<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 March 31, 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 94-2455115
(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)
(415) 572-0200
(Registrant's telephone number, including area code)
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 [_] No [X]
As of March 31, 1997 there were 10,209,596 shares of the Registrant's
common stock outstanding.
================================================================================
<PAGE>
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
At March 31, 1997 and June 30, 1996............................ 3
Condensed Consolidated Statements of Operations
For the three and nine months ended March 31, 1997 and 1996.... 4
Condensed Consolidated Statements of Cash Flows
For the nine months ended March 31, 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...................................... 8
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................... 25
SIGNATURES.............................................................. 27
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUALIX GROUP, INC.
Condensed Consolidated Balance Sheets
(in thousands, unaudited)
March 31, June 30,
1997 1996
--------- --------
ASSETS
Current Assets:
Cash and Cash Equivalents $ 14,133 $ 3,102
Investments Available for Sale 5,440 485
Accounts Receivable, net 5,394 2,805
Other Current Assets 441 168
--------- --------
Total Current Assets 25,408 6,560
Property and equipment, net 1,440 343
--------- --------
Total Assets $ 26,848 $ 6,903
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Liabilities $ 5,250 $ 2,412
Deferred Revenue and Advances 1,604 1,087
Current Portion of Long-Term Obligations 123 268
--------- --------
Total Current Liabilities 6,977 3,767
Notes Payable and Other Liabilities 310 290
Stockholders' Equity 19,561 2,846
--------- --------
Total Liabilities and Equity $ 26,848 $ 6,903
========= ========
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
QUALIX GROUP, INC.
Condensed Consolidated Statements of Income
(in thousands, except per share amounts; unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue:
Reliability Software $ 4,482 $ 2,470 $12,340 $ 5,904
Other Products 2,748 1,331 7,696 3,662
Support, Maintenance and Consulting 1,407 615 3,650 1,531
------- ------- ------- -------
Total Revenue 8,637 4,416 23,686 11,097
Cost of Revenue:
Cost of Reliability Software 693 1,027 3,149 2,410
Cost of Other Products 1,973 930 5,414 2,596
Cost of Support, Maintenance, and Consulting 544 267 1,377 743
------- ------- ------- -------
Total Cost of Revenue 3,210 2,224 9,940 5,749
------- ------- ------- -------
Gross Profit 5,427 2,192 13,746 5,348
Operating Expense:
Sales and Marketing 3,122 1,370 7,923 3,505
General and Administrative 730 566 1,994 1,381
Research and Development 591 131 1,569 314
Merger Expenses -- -- 595 --
------- ------- ------- -------
Total Operating Expenses 4,443 2,067 12,081 5,200
------- ------- ------- -------
Income from Operations 984 125 1,665 148
------- ------- ------- -------
Interest Income (Expense), net 101 22 132 53
Gain on Sale of Stock -- -- -- 763
------- ------- ------- -------
Income Before Income Taxes 1,085 147 1,797 964
Provision for Taxes 168 -- 169 --
------- ------- ------- -------
Net Income $ 917 $ 147 $ 1,628 $ 964
======= ======= ======= =======
Net Income Per Share $ 0.09 $ 0.02 $ 0.18 $ 0.12
------- ------- ------- -------
Shares used in Per Share Computation 9,737 8,320 8,812 8,175
====== ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
QUALIX GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands, except per share amounts; unaudited)
Nine Months Ended
March 31,
1997 1996
------ ------
Cash Flows from Operating Activities:
Net income $ 1,628 $ 964
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization 187 121
Gain on sale of investments -- (763)
Changes in:
Accounts receivable (2,589) (1,191)
Other current assets (273) (12)
Accounts payable and accrued liabilities 2,838 662
Deferred revenue and advances 517 261
Liability under employee termination
agreement (152) (45)
------- ------
Net cash provided by (used in)
operating activities 2,156 (3)
------- ------
Cash Flows from Investing Activities:
Purchases of property and equipment, net (1,283) (233)
Sale (purchase) of investments (4,933) 847
Other assets, net -- 8
------- ------
Net cash provided by (used in)
investing activities (6,216) 622
------- ------
Cash Flows from Financing Activities:
Repayments of capital lease obligations (1) (6)
Issuance of long-term obligations 27 --
Proceeds from issuance of preferred and
common stock, net 15,065 314
------- ------
Net cash provided by (used in)
financing activities 15,091 308
------- ------
Net increase (decrease) in cash and cash
equivalents 11,031 927
Cash and cash equivalents, beginning of year 3,102 1,611
------- ------
Cash and cash equivalents, end of period $14,133 $2,538
======= ======
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
QUALIX GROUP, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 1997
(Unaudited)
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 accruals) 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 financial statements and notes thereto included in the
Company's prospectus dated February 12, 1997.
2. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. Net Income Per Share
Net income per share has been computed using the weighted average number of
shares of common and dilutive common equivalent shares outstanding during the
period. Dilutive common equivalent shares consist of the options and warrants
(using the treasury stock method for all periods presented). The number of
shares used in the per share calculation have been adjusted retroactively to
give effect to a one for two and one-half reverse split of all outstanding
shares of common stock effective January 14, 1997 and also gives retroactive
effect to the conversion of all outstanding shares of preferred stock into
common stock upon the closing of the Company's initial public offering.
4. Effects of Recent Accounting Pronouncements
In February 1997 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." This statement is intended to simplify the computation of earnings per
share. This statement replaces primary earnings per share with basic earnings
per share and requires
6
<PAGE>
dual presentation of basic and diluted earnings per share. SFAS 128 will be
effective for the Company's second quarter of fiscal 1998, and requires
restatement of all previously reported earnings per share data that are
presented. Early adoption of this statement is not permitted. The Company does
not expect that fully diluted earnings per share amounts will differ materially
from amounts to be reported under this statement.
5. Litigation
The Company had an exclusive right to certain technology of Veritas that is
used as a basis for one of the Company's products. On October 1, 1996, the
Company introduced a new product that competes directly with Veritas' product
incorporating such technology. On October 25, 1996, the Company sued Veritas
alleging breach of contract, unfair competition and intentional interference
with prospective economic advantage in connection with a contract dated as of
April 10, 1995 between the Company and Veritas. On October 29, 1996, Veritas
filed a cross-complaint alleging unfair competition, false advertising, breach
of contract, fraud and negligent misrepresentation. On November 27, 1996,
Veritas served the Company with a written demand for arbitration of various
issues relating to the dispute, including fraud, negligent misrepresentation,
breach of contract, pricing below cost, unfair competition and false
advertising. Previously, by letter dated November 19, 1996, Veritas had
indicated that at the arbitration it would also pursue a trade secret
misappropriation claim but did not include that claim within the demand for
arbitration. The Company has submitted into the arbitration a request for
declaratory relief that the development of QualixHA+ did not constitute
misappropriation of Veritas' trade secrets. Following such submission, Veritas
raised a claim of misappropriation of its trade secrets. Based in part upon
procedures undertaken by the Company to ensure that the core software engine to
QualixHA+ was developed by employees and consultants who had no exposure to
Veritas' trade secrets, the Company believes that it would have meritorious
defenses to such claims; additionally, the Company believes that its claims
against Veritas are meritorious. Although the ultimate outcome of this matter is
not presently determinable, management believes that its resolution will not
have a material adverse effect on the Company's financial position or results of
operations.
7
<PAGE>
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 prospectus dated February 12, 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
The Company began operating primarily as a distributor, value-added
reseller 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
is based on a licensed core software engine. 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. More recently, 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. 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."
Prior to the Octopus Technologies merger, and prior to developing
QualixHA+, the Company had minimal research and development expenditures and a
correspondingly high cost of product revenue. The Company expects its research
and development expenditures to increase substantially in the future as a result
of its increasing focus on internal development of products. See "Risk
Factors--Need to Expand Product Development and Engineering Capability."
8
<PAGE>
Results of Operations
Total Revenues
--------------
Total revenues increased to $8,637,000 in the third quarter of fiscal 1997
from $4,416,000 for the same period of 1996, an increase of $4,221,000, or 96%.
