<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 000-22043
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NEW ERA OF NETWORKS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 84-1234845
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
7400 EAST ORCHARD ROAD
ENGLEWOOD, COLORADO 80111
(Address of principal executive offices)
Registrant's telephone number, including area code: (303) 694-3933
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past (90) days. YES [X] NO [ ]
The number of shares of the issuer's Common Stock outstanding as of
September 30, 1998 was 12,340,413.
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets.................................
Consolidated Statements of Operations.......................
Consolidated Statements of Cash Flows.......................
Notes to Consolidated Financial Statements..................
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................
PART II OTHER INFORMATION
Item 1. Legal Proceedings...........................................
Item 2. Changes in Securities.......................................
Item 3. Defaults Upon Senior Securities.............................
Item 4. Submission of Matters to a Vote of Security Holders.........
Item 5. Other Information...........................................
Item 6. Exhibits and Reports on Form 8-K............................
Signatures...........................................................
</TABLE>
2
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NEW ERA OF NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 35,718,242 $ 7,150,362
Short-term investments.................................... 9,031,972 15,573,617
Accounts receivable, net of an allowance for uncollectible
accounts of $800,000 and $300,000, respectively........ 18,814,848 11,072,850
Unbilled revenue.......................................... 3,405,777 1,667,456
Prepaid expenses and other................................ 2,234,599 1,020,394
------------ ------------
Total current assets.............................. 69,205,438 36,484,679
------------ ------------
Property and equipment:
Computer equipment and software........................... 7,406,329 2,725,144
Furniture, fixtures and equipment......................... 2,077,332 640,218
Leasehold improvements.................................... 1,336,094 86,563
------------ ------------
10,819,755 3,451,925
Less -- accumulated depreciation.......................... (1,967,038) (1,036,088)
------------ ------------
Property and equipment, net............................... 8,852,717 2,415,837
Long-term investments....................................... 2,546,326 --
Intangible assets, net...................................... 36,907,626 704,132
Other assets, net........................................... 1,464,853 624,527
------------ ------------
Total assets...................................... $118,976,960 $ 40,229,175
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 5,472,850 $ 2,171,722
Accrued liabilities....................................... 6,066,142 2,081,959
Current portion of deferred revenue....................... 6,520,699 1,177,262
Current portion of borrowings............................. 419,971 66,963
Notes payable -- sellers.................................. 2,018,393 --
------------ ------------
Total current liabilities......................... 20,498,055 5,497,906
Notes payable -- banks...................................... 373,546 --
Deferred revenue............................................ 1,358,052 --
------------ ------------
Total liabilities................................. 22,229,653 5,497,906
Stockholders' equity:
Common stock, $.0001 par value, 45,000,000 shares
authorized; 12,340,413 and 9,106,157 shares issued and
outstanding, respectively.............................. 1,234 911
Additional paid-in capital................................ 121,284,218 46,191,190
Accumulated deficit....................................... (24,739,894) (11,517,978)
Cumulative translation adjustment......................... 201,749 57,146
------------ ------------
Total stockholders' equity........................ 96,747,307 34,731,269
------------ ------------
Total liabilities and stockholders' equity........ $118,976,960 $ 40,229,175
============ ============
</TABLE>
See notes to consolidated financial statements.
3
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NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues:
Software licenses.................... $ 10,713,736 $ 4,031,099 $ 24,553,964 $ 9,691,279
Services and maintenance............. 6,749,586 1,890,332 13,951,368 4,682,894
------------ ----------- ------------ -----------
Total revenues............... 17,463,322 5,921,431 38,505,332 14,374,173
Cost of revenues:
Cost of software licenses............ 451,944 342,470 1,115,947 757,935
Cost of services and maintenance..... 3,518,187 1,148,282 7,179,483 3,188,909
------------ ----------- ------------ -----------
Total cost of revenues....... 3,970,131 1,490,752 8,295,430 3,946,844
------------ ----------- ------------ -----------
Gross profit........................... 13,493,191 4,430,679 30,209,902 10,427,329
Operating expenses:
Sales and marketing.................. 5,732,578 2,252,705 13,165,903 5,930,783
Research and development............. 4,169,414 2,107,922 9,775,708 4,890,464
General and administrative........... 1,803,584 615,797 3,963,301 1,481,377
Charge for acquired in-process
research and development.......... 13,857,000 2,600,000 17,597,000 2,600,000
Amortization of intangibles.......... 482,225 18,016 612,885 18,016
------------ ----------- ------------ -----------
Total operating expenses..... 26,044,801 7,594,440 45,114,797 14,920,640
------------ ----------- ------------ -----------
Loss from operations................... (12,551,610) (3,163,761) (14,904,895) (4,493,311)
Other income, net...................... 896,182 428,609 1,682,979 444,624
------------ ----------- ------------ -----------
Loss before provision for income
taxes................................ (11,655,428) (2,735,152) (13,221,916) (4,048,687)
Provision for income taxes............. -- -- -- --
------------ ----------- ------------ -----------
Net loss............................... $(11,655,428) $(2,735,152) $(13,221,916) $(4,048,687)
============ =========== ============ ===========
