<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
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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<TABLE>
<S> <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)
</TABLE>
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:
<TABLE>
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MARK A. BERTELSEN, ESQ.
ROBERT M. TARKOFF, ESQ. MICHAEL L. PLATT, ESQ.
MICHAEL S. ELLIS, ESQ. LAURA M. MEDINA, ESQ.
JOEL W. TOLEDANO, ESQ. JOHN W. BENDER, ESQ.
WILSON SONSINI GOODRICH & ROSATI COOLEY GODWARD LLP
PROFESSIONAL CORPORATION 2595 CANYON BOULEVARD, SUITE 250
650 PAGE MILL ROAD BOULDER, CO 80302
PALO ALTO, CALIFORNIA 94304 (303) 546-4000
(650) 493-9300
</TABLE>
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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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the box and list the Securities Act registration
statement 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
<TABLE>
<S> <C> <C> <C> <C>
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AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1)(2) PER SHARE(2)(3) PRICE(1)(2)(3) REGISTRATION FEE
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Common Stock(4)........................ 4,600,000 Shares $29.53 $135,838,000 $37,763
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</TABLE>
(1) Includes 600,000 shares of Common Stock which may be purchased by the
Underwriters to cover over-allotments, if any.
(2) All share and per share information has been adjusted to reflect a
two-for-one stock split that will be effected in the form of a 100% stock
dividend to stockholders of record as of November 23, 1998.
(3) Estimated solely for purposes of calculating the registration fee, based on
the average of the high and low prices for the Company's Common Stock as
reported on the NASDAQ National Market on November 13, 1998 in accordance
with Rule 457 under the Securities Act of 1933.
(4) Includes associated rights to purchase shares of Series A Preferred Stock of
New Era of Networks, Inc.
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
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED NOVEMBER , 1998
4,000,000 Shares
NEW ERA OF NETWORKS, INC.
Common Stock
---------------------
NEON's Common Stock is traded on The Nasdaq National Market under the symbol
"NEON". On November 17, 1998, the last reported sale price for the Common Stock
on The Nasdaq National Market was $30.81 per share.
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS" ON
PAGE 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS NEON
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<S> <C> <C> <C>
Per Share............................................ $ $ $
Total(1)............................................. $ $ $
</TABLE>
(1) NEON has granted the Underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase a maximum of 600,000 additional
shares to cover over-allotments of shares.
Delivery of the shares of Common Stock will be made on or about
, 1998, against payment in immediately available funds.
CREDIT SUISSE FIRST BOSTON
SG COWEN
SOUNDVIEW TECHNOLOGY GROUP, INC.
VOLPE BROWN WHELAN & COMPANY
WARBURG DILLON READ LLC
Prospectus dated , 1998
<PAGE> 3
DESCRIPTION OF ARTWORK
Inside Front cover
Application Integration - The NEONet Solution: explains Integrating
applications for Business; Easy Integration Within Networks; Guaranteed
Transaction Delivery; Intelligent, Realtime Transaction Routing and; Data
Transformation.
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."
Left Gatefold - Top
A chart titled "The Problem: Unintegrated Applications" demonstrating
three distinct application systems: legacy data-base, internet, and
Client/Server application.
Right Gatefold - Top
A chart titled "Interapplication Spaghetti" demonstrating a host of
difference application systems with many arrows in between each one.
Gatefold - Middle Bottom
A chart titled "The NEON Solution: showing a graphical depiction of the
NEONet rules engine between disparate application systems.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
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PAGE
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PROSPECTUS SUMMARY............................ 3
RISK FACTORS.................................. 6
USE OF PROCEEDS............................... 14
DIVIDEND POLICY............................... 14
PRICE RANGE OF COMMON STOCK................... 14
CORPORATE INFORMATION......................... 14
CAPITALIZATION................................ 15
DILUTION...................................... 15
SELECTED CONSOLIDATED FINANCIAL DATA.......... 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................. 17
</TABLE>
<TABLE>
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PAGE
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BUSINESS...................................... 27
MANAGEMENT.................................... 41
PRINCIPAL STOCKHOLDERS........................ 44
UNDERWRITING.................................. 46
NOTICE TO CANADIAN RESIDENTS.................. 47
LEGAL MATTERS................................. 48
EXPERTS....................................... 48
ADDITIONAL INFORMATION........................ 49
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.... F-1
</TABLE>
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Securities and
Exchange Commission (the "Commission") pursuant to the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), are incorporated in this Prospectus by
reference: (i) the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997; (ii) the Company's Quarterly Reports on Form 10-Q for
the quarters ended September 30, 1998, June 30, 1998 and March 31, 1998; (iii)
the Company's Current Reports on Form 8-K filed on November 18, 1998, October
14, 1998, August 17, 1998, August 14, 1998, and June 26, 1998; (iv) the
Company's Definitive Proxy Statement dated April 15, 1998, filed in connection
with the Company's 1997 Annual Meeting of Stockholders held on May 14, 1998; and
(v) the description of the Company's Common Stock contained in the Company's
Registration Statement on Form 8-A filed under Section 12 of the Exchange Act,
including any amendment or report updating such description.
Each document filed by the Company pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering made hereby shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the date of filing
of such document (all such documents, and the documents enumerated above, being
hereinafter referred to as "Incorporated Documents").
Any statement contained in an Incorporated Document shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed Incorporated
Document modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, including any beneficial owner, upon the written
or oral request of such person, a copy of any or all of the Incorporated
Documents, other than exhibits to such documents unless such exhibits are
specifically incorporated by reference therein. Requests for such copies should
be directed to New Era of Networks, Inc., 7400 East Orchard Rd., Suite 230,
Englewood, CO, 80111, Attention: Investor Relations (telephone 303-694-3933).
The information relating to the Company contained in this Prospectus does not
purport to be comprehensive and should be read together with the information
contained in the Incorporated Document.
FORWARD-LOOKING STATEMENTS
This Prospectus and the documents incorporated herein by reference contain
forward-looking statements that have been made pursuant to the provisions of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements are not historical facts but rather are based on current
expectations, estimates and projections about the Company's industry,
management's beliefs, and assumptions made by management. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates"
and variations of such words and similar expressions are intended to identify
such forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and other factors,
some of which are beyond the Company's control, that are difficult to predict
and could cause actual results to differ materially from those expressed or
forecasted in such forward-looking statements. Such risks and uncertainties
include those described in "Risk Factors" and elsewhere in this Prospectus and
in the documents incorporated herein by reference. Readers are cautioned not to
place undue reliance on these forward-looking statements which reflect
management's view only as of the date of this Prospectus. The Company undertakes
no obligation to update such statements or publicly release the result of any
revisions to these forward-looking statements which it may make to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
<PAGE> 5
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our Company and the Common Stock being sold in this
offering and our financial statements and notes thereto appearing elsewhere in
this Prospectus.
NEW ERA OF NETWORKS, INC.
We develop and sell enterprise application integration ("EAI") software and
services. Our software products provide a method for companies to integrate
disparate systems enterprise-wide, including software systems spanning multiple
hardware and software platforms, operating systems and database types. We have
completed several acquisitions beginning in the third quarter of 1997 and
continuing through the third quarter of 1998. These acquisitions have increased
our international presence and vertical industry penetration and have added
several products to our software portfolio, including customer relationship
management software for the financial services industry, additional message
broker software, a single sign-on product and a web-based e-commerce integration
product.
Competitive forces are driving companies to adopt new technologies and new
business practices. Historically, companies have addressed technology needs at a
departmental level or by geography, in isolation from the rest of the business.
Today, competitive advantage is often gained by managing initiatives that cut
across organizations, such as organizing the business around customers or
managing an entire supply chain. This requires integrating new systems and
previously isolated legacy systems, an exercise that has been manually
intensive, often inflexible and requires expensive ongoing maintenance.
According to Gartner Group, Inc., an information technology industry research
firm, 35% to 40% of all computer programming effort within a company is devoted
to maintaining programs solely designed to transfer information between
different databases. The Gartner Group refers to the complex morass of
individual unstructured integration among disparate applications as
"interapplication spaghetti."
Our objective is to establish the NEONet solution as the leading standard
for application integration across the enterprise. The key elements of our
strategy include leveraging strategic relationships, expanding into additional
vertical markets, developing cross-industry applications, expanding global sales
capabilities and maintaining technological leadership. Through September 30,
1998, we have shipped products or services (including products and services
acquired) to approximately 700 customers worldwide. Representative customers of
the Company include Abbey National Treasury Services, Citibank, The Coca-Cola
Company, Eaton Corporation, GTE Corporation, Industrial Bank of Japan Ltd., JP
Morgan & Co., Inc., Kaiser Foundation Health Plan, Inc., Liverpool Victoria
Friendly Society, Mayo Foundation for Medical Education and Research, Merrill
Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch"), Monsanto Company, State
Street Bank & Trust Co. and Sumitomo Bank of California.
As part of its strategy, the Company has established reseller and joint
marketing relationships with such companies as Cambridge Technology Partners,
Candle Corporation, Ernst & Young, Hewlett-Packard Company, IBM, Medisolution,
Inc., NIWS (Japan), Oracle Corporation, PeopleSoft, Inc., SAP AG, SunGard
Financial Systems and Sun Microsystems, Inc.
3
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company................. 4,000,000 shares(1)
Common Stock to be Outstanding after the Offering... 28,680,826 shares(2)
Use of proceeds..................................... General corporate purposes, including
working capital and potential
acquisitions.
NASDAQ National Market Symbol....................... NEON
</TABLE>
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(1) Assumes the Underwriter's over-allotment option to purchase 600,000 shares
is not exercised. See "Underwriting."
(2) Based upon shares outstanding as of September 30, 1998 (assuming no exercise
of options after September 30, 1998). Excludes (i) 7,202,948 shares of
Common Stock reserved for issuance pursuant to the Company's employee
benefit plans, under which options to purchase 5,277,572 shares of Common
Stock were outstanding as of September 30, 1998.
---------------------
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ----------------------
1995 1996 1997(1) 1997(1) 1998(2)
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<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Software licenses.............................. $ -- $ 3,383 $ 15,970 $ 9,691 $ 24,554
Services and maintenance....................... 1,271 3,762 6,676 4,683 13,951
------- ------- ------- ------ ------
Total revenues................................... 1,271 7,145 22,646 14,374 38,505
Cost of revenues................................. 751 3,328 5,343 3,947 8,295
------- ------- ------- ------ ------
Gross profit................................... 520 3,817 17,303 10,427 30,210
Loss from operations............................. (1,490) (5,733) (4,251) (4,493) (14,905)
Net loss......................................... $ (1,503) $ (5,672) $ (3,507) $ (4,049) $ (13,222)
Net loss per common share, basic and diluted..... $ (.57) $ (2.10) $ (.32) $ (.47) $ (.63)
Weighted average shares of Common Stock
outstanding, basic and diluted(3).............. 2,617,994 2,706,552 10,958,302 8,555,980 20,981,480
========= ========= ========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
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ACTUAL AS ADJUSTED(4)
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<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents, short-term and long-term
investments............................................. $ 47,297 $159,011
Working capital........................................... 48,707 160,421
Total assets.............................................. 118,977 230,691
Stockholders' equity...................................... 96,747 208,461
</TABLE>
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(1) Results include a $2.6 million charge for acquired in-process research and
development.
(2) Results include a $17.6 million charge for acquired in-process research and
development.
(3) See Note 2 of Notes to audited Consolidated Financial Statements for an
explanation of the weighted average common shares outstanding used to
compute net loss per share.
(4) Reflects the sale of 4,000,000 shares of Common Stock offered by the Company
at an assumed public offering price of $29.53 per share, after deducting the
underwriting discount and estimated offering costs payable by the Company.
---------------------------
Unless otherwise indicated, the information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option. In addition, all share and
per share information has been adjusted to reflect a two-for-one stock split
that will be effected in the form of a 100% stock dividend to stockholders of
record as of November 23, 1998.
4
<PAGE> 7
RECENT ACQUISITIONS
MSB Consultants Limited. In June 1998, we acquired all the outstanding
capital stock of MSB Consultants Limited, a corporation organized under the laws
of the United Kingdom ("MSB"). We paid MSB's shareholders an aggregate of $4.8
million, of which $1.2 million was paid in cash and approximately $3.6 million
was paid through the issuance of 276,924 shares of Common Stock. In addition,
shares of Common Stock of the Company having a total value upon issuance of
$3,000,000 may be issued to shareholders of MSB upon the achievement of
performance targets during the two-year period following the closing. MSB
develops and sells software and supplies consulting services in the areas of
design, development, implementation, installation, and support of financial
trading systems, market display data and middleware solutions for financial
institutions.
Century Analysis Incorporated In September 1998, we acquired all the
outstanding capital stock of Century Analysis Incorporated, a California
corporation ("CAI") for $23.0 million in cash and 880,062 unregistered shares of
Common Stock. In connection with the acquisition, we assumed all options
outstanding under CAI's option plan at the exchange ratio. In addition, 391,138
shares of Common Stock may be issued to the shareholders of CAI upon the
achievement of certain performance criteria. CAI is a software manufacturer that
has provided solutions since 1975 for productivity, connectivity and information
management.
Both acquisitions were accounted for under the purchase method of
accounting. See Note 2 of Notes to unaudited Consolidated Financial Statements.
5
<PAGE> 8
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our Company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations.
If any of the following risks actually occur, our business, financial
condition or results of future operations could be materially adversely
affected. In such case, the trading price of our Common Stock could decline, and
you may lose all or part of your investment.
This Prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in this
Prospectus.
OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY AND WE MAY NOT BE ABLE TO MAINTAIN
OUR EXISTING GROWTH RATES.
Although we have had significant revenue growth in recent quarters, such
growth rates may not be sustainable, and you should not use these past results
to predict future operating margins and results. Our quarterly operating results
have fluctuated significantly in the past and may vary significantly in the
future. Our future operating results will depend on many factors, including the
following:
- the continued growth of the Enterprise Application Integration ("EAI")
software market;
- the size of the orders for our products, and the timing of such orders;
- potential delays in our implementations at customer sites;
- continued development of indirect distribution channels;
- increased demand for our products;
- the timing of our product releases;
- competition;
- the effects of global economic uncertainty on capital expenditures for
software.
Quarterly revenues and operating results depend upon the volume and timing
of customer contracts received during a given quarter, and the percentage of
each contract which we are 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 our 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. If this
trend continues, any failure or delay in the closing of orders during the last
part of a quarter will have a material adverse effect on our business.
As a result of these and other factors, we believe that period-to-period
comparisons of our historical results of operations are not a good predictor of
our future performance. If our future operating results are below the
expectations of stock market analysts, our stock price may decline.
IF OUR SALES CYCLE IS LONGER THAN WE ANTICIPATE, OUR OPERATING RESULTS MAY
SUFFER.
Our customers typically take a long time to evaluate our products.
Therefore the timing of license revenue is difficult to predict. A sale of our
products to a customer typically involves a significant technical evaluation and
a commitment of capital and other resources by the customer. This evaluation
process frequently results in a sales cycle that lasts several months.
Additional delays are caused by customers' internal procedures to approve large
capital expenditures and to test, implement and accept new technologies that
affect key operations within their organization. Our operating expense levels
are relatively fixed in the short-term and are based in part on expectations of
future revenues. Consequently, any delay in the recognition of revenue due to a
longer sales cycle caused by these factors could result in operating losses.
THE COMPANY HAS A SHORT OPERATING HISTORY AND A HISTORY OF OPERATING LOSSES.
An investor in our Common Stock must evaluate the risks, uncertainties,
expenses and difficulties frequently encountered by early stage companies in
rapidly evolving markets. We have had only a limited operating history upon
which an evaluation of our Company and its prospects can be based. Prior to
1996, we recorded only nominal product revenue, and we have not been profitable
on an annual basis. At
6
<PAGE> 9
September 30, 1998, our Company had an accumulated deficit of approximately
$24.7 million. To address these risks and uncertainties, we must do the
following:
- successfully implement our sales and marketing strategy;
- expand our direct sales channels;
- further develop our indirect distribution channels;
- respond to competition in the EAI software market;
- continue to attract and retain qualified personnel;
- continue to develop and upgrade our products and technology more rapidly
than competitors;
- commercialize our products and services with future technologies.
We may not successfully implement any of our strategies or successfully
address these risks and uncertainties. Even if we accomplish these objectives we
may not be profitable in the future.
FAILURE TO ADD CUSTOMERS OR EXPAND INTO NEW MARKETS MAY HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS.
A significant portion of our revenue has come from a small number of large
purchasers. For example, for the nine months ended September 30, 1998, our top
ten customers accounted for 41% of total revenues. Our largest customer in the
third quarter of 1998 accounted for approximately 20% of our total revenues, and
for the nine months ended September 30, 1998 accounted for approximately 10% of
our total revenues. Historically, our revenues have been derived primarily from
sales to large banks and financial institutions. For example, sales to large
banks and financial institutions accounted for 72% of total revenues for the
year ended December 31, 1997, and approximately 60% of total revenues in the
nine months ended September 30, 1998. These customers or other customers may not
continue to purchase our products. Our failure to add new customers that make
significant purchases of our products and services would have a material adverse
effect on our business, financial condition and results of operations.
While we have developed experience marketing our products to financial
institutions, we have less experience with other vertical market segments. New
market segments that we are currently targeting are likely to have significantly
different characteristics than the financial institutions segment. As a result,
we may change our pricing structures, sales methods, sales personnel, consulting
services and customer support. We may not be successful in selling our products
and services to the additional segments targeted. Our inability to expand sales
of our products and services into these additional markets will materially
adversely effect our business.
OUR OPERATING RESULTS ARE SUBSTANTIALLY DEPENDENT ON ONE PRODUCT FAMILY.
A substantial majority of our revenues come from the NEONet suite of
products and related services, and we expect this pattern to continue.
Accordingly, our Company's future operating results will depend on the demand
for NEONet and related services by future customers, including new and enhanced
releases that are subsequently introduced. There can be no assurance that the
market will continue to demand our current products or that we will be
successful in marketing any new or enhanced products. If our competitors release
new products that are superior to NEONet in performance or price, demand for our
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
our business, financial condition and results of operations.
INABILITY TO INTEGRATE ACQUIRED COMPANIES MAY INCREASE THE COSTS OF RECENT
ACQUISITIONS.
Our Company has acquired three companies in the last fifteen months. We may
from time to time acquire companies with complementary products and services in
the application integration or other related software markets. We acquired
Menhir Limited ("Menhir") in September of 1997, MSB in June of 1998 and CAI in
September of 1998. These acquisitions will expose our Company to increased risks
and costs, including the following:
- assimilating new operations and personnel;
- diverting financial and management resources from existing operations;
- integrating acquired personnel and technologies.
7
<PAGE> 10
Our Company may not be able to generate sufficient revenues from any of
these acquisitions to offset the associated acquisition costs. We will also be
required to maintain uniform standards of quality and service, controls,
procedures and policies. Our failure to achieve any of these standards may hurt
relationships with customers, employees, and new management personnel. In
addition, our future acquisitions may result in additional stock issuances which
could be dilutive to our Company's stockholders.
Our Company may also evaluate joint venture relationships with
complementary businesses. Any joint venture we enter into 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 our financial
condition and results of operations.
OUR GROWTH IS DEPENDENT UPON THE SUCCESSFUL DEVELOPMENT OF OUR DIRECT AND
INDIRECT SALES CHANNELS.
We sell our products primarily through our direct sales force and we
support our customers with our internal technical and customer support staff. We
will continue to rely on our ability to recruit and train additional sales
people and qualified technical support personnel. Our Company's ability to
achieve significant revenue growth in the future will greatly depend on our
ability to recruit and train sufficient technical, customer and direct sales
personnel, particularly additional sales personnel focusing on the new vertical
market segments that we target. We have in the past and may in the future
experience difficulty in recruiting qualified sales, technical and support
personnel. Our inability to rapidly and effectively expand our direct sales
force and our technical and support staff could materially adversely affect our
business.
Our Company believes that future growth also will depend on developing and
maintaining successful strategic relationships with distributors, resellers, and
systems integrators. Our Company's strategy is to continue to increase the
proportion of customers served through these indirect channels. We are currently
investing, and plan to continue to invest, significant resources to develop
these indirect channels. This could adversely affect our operating results if
these efforts do not generate license and service revenues necessary to offset
such investment. Also, our inability to recruit and retain qualified
distributors, resellers and systems integrators could adversely affect our
Company's results of operations. Another risk is that because lower unit prices
are typically charged on sales made through indirect channels, increased
indirect sales could adversely affect our Company's average selling prices and
result in lower gross margins.
THERE ARE MANY RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
We continue to expand our international operations, and these efforts
require significant management attention and financial resources. Each version
of our product also has to be localized within each country. Our Company has
committed resources to the opening and integration of additional international
sales offices and the expansion of international sales and support channels. Our
Company's efforts to develop and expand international sales and support channels
may not be successful. International sales are subject to a number of risks,
including the following:
- longer payment cycles;
- unexpected changes in regulatory requirements;
- difficulties and expenses associated with complying with a variety of
foreign laws;
- import and export restrictions and tariffs;
- difficulties in staffing and managing foreign operations;
- difficulty in accounts receivable collection and potentially adverse tax
consequences;
- currency fluctuations;
- currency exchange or price controls;
- political and economic instability abroad.
Additionally, intellectual property may be more difficult to protect
outside of the United States. International sales can also be affected to a
greater extent by seasonal fluctuations resulting from the lower sales that
typically occur during the summer months in Europe and other parts of the world.
In addition, the market for our Company's products is not as developed outside
of North America. We may not be able to successfully penetrate international
markets or if we do, there can be no assurance that
8
<PAGE> 11
we will grow these markets at the same rate as in North America.
OUR MARKETS ARE HIGHLY COMPETITIVE.
We compete in markets that are intensely competitive and are expected to
become more competitive as current competitors expand their product offerings
and new competitors enter the market. Our current competitors include a number
of companies offering one or more solutions to the application integration
problem, some of which are directly competitive with our products. We have faced
competition for product sales with the following entities:
Internal Information Technology Departments.
"In-house" Information Technology departments of potential customers have
developed or may develop systems that substitute for some or all of the
functionality offered by our products. We expect that internally developed
application integration systems will continue to be a principal source of
competition for the foreseeable future. In particular, it can be difficult to
sell our product to a potential customer whose internal development group has
already made large investments in and progress towards completion of systems
that our products are intended to replace.
Software Vendors.
We face competition from a variety of vendors offering EAI capabilities,
including TSI International Software Ltd., Active Software, Software
Technologies Corporation and Vitria Technology, Inc. Other software companies
target the EAI market through various alternative technological solutions, such
as data synchronization, transaction monitoring, and subject-based
publish/subscribe messaging systems. Some vendors also sell software that
competes with only one of our products, but could be expanded or enhanced. For
example, Microsoft, BEA Systems and others provide messaging and queuing
solutions that compete with the NEONet Messaging and Queuing module, but 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. We also face competition from relational database vendors such as
Oracle, Informix, Sybase and Microsoft.