Total revenues increased to $23,686,000 in the first nine months of fiscal 1997
from $11,097,000 for the same period of 1996, an increase of $12,589,000, or
113%.
Reliability Software. Reliability software revenues increased to $4,482,000
--------------------
in the third quarter and $12,340,000 in the first nine months of fiscal 1997,
from $2,470,000 and $5,904,000, respectively, for the comparable periods in the
prior year. Third quarter revenues increased $2,012,000, or 81% and nine month
revenues increased $6,436,000, or 109%. These increases primarily reflect 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. As previously
mentioned, the most recent calendar quarters were favorably impacted by sales of
Qualix HA+, the Company's UNIX-based high-availability clustering software
product, which was introduced on October 1, 1996.
Other Products. Revenue from the sale of other products increased to
--------------
$2,748,000 in the third quarter of fiscal 1997 from $1,331,000 for the same
period of 1996, an increase of $1,417,000, or 106%. Other product revenues
increased to $7,696,000 in the first nine months of fiscal 1997 from $3,662,000
for the same period of 1996, an increase of $4,034,000, or 110%. These increases
primarily reflect the expansion of the Qualix Direct telesales organization.
Support, Maintenance and Consulting. Support, maintenance and consulting
-----------------------------------
revenue, primarily derived from annual maintenance agreements and training,
increased to $1,407,000 in the third quarter of fiscal 1997 from $615,000 for
the same period of 1996, an increase of $792,000, or 129%. Support, maintenance
and consulting revenue increased to $3,650,000 in the first nine months of
fiscal 1997 from $1,531,000 for the same period of 1996, an increase of
$2,119,000, or 138%. 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
----------------
Cost of revenues increased to $3,210,000 in the third quarter of fiscal
1997 from $2,224,000 for the same period of 1996, an increase of $986,000, or
44%. Cost of revenues increased to $9,940,000 in the first nine months of fiscal
1997 from $5,749,000 for the same period of 1996, an increase of $4,191,000, or
73%.
9
<PAGE>
Cost of Reliability Software. Cost of reliability software as a percentage
----------------------------
of reliability software revenues decreased to 15% in the third quarter of fiscal
1997 from 42% in the third quarter of 1996. Cost of reliability software as a
percentage of reliability software revenues decreased to 26% in the first nine
months of fiscal 1997 from 41% in the first nine months of 1996. These decreases
are primarily due to increased sales volumes of higher margin internally
developed reliability products.
Cost of Other Products. Cost of other products as a percentage of other
----------------------
product revenues increased to 72% in the third quarter of fiscal 1997 from 70%
in the third quarter of the prior year and decreased to 70% in the first nine
months of fiscal 1997 from 71% in the same period of fiscal 1996. These slight
increases are 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 higher margin products.
Cost of Support, Maintenance and Consulting. Cost of support, maintenance
-------------------------------------------
and consulting as a percentage of support, maintenance and consulting revenues
decreased to 39% for the third quarter of fiscal 1997 from 43% for the same
period of and decreased to 38% for the first nine months of fiscal 1997 from 49%
for the same period of 1996. These decreases are primarily the result of
increases in the Company's support staff and a corresponding reduction in the
use of outside consultants.
Operating Expenses
- ------------------
Sales and Marketing. Sales and marketing expenses increased to $3,122,000
-------------------
in the third quarter of fiscal 1997 from $1,370,000 for the same period of 1996,
an increase of $1,752,000, or 128%. Sales and marketing expenses increased to
$7,923,000 in the first nine months of fiscal 1997 from $3,505,000 for the same
period of 1996, an increase of $4,418,000, or 126%. These expenses increased as
a percentage of total net revenues to 36% in the third quarter of fiscal 1997
from 31% in the third quarter of 1996 and increased to 33% of total net revenues
in the first nine months of fiscal 1997 from 32% in the first nine months of
1996. These increases on an absolute and percentage basis were primarily a
result of the expanded infrastructure to support the Company's growing global
presence, including the opening of ten new sales offices worldwide, and the
added personnel to expand the Company's marketing and distribution capabilities.
