<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________________
Commission file number 0-22158
NETMANAGE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0252226
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
10725 NORTH DE ANZA BOULEVARD
CUPERTINO, CALIFORNIA 95014
(Address of principal executive offices, including zip code)
(408) 973-7171
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO_____
Number of shares of registrant's common stock outstanding as of October 31,
1996: 43,019,222
<PAGE> 2
NETMANAGE, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1996 and
December 31, 1995 3
Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 1996 and September 30, 1995 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1996 and September 30, 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
It is suggested that these condensed consolidated financial statements be read
in conjunction with the consolidated financial statements and the notes thereto
included in the Company's Report on Form 10-K for the year ended December 31,
1995, filed on March 29, 1996.
2
<PAGE> 3
NETMANAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
--------- ---------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 30,414 $ 32,593
Short-term investments 16,061 25,156
Accounts receivable, net 16,104 20,397
Prepaid expenses and other current assets 9,232 6,990
--------- ---------
Total current assets 71,811 85,136
--------- ---------
PROPERTY AND EQUIPMENT, at cost:
Computer software and equipment 14,562 10,656
Furniture and fixtures 5,371 5,034
Leasehold improvements 1,454 1,355
--------- ---------
21,387 17,045
Less - Accumulated depreciation (8,543) (4,900)
--------- ---------
Net property and equipment 12,844 12,145
--------- ---------
LONG-TERM INVESTMENTS 67,077 51,545
GOODWILL, PURCHASED SOFTWARE AND OTHER INTANGIBLES, net 3,645 1,439
OTHER ASSETS 5,420 4,206
--------- ---------
$ 160,797 $ 154,471
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,838 $ 4,749
Accrued liabilities 2,947 3,680
Accrued payroll and payroll-related expenses 4,656 4,003
Deferred revenue 7,866 10,877
Income taxes payable 1,043 429
--------- ---------
Total current liabilities 19,350 23,738
--------- ---------
LONG-TERM LIABILITIES 1,911 1,336
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock 427 417
Additional paid-in capital 87,569 83,520
Retained earnings 52,353 45,850
Cumulative translation adjustments (813) (390)
--------- ---------
Total stockholders' equity 139,536 129,397
--------- ---------
$ 160,797 $ 154,471
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
NETMANAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET REVENUES:
License fees $ 21,316 $ 31,104 $ 73,773 $ 84,590
Services 4,110 4,146 11,450 9,630
-------- -------- -------- --------
Total net revenues 25,426 35,250 85,223 94,220
COST OF REVENUES 2,383 3,489 8,191 9,775
-------- -------- -------- --------
GROSS MARGIN 23,043 31,761 77,032 84,445
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development 6,734 6,044 20,984 16,566
Sales and marketing 13,390 12,451 39,422 34,219
General and administrative 2,586 2,625 8,245 7,167
Amortization of goodwill 577 330 1,193 999
Acquisition costs 199 83 199 83
-------- -------- -------- --------
Total operating expenses 23,486 21,533 70,043 59,034
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS (443) 10,228 6,989 25,411
INTEREST INCOME AND OTHER, NET 1,034 1,277 4,028 3,467
EQUITY IN LOSSES OF UNCONSOLIDATED AFFILIATE (225) (48) (568) (48)
-------- -------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 366 11,457 10,449 28,830
PROVISION FOR INCOME TAXES 125 3,896 3,553 9,803
-------- -------- -------- --------
NET INCOME $ 241 $ 7,561 $ 6,896 $ 19,027
======== ======== ======== ========
NET INCOME PER SHARE $ 0.01 $ 0.18 $ 0.16 $ 0.44
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES
AND EQUIVALENTS 43,049 43,042 43,244 42,849
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
NETMANAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,896 $ 19,027
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 7,319 4,049
Compensation costs related to stock option grants -- 104
Provision for doubtful accounts and returns 205 2,197
Changes in assets and liabilities, net of business combinations:
Accounts receivable 4,103 (11,216)
Prepaid expenses and other current assets (601) (1,810)
Accounts payable (1,911) 1,054
Accrued liabilities, payroll and payroll-related expenses (659) 4,572
Deferred revenue (2,864) 4,058
Income taxes payable 614 897
--------------- ---------------
Net cash provided by operating activities 13,102 22,932
