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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 333-17529
QUALIX GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0261239
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1900 S. NORFOLK ST., SUITE 224
SAN MATEO, CA 94403-1151
(Address of principal executive offices)
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(650) 572-0200
(Registrant's telephone number, including area code)
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Indicate by check [X] whether the registrant (1) has filed all reports
required to be filed by Sections 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. Yes [X] No [ ]
As of September 30, 1997 there were 10,364,642 shares of the Registrant's
common stock outstanding.
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QUALIX GROUP, INC.
INDEX
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PART I FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets
At September 30, 1997 and June 30, 1997............................ 3
Condensed Consolidated Statements of Operations
For the three months ended September 30, 1997 and 1996............. 4
Condensed Consolidated Statements of Cash Flows
For the three months ended September 30, 1997 and 1996............. 5
Notes to Condensed 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 2. Changes in Securities......................................... 23
Item 3. Defaults Upon Senior Securities............................... 23
Item 4. Submission of Matters to a Vote of Security Holders........... 23
Item 5. Other Information............................................. 23
Item 6. Exhibits and Reports on Form 8-K.............................. 25
SIGNATURE.............................................................. 25
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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QUALIX GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, unaudited)
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Sept 30, June 30,
1997 1997
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ASSETS
Current Assets:
Cash and cash equivalents $ 4,957 $ 9,617
Temporary cash investments 13,231 9,541
Accounts receivable, net 5,428 5,147
Other current assets 551 470
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Total current assets 24,167 24,775
Property and equipment, net 1,894 1,559
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Total assets $ 26,061 $ 26,334
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liablilites:
Accounts payable and accrued liabilities $ 4,021 $ 4,119
Deferred revenue and advances 1,298 1,795
Current portion of long-term obligations 128 126
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Total current liabilities 5,447 6,040
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Long-term obligations 196 191
Stockholders' Equity 20,418 20,103
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Total liabilities and stockholders' equity $ 26,061 $ 26,334
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See accompanying notes to condensed consolidated financial statements
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QUALIX GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts; unaudited)
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Three Months Ended
September 30,
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1997 1996
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Revenue:
Reliability software $ 4,506 $ 3,697
Other products 2,386 2,288
Support, maintenance and consulting 1,333 964
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Total revenue 8,225 6,949
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Cost of revenue:
Cost of reliability software 64 1,541
Cost of other products 1,708 1,586
Cost of support, maintenance and consulting 483 341
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Total cost of revenue 2,255 3,468
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Gross profit 5,970 3,481
Operating expenses:
Sales and marketing 4,319 2,142
General and administrative 1,014 481
Research and development 848 422
Merger expenses - 595
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Total operating expenses 6,181 3,640
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Loss from operations (211) (159)
Interest income (expense), net 248 21
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Income (loss) before income taxes 37 (138)
Provision for income taxes - 1
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Net income (loss) $ 37 $ (139)
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Net income (loss) per share $ 0.00 $ (0.02)
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Shares used in per share computation 10,717 8,319
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See accompanying notes to condensed consolidated financial statements.
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<CAPTION>
QUALIX GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands - unaudited)
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Quarter Ended
September 30,
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1997 1996
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Cash flows from operating activities:
Net income (loss) $ 37 $ (139)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 152 41
Amortization of discount on long-term obligations 7 -
Changes in:
Accounts receivable (281) (264)
Other current assets (81) (134)
Accounts payable and accrued liabilities (98) 827
Deferred revenue and advances (497) 304
Liability under employment termination agreement - (45)
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Net cash provided by (used in) operating activities (761) 590
Cash flows from investing activities:
Purchases of property and equipment, net (487) (168)
Purchase of temporary cash investments (6,594) -
Proceeds from maturity of temporary cash investments 2,946 -
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Net cash used in investing activities (4,135) (168)
Cash flow from financing activities:
Issuance of long-term obligations, net - 8
Proceeds from issuance of common stock, net 236 -
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Net cash provided by financing activities 236 8
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Net increase (decrease) in cash and cash equivalents (4,660) 430
Cash and cash equivalents, beginning of year 9,617 3,102
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Cash and cash equivalents, end of year 4,957 3,532
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Noncash investing and financing activities:
Conversion of preferred shares to common stock - 290
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Supplemental disclosure of cash flow information:
Cash paid during the period for interest - 9
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Cash paid during the period for income taxes 109 48
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
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QUALIX GROUP, INC.
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
Effective February 12, 1997, the Company completed its initial public
offering. The accompanying interim condensed financial statements are unaudited,
but have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for annual financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of financial position,
results of operations and cash flows at the dates and for the periods presented
have been included. The interim financial information herein is not necessarily
indicative of the results of any future period. The interim condensed financial
statements should be read in conjunction with the June 30, 1997 consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. Intercompany accounts and transactions have been
eliminated in consolidation.
2. Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted average number of
common shares and common equivalent shares outstanding during the periods.
Prior to the Company's initial public offering in February 1997, common
equivalent shares include preferred stock and certain warrants (using the "if
converted" method) and stock options and the remaining warrants (using the
treasury stock method). Common equivalent shares are excluded from the
computation if their effect is anti-dilutive, except that, pursuant to the
Securities and Exchange Commission's Staff Accounting Bulletins and staff
policy, such computations include all common and common equivalent shares issued
within the 12 months preceding the initial filing date as if they were
outstanding for all periods prior to the initial filing date. In addition, all
outstanding preferred stock and warrants that were converted in the initial
public offering are included in the computation as common equivalent shares even
when the effect is anti-dilutive.
3. Effects of Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
128). The Company is required to adopt SFAS 128 in the second quarter of fiscal
1998 and will restate at that time earnings per share (EPS) data for prior
periods to conform with SFAS 128. Earlier application is not permitted.
