<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 22, 1997
REGISTRATION NO. 333-20189
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NEW ERA OF NETWORKS, INC.
(Exact name of registrant as specified in its charter)
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<C> <C> <C>
DELAWARE 7371 84-1234845
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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7400 EAST ORCHARD ROAD, SUITE 230
ENGLEWOOD, CO 80111
(303) 694-3933
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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GEORGE F. (RICK) ADAM, JR.
CHIEF EXECUTIVE OFFICER
NEW ERA OF NETWORKS, INC.
7400 EAST ORCHARD ROAD, SUITE 230
ENGLEWOOD, CO 80111
(303) 694-3933
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
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MARK A. BERTELSEN, ESQ. JAMES H. CARROLL, ESQ.
RICHARD J. HART, ESQ. MICHAEL L. PLATT, ESQ.
ROBERT M. TARKOFF, ESQ. LAURA MAJERFELD, ESQ.
DAVID M. CAMPBELL, ESQ. COOLEY GODWARD LLP
WILSON SONSINI GOODRICH & ROSATI 2595 CANYON BOULEVARD, SUITE 250
PROFESSIONAL CORPORATION BOULDER, CO 80302
650 PAGE MILL ROAD (303) 546-4000
PALO ALTO, CALIFORNIA 94304
(415) 493-9300
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 145 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) REGISTRATION FEE(3)
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Common Stock....................... 2,645,000 shares $12.00 $31,740,000 $9,618
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(1) Includes 345,000 shares of Common Stock which may be purchased by the
Underwriters to cover over-allotments, if any.
(2) Estimated pursuant to Rule 457 solely for purposes of calculating the
registration fee.
(3) A registration fee of $10,350 was previously paid in connection with the
initial filing.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES
LAWS OF ANY SUCH STATE.
Subject To Completion, Dated May 22, 1997
PROSPECTUS
2,300,000 Shares
[NEON LOGO]
Common Stock
-----------------------
All of the 2,300,000 shares of Common Stock offered hereby are being
sold by New Era of Networks, Inc. ("NEON" or the "Company"). Prior to this
offering, there has been no public market for the Common Stock of the Company.
It is currently estimated that the initial public offering price will be between
$10.00 and $12.00 per share. See "Underwriting" for a discussion of the factors
to be considered in determining the initial public offering price. The Company
has applied to have the Common Stock approved for quotation on the Nasdaq
National Market under the symbol "NEON."
The Common Stock offered hereby involves a high degree of risk. See
"Risk Factors," beginning on page 6.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Price to Underwriting Discounts Proceeds to
Public and Commissions(1) Company(2)
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<S> <C> <C> <C>
Per Share.......................... $ $ $
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Total (3).......................... $ $ $
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1. For information regarding indemnification of the Underwriters, see
"Underwriting."
2. Before deducting expenses of the offering payable by the Company, estimated
at $850,000.
3. The Company has granted the Underwriters an option, exercisable within 30
days from the date hereof, to purchase up to 345,000 additional shares of
Common Stock on the same terms and conditions set forth above, solely to
cover over-allotments, if any. If such option is exercised in full, the
total Price to Public will be $ , the Underwriters' Discounts and
Commissions will be $ and the Proceeds to Company will be
$ . See "Underwriting."
-----------------------
The shares of Common Stock offered by the Underwriters are subject to prior
sale, receipt and acceptance by them and are subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that delivery of such shares will be made through the
offices of UBS Securities LLC, 299 Park Avenue, New York, New York, on or about
, 1997.
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UBS Securities Cowen & Company
, 1997
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information, including "Risk Factors" and
the Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Prospectus. The discussion in this Prospectus contains forward-looking
statements which include risks and uncertainties. The Company's actual results
could differ materially from those discussed in this Prospectus. Factors that
could cause or contribute to such differences include those discussed in the
sections entitled "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operation" and "Business," as well as those
discussed elsewhere in this Prospectus.
THE COMPANY
New Era of Networks, Inc. ("NEON" or the "Company") develops, markets and
supports application integration software and provides application integration
services. The Company's flagship software suite, NEONet, provides organizations
with a structured software platform for the integration of disparate systems and
applications across the enterprise, a process known as application integration.
NEONet facilitates the rapid and efficient deployment and ongoing maintenance of
application integration across the enterprise. NEONet supports a heterogeneous
environment of hardware, operating system, network and database platforms,
permits organizations to leverage existing legacy systems, and accommodates the
extension of the corporate information systems environment to new enterprise
applications and to new computing paradigms such as the Internet/Intranet.
Organizations are increasingly seeking to incorporate powerful new software
applications that operate across the enterprise and also serve as interfaces to
customers and suppliers. At the same time, organizations are seeking to better
leverage their existing information systems and take advantage of their prior
technology investments by integrating previously independent application systems
and databases. Effective application integration strategies are critical to an
organization's ability to respond to changing market demands, seize new market
opportunities, improve customer service, and realize planned improvements in
business processes. Organizations have historically addressed the need to
integrate applications through a number of narrow integration techniques,
typically implemented in an ad hoc manner, addressing specific integration
requirements as they arise over time. Accordingly, traditional techniques
generally require extensive manual custom software coding, provide limited
functionality, flexibility and scaleability, and require a costly and burdensome
ongoing maintenance process. According to Gartner Group, Inc., an information
technology industry research firm, 35% to 40% of all programming effort in a
typical organization is devoted to developing and maintaining the extract and
update programs whose only purpose is to transfer information between different
databases. The Gartner Group refers to the complex morass of individual
unstructured integration among disparate applications as "interapplication
spaghetti."
In January 1996, the Company introduced NEONet, an integrated solution that
addresses the interapplication spaghetti problem and provides a scaleable
infrastructure that supports rapid and efficient updates to integration
implementations. NEONet consists of three principal modules: (i) Messaging and
Queuing; (ii) Formatter; and (iii) Rules Engine, together with a suite of
libraries and tools. The Messaging and Queuing module provides guaranteed
real-time delivery of data transactions across heterogeneous applications. The
Formatter module provides dynamic formatting of data messages to meet the native
format requirements of different applications. The Rules Engine enables an
organization to define and fulfill the data requirements of different
applications through a sophisticated set of readily modifiable business rules.
Since the initial release of NEONet, the Company has introduced several products
that increase the functionality of the three core NEONet modules. These products
include NEONreplication, NEOCAS and NEONweb.
NEON's objective is to establish NEONet as the leading standard for
application integration across the enterprise. Key elements of the Company's
strategy include expanding vertical markets, maintaining the technological
leadership of NEONet, expanding global sales capabilities, and developing
cross-industry applications which have significant importance across different
vertical markets.
Through March 31, 1997, the Company has shipped NEONet to a total of 26
customers in the financial services, health care, information technology and
systems consulting and other industries. Representative customers of the Company
include Merrill Lynch, Pierce, Fenner & Smith Incorporated, Deutsche Morgan
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Grenfell, Inc., Chase Manhattan Bank, Credit Suisse, ADP Financial Information
Services, Ernst & Young, Jackson Memorial Hospital, KN Energy and Pacific
Investment Mortgage Company. The Company markets its software and related
services primarily through a direct sales organization, complemented by indirect
sales channels including VARs, OEMs and international distributors. As part of
this strategy, the Company has established reseller and joint marketing
relationships with firms such as Hewlett-Packard, Sun Microsystems, SunGard
Financial Services, Andersen Consulting, Ernst & Young, Scopus, Open Market,
Oracle and SWIFT.
The Company was incorporated in Illinois in June 1993, commenced operations
in January 1994, and was reincorporated in Delaware in December 1995. Unless the
context otherwise requires, references in this Prospectus to "NEON" or the
"Company" refer to New Era of Networks, Inc., a Delaware corporation and its
subsidiary. The Company's principal executive offices are located at 7400 East
Orchard Road, Suite 230, Englewood, Colorado 80111. Its telephone number is
(303) 694-3933.
THE OFFERING
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Common Stock Offered by the Company................ 2,300,000 shares,
Common Stock Outstanding after the Offering........ 8,140,461 shares(1)
Use of proceeds.................................... Repayment of certain indebtedness and for
general corporate purposes, including
working capital.
Proposed Nasdaq National Market Symbol............. NEON
Risk Factors....................................... The Common Stock offered hereby involves a
high degree of risk. See "Risk Factors."
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(1) Based upon shares outstanding as of March 31, 1997. Excludes (i) an
aggregate of 1,353,712 shares of Common Stock issuable upon exercise of
options outstanding under the Company's Amended and Restated 1995 Stock
Option Plan as of March 31, 1997, at a weighted average exercise price of
$5.37 per share, as well as an additional 941,925 shares reserved at such
date for future grant under such plan (giving effect to an increase in the
number of shares authorized for issuance under such plan in January 1997),
(ii) 216,666 shares of Common Stock reserved for issuance under the
Company's 1997 Employee Stock Purchase Plan, and (iii) 100,000 shares of
Common Stock reserved for issuance under the Company's 1997 Director Stock
Option Plan.
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This Prospectus includes trademarks of the Company and other companies.
4
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
The summary consolidated financial data presented below have been derived
from the Company's Consolidated Financial Statements and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus.
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THREE MONTHS ENDED
YEAR ENDED DEC. 31, ---------------------------------------------------------
--------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1994 1995 1996 1996 1996 1996 1996 1997
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Software licenses....... $ -- $ -- $ 3,383 $ 111 $ 411 $ 832 $ 2,029 $ 2,447
Services and
maintenance........... 149 1,271 3,762 945 1,186 841 790 1,227
----- ------- --------- --------- --------- --------- --------- ---------
Total revenues............ 149 1,271 7,145 1,056 1,597 1,673 2,819 3,674
Cost of revenues.......... 85 751 3,328 710 836 707 1,075 1,050
----- ------- --------- --------- --------- --------- --------- ---------
Gross profit.............. 64 520 3,817 346 761 966 1,744 2,624
Loss from operations...... (690) (1,490) (5,733) (757) (1,365) (2,120) (1,491) (783)
Net loss.................. $(719) $(1,503) $ (5,672) $ (755) $ (1,358) $ (2,071) $ (1,488) $ (784)
===== ======= ========= ========= ========= ========= ========= =========
Pro forma net loss per
common share(1)......... $ (0.98) $ (0.14) $ (0.24) $ (0.34) $ (0.25) $ (0.13)
========= ========= ========= ========= ========= =========
Pro forma weighted average
shares of Common Stock
outstanding(1).......... 5,789,382 5,388,815 5,618,209 6,073,360 6,077,145 6,094,414
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MARCH 31, 1997
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ACTUAL AS ADJUSTED(2)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $1,641 $22,779
Working capital............................................. 1,294 23,886
Total assets................................................ 7,373 28,511
Stockholders' equity........................................ 2,833 25,512
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(1) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the pro forma weighted average common shares outstanding used to compute
pro forma net loss per share.
(2) Reflects the sale of 2,300,000 shares of Common Stock offered by the Company
hereby at an assumed initial public offering price of $11.00 per share,
after deducting estimated underwriting discounts and commissions and
estimated offering costs payable by the Company, and the application of the
net proceeds therefrom. See "Capitalization" and "Use of Proceeds."
---------------------------
Unless otherwise indicated, the information in this Prospectus: (i) gives
effect to an amendment to the Company's Certificate of Incorporation to be
effected prior to the effectiveness of this Offering, which amendment shall
increase the authorized capital stock of the Company and effect a two-for-nine
reverse split of the Company's Common Stock, (ii) gives effect to the conversion
of all outstanding shares of Preferred Stock into Common Stock at a two-for-nine
conversion rate upon the completion of the Offering, and (iii) assumes no
exercise of the Underwriters' over-allotment option.
5
<PAGE> 7
RISK FACTORS
In addition to the other information contained in this Prospectus,
investors should carefully consider the following risk factors before making an
investment decision concerning the Common Stock. All statements, trend analysis
and other information contained in this Prospectus relative to markets for the
Company's products and trends in revenues, gross margin and anticipated expense
levels, as well as other statements including words such as "anticipate,"
"believe," "plan," "estimate," "expect" and "intend" and other similar
expressions, constitute forward-looking statements. These forward-looking
statements are subject to business and economic risks and uncertainties, and the
Company's actual results of operations may differ materially from those
contained in the forward-looking statements. Factors that may cause such a
difference include, but are not limited to, those discussed below and in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
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 commenced shipment of its principal
product, NEONet, in July 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 does not expect to be profitable for several quarters, and may never
achieve profitability unless revenues increase substantially. At March 31, 1997,
the Company had an accumulated deficit of approximately $8.8 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 uncertainties, or that the
Company will achieve or sustain profitability on a quarterly or annual basis in
the future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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 will 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. For example, in the fourth quarter of 1996
the Company's largest customer contract accounted for over 32% of the Company's
total quarterly revenues, and in the first quarter of 1997 its largest customer
contract accounted for over 25% of the Company's total quarterly revenues. See
"-- Customer Concentration; Dependence Upon Financial Institutions Industry;
Risks of New Targeted Market Segments." Quarterly revenues and operating results
typically
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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.
See "Business -- Sales and Marketing." 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Research and Development."
7
<PAGE> 9
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. See "Business -- Products and Services" and
"Business -- Product Development."
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 quarters ended December 31, 1996 and March 31,
1997, the Company's largest customer contract accounted for 32% and 25% of the
Company's total revenues, respectively. 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 three-month period ended March 31, 1997, sales to banks and financial
institutions accounted for 86% and 80%, 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 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Customers."
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 March 31, 1997, the size of the Company's staff increased from
35 to 133 full time equivalent employees. Further significant increases in the
number of employees are anticipated during 1997. 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
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management joined the Company in 1996. 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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 such acquisitions 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 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
9
<PAGE> 11
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 content 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 faces 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. See "Business -- Competition."
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 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.
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<PAGE> 12
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. See "Business -- Product
Development."
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 commissioned sales force has increased from one person in January
1996 to 18 people as of March 31, 1997. 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. See
"Business -- Sales and Marketing."
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 results. In particular, the services
of George F. (Rick) Adam, Jr., the Company's Chief Executive Officer, Harold A.
Piskiel, the Company's Senior Vice President, Chief Technical Officer, or Robert
I. Theis, the Company's Senior Vice President of Marketing, would be difficult
to replace. The Company currently maintains a $1.0 million "key person" life
insurance policy on George F. (Rick) Adam, Jr., of which the Company is the sole
beneficiary. 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
11
<PAGE> 13
references could be adversely affected, which may materially affect the
Company's business, operating results and financial condition. See "Management."
Risks Associated with International Operations. Although sales of the
Company's products outside of North America to date have represented less than
10% of total revenues, the Company intends to expand its operations
internationally. These efforts will require significant management attention and
financial resources, as well as the development of international versions of the
Company's products. The Company has committed resources to the opening of
international sales offices and the expansion of international sales and support
channels. There can be no assurance that the Company's efforts to develop
international sales and support channels will be successful. International sales
are subject to a number of risks, including longer payment cycles, unexpected
changes in regulatory requirements, import and export restrictions and tariffs,
difficulties in staffing and managing foreign operations, the burden of
complying with a variety of foreign laws, greater difficulty in accounts
receivable collection, potentially adverse tax consequences, currency
fluctuations, the imposition of currency exchange or price controls, and
political and economic instability abroad. Additionally, intellectual property
may be more difficult to protect outside of the United States. If the Company
increases its international sales, its total revenues may also be affected to a
greater extent by seasonal fluctuations resulting from lower sales that
typically occur during the summer months in Europe and other parts of the world.
In addition, the market for application integration software outside of North
America is not as developed and there can be no assurance that it will grow at
the same rate as in North America or that, if it does develop rapidly, the
Company will be successful in such international markets.
Dependence on Relationships with Complementary Vendors. The Company
believes that, in order to provide competitive solutions for heterogeneous, open
computing environments, it will be necessary to develop, maintain and enhance
close relationships with database, data access, hardware and operating system
vendors. There can be no assurance that the Company will be able to maintain its
existing relationships or develop additional relationships with such vendors.
The Company's failure to do so could adversely affect the portability of the
Company's products to existing and new platforms and databases and the timing of
the release of new and enhanced products for the marketplace by the Company.
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
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<PAGE> 14
expects that application integration software developers will increasingly be
subject to infringement claims as the number of products in different industry
segments overlap. Any claims, including the specific claim by New Paradigm, 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. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to the Company or at all, which could have a
material adverse effect upon the Company's business, financial condition and
operating results. 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. See
"Business -- Intellectual Property, Proprietary Rights and Licenses."
Risk of Software Defects. Software products as complex as those offered by
the Company frequently contain undetected errors or defects, especially when
first introduced or when new versions or enhancements are released. Testing of
the Company's products is particularly challenging because it is difficult to
simulate the wide variety of computer environments into which the Company's
application integration software is deployed. Despite product testing by the
Company and its customers, the Company has in the past shipped product releases
of NEONet with some defects and has discovered other software errors in its
products after their commercial shipment. There can be no assurance that,
despite testing by the Company and by current and potential customers, defects
and errors will not be found in new products or in new versions or enhancements
of existing products after commencement of commercial shipments. Although
defects have not materially and adversely affected the Company's operating
results to date, any defects discovered in the future could result in adverse
customer reaction, negative publicity regarding the Company, its products or
delay in or failure to achieve market acceptance, any of which could have a
material adverse effect upon the Company's business, operating results and
financial condition. See "Business -- Research and Development."
Product Liability. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. It is possible, however, that the limitation
of liability provisions contained in the Company's license agreements may not be
effective as a result of federal, state or local laws or ordinances or
unfavorable judicial decisions. Although the Company has not experienced any
product liability claims to date, the license and support of the Company's
software by the Company may entail the risk of such claims. A successful product
liability claim brought against the Company would have a material adverse effect
on the Company's business, operating results and financial condition.
No Prior Public Market; Possible Volatility of Stock Price. Prior to this
Offering, there has been no public market for the Company's Common Stock, and
there can be no assurance that an active public market for the Company's Common
Stock will develop or be sustained after the Offering. The initial public
offering price will be determined through negotiations between the Company and
the Underwriters and may not be indicative of the market price of the Common
Stock after the Offering. The trading price of the Company's Common Stock could
be subject to wide fluctuations in response to quarterly variations in operating
results, announcements of technological innovations or new products by the
Company or its competitors, developments with respect to patents or proprietary
rights, changes in financial estimates by securities analysts and other events
or factors. In addition, the stock market has experienced volatility that has
particularly affected the market prices of equity securities of many high
technology companies and that often has been unrelated or disproportionate to
the operating performance of such companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock.
Control by Existing Stockholders. Upon completion of this offering, the
directors, executive officers and principal stockholders of the Company and
their affiliates will, in the aggregate, beneficially own 68.2% of the
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<PAGE> 15
Company's outstanding Common Stock (65.5% if the Underwriters' over-allotment
option is exercised in full). As a result, these stockholders, acting together,
will possess voting control over the Company, giving them the ability, among
other things, to elect at least a majority of the Company's Board of Directors
and to control the vote on significant corporate transactions. Such control
could delay, defer or prevent a change in control of the Company, impede a
merger, consolidation, takeover or other business combination involving the
Company, or discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of the Company. See "Management" and
"Principal Stockholders."
Effect of Certain Charter Provisions; Anti-Takeover Effects of Delaware
Law. Upon completion of this Offering, the Company's Board of Directors will
have the authority to issue up to 2,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions, including
voting rights, of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no current plans to issue shares of Preferred Stock. In
addition, the Company's Bylaws and indemnity agreements provide that the Company
will indemnify officers and directors against losses they may incur in legal
proceedings resulting from their service to the Company. Further, certain
provisions of the Company's charter documents and of Delaware law could
discourage potential acquisition proposals and could delay or prevent a change
in control of the Company. These provisions are designed to reduce the
vulnerability of the Company to an unsolicited acquisition proposal. These
provisions are also intended to discourage certain tactics that may be used in
proxy fights. However, such provisions could have the effect of discouraging
others from making tender offers for the Company's shares and, as a consequence,
they also may adversely affect the market price of the Company's Common Stock.
Such provisions also may have the effect of preventing changes in the management
of the Company. In addition, Section 203 of the Delaware General Corporation Law
restricts certain business combinations with any "interested stockholder" as
defined by such statute. The statute may have the effect of delaying, deferring
or preventing a change in control of the Company. See "Description of Capital
Stock."
Benefits of the Offering to Current Stockholders. This Offering will
provide substantial benefits to current equity stockholders of the Company.
Consummation of this Offering is expected to create a public market for the
Common Stock held by the Company's current stockholders, including directors and
executive officers of the Company. Current stockholders paid an aggregate of
approximately $11.7 million for an aggregate of approximately 5,840,461 shares
of Common Stock (assuming the conversion of all shares of Preferred Stock into
Common Stock upon the effectiveness of this Offering). This Offering will result
in gross unrealized gain to such stockholders in the aggregate of approximately
$52.5 million assuming a public offering price of $11.00 per share. See "-- No
Prior Public Market, Possible Volatility of Stock Price" and "-- Dilution."
Shares Eligible for Future Sale. Sales of a substantial number of shares of
Common Stock in the public market following this Offering could adversely affect
the market price for the Company's Common Stock. The 2,300,000 shares of Common
Stock offered hereby will be freely tradeable without restriction in the public
market. The number of additional shares of Common Stock available for sale is
limited by restrictions under the Securities Act, as amended, as well as by
certain 180-day lock-up agreements entered into by stockholders and
optionholders of the Company. On the date of the Offering, all outstanding
shares of Common Stock are subject to these lock-up agreements and may not be
sold into the public market without the consent of UBS Securities LLC. Upon
expiration of the lock-up agreements 180 days following the date of this
Prospectus (or earlier, to the extent UBS Securities LLC may consent), a total
of 5,840,461 shares of Common Stock will be eligible for sale into the public
market under Rule 144, subject to certain volume and other limitations of Rule
144. In addition, the Company intends to register on a registration statement on
Form S-8, on the effective date of this Offering, a total of 2,333,333 shares of
Common Stock reserved for issuance under the Company's Amended and Restated 1995
Stock Option Plan, of which options to purchase 1,353,712 shares were
outstanding at March 31, 1997 (of these option shares, only 145,752 option
shares were vested and exercisable as of March 31, 1997), a total of 216,666
shares of Common Stock reserved for issuance under the
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<PAGE> 16
Company's 1997 Employee Stock Purchase Plan, and a total of 100,000 shares of
Common Stock reserved for issuance under the Company's 1997 Director Stock
Option Plan. See "Shares Eligible for Future Sale."
No Specific Plan for Significant Portion of Proceeds; Proceeds May Not Be
Invested to Yield Significant Returns. The Company currently has no specific
plans for a significant portion of the net proceeds of the Offering. As a
consequence, the Company's management will have the discretion to allocate this
portion of the net proceeds of this offering to uses that the stockholders may
not deem desirable, and there can be no assurance that these proceeds can or
will be invested to yield a significant return. Substantially all of the
proceeds of the Offering will be invested in short-term, interest-bearing,
investment grade securities for an indefinite period of time. See "Use of
Proceeds."
Dilution. Investors participating in the Offering will incur immediate,
substantial dilution in the net tangible book value of the Common Stock from the
initial public offering price. To the extent that options or warrants to
purchase the Company's Common Stock are exercised, there will be further
dilution. See "Dilution."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,300,000 shares of
Common Stock offered by the Company hereby at an assumed public offering price
of $11.00 per share are estimated to be approximately $22,679,000 (approximately
$26,208,350 if the Underwriters' over-allotment option is exercised in full),
net of estimated underwriting discounts and commissions and estimated offering
expenses payable by the Company. The principal purposes of the Offering are to
obtain additional working capital, establish a public market for the Company's
Common Stock, and facilitate future access to public markets.
A portion of the net proceeds will be used to repay outstanding bank debt.
As of March 31, 1997, the Company had outstanding borrowings of approximately
$1.0 million under a $2.0 million revolving credit facility used for working
capital purposes, approximately $477,000 outstanding under a $1.0 million
equipment financing facility and $57,875 under a promissory note. The Company's
revolving credit facility and its equipment financing facility bear interest at
the bank's prime lending rate (8.5% at March 31, 1997) plus 1/2% and 1%,
respectively, and the promissory note bears interest at 8.75%. The Company's
revolving credit facility expires on September 5, 1997, while amounts borrowed
under the equipment financing facility are due in monthly installments beginning
July 5, 1997 and continuing through June 5, 2000, the maturity date.
The Company expects to use the remainder of the net proceeds of the
Offering for general corporate purposes, including working capital. Up to
approximately $1.7 million of the net proceeds may be used to pay certain
royalty obligations payable by the Company to Merrill Lynch. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 3 of Notes to Consolidated Financial Statements. A portion of the net
proceeds may also be used to acquire or invest in complementary businesses or
products or to obtain the right to use complementary technologies. Although from
time to time the Company evaluates potential acquisitions of such businesses,
products or technologies, and anticipates continuing to make such evaluations,
the Company has no present understandings, commitments or agreements with
respect to any acquisition of other businesses, products or technologies.
Pending such uses, the proceeds will be invested in interest-bearing securities.
DIVIDEND POLICY
The Company has never paid or declared any cash dividends. It is the
present policy of the Company to retain earnings to finance the growth and
development of the businesses and, therefore, the Company does not anticipate
paying cash dividends on its Common Stock in the foreseeable future. In
addition, the Company's bank credit facilities contain certain covenants that
prohibit the Company from paying dividends without prior bank consent.
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<PAGE> 17
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of March 31, 1997 (after giving effect to the two-for-nine reverse
stock split of Common Stock to be effective prior to the effectiveness of this
offering) (i) on an actual basis, (ii) on a pro forma basis to give effect to
the conversion of all outstanding Preferred Stock into Common Stock upon the
closing of the Offering and (iii) pro forma as adjusted to give effect to the
sale by the Company of 2,300,000 shares of Common Stock offered by the Company
hereby (after deducting underwriting discounts and commissions and estimated
offering expenses). This table should be read in conjunction with the
consolidated financial statements and related notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt.............................................. $ 387 $ 387 $ --
Stockholders' equity(1)(2):
Convertible preferred stock, $.01 par value; authorized,
20,016,963 shares actual, issued and outstanding,
20,016,963 actual, none pro forma or pro forma as
adjusted............................................... 11,385 -- --
Preferred stock, undesignated, $.0001 par value;
authorized, 2,000,000 shares pro forma; issued and
outstanding, none, pro forma and pro forma as
adjusted............................................... N/A -- --
Common stock, $.0001 par value; authorized, 45,000,000
shares; issued and outstanding, 1,392,247 shares
actual, 5,840,461 pro forma and 8,140,461 pro forma as
adjusted............................................... 1 1 1
Additional paid-in-capital................................ 243 11,628 34,307
Accumulated deficit....................................... (8,796) (8,796) (8,796)
------- ------- -------
Total stockholders' equity........................ 2,833 2,833 25,512
------- ------- -------
Total capitalization.............................. $ 3,220 $ 3,220 $25,512
======= ======= =======
</TABLE>
- ---------------
(1) Excludes (i) 1,353,712 shares of Common Stock issuable upon the exercise of
options outstanding under the Company's Amended and Restated 1995 Stock
Option Plan as of March 31, 1997 at a weighted average exercise price of
$5.37 per share, of which options to purchase 145,752 shares were
exercisable at March 31, 1997, as well as an additional 941,925 shares of
Common Stock reserved for future grant under such plan (after giving effect
to an increase in the number of shares reserved for issuance under such plan
in January 1997), (ii) 216,666 shares of Common Stock reserved for future
issuance under the Company's 1997 Employee Stock Purchase Plan adopted in
January 1997 and (iii) 100,000 shares of Common Stock reserved for future
issuance under the Company's 1997 Director Option Plan adopted in January
1997. See Notes 5 and 9 of Notes to Consolidated Financial Statements.
(2) Gives effect to the conversion of all outstanding shares of Preferred Stock
into shares of Common Stock at a two-for-nine conversion rate.
16
<PAGE> 18
DILUTION
The net tangible book value of the Company as of March 31, 1997 was $2.3
million or $0.39 per share of Common Stock. Net tangible book value per share is
determined by dividing the net tangible book value of the Company (total
tangible assets less total liabilities) by the number of shares of Common Stock
outstanding, after the assumed conversion of all outstanding Convertible
Preferred Stock upon closing of this Offering. After giving effect to the sale
by the Company of the 2,300,000 shares of Common Stock offered hereby (based
upon an assumed initial public offering price of $11.00 per share and after
deduction of estimated underwriting discounts and commissions and estimated
offering expenses), the Company's net tangible book value at March 31, 1997
would have been $25.0 million or $3.07 per share. This represents an immediate
increase in net tangible book value to existing stockholders of $2.68 per share
and an immediate dilution to new investors of $7.93 per share.
The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Net tangible book value per share as of March 31, 1997.... $0.39
Increase in net tangible book value per share attributable
to new investors....................................... 2.68
-----
Net tangible book value per share after offering............ 3.07
------
Dilution per share to new investors......................... $ 7.93
======
</TABLE>
The following table sets forth on a pro forma basis as of March 31, 1997,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid, and the average price per share paid by
the existing stockholders and by the new investors (based upon an assumed
initial public offering price of $11.00 per share before deduction of estimated
underwriting discounts and commissions and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 5,840,461 71.7% $11,746,058 31.7% $ 2.01
New investors....................... 2,300,000 28.3 25,300,000 68.3 11.00
--------- ----- ----------- -----
Total............................. 8,140,461 100.0% $37,046,058 100.0%
========= ===== =========== =====
</TABLE>
The foregoing table assumes no exercise of the Underwriters' over-allotment
option and no exercise of stock options or warrants outstanding at March 31,
1997. As of March 31, 1997, there were options outstanding under the Company's
Amended and Restated 1995 Stock Option Plan to purchase a total of 1,353,712
shares of Common Stock at a weighted average exercise price of $5.37 per share,
and (after giving effect to an increase in the number of shares reserved for
issuance under such plan in January 1997) an aggregate of 941,925 additional
shares remained available for future grant. As of such date there were also
warrants outstanding to purchase 31,056 shares of Series C Preferred Stock at an
exercise price of $1.61 per share, which following the automatic conversion of
Series C Preferred Stock into Common Stock upon completion of the Offering will
be exercisable for 6,901 shares of Common Stock at an exercise price of $7.25
per share. In addition, in January 1997 the Board of Directors adopted a 1997
Employee Stock Purchase Plan and 1997 Director Option Plan and reserved an
aggregate of 216,666 and 100,000 shares, respectively, for issuance thereunder.
To the extent that any of these options or warrants are exercised, there will be
further dilution to new investors. See "Capitalization," "Management -- Employee
Benefit Plans" and Notes 5 and 9 of Notes to Consolidated Financial Statements.
17
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and related
Notes thereto, and with Management's Discussion and Analysis of Financial
Conditions and Results of Operations included elsewhere in this Prospectus. The
consolidated financial statement data for the years ended December 31, 1994,
1995 and 1996 and the three months ended March 31, 1996 and 1997 are derived
from the Company's audited and unaudited Consolidated Financial Statements
included elsewhere in this Prospectus. Historical results are not necessarily
indicative of results of operations to be expected in the future.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- -----------------------
1994 1995 1996 1996 1997
---------- ---------- ----------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
Software licenses.............. $ -- $ -- $ 3,383 $ 111 $ 2,447
Services and maintenance....... 149 1,271 3,762 945 1,227
----- --------- ---------- ---------- ----------
Total revenues............ 149 1,271 7,145 1,056 3,674
Cost of revenues:
Cost of software licenses...... -- -- 1,022 33 250
Cost of services and
maintenance.................. 85 751 2,306 677 800
----- --------- ---------- ---------- ----------
Total cost of revenues.... 85 751 3,328 710 1,050
----- --------- ---------- ---------- ----------
Gross profit................... 64 520 3,817 346 2,624
Operating expenses:
Sales and marketing............ 178 549 4,425 320 1,690
Research and development....... 423 1,116 3,658 608 1,222
General and administrative..... 153 345 1,467 175 495
----- --------- ---------- ---------- ----------
Total operating
expenses................ 754 2,010 9,550 1,103 3,407
----- --------- ---------- ---------- ----------
Loss from operations.............. (690) (1,490) (5,733) (757) (783)
Interest income (expense), net.... (29) (13) 61 2 (1)
----- --------- ---------- ---------- ----------
Net loss.......................... $(719) $ (1,503) $ (5,672) $ (755) $ (784)
===== ========= ========== ========== ==========
Pro forma net loss per common
share.......................... $ (0.98) $ (0.14) $ (0.13)
========== ========== ==========
Pro forma weighted average shares
of Common Stock
outstanding(1)................. 5,789,382 5,388,815 6,094,414
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1994 1995 1996 1997
---- ------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................... $127 $1,135 $3,387 $1,641
Working capital (deficit)........................... (55) 1,557 2,586 1,294
Total assets........................................ 333 2,209 7,073 7,373
Long-term debt...................................... 780 318 442 387
Stockholders' equity (deficit)...................... (718) 1,591 3,515 2,833
</TABLE>
- ---------------
(1) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the weighted average shares of Common Stock outstanding used to compute
net loss per common share.
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All statements, trend analysis and other information contained in the
following discussion and elsewhere in this Prospectus relative to markets for
the Company's products and trends in revenues, gross margin and anticipated
expense levels, as well as other statements including words such as
"anticipate," "believe," "plan," "estimate," "expect" and "intend" and other
similar expressions, constitute forward-looking statements. These
forward-looking statements are subject to business and economic risks and
uncertainties, and the Company's actual results of operations may differ
materially from those contained in the forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in "Risk Factors" as well as other risks and uncertainties
referenced in this Prospectus.
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. During these
years, the Company's strategy was to develop its application integration
software, demonstrate the Company's expertise, and finance a portion of product
development expenses through customer-funded services projects, principally one
large-scale application integration consulting and development project for
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and its
wholly-owned subsidiary Merrill Lynch Group, Inc. As a result of the Merrill
Lynch contract the Company recognized substantial revenues from professional
services in 1995 in connection with the development of NEONet and its
installation at Merrill Lynch. The Company completed and commercially introduced
its initial version of NEONet in January 1996 and completed the Merrill Lynch
professional services agreement in June 1996. 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.
In March 1997, the Company announced the availability of Release 3.1 of NEONet
which contained, among other enhancements, an improved graphical user interface.
As a result of the Company's focus on professional services activities in
its development stage, services and maintenance revenues increased from $149,000
in 1994 to $1.3 million in 1995 and to $3.8 million in 1996 and $1.2 million in
the first quarter of 1997. As the Company has transitioned to a focus on
software licenses, software license revenues have increased from no license
revenues in 1994 and 1995 to $3.4 million in 1996 and $2.4 million in the first
quarter of 1997. The Company anticipates that professional services will
continue to be utilized to help gain penetration into new vertical markets and
will also continue to be an important adjunct to software license sales.
However, as the Company's business continues and the Company increasingly
focuses on software licenses, the Company believes that both license revenues
and associated maintenance revenues will increase, and professional services
revenues will continue to decline as a percentage of total net revenues.
Accordingly, the Company expects that future revenues will depend to a
significant degree on the successful market acceptance of the NEONet product.
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. 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. Any failure to continue to achieve market acceptance of
NEONet would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors -- Product Concentration
and -- Uncertainty of Future Operating Results; Lengthy Sales Cycle;
Fluctuations in Quarterly Results."
The Company generates revenues from both professional service arrangements
and software license arrangements. Revenue from professional service
arrangements is recognized on either a time and materials or
progress-to-completion basis as the services are performed and amounts due from
customers are deemed collectible and contractually nonrefundable. The Company
recognizes license fee revenue when the licensed software has been delivered,
customer acceptance has occurred, all significant Company obligations have been
19
<PAGE> 21
satisfied, payment is due within twelve months and the fee is fixed and
determinable and deemed collectible. Maintenance and support revenues related to
software licenses are recognized ratably over the term of each maintenance
arrangement. See Note 2 of Notes to Consolidated Financial Statements.
In connection with the software development and license arrangement the
Company entered into with Merrill Lynch, the Company is obligated to pay
royalties to Merrill Lynch on net revenues from licenses of NEONet, up to a
total of $1.9 million in royalties. The royalty rate was 30% through 1996 and
was revised to 10% in January 1997. Such royalty payments are accounted for as
cost of software licenses. Through March 31, 1997, a total of approximately $1.3
million in such royalties have been accrued, of which $200,000 has been paid to
Merrill Lynch.
The Company's operating expenses have increased steadily since inception as
the Company has sought to develop the infrastructure necessary to support a
growing business. Research and development expenses, relating principally to the
development of NEONet, increased from $423,000 in 1994 to $1.1 million in 1995
and $3.7 million in 1996. Sales and marketing expenses have also increased,
particularly in 1996, as the Company has expanded its commissioned sales force
from one person at December 31, 1995 to 18 as of March 31, 1997, increasing from
$179,000 in 1994 to $549,000 in 1995 and $4.4 million in 1996. Similarly, the
Company's general and administrative expenses, which have increased as the
Company has expanded its organization to support a growing business, increased
from $153,000 in 1994 to $345,000 in 1995 and $1.5 million in 1996. The Company
believes that continued expansion of its operations is essential to achieving
its strategy and therefore intends to continue to increase expenditures in all
operational areas. Although the rate of these increases will depend upon a
number of factors, including the continued growth of the Company's revenues,
success in hiring personnel to expand its business and market acceptance of the
Company's products, the planned expenditures could result in the Company
remaining unprofitable for at least several quarters. The Company has not been
profitable in any period to date, and as of March 31, 1997 had an accumulated
deficit of approximately $8.8 million. As a result of anticipated expenditure
increases in the future, the Company does not expect to be profitable for
several quarters and may never achieve profitability unless revenues increase
substantially. There can be no assurance that the Company will achieve or
sustain profitability on a quarterly or annual basis in the future.
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 effected. See "Risk Factors -- Management of Growth."
RESULTS OF OPERATIONS FOR FISCAL YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
The Company's revenues increased from $149,000 for the year ended December
31, 1994 to $1.3 million in the year ended December 31, 1995, as the Company
grew customer-funded development and related services projects. Revenues for the
fiscal year ended December 31, 1996 increased to $7.1 million due to the
significant increase in software license revenues during 1996. As noted above,
the Company's operating expenses have increased steadily over these periods as
the Company has sought to develop the infrastructure necessary to support a
growing business. Research and development expenses, relating principally to the
development of NEONet, increased from $423,000 in 1994 to $1.1 million in 1995
and $3.7 million in 1996. Sales and marketing expenses have also increased,
particularly in 1996, as the Company has expanded its commissioned sales force
from one person at December 31, 1995 to 14 as of December 31, 1996, increasing
from $179,000 in 1994 to $549,000 in 1995 and $4.4 million in 1996. Similarly,
the Company's general and administrative expenses, which have increased as the
Company has expanded its organization to support a growing business, increased
from $153,000 in 1994 to $345,000 in 1995 and $1.5 million in 1996.
20
<PAGE> 22
QUARTERLY RESULTS OF OPERATIONS
Because of the significant increases in the level of operations of the
Company from year to year during its short operating history, the Company does
not believe year to year comparisons are particularly meaningful. Accordingly
the following discussion focuses on the Company's quarterly results for the six
quarters in the period ended March 31, 1997. However, even with respect to
quarterly results, in view of the Company's limited operating history, recent
growth and other factors enumerated under "Risk Factors" and elsewhere herein,
the Company believes that 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. 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.
See "Risk Factors -- Uncertainty of Future Operating Results; Lengthy Sales
Cycle; Fluctuations in Quarterly Results."
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 revenue 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 revenue and operating results typically depend upon the volume
and timing of customer contracts received during a given quarter, and the amount
of revenues associated with each such contract which the Company is entitled to
recognize during such 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.
See "Business -- Sales and Marketing." The Company's operating expense levels
are relatively fixed and are based in part on expectations as to 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.
The following tables present unaudited quarterly consolidated statement of
operations data for the last six quarters in the 18-month period ended March 31,
1997, as well as such data expressed as a percentage of the Company's revenues
for the periods indicated. This data has been derived from unaudited
consolidated financial statements that have been prepared on the same basis as
the audited consolidated financial statements and include all adjustments
(consisting only of normal recurring adjustments) that the Company considers
necessary for a fair presentation of such information.
21
<PAGE> 23
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1995 1996 1996 1996 1996 1997
-------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
Software licenses...................... $ -- $ 111 $ 411 $ 832 $ 2,029 $ 2,447
Services and maintenance............... 629 945 1,186 841 790 1,227
------ ------ ------- ------- ------- -------
Total revenues................. 629 1,056 1,597 1,673 2,819 3,674
------ ------ ------- ------- ------- -------
Cost of revenues:
Cost of software licenses.............. -- 33 123 252 614 250
Cost of services and maintenance....... 397 677 713 455 461 800
------ ------ ------- ------- ------- -------
Total cost of revenues......... 397 710 836 707 1,075 1,050
------ ------ ------- ------- ------- -------
Gross profit........................... 232 346 761 966 1,744 2,624
Operating expenses:
Sales and marketing.................... 142 320 1,010 1,469 1,626 1,690
Research and development............... 416 608 736 1,142 1,172 1,222
General and administrative............. 126 175 380 475 437 495
------ ------ ------- ------- ------- -------
Total operating expenses....... 684 1,103 2,126 3,086 3,235 3,407
------ ------ ------- ------- ------- -------
Loss from operations................... (452) (757) (1,365) (2,120) (1,491) (783)
Other income, net...................... 15 2 7 49 3 (1)
------ ------ ------- ------- ------- -------
Net loss....................... $ (437) $ (755) $(1,358) $(2,071) $(1,488) $ (784)
====== ====== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1995 1996 1996 1996 1996 1997
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues:
Software licenses...................... --% 11% 26% 50% 72% 67%
Services and maintenance............... 100 89 74 50 28 33
--- --- --- ---- --- ---
Total revenues................. 100 100 100 100 100 100
--- --- --- ---- --- ---
Cost of revenues:
Cost of software licenses(1)........... -- 30 30 30 30 10
Cost of services and maintenance(2).... 63 72 60 54 58 65
--- --- --- ---- --- ---
Total cost of revenues......... 63 67 52 42 38 29
--- --- --- ---- --- ---
Gross profit........................... 37 33 48 58 62 71
Operating expenses:
Sales and marketing.................... 23 30 63 88 58 46
Research and development............... 66 58 46 68 42 33
General and administrative............. 20 17 24 29 15 13
--- --- --- ---- --- ---
Total operating expenses....... 109 105 133 185 115 92
--- --- --- ---- --- ---
Loss from operations................... (72) (72) (85) (127) (53) (21)
Other income, net...................... 2 -- -- 3 -- --
--- --- --- ---- --- ---
Net loss....................... (70)% (72)% (85)% (124)% (53)% (21)%
=== === === ==== === ===
</TABLE>
- ---------------
(1)As a percentage of software license revenue.
(2)As a percentage of services and maintenance revenue.
22
<PAGE> 24
REVENUES
The Company's total revenues increased in each of the six quarters in the
period ended March 31, 1997. Software license revenues were not significant
until the initial introduction of the Company's NEONet software in January 1996
and, more significantly, the release of NEONet version 3.0 in November 1996.
From the quarter ended March 31, 1996 through the quarter ended March 31, 1997,
software license revenues have increased each quarter, reflecting growing market
awareness of the Company's products, the continuing development of an installed
base of customers to serve as references for additional customers, the
introduction of NEONet version 2.2 in June 1996, and emerging market acceptance
of the Company's software products, particularly in the financial services
industry. Services and maintenance revenues declined in the last half of 1996,
primarily due to the completion of the professional services contract with
Merrill Lynch in the quarter ended June 30, 1996. Services and maintenance
revenues grew substantially in the first quarter of 1997, increasing by
approximately 55% from the prior quarter, reflecting primarily an increase in
the number of pilot programs and service engagements. The Company expects that
revenues derived from services will decline as a percentage of total revenues.
However, the Company expects that maintenance revenue will increase as the
Company's installed base of software licenses increases.
COST OF REVENUES
Cost of revenues consists of costs of software licenses and costs of
services and maintenance. Cost of software licenses consists primarily of
royalty payments. The Company has an agreement to pay royalties on NEONet
revenue license fees collected to Merrill Lynch until such royalties reach a
cumulative total $1.9 million. The Company accrued royalties at 30% of software
license fees in 1996 and is accruing royalties at 10% of software license fees
in 1997, reflecting the Company's revised agreement with Merrill Lynch. Royalty
expenses are accounted for as cost of software licenses. As a result, cost of
software licenses was approximately 30% in 1996 and 10% in the first quarter of
1997. At March 31, 1997, total accrued royalties due to Merrill Lynch were
approximately $1.3 million, of which $200,000 has been paid.
Cost of services and maintenance consists primarily of personnel, facility
and system costs incurred in providing customer care (maintenance and support),
which include customer support, training, and consulting services. The reduction
in cost of services and maintenance in the quarters ended September 30, 1996 and
December 31, 1996 was a result of reassigning staff from service efforts to
research and development. Cost of services and maintenance increased both in
absolute dollars and as a percentage of related revenue in the first quarter of
1997, principally due to an increase in professional service engagements and the
use, at higher cost, of subcontract labor on certain engagements. The Company
expects to continue to use subcontractors at least through the second quarter of
1997.
OPERATING EXPENSES
Research and Development
Research and development expenses have increased quarter to quarter in the
periods indicated, from $416,000 in the quarter ended December 31, 1995 to $1.2
million in the quarter ended March 31, 1997, as the Company has continued to
develop its software products and to hire engineering personnel. The Company
anticipates that research and development expenses will continue to increase as
the Company continues to develop new and enhanced software products. Such
expenses may fluctuate from quarter to quarter, both in total expenditures and
as a percentage of total revenues, depending upon the status of various
development projects, the ability to hire engineering personnel who are in great
demand and the rate of growth, if any, of the Company's revenues.
Research and development expenses have been expensed as incurred. Under the
criteria set forth in Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," capitalization of software development costs begins upon the
establishment of technological feasibility of the product and ends when the
product is ready for general release. The establishment of technological
feasibility and the ongoing assessment of the recoverability of these costs
require considerable judgment by management with respect to certain external
factors, including,
23
<PAGE> 25
but not limited to, anticipated future gross product revenues, estimated
economic life and changes in software and hardware technology. The Company
believes that costs incurred through March 31, 1997, which satisfy the above
criteria were immaterial and, therefore, no software development costs have been
capitalized by the Company to date.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries, commissions and
promotional expenses and other related expenses of sales and marketing
personnel, and increased from $142,000 in the quarter ended December 31, 1995 to
$1.7 million in the quarter ended March 31, 1997. Sales and marketing expenses
increased quarter to quarter through 1996 as the Company continued to expand its
overall sales and marketing resources and business infrastructure. Such expenses
increased in particular in the quarters ended June 30, 1996 and September 30,
1996 as the Company placed sales personnel in Massachusetts, California,
Colorado, Illinois, Texas, Pennsylvania and the United Kingdom. The Company has
increased its sales force from five persons at March 31, 1996 to 18 at March 31,
1997. The Company expects to continue to expand its sales and marketing
resources, both by expansion of the Company's direct sales force and the
continued development of indirect distribution channels and promotional
activity. Accordingly, the Company anticipates that sales and marketing expenses
will continue to increase in absolute dollars, although such expenditures may
vary as a percentage of total revenues depending upon the rate of growth in the
Company's revenue, if any.
