Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________ .
COMMISSION FILE NO. 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) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 973-7171
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.01
PAR VALUE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The approximate aggregate market value of the Common Stock held by
non-affiliates of the registrant, based upon the closing price of the Common
Stock reported on the Nasdaq Stock Market, was $146,360,508 as of February 26,
1999.(1)
The number of shares of Common Stock outstanding as of February 26, 1999
was 66,366,649.
------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Sections of the registrant's definitive Proxy Statement for the
registrant's Annual Meeting of Stockholders, to be held May 27, 1999, which will
be filed with the Securities and Exchange Commission, are incorporated by
reference into Part III of this Report to the extent stated herein.
- ---------------
(1) Excludes 13,144,646 shares of Common Stock held by directors and officers
and stockholders whose beneficial ownership exceeds five percent of the
shares outstanding at December 31, 1998. Exclusion of shares held by any
person should not be construed to indicate that such person possesses the
power, direct or indirect, to direct or cause the direction of the
management or policies of the registrant, or that such person is controlled
by or under common control with the registrant.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
PART I
ITEM 1 -- BUSINESS.
OVERVIEW
NetManage, Inc. (the "Company") develops, markets and supports software
applications for connecting personal computers to UNIX(R), 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 is a recognized leader in "PC
connectivity" and was one of the first to develop and market a Windows-based
transmission protocol that has since become the industry standard for the
Internet. The Company business is focused on taking advantage of three major
industry trends: expansion of the Internet; continued mobilization of personal
computer users; and broader access to corporate data and information. Its
principal products are compatible with Microsoft Corporation's ("Microsoft")
Windows 3.1, Windows 95, Windows 98, and Windows NT platforms, International
Business Machines Corporation ("IBM") operating systems, including OS/2, and
Novell, Inc. ("Novell") operating systems. The Company was incorporated in 1990
as a California corporation and changed its incorporation to Delaware in 1993 in
conjunction with its initial public offering.
The Company has two types of connectivity software products, personal
computer ("PC") connectivity and visual connectivity. PC connectivity products
provide the technology to make the connection between personal computers and
large corporate computers possible. These products leverage the strengths and
popularity of the Internet and offer features to improve network manageability.
PC connectivity products include the Company's strongest brands: the
Chameleon(TM) family (Chameleon UNIX Link97, Chameleon HostLink97, and Chameleon
3270LT), the NS/Portfolio(TM) family (NS/Portfolio Enterprise, NS/Portfolio for
Mainframe, NS/Portfolio for AS/400 and NS/Router(R)), and the OnNet(R) and
OnWeb(TM) family (OnNet Host, OnNet Host Suite, OnNet for Windows Terminal
Server and OnWeb). The Company's visual connectivity products add value to its
PC connectivity product offerings and also target new market segments. Current
products include SupportNow(TM) and OpSession(TM), software tools that help
reduce the length of support phone calls from end-users.
THE FOLLOWING DISCUSSION CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. SUCH
FORWARD-LOOKING STATEMENTS INCLUDE, AMONG OTHERS, STATEMENTS REGARDING THE
COMPANY'S EXPECTATION THAT INDIRECT SALES WILL GROW AS A PERCENTAGE OF BOTH
DOMESTIC AND TOTAL REVENUES AND THE COMPANY'S EXPECTATION THAT IT WILL CONTINUE
TO TARGET AND EXPAND ITS MARKETING AND SALES EFFORTS IN MAJOR EUROPEAN AND ASIAN
MARKETS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
BELOW AND IN ITEM 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS," INCLUDING THOSE DISCUSSED UNDER THE
HEADING "FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION."
INDUSTRY BACKGROUND
Three important industry trends have had strong influence on the Company's
business strategy during the past two years: (i) the continuing development of
the Internet, intranets and extranets as mission-critical business applications
in large companies, (ii) an increased desire on the part of corporations to make
information stored in mainframes and midrange computers ("legacy" systems)
broadly accessible and (iii) the continued mobilization of users of personal
computers on a global basis.
The Company uses the term "internetworking" to describe the technology of
global connectivity. Internetworking had its origins in the Internet, a
worldwide "network of networks" which allows communication between different
organizations and locations, each with its own individual network of computers.
With the rapid development of the Internet, the breadth of the connectivity
industry has quickly expanded beyond proprietary-based solutions to Web-based
technologies and other open protocol solutions. The application of this same
internetworking technology within a company on its own computer networks is
known as an
1
3
"intranet" to distinguish it from the larger public Internet. When companies use
internetworking technology for connecting to outside customers and suppliers,
it's known as an "extranet." An extranet is a network upon which all users are
known and authenticated as opposed to the Internet where the identities of users
are anonymous. Importantly, internetworking is comprised of many different
applications which must communicate with one another, each according to its
function, and which must follow certain standards or conventions which ensure
interoperability.
The personal computer has continued to grow in importance as a tool for
facilitating communications, information sharing and group productivity in large
companies. As professional workers have become more mobile, there is an
accelerated effort to connect personal computers easily and reliably to
corporate networks to improve communications and organizational productivity. As
a result, the personal computer has become an important tool to connect workers
to shared repositories of information and to other people, regardless of
location, network or type of computer. Internetworking also facilitates
activities such as mobile computing by allowing users to use and to access more
effectively all of a company's computer systems from a remote location within
the confines of an organization's security and access control policies.
The specific tasks facilitated by internetworking are numerous and include
basic functions such as file transfer and file sharing capabilities, remote data
access, login to remote computers and information publishing. Within
organizations, PCs must connect not only to other PCs via LANs (Local Area
Networks), but also to workstations, servers, minicomputers and mainframes, many
of which may run different operating system software and connect to different
physical networks. In addition, more companies are seeking ways to link their
computer systems directly with those of vendors, customers and other business
partners to enhance the flow of information and reduce expenses.
For a network to function properly, all connected devices must follow rules
or "protocols" that govern access to the network and communication with other
devices. "TCP/IP" (Transmission Control Protocol/ Internet Protocol) is the name
of the data communications protocol family that has become the de facto
networking standard application because it is an open (non-proprietary) protocol
capable of linking disparate environments. The Company was one of the first
software vendors to deliver the TCP/IP protocol and related applications for the
Microsoft Windows platform. Selling primarily to the business user, NetManage
has promoted standards based on its implementation of TCP/IP that have been
adopted by the industry at large. The most notable example is the Windows
Sockets, or "WinSock," interface, which is used today by a wide range of Windows
internetworking software vendors including Microsoft.
The Company believes that the open and interoperable characteristics of
internetworking technology, the use of intranets and the software that enables
them will continue to grow within organizations. The software required to
implement an internetworking solution includes applications for the desktop, the
software which transports information over the wires, the servers at the other
end and management support and development tools to create and administer a
network of this type. Additionally, an easy-to-use, intuitive interface can
extend the use of these software components to a non-technical audience and
facilitates adoption by such an audience.
The Company's vision is to provide internetworking connectivity products
that greatly improve the communication between personal computers, host
computers and legacy systems, regardless of where the PCs are located, and to
deliver products and services that provide an easy to use, standards-based
infrastructure to support businesses in running more efficiently, thereby
bringing personal computers together with corporate host systems and connecting
both to the Internet. As the Company continues to deliver on its vision,
personal computer users will be able to access corporate data and information
efficiently and easily.
PRODUCTS AND TECHNOLOGY
The Company's comprehensive suite of products provides organizations with
cost-effective solutions for connecting people, their computers and their
businesses. The Company's products extend the functionality of these
organizations' technology investments by providing essential services that are
not included in desktop and network operating systems. The result is streamlined
communication, reductions in the total cost of ownership and increased
productivity throughout an organization.
2
4
The Company has been a long-time proponent of industry standards and it
pursues partnerships and alliances with key industry players. In addition to
promoting technological progress, these alliances help strengthen the Company's
market insight and lead to improved customer solutions with greater value. Some
of the Company's strategic partners include Microsoft, Intel Corporation
("Intel"), IBM and AT&T. All NetManage products are developed around the
following:
Ease of Use -- The Company's goal is to create applications for
non-technical users. The Company's products are designed to be set up on
any personal computer in a few minutes and to determine with minimum user
intervention, the appropriate settings and installation parameters for each
PC's configuration and network. For many corporate users, the cost of
training, installation and support can exceed software acquisition costs.
Ease of use can reduce such costs. Moreover, ease of use increases product
utilization, thereby enhancing product value to the customer. Thus, by
reducing costs and enhancing value, the benefit of ease of use is
significant to the Company's target market.
Manageability -- NetManage offers an integrated suite of applications,
improving network manageability for system administrators. For example,
customers do not have to buy terminal emulation from one vendor and file
transfer from another, each with its own setup, user interface and feature
set. Client applications are compatible with custom intranet applications
built using NetManage developer toolkits. The common characteristics of the
product suite tend to increase user satisfaction and product utilization. A
well-integrated product lowers the cost of ownership and increases product
value to the customer.
Functionality -- The depth and completeness of the applications in
NetManage products are designed to compete with "best of class"
functionality from specialist vendors in each category. The value
proposition of NetManage's product offerings is enhanced by eliminating
multi-source product purchases with no compromise on advanced software
functionality. The economic proposition for the customer is enhanced by
purchasing software and service from a single vendor.
Supportability -- NetManage recognizes that its customers need to reduce
continually the cost-of-ownership associated with PC connectivity software.
Unlike competitors, who have focused solely on improved manageability to
reduce costs, NetManage has also invested in the development of unique
support tools. Products are designed with well-integrated support tools
that reduce the time required to resolve software problems and reduce
downtime, significantly enhancing the value of NetManage's product
offerings to customers.
Adherence to Standards -- The foundation of the Internet is predicated upon
the notion that any client can talk to any server, and that all APIs
(Application Program Interfaces) and protocols are published as free open
standards. In the corporate computing environment, it is impossible to
guarantee a common set of software on every client and every server.
NetManage's commitment to open standards ensures that the plug-and-play
interoperability that has made the Internet successful extends to corporate
intranets as well.
The Company's best-known products include the Chameleon, NS/Portfolio, and
OnNet product families. The Company recently acquired FTP Software, Inc.
("FTP"), a PC connectivity company, to expand and improve its offerings for
Web-based host connectivity products and secure access to corporate information
across TCP/IP networks for end users, and to deliver user-based management
features to enable centralized desktop administration. The Company's products
include:
Chameleon UNIX
Link97 Complete PC-to-UNIX connectivity, including PC NFS
(Network File System) file sharing, the most
comprehensive suite of Telnet terminal emulation for
TCP/IP and asynchronous connections and the
industry's first Web-enabled X Windows server.
Chameleon HostLink97 Complete PC-to-IBM mainframe and AS/400
connectivity -- including Web browser access and
simplified management.
Chameleon 3270LT IBM mainframe connectivity software for TCP/IP
networks.
3
5
InterDrive(R) and
InterDrive Gateway Client applications which provide network users with
access to printers, directories and file systems on
network servers, a server product allowing users to
share applications, information and devices as if
connected directly to a desktop, and a gateway
product linking standard Windows desktops to UNIX
file sharing systems.
NS/Portfolio
Enterprise Full-featured, manageable access to IBM mainframes
and AS/400 systems from Windows platforms.
NS/Portfolio
for Mainframes Comprehensive PC-to-IBM mainframe communications
solution for Windows platforms.
NS/Portfolio for
AS/400 Comprehensive PC-to-IBM AS/400 communications
solution for Windows platforms.
NS/Router Portfolio The industry-standard Windows-based APPC router
offering increased productivity, ease of
installation and configuration and enhanced security
for host-server data.
OnNet 16/OnNet 32/
OnNet Host Suite OnNet products provide end users with a full range
of applications designed to reach and share
information on corporate intranets and the Internet
and across legacy systems, and advanced terminal
emulation.
OnWeb Host OnWeb Host enables host access through any
Java-enabled Web browser. Deployment, upgrades and
support are handled centrally, permitting control
and audit of user-based host access. It includes the
OnWeb Application server, a Java servlet, that
delivers applets and works with the Web server to
manage and audit security and network activity.
OpSession Comprehensive real-time, interactive application and
document sharing software used in support, remote
training and demonstrations.
OpSession SDK Comprehensive software developer tool that enables
programmers to add real-time application and
workgroup sharing capability, using standard
Internet technology, to any Microsoft Windows
95/98/NT application
SupportNow Interactive, real-time, visual support solution that
brings the users' desktop to the support
representative and reduces the length of time spent
on a support incident. It provides independent
software vendors ("ISVs") a way to offer faster and
more effective technical support to their customers
via interactive sessions.
SupportNow Server Comprehensive real-time support server offering
SupportNow Call Queue Management, conferencing,
backend help desk integration, and firewall and
proxy services for OpSession and SupportNow
products.
Substantially all of the Company's net revenues have been derived from the
sale of products that provide internetworking applications for the Microsoft
Windows environment and are marketed primarily to Windows users. As a result,
sales 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. See "Factors that May
Affect Future Results and Financial Condition -- Product Development and
Competition" under Item 7 below.
The Company's competitors could seek to expand their product offerings by
designing and selling similar or new technology that could render the Company's
products obsolete or adversely affect sales of the Company's products. These
developments may adversely affect the Company's sales of its own products either
4
6
by directly affecting customer purchasing decisions or by making potential
customers delay their purchases of the Company's products. See "Competition"
below.
NetManage, Chameleon UNIXLink, Chameleon HostLink, OpSession, SupportNow,
NS/Portfolio, NS/ Router, the NetManage logo and the lizard logo are trademarks
or registered trademarks of NetManage, Inc. in the United States and other
countries. FTP Software, OnNet, OnWeb and InterDrive are trademarks or
registered trademarks of FTP Software, Inc. in the U.S. and other countries.
UNIX is a registered trademark in the U.S. and other countries, licensed
exclusively through X/Open Company Limited. AS/400 is a registered trademark in
the U.S. and other countries of International Business Machines Corporation. All
other trademarks are the property of their respective owners.
SALES AND MARKETING
The Company's products are designed to meet the needs of corporate
end-users, network administrators, system administrators and MIS (Management
Information Systems) managers. The Company, through its PC connectivity
products, targets three key connectivity market segments: connecting personal
computers to UNIX, midrange (including IBM AS/400) and mainframe systems. Visual
connectivity solutions extend NetManage's core connectivity strengths and are
designed to foster better one-to-one relationships with customers by adding the
element of human interaction to the Internet. The Company's visual connectivity
products and services improve customer support and augment the sales process for
the independent software vendor (ISV) and corporate marketplace.
The Company is organized to solve the critical network and internetworking
software application needs of corporations in a wide range of industries. From
education and government to finance and manufacturing, the Company's products
are being used to streamline communications throughout organizations. The
Company's products are used by more than 30,000 organizations, encompassing more
than 11 million users worldwide.
The Company's marketing strategy is to establish itself as the preferred
supplier of complete PC and visual connectivity solutions for corporations that
have built-in management and support features. It has a competitive advantage as
a "single-source" supplier for corporations. The Company's products are marketed
and sold in the United States and internationally by the Company's direct sales
force and authorized channel partners.
In the United States, the Company combines advertising and promotion with
direct sales through a telephone-based sales force, assisted by designated
personnel specifically assigned to the needs of major accounts. As part of its
continuing strategy to develop multiple distribution channels, the Company
expects to continue its use of indirect channels, such as resellers,
particularly value added resellers and systems integrators, distributors and
original equipment manufacturers, both in the U.S. and internationally. The
acquisition of FTP in August 1998, which has historically sold its products
through indirect channels to a greater extent than NetManage, has resulted in a
increase in sales through indirect sales channels in the latter half of 1998.
Indirect sales may grow as a percentage of revenues of both domestic and total
revenues, as a result of the acquisition of FTP or to increase market
penetration. Any material increase in the Company's indirect sales 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 resellers and
distributors who will be able to market the Company's products effectively and
will be qualified to provide timely and cost-effective customer support and
service. The Company ships products to resellers and distributors on a
purchase-order basis, and many of the Company's resellers and distributors carry
competing product lines. Therefore, there can be no assurance that any reseller
or distributor will continue to represent the Company's products, and the
inability to recruit or retain important resellers or distributors could
adversely affect the Company's results of operations. See "Factors That May
Affect Future Results and Financial Condition -- Marketing and Distribution"
under Item 7 below.
Internationally, the Company has sales offices in Belgium, France, Germany,
Israel, Italy, Japan, the Netherlands, Spain and the United Kingdom. The Company
also utilizes local distributors internationally.
5
7
The Company supports the sales activity of these sales offices and distributors
in target countries through localization of products and sales material, local
training and participation in local trade shows.
