known as Norton Uninstall Deluxe, that
is competitive with CyberMedia's UnInstaller program. The Complaint seeks money
damages and injunctive relief against the defendants.
On March 11, 1998, defendants Symantec and ZebraSoft filed Counterclaims
against CyberMedia for slander, libel, product disparagement and related state
law claims. The defendants' Counterclaims seek unspecified money damages and
injunctive relief. Discovery is on going and the Court has not set a trial date.
Defendants O'Pry, Lynch and Vashi have filed a motion to dismiss for lack of
personal jurisdiction which has been briefed and is pending before the court.
The Company believes that the claims asserted in the Counterclaims are without
merit and intends to defend against them vigorously.
On March 12, 1998, a shareholder class action complaint was filed against
the Company and certain of its current and former officers and directors. The
complaint, Ong v. CyberMedia, et al., No. 98-1811, was filed in the United
States District Court for the Central District of California. The complaint
alleges a class period between July 22, 1997 and January 30, 1998. The complaint
asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of
1934. The allegations underlying the complaint surround an
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alleged scheme by defendants to disseminate false and misleading statements
and/or to omit to state facts concerning the present and future finances and
business prospects of the Company during the class period. Plaintiff seeks an
unspecified amount of damages in excess of $75,000. On March 16, 1998, plaintiff
filed an amended class action complaint. The amended complaint added an
additional director defendant and extended the class period to March 13, 1998.
On March 19, 1998, a second class action complaint was filed against the
Company and certain of its officers and directors alleging facts nearly
identical to those alleged in the Ong complaint. The complaint, Brown v.
CyberMedia, et al., No. B C187898, was filed in the Superior Court of Los
Angeles County. It alleges a class period from March 31, 1997 through March 12,
1998, and asserts claims under Sections 25400 and 25500 of the California
Corporations Code, Sections 1709-1710 of the California Civil Code, and Sections
17200 and 17500 of the California Business and Professions Code. Plaintiff seeks
damages of an unspecified amount.
On March 24, 1998 a third shareholder class action complaint was filed
against the Company and certain of its current and former officers and
directors. The complaint, St. John v. CyberMedia, et al., No. 98-2085 MRP(SHx),
was filed in the United States District Court for the Central District of
California. The complaint alleges a class period between March 31, 1997 and
March 13, 1998. The complaint asserts claims under Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934. Like the previously filed complaints, the
basic allegations concern an alleged scheme by defendants to disseminate false
and misleading statements and/or to omit to state facts concerning the present
and future finances and activities of the Company during the class period.
Plaintiff seeks an unspecified amount of damages in excess of $75,000.
On March 26, 1998 another shareholder class action complaint was filed
against the Company and certain of its current and former officers and
directors. The complaint, Zier v. CyberMedia, et al., No. 98-2210 CM(Mcx), was
filed in the United States District Court for the Central District of
California. The complaint alleges a class period between March 31, 1997 and
March 12, 1998. The complaint asserts claims under Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934. Like the previously filed complaints, the
basic allegations concern an alleged scheme by defendants to disseminate false
and misleading statements and/or to omit to state facts concerning the present
and future finances and activities of the Company during the class period.
Plaintiff seeks an unspecified amount of damages in excess of $75,000.
On March 31, 1998 a shareholder class action complaint was filed against the
Company and certain of its current and former officers and directors. The
complaint, Smith v. CyberMedia, et al., No. BC 188527, was filed in the Superior
Court of Los Angeles County. The complaint alleges a class period between March
31, 1997 and March 13, 1998. The complaint asserts claims under Sections 25400,
25402, 25500 and 1507 of the California Corporations Code, and Sections
1709-1710 of the California Civil Code. The allegations underlying the complaint
are nearly identical to the allegations asserted in the other class action
complaints.Plaintiff seeks damages of an unspecified amount.
On April 8, 1998 a shareholder class action complaint was filed against the
Company and certain of its current and former officers and directors. The
complaint, Stockwell v. CyberMedia, No. BC 189020, was filed in the Superior
Court of Los Angeles County. The complaint alleges a class period between March
31, 1997 and March 12, 1998. The complaint asserts claims under Sections 25400
and 25500 of the California Corporations Code, Sections 1709-1710 of the
California Civil Code and Sections 17200 and 17500 of the California Business
and Professions Code. The allegations underlying the complaint are nearly
identical to the allegations asserted in the other class action complaints.
Plaintiff seeks damages of an unspecified amount.
On April 8, 1998 a shareholder class action complaint was filed against the
Company and certain of its current and former officers and directors. The
complaint, Liu v. CyberMedia, et al., No. 98-2617, was filed in the United
States District Court for the Central District of California. The complaint
alleges a class period between March 31, 1997 and March 13, 1998. The complaint
asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of
1934. The allegations underlying the complaint are nearly
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identical to the allegations asserted in the other class action complaints.
Plaintiff seeks an unspecified amount of damages in excess of $75,000.
On April 23, 1998 a shareholder class action complaint was filed against the
Company and certain of its current and former officers and directors. The
complaint, Kerr v. CyberMedia, et al., No. 98-3104 RJK(ANx), was filed in the
United States District Court for the Central District of California. The
complaint alleges a class period between July 22, 1997 and March 13, 1998. The
complaint asserts claims under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934. The allegations underlying the complaint are nearly
identical to the allegations asserted in the other class action complaints.
Plaintiff seeks damages of an unspecified amount.
The Company intends to defend against these actions vigorously.
Item 5. Other Information
Peter Morris, a member of the Board of Directors of the Company, resigned
his position as a director in January 1998, for personal business reasons.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
...10.12(2) Form of employment agreement between the Company and Kanwal Rekhi
...10.12(3) Form of employment agreement between the Company and James Tolonen
...27.1 Financial Data Schedule
(b) Reports on form 8-K
...No reports on Form 8-K have been filed during the period for which the
report is filed.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
CYBERMEDIA, INC.
(Registrant)
Date: May 15, 1997 By: /s/ James R. Tolonen
---------------------
President and Chief Operating Officer
By: /s/ Jane E. Wike
---------------------
Vice-President, Finance
(Chief Accounting Officer)
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<TABLE>
<S> <C>
INDEX TO EXHIBITS
Exhibit Page
10.12 (2) Employment agreement between the Company and Kanwal Rekhi 28
10.12 (3) Employment agreement between the Company and James R. Tolonen 37
27.1 Financial Data Schedule 46
</TABLE>
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Exhibit 10.12 (2)
Employment Agreement
This Employment Agreement (this "Agreement") is made as of April 22,
1998 by and between CyberMedia Inc., with offices at 2850 Ocean Park Boulevard,
Santa Monica, CA 90405 (the "Company"), and Kanwal Rekhi with an address of
16150 Hillvale Avenue, Monte Sereno, California 95030 ("Executive").
1........Employment and Term.
Effective from and after April 22, 1998 (the "Effective
Date"), the Company hereby employs Executive, and Executive hereby accepts
employment by the Company, on the terms and subject to the conditions set forth
in this Agreement, until such time as Executive or the Company shall terminate
such employment in accordance with the terms and conditions herein (such period
of time, the "Term of Employment").
2........Duties; Location of Employment.
(a) During the Term of Employment, Executive shall serve on a
full-time basis as the Company's Chief Executive Officer. In such capacity,
Executive shall report to, and have such responsibilities and duties with
respect to the Company's business as may be required of him by the Company's
Board of Directors (the "Board"). Executive currently serves on the Board.
During the Employment Term, the Company shall use its best efforts to nominate
and elect Executive as a director, and Executive shall serve in such capacity
without additional consideration. Executive shall serve the Company faithfully
and to the best of his ability in such capacities, devoting his full business
time, attention, knowledge, energy and skills to such employment; provided,
however, the Company acknowledges that Executive may serve on the board of
directors of other companies with the prior approval of the Board. Executive
shall travel as reasonably required in connection with the performance of his
duties hereunder.
(b) Executive's services shall be rendered principally
at the current offices of the Company located at 2850 Ocean Park Boulevard,
Santa Monica, CA 90405.
3........Compensation and Benefits.
As full and complete compensation to Executive for the
performance of the services required hereunder, the Company shall pay, grant or
provide Executive, and Executive agrees to accept, the following salary and
other compensation and benefits:
(a) A base salary, payable in accordance with the Company's
standard payroll practices for senior executive employees, but not less
frequently than monthly, at an annual rate of $275,000 ("Base Salary").
