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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 June 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 July 31, 1996:
42,745,830
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NETMANAGE, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 1996 and
December 31, 1995 3
Condensed Consolidated Statements of Operations for the three
and six months ended June 30, 1996 and June 30, 1995 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1996 and June 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 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
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
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NETMANAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
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ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 28,368 $ 32,593
Short-term investments 15,782 25,156
Accounts receivable, net 17,137 20,397
Prepaid expenses and other current assets 8,221 6,990
-------- --------
Total current assets 69,508 85,136
-------- --------
PROPERTY AND EQUIPMENT, at cost:
Computer software and equipment 13,304 10,656
Furniture and fixtures 5,157 5,034
Leasehold improvements 1,396 1,355
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19,857 17,045
Less - Accumulated depreciation (7,224) (4,900)
-------- --------
Net property and equipment 12,633 12,145
-------- --------
LONG-TERM INVESTMENTS 70,813 51,545
GOODWILL, PURCHASED SOFTWARE AND OTHER INTANGIBLES, net 4,772 1,439
OTHER ASSETS 4,733 4,206
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$162,459 $154,471
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,975 $ 4,749
Accrued liabilities 3,148 3,680
Accrued payroll and payroll-related expenses 5,602 4,003
Deferred revenue 7,883 10,877
Income taxes payable 1,100 429
-------- --------
Total current liabilities 21,708 23,738
-------- --------
LONG-TERM LIABILITIES 1,796 1,336
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STOCKHOLDERS' EQUITY:
Common stock 422 417
Additional paid-in capital 86,991 83,520
Retained earnings 52,505 45,850
Cumulative translation adjustments (963) (390)
-------- --------
Total stockholders' equity 138,955 129,397
-------- --------
$162,459 $154,471
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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NETMANAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------- ---------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1995 1996 1995
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<S> <C> <C> <C> <C>
NET REVENUES:
License fees $23,088 $28,987 $52,457 $53,486
Services 3,687 3,047 7,340 5,484
------- ------- ------- -------
Total net revenues 26,775 32,034 59,797 58,970
COST OF REVENUES 2,537 3,563 5,808 6,286
------- ------- ------- -------
GROSS MARGIN 24,238 28,471 53,989 52,684
------- ------- ------- -------
OPERATING EXPENSES:
Research and development 7,076 5,648 14,250 10,522
Sales and marketing 13,214 12,121 26,032 21,768
General and administrative 3,001 2,290 5,659 4,542
Amortization of goodwill 307 339 616 669
------- ------- ------- -------
Total operating expenses 23,598 20,398 46,557 37,501
------- ------- ------- -------
INCOME FROM OPERATIONS 640 8,073 7,432 15,183
INTEREST INCOME 1,956 1,201 2,994 2,190
EQUITY IN LOSSES OF UNCONSOLIDATED AFFILIATE (118) - (343) -
------- ------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES 2,478 9,274 10,083 17,373
PROVISION FOR INCOME TAXES 843 3,153 3,428 5,907
------- ------- ------- -------
NET INCOME $ 1,635 $ 6,121 $ 6,655 $11,466
======= ======= ======= =======
NET INCOME PER SHARE $ 0.04 $ 0.14 $ 0.15 $ 0.27
======= ======= ======= =======
WEIGHTED AVERAGE COMMON SHARES AND
EQUIVALENTS
43,521 42,702 43,340 42,753
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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NETMANAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------
JUNE 30, JUNE 30,
1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,655 $ 11,466
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 4,470 2,820
Compensation costs related to stock option grants - 69
Provision for doubtful accounts and returns 576 1,699
Changes in assets and liabilities, net of business combinations:
Accounts receivable 2,684 (4,998)
Prepaid expenses and other current assets 36 (3,078)
Accounts payable (774) 1,448
Accrued liabilities, payroll and payroll-related expenses 737 3,050
Deferred revenue (2,962) 3,016
Income taxes payable 671 (893)
-------- --------
Net cash provided by operating activities 12,093 14,599
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (17,195) (25,429)
Proceeds from maturity of short-term investments 26,542 17,850
Purchases of long-term investments (29,118) (14,577)
Proceeds from maturity of long-term investments 9,005 1,011
Purchases of property and equipment (2,836) (6,537)
Acquisition of a business (1,325) -
Purchases of software and other intangible assets (4,193) -
Investment in unconsolidated affiliate (101) -
-------- --------
Net cash used in investing activities (19,221) (27,682)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 3,476 1,491
-------- --------
Net cash provided by financing activities 3,476 1,491
EFFECT OF EXCHANGE RATE CHANGES ON CASH (573) 172
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,225) (11,420)
CASH AND CASH EQUIVALENTS, beginning of period 32,593 43,551
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 28,368 $ 32,131
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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NETMANAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. INTERIM FINANCIAL DATA
The interim condensed consolidated financial statements for the three and
six month periods ended June 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 acquired all of the outstanding stock of
Maximum Information, Inc. ("MaxInfo") 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 will be 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 will not be restated to
reflect the acquisition retroactively.
