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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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)
<TABLE>
<S> <C>
DELAWARE 77-0252226
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
10725 NORTH DE ANZA BOULEVARD
CUPERTINO, CALIFORNIA 95014
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(408) 973-7171
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Number of shares of registrant's common stock outstanding as of March 31,
1999: 65,772,242
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NETMANAGE, INC.
TABLE OF CONTENTS
<TABLE>
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 1999 and
December 31, 1998........................................... 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1999 and March 31, 1998........ 4
Condensed Consolidated Statements of Other Comprehensive
Income (Loss) for the three months ended March 31, 1999 and
March 31, 1998.............................................. 5
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and March 31, 1998........ 6
Notes to Condensed Consolidated Financial Statements........ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 22
Item 2. Changes in Securities....................................... 22
Item 3. Defaults upon Senior Securities............................. 22
Item 4. Submission of Matters to a Vote of Security Holders......... 22
Item 5. Other Information........................................... 22
Item 6. Exhibits and Reports on Form 8-K............................ 22
Signatures.................................................. 23
</TABLE>
2
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NETMANAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 27,197 $ 43,104
Short-term investments.................................... 75,435 62,539
Accounts receivable, net.................................. 14,544 19,234
Prepaid expenses and other current assets................. 15,650 15,695
-------- ---------
Total current assets.............................. 132,826 140,572
-------- ---------
PROPERTY AND EQUIPMENT, at cost:
Computer software and equipment........................... 2,972 10,117
Furniture and fixtures.................................... 4,849 4,877
Leasehold improvements.................................... 2,826 2,408
-------- ---------
10,647 17,402
Less -- Accumulated depreciation.......................... (5,213) (10,268)
-------- ---------
Net property and equipment........................ 5,434 7,134
-------- ---------
LONG-TERM INVESTMENTS....................................... 32,906 33,606
GOODWILL AND OTHER INTANGIBLES, net......................... 17,811 18,971
OTHER ASSETS................................................ 1,469 1,470
-------- ---------
$190,446 $ 201,753
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 4,313 $ 4,444
Accrued liabilities....................................... 8,222 12,372
Accrued payroll and payroll-related expenses.............. 3,595 4,938
Deferred revenue.......................................... 13,021 14,025
Income taxes payable...................................... 6,555 6,680
-------- ---------
Total current liabilities......................... 35,706 42,459
-------- ---------
LONG-TERM LIABILITIES....................................... 1,050 134
-------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value --
Authorized -- 125,000,000 shares
Issued -- 69,387,942 and 69,377,177 shares,
respectively
Outstanding -- 65,772,242 and 67,348,477 shares,
respectively........................................... 693 693
Treasury stock, at cost -- 3,615,700 and 2,028,700 shares,
respectively.............................................. (8,643) (4,246)
Additional paid-in capital.................................. 168,256 168,301
Accumulated deficit......................................... (5,008) (3,972)
Accumulated comprehensive loss.............................. (1,608) (1,616)
-------- ---------
Total stockholders' equity........................ 153,690 159,160
-------- ---------
$190,446 $ 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
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
MARCH 31, MARCH 31,
1999 1998
---------- ----------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C>
NET REVENUES:
License fees.............................................. $12,073 $13,955
Services.................................................. 5,281 3,358
------- -------
Total net revenues................................ 17,354 17,313
COST OF REVENUES............................................ 972 991
------- -------
GROSS MARGIN................................................ 16,382 16,322
------- -------
OPERATING EXPENSES:
Research and development.................................. 4,223 4,530
Sales and marketing....................................... 10,854 9,179
General and administrative................................ 2,304 2,667
Amortization of goodwill.................................. 1,160 487
------- -------
Total operating expenses.......................... 18,541 16,863
------- -------
LOSS FROM OPERATIONS........................................ (2,159) (541)
INTEREST INCOME AND OTHER, NET.............................. 1,172 822
EQUITY IN INCOME OF UNCONSOLIDATED AFFILIATE................ -- 449
------- -------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES............. (987) 730
PROVISION FOR INCOME TAXES.................................. 49 199
------- -------
NET INCOME (LOSS)........................................... $(1,036) $ 531
======= =======
DILUTED NET INCOME (LOSS) PER SHARE......................... $ (0.02) $ 0.01
======= =======
WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS:
BASIC....................................................... 66,784 43,728
======= =======
DILUTED..................................................... 66,784 43,903
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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NETMANAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF OTHER COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
MARCH 31, MARCH 31,
1999 1998
--------- ---------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Net loss.................................................... $(1,036) $531
