We develop and market software and service solutions that are designed to enable our customers to access and leverage the investment they have in their corporate business applications, processes and data. We provide a range of personal computer, browser-based and server-based software products and tools. These products allow our customers to access and leverage applications, business processes and data on IBM and IBM compatible mainframe computers, IBM mid-range computers such as the iSeries, (often referred to as host access), in packaged applications, middleware and databases such as SAP, Siebel, Oracle and PeopleSoft, amongst others, and on UNIX and Microsoft based servers. We provide support, maintenance, and technical consultation services to our customers in association with the products we develop and market. We provide applications and management consultancy to our customers primarily in association with the server-based products we deliver that are designed to allow customers to develop and deploy new web-based applications and services.
Four important industry trends have strong influences on our business strategy:
1. the adoption of electronic commerce by major corporations worldwide and the increasing acceptance of these approaches in mid-sized companies;
2. the continuing development of the Internet, intranets and extranets for delivery of mission-critical business applications in large and mid-sized companies;
3. the desire on the part of corporations to make business processes and information broadly accessible internally and externally to their employees, customers, and business partners; and
4. the continued mobilization of users of personal computers and the proliferation of wireless and handheld devices requiring corporate system access on a global basis.
The growth of the Internet has also been matched by an increase in the use of mobile computing which allows users to access a company’s computer systems from remote locations within the confines of an organization’s security and access-control policies. As the Internet continues to grow, the number of different communication and inter-networking options required by major corporations to support their businesses is also increasing. The number and type of mobile computing and communication devices now includes wireless handheld devices, personal digital assistants (PDAs), Internet and Web-enabled cellular phones and smartphones. We anticipate that these trends will continue to accelerate over the next several years.
We believe that our customers require a single set of solutions that address the traditional need for host access combined with the need for the presentation of existing corporate systems with a Web application look and feel, along with the delivery of existing corporate processes and transactions as reusable programmatic components such as Web services. In assessing the change in the marketplace, we have focused our sales and marketing efforts on meeting the changing needs of our customers. Our products are designed and built to incorporate reusable components and technologies and to utilize common underlying services such as user management, system management, security, auditing and reporting. Several technologies are employed to provide these solutions; which include traditional thick client or desktop solutions; thin client or browser-based solutions; zero footprint or server-based solutions and application adapter or connector technologies. Within this marketplace, we believe the trend is away from desktop solutions and toward zero footprint solutions. We believe this movement is primarily driven by a desire to reduce the total cost of ownership associated with deploying and maintaining older technology. We also believe that a major element of our customer base will deploy a mixture of all types of solutions.
The market is also made up of a number of products that allow organizations to reduce costs or increase revenue by allowing them, or their business partners, to interact via the Internet with corporate business applications that are the backbone of their business processes. A primary example of this kind of solution is found in self-service call center applications. Companies are building solutions that allow customers to determine order status over the Internet without involving a customer support representative. This approach simultaneously minimizes staffing costs and improves customer service. Our products assist our customers in building solutions that quickly transform corporate applications into Web-based solutions.
Industry background
The number and variety of applications that utilize internal company networks and the Internet continues to grow, driven in part by corporate initiatives to increase the responsiveness and agility of the business. Additionally, enterprises are faced with much tighter restrictions on corporate IT budgets and new application initiatives. IT organizations are more focused on leveraging their current investments in systems and applications, improving operating efficiencies, reducing costs and extending their company’s market reach.
We develop products that are designed to assist companies in meeting these needs. Our products include:
1. traditional host access products for desktops to communicate with corporate host systems;
2. products that allow organizations to transform corporate applications into systems that can service external users, partners and customers through the Web; and
3. development platforms that allow organizations to create new applications based on information and data from one or more existing applications.
Additionally, we provide products that allow access to and use of existing business processes and transactions for customers using application server development platforms such as IBM WebSphere, BEA WebLogic and Microsoft .NET. These products are referred to as “connecters” or “adapters” and allow corporate applications to be presented in formats such as Web Services. These products address the access and integration markets which over time have converged, as both customers and the industry look for more integrated solutions. We believe that these trends will continue and gain momentum as businesses experience the often rapid return on investment derived from these solutions.
Companies are seeking ways to make certain applications accessible to customers, partners and vendors in order to enhance the flow of information and reduce expenses. This major move, utilizing the Internet as the inter-networking solution, covers the full migration of moving business processes to the Web and the sharing of those processes with partners—allowing electronic selling, trading and other transactions on the Web. We are focused on providing solutions to our customers that allow them to more easily share business processes and business services in a secure environment.
We believe that the open and interoperable characteristics of inter-networking technology, the use of intranets and the software that enables them, and the continued adoption of the Internet as an inter-company communication mechanism will continue to grow.
We believe that the adoption of Services Oriented Architectures (SOA) will drive the requirement to incorporate existing applications as key components in the new approach to corporate IT systems. The ability to “componentize” existing business processes in an industry standard way and deliver those components to new applications and frameworks easily and quickly will ensure that corporations get new and increased value from their existing IT assets.
Our vision is to provide our integration products and solutions to greatly improve and extend the reach and value of existing corporate systems, regardless of what the end-user devices are or where the end-user devices are located. As we continue to deliver on our vision, we intend to support our customers in implementing business-to-employee (B2E), business-to-business (B2B), and business-to-customer (B2C) solutions and SOA. See “Risk Factors” under Item 1A below.
Products and technology
Our suite of products provides organizations with cost-effective solutions for connecting companies with their employees, partners and customers. Our products extend the functionality of these organizations’ technology investments by providing essential services that are not included in desktop and network operating systems. Our solutions are designed to streamline communication, reduce the total cost of ownership of desktop connectivity, and increase productivity throughout an organization.
Our current products include:
RUMBA
Connectivity software designed to connect PCs to IBM mainframe and iSeries systems and UNIX host systems. RUMBA provides state-of-the-art terminal and printer emulation, file sharing, and file transfer solutions.
ViewNow X Server and
ViewNow InterDrive NFS
Connectivity software allowing PCs to share files with UNIX host systems using Network File System, or NFS, and to access and run X Windows applications on UNIX hosts.
OnWeb Web-to-Host
A browser-based product for fast deployment of host access solutions to any browser supporting ActiveX or Java. OnWeb Web-to-Host can be deployed from virtually any Web server and can lower total cost of ownership of terminal emulators by eliminating the need to configure individual desktops during initial installation and future updates. This product was formerly marketed under the RUMBA brand name until the fourth quarter of 2003.