(b) The right to participate in any medical, dental,
disability, insurance, retirement, savings, vacation, sick leave or other plans
or programs established for the benefit of the Company's key senior executive
employees.
(c) Prompt reimbursement for all reasonable business-related
expenses incurred by Executive in accordance with the policies and procedures of
the Company as in effect from time to time with respect to other key senior
executives.
(d) Paid vacation in accordance with the policies of the
Company as in effect from time to time with respect to other key senior
executives.
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(e) Non-qualified stock options (the "Options") to acquire
five hundred twenty eight thousand (528,000) shares of the common stock of the
Company (the "Common Stock"), on terms substantially similar to those applicable
to options granted under the Company's Amended 1993 Stock Option Plan (the
"Option Plan") and standard form of option agreement, as modified by this
Agreement. The Options shall be granted, and vesting thereof shall commence, as
of the Effective Date, and the Options shall have an exercise price equal to $10
per share. Except as otherwise provided herein, the Options shall vest on a
monthly basis over a forty-eight (48) month period, subject to Executive's
continued service to the Company.
(f) Within thirty (30) days of the Effective Date, the Company
shall pay Executive a bonus of $341,250. Provided Executive remains an employee
of the Company on the first anniversary of the Effective Date, the Company shall
pay Executive a bonus of $300,000 within fifteen (15) days of such anniversary.
Provided Executive remains an employee of the Company on the second anniversary
of the Effective Date, the Company shall pay to Executive a bonus of $300,000
within fifteen (15) days of such anniversary. Notwithstanding the foregoing, in
the event Executive becomes entitled to benefits under Section 4(d) or Section
4(g), the Company shall pay to Executive the bonuses described in this Section
3(f) to the extent not previously paid. Any bonuses payable hereunder shall be
subject to applicable tax withholding.
(g) The Executive shall be eligible to receive for each
annual period during the Term of Employment commencing January 1 and ending
December 31, beginning January 1, 1999 (the "Bonus Period"), an annual bonus
(the "Annual Bonus") of up to one hundred percent (100%) of Executive's Base
Salary (the "Target Bonus"), to be earned based upon attainment of performance
goals and objectives to be determined by the Board on or before January 1 of
each such year during the Term of Employment. For the period beginning with the
Effective Date and ending on June 30, 1998, Executive shall be eligible to
receive a bonus (the "Initial Bonus") of $46,200 based on performance goals and
objectives to be determined by the Board on or before June 1, 1998. For the
period beginning July 1, 1998 and ending December 31, 1998, Executive shall be
eligible to receive a quarterly bonus of $68,750 for each of the fiscal quarters
beginning July 1, 1998 and October 1, 1998, (the "Quarterly Bonus") to be earned
upon attainment of performance goals and objectives to be determined by the
Board on or before the beginning of each such quarter. The Initial Bonus and
Quarterly Bonus, if any, shall be paid within 60 days after the close of the
applicable fiscal quarter. The Annual Bonus, if any, shall be paid no less
frequently than once each year within 60 days after the Bonus Period.
(h) The right, exercisable for 30 days after the Effective
Date, to purchase on terms substantially similar to those applicable to stock
purchase rights under the Option Plan and standard form of restricted stock
purchase agreement up to one hundred fifty thousand (150,000) shares of Common
Stock, at a price of $6.375 per share (the "Restricted Stock"). Executive may
purchase the Restricted Stock with a full recourse promissory note (the "Note").
The Note shall accrue interest semi-annually at the "applicable federal rate"
(within the meaning of Section 1274(d) of the Code), and shall be subject to
repayment in accordance with Section 5 below. Restricted Stock shall vest on a
monthly basis over a thirty-six (36) month period commencing on the Effective
Date, subject to Executive's continued service to the Company or as otherwise
provided herein, with 4,166 shares of Restricted Stock to vest each month during
such thirty-six (36) month period except for the last month of such thirty-six
(36) month period in which 4,190 shares of Restricted Stock shall vest, subject
to earlier vesting, if any, if either of the following events or conditions
occurs or is satisfied during the Term of Employment: (x) the average closing
stock price of the common stock of the Company on the Nasdaq National Market
exceeds fifteen dollars ($15) for any twenty (20) consecutive trading days, or
(y) the Company recognizes a Net Profit for two fiscal consecutive quarters (the
"Net Profit Period"). For purposes of this Agreement, the Company shall have
recognized a "Net Profit" for the Net Profit Period if, with respect to each
fiscal quarter in the Net Profit Period, (x) the Company has net revenues in
excess of $16 million for each such fiscal quarter as reported in the Company's
consolidated statement of operations ("Statement of Operations") in the
Company's Form 10-Q for the quarter then ended or the Company's annual report on
Form 10-K for the year then ended, as the case may be (the "SEC Reports"), and
(y) the Company's earnings before interest and taxes for each such fiscal
quarter ("EBIT") are in excess of 5% of the net revenues of the Company for such
fiscal quarter as reported in the Statement of Operations in the Company's SEC
Reports; provided, that, EBIT for any
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particular fiscal quarter shall be determined without giving effect to
Executive's right to the bonus described in Section 3(f).
(i) The Company shall pay premiums during the Term of
Employment required to be paid in order to maintain a life insurance policy on
the life of Executive with $2 million of benefits payable upon Executive's death
to a beneficiary or beneficiaries designated by Executive. Upon termination of
this Agreement, the Company shall be entitled to withdraw from the cash
surrender value of such policy, to the extent available, an amount equal to the
insurance premiums paid by the Company.
(j) The Company and Executive agree to negotiate, in good
faith, mutually agreeable temporary living accommodations near the Company's
current offices in Santa Monica, California. In addition, the Company shall pay
or reimburse Executive, as the case may be, for the Executive's reasonable and
prudent travel expenses incurred by Executive to and from his current residence
in Monte Sereno, California.
4........Termination.
(a) Disability. In the event of the permanent disability (as
hereinafter defined) of Executive during the Term of Employment, the Company
shall have the right, upon written notice to Executive, to terminate Executive's
employment hereunder, effective upon the 30th calendar day following the giving
of such notice (or such later day as shall be specified in such notice). Upon
the effectiveness of such termination, (i) the Company shall have no further
obligations hereunder, except to pay and provide, subject to applicable
withholding, (A) all amounts of Base Salary accrued, but unpaid, at the
effective date of termination, (B) a lump sum amount equal to Executive's then
annual Base Salary, (C) a pro rata portion of Executive's Quarterly Bonus or
Target Bonus, as applicable, and (D) all reasonable unreimbursed
business-related expenses, and (ii) Executive shall have no further obligations
hereunder other than those provided for in Sections 6 and 7 hereof. All amounts
payable to Executive pursuant to this Section 4(a) shall be payable within 30
days following the effectiveness of the termination of Executive's employment.
For purposes of this paragraph, "permanent disability" shall be defined as any
physical or mental disability or incapacity which renders Executive incapable in
any material respect of performing the services required of him in accordance
with his obligations under Section 2 for a period of 120 days, consecutive or
otherwise, in any 360 day period.
(b) Death. In the event of the death of Executive during the
Term of Employment, this Agreement shall automatically terminate and the Company
shall have no further obligations hereunder, except to pay and provide to
Executive's beneficiary or other legal representative, subject to applicable
withholding, (A) all amounts of Base Salary accrued but unpaid, at the date of
death, (B) a pro rata portion of Executive's Quarterly Bonus or Target Bonus, as
applicable, and (C) all reasonable unreimbursed business-related expenses. All
amounts payable to Executive pursuant to this Section 4(b) shall be payable
within 30 days following the date of death.
(c) Cause. The Company shall have the right, upon written
notice to Executive, to terminate Executive's employment under this Agreement
for Cause (as hereinafter defined); provided, however, that the Company shall
not terminate Executive's employment for Cause unless the Company shall first
have given Executive written notice of the Company's intention to do so, which
written notice shall specify the particular breaches, acts or failures to act
constituting the basis for such termination and shall offer Executive an
opportunity, within 20 days of the receipt of such notice, to meet with the
Board to defend such breaches, acts or failures to act and/or to cure any such
breaches or acts which are possible to cure. In the event of a termination for
Cause, this Agreement shall terminate and Executive shall be removed from office
effective as of the date specified by the Company in the notice (subject to the
20-day period referred to above) and (i) the Company shall have no further
obligations hereunder, except to pay all amounts of Base Salary, reimburse all
reasonable unreimbursed business-related expenses and pay and provide all other
benefits accrued to the date of termination and (ii) Executive shall have no
further obligations hereunder except for those provided for in Sections 6 and 7
hereof; provided, however, that nothing contained in this Section 4(c) shall
constitute a waiver or release by the Company of any rights or
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claims it may have against Executive for actions or omissions which give rise to
a termination under this Section 4(c).
