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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1997
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 (IRS 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, 1997:
43,463,047
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NETMANAGE, INC.
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 1997 and
December 31, 1996 3
Condensed Consolidated Statements of Operations for the three
and six months ended June 30, 1997 and June 30, 1996 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1997 and June 30, 1996 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 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
</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,
1996, filed on March 31, 1997.
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NETMANAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
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JUNE 30, DECEMBER 31,
1997 1996
--------- ---------
(UNAUDITED) (AUDITED)
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 20,597 $ 19,483
Short-term investments 47,982 46,609
Accounts receivable, net 8,273 13,915
Prepaid expenses and other current assets 9,921 13,191
--------- ---------
Total current assets 86,773 93,198
--------- ---------
PROPERTY AND EQUIPMENT, at cost:
Computer software and equipment 15,101 14,874
Furniture and fixtures 5,575 5,622
Leasehold improvements 1,404 1,434
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22,080 21,930
Less - Accumulated depreciation (12,568) (9,872)
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Net property and equipment 9,512 12,058
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LONG-TERM INVESTMENTS 34,762 37,201
GOODWILL AND OTHER INTANGIBLES, net 1,142 1,763
OTHER ASSETS 8,318 8,309
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$ 140,507 $ 152,529
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,903 $ 2,060
Accrued liabilities 2,967 4,154
Accrued payroll and payroll-related expenses 4,543 4,779
Deferred revenue 7,081 8,839
Income taxes payable 1,519 1,698
--------- ---------
Total current liabilities 18,013 21,530
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LONG-TERM LIABILITIES 629 1,708
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STOCKHOLDERS' EQUITY:
Common stock 434 431
Additional paid-in capital 90,707 90,193
Retained earnings 32,464 39,751
Cumulative translation adjustments (1,740) (1,084)
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Total stockholders' equity 121,865 129,291
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$ 140,507 $ 152,529
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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NETMANAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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THREE MONTHS ENDED SIX MONTHS ENDED
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JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
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NET REVENUES:
License fees $ 8,963 $ 23,088 $ 21,243 $ 52,457
Services 3,738 3,687 7,837 7,340
-------- -------- -------- --------
Total net revenues 12,701 26,775 29,080 59,797
COST OF REVENUES 899 2,537 2,024 5,808
-------- -------- -------- --------
GROSS MARGIN 11,802 24,238 27,056 53,989
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development 4,778 7,076 10,868 14,250
Sales and marketing 10,518 13,214 20,817 26,032
General and administrative 2,444 3,001 4,834 5,659
Amortization of goodwill 260 307 520 616
-------- -------- -------- --------
Total operating expenses 18,000 23,598 37,039 46,557
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS (6,198) 640 (9,983) 7,432
INTEREST INCOME AND OTHER, NET 1,362 1,956 2,617 2,994
EQUITY IN INCOME (LOSSES) OF
UNCONSOLIDATED AFFILIATE 288 (118) 79 (343)
-------- -------- -------- --------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (4,548) 2,478 (7,287) 10,083
PROVISION FOR INCOME TAXES -- 843 -- 3,428
-------- -------- -------- --------
NET INCOME (LOSS) $ (4,548) $ 1,635 $ (7,287) $ 6,655
======== ======== ======== ========
NET INCOME (LOSS) PER SHARE $ (0.10) $ 0.04 $ (0.17) $ 0.15
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES
AND EQUIVALENTS 43,328 43,521 43,255 43,340
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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NETMANAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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SIX MONTHS ENDED
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JUNE 30, JUNE 30,
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (7,287) $ 6,655
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 4,721 4,470
Provision for doubtful accounts and returns -- 576
Equity in (income) losses of unconsolidated affiliate (79) 343
Changes in assets and liabilities, net of business combinations:
Accounts receivable 5,642 2,684
Prepaid expenses and other assets 3,444 36
Accounts payable (157) (774)
Accrued liabilities, payroll and payroll-related expenses (1,423) 737
Deferred revenue (2,837) (2,962)
Income taxes payable (179) 671
-------- --------
Net cash provided by operating activities 1,845 12,436
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (23,895) (17,195)
Proceeds from maturity of short-term investments 22,139 26,542
Purchases of long-term investments (17,613) (29,118)
Proceeds from maturity of long-term investments 19,513 9,005
Purchases of property and equipment (606) (2,836)
Purchases of technology and other intangible assets (530) (4,193)
Acquisition of a business -- (1,325)
Investment in unconsolidated affiliate (163) (444)
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Net cash used in investing activities (1,155) (19,564)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 517 3,476
-------- --------
Net cash provided by financing activities 517 3,476
EFFECT OF EXCHANGE RATE CHANGES ON CASH (93) (573)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,114 (4,225)
CASH AND CASH EQUIVALENTS, beginning of period 19,483 32,593
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 20,597 $ 28,368
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</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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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, 1997 and 1996 for NetManage(R), 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% interest in an
unconsolidated affiliate, NetVision, Ltd., is accounted for by the equity
method.