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (30,495) (42,772)
Proceeds from maturity of short-term investments 39,546 31,900
Purchases of long-term investments (35,420) (18,441)
Proceeds from maturity of long-term investments 18,605 10,111
Purchases of property and equipment (4,174) (8,763)
Investment in unconsolidated affiliate (1,214) (48)
Acquisition of a business (1,325) --
Purchases of software and other intangible assets (4,100) --
--------------- ---------------
Net cash used in investing activities (18,577) (28,013)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 3,719 2,845
--------------- ---------------
Net cash provided by financing activities 3,719 2,845
EFFECT OF EXCHANGE RATE CHANGES ON CASH (423) (87)
--------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,179) (2,323)
CASH AND CASH EQUIVALENTS, beginning of period 32,593 43,551
--------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $ 30,414 $ 41,228
=============== ===============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
NETMANAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. INTERIM FINANCIAL DATA
The interim condensed consolidated financial statements for the three and
nine month periods ended September 30, 1996 and 1995 for NetManage, Inc.
(the "Company") have been prepared on the same basis as the year end
consolidated financial statements and, in the opinion of management,
include all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial information set forth therein, in
accordance with generally accepted accounting principles. The Company
believes the results of operations for the interim periods are subject to
fluctuation and may not be an indicator of future financial performance.
2. CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated. The Company's 50 percent investment in
an unconsolidated affiliate, NetVision, Ltd. ("NetVision"), is accounted
for by the equity method.
3. ACQUISITIONS
On July 3, 1996, the Company closed the acquisition of all of the
outstanding stock of Maximum Information, Inc. ("MaxInfo"), effective as of
July 29, 1996, in exchange for approximately 590,000 shares of the
Company's common stock. The Company also assumed MaxInfo's outstanding
options, which were converted into options to purchase approximately
129,000 shares of the Company's common stock. This transaction was
accounted for as a pooling of interests during the third quarter of 1996.
The operations of MaxInfo are not material to the Company's consolidated
results of operations and financial position and, therefore, the historical
financial statements have not been restated to reflect the acquisition
retroactively. Accordingly, the operations of MaxInfo from the effective
date forward have been recorded in the Company's consolidated financial
statements.
4. CAPITALIZED SOFTWARE
Software development costs are accounted for in accordance with Statement
of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," under which
the Company is required to capitalize software development costs after
technological feasibility is established, which the Company defines as the
development of a working model and further defines as the development of a
beta version of the software. Prior to 1996, software development costs
that were eligible for capitalization had not been significant and the
Company charged all software development costs to research and development
expense. During the three and nine month periods ended September 30, 1996,
the Company capitalized approximately $0.1 million and $4.1 million,
respectively, of purchased software. Amortization of purchased software is
calculated on a straight-line basis over the estimated remaining economic
life of the underlying products (from two to five years). Amortization
expense is included in the accompanying Condensed Consolidated Statements
of Operations in Cost of Revenues. During the three and nine month periods
ended September 30, 1996 amortization of purchased software amounted to
approximately $0.5 million and $1.0 million, respectively.
5. NET INCOME PER SHARE
Net income per share data has been computed using the weighted average
number of shares of common stock and common equivalent shares from stock
options outstanding (when dilutive using the treasury stock method). Fully
diluted net income per share is substantially the same as primary net
income per share.
6
<PAGE> 7
6. ACCOUNTING FOR STOCK-BASED COMPENSATION
Effective January 1, 1996 the Company adopted the disclosure only
provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation". The effect on the Company's
financial position and results of operations, upon adoption, was not
significant.