OnWeb Server
A broad, robust, and highly scalable server-based solution designed to allow customers to leverage their existing enterprise applications, information, and business processes for new presentation methods and integration projects. OnWeb Server is designed to enable application publishing on the Web by mapping one or more human-based transactions or processes to a Web-based presentation. OnWeb can also generate .NET Assemblies, BizTalk adapters, JavaBeans, Enterprise JavaBeans (EJB) and portlets from back-end transactions. These components can then be reused in building new applications and services.
OnWeb for iSeries
OnWeb for iSeries runs natively on IBM iSeries hardware and does not require the use of a separate runtime server. OnWeb for iSeries is capable of combining information from multiple 5250 applications, databases and RPG applications, and publishing the results directly in HTML or delivering them as a Web service, JavaBean, EJB or .NET Assembly.
Librados Application and
Technology Adapters
A range of high performance and highly scalable application and technology adapters for both Java J2EE application servers and Microsoft BizTalk servers. Our Librados adapters allow data and information to be accessed and extracted from a range of packaged applications such as SAP, PeopleSoft, JD Edwards, Siebel and Oracle, amongst others, for a range of databases including Oracle, Informix, IBM DB2 and Sybase and for a range of technology connections including support for Electronic Data Interchange (EDI) standards. This technology resides entirely within the bounds of the application server environment negating the need for intermediary (or proxy) servers which may hinder performance and increase implementation complexity.
A significant portion of our net revenues has been derived from the sale of products that provide host access, presentation and integration solutions for the Microsoft Windows environment (clients and servers), and are marketed primarily to Windows users. In addition, our strategy of developing products based on the Windows operating environment is substantially dependent on our ability to gain pre-release access to, and to develop expertise in, current and future Windows developments by Microsoft. We have no agreement with Microsoft giving us pre-release access to future Windows products. Also, we have products which are similar to functionality included in some Microsoft products. Microsoft is expected to increase development of such products.
Some of our newer OnWeb products have been developed to run on the UNIX operating system, including Linux and Solaris and are marketed primarily to the Fortune 1000 companies running UNIX platforms as their servers. In addition, our strategy of developing products based on the UNIX operating environment is substantially dependent on our ability to gain pre-release access to, and to develop expertise in, current and future UNIX developments by Sun, IBM, HP and others. No agreement between a developer of UNIX operating systems and us exists to provide pre-release access to future UNIX products.
We have had a number of acquisitions over time, including our most recent acquisition of Librados, Inc. in the fourth quarter of 2004 that have provided technology incorporated into our current product offerings. We regularly evaluate product and technology acquisition opportunities and we may make acquisitions in the future if we determine that an acquisition would further our corporate strategy.
For a discussion of risk factors that may affect our business and financial results, see “Risk Factors” in Item 1A below.
Working capital
At December 31, 2005, we had working capital of $14.0 million. We believe that our current cash balance and future operating cash flows will be sufficient to meet our working capital needs, capital expenditure requirements and complete currently identified projects and planned objectives for at least the next 12 months. Although we do not have any specific commitments with regard to future capital expenditures, we do anticipate normal capital expenditures for the replacement and addition of computer equipment and furniture and fixtures related to our operations. Our standard payment terms are net 30 days and the majority of our business is done under those terms. Our cash balance could be impacted by the risks and uncertainties outlined in Item 1A, “Risk Factors”, however there are no additional trends or uncertainties that we are aware of that will materially impact our cash balance.
Backlog
Since we generally ship software products within a short period of time after receipt of an order, we do not typically have a material backlog of unfilled orders. Our revenues, in particular our license fees, in any one quarter are substantially dependent on orders booked in that quarter and particularly in the last month of that quarter.
Sales and marketing
We develop products that are designed to provide solutions for our customers across a wide-range of industries. Successful installations can be found in government agencies, as well as companies in the finance, health care, manufacturing and insurance industries. Our products are designed to improve business processes throughout these organizations.
To bring our products to market we use a combination of telesales and direct sales personnel specifically assigned to meet the needs of major customer accounts. As part of our strategy to develop multiple distribution channels, we expect to continue our use of indirect channels, such as resellers, particularly value added resellers and systems integrators, and to a lesser extent distributors and original equipment manufacturers, both in the United States and internationally. Any material increase in our indirect sales may adversely affect our average selling prices and gross margins due to the lower unit costs that are typically charged when selling through indirect channels.
In the United States, we have eight sales offices, and internationally, we have sales offices in Canada, France, Germany, Israel, Italy, Holland, Spain, and the United Kingdom. We also utilize local distributors and resellers internationally. We support the sales activity of these sales offices and distributors in specific countries through localization of products and sales material, local training, and participation in local trade shows.
In 2005, 2004, and 2003 respectively, we derived approximately 33%, 27% and 29% of net revenues from sales outside of North America (United States and Canada). We believe that the potential international markets for our products are substantial, based on the extent to which Windows, UNIX and inter-networking products are used internationally. Accordingly, we localize many of our products for use in the native language of specific countries. We intend to continue to target major European countries for additional sales and marketing activity.
Risks inherent in our 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, weak or unenforced international intellectual property laws, 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.
Historically, our business and levels of revenues have fluctuated on a seasonal basis. Our fourth quarter has typically been our strongest revenue quarter, we believe in large part driven by customer spending patterns and the sales organization’s focus on achieving sales incentives.
Customer support
Our North America support organization consists of a staff of professionals providing support by telephone primarily from our facilities in Ottawa, Ontario, Canada, Kirkland, WA and Cupertino, CA. Both telephone support and regular update releases of our products are made available to customers that purchase an annual or multi-year maintenance and support agreement. Our sales and customer support organizations work together to provide customer satisfaction. Our customers outside North America are supported by our support organization located in Haifa, Israel, by various international sales offices and by local distributors and resellers who are trained by us.
Research and development
We believe that our future success will depend on our ability to enhance our existing products and to develop and introduce new products providing access, presentation and integration services, which address customer needs in the areas of B2B, B2C, B2E and SOA. On December 31, 2005 we had 53 employees involved in research and development activities located primarily in Canada and Israel. Our internal research and development resources are complemented by the selective use of third party consulting resources which are covered by intellectual property and confidentiality agreements. Our research and development expenses for the years ended December 31, 2005, 2004, and 2003 were $7.2 million, $7.0 million, and $8.3 million, respectively.
