UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
Commission File Number: 0-26008
MYSOFTWARE COMPANY
2197 E. Bayshore Road, Palo Alto, California 94303
(650) 473-3600
Incorporated in I.R.S. Employer Identification No.
Delaware 77-0195362
- -------- ----------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark whether the registrant: (1) has filed all reports 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy of information
statements incorporated by reference in Part III of this Form 10-KSB. [ X ]
Based on the closing price of $3.563 on February 28, 1998, the aggregate
market value of the common stock held by non-affiliates of the registrant as
of February 28, 1998 was $10,277,748.
The number of shares outstanding of the registrant's common stock as of
December 31, 1997, was 4,235,856.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated April 13, 1998 to be
delivered to stockholders in connection with the Notice of Annual Meeting of
Shareholders to be held on May 21, 1998, are incorporated by reference into
Part III.
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TABLE OF CONTENTS
Page No.
PART 1
Item 1. Business 3
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 19
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 7. Financial Statements and Supplementary Data 22
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 22
PART III
Item 9. Directors and Executive Officers of the Registrant 23
Item 10. Executive Compensation 24
Item 11. Securities of Ownership of Certain Beneficial Owners
and Management 24
Item 12. Certain Relationships and Related Transactions 24
Item 13. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 25
Signatures 26
Financial Statements 28
Exhibits 45
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PART 1
ITEM 1. BUSINESS
MySoftware Company (the "Company" or "MySoftware") designs, markets, and
supports a family of leading task-specific software applications for small
businesses, including home-based businesses. MySoftware provides users with
easy-to-learn and easy-to-use solutions, including tools for managing mail
lists and saving on direct mail postage. MySoftware also provides
productivity tools for creating brochures, stationery, postcards, labels,
invoices and estimates, Internet home pages, Web-based resumes and Web-based
calendars. Headquartered in Palo Alto, California, the Company was founded
in 1986 and completed its initial public offering in June 1995.
In addition to retail software products, MySoftware offers complementary
annuity-based products and services to its customers, particularly in the
mailing area, where MySoftware has established a leading market position.
With an increasing number of small businesses relying on direct marketing to
grow their businesses, MySoftware is positioned to meet the mailing management
needs of this important market. Current services such as address correction,
available through subscriptions to MyAddressChecker CD-ROM, offer customers
added value and create the opportunity for long-term relationships with
MySoftware.
The Company places significant emphasis on consumer marketing techniques in
developing products and building brand awareness. The Company primarily
distributes its products through the retail channel, in computer software and
office supply stores throughout the United States and Canada. The Company
has also added new distribution methods, including direct, other equipment
manufacturer ("OEM"), and international channels. In addition to retail
software products and annuity-based mailing products, the Company also offers
complementary paper products and receives commissions from the sales of such
products by third parties.
The United States Small Business Administration reports that there are
approximately 22 million small businesses in the United States. According to
IDC/LINK, income-generating home offices are expected to grow over 27% from
1995 to 1999, with the fastest growth expected in those companies with fewer
than 10 employees. According to a Home Office Computing (January, 1995)
survey, the top three challenges facing small businesses are obtaining new
business clients, growing their businesses, and promoting their businesses.
The Company's internal research indicates that small businesses are concerned
about projecting a professional image in their sales and marketing materials
and in other communications with customers. The Company's research also
indicates that many small businesses perceive opportunities for improvement
in the management of their mailings.
Historically, small businesses have lacked the tools to create professional-
quality marketing materials and to mail their materials effectively, or they
have relied on costly third party providers. Today, small businesses are
adopting new office productivity technologies in growing numbers.
Penetration of computers in the small business market increased from 40% in
1989 to 78% in 1997, according to IDC/LINK. Moreover, the availability of
low cost, high resolution laser and inkjet printers, including color
printers, has made it possible to produce professional-looking materials
directly from personal computers. As a result, small businesses are
increasingly using their computers to combine text, data, and color graphics
to produce high-quality marketing materials on their own desktops and to mail
these materials via the United States Postal Service ("USPS").
To serve this market, a number of companies have begun to offer marketing and
communications products targeted toward small businesses. These companies
include Dun and Bradstreet Corp. and American Business Information, Inc.
("ABI") which provide targeted mailing lists; PaperDirect, Inc.
("PaperDirect"), Geographics, Inc., ("Geographics"), and BeaverPrints, Inc.
("BeaverPrints"), which provide pre-printed papers; Pitney Bowes, Inc.
("Pitney Bowes"), which provides their Personal Post Office, a desktop
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postage meter for small businesses including home-based businesses; and
Kinko's Copies and Alpha Graphics, Inc. which provide production services.
Although various general purpose software applications, such as word
processing, database, and desktop publishing applications, have a broad range
of features and can be used to perform many of the sales and marketing tasks
desired by small businesses, these applications are often complex and
relatively difficult to use. Accordingly, the Company believes that there is
a substantial opportunity for task-specific software designed to provide
cost-effective, easy-to-learn, and easy-to-use solutions to busy,
results-oriented small business users.
COMPANY STRATEGY
MySoftware's core software products address the sales and marketing needs of
small businesses: communicating with customers, attracting new business, and
managing customer lists. In order to address this growing market, the
Company has focused on becoming the leading seller in its core categories,
including mailing, brochures, labeling, business cards, and invoices/
estimates. Key elements of the Company's strategy are summarized below.
Provide a family of fully featured, task-specific applications. The Company's
target users are busy and results-oriented. These users often find general
purpose software programs cumbersome to learn and to use for a particular
task. By developing task-specific applications, MySoftware makes its
products easy-to-learn and easy-to-use, while incorporating all the
capabilities needed to successfully perform a focused task. Users can solve
other small business marketing challenges by purchasing additional task-
specific software from MySoftware's family of interoperable products.
Build product loyalty and brand name. The Company believes that building the
MySoftware brand is important to its long-term success. By offering a family
of related products that complement one another and have similar names and
packaging, the Company aims to raise brand awareness and increase sales of
each of its products. MySoftware also conducts active brand marketing and
communications campaigns, including public relations efforts, direct
communications, advertising, and retailer promotions. To further increase
consumer exposure to its products, the Company establishes cooperative
marketing arrangements with companies that offer complementary sales and
marketing products. To date, MySoftware has established such arrangements
with Avery Dennison Corporation ("Avery"), BeaverPrints, iMarket Inc.,
American Express Company ("American Express"), PaperDirect, Geographics, New
England Business Systems, Inc. ("NEBS"), Pitney Bowes, MindSpring
Enterprises, Inc. ("MindSpring"), and EarthLink Network, Inc.("EarthLink").
Focus on core product categories. MySoftware focuses its marketing and
development resources on five core product categories: mailing, brochures,
labeling, business cards, and invoices/estimates. The Company further
leverages its leadership position in the mailing category by offering
annuity-based mailing-related products and services. By maintaining this
focus, the Company believes that it will continue to be positioned to
understand customer needs, produce easy-to-learn and easy-to-use products,
build its brand name, and lead the market in these categories.
Focus on expanding channels of distribution. The Company's distribution
efforts are primarily focused on the retail channel, since most small
businesses and individuals purchase software through retail outlets. The
Company actively seeks to increase its visibility in the retail channel by
conducting periodic retail promotions, monitoring sell-through and inventory
levels, locating its sales force near major retailers, designing its
packaging for self-service selling environments, supporting retailers'
advertising and promotional efforts, and conducting independent public
relations and advertising efforts. In addition to retail distribution, the
Company sells its products and services directly to customers through its
direct channel (including both telephone and Internet sales). The Company also
distributes products through its OEM channel, through which it has formed
partnerships with internationally-known companies such as Pitney Bowes,
Hewlett-Packard Company, Brother, Epson, Samsung, U S WEST, Acer, and other
industry leaders. Such relationships enable the Company to generate
additional revenues, expand its target market for annuity-based products and
services, and build awareness of the MySoftware brand. As part of
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the Company's efforts to expand its product distribution channels, in December
1997, the Company initiated an international sales effort and plans to seek
out various international partners for localization, marketing, and
distribution of the Company's products abroad.
Emphasize market-driven product development. The Company employs extensive
market research and user feedback to define, develop, and improve its
products to meet customer needs more effectively. MySoftware applies an
integrated four-step consumer marketing process to define, develop, and
improve its products. These steps include: performing consumer research to
identify user needs and behavior; incorporating the research to develop easy-
to-learn, easy-to-use, fully featured, task-specific applications; conducting
both pre- and post-release usability testing to validate these designs; and
collecting customer support data and product returns feedback to drive future
improvements.
Leverage core competencies. MySoftware leverages its core competencies in
product development and in sales and marketing through strategic use of
third-party service providers. The Company has chosen to use third-party
providers to perform functions that it believes can be better or more
effectively performed by a specialized organization. These functions include
software coding, assembly, customer technical support, telephone customer
registration, and some aspects of direct communications to consumers (such as
fax and e-mail distribution). MySoftware believes that this organizational
approach allows it to achieve quality and flexibility and to control costs,
while maintaining effective control over its business operations.
PRODUCTS
The Company's core products are a family of leading task-specific software
applications that address the specific sales and marketing needs of small
businesses, usually those with ten or fewer employees. The Company provides
users with powerful, easy-to-learn and easy-to-use solutions for creating
customized, professional-quality mailing lists, brochures, labels, business
cards, invoices/estimates, and other marketing communications materials. The
Company also markets annuity-based mailing products and services that
complement the Company's existing mailing software products. The Company
backs its products with a 30-day money-back guarantee. All of MySoftware's
core applications are available for both Microsoft Windows 3.1 and Windows 95.
MyAdvancedMailList / MyAddressChecker / MyDeluxeMailList / MyMailManager /
ProVenture Mail Tools / MyMailList & Address Book
MySoftware's initial mailing list product was introduced in September 1987.
MyAdvancedMailList, introduced in June 1989, stores and organizes mailing
list data that can be printed in a variety of forms, including mailing
labels, envelopes, address books, and Rolodex cards, or used in conjunction
with other MySoftware applications, such as MyAdvancedBrochures.
MyAdvancedMailList has a built-in database function that enables MySoftware's
customers to maintain and sort mailing lists and other customer data.
MyAddressChecker, introduced in 1994, is USPS CASS-certified and enables
users to qualify for Bulk Mail discounts from the Post Office. Users must
subscribe to bi-monthly CD-ROM updates to continue to qualify for postal
discounts, which can be as great as approximately 51.6%. The program
verifies and corrects addresses against the national database of deliverable
addresses maintained by the Post Office and supplies the appropriate ZIP+4
codes necessary to print delivery point bar codes and to qualify for these
discounts. MyDeluxeMailList, introduced in March 1995, includes Zip Look Up,
a CD-ROM of every valid address in the United States, enabling users to
correct their addresses and add ZIP+4 codes that help speed delivery of their
mail. MyMailManager, designed for Windows 95, was introduced in December 1996.
ProVenture Mail Tools, introduced in June 1997, offers similar mailing
features but works with customers' existing databases. Users with customer or
prospect lists already stored in programs such as ACT!, Access, FileMaker,
Excel, Word, and FoxPro can use Mail Tools to add mail list management
and printing features their programs may lack. MyMailList & Address Book,
introduced in December 1997, provides users with simple features to organize
names and addresses, at a lower price point than the Company's other mailing
products. MyAdvancedMailList earned a 1997 "Editors' Pick" award from Home
Office Computing magazine.