7
<PAGE> 8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This discussion contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. Such forward-looking statements
include statements regarding expected changes in revenues and expected increases
in operating expenses and capital spending. The Company's actual results could
differ significantly from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include,
among others, those discussed below as well as those discussed in the Company's
Report on Form 10-K for the year ended December 31, 1995. The following
discussion should be read in conjunction with the consolidated financial
statements and notes thereto.
OVERVIEW
NetManage(R), Inc. (the "Company") develops, markets and supports an integrated
set of application, server and development tool software for the Microsoft
Windows, Windows 95, Windows NT and Mac OS platforms. The Company's
standards-based products provide TCP/IP and SNA host access, UNIX access
including NFS and X, Active X-based development, and desktop and Web management.
The Company's products are sold and serviced worldwide by the Company's direct
sales force, international subsidiaries and authorized channel partners. Since
the Company's inception, revenues from the Chameleon(TM) family of products have
represented substantially all of the Company's revenues, and the Company expects
that revenues from these products will continue to account for a substantial
portion of the Company's revenues for the foreseeable future.
On July 3, 1996, the Company closed the acquisition of all of the outstanding
stock of Maximum Information, Inc. ("MaxInfo"), effective as of July 29, 1996,
in exchange for approximately 590,000 shares of the Company's common stock. The
Company also assumed MaxInfo's outstanding options, which were converted into
options to purchase approximately 129,000 shares of the Company's common stock.
This transaction was accounted for as a pooling of interests during the third
quarter of 1996. The operations of MaxInfo are not material to the Company's
consolidated results of operations and financial position and, therefore, the
historical financial statements have not been restated to reflect the
acquisition retroactively. Accordingly, the operations of MaxInfo from the
effective date forward have been recorded in the Company's consolidated
financial statements.
On November 29, 1995, the Company acquired all of the outstanding stock of AGE
Logic, Inc. ("AGE") in exchange for shares of the Company's common stock. The
transaction was accounted for as a pooling of interests and accordingly, the
Company's consolidated financial statements for the three and nine month periods
ended September 30, 1995 have been restated to combine the results of AGE and
the Company. The Company also acquired all of the outstanding stock of Syzygy
Communications, Inc. ("Syzygy"), in exchange for shares of the Company's common
stock, on October 16, 1995. This transaction was also accounted for as a pooling
of interests, however, the operations of Syzygy were not material to the
Company's consolidated results of operations and financial position and,
therefore, the historical financial statements have not been restated to reflect
the acquisition retroactively. Accordingly, the operations of Syzygy from the
date of acquisition forward have been recorded in the Company's consolidated
financial statements.
The Company regularly evaluates product and technology acquisition opportunities
and anticipates that it may make additional acquisitions in the future. Product
and technology acquisitions entail numerous risks, including difficulties in the
assimilation of acquired operations and products, diversion of management's
attention away from day-to-day matters and potential loss of key employees from
acquired companies. No assurance can be given as to the ability of the Company
to integrate successfully the operations and personnel acquired to date, and if
applicable, in the future, and the failure of the Company to do so could have a
material adverse effect on the Company's results of operations.
The Company has experienced and expects to experience in future periods
significant fluctuations in operating results that may be caused by many
factors, including among others: demand for the Company's products; introduction
or enhancements of products by the Company or its competitors; technological
changes in computer networking; market acceptance of new products; customer
order deferrals in anticipation of new products; the size and timing of
individual orders; mix of distribution channels through which the Company's
products are sold; mix of international and domestic revenues; seasonality of
revenues; quality control of products; changes in the
8
<PAGE> 9
Company's operating expenses; personnel changes; foreign currency exchange rates
and general economic conditions. As a result, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
The market for the Company's products is intensely competitive and characterized
by rapidly changing technology, evolving industry standards, changes in
customers' needs and frequent new product introductions. To maintain or improve
its position in this industry, the Company must continue to enhance its current
products and to develop, introduce successfully and market new products on a
timely and cost-effective basis. Any failure by the Company to anticipate or
respond adequately to changes in technology and customer preferences, or any
significant delays in product development or introduction, would have a material
adverse effect on the Company's results of operations. The failure to develop on
a timely basis these or other enhancements incorporating new functionality could
cause customers to delay purchase of the Company's current products and thereby
adversely affect the Company's results of operations. There can be no assurance
that the Company will be successful in developing new products or enhancing its
existing products on a timely basis, or that such new products or product
enhancements will achieve market acceptance.
