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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 September 30, 1998
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)
<TABLE>
<S> <C>
DELAWARE 77-0252226
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
</TABLE>
10725 NORTH DE ANZA BOULEVARD
CUPERTINO, CALIFORNIA 95014
(Address of principal executive offices, including zip code)
(408) 973-7171
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Number of shares of registrant's common stock outstanding as of October 31,
1998: 69,038,199
<PAGE> 2
NETMANAGE, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1998 and
December 31, 1997 3
Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 1998 and September 30, 1997 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and September 30, 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 26
</TABLE>
2
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NETMANAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 65,042 $ 12,706
Short-term investments 25,580 36,845
Accounts receivable, net 13,065 13,408
Prepaid expenses and other current assets 21,506 15,726
--------- ---------
Total current assets 125,193 78,685
--------- ---------
PROPERTY AND EQUIPMENT, at cost:
Computer software and equipment 15,455 13,010
Furniture and fixtures 7,382 5,512
Leasehold improvements 2,659 1,308
--------- ---------
25,496 19,830
Less - Accumulated depreciation (15,633) (10,999)
--------- ---------
Net property and equipment 9,863 8,831
--------- ---------
LONG-TERM INVESTMENTS 40,576 19,734
GOODWILL AND OTHER INTANGIBLES, net 20,131 3,293
OTHER ASSETS 9,607 9,050
--------- ---------
$ 205,370 $ 119,593
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,153 $ 1,674
Accrued liabilities 22,578 5,185
Accrued payroll and payroll-related expenses 4,476 4,804
Deferred revenue 12,133 9,118
Income taxes payable 5,877 2,362
--------- ---------
Total current liabilities 52,217 23,143
--------- ---------
LONG-TERM LIABILITIES 239 363
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock 690 438
Additional paid-in capital 167,644 91,564
Retained earnings (accumulated deficit) (12,564) 5,996
Cumulative translation adjustments (2,856) (1,911)
--------- ---------
Total stockholders' equity 152,914 96,087
--------- ---------
$ 205,370 $ 119,593
========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
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NETMANAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET REVENUES:
License fees $ 12,890 $ 9,774 $ 37,451 $ 31,017
Services 4,198 3,782 11,490 11,619
--------- --------- --------- ---------
Total net revenues 17,088 13,556 48,941 42,636
COST OF REVENUES 547 889 2,243 2,913
--------- --------- --------- ---------
GROSS MARGIN 16,541 12,667 46,698 39,723
--------- --------- --------- ---------
OPERATING EXPENSES:
Research and development 4,293 5,585 13,396 16,453
Sales and marketing 9,813 10,927 28,714 31,744
General and administrative 3,372 3,186 8,795 8,020
Write-off of in-process research and development 9,500 16,001 9,500 16,001
Restructuring 7,033 5,172 7,033 5,172
Amortization of goodwill and other intangibles 700 228 1,657 748
--------- --------- --------- ---------
Total operating expenses 34,711 41,099 69,095 78,138
--------- --------- --------- ---------
LOSS FROM OPERATIONS (18,170) (28,432) (22,397) (38,415)
INTEREST INCOME AND OTHER, NET 1,401 1,112 2,818 3,729
EQUITY IN INCOME OF UNCONSOLIDATED AFFILIATE 374 418 1,027 497
--------- --------- --------- ---------
LOSS BEFORE PROVISION FOR INCOME TAXES (16,395) (26,902) (18,552) (34,189)
PROVISION (BENEFIT) FOR INCOME TAXES (7) -- 8 --
--------- --------- --------- ---------
NET LOSS $ (16,388) $ (26,902) $ (18,560) $ (34,189)
========= ========= ========= =========
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.29) $ (0.62) $ (0.39) $ (0.79)
WEIGHTED AVERAGE COMMON SHARES
AND EQUIVALENTS, BASIC AND DILUTED 56,591 43,454 48,159 43,322
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
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NETMANAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (18,560) $ (34,189)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 6,673 6,726
Equity in income of unconsolidated affiliate (1,027) (497)
Provision for doubtful accounts 378 268
Write-off of in-process research and development 9,500 16,001
Write down of assets related to restructuring 1,312 1,766
Changes in assets and liabilities, net of business combinations:
Accounts receivable 3,566 8,902
Prepaid expenses and other assets 952 3,576
Accounts payable 1,481 (1,438)
Accrued liabilities, payroll and payroll-related expenses (998) 416
Deferred revenue (1,717) (3,311)
Income taxes payable 30 (322)
--------- ---------
Net cash provided by (used in) operating activities 1,590 (2,102)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (16,100) (27,395)
Proceeds from maturity of short-term investments 53,324 30,252
Purchases of long-term investments (24,529) (17,613)
Proceeds from maturity of long-term investments 15,184 33,342
Purchases of property and equipment (355) (552)
Proceeds from acquisition of FTP 21,642 --
Purchases of technology and other intangible assets -- (530)
Acquisition of NetSoft, Inc., net of cash acquired -- (23,281)
Investment in unconsolidated affiliate (2) (163)
--------- ---------
Net cash provided by (used in) investing activities 49,164 (5,940)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 1,177 727
--------- ---------
Net cash provided by financing activities 1,177 727
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 405 (247)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 52,336 (7,562)
CASH AND CASH EQUIVALENTS, beginning of period 12,706 19,483
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 65,042 $ 11,921
========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
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NETMANAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. INTERIM FINANCIAL DATA
The interim condensed consolidated financial statements for the three- and
nine-month periods ended September 30, 1998 and 1997 for NetManage, Inc.
(the "Company") have been prepared on the same basis as the year end
consolidated financial statements and, in the opinion of management,
include all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial information set forth therein in
accordance with generally accepted accounting principles. The Company
believes the results of operations for the interim periods are subject to
fluctuation and may not be an indicator of future financial performance and
should be read in conjunction with the information contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
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 investment in an
unconsolidated affiliate, NetVision, Ltd., is accounted for by the equity
method.
3. ACQUISITIONS
On August 26, 1998, the Company acquired all of the outstanding shares of
common stock of FTP Software, Inc. ("FTP") through the merger of Amanda
Acquisition Corp., a wholly-owned subsidiary of the Company, with and into
FTP, which survived the merger as a wholly-owned subsidiary of the Company.
Each outstanding share of the common stock of FTP, and each associated
junior preferred stock purchase right, was converted into 0.72767 of a
share of the Company's common stock. Outstanding FTP options were converted
into options to purchase shares of the Company's common stock at the same
conversion rate, with appropriate corresponding changes to the exercise
price. As a result, 34,035,463 shares of FTP common stock outstanding
immediately prior to the merger were converted into approximately
24,766,640 shares of the Company's common stock and options to acquire
approximately 5,587,528 shares of FTP common stock were assumed by the
Company and converted into options to purchase approximately 4,065,351
shares of the Company's common stock. The total purchase price for the
acquisition was approximately $78.3 million. The acquisition was accounted
for using the purchase method of accounting and, accordingly, the results
of FTP from the date of acquisition forward have been recorded in the
Company's consolidated financial statements. The Company has allocated the
purchase price to the assets acquired and liabilities assumed, acquired
software ($1.8 million, to be amortized over five years), acquired
intangible assets ($16.8 million, to be amortized over seven years) and
acquired research and development in process ($9.5 million) based on a
preliminary valuation of the acquired net assets. Because the acquired
in-process research and development had not yet achieved technological
feasibility and, in management's opinion, had no probable alternative
future use, this amount was reflected as a one-time charge to operations in
the three-month period ended September 30, 1998. The remaining intangibles
of $18.6 million, consisting of goodwill and developed technology, are
included in goodwill and other intangibles in the accompanying balance
sheet and are being amortized over their estimated useful lives of five to
seven years.