On June 6, 1996, the Company purchased certain assets related to the Z-mail
business, an electronic mail and messaging system, from Network Computing
Devices, Inc. The assets purchased include customer lists and records,
customer contracts and service agreements, intellectual property rights and
the Z-mail proprietary software. The purchase price included cash
consideration and the assumption of certain Z-mail business-related
liabilities. The assets purchased are included in Goodwill, Purchased
Software and Other Intangibles in the accompanying Condensed Consolidated
Balance Sheets and are being amortized on a straight-line basis over the
estimated lives of the assets purchased of 2 years.
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 six month periods ended June 30, 1996, the
Company capitalized approximately $3.0 million and $4.0 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 six month periods
ended June 30, 1996 amortization of purchased software amounted to
approximately $0.3 million and $0.5 million, respectively.
6
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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. 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
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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. 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 applications, servers and development tools for IntraNet collaboration,
access, development and management on the Microsoft Windows, Windows 95, Windows
NT and Mac OS platforms. 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 acquired all of the outstanding stock of Maximum
Information, Inc. ("MaxInfo") 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 will be 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 will not
be restated to reflect the acquisition retroactively.
On November 29, 1995, the Company acquired all of the outstanding stock of AGE
Logic, Inc. ("AGE"). The transaction was accounted for as a pooling of interests
and accordingly, the Company's consolidated financial statements for the three
and six month periods ended June 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") 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
attentions 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 successfully integrate 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.
Although the Company experienced significant growth in previous periods, such
growth should not be relied upon as indicative of future operating results. 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; the size and timing of individual orders; market acceptance of new
products; seasonality of revenues; customer order deferrals in anticipation of
new products; mix of distribution channels through which the Company's products
are sold; mix of international and domestic revenues; quality control of
products; changes in the 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.
8
<PAGE> 9
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 develop, successfully introduce 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.
The Company has recently 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 be dependent in part on its 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 manage such changes successfully.