3. ACQUISITIONS
On July 29, 1997, the Company acquired all of the outstanding shares of
Network Software Associates, Inc. ("NSA"), for $26.0 million in cash,
pursuant to the Stock Purchase Agreement dated July 8, 1997. NSA is a
holding company for NetSoft ("NetSoft"), a privately-held company
specializing in the development, marketing and support of PC-to-Host
connectivity software solutions. As of the date of the acquisition, NSA and
NetSoft have continued as wholly-owned subsidiaries of NetManage. The
acquired company hereinafter will be referred to as NetSoft. The
transaction will be accounted for as a purchase during the third quarter of
1997 and, accordingly, the results of NetSoft from the date of acquisition
forward will be recorded in the Company's consolidated financial
statements. An independent valuation of the purchase transaction is
currently in process and will be finalized in the third quarter of 1997.
4. NET INCOME (LOSS) PER SHARE
Net loss per share data has been computed using the weighted average number
of shares of common stock. 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.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share".
SFAS No. 128 is effective for the Company's fiscal year ending December 31,
1997. Upon adoption, all prior-period earnings per share data presented
will be restated to conform with SFAS No. 128. The Company has not yet
quantified the effect of adopting SFAS No. 128.
5. COMMITMENTS AND CONTINGENCIES
On January 9, 1997, a securities class action complaint, Head, et al. v.
NetManage, Inc., et al., No. 07763295, was filed in the Superior Court of
California, Santa Clara County, against the Company and certain of its
directors and current and former officers. On January 10, 1997, the same
plaintiffs filed a securities class action complaint, Head, et al. v.
NetManage, Inc., et al., No. C-97-20061-JW, in the United States District
Court for the Northern District of California, against the same defendants.
Both complaints allege that, between July 25, 1995 and January 11, 1996,
the defendants made false or misleading statements of material fact about
the Company's prospects and failed to follow generally accepted accounting
principles. The state court
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complaint asserts claims under California state law; the federal court
complaint asserts claims under the federal securities laws. Both complaints
seek an unspecified amount of damages. The Company believes there is no
merit to either case and intends to defend both cases vigorously. There can
be no assurance that the Company will be able to prevail in the lawsuits,
or that the pendency of the lawsuits will not adversely affect the
Company's operations. As the outcome of this matter cannot be reasonably
determined, the Company has not accrued for any potential loss
contingencies.
On March 21, 1997, a securities class action complaint, Interactive Data
Systems, Inc., et al. v. NetManage, Inc., et al., No. CV764945, was filed
in the Superior Court of California, Santa Clara County, against the
Company and certain of its directors and officers. On June 19, 1997, one of
the plaintiffs in that action filed a securities class action complaint,
Molinari v. NetManage, Inc., et al., No. C-97-20544-JW-PVT, in the United
States District Court for the Northern District of California against the
same defendants. Both complaints allege that, between April 18, 1996 and
July 18, 1996, the defendants made false or misleading statements of
material fact about the Company's prospects. The state court complaint
asserts claims under California state law; the federal complaint asserts
claims under the federal securities laws. Both complaints seek an
unspecified amount of damages. The Company believes there is no merit to
either case and intends to defend both cases vigorously. There can
be no assurance that the Company will be able to prevail in the lawsuits,
or that the pendency of the lawsuits will not adversely affect the
Company's operations. As the outcome of this matter cannot be reasonably
determined, the Company has not accrued for any potential loss
contingencies.
The Company may be contingently liable with respect to certain asserted and
unasserted claims that arise during the normal course of business. In the
opinion of management, the outcome of all other such matters presently
known to management will not have a material adverse effect on the
Company's business, financial position or results of operations.
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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. Such forward-looking statements
include, among others, statements regarding expected fluctuations or increases
in revenues and percentages of revenues from international markets, indirect
sales channels and statements regarding expected fluctuations or 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, slower than expected growth in the markets for the Company's
products or the Company's failure to take advantage of growth in those markets.