General and Administrative
General and administrative expenses consist primarily of salaries and other
related expenses of administrative, executive and financial personnel and other
outside professional fees, and increased from $126,000 in the quarter ended
December 31, 1995 to $495,000 in the quarter ended March 31, 1997. General and
administrative expenses have increased as the Company has continued to build the
infrastructure to support its business, including the implementation of
financial and human resource systems and the establishment of a legal
department. These expenses are expected to increase in absolute dollars in the
future as the Company expands its administrative staff, including in particular
its finance organization, implements additional management information systems,
and undertakes various accounting and legal activities required in connection
with becoming a public company.
OPERATING LOSSES
The Company incurred an operating loss in each of the six quarters in the
period ended March 31, 1997. These losses resulted from the Company's continued
investment in infrastructure to support expanding operations, as discussed
above. As a result, the Company had an accumulated deficit of $8.8 million as of
March 31, 1997.
OTHER INCOME, NET
Other income, net, consists of interest earned on cash and short-term
investments, offset by interest expense on short-term borrowings. See Note 3 of
Notes to Consolidated Financial Statements.
PROVISION FOR INCOME TAXES
From inception through May 9, 1995, the Company was an S corporation for
income tax purposes and its taxable loss and tax credits were included in the
personal tax return of its stockholders. For the remainder of 1995 and
prospectively, items of taxable income and expense are reported in the corporate
income tax returns of the Company. The Company had a net loss for the period May
10, 1995 through December 31, 1996 which resulted in a net operating loss for
federal and state income tax purposes of approximately $6.4 million, which
expires beginning in 2010. The Company's utilization of its net operating losses
may be limited in the event of any future ownership change within the meaning of
the Tax Reform Act of 1986 and similar state provisions.
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." See Note
4 of Notes to Consolidated Financial Statements.
24
<PAGE> 26
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations, research and
development and capital expenditures primarily through private placements of a
total of $11.4 million of convertible preferred stock as well as debt financing.
During 1995 and 1996, operating activities utilized $1.6 million and $5.4
million in cash, respectively. In the quarter ended March 31, 1997, the Company
utilized approximately $1.7 million in cash. This cash utilization was primarily
a result of net operating losses, as well as increased working capital
associated with growing operations, particularly increases in accounts
receivable. Cash generated by financing activities was $3.0 million in 1995 and
$8.7 million in 1996, respectively, primarily due to issuances of preferred
stock. Capital expenditures totaled $301,000 in 1995 and $1.1 million in 1996,
primarily for computer equipment, software and telecommunications equipment. The
Company expects that its capital expenditures and office space requirements will
increase as the Company's employee base grows. The Company's principal current
commitments consist primarily of leases on its office facilities. See Note 7 of
Notes to Consolidated Financial Statements.
At March 31, 1997, the Company had $1.6 million in cash and cash
equivalents and $1.3 million in working capital. The Company has a $2.0 million
revolving credit facility and $1.0 million equipment financing facility with a
bank, which expire on September 5, 1997 and June 5, 2000, respectively. These
credit facilities are secured by all assets of the Company with the exception of
certain intangibles. Borrowings on the revolving credit facility are limited to
75% of the Company's eligible accounts receivable. Eligible accounts receivable
include accounts receivable that have been outstanding less than 90 days from
the date of the invoice (excluding accounts in which more than 50% of the
account is outstanding more than 90 days from the invoice date and certain other
accounts). At March 31, 1997, borrowings on the line of credit totaled $1.0
million, and borrowings on the equipment financing facility totalled
approximately $477,000. The Company's credit facilities contain certain
financial covenants and restrictions as to various matters including the
Company's ability to pay cash dividends and effect mergers or acquisitions
without the bank's prior approval. The Company is currently in compliance with
such financial covenants and restrictions. See Note 3 of Notes to Consolidated
Financial Statements.
The Company anticipates that the net proceeds of this Offering, together
with the Company's existing balances of cash and cash equivalents and borrowings
available under the Company's credit facilities, will be sufficient to meet the
Company's working capital and capital expenditure needs for at least the next 12
months. Thereafter, the Company may require additional sources of funds in order
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. If the expected closing of the initial public offering is
significantly delayed or suspended, the Company believes that funding sufficient
to continue operations at least for the remainder of 1997 can be obtained
through other sources.
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BUSINESS
NEON develops, markets and supports application integration software and
provides application integration services. The Company's flagship software
suite, NEONet, provides organizations with a structured software platform for
the integration of disparate systems and applications across the enterprise, a
process known as application integration. NEONet facilitates the rapid and
efficient deployment and ongoing maintenance of application integration across
the enterprise. NEONet supports a heterogeneous environment of hardware,
operating system, network and database platforms, permits organizations to
leverage existing legacy systems, and accommodates the extension of the
corporate information systems environment to new enterprise applications and to
new computing paradigms such as the Internet/Intranet.
Through March 31, 1997, the Company has shipped NEONet to a total of 26
customers in the financial services, health care, information technology and
systems consulting, and other industries. Representative customers of the
Company include Merrill Lynch, Deutsche Morgan Grenfell, Inc., Chase Manhattan
Bank, Credit Suisse, ADP Financial Information Services, Ernst & Young, Jackson
Memorial Hospital, KN Energy and Pacific Investment Mortgage Company. The
Company markets its software and related services primarily through a direct
sales organization, complemented by indirect sales channels including VARs, OEMs
and international distributors. As part of this strategy, the Company has
established reseller and joint marketing relationships with firms such as
Hewlett-Packard, Sun Microsystems, SunGard Financial Systems, Andersen
Consulting, Ernst & Young, Scopus, Open Market, Oracle and SWIFT.
INDUSTRY BACKGROUND
Organizations today are under increasing pressure to respond to a number of
powerful market forces to remain competitive. Forces such as globalization and
deregulation have led to industry consolidation and a focus on cost, quality,
and customer service. In response to the increasingly competitive environment,
companies have acquired other businesses, diversified operations geographically,
engaged in business process reengineering, and sought to tighten relationships
with key suppliers, distributors, and customers. The implementation of IT based
solutions, increasingly seen as strategic competitive assets, has been and will
continue to be a critical part of these efforts. Information systems are used to
disseminate critical corporate information across the enterprise, to streamline
operations, and to improve organizational flexibility and responsiveness.
The Complexity of Today's Enterprise Application Environment
The range of computing environments and software applications utilized
across the typical business organization is vast and growing, involving both
mainframe and minicomputer-based legacy systems and more recently introduced
client/server environments. Organizations are incorporating powerful, new
software applications that operate on an enterprise-wide basis and also serve as
interfaces to customers and suppliers. At the same time, organizations are
seeking to better exploit their existing information systems and take advantage
of their prior technology investments by integrating previously independent
legacy and other applications and databases.
Critical software applications historically were developed for large
mainframe-based computing environments and, later, minicomputer-based systems.
Many organizations still rely on these legacy systems for high-volume
transaction processing and maintenance of critical data. These legacy
applications were typically designed for the specific business functions of a
single department, such as inventory control or payroll, and did not interface
with other applications across the enterprise. Moreover, legacy systems operated
on one central computer with one operating system and one database system. As
the need to automate additional critical business functions throughout the
enterprise increased, additional specialized applications were written, again
typically without regard for interoperation with other applications.
Additionally, the recent growth of the Internet and the use of Intranets have
led to the emergence of another class of enterprise applications, adding another
dimension of complexity to the problem of integrating business applications
across the enterprise.
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Business Drivers of Application Integration
Organizations are increasingly demanding greater information sharing among
their application systems in order to help the organization accomplish key
strategic objectives. These organizational objectives include the following:
Enhancement of Customer Service and Customer Care. As organizations
attempt to better understand and meet the needs of their customers, they
are recognizing that much of the information necessary to obtain a unified
view of the customer is widely dispersed across numerous incompatible
application systems. For example, an organization that wants to better
understand a customer's purchasing history may need to integrate data
stored in separate systems in marketing, sales and other departments.
Similarly, a company seeking to improve customer service through a call
center application must be able to share information with order-tracking
software, which in turn must be accessible by salespeople in the field.
Efficient Management of Internal Resources and the Supply Chain. Many
companies are seeking to achieve greater productivity and efficiency across
functional areas, such as integration of sales forecasts and manufacturing
planning in order to improve inventory management. In addition, many
companies are tightening their relationships with key suppliers and
distributors to improve responsiveness to new market conditions. For
example, more companies are using "just-in-time" manufacturing techniques
that require better sharing of information between a company and its
suppliers.
Improved Risk Management. Rapidly changing markets and economic
conditions have driven businesses to seek a more integrated view of their
risk profile. For example, organizations need to manage cash, accounts
receivable, and aggregate customer exposure in more timely and
comprehensive ways. As another example, financial institutions need to
analyze and manage their financial exposure on a real-time basis across
different securities, trading markets and currencies. Providing a
consolidated, enterprise-wide view of risk requires the timely integration
of data residing on different systems and in different departments.
Pursuit of New Growth Opportunities. Many organizations have in recent
years extended their operations overseas as globalization and deregulation
have opened new markets. In addition, organizations have sought to pursue
additional market opportunities through mergers and acquisitions. As
organizations have extended operations overseas, they have adopted
applications that address the specific needs of each local market. As they
have acquired new businesses, they have inherited additional systems and
applications. All of these systems must be integrated with a company's
existing applications in order to manage and expand the enterprise
efficiently.
Implementation of Tactical Initiatives. Application integration is
essential to many tactical corporate initiatives, including business
process reengineering, implementation of best of breed enterprise
applications, data warehousing and database replication, electronic
commerce, and the incorporation of Internet/Intranet technologies.
Effective application integration strategies are critical to an
organization's ability to respond to changing market demands, seize new market
opportunities, improve customer service, and realize planned business process
improvements. However, organizations today face major challenges in attempting
to integrate their disparate and distributed application systems.
Challenges in Achieving Application Integration
Organizations have historically addressed the need to integrate
applications by means of a number of narrow integration techniques, including
data extract programs, screen scraping, file transfers and update programs as
well as data sharing and data synchronization. These techniques have typically
been implemented in an ad hoc manner to address specific integration
requirements as they have arisen over time. Accordingly, they have generally
required extensive manual custom software coding and provided limited
functionality, flexibility and scaleability, and require a costly and burdensome
ongoing maintenance process. As a result of
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the limitations of these techniques, additions of new applications and changes
in the business processes addressed by different applications have required
continual and extensive rewrites of existing applications with attendant costs,
delays and errors. According to Gartner Group, Inc., in a typical computing
environment, 35% to 40% of all programming effort is devoted to developing and
maintaining the extract and update programs whose only purpose is to transfer
information between different databases.
Gartner Group refers to the complex market of individual, unstructured
integration among disparate applications as "interapplication spaghetti."
[CHART]
The Application Integration Market Opportunity
The need to utilize information and information technology as strategic
assets, together with the proliferation of disparate applications across
enterprises and the limitations inherent in historical application integration
methodologies, have created a need for packaged application integration software
solutions. Organizations require an integrated solution that can untangle the
existing interapplication spaghetti and provide a scaleable infrastructure that
supports rapid and efficient updates to integration implementations as
additional applications are added and business rules change. This solution must
support a heterogeneous environment of hardware, operating system, networking
and RDBMS platforms, permit an organization to leverage its existing legacy
systems and accommodate the extension of the corporate information systems
environment to new enterprise applications and to new computing paradigms such
as the Internet/Intranet.
SOLUTION
NEON has become a leading provider of application integration software
through its unique integrated approach to addressing the challenges of
application integration. The Company's flagship software suite, NEONet, provides
organizations with a structured software platform for application integration,
facilitating the rapid and efficient deployment and ongoing management of
application integration among disparate applications across the enterprise.
NEONet addresses the limitations of earlier application integration paradigms by
providing in a packaged integrated software solution the various elements
required to address the application integration challenge in a scaleable and
flexible manner. NEONet consists of three interoperable modules, which may be
purchased as a unit or separately, Messaging and Queuing, Formatter and Rules
Engine, together with a suite of libraries and tools. The Messaging and Queuing
module provides guaranteed real-time delivery of data transactions across
heterogeneous applications. The Formatter module provides dynamic formatting of
data messages to meet the native format requirements of different applications.
The
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Rules Engine module enables an organization to define and fulfill the data
requirements of different applications through sophisticated and easily
modifiable business rules.
This packaged application solution offers the following key benefits:
Enhances IT Productivity. NEONet enhances IT productivity by freeing
programmers from the complex, time-consuming and error-prone process of
manually writing custom integration code in a piecemeal manner each time an
application is added or modified or a business process changes. By
providing a structured platform for managing application integration,
NEONet reduces application development time and the ongoing burden and
expense of maintenance associated with writing custom code. This enables
organizations to manage application integration more easily as business
needs evolve. Accordingly, NEONet enables organizations to address the
growing backlog of integration requirements.
Provides Flexible, Long-Term Platform for Application Integration. As
a structured platform for application integration, NEONet accommodates
changes ranging from the addition of new applications to the incorporation
of new technologies. NEONet's architecture also enables IT organizations to
quickly disseminate these changes throughout the entire enterprise.
Preserves Existing IT Investment. By permitting the integration of new
computing platforms and applications with legacy systems, NEONet helps to
preserve the investment that organizations have made in existing mainframe
and minicomputer-based systems, while serving as a bridge to client/server
and Internet/Intranet based applications. NEONet is also particularly
useful in data warehousing and data mining efforts, in which valuable
corporate data residing in legacy systems is retrieved and reformatted for
new applications.
Improves Efficiency of Enterprise IT Environment. While historical
approaches to application integration have typically permitted only batch
processing, NEONet's high throughput capability enables organizations to
provide real-time data delivery of information across a broad variety of
systems. NEONet also improves the reliability of the IT environment by
guaranteeing delivery of the data messages sent and received by
applications exactly once and in the precise order in which they were sent.
By removing the bottlenecks to data integration, NEONet enables a broad
variety of critical, emerging business applications such as data
replication, data warehousing, and transaction-oriented applications.
STRATEGY
The Company's objective is to establish NEONet as the leading standard for
application integration across the enterprise. Key elements of the Company's
strategy include:
Expand Vertical Markets. The Company plans to increase the number of
vertical market segments it serves using a strategy established by the
Company in the technically demanding financial services market for which
the Company initially developed NEONet. The Company penetrated the
financial services market by leveraging the industry experience of the
Company's founders and other key personnel and by collaborating with a
number of strategic customers. The Company's strategy is to penetrate
additional vertical markets, including health care, telecommunications and
manufacturing, by establishing development relationships with strategic
customers and by leveraging an understanding of customer needs in these
specific markets.
Maintain Technological Leadership. The Company is an early entrant in
the emerging application integration market, and seeks to maintain a
leadership position by continuing to provide innovative application
integration solutions. NEON was the first company to offer a single
integrated solution combining messaging and queuing, dynamic formatting and
rules-based processing. NEON was also the first to offer a scaleable rules
engine that can process high volumes of messages in real-time using large
numbers of complex processing rules. The Company continues to focus on the
support of additional current and emerging computing platforms. The Company
released NEONweb in December 1996, extending the NEONet solution to
Internet/Intranet applications, providing assured communications from HTML,
Java and CGI applications to web-based servers, and legacy and
client/server based information systems.
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Expand Sales Capability Worldwide. The Company's strategy is to expand
its sales and marketing capabilities in order to address the worldwide
market for its products. In 1996, the Company increased its direct sales
capabilities from one commissioned sales person at January 31, 1996 to 18
at March 31, 1997. The Company intends to continue to expand its global
sales coverage through additional international direct sales offices and
the expansion of indirect channels. In this regard, the Company has
established reseller and joint marketing relationships with OEMs,
independent software vendors, VARs and systems integration firms such
Hewlett-Packard, Sun Microsystems, SunGard Financial Systems, Andersen
Consulting, Ernst & Young, Scopus, Open Market, Oracle and SWIFT.
Develop Cross-Industry Applications. In addition to its focus on
strategic vertical markets, the Company has targeted the development and
marketing of NEONet to specific applications which have significant
importance across different vertical segments. The Company has focused on
data replication and warehousing applications, in which NEONet permits an
organization to extract data from multiple historical databases and
reformat that data for ready access via data warehouses. The Company has
also targeted electronic commerce, including electronic data interchange
(EDI) and Internet/Intranet integration, as well as customer service call
centers, in which organizations are seeking to connect to legacy
applications in order to enhance customer service.
PRODUCTS AND SERVICES
NEONet Software
The Company's NEONet software provides organizations with a structured
software platform for the rapid and efficient development and ongoing management
of application integration among disparate applications across the enterprise.
The principal modules of NEONet are as follows:
<TABLE>
<CAPTION>
FIRST
PRODUCT NAME RELEASE FUNCTION BENEFIT
------------ ------- -------- -------
<S> <C> <C> <C>
NEONet...................... Jan. 96 Processes high volumes of data Provides application integration
transactions between heterogenous across heterogeneous enterprise
systems. environments.
Messaging and Queuing..... High performance, asynchronous data Provides guaranteed delivery of
messaging and queuing transport transactions once and only once and
mechanisms. maintains transaction integrity.
Formatter................. Dynamic real-time translator of data Enables heterogeneous applications
to multiple required formats. to communicate seamlessly.
Rules Engine.............. Content publish/subscribe, Allows real-time routing of data
propagation and synchronization tool transactions across the enterprise,
with intelligent routing. based on readily modifiable business
rules and the data content of each
message.
NEONweb..................... Dec. 96 Guaranteed delivery of data Provides transaction integrity for
transactions from web clients to web electronic commerce applications.
servers and to legacy systems.
NEOCAS...................... Oct. 96 Interface module to Society for Reduces the time and effort required
Worldwide Interbank Financial to accept and reformat messages to a
Telecommunication (SWIFT) protocol customer's own applications.
used by financial institutions
worldwide.
NEONreplication............. Jun. 96 Data replication module to update Allows timely updates of dispersed
and synchronize multiple critical databases without the need
heterogeneous databases. for extensive custom coding.
</TABLE>
Messaging and Queuing. The foundation of the NEONet architecture is the
NEONet Messaging and Queuing module, which provides the Company's basic
asynchronous transport vehicle. The Messaging and Queuing module sends
transactions from one application to another, consisting of instructions or data
between applications and databases, and provides for guaranteed delivery of each
message once and only once and in the same order the messages are sent. The
system uses a message queue for the sending system to ensure that the sending
system can distribute a high volume of messages in real time without the need to
wait for confirmation of receipt, as well as a message queue for the recipient
system to ensure that the recipient system
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can download messages when available. The NEONet Messaging and Queuing module is
offered at list prices ranging from $18,000 to $85,000 per server, depending
upon the class of server on which the product is operated.
Formatter. The NEONet Formatter module can be added to the Messaging and
Queuing module to provide for dynamic reformatting of data messages in real time
so they may be accepted and read by multiple receiving applications in
heterogeneous environments. The NEONet Formatter parses and reformats messages
by translating messages among different protocols, programming languages,
applications, and hardware platforms. The sending application can issue a
message in a single format, and the dynamic formatter reformats the message into
the new format required by each receiving application, a function that is
critical to supporting database replication and application integration. The
Formatter module is sold at list prices ranging from $25,000 to $150,000 per
server, depending upon the class of server on which the product is operated.
Rules Engine. The NEONet Rules Engine module provides for the publishing of
a sending application's single message to multiple recipient applications and
databases, in each case in the proper format for the designated recipient, based
upon a set of user-defined business rules. Each receiving application registers
or subscribes to the data generated by multiple applications which, by
specifying the values of data in the transactions that are of interest, enables
each subscribing application to receive only the data it requires. The Rules
Engine module is based on a proprietary, high-speed, scaleable architecture that
can support high numbers of business rules while continuing to provide real-time
data access and distribution. This enables an organization to prescribe
sophisticated rules that determine which data needs delivery to specific
applications and databases and under which circumstances. These rules can be
readily modified or updated as business requirements change. The Rules Engine
module is offered at list prices ranging from $25,000 to $150,000 per server,
depending upon the class of server on which the product is operated.
NEONweb. NEONweb is a complementary module to the NEONet platform that
facilitates the integration of Internet/Intranet environments with legacy and
client/server-based systems. NEONweb extends to the Internet/Intranet the
security of NEONet's guaranteed message delivery and receipt. This functionality
is essential for electronic commerce on the Internet, including both electronic
data interchange and consumer commerce. NEONweb is offered at a list price of
$25,000 per server and requires a license of the NEONet Messaging and Queuing
module.
NEOCAS. The Company's NEOCAS module facilitates application integration
using the SWIFT interface standard commonly used for financial processing among
financial institutions worldwide. This module requires a license of the NEONet
Messaging and Queuing and Formatting modules and is offered at a list price of
$35,000 per server.
NEONreplication. The NEONreplication module is a set of libraries that
facilitates the automatic update and synchronization of multiple databases for
the purpose of database replication. Database replication is essential for
sophisticated, real-time applications in the financial services and other
industries, as it permits the maintenance in real time of multiple databases.
The NEONreplication module is offered at list prices ranging from $15,000 to
$75,000 per server, depending upon the class of server on which it is operated.
Customer Services
As part of its commitment to provide a total solution to customer needs,
the Company offers the following customer services:
Customer Care. In conjunction with its software license products, NEON
offers an array of professional and support services that focus on
providing product education to both external and internal customers, as
well as specialized work request reporting and tracking services. The
Company's customer care service offerings include both a basic five day a
week, twelve hour a day customer hotline and an extended seven day a week,
twenty-four hours a day support hotline. The Company's standard term for
customer care agreements is twelve months.
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Professional Services. The Company provides for NEONet software
installation and consulting services as well as generalized consulting on
the design and development of enterprise-wide application integration
utilizing the Company's expertise in client/server, Internet/Intranet and
database management technologies. The Company's initial relationships with
customers historically have involved a one-time limited engagement
involving professional services, particularly as the Company has sought to
address a new vertical market segment. This has often expanded into
licenses of the Company's application integration software products. NEON
offers professional services in conjunction with other professional service
organizations and system integrations.
Fee-based Training Services. The Company offers its customers, for an
additional fee, comprehensive training in NEON software products. These
courses are conducted at both NEON's corporate facilities in Denver and New
York City as well as at several customer locations.
CUSTOMERS AND CUSTOMER APPLICATIONS
Customers
The Company has sold products and services to a total of 48 customers, of
which 26 have purchased NEONet. Five customers of the Company together accounted
for more than 72% of the Company's total revenues in 1996. One customer, Merrill
Lynch, accounted for 69% of net revenues in 1995 and 22% in 1996, respectively.
Representative customers of the Company who have purchased products or services,
categorized by vertical industry, include the following:
<TABLE>
<S> <C>
FINANCIAL SERVICES HEALTH CARE
ADP Financial Information Services Froedert Hospital
Alliance Capital Huron
BZW Services, Ltd. (London) Ingalls Health Systems
Cedel Bank (LU) Jackson Memorial Hospital
Chase Manhattan Bank Muhlenberg Hospital
Chicago Mercantile Exchange PCN
Cigna Rose/Swedish
Citibank
Credit Suisse INFORMATION TECHNOLOGY AND SYSTEMS
Deutsche Morgan Grenfell, Inc. CONSULTING
FMR Corp. (Fidelity) Broadway Seymour
Fiduciary Trust International Computer Systems Resources
JP Morgan & Co. DMW
Long Term Credit Bank Ernst & Young
Merrill Lynch, Pierce, Fenner & Smith Informatics
Incorporated Integrated Resources Group
NIKKO Securities Silicon Graphics, Inc.
NSCC Sun Microsystems
Pacific Investment Mortgage Company SunGard Financial Systems
Pioneer Synquest
Prudential Securities Texas Instruments
State Street Bank Transolutions
Swiss Bank Corporation Xerox Corporation
Thomson Financial Services
Western Asset Management Company OTHER
Kelly Services
Pinkerton
KN Energy
Total Petroleum
</TABLE>
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Customer Applications
The following customer case studies illustrate the application integration
challenges facing typical customers of the Company and the means by which NEONet
has facilitated achievement of the customers' goals.
Extending Database Access to Customers. A leading provider of data
processing services stores and processes three million customer transactions a
day on its mainframe-based system. The service provider's end user customers
increasingly demanded that the service provider enable end users to access their
individual data through a client/server architecture and server-based relational
database. Accordingly, NEON's customer needed to establish real-time database
replication between the customer's mainframe-based system and a client/server
environment accessible by customers. Data replication requires coordinating,
updating and reconciling constantly changing databases.
The service provider sought to acquire an integrated package solution that
would be sufficiently flexible to implement data replication across the various
databases and to integrate the required data flows. The packaged solution had to
support a threshold of functionality superior to point-to-point communication
and had to be both fast enough to manage very large numbers of network
transactions and scaleable to support a fast-growing network computing
environment. The customer selected NEONet, including the NEONreplication module,
to provide the requisite platform for data replication and data flow management.
NEONet Messaging and Queuing delivers data from the mainframe database to a
Sybase database on the Sun SPARC Server in real time, and guarantees delivery of
the data, once and only once. NEONet's flexibility simplifies data flows across
the heterogeneous environments, and permits completion and tracking of a high
volume of messages. The Company's proprietary content publish/subscribe
architecture greatly simplifies network transaction management by enabling each
subscriber to receive only the information he wants. Users now access timely
client/server databases (e.g., Sybase running on Sun servers) even though core
processing is still done on the mainframe.
Integrating Acquired Businesses. A NEON customer achieved significant
growth in recent years through acquisitions. The acquired businesses were of
varying size and geographic location and used a broad range of applications
running on a variety of hardware, operating systems, and databases. Routing data
among the disparate systems was becoming increasingly costly and time-consuming.
The company was devoting significant in-house resources to continually write and
update extract programs in C programming language and to transport the data via
File Transport Programs (FTP), a batch mechanism which did not guarantee
delivery. The company was forced to add staff just to monitor the FTP process.
In addition, because continued acquisitions added different platforms and
applications to the enterprise network, additional employees were hired to write
and maintain that code. The customer chose to implement NEONet across this
environment, integrating applications, hardware, operating systems and
databases, and allowing systems to exchange data with minimal effort. With
NEONet guaranteed delivery, fewer personnel were required to monitor the data
transfer and routing. As the company continues to acquire other companies, those
applications can be integrated seamlessly into the network. Using NEONet, the
company has saved time and money, required fewer staff and less maintenance
programming, allowing the Company's programmers to concentrate on new
development.
Enabling Global Database Replication. Another NEONet customer is a
multinational bank with worldwide operations. In a typical 24-hour period, the
customer handles thousands of trading transactions. Prior to implementing a
NEONet-enabled solution, the customer processed these transactions through one
central database, resulting in slow response times and frequent interruptions
due to network outages. The customer addressed these bottlenecks by implementing
global data replication, in which multiple, identical databases are maintained
across the globe. This provides remote sites with fast and efficient access to
essential information while limiting the impact on network performance. A
critical requirement of such a system is real-time distribution of data updates
across the system, with guaranteed delivery of data and no duplication.
This customer implemented global data replication across North America,
Europe and Asia using NEONet to ensure reliable communications between the
servers and the central database providing continual
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access to current data at remote sites even during network outages. NEONet's
Messaging and Queuing module, together with the Rules Engine module evaluates
the content of each data message according to rules defined by the customer so
that only appropriately selected transactions are to be replicated. The
replicated transactions are converted by the Formatter into SQL update
statements, distributed to each remote database, and executed at the local
databases by NEONet's SQL Apply functionality through the NEONreplication
product. The customer benefited through timely, consistent databases available
on three continents.
SALES AND MARKETING
The Company currently markets its software and services primarily through a
direct sales organization, complemented by other sales channels including VARs,
OEMs, and international distributors. As of March 31, 1997, the Company's direct
sales force included 18 commissioned sales representatives located in eight U.S.
cities and London. In addition, the Company has initiated the implementation of
a multi-tiered channel program to recruit, support, and jointly market
comprehensive product solutions. As part of this strategy, the Company has
established distribution relationships with certain strategic hardware vendors,
database providers, software and toolset developers, systems integrators and
implementation consultants, including companies designing software, database
packages, and hardware integration and consulting services. The Company has also
sought to develop alliances with key solutions producers to targeted vertical
industry sectors, including financial services, health care, telecommunications,
and manufacturing. The Company plans to further identify and develop
relationships with additional partners who can complement existing NEON products
and supplement existing NEON product solutions. The Company also utilizes
advertising, direct mail and public relations programs, participates in industry
trade shows and organizes customer information seminars to promote the adoption
and implementation of its application integration technologies.
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 accounted for no revenue to date. The Company is currently investing,
and plans to continue to invest, significant resources for developing the
indirect channels, 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.
TECHNOLOGY
NEONet and its extension products and services are primarily targeted at
enabling and facilitating the cooperation and interoperation of multiple
applications of widely differing design and developmental generations. NEONet
operates on a heterogeneous mix of hardware and underlying software platforms,
utilizing existing transaction management capabilities found in the underlying
operating environments.
NEONet's core technologies have been integrated into an enterprise level
information broker architecture that leverages the benefits of individual
modules to deliver the following additional benefits:
- Employs fully anonymous content-based publish-subscribe capabilities,
with dynamic formatting and exactly once guaranteed delivery to abstract
the translation and delivery of information across applications.
- Simplifies the intrusion into new or legacy programs needed for such
programs to interoperate.
- Uses a non-programmatic and declarative rather than procedural definition
toolset, allowing configuration and maintenance workloads to scale
comfortably by describing formats for input and output as the number of
interfaces increases.
- Maintains transaction level reliability and state matching for the
transmission of critical data.
34
<PAGE> 36
- Provides independent scaleability across all modules to service
information-intensive enterprises.
- Combines implicitly asynchronous architecture and high reliability to
permit all nodes of a network to operate at enhanced efficiency.
- Operates transparently over the wide range of computing hardware,
network, and operating software often found in today's information
technology environments.
Proprietary Technologies
Rules Engine. The Rules Engine combines the ability to support the high
degree of expressiveness and flexibility of a Boolean logic model with
predictable performance, previously available only in significantly less
functional single field evaluation models. In addition, the Rules Engine is
capable of supporting a high number of rules without suffering performance
degradation. The Rules Engine examines the value of any field, or group of
fields found in or derivable from the message using Boolean operators to
determine subsequent actions. Using either the NEON GUI panels, or APIs provided
by the Rules Engine for programmatic rules updates, subscribers can assert rules
that will cause the Rules Engine to select only those instances of messages that
meet their particular needs and specify their format and delivery instructions.
Formatter. Applications exchanging data rarely use the same format even
though the data may have consistent semantic meaning. Existing commercial
reformatter tools, whether script or GUI-based, are typically procedural in
nature, requiring that each conversion from one format to another be
individually coded into the tool. This is particularly true when such
applications are a mix of legacy, purchased, and newly developed applications.
Accomplishing reformatting in the delivery layer frees programmers from having
to manually code all of the transformations. The Formatter uses a declarative
architecture, meaning that format structures and rules themselves are described
during configuration and stored in a format repository. Conversion of one format
to another is derived at execution time by the Formatter. The Formatter can
interpret and build a wide range of fixed, variable, and recursive formats
including proprietary and standard, and can derive as well as transform data
using calculations, tables and exits.
Messaging and Queuing. The Messaging and Queuing module provides a fast,
simple and portable cross-platform guaranteed delivery messaging and queuing
mechanism without the need to poll queues. A program sends a message to another
by simply naming the target and sending it to NEONet. The sending program no
longer needs to be concerned about the recipient's characteristics or even if it
is currently available. The message is queued locally and is a recoverable
component of the sender's transaction, which is then able to continue
processing. A receiving program obtains one or more messages from NEONet as the
messages become available or when the receiving program becomes available. The
receipt of the message then becomes a recoverable component of the receiver's
transaction, and the delivery of messages is guaranteed as to uniqueness and
order.
RESEARCH AND DEVELOPMENT
The Company has made substantial investments since inception in research
and development. The Company first introduced NEONet in January 1996, and
introduced next version releases in June, August and December 1996 and March
1997. Each new version of NEONet consisted of substantially rewritten code
providing greater scaleability, higher performance, and greater integration
capabilities.
The Company's research and development efforts are focused primarily on the
extension of NEONet's capabilities, additional hardware, operating system and
network platform support, the development of additional functionality and
libraries for targeted vertical markets, and quality assurance and testing. The
Company's research and development staff is also engaged in advanced development
efforts to exploit the Company's core technology and expand the markets for the
Company's products. These areas include, for example, development of rules-based
programming tools to replace conventional application logic, dynamic generation
of interfaces between existing technology layers, and event-driven workflow
dispatching and routing. The Company has adopted a policy of new product
releases every three months. This provides a means to disseminate additional
functionalities requested by customers as the Company continues to address
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<PAGE> 37
specific targeted markets. In addition, the Company believes that this
discipline spurs continual innovation and quality control throughout the
development and quality assurance organizations. As of March 31, 1997, the
Company's research and development staff consisted of 41 persons. The Company's
research and development expenditures in 1995 and 1996 were $1.1 million and
$3.7 million, respectively, and represented 88% and 51% of total revenues,
respectively, during such periods. The Company's research and development
expenses during the first quarter of 1997 were $1.2 million, representing 33% of
total revenues for such period.
Extension Products
Foreign Transport Interface. Building interfaces to other Transport and
Messaging systems (such as IBM's MQSeries), NEON is extending the power of the
anonymous publish-subscribe architecture to users of those systems, and to
additional systems for NEONet users.
NEOCAS Interface and SWIFT Libraries. NEON is developing an interactive
interface to the SWIFT banking and brokerage network using the SWIFT ALLIANCE
gateway, proprietary NEON queuing and message management algorithms and a
library of SWIFT formats pre-packaged in the Company's Formatter. This
significantly reduces implementation time for NEON customers initially
implementing or maintaining SWIFT applications.
NEONworkflow. Using its high performance, scaleable Rules Engine, the
Company is building a complex, event-driven workflow dispatching and routing
system.
NEONremote. Implements NEONet queuing and delivery and Internet transport
(HTTP) capability for Microsoft Windows 95 and Windows for Workgroups.
Additionally, NEONremote facilitates mobile/ disconnected computing applications
and supports resynchronization of data to enterprise databases over local and
wide-area networks and the Internet.
The markets for the Company's products are characterized by rapidly
changing technologies, evolving industry standards, frequent new product
introductions and short product life cycles. As its product families mature, the
Company expects that their gross margins may decline. The Company's future
success will depend to a substantial degree upon its ability to enhance its
existing products and to develop and introduce, on a timely and cost-effective
basis, new products and features that meet changing customer requirements and
emerging and evolving industry standards. The Company budgets for research and
development based on planned product introductions and enhancements; however,
actual expenditures may significantly differ from budgeted expenditures.
Inherent in the product development process are a number of risks. The
development of new, technologically advanced software products is a complex and
uncertain process requiring high levels of innovation, as well as the accurate
anticipation of technological and market trends. The introduction of new or
enhanced products also requires the Company to manage the transition from older
products in order to minimize disruption in customer ordering patterns, avoid
excessive levels of older product inventories and ensure that adequate supplies
of new products can be delivered to meet customer demand. There can be no
assurance that the Company will successfully develop, introduce or manage the
transition to new products. The Company has in the past, and may in the future,
experienced delays in the introduction of its products, due to factors internal
and external to the Company. Any future delays in the introduction or shipment
of new or enhanced products, the inability of such products to gain market
acceptance or problems associated with new product transitions could adversely
affect the Company's operating results, particularly on a quarterly basis. See
"Risk Factors -- Rapid Technological Change; Limited Platform Coverage;
Dependence on New Products."
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 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.
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<PAGE> 38
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 sychronization and transaction monitoring, and a
limited number of companies such as TIBCO offer content 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 and may in the future
compete with NEONet.
The Company also faces 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.
The Company believes that the principal competitive factors affecting its
market include product features such as heterogeneous computing platforms,
responsiveness to customer needs, scaleability, adaptability, support of a broad
range of functionality, performance, ease of use, quality, price, and
availability of professional services for product implementation, customer
service and support, effectiveness of sales and marketing efforts, and company
and product reputation. Although the Company believes that it currently competes
favorably with respect to such factors, there can be no assurance that the
Company can maintain its
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<PAGE> 39
competitive position against current and potential competitors, especially those
with greater financial, marketing, service, support, technical, and other
resources than the Company.
INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS AND LICENSES
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. 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.
The Company also relies on certain technology which it licenses from third
parties, including software which is integrated with internally developed
software and used in the Company's products to perform key functions. There can
be no assurance that these third party technology licenses will continue to be
available to the Company on commercially reasonable terms. The loss of or
inability of the Company to maintain any of these technology licenses could
result in delays or reductions in product shipments until equivalent technology
could be identified, licensed and integrated. Any such delays or reductions in
product shipments would materially adversely affect the company's business,
operating results and 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 such third parties' proprietary rights. On July 1, 1996, the Company
was notified that the Company's products may infringe the proprietary rights of
New Paradigm, an application integration software company. New Paradigm alleged
that NeoNet's Formatter module 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. Any claims, including
the specific claim by New Paradigm, 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. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to the Company or at all, which could have a material adverse effect upon the
Company's business, financial condition and operating results. 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 that 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 results of operations.
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<PAGE> 40
EMPLOYEES
As of March 31, 1997, the Company employed 133 persons, including 66 in
sales, marketing and field operations, 41 in research and development, 15 in
finance and administration and 11 in client services. Of these, one is located
in the United Kingdom, and the remainder are located in the United States. None
of the Company's employees are represented by a labor union. The Company has
experienced no work stoppages and believes its relationship with its employees
is good. Competition for qualified personnel in the Company's industry is
intense.
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, operating results and financial condition. In
particular, the services of George F. (Rick) Adam, Jr., Chief Executive Officer,
Harold Piskiel, Senior Vice President, Chief Technical Officer, or Robert I.
Theis, Senior Vice President of Marketing, would be difficult to replace. 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. See "Management."
FACILITIES
The Company's principal administrative, engineering, manufacturing,
marketing and sales facilities total approximately 21,259 square feet, and are
located in two buildings in Englewood, Colorado under subleases which begin to
expire in December 1999. In addition, the Company leases offices in the
metropolitan area of New York. Management believes that its current facilities
are adequate to meet its needs through the next twelve months, and that, if
required, suitable additional space will be available to accommodate expansion
of the Company's operations on commercially reasonable terms.
LEGAL PROCEEDINGS
As of the date hereof, there is no material litigation against the Company.
From time to time, the Company is a party to litigation and claims incident to
the ordinary course of business. While the results of litigation and claims
cannot be predicted with certainty, the Company believes that the final outcome
of such matters will not have a material adverse effect on the Company's
business, financial condition and operating results.
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<PAGE> 41
MANAGEMENT
The executive officers and directors of the Company and certain information
about them are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
George F. (Rick) Adam, Jr.(1)............. 50 Chairman of the Board, Chief Executive
Officer, President and Director
Harold A. Piskiel(2)...................... 50 Senior Vice President, Chief Technical
Officer and Director
Stephen E. Webb........................... 48 Senior Vice President and Chief Financial
Officer
Robert I. Theis........................... 35 Senior Vice President of Marketing
Frederick T. Horn......................... 43 Senior Vice President of Product
Development and Client Services
Leonard M. Goldstein...................... 50 Senior Vice President, Senior Counsel and
Secretary
Kevin Scully.............................. 43 Senior Vice President of Sales and Field
Operations, Financial Services
Frank A. Russo, Jr........................ 52 Senior Vice President of Sales and Field
Operations, Eastern Region
Evan G. Westenskow........................ 49 Senior Vice President of Sales and Field
Operations, Western Region
Michael E. Jaroch......................... 52 Senior Vice President of Human Resources
James C. Parks............................ 53 Vice President of Finance and Controller
Steve Lazarus(a)(b)(1).................... 65 Director
Mark L. Gordon(a)(3)...................... 45 Director
James Reep(b)(2).......................... 45 Director
</TABLE>
- ---------------
(a) Member of Compensation Committee.
(b) Member of Audit Committee.
(1) Mr. Adam and Mr. Lazarus are Class I Directors and will stand for
re-election at the third annual meeting of the stockholders held after the
Offering.
(2) Mr. Piskiel and Mr. Reep are Class II Directors and will stand for
re-election at the second annual meeting of the stockholders held after the
Offering.
(3) Mr. Gordon is a Class III Director and will stand for re-election at the
first annual meeting of the stockholders held after the Offering.
Mr. Adam has served as Chairman of the Board, Chief Executive Officer,
President and a Director of the Company since founding the Company in June 1993.
From 1987 to 1993, Mr. Adam was General Partner of Goldman, Sachs & Co. and
served as the Chief Information Technology Officer. From 1980 to 1987, Mr. Adam
was Chief Information Officer and Vice President of Personnel for Baxter Health
Care Corporation. Mr. Adam received a B.S. degree from the U.S. Military
Academy, West Point, New York and an M.B.A. from Florida State University.
Mr. Piskiel has served as Senior Vice President, Chief Technical Officer
and a Director of the Company since joining the Company in March 1995. From 1993
to 1995, Mr. Piskiel served as the Chief Architect and Project Manager for the
Information Technology Division of Merrill Lynch & Co. From 1984 to 1993, Mr.
Piskiel served as Vice President of Data Administration and Distribution
Architecture at Goldman, Sachs & Co. Mr. Piskiel holds a B.A. degree from Long
Island University.
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<PAGE> 42
Mr. Webb has served as Senior Vice President and Chief Financial Officer of
the Company since joining the Company in December 1996. Prior to December 1996,
Mr. Webb served as the Executive Vice President and Chief Financial Officer of
Telectronics Pacing Systems, Inc., an international manufacturer and distributor
of implantable electronic cardiac devices, from April 1994 to December 1996.
Prior to working at Telectronics Pacing Systems, Inc., Mr. Webb spent seventeen
years with Hewlett-Packard Company, most recently as controller of the HP
Software Business Unit. Mr. Webb holds a B.A. from Stanford University and an
M.B.A. degree from the Harvard Graduate School of Business.
Mr. Theis has served as Senior Vice President of Marketing since joining
the Company in October 1996. Prior to joining the Company, Mr. Theis served as
Managing Director of the Worldwide Financial Services Industry Group of Sun
Microsystems, Inc. from April 1986 to October 1996. Prior to joining Sun
Microsystems, Mr. Theis served as the workstation program manager for Silicon
Graphics. Mr. Theis received a B.S. degree from the University of Pittsburgh,
Pennsylvania.
Mr. Horn has served as Senior Vice President of Product Development and
Client Services since joining the Company in July 1996. From January 1994 to
July 1996, Mr. Horn was a partner with Ernst & Young, LLP in the Management
Consulting Group, where he specialized in financial industry consulting. From
February 1992 through December 1993, Mr. Horn was a Managing Director of SHL
Systemhouse, a software services firm. Prior to joining SHL Systemhouse, Mr.
Horn served as a Vice President of Goldman, Sachs & Co. Mr. Horn received his
B.A. degree from Northwestern University.
Mr. Goldstein has served as Senior Vice President, Senior Counsel and
Secretary since joining the Company in July 1996. From 1976 to July 1996, Mr.
Goldstein practiced law privately with the firm of Feder, Morris, Tamblyn and
Goldstein, for which firm he served as Managing Partner and President. Mr.
Goldstein holds a B.A. degree from American University and a J.D. degree from
the State University of New York at Buffalo School of Law.
Mr. Scully joined the Company in January 1996 as Senior Vice President of
Sales and Field Operations, Financial Services. From February 1994 to January
1996, Mr. Scully served as a Vice President in charge of Global Information
Technology, for all of the trading groups of J.P. Morgan & Co. From January 1992
to December 1994, Mr. Scully served as a Director of the Fixed Income Trading
Department at CS First Boston. Prior to CS First Boston, Mr. Scully was the
global Chief Information Officer and Senior Vice President for Sumitomo Bank
Capital Markets division of Sumitomo Bank. Mr. Scully holds a B.S. degree from
Marietta College.
Mr. Russo has served as Senior Vice President of Sales and Field
Operations, Eastern Region since joining the Company in March 1996. Prior to
March 1996, Mr. Russo served as the President and Chief Executive Officer of
Strategic Marketing Information, Inc. From 1989 to 1991, Mr. Russo served as
President of Spectrum Healthcare Solutions. From 1987 through 1989, Mr. Russo
served as President of Baxter-Travenol's Systems Division. Mr. Russo holds
B.B.A. and M.B.A. degrees from Adelphi University.
Mr. Westenskow has served as Senior Vice President of Sales and Field
Operations, Western Region since joining the Company in March 1996. From
September 1994 to March 1996, Mr. Westenskow served as Vice President of Sales
for MIACO, a consulting and training company specializing in relational
databases. From May 1991 to May 1994, Mr. Westenskow served as the Vice
President of Field Operations at ASK Group, a database and manufacturing
software company. Prior to joining ASK Group, Mr. Westenskow held a variety of
sales management positions at Hewlett-Packard Company, most recently as area
sales manager. Mr. Westenskow holds a B.S. degree from University of Utah.
Mr. Jaroch has served as Senior Vice President of Human Resources since he
joined the Company in April 1996. From 1995 to 1996, Mr. Jaroch served as Senior
Consultant to Intersource Executive Search, an executive recruiting firm. From
1990 to 1995, Mr. Jaroch served as the Senior Human Resources Administrator for
Lockheed Aeronautical Systems Company. Mr. Jaroch received a B.S. degree from
Northern Illinois University and an M.B.A. degree from the Lake Forest Graduate
School of Business.
Mr. Parks has served as Vice President of Finance and Controller of the
Company since joining the Company in January 1996. From 1984 through January
1996, Mr. Parks consulted for various start-up
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<PAGE> 43
technology companies in the roles of Chief Financial Officer and Controller.
Prior to 1984, Mr. Parks served as a Manager of Arthur Andersen in Denver,
Colorado. Mr. Parks holds a B.A. degree from University of Northern Colorado and
an M.B.A. degree from the University of Denver, Colorado.
Mr. Lazarus has served as a Director of the Company since April 1995. Since
1986, Mr. Lazarus has served as a senior principal of various venture capital
funds associated with ARCH Venture, including President and Chief Executive
Officer of ARCH Development Corporation and Managing Director of ARCH Venture
Partners. From 1986 to 1994, Mr. Lazarus served as the Associate Dean of the
Graduate School of Business of the University of Chicago. He currently serves as
a director of Amgen, Primark and Illinois Superconductor. Mr. Lazarus holds a
B.A. degree from Dartmouth College and an M.B.A. degree from the Harvard
Graduate School of Business.
Mr. Gordon has served as a Director of the Company since the Company's
inception. Since 1980, Mr. Gordon has been a partner in the law firm of Gordon &
Glickson PC, directing the firm's information communications and computer
technology practice. Mr. Gordon holds a B.A. degree from the University of
Michigan and a J.D. degree from the Northwestern University School of Law.
Mr. Reep has served as a Director of the Company since March 1996. Since
1980, Mr. Reep has served as Chairman and Director of First Consulting Group, an
information consulting firm specializing in health care systems that he
co-founded. Mr. Reep holds a B.S. degree from California State University at
Long Beach and an M.B.A. degree from the University of Chicago.