For purposes of this Agreement, the term "Cause" shall mean:
(i) any act of fraud, embezzlement or dishonesty on
the part of Executive with respect to the Company or any of its affiliates; or
(ii) any material breach by Executive of his
obligations under Sections 6 or 7 hereof; or
(iii) conviction of Executive of any felony; or
(iv) a material breach of, or the failure or refusal
by Executive to perform and discharge, Executive's duties, responsibilities
and obligations under this Agreement (it being understood that no action
or failure to act by Executive shall be considered to be Cause if such action or
failure to act shall have been taken by Executive in good faith).
(d) Without Cause. The Company shall have the right, upon
written notice to Executive, to terminate Executive's employment under this
Agreement without Cause, in which case this Agreement shall terminate on the
date specified in such notice. The Company thereafter shall have no further
obligations hereunder, except (subject to applicable withholding) to (i) pay all
amounts of Base Salary accrued, but unpaid, to the date of termination, (ii) pay
an additional amount equal to the sum of (A) Executive's annual Base Salary and
(B) Executive's Target Bonus for the fiscal year in which such termination
occurs, and (iii) reimburse all reasonable unreimbursed business-related
expenses. In addition, in the event Executive's employment is terminated by the
Company without Cause, all Options which would have vested had Executive
remained employed by the Company for a twelve month consecutive period after the
date of such termination and Restricted Stock that remains unvested as of such
date of termination shall automatically and immediately vest upon such
termination, in all cases subject to applicable tax withholding. For purposes of
this Section 4(d), Executive's employment will be considered to have been
terminated by the Company without Cause in the event Executive voluntarily
resigns his employment with the Company because of (i) a material adverse change
in his position with the Company which materially reduces his responsibility,
without Cause and without Executive's written consent; or (ii) a material
reduction in Executive's compensation without his written consent.
(e) Voluntary Termination. Executive may voluntarily terminate
his employment with the Company at any time upon at least 30 days prior written
notice, in which case this Agreement shall terminate on the 30th day from such
notice or such longer period as may be consented to by the Company. Upon
termination, the Company shall have no further obligations hereunder, except to
pay all amounts of Base Salary accrued, but unpaid, at the effective date of
voluntary termination, and all reasonable unreimbursed business-related
expenses, if any.
(f) Plan Benefits. Upon any termination of Executive's
employment hereunder, the Company shall pay Executive the amounts and shall
provide all benefits generally available upon termination under any employee
benefit plans, policies and practices of the Company, determined in accordance
with the applicable terms and provisions of such plans, policies and practices.
(g) Change of Control. In the event (i) of a Change of
Control of the Company during the six-month period immediately after the
Effective Date (the "Initial Period") and (ii) within twelve months after such
Change of Control either Executive voluntarily resigns or the Company terminates
Executive's employment other than for Cause, then (A) the Company shall pay
Executive an amount equal to 300% of Executive's annual Base Salary less any
amounts of the Target Bonus, Initial Bonus and Quarterly Bonus earned or paid
with respect to the Company's fiscal year in which such termination occurs, and
(B) all Options which would have vested had Executive remained employed by the
Company from the Effective Date through and until twenty-four consecutive months
after the Effective Date and Restricted Stock that remain unvested as of such
date of termination shall automatically and
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immediately vest upon such termination, in all cases subject to applicable
tax withholding. In the event (i) of a Change of Control of the Company at any
time after the Initial Period and (ii) within twelve months after such Change of
Control Executive either voluntarily resigns or the Company terminates
Executive's employment other than for Cause, then (A) the Company shall pay
Executive an amount equal to 200% of the Executive's annual Base Salary, and (B)
all Options which would have vested had Executive remained employed by the
Company for an eighteen month period after the date of such termination and
Restricted Stock that remain unvested as of such date of termination shall
automatically and immediately vest upon such termination, in all cases subject
to applicable tax withholding. In the event of a Change of Control of the
Company at a value (the "Transaction Value") that equals or exceeds $20 per
share of Company common stock (as determined by the Board, in its discretion),
Executive's Options shall vest as follows (in addition to any accelerated
vesting provided above): if the Transaction Value is less than $30 per share,
then the Options shall vest as though Executive had remained employed by the
Company for an additional 12 months; if the Transaction Value equals or exceeds
$30 per share, then Executive's Options shall fully vest.For purposes of this
Agreement, a "Change of Control" shall be deemed to have occurred upon the
closing of (i) a merger, reorganization or consolidation of the Company with or
into any other corporation or other entity, or sale of all or substantially all
of the assets of the Company, unless the stockholders of the Company immediately
prior to such transaction hold at least 50% of the total voting power
represented by the voting securities of the entity surviving such merger,
reorganization or consolidation (or its parent), or the entity purchasing such
assets (or its parent), or (ii) upon a sale or transfer of more than 50% of the
Common Stock of the Company to a person or persons acting as a group, which
person or group is not controlled directly or indirectly by the Company, in a
single transaction or series of related transactions.
5........Repayment of Note.
Executive's Note (as described in Section 3(h)), shall be due
and payable in full, together with any accrued but unpaid interest, on the third
anniversary of the Effective Date, subject to earlier prepayment voluntarily by
Executive or as follows:
(a) The principal amount of the Note, together with any
accrued but unpaid interest, shall be due and payable in full within ninety (90)
days of the date Executive's employment with Company (or its successor)
terminates for any reason, but only if such termination occurs more than ninety
(90) days before the third anniversary of the Effective Date.
(b) Within thirty (30) days of receiving any bonus as provided
in Section 3(f), Executive shall pay to the Company an amount equal to the bonus
amount, net of applicable tax withholding.
6........Confidentiality; Ownership.
(a) During the Term of Employment and thereafter, Executive
shall keep secret and retain in strictest confidence and not use or disclose,
furnish or make accessible to anyone outside the Company and any of its
affiliates, directly or indirectly, or use for the benefit of himself or others
except in connection with the business of the Company and the business of any of
its subsidiaries or affiliates, any Protected Information. The term "Protected
Information" shall mean trade secrets, confidential or proprietary information
and all other knowledge, technology, know-how, information, documents or
materials owned, developed or possessed by the Company or any of its
subsidiaries or affiliates, whether in tangible or intangible form, pertaining
to the business of the Company or any of its subsidiaries or affiliates,
including, but not limited to, research and development operations, systems,
databases, computer programs and software, designs, models, operating
procedures, knowledge of the organization, products and services (including
prices, costs, sales or content), processes, techniques, contracts, financial
information or measures, business methods, future business plans, details of
consultant contracts, new personnel acquisition plans, business acquisition
plans, customers and suppliers (including identities of customers and
prospective customers and suppliers, identities of individual contacts at
business entities which are customers or prospective customers or suppliers,
preferences, businesses or habits), and business relationships; provided,
however, that Protected Information shall not include information that shall
become generally known to the public or the trade without violation of this
Section 6.
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(b) Executive acknowledges that all developments, inventions
(whether patentable or otherwise), discoveries, improvements, patents, trade
secrets, copyrights, designs, reports, works of authorship, computer software,
flow charts and diagrams, procedures, data, documentation and writings and
applications thereof relating to the business of the Company or planned business
of the Company or any of its subsidiaries or affiliates that, alone or jointly
with others, Executive may conceive, create, make, develop, reduce to practice
or acquire during the Term of Employment, or has conceived, created, made,
developed, reduced to practice or acquired prior to the Term of Employment
(collectively, the "Developments") are, shall remain, and shall be the sole and
exclusive property of the Company, and Executive hereby assigns to the Company
all of his right, title and interest in and to all such Developments. Executive
shall promptly and fully disclose all future material Developments to the Board
and, at any time upon request and at the expense of the Company, shall execute,
acknowledge and deliver to the Company all instruments that the Company shall
prepare, give evidence and take all other actions that are necessary or
desirable in the opinion of the Company to enable the Company to file and
prosecute applications for and to acquire, maintain and enforce all letters
patent, trademark registrations or copyrights covering the Developments in all
countries in which the same are deemed necessary by the Company. All memoranda,
notes, lists, drawings, records, files, computer tapes, programs, software,
source and programming narratives and other documentation (and all copies
thereof, except for Executive's appointment book, daily planner or similar
organizational or scheduling notes) made or compiled by Executive or made
available to Executive concerning the Developments or otherwise concerning the
business of the Company or planned business of the Company or any of its
subsidiaries or affiliates shall be the property of the Company or such
subsidiary or affiliate and shall be delivered to the Company or such subsidiary
or affiliate promptly upon the termination of the Term of Employment.