In 1998, 1997 and 1996, respectively the Company derived approximately 26%,
23% and 33% of net revenues from international sales, including export sales.
The Company believes that the potential international markets for its products
are substantial, based on the extent to which Windows and internetworking
products are used internationally. Accordingly, the Company localizes many of
its products for use in the native language of target countries. Further, the
Company has adapted many of its products to support computing standards that are
unique to these countries, such as the NEC PC in Japan. The Company intends to
continue to target major European and Asian countries for additional sales and
marketing activity and to expand the use of its local sales offices and Israel
subsidiary in the support of its international sales. For a summary of
international operations by geographic area, see Note 8 of the Notes to
Consolidated Financial Statements included herein. 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 international distributors will be able to meet effectively
that demand.
Risks inherent in the Company's international business activities generally
include unexpected changes in regulatory requirements, tariffs and other trade
barriers, costs and risks of localizing products for foreign countries, longer
accounts receivable payment cycles, difficulties in managing international
operations, currency fluctuations, potentially adverse tax consequences,
repatriation of earnings and the burdens of complying with a wide variety of
foreign laws. There can be no assurance that such factors will not have an
adverse effect on the Company's future international sales and, consequently, on
the Company's results of operations.
CUSTOMER SUPPORT
The Company's domestic support organization consists of an experienced
staff of engineers providing support by telephone from the Company's facilities
in California and Massachusetts. Both telephone support and regular update
releases of the Company's products are provided to customers who purchase an
annual maintenance agreement. The sales and the customer support organizations
at NetManage work together closely to provide customer satisfaction.
International customers are supported by Company personnel located in
various international sales offices as well as local distributors who are
trained by the Company.
RESEARCH AND DEVELOPMENT
The Company believes that its future success will depend on its ability to
enhance its existing products and to develop and introduce new products related
to PC connectivity. As of December 31, 1998, the Company had approximately 150
full time employees engaged in research and development for existing and
potential new products. The Company's research and development expenses for the
years ended December 31, 1998, 1997 and 1996 were $18.9 million, $20.7 million
and $27.9 million, respectively.
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. 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. Several key factors will contribute to the
continued growth of the Company's marketplace, including the continued migration
from 16- to 32-bit Microsoft Windows platforms, the proliferation of Microsoft
Windows NT client and server technology, the proliferation of multi-user
Microsoft Windows NT systems and the continued implementation of Web-based
access to corporate mainframe and midrange computer systems and information.
6
8
Any 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 results of operations. The failure to develop on a timely basis new
products and 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 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.
The Company competes directly with providers of Windows internetworking
applications, such as Hummingbird Communications, Ltd., Attachmate Corporation,
Wall Data, Inc., IBM, WRQ, Inc., Microsoft and Novell, as well as other major
computer and communications systems vendors, such as Sun Microsystems, Inc. It
is imperative that the Company's development efforts remain competitive in this
marketplace, particularly given that the market is rapidly evolving and subject
to rapid technological change. There is no assurance that the Company will be
successful in its efforts to do so.
Many of the Company's competitors have substantially greater financial,
technical, sales, marketing and other resources, as well as greater name
recognition and a larger customer base, than the Company. The market for the
Company's products is characterized by significant price competition, and the
Company anticipates that it will face increasing pricing pressures from current
competitors in the future. Moreover, given that there are low barriers to entry
into the software market and that the market is rapidly evolving and subject to
rapid technological change, the Company believes that competition will persist
and intensify in the future. Accordingly, there can be no assurance that the
Company will be able to provide products that compare favorably with the
products of the Company's competitors or that competitive pressures will not
require the Company to reduce its prices. During 1998, the Company has continued
to experience price declines. Any further material reduction in the price of the
Company's products would negatively affect gross margins as a percentage of net
revenues and would require the Company to further increase software unit sales
in order to maintain net revenues at existing levels.
PROPRIETARY RIGHTS
The Company relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary rights. However, the basic TCP/IP protocols on which the
Company's products are based are non-proprietary and other companies have
developed their own versions. 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" or "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 for 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 or royalty from such third parties. There can
be no assurance that any of such claims would not result in protracted and
costly litigation or that additional claims will not be made in the future or
that the Company will not be required to enter into a costly license agreement.
7
9
The Company believes that, due to the rapid pace of innovation within its
industry, factors such as the technological and creative skills of its personnel
are more important to establishing and maintaining a technology leadership
position within the industry than are the various legal means of protecting its
technology.
EMPLOYEES
As of December 31, 1998, the Company had a total of 455 full-time
employees, of whom 183 were engaged in sales, marketing and technical support,
105 in general management, administration and finance, 161 in software
development and engineering and six in production. None of the Company's
employees are subject to a collective bargaining agreement, and the Company has
not experienced any work stoppage.
The majority of the Company's employee workforce is located in the
extremely competitive employment markets of the Silicon Valley and Irvine in
California, North Andover, Massachusetts and Haifa, Israel. During 1998, the
Company experienced high attrition at all levels and across all functions of the
Company. The attrition experienced by the Company was attributable to various
factors including, among others, industry-wide demand exceeding supply for
experienced engineering and sales professionals and the effects of the Company's
1997 and 1998 restructurings and acquisitions. Managing employee attrition,
integrating acquired operations and products and expanding both the geographic
area of its customer base and operations have resulted in substantial demands on
the Company's management resources. The Company's future operating results will
be dependent in part on its ability to attract and retain its employees and to
train and manage its management and employee base. There can be no assurance
that the Company will be able to manage such challenges successfully. See
"Factors That May Affect Future Results and Financial Condition -- Changes in
Personnel" under Item 7 below.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of March 15, 1999
are as follows:
NAME AGE POSITION
---- --- --------
Zvi Alon................... 47 Chairman of the Board, President and Chief
Executive Officer
Gary R. Anderson........... 52 Chief Financial Officer, Senior Vice
President, Finance and Secretary
Richard French............. 44 Senior Vice President, General Manager of
Emerging Technology
D. Patrick Linehan......... 51 Senior Vice President, General Manager of PC
Connectivity
Peter R. Havart-Simkin..... 46 Senior Vice President of Worldwide Marketing
Zvi Alon is the founder of the Company and has served as its Chairman of
the Board, President and Chief Executive Officer since the Company's formation.
From 1986 to 1989, Mr. Alon was the President of Halley Systems, a manufacturer
of networking equipment including bridges and routers. He also has served as
Manager, Standard Product Line at Sytek, Inc., a networking company, and Manager
of the Strategic Business Group for Architecture, Graphics and Data
Communications at Intel Corporation, a semiconductor manufacturer. Mr. Alon
received a B.S. degree in electrical engineering from the Technion-Israel
Institute of Technology in Haifa, Israel. Mr. Alon is the son-in-law of Mr. Uzia
Galil, a director of the Company.
Gary R. Anderson has served as Senior Vice President, Finance and Chief
Financial Officer since December 1997 when he joined the Company. From September
1996 to July 1997, Mr. Anderson was Chief Financial Officer and Executive Vice
President of NetSource Communications, a telecommunications and telemanagement
services provider, and from April 1995 to April 1996 he was Chief Financial
Officer and Vice President of Air Net Communications, a telecommunications
hardware developer. Mr. Anderson also served as Senior Vice President and Chief
Financial Officer of WYSE Technology, Inc., a hardware manufacturer, from June
1989 to January 1995. Mr. Anderson is a Certified Public Accountant.
8
10
Richard French joined NetManage in December 1998 and became Senior Vice
President and General Manager of Emerging Technology in January 1999. Mr. French
brings to NetManage more than 23 years of experience in the high technology
industry, most recently as President and CEO of the San Francisco-based start-up
Infoscape, Inc. From 1994 to 1998, Mr. French served in several executive
positions at Oracle Corporation. Most recently he served as Vice President of
Oracle's Enterprise Platforms Division, where he managed the top five product
platform divisions. From 1989 to 1993, Mr. French held various senior management
positions for the leading European computer vendor, Groupe Bull, most recently
as Vice President, Software Business. Mr. French received a B.S. degree in
mathematics from the University of Waterloo in Canada.
D. Patrick Linehan joined the Company in July 1997 as Senior Vice
President, General Manager of PC Connectivity Products. Prior to joining the
Company, he served as President and Chief Executive Officer of NetSoft, a
software development company, since May 1996. From January 1995 to May 1996, Mr.
Linehan was President and Chief Executive Officer of MiraLink Corporation, a
hardware manufacturer and software developer. Previously, he was Chief Operating
Officer at Starbase Corporation, a software developer, from October 1993 to
January 1995 and President and Chief Executive Officer of Castelle, Inc., a
networking hardware manufacturer, from July 1991 to October 1993. Mr. Linehan
received a B.A. degree in business administration from the University of
Washington in Seattle.
Peter R. Havart-Simkin joined the Company in August 1998 and became Senior
Vice President of Marketing in January 1999. Mr. Havart-Simkin came to the
Company from FTP, where he had served as Chief Technology Officer since July
1996, when FTP acquired Firefox Communications Inc. ("Firefox"), a networking
software company. Prior to joining FTP, Mr. Havart-Simkin served with Firefox as
Vice President and Chief Technical Officer from January 1994 to July 1996 and as
Vice President of Marketing and Product Strategy from 1989 until January 1994.
One of the founders of Firefox, Mr. Havart-Simkin also served as a director of
Firefox from 1989 to February 1995. Before that time, Mr. Havart-Simkin held
sales and marketing positions with a number of hardware and software companies
over a 20-year period.
ITEM 2 -- PROPERTIES.
In the United States, the Company's sales, marketing, technical support,
administration, product development and support functions occupy an aggregate of
approximately 70,000 square feet of facilities comprised of one building located
in Cupertino, California and one building in Irvine, California. The Company
also leases approximately 110,000 square feet in North Andover, Massachusetts,
which is used for product development, sales and technical support, and 8,000
square feet in Vienna, Virginia which is used for sales.
Internationally, the Company leases approximately 32,000 square feet in
Haifa, Israel for the purpose of international sales, marketing and technical
support, administration, and product development. The Company also leases sales
office space in Belgium, France, Germany, Italy, Japan, the Netherlands, and the
United Kingdom.
ITEM 3 -- 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
9
11
granted without leave to amend the defendants' motion to dismiss the second
amended complaint in the Head federal action; plaintiffs have filed a notice of
appeal to the U.S. Court of Appeals for the Ninth Circuit. On February 2, 1999,
the federal court dismissed with prejudice the Beasley action pursuant to its
order in the Head action. The Company believes there is no merit to these cases
and intends to defend them vigorously.
On March 21, 1997, a securities class action complaint, Interactive Data
Systems, Inc., et al. v. NetManage, Inc., et al., No. CV764945, was filed in the
Superior Court of California, Santa Clara County, against the Company and
certain of its directors and officers. On June 19, 1997, one of the plaintiffs
in that action filed a securities class action complaint, Molinari v. NetManage,
Inc., et al., No. C-98-202-CRB, in the United States District Court for the
Northern District of California against the same defendants. Both complaints
allege that, between April 18, 1996 and July 18, 1996, the defendants made false
or misleading statements of material fact about the Company's prospects. The
state court complaint asserts claims under California state law; the federal
complaint asserts claims under the federal securities laws. Both complaints seek
an unspecified amount of damages. The federal court certified the purported
class. On February 26, 1998, the state court entered judgment in favor of the
Company in the state case. Plaintiffs have filed a notice of appeal as to the
Company and have indicated that they will file an amended complaint as to the
individual defendants. On December 30, 1998, the federal court granted without
leave to amend the defendants' motion to dismiss the complaint in the Molinari
case. Plaintiffs have filed a notice of appeal to the U.S. Court of Appeals for
the Ninth Circuit. The Company believes there is no merit to these cases and
intends to defend these cases vigorously.
On October 10, 1997, a shareholder derivative action was filed in the
United States District Court for the Northern District of California against
nine present and former officers and directors of the Company. Sucher v. Alon et
al., No. C-98-203-CRB. The complaint alleged that the defendants violated
various fiduciary duties to the Company; the Company is named as a nominal
defendant. The complaint was predicated on the factual allegations contained in
the Head and Molinari class action complaints, and sought an unspecified amount
of damages. On November 6, 1998, the court dismissed the complaint without leave
to amend on the grounds that plaintiffs had failed to make a pre-litigation
demand on the Company's board of directors. Plaintiff have filed a notice of
appeal to the U.S. Court of Appeals for the Ninth Circuit.
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 May 7, 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 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
10
12
the court of appeals as of March 23, 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 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 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is traded on the Nasdaq National Market under
the symbol NETM. As of February 26, 1999, there were 1,070 stockholders of
record and approximately 13,050 beneficial owners of the Company's common stock.
The high and low closing sales prices of the Company's common stock as
reported on the Nasdaq National Market for each quarter of 1998 and 1997 are as
follows:
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
1998
High..................................... $4.59 $4.16 $3.25 $3.00
Low...................................... $2.59 $2.66 $0.97 $0.97
1997
High..................................... $6.47 $3.75 $4.28 $4.94
Low...................................... $2.78 $2.53 $2.75 $2.19
The Company has not paid cash dividends on its common stock and does not
intend to pay any cash dividends in the foreseeable future.
11
13
ITEM 6 -- SELECTED CONSOLIDATED FINANCIAL DATA.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net revenues........................ $ 71,727 $ 61,524 $104,596 $125,446 $ 71,466
Income (loss) from operations(1).... $(21,817) $(42,074) $(13,653) $ 29,596 $ 26,619
Net income (loss)................... $ (9,968) $(33,755) $ (5,705) $ 22,297 $ 17,815
Net income (loss) per share,
diluted(2)........................ $ (0.19) $ (0.78) $ (0.13) $ 0.52 $ 0.43
Weighted average common shares,
diluted........................... 53,205 43,385 42,341 42,955 41,103
BALANCE SHEET DATA:
Working capital..................... $ 98,113 $ 55,542 $ 71,668 $ 83,738 $ 64,091
Total assets........................ $201,753 $119,593 $152,529 $154,471 $116,358
Total stockholders' equity.......... $159,160 $ 96,087 $129,291 $129,397 $ 99,306
- ---------------
(1) Loss from operations includes write-offs of in-process research and
development of $9.5 million, $20.6 million and $13.4 million for the years
ended December 31, 1998, 1997 and 1996, respectively.
(2) Net income (loss) per share has been restated for all periods presented in
accordance with SFAS No. 128. See Note 2 of the accompanying Notes to
Consolidated Financial Statements.
12
14
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THIS ANNUAL REPORT ON FORM 10-K 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 ON 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).
With the recent acquisition of FTP, the Company has enhanced its market
position and product offerings by becoming a supplier with a broader range of
software solutions spanning major market segments. The Company's full line of
products includes the Chameleon product family, the NS/Portfolio product family,
the OnNet Host and OnWeb Host product families and the InterDrive family of NFS
products. Its products are sold and serviced worldwide by the Company's direct
sales force, international subsidiaries and authorized channel partners.
On October 31, 1998, the Company's Board of Directors authorized the
purchase from time to time of up to four million shares of the Company's common
stock through open market purchases. During the fourth quarter of 1998, the
Company repurchased 2,028,700 shares of its common stock on the open market at
an average purchase price of $2.09 per share, at a total cost of approximately
$4.2 million.
13
15
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 of the restructuring actions
were completed by the end of 1998 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.
In December 1998, the Company sold its equity interest in NetVision Ltd.
("NetVision"), an Internet service provider in Israel, for $17 million, and
recognized a gain of $11.7 million.
In November 1997, the Company acquired all of the outstanding shares of
Relay Technology, Inc. ("Relay"), a privately-held company, for $4.2 million in
cash. Relay was primarily engaged in the development, marketing and support of
network connectivity, file transfer and terminal emulation software. The
acquisition was accounted for as a purchase. In connection with the acquisition,
net intangibles of approximately $5.8 million were acquired, of which $4.6
million was reflected as a charge to operations in the fourth quarter of 1997
for the write-off of acquired in-process research and development that had not
yet achieved technological feasibility and, in management's opinion, had no
probable alternative future use.
In July 1997, the Company acquired all of the outstanding shares of Network
Software Associates, Inc., a California corporation ("NSA"), for $26.0 million
in cash. NSA is a holding company for NetSoft, a privately-held company
specializing in the development, marketing and support of PC-to-host
connectivity software solutions. The acquisition was accounted for using the
purchase method of accounting and, accordingly, the results of NetSoft from the
acquisition date forward have been recorded in the Company's consolidated
financial statements. In connection with the acquisition, net intangibles of
approximately $18.6 million were acquired, of which $16.0 million was reflected
as a charge to operations in the third quarter of 1997 for the write-off of
acquired in-process research and development that had not yet achieved
technological feasibility and, in management's opinion, had no probable
alternative future use.
