<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE
PERIOD ENDED SEPTEMBER 30, 1997
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM TO
Commission File Number 000-22043
---------------------
NEW ERA OF NETWORKS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<C> <C>
DELAWARE 84-1234845
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
7400 EAST ORCHARD ROAD, SUITE 230
ENGLEWOOD, COLORADO 80111
(Address of principal executive offices)
Registrant's telephone number, including area code: (303) 694-3933
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
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 periods 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 [ ]
The number of shares of the issuer's Common Stock outstanding as of
September 30, 1997 was 9,059,919.
================================================================================
<PAGE> 2
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets............................ 3
Consolidated Statements of Operations.................. 4
Consolidated Statements of Cash Flows.................. 5
Notes to the Consolidated Financial Statements......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition
and Results of Operations.............................. 8
Item 3. Quantitative and Qualitative Disclosures about
Market Risk............................................ 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................. 20
Item 2. Changes in Securities and use of proceeds......... 20
Item 3. Defaults Upon Senior Securities................... 20
Item 4. Submission of Matters to a Vote of Security
Holders................................................ 20
Item 5. Other Information................................. 20
Item 6. Exhibits and Reports on Form 8-K.................. 20
Signatures................................................ 21
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEW ERA OF NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 26,343,629 $ 3,387,466
Accounts receivable, net of an allowance for uncollectible
accounts of $300,000 and $150,000, respectively........ 6,696,010 2,229,417
Unbilled revenue.......................................... 2,261,319 --
Prepaid expenses and other................................ 761,744 83,984
------------ -----------
Total current assets.............................. 36,062,702 5,700,867
------------ -----------
Property and Equipment:
Computer equipment and software........................... 1,789,856 1,132,049
Furniture, fixtures and equipment......................... 565,709 363,720
Leasehold improvements.................................... 67,059 33,050
------------ -----------
2,422,624 1,528,819
Less accumulated depreciation............................. (821,837) (401,364)
------------ -----------
Property and equipment, net............................... 1,600,787 1,127,455
------------ -----------
Other Assets, net........................................... 1,419,109 244,416
------------ -----------
Total assets...................................... $ 39,082,598 $ 7,072,738
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 2,165,657 $ 469,640
Accrued liabilities....................................... 1,774,639 1,369,634
Notes payable to banks.................................... 495,425 1,100,553
Deferred revenue.......................................... 625,167 175,300
------------ -----------
Total current liabilities......................... 5,060,888 3,115,127
Notes payable to banks...................................... 32,284 442,277
------------ -----------
Total liabilities................................. 5,093,172 3,557,404
------------ -----------
Stockholders' Equity:
Preferred stock
Series A, $.01 par value, convertible preferred stock,
0 and 9,169,028 shares authorized; 0 and 9,169,028
shares issued and outstanding........................ -- 2,000,000
Series B, $.01 par value, convertible preferred stock,
0 and 6,183,339 shares authorized; 0 and 6,183,339
shares issued and outstanding........................ -- 1,875,000
Series C, $.01 par value, convertible preferred stock,
0 and 4,664,596 shares authorized; 0 and 4,664,596
shares issued and outstanding........................ -- 7,510,000
Preferred stock, $.0001 par value, 2,000,000 and 0 shares
authorized; 0 shares issued and outstanding............ -- --
------------ -----------
Total preferred stock............................. -- 11,385,000
Common stock, $.0001 par value, 45,000,000 shares
authorized; 9,059,919 and 1,359,091 shares issued and
outstanding, respectively.............................. 906 136
Additional paid-in capital................................ 46,048,552 141,543
Accumulated deficit....................................... (12,060,032) (8,011,345)
------------ -----------
Total stockholders' equity........................ 33,989,426 3,515,334
------------ -----------
Total liabilities and stockholders' equity........ $ 39,082,598 $ 7,072,738
============ ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
3
<PAGE> 4
NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Software licenses....................... $ 4,031,099 $ 832,201 $ 9,691,279 $ 1,353,895
Services and maintenance................ 1,890,332 840,669 4,682,894 2,971,754
----------- ----------- ----------- -----------
Total revenues.................. 5,921,431 1,672,870 14,374,173 4,325,649
----------- ----------- ----------- -----------
Cost of revenues:
Cost of software licenses............... 342,470 251,667 757,935 408,175
Cost of services and maintenance........ 1,148,282 454,907 3,188,909 1,844,351
----------- ----------- ----------- -----------
Total cost of revenues.......... 1,490,752 706,574 3,946,844 2,252,526
----------- ----------- ----------- -----------
Gross Profit.............................. 4,430,679 966,296 10,427,329 2,073,123
Operating Expenses:
Sales and marketing..................... 2,252,705 1,469,562 5,930,783 2,799,354
Research and development................ 2,107,922 1,141,251 4,890,464 2,485,661
General and administrative.............. 615,797 475,354 1,481,377 1,029,837
Charge for acquired in-process research
and development...................... 2,600,000 -- 2,600,000 --
Amortization of intangibles............. 18,016 -- 18,016 --
----------- ----------- ----------- -----------
Total operating expenses........ 7,594,440 3,086,167 14,920,640 6,314,852
----------- ----------- ----------- -----------
Loss from operations...................... (3,163,761) (2,119,871) (4,493,311) (4,241,729)
Other income (expense), net............... 428,609 48,740 444,624 57,871
----------- ----------- ----------- -----------
Loss before provision for income taxes.... (2,735,152) (2,071,131) (4,048,687) (4,183,858)
Provision for income taxes................ -- -- -- --
----------- ----------- ----------- -----------
Net loss.................................. $(2,735,152) $(2,071,131) $(4,048,687) $(4,183,858)
=========== =========== =========== ===========
Net loss per common share................. $ (0.30) $ (0.34) $ (0.56) $ (0.73)
=========== =========== =========== ===========
Weighted average shares of common stock
outstanding............................. 9,035,442 6,073,360 7,199,153 5,693,461
=========== =========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
4
<PAGE> 5
NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(4,048,687) ($4,183,858)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization.......................... 445,617 216,700
Charge for acquired in-process research and
development........................................... 2,600,000 --
Issuance of common stock and common stock options for
services.............................................. -- 65,500
Changes in assets and liabilities --
Accounts receivable.................................. (3,647,473) (1,520,236)
Unbilled revenue..................................... (2,261,319) --
Prepaid expenses and other........................... (596,024) (119,936)
Other assets......................................... (340,384) (160,841)
Accounts payable..................................... 774,747 281,502
Accrued liabilities.................................. 90,976 752,850
Deferred revenue..................................... 398,527 28,228
----------- -----------
Net cash used in operating activities............. (6,584,020) (4,640,091)
----------- -----------
Cash flows from investing activities:
Proceeds from sale of short-term investments.............. -- 102,532
Business combinations, net of cash acquired............... (2,800,000) --
Purchase of property and equipment........................ (792,384) (1,030,588)
----------- -----------
Net cash used in investing activities............. (3,592,384) (928,056)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 38,381,640 --
Common stock issuance costs............................... (3,658,860) --
Proceeds from issuance of preferred stock................. -- 7,510,000
Preferred stock issuance costs............................ -- (36,456)
Proceeds from note payable to stockholder................. -- 104,709
Payments on note payable to stockholder................... -- (422,867)
Proceeds from notes payable to banks...................... 600,000 1,568,533
Principal payments on notes payable to banks.............. (2,190,213) (1,000,396)
----------- -----------
Net cash provided by financing activities......... 33,132,567 7,723,523
----------- -----------
Net increase in cash and cash equivalents................... 22,956,163 2,155,376
Cash and cash equivalents, beginning of period.............. 3,387,466 1,135,027
----------- -----------
Cash and cash equivalents, end of period.................... $26,343,629 $ 3,290,403
=========== ===========
Supplemental disclosures of non-cash transactions:
Issuance of common stock to employees in exchange for
services............................................... $ -- $ 40,000
=========== ===========
Issuance of common stock options and warrants in exchange
for services........................................... $ -- $ 25,500
=========== ===========
Conversion of preferred stock to common................... $11,385,000 $ --
=========== ===========
Accrued common stock offering costs....................... $ 200,000 $ --
=========== ===========
Accrued business combination costs........................ $ 200,000 $ --
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
5
<PAGE> 6
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION.