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SFAS 128 replaces current earnings per share reporting requirements and
requires a dual presentation of basic and diluted EPS. Basic EPS excludes
dilution and is computed by dividing net income by the weighted average of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock.
If SFAS 128 had been in effect during the current and prior year periods,
basic and diluted EPS would not have been significantly different than EPS
currently reported for the periods.
In June 1997, the FASB adopted SFAS No.130, "Reporting Comprehensive Income",
which requires that an enterprise report, by major components and as a single
total, the change in its net assets during the period from nonowner sources; and
SFAS No.131, "Disclosures about Segments of an Enterprise and Related
Information", which establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about its products,
services, geographic areas and major customers. Adoption of these statements
will not impact the Company's consolidated financial position, results of
operations or cash flows. Both statements are effective for the Company
beginning July 1, 1998, with earlier application permitted.
4. Litigation
On October 25, 1996, the Company sued Veritas Software Corporation ("Veritas")
in the Santa Clara County California Superior Court alleging breach of contract,
unfair competition and intentional interference with prospective economic
advantage in connection with a contract dated as of April 10, 1995 (the "Master
Agreement") between the Company and Veritas. The Master Agreement was entered
into following Veritas' acquisition of a company whose high availability product
the Company previously had the right to sell. The Master Agreement granted the
Company the right to market and support FirstWatch, a product which formed the
core software engine of QualixHA, a high availability product for UNIX
environments previously sold by the Company, but which is not part of QualixHA+.
The Master Agreement, and therefore the Company's right to market QualixHA,
terminated on February 28, 1997. The Company sought unspecified compensatory
and punitive damages. Veritas filed a cross-complaint on October 29, 1996
alleging that the Company engaged in unfair competition, false advertising,
breach of contract, fraud and negligent misrepresentation as a result of various
alleged activities. Veritas sought unspecified compensatory and punitive
damages and injunctive relief including requiring Qualix to divulge certain
customer information. On October 29, 1996, the court granted the Company a
temporary restraining order enjoining Veritas from stating that the Master
Agreement had been terminated. The court also granted Veritas an order
enjoining the Company from stating that QualixHA+ is an upgrade to FirstWatch or
that QualixHA+ is the FirstWatch product. On November 14, 1996, the court
issued a preliminary injunction against Veritas on substantially similar terms
as the temporary restraining order and indicated that it would, upon submission
of an order by Veritas, issue a preliminary injunction enjoining the Company
from stating that QualixHA+ is an upgrade to FirstWatch. Veritas never submitted
such an order. In November 1996, the Company and Veritas began arbitration of
the dispute pursuant to the Master Agreement.
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On August 11, 1997 the Company and Veritas entered into a Mutual
Settlement Agreement and Settlement of Claims in connection with all legal
actions and arbitration proceedings between the companies. All licensing
agreements between the companies, including the Master Agreement, have been
terminated and all claims between the companies relating to the dispute have
been dismissed with prejudice. The resolution of this matter did not have a
material adverse effect on the Company's financial position or results of
operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q contains forward-looking statements written in the meaning of
section 21E of the Securities Exchange Act of 1934, as amended. These forward-
looking statements involve a number of risks and uncertainties. Such risks and
uncertainties include, but are not limited to, those discussed under the heading
"Risk Factors" contained herein and in the Company's other reports and filings
with the Securities and Exchange Commission ("SEC"), including the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1997. The actual
results that the Company achieves may differ materially from any anticipated
results described in the forward-looking statements due to such risks and
uncertainties.
The Company has used various sentences within this Form 10-Q which contain
such forward-looking statements, and words such as "believes", "anticipates",
"expects", "intends", and similar expressions are intended to identify forward-
looking statements, but are not the exclusive means of denoting the same. The
Company undertakes no obligation to revise any forward-looking statements in
order to reflect events or circumstances that may arise after the date of this
report. Readers are urged to carefully review and consider various disclosures
made by the Company in this report and in the Company's other reports filed with
the SEC that attempt to advise interested parties of the risks and factors that
may affect the Company's business.
OVERVIEW
Qualix is a leading provider of reliability software for UNIX and Windows NT
applications and servers in distributed computing environments. The Company's
reliability solutions are designed to minimize the impact of system failures on
business-critical applications. The Company offers software products for high
availability, security and storage management. Although a substantial majority
of the Company's historical revenue has come from products licensed from third
parties, the Company now focuses its sales and marketing efforts on higher
margin internally developed or acquired products. See "Risk Factors - Recent
Transition to New Business Model."
The Company began operating primarily as a distributor, value-added reseller
(VAR) and publisher of licensed third party client/server software products. In
1993, the Company focused on the reliability market by introducing QualixHA, its
first high availability product for the UNIX operating environment. QualixHA was
based on a licensed core software engine. In May 1996, the Company acquired
substantially all of the assets and assumed certain liabilities of Anthill
Incorporated ("Anthill"), including technology relating to a hierarchical
storage management product under development. In August 1996, the Company
merged with Octopus Technologies, Inc. ("Octopus Technologies") which had
developed high availability and remote data mirroring products for the Windows
NT operating environment. Additionally, the Company successfully completed an
initial public offering in February 1997.
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In October 1996, the Company introduced QualixHA+, which is based on an
internally developed core software engine. A key element of the Company's
strategy is to increase substantially the percentage of revenues derived from
internally developed or acquired products that typically have higher gross
margins than licensed products. Pursuant to this strategy, the Company ceased
marketing Qualix HA in February 1997. The Company is developing several
additional systems management products. See "Risk Factors--Recent Transition to
New Business Model," "--Uncertainty of Success of Recently Introduced and
Planned Products" and "--Dependence on Licensed Products."