Net loss per common share, basic and
diluted (Note 3)..................... $ (0.97) $ (0.30) $ (1.26) $ (0.95)
============ =========== ============ ===========
Weighted average shares of common stock
outstanding, basic and diluted....... 11,979,073 9,035,442 10,490,740 4,277,990
============ =========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
4
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NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(13,221,916) $(4,048,687)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities --
Depreciation and amortization.......................... 1,551,133 445,617
Charge for acquired in-process research and
development........................................... 17,597,000 2,600,000
Imputed interest on business combination............... 90,000 --
Changes in assets and liabilities --
Accounts receivable, net............................. (3,604,011) (3,647,473)
Unbilled revenue..................................... (1,198,396) (2,261,319)
Prepaid expenses and other........................... (1,075,276) (596,024)
Other assets, net.................................... (167,063) (340,384)
Accounts payable..................................... 1,049,041 774,747
Accrued liabilities.................................. 2,540 90,976
Deferred revenue, current and long-term.............. 1,393,628 398,527
------------ -----------
Net cash provided by (used in) operating
activities..................................... 2,416,680 (6,584,020)
------------ -----------
Cash flows from investing activities:
Purchases of short-term investments....................... (5,529,436) --
Proceeds from sale of short-term investments.............. 12,071,081 --
Purchases of long-term investments........................ (2,946,326) (5,073,265)
Business combinations, net of cash acquired............... (22,131,246) (2,800,000)
Purchase of property and equipment........................ (4,837,662) (792,384)
------------ -----------
Net cash used in investing activities............. (23,373,589) (8,665,649)
------------ -----------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 56,038,889 38,381,640
Common stock issuance costs............................... (3,545,538) (3,658,860)
Proceeds from notes payable to banks...................... -- 600,000
Principal payments on notes payable to banks.............. (3,018,853) (2,190,213)
------------ -----------
Net cash provided by financing activities......... 49,474,498 33,132,567
Effect of exchange rate on cash............................. 50,291 --
------------ -----------
Net increase in cash and cash equivalents................... 28,567,880 17,882,898
Cash and cash equivalents, beginning of period.............. 7,150,362 3,387,466
------------ -----------
Cash and cash equivalents, end of period.................... $ 35,718,242 $21,270,364
============ ===========
Supplemental cash flow information:
Cash paid during the period for --
Interest............................................... $ 32,620 $ 77,768
============ ===========
Taxes.................................................. $ -- $ --
============ ===========
Supplemental disclosures of noncash transactions:
Common stock issued for business combinations............. $ 22,600,000 $ --
============ ===========
Accrued business combination costs........................ $ 1,463,000 $ 200,000
============ ===========
Conversion of preferred stock to common................... $ -- $11,385,000
============ ===========
Accrued common stock offering costs....................... $ -- $ 200,000
============ ===========
</TABLE>
See notes to consolidated financial statements.
5
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NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION.
The accompanying consolidated interim financial statements have been
prepared by New Era of Networks, Inc. (the "Company"), without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission (the
"SEC"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations. These
financial statements should be read in conjunction with the Company's audited
consolidated financial statements included in the Company's Registration
Statement on Form S-1 and related Prospectus dated May 20, 1998, and the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997. The consolidated results of operations for the three and nine months ended
September 30, 1998, are not necessarily indicative of the results to be expected
for any subsequent period or for the entire fiscal year ending December 31,
1998.
The accompanying unaudited consolidated interim financial statements
reflect, in the opinion of management, all adjustments that are of a normal and
recurring nature and that are necessary for a fair presentation of the financial
position and results of operations for the periods presented. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Certain reclassifications have been made to prior period
financial statements to conform to the September 30, 1998 presentation.
2. BUSINESS COMBINATIONS.
Century Analysis Incorporated
Effective as of September 1, 1998, the Company acquired all of the
outstanding capital stock of Century Analysis Inc., a California corporation
("CAI"), by means of a Share Acquisition Agreement by and among CAI, the
shareholders of CAI and the Company.
The aggregate consideration paid by the Company was $41,000,000, payable as
follows: approximately $21,000,000 in cash, approximately $2,018,000 in
short-term notes payable to CAI shareholders, and approximately $18,000,000
through the issuance of 440,031 unregistered shares of the Company's common
stock. The Company also issued stock options exercisable for shares of the
Company's common stock to assume all outstanding CAI stock options valued at
approximately $1,000,000. An additional 195,569 unregistered shares of the
Company's common stock are issuable contingent upon the achievement of certain
performance criteria by CAI. The Company expects that the fees and expenses
related to the acquisition will be approximately $1,500,000. The acquisition was
accounted for under the purchase method of accounting and, accordingly, the
assets, liabilities and operating results of CAI have been included in the
accompanying consolidated financial statements from the effective date of the
acquisition.
