<PAGE> 1
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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, 1999
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 October 29,
1999: 63,427,718
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1
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NETMANAGE, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1999 and
December 31, 1998 3
Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 1999 and September 30, 1998 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1999 and September 30, 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 27
Item 3. Defaults upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
</TABLE>
2
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NETMANAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 44,361 $ 43,104
Short-term investments 39,568 62,539
Accounts receivable, net 11,099 19,234
Prepaid expenses and other current assets 13,686 15,695
--------- ---------
Total current assets 108,714 140,572
--------- ---------
PROPERTY AND EQUIPMENT, at cost:
Computer software and equipment 4,118 10,117
Furniture and fixtures 4,965 4,877
Leasehold improvements 2,785 2,408
--------- ---------
11,868 17,402
Less - Accumulated depreciation (7,806) (10,268)
--------- ---------
Net property and equipment 4,062 7,134
--------- ---------
LONG-TERM INVESTMENTS 45,602 33,606
GOODWILL AND OTHER INTANGIBLES, net 17,707 18,971
OTHER ASSETS 1,965 1,470
--------- ---------
$ 178,050 $ 201,753
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,728 $ 4,444
Accrued liabilities 8,339 12,372
Accrued payroll and payroll-related expenses 3,442 4,938
Deferred revenue 9,613 14,025
Income taxes payable 6,238 6,680
--------- ---------
Total current liabilities 31,360 42,459
--------- ---------
LONG-TERM LIABILITIES 1,232 134
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value --
Authorized -- 125,000,000 shares
Issued -- 69,703,814 and 69,377,177 shares,
respectively
Outstanding -- 63,349,514 and 67,348,477 shares,
respectively 697 693
Treasury stock, at cost -- 6,354,300 and 2,028,700 shares,
respectively (15,559) (4,246)
Additional paid-in capital 168,740 168,301
Accumulated deficit (5,423) (3,972)
Accumulated other comprehensive loss (2,997) (1,616)
--------- ---------
Total stockholders' equity 145,458 159,160
--------- ---------
$ 178,050 $ 201,753
========= =========
</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,
----------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET REVENUES:
License fees $ 12,700 $ 12,890 $ 38,570 $ 37,451
Services 4,946 4,198 14,783 11,490
-------- -------- -------- --------
Total net revenues 17,646 17,088 53,353 48,941
COST OF REVENUES 849 547 2,777 2,243
-------- -------- -------- --------
GROSS MARGIN 16,797 16,541 50,576 46,698
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development 3,809 4,293 12,843 13,396
Sales and marketing 8,995 9,813 30,375 28,714
General and administrative 2,311 3,372 7,920 8,795
Legal settlements 1,750 2,063
Write-off of in-process research and development -- 9,500 -- 9,500
Restructuring -- 7,033 -- 7,033
Amortization of goodwill 944 700 3,264 1,657
-------- -------- -------- --------
Total operating expenses 17,809 34,711 56,465 69,095
-------- -------- -------- --------
LOSS FROM OPERATIONS (1,012) (18,170) (5,889) (22,397)
INTEREST INCOME AND OTHER, NET 1,839 1,401 4,519 2,818
EQUITY IN INCOME OF UNCONSOLIDATED AFFILIATE -- 374 -- 1,027
-------- -------- -------- --------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 827 (16,395) (1,370) (18,552)
PROVISION (BENEFIT) FOR INCOME TAXES 8 (7) 81 8
-------- -------- -------- --------
NET INCOME (LOSS) $ 819 $(16,388) $ (1,451) $(18,560)
======== ======== ======== ========
NET INCOME (LOSS) PER SHARE, BASIC AND DILUTED $ 0.01 $ (0.29) $ (0.02) $ (0.39)
======== ======== ======== ========
WEIGHTED-AVERAGE COMMON SHARES AND EQUIVALENTS:
BASIC 63,743 56,591 65,072 48,159
======== ======== ======== ========
DILUTED 65,190 56,591 65,072 48,159
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
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NETMANAGE, INC.
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income (Loss) $ 819 $(16,388) $(1,451) $(18,560)
Other comprehensive income (loss):
Foreign currency translation adjustments (1,458) (816) (1,381) (945)
------- -------- ------- --------
Other comprehensive loss $ (639) $(17,204) $(2,832) $(19,505)
======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
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NETMANAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,451) $(18,560)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 7,564 6,673
Provision for doubtful accounts and returns 118 378
Equity in income of unconsolidated -- (1,027)
affiliate
Write-off of in-process research and development -- 9,500
Write-down of assets related to restructuring -- 1,312
Changes in assets and liabilities, net of business combinations:
Accounts receivable 8,017 3,566
Prepaid expenses and other assets 1,609 952
Accounts payable (715) 1,481
Accrued liabilities, payroll and payroll-related expenses (6,424) (998)
Deferred revenue (4,412) (1,717)
Income taxes payable (442) 30
-------- --------
Net cash provided by operating activities 3,864 1,590
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (64,174) (16,100)
Proceeds from maturity of short-term investments 86,004 53,324
Purchases of long-term investments (23,973) (24,529)
Proceeds from maturity of long-term investments 11,288 15,184
Purchases of property and equipment (531) (355)
Purchase of equity investment carried at cost (150) --
Proceeds from acquisition of FTP -- 21,640
-------- --------
Net cash provided by investing activities 8,464 49,164
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net of issuance costs 442 1,177
Repurchase of common stock (11,313) --
-------- --------
Net cash provided by (used in) financing activities (10,871) 1,177
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (200) 405
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,257 52,336
CASH AND CASH EQUIVALENTS, beginning of period 43,104 12,706
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 44,361 $ 65,042
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
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NETMANAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. INTERIM FINANCIAL DATA
The interim financial statements for the three and nine month periods ended
September 30, 1999 and 1998 for NetManage, Inc. (the "Company") have been
prepared on the same basis as the year end 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 interest in an unconsolidated
affiliate, NetVision, Ltd., which was sold in December 1998, was accounted for
by the equity method of accounting prior to the sale.