The accompanying consolidated interim financial statements have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (the "Commission"). Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. These financial statements should be
read in conjunction with the Company's audited consolidated financial statements
as included in the Company's Registration Statement on Form S-1 and related
Prospectus dated June 18, 1997. The consolidated results of operations for the
three and nine months ended September 30, 1997, are not necessarily indicative
of the results to be expected for any subsequent period or for the entire fiscal
year ending December 31, 1997. The December 31, 1996, balance sheet was derived
from audited financial statements, but does not include all disclosures required
by generally accepted accounting principles.
The accompanying unaudited consolidated interim financial statements
reflect, in the opinion of management, all adjustments which are of a normal and
recurring nature, necessary for a fair presentation of the financial position
and results of operations for the periods presented. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
2. INITIAL PUBLIC OFFERING.
In June 1997, the Company completed its initial public offering and issued
2,760,000 shares of its Common Stock to the public at a price of $12.00 per
share. The Company received approximately $29.7 million of cash, net of
underwriting discounts, commissions and other offering costs. Upon completion of
the offering, all outstanding shares of Series A, Series B, and Series C
Preferred Stock (a total of 20,016,963 shares) were converted into 4,448,209
shares of Common Stock. In July 1997, the underwriters of the Company's initial
public offering exercised their over-allotment option and purchased an
additional 414,000 shares of Common Stock at $12.00 per share from the Company
with net proceeds to the Company of approximately $4.6 million.
3. BUSINESS COMBINATION.
Effective as of September 1, 1997, New Era of Networks Limited, a
wholly-owned United Kingdom subsidiary of the Company ("NEON UK"), acquired all
of the outstanding capital stock of Menhir Limited, a corporation organized
under the laws of the United Kingdom ("Menhir") by means of a Share Purchase
Agreement by and among Menhir, the shareholders of Menhir, and NEON UK (the
"Purchase Agreement").
The total purchase price of $2,800,000, plus fees and expenses of
approximately $200,000, was paid in cash. The acquisition was accounted for
under the purchase method of accounting, and accordingly, the operating results
of Menhir have been included in the accompanying consolidated financial
statements from the effective date of the acquisition.
An independent valuation of Menhir's net assets was completed to assist in
the allocation of the purchase price. Approximately $2,600,000 of the purchase
price represented the intangible value of in-process research and development
projects that had not yet reached technological feasibility. The related
technology had no alternative future use and will require substantial additional
development by the Company. This amount was
6
<PAGE> 7
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
charged to operations in the quarter ended September 30, 1997. A portion of the
purchase price was also assigned to marketable software products ($460,000) and
goodwill ($400,000) which are being amortized on a straight-line basis over
three and seven year periods, respectively. Menhir's other assets and
liabilities assumed are included in the accompanying balance sheet as of
September 30, 1997.
4. NET LOSS PER COMMON SHARE.
Net loss per common share is computed using the weighted average number of
outstanding shares of Common Stock (assuming conversion of the Preferred Stock
occurred on the date of its issuance) and Common Stock equivalent shares from
Common Stock options and warrants. Pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 83, Common Stock and Common Stock
equivalent shares issued by the Company at prices significantly below the
assumed public offering price during the twelve month period prior to the
proposed offering date (using the treasury stock method) have been included in
the calculation as if they were outstanding since January 1, 1996 regardless of
whether they are antidilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share". The
purpose of SFAS No. 128 is to simplify the computation of earnings per share
("EPS") and to make the U.S. standard for computing EPS more compatible with the
EPS standards of other countries and with that of the International Accounting
Standards Committee. The effective date for the application of SFAS No. 128 for
both interim and annual periods is after December 15, 1997. Earlier application
is not permitted. It is management's opinion that the application of SFAS No.
128 will not have a material effect on its EPS as previously reported.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth the percentages that selected items in the
Consolidated Statements of Operations bear to total revenues. The three-month
and nine-month periods ending September 30, 1997 include the charge for acquired
in-process research and development and amortization of intangibles associated
with the acquisition of Menhir Limited, in September 1997. The loss from
operations and net loss are shown both with and without the effect of those
items.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Licenses................................. 68 % 50 % 67 % 31 %
Services and maintenance................. 32 % 50 % 33 % 69 %
--- ---- --- ---
Total revenues................... 100 % 100 % 100 % 100 %
Cost of revenues:
Cost of software licenses*............... 8 % 30 % 8 % 30 %
Cost of services and maintenance*........ 61 % 54 % 68 % 62 %
--- ---- --- ---
Total cost of revenues........... 25 % 42 % 27 % 52 %
Operating expenses:
Sales and marketing...................... 38 % 88 % 41 % 65 %
Research and development................. 36 % 68 % 34 % 57 %
General and administrative............... 10 % 28 % 10 % 24 %
Charge for acquired in-process research
and development....................... 44 % NA 18 % NA
Amortization of intangibles.............. l1 % NA l1 % NA
--- ---- --- ---
Total operating expenses......... 128 % 184 % 104 % 146 %
Loss from operations....................... (53)% (127)% (31)% (98)%
Excluding acquisition-related
intangibles.............................. (9)% (127)% (13)% (98)%
Other income, net.......................... 7 % 3 % 3 % 1 %
Loss before provision for income taxes..... (46)% (124)% (28)% (97)%
Provision for income taxes................. 0 % 0 % 0 % 0 %
Net loss................................... (46)% (124)% (28)% (97)%
Excluding acquisition-related
intangibles.............................. (2)% (124)% (10)% (97)%
</TABLE>
- ---------------
* As a percentage of License and Services and Maintenance Revenues,
respectively.