<PAGE>
MyBrochures / MyAdvancedBrochures / MyProfessionalMarketingMaterials
MyBrochures was originally introduced in April 1994. MyAdvancedBrochures was
introduced in September 1994. MyAdvancedBrochures enables users to design
and produce flyers, postcards, professional-looking color brochures, menus,
newsletters, and invitations in a variety of formats and sizes. All these
brochure programs offer built-in templates, which can be easily customized to
suit users' needs. The Windows 95 version of the program was introduced in
September 1995. MyProfessionalMarketingMaterials, introduced in September
1996, provides customers with more than 600 color printable designs,
as well as the ability to design from more than 500 pre-printed specialty
papers.
MyAdvancedLabelDesigner / MyDeluxeLabelDesigner / MyLabels
MySoftware's initial labeling product was introduced in March 1988.
MyAdvancedLabelDesigner, introduced in May 1992, enables users to design and
print professional-looking, color labels in standard and custom sizes,
including mailing and shipping labels, name cards, Rolodex cards, file
folders, cassette and video tape labels, and more. Text, data, and graphics
can be entered directly into MyAdvancedLabelDesigner or imported from other
applications such as dBase, Paradox, and Access. Labels can be enhanced with
special design elements including color, rotated text, and clip art. In
March 1996, the Company introduced the Windows 95 version of
MyAdvancedLabelDesigner, which supports ten different label brands and more
than 500 label sizes. MyLabels was introduced in March 1996 to provide
similar features to a more value-conscious consumer.
MyAdvancedInvoices & Estimates / EasyCustomInvoices / ProVenture Billing
Solution / MyDeluxeInvoices & Estimates
MySoftware's initial invoice product was introduced in December 1990. The
Advanced version, introduced in August 1993, is an invoicing, estimating, and
cash management application. The program easily produces professional-
looking invoices and estimates on plain paper or on a variety of pre-printed
forms. The application also produces a variety of sales and accounts-
receivable reports designed to assist small businesses in analyzing financial
and accounting aspects of their businesses. EasyCustomInvoices, designed for
Windows 95 and introduced in September 1996, allows users to customize their
forms with different fonts, column widths, column headings, and more.
ProVenture Billing Solution was introduced in June 1997 and was designed to
help customers manage the entire billing process. It offers enhanced tracking
capabilities, such as the Tracker window that automatically notifies the user
when a customer is overdue. MyDeluxeInvoices, introduced in November 1997, is
the Windows 95 version of MyAdvancedInvoices and offers enhanced usability
features. MySoftware also sells pre-printed invoice, estimate, and statement
forms for use with all software products in its invoicing/estimating
category. The Company contracts with a third party to manage its private-
label forms business and shares in the sales revenues and marketing costs of
the business. There can be no assurance that this arrangement can be
maintained or will benefit the Company.
MyProfessionalBusinessCards / ProVenture Custom Business Stationery
In April 1995, the Company introduced MyProfessionalBusinessCards in its new
business card product category. Following its task-specific application
strategy, MySoftware has given small business owners a tool for creating
professional-looking business cards in minutes. This program gives small
business owners the flexibility to design and print small quantities of
customized business cards for any occasion. MyProfessionalBusinessCards is
available in both Windows 3.1 and Windows 95 versions. The Company introduced
Custom Business Stationery in May 1997. This product is designed to create
custom, matching, professional-quality business cards, letterhead, and
envelopes. Custom Business Stationery also gives customers the ability to
import logos in 15 different formats and to maintain a database of employees
or contacts.
MyInternetBusinessPage / Pacifica Personal WebPage Designer
In August 1996, the Company introduced MyInternetBusinessPage, its first
Internet-related product. The product allows users to create and publish
Internet Web pages on the World Wide Web. The product is created
specifically to address the needs of small businesses, and includes dozens of
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easy-to-customize templates, including a pre-designed form that customers can
use to communicate via electronic mail with the page owner. In December 1996,
the Company introduced Pacifica Personal WebPage Designer. The program comes
with more than a dozen templates for showcasing hobbies, interests, and family
events. The program allows an entire Web site or portions of it to be
password-protected to guard the privacy of the author. Users of both
MyInternetBusinessPage and Personal WebPage Designer are not required to
learn the HTML programming language to create their pages, and are able to
publish their pages on the World Wide Web using SwiftSite or another Internet
publishing site. MySoftware earns a share of fees that users pay to
SwiftSite for publishing; revenues to date from this source have not been
significant.
Jalapeno Hot Buttons / Hot Banners / Hot Backgrounds
In December 1996, the Company released two products, Hot Buttons and Hot
Banners, that allow authors of Web sites to easily create graphic images that
enhance the visual impact of their Web pages. Hot Buttons allows users to
create customized professional-quality buttons, headers, bullets, page
breaks, and other Web graphic elements without having to learn complicated
photo or paint manipulation programs. Hot Banners allows users to create
banners and other Web graphics containing multiple text and image elements.
Hot Backgrounds was introduced in August 1997 and enables users to create
custom background designs for their Web pages. The elements created by all of
these programs can be used with all of the major Web page authoring tools on
the market, including MyInternetBusinessPage and Pacifica Personal WebPage
Designer.
Other Products
The Company sells a simple database program, MyDataBase, and other Internet-
related products, Pacifica Professional WebResume and Pacifica WebCalendar.
MyDataBase is designed to enable users to easily organize and summarize
information. WebResume is an all-in-one Web job search and career management
tool. WebCalendar helps users create a dynamic, customized event calendar and
publish it on the Web in minutes. The Company also markets the American
Check Printers line of checks for personal financial programs. These products
are not expected to contribute materially to the Company's future revenues.
PRODUCT DEVELOPMENT
The software industry is undergoing rapid changes, including evolution of
industry standards, introduction of new operating systems and environments,
frequent new product introductions, introduction of new media, and changes in
customer requirements and preferences. The Company believes that its future
success will depend in large part upon its ability to keep pace with
competitive offerings, to adapt to new operating systems, hardware platforms,
media, Internet technologies, and industry standards, and to provide
additional functionality by enhancing its existing products and introducing
new products on a timely basis.
The Company focuses on developing and improving its family of core products
at the same time as it develops products and services in complementary
software categories. This focused strategy allows MySoftware to know its
market and to develop solutions to customer problems. In order to meet the
business development needs of small businesses, the Company works with
current and prospective users to define the functionality of the Company's
new products and make improvements to its existing products. The Company's
development process is organized around multi-functional teams composed of
product development, marketing, and quality assurance personnel who work
together in the development of products from an earlier design stage. This
team approach ensures a high level of marketing and customer support input
throughout many stages of product development.
MySoftware conducts systematic usability testing as an integral part of the
product development process, beginning with the product specification phase,
continuing during development and beta testing phases, and concluding with
post-release customer satisfaction audits. This testing is used to identify
potential problems quickly and formulate early solutions. In addition to
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monitoring customer support calls and requests, the Company has in place a
mandatory customer registration program that further enhances its ability to
monitor customer use of its products and to obtain valuable customer feedback.
MySoftware creates all product specifications for both new products and
updates of its existing products, and maintains internal control over the
creative and market-driven aspects of product development. Once a product
has been defined and a detailed specification has been designed, the Company
leverages its resources by outsourcing coding functions. The Company relies
primarily on three independent firms with which the Company has worked for
seven, five, and two years, respectively, to perform the majority of the
coding for its software products, including coding for new products and
maintenance and bug-fix releases, and updates for existing products. The
need to update the Company's products, both for enhanced functionality and
for ease of use under new operating platforms, increases the Company's
dependence on these third-party coders. The Company has entered into
separate software development agreements for the development of specific
pieces of software as work-for-hire with its third-party coders. The Company
compensates third-party coders primarily through payments for software
production costs and royalty payments. Royalty expenses have been at 2% of
net revenues of the relevant products, with a dollar maximum cap on total
royalty payments for certain products. The Company generally owns all
intellectual property rights to products developed by third-party coders with
the exception of the base code for MyBrochures, MyAdvancedBrochures,
MyProfessionalMarketingMaterials, MyProfessionalBusiness-Cards, and Custom
Business Stationery. With respect to these products, the Company owns the
code for the user interface, while the base code is owned by the third-party
coder. The Company holds an irrevocable, non-exclusive license to copy and
distribute the executable code compiled from the base code and to make
limited modifications. Third-party coders have also agreed not to develop or
market any stand-alone desktop publishing software based on the base code
that competes with the Company's products prior to October 1998. The
Company's success depends in part on its continued ability to obtain and
renew agreements for coding by independent software developers. There can be
no assurance that the Company will be able to obtain or renew such coding
agreements on favorable terms, if at all.
The Company has made use of shared code across products. For example,
MyAdvancedMailList and MyAdvancedLabelDesigner share portions of the same
base code, and the code for MyAdvancedBrochures was used to develop
MyProfessionalBusinessCards and Custom Business Stationery. The Company
believes its ability to share and reuse significant blocks of code across
multiple products has enabled it to shorten development time and reduce
development costs.
As of December 31, 1997, the Company had 18 full-time and 2 part-time
professional and technical employees engaged in product development. During
the years ended December 31, 1997, 1996, and 1995, product development
expenses were $2,221,712, $1,988,881, and $1,342,045, respectively, not
including capitalized software production costs paid to third party coders of
$1,290,180, $1,253,117, and $742,419, respectively, which were capitalized.
SALES AND MARKETING
Sales
The Company's products are distributed primarily through computer software
and office supply retailers throughout the United States and Canada,
including computer superstores (Computer City Super Center; CompUSA Inc.;
Elek-tek, Inc.; Fry's Electronics, Inc.; MicroCenter), office warehouse clubs
(Office Depot Inc.; OfficeMax; Staples Inc.), software specialty stores
(Egghead Inc.; Electronics Boutique), mass merchants (Target; Wal-Mart),
consumer electronics stores (BestBuy Co., Inc.) and general warehouse clubs
(Price/Costco Inc.; Sam's Club). Of the Company's top twelve retail outlets,
MySoftware sells directly to eight and services the other four retailers
through distributors such as Ingram Micro, Inc. ("Ingram"), Merisel, Inc. and
GoodTimes. Ingram and Office Depot, Inc. accounted for net revenues of
37% and 20% for 1997, 34% and 29% for 1996, and 28% and 23% for 1995,
respectively. The Company has non-exclusive arrangements with its
distributors and retailers that generally do not require minimum purchases of
the Company's products and may be terminated at any time.
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The Company monitors product sell-through and retail inventory information.
Most of the Company's distributors and key retailers provide weekly or
monthly sell-through data as well as current inventory information. This
information is analyzed for both positive and negative trends and is used to
assist the Company's retailers in managing product inventory levels. This
information is also used to determine the effectiveness of retail promotions
and account advertising. The Company's promotional vehicles are also geared
toward increasing customer exposure to its products with additional facings
and high traffic locations. The Company maintains sales forces in the Dallas,
Los Angeles, and Miami metropolitan areas, and has contracted with
manufacturers' representative firms in the Dallas and Minneapolis
metropolitan areas.