System Integrators and Professional Service Organizations.
These entities design and develop custom systems and perform custom
integration of systems and applications. Certain of these firms may possess
industry specific expertise or reputations among potential customers. These
systems integrators and consulting firms can resell our products and may engage
in joint marketing and sales efforts with us. We rely upon these firms for
recommendations of our Company's 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 our competitors, and there can be no assurance
that these firms will not market or recommend software products that are
competitive with our products.
Many of our 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 our
Company. Many of our competitors may also have well-established relationships
with current and potential customers of our Company. In addition, many of these
competitors have extensive knowledge of the application integration industry,
and are capable of offering a single-vendor solution. As a result, our
competitors may be in a better position than we are to devote significant
resources toward the development, promotion and sale of their products. They may
also respond more quickly to new or emerging technologies and changes in
customer requirements. 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. We also expect 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
our business, financial condition and results of operations. There can be no
assurance that we will be able to compete successfully against current and
future competitors, or that competitive pressure faced by our Company will not
materially adversely affect our business, financial condition and results of
operations.
9
<PAGE> 12
OUR FAILURE TO MANAGE GROWTH OF OPERATIONS MAY ADVERSELY AFFECT US.
We must plan and manage effectively in order to successfully offer products
and services and implement our business plan in a rapidly evolving market. We
continue to increase the scope of our operations domestically and
internationally and have grown our headcount substantially. For example, at
January 1, 1996, we had a total of 35 employees and at September 30, 1998 we had
a total of 546 employees. We may further expand domestically or internationally
through internal growth or through acquisitions of related companies and
technologies. This growth will continue to place a significant strain on our
management systems and resources.
For us to effectively manage our growth, we must continue to enact the
following measures:
- improve our operational, financial and management controls;
- improve our reporting systems and procedures;
- install new management and information control systems;
- expand, train and motivate our workforce.
In particular, we are currently migrating our existing accounting software to a
packaged application that will allow greater flexibility in reporting and
tracking results. If we fail to install this software in an efficient and timely
manner or if the new systems fail to adequately support our level of operations,
then we could incur substantial additional expenses to remedy such failure.
WE MUST KEEP PACE WITH TECHNOLOGICAL CHANGE TO REMAIN COMPETITIVE.
The market for our products is characterized by rapid technological change,
frequent new product introductions and enhancements, changes in customer demands
and evolving industry standards. Our existing products could be rendered
obsolete if we fail to keep up in any of these ways. We have also found that the
technological life cycles of our products are difficult to estimate, partially
because they may vary according to the particular application or vertical market
segment. We believe that our future success will depend upon our ability to
continue to enhance our current product line while we concurrently develop and
introduce new products that keep pace with competitive and technological
developments. These developments require us to continue to make substantial
product development investments.
Existing Products. We currently serve a customer base with a wide variety
of hardware, software, database, and networking platforms. To gain broad market
acceptance, we believe that we will have to support our products on a variety of
platforms. Our success will depend, among others, on the following factors:
- our ability to integrate our products with multiple platforms, especially
relative to our competition;
- the portability of our products, particularly the number of hardware
platforms, operating systems and databases that our products can source
or target;
- the integration of additional software modules under development with
existing products; and,
- our management of software development being performed by third-party
developers.
Future Products. There can be no assurance that we will be successful in
developing and marketing future product enhancements or new products that
respond to technological changes, shifting customer preferences, or evolving
industry standards. We may experience difficulties that could delay these
products. If we are unable to develop and introduce new products or enhancements
of existing products in a timely manner or if we experience delays in the
commencement of commercial shipments of new products and enhancements, then
customers may forego purchases of our products and purchase those of our
competitors.
OUR FAILURE TO MAINTAIN CLOSE RELATIONSHIPS WITH KEY SOFTWARE VENDORS WILL
ADVERSELY AFFECT OUR PRODUCT OFFERING.
We believe that in order to provide competitive solutions for
heterogeneous, open computing environments, it is 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 we will be able to maintain our existing
relationships or develop additional relationships with such vendors. Our failure
to do so could adversely
10
<PAGE> 13
affect the portability of our products to existing and
new platforms and databases and the timing of the release of new and enhanced
products.
OUR INABILITY TO ATTRACT AND RETAIN PERSONNEL MAY ADVERSELY AFFECT OUR COMPANY.
Our success greatly depends on the continued service of our key technical,
sales and senior management personnel. None of these persons are bound by an
employment agreement. The loss of any of our senior management or other key
research, development, sales and marketing personnel, particularly if lost to
competitors, could have a material adverse effect on our future operating
results. In particular George F. (Rick) Adam, our Chief Executive Officer, and
Harold A. Piskiel, our Chief Technology Officer, would be difficult to replace.
Our future success will depend in large part upon our ability to attract, retain
and motivate highly skilled employees. We face significant competition for
individuals with the skills required to perform the services we offer. We cannot
assure that we will be able to retain sufficient numbers of these highly skilled
employees. Because of the complexity of the EAI software market, we have in the
past experienced 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, and we expect this pattern to continue.
OUR FAILURE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS MAY ADVERSELY AFFECT
US.
Our success and ability to compete is dependent in part upon our
proprietary technology. We rely on a combination of copyright, trademark and
trade secret laws, as well as confidentiality agreements and licensing
arrangements, to establish and protect our proprietary rights. We presently have
no patents, but we have three patent applications pending. Despite our efforts
to protect our proprietary rights, existing copyright, trademark and trade
secret laws afford only limited protection. In addition, the laws of certain
foreign countries do not protect our rights to the same extent as do the laws of
the United States. Attempts may be made to copy or reverse engineer aspects of
our products or to obtain and use information that we regard as proprietary.
Accordingly, there can be no assurance that we will be able to protect our
proprietary rights against unauthorized third-party copying or use. Any
infringement of our proprietary rights could materially adversely affect our
future operating results. Furthermore, policing the unauthorized use of our
products is difficult and litigation may be necessary in the future to enforce
our intellectual property rights, to protect our 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 our future operating results.
INTELLECTUAL PROPERTY CLAIMS CAN BE COSTLY AND RESULT IN THE LOSS OF SIGNIFICANT
RIGHTS.
It is also possible that third parties will claim that we have infringed
their current or future products. We expect that EAI software developers will
increasingly be subject to infringement claims as the number of products in
different industry segments overlap. Any claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays, or
require us to enter into royalty or licensing agreements, any of which could
have a material adverse effect upon our operating results. There can also be no
assurance that such royalty or licensing agreements, if required, would be
available on terms acceptable to us, if at all. There can be no assurance that
legal action claiming patent infringement will not be commenced against us, or
that we would prevail in such litigation given the complex technical issues and
inherent uncertainties in patent litigation. In the event a patent claim against
us was successful and we could not obtain a license on acceptable terms or
license a substitute technology or redesign to avoid infringement, our business,
financial condition and results of operations would be materially adversely
affected.
GLOBAL ECONOMIC UNCERTAINTY MAY AFFECT THE CAPITAL EXPENDITURES OF OUR
CUSTOMERS.
The EAI software market could be negatively impacted by certain generic
factors, including global economic difficulties and uncertainty, reductions in
capital expenditures by large customers, and increasing competition. These
factors could in turn give rise to longer sales cycles, deferral or delay of
customer purchasing decisions, and increased price competition. The presence of
such factors in the EAI software market could adversely affect our operating
results.
11
<PAGE> 14
YEAR 2000 RISKS MAY RESULT IN MATERIAL ADVERSE EFFECTS ON OUR BUSINESS.
Many currently 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 a little over a
year, computer systems and/or software products used by many companies may need
to be upgraded to comply with such year 2000 requirements. While we have
assessed our products, services and internal systems, certain internal financial
packages have not yet been implemented and may require further assessment by us.
We believe we are currently expending sufficient resources to review our
products and services, as well as our internal management information system in
order to remedy those products, services and systems that are not year 2000
compliant. We expect such modifications will be made on a timely basis and we do
not believe that the cost of such modifications will have a material effect on
our operating results. There can be no assurance, however, that we will be able
to modify such products, services and systems in a timely and successful manner
to comply with the year 2000 requirements, which could have a material adverse
effect on our operating results. Moreover, we believe that some customers may be
purchasing our 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 our current customers, to
reevaluate their current system needs and as a result consider switching to
other systems and suppliers. Any of the foregoing could result in a material
adverse effect on our business, operating results and financial condition.
Additionally, during the next twelve months there is likely to be an increased
customer focus on addressing year 2000 issues, creating the risk that customers
may reallocate capital expenditures to fix year 2000 problems of existing
systems. Although we have not experienced the effects of such a trend to date,
if customers defer purchases of our software because of such a reallocation, it
could adversely affect our operating results.
THERE ARE SUBSTANTIAL SHARES ELIGIBLE FOR SALE; THE SALE OF SUCH SHARES MAY
DEPRESS OUR STOCK PRICE.
If our stockholders sell substantial amounts of our Common Stock (including
shares issued upon the exercise of outstanding options) in the public market
following this offering, the market price of our Common Stock could fall. Such
sales also might make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem appropriate. Upon
completion of this offering, we will have outstanding 28,680,826 shares of
Common Stock (based upon shares outstanding as of September 30, 1998), assuming
no exercise of the Underwriters' over-allotment option and no exercise of
outstanding options after September 30, 1998. Of these shares, the 4,000,000
shares sold in this offering, together with the 6,348,000 shares sold in our
initial public offering in June 1997 and the 6,900,000 shares sold in our
follow-on offering in May 1998 are freely tradable. The remaining 11,432,826
shares are eligible for sale in the public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
---------------- --------------------------
<S> <C>
2,801,218 December 3, 1998
3,181,218 60 days from the date of
this prospectus
10,652,764 90 days from the date of
this prospectus
</TABLE>
The table above excludes options to purchase 5,277,572 shares of Common Stock
that were outstanding at September 30, 1998.
OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE.
The trading price of our Common Stock has fluctuated significantly since
our initial public offering in June 1997. In addition, the trading price of our
Common Stock could be subject to wide fluctuations in response to quarterly
variations in operating results, announcements of technological innovations or
new products by our 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 our
Company's Common Stock.
ADOPTION OF THE EURO PRESENTS UNCERTAINTIES FOR
OUR COMPANY.
In January 1999, the new "Euro" currency is scheduled to be introduced in
certain European countries that are part of the European Monetary Union ("EMU").
During 2002, all EMU countries are
12
<PAGE> 15
expected to be operating with the Euro as their single currency. A significant
amount of uncertainty exists as to the effect the Euro will have on the
marketplace generally and, additionally, all of the final rules and regulations
have not yet been defined and finalized by the European Commission with regard
to the Euro currency. We are currently assessing the effect the introduction of
the Euro will have on our internal accounting systems and the sales of our
products. We are not aware of any material operational issues or costs
associated with preparing our internal systems for the Euro. However, we do
utilize third party vendor equipment and software products that may or may not
be EMU compliant. Although we are currently taking steps to address the impact,
if any, of EMU compliance for such third party products, the failure of any
critical components to operate properly post-Euro may have an adverse effect on
the business or results of operations of our Company or require us to incur
expenses to remedy such problems.
13
<PAGE> 16
USE OF PROCEEDS
The net proceeds to NEON from its sale of the 4,000,000 shares of Common
Stock are estimated to be approximately $111.7 million at an assumed public
offering price of $29.53 per share (approximately $128.5 million if the
Underwriters' over-allotment option is exercised in full), after deducting the
underwriting discount and estimated offering expenses payable by the Company.
The Company expects to use the net proceeds of the offering for general
corporate purposes, including working capital. 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 the Company from
time to time 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 short-term interest-bearing securities and
debt-instruments in compliance with the Company's investment policy.
DIVIDEND POLICY
The Company has never paid or declared any cash dividends. The Company
currently expects to retain future earnings, if any, to finance the growth and
development of its business and, therefore, does not anticipate paying cash
dividends in the foreseeable future.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock commenced trading on the NASDAQ National Market
on June 18, 1997 and is traded under the symbol "NEON." The following table sets
forth the high and low sales prices of the Common Stock as reported by the
NASDAQ National Market. All prices have been restated to reflect a two-for-one
stock split to be effected in the form of a 100% stock dividend to stockholders
of record as of November 23, 1998.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1997
Second Quarter (from June 18, 1997)....................... $ 8.63 $ 7.32
Third Quarter............................................. 8.75 6.75
Fourth Quarter............................................ 7.25 5.38
1998
First Quarter............................................. $12.44 $ 4.75
Second Quarter............................................ 16.50 11.50
Third Quarter............................................. 23.44 14.31
Fourth Quarter (through November 17, 1998)................ 30.97 14.06
------ ------
</TABLE>
On November 17, 1998, the last reported sale price of the Common Stock on
the NASDAQ National Market was $30.81 per share. As of November 17, 1998, there
were approximately 90 holders of record of the Company's Common Stock.
CORPORATE INFORMATION
New Era of Networks, Inc. was incorporated in Illinois in June 1993 and was
reincorporated in Delaware in December 1995. References in this Prospectus to
the "Company," "NEON," "we," "our," and "us" refer to New Era of Networks, Inc.,
a Delaware corporation; its predecessor, New Era of Networks, Inc., an Illinois
corporation, and its wholly-owned, consolidated subsidiaries. NEON's principal
executive offices are located at 7400 East Orchard Rd., Englewood, CO, 80111,
and NEON's telephone number is 303-694-3933. Information contained as NEON's Web
site does not constitute part of this Prospectus. All share and per share
information contained herein has been restated to reflect a two-for-one stock
split to be effected in the form of a 100% stock dividend to stockholders of
record as of November 23, 1998. New Era of Networks, Inc., NEON, NEONet,
Rapport, Impact!, CAI-Net III, and Web-VA are all trademarks of New Era of
Networks, Inc. All other trademarks or servicemarks appearing in this Prospectus
are the property of their respective holders.
14
<PAGE> 17
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1998 on an actual basis, and as adjusted to give effect to the
Company's sale of 4,000,000 shares of Common Stock at an assumed public offering
price of $29.53 per share after deducting the underwriting discount 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>
SEPTEMBER 30, 1998
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity(1)(2):
Preferred stock, $.0001 par value; 2,000,000 shares
authorized; none issued or outstanding................. $ -- $ --
Common stock, $.0001 par value; 45,000,000 shares
authorized; 24,680,826 shares actual and 28,680,826
shares, as adjusted, issued and outstanding(2)......... 2 3
Additional paid-in-capital................................ 121,283 232,996
Accumulated deficit....................................... (24,740) (24,740)
Cumulative translation adjustment......................... 202 202
-------- --------
Total stockholders' equity........................ $ 96,747 $208,461
======== ========
</TABLE>
- ---------------
(1) Based upon shares outstanding as of September 30, 1998. Excludes 7,202,948
shares of Common Stock reserved for issuance pursuant to the Company's
employee benefit plans, under which options to purchase 5,277,572 shares of
Common Stock were outstanding as of September 30, 1998, at a weighted
average exercise price of $7.1045 per share.
(2) All share and per share information has been adjusted to reflect a
two-for-one stock split that will be effected in the form of a 100% stock
dividend to stockholders of record as of November 23, 1998.
DILUTION
The net tangible book value of the Company as of September 30, 1998 was
$59.8 million or $2.42 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 giving effect to the sale by the Company of 4,000,000
shares of Common Stock offered hereby at the public offering price of $29.53 per
share (and after deduction of underwriting discounts and commissions and
estimated offering expenses), the Company's net tangible book value at September
30, 1998 would have been $171.6 million or $5.98 per share. This represents an
immediate increase in net tangible book value to existing stockholders of $3.56
per share and an immediate dilution to new investors of $23.55 per share.
The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Public offering price per share............................. $29.53
Net tangible book value per share as of September 30,
1998................................................... $2.42
Increase in net tangible book value per share attributable
to new investors....................................... 3.56
-----
Net tangible book value per share after offering............ 5.98
------
Dilution per share to new investors......................... $23.55
======
</TABLE>
15
<PAGE> 18
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, 1995,
1996 and 1997 and the nine months ended September 30, 1997 and 1998 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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- -------------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- -----------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses................... $ -- $ 3,383 $ 15,970 $ 9,691 $ 24,554
Services and maintenance............ 1,271 3,762 6,676 4,683 13,951
--------- --------- --------- ---------- ---------
Total revenues........................ 1,271 7,145 22,646 14,374 38,505
Cost of revenues:
Cost of software licenses........... -- 1,022 900 758 1,116
Cost of services and maintenance.... 751 2,306 4,443 3,189 7,179
--------- --------- --------- ---------- ---------
Total cost of revenues................ 751 3,328 5,343 3,947 8,295
--------- --------- --------- ---------- ---------
Gross profit........................ 520 3,817 17,303 10,427 30,210
Operating expenses:
Sales and marketing................. 549 4,425 8,824 5,931 13,166
Research and development............ 1,116 3,658 7,730 4,890 9,776
General and administrative.......... 345 1,467 2,334 1,481 3,963
Charges for acquired in-process
research and development.......... -- -- 2,600 2,600 17,597
Amortization of intangibles......... -- -- 66 19 613
--------- --------- --------- ---------- ---------
Total operating expenses.............. 2,010 9,550 21,554 14,921 45,115
--------- --------- --------- ---------- ---------
Loss from operations.................. (1,490) (5,733) (4,251) (4,493) (14,905)
Other income (expense), net........... (13) 61 744 445 1,683
--------- --------- --------- ---------- ---------
Loss before provision for income taxes... (1,503) (5,672) (3,507) (4,049) (13,222)
Provision for income taxes............ -- -- -- -- --
--------- --------- --------- ---------- ---------
Net loss.............................. $ (1,503) $ (5,672) $ (3,507) $ (4,049) $ (13,222)
========= ========= ========= ========= ==========
Net loss per common share, basic and
diluted(1)(2)....................... $ (.57) $ (2.10) $ (.32) $ (.47) $ (.63)
========= ========= ========= ========= ==========
Weighted average shares of Common Stock
outstanding, basic and diluted(1)(2)... 2,617,994 2,706,552 10,958,302 8,555,980 20,981,480
========== ========== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1995 1996 1997 1998
CONSOLIDATED BALANCE SHEET DATA: ------ ------ ------- -------------
<S> <C> <C> <C> <C>
Cash, cash equivalents, short-term and long-term
investments............................................. $1,135 $3,387 $22,724 $ 47,297
Working capital........................................... 1,557 2,586 30,987 48,707
Total assets.............................................. 2,209 7,073 40,229 118,977
Stockholders' equity...................................... 1,591 3,515 34,731 96,747
</TABLE>
- ---------------
(1) See Note 2 of Notes to audited Consolidated Financial Statements for an
explanation of the weighted average shares of Common Stock outstanding used
to compute net income (loss) per common share.
(2) All share and per share information has been adjusted to reflect a
two-for-one stock split that will be effected in the form of a 100% stock
dividend to stockholders of record as of November 23, 1998.
16
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All statements, trend analysis and other information contained in the
following discussion relative to markets for the Company's products and trends
in revenues, gross margins 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
From inception through 1995, the Company was in the development stage and
was principally focused on product development and assembling its management
team and infrastructure. Software license revenues were not significant until
the commercial release of the NEONet software in 1996. Since the initial release
of NEONet in January 1996, a substantial portion of the Company's revenues has
been attributable to licenses of NEONet and related services. In November 1996
and March 1998, the Company commenced shipment to customers of Release 3.0 and
4.0, respectively, of NEONet, which provided additional capabilities for
effective enterprise-wide application integration.
The Company generates revenue from software licenses, professional service
arrangements, and software maintenance arrangements. Software license revenues
are recognized 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. Revenue from professional service
arrangements is recognized on either a time and materials or
percentage-of-completion basis as the services are performed and amounts due
from customers are deemed collectible and contractually nonrefundable. Revenues
recognized under the percentage-of-completion basis which have not yet been
invoiced are recorded as unbilled revenues in the accompanying consolidated
balance sheets. Software maintenance revenue related to software licenses is
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 consolidated balance
sheets.
In June 1998, the Company acquired all of the outstanding capital stock of
MSB. 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 276,924 shares of Common Stock of the Company. Additional 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. In September 1998, the Company
acquired all the outstanding capital stock of CAI for $23.0 million in cash and
880,062 shares of the Company's Common Stock. In connection with the
acquisition, the Company assumed all options outstanding under CAI's option plan
at an exchange ratio. In addition, 391,138 shares of Common Stock may be issued
to the shareholders of CAI upon the achievement of certain performance criteria.
Both acquisitions were accounted for under the purchase method of accounting.
See Note 2 of Notes to unaudited Consolidated Financial Statements.
RECENT ACCOUNTING PRONOUNCEMENT
SOP 97-2, "Software Revenue Recognition," was issued in October 1997 and
supercedes the guidance of SOP 91-1 for recognizing revenue from software
arrangements. The Company believes its revenue recognition policies and
practices comply with the requirements of SOP 97-2 in all material respects.
However, SOP 97-2 includes restrictive provisions regarding specific terms of
software arrangements which, if present, require deferral of revenue recognition
beyond the point of delivery of the software. Future competitive conditions may
arise that could necessitate changes in the Company's business practices and the
contract terms of its software
17
<PAGE> 20
arrangements. Such changes may require deferral of revenue recognition and
periodic operating results could be adversely affected.
RESULTS OF OPERATIONS
The following table sets forth the percentages that selected items in the
consolidated statements of operations bear to total revenues. The year ended
1997 includes the charge for acquired in-process research and development
associated with the acquisition of Menhir in September 1997. The nine months
ended September 1998 includes the charges for acquired in-process research and
development associated with the acquisitions of MSB in June 1998 and CAI in
September 1998.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses...................................... --% 47% 71% 67% 64%
Services and maintenance............................... 100 53 29 33 36
---- --- ---- ---- ----
Total revenues........................................... 100 100 100 100 100
Cost of revenues:
Cost of software licenses(1)........................... -- 30 6 8 5
Cost of services and maintenance(1).................... 59 61 67 68 51
---- --- ---- ---- ----
Total cost of revenues................................... 59 47 24 27 22
Gross profit........................................ 41 53 76 73 78
Operating expenses:
Sales and marketing.................................... 43 62 39 41 34
Research and development............................... 88 51 34 34 25
General and administrative............................. 27 21 10 10 10
Charges for acquired in-process research and
development......................................... -- -- 11 18 46
Amortization of intangibles............................ -- -- 1 1 2
---- --- ---- ---- ----
Total operating expenses................................. 158 134 95 104 117
---- --- ---- ---- ----
Loss from operations..................................... (117) (80) (19) (31) (39)
Other income (expense), net.............................. (1) 1 3 3 5
---- --- ---- ---- ----
Loss before provision for income taxes................... (118) (79) (15) (28) (34)
Provision for income taxes............................... -- -- -- -- --
==== === ==== ==== ====
Net loss................................................. (118)% (79)% (15)% (28)% (34)%
==== === ==== ==== ====
Net income (loss) excluding charges for acquired
in-process research and development and amortization of
intangibles............................................ (118)% (79)% (4)% (10)% 13%
==== === ==== ==== ====
</TABLE>
- ---------------
(1) As a percentage of software licenses and services and maintenance revenues,
respectively.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
REVENUES
Our revenues increased from $14.4 million for the nine months ended
September 30, 1997 to $38.5 million for the nine months ended September 30,
1998. This increase resulted from significantly increased indirect channel
revenues, increased professional services, and additions to our product
portfolio. The acquisitions of MSB in June of 1998 and CAI in September of 1998
added to NEON's product portfolio, which 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
nine months ended September 30, 1998, international revenues increased to 30% of
total revenues, compared with 24% of total revenues for the nine months ended
September 30, 1997.
