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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
[ ] 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, 95014
CUPERTINO, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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 $59,920,389 AS OF FEBRUARY 28,
2001.(1)
THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF FEBRUARY 28, 2001
WAS 65,223,230.
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DOCUMENTS INCORPORATED BY REFERENCE
SECTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE
REGISTRANT'S ANNUAL MEETING OF STOCKHOLDERS, TO BE HELD MAY 30, 2001, 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.
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(1) Excludes 17,286,919 shares of Common Stock held by directors and officers
and stockholders whose beneficial ownership exceeds five percent of the
shares outstanding at December 31, 2000. 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.
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PART I
ITEM 1 -- BUSINESS.
OVERVIEW
NetManage, Inc. (the "Company") develops and markets software and service
solutions that allow its customers to access and leverage the considerable
investment they have in their host-based business applications, processes and
data.
The Company's business is primarily focused on providing a full spectrum of
specific personal computer and network or application server-based software and
tools. These products allow the Company's customers to access and use their
mission-critical line-of-business host applications and resources; to publish
information from existing host systems in a web presentation particularly to new
users on the Internet; to create new web-based applications that leverage the
corporation's existing business processes; and, to ensure the continued
operation of these solutions through the incorporation and deployment of
innovative real-time Internet-based support solutions.
The Company's business is targeted at taking advantage of the trend of
major corporations worldwide to adopt Business-to-Business ("B2B") or
Business-to-Consumer ("B2C") initiatives. In this market, the Company enables
its customers to bridge between their existing access systems and technologies
(Business-to-Employee or "B2E") and those required to compete in the B2B and B2C
marketplaces. The corporate resources internal to the organization, those behind
existing B2E solutions, are the basis of any eBusiness transformation for an
existing company. Alongside these solutions, the Company is focused on providing
products that allow existing corporate business processes to be extended to
business partners in the supply and demand chains, and products that allow new
business processes to be created in support of corporate eBusiness B2B and B2C
initiatives. The Company is also focused on taking advantage of major current
industry trends: the expansion of the Internet and its adoption as the eCommerce
and eBusiness infrastructure; the continued mobilization of personal computer
users and the adoption of mobile information access and display devices; and,
the availability of broader access to corporate data and information for people
internal and external to an organization.
The Company develops and markets these software solutions to allow its
customers to access and leverage applications, business processes and data on
IBM corporate mainframe computers and IBM midrange computers such as AS/400 and
on UNIX(R) based servers. The Company also develops and markets software that
allows real time application sharing on corporate networks and across the
Internet for the purposes of application support, help and training. The Company
provides professional support, maintenance, and technical consultancy services
to its customers in association with the products it develops and markets. The
Company provides professional applications and management consultancy to its
customers in association with the server-based products it delivers that allow
customers to develop and deploy new web-based applications.
The Company's principal products are compatible with Microsoft
Corporation's ("Microsoft") Windows 2000, Windows NT, Windows 98, Windows 95 and
Windows 3.x platforms, International Business Machines Corporation ("IBM")
operating systems, Novell, Inc. ("Novell") operating systems and various
implementations of the industry standard UNIX operating system such as IBM's
AIX, Hewlett Packard's HP/UX, Sun Microsystems' Solaris and the open source
Linux system.
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 a range of access, publishing and integration products. It
also has a range of support connectivity products that provide real-time visual
support in conjunction with help desk systems aimed at reducing the time and
cost of end user support. The Company's host access products provide the
applications and solutions that allow end user devices, including personal
computers, to communicate with large centralized corporate computer systems.
Host access products include the Company's current brands: the RUMBA(R),
ViewNow(TM) families, and the Chameleon(R) family. Strong publishing and
integration brands include the OnWeb(R) family and the Salvo(TM) family. The
Company's real-time visual support connectivity
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products add value to its access, publishing and integration solution offerings
and also target new market segments. Current products include SupportNow(TM)
Enterprise and the SupportNow SDK(TM) software tools that help reduce the length
and cost of support phone calls from end-users and help with end user education
and training.
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 sales will grow, and 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
Four important industry trends have had strong influence on the Company's
business strategy during the past two years: (i) the rapid adoption of eBusiness
and electronic trading approaches by major corporations worldwide; (ii) the
continuing development of the Internet, intranets and extranets for delivery of
mission-critical business applications in large companies; (iii) an increased
desire on the part of corporations to make information stored in mainframes and
midrange computers ("legacy" systems) broadly accessible internally and
externally to their employees and business partners; and, (iv) the continued
mobilization of users of personal computers and the proliferation of wireless
and handheld devices requiring corporate host access 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 "intranet" to distinguish it from the larger public Internet. When
companies use internetworking technology for connecting to outside customers and
suppliers, it is 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 to ensure interoperability.
The number and variety of applications and services that utilize the
internetworking infrastructure is growing rapidly -- pushed along by the
Internet and corporate eBusiness initiatives. The Company is focused on several
levels of product that utilize the internetworking infrastructure. These include
traditional host access products for corporate desktops and servers, which
provide users with the ability to communicate with corporate host systems;
products that allow organizations to transform "legacy" applications into
systems that can service external users, partners and customers -- particularly
through the Web; and, development platforms that allow organizations to
re-engineer their existing "Legacy" applications and draw one or many existing
applications and information sources together to create new applications for new
internal and external users.
The personal computer has continued to be an important 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
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location within the confines of an organization's security and access control
policies. As the Internet economy grows, the number of different communication
and internetworking options required by major corporations to support their
businesses, is increasing. The number and type of mobile computing and
communication devices is also increasing, now includes wireless handheld
devices, Personal Digital Assistants (PDAs), and Internet and Web-enabled
cellular phones.
Within organizations, personal computers must connect not only to other
personal computers via Local Area Networks (LANs), but also to workstations,
servers, minicomputers and mainframes, many of which may run different operating
system software, and 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. This major move, utilizing the Internet as the internetworking
solution, is termed eBusiness or eCommerce. eBusiness covers the full migration
of business processes to the web and the sharing of those business processes
with partners. eCommerce covers the elements that allow electronic selling,
trading and transactions on the Web. These two terms are now augmented by
specific terms that incorporate the advent of the wireless Internet. eMobile or
mCommerce describes the use of a wide range of handheld, mobile and wireless
devices as a part of an overall eBusiness or eCommerce solution.
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 that 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 access, publishing and integration
products, and application level solutions, that greatly improve and extend the
reach of existing corporate host-centric systems -- regardless of what the
end-user devices are and regardless of where the end-user devices are located.
As the Company continues to deliver on its vision, it will enable its customers
to implement B2E, B2B, and B2C business solutions, enable them to compete in the
Internet ecomony, and allow both internal and external users to access corporate
applications, data and information efficiently, and utilize business processes
in a manageable, secure and supportable way.
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.
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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. Over
time some of the Company's strategic partners include Microsoft, Intel, IBM,
Novell, Dell Computer and AT&T. All NetManage products are developed around the
following:
Ease of Use -- The Company's goal is to create host access
applications for non-technical users and to provide straightforward tools
allowing swift new application development. The Company's products are
designed to be set up on any personal computer or network server in a few
minutes. For many corporate users, the cost of training, installation, and
support can exceed software acquisition costs. Ease of use can reduce these
costs. Moreover, ease of use increases product utilization, thereby
enhancing product value to the customer.
