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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 March 31, 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)
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
May 1, 1998: 44,008,789
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NETMANAGE, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 1998 and
December 31, 1997 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1998 and March 31, 1997 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 and March 31, 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
These condensed consolidated financial statements should 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, 1997, filed on
March 31, 1998.
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NETMANAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1998 1997
--------- ---------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 15,091 $ 12,706
Short-term investments 40,690 36,845
Accounts receivable, net 12,923 13,408
Prepaid expenses and other current assets 13,802 15,726
--------- ---------
Total current assets 82,506 78,685
--------- ---------
PROPERTY AND EQUIPMENT, at cost:
Computer software and equipment 13,137 13,010
Furniture and fixtures 5,495 5,512
Leasehold improvements 1,302 1,308
--------- ---------
19,934 19,830
Less - Accumulated depreciation (12,037) (10,999)
--------- ---------
Net property and equipment 7,897 8,831
--------- ---------
LONG-TERM INVESTMENTS 15,365 19,734
GOODWILL AND OTHER INTANGIBLES, net 2,786 3,293
OTHER ASSETS 9,395 9,050
--------- ---------
$ 117,949 $ 119,593
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,097 $ 1,674
Accrued liabilities 3,270 5,185
Accrued payroll and payroll-related expenses 3,573 4,804
Deferred revenue 8,926 9,118
Income taxes payable 2,515 2,362
--------- ---------
Total current liabilities 20,381 23,143
--------- ---------
LONG-TERM LIABILITIES 454 363
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock 440 438
Additional paid-in capital 92,054 91,564
Retained earnings 6,526 5,996
Accumulated translation adjustment (1,906) (1,911)
--------- ---------
Total stockholders' equity 97,114 96,087
--------- ---------
$ 117,949 $ 119,593
========= =========
</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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------
MARCH 31, MARCH 31,
1998 1997
-------- --------
<S> <C> <C>
NET REVENUES:
License fees $ 13,955 $ 12,280
Services 3,358 4,099
-------- --------
Total net revenues 17,313 16,379
COST OF REVENUES 991 1,125
-------- --------
GROSS MARGIN 16,322 15,254
-------- --------
OPERATING EXPENSES:
Research and development 4,530 6,090
Sales and marketing 9,179 10,299
General and administrative 2,667 2,390
Amortization of goodwill 487 260
-------- --------
Total operating expenses 16,863 19,039
-------- --------
LOSS FROM OPERATIONS (541) (3,785)
INTEREST INCOME AND OTHER, NET 822 1,255
EQUITY IN INCOME (LOSSES) OF
UNCONSOLIDATED AFFILIATE 449 (209)
-------- --------
INCOME (LOSS) BEFORE PROVISION 730 (2,739)
FOR INCOME TAXES
PROVISION FOR INCOME TAXES 199 --
-------- --------
NET INCOME (LOSS) $ 531 $ (2,739)
======== ========
NET INCOME (LOSS) PER SHARE
Basic $ 0.01 $ (0.06)
Diluted $ 0.01 $ (0.06)
WEIGHTED AVERAGE COMMON SHARES
AND EQUIVALENTS
Basic 43,728 43,182
Diluted 43,903 43,182
</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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
MARCH 31, MARCH 31,
1998 1997
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 531 $ (2,739)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 1,741 2,779
Provision for doubtful accounts and returns 68 --
Equity in (income) losses of unconsolidated affiliate (449) 209
Changes in assets and liabilities:
Accounts receivable 417 3,823
Prepaid expenses and other assets 1,997 3,455
Accounts payable 423 (942)
Accrued liabilities, payroll and payroll-related expenses (3,059) (743)
Deferred revenue (188) (2,136)
Income taxes payable 153 (169)
-------- --------
Net cash provided by operating activities 1,634 3,537
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (5,746) (4,100)
Proceeds from maturity of short-term investments 1,900 13,592
Purchases of long-term investments (2,134) (12,781)
Proceeds from maturity of long-term investments 6,451 2,417
Purchases of property and equipment (287) (68)
Purchases of technology and other intangible assets (90) (530)
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Net cash provided by (used in) investing activities 94 (1,470)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 492 105
-------- --------
Net cash provided by financing activities 492 105
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 165 (526)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,385 1,646
CASH AND CASH EQUIVALENTS, beginning of period 12,706 19,483
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 15,091 $ 21,129
======== ========
</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-month
periods ended March 31, 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.
