<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD
ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
COMMISSION FILE NUMBER 000-22043
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NEW ERA OF NETWORKS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 84-1234845
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
7400 EAST ORCHARD ROAD
ENGLEWOOD, COLORADO 80111
(Address of principal executive offices)
Registrant's telephone number, including area code: (303) 694-3933
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past (90) days. YES [X] NO [ ]
The number of shares of the issuer's Common Stock outstanding as of June
30, 1998 was 11,775,930.
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<PAGE> 2
INDEX
<TABLE>
<S> <C> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets................................. 2
Consolidated Statements of Operations....................... 3
Consolidated Statements of Cash Flows....................... 4
Notes to Consolidated Financial Statements.................. 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 7
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 17
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................... 18
ITEM 2. CHANGES IN SECURITIES....................................... 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................. 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 18
ITEM 5. OTHER INFORMATION........................................... 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 18
SIGNATURES........................................................... 20
</TABLE>
1
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NEW ERA OF NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 54,972,145 $ 7,150,362
Short-term investments.................................... 13,533,712 15,573,617
Accounts receivable, net of an allowance for uncollectible
accounts of $300,000................................... 13,279,463 11,072,850
Unbilled revenue.......................................... 2,411,837 1,667,456
Prepaid expenses and other................................ 1,729,861 1,020,394
------------ ------------
Total current assets.............................. 85,927,018 36,484,679
------------ ------------
Property and equipment:
Computer equipment and software........................... 4,329,920 2,725,144
Furniture, fixtures and equipment......................... 1,226,155 640,218
Leasehold improvements.................................... 297,868 86,563
------------ ------------
5,853,943 3,451,925
Less -- accumulated depreciation.......................... (1,538,752) (1,036,088)
------------ ------------
Property and equipment, net............................... 4,315,191 2,415,837
Long-term investments....................................... 3,515,370 --
Other assets, net........................................... 2,982,326 1,328,659
------------ ------------
Total assets...................................... $ 96,739,905 $ 40,229,175
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,126,498 $ 2,171,722
Accrued liabilities....................................... 3,536,969 2,081,959
Deferred revenue.......................................... 1,503,629 1,177,262
Current portion of bank borrowings........................ 47,417 66,963
------------ ------------
Total liabilities................................. 8,214,513 5,497,906
------------ ------------
Stockholders' equity:
Common stock, $.0001 par value, 45,000,000 shares
authorized; 11,775,930 and 9,106,157 shares issued and
outstanding, respectively.............................. 1,178 911
Additional paid-in capital................................ 101,476,002 46,191,190
Accumulated deficit....................................... (13,084,466) (11,517,978)
Cumulative translation adjustment......................... 132,678 57,146
------------ ------------
Total stockholders' equity........................ 88,525,392 34,731,269
------------ ------------
Total liabilities and stockholders' equity........ $ 96,739,905 $ 40,229,175
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
2
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NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
1998 1997 1998 1997
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Software licenses....................... $ 7,267,594 $3,212,770 $13,840,228 $ 5,660,180
Services and maintenance................ 4,192,293 1,566,124 7,201,782 2,792,562
----------- ---------- ----------- -----------
Total revenues.................. 11,459,887 4,778,894 21,042,010 8,452,742
Cost of revenues:
Cost of software licenses............... 442,003 165,659 664,003 415,465
Cost of services and maintenance........ 2,134,838 1,240,470 3,661,296 2,040,627
----------- ---------- ----------- -----------
Total cost of revenues.......... 2,576,841 1,406,129 4,325,299 2,456,092
----------- ---------- ----------- -----------
Gross profit.............................. 8,883,046 3,372,765 16,716,711 5,996,650
Operating expenses:
Sales and marketing..................... 3,827,804 1,987,996 7,433,325 3,678,078
Research and development................ 2,915,247 1,560,078 5,606,294 2,782,542
General and administrative.............. 1,168,253 370,944 2,159,717 865,580
Charge for acquired in-process research
and development...................... 3,740,000 -- 3,740,000 --
Amortization of intangibles............. 81,283 -- 130,660 --
----------- ---------- ----------- -----------
Total operating expenses........ 11,732,587 3,919,018 19,069,996 7,326,200
----------- ---------- ----------- -----------
Loss from operations...................... (2,849,541) (546,253) (2,353,285) (1,329,550)
Other income, net......................... 490,675 17,118 786,797 16,015
----------- ---------- ----------- -----------
Loss before provision for income taxes.... (2,358,866) (529,135) (1,566,488) (1,313,535)
Provision for income taxes................ -- -- -- --
----------- ---------- ----------- -----------
Net loss.................................. $(2,358,866) $ (529,135) $(1,566,488) $(1,313,535)
=========== ========== =========== ===========
Net loss per common share, basic and
diluted (Note 3)........................ $ (0.23) $ (0.22) $ (0.16) $ (0.69)
=========== ========== =========== ===========
Weighted average shares of common stock
outstanding, basic and diluted.......... 10,338,506 2,422,915 9,746,574 1,899,261
=========== ========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
3
