<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JULY 29, 1997
NETMANAGE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-15067 77-0252226
(State or other (Commission File Number) (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
10725 NORTH DE ANZA BOULEVARD, CUPERTINO, CA 95014
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 973-7171
NOT APPLICABLE
(Former name, former address and former fiscal
year, if changed since last report)
<PAGE> 2
The Registrant hereby amends Parts (a) and (b) of Item 7, Financial Statements
and Exhibits, of its report on Form-8-K filed on August 8, 1997,to read in full
as follows:
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements of business acquired.
The consolidated financial statements of Network
Software Associates, Inc. for the years ended March
31, 1997, 1996 and 1995, and the unaudited
condensed balance sheet of NetSoft as of June 30,
1997 and the related statements of operations for
the three-month periods ended June 30, 1997 and
1996 are attached hereto as Exhibit 99.1 and
incorporated herein by this reference.
(b) Pro forma financial information.
The unaudited pro forma condensed consolidated
balance sheet of NetManage, Inc. as of June 30,
1997 and the related statements of operations for
the six month period ended June 30, 1997 and the
twelve month period ended December 31, 1996 are
attached hereto as Exhibit 99.2 and incorporated
herein by this reference.
-2-
<PAGE> 3
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.
Date: October 14, 1997 NETMANAGE, INC., a Delaware corporation
By: /s/ Zvi Alon
------------------------------------
Zvi Alon
Chairman of the Board, President
and Chief Executive Officer
-3-
<PAGE> 4
NETMANAGE, INC.
EXHIBIT INDEX
TO FORM 8-K/A
Exhibit No. Description
- ----------- -----------
23.1 Consent of ERNST & YOUNG LLP
99.1 Financial Statements of Network Software Associates,
Inc.
99.2 Pro Forma Financial Statements of NetManage, Inc.
-4-
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(No. 33-74460, 33-95906, 33-99818 and 333-09157) on Form S-8 of NetManage,
Inc., of our report dated June 16, 1997, except for Note 10, as to which the
date is July 8, 1997, with respect to the consolidated financial statements of
Network Software Associates, Inc., insofar as they relate to the data included
in the Form 8-K filed by NetManage, Inc. with the Security Exchange Commission.
/s/ ERNST & YOUNG LLP
Orange County, California
October 13, 1997
<PAGE> 1
EXHIBIT 99.1
Network Software Associates, Inc.
Consolidated Financial Statements
Years ended March 31, 1997, 1996 and 1995
CONTENTS
Report of Independent Auditors.............................................1
Financial Statements
Consolidated Balance Sheets................................................2
Consolidated Statements of Income..........................................4
Consolidated Statements of Shareholders' Equity............................5
Consolidated Statements of Cash Flows......................................6
Notes to Consolidated Financial Statements.................................7
<PAGE> 2
Report of Independent Auditors
The Board of Directors
Network Software Associates, Inc.
We have audited the accompanying consolidated balance sheets of Network Software
Associates, Inc. as of March 31, 1997, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity and cash flows for the
years then ended. 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 did not audit the 1997, 1996 or
1995 financial statements of Network Software Associates, Inc. - Federal Systems
Division, a division of the Company, and certain wholly owned foreign
subsidiaries which statements reflect total assets of $1,597,000, $3,355,000 and
$3,991,000 as of March 31, 1997, 1996 and 1995, respectively, and total revenues
of $6,801,000, $9,989,000 and $10,581,000 for the years then ended,
respectively. Those statements were audited by other auditors whose reports have
been furnished to us, and our opinion, insofar as it relates to the 1997, 1996
and 1995 data included for Network Software Associates, Inc. - Federal Systems
Division and certain wholly owned foreign subsidiaries, is based solely on the
reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Network Software Associates, Inc. at
March 31, 1997, 1996 and 1995, and the consolidated results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
June 16, 1997,
except for Note 10, as to which the date is
July 8, 1997
1
<PAGE> 3
Network Software Associates, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
MARCH 31
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,798,000 $ 4,051,000 $ 2,651,000
Accounts receivable, less allowance
for doubtful accounts of $269,000
in 1997, $191,000 in 1996 and
$139,000 in 1995 9,973,000 6,493,000 6,337,000
Income tax receivable 615,000 -- --