The Company's Amended and Restated Bylaws (the "Bylaws"), as amended,
effective upon the completion of the Offering, provide for five directors
divided into three classes. The initial term of Class III directors is through
the first annual meeting of stockholders following the Offering, the initial
term of Class II directors is through the second annual meeting of stockholders
following the Offering, and the initial term of Class I directors is through the
third annual meeting of stockholders following the Offering, and the subsequent
terms for directors of each class is three years, in each case until their
successors have been elected and qualified. Officers serve at the discretion of
the Board. There are no familial relationships among any of the directors or
officers of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has a Compensation Committee and an Audit Committee.
The Compensation Committee makes recommendations to the Board concerning
salaries and incentive compensation for the Company's officers and employees and
administers the Company's incentive plans. The Audit Committee reviews the
results and scope of the audit and other accounting related services and reviews
and evaluates the Company's internal audit and control functions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors currently consists of
Messrs. Lazarus and Gordon, neither of whom is an officer or employee of the
Company. No member of the Compensation Committee or executive officer of the
Company has a relationship that would constitute an interlocking relationship
with executive officers or directors of another entity.
DIRECTOR COMPENSATION
With the exception of Mr. Gordon, directors receive no cash remuneration
for serving on the Board. Non-employee directors are entitled to participate in
the Company's 1997 Director Option Plan. See "Management -- Employee Benefit
Plans -- 1997 Director Stock Option Plan." Mr. Gordon is currently paid a yearly
stipend of $10,000 for serving as a director.
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<PAGE> 44
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company during
the fiscal year ended December 31, 1996 to the Company's Chief Executive Officer
and each of the Company's four other most highly compensated executive officers
who were serving as executive officers at the end of the 1996 fiscal year
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION AWARDS
COMPENSATION(1) ---------------------
FISCAL ------------------- SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(2) OPTIONS
--------------------------- ------ -------- -------- ---------------------
<S> <C> <C> <C> <C>
George F. (Rick) Adam, Jr............. 1996 $140,000 $40,000 --
Chairman of the Board, Chief
Executive Officer, President and
Director
Harold A. Piskiel..................... 1996 140,000 -- 26,666
Senior Vice President, Chief
Technical Officer and Director
Kevin Scully.......................... 1996 182,290 -- 57,064
Senior Vice President of Sales and
Field Operations, Financial Services
Frank A. Russo, Jr.................... 1996 118,921 -- 46,932
Senior Vice President of Sales and
Field Operations, Eastern Region
Evan G. Westenskow.................... 1996 105,912 -- 48,531
Senior Vice President of Sales and
Field Operations, Western Region
</TABLE>
- ---------------
(1) These amounts reflect salary and bonus paid for the full fiscal year 1996.
Excludes certain perquisites and other personal benefits, such as life
insurance premiums paid by the Company. In the case of Kevin Scully, Frank
A. Russo, Jr., and Evan G. Westenskow, salary includes commissions earned in
1996.
(2) Includes bonus amounts earned in the first fiscal year indicated even though
such bonus amounts may be paid in a subsequent fiscal year.
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<PAGE> 45
Option Grants and Exercises in Last Fiscal Year
The following tables set forth information regarding stock options granted
to and exercised by the Named Executive Officers during the last fiscal year, as
well as options held by such officers as of December 31, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS(1) REALIZABLE VALUE
------------------------------------------------------------ AT ASSUMED
PERCENT OF ANNUAL RATES OF
TOTAL STOCK PRICE
NUMBER OF OPTIONS APPRECIATION FOR
SECURITIES GRANTED TO EXERCISE OPTION TERM(2)
UNDERLYING EMPLOYEES IN PRICE EXPIRATION -----------------
NAME OPTION GRANTED(#) FISCAL YEAR ($/SECURITY) DATE 5% 10%
---- ----------------- ------------ ------------ ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
George F. (Rick) Adam, Jr.... -- -- -- -- -- --
Harold A. Piskiel............ 20,000 2.4% $2.25 3/15/01 12,434 27,473
6,666 -- 9.00 12/20/01 16,576 36,626
Kevin Scully(3).............. 46,666 5.1 2.25 1/08/01 29,011 64,102
2,086 -- 2.25 5/31/01 1,297 2,865
967 -- 7.25 7/31/01 1,937 4,280
1,242 -- 7.25 8/31/01 2,488 5,497
1,570 -- 7.25 9/30/01 3,145 6,949
1,600 -- 7.25 10/31/01 3,205 7,082
533 -- 7.25 11/30/01 1,068 2,359
2,400 -- 9.00 12/31/01 5,968 13,187
Frank A. Russo, Jr.(3)....... 46,666 4.2 2.25 3/01/01 29,011 64,102
266 -- 7.25 9/30/01 533 1,177
Evan G. Westenskow(3)........ 46,666 4.3 2.25 3/25/01 29,011 64,102
455 -- 7.25 8/31/01 911 2,014
77 -- 7.25 9/30/01 154 341
533 -- 7.25 11/30/01 1,068 2,359
800 -- 9.00 12/31/01 1,989 4,396
</TABLE>
- ---------------
(1) Each of these options was granted pursuant to the Company's 1995 Stock
Option Plan and is subject to the terms of such plan as described herein.
(2) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), shown are the hypothetical gains or "options spreads" that
would exist for the respective options. These gains are based on assumed
rates of annual compounded stock price appreciation of 5% and 10% from the
date the option was granted over the full option term. The 5% and 10%
assumed rates of appreciation are mandated by the rules of the Commission
and do not represent the Company's estimate or projection of future
increases in the price of its Common Stock.
44
<PAGE> 46
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR- IN-THE-MONEY OPTIONS
SHARES END: AT FISCAL YEAR-END(1):
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
George F. (Rick) Adam, Jr..... -- -- -- -- -- --
Harold A. Piskiel............. -- -- 7,777 65,555 $52,495 $ 397,500
Kevin Scully(2)............... -- -- 10,398 46,666 24,459 315,000
Frank A. Russo, Jr.(2)........ -- -- 266 46,666 468 315,000
Evan G. Westenskow(2)......... -- -- 1,865 46,666 1,871 315,000
</TABLE>
- ---------------
(1) Based upon the estimated fair market value of Common Stock as of December
31, 1996 ($9.00), minus the per share exercise price, multiplied by the
number of shares underlying the option. Except as referred below, options
granted pursuant to the Company's 1995 Stock Option Plan vest according to
the following schedule: one-sixth upon the expiration of one year from the
date of grant; one-third upon the expiration of the second year from the
date of grant; one-half upon the expiration of the third year from the date
of grant. Certain options granted upon the attainment of certain sales
targets are fully vested upon the date of grant.
(2) Includes 10,398 options for Kevin Scully, 266 options for Frank A. Russo,
Jr., and 1,865 options for Evan G. Westenskow, all of which options were
fully vested upon the date of grant. The Company grants fully vested options
to members of the sales force upon the achievement of certain revenue
targets.
EMPLOYEE BENEFIT PLANS
1995 Stock Option Plan.
The Company's Amended and Restated 1995 Stock Option Plan (the "1995 Stock
Option Plan") was adopted in 1995, amended in 1996 and amended and restated in
January 1997. The 1995 Stock Option Plan provides for the grant to employees of
the Company (including officers and employee directors) of incentive stock
options and stock purchase rights ("SPRs") within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), and for the grant of
nonstatutory stock options to employees and consultants of the Company. The 1995
Stock Option Plan is administered by the Board of Directors or a committee
designated by the Board of Directors (the "Administrator"), which selects the
optionees, determines the number of shares to be subject to each option and
determines the exercise price of each option. An aggregate of 2,333,333 shares
of Common Stock are reserved for issuance under the 1995 Stock Option Plan, of
which, as of March 31, 1997, options to purchase an aggregate of 1,353,712
shares were outstanding and an aggregate of 941,925 shares remained available
for future grants. The exercise price of all incentive stock options granted
under the 1995 Stock Option Plan must be at least equal to the fair market value
of the Common Stock on the date of grant. The exercise price of all nonstatutory
stock options granted under the 1995 Stock Option Plan shall be determined by
the Administrator. With respect to any participant who owns stock possessing
more than 10% of the voting power of all classes of stock of the Company, the
exercise price of any incentive stock option granted must equal at least 110% of
the fair market value on the grant date and the maximum term of the option must
not exceed five years. The term of all other options granted under the 1995
Stock Option Plan may not exceed ten years.
In the event of a Change in Control of the Company, as defined in the 1995
Stock Option Plan, all outstanding options granted under the plan prior to
December 31, 1996 shall become vested and exercisable in full and shall be
assumed or an equivalent option substituted by the successor corporation; if the
successor corporation refuses to assume or substitute for such options, then
such options shall be exercisable in full for a period of fifteen days after
notice from the Administrator, and shall thereafter terminate. With respect to
options granted on or after January 1, 1997, upon any Change in Control each
such option shall be assumed or an equivalent option substituted by the
successor corporation or, if the successor corporation refuses to assume or
substitute for the outstanding options, such options will become fully vested
and exercisable for a period of fifteen days after notice from the
Administrator, and shall thereafter terminate; in addition, each holder of an
option granted under the plan on or after January 1, 1997 and assumed or
substituted upon a change in control
45
<PAGE> 47
shall be entitled to an additional twelve months of vesting following any
involuntary termination of the optionee's employment with the successor
corporation within twelve months following the Change in Control. Unless
terminated sooner, the 1995 Stock Option Plan will terminate ten years from its
effective date. The Board has authority to amend or terminate the 1995 Stock
Option Plan, provided that no such action may impair the rights of the holder of
any outstanding options without the written consent of such holder.
Options and SPRs granted under the 1995 Plan are not generally transferable
by the optionee except by will or by the laws of descent and distribution, and
are exercisable during the lifetime of the optionee only by such optionee.
Generally, options granted under the 1995 Plan must be exercised within thirty
days of the end of an optionee's status as an employee or consultant of the
Company, or within twelve months after such optionee's termination by death or
disability, but in no event later than the expiration of the option term. In the
case of SPRs, unless the Administrator determines otherwise, the Company will
have a repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's employment with the Company for any reason
(including death or disability). Such repurchase option lapses at a rate
determined by the Administrator. The purchase price for shares repurchased by
the Company will be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to the Company.
1997 Employee Stock Purchase Plan.
The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted in January 1997 and will become effective upon the closing of the
Offering. A total of 216,666 shares of Common Stock has been reserved for
issuance under the Purchase Plan. The Purchase Plan is intended to qualify under
Section 423 of the Code. Offering periods may be up to 24 months in duration and
may include several purchase periods as determined by the Board. The initial
offering period will commence on the date of the Offering and end on the last
business day on or prior to August 15, 1997, and subsequent offering periods are
initially expected to end on February 15 and August 15 of each year. Employees
are eligible to participate if they are regularly employed by the Company for at
least twenty hours per week and more than five months in any calendar year.
The Purchase Plan permits eligible employees to purchase Common Stock
through payroll deductions, which may not exceed 10% of an employee's eligible
compensation (20% in the first offering period), including base salary,
commissions, bonuses, overtime and other cash compensation, at a price equal to
85% of the fair market value of the Common Stock at the beginning of each
offering period or the purchase date, whichever is lower. In the event of
certain changes in control of the Company, the Purchase Plan provides that the
Board of Directors will shorten the offering period by setting a new purchase
date to occur before the change in control event. Unless terminated sooner, the
Purchase Plan will terminate ten years after its effective date. The Board of
Directors has the authority to amend or terminate the Purchase Plan provided
that no such action adversely affects the rights of any participant.
1997 Director Option Plan
The Board of Directors adopted the 1997 Director Option Plan (the "Director
Plan") in January 1997 to provide for the automatic grant to non-employee
directors of the Company of options to purchase shares of Common Stock. The
Director Plan is administered by the Board, unless the Board delegates
administration to a committee. An aggregate of 100,000 shares of Common Stock
has been reserved for issuance under the Director Plan, subject to adjustment in
the event of certain capital changes. Each non-employee director who first
becomes a director after the effective date of the Offering shall automatically
be granted an option to purchase 16,666 shares on the date on which such person
first becomes a non-employee director. In addition, each non-employee director
shall be automatically granted an option to purchase 5,000 shares each year
commencing on the day after the annual stockholder meeting. Options granted
under the Director Plan expire ten years after the date of grant and have an
exercise price equal to 100% of the fair market value of the Common Stock on the
date of grant. Initial options granted under the Director Plan shall become
exercisable cumulatively after three years as to one-third of the shares subject
to the option on each anniversary of the grant date, provided the optionee
continues to serve as a director. Each annual grant under the Director Plan
shall become exercisable in full on the third anniversary of the grant date,
provided the optionee continues to
46
<PAGE> 48
serve as a director. In the event of any Change in Control of the Company, as
defined in the Director Plan, outstanding options under the Director Plan must
be assumed (or an equivalent option substituted) by the successor corporation,
or the options shall become exercisable in full for at least 15 days after
notice by the Company. In addition, if within one year following such a Change
in Control a director shall involuntarily cease to be a director, the director
shall be entitled to option vesting through the date of termination as a
director plus one additional year thereafter.
Prior to the adoption of the Director Plan, the directors of the Company
received the following grants under the 1995 Stock Option Plan; Mark Gordon was
granted options to purchase an aggregate of 13,333 shares of Common Stock at an
exercise price of $2.25 per share, of which 2,222 shares were vested at March
31, 1997; and James Reep was granted options to purchase an aggregate of 13,333
shares of Common Stock of at an exercise price of $2.25 per share, of which
2,222 shares were vested at March 31, 1997.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Bylaws provide that the Company shall indemnify its officers
and directors, and may indemnify its employees and other agents to the fullest
extent provided by Delaware law. The Company has obtained director and officer
liability insurance with respect to certain matters, including matters arising
under the Securities Act. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers, and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. At present,
there is no pending litigation or proceeding involving any director or officer,
employee or agent of the Company in which indemnification will be required or
permitted. The Company is not aware of any threatened litigation or proceeding
which may result in a claim for such indemnification.
47
<PAGE> 49
CERTAIN TRANSACTIONS
Since the Company's inception in June 1993, the Company has issued, in
private placement transactions, shares of its Preferred Stock as follows: an
aggregate of 9,169,028 shares of Series A Preferred Stock (2,037,562 shares of
Common Stock issuable upon conversion thereof) for aggregate consideration of
$2.0 million in May 1995; 6,183,339 shares of Series B Preferred Stock
(1,374,075 shares of Common Stock issuable upon conversion thereof) for
aggregate consideration of approximately $1.9 million in September 1995; and
4,664,596 shares of Series C Preferred Stock (1,036,577 shares of Common Stock
issuable upon conversion thereof) for aggregate consideration of approximately
$7.5 million in June 1996. All such Preferred Stock will convert into an
aggregate of 4,448,214 shares of Common Stock upon the completion of this
Offering. The following table summarizes the shares of Preferred Stock purchased
by executive officers, directors and five percent stockholders of the Company
and persons associated with them:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C TOTAL SHARES
INVESTOR PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK AS CONVERTED(1)
-------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
ARCH Venture Fund II, L.P.(2)... 2,292,257 1,236,668 745,342 949,836
George F. (Rick) Adam, Jr....... 6,876,771 -- -- 1,528,171
Venrock Associates(3)........... -- 4,478,386 1,204,969 1,262,966
Terence J. Garnett.............. -- 468,285 37,267 112,345
Merrill Lynch Group, Inc........ -- -- 1,863,354 414,079
The Hamilton Companies,
LLC(5)........................ -- -- 813,664 180,814
</TABLE>
- ---------------
(1) Upon the closing of the Offering, each share of the Company's Series A
Preferred, Series B Preferred, and Series C Preferred Stock will be
converted into shares of Common Stock at a two-for-nine conversion ratio.
(2) ARCH Venture Fund II, L.P. is a limited partnership managed by ARCH
Management Partners II, L.P. ARCH Venture Partners, L.P. is the general
partner of Arch Management Partners II, L.P. Steve Lazarus, a director of
the Company, is a general partner of ARCH Venture Partners, L.P. and
exercises voting control over the shares beneficially owned by ARCH Venture
Fund II, L.P.
(3) Includes 3,080,714 shares of Series B Preferred Stock and 747,081 of Series
C Preferred Stock held by Venrock Associates, are 1,397,672 shares of
Series B Preferred Stock and 457,888 shares of Series C Preferred Stock
held by Venrock Associates II, L.P.
The shares of Common Stock issuable upon conversion of the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock are
entitled to certain registration rights. See "Description of Capital
Stock -- Registration Rights."
In March 1995, the Company issued 133,333 shares of Common Stock to Mr.
Piskiel in exchange for an aggregate consideration of $18,000.
Mr. Adam is the owner of Air America LLC, a private air charter company
that has provided service to the Company. Total expenses for services rendered
by Air America LLC to the Company were $84,506 in 1995. No services in excess of
$60,000 were provided by Air America LLC to the Company in 1996.
In January 1994, the Company entered into a revolving credit line with Mr.
Adam providing for borrowings by the Company of up to $1.0 million. The
outstanding indebtedness of $1.0 million under this credit line was repaid in
May 1995 in connection with the Company's Series A Preferred Stock financing;
Mr. Adam purchased a total of 6,876,771 shares of Series A Preferred Stock in
exchange for cancellation of the $1.0 million of indebtedness, payment by Mr.
Adam of $500,000 in cash and surrender by Mr. Adam of a total of 1,018,781
shares of Common Stock.
The Company is party to a royalty agreement with Merrill Lynch under which
the Company is obligated to pay royalties to Merrill Lynch on net revenues from
licenses of NEONet, up to a total of $1.9 million. the royalty rate was 30%
through 1996 and was revised to 10% in January 1997. Merrill Lynch is a
stockholder of the Company. In addition, Merrill Lynch is a licensee of the
Company's NEONet products.
48
<PAGE> 50
The Company has granted options to certain of its directors and executive
officers. See "Management -- Option Grants in Last Fiscal Year," "-- Employee
Benefit Plans -- 1997 Director Option Plan" and "Principal Stockholders."
The Company intends to enter into indemnification agreements with each of
its officers and directors upon the effectiveness of this Offering. See
"Management -- Limitation of Liability and Indemnification Matters."
Mark L. Gordon, a director of the Company, is a partner at Gordon &
Glickson, a law firm that has provided legal services for the Company. During
1995 and 1996, the total amounts paid to Gordon & Glickson by the Company for
services performed was $78,766 and $198,932, respectively.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
affiliated third parties. All future transactions, including loans, between the
Company and its officers, directors, principal stockholders and their affiliates
will be approved by a majority of the Board of Directors, including a majority
of the independent and disinterested directors, and will continue to be on terms
no less favorable to the Company than could be obtained from unaffiliated third
parties.
49
<PAGE> 51
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 31, 1997, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, by
(i) each person (or group of affiliated persons) who is known by the Company to
own beneficially 5% or more of the Company's Common Stock, (ii) each of the
Company's directors, (iii) each of the Named Executive Officers, and (iv) all
directors and officers as a group. Except as indicated in the footnotes to the
table, the persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable.
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL (1)(2)
----------------------
DIRECTORS, NAMED EXECUTIVE OFFICERS NUMBER OF SHARES BEFORE AFTER
AND 5% STOCKHOLDERS BENEFICIALLY OWNED (1) OFFERING OFFERING
----------------------------------- ---------------------- -------- --------
<S> <C> <C> <C>
George F. (Rick) Adam, Jr. (2)..................... 2,749,389 47.1 % 33.8 %
c/o NEON, Inc.
7400 East Orchard Road, Suite 230
Englewood, CO 80111
Harold A. Piskiel (3).............................. 144,443 2.5 1.8
Venrock Associates(4).............................. 850,621 14.6 10.4
Venrock Associates II, LP (4)...................... 412,345 7.1 5.1
c/o 30 Rockefeller Plaza
Room 5508
New York, NY 10112
ARCH Venture Fund II, L.P. (5)..................... 949,836 16.3 11.7
c/o 135 S. LaSalle Street, Suite 3702
Chicago, IL 60603
Merrill Lynch Group, Inc. (6)...................... 414,078 7.1 5.1
c/o Merrill Lynch Group, Inc.
World Financial Center, North Tower
New York, NY 10281
Kevin Scully (7)................................... 29,107 * *
Frank A. Russo, Jr. (8)............................ 9,109 * *
Evan G. Westenskow (9)............................. 11,508 * *
Steve Lazarus (10)................................. 949,836 16.3 11.7
Mark L. Gordon (11)................................ 2,222 * *
James Reep (11).................................... 2,222 * *
All directors and executive officers
as a group (14 people) (12)...................... 3,930,057 66.2 % 47.7 %
</TABLE>
- ---------------
* Less than 1%.
(1) Assumes no exercise of the Underwriters' over-allotment option. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. In computing the number of shares beneficially owned
by a person and the percentage ownership of that person, shares of Common
Stock subject to options held by that person that are currently exercisable
or exercisable within 60 days of March 31, 1997 are deemed outstanding.
Such shares, however, are not deemed outstanding for the purposes of
computing the percentage ownership of each other person. Except as
indicated in the footnotes to this table and pursuant to applicable
community property laws, each stockholder named in the table has sole
voting and investment power with respect to the shares set forth opposite
such stockholder's name. Percentage of ownership is based on 5,840,461
shares of Common Stock outstanding on March 31, 1997 and 8,140,461 shares
of Common Stock outstanding after completion of the
50
<PAGE> 52
Offering. Share ownership gives effect to the automatic conversion of all
outstanding shares of Preferred Stock into Common Stock upon completion of
the Offering.
(2) Includes 100,000 shares of Common Stock held in the name of Adams
Investment I, LLP, George F. Adam, III; 100,000 shares of Common Stock held
in the name of Adams Investment II, LLP, John C. Adam; 37,333 shares held
in the name of Adams Investment III, LLP, George F. Adam, Jr., Trustee for
Gregory S. Adam; and 37,333 shares of Common Stock held in the name of
Adams Investment IV, LLP, George F. Adam, Jr., Trustee for Rebecca Adam.
(3) Includes 11,110 shares of Common Stock issuable upon exercise of stock
options that are exercisable within 60 days of the Offering.
(4) Includes 850,621 shares of Common Stock issuable upon conversion of
3,827,795 shares of Preferred Stock held by Venrock Associates, L.P. and
412,345 shares of Common Stock issuable upon conversion of 1,855,560 shares
of Preferred Stock held by Venrock Associates II, L.P.
(5) Includes 949,836 shares of Common Stock issuable upon conversion of
4,274,267 shares of Preferred Stock held by ARCH Venture Fund II, L.P., of
which Steven Lazarus exercises voting control.
(6) Includes 414,078 shares of Common Stock issuable upon conversion of
1,863,354 shares of Preferred Stock held by Merrill Lynch Group, Inc., a
wholly owned subsidiary of Merrill Lynch.
(7) Consists of 29,107 shares of Common Stock issuable upon the exercise of
stock options exercisable within 60 days of the Offering.
(8) Consists of 9,109 shares issuable upon the exercise of stock options
exercisable within 60 days of the Offering.
(9) Consists of 11,508 shares of Common Stock issuable upon the exercise of
stock options exercisable within 60 days of the Offering.
(10) Consists of 949,836 shares held by ARCH Venture Fund II, L.P., as to which
Mr. Lazarus disclaims beneficial ownership, except to the extent of his
pecuniary interest therein.
(11) Consists of 2,222 shares of Common Stock issuable upon the exercise of
stock options exercisable within 60 days of the Offering.
(12) Includes an aggregate of 97,498 shares of Common Stock issuable upon
exercise of stock options exercisable within 60 days of the Offering.
51
<PAGE> 53
DESCRIPTION OF CAPITAL STOCK
Effective upon completion of the Offering, the authorized capital stock of
the Company shall consist of 45,000,000 shares of Common Stock, $0.0001 par
value per share, and 2,000,000 shares of Preferred Stock, $0.0001 par value per
share.
COMMON STOCK
As of March 31, 1997, there were 5,840,461 shares of Common Stock
outstanding held of record by 21 stockholders (assuming the conversion of all
outstanding shares of Preferred Stock into Common Stock upon the closing of this
Offering). The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to outstanding shares of Preferred Stock, if any, the holders of
Common Stock are entitled to receive ratably such dividends as may be declared
from time to time by the Board of Directors out of funds legally available
therefor. In the event of the liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior liquidation rights of
Preferred Stock, if any, then outstanding. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Common Stock. All outstanding shares
of Common Stock are fully paid and non-assessable, and the shares of Common
Stock to be outstanding upon completion of this Offering will be fully paid and
non-assessable.
PREFERRED STOCK
The Company is authorized to issue 2,000,000 shares of undesignated
Preferred Stock. The Board of Directors has the authority to issue the
undesignated Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued shares of undesignated preferred stock and to fix the number of shares
constituting any series and the designations of such series, without any further
vote or action by the stockholders. The Board of Directors, without stockholder
approval, can issue Preferred Stock with voting and conversion rights which
could adversely affect the voting power of the holders of Common Stock. The
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company.
WARRANT
In connection with the loan and security agreement entered into in April
1996 with Silicon Valley Bank, the Company issued a warrant (the "Warrant") to
purchase 31,056 shares of Series C Preferred Stock at an exercise price of $1.61
per share, which, following the automatic conversion of Series C Preferred Stock
into Common Stock upon completion of this Offering, will be exercisable for
6,901 shares of Common Stock at an exercise price of $7.25 per share. Upon
exercise, the holder of such warrant is entitled to the registration rights set
forth in the Rights Agreement. See "Description of Capital Stock -- Registration
Rights.
REGISTRATION RIGHTS
Pursuant to a Registration Rights Agreement dated as of May 9, 1995, as
amended September 20, 1995 and June 3, 1996, among the Company and certain
holders of its securities (the "Rights Agreement"), the holders of approximately
4,466,666 shares of Common Stock (the "Registrable Securities") after this
Offering will be entitled to certain rights with respect to the registration of
the Registrable Securities under the Securities Act. Under the Rights Agreement,
if the Company proposes to register any of its securities under the Securities
Act, either for its own account or the account of other stockholders, the
holders of Registrable Securities are entitled to notice of such registration
and are entitled to include their Registrable Securities therein. Further,
holders of Registrable Securities may require the Company to register all or a
portion of their Registrable Securities on Form S-3, when such form becomes
available for use by the Company, subject to certain conditions and limitations.
The holders' rights with respect to all such registrations are subject to
certain conditions, including the right of the underwriters to limit the number
of shares included in any such
52
<PAGE> 54
registration. With respect to all registrations, other than those on Form S-3,
the Company has agreed to pay all expenses related thereto, except for
underwriting discounts and commissions and stock transfer taxes.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "Delaware Law"), an anti-takeover law. In general,
the statute prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
For purposes of Section 203, a "business combination" includes a merger, asset
sale or other transaction resulting in a financial benefit to the interested
stockholder, and an "interested stockholder" is a person who, together with
affiliates and associates, owns (or at any time during the prior three years has
owned) 15% or more of the corporation's voting stock.
The Company's Bylaws require that special meetings of the stockholders of
the Company may be called only by the Board of Directors, the Chairman of the
Board, the Chief Executive Officer or by holders of at least 20% of the voting
power of all then-outstanding shares of voting stock. The Company's Certificate
of Incorporation provides that the authorized number of directors may be changed
only by resolution of the Board of Directors. In addition, the Board of
Directors is divided into three classes. The initial term of Class III directors
is through the first annual meeting of stockholders following the Offering, the
initial term of the Class II directors is through the second annual meeting of
stockholders following the Offering, and the initial term of the Class I
directors is through the third annual meeting of stockholders following the
Offering, and the subsequent terms for directors of each class is three years,
in each case until their successors have been elected and qualified. These
provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is First National
Bank of Boston.
LISTING
The Company has applied to list its Common Stock on the Nasdaq National
Market under the symbol NEON. The Company has not applied to list its Common
Stock on any other exchange or quotation system.
53
<PAGE> 55
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this Offering, the Company will have outstanding
an aggregate of 8,140,461 shares of Common Stock (8,485,461 if the Underwriters'
over-allotment option is exercised in full). Of the total outstanding shares of
Common Stock, the 2,300,000 shares of Common Stock sold in this Offering will be
freely tradable without restriction or further registration under the Securities
Act, unless purchased by "affiliates" of the Company, as that term is defined in
Rule 144 under the Securities Act (in which case resales by the affiliates would
be subject to certain volume limitations and other restrictions described
below).
The remaining 5,840,461 shares of Common Stock held by existing
stockholders upon consummation of this Offering are "restricted securities" as
that term is defined in Rule 144 under the Securities Act (the "Restricted
Stock"). In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
shares for at least two years (including, if the shares are transferred, the
holding period of any prior owner except an affiliate) is entitled to sell in
"broker's transactions" or to "market makers", within any three-month period
commencing 90 days after the date of this Prospectus, a number of shares that
does not exceed the greater of (i) 1% of the then outstanding shares of such
class of the Common Stock (approximately 81,404 shares immediately after this
Offering) or (ii) generally, the average weekly trading volume in such class of
the Common Stock during the four calendar weeks preceding the filing of Form 144
with respect to such sale, and subject to certain other limitations and
restrictions. In addition, a person who is not deemed to have been an affiliate
of the Company at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least three years,
would be entitled to sell such shares under Rule 144(k) without regard to the
volume and other requirements described above. Shares of Common Stock that would
otherwise be deemed "restricted securities" could be sold at any time through an
effective registration statement relating to such shares of Common Stock.
The Company and each of its stockholders and optionholders have agreed,
subject to certain exceptions, not to offer, sell, contract to sell or otherwise
dispose of any Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of UBS Securities LLC (the "Lock Up
Agreements").
Due to the resale restrictions under Rule 144 and the Lock Up Agreements,
no shares of Restricted Stock will be eligible for resale into the public market
on the date of this Offering, except as UBS Securities LLC may consent.
Beginning 180 days following the date of this Prospectus (or such earlier date
on which UBS Securities LLC may elect to release the Lock Up Agreements), an
aggregate of 5,840,461 shares of Restricted Stock will first become eligible for
sale in the public market pursuant to Rule 144 and the expiration of the Lock Up
Agreements, subject to certain volume limitations and other resale restrictions
pursuant to Rule 144. In addition, the Company intends to file a Registration
Statement on Form S-8 after the effective date of this Offering to register an
aggregate of 2,333,333 shares of Common Stock issuable pursuant to the Company's
Amended and Restated 1995 Stock Option Plan (of which options to purchase an
aggregate of 1,353,712 shares were outstanding as of March 31, 1997, including
an aggregate of 145,752 option shares which were vested and exercisable as of
such date), an aggregate of 216,666 shares issuable pursuant to the Company's
1997 Employee Stock Purchase Plan and an aggregate of 100,000 shares of Common
Stock issuable pursuant to the Company's 1997 Director Option Plan; due to the
Lock Up Agreements, shares issuable pursuant to such plans will not be eligible
for resale into the public market until 180 days following the date of this
Prospectus (or such earlier date on which UBS Securities LLC may elect to
release the Lock Up Agreements). See "Management -- Employee Benefit Plans."
Holders of an aggregate of approximately 4,466,666 shares of Common Stock
have the right to require the Company to register their shares of Common Stock
under certain circumstances.
Prior to this Offering, there has not been any public market for the Common
Stock. No prediction can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Sales of substantial additional amounts of Common
Stock in the public market, or the perception that such sales may occur, could
materially adversely affect the prevailing market price of the Common Stock.
54
<PAGE> 56
UNDERWRITING
Subject to the terms and subject to conditions contained in an Underwriting
Agreement dated the date hereof, the Underwriters named below (the
"Underwriters"), for whom UBS Securities LLC and Cowen & Company are serving as
Representatives (the "Representatives"), have agreed to purchase, from the
Company the following respective number of shares of Common Stock.
<TABLE>
<CAPTION>
TOTAL
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
UBS Securities LLC..........................................
Cowen & Company.............................................
---------
Total............................................. 2,300,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by counsel,
and to certain other conditions. The Underwriters are obligated to take and pay
for all of the shares of Common Stock offered hereby (other than those covered
by the over-allotment option described below) if any are taken.
The Underwriters propose to offer part of the shares of Common Stock
offered hereby directly to the public at the public offering price set forth on
the cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ per share under the public offering price. Any
Underwriter may allow, and such dealers may reallow, a concession not in excess
of $ per share to other Underwriters or to certain other dealers.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 345,000 additional
shares of Common Stock at the public offering price set forth on the cover page
hereof, less underwriting discounts and commissions. The Underwriters may
exercise such option to purchase solely for the purpose of covering
over-allotments, if any, incurred in the sale of the shares of Common Stock
offered hereby. To the extent such option is exercised, each Underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional shares as the number set forth next to such
Underwriter's name in the preceding table bears to the total number of shares of
Common Stock offered hereby.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act of
1933, as amended.
All officers, directors, stockholders and option holders of the Company
have agreed not to offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock, or enter into any swap or similar
agreement that transfers, in whole or in part, the economic risk of ownership of
the Common Stock, for a period of 180 days after the date of this Prospectus,
without the prior written consent of UBS Securities LLC, subject to certain
limited exceptions. See "Shares Eligible for Future Sale."
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the Representatives are permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
consist of bids or
55
<PAGE> 57
purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock. If the Underwriters create a short position in the Common Stock in
connection with the offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Representatives may
reduce that short position by purchasing Common Stock in the open market. The
Representative may also elect to reduce any short position by exercising all or
part of the over-allotment option described above. The Representatives may also
impose a penalty bid on certain Underwriters and selling group members. This
means that if the Representatives purchase shares of Common Stock in the open
market to reduce the Underwriters' short position or to stabilize the price of
the Common Stock, they may reclaim the amount of the selling concession from the
Underwriters and selling group members who sold those shares as part of the
offering. In general, purchases of a security for the purpose of stabilization
or to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of any security. Neither the Company nor any of the
Underwriters makes any representation or predictions as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Common Stock. In addition, neither the Company nor any of the
Underwriters makes any representation that the Representatives will engage in
such transactions or that such transactions, once commenced, will not be
discounted without notice.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Certain legal matters in connection with the offering will be
passed upon for the Underwriters by Cooley Godward LLP, Boulder, Colorado.
EXPERTS
The financial statements of New Era of Networks, Inc. as of December 31,
1995 and 1996 and for each of the three years in the period ended December 31,
1996 included in this prospectus and elsewhere in the registration statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
ADDITIONAL INFORMATION
The Company intends to furnish to its stockholders annual reports
containing audited financial statements with an opinion thereon expressed by an
independent certified public accounting firm, and quarterly reports containing
unaudited financial information for the first three quarters of each fiscal
year.
The Company has filed with the Securities and Exchange Commission a
Registration Statement (including any amendments thereto) on Form S-1 under the
Securities Act with respect to the Common Stock offered hereby. This Prospectus,
which constitutes a part of the Registration Statement, omits certain of the
information contained in the Registration Statement and the exhibits and
schedules thereto on file with the Commission pursuant to the Securities Act and
the rules and regulations of the Commission thereunder. The Registration
Statement, including exhibits and schedules thereto, may be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W. Washington, D.C. 20549 and the regional
offices of the Commission located at Seven World Trade Center, 13th Floor, New
York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago Illinois 60661. Copies of all or any part thereof may be
obtained from the Commission upon the payment of certain fees prescribed by the
Commission. Such reports and other information may also be inspected without
charge at a Web site maintained by the Commission. The address of this site is
http://www.sec.gov.
56
<PAGE> 58
NEW ERA OF NETWORKS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 59
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To New Era of Networks, Inc.:
We have audited the accompanying consolidated balance sheets of NEW ERA OF
NETWORKS, INC. (a Delaware corporation) as of December 31, 1995 and 1996, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
New Era of Networks, Inc., as of December 31, 1995 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
January 17, 1997.
F-2
<PAGE> 60
NEW ERA OF NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 1,135,027 $ 3,387,466 $ 1,640,766
Short-term investments.................................... 102,532 -- --
Accounts receivable, net of an allowance for uncollectible
accounts of $30,000, $150,000 and $200,000,
respectively............................................ 590,332 2,229,417 3,656,536
Prepaid expenses and other................................ 29,465 83,984 150,531
----------- ----------- -----------
Total current assets............................... 1,857,356 5,700,867 5,447,833
----------- ----------- -----------
Property and Equipment:
Computer equipment and software........................... 337,993 1,132,049 1,319,708
Furniture, fixtures and equipment......................... 90,568 363,720 368,177
Leasehold improvements.................................... 3,151 33,050 43,563
----------- ----------- -----------
431,712 1,528,819 1,731,448
Less -- accumulated depreciation.......................... (98,445) (401,364) (521,507)
----------- ----------- -----------
Property and equipment, net............................... 333,267 1,127,455 1,209,941
----------- ----------- -----------
Other Assets................................................ 18,590 244,416 715,459
----------- ----------- -----------
Total assets....................................... $ 2,209,213 $ 7,072,738 $ 7,373,233
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 159,770 $ 469,640 $ 936,912
Accrued liabilities....................................... 116,814 1,369,634 1,797,394
Notes payable to banks (Note 3)........................... -- 1,100,553 1,154,055
Deferred revenue.......................................... 23,500 175,300 265,300
----------- ----------- -----------
Total current liabilities.......................... 300,084 3,115,127 4,153,661
Notes payable to banks (Note 3)............................. -- 442,277 386,840
Note payable to stockholder (Note 3)........................ 318,158 -- --
----------- ----------- -----------
Total liabilities.................................. 618,242 3,557,404 4,540,501
----------- ----------- -----------
Commitments and Contingencies (Note 7)
Stockholders' Equity (Note 5):
Preferred stock --
Series A, $.01 par value, convertible preferred stock,
9,169,028 shares authorized, issued and outstanding,
entitled to a preference in liquidation of
$2,000,000............................................ 2,000,000 2,000,000 2,000,000
Series B, $.01 par value, convertible preferred stock,
6,183,339 shares authorized, issued and outstanding,
entitled to a preference in liquidation of
$1,875,000............................................ 1,875,000 1,875,000 1,875,000
Series C, $.01 par value, convertible preferred stock,
4,664,596 shares authorized, issued and outstanding,
entitled to a preference in liquidation of
$7,510,000............................................ -- 7,510,000 7,510,000
----------- ----------- -----------
Total preferred stock.............................. 3,875,000 11,385,000 11,385,000
Common stock, $.0001 par value, 45,000,000 shares
authorized, 1,336,774, 1,359,091 and 1,392,247 shares
issued and outstanding, respectively.................... 133 136 139
Additional paid-in capital................................ 18,409 141,543 243,338
Accumulated deficit....................................... (2,302,571) (8,011,345) (8,795,745)
----------- ----------- -----------
Total stockholders' equity......................... 1,590,971 3,515,334 2,832,732
----------- ----------- -----------
Total liabilities and stockholders' equity......... $ 2,209,213 $ 7,072,738 $ 7,373,233
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-3
<PAGE> 61
NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- -----------------------
1994 1995 1996 1996 1997
--------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues (Notes 2 and 8):
Software licenses............. $ -- $ -- $ 3,382,464 $ 111,000 $2,447,410
Services and maintenance...... 149,400 1,270,600 3,762,223 944,828 1,226,438
--------- ----------- ----------- ---------- ----------
Total revenues........ 149,400 1,270,600 7,144,687 1,055,828 3,673,848
--------- ----------- ----------- ---------- ----------
Cost of revenues:
Cost of software licenses
(Note 7)................... -- -- 1,021,849 33,300 249,806
Cost of services and
maintenance................ 84,982 750,718 2,306,370 676,733 800,157
--------- ----------- ----------- ---------- ----------
Total cost of
revenues............ 84,982 750,718 3,328,219 710,033 1,049,963
--------- ----------- ----------- ---------- ----------
Gross profit.................... 64,418 519,882 3,816,468 345,795 2,623,885
Operating expenses:
Sales and marketing........... 178,505 548,912 4,424,554 319,691 1,690,082
Research and development...... 422,678 1,115,742 3,658,493 608,227 1,222,464
General and administrative.... 153,127 345,389 1,466,594 174,621 494,636
--------- ----------- ----------- ---------- ----------
Total operating
expenses............ 754,310 2,010,043 9,549,641 1,102,539 3,407,182
--------- ----------- ----------- ---------- ----------
Loss from operations............ (689,892) (1,490,161) (5,733,173) (756,744) (783,297)
Other income (expense), net..... (29,302) (12,549) 60,855 1,627 (1,103)
--------- ----------- ----------- ---------- ----------
Loss before provision for
income taxes.................. (719,194) (1,502,710) (5,672,318) (755,117) (784,400)
Provision for income taxes...... -- -- -- -- --
--------- ----------- ----------- ---------- ----------
Net loss........................ $(719,194) $(1,502,710) $(5,672,318) $ (755,117) $ (784,400)
========= =========== =========== ========== ==========
Pro forma net loss per common
share......................... $ (0.98) $ (0.14) $ (0.13)
=========== ========== ==========
Pro forma weighted average
shares of Common Stock
outstanding (Note 2).......... 5,789,382 5,388,815 6,094,414
=========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-4
<PAGE> 62
NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
SERIES A, SERIES B AND
SERIES C CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------ ------------------ PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ----------- --------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1993 (inception)...... -- $ -- -- $ -- $ -- $ -- $ --
Common stock issued upon formation..... -- -- 2,222,222 222 778 -- 1,000
---------- ----------- --------- ----- -------- ----------- -----------
Balances, December 31, 1993.............. -- -- 2,222,222 222 778 -- 1,000
Net loss............................... -- -- -- -- -- (719,194) (719,194)
---------- ----------- --------- ----- -------- ----------- -----------
Balances, December 31, 1994.............. -- -- 2,222,222 222 778 (719,194) (718,194)
Issuance of common stock to an employee
in exchange for services............. -- -- 133,333 13 17,987 -- 18,000
Issuance of Series A convertible
preferred stock ($0.218 per share) in
May for cash of $1,000,000,
cancellation of liabilities of
$1,000,000 and the surrender of
1,018,781 shares of common stock, net
of issuance costs of $41,952......... 9,169,028 2,000,000 (1,018,781) (102) (356) (41,494) 1,958,048
Issuance of Series B convertible
preferred stock ($0.303 per share) in
September for cash of $1,875,000, net
of issuance costs of $39,173......... 6,183,339 1,875,000 -- -- -- (39,173) 1,835,827
Net loss............................... -- -- -- -- -- (1,502,710) (1,502,710)
---------- ----------- --------- ----- -------- ----------- -----------
Balances, December 31, 1995.............. 15,352,367 3,875,000 1,336,774 133 18,409 (2,302,571) 1,590,971
Issuance of Series C convertible
preferred stock ($1.61 per share) in
June for cash of $7,510,000, net of
issuance cost of $36,456............. 4,664,596 7,510,000 -- -- -- (36,456) 7,473,544
Issuance of common stock to an employee
in exchange for services............. -- -- 17,777 2 39,998 -- 40,000
Issuance of common stock upon exercise
of stock options..................... -- -- 4,540 1 10,219 -- 10,220
Issuance of common stock options and
warrants in exchange for services.... -- -- -- -- 72,917 -- 72,917
Net loss............................... -- -- -- -- -- (5,672,318) (5,672,318)
---------- ----------- --------- ----- -------- ----------- -----------
Balances, December 31, 1996.............. 20,016,963 11,385,000 1,359,091 136 141,543 (8,011,345) 3,515,334
---------- ----------- --------- ----- -------- ----------- -----------
Issuance of common stock upon exercise
of stock options..................... -- -- 33,156 3 101,795 -- 101,798
Net loss............................... -- -- -- -- -- (784,400) (784,400)
---------- ----------- --------- ----- -------- ----------- -----------
Balances, March 31, 1997 (unaudited)..... 20,016,963 $11,385,000 1,392,297 $ 139 $243,338 $8,795,745 $ 2,832,732
========== =========== ========= ===== ======== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
F-5
<PAGE> 63
NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- -----------------------
1994 1995 1996 1996 1997
--------- ----------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................... $(719,194) $(1,502,710) $(5,672,318) $(755,117) $ (784,400)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization........................ 19,377 80,344 324,182 40,784 121,893
Issuance of common stock and common stock options for
services........................................... -- 4,500 126,417 47,000 --
Loss on sale of property and equipment............... -- -- 16,943 -- --
Changes in assets and liabilities --
Accounts receivable................................ (43,291) (547,041) (1,639,085) (627,115) (1,427,119)
Prepaid expenses and other......................... (50,202) 15,647 (303,759) (79,725) (30,411)
Accounts payable................................... 61,811 97,959 309,870 329,216 365,272
Accrued liabilities................................ 209,468 206,530 1,252,820 58,602 127,760
Deferred revenue................................... -- 23,500 151,800 1,650 90,000
--------- ----------- ----------- --------- -----------
Net cash used in operating activities............ (522,031) (1,621,271) (5,433,130) (984,705) (1,537,005)
--------- ----------- ----------- --------- -----------
Cash flows from investing activities:
Purchase of short-term investments..................... -- (102,532) -- -- --
Proceeds from sale of short-term investments........... -- -- 102,532 102,532 --
Proceeds from sale of property and equipment........... -- -- 5,654 -- --
Purchases of property and equipment.................... (131,576) (301,412) (1,131,053) (258,959) (202,629)
--------- ----------- ----------- --------- -----------
Net cash used in investing activities............ (131,576) (403,944) (1,022,867) (156,427) (202,629)
--------- ----------- ----------- --------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock................. 1,000 -- 10,220 -- 101,798
Proceeds from issuance of preferred stock.............. -- 2,875,000 7,510,000 -- --
Preferred stock issuance costs......................... -- (81,125) (36,456) -- --
Proceeds from note payable to stockholder.............. 791,413 250,200 104,709 104,709 --
Payments on note payable to stockholder................ (11,760) (10,879) (422,867) -- --
Proceeds from notes payable to banks................... -- 415,000 2,545,116 50,000 --
Principal payments on notes payable to banks........... -- (415,000) (1,002,286) -- (1,935)
Payment of deferred offering costs..................... -- -- -- -- (106,929)
--------- ----------- ----------- --------- -----------
Net cash provided by financing activities........ 780,653 3,033,196 8,708,436 154,709 (7,066)
--------- ----------- ----------- --------- -----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-6
<PAGE> 64
NEW ERA OF NETWORKS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- ------------------------
1994 1995 1996 1996 1997
-------- ---------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net increase (decrease) in cash
and cash equivalents........... $127,046 $1,007,981 $2,252,439 $ (986,423) $(1,746,700)
Cash and cash equivalents,
beginning of period............ -- 127,046 1,135,027 1,135,027 3,387,466
-------- ---------- ---------- ---------- -----------
Cash and cash equivalents, end of
period......................... $127,046 $1,135,027 $3,387,466 $ 148,604 $ 1,640,766
======== ========== ========== ========== ===========
Supplemental disclosures of cash
flow information:
Issuance of common stock to
employees in exchange for
services.................... $ -- $ 18,000 $ 40,000 $ 40,000 $ --
======== ========== ========== ========== ===========
Issuance of common stock
options and warrants in
exchange for services....... $ -- $ -- $ 72,917 $ 7,000 $ --
======== ========== ========== ========== ===========
Issuance of preferred stock in
exchange for common stock
and cancellation of
liabilities to
stockholder................. $ -- $1,000,458 $ -- $ -- $ --
======== ========== ========== ========== ===========
Conversion of accrued
liabilities to debt......... $ -- $ 299,184 $ -- $ -- $ --
======== ========== ========== ========== ===========
Deferred offering costs........ $ -- $ -- $ -- $ -- $ 402,000
======== ========== ========== ========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-7
<PAGE> 65
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 (UNAUDITED)
(1) DESCRIPTION OF BUSINESS
New Era of Networks, Inc. (the "Company") develops, markets and supports
application integration software and provides application integration services.