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NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(1,566,488) $(1,313,535)
Adjustments to reconcile net income (loss) to net cash
used in operating activities --
Depreciation and amortization.......................... 630,538 261,031
Charge for acquired in-process research and
development........................................... 3,740,000 --
Changes in assets and liabilities --
Accounts receivable, net............................. (1,469,178) (1,710,273)
Unbilled revenue..................................... (744,381) (847,950)
Prepaid expenses and other........................... (686,038) (564,118)
Other assets, net.................................... (627,769) 3,731
Accounts payable..................................... 709,746 649,506
Accrued liabilities.................................. 705,033 580,997
Deferred revenue..................................... 326,389 147,204
----------- -----------
Net cash provided by (used in) operating
activities...................................... 1,017,852 (2,793,407)
----------- -----------
Cash flows from investing activities:
Purchases of short-term investments....................... (2,032,587) --
Proceeds from sale of short-term investments.............. 4,072,492 500,000
Purchases of long-term investments........................ (3,515,370) --
Business combination, net of cash acquired................ (1,179,774) --
Purchase of property and equipment........................ (2,357,004) (400,819)
----------- -----------
Net cash provided by (used in) investing
activities...................................... (5,012,243) 99,181
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 55,171,990 33,226,290
Common stock issuance costs............................... (3,486,911) (2,757,950)
Proceeds from notes payable to banks...................... -- 600,000
Principal payments on notes payable to banks.............. (19,340) (2,142,830)
----------- -----------
Net cash provided by (used in) financing
activities...................................... 51,665,739 28,925,510
Effect of exchange rate on cash............................. 150,435 --
----------- -----------
Net increase in cash and cash equivalents................... 47,821,783 26,231,284
Cash and cash equivalents, beginning of period.............. 7,150,362 2,887,466
----------- -----------
Cash and cash equivalents, end of period.................... $54,972,145 $29,118,750
=========== ===========
Supplemental cash flow information:
Cash paid during the period for --
Interest............................................... $ 6,962 $ 77,799
=========== ===========
Taxes.................................................. $ -- $ --
=========== ===========
Supplemental disclosures of noncash transactions:
Common stock issued for business combination.............. $ 3,600,000 $ --
=========== ===========
Accrued business combination costs........................ $ 375,000 $ --
=========== ===========
Conversion of preferred stock to common................... $ -- $11,385,000
=========== ===========
Accrued common stock offering costs....................... $ -- $ 660,000
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
4
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NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION.
The accompanying consolidated interim financial statements have been
prepared by New Era of Networks, Inc. (the "Company"), without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission (the
"SEC"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations. These
financial statements should be read in conjunction with the Company's audited
consolidated financial statements as included in the Company's Registration
Statement on Form S-1 and related Prospectus dated May 20, 1998, and the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997. The consolidated results of operations for the three and six months ended
June 30, 1998, are not necessarily indicative of the results to be expected for
any subsequent period or for the entire fiscal year ending December 31, 1998.
The accompanying unaudited consolidated interim financial statements
reflect, in the opinion of management, all adjustments that are of a normal and
recurring nature and that are necessary for a fair presentation of the financial
position and results of operations for the periods presented. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Certain reclassifications have been made in prior years'
financial statements to conform to the 1998 presentation.
2. BUSINESS COMBINATION.
Effective as of June 1, 1998, the Company acquired all of the outstanding
capital stock of MSB Consultants Limited ("MSB"), a corporation organized under
the laws of the United Kingdom, by means of a Share Purchase Agreement by and
among the shareholders of MSB and the Company.
The aggregate consideration paid by the Company was $4,800,000, of which
$1,200,000 was paid in cash and approximately $3,600,000 was paid through the
issuance of 138,462 unregistered shares of common stock of the Company.
Additional unregistered shares having a total value upon issuance of up to
$3,000,000 may also be issued to shareholders of MSB upon the achievement of
certain performance targets during the two-year period following the closing.
The Company expects that the fees and expenses related to the acquisition will
be approximately $375,000. The acquisition was accounted for under the purchase
method of accounting and, accordingly, the operating results of MSB have been
included in the accompanying consolidated financial statements from the
effective date of the acquisition.
An independent valuation of MSB's net assets was completed to assist in the
allocation of the purchase price. Approximately $3,740,000 of the purchase price
represented the intangible value of in-process research and development projects
that had not yet reached technological feasibility. The related technology has
no alternative future use and will require substantial additional development by
the Company. This amount was charged to operations in the quarter ended June 30,
1998. A portion of the purchase price was also assigned to marketable software
products ($770,000) and goodwill ($698,000) which are being amortized on a
straight-line basis over three- and seven-year periods, respectively. MSB's
other assets were valued at $2,036,000 and its liabilities assumed totaled
$996,000. MSB's assets, liabilities, and operating results are included in the
accompanying consolidated financial statements prospectively from the effective
acquisition date.