Notes receivable 28,000 103,000 160,000
Inventories 448,000 418,000 390,000
Deferred tax assets 1,527,000 935,000 505,000
Prepaid expenses 688,000 281,000 286,000
---------- ---------- ---------
Total current assets 16,077,000 12,281,000 10,329,000
Property and equipment, at cost:
Equipment 3,781,000 3,251,000 2,200,000
Furniture and fixtures 748,000 735,000 575,000
--------- ---------- ---------
4,529,000 3,986,000 2,775,000
Less accumulated depreciation
and amortization 1,987,000 1,683,000 1,062,000
--------- --------- ---------
Net property and equipment 2,542,000 2,303,000 1,713,000
Note receivable from Exycon AG,
less current portion -- -- 115,000
Note receivable from shareholder 99,000 92,000 86,000
Goodwill, net of accumulated
amortization of $272,000 in
1997, $202,000 in 1996
and $133,000 in 1995 75,000 145,000 214,000
Deferred tax assets -- 277,000 361,000
Other assets 303,000 90,000 76,000
----------- ----------- -----------
Total assets $19,096,000 $15,188,000 $12,894,000
=========== =========== ===========
</TABLE>
2
<PAGE> 4
<TABLE>
<CAPTION>
MARCH 31
1997 1996 1995
----------- ------------ -----------
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit $ -- $ -- $ 47,000
Accounts payable 1,450,000 1,188,000 1,762,000
Accrued compensation and related expenses 1,712,000 1,800,000 2,291,000
Deferred incentive compensation 1,438,000 700,000 213,000
Income taxes payable -- 648,000 92,000
Accrued postcontract customer support costs 356,000 296,000 236,000
Other accrued liabilities 1,380,000 724,000 496,000
Deferred revenue 1,750,000 884,000 636,000
Current portion of long-term debt 220,000 348,000 384,000
--------- --------- ---------
Total current liabilities 8,306,000 6,588,000 6,157,000
Long-term debt, less current portion 121,000 340,000 585,000
Accrued compensation -- -- 170,000
Deferred tax liabilities 89,000 -- --
Other long-term liabilities 428,000 232,000 235,000
Commitments and contingencies
Shareholders' equity:
Common stock, no par value:
Authorized shares - 3,000,000
Issued and outstanding shares - 1,876,000
in 1997, 1996 and 1995 62,000 62,000 62,000
Retained earnings 10,139,000 8,108,000 5,642,000
Cumulative translation adjustment (49,000) (142,000) 43,000
----------- ------------ ------------
Total shareholders' equity 10,152,000 8,028,000 5,747,000
----------- ------------ ------------
Total liabilities and shareholders' equity $19,096,000 $15,188,000 $12,894,000
=========== =========== ============
</TABLE>
See accompanying notes.
<PAGE> 5
Network Software Associates, Inc.
Consolidated Statements of Income
YEAR ENDED MARCH 31
1997 1996 1995
------------ ------------ -------------
Revenues:
Software sales $ 33,305,000 $ 28,038,000 $ 23,342,000
Royalties 1,888,000 2,012,000 2,945,000
Hardware sales 1,752,000 3,154,000 2,939,000
Services 2,335,000 992,000 726,000
------------ ------------ ------------
Total revenues 39,280,000 34,196,000 29,952,000
Costs and expenses:
Cost of sales 4,101,000 4,870,000 4,510,000
Sales and marketing 20,755,000 15,943,000 13,726,000
General and administrative 7,018,000 4,511,000 3,073,000
Research and development 4,515,000 4,677,000 4,032,000
Interest (income) expense, net (93,000) 9,000 (19,000)
----------- ------------ ------------
Total costs and expenses 36,296,000 30,010,000 25,322,000
----------- ------------ ------------
Income before provision for
income taxes 2,984,000 4,186,000 4,630,000
Provision for income taxes 953,000 1,720,000 1,925,000
------------ ------------ ------------
Net income $ 2,031,000 $ 2,466,000 $ 2,705,000
============ ============ ============
Net income per common share $ 1.08 $ 1.31 $ 1.44
============ ============ ============
Weighted average commonshares
outstanding 1,876,000 1,876,000 1,876,000
============ ============ ============
See accompanying notes.
4
<PAGE> 6
Network Software Associates, Inc.
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
COMMON STOCK CUMULATIVE
------------------------ RETAINED TRANSLATION
SHARES AMOUNT EARNINGS ADJUSTMENT TOTAL
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1994 1,876,000 $ 62,000 $ 2,937,000 $ 34,000 $ 3,033,000
Translation adjustment -- -- -- 9,000 9,000
Net income -- -- 2,705,000 -- 2,705,000
---------- -------- ----------- --------- -----------
Balance at March 31, 1995 1,876,000 62,000 5,642,000 43,000 5,747,000
Translation adjustment -- -- -- (185,000) (185,000)
Net income -- -- 2,466,000 -- 2,466,000
---------- -------- ----------- --------- -----------
Balance at March 31, 1996 1,876,000 62,000 8,108,000 (142,000) 8,028,000
Translation adjustment -- -- -- 93,000 93,000
Net income -- -- 2,031,000 -- 2,031,000
---------- -------- ----------- --------- -----------
Balance at March 31, 1997 1,876,000 $ 62,000 $10,139,000 $ (49,000) $10,152,000
========== ======== =========== ========= ===========
</TABLE>
See accompanying notes.