3. NET INCOME (LOSS) PER SHARE
Basic net income (loss) 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 dilutive potential common
shares. Potential common shares include dilutive shares issuable upon the
exercise of outstanding common stock options computed using the treasury stock
method. For the nine month period ended September 30, 1999, and for the three
and nine month periods ended September 30, 1998, the number of shares used in
the computation of diluted loss per share were the same as those used for the
computation of basic loss per share. Potentially dilutive securities of 801,837
and 2,249,076 were not included in the computation of diluted net income (loss)
per common share because to do so would have been anti-dilutive for the three
month and nine month period ended September 30, 1999, respectively.
4. RESTRUCTURING OF OPERATIONS
In late August 1998, following the acquisition of FTP Software, Inc. ("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 1998. The restructuring charge included approximately
$5.5 million of estimated expenses for the write-off of excess equipment and
leasehold improvements as NetManage facilities were downsized or closed,
facilities-related expenses associated with the consolidation of redundant
operations and $1.5 million of employee-related expenses for employee
terminations. Additionally, prior to the acquisition of FTP by the Company, FTP
recorded a restructuring charge. The remaining restructuring liability of $9.7
million as of the date of acquisition was assumed by the Company in connection
with the acquisition. The two restructuring plans included a reduction in the
Company's worldwide workforce, reduction of office space, and the closure of
four domestic locations, closure of all of FTP's international facilities and
additional NetManage international locations. The reduction in force involved
approximately 150 employees. Asset related write-offs primarily relate to
leasehold improvements, computers, and communications equipment which would no
longer be used when facilities were closed or downsized and headcount was
reduced. The Company completed the majority of the restructuring actions by the
end of 1998. The Company anticipated that the execution of the restructuring
actions would require total cash expenditures of approximately $13.7 million,
which was expected to be funded from internal operations. As of
7
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NETMANAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1999, the Company had incurred costs totaling approximately $16.8
million related to the restructuring, which required $13.1 million in cash
expenditures. Accrued liabilities at September 30, 1999, includes an increase to
the restructuring reserve for $2.7 million which, after an evaluation of the
restructuring charges and actions taken since the initial restructuring charge
was taken, was determined to be the increase necessary for anticipated continued
restructuring activities. The increase relates to lease commitments for FTP
facilities which the Company has been unable to extricate itself from the lease
or find suitable sublease tenants. As the additional reserve relates to FTP
facilities and the closure of those facilities was initiated prior to the
acquisition of FTP, the increase to the restructuring reserve was recorded as
part of an adjustment to the FTP purchase price allocation resulting in
additional goodwill.
The following table lists the components of the restructuring accrual as of
September 30, 1999 and December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
EMPLOYEE EXCESS EXCESS
COSTS ASSETS FACILITIES TOTAL
-------- ------- ---------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 ........... $ 591 $ 1,089 $ 3,544 $ 5,224
------- ------- ------- --------
Reserve utilized in the nine months
ending September 30, 1999 ............ (591) (1,089) (3,544) (5,224)
Addition to reserve recorded as an
adjustment to the FTP purchase
price allocation...................... -- -- 2,722 2,722
------- ------- ------- --------
Balance at September 30, 1999 .......... $ -- $ -- $ 2,722 $ 2,722
======= ======= ======= ========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
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-97-4385-CRB, 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. On September 10, 1997, a class action
substantially similar to the Head action was filed, Beasley v. NetManage, Inc.,
et al., C-98-1794 CRB (N.D. Cal.), seeking an unspecified amount of damages. The
federal court certified the purported class. On December 30, 1998, the federal
court granted without leave to amend the defendants' motion to dismiss the
second amended complaint in the Head federal action; plaintiffs have filed a
notice of appeal to the U.S. Court of Appeals for the Ninth Circuit. On February
2, 1999, the federal court dismissed with prejudice the Beasley action pursuant
to its order in the Head action. The Company believes there is no merit to these
cases and intends to defend them vigorously.
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-98-202-CRB, in the United States District Court for the
Northern District of California against the same defendants. Both complaints
allege that, between April 18, 1996 and July 18, 1996, the defendants made false
or misleading statements of material fact about the Company's prospects. The
state court complaint asserts claims under California state law; the federal
complaint asserts claims under the federal securities laws. Both complaints seek
an unspecified amount of damages. The federal court
8
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NETMANAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
certified the purported class. On February 26, 1998, the state court entered
judgement in favor of the Company in the state case. Plaintiffs have filed a
notice of appeal as to the Company and have indicated that they will file an
amended complaint as to the individual defendants. On December 30, 1998, the
federal court granted without leave to amend the defendants' motion to dismiss
the complaint in the Molinari case. Plaintiffs have filed a notice of appeal to
the U.S. Court of Appeals for the Ninth Circuit. The Company believes there is
no merit to these cases and intends to defend these cases vigorously.
On October 10, 1997, a shareholder derivative action 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. Sucher v. Alon et al.,
No. C-98-203-CRB. The complaint alleged that the defendants violated various
fiduciary duties to the Company; the Company is named as a nominal defendant.
The complaint was predicated on the factual allegations contained in the Head
and Molinari class action complaints, and sought an unspecified amount of
damages. On November 6, 1998, the court dismissed the complaint without leave to
amend on the grounds that plaintiffs had failed to make a pre-litigation demand
on the Company's board of directors. Plaintiff have filed a notice of appeal to
the U.S. Court of Appeals for the Ninth Circuit. Appellate briefing is complete
and no hearing date has been set.