In the third quarter of 1997, the Company initiated a plan to restructure
its operations worldwide due to business conditions. The purpose of the plan was
intended to realign the Company to focus solely on its core competencies: UNIX,
AS/400, midrange and mainframe connectivity. In connection with the plan, the
Company recorded a $5.2 million charge to operating expenses in the third
quarter of 1997. As of December 31, 1998, the Company had completed these
restructuring activities and had incurred costs totaling approximately $5.2
million related to the restructuring.
In July 1996, the Company acquired all of the outstanding stock of Maximum
Information, Inc., a California corporation ("MaxInfo"), in exchange for
approximately 590,000 shares of the Company's common stock. This transaction was
accounted for as a pooling of interests during the third quarter of 1996. The
operations of MaxInfo, however, were not material to the Company's consolidated
results of operations and financial position and, therefore, the historical
financial statements have not been restated to reflect the
14
16
acquisition retroactively. Accordingly, the operations of MaxInfo from the date
of acquisition forward have been recorded in the Company's consolidated
financial statements.
RESULTS OF OPERATIONS
During the past year, the Company has taken several initiatives intended to
control costs and reduce operating expenses, including the discontinuance of
several low revenue generating products and the initiation of a restructuring
plan in the third quarter of 1998. The Company also focused on integrating the
technologies acquired as a result of its acquisitions of FTP, NetSoft and Relay
in August 1998, July 1997 and November 1997, respectively, with the Company's
product offerings. The Company continues to focus on the core competencies of
its two business groups, the Core Technology Business Unit ("Core") and the
Emerging Technology Business Unit ("Emerging"), each with dedicated development,
sales, marketing and support resources. Core products provide the technology to
make the connection between personal computers and large corporate computers
possible. These products leverage the strengths and popularity of the Internet
and offer features to improve network manageability. PC connectivity products
include the Company's strongest brands: the Chameleon family (Chameleon HostLink
97, Chameleon UNIX Link 97, Chameleon 3270LT), and the NS/Portfolio family
(NS/Portfolio Enterprise, NS/Portfolio for Mainframe, NS/Portfolio for AS/400,
NS/Router, OnNet Host and OnWeb Host). Visual connectivity products add value to
the PC connectivity product offerings and also target new market segments.
Current products include DemoNow, SupportNow and OpSession, real-time software
tools that help reduce the length of support phone calls from end-users.
For the year ended December 31, 1998 as compared to the prior year, the
Company experienced an increase in net revenues and a decrease in net loss. The
increase in net revenues is primarily attributable to the Company's expanded
product offerings as a result of the inclusion of sales of FTP's products from
the date of acquisition forward, the Company's 1997 acquisitions of NetSoft and
Relay, the release of UNIXLink/ HostLink 8.0 late in the second quarter of 1998
and the growth in sales for SupportNow. However, the Company continues to
experience pricing pressures on certain of its products. There can be no
assurance that revenues will increase at the same rate, or at all, in future
periods. See "Factors That May Affect Future Results and Financial
Condition -- Marketing and Distribution" below.
Because the Company generally ships software products within a short period
after receipt of an order, the Company does not have a material backlog of
unfilled orders, and revenues in any one quarter are substantially dependent on
orders booked in that quarter. The Company's operating expense levels are based
in part on the Company's expectations as to future revenues and to a large
extent are fixed. Operating expenses, excluding the write-off of in-process
research and development, have decreased in absolute dollars for the year ended
December 31, 1998 compared to 1997 as a result of the restructuring plans
initiated in the third quarters of 1998 and 1997 and the resulting reduction of
headcount and the closing and/or consolidation of facilities. Operating expenses
are expected to remain relatively constant throughout 1999 and 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.
15
17
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
YEAR ENDED
DECEMBER 31, CHANGE
------------------ ----------------
1998 1997 $ %
------ ------ ------ ------
(DOLLARS IN MILLIONS)
Net revenues:
License fees...................................... $ 55.1 $ 45.8 $ 9.3 20.3%
Services.......................................... 16.6 15.7 0.9 5.7%
------ ------ ------
Total net revenues........................ $ 71.7 $ 61.5 $ 10.2 16.5%
As a percentage of net revenues:
License fees...................................... 76.8% 74.4%
Services.......................................... 23.2% 25.6%
------ ------
Total net revenues........................ 100.0% 100.0%
Gross margin........................................ $ 68.3 $ 57.4 $ 10.9 (19.0)%
As a percentage of net revenues................... 95.2% 93.3%
Research and development............................ $ 18.9 $ 20.7 $ (1.8) (8.7)%
As a percentage of net revenues................... 26.4% 33.6%
Sales and marketing................................. $ 39.5 $ 41.5 $ (2.0) (4.8)%
As a percentage of net revenues................... 55.1% 67.5%
General and administrative.......................... $ 12.4 $ 10.4 $ 2.0 19.2%
As a percentage of net revenues................... 17.3% 16.9%
Write-off of in-process
research and development.......................... $ 9.5 $ 20.6 $(11.1) (53.9)%
As a percentage of net revenues................... 13.2% 33.6%
Restructuring charge................................ $ 7.0 $ 5.2 $ 1.8 34.6%
As a percentage of net revenues................... 9.7% 8.4%
Interest income..................................... $ 3.5 $ 4.6 $ (1.1) (23.9)%
As a percentage of net revenues................... 4.9% 7.4%
Equity in income (loss) of
unconsolidated affiliate.......................... $ 1.0 $ 1.1 $ (0.1) (9.1)%
As a percentage of net revenues................... 1.4% 1.8%
Unrealized gain on investment in
unconsolidated affiliate.......................... $ -- $ 2.2 $ (2.2) n/a
As a percentage of net revenues................... -- 3.5%
Gain on sale of investment in
unconsolidated affiliate.......................... $ 11.7 $ -- $ 11.7 n/a
As a percentage of net revenues................... 16.3% --
Provision (benefit) for income taxes................ $ 4.4 $ (0.5) $ 4.9 (980.0)%
Effective tax rate................................ n/a n/a
Net loss............................................ $(10.0) $(33.8) $ 23.8 70.4%
NET REVENUES
Historically, substantially all of the Company's net revenues have been
derived from software license fees. Service revenues have been primarily
attributable to maintenance agreements associated with product licenses.
License fees increased both in absolute dollars and as a percentage of
total net revenues during the year ended December 31, 1998 as compared to the
year ended December 31, 1997. The increase in license fees was primarily
attributable to the inclusion of FTP's revenues from the date of acquisition
forward, integration of
16
18
new products from the Company's 1997 acquisitions of NetSoft and Relay, the
release of UNIXLink/ HostLink 8.0 late in the second quarter of 1998 and growth
in product sales for SupportNow; this increase was partially offset by a decline
in sales of the Company's Chameleon products. The increase in service revenues
in absolute dollars for the year ended December 31, 1998 as compared to 1997
primarily reflects the growth in the customer base as a result of the
aforementioned increase in licenseS.
The Company has operations worldwide with sales offices located in the
United States, Europe, Israel and Japan. International revenues as a percentage
of total net revenues were approximately 26% and 23% for the years ended
December 31, 1998 and 1997, respectively. The increase in international revenues
as a percentage of total net revenues was due to the integration of FTP
products, particularly in Europe, with the Company's product lines in the
international marketplace. The Company continues to integrate the sales and
distribution efforts of the combined Company. There can be no assurance that
such integration will be completed expeditiously or successfully.
Software license fees are generally recognized as revenue upon shipment if
the fee is considered fixed and determinable, the arrangement does not include
significant customization of the software and collectibility is probable.
Allowances for returns and doubtful accounts are provided based on historical
rates of returns and write-offs, which have not been material to date. Certain
of the Company's sales to distributors are under agreements providing rights of
return and price protection on unsold merchandise. Accordingly, the Company
defers recognition of such sales until the merchandise is sold by the
distributor.
The Company provides ongoing maintenance and support to its customers,
generally under annual service agreements. Maintenance and support is comprised
of software updates for existing products and telephone support. Service
revenues are recognized on a pro-rata basis over the terms of such agreements.
Periodically, the Company has provided training and consulting services to
selected customers. Revenue from such services is recognized as the related
services are performed and has not been material to date. The Company does not
expect that revenues generated from such training and consulting services will
become materially significant in the future.
No customer accounted for more than 10% of net revenues during the years
ended December 31, 1998 and 1997.
GROSS MARGIN
Cost of revenues primarily includes royalties paid to third parties for
licensed software incorporated into the Company's products, costs associated
with product packaging, documentation and software duplication and the
amortization and write-down of purchased software. Gross margin, in absolute
dollars and as a percentage of net revenues, increased between the years ended
December 31, 1997 and 1998 primarily as a result of the change in the mix of
products sold and significant cost savings obtained from the outsourcing of
manufacturing activities beginning in the third quarter of 1998. Cost of service
revenues through December 31, 1998 has not been material and is not reported
separately.
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 of distribution, which carry lower margins. In 1999, FTP's
products, which are sold through lower margin indirect channels, will be
included in the Company's results for the entire year.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses consist primarily of salaries and
benefits, occupancy and travel expenses, and fees paid to outside consultants.
The decrease in R&D expenses in absolute dollars and as a percentage of total
net revenues for 1998 as compared to 1997 primarily reflects cost savings,
particularly in R&D salaries and benefits, associated with the reduction in
headcount resulting from the recent restructuring
17
19
plans announced in the third quarters of 1998 and 1997 as well as the Company's
continued efforts to control operating expenses.
The Company expects that R&D spending in absolute dollars will remain
relatively constant for 1999 and, as a percentage of 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 No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," under which the Company is
required to capitalize software development costs after technological
feasibility is established, which the Company defines as a working model and
further defines as a beta version of the software. The establishment of
technological feasibility and the ongoing assessment of the recoverability of
these costs requires considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future gross
product revenue, estimated economic life and changes in technology. Costs that
do not qualify for capitalization are charged to R&D expense when incurred. To
date, internal software development costs that were eligible for capitalization
have not been significant and the Company has charged all internal software
developments costs to R&D expense as incurred.
SALES AND MARKETING
Sales and marketing ("S&M") expenses consist primarily of salaries and
commissions of sales and marketing personnel, advertising and promotional
expenses and customer service and support costs. The decrease in S&M expenses in
absolute dollars and as a percentage of net revenues for the year ended December
31, 1998 as compared to the prior year primarily reflects declines in S&M
salaries and benefits related to employee attrition and the 1998 and 1997
restructurings discussed above and reduced advertising expenses, partially
offset by increased commissions expense due to the sales growth in 1998.
The Company believes that S&M expenses will increase significantly in
absolute dollars and as a percentage of net revenues during 1999 as the Company
launches new products which will be based on the integration of the technologies
of FTP with those of the Company, which 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 increased in absolute dollars
and as a percentage of sales for the year ended December 31, 1998 as compared to
the prior year due to an increase in G&A salary expense as a result of the
NetSoft and FTP acquisitions as well as increased legal expenses associated with
defending the lawsuits discussed in Note 5 of the accompanying Notes to
Consolidated Financial Statements. The Company has taken steps to address the
growth in G&A expenses through the restructuring plan announced in August 1998
and the Company believes that G&A expenses will decrease slightly in absolute
dollars and as a percentage of net revenues 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.
WRITE-OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT
As previously discussed, in connection with the acquisitions of all of the
outstanding shares of FTP, NSA and Relay during the third quarter of 1998 and
the third and fourth quarters of 1997, respectively, the Company acquired a
total of $28.1 million in 1998 and $24.4 million in 1997 of intangible assets
and purchased technology. Of this amount, $9.5 million in 1998 and $20.6 million
in 1997 were reflected as a charge to operations for the write-off of in-process
research and development that had not reached technological feasibility and, in
management's opinion, had no probable alternative future use. These charges were
reflected in the Company's Consolidated Statements of Operations for the years
ended December 31, 1998 and 1997, respectively.
18
20
The Company allocates values to in-process research and development based
on an assessment of research and development projects. The values assigned to
those assets are limited to significant research projects for which
technological feasibility had not been established. This allocation represents
the estimated fair value based on the risk adjusted cash flow of incomplete
projects.
The value was determined by estimating the costs to develop the purchased
in-process technology into commercially viable products, estimating the cash
flows from the projects and discounting the net cash flows to their present
value.
The nature of the efforts to develop the acquired in-process technology
into commercially viable products principally relate to the completion of all
planning, designing, coding, and testing activities that are necessary to
establish that the products can be produced to meet the Company's design
requirements, including functions, features, and technical and economic
performance requirements.
RESTRUCTURING CHARGE
As discussed above, in the third quarters of 1998 and 1997, the Company
initiated plans to restructure its operations worldwide.
In August 1998, the Company announced and 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 and also assumed a
$9.7 million restructuring liability in connection with the acquisition of FTP
in the third quarter of 1998. The two restructuring plans included a reduction
in the Company's worldwide workforce, reduction of office space and closure of
domestic and international locations. 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 plan will require
cash expenditures of $13.7 million, which will be funded from internal
operations. As of December 31, 1998, the Company had incurred costs totaling
approximately $11.5 million relating to restructuring, requiring $9.9 million in
cash expenditures.
In the third quarter of 1997, the Company initiated a plan to restructure
its worldwide operations due to business conditions and a need to focus solely
on its core competencies. In connection with this plan, the Company recorded a
$5.2 million charge to operating expenses in the third quarter of 1997. This
plan included a reduction in workforce, closure of international locations and
elimination of certain unprofitable product lines. As of December 31, 1997, the
Company had incurred costs totaling approximately $4.3 million related to the
restructuring. The remaining restructuring actions were completed in the year
ended December 31, 1998 and required cash expenditures of approximately $0.9
million.
INTEREST INCOME
The decline in interest income for the year ended December 31, 1998 as
compared to the prior year is the result of a decrease in cash balances in 1998
prior to the acquisition of FTP. This was due to the cash used to fund
operations, cash requirements for restructuring activities and an adjustment to
interest income to convert FTP's investments from available for sale to held to
maturity. The reductions were partially offset by increases in the Company's
cash and investments following the acquisition of FTP and the sale of the
Company's 32% interest in NetVision.
EQUITY IN INCOME (LOSS) OF UNCONSOLIDATED AFFILIATE AND UNREALIZED GAIN ON
INVESTMENT IN UNCONSOLIDATED AFFILIATE
In December 1998, the Company sold its equity interest in NetVision for
$17.0 million. The Company's ownership interest prior to the sale was
approximately 32%. In connection with this transaction, the Company recorded a
gain on the sale of its NetVision stock of $11.7 million, which is included in
the accompanying Consolidated Statement of Operations for the year ended
December 31, 1998.
19
21
PROVISION FOR INCOME TAXES
The Company recorded a provision for income taxes for the year ended
December 31, 1998 of approximately $4.4 million, which consisted primarily of
foreign taxes for the gain realized on the sale of its interest in NetVision and
an increase to the valuation allowance against the Company's deferred tax asset.
For the year ended December 31, 1997, the Company recorded a tax benefit of
approximately $0.5 million.