Research and Development. Research and development expenses increased to
------------------------
$591,000 in the third quarter of fiscal 1997 from $131,000 for the same period
of 1996, an increase of $460,000, or 351%. Research and development expenses
increased to $1,569,000 in the first nine months of fiscal 1997 from $314,000
for the same period of 1996, an increase of $1,255,000, or 400%. These increases
were primarily attributable to increased staffing and related expenses required
to support new product development activities, including developing Qualix HA+,
the Company's UNIX-based high-availability clustering software product, Octopus
and Qualix DataStar, the Company's UNIX remote data mirroring application.
10
<PAGE>
General and Administrative. General and administrative expenses increased
--------------------------
to $730,000 in the third quarter of fiscal 1997 from $566,000 for the same
period of 1996, an increase of $164,000, or 29%. As a percentage of total net
revenues, these expenses decreased to 8% in the third quarter of fiscal 1997
from 13% in the third quarter of 1996. General and administrative expenses
increased to $1,994,000 in the first nine months of fiscal 1997 from $1,381,000
for the same period of 1996, an increase of $613,000, or 44%. As a percentage of
total net revenues, general and administrative expenses decreased to 8% in the
first nine months of fiscal 1997 from 12% in the first nine months of 1996.
These increases in absolute dollars are primarily a result of increased staffing
and related costs required to manage and support the Company's growth. The
decreases in percentage of total revenues are due to the fixed nature of some of
these costs.
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.
Gain on Sale of Stock. In May 1995, the Company received shares of Veritas
---------------------
common stock pursuant to a merger agreement between Veritas and Tidalwave
Technologies, Inc. In September 1995, the Company sold 75% of the shares and
realized a gain of $763,000.
Interest Income and Expense, net. Interest income increased to $101,000 in
--------------------------------
the third quarter of fiscal 1997 from $22,000 for the same period of 1996, an
increase of $79,000, or 359%. Interest income increased to $132,000 in the first
nine months of fiscal 1997 from $53,000 for the same period of 1996, an increase
of $79,000, or 149%. These increases reflect 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 had an effective tax rate of 15% in
--------------------------
the quarter ended March 31, 1997, compared to 0% for the same period of 1996.
The Company had an effective tax rate of 9% for the nine months ended March 31,
1997, compared to 0% for the same period of 1996. This increase is a result of
the Alternative Minimum Tax imposed by the Internal Revenue Service and state
income taxes. Due to the Company's remaining net operating loss carryforwards,
the effective tax rate is lower than the statutory rate.
The Company accounts for income taxes in accordance with the Statement of
Financial Accounting Standards No. 109 ("SFAS 109") for all periods presented.
Under SFAS 109, the Company recognizes deferred tax assets and liabilities for
the expected consequences of temporary differences between the carrying amounts
for financial statement purposes and the tax bases of assets and liabilities.
The Company believes that, based on a number of factors, the available objective
evidence creates sufficient uncertainty regarding the realizability of the
deferred tax assets such that a full valuation allowance is appropriate. These
factors include losses in two of the Company's most recent three years of
operations, success of new product offerings and integration of newly acquired
businesses.
11
<PAGE>
Liquidity and Capital Resources
At March 31, 1997, the Company had $19,573,000 in cash, cash equivalents
and investments, compared to $3,587,000 at June 30, 1996, an increase of
15,986,000, or 446%. At March 31, 1997, the Company had working capital of
$18,431,000 compared to $2,793,000 at June 30, 1996.
Cash Flows From Financing Activities and Investing Activities. Cash
-------------------------------------------------------------
provided by financing activities was $15,091,000 and $308,000 in the first nine
months of fiscal 1997 and 1996 respectively. The increase was primarily provided
by the initial public offering of Company stock in February 1997. The Company
sold 2.2 million shares of Common Stock, resulting in net proceeds to the
Company (after deducting underwriting discounts, commissions and offering
expenses) of approximately $16.4 million. Investing activities used $6,216,000
in the first nine months of fiscal 1997 and provided cash of $622,000 in the
same period of the prior year. Included in these totals are the net cash
provided or used by the purchase and sale of short-term investments and
purchases of property and equipment. The Company purchased $4,933,000 of
short-term investments in the first nine months of fiscal 1997 and generated
$847,000 of cash through sales of an investment during the first nine
months of fiscal 1996. The Company used $1,283,000 and $233,000 of cash during
the first nine months of fiscal 1997 and 1996, respectively, to purchase
property and equipment.