Manageability -- NetManage offers an integrated suite of products and
improved network manageability for system administrators. NetManage is
focused on providing managed products and built-in common management server
support. The common characteristics of the product suite are 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 access, publishing
and integration 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
Application Programming Interfaces (APIs) 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 ViewNow(TM), SupportNow(TM),
OnWeb(R) and RUMBA(R), product families. During 2000 the Company acquired
Aqueduct Inc., a developer of application management and monitoring technology,
and will be incorporating Aqueduct's powerful application tools to significantly
enhance the Company's forthcoming management server products under the
ManageNow(TM) brand. The Company's currently available products include:
ViewNow(TM) Windows Edition ViewNow(TM)Windows Edition provides Microsoft
Windows users with a complete set of
high-performance connectivity software focused
on access to UNIX(R)hosts providing powerful
management facilities for centralized
configuration, deployment and control, as well
as built-in real-time support capabilities.
ViewNow(TM) InterDrive(R) NFS Client and server 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(R)file sharing systems.
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SupportNow(TM) 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(TM) Enterprise 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(TM) Server Comprehensive real-time support server offering
SupportNow(TM)Call Queue Management,
conferencing, backend help desk
integration, firewall and proxy services.
OnWeb(R) Comprehensive, robust and highly scalable
server-based solution allowing customers to
leverage their existing host applications, host
based information and host based business
processes into new applications or presentation
methods. OnWeb provides application publishing
to the web, the ability to selectively combine
information from more than one back-end system
resource for web presentation, and the ability
to add new business process or business logic
to augment that provided by a company's
existing systems. OnWeb has a complete range of
back-end connectors allowing access to host
applications and services, a powerful optimized
development environment called OnWeb Designer,
and a range of information publishers allowing
presentations such as HTML, WML, XML, COM and
Java Beans.
OnWeb(R) TI A member of the OnWeb family specially
developed as part of an agreement with
Microsoft to provide additional host access
services to Microsoft's Host Integration Server
2000 (HIS2000). OnWeb's back-end connectors and
design environment allow a wide range of
existing systems to be presented as COM/MTS
transactions to Microsoft's HIS2000 based
development environment expanding substantially
the capability and applicability of Microsoft's
solutions.
RUMBA(R) Office Complete connectivity software focused on
connecting PCs to IBM mainframe and AS/400
systems. RUMBA(R)Office provides state-
of-the-art terminal and printer emulation; file
sharing and file transfer solutions.
RUMBA(R) Web-to-Host A browser-based solution for fast deployment of
host access solutions to any browser supporting
ActiveX or Java. RUMBA(R)Web-to-Host deploys
from virtually any Web server, lowering Total
Cost of Ownership (TCO) by eliminating the need
to configure individual desktops during initial
installation and future updates.
Substantially all of the Company's net revenues have been derived from the
sale of products that provide access, publishing and integration applications
for the Microsoft Windows environment, and are marketed primarily to Windows
users. As a result, sales of the Company's products might be negatively impacted
by developments adverse to Microsoft's Windows products. In addition, the
Company's strategy of developing products based on the Windows operating
environment is substantially dependent on its ability to gain pre-release access
to, and to develop expertise in, current and future Windows developments by
Microsoft. No
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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
by directly affecting customer purchasing decisions or by making potential
customers delay their purchases of the Company's products. See "Competition"
below.
NetManage, ViewNow, Rumba, OnWeb, OnNet, Chameleon UNIXLink, Chameleon
HostLink, OpSession, SupportNow, NS/Portfolio, NS/ Router, InterDrive, the
NetManage logo and the lizard logo are trademarks or registered trademarks of
NetManage, Inc. or its wholly owned subsidiaries 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. Windows 2000, Windows NT,
Windows 98, Windows 95 and Windows 3.x are registered trademarks in the U.S. and
other countries by Micosoft Corporation. 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, MIS (Management
Information Systems) managers, and line-of-business managers. The Company,
through its host access products, targets three key market segments: 1)
connecting users of communication devices to UNIX, midrange (including IBM
AS/400) and mainframe systems; 2) allowing customers with these three types of
host systems to publish and re-engineer their applications for the Internet
economy; and 3) the Web. NetManage's goal is to allow customers to access,
publish and integrate their corporate information from anywhere on their global
business network, and to make that information available to employees, customers
and partners in a secure and manageable way. Realtime support 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 realtime support products and
services improve customer support and augment the sales process for the
independent software vendor (ISV) and corporate marketplaces.
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.
In the United States, the Company uses a combination of direct sales with
telemarketing support, assisted by designated personnel specifically assigned to
meet 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 United States and internationally. 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 or 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, Brazil, Canada,
France, Germany, Sweden, Israel, Italy, Japan, Mexico, the Netherlands, Spain,
and the United Kingdom. The Company also utilizes
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local distributors internationally. 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 2000, 1999, and 1998 respectively, the Company derived approximately
25%, 26%, and 26% 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 its 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 the Company's international distributors
will be able to effectively meet that demand.
Risks inherent in the Company's international business activities generally
include unexpected changes in regulatory requirements, tariffs, and other trade
barriers, costs and risks of localizing products for foreign countries, longer
accounts receivable payment cycles, difficulties in managing international
operations, currency fluctuations, potentially adverse tax consequences,
repatriation of earnings, and the burdens of complying with a wide variety of
foreign laws. There can be no assurance that such factors will not have an
adverse effect on the Company's future 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 and other professionals providing support by telephone from
the Company's facilities in Washington State; Massachusetts; and Ottawa,
Ontario, Canada. 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 Haifa, Israel and by 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 and host access publishing and integration solutions which
address the B2B, B2C and B2E markets. As of December 31, 2000, the Company had
approximately 180 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, 2000, 1999, and 1998 were $24.4
million, $18.5 million, and $18.9 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: the proliferation of Microsoft
Windows client; server technology; and the continued implementation of Web-based
access to corporate mainframe and midrange computer systems.
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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,
IBM, WRQ, Inc., Microsoft and Novell, as well as other major computer and
communications systems vendors, such as Sun Microsystems, Inc. It also competes
with companies such as IBM, BEA, Hewlett Packard, WebMethods, Silverstream, and
Computer Associates in the web integration server markets. In the real-time
support market it competes with companies such as Symantec Corporation. 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, 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 2000, 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 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 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
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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.
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, 2000, the Company had a total of 660 full-time
employees, of whom 354 were engaged in sales, marketing, technical support and
consulting, 104 in general management, administration and finance, 180 in
software development and engineering, and 22 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 in California;
North Andover, Massachusetts; Kirkland and Bellingham, Washington; Ottawa,
Ontario, Canada; and Haifa, Israel. During 2000, 1999, and 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
2000, 1999, and 1998 restructurings and acquisitions, and results of operations.
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, retain its employees, and to train, 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.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of March 15, 2001
are as follows:
NAME AGE POSITION
---- --- --------
Zvi Alon............................. 49 Chairman of the Board, President and Chief Executive
Officer
Michael R. Peckham................... 50 Chief Financial Officer, Senior Vice President,
Finance and Secretary
Robert Lee........................... 63 Vice President, Human Resources
Peter R. Havart-Simkin............... 48 Senior Vice President, Worldwide Strategic Development
and New Business
David Desjardins..................... 41 Vice President, Worldwide Consulting
Charles Mawby........................ 41 Vice President, Worldwide Engineering
Bertram Rankin....................... 42 Vice President, 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.
Michael R. Peckham joined the Company in November 1999 as Senior Vice
President, Finance, Chief Financial Officer, and Secretary. From February 1993
until November 1999, Mr. Peckham was Vice President, Finance and Administration
for Simware Inc., an international software development company. Prior to that
he served as Chief Financial Officer for NORR Partnership Limited, architects
and engineers from June 1987 to February 1993. Mr. Peckham holds a Bachelor of
Commerce (Honors Degree) from the University of Ottawa. Mr. Peckham is also a
Chartered Accountant.