9
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RESULTS OF OPERATIONS
JUNE 30, 1996 COMPARED TO JUNE 30, 1995
<TABLE>
<CAPTION>
(Dollars in millions) Three Months Ended Six Months Ended
1996 1995 Change 1996 1995 Change
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<S> <C> <C> <C> <C> <C> <C>
Net revenues:
License fees $ 23.1 $ 29.0 (20.4%) $ 52.5 $ 53.5 (1.9%)
Services 3.7 3.0 21.0% 7.3 5.5 33.8%
------ ------ ------ ------
Total net revenues $ 26.8 $ 32.0 (16.4%) $ 59.8 $ 59.0 1.4%
Percentage of net revenues:
License fees 86.2% 90.5% 87.7% 90.7%
Services 13.8% 9.5% 12.3% 9.3%
------ ------ ------ ------
Total net revenues 100.0% 100.0% 100.0% 100.0%
Gross margin $ 24.2 $ 28.5 (14.9%) $ 54.0 $ 52.7 2.5%
Percentage of net revenues 90.5% 88.9% 90.3% 89.3%
Research and development $ 7.1 $ 5.6 25.3% $ 14.3 $ 10.5 35.4%
Percentage of net revenues 26.4% 17.6% 23.8% 17.8%
Sales and marketing $ 13.2 $ 12.1 9.0% $ 26.0 $ 21.8 19.6%
Percentage of net revenues 49.4% 37.8% 43.5% 36.9%
General and administrative $ 3.0 $ 2.3 31.0% $ 5.7 $ 4.5 24.6%
Percentage of net revenues 11.2% 7.1% 9.5% 7.7%
Interest income $ 2.0 $ 1.2 62.9% $ 3.0 $ 2.2 36.7%
Percentage of net revenues 7.3% 3.7% 5.0% 3.7%
Equity in losses of
unconsolidated affiliate $ (0.1) $ - 100.0% $ (0.3) $ - 100.0%
Percentage of net revenues 0.4% - 0.6% -
Provision for income taxes $ 0.8 $ 3.2 (73.3%) $ 3.4 $ 5.9 (42.0%)
Effective tax rate 34.0% 34.0% 34.0% 34.0%
</TABLE>
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 the three and six month periods ended June 30, 1996 as compared
to the same periods of 1995. The decline in license fees 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
continue to affect the market for the foreseeable future. While the Company is
adjusting its operations and particularly its sales and marketing efforts to
address these issues, there can be no assurance that revenues will stabilize or
increase in the future. As a percentage of net revenues, the decline in license
fees also reflects a significant decline in the revenue base, particularly
during the three month period ended June 30, 1996 as compared to the same three
month period of the prior year. Service revenues increased, however, reflecting
the Company's focus on marketing its customer support services domestically and
internationally.
10
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During 1995, the Company expanded its worldwide operations with new sales
offices domestically, and internationally, in Europe and Japan. International
revenues, as a percentage of total net revenues, increased from 23% to 30% for
the three month period ended June 30, 1995 as compared to the three month period
ended June 30, 1996. For the six month period ended June 30, 1995 as compared to
the six month period ended June 30, 1996, international revenues increased from
29% to 34% of net revenues. A shift in international marketing efforts towards
indirect channels, including increasing the number of international distributors
and resellers, contributed to this increase. Additionally, the introduction of
an increased number of localized versions of the Company's products also
contributed to the increased acceptance of the Company's products in the
international marketplace. There can be no assurance of increased use or
acceptance of the Company's products in the international or domestic
marketplace.
The Company has also focused its domestic marketing efforts on indirect sales
channels. As part of its strategy to develop multiple distribution channels, the
Company expects to increase its use of resellers, particularly value added
resellers, system integrators and retailers, 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.
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.
No customer accounted for more than 10% of net revenues during the second
quarters of 1996 or 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 June 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 six month periods
ended June 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.
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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 six month periods ended June 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 second quarter 1996 revenue base also contributed to the increase in R&D as
a percentage of net revenues during both the three and six month periods ended
June 30, 1996 as compared to the same periods of the prior year.
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 six
month periods ended June 30, 1996, the Company capitalized approximately $3.0
million and $4.0 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 six month
periods ended June 30, 1996 amortization of purchased software amounted to
approximately $0.3 million and $0.5 million, respectively.
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 six month periods ended June 30, 1996 as compared to the
same periods of 1995, both in absolute dollars and as a percentage of net
revenues, reflects increased salaries and commissions due to increased staffing,
the growth of internal telesales and customer service and support 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
General and administrative ("G&A") expenses increased in absolute dollars and as
a percentage of net revenues during the three and six month periods ended June
30, 1996 as compared to the same periods of 1995 primarily as a result of
increased staffing and associated expenses necessary to support the Company's
growth. The increase as a percentage of net revenues was also attributable to
the decreased revenue base during the second 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
Interest income increased in absolute dollars and as a percentage of net
revenues primarily as a result of an increase in the aggregate amount of cash
and cash equivalents, short term investments and long term investments from
$98.3 million at June 30, 1995 to $115.0 million at June 30, 1996.