Cash Flows From Operating Activities. The Company's operating activities
------------------------------------
generated cash of $2,156,000 in the first nine months of fiscal 1997 and used
cash of $3,000 in the same period of the prior year. Cash generated from
operating activities for the nine months ended March 31, 1997 is attributed
principally to the higher revenues and income from operations and increases in
accounts payable and accrued liabilities offset by increases in accounts
receivable and other current assets. During the comparable period of fiscal
1996, cash used in operating activities is attributable to income from
operations and increases in accounts payable, accrued liabilities and deferred
revenues and advances, offset by increases in accounts receivable and other
current assets and a gain on sale of investments. The increases in deferred
revenue and advances are attributable to payments under support, maintenance and
consulting contracts for which revenue has not yet been recognized.
The Company believes that cash flow from operations, existing cash balances
and short-term 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.
12
<PAGE>
Risk Factors
Limited Operating History; No Assurance of Profitability. The Company was
--------------------------------------------------------
incorporated in 1990 and accordingly has a very limited operating history, which
makes the prediction of future results difficult or impossible. The Company has
incurred significant net losses since its inception and had an accumulated
deficit of approximately $5.6 million as of March 31, 1997. Although the Company
has achieved eight consecutive quarters of operating income before giving effect
to nonrecurring gains and expenses, there can be no assurance that the Company
will be profitable on an annual or quarterly basis in the future, and recent
operating results should not be considered indicative of future financial
performance. The Company is subject to the risks inherent in the operation of a
new business enterprise, and there can be no assurance that the Company will be
able to successfully address these risks. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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 is based on a
core software engine licensed from Veritas Software Corporation ("Veritas"). 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. More recently, 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. 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 "--Uncertainty of Success of
Recently Introduced and Planned Products" and "-- Dependence on Qualix Direct."
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 cycles; customer budget
changes; introduction or enhancement of products by the Company or its
competitors; 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
13
<PAGE>
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 a
nonrecurring $763,000 gain on sale of stock in the quarter ended September 30,
1995, a $740,000 writeoff of purchased in-process technology in the quarter
ended June 30, 1996 and $595,000 of 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 recently introduced 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 at the beginning of any quarter has
represented only a small portion of that quarter's total revenue. 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, 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
14
<PAGE>
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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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, such as Veritas,
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 scalability, 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 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
15
<PAGE>
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 32% and 33% of total revenue in the third quarter of fiscal 1997
and for the nine months March 31, 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 has recently begun to sell its
lower priced reliability products through Qualix Direct, there can be no
assurance that it 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 and in October 1996 introduced QualixHA+, its high availability
product for UNIX based systems, which is based on an internally developed core
software engine. 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 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
16
<PAGE>
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 significant 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/HA+ 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 parties 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 and is currently
in litigation with Veritas concerning the Company's QualixHA high availability
product, which has historically represented a significant portion of the
Company's revenue. See "--Litigation." 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 consequence of such industry patterns. There can
17
<PAGE>
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 addition to recently
introducing QualixHA+, the Company is also developing storage management
products as a result of acquiring the technology of Anthill Incorporated
("Anthill") in May 1996. 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, successfully integrate its recently hired senior
manager for product development, 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. In particular, there can be no assurance that the
Company's current resellers will adopt or successfully market the Company's new
QualixHA+ product. 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.
Litigation. On October 25, 1996, the Company sued 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
18
<PAGE>
of April 10, 1995 (the "Master Agreement") between the Company and Veritas. The
Master Agreement granted the Company the right to market and support FirstWatch,
a product which forms the core software engine of QualixHA but which is not part
of QualixHA+. The Master Agreement, and therefore the Company's right to sell
QualixHA, terminated on February 28, 1997. The Company is seeking 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 seeks 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 has 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 has not yet submitted such an
order.