Many of the Company's competitors have substantially greater financial,
technical, sales, marketing and other resources, as well as greater name
recognition and a larger customer base, than the Company. The market for the
Company's products is characterized by significant price competition and the
Company anticipates that it will face increasing pricing pressures from its
current and new competitors in the future. Moreover, given that there are low
barriers to entry into the software market and that the market is rapidly
evolving and subject to rapid technological change, the Company believes that
competition will persist and intensify in the future. Accordingly, there can be
no assurance that the Company will be able to provide products that compare
favorably with the products of the Company's competitors or that competitive
pressures will not require the Company to reduce its prices. Any material
reduction in the price of the Company's products would require the Company to
increase unit sales in order to maintain revenues at pre-existing levels. There
can be no assurance that the Company will be successful in doing so.
Because the Company generally ships software products within a short period
after receipt of an order, the Company typically does not have a material
backlog of unfilled orders, and revenues in any quarter are substantially
dependent on orders booked in that quarter. The Company's expense levels are
based in part on its expectations as to future revenues and to a large extent
are fixed. Therefore, the Company may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. Accordingly, any
significant shortfall of demand in relation to the Company's expectations or any
material delay of customer orders would have an almost immediate adverse impact
on the Company's operating results and on the Company's ability to maintain
profitability. Fluctuations in operating results may also result in volatility
in the price of the Company's common stock.
During the twelve month period from September 30, 1995 to September 30, 1996,
the Company experienced rapid growth in the number of employees and the
geographic area of its customer base and operations. These increases have
resulted in substantial demands on the Company's management resources. The
Company's future operating results will continue to be dependent in part on its
ongoing ability to continue to implement and improve its operating and financial
controls and to expand, train and manage its management and employee base. There
can be no assurance that the Company will be able to do so successfully.
9
<PAGE> 10
RESULTS OF OPERATIONS
The Company experienced a significant decline in its net revenues and net income
during the three and nine month periods ended September 30, 1996 as compared to
the same periods of 1995. The decline in net revenues primarily reflects an
overall industry trend characterized by increased competition, pricing
pressures, and general confusion in the IntraNet marketplace resulting from the
rapidly changing technology and product introductions. Operating expenses for
the three and nine month periods ended September 30, 1996 included increased
costs related to the Company's acquisition activity, particularly headcount
related costs, and increased costs related to the Company's investment in
expanding its direct corporate sales and support functions in the U.S., neither
of which has yet produced the expected results in terms of increasing net
revenues. Operating expense levels are based, in part, on the Company's
expectations as to future revenues and to a large extent are fixed. Expense
growth, coupled with the decline in net revenues, resulted in an adverse impact
on the Company's net income during the three and nine month periods ended
September 30, 1996. Operating expenses are expected to increase in absolute
dollars in the future; these expenses may also increase in the future as a
percentage of net revenues depending on fluctuations in total revenues and
overall Company growth. While the Company is adjusting its operations to address
these issues, there can be no assurance that revenues or net income will
stabilize or increase in the future.