Competition
The market for our products is intensely competitive and characterized by rapidly changing technology, evolving industry standards, changes in customers’ needs, consolidation of vendors, and frequent new product introductions. To maintain or improve our position in the industry, we must continue to successfully develop, introduce and market new products and product enhancements on a timely and cost-effective basis. Three key factors will contribute to the continued growth of our marketplace: the proliferation of Microsoft Windows client and server technology, the proliferation of the use of the UNIX operating system—particularly the UNIX Open Source version and the continued implementation of Web-based access to corporate computer systems.
We compete directly with providers of Windows inter-networking applications, such as IBM, AttachmateWRQ and Hummingbird Ltd. as well as other major PC connectivity vendors. We also compete with companies such as Jacada Ltd., Seagull Holding NV, IBM, BEA, and Computer Associates International, Inc. with respect to web integration server products and with iWay and Attunity, Ltd. with respect to application adapter products.
Many of our competitors have substantially greater financial, technical, sales, marketing, personnel, and other resources, as well as greater name recognition and a larger customer base than we do. Significant price competition characterizes the markets for our products and we anticipate that we will face increasing pricing pressures from competitors in the future. Moreover, given that there are low barriers to entry into the software market, and the market is rapidly evolving and subject to rapid technological change, we believe that competition will persist and intensify in the future. We have experienced price declines over the last several years. A reduction in the price of our products would negatively affect gross margins as a percentage of net revenues, and would require us to increase software unit sales, in order to maintain net revenues at existing levels.
Proprietary rights
We rely on a combination of patent, copyright, trade secret, confidentiality procedures, trademark laws, and contractual provisions to protect our intellectual property and proprietary rights. However, the basic TCP/IP
protocols on which our products are based are non-proprietary, and other companies have developed their own versions. We seek to protect our 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 our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult, and while we are unable to determine the extent to which piracy of our software products exists, software piracy can be expected to be a persistent problem. In selling our products, we rely primarily on “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 our proprietary rights to as great an extent as do the laws of the United States. 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 us. We have received, and may receive in the future, communications from third parties asserting that our products infringe, or may infringe, the proprietary rights of third parties, seeking indemnification against such infringement or indicating that we may be required to obtain a license or royalty from such third parties.
We believe that, due to the rapid pace of innovation within our industry, factors such as the technological and creative skills of our personnel are more important to establishing and maintaining a technology leadership position within the industry than are the various legal means of protecting our technology.
Employees
On December 31, 2005, we had a total of 204 regular full-time employees, of whom 99 were engaged in sales, marketing, technical support and consulting, 27 in general management, finance and human resources, 22 in information technology and facilities, 53 in software development and engineering and 3 in production. None of our employees is subject to a collective bargaining agreement, and we have not experienced any work stoppage.
The majority of our workforce is located in the competitive employment markets of the Silicon Valley in California; Ottawa, Ontario, Canada and Haifa, Israel.
Executive officers of the registrant
The executive officers, their ages and their positions as of March 23, 2006 are as follows:
| Name |
Age |
Position | ||
| Zvi Alon |
54 | Chairman of the Board, President and Chief Executive Officer | ||
| Michael R. Peckham |
55 | Chief Financial Officer, Senior Vice President, Finance and Secretary | ||
| Ido Hardonag |
45 | Senior Vice President, Worldwide Engineering | ||
| George Bennett |
45 | Vice President, North American Sales | ||
| Cheli Dudai-Karpel |
52 | Vice President, European and Israel Operations | ||
| Yuan Huntington |
37 | Vice President, Marketing | ||
| Andrew Murchison |
52 | Vice President, Partnerships and Alliances | ||
| Ronald Rudolph |
56 | Vice President, Human Resources | ||
| Avi Schlank |
48 | Vice President, Strategic Partner and Business Development | ||
| Bret L. England |
47 | Corporate Controller and Treasurer |
Zvi Alon is the founder of NetManage, Inc. and has served as our Chairman of the Board, President and Chief Executive Officer since our formation in 1990. 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 former son-in-law of Mr. Uzia Galil, a director of the Company.
Michael R. Peckham joined us 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 in Ottawa, Canada. Mr. Peckham is also a Chartered Accountant in the Province of Ontario, Canada.
Ido Hardonag re-joined us in October 2002 as Senior Vice President, Worldwide Engineering. Mr. Hardonag is responsible for worldwide engineering and research and development for the company’s current and future product lines and was previously employed by NetManage from July 1992 to January 2000 in several engineering management positions, the most recent as Vice President, Research and Development. Prior to re-joining the Company, Mr. Hardonag served as an independent consultant, between October 2001 to September 2002, providing consulting services to a number of companies. Prior to that Mr. Hardonag was with TeleKnowledge Group, a start-up company in Israel where he served as Vice President, Research and Development from January 2000 to September 2001. He was responsible for core product development, new product releases and customer-related projects for its e-billing product. Mr. Hardonag received a B.S. in computer science from Tel-Aviv University in Tel-Aviv, Israel and a M.S. in computer science from the University of Southern California.
George Bennett joined us in December 2005 as Vice President, North America Sales. From October 2004 to December 2005, Mr. Bennett worked for Clear Technology Inc., a business process management software company as senior vice president sales and marketing. From August 2002 to October 2004, Mr. Bennett worked for HandySoft Inc, a public Korean company that focused on business process management. From May 2002 to August 2002, Mr. Bennett worked as a consultant. Prior to that from December 2000 to April 2002, Mr. Bennett worked for FileNET Inc. a public company focused on imaging software, content management and business process management software as the worldwide vice president of channel sales. Prior to that from November 1995 to December 2000, Mr. Bennett worked at Vision Solution Inc, a high availability software and solutions company, as Vice President Sales. Mr. Bennett attended the United States Military Academy at West Point, NY.
Cheli Dudai-Karpel re-joined us in March 2003 as Director, European and Israel Operations and was promoted to Vice President, European and Israel Operations in November 2004. Prior to re-joining the Company, Ms. Karpel worked as a consultant from November 2002 to March 2003. From December 2000 to November 2002 Ms. Karpel worked for Anota Ltd., a provider of e-business solutions for host-to-web access, initially as COO and was promoted to CEO in September 2001. Ms. Karpel worked from December 1999 to December 2000 for Internet2Anywhere, an Israeli based wireless internet provider, as Vice President, Marketing. From May 1993 to January 1999 Ms. Karpel worked for the Company and was a founding team member for NetManage Ltd. Ms. Karpel holds a B.A. degree in Political Science and Literature and has completed M.S. studies in Social Sciences from Haifa University. She also holds a diploma in Systems Analysis and Management from Bar-Iian University in Israel and a diploma in Management and Planning from the Israeli Institute of Technology.