The Master Agreement requires binding arbitration of contract disputes
through the American Arbitration Association ("AAA"). On November 27, 1996,
Veritas served the Company with a demand for arbitration of various issues
relating to the dispute, including fraud, negligent misrepresentation, breach of
contract, pricing below cost, unfair competition and false advertising. Veritas
is expected to seek substantially the same relief in the arbitration as in the
lawsuit. The Company received formal notification of the arbitration from the
AAA and has responded. That response included submission of certain claims of
the Company against Veritas into the arbitration, including the claims raised by
the Company in its lawsuit against Veritas. The AAA has assigned an arbitrator
to this matter, and discovery has commenced in the arbitration. There can be no
assurance that all of the claims asserted by Veritas or the Company fall within
the scope of the arbitration provision, and therefore they may be resolved
through litigation rather than arbitration.
The Company believes that its claims against Veritas are meritorious and
that it has meritorious defenses to the claims brought by Veritas. The Company
intends to vigorously pursue its claims and defenses against Veritas. After
consideration of the nature of the claims and facts relating to the litigation
and after consultation with legal counsel, the Company believes that resolution
of its dispute with Veritas will not have a material adverse effect on the
Company's business, financial condition and results of operations. However, due
to the nature of litigation and arbitration and because discovery has not
commenced, the Company cannot determine the total expense or possible loss or
other harm that it may incur as a result of litigation, arbitration or
settlement of its dispute with Veritas. Although QualixHA+ was introduced and
began generating revenue in October 1996, there can be no assurance that loss of
the right to sell QualixHA would not have a material adverse effect on the
Company's business, financial condition and results of operations.
19
<PAGE>
Previously, by letter dated November 19, 1996, Veritas had indicated that
at the arbitration it would also pursue "trade secret misappropriation claims
based upon Qualix's use of developers who had access to Veritas' trade secrets."
The Company has submitted into the arbitration a request for declaratory relief
that the development of QualixHA+ did not constitute misappropriation of
Veritas' trade secrets. Following such submission, Veritas raised a claim of
misappropriation of its trade secrets. As is noted above, there can be no
assurance that this or other claims will be deemed to fall within the scope of
the arbitration provision. Based in part upon procedures undertaken by the
Company to ensure that the core software engine to QualixHA+ was developed by
employees and consultants who had no exposure to Veritas' trade secrets, the
Company believes that it would have meritorious defenses to any such claims.
Nevertheless, there can be no assurance that Veritas will not be successful in
obtaining damages or other relief that would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"--Dependence on Proprietary Technology; Risk of Infringement."
Integration of Acquisitions. In May 1996, the Company acquired
---------------------------
substantially all of the assets and assumed certain liabilities of Anthill,
including technology relating to a hierarchical storage management product under
development. In August 1996, the Company merged with Octopus Technologies. 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 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 for its existing or future acquisitions.
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
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.
20
<PAGE>
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.
21
<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. Based upon its initial
investigation of this claim, the Company believes that it may be required to
obtain a license to use the Octopus mark in France, adopt a new trademark to
replace the Octopus mark in France or be subject to other liability. Although
there can be no assurance that Qualix can obtain a license to use the Octopus
mark in France on commercially reasonable terms or at all, Qualix does not
believe that resolution of this matter 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 "--Litigation."
International Sales. Net revenue from customers outside the United States
-------------------
was 5%, 9%, 17% and 17% of total revenue for fiscal years 1994, 1995 and 1996
and the nine months ended March 31, 1997, respectively. 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 entirely
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
22
<PAGE>
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.
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 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. 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. As of
-------------------------------------------------------------------
March 31, 1997, the present directors, executive officers and principal
stockholders, and their affiliates and related persons beneficially own
approximately 45.9% of the outstanding shares of the Company's Common Stock. As
a result, 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.
