<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1998
REGISTRATION NO. 333- --
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NEW ERA OF NETWORKS, INC.
(Exact name of registrant as specified in its charter)
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<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>
<S> <C>
MARK A. BERTELSEN, ESQ.
ROBERT M. TARKOFF, ESQ.
DAVID M. CAMPBELL, ESQ. MICHAEL L. PLATT, ESQ.
MICHAEL S. ELLIS, ESQ. LAURA M. MEDINA, 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
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<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock..................... 3,450,000 shares $26.125 $90,131,250 $26,589
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</TABLE>
(1) Includes 450,000 shares of Common Stock which may be purchased by the
Underwriters to cover over-allotments, if any.
(2) Estimated pursuant 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 April 24, 1998 in
accordance with Rule 457 under the Securities Act of 1933.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT
BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY
SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
Subject to Completion Dated April 30, 1998
PROSPECTUS
3,000,000 Shares
[NEON LOGO]
Common Stock
-----------------------
Of the 3,000,000 shares of Common Stock offered hereby, shares
are being sold by New Era of Networks, Inc. ("NEON" or the "Company") and
shares are being sold by the Selling Stockholders. The Company will
not receive any proceeds from the sale of shares by the Selling Stockholders.
The Company's Common Stock is quoted on the NASDAQ National Market under the
symbol "NEON." On April 29, 1998, the last reported sale price of the Common
Stock was $25.50 per share. See "Price Range of Common Stock."
The Common Stock offered hereby involves a high degree of risk. See
"Risk Factors," beginning on page 6.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Price to Underwriting Discounts Proceeds to Proceeds to Selling
Public and Commissions [1] Company [2] Stockholders
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<S> <C> <C> <C> <C>
Per Share............ $ $ $
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Total [3]............ $ $ $
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1. For information regarding indemnification of the Underwriters, see
"Underwriting."
2. Before deducting expenses of the offering payable by the Company, estimated
at $500,000.
3. The Company has granted the Underwriters an option, exercisable within 30
days from the date hereof, to purchase up to 450,000 additional shares of
Common Stock on the same terms and conditions set forth above, solely to
cover over-allotments, if any. If such option is exercised in full, the
total Price to Public will be $ , the Underwriters' Discounts and
Commissions will be $ and the Proceeds to Company will be $ .
See "Underwriting."
-----------------------
The shares of Common Stock offered by the Underwriters are subject to prior
sale, receipt and acceptance by them and are subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that delivery of such shares will be made through the
offices of UBS Securities LLC, 299 Park Avenue, New York, New York, on or about
, 1998.
-----------------------
UBS SECURITIES
COWEN & COMPANY
BANCAMERICA ROBERTSON STEPHENS
SOUNDVIEW FINANCIAL GROUP, INC.
, 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 NEONet Solution: showing a graphical depiction of the
NEONet rules engine between disparate application systems.
<PAGE> 4
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."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
<PAGE> 5
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information, including "Risk Factors" and
the Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Prospectus.
THE COMPANY
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, Enterprise Business
Applications, Application Integration Libraries and Tools and Utilities. With
the acquisition of Menhir Limited ("Menhir") in September 1997, the Company
increased its international presence and added to its product portfolio Rapport,
a customer management and contact information system developed primarily for the
banking industry.
Organizations are increasingly seeking to integrate powerful new software
applications that operate across the enterprise and also serve as interfaces to
customers and suppliers. At the same time, organizations are seeking to better
leverage their existing information systems and take advantage of their prior
technology investments by integrating previously independent application systems
and databases. Effective application integration strategies are critical to an
organization's ability to respond to changing market demands, seize new market
opportunities, improve customer service and realize planned improvements in
business processes. Organizations have historically addressed the need to
integrate applications through a number of limited integration techniques,
typically implemented in an ad hoc manner, addressing specific integration
requirements as they arise over time. Accordingly, traditional techniques
generally require extensive manual custom software coding, provide limited
functionality, flexibility and scaleability, and require a costly and burdensome
ongoing maintenance process. According to Gartner Group, Inc., an information
technology industry research firm, 35% to 40% of all programming effort in a
typical organization is devoted to developing and maintaining the extract and
update programs whose only purpose is to transfer information between different
databases. The Gartner Group refers to the complex morass of individual
unstructured integration among disparate applications as "interapplication
spaghetti."
In January 1996, the Company introduced NEONet, an integrated solution that
addressed the interapplication spaghetti problem and provided a scaleable
infrastructure that supported rapid and efficient updates to integration
implementations. The NEONet solution provides a comprehensive platform for EAI,
including a family of software products for high-quality, high-performance
development and ongoing management of application integration among disparate
systems. NEONet consists of the following four main product categories for
Enterprise Application Integration: (i) Enterprise Integration Engine,
MQIntegrator, provides a robust messaging and queuing foundation that supports
asynchronous interprocess and cross-platform communication, delivering superior
synchronization and recoverability; (ii) Business Applications provide a
comprehensive set of software solutions that enable applications to interoperate
seamlessly, easily and efficiently; (iii) Application Integration Libraries
pre-load leading packaged software format libraries from specific packaged
applications into the Formatter, further enhancing the ease of installing and
integrity of these applications; (iv) Tools and Utilities provide several
extension tools and utilities to facilitate EAI, including NEONweb,
NEONreplication, NEONmsgtrak and NEONaccess.
NEON's objective is to establish NEONet as the leading standard for
application integration across the enterprise. Key elements of the Company's
strategy include leveraging strategic relationships, expanding into additional
vertical markets, developing cross-industry applications, expanding global sales
capabilities and maintaining technological leadership. Through March 31, 1998,
the Company shipped products or provided services to approximately 160 customers
worldwide. Representative customers of the Company include Abbey National
Treasury Services, Aetna, Inc., Chase Manhattan Bank, CIGNA Corporation,
Citibank, Disclosure Incorporated, Discover Brokerage Direct, Eaton Corporation,
GTE Corporation, JP Morgan & Co., Merrill
3
<PAGE> 6
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Physicians
Computer Network, Monsanto Company, State Street Global Advisors, and Sumitomo
Bank of California. As part of its strategy, the Company has established
reseller and joint marketing relationships with IBM, PeopleSoft, Inc., Candle
Corporation, Sun Microsystems, Inc., Hewlett-Packard Company, SAP AG, Ernst &
Young, SunGard Financial Systems, Scopus Technology, Inc., Oracle Corporation,
Tandem/Compaq and NIWS (Japan).
The Company was incorporated in Illinois in June 1993, commenced operations
in January 1994, and was reincorporated in Delaware in December 1995. Unless the
context otherwise requires, references in this Prospectus to "NEON" or the
"Company" refer to New Era of Networks, Inc., a Delaware corporation and its
subsidiaries. The Company's principal executive offices are located at 7400 East
Orchard Road, Suite 230, Englewood, Colorado 80111. Its telephone number is
(303) 694-3933.
THE OFFERING
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<S> <C>
Common Stock Offered by the Company................. 1,900,000 shares
Common Stock Offered by the Selling Stockholders.... 1,100,000 shares
Common Stock to be Outstanding after the Offering... 11,113,666 shares(1)
Use of proceeds..................................... General corporate purposes, including
working capital. See "Use of Proceeds."
NASDAQ National Market Symbol....................... NEON
Risk Factors........................................ The Common Stock offered hereby involves a
high degree of risk. See "Risk Factors."
</TABLE>
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(1) Based upon shares outstanding as of March 31, 1998 (assuming no exercise of
options after March 31, 1998). Excludes (i) 2,649,999 shares of Common Stock
reserved for issuance pursuant to the Company's employee benefit plans,
under which options to purchase 2,177,985 shares of Common Stock were
outstanding as of March 31, 1998 at a weighted average exercise price of
$9.09.
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4
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- ----------------------
1995 1996 1997(1) 1997 1998
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Software licenses........................... $ -- $ 3,383 $ 15,970 $ 2,447 $ 6,573
Services and maintenance.................... 1,271 3,762 6,676 1,227 3,009
------- ------- ------- ------- -------
Total revenues................................ 1,271 7,145 22,646 3,674 9,582
Cost of revenues.............................. 751 3,328 5,343 1,050 1,748
------- ------- ------- ------- -------
Gross profit................................ 520 3,817 17,303 2,624 7,834
Income (loss) from operations................. (1,490) (5,733) (4,251) (783) 496
Net income (loss)............................. $ (1,503) $ (5,672) $ (3,507) $ (784) $ 792
Net income (loss) per common share, basic..... $ (1.15) $ (4.19) $ (0.64) $ (0.57) $ 0.09
Net income (loss) per common share, diluted... $ (1.15) $ (4.19) $ (0.64) $ (0.57) $ 0.08
Weighted average shares of Common Stock
outstanding, basic(2)....................... 1,308,997 1,353,276 5,479,151 1,375,606 9,154,642
Weighted average shares of Common Stock
outstanding, diluted(2)..................... 1,308,997 1,353,276 5,479,151 1,375,606 10,166,297
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1998
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ACTUAL AS ADJUSTED(3)
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<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments......... $22,724 $21,032 $67,564
Working capital........................................... 30,987 31,827 78,359
Total assets.............................................. 40,229 40,846 87,378
Stockholders' equity...................................... 34,731 36,354 82,886
</TABLE>
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(1) Results include a $2.6 million charge for acquired in-process research and
development.
(2) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the weighted average common shares outstanding used to compute net income
(loss) per share.
(3) Reflects the sale of 1,900,000 shares of Common Stock offered by the Company
hereby at an assumed public offering price of $26.125 per share, after
deducting estimated underwriting discounts and commissions and estimated
offering costs payable by the Company, and the application of the net
proceeds therefrom. See "Capitalization" and "Use of Proceeds."
---------------------------
Unless otherwise indicated, the information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option.
This Prospectus includes trademarks of the Company and other companies.
5
<PAGE> 8
RISK FACTORS
In addition to the other information contained in this Prospectus,
investors should carefully consider the following risk factors before making an
investment decision concerning the Common Stock. All statements, trend analysis
and other information contained in this Prospectus relative to markets for the
Company's products and trends in revenues, gross margin and anticipated expense
levels, as well as other statements including words such as "anticipate,"
"believe," "plan," "estimate," "expect" and "intend" and other similar
expressions, constitute forward-looking statements. These forward-looking
statements are subject to business and economic risks and uncertainties, and the
Company's actual results of operations may differ materially from those
contained in the forward-looking statements. Factors that may cause such a
difference include, but are not limited to, those discussed below and in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Uncertainty of Future Operating Results; Lengthy Sales Cycle; Fluctuations
in Quarterly Results. Although the Company has experienced significant revenue
growth in recent periods, such growth rates will not be sustainable and are not
necessarily indicative of future operating results and operating margins. The
Company's quarterly operating results have fluctuated significantly in the past
and may vary significantly in the future. Future operating results will depend
on many factors, including, among others, the growth of the EAI software market,
the size and timing of software licenses, the delay or deferral of customer
implementations, the ability of the Company to maintain or increase market
demand for the Company's products, the timing of new product announcements and
releases by the Company, competition by existing and emerging competitors in the
application integration software market, the ability of the Company to expand
its direct sales force and develop indirect distribution channels, the Company's
success in developing and marketing new products and controlling costs,
budgeting cycles of customers, product life cycles, software defects and other
product quality problems, the mix of products and services sold, decreased
margins associated with higher expenses of subcontract labor, international
operations, uncertainties in revenue recognition associated with adoption of
Statement of Position ("SOP") 97-2, and general domestic and international
economic and political conditions. A significant portion of the Company's
revenues has been, and the Company believes will continue to be, derived from a
small number of relatively large customer contracts or arrangements, and the
timing of revenue recognition from such contracts and arrangements has caused
and may continue to cause material fluctuations in the Company's operating
results, particularly on a quarterly basis. For example, in the fourth quarter
of 1997 the Company's largest customer accounted for approximately 14% of the
Company's total revenues, and in the first quarter of 1998 its largest customer
accounted for approximately 10% of the Company's total revenues. See
"-- Customer Concentration; Dependence Upon Financial Institutions Industry;
Risks of New Targeted Market Segments." Quarterly revenues and operating results
typically depend upon the volume and timing of customer contracts received
during a given quarter, and the percentage of each contract which the Company is
able to recognize as revenue during each quarter, each of which is difficult to
forecast. In addition, as is common in the software industry, a substantial
portion of the Company's revenues in a given quarter historically have been
recorded in the third month of that quarter, with a concentration of such
revenues in the last two weeks of the third month. To the extent this trend
continues, any failure or delay in the closing of orders during the last part of
any given quarter will have a material adverse effect on the Company's business,
financial condition and results of operations.
In addition, the timing of license revenue is difficult to predict because
of the length and variability of the Company's sales cycle. The purchase of the
Company's products by its customers typically involves a significant technical
evaluation and commitment of capital and other resources, with the attendant
delays frequently associated with customers' internal procedures to approve
large capital expenditures and to test, implement and accept new technologies
that affect key operations. This evaluation process frequently results in a
lengthy sales process of several months and subjects the sales cycle associated
with the purchase of the Company's products to a number of significant risks,
including customers' budgetary constraints and internal acceptance reviews. The
length of the Company's sales cycle may vary substantially from customer to
customer, particularly for customers within different vertical market segments.
See "Business -- Sales and Marketing." The Company's operating expense levels
are relatively fixed and are based in part on expectations of future revenues.
Consequently, any delay in the recognition of revenue from quarter to quarter
could result in operating losses. To the extent that such operating expenses
precede, or are not subsequently followed by, increased revenues, the Company's
operating results would be materially adversely affected.
6
<PAGE> 9
As a result of these and other factors, the Company believes that
period-to-period comparisons of its historical results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. It is possible that the Company's future quarterly operating
results from time to time may not meet the expectations of stock market analysts
or investors, which would likely have an adverse effect on the market price of
the Company's Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Limited Operating History; History of Operating Losses; Accumulated
Deficit. The Company was formed in 1993, and installed NEONet at its first
customer site in January 1996. The Company commenced shipment of its principal
product, NEONet, in July 1996. Accordingly, the Company has only a limited
operating history upon which an evaluation of the Company and its prospects can
be based. Prior to 1996, the Company recorded only nominal product revenue, and
the Company has not been profitable on an annual basis. At March 31, 1998, the
Company had an accumulated deficit of approximately $10.7 million. The Company's
prospects must be evaluated in light of the risks, uncertainties, expenses and
difficulties frequently encountered by companies in the early stage of their
development. The new and rapidly evolving markets in which the Company operates
makes these risks, uncertainties, expenses and difficulties particularly
pronounced. In order to address these risks and uncertainties the Company must,
among other things, successfully implement its sales and marketing strategy,
expand its direct sales channels, develop its indirect distribution channels,
respond to competitive and other developments in the application integration
software market, attract and retain qualified personnel, continue to develop and
upgrade its products and technology more rapidly than competitors, and
commercialize its products and services that incorporate existing and future
technologies. There can be no assurance that the Company will be able to
successfully implement any of its strategies or successfully address these risks
and uncertainties, or that the Company will be profitable in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Customer Concentration; Dependence Upon Financial Institutions Industry;
Risks of New Targeted Market Segments. In fiscal 1997, the Company's top ten
customers accounted for 56% of total revenues. For the quarter ended December
31, 1997 and the first quarter of 1998, the Company's largest customer accounted
for approximately 14% and 10%, respectively, of the Company's total revenues. In
addition, to date the Company's revenues have been derived primarily from sales
to large banks and financial institutions, which accounted for 72% of total
revenues for the year ended December 31, 1997. In the first quarter of 1998,
sales to banks and financial institutions accounted for approximately 44% of
total revenues. This decline in the concentration of sales to banks and
financial institutions was primarily the result of an increase in indirect
channel license revenues, which accounted for 32% of total revenues in the first
quarter of 1998. There can be no assurance that these customers or other
customers of the Company will continue to purchase the Company's products in the
future. The Company's failure to add new customers that make significant
purchases of the Company's products and services would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company has limited experience in marketing its products to customers
outside of the financial institutions industry. The additional market segments
currently targeted by the Company are likely to have significantly different
market characteristics than the financial institutions segment, and licensing
NEONet products in such other segments may require pricing structures, sales
methods, sales personnel, consulting services and customer support that differ
from those previously used by the Company. There can be no assurance that the
Company will be successful in achieving significant market acceptance or
penetration in the additional segments targeted by the Company. If the Company
is unsuccessful in penetrating additional vertical market segments, its future
growth, financial condition and results of operations will be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Customers."
Product Concentration. A substantial portion of the Company's revenues have
been attributable to licenses of NEONet and related services. The Company
currently expects that revenues attributable to NEONet and related services will
continue to account for a substantial majority of the Company's revenues at
least through 1998. Accordingly, the Company's future operating results will be
dependent upon the level of market acceptance of, and demand for, NEONet. The
Company's future performance will, to a large extent, depend upon the
7
<PAGE> 10
successful development, introduction and customer acceptance of new and enhanced
releases of NEONet and other products. There can be no assurance that the
Company's products will achieve continued market acceptance or that the Company
will be successful in marketing any new or enhanced products. In the event that
the Company's current or future competitors release new products that have more
advanced features, offer better performance or are more price competitive than
NEONet, demand for the Company's products may decline. A decline in demand for
NEONet as a result of competition, technological change or other factors would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Products and Services" and
"Business -- Product Development."
Integration of Acquisitions and Joint Ventures. In September 1997, the
Company acquired Menhir through its wholly-owned subsidiary, New Era of Networks
Limited, and may from time to time acquire companies with complementary products
and services in the application integration or other related software markets.
The Company's acquisition of Menhir will, and any future acquisitions may expose
the Company to increased risks, including those associated with the assimilation
of new operations and personnel, the diversion of financial and management
resources from existing operations, and the inability of management to
successfully integrate acquired businesses, personnel and technologies.
Furthermore, there can be no assurance that the Company will be able to generate
sufficient revenues from any such acquisition to offset associated acquisition
costs, or that the Company will be able to maintain uniform standards of quality
and service, controls, procedures and policies, which may result in the
impairment of relationships with customers, employees, and new management
personnel. Certain acquisitions may also result in additional stock issuances
which could be dilutive to the Company's stockholders. The Company may also
evaluate, on a case-by-case basis, joint venture relationships with
complementary businesses. Any such joint venture investment would involve many
of the same risks posed by acquisitions, particularly those risks associated
with the diversion of resources, the inability to generate sufficient revenues,
the management of relationships with third parties, and potential additional
expenses, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Risks Associated with Expanding Distribution; Indirect Distribution Channel
Risks. To date, the Company has sold its products primarily through the
Company's direct sales force and has supported its customers with its technical
and customer support staff. The Company's commissioned sales force has increased
from one person in January 1996 to 25 people as of March 31, 1998. The Company's
ability to achieve significant revenue growth in the future will depend in large
part on its ability to recruit and train sufficient direct sales, technical and
customer personnel, particularly additional sales personnel focusing on the new
vertical market segments targeted by the Company's marketing strategy. The
Company has at times experienced and continues to experience difficulty in
recruiting qualified sales, technical and support personnel. The inability of
the Company to rapidly and effectively expand its direct sales force and its
technical and support staff could materially adversely affect the Company's
business, financial condition and operating results.
The Company believes that future growth also will depend upon its success
in developing and maintaining strategic relationships with distributors,
resellers, and systems integrators. The Company's strategy is to continue to
increase the proportion of customers served through these indirect channels.
Although sales through indirect channels accounted for less than 10% of total
revenues in 1997, indirect sales increased to approximately 15% of total
revenues in the fourth quarter of 1997 and to approximately 32% in the first
quarter of 1998. The Company is currently investing, and plans to continue to
invest, significant resources to develop the indirect channel, which could
adversely affect the Company's operating results if the Company's efforts do not
generate license and service revenues necessary to offset such investment. The
Company's inability to recruit and retain qualified distributors, resellers and
systems integrators could adversely affect the Company's results of operations.
The Company's success in selling into indirect distribution channels could also
adversely affect the Company's average selling prices and result in lower gross
margins, since lower unit prices are typically charged on sales through indirect
channels. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations;" and "Business -- Sales and Marketing."
Risks Associated with International Operations. Sales of the Company's
products outside of North America in the fourth quarter of 1997 and the first
quarter of 1998 represented approximately 29% and 34%, respectively, of total
revenues, increasing from approximately 28% in fiscal year 1997. The Company
continues to expand its international operations, and these efforts require
significant management attention and financial resources, as
8
<PAGE> 11
well as the development of international versions of the Company's products. The
Company has committed resources to the opening of international sales offices
and the expansion of international sales and support channels. There can be no
assurance that the Company's efforts to develop and expand international sales
and support channels will be successful. International sales are subject to a
number of risks, including longer payment cycles, unexpected changes in
regulatory requirements, import and export restrictions and tariffs,
difficulties in staffing and managing foreign operations, the burden of
complying with a variety of foreign laws, greater difficulty in accounts
receivable collection, potentially adverse tax consequences, currency
fluctuations, the imposition of currency exchange or price controls, and
political and economic instability abroad. Additionally, intellectual property
may be more difficult to protect outside of the United States. If the Company
increases its international sales, its total revenues may also be affected to a
greater extent by seasonal fluctuations resulting from lower sales that
typically occur during the summer months in Europe and other parts of the world.
In addition, the market for application integration software outside of North
America is not as developed and there can be no assurance that it will grow at
the same rate as in North America or that, if it does develop rapidly, the
Company will be successful in such international markets.
Competition. The market for the Company's products is intensely competitive
and is expected to become increasingly competitive as current competitors expand
their product offerings and new competitors enter the market. The Company's
current competitors include a number of companies offering one or more solutions
to the application integration problem, some of which are directly competitive
with the Company's products.
To date, the Company has faced competition and sales resistance from the
internal information technology departments of potential customers that have
developed or may develop in-house systems that may substitute for those offered
by the Company. The Company expects that internally developed application
integration systems will continue to be a principal source of competition for
the foreseeable future. In particular, the Company has had difficulties making
sales to organizations whose internal development groups have already progressed
significantly toward completion of systems that the Company's products might
replace, or where the underlying technologies used by such groups differ
fundamentally from the Company's products.
The Company's competitors also include software vendors targeting the
enterprise-wide application integration market through various technological
solutions. For example, Microsoft, BEA Systems and others provide messaging and
queuing solutions that compete with the NEONet Messaging and Queuing module. In
the future these vendors could elect to provide a more complete integration
solution that would also compete with NEONet's dynamic formatting and
rules-based engine modules. In addition, a large number of other companies
provide alternative solutions to application integration utilizing other
technologies such as data synchronization, transaction monitoring, and
subject-based publish/subscribe messaging systems. The Company also faces
competition from relational database vendors such as Oracle, Informix, Sybase
and Microsoft. In addition, NEON faces competition from vendors offering EAI
capabilities, including TSI International Software Ltd., Active Software and
Vitria Technology, Inc.
The Company 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 a better position than the Company to devote significant
resources toward the development, promotion and sale of
9
<PAGE> 12
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. See "Business -- Competition."
Fixed-Price Development and Service Contracts. The Company offers
development and consulting services to its customers. Typically, the Company
enters into service agreements with its customers on a "time and materials"
basis. Certain customers have asked for, and the Company has from time to time
entered into, fixed-price service contracts. These contracts may specify certain
milestones to be met by the Company regardless of actual costs incurred by the
Company in fulfilling these obligations. Certain of these fixed price contracts
provide for significant potential revenue, which if not completed in a timely
manner would delay the timing of or reduce the total amount of revenue
recognized by the Company. Such delay or reduction could have a material adverse
effect on the Company's financial results. There can be no assurance that the
Company can successfully complete these contracts on budget, and the Company's
inability to do so could have a material adverse effect on its business,
financial condition and results of operations.
Management of Growth. The Company is currently experiencing a period of
rapid growth that has placed and is expected to continue to place a strain on
the Company's administrative, financial and operational resources. From January
1, 1996 through March 31, 1998, the size of the Company's staff increased from
35 to 255 full time equivalent employees. Except for George F. (Rick) Adam, Jr.,
the Company's Chief Executive Officer, and Harold A. Piskiel, the Company's
Chief Technology Officer, all of the Company's senior management joined the
Company in 1996 or 1997. In addition, the Company has expanded geographically by
adding sales personnel in New York City, Chicago, San Francisco, Philadelphia,
Boston, Atlanta, London, England and Sydney, Australia. The Company may further
expand into these regions or into others through internal growth or through
acquisitions of related companies and technologies. Such expansion may strain
management's ability to successfully integrate its operations throughout these
regions. Any additional growth within a short time period may divert management
attention from day-to-day operations, which could have a material adverse effect
on the Company's business, financial condition, and results of operations.