5
<PAGE> 7
Network Software Associates, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,031,000 $ 2,466,000 $ 2,705,000
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 1,000,000 714,000 434,000
Deferred income taxes (226,000) (346,000) (383,000)
Loss on disposal of fixed assets 322,000 19,000 85,000
Change in operating assets and
liabilities:
Accounts receivable (3,466,000) (156,000) (1,156,000)
Inventories (30,000) (28,000) 5,000
Prepaid expenses and other assets (620,000) (23,000) (145,000)
Accounts payable 262,000 (574,000) 16,000
Income taxes payable (1,277,000) 556,000 (459,000)
Accrued compensation and related (88,000) (746,000) 533,000
expenses
Deferred incentive compensation 738,000 572,000 213,000
Accrued postcontract customer support 60,000 60,000 36,000
costs
Other accrued liabilities 852,000 239,000 650,000
Deferred revenue 866,000 248,000 337,000
Other 93,000 (185,000) 9,000
---------- ---------- -----------
Net cash provided by operating activities 517,000 2,816,000 2,880,000
INVESTING ACTIVITIES
Investment in property and equipment (1,544,000) (1,278,000) (1,294,000)
Increase in notes receivable (28,000) -- --
Increase in note receivable from shareholder (7,000) (6,000) (6,000)
Payments received on notes receivable 103,000 172,000 152,000
Proceeds from disposal of fixed assets 53,000 24,000 --
----------- ----------- -----------
Net cash used in investing activities (1,423,000) (1,088,000) (1,148,000)
FINANCING ACTIVITIES
Principal payments on long-term debt (347,000) (281,000) (76,000)
Reduction in lines of credit borrowings -- (47,000) (96,000)
Additions to long-term debt -- -- 100,000
----------- ----------- -----------
Net cash used in financing activities (347,000) (328,000) (72,000)
Net increase (decrease) in cash and
equivalents (1,253,000) 1,400,000 1,660,000
Cash and cash equivalents at beginning of year 4,051,000 2,651,000 991,000
----------- ----------- -----------
Cash and cash equivalents at end of year $ 2,798,000 $ 4,051,000 $ 2,651,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH PAID
DURING THE YEAR
Interest $ 81,000 $ 110,000 $ 50,000
Income taxes $ 2,403,000 $ 1,479,000 $ 2,660,000
</TABLE>
6
See accompanying notes.
<PAGE> 8
Network Software Associates, Inc.
Notes to Consolidated Financial Statements
March 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION
Network Software Associates, Inc. (the Company) was incorporated in California
in 1980 and engages principally in the development and marketing of hardware and
software networking applications for IBM and IBM compatible computers.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiary, NetSoft, a California corporation, and NetSoft's five European
sales subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
RESTATEMENT OF PRIOR YEARS' FINANCIAL STATEMENTS
In fiscal 1996 and 1995, the Company did not accrue deferred compensation
related to the deferred incentive agreements described in Note 7. Income before
provision for income taxes and net income should have been $487,000 and $312,000
less, respectively, than the reported amounts in 1996 and $128,000 and $83,000
less, respectively, than the reported amounts in 1995. These deferred
compensation account balances for 1996 and 1995 have been restated in these
consolidated financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's cash, cash equivalents, accounts receivable and
accounts payable approximated their carrying amounts due to the relatively short
maturity of these items. The fair value of debt approximated its carrying amount
at March 31, 1997 based on rates currently available to the Company for debt
with similar terms and remaining maturities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumption that
effect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
7
<PAGE> 9
Network Software Associates, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
Sales to the Company's recurring customers are generally made on open account
terms. The Company performs periodic credit evaluations of its ongoing customers
and does not generally require collateral. Reserves are maintained for potential
credit losses which have been minimal and within management's expectations.
The Company has been approved for participation in the Small Business
Administration's Section 8(a) program. Section 8(a) sales aggregated
approximately $244,000, $698,000 and $86,000 for the years ended March 31, 1997,
1996 and 1995, respectively.
The Company's products are sold primarily to corporate customers with no
specific industry concentration. International sales represented approximately
33%, 28% and 23% of sales for the years ended March 31, 1997, 1996 and 1995.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with maturities of
three months or less.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist primarily of printed circuit boards, manuals and supplies for
packaging hardware and software systems.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of property and equipment is provided using the
straight line (half-year convention) method over estimated useful lives of three
to seven years or the length of the related lease, if shorter.
Goodwill is amortized on a straight-line method over a five year period.
REVENUE RECOGNITION
The Company recognizes revenues from the sale of its software and hardware
products upon shipment and recognizes royalty revenue in the period the related
products are shipped by licensees. Postcontract customer support revenues are
recognized pro rata over the support period, generally one year.
8
<PAGE> 10
Network Software Associates, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
Revenue on firm fixed-price contracts is recognized on the completed contract
method upon shipment or delivery of the related hardware and software products.