The Company's products are also distributed through direct, OEM, and
international channels. Direct sales to customers are expected to increase as
the Company introduces new, annuity-based products and services to its
mailing customer base. Sales through the OEM channel, with partners such as
Pitney Bowes, Brother, U S WEST, and others, enable the Company to generate
additional revenues, expand the target market for its annuity-based products
and services, and build awareness of the MySoftware brand. In December 1997,
the Company hired a Vice President of International Sales to launch its
international sales efforts. Revenues from sources outside of North America
have not been significant to date.
Cooperative Marketing Arrangements
MySoftware has entered into cooperative marketing relationships with
companies that sell products complementary to the Company's products,
including paper products and targeted mailing lists. In exchange for
inserting these marketing partners' catalogs and product samples inside the
Company's retail software packages, the Company receives a per-registered-
user fee, per-product-shipped fee, or sales commission on any sales generated
by the Company's activities or other promotional consideration. MySoftware
currently has cooperative marketing programs with Geographics, PaperDirect,
BeaverPrints, MindSpring, and EarthLink. To date, these activities have not
produced significant revenues, but the Company believes that these activities
contribute to its brand-building efforts. There can be no assurance that any
of these arrangements can be maintained or will benefit the Company.
In addition, the Company has developed custom versions of its products for
sale by some of its marketing partners. The Company has entered into a resale
contract with NEBS for various MySoftware titles. There can be no assurance
that any significant revenue will result from these activities or that any of
these relationships can be maintained.
Marketing
MySoftware's marketing department is responsible for managing products and
developing new market opportunities; building brand recognition through
public relations, advertising, and other promotional techniques; and
communicating directly with current customers to market additional products
and services. The Company's marketing department has three main areas of
focus: product marketing, corporate marketing, and direct communications.
The Company's product marketing group is responsible for analyzing the
marketing needs of small businesses and individuals, specifying product
features, validating product ease-of-learning and ease-of-use, managing
package design, coordinating product training, developing sales of
complementary products and services, and increasing repeat purchases by
existing customers. Market research is an integral part of MySoftware's
customer-focused approach, enabling the Company to continue to improve
existing products and define new products. Product marketing personnel work
closely with product development engineers to develop overall product
development specifications based on demonstrated customer needs.
The Company's corporate marketing group focuses on building awareness of the
MySoftware brand and increasing MySoftware product trials. Its
responsibilities include external communications, such as public and investor
relations, advertising, the corporate Web site, trademark issues, and
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promotions. MySoftware also conducts periodic retail promotions designed to
increase short-term sales and strengthen relationships with retailers.
The Company formed a direct communications group in 1997 to utilize various
technologies, including the Internet, to market products and services
directly to MySoftware customers, who then order these annuity services
directly from the Company. This group markets primarily mailing-related
products and services to the Company's current mailing customers using direct
mail, fax, and e-mail communications.
CUSTOMER SUPPORT
The Company's customer support activities provide valuable services to its
customers and enhance customer satisfaction, in addition to providing valuable
customer input to the Company's product development process. MySoftware
provides customer technical support in-house for certain Internet products
and through a third party managed by the Company's internal customer support
group for all other products. This structure facilitates the Company's
ability to achieve satisfactory customer support on a cost-effective basis.
The Company receives daily downloads of data from its customer technical
support provider, allowing it to monitor service levels and support quality.
The Company's contract with its customer technical support operator can be
terminated on 30 days' notice by either party. This third party provider
also provides services to several larger companies, and there can be no
assurance that demands from such companies or other factors will not result
in termination of this relationship. The unavailability of such a firm to
perform customer technical support for the Company could result in
significant disruption to the Company's operations, could lead to customer
dissatisfaction, and could have a material adverse effect on the Company.
OPERATIONS
The Company directly performs all purchasing, finished goods inventory
management and warehousing, scheduling, order processing, and shipping. The
Company prepares master software diskettes, CD-ROMs, user manuals, and
packaging designs, and conducts independent quality control and testing at
its facilities. Diskette and CD-ROM duplication, printing of documentation,
and packaging and assembly are performed by independent contractors to the
Company's specifications. To date, the Company has not experienced
any material difficulties or delays in the manufacture and assembly of its
products. However, if such difficulties and delays were encountered and if
the Company's transition to an alternate vendor were not completed promptly,
the Company could be adversely affected.
The Company generally ships products within three days of receipt of an
order. As a result, the Company has relatively little backlog at any given
time, and does not consider backlog to be a significant indicator of future
performance.
COMPETITION
The market for the Company's small business products is intensely
competitive, and is characterized by pressure to increase marketing and
promotional activity, incorporate new features, release new product versions,
and reduce prices. Existing software companies may broaden or enhance their
product lines to compete with the Company's products, and other potential new
competitors, including computer hardware manufacturers, diversified media
companies, and small business service companies, may enter or increase their
focus on the small business software market, resulting in even greater
competition for the Company. The Company's software products compete with
task-specific products sold by Avery (labeling software), Intuit, Inc.
("Intuit") (invoicing/estimating software), The Learning Company, Inc. ("The
Learning Company") (business card and labeling software), Broderbund
Software, Inc. ("Broderbund") (brochure/marketing material software) and
several other companies of varying size and financial and marketing strength.
The Company's products also compete with general purpose programs, such as
word processing, database, and desktop publishing products from major
software companies, including Adobe Systems Incorporated ("Adobe"), Lotus
Development Corp. ("Lotus"), Microsoft Corp. ("Microsoft"), and Corel
<PAGE>
Corporation ("Corel"). The Company believes it would face increased
competition from such general purpose programs if such programs were designed
for greater ease-of-use of task-specific functions. In addition, new
operating systems may incorporate features enabling users to accomplish small
business marketing and other tasks currently addressed by the Company's
software products.
The Company's strategy of focusing on its core and complementary products
heightens the competitive risk. Many of the companies with which the Company
currently competes, or may compete in the future, have greater financial,
technical, marketing, sales, and customer support resources, as well as
greater name recognition and access to customers, than the Company. The
competition for retail shelf space and direct Internet selling is also likely
to increase due to the proliferation of software products and companies.
Failure to achieve and maintain unit sales volumes may result in loss of
shelf space which may, in turn, lead to further reductions in sales volumes.
Only a small percentage of products introduced in the market achieve any
degree of sustained market acceptance. Principal competitive factors in the
marketing of software include product features, quality, reliability,
technological sophistication, brand recognition, ease-of-learning, ease-of-
use, merchandising, access to distribution channels and retail shelf space,
marketing, advertising, public relations, price, and the availability and
quality of support services. The Company believes that it competes
effectively in these areas, particularly in the areas of quality, brand
recognition, ease-of-learning, ease-of-use, merchandising, access to
distribution channels and retail shelf space. To the extent that competitors
achieve performance, price, or other selling advantages, the Company could be
adversely affected. There can be no assurance that the Company will have the
resources required to respond to market or technological changes or to
compete successfully in the future. In addition, increasing competition in
the small business software market may cause prices to fall, which could
adversely affect the Company.
PROPRIETARY RIGHTS AND LICENSES
The Company relies primarily on a combination of trademark, copyright, and
trade secret laws, employee and third-party nondisclosure agreements, and
other methods to protect its proprietary rights. The Company does not
include in its products any mechanism to prevent or inhibit unauthorized
copying. Unauthorized copying occurs within the software industry, and if a
significant amount of unauthorized copying of the Company's products were to
occur, the Company could be adversely affected. In addition, as the number
of software products in the industry increases and the functionality of these
products further overlaps, software developers and publishers may
increasingly become subject to infringement claims. There can be no
assurance that third parties will not assert infringement claims against the
Company in the future with respect to current or future products. Use of
third-party coders may increase the risk of infringement of the rights of
others. The third-party coders' liabilities to the Company for any
infringement of copyrights, trade secrets, or patents is contractually
limited to royalties received from the Company.
Although the Company has not been the target of any actual, pending, or
threatened intellectual property litigation, there has been substantial
litigation regarding copyrights, trademark, and other intellectual property
rights involving other computer software companies. Any such claims or
litigation, with or without merit, could be costly and could divert
management's attention, which could have a material adverse effect on the
Company. Adverse determinations in such claims or litigation could also have
a material adverse effect on the Company.
EMPLOYEES
As of December 31, 1997, the Company employed 67 full-time employees and 4
part-time employees. Of the Company's full-time employees, 31 are in sales
and marketing, 18 are in development, 5 are in customer support, 9 are in
administration and finance, and 4 are in operations. None of the Company's
employees is represented by a collective bargaining agreement, nor has the
Company ever experienced any work stoppage. The Company believes that it has
good employee relations.
<PAGE>
RISK FACTORS
The following risk factors should be considered carefully in addition to the
other information contained in this Form 10-KSB.
Emerging Market; Uncertainty of Market Acceptance
The Company's success is dependent on the market acceptance of its new and
existing products. The majority of the Company's revenues are derived from
the sale of task-specific software applications for small businesses and
Internet page authors. The market for such products is relatively
undeveloped, making it difficult to predict with any assurance the future
size of the market. The Company's focus on a small number of core products
heightens exposure to these market development and product acceptance risks.
Furthermore, because the success of a majority of the Company's current and
planned products depends upon continued use by small businesses of
traditional mailing vehicles in the conduct of their businesses, increased
use of competing means, such as the Internet and other means of electronic
communications, could adversely affect the Company. The Company embraces a
strategy of building brand name recognition primarily through the use of
consumer marketing techniques. This strategy is likely to require increased
sales and marketing expenditures. There can be no assurance that the Company
will be able to build brand recognition successfully, or that its marketing
strategy will be successful. There also can be no assurance that the
Company's existing products will achieve broad-based market acceptance, that
sales of such products will continue at historical rates or that the Company
will introduce new products that achieve significant market acceptance in the
future.
The Company's success is increasingly dependent upon its ability to secure
arrangements with OEM partners that distribute the Company's products. These
relationships allow the Company to generate additional revenues, expand its
target market for annuity-based products and services, and build awareness
of the MySoftware brand. OEM revenues accounted for 8.5% of the Company's
revenues in 1997. The market for these relationships is highly competitive,
and there can be no assurance that the Company will be successful in
sustaining existing relationships or creating new relationships in the
future. Although revenues from international sales of the Company's products
have been insignificant in the past, the Company plans to seek out various
international partners for the localization, marketing, and distribution of
the Company's products. The markets that the Company plans to penetrate are
highly fragmented and very competitive. There can be no assurance that the
Company will be successful in penetrating these international markets.
Changes in Technology and Industry Standards; Timing and Quality of New
Product Offerings
The Company believes that its future success will depend in large part upon
its ability to keep pace with competitive offerings, to adapt to new
operating systems, hardware platforms, media, and industry standards, and to
provide additional functionality by enhancing its existing products and
introducing new products on a timely basis. The development cycle for
products utilizing new operating systems or formats may be significantly
longer than the Company's current development cycle for products on existing
operating systems and formats. If the Company were unable to develop such
products in a timely manner due to resource constraints or technological or
other reasons, this inability would have a material adverse effect on the
Company. Failure to develop and introduce new products and product
enhancements in a timely fashion could result in significant product returns
and inventory obsolescence and could have a material adverse effect on the
Company. In addition, introduction or anticipation of new or improved
products by others could also result in lower sales and increased product
returns.