The Company's ability to manage its staff and facilities growth effectively
will require it to continue to improve its operational, financial and management
controls, reporting systems and procedures, to install new management
information and control systems and to expand, train, motivate and manage its
work force. In particular, the Company is currently migrating its existing
accounting software to a packaged application, which will allow greater
flexibility in reporting and tracking results. There can be no assurance that
the Company will install such software package in an efficient and timely manner
or that the new systems will be adequate to support the Company's level of
operations. If the Company's management is unable to manage growth effectively
and new employees are unable to achieve targeted performance levels, the
Company's business, financial condition and results of operations would be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Dependence Upon Emerging Market for Application Integration Software.
Substantially all of the Company's revenues to date have been attributable to
sales of application integration software products and services, and the Company
expects that substantially all revenues in the foreseeable future will be
derived from such products. The market for application integration software is
relatively new and emerging. The Company's future financial performance will
depend, to a large extent, on continued growth in the number of organizations
demanding software and services for application integration and seeking outside
vendors to develop, manage and maintain the integration software used for their
mission-critical applications. Many potential customers for third-party
application integration software have made significant investments in internally
developed integration
10
<PAGE> 13
systems, and are highly dependent upon the continued use of such internally
developed systems. The dependence of organizations on such internally developed
systems coupled with the significant costs required to shift to third-party
products may substantially inhibit future demand for third-party application
integration software products, such as those offered by the Company. There can
be no assurance that the market for application integration software products
and services will continue to grow. If the application integration market fails
to grow or grows more slowly than the Company currently anticipates, the
Company's business, financial condition and results of operations would be
materially adversely affected.
The Company intends to continue to devote considerable resources educating
potential customers about application integration software. Even if a sizable
market for third-party application integration continues to develop, there can
be no assurance that such expenditures or any other marketing efforts will
enable the Company's products to achieve or sustain significant market
acceptance. If the Company is unsuccessful in establishing broad market
acceptance for its current and future products, the Company's future growth,
financial condition and results of operations will be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Research and Development."
Rapid Technological Change; Platform Coverage; Dependence on New Products.
The market in which the Company competes is characterized by rapid technological
change, frequent new product introductions and enhancements, changes in customer
demands and evolving industry standards. The introduction of products
incorporating new technologies and the emergence of shifting customer
requirements, or changing industry standards, could render certain of the
Company's existing products obsolete. The technological life cycles of the
Company's products are difficult to estimate, and may vary across vertical
market segments. The Company's future success will depend upon its ability to
continue to enhance its current product line and to continue to develop and
introduce new products that keep pace with competitive and technological
developments. Such developments will require the Company to continue to make
substantial product development investments.
The Company currently serves, and intends to continue to serve, a customer
base with a wide variety of hardware, software, database, and networking
platforms. To gain broad market acceptance, the Company believes that in the
future it must support the NEONet product suite on a variety of platforms.
The success of the Company's products will depend on various factors,
including the ability to integrate the Company's products with multiple
platforms as compared to competitive offerings, the portability of the Company's
products, particularly the number of hardware platforms, operating systems and
databases that the Company's products can source or target, the integration of
additional software modules under development with existing products, and the
Company's management of software development being performed by third party
developers. There can be no assurance that the Company will be successful in
developing and marketing product enhancements or new products that respond to
these technological changes, shifting customer tastes, or evolving industry
standards, or that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and marketing of these
products. If the Company is unable to develop and introduce new products or
enhancements of existing products in a timely manner or if the Company
experiences delays in the commencement of commercial shipments of new products
and enhancements, the Company's business, operating results and financial
condition would be materially adversely affected. See "Business -- Product
Development."
Risk of Software Defects. Software products as complex as those offered by
the Company frequently contain undetected errors or defects, especially when
first introduced or when new versions or enhancements are released. Testing of
the Company's products is particularly challenging because it is difficult to
simulate the wide variety of computer environments into which the Company's
application integration software is deployed. Despite product testing by the
Company and its customers, the Company has in the past shipped product releases
of NEONet with some defects and has discovered other software errors in its
products after their commercial shipment. There can be no assurance that,
despite testing by the Company and by current and potential customers, defects
and errors will not be found in new products or in new versions or enhancements
of existing products after commencement of commercial shipments. Although
defects have not materially and adversely affected the Company's operating
results to date, any defects discovered in the future could result in adverse
customer reaction, negative publicity regarding the Company, its products or
delay in or failure to achieve market
11
<PAGE> 14
acceptance, any of which could have a material adverse effect upon the Company's
business, operating results and financial condition. See "Business -- Research
and Development."
Dependence on Relationships with Complementary Vendors. The Company
believes that, in order to provide competitive solutions for heterogeneous, open
computing environments, it will be necessary to develop, maintain and enhance
close relationships with a wide range of vendors, including database, ERP,
supply chain and Electronic Data Interchange (EDI) software vendors, as well as
hardware and operating system vendors. There can be no assurance that the
Company will be able to maintain its existing relationships or develop
additional relationships with such vendors. The Company's failure to do so could
adversely affect the portability of the Company's products to existing and new
platforms and databases and the timing of the release of new and enhanced
products for the marketplace by the Company.
Dependence on Key Personnel; Ability to Attract and Retain Personnel. The
Company's future success will depend in large part upon the continued service of
its key technical, sales and senior management personnel, none of whom is bound
by an employment agreement. The loss of any of the Company's senior management
or other key research, development, sales and marketing personnel, particularly
if lost to competitors, could have a material adverse effect on the Company's
business, financial condition and results of operations. In particular, the
Company's Chief Executive Officer, George F. (Rick) Adam and Harold A. Piskiel,
Chief Technology Officer of the Company, would be difficult to replace. The
Company's future success will depend in large part upon its ability to attract,
retain and motivate highly skilled employees. There is significant competition
for employees with the skills required to perform the services offered by the
Company and there can be no assurance that the Company will be able to continue
to attract and retain sufficient numbers of highly skilled employees. Because of
the complexity of the application integration software market, the Company has
in the past experienced, and expects in the future to experience, a significant
time lag between the date on which technical and sales personnel are hired and
the time at which 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. See "Management."
Protection of Intellectual Property; Risks of Infringement. The Company's
success and ability to compete is dependent in part upon its proprietary
technology. The Company relies on a combination of copyright, trademark and
trade secret laws, as well as confidentiality agreements and licensing
arrangements, to establish and protect its proprietary rights. The Company
presently has no patents, but has three patent applications pending. Despite the
Company's efforts to protect its proprietary rights, existing copyright,
trademark and trade secret laws afford only limited protection. Moreover, the
laws of certain countries do not protect the Company's proprietary rights to the
same extent as do the laws of the United States. In addition, attempts may be
made to copy or reverse engineer aspects of the Company's products or to obtain
and use information that the Company regards as proprietary. Accordingly, there
can be no assurance that the Company will be able to protect its proprietary
rights against unauthorized third-party copying or use, which could materially
adversely affect the Company's business, operating results or financial
condition. Moreover, there can be no assurance that others will not develop
products that infringe the Company's proprietary rights, or that are similar or
superior to those developed by the Company. Policing the unauthorized use of the
Company's products is difficult and litigation may be necessary in the future to
enforce the Company's intellectual property rights, to protect the Company's
trade secrets or to determine the validity and scope of the proprietary rights
of others. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
financial condition or results of operations.
There can be no assurance that third parties will not claim infringement by
the Company with respect to current or future products. The Company expects that
application integration software developers will increasingly be subject to
infringement claims as the number of products in different industry segments
overlap. In this regard, the Company is aware that one of its competitors has a
U.S. patent covering certain aspects of publish/ subscribe messaging systems.
This competitor has invited the Company to consider discussing a license under
its patent. The Company believes its NEONet product does not infringe any valid
claim of the patent. However, any claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays, or
require the Company to enter into royalty or licensing agreements, any of which
could have a material adverse
12
<PAGE> 15
effect upon the Company's business, financial condition and operating results.
There can be no assurance that such royalty or licensing agreements, if
required, would be available on terms acceptable to the Company, or at all.
Moreover, the cost of defending patent litigation could be substantial,
regardless of the outcome. There can be no assurance that legal action claiming
patent infringement will not be commenced against the Company, or that the
Company would necessarily prevail in such litigation given the complex technical
issues and inherent uncertainties in patent litigation. In the event a patent
claim against the Company was successful and the Company could not obtain a
license on acceptable terms or license a substitute technology or redesign to
avoid infringement, the Company's business, financial condition and results of
operations would be materially adversely affected.
Product Liability. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. It is possible, however, that the limitation
of liability provisions contained in the Company's license agreements may not be
effective as a result of federal, state or local laws or unfavorable judicial
decisions. Although the Company has not experienced any product liability claims
to date, the license and support of the Company's software by the Company
entails the risk of such claims. A successful product liability claim brought
against the Company would have a material adverse effect on the Company's
business, operating results and financial condition.
Impact of the Year 2000 Issue. Many installed computer systems and software
products are coded to accept only two digit entries in the date code field.
Beginning in the year 2000, these code fields will need to accept four digit
entries to distinguish 21st century dates from 20th century dates. As a result,
in less than two years, computer systems and/or software products used by many
companies may need to be upgraded to comply with such year 2000 requirements.
The Company believes it is currently expending sufficient resources to review
its product and services, as well as its internal management information system
in order to identify and modify those products, services and systems that are
not year 2000 compliant. The Company expects such modifications will be made on
a timely basis and does not believe that the cost of such modifications will
have a material effect on the Company's operating results. There can be no
assurance, however, that the Company will be able to modify timely and
successfully such products, services and systems to comply with the year 2000
requirements, which could have a material adverse effect on the Company's
operating results. Moreover, the Company believes that some customers may be
purchasing the Company's products as an interim solution to their year 2000
needs until their current suppliers reach compliance. Conversely, year 2000
issues could cause a significant number of companies, including current
customers of the Company, to reevaluate their current system needs and as a
result consider switching to other systems and suppliers. Any of the foregoing
could result in a material adverse effect on the Company's business, operating
results and financial condition. Furthermore, there can be no assurance that
these or other factors relating to the year 2000 compliance issues, including
litigation, will not have a material adverse effect on the Company's business,
financial condition or results of operations.
Control by Existing Stockholders. Upon completion of this offering, the
directors, executive officers and principal stockholders of the Company and
their affiliates will, in the aggregate, beneficially own % of the
Company's outstanding Common Stock. As a result, these stockholders, acting
together, will possess voting control over the Company, giving them the ability,
among other things, to elect at least a majority of the Company's Board of
Directors and to control the vote on significant corporate transactions. Such
control could delay, defer or prevent a change in control of the Company, impede
a merger, consolidation, takeover or other business combination involving the
Company, or discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of the Company. See "Management" and
"Principal and Selling Stockholders."
Effect of Certain Charter Provisions; Anti-Takeover Effects of Delaware
Law. The Company's Board of Directors has the authority to issue up to 2,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the stockholders. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. The Company has no current plans to
issue shares of Preferred Stock. In addition, the Company's
13
<PAGE> 16
Bylaws and indemnity agreements provide that the Company will indemnify officers
and directors against losses they may incur in legal proceedings resulting from
their service to the Company. Further, certain provisions of the Company's
charter documents and of Delaware law could discourage potential acquisition
proposals and could delay or prevent a change in control of the Company. These
provisions are designed to reduce the vulnerability of the Company to an
unsolicited acquisition proposal. These provisions are also intended to
discourage certain tactics that may be used in proxy contests. However, such
provisions could have the effect of discouraging others from making tender
offers for the Company's shares and, as a consequence, they also may adversely
affect the market price of the Company's Common Stock. Such provisions also may
have the effect of preventing changes in the management of the Company. In
addition, Section 203 of the Delaware General Corporation Law restricts certain
business combinations with any "interested stockholder" as defined by such
statute. The statute may have the effect of delaying, deferring or preventing a
change in control of the Company. See "Description of Capital Stock."
Shares Eligible for Future Sale. Upon completion of the offering, assuming
the issuance of 1,900,000 shares of Common Stock offered by the Company hereby
(not including an aggregate of 450,000 shares of Common Stock which may be
exercised pursuant to an over-allotment option granted to the Underwriters), the
Company will have outstanding 11,113,666 shares of Common Stock, assuming no
exercise of options after March 31, 1998. Of these shares, all of the shares
sold in the offering will be freely tradeable without restriction or further
registration under the Securities Act unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 of the Securities Act.
Of the remaining 8,113,666 shares outstanding upon completion of the
offering, 3,860,037 will be "restricted securities" as that term is defined
under Rule 144 (the "Restricted Shares") and may not be sold publicly unless
they are registered under the Securities Act or are sold pursuant to Rule 144 or
another exemption from registration and 4,253,629 shares will be freely
tradeable. Beginning on or about August 20, 1998 (90 days after the completion
date of the Company's public offering), upon expiration of lock-up agreements
between the representatives of the underwriters and officers, directors and
certain stockholders of the Company, approximately 617,105 Shares will be
eligible for immediate resale and approximately 2,763,801 Shares will be
eligible for resale pursuant to Rule 144 under the Securities Act, subject to
compliance with the volume limitations and other restrictions under Rule 144. In
addition, a total of 2,333,333 shares of Common Stock reserved for issuance
under the Company's 1995 Amended and Restated Stock Option Plan, of which
options to purchase 2,126,320 shares of Common Stock were outstanding at March
31, 1998 (of these option shares, 342,793 option shares were vested and
exercisable as of March 31, 1998), a total of 216,666 shares of Common Stock
reserved for issuance under the Company's 1997 Employee Stock Purchase Plan of
which 48,644 had been purchased as of March 31, 1998 and a total of 100,000
shares of Common Stock reserved for issuance under the Company's 1997 Director
Stock Option Plan, of which options to purchase 51,665 shares were outstanding
as of March 31, 1998. See "Shares Eligible for Future Sale."
Volatility of Stock Price. The trading price of the Company's Common Stock
has fluctuated significantly since the Company's initial public offering in June
1997. In addition, the trading price of the Company's Common Stock could be
subject to wide fluctuations in response to quarterly variations in operating
results, announcements of technological innovations or new products by the
Company or its competitors, developments with respect to patents or proprietary
rights, changes in financial estimates by securities analysts and other events
or factors. In addition, the stock market has experienced volatility that has
particularly affected the market prices of equity securities of many high
technology companies and that often has been unrelated or disproportionate to
the operating performance of such companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock.
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<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,900,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$46.5 million at an assumed public offering price of $26.125 per share
(approximately $57.7 million if the Underwriters' over-allotment option is
exercised in full), net of estimated underwriting discounts and commissions and
estimated offering expenses payable by the Company.
The 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. The Company
will not receive any proceeds from the sale of shares by the Selling
Stockholders.
DIVIDEND POLICY
The Company has never paid or declared any cash dividends. It is the
present policy of the Company to retain earnings to finance the growth and
development of the businesses and, therefore, the Company does not anticipate
paying cash dividends on its Common Stock in the foreseeable future.
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company commenced trading publicly 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 Company's Common
Stock as reported by the NASDAQ National Market for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1997
Second Quarter (from June 18, 1997)....................... $ 17.25 $ 14.63
Third Quarter............................................. 17.50 13.50
Fourth Quarter............................................ 14.50 10.75
1998
First Quarter............................................. $ 24.88 $ 9.50
Second Quarter (through April 29, 1998)................... 29.13 23.13
</TABLE>
On April 29, 1998, the last reported sale price of the Common Stock on the
NASDAQ National Market was $25.50 per share. As of April 29, 1998, there were
approximately 60 holders of record of the Company's Common Stock.
15
<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998 (i) on an actual basis, and (ii) as adjusted to give effect to
the sale by the Company of 1,900,000 shares of Common Stock offered by the
Company at an assumed public offering price of $26.125 per share and after
deducting underwriting discounts and commissions and estimated offering expenses
payable by the Company. This table should be read in conjunction with the
consolidated financial statements and related notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity(1):
Preferred stock, $.0001 par value; 2,000,000 shares
authorized; none issued or outstanding................. $ -- $ --
Common stock, $.0001 par value; 45,000,000 shares
authorized; 9,213,666 shares actual and 11,113,666
shares, as adjusted, issued and outstanding............ 1 1
Additional paid-in-capital................................ 47,033 93,565
Accumulated deficit....................................... (10,726) (10,726)
Cumulative translation adjustment......................... 46 46
-------- --------
Total stockholders' equity........................ $ 36,354 $ 82,886
======== ========
</TABLE>
- ---------------
(1) Based upon shares outstanding as of March 31, 1998. Excludes (i) 2,649,999
shares of Common Stock reserved for issuance pursuant to the Company's
employee benefit plans, under which options to purchase 2,177,985 shares of
Common Stock were outstanding as of March 31, 1998, at a weighted average
exercise price of $9.09 per share and (ii) 600,000 additional shares of
Common Stock proposed to be reserved for issuance under the Company's
employee benefit plans, subject to stockholder approval. See "Management-
Employee Benefit Plans." See "Management -- Employee Benefit Plans" and Note
6 of Notes to Audited Consolidated Financial Statements.
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<PAGE> 19
DILUTION
The net tangible book value of the Company as of March 31, 1998 was $35.7
million or $3.88 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 1,900,000 shares
of Common Stock offered hereby at an assumed public offering price of $26.125
per share (and after deduction of estimated underwriting discounts and
commissions and estimated offering expenses), the Company's net tangible book
value at March 31, 1998 would have been $82.2 million or $7.40 per share. This
represents an immediate increase in net tangible book value to existing
stockholders of $3.53 per share and an immediate dilution to new investors of
$18.725 per share.
The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Public offering price per share............................. $26.13
Net tangible book value per share as of March 31, 1998.... $3.88
Increase in net tangible book value per share attributable
to new investors....................................... 3.53
-----
Net tangible book value per share after offering............ 7.40
------
Dilution per share to new investors......................... $18.73
======
</TABLE>
17
<PAGE> 20
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 three months ended March 31, 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>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------- -------------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- -----------
CONSOLIDATED STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses................... $ -- $ 3,383 $ 15,970 $ 2,447 $ 6,573
Services and maintenance............ 1,271 3,762 6,676 1,227 3,009
--------- --------- --------- --------- ----------
Total revenues........................ 1,271 7,145 22,646 3,674 9,582
Cost of revenues:
Cost of software licenses........... -- 1,022 900 250 222
Cost of services and maintenance.... 751 2,306 4,443 800 1,526
--------- --------- --------- --------- ----------
Total cost of revenues................ 751 3,328 5,343 1,050 1,748
--------- --------- --------- --------- ----------
Gross profit........................ 520 3,817 17,303 2,624 7,834
Operating expenses:
Sales and marketing................. 549 4,425 8,824 1,690 3,606
Research and development............ 1,116 3,658 7,730 1,222 2,691
General and administrative.......... 345 1,467 2,334 495 992
Charge for acquired in-process
research and development.......... -- -- 2,600 -- --
Amortization of intangibles......... -- -- 66 -- 49
--------- --------- --------- --------- ----------
Total operating expenses.............. 2,010 9,550 21,554 3,407 7,338
--------- --------- --------- --------- ----------
Income (loss) from operations......... (1,490) (5,733) (4,251) (783) 496
Other income (expense), net........... (13) 61 745 (1) 296
--------- --------- --------- --------- ----------
Income (loss) before provision for
income taxes........................ (1,503) (5,672) (3,507) (784) 792
Provision for income taxes............ -- -- -- -- --
--------- --------- --------- --------- ----------
Net income (loss)..................... $ (1,503) $ (5,672) $ (3,507) $ (784) $ 792
========= ========= ========= ========= ==========
Net income (loss) per common share,
basic............................... $ (1.15) $ (4.19) $ (0.64) $ (0.57) $ 0.09
========= ========= ========= ========= ==========
Net income (loss) per common share,
diluted............................. $ (1.15) $ (4.19) $ (0.64) $ (0.57) $ 0.08
========= ========= ========= ========= ==========
Weighted average shares of Common Stock
outstanding, basic(1)............... 1,308,997 1,353,276 5,479,151 1,375,606 9,154,642
Weighted average shares of Common Stock
outstanding, diluted(1)............. 1,308,997 1,353,276 5,479,151 1,375,606 10,166,297
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MARCH 31,
1995 1996 1997 1998
CONSOLIDATED BALANCE SHEET DATA: ------ ------ ------- ---------
<S> <C> <C> <C> <C>
Cash, cash equivalents and short-term investments......... $1,135 $3,387 $22,724 $21,032
Working capital........................................... 1,557 2,586 30,987 31,827
Total assets.............................................. 2,209 7,073 40,229 40,846
Stockholders' equity...................................... 1,591 3,515 34,731 36,354
</TABLE>
- ---------------
(1) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the weighted average shares of Common Stock outstanding used to compute
net income (loss) per common share.
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All statements, trend analysis and other information contained in the
following discussion and elsewhere in this Prospectus relative to markets for
the Company's products and trends in revenues, gross margin and anticipated
expense levels, as well as other statements including words such as
"anticipate," "believe," "plan," "estimate," "expect" and "intend" and other
similar expressions, constitute forward-looking statements. These
forward-looking statements are subject to business and economic risks and
uncertainties, and the Company's actual results of operations may differ
materially from those contained in the forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in "Risk Factors" as well as other risks and uncertainties
referenced in this Prospectus.
OVERVIEW
The Company began operations in January 1994 to develop, market and support
enterprise software for application integration. In 1994 and 1995, the Company
was in the development stage and was principally focused on product development
and 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.
In June 1997, the Company completed its initial public offering and issued
3,174,000 shares of its Common Stock, and received approximately $34.3 million
cash net of underwriting discounts, commissions and other offering costs.
In September 1997, the Company acquired all of the outstanding capital
stock of Menhir, a developer and marketer of enterprise client information
systems, for $2.8 million in cash, plus fees and expenses of approximately
$200,000. The acquisition was accounted for under the purchase method of
accounting. Menhir's assets, liabilities and operating results have been
included in the Company's consolidated financial statements prospectively from
September 1, 1997.
The Company generates revenue from software licenses, professional service
arrangements, and software maintenance arrangements. The Company recognizes
software license revenues 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.
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 arrangements. Such changes may require deferral
of revenue recognition and periodic operating results could be adversely
affected.
19
<PAGE> 22
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 income and loss
from operations and net income and net loss are shown both with and without the
effect of those items.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- ------------
1995 1996 1997 1997 1998
----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses...................................... --% 47% 71% 67% 69%
Services and maintenance............................... 100 53 29 33 31
---- --- ---- ---- ----
Total revenues........................................... 100 100 100 100 100
Cost of revenues:
Cost of software licenses(1)........................... -- 30 6 10 3
Cost of services and maintenance(1).................... 59 61 67 65 51
---- --- ---- ---- ----
Total cost of revenues................................... 59 47 24 29 18
Gross profit........................................ 41 53 76 71 82
Operating expenses:
Sales and marketing.................................... 43 62 39 46 38
Research and development............................... 88 51 34 33 28
General and administrative............................. 27 21 10 13 10
Charge for acquired in-process research and
development......................................... -- -- 11 -- --
Amortization of intangibles............................ -- -- 1 -- 1
---- --- ---- ---- ----
Total operating expenses................................. 158 134 95 92 77
---- --- ---- ---- ----
Income (loss) from operations............................ (117) (80) (19) (21) 5
Other income (expense), net.............................. (1) 1 3 -- 3
---- --- ---- ---- ----
Income (loss) before provision for income taxes.......... (118) (79) (15) (21) 8
Provision for income taxes............................... -- -- -- -- --
==== === ==== ==== ====
Net income (loss)........................................ (118)% (79)% (15)% (21)% 8%
==== === ==== ==== ====
</TABLE>
- ---------------
(1) As a percentage of Software licenses and Services and maintenance revenues,
respectively.
THREE MONTHS ENDED MARCH 31, 1997 AND 1998
REVENUES
The Company's revenues increased from $3.7 million in the quarter ended
March 31, 1997 to $9.6 million in the quarter ended March 31, 1998. This
increase resulted from significantly increased indirect channel revenues,
increased international presence, additions to the Company's product portfolio,
and an increase in the Company's sales force. The acquisition of Menhir in
September 1997 added the Rapport product to NEON's portfolio, which contributed
both to increased software licenses and services and maintenance revenues. In
the first quarter of 1998, indirect channel revenues increased to 32% of total
revenues and international revenues increased to 34% of total revenues.
Software license revenues increased from $2.4 million, or 67% of revenues,
in the quarter ended March 31, 1997 to $6.6 million, or 69% of revenues, in the
quarter ended March 31, 1998. The growth in software license revenues reflected
the growing market awareness and acceptance of the Company's products and the
establishment of distributor and reseller relationships with IBM, PeopleSoft,
Candle Corporation, and NIWS (Japan), all of which contributed to software
license revenues in the quarter ended March 31, 1998.
