<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------------
FORM 10-Q
-------------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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 April 28, 2000:
64,324,373
================================================================================
<PAGE> 2
NETMANAGE, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2000 and
December 31, 1999 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2000 and March 31, 1999 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2000 and March 31, 1999 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 26
Item 3. Defaults upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
</TABLE>
2
<PAGE> 3
NETMANAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 2000 1999
--------- ------------
<S> <C> <C>
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 53,405 $ 63,079
Short-term investments 145 148
Accounts receivable, net 24,305 30,544
Prepaid expenses and other current assets 17,731 20,497
--------- ---------
Total current assets 95,586 114,268
--------- ---------
PROPERTY AND EQUIPMENT, at cost:
Computer software and equipment 10,588 10,315
Furniture and fixtures 6,310 6,310
Leasehold improvements 3,433 3,433
--------- ---------
20,331 20,058
Less - Accumulated depreciation (10,044) (8,473)
--------- ---------
Net property and equipment 10,287 11,585
--------- ---------
GOODWILL AND OTHER INTANGIBLES, net 81,737 86,040
OTHER ASSETS 2,812 3,474
--------- ---------
$ 190,422 $ 215,367
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,782 $ 7,104
Accrued liabilities 25,590 39,760
Accrued payroll and payroll-related expenses 6,870 4,669
Deferred revenue 27,796 27,710
Income taxes payable 8,841 12,265
--------- ---------
Total current liabilities 74,879 91,508
--------- ---------
LONG-TERM LIABILITIES 2,397 3,666
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value--
Authorized-- 125,000,000 shares
Issued-- 70,658,753 and 70,162,149 shares,
respectively
Outstanding-- 64,304,453 and 63,807,849 shares,
respectively 706 701
Treasury stock, at cost-- 6,354,300 and 6,354,300 shares,
respectively (15,559) (15,559)
Additional paid-in capital 170,476 169,606
Accumulated deficit (38,866) (31,464)
Accumulated other comprehensive loss (3,611) (3,091)
--------- ---------
Total stockholders' equity 113,146 120,193
--------- ---------
$ 190,422 $ 215,367
========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE> 4
NETMANAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
NET REVENUES:
License fees $ 14,942 $ 12,073
Services 12,488 5,281
-------- --------
Total net revenues 27,430 17,354
COST OF REVENUES 1,127 972
-------- --------
GROSS MARGIN 26,303 16,382
-------- --------
OPERATING EXPENSES:
Research and development 6,582 4,223
Sales and marketing 19,506 10,854
General and administrative 5,960 2,304
Insurance recovery (2,516) --
Amortization of goodwill 4,492 1,160
-------- --------
Total operating expenses 34,024 18,541
-------- --------
LOSS FROM OPERATIONS (7,721) (2,159)
INTEREST INCOME AND OTHER, NET 453 1,172
-------- --------
LOSS BEFORE PROVISION FOR INCOME TAXES (7,268) (987)
PROVISION FOR INCOME TAXES 134 49
-------- --------
NET LOSS $ (7,402) $ (1,036)
======== ========
NET LOSS PER SHARE:
BASIC $ (0.12) $ (0.02)
DILUTED $ (0.12) $ (0.02)
WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS:
BASIC 64,138 66,784
DILUTED 64,138 66,784
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE> 5
NETMANAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------
2000 1999
------- -------
<S> <C> <C>
Net Loss $(7,402) $(1,036)
Other comprehensive loss:
Unrealized loss on investments (212) --
Foreign currency translation adjustments (308) (15)
------- -------
Other comprehensive loss $(7,922) $(1,051)
======= =======
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE> 6
NETMANAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,402) $ (1,036)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 6,142 3,013
Provision for doubtful accounts and returns 41 118
Changes in assets and liabilities, net of business combinations:
Accounts receivable 6,198 4,572
Prepaid expenses and other assets 3,428 44
Accounts payable (1,322) 1
Accrued liabilities, payroll and payroll-related expenses (11,969) (4,574)
Deferred revenue 86 (88)
Income taxes payable (3,424) (125)
Long-term liabilities (1,269) --
-------- --------
Net cash provided by (used in) operating activities (9,491) 1,712
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (17,638) (22,733)
Proceeds from sales and maturities of short-term investments 16,959 16,280
Purchases of long-term investments -- (11,657)
Proceeds from maturity of long-term investments -- 4,998
Purchases of property and equipment (273) (118)
-------- --------
Net cash used in investing activities (952) (13,230)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net of issuance costs 875 --
Repurchase of common stock -- (4,398)
-------- --------
Net cash provided by (used in) financing activities 875 (4,398)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (106) 9
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (9,674) (15,907)
CASH AND CASH EQUIVALENTS, beginning of period 63,079 43,104
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 53,405 $ 27,197
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
<PAGE> 7
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,
2000 and 1999 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.