Other comprehensive income (loss):
Foreign currency translation adjustments.................. 8 (5)
Other comprehensive income (loss)........................... $(1,028) $526
</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
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
MARCH 31, MARCH 31,
1999 1998
--------- ---------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(1,036) $ 531
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 3,013 1,741
Provision for doubtful accounts and returns............ 118 68
Equity in income of unconsolidated affiliate........... -- (449)
Changes in assets and liabilities, net of business
combinations:
Accounts receivable.................................. 4,572 417
Prepaid expenses and other assets.................... 45 1,997
Accounts payable..................................... (131) 423
Accrued liabilities, payroll and payroll-related
expenses............................................ (4,618) (3,059)
Deferred revenue..................................... (88) (188)
Income taxes payable................................. (125) 153
------- -------
Net cash provided by operating activities......... 1,750 1,634
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments....................... (22,733) (5,746)
Proceeds from maturity of short-term investments.......... 16,280 1,900
Purchases of long-term investments........................ (11,657) (2,134)
Proceeds from maturity of long-term investments........... 4,998 6,451
Purchases of property and equipment....................... (118) (287)
Purchases of technology and other intangible assets....... -- (90)
------- -------
Net cash provided by (used in) investing
activities...................................... (13,230) 94
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net of issuance
costs.................................................. 15 492
Purchase of treasury stock................................ (4,398) --
------- -------
Net cash provided by (used in) financing
activities...................................... (4,383) 492
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (44) 165
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (15,907) 2,385
CASH AND CASH EQUIVALENTS, beginning of period.............. 43,104 12,706
------- -------
CASH AND CASH EQUIVALENTS, end of period.................... $27,197 $15,091
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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NETMANAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. INTERIM FINANCIAL DATA
The interim financial statements for the three month periods ended March
31, 1999 and 1998 for NetManage(R), 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
using 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 (loss) 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 quarter
ended March 31, 1999, the number of shares used in the computation of diluted
earnings per share were the same as those used for the computation of basic
earnings per share. Potentially dilutive securities of 2,412,155 were not
included in the computation of diluted earnings per common share because to do
so would have been antidilutive for the quarter ended March 31, 1999.
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 are 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
combined Company's worldwide workforce, reduction of office space, and the
closure of four domestic locations, 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 and expects to complete the remaining items within one year from the
date the restructuring plan was initiated. The Company anticipates that the
execution of the restructuring actions will require total cash expenditures of
approximately $13.7 million, which is expected to be funded from internal
operations. As of March 31, 1999, the Company had incurred costs totaling
approximately $14.1 million related to the restructuring, which required $11.8
7
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NETMANAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
million in cash expenditures. Accrued liabilities at March 31, 1999 included the
remaining reserve related to these restructuring plans of approximately $2.7
million.
The following table lists the components of the NetManage restructuring
accrual as of March 31, 1999 and December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
EMPLOYEE EXCESS EXCESS
COSTS ASSETS FACILITIES TOTAL
-------- ------ ---------- -------
<S> <C> <C> <C> <C>
Reserve provided..................................... $ 1,500 $1,500 $ 4,031 $ 7,031
Reserve utilized in 1998............................. (1,071) (411) (1,534) (3,016)
------- ------ ------- -------
Balance at December 31, 1998......................... $ 429 $1,089 $ 2,497 $ 4,015
Reserve utilized in the quarter ended March
31,1999............................................ (410) (880) (314) (1,604)
------- ------ ------- -------
Balance at March 31, 1999.......................... $ 19 $ 209 $ 2,183 $ 2,411
======= ====== ======= =======
</TABLE>
The following table lists the components and activity of the FTP
restructuring accrual of $9.7 million, assumed by the Company in connection with
the acquisition, as of March 31, 1999 and December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
EMPLOYEE EXCESS EXCESS
COSTS ASSETS FACILITIES TOTAL
-------- ------- ---------- -------
<S> <C> <C> <C> <C>
Reserve balance at date of acquisition.............. $ 5,784 $ 1,174 $ 2,763 $ 9,721
Reserve utilized in 1998............................ (5,622) (1,174) (1,716) (8,512)
------- ------- ------- -------
Balance at December 31, 1998........................ $ 162 $ -- $ 1,047 $ 1,209
Reserve utilized in the quarter ended March
31,1999........................................... (162) -- (774) (936)
------- ------- ------- -------
Balance at March 31, 1999......................... $ -- $ -- $ 273 $ 273
======= ======= ======= =======
</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
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NETMANAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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. Plaintiffs have filed a notice of
appeal to the U.S. Court of Appeals for the Ninth Circuit.