Services and maintenance revenues increased from $1.2 million, or 33% of
revenues, in the quarter ended March 31, 1997 to $3.0 million, or 31% of
revenues, in the quarter ended March 31, 1998. The growth of services
20
<PAGE> 23
and maintenance revenues resulted from professional service engagements
associated with the growing sales of the Company's products, increased
maintenance revenue from the larger installed base of software license
customers, and increased training revenue.
In the quarter ended March 31, 1998, the Company's largest customer and top
ten customers accounted for 10% and 57%, respectively, of total revenues. This
compares with 25% and 75%, respectively, for the same period in 1997. To date,
the Company's revenues have been derived primarily from sales to large banks and
financial institutions, which accounted for 72% of total revenues for the year
ended December 31, 1997. In the first quarter of 1998, sales to banks and
financial institutions accounted for approximately 44% of total revenues.
COST OF REVENUES
Cost of revenues consist of costs of software licenses and costs of
services and maintenance. As a percentage of total revenue, cost of revenues
declined from 29% in the quarter ended March 31, 1997 to 18% in the quarter
ended March 31, 1998. Although cost of revenue decreased as a percentage of
total revenue, the costs increased on an absolute dollar basis by approximately
$700,000. This increase was due primarily to the growth in professional service
engagements.
Cost of software licenses consisted primarily of royalty payments for the
three months ended March 31, 1997. With the fulfillment of the royalty
obligation to Merrill Lynch in the fourth quarter of 1997, the cost of software
licenses for the three months ended March 31, 1998 consisted primarily of the
internal costs associated with the fulfillment of license development
arrangements and software packaging and distribution.
Costs of service and maintenance consist primarily of personnel, facility
and system costs incurred in providing professional service consulting,
training, and customer support services. Costs of services and maintenance
decreased as a percentage of services and maintenance revenue from 65% in the
quarter ended March 31, 1997 to 51% in the quarter ended March 31, 1998,
although costs of services and maintenance increased $726,000 in absolute
dollars. This improved margin resulted primarily from improved utilization of
field service personnel and an increase in professional service rates.
OPERATING EXPENSES
Sales and Marketing
Sales and marketing expenses increased from $1.7 million, or 46% of total
revenues, in the quarter ended March 31, 1997 to $3.6 million, or 38% of total
revenues, in the quarter ended March 31, 1998. The increase in absolute dollars
reflected the hiring of additional sales representatives and marketing
personnel, increased promotional programs, and increased sales commissions
associated with higher revenues. Sales and marketing expenses declined as a
percent of total revenues due to higher percentage growth in revenues, and
efficiencies associated with the achievement of economies of scale.
Research and Development
Research and development expenses increased from $1.2 million, or 33% of
revenues, in the quarter ended March 31, 1997 to $2.7 million, or 28% of
revenues, in the quarter ended March 31, 1998. The increase in absolute dollars
principally reflected the hiring of additional personnel. The decline as a
percentage of revenues was due to higher percentage growth in revenues. No
software development costs have been capitalized to date in accordance with SFAS
No. 86.
General and Administrative
General and administrative expenses grew from $495,000, or 13% of total
revenues, in the quarter ended March 31, 1997 to $992,000, or 10% of total
revenues, in the quarter ended March 31, 1998. Expenses grew in dollars as the
Company added personnel to its finance, legal, MIS, and human resource
departments, but declined as a percent of total revenues primarily due to higher
percentage growth in revenues.
21
<PAGE> 24
OTHER INCOME (EXPENSE), NET
The Company reported other expense of $1,000 in the quarter ended March 31,
1997 and other income of $296,000 in the quarter ended March 31, 1998. The
increase in other income was due to interest earned on cash invested from the
proceeds of the Company's initial public offering in June of 1997. The Company
anticipates that interest income may decline in future periods as cash balances
may be used to fund future acquisitions, as well as fund the ongoing operations
of the Company.
PROVISION FOR INCOME TAXES
The Company has reported no income tax expense for any period. As of March
31, 1998, the net deferred tax asset of approximately $3.1 million was offset by
a valuation allowance of a like amount. The comparable figure for December 31,
1997 was $3.4 million.
NET INCOME (LOSS)
Net income for the three months ended March 31, 1998 was approximately
$792,000, or $0.08 per Common Share on 10.2 million weighted average shares
outstanding on a diluted basis. This compares to a net loss of $784,000, or
$0.57 per Common Share on 1.4 million weighted average shares outstanding on a
diluted basis in the first quarter of 1997. The improved net income position
resulted from the increased growth of the Company's revenues, particularly the
growth of software license revenues, as compared with the growth of costs and
expenses.
FISCAL YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
REVENUES
The Company's 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 of the Company's 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 the Company sold to a greater number of customers and
expanded its 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 the Company's products, expansion of international sales
resources, the continued growth of an installed base of accounts to serve as
references for new customers, repeat business by existing customers, and
expanded functionality of the NEONet product. In December 1997, the Company
entered into a license agreement with IBM for the joint development of a product
designed to integrate IBM's MQSeries product with certain of the Company's
products. Under the terms of the agreement, both companies are expected to begin
selling the resulting MQIntegrator product as early as the second quarter of
1998. The Company expects that future software license revenues will be
comprised of MQIntegrator, Business Applications, Application Integration
Libraries, Tools and Utilities and new 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.
In 1997, the Company's top ten customers accounted for 56% of total
revenues. For the year ended December 31, 1997, the Company's largest customer
accounted for 14% of the Company's total revenues. To date, the Company's
revenues have been derived primarily from sales to large banks and financial
institutions. For
22
<PAGE> 25
the year ended December 31, 1997, sales to banks and financial institutions
accounted for 72% of the Company's 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.
The Company had an agreement to pay royalties to Merrill Lynch on NEONet
license revenue until such royalties reached a cumulative total of $1.9 million.
The Company accrued royalties at 30% of NEONet license fees in 1996 and 10% of
NEONet license fees in 1997, reflecting the Company's 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, the Company 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. The Company expects it 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 the Company's
expansion of its overall sales and marketing resources and infrastructure,
including international expansion in 1997. As a percentage of total revenues,
sales and marketing expense increased in 1996 compared to 1995 as the Company
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. The Company expects to continue to
expand its direct sales force and professional marketing staff, further increase
its international presence, and continue to develop its indirect sales channels
and increase promotional activity. Accordingly, the Company expects 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. The Company currently
anticipates that research and development expenses may continue to increase in
absolute dollars as the Company continues 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
23
<PAGE> 26
administrative functions of the 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 the
Company added personnel to all administrative areas but declined as a percentage
of total revenues principally due to economies of scale associated with
increased revenues. The Company expects general and administrative expenses to
continue to grow as the Company implements additional management information
systems associated with its business growth, continues its international
expansion, and incurs costs incident to being a publicly held company.
CHARGE FOR ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT/AMORTIZATION OF
INTANGIBLES
Based on an independent appraisal of the net assets acquired, $2.6 million
allocated to in-process research and development projects was charged to
operations in connection with the acquisition of Menhir in September 1997. The
Company 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 the year ended December 31,
1997.
OTHER INCOME (EXPENSE), NET
The Company 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 the Company's initial public
offering in June 1997. The Company anticipates that interest income will decline
in future periods as cash balances may be used to fund potential future
acquisitions and the ongoing operations of the Company.
PROVISIONS FOR INCOME TAXES
The Company has reported no income tax expense for any period. As of
December 31, 1997, the 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.
NET LOSS
Giving effect to expenses associated with the Menhir acquisition, the
Company reported a net loss, basic and diluted of $3.5 million, or $0.64 per
share in 1997. Excluding the charge for acquired in-process research and
development, the net loss, basic and diluted was approximately $907,000, or
$0.17 per Common Share on 5,479,151 weighted average shares outstanding. This
compares to a net loss, basic and diluted of $1.5 million, or $1.15 per Common
Share on 1,308,997 shares in 1995, and $5.7 million, or $4.19 per Common Share
on 1,353,276 shares, in 1996. The reduced net loss in 1997 as compared to 1996
resulted from the high 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 the Company's sales force
and other staff, and from royalty payments due to Merrill Lynch.
24
<PAGE> 27
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following tables present unaudited quarterly consolidated statement of
operations data for each quarter in the nine quarters ended March 31, 1998, as
well as such data expressed as a percentage of the Company's revenues for the
periods indicated. This data has been derived from unaudited consolidated
financial statements that have been prepared on the same basis as the audited
consolidated financial statements and include all adjustments (consisting only
of normal recurring adjustments) that the Company considers necessary for a fair
presentation of such information. The Company believes quarter-to-quarter
comparisons of its financial results should not be relied upon as an indication
of future performance, and operating results may fluctuate from quarter to
quarter in the future.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
CONSOLIDATED STATEMENT OF 1996 1996 1996 1996 1997 1997 1997 1997 1998
OPERATIONS DATA: --------- -------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses........ $ 111 $ 411 $ 832 $ 2,029 $ 2,447 $ 3,213 $ 4,031 $ 6,279 $ 6,573
Services and
maintenance............ 945 1,186 841 790 1,227 1,566 1,890 1,993 3,009
------ ------- ------- ------- ------- ------- ------- ------- -------
Total revenues............. 1,056 1,597 1,673 2,819 3,674 4,779 5,921 8,272 9,582
------ ------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Cost of software
licenses............... 33 123 252 614 250 166 342 142 222
Cost of services and
maintenance............ 677 713 455 461 800 1,240 1,148 1,254 1,526
------ ------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenues..... 710 836 707 1,075 1,050 1,406 1,490 1,396 1,748
------ ------- ------- ------- ------- ------- ------- ------- -------
Gross profit............. 346 761 966 1,744 2,624 3,373 4,431 6,876 7,834
Operating expenses:
Sales and marketing...... 320 1,010 1,469 1,626 1,690 1,988 2,253 2,893 3,606
Research and
development............ 608 736 1,142 1,172 1,222 1,560 2,108 2,840 2,691
General and
administrative......... 175 380 475 437 495 371 616 853 992
Charge for acquired
in-process research and
development............ -- -- -- -- -- -- 2,600 -- --
Amortization of
intangibles............ -- -- -- -- -- -- 18 48 49
------ ------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses... 1,103 2,126 3,086 3,235 3,407 3,919 7,595 6,634 7,338
------ ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. (757) (1,365) (2,120) (1,491) (783) (546) (3,164) 242 496
Other income (expense),
net.................... 2 7 49 3 (1) 17 429 301 296
------ ------- ------- ------- ------- ------- ------- ------- -------
Net income
(loss)........... $ (755) $(1,358) $(2,071) $(1,488) $ (784) $ (529) $(2,735) $ 543 $ 792
====== ====== ====== ====== ===== ===== ====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL
REVENUES:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses........ 11% 26% 50% 72% 67% 67% 68% 76% 69%
Services and
maintenance............ 89 74 50 28 33 33 32 24 31
--- ----- ---- ---- --- --- --- --- ---
Total revenues............. 100 100 100 100 100 100 100 100 100
--- ----- ---- ---- --- --- --- --- ---
Cost of revenues:
Cost of software
licenses(1)............ 30 30 30 30 10 5 8 2 3
Cost of services and
maintenance(1)......... 72 60 54 58 65 79 61 63 51
--- ----- ---- ---- --- --- --- --- ---
Total cost of revenues..... 67 52 42 38 29 29 25 17 18
--- ----- ---- ---- --- --- --- --- ---
Gross profit............. 33 48 58 62 71 71 75 83 82
Operating expenses:
Sales and marketing...... 30 63 88 58 46 42 38 35 38
Research and
development............ 58 46 68 42 33 33 36 34 28
General and
administrative......... 17 24 29 15 13 8 10 10 10
Charge for acquired
in-process research and
development............ -- -- -- -- -- -- 44 -- --
Amortization of
intangibles............ -- -- -- -- -- -- -- 1 1
--- ----- ---- ---- --- --- --- --- ---
Total operating expenses... 105 133 185 115 92 82 128 81 77
--- ----- ---- ---- --- --- --- --- ---
Income (loss) from
operations............. (72) (85) (127) (53) (21) (11) (53) 3 5
Other income (expense),
net.................... -- -- 3 -- -- -- 7 4 3
--- ----- ---- ---- --- --- --- --- ---
Net income
(loss)........... (72)% (85)% (124)% (53)% (21)% (11)% (46)% 7% 8%
=== ===== ==== ==== === === === === ===
</TABLE>
- ---------------
(1) As a percentage of software licenses and services and maintenance revenues,
respectively.
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The increase in software license revenues as a percent of total revenues
for the quarter ended December 31, 1997, as compared to preceding quarters, is
primarily due to an increase in indirect channel revenues, which accounted for
approximately 15% of total revenues in the fourth quarter of 1997 and increased
to 32% of total revenues in the first quarter of 1998. The Company believes that
indirect channel revenues generated through sales by strategic reseller
partners, and in particular through IBM and PeopleSoft, will continue to effect
software license revenues in future quarters.
Future operating results will depend on many factors, including, among
others, the growth of the application integration software market, the size and
timing of software licenses, the delay or deferral of customer implementations,
the ability of the Company to maintain or increase market demand for the
Company's products, the timing of new product announcements and releases by the
Company, competition by existing and emerging competitors in the application
integration software market, the ability of the Company to expand its direct
sales force and develop indirect distribution channels, the Company's success in
developing and marketing new products and controlling costs, budgeting cycles of
customers, product life cycles, software defects and other product quality
problems, the mix of products and services sold, international 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 the Company's revenues have been, and the Company
believes will continue to be, derived from a small number of relatively large
customer contracts or arrangements, and the timing of revenue recognition from
such contracts and arrangements has caused and may continue to cause material
fluctuations in the Company's operating results, particularly on a quarterly
basis. For example, in the fourth quarter of 1997 the Company's largest customer
accounted for approximately 14% of the Company's total revenues, and in the
first quarter of 1998 its largest customer accounted for approximately 10% of
the Company's 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 the
Company is entitled to recognize during such quarter, each of which is difficult
to forecast. In addition, as is common in the software industry, a substantial
portion of the Company's revenues in a given quarter historically have been
recorded in the third month of that quarter, with a concentration of such
revenues in the last two weeks of the third month. To the extent this trend
continues, any failure or delay in the closing of orders during the last part of
any given quarter will have a material adverse effect on the Company's results
of operations.
In addition, the timing of license revenues is difficult to predict because
of the length and variability of the Company's sales cycle. The purchase of the
Company's products by its customers typically involves a significant technical
evaluation and commitment of capital and other resources, with the attendant
delays frequently associated with customers' internal procedures to approve
large capital expenditures and to test, implement and accept new technologies
that affect key operations. This evaluation process frequently results in a
lengthy sales process of several months and subjects the sales cycle associated
with the purchase of the Company's products to a number of significant risks,
including customers' budgetary constraints and internal acceptance reviews. The
length of the Company's sales cycle may vary substantially from customer to
customer, particularly for customers within different vertical market segments.
See "Business -- Sales and Marketing." The Company's operating expense levels
are relatively fixed and are based in part on expectations as to future
revenues. Consequently, any delay in the recognition of revenue from quarter to
quarter could result in operating losses. To the extent that such operating
expenses precede, or are not subsequently followed by, increased revenues, the
Company's operating results would be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
The Company reported $21.0 million in cash, cash equivalents and short-term
investments at March 31, 1998, compared to $22.7 million at December 31, 1997.
There was no significant bank debt in either period. The Company maintains a
line of credit that can be used for working capital requirements on an as-needed
basis. Accounts receivable, net, grew from $11.1 million at December 31, 1997 to
$12.1 million at March 31, 1998. Unbilled revenue, which represents progress on
funded development projects which is not billed until specified by a contract
date or milestone, grew from $1.7 million to $1.9 million over the same period.
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Cash used for operating activities was $1.0 million and $1.5 million for
the first three months of 1998 and 1997, respectively. A $1.6 million
improvement in net profit was offset, in part, by decreases in accounts payable
due to the satisfaction of certain liabilities.
Cash provided by investing activities was $36,000 in the first three months
of 1998 compared to usage of $203,000 for the same period of 1997. The net cash
provided by investing activities in the 1998 period is the net proceeds from the
maturities of short-term investments net of $992,000 of capital expenditures.
The usage of cash for the comparable period of 1997 was due solely to capital
expenditures.
Cash provided by financing activities was $328,000 in the first three
months of 1998 compared to usage of $7,000 for the same period of 1997. Through
March 31, 1998, the Company had received $345,000 for issuance of Common Stock
associated with the exercise of options and warrants.
The Company believes that the proceeds from this offering, along with its
existing balance of cash, cash equivalents and short-term investments will be
sufficient to meet the Company's working capital and capital expenditure needs
at least for the next twelve months. Thereafter, the Company may require
additional sources of funds to continue to support its business. There can be no
assurance that such capital, if needed, will be available or will be available
on terms acceptable to the Company.
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<PAGE> 30
BUSINESS
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information, including "Risk Factors" and
the Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Prospectus.
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 March 31, 1998, the Company shipped products or provided services
to approximately 160 customers worldwide. Representative customers of the
Company include Abbey National Treasury Services, Aetna, Inc., Chase Manhattan
Bank, CIGNA Corporation, Citibank, Disclosure Incorporated, Discover Brokerage
Direct, Eaton Corporation, GTE Corporation, JP Morgan & Co., Merrill Lynch,
Physicians Computer Network, Monsanto Company, State Street Global Advisors, and
Sumitomo Bank of California. As part of its strategy, the Company has
established reseller and joint marketing relationships with IBM, PeopleSoft,
Inc., Candle Corporation, Sun Microsystems, Inc., Hewlett-Packard Company, SAP
AG, Ernst & Young, SunGard Financial Systems, Scopus Technology, Inc., Oracle
Corporation, Tandem/Compaq and NIWS (Japan).
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
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well as data sharing and data synchronization. These techniques have typically
been implemented in an ad hoc manner to address specific integration
requirements as they have arisen over time. Accordingly, they have generally
required extensive manual custom software coding and provided limited
functionality, flexibility and scaleability, and require a costly and burdensome
ongoing maintenance process. As a result of 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 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 NEONet 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. Currently
the Company has distribution agreements with IBM, PeopleSoft, Candle
Corporation, NIWS (Japan), Tandem/Compaq and SunGard Financial Systems. In
addition, the Company has strategic marketing and reseller relationships
with S.W.I.F.T., SAP AG, Oracle, Sun Microsystems, Inc, Ernst & Young, and
Electronic Data Systems (EDS). 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. The Company
penetrated the financial services market by leveraging the industry
experience of the Company's founders and other key personnel and by
collaborating with a number of strategic customers. The Company's strategy
is to penetrate additional vertical markets, including health care,
telecommunications and manufacturing, by establishing development
relationships with strategic customers and by leveraging an understanding
of customer needs in these specific markets.
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 25 at March 31, 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 Company has established reseller and joint marketing
relationships with OEMs, independent software vendors, VARs and systems
integration firms such as IBM, PeopleSoft, Candle Corporation, Hewlett-
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Packard, Sun Microsystems, Inc, SunGard Financial Systems, Ernst & Young,
Scopus Technology, Inc, Oracle and S.W.I.F.T.
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
1997, the Company released Application Integration Libraries to facilitate
the integration of ERP application into the enterprise. The Company also
introduced NEON Business EventManager, a business process automation and
workflow system, and NEON Enterprise ProcessExecutive, a software product
designed to seamlessly integrate business transaction systems with business
control systems.
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.
NEONet comprises 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.
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 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
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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.
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.
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:
Maintenance and Support. In conjunction with its software license products,
the Company offers an array of professional and support services that focus on
providing product education to both external and internal customers, as well as
specialized work request reporting and tracking services. The Company's
maintenance and
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support service offers a seven days a week, twenty-four hours a day customer
hotline. The Company's standard term for maintenance and support agreements is
twelve months.
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 and London, England, as well as at several
customer locations.
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CUSTOMERS AND CUSTOMER APPLICATIONS
Customers
The Company has sold products and services to over 160 customers. The
Company's top ten customers accounted for approximately 56% of the Company's
total revenues in 1997. Customers of the Company who have purchased products or
services, categorized by vertical industry, include the following:
BANKING
Banque Paribas
Barclays Bank
Chase Manhattan Corporation
Citibank
Credit Lyonnais S.A.
(Dresdner) Kleinwort Benson Ltd
Fiduciary Trust Company International
JP Morgan & Co. Incorporated
Long Term Credit Bank of Japan, Limited
NatWest Ventures Limited
State Street Bank & Trust Co.
Sumitomo Bank of California
The Royal Bank of Scotland
BROKERAGE
Chase Securities Inc.
Discover Brokerage Direct
Morgan Stanley Dean Witter & Co.
Credit Suisse
Deutsche Bank
Merrill Lynch
Nikko Securities Co., Ltd.
Union Bank of Switzerland
ASSET MANAGERS
Alliance Capital Corp.
Fidelity Investments
Global Asset Management
Pacific Investment Management Company
State Street Global Advisors
Western Asset Management Company
INSURANCE
American International Group
Aetna, Inc.
CIGNA Corporation
Equitable of Iowa
Guardian Life Insurance
TriMark Technologies, Inc.
BUSINESS SERVICES
Automated Data Processing, Inc.
Cedel Group
Chicago Board of Trade
Chicago Mercantile Exchange
The Depository Trust Company (DTC)
Disclosure Incorporated
Dow Jones & Company, Inc.
National Securities Clearing Corporation
Primark Corporation
INFORMATION TECHNOLOGY AND SYSTEMS
CONSULTING
The Beacon Group
Candle Corporation
DMW Group
Ernst & Young
IBM
Locigaisel
NIWS
PeopleSoft, Inc.
Physicians Computer Network
Scopus Technology, Inc.
SunGard Financial Systems
Tandem/Compaq
OTHER INDUSTRIES
Eaton Corporation
GTE Corporation
Ingalls Health Systems
KN Energy
Monsanto Company
Physicians Computer Network
Skadden Arps Slate Meagher & Flom
Total Petroleum
Xerox Corporation
Customer Applications
The following customer case studies illustrate the application integration
challenges facing typical customers of the Company and the means by which NEON
has facilitated achievement of the customers' goals.
Extending Database Access to Customers. A leading provider of data
processing services stores and processes three million customer transactions a
day on its mainframe-based system. The service provider's end user customers
increasingly demanded that the service provider enable end users to access their
individual data through a client/server architecture and server-based relational
database. Accordingly, NEON's customer needed to establish real-time database
replication between the customer's mainframe-based system and a client/server
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environment accessible by customers. Data replication requires coordinating,
updating and reconciling constantly changing databases.
The service provider sought to acquire an integrated package solution that
would be sufficiently flexible to implement data replication across the various
databases and to integrate the required data flows. The packaged solution had to
support a threshold of functionality superior to point-to-point communication
and had to be both fast enough to manage very large numbers of network
transactions and scaleable to support a fast-growing network computing
environment. The customer selected NEONet, including the NEONreplication module,
to provide the requisite platform for data replication and data flow management.
NEONet Messaging and Queuing delivers data from the mainframe database to a
Sybase database on the Sun SPARC Server in real time, and guarantees delivery of
the data, once and only once. NEONet's flexibility simplifies data flows across
the heterogeneous environments, and permits completion and tracking of a high
volume of messages. The Company's proprietary content publish/subscribe
architecture greatly simplifies network transaction management by enabling each
subscriber to receive only the information he wants. Users now access timely
client/server databases (e.g., Sybase running on Sun servers) even though core
processing is still done on the mainframe.
Integrating Acquired Businesses. A NEON customer achieved significant
growth in recent years through acquisitions. The acquired businesses were of
varying size and geographic location and used a broad range of applications
running on a variety of hardware, operating systems, and databases. Routing data
among the disparate systems was becoming increasingly costly and time-consuming.
The company was devoting significant in-house resources to continually write and
update extract programs in C programming language and to transport the data via
File Transport Programs (FTP), a batch mechanism which did not guarantee
delivery. The company was forced to add staff just to monitor the FTP process.
In addition, because continued acquisitions added different platforms and
applications to the enterprise network, additional employees were hired to write
and maintain that code. The customer chose to implement NEONet across this
environment, integrating applications, hardware, operating systems and
databases, and allowing systems to exchange data with minimal effort. With
NEONet guaranteed delivery, fewer personnel were required to monitor the data
transfer and routing. As the company continues to acquire other companies, those
applications can be integrated seamlessly into the network. Using NEONet, the
company has saved time and money, required fewer staff and less maintenance
programming, allowing the Company's programmers to concentrate on new
development.
Enabling Global Database Replication. Another NEONet customer is a
multinational bank with worldwide operations. In a typical 24-hour period, the
customer handles thousands of trading transactions. Prior to implementing a
NEONet-enabled solution, the customer processed these transactions through one
central database, resulting in slow response times and frequent interruptions
due to network outages. The customer addressed these bottlenecks by implementing
global data replication, in which multiple, identical databases are maintained
across the globe. This provides remote sites with fast and efficient access to
essential information while limiting the impact on network performance. A
critical requirement of such a system is real-time distribution of data updates
across the system, with guaranteed delivery of data and no duplication.