5
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NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. 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 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 dated June 18, 1997 and
subsequent filings with the SEC were determined on a pro forma basis as required
by SEC Staff Accounting Bulletin No. 83 ("SAB No. 83"). Pro forma weighted
average shares outstanding included effects of certain securities issued by the
Company prior to its initial public offering, regardless of being antidilutive.
In February 1998, SAB No. 83 was superceded by SEC Staff Accounting Bulletin No.
98 ("SAB No. 98") which effectively required the Company to retroactively
restate its loss per common share.
4. COMPREHENSIVE INCOME.
In June of 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 "Reporting Comprehensive Income"
("SFAS 130"). The purpose of SFAS 130 is to report a measure of all changes in
equity that result from recognized transactions and other economic events of the
period other than transactions with owners in their capacity as owners. The only
item of other comprehensive income reported by the Company is the cumulative
translation adjustment. The Company's comprehensive income for the three and six
months ended June 30, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -------------------------
1998 1997 1998 1997
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss for the period........... $(2,358,866) $(529,135) $(1,566,488) $(1,313,535)
Change in cumulative translation
adjustment...................... 86,764 -- 75,532 --
----------- --------- ----------- -----------
Comprehensive loss................ $(2,272,102) $(529,135) $(1,490,956) $(1,313,535)
=========== ========= =========== ===========
</TABLE>
6
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains certain trend analysis and other
forward-looking statements. Words such as "anticipate," "believe," "plan,"
"estimate," "expect," "seek," and "intend" and words of similar import are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and are subject to business and economic risks
and uncertainties which are difficult to predict. Therefore, the Company's
actual results of operations may differ materially from those expressed or
forecasted in the forward-looking statements as a result of a number of factors,
including those set forth in this discussion under "Factors That May Affect
Future Results" and other risks detailed from time to time in reports filed with
the SEC. In addition, the discussion of the Company's results of operations
should be read in conjunction with matters described in detail in the Company's
Prospectus dated May 20, 1998, including the "Risk Factors" set forth therein.
The following table sets forth the percentages that selected items in the
Consolidated Statements of Operations bear to total revenues:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Software licenses.................................... 63% 67% 66% 67%
Services and maintenance............................. 37 33 34 33
--- --- --- ---
Total revenues......................................... 100 100 100 100
Cost of revenues:
Cost of software licenses(1)......................... 6 5 5 7
Cost of services and maintenance(1).................. 51 79 51 73
--- --- --- ---
Total cost of revenues................................. 22 29 21 29
Gross profit...................................... 78 71 79 71
Operating expenses:
Sales and marketing.................................. 33 41 35 44
Research and development............................. 25 33 27 33
General and administrative........................... 10 8 10 10
Charge for acquired in-process research and
development....................................... 33 -- 17 --
Amortization of intangibles.......................... 1 -- 1 --
--- --- --- ---
Total operating expenses............................... 102 82 90 87
--- --- --- ---
Loss from operations................................... (24) (11) (11) (16)
Other income, net...................................... 4 -- 4 --
--- --- --- ---
Loss before provision for income taxes................. (20) (11) (7) (16)
Provision for income taxes............................. -- -- -- --
=== === === ===
Net loss............................................... (20)% (11)% (7)% (16)%
=== === === ===
Net income (loss) excluding charge for acquired
in-process research and development.................. 12% (11)% 10% (16)%
=== === === ===
</TABLE>
- ---------------
(1) As a percentage of software licenses and services and maintenance revenues,
respectively.
REVENUES
The Company's revenues increased from $4.8 million and $8.5 million for the
three and six months ended June 30, 1997, respectively, to $11.5 million and
$21.0 million for the three and six months ended June 30, 1998, respectively.
This increase resulted from significantly increased indirect channel revenues,
increased international presence, and additions to the Company's product
portfolio. The acquisitions of MSB in June of
7
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1998 and Menhir Limited ("Menhir") in September of 1997 added to NEON's product
portfolio, which contributed to increased software licenses and services and
maintenance revenues. For the six months ended June 30, 1998, indirect channel
revenues increased to 21% of total revenues, compared with 5% for the six months
ended June 30, 1997. For the six months ended June 30, 1998, international
revenues increased to 31% of total revenues, compared with 14% of total revenues
for the six months ended June 30, 1997.
Software license revenues increased from $3.2 million and $5.7 million for
the three and six months ended June 30, 1997, respectively, to $7.3 million and
$13.8 million for the three and six months ended June 30, 1998, respectively.
This growth in software license revenues reflects the growing market awareness
and acceptance of the Company's enterprise application integration software
products and the establishment of distributor and reseller relationships with
IBM, PeopleSoft, Candle Corporation, and NIWS (Japan).
Services and maintenance revenues increased from $1.6 million and $2.8
million for the three and six months ended June 30, 1997, respectively, to $4.2
million and $7.2 million for the three and six months ended June 30, 1998,
respectively. The increase in the relative percentage of service revenues to
total revenues in these periods was attributable to two primary factors:
increases in the installed base of customers receiving maintenance, training and
other support services; and a significant increase in consulting revenues as a
result of expanded demand for NEON's direct assistance with application
integration implementation projects.