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 asserts
causes of action for fraud, negligent misrepresentation, negligence and breach
of contract, and seeks an unspecified amount of damages. Trial of the case is
scheduled for November 1999. The Company believes there is no merit to the case
and intends to defend the case vigorously.
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. NetManage
acquired FTP in August 1998. On September 24, 1998, the court granted
defendants' motion for partial summary judgment and granted without leave to
amend defendants' renewed motion to dismiss the complaint. Plaintiffs have filed
a notice of appeal. FTP believes that there is no merit to this 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 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. No decision has been
rendered by the court of appeals as of May 12, 1999. Firefox believes that there
is no merit to the case and intends to defend the case 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
9
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NETMANAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 method used to distribute their products.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Quarterly report on Form 10Q contains 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 acquisition of FTP. The Company's actual results could differ
materially from the results discussed in the forward-looking statements. Factors
that could cause or contribute to such differences include, among others, that
the markets for the Company's products, including but not limited to Chameleon
UNIX Link97, Chameleon HostLink97, OnNet Host, OnWeb Host, SupportNow,
OpSession, NS/Portfolio and NS/Router, 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 personnel following the acquisition of FTP and the
August 1998 restructuring described below, that the Company will be able to
realize new business opportunities that may exist as a result of the acquisition
of FTP, 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. The timing of completion of the August
1998 restructuring of operations described below and the amount of the related
restructuring charge is dependent upon a number of factors including risks
associated with the integration of the operations of FTP, the Company's ability
to complete the integration of the operations and technologies of FTP in a
timely, efficient and cost-effective manner, the rate and amount at which the
Company is able to terminate leases on or sublease excess office space and the
accuracy of management's estimates of lease termination or sublease and other
restructuring charges. Additional factors that could affect the Company's
business, financial condition and results of operations include those discussed
below under "Factors That May Affect Future Results and Financial Condition."
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 incomplete 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 includes a reduction in the Company's
worldwide workforce and office space. The majority
11
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of the restructuring actions were completed by March 31, 1999 with remaining
items expected to be completed within one year from the date the restructuring
plan was initiated.
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 that the FTP
integration, or the integration of any future acquisition, will be accomplished
successfully, and the failure to accomplish effectively any of these
integrations could have a material adverse effect on NetManage's results of
operations and financial condition.
RESULTS OF OPERATIONS
The Company's net revenues were nearly the same for the three month period
ended March 31, 1999 as compared to the same period of 1998. There was a decline
in license fee revenues which was offset by revenues associated with maintenance
contracts during the quarter ended March 31, 1999. Cost reduction programs,
including the restructuring plan announced and executed in the third quarter of
1998 resulted in slight reductions in research and development and general and
administrative expenses in the first quarter of 1999 as compared with the first
quarter of 1998. The benefits of these cost reduction programs were offset by
significant increases in sales and marketing expenses as the Company announced
the upcoming release of its new product line in the second quarter of 1999, and
the increase in goodwill amortization associated with the purchase of FTP
resulting in a loss for operations in the period ended March 31, 1999.
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 remain relatively constant
throughout 1999 but may fluctuate as a percentage of net revenues as the Company
completes its integration of FTP into its operations and 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.