The following discussion contains certain trend analysis and other
forward-looking statements. Words such as "anticipate," "believe," "plan,"
"estimate," "expect," "seek," and "intend" and words of similar import are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and are subject to business and economic risks
and uncertainties which are difficult to predict. Therefore, the Company's
actual results of operations may differ materially from those expressed or
forecasted in the forward-looking statements as a result of a number of factors,
including those set forth in this discussion under "Certain Factors That May
Affect Future Results" and other risks detailed from time to time in reports
filed with the Securities and Exchange Commission. In addition, the discussion
of the Company's results of operations should be read in conjunction with
matters described in detail in the Company's Prospectus dated June 18, 1997,
including the "Risk Factors" set forth therein.
OVERVIEW
The Company began operations in January 1994 to develop, market and support
enterprise software for application integration. In 1994 and 1995, the Company
was in the development stage and was principally focused on product development
and the assembling of its management team and infrastructure. The
8
<PAGE> 9
Company completed and commercially introduced its initial version of NEONet in
January 1996. Software license revenues were not significant until the initial
introduction of the NEONet software in January 1996 and, more significantly, the
release of NEONet version 2.2 in June 1996. Since the initial release of NEONet
in January 1996 a substantial portion of the Company's revenues have been
attributable to licenses of NEONet and related services. In November 1996, the
Company commenced shipment to customers of Release 3.0 of NEONet, which provided
additional capabilities for effective enterprise-wide application integration.
The Company currently expects that revenues attributable to NEONet and related
services will continue to account for a substantial majority of the Company's
revenues at least through 1997. Accordingly, the Company's future operating
results will be dependent upon the level of market acceptance of, and demand
for, NEONet.
In view of the Company's limited operating history, recent growth and other
factors enumerated under "Certain Factors That May Affect Future Results," the
Company believes that the quarter-to-quarter comparisons of its financial
results should not be relied upon as an indication of future performance, and
operating results may fluctuate from quarter to quarter in the future.
In September 1997, the Company acquired all of the outstanding capital
stock of Menhir, a developer and marketer of enterprise client information
systems, for $2.8 million in cash. The acquisition was accounted for under the
purchase method of accounting. The results of operations for Menhir from the
period beginning September 1 and continuing through September 30, 1997 have been
incorporated into three and nine-month statements of operations, and assets and
liabilities have been consolidated in the September 30, 1997 balance sheet.
REVENUES
Total revenues for the three and nine months ended September 30, 1997 were
$5.9 million and $14.4 million, compared with $1.7 million and $4.3 million in
the corresponding periods of 1996. This growth was primarily attributable to the
substantial increase in software license revenues from the NEONet product family
and associated services and maintenance revenues. Additionally, the inclusion of
September revenues from sales of the Rapport product resulting from acquisition
of Menhir contributed to the growth in total revenues.
Software license revenues were $4.0 million and $9.7 million for the three
and nine months ended September 30, 1997, compared with approximately $800,000
and $1.4 million for the corresponding periods of 1996. This constituted 68% and
67% of total revenues in the quarter and nine months ended September 30, 1997
compared to 50% and 31% in the corresponding periods of 1996. The increase in
software licenses revenues, both in absolute dollars and as a percent of total
revenues, reflects a growing market awareness and acceptance of the Company's
products, expansion of international sales resources, the continued growth of an
installed base of accounts to serve as references for new customers, repeat
business by existing customers, and continually expanding functionality in the
NEONet product.
Services and maintenance revenues were $1.9 million and $4.7 million for
the three and nine months ended September 30, 1997 compared with $800,000 and
$3.0 million for the corresponding periods of 1996. This constituted a growth of
125% and 58% in the three and nine months ended September 30, 1997, compared to
the corresponding 1996 periods. Services and maintenance revenues grew due to
professional services delivered in conjunction with new license sales and to a
larger installed base of customers purchasing maintenance services for new or
existing software licenses. The growth in service revenues for the nine-month
period ending September 30, 1997 as compared with the nine month period ending
September 30, 1996 was affected by the completion of the Merrill Lynch service
engagement in the quarter ended June 30, 1996. In the first half of 1996, the
majority of the Company's revenues were derived from this agreement.
During the three and nine month periods ending September 30, 1997, the
Company's largest customer accounted for 19% and 21% respectively, of total
revenues.
9
<PAGE> 10
COST OF REVENUES
Cost of revenues consists of costs of software licenses and costs of
services and maintenance. Cost of software licenses consisted primarily of
royalty payments under an agreement to pay certain royalties to Merrill Lynch
until such royalties reach $1.9 million. The Company accrued royalties at 30% of
NEONet license sales in 1996 and at 10% during the nine months ended September
30, 1997. As of September 30, 1997, total accrued royalties due to Merrill Lynch
were approximately $1.75 million, of which $1.44 million had been paid. The
Company expects that the remaining Merrill Lynch royalty obligation of
approximately $150,000 will be satisfied by the end of fiscal 1997. While this
will extinguish any royalties due on NEONet, there can be no assurances that the
Company will not develop, market, and sell other products that will carry
royalty obligations.
Cost of revenues as a percentage of total was 25% and 27% in the three and
nine month periods ended September 30, 1997 compared to 42% and 52% in the
corresponding periods of 1996. The reductions in these percentages were due to a
greater proportion of revenues being from software licenses which require
substantially lower direct costs than services and maintenance revenues.
Cost of software licenses was 8% of software license revenues in both the
three months and nine months ended September 30, 1997, compared to 30% in both
the three months and nine months ended September 30, 1996. The decrease reflects
the reduction in royalty rate payable to Merrill Lynch & Co. on the NEONet
license sales from 30% to 10% effective in January, 1997 and the increase of
sales non royalty-bearing products in the 1997 periods.