At December 31, 1998, the Company had a net deferred tax asset of
approximately $5.8 million. Realization of the net deferred tax asset is
dependent on the Company generating sufficient future taxable income. Although
realization is not assured, management believes that it is more likely than not
that the net deferred tax asset will be realized. The amount of the net deferred
tax asset, however, could be reduced in the near term if actual future taxable
income differs from estimated amounts.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
YEAR ENDED
DECEMBER 31, CHANGE
------------------ ----------------
1997 1996 $ %
------ ------ ------ ------
(DOLLARS IN MILLIONS)
Net revenues:
License fees...................................... $ 45.8 $ 89.3 $(43.5) (48.7)%
Services.......................................... 15.7 15.3 0.4 2.6%
------ ------ ------
Total net revenues........................ $ 61.5 $104.6 $(43.1) (41.2)%
As a percentage of net revenues:
License fees................................... 74.4% 85.4%
Services....................................... 25.6% 14.6%
------ ------
Total net revenues........................ 100.0% 100.0%
Gross margin........................................ $ 57.4 $ 92.8 $(35.3) (38.1)%
As a percentage of net revenues................... 93.3% 88.7%
Research and development............................ $ 20.7 $ 27.9 $ (7.3) (26.0)%
As a percentage of net revenues................... 33.6% 26.7%
Sales and marketing................................. $ 41.5 $ 52.2 $(10.7) (20.5)%
As a percentage of net revenues................... 67.5% 49.9%
General and administrative.......................... $ 10.4 $ 11.2 $ (0.8) (6.9)%
As a percentage of net revenues................... 16.9% 10.7%
Write-off of in-process research and development.... $ 20.6 $ 13.4 $ 7.3 54.2%
As a percentage of net revenues................... 33.6% 12.8%
Restructuring charge................................ $ 5.2 $ -- $ 5.2 n/a
As a percentage of net revenues................... 8.4% --
Interest income..................................... $ 4.6 $ 5.6 $ (1.1) (18.9)%
As a percentage of net revenues................... 7.4% 5.4%
Equity in income (loss) of unconsolidated
affiliate......................................... $ 1.1 $ (1.0) $ 2.2 (213.9)%
As a percentage of net revenues................... 1.8% 1.0%
Unrealized gain on investment in unconsolidated
affiliate......................................... $ 2.2 $ -- $ 2.2 n/a
As a percentage of net revenues................... 3.5% --
Benefit for income taxes............................ $ (0.5) $ (3.3) $ 2.9 (86.2)%
Effective tax rate................................ n/a n/a
Net loss............................................ $(33.8) $ (5.7) $(30.2) 491.7%
NET REVENUES
License fees decreased substantially both in absolute dollars and as a
percentage of total net revenues during the year ended December 31, 1997 as
compared to 1996. The decline in license fees was primarily
20
22
attributable to increased competition and heightened pricing pressures and the
Company's lack of success in marketing and selling its products, particularly in
the international marketplace. Further, the timing of the NetSoft and Relay
acquisitions and the release of the Company's Chameleon HostLink 97 product
prevented these events from contributing significantly to revenues during the
year ended December 31, 1997. The increase in service revenues as a percentage
of total net revenues for the year ended December 31, 1997 as compared to 1996
primarily reflects the decline in the total net revenues base as a result of the
aforementioned decline in license fee revenues.
International revenues as a percentage of total net revenues were
approximately 23% and 33% for the years ended December 31, 1997 and 1996,
respectively. The decline in international revenues as a percentage of total net
revenues was due largely to the Company's lack of success in marketing and
selling its products in 1997, particularly in Europe and Japan, the latter of
which accounted for the majority of the Company's international revenues during
1996.
No customer accounted for more than 10% of net revenues during the years
ended December 31, 1997 and 1996.
GROSS MARGIN
Gross margin, as a percentage of net revenues, increased between the years
ended December 31, 1996 and 1997 primarily as a result of decreased packaging
and documentation costs as well as the inclusion of a charge in 1996 of $2.7
million for the amortization and write-down of purchased software. The write-off
of purchased software primarily resulted from the Company's decision during the
fourth quarter of 1996 to discontinue its ChameleonNFS for Mac OS and Xoftware
for Mac OS product lines. Amounts incurred for the amortization and write-down
of purchased software in 1997 were immaterial. Cost of service revenues through
December 31, 1997 was not material and was not reported separately.
RESEARCH AND DEVELOPMENT
The decrease in R&D expenses in absolute dollars for the year ended
December 31, 1997 as compared to the prior year is primarily the result of cost
savings, particularly R&D salaries and benefits, associated with employee
attrition during 1997 and the previously discussed 1997 restructuring. The
decline in the total net revenues base resulted in the increase in R&D expenses
as a percentage of net revenues for the year ended December 31, 1997 as compared
to 1996.
SALES AND MARKETING
The decrease in S&M expenses in absolute dollars for the year ended
December 31, 1997 as compared to the prior year primarily reflects cost savings
related to employee attrition during 1997 and the 1997 restructuring and the
resulting declines in S&M salaries and benefits, as well as a decline in
advertising in 1997 as the Company re-evaluated its marketing and selling
strategies. As a percentage of total net revenues for the year ended December
31, 1997 as compared to 1996, the increase in S&M expenses was attributable to
the decreased total net revenues base.
GENERAL AND ADMINISTRATIVE
G&A expenses decreased in absolute dollars for the year ended December 31,
1997 as compared to the prior year due to cost savings related to employee
attrition during 1997 and the 1997 restructuring. As a percentage of total net
revenues for the year ended December 31, 1997 as compared to 1996, the increase
in G&A expenses was attributable to the decreased total net revenues base in
1997.
WRITE-OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the acquisitions of NetSoft and Relay during the third
and fourth quarters of 1997, respectively, the Company acquired a total of $24.4
million of intangible assets. Of this amount, $20.6 million was reflected as a
charge to operations for the write-off of in-process research and development
that had not
21
23
reached technological feasibility and, in management's opinion, had no probable
alternative future use. This charge is reflected in the Company's Consolidated
Statement of Operations for the year ended December 31, 1997.
During the fourth quarter of 1996, the Company purchased technology from
Applicom Software Industries (1990) Ltd. and U.S. Computer Software, Inc. In
management's opinion, neither of these purchased technologies had reached
technological feasibility nor had a probable alternative future use.
Accordingly, these technology purchases, totaling approximately $13.4 million,
were deemed to be in-process research and development and were charged to
operations for the year ended December 31, 1996.
RESTRUCTURING CHARGE
As discussed above, in the third quarter of 1997, the Company initiated a
plan to restructure its operations worldwide. In connection with this plan, a
restructuring charge of $5.2 million was recorded in the Company's Consolidated
Statement of Operations for the year ended December 31, 1997. The restructuring
charge included approximately $1.8 million of employee-related expenses for
employee terminations, approximately $2.4 million for the write-off of excess
equipment and facilities related expenses associated with the consolidation of
operations and approximately $1.0 million for the write-off of intangible assets
related to certain unprofitable products. The restructuring plan included the
termination of employees worldwide and the reduction in worldwide office space,
primarily for the purpose of consolidating certain domestic technical support
and engineering locations. No such charges were incurred for the year ended
December 31, 1996.
INTEREST INCOME
The decline in interest income for the year ended December 31, 1997 as
compared to the same period of the prior year is primarily the result of a
decrease in aggregate cash and investments from $103.3 million at December 31,
1996 to $69.3 million at December 31, 1997. The increase in interest income as a
percentage of total net revenues for the year ended December 31, 1997 as
compared to 1996 is attributable to the decreased total net revenues base in
1997.
EQUITY IN INCOME (LOSS) OF UNCONSOLIDATED AFFILIATE AND UNREALIZED GAIN ON
INVESTMENT IN UNCONSOLIDATED AFFILIATE
In December 1997, NetVision issued an additional 800,000 preferred shares
which were sold to Tevel Israel International Communications, Ltd ("Tevel"), an
unrelated party, for $10.0 million cash in exchange for a one-third interest in
NetVision. As a result of the issuance and sale of these shares by NetVision,
the Company's ownership interest in NetVision decreased from 50% to
approximately 32%. In connection with this transaction, the Company recorded an
unrealized gain on the sale of stock by NetVision of $2.2 million, which is
included in the accompanying Consolidated Statement of Operations for the year
ended December 31, 1997.
BENEFIT FOR INCOME TAXES
The Company recorded a benefit for income taxes for the years ended
December 31, 1997 and 1996 of approximately $0.5 million and $3.3 million,
respectively, on a pre-tax loss of $34.2 million and $9.0 million, respectively.
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.
22
24
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.
The table below presents the carrying value, market value and related
weighted average interest rates for the Company's investment portfolio as of
December 31, 1998. All investments mature, by policy, in four years or less.
CARRYING MARKET AVERAGE
VALUE VALUE INTEREST RATE
-------- ------ -------------
(IN MILLIONS, EXCEPT FOR
AVERAGE INTEREST RATES)
Investment Securities:
Cash equivalents -- fixed rate..................... $ 6.4 $ 6.4 5.39%
Short-term investments -- fixed rate............... 62.5 62.5 5.24%
Long-term investments -- fixed rate................ 33.6 33.9 5.93%
------ ------
Total investment securities..................... 102.5 102.8 5.48%
Money market funds -- variable rate................ 7.1 7.1 5.02%
------ ------
Total interest bearing instruments......... $109.6 $109.9 5.45%
====== ======
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, 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. 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.
The table below provides information as of December 31, 1998 about the
Company's forward contracts. The information is provided in U.S. dollar
equivalent amounts. The table presents the notional amount (at contract exchange
rates) and the contractual foreign currency exchange rates. These forward
contracts mature in less than 30 days.
NOTIONAL CONTRACT
AMOUNT RATE
--------- ---------
(IN THOUSANDS, EXCEPT
FOR AVERAGE
CONTRACT RATES)
Forward contracts:
British pounds sterling................................. $ 700 0.59
German deutschemarks.................................... $1,200 1.66
French francs........................................... $ 275 5.56
Belgian francs.......................................... $ 750 34.25
The unrealized gain (loss) on the outstanding forward contracts at December
31, 1998 was immaterial to the Company's consolidated financial statements. Due
to the short-term nature of the forward contracts, the fair value at December
31, 1998 was negligible. The realized gain (loss) on these contracts as they
matured was not material to the consolidated operations of the Company.
23
25
LIQUIDITY AND CAPITAL RESOURCES
AS OF DECEMBER 31,
-------------------
1998 1997
-------- -------
(IN MILLIONS)
Cash and cash equivalents................................... $ 43.1 $12.7
Short-term investments...................................... $ 62.5 $36.8
Long-term investments....................................... $ 33.6 $19.7
Net cash (used in) operating activities..................... $ (8.6) $(5.8)
Net cash provided by (used in) investing activities......... $ 41.9 $(1.9)
Net cash provided by (used in) financing activities......... $ (2.6) $ 1.2
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 aggregate net proceeds to the
Company of approximately $72.5 million. The Company does not have a bank line of
credit or an equipment lease facility.
During the year ended December 31, 1998, the Company's aggregate cash and
cash equivalents, short-term investments and long-term investments increased
from $69.3 million to $139.2 million. This increase was due primarily to the
acquisition of FTP in August 1998 and the sale of the Company's interest in
NetVision in December 1998.
Net cash used in operating activities for the year ended December 31, 1998
reflects the Company's cash requirements of the operating loss, partially offset
by non-cash operating charges, such as depreciation and amortization, the
write-off of in-process research and development and the write-down of assets
related to the 1998 restructuring.
The Company's principal investing activities to date have been the purchase
of short-term and long-term investments and business acquisitions. Additionally,
during 1998 the Company sold its investment in NetVision, generating cash
proceeds of $17 million. The Company does not have any specific commitments with
regard to future capital expenditures.
Net cash used in financing activities in 1998 reflects the repurchase of
shares of the Company's common stock for $4.2 million in the open market under
the repurchase program described below, partially offset by proceeds from the
sale of common stock under the Company's employee stock purchase plan and stock
option plans.
At December 31, 1998, the Company had working capital of $98.1 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.
On October 26, 1998, the Company's Board of Directors authorized the
repurchase from time to time of up to four million shares of the Company's
common stock through open market purchases. During the fourth quarter of 1998,
the Company repurchased 2,028,700 shares of its common stock on the open market
at an average purchase price of $2.09 per share for a total cost of
approximately $4.2 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
24
26
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.
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.
25
27
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.
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 the latter
half of 1996 and throughout 1997 and 1998, the Company (and, prior to the
acquisition, FTP) experienced high attrition at all levels and across all
functions of the Company. The attrition experienced by the Company was
attributable to various factors including, among others, industry-wide demand
exceeding supply for experienced engineering and sales professionals, the
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
26
28
resources and increases the difficulty of hiring, training and assimilating new
employees. Any failure of the Company to retain and attract qualified employees
or to train or manage its management and employee base could have a material
adverse effect on its business, financial condition and results of operations.
PRODUCT DEVELOPMENT AND COMPETITION
The market for the Company's products is intensely competitive and
characterized by rapidly changing technology, evolving industry standards,
changes in customers' needs and frequent new product introductions. From time to
time over the past three years, many customers have delayed purchase decisions
due to the confusion in the marketplace relating to rapidly changing technology
and product introductions. To maintain or improve its position in this industry,
the Company must continue to successfully develop, introduce and market new
products and product enhancements on a timely and cost-effective basis. The
Company has experienced difficulty from time to time in developing and
introducing new products and enhancing existing products in a manner which
satisfies customer requirements and changing market demands. Any further failure
by the Company to anticipate or respond adequately to changes in technology and
customer preferences, or any significant delays in product development or
introduction, could have a material adverse effect on the Company's business,
financial condition and results of operations. The failure to develop on a
timely basis products or product enhancements incorporating new functionality
could cause customers to delay purchase of the Company's current products or
cause customers to purchase products from the Company's competitors; either
situation would adversely affect the Company's business, financial condition and
results of operations. There can be no assurance that the Company will be
successful in developing new products or enhancing its existing products on a
timely basis, or that such new products or product enhancements will achieve
market acceptance.
Because certain of the Company's products incorporate software and other
technologies developed and maintained by third parties, the Company is, to 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.
27
29
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 additional cost. In particular, Microsoft has embedded
a TCP/IP protocol suite in its Windows 95 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 introduction and use of the Euro will affect the
Company's foreign exchange and hedging activities, and may result in increased
fluctuations in foreign currency hedging results.
MARKETING AND DISTRIBUTION
Historically, the Company has relied significantly on its independent
distributors, systems integrators and value-added resellers for certain elements
of the marketing and distribution of its products. The agreements in place with
these 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
28
30
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 costs that are typically charged when selling through indirect
channels. There can be no assurance that the Company will be able to attract or
retain resellers and distributors who will be able to market the Company's
products effectively, will be qualified to provide timely and cost-effective
customer support and service or will continue to represent the Company's
products, and any inability on the part of the Company to recruit or retain
important resellers or distributors could adversely affect the Company's
business, financial condition or results of operations.
PROPRIETARY RIGHTS
The Company relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary rights. 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 26% of net revenues from international
sales during the year ended December 31, 1998. While the Company expects that
international sales will continue to account for a significant portion of its
net revenues, there can be no assurance that the Company will be able to
maintain or increase international market demand for the Company's products or
that the Company's distributors will be able to effectively meet that demand.
Risks inherent in the Company's international business activities generally
include unexpected changes in regulatory requirements, 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
29
31
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 and it could
suffer, be adversely affected, or be required to expend additional resources to
resolve those problems. See "Liquidity and Capital Resources -- Year 2000
Compliance" above. In addition, many of the Company's products are designed to
function with legacy systems, many of which may not be Year 2000 compliant.
Failures of these legacy systems to be Year 2000 compliant may reduce demand for
the Company's products and adversely affect the Company's business, financial
condition or results of operations. The Company is also relying on assurances
from suppliers that they and their products are prepared for the Year 2000.
However, there can be no assurance that statements from vendors are reliable,
since the Company has not independently investigated its vendors' assertions
about their products. Any failure to be Year 2000 compliant on the Company's
vendors or customers could adversely affect the Company's business, financial
condition or results of operations.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to or commerce
on the Internet. However, due to the increasing popularity and use of the
Internet, it is possible that various laws and regulations may be adopted with
respect to the Internet, covering issues such as user privacy, pricing and
characteristics and quality of products and services. The adoption of any such
laws or regulations may decrease the growth of the Internet, which could in turn
decrease the demand for the Company's products, increase the Company's cost of
doing business or otherwise have an adverse effect on its business, financial
condition or results of operations. Moreover, the applicability to the Internet
of existing laws governing issues such as property ownership, libel and personal
privacy is uncertain. Further, due to the encryption technology contained in
certain of the Company's products, such products are subject to U.S. export
controls. There can be no assurance that such export controls, either in their
current form or as may be subsequently enacted, will not limit the Company's
ability to distribute products outside of the United States or electronically.
While the Company takes precautions against unlawful exportation, there can be
no assurance that inadvertent violations will not occur, and the global nature
of the Internet makes it virtually impossible to effectively control the
distribution of the Company's products. In addition, future federal or state
legislation or regulation may further limit levels of encryption or
authentication technology. Any such export restriction, new legislation or
regulation or unlawful exportation could have a material adverse effect on the
Company's business, financial condition or results of operations.
LITIGATION
The Company and certain of its subsidiaries are currently parties to class
action lawsuits filed by holders or former holders of each company's common
stock. See Note 5 of the accompanying Notes to the Consolidated Financial
Statements. There can be no assurance that the Company or its subsidiaries will
be able to prevail in the lawsuits or that adverse outcomes in one or more of
these proceedings will not have a material adverse effect on the Company's
business, results of operations or financial condition.