Dependence on Postal Regulations and Availability of Postal Information
The Company's line of mailing products, which in the aggregate accounted for
25.8% of the Company's net revenues from domestic distributors and retailers
in 1997, have been developed based on current USPS regulations ("Postal
Service regulations"). Changes in Postal Service regulations, which
historically have occurred frequently, could necessitate updating these
products or could eliminate or reduce the usefulness of these products, which
<PAGE>
could adversely affect the Company's operating results. The Company licenses
from an independent third-party address information and certain software code
embodied in the MyDeluxeMailList, MyMailManager, and Mail Tools products that
perform address corrections, add ZIP+4 Codes and supply delivery point bar
codes. There can be no assurance that the Company will be able to maintain or
renew its relationship with this third party or that the code and information
licensed to the Company will be error free or perform to the Company's
specifications or in accordance with Postal Service regulations. Significant
changes in Postal Service regulations or the inability to maintain or renew
its relations with the independent party on acceptable terms or at all could
have a material adverse effect on the Company. The Company must also obtain
Postal Service certification on a bi-monthly basis in order to be able to
supply MyMailManager, MyDeluxeMailList, MyAdvancedMailList, and Mail Tools
users with CD-ROM updates in a timely manner. There can be no assurance that
the Company will be able to continue to secure such certification on a timely
basis, if at all, and the failure to do so could have a material adverse effect
on the Company. Moreover, increased adoption of facsimile, electronic mail,
or other alternative communications technologies could result in reduced use
of the postal system, thereby adversely affecting the market for the Company's
mailing products.
Fluctuations in Operating Results
The Company has experienced, and may continue to experience, significant
fluctuations in operating results due to a variety of factors. These factors
include: the size and rate of growth of the market for task-specific
applications for small businesses and of the software market generally;
market acceptance of the Company's products and those of its competitors; the
timing and number of product enhancements and new product introductions by
the Company and its competitors; the timing and extent of development and
promotional expenses; product returns; changes in pricing policies by the
Company and its competitors; accuracy of retailers' forecasts of consumer
demand; timing of the receipt of orders from major retailer and distributor
customers; cancellations or terminations by retail or distributor accounts;
shelf space reductions; and delays in shipment. Products generally are
shipped as orders are received, and accordingly, the Company historically
has operated with little backlog. As a result, net revenues in any quarter
are dependent on orders booked and shipped in that quarter. A significant
portion of the Company's operating expenses are relatively fixed, and planned
expenditures are based, in part, on expectations with regard to future sales.
As a result, if net revenues do not meet the Company's expectations in any
given quarter, operating results may be materially adversely affected. The
Company's operating results can also be affected substantially by the timing
of new product introductions, which may result in substantial increases in
product returns and higher selling and marketing expenses. In response to
competitive pressure, the Company may also take certain pricing or marketing
actions that could have a material adverse effect on the Company. There can
be no assurance that the Company will achieve consistent profitability on a
quarterly or annual basis.
Competition
The market for the Company's products is intensely competitive, and is
characterized by pressure to increase marketing and promotional activities,
incorporate new features, release new product versions, and reduce prices.
Existing software companies may broaden or enhance their product lines to
compete with the Company's products, and other potential new competitors,
including computer hardware manufacturers, diversified media companies, and
small business service companies, may enter or increase their focus on the
small business software market, resulting in even greater competition for the
Company. The Company's software products compete with task-specific products
sold by Avery (labeling software), Intuit (invoicing/estimating software),
The Learning Company (business card and labeling software), Broderbund
(brochure/marketing material software), and several other companies of
varying size and financial and marketing strength. The Company's products
also compete with general purpose programs, such as word processing, database
and desktop publishing products from major software companies, including
Adobe, Lotus, Microsoft, and Corel. The Company believes that it would face
increased competition from such general purpose programs if such programs
were designed for greater ease-of-use of task-specific functions. In
addition, new operating systems or technologies may incorporate features
enabling users to accomplish small business marketing and other tasks
currently addressed by the Company's software products.
<PAGE>
The Company's strategy of focusing on its core and complementary products
heightens the competitive risk. Many of the companies with which the Company
currently competes, or may compete in the future, have greater financial,
technical, marketing, sales and customer support resources, as well as
greater name recognition and access to customers than the Company. To the
extent that competitors achieve performance, price, or other selling
advantages, the Company could be adversely affected. There can be no
assurance that the Company will have the resources required to respond
effectively to market or technological changes or to compete successfully in
the future. In addition, increasing competition in the market for task-
specific applications may cause prices to fall, which may adversely affect
the Company. The competition for retail shelf space and direct Internet
selling is also likely to increase due to the proliferation of software
products and companies. Failure to achieve and maintain retail sales volumes
may result in loss of shelf space which may, in turn, lead to further
reductions in sales volumes.
Dependence on Limited Distribution and Retail Channels
Sales to a limited number of distributors and retailers have constituted, and
are anticipated to continue to constitute, a significant share of the
Company's net revenues from software. There is an increasing number of
software products competing for access to these channels. Retailers of the
Company's products typically have a limited amount of shelf space and
promotional resources, and there is intense competition for shelf space and
promotional support from retailers. Some distributors control access to
shelf space of certain retailers, and termination of the Company's
relationship with a particular distributor may prevent the Company from
obtaining shelf space in some retail outlets. As a result, retailers and
distributors increasingly are in a better position to negotiate favorable
terms of sale, including price discounts and product-return policies. Since
task-specific applications for small businesses constitute a relatively small
percentage of these retailers' sales volumes, there can be no assurance that
such retailers will continue to purchase the Company's products or provide
the Company's products with high quality and adequate levels of shelf space
and promotional support. The Company has nonexclusive arrangements with its
distributors and retailers which generally do not require minimum purchases
of the Company's products and which may be terminated at any time. In
addition, other types of retail outlets and methods of product distribution
may become important in the future, such as the Internet, online services,
and other electronic distribution services. The Company's success will
depend, in part, upon its ability to maintain access to existing channels of
distribution and gain access to new channels if and when they develop.
Dependence on the Internet
The success of the Company's future mailing-related products and services may
rely on Internet distribution. The failure of Internet usage to grow could
have a material adverse effect on the Company.
Customer Concentration; Credit Risk
The Company sells its products principally to a limited number of major
retailers and to distributors for resale to retailers. Such sales have
constituted, and may continue to constitute, a majority of the Company's net
revenues. In 1997, one distributor accounted for 61% of net revenues, and
one retailer accounted for 20% of net revenues. None of the Company's
distributors or retailers has a minimum purchase obligation. The loss of, or
significant reduction in, sales volume attributable to any of the Company's
principal distributors or retail accounts could materially and adversely
affect the Company.
The Company's sales are made on credit terms, and the Company does not hold
collateral to secure payment. Although the Company currently maintains
accounts receivable insurance that covers a portion of its accounts, there
can be no assurance that the Company will be able to maintain or increase such
insurance on acceptable terms or at all. The inability to collect any
significant receivable in a timely manner could adversely affect the Company.
A majority of the Company's software sales are made through retailers. The
Company could be adversely affected if an alternative channel for
distribution of software were to become a major vehicle for distributing
software.
<PAGE>
Risk of Product Returns
The Company has various stock balancing terms with distributors and retailers
that allow distributors and retailers certain rights to return products.
There can be no assurance that retailers and distributors will not seek and
obtain additional return and credit rights. The Company also provides end
users with a 30-day money-back guarantee. It is difficult for the Company to
ascertain current demand for its existing products, predict demand for newly
introduced products or verify that inventories are appropriate for actual
demand levels. Accordingly, the Company is exposed to the risk of product
returns from retailers and distributors, particularly during times of product
transition. In addition, promotional or other activities of competitors could
cause returns to increase sharply at any time. The Company establishes
reserves based on estimated future returns of products, taking into account
promotional activities, the timing of new product introductions, distributor
and retailer inventories of the Company's products, and other factors.
Product returns that exceed the Company's reserves could adversely affect the
Company's operating results and financial condition.
Dependence on External Coding Contractors
The Company generally develops internally the specifications for both new
products and updates of its existing products. The Company relies primarily
on three independent firms to perform the majority of the coding for its
software products, including coding for new products and bug fixes,
maintenance and updates for existing products. While the Company generally
owns the code that is developed by these firms, the base code used in
developing the Company's brochures and business cards products is owned by
the third-party coder, subject to a non-exclusive license to the Company.
Although the agreement with that firm contains various protective terms,
there can be no assurance that such provisions will effectively protect the
Company's interests. The need to update the Company's products over time,
both for enhanced functionality and to take advantage of new operating
platforms, increases the Company's dependence on these third-party coders.
The Company may have less control over the scheduling and quality of the work
of independent coders than it does over its own employees, and there can be
no assurance that such coders will complete products for the Company on a
timely basis, within acceptable guidelines, or at all. In addition, many
independent coders have limited financial resources, which exposes the
Company to the risk that such coders may go out of business prior to
completing a project or require larger pre-payments from the Company.
As independent coders are in high demand, there can be no assurance that
independent coders, including those which have developed products for the
Company in the past, will be available to provide coding services to the
Company in the future. The Company has compensated third-party coders
primarily through royalty payments, which have been partially prepaid to
cover their costs. Even if the Company is able to secure coding services,
increased demand for these services may allow third-party coders to negotiate
more advantageous terms. There can be no assurance that the Company will be
able to obtain or renew such coding agreements on favorable terms, or at all.
Capitalized Software Production Costs
The Company makes payments to third party developers for software production
costs. These payments are capitalized upon the establishment of technological
feasibility, which is defined by the Company as the completion of a detailed
design specification of the software and are amortized to cost of revenues
during the period that the related product revenues are recognized. The on-
going assessment of the realizability of these costs requires considerable
judgment related to anticipated future product revenues, estimated economic
lives, and changes in hardware and software technology. In the event that the
future product revenues do not meet the anticipated forecasts, the
unamortized software production costs could adversely affect the Company's
financial statements. For example, the Company had a writeoff of $1,296,000
in 1997.
Dependence on Third-Party Service Providers and Supplies
The Company relies on external service providers to perform most of its
customer technical support and product assembly functions. One independent
firm provides substantially all customer technical support for the Company's
software products. The Company's agreement with this firm is terminable on
30 days' notice by either party. This contractor also provides services to
several larger companies, and there can be no assurance that demands from
such companies or other factors will not result in termination by such
<PAGE>
contractor of its relationship with the Company. The unavailability of such
firm to perform customer technical support for the Company would result in
significant disruption to the Company's operations, could lead to customer
dissatisfaction and could have a material adverse effect on the Company. The
Company relies on two printers for packaging and two assembly houses to
assemble and package its products and has only limited sources for some of
its supplies. The Company does not have contracts with such assembly houses
or suppliers. All of the Company's inventory of packaging components is
maintained at third-party facilities. The Company's ability to assemble and
package its products is dependent on continued relationships with these third
parties. The failure of such third-party vendors to continue to provide
supplies and services to the Company on a timely basis could have a material
adverse effect on the Company.
Dependence on Key Personnel
The Company's success depends to a significant extent on the performance and
continued service of its senior management and certain key employees.
Competition for highly skilled employees with technical, management,
marketing, sales, product development, and other specialized skills is
intense, and there can be no assurance that the Company will be successful in
attracting and retaining such personnel. In addition, there can be no
assurance that employees will not leave the Company or, after leaving,
compete against the Company. The Company's failure to attract additional
qualified employees or to retain the services of key personnel could have a
material adverse effect on the Company.