(c) The provisions of this Section 6 shall, without any
limitation as to time, survive the expiration or termination of Executive's
employment hereunder, irrespective of the reason for any termination.
7........Covenant-Not to Solicit. Executive agrees that for a period of
one (1) year following any termination of the employment of Executive with the
Company, Executive will not, directly or indirectly, without the prior written
consent of the Company: solicit, entice, persuade or induce any employee,
consultant, agent or independent contractor of the Company or of any of its
subsidiaries or affiliates to terminate his or her employment by the Company or
such subsidiary or affiliate to become employed by any person, firm or
corporation other than the Company or such subsidiary or affiliate, or approach
any such employee, consultant, agent or independent contractor for any of the
foregoing purposes, or hire any such employee, consultant, agent or independent
contractor or authorize or assist in the taking of any such actions by any third
party.
8........Rights Regarding Salary and Benefits. The right of Executive
to participate in plans and programs, and to receive salary, benefits or
reimbursement from the Company pursuant to the terms of this Agreement shall not
be affected by or subject to (i) any set-off, counterclaim, recoupment, defense
or other right which the Company may have against Executive (other than in
respect of debts for money owed by Executive to the Company), or (ii) any
insolvency, bankruptcy, reorganization or similar proceedings by or against the
Company.
9........Survivorship. The respective rights and obligations of the
parties hereunder, including, without limitation, the rights and obligations
pursuant to Sections 6 and 7, shall survive any termination of this Agreement to
the extent necessary for the intended preservation of such rights and
obligations.
10.......Specific Performance. Executive acknowledges that the services
to be rendered by Executive are of a special, unique and extraordinary character
and, in connection with such services, Executive will have access to
confidential information vital to the Company's Business and the businesses of
its subsidiaries and affiliates. By reason of this, Executive consents and
agrees that if Executive violates any of the provisions of Sections 6 or 7
hereof, the Company and its subsidiaries and affiliates would sustain
irreparable injury and that money damages will not provide adequate remedy to
the Company and that the Company shall be entitled to have Sections 6 or 7
specifically enforced by any court having equity
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jurisdiction. Nothing contained herein shall be construed as prohibiting the
Company or any of its subsidiaries or affiliates from pursuing any other
remedies available to it for such breach or threatened breach, including the
recovery of damages from Executive.
11.......Deductions and Withholding; Expenses. Executive agrees that
the Company and/or its subsidiaries or affiliates shall withhold from any and
all compensation paid to and required to be paid to Executive pursuant to this
Agreement, all federal, state, local and/or other taxes which the Company
determines are required to be withheld in accordance with applicable statutes
and/or regulations from time to time in effect and all amounts required to be
deducted in respect of Executive's coverage under applicable employee benefit
plans. For purposes of this Agreement and calculations hereunder, all such
deductions and withholdings shall be deemed to have been paid to and received by
Executive.
12.......Waiver. The waiver by the Company of a breach of any provision
of this Agreement by Executive shall not operate or be construed as a waiver of
any subsequent breach by him. The waiver by Executive of a breach of any
provision of this Agreement by the Company shall not operate or be construed as
a waiver of any subsequent-breach by the Company.
13.......Governing Law. This Agreement shall be subject to, and
governed by, the laws of the State of California applicable to agreements made
and to be performed entirely therein.
14.......Assignability; Successors.
(a) The obligations of Executive may not be delegated and,
except as expressly provided in Section 4(b) relating to the designation of
beneficiaries, Executive may not, without the Company's prior written consent
thereto, assign, transfer, convey, pledge, encumber, hypothecate or otherwise
dispose of this Agreement or any interest herein. Any such attempted delegation
or disposition shall be null and void and without effect. Notwithstanding the
foregoing, Executive may transfer his Options and Restricted Stock to his
immediate family members or to a family trust or family partnership, subject to
the terms and conditions of the Option Plan, as modified by this Agreement.
(b) The Company and Executive agree that this Agreement and
each of the Company's rights and obligations hereunder may be assigned or
transferred by the Company to and shall be assumed by and binding upon any
Successor to the Company.
(c) The term "Successor" shall mean any corporation or other
business entity which succeeds to the assets or conducts the business of the
Company, whether directly or indirectly, by purchase, merger, consolidation or
otherwise.
In the event that another corporation or other business entity becomes
a Successor of the Company, then the Successor shall, by an agreement in form
and substance reasonably satisfactory to Executive, expressly assume and agree
to perform this Agreement in the same manner and to the same extent as the
Company would be required to perform if there had been no successor.
15.......Change of Control Payments.
(a) Notwithstanding anything to the contrary contained herein
(including, without limitation, in Section 4(g) hereof), in the event that any
payment or benefit received or to be received by Executive in connection with a
termination of Executive's employment with the Company (collectively, the
"Severance Payments") would (i) constitute a "parachute payment" within the
meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the
"Code") or any similar or successor provision to 280G and (ii) but for this
Section 15(a), be subject to the excise tax imposed by Section 4999 of the Code
or any similar or successor provision to Section 4999 (the "Excise Tax"), then
such Severance Payments (which Severance Payments shall collectively be referred
to herein as the "Severance Parachute Payments") shall be reduced to the largest
amount which would result in no portion of the Severance Parachute Payments
being subject to the Excise Tax. In the event any reduction of benefits is
required pursuant to this Agreement, Executive shall be allowed to choose which
benefits hereunder are reduced
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(e.g., reduction first from the Severance Payment, then from the vesting
acceleration). If the Internal Revenue Service (the "IRS") determines that a
Severance Parachute Payment is subject to the Excise Tax, then the Company may
seek to enforce the provisions of Section 15(b) hereof. Such enforcement of
Section 15(b) hereof shall be the only remedy, under any and all applicable
state and federal laws or otherwise, for Executive's failure to reduce the
Severance Parachute Payments so that no portion thereof is subject to the Excise
Tax.
(b) If, notwithstanding the reduction described in Section
15(a) hereof, the IRS determines that Executive is liable for the Excise Tax as
a result of the receipt of a Severance Parachute Payment, then Executive shall,
subject to the provisions of this Agreement, be obligated to pay to the Company
(the "Repayment Obligation") an amount of money equal to the "Repayment Amount."
The Repayment Amount with respect to a Severance Parachute Payment shall be the
smallest such amount, if any, as shall be required to be paid to the Company so
that Executive's net proceeds with respect to any Severance Parachute Payment
(after taking into account the payment of the Excise Tax imposed on such
Severance Parachute Payment) shall be maximized. Notwithstanding the foregoing,
the Repayment Amount with respect to a Severance Parachute Payment shall be zero
if a Repayment Amount of more than zero would not eliminate the Excise Tax
imposed on such Severance Parachute Payment. If the Excise Tax is not eliminated
through the performance of the Repayment Obligation, Executive shall pay the
Excise Tax. The Repayment Obligation shall be performed within 30 days of either
(i) Executive's entering into a binding agreement with the IRS as to the amount
of Executive's Excise Tax liability or (ii) a final determination by the IRS or
a court decision requiring Executive to pay the Excise Tax with respect to such
a Severance Parachute Payment from which no appeal is available or is timely
taken.
16.......Severability; Blue-Pencilling. If any provision (or any part
thereof) of this Agreement, including Sections 6 and 7, as applied to either
party or to any circumstances, shall be determined by any court of competent
jurisdiction to be invalid or unenforceable, the same shall in no way affect any
other provision or remaining part thereof of this Agreement, which shall be
given full effect without regard to the invalid or unenforceable provision or
part thereof, or the validity or enforceability of this Agreement.
If any of the provisions of Sections 6 or 7, or any part thereof, are
determined by the Panel to be unreasonable because of the duration of such
provision or the geographic scope thereof, the Panel or such court shall have
the power to reduce the duration or restrict or redefine the geographic scope of
such provision and to enforce such provision as so reduced, restricted or
redefined.