6
<PAGE> 7
The aggregate purchase price is computed as follows (in thousands):
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<S> <C>
Value of NetManage common stock issued $ 74,042
Value of options assumed 1,113
Acquisition costs 3,157
---------
$ 78,312
=========
</TABLE>
The purchase price is allocated as follows (in thousands):
<TABLE>
<S> <C>
Assets $ 71,387
Equipment 5,838
In-process research and development 9,500
Developed technology 1,800
Goodwill and acquired intangible assets 16,784
Liabilities assumed, including FTP related restructuring items (26,997)
---------
Net assets acquired $ 78,312
=========
</TABLE>
The following unaudited pro forma financial information shows the results
of operations for the nine-month period ended September 30, 1998 and the
year ended December 31, 1997 as if the acquisition of FTP had occurred at
the beginning of the periods presented and at the same aggregate purchase
price. The results are not necessarily indicative of what would have
occurred had the acquisition actually been made at the beginning of each of
the respective periods presented or of future operations of the combined
companies. The pro forma financial data for the nine-month period ended
September 30, 1998 combines the Company's results for the nine-months ended
September 30, 1998 with the results of FTP for the period from January 1,
1998 through the date of acquisition. The pro forma financial data for 1997
combines the Company's results of operations with FTP's results of
operations for the year ended December 31, 1997. The following unaudited
pro forma financial data includes the straight-line amortization of
intangibles over a period of five to seven years.
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
------------------ ------------------
Nine Months Ended Nine Months Ended
September 31, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Revenue $ 73,760 $ 95,618
Net loss (19,887) (86,797)
Net loss per share (.29) (1.28)
Weighted average common and common
equivalent shares outstanding 68,777 67,928
</TABLE>
4. RESTRUCTURING OF OPERATIONS
In late August 1998, following the acquisition of FTP, the Company
initiated a plan to restructure its worldwide operations as a result of
business conditions and in connection with the integration of the
operations of FTP. In connection with this plan, the Company recorded a
$7.0 million charge to operating expenses in the three month period ended
September 30, 1998 and recognized a restructuring liability of $9.7 million
treated as assumed in the purchase of FTP and allocated to the purchase
price. The restructuring charge includes approximately $5.5 million of
estimated expenses for the write-off of excess equipment and
facilities-related expenses associated with the consolidation of operations
and $1.5 million of employee-related expenses for employee terminations.
The restructuring plan includes a reduction in the Company's worldwide
workforce and office space. The Company anticipates that the majority of
the restructuring actions will be completed by the end of 1998 with
remaining items to be completed within
7
<PAGE> 8
one year from the date the restructuring plan was initiated. The Company
anticipates that the execution of the restructuring actions will require
cash expenditures of approximately $13.7 million, which will be funded from
internal operations. As of September 30, 1998, the Company had incurred
costs totaling approximately $4.9 million related to the restructuring.
Accrued liabilities at September 30, 1998 included a reserve related to
this restructuring plan of approximately $11.8 million resulting from the
above mentioned charge to operating expenses and the assumption of
restructuring liabilities identified as being FTP-related activities which
were included in the calculation of the purchase price.
5. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset
or liability measured at its fair value and requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for all fiscal
years beginning after June 15, 1998 and may be adopted as of the beginning
of any fiscal quarter after June 15, 1998. The Company plans to adopt SFAS
No. 133 in the first quarter of 1999 and does not believe that its adoption
will have a material effect on the Company's financial statements.
6. NET LOSS PER SHARE
Basic net loss per share data has been computed using the weighted average
number of shares of common stock outstanding during the periods presented.
Diluted net loss per share data has been computed using the weighted
average number of shares of common stock and potentially dilutive common
stock. Potentially dilutive securities, which include shares issuable upon
the exercise of outstanding common stock options, computed using the
treasury stock method, of 4,643,593 and 4,649,627 for the three- and
nine-month periods ended September 30, 1998 and 1997, respectively, were
not included in the computation of diluted net loss per common share since
their inclusion would have been antidilutive for the respective periods.
For the three- and nine-month periods ended September 30, 1998 and 1997,
the number of shares used in the computation of diluted earnings per share
was the same as those used for the computation of basic earnings per share
as all potential common shares were antidilutive.
7. REVENUE RECOGNITION
During the quarter ended March 31, 1998, the Company adopted the Statement
of Position ("SOP") 97-2, "Software Revenue Recognition," which provides
guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions. The adoption of SOP 97-2 did
not have a material impact on the Company's consolidated financial
statements for the three or nine months ended September 30, 1998.
8. COMPREHENSIVE LOSS
During the quarter ended March 31, 1998, the Company adopted SFAS No. 130,
"Comprehensive Income," which was issued by the FASB in 1997. SFAS No. 130
requires companies to report a new, additional measure of income on the
income statement or to create a new financial statement that discloses the
new measure of income. "Comprehensive income" includes foreign currency
translation gains and losses and other unrealized gains and losses that
have previously been excluded from net income and reflected instead in
stockholders' equity.
8
<PAGE> 9
The following table summarizes comprehensive loss for the three- and
nine-month periods ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss $ (16,388) $ (26,902) $ (18,560) $ (34,189)
Foreign currency
translation adjustment
(net of tax benefit of $0
in 1998 and 1997) (832) (17) (945) (638)
--------- --------- --------- ---------
Comprehensive loss $ (17,220) $ (26,919) $ (19,505) $ (34,827)
</TABLE>
9. 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 complaint asserts claims under California state
law; the federal court complaint asserts claims under the federal
securities laws. In addition, on September 10, 1997, the Company and
several of its officers and directors were named in a securities class
action complaint filed in the Northern District of California, Beasley v.
NetManage, Inc., et al., C-97-3329 FMS, (N.D. Cal.). This complaint is
substantially similar to the previously-filed case of Head et al. v.
NetManage, Inc. et al., discussed above, and contains similar allegations,
names the same defendants, and purports to represent purchasers of
NetManage stock during the same class period as in the previously-filed
complaint. The complaints seek an unspecified amount of damages. On
February 24, 1998, the federal court granted the defendants' motion to
dismiss the federal class action complaint in Head, et al. v. NetManage,
Inc., et al. The plaintiffs filed an amended complaint and the defendants
have moved to dismiss. The Company believes there is no merit to these
cases 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. On February 26, 1998, the state court
entered judgement in favor of the Company in the state case. The plaintiffs
have filed a notice of appeal from this judgement and are expected to file
an amended complaint as to the individual defendants. 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.