An independent valuation of CAI's net assets was performed to assist in the
allocation of the purchase price. Approximately $13,857,000 of the purchase
price represented the intangible value of in-process research and development
projects that had not yet reached technical feasibility. The related technology
has no alternative future use and will require substantial additional
development by the Company. This amount was charged to operations in the quarter
ended September 30, 1998. A portion of the purchase price was also assigned to
marketable software products ($5,814,000) and goodwill ($29,348,000), which are
being amortized on a straight-line basis over five- and ten-year periods,
respectively. CAI's other assets were valued at approximately $6,800,000 and its
liabilities assumed totaled approximately $12,500,000.
6
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NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MSB Consultants Limited
Effective as of June 1, 1998, the Company acquired all of the outstanding
capital stock of MSB Consultants Limited ("MSB"), a corporation organized under
the laws of the United Kingdom, by means of a Share Purchase Agreement by and
among the shareholders of MSB and the Company.
The aggregate consideration paid by the Company was $4,800,000, of which
$1,200,000 was paid in cash and approximately $3,600,000 was paid through the
issuance of 138,462 unregistered shares of common stock of the Company.
Additional unregistered shares having a total value upon issuance of up to
$3,000,000 may also be issued to shareholders of MSB upon the achievement of
certain performance targets during the two-year period following the closing.
The fees and expenses related to the acquisition were approximately $375,000.
The acquisition was accounted for under the purchase method of accounting and,
accordingly, the assets, liabilities and operating results of MSB have been
included in the accompanying consolidated financial statements from the
effective date of the acquisition.
An independent valuation of MSB's net assets was performed to assist in the
allocation of the purchase price. Approximately $3,740,000 of the purchase price
represented the intangible value of in-process research and development projects
that had not yet reached technological feasibility. The related technology has
no alternative future use and will require substantial additional development by
the Company. This amount was charged to operations in the quarter ended June 30,
1998. A portion of the purchase price was also assigned to marketable software
products ($770,000) and goodwill ($698,000) which are being amortized on a
straight-line basis over three- and seven-year periods, respectively. MSB's
other assets were valued at $2,036,000 and its liabilities assumed totaled
$996,000.
3. NET LOSS PER COMMON SHARE.
The Company has adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" ("SFAS 128"), by retroactively restating loss per share
amounts for all periods presented. Under SFAS 128, basic loss per common share
is determined by dividing net loss from continuing operations available to
common shareholders by the weighted average number of common shares outstanding
during each period. Diluted earnings per common share includes the effects of
potentially issuable common stock, but only if dilutive. The treasury stock
method, using the average price of the Company's common stock for the period, is
applied to determine dilution from options and warrants. The if-converted method
is used for convertible securities.
Loss per share amounts presented in the Prospectus dated June 18, 1997 and
subsequent filings with the SEC were determined on a pro forma basis as required
by SEC Staff Accounting Bulletin No. 83 ("SAB No. 83"). Pro forma weighted
average shares outstanding included effects of certain securities issued by the
Company prior to its initial public offering, regardless of being antidilutive.
In February 1998, SAB No. 83 was superceded by SEC Staff Accounting Bulletin No.
98 which effectively required the Company to retroactively restate its loss per
common share.
4. COMPREHENSIVE INCOME.
In June of 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 "Reporting Comprehensive Income"
("SFAS 130"). The purpose of SFAS 130 is to report a measure of all changes in
equity that result from recognized transactions and other economic events of the
period other than transactions with owners in their capacity as owners. The only
item of other
7
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NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
comprehensive income reported by the Company is the cumulative translation
adjustment. The Company's comprehensive income for the three and nine months
ended September 30, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net loss for the period........ $(11,655,428) $(2,735,152) $(13,221,916) $(4,048,687)
Change in cumulative
translation adjustment....... 69,071 -- 144,603 --
------------ ----------- ------------ -----------
Comprehensive loss............. $(11,586,357) $(2,735,152) $(13,077,313) $(4,048,687)
============ =========== ============ ===========
</TABLE>
5. SUBSEQUENT EVENT.
On November 11, 1998, the Company's board of directors approved a
two-for-one stock split, payable in the form of a stock dividend to stockholders
of record as of November 23, 1998. All shares and per share data in the
accompanying financial information have not been adjusted to reflect the stock
split.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains certain trend analysis and other
forward-looking statements. Words such as "anticipate," "believe," "plan,"
"estimate," "expect," "seek," and "intend" and words of similar import are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and are subject to business and economic risks
and uncertainties which are difficult to predict. Therefore, the Company's
actual results of operations may differ materially from those expressed or
forecasted in the forward-looking statements as a result of a number of factors,
including those set forth in this discussion under "Factors That May Affect
Future Results" and other risks detailed from time to time in reports filed with
the SEC. In addition, the discussion of the Company's results of operations
should be read in conjunction with matters described in detail in the Company's
Prospectus dated May 20, 1998, including the "Risk Factors" set forth therein.