17.......Notices. All notices to the Company or Executive permitted or
required hereunder shall be in writing, shall refer to this Agreement and shall
be delivered personally, by telecopier or by courier service providing for
next-day delivery or sent by registered or certified mail, return receipt
requested, to the following addresses:
(a) if to the Company to:
CyberMedia, Inc.
2850 Ocean Park Boulevard
Santa Monica, CA 90405
Attention: General Counsel
Telephone: (310) 664-5000
Facsimile: (310) 581-4720
(b) if to Executive to:
16150 Hillvale Avenue
Monte Sereno, CA 95030
Any party may change the address to which notices shall be
sent by sending written notice of such change of address to the other party. Any
such notice shall be deemed given, if delivered
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personally, upon receipt; if sent by certified or registered mail, 3 days after
deposit (postage prepaid) with the U.S. mail service; if sent by courier service
providing for next day delivery, the next business day following deposit with
such courier service; and if telecopied, when telecopied.
18.......Paragraph Headings. The paragraph headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
19.......Entire Agreement. This Agreement together with any other
agreement expressly referred to herein embodies the entire agreement of the
parties and supersedes all prior agreements and understandings of the parties
with respect to Executive's employment between the Company and Executive. This
Agreement may not be changed or terminated orally but only by an agreement in
writing signed by the parties hereto.
20.......Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
taken together shall constitute one and the same instrument.
In Witness Whereof, the parties hereto have duly executed this
Agreement as of April 22, 1998.
CyberMedia, Inc.
By: /s/ Suhas Patil
----------------------
Name: Suhas Patil
Title: Compensation Committee, Board of
Directors
/s/ Kanwal Rekhi
----------------------
Kanwal Rekhi
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Exhibit 10.12 (3)
Employment Agreement
This Employment Agreement (this "Agreement") is made as of April 22,
1998 by and between CyberMedia Inc., with offices at 2850 Ocean Park Boulevard,
Santa Monica, CA 90405 (the "Company"), and Jim Tolonen, with an address of 3911
Spray Lane, Malibu, CA 90265 ("Executive").
1. Employment and Term.
Effective from and after April 22, 1998 (the "Effective
Date"), the Company hereby employs Executive, and Executive hereby accepts
employment by the Company, on the terms and subject to the conditions set forth
in this Agreement, until such time as Executive or the Company shall terminate
such employment in accordance with the terms and conditions herein (such period
of time, the "Term of Employment"). The Company acknowledges and understands
that prior to May 1, 1998, Executive will be available on a limited, part-time
basis in deference to his obligations to and his transition from his prior
employer.
2. Duties; Location of Employment.
(a) During the Term of Employment, Executive shall serve on a
full-time basis as the Company's President and Chief Operating Officer. In such
capacity, Executive shall report to, and have such responsibilities and duties
with respect to the Company's business as may be required of him by the
Company's Chief Executive Officer ("CEO") or, in the absence of a CEO, the
Company's Board of Directors (the "Board"). Executive currently serves on the
Board. During the Employment Term, the Company shall use its best efforts to
nominate and elect Executive as a director, and Executive shall serve in such
capacity without additional consideration. Executive shall serve the Company
faithfully and to the best of his ability in such capacities, devoting his full
business time, attention, knowledge, energy and skills to such employment;
provided, however, the Company acknowledges that Executive may serve on the
board of directors of other companies with the prior approval of the Board.
Executive shall travel as reasonably required in connection with the performance
of his duties hereunder.
(b) Executive's services shall be rendered principally
at the current offices of the Company located at 2850 Ocean Park Boulevard,
Santa Monica, CA 90405.
3. Compensation and Benefits.
As full and complete compensation to Executive for the
performance of the services required hereunder, the Company shall pay, grant or
provide Executive, and Executive agrees to accept, the following salary and
other compensation and benefits:
(a) A base salary, payable in accordance with the Company's
standard payroll practices for senior executive employees, but not less
frequently than monthly, at an annual rate of $250,000 ("Base Salary").
(b) The right to participate in any medical, dental,
disability, insurance, retirement, savings, vacation, sick leave or other plans
or programs established for the benefit of the Company's key senior executive
employees.
(c) Prompt reimbursement for all reasonable business-related
expenses incurred by Executive in accordance with the policies and procedures of
the Company as in effect from time to time with respect to other key senior
executives.
(d) Paid vacation in accordance with the policies of the
Company as in effect from time to time with respect to other key senior
executives.
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(e) Non-qualified stock options (the "Options") to acquire
four hundred six thousand (406,000) shares of the common stock of the Company
(the "Common Stock"), on terms substantially similar to those applicable to
options granted under the Company's Amended 1993 Stock Option Plan (the "Option
Plan") and standard form of stock option agreement, as modified by this
Agreement. The Options shall be granted, and vesting thereof shall commence, as
of the Effective Date. The Options shall have an exercise price equal to the
fair market value of Common Stock as of the Effective Date as determined by the
Board as to one hundred thousand (100,000) of the Option shares, and $10 per
share as to three hundred six thousand (306,000) of the Option shares. Except as
otherwise provided herein, the Options shall vest on a monthly basis over a
forty-eight (48) month period, subject to Executive's continued service to the
Company.
(f) Within thirty (30) days of the Effective Date, the Company
shall pay Executive a bonus of $227,500. Provided Executive remains an employee
of the Company on the first anniversary of the Effective Date, the Company shall
pay Executive a bonus of $200,000 within fifteen (15) days of such anniversary.
Provided Executive remains an employee of the Company on the second anniversary
of the Effective Date, the Company shall pay to Executive a bonus of $200,000
within fifteen (15) days of such anniversary. Notwithstanding the foregoing, in
the event Executive becomes entitled to benefits under Section 4(d) or Section
4(g), the Company shall pay to Executive the bonuses described in this Section
3(f) to the extent not previously paid. Any bonuses payable hereunder shall be
subject to applicable tax withholding.
(g) The Executive shall be eligible to receive for each
annual period during the Term of Employment commencing January 1 and ending
December 31, beginning January 1, 1999 (the "Bonus Period"), an annual bonus
(the "Annual Bonus") of up to one hundred percent (100%) of Executive's Base
Salary (the "Target Bonus"), to be earned based upon attainment of performance
goals and objectives to be determined by the Board on or before January 1 of
each such year during the Term of Employment. For the period beginning with the
Effective Date and ending on June 30, 1998, Executive shall be eligible to
receive a bonus (the "Initial Bonus") of $42,000 based on performance goals and
objectives to be determined by the Board on or before June 1, 1998. For the
period beginning July 1, 1998 and ending December 31, 1998, Executive shall be
eligible to receive a quarterly bonus of $62,500 for each of the fiscal quarters
beginning July 1, 1998 and October 1, 1998, (the "Quarterly Bonus") to be earned
upon attainment of performance goals and objectives to be determined by the
Board on or before the beginning of each such quarter. The Initial Bonus and
Quarterly Bonus, if any, shall be paid within 60 days after the close of the
applicable fiscal quarter. The Annual Bonus, if any, shall be paid no less
frequently than once each year within 60 days after the Bonus Period.
(h) The right, exercisable for 30 days after the Effective
Date, to purchase on terms substantially similar to those applicable to stock
purchase rights under the Option Plan and standard form of restricted stock
purchase agreement up to one hundred thousand (100,000) shares of Common Stock,
at a price of $6.375 per share (the "Restricted Stock"). Executive may purchase
the Restricted Stock with a full recourse promissory note (the "Note"). The Note
shall accrue interest semi-annually at the "applicable federal rate" (within the
meaning of Section 1274(d) of the Code), and shall be subject to repayment in
accordance with Section 5 below. Restricted Stock shall vest on a monthly basis
over a thirty-six (36) month period commencing on the Effective Date, subject to
Executive's continued service to the Company or as otherwise provided herein,
with 2,777 shares of Restricted Stock to vest each month during such thirty-six
(36) month period except for the last month of such thirty-six (36) month period
in which 2,805 shares of Restricted Stock shall vest, subject to earlier
vesting, if any, if either of the following events or conditions occurs or is
satisfied during the Term of Employment: (x) the average closing stock price of
the common stock of the Company on the Nasdaq National Market exceeds fifteen
dollars ($15) for any twenty (20) consecutive trading days, or (y) the Company
recognizes a Net Profit for two fiscal consecutive quarters (the "Net Profit
Period"). For purposes of this Agreement, the Company shall have recognized a
"Net Profit" for the Net Profit Period if, with respect to each fiscal quarter
in the Net Profit Period, (x) the Company has net revenues in excess of $16
million for each such fiscal quarter as reported in the Company's consolidated
statement of operations ("Statement of Operations") in the Company's Form 10-Q
for the quarter then ended or the Company's annual report on Form 10-K for the
year then ended, as the
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case may be (the "SEC Reports"), and (y) the Company's earnings before
interest and taxes for each such fiscal quarter ("EBIT") are in excess of 5% of
the net revenues of the Company for such fiscal quarter as reported in the
Statement of Operations in the Company's SEC Reports; provided, that, EBIT for
any particular fiscal quarter shall be determined without giving effect to
Executive's right to the bonus described in Section 3(f).