QUARTERLY FINANCIAL INFORMATION
The following table sets forth unaudited quarterly financial information
for the Company's last eight quarters. This unaudited information has been
prepared on the same basis as the audited consolidated
30
32
financial statements and, in the opinion of management, includes all adjustments
(consisting only of normal recurring adjustments) necessary for the fair
presentation of the information for the periods presented.
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, those described above within "Factors That May
Affect Future Results and Financial Condition." The Company's future revenues
and results of operations could be subject to significant volatility and may
also be unpredictable due to shipment patterns typical of the software industry.
A significant percentage of the Company's revenues are generally recognized in
the third month of each quarter and tend to occur in the latter half of that
month. 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.
1997 1998
-------------------------------------- --------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- ------- ------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net revenues.................... $16,379 $12,701 $ 13,556 $18,888 $17,313 $14,540 $ 17,088 $22,785
Gross margin.................... 15,254 11,802 12,667 17,708 16,322 13,836 16,541 21,611
Income (loss) from
operations(1)................. (3,785) (6,198) (28,432) (3,659) (541) (3,686) (18,170) 572
Net income (loss)............... (2,739) (4,458) (26,902) 434 531 (2,704) (16,388) 8,568
Net income (loss) per share,
diluted....................... $ (0.06) $ (0.10) $ (0.62) $ (0.01) $ 0.01 $ (0.06) $ (0.29) $ 0.12
Weighted average common shares,
diluted....................... 43,182 43,328 43,454 44,057 43,903 44,158 56,591 69,000
Price range per common
share(2)...................... $ 2.78- $ 2.53- $ 2.75- $ 2.19- $ 2.59- $ 2.66- $ 0.97- $ 0.97-
$ 6.47 $ 3.75 $ 4.28 $ 4.94 $ 4.59 $ 4.16 $ 3.25 $ 3.00
- ---------------
(1) Loss from operations includes write-offs of in-process research and
development of $16.0 million, $4.6 million and $9.5 million for the quarters
ended September 30, 1997, December 31, 1997 and September 30, 1998,
respectively.
(2) The Company's common stock is traded on the Nasdaq National Market under the
symbol NETM. Price range per share is based on the quarterly high and low
closing prices for the Company's common stock as reported by Nasdaq. As of
February 26, 1999, there were 1,070 stockholders of record of the Company's
common stock.
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by Item 7A is incorporated by reference from the
section entitled "Disclosures about Market Risk" found above, under Item 7,
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations."
31
33
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Financial Statements:
Report of Independent Public Accountants.................. 33
Consolidated Balance Sheets at December 31, 1998 and
1997................................................... 34
Consolidated Statements of Operations --
Years ended December 31, 1998, 1997 and 1996........... 35
Consolidated Statements of Other Comprehensive Loss --
Years ended December 31, 1998, 1997 and 1996........... 36
Consolidated Statements of Stockholders' Equity --
Years ended December 31, 1998, 1997 and 1996........... 37
Consolidated Statements of Cash Flows --
Years ended December 31, 1998, 1997 and 1996........... 38
Notes to Consolidated Financial Statements................ 39
Financial Statement Schedules:
II Valuation and Qualifying Accounts...................... 59
All other schedules are omitted because they are not required or the
required information is shown in the accompanying consolidated financial
statements or notes thereto.
32
34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To NetManage, Inc.:
We have audited the accompanying consolidated balance sheets of
NetManage, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations, other
comprehensive loss, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of NetManage, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14(a) is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
January 26, 1999
33
35
NETMANAGE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
ASSETS --------------------
1998 1997
-------- --------
CURRENT ASSETS:
Cash and cash equivalents................................. $ 43,104 $ 12,706
Short-term investments.................................... 62,539 36,845
Accounts receivable, less allowances of $3,859 and $1,375,
respectively........................................... 19,234 13,408
Prepaid expenses and other current assets................. 15,695 15,726
-------- --------
Total current assets.............................. 140,572 78,685
-------- --------
PROPERTY AND EQUIPMENT, at cost:
Computer software and equipment........................... 10,117 13,010
Furniture and fixtures.................................... 4,877 5,512
Leasehold improvements.................................... 2,408 1,308
-------- --------
17,402 19,830
Less -- Accumulated depreciation.......................... (10,268) (10,999)
-------- --------
Net property and equipment............................. 7,134 8,831
-------- --------
LONG-TERM INVESTMENTS....................................... 33,606 19,734
GOODWILL AND OTHER INTANGIBLES, net......................... 18,971 3,293
OTHER ASSETS................................................ 1,470 9,050
-------- --------
$201,753 $119,593
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 4,444 $ 1,674
Accrued liabilities....................................... 12,372 5,185
Accrued payroll and payroll-related expenses.............. 4,938 4,804
Deferred revenue.......................................... 14,025 9,118
Income taxes payable...................................... 6,680 2,362
-------- --------
Total current liabilities......................... 42,459 23,143
-------- --------
LONG-TERM LIABILITIES....................................... 134 363
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value --
Authorized -- 125,000,000 shares
Issued -- 69,377,177 and 43,752,930 shares,
respectively
Outstanding -- 67,348,477 and 43,752,930 shares,
respectively.......................................... 693 438
Treasury stock, at cost -- 2,028,700 and zero shares,
respectively........................................... (4,246) --
Additional paid-in capital................................ 168,301 91,564
Retained earnings (accumulated deficit)................... (3,972) 5,996
Accumulated other comprehensive loss...................... (1,616) (1,911)
-------- --------
Total stockholders' equity........................ 159,160 96,087
-------- --------
$201,753 $119,593
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
34
36
NETMANAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
NET REVENUES:
License fees............................................. $ 55,114 $ 45,795 $ 89,334
Services................................................. 16,613 15,729 15,262
-------- -------- --------
Total net revenues............................... 71,727 61,524 104,596
COST OF REVENUES........................................... 3,416 4,093 11,837
-------- -------- --------
GROSS MARGIN............................................... 68,311 57,431 92,759
-------- -------- --------
OPERATING EXPENSES:
Research and development................................. 18,882 20,670 27,938
Sales and marketing...................................... 39,453 41,455 52,167
General and administrative............................... 12,445 10,428 11,198
Write-off of in-process research and development......... 9,500 20,643 13,384
Amortization of goodwill................................. 2,817 1,137 1,526
Restructuring charge..................................... 7,031 5,172 --
Acquisition costs........................................ -- -- 199
-------- -------- --------
Total operating expenses......................... 90,128 99,505 106,412
-------- -------- --------
LOSS FROM OPERATIONS....................................... (21,817) (42,074) (13,653)
INTEREST INCOME............................................ 3,474 4,562 5,625
EQUITY IN INCOME (LOSS) OF UNCONSOLIDATED
AFFILIATE................................................ 1,027 1,145 (1,005)
UNREALIZED GAIN ON INVESTMENT IN UNCONSOLIDATED
AFFILIATE................................................ -- 2,152 --
GAIN ON SALE OF INVESTMENT IN UNCONSOLIDATED AFFILIATE..... 11,748 -- --
-------- -------- --------
LOSS BEFORE INCOME TAXES................................... (5,568) (34,215) (9,033)
PROVISION (BENEFIT) FOR INCOME TAXES....................... 4,400 (460) (3,328)
-------- -------- --------
NET LOSS................................................... $ (9,968) $(33,755) $ (5,705)
======== ======== ========
NET LOSS PER SHARE:
Basic.................................................... $ (0.19) $ (0.78) $ (0.13)
Diluted.................................................. $ (0.19) $ (0.78) $ (0.13)
WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS:
Basic.................................................... 53,205 43,385 42,341
Diluted.................................................. 53,205 43,385 42,341
The accompanying notes are an integral part of these consolidated financial
statements.
35
37
NETMANAGE, INC.
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997 1996
------- -------- -------
Net loss.................................................... $(9,968) $(33,755) $(5,705)
Other comprehensive income (loss):
Foreign currency translation adjustments.................. 295 (827) (694)
------- -------- -------
Other comprehensive loss.................................... $(9,673) $(34,582) $(6,399)
======= ======== =======
See accompanying notes to the condensed consolidated financial statements.
36
38
NETMANAGE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
-------------------- PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS LOSS TOTAL
---------- ------- ---------- -------- ------------- --------
BALANCE, DECEMBER 31, 1995..... 41,660,332 $ 417 $ 83,520 $ 45,850 $ (390) $129,397
Sale of common stock under
employee stock purchase
plan......................... 226,124 2 1,868 - - 1,870
Exercise of stock options...... 666,399 7 2,831 - - 2,838
Income tax benefit from stock
option transactions.......... - - 642 - - 642
Pooling of interests with
Maximum Information, Inc..... 590,448 6 334 (394) - (54)
Issuance of common stock for
purchase of technology....... 121,997 1 999 - - 1,000
Repurchase of common stock from
employees for cash........... (116,950) (2) (1) - - (3)
Translation adjustment......... - - - - (694) (694)
Net loss....................... - - - (5,705) - (5,705)
---------- ------- -------- -------- ------- --------
BALANCE, DECEMBER 31, 1996..... 43,148,350 431 90,193 39,751 (1,084) 129,291
Sale of common stock under
employee stock purchase
plan......................... 343,142 4 785 - - 789
Exercise of stock options...... 272,035 3 437 - - 440
Income tax benefit from stock
option transactions.......... - - 149 - - 149
Repurchase of common stock from
employees for cash........... (10,597) - - - - -
Translation adjustment......... - - - - (827) (827)
Net loss....................... - - - (33,755) - (33,755)
---------- ------- -------- -------- ------- --------
BALANCE, DECEMBER 31, 1997..... 43,752,930 438 91,564 5,996 (1,911) 96,087
Sale of common stock under
employee stock purchase
plan......................... 519,698 5 964 - 969
Exercise of stock options...... 337,909 3 618 - 621
Common stock issued in
connection with FTP
acquisition.................. 24,766,640 247 74,042 - - 74,289
Issuance of NetManage options
in exchange for FTP
options...................... - - 1,113 - - 1,113
Repurchase of common stock for
cash......................... (2,028,700) (4,246) - - - (4,246)
Translation adjustment......... - - - - 295 295
Net loss....................... - - - (9,968) - (9,968)
---------- ------- -------- -------- ------- --------
BALANCE, DECEMBER 31, 1998..... 67,348,477 $(3,553) $168,301 $ (3,972) $(1,616) $159,160
========== ======= ======== ======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
37
39
NETMANAGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................. $ (9,968) $(33,755) $ (5,705)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization......................... 10,060 8,204 9,846
Provision for doubtful accounts and returns........... 378 268 886
Equity in (income) losses of unconsolidated
affiliate........................................... (1,027) (1,145) 1,005
Gain on sale of interest in unconsolidated
affiliate........................................... (11,748)
Write-off of in-process research and development...... 9,500 20,643 13,384
Write-down of assets related to restructure........... 1,511 1,831 --
Write-down of purchased technology to net realizable
value............................................... -- -- 1,248
Unrealized gain on investment in unconsolidated
affiliate........................................... -- (2,152) --
Changes in assets and liabilities, net of business
combinations:
Accounts receivable................................. (2,603) 6,688 5,611
Prepaid expenses and other current assets........... 6,763 (1,012) (6,201)
Other assets........................................ (5,252)
Accounts payable.................................... (1,228) (1,447) (2,689)
Accrued liabilities, payroll and payroll-related
expenses......................................... (5,935) (2,838) (330)
Deferred revenue.................................... 70 (4,034) (2,094)
Income taxes payable................................ 833 2,918 (1,268)
-------- -------- --------
Net cash provided by (used in) operating
activities..................................... (8,646) (5,831) 13,693
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments...................... (96,628) (27,395) (44,201)
Proceeds from maturities of short-term investments....... 95,586 36,320 45,045
Purchases of long-term investments....................... (37,915) (23,925) (32,841)
Proceeds from maturities of long-term investments........ 35,935 40,675 23,205
Proceeds from sale of investment in unconsolidated
affiliate............................................. 17,000 -- --
Purchases of property and equipment...................... (1,115) (326) (4,716)
Acquisition of businesses, net of cash acquired.......... 29,157 (26,651) (1,325)
Acquisition of in-process research and development....... -- -- (11,384)
Purchases of technology and other intangible assets...... -- (530) (2,668)
Investment in unconsolidated affiliate................... (33) (58) (1,929)
-------- -------- --------
Net cash provided by (used in) investing
activities..................................... 41,987 (1,890) (30,814)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net of issuance
costs................................................. 1,590 1,229 4,708
Repurchase of common stock............................... (4,246) -- (3)
-------- -------- --------
Net cash provided by (used in) financing
activities..................................... (2,656) 1,229 4,705
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................... (287) (285) (694)
-------- -------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS.................. 30,398 (6,777) (13,110)
CASH AND CASH EQUIVALENTS, beginning of year............... 12,706 19,483 32,593
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year..................... $ 43,104 $ 12,706 $ 19,483
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes.......................................... $ 71 $ 358 $ 2,852
The accompanying notes are an integral part of these consolidated financial
statements.
38
40
NETMANAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND ORGANIZATION:
NetManage, Inc. (the "Company") develops, markets and supports PC
connectivity software, offering Windows applications for connecting to UNIX,
AS/400 and mainframe host systems. The Company's mission is to provide global
connectivity products that greatly improve the communication between personal
computers and legacy systems regardless of where PCs are located. The Company
also provides remote access, application sharing and help desk technology in its
OpSession and SupportNow products and its newly introduced DemoNow Product.
Substantially all of the Company'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 the Company's products would be materially adversely affected by market
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 products
compatible with future Windows releases on a timely basis.
Additionally, 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.
To maintain or improve its position in this industry, the Company must continue
to enhance its current products and develop new products on a timely and
cost-effective basis. 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany accounts and transactions
have been eliminated. The Company's investment in NetVision, Ltd. ("NetVision")
was accounted for using the equity method prior to its sale in December 1998
(see Note 3).
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Foreign Currency Translation and Foreign Exchange Contracts
The functional currency of the Company's foreign subsidiaries is the local
currency. Gains and losses resulting from the translation of the foreign
subsidiaries' financial statements are reported as a separate component of
stockholders' equity. The Company enters into forward exchange contracts to
reduce the impact of foreign currency fluctuations on those balance sheet
accounts denominated in foreign currency, other than the entities' local
currency, that give rise to transaction gains or losses. The notional amount of
the forward contracts was approximately $2.9 million, $1.9 million and $2.9
million at December 31, 1998, 1997 and 1996, respectively. The 1998 contracts
expired on January 30, 1998. Gains and losses on foreign exchange contracts were
immaterial for the years ended December 31, 1998, 1997 and 1996.
39
41
NETMANAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue Recognition
During the quarter ended March 31, 1998, the Company adopted Statement of
Position ("SOP") 97-2, "Software Revenue Recognition," which provides guidance
on applying generally accepted accounting principles in recognizing revenue on
software transactions. The adoption of SOP 97-2 did not have a material impact
on the Company's consolidated financial statements for the year ended December
31, 1998.
License fees are earned under software license agreements to end-users and
resellers and are generally recognized as revenue upon shipment of the software
if collection of the resulting receivable is probable, the fee is fixed and
determinable and vendor-specific objective evidence exists to allocate the total
fee to all delivered and undelivered elements of the arrangement. The Company
offers its customers a 30-day right of return on sales and records an estimate
of such returns at the time of product delivery based on historical experience.
To date, such returns have been insignificant. Certain of the Company's sales
are made to domestic distributors under agreements allowing 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's international distributors generally do not have return rights and, as
such, the Company generally recognizes sales to international distributors upon
shipment, if all other revenue recognition criteria has been met.
Service revenues consist of fees for providing system updates for existing
software products, user documentation and technical support, generally under
annual service agreements, and are recognized ratably over the terms of such
agreements. If such services are included in the initial licensing fee, the
value of the services is unbundled and recognized ratably over the related
service period. The cost of service revenues is not material and is included in
cost of revenues in the accompanying Consolidated Statements of Operations.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Short-term and Long-term Investments
The Company accounts for its investments under the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Under SFAS No. 115, the Company's
investments are classified as held-to-maturity and are valued using the
amortized cost method. The Company's investments mature at various dates through
October 2002. Investments with a maturity of greater than one year from the
balance sheet date are classified as long-term investments. At December 31, 1998
and 1997, the fair value of the investments approximated amortized cost and, as
such, gross unrealized holding gains and losses were not material. The fair
value of the investments was determined based on quoted market prices at the
reporting dates for those instruments. The carrying value of the Company's
investments by major security type consisted of the following as of December 31,
1998 and 1997 (in thousands):
DESCRIPTION 1998 1997
----------- ------- -------
Municipal bonds.......................................... $23,938 $44,754
Auction rate securities.................................. 26,684 3,500
Corporate bonds.......................................... 20,687 4,313
Government securities.................................... 24,836 4,000
CDs/Bankers acceptance notes............................. -- 12
------- -------
$96,145 $56,579
======= =======
40
42
NETMANAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Property and Equipment
Property and equipment are recorded at cost. Betterments, renewals and
extraordinary repairs that extend the life of the asset are capitalized, other
repairs and maintenance are expensed. Depreciation is computed using the
straight-line method over the following estimated useful lives:
CLASSIFICATION LIFE
-------------- ----
Computer software and equipment................... 2 to 3 years
Furniture and fixtures............................ 5 years
Leasehold improvements............................ Shorter of the lease term or
the estimated useful life
Goodwill
Goodwill arising from the Company's acquisitions (see Note 3) is amortized
on a straight-line basis over two to seven years. Accumulated amortization was
approximately $5.9 million and $3.1 million at December 31, 1998 and 1997,
respectively.