The following table sets forth the percentages that selected items in the
Consolidated Statements of Operations bear to total revenues:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
1998 1997 1998 1997
------ ----- ------ -----
<S> <C> <C> <C> <C>
Revenues:
Software licenses....................................... 61% 68% 64% 67%
Services and maintenance................................ 39 32 36 33
--- --- --- ---
Total revenues............................................ 100 100 100 100
Cost of revenues:
Cost of software licenses(1)............................ 4 8 5 8
Cost of services and maintenance(1)..................... 52 61 51 68
--- --- --- ---
Total cost of revenues.................................... 23 25 22 27
Gross profit.................................... 77 75 78 73
Operating expenses:
Sales and marketing..................................... 33 38 34 41
Research and development................................ 24 36 25 34
General and administrative.............................. 10 10 10 10
Charge for acquired in-process research and
development.......................................... 79 44 46 18
Amortization of intangibles............................. 3 <1 2 <1
--- --- --- ---
Total operating expenses.................................. 149 128 117 104
--- --- --- ---
Loss from operations...................................... (72) (53) (39) (31)
Other income, net......................................... 5 7 5 3
--- --- --- ---
Loss before provision for income taxes.................... (67) (46) (34) (28)
Provision for income taxes................................ -- -- -- --
=== === === ===
Net loss.................................................. (67)% (46)% (34)% (28)%
=== === === ===
Net income (loss) excluding charges for acquired
in-process research and development and amortization of
intangibles............................................. 15% (2)% 13% (10)%
=== === === ===
</TABLE>
- ---------------
(1) As a percentage of software licenses and services and maintenance revenues,
respectively.
REVENUES
The Company's revenues increased from $5.9 million and $14.4 million for
the three and nine months ended September 30, 1997, respectively, to $17.5
million and $38.5 million for the three and nine months ended September 30,
1998, respectively. This increase resulted from significantly increased indirect
channel revenues, increased professional services, and additions to the
Company's product portfolio. The acquisitions of MSB in June of 1998 and CAI in
September of 1998 added to NEON's product portfolio, which
9
<PAGE> 10
contributed to increased software licenses and services and maintenance
revenues. For the nine months ended September 30, 1998, indirect channel
revenues increased to 19% of total revenues, compared with 3% for the nine
months ended September 30, 1997. For the three and nine months ended September
30, 1998, international revenues increased to 27% and 30% of total revenues,
compared with 41% and 24% of total revenues for the three and nine months ended
September 30, 1997.
Software license revenues increased from $4.0 million and $9.7 million for
the three and nine months ended September 30, 1997, respectively, to $10.7
million and $24.6 million for the three and nine months ended September 30,
1998, respectively. This growth in software license revenues reflects the
growing market awareness and acceptance of the Company's enterprise application
integration software products and the establishment of distributor and reseller
relationships with IBM, PeopleSoft, Candle Corporation, and NIWS (Japan).
Services and maintenance revenues increased from $1.9 million and $4.7
million for the three and nine months ended September 30, 1997, respectively, to
$6.7 million and $14.0 million for the three and nine months ended September 30,
1998, respectively. The increase in the relative percentage of service revenues
to total revenues in these periods was attributable to two primary factors:
increases in the installed base of customers receiving maintenance, training and
other support services; and a significant increase in consulting revenues as a
result of expanded demand for NEON's direct assistance with application
integration implementation projects.
COST OF REVENUES
Cost of revenues consists of cost of software licenses and cost of services
and maintenance. As a percentage of total revenues, cost of revenues declined
from 25% and 27% for the three and nine months ended September 30, 1997,
respectively, to 23% and 22% for the three and nine months ended September 30,
1998, respectively. Although cost of revenues decreased as a percentage of total
revenues, the costs increased on an absolute basis by approximately $2.5 million
and $4.3 million for the three and nine months ended September 30, 1998,
respectively, compared with the same periods in 1997. This increase was due
primarily to the growth in professional service engagements created by the
increased demand for NEON's direct assistance with application integration
implementation projects. If revenues derived from professional service
engagements increase as a percentage of total revenues in future periods, cost
of revenues as a percentage of total revenues may also increase.
Cost of software licenses consists principally of royalty payments to third
parties for jointly developed products, software purchased from third parties
for resale, and internal costs associated with the fulfillment of license sales.
Cost of software licenses increased from $342,000, or 8% of software license
revenues, for the quarter ended September 30, 1997 to $452,000, or 4% of
software license revenues, for the quarter ended September 30, 1998. Cost of
software licenses increased from $758,000, or 8% of software license revenues,
for the nine months ended September 30, 1997 to $1.1 million, or 5% of software
license revenues, for the nine months ended September 30, 1998. Cost of software
licenses as a percentage of software license revenues may fluctuate from period
to period due principally to the mix of sales of royalty-bearing software
products in each period. Royalties associated with certain software products
currently under development through joint business arrangements may cause the
cost of software licenses to increase in future periods.