Yuan Huntington joined us in August 2004 as Director, Product Marketing and was promoted to Vice President, Marketing in February 2005. From April 2004 to July 2004, Ms. Huntington worked as a consultant for the Company. Prior to joining the Company, Ms. Huntington was on sabbatical from September 2003 to March 2004. Before that, Ms. Huntington was the Vice President of Business Development from August 2001 to August 2003 for Talkway Communications, a company focused on providing video-based communication solutions. Ms. Huntington worked from April 2001 to August 2001 at WebGain, a Java tools company funded by Warburg Pincus and BEA Systems, as the Senior Director of Product Management. From April 2000 to February 2001, Ms. Huntington was the Executive Director of Business Applications at Broadband Office, an internet start-up funded by Kleiner-Perkins Caulfield & Byer, Microsoft and Sun. Prior to Broadband Office, Ms. Huntington spent four years at Netscape Communications, an internet software company, as the Director of Product Marketing. Ms. Huntington received a B.S. degree in Management Economics from the University of California at Davis.
Andrew Murchison joined us in February 2005, as Vice President, Partnerships and Alliances. Mr. Murchison worked as a consultant from November 2004 to February 2005. Mr. Murchison was the Vice President of Strategic Business Alliances, with Computer Associates International/Platinum Global and Industry Alliances, from January 1999 to October 2004. During his tenure with Computer Associates, he managed Strategic RDBMS, ERP and ISV relationships. Prior to joining Computer Associates, Mr. Murchison was Vice President of Sales at Mercantec Inc., an e-commerce software company, from July 1996 to December 1998. From July 1990 to July 1996, Mr. Murchison was Assistant Vice President of OEM Sales at Micro Focus Inc. Mr. Murchison has a B. S. degree in Physics, with a Computer Science emphasis, from Loma Linda University.
Ronald Rudolph joined us in April 2003. Mr. Rudolph worked as a consultant from August 2001 to March 2003. Mr. Rudolph was the Senior Vice President of Administration at Infogrames Interactive Software, Inc., an interactive software manufacturer, from December 1999 to July 2001. Prior to that, he was the Vice President of Administration at Wyse Technology, Inc, a computer manufacturer, from August 1998 to December 1999. Mr. Rudolph worked at 3COM Corporation, a computer-networking manufacturer, from October 1994 to August 1998 as Vice President of Human Resources Operations. Mr. Rudolph holds a M.S. and Psy. D. in Psychology from California Coast University, Santa Ana, CA, and a B.A. in Psychology from University of California, Santa Cruz. Mr. Rudolph also studied Increasing Human Resources Effectiveness at Harvard University and received a Certificate in Executive Management from the Wharton School, University of Pennsylvania.
Avi Schlank joined NetManage in March 2006 as Vice President, Strategic Partner and Business Development. Prior to joining NetManage, Mr. Schlank was with Bits Etc, Inc., from March 2000 to February 2006, a business consulting and solutions company he co-founded. Prior to that, he was Director of Product Marketing at Wind River Systems from September 1998 to February 2000. Before joining Wind River, Mr. Schlank was Vice President, Business Development with Nice Systems from May 1997 to August 1998. Mr. Schlank holds a certification in software engineering from MAMRAM—IDF Academy of Software Engineering, Ramat Gan, Israel.
Bret L. England joined NetManage in December 2004 as Corporate Controller and Treasurer. From September 2003 to December 2004, Mr. England was the President and Founder of England Asset Management and Consulting Services. Previous to September 2003 Mr. England worked as a senior financial executive at several public and private software and internet companies including Satmetrix System—Chief Financial Officer, March 2003 to September 2003, Portal Software—VP Finance, Chief Accounting Officer, September 2001 to January 2003, Alta Vista—Chief Financial Officer and Treasurer, June 2000 to September 2001, Informix Software—International Controller, April 1999 to June 2000, and Symantec—EMEA Finance, Treasury Director, and International Tax Manager, November 1992 to April 1999. Mr. England also worked for Deloitte & Touche from June 1985 to November 1992 and KPMG from December 1983 to June 1985. Mr. England has a B.S. in Accounting from Weber State University, a Masters in Taxation from Golden Gate University, and an Executive Education Certificate from the Stanford Graduate School of Business. Mr. England is a Certified Public Accountant.
Available Information
We are a reporting company and file annual, quarterly and special reports, proxy statements and other information with the United States Securities and Exchange Commission (SEC). We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports available on our website ( www.netmanage.com ), free of charge, as soon as reasonably practicable after we have electronically filed or furnished such materials to the SEC. These filings are also available on the SEC’s web site at www.sec.gov . In addition, you may read and copy any documents we file at the SEC’s public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the SEC located at 233 Broadway, New York, New York 10279, and at 175 West Jackson Blvd., Suite 900, Chicago, Illinois 60604. You may obtain information on the operation of the SEC’s public reference room in Washington, D.C. by calling the SEC at 1-800-SEC-0330. You can also read and copy our SEC filings at the office of the National Association of Securities Dealers, Inc. at 1735 K Street, Washington, D.C. 20006.
Item 1A— Risk Factors
Our business is subject to a number of risks and uncertainties. You should carefully consider the risks described below, in addition to the other information contained in this Report and in our other filings with the SEC. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations. If any of these risks actually occur, our business, financial condition or results of operations could be seriously harmed. In that event, the market price for our common stock could decline and you may lose part or all of your investment.
Our operating results and net income have fluctuated significantly in the past and may continue to do so in the future, which could cause our stock price to decline.
We have experienced, and expect to experience in future periods, significant fluctuations in operating results and net income that may be caused by many factors including, among others:
• general economic conditions;
• changes in the demand for our products;
• introduction or enhancements to our products and those of our competitors;
• technological changes in computer networking;
• competitive pricing pressures;
• market acceptance of new products;
• customer order deferrals in anticipation of new products and product enhancements;
• the size and timing of individual product orders;
• mix of international and domestic revenues;
• mix of distribution channels through which our products are sold;
• loss of, or failure to enter into, strategic alliances to develop or promote our products;
• quality control of our products;
• changes in our operating expenses;
• personnel changes;
• foreign currency exchange rates;
• potential tax benefits;
• seasonality; and
• adverse business conditions in specific industries.