This customer implemented global data replication across North America,
Europe and Asia using NEONet to ensure reliable communications between the
servers and the central database providing continual access to current data at
remote sites even during network outages. NEONet's Messaging and Queuing module,
together with the Rules Engine module evaluates the content of each data message
according to rules defined by the customer so that only appropriately selected
transactions are to be replicated. The replicated transactions are converted by
the Formatter into SQL update statements, distributed to each remote database,
and executed at the local databases by NEONet's SQL Apply functionality through
the NEONreplication product. The customer benefited through timely, consistent
databases available on three continents.
SALES AND MARKETING
The Company currently markets its software and services primarily through a
direct sales organization, complemented by indirect sales channels. As of March
31, 1998, the Company's direct sales force included 25 commissioned sales
representatives located in 7 U.S. cities, London, England and Sydney, Australia.
In
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addition, the Company has initiated the implementation of a multi-tiered channel
program to recruit, support, and jointly market comprehensive product solutions.
As part of this strategy, the Company has established distribution relationships
with certain strategic hardware vendors, database providers, software and
toolset developers, systems integrators and implementation consultants,
including companies designing software, database packages, and hardware
integration and consulting services. The Company has also sought to develop
alliances with key solution providers to targeted vertical industry sectors,
including financial services, health care, telecommunications, and
manufacturing. The Company plans to further identify and develop relationships
with additional partners who can complement existing NEON products and
supplement existing NEON product solutions. The Company also utilizes
advertising, direct mail and public relations programs, participates in industry
trade shows and organizes customer information seminars to promote the adoption
and implementation of its application integration technologies.
The Company believes that future growth also will depend upon its success
in developing and maintaining strategic relationships with distributors,
resellers, and systems integrators. The Company's strategy is to continue to
increase the proportion of customers served through these indirect channels.
Although sales through indirect channels accounted for less than 10% of total
revenues in 1997, indirect sales increased to approximately 15% of total
revenues in the fourth quarter of 1997 and to 32% in the first quarter of 1998.
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. The Company has recently entered into
significant relationships with the following strategic partners: IBM, PeopleSoft
and Candle Corporation. The Company and IBM agreed to a multi-year joint
development, marketing and reselling arrangement for the MQIntegrator product.
MQIntegrator will be a standard product offering from both IBM and NEON.
The Company and PeopleSoft recently entered into a multi-year joint
development, marketing and reselling arrangement for the Business EventManager
product. Business EventManager will be a standard product offering from both
companies as the solution to more rapidly implement PeopleSoft's application
solutions.
The Company and Candle recently entered into a multi-year marketing and
reselling arrangement for products from both companies. Candle Corporation will
integrate the NEONet Rules and Formatter 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.
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;
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- 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;
In addition, 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 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.
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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 March 31, 1998, the
Company's research and development staff consisted of 108 persons. The Company's
research and development expenditures in 1995, 1996, 1997 and the first quarter
of 1998 were approximately $1.1 million, $3.7 million, $7.7 million and $2.7
million, respectively, and represented 88%, 51%, 34% and 28% 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 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. See "Risk Factors -- Rapid Technological
Change; Limited Platform Coverage; Dependence on New Products."
COMPETITION
The market for the Company's products is intensely competitive and is
expected to become increasingly competitive as current competitors expand their
product offerings and new competitors enter the market. 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.
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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 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 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. See "Business -- Competition."
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
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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. In this regard, the Company is aware that one of its competitors has a
U.S. patent covering certain aspects of publish/ subscribe messaging systems.
This competitor has invited the Company to consider discussing a license under
its patent. The Company believes its NEONet product does not infringe any valid
claim of the patent. However, any claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays, or
require the Company to enter into royalty or licensing agreements, any of which
could have a material adverse effect upon the Company's business, financial
condition and operating results. There can be no assurance that such royalty or
licensing agreements, if required, would be available on terms acceptable to the
Company, or at all. Moreover, the cost of defending patent litigation could be
substantial, regardless of the outcome. There can be no assurance that legal
action claiming patent infringement will not be commenced against the Company,
or that the Company would necessarily prevail in such litigation given the
complex technical issues and inherent uncertainties in patent litigation. In the
event a patent claim against the Company was successful and the Company could
not obtain a license on acceptable terms or license a substitute technology or
redesign to avoid infringement, the Company's business, financial condition and
results of operations would be materially adversely affected.
The Company is aware that a number of organizations are utilizing the names
Neon and New Era as either a trademark or tradename or both. In particular, the
Company has received notices from NEON Systems, Inc. and Neon Software, Inc.
alleging that the Company's use of NEON as a tradename and/or trademark violates
such respective companies' proprietary rights. Such claims or any additional
claims against the Company alleging trademark or tradename infringement could be
time consuming and result in costly litigation. A successful claim regarding the
infringement of a trademark and/or tradename could result in substantial
monetary damages against the Company or an injunction prohibiting the use by the
Company of the particular trademark or tradename. Any such injunction could
materially adversely affect the Company's corporate or product name recognition
and marketing efforts. Accordingly, any monetary damages or injunction could
have a material adverse effect upon the Company's business, financial condition
and results of operations.
EMPLOYEES
As of March 31, 1998, the Company employed 255 persons, including 89 in
sales, marketing and field operations, 108 in research and development, 36 in
finance and administration and 22 in client services. Of these, 65 are located
in the United Kingdom, three are located in Australia 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. The
Company's future success will depend in
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large part upon its ability to attract, retain and motivate highly skilled
employees. There is significant competition for employees with the skills
required to perform the services offered by the Company and there can be no
assurance that the Company will be able to continue to attract and retain
sufficient numbers of highly skilled employees. Because of the complexity of the
application integration software market, the Company has in the past
experienced, and expects in the future to experience a significant time lag
between the date on which technical and sales personnel are hired and the time
at which persons become fully productive. If the Company is unable to manage the
post-sales process effectively, its ability to attract repeat sales or establish
strong account references could be adversely affected, which may materially
affect the Company's business, financial condition and results of operations.
See "Management."
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, 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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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).......... 51 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........................... 49 Senior Vice President and Chief Financial
Officer
Robert I. Theis........................... 38 Senior Vice President and Chief Marketing
Officer
Frederick T. Horn......................... 44 Senior Vice President of Product
Development and Client Services
Leonard M. Goldstein...................... 51 Senior Vice President, Senior Counsel and
Secretary
Frank A. Russo, Jr........................ 53 President, North American Operations
Peter T. Hoversten........................ 43 Senior Vice President, Application
Engineering
Michael E. Jaroch......................... 53 Senior Vice President of Human Resources
James C. Parks............................ 54 Vice President of Finance and Controller
Steve Lazarus(a)(b)(c)(1)................. 66 Director
Mark L. Gordon(a)(3)...................... 46 Director
James A. Reep(b)(2)....................... 46 Director
Elisabeth W. Ireland(3)................... 41 Director
Patrick J. Fortune(3)..................... 51 Director
</TABLE>
- ---------------
(a) Member of the Compensation Committee.
(b) Member of the Audit Committee.
(c) Member of the Nominating Committee.
(1) Mr. Adam and Mr. Lazarus 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 1998 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.
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
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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. 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 University of Northern Colorado and an M.B.A. degree from the University of
Denver, Colorado.
Mr. Lazarus has served as a Director of the Company since April 1995. Since
1986, Mr. Lazarus has served as a senior principal of various venture capital
funds associated with ARCH Venture, including President and Chief Executive
Officer of ARCH Development Corporation and Managing Director of ARCH Venture
Partners. From 1986 to 1994, Mr. Lazarus served as the Associate Dean of the
Graduate School of Business of the University of Chicago. He currently serves as
a director of Amgen, Primark, 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.
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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 holds a B.A. degree from the University of Wisconsin, an M.B.A. from
Northwestern University and a Ph.D. in physical chemistry from the University of
Wisconsin.
The Company's Amended and Restated Bylaws (the "Bylaws"), as amended,
provide for seven directors divided into three classes. The initial term of
Class III directors was 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.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has a Compensation Committee, an Audit Committee and
a Nominating Committee. The Compensation Committee makes recommendations to the
Board concerning salaries and incentive compensation for the Company's officers
and employees and administers the Company's incentive plans. The Audit Committee
reviews the results and scope of the audit and other accounting related services
and reviews and evaluates the Company's internal audit and control functions.
The Nominating Committee recommends candidates to fill vacancies on the Board of
Directors and a slate of directors at the annual meeting of the Company,
evaluates the composition of the Board and reviews the compensation of Board
members.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors currently consists of
Messrs. Lazarus and Gordon, neither of whom is an officer or employee of the
Company. No member of the Compensation Committee or executive officer of the
Company has a relationship that would constitute an interlocking relationship
with executive officers or directors of another entity, except for the
following: Mr. Gordon is a partner at Gordon & Glickson, a law firm that has
provided legal services for the Company. During 1995 and 1996, the total amounts
paid to Gordon & Glickson for services performed were $78,766 and $198,932,
respectively. See "Certain Transactions."
45
<PAGE> 48
DIRECTOR COMPENSATION
Each director of the Company receives $1,000 plus reimbursement for all
expenses per Board of Director meeting attended, as their sole cash
remuneration. In addition, each non-employee director may participate in the
Company's 1997 Director Option Plan. See "Employee Benefit Plans -- 1997
Director Option Plan."
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company during
the fiscal years ended December 31, 1996 and 1997 to the Company's Chief
Executive Officer and each of the Company's four other most highly compensated
executive officers who were serving as executive officers at the end of the 1997
fiscal year (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
---------------------- SECURITIES ALL OTHER
FISCAL BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($)(1) ($) OPTIONS(#) ($)
- --------------------------- ------ ------------ ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
George F. (Rick) Adam, Jr.................. 1997 $162,500 -- 11,000 --
Chairman of the Board, President and 1996 140,000 $40,000 -- --
Chief Executive Officer
Frank A. Russo, Jr......................... 1997 233,362 -- 30,275 --
President of U.S. Sales and Field
Operations 1996 118,921 -- 46,932 --
Kevin Scully............................... 1997 355,418 -- 48,396 --
Senior Vice President of Sales and 1996 182,290 -- 57,064 --
Field Operations, Financial Services
Stephen E. Webb............................ 1997 139,167 45,079 11,000 --
Senior Vice President and 1996 1,000 -- 67,999 --
Chief Financial Officer
Harold A. Piskiel.......................... 1997 152,500 -- 13,000 --
Executive Vice President and 1996 140,000 -- 26,666 --
Chief Technology Officer
</TABLE>
- ---------------
(1) These amounts reflect salary paid for the full fiscal years ended 1996 and
1997. Excludes certain perquisites and other personal benefits, such as life
insurance premiums paid by the Company. In the case of Kevin Scully and
Frank A. Russo, Jr., salary includes commissions earned in each year. Mr.
Scully, as of February 28, 1998, resigned as an executive officer of the
Company.
46
<PAGE> 49
Option Grants and Exercises in Last Fiscal Year
The following tables set forth information regarding stock options granted
to and exercised by the Named Executive Officers during the last fiscal year, as
well as options held by such officers as of December 31, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
--------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(4)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ---------------------
NAME GRANTED(1) FISCAL YEAR(2) PRICE DATE(3) 5% 10%
- ---- ---------- -------------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
George F. (Rick) Adam, Jr............... 5,000 0.41% $13.20 6/16/02 18,235 $40,294
6,000 0.49 13.61 11/13/02 22,565 49,863
Frank A. Russo, Jr.(5).................. 266 0.02 9.00 2/27/02 661 1,462
800 0.06 9.00 3/30/02 1,989 4,396
1,333 0.11 9.00 5/29/02 3,315 7,324
5,000 0.41 12.00 6/16/02 16,577 36,631
3,388 0.28 16.50 6/29/02 15,445 34,129
602 0.05 16.50 6/29/02 2,744 6,064
1,064 0.09 13.88 7/30/02 4,079 9,013
1,330 0.11 13.75 8/28/02 5,052 11,165
2,926 0.24 13.75 9/29/02 11,115 24,562
532 0.04 12.50 10/30/02 1,837 4,060
1,862 0.15 12.75 11/29/02 6,559 14,494
11,172 0.91 11.25 12/30/02 34,724 76,732
Kevin Scully(6)......................... 1,333 0.11 9.00 1/30/02 3,315 7,324
1,333 0.11 9.00 2/27/02 3,315 7,324
7,278 0.59 9.00 3/30/02 18,097 39,990
988 0.08 9.00 3/30/02 2,457 5,429
179 0.01 9.00 4/29/02 445 984
3,820 0.31 9.00 4/29/02 9,499 20,989
1,333 0.11 9.00 5/29/02 3,315 7,324
5,000 0.41 12.00 6/16/02 16,577 36,631
2,128 0.17 16.50 6/29/02 9,701 21,436
798 0.06 13.88 7/30/02 3,059 6,760
1,596 0.13 13.75 8/28/02 6,063 13,398
5,054 0.41 13.75 9/29/02 19,199 42,426
532 0.04 12.50 10/30/02 1,837 4,060
4,256 0.35 12.75 11/29/02 14,992 33,129
12,768 1.04 11.25 12/30/02 39,685 87,694
Stephen E. Webb......................... 5,000 0.41 12.00 6/16/02 16,577 36,631
6,000 0.49 12.34 11/13/02 20,514 45,330
Harold A. Piskiel....................... 7,000 0.57 12.00 6/16/02 23,208 51,283
6,000 0.49 12.34 11/13/02 20,514 45,330
</TABLE>
- ---------------
(1) All options in this table are incentive stock options and were granted under
the Amended and Restated 1995 Stock Option Plan and have exercise prices
equal to the fair market value on the date of grant. All such options have
five-year terms. All options vest over a three-year period, except as noted
in footnote six below, at the rate of one-sixth, one-third and one-half at
the end of each year from the date of grant.
(2) The Company granted options to purchase 1,231,571 shares of Common Stock to
employees and consultants in fiscal 1997.
(3) Options may terminate before their expiration upon the termination of
optionee's status as an employee or consultant, the optionee's death or an
acquisition of the Company.
(4) Potential realizable value assumes that the stock price increases from the
exercise price from the date of grant until the end of the option term (5
years) at the annual rate specified (5% and 10%). Annual compounding
47
<PAGE> 50
results in total appreciation of approximately 28% (at 5% per year) and 61%
(at 10% per year). If the price of the Company's Common Stock were to
increase at such rates from the price at 1997 fiscal year end ($11.25 per
share) over the next 5 years, the resulting stock price at 5% and 10%
appreciation would be $14.35 and $18.11, respectively. The assumed annual
rates of appreciation are specified in SEC rules and do not represent the
Company's estimate or projection of future stock price growth. The Company
does not necessarily agree that this method can properly determine the value
of an option.
(5) A total of 25,275 options granted to Mr. Russo vest at the earlier of the
collection of certain sales receivables by the Company or the third
anniversary from the date of grant.
(6) Mr. Scully, as of February 28, 1998, resigned as an executive officer of the
Company. A total of 43,396 options granted to Mr. Scully vest at the earlier
of the collection of certain receivables by the Company or the third
anniversary from the date of grant. Under the provisions of an agreement
between Mr. Scully and the Company, all options will cease vesting on
January 8, 1999 and all unexercised options will terminate on March 9, 1999.
OPTION EXERCISES AND HOLDINGS
The following table sets forth, for each of the officers in the Summary
Compensation Table, certain information concerning stock options exercised
during fiscal 1997, and the number of shares subject to both exercisable stock
options as of December 31, 1997. Also reported are values for "in-the-money"
options that represent the positive spread between the respective exercise
prices of outstanding stock options and the fair market value of the Company's
Common Stock as of December 31, 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES VALUE OPTIONS AT FISCAL YEAR END FISCAL YEAR END($)(1)
ACQUIRED ON REALIZED --------------------------- ---------------------------
NAME EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
George F. (Rick) Adam, Jr. .... -- -- -- $11,000 -- --
Frank A. Russo, Jr. ........... -- -- $19,754 57,453 $ 76,474 $349,983
Kevin Scully(2)................ -- -- 44,813 60,647 154,439 350,001
Stephen E. Webb................ -- -- 11,333 67,666 25,499 127,499
Harold A. Piskiel.............. -- -- 27,777 58,555 242,494 372,499
</TABLE>
- ---------------
(1) Market value of underlying securities based on the closing price of
Company's Common Stock on December 31, 1997 (the last trading day of fiscal
1997) on the NASDAQ National Market of $11.25 minus the exercise price.
(2) Mr. Scully, as of February 28, 1998, resigned as an executive officer of the
Company.
EMPLOYEE BENEFIT PLANS
Amended and Restated 1995 Stock Option Plan.
The Company's Amended and Restated 1995 Stock Option Plan (the "1995 Stock
Option Plan") was adopted in 1995, amended in 1996 and amended and restated in
January 1997. The 1995 Stock Option Plan provides for the grant to employees of
the Company (including officers and employee directors) of incentive stock
options and stock purchase rights ("SPRs") within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), and for the grant of
nonstatutory stock options to employees and consultants of the Company. The 1995
Stock Option Plan is administered by the Board of Directors or a committee
designated by the Board of Directors (the "Administrator"), which selects the
optionees, determines the number of shares to be subject to each option and
determines the exercise price of each option. An aggregate of 2,333,333 shares
of Common Stock are reserved for issuance under the 1995 Stock Option Plan, of
which, as of March 31, 1998, options to purchase an aggregate of 2,126,320
shares were outstanding and an aggregate of 25,652 shares remained available for
future grants. The foregoing share figures do not include the following
amendments to the 1995 Stock Option Plan which have been submitted to the
Company's stockholders for
48
<PAGE> 51
approval at the 1998 Annual Meeting of Stockholders (the "Annual Meeting"): (i)
an increase in the number of shares reserved for issuance under the 1995 Stock
Option Plan by 500,000 shares and (ii) the automatic increase in the number of
shares reserved for issuance under the 1995 Stock Option Plan upon the
expiration of each fiscal year following the annual meeting of stockholders in
an amount equal to the lesser of 350,000, 3% of the outstanding shares of the
Company's Common Stock on such date or a lesser amount determined by the Board
of Directors. The exercise price of all incentive stock options granted under
the 1995 Stock Option Plan must be at least equal to the fair market value of
the Common Stock on the date of grant. The exercise price of all nonstatutory
stock options granted under the 1995 Stock Option Plan shall be determined by
the Administrator. With respect to any participant who owns stock possessing
more than 10% of the voting power of all classes of stock of the Company, the
exercise price of any incentive stock option granted must equal at least 110% of
the fair market value on the grant date and the maximum term of the option must
not exceed five years. The term of all other options granted under the 1995
Stock Option Plan may not exceed ten years.
In the event of a Change in Control of the Company, as defined in the 1995
Stock Option Plan, all outstanding options granted under the plan prior to
December 31, 1996 shall become vested and exercisable in full and shall be
assumed or an equivalent option substituted by the successor corporation; if the
successor corporation refuses to assume or substitute for such options, then
such options shall be exercisable in full for a period of fifteen days after
notice from the Administrator, and shall thereafter terminate. With respect to
options granted on or after January 1, 1997, upon any Change in Control each
such option shall be assumed or an equivalent option substituted by the
successor corporation or, if the successor corporation refuses to assume or
substitute for the outstanding options, such options will become fully vested
and exercisable for a period of fifteen days after notice from the
Administrator, and shall thereafter terminate; in addition, each holder of an
option granted under the plan on or after January 1, 1997 and assumed or
substituted upon a change in control shall be entitled to an additional twelve
months of vesting following any involuntary termination of the optionee's
employment with the successor corporation within twelve months following the
Change in Control. Unless terminated sooner, the 1995 Stock Option Plan will
terminate ten years from its effective date. The Board has authority to amend or
terminate the 1995 Stock Option Plan, provided that no such action may impair
the rights of the holder of any outstanding options without the written consent
of such holder.
Options and SPRs granted under the 1995 Plan are not generally transferable
by the optionee except by will or by the laws of descent and distribution, and
are exercisable during the lifetime of the optionee only by such optionee.
Generally, options granted under the 1995 Plan must be exercised within thirty
days of the end of an optionee's status as an employee or consultant of the
Company, or within twelve months after such optionee's termination by death or
disability, but in no event later than the expiration of the option term. In the
case of SPRs, unless the Administrator determines otherwise, the Company will
have a repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's employment with the Company for any reason
(including death or disability). Such repurchase option lapses at a rate
determined by the Administrator. The purchase price for shares repurchased by
the Company will be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to the Company.
1997 Employee Stock Purchase Plan.
The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted in January 1997 and became effective upon the closing of the Company's
initial public offering. A total of 216,666 shares of Common Stock has been
reserved for issuance under the Purchase Plan. The foregoing share figure does
not include the following amendments to the Purchase Plan that have been
submitted to the Company's stockholders for approval at the Annual Meeting: (i)
an increase in the number of shares reserved for issuance under the Purchase
Plan by 100,000 shares and (ii) an automatic increase in the number of shares
reserved for issuance under the Purchase Plan on the last day of each fiscal
year equal to the lesser of 100,000, 1.5% of the outstanding shares of the
Company's Common Stock on such date or a lesser amount determined by the Board
of Directors, Plus any shares required by the Company during the fiscal year
ending on such date. The Purchase Plan is intended to qualify under Section 423
of the Code. Offering periods may be up to 24 months in duration and may include
several purchase periods as determined by the Board. The initial offering period
commenced on June 18, 1997 and ended on the last business day on or prior to
August 15, 1997, and subsequent offering periods are initially expected to end
on February 15 and August 15 of each year. Employees are eligible to participate
if they
49
<PAGE> 52
are regularly employed by the Company for at least twenty hours per week and
more than five months in any calendar year.
The Purchase Plan permits eligible employees to purchase Common Stock
through payroll deductions, which may not exceed 10% of an employee's eligible
compensation (20% in the first offering period), including base salary,
commissions, bonuses, overtime and other cash compensation, at a price equal to
85% of the fair market value of the Common Stock at the beginning of each
offering period or the purchase date, whichever is lower. In the event of
certain changes in control of the Company, the Purchase Plan provides that the
Board of Directors will shorten the offering period by setting a new purchase
date to occur before the change in control event. Unless terminated sooner, the
Purchase Plan will terminate ten years after its effective date. The Board of
Directors has the authority to amend or terminate the Purchase Plan provided
that no such action adversely affects the rights of any participant.
1997 Director Option Plan.
The Board of Directors adopted the 1997 Director Option Plan (the "Director
Plan") in January 1997 to provide for the automatic grant to non-employee
directors of the Company of options to purchase shares of Common Stock. The
Director Plan is administered by the Board, unless the Board delegates
administration to a committee. An aggregate of 100,000 shares of Common Stock
has been reserved for issuance under the Director Plan, subject to adjustment in
the event of certain capital changes. Each non-employee director who first
becomes a director after the effective date of the Offering shall automatically
be granted an option to purchase 16,666 shares on the date on which such person
first becomes a non-employee director. In addition, each non-employee director
shall be automatically granted an option to purchase 5,000 shares each year
commencing on the day after the annual stockholder meeting. Options granted
under the Director Plan expire ten years after the date of grant and have an
exercise price equal to 100% of the fair market value of the Common Stock on the
date of grant. Initial options granted under the Director Plan shall become
exercisable cumulatively after three years as to one-third of the shares subject
to the option on each anniversary of the grant date, provided the optionee
continues to serve as a director. Each annual grant under the Director Plan
shall become exercisable in full on the third anniversary of the grant date,
provided the optionee continues to serve as a director. In the event of any
Change in Control of the Company, as defined in the Director Plan, outstanding
options under the Director Plan must be assumed (or an equivalent option
substituted) by the successor corporation, or the options shall become
exercisable in full for at least 15 days after notice by the Company. In
addition, if within one year following such a Change in Control a director shall
involuntarily cease to be a director, the director shall be entitled to option
vesting through the date of termination as a director plus one additional year
thereafter.
Prior to the adoption of the Director Plan, the directors of the Company
received the following grants under the 1995 Stock Option Plan; Mark Gordon was
granted options to purchase an aggregate of 13,333 shares of Common Stock at an
exercise price of $2.25 per share, of which 6,667 shares were vested at March
31, 1998; and James Reep was granted options to purchase an aggregate of 13,333
shares of Common Stock of at an exercise price of $2.25 per share, of which
6,667 shares were vested at March 31, 1998.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Bylaws provide that the Company shall indemnify its officers
and directors, and may indemnify its employees and other agents to the fullest
extent provided by Delaware law. The Company has obtained director and officer
liability insurance with respect to certain matters, including matters arising
under the Securities Act. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers, and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. At present,
there is no pending litigation or proceeding involving any director or officer,
employee or agent of the Company in which indemnification will be required or
permitted. The Company is not aware of any threatened litigation or proceeding
which may result in a claim for such indemnification.