Cost of services and maintenance was 61% and 68% of services and
maintenance revenues in the three and nine month periods ending September 30,
1997 compared to 54% and 62% in the corresponding periods of 1996. While cost of
service and maintenance revenues as a percentage of service and maintenance
revenues declined relative to the second quarter of 1997, the Company continued
to use subcontract labor in certain customer engagements to meet specialized
requirements. In the future, the Company believes that cost of services and
maintenance may vary from period to period depending upon the need to use
subcontractors to meet specialized customer requirements.
OPERATING EXPENSES
Research and Development
Research and development expenses were $2.1 million and $4.9 million,
respectively, in the three and nine month periods ended September 30, 1997, as
compared with $1.1 million and $2.5 million in the corresponding three and nine
month periods ended September 30, 1996, representing an increase of 85% and 97%
over the three and nine month comparative periods of 1996. The increase in
research and development expenses is primarily attributable to hiring of
additional technical personnel engaged in software development activities. As a
percentage of total revenues, research and development expenses decreased to 36%
and 34%, respectively, for the three and nine month periods ended September 30,
1997, from 68% and 57%, respectively, for the three and nine month periods ended
September 30, 1996, due to the significant growth in software licenses revenues.
Research and development expenses have been expensed as incurred. No software
development costs have been capitalized to date in accordance with Statement of
Financial Accounting Standards No. 86.
Sales and Marketing
Sales and Marketing expenses consist primarily of salaries for sales and
marketing personnel, commissions, and promotional expenses. Sales and marketing
expenses were $2.3 million and $5.9 million, respectively, for the three and
nine month periods ended September 30, 1997, as compared with $1.5 and $2.8
million, respectively, for the three and nine month periods ended September 30,
1996, representing an increase of 53% and 112%, respectively, for the 1997
periods over the 1996 comparative periods. These increases were due primarily to
the Company's expansion of its overall sales and marketing resources and
business infrastructure. As a percentage of total revenues, sales and marketing
expenses decreased to 38% and
10
<PAGE> 11
41%, respectively, for the three and nine month periods ended September 30,
1997, from 88% and 65%, respectively, for the three and nine month periods ended
September 30, 1996, due to the significant increase in revenues from software
licenses. The Company expects to continue to expand its direct sales force and,
in particular, increase its international presence, as well as continue to
develop its indirect distribution channels and increase promotional activity.
Accordingly, the Company expects sales and marketing expenses to continue to
grow in absolute dollars, although such expenditures may vary as a percentage of
total revenues depending upon the rate of growth of the Company's revenues, if
any.
General and Administrative
General and administrative expenses consist primarily of salaries and
related costs, and outside professional fees associated with the finance, legal,
human resources, and administrative functions of the Company. The Information
Services staff was expanded and consolidated under general and administrative
beginning in the third quarter of 1997. General and administrative expenses were
$616,000 and $1.5 million, respectively, for the three and nine month periods
ended September 30, 1997, as compared with $475,000 and $1.0 million,
respectively, for the three and nine month periods ended September 30, 1996. As
a percentage of total revenues, general and administrative expenses decreased
substantially in the comparative three and nine month periods from 1996 to 1997
due principally to economies of scale associated with increased revenues. The
Company expects general and administrative expenses to grow in absolute dollars
as the Company implements additional management information systems associated
with business growth, as well as incurring costs incident to being a publicly
held company.
Charge for Acquired In-Process Research and Development/Amortization of
Intangibles
Based on an independent appraisal of the net assets acquired, $2.6 million
of in-process research and development projects was charged to operations in
connection with the acquisition of Menhir. The Company also recorded on its
balance sheet $460,000, included in Other Assets, net, for marketable software
products which will be amortized under a straight-line method over a three year
period, and $400,000 for goodwill which will be amortized under a straight-line
method over a period of seven years. Approximately $18,000 of amortization was
recorded during the quarter ended September 30, 1997, which represented the
amortization of the software and goodwill for the month of September.
OTHER INCOME, NET
The Company reported net interest income of $429,000 in the quarter ended
September 30, 1997. The Company did not have material other income in the
corresponding 1996 period. The Company anticipates that interest income will
decline marginally in future periods as cash balances are used for expenses
associated with the Menhir acquisition, as well as potential future
acquisitions, and the funding of ongoing operations of the Company.
PROVISION FOR TAXES
The Company has reported no income tax expense for any period. As of
September 30, 1997, the net deferred tax asset of approximately $3.5 million was
offset by a valuation allowance of a like amount. The comparable figure for
December 31, 1996 was $2.7 million.
NET LOSS
Giving effect to the acquisition-related expenses associated with the
Menhir acquisition, the Company's net loss for the third quarter of 1997 was
($2.7) million, or ($0.30) per share on an average of 9.0 million shares
outstanding. Excluding acquisition-related expenses, the net loss was
($117,000), or ($0.01) per share. This compares to a net loss of ($2.1) million,
or ($0.34) per share on an average of 6.1 million shares outstanding in the
third quarter of 1996. For the first nine months of 1997, giving effect to the
acquisition-related expenses, the net loss was ($4.0) million, or ($0.56) per
share on an average of 7.2 million shares outstanding. Excluding
acquisition-related expenses, the net loss was ($1.4) million, or ($0.20) per
share.
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This compares to a net loss of ($4.2) million, or ($0.73) per share, on an
average of 5.7 million shares for the first nine months of 1996. The reduction
in net loss, excluding the impact of acquisition-related expenses, results from
the increased growth of the Company's revenues, particularly the growth of
software license revenues, as compared with the growth of costs and expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position remains strong, with $26.3 million in cash
and cash equivalents at September 30, 1997, compared to $3.4 million at December
31, 1996. Notes payable to banks of $0.5 million, consisting of a line of credit
held by its subsidiary, Menhir Limited, was subsequently been paid off. The
Company maintains lines of credit in both the United States and the United
Kingdom which are used for working capital requirements on an as needed basis.
Notes payable to banks at December 31, 1996 were $1.5 million.
Cash used for operating activities was $6.6 million and $4.6 million in the
first nine months of 1997 and 1996, respectively. This $2.0 million increase in
cash usage reflects a $2.9 million decrease in net loss (exclusive of the charge
for acquired in-process research and development and other non-cash expenses)
offset by a $4.9 million increase in working capital as a result of growing the
business, primarily increases in accounts receivable and unbilled revenue and a
decrease in accrued liabilities due to the payment of $1.1 million of the
royalties due to Merrill Lynch.
Cash used for investing activities was $3.6 million in the first nine
months of 1997 compared to $1.0 million for the same period of 1996. The usage
in the 1997 period consists of $2.8 million plus approximately $200,000 of
acquisition costs associated with the Menhir acquisition and $800,000 in capital
expenditures.
