FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ___________
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 No.)
177 Bovet Road, 2nd Floor
San Mateo, CA 94404
(Address of principal executive offices) (Zip code)
(650) 572-0200
(Registrant's telephone number including area code)
1900 S. Norfolk St., Suite 224 San
Mateo, CA 94403-1151 (Former name, former address, and
former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 31, 1998.
Title Outstanding
Common stock-par value $0.001 10,550,352
This document consists of 27 pages, of which this is page 1.
<PAGE>
QUALIX GROUP, INC.
INDEX
PART I FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at March 31, 1998 and June 30, 1997..................................3
Condensed Consolidated Statements of Operations-Quarter
and nine months ended March 31, 1998 and 1997........................4
Condensed Consolidated Statements of Cash Flows Nine months ended March
31, 1998 and 1997....................................................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 1. Legal Proceedings....................................................22
Item 2. Changes in Securities................................................22
Item 3. Defaults Upon Senior Securities......................................22
Item 4. Submission of Matters to a Vote of Security Holders..................22
Item 5. Other Information....................................................23
Item 6. Exhibits and Reports on Form 8-K.....................................23
SIGNATURES....................................................................24
Exhibit Index.................................................................25
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
QUALIX GROUP, INC.
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
-------------- ---------------
(unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 8,751 $ 9,617
Temporary cash investments 5,790 9,541
Accounts receivable, net 4,001 5,147
Other current assets 858 470
-------------- ---------------
Total current assets 19,400 24,775
-------------- ---------------
Property and equipment, net 3,310 1,559
============== ===============
Total assets $ 22,710 $ 26,334
============== ===============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued liabilities $ 3,677 $ 4,119
Deferred revenue and advances 1,834 1,795
Current portion of long-term obligations 131 126
-------------- ---------------
Total current liabilities 5,642 6,040
-------------- ---------------
Long-term obligations 207 191
Stockholders' Equity 16,861 20,103
============== ===============
Total liabilities and stockholders'equity $ 22,710 $ 26,334
============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
QUALIX GROUP, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts; unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
March 31, March 31,
------------------------------ ------------------------------
1998 1997 1998 1997
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenue:
Reliability software $ 2,783 $ 4,482 $ 12,830 $ 12,340
Other products 1,698 2,748 6,311 7,695
Support, maintenance and consulting 1,490 1,407 4,347 3,651
-------------- -------------- --------------- --------------
Total revenue 5,971 8,637 23,488 23,686
-------------- -------------- --------------- --------------
Cost of revenue:
Cost of reliability software 195 693 697 3,150
Cost of other products 1,194 1,973 4,513 5,413
Cost of support, maintenance and consulting 508 544 1,507 1,377
-------------- -------------- --------------- --------------
Total cost of revenue 1,897 3,210 6,717 9,940
-------------- -------------- --------------- --------------
Gross profit 4,074 5,427 16,771 13,746
-------------- -------------- --------------- ---------------
Operating expenses:
Sales and marketing 4,975 3,122 14,801 7,923
General and administrative 1,295 730 3,467 1,994
Research and development 1,036 591 2,815 1,569
Merger expenses - - - 595
-------------- -------------- --------------- --------------
Total operating expenses 7,306 4,443 21,083 12,081
-------------- -------------- --------------- --------------
Income (Loss) from operations (3,232) 984 (4,312) 1,665
Other income, net 142 101 602 132
-------------- -------------- --------------- --------------
Income (loss) before income taxes (3,090) 1,085 (3,710) 1,797
Provision for income taxes - 168 - 169
============== ============== =============== ==============
Net income (loss) $ (3,090) $ 917 $ (3,710) $ 1,628
============== ============== =============== ==============
Net income (loss) per share, basic $ (0.30) $ 0.12 $ (0.36) $ 0.30
============== ============== =============== ==============
Shares used in per share computation, basic 10,450 7,673 10,381 5,515
============== ============== =============== ==============
Net income (loss) per share, diluted $ (0.30) $ 0.10 $ (0.36) $ 0.18
============== ============== =============== ==============
Shares used in per share computation, diluted 10,450 9,205 10,381 9,146
============== ============== =============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
QUALIX GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands, unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,710) $ 1,628