3. NET LOSS PER SHARE
Basic net loss per share data has been computed using the weighted-average
number of shares of common stock outstanding during the periods. Diluted net
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 three month
periods ended March 31, 2000 and March 31, 1999, 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
8,287,354 and 2,412,155 were not included in the computation of diluted net loss
per common share because to do so would have been anti-dilutive for the three
month periods ended March 31, 2000 and 1999, respectively.
4. RESTRUCTURING OF OPERATIONS
In the fourth quarter of 1999, following the acquisitions of Wall Data and
Simware, the Company initiated a plan to restructure its worldwide operations in
connection with the integration of operations of the two acquired companies. In
connection with this plan, the Company recorded a $3.8 million charge to
operating expenses in 1999. The restructuring charge includes approximately $1.9
million of estimated expenses for facilities-related charges associated with the
consolidation of redundant operations and $1.4 million of employee-related
expenses for employee terminations. The Company anticipates that the execution
of the restructuring actions will require total cash expenditures of
approximately $3.8 million, which is expected to be funded from internal
operations. As of March 31, 2000, the Company had incurred costs totaling
approximately $1.4 million related to the restructuring, which required $1.4
million in cash expenditures. The remaining reserve related to this
restructuring was approximately $2.4 million which was included in accrued
liabilities.
7
<PAGE> 8
NETMANAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table lists the components of the 1999 NetManage restructuring
charge for the quarter ended March 31, 2000 (in thousands):
<TABLE>
<CAPTION>
Employee Excess
Costs Facilities Other Total
---------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1999 $ 1,297 $ 1,868 $475 $ 3,640
Reserve utilized in three
months ended March 31, 2000 (882) (371) -- (1,253)
---------------------------------------------
Balance at March 31, 2000 $ 415 $ 1,497 $475 $ 2,387
=============================================
</TABLE>
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. 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 March 31, 2000, the Company had incurred
costs totaling approximately $18.1 million related to the restructuring, which
required $14.1 million in cash expenditures. At March 31, 2000, the remaining
FTP reserve related to this restructuring plan was approximately $1.3 million
which was included in accrued liabilities.
The following table lists the components of the 1998 NetManage restructuring
charge for the quarter ended March 31, 2000 (in thousands):
<TABLE>
<CAPTION>
Employee Excess Excess
Costs Assets Facilities Total
----------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1999 $-- $-- $ 2,522 $ 2,522
Reserve utilized in three
months ended March 31, 2000 -- -- (1,195) (1,195)
----------------------------------------
Balance at March 31, 2000 $-- $-- $ 1,327 $ 1,327
========================================
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
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
8
<PAGE> 9
NETMANAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
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 Company believes there is no merit
to these cases. The Company has reached an agreement in principle to settle
these cases. The agreement is subject to court review and approval. The Company
does not expect that the settlement will have a material effect on the Company's
financial results.
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
Company believes there is no merit to these cases. The Company has reached an
agreement in principle to settle these cases. The agreement is subject to court
review and approval. The Company does not expect that the settlement will have a
material effect on the Company's financial results.
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. An agreement in principle has
been reached to settle the derivative case. The agreement is subject to court
review and approval. The Company does not expect that the settlement will have a
material effect on the Company's financial results. 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.). After remand, the Company renewed its motion to
dismiss. On March 22, 2000, a hearing on the Company's motion to dismiss was
held by the district court. The Company believes that there is no merit to the
case and intends to defend the case vigorously.
9
<PAGE> 10
NETMANAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
three operating segments: web integration and publishing, PC connectivity and
real-time support. 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 web integration and
publishing market segment develops, markets and supports software products that
access host information systems and allow the information to be integrated and
published using web technology. 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 real-time support segment develops, markets and supports software products
that reduce the time and resource requirements for end-user support. The Company
has aggregated these three 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.