Cash flow from financing activities was $33.1 million in the first nine
months of 1997 compared to $7.7 million for the same period of 1996. Through
September 30, 1997, the Company had received $34.3 million in net proceeds from
its initial public offering.
The Company believes that its existing balance of cash and cash equivalents
will be sufficient to meet the Company's working capital and capital expenditure
needs at least for the next twelve months. Thereafter, the Company may require
additional sources of funds to continue to support its business. There can be no
assurance that such capital, if needed, will be available or will be available
on terms acceptable to the Company.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Limited Operating History; History of Operating Losses; Accumulated
Deficit. The Company was formed in 1993, and installed NEONet at its first
customer site in January 1996. The Company commercially introduced its initial
version of NEONet in January 1996. Accordingly, the Company has only a limited
operating history upon which an evaluation of the Company and its prospects can
be based. Prior to 1996, the Company recorded only nominal product revenue, and
the Company has never been profitable on a quarterly or annual basis. The
Company may not be profitable for several quarters, and may never achieve
profitability unless revenues increase substantially. At September 30, 1997, the
Company had an accumulated deficit of approximately $12.1 million. The Company's
limited operating history makes the prediction of future operating results
difficult or impossible. The Company's prospects must be evaluated in light of
the risks, uncertainties, expenses and difficulties frequently encountered by
companies in the early stage of their development. The new and rapidly evolving
markets in which the Company operates makes these risks, uncertainties, expenses
and difficulties particularly pronounced. In order to address these risks and
uncertainties the Company must, among other things, successfully implement its
sales and marketing strategy, expand its direct sales channels, develop its
indirect distribution channels, respond to competitive and other developments in
the application integration software market, attract and retain qualified
personnel, continue to develop and upgrade its products and technology more
rapidly than competitors, and commercialize its products and services that
incorporate existing and future technologies. There can be no assurance that the
Company will be able to successfully implement any of its strategies or
successfully address these risks and
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<PAGE> 13
uncertainties, or that the Company will achieve or sustain profitability on a
quarterly or annual basis in the future.
Uncertainty of Future Operating Results; Lengthy Sales Cycle; Fluctuations
in Quarterly Results. Although the Company has experienced significant revenue
growth in recent periods, such growth rates may not be sustainable and are not
necessarily indicative of future operating results and operating margins. The
Company's quarterly operating results have fluctuated significantly in the past
and may vary significantly in the future. Future operating results will depend
on many factors, including, among others, the growth of the application
integration software market, the size and timing of software licenses, the delay
or deferral of customer implementations, the ability of the Company to maintain
or increase market demand for the Company's products, the timing of new product
announcements and releases by the Company, competition by existing and emerging
competitors in the application integration software market, the ability of the
Company to expand its direct sales force and develop indirect distribution
channels, the Company's success in developing and marketing new products and
controlling costs, budgeting cycles of customers, product life cycles, software
defects and other product quality problems, the mix of products and services
sold, international expansion, and general domestic and international economic
and political conditions. A significant portion of the Company's revenues has
been, and the Company believes will continue to be, derived from a small number
of relatively large customer contracts or arrangements, and the timing of
revenue recognition from such contracts and arrangements has caused and may
continue to cause material fluctuations in the Company's operating results,
particularly on a quarterly basis. Quarterly revenues and operating results
typically depend upon the volume and timing of customer contracts received
during a given quarter, and the percentage of each such contract which the
Company is able to recognize as revenue during each quarter, each of which is
difficult to forecast. In addition, as is common in the software industry, a
substantial portion of the Company's revenues in a given quarter historically
have been recorded in the third month of that quarter, with a concentration of
such revenues in the last two weeks of the third month. To the extent this trend
continues, any failure or delay in the closing of orders during the last part of
any given quarter will have a material adverse effect on the Company's business,
financial condition and results of operations.
In addition, the timing of license revenue is difficult to predict because
of the length and variability of the Company's sales cycle. The purchase of the
Company's products by its customers typically involves a significant technical
evaluation and commitment of capital and other resources, with the attendant
delays frequently associated with customers' internal procedures to approve
large capital expenditures and to test, implement and accept new technologies
that affect key operations. This evaluation process frequently results in a
lengthy sales process of several months and subjects the sales cycle associated
with the purchase of the Company's products to a number of significant risks,
including customers' budgetary constraints and internal acceptance reviews. The
length of the Company's sales cycle may vary substantially from customer to
customer, particularly for customers within different vertical market segments.
The Company's operating expense levels are relatively fixed and are based in
part on expectations of future revenues. Consequently, any delay in the
recognition of revenue from quarter to quarter could result in operating losses.
To the extent that such operating expenses precede, or are not subsequently
followed by, increased revenues, the Company's operating results would be
materially adversely affected.
As a result of these and other factors, the Company believes that
period-to-period comparisons of its historical results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. It is possible that the Company's future quarterly operating
results from time to time may not meet the expectations of stock market analysts
or investors, which would likely have an adverse effect on the market price of
the Company's Common Stock.
Dependence Upon Emerging Market for Application Integration
Software. Substantially all of the Company's revenues to date have been
attributable to sales of application integration software products and services,
and the Company expects that substantially all revenues in the foreseeable
future will be derived from such products. The market for application
integration software is relatively new and emerging. The Company's future
financial performance will depend, to a large extent, on continued growth in the
number of organizations demanding software and services for application
integration and seeking outside vendors to develop, manage and maintain the
integration software used for their mission-critical applications. Many
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<PAGE> 14
potential customers for third-party application integration software have made
significant investments in internally developed integration systems, and are
highly dependent upon the continued use of such internally developed systems.
The dependence of organizations on such internally developed systems coupled
with the significant costs required to shift to third-party products may
substantially inhibit future demand for third-party application integration
software products, such as those offered by the Company. There can be no
assurance that the market for application integration software products and
services will continue to grow. If the application integration market fails to
grow or grows more slowly than the Company currently anticipates, the Company's
business, operating results, and financial condition would be materially
adversely affected.
The Company intends to continue to devote considerable resources educating
potential customers about application integration software. Even if a sizable
market for third-party application integration continues to develop, there can
be no assurance that such expenditures or any other marketing efforts will
enable the Company's products to achieve or sustain any significant degree of
market acceptance. If the Company is unsuccessful in establishing broad market
acceptance for its current and future products, the Company's future growth,
financial condition and results of operations will be materially adversely
affected.