Effect of Certain Charter Provisions; Antitakeover Effects of Certificate
-------------------------------------------------------------------------
of Incorporation and Delaware Law. The Company's Board of Directors has the
- ---------------------------------
authority to issue up to 5,000,000 shares of Preferred Stock and to determine
the price, rights, preferences, privileges and restrictions, including voting
rights of such shares, without
23
<PAGE>
any further vote or action by the Company's stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company. The Company has no
current plans to issue shares of Preferred Stock. Further, certain provisions of
the Company's Certificate of Incorporation and Bylaws and of Delaware law could
delay or make more difficult a merger, tender offer or proxy contest involving
the Company.
24
<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
1.1* -Form of Underwriting Agreement.
2.1* -Agreement and Plan of Reorganization among the Registrant, Qualix
Subsidiary, Inc. and Octopus Technologies, Inc. dated July 14, 1996.
2.2* -Articles of Merger between and among the Registrant, Qualix
Subsidiary, Inc. and Octopus Technologies, Inc. filed August 30,
1996.
3.1* -Amended and Restated Certificate of Incorporation of Registrant, as
currently in effect.
3.2* -Form of Amended and Restated Certificate of Incorporation of
Registrant (to be filed prior to the closing of the offering made
pursuant to this Registration Statement).
3.3* -Form of Amended and Restated Certificate of Incorporation of
Registrant (to be filed upon the closing of the offering made
pursuant to this Registration Statement).
3.4* -Bylaws of the Registrant, as currently in effect.
4.1* -Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
4.2* -Specimen Common Stock certificate.
4.3* -Series D Preferred Stock and Warrant Purchase Agreement dated
April 11, 1995.
5.1* -Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian
LLP.
25
<PAGE>
10.1* -Form of Indemnification Agreement.
10.2* -1995 Stock Option Plan.
10.3* -1997 Stock Option Plan.
10.4* -Employee Stock Purchase Plan.
10.5* -Senior Managers Bonus Plan.
10.6* -Series A Preferred Stock Purchase Agreement dated November 15, 1990.
10.7* -Series B Preferred Stock Purchase Agreement dated December 27, 1991.
10.8* -Series C Preferred Stock Purchase Agreement dated October 20, 1992.
10.9* -Series C Preferred Stock Purchase Agreement dated November 16, 1993.
10.10* -Note and Warrant Purchase Agreement dated August 26, 1994.
10.11* -Asset Purchase Agreement between Anthill Incorporated and Registrant
dated May 1, 1996.
10.12* -Employment Agreement between Registrant and Richard G. Thau dated
November 15, 1990.
10.13* -Employment Agreement between Registrant and Jean A. Kovacs dated
November 15, 1990.
10.14* -Employment Agreement between Registrant and Bruce C. Felt dated March
25, 1994.
10.15* -Promissory Notes of Bruce A. Felt dated May 17, 1996 and May 17,
1996 in the principal amounts of $96,000 and $9,600, respectively.
10.16*+ -Distributor Agreement between Registrant and StereoGraphics
Corporation dated March 27, 1996.
10.17*+ -Letter Agreement between Registrant and Silicon Graphics, Inc. dated
June 6, 1994.
10.18* -[This item intentionally left blank.]
10.19*+ -Master Agreement between Registrant and Veritas Software Corporation
dated April 10, 1995.
10.20* -Reseller Agreement between Registrant and Check Point Software
Technologies Ltd. dated June 3, 1994.
10.21* -Lease Agreement between Registrant and Norfolk Atrium, a California
Limited Partnership dated April 1, 1995.
21.1* -Subsidiary of the Registrant.
23.1* -Independent Auditors' Consent and Report on Schedule (see page II-7).
23.2* -Consent of Counsel. Reference is made to Exhibit 5.1.
24.1* -Power of Attorney (see page II-4).
27 -Financial Data Schedule.
- -------------
* Incorporated by reference from an exhibit to the Company's Registration
Statement on Form S-1, as amended, (File No. 333-17529) declared effective
by the Commission on February 12, 1997.
+ Confidential treatment requested.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
1997.
26
<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 May 9, 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)
27
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
1.1* -Form of Underwriting Agreement.
2.1* -Agreement and Plan of Reorganization among the Registrant, Qualix
Subsidiary, Inc. and Octopus Technologies, Inc. dated July 14, 1996.