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 606 187
Amortization of discount on long-term obligations 21 -
Forgiveness of note receivable from stockholder 3 -
Changes in:
Accounts receivable 1,146 (2,589)
Other current assets (388) (273
Accounts payable and accrued liabilities (442) 2,838
Deferred revenue and advances 39 517
Liability under employment termination agreement - (152)
-------------- --------------
Net cash provided by (used in) operating activities (2,725) 2,156
-------------- --------------
Cash flows from investing activities:
Purchases of property and equipment, net (2,357) (1,283)
Purchase of temporary cash investments (10,411) (4,933)
Proceeds from maturity of temporary cash investments 14,205 -
-------------- --------------
Net cash provided by (used) in investing activities 1,437 (6,216)
-------------- --------------
Cash flows from financing activities:
Repayment of capital lease obligations - (1)
Issuance of long-term obligations, net - 27
Proceeds from issuance of common stock, net 422 15,065
-------------- --------------
Net cash provided by financing activities 422 15,091
-------------- --------------
Net increase(decrease) in cash and cash equivalents (866) 11,031
Cash and cash equivalents, beginning of year 9,617 3,102
============== ==============
Cash and cash equivalents, end of period $ 8,751 $ 14,133
============== ==============
Noncash investing and financing activities:
Net unrealized (gain) loss on investment $ (43) $ -
============== ==============
Issuance of common stock for stockholder notes $ 171,000 $ -
============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ - $ -
============== ==============
Cash paid during the period for income taxes $ 109 $ -
============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
QUALIX GROUP, INC.
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
The Company completed its initial public offering on February 12, 1977. The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and 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 consolidated 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 basic share has been computed based upon the
weighted average number of common shares outstanding for the periods presented,
adjusted for contingently issuable shares.
For diluted net income (loss) per share, shares used in the per share
computation include weighted average common and potentially dilutive common
shares outstanding. Potentially dilutive common shares consist of shares
issuable upon the assumed exercise of dilutive stock options.
Pursuant to the Securities and Exchange Commission's Staff Accounting Bulletins
and staff policy, all outstanding preferred stock and warrants that were
converted into common stock in the initial public offering are included in the
computation as potentially dilutive shares when the effect is dilutive. Prior to
the Company's initial public offering in February 1997, potentially dilutive
shares include preferred stock and certain warrants (using the "if converted"
method) totaling 1,532,000 and 2,907,000 shares for the quarter and for the nine
month period ended March 31, 1997, respectively. Additionally, all common and
potentially dilutive shares issued within the 12 months preceding the initial
filing date are included and totaled 192,000 shares both for the quarter and for
the nine month period ended March 31, 1997.
3. Effects of Recent Accounting Pronouncement
In June 1997, the Financial Accounting Standards Board adopted
Statement of Financial Accounting Standards 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.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
This Form 10-Q contains forward-looking statements within 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 and adversely 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 and data protection. 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. The Company successfully completed an initial
public offering in February 1997.
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 decreased to $5,971,000 in the third quarter of fiscal 1998
from $8,637,000 for the same period of fiscal 1997, a decrease of $2,666,000, or
31%. Total revenues for the nine months ended March 31, 1998 decreased $198,000,
or 1% from the comparable prior year period.
Reliability Software. Reliability software revenues decreased to $2,783,000 in
the third quarter of fiscal 1998, from $4,482,000 for the comparable period in
the prior year, a decrease of $1,699,000, or 38%; reliability software revenues
for the nine months ended March 31, 1998 increased to $12,830,000 from
$12,340,000 for the nine months ended March 31, 1997, an increase of 4%. The
decrease from the comparable quarter in the prior year is attributable to the
continuing decline in sales force productivity during the quarter. Sales
productivity levels declined in the first three quarters of fiscal 1998 as a
result of adding new sales personnel without a corresponding increase in
revenue. The Company's ability to increase revenues and improve operating
results in future periods depends significantly on improving sales productivity
levels.