SEPTEMBER 30, 1996 COMPARED TO SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
(Dollars in millions) Three Months Ended Nine Months Ended
1996 1995 Change 1996 1995 Change
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
License fees $ 21.3 $ 31.1 (31.5%) $ 73.8 $ 84.6 (12.8%)
Services 4.1 4.1 (0.9%) 11.4 9.6 18.9%
-------- -------- -------- --------
Total net revenues $ 25.4 $ 35.2 (27.9%) $ 85.2 $ 94.2 (9.5%)
Percentage of net revenues:
License fees 83.8% 88.2% 86.6% 89.8%
Services 16.2% 11.8% 13.4% 10.2%
-------- -------- -------- --------
Total net revenues 100.0% 100.0% 100.0% 100.0%
Gross margin $ 23.0 $ 31.8 (27.4%) $ 77.0 $ 84.4 (8.8%)
Percentage of net revenues 90.6% 90.1% 90.4% 89.6%
Research and development $ 6.7 $ 6.0 11.4% $ 21.0 $ 16.6 26.7%
Percentage of net revenues 26.5% 17.1% 24.6% 17.6%
Sales and marketing $ 13.4 $ 12.5 7.5% $ 39.4 $ 34.2 15.2%
Percentage of net revenues 52.7% 35.3% 46.3% 36.3%
General and administrative $ 2.6 $ 2.6 (1.5%) $ 8.2 $ 7.2 15.0%
Percentage of net revenues 10.2% 7.4% 9.7% 7.6%
Interest income and other, net $ 1.0 $ 1.3 (19.0%) $ 4.0 $ 3.5 16.2%
Percentage of net revenues 4.1% 3.6% 4.7% 3.7%
Equity in losses of
unconsolidated affiliate $ (0.2) $ -- 368.8% $ (0.6) $ -- 1,083.3%
Percentage of net revenues 0.9% 0.1% 0.7% 0.1%
Provision for income taxes $ 0.1 $ 3.9 (96.8%) $ 3.6 $ 9.8 (63.8%)
Effective tax rate 34.0% 34.0% 34.0% 34.0%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
Net revenues
Substantially all of the Company's net revenues have been derived from software
license fees and, to a lesser extent, service revenues, which have been
primarily attributable to maintenance agreements associated with such licenses.
License fees decreased both in absolute dollars and as a percentage of net
revenues during both the three and nine month periods ended September 30, 1996
as compared to the same relative periods of 1995. The decline in license fees in
absolute dollars was primarily attributable to increased competition; heightened
pricing pressures; and the general confusion within the IntraNet market
resulting from the rapidly changing technology and product introductions, the
delayed release of Windows NT 4.0, and the slow adoption of Windows 95 in
corporate accounts, all of which contributed to delayed buying decisions,
particularly by corporate users. These factors may lead to lower unit volumes as
well as lower average prices for the foreseeable future. While the Company has
been adjusting its operations to address these issues, there can be no assurance
that revenues will stabilize or increase in the future. As a percentage of total
net revenues, the decline in license fees during the three month period ended
September 30, 1996 as compared to the same three month period of 1995 reflects
the significant decline in the total net revenue base as service revenues, in
absolute dollars, were constant. During the nine month period ended September
30, 1996 as compared to the nine month period ended September 30, 1995, however,
the decline in license revenues as a percentage of net revenues reflects the
nearly 20% absolute dollar increase in the service revenue component of total
net revenues, as discussed below.
The increase in service revenues in absolute dollars for the nine months ended
September 30, 1996 and as a percentage of total net revenues for both the three
and nine months ended September 30, 1996 is due primarily to the Company's
increased focus on marketing its customer support services domestically and
internationally. Despite these increased efforts, service revenues in absolute
dollars for the three months ended September 30, 1996 as compared to the same
three month period in the prior year was relatively constant, which is
consistent with the aforementioned decline in license fee revenues during this
period.