In addition, there is no assurance that the Company's acquisition of NetSoft or
the Company's other organizational changes and plans for 1997 will prove
successful, that the Company's existing products or those of the combined
companies will continue to meet with customer acceptance, that the Company will
not suffer increased competitive pressures, that the Company's corporate buying
decisions will not be influenced by the actions of the Company's competitors or
other market factors or that the Company will return to profitability and
growth. Additional factors are identified under the heading "Factors That May
Affect Future Results and Financial Condition". Factors that could cause or
contribute to such differences include those discussed below as well as those
discussed in the Company's Report on Form 10-K for the year ended December 31,
1996. The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto.
OVERVIEW
NetManage, Inc. (the "Company") develops, markets and supports PC connectivity
software for the Microsoft Windows 3.1, Windows 95 and Windows NT platforms,
offering applications for UNIX and IBM host access as well as for messaging and
collaboration. The Company's products include the Chameleon(TM) ATX family
(Chameleon HostLink(TM) 97, Chameleon UNIXLink 97), ECCO(R) Pro and the
Z-Mail(R) messaging family. Its 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 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 29, 1997, the Company acquired all of the outstanding shares of Network
Software Associates, Inc. ("NSA"), for $26.0 million in cash, pursuant to the
Stock Purchase Agreement dated July 8, 1997. NSA is a holding company for
NetSoft ("NetSoft"), a privately-held company specializing in the development,
marketing and support of PC-to-Host connectivity software solutions. As of the
date of the acquisition, NSA and NetSoft have continued as wholly-owned
subsidiaries of NetManage. The transaction will be accounted for as a purchase
during the third quarter of 1997 and, accordingly, the results of NetSoft from
the date of acquisition forward will be recorded in the Company's consolidated
financial statements. Accounting for the acquisition as a purchase could result
in a significant intangible asset or a significant charge against results of
operations or both, which could materially and adversely affect future results
of operations. An independent valuation of the purchase transaction is currently
in process and will be finalized in the third quarter of 1997. As described in
detail under the heading "Factors That May Affect Future Results and Financial
Condition", acquisitions involve a number of risks, including the integration of
the acquired company's operations, personnel and products. There can be no
assurance that the NetSoft integration will be accomplished successfully, and
the failure to effectively accomplish the integration could have a material
adverse effect on NetManage's results of operations and financial condition.
RESULTS OF OPERATIONS
The Company experienced a significant decline in net revenues for both the
three- and six-month periods ended June 30, 1997 as compared to the same periods
of 1996. The decline in net revenues primarily reflects the Company's lack of
success in marketing and selling its products, particularly in Europe and Japan,
as well as increased competition and pricing pressures. The Company has recently
introduced two new products, Chameleon UNIXLink 97 and Chameleon HostLink 97.
Chameleon UNIXLink 97 began shipping towards the end of the
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second quarter of 1997, and therefore did not contribute significantly to second
quarter revenues. Chameleon HostLink 97 did not begin shipping until early in
the third quarter of 1997 and therefore had no effect on second quarter
revenues.
During the fourth quarter of 1996, the Company discontinued several low revenue
generating products and focused efforts on controlling expenses in order to
reduce operating expenses and attempt to return the Company to profitability. In
addition, the Company consolidated its products and operations into two distinct
business units, each with dedicated development, sales, marketing and support
resources. The Core Products Business Unit is focused on enhancing and marketing
the Company's established products, including the Chameleon networking products.
The Emerging Technologies Business Unit is focused on the Company's new
products, including the messaging and collaboration products. The benefits of
this reorganization have yet to contribute in terms of increased revenues, and
net revenues have actually declined on a sequential quarterly basis between the
fourth quarter of 1996 and the first and second quarters of 1997. As a result of
the Company's focus on controlling expenses, however, operating expenses have
also continued to decline, and in the second quarter of 1997 were approximately
$1.0 million lower than the first quarter 1997 level and were $5.0 million lower
than the fourth quarter 1996 level, excluding a fourth quarter 1996 charge of
$13.4 million for the write-off of in-process research and development. Despite
the decline in operating expenses, the Company reported a net loss of $4.5
million and $7.3 million, for the three- and six-month periods ended June 30,
1997, respectively, resulting from the aforementioned revenue decline during the
same periods. Operating expense levels are based in part on the Company's
expectations as to future revenues and to a large extent are fixed. Operating
expenses are expected to increase in absolute dollars for the remainder of 1997
as a result of the Company's acquisition of NetSoft, and will fluctuate as a
percentage of net revenues as the Company integrates NetSoft into its operations
and the Company's newly introduced products begin contributing to revenues.