Software Development Costs
Software development costs are accounted for in accordance with SFAS No.
86, "Accounting for of Computer Software to be Sold, Leased or Otherwise
Marketed," under which capitalization of software development costs begins upon
the establishment of technological feasibility of the product, which the Company
defines as the development of a working model and further defines as the
development of 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. Such costs
are reported at the lower of unamortized cost or net realizable value.
Amortization of purchased software is generally computed on a straight-line
basis over one to five years or, if less, the estimated remaining economic life
of the underlying products. To date, internal software development costs that
were eligible for capitalization have not been significant and the Company has
charged all software development costs to research and development as incurred.
For the years ended December 31, 1998, 1997 and 1996, approximately $.1
million, $.4 million and $2.7 million, respectively, is included in the
accompanying Consolidated Statements of Operations in cost of revenues for the
amortization and write-down to net realizable value of software purchased and
capitalized during 1996 and 1997. Prior to 1996, purchased software costs
eligible for capitalization had not been significant and the Company charged all
such costs to research and development as incurred.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash investments and trade
receivables. The Company has cash investment policies that limit the amount of
credit exposure to any one issuer and restrict placement of these investments to
issuers evaluated as credit worthy. Concentrations of credit risk with respect
to trade receivables are limited due to the large number of customers comprising
the Company's customer base and their dispersion across many different
industries and geographies.
Net Loss Per Share
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share." SFAS No.
128 requires companies to compute net loss per share under two different
methods, basic and diluted. Basic net loss per share data has been computed
using the weighted average number of shares of common stock outstanding
41
43
NETMANAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 years ended December 31, 1998, 1997 and 1996, 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 5,444,330, 3,613,521 and 4,270,780 were not included in the
computation of diluted earnings per common share because to do so would have
been antidilutive for the years ended December 31, 1998, 1997 and 1996,
respectively.
New Accounting Standards
During 1998, the Company adopted SFAS No. 130, "Comprehensive Income." SFAS
No. 130 requires companies to report a new, additional measure of income on the
income statement or to create a new financial statement that discloses the new
measure of income. "Comprehensive income" includes foreign currency translation
gains and losses and other unrealized gains and losses that have previously been
excluded from net income and reflected instead in stockholders' equity.
During 1998, the Company adopted SFAS No. 131, "Disclosures About Segments
of an enterprise and Related Information." SFAS 131 requires a new basis of
determining reportable business segments, i.e. the management approach. This
approach requires that business segment information used by management to assess
performance and manage company resources be the source for information
disclosure.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value and requires that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. SFAS No. 133 is effective for all fiscal years beginning after
June 15, 1998 and may be adopted as of the beginning of any fiscal quarter after
June 15, 1998. The Company plans to adopt SFAS No. 133 in the first quarter of
1999 and does not believe that its adoption will have a material effect on the
Company's financial statements.
In December 1998, the AICPA issued SOP 98-9, "Modification of 97-2,
Software Revenue Recognition, with respect to Certain Transactions." SOP 98-9
amends SOP 97-2 and extends the effective date for SOP 98-4 through fiscal years
beginning on or before March 15, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into in fiscal years beginning after March
15, 1999. The Company does not believe that the adoption of SOP 98-9 will have a
material impact on its financial condition or results of operations.
3. ACQUISITIONS AND OTHER INVESTMENTS:
On August 27, 1998, the Company acquired all of the outstanding shares of
common stock of FTP Software, Inc. ("FTP"). Each outstanding share of the common
stock of FTP, and each associated junior preferred stock purchase right, was
converted into 0.72767 of a share of the Company's common stock. Outstanding FTP
options were converted into options to purchase shares of the Company's common
stock at the same conversion rate, with appropriate corresponding changes to the
exercise price. As a result, 34,035,463 shares of FTP common stock outstanding
immediately prior to the merger were converted into approximately 24,766,640
shares of the Company's common stock and options to acquire approximately
5,587,528 shares of FTP common stock were assumed by the Company and converted
into options to purchase approximately 4,065,351 shares of the Company's common
stock. The total purchase price for the acquisition was approximately $78.3
million. The acquisition was accounted for using the purchase method of
accounting and, accordingly, the results of FTP from the date of acquisition
forward have been recorded in the Company's consolidated financial statements.
42
44
NETMANAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The aggregate purchase price for the acquisition of FTP is computed as
follows (in thousands):
Value of NetManage common stock issued..................... $74,042
Value of options assumed................................... 1,113
Acquisition costs.......................................... 3,157
-------
$78,312
=======
The purchase price is allocated as follows (in thousands):
Cash and investments...................................... $ 61,249
Other current assets...................................... 10,138
Equipment................................................. 5,838
Intangible assets......................................... 18,584
In-process research and development....................... 9,500
Current liabilities assumed, including FTP related
restructuring items..................................... (26,997)
--------
Net assets acquired..................................... $ 78,312
========
In connection with the acquisition of FTP, the Company allocated $9.5
million of the purchase price to incomplete research and development projects.
The Company used an independent third-party appraiser to assess and allocate a
value to the in-process research and development. This allocation represents the
estimated fair value based on risk-adjusted cash flows related to the incomplete
projects. At the date of acquisition, the development of these projects had not
yet reached technological feasibility and the R&D in progress had no alternative
future uses. Accordingly, these costs were expensed as of the acquisition date.
The remaining intangibles of $18.6 million, consisting of goodwill and developed
technology, are included in goodwill and other intangibles in the accompanying
balance sheets and are being amortized over their estimated useful lives of five
to seven years.
As of the acquisition date, FTP's significant ongoing research and
development projects included next-generation versions and development of new
product technologies. At the time of the acquisition, these projects had
estimated completion percentages ranging from 58% to 74%, estimated technology
lives of five to seven years, and projected product introduction dates between
the end of 1998 and the first six months of 1999. The nature of the efforts
required to develop the acquired in-process technology into commercially viable
products principally relate to the completion of all planning, designing,
coding, and testing activities that are necessary to establish that the products
can be produced to meet their design requirements, including functions,
features, and technical and economic performance requirements.
The Company allocated value to the in-process research and development
based on an assessment of the R&D projects. The value assigned to these assets
was limited to significant research projects for which technological feasibility
had not been established, including development, engineering and testing
activities associated with the introduction of FTP's next-generation
technologies and products. The value was determined by estimating the costs to
develop the purchased in-process technology into commercially viable products,
estimating the resulting net cash flows from the projects and discounting the
net cash flows to their present value. The Company used a discount rate of 20%
for the calculation of present value of cash flows. The discount rate used for
the in-process technology was higher than the Company's weighted average cost of
capital due to the risk of realizing cash flows from projects that had yet to
reach technological feasibility.
The revenue projection used to value the in-process research and
development was based on estimates of relevant market sizes and growth factors,
expected trends in technology and the nature and expected timing of new product
introductions by the Company and its competitors. Future revenue estimates were
aggregated into four product categories: 16-bit, 32-bit, Web-based, and other.
Web-based product revenues were
43
45
NETMANAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
estimated to increase at a compound annual rate of approximately 50% for fiscal
years 1999 through 2002, stabilizing at 10% growth after 2002.
Operating expenses used in the valuation analysis of FTP included: (i) cost
of sales, (ii) selling, general and administrative expenses, and (iii) research
and development expenses. Operating expenses were estimated based on data
provided by management. Due to purchasing power increases and general economies
of scale, estimated operating expense as a percentage of revenues were expected
to decrease after the acquisition.
The following unaudited pro forma financial information shows the results
of operations for the years ended December 31, 1998 and 1997 as if the
acquisition of FTP had occurred at the beginning of the periods presented and at
the same aggregate purchase price. The results are not necessarily indicative of
what would have occurred had the acquisition actually been made at the beginning
of each of the respective periods presented or of future operations of the
combined companies. The pro forma financial data for the year ended December 31,
1998 combines the Company's results for the year ended December 31, 1998 with
the results of FTP for the period from January 1, 1998 through the date of
acquisition (August 26, 1998.) The pro forma financial data for 1997 combines
the Company's results of operations with FTP's results of operations for the
year ended December 31, 1997. The following unaudited pro forma financial data
includes the straight-line amortization of intangibles over a period of five to
seven years and excludes the charge for in-process research and development (in
thousands, except per share amounts):
YEARS ENDED DECEMBER 31,
-------------------------
1998 1997
---------- -----------
Revenue............................................... $ 96,545 $ 129,258
Net loss.............................................. $(11,319) $ (90,354)
Net loss per share, diluted........................... $ (0.18) $ (1.33)
Weighted average common shares, diluted............... 61,940 68,010
In December 1998, the Company sold its equity interest in NetVision for
$17.0 million. The Company's ownership interest prior to the sale was
approximately 32%. In connection with this transaction, the Company recorded a
gain on the sale of stock by NetVision of $11.7 million, which is included in
the accompanying Consolidated Statement of Operations for the year ended
December 31, 1998.
In December 1997, NetVision issued an additional 800,000 preferred shares
which were sold to Tevel Israel International Communications, Ltd., an unrelated
party, for $10.0 million cash in exchange for a one-third interest in NetVision.
As a result of the issuance and sale of these shares by NetVision, the Company's
ownership interest in NetVision decreased from 50% to approximately 32%. In
connection with this transaction, the Company recorded an unrealized gain on
NetVision's sale of stock of $2,152,000, which is included in the accompanying
Consolidated Statement of Operations for the year ended December 31, 1997. The
investment in NetVision of approximately $5.0 million was included in other
assets in the accompanying Consolidated Balance Sheets at December 31, 1997.
In July 1995, the Company had agreed to an investment by Elron Electronics,
Ltd. ("Elron") in NetVision. Following the investment by Elron, the Company's
ownership interest in NetVision decreased from 100% to 50%.
A director of the Company also serves as the Chairman of the Board of
Directors, President and Chief Executive Officer of Elron. Elron holds an
investment in the common stock of the Company representing approximately 1% of
the Company's outstanding shares as of December 31, 1998.
In November 1997, the Company acquired all of the outstanding shares of
Relay Technology, Inc. ("Relay"), a privately-held company primarily engaged in
the development, marketing and support of network connectivity, file transfer
and terminal emulation software for $4.2 million in cash. The acquisition was
accounted for as a purchase, and accordingly, the results of Relay from the date
of acquisition forward
44
46
NETMANAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
have been recorded in the Company's consolidated financial statements. In
connection with the purchase, net intangibles of approximately $5.8 million were
acquired, of which $4.6 million is reflected as a charge to operations for the
write-off of in-process research and development that had not yet reached
technological feasibility and, in management's opinion, had no probable
alternative future use. The remaining intangible of $1.2 million, consisting of
goodwill, is included in goodwill and other intangibles in the accompanying
balance sheets and is being amortized over its estimated useful life of two
years. Comparative pro forma financial information has not been presented as the
results of Relay are not material to the Company's consolidated financial
statements.
In July 1997, the Company acquired all of the outstanding shares of Network
Software Associates, Inc. ("NSA") for $26.0 million in cash. NSA is a holding
company for NetSoft ("NetSoft"), a privately-held company specializing in the
development, marketing and support of PC-to-Host connectivity software
solutions. The acquired company hereinafter will be referred to as NetSoft. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the results of NetSoft from the date of acquisition forward have
been recorded in the Company's consolidated financial statements. In connection
with the acquisition, net intangibles of $18.6 million were acquired, of which
$16.0 million was reflected as a charge to operations for the write-off of
in-process research and development that had not reached technological
feasibility and, in management's opinion, had no probable alternative future
use. The remaining intangible of $2.6 million, consisting of goodwill, is
included in goodwill and other intangibles in the accompanying balance sheets
and is being amortized over its estimated useful life of two years.
In connection with the NetSoft acquisition, net assets acquired were as
follows (in thousands):
Cash and cash equivalents.................................. $ 2,719
Trade accounts receivable and other current assets......... 8,802
Intangibles, including in-process research and
development.............................................. 18,589
Property, equipment and other long-term assets............. 2,733
Current liabilities assumed................................ (6,224)
Long-term liabilities...................................... (619)
-------
Net assets acquired...................................... $26,000
=======
The following unaudited pro forma financial information shows the results
of operations for the years ended December 31, 1997 and 1996 as if the NetSoft
acquisition had occurred at the beginning of each of the years presented and at
the purchase price established in July 1997. The pro forma financial data
includes the straight-line amortization of intangibles over a two-year period
and excludes the charge for in-process research and development. The results are
not necessarily indicative of what would have occurred had the acquisition
actually been made at the beginning of each of the respective years presented or
of the future operations of the combined companies.
YEARS ENDED DECEMBER 31,
------------------------
1997 1996
---------- ----------
(IN THOUSANDS)
Revenue................................................ $ 81,103 $134,214
Net loss............................................... $(35,137) $ (4,565)
Net loss per share, diluted............................ $ (0.80) $ (0.11)
Weighted average common shares, diluted................ 43,385 42,341
In November 1996, the Company purchased collaborative computing software
technology from Applicom Software Industries (1990) Ltd. ("Applicom") for cash
consideration of approximately $10.0 million. In the opinion of management, the
purchased technology had not reached technological
45
47
NETMANAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
feasibility and had no probable alternative future use. Accordingly, the entire
purchase price was deemed to be in-process research and development and was
charged to operations in 1996.
In July 1996, the Company acquired all of the outstanding stock of Maximum
Information, Inc. ("MaxInfo"), in exchange for approximately 590,000 shares of
the Company's common stock. The Company also assumed MaxInfo's outstanding
employee stock options, which were converted into options to purchase
approximately 129,000 shares of the Company's common stock. This transaction was
accounted for as a pooling of interests during the third quarter of 1996. The
operations of MaxInfo, however, were not material to the Company's consolidated
results of operations and financial position and, therefore, the historical
financial statements have not been restated to reflect the acquisition
retroactively. Accordingly, the operations of MaxInfo from the date of
acquisition forward have been recorded in the Company's consolidated financial
statements.
4. RESTRUCTURING OF OPERATIONS
In late August 1998, following the acquisition of FTP, the Company
initiated a plan to restructure its worldwide operations as a result of business
conditions and in connection with the integration of the operations of FTP. In
connection with this plan, the Company recorded a $7.0 million charge to
operating expenses in 1998. The restructuring charge includes 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
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
December 31, 1998, the Company had incurred costs totaling approximately $11.5
million related to the restructuring, which required $9.9 million in cash
expenditures. Accrued liabilities at December 31, 1998 included the remaining
reserve related to these restructuring plans of approximately $5.2 million.
The following table lists the components of the NetManage restructuring
accrual for the year ended December 31, 1998 (in thousands):
EMPLOYEE EXCESS EXCESS
COSTS ASSETS FACILITIES TOTAL
-------- ------ ---------- -------
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
======= ====== ======= =======
46
48
NETMANAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, for the year ended December 31, 1998 (in thousands):
EMPLOYEE EXCESS EXCESS
COSTS ASSETS FACILITIES TOTAL
-------- ------- ---------- -------
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
======= ======= ======= =======
In the third quarter of 1997, the Company initiated a plan to restructure
its operations worldwide due to business conditions. The plan was intended to
realign the Company to focus solely on its core competencies -- UNIX, AS/400
midrange and IBM mainframe connectivity. In connection with this plan, the
Company recorded a $5.2 million charge to operating expenses. The restructuring
charge included approximately $1.8 million of estimated employee-related
expenses for employee terminations, approximately $2.4 million for the write-off
of excess equipment and facilities-related expenses associated with the
consolidation of operations and approximately $1.0 million for the write-off of
intangible assets related to certain unprofitable products. The restructuring
plan included the termination of employees worldwide and reduction in worldwide
office space, which primarily consisted of the consolidation of sales offices in
Europe resulting from the acquisition of NetSoft in the third quarter of 1997 as
well as the consolidation of certain domestic technical support and engineering
locations. As of December 31, 1997, the Company had incurred costs totaling
approximately $4.3 million related to the restructuring. The remaining
restructuring actions were completed in the year ended December 31, 1998 and
required the expenditure of approximately $0.9 million in cash.