Provisions for estimated losses, if any, on uncompleted contracts are recorded
in the period in which the loss becomes known.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expenses,
including the cost of promotional literature, print ads, direct mail and trade
shows aggregated $2,758,000, $2,154,000 and $1,742,000 for the years ended March
31, 1997, 1996 and 1995, respectively.
RESEARCH AND DEVELOPMENT
Research and development expenses resulting from the design, development and
testing of new software are expensed as incurred, until technological
feasibility has been established for the product. Thereafter, certain costs such
as coding and testing are capitalized until the product is available for general
release to customers. The Company uses the working model approach to establish
technological feasibility and, to date, all costs have been expensed as
incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
Effective April 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of. Implementation did not have a material
impact on the consolidated financial statements.
EARNING PER SHARE
Earnings per share are based upon the weighted average number of common shares
outstanding during each period.
9
<PAGE> 11
Network Software Associates, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATION
Certain prior years amounts have been reclassified to conform with current year
presentation.
2. BUSINESS ACQUISITION
Effective May 1, 1993, the Company purchased the common stock of four
subsidiaries of Exycon AG (the Company's former European distributor). The
remaining balance due from Exycon AG for trade receivables in existence at the
date of acquisition of $103,000 at March 31, 1996 was repaid in 1997. Amounts
receivable under the note bore interest at 8% per annum.
In conjunction with the acquisition, the Company entered into a consulting and
noncompete agreement with Exycon Services which required the Company to pay
royalties from available cash as defined. Effective March 1, 1995, the agreement
was terminated and a $790,000 subordinated note was issued in full settlement
for royalties accrued as of that date. As the note is non-interest bearing the
Company imputed interest at 12% over its 30 month term. (Note 4)
Concurrent with the acquisition, the Company also entered into a consulting and
noncompete agreement with Exycon AG which extends through May 1, 1998. This
agreement requires payments of $15,000 per month through October 1996.
3. LINES OF CREDIT
NetSoft has a $2,500,000 line of credit agreement bearing interest at prime plus
.25% (8.5% at March 31, 1997). No borrowings were outstanding under this line at
March 31, 1997 and 1996. The line is secured by substantially all of NetSoft's
assets and is guaranteed by the Company. The agreement requires NetSoft to
maintain certain financial ratios. At March 31, 1997, NetSoft was in compliance
with all covenants.
The Company has a $250,000 line of credit agreement bearing interest at the
prime rate of interest. No borrowings were outstanding under this line at March
31, 1997 or 1996.
10
<PAGE> 12
Network Software Associates, Inc.
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following at March
31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- ---------
<S> <C> <C> <C>
Subordinated note, due in monthly
installments of $26,000 through August
1997 (net of unamortized discount of
$5,000 in 1997, $42,000 in 1996 and
$114,000 in 1995) (Note 2) $153,000 $432,000 $676,000
Obligations under capital leases (net of
deferred finance charges of $27,000 in
1997, $51,000 in 1996 and $42,000 in 188,000 256,000 196,000
1995)
Note payable (Note 7) -- -- 97,000
-------- -------- --------
341,000 688,000 969,000
Less current portion 220,000 348,000 384,000
-------- -------- --------
Due after one year $121,000 $340,000 $585,000
======== ======== ========
</TABLE>
The Company incurred capital lease obligations of $0, $127,000 and $158,000 in
1997, 1996 and 1995, respectively, in connection with lease agreements to
acquire equipment. Capitalized leases relate to equipment included in the
accompanying consolidated balance sheets at a cost of $299,000, $314,000 and
$222,000 at March 31, 1997, 1996 and 1995, respectively. Accumulated
amortization related to this equipment aggregated $168,000, $62,000 and $49,000
at March 31, 1997, 1996 and 1995, respectively. The leases provide for options
to purchase the equipment at the end of the lease term at the then fair market
value.
Payments related to the Company's long-term debt and capital lease obligations
are as follows for the years ending March 31:
<TABLE>
<CAPTION>
LONG-TERM CAPITAL LEASE
DEBT OBLIGATIONS
--------- -------------
<S> <C> <C>
1998 $153,000 $ 87,000
1999 -- 77,000
2000 -- 47,000
2001 -- 4,000
-------- ---------
$153,000 215,000
========
Less amount representing interest 27,000
---------
Present value of minimum lease payments $ 188,000
=========
</TABLE>
11
<PAGE> 13
Network Software Associates, Inc.
Notes to Consolidated Financial Statements (continued)
5. COMMITMENTS
The Company leases various office facilities and certain equipment under lease
agreements expiring through 2003. Future minimum lease payments under
noncancelable operating leases consist of the following as of March 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 850,000
1999 613,000
2000 235,000
2001 181,000
2002 82,000
Thereafter 26,000
==========
$1,987,000
==========
</TABLE>
Rent expense aggregated approximately $920,000, $803,000 and $611,000 for the
years ended March 31, 1997, 1996 and 1995, respectively.