Product Concentration. A substantial portion of the Company's revenues have
been attributable to licenses of NEONet and related services. The Company
currently expects that revenues attributable to NEONet and related services will
continue to account for a substantial majority of the Company's revenues at
least through 1997. Accordingly, the Company's future operating results will be
dependent upon the level of market acceptance of, and demand for, NEONet. The
Company's future performance will, to a large extent, depend upon the successful
development, introduction and customer acceptance of new and enhanced releases
of NEONet and other products. There can be no assurance that the Company's
products will achieve continued market acceptance or that the Company will be
successful in marketing any new or enhanced products. In the event that the
Company's current or future competitors release new products that have more
advanced features, offer better performance or are more price competitive than
NEONet, demand for the Company's products may decline. A decline in demand for
NEONet as a result of competition, technological change or other factors would
have a material adverse effect on the Company's business, financial condition
and results of operations.
Customer Concentration; Dependence Upon Financial Institutions Industry;
Risks of New Targeted Market Segments. A relatively small number of customers
account for a significant percentage of the Company's revenues. For the year
ended December 31, 1996, sales to Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"), ADP Financial Information Services, JP Morgan &
Co. and SunGard Financial Systems accounted for 22%, 16%, 14% and 13% of total
revenues, respectively. For the three and nine months ended September 30, 1997,
the Company's largest customer contract accounted for 19% and 21%, respectively,
of the Company's total revenues. There can be no assurance that these customers
or other customers of the Company will continue to purchase the Company's
products in the future. The Company's failure to add new customers that make
significant purchases of the Company's products and services would have a
material adverse effect on the Company's business, financial condition and
result of operations.
To date, the Company's revenues have been derived primarily from sales to
large banks and financial institutions. During the year ended December 31, 1996
and the nine-month period ended September 30, 1997, sales to banks and financial
institutions accounted for 80% and 78%, respectively, of the Company's total
revenues. The Company's marketing strategy calls for the Company to increase its
penetration of the financial institutions market segment and to focus other
sales efforts on additional vertical market segments, principally health care,
telecommunications and manufacturing. Accordingly, the Company expects that
revenues attributable to the financial institutions market segment will continue
to account for a substantial portion of the Company's revenues in the near
future. Any factors affecting the health of the financial services industry, or
other targeted vertical market segments that contain a significant portion of
the Company's customer base, could affect the purchasing patterns of the
Company's customers within these industries, which would have a material adverse
effect on the Company's business, operating results and financial condition.
The Company has only limited experience in marketing its products to
customers outside of the financial institutions industry. The additional market
segments currently targeted by the Company are likely to have
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<PAGE> 15
significantly different market characteristics than the financial institutions
segment, and licensing NEONet products in such other segments may require
pricing structures, sales methods, sales personnel, consulting services and
customer support that differ from those previously used by the Company. There
can be no assurance that the Company will be successful in achieving significant
market acceptance or penetration in the additional segments targeted by the
Company. If the Company is unsuccessful in penetrating additional vertical
market segments, its future growth, financial condition and results of
operations will be materially adversely affected.
Management of Growth. The Company is currently experiencing a period of
rapid growth that has placed and is expected to continue to place a strain on
the Company's administrative, financial and operational resources. From January
1, 1996 through September 30, 1997, the size of the Company's staff increased
from 35 to 211 full time equivalent employees (including 41 employees acquired
as part of the Menhir acquisition). Except for George F. (Rick) Adam, Jr., the
Company's Chief Executive Officer, and Harold A. Piskiel, the Company's Senior
Vice President, Chief Technical Officer, all of the Company's senior management
joined the Company in 1996 or 1997. Most of the Company's senior managers have
worked together at the Company for only a brief period. In addition, the Company
expanded geographically by adding sales personnel in New York City, Chicago,
Houston, San Francisco, Philadelphia, Atlanta and London, England. The Company
may further expand into these regions or into others through internal growth or
through acquisitions of related companies and technologies, although no such
acquisitions are currently being negotiated. Such expansion may strain
management's ability to successfully integrate its operations throughout these
regions. Any additional growth within a short time period may divert management
attention from day-to-day operations, which could have a material adverse effect
on the Company's business, financial condition, and operating results.
The Company's ability to manage its staff and facilities growth effectively
will require it to continue to improve its operational, financial and management
controls, reporting systems and procedures, to install new management
information and control systems and to expand, train, motivate and manage its
work force. There can be no assurance that the Company will install such
management information and control systems in an efficient and timely manner or
that the new systems will be adequate to support the Company's level of
operations. If the Company's management is unable to manage growth effectively
and new employees are unable to achieve targeted performance levels, the
Company's business, operating results and financial condition would be
materially adversely affected.
Integration of Potential Acquisitions and Joint Ventures. The Company may
from time to time engage in acquisitions of companies with complementary
products and services in the application integration or other related software
markets. Although no additional acquisitions following the Menhir acquisition
are currently being negotiated, any future acquisitions would expose the Company
to increased risks, including those associated with the assimilation of new
operations and personnel, the diversion of financial and management resources
from existing operations, and the inability of management to integrate
successfully acquired businesses, personnel and technologies. Furthermore, there
can be no assurance that the Company will be able to generate sufficient
revenues from any such acquisition to offset associated acquisition costs, or
that the Company will be able to maintain uniform standards of quality and
service, controls, procedures and policies, which may result in the impairment
of relationships with customers, employees, and new management personnel.
Certain acquisitions may also result in additional stock issuances which could
be dilutive to the Company's stockholders. The Company may also evaluate, on a
case-by-case basis, joint venture relationships with certain complementary
businesses. Any such joint venture investment would involve many of the same
risks posed by acquisitions, particularly those risks associated with the
diversion of resources, the inability to generate sufficient revenues, the
management of relationships with third parties, and potential additional
expenses, any of which could have a material adverse effect on the Company's
business, financial condition or operating results.
Competition. The market for the Company's products is intensely competitive
and is expected to become increasingly competitive as current competitors expand
their product offerings and new competitors enter the market. In this regard,
the Company believes that the application integration market is relatively new,
such that there is great likelihood that additional, significant competitors
will enter the market. The Company's
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current competitors include a large number of companies offering one or more
solutions to the application integration problem, some of which are directly
competitive with NEONet.
To date, the Company has faced competition and sales resistance from the
internal information technology departments of potential customers that have
developed or may develop in-house systems that may substitute for those offered
by the Company. The Company expects that internally developed application
integration systems will continue to be a principal source of competition for
the foreseeable future. In particular, the Company has had difficulties making
sales to organizations whose internal development groups have already progressed
significantly toward completion of systems that the Company's products might
replace, or where the underlying technologies used by such groups differ
fundamentally from the Company's.