9
<PAGE> 10
On October 10, 1997, a verified derivative complaint was filed in the
United States District Court for the Northern District of California
against nine present and former officers and directors of the Company which
alleged that these persons violated various duties to the Company. Sucher
v. Alon et al., No. C-98-203-CRB. The derivative complaint also named the
Company as a nominal defendant. The derivative complaint was predicated on
the factual allegations contained in the class action complaints discussed
above. No demand was previously made to the Company's Board of Directors
concerning the allegations of the derivative complaint, which sought an
unspecified amount of damages. The Court dismissed the complaint on the
grounds that the plaintiff was obligated to make a demand on the Board of
Directors. The plaintiff subsequently filed an amended complaint, which the
Company and the individual defendants moved to dismiss. On November 6, 1998
the Court dismissed the amended complaint without leave to amend. The
Company currently has no knowledge of the plaintiff's intent to file for an
appeal.
On November 26, 1997, a complaint was filed against the Company in the
Superior Court of California, San Diego County, Shaw et al. v. NetManage,
Inc., No. 716081. The plaintiffs, who held a significant ownership interest
in AGE before it was acquired by NetManage, bring causes of action alleging
fraud, negligent misrepresentations, negligence and breach of contract with
respect to the Company's acquisition of AGE. The complaint seeks an
unspecified amount of damages. The Company believes there is no merit to
the case and intends to defend the case vigorously. There can be no
assurance that the Company will be able to prevail in the lawsuit, or that
the pendency of the lawsuit 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 loss contingencies.
In March 1996, a class action lawsuit was filed in the United States
District Court for the District of Massachusetts, naming FTP and certain of
its former officers as defendants. The lawsuit, captioned Lawrence M.
Greebel v. FTP Software, Inc., et al., Civil Action No. 96-10544, alleged
that the defendants publicly issued false and misleading statements and
omitted to disclose material facts necessary to make such statements not
false and misleading, which the plaintiffs contended caused an artificial
inflation in the price of FTP's Common stock. Specifically, the original
complaint alleged that the defendants knowingly concealed adverse facts and
made false or misleading statements concerning the operating results and
financial condition of FTP, the effects of FTP's July 1995 corporate
restructuring and changing competitive factors in FTP's industry. The
lawsuit, which was purportedly brought on behalf of a class of purchasers
of FTP's common stock during the period from July 14, 1995 to January 3,
1996, alleged violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 10b-5
thereunder and sought relief in the form of unspecified compensatory
damages, costs and expenses and such other relief as the court deemed
proper and just. In August 1996, plaintiffs filed an amended complaint
adding allegations concerning what plaintiffs claimed were wrongful sales
and accounting practices by FTP during the class period, in addition to the
same causes of action as the original complaint.
In October 1996, FTP filed a motion to dismiss the complaint on the grounds
that the plaintiffs had not met the pleading requirements of the Private
Securities Litigation Reform Act of 1995. The motion was denied by the
court on February 13, 1997. On February 13, 1998, FTP filed a motion for
partial summary judgment and renewed motion to dismiss; plaintiffs filed
their response on March 20, 1998. A hearing on these motions was held on
September 14, 1998, and on September 24, 1998 the court granted defendants'
motion for partial summary judgment and dismissed the complaint. On October
2, 1998, plaintiffs filed notice of their intention to appeal this
decision.
FTP believes the lawsuit to be without merit, and intends to defend itself
and its former officers vigorously. The cost of defending the litigation
and the outcome of the litigation are uncertain and cannot be estimated.
There can be no assurance that FTP will prevail in the lawsuit, or that
pendency of the lawsuit will not adversely affect FTP's operations. As the
outcome of this matter cannot be reasonably determined, FTP has not accrued
for any potential loss contingencies.
In February 1996, a class action lawsuit, captioned Richard Zeid and Siom
Misrah, et al. v. John Kimberley, Frank M. Richardson, Mark A. Rowlinson
and Firefox Communications, Inc., Case No. C96 20136, was filed in the
United States District Court for the Northern District of California, San
Francisco Division (transferred to
10
<PAGE> 11
the San Jose Division), naming Firefox Communications Inc., which FTP
acquired in July 1996 ("Firefox"), and certain of its former officers and
directors as defendants. The original complaint alleged that the defendants
misrepresented or failed to disclose material facts about Firefox's
operations and financial results, which the plaintiffs contended resulted
in an artificial inflation in the price of Firefox's Common stock. The suit
was purportedly brought on behalf of a class of purchasers of Firefox's
common stock during the period from August 3, 1995 to January 2, 1996. The
complaint alleged claims for violations of Sections 10(b) and 20(a) of the
Exchange Act and Rule 10b-5 thereunder and sought relief in the form of
unspecified compensatory damages, pre- and post-judgment interest,
attorneys' and expert witness fees and such extraordinary, equitable and/or
injunctive relief as permitted by law, equity and the federal statutory
provisions under which the suit was brought. In June 1996, the District
Court entered an order dismissing plaintiffs' complaint. In the order, the
court dismissed with prejudice certain of plaintiffs' claims that warnings
and disclosures in Firefox's Form 10-Qs were false and misleading, while
granting plaintiffs permission to amend their complaint as it concerned
certain of plaintiffs' claims that Firefox was responsible for false and
misleading analysts reports, Firefox statements and financial statements.
In July 1996, plaintiffs filed their amended complaint. The amended
complaint alleged that defendants misrepresented or failed to disclose
material facts about Firefox's operations and financial results which the
plaintiffs contended resulted in an artificial inflation of the price of
Firefox's common stock. The amended complaint was purportedly brought on
behalf of a class of purchasers of Firefox's common stock during the period
from July 20, 1995 to January 2, 1996. The amended complaint again alleged
claims for violations of Sections 10(b) and 20(a) of the Exchange Act and
Rule 10b-5 thereunder and sought relief in the form described above.
Specifically, the amended complaint alleged that defendants knew allegedly
material adverse non-public information about Firefox's financial results
and business conditions which allegedly was not disclosed, that they
improperly directed that certain sales and revenues be recognized and
failed to keep adequate reserves and that they participated in drafting,
reviewing and/or approving allegedly misleading statements, releases,
analysts reports and other public representations, including disclaimers
and warnings of and about Firefox. The amended complaint also alleged that
John A. Kimberley, then an officer and director of Firefox, and Frank
Richardson, a former officer and director of Firefox, were liable as
"controlling persons" of Firefox. In September 1996, Firefox filed a motion
to dismiss the amended complaint on the grounds that the plaintiffs had not
met the pleading requirements of the Private Securities Litigation Reform
Act of 1995. On May 8, 1997, the court dismissed the amended complaint on
such grounds, without leave to amend. Plaintiffs have appealed the
dismissal to the Ninth Circuit Court of Appeals. Oral argument on the
appeal was held on September 14, 1998; no decision has been rendered by the
court as of November 11, 1998.