12
<PAGE> 13
FIRST QUARTER 1999 COMPARED TO FIRST QUARTER 1998
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------
MARCH 31, CHANGE
----------------- ---------------
1999 1998 $ %
----- ------ ----- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net revenues:
License fees..................................... $12.1 $ 13.9 $(1.8) (13.5%)
Services......................................... 5.3 3.4 1.9 57.3%
----- ------
Total net revenues.......................... $17.4 $ 17.3 $ 0.1 0.2%
As a percentage of net revenues:
License fees..................................... 69.5% 80.6%
Services......................................... 30.5% 19.4%
----- ------
Total net revenues.......................... 100.0% 100.0%
Gross margin.......................................... $16.4 $ 16.3 $ 0.1 0.4%
As a percentage of net revenues..................... 94.4% 94.3%
Research and development.............................. $ 4.2 $ 4.5 $(0.3) (6.8%)
As a percentage of net revenues..................... 24.3% 26.2%
Sales and marketing................................... $10.9 $ 9.2 $ 1.7 18.3%
As a percentage of net revenues..................... 62.5% 53.0%
General and administrative............................ $ 2.3 $ 2.7 $(0.4) (13.6%)
As a percentage of net revenues..................... 13.3% 15.4%
Interest income and other, net........................ $ 1.2 $ 0.8 $ 0.4 42.6%
As a percentage of net revenues..................... 6.8% 4.6%
Provision for income taxes............................ -- $ 0.2 $(0.2) (100.0%)
Effective tax rate.................................. -- 27.3%
</TABLE>
Net revenues
Historically, a substantial portion of the Company's net revenues have been
derived from software license fees. Service revenues have been primarily
attributable to maintenance agreements associated with licenses.
License fees decreased both in absolute dollars and as a percentage of net
revenues during the first quarter of 1999 as compared to the first quarter of
1998. The decline in license fees was primarily attributable to declines in UNIX
and midrange connectivity product sales partially offset by the sales of suite
products which provide the customers connectivity solutions supporting a variety
of platforms.
The increase in service revenues both in absolute dollars and as a
percentage of sales for the three-month period ended March 31, 1999 as compared
with the same period 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 27% and 28% for the three month periods
ended March 31, 1999 and 1998, respectively.
Software license fees are generally recognized as revenue upon shipment if
the fee is considered fixed and determinable, the arrangement does not include
significant customization of the software and collectibility is probable.
Allowances for returns and doubtful accounts are provided based on historical
rates of returns and write-offs, which have not been material to date. Certain
of the Company's sales to distributors are under agreements providing rights of
return and price protection on unsold merchandise. Accordingly, the Company
defers recognition of such sales until the merchandise is sold by the
distributor.
The Company provides ongoing maintenance and support to its customers,
generally under annual service agreements. Maintenance and support is comprised
of software updates for existing products and telephone
13
<PAGE> 14
support. Service revenues are recognized on a pro-rata basis over the term of
such agreements. The Company expects that service revenues will continue to
increase as a percentage of total net revenues. 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 more that 10% of net revenues during the quarters
ended March 31, 1999 or March 31, 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 March 31, 1999 has not been material and is not
reported separately.
Gross margins remained nearly the same in absolute dollars and as a
percentage of net revenues for the first quarter of 1999 as compared to the
first quarter of 1998.
Gross margin as a percentage of net revenues may fluctuate in the future
due to increased price competition, the mix of distribution channels used by the
Company, the mix of license fee revenues versus service revenues, the mix of
products sold and the mix of international versus domestic revenues. The Company
typically recognizes higher gross margins on direct sales than on sales through
indirect channels and higher gross margins on license fee revenues than on
service revenues.
Research and development
Research and development ("R&D") expenses consist primarily of salaries and
benefits, occupancy and travel expenses, as well as fees paid to outside
consultants. The slight decrease in R&D expenses in absolute dollars and as a
percentage of net revenues for the three months ended March 31, 1999 as compared
to the three months ended March 31, 1998 primarily reflects cost savings,
particularly in R&D salaries and benefits, associated with the reduction in
headcount resulting from the recent restructuring plan announced in the third
quarter of 1998 as well as the Company's continued efforts to reduce expenses.
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.
Sales and marketing
Sales and marketing ("S&M") expenses consist primarily of salaries and
commissions of sales and marketing personnel, advertising and promotion
expenses, and customer service and support costs. The increase in S&M expenses
in absolute dollars for the first quarter of 1999 as compared to the first
quarter of 1998 primarily reflects the increased marketing costs of advertising,
trade shows, and promotions related to the release of the Company's new product
lines scheduled for release in the second quarter of 1999.