During mid-1995, the Company expanded its worldwide operations with new sales
offices internationally in Europe and Japan. As a result, international
revenues, as a percentage of total net revenues, increased from 30% for the
three month period ended September 30, 1995 to 40% for the three month period
ended September 30, 1996. For the nine month period ended September 30, 1995 as
compared to the nine month period ended September 30, 1996, international
revenues increased from 30% to 35% of net revenues, respectively. A shift in
international marketing efforts during 1996 towards indirect channels, including
increasing the number of international distributors and resellers, contributed
to the year over year increase. Additionally, the introduction of an increased
number of localized versions of the Company's products in 1996 also contributed
to the increased acceptance of the Company's products in the international
marketplace.
As part of its strategy to develop multiple distribution channels, the Company
expects to increase its use of resellers, particularly value added and system
integrators, in addition to distributors and original equipment manufacturers.
The Company expects that indirect sales will grow as a percentage of both
domestic and total revenues and that any material increase in the Company's
indirect sales as a percentage of revenues will adversely affect the Company's
average selling prices and gross margins due to the lower unit prices that are
typically charged when selling through indirect channels. There can be no
assurance that the Company will be able to attract resellers and distributors
who will be able to market the Company's products effectively and will be
qualified to provide timely and cost-effective customer support and service. The
Company ships products to resellers and distributors on a purchase-order basis,
and many of the Company's resellers and distributors carry competing product
lines. Therefore, there can be no assurance that any reseller or distributor
will continue to represent the Company's products, and the inability to recruit
or retain effective resellers or distributors could adversely affect the
Company's results of operations.
Software license fees are generally recognized as revenue upon shipment if there
are no, or insignificant, post-delivery obligations. Allowances for returns and
doubtful accounts are provided based on historical rates of returns and
write-offs, which have not been material to date. Certain of the Company's sales
to distributors are under agreements providing rights of return and price
protection on unsold merchandise. Accordingly, the Company defers recognition of
such sales until the merchandise is sold by the distributor.
11
<PAGE> 12
The Company provides ongoing maintenance and support to its customers, generally
under annual service agreements. Maintenance and support is comprised of
software updates for existing products and telephone support. Service revenues
are recognized on a pro-rata basis over the term of such agreements. The Company
expects that service revenues will continue to increase as a percentage of total
net revenues.
Periodically the Company has provided training and consulting services to
selected customers. Such revenue is recognized as the related services are
performed and has not been material to date. The Company does not expect that
revenues generated from such services will become materially significant in the
future.
The Company had one customer which accounted for approximately 10% of net
revenues during the three months ended September 30, 1996. This percentage may
fluctuate in future periods, however, and there is no assurance that it will not
decline significantly. No customer accounted for 10% or more of net revenues
during the three months ended September 30, 1995.
Gross margin
Cost of revenues primarily includes royalties paid to third parties for licensed
software incorporated into the Company's products, costs associated with product
packaging, documentation and software duplication, and amortization of purchased
software. Cost of service revenues through September 30, 1996 has not been
material and is not reported separately. Gross margin as a percentage of net
revenues was relatively constant between both the three month periods and nine
month periods ended September 30, 1996 and 1995, and in absolute dollars
fluctuated in proportion to the changes in the revenue base.
Gross margin as a percentage of net revenues may fluctuate in the future due to
increased price competition, the mix of distribution channels used by the
Company, the mix of products sold, the mix of license fee revenue versus service
revenues, and the mix of international versus domestic revenues. The Company
typically realizes higher gross margins on direct sales than on sales through
indirect channels and higher gross margins on license fee revenues than on
service revenues.
Research and development
Research and development ("R&D") expenses consist primarily of salaries and
benefits, occupancy and travel expenses, as well as fees paid to outside
consultants. The increase during the three and nine month periods ended
September 30, 1996 as compared to the same periods of the prior year, both in
absolute dollars and as a percentage of net revenues, primarily reflects the
hiring of additional product development engineers in the United States and
Israel. The decline in the revenue base, particularly during the quarter ended
September 30, 1996, contributed to the increase in R&D as a percentage of net
revenues for the three and nine months ended September 30, 1996 as compared to
the same periods in 1995.