RESULTS OF OPERATIONS
Total Revenues
Total revenues increased to $8,225,000 in the first quarter of fiscal 1998
from $6,949,000 for the same period of 1997, an increase of $1,276,000, or 18%.
Total revenues declined $235,000 from the previous quarter ended June 30, 1997,
a decrease of 3%.
Reliability Software. Reliability software revenues increased to $4,506,000
in the first quarter of fiscal 1998, from $3,697,000 for the comparable period
in the prior year, an increase of $809,000, or 22%. This increase primarily
reflects the continuing broad market acceptance of high availability products
for the UNIX and Windows NT operating environments, the increase in sales
personnel and the expansion of the field sales and telemarketing organization.
The most recent calendar quarters were favorably impacted by sales of QualixHA+,
the Company's UNIX-based high-availability clustering software product, and
OctopusHA+, the Company's high-availability and remote mirroring product for
Windows NT based systems.
Other Products. Revenue from the sale of other products increased to
$2,386,000 in the first quarter of fiscal 1998 from $2,288,000 for the same
period of 1997, an increase of $98,000, or 4%. This increase primarily reflects
the expansion of the Qualix Direct telesales organization. Revenue from the sale
of other products decreased by $254,000 or 10% from the prior quarter ended June
30, 1997. This decrease is attributable to Qualix Direct's continued focus on
the sales of the Company's internally developed reliability products and to its
de-emphasis on the sales of third party products.
Support, Maintenance and Consulting. Support, maintenance and consulting
revenue, primarily derived from annual maintenance agreements and training,
increased to $1,333,000 in the first quarter of fiscal 1998 from $964,000 for
the same period of 1997, an increase of $369,000, or 38%. The percentage
increase in support, maintenance and consulting was higher than the percentage
increase in reliability product revenue because of support contract renewals
from the Company's installed base and because of sales of support contracts into
the Octopus installed base which historically had purchased minimal amounts of
support.
Cost of Revenues
<PAGE>
Cost of revenues decreased to $2,255,000 in the first quarter of fiscal 1998
from $3,468,000 for the same period of 1997, a decrease of $1,213,000, or 35%.
Cost of Reliability Software. Cost of reliability software as a percentage of
reliability software revenues decreased to 1% in the first quarter of fiscal
1998 from 42% in the first quarter of 1997. This decrease is primarily due to
increased sales volumes of higher margin internally developed reliability
products that have little or no royalty or licensing components and the benefit
of converting some of the Company's installed base from QualixHA that had a
royalty component, to QualixHA+ with no royalty component. This conversion
generated an immediate gross margin benefit approximating 12% of reliability
software revenues for the quarter; the Company does not expect to realize cost
benefits from similar conversions in the future.
Cost of Other Products. Cost of other products as a percentage of other
product revenues increased to 72% in the first quarter of fiscal 1998 from 69%
in the first quarter of the prior year. This slight increase is attributable to
the increased demand for lower margin products. In general, margins for resold
products are decreasing, however these decreases were partially offset by the
refocused efforts of the Qualix Direct telesales organization on the higher
margin reliability products.
Cost of Support, Maintenance and Consulting. Cost of support, maintenance and
consulting as a percentage of support, maintenance and consulting revenues
increased to 36% for the first quarter of fiscal 1998 from 35% for the same
period of 1997. This slight increase is primarily the result of increases in
the Company's support staff.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased to $4,319,000 in
the first quarter of fiscal 1998 from $2,142,000 for the same period of 1997, an
increase of $2,177,000, or 102%. These expenses increased as a percentage of
total net revenues to 53% in the first quarter of fiscal 1998 from 31% in the
first quarter of 1997. This increase on an absolute and percentage basis was
primarily a result of the expanded infrastructure to support the Company's
growing global presence, including the opening of twelve new sales offices
worldwide, and the added personnel to expand the Company's marketing and
distribution capabilities. The Company's sales and marketing head count has
increased from 50 to 103 from September 30, 1996 to September 30, 1997.
General and Administrative. General and administrative expenses increased to
$1,014,000 in the first quarter of fiscal 1998 from $481,000 for the same period
of 1997, an increase of $533,000, or 111%. As a percentage of total net
revenues, these expenses increased to 12% in the first quarter of fiscal 1998
from 7% in the first quarter of 1997. This increase in absolute dollars is
primarily a result of increased staffing and related costs required to manage
and support the Company's growth as well as increases in depreciation expense,
bad debt reserves and other costs associated with business expansion.
Research and Development. Research and development expenses increased to
$848,000 in the first quarter of fiscal 1998 from $422,000 for the same period
of 1997, an increase of $426,000, or 101%. This increase was primarily
attributable to increased staffing and
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related expenses required to support new product development activities,
including developing version 2.0 of QualixHA+, version 3.0 of OctopusHA+, and
Qualix DataStar, the Company's UNIX remote data mirroring application.
Merger Expenses. Merger expenses of $595,000 were incurred in connection with
the acquisition of Octopus Technologies in the quarter ended September 30, 1996.
Merger expenses consisted primarily of investment banking, legal and accounting
fees.
Interest Income and Expense, net. Interest income (expense), net, increased
to $248,000 in the first quarter of fiscal 1998 from $21,000 for the same period
of 1997, an increase of $227,000, or 1,081%. This increase reflects higher
average investment balances largely attributable to the proceeds from the
Company's initial public offering in February 1997.
Provision For Income Taxes. The Company recorded no provision for income
taxes in the quarter ended September 30, 1997 due to the benefit attributable to
tax assets not recognized previously due to uncertainty with respect to
recovery. For the same period in the prior fiscal year, the Company recorded no
provision as the Company had taxable losses for which no benefit was recognized.