The Company's competitors also include software vendors targeting the
enterprise-wide application integration market through various technological
solutions. For example, IBM, Microsoft, BEA and others provide messaging and
queuing solutions that compete with the NEONet Messaging and Queuing module. In
the future these vendors could elect to provide a more complete integration
solution that would also compete with NEONet's dynamic formatting and
rules-based engine modules. In addition, a large number of other companies
provide alternative solutions to application integration utilizing other
technologies such as data synchronization and transaction monitoring, and a
limited number of companies such as TIBCO, Inc. offer subject-based
publish/subscribe messaging systems designed to operate similarly to NEONet. The
Company also faces competition from relational database vendors such as IBM,
Oracle, Informix, Sybase and Microsoft, whose products currently compete with
NEONet to some extent and are likely to compete more directly in the future.
The Company also may face competition from systems integrators and
professional service organizations, such as Andersen Consulting, Ernst & Young
and KPMG Peat Marwick, which design and develop custom systems and perform
custom integration. Certain of these firms may possess industry specific
expertise or reputations among potential customers for offering enterprise
solutions to application integration needs. These systems integration and
consulting firms can be resellers of the Company's products and may engage in
joint marketing and sales efforts with the Company. The Company relies upon such
firms for recommendations of NEONet products during the evaluation stage of the
purchase process, as well as for implementation and customer support services.
These systems integration and consulting firms may have similar, and often more
established, relationships with the Company's competitors, and there can be no
assurance that these firms will not market or recommend software products
competitive with the Company's products in the future.
Most of the Company's competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources,
significantly greater name recognition, and a larger installed base of customers
than the Company. In addition, many of the Company's competitors have
well-established relationships with current and potential customers of the
Company, have extensive knowledge of the application integration industry, and
are capable of offering a single-vendor solution. As a result, the Company's
competitors may be more able than the Company to devote significant resources
toward the development, promotion and sale of their products and to respond more
quickly to new or emerging technologies and changes in customer requirements. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address customer needs. Accordingly, it is possible
that new competitors or alliances among competitors may emerge and rapidly
acquire significant market share. The Company also expects that the competition
will increase as a result of software industry consolidations. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share, any of which could materially adversely affect the
Company's business, operating results and financial condition. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors, or that competitive pressure faced by the Company will
not materially adversely affect its business, operating results, and financial
condition.
Rapid Technological Change; Limited Platform Coverage; Dependence on New
Products. The market in which the Company competes is characterized by rapid
technological change, frequent new product introductions and enhancements,
changes in customer demands and evolving industry standards. The
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introduction of products incorporating new technologies and the emergence of
shifting customer requirements, or changing industry standards, could render
certain of the Company's existing products obsolete. The technological life
cycles of the Company's products are difficult to estimate, and may vary across
vertical market segments. The Company's future success will depend upon its
ability to continue to enhance its current product line and to continue to
develop and introduce new products that keep pace with competitive and
technological developments. Such developments will require the Company to
continue to make substantial product development investments.
The Company currently serves, and intends to continue to serve, a customer
base with a wide variety of hardware, software, database, and networking
platforms. To gain broad market acceptance, the Company believes that in the
future it must support NEONet on a variety of platforms. The Company's product
currently does not support all major platforms, and there can be no assurance
that the Company will adequately expand its database and platform coverage to
service potential customers, or that such expansion will be sufficiently rapid
to meet or exceed platform and database coverage of competitors.
The success of the Company's products will depend on various factors,
including the ability to integrate the Company's products with customer
platforms as compared to competitive offerings, the portability of the Company's
products, particularly the number of hardware platforms, operating systems and
databases that the Company's products can source or target, the integration of
additional software modules under development with existing products, and the
Company's management of software development being performed by third party
developers. There can be no assurance that the Company will be successful in
developing and marketing product enhancements or new products that respond to
these technological changes, shifting customer tastes, or evolving industry
standards, or that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and marketing of these
products. If the Company is unable to develop and introduce new products or
enhancements of existing products in a timely manner or if the Company
experiences delays in the commencement of commercial shipments of new products
and enhancements, the Company's business, operating results and financial
condition would be materially adversely affected.
Risks Associated with Expanding Distribution; Indirect Distribution Channel
Risks. To date, the Company has sold its products primarily through direct sales
and has supported its customers with its technical and customer support staff.
The Company's ability to achieve significant revenue growth in the future will
depend in large part on its ability to recruit and train sufficient direct
sales, technical and customer personnel, particularly additional sales personnel
focusing on the new vertical market segments targeted by the Company's marketing
strategy. The Company has at times experienced and continues to experience
difficulty in recruiting qualified sales, technical and support personnel. Any
failure by the Company to rapidly and effectively expand its direct sales force
and its technical and support staff could materially adversely affect the
Company's business, financial condition and operating results.
The Company believes that future growth will depend upon its success in
developing and maintaining strategic relationships with distributors, resellers,
and systems integrators. While the Company's current strategy is to increase the
proportion of customers served through these indirect channels, indirect channel
sales have not accounted for significant revenue to date. The Company is
currently investing, and plans to continue to invest, significant resources to
develop the indirect channel, which could adversely affect the Company's
operating results if the Company's efforts do not generate license revenues
necessary to offset such investment. The Company's inability to recruit and
retain qualified third-party distributors, VARs and systems integrators could
adversely affect the Company's results of operations. The Company's success in
selling into this indirect distribution channel could also adversely affect the
Company's average selling prices and result in lower gross margins, since lower
unit prices are typically charged on sales through indirect channels.
Dependence on Key Personnel; Ability to Attract and Retain Personnel. The
Company's future success will depend in large part upon the continued service of
its key technical, sales and senior management personnel, none of whom is bound
by an employment agreement. The loss of any of the Company's senior management
or other key research, development, sales and marketing personnel, particularly
if lost to competitors, could have a material adverse effect on the Company's
business, financial condition and operating
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results. The Company's future success will depend in large part upon its ability
to attract, retain and motivate highly skilled employees. There is significant
competition for employees with the skills required to perform the services
offered by the Company and there can be no assurance that the Company will be
able to continue to attract and retain sufficient numbers of highly skilled
employees. Because of the complexity of the application integration software
market, the Company has in the past experienced, and expects in the future to
experience, a significant time lag between the date on which technical and sales
personnel are hired and the time at which persons become fully productive. If
the Company is unable to manage the post-sales process effectively, its ability
to attract repeat sales or establish strong account references could be
adversely affected, which may materially affect the Company's business,
operating results and financial condition.