In addition, our acquisition of complementary businesses, products or technologies has in the past caused and may continue to cause fluctuations in our operating results due to in-process research and development charges, the amortization of acquired intangible assets, and integration costs recorded in connection with acquisitions.
Since we generally ship software products within a short period of time after receipt of an order, we do not typically have a material backlog of unfilled orders, and our revenues in any one quarter are substantially dependent on orders booked in that quarter and particularly in the last month of that quarter. Our expenses are based in part on our expectations as to future revenues and to a large extent are fixed. Therefore, we may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly,
any significant shortfall in demand for our products in relation to our expectations or any material delay of customer orders would have an almost immediate adverse impact on our operating results and on our ability to achieve profitability.
As a result, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Fluctuations in our operating results have caused, and may in the future cause us to perform below the expectations of public market analysts and investors. If our operating results fall below market expectations, the price of our common stock may fall.
We have only been profitable in two years since 1995 and may never achieve profitability in the future which would weaken our financial condition.
With the exception of the net income reported for 2005 and 2004, we have not achieved profitability on an annual basis since 1995 and we may never obtain sufficient revenues to sustain profitability in any future period. In addition, we cannot be certain that we can increase profitability, particularly to the extent that we face price competition. As a result, we will need to generate significant revenues to attain profitability. Increasing competition may cause our prices to decline, which would harm our operating results. We anticipate that the prices for our software products may decline over the next few years. We expect to face increased competition in markets where we sell our products, which will make it more difficult to increase or maintain our prices and profit margins. If anticipated increases in sales volume do not keep pace with anticipated pricing pressures, our revenues would decline and our business could be harmed. Despite our efforts to introduce enhancements to our products, we may not be successful in maintaining our pricing.
We rely in part on third parties for sales of our products and our revenues could decline significantly with little or no notice.
We rely in part on our independent distributors and value-added resellers for certain elements of the marketing and distribution of our products. The agreements in place with these organizations are generally non-exclusive, of limited duration, are terminable with little or no notice by either party and generally do not contain minimum purchase requirements. There can be no assurance that we will be able to attract or retain distributors and resellers who will be able to market our products effectively. These distributors of our products are not within our control and generally represent competing product lines of other companies in addition to our products. There can be no assurance that these organizations will give a high priority to the marketing of our products, and they may give a higher priority to the products of our competitors.
Furthermore, our results of operations can also be materially adversely affected by changes in the inventory strategies of our distributors, which can occur rapidly and may not be related to end-user demand. As part of our continued strategy of selling through multiple distribution channels, we expect to continue using indirect distribution channels, particularly value-added resellers and system integrators, in addition to distributors and original equipment manufacturers. Indirect sales may grow as a percentage of both domestic and total net revenues during 2006 and beyond, as a result of acquisitions or increased market penetration. Any material increase in our indirect sales as a percentage of revenues may adversely affect our average selling prices and gross margins due to lower unit costs that are typically charged when selling through indirect channels. There can be no assurance that we will be able to attract or retain resellers and distributors who will be able to market our products effectively, will be qualified to provide timely and cost-effective customer support and service, or will continue to represent our products. If we are unable to recruit or retain important resellers or distributors or if they decrease their sales of our products, we may suffer a material adverse effect on our business, financial condition or results of operations.
We have undergone significant restructurings, which may have a material adverse effect on our operating results.
We undertook a restructuring of our operations in January 2003. The restructuring plan involved reductions in our worldwide workforce and the consolidation of certain of our sales, customer support, and research and
development operations. We have also had to write-down assets as part of the restructuring effort that lowered our operating results. The restructuring plans may not be successful and may not improve future operating results. We may also be required to implement additional restructuring plans in the future.
We may not be able to successfully make acquisitions of or investments in other companies or technologies which could limit our future growth and access to technology.
We have limited experience in acquiring or making investments in companies, technologies or services. We regularly evaluate product and technology acquisition opportunities and anticipate that we may make additional acquisitions in the future if we determine that an acquisition would further our corporate strategy. Acquisitions in our industry are particularly difficult to assess because of the rapidly changing technological standards. If we make any acquisitions, we will be required to assimilate the personnel, operations and products of the acquired business and train, retain and motivate key personnel from the acquired business. However, the key personnel of the acquired business may decide not to work for us. In addition we may not be successful in the integration of product lines and customers of an acquired company. Moreover, if the operations of an acquired company or business do not meet our expectations, we may be required to restructure the acquired business, or write-off the value of some or all of the assets of the acquired business. No assurance can be given that any acquisition by us will or will not occur. If an acquisition does occur, no assurance can be given that it will not materially and adversely affect us, or that any such acquisition will be successful in enhancing our business.
We are dependent upon our key management and employees for our future success, and few of our key managers and employees are obligated to stay with us.
Our success depends in part on our ability to attract and retain key senior management and certain other personnel. Many of our key employees are employed on an at-will basis. If any of our key employees left or were unable to work and we were unable to find a suitable replacement, then our business, financial condition and results from operations could be materially harmed.
We face significant competition and competition in our market is likely to increase which could harm our business.
The markets for our products are intensely competitive and characterized by rapidly changing technology, evolving industry standards, price erosion, changes in customers’ needs, and frequent new product introductions. We anticipate continued growth and competition in our industry and the entrance of new competitors into our markets, and accordingly, the markets for our products will remain intensely competitive. We expect that competition will increase in the near term and that our primary long-term competitors may not yet have entered the market. Several key factors contribute to the continued growth of our marketplaces including the proliferation of Microsoft Windows client server technology, and the continued implementation of web-based access to corporate mainframe and mid-range computer systems. Our connectivity software products compete with major computer and communication systems vendors, including Microsoft, IBM, BEA, Computer Associates International, Inc. and Sun Microsystems, Inc., as well as smaller networking software companies such as Jacada Ltd., Seagull Holding HV, and Hummingbird Ltd. We also face competition from makers of terminal emulation software such as AttachmateWRQ, and with respect to application adapters, we face competition from iWay and Attunity, Ltd.
Many of our current competitors have, and many of our future competitors may have, substantially greater financial, technical, sales, marketing and other resources, in addition to greater name recognition and a larger customer base than us. The markets for our products are characterized by significant price competition and we anticipate that we will face increasing pricing pressures from our competitors in the future. In addition, our current and future competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements than we can. Increased competition could result in price reductions, fewer customer orders, reduced gross profit margins and loss of market share, any of which could harm our business.