18
<PAGE> 21
Software license revenues increased from $9.7 million for the nine months
ended September 30, 1997 to $24.6 million for the nine months ended September
30, 1998. This growth in software license revenues reflects the growing market
awareness and acceptance of our enterprise application integration software
products and the establishment of distributor and reseller relationships with
IBM, PeopleSoft, Candle Corporation, and NIWS (Japan), and the license revenues
contributed from the acquisition of CAI in September, 1998.
For the nine months ended September 30, 1998, our top ten customers
accounted for 41% of total revenues, as compared to 69% for the corresponding
period in 1997.
Services and maintenance revenues increased from $4.7 million for the nine
months ended September 30, 1997 to $14.0 million for the nine months ended
September 30, 1998. The increase in the relative percentage of service revenues
to total revenues in this period 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 27% for the nine months ended September 30, 1997 to 22% for the nine months
ended September 30, 1998. Although cost of revenues decreased as a percentage of
total revenues, the costs increased on an absolute basis by approximately $4.3
million for the nine months ended September 30, 1998 compared with the same
period 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 $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 68% for the
nine months ended September 30, 1997 to 51% for the 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.
OPERATING EXPENSES
Sales and Marketing
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 our continued expansion of our direct sales force,
increased commission expense associated with higher revenues, continued
investment in building an international direct sales force, and increased
marketing expenses for our 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.
19
<PAGE> 22
Research and Development
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 our 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 $1.5 million, or 10% of total
revenues, for the nine months ended September 30, 1997 to $4.0 million, or 10%
of total revenues, for the nine months ended September 30, 1998. The increase in
general and administrative expenses resulted primarily from increases in
staffing, information systems, and related infrastructure to support our 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 nine 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 nine months ended September
30, 1997, $2.6 million of the Menhir purchase price was allocated to in-process
research and development and charged to expense. Amortization of the intangibles
for the nine months ended September 30, 1998 of $613,000 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 of $445,000 for the nine months ended
September 30, 1997 and $1.7 million for the nine months ended September 30,
1998. The increase in other income was due to interest earned on cash invested
from the proceeds of our initial public offering in June of 1997 and subsequent
public offering in May of 1998.
PROVISION FOR INCOME TAXES
We have 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, we reported net losses for the nine months ended September 30,
1998 of approximately $13.2 million, or $.63 per share. Excluding
acquisition-related expenses and amortization, we generated net income for the
nine months ended September 30, 1998 of $5.0 million, or $.21 per diluted share.
Also excluding acquisition-related expenses and amortization, this compares to a
net loss of $1.4 million, or $.17 per basic and diluted share for the nine
months ended September 30, 1997. The operating results improved due to the
increased growth of our revenues, as compared with the growth of costs and
expenses.
FISCAL YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
REVENUES
Our revenues increased from $1.3 million for the year ended December 31,
1995 to $7.1 million for the year ended December 31, 1996, reflecting
significant software license revenues related to the commercial introduction
20
<PAGE> 23
of our NEONet product. Revenues increased from $7.1 million for the year ended
December 31, 1996 to $22.6 million for the year ended December 31, 1997 as we
sold to a greater number of customers and expanded our business internationally.
Software license revenues grew from zero in the year ended December 31,
1995 to $3.4 million, or 47% of total revenue, in the year ended December 31,
1996 and to $16.0 million, or 71% of total revenues, in the year ended December
31, 1997. The increase in software license revenues, both in absolute dollars
and as a percentage of total revenues, reflected an increase in market awareness
and acceptance of our products, expansion of international sales resources, the
continued growth of an installed base of accounts to serve as references for new
customers, repeat business by existing customers, and expanded functionality of
the NEONet product. In December 1997, we entered into a license agreement with
IBM for the joint development of a product designed to integrate IBM's MQSeries
product with certain of our products. We began selling the MQIntegrator product
in May of 1998. We expect that future software license revenues will be
comprised primarily of MQIntegrator, Business Applications, Application
Integration Libraries, Tools and Utilities and other acquired or developed
applications.
Services and maintenance revenues grew from $1.3 million, or 100% of
revenues, in the year ended December 31, 1995 to $3.8 million, or 53% of total
revenues, in the year ended December 31, 1996, to $6.7 million, or 29% of total
revenues, in the year ended December 31, 1997. Services and maintenance revenues
declined as a percentage of total revenues from 1995 to 1996 due to the
completion of a professional services contract with Merrill Lynch in the quarter
ended June 30, 1996 and the commercial release of NEONet. Services and
maintenance revenues grew 77% in the year ended December 31, 1997 compared to
the year ended December 31, 1996, reflecting service engagements associated with
the growing sales of the NEONet suite of products.
For the year ended December 31, 1997, our top ten customers accounted for
56% of total revenues, and our largest customer accounted for 14% of our total
revenues. To date, our revenues have been derived primarily from sales to large
banks and financial institutions. For the year ended December 31, 1997, sales to
banks and financial institutions accounted for 72% of our total revenues.
COST OF REVENUES
As a percentage of total revenues, total cost of revenues declined from 59%
in 1995, to 47% in 1996, to 24% in 1997. The decline reflects the increasing mix
of higher-margin software license sales and a decline in royalty expense.
We had an agreement to pay royalties to Merrill Lynch on NEONet license
revenue until such royalties reached a cumulative total of $1.9 million. We
accrued royalties at 30% of NEONet license fees in 1996 and 10% of NEONet
license fees in 1997, reflecting our revised agreement with Merrill Lynch during
1997. As a result, cost of software licenses was approximately 30% of software
license revenue in 1996. In the quarter ended December 31, 1997, we met the
cumulative $1.9 million royalty requirement, and cost of software licenses in
1997 fell to approximately 6% of software license revenue. While the royalty
obligation to Merrill Lynch on NEONet has been satisfied, there are other
products that currently carry royalty obligations.
As a percent of services and maintenance revenues, cost of services and
maintenance was 59%, 61%, and 67% in 1995, 1996, and 1997, respectively. The
higher percentage cost in 1997 reflected the use, at higher cost, of subcontract
labor on certain engagements. We expect that we may continue to use
subcontractors for the delivery of professional services from time to time.
OPERATING EXPENSES
Sales and Marketing
Sales and marketing expenses consist primarily of salaries for sales and
marketing personnel, commissions, travel, and promotional expenses. Sales and
marketing expenses were $549,000, $4.4 million, and $8.8 million, representing
43%, 62%, and 39% of total revenues, respectively, in the years ended December
31, 1995, 1996, and 1997. These increases were due primarily to our expansion of
our overall sales and marketing resources and
21
<PAGE> 24
infrastructure, including international expansion in 1997. As a percentage of
total revenues, sales and marketing expense increased in 1996 compared to 1995
as we commercialized the NEONet product and deployed a direct sales force. Sales
and marketing expenses decreased as a percentage of revenues in 1997 compared to
1996 primarily due to growth in revenues. We expect to continue to expand our
direct sales force and professional marketing staff, further increase our
international presence, and continue to develop our indirect sales channels and
increase promotional activity. Accordingly, we expect sales and marketing
expenses to continue to grow in absolute dollars.
Research and Development
Research and development expenses include amounts associated with the
development of new products, enhancements of existing products and quality
assurance activities. The expenses consist primarily of employee salary and
benefits, consultant costs, and associated equipment and software costs.
Research and development costs have been expensed as incurred. No software
development costs have been capitalized to date in accordance with Statement of
Financial Accounting Standards No. 86. Research and development expenses were
$1.1 million, $3.7 million, and $7.7 million, representing 88%, 51%, and 34% of
total revenues, respectively, for the years ended December 31, 1995, 1996, and
1997. The increase in research and development expenses is primarily
attributable to hiring additional technical personnel engaged in software
development activities, and its decline as a percentage of total revenues was
due to the higher percentage growth in revenues. We currently anticipate that
research and development expenses may continue to increase in absolute dollars
as we continue to commit substantial resources to new product development.
General and Administrative
General and administrative expenses consist primarily of salaries and
related costs, outside professional fees, and software and equipment costs
associated with the finance, legal, human resources, information systems, and
administrative functions of our Company. General and administrative expenses
were $345,000, $1.5 million, and $2.3 million, representing 27%, 21%, and 10% of
total revenues, respectively, for the years ended December 31, 1995, 1996, and
1997. General and administrative expenses grew in absolute dollars as we added
personnel to all administrative areas but declined as a percentage of total
revenues principally due to economies of scale associated with increased
revenues. We expect general and administrative expenses to continue to grow as
we implement additional management information systems associated with our
business growth and international expansion.
CHARGE FOR ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT/AMORTIZATION OF
INTANGIBLES
Based on an independent appraisal of the net assets acquired, $2.6 million
allocated to in-process research and development projects was charged to
operations in connection with the acquisition of Menhir in September 1997. We
also allocated approximately $460,000 to marketable software products acquired
which are being amortized over three years, and approximately $310,000 to
goodwill which is being amortized over a period of seven years. Amortization
expense of approximately $66,000 was recorded during 1997.
OTHER INCOME (EXPENSE), NET
We recorded net other income of $745,000 in 1997. This compares to net
other income of $61,000 in 1996 and net other expense of $13,000 in 1995. The
increase in net other income in 1997 resulted primarily from the interest earned
on cash invested from the proceeds of our initial public offering in June 1997.
PROVISIONS FOR INCOME TAXES
We have reported no income tax expense for any period. As of December 31,
1997, net deferred tax assets of approximately $3.4 million were further offset
by a valuation allowance of an equivalent amount. The net deferred tax asset at
December 31, 1996 was $2.7 million, which was offset by a valuation allowance of
the same amount.
22
<PAGE> 25
NET LOSS
Giving effect to expenses associated with the Menhir acquisition, we
reported a net loss, basic and diluted of $3.5 million, or $.32 per share in
1997. Excluding the charge for acquired in-process research and development and
acquisition related amortization, the net loss, basic and diluted was
approximately $841,000, or $.08 per Common Share on 10,958,302 weighted average
shares outstanding. This compares to a net loss, basic and diluted of $5.7
million, or $2.10 per Common Share on 2,706,552 weighted average shares
outstanding in 1996, and $1.5 million, or $.57 per Common Share on 2,617,994
weighted average shares outstanding in 1995. The reduced net loss in 1997 as
compared to 1996 resulted from the growth in revenues, particularly software
license revenues, as compared with the growth of costs and expenses. The
increased loss in 1996 compared to 1995 resulted from the buildup of our sales
force and other staff, and from royalty payments due to Merrill Lynch.
YEAR 2000 RISKS
Many currently 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 a little over a
year, computer systems and/or software products used by many companies may need
to be upgraded to comply with such year 2000 requirements. While we have
assessed our products, services and internal systems, certain internal financial
packages have not yet been implemented and may require further assessment by us.
We believe we are currently expending sufficient resources to review our
products and services, as well as our internal management information system in
order to remedy those products, services and systems that are not year 2000
compliant. We expect such modifications will be made on a timely basis and we do
not believe that the cost of such modifications will have a material effect on
our operating results. There can be no assurance, however, that we will be able
to modify such products, services and systems in a timely and successful manner
to comply with the year 2000 requirements, which could have a material adverse
effect on our operating results. Moreover, we believe that some customers may be
purchasing our 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 our current customers, to
reevaluate their current system needs and as a result consider switching to
other systems and suppliers. Any of the foregoing could result in a material
adverse effect on our business, operating results and financial condition.
Additionally, during the next twelve months there is likely to be an increased
customer focus on addressing year 2000 issues, creating the risk that customers
may reallocate capital expenditures to fix year 2000 problems of existing
systems. Although we have not experienced the effects of such a trend to date,
if customers defer purchases of our software because of such a reallocation, it
could adversely affect our operating results.
23
<PAGE> 26
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following tables present unaudited quarterly consolidated statement of
operations data for each quarter in the seven quarters ended September 30, 1998,
as well as such data expressed as a percentage of our revenues for the periods
indicated. This data has been derived from unaudited consolidated financial
statements totals 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 we consider necessary for a fair
presentation of such information. We believe quarter-to-quarter comparisons of
our 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
CONSOLIDATED STATEMENT OF OPERATIONS 1997 1997 1997 1997 1998 1998 1998
DATA: --------- --------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses.................... $ 2,447 $ 3,213 $ 4,031 $ 6,279 $ 6,573 $ 7,268 $ 10,714
Services and maintenance............. 1,227 1,566 1,890 1,993 3,009 4,192 6,749
----- ---- ----- ---- ---- ---- ----
Total revenues......................... 3,674 4,779 5,921 8,272 9,582 11,460 17,463
----- ---- ----- ---- ---- ----- -----
Cost of revenues:
Cost of software licenses............ 250 166 342 142 222 442 452
Cost of services and maintenance..... 800 1,240 1,148 1,254 1,526 2,135 3,518
----- ---- ----- ---- ---- ---- ----
Total cost of revenues................. 1,050 1,406 1,490 1,396 1,748 2,577 3,970
----- ---- ----- ---- ---- ---- ----
Gross profit......................... 2,624 3,373 4,431 6,876 7,834 8,883 13,493
Operating expenses:
Sales and marketing.................. 1,690 1,988 2,253 2,893 3,606 3,828 5,733
Research and development............. 1,222 1,560 2,108 2,840 2,691 2,915 4,169
General and administrative........... 495 371 616 853 992 1,168 1,804
Charge for acquired in-process
research and development(2)........ -- -- 2,600 -- -- 3,740 13,857
Amortization of intangibles.......... -- -- 18 48 49 82 482
----- ---- ----- ---- ---- ---- ----
Total operating expenses............... 3,407 3,919 7,595 6,634 7,338 11,733 26,045
----- ---- ----- ---- ---- ----- -----
Income (loss) from operations........ (783) (546) (3,164) 242 496 (2,850) (12,552)
Other income (expense), net.......... (1) 17 429 301 296 491 896
----- ---- ----- ---- ---- ---- ----
Net income (loss).............. $ (784) $ (529) $ (2,735) $ 543 $ 792 $ (2,359) $ (11,656)
===== ==== ===== ==== ==== ==== =====
Net income (loss) per share, basic..... $ (.29) $ (.11) $ (.15) $ .03 $ .04 $ (.11) $ (.43)
========= ========= ========== ========== ========== ========== ==========
Weighted average shares of Common Stock
outstanding, basic................... 2,751,212 4,845,830 18,070,884 18,165,268 18,309,284 20,677,012 27,003,514
========= ========= ========== ========== ========== ========== ==========
Net income (loss) per share, diluted... $ (.29) $ (.11) $ (.15) $ .03 $ .04 $ (.11) $ (.43)
========= ========= ========== ========== ========== ========== ==========
Weighted average shares of Common Stock
outstanding, diluted................. 2,751,212 4,845,830 18,070,884 19,531,432 20,332,594 20,677,012 27,003,514
========= ========= ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses.................... 67% 67% 68% 76% 69% 63% 61%
Services and maintenance............. 33 33 32 24 31 37 39
--------- --------- ---------- ---------- ---------- ---------- ----------
Total revenues......................... 100 100 100 100 100 100 100
--------- --------- ---------- ---------- ---------- ---------- ----------
Cost of revenues:
Cost of software licenses(1)......... 10 5 8 2 3 6 4
Cost of services and
maintenance(1)..................... 65 79 61 63 51 51 52
--------- --------- ---------- ---------- ---------- ---------- ----------
Total cost of revenues................. 29 29 25 17 18 22 23
--------- --------- ---------- ---------- ---------- ---------- ----------
Gross profit......................... 71 71 75 83 82 78 77
Operating expenses:
Sales and marketing.................. 46 42 38 35 38 33 33
Research and development............. 33 33 36 34 28 25 24
General and administrative........... 13 8 10 10 10 10 10
Charge for acquired in-process
research and development........... -- -- 44 -- -- 33 79
Amortization of intangibles.......... -- -- -- 1 1 1 3
--------- --------- ---------- ---------- ---------- ---------- ----------
Total operating expenses............... 92 82 128 81 77 102 149
--------- --------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations........ (21) (11) (53) 3 5 (24) (72)
Other income (expense), net.......... -- -- 7 4 3 4 5
--------- --------- ---------- ---------- ---------- ---------- ----------
Net income (loss).............. (21)% (11)% (46)% 7% 8% (20)% (67)%
========= ========= ========== ========== ========== ========== ==========
</TABLE>
- ---------------
(1) As a percentage of software licenses and services and maintenance revenues,
respectively.
(2) Excluding acquisition-related expenses and amortization, we generated net
income (loss) for the quarters ended September 30, 1997, June 30, 1998 and
September 30, 1998 of $(117,136), $1,462,417, and $2,683,797, respectively.
24
<PAGE> 27
The increase in software license revenues as a percent of total revenues
for the quarter ended December 31, 1997, as compared to preceding quarters, was
primarily due to an increase in indirect channel revenues, which accounted for
approximately 15% of total revenues in the fourth quarter of 1997. Indirect
channel revenues comprised 32% of total revenues in the first quarter of 1998,
and 19% of total revenues for the first nine months of 1998. We believe that the
timing and level of indirect channel revenues generated through sales by
strategic reseller partners, and in particular through IBM and PeopleSoft, may
vary as a percentage of total revenues, and will continue to affect software
license revenues in future quarters. Total revenues for the third quarter of
1998 were positively impacted by revenues from the products and services
acquired through the Menhir, MSB and CAI acquisitions.
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,
our ability to maintain or increase market demand for our products, the timing
of our new product announcements and releases, competition by existing and
emerging competitors in the application integration software market, our ability
to expand our direct sales force and develop indirect distribution channels, our
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
operations, uncertainties in revenue recognition associated with adoption of SOP
97-2, and general domestic and international economic and political conditions.
A significant portion of our revenues have been, and we believe 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 our
operating results, particularly on a quarterly basis. For example, in the third
quarter of 1998 our largest customer accounted for approximately 20% of our
total revenues, and for the nine months ended September 30, 1998 our largest
customer accounted for approximately 10% of our total revenues. 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 we are 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 our 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
our results of operations.
In addition, the timing of license revenues is difficult to predict because
of the length and variability of our sales cycle. The purchase of our products
by our 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 our products to a number of significant risks, including customers'
budgetary constraints and internal acceptance reviews. The length of our sales
cycle may vary substantially from customer to customer, particularly for
customers within different vertical market segments. See "Business -- Sales and
Marketing." Our 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, our operating results would be materially
adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
We 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. We maintain 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
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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 charges 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 $792,000 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. In the 1997
period, we received $34.2 million in net proceeds from our initial public
offering and approximately $294,000 from the exercise of stock options.
We believe that our existing balances of cash, cash equivalents and
short-term and long-term investments will be sufficient to meet our working
capital and capital expenditure needs at least for the next twelve months.
Thereafter, we may require additional sources of funds to continue to support
our business. There can be no assurance that such additional funding, if needed,
will be available on terms acceptable to us, if at all.
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BUSINESS
New Era of Networks, Inc. ("NEON" or the "Company") develops, markets and
supports enterprise application integration ("EAI") software and services. The
Company's architectural platform, NEONet, provides organizations with a
structured software platform for the rapid and efficient integration and ongoing
maintenance of disparate systems and applications across the enterprise. NEON's
packaged software solutions support EAI across popular hardware platforms,
operating systems, and database types. The NEONet architecture consists of four
product categories: Enterprise Integration Engine, Business Applications,
Application Integration Libraries and Tools and Utilities. With the acquisition
of Menhir in September 1997, the Company increased its international presence
and added to its product portfolio Rapport, a leading customer management and
contact information system developed primarily for the banking industry.
Through September 30, 1998, the Company shipped products or provided
services (including products and services acquired) to approximately 700
customers worldwide. Representative customers of the Company include Abbey
National Treasury Services, Citibank, The Coca-Cola Company, Eaton Corporation,
GTE Corporation, Industrial Bank of Japan Ltd., JP Morgan & Co., Inc., Kaiser
Foundation Health Plan, Inc., Liverpool Victoria Friendly Society, Mayo
Foundation for Medical Education and Research, Merrill Lynch, Monsanto Company,
State Street Bank & Trust Co. and Sumitomo Bank of California. As part of its
strategy, the Company has established reseller and joint marketing relationships
with such companies as Candle Corporation, Cambridge Technology Partners, Ernst
& Young, Hewlett-Packard Company, IBM, Medisolution, Inc., NIWS (Japan), Oracle
Corporation, PeopleSoft, Inc., SAP AG, SunGard Financial Systems and Sun
Microsystems, Inc.
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:
Integration of ERP Applications. Organizations install Enterprise
Resource Planning (ERP) applications to gain competitive advantage, to
automate and streamline business processes and to fully integrate
enterprises obtained through mergers or acquisitions. In order to fully
realize the benefit of ERP applications, organizations must integrate these
applications into their existing information technology structure,
including legacy applications, other business applications and disparate
operating systems and databases.
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.
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.
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 limited number of 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
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scaleability, and require a costly and burdensome ongoing maintenance process.
As a result of 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 is a leading provider of enterprise application integration software.
The Company's NEONet architecture provides organizations with a structured
software platform for EAI, facilitating the rapid and efficient deployment and
ongoing management of EAI among disparate applications across the enterprise.
NEONet addresses the limitations of earlier application integration paradigms by
providing packaged integrated software solutions that include the various
elements required to address the application integration challenge in a
scaleable and flexible manner. The NEONet architecture consists of four product
categories: Enterprise Integration Engine, Business Applications, Application
Integration Libraries and Tools and Utilities.
This packaged application solution offers the following key benefits:
Supports Rapid Implementation of Enterprise Applications. NEONet
enables rapid implementation, reduces installation and integration costs
for otherwise expensive and resource-intensive enterprise applications,
including ERP applications, and provides an open platform for integrating
other acquired applications, systems, and architectures.
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Enhances IT Productivity. NEONet enhances IT productivity by reducing
the need to develop complex, time-consuming custom integration code each
time an application is added or modified or a business process changes.