Firefox believes the lawsuit to be without merit, and intends to defend
itself and its former officers and directors vigorously. The cost of
defending the litigation and the outcome of the litigation are uncertain
and cannot be estimated. There can be no assurance that Firefox will
prevail in the lawsuit, or that pendency of the lawsuit will not adversely
affect Firefox's operations. As the outcome of this matter cannot be
reasonably determined, Firefox 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.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Quarterly Report on Form 10-Q contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
Such forward-looking statements include, among others, statements regarding
expected revenues from products recently introduced or acquired as a result of
recent acquisitions of other companies, expected changes in operating expenses
and capital spending, the Company's expectation that indirect sales will
increase as a percentage of domestic and total revenues, and the Company's
expectation that research and development and sales and marketing expenses will
increase as a result of the Company's acquisition of FTP. The Company's actual
results could differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, among others, that the markets for the Company's products,
including but not limited to Chameleon(TM) UNIX(R) Link 97, Chameleon HostLink
97, OnNet(R) Host, OnWeb(TM) Host, SupportNow(TM), OpSession(TM), N/S
Portfolio(TM) and NS/Router(R), could grow more slowly than the Company or
market analysts believe or that the Company will not be able to compete
effectively in those markets. In addition, there is no assurance that the
Company's products for real-time customer support over the Internet will
continue to receive customer acceptance, especially in light of the early stage
of development of the markets for such Internet-based applications, that the
Company will not suffer increased competitive pressures, that buying decisions
by the Company's customers will not be adversely influenced by the actions of
the Company's competitors or other market factors or by the Company's
acquisition of FTP, that the Company will be able to retain and hire sufficient
qualified personnel following the acquisition of FTP and the August 1998
restructuring described below, that the Company will be able to realize on new
business opportunities that may exist as a result of the acquisition of FTP,
that the Company will be continue to execute on its business plan in a manner
that will allow it to improve its financial position or that the continuing
economic difficulties in Asia will not adversely affect sales of the Company's
products in that region. The timing of completion of the August 1998
restructuring described below and the amount of the related restructuring charge
is dependent upon a number of factors including risks associated with the
integration of the operations of FTP, including the Company's ability to
integrate the operations of FTP in a timely, efficient and cost-effective
manner, the rate and amount at which the Company is able to terminate leases on
or sublease excess office space and the accuracy of management's estimates of
lease termination or sublease and other restructuring charges. Additional
factors that could affect the Company's business, financial condition and
results of operations include those discussed below under "-- Factors That May
Affect Future Results and Financial Condition" as well as those discussed in the
Company's Report on Form 10-K for the year ended December 31, 1997. The
following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto included above.
OVERVIEW
NetManage, Inc. (the "Company") develops, markets and supports PC connectivity
software, offering world-class Windows applications for connecting to UNIX,
AS/400 and IBM mainframe host systems. The Company's mission is to provide
global connectivity products that greatly improve the communication between
personal computers and legacy systems regardless of where PCs are located. The
Company also provides remote access, application sharing and help desk
technology in its newly introduced OpSession and SupportNow products.
With the recent acquisition of FTP, the Company has enhanced its market position
and product offerings by becoming a supplier with a broader range of software
solutions spanning major market segments. The Company's products include the
Chameleon product family, the NS/Portfolio product family, OnNet Host and OnWeb
Host product families and the InterDrive(R) family of NFS server products. Its
products are sold and serviced worldwide by the Company's direct sales force,
international subsidiaries and authorized channel partners.
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<PAGE> 13
ACQUISITIONS
On August 26, 1998, the Company acquired all of the outstanding shares of common
stock of FTP Software, Inc. ("FTP") for an aggregate purchase price of $78.3
million through a stock merger of Amanda Acquisition Corp., a wholly-owned
subsidiary of the Company, with and into FTP, which survived the merger as a
wholly-owned subsidiary of the Company. The acquisition was accounted for using
the purchase method of accounting and, accordingly, the results of FTP from the
date of acquisition forward have been recorded in the Company's consolidated
financial statements.
RESTRUCTURING
In late August, 1998, following the acquisition of FTP, the Company initiated a
plan to restructure its worldwide operations as a result of business conditions
and in connection with the integration of the operations of FTP. In connection
with this plan, the Company recorded a $7.0 million charge to operating expenses
in the three months ended September 30, 1998 and recognized a restructuring
liability of $9.7 million treated as assumed in the purchase of FTP and
allocated to the purchase price. The restructuring charge includes approximately
$5.5 million of estimated expenses for the write-off of excess equipment and
facilities-related expenses associated with the consolidation of operations and
$1.5 million of employee-related expenses for employee terminations. The
restructuring plan includes a reduction in the Company's worldwide workforce and
office space. The Company anticipates that the majority of the restructuring
actions will be completed by the end of 1998 with remaining items to be
completed within one year from the date the restructuring plan was initiated.
The Company anticipates that the execution of the restructuring actions will
require cash expenditures of approximately $13.7 million, which will be funded
from internal operations. As of September 30, 1998, the Company had incurred
costs totaling approximately $4.9 million related to the restructuring. Accrued
liabilities at September 30, 1998 included a reserve related to this
restructuring plan of approximately $11.8 million resulting from the above
mentioned charge to operating expenses and the assumption of restructuring
liabilities identified as being FTP-related activities which were included in
the calculation of the purchase price.
RESULTS OF OPERATIONS
During the past year, the Company discontinued several low revenue generating
products and focused efforts on controlling costs in order to reduce operating
expenses, including announcing and initiating restructuring plans in the third
quarter of 1998 and the third quarter of 1997. The Company also focused on
integrating the technologies acquired as a result of its acquisitions of Network
Software Associates, Inc. ("NetSoft") and Relay Technology, Inc. ("Relay") in
July and November of 1997, respectively.
Because the Company generally ships software products within a short period
after receipt of an order, the Company does not have a material backlog of
unfilled orders, and revenues in any one quarter are substantially dependent on
orders booked in that quarter. The Company's 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, excluding the write-off of in-process
research and development and restructuring charges, decreased for the three and
nine months ended September 30, 1998 compared to the same periods in 1997 as a
result of the restructuring plan initiated in the third quarter of 1997, the
resulting reduction of headcount and the closing and/or consolidation of
facilities.