Furthermore, our competitors could seek to expand their product offerings by designing and selling products using technology that could render obsolete or adversely affect sales of our products. These developments may adversely affect sales of our products either by directly affecting customer-purchasing decisions or by causing potential customers to delay their purchases of our products. Several of our competitors have developed proprietary networking applications and certain of such vendors, including Novell, provide a TCP/IP protocol suite in their products at little or no additional cost. In particular, Microsoft has embedded a TCP/IP protocol suite in its Windows 98, Windows 2000, Windows ME, Windows NT, Windows XP, and Windows .NET operating systems. We have products, which are similar to connectivity products marketed by Microsoft. Microsoft is expected to increase development of such products, which could have a material adverse effect on our business, financial condition or results of operations.
If we fail to manage technological change, respond to consumer demands or evolving industry standards or if we fail to enhance our products’ interoperability with the products of our customers, demand for our products will decrease and our business will suffer.
From time to time, many of our customers have delayed purchase decisions due to confusion in the marketplace relating to rapidly changing technology and product introductions. To maintain or improve our position in this industry, we must successfully develop, introduce, and market new products and product enhancements on a timely and cost-effective basis. We have experienced difficulty from time to time in developing and introducing new products and enhancing existing products, in a manner which satisfies customer requirements and changing market demands. Any failure by us 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 our business, financial condition, and results of operations. The failure to develop products or product enhancements incorporating new functionality on a timely basis could cause customers to delay purchase of our current products or cause customers to purchase products from our competitors; either situation would adversely affect our business, financial condition, and results of operations. We may not be successful in developing new products or enhancing our existing products on a timely basis, and any new products or product enhancements developed by us may not achieve market acceptance. In addition, we incorporate software and other technologies owned by third parties and as a result, we are dependent upon such third parties’ ability to enhance their current products, to develop new products that will meet changing customer needs on a timely and cost-effective basis, and to respond to emerging industry standards and other technological changes.
We depend upon technology licensed from third parties, and if we do not maintain these license arrangements we will not be able to ship many of our products and our business will be seriously harmed.
Certain of our products incorporate software and other technologies developed and maintained by third parties. We license these technologies from third parties under agreements with a limited duration, and we may not be able to maintain these license arrangements. If we fail to maintain our license arrangements or find suitable replacements, we would not be able to ship many of our products and our business would be materially harmed. For example, we have a license agreement with Microquill for SmartHeap ® for SMP for one year, which we incorporate in our OnWeb product line. There can be no assurance that we would be able to replace the functionality provided by the third-party technologies currently offered in conjunction with our products if those technologies become unavailable to us or obsolete or incompatible with future versions of our products or market standards.
We depend upon the compatibility of our products with applications operating on Microsoft Windows to sell our products.
A significant portion of our net revenues have been derived from the sales of products that provide inter-networking applications for the Microsoft Windows environment and are marketed primarily to Windows users. As a result, sales of certain of our products would be negatively impacted by developments adverse to Microsoft
Windows products. As well, if competing technologies such as Linux are successful in negatively impacting Microsoft’s success, our ability to sell our products would be further limited. In addition, our strategy of developing products based on the Windows operating environment is substantially dependent on our ability to gain pre-release access to, and to develop expertise in, current and future Windows developments by Microsoft. We have no agreement with Microsoft giving us pre-release access to future Windows products. If we are unable to gain such access our ability to develop new products compatible with future Windows release in a timely manner could be harmed. Also, we have products which are similar to functionality included in some Microsoft products. Microsoft is expected to increase development of such products, which could have a material adverse effect on our business, financial condition or results of operations.
We depend upon the compatibility of our products with applications operating on UNIX platforms to sell our products.
A small percentage of our net revenues have been derived from the sales of products that provide inter-networking applications for UNIX environments, including Linux and Solaris and are marketed primarily to the Fortune 1000 companies running UNIX platforms as their servers. As a result, sales of certain of our products would be negatively impacted by developments adverse to UNIX products or developments in the Open Source community based around Linux adverse to our own Linux-based products. In addition, our strategy of developing products based on the UNIX operating environment is substantially dependent on our ability to gain pre-release access to, and to develop expertise in, current and future UNIX developments by various companies including IBM, Hewlett-Packard and Sun. No agreement between a developer of UNIX operating systems and us exists to provide pre-release access to future UNIX products. If we are unable to gain such access our ability to develop new products compatible with future UNIX product releases in a timely manner could be harmed.
The loss of any of our strategic relationships would make it more difficult to keep pace with evolving industry standards and to design products that appeal to the marketplace.
Our future success depends on our ability to maintain and enter into new strategic alliances and OEM relationships to develop necessary products or technologies, to expand our distribution channels or to jointly market or gain market awareness for our products. We currently rely on strategic relationships, such as those with Microsoft to provide us with state of the art technology, assist us in integrating our products with leading industry applications and help us make use of economies of scale in manufacturing and distribution. However, we do not have written agreements with some of our strategic partners and cannot ensure these relationships will continue for a significant period of time. Many of our agreements with these partners are informal and may be terminated by them at any time. There can be no assurance that we will be successful in maintaining current alliances or developing new alliances and relationships or that such alliances and relationships will achieve their intended purposes.
We may be subject to product returns, product liability claims and reduced sales because of defects in our products which could reduce our revenues and otherwise adversely affect our financial results.
Software products as complex as those offered by us may contain undetected errors or failures when first introduced or as new versions are released. The likelihood of errors is higher when a new product is introduced or when new versions or enhancements are released. Errors may also arise as a result of defects in third-party products or components, which are incorporated into our products. There can be no assurance that, despite testing by us and by current and potential customers, errors will not be found in new products or product enhancements after commencement of commercial shipments, which could result in loss of or delay in market acceptance. We may be required to devote significant financial resources and personnel to correct any defects. Known or unknown errors or defects that affect the operation of our products could result in the following, any of which could have a material adverse effect on our business, financial condition, and results of operations:
• delay or loss of revenues;
• cancellation of a purchase order or contract due to defects;
• diversion of development resources;
• damage to our reputation;
• failure of our products to achieve market acceptance;
• increased service and warranty costs; and
• litigation costs.
Although some of our licenses with customers contain provisions designed to limit our exposure to potential product liability claims, these contractual limitations on liability may not be enforceable or may only limit, rather than eliminate potential liability. In addition, our product liability insurance may not be adequate to cover our losses in the event of a product liability claim resulting from defects in our products and may not be available to us in the future.