The small increase over the nine months ended March 31, 1997 is primarily due to
the Company's success in closing large licensing transactions during the quarter
ended December 31, 1997, and also reflects the continuing broad market
acceptance of high availability products for the UNIX and Windows NT operating
environments and the expansion of the field sales and telemarketing
organization. Large transactions also reflect the focus of the Company's sales
force on enterprise-wide license agreements and larger transaction sizes. The
timing of large sales can cause significant fluctuations in the Company's
operating results. See "Risk Factors--Risk of Significant Fluctuations in
Quarterly Operating Results."
Other Products. Revenue from the sale of other products decreased to
$1,698,000 in the third quarter and $6,311,000 for the nine months ended
March 31, 1998 from $2,748,000 and $7,695,000, respectively, for the same
periods of fiscal 1997. These decreases of $1,050,000 or 38% and $1,384,000 or
18% are attributable to Qualix's continued focus on the sales of the Company's
internally developed higher margin reliability products as compared to third
party products.
Support, Maintenance and Consulting. Support, maintenance and consulting
revenue, primarily derived from annual maintenance agreements and training,
increased to $1,490,000 in the third quarter of fiscal 1998 from $1,407,000 for
the same period of fiscal 1997, an increase of $83,000, or 6%. Support,
maintenance and consulting revenue increased to $4,347,000 in the first nine
months of fiscal 1998 from $3,651,000 for the same period in fiscal 1997, an
increase of $696,000 or 19%. The increases in support, maintenance and
consulting are primarily attributable to increases in the installed base
generating increased sales of support contracts.
Cost of Revenues
Cost of revenues decreased to $1,897,000 in the third quarter of fiscal
1998 from $3,210,000 for the same period of 1997, a decrease of $1,313,000, or
41%. Cost of revenues decreased to $6,717,000 in the first nine months of fiscal
1998 from $9,940,000 for the same period of fiscal 1997, a decrease of 32%.
Cost of Reliability Software. Cost of reliability software as a percentage
of reliability software revenues decreased to 7% in the third quarter of fiscal
1998 from 15% in the third quarter of 1997 and to 5% from 26% for the first nine
months of the respective fiscal years. These decreases are primarily due to
increased sales volumes of higher margin internally developed reliability
products that have little or no royalty or licensing components.
Cost of Other Products. Cost of other products as a percentage of other
product revenues decreased to 70% in the third quarter from 72% in the third
quarter of 1997 and increased in the first nine months of fiscal 1998 to 72%
from 70% in the first nine months of the prior year. The slight increase for the
comparable nine month periods 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 and
adjustments to the product offerings during the quarter.
Cost of Support, Maintenance and Consulting. Cost of support, maintenance
and consulting as a percentage of support, maintenance and consulting revenues
decreased to 34% for the third quarter of fiscal 1998 from 39% for the same
period of 1997. Cost of support, maintenance and consulting decreased to 35% of
support, maintenance and consulting revenues for the first nine months of fiscal
1998 compared to 38% for the comparable period in 1997. These decreases are
primarily the result of increased revenues while associated cost levels remained
relatively stable.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased to $4,975,000
in the third quarter of fiscal 1998 from $3,122,000 for the same period of 1997,
an increase of $1,853,000, or 59%. Sales and marketing expenses increased to
$14,801,000 in the first nine months of fiscal 1998 from $7,923,000 for the same
period of 1997, an increase of $6,878,000 or 87%. These expenses increased as a
percentage of total net revenues to 83% in the third quarter of fiscal 1998 from
36% in the third quarter of 1997. This increase on an absolute and percentage
basis was primarily a result of the expansion in sales infrastructure, including
the opening of 8 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 66 to 94 from
March 31, 1997 to March 31, 1998. Sales productivity levels declined in the
first nine months of fiscal 1998 as a result of adding new sales personnel. The
Company's ability to increase revenues and improve operating results depends
significantly on improving sales productivity levels. The Company believes that
sales and marketing expense levels will remain stable on an absolute dollar
basis during the remainder of fiscal 1998 as the Company continues to adjust the
levels of its sales and marketing staff.