Net Income. Net income for the period was $37,000 or $0.00 per share,
compared to net income of $1,079,000 or $0.10 per share for the three months
ended June 30, 1997. In addition to the increases in General and Administrative
expenses and Research and Development expenses associated with the Company's
growth, during the quarter ended September 30, 1997, the Company made
significant investments in expanding its field sales force, increasing headcount
by more than 40%. Since the sales cycle for the Company's products typically
exceeds 90 days, the incremental costs associated with the additional sales
personnel exceeded the revenue which they generated during the period.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had $18,188,000 in cash, cash equivalents
and temporary cash investments, compared to $19,158,000 at June 30, 1997, a
decrease of $970,000, or 5%. At September 30, 1997, the Company had working
capital of $18,720,000 compared to $18,735,000 at June 30, 1997.
Cash Flows From Operating Activities. The Company's operating activities used
cash of $761,000 in the first three months of fiscal 1998 and generated cash of
$590,000 in the same period of the prior year. Cash used in operating
activities for the three months ended September 30, 1997 is attributed
principally to the income from operations offset by increases in accounts
receivable and other assets and decreases in deferred revenues and advances and
accounts payable and other accrued liabilities. During the comparable period of
fiscal 1997, cash provided by operating activities was attributable to increases
in accounts payable and accrued liabilities and deferred revenues and advances,
offset by a loss from operations and increases in accounts receivable and other
assets. The increases in
<PAGE>
deferred revenue and advances are attributable to payments under support,
maintenance and consulting contracts for which revenue had not yet been
recognized.
Cash Flows From Investing Activities and Financing Activities. Investing
activities used $4,135,000 in the first three months of fiscal 1998 and $168,000
in the same period of the prior year. Included in these totals are the net cash
provided or used by the purchase and maturities of temporary cash investments
and purchases of property and equipment. The Company purchased $6,594,000 of
temporary cash investments in the first three months of fiscal 1998 and
generated $2,946,000 of cash through maturities of temporary cash investments
during the first three months of fiscal 1998. The Company used $487,000 and
$168,000 of cash during the first three months of fiscal 1998 and 1997,
respectively, to purchase property and equipment. Net cash provided by
financing activities was $236,000 and $8,000 in the first three months of fiscal
1998 and 1997, respectively. The increase was primarily provided by proceeds
from the issuance of common stock.
The Company believes that cash flow from operations, existing cash balances
and temporary cash investments will be sufficient to meet its working capital
requirements for at least the next 12 months. However, if the available funds
and cash generated from operations are insufficient to satisfy the Company's
cash needs, the Company may be required to sell additional equity or convertible
debt securities. There can be no assurance that the Company will be able to
sell such securities. Moreover, the sale of additional equity or convertible
debt securities could result in dilution to the Company's stockholders.
RISK FACTORS
Recent Transition to New Business Model. The Company originally began
operating primarily as a distributor, value-added reseller ("VAR") and publisher
of licensed third party client/server software products. In 1993, the Company
focused on the reliability market by introducing QualixHA, its first high
availability product for the UNIX operating environment. QualixHA was based on a
core software engine licensed from Veritas. In August 1996, the Company merged
with Octopus Technologies, which had developed high availability and remote data
mirroring products for the Windows NT operating environment. In October 1996,
the Company introduced QualixHA+, which is based on an internally developed core
software engine. The Company's strategy is to increase substantially the
percentage of revenues derived from internally developed or acquired products
that typically have higher gross margins than licensed products. Pursuant to
this strategy, the Company ceased marketing QualixHA in February 1997. There
can be no assurance that the Company will successfully implement this strategy.
The Company's future profitability, if any, will be heavily dependent on the
successful development and/or acquisition, introduction and enhancement of its
own reliability products. See "-- Dependence on Qualix Direct" and "--
Uncertainty of Success of Recently Introduced and Planned Products."
Risk of Significant Fluctuations in Quarterly Operating Results. The Company
has experienced, and expects to continue to experience, significant fluctuations
in operating results, on an annual and a quarterly basis, as a result of a
number of factors, many of which are outside the Company's control, including
the size and timing of orders; lengthy sales
<PAGE>
cycles; customer budget changes; introduction or enhancement of products by the
Company or its competitors; expansion of the Company's field sales force;
changes in pricing policy of the Company or its competitors; the mix of products
sold, including particularly the mix of owned, licensed and resold products;
increased competition; technological changes in computer systems and
environments; the ability of the Company to timely develop or acquire, introduce
and market new products; quality control of products sold; market readiness to
deploy reliability products for distributed computing environments; market
acceptance of new products and product enhancements; seasonality of revenue;
customer order deferrals in anticipation of new products and product
enhancements; the Company's success in expanding its sales and marketing
programs; personnel changes; foreign currency exchange rates; mix of sales
channels; acquisition costs or other nonrecurring charges in connection with the
acquisition of companies, products or technologies; and general economic
conditions. The Company's operating results have historically fluctuated
significantly as a result of nonrecurring items, including $595,000 of
nonrecurring merger expenses relating to the Octopus Technologies merger in the
quarter ended September 30, 1996.
The Company believes that operating results over at least the next few
quarters will be particularly dependent upon achieving significant market
acceptance of its OctopusHA+ and QualixHA+ products, the amount of any price
reduction for such products, the timing of large orders for such products, the
level of revenues from lower margin products resold through the Qualix Direct
telesales organization and the level of research and development expenses in
connection with the Company's ongoing and planned product development program.