(i) The Company shall pay premiums during the Term of
Employment required to be paid in order to maintain a life insurance policy on
the life of Executive with $2 million of benefits payable upon Executive's death
to a beneficiary or beneficiaries designated by Executive. Upon termination of
this Agreement, the Company shall be entitled to withdraw from the cash
surrender value of such policy, to the extent available, an amount equal to the
insurance premiums paid by the Company.
(j) The Company will pay or reimburse Executive, as the case
may be, for the following costs and expenses incurred in connection with
Executive's and his family's relocation to Santa Monica, California; (i)
Executive's reasonable and prudent moving expenses to a Santa Monica, California
residence; (ii) Executive's reasonable and prudent rental expenses for a Santa
Monica, California interim residence for a period of up to 270 days from the
Effective Date; (iii) the reasonable and prudent travel expenses incurred by the
Executive arising out of personal visits to Los Gatos, California until his
family relocates to the Santa Monica, California area; (iv) the reasonable
closing costs, such costs not to include any financing points, arising out of
Executive's sale of his Los Gatos, California residence and purchase of a Santa
Monica, California area residence; and (v) all other reasonable and prudent
one-time direct costs of relocation (but not including any loss on the sale of
the Los Gatos, California residence). Notwithstanding the foregoing, the
Company's obligation to pay or reimburse Executive for such expenses shall not
exceed $75,000.
4. Termination.
(a) Disability. In the event of the permanent disability (as
hereinafter defined) of Executive during the Term of Employment, the Company
shall have the right, upon written notice to Executive, to terminate Executive's
employment hereunder, effective upon the 30th calendar day following the giving
of such notice (or such later day as shall be specified in such notice). Upon
the effectiveness of such termination, (i) the Company shall have no further
obligations hereunder, except to pay and provide, subject to applicable
withholding, (A) all amounts of Base Salary accrued, but unpaid, at the
effective date of termination, (B) a lump sum amount equal to Executive's then
annual Base Salary, (C) a pro rata portion of Executive's Quarterly Bonus or
Target Bonus, as applicable, and (D) all reasonable unreimbursed
business-related expenses, and (ii) Executive shall have no further obligations
hereunder other than those provided for in Sections 6 and 7 hereof. All amounts
payable to Executive pursuant to this Section 4(a) shall be payable within 30
days following the effectiveness of the termination of Executive's employment.
For purposes of this paragraph, "permanent disability" shall be defined as any
physical or mental disability or incapacity which renders Executive incapable in
any material respect of performing the services required of him in accordance
with his obligations under Section 2 for a period of 120 days, consecutive or
otherwise, in any 360-day period.
(b) Death. In the event of the death of Executive during the
Term of Employment, this Agreement shall automatically terminate and the Company
shall have no further obligations hereunder, except to pay and provide to
Executive's beneficiary or other legal representative, subject to applicable
withholding, (A) all amounts of Base Salary accrued but unpaid, at the date of
death, (B) a pro rata portion of Executive's Quarterly Bonus or Target Bonus, as
applicable, and (C) all reasonable unreimbursed business-related expenses. All
amounts payable to Executive pursuant to this Section 4(b) shall be payable
within 30 days following the date of death.
(c) Cause. The Company shall have the right, upon written
notice to Executive, to terminate Executive's employment under this Agreement
for Cause (as hereinafter defined); provided, however, that the Company shall
not terminate Executive's employment for Cause unless the Company shall first
have given Executive written notice of the Company's intention to do so, which
written notice shall specify the particular breaches, acts or failures to act
constituting the basis for such termination and
39
<PAGE>
shall offer Executive an opportunity, within 20 days of the receipt of such
notice, to meet with the Board to defend such breaches, acts or failures to act
and/or to cure any such breaches or acts which are possible to cure. In the
event of a termination for Cause, this Agreement shall terminate and Executive
shall be removed from office effective as of the date specified by the Company
in the notice (subject to the 20-day period referred to above) and (i) the
Company shall have no further obligations hereunder, except to pay all amounts
of Base Salary, reimburse all reasonable unreimbursed business-related expenses
and pay and provide all other benefits accrued to the date of termination and
(ii) Executive shall have no further obligations hereunder except for those
provided for in Sections 6 and 7 hereof; provided, however, that nothing
contained in this Section 4(c) shall constitute a waiver or release by the
Company of any rights or claims it may have against Executive for actions or
omissions which give rise to a termination under this Section 4(c).
For purposes of this Agreement, the term "Cause" shall mean:
(i) any act of fraud, embezzlement or dishonesty on
the part of Executive with respect to the Company or any of its affiliates;or
(ii) any material breach by Executive of his
obligations under Sections 6 or 7 hereof; or
(iii) conviction of Executive of any felony; or
(iv) a material breach of, or the failure or refusal
by Executive to perform and discharge, Executive's duties, responsibilities
and obligations under this Agreement (it being understood that no action
or failure to act by Executive shall be considered to be Cause if such action or
failure to act shall have been taken by Executive in good faith).
(d) Without Cause. The Company shall have the right, upon
written notice to Executive, to terminate Executive's employment under this
Agreement without Cause, in which case this Agreement shall terminate on the
date specified in such notice. The Company thereafter shall have no further
obligations hereunder, except (subject to applicable withholding) to (i) pay all
amounts of Base Salary accrued, but unpaid, to the date of termination, (ii) pay
an additional amount equal to the sum of (A) Executive's annual Base Salary and
(B) Executive's Target Bonus for the fiscal year in which such termination
occurs, and (iii) reimburse all reasonable unreimbursed business-related
expenses. In addition, in the event Executive's employment is terminated by the
Company without Cause, all Options which would have vested had Executive
remained employed by the Company for a twelve month consecutive period after the
date of such termination and Restricted Stock that remains unvested as of such
date of termination shall automatically and immediately vest upon such
termination, in all cases subject to applicable tax withholding. For purposes of
this Section 4(d), Executive's employment will be considered to have been
terminated by the Company without Cause in the event Executive voluntarily
resigns his employment with the Company because of (i) a material adverse change
in his position with the Company which materially reduces his responsibility,
without Cause and without Executive's written consent; or (ii) a material
reduction in Executive's compensation without his written consent.
(e) Voluntary Termination. Executive may voluntarily terminate
his employment with the Company at any time upon at least 30 days prior written
notice, in which case this Agreement shall terminate on the 30th day from such
notice or such longer period as may be consented to by the Company. Upon
termination, the Company shall have no further obligations hereunder, except to
pay all amounts of Base Salary accrued, but unpaid, at the effective date of
voluntary termination, and all reasonable unreimbursed business-related
expenses, if any.
(f) Plan Benefits. Upon any termination of Executive's
employment hereunder, the Company shall pay Executive the amounts and shall
provide all benefits generally available upon termination under any employee
benefit plans, policies and practices of the Company, determined in accordance
with the applicable terms and provisions of such plans, policies and practices.