2.2* -Articles of Merger between and among the Registrant, Qualix
Subsidiary, Inc. and Octopus Technologies, Inc. filed August 30,
1996.
3.1* -Amended and Restated Certificate of Incorporation of Registrant, as
currently in effect.
3.2* -Form of Amended and Restated Certificate of Incorporation of
Registrant (to be filed prior to the closing of the offering made
pursuant to this Registration Statement).
3.3* -Form of Amended and Restated Certificate of Incorporation of
Registrant (to be filed upon the closing of the offering made
pursuant to this Registration Statement).
3.4* -Bylaws of the Registrant, as currently in effect.
4.1* -Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
4.2* -Specimen Common Stock certificate.
4.3* -Series D Preferred Stock and Warrant Purchase Agreement dated
April 11, 1995.
5.1* -Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian
LLP.
10.1* -Form of Indemnification Agreement.
10.2* -1995 Stock Option Plan.
10.3* -1997 Stock Option Plan.
10.4* -Employee Stock Purchase Plan.
10.5* -Senior Managers Bonus Plan.
10.6* -Series A Preferred Stock Purchase Agreement dated November 15, 1990.
10.7* -Series B Preferred Stock Purchase Agreement dated December 27, 1991.
10.8* -Series C Preferred Stock Purchase Agreement dated October 20, 1992.
10.9* -Series C Preferred Stock Purchase Agreement dated November 16, 1993.
10.10* -Note and Warrant Purchase Agreement dated August 26, 1994.
10.11* -Asset Purchase Agreement between Anthill Incorporated and Registrant
dated May 1, 1996.
10.12* -Employment Agreement between Registrant and Richard G. Thau dated
November 15, 1990.
10.13* -Employment Agreement between Registrant and Jean A. Kovacs dated
November 15, 1990.
10.14* -Employment Agreement between Registrant and Bruce C. Felt dated March
25, 1994.
10.15* -Promissory Notes of Bruce A. Felt dated May 17, 1996 and May 17,
1996 in the principal amounts of $96,000 and $9,600, respectively.
10.16*+ -Distributor Agreement between Registrant and StereoGraphics
Corporation dated March 27, 1996.
28
<PAGE>
10.17*+ -Letter Agreement between Registrant and Silicon Graphics, Inc. dated
June 6, 1994.
10.18* -[This item intentionally left blank.]
10.19*+ -Master Agreement between Registrant and Veritas Software Corporation
dated April 10, 1995.
10.20* -Reseller Agreement between Registrant and Check Point Software
Technologies Ltd. dated June 3, 1994.
10.21* -Lease Agreement between Registrant and Norfolk Atrium, a California
Limited Partnership dated April 1, 1995.
21.1* -Subsidiary of the Registrant.
23.1* -Independent Auditors' Consent and Report on Schedule (see page II-7).
23.2* -Consent of Counsel. Reference is made to Exhibit 5.1.
24.1* -Power of Attorney (see page II-4).
27 -Financial Data Schedule.
- -------------
* Incorporated by reference from an exhibit to the Company's Registration
Statement on Form S-1, as amended, (File No. 333-17529) declared effective
by the Commission on February 12, 1997.
+ Confidential treatment requested.
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 14,133
<SECURITIES> 5,440
<RECEIVABLES> 5,698
<ALLOWANCES> 304
<INVENTORY> 258
<CURRENT-ASSETS> 25,408
<PP&E> 2,122
<DEPRECIATION> 682
<TOTAL-ASSETS> 26,848
<CURRENT-LIABILITIES> 6,977
<BONDS> 0
0
0
<COMMON> 26,280
<OTHER-SE> (6,719)
<TOTAL-LIABILITY-AND-EQUITY> 26,848
<SALES> 23,686
<TOTAL-REVENUES> 23,686
<CGS> 9,940
<TOTAL-COSTS> 9,940
<OTHER-EXPENSES> 12,081
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31
<INCOME-PRETAX> 1,797
<INCOME-TAX> 169
<INCOME-CONTINUING> 1,628
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,628
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