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<PAGE> 14
SEPTEMBER 30, 1998 COMPARED TO SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
(Dollars in millions) Three Months Ended Nine Months Ended
1998 1997 Change 1998 1997 Change
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
License fees $ 12.9 $ 9.8 31.9% $ 37.5 $ 31.0 20.7%
Services 4.2 3.8 11.0% 11.4 11.6 (1.1)%
-------- -------- -------- -------
Total net revenues $ 17.1 $ 13.6 26.1% $ 48.9 $ 42.6 14.8%
As a percentage of net revenues:
License fees 75.4% 72.1% 76.5% 72.7%
Services 24.6% 27.9% 23.5% 27.3%
-------- -------- -------- -------
Total net revenues 100.0% 100.0% 100.0% 100.0%
Gross margin $ 16.5 $ 12.7 30.6% $ 46.7 $ 39.7 17.6%
As a percentage of net revenues 96.8% 93.4% 95.4% 93.2%
Research and development $ 4.3 $ 5.6 (23.1%) $ 13.4 $ 16.5 (18.6%)
As a percentage of net revenues 25.1% 41.2% 27.4% 38.6%
Sales and marketing $ 9.8 $ 10.9 (10.2%) $ 28.7 $ 31.7 (9.5%)
As a percentage of net revenues 57.4% 80.6% 58.7% 74.5%
General and administrative $ 3.4 $ 3.2 5.8% $ 8.8 $ 8.0 9.7%
As a percentage of net revenues 19.7% 23.5% 18.0% 18.8%
Write-off of in-process
research and development $ 9.5 $ 16.0 (40.6%) $ 9.5 $ 16.0 (40.6%)
As a percentage of net revenues 55.6% 118.0% 19.0% 37.5%
Restructuring charge $ 7.0 $ 5.2 36.0% $ 7.0 $ 5.2 36.0%
As a percentage of net revenues 41.2% 38.2% 14.4% 12.1%
Interest income and other, net $ 1.4 $ 1.1 26.1% $ 2.8 $ 3.7 (24.4%)
As a percentage of net revenues 8.2% 8.2% 5.8% 8.7%
Benefit (provision) for income taxes $ 0.7 -- 100.0% $ (0.8) -- 100.0%
-- --
Effective tax rate -- -- -- --
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
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.
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 22% and 32% for the three-month periods ended
September 30, 1998 and 1997, respectively, and approximately 25% and 23% for the
nine-month periods ended September 30, 1998 and 1997, respectively. The
Company's July 1997 acquisition of NetSoft, which had historically been
successful in marketing and selling its products internationally, resulted in
the increase in international revenues as a percentage of total net revenues for
the nine-month period ended September 30, 1998 compared to the same period in
1997.
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<PAGE> 15
License fees increased both in absolute dollars and as a percentage of total net
revenues during the three- and nine-month periods ended September 30, 1998
compared to the same periods in 1997. The increase is primarily attributable to
the Company's expanded product offerings as a result from the Company's 1997
acquisitions of NetSoft and Relay, the release of UNIXLink/HostLink 8.0 late in
the second quarter of 1998 and the inclusion of FTP's revenues from the date of
acquisition forward.
Service revenues increased in absolute dollars for the three months ended
September 30, 1998 compared to the same period in 1997 due to the addition of
FTP's revenues from the date of acquisition forward. Service revenues decreased
slightly in absolute dollars for the nine months ended September 30, 1998
compared to the same period in 1997.
Software license fees are generally recognized as revenue upon shipment if the
fee is considered fixed and determinable, the arrangement does not include
significant customization of the software and collectibility is probable.
Allowances for returns and doubtful accounts are provided based on historical
rates of returns and write-offs, which have not been material to date. Certain
of the Company's sales to distributors are under agreements providing rights of
return and price protection on unsold merchandise. Accordingly, the Company
defers recognition of such sales until the merchandise is sold by the
distributor.
The Company provides ongoing maintenance and support to its customers, generally
under annual service agreements. Maintenance and support is comprised of
software updates for existing products and telephone support. Service revenues
are recognized on a pro-rata basis over the terms of such agreements.
Periodically, the Company has provided training and consulting services to
selected customers. Revenue from such services 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
nine-month periods ended September 30, 1998 or 1997.
GROSS MARGIN
Cost of revenues primarily consists of 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 September 30, 1998 has not been material and is not
reported separately.
Gross margin increased both in absolute dollars and as a percentage of total net
revenues for the three- and nine-month periods ended September 30, 1998 compared
to the same periods in 1997, primarily as a result of the change in the mix of
products sold as well as the mix of distribution channels used by the Company.
The Company has also realized significant cost savings by outsourcing
manufacturing activities beginning in the third quarter of 1998.
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. The Company anticipates that gross margins as a percentage of
sales may decrease slightly as a percentage of sales in the fourth quarter of
1998 as FTP's products are integrated into the Company's product line as FTP's
products have been typically sold through indirect channels of distribution
which carry lower margins.
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 and as a
percentage of total net revenues for the three- and nine-month periods ended
September 30, 1998 as compared to the same periods of the prior year primarily
reflects cost savings, particularly in salaries and benefits, associated with
the reduction in headcount resulting from the restructuring plan announced in
the third quarter of 1997 as well as the Company's continued efforts to control
operating expenses. The Company expects that R&D expenses will
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<PAGE> 16
increase significantly in absolute dollars in the fourth quarter of 1998 due to
the anticipated costs of integrating the products of FTP into the Company's
product line.
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 promotional
expenses, and customer service and support costs. The decrease in S&M expenses
both in absolute dollars and as a percentage of total net revenues for the
three- and nine-month periods ended September 30, 1998 compared to the same
periods in 1997 primarily reflects cost savings related to reduced headcount as
a result of the 1997 restructuring plan and the resulting decreases in salaries
and benefits, as well as a decline in promotional expenses as the Company
re-evaluated its marketing and selling strategies. The Company expects that
sales and marketing expenses may increase slightly during the remainder of 1998
due to the increased promotional expenses expected to be incurred to market the
broader range of products offered by the combined Company.
GENERAL AND ADMINISTRATIVE
General and administrative ("G&A") expenses increased in absolute dollars for
the three- and nine-month periods ended September 30, 1998 compared to the same
periods in 1997 due to an increase in salary expense as a result of the NetSoft
and FTP acquisitions as well as increased legal expenses associated with
defending the lawsuits filed against the Company in 1997 and the FTP and Firefox
lawsuits discussed in Note 9 of the notes to the unaudited condensed
consolidated financial statements included above. The change in G&A expenses as
a percentage of total net revenues for both the three- and nine-month periods
ended September 30, 1998 compared to the same periods in 1997 is attributable to
the corresponding changes in the total net revenues base. The Company expects
that general and administrative expenses will remain relatively constant in
absolute dollars for the remainder of 1998 relative to the third quarter of
1998.
Interest and Other Income, Net
The decline in interest income and other, net, in both absolute dollars and as a
percentage of total net revenues for the nine-month period ended September 30,
1998 compared to the same period in 1997 is primarily the result of a decrease
in the aggregate amount of cash and investments from September 30, 1997 to
August 1998 prior to acquisition of FTP, partially offset by an increase in
interest income following the acquisition of FTP, given the resulting increase
in the Company's greater cash and investment balances. The increase in absolute
dollars for the three months ended September 30, 1998 is a result of the
addition of FTP's cash and investments to the Company's cash and investment base
as a result of the FTP acquisition in August 1998. The Company anticipates that
interest income may decline in absolute dollars in the fourth quarter of 1998
due to the cash flow requirements of the stock repurchase program announced in
October 1998, as described under "--Liquidity and Capital Resources" below, and
restructuring activities.