40
<PAGE>
(g) Change of Control. In the event (i) of a Change of Control
of the Company during the six-month period immediately after the Effective Date
(the "Initial Period") and (ii) within twelve months after such Change of
Control either Executive voluntarily resigns or the Company terminates
Executive's employment other than for Cause, then (A) the Company shall pay
Executive an amount equal to 300% of Executive's annual Base Salary less any
amounts of the Target Bonus, Initial Bonus and Quarterly Bonus earned or paid
with respect to the Company's fiscal year in which such termination occurs, and
(B) all Options which would have vested had Executive remained employed by the
Company from the Effective Date through and until twenty-four consecutive months
after the Effective Date and Restricted Stock that remain unvested as of such
date of termination shall automatically and immediately vest upon such
termination, in all cases subject to applicable tax withholding. In the event
(i) of a Change of Control of the Company at any time after the Initial Period
and (ii) within twelve months after such Change of Control Executive either
voluntarily resigns or the Company terminates Executive's employment other than
for Cause, then (A) the Company shall pay Executive an amount equal to 200% of
the Executive's annual Base Salary, and (B) all Options which would have vested
had Executive remained employed by the Company for an eighteen month period
after the date of such termination and Restricted Stock that remain unvested as
of such date of termination shall automatically and immediately vest upon such
termination, in all cases subject to applicable tax withholding. In the event of
a Change of Control of the Company at a value (the "Transaction Value") that
equals or exceeds $20 per share of Company common stock (as determined by the
Board, in its discretion), Executive's Options shall vest as follows (in
addition to any accelerated vesting provided above): if the Transaction Value is
less than $30 per share, then the Options shall vest as though Executive had
remained employed by the Company for an additional 12 months; if the Transaction
Value equals or exceeds $30 per share, then Executive's Options shall fully
vest.For purposes of this Agreement, a "Change of Control" shall be deemed to
have occurred upon the closing of (i) a merger, reorganization or consolidation
of the Company with or into any other corporation or other entity, or sale of
all or substantially all of the assets of the Company, unless the stockholders
of the Company immediately prior to such transaction hold at least 50% of the
total voting power represented by the voting securities of the entity surviving
such merger, reorganization or consolidation (or its parent), or the entity
purchasing such assets (or its parent), or (ii) upon a sale or transfer of more
than 50% of the Common Stock of the Company to a person or persons acting as a
group, which person or group is not controlled directly or indirectly by the
Company, in a single transaction or series of related transactions.
5. Repayment of Note.
Executive's Note (as described in Section 3(h)), shall be due
and payable in full, together with any accrued but unpaid interest, on the third
anniversary of the Effective Date, subject to earlier prepayment voluntarily by
Executive or as follows:
(a) The principal amount of the Note, together with any
accrued but unpaid interest, shall be due and payable in full within ninety (90)
days of the date Executive's employment with Company (or its successor)
terminates for any reason, but only if such termination occurs more than ninety
(90) days before the third anniversary of the Effective Date.
(b) Within thirty (30) days of receiving any bonus as
provided in Section 3(f), Executive shall pay to the Company an amount equal to
the bonus amount, net of applicable tax withholding.
6. Confidentiality; Ownership.
(a) During the Term of Employment and thereafter, Executive
shall keep secret and retain in strictest confidence and not use or disclose,
furnish or make accessible to anyone outside the Company and any of its
affiliates, directly or indirectly, or use for the benefit of himself or others
except in connection with the business of the Company and the business of any of
its subsidiaries or affiliates, any Protected Information. The term "Protected
Information" shall mean trade secrets, confidential or proprietary information
and all other knowledge, technology, know-how, information, documents or
materials owned, developed or possessed by the Company or any of its
subsidiaries
41
<PAGE>
or affiliates, whether in tangible or intangible form, pertaining to the
business of the Company or any of its subsidiaries or affiliates, including, but
not limited to, research and development operations, systems, databases,
computer programs and software, designs, models, operating procedures, knowledge
of the organization, products and services (including prices, costs, sales or
content), processes, techniques, contracts, financial information or measures,
business methods, future business plans, details of consultant contracts, new
personnel acquisition plans, business acquisition plans, customers and suppliers
(including identities of customers and prospective customers and suppliers,
identities of individual contacts at business entities which are customers or
prospective customers or suppliers, preferences, businesses or habits), and
business relationships; provided, however, that Protected Information shall not
include information that shall become generally known to the public or the trade
without violation of this Section 6.
(b) Executive acknowledges that all developments, inventions
(whether patentable or otherwise), discoveries, improvements, patents, trade
secrets, copyrights, designs, reports, works of authorship, computer software,
flow charts and diagrams, procedures, data, documentation and writings and
applications thereof relating to the business of the Company or planned business
of the Company or any of its subsidiaries or affiliates that, alone or jointly
with others, Executive may conceive, create, make, develop, reduce to practice
or acquire during the Term of Employment, or has conceived, created, made,
developed, reduced to practice or acquired prior to the Term of Employment
(collectively, the "Developments") are, shall remain, and shall be the sole and
exclusive property of the Company, and Executive hereby assigns to the Company
all of his right, title and interest in and to all such Developments. Executive
shall promptly and fully disclose all future material Developments to the Board
and, at any time upon request and at the expense of the Company, shall execute,
acknowledge and deliver to the Company all instruments that the Company shall
prepare, give evidence and take all other actions that are necessary or
desirable in the opinion of the Company to enable the Company to file and
prosecute applications for and to acquire, maintain and enforce all letters
patent, trademark registrations or copyrights covering the Developments in all
countries in which the same are deemed necessary by the Company. All memoranda,
notes, lists, drawings, records, files, computer tapes, programs, software,
source and programming narratives and other documentation (and all copies
thereof, except for Executive's appointment book, daily planner or similar
organizational or scheduling notes) made or compiled by Executive or made
available to Executive concerning the Developments or otherwise concerning the
business of the Company or planned business of the Company or any of its
subsidiaries or affiliates shall be the property of the Company or such
subsidiary or affiliate and shall be delivered to the Company or such subsidiary
or affiliate promptly upon the termination of the Term of Employment.
(c) The provisions of this Section 6 shall, without any
limitation as to time, survive the expiration or termination of Executive's
employment hereunder, irrespective of the reason for any termination.
7. Covenant-Not to Solicit. Executive agrees that for a period of one
(1) year following any termination of the employment of Executive with the
Company, Executive will not, directly or indirectly, without the prior written
consent of the Company: solicit, entice, persuade or induce any employee,
consultant, agent or independent contractor of the Company or of any of its
subsidiaries or affiliates to terminate his or her employment by the Company or
such subsidiary or affiliate to become employed by any person, firm or
corporation other than the Company or such subsidiary or affiliate, or approach
any such employee, consultant, agent or independent contractor for any of the
foregoing purposes, or hire any such employee, consultant, agent or independent
contractor or authorize or assist in the taking of any such actions by any third
party.
8. Rights Regarding Salary and Benefits. The right of Executive to
participate in plans and programs, and to receive salary, benefits or
reimbursement from the Company pursuant to the terms of this Agreement shall not
be affected by or subject to (i) any set-off, counterclaim, recoupment, defense
or other right which the Company may have against Executive (other than in
respect of debts for money owed by Executive to the Company), or (ii) any
insolvency, bankruptcy, reorganization or similar proceedings by or against the
Company.
42
<PAGE>
9. Survivorship. The respective rights and obligations of the parties
hereunder, including, without limitation, the rights and obligations pursuant to
Sections 6 and 7, shall survive any termination of this Agreement to the extent
necessary for the intended preservation of such rights and obligations.
10. Specific Performance. Executive acknowledges that the services to
be rendered by Executive are of a special, unique and extraordinary character
and, in connection with such services, Executive will have access to
confidential information vital to the Company's Business and the businesses of
its subsidiaries and affiliates. By reason of this, Executive consents and
agrees that if Executive violates any of the provisions of Sections 6 or 7
hereof, the Company and its subsidiaries and affiliates would sustain
irreparable injury and that money damages will not provide adequate remedy to
the Company and that the Company shall be entitled to have Sections 6 or 7
specifically enforced by any court having equity jurisdiction. Nothing contained
herein shall be construed as prohibiting the Company or any of its subsidiaries
or affiliates from pursuing any other remedies available to it for such breach
or threatened breach, including the recovery of damages from Executive.
11. Deductions and Withholding; Expenses. Executive agrees that the
Company and/or its subsidiaries or affiliates shall withhold from any and all
compensation paid to and required to be paid to Executive pursuant to this
Agreement, all federal, state, local and/or other taxes which the Company
determines are required to be withheld in accordance with applicable statutes
and/or regulations from time to time in effect and all amounts required to be
deducted in respect of Executive's coverage under applicable employee benefit
plans. For purposes of this Agreement and calculations hereunder, all such
deductions and withholdings shall be deemed to have been paid to and received by
Executive.
12. Waiver. The waiver by the Company of a breach of any provision of
this Agreement by Executive shall not operate or be construed as a waiver of any
subsequent breach by him. The waiver by Executive of a breach of any provision
of this Agreement by the Company shall not operate or be construed as a waiver
of any subsequent-breach by the Company.