10
<PAGE> 11
NETMANAGE, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Form 10-Q contains forward-looking statements that involve risks and
uncertainties. Forward-looking statements include assumptions regarding expected
revenues from products recently introduced or acquired as a result of recent
acquisitions of other companies, expected changes in operating expenses and
capital spending, the Company's expectation that indirect sales will increase as
a percentage of domestic and total revenues, and the Company's expectation that
research and development and sales and marketing expenses will increase as a
result of the Company's acquisitions of Wall Data and Simware. 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 other things, a realization in the future 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 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 recent acquisitions of Wall Data and Simware, that the Company
will be able to realize new business opportunities that may exist as a result of
the acquisition of Wall Data or Simware, 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 economic difficulties in Asia,
particularly Japan, will not adversely affect sales of the Company's products in
that region. The timely completion of the restructuring of operations described
below is dependent upon a number of factors, including risks associated with the
integration of the operations of Wall Data and Simware, the Company's ability to
complete the integration of the operations and technologies of Wall Data and
Simware in a timely, efficient and cost-effective manner, the rate and amount at
which the Company is able to terminate leases or sublease excess office space
and the accuracy of management's estimates of lease termination or sublease and
other restructuring charges.
OVERVIEW
The Company develops and markets software applications that allow its customers
to implement host computer access from a range of internal or external desktop
or web-based client computers, to publish information from existing host-centric
applications to Internet and web-based client computer users, and to create new
applications that leverage existing host applications and data sources. The
Company develops and markets these software solutions for UNIX(R), IBM AS/400
midrange and IBM corporate mainframe computers. The Company also develops and
markets software that increases the productivity of corporate call centers, and
allows real time application sharing on corporate networks and across the
Internet. The company provides professional support, maintenance and consultancy
services to its customers in association with the products it develops and
markets.
On December 29, 1999, the Company completed its acquisition of Wall Data
Incorporated ("Wall Data"), a leader in the PC-to-IBM connectivity market. The
Company acquired a total of 10,203,344 outstanding shares of Wall Data common
stock and paid cash to qualifying Wall Data option holders and employee stock
purchase plan participants pursuant to a cash tender offer of $9.00 per common
share. Total aggregate payments pursuant to the cash tender offer amounted to
approximately $94.0 million. The Company completed the transaction in two
stages. On November 26, 1999, the Company acquired approximately 89% of the
outstanding shares of Wall Data pursuant to the cash tender offer. The Company
acquired the remaining outstanding shares of Wall Data by means of a merger
completed in accordance with Washington law on December 29, 1999. The
acquisition was accounted for using the purchase method of accounting.
On December 10, 1999, the Company completed its acquisition of Simware Inc.
("Simware"), a leading provider of e-commerce solutions and web integration
servers. The Company acquired a total of 7,503,372 shares of Simware common
stock and paid cash to qualifying Simware option holders and employee stock
purchase plan participants
11
<PAGE> 12
NETMANAGE, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
pursuant to a cash tender offer of $3.75 per common share. The Company completed
the transaction in two stages. On November 2, 1999, the Company acquired
approximately 91% of the outstanding shares of Simware pursuant to the cash
tender offer. The Company acquired the remaining outstanding shares of Simware
by means of a compulsory acquisition completed in accordance with Canadian law
on December 10, 1999. The acquisition was accounted for using the purchase
method of accounting.
In the fourth quarter of 1999, following the acquisitions of Wall Data and
Simware, the Company initiated a plan to restructure its worldwide operations in
connection with the integration of operations of the acquisitions. In connection
with this plan, the Company recorded a $3.8 million charge to operating expenses
in 1999. The restructuring charge included approximately $1.9 million of
estimated expenses for facilities-related charges associated with the
consolidation of redundant operations and $1.4 million of employee-related
expenses for employee termination costs. The Company anticipates that the
execution of the restructuring actions will require total cash expenditures of
approximately $3.8 million, which is expected to be funded from internal
operations. As of March 31, 2000, the Company had made cash payments totaling
approximately $1.4 million related to the restructuring.
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. In late August 1998, following the acquisition of FTP, the Company
initiated a plan to restructure its worldwide operations as a result of current
business conditions and in connection with the integration of the operations of
FTP. The restructuring has been substantially completed with the exception of
certain lease obligations.