Robert Lee joined the Company as Vice President, Human Resources in July
2000. Prior to joining NetManage, Mr. Lee served as an independent consultant in
the human resources field working on assignments for both private and public
organizations in a range of industries. From February 1990 to March 1999, Mr.
Lee worked for Seagate Technology, Inc. initially as Manager of Employee
Benefits and promoted to Vice President, Human Resources in September 1997.
Seagate is a manufacturer of computer disk drives. From January 1982 until
January 1990, Mr. Lee was Vice President of Human Resources with Plantronics,
Inc., a supplier of telecommunications products.
Peter R. Havart-Simkin joined the Company in August 1998 and became Senior
Vice President of Marketing in January 1999. In November 1999 he was appointed
as Senior Vice President, Worldwide Strategic Development and New Business. 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.
David P. Desjardins joined the Company in November 1999 as part of the
acquisition of Simware. Mr. Desjardins was appointed Vice President, Worldwide
Consulting in January 2001 after acting as Vice President, OnWeb since March
2000. While with Simware, Mr. Desjardins was appointed Vice President, Solutions
Group in June 1998 after acting as Director, Solutions Group since joining
Simware in January 1997. From November 1995 until December 1997, Mr. Desjardins
was Vice President Operations for Appian Interactive Corporation, a software
company selling web-publishing solutions. Mr. Desjardins served as an
independent systems and technology consultant on large-scale projects in the
energy industry from April 1994 until September 1997. From February 1993 to
March 1994 Mr. Desjardins held various positions, the most
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recent of which was Chief Operating Officer, with Intera Tydac Technologies
Inc., a provider of geographic information software and services.
Charles Mawby joined the Company in November 1999 as part of the
acquisition of Simware. Mr. Mawby was appointed Vice President, Worldwide
Engineering in October 2000 after serving as Vice President of Engineering for
NetManage's eSolutions group. Mr. Mawby was with Simware from October 1997 to
October 1999, serving as Manager of New Products and Director of Development.
Prior to that, he was the Director of Integration Services at Systems Xcellence,
Inc., a software development and integration company, from January 1997 to
October 1997. From April 1994 until December 1996, Mr. Mawby was President of
TechNode Inc., a software company focused on the development and marketing of
systems management products for use in terrestrial and wireless networks based
on scaleable agent technology developed by Mr. Mawby. Prior to that he served as
Vice President of Operations and Engineering for Remuera Corporation from
September 1988 to August 1991, and as President of Remuera Research &
Development (Canada) Inc. from September 1991 to March 1994.
Bertram W. Rankin joined the Company in October 2000 as Vice President,
Worldwide Marketing. Prior to joining NetManage, Mr. Rankin was with Ricoh
Silicon Valley ("RSV"), a division of Ricoh Company Ltd. from July 1998 until
September 2000. RSV developed and sold a line of information management
solutions. While with RSV, Mr. Rankin was appointed General Manager in November
1999 after acting as Vice President of Marketing from July 1998. From October
1995 to June 1998, Mr. Rankin was Vice-President of Marketing with MindWorks
Corporation, a developer of networked document management software. Mr. Rankin
served as Director of Product Marketing with Xerox Corporation from September
1992 to September 1995.
ITEM 2 -- PROPERTIES.
Substantially all of the Company's office space is leased. The Company has
165,000 square feet of total leased space in North America including the
Company's primary site, a 39,000 square foot headquarters building in Cupertino,
CA. This location supports executive, legal, finance, human resources,
marketing, sales, and administration. Other primary sites are located in
Kirkland, WA which supports sales, technical support and marketing and
Bellingham, WA which supports research and development. North Andover, MA
supports the east coast with sales and technical support. Ottawa, Ontario,
Canada supports the consulting and research and development groups primarily for
the OnWeb product line. North American real estate lease obligations have been
reduced through subleases, lease terminations, and natural expiration. Regional
sales offices are located in New York, NY; Irvine, CA ; Austin, TX; Miami, FL;
and Vienna, VA.
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, Brazil, France, Germany, Italy, Japan, Mexico, the
Netherlands, and the United Kingdom. European and Israel real estate obligations
have been reduced through subleases, lease terminations, and natural
expirations.
ITEM 3 -- LEGAL PROCEEDINGS.
On May 21, 1999, Verity filed a complaint against the Company alleging
claims for breach of contract, contractual and tortious breach of the implied
covenant of good faith and fair dealing, fraud, negligent misrepresentation,
conspiracy, and indemnification. The complaint arose out of the sale by FTP of
certain technology to Verity. Verity claimed that FTP's representations and
warranties regarding its ownership of the technology sold were inaccurate,
especially insofar as a third party claimed ownership of the technology. Verity
sought compensatory and punitive damages in an unspecified amount, and
attorneys' fees. The action was pending in the Superior Court for the County of
Santa Clara. The Company answered the complaint denying the allegations and
raising several affirmative defenses, among them that it had secured a release
from the third party of any claims it might have otherwise had against Verity
regarding ownership of the technology. However, NetManage decided to settle the
matter on August 15, 2000 by agreeing to secure license and distribution rights
for 100,000 copies of Verity software for $800,000.
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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 filed a notice of appeal
to the U. S. Court of Appeals for the Ninth Circuit. An agreement in principle
had been reached to settle the derivative case. In January of 2001, the Court
gave final approval of the settlement. This matter was settled, with no
admission of guilt, for a cash payment of $100,000 by NetManage's insurance
carriers.
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 alleged 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
asserted claims under California state law; the federal court complaint asserted
claims under the federal securities law. 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 alleged that, between April 18, 1996 and July 18,
1996, the defendants made false or misleading statements of material fact about
the Company's prospects. On September 19, 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 defendant's motion to dismiss the
second amended complaint in the Head federal action. Plaintiffs 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 individual cases of Head, Molinari, Beasley,&
Interactive Data were consolidated into NetManage I (federal claims) and
NetManage II (state claims). In November 2000, all were collectively settled,
with no admission of guilt, for a cash payment of $5.1 million by NetManage's
insurance carriers.
On March 14, 1996, a securities class action complaint, Greeble v. FTP
Software, Inc., et al., No 96-10544, was filed in the United States District
Court for the District of Massachusetts against FTP and certain of its former
officers and directors. The complaint alleged that between July 14, 1995 and
January 3, 1996, defendants violated the federal securities laws by making false
and misleading statements of material fact about FTP's prospects and financial
statements. NetManage acquired FTP in August 1998. On September 24, 1998, the
district court granted defendants' motion for partial summary judgment and
granted without leave to amend defendants' renewed motion to dismiss the
complaint. Plaintiffs filed a notice of appeal. Oral argument on the appeal was
held on June 9, 1999. By order dated October 8, 1999, the United States Court of
Appeals for the First Circuit affirmed the district court's dismissal.
Plaintiffs time to petition for review by the United States Supreme Court
expired and as a result the case has been closed.
In February 1996, a securities class action complaint, Zeid, et al. v.
Kimberley, et al., Case No. C-96-20136SW, was filed in the United States
District Court for the Northern District of California against Firefox
Communications Inc. ("Firefox") and certain of its former officers and
directors. FTP acquired Firefox in July 1996. The complaint alleged that,
between July 20, 1995 and January 2, 1996, the defendants violated the federal
securities laws by making false or misleading statements about Firefox's
operations and financial results. On May 8, 1997, the district court granted
defendants' motion to dismiss
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without leave to amend. Plaintiffs filed a notice of appeal. Oral argument on
the appeal was held on September 14, 1998. On November 1, 1999, the Court of
Appeals for the Ninth Circuit issued an order vacating the judgment of the
district court and remanded the case back to the district court for
reconsideration in light of its recently issued landmark decision in the
securities litigation case of Janas v. McCraken (In re Silicon Graphics Inc.).