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, former shareholders of AGE Logic, which the Company
acquired in 1995, allege that the Company and certain of its officers made
misleading statements in connection with the acquisition. The complaint asserted
causes of action for fraud, negligent misrepresentation, negligence and breach
of contract, and sought unspecified damages. The Company has agreed to settle
the matter with a cash payment of $1.75 million. The Company is in the process
of seeking insurance reimbursement for the amount paid in settlement. Any
amounts not reimbursed by insurance would be recorded as a charge against
earnings.
On March 14, 1996, a securities class action complaint, Greebel v. FTP Software,
Inc., et al., No. 96-10544, was filed in the United States District Court for
the District of Massachusetts against FTP and certain of its former officers and
directors. The complaint alleged that between July 14, 1995 and January 3, 1996,
defendants violated the federal securities laws by making false and misleading
statements of material fact about FTP's prospects and financial statements.
NetManage acquired FTP in August 1998. On September 24, 1998, the district court
granted defendants' motion for partial summary judgment and granted without
leave to amend defendants' renewed motion to dismiss the complaint. Plaintiffs
filed a notice of appeal. Oral argument on the appeal was held on June 9, 1999.
By order dated October 8, 1999, the United States Court of Appeals for the First
Circuit affirmed the district court's dismissal. Time to petition for review by
the United States Supreme Court has not expired, but as of the date of this
filing, the Company is not aware of any such petition. FTP believes there is no
merit to the case and intends to defend the case vigorously.
In February 1996, a securities class action complaint, Zeid, et al. v.
Kimberley, et al., Case No. C-96-20136SW, was filed in the United States
District Court for the Northern District of California against Firefox
Communications Inc. ("Firefox") and certain of its former officers and
directors. FTP acquired Firefox in July 1996. The complaint alleged that,
between July 20, 1995 and January 2, 1996, the defendants violated the federal
securities laws by making false or misleading statements about Firefox's
operations and financial results. On May 8, 1997, the district court granted
defendants' motion to dismiss without leave to amend. Plaintiffs filed a notice
of appeal. Oral argument on the appeal was held on September 14, 1998. On
November 1, 1999, the Court of Appeals for the Ninth Circuit issued an order
vacating the judgment of the district court and remanded the case back to the
district court for reconsideration in light of its recently issued landmark
decision in the securities litigation case of Janas v. McCraken (In re Silicon
Graphics Inc.). Firefox believes that there is no merit to the case and intends
to defend the case vigorously.
9
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NETMANAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On May 21, 1999, Verity filed a complaint against the company alleging claims
for breach of contract, contractual and tortious breach of the implied covenant
of good faith and fair dealing, fraud, negligent misrepresentation, conspiracy,
and indemnification. The complaint arises out of the sale by FTP of certain
technology to Verity. Verity claims that FTP's representations and warranties
regarding its ownership of the technology sold were inaccurate, especially
insofar as a third party claimed ownership of the technology. Verity seeks
compensatory and punitive damages in an unspecified amount, and attorneys fees.
The action is pending in the Superior Court for the County of Santa Clara. The
Company has answered the complaint, denying the allegations and raising several
affirmative defenses, among them that it has secured a release from the third
party of any claims it might have otherwise had against Verity regarding
ownership of the technology. The Company believes that it has meritorious
defenses to the claims alleged and intends to defend the action vigorously.
The cost of defending each of these cases and their ultimate outcome are
uncertain and cannot be estimated. There can be no assurance either that
NetManage (or its subsidiaries, where applicable) will ultimately prevail in any
of these cases, or that the result in these cases will not have a material
adverse effect on the Company's financial position or results of operations. As
the outcome of these cases cannot be reasonably determined, the Company has not
accrued for any potential loss contingencies.
The Company may be contingently liable with respect to certain asserted and
unasserted claims that arise during the normal course of business. In the
opinion of management, the outcome of such matters presently known to management
will not have a material adverse effect on the Company's business, financial
position or results of operations.
6. SEGMENT REPORTING
In 1998, the Company adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information." The Company concluded that it operates in
two operating segments: PC connectivity and visual connectivity. An operating
segment is defined as a component of an enterprise for which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The Company's chief operating decision maker is its chief executive
officer. The PC connectivity segment develops, markets and supports software
products that provide the technology to make the connection between personal
computers and large corporate computers possible. The visual connectivity
segment develops, markets and supports software products that add value to the
PC connectivity product offerings. The Company has aggregated these two segments
for reporting purposes as they have similar economic characteristics and are
similar with respect to the nature of their products, the nature of their
production processes, the type of customer that their products are sold to and
the methods used to distribute their products.
7. SHAREHOLDER RIGHTS PLAN
On April 26, 1999, pursuant to a Preferred Shares Rights Agreement (the "Rights
Agreement") between the Company and BankBoston, N.A., as Rights Agent (the
"Rights Agent"), the Company's Board of Directors declared a dividend of one
right (a "Right") to purchase one one-thousandth share of the Company's Series A
Participating Preferred Stock ("Series A Preferred") for each outstanding share
of Common Stock, $0.001 par value ("Common Shares"), of the Company. The
dividend was payable on May 28, 1999 (the "Record Date") to stockholders of
record as of the close of business on that date. Each Right initially entitles
the registered holder to purchase from the Company one one-thousandth of a share
of Series A Preferred, a designated series of preferred stock for which each
1/1000 of a share has economic attributes equivalent to one share of Common
Stock at an exercise price of $24.00 per right, subject to adjustment.