With the acquisitions of Wall Data, Simware, FTP, and prior acquisitions, the
Company has enhanced its market position and product offerings by becoming a
supplier with a broader range of software solutions spanning major market
segments. The Company's full line of products includes the recently acquired
RUMBA product family with the acquisition of Wall Data, the Chameleon product
family, the NS/Portfolio product family, the OnNet Host and OnWeb Host product
families and the InterDrive family of NFS products. In addition, with the
acquisition of Simware, the Company established itself in the web-based
eBusiness and web integration server market with the Salvo Commerce Servers and
Salvo application re-engineering and integration servers. The Company products
are sold and serviced worldwide by the Company's direct sales force,
international subsidiaries and authorized channel partners.
As described in detail below under "Factors that may Affect Future Results and
Financial Conditions," 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 current integration of Simware and
Wall Data, or the integration of any future acquisition(s), 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.
12
<PAGE> 13
NETMANAGE, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The Company's net revenues increased for the three month period ended March 31,
2000, as compared to the same period of 1999 primarily due to the inclusion of
Wall Data's and Simware's revenues for the quarter ended March 31, 2000. No
revenues or expenses for Wall Data or Simware are included in the comparative
period in 1999. Operating expenses have increased as a result of the inclusion
of Wall Data's and Simware's operating expenses which began in the fourth
quarter of 1999 and an increase in goodwill amortization associated with the
purchases of Wall Data and Simware.
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 increase on a quarterly
basis 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 MONTHS ENDED MARCH 31, 2000 COMPARED TO MARCH 31, 1999 (DOLLARS IN
MILLIONS):
<TABLE>
<CAPTION>
Three months ended March 31,
--------------------------------
2000 1999 Change %
------ ------ --------
<S> <C> <C> <C>
Net revenues:
License fees $ 14.9 $ 12.1 23.8%
Services 12.5 5.3 136.5%
------ ------
Total net revenues $ 27.4 $ 17.4 58.1%
------ ------
As a percentage of revenues:
License fees 54.4% 69.6%
Services 45.6% 30.4%
------ ------
Total net revenues 100.0% 100.0%
------ ------
Gross margin $ 26.3 $ 16.4 60.6%
As a percentage of revenues: 95.9% 94.3%
Research and development $ 6.6 $ 4.2 55.9%
As a percentage of revenues: 24.0% 24.3%
Sales and marketing $ 19.5 $ 10.9 79.7%
As a percentage of revenues: 71.1% 62.5%
General and administrative $ 6.0 $ 2.3 158.7%
As a percentage of revenues: 21.7% 13.3%
Interest income and other, net $ 0.5 $ 1.2 -61.3%
As a percentage of revenues: 1.7% 6.8%
Provision for income taxes $ 0.1 $ -- 173.5%
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 and service revenues increased for the three months ended March
31, 2000 as compared to the same period in 1999 which is attributable to the
inclusion of Wall Data's and Simware's revenues in the first quarter of 2000.
License revenue growth was affected by a number of integration issues
surrounding the acquisitions including integration of the sales organizations
and supporting infrastructure. Services revenue growth was due to the addition
of Wall Data's and Simware's installed base of customers.
14
<PAGE> 15
NETMANAGE, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Company has operations worldwide with sales offices located in the United
States, Europe, Canada, Latin America, Israel and Japan. Revenues outside of the
United States as a percentage of total net revenues were approximately 33% and
27% for the three months ended March 31, 2000 and 1999, respectively. Revenues
outside of the United States as a percentage of total net revenues increased due
to the inclusion of results from the recent acquisitions of Wall Data and
Simware, particularly in Europe.
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. Certain of the Company's sales to distributors
are under agreements providing rights of return and price protection on unsold
merchandise. Accordingly, the Company defers recognition of such sales until the
merchandise is sold by the distributor.
The Company provides ongoing maintenance and support to its customers, generally
under annual service agreements. Maintenance and support is comprised of
software updates for existing products and telephone support. Service revenues
are recognized on a pro-rata basis over the terms of such agreements.
Periodically, the Company has provided training and consulting services to
selected customers. Revenue from such services is recognized as the related
services are performed and has not been material to date. The Company expects
that revenues generated from such training and consulting services should
increase in the future.
No customer accounted for 10% or more of net revenues in the three months ended
March 31, 2000 or 1999.
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 order processing, product packaging, documentation and software
duplication.