Cost of services and maintenance consists primarily of personnel, facility
and systems costs incurred in providing professional service consulting,
training, and customer support services. Cost of services and maintenance
decreased as a percentage of services and maintenance revenues from 61% and 68%
for the three and nine months ended September 30, 1997, respectively, to 52% and
51% for the three and nine months ended September 30, 1998. This improved margin
resulted from improved utilization of field service personnel, an increase in
professional service rates, and reduced use of subcontractors.
10
<PAGE> 11
OPERATING EXPENSES
Sales and Marketing
Sales and marketing expenses increased from $2.3 million, or 38% of total
revenues, for the quarter ended September 30, 1997 to $5.7 million, or 33% of
total revenues, for the quarter ended September 30, 1998. Sales and marketing
expenses increased from $5.9 million, or 41% of total revenues, for the nine
months ended September 30, 1997 to $13.2 million, or 34% of total revenues, for
the nine months ended September 30, 1998. The dollar increase is attributable to
the Company's continued expansion of its direct sales force, increased
commission expense associated with higher revenues, continued investment in
building an international direct sales force, and increased marketing expenses
for the Company's expanded software product offerings. Sales and marketing
expenses declined as a percent of total revenues due to higher percentage growth
in revenues and efficiencies associated with the achievement of economies of
scale.
Research and Development
Research and development expenses increased from $2.1 million, or 36% of
total revenues, for the quarter ended September 30, 1997 to $4.2 million, or 24%
of total revenues, for the quarter ended September 30, 1998. Research and
development expenses increased from $4.9 million, or 34% of total revenues, for
the nine months ended September 30, 1997 to $9.8 million, or 25% of total
revenues, for the nine months ended September 30, 1998. Software product
development expenditure increases are directly attributable to increases in the
Company's staff of software engineers and consultants, and the associated
infrastructure costs required to support software product development
initiatives. The decline in research and development expenses as a percentage of
revenues was due primarily to higher percentage growth in revenues.
General and Administrative
General and administrative expenses grew from $616,000, or 10% of total
revenues, and $1.5 million, or 10% of total revenues, for the three and nine
months ended September 30, 1997, respectively, to $1.8 million, or 10% of total
revenues, and $4.0 million, or 10% of total revenues, for the three and nine
months ended September 30, 1998, respectively. The increase in general and
administrative expenses resulted primarily from increases in staffing,
information systems, and related infrastructure to support the Company's growth
and increases in administrative expenses associated with the operation of
foreign subsidiaries.
Charge for Acquired In-Process Research and Development/Amortization of
Intangibles
For the three months ended September 30, 1998, $13.9 million of the CAI
purchase price was allocated to in-process research and development and charged
to expense. The nine months ended September 30, 1998 also includes $3.7 million
of the MSB purchase price, which was allocated to in-process research and
development projects and charged to expense. For the three and nine months ended
September 30, 1997, $2.6 million of the Menhir Limited ("Menhir") purchase price
was allocated to in-process research and development and charged to expense.
Amortization of the intangibles for the three and nine months ended September
30, 1998 of $482,000 and $613,000, respectively, is comprised of the
amortization of acquired software and goodwill associated with the acquisition
of Menhir in September of 1997, MSB in June of 1998, and CAI in September of
1998.
OTHER INCOME, NET
The Company reported other income, net of $429,000 and $445,000 for the
three and nine months ended September 30, 1997, respectively, and $896,000 and
$1.7 million for the three and nine months ended September 30, 1998,
respectively. The increase in other income was due to interest earned on cash
invested from the proceeds of the Company's initial public offering in June of
1997 and subsequent public offering in May of 1998.
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PROVISION FOR INCOME TAXES
The Company has reported no income tax expense for any period. As of
September 30, 1998, the net deferred tax asset of approximately $6.4 million was
offset by a valuation allowance of a like amount. The comparable figure for
December 31, 1997 was $3.4 million.
NET LOSS
Due to the acquisition-related expenses associated with the MSB and CAI
acquisitions, the Company reported net losses for the three and nine months
ended September 30, 1998 of approximately $11.7 million, or $0.97 per share and
$13.2 million, or $1.26 per share. Excluding acquisition-related expenses and
amortization, the Company generated net income for the three and nine months
ended September 30, 1998 of $2.7 million, or $0.20 per diluted share and $5.0
million, or $0.42 per diluted share, respectively. Also excluding
acquisition-related expenses and amortization, this compares to a net loss of
$117,000, or $0.01 per basic and diluted share and net loss of $1.4 million, or
$0.33 per basic and diluted share for the three and nine months ended September
30, 1997, respectively. The operating results improved due to the increased
growth of the Company's revenues, as compared with the growth of costs and
expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $47.3 million in cash, cash equivalents, short-term and
long-term investments at September 30, 1998, compared to $22.7 million at
December 31, 1997. The Company maintains a line of credit of $2,000,000 that can
be used for working capital requirements on an as-needed basis. Net accounts
receivable grew from $11.1 million at December 31, 1997 to $18.8 million at
September 30, 1998. The increase in net accounts receivable resulted from
acquired receivables from CAI in September of 1998 and MSB in June of 1998 and
the growth in customer licensing activity partially offset by increased cash
collections. Unbilled revenue, which consists primarily of progress on software
development contracts which is not billed until specified by a contract date or
milestone, grew from $1.7 million at December 31, 1997 to $3.4 million at
September 30, 1998.