50
<PAGE> 53
CERTAIN TRANSACTIONS
In March 1995, the Company issued 133,333 shares of Common Stock to Mr.
Piskiel in exchange for an aggregate consideration of $18,000.
Mr. Adam is the owner of Air America LLC, a private air charter company
that has provided service to the Company. Total expenses for services rendered
by Air America LLC to the Company were $84,506 in 1995. No services in excess of
$60,000 were provided by Air America LLC to the Company in 1996 or 1997. In the
first quarter of 1998, Air America LLC charged the Company $50,310 for air
charter services.
The Company was a party to a royalty agreement with Merrill Lynch under
which the Company is obligated to pay royalties to Merrill Lynch on net revenues
from licenses of NEONet, up to a total of $1.9 million. The royalty rate was 30%
through 1996 and was revised to 10% in January 1997. Merrill Lynch is a
stockholder of the Company. In addition, Merrill Lynch is a licensee of the
Company's NEONet products.
The Company has granted options to certain of its directors and executive
officers. See "Management -- Option Grants in Last Fiscal Year," "-- Employee
Benefit Plans -- 1997 Director Option Plan" and "Principal and Selling
Stockholders."
The Company has entered into indemnification agreements with each of its
officers and directors. See "Management -- Limitation of Liability and
Indemnification Matters."
Mark L. Gordon, a director of the Company, is a partner at Gordon &
Glickson, a law firm that has provided legal services for the Company. During
1995 and 1996, the total amounts paid to Gordon & Glickson by the Company for
services performed were $78,766 and $198,932, respectively. No services in
excess of $60,000 were provided to the Company by Gordon & Glickson in 1997.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors, principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including a
majority of the independent and disinterested directors, and will continue to be
on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
51
<PAGE> 54
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 31, 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, (iii) each of the Named Executive Officers, and (iv) all
directors and officers as a group. Except as indicated in the footnotes to the
table, the persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED NUMBER OF BENEFICIALLY OWNED
PRIOR TO OFFERING(2) SHARES OFFERED AFTER OFFERING
---------------------- -------------- ----------------------
5% STOCKHOLDERS, DIRECTORS AND OFFICERS(1) NUMBER PERCENTAGE NUMBER PERCENTAGE
- ------------------------------------------ --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
George F. (Rick) Adam, Jr.(3)......... 2,827,384 30.69%
c/o New Era of Networks, Inc.
New Era of Networks, Inc.
7400 East Orchard Road
Suite 230
Englewood, Colorado 80111
Harold A. Piskiel(4).................. 162,776 1.76
c/o New Era of Networks, Inc.
New Era of Networks, Inc.
7400 East Orchard Road
Suite 230
Englewood, Colorado 80111
Venrock Associates.................... 650,086 7.06
30 Rockefeller Plaza
Room 5508
New York, NY 10112
Venrock Associates II................. 317,019 3.44
30 Rockefeller Plaza
Room 5508
New York, NY 10112
ARCH Venture Fund II.................. 949,836 10.31
8735 W. Higgins Road
Suite 235
Chicago, IL 60631
Edgemont Asset Management............. 600,000 6.51
140 East 45th Street
43rd Floor
New York, NY 10017
DIRECTORS
Steve Lazarus(5)...................... 966,503 10.48
Mark L. Gordon(6)..................... 7,667 *
Elisabeth W. Ireland(7)............... 14,465 *
James Reep(8)......................... 6,667 *
Patrick J. Fortune(9)................. -- --
EXECUTIVE OFFICERS
Frank A. Russo(10).................... 43,820 *
Kevin Scully(11)...................... 73,753 *
Stephen E. Webb....................... 10,919 *
All directors and executive officers as a
group (15 persons)(12).............. 4,158,064 44.34
</TABLE>
- ---------------
* Less than 1%.
52
<PAGE> 55
(1) Assumes no exercise of the Underwriters' over-allotment option. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. In computing the number of shares beneficially owned
by a person and the percentage ownership of that person, shares of Common
Stock subject to options held by that person that are currently exercisable
or exercisable within 60 days of March 31, 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 9,213,666
shares of Common Stock outstanding on March 31, 1998 and 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.
(2) The number and percentage of shares beneficially owned is determined under
rules of the Securities and Exchange Commission ("SEC"), and the
information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rules, beneficial ownership includes any shares
as to which the individual has sole or shared voting power or investment
power and also any shares which the individual has the right to acquire
within 60 days of March 31, 1998 through the exercise of any stock option
or other right. Unless otherwise indicated in the footnotes, each person
has sole voting and investment power (or shares such powers with his or her
spouse) with respect to the shares shown as beneficially owned.
(3) Mr. Adam is also Chairman of the Board, President and Chief Executive
Officer of the Company. Includes 40,991 shares of Common Stock held in the
name of Adam's Investments I, LLLP, George F. Adam, III; 40,991 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; and 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 28,000 shares of Common Stock held
in the name of the Adam Family Foundation, George F. Adam, Jr., Trustee.
(4) Mr. Piskiel is also Executive Vice President and Chief Technology Officer
of the Company. Includes 34,443 shares of Common Stock issuable upon
exercise of stock options that are exercisable within 60 days of March 31,
1998.
(5) Includes 949,836 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 6,667 shares of Common Stock issuable upon
exercise of stock options that are exercisable within 60 days of March 31,
1998.
(6) Includes 6,667 shares of Common Stock issuable upon exercise of stock
options that are exercisable within 60 days of March 31, 1998.
(7) The Hamilton Companies, of which Ms. Ireland is a manager, holds a
registered certificate for 180,814 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
14,465 shares was 7,233 shares of Common Stock to Elisabeth W. Ireland, and
7,231 shares to Elisabeth W. Ireland and George R. Ireland as joint
tenants.
(8) Includes 6,667 shares of Common Stock issuable upon exercise of stock
options that are exercisable within 60 days of March 31, 1998.
(9) Patrick J. Fortune joined the Board of Directors of the Company on February
22, 1998. Mr. Fortune owns no Common Stock and is not yet vested in any
stock options.
(10) Includes 43,820 shares of Common Stock issuable upon the exercise of stock
options exercisable within 60 days of March 31, 1998.
(11) Mr. Scully, as of February 28, 1998, resigned as an executive officer of
the Company. Includes 4,000 shares of Common Stock held in the name of Mary
Ann Dore, Mr. Scully's spouse; 500 shares of Common Stock held in the name
of Kevin Scully, Custodian F/B/O Caitlin Scully, minor; 500 shares of
Common Stock held in the name of Kevin Scully, Custodian F/B/O Micaela
Scully, minor; 500 shares of Common Stock held in the name of Mary Ann
Dore, Custodian F/B/O Kelly O'Connell, minor; 500 shares of Common Stock
held in the name of Mary Ann Dore, Custodian F/B/O Christian O'Connell,
minor. Also includes 66,753 shares of Common Stock issuable upon exercise
of stock options that are exercisable within 60 days of March 31, 1998.
(12) Includes 162,573 shares of Common Stock issuable upon the exercise of stock
options exercisable within 60 days of March 31, 1998.
53
<PAGE> 56
DESCRIPTION OF CAPITAL STOCK
Effective upon completion of the Offering, the authorized capital stock of
the Company shall consist of 45,000,000 shares of Common Stock, $0.0001 par
value per share, and 2,000,000 shares of Preferred Stock, $0.0001 par value per
share.
COMMON STOCK
As of March 31, 1998, there were 9,213,666 shares of Common Stock
outstanding held of record by approximately 60 stockholders. The holders of
Common Stock are entitled to one vote per share on all matters to be voted on by
the stockholders. Subject to preferences that may be applicable to outstanding
shares of Preferred Stock, if any, the holders of Common Stock are entitled to
receive ratably such dividends as may be declared from time to time by the Board
of Directors out of funds legally available therefor. In the event of the
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior liquidation rights of Preferred Stock, if any,
then outstanding. The Common Stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are fully
paid and non-assessable, and the shares of Common Stock to be outstanding upon
completion of this Offering will be fully paid and non-assessable.
PREFERRED STOCK
The Company is authorized to issue 2,000,000 shares of undesignated
Preferred Stock. The Board of Directors has the authority to issue the
undesignated Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued shares of undesignated preferred stock and to fix the number of shares
constituting any series and the designations of such series, without any further
vote or action by the stockholders. The Board of Directors, without stockholder
approval, can issue Preferred Stock with voting and conversion rights which
could adversely affect the voting power of the holders of Common Stock. The
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company.
REGISTRATION RIGHTS
Pursuant to a Registration Rights Agreement dated as of May 9, 1995, as
amended September 20, 1995 and June 3, 1996, among the Company and certain
holders of its securities (the "Rights Agreement"), the holders of approximately
4,466,666 shares of Common Stock (the "Registrable Securities") are entitled to
certain rights with respect to the registration of the Registrable Securities
under the Securities Act. Under the Rights Agreement, if the Company proposes to
register any of its securities under the Securities Act, either for its own
account or the account of other stockholders, the holders of Registrable
Securities are entitled to notice of such registration and are entitled to
include their Registrable Securities therein. Further, holders of Registrable
Securities may require the Company to register all or a portion of their
Registrable Securities on Form S-3, when such form becomes available for use by
the Company, subject to certain conditions and limitations. The holders' rights
with respect to all such registrations are subject to certain conditions,
including the right of the underwriters to limit the number of shares included
in any such registration. With respect to all registrations, other than those on
Form S-3, the Company has agreed to pay all expenses related thereto, except for
underwriting discounts and commissions and stock transfer taxes.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, the statute prohibits
a publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of Section
203, a "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is a person who,
54
<PAGE> 57
together with affiliates and associates, owns (or at any time during the prior
three years has owned) 15% or more of the corporation's voting stock.
The Company's Bylaws require that special meetings of the stockholders of
the Company may be called only by the Board of Directors, the Chairman of the
Board, the Chief Executive Officer or by holders of at least 20% of the voting
power of all then-outstanding shares of voting stock. The Company's Certificate
of Incorporation provides that the authorized number of directors may be changed
only by resolution of the Board of Directors. In addition, the Board of
Directors is divided into three classes. The initial term of Class III directors
is through the first annual meeting of stockholders on May 14, 1998, the initial
term of the Class II directors is through the second annual meeting of
stockholders following the Offering, and the initial term of the Class I
directors is through the third annual meeting of stockholders following the
Offering, and the subsequent terms for directors of each class is three years,
in each case until their successors have been elected and qualified. These
provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Boston EquiServe.
LISTING
The Company's Common Stock is traded on the NASDAQ National Market under
the trading symbol "NEON."
55
<PAGE> 58
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, assuming the issuance of 1,900,000 shares
of Common Stock offered by the Company hereby (not including an aggregate of
450,000 shares of Common Stock which may be exercised pursuant to an
over-allotment option granted to the Underwriters), the Company will have
outstanding 11,113,666 shares of Common Stock, assuming no exercise of options
after March 31, 1998. Of these shares, all of the shares sold in the offering
will be freely tradeable without restriction or further registration under the
Securities Act unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 of the Securities Act.
Of the remaining 8,113,666 shares outstanding upon completion of the
offering, 3,860,037 will be "restricted securities" as that term is defined
under Rule 144 (the "Restricted Shares") and may not be sold publicly unless
they are registered under the Securities Act or are sold pursuant to Rule 144 or
another exemption from registration and 4,253,629 shares will be freely
tradeable. Beginning on or about August 20, 1998 (90 days after the estimated
completion date of the offering), upon expiration of lock-up agreements between
the representatives of the underwriters and officers, directors and certain
stockholders of the Company, approximately 617,105 Shares will be eligible for
immediate resale and approximately 2,763,801 Shares will be eligible for resale
pursuant to Rule 144 under the Securities Act, subject to compliance with the
volume limitations and other restrictions under Rule 144.
Any early release of the Lock-Up Agreements by the Underwriters, which, if
granted, could permit sales of a substantial number of shares and could
adversely affect the trading price of the Company's shares, may not be
accompanied by an advance public announcement by the Company. In addition,
certain holders of Common Stock have the right to include their shares in any
future registration of securities effected by the Company to acquire the Company
to register their shares for future sale, subject to certain exceptions.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least one year, including persons who may be deemed "affiliates" of the Company,
would be entitled to sell within any three-month period a number of shares that
doe not exceed the greater of 1% of the number of shares of Common Stock then
outstanding or the average weekly trading volume of the Common Stock as reported
through the Nasdaq National Market during the four calendar weeks preceding the
filing of a Form 144 with respect to such sale. Sales under Rule 144 are also
subject to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. In addition, a
person who is not deemed to have been an affiliate of the company at any time
during the 90 days preceeding a sale, and who has beneficially owned for at
least two years the shares proposed to be sold, would be entitled to sell such
shares under the Rule 144(k) without regard to the requirements described above.
In addition, a total of 2,333,333 shares of Common Stock reserved for
issuance under the Company's 1995 Amended and Restated Stock Option Plan, of
which options to purchase 2,126,320 shares of Common Stock were outstanding at
March 31, 1998 (of these option shares, 342,793 option shares were vested and
exercisable as of March 31, 1998), a total of 216,666 shares of Common Stock
reserved for issuance under the Company's 1997 Employee Stock Purchase Plan of
which 48,644 had been purchased as of March 31, 1998 and a total of 100,000
shares of Common Stock reserved for issuance under the Company's 1997 Director
Stock Option Plan, of which options to purchase 51,665 shares were outstanding
as of March 31, 1998; due to the Lock-Up Agreements, shares issuable pursuant to
such plans will not be eligible for resale into the public market until 90 days
following the date of this Prospectus (or such earlier date on which UBS
Securities LLC may elect to release the Lock-Up Agreements). See
"Management -- Employee Benefit Plans."
No prediction can be made as to the effect, if any, that markets sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of
Common Stock of the Company in the public market after the lapse of the
restrictions described below could adversely affect the prevailing market price
and the ability of the Company to raise equity capital in the future at a time
and price which it deems appropriate. In addition, after the offering, the
holders of approximately 4,258,629 shares of Common Stock (the "Registrable
Securities") will be entitled to certain demand and piggyback rights with
respect to registration of such shares under the Securities Act. Registration of
such shares under the Securities Act would result in such shares becoming freely
tradeable without restriction under the Securities Act (except for shares
purchased by affiliates of the Company) immediately upon the effectiveness of
56
<PAGE> 59
such registration. See "Description of Capital Stock -- Registration Rights of
Certain Holders." If such holders, by exercising their demand registration
rights, cause a larger number of securities to be registered and sold in the
public market, such sales could have an adverse effect on the market price for
the Company's Common Stock. If the Company were to include in a Company
initiated registration any Registrable Securities pursuant to the exercise of
piggyback registration rights, such sales may have an adverse effect on the
Company's ability to raise capital.
57
<PAGE> 60
UNDERWRITING
Subject to the terms and subject to conditions contained in an Underwriting
Agreement dated the date hereof, the Underwriters named below (the
"Underwriters"), for whom UBS Securities LLC, Cowen & Company, BancAmerica
Robertson Stephens and SoundView Financial Group, Inc. are serving as
Representatives (the "Representatives"), have agreed to purchase, from the
Company and the Selling Stockholders the following respective number of shares
of Common Stock.
<TABLE>
<CAPTION>
TOTAL
NUMBER OF
UNDERWRITERS SHARES
- ------------ ---------
<S> <C>
UBS Securities LLC..........................................
Cowen & Company.............................................
BancAmerica Robertson Stephens..............................
SoundView Financial Group, Inc..............................
Total............................................. 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by counsel,
and to certain other conditions. The Underwriters are obligated to take and pay
for all of the shares of Common Stock offered hereby (other than those covered
by the over-allotment option described below) if any are taken.
The Underwriters propose to offer part of the shares of Common Stock
offered hereby directly to the public at the public offering price set forth on
the cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ per share under the public offering price. Any
Underwriter may allow, and such dealers may reallow, a concession not in excess
of $ per share to other Underwriters or to certain other dealers.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 450,000 additional
shares of Common Stock at the public offering price set forth on the cover page
hereof, less underwriting discounts and commissions. The Underwriters may
exercise such option to purchase solely for the purpose of covering
over-allotments, if any, incurred in the sale of the shares of Common Stock
offered hereby. To the extent such option is exercised, each Underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional shares as the number set forth next to such
Underwriter's name in the preceding table bears to the total number of shares of
Common Stock offered hereby.
The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act of 1933, as amended.
All executive officers, directors and certain stockholders and option
holders of the Company have agreed not to offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock, or enter into
any swap or similar agreement that transfers, in whole or in part, the economic
risk of ownership of the Common Stock, for a period of 90 days after the date of
this Prospectus, without the prior written consent of UBS Securities LLC,
subject to certain limited exceptions. The Company has agreed that it will not,
without the prior written consent of UBS Securities LLC, offer, sell or
otherwise dispose of any shares of Common Stock, options or warrants to acquire
shares of Common Stock or securities exchangeable for or convertible into shares
of Common Stock during the 90-day period following the date of this Prospectus,
except that the Company may issue shares upon the exercise of options granted
prior to the date hereof, and may grant additional options under its Plans,
provided that, without the prior written consent of UBS Securities LLC, such
additional options shall not be exercisable during such period. See "Shares
Eligible for Future Sale."
In connection with this offering and in compliance with applicable law
including Regulation M and industry practice, the Underwriters may over-allot or
effect transactions which stabilize, maintain or otherwise affect the
58
<PAGE> 61
market price of the Common Stock at levels above those which might otherwise
prevail in the open market, including by entering stabilizing bids, effecting
syndicate covering transactions or imposing penalty bids. A stabilizing bid
means the placing of any bid, or the effecting of any purchase, for the purpose
of pegging, fixing or maintaining the price of a security. A syndicate covering
transaction means the placing of any bid on behalf of the underwriting syndicate
or the effecting of any purchase to reduce a short position created in
connection with this offering. A penalty bid means an arrangement that permits
UBS Securities LLC, as managing underwriter, to reclaim a selling concession
from a syndicate member in connection with this offering when the Common Stock
originally sold by the syndicate member are purchased in syndicate covering
transactions. Such transactions may be effected on the NASDAQ National Market or
otherwise. The Underwriters are not required to engage in any of these
activities. Any such activities, if commenced, may be discontinued at any time.
In connection with this offering, certain Underwriters, who are qualified
registered market makers on the Nasdaq Stock Market, may engage in passive
market making on Nasdaq in accordance with Rule 103 of Regulation M under the
Exchange Act during the one day period before the commencement of the offers or
sales of the Common Stock. The passive market making transactions must comply
with applicable volume and price limits and be identified as such. In general, a
passive market maker must display its bid at a price not in excess of the
highest independent bid for such security; if all independent bids are lowered
before the passive market maker's bid, however, such bid must then be lowered
when certain purchase limits are exceeded. Passive market making may stabilize
the market price of the Common Stock above independent market level and, if
commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Certain legal matters in connection with the offering will be
passed upon for the Underwriters by Cooley Godward LLP, Boulder, Colorado.
EXPERTS
The financial statements of New Era of Networks, Inc. as of December 31,
1995, 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.
ADDITIONAL INFORMATION
The Company intends to furnish to its stockholders annual reports
containing audited financial statements with an opinion thereon expressed by an
independent certified public accounting firm, and quarterly reports containing
unaudited financial information for the first three quarters of each fiscal
year.
The Company has filed with the Securities and Exchange Commission a
Registration Statement (including any amendments thereto) on Form S-1 under the
Securities Act with respect to the Common Stock offered hereby. This Prospectus,
which constitutes a part of the Registration Statement, omits certain of the
information contained in the Registration Statement and the exhibits and
schedules thereto on file with the Commission pursuant to the Securities Act and
the rules and regulations of the Commission thereunder. The Registration
Statement, including exhibits and schedules thereto, may be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W. Washington, D.C. 20549 and the regional
offices of the Commission located at Seven World Trade Center, 13th Floor, New
York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago Illinois 60661. Copies of all or any part thereof may be
obtained from the Commission upon the payment of certain fees prescribed by the
Commission. Such reports and other information may also be inspected without
charge at a Web site maintained by the Commission. The address of this site is
http://www.sec.gov.
59
<PAGE> 62
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 March 31, 1998 and
December 31, 1997......................................... F-19
Consolidated Statements of Operation for the three months
ended March 31, 1998
and 1997.................................................. F-20
Consolidated Statements of Cash Flows for the three months
ended March 31, 1998
and 1997.................................................. F-21
Notes to Consolidated Financial Statements.................. F-22
</TABLE>
F-1
<PAGE> 63
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> 64
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, 9,106,157 and 1,359,091, shares issued and
outstanding as of December 31, 1997 and 1996,
respectively........................................... 911 136
Additional paid-in capital................................ 46,191,190 141,543
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> 65
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........ $ (.64) $ (4 .19) $ (1 .15)
=========== =========== ===========
Weighted average shares of common stock outstanding
(Note 2).......................................... 5,479,151 1,353,276 1,308,997
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these
consolidated statements.
F-4
<PAGE> 66
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.............. -- $ -- 2,222,222 $222 $ 778 $ (719,194)
Issuance of common stock to an employee
in exchange for services............. -- -- 133,333 13 17,987 --
Issuance of Series A convertible
preferred stock ($0.218 per share) in
May for cash of $1,000,000,
cancellation of liabilities of
$1,000,000 and the surrender of
1,018,781 shares of common stock, net
of issuance costs of $41,952......... 9,169,028 2,000,000 (1,018,781) (102) (356) (41,494)
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 1,336,774 133 18,409 (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............. -- -- 17,777 2 39,998 --
Issuance of common stock upon exercise
of stock options..................... -- -- 4,540 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 1,359,091 136 141,543 (8,011,345)
Issuance of common stock upon initial
public offering net of issuance costs
of $3,861,852........................ -- -- 3,174,000 317 34,225,830 --
Conversion of preferred stock --
Series A............................. (9,169,028) (2,000,000) 2,037,561 204 1,999,796 --
Series B............................. (6,183,339) (1,875,000) 1,374,074 137 1,874,863 --
Series C............................. (4,664,596) (7,510,000) 1,036,574 104 7,509,896 --
Issuance of common stock upon exercise
of stock options..................... -- -- 124,857 13 439,262 --
Cumulative translation adjustment...... -- -- -- -- -- --
Net loss............................... -- -- -- -- -- (3,506,633)
---------- ----------- ---------- ---- ----------- ------------
BALANCES, December 31, 1997.............. -- $ -- 9,106,157 $911 $46,191,190 $(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
1,018,781 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> 67
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> 68
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(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 2,760,000 shares of its common stock to the public at a price of $12.00
per share. The Company received approximately $29.7 million of cash, net of
underwriting discounts, commissions and other offering costs. Upon completion of
the offering, all outstanding shares of Series A, Series B, and Series C
preferred stock (a total of 20,016,963 shares) were converted into 4,448,209
shares of common stock. In July 1997, the underwriters of the Company's IPO
exercised their over-allotment option and purchased an additional 414,000 shares
of common stock at $12.00 per share from the Company with net proceeds to the
Company of approximately $4.6 million, 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.
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.
F-7
<PAGE> 69
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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.
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.
F-8
<PAGE> 70
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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 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.
F-9
<PAGE> 71
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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).......................................... -- 4,448,209 3,411,635
Exercise of outstanding stock options (Note
6)....................................... 2,103,358 1,377,106 248,229
</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...... 7,663,907 5,789,382 3,621,830
Pro forma loss per common share............... (.46) (.98) (.41)
</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.
(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
F-10
<PAGE> 72
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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 6,901 shares of Company common stock for $7.245 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.