Gross margins increased in absolute dollars and as a percentage of net revenues
for the three month period ended March 31, 2000 as compared to the same period
in 1999, primarily as a result of the increase in revenue.
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 increased in absolute dollars primarily as a result of
the Wall Data and Simware acquisitions and resulting increase in headcount but
remained relatively the same as a percentage of net revenues for the three month
period ended March 31, 2000 as compared to the same period in 1999.
The Company expects that R&D spending in absolute dollars will increase during
the remainder of 2000 due to increased staffing and, as a percentage of net
revenues, will fluctuate depending on future revenue levels.
15
<PAGE> 16
NETMANAGE, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Software development costs are accounted for in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," under which the Company is
required to capitalize software development costs after technological
feasibility is established, which the Company defines as a working model and
further defines as a beta version of the software. The establishment of
technological feasibility and the ongoing assessment of the recoverability of
these costs requires considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future gross
product revenue, estimated economic life and changes in technology. Costs that
do not qualify for capitalization are charged to R&D expense when incurred. To
date, internal software development costs that were eligible for capitalization
have not been significant and the Company has charged all internal software
developments costs to R&D expense as incurred.
SALES AND MARKETING
Sales and marketing ("S&M") expenses consist primarily of salaries and
commissions of sales and marketing personnel, advertising and promotion
expenses, and customer service and support costs. S&M expense has increased on
an absolute dollar basis and as a percentage of net revenue for the three month
period ended March 31, 2000 compared to the same period in 1999 reflecting the
increased marketing costs of advertising, trade shows, and promotions and the
increase in sales, customer support and consulting personnel related to the
Company's recent acquisitions of Wall Data and Simware.
The Company believes that S&M expenses will increase in absolute dollars as the
Company expands its S&M activities . The Company expects that S&M expenses
during 2000 as a percentage of total net revenues will fluctuate depending on
future revenue levels.
GENERAL AND ADMINISTRATIVE
General and administrative ("G&A") expenses have increased in absolute dollars
and as a percentage of net revenue for the period ended March 31, 2000 as
compared to the same period in 1999 primarily as a result of the acquisitions of
Wall Data and Simware and resulting increase in headcount. The Company believes
that G&A expenses will decrease slightly in absolute dollars throughout the
remainder of 2000 as the Company completes certain payments associated with the
transition.
INSURANCE RECOVERY
During the three months ended March 31, 2000, the Company received a cash
payment of $2.5 million from an insurance company as a reimbursement of amounts
paid by the Company in 1999 in connection with settlement of certain litigation.
INTEREST INCOME
Interest income decreased in absolute dollars which was due to the decrease in
cash and cash equivalents and short and long term investment balances as a
result of the cash tender offers for the acquisitions of Wall Data and Simware.
PROVISION FOR INCOME TAXES
The Company's effective tax rate for 2000 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.
DISCLOSURES ABOUT MARKET RISK
Interest rate risk
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio. The Company places its
investments with high credit quality issuers and, by policy, limits the amount
of credit exposure to any one issuer. As stated in its policy, the Company is
averse to principal loss and seeks to preserve its invested funds by limiting
default risk, liquidity risk and territory risk.
The Company mitigates default and liquidity risks by investing in only safe and
high credit quality securities and by positioning its portfolio to respond
appropriately to a significant reduction in a credit rating of any investment
issuer or guarantor. The portfolio includes only marketable securities with
active secondary or resale markets to ensure portfolio liquidity. The Company
mitigates territory risk by only allowing up to 25% of the portfolio to be
placed outside of the United States.
Foreign currency risk
The Company transacts business in various foreign currencies, primarily in
Europe and Israel. The Company has established a foreign currency hedging
program, utilizing foreign currency forward exchange contracts ("forward
contracts") to hedge certain foreign currency exposures in certain European
countries. Under this program, increases or decreases in the Company's foreign
currency transactions are partially offset by gains and losses on the forward
contracts, so as to mitigate the possibility of short-term earnings volatility.
The Company does not use forward contracts for trading purposes. All outstanding
forward contracts at the end of a period are marked-to-market with unrealized
gains and losses included in interest income and other, net and, thus, are
recognized in income in advance of the actual foreign currency cash flows. As
these forward contracts mature, the realized gains and losses are recorded and
are included in net income (loss) as a component of interest income and other,
net. The Company's ultimate realized gain or loss with respect to currency
fluctuations will depend upon the currency exchange rates and other factors in
effect as the contracts mature. At March 31, 2000, the Company had no
outstanding foreign currency option contracts.