The Company believes that a significant investment in R&D is required to remain
competitive in the software industry. The Company expects that R&D expenses as a
percentage of net revenues will fluctuate depending on future revenue growth,
acquisitions and licensing of technology, and expects that R&D expenses will
increase in absolute dollars in the future.
Software development costs are accounted for in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," under which the Company is
required to capitalize software development costs after technological
feasibility is established, which the Company defines as the development of a
working model and further defines as the development of a beta version of the
software. Prior to 1996, software development costs that were eligible for
capitalization had not been significant and the Company charged all software
development costs to research and development expense. During the three and nine
month periods ended September 30, 1996, the Company capitalized approximately
$0.1 million and $4.1 million, respectively, of purchased software. Amortization
of purchased software is calculated on a straight-line basis over the estimated
remaining economic life of the underlying products (from two to five years).
Amortization expense is included in the accompanying Condensed Consolidated
Statements of Operations in Cost of Revenues. During the three and nine month
periods ended September 30, 1996 amortization of purchased software amounted to
approximately $0.5 million and $1.0 million, respectively.
12
<PAGE> 13
Sales and marketing
Sales and marketing ("S&M") expenses consist primarily of salaries and
commissions of sales and marketing personnel, advertising and promotion
expenses, and customer service and support costs. The increase in S&M expenses
during the three and nine month periods ended September 30, 1996 as compared to
the same periods of 1995, both in absolute dollars and as a percentage of net
revenues, primarily reflects increased salaries and commissions due to increased
staffing, the growth of domestic field sales and support and customer service
functions, increased marketing activities, including trade show participation,
advertising and promotions, and the opening of foreign sales offices in Europe
and Japan, as well as domestic sales offices during mid-1995.
The Company believes that S&M expenses will continue to increase in absolute
dollars as the Company continues to expand its sales and support staff
worldwide, including the opening of one or more additional international offices
and the expansion of the Company's existing domestic and international sales
offices, and continues to place increased focus on the marketing of its products
through indirect sales channels. These activities may also result in an increase
in S&M expenses as a percentage of net revenues in the future.
General and administrative
The increase in general and administrative expenses ("G&A") in absolute dollars
for the nine months ended September 30, 1996, and as a percentage of net
revenues for the three and nine month periods ended September 30, 1996 as
compared to the same three and nine months periods of 1995, is primarily a
result of increased staffing and associated expenses necessary to support the
Company's growth. The increase in G&A expenses as a percentage of net revenues
was also attributable to the decreased revenue base during the third quarter of
1996 as compared to the same quarter of 1995.
The Company believes that G&A expenses will continue to increase in absolute
dollars as the Company continues to expand its staffing to support the Company's
growth which may result in an increase in G&A expenses as a percentage of net
revenues in the future.
Interest income and other, net
Interest income and other, net includes interest income earned on the Company's
cash and investments as well as foreign exchange gains and losses. This income
decreased in absolute dollars during the third quarter of 1996 as compared to
the third quarter of 1995 due largely to a decline in the strength of the U.S.
dollar relative to the Israeli Shekel. The increase in interest income and
other, net, in absolute dollars during the nine months ended September 30, 1996
and as a percentage of net revenues during the three and nine months ended
September 30, 1996 as compared to the same periods of 1995 was primarily due to
an increase in the aggregate amount of cash and cash equivalents, short term
investments and long term investments from $105.2 million at September 30, 1995
to $113.6 million at September 30, 1996 resulting in an increase in the related
interest income. The increase as a percentage of net revenues reflects the
aforementioned decrease in the Company's revenue base.
Equity in losses of unconsolidated affiliate
In July 1995, NetManage, Ltd., one of the Company's wholly-owned subsidiaries,
agreed to an investment in one of its wholly-owned subsidiaries, NetVision, Ltd.