Provides a Flexible, Long-Term Platform for Application
Integration. NEON provides a structured platform architecture for
application integration that easily accommodates changes ranging from the
addition of new applications to the incorporation of new technologies.
Preserves Existing IT Investment. By facilitating the integration of
new computing platforms and applications with legacy systems, NEON helps
preserve an organization's investments in existing legacy systems, such as
mainframe and minicomputer-based systems, while serving as a bridge to
client/server and Internet/intranet-based applications.
Improves Efficiency of Enterprise IT Environment. The high throughput
capability of NEON's EAI products enables organizations to provide
real-time data delivery across a wide variety of systems. By removing the
bottlenecks to data integration, NEON supports numerous critical emerging
business applications such as data replication, data warehousing and
transaction-oriented applications.
STRATEGY
The Company's objective is to establish the NEONet suite of products as the
leading standard for application integration across the enterprise. Key elements
of the Company's strategy include:
Leverage Strategic Relationships. The Company plans to expand its
sales activities through both direct and indirect channel models. As part
of this strategy, the Company has established reseller and joint marketing
relationships with such companies as Candle Corporation, Cambridge
Technology Partners, Ernst & Young, Hewlett-Packard Company, IBM,
Medisolution, Inc., NIWS (Japan), Oracle Corporation, PeopleSoft, Inc., SAP
AG, SunGard Financial Systems and Sun Microsystems, Inc. As the Company's
business expands into additional markets, the Company plans to continue to
use distributors and resellers to deploy its products and services.
Expand into Additional 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. A major step in
this direction was the acquisition of CAI in September 1998, a recognized
leader in application integration solutions for the healthcare industry.
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
telecommunications and manufacturing, by establishing development
relationships through acquisitions of companies with strategic customers
and by leveraging an understanding of customer needs in these specific
markets.
Develop Cross-Industry Applications. The Company has targeted the
development and marketing of its products 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. The Company
believes that as companies continue to make strategic investments in their
enterprise applications, these applications will need to be fully
integrated into the business enterprise.
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. To accomplish this objective, the Company
increased its direct sales capabilities from one commissioned sales person
at January 31, 1996 to 47 at September 30, 1998. 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
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Company has established reseller and joint marketing relationships with
OEMs, independent software vendors, VARs and systems integration firms.
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. During
1998, the Company released MQIntegrator combining NEON Rules and NEON
Formatter with MQSeries to take advantage of the market leadership of
MQSeries. The Company also released NEON Business EventManager, a business
process automation and workflow system. In addition, through the
acquisition of CAI the Company acquired products including Impact! message
broker, Web-VA e-commerce integration software, HL7 (Healthcare)
Integration capability, and CAI-Net III single sign-on.
PRODUCTS AND SERVICES
NEON offers a structured architecture software platform for high-speed,
high-quality, high-performance development and ongoing management of application
integration among disparate systems across the enterprise.
The NEONet suite of products is comprised of four main product categories:
Enterprise Integration Engine
MQIntegrator. MQIntegrator provides the robust messaging and queuing
foundation that supports asynchronous interprocess and cross-platform
communication, delivering superior synchronization and recoverability. IBM
MQSeries, the transport layer within MQIntegrator, transports transactions
consisting of instructions or data between applications and databases from
one application to another. IBM MQSeries provides guaranteed delivery of
each message once and only once, in the same order the messages are sent.
The Company has recently released a mainframe version of MQIntegrator.
Impact! Impact! is a message broker that streamlines information
processing by non-invasively moving data between data sources and
destinations, including existing applications, files, databases, objects,
and Web clients. It offers messaging, message management, routing and
reformatting, and it offers both synchronous and asynchronous operation.
Rules Engine. The MQIntegrator Rules Engine provides enterprise users
with a content-based, transaction routing system. This enables real-time
routing of transactions based on easily modifiable business rules and the
contents of each message. The rules engine provides message creation and
dispatch of multiple, new, independently formatted, and delivered messages
to multiple destinations or processes from a single input message.
Formatter. The Formatter dynamically transforms messages to multiple
required formats, allowing heterogeneous applications to communicate
seamlessly. Each transaction reaches each recipient in the recipient's
native format, regardless of the underlying database.
Business Applications
NEON Business EventManager. NEON Business EventManager is an EAI
product that facilitates integration based on business processes or events.
This product enables business analysts to make decisions or rules in
typical business language without having to deal with technical
architecture. Each purchase of Business EventManager requires a license of
MQIntegrator.
NEON Enterprise ProcessExecutive. NEON Enterprise ProcessExecutive is
a comprehensive business process automation and workflow system for the
business enterprise. Enterprise Process Executive provides a tool for
modeling and monitoring business processes across complex organizations.
Process flows can be
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directed across the enterprise, based on the results of defined required
activities. MQIntegrator and Enterprise ProcessExecutive build upon the
core MQIntegrator functionality to provide valuable cost management
capabilities, with a number of defined events that may be discrete,
associated, related, or collective. Each NEON Enterprise ProcessExecutive
purchase requires a license of MQIntegrator.
NEON Rapport. NEON Rapport integrates client and customer files and
systems across the financial enterprise. By breaking down product and
services boundaries, Rapport manages client and contact relationship
information. Rapport also allows banks and securities firms to migrate to a
client-focused strategy, which provides a global resource for all client
relationships.
Application Integration Libraries
Building on the power of the MQIntegrator core technology, NEON is
preloading packaged software format libraries from leading packaged
applications into the Formatter, further enhancing the ease and speed of
installation and integration of these applications.
NEON PeopleSoft Integration Libraries. The NEON PeopleSoft Integration
Libraries provide a flexible solution to integrating with PeopleSoft
applications. NEON PeopleSoft Integration Libraries supply journal entry
data from a wide range of sources, such as manufacturing, inventory, and
other applications.
NEON SAP Integration Libraries. The NEON SAP Integration Libraries
extend the concept of Application Link Enabling (ALE) integration out to
the enterprise. NEON's SAP Integration Libraries facilitate data
conversion, data validation, and data enrichment. NEON's MQIntegrator and
the SAP Integration Libraries handle business-oriented, rules-based control
of how and when data flows between legacy, third party, or other ERP
applications and SAP R/3.
NEON S.W.I.F.T. Integration Libraries. The NEON S.W.I.F.T. Integration
Libraries simplify complex tasks and reduce the time and effort required to
accept and reformat messages to a customer's own application. As businesses
change and evolve, NEON customers can customize the S.W.I.F.T. Integration
Libraries to meet the challenges of message reformatting on a global basis.
Tools and Utilities
NEONweb. NEONweb is a complementary module to the NEONet platform that
guarantees delivery of data transactions from Internet/intranet clients to
web servers and to legacy systems. NEONweb provides a set of tools for
managing interactions between web-based servers and HTML, Java or CGI, as
well as legacy and client/server-based systems.
CAI-Net III. CAI-Net III is a single sign-on product. It allows
customers to use a single password to gain access to multiple applications
simultaneously. It also allows users to sign on from any workstation or
location. Additional security is available through encryption,
sign-on/password administration, and auditing.
Web-VA. Web-Va is a web-based e-commerce integration product. It uses
application wrapping services to make enterprise resources such as
applications, files and databases available to clients. It includes
security control, audit services, transactional services, and data control.
NEONreplication. NEONreplication is a set of libraries that performs
automatic database replication for use in updating and synchronizing
multiple heterogeneous databases. Timely updates of dispersed critical
databases reduce the need for extensive custom coding. Database replication
is essential for sophisticated, real-time applications in financial
services and other industries, as it permits the real-time maintenance of
multiple databases.
NEONmsgtrak. NEONmsgtrak is a GUI-based tool for monitoring and
managing all messages between MQIntegrator, internal applications, and
external interfaces. NEONmsgtrak centrally monitors message progress,
maintains a complete audit trail of all messages, and supports automated
message retrieval and cancellation. NEONmsgtrak makes it easier to monitor,
evaluate, tune, and streamline all transaction flows in complex,
high-volume business enterprise.
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NEONaccess. NEONaccess provides ideal application integration using
the S.W.I.F.T. interface standard. NEONaccess is an interface to the
S.W.I.F.T. protocol used for financial processing among financial
institutions worldwide. S.W.I.F.T. provides low-cost, standardized
financial processing and communication services. S.W.I.F.T.'s global
network, standards, and value-added services enable customers to reduce
costs, increase productivity, control risk, and strengthen the security of
their global financial communications.
Customer Services
As part of its commitment to provide a total solution to customer needs,
the Company offers the following customer services in conjunction with its
software licenses.
Maintenance and Support. The Company offers an array of support services
that focus on reporting and tracking work requests from customers. The Company's
maintenance and support service offers a seven days a week, twenty-four hours a
day customer hotline.
Professional Services. The Company provides for NEON software installations
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 offers these professional services often 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 the Company's software products. These
courses are conducted at the Company's principal corporate facilities in
Englewood, Colorado, New York City, Pacheco, California and London, England, as
well as at customer locations on request. In addition, the Company's partners
plan to provide fee-based training services on which the Company will receive a
royalty.
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CUSTOMERS
The Company has directly or indirectly licensed its products or provided
its services (including products and services acquired) to over 700 customers
worldwide. The following is a representative list of the Company's customers:
FINANCIAL SERVICES
ABN-Amro Bank N.V.
Acadian Asset Management
Automated Data Processing, Inc.
Alliance Capital Corporation
Bank of America National Trust & Savings
Association
Banque Paribas
Barclays Bank
Bank for International Settlements
Capital One Services Inc.
Cedel Group
Chicago Board of Trade
Chicago Mercantile Exchange
Citibank
CommerzBank AG
Credit Suisse
Den Danske Bank Group
The Depository Trust Company (DTC)
Disclosure Incorporated
Fidelity Investments
Fischer Francis Trees & Watts, Inc.
Global Asset Management
The Industrial Bank of Japan, Ltd.
JP Morgan & Co., Incorporated
Merrill Lynch Pierce Fenner & Smith
Incorporated
NatWest Ventures Limited
Norwest Services, Inc.
The Standard Bank of South Africa, Ltd.
State Street Bank and Trust Company
State Street Global Advisors
Sumitomo Bank of California
Warburg Dillon Read LLC
Western Asset Management Company
HEALTHCARE
Akron General Medical Center
BJC Barnes Jewish Christian Health System
Brookwood Medical Center
Carondolet Health Care Corporation
Catholic Healthcare West
St. Agnes Hospital
Detroit Medical Center
Fuji Medical Systems, USA Incorporated
Group Health Cooperative
John Muir Medical Center
Kaiser Foundation Health Plan Inc.
Lehigh Valley Hospital
Loma Linda University Medical Center
Mayo Foundation for Medical Education and
Research
Mercy Health Partners
Mercy Hospital of Miami
Sutter Health/CHS
State University of New York at Stony Brook
Tenet Health System for USC University
Hospital
UC Davis Medical Center
UC San Diego Medical Center
UC San Francisco Medical Center
University of Massachusetts Worcester
INSURANCE
Aegon Nederland B.V.
Aetna Inc.
American International Group Data Center, Inc.
CIGNA Corporation
Equitable of Iowa Companies
Fortis Nederland B.V.
Liverpool Victoria Friendly Society
Mutual of New York
MANUFACTURING
Bristol-Myers Squibb Company
The Coca-Cola Company
DSM Chemicals North America, Inc.
Eaton Corporation
Glaxo Wellcome Inc.
Koch Industries Inc.
Merck & Company, Inc.
Monsanto Company
Nortel Limited
Pitney Bowes, Inc.
Raychem Corporation
SmithKline Beecham
Xerox Corporation
TRAVEL/TRANSPORTATION
British Airways plc
TELECOM
AT&T
ALLTEL Information Services, Inc.
Cellnet
Clearnet, Inc.
CANTV
DMW Worldwide
GlobalOne Communications LLC
GTE Corporation
Nortel Limited
UTILITIES
Cobb EMC
Columbia Energy Services
London Electricity
Yorkshire Electricity
GOVERNMENT
City of Fort Lauderdale
Indiana Department of Environmental
Management
Sweden Post Office
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SALES AND MARKETING
The Company currently markets its software and services primarily through a
direct sales organization, complemented by indirect sales channels. As of
September 30, 1998, the Company's direct sales force included 47 commissioned
sales representatives located in 7 U.S. cities, London, England, Prague, The
Czech Republic and Sydney, Australia. In addition, the Company's multi-tiered
channel program provides additional sales channels for jointly marketed
products. 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 developed
alliances with key solution providers to targeted vertical industry sectors,
including financial services, health care, telecommunications, and
manufacturing.
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. The
Company is currently investing, and plans to continue to invest, significant
resources to develop the indirect channels, 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 these 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
STRATEGIC RELATIONSHIPS
The Company's strategy has been to expand its indirect channel
relationships with strategic partners including third-party distributors,
systems integrators and resellers. Examples of certain of the Company's key
strategic relationships include:
IBM. The Company and IBM entered into a multi-year joint development,
marketing and reselling arrangement in the fourth quarter of 1997 for the
MQIntegrator product. MQIntegrator combines NEON's Rules Engine and Formatter
components with IBM's MQSeries messaging product. MQIntegrator is sold as a
standard product offering by both IBM and NEON.
PeopleSoft. The Company and PeopleSoft entered into a multi-year joint
development, marketing and reselling arrangement in the first quarter of 1998
for the Business EventManager product. Business EventManager is sold as a
standard product offering from both companies as the solution to more rapidly
implement PeopleSoft's application solutions.
Candle Corporation. The Company and Candle entered into a multi-year
marketing and reselling arrangement in the first quarter of 1998 for products
from both companies. Candle Corporation will integrate the NEONet Rules Engine
and Formatter components product into Roma Candle, a proprietary software
product of Candle Corporation, as a standard product offering. In addition, the
Company agreed to market and sell certain Candle products to further enhance the
NEONet product suite.
Hewlett-Packard Nederland B.V. Through its recent acquisition of CAI, NEON
assumed a five-year agreement between CAI and Hewlett-Packard Nederland B.V.
Under this agreement, Hewlett-Packard Nederland B.V. markets and resells CAI
products in the Netherlands.
The Company has recently expanded its presence in the Enterprise Resource
Planning (ERP) market through the signing of contracts with Coca-Cola Company,
Pitney Bowes, Tivoli Systems, Monsanto Company and Industrial Bank of Japan.
Each of these customers has selected NEON's MQIntegrator for their SAP R/3
integration.
35
<PAGE> 38
In addition, the Company has reseller and joint marketing relationships
(including relationships acquired) with the following entities:
ADAC Healthcare Information Systems, Inc.
HISCOM (recently acquired by Baan Company)
Cambridge Technology Partners
Candle Corporation
Computer Sciences Corporation
Electronic Data Systems (EDS)
Ernst & Young
Fuji Medical Systems, USA Inc.
Hewlett-Packard Company
IBM
Locicasiel
Logica UK Ltd.
Logica USA Energy & Utilities
Medisolution, Inc.
NIWS (Japan)
Northern Telecom Inc.
Oberon Software, Inc.
Oracle Corporation
PeopleSoft, Inc.
Perot Systems Corporation
SAP AG
Seibel Systems, Inc.
State Street Global Advisors
Sumitomo Bank of California
SunGard Financial Systems
Sun Microsystems, Inc.
S.W.I.F.T.
Tandem Computers Inc. (a Compaq Company)
Unisys Corporation
TECHNOLOGY
The NEON product suite and services are primarily targeted at enabling and
facilitating the cooperation and inter-operation 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.
NEON'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 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 inter-operate;
- 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;
- 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;
The Company's Rapport product provides an integrated customer contact and
status application utilizing client/server, relational database, and web browser
technology, which integrates customer information, contact and financial data.
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
36
<PAGE> 39
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. NEONet's Messaging and Queuing technology 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
released new versions periodically throughout 1996 and 1997. Each new version of
NEONet consisted of substantially rewritten code providing greater
functionality, 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 makes available new product releases
approximately every six months. This provides a means to disseminate features
and functions requested by customers as the Company continues to address
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 September 30, 1998, the
Company's research and development staff consisted of 184 persons. The Company's
research and development expenditures in 1995, 1996, 1997 and the first nine
months of 1998 were approximately $1.1 million, $3.7 million, $7.7 million and
$9.8 million, respectively, and represented 88%, 51%, 34% and 25% of total
revenues, respectively, during such periods. In December 1997 the Company
entered into a joint product development agreement with IBM designed to
integrate IBM's MQSeries product with certain of the Company's products.
To extend the interoperability of the Company's products, the Company is
currently developing NEON OpenBroker, an open interface designed to interoperate
with IBM MQSeries, Microsoft MSMQ, Object Request Brokers (ORBs), Transaction
Processing (TP) Monitors, and a variety of other products and Architectures.
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. 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
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<PAGE> 40
requirements and emerging and evolving industry standards. The Company budgets
for research and development based on planned product introductions and
enhancements. Actual expenditures, however, 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, as well as 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, experience 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
results of operations, particularly on a quarterly basis.
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
enterprise application integration market through various technological
solutions. For example, 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 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, Software Technologies Corporation, and Vitria
Technologies, Inc.
The Company also may 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
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<PAGE> 41
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 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.
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 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'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, 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. 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 would be materially adversely affected.
EMPLOYEES
As of September 30, 1998, the Company employed 546 persons, including 88 in
sales, marketing and field operations, 184 in research and development, 92 in
finance and administration and 182 in client services. Of these, 99 are located
in the United Kingdom, seven are located in Australia, four are located in the
Czech
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<PAGE> 42
Republic 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.
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,
and Harold Piskiel, Chief Technology Officer, would be difficult to replace.
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. 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, financial condition and results of operations.
FACILITIES
The Company's principal administrative, engineering, manufacturing,
marketing and sales facilities total approximately 34,400 square feet, and are
located in Englewood, Colorado. In addition, the Company leases offices in New
York City, Pacheco, California, London, England and Sydney, Australia. The
Company 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> 43
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)(c).......... 52 Chairman of the Board, Chief Executive
Officer, President and Director
Harold A. Piskiel(2)...................... 51 Executive Vice President, Chief Technology
Officer and Director
Stephen E. Webb........................... 50 Senior Vice President and Chief Financial
Officer
Robert I. Theis........................... 37 Senior Vice President and Chief Marketing
Officer
Frederick T. Horn......................... 45 Senior Vice President of Product
Development and Client Services
Leonard M. Goldstein...................... 51 Senior Vice President, Senior Counsel and
Secretary
Frank A. Russo, Jr........................ 54 President, North American Operations
Peter T. Hoversten........................ 43 Senior Vice President, Application
Engineering
Michael E. Jaroch......................... 54 Senior Vice President of Human Resources
James C. Parks............................ 55 Vice President of Finance and Controller
Nicholas R. Sedgwick...................... 34 Chief Executive, Europe
Michael T. Donaldson...................... 40 Senior Vice President, Worldwide Marketing
Steve Lazarus(a)(b)(c)(1)................. 67 Director
Mark L. Gordon(a)(3)...................... 47 Director
James A. Reep(b)(2)....................... 47 Director
Elisabeth W. Ireland(3)................... 41 Director
Patrick J. Fortune(3)..................... 51 Director
Joseph E. Kasputys(1)..................... 62 Director
</TABLE>
- ---------------
(a) Member of the Compensation Committee.
(b) Member of the Audit Committee.
(c) Member of the Nominating Committee.
(1) Mr. Adam, Mr. Lazarus and Mr. Kasputys are Class I Directors and will stand
for re-election at the 2000 annual meeting of the stockholders.
(2) Mr. Piskiel and Mr. Reep are Class II Directors and will stand for
re-election at the 1999 annual meeting of the stockholders.
(3) Mr. Gordon, Ms. Ireland and Mr. Fortune are Class III Directors and will
stand for re-election at the 2001 annual meeting of the stockholders.
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.
Mr. Piskiel has served as Executive Vice President, Chief Technology
Officer and a Director of the Company since joining the Company in March 1995.
From 1993 to 1995, Mr. Piskiel served as Vice President of Data Distribution for
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> 44
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. degree from Stanford University
and an M.B.A. degree from the Harvard Graduate School of Business.
Mr. Theis has served as Senior Vice President and Chief Marketing Officer
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 served as 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. Russo has served as President, North American Operations since January
1, 1998. Prior to that position, Mr. Russo 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. Hoversten has served as Senior Vice President, Application Engineering
since April, 1998. Mr. Hoversten served as Senior Vice President, Application
Development and Field Operations from May 1, 1997 to April, 1998. From January
1989 to May 1997, Mr. Hoversten served as a Vice President of Technology at
Goldman, Sachs & Co. Mr. Hoversten holds a B.S. degree from the University of
Pennsylvania.
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 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 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 the University of Northern Colorado and an M.B.A. degree from the
University of Denver, Colorado.
Mr. Sedgwick has served as Chief Executive, Europe of the Company since
July 1998. He served as Managing Director, Europe, from September 1997 to July
1998. From 1993 to September 1997, Mr. Sedgwick served as President and Chief
Executive Officer of Menhir. Mr. Sedgwick holds a B.A. degree from the
University of East London.
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<PAGE> 45
Mr. Donaldson will serve as Senior Vice President, Worldwide Marketing,
beginning in December 1998. Prior to joining the Company, Mr. Donaldson served
as Vice President of Technical Marketing for CrossWorlds Software, Inc. from
June 1998 to November 1998 and as Vice President of Marketing from April 1996 to
June 1998. Prior to joining CrossWorlds Software, Mr. Donaldson served from 1989
to March 1996 in several capacities for Sybase, Inc., most recently as Director,
Technology and Business Planning. Mr. Donaldson holds a B.S. degree and an M.S.
degree from Virginia Tech.
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, Nanophase Technologies 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 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.
Ms. Ireland has served as a Director of the Company since January 1998.
Since January 1994, Ms. Ireland has been a partner with the Hamilton Companies,
an investment partnership. From 1988 to 1994, Ms. Ireland was a private investor
and consultant. From 1986 to 1988, Ms. Ireland was Director of Marketing and
Sales for Bloomberg L.P., a financial information service. Ms. Ireland holds an
A.B. Degree from Smith College and an M.B.A. from the Wharton School at the
University of Pennsylvania.
Dr. Fortune has served as director of the Company since February 1998.
Since October 1995, Dr. Fortune has been Vice President, Information Technology
and Chief Information Officer for Monsanto Company. From September 1994 to
September 1995, Dr. Fortune served as President and Chief Operating Officer of
Coram Healthcare Corporation in Colorado. From December 1991 to August 1994, Dr.
Fortune was Vice President, Information Management at Bristol-Myers Squibb. Dr.
Fortune serves on the Board of Directors of Parcxel International Corporation, a
contract research organization. Dr. Fortune holds a B.A. degree from the
University of Wisconsin, an M.B.A. degree from Northwestern University and a
Ph.D. in physical chemistry from the University of Wisconsin.