COST OF REVENUES
Cost of revenues consists of cost of software licenses and cost of services
and maintenance. As a percentage of total revenues, cost of revenues declined
from 29% for both the three and six months ended June 30, 1997 to 22% and 21%
for the three and six months ended June 30, 1998, respectively. Although cost of
revenues decreased as a percentage of total revenues, the costs increased on an
absolute dollar basis by approximately $1.2 million and $1.9 million for the
three and six months ended June 30, 1998, respectively, compared with the same
periods in 1997. This increase was due primarily to the growth in professional
service engagements created by the increased demand for NEON's direct assistance
with application integration implementation projects. As revenues derived from
professional service engagements increase as a percentage of total revenues in
future periods, cost of revenues as a percentage of total revenues may also
increase.
Cost of software licenses consists principally of royalty payments to third
parties for jointly developed products and internal costs associated with the
fulfillment of license sales. Cost of software licenses increased from $166,000,
or 5% of software license revenues, for the quarter ended June 30, 1997 to
$442,000, or 6% of software license revenues, for the quarter ended June 30,
1998. Cost of software licenses increased from $415,000, or 7% of software
license revenues, for the six months ended June 30, 1997 to $664,000, or 5% of
software license revenues, for the six months ended June 30, 1998. Cost of
software licenses as a percentage of license revenues may fluctuate from period
to period due principally to the mix of sales of royalty-bearing software
products in each period. Royalties associated with certain software products
currently under development through joint business arrangements may cause the
cost of software licenses to increase in future periods.
Cost of services and maintenance consists primarily of personnel, facility
and systems costs incurred in providing professional service consulting,
training, and customer support services. Cost of services and maintenance
decreased as a percentage of services and maintenance revenues from 79% and 73%
for the three and six months ended June 30, 1997, respectively, to 51% for both
the three and six months ended June 30, 1998. This improved margin resulted from
improved utilization of field service personnel, an increase in professional
service rates, and reduced use of subcontractors.
OPERATING EXPENSES
Sales and Marketing
Sales and marketing expenses increased from $2.0 million, or 41% of total
revenues, for the quarter ended June 30, 1997 to $3.8 million, or 33% of total
revenues, for the quarter ended June 30, 1998. Sales and marketing expenses
increased from $3.7 million, or 44% of total revenues, for the six months ended
June 30,
8
<PAGE> 10
1997 to $7.4 million, or 35% of total revenues, for the six months ended June
30, 1998. The increase in absolute dollars is attributable to the Company's
continued expansion of its direct sales force, increased commission expense
associated with higher revenues, continued investment in building an
international direct sales force, and increased marketing expenses for the
Company's expanded software product offerings. Sales and marketing expenses
declined as a percent of total revenues due to higher percentage growth in
revenues and efficiencies associated with the achievement of economies of scale.
Research and Development
Research and development expenses increased from $1.6 million, or 33% of
total revenues, for the quarter ended June 30, 1997 to $2.9 million, or 25% of
total revenues, for the quarter ended June 30, 1998. Research and development
expenses increased from $2.8 million, or 33% of total revenues, for the six
months ended June 30, 1997 to $5.6 million, or 27% of total revenues, for the
six months ended June 30, 1998. Software product development expenditure
increases are directly attributable to increases in the Company's staff of
software engineers and consultants, and the associated infrastructure costs
required to support software product development initiatives. The decline in
research and development expenses as a percentage of revenues was due primarily
to higher percentage growth in revenues.
General and Administrative
General and administrative expenses grew from $371,000, or 8% of total
revenues, and $866,000, or 10% of total revenues, for the three and six months
ended June 30, 1997, respectively, to $1.2 million, or 10% of total revenues,
and $2.2 million, or 10% of total revenues, for the three and six months ended
June 30, 1998, respectively. The increase in general and administrative expenses
resulted primarily from increases in staffing, information systems, and related
infrastructure to support the Company's growth and increases in administrative
expenses associated with the operation of foreign subsidiaries.
Charge for Acquired In-Process Research and Development/Amortization of
Intangibles
For the three and six months ended June 30, 1998, $3.7 million of the MSB
purchase price was allocated to in-process research and development projects and
charged to expense in connection with the acquisition of MSB. Amortization of
the intangibles for the three and six months ended June 30, 1998 of $81,000 and
$131,000, respectively, is comprised of the amortization of acquired software
and goodwill associated with the acquisition of Menhir in September of 1997 and
MSB in June of 1998.
OTHER INCOME (EXPENSE), NET
The Company reported other income, net of $17,000 and $16,000 for the three
and six months ended June 30, 1997, respectively, and $491,000 and $787,000 for
the three and six months ended June 30, 1998, respectively. The increase in
other income was due to interest earned on cash invested from the proceeds of
the Company's initial public offering in June of 1997 and subsequent public
offering in May of 1998. The Company anticipates that interest income may
decline in future periods as cash balances may be used to fund future
acquisitions, as well as to fund the ongoing operations of the Company.