After remand, the Company renewed its motion to dismiss. On March 22, 2000, a
hearing on motion to dismiss was held by the district court. The district court
again dismissed the complaint without leave to amend. The plaintiffs again filed
a notice of appeal in the Ninth Circuit. The Company is awaiting the results of
oral arguments held in the Ninth Circuit on March 20, 2001. The Company believes
the case is without merit and intends to defend it vigorously.
As the outcome of any case cannot be reasonably determined, the Company is
unable to make any assurance as to whether the result in a case will have a
material or adverse effect on the Company's financial position or results of
operations. Moreover, 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.
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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 28, 2001, there were 932 stockholders of record
and approximately 30,200 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 2000 and 1999 are as
follows:
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
2000
High............................................. $9.22 $5.41 $4.41 $2.09
Low.............................................. $4.88 $2.50 $2.03 $0.66
1999
High............................................. $3.25 $2.75 $2.53 $6.56
Low.............................................. $1.88 $2.06 $2.00 $1.97
The Company has not paid cash dividends on its common stock and does not
intend to pay any cash dividends in the foreseeable future.
ITEM 6 -- SELECTED CONSOLIDATED FINANCIAL DATA.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net revenues........................ $104,072 $ 79,200 $ 71,727 $ 61,524 $104,596
Loss from operations(1)............. $(74,982) $(31,999) $(21,817) $(42,074) $(13,653)
Net loss............................ $(71,910) $(27,492) $ (9,968) $(33,755) $ (5,705)
Net loss per share, basic and
diluted........................... $ (1.11) $ (0.42) $ (0.19) $ (0.78) $ (0.13)
Weighted average common shares,
basic and diluted................. 64,863 64,712 53,205 43,385 42,341
BALANCE SHEET DATA:
Cash and cash equivalents and short
term investments.................. $ 38,050 $ 63,227 $105,643 $ 49,551 $ 66,092
Working capital..................... $ 20,293 $ 22,760 $ 98,113 $ 55,542 $ 71,668
Total assets........................ $109,981 $215,367 $201,753 $119,593 $152,529
Total stockholders' equity.......... $ 53,029 $120,193 $159,160 $ 96,087 $129,291
- ---------------
(1) Loss from operations includes write-offs of in-process research and
development of $1.7 million, $19.1 million, $9.5 million, $20.6 million, and
$13.4 million for the years ended December 31, 2000, 1999, 1998, 1997, and
1996, respectively. Additionally, loss from operations includes
restructuring charges of $5.6 million, $3.8 million, $7.0 million and $5.2
million for the years ended December 31, 2000, 1999, 1998 and 1997. Also,
loss from operations includes an asset impairment charge of approximately
$42.2 million and an insurance recovery of $3.8 million for the year ended
December 31, 2000. (See further discussion in "Management's Discussion and
Analysis of Financial Condition and Results of Operations")
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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. Forward-looking statements include assumptions
regarding expected revenues from products recently introduced or acquired as a
result of recent acquisitions of other companies, expected changes in operating
expenses and capital spending, the Company's expectation that sales will
increase, the Company's expectation that research and development will remain
flat, sales and marketing expenses will increase as a result of the Company's
acquisition of FTP in 1998, and the Company's acquisitions of Wall Data and
Simware in 1999, and Aqueduct in 2000. The Company's actual results could differ
materially from the results discussed in the forward-looking statements. Factors
that could cause or contribute to such differences include, among other things,
a realization in the future that the markets for the Company's products,
including but not limited to Rumba, ViewNow, OnWeb and SupportNow could grow
more slowly than the Company or market analysts believe, or the Company will not
be able to compete effectively in those markets. In addition, there is no
assurance that the Company's products for real-time customer support over the
Internet will receive customer acceptance, that the Company will not suffer
increased competitive pressures, that buying decisions by the Company's
customers will not be adversely influenced by the actions of the Company's
competitors or other market factors, that the Company will be able to realize
new business opportunities that may exist as a result of the acquisition of Wall
Data, Simware, or Aqueduct, that the Company will be able to execute on its
revised business plan in a manner that will allow it to improve its financial
position, or that economic difficulties in the United States and Asia,
particularly Japan, will not adversely affect sales of the Company's products in
that region. The timely completion of the Company's restructuring of operations
described below is dependent upon a number of factors, including risks
associated with the integration of the remaining operations of Wall Data,
Simware, and Aqueduct, the Company's ability to complete the integration of the
operations and technologies of Wall Data, Simware and Aqueduct in a timely,
efficient and cost-effective manner. 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 and markets software applications that allow its
customers to implement host computer access from a range of internal or external
desktop or web-based client computers, to publish information from existing
host-centric applications to Internet and web-based client computer users, and
to create new applications that leverage existing host applications and data
sources. The Company develops and markets these software solutions for UNIX(R),
IBM AS/400 midrange and IBM corporate mainframe computers. The Company also
develops and markets software that increases the productivity of corporate call
centers, and allows real-time application sharing on corporate networks and
across the Internet. The Company provides professional support, maintenance and
consultancy services to its customers in association with the products it
develops and markets.
In the first six months of 2000, revenues, primarily from the Wall Data and
FTP products fell short of the level of revenues anticipated prior to the
acquisitions. In management's judgment, this short-fall in the level of revenue
was not a temporary condition. As a result, the Company revisited its strategy
to refocus itself on core competencies, revised its business plan, and its
projected future revenues for each family of products. Management believed it
was necessary to restructure the Company and reduce operating expenses in line
with the revised anticipated level of revenues, which were expected to be less
than or comparable to revenues generated during the first half of fiscal 2000.
As a result, the Company announced a restructuring on August 3, 2000. As
part of the restructuring, the Company reduced its workforce by approximately
17%, consisting mostly of Engineering and Customer Support personnel who were
focussed primarily on the Company's older technologies, acquired through the
Wall Data and FTP acquisitions. With the reduction in personnel, knowledge
levels with respect to certain products and the Company's ability to enhance and
expand products acquired from Wall Data and FTP was reduced, thus impacting
future expected revenues from these product families. In connection with the
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restructuring, the Company also made provisions for reductions in office space,
related overhead expenses, and the write-down of certain assets. The total
amount of the restructuring charge was $5.6 million. The restructuring charge
includes approximately $3.0 million of estimated expenses for facilities-related
charges and $1.6 million of employee-related expenses for employee terminations.
As of December 31, 2000 the Company had incurred costs totaling approximately
$3.6 million related to the restructuring which required $3.6 million in cash
expenditures.
Based on management's analysis of revised product directions, revenue
forecasts and undiscounted future cash flows, taking into account the estimated
impact on product development and customer support resulting from the reductions
in personnel, the Company determined that there was a permanent impairment of
the long-lived assets related to the acquisitions of Wall Data and FTP Software.
In accordance with Statement of Financial Standards (SFAS) No. 121, the Company
reevaluated the fair value of these long-lived assets and intangibles using
primarily the estimated discounted cash flows method. Management used the same
methodology to evaluate the fair value of its long-lived assets and intangibles
to allocate purchase price at the time of acquisition. As a result the Company
wrote off $42.2 million of goodwill and other intangibles, through a charge to
operations in the third quarter of fiscal 2000.