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. NET INCOME PER SHARE
Basic net income per share data has been computed using the weighted average
number of shares of common stock outstanding during the periods. Diluted net
income per share data has been computed using the weighted average number of
shares of common stock and potential common shares. Potential common shares
include dilutive shares issuable upon the exercise of outstanding common
stock options computed using the treasury stock method. Potentially dilutive
securities of 2,828,873 and 3,710,170 were not included in the computation
of diluted earnings per common share because to do so would have been
antidilutive for the three months ended March 31, 1998 and 1997,
respectively. For the three months ended March 31, 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. For the three months ended March
31, 1998, a reconciliation of the shares used in the computation of basic
and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
Number of Per Share
Shares Amount
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<S> <C> <C>
Basic earnings per share 43,728,143 $.01
Common stock options 175,244 .00
---------- ----
Diluted earnings per share 43,903,387 $.01
========== ====
</TABLE>
4. 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 consolidated financial statements for the three
months ended March 31, 1998.
5. COMPREHENSIVE INCOME (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 has the new
measure of income
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on it. "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 equity. The following table summarizes
comprehensive income (loss) for the three-month periods ended March 31, 1998 and
1997.
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Net income (loss) $ 531 $(2,739)
Foreign currency translation
adjustments, (net of tax benefit of
$0 in 1998 and 1997) (5) (526)
------- -------
Comprehensive income (loss) $ 526 $(3,265)
======= =======
</TABLE>
6. 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 are expected to file an amended
complaint. 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.
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 alleging that these
persons violated various duties to the Company. Sucher v. Alon et al., No.
C-97-20897 JW (EAI)
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(N.D. Cal.). The derivative complaint also names the Company as a nominal
defendant. The derivative complaint is 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 seeks an unspecified amount
of damages.
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.
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 Quarterly Report on Form 10Q 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 newly introduced products, the timing of the completion
of the Company's restructuring, the amount of restructuring charges, statements
regarding expected fluctuations in operating expenses and capital spending,
statements regarding the Company's expectation that indirect sales will increase
as a percentage of domestic and total revenues, the Company's expectation that
it will increase its marketing and sales efforts in major European and Asian
markets, and statements regarding the Company's expectations as to the
composition of revenues between international and domestic. 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, that the markets for the Company's products,
including but not limited to Chameleon(TM) UNIX(R) Link 97 and Chameleon
HostLink 97, AS/400(R), SupportNow, OpSession, N/S Portfolio and NS/Router could
grow more slowly than the Company or market analysts believe, or the Company
will not be able to take advantage of growth 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 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 be able to continue to execute on its business plan in a manner that will
allow it to sustain profitability and growth. The amount of the restructuring
charges and timing of completion of the restructuring is dependent upon a number
of factors including the rate at which the Company is able to terminate office
leases and the accuracy of management's estimates of lease termination and other
restructuring charges. 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, 1997. 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 and
IBM system OS/2 and Novell, offering applications for UNIX(R), AS/400(R) and IBM
Mainframe host systems. The Company also provides remote access, application
sharing and help desk technology in its newly introduced OpSession and
SupportNow products. 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 its Core Technology products will continue to
account for a substantial portion of the Company's revenues for the foreseeable
future.