Management of Growth
The Company has experienced periods of growth that have placed, and could
continue to place, a significant strain on the Company's financial,
management, and other resources. The Company may attempt to hire additional
key personnel in high level management positions in the future. The Company's
ability to manage its growth effectively will require it to continue to
improve its operations and financial management information systems, and to
attract, train, motivate, manage, and retain key employees. If the Company's
management were to become unable to manage growth effectively, the Company
could be adversely affected.
Limited Protection of Intellectual Property and Proprietary Rights
The Company relies primarily on a combination of trademarks, copyright and
trade secret laws, employee and third-party nondisclosure agreements and
other methods to protect its proprietary rights. The Company does not
include in its products any mechanism to prevent or inhibit unauthorized
copying. Unauthorized copying occurs within the software industry, and if a
significant amount of unauthorized copying of the Company's products were to
occur, the Company could be adversely affected. In addition, as the number
of software products in the industry increases and the functionality of these
products further overlaps, software developers, and publishers may
increasingly become subject to infringement claims. There can be no
assurance that third parties will not assert infringement claims against the
Company in the future with respect to current or future products. Use of
third-party coders may increase the risk of infringement. In the event that
the Company's third party coders were to use infringing code in the Company's
products, the Company could be required to pay damage or be subject to an
injunction to prevent the Company from shipping its products. The third-
party coders' liability to the Company for any infringement of copyrights,
trade secrets, or patents is contractually limited to amounts received from
the Company. Although the Company has not been the target of any actual,
pending, or threatened intellectual property litigation, there has been
substantial litigation regarding copyright, trademark, and other intellectual
property rights involving computer software companies. Any such claims or
litigation, with or without merit, could be costly and a diversion of
management's attention, which could have a material adverse effect on the
Company. Adverse determinations in such claims or litigation could also have
a material adverse effect on the Company.
As part of the Company's general branding strategy, it attempts to limit the
use of the "My" prefix by others in the software field. If the Company is
unsuccessful in these efforts, the value of the Company's brand could be
materially impacted.
<PAGE>
Possible Volatility of Stock Price
The Company believes factors such as quarterly fluctuations in its revenues
or results of operations, general conditions in the computer hardware and
software industries, and announcements of new products by the Company or by
its competitors may cause the market price of the Common Stock to fluctuate,
perhaps substantially. In addition, in recent years the stock market in
general, and the prices of the stocks of technology companies in particular,
have experienced large price fluctuations, sometimes without regard to the
fundamentals of the particular company. These broad market and industry
fluctuations may adversely affect the market price of the Company's Common
Stock.
Anti-Takeover Provisions
The Company's Board of Directors has the authority to issue up to 2,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
and privileges of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. Issuance of shares of Preferred
Stock could have the effect of making it more difficult for a third party to
acquire a majority of outstanding voting stock of the Company. In addition,
the Company is subject to anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which prohibits the Company from engaging
in a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. The application of Section 203 also could have the effect
of delaying or preventing a change of control of the Company. Certain other
provisions of the Company's Certificate of Incorporation may have the effect
of delaying or preventing changes in control or management of the Company,
which could adversely affect the market price of the Company's Stock.
<PAGE>
ITEM 2. PROPERTIES
As of December 31, 1997 MySoftware leased approximately 20,000 square feet of
office space in Palo Alto, California, which facility includes its executive
offices, marketing, sales, product development, and customer support. In
addition, the Company also leased approximately 3,000 square feet of office
space in San Francisco for its marketing, product development, and Web
selling group for its Internet products. The Company entered into an
agreement to lease its facilities under a certain non-cancelable operating
lease extending through 2000.
ITEM 3. LEGAL PROCEEDINGS
MySoftware is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Since the Company's initial public offering of its Common Stock on June 15,
1995, the Company's Common Stock has been traded on the Nasdaq National
Market (Nasdaq") under the symbol "MYSW." As of December 31, 1997 there were
45 record holders of the Company's Common Stock. As of the same date,
4,235,856 shares of Common Stock were outstanding out of 20,000,000 shares of
Common Stock authorized.
The following table sets forth the range of high and low sales prices per
share of Common Stock for each of the periods indicated, as reported by
Nasdaq.
<TABLE>
<CAPTION>
High Low
_________________________________________________________
<S> <C> <C>
1995 by quarter:
Second $14.25 $12.00
Third 14.50 10.50
Fourth 15.50 10.50
1996 by quarter:
First $13.25 $ 4.63
Second 9.25 5.75
Third 6.50 3.50
Fourth 5.25 3.50
1997 by quarter:
First $4.38 $ 2.25
Second 3.25 2.06
Third 2.48 1.56
Fourth 4.25 1.88
</TABLE>
DIVIDEND POLICY
Prior to its initial public offering, the Company made distributions as a S
corporation from undistributed earnings to its stockholders, including
amounts to fund the payments of their individual tax liabilities attributable
to their allocation of the Company's income. Such distributions totaled
$2,815,000 and $200,000 (less contributions of $200,000) in 1995 and 1994,
respectively. Upon completion of its initial public offering, the Company
terminated its S corporation status. Future earnings will be retained for use
in the Company's business, and the Company does not intend to pay any cash
dividends on its Common Stock for the foreseeable future.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
MySoftware designs, markets and supports a family of leading task-specific
software applications for small businesses, including home-based businesses.
The Company provides users with powerful, easy-to-learn and easy-to-use
solutions for business mailers, including tools for mail list management,
tools for postage cost savings and tools for creating brochures, stationery,
and postcards. The Company also provides productivity tools for labels,
invoices/estimates, Internet home pages, Web-based resumes and Web-based
calendars. The Company's products are fully featured to meet the requirements
of a particular task, yet they are easy to learn and easy to use. MySoftware
places significant emphasis on consumer marketing techniques in developing
products and building brand awareness. The Company's products are distributed
primarily through computer software and office supply retailers, and are
currently sold in approximately 5,000 stores throughout the United States and
Canada.
Fiscal 1997 was a period during which the Company continued to emphasize
investment in product development and to introduce new products both within
existing software product categories and in its Internet tools category.
MySoftware introduced three new products under the ProVenture brand in June
1997 - Custom Business Stationery, Mail Tools and Billing Solution - and
introduced MyMailList & Address Book in December 1997. The Company also
introduced two new Internet-related products under the Pacifica brand:
Professional WebResume in August 1997 and WebCalendar in November 1997.
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other parts of this Annual Report contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed elsewhere herein.
NET REVENUES
MySoftware's net revenues decreased 4% to $12.4 million in 1997, compared to
$12.9 million in 1996. The Company's net revenues decreased 4% in 1996 from
$13.4 million in 1995. The Company generates revenues primarily through the
sale of software products to retailers and to distributors for resale to
retailers. Approximately 5% of software sales are made directly to end-users.
Additional revenues are generated by sales of complementary products, such as
address-correction CD-ROM's, invoice forms and checks, and other supplies and
related services. The Company also earns revenues from sales of its products
by strategic partners who typically bundle MySoftware products with their own
to offer their small business customers a premium. Sales of software products
represented 81.3%, 81.6% and 85.2% of net revenues in 1997, 1996 and 1995
respectively.
The decrease in net revenues in 1997 compared to 1996 was primarily the
result of softness in the retail market for the Company's products. The
decrease in net revenues in 1996 compared to 1995 was primarily the result of
uncertainty in the retail channel, which resulted in decreased sales in the
fourth quarter of 1996.
GROSS PROFITS
The Company's gross profit margins were 53.6% in 1997, compared to 69.3% in
1996 and 74.7% in 1995. The decline in gross profit margin in 1997 from 1996
was primarily due to the write-off of software production costs related to
product development. Software margins declined in 1996 compared to 1995
primarily due to a change in the freight arrangements with certain customers.
<PAGE>
PRODUCT DEVELOPMENT EXPENSES
The Company's product development expenses were $2.2 million in 1997,
compared to $2.0 million in 1996 and $1.3 million in 1995. As a percent of
net revenues, product development expenses were 18.0% in 1997, compared to
15.4% in 1996 and 10.0% in 1995. The increases in both 1997 and 1996 from the
previous years were primarily the result of lower revenues and the increased
expense of developing new products in both existing and new product
categories.
Much of the Company's product development costs are coding costs paid to
outside contractors. These costs have been capitalized and amortized to the
cost of revenues as the corresponding products are sold. The Company
includes the costs of identifying and validating product concepts and
features in sales and marketing expenses.
SALES AND MARKETING EXPENSES
Sales and marketing expenses were $6.4 million in 1997, compared to $6.3
million in 1996 and $5.2 million in 1995, representing 51.5%, 48.7% and 39.0%
of net revenues, respectively. Sales and marketing expenses have increased
over time to support the Company's expansion of products and increase its
brand name recognition. The increases in these expenses as a percentage of
net revenues in both 1997 and 1996 from the previous years were primarily
because of the Company's efforts to introduce new products.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $2.2 million in 1997, $1.8 million
in 1996 and $1.4 million in 1995, representing 17.7%, 14.2% and 10.7% of net
revenues, respectively. The increases in general and administrative expenses
in 1997 compared to 1996 and in 1996 compared to 1995 are attributable to
expenses incurred to support the Company's creation of a division in San
Francisco to publish Internet-related products. In 1997, the Company incurred
$193,000 of restructuring expenses associated with the closing of the San
Francisco division.
ACQUIRED TECHNOLOGY
In January of 1996, the Company wrote off acquired technology in the amount
of $255,000, resulting from the Company's acquisition of technology which had
not reached technological feasibility from MediaTech, Inc., an Internet
publishing tools company.
INTEREST INCOME
Interest income was $309,000 in 1997, compared to $397,000 in 1996 and
$277,000 in 1995. The decrease in interest income in 1997 from 1996 was the
result of lower average cash balances during the year. The increase in 1996
from 1995 was attributable to the investment of the proceeds of the Company's
initial public offering in June 1995.
PROVISION FOR INCOME TAXES AND PRO FORMA INCOME TAXES
Based on the results of the current year operations and uncertainty of future
realization of the deferred tax assets, the Company's management does not
believe that it is likely that the sufficient future taxable income will be
generated to realize all of the net deferred tax assets. Accordingly, a full
valuation allowance was established in 1997.
On June 15, 1995, the Company terminated its status as a Subchapter S
corporation. During the remainder of 1995, the Company was fully subject to
federal and state income taxes. The pro forma income taxes reflect provisions
for income taxes as if the Company had been a C corporation, fully subject to
federal and state income taxes, during all of 1995 and 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of financing have been net cash from
operations, and in 1995, the proceeds from its initial public offering of
common stock. Operating activities used cash of $1.3 million in 1997, and
<PAGE>
generated cash of $1.4 million in 1996 and $1.2 million in 1995. The
Company's cash and cash equivalents balance was $5.0 million on December 31,
1997.
RECENT ACCOUNTING PRONOUNCEMENT
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 97-2, "Software Revenue Recognition." SOP 97-2
establishes standards relating to the recognition of all aspects of software
revenue. SOP 97-2 is effective for transactions entered into in fiscal years
beginning after December 15, 1997. The Company has not yet determined the
impact of SOP 97-2 on its revenue recognition policy or its results of
operations.