The Company believes that S&M expenses will increase significantly in
absolute dollars and as a percentage of net revenues during the remainder of
1999 as compared with comparable periods in 1998, as the
14
<PAGE> 15
Company launches new products which will be based on the integration of the
technologies of FTP with those of the Company. This will require additional
advertising and promotion activities. 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 decreased in absolute dollars
for the quarter ended March 31, 1999 as compared to the quarter ended March 31,
1998. The decrease in G&A expenses in absolute dollars and as a percentage of
sales for the three months ended March 31, 1999 as compared to the three months
ended March 31, 1998 primarily reflects cost savings, particularly in G&A
salaries and benefits, associated with the reduction in headcount resulting form
the recent restructuring plan announced in the third quarter of 1998 as well as
the Company's continued efforts to reduce expenses. The Company believes that
G&A expenses will decrease slightly in absolute dollars throughout 1999. No
assurance can be given that the restructuring will prove to be successful, that
future operating results will improve, or that the actions undertaken in the
restructuring will not disrupt the Company's remaining operations. Further,
there can be no assurance that additional reorganization of the Company's
operations will not be required in the future.
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 one of its wholly-owned subsidiaries,
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 the first quarter of 1999 was 0% due
to the Company's loss position as compared to an effective tax rate of 27.3% for
the first quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
AS OF MARCH 31,
----------------
1999 1998
------ ------
(IN MILLIONS)
<S> <C> <C>
Cash and cash equivalents................................... $27.2 $15.1
Short-term investments...................................... 75.4 40.7
Long-term investments....................................... 32.9 15.4
Net cash provided by operating activities................... 1.8 1.6
Net cash provided by (used in) investing activities......... (13.2) 0.1
Net cash provided by (used in) financing activities......... (4.4) 0.5
</TABLE>
Since the Company's inception, growth has been financed primarily through
cash provided by operations and sales of capital stock. The Company's primary
financing activities to date consist of its initial and secondary stock
offerings and preferred stock issuances, and have aggregated net proceeds to the
Company of approximately $72.5 million. The Company does not have a bank line of
credit or an equipment lease facility.
The Company's cash and cash equivalents, short-term investments and
long-term investments increased from $71.2 million at March 31, 1998 to $135.5
million at March 31, 1999. This increase was primarily due to the acquisition of
FTP in the third quarter of 1998, the sale of NetVision in December 1998,
partially offset by the repurchase of shares of the Company's stock in the
fourth quarter of 1998 and first quarter of 1999.
15
<PAGE> 16
The Company's principal investing activities to date have been the purchase
of short and long-term investments, purchases of property and equipment, and
cash payments for acquisitions. Net of proceeds from maturities, the Company
invested $13.1 million in short-term and long-term investments during the first
quarter of 1999. Expenditures for purchases of property and equipment were
minimal during the first quarter of 1999 due to the Company's efforts to control
operating expenses. The Company does not have any specific commitments with
regard to future capital expenditures, and it is anticipated that such spending
will remain relatively constant during the remaining quarters of 1999.
Net cash used by financing activities during the first quarter of 1999
reflects the repurchase of shares of the Company's common stock for $4.4 million
in the open market under the repurchase program described below.
At March 31, 1999, the Company had working capital of $97.1 million. The
Company believes that its current cash balances and cash flows from current
operations will be sufficient to meet the Company's working capital and capital
expenditure requirements for the foreseeable future.
On January 22, 1999, the Company's Board of Directors authorized the
repurchase from time to time of an additional two million shares of the
Company's common stock through open market purchases. During the first quarter
of 1999, the Company repurchased 1,587,000 shares of its common stock on the
open market at an average purchase price of $2.77 per share for a total cost of
approximately $4.4 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 issue
is whether computer systems will properly recognize date-sensitive information
when the year changes to 2000. The risk for the Company exists in four areas as
follows: systems used by the Company to run its business; systems used by the
Company's suppliers; potential warranty or other claims from the Company's
customers; and the potential reduced spending by other companies on networking
solutions as a result of significant information systems spending on Year 2000
remediation.
For the Year 2000 non-compliance issues identified to date, the cost of
testing, upgrade, and remediation of the Company's internal systems is
approximately $1.3 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
$800,000. The Company expects to implement upgrades and remediations prior to
the end of 1999. If implementation of such systems is delayed, or if significant
new non-compliance issues are identified, the Company's business, financial
condition or results of operations could be materially adversely affected.
The Company is contacting its critical suppliers to determine that the
suppliers' operations and the products and services they provide are Year 2000
compliant. Where practicable, the Company will attempt to mitigate its risks
with respect to the failure of suppliers to be Year 2000 ready. If suppliers are
not Year 2000 compliant, the Company may seek alternative sources of supplies.
However, such failures remain a possibility and could have an adverse impact on
the Company's business, financial condition or results of operations.