The Company's gross margin will be affected by a number of factors, including
the mix of owned, licensed and resold products, the percentage of total revenue
from service contracts, product pricing, the percentage of total revenue from
direct sales and indirect distribution channels and the percentage of sales by
the Qualix Direct telesales organization. Internally developed or acquired
products generally have higher gross margins than licensed products because
lower or no royalties must be paid. Service revenues generally have lower
margins than revenues from sales of owned products because of the costs incurred
to generate service revenues. Revenues from products resold by the Qualix Direct
telesales organization generally have lower gross margins than revenues from
owned and licensed products sold by the Company's other direct and indirect
distribution channels.
Large sales of certain reliability products, including QualixHA+, often have
long cycles and are subject to a number of significant risks over which the
Company has little or no control. The timing of large sales can cause
significant fluctuations in the Company's operating results, and delivery
schedules may be canceled or delayed. Because sales orders are typically shipped
shortly after receipt, order backlog as of any particular date is not
necessarily indicative of the Company's future revenues. Accordingly, total
revenues in any quarter are substantially dependent on orders booked and shipped
during that quarter. Historically, the Company has often recognized a
significant portion of its revenues in the last weeks, or even days, of a
quarter. As a result, the magnitude of quarterly fluctuations may not become
evident until late in, or after the close of, a particular quarter. In addition,
the Company's expense levels are based in significant part on expectations as to
future revenues and as a result are relatively fixed in the short run. If
revenues are below expectations in any given quarter, net income is likely to be
disproportionately affected,
<PAGE>
particularly because the Company relies heavily on a relatively high cost
direct sales channel.
Based upon all of the foregoing, the Company believes that the Company's
annual and quarterly revenues, expenses and operating results are likely to vary
significantly in the future, that period-to-period comparisons of its results of
operations are not necessarily meaningful and that, in any event, such
comparisons should not be relied upon as indications of future performance. In
addition, it is likely that in future quarters the Company's operating results
will be below the expectations of public market analysts and investors. In such
event, the price of the Company's Common Stock would be materially and adversely
affected.
Intense Competition. The market for reliability software for distributed
computing environments is intensely competitive, fragmented and characterized by
rapid technological developments, evolving standards and rapid changes in
customer requirements. To maintain and improve its position in this market, the
Company must continue to enhance current products and develop new products in a
timely fashion. Although the Company believes that the reliability segment of
the market is in the early stages of development, the Company competes, or may
compete, with four types of vendors: (i) independent vendors that provide
reliability products; (ii) host-based systems management software companies
migrating their products to the distributed computing market; (iii) distributed
computing systems management software companies that incorporate reliability
products as a part of integrated systems management solutions; and (iv) hardware
and operating system vendors that incorporate reliability solutions into their
products.
Many of the Company's competitors have longer operating histories and have
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base, than
the Company. The Company's current and future competitors could introduce
products with more features, higher scaleability, greater
functionality and lower prices than the Company's products. These competitors
could also bundle existing or new products with other, more established products
in order to compete with the Company. The Company's focus on reliability
software may be a disadvantage in competing with vendors that offer a broader
range of products. Moreover, as the distributed systems management software
market develops, a number of companies with significantly greater resources than
those of the Company could attempt to increase their presence in this market by
acquiring or forming strategic alliances with competitors or business partners
of the Company. Because there are relatively low barriers to entry for the
software market, the Company expects additional competition from other
established and emerging companies. Increased competition is likely to result in
price reductions, reduced gross margins and loss of market share, any of which
could materially and adversely affect the Company's business, operating results
and financial condition. Any material reduction in the price of the Company's
products would negatively affect gross margins and would require the Company to
increase software unit sales in order to maintain gross profits.
In addition, the distributed computing market is characterized by rapid
technological advances, changes in customer requirements, frequent new product
introductions and enhancements and evolving industry standards in computer
hardware and software
<PAGE>
technology. The introduction of products embodying new technologies and the
emergence of new industry standards may render the Company's existing or planned
products obsolete or unmarketable, particularly because the market for
reliability products is in an early stage of development. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors, especially those with significantly greater financial,
marketing, service, support, technical and other resources than the Company, and
the failure to do so would have a material adverse effect upon the Company's
business, financial condition and results of operations.
Dependence on Qualix Direct. Through its Qualix Direct telesales organization,
the Company has historically derived and expects to continue to derive a
significant portion of its total revenue from reselling ancillary software and
hardware products for distributed computing systems. Qualix Direct accounted for
29% and 33% of total revenue in the first quarter of fiscal 1998 and fiscal
1997, respectively. The Company's reliance on Qualix Direct entails a number of
risks. Qualix Direct's product line is updated frequently in response to changes
in vendor offerings. Qualix Direct has no long-term supply contracts with its
vendors and many resold products are acquired pursuant to purchase orders or
contracts that can be terminated with little or no notice. In addition, Qualix
Direct generally has little or no control over the marketing, support and
enhancement of its resold products by its vendors and faces significant
competition from distributors and other distribution channels. Moreover, gross
margins on products resold by Qualix Direct are generally lower than gross
margins on owned and licensed products sold by the Company's field sales
organization. In addition, the Company's net revenues may be adversely impacted
if sales by Qualix Direct decline or do not grow at anticipated rates, even
though the Company's gross margins may be less significantly impacted. Although
the Company sells its lower priced reliability products through Qualix Direct
telesales representatives, there can be no assurance that such efforts will be
successful or that such activities will not create conflicts with the Company's
other direct or indirect distribution channels. Any adverse development at
Qualix Direct could have a material adverse impact on the Company's business,
financial condition and results of operations.