6. TAXES BASED ON INCOME
The Company utilizes the liability method of accounting for income taxes as set
forth in Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes. Under the liability method, deferred taxes are determined based on
the differences between the financial statement and tax basis of assets and
liabilities, using enacted tax rates.
The provision for income taxes, consists of the following for the years ended
March 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal $ 954,000 $1,555,000 $1,803,000
State 162,000 331,000 427,000
Foreign 63,000 180,000 78,000
----------- ---------- ----------
1,179,000 2,066,000 2,308,000
Deferred:
Federal (206,000) (363,000) (323,000)
State (72,000) (49,000) (74,000)
Foreign 52,000 66,000 14,000
----------- ---------- ----------
(226,000) (346,000) (383,000)
----------- ---------- ----------
$ 953,000 $1,720,000 $1,925,000
=========== ========== ==========
</TABLE>
12
<PAGE> 14
Network Software Associates, Inc.
Notes to Consolidated Financial Statements (continued)
6. TAXES BASED ON INCOME (CONTINUED)
A reconciliation of the statutory federal income tax provision to the actual
provision for the years ended March 31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Statutory federal income tax provision $1,015,000 $1,423,000 $1,573,000
U.S benefit of foreign losses (570,000) -- --
Effect of foreign income tax rates (5,000) 47,000 (91,000)
Foreign losses without benefit 383,000 48,000 67,000
State taxes, net of and federal benefit 59,000 186,000 234,000
Nondeductible amortization of goodwill 37,000 37,000 37,000
Other, net 34,000 (21,000) 105,000
---------- ---------- ----------
Provision for income taxes $ 953,000 $1,720,000 $1,925,000
========== ========== ===========
</TABLE>
Deferred income taxes reflect the tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's net deferred tax assets and liabilities as of March 31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Deferred tax assets:
Deferred incentive compensation $ 591,000 $ 220,000 $ 45,000
Foreign tax loss carryforwards 575,000 211,000 163,000
Accrued expenses and deferred 405,000 401,000 308,000
revenue
Accrued compensation 333,000 503,000 435,000
Reserves not currently deductible 202,000 225,000 106,000
Intercompany inventory profit
elimination 137,000 51,000 26,000
Inventory capitalization 7,000 7,000 11,000
---------- ---------- ----------
2,250,000 1,618,000 1,094,000
Valuation allowance (575,000) (211,000) (163,000)
---------- ---------- ----------
Total deferred tax assets 1,675,000 1,407,000 931,000
Deferred tax liabilities:
Tax over book depreciation (105,000) (115,000) (51,000)
Foreign interest accrual (132,000) (80,000) (14,000)
---------- ---------- ----------
Total deferred tax liabilities (237,000) (195,000) (65,000)
========== ========== ==========
Net deferred tax asset $1,438,000 $1,212,000 $ 866,000
========== ========== ==========
</TABLE>
13
<PAGE> 15
Network Software Associates, Inc.
Notes to Consolidated Financial Statements (continued)
6. TAXES BASED ON INCOME (CONTINUED)
The valuation allowance against deferred tax assets relates to temporary
differences associated with foreign tax loss carryforwards. In 1997, the Company
made certain tax elections which allowed it to deduct $1,675,000 of these
foreign tax loss carryforwards in its U.S. federal and state income tax returns.
In future years, if the benefit of these loss carryforwards is realized in the
foreign tax jurisdictions, there will be no decrease in the Company's effective
tax rate.
7. RELATED PARTY TRANSACTIONS
The Company has entered into a loan agreement with an individual responsible for
managing one of the Company's sales offices (Sales Office) to provide financing
for the Company to develop, manage and maintain the Sales Office. The terms of
the loan require accrual of profit sharing amounts, rather than interest, equal
to one-half of the Sales Office's cumulative pretax earnings, as defined.
Repayment of principal and accrued profit sharing are to be made only from
available cash flow generated by the Sales Office. The balance on this note of
$47,000 at March 31, 1995 was repaid in 1996. In addition, the sales office
manager loaned the Company $100,000 in 1995 under a demand note bearing interest
at 10%, which was also repaid in full in 1996.
In February 1992, the Company agreed to compensate the manager of the Sales
Office $170,000 for prior services rendered. Payment of this amount was to be
made from available cash flow, as defined, subsequent to repayment of the note
payable. This compensation was paid in 1996.
During 1994, the Company entered into deferred incentive agreements with the
management of the Sales Office under which additional compensation equal to the
increase in the value of the Sales Office is payable to the employees at any
time prior to December 31, 2005. Amounts earned under the agreement are paid
only once during the term of the agreement; after payment this provision of the
agreement is terminated.