10
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NETMANAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Rights are triggered and become exercisable upon the earlier of: (i) 10 days
following a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired, or obtained the right
to acquire, beneficial ownership of 20% or more of the outstanding Common Shares
or (ii) 10 business days following the commencement of, or announcement of a
tender offer or exchange offer the consummation of which would result in the
beneficial ownership by a person or group of 20% or more of the outstanding
Common Stock. If the Rights are triggered because an Acquiring Person
beneficially owns 20% or more of the Company's Common Stock, each Right will
provide its holder, other than a holder who is an Acquiring Person, the right to
purchase that number of shares of Common Stock having a market value at the time
equal to twice the exercise price, upon payment of the exercise price of $24.00
per Right. In addition, in the event of certain business combinations, the
Rights permit the purchase of shares of common stock of an acquiror at a 50%
discount from the market price at the time. The Board of Directors has the right
to redeem the Rights at a price of $0.001 per Right at any time prior to the
close of business on the tenth day after the first public announcement that a
person has become an Acquiring Person (or such later time as may be determined
by the Board of Directors). If the Rights are triggered under certain
circumstances, the Board of Directors may elect to exchange each Right (other
than Rights held by an Acquiring Person) for one share of the Company's Common
Stock. The Rights expire on May 7, 2009. These provisions may have the effect of
deterring hostile takeovers or delaying changes in control or management of the
Company.
8. TREASURY STOCK
In July 1999, the Board of Directors approved an increase to the Company's stock
repurchase program of 3 million shares of its common stock. The repurchases will
be made from time to time on the open market at prevailing market prices or in
negotiated transactions off the market. During the three months ended September
30, 1999, the Company purchased 737,300 shares of its common stock at an average
price of $2.46.
9. SUBSEQUENT EVENTS
On September 27, 1999, the Company announced it had entered into an agreement to
acquire Simware Inc., a Canadian company ("Simware") and a leader in web-based
eCommerce solutions and web integration servers. The agreement provided that the
acquisition would be effected by means of a cash tender offer for all the
outstanding shares of Simware at $3.75 per share, or approximately $32
million. Pursuant to the tender offer, the Company acquired 91% of the
outstanding shares of Simware on November 2, 1999. The Company intends to
acquire the remaining shares in the fourth quarter of 1999 through a compulsory
acquisition to be completed in accordance with Canadian law. The acquisition
will be accounted for using the purchase method of accounting.
On October 20, 1999, the Company announced an agreement to acquire Wall Data
Incorporated, a Washington corporation ("Wall Data"). With its RUMBA product
line, Wall Data is a leader in the PC-to-IBM connectivity market. The agreement
provided that the acquisition would be effected by means of a cash tender offer
for all the outstanding shares of Wall Data at $9.00 per share, or approximately
$98 million. A tender offer commenced on October 27, 1999, and the offer period
will expire on November 24, 1999. The tender offer is subject to customary
conditions, including the expiration or termination of the waiting period under
the Hart Scott Rodino Antitrust Improvements Act of 1976. The acquisition will
be accounted for using the purchase method of accounting.
11
<PAGE> 12
NETMANAGE, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THIS QUARTERLY REPORT ON FORM 10Q CONTAINS 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 WILL
REMAIN FLAT AND SALES AND MARKETING EXPENSES WILL INCREASE AS A RESULT OF THE
COMPANY'S ACQUISITIONS. 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 UNIX LINK97,
CHAMELEON HOSTLINK97, ONNET HOST, ONWEB HOST, SUPPORTNOW, OPSESSION,
NS/PORTFOLIO, NS/ROUTER AND VIEWNOW 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, 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, THAT THE COMPANY WILL BE ABLE TO RETAIN AND
HIRE SUFFICIENT QUALIFIED, THAT THE COMPANY WILL BE ABLE TO 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. 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." THE FOLLOWING DISCUSSION SHOULD BE READ IN
CONJUNCTION WITH THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
THERETO.
OVERVIEW
The Company develops, markets and supports software applications for connecting
personal computers to UNIX, AS/400, midrange and corporate mainframe computers
and software that increases the productivity of corporate call centers, and
allows real time application sharing on corporate networks and across the
Internet. The Company's vision is to provide internetworking connectivity
products that greatly improve the communication between personal computers, host
computers and legacy systems. The Company also provides visual connectivity
solutions which can improve customer support and augment the sales process for
the independent software vendor (ISV).
On August 27, 1998, the Company acquired all of the outstanding common stock of
FTP in exchange for NetManage stock for an aggregate purchase price of $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.
In connection with the acquisition of FTP, the Company allocated $9.5 million of
the purchase price to in-process research and development projects. At the date
of acquisition, the development of these projects had not yet reached
technological feasibility and, in management's opinion, the in-process research
and development had no probable alternative future use. Accordingly, these costs
were expensed as of the acquisition date.
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. The restructuring plan included a reduction in the Company's worldwide
workforce and office space. The majority of the restructuring actions were
completed by December 31, 1998 with remaining items expected to be completed
within one year from the date the restructuring plan was initiated. In the
quarter ended September 30, 1999, the Company re-examined the restructuring
charge and actions which had occurred over the last year and determined that an
additional restructuring accrual of $2.7 million would be necessary for the FTP
acquisition. Substantially all the additional accrual relates to an increase
necessary for excess FTP facilities as the Company has been unsuccessful in
12
<PAGE> 13
NETMANAGE, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
either extricating itself from several leases or finding suitable sublease
tenants. The increase to the accrual was recorded as part of an adjustment to
the FTP purchase price allocation, resulting in additional goodwill.
On September 27, 1999, the Company announced it had entered into an agreement to
acquire Simware Inc., a Canadian company ("Simware") and a leader in web-based
eCommerce solutions and web integration servers. The agreement provided that the
acquisition would be effected by means of a cash tender offer for all the
outstanding shares of Simware at US$3.75 per share, or approximately $32
million. Pursuant to the tender offer, the Company acquired 91% of the
outstanding shares of Simware on November 2, 1999. The Company intends to
acquire the remaining shares in the fourth quarter of 1999 through a compulsory
acquisition to be completed in accordance with Canadian law. The acquisition
will be accounted for using the purchase method of accounting
On October 20, 1999, the Company announced an agreement to acquire Wall Data
Incorporated, a Washington corporation ("Wall Data"). With its RUMBA product
line, Wall Data is a leader in the PC-to-IBM connectivity market. The agreement
provided that the acquisition would be effected by means of a cash tender offer
for all the outstanding shares of Wall Data at $9.00 per share, or approximately
$98 million. A tender offer commenced on October 27, 1999, and the offer period
will expire on November 24, 1999. The tender offer is subject to customary
conditions, including the expiration or termination of the waiting period under
the Hart Scott Rodino Antitrust Improvements Act of 1976. The acquisition
will be accounted for using the purchase method of accounting.