PROVISION FOR INCOME TAXES
The Company has reported no income tax expense for any period. As of June
30, 1998, the net deferred tax asset of approximately $2.4 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)
Giving effect to the acquisition-related expenses associated with the MSB
acquisition, the Company's net loss for the three and six months ended June 30,
1998 was approximately $2.4 million, or $0.23 per share and $1.6 million, or
$0.16 per share. Excluding acquisition-related expenses, the Company generated
net income for the three and six months ended June 30, 1998 of $1.4 million, or
$0.12 per share and $2.2 million, or
9
<PAGE> 11
$0.20 per share, respectively. This compares to a net loss of $529,000, or $0.22
per share and net loss of $1.3 million, or $0.69 per share for the three and six
months ended June 30, 1997, respectively. The improved net income and earnings
per share position resulted from the increased growth of the Company's revenues,
as compared with the growth of costs and expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company reported $72.0 million in cash, cash equivalents, short-term
and long-term investments at June 30, 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 $13.3 million at June 30, 1998. The increase in
net accounts receivable resulted from the growth in customer licensing activity
partially offset by increased cash collections. Unbilled revenue, which
represents progress on software development contracts which is not billed until
specified by a contract date or milestone, grew from $1.7 million to $2.4
million over the same period.
Cash provided by operating activities was $1.0 million for the first six
months of 1998, compared with a net cash usage of $2.8 million for the same
period of 1997. Operating cash flows increased primarily due to increases in
income before depreciation, amortization, and the charge for in-process research
and development which were partially offset by a net decrease in working
capital.
Cash used for investing activities was $5.0 million in the first six months
of 1998, compared with net cash provided of $99,000 for the same period of 1997.
The net cash used in investing activities in the 1998 period was $1.5 million in
net purchases of short-term and long-term investments, $1.2 million used in the
acquisition of MSB, and $2.3 million used in capital expenditures. The net cash
provided for the comparable period of 1997 consisted of proceeds of $500,000
from maturities of short-term investments, net of $401,000 of capital
expenditures.
Cash provided by financing activities was $51.7 million in the first six
months of 1998 compared to $28.9 million for the same period of 1997. In the
1998 period, the Company received $50.7 million in net proceeds from its
secondary offering and $1.0 million in proceeds from the exercise of stock
options, warrants and employee stock purchase plan arrangements. Also in the
1998 period, $3.6 million of common stock was issued in connection with the MSB
acquisition. In the 1997 period, the Company received $29.7 million in net
proceeds from its initial public offering and $106,000 from the exercise of
stock options.
The Company believes that its existing balances of cash, cash equivalents
and short-term and long-term investments will be sufficient to meet the
Company's working capital and capital expenditure needs at least for the next
twelve months. Thereafter, the Company may require additional sources of funds
to continue to support its business. There can be no assurance that such
capital, if needed, will be available or will be available on terms acceptable
to the Company.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks and the possible impact of these
factors on future results of operations.
Uncertainty of Future Operating Results; Lengthy Sales Cycle; Fluctuations
in Quarterly Results. Although the Company has experienced significant revenue
growth in recent periods, such growth rates will not be sustainable and are not
necessarily indicative of future operating results and operating margins. The
Company's quarterly operating results have fluctuated significantly in the past
and may vary significantly in the future. Future operating results will depend
on many factors, including, among others, the growth of the Enterprise
Application Integration ("EAI") software market, the size and timing of software
licenses, the delay or deferral of customer implementations, the ability of the
Company to maintain or increase market demand for the Company's products, the
timing of new product announcements and releases by the Company, competition by
existing and emerging competitors in the application integration software
market, the ability of
10
<PAGE> 12
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 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. 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.
The Company's operating expense levels are relatively fixed and are based in
part on expectations of future revenues. Consequently, any delay in the
recognition of revenue from quarter to quarter could result in operating losses.
To the extent that such operating expenses precede, or are not subsequently
followed by, increased revenues, the Company's operating results would be
materially adversely affected.
As a result of these and other factors, the Company believes that
period-to-period comparisons of its historical results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. It is possible that the Company's future quarterly operating
results from time to time may not meet the expectations of stock market analysts
or investors, which would likely have an adverse effect on the market price of
the Company's common stock.
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 of 1996. The Company commenced shipment of its
principal product, NEONet, in July of 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 June 30,
1998, the Company had an accumulated deficit of approximately $13.1 million. The
Company's prospects must be evaluated in light of the risks, uncertainties,
expenses and difficulties frequently encountered by companies in the early stage
of their development. The new and rapidly evolving markets in which the Company
operates makes these risks, uncertainties, expenses and difficulties
particularly pronounced. In order to address these risks and uncertainties the
Company must, among other things, successfully implement its sales and marketing
strategy, expand its direct sales channels, develop its indirect distribution
channels, respond to competitive and other developments in the application
integration software market, attract and retain qualified personnel, continue to
develop and upgrade its products and technology more rapidly than competitors,
and commercialize its products and services to incorporate existing and future
technologies. There can be no assurance that the Company will be able to
successfully implement any of its
11
<PAGE> 13
strategies or successfully address these risks and uncertainties, or that the
Company will be profitable in the future.