ACQUISITIONS
In July 1997, the Company acquired all of the outstanding shares of Network
Software Associates, Inc. ("NSA") a holding company for NetSoft ("NetSoft") for
$26.0 million in cash. In November 1997, the Company acquired all of the
outstanding shares of Relay Technology, Inc. ("Relay") for $4.2 million in cash.
Both of these acquisitions were accounted for using the purchase method of
accounting and, accordingly, the results of the acquired companies from the
acquisition date forward have been recorded in the Company's consolidated
financial statements.
RESTRUCTURING
In the third quarter of 1997, the Company initiated a plan to restructure its
operations worldwide due to adverse business conditions including reduced sales
of the Company's products. The restructuring plan included the termination of a
number of employees worldwide and the reduction in worldwide office space, which
primarily
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consisted of the consolidation of certain domestic technical support and
engineering locations. The restructuring actions remaining to be completed as of
March 31, 1998 are expected to be completed by the third quarter of 1998. The
Company anticipates that these remaining restructuring actions will require the
expenditures of approximately $0.3 million of cash during the remainder of 1998,
all of which are reflected in accrued liabilities on the accompanying balance
sheet at March 31, 1998.
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 a restructuring plan announced and executed in the third
quarter of 1997, in an attempt to return the Company to profitability. These
efforts have contributed to improved operating results.
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 decreased during the first quarter of 1998
as compared to the same period in 1997 as a result of the restructuring plan
discussed above, the resulting reduction of headcount and the closing and/or
consolidation of facilities. Operating expenses are expected to fluctuate as a
percentage of revenues as the Company's newly introduced products begin
contributing to revenues.
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MARCH 31, 1998 COMPARED TO MARCH 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(Dollars in millions) Three Months Ended
1998 1997 $ %
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues:
License fees $ 13.9 $ 12.3 1.6 13.0%
Services 3.4 4.1 (.7) (1.7%)
------ ------
Total net revenues $ 17.3 $ 16.4 .9 (5.5%)
As a percentage of net revenues:
License fees 80.6% 75.0%
Services 19.4% 25.0%
------ ------
Total net revenues 100.0% 100.0%
Gross margin $ 16.3 $ 15.3 1.0 6.5
As a percentage of net revenues 94.3% 93.1%
Research and development $ 4.5 $ 6.1 (1.6) (2.6%)
As a percentage of net revenues 26.2% 37.2%
Sales and marketing $ 9.2 $ 10.3 (1.1) (10.7%)
As a percentage of net revenues 53.0% 62.9%
General and administrative $ 2.7 $ 2.4 0.3 12.5%
As a percentage of net revenues 15.4% 14.6%
Interest income and other, net $ .8 $ 1.3 (0.5) (38.5%)
As a percentage of net revenues 4.5% 7.7%
Provision for income taxes $ 0.2 $ -- 0.2 (100.0%)
Effective tax rate 25.0% --
</TABLE>
Net revenues
Historically, the majority 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 28% and 21% for the three-month periods ended March
31, 1998 and 1997, respectively. In the latter half of 1997, the Company took
steps to reorganize its staffing and management, distributor relationships, and
product marketing in Europe as well as Japan. These efforts, together with 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 both in absolute dollars and as a
percentage of total net revenues for the quarter ended March 31, 1998 as
compared to the same period in 1997.
License fees increased both in absolute dollars and as a percentage of total net
revenues during the three-month period ended March 31, 1998 as compared to the
same period in 1997. This increase is primarily attributable to the
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Company's expanded product offerings as a result of the Company's 1997
acquisitions of NetSoft and Relay, as discussed above.
The decline in service revenues both in absolute dollars and as a percentage of
total net revenues for the three-month period ended March 31, 1998 as compared
to the same period of 1997 is primarily due to the decline in the license fee
revenues during the first half of 1997 which will generally affect service
revenues for the trailing months.
Software license fees are generally recognized as revenue upon shipment if the
fee is considered fixed or 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 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 constitute a
material portion of total revenues.