Uncertainty of Success of Recently Introduced and Planned Products. A key
element of the Company's strategy is to increase substantially the percentage of
revenues derived from higher margin owned reliability software products. In
August 1996, the Company acquired and introduced high availability and remote
data mirroring products for Windows NT based systems upon merging with Octopus
Technologies. In October 1996 introduced QualixHA+, its high availability
product for UNIX based systems, which is based on an internally developed core
software engine. Version 2.0 of this product, which includes a GUI and
additional clustering features, commenced shipping in October, 1997. In April,
1997 the Company introduced DataStar, a network-based data duplication and
remote mirroring software for UNIX environments. In July, 1997 the Company
began shipping version 3.0 of OctopusHA+, its high availability and remote
mirroring product for Windows NT based systems. In addition, the Company is
developing additional reliability products. There are a number of risks
associated with the successful development or acquisition and introduction of
the Company's existing and planned products. The Company needs to significantly
expand and enhance its product development and engineering resources in order to
successfully implement its product development program. See "--Need to Expand
Product Development and Engineering Capability." The Company has in the past
<PAGE>
experienced delays in the development of new products and enhancements to
existing products. There can be no assurance that the Company can successfully
develop any additional products or enhance existing products. Even if developed
or acquired, such products or enhancements may contain undetected difficulties
or defects that are not discovered before they are released. See "--Risk of
Software Defects." In addition, there can be no assurance that the Company can
successfully market and sell any such products or enhancements or that they will
achieve significant market acceptance. Failure of the Company to successfully
develop, market and sell existing and planned products or enhancements would
have a material adverse effect on the Company's business, financial condition
and results of operations.
Dependence on Licensed Products. The Company has historically derived a
substantial majority, and expects to continue to derive a portion, of its total
revenue from the sale of products that are licensed or incorporate a significant
amount of technology that is licensed from third parties (collectively,
"licensed products"). There are a number of disadvantages and risks associated
with the sale of licensed products. The Company is frequently unable to obtain
exclusive rights to sell a licensed product, in which case the Company competes
against the licensor and potentially other third party licensees. The licenses
are typically for a specified period. For example, the Company's right to sell
FireWall-1 (and QualixHA+ for Firewalls, which incorporates FireWall-1) is
subject to annual renewal. The Company must typically pay a significant per copy
royalty that reduces gross margins realized by the Company from the sale of
licensed products and may put the Company at a competitive disadvantage against
the licensor or other third party licensees paying lower royalty rates. In
addition, the Company may have little or no control over the timing,
functionality and quality of enhancements and upgrades to the product and may be
restricted in the method and manner, including distribution channels, by which
the Company may sell the product. The Company may from time to time need to
enforce its rights under licenses. See "--Legal Proceedings." Notwithstanding
these factors, the Company anticipates it will derive a significant percentage
of its revenues from licensed products for the foreseeable future. Any loss in
the right to sell licensed products or any adverse change in the terms upon
which it sells licensed products could have a material adverse effect on the
Company's business, financial condition and results of operations.
Product Concentration. The Company currently derives the majority of its
revenues from the sale of reliability products and related services for
distributing computing environments. Broad market acceptance of the Company's
reliability products is therefore critical to the Company's future success.
Demand for the Company's reliability products will depend in large part on
increasing market acceptance of distributed computing systems, particularly for
business-critical applications, and the need for reliability systems management
software products and services for these computing systems. There can be no
assurance that market acceptance of distributed computing systems will increase
for business-critical applications or that market acceptance of reliability
products and services will increase. If reliability products fail to achieve
broad market acceptance in distributed computing environments, the Company's
business, operating results and financial condition would be materially and
adversely affected. During recent years, segments of the computer industry have
experienced significant economic downturns characterized by decreased product
demand, production overcapacity, price erosion, work slowdowns and layoffs. The
Company's financial performance may in the future experience substantial
fluctuations as a
<PAGE>
consequence of such industry patterns. There can be no assurance that
such factors will not have a material adverse effect on the Company's business,
financial condition and results of operations.
Need to Expand Product Development and Engineering Capability. The Company's
future success is critically dependent on expanding and integrating its product
development and engineering capability. In order to maintain its market and
technological leadership, the Company must maintain and upgrade its products and
develop new products. To successfully implement its product development program,
the Company must, among other things, hire additional software engineers,
continue integrating its Octopus Technologies and Anthill development teams with
its QualixHA+ development team, enhance its product development policies and
procedures and substantially increase expenditures on product development and
engineering. There can be no assurance that the Company's product development
efforts will be successful or that future products will be available on a timely
basis or at all or achieve market acceptance. Moreover, expansion of the
Company's product development program will increase the Company's operating
expenses, and there can be no assurance that actual spending increases will not
exceed anticipated amounts or that such increases will result in sufficient
revenues to justify such increases. Failure to successfully implement the
Company's product development program would have a material adverse effect on
its business, financial condition and results of operations.
Dependence on Indirect Distribution Channels. An important element of the
Company's sales and marketing strategy is to continue to sell its products and
services through indirect distribution channels, including distributors, system
integrators, VARs, systems management software vendors and OEMs. Selling through
indirect channels may limit the Company's contacts with its customers. As a
result, the Company's ability to accurately forecast sales, evaluate customer
satisfaction and recognize emerging customer requirements may be hindered.
Marketing products through the Company's field sales force and through indirect
distribution channels may result in distribution channel conflicts. There can be
no assurance that channel conflicts will not materially adversely affect its
field sales efforts as well as its relationships with existing or future
distributors, system integrators, VARs, systems management software vendors and
OEMs. The Company's reliance on indirect distribution increases the risks
associated with the introduction of new products, including risks of delays in
adoption and the risk that resellers will evaluate and potentially adopt
competitive products. There can be no assurance that the Company's current
resellers will adopt or successfully market any of the Company's new products.