As described in detail below, under the heading "Factors That May Affect Future
Results and Financial Condition," acquisitions involve a number of risks,
including risks relating to the integration of the acquired company's
operations, personnel and products. There can be no assurance the integration of
any future acquisitions, will be accomplished successfully, and the failure to
accomplish effectively any integrations could have a material adverse effect on
NetManage's results of operations and financial condition.
RESULTS OF OPERATIONS
The Company's net revenues increased for the three and nine month periods ended
September 30, 1999 as compared to the same periods of 1998 primarily due to the
inclusion of FTP's results since its acquisition August 27, 1998. Operating
expenses have decreased as a result of cost reductions associated with the
Company's restructuring plan which began in the third quarter of 1998, although
these reductions have been offset by an increase in legal expenses associated
with the defense of various lawsuits, increases in sales and marketing expenses
connected with the release of new product lines and an increase in goodwill
amortization associated with the purchase of FTP.
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 are expected to decrease in the third
quarter although they may fluctuate as a percentage of net revenues as the
Company develops and introduces new products, which may contribute more
significantly to revenue. While the Company continues to adjust its operations
to address these issues, there can be no assurance that net revenues or net
income will stabilize or improve in the future.
13
<PAGE> 14
NETMANAGE, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO SEPTEMBER 30, 1998
(Dollars in millions)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
Net revenues: 1999 1998 Change % 1999 1998 Change %
------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
License fees $ 12.7 $ 12.9 -1.6% $ 38.6 $ 37.5 2.9%
Services 4.9 4.2 16.7% 14.8 11.5 28.7%
------ ------ ------ ------
Total net revenues $ 17.6 $ 17.1 2.9% $ 53.4 $ 49.0 9.0%
------ ------ ------ ------
As a percentage of revenues:
License fees 72.2% 75.4% 72.3% 76.5%
Services 27.8% 24.6% 27.7% 23.5%
------ ------ ------ ------
Total net revenues 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Gross margin $ 16.8 $ 16.5 1.8% $ 50.6 $ 46.7 8.4%
As a percentage of revenues: 95.5% 96.5% 94.8% 95.3%
Research and development $ 3.8 $ 4.3 -11.6% $ 12.8 $ 13.4 -4.5%
As a percentage of revenues: 21.6% 25.1% 24.0% 27.3%
Sales and marketing $ 9.0 $ 9.8 -8.2% $ 30.4 $ 28.7 5.9%
As a percentage of revenues: 51.1% 57.3% 56.9% 58.6%
General and administrative $ 2.3 $ 3.4 -32.4% $ 7.9 $ 8.8 -10.2%
As a percentage of revenues: 13.1% 19.9% 14.8% 18.0%
Interest income and other, net $ 1.8 $ 1.4 28.6% $ 4.5 $ 2.8 60.7%
As a percentage of revenues: 10.2% 8.2% 8.4% 5.7%
Provision for income taxes $ -- $ -- -- $ 0.1 $ -- 100.00%
Effective tax rate -- -- -- -- -- --
</TABLE>
NET REVENUES
Historically, a substantial portion of the Company's net revenues has been
derived from software license fees. Service revenues have been primarily
attributable to maintenance agreements associated with licenses.
License revenues increased nominally for the nine months ended September 30,
1999, as compared to the same period in 1998 and decreased slightly during the
three month period ended September 30, 1999, as compared to the same period in
1998. The increase in service revenues for the three and nine-month periods
ended September 30, 1999 as compared with the same periods in 1998 is due to
revenue attributable to the increased sales of maintenance contracts which
occurred as a result of the FTP acquisition in the third quarter of 1998.
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 relatively constant at 23% and 27% for the three-month periods
ended September 30, 1999 and 1998, respectively, and 25% and 30% for the
nine-month periods ended September 30, 1999 and 1998, respectively.
14
<PAGE> 15
NETMANAGE, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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 distributor sells the merchandise.
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 services will become materially significant in the
future.
No customer accounted for 10% of net revenues in the three months ended
September 30, 1999 and 1998 or in the nine-month periods ended September 30,
1999 and 1998.
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 September 30, 1999 has not been material and is not reported
separately.
Gross margins increased in absolute dollars while remaining relatively stable as
a percentage of net revenues for both the three and nine-month periods ended
September 30, 1999 compared to the same periods in 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.
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. R&D expense remained relatively constant in absolute dollars and
reduced as a percentage of net revenues for the three and nine-month periods
ended September 30, 1999 as compared to the same periods in 1998. This primarily
reflects cost savings, particularly in R&D salaries and benefits, associated
with the reduction in headcount resulting from the restructuring plan announced
in the third quarter of 1998, as well as the Company's continued efforts to
reduce expenses, offset by the cost of R&D employees added with the acquisition
of FTP .
The Company expects that R&D spending in absolute dollars will remain relatively
constant for the remainder of 1999 and, as a percentage of net revenues, 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.
15
<PAGE> 16
NETMANAGE, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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. S&M expense decreased slightly
on an absolute dollar basis for the three-month period ended September 30, 1999
compared to the same period in 1998 while S&M expense increased slightly on an
absolute dollar basis for the nine-month period ended September 30, 1999
compared to the same period in 1998. The expenses as a percentage of net revenue
decreased for the three months ended September 30, 1999 compared to the prior
year while they remained relatively flat as a percentage of net revenue for the
nine-months ended September 30, 1999 compared to the same period in the prior
year. The increase in year-to-date S&M expenses in absolute dollars reflects the
increased marketing costs of advertising, trade shows, and promotions related to
the Company's new product lines released in the second quarter of 1999.