No customer accounted for more than 10% of net revenues during the three-month
periods ended March 31, 1998 or March 31, 1997
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 March 31, 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-month period ended March 31, 1998 as compared to the
three-month period ended March 31, 1997 primarily as a result of the increase in
the net revenue base while costs remained relatively fixed.
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.
Research and development
Research and development ("R&D") expenses consist primarily of salaries and
benefits, as well as fees paid to certain outside consultants. The decrease in
R&D expenses in absolute dollars for the three-month period ended March 31, 1998
as compared to the same period of the prior year primarily reflects cost
savings, particularly in salaries and benefits, associated with employee
attrition and the previously discussed restructuring. The Company does not
expect significant changes in R&D spending for the remainder of 1998 and expects
that, as a percentage of net revenues, R&D expenses 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
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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 both absolute dollars and as a percentage of total net revenues for the
three-month period ended March 31, 1998 as compared to the same period in 1997
primarily reflects cost savings related to employee attrition and the
restructuring mentioned above, as well as a decline in advertising costs as the
Company re-evaluated its marketing and selling strategies.
The Company believes that S&M expenses, particularly related to advertising and
promotion expenses, will increase in absolute dollars during the remainder of
1998 as the Company implements its worldwide marketing and selling strategies.
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 increased in absolute dollars for
the three-month period ended March 31, 1998 as compared to the same period of
1997 largely due to additional legal fees associated with defending the lawsuits
filed against the Company in 1997 as discussed in Item I. Legal Proceedings. The
Company does not anticipate significant fluctuations in G&A expenses throughout
the remainder of 1998 and expects that, as a percentage of total net revenues,
G&A expenses will fluctuate depending on future revenue levels.
Interest income and other, net
Interest income and other, net includes interest income earned on the Company's
cash and investments as well as foreign exchange gains and losses. The decline
in interest income and other, net in both absolute dollars and as a percentage
of total net revenues for the three-month period ended March 31, 1998 as
compared to the same period in 1997 is primarily the result of a decrease in the
aggregate amount of cash and investments from $105.3 million for the quarter
ended March 31, 1997 to $71.2 million for the quarter ended March 31, 1998.
Provision for income taxes
The Company's effective tax rate for the three-month period ended March 31, 1998
was 25% which reflects the benefit of tax credits and net operating loss
carryforwards. Due to the Company's loss position in the three-month period
ended March 31, 1997, the Company did not have a tax provision.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
As of March 31,
(In millions) 1998 1997
- -----------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 15.1 $ 21.1
Short-term investments 40.7 36.9
Long-term investments 15.4 47.3
Net cash provided by operating activities 1.6 3.5
Net cash provided by (used in) investing
activities 0.1 (1.5)
Net cash provided by financing activities 0.5 0.1
- -----------------------------------------------------------------
</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.
13
<PAGE> 14
The Company's cash and cash equivalents, short-term investments and long-term
investments increased from $69.3 million at December 31, 1997 to $71.2 million
at March 31, 1998. This increase was primarily due to cash provided by the
Company's operations.
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 $0.5 million from maturities of short-term and long-term investments
during the three-month period ended March 31, 1998. Expenditures for purchases
of property and equipment were minimal during the first quarter of 1998 due to
the Company's efforts to control expenses. The Company does not have any
specific commitments with regard to future capital expenditures. The Company's
principal commitment as of March 31, 1998 consists of leases on its facilities.
Net cash provided by financing activities during the three months ended March
31, 1998 reflects proceeds from the issuance of common stock under the Company's
stock option plan.
At March 31, 1998, the Company had working capital of $62.1 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
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; 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 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.
Lack of Backlog
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. 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.
Restructuring Risks
During 1997, the Company initiated a plan to restructure its operations and
focus on its core competencies of UNIX(R), AS/400(R) Midrange and IBM Mainframe
connectivity. The Company undertook the restructuring in response to adverse
business conditions in order to improve the Company's future financial
performance, however, no assurance can be given that the restructuring will 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.