On June 5, 2000, the Company completed its acquisition of Aqueduct
Software, Inc. ("Aqueduct"), an early stage web-based application intelligence
company. The Company issued 1,121,495 shares of NetManage common stock and
issued warrants and options to purchase an additional 727,237 shares for all the
outstanding stock of Aqueduct including the retirement of $2.2 million of notes
payable and accrued interest. The Company also hired the three employees of
Aqueduct. The acquisition was accounted for as a purchase.
In the fourth quarter of 2000, the Company determined that it had
overestimated the liabilities assumed in the FTP and Wall Data acquisitions by
approximately $9.4 million. The Company reversed these liabilities against the
remaining goodwill and other intangibles acquired.
In the fourth quarter of 1999, following the acquisitions of Wall Data and
Simware, the Company initiated a plan to restructure its worldwide operations in
connection with the integration of operations of the acquisitions. In connection
with this plan, the Company recorded a $3.8 million charge to operating expenses
in 1999. The restructuring charge includes approximately $1.9 million of
estimated expenses for facilities-related charges associated with the
consolidation of redundant operations, $1.4 million of employee-related expenses
for employee termination costs, and $500,000 in accounting and legal fees
related to the acquisitions. The Company anticipates that the execution of the
restructuring actions will require total cash expenditures of approximately $3.8
million, which is expected to be funded from internal operations. As of December
31, 2000, the Company had made cash payments totaling approximately $2.4 million
related to the restructuring.
On December 29, 1999, the Company completed its acquisition of Wall Data
Incorporated ("Wall Data"), a leader in the PC-to-IBM host connectivity market.
The Company acquired a total of 10,203,344 outstanding shares of Wall Data
common stock and paid cash to qualifying Wall Data option holders and employee
stock purchase plan participants pursuant to a cash tender offer of $9.00 per
common share. Total aggregate payments pursuant to the cash tender offer
amounted to approximately $94.0 million. The Company completed the transaction
in two stages. On November 26, 1999, the Company acquired approximately 89% of
the outstanding shares of Wall Data pursuant to the cash tender offer. The
Company acquired the remaining outstanding shares of Wall Data by means of a
merger completed in accordance with Washington law on December 29, 1999. The
acquisition was accounted for as a purchase.
On December 10, 1999, the Company completed its acquisition of Simware Inc.
("Simware"), a leading provider of e-commerce solutions and web integration
servers. The Company acquired a total of 7,503,372 shares of Simware common
stock and paid cash to qualifying Simware option holders and employee stock
purchase plan participants pursuant to a cash tender offer of $3.75 per common
share. Total aggregate payments pursuant to the cash tender offer amounted to
approximately $29.2 million. The Company completed the transaction in two
stages. On November 2, 1999, the Company acquired approximately 91% of the
outstanding shares of Simware pursuant to the cash tender offer. The Company
acquired the remaining outstanding shares of Simware by means of a compulsory
acquisition completed in accordance with Canadian law on December 10, 1999. The
acquisition was accounted for as a purchase.
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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.
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 as a purchase. In late August
1998, following the acquisition of FTP, the Company initiated a plan to
restructure its worldwide operations as a result of current business conditions
and in connection with the integration of the operations of FTP. 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. As of
December 31, 2000, the restructuring has been substantially completed with the
exception of certain lease obligations. See Note 4 of Notes to Consolidated
Financial Statements.
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
integration of previously acquired companies, or the integration of any future
acquisition(s), will be accomplished successfully, and the failure to accomplish
effectively any of these integration's could have a material adverse effect on
NetManage's results of operations and financial condition. As discussed above,
the Company already incurred significant restructuring charges and asset
impairment in connection with the acquisition of Wall Data and FTP.
The Company's Board of Directors authorized the repurchase from time to
time of up to 9 million shares of the Company's common stock through open market
purchases. On January 2, 2001, the Company purchased 43,640 shares of its common
stock on the open market at an average purchase price of $0.996 per share for a
total cost of approximately $43,500. During 2000, the Company purchased
1,004,765 shares of its common stock on the open market at an average purchase
price of $0.85 per share for a total cost of approximately $0.9 million.
Cumulatively, as of December 31, 2000, the Company has purchased 7,359,065
shares of its common stock at an average price of $2.23 per share for a total
cost of approximately $16.4 million.
RESULTS OF OPERATIONS
During the past several years, the Company has taken several initiatives
intended to control costs and reduce operating expenses, including the
discontinuance of several low revenue generating products, and implementing
worldwide restructuring of its operations as a result of acquisitions and
prevailing market conditions.
Recently the Company has initiated other restructuring plans as a result of
the acquisitions of Wall Data, Simware, and Aqueduct including the restructuring
plan of $5.6 million announced on August 3, 2000. For most of 2000, the Company
focused on the core competencies of its key business lines -- the PC
Connectivity product line, the Web Publishing, Integration and Development
product line, and the Realtime Interactive Support product line -- each with
dedicated development, sales, marketing, and support resources. The PC
Connectivity product line provides the technology to make the connection between
personal computers and large corporate computers possible. These products
leverage the strengths and popularity of the Internet, as well as corporate
private networks, and offer features to improve network manageability. The Web
Publishing, Integration and Development product line provides the technology to
allow customers to leverage the investment they have in existing host based
systems, applications and business processes for new web-based presentations,
applications and solutions. The Publishing, Integration and Development product
line includes the company's latest product branded OnWeb. The Realtime
Interactive Support products add value to the PC Connectivity and Web
Publishing, Integration and Development product offerings, and are also targeted
at
17
19
new market segments. Products included SupportNow Enterprise and SupportNow
SDK -- real-time software tools that help reduce the length of support phone
calls from end-users and augment application help and training.
For the year ended December 31, 2000 as compared to the prior year, the
Company experienced an increase in net revenues and, an increase in net loss.