12
<PAGE> 13
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.
Provision for income taxes
The Company's effective tax rate is unchanged for both the three and six month
periods ended June 30, 1996 as compared to the same periods of 1995.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
(In millions) Six Months Ended
June 30, June 30,
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $28.4 $32.1
Short-term investments 15.8 26.9
Long-term investments 70.8 39.3
Net cash provided by operating activities 12.1 14.6
Net cash used in investing activities 19.2 27.7
Net cash provided by financing activities 3.5 1.5
</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, and have 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 $115.0 million
at June 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 $10.8 million in
short-term and long-term investments during the six month period ended June 30,
1996. Expenditures for purchases of property and equipment were $2.8 million
during the same period 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 June 30, 1996 consists of leases on its facilities.
Net cash provided by financing activities during the first six months of 1996
reflects proceeds from the issuance of common stock under the Company's stock
option plan.
At June 30, 1996, the Company had working capital of $47.8 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.
13
<PAGE> 14
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
The 1996 annual meeting was held at the offices of the Company at 10725
North De Anza Boulevard, Cupertino, California on May 29, 1996 at 9:00
a.m. local time, for the following purposes:
1. To elect two directors to hold office until the 1999 Annual
Meeting of Stockholders.
2. To approve the Company's 1992 Stock Option Plan, as amended, to
increase the aggregate number of shares of Common Stock authorized
for issuance under such plan by 2,000,000 shares.
3. To ratify the selection of Arthur Andersen LLP as independent
auditors of the Company for its fiscal year ending December 31,
1996.
Shareholders of record at the close of business on March 29, 1996 were
entitled to vote at the meeting.
a. On the vote for the election of directors, the following persons
received the number of votes set forth opposite their respective
names:
<TABLE>
<CAPTION>
For Against
--- -------
<S> <C> <C>
Uzia Galil 37,633,935 484,369
Darrell Miller 37,659,947 458,357
</TABLE>
b. On the motion with respect to increasing the aggregate number of
shares of Common Stock authorized for issuance under the Company's
1992 Stock Option Plan, as amended:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
31,570,565 6,217,010 330,729
</TABLE>
c. On the motion with the respect to the selection of Arthur Andersen
LLP as independent auditors of the Company:
<TABLE>
For Against Abstain
--- ------- -------
<S> <C> <C>
37,872,688 95,843 149,773
</TABLE>
ITEM 5. OTHER INFORMATION
Not applicable
14
<PAGE> 15
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: AUGUST 13, 1996 BY: /S/ WALTER D. AMARAL
------------------------- ----------------------------------
WALTER D. AMARAL
SENIOR VICE PRESIDENT, FINANCE AND
CHIEF FINANCIAL OFFICER
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 28,368
<SECURITIES> 15,782
<RECEIVABLES> 19,866
<ALLOWANCES> 2,729
<INVENTORY> 0
<CURRENT-ASSETS> 69,508
<PP&E> 19,857
<DEPRECIATION> (7,224)
<TOTAL-ASSETS> 162,459
<CURRENT-LIABILITIES> 21,708
<BONDS> 0
0
0
<COMMON> 422
<OTHER-SE> 138,533
<TOTAL-LIABILITY-AND-EQUITY> 162,459
<SALES> 59,797
<TOTAL-REVENUES> 59,797
<CGS> 5,808
<TOTAL-COSTS> 5,808
<OTHER-EXPENSES> 14,866
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,083
<INCOME-TAX> 3,428
<INCOME-CONTINUING> 6,655
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,655
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