5. COMMITMENTS AND CONTINGENCIES:
Legal Proceedings
On January 9, 1997, a securities class action complaint, Head, et al. v.
NetManage, Inc., et al., No. 07763295, was filed in the Superior Court of
California, Santa Clara County, against the Company and certain of its directors
and current and former officers. On January 10, 1997, the same plaintiffs filed
a securities class action complaint, Head, et al. v. NetManage, Inc., et al.,
No. C-97-4385-CRB, in the United States District Court for the Northern District
of California, against the same defendants. Both complaints allege that, between
July 25, 1995 and January 11, 1996, the defendants made false or misleading
statements of material fact about the Company's prospects and failed to follow
generally accepted accounting principles. The state court complaint asserts
claims under California state law; the federal court complaint asserts claims
under the federal securities laws. On September 10, 1997, a class action
substantially similar to the Head action was filed, Beasley v. NetManage, Inc.,
et al., C-98-1794 CRB (N.D. Cal.), seeking an unspecified amount of damages. The
federal court certified the purported class. On December 30, 1998, the federal
court granted without leave to amend the defendants' motion to dismiss the
second amended complaint in the Head federal action; plaintiffs have filed a
notice of appeal to the U.S. Court of Appeals for the Ninth Circuit. On February
2, 1999, the federal court dismissed with prejudice the Beasley action pursuant
to its order in the Head action. The Company believes there is no merit to these
cases and intends to defend them vigorously.
On March 21, 1997, a securities class action complaint, Interactive Data
Systems, Inc., et al. v. NetManage, Inc., et al., No. CV764945, was filed in the
Superior Court of California, Santa Clara County, against the Company and
certain of its directors and officers. On June 19, 1997, one of the plaintiffs
in that action filed a securities class action complaint, Molinari v. NetManage,
Inc., et al., No. C-98-202-CRB, in the United States District Court for the
Northern District of California against the same defendants. Both complaints
allege that, between April 18, 1996 and July 18, 1996, the defendants made false
or misleading statements of material fact about the Company's prospects. The
state court complaint asserts claims under
47
49
NETMANAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
California state law; the federal complaint asserts claims under the federal
securities laws. Both complaints seek an unspecified amount of damages. The
federal court certified the purported class. On February 26, 1998, the state
court entered judgement in favor of the Company in the state case. Plaintiffs
have filed a notice of appeal as to the Company and have indicated that they
will file an amended complaint as to the individual defendants. On December 30,
1998, the federal court granted without leave to amend the defendants' motion to
dismiss the complaint in the Molinari case. Plaintiffs have filed a notice of
appeal to the U.S. Court of Appeals for the Ninth Circuit. The Company believes
there is no merit to these cases and intends to defend these cases vigorously.
On October 10, 1997, a shareholder derivative action was filed in the
United States District Court for the Northern District of California against
nine present and former officers and directors of the Company. Sucher v. Alon et
al., No. C-98-203-CRB. The complaint alleged that the defendants violated
various fiduciary duties to the Company; the Company is named as a nominal
defendant. The complaint was predicated on the factual allegations contained in
the Head and Molinari class action complaints, and sought an unspecified amount
of damages. On November 6, 1998, the court dismissed the complaint without leave
to amend on the grounds that plaintiffs had failed to make a pre-litigation
demand on the Company's board of directors. Plaintiff have filed a notice of
appeal to the U.S. Court of Appeals for the Ninth Circuit.
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 May 7, 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 March 23, 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 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.
48
50
NETMANAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Facilities and equipment are leased under noncancelable operating leases
expiring on various dates through the year 2007. As of December 31, 1998, future
minimum rental payments under operating leases are as follows (in thousands):
YEAR
----
1999....................................................... $ 8,133
2000....................................................... 6,517
2001....................................................... 4,671
2002....................................................... 3,562
2003....................................................... 2,870
Thereafter................................................. 5,403
-------
$31,156
=======
Rent expense was approximately $2.4 million, $3.9 million and $3.4 million
for the years ended December 31, 1998, 1997 and 1996, respectively.
6. CAPITAL STOCK:
Common Stock
As of December 31, 1998, the Company has reserved the following shares of
authorized but unissued common stock:
Employee stock option plans.............................. 7,158,148
Directors' stock option plan............................. 739,835
Employee stock purchase plan............................. 1,167,897
----------
9,065,880
==========
Stock Repurchase Plan
In October 1998, the Company's Board of Directors authorized the repurchase
of up to 4 million shares of the Company's common stock for general corporate
purposes. During 1998, the Company repurchased 2,028,700 shares of its common
stock on the open market at an average purchase price of $2.09 per share for a
total cost of $4.2 million.
Employee Stock Option Plans
During 1992, the Company established the 1992 Employee Stock Option Plan
(the "Plan"). The Company currently has authorized a total of 9,800,000 shares
for issuance under the Plan. The Plan provides for the grant by the Company of
incentive stock options or non-statutory stock options to employees, officers,
directors and consultants. The exercise price of incentive stock options may not
be less than 100% of the fair market value of the common stock on the date of
grant (110% of such fair market value in the case of a grant to a holder of more
than 10% of the voting power of the Company's outstanding capital stock (a "10%
stockholder")); the exercise price of non-statutory options may not be less than
85% of such fair market value. Up until mid-1997, options granted under the Plan
generally were scheduled to become exercisable at a rate of one-fourth of the
shares subject to the option at the end of the first year and 1/48 of the shares
subject to the
49
51
NETMANAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
option at the end of each calendar month thereafter. From mid-1997 until the
fall of 1998, options granted under the Plan for new hires generally were
scheduled to become exercisable at a rate of one-fifth of the shares subject to
the option at the end of the first year and 1/60 of the shares subject to the
option at the end of each calendar month thereafter. Beginning in the fall of
1998, options granted under the Plan become exercisable at a rate of one-fourth
of the shares subject to the option at the end of the first year and 1/48 of the
shares subject to the option at the end of each calendar month thereafter. The
maximum term of a stock option under the Plan is 10 years (five years in the
case of an incentive option granted to a 10% stockholder).
In connection with the acquisition of FTP, the Company assumed options to
purchase shares of FTP's common stock held by employees of FTP and its
subsidiaries (the "Assumed FTP Options"). Pursuant to the FTP merger, these
options were converted into options to purchase shares of NetManage common stock
at the FTP merger exchange rate, with appropriate adjustments to the exercise
price. The assumed FTP Options were granted under, and continue to be governed
by the plans under which they were originally granted. The options generally
vest over three to four years and have a maximum term of ten years. No
additional options will be granted pursuant to any of the FTP stock option
plans.
The Company also assumed certain options granted to former employees of
acquired companies acquired (the "Acquired Options"). The Acquired Options were
assumed by the Company outside of the Plan, but all are administered as if
assumed under the Plan. All of the Acquired Options have been adjusted to
effectuate the conversion under the Agreements and Plans of Reorganization
between the Company and the companies acquired. Certain of the Acquired Options
became immediately exercisable under the original terms of the option
agreements. The remaining Acquired Options continue to vest under the original
vesting schedule over a four-year period. No additional options will be granted
under any of the acquired companies' plans.
In October 1998, the Company's Board of Directors approved an option
exchange program pursuant to which all directors and employees of the Company
were given the opportunity to exchange any or all of their existing options for
new options covering a number of shares of the Company's common stock determined
under a formula that took into account the original number of shares, term and
vesting schedule of the existing options, at an exercise price of $1.00 per
share (being the fair market value of the Company's common stock on the grant
date of the new options). The new options become exercisable at a rate of
one-fourth of the shares subject to the option at the end of the first year and
1/36 of the remaining shares subject to the option at the end of each calendar
month thereafter, and have a term of 10 years from the date of grant. Pursuant
to this exchange offer, options covering an aggregate of 3,020,421 shares of the
Company's common stock, with exercise prices ranging from $1.00 to $43.64 per
share, were exchanged for options covering an aggregate of 2,196,612 shares of
the Company's common stock.
In September 1997, January 1997 and February 1996, upon approval by the
Company's Board of Directors, the Company repriced 1,703,624, 3,451,079 and
2,302,338 options, respectively, originally issued at prices ranging from $3.25
to $6.00, $6.63 to $21.25, and $11.63 to $24.62, respectively. The options were
repriced at the then current market value of the Company's common stock of $3.06
for the September 1997 repricing, $6.00 for the January 1997 repricing, and
$11.13 for the February 1996 repricing. The Company's Board of Directors
extended the vesting period for all options repriced in February 1996 by an
additional six months.
Non-Employee Directors' Stock Option Plan
In July 1993, the Company adopted the 1993 Directors' Stock Option Plan
(the "Directors' Plan") and reserved 800,000 shares of common stock for issuance
thereunder. Under the Directors' Plan, options may be granted only to
non-employee directors of the Company at an exercise price of 100% of the fair
market value of the stock on the date of grant. Options granted under the
Directors' Plan become exercisable at a rate of one-fourth of the shares subject
to the option at the end of the first year and 1/48 of the shares subject to the
50
52
NETMANAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
option at the end of each calendar month thereafter. The maximum term of a stock
option under the Directors' Plan is ten years.
Employee Stock Purchase Plan
In July 1993, the Company adopted the Employee Stock Purchase Plan (the
"Purchase Plan") and reserved 2,400,000 shares of common stock for future
issuance under the Purchase Plan. Under the Purchase Plan, the Company's
employees, subject to certain restrictions, may purchase shares of common stock
at a price per share that is equal to 85% of the lower of the fair market value
of the common stock on the commencement date of each offering period or the
relevant purchase date. For the years ended December 31, 1998, 1997 and 1996,
519,698, 343,142 and 226,124 shares, respectively, were issued under the
Purchase Plan at prices ranging from $1.28 to $2.87 per share, $2.28 to $2.34
per share and $5.79 to $12.54 per share, respectively.
Stock-Based Compensation Plans
The Company accounts for the above plans under Accounting Principles Board
Opinion ("APB") No. 25, under which no compensation cost has been recognized.
Had compensation cost for these plans been determined consistent with SFAS No.
123, "Accounting for Stock-Based Compensation," the Company's net loss per share
would have been adjusted to the following pro forma amounts (in thousands,
except per share amounts):
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Net loss:
As reported...................................... $ (9,968) $(33,755) $ (5,705)
Pro forma........................................ (12,922) (42,453) (11,135)
Net loss per share:
As reported...................................... $ (0.19) $ (0.78) $ (0.13)
Pro forma -- Basic............................... (0.24) (0.98) (0.26)
Pro forma -- Diluted............................. (0.24) (0.98) (0.26)
Because the method of accounting prescribed by SFAS No. 123 has not been
applied to options granted prior to January 1, 1995, the resulting pro forma
effect of compensation cost may not be representative of that to be expected in
future years.
51
53
NETMANAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Option activity, including the Acquired Options, under the Company's stock
option plans was as follows:
WEIGHTED
OPTIONS AVERAGE
AVAILABLE SHARES EXERCISE PRICE
---------- ---------- --------------
Balance at December 31, 1995.......... 2,548,008 4,591,061 $ 8.83
Authorized.......................... 2,000,000 --
Granted............................. (1,852,317) 1,852,317 9.71
Exercised........................... -- (631,142) 4.42
Terminated.......................... 1,541,456 (1,541,456) 10.32
---------- ----------
Balance at December 31, 1996.......... 4,237,147 4,270,780 9.99
Granted............................. (7,856,064) 7,856,064 4.28
Exercised........................... -- (272,035) 1.62
Terminated.......................... 8,241,288 (8,241,288) 7.50
---------- ----------
Balance at December 31, 1997.......... 4,622,371 3,613,521 3.00
Granted............................. (9,623,317) 9,623,317 3.89
Exercised........................... -- (337,909) 1.81
Terminated.......................... 7,454,599 (7,454,599) 4.96
---------- ----------
Balance at December 31, 1998.......... 2,453,653 5,444,330 1.96
========== ==========
Exercisable at December 31, 1996...... 1,098,034 6.77
Exercisable at December 31, 1997...... 1,031,752 3.07
Exercisable at December 31, 1998...... 640,862 4.61
The following table summarizes the Company's outstanding options as of
December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED
RANGE OF NUMBER REMAINING LIFE WEIGHTED AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------------- ----------- ---------------- ---------------- ----------- --------------
$0.08 - $1.50 2,140,698 9.73 $ 1.01 13,140 $ 1.15
$1.72 - $5.33 3,215,556 8.99 $ 2.31 554,061 $ 3.64
$6.70 - $43.64 88,076 8.53 $ 12.19 73,661 $ 12.51
--------- -------
$0.08 - $43.64 5,444,330 9.27 $ 1.96 640,862 $ 4.61
========= =======
The weighted average fair values of options granted during 1998, 1997 and
1996 were $1.19, $3.55 and $6.20 per share, respectively. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing method with the following weighted average assumptions used for grants
in 1998, 1997 and 1996:
1998 1997 1996
---------------- ---------------- ----------------
Volatility............. 207.25% 183.16% 77.89%
Risk-free interest
rate................. 4.07% - 5.87% 4.93% - 5.79% 4.94% - 6.65%
Dividend yield......... 0.00% 0.00% 0.00%
Expected term.......... 3 - 4 month 3 - 7 months 3 - 7 months
beyond vest date beyond vest date beyond vest date
52
54
NETMANAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES:
The provision (benefit) for income taxes is based upon loss before income
taxes as follows (in thousands):
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
-------- -------- -------
Domestic.................................... $(12,128) $(25,573) $(5,502)
Foreign..................................... 6,560 (8,642) (3,531)
-------- -------- -------
$ (5,568) $(34,215) $(9,033)
======== ======== =======
The components of the provision (benefit) for income taxes are as follows
(in thousands):
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997 1996
------ ------- -------
Current --
Federal...................................... $ -- $(3,134) $ 2,008
State........................................ 2 1 536
Foreign...................................... 2,400 235 830
------ ------- -------
Total current........................ 2,402 (2,898) 3,374
------ ------- -------
Deferred --
Federal...................................... 1,978 2,231 (4,816)
State........................................ 20 207 (1,886)
------ ------- -------
Total deferred....................... 1,998 2,438 (6,702)
------ ------- -------
Provision (benefit) for income taxes........... $4,400 $ (460) $(3,328)
====== ======= =======
The provision (benefit) for income taxes differs from the amounts which
would result by applying the applicable statutory Federal income tax rate to
income before taxes, as follows (in thousands):
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
------- -------- -------
Provision (benefit) at Federal statutory
rate....................................... $(1,949) $(11,975) $(3,162)
State income taxes, net of Federal tax
benefit.................................... (320) (2,068) (546)
Nontaxable interest income................... (469) (982) (1,016)
Foreign losses benefited at a lower tax
rate....................................... -- 2,140 --
Nondeductible write-off of in-process
research and development................... 3,895 8,464 1,803
Change in valuation allowance................ 1,123 3,292 --
Acquisition costs............................ -- -- 161
Tax credits.................................. -- -- (889)
Tax savings from foreign operations.......... -- -- (1,429)
Nondeductible expenses....................... 58 94 240
Foreign taxes................................ 2,400 235 830
Other........................................ (338) 340 680
------- -------- -------
Provision (benefit) for income taxes....... $ 4,400 $ (460) $(3,328)
======= ======== =======
53
55
NETMANAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of the net deferred income tax asset are as follows (in
thousands):
DECEMBER 31,
-------------------
1998 1997
-------- -------
Deferred revenue recognized currently for tax
purposes.............................................. $ 463 $ 1,079
Reserves and accruals not currently deductible for tax
purposes.............................................. 2,772 2,499
Net operating loss carryforwards -- NetManage........... 2,008 1,179
Net operating loss carryforwards -- FTP................. 3,451 --
Tax credit carryforwards -- NetManage................... 507 185
Tax credit carryforwards -- FTP......................... 2,130 --
Write-off of in-process research and development, not
currently deductible for tax purposes................. 5,375 5,819
Depreciation and amortization........................... 388 (291)
Capitalized R&D -- FTP.................................. 8,728 --
Other temporary differences............................. 79 614
-------- -------
Total deferred tax asset...................... 25,901 11,084
Less: Valuation allowance............................... (20,107) (3,292)
-------- -------
Net deferred tax asset........................ $ 5,794 $ 7,792
======== =======
In connection with the acquisition of FTP, the Company assumed FTP's
deferred tax asset of $15.7 million. Realization of FTP's deferred tax asset is
dependent upon generating sufficient future taxable income in specific tax
jurisdictions. Due to the uncertainty as to whether the deferred tax asset may
be realized, the Company recorded a valuation allowance for the entire balance
of the FTP deferred tax asset at the time of acquisition.