While the Company will continue to adjust its operations to address these
issues, there can be no assurance that net revenues or net income will stabilize
or improve in the future.
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JUNE 30, 1997 COMPARED TO JUNE 30, 1996
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(Dollars in millions) Three Months Ended Six Months Ended
1997 1996 Change 1997 1996 Change
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Net revenues:
License fees $ 9.0 $ 23.1 (61.2%) $ 21.2 $ 52.5 (59.5%)
Services 3.7 3.7 1.4% 7.8 7.3 6.8%
-------- -------- -------- -------
Total net revenues $ 12.7 $ 26.8 (52.6%) $ 29.0 $ 59.8 (51.4%)
As a percentage of net revenues:
License fees 70.6% 86.2% 73.1% 87.7%
Services 29.4% 13.8% 26.9% 12.3%
-------- -------- -------- -------
Total net revenues 100.0% 100.0% 100.0% 100.0%
Gross margin $ 11.8 $ 24.2 (51.3%) $ 27.1 $ 54.0 (49.9%)
As a percentage of net revenues 92.9% 90.5% 93.0% 90.3%
Research and development $ 4.8 $ 7.1 (32.5%) $ 10.9 $ 14.3 (23.7%)
As a percentage of net revenues 37.6% 26.4% 37.4% 23.8%
Sales and marketing $ 10.5 $ 13.2 (20.4%) $ 20.8 $ 26.0 (20.0%)
As a percentage of net revenues 82.8% 49.4% 71.6% 43.5%
General and administrative $ 2.4 $ 3.0 (18.6%) $ 4.8 $ 5.7 (14.6%)
As a percentage of net revenues 19.2% 11.2% 16.6% 9.5%
Interest income $ 1.4 $ 2.0 (30.4%) $ 2.6 $ 3.0 (12.6%)
As a percentage of net revenues 10.7% 7.3% 9.0% 5.0%
Provision for income taxes -- $ 0.8 (100.0%) -- $ 3.4 (100.0%)
Effective tax rate -- 34.0% -- 34.0%
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Net revenues
Historically, substantially all of the Company's net revenues have been derived
from software license fees. Service revenues have been primarily attributable to
maintenance agreements associated with licenses.
License fees decreased substantially both in absolute dollars and as a
percentage of total net revenues during the three- and six-month periods ended
June 30, 1997 as compared to the same periods of 1996. As previously discussed,
the decline in license fees was primarily attributable to increased competition
and heightened pricing pressures and the Company's lack of success in marketing
and selling its products, particularly in the international marketplace.
Further, as discussed above, the timing of the release of the Company's
Chameleon UNIXLink 97 and Chameleon HostLink 97 products prevented these
products from contributing significantly to revenues during the three- or
six-month periods ended June 30, 1997. While the Company hopes that the
introduction of these products will contribute to increased revenues in future
quarters, there can be no assurance that revenues will stabilize or increase in
the future, other than the revenues which are expected to be contributed as a
result of the acquisition of NetSoft. The increase in service revenues as a
percentage of total net revenues for both the three- and six-month periods ended
June 30, 1997 as compared to the same periods of 1996 primarily reflects the
decline in the total net revenues base as a result of the aforementioned decline
in license fee revenues.
The Company has operations worldwide with sales offices located in the United
States, Europe and Japan. International revenues as a percentage of total net
revenues were approximately 17% and 30% for the three-month
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periods ended June 30, 1997 and 1996, respectively, and 19% and 34% for the
six-month periods ended June 30, 1997 and 1996, respectively. The decline in
international revenues as a percentage of total net revenues is due largely to
the Company's lack of success in marketing and selling its products,
particularly in Europe and Japan, the latter of which accounted for the majority
of the Company's international revenues during both the three- and six- month
periods ended June 30, 1996. In an attempt to improve the Company's
international revenues, the Company has addressed and taken steps with respect
to staffing and management, distributor relationships, and product marketing in
both Europe and Japan. While recently acquired NetSoft has historically been
very successful in marketing and selling its products internationally, the
Company will need to integrate successfully and streamline overlapping
functions, particularly in Europe. There can be no assurance that such
integration will be accomplished expeditiously or successfully, or that the
Company will succeed in its attempts to improve its international marketing and
sales efforts.