17
<PAGE> 18
NETMANAGE, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
March 31, December 31,
(In millions) 2000 1999
- ------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $53.4 $63.1
Short-term investments 0.1 0.1
----- -----
Total $53.5 $63.2
</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, which aggregated net proceeds to the
Company of approximately $72.5 million. The Company does not have a bank line of
credit.
During the three months ended March 31, 2000, the Company's aggregate cash and
cash equivalents and short-term investments decreased from $63.2 million to
$53.5 million. This decrease was due primarily to the payment of acquisition
costs of Wall Data and restructuring cash expenditures in the first quarter of
2000.
Net cash used by operating activities for the three months ended March 31, 2000
reflects the Company's cash used in certain Company operations.
The Company's principal investing activities to date have been the purchase of
short-term and long-term investments and business acquisitions. The Company does
not have any specific commitments with regard to future capital expenditures.
Net cash used in financing activities in 2000 reflects proceeds from the sale of
common stock under the Company's employee stock purchase plan and stock option
plans.
At March 31, 2000, the Company had working capital of $20.7 million. The Company
believes that its current cash balances and future operating cash flows will be
sufficient to meet the Company's working capital and capital expenditure
requirements for the foreseeable future.
YEAR 2000 COMPLIANCE
STATE OF READINESS To date, the Company has not experienced disruption in its
business related to the Year 2000 Issue. However, we cannot provide any
assurance that no Year 2000 issues will impact our systems, products or other
aspects of our business in the future. To the Company's knowledge, its key
suppliers have not experienced disruptions in their businesses related to the
Year 2000 Issue. However, we cannot provide any assurance that no Year 2000
Issue will effect our suppliers in the future.
18
<PAGE> 19
NETMANAGE, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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
such as those recorded in connection with the acquisitions of FTP, Wall Data and
Simware.
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.
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 BOTH SIMWARE AND WALL DATA
In early December 1999, following its acquisition of Simware and Wall Data the
Company initiated a plan to restructure its worldwide operations in connection
with the need to integrate the operations of Simware and Wall Data. 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 will be
completed by the end of the second quarter of 2000. 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.
As indicated below, the successful combination of companies requires
coordination of sales and marketing and research and development efforts and may
be difficult to accomplish. The integration of both Wall Data and Simware has
involved the integration of geographically separated organizations (in suburban
Kirkland, Washington, Boston, Massachusetts, Cupertino and Irvine, California,
Ottawa, Canada and Haifa, Israel) and personnel with diverse business
backgrounds and corporate cultures. The Company believes that such factors as
the attention and
19
<PAGE> 20
NETMANAGE, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
dedication of management and other resources required to effect the integration
and the disruption in the business of both Wall Data and Simware resulting from
the announcement and consummation of the acquisition may have contributed to an
interruption and loss of momentum in the business activities of both Wall Data
and Simware, and that the Company's ability to maintain or increase revenues
from the sale of products from Wall Data and Simware 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 recent
acquisition of Wall Data and Simware, 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, the suburban Seattle area and Haifa,
Israel. Since the latter half of 1996, the Company (and, prior to their
acquisitions, both FTP and Wall Data) 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 restructuring and acquisitions and
the Company's results of operations. 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
20
<PAGE> 21
NETMANAGE, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
over the past three years, many customers have delayed purchase decisions due to
the confusion in the marketplace relating to rapidly changing technology and
product introductions. To maintain or improve its position in this industry, the
Company must continue to successfully develop, introduce and market new products
and product enhancements on a timely and cost-effective basis. The Company has
experienced difficulty from time to time in developing and introducing new
products and enhancing existing products in a manner which satisfies customer
requirements and changing market demands. Any further failure by the Company to
anticipate or respond adequately to changes in technology and customer
preferences, or any significant delays in product development or introduction,
could have a material adverse effect on the Company's business, financial
condition and results of operations. The failure to develop on a timely basis
products or product enhancements incorporating new functionality could cause
customers to delay purchase of the Company's current products or cause customers
to purchase products from the Company's competitors; either situation would
adversely affect the Company's business, financial condition and results of
operations. There can be no assurance that the Company will be successful in
developing new products or enhancing its existing products on a timely basis, or
that such new products or product enhancements will achieve market acceptance.