The Company's flagship software suite, NEONet, provides organizations with a
structured software platform for the integration of disparate systems and
applications across the enterprise, a process known as application integration.
NEONet facilitates the rapid and efficient deployment and ongoing maintenance of
application integration across the enterprise. NEONet supports a heterogeneous
environment of hardware, operating system, network and database platforms,
permits organizations to leverage existing legacy systems, and accommodates the
extension of the corporate information systems environment to new enterprise
applications and to new computing paradigms such as the Internet/Intranet. The
Company markets its software and related services primarily through a direct
sales organization, complemented by other indirect sales channels including
VARs, OEM's and international distributors.
Effective June 4, 1996, the Company formed a wholly owned foreign
subsidiary, New Era of Networks Limited ("Limited"), incorporated in the United
Kingdom.
Liquidity and Capital Resources
Since inception, the Company's capital requirements have been funded
primarily through stockholder loans, private placements of convertible preferred
stock and bank loans. Cumulative operating losses from inception through
December 31, 1996, have been approximately $7.9 million, including approximately
$5.7 million for the year ended December 31, 1996. The Company's existing
balances of cash and cash equivalents and borrowings available under existing
debt facilities are not expected to be sufficient to meet the Company's working
capital and capital expenditure needs during 1997 and additional funding will be
required. The Company expects to file in May 1997 an amendment to the
registration statement filed in January 1997, prepared in connection with the
Company's initial public offering of its Common Stock at an assumed price to
public of $11.00 per share and covering an estimated 2,645,000 shares (the
"Offering"). If the expected closing of the initial public offering is
significantly delayed or suspended, the Company believes that funding sufficient
to continue operations at least for the remainder of 1997 can be obtained from
other sources. However, the Company currently has no written commitments for
such additional financing and has no assurance that it will be available, or if
available, on terms acceptable to the Company.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and Limited. All significant intercompany accounts and transactions
have been eliminated in consolidation.
1994 Financial Statements
The Company was incorporated June 30, 1993, but operations did not commence
until January 1994. Accordingly, the statement of operations and statement of
cash flows for 1994 represent results from inception to December 31, 1994.
Interim Financial Statements
The consolidated financial statements of the Company as of March 31, 1997
and for the three months ended March 31, 1996 and 1997 presented herein have
been prepared by the Company without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. The financial statements
reflect all adjustments (consisting of only normal recurring accruals) which, in
the opinion of management, are
F-8
<PAGE> 66
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
necessary to present fairly the financial position, results of operations and
cash flows of the Company as of March 31, 1997 and for the three months ended
March 31, 1996 and 1997.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiary is the local
currency. Translation of the December 31, 1996 and March 31, 1997 balance sheet
amounts to U.S. dollars is based on the applicable exchange rate as of those
dates. Statement of operations and statement of cash flows amounts are
translated at the average exchange rates for the period. The cumulative currency
translation adjustment at December 31, 1996 and March 31, 1997 was
insignificant. In future periods, the cumulative translation adjustment will be
presented as a separate component of stockholders' equity, if significant.
Transactions denominated in currencies other than the local currency are
recorded based on exchange rates at the time such transactions arise. Subsequent
changes in exchange rates result in transaction gains and losses which are
reflected in income as unrealized (based on period end translation) or realized
(upon settlement of the transactions). Unrealized translation gains and losses
applicable to long-term intercompany investments by the Company in its foreign
subsidiary are included in the cumulative currency translation adjustments, and
unrealized translation gains or losses applicable to short-term intercompany
receivable from or payable to the Company and its foreign subsidiary are
included in income.
Revenue Recognition
The Company generates revenues from both professional service arrangements
and software license arrangements. Revenue from professional service
arrangements is recognized on either a time and materials or
progress-to-completion basis as the services are performed and amounts due from
customers are deemed collectible and contractually nonrefundable. The Company
recognizes license fee revenue when the licensed software has been delivered,
customer acceptance has occurred, all significant Company obligations have been
satisfied, payment is due within twelve months and the fee is fixed and
determinable and deemed collectible. Maintenance and support revenues related to
software licenses are recognized ratably over the term of each maintenance
arrangement.
Amounts collected or billed prior to satisfying the above revenue
recognition criteria are reflected as deferred revenue in the accompanying
balance sheets. As of December 31, 1995 and 1996, and March 31, 1997 deferred
revenue was $23,500, $175,300 and $265,300 (unaudited), respectively.
Cost of Services and Maintenance
Cost of services related to professional service arrangements and
maintenance include the direct labor costs incurred plus a related overhead
allocation.
Research and Development
Research and development costs are expensed as incurred and include
salaries, supplies and other direct costs.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents.
Property and Equipment
Depreciation of property and equipment is computed on a straight-line basis
over the following estimated useful lives:
<TABLE>
<S> <C>
Computer equipment and software............................. 3 years
Furniture, fixtures and equipment........................... 5-7 years
Leasehold improvements...................................... 2-4 years
</TABLE>
F-9
<PAGE> 67
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maintenance and repairs are expensed as incurred, and improvements are
capitalized.
Deferred Offering Costs (unaudited)
As of March 31, 1997, the Company has deferred costs of $508,929 related to
its initial public offering. Such costs are included in other assets in the
accompanying March 31, 1997 Balance Sheet. The Company will offset the deferred
offering costs against the proceeds upon completion of its initial public
offering, otherwise such costs will be expensed.
Software Development Costs
Under the criteria set forth in Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," capitalization of software development costs begins upon
the establishment of technological feasibility of the product and ends when the
product is ready for general release. The establishment of technological
feasibility and the ongoing assessment of the recoverability of these costs
require considerable judgment by management with respect to certain external
factors, including, but not limited to, anticipated future gross product
revenues, estimated economic life and changes in software and hardware
technology. The Company believes that costs incurred through March 31, 1997
which satisfy the above criteria were immaterial, and therefore no software
development costs have been capitalized by the Company to date.
Income Taxes
The current provision for income taxes represents actual or estimated
amounts payable or refundable on tax returns filed or to be filed for each year.
Deferred tax assets and liabilities are recorded for the estimated future tax
effects of temporary differences between the basis of assets and liabilities and
amounts reported in the combined balance sheets. Deferred tax assets are also
recognized for net operating loss and tax credit carryovers. The overall change
in deferred tax assets and liabilities for the period measures the deferred tax
expense for the period. Effects of changes in enacted tax laws on deferred tax
assets and liabilities are reflected as adjustments to tax expense in the period
of enactment. The measurement of deferred tax assets may be reduced by a
valuation allowance based on judgmental assessment of available evidence if
deemed more likely than not that some or all of the deferred tax assets will not
be realized.
Pro Forma Net Loss Per Common Share
Historical net loss per common share is not considered relevant as it would
differ materially from pro forma net loss per common share given the
contemplated changes in the capital structure of the Company. Pro forma net loss
per common share is computed using the sum of 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 and an assumed offering
price of $11.00 per share) have been included in the calculation as if they were
outstanding since January 1, 1996 regardless of whether they are antidilutive.
Fair Value of Financial Instruments
The recorded amounts for cash and cash equivalents, receivables, other
current assets, and accounts payable and accrued expenses approximate fair value
due to the short-term nature of these financial instruments.
F-10
<PAGE> 68
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk
The Company's accounts receivable as of December 31, 1996 and March 31,
1997 are concentrated with certain customers in the financial services industry.
During the years ended December 31, 1995 and 1996 and during the three months
ended March 31, 1996 and 1997, the Company recognized approximately 69%, 81%,
92% (unaudited) and 80% (unaudited), respectively, of its revenue from financial
services industry clients (see Note 8).
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily accounts receivable and cash
equivalents. The Company performs ongoing credit evaluations of its customers'
financial condition and generally requires no collateral from its customers. The
Company has a cash investment policy which restricts investments to ensure
preservation of principal and maintenance of liquidity.
Use of Estimates in the Preparation of Financial Statements
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.
(3) NOTES PAYABLE
Note Payable to Stockholder
From January 1994 to May 1995, the Company's operations were funded by
revolving credit borrowings from its majority stockholder. During this period,
the note payable allowed for maximum borrowing of $1,000,000 at a 9% interest
rate per annum. In May 1995, the Company completed its first preferred stock
financing which included the issuance of Series A preferred stock to the
Company's principal stockholder in satisfaction of $1,000,000 of borrowings
outstanding at that time (see Note 5). The note agreement was then amended to
provide for maximum available borrowings of $500,000 from the stockholder. All
principal and interest is due on or before December 31, 1997. The amount of
borrowings outstanding at December 31, 1995, December 31, 1996 and March 31,
1997 were $318,158, $0 and $0 (unaudited), respectively.
Notes Payable to Banks
From inception to September 1995, the Company has had two revolving bank
credit agreements. The first agreement commenced in November 1994 and matured in
November 1995. Borrowings under this agreement had a maximum of $100,000,
accrued interest at the bank's base floating rate and were unsecured. The second
agreement commenced in June 1995 and matured in September 1995. This agreement
had maximum borrowings of $50,000, accrued interest at the bank's floating rate
and was secured by the Company's certificate of deposit maintained at the bank.
On March 15, 1996, the Company signed a promissory note payable to a bank.
The note bears interest at a fixed rate of 8.75%, matures on March 15, 1999 and
is payable in monthly installments. As of December 31, 1996 and March 31, 1997,
$59,810 and $57,875 (unaudited), respectively, was outstanding under this note
payable of which $24,005 and $27,663 (unaudited), respectively, was a current
liability. The note is secured by certain equipment owned by the Company.
In April 1996, the Company entered into a loan and security agreement with
a bank. The agreement, as amended and restated in September 1996, consists of
two separate borrowing facilities: (i) a revolving facility and (ii) an
equipment facility. Borrowings on the revolving facility are restricted to the
lesser of an amount
F-11
<PAGE> 69
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
based on certain asset levels (approximately $1,125,000 and $2,393,000
(unaudited) as of December 31, 1996 and March 31, 1997, respectively) or the
committed borrowing limit of $2,000,000. The revolving facility bears interest
at the bank's prime borrowing rate plus 1/2% (8.75% at December 31, 1996 and 9%
at March 31, 1997) and matures on September 5, 1997. In addition to the
revolving facility, the Company may borrow up to $1,000,000 under the equipment
facility for the purchase or refinancing of qualified equipment. Any borrowings
on the equipment facility must be made by June 6, 1997. The equipment facility
bears interest at the bank's prime borrowing rate plus 1% (9.25% at December 31,
1996 and 9.5% at March 31, 1997) and matures on June 5, 2000. Amounts
outstanding under the equipment facility at June 6, 1997 are payable in equal
monthly installments beginning July 5, 1997 through the maturity date. The debt
under both facilities is secured by all assets of the Company with the exception
of certain intangibles. The agreement requires that the Company maintain
compliance with certain covenants related to tangible net worth, debt service
coverage and current ratios. As of December 31, 1996 and March 31, 1997
(unaudited) there were borrowings of $1,006,438 outstanding under the revolving
facility and $476,582 outstanding under the equipment facility.
Aggregate Maturities for notes payable outstanding as of December 31, 1996
are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDING
DECEMBER 31, AMOUNT
- ------------ ----------
<S> <C> <C>
1997.................................................................. $1,100,553
1998.................................................................. 176,589
1999.................................................................. 176,314
2000.................................................................. 89,374
----------
$1,542,830
==========
</TABLE>
In connection with the loan and security agreement discussed above, the
Company issued to the bank warrants to purchase 31,056 shares of the Company's
Series C Preferred Stock at an exercise price of $1.61 per share (convertible on
a nine-for-two basis into common stock). The warrants are exercisable through
April 11, 2001.
(4) INCOME TAXES
The Company was an S corporation for income tax purposes from inception
through May 1995, and its taxable income or loss and tax credits for such period
were included in the personal tax return of its stockholder. Items of taxable
income and expense for subsequent periods are being reported in the corporate
income tax returns of the Company. On a pro forma basis for the periods the
Company was an S corporation, the Company had no income taxes payable due to net
losses incurred. At the date of termination of subchapter S status, the Company
provided an allowance for the full amount of its net deferred tax assets.
Therefore, the change in tax status had no effect on the financial statements of
the Company at that date.
F-12
<PAGE> 70
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the Company's deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
--------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts.................................. $ 11,400 $ 57,800
Nonstatutory stock options............................... -- 27,700
Organization costs....................................... 4,500 1,800
Accrued interest......................................... 7,200 --
Accrued compensation..................................... 115,000 --
Trademark costs.......................................... -- 11,100
Accrued vacation......................................... -- 31,600
Capital loss carryforward................................ -- 4,700
Tax credits carryforward................................. -- 148,600
Net operating loss carryforward.......................... 353,000 2,458,000
--------- -----------
Total deferred tax assets........................ 491,100 2,741,300
--------- -----------
Deferred tax liabilities:
Deferred compensation.................................... (5,200) --
Depreciation............................................. (8,000) (9,400)
--------- -----------
Total deferred tax liabilities................... (13,200) (9,400)
--------- -----------
Total net deferred tax assets.................... 477,900 2,731,900
--------- -----------
Valuation allowance...................................... (477,900) (2,731,900)
--------- -----------
Net deferred taxes....................................... $ -- $ --
========= ===========
</TABLE>
The criteria for realization of net deferred tax assets are not currently
satisfied because of the losses incurred by the Company from inception. Further,
the Internal Revenue Code contains provisions which may limit the net operating
loss carryforwards available for use in any given year upon the occurrence of
certain events, including significant changes in ownership. Therefore, a
valuation allowance for the entire net deferred tax asset has been established.
As of December 31, 1996, the Company had net operating loss carryforwards
available totaling approximately $6,384,000. These carryforwards expire
beginning in 2010. The Company also has research and development tax credit
carryforwards of approximately $148,600 expiring beginning in 2010.
The income tax provision (benefit) calculated using the federal statutory
rate is different than the income tax provision (benefit) for financial
reporting purposes as follows:
<TABLE>
<CAPTION>
1995 1996
--------- -----------
<S> <C> <C>
Income tax provision (benefit) at the federal statutory
rate..................................................... $(510,900) $(1,928,600)
Tax effect of loss for the period from January 1, 1995
through May 1995 reported by the S Corporation........... 186,100 --
Net deferred tax assets recognized upon termination of S
Corporation status....................................... (117,700) --
Deferred state income tax assets, net of federal tax
effect................................................... (42,100) (246,400)
Nondeductible expenses..................................... 6,700 69,600
Increase in tax credit carryforwards....................... -- (148,600)
Change in valuation allowance.............................. 477,900 2,254,000
--------- -----------
Net provision (benefit) for income taxes................... $ -- $ --
========= ===========
</TABLE>
F-13
<PAGE> 71
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) STOCKHOLDERS' EQUITY
Reverse Stock Split and Change in Authorized Shares
On May 16, the Company's Board of Directors approved the amendment and
restatement of the Company's certificate of incorporation to effect (i) a
two-for-nine reverse split of the Company's common stock, (ii) an increase in
the number of authorized shares of common stock to 45,000,000, (iii) the
authorization of 2,000,000 shares of preferred stock undesignated as to series,
and (iv) the establishment of a classified board of directors, effective upon
the Company's initial public offering, pursuant to which the Board of Directors
shall be divided into three classes having initial terms of one, two and three
years, respectively, and subsequent terms of three years. The accompanying
consolidated financial statements have been retroactively adjusted with respect
to common stock to reflect the reverse stock split. Following approval of the
stockholders of certain amendments to the Company's certificate of
incorporation, the Series A, Series B, and Series C convertible preferred stock
described below will convert into shares of common stock on the basis of nine
preferred shares for two common shares upon the closing of the Offering.
Stock Options
The Company's 1995 Stock Option Plan (the "1995 Plan"), as amended,
provides for the grant of options to purchase up to an aggregate of 2,333,333
shares of common stock to employees and nonemployees; 133,333 shares are
available for grants to nonemployees and consultants. Incentive stock options
granted to employees have an exercise price equal to the fair market value of
the underlying shares at the date of grant. The exercise price of nonstatutory
options granted to employees and consultants is determined by the Board of
Directors. The term of all options granted may not exceed 10 years; options
granted through 1996 have a term of five years. Options vest as determined by
the Board, but generally vesting occurs as to one-sixth of the shares after one
year, an additional one-third after two years and the remainder after three
years from date of grant. If employment is terminated for any reason, vested
options must be exercised within 30 days of termination or they are
automatically cancelled.
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
SFAS 123, "Accounting for Stock-Based Compensation," defines a fair value
based method of accounting for employee stock options or similar equity
instruments. However, SFAS 123 allows the continued measurement of compensation
cost for such plans using the intrinsic value based method prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), provided
that pro forma disclosures are made of net income or loss and net income or loss
per share, assuming the fair value based method of SFAS 123 had been applied.
The Company has elected to account for its stock-based compensation plans under
APB 25; accordingly, for purposes of the pro forma disclosures presented below,
the Company has computed the fair values of all options granted during 1995 and
1996, using the Black-Scholes pricing model and the following weighted average
assumptions:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Risk-free interest rate............................. 6.3% 6.0%
Expected lives...................................... 3.0 years 3.0 years
Expected volatility................................. 84.0% 84.0%
Expected dividend yield............................. 0% 0%
</TABLE>
To estimate expected lives of options for this valuation, it was assumed
options will be exercised upon becoming fully vested at the end of three years.
All options are initially assumed to vest. Cumulative compensation cost
recognized in pro forma net income or loss with respect to options that are
forfeited prior to vesting is adjusted as a reduction of pro forma compensation
expense in the period of forfeiture. Because the Company's common stock is not
yet publicly traded, the expected market volatility was based on an average of
F-14
<PAGE> 72
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
five other companies deemed to have characteristics similar to the Company for
periods subsequent to their IPO's. Actual volatility of the Company's common
stock may vary. Fair value computations are highly sensitive to the volatility
factor assumed; the greater the volatility, the higher the computed fair value
of options granted.
The total fair value of options granted was computed to be approximately
$125,500 and $3,193,000 for the years ended December 31, 1995 and 1996,
respectively. These amounts are amortized ratably over the vesting periods of
the options. Pro forma stock-based compensation, net of the effect of
forfeitures, was $10,986 and $446,528 for 1995 and 1996, respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net loss and pro forma net loss per
common share would have been reported as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996
----------- -----------
<S> <C> <C>
Net Loss --
As reported................................... $(1,502,710) $(5,672,318)
Pro forma..................................... $(1,513,696) $(6,118,846)
Pro Forma Net Loss Per Common Share --
As reported................................... $ (0.98)
Pro forma..................................... $ (1.10)
</TABLE>
Weighted average shares used to calculate pro forma net loss per share were
determined as described in Note 2, except in applying the treasury stock method
to outstanding options, net proceeds assumed received upon exercise were
increased by the amount of compensation cost attributable to future service
periods and not yet recognized as pro forma expense.
A summary of the 1995 Plan for the years ended December 31, 1995 and 1996
is as follows:
EMPLOYEE OPTIONS
<TABLE>
<CAPTION>
1995 1996
------------------ --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year........................ -- $ -- 248,229 $2.05
Granted................................................. 261,295 2.05 1,238,038 5.34
Canceled................................................ (13,066) 2.25 (107,953) 3.11
Exercised............................................... -- -- (1,208) 2.25
------- ---------
Outstanding at end of year.............................. 248,229 2.05 1,377,106 4.92
======= =========
Exercisable at end of year.............................. 1,067 73,126
======= =========
</TABLE>
The weighted average exercise prices and weighted average fair values of
options granted during 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
---------------------------- ----------------------------
NUMBER OF FAIR EXERCISE NUMBER OF FAIR EXERCISE
OPTIONS VALUE PRICE OPTIONS VALUE PRICE
--------- ----- -------- --------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Exercise price equal to market price........ 54,963 $0.78 $1.35 466,605 $4.17 $7.25
Exercise price greater than market price.... 206,333 0.44 2.25 771,433 1.52 4.17
------- ---------
261,296 1,238,038
======= =========
</TABLE>
F-15
<PAGE> 73
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about employee stock options
outstanding and exercisable at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -------------------------
NUMBER OF WEIGHTED
OPTIONS AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES 1996 LIFE IN YEARS PRICE 1996 PRICE
- -------- -------------- ------------- -------- -------------- --------
<C> <C> <C> <C> <C> <C>
$1.35 54,963 3.72 $1.35 18,321 $1.35
2.25 653,917 4.05 2.25 33,442 2.25
7.25 448,005 4.63 7.25 17,363 7.25
9.00 220,221 4.98 9.00 4,000 9.00
--------- ------
1,337,106 73,126
========= ======
</TABLE>
During the three months ended March 31, 1997, employees exercised 31,823
stock options resulting in $86,798 of proceeds to the Company. As of March 31,
1997, the Company had 1,340,800 stock options outstanding of which 132,840 are
exercisable.
NONEMPLOYEE OPTIONS
The Company has granted stock options to nonemployees for 17,579 shares at
a weighted average exercise price of $4.35 per share (range of $2.25 to $14.63)
and has recognized cost of $72,917 related to these options based on the value
of the services received. During 1996, 3,333 options to purchase Common Stock
were exercised at $2.25 per share. At December 31, 1996, 14,246 options remained
outstanding and exercisable at a weighted average exercise price of $6.92 per
share. The accounting for these options is the same under APB 25 and SFAS 123.
During the three months ended March 31, 1997, nonemployees exercised 1,333
stock options resulting in proceeds to the Company of $15,000. As of March 31,
1997, the Company had 12,912 nonemployee stock options outstanding and
exercisable.
Subsequent Events
On January 3, 1997, the Company's Board of Directors adopted, effective as
of the Company's initial underwritten public offering, the 1997 Director Option
Plan ("Director Plan") and the 1997 Employee Stock Purchase Plan ("Purchase
Plan"). Each of these actions require stockholder approval.
The Director Plan provides for the automatic grant to each non-employee
director, on September 1 of each year, of an option to purchase 5,000 shares of
the Company's common stock at an exercise price equal to the fair market value
of the common stock on the date of grant. In addition, each new non-employee
director joining the Board of Directors after the Company's initial public
offering will automatically be granted an option to purchase 16,666 shares of
the Company's common stock at an exercise price equal to the fair market value
at date of grant. The Board of Directors has reserved an aggregate of 100,000
shares for issuance under the Director Plan.
The Purchase Plan will permit eligible employees to purchase common stock
through payroll deductions, which may not exceed 10% of an employee's eligible
compensation (or, for the initial plan period, 20% of eligible compensation) at
a price equal to 85% of the lower of the fair market value of the common stock
on the first or last day of the plan period. The Purchase Plan will terminate in
ten years. The Board of Directors has reserved an aggregate of 216,666 shares of
common stock for issuance under the Purchase Plan.
F-16
<PAGE> 74
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Preferred Stock
In May 1995, the Company issued 9,169,028 shares of $.01 par value Series A
Convertible Preferred Stock ("Series A"). One of the purchasers, the Company's
previous sole stockholder and the holder of the Company's $1,000,000 note
payable, paid $500,000 cash, canceled the $1,000,000 outstanding as of May 9,
1995 under the note payable (Note 3), and surrendered 1,018,781 shares of
Company common stock in exchange for 6,876,771 shares of Series A. The remaining
2,292,257 shares of Series A were purchased for $500,000 cash by an unrelated
entity.
In September 1995, the Company issued 6,183,339 shares of $.01 par value
Series B Convertible Preferred Stock ("Series B") for $1,875,000 cash in a
private placement transaction.
In June 1996, the Company issued 4,664,596 shares of $.01 par value Series
C Convertible Preferred Stock ("Series C") for $7,510,000 cash in another
private placement transaction.
The holders of the Series A, Series B and Series C are entitled to a number
of votes per share equal to the number of shares into which each share of
preferred stock is then convertible.
The holders of the Series A, Series B and Series C are entitled to receive
dividends at the same rate dividends are paid to holders of common stock.
Dividends to be paid will be determined based on the number of common shares
into which each preferred share is convertible at the time the dividend is
declared.
Under the terms of the Series A, Series B and Series C agreements, each
stockholder, in certain circumstances, has the preemptive right to retain the
same percentage ownership in the Company upon the sale of additional stock.
Holders of Series A, in the event of liquidation, have preference over the
distributions of funds made to holders of common stock. The liquidation
preference will be determined as the greater of (1) $0.218 per share plus any
dividends declared but unpaid, or (2) an amount per share as would have been
payable had each Series A share been converted to common stock (see above)
immediately prior to such liquidation.
Holders of Series B and Series C, in the event of liquidation, or
consolidation or merger involving an exchange of stock whereon the current
stockholders retain less than 50% of the surviving entity's voting shares, have
preference over distributions of funds made to holders of Series A and common
stock. The liquidation preference will be determined as the greater of (1) $.303
per share in the case of Series B and $1.61 in the case of Series C plus any
dividends declared but unpaid or (2) an amount per share as would have been
payable had each share been converted to common stock (see above) immediately
prior to liquidation.
(6) RELATED PARTY TRANSACTIONS
A company related by common ownership provides air transportation service
for the Company. Total expenses incurred during the years ended December 31,
1994, 1995 and 1996 and during the three months ended March 31, 1996 and 1997
for services rendered by this related party was $39,020, $84,506, $0, $0
(unaudited) and $0 (unaudited), respectively.
Accrued liabilities at December 31, 1994 included $180,000 (representing
his entire annual salary) payable to the Company's president/majority
stockholder. This amount, along with an additional $60,000 for 1995 activity and
accrued interest of $59,184, was converted to preferred stock in May 1995.
Note Receivable from Employee
On August 1, 1996, the Company entered into an employment agreement whereby
the Company issued a revolving line of credit to an employee. Under this
agreement, the employee may borrow up to $170,000, interest accrues at the prime
interest rate, and borrowings are secured by the employee's stock options in the
Company. The agreement matures on January 1, 2008, and interest is payable on a
quarterly basis. Amounts
F-17
<PAGE> 75
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outstanding under this agreement at January 1, 1998 will be payable in equal
monthly installments through the maturity date. The amount outstanding under
this agreement was $50,000 at December 31, 1996 and $75,000 at March 31, 1997.
(7) COMMITMENTS AND CONTINGENCIES
Cost of Software Licenses
Cost of software licenses represents royalties payable to a customer under
the terms of a software development agreement. The customer is also a holder of
the Company's Series C preferred stock. The agreement grants the commercial
rights to the developed software to the Company. The Company is to pay the
customer a royalty of 30% of all license, maintenance, support and upgrade fees
derived from the software on a quarterly basis, subject to a cumulative maximum
of $1,900,000. In 1997, the agreement was amended to adjust the royalty
percentage to 10%. Effective January 1, 1997, the Company began accruing the
royalty at 10% and will continue at this rate until the cumulative maximum is
reached. Royalties for the year ended December 31, 1996 and the three months
ended March 31, 1996 and 1997 were approximately $1,022,000, $33,000 (unaudited)
and $250,000 (unaudited), respectively, including approximately $1,011,000 and
$1,076,000 (unaudited) reflected in accrued liabilities at December 31, 1996 and
March 31, 1997, respectively.
Operating Leases
The Company leases its administrative offices, research facilities and
certain equipment under noncancelable operating lease agreements. Rent expense
under these leases for the years ended December 31, 1994, 1995 and 1996 and the
three months ended March 31, 1996 and 1997 was $15,680, $81,680, $357,401,
$41,767 and $138,486, respectively. The following is a schedule of future
minimum lease payments for the years ending December 31:
<TABLE>
<S> <C>
1997.............................................. $ 404,614
1998.............................................. 385,734
1999.............................................. 228,585
2000.............................................. 82,411
----------
$1,101,344
==========
</TABLE>
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 the proprietary rights of New
Paradigm, an application integration software company. New Paradigm alleged that
the Company's NEONet Formatter module will infringe certain patent claims set
forth in an application filed in both the United States and Europe.
The Company does not believe that such allegations have merit and, if
pursued by New Paradigm, the Company intends to vigorously defend such claims.
The Company is also aware that a number of other organizations are currently
using 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 that the Company's use of NEON as a tradename
and/or trademark violates such respective companies' proprietary rights. As of
January 17, 1997, the Company has received no actual claims and currently does
not believe that the notices it has received will give rise to valid claims. It
is impossible for the Company to currently estimate the magnitude of the
financial impact, if any, these existing allegations might have on the Company's
business, financial condition, or results of operations.
F-18
<PAGE> 76
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) MAJOR CUSTOMERS
Various customers accounted for more than 10% of total revenue for the
following periods:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------- ----------------
CUSTOMER 1994 1995 1996 1996 1997
-------- ----- ----- ----- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................... N/A 69% 22% 67% N/A
ADP Financial Information Services........... N/A N/A 16% N/A N/A
JP Morgan & Co............................... N/A N/A 14% N/A N/A
SunGard Financial Systems.................... N/A N/A 13% N/A N/A
Ingalls Health System........................ 20% 13% N/A N/A N/A
United Western Medical Center................ 70% N/A N/A N/A N/A
BZW Services, Ltd............................ N/A N/A N/A N/A 25%
Chase Manhattan Bank......................... N/A N/A N/A N/A 13%
</TABLE>
F-19
<PAGE> 77
No person is authorized in connection with any offering made hereby to give
any information or to make any representation not contained herein and, if given
or made, such information or representation must not be relied upon as having
been authorized by the Company or the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any security
other than the Common Stock offered hereby, nor does it constitute an offer to
sell or a solicitation of an offer to buy any of the securities offered hereby
to any person in any jurisdiction in which it is unlawful to make such an offer
or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any date subsequent to the date
hereof.
---------------------------
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 6
Use of Proceeds............................ 15
Dividend Policy............................ 15
Capitalization............................. 16
Dilution................................... 17
Selected Financial Data.................... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 19
Business................................... 26
Management................................. 40
Certain Transactions....................... 48
Principal Stockholders..................... 50
Description of Capital Stock............... 52
Shares Eligible for Future Sale............ 54
Underwriting............................... 55
Legal Matters.............................. 56
Experts.................................... 56
Additional Information..................... 56
Index to Consolidated Financial
Statements............................... F-1
</TABLE>
---------------------
Until , 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
2,300,000 Shares
[NEON LOGO]
Common Stock
-----------------------------
PROSPECTUS
, 1997
-----------------------------
UBS Securities
Cowen & Company
<PAGE> 78
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of the Common Stock being registered hereby. All amounts are
estimates except the SEC registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT TO BE
PAID BY
REGISTRANT
------------
<S> <C>
SEC Registration Fee........................................ $ 10,350
NASD Filing Fee............................................. 4,295
Nasdaq National Market Application Fee...................... 50,000
Printing.................................................... 150,000
Legal Fees and Expenses..................................... 300,000
Accounting Fees and Expenses................................ 125,000
Director and Officer Liability Insurance.................... 100,000
Blue Sky Fees and Expenses.................................. 10,000
Transfer Agent and Registrar Fees........................... 5,000
Miscellaneous............................................... 95,355
--------
Total............................................. $850,000
========
</TABLE>
The Registrant intends to pay all expenses of registration, issuance and
distribution.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law Code authorizes a court
to award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Securities
Act"). Article seven of the Registrant's Certificate of Incorporation (Exhibits
3.1, 3.2 and 3.4 hereto) and Article VI of the Registrant's Bylaws (Exhibit 3.3
hereto) provide for mandatory indemnifications of its directors and officers and
permissible indemnifications of employees and offer agents to the maximum extent
permitted by the Delaware General Corporation Law. In addition, the Registrant
has entered into Indemnification Agreements (Exhibit 10.1 hereto) with its
officers and directors. Reference is also made to Section 9 of the Underwriting
Agreement contained in Exhibit 1.1 hereto, which provides for the
indemnification of officers, directors and controlling persons of the Registrant
against certain liabilities and Section 11 of the Amended and Restated Rights
Agreement (Exhibit 10.5 hereto), which provides for the cross indemnification of
certain of the Company stockholders and the Company, its officers and directors
against certain liabilities under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years prior to the effective date of this Registration
Statement, the Registrant has issued and sold the following unregistered
securities:
(1) Common Stock:
On June 30, 1993, the Company issued 10,000,000 (2,222,222 after giving
effect to the two-for-nine reverse stock split) shares of Common Stock to George
F. (Rick) Adam, Jr. at an aggregate purchase price of $1,000. On May 9, 1995, in
conjunction with the Closing of the Series A Preferred Stock financing, Mr. Adam
received 6,876,771 shares of Series A Preferred in exchange for the surrender of
4,584,514 (1,018,781 after
II-1
<PAGE> 79
giving effect to the two-for-nine reverse stock split) shares of Common Stock,
the cancellation of a $1.0 million note payable by the Company to Mr. Adam and
the payment of $500,000 cash.
On March 6, 1995 the Company issued 600,000 (133,333 after giving effect to
the two-for-nine reverse stock split basis) shares of Common Stock to Harold A.
Piskiel in exchange for an aggregate purchase price of $18,000.
(2) Series A Preferred Stock:
In May 1995, the Company issued an aggregate of 9,169,028 shares of Series
A Convertible Preferred Stock ("Series A"), $0.01 par value, to the following
individual and entity:
(i) George F. (Rick) Adam, Jr. received 6,876,771 shares of Series A in
exchange for the cancellation of a $1,000,000 note payable by the Company to Mr.
Adam, the payment of $500,000 cash to the Company and the surrender of
4,584,514, (1,018,781 after giving effect to the two-for-nine reverse stock
split) shares of Common Stock; and
(ii) the remaining 2,292,257 shares of Series A were purchased by ARCH
Venture Partners II, L.P. in exchange for the payment of $500,000 to the
Company.
(3) Series B Preferred Stock:
In September 1995, the Company issued an aggregate of 6,183,339 shares of
Series B Preferred Stock ("Series B"), $0.01 par value, to the following
entities and individual;
(i) ARCH Venture Partners II, L.P. received 1,236,668 shares of Series B
in exchange for the payment of $375,000 cash to the Company;
(ii) Venrock Associates received 3,080,714 shares of Series B in exchange
for the payment of $934,178, and Venrock Associates II, L.P. received 1,397,672
shares of Series B in exchange for the payment of $423,822 to the Company; and
(iii) Terence J. Garnett received 468,285 shares of Series B in exchange
for the payment of $142,000 to the Company.
(4) Series C Preferred Stock:
In June 1996 the Company issued an aggregate of 4,664,596 shares of Series
C Convertible Preferred Stock ("Series C"), $0.01 par value, to the following
entities and individuals:
(i) ARCH Venture Partners, II, L.P. received 745,342 shares of Series C
in exchange for the payment of $1,200,000 to the Company;
(ii) Fred Hamilton received 813,664 shares of Series C in exchange for the
payment of $1,310,000 cash to the Company;
(iii) Merrill Lynch Group, Inc. received 1,863,354 shares of Series C in
exchange for the payment of $3,000,000 to the Company;
(iv) Venrock Associates received 747,081 shares of Series C in exchange for
$1,202,800, and Venrock Associates II, L.P. received 457,888 shares of Series C
in exchange for $737,200 paid to the Company; and
(v) Terence J. Garnett received 37,267 shares of Series C in exchange for
$60,000 paid to the Company.
(5) Warrant:
In April 1996, the Company issued a warrant to purchase 31,056 shares of
Series C Preferred Stock at an exercise price of $1.61 per share.
II-2
<PAGE> 80
(6) Common Stock Issued Upon Exercise of Options:
At March 31, 1997, the Company had issued 169,654 (37,696 after giving
effect to the two-for-nine reverse stock split basis) shares of Common Stock,
$0.0001 par value, pursuant to the exercise of stock options at a weighted
average exercise price of $0.66 ($2.97 after giving effect to the two-for-nine
reverse stock split) per share in the aggregate amount of $111,994.
The sales and issuance of securities in the transactions described in
paragraphs (1) through (6) above were deemed to be exempt from registration
under the Securities Act by virtue of Section 4(2) thereof and/or Regulation D
promulgated under the Securities Act. The purchasers in each case represented
their intention to acquire the securities for investment only and not with a
view to the distribution thereof. Appropriate legends are affixed to the stock
certificates issued in such transactions. Similar legends were imposed in
connection with any subsequent sales of any such securities. All recipients
either received adequate information about the Company or had access, through
employment or other relationships, to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant, Certificate
of Ownership and Merger merging Neon Software, Inc., an
Illinois corporation with and into the Registrant, and
Certificates of Amendment to the Certificate of
Incorporation of the Registrant dated April 12, 1996 and
June 3, 1996.
3.2+ Form of Amended and Restated Certificate of Incorporation to
be filed upon the consummation of the Offering.
3.3+ Amended and Restated ByLaws of the Registrant to be
effective upon the effectiveness of the Offering.
3.4 Amended and Restated Certificate of Incorporation dated May
21, 1997
4.1+ Specimen Stock Certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation regarding legality of securities being
registered.
10.1+ Form of Indemnification Agreement between the Registrant and
its directors and executive officers.
10.2+ Registrant's 1995 Stock Option Plan (Amended and Restated as
of January 3, 1997)
10.3+ Registrant's 1997 Director Stock Option Plan.
10.4+ Registrant's 1997 Employee Stock Purchase Plan.
10.5+ Warrant to Purchase Stock issued to Silicon Valley Bank
dated April 12, 1996.
10.6+ Series A Convertible Preferred Stock Purchase Agreement
between the Registrant and the purchasers named therein
dated May 9, 1995.
10.7+ Series B Convertible Preferred Stock Purchase Agreement
between the Registrant and the purchasers named therein
dated September 20, 1995.
10.8+ Series C Convertible Preferred Stock Purchase Agreement
between the Registrant and the purchasers named therein
dated June 3, 1996.
10.9+ Registration Rights Agreement between the Registrant and
certain parties named therein dated May 9, 1995.
10.10+ Amendment No. 1 to Registration Rights Agreement between the
Registrant and certain parties named therein dated
September 20, 1995.
</TABLE>
II-3
<PAGE> 81
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.11+ Amendment No. 2 to Registration Rights Agreement between the
Registrant and certain parties named therein dated June
3, 1996.
10.12+ Lease Agreement between the Registrant and State of
California Public Employees' Retirement System for the
property at 7400 East Orchard Road, Suite 230, Englewood,
CO dated October 12, 1994 and Commencement Date Agreement
dated January 23, 1995 in connection therewith.
10.13+ Master Agreement for Professional Services between the
Registrant and Merrill Lynch, Pierce, Fenner & Smith
Incorporated dated March 1, 1995 and related agreements.
10.14* Value Added Reseller Agreement between the Registrant and
SunGard Systems International Inc. dated December 31,
1996.
11.1+ Statement regarding computation of pro forma net loss per
common share.
21.1+ Subsidiary of the Registrant.
23.1* Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
24.1+ Power of Attorney (see II-5)
27.1+ Financial Data Schedule
</TABLE>
- ------------------
+ Previously filed
* To be filed by amendment
(b) Financial Statement Schedules -- NONE
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) That for purposes of determining any liability under the
Securities Act, the information omitted from the form of this prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) That for purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 24
of this Registration Statement or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by
II-4
<PAGE> 82
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933, and will be governed by the final
adjudication of such issue.
(4) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denomination and registered in
such names as required by the Underwriters to permit prompt delivery to
each purchaser.
II-5
<PAGE> 83
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
DENVER, STATE OF COLORADO, ON MAY 21, 1997.
New Era of Networks, Inc.
By: /s/ LEONARD M. GOLDSTEIN
------------------------------------
Leonard M. Goldstein
Senior Vice President, Senior
Counsel and Secretary
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
AMENDMENT NO. 1 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES STATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GEORGE F. ADAM, JR.* Chairman of the Board, Chief May 21, 1997
- ----------------------------------------------------- Executive Officer, President and
George F. Adam, Jr. Director
/s/ STEPHEN E. WEBB* Senior Vice President and Chief May 21, 1997
- ----------------------------------------------------- Financial Officer
Stephen E. Webb
/s/ JAMES C. PARKS* Vice President of Finance and May 21, 1997
- ----------------------------------------------------- Controller (Principal Accounting
James C. Parks Officer)
/s/ HAROLD A. PISKIEL* Senior Vice President, Chief May 21, 1997
- ----------------------------------------------------- Technical Officer and Director
Harold A. Piskiel
/s/ STEVE LAZARUS* Director May 21, 1997
- -----------------------------------------------------
Steven Lazarus
/s/ MARK L. GORDON* Director May 21, 1997
- -----------------------------------------------------
Mark L. Gordon
/s/ JAMES REEP* Director May 21, 1997
- -----------------------------------------------------
James Reep
By: /s/ LEONARD M. GOLDSTEIN
-------------------------------------------------
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 84
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
------- ----------------------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant, Certificate
of Ownership and Merger merging Neon Software, Inc., an
Illinois corporation with and into the Registrant, and
Certificates of Amendment to the Certificate of
Incorporation of the Registrant dated April 12, 1996 and
June 3, 1996.
3.2+ Form of Amended and Restated Certificate of Incorporation to
be filed upon the consummation of the Offering.
3.3+ Amended and Restated ByLaws of the Registrant to be
effective upon the effectiveness of the Offering.
3.4 Amended and Restated Certificate of Incorporation dated May
21, 1997.
4.1+ Specimen Stock Certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation regarding legality of securities being
registered.
10.1+ Form of Indemnification Agreement between the Registrant and
its directors and executive officers.
10.2+ Registrant's 1995 Stock Option Plan (Amended and Restated as
of January 3, 1997).
10.3+ Registrant's 1997 Director Stock Option Plan.
10.4+ Registrant's 1997 Employee Stock Purchase Plan.
10.5+ Warrant to Purchase Stock issued to Silicon Valley Bank
dated April 12, 1996.
10.6+ Series A Convertible Preferred Stock Purchase Agreement
between the Registrant and the purchasers named therein
dated May 9, 1995.
10.7+ Series B Convertible Preferred Stock Purchase Agreement
between the Registrant and the purchasers named therein
dated September 20, 1995.
10.8+ Series C Convertible Preferred Stock Purchase Agreement
between the Registrant and the purchasers named therein
dated June 3, 1996.
10.9+ Registration Rights Agreement between the Registrant and
certain parties named therein dated May 9, 1995.
10.10+ Amendment No. 1 to Registration Rights Agreement between the
Registrant and certain parties named therein dated
September 20, 1995.
10.11+ Amendment No. 2 to Registration Rights Agreement between the
Registrant and certain parties named therein dated June
3, 1996.
10.12+ Lease Agreement between the Registrant and State of
California Public Employees' Retirement System for the
property at 7400 East Orchard Road, Suite 230, Englewood,
CO dated October 12, 1994 and Commencement Date Agreement
dated January 23, 1995 in connection therewith.
10.13+ Master Agreement for Professional Services between the
Registrant and Merrill Lynch, Pierce, Fenner & Smith
Incorporated dated March 1, 1995 and related agreements.
10.14* Value Added Reseller Agreement between the Registrant and
SunGard Systems International Inc. dated December 31,
1996.
11.1+ Statement regarding computation of pro forma net loss per
common share.
21.1+ Subsidiary of the Registrant.
23.1* Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
24.1+ Power of Attorney (see II-5).
27.1+ Financial Data Schedule.
</TABLE>
- ------------------
+ Previously filed
* To be filed by amendment
<PAGE> 1
2,300,000 Shares
NEW ERA OF NETWORKS, INC.
Common Stock
UNDERWRITING AGREEMENT
____________ __, 1997
UBS Securities LLC
Cowen & Company
As Representatives of the Several Underwriters
c/o UBS Securities LLC
299 Park Avenue
New York, NY 10171
Ladies and Gentlemen:
New Era of Networks, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell 2,300,000 shares (the "Firm Shares") of its
authorized but unissued Common Stock, $.0001 par value per share (the "Common
Stock"), to the several underwriters listed on Schedule A to this Agreement
(collectively, the "Underwriters"). The Company also proposes to grant to the
Underwriters an option to purchase up to 345,000 additional shares (the "Option
Shares") of Common Stock on the terms and for the purposes set forth in Section
3(c). The Firm Shares and the Option Shares are hereinafter collectively
referred to as the "Shares."
The Company wishes to confirm as follows its agreements with you (the
"Representatives") and the other Underwriters on whose behalf you are acting in
connection with the several purchases by the Underwriters of the Shares.
1. REGISTRATION STATEMENT. A registration statement on Form S-1 (File No.
333- 20169 including a prospectus relating to the Shares and each amendment
thereto has been prepared by the Company in conformity with the requirements of
the Securities Act of 1933, as amended (the "Act"), and the rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") thereunder, and has been filed with the
Commission. There have been delivered to you three signed copies of such
registration statement and amendments, together with three copies of each
exhibit filed therewith. Copies of such registration statement and amendments
(but without exhibits) and of the related preliminary prospectus have been
delivered to you in such reasonable quantities as you have requested for each
of the Underwriters. If such registration statement has not become effective,
a further amendment to such registration statement, including a form of final
prospectus, necessary to
1.
<PAGE> 2
permit such registration statement to become effective will be filed promptly
by the Company with the Commission. If such registration statement has become
effective, a final prospectus containing all Rule 430A information (as
hereinafter defined) will be filed by the Company with the Commission in
accordance with Rule 424(b) of the Rules and Regulations on or before the
second business day after the date hereof (or such earlier time as may be
required by the Rules and Regulations).
The term "Registration Statement" as used in this Agreement shall mean
such registration statement (including all exhibits and financial statements,
at the time such registration statement becomes or became effective and, in the
event any post-effective amendment thereto becomes effective prior to the
Closing Date (as hereinafter defined), shall also mean such registration
statement as so amended; provided, however, that such term shall include all
Rule 430A information deemed to be included in such registration statement at
the time such registration statement becomes effective as provided by Rule 430A
of the Rules and Regulations and shall also mean any registration statement
filed pursuant to Rule 462(b) of the Rules and Regulations with respect to the
Shares. The term "Preliminary Prospectus" shall mean any preliminary
prospectus referred to in the preceding paragraph and any preliminary
prospectus included in the Registration Statement at the time it becomes
effective that omits Rule 430A information. The term "Prospectus" as used in
this Agreement shall mean the prospectus relating to the Shares in the form in
which it is first filed with the Commission pursuant to Rule 424(b) of the
Rules and Regulations or, if no filing pursuant to Rule 424(b) of the Rules and
Regulations is required, shall mean the form of final prospectus included in
the Registration Statement at the time such registration statement becomes
effective. The term "Rule 430A Information" means information with respect to
the Shares and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A of the
Rules and Regulations.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants as follows:
(a) The Company has not received, and has no notice of, any order of
the Commission preventing or suspending the use of any Preliminary Prospectus,
or instituted proceedings for that purpose, and each Preliminary Prospectus, at
the time of filing thereof, conformed in all material respects to the
requirements of the Act and the Rules and Regulations. When the Registration
Statement became or becomes, as the case may be, effective (the "Effective
Date") and at all times subsequent thereto up to and at the Closing Date (as
hereinafter defined), any later date on which Option Shares are to be purchased
(the "Option Closing Date") and when any post-effective amendment to the
Registration Statement becomes effective or any amendment or supplement to the
Prospectus is filed with the Commission, (i) the Registration Statement and
Prospectus, and any amendments or supplements thereto, will contain all
statements which are required to be stated therein by, and will comply with the
requirements of, the Act and the Rules and Regulations, and (ii) neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, will include any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading. The foregoing representations and warranties
in this Section 2(a) do not apply to any statements or omissions made in
reliance on and in conformity with the information contained in Paragraph 1,
inclusive of the list of underwriters set forth
2.