The increase in net revenues is primarily attributable to an increase in
maintenance revenues as a result of the inclusion of revenues from the recent
acquisitions of Wall Data, Simware, and Aqueduct. The Company continues to
experience pricing pressures on 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, amortization and impairment of goodwill and
restructuring charges, have increased in absolute dollars and have fluctuated as
a percentage of revenues for the year ended December 31, 2000 compared to 1999
primarily as a result of the inclusion of the operations of Wall Data, Simware,
and Aqueduct. Operating expenses are expected to increase as a result of the
acquisitions of Wall Data, Simware and Aqueduct but may fluctuate as a
percentage of net revenues as the Company completes its integration of Wall
Data, Simware, and Aqueduct 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.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
YEAR ENDED
DECEMBER 31, CHANGE
---------------- ---------------
2000 1999 $ %
------ ------ ------ -----
(DOLLARS IN MILLIONS)
Net revenues:
License fees......................................... $ 56.3 $ 56.5 $ (0.2) (0.4)%
Services............................................. 47.8 22.7 25.1 110.8%
------ ------ ------
Total net revenues........................... $104.1 $ 79.2 $ 24.9 31.4%
As a percentage of net revenues:
License fees......................................... 54.1% 71.3%
Services............................................. 45.9% 28.7%
------ ------
Total net revenues........................... 100.0% 100.0%
Gross margin........................................... $ 99.8 $ 74.6 $ 25.2 33.9%
As a percentage of net revenues...................... 95.9% 94.2%
Research and development............................... $ 24.4 $ 18.5 $ 5.9 31.6%
As a percentage of net revenues...................... 23.4% 23.4%
Sales and marketing.................................... $ 71.9 $ 45.3 $ 26.6 58.5%
As a percentage of net revenues...................... 69.1% 57.2%
General and administrative............................. $ 18.7 $ 14.1 $ 4.6 32.8%
As a percentage of net revenues...................... 18.0% 17.8%
Insurance recovery..................................... $ (3.8) $ (3.8) 100.0%
As a percentage of net revenues...................... (3.7%)
Write-off of in-process research and development....... $ 1.7 $ 19.1 $(17.4) (91.1)%
As a percentage of net revenues...................... 1.6% 24.1%
Restructuring charge................................... $ 5.6 $ 3.8 $ 1.8 47.7%
As a percentage of net revenues...................... 5.4% 4.8%
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20
YEAR ENDED
DECEMBER 31, CHANGE
---------------- ---------------
2000 1999 $ %
------ ------ ------ -----
(DOLLARS IN MILLIONS)
Goodwill impairment.................................... $ 42.2 $ 42.2 100.0%
As a percentage of net revenues...................... 40.5%
Amortization of goodwill............................... $ 14.1 $ 5.7 $ 8.4 149.1%
As a percentage of net revenues...................... 13.6% 7.2%
Interest income and other, net......................... $ 1.8 $ 4.9 $ (3.1) (62.4)%
As a percentage of net revenues...................... 1.8% 6.2%
Gain on investment, net................................ $ 2.0 $ 2.0 100.0%
As a percentage of net revenues...................... 1.9%
Provision for income taxes............................. $ 0.7 $ 0.4 $ 0.3 93.9%
Effective tax rate................................... NA NA
Net loss............................................... $(71.9) $(27.5) $(44.4) 161.6%
As a percentage of net revenues...................... (69.1%) (34.7%)
Net Revenues
Though fiscal year 2000, a majority of the Company's net revenues have been
derived from software license fees. Service revenues have been primarily
attributable to maintenance agreements associated with product licenses.
License fees remained relatively flat in absolute dollars and decreased
substantially as a percentage of total net revenues during the year ended
December 31, 2000 as compared to the year ended December 31, 1999. License fees
in 2000 include a full year's license fee revenue for Wall Data and Simware
versus the inclusion of two months of Simware's revenues and one month of Wall
Data's revenues in 1999. License fees in 2000 reflect the replacement of
historical product revenue with products from the acquired companies. The
increase in service revenues in absolute dollars and as a percentage of total
net revenues for the year ended December 31, 2000 as compared to 1999 primarily
reflects the addition of existing customer base as a result of the Wall Data and
Simware acquisitions.
The Company has operations worldwide with sales offices located in the
United States, Europe, Canada, Latin America, Israel, and Japan. International
revenues as a percentage of total net revenues were approximately 25% and 26%,
respectively, for the years ended December 31, 2000 and 1999. International
revenues as a percentage of total net revenues were relatively unchanged due to
the integration of FTP products, particularly in Europe, with the Company's
product lines in the international marketplace, and to a lesser extent, the
inclusion of results from the recent acquisitions of Wall Data and Simware
offset by declines in sales of the Company's other international product
offerings. The Company is currently in the process of integrating the sales and
distribution efforts of these recent acquisitions.
Software license fees are generally recognized as revenue upon shipment if
the fee is considered fixed and determinable, the arrangement does not include
significant customization of the software, and collectibility is probable.
Allowances for returns and doubtful accounts are provided based on historical
rates of returns and write-offs. Certain of the Company's sales to distributors
are under agreements providing rights of return and price protection on unsold
merchandise. Accordingly, the Company defers recognition of such sales until the
merchandise is sold by the distributor.
The Company provides ongoing maintenance and support to its customers,
generally under annual service agreements. Maintenance and support is comprised
of software updates for existing products and telephone support. Service
revenues are recognized on a pro-rata basis over the terms of such agreements.
The Company provides training and consulting services to its customers. Revenue
from such services is recognized as the related services are performed and has
not been material to date. The Company expects that revenues generated from such
training and consulting services will increase in the future.
19
21
No customer accounted for more than 10% of net revenues during the years
ended December 31, 2000 and 1999.
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, 2000 and 1999 primarily as a result of the change in the mix of
products sold and the shift of the Company's revenue from product to service
revenue. Cost of service revenues through December 31, 2000 and 1999 have not
been material and are 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 2000,
products acquired with Wall Data, which are sold through lower margin indirect
channels, were 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.
R&D expenses, in absolute dollars, have increased for 2000 as compared to 1999,
primarily as a result of increased headcount from the acquisitions of Wall Data
and Simware in the fourth quarter of 1999. The Company expects that R&D spending
in absolute dollars will increase in 2001 but, 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.
Sales and marketing
Sales and marketing ("S&M") expenses consist primarily of salaries and
commissions of sales and marketing personnel, consulting personnel, advertising
and promotional expenses, customer service and support costs. S&M expenses
increased in absolute dollars during 2000 as compared to 1999 primarily due to
increased headcount as a result of the of Wall Data and Simware acquisitions in
the fourth quarter of 1999. The Company expects that S&M expenses during 2001,
as a percentage of total net revenues, will fluctuate depending on future
revenue levels.
General and administrative
General and administrative ("G&A") expenses increased in absolute dollars
for 2000 as compared to 1999, primarily due to an increase in headcount as a
result of the of Wall Data and Simware acquisitions, in the fourth quarter of
1999.
20
22
Insurance recovery
During the first quarter and third quarter of 2000, the Company received a
cash payment of $2.5 million and $1.3 million, respectively, from it's insurance
companies as a reimbursement of amounts paid for legal fees and expenses by the
Company substantially in prior years in connection with settlement of certain
litigation.
Write-off of in-process research and development
In connection with the acquisition of Aqueduct in the second quarter of
2000, the Company allocated $1.7 million of the purchase price to in-process
research and development projects. 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 research and development in progress had no
alternative future uses. Accordingly, these costs were expensed as of the
acquisition date.
In connection with the acquisitions of Wall Data and Simware in the fourth
quarter of 1999, the Company acquired total intangible assets and purchased
technology of $92.2 million. Of this amount, $19.1 million was reflected as a
charge to operations in the fourth quarter of 1999, 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 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. For a further discussion of write-off of in-process
research and development as it relates to the Company's acquisitions, see Note 3
of the accompanying Notes to the Company's Consolidated Financial Statements.
Restructuring charge
On August 3, 2000, the Company announced a restructuring of its operations
designed to re-focus the Company on core business functions and reduce operating
expenses. In connection with the restructuring, the Company reduced its
workforce by approximately 17% and made provisions for reductions in office
space, related overhead expenses, and the write-down of certain assets. The
total amount of the restructuring charge was $5.6 million, which primarily
consisted of approximately $3.0 million of estimated expenses for facilities-
related charges, $1.6 million of employee-related expenses for employee
terminations and an $800,000 settlement to Verity for a software license that
the Company does not plan to use and accordingly has written-off.
In the fourth quarter of 1999, following the acquisitions of Wall Data and
Simware, the Company initiated a plan to restructure its worldwide operations in
connection with the integration of operations of the acquisitions. In connection
with this plan, the Company recorded a $3.8 million charge to operating expenses
in 1999. The restructuring charge included approximately $1.9 million of
estimated expenses for facilities-related charges associated with the
consolidation of redundant operations, the write-off of excess equipment,
leasehold improvements as facilities are downsized or closed, $1.4 million of
employee-related expenses for employee terminations, and $500,000 in accounting
and legal fees related to the acquisitions.