Cash provided by operating activities was $2.4 million for the nine months
ended September 30, 1998, compared with a net cash usage of $6.6 million for the
same period of 1997. Operating cash flows increased primarily due to increases
in income before depreciation, amortization, and the charge for in-process
research and development which were partially offset by a net decrease in
working capital.
Cash used for investing activities was $23.4 million in the nine months
ended September 30, 1998, compared with net cash used of $8.7 million for the
same period of 1997. The net cash used in investing activities in the 1998
period was $3.6 million in net proceeds from the sale of short-term and
long-term investments, $21 million used in the acquisition of CAI, $1.2 million
used in the acquisition of MSB, and $4.8 million used in capital expenditures.
The net cash used in the comparable period of 1997 consisted of $5.1 million in
purchases of short-term investments, $2.8 million used in the acquisition of
Menhir, and $800,000 used in capital expenditures.
Cash provided by financing activities was $49.5 million in the nine months
ended September 30, 1998 compared to $33.1 million for the same period of 1997.
In the 1998 period, the Company received $50.6 million in net proceeds from its
secondary offering and $1.9 million in proceeds from the exercise of stock
options, warrants and employee stock purchase plan arrangements. Also in the
1998 period, $19.0 million and $3.6 million of common stock and stock options
for the Company's common stock were issued in connection with the CAI and MSB
acquisitions, respectively. In the 1997 period, the Company received $34.2
million in net proceeds from its initial public offering and approximately
$294,000 from the exercise of stock options.
The Company believes that its existing balances of cash, cash equivalents
and short-term and long-term investments will be sufficient to meet the
Company's working capital and capital expenditure needs at least for the next
twelve months. Thereafter, the Company may require additional sources of funds
to continue to
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support its business. There can be no assurance that such capital, if needed,
will be available or will be available on terms acceptable to the Company.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks and the possible impact of these
factors on future 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 Enterprise
Application Integration ("EAI") 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, decreased margins associated with higher
expenses of subcontract labor, international operations, uncertainties in
revenue recognition associated with the application of Statement of Position
97-2, and general domestic and international economic and political conditions.
A significant portion of the Company's revenues has been, and the Company
believes will continue to be, derived from a small number of relatively large
customer contracts or arrangements, and the timing of revenue recognition from
such contracts and arrangements has caused, and may continue to cause, material
fluctuations in the Company's operating results, particularly on a quarterly
basis. Quarterly revenues and operating results typically depend upon the volume
and timing of customer contracts received during a given quarter, and the
percentage of each 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 may have a material
adverse effect on the Company's business, financial condition and results of
operations.
In addition, the timing of license revenue is difficult to predict because
of the length and variability of the Company's sales cycle. The purchase of the
Company's products by its customers typically involves a significant technical
evaluation and commitment of capital and other resources, with the attendant
delays frequently associated with customers' internal procedures to approve
large capital expenditures and to test, implement and accept new technologies
that affect key operations. This evaluation process frequently results in a
lengthy sales process of several months and subjects the sales cycle associated
with the purchase of the Company's products to a number of significant risks,
including customers' budgetary constraints and internal acceptance reviews. The
length of the Company's sales cycle may vary substantially from customer to
customer, particularly for customers within different vertical market segments.
The Company's operating expense levels are relatively fixed and are based in
part on expectations of future revenues. Consequently, any delay in the
recognition of revenue from quarter to quarter could result in operating losses.
To the extent that such operating expenses precede, or are not subsequently
followed by, increased revenues, the Company's operating results may 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.
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Limited Operating History; History of Operating Losses; Accumulated
Deficit. 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 had not been
profitable on an annual basis. At September 30, 1998, the Company had an
accumulated deficit of approximately $24.7 million. 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 to 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 be profitable in the future.
Customer Concentration; Dependence Upon Financial Institutions Industry;
Risks of New Targeted Market Segments. For the three and nine months ended
September 30, 1997, the Company's largest customer accounted for 19% and 21%,
respectively, of the Company's total revenues. For the three and nine months
ended September 30, 1998, the Company's largest customer accounted for
approximately 20% and 10%, respectively, of the Company's total revenues. In
addition, to date the Company's revenues have been derived primarily from sales
to large banks and financial institutions, which accounted for 72% of total
revenues for the year ended December 31, 1997. In the first nine months of 1998,
sales to banks and financial institutions accounted for approximately 60% of the
Company's total revenues. This decline in the concentration of sales to banks
and financial institutions was primarily the result of an increase in indirect
channel license revenues and sales into other industry segments. 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 results of operations.