<PAGE> 3
thereunder, in the section of the Prospectus entitled "Underwriting" and the
information in the last paragraph on the front cover page of the Prospectus.
The Company has not distributed any offering material in connection with the
offering or sale of the Shares other than the Registration Statement, the
Preliminary Prospectus, the Prospectus or any other materials, if any,
permitted by the Act.
(b) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with full
corporate power and authority to own, lease and operate its properties and
conduct its business as described in the Registration Statement. The Company is
duly qualified to do business as a foreign corporation in good standing in each
jurisdiction where the ownership or leasing of its properties or the conduct of
its business requires such qualification, except where the failure to so
qualify would not have a material adverse effect on the business, properties,
financial condition or results of operations of the Company and Subsidiary (as
hereinafter defined) taken as a whole (a "Material Adverse Effect"). The
Company has no subsidiaries (as defined in the Rules and Regulations) other
than NEON Limited (the "Subsidiary"). The Company owns one hundred percent
(100%) of the outstanding common stock of Subsidiary. Other than Subsidiary,
the Company does not own, directly or indirectly, any shares of stock or any
other equity or long-term debt securities of any corporation or have any equity
interest in any firm, partnership, joint venture, association or other entity.
Complete and correct copies of the certificates of incorporation and of the
bylaws of the Company and Subsidiary and all amendments thereto have been
delivered to the Representatives, and except as set forth in the exhibits to
the Registration Statement no changes therein will be made subsequent to the
date hereof and prior to the Closing Date or, if later, the Option Closing
Date. Subsidiary has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, with full corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Registration Statement. Subsidiary is duly qualified to do business as a
foreign corporation in good standing in each jurisdiction where the ownership
or leasing of the properties or the conduct of its business requires such
qualification, except where the failure to so qualify would not have a Material
Adverse Effect. All of the outstanding shares of capital stock of Subsidiary
have been duly authorized and validly issued, are fully paid and non-assessable
and (except as otherwise described in this Section 1(b)) are owned by the
Company subject to no security interest, other encumbrance or adverse claims.
No options, warrants or other rights to purchase, agreements or other
obligation to issue or other rights to convert any obligation into shares of
capital stock or ownership interests in the Subsidiary are outstanding.
(c) The Company has full power and authority (corporate and otherwise)
to enter into this Agreement and to perform the transactions contemplated
hereby. This Agreement has been duly authorized, executed and delivered by the
Company and is a valid and binding agreement on the part of the Company,
enforceable against the Company in accordance with its terms, except as rights
to indemnity and contribution hereunder may be limited by applicable laws or
equitable principles and except as enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles. The performance of this Agreement by the Company and the
consummation by the Company of the transactions herein contemplated will not
result in a breach or violation of any of the terms and provisions of, or
constitute a default under, (i) any indenture,
3.
<PAGE> 4
mortgage, deed of trust, loan agreement, bond, debenture, note agreement or
other evidence of indebtedness, or any lease, contract or other agreement or
instrument to which the Company or any Subsidiary is a party or by which its
properties are bound, or (ii) the certificate of incorporation, as amended, or
bylaws of the Company or Subsidiary or (iii) any law, order, rule, regulation,
writ, injunction or decree of any court or governmental agency or body to which
the Company or any Subsidiary is subject. The Company is not required to
obtain or make (as the case may be) any consent, approval, authorization,
order, designation or filing by or with any court or regulatory, administrative
or other governmental agency or body as a requirement for the consummation by
the Company of the transactions herein contemplated, except such as may be
required under the Act, the Securities Exchange Act of 1934, as amended (the
"Exchange Act") or under state securities or blue sky ("Blue Sky") laws or
under the rules and regulations of the National Association of Securities
Dealers, Inc. ("NASD").
(d) There is not pending or, to the Company's knowledge, threatened,
any action, suit, claim, proceeding or investigation against the Company or
Subsidiary or any of their respective officers or any of their respective
properties, assets or rights before any court or governmental agency or body or
otherwise which might result in a Material Adverse Effect or have a material
adverse effect on the Company's properties, assets or rights, or prevent
consummation of the transactions contemplated hereby. There are no statutes,
rules, regulations, agreements, contracts, leases or documents that are
required to be described in the Prospectus, or to be filed as exhibits to the
Registration Statement by the Act or by the Rules and Regulations that have not
been accurately described in all material respects in the Prospectus or filed
as exhibits to the Registration Statement.
(e) All outstanding shares of capital stock of the Company have been
duly authorized and validly issued and are fully paid and nonassessable, have
been issued in compliance with all federal and state securities laws, were not
issued in violation of any preemptive right, resale right, right of first
refusal or similar right. The authorized and outstanding capital stock of the
Company conforms in all material respects to the description thereof contained
in the Registration Statement and the Prospectus (and such description
correctly states the substance of the provisions of the instruments defining
the capital stock of the Company). The Shares have been duly authorized for
issuance and sale to the Underwriters pursuant to this Agreement and, when
issued and delivered by the Company against payment therefor in accordance with
the terms of this Agreement, will be duly and validly issued and fully paid and
nonassessable. Except as set forth in the Prospectus, no preemptive right,
co-sale right, right of first refusal or other similar rights of
securityholders exists with respect to any of the Shares or the issue and sale
thereof other than those that have been expressly waived prior to the date
hereof. No holder of securities of the Company has the right to cause the
Company to include such holder's securities in the Registration Statement. No
further approval or authorization of any security holder, the Board of
Directors or any duly appointed committee thereof or others is required for the
issuance and sale or transfer of the Shares, except as may be required under
the Act, the Exchange Act or under state securities or Blue Sky laws. Except as
disclosed in or contemplated by the Prospectus and the financial statements of
the Company, and the related notes thereto, included in the Prospectus the
Company does not have outstanding any options or warrants to purchase, or any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options,
4.
<PAGE> 5
rights, convertible securities or obligations. The description of the
Company's stock option and other plans or arrangements, and the options or
other rights granted and exercised thereunder, set forth in the Prospectus
accurately and fairly presents, in all material respects, the information
required to be shown with respect to such plans, arrangements, options and
rights.
(f) Arthur Andersen LLP (the "Accountants") who have examined the
financial statements, together with the related schedules and notes, of the
Company filed with the Commission as a part of the Registration Statement,
which are included in the Prospectus, are independent public accountants within
the meaning of the Act and the Rules and Regulations. The financial statements
of the Company, together with the related schedules and notes, forming part of
the Registration Statement and the Prospectus, fairly present the financial
position and the results of operations of the Company at the respective dates
and for the respective periods to which they apply. All financial statements,
together with the related schedules and notes, filed with the Commission as
part of the Registration Statement have been prepared in accordance with
generally accepted accounting principles as in effect in the United States
consistently applied throughout the periods involved except as may be otherwise
stated in the Registration Statement. The selected and summary financial and
statistical data included in the Registration Statement present fairly the
information shown therein and have been compiled on a basis consistent with the
financial statements presented therein. No other financial statements or
schedules are required by the Act or the Rules and Regulations to be included
in the Registration Statement.
(g) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus, there has not been (i) any
material adverse change, or any development which, in the Company's reasonable
judgment, is likely to cause a material adverse change, in the business,
properties or assets described or referred to in the Registration Statement, or
the results of operations, condition (financial or otherwise), business or
operations of the Company and Subsidiary taken as a whole, (ii) any transaction
which is material to the Company or Subsidiary, except transactions in the
ordinary course of business, (iii) any obligation, direct or contingent, which
is material to the Company and its Subsidiary taken as a whole, incurred by the
Company or Subsidiary, except obligations incurred in the ordinary course of
business, (iv) any change in the capital stock or outstanding indebtedness of
the Company or Subsidiary or (v) any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company. Neither the Company
nor its Subsidiary has any material contingent obligation which is not
disclosed in the Registration Statement.
(h) Except as set forth in the Prospectus, (i) the Company and
Subsidiary have good and marketable title to all material properties and assets
described in the Prospectus as owned by them, free and clear of any pledge,
lien, security interest, charge, encumbrance, claim, equitable interest, or
restriction, (ii) the agreements to which the Company or the Subsidiary is a
party described in the Prospectus are valid agreements, enforceable against the
Company or Subsidiary in accordance with their terms, except as enforcement may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles, and, to the Company's knowledge, the other
contracting party or parties thereto are not in material breach or default
under any of such agreements and (iii) the Company and Subsidiary have valid
and enforceable leases for the
5.
<PAGE> 6
properties described in the Prospectus as leased by it, and such leases conform
in all material respects to the description thereof, if any, set forth in the
Registration Statement.
(i) The Company and Subsidiary now hold and at the Closing Date and any
later Option Closing Date, as the case may be, will hold, all licenses,
certificates, approvals and permits from all state, United States, foreign and
other regulatory authorities that are material to the conduct of the business
of the Company (as such business is currently conducted), except for such
licenses, certificates, approvals and permits the failure of which to hold
would not have a Material Adverse Effect), all of which are valid and in full
force and effect (and there is no proceeding pending or, to the knowledge of
the Company, threatened which may cause any such license, certificate, approval
or permit to be withdrawn, canceled, suspended or not renewed). Neither the
Company nor Subsidiary is in violation of its certificate of incorporation or
bylaws, or, except for defaults or violations which would not have a Material
Adverse Effect, in default in the performance or observance of any obligation,
agreement, covenant or condition contained in any bond, debenture, note or
other evidence of indebtedness or in any contract, indenture, mortgage, loan
agreement, joint venture or other agreement or instrument to which it is a
party or by which it or any of its properties are bound, or in violation of any
law, order, rule, regulation, writ, injunction or decree of any court or
governmental agency or body.
(j) The Company and Subsidiary have filed on a timely basis all
necessary federal, state and foreign income, franchise and other tax returns
and has paid all taxes shown thereon as due, and the Company has no knowledge
of any tax deficiency which has been or might be asserted against the Company
or Subsidiary which might have a Material Adverse Effect. All material tax
liabilities are adequately provided for within the financial statements of the
Company.
(k) The Company and Subsidiary maintain insurance of the types and in
the amounts adequate for their business and consistent with insurance coverage
maintained by similar companies in similar businesses, including, but not
limited to, insurance covering product liability and real and personal property
owned or leased against theft, damage, destruction, acts of vandalism and all
other risks customarily insured against, all of which insurance is in full
force and effect.
(l) Neither the Company nor Subsidiary is involved in any labor dispute
or disturbance nor, to the knowledge of the Company, is any such dispute or
disturbance threatened.
(m) Except as described in the Prospectus, the Company and Subsidiary
own or possess adequate licenses or other rights to use all patents, patent
applications, trademarks, trademark applications, service marks, service mark
applications, tradenames, copyrights, manufacturing processes, formulae, trade
secrets, know-how, franchises, and other material intangible property and
assets (collectively, "Intellectual Property") necessary to the conduct of
their businesses as conducted and as proposed to be conducted as described in
the Prospectus. The Company has no knowledge of any facts which would preclude
it from having rights to its patent applications referenced in the Prospectus.
The Company has no knowledge that it or Subsidiary lacks or will be unable to
obtain any rights or licenses to use any of the Intellectual Property necessary
to conduct the business now conducted or proposed to be conducted by it as
6.
<PAGE> 7
described in the Prospectus, except as described in the Prospectus. The
Prospectus fairly and accurately describe the Company's rights with respect to
the Intellectual Property. The Company has not received any notice of
infringement or of conflict with rights or claims of others with respect to any
Intellectual Property, except to the extent such notices or claims are fairly
and accurately described in the Prospectus. The Company is not aware of any
patents of others which are existing or infringed upon by potential products
referred to in the Prospectus in such a manner as to materially and adversely
affect the Company and Subsidiary taken as a whole.
(n) The Company and Subsidiary are conducting their businesses in
compliance with all of the laws, rules and regulations of the jurisdictions in
which it is conducting business.
(o) The Company is not an "investment company," or a "promoter" or
"principal underwriter" for a registered investment company, as such terms are
defined in the Investment Company Act of 1940, as amended.
(p) Neither the Company nor Subsidiary has incurred any liability for a
fee, commission, or other compensation on account of the employment of a broker
or finder in connection with the transactions contemplated by this Agreement
other than the underwriting discounts and commissions contemplated hereby.
(q) Each of the Company and Subsidiary is (i) in compliance with any
and all applicable United States, state and local environmental laws, rules,
regulations, treaties, statutes and codes promulgated by any and all
governmental authorities relating to the protection of human health and safety,
the environment or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), (ii) has received all permits, licenses or other
approvals required of it under applicable Environmental Laws to conduct its
business as currently conducted, and (iii) is in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permit
licenses or other approvals would not, individually or in the aggregate, have a
Material Adverse Effect. No action, proceeding, revocation proceeding, writ,
injunction or claim is pending or threatened relating to the Environmental Laws
or to the Company's or its Subsidiaries' activities involving Hazardous
Materials. "Hazardous Materials" means any material or substance (i) that is
prohibited or regulated by any environmental law, rule, regulation, order,
treaty, statute or code promulgated by any governmental authority, or any
amendment or modification thereto, or (ii) that has been designated or
regulated by any governmental authority as radioactive, toxic, hazardous or
otherwise a danger to health, reproduction or the environment.
(r) Neither the Company nor Subsidiary has engaged in the generation,
use, manufacture, transportation or storage of any Hazardous Materials on any
of the Company's or its Subsidiary's properties or former properties, except
where such use, manufacture, transportation or storage is in compliance with
Environmental Laws. No Hazardous Materials have been treated or disposed of on
any of the Company's or Subsidiary's properties or on properties formerly owned
or leased by the Company or any Subsidiary during the time of such ownership or
lease, except in compliance with Environmental Laws. No spills, discharges,
releases, deposits, emplacements, leaks or disposal of any Hazardous Materials
have occurred on
7.
<PAGE> 8
or under or have emanated from any of the Company's or Subsidiary's properties
or former properties.
(s) Neither the Company nor Subsidiary has at any time during the last
five years (i) made any unlawful contribution to any candidate for foreign
office, or failed to disclose fully any contribution in violation of law, or
(ii) made any payment to any foreign, United States or state governmental
officer or official, or other person charged with similar public of
quasi-public duties, other than payments required or permitted by the laws of
the United States.
(t) The Common Stock is registered pursuant to Section 12(g) of the
Exchange Act. The Shares have been duly authorized for quotation on the
National Association of Securities Dealers, Inc. Automated Quotation System
National Market System ("Nasdaq National Market"). The Company has taken no
action designed to, or likely to have the effect of, terminating the
registration of the Common Stock under the Exchange Act or delisting the Common
Stock from the Nasdaq National Market, nor has the Company received any
notification that the Commission or the Nasdaq National Market is contemplating
terminating such registration or listing.
(u) Neither the Company nor, to its knowledge, any of its officers,
directors or affiliates has taken, and at the Closing Date and at any later
Option Closing Date, neither the Company nor, to its knowledge, any of its
officers, directors or affiliates will have taken, directly or indirectly, any
action which has constituted, or might reasonably be expected to constitute,
the stabilization or manipulation of the price of sale or resale of the Shares.
(v) The Company has timely and properly filed with the Commission all
reports and other documents required to have been filed by it with the
Commission pursuant to the Act and the Rules and Regulations. True and complete
copies of all such reports and other documents have been delivered to you.
3. PURCHASE OF THE SHARES BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, the Company agrees to issue and sell
the Firm Shares to the several Underwriters, and each of the Underwriters
agrees to purchase from the Company the respective aggregate number of Firm
Shares set forth opposite its name on Schedule A, plus such additional number
of Firm Shares which such Underwriter may become obligated to purchase pursuant
to Section 3(b) hereof. The price at which such Firm Shares shall be sold by
the Company and purchased by the several Underwriters shall be $_____ per
share. In making this Agreement, each Underwriter is contracting severally and
not jointly; except as provided in paragraphs (b) and (c) of this Section 3,
the agreement of each Underwriter is to purchase only the respective number of
Firm Shares specified on Schedule A.
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 10 hereof) to purchase and pay
for the number of Shares agreed to be purchased by such Underwriter or
Underwriters, the non-defaulting Underwriters shall have the
8.
<PAGE> 9
right within twenty four (24) hours after such default to purchase, or procure
one or more other Underwriters to purchase, in such proportions as may be
agreed upon between you and such purchasing Underwriter or Underwriters and
upon the terms herein set forth, all or any part of the Shares which such
defaulting Underwriter or Underwriters agreed to purchase. If the
non-defaulting Underwriters fail so to make such arrangements with respect to
all such Shares and portion, the number of Shares which each non defaulting
Underwriter is otherwise obligated to purchase under this Agreement shall be
automatically increased on a pro rata basis (as adjusted by you in such manner
as you deem advisable to avoid fractional shares) to absorb the remaining
shares and portion which the defaulting Underwriter or Underwriters agreed to
purchase; provided, however, that the non-defaulting Underwriters shall not be
obligated to purchase the Shares and portion which the defaulting Underwriter
or Underwriters agreed to purchase if the aggregate number of such Shares
exceeds ten percent (10%) of the total number of Shares which all Underwriters
agreed to purchase hereunder. If the total number of Shares which the
defaulting Underwriter or Underwriters agreed to purchase shall not be
purchased or absorbed in accordance with the two preceding sentences, the
Company shall have the right, within twenty-four (24) hours next succeeding the
24-hour period referred to above, to make arrangements with other underwriters
or purchasers reasonably satisfactory to you for purchase of such Shares and
portion on the terms herein set forth. In any such case, either you or the
Company shall have the right to postpone the Closing Date determined as
provided in Section 5 hereof for not more than seven business days after the
date originally fixed as the Closing Date pursuant to said Section 5 in order
that any necessary changes in the Registration Statement, the Prospectus or any
other documents or arrangements may be made. If the aggregate number of Shares
which the defaulting Underwriter or Underwriters agreed to purchase exceeds 10%
of the total number of Shares which all Underwriters agreed to purchase
hereunder, and if neither the non-defaulting Underwriters nor the Company shall
make arrangements within the 24-hour periods stated above for the purchase of
all the Shares which the defaulting Underwriter or Underwriters agreed to
purchase hereunder, this Agreement shall be terminated without further act or
deed and without any liability on the part of the Company to any non defaulting
Underwriter and without any liability on the part of any non-defaulting
Underwriter to the Company. Nothing in this paragraph (b), and no action taken
hereunder, shall relieve any defaulting Underwriter from liability in respect
of any default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth, the
Company grants an option to the several Underwriters to purchase all or any
portion of the Option Shares from the Company at the same price per share as
the Underwriters shall pay for the Firm Shares. Said option may be exercised
only to cover over-allotments in the sale of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time (but not more
than once) on or before the 30th day after the date of this Agreement upon
written or telegraphic notice by you to the Company setting forth the aggregate
number of shares of the Option Shares as to which the several Underwriters are
exercising the option. Delivery of certificates for the shares of Option
Shares, and payment therefor, shall be made as provided in Section 5 hereof.
Each Underwriter will purchase such percentage of the Option Shares as is equal
to the percentage of Firm Shares that such Underwriter is purchasing, the exact
number of shares to be adjusted by you in such manner as you deem advisable to
avoid fractional shares.
9.
<PAGE> 10
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering of the Shares by the
Underwriters shall be as set forth in the Prospectus. The Underwriters may from
time to time change the public offering price after the closing of the initial
public offering and increase or decrease the concessions and discounts to
dealers as they may determine.
(b) You, on behalf of the Underwriters, represent and warrant that (i)
the information set forth in Paragraph 1, inclusive of the list of underwriters
set forth thereunder, contained under the caption "Underwriting" in the
Registration Statement, any Preliminary Prospectus and the Prospectus relating
to the Shares (insofar as such information relates to the Underwriters)
constitutes the only information furnished by the Underwriters to the Company
for inclusion in the Registration Statement, any Preliminary Prospectus, and
the Prospectus, and that the statements made therein are correct and do not
omit to state any material fact required to be stated therein or necessary to
make the statements made therein in light of the circumstances under which they
were made not misleading, and (ii) the Underwriters have not distributed and
will not distribute prior to the Closing Date or on any Option Closing Date, as
the case may be, any of offering material in connection with the offering and
sale of the shares other than the Preliminary Prospectus, the Prospectus, the
Registration Statement and other materials permitted by the Act.
5. DELIVERY OF AND PAYMENT FOR THE SHARES.
(a) Delivery of certificates for the Firm Shares and the Option Shares
(if the option granted pursuant to Section 3(c) hereof shall have been
exercised not later than 11:00 a.m., Denver time, on the date at least two
business days preceding the Closing Date), and payment therefor, shall be made
at the offices of Cooley Godward LLP, 2595 Canyon Boulevard, Suite 250,
Boulder, Colorado 80302 6737 (or at such other place as may be agreed upon by
the Company and you) at 7:00 a.m., Denver time (a) on the third (3rd) full
business day following the first day that Shares are traded, (b) if this
Agreement is executed and delivered after 2:30 p.m., Denver time, the fourth
(4th) full business day following the day that this Agreement is executed and
delivered or (c) at such time on such other day, not later than seven (7) full
business days following the first day that Shares are traded, as shall be
agreed upon in writing by the Company and you (the "Closing Date").
(b) If the option granted pursuant to Section 3(c) hereof shall be
exercised after 11:00 a.m., Denver time, on the date two business days
preceding the Closing Date, and on or before the 30th day after the date of
this Agreement, delivery of certificates for the Option Shares, and payment
therefor, shall be made at the offices of Cooley Godward LLP, 2595 Canyon
Boulevard, Suite 250, Boulder, Colorado 80302 6737 at 7:00 a.m., Denver time,
on the third (3rd) business day after the exercise of such option.
(c) Payment for the Shares purchased from the Company shall be made to
the Company or its order, by either a same day funds check or Federal Funds
wire transfer. Such payment shall be made upon delivery of certificates for the
Shares to you for the respective accounts of the several Underwriters against
receipt therefor signed by you. Certificates for the
10.
<PAGE> 11
Shares to be delivered to you shall be registered in such name or names and
shall be in such denominations as you may request at least two business days
before the Closing Date, in the case of Firm Shares, and at least two business
days prior to the Option Closing Date, in the case of the Option Shares. Such
certificates will be made available to the Underwriters for inspection,
checking and packaging at a location in New York, New York, designated by the
Underwriters not less than one full business day prior to the Closing Date or,
in the case of the Option Shares, by 3:00 p.m., New York time, on the business
day preceding the Option Closing Date.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose check shall not have been
received by you on the Closing Date or any later Option Closing Date. Any such
payment by you shall not relieve such Underwriter from any of its obligations
hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and agrees as
follows:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective as promptly as possible; it will notify you, promptly after it shall
receive notice thereof, of the time when the Registration Statement or any
subsequent amendment to the Registration Statement has become effective or any
supplement to the Prospectus has been filed. If the Company omitted information
from the Registration Statement at the time it was originally declared
effective in reliance upon Rule 430A(a), the Company will provide evidence
satisfactory to you that the Prospectus contains such information and has been
filed, within the time period prescribed, with the Commission pursuant to
subparagraph (1) or (4) of Rule 424(b) of the Rules and Regulations or as part
of a post-effective amendment to such Registration Statement as originally
declared effective which is declared effective by the Commission. If for any
reason the filing of the final form of Prospectus is required under Rule
424(b)(3) of the Rules and Regulations, it will provide evidence satisfactory
to you that the Prospectus contains such information and has been filed with
the Commission within the time period prescribed. The Company will notify you
promptly of any request by the Commission for the amending or supplementing of
the Registration Statement or the Prospectus or for additional information.
Promptly upon your request, it will prepare and file with the Commission any
amendments or supplements to the Registration Statement or Prospectus which, in
the reasonable opinion of counsel to the several Underwriters ("Underwriters'
Counsel"), may be necessary or advisable in connection with the distribution of
the Shares by the Underwriters. The Company will promptly prepare and file with
the Commission, and promptly notify you of the filing of, any amendments or
supplements to the Registration Statement or Prospectus which may be necessary
to correct any statements or omissions, if, at any time when a prospectus
relating to the Shares is required to be delivered under the Act, any event
shall have occurred as a result of which the Prospectus or any other prospectus
relating to the Shares as then in effect would include an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. In case any Underwriter is required to deliver a prospectus
within the nine-month period referred to in Section 10(a)(3) of the Act in
connection with the sale of the Shares, the Company will
11.
<PAGE> 12
prepare promptly upon request, but at the expense of such Underwriter, such
amendment or amendments to the Registration Statement and such prospectus or
prospectuses as may be necessary to permit compliance with the requirements of
Section 10(a)(3) of the Act. The Company will file no amendment or supplement
to the Registration Statement or Prospectus that shall not previously have been
submitted to you a reasonable time prior to the proposed filing thereof or to
which you shall reasonably object in writing or which is not in compliance with
the Act and Rules and Regulations or the provisions of this Agreement.
(b) The Company will advise you, promptly after it shall receive notice
or obtain knowledge thereof of the issuance of any stop order by the Commission
suspending the effectiveness of the Registration Statement or the use of the
Prospectus or of the initiation or threat of any proceeding for that purpose;
and it will promptly use its best efforts to prevent the issuance of any such
stop order or to obtain its withdrawal at the earliest possible moment if such
stop order should be issued.
(c) The Company will cooperate with you in endeavoring to qualify the
Shares for offering and sale under the securities laws of such jurisdictions as
you may designate and to continue such qualifications in effect for so long as
may be required for purposes of the distribution of the Shares, except that the
Company shall not be required in connection therewith or as a condition thereof
to qualify as a foreign corporation, or to execute a general consent to service
of process in any jurisdiction, or to make any undertaking with respect to the
conduct of its business. In each jurisdiction in which the Shares shall have
been qualified, the Company will make and file such statements, reports and
other documents in each year as are or may be reasonably required by the laws
of such jurisdictions so as to continue such qualifications in effect for so
long a period as you may reasonably request for distribution of the Shares, or
as otherwise may be required by law.
(d) The Company will furnish to you, as soon as available, copies of
the Registration Statement (three of which will be signed and which will
include all exhibits), each Preliminary Prospectus, the Prospectus and any
amendments or supplements to such documents, including any prospectus prepared
to permit compliance with Section 10(a)(3) of the Act, all in such quantities
as you may from time to time reasonably request.
(e) The Company will make generally available to its stockholders as
soon as practicable, but in any event not later than the 45th day following the
end of the fiscal quarter first occurring after the first anniversary of the
effective date of the Registration Statement, an earnings statement (which will
be in reasonable detail but need not be audited) complying with the provisions
of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and
covering a twelve-month period beginning after the effective date of the
Registration Statement, and will advise you in writing when such statement has
been made available.
(f) During a period of five years after the date hereof, the Company,
as soon as practicable after the end of each respective period, will furnish to
its stockholders annual reports (including financial statements audited by
independent certified public accountants) and will furnish to its stockholders
unaudited quarterly reports of operations for each of the first three quarters
of the fiscal year, and will, upon request, furnish to you and the other
several
12.
<PAGE> 13
Underwriters hereunder (i) concurrently with making such reports available to
its stockholders, statements of operations of the Company for each of the first
three quarters in the form made available to the Company's stockholders; (ii)
concurrently with the furnishing thereof to its stockholders, a balance sheet
of the Company as of the end of such fiscal year, together with statements of
operations, of stockholders' equity and of cash flow of the Company for such
fiscal year, accompanied by a copy of the certificate or report thereon of
nationally recognized independent certified public accountants; (iii)
concurrently with the furnishing of such reports to its stockholders, copies of
all reports (financial or other) mailed to stockholders; (iv) as soon as they
are available, copies of all reports and financial statements furnished to or
filed with the Commission, any securities exchange or the Nasdaq National
Market by the Company (except for documents for which confidential treatment is
requested); and (v) every material press release and every material news item
or article in respect of the Company or its affairs which was generally
released to stockholders or prepared for general release by the Company. During
such five-year period, if the Company shall have any active subsidiaries, the
foregoing financial statements shall be on a consolidated basis to the extent
that the accounts of the Company are consolidated with any subsidiaries, and
shall be accompanied by similar financial statements for any significant
subsidiary that is not so consolidated.
(g) Prior to or simultaneously with the execution and delivery of this
Agreement, the Company will obtain agreement from each beneficial owner of the
Company's Common Stock listed on Schedule B to this Agreement providing that
such person will not, for a period of 180 days after the date of the
Prospectus, without the prior written consent of UBS Securities LLC, directly
or indirectly, offer to sell, sell, hypothecate, contract to sell, grant any
option to purchase, or otherwise dispose of, any shares of Common Stock
beneficially owned as of the date such lockup agreement is executed (including,
without limitation, shares of Common Stock which may be deemed to be
beneficially owned in accordance with the Rules and Regulations and shares of
Common Stock which may be issued upon exercise of a stock option or warrant) or
any securities convertible into or exercisable or exchangeable for such Common
Stock except (a) by operation of law, (b) pursuant to a bona fide gift or by
will or intestacy to any person or other entity which agrees in writing to be
bound by this restriction or (c) pursuant to a transfer by a partnership to a
partner or retired partner of such partnership or by a corporation to a
shareholder of such corporation which agrees in writing to be bound by this
restriction. Each such person or entity shall also agree and consent to the
entry of stop transfer instructions with the Company's transfer agent against
the transfer of shares of Common Stock held by such person or entity, except in
compliance with the foregoing restriction.
(h) The Company shall not, during the 180 days following the effective
date of the Registration Statement, except with your prior written consent as
Representatives, file a registration statement covering any of its shares of
capital stock, except that one or more registration statements on Form S 8 may
be filed at any time following the effective date of the Registration
Statement.
(i) The Company shall not, during the 180 days following the effective
date of the Registration Statement, except with your prior written consent as
Representatives, issue, sell, offer or agree to sell, grant, distribute or
otherwise dispose of, directly or indirectly, any shares of Common Stock, or
any options, rights or warrants with respect to shares of Common Stock, or
13.
<PAGE> 14
any securities convertible into or exchangeable for Common Stock, other than
(i) the sale of Shares hereunder, (ii) the grant of options or the issuance of
shares of Common Stock under the Company's stock option plans or stock purchase
plan, as the case may be, existing on the date hereof, (iii) the issuance of
shares of Common Stock upon exercise of the currently outstanding options or
warrants described in the Registration Statement.
(j) The Company will apply the net proceeds from the sale of the Shares
being sold by it in the manner set forth under the caption "Use of Proceeds" in
the Prospectus.
(k) The Company will maintain a Transfer Agent and, if necessary under
the jurisdiction of incorporation of the Company, a Registrar (which may be the
same entity as the Transfer Agent) for its Common Stock.
(l) The Company will use its best efforts to maintain listing of its
shares of Common Stock on the Nasdaq National Market.
(m) The Company is familiar with the Investment Company Act of 1940, as
amended, and the rules and regulations thereunder, and has in the past
conducted its affairs, and will in the future conduct its affairs, in such a
manner so as to ensure that the Company was not and will not be an "investment
company" within the meaning of the Investment Company Act of 1940, as amended,
and the rules and regulations thereunder.
(n) If at any time during the 180-day period after the Registration
Statement becomes effective, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your reasonable
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above consult with you in good faith regarding the necessity of disseminating a
press release or other public statement responding to or commenting on such
rumor, publication or event and, if the Company in its reasonable judgment
determines that such a press release or other public statement is appropriate,
the substance of any press release or other public statement.
7. EXPENSES.
The Company agrees with each Underwriter that:
(a) The Company will pay and bear all costs, fees and expenses in
connection with the preparation, printing and filing of the Registration
Statement (including financial statements, schedules and exhibits), Preliminary
Prospectuses and the Prospectus and any amendments or supplements thereto; the
reproduction of this Agreement, the Master Agreement Among Underwriters, the
Master Selected Dealer Agreement, the Preliminary Blue Sky Memoranda and any
Supplemental Blue Sky Memoranda and any instruments related to any of the
foregoing; the issuance and delivery of the Shares hereunder to the several
Underwriters, including transfer taxes, if any; the cost of all stock
certificates representing the Shares and Transfer Agents' and Registrars' fees;
the fees and disbursements of corporate, patent and
14.
<PAGE> 15
regulatory counsel for the Company; all fees and other charges of the Company's
independent public accountants; the cost of furnishing to the several
Underwriters copies of the Registration Statement (including appropriate
exhibits), Preliminary Prospectuses and the Prospectus, and any amendments or
supplements to any of the foregoing; NASD filing fees and expenses incident to
securing any required review and the cost of qualifying the Shares under the
laws of such jurisdictions within the United States as you may designate
(including filing fees and fees and disbursements of Underwriters' Counsel in
connection with such NASD filings and Blue Sky qualifications); listing
application fees of the Nasdaq National Market; and all other expenses directly
incurred by the Company in connection with the performance of its obligations
hereunder.
(b) If the transactions contemplated hereby are not consummated by
reason of any failure, refusal or inability on the part of the Company to
perform any agreement on its part to be performed hereunder or to fulfill any
condition of the Underwriters' obligations hereunder, the Company will, in
addition to paying the expenses described in clause (a) above, reimburse the
several Underwriters for all out-of-pocket expenses (including reasonable fees
and disbursements of Underwriters' Counsel) incurred by the Underwriters in
reviewing the Registration Statement and the Prospectus and in otherwise
investigating, preparing to market or marketing the Shares. The Company will in
no event be liable to any of the several Underwriters for any loss of
anticipated profits from the sale by them of the Shares.
8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS.
The obligations of the several Underwriters to purchase and pay for the
Shares, as provided herein, shall be subject to the accuracy, as of the date
hereof and the Closing Date and any later Option Closing Date, as the case may
be, of the representations and warranties of the Company herein, to the
performance by the Company of its obligations hereunder and to the following
additional conditions:
(a) The Registration Statement shall have become effective not later
than 9:00 a.m., New York City time, on the date following the date of this
Agreement, or such later time or date as shall be consented to in writing by
you. If the filing of the Prospectus, or any supplement thereto, is required
pursuant to Rule 424(b) and Rule 430A of the Rules and Regulations, the
Prospectus shall have been filed in the manner and within the time period
required by Rule 424(b) and Rule 430A of the Rules and Regulations. No stop
order suspending the effectiveness of the Registration Statement shall have
been issued and no proceeding for that purpose shall have been initiated or, to
the knowledge of the Company or any Underwriter, threatened by the Commission,
and any request of the Commission for additional information (to be included in
the Registration Statement or the Prospectus or otherwise) shall have been
complied with to the reasonable satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in connection
with this Agreement, the form of Registration Statement and the Prospectus, and
the registration, authorization, issue, sale and delivery of the Shares shall
have been reasonably satisfactory to Underwriters' Counsel, and such counsel
shall have been furnished with such papers and information as they may
reasonably have requested to enable them to pass upon the matters referred to
in this subsection.
15.
<PAGE> 16
(c) You shall have received, at no cost to you, on the Closing Date and
on any later Option Closing Date, as the case may be, the opinion of Wilson,
Sonsini, Goodrich & Rosati, Professional Corporation, corporate counsel to the
Company, dated the Closing Date or such later Option Closing Date, in the form
attached hereto on Appendix A, addressed to the Underwriters and with
reproduced copies of signed counterparts thereof for each of the
Representatives.
(d) You shall have received, at no cost to you, on the Closing Date and
on any later Option Closing Date, as the case may be, the opinion of trademark
counsel to the Company, dated the Closing Date or such later Option Closing
Date, in the form attached hereto as Appendix B, addressed to the Underwriters
and with reproduced copies of signed counterparts thereof for each of the
Representatives.
(e) You shall have received, at no cost to you, on the Closing Date and
on any later Option Closing Date, as the case may be, the opinion of patent
counsel to the Company, dated the Closing Date or such later Option Closing
Date, in the form attached hereto as Appendix C, addressed to the Underwriters
and with reproduced copies of signed counterparts thereof for each of the
Representatives.
(f) You shall have received from Cooley Godward LLP, Underwriters'
Counsel, an opinion or opinions, dated the Closing Date or on any later Option
Closing Date, as the case may be, in form and substance reasonably satisfactory
to you, with respect to the sufficiency of all corporate proceedings undertaken
by the Company and other legal matters relating to this Agreement and the
transactions contemplated hereby as you may reasonably require, and the Company
shall have furnished to such counsel such documents as it may have reasonably
requested for the purpose of enabling it to pass upon such matters.
(g) You shall have received on the Closing Date and on any later Option
Closing Date, as the case may be, a letter from the Accountants addressed to
the Company and the Underwriters, dated the Closing Date or such later Option
Closing Date, as the case may be, confirming that it is an independent
certified public accountant with respect to the Company within the meaning of
the Act and the Rules and Regulations thereunder and based upon the procedures
described in its letter delivered to you concurrently with the execution of
this Agreement (herein called the "Original Letter"), but carried out to a date
not more than three days prior to the Closing Date or any such later Option
Closing Date, as the case may be, (i) confirming that the statements and
conclusions set forth in the Original Letter are accurate as of the Closing
Date or such later Option Closing Date, as the case may be; and (ii) setting
forth any revisions and additions to the statements and conclusions set forth
in the Original Letter that are necessary to reflect any changes in the facts
described in the Original Letter since the date of such letter, or to reflect
the availability of more recent financial statements, data or information. The
letter shall not disclose any change, or any development involving a
prospective change, in or affecting the business or properties of the Company
which, in your reasonable judgment, makes it impracticable or inadvisable to
proceed with the public offering of the Shares as contemplated by the
Prospectus. In addition, you shall have received from the Accountants a letter
addressed to the Company and made available to you for the use of the
Underwriters stating that its review of the Company's system of internal
accounting controls, to the extent it deemed necessary in
16.
<PAGE> 17
establishing the scope of its latest examination of the Company's financial
statements, did not disclose any weaknesses in internal controls that it
considered to be material weaknesses. All such letters shall be in a form
reasonably satisfactory to the Representatives and their counsel.
(h) You shall have received on the Closing Date and on any later Option
Closing Date, as the case may be, a certificate of the President and the Chief
Financial Officer of the Company, dated the Closing Date or such later date, to
the effect that as of such date (and you shall be satisfied that as of such
date):
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date or any
later Option Closing Date, as the case may be; and the Company has complied
with all of the agreements and satisfied all of the conditions on its part to
be performed or satisfied at or prior to the Closing Date or any later Option
Closing Date, as the case may be;
(ii) The Registration Statement has become effective under the Act
and no stop order suspending the effectiveness of the Registration Statement or
preventing or suspending the use of the Prospectus has been issued, and no
proceedings for that purpose have been instituted or are pending or, to the
best of their knowledge, threatened under the Act;
(iii) They have carefully reviewed the Registration Statement and
the Prospectus; and, when the Registration Statement became effective and at
all times subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus and any amendments or supplements
thereto contained all statements and information required to be included
therein or necessary to make the statements therein not misleading; and when
the Registration Statement became effective, and at all times subsequent
thereto up to the delivery of such certificate, none of the Registration
Statement, the Prospectus or any amendment or supplement thereto included any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading; and, since the effective date of the Registration Statement, there
has occurred no event required to be set forth in an amended or supplemented
Prospectus that has not been so set forth; and
(iv) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not been (a)
any material adverse change in the properties or assets described or referred
to in the Registration Statement and the Prospectus or in the condition
(financial or otherwise), operations, business or prospects of the Company and
Subsidiary, (b) any transaction which is material to the Company and
Subsidiary, except transactions entered into in the ordinary course of
business, (c) any obligation, direct or contingent, incurred by the Company or
Subsidiary, which is material to the Company and Subsidiary taken as a whole,
(d) any change in the capital stock or outstanding indebtedness of the Company
or Subsidiary which is material to the Company and Subsidiary taken as a whole
or (e) any dividend or distribution of any kind declared, paid or made on the
capital stock of the Company.
17.
<PAGE> 18
(i) The Company shall have furnished to you such further certificates
and documents as you shall reasonably request as to the accuracy of the
representations and warranties of the Company herein, as to the performance by
the Company of its obligations hereunder and as to the other conditions
concurrent and precedent to the obligations of the Underwriters hereunder.
(j) The Firm Shares and the Option Shares, if any, shall have been
approved for designation upon notice of issuance on the Nasdaq National Market.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company will furnish you with such number of
conformed copies of such opinions, certificates, letters and documents as you
shall reasonably request.
9. INDEMNIFICATION AND CONTRIBUTION.
(a) Subject to the provisions of paragraph (f) below, the Company
agrees to indemnify and hold harmless each Underwriter and each person
(including each partner or officer thereof) who controls any Underwriter within
the meaning of Section 15 of the Act from and against any and all losses,
claims, damages or liabilities, joint or several, to which such indemnified
parties or any of them may become subject under the Act, the Exchange Act, or
the common law or otherwise, and the Company agrees to reimburse each such
Underwriter and controlling person for any legal or other out-of-pocket
expenses (including, except as otherwise hereinafter provided, reasonable fees
and disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any 462(b) registration
statement) or any post effective amendment thereto (including any 462(b)
registration statement), or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (ii) any untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus or the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment thereof or supplement thereto) or the omission or
alleged omission to state therein a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that (1) the indemnity agreements of
the Company contained in this paragraph (a) shall not apply to any such losses,
claims, damages, liabilities or expenses if such statement or omission is
contained in Paragraph 1, inclusive of the list of underwriters set forth
thereunder, in the section of the Prospectus entitled "Underwriting" or the
last paragraph of text on the cover page of the Prospectus, and (2) the
indemnity agreement contained in this paragraph (a) with respect to any
Preliminary Prospectus not inure to the benefit of any Underwriter from whom
the person asserting any such losses, claims, damages, liabilities or expenses
purchased the Shares which is the subject thereof (or to the benefit of any
person controlling such Underwriter) if at or prior to the written confirmation
of the sale of such Shares a copy of the Prospectus (or the Prospectus as
amended or
18.
<PAGE> 19
supplemented) was not sent or delivered to such person and the untrue statement
or omission of a material fact contained in such Preliminary Prospectus was
corrected in the Prospectus (or the Prospectus as amended or supplemented)
unless the failure is the result of noncompliance by the Company with paragraph
(a) of Section 6 hereof. The indemnity agreements of the Company contained in
this paragraph (a) and the representations and warranties of the Company
contained in Section 2 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any indemnified
party and shall survive the delivery of any payment for the Shares.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its executive officers, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of
Section 15 of the Act, from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any of them
may become subject under the Act, the Exchange Act, or the common law or
otherwise and to reimburse each of them for any legal or other expenses
including, except as otherwise hereinafter provided, reasonable fees and
disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post effective amendment thereto (including any 462(b)
registration statement) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading or (ii) any untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus or the Prospectus
(as amended or as supplemented if the Company shall have filed with the
Commission any amendment thereof or supplement thereto) or the omission or
alleged omission to state therein a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that in the cases of clauses (i) and
(ii) above, such statement or omission is contained in Paragraph 1, inclusive
of the list of underwriters set forth thereunder, in the section of the
Prospectus entitled "Underwriting" or the last paragraph on the cover page of
the Prospectus. The indemnity agreement of each Underwriter contained in this
paragraph (b) shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of any indemnified party and shall
survive the delivery of and payment for the Shares.
(c) Each party indemnified under the provision of paragraphs (a) and
(b) of this Section 9 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against it, in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (a "Notice") of such service
or notification to the party or parties from whom indemnification may be sought
hereunder. No indemnification provided for in such paragraphs shall be
available to any party who shall fail so to give the Notice if the party to
whom such Notice was not given was unaware of the action, suit, investigation,
inquiry or
19.
<PAGE> 20
proceeding to which the Notice would have related and was prejudiced by the
failure to give the Notice, but the omission so to notify such indemnifying
party or parties of any such service or notification shall not relieve such
indemnifying party or parties from any liability which it or they may have to
the indemnified party for contribution or otherwise than on account of such
indemnity agreement. Any indemnifying party shall be entitled at its own
expense to participate in the defense of any action, suit or proceeding
against, or investigation or inquiry of, an indemnified party. Any
indemnifying party shall be entitled, if it so elects within a reasonable time
after receipt of the Notice by giving written notice (the "Notice of Defense")
to the indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or
parties shall be entitled to conduct the defense to the extent reasonably
determined by such counsel to be necessary to protect the interests of the
indemnified party or parties and (ii) in any event, the indemnified party or
parties shall be entitled, at its or their own expense to have counsel chosen
by such indemnified party or parties participate in, but not conduct, the
defense. It is understood that the indemnifying parties shall not, in respect
of the legal defenses of any indemnified party in connection with any
proceeding or related proceedings in the same jurisdiction, be liable for (a)
the fees and expenses of more than one separate firm (in addition to any local
counsel) for all of the Underwriters and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Act, and (b) the fees and
expenses of more than one separate firm (in addition to any local counsel) for
the Company, its directors, its officers who sign the Registration Statement
and each person, if any, who controls the Company within the meaning of Section
15 of the Act. If, within a reasonable time after receipt of the Notice, an
indemnifying party gives a Notice of Defense and the counsel chosen by the
indemnifying party or parties is reasonably satisfactory to the indemnified
party or parties, the indemnifying party or parties will not be liable under
paragraphs (a) through (c) of this Section 9 for any legal or other expenses
subsequently incurred by the indemnified party or parties in connection with
the defense of the action, suit, investigation, inquiry or proceeding, except
that (a) the indemnifying party or parties shall bear the legal and other
expenses incurred in connection with the conduct of the defense as referred to
in clause (i) of the proviso to the preceding sentence and (b) the indemnifying
party or parties shall bear such other expenses as it or they have authorized
to be incurred by the indemnified party or parties. If, within a reasonable
time after receipt of the Notice, no Notice of Defense has been given, the
indemnifying party or parties shall be responsible for any legal or other
expenses incurred by the indemnified party or parties in connection with the
defense of the action, suit, investigation, inquiry or proceeding. The
indemnifying party or parties shall not be liable for any settlement of any
proceeding effected without its or their written consent, provided such consent
has not been unreasonably withheld.
20.
<PAGE> 21
(d) If the indemnification provided for in this Section 9 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 9, then each indemnifying party shall, in
lieu of indemnifying such indemnified party, contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 9 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party
in connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company, on the one hand, and the Underwriters, on the other, shall be deemed
to be in the same respective proportions as the total net proceeds from the
offering of the Shares received by the Company and the total underwriting
discount received by the Underwriters, as set forth in the table on the cover
page of the Prospectus, bear to the aggregate public offering price of the
Shares. Relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by each indemnifying party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this
paragraph (d). The amount paid by an indemnified party as a result of the
losses, claims, damages or liabilities, or actions in respect thereof, referred
to in the first sentence of this paragraph (d) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigation, preparation to defend or defense against any
action or claim which is the subject of this paragraph (d). Notwithstanding the
provisions of this paragraph (d), no Underwriter shall be required to
contribute any amount in excess of the underwriting discount applicable to the
Shares purchased by such Underwriter. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this paragraph (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give
written notice of such service to the party or parties from whom contribution
may be sought, but the omission so to notify such party or parties of any such
service shall not relieve the party from whom contribution may be sought from
any obligation it may have hereunder or otherwise (except as specifically
provided in paragraph (c) of this Section 9).