YEAR 2000 ISSUES
The Company has considered the impact of Year 2000 on its computer systems
and applications and has developed a remediation plan. Conversion and
testing activities are in process and the Company expects to complete the
process within a reasonable time. Expenditure in 1997 was not material and
the expenditures in 1998 and 1999 are also not expected to be material.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements included herein beginning on page 28.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Information with respect to Directors may be found in the section captioned
"Election of Directors" appearing in the definitive Proxy Statement to be
delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held on May 21, 1998. Such information is incorporated
herein by reference.
EXECUTIVE OFFICERS
The executive officers of the Company as of March 26, 1998 are as follows:
NAME AGE POSITION
- ----------------------- ------- ---------------------------------------
Gregory W. Slayton 38 President, Chief Executive Officer and
Director
Thomas C. Hoster 47 Vice President and Chief Financial Officer
and Secretary
A biography of the principal occupation for the past five years of each of
the executive officers is provided below.
Gregory W. Slayton joined the Company as President and Chief Executive
Officer and has served as a member of the Company's Board of Directors since
December 1997. Mr. Slayton has been a director of Synesis Management
Consulting since July 1997 and of Digital Oil Technologies since August 1997.
From March 1996 to July 1997, Mr. Slayton was the President, Chief Operating
Officer, and a member of the Board for ParaGraph International. From December
1995 to March 1996, Mr. Slayton also served as the Interim President and
Chief Executive Officer of Velocity, Inc. Mr. Slayton co-founded Worlds, Inc.
in August 1994 and served as Senior Vice President and Chief Financial
Officer from its inception to November 1995. Prior to founding Worlds, Inc.,
Mr. Slayton served as Vice President and Chief Financial Officer at Paramount
Technology Group of Paramount Communications Inc. Prior to that time, Mr.
Slayton was a management consultant with McKinsey & Company for four years.
Mr. Slayton holds a Bachelors of Arts in Economics from Dartmouth College
magna cum laude and a Masters of Business Administration with Honors from
Harvard Business School.
Thomas C. Hoster has served as Vice President and Chief Financial Officer
since joining the Company in July 1996 and as its Secretary since May 1997.
Prior to that time, Mr. Hoster held a number of Finance and Administration
positions at Octel Communications Corporation, a manufacturer of voice mail
equipment, including Treasurer, Director of Investor Relations, General
Manager of Octel Capital, and Director of Customer Administration. Prior to
that, Mr. Hoster was Executive Vice President of Mid-America Federal in
Columbus, Ohio, and Vice President of Chemical Bank in New York. Mr. Hoster
has a Bachelors in Electrical Engineering from Princeton University and a
Masters of Business Administration from Stanford University.
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Information with respect to this item will be set forth in the Company's
Proxy Statement for its Annual Meeting of Stockholders to be held on May 21,
1998, and is incorporated herein by reference.
ITEM 11. SECURITIES OF OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item will be set forth in the Company's
Proxy Statement for its Annual Meeting of Stockholders to be held on May 21,
1998, and is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item will be set forth in the Company's
Proxy Statement for its Annual Meeting of Stockholders to be held on May 21,
1998, and is incorporated herein by reference.
<PAGE>
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
1. Financial Statements
Independent Auditors' Report 29
Balance Sheets
December 31, 1997 and 1996 30
Statements of Operations
Years Ended December 31, 1997, 1996 and 1995 31
Statements of Stockholders' Equity
Years Ended December 31, 1997, 1996 and 1995 32
Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995 33
Notes to Financial Statements 34
2. Exhibits:
See Exhibits Index on page 45. The Exhibits listed in the
accompanying Exhibits Index are filed or incorporated by reference
as part of this report.
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the quarter ended
December 31, 1997.
<PAGE>
SIGNATURES
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, in the City of
Palo Alto, California, on the 26th day of March 1998.
MYSOFTWARE COMPANY
BY /s/ Gregory W. Slayton
--------------------------
Gregory W. Slayton
President and Chief Executive Officer
<PAGE>
SIGNATURES
(Continued)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 26th day of March 1998.
Signature Title
- -------------------------- -----------------------------------------------
/s/ David P. Mans Chairman of the Board of Directors
- --------------------------
David P. Mans
/s/ Gregory W. Slayton President, Chief Executive Officer and Director
- --------------------------
Gregory W. Slayton (Principal Executive Officer)
/s/ Thomas C. Hoster Vice President and Chief Financial Officer
- --------------------------
Thomas C. Hoster (Principal Financial and Accounting Officer)
/s/ James F. Willenborg Director
- --------------------------
James F. Willenborg
/s/ Donald F. Wood Director
- --------------------------
Donald F. Wood
/s/ John J. Katsaros Director
- --------------------------
John J. Katsaros
<PAGE>
FINANCIAL STATEMENTS
As required under Item 7. Financial Statements and Supplementary Data, the
financial statements of the Company are provided in this separate section.
The financial statements included in this section are as follows:
Sequentially
Numbered
Financial Statement Description Page
- ---------------------------------------------------------------------------
Independent Auditors' Report 29
Balance Sheets
December 31, 1997 and 1996 30
Statements of Operations
Years Ended December 31, 1997, 1996 and 1995 31
Statements of Stockholders' Equity
Years Ended December 31, 1997, 1996 and 1995 32
Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995 33
Notes to Financial Statements 34
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
MySoftware Company:
We have audited the accompanying balance sheets of MySoftware Company as of
December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MySoftware Company as of
December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1997,
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Mountain View, California
February 6, 1998
<PAGE>
<TABLE>
MYSOFTWARE COMPANY
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5,034,828 $ 7,718,441
Accounts receivable, net 1,031,286 1,242,226
Inventories 620,781 596,136
Other current assets 1,019,089 820,588
Deferred income taxes --- 307,733
------------ ------------
Total current assets 7,705,984 10,685,124
Property and equipment, net 278,287 354,482
Other assets 674,131 1,369,593
------------ ------------
Total assets $ 8,658,402 $ 12,409,199
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 848,045 $ 729,467
Accrued compensation 464,379 388,394
Other accrued liabilities 2,654,839 2,550,781
------------ ------------
Total current liabilities 3,967,263 3,668,642
Deferred income taxes --- 25,388
Stockholders' equity:
Preferred stock: $0.001 par value; 2,000,000
shares authorized; none outstanding --- ---
Common stock: $0.001 par value; 20,000,000
shares authorized; 4,235,856 and 4,233,366
shares issued and outstanding, respectively 4,236 4,234
Additional paid-in capital 8,568,393 8,561,503
Retained earnings (accumulated deficit) (3,881,490) 149,432
------------ ------------
Total stockholders' equity 4,691,139 8,715,169
------------ ------------
Total liabilities and stockholders' equity $ 8,658,402 $ 12,409,199
============ ============
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
MYSOFTWARE COMPANY
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net revenues $ 12,353,090 $ 12,872,575 $ 13,398,955
Cost of revenues 5,737,570 3,951,241 3,395,783
------------ ------------ ------------
Gross profit 6,615,520 8,921,334 10,003,172
------------ ------------ ------------
Operating expenses:
Product development 2,221,712 1,988,881 1,342,045
Sales and marketing 6,356,201 6,270,939 5,224,470
General and administrative 2,184,769 1,831,183 1,434,058
Restructuring charge 193,000 --- ---
Write-off of acquired technology --- 255,000 ---
------------ ------------ ------------
Total operating expenses 10,955,682 10,346,003 8,000,573
------------ ------------ ------------
Operating income (loss) (4,340,162) (1,424,669) 2,002,599
Interest income, net 309,240 397,586 276,726
------------ ------------ ------------
Income (loss) before taxes (4,030,922) (1,027,083) 2,279,325
Income tax expense (benefit) --- (72,000) 304,158
------------ ------------ ------------
Net income (loss) $ (4,030,922) $ (955,083) $ 1,975,167
============= ============ ============
Net loss per share-basic
and diluted $ (0.95) $ (0.23)
============= ============
Shares used in computing net
loss per share-basic
and diluted 4,233,366 4,233,486
============= ============
Pro forma net income data (unaudited):
Income before taxes as reported $ 2,279,325
Pro forma income taxes 809,160
------------
Pro forma net income $ 1,470,165
============
Pro forma net income per share-basic $ 0.39
============
Pro forma net income per share-diluted $ 0.37
============
Shares used in computing pro forma net income
per share-basic 3,711,307
============
Shares used in computing pro forma net income
per share-diluted 3,937,948
============
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
MYSOFTWARE COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
<CAPTION>
Retained
Additional Earnings Total
Common Stock Paid-in (Accumulated) Stockholders'
Shares Amount Capital Deficit) Equity
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances as of
December 31, 1994 3,218,530 $ 3,219 $ 250,110 $ 730,171 $ 983,500
Stockholder distributions --- --- (1,214,560) (1,600,823) (2,815,383)
Initial public offering,
net of issuance costs 1,000,000 1,000 9,439,375 --- 9,440,375
Exercise of stock
options 12,836 13 22,541 --- 22,554
Tax benefit from
exercise of options --- --- 64,037 --- 64,037
Net income --- --- --- 1,975,167 1,975,167
---------- ------- ---------- ---------- -----------
Balances as of
December 31, 1995 4,231,366 4,232 8,561,503 1,104,515 9,670,250
Exercise of stock
options 2,000 2 --- --- 2
Net loss --- --- --- (955,083) (955,083)
---------- ------- ---------- ---------- -----------
Balances as of
December 31, 1996 4,233,366 4,234 8,561,503 149,432 8,715,169
Exercise of stock
options 2,500 2 6,890 --- 6,892
Net loss --- --- --- (4,030,922) (4,030,922)
---------- ------- ---------- ---------- -----------
Balances as of
December 31, 1997 4,235,866 $ 4,236 $ 8,568,393 $(3,881,490) $ 4,691,139
========== ======= ========== ========== ===========
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
MYSOFTWARE COMPANY
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
<CAPTION>
Cash flows from operating activities: 1997 1996 1995
------------- ----------- -----------
<S> <C> <C> <C>
Net income (loss) $ (4,030,922) $ (955,083) $ 1,975,167
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 2,117,859 658,478 292,845
Provisions for returns and doubtful
accounts (57,002) 1,594,777 1,235,000
Deferred income taxes 282,345 149,460 (431,805)
Changes in operating assets and liabilities:
Accounts receivable 35,023 595,256 (2,489,294)
Inventories (24,645) (147,623) (168,232)
Other assets (199,001) (667,438) (139,833)
Accounts payable 118,578 (47,924) 295,530
Deferred officers' compensation --- (52,922) (56,778)
Deferred income taxes (25,388) --- ---
Accrued compensation 75,985 46,323 78,978
Other accrued liabilities 362,364 238,766 593,208
---------- --------- ----------
Net cash provided by (used for)
operating activities (1,344,804) 1,412,070 1,184,786
---------- --------- ----------
Cash flows from investing activities:
Additions to property and equipment (55,520) (234,838) (219,912)
Software production costs and other assets(1,290,180) (1,253,117) (742,419)
---------- --------- ----------
Net cash used for investing activities(1,345,700) (1,487,955) (962,331)
---------- --------- ----------
Cash flows from financing activities:
Proceeds from exercise of stock options 6,892 2 22,554
Stockholder distributions --- --- (2,815,383)
Proceeds from IPO, net of issuance costs --- --- 9,440,375
---------- --------- ----------
Net cash provided by financing
activities 6,892 2 6,647,546
---------- --------- ----------
Net increase (decrease) in cash and cash
equivalents (2,683,612) (75,883) 6,870,001
Cash and cash equivalents at beginning
of year 7,718,441 7,794,324 924,323
---------- --------- ----------
Cash and cash equivalents at end of year $ 5,034,829 $ 7,718,441 $ 7,794,324
=========== =========== ===========
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
MYSOFTWARE COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
MySoftware Company (the Company) develops, manufactures and markets small
business application programs. The Company sells its products primarily
through distributors and retail dealers.