Realization of the net deferred tax asset of $5.8 million is dependent on
generating sufficient future taxable income. Although realization is not
assured, management believes it is more likely than not that the net deferred
tax asset will be realized. The amount of the deferred tax asset considered
realizable, however, could be reduced if actual future taxable income differs
from estimated amounts.
At December 31, 1998, the Company had gross net operating loss
carryforwards for Federal income tax purposes of approximately $15.2 million
expiring at various dates through 2013 and Federal tax credit carryforwards of
approximately $2.2 million which expire in various years through 2012. At
December 31, 1998, the Company had state net operating loss carryforwards of
approximately $1.6 million available to offset future taxable income in several
state jurisdictions expiring at various dates through 2013. Similarly, state tax
credits of $430,000 were available at December 31, 1998, expiring in 2010. In
accordance with certain provisions of the Internal Revenue Code, as amended, a
change in ownership of greater than 50% of a company within a three year period
results in an annual limitation on the Company's ability to utilize its net
operating loss carryforward from tax periods prior to the ownership change. Such
a change in ownership occurred with respect to the Company's acquisition of
certain companies, including FTP. Accordingly, the net operating losses and
credits of the Company are subject to these limitations.
During 1998, the Company sold its remaining equity investment in NetVision.
The sale resulted in a capital gain for tax purposes of approximately $13.5
million. Accordingly, the Company has recorded a tax provision of $2.0 million
for the related Israeli income taxes.
The Company's subsidiary in Haifa, Israel has a ten-year tax holiday, which
commenced January 1, 1995. During the first two years of the tax holiday, the
subsidiary was exempt from taxation on income generated during that period.
During the remaining eight years, income generated by the subsidiary will be
taxed at a reduced income tax rate of 10%. The Haifa tax holiday decreased the
consolidated net loss by approximately $1.4 million ($0.03 per share) for the
year ended December 31, 1996. There was no impact on the net loss for the years
ended December 31, 1998 and 1997.
54
56
NETMANAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. 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.
The following table presents a summary of operations by geographic area (in
thousands):
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Revenues:
Domestic operations...................... $ 53,144 $ 48,155 $ 74,996
European operations...................... 16,845 10,574 16,377
Asian operations......................... 1,738 2,795 13,223
-------- -------- --------
Consolidated.......................... $ 71,727 $ 61,524 $104,596
======== ======== ========
Income (loss) from operations:
Domestic operations...................... $(14,500) $(29,877) $(10,780)
European operations...................... (7,202) (12,380) (3,396)
Asian operations......................... (115) 133 523
-------- -------- --------
Consolidated.......................... $(21,817) $(42,074) $(13,653)
======== ======== ========
Identifiable assets:
Domestic operations...................... $203,214 $121,582 $147,581
European operations...................... 77,928 27,690 23,299
Asian operations......................... 1,952 1,433 2,204
Eliminations............................. (81,341) (31,112) (20,555)
-------- -------- --------
Consolidated.......................... $201,753 $119,593 $152,529
======== ======== ========
Domestic revenues include export revenues of approximately $.4 million, $.8
million and $3.2 million to Asia for the years ended December 31, 1998, 1997 and
1996, respectively, and $1.6 million, $2.4 million and $2.1 million and to the
rest of the world for the years ended December 31, 1998, 1997 and 1996,
respectively.
There were no customers that accounted for more than 10% of net revenues
for the years ended December 31, 1998, 1997 or 1996.
55
57
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company's definitive Proxy Statement will be filed with the Securities
and Exchange Commission in connection with the solicitation of proxies for the
Company's Annual Meeting of Stockholders, to be held on May 27, 1999 (the "Proxy
Statement"). Certain information required by this item is incorporated by
reference from the information contained in the Proxy Statement under the
captions "Election of Directors" and "Security Ownership of Certain Beneficial
Owners and Management -- Compliance with the Reporting Requirements of Section
16(a)." For information regarding executive officers of the Company, see Part I
of this Form 10-K under the caption "Business -- Executive Officers of the
Registrant."
ITEM 11 -- EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from the
information contained in the Company's Proxy Statement under the caption
"Executive Compensation", except for the information appearing under the
captions "-- Ten Year Option Repricing," "-- Report of the Board of Directors on
Repricing of Options," "-- Report of the Compensation Committee of the Board of
Directors on Executive Compensation" and "-- Performance Measurement
Comparison."
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference from the
information contained in the Company's Proxy Statement under the caption
"Security Ownership of Certain Beneficial Owners and Management."
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from the
information contained in the Company's Proxy Statement under the caption
"Certain Transactions."
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report on Form 10-K:
FINANCIAL STATEMENTS:
See Index to Consolidated Financial Statements at Item 8 on page 31 of this
Report.
FINANCIAL STATEMENT SCHEDULE:
See Index to Consolidated Financial Statements at Item 8 on page 31 of this
Report.
56
58
EXHIBITS:
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
3.1 Certificate of Incorporation of the Registrant.(1)
3.2 Form of Certificate of Amendment of Certificate of
Incorporation of the Registrant.(2)
3.3 Bylaws of the Registrant.(1)
4.1 Amended Stock Rights Agreement, among the Registrant and the
parties named therein, dated as of March 12, 1993.(1)
4.2 Form of Common Stock certificate.(1)
10.1 Form of Indemnity Agreement entered into among the
Registrant and its directors and officers.(1)
10.2* Registrant's 1992 Stock Option Plan, as amended, including
forms of option agreements.(1)
10.3* Registrant's 1993 Non-Employee Directors Stock Option Plan,
including form of option agreements.(1)
10.4* Registrant's 1993 Employee Stock Purchase Plan, including
form of offering document.(1)
10.5 Lease between the Registrant and Stevens Creek Office Center
Associates, dated as of November 30, 1992.(1)
10.6 Lease between the Registrant and Beim & James Properties
III, dated January 3, 1994.(3)
10.7 Lease between the Registrant and Cupertino Industrial
Associates, dated September 30, 1994.(4)
10.8 Lease between the Registrant and the Flatley Company, dated
January 30, 1995.(5)
10.9 Lease between the Registrant and Cupertino Brown Investment,
dated April 28, 1995.(6)
10.10 Agreement between NetManage, Ltd., Elron Electronic
Industries, Ltd., and NetVision, Ltd., dated July 1,
1995.(6)
10.11 Agreement and Plan of Reorganization among the Registrant,
NetManage Acquisition Corporation, Syzygy Communications,
Inc. and the Designated Shareholders, dated October 16,
1995.(6)
10.12 Agreement and Plan of Reorganization among the Registrant,
NetManage Acquisition Corporation and AGE Logic, Inc., dated
November 17, 1995.(6)
10.13 Stock Purchase Agreement by and among the Registrant,
Network Software Associates, Inc. a California corporation,
NetSoft, a California corporation, holders of securities of
NSA and holders of securities of NetSoft, dated as of July
8, 1997.(7)
10.14 Agreement and Plan of Reorganization by and among the
Registrant, Amanda Acquisition Corp. and FTP Software, Inc.,
dated as of June 15, 1998, as amended as of June 30, 1998
and July 14, 1998.(8)
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Public Accountants.
24.1 Power of Attorney. Reference is made to the signature page
to this Form 10-K.
27.1 Financial Data Schedule.
- ---------------
(1) Incorporated by reference to the Exhibits filed with the Registrant's
Registration Statement on Form S-1 (No. 33-66460) dated July 24, 1993, as
amended, which became effective September 20, 1993.
(2) Incorporated by reference to the Exhibits filed with the Registrant's
Registration Statement on Form S-4 (No. 333-59101) dated July 17, 1998 (the
"Form S-4").
(3) Incorporated by reference to the Exhibits filed with the Registrant's
Registration Statement on Form S-1 (No. 33-74364) dated January 24, 1994, as
amended, which became effective February 10, 1994.
57
59
(4) Incorporated by reference to the Exhibits filed with the Registrant's Form
10-Q for the quarter ended September 30, 1994.
(5) Incorporated by reference to the Exhibits filed with the Registrant's Form
10-Q for the quarter ended March 31, 1995.
(6) Incorporated by reference to the Exhibits filed with the Registrant's Form
10-K for the year ended December 31, 1995.
(7) Incorporated by reference to the Exhibits filed with the Registrant's Form
8-K dated July 29, 1997.
(8) Incorporated by reference to Annex A to the Joint Proxy Statement/Prospectus
included in the Form S-4.
* Employee Benefit Plan
(b) Reports on Form 8-K
A Current Report on Form 8-K/A was filed by the Company on October 30,
1998 amending its Report on Form 8-K dated August 27, 1998, to amend the
description of the acquisition of FTP and the Company's August 1998
restructuring and to include certain financial statements of FTP and pro
forma combined financial statements for the Company and FTP.
A Current Report on Form 8-K dated October 27, 1998 was filed by the
Company to report the Company's announcement of a stock repurchase program
whereby up to 4,000,000 shares of its common stock may be repurchased in
the open market from time to time, as more particularly described in the
press release filed as an exhibit thereto.
A Current Report on Form 8-K/A was filed by the Company on November
10, 1998, amending its Current Report on Form 8-K dated August 27, 1998, as
amended by its Current Report on Form 8-K/A filed on October 30, 1998, to
amend the description of the acquisition of FTP and the Company's August
1998 restructuring and the pro forma combined financial statements for the
Company and FTP.
(c) Exhibits
The exhibits required by this Item are listed under Item 14(a).
(d) Financial Statement Schedules
The financial statement schedule required by this Item is listed under
Item 14(a).
Copyright(C) 1998 NetManage, Inc. All rights reserved. NetManage, Chameleon
UNIX Link, Chameleon HostLink, OpSession, SupportNow, NS/Portfolio,
NS/Router, the NetManage logo and the lizard logos are trademarks or
registered trademarks of NetManage, Inc. in the United States and other
countries. UNIX is a registered trademark in the U.S. and other countries,
licensed exclusively through X/Open Company Limited. AS/400 is a registered
trademark in the U.S. and other countries of International Business
Machines Corporation. FTP Software, OnNet, OnWeb and Interdrive are
trademarks or registered trademarks of FTP Software, Inc., a wholly-owned
subsidiary of NetManage, Inc., in the United States and other countries.
All other trademarks are the property of their respective owners.
58
60
SCHEDULE II
NETMANAGE, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING OF REVENUES, AND END OF
PERIOD COSTS OR EXPENSES WRITE-OFFS PERIOD
------------ ----------------- ---------- ----------
Year ended December 31, 1996:
Allowance for doubtful accounts and
sales returns....................... $2,516 886 (1,390) $2,012
Year ended December 31, 1997:
Allowance for doubtful accounts and
sales returns....................... $2,012 268 (905) $1,375
Year ended December 31, 1998:
Allowance for doubtful accounts and
sales returns....................... $1,375 3,124(1) (640) $3,859
- ---------------
(1) The allowance for doubtful accounts and sales returns includes a reserve for
doubtful accounts of $2,746,000 which was assumed as part of the acquisition
of FTP. The actual amount charged to expense by the Company in 1998 was
$378,000.
59
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K Annual
Report to be signed on its behalf by the undersigned, thereunto duly authorized
on the 31st day of March 1998.
NETMANAGE, INC.
By /s/ ZVI ALON
------------------------------------
Zvi Alon
Chairman of the Board, President
and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints ZVI ALON
and GARY R. ANDERSON his or her true and lawful attorneys-in-fact and agents,
each acting alone, with the power of substitution and resubstitution, for him or
her and in his or her name, place and stead, in any and all capacities, to sign
any amendments to this Form 10-K Annual Report, and to file the same, with
exhibits thereto and other documents in connections therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ZVI ALON Chairman of the Board, March 31, 1999
- --------------------------------------------------- President and Chief Executive
Zvi Alon Officer (Principal Executive
Officer)
/s/ GARY R. ANDERSON Chief Financial Officer and March 31, 1999
- --------------------------------------------------- Senior Vice President, Finance
Gary R. Anderson and Secretary (Principal
Financial and
Accounting Officer)
/s/ JOHN BOSCH Director March 31, 1999
- ---------------------------------------------------
John Bosch
/s/ UZIA GALIL Director March 31, 1999
- ---------------------------------------------------
Uzia Galil
/s/ SHELLEY HARRISON, PHD Director March 31, 1999
- ---------------------------------------------------
Shelley Harrison, PhD
/s/ DARRELL MILLER Director March 31, 1999
- ---------------------------------------------------
Darrell Miller
/s/ ABRAHAM OSTROVSKY Director March 31, 1999
- ---------------------------------------------------
Abraham Ostrovsky
60
62
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ------- ------------------------------------------------------------ ------------
3.1 Certificate of Incorporation of the Registrant.(1)
3.2 Form of Certificate of Amendment of Certificate of
Incorporation of the Registrant.(2)
3.3 Bylaws of the Registrant.(1)
4.1 Amended Stock Rights Agreement, among the Registrant and the
parties named therein, dated as of March 12, 1993.(1)
4.2 Form of Common Stock certificate.(1)
10.1 Form of Indemnity Agreement entered into among the
Registrant and its directors and officers.(1)
10.2* Registrant's 1992 Stock Option Plan, as amended, including
forms of option agreements.(1)
10.3* Registrant's 1993 Non-Employee Directors Stock Option Plan,
including form of option agreements.(1)
10.4* Registrant's 1993 Employee Stock Purchase Plan, including
form of offering document.(1)
10.5 Lease between the Registrant and Stevens Creek Office Center
Associates, dated as of November 30, 1992.(1)
10.6 Lease between the Registrant and Beim & James Properties
III, dated January 3, 1994.(3)
10.7 Lease between the Registrant and Cupertino Industrial
Associates, dated September 30, 1994.(4)
10.8 Lease between the Registrant and the Flatley Company, dated
January 30, 1995.(5)
10.9 Lease between the Registrant and Cupertino Brown Investment,
dated April 28, 1995.(6)
10.10 Agreement between NetManage, Ltd., Elron Electronic
Industries, Ltd., and NetVision, Ltd., dated July 1,
1995.(6)
10.11 Agreement and Plan of Reorganization among the Registrant,
NetManage Acquisition Corporation, Syzygy Communications,
Inc. and the Designated Shareholders, dated October 16,
1995.(6)
10.12 Agreement and Plan of Reorganization among the Registrant,
NetManage Acquisition Corporation and AGE Logic, Inc., dated
November 17, 1995.(6)
10.13 Stock Purchase Agreement by and among the Registrant,
Network Software Associates, Inc. a California corporation,
NetSoft, a California corporation, holders of securities of
NSA and holders of securities of NetSoft, dated as of July
8, 1997.(7)
10.14 Agreement and Plan of Reorganization by and among the
Registrant, Amanda Acquisition Corp. and FTP Software, Inc.,
dated as of June 15, 1998, as amended as of June 30, 1998
and July 14, 1998.(8)
63
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ------- ------------------------------------------------------------ ------------
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Public Accountants.
24.1 Power of Attorney. Reference is made to the signature page
to this Form 10-K.
27.1 Financial Data Schedule.
- ---------------
(1) Incorporated by reference to the Exhibits filed with the Registrant's
Registration Statement on Form S-1 (No. 33-66460) dated July 24, 1993, as
amended, which became effective September 20, 1993.
(2) Incorporated by reference to the Exhibits filed with the Registrant's
Registration Statement on Form S-4 (No. 333-59101) dated July 17, 1998 (the
"Form S-4").
(3) Incorporated by reference to the Exhibits filed with the Registrant's
Registration Statement on Form S-1 (No. 33-74364) dated January 24, 1994, as
amended, which became effective February 10, 1994.
(4) Incorporated by reference to the Exhibits filed with the Registrant's Form
10-Q for the quarter ended September 30, 1994.
(5) Incorporated by reference to the Exhibits filed with the Registrant's Form
10-Q for the quarter ended March 31, 1995.
(6) Incorporated by reference to the Exhibits filed with the Registrant's Form
10-K for the year ended December 31, 1995.
(7) Incorporated by reference to the Exhibits filed with the Registrant's Form
8-K dated July 29, 1997.
(8) Incorporated by reference to Annex A to the Joint Proxy Statement/Prospectus
included in the Form S-4.
* Employee Benefit Plan