21.
<PAGE> 22
(e) The Company will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in
any pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not such Underwriter or any
person who controls such Underwriter within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act is a party to such claim, action, suit or
proceeding) unless such settlement, compromise or consent includes an
unconditional release of such Underwriter and each such controlling person from
all liability arising out of such claim, action, suit or proceeding.
(f) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof, including without limitation the
provisions of this Section 9 and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 9 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.
10. TERMINATION. This Agreement may be terminated by you at any time on
or prior to the Closing Date or on or prior to any later Option Closing Date,
as the case may be, (i) if the Company shall have failed, refused or been
unable, at or prior to the Closing Date, or on or prior to any later Option
Closing Date, as the case may be, to perform any agreement on its part to be
performed, or because any other condition of the Underwriters' obligations
hereunder required to be fulfilled by the Company is not fulfilled, or (ii) if
trading on the New York Stock Exchange, the American Stock Exchange or the
Nasdaq National Market shall have been suspended, or minimum or maximum prices
for trading shall have been fixed, or maximum ranges for prices for securities
shall have been required on the New York Stock Exchange, the American Stock
Exchange or the Nasdaq National Market, by such trading exchanges or by order
of the Commission or any other governmental authority having jurisdiction, or
if a banking moratorium shall have been declared by federal or New York
authorities, or (iii) if the Company shall have sustained a loss by strike,
fire, flood, accident or other calamity of such character as to have a Material
Adverse Effect regardless of whether or not such loss shall have been insured,
or (iv) if there shall have been a material adverse change in the general
political or economic conditions or financial markets in the United States as
in the judgment of the Representatives makes it inadvisable or impracticable
to proceed with the offering, sale and delivery of the Shares, or (v) if there
shall have occurred an outbreak or escalation of hostilities between the United
States and any foreign power or of any other insurrection or armed conflict
involving the United States or other national or international calamity,
hostilities or crisis or the declaration by the United States of a national
emergency which, in the judgment of the Representatives, adversely affects the
marketability of the Shares, or (vi) if since the respective dates as of which
information is given in the Registration Statement and the Prospectus, there
shall have occurred any material adverse change or any development involving a
prospective material adverse change in or affecting the condition, financial or
otherwise, of the Company or the business affairs, management, or business
prospects of the Company, whether or not arising in the ordinary course of
business, or (vii) if any foreign, federal or state statute, regulation, rule
or order of any court or other governmental authority shall have been enacted,
published, decreed or otherwise promulgated which in the judgment of the
Representatives materially and adversely affects or will materially and
adversely
22.
<PAGE> 23
affect the business or operations of the Company, or trading in the Common
Stock shall have been suspended, or (viii) there shall have occurred a material
adverse decline in the value of securities generally on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market or (ix)
action shall be taken by any foreign, federal, state or local government or
agency in respect of its monetary or fiscal affairs which, in the judgment of
the Representatives, has a material adverse effect on the securities markets in
the United States. If this Agreement shall be terminated in accordance with
this Section 10, there shall be no liability of the Company to the Underwriters
and no liability of the Underwriters to the Company; provided, however, that in
the event of any such termination the Company agrees to indemnify and hold
harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company under this Agreement, including
all costs and expenses referred to in Section 7.
If you elect to terminate this Agreement as provided in this Section 10,
the Company shall be notified promptly by you by telephone, telecopy or
telegram, confirmed by letter.
11. REIMBURSEMENT OF CERTAIN EXPENSES.
(a) In addition to their other obligations under Section 9 of this
Agreement, the Company hereby agrees to reimburse on a quarterly basis the
Underwriters for all reasonable legal and other expenses incurred in connection
with investigating or defending any claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in paragraph (a) of Section 9 of this
Agreement, notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the obligations under this Section 11 and the
possibility that such payments might later be held to be improper; provided,
however, that (i) to the extent any such payment is ultimately held to be
improper, the persons receiving such payments shall promptly refund them and
(ii) such persons shall provide to the Company, upon request, reasonable
assurances of their ability to effect any refund, when and if due.
(b) In addition to their other obligations under Section 9 of this
Agreement, the Underwriters hereby agree to reimburse on a quarterly basis the
Company for all reasonable legal and other expenses incurred in connection with
investigating or defending any claim, action, investigation, inquiry or other
proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in paragraph (b) of Section 9 of this
Agreement, notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the obligations under this Section 11 and the
possibility that such payments might later be held to be improper; provided,
however, that (i) to the extent any such payment is ultimately held to be
improper, the Company shall promptly refund it and (ii) the Company shall
provide to the Underwriter, upon request, reasonable assurances of its ability
to effect any refund, when and if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure
to the benefit of the Company and the several Underwriters and, with respect to
the provisions of Section 9 hereof, the several parties (in addition to the
Company and the several Underwriters) indemnified under the provisions of said
Section 9, and their respective personal representatives,
23.
<PAGE> 24
successors and assigns. Nothing in this Agreement is intended or shall be
construed to give to any other person, firm or corporation any legal or
equitable remedy or claim under or in respect of this Agreement or any
provision herein contained. The term "successors and assigns" as herein used
shall not include any purchaser, as such purchaser, of any of the Shares from
any of the several Underwriters.
13. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters,
shall be mailed, telegraphed or delivered to UBS Securities LLC, 299 Park
Avenue, New York, NY 10171, Attention: Mr. Richard Messina; and if to the
Company, shall be mailed, telegraphed or delivered to it at its office, 7400
East Orchard, Suite 230, Englewood, CO 80111, Attention: George F. Adam, Jr.
All notices given by telegraph shall be promptly confirmed by letter.
14. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(i) any investigation made by or on behalf of any Underwriter or controlling
person thereof, or by or on behalf of the Company or its respective directors
of officers, and (ii) delivery of and payment for the Shares under this
Agreement.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
You will act as Representatives of the several Underwriters in all
dealings with the Company under this Agreement, and any action under or in
respect of this Agreement taken by you jointly or by UBS Securities LLC, as
Representatives, will be binding upon all of the Underwriters.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of New York.
[INTENTIONALLY LEFT BLANK]
24.
<PAGE> 25
Please sign and return to the Company the enclosed copies of this letter,
whereupon this letter will become a binding agreement among the Company and the
several Underwriters in accordance with its terms.
Very truly yours,
NEW ERA OF NETWORKS, INC.
By:
-----------------------------------
George F. Adam, Jr.
President and Chief Executive Officer
The foregoing Agreement
is hereby confirmed and
accepted as of the date
first above written.
UBS SECURITIES LLC
By:
--------------------------
Title:
--------------------------
COWEN & COMPANY
By:
--------------------------
Title:
--------------------------
Acting on behalf of the several
Underwriters, including themselves,
named on Schedule A hereto.
<PAGE> 26
SCHEDULE A
UNDERWRITERS
Number of
Shares to be
Underwriters Purchased
- --------------------------------------------------------------- ------------
UBS Securities LLC.............................................
Cowen & Company................................................
Total [ ]
============
<PAGE> 27
SCHEDULE B
LOCK-UP AGREEMENTS
Lock-up agreements shall be obtained from each beneficial holder of the
Company's capital stock, including, but not limited to, each holder of an
option or warrant to purchase capital stock.
<PAGE> 28
APPENDIX A
1. OPINION OF COUNSEL TO THE COMPANY
Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, shall opine
to the effect that:
(a) The Company has been duly organized and is validly existing as a
corporation, and is in good standing under, the laws of the State of Delaware;
(b) The Company has the corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus; the Company is duly qualified to do business as a foreign
corporation and is in good standing in all jurisdictions in which the ownership
or leasing of its properties or the conduct of its business requires such
qualification, except where the failure to so qualify would not have a Material
Adverse Effect;
(c) Other than Subsidiary, the Company does not own or control,
directly or indirectly, any corporation, association or other entity.
Subsidiary has been duly incorporated and is validly existing as a corporation
in good standing under the laws of the jurisdiction of its incorporation, with
full corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Registration Statement. Each
Subsidiary is duly qualified to do business as a foreign corporation in good
standing in each jurisdiction where the ownership or leasing of the properties
or the conduct of its business requires such qualification, except where the
failure to so qualify would not have a Material Adverse Effect. All of the
outstanding shares of capital stock of Subsidiary have been duly authorized and
validly issued, are fully paid and non-assessable and, except as otherwise
stated in the Registration Statement), are owned by the Company, in each case
subject to no security interest, other encumbrance or adverse claim; to the
best of such counsel's knowledge, no options, warrants or other rights to
purchase, agreements or other obligations to issue or other rights to convert
any obligation into shares of capital stock or ownership interests in the
Subsidiaries are outstanding;
(d) Immediately prior to closing, the authorized capital stock of the
Company consisted of ____________ shares of Preferred Stock, .01 par value, of
which __________ shares are designated Series A Preferred Stock, of which
__________ shares are issued and outstanding, __________ shares are designated
Series B Preferred Stock, of which __________ shares are issued and
outstanding, and __________ shares are designated Series C Preferred Stock, of
which __________ shares are issued and outstanding, and __________ shares of
Common Stock, $.001 par value, of which _________ shares are outstanding; the
authorized shares of the Company's Common Stock have been duly authorized; the
issued and outstanding shares of the Company's capital stock have been duly
authorized and validly issued and are fully paid and nonassessable, and have
not been issued in violation of any preemptive right, co-sale right,
registration right, right of first refusal or other similar right known to such
counsel;
1.
<PAGE> 29
(e) The Shares to be issued by the Company pursuant to this Agreement
have been duly authorized and will be, upon issuance and delivery against
payment therefor in accordance with the terms hereof, validly issued, fully
paid and nonassessable, and, to our knowledge, the stockholders of the Company
do not have any preemptive right, co-sale right, registration right, right of
first refusal or other similar right, which rights have not previously been
waived, in connection with the purchase or sale of any of the Shares;
(f) The Company has full corporate power and authority to enter into
this Agreement and to issue, sell and deliver to the Underwriters the Firm
Shares or the Option Shares, as the case may be, to be issued and sold by it
hereunder;
(g) This Agreement has been duly authorized by all necessary corporate
action on the part of the Company and has been duly executed and delivered by
the Company and is a valid and binding agreement of the Company, enforceable in
accordance with its terms, except as rights to indemnity may be limited by
applicable laws and public policy and except as enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, arrangement, moratorium or
other similar laws affecting creditors' rights, and subject to general equity
principles and to limitations on availability of equitable relief, including
specific performance;
(h) The Registration Statement has become effective under the Act and,
to our knowledge, no stop order suspending the effectiveness of the
Registration Statement or suspending or preventing the use of the Prospectus
has been issued and no proceedings for that purpose have been instituted or are
pending or threatened under the Act; any required filing of the Prospectus and
any supplement thereto pursuant to Rule 424(b) of the Rules and Regulations has
been made in the manner and within the time period required by such Rule
424(b);
(i) The Registration Statement, all Preliminary Prospectuses, the
Prospectus, and each amendment or supplement thereto (other than the financial
statements, financial data and supporting schedules included therein, as to
which such counsel need express no opinion), comply as to form in all material
respects with the requirements of the Act and the applicable Rules and
Regulations and to our knowledge, there are no agreements, contracts, leases or
documents of a character required to be described in, or filed as an exhibit
to, the Registration Statement which are not described or filed as required by
the Act and the applicable Rules and Regulations;
(j) The terms and provisions of the capital stock of the Company
conform to the description thereof contained in the Registration Statement and
the Prospectus, and the information in the Prospectus under the caption
"Description of Capital Stock", to the extent that it constitutes matters of
law or legal conclusions, has been reviewed by us and is correct, and the form
of certificate evidencing the Common Stock complies with the applicable
provisions of Delaware law;
(k) The statements in the Registration Statement and the Prospectus
summarizing statutes, rules and regulations, including the Delaware corporation
law and the description of the certificate of incorporation and bylaws are
accurate and fairly and correctly present the information required to be
presented by the Act or the Rules and Regulations in all material respects; and
such counsel does not know of any statutes, rules or regulations required to
2.
<PAGE> 30
be described in the Registration Statement or the Prospectus that are not
described or referred to therein as required;
(l) The statements under the captions "Risk Factors - Shares Eligible
for Future Sale," "Management - Employee Benefit Plans," "Management -
Compensation Committee Interlocks and Insider Participation," "Certain
Transactions" and "Description of Capital Stock" in the Prospectus, insofar as
such statements constitute a summary of documents referred to therein or
matters of law, are accurate summaries and fairly and correctly present, in all
material respects, the information called for with respect to such documents
and matters; provided that such counsel shall be entitled to rely on
representations of the Company with respect to certain factual matters
contained in such statements, and provided further that such counsel shall
state that nothing has come to the attention of such counsel which leads them
to believe that such representations are not true and correct in all material
respects;
(m) The information required to be set forth in the Registration
Statement in answer to Items 9, 10 (insofar as it relates to us) and 11(c) of
Form S-1 is to our knowledge accurately and adequately set forth therein in all
material respects or no response is required with respect to such Items;
(n) The execution, delivery and performance of this Agreement and the
consummation of the transactions therein contemplated do not and will not (a)
conflict with or result in a breach of any of the terms or provisions of or,
constitute a default under, the certificate of incorporation, as amended (the
"Certificate of Incorporation"), or bylaws of the Company, any agreement or
document filed as an exhibit to the Registration Statement, or any statute,
rule or regulation applicable to the Company (except that no opinion need to be
expressed with respect to compliance with federal and state securities laws) or
(b) to our knowledge, result in the creation or imposition of any lien or
encumbrance upon any of the assets of the Company pursuant to the terms or
provisions of, or result in a breach or violation of any of the terms or
provisions of, or constitute a default or result in the acceleration of any
obligation under, any indenture, mortgage, deed of trust, loan agreement, bond,
debenture, note agreement, other evidence of indebtedness, lease, contract or
other agreement or instrument to which the Company is a party or by which its
property is bound or (c) to our knowledge, conflict with or result in a
violation or breach of, or constitute a default under, any applicable license,
authorization, approval, permit, judgment, franchise, order, writ or decree of
any court or governmental agency or body;
(o) The Company has the corporate power and authority to own or lease
all of the assets owned or leased by it and to conduct its business, in each
case as described in the Registration Statement and the Prospectus, except
where failure to have such power and authority would not have a Material
Adverse Effect, and has all licenses, permits, consents, orders, approvals and
authorizations of any federal or state government authority that are necessary
to conduct its business as described in the Registration Statement and the
Prospectus, except where failure to have such licenses, permits, consents,
orders, approvals and authorizations would not have a Material Adverse Effect.
3.
<PAGE> 31
(p) No authorization, approval, consent, order, designation or
declaration of or filing by or with any governmental authority or agency is
necessary in connection with the execution and delivery of this Agreement by
the Company and the consummation of the transactions therein contemplated
except such as may have been obtained under the Act and the Rules and
Regulations or such as may be required under state securities or Blue Sky laws
or by the bylaws and rules of the NASD in connection with the purchase and
distribution of the Shares by the Underwriters;
(q) The Company is not in violation of its Certificate of Incorporation
or bylaws, and to our knowledge, the Company is not in breach of or default
with respect to any provision of any agreement, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other instrument by which it or any of
its properties may be bound or affected, except where such default would not
materially adversely affect the Company and, to the best of such counsel's
knowledge, the Company is in compliance with all laws, rules, regulations,
judgments, decrees, orders and statutes of any court or jurisdiction to which
it is subject, except where noncompliance would not materially adversely affect
the Company;
(r) To our knowledge, there are no pending or threatened actions,
suits, claims, proceedings or investigations that, if successful, would have a
Material Adverse Effect or would limit, revoke, cancel, suspend, or cause not
to be renewed any existing license, certificate, registration, approval or
permit, known to us, from any state, federal, or regulatory authority that is
material to the conduct of the business of the Company as presently conducted,
or that is of a character otherwise required to be disclosed in the
Registration Statement or the Prospectus under the Act or the applicable Rules
and Regulations;
(s) To our knowledge, except as set forth in the Registration Statement
and Prospectus, no holders of shares of Common Stock or other securities of the
Company have registration rights with respect to securities of the Company and,
except as set forth in the Registration Statement and Prospectus, all holders
of securities of the Company having registration rights with respect to shares
of Common Stock or other securities have, with respect to the offering
contemplated hereby, waived such rights or such rights have otherwise been
waived or such rights have expired by reason of lapse of time following
notification of the Company's intent to file the Registration Statement.
(t) The Company will not, upon consummation of the transactions
contemplated by this Agreement, be an "investment company," or a "promoter" or
"principal underwriter" for, a "registered investment company," as such terms
are defined in the Investment Company Act of 1940, as amended;
In addition, counsel shall include a statement to the effect that such
counsel has participated in conferences with officials and other
representatives of the Company, the Representatives, Underwriters' Counsel and
the independent public accountants of the Company, at which conferences the
contents of the Registration Statement and the Prospectus and related matters
were discussed, and although they have not verified the accuracy or
completeness of the statements contained in the Registration Statement or the
Prospectus, nothing has come to the attention of such counsel which caused them
to believe that, at the time the Registration
4.
<PAGE> 32
Statement became effective the Registration Statement (except as to financial
statements, financial and statistical data and supporting schedules contained
therein, as to which such counsel need express no opinion) contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
at the Closing Date or any later Option Closing Date, as the case may be, the
Registration Statement or the Prospectus (except as aforesaid) contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under, which they were made, not misleading.
Counsel rendering the foregoing may rely (i) as to questions of law not
involving the laws of the State of California, the United States or the General
Corporation Law of the State of Delaware upon opinions of local counsel, and
(ii) as to questions of fact upon representations or certificates of officers
of the Company and of governmental officials, as the case may be, in which case
its opinion is to state that it is so doing and that it has no actual knowledge
of any material misstatement or inaccuracy in such opinions, representations or
certificates, and that they believe that they and the Underwriters are
justified in relying on such opinions or certificates. Copies of any opinion,
representation or certificate so relied upon shall be delivered to you, as
Representatives of the Underwriters, and to Underwriters' Counsel.
5.
<PAGE> 33
APPENDIX B
OPINION OF TRADEMARK COUNSEL TO THE COMPANY
We have reviewed the statements regarding trademarks and the claims from Neon
Systems, Inc. and Neon Software, Inc. set forth in the Registration Statement
and the Prospectus under the captions "Risk Factors -- Protection of
Intellectual Property" and "Business -- Intellectual Property, Proprietary
Rights and Licenses" and such statements accurately summarize the matters
described therein. We participated in the preparation of such sections of the
Registration Statement and the Prospectus, and nothing has come to our
attention that would lead us to believe that either at the effective date of
the Registration Statement or at the date hereof such sections of the
Registration Statement and the Prospectus, or any amendment or supplement,
contained or contain any untrue statement of a material fact or omitted or omit
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading.
<PAGE> 34
APPENDIX C
OPINION OF PATENT COUNSEL TO THE COMPANY
We have reviewed the statements regarding patents and the claim from New
Paradigm Software Corp. set forth in the Registration Statement and the
Prospectus under the captions "Risk Factors -- Protection of Intellectual
Property" and "Business -- Intellectual Property, Proprietary Rights and
Licenses" and such statements accurately summarize the matters described
therein. We participated in the preparation of such sections of the
Registration Statement and the Prospectus, and nothing has come to our
attention that would lead us to believe that either at the effective date of
the Registration Statement or at the date hereof such sections of the
Registration Statement and the Prospectus, or any amendment or supplement,
contained or contain any untrue statement of a material fact or omitted or omit
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading.
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
NEON SOFTWARE, INC.
ARTICLE ONE
The name of the corporation is :
NEON SOFTWARE, INC.
ARTICLE TWO
The address of the corporation's registered office in the State of
Delaware is 1013 Centre Road, City of Wilminton, County of New Castle 19805.
The name of its registered agent at such address is The Prentice Hall
Corporation System, Inc.
ARTICLE THREE
The nature of the business or purposes to be conducted or promoted is
to engage in any and all lawful acts or activities for which corporations may
be organized under the General Corporation Law of the State of Delaware.
ARTICLE FOUR
1. Authorized Shares The aggregate number of shares of capital
stock which the corporation has authority to issue is 41,352,367 shares,
comprised of (i) 26,000,000 shares of Common Stock, par value $.001 per share
(the "Common Stock"); and (ii) 9,169,028 shares of Series A Convertible
Preferred Stock, par value $.01 per share (the "Series A Preferred Stock") and
6,183,339 shares of Series B Convertible Preferred Stock, par value $.01 per
share (the "Series B Preferred Stock" and together with the Series A Preferred
Stock referred to herein as the "Preferred Stock.")
2. Voting
2A. General. Except as may be otherwise provided in
these terms of the Preferred Stock or by law, the holders of Preferred Stock
and Common Stock shall vote together with all other classes and series of stock
of the Corporation as a single class on all actions to be taken by the
stockholders of the Corporation, including, but not limited to actions amending
the Articles of Incorporation of the Corporation to increase the number of
authorized shares of Common Stock. Each holder of Preferred Stock shall be
entitled to one vote for each share of Common Stock (including fractions of a
share) which would be issuable to such holder upon the
<PAGE> 2
conversion of all the shares of Preferred Stock so held on the record date for
the determination of stockholders entitled to vote. Each holder of Common
Stock shall be entitled to one vote per share.
2B. Board Size. The Corporation shall not, without the
written consent or affirmative vote of the holders of a majority of the then
outstanding shares of Preferred Stock, given in writing or by vote at a
meeting, consenting or voting (as the case may be) separately as a single
class, reduce the number of directors constituting the Board of Directors to a
number less than five or increase the maximum number of directors constituting
the Board of Directors to a number in excess of seven.
2C. Board Seats. The holders of the Series A Preferred
Stock, voting as a separate series, shall be entitled to elect one director of
the Corporation. The holder of the Series B Preferred Stock, voting as a
separate series, shall be entitled to elect one director of the Corporation.
The holders of the Common Stock, voting as a separate class, shall be entitled
to elect the remaining directors of the Corporation. At any meeting (or in a
written consent in lieu thereof) held for the purpose of electing directors,
the presence in person or by proxy (or the written consent) of the holders of a
majority of the shares of Series A Preferred Stock then outstanding shall
constitute a quorum of Series A Preferred Stock for the election of the
director to be elected solely by the holders of Series A Preferred Stock; and
the presence in person or by proxy (or the written consent) of the holders of a
majority of the shares of Series B Preferred Stock then outstanding shall
constitute a quorum of Series B Preferred Stock for the election of the
director to be elected solely by the holders of Series B Preferred Stock. A
vacancy in the directorship elected by the holders of the Series A Preferred
Stock shall be filled only by vote or written consent of the holders of the
Series A Preferred Stock. A vacancy in the directorship elected by the holders
of Series B Preferred Stock shall be filled only by vote or written consent of
the holders of Series B Preferred Stock. A vacancy in any directorship elected
by the holders of the Common Stock shall be filled only by vote or written
consent of the holders of the Common Stock.
3. Dividends. The holders of the Preferred Stock shall be
entitled to receive, out of funds legally available therefor, dividends at the
same rate as dividends (other than dividends paid in additional shares of
Common Stock) are paid with respect to the Common Stock (treating each share of
Preferred Stock as being equal to the number of shares of Common Stock
(including fractions of a share) into which each share of Preferred Stock is
then convertible).
4. Liquidation.
4A. Upon any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, the holders of the shares of
Series B Preferred Stock shall be entitled, before any distribution or payment
is made upon any stock ranking on liquidation junior to the Series B Preferred
Stock, to be paid an amount equal to the greater of (i) $.3032342 per share (as
adjusted for stock splits, stock dividends and the like) plus, in the case of
each share, an amount equal to any dividends declared but unpaid thereon,
computed to the date payment thereof is made available, or (ii) such amount per
share as would have been payable had each such
2
<PAGE> 3
share been converted to Common Stock pursuant to paragraph 6 immediately prior
to such liquidation, dissolution or winding up, and the holders of Series B
Preferred Stock shall not be entitled to any further payment, such amount
payable with respect to one share of Series B Preferred Stock being sometimes
referred to as the "Series B Liquidation Payment" and with respect to all
shares of Series B Preferred Stock being sometimes referred to as the "Series B
Liquidation Payments." If upon such liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, the assets to be distributed
among the holders of Series B Preferred Stock shall be insufficient to permit
payment to the holders of Series B Preferred Stock of the amount distributable
as aforesaid, then the entire assets of the Corporation to be so distributed
shall be distributed ratably among the holders of Series B Preferred Stock.
Upon any such liquidation, dissolution or winding up of the Corporation, after
the holders of Series B Preferred Stock shall have been paid in full the
amounts to which they shall be entitled, the holders of the shares of Series A
Preferred Stock shall be entitled, before any distribution or payment is made
upon any stock ranking on liquidation junior to the Series A Preferred Stock,
to be paid an amount equal to the greater of (i) $.218 per share plus, (as
adjusted for stock split, stock dividends and the like) in the case of each
share, an amount equal to any dividends declared but unpaid thereon, computed
to the date payment thereof is made available, or (ii) such amount per share as
would have been payable had each such share been converted to Common Stock
pursuant to paragraph 6 immediately prior to such liquidation, dissolution or
winding up, and the holders of Series A Preferred Stock shall not be entitled
to any further payment, such amount payable with respect to one share of Series
A Preferred Stock being sometimes referred to as the "Series A Liquidation
Payment", with respect to all shares of Series A Preferred Stock being
sometimes referred to as the "Series A Liquidation Payments" and collectively
with the Series B Liquidation Payments, the "Liquidation Payments." If upon
such liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the assets to be distributed among the holders of
Series A Preferred Stock shall be insufficient to permit payment to the holders
of Series A Preferred Stock of the amount distributable as aforesaid, then the
entire remaining assets of the Corporation to be so distributed shall be
distributed ratably among the holders of Series A Preferred Stock. Upon any
such liquidation, dissolution or winding up of the Corporation, after the
holders of Series A Preferred Stock shall have been paid in full the amounts to
which they shall be entitled, the remaining net assets of the Corporation may
be distributed to the holders of stock ranking on liquidation junior to the
Series A Preferred Stock. Written notice of such liquidation, dissolution or
winding up, stating a payment date, the amount of the Liquidation Payments and
the place where Liquidation Payments shall be payable, shall be delivered in
person, mailed by certified or registered mail, return receipt requested, or
sent by telecopier or telex, not less than 20 days prior to the payment date
stated therein, to the holders of record of Preferred Stock, such notice to be
addressed to each such holder at its address as shown by the records of the
Corporation.
4B. The consolidation or merger of the Corporation into
or with any other entity or entities which results in the exchange of
outstanding shares of the Corporation for securities or other consideration
issued or paid or caused to be issued or paid by any such entity or affiliate
thereof (other than (x) a merger to reincorporate the Corporation in a
different jurisdiction and (y) a merger in which the Corporation is the
surviving entity, that is, in which the Corporation's shareholders own or
control 50% or more of the surviving entity's voting shares),
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and the sale, lease, abandonment, transfer or other disposition by the
Corporation of all or substantially all its assets, shall be deemed to be a
liquidation, dissolution or winding up of the Corporation within the meaning of
the provisions of this paragraph 4. For purposes of paragraph 4, the Common
Stock shall rank on liquidation junior to the Series A Preferred Stock and the
Series A Preferred Stock shall rank junior on liquidation to the Series B
Preferred Stock.
5. Restrictions. At any time when shares of Preferred Stock are
outstanding, except where the vote or written consent of the holders of a
greater number of shares of the Corporation is required by law or by the
Articles of Incorporation, and in addition to any other vote required by law or
the Articles of Incorporation, without the approval of the holders of a
majority of the then outstanding shares of Preferred Stock given in writing or
by vote at a meeting, consenting or voting (as the case may be) separately as a
series, the Corporation will not:
5A. Create or authorize the creation of any additional
class or series of shares of stock unless the same ranks junior to both series
of Preferred Stock as to the distribution of assets on the liquidation,
dissolution or winding up of the Corporation, or increase the authorized amount
of Preferred Stock or increase the authorized amount of any additional class or
series of shares of stock unless the same ranks junior to both series of
Preferred Stock as to the distribution of assets on the liquidation,
dissolution or winding up of the Corporation, or create or authorize any
obligation or security convertible into shares of Preferred Stock or into
shares of any other class or series of stock unless the same ranks junior to
both series of Preferred Stock as to the distribution of assets on the
liquidation, dissolution or winding up of the Corporation, whether any such
creation, authorization or increase shall be by means of amendment to the
Articles of Incorporation or by merger, consolidation or otherwise;
5B. Consent to any liquidation, dissolution or winding up
of the Corporation or consolidate or merge into or with any other entity or
entities or sell, lease, abandon, transfer or otherwise dispose of all or
substantially all its assets, provided, however, that this Section 5B does not
apply to mergers in which the Corporation is the surviving entity (that is, in
cases in which the Corporation's shareholders own or control 50% or more of the
surviving entity's voting shares);
5C. Amend, alter or repeal its Articles of Incorporation
or By-laws in a manner adversely and substantially affecting either series of
Preferred Stock.
5D. Purchase or set aside any sums for the purchase of,
or pay any dividend or make any distribution on, any shares of stock other than
Preferred Stock, except for dividends or other distributions payable on the
Common Stock solely in the form of additional shares of Common Stock and except
for the purchase of shares of Common Stock from former employees of the
Corporation who acquired such shares directly from the Corporation, if each
such purchase is made pursuant to contractual rights held by the Corporation
relating to the termination of employment of such former employee and the
purchase price does not exceed the original issue price paid by such former
employee to the Corporation for such shares; or
5E. Redeem or otherwise acquire any shares of Preferred
Stock except pursuant to a purchase offer made pro rata to all holders of the
shares of Preferred Stock on the
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basis of the aggregate number of outstanding shares of Preferred Stock then
held by each such holder.
6. Conversions. The holders of shares of Preferred Stock shall
have the following conversion rights:
6A. Right to Convert. Subject to the terms and
conditions of this paragraph 6, the holder of any share or shares of Preferred
Stock shall have the right, at its option at any time, to convert any such
shares of Preferred Stock (except that upon any liquidation of the Corporation
the right of conversion shall terminate at the close of business on the
business day fixed for payment of the amount distributable on Preferred Stock)
into such number of fully paid and nonassessable shares of Common Stock as is
obtained as follows:
(i) with respect to the Series A Preferred Stock, by
(a) multiplying the number of shares of Series A Preferred Stock so to
be converted by $.218 and (b) dividing the result by the Conversion
Price of $.218 per share or, in case an adjustment of such price has
taken place pursuant to the further provisions of this paragraph 6,
then by the conversion price as last adjusted and in effect at the
date any share or shares of Series A Preferred Stock are surrendered
for conversion, and (ii) with respect to the Series B Preferred Stock,
by (a) multiplying the number of shares of Series B Preferred Stock so
to be converted by $.3032342 and (b) dividing the result by the
conversion price of $.3032342 per share or, in case an adjustment of
such price has taken place pursuant to the further provisions of this
paragraph 6, then by the conversion price as last adjusted and in
effect at the date any share or shares of Series B Preferred Stock are
surrendered for conversion. The respective prices at which the shares
of Series A Preferred Stock and the shares of Series B Preferred Stock
may be converted into shares of Common Stock, as adjusted in
accordance with this paragraph 6, are referred to herein as the
"Series A Conversion Price" and the "Series B Conversion Price";
respectively, and the term "Conversion Price" as used herein shall
refer to either the Series A Conversion Price or the Series B
Conversion Price, as the context shall require.
Such rights of conversion shall be exercised by the holder thereof by
giving written notice that the holder elects to convert a stated number of
shares of Preferred Stock into Common Stock and by surrender of a certificate
or certificates for the shares so to be converted to the Corporation at its
principal office (or such other office or agency of the Corporation as the
Corporation may designate by notice in writing to the holders of Preferred
Stock) at any time during its usual business hours on the date set forth in
such notice, together with a statement of the name or names (with address) in
which the certificate or certificates for shares of Common Stock shall be
issued.
6B. Issuance of Certificates; Time Conversion Effected.
Promptly after the receipt of the written notice referred to in subparagraph 6A
and surrender of the certificate or certificates for the share or shares of
Preferred Stock to be converted, the Corporation shall issue and deliver, or
cause to be issued and delivered, to the holder, registered in such name or
names
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as such holder may direct, a certificate or certificates for the number of
whole shares of Common Stock issuable upon the conversion of such share or
shares of Preferred Stock. To the extent permitted by law, such conversion
shall be deemed to have been effected and the Conversion Price shall be
determined as of the close of business on the date on which such written notice
shall have been received by the Corporation and the certificate or certificates
for such share or shares shall have been surrendered as aforesaid, and at such
time the rights of the holder of such share or shares of Preferred Stock shall
cease, and the person or persons in whose name or names any certificate or
certificates for shares of Common Stock shall be issuable upon such conversion
shall be deemed to have become the holder or holders of record of the shares
represented thereby.
6C. Fractional Shares; Dividends; Partial Conversion. No
fractional shares shall be issued upon conversion of Preferred Stock into
Common Stock and no payment or adjustment shall be made upon any conversion on
account of any cash dividends on the Common Stock issued upon such conversion.
At the time of each conversion, the Corporation shall pay in cash an amount
equal to all dividends, declared and unpaid on the shares of Preferred Stock
surrendered for conversion to the date upon which such conversion is deemed to
take place as provided in subparagraph 6B. In case the number of shares of
Preferred Stock represented by the certificate or certificates surrendered
pursuant to subparagraph 6A exceeds the number of shares converted, the
Corporation shall, upon such conversion, execute and deliver to the holder, at
the expense of the Corporation, a new certificate or certificates for the
number of shares of Preferred Stock represented by the certificate or
certificates surrendered which are not to be converted. If any fractional
share of Common Stock would, except for the provisions of the first sentence of
this subparagraph 6C, be delivered upon such conversion, the Corporation, in
lieu of delivering such fractional share, shall pay to the holder surrendering
the Preferred Stock for conversion an amount in cash equal to the current
market price of such fractional share as determined in good faith by the Board
of Directors of the Corporation.
6D. Adjustment of Price Upon Issuance of Common Stock. Except as
provided in subparagraph 6E, if and whenever the Corporation shall issue or
sell, or is, in accordance with subparagraphs 6D(1) through 6D(7), deemed to
have issued or sold, any shares of Common Stock for a consideration per share
less than the Series A Conversion Price or Series B Conversion Price, as the
case may be (the "Applicable Conversion Price"), in effect immediately prior to
the time of such issue or sale, then, forthwith upon such issue or sale, the
Applicable Conversion Price shall be reduced to the price determined by
dividing (i) an amount equal to the sum of (a) the number of shares of Common
Stock outstanding immediately prior to such issue or sale multiplied by the
then existing Applicable Conversion Price and (b) the consideration, if any,
received by the Corporation upon such issue or sale, by (ii) the total number
of shares of Common Stock outstanding immediately after such issue or sale.
For purposes of this subparagraph 6D, the following subparagraphs
6D(1) to 6D(7) shall also be applicable:
6D(1) Issuance of Rights or Options. In case at any
time the Corporation shall in any manner grant (whether directly or by
assumption in a merger or otherwise) any warrants or other rights to
subscribe for or to purchase,
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or any options for the purchase of, Common Stock or any stock or
security convertible into or exchangeable for Common Stock (such
warrants, rights or options being called "Options" and such
convertible or exchangeable stock or securities being called
"Convertible Securities") whether or not such Options or the right to
convert or exchange any such Convertible Securities are immediately
exercisable, and the price per share for which Common Stock is
issuable upon the exercise of such Options or upon the conversion or
exchange of such Convertible Securities (determined by dividing (i)
the total amount, if any, received or receivable by the Corporation as
consideration for the granting of such Options, plus the minimum
aggregate amount of additional consideration payable to the
Corporation upon the exercise of all such Options, plus, in the case
of such Options which relate to Convertible Securities, the minimum
aggregate amount of additional consideration, if any, payable upon the
issue or sale of such Convertible Securities and upon the conversion
or exchange thereof, by (ii) the total maximum number of shares of
Common Stock issuable upon the exercise of such Options or upon the
conversion or exchange of all such Convertible Securities issuable
upon the exercise of such Options) shall be less than the Applicable
Conversion Price in effect immediately prior to the time of the
granting of such Options, then the total maximum number of shares of
Common Stock issuable upon the exercise of such Options or upon
conversion or exchange of the total maximum amount of such Convertible
Securities issuable upon the exercise of such Options shall be deemed
to have been issued for such price per share as of the date of
granting of such Options or the issuance of such Convertible
Securities and thereafter shall be deemed to be outstanding. Except
as otherwise provided in subparagraph 6D(3), no adjustment of the
Conversion Price shall be made upon the actual issue of such Common
Stock or of such Convertible Securities upon exercise of such Options
or upon the actual issue of such Common Stock upon conversion or
exchange of such Convertible Securities.
6D(2) Issuance of Convertible Securities. In case
the Corporation shall in any manner issue (whether directly or by
assumption in a merger or otherwise) or sell any Convertible
Securities, whether or not the rights to exchange or convert any such
Convertible Securities are immediately exercisable, and the price per
share for which Common Stock is issuable upon such conversion or
exchange (determined by dividing (i) the total amount received or
receivable by the Corporation as consideration for the issue or sale
of such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Corporation upon the
conversion or exchange thereof, by (ii) the total maximum number of
shares of Common Stock issuable upon the conversion or exchange of all
such Convertible Securities) shall be less than the Applicable
Conversion Price in effect immediately prior to the time of such issue
or sale, then the total maximum number of shares of Common Stock
issuable upon conversion or exchange of all such Convertible
Securities shall be deemed to have been issued for such price per
share as of the date of the issue or sale of such Convertible
Securities and thereafter shall be deemed to be outstanding, provided
that (a)
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except as otherwise provided in subparagraph 6D(3), no adjustment of
the Conversion Price shall be made upon the actual issue of such
Common Stock upon conversion or exchange of such Convertible
Securities and (b) if any such issue or sale of such Convertible
Securities is made upon exercise of any Options to purchase any such
Convertible Securities for which adjustments of the Conversion Price
have been or are to be made pursuant to other provisions of this
subparagraph 6D, no further adjustment of the Conversion Price shall
be made by reason of such issue or sale.
6D(3) Change in Option Price or Conversion Rate.
Upon the happening of any of the following events, namely, if the
purchase price provided for in any Option referred to in subparagraph
6D(1), the additional consideration, if any, payable upon the
conversion or exchange of any Convertible Securities referred to in
subparagraph 6D(1) or 6D(2), or the rate at which Convertible
Securities referred to in subparagraph 6D(1) or 6D(2) are convertible
into or exchangeable for Common Stock shall change at any time
(including, but not limited to, changes under or by reason of
provisions designed to protect against dilution), the Applicable
Conversion Price in effect at the time of such event shall forthwith
be readjusted to the Applicable Conversion Price which would have been
in effect at such time had such Options or Convertible Securities
still outstanding provided for such changed purchase price, additional
consideration or conversion rate, as the case may be, at the time
initially granted, issued or sold, but only if as a result of such
adjustment the Applicable Conversion Price then in effect hereunder is
thereby reduced; and on the termination of any such Option or any such
right to convert or exchange such Convertible Securities, the
Applicable Conversion Price then in effect hereunder shall forthwith
be increased to the Applicable Conversion Price which would have been
in effect at the time of such termination had such Option or
Convertible Securities, to the extent outstanding immediately prior to
such termination, never been issued.
6D(4) Stock Dividends. In case the Corporation
shall declare a dividend or make any other distribution upon any stock
of the Corporation payable in Common Stock (except for dividends or
distributions upon the Common Stock), Options or Convertible
Securities, any Common Stock, Options or Convertible Securities, as
the case may be, issuable in payment of such dividend or distribution
shall be deemed to have been issued or sold without consideration.
6D(5) Consideration for Stock. In case any shares
of Common Stock, Options or Convertible Securities shall be issued or
sold for cash, the consideration received therefor shall be deemed to
be the amount received by the Corporation therefor, without deduction
therefrom of any expenses incurred or any underwriting commissions or
concessions paid or allowed by the Corporation in connection
therewith. In case any shares of Common Stock, Options or Convertible
Securities shall be issued or sold for a consideration other than
cash, the amount of the consideration other than cash received by the
Corporation shall
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be deemed to be the fair value of such consideration as determined in
good faith by the Board of Directors of the Corporation, without
deduction of any expenses incurred or any underwriting commissions or
concessions paid or allowed by the Corporation in connection
therewith. In case any Options shall be issued in connection with the
issue and sale of other securities of the Corporation, together
comprising one integral transaction in which no specific consideration
is allocated to such Options by the parties thereto, such Options
shall be deemed to have been issued for such consideration as
determined in good faith by the Board of Directors of the Corporation.
6D(6) Record Date. In case the Corporation shall
take a record of the holders of its Common Stock for the purpose of
entitling them (i) to receive a dividend or other distribution payable
in Common Stock, Options or Convertible Securities or (ii) to
subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date shall be deemed to be the date of
the issue or sale of the shares of Common Stock deemed to have been
issued or sold upon the declaration of such dividend or the making of
such other distribution or the date of the granting of such right of
subscription or purchase, as the case may be.
6D(7) Treasury Shares. The number of shares of
Common Stock outstanding at any given time shall not include shares
owned or held by or for the account of the Corporation, and the
disposition of any such shares shall be considered an issue or sale of
Common Stock for the purpose of this subparagraph 6D.
6E. Certain Issues of Common Stock Excepted. Anything
herein to the contrary notwithstanding, the Corporation shall not be required
to make any adjustment of the Conversion Price in the case of the issuance from
and after the date of filing of these terms of the Series A Convertible
Preferred Stock of up to an aggregate of 3,927,629 shares (appropriately
adjusted to reflect the occurrence of any event described in subparagraph 6F)
of Common Stock to directors, officers, employees or consultants of the
Corporation in connection with their service as directors of the Corporation,
their employment by the Corporation or their retention as consultants by the
Corporation, or to suppliers and other parties as payment for goods or services
rendered to the Corporation, plus such number of shares of Common Stock which
are repurchased by the Corporation from such persons after such date pursuant
to contractual rights held by the Corporation and at repurchase prices not
exceeding the respective original purchase prices paid by such persons to the
Corporation therefor.
6F. Subdivision or Combination of Common Stock. In case
the Corporation shall at any time subdivide (by any stock split, stock dividend
or otherwise) its outstanding shares of Common Stock into a greater number of
shares, the Conversion Price in effect immediately prior to such subdivision
shall be proportionately reduced, and, conversely, in case the outstanding
shares of Common Stock shall be combined into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination shall be
proportionately
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increased. In the case of any such subdivision, no further adjustment shall be
made pursuant to subparagraph 6D(4) by reason thereof.
6G. Reorganization or Reclassification. If any capital
reorganization or reclassification of the capital stock of the Corporation
shall be effected in such a way that holders of Common Stock shall be entitled
to receive stock, securities or assets with respect to or in exchange for
Common Stock, then, as a condition of such reorganization or reclassification,
lawful and adequate provisions shall be made whereby each holder of a share or
shares of Preferred Stock shall thereupon have the right to receive, upon the
basis and upon the terms and conditions specified herein and in lieu of the
shares of Common Stock immediately theretofore receivable upon the conversion
of such share or shares of Preferred Stock, such shares of stock, securities or
assets as may be issued or payable with respect to or in exchange for a number
of outstanding shares of such Common Stock equal to the number of shares of
such Common Stock immediately theretofore receivable upon such conversion had
such reorganization or reclassification not taken place, and in any such case
appropriate provisions shall be made with respect to the rights and interests
of such holder to the end that the provisions hereof (including without
limitation provisions for adjustments of the Applicable Conversion Price) shall
thereafter be applicable, as nearly as may be, in relation to any shares of
stock, securities or assets thereafter deliverable upon the exercise of such
conversion rights.
6H. Notice of Adjustment. Upon any adjustment of the
Conversion Price, then and in each such case the Corporation shall give written
notice thereof, by delivery in person, certified or registered mail, return
receipt requested, telecopier or telex, addressed to each holder of shares of
Preferred Stock at the address of such holder as shown on the books of the
Corporation, which notice shall state the Series A Conversion Price or the
Series B Conversion Price, as the case may be, resulting from such adjustment,
setting forth in reasonable detail the method upon which such calculation is
based.
6I. Other Notices. In case at any time:
(1) the Corporation shall declare any dividend
upon its Common Stock payable in cash or stock or make any other
distribution to the holders of its Common Stock;
(2) the Corporation shall offer for subscription
pro rata to the holders of its Common Stock any additional shares of
stock of any class or other rights;
(3) there shall be any capital reorganization or
reclassification of the capital stock of the Corporation, or a
consolidation or merger of the Corporation with or into another entity
or entities, or a sale, lease, abandonment, transfer or other
disposition of all or substantially all its assets; or
(4) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Corporation;
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then, in any one or more of said cases, the Corporation shall give, by delivery
in person, certified or registered mail, return receipt requested, telecopier
or telex, addressed to each holder of any shares of Preferred Stock at the
address of such holder as shown on the books of the Corporation, (a) at least
20 days' prior written notice of the date on which the books of the Corporation
shall close or a record shall be taken for such dividend, distribution or
subscription rights or for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding up and (b) in the case of any such
reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding up, at least 20 days' prior written notice
of the date when the same shall take place. Such notice in accordance with the
foregoing clause (a) shall also specify, in the case of any such dividend,
distribution or subscription rights, the date on which the holders of Common
Stock shall be entitled thereto and such notice in accordance with the
foregoing clause (b) shall also specify the date on which the holders of Common
Stock shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, disposition, dissolution, liquidation or winding up, as the case may
be.
6J. Stock to be Reserved. The Corporation will at all
times reserve and keep available out of its authorized Common Stock, solely for
the purpose of issuance upon the conversion of Preferred Stock as herein
provided, such number of shares of Common Stock as shall then be issuable upon
the conversion of all outstanding shares of Preferred Stock. The Corporation
covenants that all shares of Common Stock which shall be so issued shall be
duly and validly issued and fully paid and nonassessable and free from all
taxes, liens and charges with respect to the issue thereof, and, without
limiting the generality of the foregoing, the Corporation covenants that it
will from time to time take all such action as may be requisite to assure that
the par value per share of the Common Stock is at all times equal to or less
than the Series A Conversion Price and the Series B Conversion Price in effect
at the time. The Corporation will take all such action as may be necessary to
assure that all such shares of Common Stock may be so issued without violation
of any applicable law or regulation, or of any requirement of any national
securities exchange upon which the Common Stock may be listed. The Corporation
will not take any action which results in any adjustment of the Conversion
Price if the total number of shares of Common Stock issued and issuable after
such action upon conversion of the Preferred Stock would exceed the total
number of shares of Common Stock then authorized by the Articles of
Incorporation.
6K. No Reissuance of Preferred Stock. Shares of
Preferred Stock which are converted into shares of Common Stock as provided
herein shall not be reissued.
6L. Issue Tax. The issuance of certificates for shares
of Common Stock upon conversion of Preferred Stock shall be made without charge
to the holders thereof for any issuance tax in respect thereof, provided that
the Corporation shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the holder of the Preferred Stock
which is being converted.