Mr. Kasputys has served as a director of the Company since July 1998. Since
1988, Mr. Kasputys has served as Chairman, President and Chief Executive Officer
of Primark Corporation. He currently serves as a director of Lifeline Systems.
Mr. Kasputys holds a B.A. degree from Brooklyn College and an M.B.A. degree from
the Harvard Graduate School of Business.
The Company's Bylaws provide for eight directors divided into three
classes. The initial term of Class III directors is through the first annual
meeting of stockholders held in May 1998, the initial term of Class II directors
is through the 1999 annual meeting of stockholders, and the initial term of
Class I directors is through the 2000 annual meeting of stockholders, 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.
Upon completion of this offering, the directors and executive officers of
the Company and their affiliates will, in the aggregate, beneficially own
approximately 26% of the Company's outstanding Common Stock. These stockholders,
if acting together, would be able to significantly influence all matters
requiring approval by our stockholders, including the election of directors and
the approval of mergers or other business combination transactions.
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<PAGE> 46
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of September 30, 1998, 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, and (iii) 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. All share information has been adjusted to reflect a two-for-one
stock split that will be effected in the form of a 100% stock dividend to
stockholders of record as of November 23, 1998.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING AFTER OFFERING
---------------------- ----------------------
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENTAGE NUMBER PERCENTAGE
--------------------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
5% STOCKHOLDERS
George F. (Rick) Adam, Jr.(2).................... 5,078,434 20.57% 5,078,434 17.71%
ARCH Venture Fund II(3).......................... 1,499,672 6.08 1,499,672 5.23
DIRECTORS
Steve Lazarus(4)................................. 1,548,950 6.27 1,548,950 5.40
Mark L. Gordon(5)................................ 32,332 * 32,332 *
Elisabeth W. Ireland(6).......................... 28,930 * 28,930 *
James Reep(7).................................... 14,998 * 14,998 *
Patrick J. Fortune(8)............................ -- -- -- *
Joseph E. Kasputys(9)............................ -- -- -- --
Harold A. Piskiel(10)............................ 330,552 1.33 330,552 1.15
All directors and executive officers as a group
(17 persons)(11)............................... 7,496,624 29.97 7,496,624 25.84
</TABLE>
- ---------------
* Less than 1% of the Company's outstanding Common Stock.
(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 September 30, 1998 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 24,680,826
shares of Common Stock outstanding on September 30, 1998 and 28,680,826
shares of Common Stock outstanding after completion of the Offering. The
individual stockholder information in this table was obtained from filings
made with the SEC pursuant to 13(d) or 13(g) of the Exchange Act. Unless
otherwise indicated, the address of each of the individuals named above is:
c/o New Era of Networks, Inc., 7400 East Orchard Road, Suite 230,
Englewood, Colorado 80111.
(2) Mr. Adam is also Chairman of the Board, President and Chief Executive
Officer of the Company. Includes 32,991 shares of Common Stock held in the
name of Adam's Investments I, LLLP, George F. Adam, III; 32,991 shares of
Common Stock held in the name of Adam's Investments II, LLLP, John C. Adam;
15,302 shares of Common Stock held in the name of Adam's Investments III,
LLLP, George F. Adam, Jr., Trustee for Gregory S. Adam; 15,302 shares of
Common Stock held in the name of Adam's Investments IV LLLP, George F.
Adam, Jr., Trustee for Rebecca Adam; and 18,000 shares of Common Stock held
in the name of the Adam Family Foundation, George F. Adam, Jr., Trustee.
(3) The address of ARCH Venture Fund II is 8735 W. Higgins Road, Suite 235,
Chicago, IL 60631.
44
<PAGE> 47
(4) Includes 1,499,672 shares of Common Stock registered in the name of ARCH
Venture Fund II, L.P., a limited partnership of which Steve Lazarus is a
general partner. Also includes 28,332 shares of Common Stock issuable upon
exercise of stock options that are exercisable within 60 days of September
30, 1998.
(5) Includes 28,332 shares of Common Stock issuable upon exercise of stock
options that are exercisable within 60 days of September 30, 1998.
(6) The Hamilton Companies, of which Ms. Ireland is a manager, holds a
registered certificate for 361,628 shares of Common Stock of the Company.
The Hamilton Companies distributed to Ms. Ireland an 8% interest in these
shares, or 14,465 shares of Common Stock. The actual distribution of the
28,930 shares was 14,465 shares of Common Stock to Elisabeth W. Ireland,
and 14,465 shares to Elisabeth W. Ireland and George R. Ireland as joint
tenants.
(7) Includes 14,998 shares of Common Stock issuable upon exercise of stock
options that are exercisable within 60 days of September 30, 1998.
(8) Patrick J. Fortune joined the Board of Directors of the Company in February
1998. Mr. Fortune owns no Common Stock and is not yet vested in any stock
options.
(9) Joseph E. Kasputys joined the Board of Directors of the Company in July
1998. Mr. Kasputys owns no Common Stock and is not yet vested in any stock
options.
(10) Mr. Piskiel is also Executive Vice President and Chief Technology Officer
of the Company. Includes 119,886 shares of Common Stock issuable upon
exercise of stock options that are exercisable within 60 days of September
30, 1998.
(11) Includes 313,024 shares of Common Stock issuable upon the exercise of stock
options exercisable within 60 days of September 30, 1998.
45
<PAGE> 48
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated (the "Underwriting Agreement"), the underwriters
named below (the "Underwriters"), for whom Credit Suisse First Boston
Corporation ("CSFBC"), SG Cowen Securities Corporation, SoundView Technology
Group, Inc., Volpe Brown Whelan & Company, LLC and UBS AG, acting through its
subsidiary Warburg Dillon Read LLC, are acting as representatives (the
"Representatives"), have severally, but not jointly, agreed to purchase from the
Company the following respective numbers of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
SG Cowen Securities Corporation.............................
SoundView Technology Group, Inc. ...........................
Volpe Brown Whelan & Company, LLC...........................
UBS AG, acting through its subsidiary Warburg Dillon Read
LLC.......................................................
---------
Total............................................. 4,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, and that the
Underwriters will be obligated to purchase all of the shares of Common Stock
offered hereby (other than those shares covered by the over-allotment option
described below) if any are purchased. The Underwriting Agreement provides,
that, in the event of a default by an Underwriter, in certain circumstances the
purchase commitments of non-defaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
The Company has granted to the Underwriters an option exercisable by CSFBC,
expiring at the close of business on the 30th day after the date of this
Prospectus, to purchase up to 600,000 additional shares of Common Stock at the
offering price, less underwriting discounts and commissions, all as set forth on
the cover page of this Prospectus. Such option may be exercised only to cover
over-allotments in the sale of the shares of Common Stock. To the extent that
the option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares of Common Stock as it was obligated to purchase pursuant to
the Underwriting Agreement.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public initially at the
public offering price set forth on the cover page of this Prospectus and,
through the Representatives, to certain dealers at such price less a concession
of $ per share, and the Underwriters and such dealers may allow a discount
of $ per share on sales to certain other dealers. After the Offering, the
public offering price and concession and discount to dealers may be changed by
the Representatives.
The following table summarizes the compensation to be paid to the
Underwriters by NEON, and the expenses payable by NEON.
<TABLE>
<CAPTION>
TOTAL
-------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
---------- -------------- --------------
<S> <C> <C> <C>
Underwriting Discounts and Commissions paid by NEON..... $ $ $
Expenses payable by NEON................................ $ $ $
</TABLE>
The Company and certain of its directors, officers and stockholders have
agreed that they will not offer, sell, contract to sell, announce their
intention to sell, pledge or otherwise dispose of, directly or indirectly, or,
in the case of the Company file with the Securities and Exchange Commission (the
"Commission") a registration statement under the Securities Act of 1933 (the
"Securities Act") relating to any additional shares of the Common Stock or
securities convertible into or exchangeable or exercisable for any shares of the
Common Stock, without the prior written consent of CSFBC for a period of days
after the date of this Prospectus.
46
<PAGE> 49
The Company has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or contribute
to payments that the Underwriters may be required to make in respect thereof.
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions,
penalty bids and "passive" market making in accordance with Regulation M under
the Securities Exchange Act of 1934 (the "Exchange Act"). Over-allotment
involves syndicate sales in excess of the offering size, which creates a
syndicate short position. Stabilizing transactions permit bids to purchase the
underlying security so long as the stabilizing bids do not exceed a specified
maximum. Syndicate covering transactions involve purchases of the shares of
Common Stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the
Representatives to reclaim a selling concession from a syndicate member when the
shares of Common Stock originally sold by such syndicate member are purchased in
a syndicate covering transaction to cover syndicate short positions. In
"passive" market making, market makers in the Securities who are Underwriters or
prospective Underwriters may, subject to certain limitations, make bids for or
purchases of the Securities until the time, if any, at which a stabilizing bid
is made. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the Common Stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that NEON prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of Common Stock are effected. Accordingly, any resale of the Common Stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the Common Stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to NEON and the dealer from whom such
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such Common Stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as agent
and (iii) such purchaser has reviewed the text above under "Resale
Restrictions".
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or recission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such
47
<PAGE> 50
persons in Canada or to enforce a judgment obtained in Canadian courts against
such issuer or persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Common Stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
Common Stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from NEON. Only one such
report must be filed in respect of Common Stock acquired on the same date and
under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Common Stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the Common
Stock in their particular circumstances and with respect to the eligibility of
the Common Stock for investment by the purchaser under relevant Canadian
Legislation.
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,
1996 and 1997 and for each of the three years in the period ended December 31,
1997 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.
The financial statements of Century Analysis Incorporated as of and for the
years ended December 31, 1997 and 1996 incorporated by reference in this
prospectus from the Current Report on Form 8-K of New Era of Networks, Inc.
filed on October 14, 1998, as amended, have been audited by Deloitte & Touche
LLP, independent auditors as stated in their report, which is incorporated
herein by reference, and have been so incorporated in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
48
<PAGE> 51
ADDITIONAL INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, and files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the Commission's
following Regional Offices: 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048. Copies of such material can be obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20594. The Commission maintains a World Wide Web site
that contains reports, proxy statements and other information regarding
registrants that file electronically with the Commission. The address of the
site is http://www.sec.gov. The Company's Common Stock is quoted on the Nasdaq
National Market and reports, proxy statements and other information concerning
the Company also may be inspected at the offices of Nasdaq Operations, 1735 K
Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement") under the Securities Act of 1933, as amended,
with respect to the securities offered by this Prospectus. This Prospectus,
which forms a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain parts of which have
been omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement, including the exhibits
filed or incorporated by reference in the Registration Statement. Statements
made in this Prospectus about any contact or other document are not necessarily
complete and in each instance in which a copy of such contract is filed with, or
incorporated by reference in, the Registration Statement as an exhibit,
reference is made to such copy, and each such statement shall be deemed
qualified in all respects by such reference. Copies of the Registration
Statement may be inspected, without charge, at the offices of the Commission, or
obtained at prescribed rates from the Public Reference Section of the Commission
at the address set forth above.
49
<PAGE> 52
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 as of December 31, 1997 and
1996...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995.......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997......................... F-19
Consolidated Statements of Operations for the nine months
ended September 30, 1998 and 1997 (unaudited)............. F-20
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997 (unaudited)............. F-21
Notes to Consolidated Financial Statements (unaudited)...... F-22
</TABLE>
F-1
<PAGE> 53
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, 1997 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, 1997. 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, 1997 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, 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
January 27, 1998.
F-2
<PAGE> 54
NEW ERA OF NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 7,150,362 $ 2,887,466
Short-term investments.................................... 15,573,617 500,000
Accounts receivable, net of allowance for uncollectible
accounts of $300,000 and $150,000, respectively........ 11,072,850 2,229,417
Unbilled revenue.......................................... 1,667,456 --
Prepaid expenses and other................................ 1,020,394 83,984
------------ -----------
Total current assets.............................. 36,484,679 5,700,867
------------ -----------
Property and equipment:
Computer equipment and software........................... 2,725,144 1,132,049
Furniture, fixtures and equipment......................... 640,218 363,720
Leasehold improvements.................................... 86,563 33,050
------------ -----------
3,451,925 1,528,819
Less-accumulated depreciation............................. (1,036,088) (401,364)
------------ -----------
Property and equipment, net............................... 2,415,837 1,127,455
------------ -----------
Other assets, net........................................... 1,328,659 244,416
------------ -----------
Total assets...................................... $ 40,229,175 $ 7,072,738
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,171,722 $ 469,640
Accrued liabilities....................................... 2,081,959 1,369,634
Current portion of bank borrowings (Note 4)............... 66,963 1,100,553
Deferred revenue.......................................... 1,177,262 175,300
------------ -----------
Total current liabilities......................... 5,497,906 3,115,127
------------ -----------
Bank borrowings (Note 4).................................... -- 442,277
------------ -----------
Total liabilities................................. 5,497,906 3,557,404
------------ -----------
Commitments and contingencies (Note 8)
Stockholders' equity (Note 6):
Preferred stock, 2,000,000 shares authorized; none issued
or outstanding at December 31, 1997.................... -- --
Convertible Series A, B and C Preferred stock, $.01 par
value, 20,016,963 shares authorized, issued and
outstanding at December 31, 1996, stated at liquidation
preference............................................. -- 11,385,000
Common stock, $.0001 par value, 45,000,000 shares
authorized, 18,212,314 and 2,718,182, shares issued and
outstanding as of December 31, 1997 and 1996,
respectively........................................... 1,822 272
Additional paid-in capital................................ 46,190,279 141,407
Accumulated deficit....................................... (11,517,978) (8,011,345)
Cumulative translation adjustment......................... 57,146 --
------------ -----------
Total stockholders' equity........................ 34,731,269 3,515,334
------------ -----------
Total liabilities and stockholders' equity........ $ 40,229,175 $ 7,072,738
============ ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these
consolidated statements.
F-3
<PAGE> 55
NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues (Notes 2 and 9):
Software licenses................................. $15,969,840 $ 3,382,464 $ --
Services and maintenance.......................... 6,675,602 3,762,223 1,270,600
----------- ----------- -----------
Total revenues............................ 22,645,442 7,144,687 1,270,600
----------- ----------- -----------
Cost of revenues:
Cost of software licenses (Note 8)................ 899,710 1,021,849 --
Cost of services and maintenance.................. 4,442,908 2,306,370 750,718
----------- ----------- -----------
Total cost of revenues.................... 5,342,618 3,328,219 750,718
----------- ----------- -----------
Gross profit........................................ 17,302,824 3,816,468 519,882
----------- ----------- -----------
Operating expenses:
Sales and marketing............................... 8,823,830 4,424,554 548,912
Research and development.......................... 7,730,411 3,658,493 1,115,742
General and administrative........................ 2,334,185 1,466,594 345,389
Charge for acquired in-process research and
development.................................... 2,600,000 -- --
Amortization of intangibles....................... 65,836 -- --
----------- ----------- -----------
Total operating expenses.................. 21,554,262 9,549,641 2,010,043
----------- ----------- -----------
Loss from operations................................ (4,251,438) (5,733,173) (1,490,161)
Other income (expense), net......................... 744,805 60,855 (12,549)
----------- ----------- -----------
Loss before provision for income taxes.............. (3,506,633) (5,672,318) (1,502,710)
Provision for income taxes.......................... -- -- --
----------- ----------- -----------
Net loss............................................ $(3,506,633) $(5,672,318) $(1,502,710)
=========== =========== ===========
Net loss per common share, basic and diluted........ $ (.32) $ (2.10) $ (.57)
=========== =========== ===========
Weighted average shares of common stock outstanding
(Note 2).......................................... 10,958,302 2,706,552 2,617,994
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these
consolidated statements.
F-4
<PAGE> 56
NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
SERIES A, SERIES B AND
SERIES C CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------ ------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
---------- ----------- ---------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1994.............. -- $ -- 4,444,444 $ 444 $ 556 $ (719,194)
Issuance of common stock to an employee
in exchange for services............. -- -- 266,666 27 17,973 --
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
2,037,562 shares of common stock, net
of issuance costs of $41,952......... 9,169,028 2,000,000 (2,037,562) (204) (254) (41,494)
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)
Net loss............................... -- -- -- -- -- (1,502,710)
---------- ----------- ---------- ------ ----------- ------------
BALANCES, December 31, 1995.............. 15,352,367 3,875,000 2,673,548 267 18,275 (2,302,571)
Issuance of Series C convertible
preferred stock ($1.61 per share) in
June for cash of $7,510,000, net of
issuance costs of $36,456............ 4,664,596 7,510,000 -- -- -- (36,456)
Issuance of common stock to an employee
in exchange for services............. -- -- 35,554 4 39,996 --
Issuance of common stock upon exercise
of stock options..................... -- -- 9,080 1 10,219 --
Issuance of common stock options and
warrants in exchange for services.... -- -- -- -- 72,917 --
Net loss............................... -- -- -- -- -- (5,672,318)
---------- ----------- ---------- ------ ----------- ------------
BALANCES, December 31, 1996.............. 20,016,963 11,385,000 2,718,182 272 141,407 (8,011,345)
Issuance of common stock upon initial
public offering net of issuance costs
of $3,861,852........................ -- -- 6,348,000 635 34,225,512 --
Conversion of preferred stock --
Series A............................. (9,169,028) (2,000,000) 4,075,122 408 1,999,592 --
Series B............................. (6,183,339) (1,875,000) 2,748,148 275 1,874,725 --
Series C............................. (4,664,596) (7,510,000) 2,073,148 207 7,509,793 --
Issuance of common stock upon exercise
of stock options..................... -- -- 249,714 25 439,250 --
Cumulative translation adjustment...... -- -- -- -- -- --
Net loss............................... -- -- -- -- -- (3,506,633)
---------- ----------- ---------- ------ ----------- ------------
BALANCES, December 31, 1997.............. -- $ -- 18,212,314 $1,822 $46,190,279 $(11,517,978)
========== =========== ========== ====== =========== ============
<CAPTION>
CUMULATIVE
TRANSLATION
ADJUSTMENT TOTAL
----------- -----------
<S> <C> <C>
BALANCES, December 31, 1994.............. $ -- $ (718,194)
Issuance of common stock to an employee
in exchange for services............. -- 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
2,037,562 shares of common stock, net
of issuance costs of $41,952......... -- 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......... -- 1,835,827
Net loss............................... -- (1,502,710)
------- -----------
BALANCES, December 31, 1995.............. -- 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 costs of $36,456............ -- 7,473,544
Issuance of common stock to an employee
in exchange for services............. -- 40,000
Issuance of common stock upon exercise
of stock options..................... -- 10,220
Issuance of common stock options and
warrants in exchange for services.... -- 72,917
Net loss............................... -- (5,672,318)
------- -----------
BALANCES, December 31, 1996.............. -- 3,515,334
Issuance of common stock upon initial
public offering net of issuance costs
of $3,861,852........................ -- 34,226,147
Conversion of preferred stock --
Series A............................. -- --
Series B............................. -- --
Series C............................. -- --
Issuance of common stock upon exercise
of stock options..................... -- 439,275
Cumulative translation adjustment...... 57,146 57,146
Net loss............................... -- (3,506,633)
------- -----------
BALANCES, December 31, 1997.............. $57,146 $34,731,269
======= ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these
consolidated statements.
F-5
<PAGE> 57
NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $ (3,506,633) $(5,672,318) $(1,502,710)
Adjustments to reconcile net loss to net cash used
in operating activities-
Depreciation and amortization.................. 701,636 324,182 80,344
Charge for acquired in-process research and
development.................................. 2,600,000 -- --
Issuance of common stock and common stock
options for services......................... -- 126,417 4,500
Loss on sale of property and equipment......... -- 16,943 --
Changes in assets and liabilities --
Accounts receivable, net..................... (9,691,769) (1,639,085) (547,041)
Prepaid expenses and other assets............ (1,030,195) (303,759) 15,647
Accounts payable............................. 980,815 309,870 97,959
Accrued liabilities.......................... 345,003 1,252,820 206,530
Deferred revenue............................. 950,622 151,800 23,500
------------ ----------- -----------
Net cash used in operating activities..... (8,650,521) (5,433,130) (1,621,271)
------------ ----------- -----------
Cash flows from investing activities:
Purchases of short-term investments............... (15,573,617) (500,000) (102,532)
Proceeds from sale of short-term investments...... 500,000 102,532 --
Business combinations, net of cash acquired....... (2,800,000) -- --
Proceeds from sale of property and equipment...... -- 5,654 --
Purchases of property and equipment............... (1,811,744) (1,131,053) (301,412)
------------ ----------- -----------
Net cash used in investing activities..... (19,685,361) (1,522,867) (403,944)
------------ ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock............ 38,527,274 10,220 --
Common stock issuance costs....................... (3,861,852) -- --
Proceeds from issuance of preferred stock......... -- 7,510,000 2,875,000
Preferred stock issuance costs.................... -- (36,456) (81,125)
Proceeds from note payable to stockholder......... -- 104,709 250,200
Payments on note payable stockholder.............. -- (422,867) (10,879)
Proceeds from notes payable to banks.............. 609,807 2,545,116 415,000
Principal payments on notes payable to banks...... (2,676,451) (1,002,286) (415,000)
------------ ----------- -----------
Net cash provided by financing
activities.............................. 32,598,778 8,708,436 3,033,196
------------ ----------- -----------
Net increase in cash and cash equivalents........... 4,262,896 1,752,439 1,007,981
Cash and cash equivalents, beginning of period...... 2,887,466 1,135,027 127,046
------------ ----------- -----------
Cash and cash equivalents, end of period............ $ 7,150,362 $ 2,887,466 $ 1,135,027
============ =========== ===========
Supplemental cash flow information:
Cash paid during the year for --
Interest....................................... $ 95,661 $ 25,007 $ 61,784
============ =========== ===========
Taxes.......................................... $ -- $ -- $ --
============ =========== ===========
Supplemental disclosure of non-cash information:
Conversion of preferred stock to common stock..... $ 11,385,000 $ -- $ --
============ =========== ===========
Issuance of common stock to employees in exchange
for services................................... $ -- $ 40,000 $ 18,000
============ =========== ===========
Issuance of common stock options and warrants in
exchange for services.......................... $ -- $ 72,917 $ --
============ =========== ===========
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
============ =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these
consolidated statements.
F-6
<PAGE> 58
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
All share and per share information have been adjusted to reflect a
two-for-one stock split that will be effected in the form of a 100% stock
dividend to stockholders of record as of November 23, 1998.