21
23
Goodwill impairment
In connection with the restructuring announced on August 3, 2000 (see
overview section of "Management's Discussion and Analysis of Financial Condition
and results of Operations" and Notes 2 and 4 of the accompanying Notes to the
Company's Consolidated Financial Statement), management performed an evaluation
of the recoverability of all assets of FTP and Wall Data. The Company evaluated
possible impairment of long-lived assets using estimates of undiscounted future
cash flows. Impairment loss to be recognized is measured as the amount by which
the carrying amount of the assets exceeds the fair value of the asset.
Management evaluated the fair value of its long-lived assets and intangibles
using primarily the estimated discounted future cash flows method. Management
used the same methodology to evaluate the fair value of its long-lived assets
and intangibles to allocate purchase price at the time of acquisition.
Management concluded from the results of this evaluation that a significant,
permanent impairment of goodwill and other intangibles had occurred. As a
consequence, the Company wrote off $42.2 million of goodwill and other
intangibles through a charge to operations in August 2000.
Amortization of goodwill
Goodwill is an intangible asset that represents the excess of the purchase
price of an acquired company over the estimated fair value of its net
identifiable assets. Goodwill is amortized over its estimated useful life of
five to seven years. Amortization of goodwill increased in 2000 compared to
1999, primarily because 2000 was the first full year of amortization of the
goodwill arising from the acquisitions of Wall Data and Simware in the fourth
quarter of 1999. The Company expects amortization of goodwill to decrease next
year as a result of the goodwill impairment charge of $42.2 million taken in the
third quarter of 2000, and the goodwill and intangible assets adjustment to
reverse $9.4 million of overestimated liabilities assumed in the FTP, and Wall
Data acquisitions recorded in the fourth quarter of 2000.
Interest income and other, net
The decrease in interest income and other, net for 2000 as compared to
1999, is primarily the result of a net decrease in cash balances and investments
as a result of the acquisition of Wall Data and Simware in the fourth quarter of
1999.
Gain on Investment, net
On December 18, 2000, ServiceSoft, Inc. was acquired by Broadbase, Inc., a
company publicly traded on NASDAQ. The Company recognized approximately $2.0
million gain on its investment in ServiceSoft and classified the Broadbase
shares in the available-for-sale securities.
Provision for income taxes
The Company recorded a provision for income taxes for the year ended
December 31, 2000 of approximately $0.7 million, which consisted primarily of
foreign income taxes.
At December 31, 2000, the Company had a gross deferred tax asset of
approximately $62.1 million. Realization of the gross deferred tax asset is
dependent on the Company generating sufficient future taxable income. Currently,
management believes that it is likely the gross deferred tax asset may not be
realized and, therefore, has fully reserved the gross deferred tax asset. The
amount of the gross deferred tax asset, however, could be adjusted in the near
term if actual future taxable income differs from estimated amounts.
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YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
YEAR ENDED
DECEMBER 31, CHANGE
---------------- ----------------
1999 1998 $ %
------ ------ ------ ------
(DOLLARS IN MILLIONS)
Net revenues:
License fees.......................................... $ 56.5 $ 55.1 $ 1.4 2.5%
Services.............................................. 22.7 16.6 6.1 36.7%
------ ------ ------
Total net revenues............................ $ 79.2 $ 71.7 $ 7.5 10.5%
As a percentage of net revenues:
License fees.......................................... 71.3% 76.8%
Services.............................................. 28.7% 23.2%
------ ------
Total net revenues............................ 100.0% 100.0%
Gross margin............................................ $ 74.6 $ 68.3 $ 6.3 9.2%
As a percentage of net revenues....................... 94.2% 95.2%
Research and development................................ $ 18.5 $ 18.9 $ (0.4) (2.1)%
As a percentage of net revenues....................... 23.4% 26.4%
Sales and marketing..................................... $ 45.3 $ 39.5 $ 5.8 14.7%
As a percentage of net revenues....................... 57.2% 55.1%
General and administrative.............................. $ 14.1 $ 12.4 $ 1.7 13.7%
As a percentage of net revenues....................... 17.8% 17.3%
Write-off of in-process research and development........ $ 19.1 $ 9.5 $ 9.6 101.1%
As a percentage of net revenues....................... 24.1% 13.2%
Restructuring charge.................................... $ 3.8 $ 7.0 $ (3.2) (45.7)%
As a percentage of net revenues....................... 4.8% 9.7%
Amortization of goodwill................................ $ 5.7 $ 2.8 $ 2.9 103.6%
As a percentage of net revenues....................... 7.2% 3.9%
Interest income......................................... $ 4.9 $ 3.5 $ 1.4 40.0%
As a percentage of net revenues....................... 6.2% 4.9%
Equity in income of unconsolidated affiliate............ $ -- $ 1.0 $ (1.0) (100.0)%
As a percentage of net revenues....................... NA 1.4%
Gain on sale of investment in unconsolidated
affiliate............................................. $ -- $ 11.7 $(11.7) 100%
As a percentage of net revenues....................... NA 16.3%
Provision for income taxes.............................. $ .4 $ 4.4 $ (4.0) (90.9)%
Effective tax rate.................................... NA NA
Net loss................................................ $(27.5) $(10.0) $(17.5) 175.0%
As a percentage of net revenues....................... (34.7)% (13.9)%
Net Revenues
License fees increased in absolute dollars but decreased as a percentage of
total net revenues during the year ended December 31, 1999 as compared to the
year ended December 31, 1998. The increase in license fees was primarily
attributable to the inclusion of FTP's revenues for the full fiscal year 1999
and inclusion of two months of Simware's revenues and one month of Wall Data's
revenues in 1999. The increase in service revenues in absolute dollars and as a
percentage of total net revenues for the year ended December 31, 1999 as
compared to 1998, primarily reflects the growth in the customer base.
International revenues as a percentage of total net revenues were
approximately 26% for the years ended December 31, 1999 and 1998. International
revenues as a percentage of total net revenues were relatively unchanged due to
the integration of FTP products, particularly in Europe, with the Company's
product lines in the international marketplace, and to a lesser extent, the
inclusion of results from the recent acquisitions of Wall Data and Simware,
offset by declines in sales of the Company's other international product
offerings.
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25
No customer accounted for more than 10% of net revenues during the years
ended December 31, 1999 and 1998.
Gross margin
Gross margin, in absolute dollars, increased between the years ended
December 31, 1999 and 1998, and gross margin, as a percentage of net revenues,
decreased between the years ended December 31, 1999 and 1998 primarily as a
result of the change in the mix of products sold and lower average margins of
the Company's FTP products sold through indirect channels of distribution offset
by cost savings obtained from the outsourcing of manufacturing activities,
beginning in the third quarter of 1998. Cost of service revenues through
December 31, 1999 has not been material and is not reported separately.
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,
were included in the Company's results for the entire year.
Research and development
R&D expenses in absolute dollars remained relatively constant for 1999 as
compared to 1998, and as a percentage of total net revenues had decreased
slightly for 1999 as compared to 1998, primarily as a result of cost savings,
particularly in R&D salaries and benefits, associated with the reduction in
headcount from a restructuring plan announced in the third quarter of 1998,
offset by the inclusion of R&D expenses from the acquisitions of Wall Data and
Simware.
Sales and marketing
S&M expenses increased in absolute dollars and as a percentage of net
revenues during 1999 as compared to 1998, as the Company launched new products,
which were based on the integration of the technologies of FTP with those of the
Company. These efforts required additional advertising and promotion activities.
In addition, the inclusion of Simware's and Wall Data's results in the fourth
quarter also contributed to the increase of S&M expenses.