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6M. Closing of Books. The Corporation will at no time
close its transfer books against the transfer of any Preferred Stock or of any
shares of Common Stock issued or issuable upon the conversion of any shares of
Preferred Stock in any manner which interferes with the timely conversion of
such Preferred Stock, except as may otherwise be required to comply with
applicable securities laws.
6N. Definition of Common Stock. As used in this
paragraph 6, the term "Common Stock" shall mean and include the Corporation's
authorized Common Stock, par value $.001 per share, as constituted on the date
of filing of these terms of the Preferred Stock, and shall also include any
capital stock of any class of the Corporation thereafter authorized which shall
not be limited to a fixed sum or percentage in respect of the rights of the
holders thereof to participate in dividends or in the distribution of assets
upon the voluntary or involuntary liquidation, dissolution or winding up of the
Corporation; provided that the shares of Common Stock receivable upon
conversion of shares of Preferred Stock shall include only shares designated as
Common Stock of the Corporation on the date of filing of this instrument, or in
case of any reorganization or reclassification of the outstanding shares
thereof, the stock, securities or assets provided for in subparagraph 6G.
6O. Mandatory Conversion. If at any time the Corporation
shall effect a firm commitment underwritten public offering of shares of Common
Stock in which (i) the aggregate price paid for such shares by the public shall
be at least $10,000,000 and (ii) the price paid by the public for such shares
be at least $1.50 per share (appropriately adjusted to reflect the occurrence
of any event described in subparagraph 6F), then effective upon the closing of
the sale of such shares by the Corporation pursuant to such public offering,
all outstanding shares of Preferred Stock shall automatically convert to shares
of Common Stock on the basis set forth in this paragraph 6. Holders of shares
of Preferred Stock so converted may deliver to the Corporation at its principal
office (or such other office or agency of the Corporation as the Corporation
may designate by notice in writing to such holders) during its usual business
hours, the certificate or certificates for the shares so converted. As
promptly as practicable thereafter, the Corporation shall issue and deliver to
such holder a certificate or certificates for the number of whole shares of
Common Stock to which such holder is entitled, together with any cash dividends
and payment in lieu of fractional shares to which such holder may be entitled
pursuant to subparagraph 6C. Until such time as a holder of shares of
Preferred Stock shall surrender his or its certificates therefor as provided
above, such certificates shall be deemed to represent the shares of Common
Stock to which such holder shall be entitled upon the surrender thereof.
ARTICLE FIVE
The name and mailing address of the Sole Incorporator are as follows:
NAME MAILING ADDRESS
---- ---------------
Lynn Nannette Teng Gordon & Glickson P.C.
444 N. Michigan Ave., Suite 3600
Chicago, IL 60611
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ARTICLE SIX
The corporation shall have perpetual existence.
ARTICLE SEVEN
Meetings of stockholders may be held within or without the State of
Delaware, as the By-laws of the corporation may provide. The books of the
corporation may be kept outside the State of Delaware at such place or places
as may be designated from time to time by the board of directors or in the
By-laws of the corporation. Election of directors need not be by written
ballot unless the By-laws of the corporation so provide.
ARTICLE EIGHT
To the fullest extent permitted by the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended, a director of
this corporation shall not be liable to the corporation or its stockholders for
monetary damages for a breach of fiduciary duty as a director. Any repeal or
modification of this ARTICLE EIGHT shall not adversely affect any right or
protection of a director of the corporation existing at the time of such repeal
or modification.
ARTICLE NINE
Unless this Certificate of Incorporation is amended or repealed with
respect to this ARTICLE NINE or unless the By-laws of the corporation designate
otherwise, the corporation expressly elects not to be governed by Section 203
of the General Corporation Law of the State of Delaware
ARTICLE TEN
The corporation reserves the right to mend, alter, change or repeal
any provision contained in this Certificate of Incorporation in the manner now
or hereafter prescribed herein and by the General Corporation Law of the State
of Delaware, and all rights conferred upon stockholders herein are granted
subject to this reservation.
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I, THE UNDERSIGNED, being the Sole Incorporator hereinbefore named,
for the purpose of forming a corporation pursuant to the General Corporation
Law of the State of Delaware, under penalties of perjury do make this
Certificate, hereby declaring, certifying and acknowledging that this is my
true act and deed and the facts stated herein are true, and accordingly have
hereunto set my name as of this 27th day of December, 1995.
----------------------------------------
Lynn Nannette Teng, Sole Incorporator
14
<PAGE> 15
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "NEON SOFTWARE, INC." CHANGING ITS NAME FROM "NEON SOFTWARE, INC."
TO "NEW ERA OF NETWORKS, INC." FILED IN THIS OFFICE ON THE TWELFTH DAY OF
APRIL, A.D. 1996 AT 9 O'CLOCK A.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW
CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING.
[SEAL]
/s/ EDWARD J. FREEL
[SEAL] -----------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 7905493
2564986 8100 DATE: 04-12-96
960105934
<PAGE> 16
NEON SOFTWARE, INC.
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
(Adopted in Accordance with the Provisions of Section 242
of the General Corporation Law of the State of Delaware)
- --------------------------------------------------------------------------------
George F. Adam, being the Chief Executive Officer and Secretary of Neon
Software, Inc. a corporation organized and existing under and by virtue of the
laws of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY as
follows:
FIRST: That the Corporation's Certificate of Incorporation (the "Certificate
of Incorporation") be, and hereby is, amended to reflect a change in the
Corporation's name from Neon Software, Inc. to New Era Of Networks, Inc. by
deleting Article One in its entirety and substituting in lieu thereof a new
Article One as hereinafter set forth:
"ARTICLE ONE
The name of the Corporation is:
New Era Of Networks, Inc."
SECOND: That the Board of Directors of the Corporation approved the foregoing
amendments by unanimous written consent in accordance with the provisions of
Sections 141(f) and 242 of the General Corporation Law of the State of Delaware
and directed that such amendments be submitted to the Stockholders of the
Corporation entitled to vote thereon form their consideration, approval and
adoption thereof.
THIRD: That the Stockholders of the Corporation entitled to vote thereon
approved the foregoing amendments by unanimous written consent in accordance
with the provisions of Sections 228(c) and 242 of the General Corporation Law
of the State of Delaware.
[SIGNATURE PAGE TO FOLLOW]
<PAGE> 17
IN WITNESS WHEREOF, the undersigned, being the Chief Executive Officer and
Secretary hereinabove named, for the purpose of amending the Certificate of
Incorporation of the Corporation in accordance with the applicable provisions
of the General Corporation Law of the State of Delaware, under penalties of
perjury does hereby declare and certify that this is the act and deed of the
Corporation and that the facts stated herein are true, and accordingly have
hereunto signed this Certificate of Amendment of Certificate of Incorporation
as of this 1st day of March, 1996.
NEON SOFTWARE, INC.
By: /s/ GEORGE F. ADAM, JR.
-----------------------------------
George F. Adam, Jr.
Its: Chief Executive Officer & Secretary
<PAGE> 18
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "NEW ERA OF NETWORKS, INC.", FILED IN THIS OFFICE ON THE THIRD DAY
OF JUNE, A.D. 1996, AT 9 O'CLOCK A.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW
CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING.
[SEAL]
/s/ EDWARD J. FREEL
[SEAL] -----------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 7970281
2564986 8100 DATE: 06-03-96
960159993
<PAGE> 19
NEW ERA OF NETWORKS, INC.
Certificate of Amendment of Certificate of Incorporation
(Adopted in Accordance with the Provisions of Section 242
of the General Corporation Law of the State of Delaware)
- --------------------------------------------------------------------------------
George F. Adam, being the Chief Executive Officer and Secretary of New Era Of
Networks, Inc., a corporation organized and existing under and by virtue of
the laws of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY as
follows:
FIRST: That the Corporation's Certificate of Incorporation (the
"Certificate of Incorporation") be, and hereby is, amended to (i) provide
for an increase in its authorized shares, inclusive of such is the
creation and designation of a new "Series C Convertible Preferred Stock,"
par value $.01 per share and (ii) restate the preferences, qualifications,
limitations, restrictions and special or relative rights of the
Corporation's Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock, by deleting Article Four in its entirety and substituting
in lieu thereof a new Article Four, all as set forth on Exhibit A attached
hereto and made a part hereof.
SECOND: That the Board of Directors of the Corporation approved the
foregoing amendments by unanimous written consent in accordance with the
provisions of Sections 141(f) and 242 of the General Corporation Law of
the State of Delaware and directed that such amendments be submitted to
the Stockholders of the Corporation entitled to vote thereon for their
consideration, approval and adoption thereof.
THIRD: That the Stockholders of the Corporation entitled to vote
thereon approved the foregoing amendments by unanimous written consent in
accordance with the provisions of Sections 228(c) and 242 of the General
Corporation Law of the State of Delaware.
[SIGNATURE PAGE TO FOLLOW]
<PAGE> 20
IN WITNESS WHEREOF, the undersigned, being the Chief Executive Officer and
Secretary hereinabove named, for the purpose of amending the Certificate of
Incorporation of the Corporation in accordance with the applicable provisions
of the General Corporation Law of the State of Delaware, under penalties of
perjury does hereby declare and certify that this is the act and deed of the
Corporation and that the facts stated herein are true, and accordingly have
hereunto signed this Certificate of Amendment of Certificate of Incorporation
as of this 28th day of May, 1996.
NEW ERA OF NETWORKS, INC.
By: /s/ GEORGE F. ADAM, JR.
----------------------------
George F. Adam, Jr.
Its: Chief Executive Officer & Secretary
<PAGE> 21
NEW ERA OF NETWORKS, INC.
EXHIBIT A TO CERTIFICATE OF AMENDMENT
- --------------------------------------------------------------------------------
ARTICLE FOUR
1. Authorized Shares/Designations The aggregate number of
shares of capital stock which the corporation has authority to issue is
53,292,615 shares, comprised of (i) 33,275,652 shares of Common Stock, par
value $.001 per share (the "Common Stock"); and (ii) 9,169,028 shares of Series
A Convertible Preferred Stock, par value $.01 per share (the "Series A
Preferred Stock") and 6,183,339 shares of Series B Convertible Preferred Stock,
par value $.01 per share (the "Series B Preferred Stock" and 4,664,596 shares of
Series C Convertible Preferred Stock, par value $.01 per share (the "Series C
Preferred Stock); the Series A, Series B and Series C Preferred Stock are
sometimes collectively referred to herein as the "Preferred Stock")
2. Voting
2A. General. Except as may be otherwise provided in
these terms of the Preferred Stock or by law, the holders of Preferred Stock
and Common Stock shall vote together with all other classes and series of stock
of the Corporation as a single class on all actions to be taken by the
stockholders of the Corporation, including, but not limited to actions amending
the Articles of Incorporation of the Corporation to increase the number of
authorized shares of Common Stock. Each holder of Preferred Stock shall be
entitled to one vote for each share of Common Stock (including fractions of a
share) which would be issuable to such holder upon the conversion of all the
shares of Preferred Stock so held on the record date for the determination of
stockholders entitled to vote. Each holder of Common Stock shall be entitled
to one vote per share.
2B. Board Size. The Corporation shall not, without the
written consent or affirmative vote of the holders of a majority of the then
outstanding shares of Preferred Stock, given in writing or by vote at a
meeting, consenting or voting (as the case may be) separately as a single
class, reduce the number of directors constituting the Board of Directors to a
number less than five or increase the maximum number of directors constituting
the Board of Directors to a number in excess of seven.
2C. Board Seats. The holders of the Series A Preferred
Stock, voting as a separate series, shall be entitled to elect one director of
the Corporation. The holders of the Series B Preferred Stock, voting as a
separate series, shall be entitled to elect one director of the Corporation.
The holders of the Series C. Preferred Stock, voting as a separate series,
shall be entitled to elect one director of the Corporation. The holders of the
Common Stock, voting as a separate class, shall be entitled to elect the
remaining directors of the Corporation. At any meeting (or in a written
consent in lieu thereof) held for the purpose of electing directors, the
presence in person or by proxy (or the written consent) of the holders of a
majority of the shares
<PAGE> 22
of Series A Preferred Stock then outstanding shall constitute a quorum of
Series A Preferred Stock for the election of the director to be elected solely
by the holders of Series A Preferred Stock; the presence in person or by
proxy (or the written consent) of the holders of a majority of the shares of
Series B Preferred Stock then outstanding shall constitute a quorum of Series B
Preferred Stock for the election of the director to be elected solely by the
holders of Series B Preferred Stock and the presence in person or by proxy (or
the written consent) of the holders of a majority of the shares of Series C
Preferred Stock then outstanding shall constitute a quorum of Series C
Preferred stock for the election of the director to be elected solely by the
holders of Series C Preferred Stock. A vacancy in the directorship elected by
the holders of the Series A Preferred Stock shall be filled only by vote or
written consent of the holders of the Series A Preferred Stock. A vacancy in
the directorship elected by the holders of Series B Preferred Stock shall be
filled only by vote or written consent of the holders of Series B Preferred
Stock. A vacancy in the directorship elected by the holders of Series C
Preferred Stock shall be filled only by vote or written consent of the holders
of Series C Preferred Stock. A vacancy in any directorship elected by the
holders of the Common Stock shall be filled only by vote or written consent of
the holders of the Common Stock.
3. Dividends. The holders of the Preferred Stock shall be
entitled to receive, out of funds legally available therefor, dividends at the
same rate as dividends (other than dividends paid in additional shares of
Common Stock) are paid with respect to the Common Stock (treating each share of
Preferred Stock as being equal to the number of shares of Common Stock
(including fractions of a share) into which each share of Preferred Stock is
then convertible).
4. Liquidation.
4A(1) Upon any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, the holders of the shares of
Series B Preferred Stock and Series C Preferred Stock shall together be
entitled, before any distribution or payment is made upon any stock ranking on
liquidation junior to the Series B Preferred Stock or the Series C Preferred
Stock, to be paid an amount equal to the greater of (i) $.3032342 per share in
the case of the Series B Preferred Stock and $1.61 per share in the case of the
Series C Preferred Stock (each as adjusted for stock splits, stock dividends
and the like) plus, in the case of each share, an amount equal to any dividends
declared but unpaid thereon, computed to the date payment thereof is made
available, or (ii) such amount per share as would have been payable had each
such share been converted to Common Stock pursuant to paragraph 6 immediately
prior to such liquidation, dissolution or winding up, and the holders of Series
B Preferred Stock and Series C Preferred Stock shall not be entitled to any
further payment, such amount payable with respect to one share of Series B
Preferred Stock being sometimes referred to as the "Series B Liquidation
Payment" and with respect to all shares of Series B Preferred Stock being
sometimes referred to as the "Series B Liquidation Payments" and such amount
payable with respect to one share of Series C Preferred Stock being sometimes
referred to as the "Series C Liquidation Payment" and with respect to all
shares of Series C Preferred Stock being sometimes referred to as the "Series C
Liquidation Payments." If upon such liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, the assets to be distributed
among the holders of Series B Preferred Stock and the holders of Series C
Preferred Stock shall be insufficient to permit
-2-
<PAGE> 23
payment to such holders of the amount distributable
as aforesaid, then the entire assets of the Corporation to be so distributed
shall be distributed ratably among the holders of Series B Preferred Stock and
the holders of Series C Preferred Stock in the proportion that the value of the
Series B Preferred Stock and Series C Preferred Stock held by each such holder
bears to the total value of the series B Preferred Stock and Series C Preferred
Stock computed as follows:
(i) the value of the Series B Preferred Stock ("VB") held
by each Series B Preferred Shareholder shall equal the number of shares of
Series B Preferred Stock so held multiplied by $.3032342 (as adjusted for stock
splits, stock dividends and the like).
(ii) the value of the Series C Preferred Stock ("VC") held
by each Series C Preferred Shareholder shall equal the number of shares of
Series C Preferred Stock so held multiplied by $1.61 (as adjusted for stock
splits, stock dividends and the like).
(iii) the total value of the Series B Preferred Stock and
Series C Preferred Stock shall equal the sum of VB and VC for all holders of
Series B Preferred Stock and all holders of Series C Preferred Stock.
4A(2) Upon any such liquidation, dissolution or winding up
of the Corporation, after the holders of Series B Preferred Stock and the
holders of Series C Preferred stock shall have been paid in full the amounts to
which they shall be entitled, the holders of the shares of Series A Preferred
Stock shall be entitled, before any distribution or payment is made upon any
stock ranking on liquidation junior to the Series A Preferred Stock, to be paid
an amount equal to the greater of (i) $.218 per share plus, (as adjusted for
stock split, stock dividends and the like) in the case of each share, an amount
equal to any dividends declared but unpaid thereon, computed to the date
payment thereof is made available, or (ii) such amount per share as would have
been payable had each such share been converted to Common Stock pursuant to
paragraph 6 immediately prior to such liquidation, dissolution or winding up,
and the holders of Series A Preferred Stock shall not be entitled to any
further payment, such amount payable with respect to one share of Series A
Preferred Stock being sometimes referred to as the "Series A Liquidation
Payment," with respect to all shares of Series A Preferred Stock being
sometimes referred to as the "Series A Liquidation Payments," and collectively
with the Series B Liquidation Payments and the Series C Liquidation Payments,
the "Liquidation Payments." If upon such liquidation dissolution or winding up
of the Corporation, whether voluntary or involuntary, the assets to be
distributed among the holders of Series A Preferred Stock shall be insufficient
to permit payment to the holders of Series A Preferred Stock of the amount
distributable as aforesaid, then the entire remaining assets of the Corporation
to be so distributed shall be distributed ratably among the holders of Series A
Preferred Stock. Upon any such liquidation, dissolution or winding up of the
Corporation, after the holders of Series A Preferred Stock shall have been paid
in full the amounts to which they shall be entitled, the remaining net assets
of the Corporation may be distributed to the holders of stock ranking on
liquidation junior to the Series A Preferred Stock. Written notice of such
liquidation, dissolution or winding up, stating a payment date, the amount of
the Liquidation Payments and the place where Liquidation Payments shall be
payable, shall be delivered in person, mailed by certified or registered mail,
return receipt requested, or sent by telecopier or telex, not less than 20 days
prior to the payment date stated therein, to the holders of
-3-
<PAGE> 24
record of Preferred Stock, such notice to be addressed to each such holder at
its address as shown by the records of the Corporation.
4B. The consolidation or merger of the Corporation into
or with any other entity or entities which results in the exchange of
outstanding shares of the Corporation for securities or other consideration
issued or paid or caused to be issued or paid by any such entity or affiliate
thereof (other than (x) a merger to reincorporate the Corporation in a
different jurisdiction and (y) a merger in which the Corporation is the
surviving entity, that is, in which the Corporation's shareholders own or
control 50% or more of the surviving entity's voting shares), and the sale,
lease, abandonment, transfer or other disposition by the Corporation of all or
substantially all its assets, shall be deemed to be a liquidation, dissolution
or winding up of the Corporation within the meaning of the provisions of this
paragraph 4. For purposes of paragraph 4, the Common Stock shall rank on
liquidation junior to the Series A Preferred Stock; the Series A Preferred
Stock shall rank on liquidation junior to the Series B Preferred Stock and the
Series C Preferred Stock, and the Series B Preferred Stock shall rank on
liquidation in parity with the Series C Preferred Stock.
5. Restrictions. At any time when shares of Preferred Stock are
outstanding, except where the vote or written consent of the holders of a
greater number of shares of the Corporation is required by law or by the
Articles of Incorporation, and in addition to any other vote required by law or
the Articles of Incorporation, without the approval of the holders of a
majority of the then outstanding shares of Preferred Stock given in writing or
by vote at a meeting, consenting or voting (as the case may be) separately as a
series, the Corporation will not:
5A. Create or authorize the creation of any additional
class or series of shares of stock unless the same ranks junior to each and all
series of Preferred Stock as to the distribution of assets on the liquidation,
dissolution or winding up of the Corporation, or increase the authorized amount
of Preferred Stock or increase the authorized amount of any additional class or
series of shares of stock unless the same ranks junior to each and all series
of Preferred Stock as to the distribution of assets on the liquidation,
dissolution or winding up of the Corporation, or create or authorize any
obligation or security convertible into shares of Preferred Stock or into
shares of any other class or series of stock unless the same ranks junior to
both series of Preferred Stock as to the distribution of assets on the
liquidation, dissolution or winding up of the Corporation, whether any such
creation, authorization or increase shall be by means of amendment to the
Articles of Incorporation or by merger, consolidation or otherwise;
5B. Consent to any liquidation, dissolution or winding up
of the Corporation or consolidate or merge into or with any other entity or
entities or sell, lease, abandon, transfer or otherwise dispose of all or
substantially all its assets, provided, however, that this Section 5B does not
apply to mergers in which the Corporation is the surviving entity (that is, in
cases in which the Corporation's shareholders own or control 50% or more of the
surviving entity's voting shares);
5C. Either (i) amend, alter or repeal its By-laws or (ii)
amend, alter or repeal its Articles of Incorporation or By-laws in manner
adversely and substantially affecting any series of Preferred Stock relative to
the other series of Preferred Stock; provided that, in the case of
-4-
<PAGE> 25
clause (ii), the holders of a majority of the then outstanding shares of such
series of Preferred Stock being so affected have previously approved such
amendment, alteration or repeal.
5D. Purchase or set aside any sums for the purchase of,
or pay any dividend or make any distribution on, any shares of stock other than
Preferred Stock, except for dividends or other distributions payable on the
Common Stock solely in the form of additional shares of Common Stock and except
for the purchase of shares of Common Stock from former employees of the
Corporation who acquired such shares directly from the Corporation, if each
such purchase is made pursuant to contractual rights held by the Corporation
relating to the termination of employment of such former employee and the
purchase price does not exceed the original issue price paid by such former
employee to the Corporation for such shares; or
5E. Redeem or otherwise acquire any shares of Preferred
Stock except pursuant to a purchase offer made pro rata to all holders of the
shares of Preferred Stock on the basis of the aggregate number of outstanding
shares of Preferred Stock then held by each such holder.
6. Conversions. The holders of shares of Preferred Stock shall
have the following conversion rights:
6A. Right to Convert. Subject to the terms and
conditions of this paragraph 6, the holder of any share or shares of Preferred
Stock shall have the right, at its option at any time, to convert any such
shares of Preferred Stock (except that upon any liquidation of the Corporation
the right of conversion shall terminate at the close of business on the
business day fixed for payment of the amount distributable on Preferred Stock)
into such number of fully paid and nonassessable shares of Common Stock as is
obtained as follows:
(i) with respect to the Series A Preferred Stock, by
(a) multiplying the number of shares of Series A Preferred Stock so to
be converted by $.218 and (b) dividing the result by the conversion
price of $.218 per share or, in case an adjustment of such price has
taken place pursuant to the further provisions of this paragraph 6,
then by the conversion price as last adjusted and in effect at the
date any share or shares of Series A Preferred Stock are surrendered
for conversion, and
(ii) with respect to the Series B Preferred Stock, by
(a) multiplying the number of shares of Series B Preferred Stock so to
be converted by $.3032342 and (b) dividing the result by the
conversion price of $.3032342 per share or, in case an adjustment of
such price has taken place pursuant to the further provisions of this
paragraph 6, then by the conversion price as last adjusted and in
effect at the date any share or shares of Series B Preferred Stock are
surrendered for conversion; and
(iii) with respect to the Series C Preferred Stock,
by (a) multiplying the number of shares of Series C Preferred Stock so
to be converted by $1.61 and (b) dividing the result by the conversion
price of $1.61 per share or, in case an adjustment of such price has
taken place pursuant to the further provisions of this paragraph 6,
then by the
-5-
<PAGE> 26
conversion price as last adjusted and in effect at the date any share
or shares of Series C Preferred Stock are surrendered for conversion.
The respective prices at which the shares of Series A Preferred Stock and the
shares of Series B Preferred Stock and the Series C Preferred Stock may be
converted into shares of Common Stock, as adjusted in accordance with this
paragraph 6, are referred to herein as the "Series A Conversion Price," "Series
B Conversion Price" and the "Series C Conversion Price"; respectively, and the
term "Conversion Price" as used herein shall refer to either the Series A
Conversion Price, Series B Conversion Price or the Series C Conversion Price,
as the context shall require.
Such rights of conversion shall be exercised by the holder thereof by
giving written notice that the holder elects to convert a stated number of
shares of Preferred Stock into Common Stock and by surrender of a certificate
or certificates for the shares so to be converted to the Corporation at its
principal office (or such other office or agency of the Corporation as the
Corporation may designate by notice in writing to the holders of Preferred
Stock) at any time during its usual business hours on the date set forth in
such notice, together with a statement of the name or names (with address) in
which the certificate or certificates for shares of Common Stock shall be
issued.
6B. Issuance of Certificates; Time Conversion Effected.
Promptly after the receipt of the written notice referred to in subparagraph 6A
and surrender of the certificate or certificates for the share or shares of
Preferred Stock to be converted, the Corporation shall issue and deliver, or
cause to be issued and delivered, to the holder, registered in such name or
names as such holder may direct, a certificate or certificates for the number
of whole shares of Common Stock issuable upon the conversion of such share or
shares of Preferred Stock. To the extent permitted by law, such conversion
shall be deemed to have been effected and the Conversion Price shall be
determined as of the close of business on the date on which such written notice
shall have been received by the Corporation and the certificate or certificates
for such share or shares shall have been surrendered as aforesaid, and at such
time the rights of the holder of such share or shares of Preferred Stock shall
cease, and the person or persons in whose name or names any certificate or
certificates for shares of Common Stock shall be issuable upon such conversion
shall be deemed to have become the holder or holders of record of the shares
represented thereby.
6C. Fractional Shares; Dividends; Partial Conversion. No
fractional shares shall be issued upon conversion of Preferred Stock into
Common Stock and no payment or adjustment shall be made upon any conversion on
account of any cash dividends on the Common Stock issued upon such conversion.
At the time of each conversion, the Corporation shall pay in cash an amount
equal to all dividends, declared and unpaid on the shares of Preferred Stock
surrendered for conversion to the date upon which such conversion is deemed to
take place as provided in subparagraph 6B. In case the number of shares of
Preferred Stock represented by the certificate or certificates surrendered
pursuant to subparagraph 6A exceeds the number of shares converted, the
Corporation shall, upon such conversion, execute and deliver to the holder, at
the expense of the Corporation, a new certificate or certificates for the
number of shares of Preferred Stock represented by the certificate or
certificates surrendered which are not to be converted. If
-6-
<PAGE> 27
any fractional share of Common Stock would, except for the provisions of the
first sentence of this subparagraph 6C, be delivered upon such conversion, the
Corporation, in lieu of delivering such fractional share, shall pay to the
holder surrendering the Preferred Stock for conversion an amount in cash equal
to the current market price of such fractional share as determined in good
faith by the Board of Directors of the Corporation.
6D. Adjustment of Price Upon Issuance of Common Stock.
Except as provided in subparagraph 6E, if and whenever the Corporation shall
issue or sell, or is, in accordance with subparagraphs 6D(1) through 6D(7),
deemed to have issued or sold, any shares of Common Stock for a consideration
per share less than the Series A Conversion Price, Series B Conversion Price or
Series C Conversion Price, as the case may be (the "Applicable Conversion
Price"), in effect immediately prior to the time of such issue or sale, then,
forthwith upon such issue or sale, the Applicable Conversion Price shall be
reduced to the price determined by dividing (i) an amount equal to the sum of
(a) the number of shares of Common Stock outstanding immediately prior to such
issue or sale multiplied by the then existing Applicable Conversion Price and
(b) the consideration, if any, received by the Corporation upon such issue or
sale, by (ii) the total number of shares of Common Stock outstanding
immediately after such issue or sale.
For purposes of this subparagraph 6D, the following subparagraphs
6D(1) to 6D(7) shall also be applicable:
6D(1) Issuance of Rights or Options. In case at any
time the Corporation shall in any manner grant (whether directly or by
assumption in a merger or otherwise) any warrants or other rights to
subscribe for or to purchase, or any options for the purchase of,
Common Stock or any stock or security convertible into or exchangeable
for Common Stock (such warrants, rights or options being called
"Options" and such convertible or exchangeable stock or securities
being called "Convertible Securities") whether or not such Options or
the right to convert or exchange any such Convertible Securities are
immediately exercisable, and the price per share for which Common
Stock is issuable upon the exercise of such Options or upon the
conversion or exchange of such Convertible Securities (determined by
dividing (i) the total amount, if any, received or receivable by the
Corporation as consideration for the granting of such Options, plus
the minimum aggregate amount of additional consideration payable to
the Corporation upon the exercise of all such Options, plus, in the
case of such Options which relate to Convertible Securities, the
minimum aggregate amount of additional consideration, if any, payable
upon the issue or sale of such Convertible Securities and upon the
conversion or exchange thereof, by (ii) the total maximum number of
shares of Common Stock issuable upon the exercise of such Options or
upon the conversion or exchange of all such Convertible Securities
issuable upon the exercise of such Options) shall be less than the
Applicable Conversion Price in effect immediately prior to the time of
the granting of such Options, then the total maximum number of shares
of Common Stock issuable upon the exercise of such Options or upon
conversion or exchange of the total maximum amount of such Convertible
Securities issuable upon the exercise of such Options shall be deemed
to have been issued for such price per share as of the date of
granting of such Options or the
-7-
<PAGE> 28
issuance of such Convertible Securities and thereafter shall be deemed
to be outstanding. Except as otherwise provided in subparagraph
6D(3), no adjustment of the Conversion Price shall be made upon the
actual issue of such Common Stock or of such Convertible Securities
upon exercise of such Options or upon the actual issue of such Common
Stock upon conversion or exchange of such Convertible Securities.
6D(2) Issuance of Convertible Securities. In case
the Corporation shall in any manner issue (whether directly or by
assumption in a merger or otherwise) or sell any Convertible
Securities, whether or not the rights to exchange or convert any such
Convertible Securities are immediately exercisable, and the price per
share for which Common Stock is issuable upon such conversion or
exchange (determined by dividing (i) the total amount received or
receivable by the Corporation as consideration for the issue or sale
of such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Corporation upon the
conversion or exchange thereof, by (ii) the total maximum number of
shares of Common Stock issuable upon the conversion or exchange of all
such Convertible Securities) shall be less than the Applicable
Conversion Price in effect immediately prior to the time of such issue
or sale, then the total maximum number of shares of Common Stock
issuable upon conversion or exchange of all such Convertible
Securities shall be deemed to have been issued for such price per
share as of the date of the issue or sale of such Convertible
Securities and thereafter shall be deemed to be outstanding, provided
that (a) except as otherwise provided in subparagraph 6D(3), no
adjustment of the Conversion Price shall be made upon the actual issue
of such Common Stock upon conversion or exchange of such Convertible
Securities and (b) if any such issue or sale of such Convertible
Securities is made upon exercise of any Options to purchase any such
Convertible Securities for which adjustments of the Conversion Price
have been or are to be made pursuant to other provisions of this
subparagraph 6D, no further adjustment of the Conversion Price shall
be made by reason of such issue or sale.
6D(3) Change in Option Price or Conversion Rate.
Upon the happening of any of the following events, namely, if the
purchase price provided for in any Option referred to in subparagraph
6D(1), the additional consideration, if any, payable upon the
conversion or exchange of any Convertible Securities referred to in
subparagraph 6D(1) or 6D(2), or the rate at which Convertible
Securities referred to in subparagraph 6D(1) or 6D(2) are convertible
into or exchangeable for Common Stock shall change at any time
(including, but not limited to, changes under or by reason of
provisions designed to protect against dilution), the Applicable
Conversion Price in effect at the time of such event shall forthwith
be readjusted to the Applicable Conversion Price which would have been
in effect at such time had such Options or Convertible Securities
still outstanding provided for such changed purchase price, additional
consideration or conversion rate, as the case may be, at the time
initially granted, issued or sold, but only if as a result of such
adjustment the Applicable Conversion Price then in effect hereunder is
thereby reduced; and on the termination of any such Option or any such
right to convert or exchange such Convertible Securities, the
Applicable Conversion Price then in effect hereunder shall forthwith
be increased to the Applicable Conversion Price which would have been
in effect
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<PAGE> 29
at the time of such termination had such Option or Convertible
Securities, to the extent outstanding immediately prior to such
termination, never been issued.
6D(4) Stock Dividends. In case the Corporation
shall declare a dividend or make any other distribution upon any stock
of the Corporation payable in Common Stock (except for dividends or
distributions upon the Common Stock), Options or Convertible
Securities, any Common Stock, Options or Convertible Securities, as
the case may be, issuable in payment of such dividend or distribution
shall be deemed to have been issued or sold without consideration.
6D(5) Consideration for Stock. In case any shares
of Common Stock, Options or Convertible Securities shall be issued or
sold for cash, the consideration received therefor shall be deemed to
be the amount received by the Corporation therefor, without deduction
therefrom of any expenses incurred or any underwriting commissions or
concessions paid or allowed by the Corporation in connection
therewith. In case any shares of Common Stock, Options or Convertible
Securities shall be issued or sold for a consideration other than
cash, the amount of the consideration other than cash received by the
Corporation shall be deemed to be the fair value of such consideration
as determined in good faith by the Board of Directors of the
Corporation, without deduction of any expenses incurred or any
underwriting commissions or concessions paid or allowed by the
Corporation in connection therewith. In case any Options shall be
issued in connection with the issue and sale of other securities of
the Corporation, together comprising one integral transaction in which
no specific consideration is allocated to such Options by the parties
thereto, such Options shall be deemed to have been issued for such
consideration as determined in good faith by the Board of Directors of
the Corporation.
6D(6) Record Date. In case the Corporation shall
take a record of the holders of its Common Stock for the purpose of
entitling them (i) to receive a dividend or other distribution payable
in Common Stock, Options or Convertible Securities or (ii) to
subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date shall be deemed to be the date of
the issue or sale of the shares of Common Stock deemed to have been
issued or sold upon the declaration of such dividend or the making of
such other distribution or the date of the granting of such right of
subscription or purchase, as the case may be.
6D(7) Treasury Shares. The number of shares of
Common Stock outstanding at any given time shall not include shares
owned or held by or for the account of the Corporation, and the
disposition of any such shares shall be considered an issue or sale of
Common Stock for the purpose of this subparagraph 6D.
6E. Certain Issues of Common Stock Excepted. Anything
herein to the contrary notwithstanding, the Corporation shall not be required
to make any adjustment of the Conversion Price in the case of the issuance from
and after May 2, 1995 of up to an aggregate of 6,427,629 shares (appropriately
adjusted to reflect the occurrence of any event described in subparagraph 6F)
of Common Stock to directors, officers, employees or consultants of the
-9-
<PAGE> 30
Corporation in connection with their service as directors of the Corporation,
their employment by the Corporation or their retention as consultants by the
Corporation, or to suppliers and other parties as payment for goods or services
rendered to the Corporation, plus such number of shares of Common Stock which
are repurchased by the Corporation from such persons after such date pursuant
to contractual rights held by the Corporation and at repurchase prices not
exceeding the respective original purchase prices paid by such persons to the
Corporation therefor.
6F. Subdivision or Combination of Common Stock. In case
the Corporation shall at any time subdivide (by any stock split, stock dividend
or otherwise) its outstanding shares of Common Stock into a greater number of
shares, the Conversion Price in effect immediately prior to such subdivision
shall be proportionately reduced, and, conversely, in case the outstanding
shares of Common Stock shall be combined into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination shall be
proportionately increased. In the case of any such subdivision, no further
adjustment shall be made pursuant to subparagraph 6D(4) by reason thereof.
6G. Reorganization or Reclassification. If any capital
reorganization or reclassification of the capital stock of the Corporation
shall be effected in such a way that holders of Common Stock shall be entitled
to receive stock, securities or assets with respect to or in exchange for
Common Stock, then, as a condition of such reorganization or reclassification,
lawful and adequate provisions shall be made whereby each holder of a share or
shares of Preferred Stock shall thereupon have the right to receive, upon the
basis and upon the terms and conditions specified herein and in lieu of the
shares of Common Stock immediately theretofore receivable upon the conversion
of such share or shares of Preferred Stock, such shares of stock, securities or
assets as may be issued or payable with respect to or in exchange for a number
of outstanding shares of such Common Stock equal to the number of shares of
such Common Stock immediately theretofore receivable upon such conversion had
such reorganization or reclassification not taken place, and in any such case
appropriate provisions shall be made with respect to the rights and interests
of such holder to the end that the provisions hereof (including without
limitation provisions for adjustments of the Applicable Conversion Price) shall
thereafter be applicable, as nearly as may be, in relation to any shares of
stock, securities or assets thereafter deliverable upon the exercise of such
conversion rights.
6H. Notice of Adjustment. Upon any adjustment of the
Conversion Price, then and in each such case the Corporation shall give written
notice thereof, by delivery in person, certified or registered mail, return
receipt requested, telecopier or telex, addressed to each holder of shares of
Preferred Stock at the address of such holder as shown on the books of the
Corporation, which notice shall state the Series A Conversion Price, Series B
Conversion Price or the Series C Conversion Price, as the case may be,
resulting from such adjustment, setting forth in reasonable detail the method
upon which such calculation is based.
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<PAGE> 31
6I. Other Notices. In case at any time:
(1) the Corporation shall declare any dividend
upon its Common Stock payable in cash or stock or make any other
distribution to the holders of its Common Stock;
(2) the Corporation shall offer for subscription
pro rata to the holders of its Common Stock any additional shares of
stock of any class or other rights;
(3) there shall be any capital reorganization or
reclassification of the capital stock of the Corporation, or a
consolidation or merger of the Corporation with or into another entity
or entities, or a sale, lease, abandonment, transfer or other
disposition of all or substantially all its assets; or
(4) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall give, by delivery
in person, certified or registered mail, return receipt requested, telecopier
or telex, addressed to each holder of any shares of Preferred Stock at the
address of such holder as shown on the books of the Corporation, (a) at least
20 days' prior written notice of the date on which the books of the Corporation
shall close or a record shall be taken for such dividend, distribution or
subscription rights or for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding up and (b) in the case of any such
reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding up, at least 20 days' prior written notice
of the date when the same shall take place. Such notice in accordance with the
foregoing clause (a) shall also specify, in the case of any such dividend,
distribution or subscription rights, the date on which the holders of Common
Stock shall be entitled thereto and such notice in accordance with the
foregoing clause (b) shall also specify the date on which the holders of Common
Stock shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, disposition, dissolution, liquidation or winding up, as the case may
be.
6J. Stock to be Reserved. The Corporation will at all
times reserve and keep available out of its authorized Common Stock, solely for
the purpose of issuance upon the conversion of Preferred Stock as herein
provided, such number of shares of Common Stock as shall then be issuable upon
the conversion of all outstanding shares of Preferred Stock. The Corporation
covenants that all shares of Common Stock which shall be so issued shall be duly
and validly issued and fully paid and nonassessable and free from all taxes,
liens and charges with respect to the issue thereof, and, without limiting the
generality of the foregoing, the Corporation covenants that it will from time to
time take all such action as may be requisite to assure that the par value per
share of the Common Stock is at all times equal to or less than any Conversion
Price in effect at the time. The Corporation will take all such action as may
be necessary to assure that all such shares of Common Stock may be so issued
without violation of any applicable law or regulation, or of any requirement of
any national securities exchange upon which the Common Stock may be listed. The
Corporation will not take any action which results in any adjustment of the
Conversion Price if the total number of shares of Common Stock issued and
issuable after
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<PAGE> 32
such action upon conversion of the Preferred Stock would exceed the total
number of shares of Common Stock then authorized by the Articles of
Incorporation.
6K. No Reissuance of Preferred Stock. Shares of
Preferred Stock which are converted into shares of Common Stock as provided
herein shall not be reissued.
6L. Issue Tax. The issuance of certificates for shares
of Common Stock upon conversion of Preferred Stock shall be made without charge
to the holders thereof for any issuance tax in respect thereof, provided that
the Corporation shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the holder of the Preferred Stock
which is being converted.
6M. Closing of Books. The Corporation will at no time
close its transfer books against the transfer of any Preferred Stock or of any
shares of Common Stock issued or issuable upon the conversion of any shares of
Preferred Stock in any manner which interferes with the timely conversion of
such Preferred Stock, except as may otherwise be required to comply with
applicable securities laws.
6N. Definition of Common Stock. As used in this
paragraph 6, the term "Common Stock" shall mean and include the Corporation's
authorized Common Stock, par value $.001 per share, as constituted on the date
of filing of these terms of the Preferred Stock, and shall also include any
capital stock of any class of the Corporation thereafter authorized which shall
not be limited to a fixed sum or percentage in respect of the rights of the
holders thereof to participate in dividends or in the distribution of assets
upon the voluntary or involuntary liquidation, dissolution or winding up of the
Corporation; provided that the shares of Common Stock receivable upon
conversion of shares of Preferred Stock shall include only shares designated as
Common Stock of the Corporation on the date of filing of this instrument, or in
case of any reorganization or reclassification of the outstanding shares
thereof, the stock, securities or assets provided for in subparagraph 6G.
6O. Mandatory Conversion. If at any time the Corporation
shall effect a firm commitment underwritten public offering of shares of Common
Stock in which (i) the aggregate price paid for such shares by the public shall
be at least $15,000,000 and (ii) the price paid by the public for such shares
be at least $3.22 per share (appropriately adjusted to reflect the occurrence
of any event described in subparagraph 6F), then effective upon the closing of
the sale of such shares by the Corporation pursuant to such public offering,
all outstanding shares of Preferred Stock shall automatically convert to shares
of Common Stock on the basis set forth in this paragraph 6. Holders of shares
of Preferred Stock so converted may deliver to the Corporation at its principal
office (or such other office or agency of the Corporation as the Corporation
may designate by notice in writing to such holders) during its usual business
hours, the certificate or certificates for the shares so converted. As
promptly as practicable thereafter, the Corporation shall issue and deliver to
such holder a certificate or certificates for the number of whole shares of
Common Stock to which such holder is entitled, together with any cash dividends
and payment in lieu of fractional shares to which such holder may be entitled
pursuant to subparagraph 6C. Until such time as a holder of shares of
Preferred Stock shall surrender his or
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<PAGE> 33
its certificates therefor as provided above, such certificates shall be deemed
to represent the shares of Common Stock to which such holder shall be entitled
upon the surrender thereof.
7. Right of Participation. The Corporation shall, prior to any
proposed issuance by the Corporation of any of its securities (other than debt
securities with no equity feature), offer to each Preferred Stockholder by
written notice the right, for a period of thirty (30) days, to purchase for
cash at an amount equal to the price or other consideration for which such
securities are to be issued, a number of such securities so that, after giving
effect to such issuance (and the conversion, exercise and exchange into or for
(whether directly or indirectly) shares of Common Stock of all such securities
that are so convertible, exercisable or exchangeable), such Preferred
Stockholder will continue to maintain its same proportionate equity ownership
in the Corporation as of the date of such notice (treating each Preferred
Stockholder, for the purpose of such computation, as the holder of the number
of shares of Common Stock which would be issuable to such Preferred Stockholder
upon conversion, exercise and exchange of all securities (including but not
limited to the Preferred Shares) held by such Preferred Stockholder on the date
such offer is made, that are convertible, exercisable or exchangeable into or
for (whether directly or indirectly) shares of Common Stock and assuming the
like conversion, exercise and exchange of all such other securities held by
other persons); provided, however, that the participation rights of the
Preferred Stockholder pursuant to this Section shall not apply to securities
issued (A) upon conversion of any of the Preferred Shares, (B) as a stock
dividend or upon any subdivision of shares of Common Stock, provided that the
securities issued pursuant to such stock dividend or subdivision are limited to
additional shares of Common Stock, (C) pursuant to subscriptions, warrants,
options, convertible securities, or other rights outstanding as of the date of
the filing of these Preferred Stock Terms (D) solely in consideration for the
acquisition (whether by merger or otherwise) by the Corporation or any of its
subsidiaries of all or substantially all of the stock or assets of any other
entity, (E) pursuant to a firm commitment public offering, (F) pursuant to the
exercise of options to purchase Common Stock granted to directors, officers,
employees or consultants of the Corporation in connection with their service to
the Corporation, or to suppliers or other parties as payment for goods or
services rendered to the Corporation, not to exceed in the aggregate 6,427,629
shares (appropriately adjusted to reflect stock splits, stock dividends,
combinations of shares and the like with respect to the Common Stock) less the
number of shares (as so adjusted) issued pursuant to subscriptions, warrants,
options, convertible securities, or other rights outstanding as of the date of
the filing of these Preferred Stock Terms Pursuant to clause (C) above (the
shares exempted by this clause (F) being hereinafter referred to as the
"Reserved Employee Shares"), and (G) upon the exercise of any right which was
not itself in violation of the terms of this Section. The Corporation's
written notice to the Preferred Stockholders shall describe the securities
proposed to be issued by the Corporation and specify the number, price and
payment terms. Each Preferred Stockholder may accept the Corporation's offer
as to the full number of securities offered to it or any lesser number, by
written notice thereof given by it to the Corporation prior to the expiration
of the aforesaid thirty (30) day period, in which event the Corporation shall
promptly sell and such Preferred Stockholder shall buy, upon the terms
specified, the number of securities agreed to be purchased by such Preferred
Stockholder. The Corporation shall be free at any time prior to ninety (90)
days after the date of its notice of offer to the Preferred Stockholders, to
offer and sell to any third party or parties the remainder of such securities
proposed to be issued by the Corporation (including but not limited
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<PAGE> 34
to the securities not agreed by the Preferred Stockholders to be purchased by
them, at a price and on payment terms no less favorable to the Corporation than
those specified in such notice of offer to the Preferred Stockholders.
However, if such third party sale or sales are not consummated within such
ninety (90) day period, the Corporation shall not sell such securities as shall
not have been purchased within such period without again complying with this
Section.
[END OF ARTICLE FOUR]
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<PAGE> 35
PAGE 1
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
OWNERSHIP, WHICH MERGES: "NEON SOFTWARE, INC." A ILLINOIS CORPORATION WITH AND
INTO "NEON SOFTWARE, INC." UNDER THE NAME OF "NEON SOFTWARE, INC." A
CORPORATION ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE,
AS RECEIVED AND FILED IN THIS OFFICE ON THE TWENTY-EIGHTH DAY OF DECEMBER,
A.D. 1995 AT 9 O'CLOCK A.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW
CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING.
[SEAL]
/s/ EDWARD J. FREEL
[SEAL] -----------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 7771277
2564986 8100M DATE: 12-28-95
950310858
<PAGE> 36
STATE OF ILLINOIS
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 12/28/1995
950310858 - 2564986
CERTIFICATE OF OWNERSHIP AND MERGER
Merging
NEON SOFTWARE, INC.
An Illinois Corporation
With and Into
NEON SOFTWARE, INC.
A Delaware Corporation
* * * * * * *
(In Accordance with the Provisions of Section 253 of the General
Corporation Law of the State of Delaware.)
* * * * * * *
Neon Software, Inc. a corporation organized and existing under and by virtue of
the Illinois Business Corporation Act (the "Parent"), DOES HEREBY CERTIFY THAT:
FIRST: The Parent was duly incorporated on the 30th day of June 1993
in accordance with the Illinois Business Corporation Act, the provisions of
which permit a merger of a corporation of that jurisdiction with a corporation
of another jurisdiction.