Software license fees are generally recognized as revenue upon shipment if there
are no, or insignificant, post-delivery obligations, and 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 returns 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.
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 training and consulting services will become
materially significant in the future.
No customer accounted for more than 10% of net revenues during the three- or
six-month periods ended June 30, 1997 or 1996.
Gross margin
Cost of revenues primarily includes royalties paid to third parties for licensed
software incorporated into the Company's products as well as costs associated
with product packaging, documentation and software duplication. Cost of service
revenues through June 30, 1997 has not been material and is not reported
separately.
Gross margin as a percentage of net revenues increased for both the three- and
six-month periods ended June 30, 1997 as compared to June 30, 1996 primarily as
a result of decreased packaging and documentation costs. Further, cost of
revenues for the second quarter of 1996 included approximately $380,000 for the
amortization of purchased technology; no such charges were recorded for the same
quarter of 1997. For the six months ended June 30, 1997 and 1996, the Company
charged approximately $355,000 and $630,000, respectively, to cost of revenues
for the amortization of purchased technology.
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 license fee revenues versus service revenues, the mix of
products sold and the mix of international versus domestic revenues. The Company
typically recognizes 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 decrease in R&D expenses in absolute dollars for the three- and
six-month periods ended June 30, 1997 as compared to the same periods of the
prior year primarily reflects cost savings, particularly in salaries and
benefits, associated with employee attrition, as well as the Company's decision
to discontinue several low revenue generating products during the fourth quarter
of 1996. The decline in the total net revenues base, however, resulted in the
increase in R&D expenses as a percentage of net revenues for the three- and
six-month periods ended June 30, 1997 as compared to the same periods of 1996.
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The Company expects that R&D spending in absolute dollars will increase for the
remainder of 1997 due to the Company's acquisition of NetSoft in July 1997. As a
percentage of net revenues, the Company expects that R&D will fluctuate
depending on future revenue levels, acquisitions and licensing of technology.
Software development costs are accounted for in accordance with Statement of
Financial Accounting Standards ("SFAS") 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 a working model and
further defines as a beta version of the software. The establishment of
technological feasibility and the ongoing assessment of the recoverability of
these costs requires considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future gross
product revenue, estimated economic life and changes in technology. Costs that
do not qualify for capitalization are charged to R&D expense when incurred. To
date, internal software development costs that were eligible for capitalization
have not been significant and the Company has charged all internal software
developments costs to R&D expense as incurred.
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 decrease in S&M expenses
in absolute dollars for the three- and six-month periods ended June 30, 1997 as
compared to the same periods in 1996 primarily reflects cost savings related to
employee attrition and the resulting declines in salaries and benefits, and a
decline in advertising as the Company re-evaluated its marketing and selling
strategies. As a percentage of total net revenues for both the three- and
six-month periods, the increase in S&M expenses is attributable to the decreased
total net revenues base.
The Company believes that S&M expenses will increase in absolute dollars during
the remainder of 1997 as a result of the acquisition of NetSoft and as the
Company continues to implement its marketing and selling strategies,
particularly related to advertising and promotion expenses. The Company expects
that S&M expenses as a percentage of total net revenues will fluctuate depending
on future revenue levels.
General and administrative
General and administrative ("G&A") expenses decreased in absolute dollars for
the three- and six-month periods ended June 30, 1997 as compared to the same
periods in 1996 due to employee attrition and the resulting savings in salaries
and benefits, and the Company's overall focus on controlling operating expenses.
As a percentage of total net revenues for both the three- and six-month periods,
the increase in G&A expenses is attributable to the decreased total net revenues
base. The Company believes that G&A expenses will increase in absolute dollars
during the remainder of 1997 as a result of the acquisition of NetSoft and, as a
percentage of total net revenues, will fluctuate depending on future revenue
levels.
Interest income
The decline in interest income for both the three- and six-month periods ended
June 30, 1997 as compared to the same periods in 1996 is primarily the result of
a decrease in the aggregate amount of cash and investments from $115.0 million
at June 30, 1996 to $103.3 million at June 30, 1997. The increase in interest
income for both the three- and six-month periods as a percentage of net revenues
is consistent with the Company's decreased revenue base.