Because certain of the Company's products incorporate software and other
technologies developed and maintained by third parties, the Company is, to 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 might be negatively impacted by developments
adverse to Microsoft's Windows products. 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
21
<PAGE> 22
NETMANAGE, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
such as Hummingbird Communications Ltd.. The Company also faces competition from
makers of terminal emulation software such as Attachmate Corporation, 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 since 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 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.
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 net revenues
during 2000 and beyond, as a result of acquisitions 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 costs that are typically charged when
selling through indirect channels. There can be no assurance that the Company
will be able to attract or retain resellers and distributors who will be able to
market the Company's products effectively, will be qualified to provide timely
and cost-effective customer support and service or will continue to represent
the Company's products, and any inability on the part of the Company to recruit
or retain important resellers or distributors could adversely affect the
Company's business, financial condition or results of operations.
22
<PAGE> 23
NETMANAGE, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
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 33% of net revenues from international sales
during the quarter ended March 31, 2000. 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 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to or commerce
on the Internet. However, due to the increasing popularity and use of the
Internet, it is possible that various laws and regulations may be adopted with
respect to the Internet, covering issues such as user privacy, pricing and
characteristics and quality of products and services. The adoption of any such
laws or regulations may decrease the growth of the Internet, which could in turn
decrease the demand for the Company's products, increase the Company's cost of
doing business or otherwise have an adverse effect on its business, financial
condition or results of operations. Moreover, the applicability to the Internet
of existing laws governing issues such as property ownership, libel and personal
privacy is uncertain. Further, due to the encryption technology contained in
certain of the Company's products, such products are subject to U.S. export
controls. There can be no assurance that such export controls, either in their
current form or as may be subsequently enacted, will not limit the Company's
ability to distribute products outside of the United States or electronically.
While the Company takes precautions against unlawful exportation, there can be
no assurance that inadvertent violations will not occur, and the global nature
of the Internet makes it virtually impossible to effectively control the
distribution of the Company's products. In addition, future federal or state
legislation or regulation may further limit levels of encryption or
authentication 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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by Item 3. is incorporated by reference from the
section entitled "Disclosures about Market Risk" found above, under Item 2,
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations."
24
<PAGE> 25
NETMANAGE, INC.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
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 Company believes there is no merit
to these cases. The Company has reached an agreement in principle to settle
these cases. The agreement is subject to court review and approval. The Company
does not expect that the settlement will have a material effect on the Company's
financial results.
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
Company believes there is no merit to these cases. The Company has reached an
agreement in principle to settle these cases. The agreement is subject to court
review and approval. The Company does not expect that the settlement will have a
material effect on the Company's financial results.
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. An agreement in principle has
been reached to settle the derivative case. The agreement is subject to court
review and approval. The Company does not expect that the settlement will have a
material effect on the Company's financial results.
25
<PAGE> 26
NETMANAGE, INC.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.). After remand, the Company renewed its motion to dismiss. On
March 22, 2000, a hearing on the Company's motion to dismiss was held by the
district court. The Company 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 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.
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
March 31, 2000.
26
<PAGE> 27
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
NETMANAGE, INC.
(REGISTRANT)
DATE: MAY 15, 2000 BY: /s/ MICHAEL PECKHAM
--------------------- -------------------------------------
MICHAEL PECKHAM
CHIEF FINANCIAL OFFICER AND SENIOR
VICE PRESIDENT (PRINCIPAL FINANCIAL
AND ACCOUNTING OFFICER)
27
<PAGE> 28
INDEX TO EXHIBITS
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 53,405
<SECURITIES> 145
<RECEIVABLES> 24,305
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 95,586
<PP&E> 20,331
<DEPRECIATION> 10,044
<TOTAL-ASSETS> 190,422
<CURRENT-LIABILITIES> 74,879
<BONDS> 0
0
0
<COMMON> 706
<OTHER-SE> 112,440
<TOTAL-LIABILITY-AND-EQUITY> 190,422
<SALES> 14,942
<TOTAL-REVENUES> 27,430
<CGS> 1,127
<TOTAL-COSTS> 1,127
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,268)
<INCOME-TAX> 134
<INCOME-CONTINUING> (7,402)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,402)
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