SECOND: The Parent owns One Hundred percent (100%) of the issued and
outstanding shares of capital stock of Neon Software, Inc., a corporation
incorporated on the 27th day of December, 1995 in accordance with the General
Corporation Law of the State of Delaware (the "Subsidiary").
THIRD: Each of the Board of Directors of the Parent and the
shareholders of such Parent entitled to vote theron, duly adopted the following
resolutions, by unanimous written consents each dated as of the 2nd day of
December 1995, determining to merge itself with and into the Subsidiary:
(Resolutions Begin Here)
Merger With and Into Neon Software, Inc., a Delaware Corporation
WHEREAS, each of the Board of Directors and shareholders of the
Corporation previously approved and entered into that certain Series B
<PAGE> 37
Convertible Preferred Stock Purchase Agreement, dated September 20,
1995, whereby Section 5.12 thereof provides for the reincorporation of
the Corporation in the State of Delaware, and
WHEREAS, the Board of Directors deems it advisable and in the
Corporation's best interest to merge the Corporation with and into Neon
Software, Inc., a Delaware Corporation and wholly-owned subsidiary of
the Corporation ("Neon Delaware"), solely for the purpose of instituting
a change of the state of incorporation of the Corporation from Illinois
to Delaware (the "Reincorporation Merger").
BE IT RESOLVED, that the Reincorporation Merger, including the
conversion of the Corporation's issued and outstanding shares into
shares of like kind and denominations of Neon Delaware, all in
accordance with the terms and provisions of each of the Certificate of
Ownership and Merger to be filed with the Secretary of State of Delaware
(the "Certificate of Ownership") and Articles of Merger, together with a
Plan of Merger (the "Articles") be, and hereby is, approved and adopted
in all respects.
FURTHER RESOLVED, that the Plan of Merger reflecting the terms
of the Reincorporation Merger as provided for in the preceding
resolution, but and between the Corporation and Neon Delaware (the "Plan
of Merger"), and the Corporation's performance of the obligations under
the Plan of Merger and any supplementary or ancillary documents or
agreements contemplated thereby, be, and hereby are, approved in all
respects.
FURTHER RESOLVED, that in accordance with the applicable
provisions of the Illinois Business Corporation Act, the matter of the
Reincorporation Merger, subject to the terms and provisions of the Plan
of Merger, be submitted to the shareholders of the Corporation entitled
to vote thereon for their consideration, approval and adoption thereof.
FURTHER RESOLVED, that upon the approval by the holders of the
issued and outstanding shares of the Corporation's capital stock
entitled to vote thereon, the Chief Executive Officer, President and
Secretary of the Corporation be, and each hereby is, authorized and
empowered to execute and deliver, the Certificate of Ownership and the
Articles each to be filed with the Secretaries of States, and to cause
the same to be filed accordingly, and to consummate the transactions
contemplated thereby including the Corporation's performance of its
obligations thereunder, all in the name and on behalf of the
Corporation.
FURTHER RESOLVED, that the Reincorporation Merger approved
herein may be amended or terminated and abandoned by the Board of
Directors of
2
<PAGE> 38
the Corporation at any time prior to the filing of either the
Certificate of Ownership or the Articles with the respective Secretaries
of State without any further action of the Board of Directors of the
Corporation and as deemed necessary by the Chief Executive Officer and
President as evidenced by his actions.
FURTHER RESOLVED, that the Chief Executive Officer, President
and any other proper officers of the Corporation be, and each hereby is,
authorized and empowered to take all such further actions deemed
necessary in furtherance of this Reincorporation Merger including,
without limitation, to pay all related fees, which shall in such
acting officer's judgment be deemed necessary, proper or advisable in
order to fully carry out the intent and effectuate the purpose of this
and the other resolutions provided for herein, with such changes therein
and modifications thereto as each executing officer shall upon his
discretion approve, which approval shall conclusively evidenced by his
execution thereof.
FURTHER RESOLVED, that at the Effective Time (as that term is
defined in the Plan of Merger), of the Reincorporation Merger approved
herein, each certificate representing shares of capital stock issued and
outstanding in the Corporation immediately prior to the Reincorporation
Merger authorized herein, shall be automatically canceled and
extinguished without any action of the holders thereof, and further,
each share canceled shall be converted into and become a right to
receive shares of capital stock in Neon Delaware of like kind and
denominations.
FURTHER RESOLVED, that contemporaneously with the effectiveness
of the Reincorporation Merger approved herein, any proper officers of
Neon Delaware be, and each hereby is, authorized and empowered to do all
things necessary to settle the affairs of this Corporation, including,
without limitation, to execute and deliver any requisite federal or
local tax forms (including a Federal Form 996) in the name and on behalf
of the Corporation, all in furtherance of legally merging this
Corporation out of existence.
Further Actions
FURTHER RESOLVED, that the Chief Executive Officer, the
President, any Vice President, Secretary or Assistant Secretary and any
other proper officers of the Corporation be, and each hereby is,
authorized and empowered to take all such further action including,
without limitation, to arrange for and enter into supplemental
agreements, instruments, certificates or documents relating to the
Reincorporation Merger, each of the Certificate of Ownership and the
Articles and any transactions contemplated thereby or therein, and to
execute and deliver all such supplemental agreements, instruments,
certificates of documents in the name and on behalf of the Corporation,
which shall upon each such executing officer's sole discretion be
deemed necessary, proper or advisable in order to perform the
Corporation's obligations under or in connection with the aforementioned
3
<PAGE> 39
documents and the transactions contemplated therein, and to carry out
fully the intent and effectuate the purposes of this and the foregoing
resolutions.
(End of Resolutions)
FOURTH: The Reincorporation Merger has been approved, adopted,
certified, executed and acknowledged by the Parent in accordance with the
applicable provisions of the Illinois Business Corporation Act, the laws under
which it was organized.
FIFTH: Anything herein or elsewhere to the contrary notwithstanding,
this Reincorporation Merger may be amended or terminated and abandoned by the
Board of Directors of the Corporation at any time prior to the date of filing
this Certificate of Ownership and Merger with the Secretary of State of
Delaware.
SIXTH: The effective time of this Certificate of Ownership and Merger
and the Reincorporation Merger certified herein shall be December 31, 1995.
4
<PAGE> 40
IN WITNESS WHEREOF, the undersigned, for the purpose of effectuating
the Reincorporation Merger of the Parent with and into the Subsidiary, pursuant
to the General Corporation Law of the State of Delaware, under penalties of
perjury does hereby declare and certify that this is the act and deed of the
Parent and the facts stated herein are true and accordingly have hereunto
signed this Certificate of Ownership and Merger as of this 2nd day of December,
1995.
Neon Software, Inc.
an Illinois Corporation
By: /s/ GEORGE F. ADAM, JR.
----------------------------------
George F. Adam, Jr.
Its: Chief Executive Officer and President
5
<PAGE> 1
EXHIBIT 3.4
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
NEW ERA OF NETWORKS, INC.
A DELAWARE CORPORATION
New Era of Networks, Inc., a corporation organized and existing under
the laws of the State of Delaware, does hereby certify:
1. The name of the corporation is New Era of Networks, Inc., (the
"Corporation"). The original Certificate of Incorporation of the Corporation
was filed with the Secretary of State of the State of Delaware on December 27,
1995.
2. The amendment and restatement herein set forth has been duly
approved by the Board of Directors of the Corporation and by the stockholders
of the Corporation pursuant to Sections 141, 228 and 242 of the General
Corporation Law of the State of Delaware ("Delaware Law"). Approval of this
amendment and restatement was approved by a written consent signed by less than
all of the stockholders of the Corporation pursuant to Section 228 of the
Delaware Law, and notice has been given in accordance with Section 228(d) of
the Delaware Law to those shareholders not signing such written consent.
3. The restatement herein set forth has been duly adopted
pursuant to Section 245 of the Delaware Law. This Amended and Restated
Certificate of Incorporation restates and integrates and amends the provisions
of the Corporation's Certificate of Incorporation.
4. The text of the Certificate of Incorporation is hereby amended
and restated to read in its entirety as follows:
ARTICLE ONE
The name of the corporation is:
NEW ERA OF NETWORKS, INC.
<PAGE> 2
ARTICLE TWO
The address of the corporation's registered office in the State of
Delaware is 1209 Orange Street, Wilmington, Delaware 1980, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
ARTICLE THREE
The nature of the business or purposes to be conducted or promoted is
to engage in any and all lawful acts or activities for which corporations may
be organized under the General Corporation Law of the State of Delaware.
ARTICLE FOUR
1. Authorized Shares/Designations. This Corporation is
authorized to issue two classes of stock, to be designated respectively,
"Common Stock" and "Preferred Stock." The total number of shares that his
corporation has the authority to issue is 67,048,019. The number of shares of
Common Stock authorized to be issued is 45,000,000, par value $.0001 per share
(the "Common Stock"). The total number of Preferred Stock this Corporation
authorized to be issued is 22,048,019 shares 9,169,028 shares of which have
been designated Series A Convertible Preferred Stock, par value $.01 per share
(the "Series A Preferred Stock"), 6,183,339 shares of which have been
designated Series B Convertible Preferred Stock, par value $.01 per share (the
"Series B Preferred Stock" and 4,695,652 shares of which have been designated
Series C Convertible Preferred Stock, par value $.01 per share (the "Series C
Preferred Stock"), and 2,000,000 of which have been undesignated; the Series A,
Series B and Series C Preferred Stock are sometimes collectively referred to
herein as the "Preferred Stock"). Upon an (IPO) or filing of Restated
Certificate, each nine shares of Common Stock of the Corporation shall be
reconstituted as and converted into two shares of Common Stock.
The undesignated shares of Preferred Stock may be issued from
time to time in one or more series pursuant to a resolution or resolutions
providing for such issue duly adopted by the Board of Directors (authority to
do so being hereby expressly vested in the Board). The Board of Directors is
further authorized to determine or alter the rights, preferences, privileges
and restrictions granted to or imposed upon any wholly unissued series of
Preferred Stock and, to fix the number of shares of any series of Preferred
Stock and the designation of any such series of Preferred Stock. The Board of
Directors, within the limits and restrictions stated in any resolution or
resolutions of the Board of Directors originally fixing the number of shares
constituting any series, may increase or decrease (but not below the number of
shares in any such series then outstanding) the number of shares of any series
subsequent to the issue of shares of that series.
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<PAGE> 3
2. Voting.
2A. General. Except as may be otherwise provided in these
terms of the Preferred Stock or by law, the holders of Preferred Stock and
Common Stock shall vote together with all other classes and series of stock of
the Corporation as a single class on all actions to be taken by the
stockholders of the Corporation, including, but not limited to actions amending
the Articles of Incorporation of the Corporation to increase the number of
authorized shares of Common Stock. Each holder of Preferred Stock shall be
entitled to one vote for each share of Common Stock (including fractions of a
share) which would be issuable to such holder upon the conversion of all the
shares of Preferred Stock so held on the record date for the determination of
stockholders entitled to vote. Each holder of Common Stock shall be entitled
to one vote per share.
2B. Board Size. The Corporation shall not, without the
written consent or affirmative vote of the holders of a majority of the then
outstanding shares of Preferred Stock, given in writing or by vote at a
meeting, consenting or voting (as the case may be) separately as a single
class, reduce the number of directors constituting the Board of Directors to a
number less than five or increase the maximum number of directors constituting
the Board of Directors to a number in excess of seven.
2C. Board Seats. The holders of the Series A Preferred
Stock, voting as a separate series, shall be entitled to elect one director of
the Corporation. The holder of the Series B Preferred Stock, voting as a
separate series, shall be entitled to elect one director of the Corporation.
The holders of Series C Preferred Stock, voting as a separate series, shall be
entitled to elect one director of the Corporation. The holders of the Common
Stock, voting as a separate class, shall be entitled to elect the remaining
directors of the Corporation. At any meeting (or in a written consent in lieu
thereof) held for the purpose of electing directors, the presence in person or
by proxy (or the written consent) of the holders of a majority of the shares of
Series A Preferred Stock then outstanding shall constitute a quorum of Series A
Preferred Stock for the election of the director to be elected solely by the
holders of Series A Preferred Stock; and the presence in person or by proxy (or
the written consent) of the holders of a majority of the shares of Series B
Preferred Stock then outstanding shall constitute a quorum of Series B
Preferred Stock for the election of the director to b elected solely by the
holders of Series B Preferred Stock and the presence in person or by proxy (or
the written consent) of the holders of a majority of the shares of Series C
Preferred Stock then outstanding shall constitute a quorum of Series C
Preferred Stock for the election of the director to be elected solely by the
holders of Series C Preferred Stock. A vacancy in the directorship elected by
the holders of the Series A Preferred Stock shall be filled only by vote or
written consent of the holders of the Series A Preferred Stock. A vacancy in
the directorship elected by the holders of Series B Preferred Stock shall be
filled only by vote or written consent of the holders of Series B Preferred
Stock. A vacancy in the directorship elected by the holders of Series C
Preferred Stock shall be filled only by vote or written consent of the holders
of Series C Preferred Stock. A vacancy in any directorship elected by the
holders of the Common Stock shall be filled only by vote or written consent of
the holders of the Common Stock.
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3. Dividends. The holders of the Preferred Stock shall be
entitled to receive, out of funds legally available therefor, dividends at the
same rate as dividends (other than dividends paid in additional shares of
Common Stock) are paid with respect to the Common Stock (treating each share of
Preferred Stock as being equal to the number of shares of Common Stock
(including fractions of a share) into which each share of Preferred Stock is
then convertible).
4. Liquidation.
4A. Upon any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, the holders of the shares of
Series B Preferred Stock and Series C Preferred Stock shall together be
entitled, before any distribution or payment is made upon any stock ranking on
liquidation junior to the Series B Preferred Stock or the Series C Preferred
Stock, to be paid an amount equal to the greater of (i) $.3032342 per share in
the case of Series B Preferred Stock and $1.61 per share in the case of the
Series C Preferred Stock (each as adjusted for stock splits, stock dividends
and the like) plus, in the case of each share, an amount equal to any dividends
declared but unpaid thereon, computed to the date payment thereof is made
available, or (ii) such amount per share as would been payable had each such
share been converted to Common Stock pursuant to paragraph 6 immediately prior
to such liquidation, dissolution or winding up, and the holders of Series B
Preferred Stock and Series C Preferred Stock shall not be entitled to any
further payment, such amount payable with respect to one share of Series B
Preferred Stock being sometimes referred to as the "Series B Liquidation
Payment" and with respect to all shares of Series B Preferred Stock being
sometimes referred to as the "Series B Liquidation Payments" and such amount
payable with respect to one share of Series C Preferred Stock being sometimes
referred to as the "Series C Liquidation Payment" and with respect to all
shares of Series C Preferred Stock being sometimes referred to as the "Series C
Liquidation Payments." If upon such liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, the assets to be distributed
among the holders of Series B Preferred Stock and the holders of Series C
Preferred Stock shall be insufficient to permit payment to such holders of the
amount distributable as aforesaid, then the entire assets of the Corporation to
be so distributed shall be distributed ratably among the holders of Series B
Preferred Stock and the holders of Series C Preferred Stock in the proportion
that the value of the Series B Preferred Stock and Series C Preferred Stock
held by each such holder bears to the total value of the Series B Preferred
Stock and the Series C Preferred Stock computed as follows:
(i) the value of the Series B Preferred Stock ("VB") held by
each Series B Preferred Shareholder shall equal the number of shares of
Series B Preferred Stock so held multiplied by $3032342 (as adjusted
for stock splits, stock dividends and the like).
(ii) the value of the Series C Preferred Stock ("VC") held by
each Series C Preferred Shareholder shall equal the number of shares of
Series C Preferred Stock so held multiplied by $1.61 (as adjusted for
stock splits, stock dividends and the like).
(iii) the total value of the Series B Preferred Stock and
Series C Preferred Stock shall equal the sum of VB and VC for all
holders of Series B Preferred Stock and all holders of Series C
Preferred Stock.
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4A(2) Upon any such liquidation, dissolution or winding up
of the Corporation, after the holders of Series B Preferred Stock and the
holders of Series C Preferred Stock shall have been paid in full the amounts to
which they shall be entitled, the holders of the shares of Series A Preferred
Stock shall be entitled, before any distribution or payment is made upon any
stock ranking on liquidation junior to the Series A Preferred Stock, to be paid
an amount equal to the greater of (i) $.218 per share plus, (as adjusted for
stock split, stock dividends and the like) in the case of each share, an amount
equal to any dividends declared but unpaid thereon, computed to the date
payment thereof is made available, or (ii) such amount per share as would have
been payable had each such share been converted to Common Stock pursuant to
paragraph 6 immediately prior to such liquidation, dissolution or winding up,
and the holders of Series A Preferred Stock shall not be entitled to any
further payment, such amount payable with respect to one share of Series A
Preferred Stock being sometimes referred to as the "Series A Liquidation
Payment", with respect to all shares of Series A Preferred Stock being
sometimes referred to as the "Series A Liquidation Payments" and collectively
with the Series B Liquidation Payments and the Series C Liquidation Payments,
the "Liquidation Payments." If upon such liquidation, dissolution or winding
up of the Corporation, whether voluntary or involuntary, the assets to be
distributed among the holders of Series A Preferred Stock shall be insufficient
to permit payment to the holders of Series A Preferred Stock of the amount
distributable as aforesaid, then the entire remaining assets of the Corporation
to be so distributed shall be distributed ratably among the holders of Series A
Preferred Stock. Upon any such liquidation, dissolution or winding up of the
Corporation, after the holders of Series A Preferred Stock shall have been paid
in full the amounts to which they shall be entitled, the remaining net assets
of the Corporation may be distributed to the holders of stock ranking on
liquidation junior to the Series A Preferred Stock. Written notice of such
liquidation, dissolution or winding up, stating a payment date, the amount of
the Liquidation Payments and the place where Liquidation Payments shall be
payable, shall be delivered in person, mailed by certified or registered mail,
return receipt requested, or sent by telecopier or telex, not less than 20 days
prior to the payment date stated therein, to the holders of record of Preferred
Stock, such notice to be addressed to each such holder at its address as shown
by the records of the Corporation.
4B. The consideration or merger of the Corporation into
or with any other entity or entities which results in the exchange of
outstanding shares of the Corporation for securities or other consideration
issued or paid or caused to be issued or paid by any such entity or affiliate
thereof (other than (x) a merger to reincorporate the Corporation in a
different jurisdiction and (y) a merger in which the Corporation is the
surviving entity, that is, in which the Corporation's shareholders own or
control 50% or more of the surviving entity's voting shares), and the sale,
lease, abandonment, transfer or other disposition by the Corporation of all or
substantially all its assets, shall be deemed to be a liquidation, dissolution
or winding up of the Corporation within the meaning of the provisions of this
paragraph 4. For purposes of paragraph 4, the Common Stock shall rank on
liquidation junior to the Series A Preferred Stock; the Series A Preferred
Stock shall rank junior on liquidation to the Series B Preferred Stock and the
Series C Preferred Stock, and the Series B Preferred Stock shall rank on
liquidation in parity with the Series C Preferred Stock.
5. Restrictions. At any time when shares of Preferred Stock are
outstanding, except where the vote or written consent of the holders of a
greater number of shares of the Corporation is
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required by law or by the Articles of Incorporation, and in addition to any
other vote required by law or the Articles of Incorporation, without the
approval of the holders of a majority of the then outstanding shares of
Preferred Stock given in writing or by vote at a meeting, consenting or voting
(as the case may be) separately as a series, the Corporation will not:
5A. Create or authorize the creation of any additional
class or series of shares of stock unless the same ranks junior to both series
of Preferred Stock as to the distribution of assets on the liquidation,
dissolution or winding up of the Corporation, or increase the authorized amount
of Preferred Stock or increase the authorized amount of any additional class or
series of shares of stock unless the same ranks junior to both series of
Preferred Stock as to the distribution of assets on the liquidation,
dissolution or winding up of the Corporation, or create or authorize any
obligation or security convertible into shares of Preferred Stock or into
shares of any other class or series of stock unless the same ranks junior to
both series of Preferred Stock as to the distribution of assets on the
liquidation, dissolution or winding up of the Corporation, whether any such
creation, authorization or increase shall be by means of amendment to the
Articles of Incorporation or by merger, consolidation or otherwise;
5B. Consent to any liquidation, dissolution or winding up
of the Corporation or consolidate or merge into or with any other entity or
entities or sell, lease, abandon, transfer or otherwise dispose of all or
substantially all its assets, provided, however, that this Section 5B does not
apply to mergers in which the Corporation is the surviving entity (that is, in
cases in which the Corporation's shareholders own or control 50% or more of the
surviving entity's voting shares);
5C. Either (i) amend, alter or repeal its Articles of
Incorporation or By-laws or (ii) amend, alter or repeal its Articles of
Incorporation or By-laws in a manner adversely and substantially affecting any
series of Preferred Stock relative to the other series of Preferred Stock;
provided that, in the case of clause (ii), the holders of a majority of the
then outstanding shares of such series of Preferred Stock being so affected
have previously approved such amendment, alteration or repeal.
5D. Purchase or set aside any sums for the purchase of,
or pay any dividend or make any distribution on, any shares of stock other than
Preferred Stock, except for dividends or other distributions payable on the
Common Stock solely in the form of additional shares of Common Stock and except
for the purchase of shares of Common Stock from former employees of the
Corporation who acquired such shares directly from the Corporation, if each
such purchase is made pursuant to contractual rights held by the Corporation
relating to the termination of employment of such former employee and the
purchase price does not exceed the original issue price paid by such former
employee to the Corporation for such shares; or
5E. Redeem or otherwise acquire any shares of Preferred
Stock except pursuant to a purchase offer made pro rata to all holders of the
shares of Preferred Stock on the basis of the aggregate number of outstanding
shares of Preferred Stock then held by each such holder.
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6. Conversions. The holders of shares of Preferred Stock shall
have the following conversion rights:
6A. Right to Convert. Subject to the terms and
conditions of this paragraph 6, the holder of any share or shares of Preferred
Stock shall have the right, at its option at any time, to convert any such
shares of Preferred Stock (except that upon any liquidation of the Corporation
the right of conversion shall terminate at the close of business on the
business day fixed for payment of the amount distributable on Preferred Stock)
into such number of fully paid and nonassessable shares of Common Stock as is
obtained as follows:
(i) with respect to the Series A Preferred Stock, by (a)
multiplying the number of shares of Series A Preferred Stock so to be
converted by $.218 and (b) dividing the result by the Conversion Price
of $.218 per share or, in case an adjustment of such price has taken
place pursuant to the further provisions of this paragraph 6, then by
the conversion price as last adjusted and in effect at the date any
share or shares of Series A Preferred Stock are surrendered for
conversion, and
(ii) with respect to the Series B Preferred Stock, by (a)
multiplying the number of shares of Series B Preferred Stock so to be
converted by $.3032342 and (b) dividing the result by the conversion
price of $.3032342 per share or, in case an adjustment of such price
has taken place pursuant to the further provisions of this paragraph 6,
then by the conversion price as last adjusted and in effect at the date
any share or shares of Series B Preferred Stock are surrendered for
conversion; and.
(iii) with respect to the Series C Preferred Stock, by (a)
multiplying the number of shares of Series C Preferred Stock so to be
converted by $1.61 and (b) dividing the result by the conversion price
of $1.61 per share or, in case an adjustment of such price has taken
place pursuant to the further provisions of this paragraph 6, then by
the conversion price as last adjusted and in effect at the date any
share or shares of Series C Preferred Stock are surrendered for
conversion.
The respective prices at which the shares of Series A Preferred Stock and the
shares of Series B Preferred Stock and the Series C Preferred Stock may be
converted into shares of Common Stock, as adjusted in accordance with this
paragraph 6, are referred to herein as the "Series A Conversion Price," "Series
B Conversion Price," and "Series C Conversion Price"; respectively, and the
term "Conversion Price" as used herein shall refer to either the Series A
Conversion Price, Series B Conversion Price or the Series C Conversion Price,
as the context shall require.
Such rights of conversion shall be exercised by the holder thereof by
giving written notice that the holder elects to convert a stated number of
shares of Preferred Stock into Common Stock and by surrender of a certificate
or certificates for the shares so to be converted to the Corporation at its
principal office (or such other office or agency of the Corporation as the
Corporation may designate by notice in writing to the holders of Preferred
Stock) at any time during its usual business
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<PAGE> 8
hours on the date set forth in such notice, together with a statement of the
name or names (with address) in which the certificate or certificates for
shares of Common Stock shall be issued.
6B. Issuance of Certificates; Time Conversion Effected.
Promptly after the receipt of the written notice referred to in subparagraph 6A
and surrender of the certificate or certificates for the share or shares of
Preferred Stock to be converted, the Corporation shall issue and deliver, or
cause to be issued and delivered, the holder, registered in such name or names
as such holder may direct, a certificate or certificates for the number of whole
shares of Common Stock issuable upon the conversion of such share or shares of
Preferred Stock. To the extent permitted by law, such conversion shall be
deemed to have been effected and the Conversion Price shall be determined as of
the close of business on the date on which such written notice shall have been
received by the Corporation and the certificate or certificates for such share
or shares shall have been surrendered as aforesaid, and at such time the rights
of the holder of such share or shares of Preferred Stock shall cease, and the
person or persons in whose name or names any certificate or certificates for
shares of Common Stock shall be issuable upon such conversion shall be deemed to
have become the holder or holders of record of the shares represented thereby.
6C. Fractional Shares; Dividends; Partial Conversion. No
fractional shares shall be issued upon conversion of Preferred Stock into
Common Stock and no payment or adjustment shall be made upon any conversion on
account of any cash dividends on the Common Stock issued upon such conversion.
At the time of each conversion, the Corporation shall pay in cash an amount
equal to all dividends, declared and unpaid on the shares of Preferred Stock
surrendered for conversion to the date upon which such conversion is deemed to
take place as provided in subparagraph 6B. In case the number of shares of
Preferred Stock represented by the certificate or certificates surrendered
pursuant to subparagraph 6A exceeds the number of shares converted, the
Corporation shall, upon such conversion, execute and deliver to the holder, at
the expense of the Corporation, a new certificate or certificates for the
number of shares of Preferred Stock represented by the certificate or
certificates surrendered which are not to be converted. If any fractional
share of Common Stock would, except for the provisions of the first sentence of
this subparagraph 6C, be delivered upon such conversion, the Corporation, in
lieu of delivering such fractional share, shall pay to the holder surrendering
the Preferred Stock for conversion an amount in cash equal to the current
market price of such fractional share as determined in good faith by the Board
of Directors of the Corporation.
6D. Adjustment of Price Upon Issuance of Common Stock.
Except as provided in subparagraph 6E, if and whenever the Corporation shall
issue or sell, or is, in accordance with subparagraphs 6D(1) through 6D(7),
deemed to have issued or sold, any shares of Common Stock for a consideration
per share less than the Series A Conversion Price, Series B Conversion Price or
Series C Conversion Price, as the case may be (the "Applicable Conversion
Price"), in effect immediately prior to the time of such issue or sale, then,
forthwith upon such issue or sale, the Applicable Conversion Price shall be
reduced to the price determined by dividing (i) an amount equal to the sum of
(a) the number of shares of Common Stock outstanding immediately prior to such
issue or sale multiplied by the then existing Applicable Conversion Price and
(b) the
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<PAGE> 9
consideration, if any, received by the Corporation upon such issue or sale, by
(ii) the total number of shares of Common Stock outstanding immediately after
such issue or sale.
For purposes of this subparagraph 6D, the following subparagraphs
6D(1) to 6D(7) shall also be applicable:
6D(1) Issuance of Rights or Options. In case at any time
the Corporation shall in any manner grant (whether directly or by
assumption in a merger or otherwise) any warrants or other rights to
subscribe for or to purchase, or any options for the purchase of,
Common Stock or any stock or security convertible into or exchangeable
for Common Stock (such warrants, rights or options being called
"Options" and such convertible or exchangeable stock or securities
being called "Convertible Securities") whether or not such Options or
the right to convert or exchange any such Convertible Securities are
immediately exercisable, and the price per share for which Common
Stock is issuable upon the exercise of such Options or upon the
conversion or exchange of such Convertible Securities (determined by
dividing (i) the total amount, if any, received or receivable by the
Corporation as consideration for the granting of such Options, plus
the minimum aggregate amount of additional consideration payable to
the Corporation upon the exercise of all such Options, plus, in the
case of such Options which relate to Convertible Securities, the
minimum aggregate amount of additional consideration, if any, payable
upon the issue or sale of such Convertible Securities and upon the
conversion or exchange thereof, by (ii) the total maximum number of
shares of Common Stock issuable upon the exercise of such Options or
upon the conversion or exchange of all such Convertible Securities
issuable upon the exercise of such Options) shall be less than the
Applicable Conversion Price in effect immediately prior to the time of
the granting of such Options, then the total maximum number of shares
of Common Stock issuable upon the exercise of such Options or upon
conversion or exchange of the total maximum amount of such Convertible
Securities issuable upon the exercise of such Options shall be deemed
to have been issued for such price per share as of the date of
granting of such Options or the issuance of such Convertible
Securities and thereafter shall be deemed to be outstanding. Except
as otherwise provided in subparagraph 6D(3), no adjustment of the
Conversion Price shall be made upon the actual issue of such Common
Stock or of such Convertible Securities upon exercise of such Options
or upon the actual issue of such Common Stock upon conversion or
exchange of such Convertible Securities.
6D2 Issuance of Convertible Securities. In case the
Corporation shall in any manner issue (whether directly or by
assumption in a merger or otherwise) or sell any Convertible
Securities, whether or not the rights to exchange or convert any such
Convertible Securities are immediately exercisable, and the price per
share for which Common Stock is issuable upon such conversion or
exchange (determined by dividing (i) the total amount received or
receivable by the Corporation as consideration for the issue or sale
of such Convertible Securities, plus the minimum
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<PAGE> 10
aggregate amount of additional consideration, if any, payable to the
Corporation upon the conversion or exchange thereof, by (ii) the total
maximum number of shares of Common Stock issuable upon the conversion
or exchange of all such Convertible Securities) shall be less than
the Applicable Conversion Price in effect immediately prior to the
time of such issue or sale, then the total maximum number of shares of
Common Stock issuable upon conversion or exchange of all such
Convertible Securities shall be deemed to have been issued for such
price per share as of the date of the issue or sale of such
Convertible Securities and thereafter shall be deemed to be
outstanding, provided that (a) except as otherwise provided in
subparagraph 6D(3), no adjustment of the Conversion Price shall be
made upon the actual issue of such Common Stock upon conversion or
exchange of such Convertible Securities and (b) if any such issue or
sale of such Convertible Securities is made upon exercise of any
Options to purchase any such Convertible Securities for which
adjustments of the Conversion Price have been or are to be made
pursuant to other provisions of this subparagraph 6D, no further
adjustment of the Conversion Price shall be made by reason of such
issue or sale.
6D(3) Change in Option Price or Conversion Rate. Upon the
happening of any of the following events, namely, if the purchase
price provided for in any Option referred to in subparagraph 6D(1),
the additional consideration, if any, payable upon the conversion or
exchange of any Convertible Securities referred to in subparagraph
6D(1) or 6D(2), or the rate at which Convertible Securities referred
to in subparagraph 6D(1) or 6D(2) are convertible into or exchangeable
for Common Stock shall change at any time (including, but not limited
to, changes under or by reason of provisions designed to protect
against dilution), the Applicable Conversion Price in effect at the
time of such event shall be forthwith be readjusted to the Applicable
Conversion Price which would have been in effect at such time had such
Options or Convertible Securities still outstanding provided for such
changed purchase price, additional consideration or conversion rate,
as the case may be, at the time initially granted, issued or sold, but
only if as a result of such adjustment the Applicable Conversion price
then in effect hereunder is thereby reduced; and on the termination of
any such Option or any such right to convert or exchange such
Convertible Securities, the Applicable Conversion Price then in effect
hereunder shall forthwith be increased to the Applicable Conversion
Price which would have been in effect at the time of such termination
had such Option or Convertible Securities, to the extent outstanding
immediately prior to such termination, never been issued.
6D(4) Stock Dividends. In case the Corporation shall
declare a dividend or make any other distribution upon any stock of
the Corporation payable in Common Stock (except for dividends or
distributions upon the Common Stock), Options or Convertible
Securities, any Common Stock, Options or Convertible Securities, as
the case may be, issuable in payment of such dividend or distribution
shall be deemed to have been issued or sold without consideration.
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6D(5) Consideration for Stock. In case any shares of
Common Stock, Options or Convertible Securities shall be issued or
sold for cash, the consideration received therefor shall be deemed to
be the amount received by the Corporation therefor, without deduction
therefrom of any expenses incurred or any underwriting commissions or
concessions paid or allowed by the Corporation in connection
therewith. In case any shares of Common Stock, Options or Convertible
Securities shall be issued or sold for a consideration other than
cash, the amount of the consideration other than cash received by the
Corporation shall be deemed to be the fair value of such consideration
as determined in good faith by the Board of Directors of the
Corporation, without deduction of any expenses incurred or any
underwriting commissions or concessions paid or allowed by the
Corporation in connection therewith. In case any Options shall be
issued in connection with the issue and sale of other securities of
the Corporation, together comprising one integral transaction in which
no specific consideration is allocated to such Options by the parties
thereto, such Options shall be deemed to have been issued for such
consideration as determined in good faith by the Board of Directors of
the Corporation.
6D(6) Record Date. In case the Corporation shall take a
record of the holders of its Common Stock for the purpose of
entitling them (i) to receive a dividend or other distribution payable
in Common Stock, Options or Convertible Securities or (ii) to
subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date shall be deemed to be the date of
the issue or sale of the shares of Common Stock deemed to have been
issued or sold upon the declaration of such dividend or the making of
such other distribution or the date of the granting of such right of
subscription or purchase, as the case may be.
6D(7) Treasury Shares. The number of shares of Common
Stock outstanding at any given time shall not include shares owned or
held by or for the account of the Corporation, and the disposition of
any such shares shall be considered an issue or sale of Common Stock
for the purpose of this subparagraph 6D.
6E. Certain Issues of Common Stock Excepted. Anything
herein to the contrary notwithstanding, the Corporation shall not be required
to make any adjustment of the Conversion Price in the case of the issuance from
and after May 2, 1995 of up to an aggregate of 6,827,629 shares (appropriately
adjusted to reflect the occurrence of any event described in subparagraph 6F)
of Common Stock to directors, officers, employees or consultants of the
Corporation in connection with their service as directors of the Corporation,
their employment by the Corporation or their retention as consultants by the
Corporation, or to suppliers and other parties as payment for goods or services
rendered to the Corporation, plus such number of shares of Common Stock which
are repurchased by the Corporation from such persons after such date pursuant
to contractual rights held by the Corporation and at repurchase prices not
exceeding the respective original purchase prices paid by such persons to the
Corporation therefor.
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6F. Subdivision or Combination of Common Stock. In case
the Corporation shall at any time subdivide (by any stock split, stock dividend
or otherwise) its outstanding shares of Common Stock into a greater number of
shares, the Conversion Price in effect immediately prior to such subdivision
shall be proportionately reduced, and conversely, in case the outstanding
shares of Common Stock shall be combined into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination shall be
proportionately increased. In the case of any such subdivision, no further
adjustment shall be made pursuant to subparagraph 6D(4) by reason thereof.
6G. Reorganization or Reclassification. If any capital
reorganization or reclassification of the capital stock of the Corporation
shall be effected in such a way that holders of Common Stock shall be entitled
to receive stock, securities or assets with respect to or in exchange for
Common Stock, then, as a condition of such reorganization or reclassification,
lawful and adequate provisions shall be made whereby each holder of a share or
shares of Preferred Stock shall thereupon have the right to receive, upon the
basis and upon the terms and conditions specified herein and in lieu of the
shares of Common Stock immediately theretofore receivable upon the conversion
of such share or shares of Preferred Stock, such shares of stock, securities or
assets as may be issued or payable with respect to or in exchange for a number
of outstanding shares of such Common Stock equal to the number of shares of
such Common Stock immediately theretofore receivable upon such conversion had
such reorganization or reclassification not taken place, and in any such case
appropriate provisions shall be made with respect to the rights and interests
of such holder to the end that the provisions hereof (including without
limitation provisions for adjustments of the Applicable Conversion Price) shall
thereafter be applicable, as nearly as may be, in relation to any shares of
stock, securities or assets thereafter deliverable upon the exercise of such
conversion rights.
6H. Notice of Adjustment. Upon any adjustment of the
Conversion Price, then and in each such case, the Corporation shall give
written notice thereof, by delivery in person, certified or registered mail,
return receipt requested, telecopier or telex, addressed to each holder of
shares of Preferred Stock at the address of such holder as shown on the books
of the Corporation, which notice shall state the Series A Conversion price,
Series B Conversion Price or Series C Conversion Price, as the case may be,
resulting from such adjustment, setting forth in reasonable detail the method
upon which such calculation is based.
6I. Other Notices. In case at any time:
(1) the Corporation shall declare any dividend
upon its Common Stock payable in cash or stock or make any other distribution
to the holders of its Common Stock;
(2) the Corporation shall offer for subscription
pro rata to the holders of its Common Stock any additional shares of stock of
any class or other rights;
(3) there shall be any capital reorganization or
reclassification of the capital stock of the Corporation, or a consolidation or
merger of the Corporation with or into another
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entity or entities, or a sale, lease, abandonment, transfer or other
disposition of all or substantially all its assets; or
(4) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall give, by delivery
in person, certified or registered mail, return receipt requested, telecopier
or telex, addressed to each holder of any shares of Preferred Stock at the
address of such holder as shown on the books of the Corporation, (a) at least
20 days' prior written notice of the date on which the books of the Corporation
shall close or a record shall be taken for such dividend, distribution or
subscription rights or for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding up and (b) in the case of any such
reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding up, at least 20 days' prior written notice
of the date when the same shall take place. Such notice in accordance with the
foregoing clause (a) shall also specify, in the case of any such dividend,
distribution or subscription rights, the date on which the holders of Common
Stock shall be entitled thereto and such notice in accordance with the
foregoing clause (b) shall also specify the date on which the holders of Common
Stock shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, disposition, dissolution, liquidation or winding up, as the case may
be.
6J. Stock to be Reserved. The Corporation will at all
times reserve and keep available out of its authorized Common Stock, solely for
the purpose of issuance upon the conversion of Preferred Stock as herein
provided, such number of shares of Common Stock as shall then be issuable upon
the conversion of all outstanding shares of Preferred Stock. The Corporation
covenants that all shares of Common Stock which shall be so issued shall be
duly and validly issued and fully paid and nonassessable and free from all
taxes, liens and charges with respect to the issue thereof, and, without
limiting the generality of the foregoing, the Corporation covenants that it
will from time to time take all such action as may be requisite to assure that
the par value per share of the Common Stock is at all times equal to or less
than any Conversion Price in effect at the time. The Corporation will take all
such action as may be necessary to assure that all such shares of Common Stock
may be so issued without violation of any applicable law or regulation, or of
any requirement of any national securities exchange upon which the Common Stock
may be listed. The Corporation will not take any action which results in any
adjustment of the Conversion Price if the total number of shares of Common
Stock issued and issuable after such action upon conversion of the Preferred
Stock would exceed the total number of shares of Common Stock then authorized
by the Articles of Incorporation.
6K. No Reissuance of Preferred Stock. Shares of
Preferred Stock which are converted into shares of Common Stock as provided
herein shall not be reissued.
6L. Issue Tax. The issuance of certificates for shares
of Common Stock upon conversion of Preferred Stock shall be made without charge
to the holders thereof for any issuance
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tax in respect thereof, provided that the Corporation shall not be required to
pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of the
holder of the Preferred Stock which is being converted.
6M. Closing of Books. The Corporation will at no time
close its transfer books against the transfer of any Preferred Stock or of any
shares of Common Stock issued or issuable upon the conversion of any shares of
Preferred Stock in any manner which interferes with the timely conversion of
such Preferred Stock, except as may otherwise be required to comply with
applicable securities laws.
6N. Definition of Common Stock. As used in this
paragraph 6, the term "Common Stock" shall mean and include the Corporation's
authorized Common Stock, par value $.01 per share, as constituted on the date
of filing of these terms of the Preferred Stock, and shall also include any
capital stock of any class of the Corporation thereafter authorized which
shall not be limited to a fixed sum or percentage in respect of the rights of
the holders thereof to participate in dividends or in the distribution of
assets upon the voluntary or involuntary liquidation, dissolution or winding up
of the Corporation; provided that the shares of Common Stock receivable upon
conversion of shares of Preferred Stock shall include only shares designated as
Common Stock of the Corporation on the date of filing of this instrument, or in
case of any reorganization or reclassification of the outstanding shares
thereof, the stock, securities or assets provided for in subparagraph 6G.
6O. Mandatory Conversion. If at any time the Corporation
shall effect a firm commitment underwritten public offering of shares of Common
Stock in which (i) the aggregate price paid for such shares by the public shall
be at least $15,000,000 and (ii) the price paid by the public for such shares
be at least $2.50 per share (appropriately adjusted to reflect the occurrence
of any event described in subparagraph 6(F), then effective upon the closing of
the sale of such shares by the Corporation pursuant to such public offering,
all outstanding shares of Preferred Stock shall automatically convert to shares
of Common Stock on the basis set forth in this paragraph 6. Holders of shares
of Preferred Stock so converted may deliver to the Corporation at its principal
office (or such other office or agency of the Corporation as the Corporation
may designate by notice in writing to such holders) during its usual business
hours, the certificate or certificates for the shares so converted. As
promptly as practicable thereafter, the Corporation shall issue and deliver to
such holder a certificate or certificates for the number of whole shares of
Common Stock to which such holder is entitled, together with any cash dividends
and payment in lieu of fractional shares to which such holder may be entitled
pursuant to subparagraph 6(C). Until such time as a holder of shares of
Preferred Stock shall surrender his or its certificate therefor as provided
above, such certificates shall be deemed to represent the shares of Common
Stock to which such holder shall be entitled upon the surrender thereof.
7. Right of Participation. The Corporation shall, prior
to any proposed issuance by the Corporation of any of its securities (other
than debt securities with no equity feature), offer to each Preferred
Stockholder by written notice the right, for a period of thirty (30) days, to
purchase for cash at an amount equal to the price or other consideration for
which such securities are to be issued,
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<PAGE> 15
a number of such securities so that, after giving effect to such issuance (and
the conversion, exercise and exchange into or for (whether directly or
indirectly) shares of Common Stock of all such securities that are so
convertible, exercisable or exchangeable), such Preferred Stockholder will
continue to maintain its same proportionate equity ownership in the Corporation
as of the date of such notice (treating each Preferred Stockholder, for the
purpose of such computation, as the holder of the number of shares of Common
Stock which would be issuable to such Preferred Stockholder upon conversion,
exercise and exchange of all securities (including but not limited to the
Preferred Shares) held by such Preferred Stockholder on the date such offer is
made, that are convertible, exercisable or exchangeable into or for (whether
directly or indirectly) shares of Common Stock and assuming the like
conversion, exercise and exchange of all such other securities held by other
persons); provided, however, that the participation rights of the Preferred
Stockholder pursuant to this Section shall not apply to securities issued (A)
upon conversion of any of the Preferred Shares, (B) as a stock dividend or upon
any subdivision of shares of Common Stock, provided that the securities issued
pursuant to such stock dividend or subdivisions are limited to additional
shares of Common Stock, (C) pursuant to subscriptions, warrants, options,
convertible securities, or other rights outstanding as of the date of the
filing of these Preferred Stock Terms (D) solely in consideration for the
acquisition (whether by merger or otherwise) by the Corporation or any of its
subsidiaries of all or substantially all of the stock or assets of any other
entity, (E) pursuant to a firm commitment public offering, (F) pursuant to the
exercise of options to purchase Common Stock granted to directors, officers,
employees or consultants of the Corporation in connection with their service to
the Corporation, or to suppliers or other parties as payment for goods or
services rendered to the Corporation, not to exceed in the aggregate 6,827,629
shares (appropriately adjusted to reflect stock splits, stock dividends,
combinations of shares and the like with respect to the Common Stock) less the
number of shares (as so adjusted) issued pursuant to subscriptions, warrants,
options, convertible securities, or other rights outstanding as of the date of
the filing of these Preferred Stock Terms pursuant to clause (C) above (the
shares exempted by this clause (F) being hereinafter referred to as the
"Reserved Employee Shares"), and (G) upon the exercise of any right which was
not itself in violation of the terms of this Section. The Corporation's
written notice to the Preferred Stockholders shall describe the securities
proposed to be issued by the Corporation and specify the number, price and
payment terms. Each Preferred Stockholder may accept the Corporation's offer
as to the full number of securities offered to it or any lesser number, by
written notice thereof given by it to the Corporation prior to the expiration
of the aforesaid thirty (30) day period, in which event the Corporation shall
promptly sell and such Preferred Stockholder shall buy, upon the terms
specified, the number of securities agreed to be purchased by such Preferred
Stockholder. The Corporation shall be free at any time prior to ninety (90)
days after the date of its notice of offer to the Preferred Stockholders, to
offer and sell to any third party or parties the remainder of such securities
proposed to be issued by the Corporation (including but not limited to the
securities not agreed by the Preferred Stockholders to be purchased by them),
at a price and on payment terms no less favorable to the Corporation than those
specified in such notice of offer to the Preferred Stockholders. However, if
such third party sale or sales are not consummated within such ninety (90) day
period, the Corporation shall not sell such securities as shall not have been
purchased within such period without again complying with this Section.
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ARTICLE FIVE
The corporation shall have perpetual existence.
ARTICLE SIX
Meetings of stockholders may be held within or without the State of
Delaware, as the By-laws of the corporation may provide. The books of the
corporation may be kept outside the State of Delaware at such place or places
as may be designated from time to time by the board of directors or in the
By-laws of the corporation. Election of directors need not be by written
ballot unless the By-laws of the corporation so provide.
ARTICLE SEVEN
To the fullest extent permitted by the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended, a director of
this corporation shall not be liable to the corporation or its stockholders for
monetary damages for a breach of fiduciary duty as a director. Any repeal or
modification of this ARTICLE SEVEN shall not adversely affect any right or
protection of a director of the corporation existing at the time of such repeal
or modification.
ARTICLE EIGHT
Unless this Certificate of Incorporation is amended or repealed with
respect to this ARTICLE EIGHT or unless the By-laws of the corporation
designate otherwise, the corporation expressly elects not to be governed by
Section 203 of the General Corporation Law of the State of Delaware.
ARTICLE NINE
The corporation reserves the right to mend, alter, change or repeal
any provision contained in this Certificate of Incorporation in the manner now
or hereafter prescribed herein and by the General Corporation Law of the State
of Delaware, and all rights conferred upon stockholders herein are granted
subject to this reservation.
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<PAGE> 17
IN WITNESS WHEREOF, New Era of Networks, Inc. has caused this Restated
and Amended Certificate of Incorporation to be signed by George F. Adam, Jr.,
its President and Chief Executive Officer and attested to by Leonard M.
Goldstein, its Secretary, on May 21, 1997.
NEW ERA OF NETWORKS, INC.
A Delaware Corporation
By: /s/ George F. Adman, Jr.
--------------------------------
George F. Adam, Jr.
President and Chief
Executive Officer
ATTEST:
By: /s/ Leonard M. Goldstein
-------------------------------
Leonard M. Goldstein
Secretary
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<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Denver, Colorado,
May 19, 1997