In addition, these relationships are frequently terminable at any time without
cause. Therefore, there can be no assurance that any such party will continue to
represent the Company's products, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Legal Proceedings. On October 25, 1996, the Company sued Veritas Software
Corporation ("Veritas") in the Santa Clara County California Superior Court
alleging breach of contract, unfair competition and intentional interference
with prospective economic advantage in connection with a contract dated as of
April 10, 1995 (the "Master Agreement") between the Company and Veritas. The
Master Agreement was entered into following Veritas' acquisition of a company
whose high availability product the Company previously had the right to sell.
The Master Agreement granted the Company the right to
<PAGE>
market and support FirstWatch, a product which formed the core software engine
of QualixHA, a high availability product for UNIX environments previously sold
by the Company, but which is not part of QualixHA+. The Master Agreement, and
therefore the Company's right to market QualixHA, terminated on February 28,
1997. The Company sought unspecified compensatory and punitive damages. Veritas
filed a cross-complaint on October 29, 1996 alleging that the Company engaged in
unfair competition, false advertising, breach of contract, fraud and negligent
misrepresentation as a result of various alleged activities. Veritas sought
unspecified compensatory and punitive damages and injunctive relief including
requiring Qualix to divulge certain customer information. On October 29, 1996,
the court granted the Company a temporary restraining order enjoining Veritas
from stating that the Master Agreement had been terminated. The court also
granted Veritas an order enjoining the Company from stating that QualixHA+ is an
upgrade to FirstWatch or that QualixHA+ is the FirstWatch product. On November
14, 1996, the court issued a preliminary injunction against Veritas on
substantially similar terms as the temporary restraining order and indicated
that it would, upon submission of an order by Veritas, issue a preliminary
injunction enjoining the Company from stating that QualixHA+ is an upgrade to
FirstWatch. Veritas never submitted such an order. In November 1996, the Company
and Veritas began arbitration of the dispute pursuant to the Master Agreement.
On August 11, 1997 the Company and Veritas entered into a Mutual Settlement
Agreement and Settlement of Claims in connection with all legal actions and
arbitration proceedings between the companies. All licensing agreements between
the companies, including the Master Agreement, have been terminated and all
claims between the companies relating to the dispute have been dismissed with
prejudice. See "Risk Factors--Dependence on Proprietary Rights; Risk of
Infringement."
Integration of Acquisitions. The Company may make acquisitions in the future.
Acquisitions of companies, products or technologies entail numerous risks,
including an inability to successfully assimilate acquired operations and
products, diversion of management's attention, loss of key employees of acquired
companies and substantial transaction costs. Some of the products acquired may
require significant additional development before they can be marketed and may
not generate revenue at levels anticipated by the Company. There can be no
assurance that the Company will not incur these problems in the future.
Moreover, future acquisitions by the Company may result in dilutive issuances of
equity securities, the incurrence of additional debt, large one-time write-offs
and the creation of goodwill or other intangible assets that could result in
amortization expense. Any such problems or factors could have a material adverse
effect on the Company's business, financial condition and results of operations.
Dependence on Key Personnel; Management of Growth. The Company's future
operating results depend significantly on the continued service of its key
technical and senior management personnel. The Company's future success also
depends on its continuing ability to attract and retain highly qualified
technical and managerial personnel. The Company's future success is particularly
dependent on increasing its product development personnel. See "--Need to Expand
Product Development and Engineering Capability." The Company has relied in the
past on consultants as well as employees for its product development programs.
Competition for such personnel is intense, and there can be no assurance that
the Company will retain its key managerial and technical employees or that it
<PAGE>
will be successful in attracting or retaining other highly qualified technical
and managerial employees and consultants in the future. The Company has at times
experienced difficulty in recruiting qualified personnel, and there can be no
assurance that the Company will not experience such difficulties in the future.
If the Company were to experience such difficulties in the future, it may have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the growth in the Company's business has
placed, and is expected to continue to place, a significant strain on the
Company's management and operations. To manage its future growth, if any,
effectively, the Company must continue to strengthen its operational, financial
and management information systems and expand, train and manage its employee
work force. Failure to do so effectively and on a timely basis could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
Dependence on Proprietary Technology; Risks of Infringement. The Company's
success depends in part upon its proprietary technology. The Company has no
issued patents and relies on a combination of copyright, trademark and trade
secret laws, confidentiality procedures and licensing arrangements to establish
and protect its proprietary rights relating to its licensed and internally
developed products. The Company's rights to market and sell licensed products
are generally governed by license agreements of specified duration. See "--
Dependence on Qualix Direct" and "--Dependence on Licensed Products." Although
the Company has applied for a United States patent covering certain aspects of
the technology included in its Octopus Technologies data mirroring product, the
claims in the patent application have been rejected by the U.S. Patent and
Trademark Office, and there can be no assurance that a patent will be issued,
that any issued patent will provide meaningful protection for the Company's
technology, that any issued patent will provide the Company with any competitive
advantages or will not be challenged by third parties. Moreover, there can be no
assurance that the Company will develop additional proprietary products or
technologies that are patentable or that the patents of others will not have an
adverse effect on the Company's ability to do business. Furthermore, there can
be no assurance that others will not independently develop similar products,
duplicate the Company's products or, if patents are issued to the Company,
design around the patents issued to the Company. As part of its confidentiality
procedures, the Company generally enters into non-disclosure agreements with its
employees, distributors and corporate partners, and license agreements with
respect to its software, documentation and other proprietary information.
Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use the Company's products or technology without
authorization, or to develop similar technology independently. Policing
unauthorized use of the Company's products is difficult and although 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. In selling
its products, the Company relies on "shrink wrap" licenses for sales of certain
products that are not signed by licensees and, therefore, may be unenforceable
under the laws of certain jurisdictions. In addition, effective protection of
intellectual property rights is unavailable or limited in certain foreign
countries. There can be no assurance that the Company's protection of its
proprietary rights, including any patent that may be issued, will be adequate or
that the Company's competitors will not independently develop similar
technology, duplicate the Company's products or design around any patents issued
to the Company or other intellectual property rights.