The components of the Company's deferred tax assets and liabilities are as
follows:
F-11
<PAGE> 73
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
<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> 74
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 2,333,333
shares of common stock to employees and nonemployees; 133,333 shares are
available for grants to nonemployees and consultants. Incentive stock options
granted to employees have an exercise price equal to the fair market value of
the underlying shares at the date of grant. The exercise price of 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> 75
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........................ $ (0.64) $ (4.19) $ (1.15)
Pro forma.......................... (0.85) (4.52) (1.16)
</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> 76
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...... 1,377,106 $4.92 248,229 $2.05 -- $ --
Granted............................... 1,231,571 11.70 1,238,038 5.34 261,295 2.05
Cancelled............................. (381,790) 6.05 (107,953) 3.11 (13,066) 2.25
Exercised............................. (124,862) 3.52 (1,208) 2.25 -- --
--------- ----- --------- ----- ------- -----
Outstanding at end of year............ 2,102,025 $8.68 1,377,106 $4.92 248,229 $2.05
========= ===== ========= ===== ======= =====
Exercisable at end of year............ 206,736 73,126 1,067
========= ========= =======
</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.............................. 1,081,571 $4.57 $11.64 466,605 $4.17 $7.25 54,962 $0.78 $1.35
Exercise price greater than market
price.............................. 150,000 2.74 12.10 771,433 1.52 4.17 206,333 0.44 2.25
--------- --------- -------
1,231,571 1,238,038 261,295
========= ========= =======
</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>
$ 2.25 - $ 2.25 496,535 3.1 $ 2.25 108,250 $ 2.25
4.50 - 4.50 8,662 3.1 4.50 8,662 4.50
7.25 - 9.00 720,922 4.0 8.31 86,603 7.94
11.25 - 16.75 875,006 4.8 12.68 3,221 11.48
17.50 - 17.50 900 4.5 17.50 --
- --------------- --------- --- ------ ------- ------
$ 2.25 - $17.50 2,102,025 4.1 $ 8.68 206,736 $ 4.87
========= =======
</TABLE>
Non-employee Options
The Company has granted stock options to non-employees for 17,579 shares at
a weighted average exercise price of $4.35 per share (range of $2.25 to $14.63)
and has recognized cost of $72,917 related to these options based on the value
of the services received. During 1997 and 1996, 1,333 and 3,333 options to
purchase common stock were exercised at $11.25 and $2.25 per share,
respectively. At December 31, 1997, 12,913 options remained outstanding and
exercisable at a weighted average exercise price of $11.84 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> 77
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
each year, of an option to purchase 5,000 shares of the Company's common stock
at an exercise price equal to the fair market value of the common stock on the
date of grant. In addition, each new non-employee director joining the Board of
Directors after the Company's initial public offering will automatically be
granted an option to purchase 16,666 shares of the Company's common stock at an
exercise price equal to the fair market value at date of grant. The Board of
Directors has reserved an aggregate of 100,000 shares for issuance under the
Director Plan.
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 216,666 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 1,018,781 shares of Company
common stock in exchange for 6,876,771 shares of Series A. The remaining
2,292,257 shares of Series A were purchased for $500,000 cash by an unrelated
entity.
In September 1995, the Company issued 6,183,339 shares of $.01 par value
Series B Convertible Preferred Stock ("Series B") for $1,875,000 cash in a
private placement transaction.
In June 1996, the Company issued 4,664,596 shares of $.01 par value Series
C Convertible Preferred Stock ("Series C") for $7,510,000 cash in another
private placement transaction.
The 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> 78
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> 79
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> 80
NEW ERA OF NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 6,486,784 $ 7,150,362
Short-term investments.................................... 14,544,993 15,573,617
Accounts receivable, net of an allowance for uncollectible
accounts of $300,000................................... 12,088,479 11,072,850
Unbilled revenue.......................................... 1,870,397 1,667,456
Prepaid expenses and other................................ 1,328,325 1,020,394
------------ ------------
Total current assets.............................. 36,318,978 36,484,679
------------ ------------
Property and equipment:
Computer equipment and software........................... 3,329,054 2,725,144
Furniture, fixtures and equipment......................... 850,929 640,218
Leasehold improvements.................................... 264,240 86,563
------------ ------------
4,444,223 3,451,925
Less -- accumulated depreciation.......................... (1,251,160) (1,036,088)
------------ ------------
Property and equipment, net............................... 3,193,063 2,415,837
------------ ------------
Other assets, net........................................... 1,333,787 1,328,659
------------ ------------
Total assets...................................... $ 40,845,827 $ 40,229,175
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,672,905 $ 2,171,722
Accrued liabilities....................................... 1,647,795 2,081,959
Current portion of bank borrowings........................ 49,766 66,963
Deferred revenue.......................................... 1,121,460 1,177,262
------------ ------------
Total liabilities................................. 4,491,926 5,497,906
------------ ------------
Stockholders' equity:
Common stock, $.0001 par value, 45,000,000 shares
authorized; 9,213,666 and 9,106,157 shares issued and
outstanding, respectively.............................. 921 911
Additional paid-in capital................................ 47,032,666 46,191,190
Accumulated deficit....................................... (10,725,600) (11,517,978)
Cumulative translation adjustment......................... 45,914 57,146
------------ ------------
Total stockholders' equity........................ 36,353,901 34,731,269
------------ ------------
Total liabilities and stockholders' equity........ $ 40,845,827 $ 40,229,175
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-19
<PAGE> 81
NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
----------- ----------
<S> <C> <C>
Revenues:
Software licenses......................................... $ 6,572,634 $2,447,410
Services and maintenance.................................. 3,009,489 1,226,438
----------- ----------
Total revenues.................................... 9,582,123 3,673,848
Cost of revenues:
Cost of software licenses................................. 222,000 249,806
Cost of services and maintenance.......................... 1,526,458 800,157
----------- ----------
Total cost of revenues............................ 1,748,458 1,049,963
----------- ----------
Gross profit................................................ 7,833,665 2,623,885
Operating expenses:
Sales and marketing....................................... 3,605,521 1,690,082
Research and development.................................. 2,691,047 1,222,464
General and administrative................................ 991,464 494,636
Amortization of intangibles............................... 49,377 --
----------- ----------
Total operating expenses.......................... 7,337,409 3,407,182
----------- ----------
Income (loss) from operations............................... 496,256 (783,297)
Other income (expense), net................................. 296,122 (1,103)
----------- ----------
Income (loss) before provision for income taxes............. 792,378 (784,400)
Provision for income taxes.................................. -- --
----------- ----------
Net income (loss)........................................... $ 792,378 $ (784,400)
=========== ==========
Net income (loss) per common share, basic................... $ 0.09 $ (0.57)
=========== ==========
Net income (loss) per common share, diluted................. $ 0.08 $ (0.57)
=========== ==========
Weighted average shares of common stock outstanding,
basic..................................................... 9,154,642 1,375,606
=========== ==========
Weighted average shares of common stock outstanding,
diluted................................................... 10,166,297 1,375,606
=========== ==========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-20
<PAGE> 82
NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 792,378 $ (784,400)
Adjustments to reconcile net income (loss) to net cash
used in operating activities --
Depreciation and amortization.......................... 263,837 121,893
Changes in assets and liabilities --
Accounts receivable, net............................. (1,025,237) (1,173,369)
Unbilled revenue..................................... (203,949) (253,750)
Prepaid expenses and other........................... (311,612) (68,297)
Other assets, net.................................... (59,785) 37,886
Accounts payable..................................... (502,226) 365,272
Accrued liabilities.................................. 62,030 127,760
Deferred revenue..................................... (55,821) 90,000
----------- -----------
Net cash used in operating activities............. (1,040,385) (1,537,005)
----------- -----------
Cash flows from investing activities:
Proceeds from sale of short-term investments.............. 1,028,624 --
Purchase of property and equipment........................ (992,296) (202,629)
----------- -----------
Net cash used in investing activities............. 36,328 (202,629)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 345,323 101,798
Common stock issuance costs............................... -- --
Proceeds from issuance of preferred stock................. -- --
Preferred stock from issuance costs....................... -- --
Principal payments on notes payable to banks.............. (16,886) (1,935)
Payment of deferred offering costs........................ -- (106,929)
----------- -----------
Net cash provided (used in) by financing
activities...................................... 328,437 (7,066)
----------- -----------
Effect of exchange rate on cash............................. 12,042 --
Net increase in cash and cash equivalents................... (663,578) (1,746,700)
Cash and cash equivalents, beginning of period.............. 7,150,362 3,387,466
----------- -----------
Cash and cash equivalents, end of period.................... $ 6,486,784 $ 1,640,766
=========== ===========
Supplemental disclosures of noncash transactions:
Accrued deferred offering costs........................... $ 1,300 $ 402,000
=========== ===========
Common stock issued under employee stock purchase plan.... $ 496,164 $ 0
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-21
<PAGE> 83
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION.
The accompanying consolidated interim financial statements have been
prepared by New Era of Networks, Inc. (the "Company"), without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission (the
"SEC"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations. These
financial statements should be read in conjunction with the Company's audited
consolidated financial statements as included in the Company's Registration
Statement on Form S-1 and on Form 10-K and related Prospectus dated June 18,
1997. The consolidated results of operations for the three months ended March
31, 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 which are of a normal and
recurring nature, necessary for a fair presentation of the financial position
and results of operations for the periods presented. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
2. NET INCOME (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 common 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
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 for the IPO and
subsequent filings with the Securities and Exchange 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 required the Company to retroactively restate its loss per
common share.
F-22
<PAGE> 84
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. COMPREHENSIVE INCOME.
In June 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 reported by the Company is the cumulative
translation adjustment. The Company's comprehensive income for the three months
ended March 31, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
MARCH 31, MARCH 31,
1998 1997
--------- ---------
<S> <C> <C>
Net income (loss) for the period............................ $792,378 $(784,400)
Change in cumulative translation adjustment................. (11,232) --
-------- ---------
Comprehensive income (loss)................................. $781,146 $(784,400)
======== =========
</TABLE>
F-23
<PAGE> 85
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> 86
No person is authorized in connection with any offering made hereby to give
any information or to make any representation not contained herein and, if given
or made, such information or representation must not be relied upon as having
been authorized by the Company or the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any security
other than the Common Stock offered hereby, nor does it constitute an offer to
sell or a solicitation of an offer to buy any of the securities offered hereby
to any person in any jurisdiction in which it is unlawful to make such an offer
or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any date subsequent to the date
hereof.
---------------------------
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 6
Use of Proceeds............................ 15
Dividend Policy............................ 15
Capitalization............................. 16
Dilution................................... 17
Selected Consolidated Financial Data....... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 19
Business................................... 28
Management................................. 43
Certain Transactions....................... 51
Principal and Selling Stockholders......... 52
Description of Capital Stock............... 54
Shares Eligible for Future Sale............ 56
Underwriting............................... 58
Legal Matters.............................. 59
Experts.................................... 59
Additional Information..................... 59
Index to Consolidated Financial
Statements............................... F-1
</TABLE>
---------------------
Until , 1998 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
3,000,000 Shares
[NEON LOGO]
Common Stock
-----------------------------
PROSPECTUS
, 1998
------------------------------
UBS SECURITIES
COWEN & COMPANY
BANCAMERICA ROBERTSON STEPHENS
SOUNDVIEW FINANCIAL GROUP, INC.
<PAGE> 87
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of the Common Stock being registered hereby. All amounts are
estimates except the SEC registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT TO BE
PAID BY
REGISTRANT
------------
<S> <C>
SEC Registration Fee........................................ $ 26,780
NASD Filing Fee............................................. 9,000
NASDAQ National Market Additional Listing Fee............... 17,500
Printing.................................................... 175,000
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............................................... 6,720
--------
Total............................................. $500,000
========
</TABLE>
The Registrant intends to pay all expenses of registration, issuance and
distribution.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law Code authorizes a court
to award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Securities
Act"). Article seven of the Registrant's Certificate of Incorporation (Exhibit
3.1 hereto) and Article VI of the Registrant's Bylaws (Exhibit 3.2 hereto)
provide for mandatory indemnifications of its directors and officers and
permissible indemnifications of employees and offer agents to the maximum extent
permitted by the Delaware General Corporation Law. In addition, the Registrant
has entered into Indemnification Agreements (Exhibit 10.1 hereto) with its
officers and directors. Reference is also made to Section 9 of the Underwriting
Agreement contained in Exhibit 1.1 hereto, which provides for the
indemnification of officers, directors and controlling persons of the Registrant
against certain liabilities and Section 11 of the 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 September 26, 1997 by and
among Registrant and Menhir Limited.
3.1* Amended and Restated Certificate of Incorporation, as
amended through May 21, 1997.
3.2*** Amended and Restated Bylaws of Registrant, as amended
through February 2, 1998.
4.1* Form of Registrant's Common Stock Certificate.
</TABLE>
II-1
<PAGE> 88
<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.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
24.1 Power of Attorney (which is included on page II-4 herein).
27.1 Financial Data Schedule.
</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, as amended, dated October 10, 1997.
*** Incorporated herein by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
(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.
II-2
<PAGE> 89
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) That for purposes of determining any liability under the
Securities Act, the information omitted from the form of this prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) That for purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 24
of this Registration Statement or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by 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> 90
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF DENVER, STATE OF
COLORADO, ON APRIL 29, 1998. THE REGISTRANT CERTIFIES THAT IT HAS REASONABLE
GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE REQUIREMENTS FOR FILING ON FORM S-1.
New Era of Networks, Inc.
By: /s/ LEONARD M. GOLDSTEIN
----------------------------------
Leonard M. Goldstein
Senior Vice President, Senior
Counsel and Secretary
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 AND ON THE DATES STATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GEORGE F. ADAM, JR. Chairman of the Board, Chief April 29, 1998
- ----------------------------------------------------- Executive Officer, President and
George F. Adam, Jr. Director
/s/ LEONARD M. GOLDSTEIN Senior Vice President, Senior Counsel April 29, 1998
- ----------------------------------------------------- and Secretary
Leonard M. Goldstein
/s/ STEPHEN E. WEBB Senior Vice President and Chief April 29, 1998
- ----------------------------------------------------- Financial Officer (Principal
Stephen E. Webb Financial Officer)
/s/ JAMES C. PARKS Vice President of Finance and April 29, 1998
- ----------------------------------------------------- Controller (Principal Accounting
James C. Parks Officer)
/s/ HAROLD A. PISKIEL Executive Vice President, Chief April 29, 1998
- ----------------------------------------------------- Technology Officer and Director
Harold A. Piskiel
/s/ STEVE LAZARUS Director April 29, 1998
- -----------------------------------------------------
Steven Lazarus
/s/ MARK L. GORDON Director April 29, 1998
- -----------------------------------------------------
Mark L. Gordon
/s/ JAMES REEP Director April 29, 1998
- -----------------------------------------------------
James Reep
/s/ ELISABETH W. IRELAND Director April 29, 1998
- -----------------------------------------------------
Elisabeth W. Ireland
/s/ PATRICK J. FORTUNE Director April 29, 1998
- -----------------------------------------------------
Patrick J. Fortune
</TABLE>
II-4
<PAGE> 91
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1** Share Purchase Agreement dated September 26, 1997 by and
among Registrant and Menhir Limited.
3.1* Amended and Restated Certificate of Incorporation, as
amended through May 21, 1997.
3.2*** Amended and Restated Bylaws of Registrant, as amended
through February 2, 1998.
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.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
24.1 Power of Attorney (which is included on page II-4 herein).
27.1 Financial Data Schedule.
</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, as amended, dated October 10, 1997.
*** Incorporated herein by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
<PAGE> 1
3,000,000 Shares
NEW ERA OF NETWORKS, INC.
Common Stock
UNDERWRITING AGREEMENT
, 1998
---------------
UBS Securities LLC
Cowen & Company
BancAmerica Robertson Stephens
SoundView Financial Group, Inc.
As Representatives of the Several Underwriters
c/o UBS Securities LLC
299 Park Avenue
New York, NY 10171
Ladies and Gentlemen:
New Era of Networks, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell [1,900,000] shares of its authorized but unissued
Common Stock, $.0001 par value per share (the "Common Stock"), and the
stockholders of the Company listed on Schedule B hereto (collectively, the
"Selling Securityholders") propose to sell an aggregate of [1,100,000] shares of
Common Stock (collectively, such 3,000,000 shares of Common Stock are
hereinafter referred to as the "Firm Shares") to the several underwriters listed
on Schedule A to this Agreement (collectively, the "Underwriters"). The Company
also proposes to grant to the Underwriters an option to purchase up to 450,000
additional shares (the "Option Shares") of Common Stock on the terms and for the
purposes set forth in Section 3(c). The Firm Shares and the Option Shares are
hereinafter collectively referred to as the "Shares."
The Company and the Selling Securityholders severally wish to confirm
as follows agreements with you (the "Representatives") and the other
Underwriters on whose behalf you are acting in connection with the several
purchases by the Underwriters of the Shares.
1. REGISTRATION STATEMENT. A registration statement on Form S-1 (File
No. 333- __________ including a prospectus relating to the Shares and each
amendment thereto has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act"), and the
rules and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has been filed with the
Commission. There have been delivered to you three signed copies of such
registration
1.
<PAGE> 2
statement and amendments, together with three copies of each exhibit filed
therewith. Copies of such registration statement and amendments (but without
exhibits) and of the related preliminary prospectus have been delivered to you
in such reasonable quantities as you have requested for each of the
Underwriters. If such registration statement has not become effective, a further
amendment to such registration statement, including a form of final prospectus,
necessary to permit such registration statement to become effective will be
filed promptly by the Company with the Commission. If such registration
statement has become effective, a final prospectus containing all Rule 430A
information (as hereinafter defined) will be filed by the Company with the
Commission in accordance with Rule 424(b) of the Rules and Regulations on or
before the second business day after the date hereof (or such earlier time as
may be required by the Rules and Regulations).
The term "Registration Statement" as used in this Agreement shall mean
such registration statement (including all exhibits and financial statements and
all documents incorporated by reference therein), at the time such registration
statement becomes or became effective and, in the event any post-effective
amendment thereto becomes effective prior to the Closing Date (as hereinafter
defined), shall also mean such registration statement as so amended; provided,
however, that such term shall include all Rule 430A information deemed to be
included in such registration statement at the time such registration statement
becomes effective as provided by Rule 430A of the Rules and Regulations and
shall also mean any registration statement filed pursuant to Rule 462(b) of the
Rules and Regulations with respect to the Shares. The term "Preliminary
Prospectus" shall mean any preliminary prospectus referred to in the preceding
paragraph and any preliminary prospectus included in the Registration Statement
at the time it becomes effective that omits Rule 430A information. The term
"Prospectus" as used in this Agreement shall mean the prospectus relating to the
Shares in the form in which it is first filed with the Commission pursuant to
Rule 424(b) of the Rules and Regulations or, if no filing pursuant to Rule
424(b) of the Rules and Regulations is required, shall mean the form of final
prospectus included in the Registration Statement at the time such registration
statement becomes effective. The term "Rule 430A Information" means information
with respect to the Shares and the offering thereof permitted to be omitted from
the Registration Statement when it becomes effective pursuant to Rule 430A of
the Rules and Regulations.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
SECURITYHOLDERS.
(a) The Company hereby represents and warrants as follows:
(i) The Company has not received, and has no notice of, any
order of the Commission preventing or suspending the use of any Preliminary
Prospectus, or instituted proceedings for that purpose, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material respects to
the requirements of the Act and the Rules and Regulations. When the Registration
Statement became or becomes, as the case may be, effective (the "Effective
Date") and at all times subsequent thereto up to and at the Closing Date (as
hereinafter defined), any later date on which Option Shares are to be purchased
(the "Option Closing Date") and when any post-effective amendment to the
Registration Statement becomes effective or any amendment or supplement to the
Prospectus is filed with the Commission, (i) the Registration Statement and
Prospectus, and any amendments or supplements thereto, will contain all
2.
<PAGE> 3
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 foregoing
representations and warranties in this Section 2(a) do not apply to any
statements or omissions made in reliance on and in conformity with the
information contained in Paragraph 1, inclusive of the list of underwriters set
forth thereunder, in the section of the Prospectus entitled "Underwriting" and
the information in the last paragraph on the front cover page of the Prospectus.
The Company has not distributed any offering material in connection with the
offering or sale of the Shares other than the Registration Statement, the
Preliminary Prospectus, the Prospectus or any other materials, if any, permitted
by the Act.
(ii) 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, and except as set forth in the exhibits to the Registration
Statement no changes therein will be made subsequent to the date hereof and
prior to the Closing Date or, if later, the Option Closing Date. The Company has
no subsidiaries (as defined in the Rules and Regulations) other than New Era of
Networks Limited, NEON (Australia) Pty. Limited and Menhir Limited (the
"Subsidiaries"). Other than the Subsidiaries, the Company does not own, directly
or indirectly, any shares of stock or any other equity or long-term debt
securities of any corporation or have any equity interest in any firm,
partnership, joint venture, association or other entity.
(iii) 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
3.
<PAGE> 4
Company is a party or by which its properties are bound, or (ii) the 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").
(iv) 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.
(v) All outstanding shares of capital stock of the Company
have been duly authorized and validly issued and are fully paid and
nonassessable, have been issued in compliance with all federal and state
securities laws, were not issued in violation of any preemptive right, resale
right, right of first refusal or similar right. The authorized and outstanding
capital stock of the Company conforms in all material respects to the
description thereof contained in the Registration Statement and the Prospectus
(and such description correctly states the substance of the provisions of the
instruments defining the capital stock of the Company). The Shares to be sold by
the Company 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. The Shares to be sold by
the Selling Securityholders are duly authorized, validly issued, fully paid and
nonassessable. Except as set forth in the Prospectus, no preemptive right,
co-sale right, right of first refusal or other similar rights of securityholders
exists with respect to any of the Shares or the issue and sale thereof other
than those that have been expressly waived prior to the date hereof. With the
exception of the Selling Securityholders, 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 Shares, except as may be
required under the Act, the Exchange Act or under state securities or Blue Sky
laws. Except as disclosed in or contemplated by the Prospectus and the financial
statements of the Company, and the related notes thereto, included in the
Prospectus the Company does not have outstanding any options or warrants to
purchase, or any preemptive rights or other rights to subscribe for or to
purchase, any
4.
<PAGE> 5
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.
(vi) The financial statements of the Company, together with
the related schedules and notes, forming part of the Registration Statement and
the Prospectus, fairly present the financial position and the results of
operations of the Company at the respective dates and for the respective periods
to which they apply. All financial statements, together with the related
schedules and notes, filed with the Commission as part of the Registration
Statement have been prepared in accordance with generally accepted accounting
principles as in effect in the United States consistently applied throughout the
periods involved except as may be otherwise stated in the Registration
Statement.
(vii) 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 Subsidiary 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 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.
(viii) 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.
(ix) The Company now holds and at the Closing Date and any
later Option Closing Date, as the case may be, will hold, all licenses,
certificates, approvals and permits from all state, United States, foreign and
other regulatory authorities that are material
5.
<PAGE> 6
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.
(x) 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.
(xi) 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.
(xii) 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.
(xiii) 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.
(xiv) 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.
6.
<PAGE> 7
(xv) 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.
(xvi) 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.
(xvii) 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) that has been designated or regulated
by any governmental authority as radioactive, toxic, hazardous or otherwise a
danger to health, reproduction or the environment.
(xviii) Neither the Company nor 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.
(xix) The Common Stock is registered pursuant to Section 12(g)
of the Exchange Act. The Shares have been duly authorized for quotation on the
National Association of Securities Dealers, Inc. 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.
(xx) Neither the Company nor, to the Company's knowledge, the
Selling Securityholders or any of the Company's officers, directors or
affiliates has taken, and at the Closing Date and at any later Option Closing
Date, neither the Company nor the Selling Securityholders nor, to either of
their knowledge, any of the Company's officers, directors or affiliates will
have taken, directly or indirectly, any action which has constituted, or might
7.
<PAGE> 8
reasonably be expected to constitute, the stabilization or manipulation of the
price of sale or resale of the Shares.
(xxi) 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.
(b) Each of the Selling Securityholders hereby represents and warrants
as follows:
(i) Such Selling Securityholder has good and marketable title
to all of the Shares to be sold by such Selling Securityholder hereunder, free
and clear of all liens, encumbrances, equities, security interests and claims
whatsoever, with full right and authority to deliver the same hereunder,
subject, in the case of each Selling Securityholder, to the rights of First
National Bank of Boston, as Custodian (herein called the Custodian), and that
upon the delivery of and payment for such Shares hereunder, the several
Underwriters will receive good and marketable title thereto, free and clear of
all liens, encumbrances, equities, security interests and claims whatsoever.
(ii) Certificates in negotiable form for the Shares to be sold
by such Selling Securityholder have been placed in custody under a Custody
Agreement for delivery under this Agreement with the Custodian; such Selling
Securityholder specifically agrees that the Shares represented by the
certificates so held in custody for such Selling Securityholder are subject to
the interests of the several Underwriters and the Company, that the arrangements
made by such Selling securityholder for such custody, including the Power of
Attorney provided for in such Custody Agreement, are to that extent irrevocable,
and that the obligations of such Selling Securityholder shall not be terminated
by any act of such Selling Securityholder or by operation of law, whether by the
death or incapacity of such Selling Securityholder (or, in the case of a Selling
Securityholder that is not an individual, the dissolution or liquidation of such
Selling Securityholder) or the occurrence of any other event; if any such death,
incapacity, dissolution liquidation or other such event should occur before the
delivery of such Shares hereunder, certificates for such Shares shall be
delivered by the Custodian in accordance with the terms and conditions of this
Agreement as if such death, incapacity, dissolution, liquidation or other event
had not occurred, regardless of whether the Custodian shall have received notice
of such death, incapacity, dissolution, liquidation or other event.