Customer Concentration; Dependence Upon Financial Institutions Industry;
Risks of New Targeted Market Segments. In fiscal 1997, the Company's top ten
customers accounted for 56% of total revenues. For the first and second quarters
of 1998, the Company's largest customer accounted for approximately 10% and 15%,
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 six months of 1998, sales to banks and
financial institutions accounted for approximately 57% 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 and
sales into other industry segments. There can be no assurance that these
customers or other customers of the Company will continue to purchase the
Company's products in the future. The Company's failure to add new customers
that make significant purchases of the Company's products and services would
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company has limited experience in marketing its products to customers
outside of the financial institutions industry. The additional market segments
currently targeted by the Company are likely to have significantly different
market characteristics than the financial institutions segment, and licensing
NEONet products in such other segments may require pricing structures, sales
methods, sales personnel, consulting services and customer support that differ
from those previously used by the Company. There can be no assurance that the
Company will be successful in achieving significant market acceptance or
penetration in the additional segments targeted by the Company. If the Company
is unsuccessful in penetrating additional vertical market segments, its future
growth, financial condition and results of operations will be materially
adversely affected.
Product Concentration. A substantial portion of the Company's revenues have
been attributable to licenses of NEONet and related services. The Company
currently expects that revenues attributable to NEONet and related services will
continue to account for a substantial majority of the Company's revenues at
least through 1998. Accordingly, the Company's future operating results will be
dependent upon the level of market acceptance of, and demand for, NEONet. The
Company's future performance will, to a large extent, depend upon the successful
development, introduction and customer acceptance of new and enhanced releases
of NEONet and other products. There can be no assurance that the Company's
products will achieve continued market acceptance or that the Company will be
successful in marketing any new or enhanced products. In the event that the
Company's current or future competitors release new products that have more
advanced features, offer better performance or are more price competitive than
NEONet, demand for the Company's products may decline. A decline in demand for
NEONet as a result of competition, technological change or other factors would
have a material adverse effect on the Company's business, financial condition
and results of operations.
Integration of Acquisitions and Joint Ventures. In September of 1997 the
Company acquired Menhir, and in June of 1998 acquired MSB, 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
12
<PAGE> 14
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 31 people as of June 30, 1998. The Company's
ability to achieve significant revenue growth in the future will depend in large
part on its ability to recruit and train sufficient direct sales, technical and
customer personnel, particularly additional sales personnel focusing on the new
vertical market segments targeted by the Company's marketing strategy. The
Company has at times experienced and continues to experience difficulty in
recruiting qualified sales, technical and support personnel. The inability of
the Company to rapidly and effectively expand its direct sales force and its
technical and support staff could materially adversely affect the Company's
business, financial condition and operating results.
The Company believes that future growth also will depend upon its success
in developing and maintaining strategic relationships with distributors,
resellers, and systems integrators. The Company's strategy is to continue to
increase the proportion of customers served through these indirect channels.
Although sales through indirect channels accounted for less than 10% of total
revenues in 1997, indirect sales increased to approximately 32% of total
revenues in the first quarter of 1998 and to approximately 12% in the second
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.
Risks Associated with International Operations. Sales of the Company's
products outside of North America in the first and second quarters of 1998
represented approximately 34% and 29% of total revenues, respectively,
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 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
13
<PAGE> 15
substitute for those offered by the Company. The Company expects that internally
developed application integration systems will continue to be a principal source
of competition for the foreseeable future. In particular, the Company has had
difficulties making sales to organizations whose internal development groups
have already progressed significantly toward completion of systems that the
Company's products might replace, or where the underlying technologies used by
such groups differ fundamentally from the Company's products.
The Company's competitors also include software vendors targeting the EAI
market through various technological solutions. For example, Microsoft, BEA
Systems and others provide messaging and queuing solutions that compete with the
NEONet Messaging and Queuing module. In the future these vendors could elect to
provide a more complete integration solution that would also compete with
NEONet's dynamic formatting and rules-based engine modules. In addition, a large
number of other companies provide alternative solutions to application
integration utilizing other technologies such as data synchronization,
transaction monitoring, and subject-based publish/subscribe messaging systems.
The Company also faces competition from relational database vendors such as
Oracle, Informix, Sybase and Microsoft. In addition, NEON faces competition from
vendors offering EAI capabilities, including TSI International Software Ltd.,
Active Software and Vitria Technology, Inc.