In February 1994, the Company entered into an agreement with its majority
shareholder whereby, upon the occurrence of certain events, but no later than
November 1997, the Company will sell the Sales Office to the majority
shareholder. On June 30, 1997 the Sales Office was sold to the majority
shareholder for its $85,000 net book value.
At various times since inception of the Company, certain officer/shareholders
have agreed to defer payment of a portion of their compensation. Amounts accrued
are payable on request.
14
<PAGE> 16
Network Software Associates, Inc.
Notes to Consolidated Financial Statements (continued)
8. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution employee benefit plan established under
the provisions of Section 401(k) of the Internal Revenue Code. The plan allows
substantially all employees to make contributions through salary deferrals. The
Company made discretionary contributions to the Plan of $54,000, $32,000 and
$171,000 for the years ended March 31, 1997, 1996 and 1995, respectively.
9. STOCK OPTION PLAN
The Company has elected to follow Accounting Principles Board Option No. 25,
Accounting for Stock Issued to Employees (APB 25) and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123)
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of
NetSoft's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
The "NetSoft Incentive Stock Option, Nonqualified Stock Option and Restricted
Stock Purchase Plan - 1994" (the Plan) provides that options for 2,060,000
shares of the NetSoft's common stock may be granted to eligible employees. In
addition, the "President's Stock Option Plan" (President's Plan) provides that
options for up to 490,000 shares of the NetSoft's common stock may be granted to
NetSoft's President. Up to 140,000 of these authorized options may be granted in
four annual installments of 35,000 as performance based options. The exercise
price of options issued under the Plan and the President's Plan shall not be
less than the fair market value of the common stock on the date the options are
granted. The majority of the options vest annually over four years. Options
expire 10 years from the date of grant.
15
<PAGE> 17
Network Software Associates, Inc.
Notes to Consolidated Financial Statements (continued)
9. STOCK OPTION PLAN (CONTINUED)
Information regarding the Plan and the President's Plan is summarized below:
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996
----------------------- ----------------------
WEIGHTED WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
--------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of year 868,262 $2.54 728,162 $2.25
Options granted 890,000 3.20 276,500 3.20
Options exercised (6,350) 2.28 (5,470) 2.25
Options expired/forfeited (89,050) 2.91 (130,930) 2.35
--------- ----- -------- -----
Options outstanding at
end of year 1,662,862 $2.87 868,262 $2.54
========= ===== ======== =====
Options exercisable at
end of year 311,937 $2.39 140,562 $2.25
Exercise price range $2.25 to $3.20 $2.25 to $3.20
</TABLE>
The weighted-average remaining contractual life of options outstanding at March
31, 1997 and 1996, was approximately 8.5 years.
Pro forma information regarding net income is required by SFAS 123, which also
requires that the information be determined as if the Company had accounted for
NetSoft's employee stock options granted subsequent to March 31, 1995 under the
fair value method of the Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for fiscal 1997 and 1996: risk-free
interest rate equal to 6.3%; no dividend yield; no volatility factor; and a
weighted-average expected life of each options equal to four years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996
------------------------ ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net income $2,031,000 $1,907,000 $2,466,000 $2,434,000
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to March 31,
1995, its pro forma effect will not be fully reflected until fiscal 1999.
16
<PAGE> 18
Network Software Associates, Inc.
Notes to Consolidated Financial Statements (continued)
10. PROPOSED CHANGE IN OWNERSHIP
The Company has agreed to be acquired by NetManage, Inc. for $26 million. The
proposed transaction is expected to be completed in August 1997. The Company's
financial position and results of operations reflect the operating plans of
current management without consideration of strategic changes which may take
place upon consummation of the change in ownership.
17
<PAGE> 19
NETSOFT
CONDENSED STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
For The
Three Months Ended
June 30,
-----------------------------
1996 1997
------------ -------------
<S> <C> <C>
Net revenues $ 6,893 $ 6,928
Cost of revenues 698 614
------------- -------------
Gross margin 6,195 6,314
------------- -------------
Operating expenses:
Research and development 1,484 1,860
Sales and marketing 3,368 4,463
General and administrative 805 1,173
------------- -------------
Total operating expenses 5,657 7,496
------------- -------------
Income (loss) from operations 538 (1,182)
Other income (expense) 7 12
------------- -------------
Income (loss) before income
taxes 545 (1,170)
Provision (benefit) for income
taxes 364 (307)
------------- -------------
Net income (loss) $ 181 $ (863)
============= =============
</TABLE>
<PAGE> 20
NETSOFT
CONDENSED BALANCE SHEET DATA
(In thousands)
<TABLE>
<CAPTION>
As of
June 30, 1997
---------------
<S> <C>
Assets
Cash and cash equivalents and
Short-term investments $ 3,060
Accounts receivable, net 6,707
Prepaid expenses and other
current assets 2,404
---------------
Total current assets 12,171
---------------
Property and equipment, at cost: 4,374
Less - Accumulated depreciation (2,056)
---------------
Net property and equipment 2,318
---------------
Other assets 506
---------------
$ 14,995
===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 913
Accrued liabilities 1,027
Accrued payroll and
payroll-related expenses 1,344
Deferred revenue 1,784
Income taxes payable -
---------------
Total current liabilities 5,068
---------------
Long-term liabilities 613
---------------
Stockholders' equity:
Common stock 1,751
Additional paid-in capital -
Retained earnings 7,523
Cumulative translation
adjustments 40
---------------
Total stockholder's equity 9,314
---------------
$ 14,995
===============
</TABLE>
<PAGE> 1
Exhibit 99.2
NETMANAGE, INC.