General and Administrative. General and administrative expenses increased
to $1,295,000 in the third quarter of fiscal 1998 from $730,000 for the same
period of 1997, an increase of $565,000, or 77%. These expenses increased to
$3,467,000 in the first nine months of fiscal 1998 from $1,994,000 for the same
period of fiscal 1997, an increase of $1,473,000, or 74%. As a percentage of
total net revenues, these expenses increased to 15% in the first nine months of
fiscal 1998 from 8% in the comparable period of 1997. The increase in absolute
dollars is primarily a result of increased staffing and related costs required
to manage and support the Company's operations as well as increases in
depreciation expense and other costs associated with business expansion in
addition to the incremental costs associated with being a public company. The
Company expects that general and administrative expenses will increase during
the remainder of fiscal 1998 in direct correlation with the expansion of the
Company's operations.
Research and Development. Research and development expenses increased to
$1,036,000 in the third quarter of fiscal 1998 from $591,000 for the same period
of 1997, an increase of $445,000, or 75%. Research and development expenses
increased to $2,815,000 in the first nine months of fiscal 1998 from $1,569,000
in the first nine months of fiscal 1997, an increase of $1,246,000 or 79%. This
increase was primarily attributable to increased staffing and related expenses
required to support product development activities, including developing a
future release of QualixHA+, version 3.1 of OctopusHA+, and version 1.4 of
Qualix DataStar, the Company's UNIX remote data mirroring application. The
Company believes that a significant level of research and development investment
is required to remain competitive and expects such expenses will increase during
the remainder of fiscal 1998.
Merger Expenses. Merger expenses of $595,000 were incurred in connection
with the acquisition of Octopus Technologies during the nine months ended March
31, 1997. Merger expenses consisted primarily of investment banking, legal and
accounting fees.
Other Income, net. Other income increased to $142,000 in the third quarter
of fiscal 1998 from $101,000 for the same period of 1997, an increase of
$41,000, or 41%. 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 for the third quarter and first nine months of fiscal 1998 and a provision
of $168,000 and $169,000, respectively, for the same periods in the prior fiscal
year as the Company had taxable losses for which no significant benefit was
recognized.
Net Income(Loss). Net loss for the quarter ended March 31, 1998 was
$(3,090,000) or $(0.30) per share, diluted, compared to net income of $917,000
or $0.10 per share, diluted, for the comparable period in the prior fiscal year.
In addition to the increases in general and administrative expenses and research
and development expenses associated with the Company's growth, the net loss
reflects the full impact of the increase in headcount in the field sales force
and related loss in sales force productivity which occurred primarily during the
first quarter of fiscal 1998, and to a lesser extent, during the second quarter
of fiscal 1998.
Liquidity and Capital Resources
At March 31, 1998, the Company had $14,541,000 in cash, cash equivalents and
temporary cash investments, as compared to $19,158,000 at June 30, 1997, a
decrease of $4,617,000, or 24%. At March 31, 1998, the Company had working
capital of $13,758,000 compared to $18,735,000 at June 30, 1997.
Cash Flows From Operating Activities. Cash used in operations was
$2,725,000 during the first nine months of fiscal 1998 which was a $4,881,000
increase from the comparable period of the prior year. This increase is
attributed principally to the loss from operations plus increases in other
current assets and a decrease in accounts payable and accrued liabilities offset
by a decrease in accounts receivable and an increase in depreciation and
amortization. During the comparable period of fiscal 1997, cash provided by
operating activities was attributable to income from operations plus increases
in accounts payable and accrued liabilities and deferred revenues and advances,
offset by increases in accounts receivable and other current assets. The
increases in 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. Net cash
generated by investing activities of $1,437,000 for the first nine months of
fiscal 1998 primarily consisted of $2,357,000 in purchases of property and
equipment and $10,411,000 in net purchases of temporary cash investments offset
by proceeds from maturity of temporary cash investments of $14,205,000. Net cash
used by investing and financing activities was $8,875,000 for the first nine
months of fiscal 1997 provided by $15,065,000 in proceeds from the sale of
common stock and purchases of property and equipment amounting to $1,283,000
plus purchases of temporary cash investments aggregating $4,933,000.
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. As an
evolution of this strategy, the Company intends to emphasize sales to the
enterprise and has made and intends to make certain changes in management, its
sales force and product design. 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," "--Uncertainty of Success of Recently Introduced and Planned
Products" and "Dependence on Key Personnel; Recent Management Changes;
Management of Growth."