("NetVision") by Elron Electronics, Ltd. ("Elron"). The Company retains an
ownership in NetVision of 50%. Prior to the investment by Elron, the accounts of
NetVision were included in the Company's consolidated financial statements.
Subsequent to the investment, the Company did not have a majority voting
interest in NetVision. Accordingly, NetVision's accounts are no longer
consolidated and the Company's remaining investment in NetVision is accounted
for by the equity method. This investment is included in Other Assets in the
accompanying Condensed Consolidated Balance Sheets. The Company has adjusted its
investment to reflect additional equity investments in NetVision which are
offset in part by the Company's share of NetVision's losses.
Provision for income taxes
The Company's effective tax rate is unchanged for both the three and nine month
periods ended September 30, 1996 as compared to the same periods of 1995.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
(In millions) Nine Months Ended
September 30, September 30,
1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 30.4 $ 41.2
Short-term investments 16.1 30.1
Long-term investments 67.1 33.9
Net cash provided by operating activities 13.1 22.9
Net cash used in investing activities 18.6 28.0
Net cash provided by financing activities 3.7 2.8
- ---------------------------------------------------------------------------------------------
</TABLE>
Since the Company's inception, growth has been financed primarily through cash
provided by operations and sales of capital stock. The Company's primary
financing activities to date consist of its initial and secondary stock
offerings and preferred stock issuances, which aggregated net proceeds to the
Company of approximately $72.5 million. The Company does not have a bank line of
credit or an equipment lease facility.
The Company's cash and cash equivalents, short-term investments and long-term
investments increased from $109.3 million at December 31, 1995 to $113.6 million
at September 30, 1996. This increase was due primarily to cash generated from
operating activities.
The Company's principal investing activities to date have been the purchase of
short-term and long-term investments and purchases of property and equipment.
Net of proceeds from maturities, the Company invested $7.8 million in short-term
and long-term investments during the nine month period ended September 30, 1996.
Expenditures for purchases of property and equipment were $4.2 million during
the first nine months of 1996 and were primarily purchases of computer and
office equipment to support the Company's growth. Although the Company does not
have any specific commitments with regard to future capital expenditures, it is
anticipated that such spending will continue to increase. The Company's
principal commitment as of September 30, 1996 consists of leases on its
facilities.
Net cash provided by financing activities during the nine months ended September
30, 1996 reflects proceeds from the issuance of common stock under the Company's
stock option plan.
At September 30, 1996, the Company had working capital of $52.5 million. The
Company believes that its current cash balances and cash flows from current
operations will be sufficient to meet the Company's working capital and capital
expenditure requirements for the foreseeable future.
14
<PAGE> 15
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Not applicable
b. No reports on Form 8-K have been filed during the quarter for
which this report relates.
15
<PAGE> 16
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
NETMANAGE, INC.
(REGISTRANT)
DATE: NOVEMBER 13, 1996 BY: /S/ WALTER D. AMARAL
------------------- --------------------
WALTER D. AMARAL
SENIOR VICE PRESIDENT, FINANCE AND
CHIEF FINANCIAL OFFICER
16
<PAGE> 17
EXHIBIT INDEX
Exhibit No.
Ex. 27 Financial Data
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 30,414
<SECURITIES> 16,061
<RECEIVABLES> 18,065
<ALLOWANCES> 1,961
<INVENTORY> 0
<CURRENT-ASSETS> 71,811
<PP&E> 21,387
<DEPRECIATION> 8,543
<TOTAL-ASSETS> 160,797
<CURRENT-LIABILITIES> 19,350
<BONDS> 0
0
0
<COMMON> 427
<OTHER-SE> 139,109
<TOTAL-LIABILITY-AND-EQUITY> 160,797
<SALES> 85,223
<TOTAL-REVENUES> 85,223
<CGS> 8,191
<TOTAL-COSTS> 8,191
<OTHER-EXPENSES> 22,376
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,449
<INCOME-TAX> 3,553
<INCOME-CONTINUING> 6,896
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,896
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