Provision for income taxes
The Company's effective tax rate for the three- and six months ended June 30,
1997 was 0% due to the Company's loss position as compared to an effective tax
rate of 34% for the three- and six months ended June 30, 1996.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
As of June 30,
(In millions) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 20.6 $ 28.4
Short-term investments 48.0 15.8
Long-term investments 34.8 70.8
Net cash provided by operating activities 1.8 12.4
Net cash used in investing activities 1.2 19.6
Net cash provided by financing activities 0.5 3.5
- --------------------------------------------------------------------------------
</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, other than those acquired in connection
with the NetSoft acquisition and are not material to the Company.
The Company's cash and cash equivalents, short-term investments and long-term
investments remained constant from December 31, 1996 to June 30, 1997 at $103.3
million. The Company received a federal tax refund during the first quarter of
1997 in the amount of approximately $2.3 million related to the Company's 1995
tax year.
The Company's principal investing activities to date have been the purchase of
short and long-term investments, purchases of property and equipment, and cash
payments for acquisitions. Net of proceeds from maturities, the Company invested
$0.1 million in short-term and long-term investments during the first six months
of 1997. Expenditures for purchases of property and equipment were minimal
during the six months ended June 30, 1997 due to the Company's efforts to
control operating expenses and attempt to return the Company to profitability.
The Company does not have any specific commitments with regard to future capital
expenditures. It is anticipated, however, that such spending will increase as a
result of the acquisition of NetSoft. The Company's principal commitment as of
June 30, 1997 consists of leases on its facilities.
Net cash provided by financing activities during the first quarter of 1997
reflects proceeds from the issuance of common stock under the Company's stock
option plan.
At June 30, 1997, the Company had working capital of $68.8 million. As
previously noted, the Company acquired the issued and outstanding shares of
NetSoft on July 29, 1997 for $26.0 million in cash. 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
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 international and domestic revenues; mix of
distribution channels through which the Company's products are sold; seasonality
of revenues; quality control of products; changes in the Company's operating
expenses; personnel changes; foreign currency exchange rates and general
economic
13
<PAGE> 14
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.
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 achieve
profitability. Fluctuations in operating results may also result in volatility
in the price of the Company's common stock.
Acquisitions
The Company's merger and acquisition transactions, including the
recent acquisition of NetSoft, have been motivated by various factors, including
the desire to obtain new technologies, expand and enhance the Company's product
offerings, attract key personnel and strengthen the Company's presence in the
international marketplace. Product and technology acquisitions entail numerous
risks, including the diversion of management's attention away from day-to-day
matters, difficulties in the assimilation of acquired operations and personnel
(such as distribution, engineering and customer support), the incorporation of
acquired products into existing product lines, the failure to realize
anticipated benefits in terms of cost savings and synergies, undisclosed
liabilities, adverse short-term effects on reported operating results, the
amortization of acquired intangible assets, the potential loss of key employees
from acquired companies and the difficulty of presenting a unified corporate
image. The Company and NetSoft each have different systems and policies and
procedures in many operational areas that also must be integrated. To achieve
profitability the Company will need to integrate successfully and streamline
overlapping or duplicative functions. Costs generally associated with this type
of integration include severance payments, disposition of excess property and
equipment and closing of excess facilities. There can be no assurance that the
integration will be accomplished smoothly, expeditiously or successfully. To
date, the Company's previous acquisitions have not contributed significantly to
revenues. Uncertainty in the marketplace or customer hesitation related to the
NetSoft acquisition could negatively affect the Company's future revenues and
results of operations. Failure to integrate effectively the operations of the
Company and NetSoft could have a material adverse effect on the Company's
results of operations and financial condition.
The Company regularly evaluates product and technology acquisition opportunities
and anticipates that it may make additional acquisitions in the future if it
determines that an acquisition would further its corporate strategy. No
assurance can be given that any acquisition by the Company will or will not
occur, that if an acquisition does occur that it will not materially and
adversely affect the Company or that any such acquisition will be successful in
enhancing the Company's business. If the operations of an acquired company or
business do not meet the Company's expectations, the Company may be required to
restructure the acquired business or write-off the value of some or all of the
assets of the acquired business.
Product Development and Competition
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. Particularly over the
past year, many customers have delayed purchase decisions due to the confusion
in the marketplace relating to rapidly changing technology and 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 or cause customers to purchase
products from the Company's competitors; either situation would 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.