The Company may also face competition from system integrators and
professional service organizations which design and develop custom systems and
perform custom integration. Certain of these firms may possess industry specific
expertise or reputations among potential customers for offering enterprise
solutions to application integration needs. These systems integrators and
consulting firms can be resellers of the Company's products and may engage in
joint marketing and sales efforts with the Company. The Company relies upon such
firms for recommendations of NEONet products during the evaluation stage of the
purchase process, as well as for implementation and customer support services.
These systems integrators and consulting firms may have similar, and often more
established, relationships with the Company's competitors, and there can be no
assurance that these firms will not market or recommend software products
competitive with the Company's products.
Most of the Company's competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources,
significantly greater name recognition, and a larger installed base of customers
than the Company. In addition, many of the Company's competitors have
well-established relationships with current and potential customers of the
Company, have extensive knowledge of the application integration industry, and
are capable of offering a single-vendor solution. As a result, the Company's
competitors may be in a better position than the Company to devote significant
resources toward the development, promotion and sale of their products and to
respond more quickly to new or emerging technologies and changes in customer
requirements. In addition, current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties
to increase the ability of their products to address customer needs.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. The Company also
expects that the competition will increase as a result of software industry
consolidations. Increased competition is likely to result in price reductions,
reduced gross margins and loss of market share, any of which could materially
adversely affect the Company's business, financial condition and results of
operations. There can be no assurance that the Company will be able to compete
successfully against current and future competitors, or that competitive
pressure faced by the Company will not materially adversely affect its business,
financial condition and results of operations.
Management of Growth. The Company is currently experiencing a period of
rapid growth that has placed and is expected to continue to place a strain on
the Company's administrative, financial and operational resources. From January
1, 1996 through June 30, 1998, the size of the Company's staff has increased
from 35 to 321 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
14
<PAGE> 16
others through internal growth or through acquisitions of related companies and
technologies. Such expansion may strain management's ability to successfully
integrate its operations throughout these regions. Any additional growth within
a short time period may divert management attention from day-to-day operations,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's ability to manage its staff and facilities growth effectively
will require it to continue to improve its operational, financial and management
controls, reporting systems and procedures, to install new management
information and control systems and to expand, train, motivate and manage its
work force. In particular, the Company is currently migrating its existing
accounting software to a packaged application, which will allow greater
flexibility in reporting and tracking results. There can be no assurance that
the Company will install such software package in an efficient and timely manner
or that the new systems will be adequate to support the Company's level of
operations. If the Company's management is unable to manage growth effectively
and new employees are unable to achieve targeted performance levels, the
Company's business, financial condition and results of operations would be
materially adversely affected.
Rapid Technological Change; Platform Coverage; Dependence on New
Products. The market in which the Company competes is characterized by rapid
technological change, frequent new product introductions and enhancements,
changes in customer demands and evolving industry standards. The introduction of
products incorporating new technologies and the emergence of shifting customer
requirements, or changing industry standards, could render certain of the
Company's existing products obsolete. The technological life cycles of the
Company's products are difficult to estimate, and may vary across vertical
market segments. The Company's future success will depend upon its ability to
continue to enhance its current product line and to continue to develop and
introduce new products that keep pace with competitive and technological
developments. Such developments will require the Company to continue to make
substantial product development investments.
The Company currently serves, and intends to continue to serve, a customer
base with a wide variety of hardware, software, database, and networking
platforms. To gain broad market acceptance, the Company believes that in the
future it must support the NEONet product suite on a variety of platforms.
The success of the Company's products will depend on various factors,
including the ability to integrate the Company's products with multiple
platforms as compared to competitive offerings, the portability of the Company's
products, particularly the number of hardware platforms, operating systems and
databases that the Company's products can source or target, the integration of
additional software modules under development with existing products, and the
Company's management of software development being performed by third-party
developers. There can be no assurance that the Company will be successful in
developing and marketing product enhancements or new products that respond to
these technological changes, shifting customer preferences, or evolving industry
standards, or that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and marketing of these
products. If the Company is unable to develop and introduce new products or
enhancements of existing products in a timely manner or if the Company
experiences delays in the commencement of commercial shipments of new products
and enhancements, the Company's business, operating results and financial
condition would be materially adversely affected.
Dependence on Relationships with Complementary Vendors. The Company
believes that, in order to provide competitive solutions for heterogeneous, open
computing environments, it will be necessary to develop, maintain and enhance
close relationships with a wide range of vendors, including database, Enterprise
Resource Planning, supply chain and Electronic Data Interchange software
vendors, as well as hardware and operating system vendors. There can be no
assurance that the Company will be able to maintain its existing relationships
or develop additional relationships with such vendors. The Company's failure to
do so could adversely affect the portability of the Company's products to
existing and new platforms and databases and the timing of the release of new
and enhanced products for the marketplace by the Company.
Dependence on Key Personnel; Ability to Attract and Retain Personnel. The
Company's future success will depend in large part upon the continued service of
its key technical, sales and senior management
15
<PAGE> 17
personnel, none of whom is bound by an employment agreement. The loss of any of
the Company's senior management or other key research, development, sales and
marketing personnel, particularly if lost to competitors, could have a material
adverse effect on the Company's business, financial condition and results of
operations. In particular, the Company's Chief Executive Officer, George F.