Principles of Presentation and Preparation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue Recognition
Revenue from product sales is recognized upon shipment. The Company provides
reserves for estimated returns of products sold to distributors and retail
dealers, and accrues for the estimated costs of providing customer support.
Cash and Cash Equivalents
The Company considers all liquid instruments with an original maturity of 90
days or less to be cash equivalents. Cash equivalents are stated at cost and
consist primarily of money market securities. The carrying amount of cash and
cash equivalents approximates fair value.
Inventories
Inventories, comprising finished goods and packaging materials, are stated at
the lower of first-in, first-out cost or market.
Property and Equipment
Property and equipment, comprised primarily of computer equipment and
furniture, are recorded at cost. Depreciation is provided using the straight-
line method over the estimated useful lives of the respective assets, which
are generally three to five years.
The Company reviews the recoverability of the carrying amount of its property
and equipment assets whenever events or changes in circumstances indicate
that the carrying amount of an asset might not be recoverable. In the event
that facts and circumstances indicate that the carrying amount of assets may
be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows
associated with the asset would be compared to the asset's carrying amount
to determine if a write-down to fair value is required. Fair value is
determined by reference to discounted future cash flows over the remaining
useful life of the related asset.
<PAGE>
MYSOFTWARE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Software Development Costs
In accordance with Statement of Financial Accounting Standards (SFAS) No. 86,
Accounting for the Cost of Capitalized Software to be Sold, Leased, or
Otherwise Marketed, the Company capitalizes its internal software development
costs after technological feasibility has been established. Such amounts to
date have not been significant.
The Company makes payments to third party developers for software production
costs. These payments are capitalized upon the establishment of technological
feasibility, which is defined by the Company as the completion of a detailed
design specification of the software and are amortized to cost of revenues
during the period that the related product revenues are recognized. The
ongoing assessment of the realizability of the costs requires considerable
judgment related to anticipated future product revenues, estimated economic
life, and changes in hardware and software technology. The capitalized
amounts paid to third party developers for the years ended December 31, 1997,
1996 and 1995 aggregated $1,179,660, $1,197,217 and $742,419, respectively.
Accumulated amortization aggregated $861,303 as of December 31, 1997.
Amortization of these software production costs is provided on a product-by-
product basis. Annual amortization is the greater of the amount computed
using the ratio of current product revenue to the total of current and
anticipated future product revenue or the straight-line method over the
remaining estimated economic lives of two years. Amortization expenses for
the years ended December 31, 1997, 1996 and 1995, aggregated $1,986,143,
$538,390 and $241,492, of which a writeoff of $1,296,000 software production
cost was included in 1997's expense. The writeoff was related to certain
products that are not strategic to the Company's future strategy.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations
of credit risk consist primarily of cash equivalents and accounts receivable.
The Company maintains cash and cash equivalents with one financial
institution. Management believes the financial risks associated with such
deposits are minimal. Substantially all of the Company's accounts receivable
are derived from sales to computer software distributors and retailers.
Historically, the Company has not incurred material credit-related losses.
Income Taxes
Income taxes are provided under the asset and liability method, whereby
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
The Company elected to be treated as an S corporation for federal and state
income tax reporting purposes through June 15, 1995. Federal and state income
taxes on the income of an S corporation are generally payable by the
<PAGE>
MYSOFTWARE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
individual stockholders rather than the corporation. Accordingly, only the
California S corporation franchise tax has been provided through the
termination of the S corporation status in June 1995.
The Company's S corporation status terminated upon the closing of the initial
public offering (IPO) of its common stock. The accompanying statement of
operations for the year ended December 31, 1995 include provisions for income
taxes on an unaudited pro forma basis as if the Company were a C corporation,
fully subject to federal and state income taxes.
Net Income (Loss) Per Share and Pro Forma Net Income Per Share
During 1997, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128, Earnings Per Share. SFAS No. 128 requires the presentation of
basic earnings per share (EPS) and, for companies with potentially dilutive
securities, such as options, diluted EPS.
Basic earnings per share is computed using the weighted average number of
shares of common stock and convertible preferred stock outstanding. Diluted
earnings per share is computed using the weighted average number of shares of
common stock outstanding and when dilutive, common equivalent shares from
options to purchase common stock using the treasury stock method. In 1995,
dilutive common equivalent shares amounted to 166,641 shares, of which 86,641
shares related to options outstanding and 80,000 shares related to shares
deemed outstanding to fund final S corporation stockholder distribution.
Effective February 3, 1998, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin (SAB) No. 98, which changes the calculation
of earnings per share in the period prior to initial public offerings as
previously applied under SAB No. 83. When a registrant issued common stock,
warrants, options, or other potentially dilutive instruments for
consideration or with exercise prices below the initial public offering
price, within a one year period prior to the initial filing of a registration
statement relating to an initial public offering, SAB No. 83 required such
equity instruments to be treated as outstanding for all prior periods using
the anticipated initial public offering price and the treasury stock method.
Under SAB No. 98, when common stock, options, warrants, or other potentially
dilutive instruments have been issued for nominal consideration during the
periods covered by income statements in the filing, those nominal issuances
are to be reflected in earnings per share calculations for all periods
presented. Based on the Company's current understanding of the definition of
"nominal consideration," the Company has concluded that during all periods
prior to the Company's initial public offering, no equity instruments were
issued for nominal consideration. Net income per share for periods prior to
the Company's initial public offering have also been restated in accordance
with SAB No. 98.
Stock-Based Compensation
The Company accounts for its stock option plans using the intrinsic value
method.
Fair Value of Financial Instruments
The fair value of the Company's cash, receivables, and accounts payable
approximate the carrying amount due to the relatively short maturity of these
items.
<PAGE>
MYSOFTWARE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
the manner in which public companies report information about operating
segments in annual and interim financial statements. The Company is currently
evaluating the operating segment information that it will be required to
report. The Company will be required to implement SFAS No. 131 for its fiscal
year 1998.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition."
SOP 97-2 establishes standards relating to the recognition of all aspects of
software revenue. SOP 97-2 is effective for transactions entered into in
fiscal years beginning after December 15, 1997. The Company has not yet
determined the impact of SOP 97-2 on its revenue recognition policy or its
results of operations.
Reclassifications
Certain amounts in the 1995 financial statements have been reclassified to
conform with the 1996 and 1997 financial statement presentation.
2. BALANCE SHEET COMPONENTS
Accounts Receivable
A summary of accounts receivable follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Accounts receivable $ 2,310,338 $ 2,345,361
Allowance for returns and
doubtful accounts (1,279,052) (1,103,135)
------------- -------------
$ 1,031,286 $ 1,242,226
============= =============
</TABLE>
Other Current Assets
Other current assets consisted
of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
-------------- -------------
<S> <C> <C>
Prepaid income taxes $ 958,151 $ 693,722
Other 60,938 126,866
-------------- -------------
$ 1,019,089 $ 820,588
============== =============
</TABLE>
<PAGE>
MYSOFTWARE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Other Assets
Other assets consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
------------- ------------
<S> <C> <C>
Software production costs paid to
third party contractors, net of
accumulated amortization $ 642,047 $ 1,307,118
Deposits 32,084 31,584
Software development costs --- 30,891
------------- ------------
$ 674,131 $ 1,369,593
============= ============
</TABLE>
Other Accrued Liabilities
A summary of other accrued liabilities
follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
------------- ------------
<S> <C> <C>
Customer prepayments $ 853,196 $ 1,086,115
Accrued advertising 250,444 430,392
Accrued technical support 151,000 127,000
Deferred revenue 516,510 375,114
Other 883,689 532,160
------------- -----------
$ 2,654,839 $ 2,550,781
============= ===========
</TABLE>
3. STOCKHOLDERS' EQUITY
Stockholder Distributions
As an S corporation, the Company made distributions to its stockholders to
provide them with funds to pay income taxes on corporate earnings. Prior to
the completion of the IPO in June 1995, the Company declared a distribution
payable to the current stockholders of the Company for amount representing a
portion of the previous earned and undistributed S corporation earnings. The
distribution was paid by the Company following the IPO after the amount of
such taxes was determined.
Stock Options
In September 1994, the Company granted five key employees an aggregate of
235,000 common stock options at $1.50 per share, the fair market value of the
Company's common stock on the date of grant. These options vested ratably
over three years and expire 10 years from the grant date.
The Company adopted the 1995 Equity Incentive Plan (the Plan) in April 1995,
and reserved 1,000,000 shares thereunder. The Plan provides for the grant of
incentive stock options to employees of the Company and for the grant of
nonstatutory stock options to employees and consultants of the Company.
<PAGE>
MYSOFTWARE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
The Board of Directors administers the Plan and has the discretion to grant
stock options. Exercise prices may not be less than 100% and 85% of the fair
market value at the date of grant for incentive options and nonstatutory
options, respectively. Options granted under the Plan generally vest over
five years and expire after 10 years.
The Company adopted the 1995 Nonemployee Directors' Plan in April 1995 and
reserved 200,000 shares thereunder. The Nonemployee Directors' Plan provides
for the automatic grant of nonstatutory stock options to nonemployee
directors of the Company at the fair market value of the common stock on the
date of grant. The term of all options granted under the Nonemployee
Directors' Plan may not exceed 10 years or the end of the director's status
as director. In 1997, the Company granted 25,000 options under the
Nonemployee Directors' Plan.
On September 12, 1996, the Company offered its employees a stock option
repricing program that allowed employees to exchange on a one for one share
basis any options priced above the September 17, 1996 closing price of
MySoftware stock, which was $4.00. As a result, approximately 189,000 options
were surrendered by eligible employees for repriced options. The vesting term
for all these repriced options was extended by six months.
The following table summarizes all stock option activities for the 1995
Equity Incentive Plan, the 1995 Nonemployee Directors' Plan and 1994 stock
option grants:
<TABLE>
<CAPTION>
Weighted
average exercise
Stock options price per share
---------------- -------------------
<S> <C> <C>
Outstanding as of December 31, 1994 235,000 $ 1.50
Granted 188,500 8.96
Expired or canceled (9,826) 7.73
Exercised (12,836) 1.76
-------------
Outstanding as of December 31, 1995 400,838 4.85
Granted 380,450 4.68
Expired or canceled (220,531) 7.96
Exercised (2,000) 4.00
-------------
Outstanding as of December 31, 1996 558,757 3.51
Granted 584,000 2.48
Expired or canceled (103,557) 3.73
Exercised (2,500) 1.50
-------------
Outstanding as of December 31, 1997 1,036,700 2.91
=============
Available for grant at:
December 31, 1997 380,964
=============
</TABLE>
<PAGE>
MYSOFTWARE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
The following table summarizes information about stock options outstanding as
of December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- ------------------------
Range of Weighted-Avg. Weighted- Weighted-Avg.