<PAGE>
There can be no assurance that third parties will not claim infringement by
the Company with respect to current or future products. In October 1996, the
Company received correspondence from a French company asserting that it has
registered "Octopus" as a trademark in France and that the Company's use of the
mark "Octopus" infringes its trademark rights. The Company has not been
successful in obtaining a license to use the Octopus mark in France and has
determined that it must adopt a new trademark to replace the Octopus mark in
France. Qualix does not believe that this action will have a material adverse
effect on the Company's business, financial condition or results of operations.
In addition, the Company expects that software product developers will
increasingly be subject to such claims as the number of products and competitors
in the Company's industry segment grows and the functionality of products in the
industry segment overlaps. Any such claims, with or without merit, could result
in costly litigation that could absorb significant management time, which could
have a material adverse effect on the Company's business, operating results and
financial condition. Such claims might require the Company to enter into royalty
or license agreements. Such royalty or license agreements, if required, may not
be available on terms acceptable to the Company or at all, which could have a
material adverse effect upon the Company's business, financial condition and
operating results. See "--Legal Proceedings."
International Sales. Net revenue from customers outside the United States was
14% of total revenue for the three months ended September 30, 1997 and also for
the three months ended September 30, 1996. The Company intends to continue to
expand its operations outside of the United States and enter additional
international markets, which will require significant management attention and
financial resources. There can be no assurance, however, that the Company will
be able to maintain or increase international market demand for the Company's
products. The Company's international revenues are currently denominated in U.S.
dollars. An increase in the value of the U.S. dollar relative to foreign
currencies could make the Company's products more expensive and, therefore,
potentially less competitive in foreign markets. Additional risks inherent in
the Company's international business activities generally include unexpected
changes in regulatory requirements, tariffs and other trade barriers, costs and
risks of localizing products for foreign countries, adverse tax consequences,
restrictions on repatriating earnings and the burdens of complying with a wide
variety of foreign laws. There can be no assurance that such factors will not
have a material adverse effect upon the Company's future export revenues and,
consequently, the Company's business, financial condition and results of
operations.
Risk of Software Defects. Software products as complex as those offered by the
Company frequently contain errors or defects, especially when first introduced
or when new versions or enhancements are released. Despite testing by the
Company and by current and potential customers, there can be no assurance that
defects and errors will not be found in existing products or in new products,
versions or enhancements after commencement of commercial shipments. Any such
defects and errors could result in adverse customer reactions, particularly
because the Company focuses on selling reliability products, delays in market
acceptance, expensive product changes or loss of revenue, any of which could
have a material adverse effect upon the Company's business, financial condition
and results of operations.
<PAGE>
Product Liability. The Company's license agreements with customers typically
contain provisions designed to limit the Company's exposure to potential product
liability claims. A significant portion of the Company's products are licensed
pursuant to "shrink wrap" licenses. To the extent the Company relies on "shrink
wrap" licenses that are not signed by licensees and, therefore, may be
unenforceable under the laws of certain jurisdictions, the limitation of
liability provisions contained in such license agreements may not be effective.
The Company's products generally provide systems management software that is
used for business-critical applications, and, as a result, the sale and support
of products by the Company may entail the risk of product liability claims.
Although the Company maintains errors and omissions product liability insurance,
a successful liability claim brought against the Company could have a material
adverse effect upon the Company's business, financial condition and results of
operations.
Potential Volatility of Stock Price. The Company completed its initial public
offering in February 1997. As a newly public company, the market price for the
Company's stock has been subject to significant fluctuations and may be volatile
in the future. The Company believes that factors such as actual or anticipated
fluctuations in the Company's results of operations, announcements of
technological innovations, new products by the Company or its competitors,
developments with respect to patents, copyrights or proprietary rights,
conditions and trends in the distributed computing environment and other
technology industries, general market conditions and other factors may affect
the market price for the Company's stock. In addition, the stock market has from
time to time experienced significant price and volume fluctuations that have
particularly affected the market prices for the common stock of technology
companies. These broad market fluctuations may adversely affect the market price
of the Company's Common Stock. In the past, following periods of volatility in
the market price of a particular company's securities, securities class action
litigation has often been brought against that company. There can be no
assurance that such litigation will not occur in the future with respect to the
Company. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse effect
upon the Company's business, financial condition and results of operations.
Control by Directors, Executive Officers and Principal Stockholders. The
present directors, executive officers and principal stockholders, and their
affiliates and related persons, beneficially own approximately 35% of the
outstanding shares of the Company's Common Stock. These stockholders are able to
elect all of the Company's directors, have the voting power to approve all
matters requiring stockholder approval, and continue to exert significant
influence over the affairs of the Company. Such concentration of ownership may
have the effect of delaying, deferring or preventing a change in control of the
Company.
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes In Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 --Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1997.
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized on November 11, 1997.
Qualix Group, Inc.
by: /s/ Bruce C. Felt
-----------------
Bruce C. Felt
Vice President, Finance and
Chief Financial Officer
(duly authorized officer and
principal financial and
accounting officer)
<PAGE>
EXHIBIT INDEX
27 --Financial Data Schedule.
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<PAGE>
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<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,957
<SECURITIES> 13,231
<RECEIVABLES> 5,938
<ALLOWANCES> 510
<INVENTORY> 231
<CURRENT-ASSETS> 24,167
<PP&E> 2,901
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0
0
<COMMON> 25,098
<OTHER-SE> (4,680)
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