The Company believes that S&M expenses will remain relatively constant in
absolute dollars and as a percentage of net revenues during the remainder of
1999 as compared with comparable periods in 1998. The Company expects that S&M
expenses during 1999 as a percentage of total net revenues will fluctuate
depending on future revenue levels.
GENERAL AND ADMINISTRATIVE
General and administrative ("G&A") expenses have decreased in absolute dollars
and as a percentage of net revenue for the three and nine-month periods ended
September 30, 1999 as compared to the same periods in 1998. Cost savings,
particularly G&A salaries and benefits, associated with the reduction in
headcount resulting from the restructuring plan announced in the third quarter
of 1998 and the Company's continued efforts to reduce expenses have been
partially offset by an increase in G&A expenses due to legal expenses associated
with the defense of various lawsuits. The Company believes that G&A expenses
will decrease slightly in absolute dollars throughout the remainder of 1999.
LEGAL SETTLEMENTS
During the three months ended September 30, 1999, the Company entered into a
final settlement of a prior year's claim which resulted in a payment by the
Company of $1.75 million (See Part II - Item 1. Legal Proceedings below). During
the three months ended June 30, 1999, the Company ended a royalty dispute with a
cash payment of $0.3 million.
INTEREST INCOME
Interest income increased in absolute dollars and was primarily due to the
increase in cash, cash equivalents and long term investment balances that
occurred as a result of the acquisition of FTP in August 1998 and the sale of
NetVision in December 1998.
EQUITY IN INCOME OF UNCONSOLIDATED AFFILIATE
In December 1998, NetManage, Ltd., one of the Company's wholly-owned
subsidiaries, sold its investment in NetVision, Ltd. ("NetVision"). NetVision's
results for 1998 were accounted for by the equity method of accounting prior to
the date of sale in December 1998.
PROVISION FOR INCOME TAXES
The Company's effective tax rate for 1999 is 0% due to the Company's
current consolidated loss position and as international income taxes are de
minimus.
16
<PAGE> 17
NETMANAGE, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
September 30, December 31,
(In millions) 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 44.4 $ 43.1
Short-term investments 39.6 62.5
Long-term investments 45.6 33.6
------ ------
Total $129.6 $139.2
- -------------------------------------------------------------------------------
</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 aggregated net proceeds to the
Company of approximately $72.5 million. The Company does not have a bank line of
credit or an equipment lease facility.
The Company's cash and cash equivalents, short-term investments and long-term
investments, in aggregate, have decreased from $139.2 million at December 31,
1998 to $129.6 million at September 30, 1999. This decrease was primarily due
to the repurchase of shares of the Company's stock.
On September 27, 1999, the Company announced it had entered into an agreement to
acquire Simware Inc., a Canadian company ("Simware"). The agreement provided
that the acquisition would be effected by means of a cash tender offer for all
the outstanding shares of Simware at $3.75 per share, or approximately $32
million. Pursuant to the tender offer, the Company acquired 91% of the
outstanding shares of Simware on November 2, 1999. The Company intends to
acquire the remaining shares in the fourth quarter of 1999 through a compulsory
acquisition to be completed in accordance with Canadian law.
On October 20, 1999, the Company announced an agreement to acquire Wall Data
Incorporated, a Washington corporation ("Wall Data"). The agreement
provided that the acquisition would be effected by means of a cash tender offer
for all the outstanding shares of Wall Data at $9.00 per share, or approximately
$98 million. A tender offer commenced on October 27, 1999, and the offer period
will expire on November 24, 1999. The tender offer is subject to customary
conditions, including the expiration or termination of the waiting period under
the Hart Scott Rodino Antitrust Improvements Act of 1976.
The Company will expend a considerable amount of its current available cash and
investments if both the Simware Inc. and Wall Data Inc. tender offers are
successful. Substantially all of the Company's investment portfolio is comprised
of high-grade commercial paper and corporate bonds, Euro Dollar bonds and US
treasuries.
The Company's principal investing activities during 1999 have been the purchase
of short and long-term investments and purchases of property and equipment. Net
of proceeds from maturities, the Company invested $88.1 million in short-term
and long-term investments during the nine-month period ended September 30, 1999.
Expenditures for purchases of property and equipment were minimal during the
nine-month period ended September 30, 1999.
17
<PAGE> 18
NETMANAGE, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for financing activities during the nine-month period ended
September 30, 1999 reflects the repurchase of shares of the Company's common
stock for $11.3 million in the open market under the repurchase program
described below.
At September 30, 1999, the Company had working capital of $77.4 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.
The Company's Board of Directors authorized the repurchase from time to time of
up to 9 million shares of the Company's common stock through open market
purchases. During the nine-month period ended September 30, 1999, the Company
repurchased 4,325,600 shares of its common stock on the open market at an
average purchase price of $2.62 per share for a total cost of approximately
$11.3 million. Cumulatively, the Company has repurchased 6,354,300 shares of its
common stock at an average price of $2.45 per share for a total cost of
approximately $15.6 million.
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
primary issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Risk to the Company exists in at
least 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.
For the Year 2000 non-compliance issues identified to date, the remaining cost
of testing, upgrade, and remediation of the Company's internal systems is
approximately $0.3 million. The Company is conducting an ongoing review of its
estimated costs; the preliminary investment required for the necessary upgrades
and remediation for replacement of certain computer systems is estimated at less
than $0.1 million. The Company expects to implement upgrades and remediations
prior to the end of 1999. If implementation of such systems is delayed, or if
the Company has incorrectly evaluated its Year 2000 issues, 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 has contacted 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.
18
<PAGE> 19
NETMANAGE, INC.
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
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 technologies may cause
fluctuations in operating results due to in-process research and development
charges, the amortization of acquired intangible assets and integration costs,
in each case 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.