AND NETSOFT
PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS
(UNAUDITED)
On July 29, 1997, NetManage, Inc. (the "Company") acquired all of the assets of
Network Software Associates, Inc. ("NetSoft") for cash of approximately $26
million. The transaction will be accounted for as a purchase. The accompanying
unaudited pro forma combined condensed financial statements should be read in
conjunction with the historical financial statements and related notes thereto
for both the Company and NetSoft, incorporated by reference or included
elsewhere herein.
The unaudited pro forma combined condensed balance sheet has been prepared as if
the acquisition was consummated on June 30, 1997, and combines the Company's
balance sheet as of June 30, 1997, with NetSoft's balance sheet as of June 30,
1997. The unaudited pro forma combined condensed statement of operations for the
year ended December 31, 1996, has been prepared as if the acquisition was
consummated as of the beginning of the fiscal year and combines the Company's
statement of operations for the year ended December 31, 1996 with NetSoft's
statement of operations for the year ended March 31, 1996. The unaudited pro
forma combined condensed statement of operations for the six months ended June
30, 1997, combines the Company's statement of operations for the six months
ended June 30, 1997 with NetSoft's statement of operations for the six months
ended June 30, 1997.
This method of combining historical financial statements for the preparation of
the pro forma combined condensed financial statements is for presentation
purposes only. Actual statements of operations of the companies will be combined
from the closing date of the acquisition with no retroactive restatements.
Additionally, the unaudited pro forma combined condensed financial statements
are provided for illustrative purposes only and are not necessarily indicative
of the combined financial position or combined results of operations that would
have been reported had the acquistion occurred on the dates indicated, nor do
they represent a forecast of the combined financial position or results of
operations for any future period.
<PAGE> 2
NETMANAGE, INC.
AND NETSOFT
PRO FORMA COMBINED CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-----------------------------------------------
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
NETMANAGE NETSOFT ADJUSTMENTS COMBINED
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,597 $ 3,060 $ 23,657
Short-term investments 47,982 -- (26,000)(a) 21,982
Accounts receivable, net 8,273 6,707 (513)(d) 14,467
Prepaid expenses and other
current assets 9,921 2,405 12,326
-------- ------- --------
Total current assets 86,773 12,172 72,432
-------- ------- --------
Property and equipment, at cost:
Computer software and
equipment 15,101 3,813 18,914
Furniture and fixtures 5,575 408 5,983
Leasehold improvements 1,404 153 1,557
-------- -------- --------
22,080 4,374 26,454
Less - Accumulated
depreciation (12,568) (2,056) (14,624)
-------- -------- --------
Net property and
equipment 9,512 2,318 11,830
-------- -------- --------
Long-term investments 34,762 -- 34,762
Goodwill and other
intangibles, net 1,142 58 2,198 (f) 3,398
Other assets 8,318 447 8,765
--------- -------- ---------
$ 140,507 $ 14,995 $ 131,187
========= ======== =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable $ 1,903 $ 913 $ 2,816
Accrued liabilities 2,967 1,399 1,000 (e) 5,366
Accrued payroll and
payroll-related expenses 4,543 1,344 5,887
Deferred revenue 7,081 1,412 8,493
Income taxes payable 1,519 -- 1,519
-------- -------- ---------
Total current
liabilities 18,013 5,068 24,081
-------- -------- ---------
Long-term liabilities 629 613 1,242
-------- -------- ---------
Stockholders' equity:
Common stock 434 1,751 (1,751)(b) 434
Additional paid-in capital 90,707 -- 90,707
Retained earnings 32,464 7,523 (23,524)(b,c) 16,463
Cumulative translation
adjustments (1,740) 40 (40)(b) (1,740)
-------- -------- ---------
Total stockholders'
equity 121,865 9,314 105,864
-------- -------- ---------
$140,507 $ 14,995 $ 131,187
======== ======== =========
</TABLE>
See accompanying notes.
<PAGE> 3
NETMANAGE, INC.