(iii) Such Selling Securityholder has reviewed the
representations and warranties contained in this Agreement and the Registration
Statement and Prospectus. Based on the foregoing, nothing has come to the
attention of such Selling Securityholder that would lead such Selling
Securityholder to believe that (i) the representations and warranties of the
Company contained in this Agreement are not true and correct in all material
respects, (ii) on the Effective Date, the Registration Statement contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make the statements
therein not misleading or (iii) on the Effective Date the Prospectus contained
and, on the Closing Date contains any untrue statement of a material fact or
omitted or omits to state any material
8.
<PAGE> 9
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
3. PURCHASE OF THE SHARES BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and
subject to the terms and conditions herein set forth, the Company and the
Selling Securityholders agrees to issue and sell the Firm Shares to the several
Underwriters, each Selling Securityholder agrees to sell to the several
Underwriters the number of Firm Shares set forth in Schedule B opposite the name
of such Selling Securityholder, and each of the Underwriters agrees to purchase
from the Company and the Selling Securityholders the respective aggregate number
of Firm Shares set forth opposite its name on Schedule A, plus such additional
number of Firm Shares which such Underwriter may become obligated to purchase
pursuant to Section 3(b) hereof. The price at which such Firm Shares shall be
sold by the Company and the Selling Securityholders and purchased by the several
Underwriters shall be $_____ per share. The obligation of each Underwriter to
the Company and each of the Selling Securityholders shall be to purchase from
the Company and the Selling Securityholders that number of the Firm Shares which
represents the same proportion of the total number of the Firm shares to be sold
by each of the Company and the Selling Securityholders pursuant to this
Agreement as the number of the Firm Shares set forth opposite the name of such
Underwriter in Schedule A hereto represents of the total number of the Firm
Shares to be purchased by all Underwriters pursuant to this Agreement, as
adjusted by you in such manner as you deem advisable to avoid fractional shares.
In making this Agreement, each Underwriter is contracting severally and not
jointly; except as provided in paragraphs (b) and (c) of this Section 3, the
agreement of each Underwriter is to purchase only the respective number of Firm
Shares specified on Schedule A.
(b) If for any reason one or more of the Underwriters shall
fail or refuse (otherwise than for a reason sufficient to justify the
termination of this Agreement under the provisions of Section 10 hereof) to
purchase and pay for the number of Shares agreed to be purchased by such
Underwriter or Underwriters, the non-defaulting Underwriters shall have the
right within twenty four (24) hours after such default to purchase, or procure
one or more other Underwriters to purchase, in such proportions as may be agreed
upon between you and such purchasing Underwriter or Underwriters and upon the
terms herein set forth, all or any part of the Shares which such defaulting
Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail so to make such arrangements with respect to all such Shares
and portion, the number of Shares which each non defaulting Underwriter is
otherwise obligated to purchase under this Agreement shall be automatically
increased on a pro rata basis (as adjusted by you in such manner as you deem
advisable to avoid fractional shares) to absorb the remaining shares and portion
which the defaulting Underwriter or Underwriters agreed to purchase; provided,
however, that the non-defaulting Underwriters shall not be obligated to purchase
the Shares and portion which the defaulting Underwriter or Underwriters agreed
to purchase if the aggregate number of such Shares exceeds ten percent (10%) of
the total number of Shares which all Underwriters agreed to purchase hereunder.
If the total number of Shares which the defaulting Underwriter or Underwriters
agreed to purchase shall not be purchased or absorbed in accordance with the two
preceding sentences, the Company and the Selling Securityholders shall have the
right, within twenty-four (24) hours next succeeding the 24-hour period referred
to above, to make arrangements with other underwriters or purchasers reasonably
satisfactory to
9.
<PAGE> 10
you for purchase of such Shares and portion on the terms herein set forth. In
any such case, either you or the Company and the Selling Securityholders shall
have the right to postpone the Closing Date determined as provided in Section 5
hereof for not more than seven business days after the date originally fixed as
the Closing Date pursuant to said Section 5 in order that any necessary changes
in the Registration Statement, the Prospectus or any other documents or
arrangements may be made. If the aggregate number of Shares which the defaulting
Underwriter or Underwriters agreed to purchase exceeds 10% of the total number
of Shares which all Underwriters agreed to purchase hereunder, and if neither
the non-defaulting Underwriters nor the Company and the Selling Securityholders
shall make arrangements within the 24-hour periods stated above for the purchase
of all the Shares which the defaulting Underwriter or Underwriters agreed to
purchase hereunder, this Agreement shall be terminated without further act or
deed and without any liability on the part of the Company or the Selling
Securityholders to any non defaulting Underwriter and without any liability on
the part of any non-defaulting Underwriter to the Company or the Selling
Securityholders. Nothing in this paragraph (b), and no action taken hereunder,
shall relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and
covenants herein contained, and subject to the terms and conditions herein set
forth, the Company grants an option to the several Underwriters to purchase all
or any portion of the Option Shares from the Company at the same price per share
as the Underwriters shall pay for the Firm Shares. Said option may be exercised
only to cover over-allotments in the sale of the Firm Shares by the Underwriters
and may be exercised in whole or in part at any time (but not more than once) on
or before the 30th day after the date of this Agreement upon written or
telegraphic notice by you to the Company setting forth the aggregate number of
shares of the Option Shares as to which the several Underwriters are exercising
the option. Delivery of certificates for the shares of Option Shares, and
payment therefor, shall be made as provided in Section 5 hereof. Each
Underwriter will purchase such percentage of the Option Shares as is equal to
the percentage of Firm Shares that such Underwriter is purchasing, the exact
number of shares to be adjusted by you in such manner as you deem advisable to
avoid fractional shares.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering of the Shares by
the Underwriters shall be as set forth in the Prospectus. The Underwriters may
from time to time change the public offering price after the closing of the
initial public offering and increase or decrease the concessions and discounts
to dealers as they may determine.
(b) You, on behalf of the Underwriters, represent and warrant
that (i) the information set forth in Paragraph 1, inclusive of the list of
underwriters set forth thereunder, contained under the caption "Underwriting" in
the Registration Statement, any Preliminary Prospectus and the Prospectus
relating to the Shares (insofar as such information relates to the Underwriters)
constitutes the only information furnished by the Underwriters to the Company
for inclusion in the Registration Statement, any Preliminary Prospectus, and the
Prospectus, and that the statements made therein are correct and do not omit to
state any material fact required to be stated therein or necessary to make the
statements made therein in light of the circumstances under which they were made
not misleading, and (ii) the Underwriters have not distributed and
10.
<PAGE> 11
will not distribute prior to the Closing Date or on any Option Closing Date, as
the case may be, any of offering material in connection with the offering and
sale of the shares other than the Preliminary Prospectus, the Prospectus, the
Registration Statement and other materials permitted by the Act.
5. DELIVERY OF AND PAYMENT FOR THE SHARES.
(a) Delivery of certificates for the Firm Shares and the
Option Shares (if the option granted pursuant to Section 3(c) hereof shall have
been exercised not later than 11:00 a.m., Denver time, on the date at least two
business days preceding the Closing Date), and payment therefor, shall be made
at the offices of Cooley Godward LLP, 2595 Canyon Boulevard, Suite 250, Boulder,
Colorado 80302 6737 (or at such other place as may be agreed upon by the Company
and you) at 7:00 a.m., Denver time (a) on the third (3rd) full business day
following the first day that Shares are traded, (b) if this Agreement is
executed and delivered after 2:30 p.m., Denver time, the fourth (4th) full
business day following the day that this Agreement is executed and delivered or
(c) at such time on such other day, not later than seven (7) full business days
following the first day that Shares are traded, as shall be agreed upon in
writing by the Company and you (the "Closing Date").
(b) If the option granted pursuant to Section 3(c) hereof
shall be exercised after 11:00 a.m., Denver time, on the date two business days
preceding the Closing Date, and on or before the 30th day after the date of this
Agreement, delivery of certificates for the Option Shares, and payment therefor,
shall be made at the offices of Cooley Godward LLP, 2595 Canyon Boulevard, Suite
250, Boulder, Colorado 80302 6737 at 7:00 a.m., Denver time, on the third (3rd)
business day after the exercise of such option.
(c) Payment for the Shares purchased from the Company shall be
made to the Company or its order, and payment for the Shares purchased from the
Selling Securityholders shall be made to the Custodian for the account of the
Selling Securityholders, by either a same day funds check or Federal Funds wire
transfer. Such payment shall be made upon delivery of certificates for the
Shares to you for the respective accounts of the several Underwriters against
receipt therefor signed by you. Certificates for the Shares to be delivered to
you shall be registered in such name or names and shall be in such denominations
as you may request at least two business days before the Closing Date, in the
case of Firm Shares, and at least two business days prior to the Option Closing
Date, in the case of the Option Shares. Such certificates will be made available
to the Underwriters for inspection, checking and packaging at a location in New
York, New York, designated by the Underwriters not less than one full business
day prior to the Closing Date or, in the case of the Option Shares, by 3:00
p.m., New York time, on the business day preceding the Option Closing Date.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose check shall not have been
received by you on the Closing Date or any later Option Closing Date. Any such
payment by you shall not relieve such Underwriter from any of its obligations
hereunder.
11.
<PAGE> 12
6. FURTHER AGREEMENTS OF THE COMPANY AND THE SELLING SECURITYHOLDERS.
Each of the Company and the Selling Securityholders covenant and agree as
follows:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto, to
become effective as promptly as possible; it will notify you, promptly after it
shall receive notice thereof, of the time when the Registration Statement or any
subsequent amendment to the Registration Statement has become effective or any
supplement to the Prospectus has been filed. If the Company omitted information
from the Registration Statement at the time it was originally declared effective
in reliance upon Rule 430A(a), the Company will provide evidence satisfactory to
you that the Prospectus contains such information and has been filed, within the
time period prescribed, with the Commission pursuant to subparagraph (1) or (4)
of Rule 424(b) of the Rules and Regulations or as part of a post-effective
amendment to such Registration Statement as originally declared effective which
is declared effective by the Commission. If for any reason the filing of the
final form of Prospectus is required under Rule 424(b)(3) of the Rules and
Regulations, it will provide evidence satisfactory to you that the Prospectus
contains such information and has been filed with the Commission within the time
period prescribed. The Company will notify you promptly of any request by the
Commission for the amending or supplementing of the Registration Statement or
the Prospectus or for additional information. Promptly upon your request, it
will prepare and file with the Commission any amendments or supplements to the
Registration Statement or Prospectus which, in the reasonable opinion of counsel
to the several Underwriters ("Underwriters' Counsel"), may be necessary or
advisable in connection with the distribution of the Shares by the Underwriters.
The Company will promptly prepare and file with the Commission, and promptly
notify you of the filing of, any amendments or supplements to the Registration
Statement or Prospectus which may be necessary to correct any statements or
omissions, if, at any time when a prospectus relating to the Shares is required
to be delivered under the Act, any event shall have occurred as a result of
which the Prospectus or any other prospectus relating to the Shares as then in
effect would include an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. In case any
Underwriter is required to deliver a prospectus within the nine-month period
referred to in Section 10(a)(3) of the Act in connection with the sale of the
Shares, the Company will prepare promptly upon request, but at the expense of
such Underwriter, such amendment or amendments to the Registration Statement and
such prospectus or prospectuses as may be necessary to permit compliance with
the requirements of Section 10(a)(3) of the Act. The Company will file no
amendment or supplement to the Registration Statement or Prospectus that shall
not previously have been submitted to you a reasonable time prior to the
proposed filing thereof or to which you shall reasonably object in writing or
which is not in compliance with the Act and Rules and Regulations or the
provisions of this Agreement.
(b) The Company will advise you, promptly after it shall
receive notice or obtain knowledge thereof of the issuance of any stop order by
the Commission suspending the effectiveness of the Registration Statement or the
use of the Prospectus or of the initiation or threat of any proceeding for that
purpose; and it will promptly use its best efforts to prevent the issuance of
any such stop order or to obtain its withdrawal at the earliest possible moment
if such stop order should be issued.
12.
<PAGE> 13
(c) The Company will cooperate with you in endeavoring to
qualify the Shares for offering and sale under the securities laws of such
jurisdictions as you may designate and to continue such qualifications in effect
for so long as may be required for purposes of the distribution of the Shares,
except that the Company shall not be required in connection therewith or as a
condition thereof to qualify as a foreign corporation, or to execute a general
consent to service of process in any jurisdiction, or to make any undertaking
with respect to the conduct of its business. In each jurisdiction in which the
Shares shall have been qualified, the Company will make and file such
statements, reports and other documents in each year as are or may be reasonably
required by the laws of such jurisdictions so as to continue such qualifications
in effect for so long a period as you may reasonably request for distribution of
the Shares, or as otherwise may be required by law.
(d) The Company will furnish to you, as soon as available,
copies of the Registration Statement (three of which will be signed and which
will include all exhibits), each Preliminary Prospectus, the Prospectus and any
amendments or supplements to such documents, including any prospectus prepared
to permit compliance with Section 10(a)(3) of the Act, all in such quantities as
you may from time to time reasonably request.
(e) The Company will make generally available to its
stockholders as soon as practicable, but in any event not later than the 45th
day following the end of the fiscal quarter first occurring after the first
anniversary of the effective date of the Registration Statement, an earnings
statement (which will be in reasonable detail but need not be audited) complying
with the provisions of Section 11(a) of the Act and Rule 158 of the Rules and
Regulations and covering a twelve-month period beginning after the effective
date of the Registration Statement, and will advise you in writing when such
statement has been made available.
(f) During a period of three years after the date hereof, the
Company, as soon as practicable after the end of each respective period, will
furnish to its stockholders annual reports (including financial statements
audited by independent certified public accountants) and will furnish to its
stockholders unaudited quarterly reports of operations to the extent required by
applicable law, and will, upon request, furnish to you and the other several
Underwriters hereunder such reports to its stockholders and copies of all other
reports (financial or other) mailed to stockholders; and as soon as they are
available, copies of all reports and financial statements furnished to or filed
with the Commission, any securities exchange or the Nasdaq National Market by
the Company (except for documents for which confidential treatment is
requested). During such three-year period, if the Company shall have any active
subsidiaries, the foregoing financial statements shall be on a consolidated
basis to the extent that the accounts of the Company are consolidated with any
subsidiaries.
(g) Prior to or simultaneously with the execution and delivery
of this Agreement, the Company will obtain agreement from each beneficial owner
of the Company's Common Stock listed on Schedule C to this Agreement providing
that such person will not, for a period of 180 days after the date of the
Prospectus, without the prior written consent of UBS Securities LLC, sell or
otherwise dispose of or encumber any shares of Common Stock beneficially owned
by such parties as more explicitly described in the form of Lock-Up Agreement
approved by you.
13.
<PAGE> 14
(h) The Company shall not, during the 180 days following the
effective date of the Registration Statement, except with UBS Securities' prior
written consent, file a registration statement covering any of its shares of
capital stock, except that one or more registration statements on Form S-8 may
be filed at any time following the effective date of the Registration Statement.
(i) Neither the Company nor any Selling Securityholder shall,
during the 180 days following the effective date of the Registration Statement,
except with UBS Securities' prior written consent, issue, sell, offer or agree
to sell, grant, distribute or otherwise dispose of, directly or indirectly, any
shares of Common Stock, or any options, rights or warrants with respect to
shares of Common Stock, or any securities convertible into or exchangeable for
Common Stock, other than (i) the sale of Shares hereunder, (ii) the grant of
options or the issuance of shares of Common Stock under the Company's stock
option plans or stock purchase plan, as the case may be, existing on the date
hereof, (iii) the issuance of shares of Common Stock upon exercise of
outstanding options or warrants described in the Registration Statement.
(j) The Company will apply the net proceeds from the sale of
the Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(k) The Company will maintain a Transfer Agent and, if
necessary under the jurisdiction of incorporation of the Company, a Registrar
(which may be the same entity as the Transfer Agent) for its Common Stock.
(l) The Company will use its best efforts to maintain listing
of its shares of Common Stock on the Nasdaq National Market.
7. EXPENSES.
The Company and the Selling Securityholders agree with each Underwriter
that:
(a) The Company and the Selling Securityholders will pay and
bear all costs, fees and expenses in connection with the preparation, printing
and filing of the Registration Statement (including financial statements,
schedules and exhibits), Preliminary Prospectuses and the Prospectus and any
amendments or supplements thereto; the reproduction of this Agreement, the
Master Agreement Among Underwriters, the Master Selected Dealer Agreement, the
Preliminary Blue Sky Memoranda and any instruments related to any of the
foregoing; the issuance and delivery of the Shares hereunder to the several
Underwriters, including transfer taxes, if any; the cost of all stock
certificates representing the Shares and Transfer Agents' and Registrars' fees;
the fees and disbursements of corporate, patent and regulatory counsel for the
Company; all fees and other charges of the Company's independent public
accountants; the cost of furnishing to the several Underwriters copies of the
Registration Statement (including appropriate exhibits), Preliminary
Prospectuses and the Prospectus, and any amendments or supplements to any of the
foregoing; NASD filing fees and expenses incident to securing any required
review and the cost of qualifying the Shares under the laws of such
jurisdictions within the United States as you may designate (including filing
fees and fees and disbursements of Underwriters' Counsel in connection with such
NASD filings and Blue Sky qualifications); listing application fees of the
Nasdaq National Market; and all other expenses directly incurred
14.
<PAGE> 15
by the Company or the Selling Securityholders in connection with the performance
of its obligations hereunder. The Selling Securityholders will pay any transfer
taxes incident to the transfer to the Underwriters of the Shares being sold by
the Selling Securityholders.
(b) If the transactions contemplated hereby are not
consummated by reason of any failure or refusal on the part of the Company and
the Selling Securityholders to perform any agreement on its part to be performed
hereunder or to fulfill any condition of the Underwriters' obligations
hereunder, the Company and the Selling Securityholders will, in addition to
paying the expenses described in clause (a) above, reimburse the several
Underwriters for all out-of-pocket expenses (including reasonable fees and
disbursements of Underwriters' Counsel) incurred by the Underwriters in
reviewing the Registration Statement and the Prospectus and in otherwise
investigating, preparing to market or marketing the Shares. Neither the Company
nor the Selling Securityholders will in any event be liable to any of the
several Underwriters for any loss of anticipated profits from the sale by them
of the Shares.
(c) The provisions of paragraphs (a) and (b) of this Section
are intended to relieve the Underwriters from the payment of the expenses and
costs which the Company and the Selling Securityholders hereby agree to pay and
shall not affect any agreement which the Company and the Selling Securityholders
make, or may have made, for the sharing of any such expenses and costs.
8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS.
The obligations of the several Underwriters to purchase and pay for the
Shares, as provided herein, shall be subject to the accuracy, as of the date
hereof and the Closing Date and any later Option Closing Date, as the case may
be, of the representations and warranties of the Company and the Selling
Securityholders herein, to the performance by the Company and the Selling
Securityholders of its obligations hereunder and to the following additional
conditions:
(a) The Registration Statement shall have become effective not
later than 9:00 a.m., New York City time, on the date following the date of this
Agreement, or such later time or date as shall be consented to in writing by
you. If the filing of the Prospectus, or any supplement thereto, is required
pursuant to Rule 424(b) and Rule 430A of the Rules and Regulations, the
Prospectus shall have been filed in the manner and within the time period
required by Rule 424(b) and Rule 430A of the Rules and Regulations. No stop
order suspending the effectiveness of the Registration Statement shall have been
issued and no proceeding for that purpose shall have been initiated or, to the
knowledge of the Company or any Underwriter, threatened by the Commission, and
any request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been complied
with to the reasonable satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and the
Prospectus, and the registration, authorization, issue, sale and delivery of the
Shares shall have been reasonably satisfactory to Underwriters' Counsel, and
such counsel shall have been furnished with such papers and information as they
may reasonably have requested to enable them to pass upon the matters referred
to in this subsection.
15.
<PAGE> 16
(c) You shall have received, at no cost to you, on the Closing
Date and on any later Option Closing Date, as the case may be, the opinion of
Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel to the
Company, dated the Closing Date or such later Option Closing Date, in the form
attached hereto on Appendix A, addressed to the Underwriters and with reproduced
copies of signed counterparts thereof for each of the Representatives.
(d) You shall have received, at no cost to you, on the Closing
Date and on any later Option Closing Date, as the case may be, the opinion of
Wilson Sonsini Goodrich & Rosati, dated the Closing Date or such later Option
Closing Date, in the form attached hereto as Appendix B, addressed to the
Underwriters and with reproduced copies of signed counterparts thereof for each
of the Representatives. Such counsel shall state the specific items 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.
(e) You shall have received, at no cost to you, on the Closing
Date and on any later Option Closing Date, as the case may be, the opinion of
patent counsel to the Company, dated the Closing Date or such later Option
Closing Date, in the form attached hereto as Appendix C, addressed to the
Underwriters and with reproduced copies of signed counterparts thereof for each
of the Representatives.
(f) You shall have received from Cooley Godward LLP,
Underwriters' Counsel, an opinion or opinions, dated the Closing Date or on any
later Option Closing Date, as the case may be, in form and substance reasonably
satisfactory to you, with respect to the sufficiency of all corporate
proceedings undertaken by the Company and other legal matters relating to this
Agreement and the transactions contemplated hereby as you may reasonably
require, and the Company shall have furnished to such counsel such documents as
it may have reasonably requested for the purpose of enabling it to pass upon
such matters.
(g) You shall have received on the Closing Date and on any
later Option Closing Date, as the case may be, a letter from the Accountants
addressed to the Company and the Underwriters, dated the Closing Date or such
later Option Closing Date, as the case may be, confirming that it is an
independent certified public accountant with respect to the Company within the
meaning of the Act and the Rules and Regulations thereunder and based upon the
procedures described in its letter delivered to you concurrently with the
execution of this Agreement (herein called the "Original Letter"), but carried
out to a date not more than three days prior to the Closing Date or any such
later Option Closing Date, as the case may be, (i) confirming that the
statements and conclusions set forth in the Original Letter are accurate as of
the Closing Date or such later Option Closing Date, as the case may be; and (ii)
setting forth any revisions and additions to the statements and conclusions set
forth in the Original Letter that are necessary to reflect any changes in the
facts described in the Original Letter since the date of such letter, or to
reflect the availability of more recent financial statements, data or
information. The letter shall not disclose any change, or any development
involving a prospective change, in or affecting the business or properties of
the Company which, in your reasonable judgment, makes it impracticable or
inadvisable to proceed with the public offering of the Shares as contemplated by
the Prospectus. In addition, you shall have received from the Accountants a
letter addressed to the Company and made available to you for the use of the
Underwriters stating that its review of the Company's system of internal
accounting controls, to the extent it
16.
<PAGE> 17
deemed necessary in establishing the scope of its latest examination of the
Company's financial statements, did not disclose any weaknesses in internal
controls that it considered to be material weaknesses. All such letters shall be
in a form reasonably satisfactory to the Representatives and their counsel.
(h) You shall have received on the Closing Date and on any
later Option Closing Date, as the case may be, a certificate of the President
and the Chief Financial Officer of the Company, dated the Closing Date or such
later date, to the effect that as of such date (and you shall be satisfied that
as of such date):
(i) The representations and warranties of the Company
in this Agreement are true and correct, as if made on and as of the Closing Date
or any later Option Closing Date, as the case may be; and the Company has
complied with all of the agreements and satisfied all of the conditions on its
part to be performed or satisfied at or prior to the Closing Date or any later
Option Closing Date, as the case may be;
(ii) The Registration Statement has become effective
under the Act and no stop order suspending the effectiveness of the Registration
Statement or preventing or suspending the use of the Prospectus has been issued,
and no proceedings for that purpose have been instituted or are pending or, to
the best of their knowledge, threatened under the Act;
(iii) They have carefully reviewed the Registration
Statement and the Prospectus; and, when the Registration Statement became
effective and at all times subsequent thereto up to the delivery of such
certificate, the Registration Statement and the Prospectus and any amendments or
supplements thereto contained all statements and information required to be
included therein or necessary to make the statements therein not misleading; and
when the Registration Statement became effective, and at all times subsequent
thereto up to the delivery of such certificate, none of the Registration
Statement, the Prospectus or any amendment or supplement thereto included any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading; and, since the effective date of the Registration Statement, there
has occurred no event required to be set forth in an amended or supplemented
Prospectus that has not been so set forth; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, there has
not been (a) any material adverse change in the properties or assets described
or referred to in the Registration Statement and the Prospectus or in the
condition (financial or otherwise), operations, business or prospects of the
Company and Subsidiary, (b) any transaction which is material to the Company and
Subsidiary, except transactions entered into in the ordinary course of business,
(c) any obligation, direct or contingent, incurred by the Company or Subsidiary,
which is material to the Company and Subsidiary taken as a whole, (d) any change
in the capital stock or outstanding indebtedness of the Company or Subsidiary
which is material to the Company and Subsidiary taken as a whole or (e) any
dividend or distribution of any kind declared, paid or made on the capital stock
of the Company.