(1) DESCRIPTION OF BUSINESS
New Era of Networks, Inc. and its consolidated subsidiaries (the "Company")
develops, markets and supports application integration software and provides
application integration services. The Company's flagship product, 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 systems, 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 its direct sales organization, complemented by other indirect
sales channels including VARs, OEMs 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. Effective September 1, 1997, the Company, through Limited, acquired all
of the outstanding common stock of Menhir Limited ("Menhir"), a company
incorporated in the United Kingdom. Menhir's principal operations include the
development, marketing and support of Rapport, a leading contract and
relationship management system for the banking and securities industry (see Note
3). Effective January 1, 1998, Menhir's operations were combined into Limited's
organization.
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, 1997, have been approximately $12.1 million, including
approximately $4.2 million for the year ended December 31, 1997. Of the $4.2
million operating loss for the year ended December 31, 1997, $2.6 million
represented a one time charge for in-process research and development technology
due to the acquisition of Menhir.
Initial Public Offering
In June 1997, the Company completed its initial public offering ("IPO") and
issued 5,520,000 shares of its common stock to the public at a price of $6.00
per share. The Company received approximately $29.7 million of cash, net of
underwriting discounts, commissions and other offering costs. Upon completion of
the offering, all outstanding shares of Series A, Series B, and Series C
preferred stock (a total of 20,016,963 shares) were converted into 8,896,418
shares of common stock. In July 1997, the underwriters of the Company's IPO
exercised their over-allotment option and purchased an additional 828,000 shares
of common stock at $6.00 per share from the Company with net proceeds to the
Company of approximately $4.6 million, net of offering costs.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company, Limited and Menhir. All significant intercompany transactions have
been eliminated in consolidation.
F-7
<PAGE> 59
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries is their
local currency. Translation of balance sheet amounts to U.S. Dollars is based on
the applicable exchange rate at each balance sheet date. Statement of operations
and statement of cash flow amounts are translated at the average exchange rates
for the period.
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 transaction gains and losses
applicable to permanent investments by the Company in its foreign subsidiaries
are included as cumulative translation adjustments, and unrealized translation
gains or losses applicable to short-term intercompany receivables from or
payables to the Company and its foreign subsidiaries are included in income.
Revenue Recognition
The Company generates revenue from professional service arrangements,
software license and software maintenance 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. Revenues
recognized under the progress-to-completion basis which have not yet been
invoiced are recorded as unbilled revenues in the accompanying consolidated
balance sheets. 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. Software maintenance
revenue related to software licenses is 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
consolidated balance sheets. As of December 31, 1997 and 1996, deferred revenue
was $1,177,262 and $175,300, 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 Equivalents and Short-Term Investments
The Company invests certain of its excess cash in government and corporate
debt instruments. All highly liquid investments with original maturities of
three months or less are considered to be cash equivalents. The recorded amounts
for cash equivalents and short-term investments approximate fair market value
due to the short-term nature of these financial instruments.
F-8
<PAGE> 60
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Property and Equipment, net
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>
Depreciation expense was $633,200, $314,000 and $80,600 in 1997, 1996 and
1995, respectively.
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 December 31, 1996,
which satisfy the above criteria were immaterial, and therefore no software
development costs have been capitalized by the Company as of December 31, 1996.
As of December 31, 1997, the Company has recorded approximately $460,000
allocated to purchased software in connection with the Menhir acquisition. These
costs are being amortized on a straight-line basis over a three-year period. The
Company recognized approximately $51,000 of amortization expense in 1997 related
to such capitalized costs.
Goodwill
The Company recorded approximately $310,000 as goodwill in connection with
the Menhir acquisition, which is being amortized on a straight-line basis over a
seven-year period. The Company recognized approximately $15,000 in amortization
expense in 1997 related to goodwill.
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 carryforwards. 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. Deferred tax assets are reduced by a valuation
allowance based on an assessment of available evidence if deemed more likely
than not that some or all of the deferred tax assets will not be realized (see
Note 5).
Net Loss Per Common Share
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share," ("SFAS 128") as required, by retroactively restating
loss per share amounts for all periods presented. Under SFAS 128, basic earnings
(loss) per share is determined by dividing net income (loss) from continuing
operations available to common shareholders by the weighted average number of
common shares outstanding during each period. Diluted earnings per 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
F-9
<PAGE> 61
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
determine dilution from options and warrants. The if-converted method is used
for convertible securities. Because of reported losses, there are no differences
between basic and diluted per share amounts for the Company for any of the years
presented.
Potentially dilutive securities excluded under SFAS 128 as antidilutive are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Number of common shares issuable upon --
Conversion of Series Preferred Stock (Note
6).......................................... -- 8,896,418 6,823,270
Exercise of outstanding stock options (Note
6)....................................... 4,206,716 2,754,212 496,458
</TABLE>
Loss per share amounts presented in the prospectus for the IPO and
subsequent filings with the Securities and Exchanges Commission ("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 IPO, regardless
of being antidilutive. In February 1998, SAB No. 83 was superceded by SAB No. 98
which effectively requires the Company to retroactively determine its loss per
share amounts as described above.
All Series Preferred Stock converted to common stock effective upon the
Company's IPO. If the Series Preferred Stock were treated as equivalent shares
of outstanding common stock from the date of issuance, and assuming the
application of SAB No. 83, pro forma weighted average shares of common stock
outstanding and pro forma loss per common share would be as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Pro forma weighted average common shares.... 15,327,814 11,578,764 7,243,660
Pro forma loss per common share............. (.23) (.49) (.21)
</TABLE>
Concentration of Credit Risk
The Company's accounts receivable as of December 31, 1997, are concentrated
with certain customers in the financial services industry. During the years
ended December 31, 1997 and 1996, the Company recognized approximately 72% and
81%, 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, cash
equivalents and short-term investments. 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,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made in prior years' financial
statements to conform to the 1997 presentation.
F-10
<PAGE> 62
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(3) BUSINESS COMBINATION
Effective September 1, 1997, Limited acquired all of the outstanding
capital stock of Menhir by means of a Share Purchase Agreement by and among
Menhir, the shareholders of Menhir, and Limited (the "Purchase Agreement"). The
total purchase price of $2,800,000, plus fees and expenses of approximately
$200,000, was paid in cash. The acquisition was accounted for under the purchase
method of accounting and, accordingly, the operating results of Menhir have been
included in the accompanying consolidated financial statements from the
effective date of the acquisition.
An independent valuation of Menhir's net assets was completed to assist in
allocation of the purchase price. Approximately $2,600,000 of the purchase price
represented the intangible value of in-process research and development projects
that had not yet reached technological feasibility. The related technology had
no alternative future use and will require substantial additional development by
the Company. This amount was charged to operations in the quarter ended
September 30, 1997. A portion of the purchase price was also assigned to
marketable software products and goodwill which are being amortized on a
straight-line basis over three and seven year periods, respectively. Menhir's
other assets assumed in the transaction were valued at approximately $1,063,000
and liabilities assumed were approximately $1,433,000.
(4) NOTES PAYABLE
Notes Payable to Banks
On March 15, 1996, the Company signed a promissory note payable to a bank.
As of December 31, 1996, $59,810 with interest at a fixed rate of 8.75% was
outstanding under this note. The note was paid in full in 1997.
During 1996, the Company entered into a loan and security agreement with a
bank that provided for a revolving facility and an equipment facility.
Borrowings of up to $2 million are available under the revolving facility and
bear interest at the bank's prime rate plus 1/2% (8.75% at December 31, 1996).
Borrowings up to $1 million at the bank's prime rate plus 1% (9.25% at December
31, 1996) can be made for the purchase or refinancing of qualified equipment
under the equipment facility. As of December 31, 1996, borrowings outstanding
included $1,006,438 under the revolving facility and $476,582 under the
equipment facility. All outstanding borrowings were repaid during 1997 with
proceeds from the Company's initial public offering.
In connection with the loan and security agreement discussed above, the
Company issued to the bank warrants which are exercisable through April 11,
2001, for the purchase of 13,802 shares of Company common stock for $3.62 per
share.
(5) 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-11
<PAGE> 63
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
The components of the Company's deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts......................... $ 89,000 $ 57,800
Trademark costs................................. 22,000 11,100
Accrued vacation................................ 7,700 31,600
Tax credits carryforward........................ 520,600 148,600
Net operating loss carryforward................. 2,734,100 2,458,000
Other........................................... 4,500 34,200
----------- -----------
Total deferred tax assets............... 3,377,900 2,741,300
Deferred tax liabilities:
Depreciation.................................... (23,000) (9,400)
----------- -----------
Total deferred tax liabilities.......... (23,000) (9,400)
----------- -----------
Total net deferred tax assets........... 3,354,900 2,731,900
Valuation allowance............................... (3,354,900) (2,731,900)
----------- -----------
Net deferred taxes................................ $ -- $ --
=========== ===========
</TABLE>
The provision for income taxes includes the following for the years ended
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1997 1996
--------- -----------
<S> <C> <C>
Current --
Federal........................................... $ -- $ --
State............................................. -- --
--------- -----------
-- --
--------- -----------
Deferred --
Federal........................................... (557,400) (2,076,100)
State............................................. (65,600) (177,900)
--------- -----------
Total deferred benefit............................ (623,000) (2,254,000)
Increase in valuation allowance..................... 623,000 2,254,000
--------- -----------
Total provision..................................... $ -- $ --
========= ===========
</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, 1997, the Company had net operating loss carryforwards
available totaling approximately $7,102,000. These carryforwards expire
beginning in 2010. The Company also has research and development tax credit
carryforwards of approximately $520,600 expiring beginning in 2010.
F-12
<PAGE> 64
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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>
1997 1996
----------- -----------
<S> <C> <C>
Income tax provision (benefit) at the federal
statutory rate.................................. $(1,192,300) $(1,928,600)
State income tax provision (benefit), net of
federal tax effect.............................. (33,000) (246,400)
Nondeductible expenses, including charge for
acquired in process research and development in
1997............................................ 974,300 69,600
Increase in tax credit carryforwards.............. (372,000) (148,600)
Change in valuation allowance..................... 623,000 2,254,000
----------- -----------
Net provision (benefit) for income taxes.......... $ -- $ --
=========== ===========
</TABLE>
(6) STOCKHOLDERS' EQUITY
Reverse Stock Split and Change in Authorized Shares
On May 16, 1997, 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
were 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 were converted into shares of common stock on the basis of nine
preferred shares for two common shares upon 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 4,666,666
shares of common stock to employees and nonemployees; 266,666 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 nonqualified
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 1997 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 60 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 and similar equity
instruments. However, SFAS 123 allows the continued measurement of compensation
costs 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.
F-13
<PAGE> 65
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Accordingly, for purposes of the pro forma disclosures presented below, the
Company has computed the fair values of all options granted during 1997, 1996
and 1995 using the Black-Scholes pricing model and the following weighted
average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate.................... 5.98% 6% 6.3%
Expected lives............................. 3.0 years 3.0 years 3.0 years
Expected volatility........................ 49.5% 84% 84%
Expected dividend yield.................... 0% 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.
For the periods ended December 31, 1996 and 1995, all options were assumed to
vest. During 1997, a forfeiture rate of 15% was assumed on all option grants.
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 was not publicly traded at December 31, 1996, the
expected market volatility for 1996 was based on an average of 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 was
used to calculate 1997 information. Fair value computations are highly sensitive
to the volatility factor assumed in that 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
$5,575,000, $3,193,000 and $125,500 for the years ended December 31, 1997, 1996
and 1995, 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 $1,138,781, $446,528 and $10,986 for 1997, 1996 and 1995,
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,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net loss --
As reported........................ $(3,506,633) $(5,672,318) $(1,502,710)
Pro forma.......................... (4,645,414) (6,118,846) (1,513,696)
Pro forma net loss per common
share --
As reported........................ $ (.32) $ (2.10) $ (.57)
Pro forma.......................... (.42) (2.26) (.58)
</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.
F-14
<PAGE> 66
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
A summary of the 1995 Plan for the years ended December 31, 1997, 1996 and
1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
EMPLOYEE OPTIONS OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------------- --------- -------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year...... 2,754,212 $2.46 496,458 $1.03 -- $ --
Granted............................... 2,463,142 5.85 2,476,076 2.67 522,590 1.03
Cancelled............................. (763,580) 3.03 (215,906) 1.56 (26,132) 1.13
Exercised............................. (249,724) 1.76 (2,416) 1.13 -- --
--------- ----- --------- ----- ------- -----
Outstanding at end of year............ 4,204,050 $4.34 2,754,212 $2.46 496,458 $1.03
========= ===== ========= ===== ======= =====
Exercisable at end of year............ 413,472 146,252 2,134
========= ========= =======
</TABLE>
The weighted average exercise prices and weighted average fair values of
options granted during 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
NUMBER OF FAIR EXERCISE NUMBER OF FAIR EXERCISE NUMBER OF FAIR EXERCISE
OPTIONS VALUE PRICE OPTIONS VALUE PRICE OPTIONS VALUE PRICE
--------- ----- -------- --------- ----- -------- --------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise price equal to market
price.............................. 2,163,142 $2.29 $5.82 933,210 $2.09 $3.63 109,924 $0.39 $0.68
Exercise price greater than market
price.............................. 300,000 1.37 6.05 1,542,866 0.76 2.09 412,666 0.22 1.13
--------- --------- -------
2,463,142 2,476,076 522,590
========= ========= =======
</TABLE>
The following table summarizes information about the employee stock options
outstanding and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
NUMBER OF WEIGHTED -----------------------
OPTIONS AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1997 LIFE IN YEARS PRICE 1997 PRICE
- --------------- -------------- ------------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$1.13 - $1.13 993,070 3.1 $1.13 216,500 $1.13
2.25 - 2.25 17,324 3.1 2.25 17,324 2.25
3.63 - 4.50 1,441,844 4.0 4.16 173,206 3.97
5.63 - 8.38 1,750,012 4.8 6.34 6,442 5.74
8.75 - 8.75 1,800 4.5 8.75 --
------------- --------- --- ----- ------- -----
$1.13 - $8.75 4,204,050 4.1 $4.34 413,472 $2.44
========= =======
</TABLE>
Non-employee Options
The Company has granted stock options to non-employees for 35,158 shares at
a weighted average exercise price of $2.18 per share (range of $1.13 to $7.32)
and has recognized cost of $72,917 related to these options based on the value
of the services received. During 1997 and 1996, 2,666 and 6,666 options to
purchase common stock were exercised at $5.63 and $1.13 per share, respectively.
At December 31, 1997, 25,826 options remained outstanding and exercisable at a
weighted average exercise price of $5.92 per share. The accounting for these
options is the same under APB 25 and SFAS 123.
Director Plan
The Company has adopted an option plan during 1997 for certain of its
directors. The Director Plan provides for the automatic grant to each
non-employee director, on the day following the annual shareholder meeting of
F-15
<PAGE> 67
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
each year, of an option to purchase 10,000 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 33,332 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 200,000 shares for issuance under the
Director Plan.
Employee Stock Purchase Plan
The Purchase Plan permits 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, (July 1, 1997 through January 31,
1998), 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 433,332 shares of common stock for issuance under
the Purchase Plan.
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, paid $500,000 cash, cancelled a $1,000,000 note
payable due him from the Company, and surrendered 2,037,562 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 Series A, B and C Preferred Stock automatically converted to common
stock upon closing of the Company's initial public offering.
(7) RELATED PARTY TRANSACTIONS
A company owned by the Company's chief executive officer and relatives
provides air transportation service for the Company. Total expenses incurred
during the years 1997, 1996 and 1995 for services rendered by this related party
was $56,940, $0 and $84,506, respectively.
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 outstanding under this agreement at January 1, 1999
will be payable in equal monthly installments through the maturity date. The
amount outstanding under this agreement at December 31, 1997 and 1996 was
$150,000, and $50,000, respectively.
F-16
<PAGE> 68
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(8) 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 was also a holder of
the Company's Series C preferred stock. The agreement granted the commercial
rights to the developed software to the Company. The Company paid 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 continued at this rate until the cumulative maximum was reached. Royalties
for the year ended December 31, 1997 were approximately $899,000 and were paid
during 1997.
Operating Leases
The Company leases its administrative offices, research facilities and
certain equipment under noncancellable operating lease agreements. Rent expense
under these leases for the years ended December 31, 1997, 1996 and 1995 was
$650,252, $357,401, and $81,680, respectively. The following is a schedule of
future minimum lease payments for the years ending December 31:
<TABLE>
<S> <C>
1998............................. $1,147,929
1999............................. 873,547
2000............................. 289,156
2001............................. 153,230
2002............................. 151,078
Thereafter....................... 906,471
----------
$3,521,411
==========
</TABLE>
Known Claims
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-17
<PAGE> 69
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(9) MAJOR CUSTOMERS
Various customers accounted for more than 10% of total revenue for the
years ended December 31, 1997, 1996 and 1995, as follows:
<TABLE>
<CAPTION>
CUSTOMER 1997 1996 1995
- -------- ---- ---- ----
<S> <C> <C> <C>
JP Morgan Bank......................................... 14% 14% N/A
Merrill Lynch, Pierce, Fenner & Smith, Inc............. N/A 22% 69%
ADP Financial Information.............................. N/A 16% N/A
SunGard Financial Systems.............................. N/A 13% N/A
Ingalls Health System.................................. N/A N/A 13%
</TABLE>
(10) OTHER ASSETS, NET AND OTHER INCOME (EXPENSE), NET
Other assets, net consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- --------
<S> <C> <C>
Notes receivable..................................... $ 160,000 $ 75,900
Prepaids............................................. 222,704 34,502
Deposits............................................. 105,276 71,093
Goodwill, net........................................ 295,240 --
Marketable software products, net (Notes 2 and 3).... 408,892 --
Other................................................ 136,547 62,921
---------- --------
$1,328,659 $244,416
========== ========
</TABLE>
Other income (expense), net consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Interest income............................. $867,156 $123,172 $ 38,557
Interest expense............................ (82,434) (50,640) (51,106)
Other....................................... (39,917) (11,677) --
-------- -------- --------
$744,805 $ 60,855 $(12,549)
======== ======== ========
</TABLE>
F-18
<PAGE> 70
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; 24,680,826 and 18,212,314 shares issued and
outstanding, respectively.............................. 2,468 1,822
Additional paid-in capital................................ 121,282,984 46,190,279
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.
F-19
<PAGE> 71
NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1998 1997
------------ -----------
<S> <C> <C>
Revenues:
Software licenses......................................... $ 24,553,964 $ 9,691,279
Services and maintenance.................................. 13,951,368 4,682,894
------------ -----------
Total revenues.................................... 38,505,332 14,374,173
Cost of revenues:
Cost of software licenses................................. 1,115,947 757,935
Cost of services and maintenance.......................... 7,179,483 3,188,909
------------ -----------
Total cost of revenues............................ 8,295,430 3,946,844
------------ -----------
Gross profit................................................ 30,209,902 10,427,329
Operating expenses:
Sales and marketing....................................... 13,165,903 5,930,783
Research and development.................................. 9,775,708 4,890,464
General and administrative................................ 3,963,301 1,481,377
Charge for acquired in-process research and development... 17,597,000 2,600,000
Amortization of intangibles............................... 612,885 18,016
------------ -----------
Total operating expenses.......................... 45,114,797 14,920,640
------------ -----------
Loss from operations........................................ (14,904,895) (4,493,311)
Other income, net........................................... 1,682,979 444,624
------------ -----------
Loss before provision for income taxes...................... (13,221,916) (4,048,687)
Provision for income taxes.................................. -- --
------------ -----------
Net loss.................................................... $(13,221,916) $(4,048,687)
============ ===========
Net loss per common share, basic and diluted (Note 3)....... $ (0.63) $ (0.47)
============ ===========
Weighted average shares of common stock outstanding, basic
and diluted............................................... 20,981,480 8,555,980
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-20
<PAGE> 72
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.
F-21
<PAGE> 73
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
All share and per share information have been adjusted to reflect a
two-for-one stock split that will be effected in the form of a 100% stock
dividend to stockholders of record as of November 23, 1998.
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 Annual Report on
Form 10-K for the fiscal year ended December 31, 1997. The consolidated results
of operations for the 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 880,062 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 391,138 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.
F-22
<PAGE> 74
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 276,924 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 comprehensive income
F-23
<PAGE> 75
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
\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 been adjusted to reflect the stock
split.
F-24
<PAGE> 76
Inside Back Cover - Middle
Text which reads "INTEGRATING THE WORLD OF APPLICATIONS" with such text
being superimposed over an artist's depiction of the planet Earth.
<PAGE> 77
[NEON LOGO]
<PAGE> 78
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. 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........................................ $ 37,763
NASD Filing Fee............................................. 14,083
NASDAQ National Market Additional Listing Fee............... 17,500
Printing.................................................... 165,000
Legal Fees and Expenses..................................... 200,000
Accounting Fees and Expenses................................ 50,000
Blue Sky Fees and Expenses.................................. 10,000
Transfer Agent and Registrar Fees........................... 5,000
Miscellaneous............................................... 654
--------
Total............................................. $500,000
========
</TABLE>
The Registrant intends to pay all expenses of registration, issuance and
distribution.
ITEM 15. 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 and
Article VI of the Registrant's Bylaws 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 Rights
Agreement (Exhibits 10.9, 10.10 and 10.11 hereto), which provides for the cross
indemnification of certain of the Company's stockholders and the Company, its
officers and directors against certain liabilities under the Securities Act or
otherwise.
ITEM 16. EXHIBITS AND FINANCIAL SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1** Share Purchase Agreement dated June 12, 1998 by and among
Registrant, MSB Consultants Limited and the shareholders
of MSB Consultants Limited.
2.2*** Share Acquisition Agreement dated September 30, 1998 by and
among Registrant, Century Analysis Incorporated and the
shareholders of Century Analysis Incorporated.
3.1* Amended and Restated Certificate of Incorporation, as
amended through May 21, 1997.
4.1* Form of Registrant's Common Stock Certificate.
</TABLE>
II-1
<PAGE> 79
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation regarding the legality of the securities
being registered.
10.1* Form of Indemnification Agreement entered into by Registrant
with each of its directors and executive officers.
10.2* 1995 Stock Option Plan, (amended and restated as of January
3, 1997) and related agreements.
10.3* 1997 Director Option Plan and related agreements.
10.4* 1997 Employee Stock Purchase Plan and related agreements.
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.
23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Deloitte & Touche LLP.
24.1 Power of Attorney (which is included on page II-4 herein).
</TABLE>
- ---------------
* Incorporated herein by reference to the exhibit filed with the
Registrant's Registration Statement on Form S-1 (Commission File No.
333-20189).
** Incorporated herein by reference to the exhibit filed with the
Registrant's Report on Form 8-K dated June 26, 1998.
*** Incorporated herein by reference to the exhibit filed with the
Registrant's Report on Form 8-K dated October 14, 1998.
II-2
<PAGE> 80
(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 15
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 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-3
<PAGE> 81
POWER OF ATTORNEY SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF DENVER, STATE OF
COLORADO, ON NOVEMBER 18, 1998. THE REGISTRANT CERTIFIES THAT IT HAS REASONABLE
GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE REQUIREMENTS FOR FILING ON FORM S-3.