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<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
As of September 30, As of December 31,
(In millions) 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 65.0 $ 12.7
Short-term investments 25.6 36.8
Long-term investments 40.6 19.7
Net cash provided by (used in) operating activities 1.6 (5.8)
Net cash provided by (used in) investing activities 49.2 (1.9)
Net cash provided by financing activities 1.2 1.2
- ----------------------------------------------------------------------------------------------------
</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 resulted in aggregate net
proceeds to the Company of approximately $72.5 million. The Company does not
have a bank line of credit or an equipment lease facility.
The Company's cash and cash equivalents, short-term investments and long-term
investments increased from $69.3 million at December 31, 1997 to $131.2 million
at September 30, 1998. This increase was primarily due to cash provided by the
Company's acquisition of FTP, as well as cash provided by the Company's
operations and investing activities.
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 amounts invested, the Company received
proceeds of $27.9 million from maturities of short-term and long-term
investments during the nine-month period ended September 30, 1998. Expenditures
for purchases of property and equipment were minimal during the nine months
ended September 30, 1998 as a result of the Company's efforts to control
operating expenses. The Company does not have any specific commitments with
regard to future capital expenditures. The Company's principal commitment as of
September 30, 1998 consists of leases on its facilities.
Net cash provided by financing activities during the third quarter of 1998
reflects proceeds from the issuance of common stock under the Company's stock
option plan.
In late October 1998, the Company instituted a stock repurchase program whereby
up to 4,000,000 shares of the Company's common stock may be repurchased in the
open market from time to time.
At September 30, 1998, the Company had working capital of approximately $72.9
million. The Company believes that its current cash balances and cash flows from
current operations will be sufficient to meet the Company's working capital and
capital expenditure requirements for the foreseeable future.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
RESTRUCTURING; INTEGRATION OF OPERATIONS OF FTP
As described above, in late August 1998, following its acquisition of FTP, the
Company initiated a plan to restructure its worldwide operations in response to
adverse business conditions in order to improve the Company's future financial
performance and in connection with the integration of the operations of FTP. The
restructuring plan involves both a reduction in the Company's worldwide
workforce and the consolidation of certain of the Company's sales and research
and development facilities. No assurance can be given that the restructuring
will prove to be successful, that future operating results will improve, or that
the actions undertaken in the restructuring will not disrupt the Company's
remaining operations. Further, there can be no assurance that additional
reorganization of the Company's operations will not be required in the future.
In addition, the Company is in the process of integrating the operations of FTP.
As indicated below under "-- Risks of Acquisitions," the successful combination
of companies in the rapidly changing high technology industry requires
coordination of sales and marketing and research and development efforts and may
be more difficult to accomplish than in some other industries. The integration
of FTP also involves the integration of geographically separated organizations
(in suburban Boston, Massachusetts, Cupertino, Irvine, San Diego and San Jose,
California,
17
<PAGE> 18
and Haifa, Israel) and personnel with diverse business backgrounds and corporate
cultures. The Company believes that such factors, the attention and dedication
of management and other resources required to effect the integration and the
disruption in the business of FTP resulting from the announcement and
consummation of the acquisition may have contributed to an interruption and loss
of momentum in FTP business activities, and that the Company's ability to
maintain or increase revenues from the sale of FTP's products will depend in
part on its ability to effectively respond to these factors.
CHANGES IN PERSONNEL
The majority of the Company's employee workforce is located in the extremely
competitive employment markets of the Silicon Valley and Orange County in
California, the suburban Boston area and Haifa, Israel. During the latter half
of 1996 and throughout 1997 and 1998, the Company (and, prior to the
acquisition, FTP) 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 intends to continue to address the issue of attrition. In
addition, in connection with the restructuring described above and the
integration of the operations of FTP, the Company has effected a reduction in
its worldwide workforce which is expected to be substantially completed by the
end of 1998 and to involve approximately 200 employees in total. 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 and increases the
difficulty of hiring, training and assimilating new employees. Any failure of
the Company to retain and attract qualified employees or to train or manage its
management and employee base could have a material adverse effect on its
business, financial condition and results of operations.
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. From time to time over
the past three years, 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 successfully develop, introduce and market new products and
product enhancements on a timely and cost-effective basis. The Company has
experienced difficulty from time to time in developing and introducing new
products and enhancing existing products in a manner which satisfies customer
requirements and changing market demands. Any further 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,
could have a material adverse effect on the Company's business, financial
condition and results of operations. The failure to develop on a timely basis
products or product 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 business, financial condition and 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.
Because certain of the Company's products incorporate software and other
technologies developed and maintained by third parties, the Company is, to
certain extent, dependent upon such third parties' ability to enhance their
current products, to develop new products that will meet changing customer needs
on a timely and cost-effective basis, and to respond to emerging industry
standards and other technological changes. There can be no assurance that the
Company would be able to replace the functionality provided by the third party
technologies currently offered in conjunction with its products if those
technologies become unavailable to it or obsolete or incompatible with future
versions of the Company's products or market standards. For example,
substantially all of NetManage's net revenues have been derived from the sales
of products that provide internetworking applications for the Microsoft Windows
environment and are marketed primarily to Windows users. As a result, sales of
certain 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
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<PAGE> 19
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 Windows
releases.
The Company's ability to internally develop new products and product
enhancements is dependent upon its ability to attract and retain qualified
employees. See "-- Changes in Personnel" above. In addition to internal
development of new products and technologies, the future success of the Company
may depend on the ability of the Company to enter into and implement strategic
alliances and OEM relationships to develop necessary products or technologies,
to expand the Company's distribution channels or to jointly market or gain
market awareness for the Company's products. There can be no assurance that the
Company will be successful in identifying or developing such alliances and
relationships or that such alliances and relationships will achieve their
intended purposes.
Software products as complex as those offered by the Company may contain
undetected errors or failures when first introduced or as new versions are
released. There can be no assurance that, despite testing by the Company and by
current and potential customers, errors will not be found in new products or
product enhancements after commencement of commercial shipments, which could
result in loss of or delay in market acceptance. Such loss or delay could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's connectivity software products compete with major computer and
communication systems vendors, including Microsoft Corporation, IBM, Novell,
Inc. and Sun Microsystems, Inc., as well as smaller networking software
companies such as Hummingbird Communications Ltd. The Company also faces
competition from makers of terminal emulation software such as Attachmate
Corporation and Wall Data Incorporated. Many of the Company's competitors have
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name or product 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. 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.
Over the last year, the Company has experienced price declines for its products.
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 technology that could render obsolete or
adversely affect sales of the Company's products. These developments 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. Several of the Company's
competitors have developed proprietary networking applications and certain of
such vendors, including Novell, provide a TCP/IP protocol suite in their
products at little or no additional cost. In particular, Microsoft has embedded
a TCP/IP protocol suite in its Windows 95 and Windows NT operating systems. The
Company recently announced products similar to connectivity products marketed by
Microsoft. Microsoft is expected to increase development of such products, which
could have a material adverse effect on the Company's business, financial
condition or results of operations.
SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS
The Company has experienced, and expects to experience in future periods,
significant fluctuations in operating results that may be caused by many factors
including, among others, demand for the Company's products, introduction or
enhancements of products by the Company or its competitors, technological
changes in computer networking, competitive pricing pressures, market acceptance
of new products, customer order deferrals in anticipation of new products and
product enhancements, the size and timing of individual product orders, mix of
international and domestic revenues, mix of distribution channels through which
the Company's products are sold, impact of, or failure to enter into, strategic
alliances to promote the Company's products, quality control of products,
changes in the Company's operating expenses, personnel changes, foreign currency
exchange rates and general economic conditions. In addition, the Company's
acquisition of complementary businesses, products or
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<PAGE> 20
technologies may cause fluctuations in operating results due to in-process
research and development charges, the amortization of acquired intangible assets
and integration costs such as those recorded in connection with the acquisition
of FTP.
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 one quarter are substantially
dependent on orders booked in that quarter and particularly in the last month of
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.
Based on the foregoing, 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.
RISKS OF ACQUISITIONS
The Company's merger and acquisition transactions, including the recent
acquisition of FTP, 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
and OEM marketplace. Product and technology acquisitions entail numerous risks,
including the diversion of management's attention away from day-to-day
operations, difficulties in the assimilation of acquired operations and
personnel (such as sales, 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 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.
GLOBAL MARKET RISKS
The Company derived approximately 22% and 25% of net revenues from international
sales during the three and nine months ended September 30, 1998, respectively.
While the Company expects that international sales will continue to account for
a significant portion of its net revenues, 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
effectively meet that demand. Risks inherent in the Company's international
business activities generally include unexpected changes in regulatory
requirements, the limitations imposed by U.S. export laws (see "-- Government
Regulation and Legal Uncertainties" below), changes in markets caused by a
variety of political, social and economic factors, 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 exchange rate 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 business, financial condition or results of
operations. In addition, the recent financial difficulties of some international
economies could result in reduced revenue from sales to customer locations in
such areas.
20
<PAGE> 21
EURO CURRENCY
The Single European Currency (Euro) will be introduced on January 1, 1999 with
complete transition to this new currency required by January 2002. The Company
is currently assessing the issues raised by the introduction and expects to make
changes to its internal systems in preparation for the initial introduction of
the Euro. Any delays in the Company's ability to be Euro-compliant could have
an adverse impact on the Company's business, financial condition or results of
operations. The Company expects that introduction and use of the Euro will
affect the Company's foreign exchange and hedging activities, and may result in
increased fluctuations in foreign currency hedging results.
MARKETING AND DISTRIBUTION
Historically, the Company has relied significantly on its independent
distributors, systems integrators and value-added resellers for certain elements
of the marketing and distribution of its products. The agreements in place with
these organization are generally non-exclusive. These organizations are not
within the control of the Company, may represent other product lines in addition
to those of the Company and are not obligated to purchase products from the
Company. There can be no assurance that such organizations will give a high
priority to the marketing of the Company's products, and such organizations may
give a higher priority to other products, which may include those of the
Company's competitors. Actions of this nature by such organizations could result
in a lower sales effort being applied to the Company's products and a consequent
reduction in the Company's operating results. The Company's results of
operations can also be materially adversely affected by changes in the inventory
strategies of its resellers, which can occur rapidly and in many cases may not
be related to end user demand. As part of its strategy to develop multiple
distribution channels, the Company expects to increase its use of indirect
distribution channels, particularly value added resellers and system
integrators, in addition to distributors and original equipment manufacturers.
The Company expects that indirect sales may grow as a percentage of both
domestic and total revenues, both as a result of the above mentioned strategy
and the acquisition of FTP, 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. 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 Company's products effectively, will
be qualified to provide timely and cost-effective customer support and service
or will continue to represent the Company's products, and any inability on the
part of the Company to recruit or retain important resellers or distributors
could adversely affect the Company's business, financial condition or results of
operations.
PROPRIETARY RIGHTS
The Company relies primarily on a combination of copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to protect
its proprietary rights. However, the basic TCP/IP protocols are non-proprietary
and other parties have developed their own versions. See "-- Product Development
and Competition" above. The Company seeks to protect its software, documentation
and other written materials under trade secret and copyright laws, which afford
only limited protection, and, to a lesser extent, patent laws. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. Policing unauthorized use
of the Company's products is difficult and, while the Company is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. In selling its products, the
Company relies primarily on "shrink-wrap" and "click-wrap" licenses that are not
signed by licensees and, therefore, may be unenforceable under the laws of
certain jurisdictions. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to as great an extent as do the laws of
the United States. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology. In addition, the
number of patents applied and granted for software inventions is increasing.
Consequently, there is a growing risk of third parties asserting patent claims
against the Company. The Company has received, and may receive in the future,
communications from third parties asserting that the Company's products
infringe, or may infringe, the proprietary rights of third parties, seeking
indemnification against such infringement or indicating that the Company may be
interested in obtaining a license from such third parties. There can be no
assurance that any of such claims would not result in protracted and costly
litigation.
If any claims or actions were to be asserted against the Company and it were
required to seek a license of a third party's intellectual property, there can
no assurance that it would be able to acquire such a license on reasonable
21
<PAGE> 22
terms or at all, and no prediction can be made about the effect that such a
license might have on its business, financial condition or results of
operations. Should litigation with respect to any such claim commence, such
litigation could be extremely expensive and time consuming and could materially
adversely affect the Company's business, financial condition and results of
operations regardless of the outcome of the litigation.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in
existing computers systems as the millennium ("Year 2000") approaches. The issue
is whether computer systems will properly recognize date-sensitive information
when the year changes to 2000. The risk for the Company exists in four areas as
follows: systems used by the Company to run its business, systems used by the
Company's suppliers, potential warranty or other claims from the Company's
customers, and the potential reduced spending by other companies on networking
solutions as a result of significant information systems spending on Year 2000
remediation. The Company is currently evaluating its exposure in all of these
areas.
For the Year 2000 non-compliance issues identified to date, the cost of upgrade
or remediation is not expected to be material to the Company's operating
results. The Company is conducting an ongoing review of its estimated costs. The
Company expects to implement replacement systems as necessary and as remedies
become available over the next few quarters. If implementation of replacement
systems is delayed, or if significant new non-compliance issues are identified,
the Company's business, financial condition or results of operations could be
materially adversely affected.
The Company is contacting its critical suppliers to determine that the
suppliers' operations and the products and services they provide are Year 2000
compliant. Where practicable, the Company will attempt to mitigate its risks
with respect to the failure of suppliers to be Year 2000 ready. If suppliers are
not Year 2000 compliant, the Company may seek alternative sources of supplies.
However, such failures remain a possibility and could have an adverse impact on
the Company's business, financial condition or results of operations.
The Company believes its current products are Year 2000 compliant; however, all
customer situations cannot be anticipated, particularly those involving third
party products. For these reasons, the impact of customer claims on the
Company's results of operations or financial condition cannot be determined at
this time.