17.
<PAGE> 18
(i) The Company and the Selling Securityholders shall have
furnished to you such further certificates and documents as you shall reasonably
request as to the accuracy of the representations and warranties of the Company
and the Selling Securityholders herein, as to the performance by the Company and
the Selling Securityholders of their obligations hereunder and as to the other
conditions concurrent and precedent to the obligations of the Underwriters
hereunder.
(j) The Firm Shares and the Option Shares, if any, shall have
been approved for designation upon notice of issuance on the Nasdaq National
Market.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company or the Selling Securityholders, as the
case may be, will furnish you with such number of conformed copies of such
opinions, certificates, letters and documents as you shall reasonably request.
9. INDEMNIFICATION AND CONTRIBUTION.
(a) Subject to the provisions of paragraph (f) below, the
Company and the Selling Securityholders severally agree to indemnify and hold
harmless each Underwriter and each person (including each partner or officer
thereof) who controls any Underwriter within the meaning of Section 15 of the
Act from and against any and all losses, claims, damages or liabilities, joint
or several, to which such indemnified parties or any of them may become subject
under the Act, the Exchange Act, or the common law or otherwise, and the Company
and the Selling Securityholders severally agree to reimburse each such
Underwriter and controlling person for any legal or other out-of-pocket expenses
(including, except as otherwise hereinafter provided, reasonable fees and
disbursements of counsel) reasonably incurred by the respective indemnified
parties in connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any 462(b) registration statement)
or any post effective amendment thereto (including any 462(b) registration
statement), or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or (ii) any untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that (1) the indemnity agreements of the Company
and the Selling Securityholders contained in this paragraph (a) shall not apply
to any such losses, claims, damages, liabilities or expenses if such statement
or omission is contained in Paragraph 1, inclusive of the list of underwriters
set forth thereunder, in the section of the Prospectus entitled "Underwriting"
or the last paragraph of text on the cover page of the Prospectus, (2) the
indemnity agreement contained in this paragraph (a) with respect to any
Preliminary Prospectus not inure to the benefit of any Underwriter from whom the
person asserting any such losses, claims, damages, liabilities or expenses
purchased the Shares which is
18.
<PAGE> 19
the subject thereof (or to the benefit of any person controlling such
Underwriter) if at or prior to the written confirmation of the sale of such
Shares a copy of the Prospectus (or the Prospectus as amended or supplemented)
was not sent or delivered to such person and the untrue statement or omission of
a material fact contained in such Preliminary Prospectus was corrected in the
Prospectus (or the Prospectus as amended or supplemented) unless the failure is
the result of noncompliance by the Company with paragraph (a) of Section 6
hereof and (3) each Selling Securityholder shall only be liable under this
paragraph with respect to information pertaining to such Selling Securityholder
furnished by or on behalf of such Selling Securityholder expressly for use in
any Preliminary Prospectus or the Registration Statement or the Prospectus or
any such amendment thereof or supplement thereto. The indemnity agreements of
the Company and the Selling Securityholders contained in this paragraph (a) and
the representations and warranties of the Company and the Selling
Securityholders contained in Section 2 hereof shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of any payment for the Shares.
(b) Each Underwriter severally agrees to indemnify and hold
harmless the Company, each of its executive officers, each of its directors,
each other Underwriter and each person (including each partner or officer
thereof) who controls the Company or any such other Underwriter within the
meaning of Section 15 of the Act, from and against any and all losses, claims,
damages or liabilities, joint or several, to which such indemnified parties or
any of them may become subject under the Act, the Exchange Act, or the common
law or otherwise and to reimburse each of them for any legal or other expenses
including, except as otherwise hereinafter provided, reasonable fees and
disbursements of counsel) reasonably incurred by the respective indemnified
parties in connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post effective amendment thereto (including any 462(b)
registration statement) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading or (ii) any untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that in the cases of clauses (i) and (ii) above,
such statement or omission is contained in Paragraph 1, inclusive of the list of
underwriters set forth thereunder, in the section of the Prospectus entitled
"Underwriting" or the last paragraph on the cover page of the Prospectus. The
indemnity agreement of each Underwriter contained in this paragraph (b) shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of any indemnified party and shall survive the delivery of
and payment for the Shares.
(c) Each party indemnified under the provision of paragraphs
(a) and (b) of this Section 9 agrees that, upon the service of a summons or
other initial legal process upon it in any action or suit instituted against it
or upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against it, in respect of which
19.
<PAGE> 20
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (a "Notice") of such service or
notification to the party or parties from whom indemnification may be sought
hereunder. No indemnification provided for in such paragraphs shall be available
to any party who shall fail so to give the Notice if the party to whom such
Notice was not given was unaware of the action, suit, investigation, inquiry or
proceeding to which the Notice would have related and was prejudiced by the
failure to give the Notice, but the omission so to notify such indemnifying
party or parties of any such service or notification shall not relieve such
indemnifying party or parties from any liability which it or they may have to
the indemnified party for contribution or otherwise than on account of such
indemnity agreement. Any indemnifying party shall be entitled at its own expense
to participate in the defense of any action, suit or proceeding against, or
investigation or inquiry of, an indemnified party. Any indemnifying party shall
be entitled, if it so elects within a reasonable time after receipt of the
Notice by giving written notice (the "Notice of Defense") to the indemnified
party, to assume (alone or in conjunction with any other indemnifying party or
parties) the entire defense of such action, suit, investigation, inquiry or
proceeding, in which event such defense shall be conducted, at the expense of
the indemnifying party or parties, by counsel chosen by such indemnifying party
or parties and reasonably satisfactory to the indemnified party or parties;
provided, however, that (i) if the indemnified party or parties reasonably
determine that there may be a conflict between the positions of the indemnifying
party or parties and of the indemnified party or parties in conducting the
defense of such action, suit, investigation, inquiry or proceeding or that there
may be legal defenses available to such indemnified party or parties different
from or in addition to those available to the indemnifying party or parties,
then counsel for the indemnified party or parties shall be entitled to conduct
the defense to the extent reasonably determined by such counsel to be necessary
to protect the interests of the indemnified party or parties and (ii) in any
event, the indemnified party or parties shall be entitled, at its or their own
expense to have counsel chosen by such indemnified party or parties participate
in, but not conduct, the defense. It is understood that the indemnifying parties
shall not, in respect of the legal defenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for (a) the fees and expenses of more than one separate firm (in
addition to any local counsel) for all of the Underwriters and each person, if
any, who controls any Underwriter within the meaning of Section 15 of the Act,
and (b) the fees and expenses of more than one separate firm (in addition to any
local counsel) for the Company, its directors, its officers who sign the
Registration Statement and each person, if any, who controls the Company within
the meaning of Section 15 of the Act. If, within a reasonable time after receipt
of the Notice, an indemnifying party gives a Notice of Defense and the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under paragraphs (a) through (c) of this Section 9 for any legal or other
expenses subsequently incurred by the indemnified party or parties in connection
with the defense of the action, suit, investigation, inquiry or proceeding,
except that (a) the indemnifying party or parties shall bear the legal and other
expenses incurred in connection with the conduct of the defense as referred to
in clause (i) of the proviso to the preceding sentence and (b) the indemnifying
party or parties shall bear such other expenses as it or they have authorized to
be incurred by the indemnified party or parties. If, within a reasonable time
after receipt of the Notice, no Notice of Defense has been given, the
indemnifying party or parties shall be responsible for any legal or other
expenses incurred by the indemnified party or parties in connection with the
defense of the action, suit, investigation,
20.
<PAGE> 21
inquiry or proceeding. The indemnifying party or parties shall not be liable for
any settlement of any proceeding effected without its or their written consent,
provided such consent has not been unreasonably withheld.
(d) If the indemnification provided for in this Section 9 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 9, then each indemnifying party shall, in
lieu of indemnifying such indemnified party, contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 9 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Selling Securityholders, on the one hand, and the Underwriters,
on the other, shall be deemed to be in the same respective proportions as the
total net proceeds from the offering of the Shares received by the Company and
the Selling Securityholders and the total underwriting discount received by the
Underwriters, as set forth in the table on the cover page of the Prospectus,
bear to the aggregate public offering price of the Shares. Relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by each indemnifying party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this paragraph
(d). The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities, or actions in respect thereof, referred to in the first
sentence of this paragraph (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigation, preparation to defend or defense against any action or claim
which is the subject of this paragraph (d). Notwithstanding the provisions of
this paragraph (d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discount applicable to the Shares purchased by such
Underwriter. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this paragraph (d) to contribute are several in
proportion to their respective underwriting obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it
21.
<PAGE> 22
may have hereunder or otherwise (except as specifically provided in paragraph
(c) of this Section 9).
(e) Neither the Company nor the Selling Securityholders will,
without the prior written consent of each Underwriter, settle or compromise or
consent to the entry of any judgment in any pending or threatened claim, action,
suit or proceeding in respect of which indemnification may be sought hereunder
(whether or not such Underwriter or any person who controls such Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is
a party to such claim, action, suit or proceeding) unless such settlement,
compromise or consent includes an unconditional release of such Underwriter and
each such controlling person from all liability arising out of such claim,
action, suit or proceeding.
(f) The parties to this Agreement hereby acknowledge that they
are sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof, including without limitation the
provisions of this Section 9 and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 9 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.
(g) The liability of each Selling Securityholder under such
Selling Securityholder's representations and warranties contained in Section 2
hereof and under the indemnity and reimbursement agreements contained in the
provisions of this Section 9 and Section 11 hereof shall be limited to an amount
equal to the initial public offering price of the stock sold by such Selling
Securityholder to the Underwriters; provided, that, no Selling Securityholder
shall be required to provide indemnification hereunder until the Underwriters or
controlling persons seeking indemnification shall have first made a written
demand for payment on the Company with respect to any loss, claim, damage or
liability and the Company shall have either rejected such demand or failed to
make such requested payment within sixty (60) days after receipt thereof. In the
event that the Company rejects any such demand or fails to make any such
requested payment, the Underwriters or controlling persons seeking
indemnification agree to concurrently make demand for indemnification against
all Selling Securityholders; provided, that, such Underwriters or controlling
persons shall have sole discretion as to whether to take any further action
against any Selling Securityholder and no failure by an Underwriter or
controlling person to take further action against a Selling Securityholder shall
prejudice such Underwriter's or controlling person's rights with respect to
other Selling Securityholders. The Company and the Selling Securityholders may
agree, as among themselves and without limiting the rights of the Underwriters
under this Agreement, as to the respective amounts of such liability for which
they each shall be responsible.
10. TERMINATION. This Agreement may be terminated by you at any time on
or prior to the Closing Date or on or prior to any later Option Closing Date, as
the case may be, by giving written notice to the Company and the Selling
Securityholders (i) if the Company or the Selling Securityholders shall have
failed, refused or been unable, at or prior to the Closing Date, or on or prior
to any later Option Closing Date, as the case may be, to perform any agreement
on its part to be performed, or because any other condition of the Underwriters'
obligations hereunder required to be fulfilled by the Company is not fulfilled,
or (ii) if trading on the New York Stock
22.
<PAGE> 23
Exchange, the American Stock Exchange or the Nasdaq National Market shall have
been suspended, or minimum or maximum prices for trading shall have been fixed,
or maximum ranges for prices for securities shall have been required on the New
York Stock Exchange, the American Stock Exchange or the Nasdaq National Market,
by such trading exchanges or by order of the Commission or any other
governmental authority having jurisdiction, or if a banking moratorium shall
have been declared by federal or New York authorities, or (iii) if the Company
shall have sustained a loss by strike, fire, flood, accident or other calamity
of such character as to have a Material Adverse Effect regardless of whether or
not such loss shall have been insured, or (iv) if there shall have been a
material adverse change in the general political or economic conditions or
financial markets in the United States as in the judgment of the Representatives
makes it inadvisable or impracticable to proceed with the offering, sale and
delivery of the Shares, or (v) if there shall have occurred an outbreak or
escalation of hostilities between the United States and any foreign power or of
any other insurrection or armed conflict involving the United States or other
national or international calamity, hostilities or crisis or the declaration by
the United States of a national emergency which, in the judgment of the
Representatives, adversely affects the marketability of the Shares, or (vi) if
since the respective dates as of which information is given in the Registration
Statement and the Prospectus, there shall have occurred any material adverse
change or any development involving a prospective material adverse change in or
affecting the condition, financial or otherwise, of the Company or the business
affairs, management, or business prospects of the Company, whether or not
arising in the ordinary course of business, or (vii) if any foreign, federal or
state statute, regulation, rule or order of any court or other governmental
authority shall have been enacted, published, decreed or otherwise promulgated
which in the judgment of the Representatives materially and adversely affects or
will materially and adversely affect the business or operations of the Company,
or trading in the Common Stock shall have been suspended, or (viii) there shall
have occurred a material adverse decline in the value of securities generally on
the New York Stock Exchange, the American Stock Exchange or the Nasdaq National
Market or (ix) action shall be taken by any foreign, federal, state or local
government or agency in respect of its monetary or fiscal affairs which, in the
judgment of the Representatives, has a material adverse effect on the securities
markets in the United States. If this Agreement shall be terminated in
accordance with this Section 10, there shall be no liability of the Company to
the Underwriters and no liability of the Underwriters to the Company; provided,
however, that in the event of any such termination the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all reasonable costs and expenses referred to in Section 7.
If you elect to terminate this Agreement as provided in this Section
10, the Company shall be notified promptly by you by telephone, telecopy or
telegram, confirmed by letter.
11. REIMBURSEMENT OF CERTAIN EXPENSES.
(a) In addition to their other obligations under Section 9 of
this Agreement, the Company and the Selling Securityholders hereby agree to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 9 of this Agreement, notwithstanding the absence of a
judicial
23.
<PAGE> 24
determination as to the propriety and enforceability of the obligations under
this Section 11 and the possibility that such payments might later be held to be
improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
(b) In addition to their other obligations under Section 9 of
this Agreement, the Underwriters hereby agree to reimburse on a quarterly basis
the Company and the Selling Securityholders for all reasonable legal and other
expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (b) of Section 9 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 11 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the Company and the Selling Securityholders
shall promptly refund it and (ii) the Company and the Selling Securityholders
shall provide to the Underwriter, upon request, reasonable assurances of its
ability to effect any refund, when and if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall
inure to the benefit of the Company and the Selling Securityholders and the
several Underwriters and, with respect to the provisions of Section 9 hereof,
the several parties (in addition to the Company and the Selling Securityholders
and the several Underwriters) indemnified under the provisions of said Section
9, and their respective personal representatives, successors and assigns.
Nothing in this Agreement is intended or shall be construed to give to any other
person, firm or corporation any legal or equitable remedy or claim under or in
respect of this Agreement or any provision herein contained. The term
"successors and assigns" as herein used shall not include any purchaser, as such
purchaser, of any of the Shares from any of the several Underwriters.
13. Notices. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to UBS Securities LLC, 299 Park Avenue, New
York, NY 10171, Attention: Mr. Richard Messina; and if to the Company, shall be
mailed, telegraphed or delivered to it at its office, 7400 East Orchard, Suite
230, Englewood, CO 80111, Attention: George F. Adam, Jr. All notices given by
telegraph shall be promptly confirmed by letter.
14. Miscellaneous. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(i) any investigation made by or on behalf of any Underwriter or controlling
person thereof, or by or on behalf of the Company or its respective directors of
officers, and (ii) delivery of and payment for the Shares under this Agreement.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
24.
<PAGE> 25
You will act as Representatives of the several Underwriters in all
dealings with the Company under this Agreement, and any action under or in
respect of this Agreement taken by you jointly, as Representatives, or by UBS
Securities LLC will be binding upon all of the Underwriters.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of California.
[INTENTIONALLY LEFT BLANK]
25.
<PAGE> 26
Please sign and return to the Company and to the Selling Securityholders the
enclosed copies of this letter, whereupon this letter will become a binding
agreement among the Company, the Selling Securityholders 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
SELLING SECURITYHOLDERS
[List Names]
By:
----------------------------------
[Attorney-in-Fact]
The foregoing Agreement
is hereby confirmed and
accepted as of the date
first above written.
UBS SECURITIES LLC
COWEN & COMPANY
BANCAMERICA ROBERTSON STEPHENS
SOUNDVIEW FINANCIAL GROUP, INC.
As Representatives of the
several Underwriters
By: UBS SECURITIES LLC
By:
----------------------------------
Title:
Acting on behalf of the several
Underwriters, including themselves,
named on Schedule A hereto.
<PAGE> 27
SCHEDULE A
UNDERWRITERS
<TABLE>
<CAPTION>
Number of
Shares to be
Underwriters Purchased
- ---------------------------------------------------------- -------------------
<S> <C>
UBS Securities LLC........................................
Cowen & Company...........................................
BancAmerica Robertson Stephens............................
SoundView Financial Group, Inc............................
Total 3,000,000
===================
</TABLE>
<PAGE> 28
SCHEDULE B
SELLING SECURITYHOLDERS
<TABLE>
<CAPTION>
Name and Address of Key Selling Securityholder Number of Shares to be Sold
- ---------------------------------------------- ---------------------------
<S> <C>
</TABLE>
<PAGE> 29
APPENDIX A
1. OPINION OF COUNSEL TO THE COMPANY AND THE SELLING SECURITYHOLDERS
Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, shall
opine to the effect that:
(a) The Company has been duly organized and is validly
existing as a corporation, and is in good standing under, the laws of the State
of Delaware;
(b) The Company has the corporate power and authority to own,
lease and operate its properties and to conduct its business as described in the
Prospectus; the Company is duly qualified to do business as a foreign
corporation and is in good standing in all jurisdictions in which the ownership
or leasing of its properties or the conduct of its business requires such
qualification, except where the failure to so qualify would not have a Material
Adverse Effect;
(c) 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;
(d) The Shares to be issued by the Company pursuant to this
Agreement have been duly authorized and will be, upon issuance and delivery
against payment therefor in accordance with the terms hereof, validly issued,
fully paid and nonassessable, and, to our knowledge, the stockholders of the
Company do not have any preemptive right, co-sale right, registration right,
right of first refusal or other similar right, which rights have not previously
been waived, in connection with the purchase or sale of any of the Shares;
(e) 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;
(f) This Agreement has been duly authorized by all necessary
corporate action on the part of the Company and has been duly executed and
delivered by the Company and is a valid and binding agreement of the Company,
enforceable in accordance with its terms, except as rights to indemnity may be
limited by applicable laws and public policy and except as enforcement may be
limited by applicable bankruptcy, insolvency, reorganization, arrangement,
moratorium or other similar laws affecting creditors' rights, and subject to
general equity principles and to limitations on availability of equitable
relief, including specific performance;
(g) 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
<PAGE> 30
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;
(h) The form of certificate evidencing the Common Stock
complies with the applicable provisions of Delaware law;
(i) 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;
(j) The statements under the captions "Shares Eligible for
Future Sale," "Management - Employee Benefit Plans," "Management - Compensation
Committee Interlocks and Insider Participation," "Certain Transactions" and
"Description of Capital Stock" in the Prospectus, insofar as such statements
constitute a summary of documents referred to therein or matters of law or legal
conclusions, are accurate summaries and correctly present, in all material
respects, the information called for with respect to such documents and matters;
provided that such counsel shall be entitled to rely on representations of the
Company with respect to certain factual matters contained in such statements,
and provided further that such counsel shall state that nothing has come to the
attention of such counsel which leads them to believe that such representations
are not true and correct in all material respects;
(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 certificate of incorporation, as amended
(the "Certificate of Incorporation"), or bylaws of the Company, any agreement or
document filed as an exhibit to the Registration Statement, or any statute, rule
or regulation 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 (b) to our knowledge, result in the creation or imposition
of any lien or encumbrance upon any of the assets of the Company pursuant to the
terms or provisions of, or result in a breach or violation of any of the terms
or provisions of, or constitute a default or result in the acceleration of any
obligation under, any indenture, mortgage, deed of trust, loan agreement, bond,
debenture, note agreement, other evidence of indebtedness, lease, contract or
other agreement or instrument to which the Company is a party or by which its
property is bound or (c) to our knowledge, conflict with or result in a
violation or breach of, or constitute a default under, any applicable approval,
permit, judgment, order, writ or decree of any court or governmental agency or
body;
(l) The Company has the corporate power and authority to own
or lease all of the assets owned or leased by it and to conduct its business, in
each case as described in the Registration Statement and the Prospectus, except
where failure to have such power and authority would not have a Material Adverse
Effect.
2.
<PAGE> 31
(m) No authorization, approval, consent, order, designation or
declaration of or filing by or with any governmental authority or agency is
necessary in connection with the execution and delivery of this Agreement by the
Company and the Selling Securityholders and the consummation of the transactions
therein contemplated except such as may have been obtained under the Act and the
Rules and Regulations or such as may be required under state securities or Blue
Sky laws or by the bylaws and rules of the NASD in connection with the purchase
and distribution of the Shares by the Underwriters;
(n) The Company is not in violation of its Certificate of
Incorporation or bylaws, and to our knowledge, the Company is not in breach of
or default with respect to any provision of any agreement, mortgage, deed of
trust, lease, franchise, license, indenture, permit or other instrument filed as
an exhibit to the Registration Statement by which it or any of its properties
may be bound or affected, except where such default would not materially
adversely affect the Company;
(o) To our knowledge, there are no pending or threatened
actions, suits, claims, proceedings or investigations that, if successful, would
have a Material Adverse Effect or would limit, revoke, cancel, suspend, or cause
not to be renewed any existing license, certificate, registration, approval or
permit, known to us, from any state, federal, or regulatory authority that is
material to the conduct of the business of the Company as presently conducted,
or that is of a character otherwise required to be disclosed in the Registration
Statement or the Prospectus under the Act or the applicable Rules and
Regulations that is not so disclosed;
(p) 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
(q) 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.
(r) Good and marketable title to the shares of the Shares sold
by the Selling Securityholders under the Agreement, free and clear of all liens,
encumbrances, equities, security interests and claims, have been transferred to
the Underwriters who have severally purchased such shares under the Agreement,
assuming for the purpose of this opinion that the Underwriters purchased the
same in good faith without notice of any adverse claims;
(s) Based insofar as factual matters are concerned solely upon
certificates of the Selling Securityholders, the accuracy of which we have no
reason to question, (A) the Agreement has been duly executed and delivered by or
on behalf of each of the Selling Securityholders and First National Bank of
Boston as Custodian, and the Power of Attorney referred to in such Custody
Agreement have been duly executed and delivered by such Selling
3.
<PAGE> 32
Securityholder; (C) the Custody Agreement entered into by, and the Power of
Attorney given by, such Selling Securityholder is valid and binding on such
Selling Securityholder; and (D) each Selling Securityholder has full legal right
and authority to enter into the Agreement and to sell, transfer and deliver in
the manner provided in the Agreement the Shares sold by such Selling
Securityholder hereunder.
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.
4.
<PAGE> 33
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" 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> 34
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" 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> 35
SCHEDULE C
LOCK-UP AGREEMENTS
Lock-up agreements shall be obtained from all officers and directors of the
Company, each beneficial holder of the Company's capital stock and each holder
of an option or warrant to purchase in excess of ten thousand (10,000) shares of
the Company's capital stock.
<PAGE> 1
EXHIBIT 5.1
[WILSON SONSINI GOODRICH & ROSATI LETTERHEAD]
April 30, 1998
New Era of Networks, Inc.
7400 East Orchard Road, Suite 230
Englewood, CO 80111
RE: REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed by you with
the Securities and Exchange Commission on April 29, 1998 (Registration No.333- )
(the "Registration Statement"), in connection with the registration under the
Securities Act of 1933, as amended, of up to 3,450,000 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
450,000 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,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ WILSON SONSINI GOODRICH & ROSATI
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
New Era of Networks Limited, a Company registered in England.
New Era of Networks Pty. Limited, an Australian 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
April 29, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S MARCH 31, 1998 UNAUDITED CONSOLIDATED FIANACIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,486,784
<SECURITIES> 14,544,993
<RECEIVABLES> 12,088,479
<ALLOWANCES> 300,000
<INVENTORY> 0
<CURRENT-ASSETS> 36,318,978
<PP&E> 4,444,223
<DEPRECIATION> 1,251,160
<TOTAL-ASSETS> 40,845,827
<CURRENT-LIABILITIES> 4,491,926
<BONDS> 0
0
0
<COMMON> 921
<OTHER-SE> 36,352,980
<TOTAL-LIABILITY-AND-EQUITY> 40,845,827
<SALES> 9,582,123
<TOTAL-REVENUES> 9,582,123
<CGS> 1,748,458
<TOTAL-COSTS> 1,748,458
<OTHER-EXPENSES> 7,337,409
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,582
<INCOME-PRETAX> 792,378
<INCOME-TAX> 0
<INCOME-CONTINUING> 792,378
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 792,378
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.08
</TABLE>