New Era of Networks, Inc.
By: /s/ LEONARD M. GOLDSTEIN
----------------------------------
Leonard M. Goldstein
Senior Vice President and Senior
Counsel
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints George F. Adam, Jr. and Leonard M.
Goldstein, and each of them, his or her true and lawful agent, proxy and
attorney-in-fact, with full power of substitution and resubstitution, for him or
her and in his or her name, place and stead, in any and all capacities, to (i)
act on, sign and file with the Securities and Exchange Commission any and all
amendments (including post-effective amendments) to this registration statement
together with all schedules and exhibits thereto and any subsequent registration
statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, together with all schedules and exhibits thereto, (ii) act on, sign and
file such certificates, instruments, agreements and other documents as may be
necessary or appropriate in connection therewith, (iii) act on and file any
supplement to any prospectus included in this registration statement or any such
amendment or any subsequent registration statement filed pursuant to Rule 462(b)
under the Securities Act of 1933, as amended, and (iv) take any and all actions
which may be necessary or appropriate to be done, as fully for all intents and
purposes as he or she might or could do in person, hereby approving, ratifying
and confirming all that such agent, proxy and attorney-in-fact or any of his
substitutes may lawfully do or cause to be done by virtue thereof.
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES STATED AND DATED NOVEMBER 18, 1998:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ GEORGE F. ADAM, JR. Chairman of the Board, Chief Executive
- ----------------------------------------------------- Officer, President and Director (Principal
George F. Adam, Jr. Executive Officer)
/s/ STEPHEN E. WEBB Senior Vice President and Chief Financial
- ----------------------------------------------------- Officer (Principal Financial Officer)
Stephen E. Webb
/s/ JAMES C. PARKS Vice President of Finance and Controller
- ----------------------------------------------------- (Principal Accounting Officer)
James C. Parks
/s/ HAROLD A. PISKIEL Executive Vice President, Chief Technology
- ----------------------------------------------------- Officer and Director
Harold A. Piskiel
/s/ STEVE LAZARUS Director
- -----------------------------------------------------
Steven Lazarus
/s/ MARK L. GORDON Director
- -----------------------------------------------------
Mark L. Gordon
/s/ JAMES REEP Director
- -----------------------------------------------------
James Reep
</TABLE>
<PAGE> 82
POWER OF ATTORNEY SIGNATURES
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ ELISABETH W. IRELAND Director
- -----------------------------------------------------
Elisabeth W. Ireland
/s/ PATRICK J. FORTUNE Director
- -----------------------------------------------------
Patrick J. Fortune
/s/ JOSEPH E. KASPUTYS Director
- -----------------------------------------------------
Joseph E. Kasputys
</TABLE>
<PAGE> 83
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1** Share Purchase Agreement dated June 12, 1998 by and among
Registrant, MSB Consultants Limited and the shareholders
of MSB Consultants Limited.
2.2*** Share Acquisition Agreement dated September 30, 1998 by and
among Registrant, Century Analysis Incorporated and the
shareholders of Century Analysis Incorporated.
3.1* Amended and Restated Certificate of Incorporation, as
amended through May 21, 1997.
4.1* Form of Registrant's Common Stock Certificate.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation regarding the legality of the securities
being registered.
10.1* Form of Indemnification Agreement entered into by Registrant
with each of its directors and executive officers.
10.2* 1995 Stock Option Plan, (amended and restated as of January
3, 1997) and related agreements.
10.3* 1997 Director Option Plan and related agreements.
10.4* 1997 Employee Stock Purchase Plan and related agreements.
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.
23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Deloitte & Touche LLP.
24.1 Power of Attorney (which is included on page II-4 herein).
</TABLE>
- ---------------
* Incorporated herein by reference to the exhibit filed with the Registrant's
Registration Statement on Form S-1 (Commission File No. 333-20189).
** Incorporated herein by reference to the exhibit filed with the Registrant's
Report on Form 8-K dated June 26, 1998.
*** Incorporated by reference to the exhibit filed with the Registrant's Report
on Form 8-K dated October 14, 1998.
<PAGE> 1
4,000,000 SHARES
NEW ERA OF NETWORKS, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
December ___, 1998
CREDIT SUISSE FIRST BOSTON CORPORATION
SG COWEN SECURITIES CORPORATION
SOUNDVIEW TECHNOLOGY GROUP, INC.
VOLPE BROWN WHELAN & COMPANY, LLC
UBS AG, ACTING THROUGH ITS SUBSIDIARY WARBURG DILLON READ LLC
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Dear Sirs:
1. INTRODUCTORY. New Era of Networks, Inc., a Delaware corporation
("COMPANY"), proposes to issue and sell 4,000,000 shares ("FIRM SECURITIES") of
its Common Stock ("SECURITIES") and also proposes to issue and sell to the
Underwriters, at the option of the Underwriters, an aggregate of not more than
600,000 additional shares ("OPTIONAL SECURITIES") of its Securities as set forth
below. The Firm Securities and the Optional Securities are herein collectively
called the "OFFERED SECURITIES".
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to, and agrees with, the several Underwriters that:
(a) A registration statement (No. 333- ) relating to the
Offered Securities, including a form of prospectus, has been filed with the
Securities and Exchange Commission ("COMMISSION") and either (i) has been
declared effective under the Securities Act of 1933 ("ACT") and is not proposed
to be amended or (ii) is proposed to be amended by amendment or post-effective
amendment. If such registration statement ("INITIAL REGISTRATION STATEMENT") has
been declared effective, either (i) an additional registration statement
("ADDITIONAL REGISTRATION STATEMENT") relating to the Offered Securities may
have been filed with the Commission pursuant to Rule 462(b) ("RULE 462(B)")
under the Act and, if so filed, has become effective upon filing pursuant to
such Rule and the Offered Securities all have been duly
1
<PAGE> 2
registered under the Act pursuant to the initial registration statement and, if
applicable, the additional registration statement or (ii) such an additional
registration statement is proposed to be filed with the Commission pursuant to
Rule 462(b) and will become effective upon filing pursuant to such Rule and upon
such filing the Offered Securities will all have been duly registered under the
Act pursuant to the initial registration statement and such additional
registration statement. If the Company does not propose to amend the initial
registration statement or if an additional registration statement has been filed
and the Company does not propose to amend it, and if any post-effective
amendment to either such registration statement has been filed with the
Commission prior to the execution and delivery of this Agreement, the most
recent amendment (if any) to each such registration statement has been declared
effective by the Commission or has become effective upon filing pursuant to Rule
462(c) ("RULE 462(c)") under the Act or, in the case of the additional
registration statement, Rule 462(b). For purposes of this Agreement, "EFFECTIVE
TIME" with respect to the initial registration statement or, if filed prior to
the execution and delivery of this Agreement, the additional registration
statement means (i) if the Company has advised the Representatives that it does
not propose to amend such registration statement, the date and time as of which
such registration statement, or the most recent post-effective amendment thereto
(if any) filed prior to the execution and delivery of this Agreement, was
declared effective by the Commission or has become effective upon filing
pursuant to Rule 462(c), or (ii) if the Company has advised the Representatives
that it proposes to file an amendment or post-effective amendment to such
registration statement, the date and time as of which such registration
statement, as amended by such amendment or post-effective amendment, as the case
may be, is declared effective by the Commission. If an additional registration
statement has not been filed prior to the execution and delivery of this
Agreement but the Company has advised the Representatives that it proposes to
file one, "EFFECTIVE TIME" with respect to such additional registration
statement means the date and time as of which such registration statement is
filed and becomes effective pursuant to Rule 462(b). "EFFECTIVE DATE" with
respect to the initial registration statement or the additional registration
statement (if any) means the date of the Effective Time thereof. The initial
registration statement, as amended at its Effective Time, including all material
incorporated by reference therein, including all information contained in the
additional registration statement (if any) and deemed to be a part of the
initial registration statement as of the Effective Time of the additional
registration statement pursuant to the General Instructions of the Form on which
it is filed and including all information (if any) deemed to be a part of the
initial registration statement as of its Effective Time pursuant to Rule 430A(b)
("RULE 430A(b)") under the Act, is hereinafter referred to as the "INITIAL
REGISTRATION STATEMENT". The additional registration statement, as amended at
its Effective Time, including the contents of the initial registration statement
incorporated by reference therein and including all information (if any) deemed
to be a part of the additional registration statement as of its Effective Time
pursuant to Rule 430A(b), is hereinafter referred to as the "ADDITIONAL
REGISTRATION STATEMENT". The Initial Registration Statement and the Additional
Registration Statement are herein referred to collectively as the "REGISTRATION
STATEMENTS" and individually as a "REGISTRATION Statement". The form of
prospectus relating to the Offered Securities, as first filed with the
Commission pursuant to and in accordance with Rule 424(b) ("RULE 424(b)") under
the Act or (if no such filing is required) as included in a Registration
Statement, including all material incorporated by reference in such prospectus,
is
2
<PAGE> 3
hereinafter referred to as the "PROSPECTUS". No document has been or will be
prepared or distributed in reliance on Rule 434 under the Act.
(b) 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 of the Commission
thereunder (the "RULES AND REGULATIONS"). At the Effective Time and at all times
subsequent thereto up to and at the First Closing Date (as hereinafter defined),
the Optional Closing Date (as hereinafter defined) 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, (ii)
neither the Registration Statement nor any amendment 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
and (iii) neither the Prospectus nor any supplement thereto, will include any
untrue statement of a material fact omit to state a material fact required to be
stated therein or necessary to make the statement made therein, in light of the
circumstances under which they were made not misleading. The preceding sentence
does not apply to statements in or omissions from a Registration Statement or
the Prospectus based upon written furnished to the Company by any Underwriter
through the Representatives specifically for use therein, it being understood
and agreed that the only such information is that described as such in Section
7(b) hereof. The Company has not distributed any offering material in connection
with the offering or sale of the Offered Securities other than the Registration
Statement, the Preliminary Prospectus, the Prospectus or any other materials, if
any, permitted by the Act.
(c) 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
Subsidiaries (as hereinafter defined) taken as a whole (a "MATERIAL ADVERSE
EFFECT"). Complete and correct copies of the certificates of incorporation and
of the bylaws of the Company and all amendments thereto have been delivered to
the representatives of the Underwriters (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 First Closing Date or, if
later, the Optional Closing Date. The Company has no subsidiaries (as defined in
the Rules and Regulations) other than New Era of Networks Limited, NEON
(Australia) Pty. Limited, Menhir Limited, MSB Consultants Limited and Century
Analysis Incorporated, a California Corporation (the "SUBSIDIARIES"). Other than
the Subsidiaries, the Company does not own, directly or indirectly, any shares
of stock or any other
3
<PAGE> 4
equity or long-term debt securities of any corporation or have any equity
interest in any firm, partnership, joint venture, association or other entity.
(d) 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, mortgage, deed of trust, loan agreement, bond, debenture,
note agreement or other evidence of indebtedness that is material to the
Company, or any lease, contract or other agreement or instrument that is
material to the Company to which the Company is a party or by which its
properties are bound, or (ii) the restated certificate of incorporation, as
amended, or bylaws of the Company or (iii) any law, order, rule, regulation,
writ, injunction or decree of any court or governmental agency or body to which
the Company 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").
(e) Other than as fairly and accurately described in the
Prospectus, there is not pending or, to the Company's knowledge, threatened, any
action, suit, claim, proceeding or investigation against the Company 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 if
determined adversely would 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.
(f) 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
4
<PAGE> 5
correctly states the substance of the provisions of the instruments defining the
capital stock of the Company). The Offered Securities 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 Offered Securities to be sold by the Company
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 which right, if any, has not been expressly waived prior to the date
hereof. 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 Offered Securities, 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,
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.
(g) The financial statements of the Company and its
Subsidiaries, 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 and cash flows for the periods shown of the
Company and its Subsidiaries 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.
(h) 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 Subsidiaries taken as a whole, (ii)
any transaction which is material to the Company and its Subsidiaries taken as a
whole, except transactions in the ordinary course of business, (iii) any
obligation, which is material to the Company and its Subsidiaries taken as a
whole, incurred by the Company or Subsidiaries, except obligations incurred in
the ordinary course of business, (iv) any change in the capital stock or
outstanding
5
<PAGE> 6
indebtedness of the Company or Subsidiaries or (v) any dividend or distribution
of any kind declared, paid or made on the capital stock of the Company.
(i) Except as set forth in the Prospectus, (i) the Company and
Subsidiaries have good and valid 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 which are not individually or in the aggregate material to the
Company, (ii) the agreements to which the Company is a party described in the
Prospectus are valid agreements, enforceable against the Company or Subsidiaries
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 except where the inability to enforce such agreements would
not individually or in the aggregate have a Material Adverse Effect, 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
has valid and enforceable leases for the 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.
(j) The Company now holds and at the First Closing Date and
any later Optional 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). The Company is not 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.
(k) The Company has 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 which might
have a Material Adverse Effect. All material tax liabilities are adequately
provided for within the financial statements of the Company.
(l) The Company maintains insurance of the types and in the
amounts adequate for their business and consistent with insurance coverage
maintained by similar companies in similar businesses covering all risks
customarily insured against, all of which insurance is in full force and effect.
6
<PAGE> 7
(m) The Company is not involved in any labor dispute or
disturbance nor, to the knowledge of the Company, is any such dispute or
disturbance threatened.
(n) The Company owns or possesses 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 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 described in the Prospectus (the "CLAIMS"). The description of the
Claims set forth in the Registration Statement does not include any untrue
statement of material fact and does not omit to state a material fact necessary
to make the statements made therein, not misleading. The Company is not aware of
any patents, trademarks or proprietary rights of others which are existing or
infringed upon by products or potential products referred to in the Prospectus
in such a manner as to have a Material Adverse Affect.
(o) The Company is conducting their businesses in compliance
with all of the laws, rules and regulations of the jurisdictions in which it is
conducting business except were the Company's failure to comply would not have a
Material Adverse Affect.
(p) 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.
(q) The Company has not 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.
(r) The Company 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)
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<PAGE> 8
that has been designated or regulated by any governmental authority as
radioactive, toxic, hazardous or otherwise a danger to health, reproduction or
the environment.
(s) Neither the Company nor its Subsidiaries 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 Offered Securities have been duly authorized for
quotation on the National Association of Securities Dealers, Inc. 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 the Company's knowledge, any
of the Company's officers, directors or affiliates has taken, and at the First
Closing Date and at any later Optional Closing Date, neither the Company nor, to
the Company's knowledge, any of the Company's 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 Offered Securities.
(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 the Regulations. True
and complete copies of all such reports and other documents have been delivered
to you.
3. PURCHASE, SALE AND DELIVERY OF OFFERED SECURITIES. On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and the Underwriters agree, severally and not jointly, to purchase
from the Company, at a purchase price of $____ per share, the respective numbers
of shares of Firm Securities set forth opposite the names of the Underwriters in
Schedule A hereto.
The Company will deliver the Firm Securities to the Representatives for
the accounts of the Underwriters, against payment of the purchase price in
Federal (same day) funds by official bank check or checks or wire transfer to an
account at a bank acceptable to Credit Suisse First Boston Corporation ("CSFBC")
drawn to the order of at the office of Cooley Godward LLP, 2595 Canyon
Boulevard, Suite 250, Boulder, CO 80302, at 11:00 A.M., New York time, on
, or at such other time not later than seven full business
days thereafter as CSFBC and the Company determine, such time being herein
referred to as the "FIRST CLOSING DATE". For purposes of Rule 15c6-1 under the
Exchange Act, the First Closing
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<PAGE> 9
Date (if later than the otherwise applicable settlement date) shall be the
settlement date for payment of funds and delivery of securities for all the
Offered Securities sold pursuant to the offering. The certificates for the Firm
Securities so to be delivered will be in definitive form, in such denominations
and registered in such names as CSFBC requests and will be made available for
checking and packaging at the above office of Cooley Godward LLP at least 24
hours prior to the First Closing Date.
In addition, upon written notice from CSFBC given to the Company from
time to time not more than 30 days subsequent to the date of the Prospectus, the
Underwriters may purchase all or less than all of the Optional Securities at the
purchase price per Security to be paid for the Firm Securities. The Company
agrees to sell to the Underwriters the number of shares of Optional Securities
specified in such notice and the Underwriters agree, severally and not jointly,
to purchase such Optional Securities. Such Optional Securities shall be
purchased for the account of each Underwriter in the same proportion as the
number of shares of Firm Securities set forth opposite such Underwriter's name
bears to the total number of shares of Firm Securities (subject to adjustment by
CSFBC to eliminate fractions) and may be purchased by the Underwriters only for
the purpose of covering over-allotments made in connection with the sale of the
Firm Securities. No Optional Securities shall be sold or delivered unless the
Firm Securities previously have been, or simultaneously are, sold and delivered.
The right to purchase the Optional Securities or any portion thereof may be
exercised from time to time and to the extent not previously exercised may be
surrendered and terminated at any time upon notice by CSFBC to the Company.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "OPTIONAL CLOSING DATE", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "CLOSING DATE"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Company will deliver the
Optional Securities being purchased on each Optional Closing Date to the
Representatives for the accounts of the several Underwriters, against payment of
the purchase price therefor in Federal (same day) funds by official bank check
or checks or wire transfer to an account at a bank acceptable to CSFBC drawn to
the order of , at the above office of Cooley Godward LLP. The Optional
Securities being purchased on each Optional Closing Date will be in definitive
form, in such denominations and registered in such names as CSFBC requests upon
reasonable notice prior to such Optional Closing Date and will be made available
for checking and packaging at the above office of Cooley Godward LLP at a
reasonable time in advance of such Optional Closing Date.
4. OFFERING BY UNDERWRITERS. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. CERTAIN AGREEMENTS OF THE COMPANY. The Company agrees with the
several Underwriters that:
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<PAGE> 10
(a) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, the Company
will file the Prospectus with the Commission pursuant to and in accordance with
subparagraph (1) (or, if applicable and if consented to by CSFBC, subparagraph
(4)) of Rule 424(b) not later than the earlier of (A) the second business day
following the execution and delivery of this Agreement or (B) the fifteenth
business day after the Effective Date of the Initial Registration Statement.
The Company will advise CSFBC promptly of any such filing
pursuant to Rule 424(b). If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement and an
additional registration statement is necessary to register a portion of the
Offered Securities under the Act but the Effective Time thereof has not occurred
as of such execution and delivery, the Company will file the additional
registration statement or, if filed, will file a post-effective amendment
thereto with the Commission pursuant to and in accordance with Rule 462(b) on or
prior to 10:00 P.M., New York time, on the date of this Agreement or, if
earlier, on or prior to the time the Prospectus is printed and distributed to
any Underwriter, or will make such filing at such later date as shall have been
consented to by CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to
amend or supplement the initial or any additional registration statement as
filed or the related prospectus or the Initial Registration Statement, the
Additional Registration Statement (if any) or the Prospectus and will not effect
such amendment or supplementation without CSFBC's consent; and the Company will
also advise CSFBC promptly of the effectiveness of each Registration Statement
(if its Effective Time is subsequent to the execution and delivery of this
Agreement) and of any amendment or supplementation of a Registration Statement
or the Prospectus and of the institution by the Commission of any stop order
proceedings in respect of a Registration Statement and will use its best efforts
to prevent the issuance of any such stop order and to obtain as soon as possible
its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with sales by
any Underwriter or dealer, any event occurs as a result of which the Prospectus
as then amended or supplemented would include an untrue statement of a material
fact or omit to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, or if it is necessary at any time to amend the Prospectus to comply
with the Act, the Company will promptly notify CSFBC of such event and will
promptly prepare and file with the Commission, at its own expense, an amendment
or supplement which will correct such statement or omission or an amendment
which will effect such compliance. Neither CSFBC's consent to, nor the
Underwriters' delivery of, any such amendment or supplement shall constitute a
waiver of any of the conditions set forth in Section 6.
(d) As soon as practicable, but not later than the
Availability Date (as defined below), the Company will make generally available
to its securityholders an earnings statement covering a period of at least 12
months beginning after the Effective Date of the Initial Registration Statement
(or, if later, the Effective Date of the Additional Registration Statement)
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<PAGE> 11
which will satisfy the provisions of Section 11(a) of the Act. For the purpose
of the preceding sentence, "AVAILABILITY DATE" means the 45th day after the end
of the fourth fiscal quarter following the fiscal quarter that includes such
Effective Date, except that, if such fourth fiscal quarter is the last quarter
of the Company's fiscal year, "AVAILABILITY DATE" means the 90th day after the
end of such fourth fiscal quarter.
(e) The Company will furnish to the Representatives copies of
each Registration Statement, each related preliminary prospectus, and, so long
as a prospectus relating to the Offered Securities is required to be delivered
under the Act in connection with sales by any Underwriter or dealer, the
Prospectus and all amendments and supplements to such documents, in each case in
such quantities as CSFBC requests. The Prospectus shall be so furnished on or
prior to 3:00 P.M., New York time, on the business day following the later of
the execution and delivery of this Agreement or the Effective Time of the
Initial Registration Statement. All other documents shall be so furnished as
soon as available. The Company will pay the expenses of printing and
distributing to the Underwriters all such documents.
(f) The Company will arrange for the qualification of the
Offered Securities for sale under the laws of such jurisdictions as CSFBC
designates and will continue such qualifications in effect so long as required
for the distribution.
(g) During the period of 10 years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year, a copy
of its annual report to stockholders for such year; and the Company will furnish
to the Representatives (i) as soon as available, a copy of each report and any
definitive proxy statement of the Company filed with the Commission under the
Exchange Act or mailed to stockholders, and (ii) from time to time, such other
information concerning the Company as CSFBC may reasonably request.
(h) The Company will pay all expenses incident to the
performance of its obligations under this Agreement, for any filing fees and
other expenses (including fees and disbursements of counsel) incurred in
connection with qualification of the Offered Securities for sale under the laws
of such jurisdictions as CSFBC designates and the printing of memoranda relating
thereto for the filing fee incident to, and the reasonable fees and
disbursements of counsel to the Underwriters in connection with, the review by
the National Association of Securities Dealers, Inc. of the Offered Securities,
for any travel expenses of the Company's officers and employees and any other
expenses of the Company in connection with attending or hosting meetings with
prospective purchasers of the Offered Securities and for expenses incurred in
distributing preliminary prospectuses and the Prospectus (including any
amendments and supplements thereto) to the Underwriters.
(i) For a period of 180 days after the date of the public
offering of the Offered Securities, the Company will not offer, sell, contract
to sell, pledge or otherwise dispose of, directly or indirectly, or file with
the Commission a registration statement under the Act relating to, any
additional shares of its Securities or securities convertible into or
exchangeable or exercisable for any shares of its Securities, or publicly
disclose the intention to make any such
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<PAGE> 12
offer, sale, pledge, disposition or filing, without the prior written consent of
CSFBC, except grants of employee stock options pursuant to the terms of a plan
in effect on the date hereof, issuances of Securities pursuant to the exercise
of such options or the exercise of any other employee stock options outstanding
on the date hereof.