Customers whose computer systems and applications may require significant
hardware and software upgrades or modifications may plan to devote a substantial
portion of their information systems' spending to fund such upgrades and
modifications and divert spending away from networking solutions. Such changes
in customers' spending patterns could have a material adverse impact on the
Company's sales, operating results or financial condition.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to or commerce
on the Internet. However, due to the increasing popularity and use of the
Internet, it is possible that various laws and regulations may be adopted with
respect to the Internet, covering issues such as user privacy, pricing and
characteristics and quality of products and services. The adoption of any such
laws or regulations may decrease the growth of the Internet, which could in turn
decrease the demand for the Company's products, increase the Company's cost of
doing business or otherwise have an adverse effect on its business, financial
condition or results of operations. Moreover, the applicability to the Internet
of existing laws governing issues such as property ownership, libel and personal
privacy is uncertain. Further, due to the encryption technology contained in
certain of the Company's products, such products are subject to U.S. export
controls. There can be no assurance that such export controls, either in their
current form or as may be subsequently enacted, will not limit the Company's
ability to distribute products outside of the United States or electronically.
While the Company takes precautions against unlawful exportation, there can be
no assurance that inadvertent violations will not occur, and the global nature
of the Internet makes it virtually impossible to effectively control the
distribution of the Company's products. In addition, future federal or state
legislation or regulation may further limit levels of encryption or
authentication
22
<PAGE> 23
technology. Any such export restriction, new legislation or regulation or
unlawful exportation could have a material adverse effect on the Company's
business, financial condition or results of operations.
LITIGATION
The Company and certain of its subsidiaries are currently parties to class
action lawsuits filed by holders or former holders of each company's common
stock. See Note 9 of the notes to the unaudited condensed consolidated financial
statements included above. There can be no assurance that the Company or such
subsidiary will be able to prevail in the lawsuits or that adverse outcomes in
one or more of these proceedings will not have a material adverse effect on the
Company's business, results of operations or financial condition.
NetManage, Chameleon UNIXLink, Chameleon HostLink, OpSession, SupportNow,
NS/Portfolio, NS/Router, the NetManage logo and the lizard logo are trademarks
or registered trademarks of NetManage, Inc. in the United States and other
countries. FTP Software, OnNet, OnWeb and InterDrive are trademarks or
registered trademarks of FTP Software, Inc. in the U.S. and other countries.
UNIX is a registered trademark in the U.S. and other countries, licensed
exclusively through X/Open Company Limited. AS/400 is a registered trademark in
the U.S. and other countries of International Business Machines Corporation. All
other trademarks are the property of their respective owners.
23
<PAGE> 24
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For a description of certain legal proceedings involving NetManage, a
description of certain legal proceedings involving FTP and a description of
certain legal proceedings involving Firefox, see Note 9 of the notes to the
unaudited condensed consolidated financial statements included in Part I of this
Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On August 26, 1998, the Company held a special meeting of stockholders for
the purposes of: (i) considering a proposal to approve the issuance of the
Company's common stock pursuant to the Agreement and Plan of Reorganization
dated as of June 15, 1998, as amended, among the Company, FTP and Amanda
Acquisition Corp. (the "Share Proposal"); and (ii) considering a proposal to
approve an amendment to the Company's Certificate of Incorporation to increase
the number of authorized shares of the Company's common stock from 75,000,000 to
125,000,000 (the "Certificate Amendment Proposal"). The results of the votes
were as follows:
1. The Share Proposal:
<TABLE>
<CAPTION>
For Against Abstained Broker Non-Votes
--- ------- --------- ----------------
<S> <C> <C> <C>
22,479,632 1,251,524 148,675 18,122,815
</TABLE>
The affirmative vote of the holders of a majority of the outstanding shares of
the Company's common stock entitled to vote and present at the meeting in person
or by proxy (42,002,646 shares) was required to approve this proposal, in
accordance with the rules of the NASD.
2. The Certificate Amendment Proposal:
<TABLE>
<CAPTION>
For Against Abstained Broker Non-Votes
--- ------- --------- ----------------
<S> <C> <C> <C>
39,829,886 1,818,714 354,046 0
</TABLE>
The affirmative vote of a majority of the shares of the Company's common stock
outstanding on July 13, 1998, the record date for the meeting (44,209,692
shares), was required to approve this proposal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. EXHIBITS
<TABLE>
<S> <C>
3.1 Form of Certificate of Amendment of Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.2 to the Company's Registration Statement
on Form S-4, Registration No. 333-59101 (the "Form S-4")).
10.1 Agreement and Plan of Reorganization among the Company, FTP Software, Inc. and
Amanda Acquisition Corp. dated as of June 15, 1998, as amended on June 30, 1998
and July 14, 1998 (incorporated by reference to Annex A to the Joint Proxy
Statement/Prospectus included in the Form S-4).
27.1 Financial Data Schedule.
</TABLE>
24
<PAGE> 25
B. REPORTS ON FORM 8-K
On June 19, 1998, the Company filed a Current Report on Form 8-K dated June 15,
1998 to report, under Item 5 thereof, the execution of the Agreement and Plan of
Reorganization, dated as of June 15, 1998, among the Company, Amanda Acquisition
Corp. and FTP.
On September 11, 1998, the Company filed a Current Report on Form 8-K dated
August 27, 1998 to report, under Item 1 thereof, the closing of the acquisition
of FTP pursuant to the above-referenced Agreement and Plan of Reorganization and
the restructuring plan described under Item 2 of Part I of this Report and,
under Item 5 thereof, the amendment to the Company's Certificate of
Incorporation described under Item 4 above.
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NETMANAGE, INC.
(Registrant)
DATE: November 12, 1998 By: /s/ Gary R. Anderson
------------------------- ------------------------------
Gary R. Anderson
Chief Financial Officer and
Senior Vice President,Finance
(Principal Financial and
Accounting Officer)
26
<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
3.1 Form of Certificate of Amendment of Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.2 to the Company's Registration Statement
on Form S-4, Registration No. 333-59101 (the "Form S-4")).
10.1 Agreement and Plan of Reorganization among the Company, FTP Software, Inc. and
Amanda Acquisition Corp. dated as of June 15, 1998, as amended on June 30, 1998
and July 14, 1998 (incorporated by reference to Annex A to the Joint Proxy
Statement/Prospectus included in the Form S-4).
27.1 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 65,042
<SECURITIES> 25,580
<RECEIVABLES> 13,065
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 125,193
<PP&E> 25,496
<DEPRECIATION> 15,633
<TOTAL-ASSETS> 205,370
<CURRENT-LIABILITIES> 52,217
<BONDS> 0
0
0
<COMMON> 690
<OTHER-SE> 152,914
<TOTAL-LIABILITY-AND-EQUITY> 205,370
<SALES> 17,088
<TOTAL-REVENUES> 17,088
<CGS> 547
<TOTAL-COSTS> 547
<OTHER-EXPENSES> 34,711
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (16,395)
<INCOME-TAX> (7)
<INCOME-CONTINUING> (16,388)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,388)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