The Company has 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 may be materially
adversely affected.
Product Concentration. A substantial portion of the Company's revenues have
been attributable to licenses of NEONet and related services. The Company
currently expects that revenues attributable to NEONet and related services will
continue to account for a substantial majority of the Company's revenues at
least through 1998. 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 may
have a material adverse effect on the Company's business, financial condition
and results of operations.
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Integration of Acquisitions and Joint Ventures. In the second and third
quarters of 1998, the Company acquired MSB and CAI, and may from time to time
acquire companies with complementary products and services. The Company's recent
acquisitions, and any future acquisitions, may 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 successfully integrate 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 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 and
results of operations.
Risks Associated with Expanding Distribution; Indirect Distribution Channel
Risks. To date, the Company has sold its products primarily through the
Company's direct sales force 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 47 people as of September 30, 1998. 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. The
inability of 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 also will depend upon its success
in developing and maintaining strategic relationships with distributors,
resellers, and systems integrators. The Company's strategy is to continue to
increase the proportion of customers served through these indirect channels.
Although sales through indirect channels accounted for less than 10% of total
revenues in 1997, indirect sales increased to approximately 19% of the Company's
total revenues for the first nine months of 1998. 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 and service revenues necessary
to offset such investment. The Company's inability to recruit and retain
qualified distributors, resellers and systems integrators could adversely affect
the Company's results of operations. The Company's success in selling into
indirect distribution channels 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.
Risks Associated with International Operations. Sales of the Company's
products outside of North America for the three and nine months ended September
30, 1998 represented approximately 27% and 30% of the Company's total revenues,
respectively, compared with approximately 41% and 24%, respectively, for the
three and nine months ended September 30, 1997. The Company continues to expand
its international operations, and these efforts 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 and expand 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
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<PAGE> 16
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.
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. The Company's
current competitors include a number of companies offering one or more solutions
to the application integration problem, some of which are directly competitive
with the Company's products.
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 products.
The Company's competitors also include software vendors targeting the EAI
market through various technological solutions. For example, Microsoft, BEA
Systems and others provide messaging and queuing solutions that compete with the
NEONet Messaging and Queuing module. In the future these vendors could elect to
provide a more complete integration solution that would also compete with
NEONet's dynamic formatting and rules-based engine modules. In addition, a large
number of other companies provide alternative solutions to application
integration utilizing other technologies such as data synchronization,
transaction monitoring, and subject-based publish/subscribe messaging systems.
The Company also faces competition from relational database vendors such as
Oracle, Informix, Sybase and Microsoft. In addition, NEON faces competition from
vendors offering EAI capabilities, including TSI International Software Ltd.,
Active Software and Vitria Technology, Inc.
The Company may also face competition from system integrators and
professional service organizations 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 integrators 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 integrators 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.
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 in a better position 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
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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, financial
condition and results of operations. 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, financial condition and results of operations.
Management of Growth. The Company is currently experiencing a period of
rapid growth that has placed and is expected to continue to place a strain on
the Company's administrative, financial and operational resources. From January
1, 1996 through September 30, 1998, the size of the Company's staff has
increased from 35 to 546 full-time equivalent employees. This includes
approximately 190 employees added as a result of the September 1998 acquisition
of CAI. Except for George F. (Rick) Adam, Jr., the Company's Chief Executive
Officer, and Harold A. Piskiel, the Company's Chief Technology Officer, all of
the Company's senior management joined the Company in 1996 or 1997. In addition,
the Company has expanded geographically by adding sales personnel in various
locations, including New York City, Chicago, San Francisco, Philadelphia,
Boston, Atlanta, Dallas, London, England and Sydney, Australia. The Company may
further expand into these regions or into others through internal growth or
through acquisitions of related companies and technologies. 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 results of
operations.
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. In particular, the Company is currently migrating its existing
accounting software to a packaged application, which will allow greater
flexibility in reporting and tracking results. There can be no assurance that
the Company will install such software package 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, financial condition and results of operations would be
materially adversely affected.
Rapid Technological Change; 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 the NEONet product suite on a variety of platforms.
The success of the Company's products will depend on various factors,
including the ability to integrate the Company's products with multiple
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
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customer preferences, 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 could be
materially adversely affected.
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 a wide range of vendors, including database, Enterprise
Resource Planning, supply chain and Electronic Data Interchange software
vendors, as well as 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.
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 results of operations. In particular, the
Company's Chief Executive Officer, George F. (Rick) Adam and Harold A. Piskiel,
Chief Technology Officer of the Company, 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 such 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, financial condition and results of
operations.
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 upon 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, financial condition or results of operations.