AND NETSOFT
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
NETMANAGE NETSOFT ADJUSTMENTS COMBINED
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues:
License fees $ 89,334 $ 28,644 $117,978
Services 15,262 974 16,236
-------- -------- --------
Total net revenues 104,596 29,618 134,214
Cost of revenues 11,837 3,526 15,363
-------- -------- --------
Gross margin 92,759 26,092 118,851
-------- -------- --------
Operating expenses:
Research and development 27,938 3,727 31,665
Sales and marketing 52,167 15,054 67,221
General and administrative 11,198 3,090 14,288
Write-off of in-process
research and development 13,384 -- 13,384
Amortization of goodwill 1,526 -- 1,099 (g) 2,625
Acquisition costs 199 -- 199
-------- -------- --------
Total operating expenses 106,412 21,871 129,382
-------- -------- --------
Income (loss) from operations (13,653) 4,221 (10,531)
Interest income (expense), net 5,625 (35) (1,300) (h) 4,290
Equity in losses of
unconsolidated affiliate (1,005) -- (1,005)
-------- -------- --------
Income (loss) before
income taxes (9,033) 4,186 (7,246)
Provision (benefit)
for income taxes (3,328) 1,720 (1,073) (i) (2,681)
-------- -------- ---------
Net income ( loss) $ (5,705) $ 2,466 $ (4,565)
======== ======== =========
Net income (loss) per share $ (0.13) $ (0.11)
======== =========
Weighted average common shares 42,341 42,341
======== =========
</TABLE>
See accompanying notes.
<PAGE> 4
NETMANAGE, INC.
AND NETSOFT
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
-----------------------------------------------
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
NETMANAGE NETSOFT ADJUSTMENTS COMBINED
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues:
License fees $ 21,243 $ 16,055 $ 37,298
Services 7,837 1,176 9,013
--------- --------- --------
Total net revenues 29,080 17,231 46,311
Cost of revenues 2,024 1,432 3,456
--------- --------- --------
Gross margin 27,056 15,799 42,855
--------- --------- --------
Operating expenses:
Research and development 10,868 2,334 13,202
Sales and marketing 20,817 11,265 32,082
General and administrative 4,834 2,586 7,420
Amortization of goodwill 520 -- 550 (g) 1,070
--------- --------- --------
Total operating expenses 37,039 16,185 53,774
--------- --------- --------
Loss from operations (9,983) (386) (10,919)
Interest income (expense)
and other, net 2,617 (19) (650)(h) 1,948
Equity in income of --
unconsolidated affiliate 79 -- 79
--------- --------- --------
Loss before provision for
income taxes (7,287) (405) (8,892)
Benefit for income taxes -- (63) (63)
--------- --------- --------
Net income ( loss) $ (7,287) $ (342) $ (8,829)
========= ========= =========
Net income (loss) per share $ (0.17) $ (0.20)
========= =========
Weighted average common
shares 43,255 43,255
========= =========
</TABLE>
See accompanying notes.
<PAGE> 5
NETMANAGE, INC.
AND NETSOFT
NOTES TO PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The unaudited pro forma combined condensed financial statements included herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. However, the Company believes
that the disclosures are adequate to make the information presented not
misleading. These pro forma combined financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Company's annual report for the year ended December 31, 1996.
NOTE 2. PRO FORMA ADJUSTMENTS
Certain pro forma adjustments have been made to the accompanying pro forma
combined condensed balance sheet and statement of operations as described below:
(a) Entry to record cash used for the acquisition assuming the
acquisition had occurred as of June 30, 1997.
(b) Entry to eliminate stockholders' equity as a result of the
acquisition.
(c) Reflects the write-off of in-process research and development,
resulting in a decrease to retained earnings of $16,001,000.
(d) Entry to write-down receivables to fair market value.
(e) Entry to accrue transaction costs.
(f) Entry to record goodwill.
(g) Reflects the amortization of goodwill based upon an estimated life
of two years.
(h) Reflects the reduction in interest income had the transaction
been consummated as of the beginning of the periods presented.
(i) Adjusts the income tax benefit based upon a 37% effective tax rate.
<PAGE> 6
NOTE 3. IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the acquisition, which will be accounted for as a purchase,
the Company has allocated the purchase price based upon the estimated fair value
of the assets acquired and the liabilities assumed. Intangible assets acquired
aggregated approximately $18.2 million. The Company received an appraisal of the
intangible assets which indicates that approximately $16 million of the acquired
intangible assets consists of in-process research and development. Because there
can be no assurance that the Company will be able to successfully complete the
development and integration of the NetSoft products or that the acquired
technology has any alternative future use, the acquired in-process research and
development will be charged to expense by the Company in the quarter in which
the transaction is consummated. The remaining intangible asset will be amortized
on a straight-line basis over an estimated useful life of two years. Management
believes that the unamortized balance is recoverable through future operating
results.