General and administrative
G&A expenses increased slightly in absolute dollars and as a percentage of
sales for 1999 as compared to 1998, as a result of including Wall Data's and
Simware's G&A expenses from the date of acquisition forward, and the inclusion
of a $1.8 million dollar cash settlement of a lawsuit in the third quarter of
1999, offset by the reductions in G&A expenses as a result of a restructuring
plan announced in August 1998. The Company also recorded a restructuring charge
in the fourth quarter of 1999.
Write-off of in-process research and development
In connection with the acquisitions of Wall Data and Simware in the fourth
quarter of 1999 and the acquisition of FTP during the third quarter of 1998, the
Company acquired total intangible assets and purchased technology of $92.2
million in 1999 and $28.1 million in 1998. Of this amount, $19.1 million in 1999
and $9.5 million in 1998 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, 1999 and
1998, respectively.
Restructuring charge
In the fourth quarter of 1999, following the acquisitions of Wall Data and
Simware, the Company initiated a plan to restructure its worldwide operations in
connection with the integration of operations of the acquisitions. In connection
with this plan, the Company recorded a $3.8 million charge to operating expenses
in 1999. The restructuring charge included approximately $1.9 million of
estimated expenses for facilities-
24
26
related charges associated with the consolidation of redundant operations and
the write-off of excess equipment and leasehold improvements as facilities are
downsized or closed, $1.4 million of employee-related expenses for employee
terminations, and $500,000 in accounting and legal fees related to the
acquisitions. The Company anticipated that the execution of the restructuring
actions would require total cash expenditures of approximately $3.8 million,
which was expected to be funded from internal operations. As of December 31,
1999, the Company had made cash payments totaling approximately $0.2 million
related to the restructuring.
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 included approximately $5.5
million of estimated expenses for the write-off of excess equipment and
leasehold improvements as NetManage facilities were downsized or closed,
facilities-related expenses associated with the consolidation of redundant
operations, and $1.5 million of employee-related expenses for employee
terminations. Additionally, prior to the acquisition of FTP by the Company, FTP
recorded a restructuring charge. The remaining restructuring liability of $9.7
million as of the date of acquisition was assumed by the Company in connection
with the acquisition. The two restructuring plans included a reduction in the
Company's worldwide workforce, reduction of office space, and the closure of
four domestic locations, all of FTP's international facilities, and additional
NetManage international locations. The reduction in work force involved
approximately 150 employees. Asset related write-offs primarily related to
leasehold improvements, computers, and communications equipment which were no
longer 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.
Amortization of goodwill
Amortization of goodwill increased primarily in 1999 compared to 1998, as
this was the first full year of amortization of the goodwill arising from the
acquisition of FTP that occurred in August 1998.
Interest income
The increase in interest income for 1999 as compared to 1998 is primarily
the result of an increase in cash balances and investments, as a result of the
acquisition of FTP, offset by reductions of cash in the fourth quarter by the
cash tender offers for Wall Data and Simware.
Equity in income of unconsolidated affiliate and gain on investment in
unconsolidated affiliate
The Company's ownership interest in NetVision, prior to its sale in
December 1998, was approximately 32%. In connection with this ownership
interest, the Company recorded equity in income of unconsolidated affiliate of
$1.0 million, which is included in the accompanying Consolidated Statement of
Operations for the year ended December 31, 1998. In December 1998, the Company
sold its equity interest in NetVision for $17.0 million. 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.
Provision for income taxes
The Company recorded a provision for income taxes for the year ended
December 31, 1999 of approximately $0.4 million, which consisted primarily of
foreign 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.
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27
DISCLOSURES ABOUT MARKET RISK
Interest rate risk
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio. The Company places its
investments with high credit quality issuers and, by policy, limits the amount
of credit exposure to any one issuer. As stated in its policy, the Company is
averse to principal loss and seeks to preserve its invested funds by limiting
default risk, liquidity risk, and territory risk.
The Company mitigates default and liquidity risks by investing in only safe
and high credit quality securities, and by positioning its portfolio to respond
appropriately to a significant reduction in a credit rating of any investment
issuer or guarantor. The portfolio includes only marketable securities with
active secondary or resale markets to ensure portfolio liquidity. The Company
mitigates territory risk by only allowing up to 25% of the portfolio to be
placed outside of the United States.
The table below presents the carrying value, market value and related
weighted average interest rates for the Company's cash and interest-bearing
investment portfolio as of December 31, 2000. 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 and cash equivalents -- fixed rate............. $35.0 $35.0 5.8%
Short-term investments -- fixed rate................ 3.0 3.0 5.8%
----- ----- ---
Total interest bearing instruments.......... $38.0 $38.0 5.8%
===== ===== ===
Foreign currency risk
The Company transacts business in various foreign currencies, primarily in
Europe and Israel. Prior to 2000, the Company had 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 the program, increases or decreases in the Company's foreign
currency transactions were 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 were marked-to-market with unrealized
gains and losses included in interest income and, thus, were recognized in
income in advance of the actual foreign currency cash flows. As these forward
contracts matured, the realized gains and losses were recorded and were included
in net income (loss) as a component of interest income. The Company's ultimate
realized gain or loss with respect to currency fluctuations depended upon the
currency exchange rates and other factors in effect as the contracts mature.
The Company did not use foreign currency forward contracts during 2000.
LIQUIDITY AND CAPITAL RESOURCES
AS OF DECEMBER 31,
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2000 1999
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(IN MILLIONS)
Cash and cash equivalents.................................. $ 35.0 $ 63.1
Short-term investments..................................... $ 3.0 $ 0.1
Net cash provided by (used in) operating activities........ $(26.1) $ 5.0
Net cash provided by (used in) investing activities........ $ (2.6) $ 25.2
Net cash provided by (used in) financing activities........ $ 1.3 $(10.0)
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
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secondary stock offerings and preferred stock issuances, which aggregated net
proceeds to the Company of approximately $72.5 million. The Company does not
have a bank line of credit.
In March 2001, the Company received a $5.1 million income tax refund
relating to a $10.9 million net operating loss incurred in 1997, which was
carried back to 1994. The refund amount included $863,000 of interest income.
The tax refund, net of interest income, was included in other receivables in the
amount of $4.2 million as of December 31, 2000.
During the year ended December 31, 2000, the Company's aggregate cash and
cash equivalents, short-term investments and long-term investments decreased
from $63.2 million to $38.0 million. This decrease was due primarily to
operating losses, restructuring charges, and the Company's purchase of $0.9
million of its common stock in the open market under the repurchase program
described below.
The Company's principal investing activities to date have been the purchase
of short-term and long-term investments, business acquisitions, and equipment
purchases. The Company does not have any specific commitments with regard to
future capital expenditures.
Net cash provided by financing activities in 2000 reflects proceeds from
the sale of common stock under the Company's employee stock purchase plan and
stock option plans.
At December 31, 2000, the Company had working capital of $20.3 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 beyond one year.
The Company's Board of Directors has authorized the purchase from time to
time of up to 9 million shares of the Company's common stock through open market
purchases. On January 2, 2001, the Company purchased 43,640 shares of its common
stock on the open market at an average purchase price of $0.996 per share for a
total cost of approximately $43,500. During 2000, the Company purchased
1,004,765 shares of its common stock on the open market at an average purchase
price of $0.85 per share for a total cost of approximately $0.9 million.
Cumulatively, as of December 31, 2000, the Company has purchased 7,359,065
shares of its common stock at an average price of $2.23 per share for a total
cost of approximately $16.4 million.
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, general economic conditions, in particular the recent
slowdown of purchases of information technology due to current economic
conditions in North America, demand for the Co