There can be no assurance that third parties will not claim infringement by
the Company with respect to current or future products. The Company expects that
application integration software developers will increasingly be subject to
infringement claims as the number of products in different industry segments
overlap. In this regard, the Company is aware that one of its competitors has a
U.S. patent covering certain
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aspects of publish/subscribe messaging systems. This competitor has invited the
Company to consider discussing a license under its patent. The Company believes
its NEONet product does not infringe any valid claim of the patent. However, any
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays, or require the Company to enter into
royalty or licensing agreements, any of which could have a material adverse
effect upon the Company's business, financial condition and operating results.
There can be no assurance that such royalty or licensing agreements, if
required, would be available on terms acceptable to the Company, or at all.
Moreover, the cost of defending patent litigation could be substantial,
regardless of the outcome. There can be no assurance that legal action claiming
patent infringement will not be commenced against the Company, or that the
Company would necessarily prevail in such litigation given the complex technical
issues and inherent uncertainties in patent litigation. In the event a patent
claim against the Company was successful and the Company could not obtain a
license on acceptable terms or license a substitute technology or redesign to
avoid infringement, the Company's business, financial condition and results of
operations may be materially adversely affected.
Impact of the Year 2000 Event. Many installed computer systems and software
products are coded to accept only two digit entries in the date code field.
Beginning in the year 2000, these code fields will need to accept four digit
entries to distinguish 21st century dates from 20th century dates. As a result,
in less than 15 months, computer systems and/or software products used by many
companies may need to be upgraded to comply with such year 2000 requirements.
While the Company has assessed its products, services and internal systems,
certain internal financial packages have not yet been implemented and may
require further assessment by the Company. The Company believes it is currently
expending sufficient resources to review its product and services, as well as
its internal management information system in order to modify those products,
services and systems that are not year 2000 compliant. The Company expects such
modifications will be made on a timely basis and does not believe that the cost
of such modifications will have a material effect on the Company's operating
results. There can be no assurance, however, that the Company will be able to
modify timely and successfully such products, services and systems to comply
with the year 2000 requirements, which could have a material adverse effect on
the Company's operating results. Moreover, the Company believes that some
customers may be purchasing the Company's products as an interim solution to
their year 2000 needs until their current suppliers reach compliance.
Conversely, year 2000 issues could cause a significant number of companies,
including current customers of the Company, to reevaluate their current system
needs and as a result consider switching to other systems and suppliers. In
addition, the Company has not yet completed its assessment of certain earlier
versions of the Company's product which are still implemented at certain
customer sites. Any of the foregoing could result in a material adverse effect
on the Company's business, operating results and financial condition.
Furthermore, there can be no assurance that these or other factors relating to
the year 2000 compliance issues, including litigation, will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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PART II. -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
Effective September 1, 1998, the Company issued an aggregate of 440,031
unregistered shares to the shareholders of CAI in exchange for all the
outstanding capital stock of CAI (the "CAI Transaction"). The shares were issued
without registration in reliance upon the exemption set forth under Regulation D
of the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10 -- Share Acquisition Agreement relating to the CAI
Transaction (incorporated by reference to the Company's
Form 8-K filed on October 14, 1998).
27.1 -- Financial Data Schedule
</TABLE>
(b) (1) A report on Form 8-K was filed on October 14, 1998 relating to the
CAI Transaction.
(2) A report on Form 8-K was filed on August 14, 1998 relating to the
Preferred Share Rights Agreement.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW ERA OF NETWORKS, INC.
(Registrant)
By: /s/ STEPHEN E. WEBB
----------------------------------
Stephen E. Webb,
Senior Vice President,
Chief Financial Officer
(Principal Financial Officer)
Date: November 16, 1998
21
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10 -- Share Acquisition Agreement relating to the CAI
Transaction (incorporated by reference to the Company's
Form 8-K filed on October 14, 1998).
27.1 -- Financial Data Schedule
</TABLE>
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S SEPTEMBER 30, 1998 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN IT ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 35,718,242
<SECURITIES> 9,031,972
<RECEIVABLES> 18,814,848
<ALLOWANCES> 800,000
<INVENTORY> 0
<CURRENT-ASSETS> 69,205,438
<PP&E> 8,852,717
<DEPRECIATION> 1,967,038
<TOTAL-ASSETS> 118,976,960
<CURRENT-LIABILITIES> 20,498,055
<BONDS> 0
0
0
<COMMON> 1,234
<OTHER-SE> 96,746,073
<TOTAL-LIABILITY-AND-EQUITY> 118,976,960
<SALES> 17,463,322
<TOTAL-REVENUES> 17,463,322
<CGS> 3,970,131
<TOTAL-COSTS> 3,970,131
<OTHER-EXPENSES> 26,044,801
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,658
<INCOME-PRETAX> (11,655,428)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,655,428)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,655,428)
<EPS-PRIMARY> (.97)
<EPS-DILUTED> (.97)
</TABLE>