14
<PAGE> 15
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. The Company has
recently experienced price declines for its products, contributing to lower
revenues. Any further material reduction in the price of the Company's products
would require the Company to increase unit sales in order to maintain revenues
at existing levels. There can be no assurance that the Company will be
successful in doing so.
The Company's competitors could seek to expand their product offerings by
designing and selling products using TCP/IP or other technology that could
render obsolete or adversely affect sales of the Company's products. For
example, Microsoft Corporation ("Microsoft"), a company with significantly
greater financial, development and marketing resources, has recently introduced
a personal information manager and has included this product in a suite of
software. This development may adversely affect the Company's sales of its own
products either by directly affecting customer purchasing decisions or by
causing potential customers to delay their purchases of the Company's products.
Substantially all of the Company's net revenues have been derived from the sales
of products that provide inter-networking applications for the Microsoft Windows
environment and are marketed primarily to Windows users. As a result, sales of
the Company's products would be materially adversely affected by market
developments adverse to Windows. In addition, the Company's strategy of
developing products based on the Windows operating environment is substantially
dependent on its ability to gain pre-release access to, and to develop expertise
in, current and future Windows developments by Microsoft. No assurance can be
given as to the ability of the Company to provide on a timely basis products
compatible with future Window releases.
Marketing and Distribution
As part of its strategy to develop multiple distribution channels, the Company
expects to increase its use of resellers, particularly value added resellers 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 costs
that are typically charged when selling through indirect channels. The Company
and NetSoft are in the process of integrating their distribution channels.
Changes in distribution channels may adversely affect sales of the Company's
products and consequently, may adversely affect the Company's business,
financial condition and results of operations, at least in the near term. There
can be no assurance that the Company will be able to attract or retain resellers
and distributors who will be able to market the combined companies' 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 combined companies'
products, and the inability to recruit or retain important resellers or
distributors could adversely affect the Company's results of operations.
Global Market Risks
During 1997, the Company has addressed and taken steps with respect to staffing
and management, distributor relationships and product marketing in both Europe
and Japan. While NetSoft has been very successful in marketing and selling its
products internationally, the Company will need to successfully integrate and
streamline overlapping functions, particularly in Europe. There can be no
assurance that such integration will be accomplished expeditiously or
successfully, or that the Company will succeed in its attempts to improve its
international marketing and sales efforts. In addition, there can be no
assurance that the Company will be able to maintain or increase international
market demand for the Company's products or that the Company's distributors will
be able to
15
<PAGE> 16
meet effectively that demand. Risks inherent in the Company's international
business activities generally include unexpected changes in regulatory
requirements, tariffs and other trade barriers, costs and risks of localizing
products for foreign countries, longer accounts receivable payment cycles,
difficulties in managing international operations, currency fluctuations,
potentially adverse tax consequences, repatriation of earnings and the burdens
of complying with a wide variety of foreign laws. There can be no assurance that
such factors will not have an adverse effect on the Company's future
international sales and, consequently, on the Company's results of operations.
Employee Retention
The majority of the Company's employee workforce is located in the extremely
competitive employment markets of the Silicon Valley in California and in Haifa,
Israel. During the latter half of 1996 and through the first half of 1997, the
Company experienced high attrition at all levels and across all functions of the
Company. The attrition experienced by the Company was attributable to various
factors including, among others, industry-wide demand exceeding supply for
experienced engineering and sales professionals. The Company has and will
continue to address the issue of attrition, and in fact in January 1997,
repriced the majority of its outstanding stock options in an effort to retain
its employees and become competitive in the extremely competitive employment
market. Managing employee attrition, integrating acquired operations and
products and expanding both the geographic areas of its customer base and
operations have resulted in substantial demands on the Company's management
resources. The successful and expeditious integration of NetSoft's employee base
into the Company's operations is critical to mitigating the potential loss of
key employees from both the Company and NetSoft during the period following the
closing of the acquisition. The Company's future operating results will be
dependent in part on its ability to retain and attract its employee workforce,
train and manage its management and employee base, and continue to implement and
improve its operating and financial controls. There can be no assurance that the
Company will be able to manage such challenges successfully.
NetManage, the NetManage logo, ECCO and Z-Mail are registered
trademarks and Chameleon and Chameleon HostLink are trademarks of NetManage,
Inc. All other registered trademarks or trademarks are the property of their
respective owners.
16
<PAGE> 17
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 9, 1997, a securities class action complaint, Head, et al. v.