RESTRUCTURING; INTEGRATION OF OPERATIONS OF FTP
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 and in connection with the integration of the operations of FTP. The
restructuring plan involved both a reduction in the Company's worldwide
workforce and the consolidation of certain of the Company's sales and research
and development facilities. The majority of the restructuring actions were
complete as of December 31, 1998. No assurance can be given that the
restructuring will prove to be successful, that future operating results will
improve, or that the completion of the restructuring will not disrupt the
Company's 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 continues to integrate the operations of FTP. As
indicated below under "-- Risks of Acquisitions," the successful combination of
companies in the rapidly changing software 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
has involved the integration of geographically separated organizations (in
suburban Boston, Massachusetts, Cupertino and Irvine, California, 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's business activities, and that the Company's ability to
maintain or
19
<PAGE> 20
NETMANAGE, INC.
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
increase revenues from the sale of FTP's products will depend in part on its
ability to effectively respond to these factors.
RISKS OF ACQUISITIONS
The Company's merger and acquisition transactions, including the acquisition of
FTP, recent acquisition of Simware Inc. and pending acquisition of Wall Data
Inc. 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 integration of
acquired products with 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.
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 1998 and 1999,
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 effects of the Company's 1998 restructuring and acquisitions
and the Company's results of operations during 1998 and 1999. 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
20
<PAGE> 21
NETMANAGE, INC.
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
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 a
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
developments adverse to Microsoft or 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.
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, IBM, Novell 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, Wall Data, Inc.
and WRQ, Inc. 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
21
<PAGE> 22
NETMANAGE, INC.
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Company will be able to provide new products that compare favorably with the new
products of the Company's competitors or that competitive pressures will not
require the Company to reduce its prices. The Company has experienced price
declines for its mature products in 1998 and 1999. 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, Windows 98 and Windows NT operating
systems. The Company has products which are 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.
EURO CURRENCY
The Single European Currency (Euro) was introduced on January 1, 1999 with
complete transition to this new currency required by January 2002. The Company
has assessed the issues raised by the introduction and made changes to its
internal systems in connection with 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 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 organizations 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 continued strategy of selling
through multiple distribution channels, the Company expects to continue its use
of indirect distribution channels, particularly value added resellers and system
integrators, in addition to distributors and original equipment manufacturers.
Indirect sales may grow as a percentage of both domestic and total revenues
during 1999 and beyond, as a result of the acquisition of FTP or to increase
market penetration. Any material increase in the Company's indirect sales as a
percentage of revenues may adversely affect the Company's average selling prices
and gross margins due to the lower unit prices that are typically charged when
selling through indirect channels. There can be no assurance that the Company
will be able to attract 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
22
<PAGE> 23
NETMANAGE, INC.
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
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. 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 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.
GLOBAL MARKET RISKS
The Company derived approximately 23% and 25% of net revenues from international
sales during the three and nine month periods ended September 30, 1999,
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.
23
<PAGE> 24
NETMANAGE, INC.
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
YEAR 2000 COMPLIANCE
The Company currently estimates that it will incur expenses of up to $0.4
million in connection with the upgrade and remediation of non-critical internal
computer systems and testing of its software products for compliance with Year
2000. However, there can be no assurance that the Company will be able to
implement these upgrades successfully, and the Company's estimates of expenses
may be incorrect due to unknown defects in its systems. If the Company's review
of its Year 2000 readiness did not uncover all Year 2000 problems and the
Company does not have a contingency plan to address this risk it could suffer,
be adversely affected, or be required to expend additional resources to resolve
those problems. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Year 2000 Compliance" above. In addition, many of
the Company's products are designed to function with legacy systems, many of
which may not be Year 2000 compliant. Failures of these legacy systems to be
Year 2000 compliant may reduce demand for the Company's products and adversely
affect the Company's business, financial condition or results of operations. The
Company is also relying on assurances from suppliers that they and their
products are prepared for the Year 2000. However, there can be no assurance that
statements from vendors are reliable, since the Company has not independently
investigated its vendors' assertions about their products. Any failure to be
Year 2000 compliant on the Company's vendors or customers could adversely affect
the Company's business, financial condition or results of operations.
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 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 5 of the accompanying Notes to the Consolidated Financial
Statements. There can be no assurance that the Company or its subsidiaries 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.
24
<PAGE> 25
NETMANAGE, INC.
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-97-4385-CRB, 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. On September 10, 1997, a class action
substantially similar to the Head action was filed, Beasley v. NetManage, Inc.,
et al., C-98-1794 CRB (N.D. Cal.), seeking an unspecified amount of damages. The
federal court certified the purported class. On December 30, 1998, the federal
court granted without leave to amend the defendants' motion to dismiss the
second amended complaint in the Head federal action; plaintiffs have filed a
notice of appeal to the U.S. Court of Appeals for the Ninth Circuit. On February
2, 1999, the federal court dismissed with prejudice the Beasley action pursuant
to its order in the Head action. The Company believes there is no merit to these
cases and intends to defend them vigorously.
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-98-202-CRB, in the United States District Court for the
Northern District of California against the same defendants. Both complaints
allege that, between April 18, 1996 and July 18, 1996, the defendants made false
or misleading statements of material fact about the Company's prospects. The
state court complaint asserts claims under California state law; the federal
complaint asserts claims under the federal securities laws. Both complaints seek
an unspecified amount of damages. The federal court certified the purported
class. On February 26, 1998, the state court entered judgement in favor of the
Company in the state case. Plaintiffs have filed a notice of appeal as to the
Company and have indicated that they will file an amended complaint as to the
individual defendants. On December 30, 1998, the federal court granted without
leave to amend the defendants' motion to dismiss the complaint in the Molinari
case. Plaintiffs have filed a notice of appeal to the U.S. Court of Appeals for
the Ninth Circuit. The Company believes there is no merit to these cases and
intends to defend these cases vigorously.