Exercise Number Remaining Average Number Exercise
Prices Outstanding Contractual Life Exercise Price Exercisable Price
- --------- ----------- ---------------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
$ 1.50 210,510 7.50 years $ 1.50 210,510 $ 1.50
1.80 - 2.75 549,969 9.70 2.48 43,748 2.65
4.00 - 6.00 256,221 8.67 4.27 82,692 4.25
12.25 20,000 7.83 12.25 10,833 12.25
--------- -------
$ 1.50-12.25 1,036,700 8.96 $ 2.91 347,783 $ 2.63
</TABLE>
The Company applies the intrinsic value method in accounting for its stock
option plans and, accordingly, has not recognized compensation cost. If the
Company had elected to recognize compensation cost based on the fair value
of the option granted at grant date as prescribed by SFAS No. 123, net income
(loss) and earnings per share would have been changed to the pro forma
amounts indicated in the table below (in thousands except per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Net income (loss):
As reported (pro forma for 1995) $ (4,031) $ (955) $ 1,470
Pro forma (4,514) (1,277) 1,277
Net income (loss) per share-diluted:
As reported (pro forma for 1995) $ (0.95) $ (0.23) $ 0.37
Pro forma (1.07) (0.30) 0.32
</TABLE>
The effects of applying SFAS No. 123 for disclosing compensation cost may not
be representative of the effects on reported net income (loss) for future
years because pro forma net income (loss) reflects compensation costs only
for stock options granted in 1997, 1996 and 1995 and does not consider
compensation cost for stock options granted prior to January 1, 1995.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
Expected dividend yield -
Expected stock price volatility 50.00%
Risk-free interest rate 5.49 - 6.22%
Expected life of options 5 years
The weighted-average fair value of options granted during 1997, 1996 and 1995
is $1.25, $2.44 and $4.54 per share, respectively.
<PAGE>
MYSOFTWARE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. INCOME TAXES
The components of income tax expense (benefit), as presented in the
accompanying statements of operations, comprise federal taxes and state
taxes. The pro forma provision for income taxes reflects the income tax
expense that would have been reported if the Company had been a C corporation
for all of 1995. The components of income taxes for the years ended December
31, 1997, 1996 and 1995, and the unaudited pro forma income taxes for the
year ended December 31, 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Income taxes:
Current:
Federal $ (282,345) $ (221,459) $ 518,037
State --- --- 153,889
------------ ------------ ------------
Total current (282,345) (221,459) 671,926
------------ ------------ ------------
Deferred:
Federal 282,345 43,482 (325,828)
State --- 105,977 (105,977)
------------ ------------ ------------
Total deferred 282,345 149,459 (431,805)
------------ ------------ ------------
Charge in lieu of income taxes
for tax benefit from exercise
of stock options --- --- 64,037
------------ ------------ ------------
Total income tax expense
(benefit) $ --- $ (72,000) $ 304,158
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
1995
-----------
<S> <C>
Unaudited pro forma income taxes:
Current:
Federal $ 725,987
State 166,705
-----------
Total current 892,692
-----------
Deferred:
Federal (117,699)
State (29,870)
-----------
Total deferred (147,569)
-----------
Charge in lieu of income taxes for tax
benefit from exercise of stock options 64,037
-----------
Total pro forma income taxes $ 809,160
===========
</TABLE>
The following tables reconcile the expected corporate federal income tax
expense (benefit) computed by multiplying the Company's income (loss) before
income taxes by 34% to the Company's income tax expense (benefit) for the
years ended December 31, 1997, 1996 and 1995 and the unaudited pro forma
income tax expense for the year ended December 31, 1995:
<PAGE>
MYSOFTWARE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
1997 1996 1995
------------- ----------- -----------
<S> <C> <C> <C>
Expected income tax expense (benefit) $ (1,307,241) $ (349,208) $ 774,971
State income taxes, net of federal
tax effect 528 70,473 31,622
Utilization of losses 282,345 281,600 -
S corporation benefit - - (182,896)
Establishment of net deferred tax assets
in connection with the termination
of S corporation status - - (325,827)
Research and development tax credits - (83,711) -
Unutilized losses 1,029,478 - -
Other 57,890 8,846 6,288
------------- ----------- -----------
Actual income tax expense (benefit) - $ (72,000) $ 304,158
============= =========== ===========
Expected pro forma income tax expense $ 774,971
State income taxes, net of federal tax
effect 90,311
Research and development tax credits (62,717)
Other, net 6,595
-----------
Pro forma income taxes $ 809,160
===========
</TABLE>
The tax effects of temporary differences that give rise to significant
portion of the net deferred tax assets as of December 31, 1997, 1996 and 1995
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Deferred tax assets:
Accruals and reserves $ 1,340,235 $ 768,770 $ 448,921
Net operating loss carryforwards 489,843 6,314 -
Tax credit carryforwards 468,533 107,781 -
----------- ----------- ----------
Total gross deferred tax assets 2,298,611 882,865 448,921
Less valuation allowance 2,298,611 575,132 -
----------- ----------- ----------
Deferred tax assets net of valuation
allowance - 307,733 448,921
Deferred tax liabilities:
Fixed assets - 25,388 17,116
----------- ----------- ----------
Net deferred tax assets $ - $ 282,345 $ 431,805
=========== =========== ==========
</TABLE>
A valuation allowance of $2,298,611 was established in 1997 against deferred
tax assets. Based on the results of the current year operations and
uncertainty of future realization of the deferred tax assets, the Company's
management does not believe that it is likely that the sufficient future
taxable income will be generated to realize all of the net deferred tax
assets.
As of December 31, 1997, the Company has federal and California net operating
loss carryforwards of approximately $1,139,000 and $1,756,000, respectively,
which expire in 2012 and 2002, respectively. The Company also has federal and
California research and development tax credit carryforwards of approximately
$271,000 and $152,000, respectively. The federal credits expire between 2010
and 2012. The Company also has federal minimum tax credit carryforwards of
approximately $46,000.
<PAGE>
MYSOFTWARE COMPANY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. MAJOR CUSTOMERS
The following tables summarizes sales to customers when sales to such
customers exceeded 10% of revenues as well as the amounts due from these
customers as a percentage of total gross accounts receivable.
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------
Percentage of net revenues 1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Customer A 37% 34% 28%
Customer B 20% 29% 23%
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------
Percentage of total accounts receivable as of 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
Customer A 61% 28%
Customer B 17% 43%
</TABLE>
6. COMMITMENTS
Leases
The Company entered into agreements to lease its facilities under certain
noncancelable operating leases extending through 2000. Future minimum lease
commitments under these leases are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
----------------------------
<S> <C>
1998 $ 501,023
1999 513,824
2000 164,657
-----------
$ 1,179,504
===========
</TABLE>
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
approximately $419,815, $263,000 and $223,000, respectively.
Royalties
Royalties are accrued based on net sales pursuant to agreements with external
software developers of software products published by the Company. Royalty
costs, generally 2% of related revenues subject to certain maximum payment
amounts, are included in cost of revenues.
<PAGE>
MYSOFTWARE COMPANY
NOTES TO FINANICAL STATEMENTS, CONTINUED
Profit Sharing Plan
The Company's contributions to its employee profit sharing plan are made at
the Company's discretion. Contributions amounted to $-0-, $33,000 and
$164,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
<PAGE>
EXHIBITS INDEX
Exhibit Incorporated by Reference
Number Exhibit Description Form Date Number
- -------- -------------------------------- --------- --------- ----------
3.1 Certificate of Incorporation S-1 6/20/95 3.3
3.2 Bylaws S-1 6/20/95 3.4
10.1 Form of Indemnity Agreement for
officers and directors S-1 6/20/95 10.1
10.2 Form of Indemnity Agreement for
officers and directors S-1 6/20/95 10.2
10.3 1995 Equity Incentive Plan
(the "1995 Plan") S-1 6/20/95 10.3
10.4 Form of Incentive Stock Option
under the 1995 Plan S-1 6/20/95 10.4
10.5 Form of Nonstatutory Stock Option
under the 1995 Plan S-1 6/20/95 10.5
10.6 1995 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan") S-1 6/20/95 10.6
10.7 Form of Stock Option under the
Directors' Plan S-1 6/20/95 10.7
10.8 Lease Agreement by and between
MySoftware and 2197 E. Bayshore Road
Partnership dated February 25, 1993,
as amended S-1 6/20/95 10.8
10.9 Software Development Agreement by
and between MySoftware and Micro-
Burst, Inc. dated October 11, 1993
("the October 11, 1993 Agreement") S-1 6/20/95 10.9
10.10 Software Development Agreement by
and between MySoftware and Micro-
Crafts, Inc. dated September 13,
1993 ("the September 13, 1991
Agreement") S-1 6/20/95 10.10
10.11 Amendment to the September 13, 1991
Agreement between MySoftware and
MicroCrafts, Inc., dated October 10,
1994 S-1 6/20/95 10.11
<PAGE>
EXHIBITS INDEX
(CONTINUED)
Exhibit Incorporated by Reference
Number Exhibit Description Form Date Number
- -------- ---------------------------------- ---------- --------- ----------
10.12 Software Development Agreement by
and between MySoftware and Micro-
Crafts, Inc. dated October 18, 1992
("the October 18, 1992 Agreement") S-1 6/20/95 10.12
10.13 Amendment to the October 18, 1992
Agreement between MySoftware and
MicroCrafts, Inc., dated October 10,
1994 S-1 6/20/95 10.13
10.14 Software Development Agreement by
and between MySoftware and Micro-
Crafts, Inc. dated December 10, 1993) S-1 6/20/95 10.14
10.15 Software Purchase Agreement and
Assignment of Copyright dated January
15, 1996 by and between MySoftware
and Mediatech, Inc. 10-K 12/31/95 44
10.16 Amendment to Lease Agreement dated
June 30, 1995 10-K 12/31/95 54
10.17 Lease Agreement by and between
MySoftware and Birmingham Properties,
Inc. dated October 8, 1996 10-KSB 12/31/96 46
10.18 Third Amendment to Lease Agreement
by and between MySoftware and Holvick
Family Trust, dated January 31, 1997 10-KSB 12/31/96 77
23.1 Consent of KPMG Peat Marwick LLP N/A N/A N/A
27.1 Financial Data Schedule N/A N/A N/A
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITOR
The Board of Directors
MySoftware Company
We consent to incorporation by reference in the registration statement (No.
33-91898) on Form S-8 of MySoftware Company of our report dated February 6,
1998, relating to the balance sheets of MySoftware Company as of December 31,
1997, and 1996, and the related statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997, which report appears in the December 31, 1997 annual
report on Form 10-KSB of MySoftware Company.
KPMG Peat Marwick LLP
Mountain View, California
March 26, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,035
<SECURITIES> 0
<RECEIVABLES> 1,031
<ALLOWANCES> 0
<INVENTORY> 621
<CURRENT-ASSETS> 7,706
<PP&E> 278
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,658
<CURRENT-LIABILITIES> 3,967
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 4,687
<TOTAL-LIABILITY-AND-EQUITY> 8,658
<SALES> 12,353
<TOTAL-REVENUES> 12,353
<CGS> 5,738
<TOTAL-COSTS> 5,738
<OTHER-EXPENSES> 10,956
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,031)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,031)
<EPS-PRIMARY> (0.95)
<EPS-DILUTED> 0
</TABLE>