NetManage, Inc., et al., No. 07763295, was filed in the Superior Court of
California, Santa Clara County, against the Company and certain of its directors
and current and former officers. On January 10, 1997, the same plaintiffs filed
a securities class action complaint, Head, et al. v. NetManage, Inc., et al.,
No. C-97-20061-JW, in the United States District Court for the Northern District
of California, against the same defendants. Both complaints allege that, between
July 25, 1995 and January 11, 1996, the defendants made false or misleading
statements of material fact about the Company's prospects, and failed to follow
generally accepted accounting principles. The state court complaint asserts
claims under California state law; the federal court complaint asserts claims
under the federal securities laws. Both complaints seek an unspecified amount of
damages. The Company believes there is no merit to either case and intends to
defend both cases vigorously. There can be no assurance that the Company will be
able to prevail in the lawsuits, or that the pendency of the lawsuits will not
adversely affect the Company's operations. As the outcome of this matter cannot
be reasonably determined, the Company has not accrued for any potential loss
contingencies.
On March 21, 1997, a securities class action complaint, Interactive Data
Systems, Inc., et al. v. NetManage, Inc., et al., No. CV764945, was filed in the
Superior Court of California, Santa Clara County, against the Company and
certain of its directors and officers. On June 19, 1997, one of the plaintiffs
in that action filed a securities class action complaint, Molinari v. NetManage,
Inc., et al., No. C-97-20544-JW-PVT, in the United States District Court for the
Northern District of California against the same defendants. Both complaints
allege that, between April 18, 1996 and July 18, 1996, the defendants made false
or misleading statements of material fact about the Company's prospects. The
state court complaint asserts claims under California state law; the federal
complaint asserts claims under the federal securities laws. Both complaints seek
an unspecified amount of damages. The Company believes there is no merit to
either case and intends to defend both cases vigorously. There can be no
assurance that the Company will be able to prevail in the lawsuits, or that the
pendency of the lawsuits will not adversely affect the Company's operations. As
the outcome of this matter cannot be reasonably determined, the Company has not
accrued for any potential loss contingencies.
The Company may be contingently liable with respect to certain asserted and
unasserted claims that arise during the normal course of business. In the
opinion of management, the outcome of all other such matters presently known to
management will not have a material adverse effect on the Company's business,
financial position or results of operations.
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 1997 Annual Meeting of Stockholders was held at the offices of the Company
at 10725 North De Anza Boulevard, Cupertino, California on May 30, 1997 at 9:00
a.m. local time, for the following purposes:
1. To elect one director to hold office until the Annual Meeting of
Stockholders in the year 2000.
2. To ratify the selection of Arthur Andersen LLP as the independent auditors
of the Company for its fiscal year ending December 31, 1997.
17
<PAGE> 18
Stockholders of record at the close of business on March 28, 1997 were entitled
to vote at the meeting.
a. On the vote for the election of a director the following person received
the number of votes indicated:
<TABLE>
<CAPTION>
For Against
--- -------
<S> <C> <C>
Zvi Alon 38,693,744 1,157,657
</TABLE>
b. On the motion with respect to the selection of Arthur Andersen LLP as the
independent auditors of the Company:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
39,365,118 326,021 160,262
</TABLE>
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27.1 Financial Data Schedule.
b. Reports of Form 8-K
A Current Report on Form 8-K dated July 29, 1997 was filed by the
Registrant on August 8, 1997 to report under Item 5 thereof, the
Registrant's acquisition of all of the outstanding shares of Network
Software Associates, Inc.
18
<PAGE> 19
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, 1997 By: /s/ Walter D. Amaral
--------------- ---------------------------------
WALTER D. AMARAL
Senior Vice President,Finance and
Chief Financial Officer
<PAGE> 20
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
27.1 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 20,597
<SECURITIES> 47,982
<RECEIVABLES> 8,885
<ALLOWANCES> 612
<INVENTORY> 0
<CURRENT-ASSETS> 86,773
<PP&E> 22,080
<DEPRECIATION> (12,568)
<TOTAL-ASSETS> 140,507
<CURRENT-LIABILITIES> 18,013
<BONDS> 0
0
0
<COMMON> 434
<OTHER-SE> 121,431
<TOTAL-LIABILITY-AND-EQUITY> 140,507
<SALES> 29,080
<TOTAL-REVENUES> 29,080
<CGS> 2,024
<TOTAL-COSTS> 2,024
<OTHER-EXPENSES> 11,388
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,287)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,287)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,287)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