On October 10, 1997, a shareholder derivative action 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. Sucher v. Alon et al.,
No. C-98-203-CRB. The complaint alleged that the defendants violated various
fiduciary duties to the Company; the Company is named as a nominal defendant.
The complaint was predicated on the factual allegations contained in the Head
and Molinari class action complaints, and sought an unspecified amount of
damages. On November 6, 1998, the court dismissed the complaint without leave to
amend on the grounds that plaintiffs had failed to make a pre-litigation demand
on the Company's board of directors. Plaintiff have filed a notice of appeal to
the U.S. Court of Appeals for the Ninth Circuit. Appellate briefing is complete
and no hearing date has been set.
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, former shareholders of AGE Logic, which the Company
acquired in 1995, allege that the Company and certain of its officers made
misleading statements in connection with the acquisition. The complaint asserted
causes of action for fraud, negligent misrepresentation, negligence and breach
of contract, and sought unspecified damages. The Company has agreed to settle
the matter with a cash payment of $1.75 million. The Company is in the process
of seeking insurance reimbursement for the
25
<PAGE> 26
NETMANAGE, INC.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
amount paid in settlement. Any amounts not reimbursed by insurance would be
recorded as a charge against earnings.
On March 14, 1996, a securities class action complaint, Greebel v. FTP Software,
Inc., et al., No. 96-10544, was filed in the United States District Court for
the District of Massachusetts against FTP and certain of its former officers and
directors. The complaint alleged that between July 14, 1995 and January 3, 1996,
defendants violated the federal securities laws by making false and misleading
statements of material fact about FTP's prospects and financial statements.
NetManage acquired FTP in August 1998. On September 24, 1998, the district court
granted defendants' motion for partial summary judgment and granted without
leave to amend defendants' renewed motion to dismiss the complaint. Plaintiffs
filed a notice of appeal. Oral argument on the appeal was held on June 9, 1999.
By order dated October 8, 1999, the United States Court of Appeals for the First
Circuit affirmed the district court's dismissal. Time to petition for review by
the United States Supreme Court has not expired, but as of the date of this
filing, the Company is not aware of any such petition. FTP believes there is no
merit to the case and intends to defend the case vigorously.
In February 1996, a securities class action complaint, Zeid, et al. v.
Kimberley, et al., Case No. C-96-20136SW, was filed in the United States
District Court for the Northern District of California against Firefox
Communications Inc. ("Firefox") and certain of its former officers and
directors. FTP acquired Firefox in July 1996. The complaint alleged that,
between July 20, 1995 and January 2, 1996, the defendants violated the federal
securities laws by making false or misleading statements about Firefox's
operations and financial results. On May 8, 1997, the district court granted
defendants' motion to dismiss without leave to amend. Plaintiffs filed a notice
of appeal. Oral argument on the appeal was held on September 14, 1998. On
November 1, 1999, the Court of Appeals for the Ninth Circuit issued an order
vacating the judgment of the district court and remanded the case back to the
district court for reconsideration in light of its recently issued landmark
decision in the securities litigation case of Janas v. McCraken (In re Silicon
Graphics Inc.). Firefox believes that there is no merit to the case and intends
to defend the case vigorously.
On May 21, 1999, Verity filed a complaint against the company alleging claims
for breach of contract, contractual and tortious breach of the implied covenant
of good faith and fair dealing, fraud, negligent misrepresentation, conspiracy,
and indemnification. The complaint arises out of the sale by FTP of certain
technology to Verity. Verity claims that FTP's representations and warranties
regarding its ownership of the technology sold were inaccurate, especially
insofar as a third party claimed ownership of the technology. Verity seeks
compensatory and punitive damages in an unspecified amount, and attorneys fees.
The action is pending in the Superior Court for the County of Santa Clara. The
Company has answered the complaint, denying the allegations and raising several
affirmative defenses, among them that it has secured a release from the third
party of any claims it might have otherwise had against Verity regarding
ownership of the technology. The Company believes that it has meritorious
defenses to the claims alleged and intends to defend the action vigorously.
The cost of defending each of these cases and their ultimate outcome are
uncertain and cannot be estimated. There can be no assurance either that
NetManage (or its subsidiaries, where applicable) will ultimately prevail in any
of these cases, or that the result in these cases will not have a material
adverse effect on the Company's financial position or results of operations. As
the outcome of these cases cannot be reasonably determined, the Company has not
accrued for any potential loss contingencies.
The Company may be contingently liable with respect to certain asserted and
unasserted claims that arise during the normal course of business. In the
opinion of management, the outcome of such matters presently known to
26
<PAGE> 27
NETMANAGE, INC.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
management will not have a material adverse effect on the Company's business,
financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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. The Company filed no reports on Form 8-K during the three months ended
September 30, 1999.
27
<PAGE> 28
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 14, 1999 BY: /s/ GARY R. ANDERSON
-------------------- -----------------------------------------
GARY R. ANDERSON
CHIEF FINANCIAL OFFICER
AND SENIOR VICE PRESIDENT (PRINCIPAL
FINANCIAL AND ACCOUNTING OFFICER)
28
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit # Description
- --------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 44,361
<SECURITIES> 85,170
<RECEIVABLES> 11,099
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 108,714
<PP&E> 11,868
<DEPRECIATION> 7,806
<TOTAL-ASSETS> 178,050
<CURRENT-LIABILITIES> 31,360
<BONDS> 0
0
0
<COMMON> 697
<OTHER-SE> 144,761
<TOTAL-LIABILITY-AND-EQUITY> 178,050
<SALES> 53,353
<TOTAL-REVENUES> 53,353
<CGS> 2,777
<TOTAL-COSTS> 2,777
<OTHER-EXPENSES> 56,465
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 827
<INCOME-TAX> 8
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 819
<EPS-BASIC> .01
<EPS-DILUTED> .01
</TABLE>