Risks of Acquisitions
The Company's merger and acquisition transactions, including the recent
acquisitions of NetSoft and Relay, have been motivated by various factors,
including the desire to obtain new technologies, expand and enhance the
14
<PAGE> 15
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.
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. The
Company has experienced difficulty 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,
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.
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 recently announced products complementary
with 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 results of operations in the future.
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.
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
15
<PAGE> 16
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 Windows 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. 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.
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. The Company seeks to protect its software, documentation
and other written materials under patent, trade secret and copyright laws, which
afford only limited protection. 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"
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 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.
The Company believes that, due to the rapid pace of innovation within its
industry, factors such as the technological and creative skills of its personnel
are more important to establishing and maintaining a technology leadership
position within the industry than are the various legal means of protecting its
technology. The Company believes that its products and technology do not
infringe any existing proprietary rights of others, although there can be no
assurance that third parties will not assert infringement claims in the future.
Global Market Risks
The Company derived approximately 28% of net revenues from international sales
during the quarter ended March 31, 1998. 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, 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
16
<PAGE> 17
international sales and, consequently, on the Company's results of operations.
In addition, the recent financial difficulties of Asian economies could result
in reduced revenue from sales to customer locations in such areas.
Employee Retention
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 and in Haifa, Israel. During the latter half of 1996 and throughout
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. 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 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.
Year 2000 Compliance
The Company is aware of the issues associated with the programming code in
existing computers systems as the millenium ("year 2000") approaches. The issue
is whether computer systems will properly recognize date-sensitive information
when the year changes to 2000. The Company believes that any costs incurred
related to year 2000 compliance will not have a material impact on its business,
operations or financial condition.
17
<PAGE> 18
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. 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 are expected to file an amended
complaint. 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.
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 alleging that these
persons violated various duties to the Company. Sucher v. Alon et al., No.
C-97-20897 JW (EAI) (N.D. Cal.). The derivative complaint also names the Company
as a nominal defendant. The derivative complaint is 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 seeks an unspecified amount of
damages.
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.
18
<PAGE> 19
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.
19
<PAGE> 20
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27.1 Financial Data Schedule.
b. Reports on Form 8-K
Not applicable
NetManage, Chameleon UNIX(R) Link, Chameleon HostLink, Chameleon 3270LT,
Chameleon Host Agent, OpSession, SupportNow, NS/Portfolio, NS/Router, the
NetManage logo and the lizard logos are trademarks or registered trademarks of
NetManage, Inc. in the United States and other Countries. UNIX(R) is a
registered trademark in the U.S. and other countries, licensed exclusively
through X/Open Company Limited. AS/400(R) 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.
20
<PAGE> 21
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: MAY 14, 1998 BY: /S/ GARY R. ANDERSON
---------------------------- --------------------
GARY R. ANDERSON
CHIEF FINANCIAL OFFICER AND
SENIOR VICE PRESIDENT
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
22
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ----- -----------
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 15,091
<SECURITIES> 40,690
<RECEIVABLES> 14,212
<ALLOWANCES> 1,289
<INVENTORY> 0
<CURRENT-ASSETS> 82,506
<PP&E> 19,934
<DEPRECIATION> 12,037
<TOTAL-ASSETS> 117,949
<CURRENT-LIABILITIES> 20,381
<BONDS> 0
0
0
<COMMON> 440
<OTHER-SE> 96,674
<TOTAL-LIABILITY-AND-EQUITY> 117,949
<SALES> 17,313
<TOTAL-REVENUES> 17,313
<CGS> 991
<TOTAL-COSTS> 991
<OTHER-EXPENSES> 5,017
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 730
<INCOME-TAX> 199
<INCOME-CONTINUING> 531
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 531
<EPS-PRIMARY> .01<F1>
<EPS-DILUTED> .01
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