Our business depends upon licensing our intellectual property, and if we fail to protect our proprietary rights, our business could be harmed.
Our ability to compete depends substantially upon our internally developed proprietary technology. We rely primarily on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures, and contractual provisions to protect our proprietary rights. We seek to protect our software, documentation and other written materials under trade secret and copyright laws and contractual confidentiality agreements, which afford only limited protection, and, to a lesser extent, patent laws. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products and technology is difficult and, while we are unable to determine the extent to which piracy of our software products exists, software piracy can be expected to be a persistent problem. There can be no assurance that our means of protecting our proprietary rights will be adequate, or our competitors will not independently develop similar technology. In selling a portion of our products, we rely primarily on “click-wrap” licenses that are not signed by licensees and, therefore, may be unenforceable under the laws of certain jurisdictions. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States. If we are not successful in protecting our intellectual property, our business could be substantially harmed.
We rely upon our patents, trademarks, copyrights and trade secrets to protect our proprietary rights, but they may be only of limited value as we may not be able to prevent misappropriation of our technology.
There can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology. In addition, the number of patents applied and granted for software inventions is increasing. Despite any precautions which we have taken:
• laws and contractual restrictions may not be sufficient to prevent misappropriation of our technology or deter others from developing similar technologies;
• other companies may claim common law trademark rights based upon state or foreign law which precede our federal registration of such marks; and
• current federal laws that prohibit software copying provide only limited protection from software “pirates,” and effective trademark, copyright and trade secret protection may be unavailable or limited in certain foreign countries.
Our pending patent applications may never be issued, and even if issued, may provide us with little protection.
We regard the protection of patentable inventions as important to our business. However, it is possible that:
• our pending patent applications may not result in the issuance of patents;
• our patents may not be broad enough to protect our proprietary rights;
• any issued patent could be successfully challenged by one or more third parties, which could result in our loss of the right to prevent others from exploiting the inventions claimed in those patents;
• current and future competitors may independently develop similar technology, duplicate our products or design around any of our patents; and
• effective patent protection, if any, may not be available in every country in which we do business.
If we are not successful in asserting our patent rights, our business could be substantially harmed. At the present time, we have one patent pending and 12 patents issued from the U.S. Patent Office.
We have received notices of claims that may result in litigation and we may become involved in costly and time-consuming litigation over proprietary rights.
Substantial litigation regarding intellectual property rights exists in our industry. We expect that software in our industry may be increasingly subject to third party infringement claims as the number of competitors grows and the functionality of products in different areas of the industry overlaps. Third parties may currently have, or may eventually be issued, patents that would be infringed by our products or technology. We cannot be certain that any of these third parties will not make a claim of infringement against us with respect to our products and technology. We have received, and may receive in the future, communications from third parties asserting that our products infringe, or may infringe, the proprietary rights of third parties seeking indemnification against such infringement or indicating that we may be interested in obtaining a license from such third parties. Any claims or actions asserted against us could result in the expenditure of significant financial resources and the diversion of management’s time and efforts. In addition, litigation in which we are accused of infringement may cause product shipment delays, require us to develop non-infringing technology or require us to enter into royalty or license agreements even before the issue of infringement has been decided on the merits. If any litigation were not to be resolved in our favor, we could become subject to substantial damage claims and be prohibited from using the technology at issue without a royalty or license agreement. These royalty or license agreements, if required, might not be available on acceptable terms, or at all, and could result in significant costs and harm our business. If a successful claim of infringement is made against us and we cannot develop non-infringing technology or license the infringed or similar technology on a timely and cost-effective basis, our business could be significantly harmed.
Our business is subject to risks from international operations such as legal uncertainty, tariffs, trade barriers and political and economic instability which could restrict our ability to compete effectively.
We derived approximately 33% of our net revenues from sales outside of North America (United States and Canada) during the year ended December 31, 2005. While we expect that international sales will continue to account for a significant portion of our net revenues, there can be no assurance that we will be able to maintain or increase international market demand for our products or that our sales offices and distributors will be able to effectively meet that demand. Risks inherent in our international business activities generally include, among others:
• unexpected changes in regulatory requirements;
• legal uncertainty, particularly regarding intellectual property rights and protection;
• costs and risks of localizing products for foreign countries;
• longer accounts receivable payment cycles;
• language barriers in business discussions;
• cultural differences in the negotiation of contracts and conflict resolution;
• time zone differences;
• the limitations imposed by U.S. export laws (see Government Regulation and Legal Uncertainties below);
• changes in markets caused by a variety of political, social and economic factors;
• tariffs and other trade barriers;
• difficulties in managing international operations;
• currency exchange rate fluctuations;
• potentially adverse tax consequences;
• repatriation of earnings; and
• the burdens of complying with a wide variety of foreign laws.
Many of our customers are subject to many of the risks described above. These factors may have an adverse effect on our international sales and, consequently, on our business, financial condition or results of operations.
Terrorist attacks and threats or actual war could adversely affect our operating results and the price of our common stock.
The terrorist attacks in the United States, the United States response to these attacks, the current instability in Iraq have had an adverse impact on our operations. Any escalation in these events or similar future events may disrupt our operations or those of our customers. These events have had and may continue to have an adverse impact on the United States and world economies in general and consumer confidence and spending in particular, which has and could continue to harm our sales. Any of these events could increase volatility in the United States and worldwide financial markets and economies, which could harm our stock price and may limit the capital resources available to us and our customers. This could have a significant impact on our operating results, revenues and costs and may result in increased volatility in the market price of our common stock and on the future price of our common stock.
It may be difficult to raise needed capital in the future, which could significantly harm our business by limiting our ability to grow or make acquisitions.
We may require substantial additional capital to finance growth, acquisitions and fund ongoing operations in future years. Our capital requirements will depend on many factors including, among other things:
• our results of operations;
• acceptance of and demand for our products;
• the number and timing of any acquisitions and the cost of these acquisitions;
• the costs of developing new products;
• the costs associated with our refocusing on core products and technologies; and
• the extent to which we invest in new technology and research and development projects.
Although our current business plan does not require the need for further financing activities to fund our operations for the foreseeable future, due to risks and uncertainties in the marketplace as well as a potential of pursuing further acquisitions, we may need to raise additional capital. If we issue additional stock to raise capital, current percentage ownership in the company would be diluted. If we raise capital through debt; our debt servicing costs will increase. Additional financing may not be available when needed and, if such financing is available, it may not be available on terms favorable to us.