13. Governing Law. This Agreement shall be subject to, and governed by,
the laws of the State of California applicable to agreements made and to be
performed entirely therein.
14. Assignability; Successors.
(a) The obligations of Executive may not be delegated and,
except as expressly provided in Section 4(b) relating to the designation of
beneficiaries, Executive may not, without the Company's prior written consent
thereto, assign, transfer, convey, pledge, encumber, hypothecate or otherwise
dispose of this Agreement or any interest herein. Any such attempted delegation
or disposition shall be null and void and without effect. Notwithstanding the
foregoing, Executive may transfer his Options and Restricted Stock to his
immediate family members or to a family trust or family partnership, subject to
the terms and conditions of the Option Plan, as modified by this Agreement.
(b) The Company and Executive agree that this Agreement and
each of the Company's rights and obligations hereunder may be assigned or
transferred by the Company to and shall be assumed by and binding upon any
Successor to the Company.
(c) The term "Successor" shall mean any corporation or other
business entity which succeeds to the assets or conducts the business of the
Company, whether directly or indirectly, by purchase, merger, consolidation or
otherwise.
In the event that another corporation or other business entity becomes
a Successor of the Company, then the Successor shall, by an agreement in form
and substance reasonably satisfactory to Executive, expressly assume and agree
to perform this Agreement in the same manner and to the same extent as the
Company would be required to perform if there had been no successor.
43
<PAGE>
15. Change of Control Payments.
(a) Notwithstanding anything to the contrary contained herein
(including, without limitation, in Section 4(g) hereof), in the event that any
payment or benefit received or to be received by Executive in connection with a
termination of Executive's employment with the Company (collectively, the
"Severance Payments") would (i) constitute a "parachute payment" within the
meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the
"Code") or any similar or successor provision to 280G and (ii) but for this
Section 15(a), be subject to the excise tax imposed by Section 4999 of the Code
or any similar or successor provision to Section 4999 (the "Excise Tax"), then
such Severance Payments (which Severance Payments shall collectively be referred
to herein as the "Severance Parachute Payments")shall be reduced to the largest
amount which would result in no portion of the Severance Parachute Payments
being subject to the Excise Tax. In the event any reduction of benefits is
required pursuant to this Agreement, Executive shall be allowed to choose which
benefits hereunder are reduced (e.g., reduction first from the Severance
Payment, then from the vesting acceleration). If the Internal Revenue Service
(the "IRS") determines that a Severance Parachute Payment is subject to the
Excise Tax, then the Company may seek to enforce the provisions of Section 15(b)
hereof. Such enforcement of Section 15(b) hereof shall be the only remedy, under
any and all applicable state and federal laws or otherwise, for Executive's
failure to reduce the Severance Parachute Payments so that no portion thereof is
subject to the Excise Tax.
(b) If, notwithstanding the reduction described in Section
15(a) hereof, the IRS determines that Executive is liable for the Excise Tax as
a result of the receipt of a Severance Parachute Payment, then Executive shall,
subject to the provisions of this Agreement, be obligated to pay to the Company
(the "Repayment Obligation") an amount of money equal to the "Repayment Amount."
The Repayment Amount with respect to a Severance Parachute Payment shall be the
smallest such amount, if any, as shall be required to be paid to the Company so
that Executive's net proceeds with respect to any Severance Parachute Payment
(after taking into account the payment of the Excise Tax imposed on such
Severance Parachute Payment) shall be maximized. Notwithstanding the foregoing,
the Repayment Amount with respect to a Severance Parachute Payment shall be zero
if a Repayment Amount of more than zero would not eliminate the Excise Tax
imposed on such Severance Parachute Payment. If the Excise Tax is not eliminated
through the performance of the Repayment Obligation, Executive shall pay the
Excise Tax. The Repayment Obligation shall be performed within 30 days of either
(i) Executive's entering into a binding agreement with the IRS as to the amount
of Executive's Excise Tax liability or (ii) a final determination by the IRS or
a court decision requiring Executive to pay the Excise Tax with respect to such
a Severance Parachute Payment from which no appeal is available or is timely
taken.
16. Severability; Blue-Pencilling. If any provision (or any part
thereof) of this Agreement, including Sections 6 and 7, as applied to either
party or to any circumstances, shall be determined by any court of competent
jurisdiction to be invalid or unenforceable, the same shall in no way affect any
other provision or remaining part thereof of this Agreement, which shall be
given full effect without regard to the invalid or unenforceable provision or
part thereof, or the validity or enforceability of this Agreement.
If any of the provisions of Sections 6 or 7, or any part thereof, are
determined to be unreasonable because of the duration of such provision or the
geographic scope thereof, the court shall have the power to reduce the duration
or restrict or redefine the geographic scope of such provision and to enforce
such provision as so reduced, restricted or redefined.
17. Notices. All notices to the Company or Executive permitted or
required hereunder shall be in writing, shall refer to this Agreement and shall
be delivered personally, by telecopier or by courier service providing for
next-day delivery or sent by registered or certified mail, return receipt
requested, to the following addresses:
44
<PAGE>
(a) if to the Company to:
CyberMedia, Inc.
2850 Ocean Park Boulevard
Santa Monica, CA 90405
Attention: General Counsel
Telephone: (310) 664-5000
Facsimile: (310) 581-4720
(b) if to Executive to:
3911 Spray Lane
Malibu, CA 90265
Any party may change the address to which notices shall be
sent by sending written notice of such change of address to the other party. Any
such notice shall be deemed given, if delivered personally, upon receipt; if
sent by certified or registered mail, 3 days after deposit (postage prepaid)
with the U.S. mail service; if sent by courier service providing for next day
delivery, the next business day following deposit with such courier service; and
if telecopied, when telecopied.
18. Paragraph Headings. The paragraph headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
19. Entire Agreement. This Agreement together with any other agreement
expressly referred to herein embodies the entire agreement of the parties and
supersedes all prior agreements and understandings of the parties with respect
to Executive's employment between the Company and Executive. This Agreement may
not be changed or terminated orally but only by an agreement in writing signed
by the parties hereto.
20. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
taken together shall constitute one and the same instrument.
In Witness Whereof, the parties hereto have duly executed this
Agreement as of April 22,1998.
CyberMedia, Inc.
By: /s/ Suhas Patil
---------------------
Name: Suhas Patil
Title: Compensation Committee, Board of Directors
/s/ James R. Tolonen
---------------------
James R. Tolonen
45
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THESE SCHEDULES CONTAIN SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996,
MARCH 31, 1997, MARCH 31, 1998 AND THE RELATED CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE TWELVE MONTHS IN THE YEAR ENDED
DECEMBER 31, 1996, THE THREE MONTHS IN THE PERIODS ENDED MARCH
31, 1997 AND 1998 AND ARE QUALIFIED IN THEIR ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<PERIOD-END> MAR-31-1998 MAR-31-1997 DEC-31-1996
<CASH> 22,536 37,117 39,322
<SECURITIES> 0 0 0
<RECEIVABLES> 17,448 19,229 13,841
<ALLOWANCES> 12,274 2,482 1,523
<INVENTORY> 3,667 1,560 2,365
<CURRENT-ASSETS> 36,832 56,137 55,460
<PP&E> 5,588 1,632 1,265
<DEPRECIATION> 1,388 383 275
<TOTAL-ASSETS> 41,248 57,386 56,450
<CURRENT-LIABILITIES> 18,526 12,575 12,733
<BONDS> 0 0 0
<COMMON> 59,040 52,464 52,702
0 0 0
0 0 0
<OTHER-SE> (37,151) (7,702) (9,034)
<TOTAL-LIABILITY-AND-EQUITY> 41,248 57,386 56,450
<SALES> 4,697 16,533 38,524
<TOTAL-REVENUES> 4,697 16,533 38,524
<CGS> 1,281 4,213 11,991
<TOTAL-COSTS> 1,281 4,213 11,991
<OTHER-EXPENSES> 19,737 10,670 30,366
<LOSS-PROVISION> 0 20 0
<INTEREST-EXPENSE> (280) (521) (351)
<INCOME-PRETAX> (16,041) 2,171 (3,482)
<INCOME-TAX> 8 839 1
<INCOME-CONTINUING> (16,049) 1,332 (3,483)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (16,049) 1,332 (3,483)
<EPS-PRIMARY> (1.27) 0.11 (0.88)
<EPS-DILUTED> (1.27) 0.10 (0.88)
</TABLE>