The Company believes its current products are Year 2000 compliant; however,
all customer situations cannot be anticipated, particularly those involving
third party products. The cost of the additional testing of third party product
functionality as recommended by the Company's Year 2000 task force is expected
to be approximately $500,000. 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.
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<PAGE> 17
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
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 involves both a reduction in the Company's worldwide
workforce and the consolidation of certain of the Company's sales and research
and development facilities. 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 increase revenues from the sale of FTP's products will depend in
part on its ability to effectively respond to these factors.
17
<PAGE> 18
RISKS OF ACQUISITIONS
The Company's merger and acquisition transactions, including the recent
acquisition of FTP, have been motivated by various factors, including the desire
to obtain new technologies, expand and enhance the Company's product offerings,
attract key personnel and strengthen the Company's presence in the international
and OEM marketplace. Product and technology acquisitions entail numerous risks,
including the diversion of management's attention away from day-to-day
operations, difficulties in the assimilation of acquired operations and
personnel (such as sales, engineering and customer support), the 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 1997 and 1998,
the Company (and, prior to the acquisition, FTP) experienced high attrition at
all levels and across all functions of the Company. The attrition experienced by
the Company was attributable to various factors including, among others,
industry-wide demand exceeding supply for experienced engineering and sales
professionals, the effects of the Company's 1997 and 1998 restructurings and
acquisitions and the Company's results of operations during 1997. Managing
employee attrition, integrating acquired operations and products and expanding
both the geographic areas of its customer base and operations have resulted in
substantial demands on the Company's management resources and increases the
difficulty of hiring, training and assimilating new employees. Any failure of
the Company to retain and attract qualified employees or to train or manage its
management and employee base could have a material adverse effect on its
business, financial condition and results of operations.
PRODUCT DEVELOPMENT AND COMPETITION
The market for the Company's products is intensely competitive and
characterized by rapidly changing technology, evolving industry standards,
changes in customers' needs and frequent new product introductions. From time to
time over the past three years, many customers have delayed purchase decisions
due to the confusion in the marketplace relating to rapidly changing technology
and product introductions. To maintain or improve its position in this industry,
the Company must continue to successfully develop, introduce and market new
products and product enhancements on a timely and cost-effective basis. The
Company has experienced difficulty from time to time in developing and
introducing new products and enhancing existing products in a manner which
satisfies customer requirements and changing market demands. Any further failure
by the Company to anticipate or respond adequately to changes in technology and
customer preferences, or any significant delays in product development or
introduction, could have a material adverse effect on the Company's business,
financial condition and results of operations. The failure to develop on a
timely basis products or product enhancements incorporating new functionality
could cause customers to delay purchase of the Company's current products or
cause customers to purchase products from the Company's competitors; either
situation would adversely affect the Company's business, financial condition and
results of operations. There can be no assurance that the Company will be
successful in developing new products or enhancing its existing products on a
timely basis, or that such new products or product enhancements will achieve
market acceptance.
18
<PAGE> 19
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 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 products in 1998 and 1997.
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
19
<PAGE> 20
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 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
20
<PAGE> 21
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 27% of net revenues from international
sales during the quarter ended March 31, 1999. 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.
YEAR 2000 COMPLIANCE
The Company currently estimates that it will incur expenses of up to $1.3
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.
21
<PAGE> 22
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of certain legal proceedings involving NetManage, FTP,
and Firefox, see Note 5 of the notes to the unaudited condensed consolidated
financial statements included in Part 1 of this Report.
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) No reports on Form 8-K have been filed during the quarter for which this
report relates.
22
<PAGE> 23
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)
By: /s/ GARY R. ANDERSON
------------------------------------
Gary R. Anderson
Chief Financial Officer
and Senior Vice President
(Principal Financial and
Accounting Officer)
Date: May 12, 1999
23
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 27,197
<SECURITIES> 0
<RECEIVABLES> 14,544
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 132,826
<PP&E> 10,647
<DEPRECIATION> 5,213
<TOTAL-ASSETS> 190,446
<CURRENT-LIABILITIES> 35,706
<BONDS> 0
0
0
<COMMON> 693
<OTHER-SE> 152,997
<TOTAL-LIABILITY-AND-EQUITY> 190,446
<SALES> 17,354
<TOTAL-REVENUES> 17,354
<CGS> 972
<TOTAL-COSTS> 18,541
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (987)
<INCOME-TAX> 49
<INCOME-CONTINUING> (1,036)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,036)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