Because of their significant stock ownership, our officers and directors can exert significant control over our future direction.
As of March 17, 2006, our officers, directors and entities affiliated with them, in the aggregate, beneficially owned approximately 2.2 million shares, or 23% of our outstanding common stock. These stockholders, if acting together, would be able to exert significant influence on all matters requiring approval by our stockholders, including the election of directors, the approval of mergers or other business combination transactions or a sale of all or substantially all of our assets.
Certain provisions of our stock option plan, our stockholder rights plan and our certificate of incorporation and bylaws make changes of control difficult even if they would be beneficial to stockholders.
Our 1992 Stock Option Plan and our 1999 Non-statutory Stock Option Plan provide that, in the event of a change of control of NetManage, all options outstanding under those plans would become fully vested and exercisable for at least 10 days prior to the consummation of such change of control transaction. These accelerations of vesting provisions would increase the cost to any potential acquirer and could have the effect of deterring or reducing the per share price paid to purchase NetManage.
In addition, our board of directors has the authority without any further vote or action on the part of the stockholders to issue up to 1,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions of the preferred stock. This preferred stock, if it is ever issued, may have preference over and harm the rights of the holders of our common stock. Although the issuance of this preferred stock will provide us with flexibility in connection with possible acquisitions and other corporate purposes, the issuance of the preferred stock may make it more difficult for a third party to acquire a majority of our outstanding voting stock. We currently have no plans to issue preferred stock.
Our certificate of incorporation and bylaws include provisions that may have the effect of deterring an unsolicited offer to purchase our stock. In addition, we have implemented a stockholder rights plan that could deter or at least make it significantly more expensive for an unsolicited offer to purchase our stock. These provisions, coupled with the provisions of the Delaware General Corporation Law, may delay or impede a merger, tender offer or proxy contest involving us. Furthermore, our board of directors is divided into three classes, only one of which is elected each year. Directors are only capable of being removed by the affirmative vote of two thirds or greater of all classes of voting stock. These factors may further delay or prevent a change of control.
We face risks from the uncertainties of current and future governmental regulation which could have a negative impact on our ability to operate our business.
We are not currently subject to direct regulation by any government agency, other than regulations applicable to businesses generally, and there are currently few laws or regulations directly applicable to access to or commerce on the Internet. However, due to the increasing popularity and use of the Internet, it is possible that various laws and regulations may be adopted with respect to the Internet, covering issues such as user privacy, pricing and characteristics and quality of products and services. The adoption of any such laws or regulations may decrease the growth of the Internet, which could in turn decrease the demand for our products, increase our cost of doing business or otherwise have an adverse effect on our business, financial condition or results of operations. Moreover, the applicability to the Internet of existing laws governing issues such as property ownership, libel and personal privacy is uncertain. Further, due to the encryption technology contained in certain of our products, such products are subject to U.S. export controls. There can be no assurance that such export controls, either in their current form or as may be subsequently enacted, will not limit our ability to distribute products outside of the United States or electronically. While we take precautions against unlawful exportation, there can be no assurance that inadvertent violations will not occur, and the global nature of the Internet makes it virtually impossible to effectively control the distribution of our products. In addition, future federal or state
legislation or regulation may further limit levels of encryption or authentication technology. Any such export restriction, new legislation or regulation or unlawful exportation could have a material adverse effect on our business, financial condition, or results of operations.
Our acquisitions may have a material adverse effect on our operating results and financial condition.
We acquired Librados, Inc. in the fourth quarter of 2004 and have made a number of acquisitions in the past several years. These acquisitions were motivated by various factors, including the desire to obtain new technologies, expand and enhance our product offerings, expand our customer base, attract key personnel, and strengthen our presence in the international and OEM marketplaces. Product and technology acquisitions entail numerous risks, including:
• the diversion of management’s attention away from day-to-day operations;
• difficulties in the assimilation of acquired operations and personnel (such as sales, engineering, and customer support);
• the integration of acquired products with existing product lines;
• the failure to realize anticipated benefits of cost savings and synergies;
• the loss of customers;
• undisclosed liabilities;
• adverse effects on reported operating results;
• the amortization of acquired intangible assets;
• the loss of key employees; and
• the difficulty of presenting a unified corporate image.
Standards for compliance with section 404 of the Sarbanes-Oxley Act of 2002 are complex, and if we fail to comply in a timely manner, our business could be harmed and our stock price could decline.
Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment of our internal control over financial reporting, and attestation of our assessment by our independent registered public accountants. Based on our market capitalization on June 30, 2006, this requirement may first apply for our fiscal year ending December 31, 2006. The standards that must be met for management to assess the internal controls over financial reporting as effective are complex, and require significant documentation, testing and possible remediation to meet the detailed standards. We may encounter problems or delays in completing activities necessary to make an assessment of our internal controls over financial reporting. In addition, Section 404 requires attestation by our independent registered public accountants. We may encounter problems or delays in completing the implementation of any requested improvements and receiving an attestation of our assessment by our independent registered public accountants. If we cannot assess our internal controls over financial reporting as effective, or our independent registered public accountants are unable to provide an unqualified attestation report on such assessment, investor confidence and share value may be negatively impacted.
Increased costs associated with corporate governance compliance may significantly impact the results of our operations.
Changing laws, regulations, and standards relating to corporate governance, public disclosure, and compliance practices, including the Sarbanes-Oxley Act of 2002, new SEC regulations, and NASDAQ National Market rules are creating uncertainty for companies such as ours in understanding and complying with these laws, regulations, and standards. As a result of this uncertainty and other factors, devoting the necessary
resources to comply with evolving corporate governance and public disclosure standards may result in increased general and administrative expenses and a diversion of management time and attention to compliance activities. We also expect these developments to increase our legal compliance and financial reporting costs. In addition, these developments may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain such coverage. Moreover, we may not be able to comply with these new rules and regulations on a timely basis.
These developments could make it more difficult for us to retain qualified members of our board of directors or executive officers. We are presently evaluating and monitoring regulatory developments and cannot estimate the timing and magnitude of additional costs we may incur as a result. To the extent these costs are significant, our general and administrative expenses are likely to increase.
Item 1B— Unresolved Staff Comments
The Company has received no written comments regarding its periodic or current reports from the staff of the Securities and Exchange Commission that were issued 180 days or more preceding the end of its 2005 fiscal year and that remain unresolved.