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; 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, improving the productivity
of the Company's field sales force, 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, the level of research and development expenses in connection with
the Company's ongoing and planned product development program and the level of
sales and operating expenses. 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, particularly as the
Company pursues larger licensing transactions, 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, 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, including Microsoft Corporation and Sun
Microsystems, that incorporate high availability 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 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 28% and 32% of total revenue in the third 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, the Company 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
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 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 retaining 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, 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 and customer
confusion. 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.
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; Recent Management Changes; Management of
Growth. The Company's future operating results depend significantly on the
continued service of its key technical and senior management personnel and 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.
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. The Company recently hired a Senior Vice President of
Field Sales Operations and an acting Vice President of Marketing to replace
senior management personnel who have left the Company. Additionally, the Company
has hired a Vice President of Human Resources. In connection with these
management changes, the Company has experienced, and expects to continue to
experience, related employee turnover, particularly in the sales force. The
Company's future success will depend in significant part on the ability of its
new members of management to integrate into the Company and to successfully
motivate and retain existing personnel and to attract, train, motivate and
retain sufficient numbers of new personnel. Failure to successfully take any of
the foregoing actions could 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." The
Company has applied for a United States patent covering certain aspects of the
technology included in its Octopus Technologies data mirroring product and has
received the official Notice of Allowance regarding that application. However,
there can be no assurance 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.
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. In March, 1998 the Company
obtained a license to use the Octopus mark in France and management believes
that this license allows the Company to market the Octopus product in that
country.
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.
International Sales. Net revenue from customers outside the United States
was 22% of total revenue for the three months ended March 31, 1998 and 15% for
the comparable quarter in 1997. In the 1998 quarter, 11% of total revenue was
generated in Asia. 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. Although the company has been unaffected to date, economic
volatility in Asia and other parts of the world may have a significant impact on
future performance of the Company.
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.
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.
Year 2000 Compliance. The Company has, and will continue to make certain
investments in its software systems and applications to ensure that the Company
is year 2000 compliant. The financial impact to the Company has not been and is
not anticipated to be material to its financial position, results of operations
or cash flows in any given year.
The Company also relies, directly and indirectly, on external systems of
business enterprises such as customers, suppliers, creditors, financial
organizations, and of governmental entities, both domestic and international,
for accurate exchange of data. Despite the Company's efforts to address the year
2000 impact on its internal systems, the Company has not fully identified such
impact or whether it can resolve such impact without disruption of its business
or without incurring significant expense. Based on the information currently
available, the Company believes that the costs associated with the year 2000
issue, and the consequences of incomplete or untimely resolution of the year
2000 issue, will not have a material adverse effect on its business, operating
results and financial condition in any given year. In addition, even if the
internal systems of the Company are not materially affected by the year 2000
issue, the Company could be materially adversely affected through disruption in
the operation of the enterprises with which the Company interacts.
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
experience significant volatility 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 32% 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.
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
27.1 --Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Qualix Group, Inc.
May 13, 1998 By:/S/____________________________________
Date Bruce C. Felt, Vice President, Finance
and Chief Financial Officer
(duly authorized officer and principal
financial and accounting officer)
<PAGE>
EXHIBIT INDEX
Exhibit 27.1 --Financial Data Schedule.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27.1
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 8,751
<SECURITIES> 5,790
<RECEIVABLES> 4,542
<ALLOWANCES> 541
<INVENTORY> 238
<CURRENT-ASSETS> 19,400
<PP&E> 4,728
<DEPRECIATION> 1,418
<TOTAL-ASSETS> 22,710
<CURRENT-LIABILITIES> 5,642
<BONDS> 0
0
0
<COMMON> 25,290
<OTHER-SE> (8,429)
<TOTAL-LIABILITY-AND-EQUITY> 22,710
<SALES> 23,488
<TOTAL-REVENUES> 23,488
<CGS> 6,717
<TOTAL-COSTS> 6,717
<OTHER-EXPENSES> 21,083
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,710)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,710)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,710)
<EPS-PRIMARY> (0.36)
<EPS-DILUTED> (0.36)
</TABLE>