Protection of Intellectual Property; Risks of Infringement. The Company's
success and ability to compete is dependent in part upon its proprietary
technology. The Company relies on a combination of copyright, trademark and
trade secret laws, as well as confidentiality agreements and licensing
arrangements, to establish and protect its proprietary rights. The Company
presently has no patents, but has three patent applications pending. Despite the
Company's efforts to protect its proprietary rights, existing copyright,
trademark and trade secret laws afford only limited protection. Moreover, the
laws of certain countries do not protect the Company's proprietary rights to the
same extent as do the laws of the United States. In addition, attempts may be
made to copy or reverse engineer aspects of the Company's products or to obtain
and use information that the Company regards as proprietary. Accordingly, there
can be no assurance that the Company will be able to protect its proprietary
rights against unauthorized third-party copying or use, which could materially
adversely affect the Company's business, operating results or financial
condition. Moreover, there can be no assurance that others will not develop
products that infringe the Company's proprietary rights, or that are similar or
superior to those developed by the Company. Policing the unauthorized use of the
Company's products is difficult and litigation may be necessary in the future to
enforce the Company's intellectual property rights, to protect the Company's
trade secrets or to determine the validity and scope of the proprietary rights
of others. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
operating results or financial condition.
As is common in the software industry, the Company from time to time
receives notices from third parties claiming infringement by the Company's
products of third-party proprietary rights. On July 1, 1996, the Company was
notified that the Company's products may infringe proprietary rights of New
Paradigm Software Corp. ("New Paradigm"), an application integration software
company. New Paradigm alleged that NEONet's formatter will infringe certain
claims set forth in a patent application filed in the United States and Europe.
The Company does not believe such allegations have merit and, if pursued by New
Paradigm, the Company intends to vigorously defend such claim. There can be no
assurance, however, that other third parties will not claim infringement by the
Company with respect to current or future products. The Company expects that
application integration software developers will increasingly be subject to
infringement claims as the number of products in different industry segments
overlap. In this regard, the Company is aware that one of its competitors has a
U.S. patent covering certain aspects of publish/subscribe messaging systems.
This competitor has invited the Company to consider discussing a license under
its patent. The Company believes its NEONet product does not infringe any valid
claim of the patent. However, any claims, including the specific claim by New
Paradigm or any other infringement claims, with or without merit, could be time-
consuming, result in costly litigation, cause product shipment delays, or
require the Company to enter into royalty or licensing agreements, any of which
could have a material adverse effect upon the Company's business, financial
condition and operating results. There can be no assurance that such royalty or
licensing agreements, if required, would be available on terms acceptable to the
Company, or at all. Moreover, the cost of defending patent litigation could be
substantial, regardless of the outcome. There can be no assurance that legal
action claiming patent infringement will not be commenced against the Company,
or that the Company would necessarily prevail in such litigation given the
complex technical issues and inherent uncertainties in patent litigation. In the
event a patent claim against the Company was successful and the Company could
not obtain a license on acceptable terms or license a substitute technology or
redesign to avoid infringement, the Company's business, financial condition and
operating results would be materially adversely affected.
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The Company is also aware that a number of organizations are utilizing the
names Neon, New Era and NEONet as either a trademark or tradename or both. In
particular, the Company has received notices from NEON Systems, Inc. and Neon
Software, Inc. alleging the Company's use of NEON as a tradename and/or
trademark violates such respective companies' proprietary rights. Such claims or
any additional claims against the Company alleging trademark or tradename
infringement could be time-consuming and result in costly litigation. A
successful claim regarding the infringement of a trademark and/or tradename
could result in substantial monetary damages against the Company or an
injunction prohibiting the use by the Company of the particular trademark or
tradename. Any such injunction could materially adversely affect the Company's
corporate or product name recognition and marketing efforts. Accordingly, any
monetary damages or injunction could have a material adverse effect upon the
Company's business, financial condition and operating results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended September 30, 1997, a portion of the net proceeds
from the Company's initial public offering was used for the repayment of
approximately $1.5 million in outstanding borrowings. Up to approximately $1.7
million of the proceeds were used to pay certain royalty obligations due to
Merrill-Lynch & Co. Approximately $3.0 million of net proceeds were used in the
acquisition of Menhir and the related expenses associated with the acquisition.
The Company completed its initial public offering pursuant to a
Registration Statement Form S-1 (No. 333-20189) in June 1997 and issued
2,760,000 shares of its Common Stock to the public at a price of $12.00 per
share. The managing underwriters for the initial public offering were UBS
Securities LLC and Cowen & Company. The offering has been terminated and all
shares have been sold. The Company received approximately $29.7 million of cash
from the initial public offering, net of underwriting discounts, commissions,
and other offering costs. In July 1997 the underwriters of the Company's initial
public offering exercised their over-allotment option and purchased an
additional 414,000 shares at $12.00 per share with net proceeds to the Company
of approximately $4.6 million. The principal purpose of the initial public
offering was to obtain additional working capital, establish a public market for
the Company's Common Stock, and facilitate future access to public markets.
No payments constituted direct or indirect payments to directors, officers,
general partners of the issuer or their associates, or to persons owning ten
percent or more of any class of equity securities of the issuer or to affiliates
of the issuer.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON 8-K
(a) A report on Form 8-K was filed on October 10, 1997.
(b) Exhibit 27.1: Financial Data Schedule.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW ERA OF NETWORKS, INC.
(Registrant)
By: /s/ STEPHEN WEBB
----------------------------------
Stephen Webb,
Senior Vice President, Chief
Financial Officer
(Principal Financial and
Accounting Officer)
Date: November 13 ,1997
21
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
27.1 -- Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S SEPTEMBER 30, 1997 UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 26,343,629
<SECURITIES> 0
<RECEIVABLES> 6,696,010
<ALLOWANCES> 300,000
<INVENTORY> 0
<CURRENT-ASSETS> 36,062,702
<PP&E> 2,422,624
<DEPRECIATION> 821,837
<TOTAL-ASSETS> 39,082,598
<CURRENT-LIABILITIES> 5,060,888
<BONDS> 0
0
0
<COMMON> 906
<OTHER-SE> 33,988,520
<TOTAL-LIABILITY-AND-EQUITY> 39,082,598
<SALES> 14,374,173
<TOTAL-REVENUES> 14,374,173
<CGS> 3,946,844
<TOTAL-COSTS> 3,946,844
<OTHER-EXPENSES> 14,920,640
<LOSS-PROVISION> 42,838
<INTEREST-EXPENSE> 72,694
<INCOME-PRETAX> (4,048,687)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,048,687)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,048,687)
<EPS-PRIMARY> (0.56)
<EPS-DILUTED> (0.56)
</TABLE>