(j) For a period of 90 days following the date of the public
offering of the Offered Securities, the Company will not waive any contractual
restrictions that exist with respect to the resale of shares of Common Stock
held by MSB Consultants Limited and Century Analysis Incorporated, a California
corporation ("CAI").
6. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The obligations
of the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company herein, to the accuracy of the statements
of Company officers made pursuant to the provisions hereof, to the performance
by the Company of its obligations hereunder and to the following additional
conditions precedent:
(a) The Representatives shall have received a letter, dated
the date of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this Agreement,
shall be on or prior to the date of this Agreement or, if the Effective Time of
the Initial Registration Statement is subsequent to the execution and delivery
of this Agreement, shall be prior to the filing of the amendment or
post-effective amendment to the registration statement to be filed shortly prior
to such Effective Time), of Arthur Andersen LLP confirming that they are
independent public accountants within the meaning of the Act and the applicable
published Rules and Regulations thereunder and stating to the effect that:
(i) in their opinion the financial statements and
schedules examined by them and included in the Registration Statements comply as
to form in all material respects with the applicable accounting requirements of
the Act and the related published Rules and Regulations;
(ii) (A) with respect to the Company, they have
performed the procedures specified by the American Institute of Certified Public
Accountants for a review of interim financial information as described in
Statement of Auditing Standards No. 71, Interim Financial Information, on the
unaudited financial statements included in the Registration Statement; and (B)
with respect to CAI, for the eight months ended September 30, 1998, they have:
(1) read the unaudited financial statements of CAI as of and for the eight
months ended September 30, 1998 included in the Company's Current Report on Form
8-K/A, dated November 18, 1998; (2) compared the amounts appearing in such
statements to the accounting books and records of CAI; (3) inquired of Company
management the due diligence procedures performed by the Company on such
financial statements in connection with the Share Acquisition Agreement, by and
between the Company and CAI, dated September 30, 1998; and (4) verified the
arithmetic accuracy of those financial statements;
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<PAGE> 13
(iii) on the basis of the review referred to in
clause (ii) (A) above, a reading of the latest available interim financial
statements of the Company, inquiries of officials of the Company who have
responsibility for financial and accounting matters and other specified
procedures, nothing came to their attention that caused them to believe that:
(A) the unaudited financial statements included in the Registration Statements
do not comply as to form in all material respects with the applicable accounting
requirements of the Act and the related published Rules and Regulations or any
material modifications should be made to such unaudited financial statements for
them to be in conformity with generally accepted accounting principles; (B) at
the date of the latest available balance sheet read by such accountants, or at a
subsequent specified date not more than three business days prior to the date of
such letter, there was any change in the capital stock or any increase in
short-term indebtedness or long-term debt of the Company and its consolidated
subsidiaries or, at the date of the latest available balance sheet read by such
accountants, there was any decrease in net assets, as compared with amounts
shown on the latest balance sheet included in the Prospectus; or (C) for the
period from the date of the latest income statement included in the Prospectus
to the date of the latest available income statement read by such accountants
there were any decreases, as compared with the corresponding period of the
previous year, in consolidated net sales, or net operating income or
consolidated net income, except in all cases for changes, increases or decreases
which the Prospectus discloses have occurred or may occur or which are described
in such letter; and
(iv) they have compared specified dollar amounts (or
percentages derived from such dollar amounts) and other financial information
contained in the Registration Statements (in each case to the extent that such
dollar amounts, percentages and other financial information are derived from the
general accounting records of the Company and its subsidiaries subject to the
internal controls of the Company's accounting system or are derived directly
from such records by analysis or computation) with the results obtained from
inquiries, a reading of such general accounting records and other procedures
specified in such letter and have found such dollar amounts, percentages and
other financial information to be in agreement with such results, except as
otherwise specified in such letter.
For purposes of this subsection, (i) if the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement, "REGISTRATION STATEMENTS" shall mean the initial registration
statement as proposed to be amended by the amendment or post-effective amendment
to be filed shortly prior to its Effective Time, (ii) if the Effective Time of
the Initial Registration Statement is prior to the execution and delivery of
this Agreement but the Effective Time of the Additional Registration is
subsequent to such execution and delivery, "REGISTRATION STATEMENTS" shall mean
the Initial Registration Statement and the additional registration statement as
proposed to be filed or as proposed to be amended by the post-effective
amendment to be filed shortly prior to its Effective Time, and (iii)
"PROSPECTUS" shall mean the prospectus included in the Registration Statements.
All financial statements and schedules included in material incorporated by
reference into the Prospectus shall be deemed included in the Registration
Statement for purposes of this subsection.
(b) If the Effective Time of the Initial Registration
Statement is not prior to the execution and delivery of this Agreement, such
Effective Time shall have occurred not later
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<PAGE> 14
than 10:00 P.M., New York time, on the date of this Agreement or such later date
as shall have been consented to by CSFBC. If the Effective Time of the
Additional Registration Statement (if any) is not prior to the execution and
delivery of this Agreement, such Effective Time shall have occurred not later
than 10:00 P.M., New York time, on the date of this Agreement or, if earlier,
the time the Prospectus is printed and distributed to any Underwriter, or shall
have occurred at such later date as shall have been consented to by CSFBC. If
the Effective Time of the Initial Registration Statement is prior to the
execution and delivery of this Agreement, the Prospectus shall have been filed
with the Commission in accordance with the Rules and Regulations and Section
5(a) of this Agreement. Prior to such Closing Date, no stop order suspending the
effectiveness of a Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or, to the knowledge of
the Company or the Representative[s], shall be contemplated by the Commission.
(c) Subsequent to the execution and delivery of this
Agreement, there shall not have occurred (i) any change, or any development or
event involving a prospective change, in the condition (financial or other),
business, properties or results of operations of the Company or its subsidiaries
which, in the judgment of a majority in interest of the Underwriters including
the Representatives, is material and adverse and makes it impractical or
inadvisable to proceed with completion of the public offering or the sale of and
payment for the Offered Securities; (ii) any downgrading in the rating of any
debt securities of the Company (other than an announcement with positive
implications of a possible upgrading, and no implication of a possible
downgrading, of such rating); (iii) any suspension or limitation of trading in
securities generally on the New York Stock Exchange, or any setting of minimum
prices for trading on such exchange, or any suspension of trading of any
securities of the Company on any exchange or in the over-the-counter market;
(iv) any banking moratorium declared by U.S. Federal or New York authorities; or
(v) any outbreak or escalation of major hostilities in which the United States
is involved, any declaration of war by Congress or any other substantial
national or international calamity or emergency if, in the judgment of a
majority in interest of the Underwriters including the Representatives, the
effect of any such outbreak, escalation, declaration, calamity or emergency
makes it impractical or inadvisable to proceed with completion of the public
offering or the sale of and payment for the Offered Securities.
(d) The Representatives shall have received an opinion, dated
such Closing Date, of Wilson Sonsini Goodrich & Rosati, counsel for the Company,
in the form attached hereto on Appendix A.
(e) The Representatives shall have received an opinion, dated
such Closing Date, of Wilson Sonsini Goodrich & Rosati, in the form attached
hereto as Appendix B. Such counsel shall state the specific terms reviewed by
such counsel and may rely upon the opinion of Gordon & Glickson; provided, that,
such counsel state that it is reasonable for them to rely on such opinion.
(f) The Representatives shall have received the opinion, dated
such Closing Date, of patent counsel to the Company, in the form attached hereto
as Appendix C.
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<PAGE> 15
(g) The Representatives shall have received from Cooley
Godward LLP, counsel for the Underwriters, such opinion or opinions, dated such
Closing Date, with respect to the incorporation of the Company, the validity of
the Offered Securities delivered on such Closing Date, the Registration
Statements, the Prospectus and other related matters as the Representatives may
require, and the Company shall have furnished to such counsel such documents as
they request for the purpose of enabling them to pass upon such matters.
(h) The Representatives shall have received an opinion, dated
such Closing Date, from Clyde & Co., in the form attached hereto as Appendix D.
(i) The Representative shall have received a certificate,
dated such Closing Date, of the President or any Vice President and a principal
financial or accounting officer of the Company in which such officers, to the
best of their knowledge after reasonable investigation, shall state that: the
representations and warranties of the Company in this Agreement are true and
correct; the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied hereunder at or prior to
such Closing Date; no stop order suspending the effectiveness of any
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are contemplated by the Commission; the Additional
Registration Statement (if any) satisfying the requirements of subparagraphs (1)
and (3) of Rule 462(b) was filed pursuant to Rule 462(b), including payment of
the applicable filing fee in accordance with Rule 111(a) or (b) under the Act,
prior to the time the Prospectus was printed and distributed to any Underwriter;
and, subsequent to the date[s] of the most recent financial statements in the
Prospectus, there has been no material adverse change, nor any development or
event involving a prospective material adverse change, in the condition
(financial or other), business, properties or results of operations of the
Company and its subsidiaries taken as a whole except as set forth in or
contemplated by the Prospectus or as described in such certificate.
(j) The Representatives shall have received a letter, dated
such Closing Date, of Arthur Andersen LLP which meets the requirements of
subsection (a) of this Section, except that the specified date referred to in
such subsection will be a date not more than three days prior to such Closing
Date for the purposes of this subsection.
The Company will furnish the Representatives with such conformed copies of such
opinions, certificates, letters and documents as the Representatives reasonably
request. CSFBC may in its sole discretion waive on behalf of the Underwriters
compliance with any conditions to the obligations of the Underwriters hereunder,
whether in respect of an Optional Closing Date or otherwise.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company will indemnify and hold harmless each
Underwriter, its partners, directors and officers and each person, if any, who
controls such Underwriter within the meaning of Section 15 of the Act, against
any losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based
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upon any untrue statement or alleged untrue statement of any material fact
contained in any Registration Statement, the Prospectus, or any amendment or
supplement thereto, or any related preliminary prospectus, or arise out of or
are based upon 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, and will reimburse each Underwriter for any legal or other expenses
reasonably incurred by such Underwriter in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses are
incurred; provided, however, that the Company will not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement in or omission
or alleged omission from any of such documents in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through the Representatives specifically for use therein, it being understood
and agreed that the only such information furnished by any Underwriter consists
of the information described as such in subsection (b) below.
(b) Each Underwriter will severally and not jointly indemnify
and hold harmless the Company, its directors and officers and each person, if
any who controls the Company within the meaning of Section 15 of the Act,
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any Registration Statement, the Prospectus, or any amendment or
supplement thereto, or any related preliminary prospectus, or arise out of or
are based upon the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished to
the Company by such Underwriter through the Representatives specifically for use
therein, and will reimburse any legal or other expenses reasonably incurred by
the Company in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred, it being understood
and agreed that the only such information furnished by any Underwriter consists
of the following information in the Prospectus furnished on behalf of each
Underwriter: the concession and reallowance figures appearing in the fourth
paragraph under the caption "Underwriting" and the information contained in the
seventh paragraph under the caption "Underwriting".
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under subsection (a) or (b) above, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under subsection (a) or (b) above. In case any such action is
brought against any indemnified party and it notifies the indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it may wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party (who shall not, except with the consent
of the
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indemnified party, be counsel to the indemnifying party), and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened action in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party unless such settlement includes an
unconditional release of such indemnified party from all liability on any claims
that are the subject matter of such action.
(d) If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of the losses,
claims, damages or liabilities referred to in subsection (a) or (b) above (i) in
such proportion as is appropriate to reflect the relative benefits received by
the Company on the one hand and the Underwriters on the other from the offering
of the Securities 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 the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities 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 proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company bear to the total underwriting discounts and commissions received
by the Underwriters. The 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 the Company or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The amount paid by an indemnified
party as a result of the losses, claims, damages or liabilities referred to in
the first sentence of this subsection (d) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any action or claim which is the subject of this
subsection (d). Notwithstanding the provisions of this subsection (d), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. 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 subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The obligations of the Company under this Section shall be
in addition to any liability which the Company may otherwise have and shall
extend, upon the same terms
17
<PAGE> 18
and conditions, to each person, if any, who controls any Underwriter within the
meaning of the Act; and the obligations of the Underwriters under this Section
shall be in addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to each
director of the Company, to each officer of the Company who has signed a
Registration Statement and to each person, if any, who controls the Company
within the meaning of the Act.
8. DEFAULT OF UNDERWRITERS. If any Underwriter or Underwriters default
in their obligations to purchase Offered Securities hereunder on either the
First or any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters are obligated to purchase on such Closing Date, CSFBC may
make arrangements satisfactory to the Company for the purchase of such Offered
Securities by other persons, including any of the Underwriters, but if no such
arrangements are made by such Closing Date, the non-defaulting Underwriters
shall be obligated severally, in proportion to their respective commitments
hereunder, to purchase the Offered Securities that such defaulting Underwriters
agreed but failed to purchase on such Closing Date. If any Underwriter or
Underwriters so default and the aggregate number of shares of Offered Securities
with respect to which such default or defaults occur exceeds 10% of the total
number of shares of Offered Securities that the Underwriters are obligated to
purchase on such Closing Date and arrangements satisfactory to CSFBC and the
Company for the purchase of such Offered Securities by other persons are not
made within 36 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Company, except
as provided in Section 9 (provided that if such default occurs with respect to
Optional Securities after the First Closing Date, this Agreement will not
terminate as to the Firm Securities or any Optional Securities purchased prior
to such termination). As used in this Agreement, the term "Underwriter" includes
any person substituted for an Underwriter under this Section. Nothing herein
will relieve a defaulting Underwriter from liability for its default.
9. SURVIVAL OF CERTAIN REPRESENTATIONS AND OBLIGATIONS. The respective
indemnities, agreements, representations, warranties and other statements of the
Company or its officers and of the several Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation, or statement as to the results thereof, made by or on behalf
of any Underwriter, the Company or any of their respective representatives,
officers or directors or any controlling person, and will survive delivery of
and payment for the Offered Securities. If this Agreement is terminated pursuant
to Section 8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company shall remain responsible for the
expenses to be paid or reimbursed by it pursuant to Section 5 and the respective
obligations of the Company and the Underwriters pursuant to Section 7 shall
remain in effect, and if any Offered Securities have been purchased hereunder
the representations and warranties in Section 2 and all obligations under
Section 5 shall also remain in effect. If the purchase of the Offered Securities
by the Underwriters is not consummated for any reason other than solely because
of the termination of this Agreement pursuant to Section 8 or the occurrence of
any event specified in clause (iii), (iv) or (v) of Section 6(c), the Company
will reimburse the
18
<PAGE> 19
Underwriters for all out-of-pocket expenses (including fees and disbursements of
counsel) reasonably incurred by them in connection with the offering of the
Offered Securities.
10. NOTICES. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed
to the Representative c/o Credit Suisse First Boston Corporation, Eleven Madison
Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking
Department--Transactions Advisory Group, or, if sent to the Company, will be
mailed, delivered or telegraphed and confirmed to it at New Era of Networks,
Inc., Attention: George F. ("Rick") Adam, 7400 East Orchard Road, Suite 230,
Englewood, Co 80111; provided, however, that any notice to an Underwriter
pursuant to Section 7 will be mailed, delivered or telegraphed and confirmed to
such Underwriter.
11. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 7, and no other
person will have any right or obligation hereunder.
12. REPRESENTATION OF UNDERWRITERS. The Representatives will act for
the several Underwriters in connection with this financing, and any action under
this Agreement taken by the Representatives will be binding upon all the
Underwriters.
13. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS.
The Company hereby submits to the non-exclusive jurisdiction of the
Federal and state courts in the Borough of Manhattan in The City of New York in
any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
19
<PAGE> 20
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of the
counterparts hereof, whereupon it will become a binding agreement between 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 Underwriting Agreement is
hereby confirmed and accepted as of the
date first above written.
CREDIT SUISSE FIRST BOSTON CORPORATION
SG COWEN SECURITIES CORPORATION
SOUNDVIEW FINANCIAL GROUP, INC.
VOLPE BROWN WHELAN & COMPANY, LLC
WARBURG DILLON READ, LLC
Acting on behalf of themselves and as
the Representatives of the several
Underwriters
BY CREDIT SUISSE FIRST BOSTON CORPORATION
By
-------------------------------------
Title:
---------------------------------
20
<PAGE> 21
SCHEDULE A
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF
----------- FIRM SECURITIES
---------------
<S> <C>
Credit Suisse First Boston Corporation ..................
SG Cowen Securities Corporation
SoundView Financial Group, Inc.
Volpe Brown Whelan & Company, LLC
Warburg Dillon Read LLC
---------
Total......................... 4,000,000
=========
</TABLE>
A-1
<PAGE> 22
APPENDIX A
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) Century Analysis Incorporated ("CAI") has been duly organized
and is validly existing as a corporation, and is in good standing under, the
laws of the State of California, with corporate power and authority to own or
lease its properties and to conduct its business as it is currently being
conducted. The outstanding shares of CAI have been duly authorized and validly
issued, are fully paid and nonassessable and are owned of record, directly or
indirectly, by New Era of Networks, Inc, a Delaware corporation, and to our
knowledge, are fee and clear of all liens encumbrances and security interests.
To our knowledge, no options, warrants or other rights to purchase, agreements
or other obligations to issue or other rights to convert any obligations into
any shares of capital stock or ownership interests in CAI are outstanding.
(c) The Company has all requisite corporate power and authority to
own, lease and operate its properties and to conduct its business as described
in the Prospectus, except where failure to have such power and authority would
not have a Material Adverse Effect; 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;
(d) The authorized, issued and outstanding shares of capital stock
of the Company is as set forth under the caption "Capitalization" in the
Prospectus as of each date stated therein; 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 which has not been subsequently cured
or waived;
(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 the stockholders of the Company do not have any
preemptive right, or to our knowledge, 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
A-2
<PAGE> 23
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, 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;
(i) The form of certificate evidencing the Common Stock complies
with the applicable provisions of Delaware law;
(j) 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 be
described in the Registration Statement or the Prospectus that are not described
or referred to therein as required;
(k) 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 restated certificate of incorporation, as
amended (the "Certificate of Incorporation"), or bylaws of the Company, (b)
conflict with or result in the breach of any term or provision of, or constitute
a default under, any agreement filed as an exhibit to the Registration
Statement, or any statute, rule or regulation known to us which is applicable to
the Company (except that no opinion need to be expressed with respect to
compliance with federal and state securities laws) or (c) 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 (d) to our
knowledge, conflict with or result in a violation or breach of, or constitute a
default under, any applicable judgment, order, writ or decree of any court or
governmental agency or body binding upon or applicable to the Company;
(l) No authorization, approval, consent, order, designation or
declaration of or filing by or with any governmental authority or agency is
necessary for the execution and delivery or performance of this Agreement or 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;
(m) The Company is not in violation of its Certificate of
Incorporation or, to our knowledge, bylaws;
(n) To our knowledge, except as set forth in the Registration
Statement and Prospectus, there are no pending or threatened actions, suits,
claims, proceedings or investigations that, if successful,
A-3
<PAGE> 24
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 that is not so disclosed;
(o) 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; and
(p) The Company will not, upon consummation of the transactions
contemplated by this Agreement, be an "investment company," or controlled by an
"investment company" as such term is 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 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.
A-4
<PAGE> 25
APPENDIX B
OPINION OF TRADEMARK COUNSEL TO THE COMPANY
We have reviewed the statements regarding trademark 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; Risks of Infringement" and "Business -- Intellectual Property,
Proprietary Rights and Licenses" and such statements accurately summarize the
matters described therein. 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> 26
APPENDIX C
OPINION OF PATENT COUNSEL TO THE COMPANY
We have reviewed the statements regarding patents, patent claims 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; Risks of Infringement" and "Business -- Intellectual Property,
Proprietary Rights and Licenses" and such statements accurately summarize the
matters described therein. 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.
2
<PAGE> 27
APPENDIX D
OPINION OF CLYDE & CO
New Era of Networks Limited has been duly organized and is validly existing as a
corporation in good standing under the laws of England, with corporate power and
authority to own or lease its properties and to conduct its business as it is
currently being conducted. The outstanding shares of capital stock of New Era of
Networks Limited have been duly authorized and validly issued, are fully paid
and nonassessable and are owned of record, directly or indirectly, by New Era of
Networks, Inc., a Delaware corporation, and to our knowledge, are free and clear
of all liens, encumbrances and security interests. To our knowledge, no options,
warrants or other rights to purchase, agreements or other obligations to issue
or other rights to convert any obligations into any shares of capital stock or
ownership interests in New Era of Networks are outstanding.
3
<PAGE> 1
EXHIBIT 5.1
[WILSON SONSINI GOODRICH & ROSATI LETTERHEAD]
November 18, 1998
New Era of Networks, Inc.
7400 East Orchard Road, Suite 230
Englewood, CO 80111
RE: REGISTRATION STATEMENT ON FORM S-3
Ladies and Gentlemen:
We are acting as your counsel in connection with the Registration Statement
on Form S-3 to be filed by you with the Securities and Exchange Commission on
November 18, 1998 (Registration No. 333- ) (the "Registration Statement"), in
connection with the registration under the Securities Act of 1933, as amended,
of up to 4,600,000 shares of your Common Stock, $0.0001 par value per share (the
"Shares"). The Shares include an over-allotment option granted to the
underwriters of the offering to purchase 600,000 shares. We understand that the
Shares are to be sold to the underwriters of the offering for resale to the
public as described in the Registration Statement. As your legal counsel, we
have examined the proceedings taken, and are familiar with the proceedings
proposed to be taken, by you in connection with the sale and issuance of the
Shares.
It is our opinion that, upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, including the proceedings being taken in order to permit such
transaction to be carried out in accordance with applicable state securities
laws, the Shares, when issued and sold in the manner described in the
Registration Statement and in accordance with the resolutions adopted by the
Board of Directors of the Company, will be legally and validly issued, fully
paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part thereof,
and any amendments thereto.
Very truly yours,
/s/ WILSON SONSINI GOODRICH & ROSATI
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our Firm included in or made part of this Registration
Statement.
/s/ ARTHUR ANDERSEN LLP
-----------------------
ARTHUR ANDERSEN LLP
Denver, Colorado
November 18, 1998
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
New Era of Networks, Inc. on Form S-3 of our report dated September 30, 1998
(relating to the financial statements of Century Analysis Incorporated as of and
for the years ended December 31, 1997 and 1996) appearing in the Current Report
of New Era of Networks, Inc. on Form 8-K/A and to the reference to us under the
heading "Experts" in the Prospectus, which is part of this Registration
Statement.
/s/ DELOITTE & TOUCHE LLP
- --------------------------
DELOITTE & TOUCHE LLP
San Francisco, California
November 18, 1998