(Rick) Adam and Harold A. Piskiel, Chief Technology Officer of the Company,
would be difficult to replace. The Company's future success will depend in large
part upon its ability to attract, retain and motivate highly skilled employees.
There is significant competition for employees with the skills required to
perform the services offered by the Company and there can be no assurance that
the Company will be able to continue to attract and retain sufficient numbers of
highly skilled employees. Because of the complexity of the application
integration software market, the Company has in the past experienced, and
expects in the future to experience, a significant time lag between the date on
which technical and sales personnel are hired and the time at which such persons
become fully productive. If the Company is unable to manage the post-sales
process effectively, its ability to attract repeat sales or establish strong
account references could be adversely affected, which may materially affect the
Company's business, financial condition and results of operations.
Protection of Intellectual Property; Risks of Infringement. The Company's
success and ability to compete is dependent in part upon its proprietary
technology. The Company relies on a combination of copyright, trademark and
trade secret laws, as well as confidentiality agreements and licensing
arrangements, to establish and protect its proprietary rights. The Company
presently has no patents, but has three patent applications pending. Despite the
Company's efforts to protect its proprietary rights, existing copyright,
trademark and trade secret laws afford only limited protection. Moreover, the
laws of certain countries do not protect the Company's proprietary rights to the
same extent as do the laws of the United States. In addition, attempts may be
made to copy or reverse engineer aspects of the Company's products or to obtain
and use information that the Company regards as proprietary. Accordingly, there
can be no assurance that the Company will be able to protect its proprietary
rights against unauthorized third-party copying or use, which could materially
adversely affect the Company's business, operating results or financial
condition. Moreover, there can be no assurance that others will not develop
products that infringe 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.
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
16
<PAGE> 18
years, computer systems and/or software products used by many companies may need
to be upgraded to comply with such year 2000 requirements. While the Company has
assessed its products, services and internal systems, certain internal financial
packages have not yet been implemented and may require further assessment by the
Company. The Company believes it is currently expending sufficient resources to
review its product and services, as well as its internal management information
system in order to modify those products, services and systems that are not year
2000 compliant. The Company expects such modifications will be made on a timely
basis and does not believe that the cost of such modifications will have a
material effect on the Company's operating results. There can be no assurance,
however, that the Company will be able to modify timely and successfully such
products, services and systems to comply with the year 2000 requirements, which
could have a material adverse effect on the Company's operating results.
Moreover, the Company believes that some customers may be purchasing the
Company's products as an interim solution to their year 2000 needs until their
current suppliers reach compliance. Conversely, year 2000 issues could cause a
significant number of companies, including current customers of the Company, to
reevaluate their current system needs and as a result consider switching to
other systems and suppliers. In addition, the Company has not yet completed its
assessment of certain earlier versions of the Company's product which are still
implemented at certain customer sites. Any of the foregoing could result in a
material adverse effect on the Company's business, operating results and
financial condition. Furthermore, there can be no assurance that these or other
factors relating to the year 2000 compliance issues, including litigation, will
not have a material adverse effect on the Company's business, financial
condition or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
17
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
Effective June 1, 1998, the Company issued an aggregate of 138,462
unregistered shares to certain shareholders of MSB in exchange for all the
outstanding capital stock of MSB (the "MSB Transaction"). The shares were issued
without registration in reliance upon the exemption set forth under Regulation S
and Section 4(2) of the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Annual Meeting of Stockholders of the Company (the "Annual Meeting")
was held on May 14, 1998.
b) The following Class III directors were elected at the Annual Meeting for
three-year terms ending on the date of the annual stockholders' meeting in 2001:
Patrick J. Fortune
Mark L. Gordon
Elisabeth W. Ireland
The Company's Board of Directors is currently comprised of seven members
who are divided into three classes with overlapping three-year terms. A director
serves in office until his or her respective successor is duly elected and
qualified or until his or her earlier death or resignation. The term for Class
II directors (Harold A. Piskiel and James Reep) will expire at the annual
meeting of stockholders to be held in 1999, and the term for Class I directors
(George F. (Rick) Adam, Jr. and Steve Lazarus) will expire at the annual meeting
of stockholders to be held in 2000.
c) The stockholders approved an amendment to the Company's Amended and
Restated 1995 Stock Option Plan to increase the number of shares of common stock
reserved for issuance thereunder by 500,000 shares, and to include a provision
providing for the automatic increase in the number of shares available for grant
each fiscal year.
d) The stockholders approved an amendment to the Company's 1997 Stock
Purchase Plan to increase the number of shares of common stock available for
grant thereunder by 100,000 shares, and to include a provision providing for an
automatic increase in the number of shares available for grant each fiscal year.
e) The stockholders also ratified the appointment of Arthur Andersen, LLP
as the independent auditors for the year ended December 31, 1998.
f) The results of the vote on the matters voted upon at the Annual Meeting
were, respectively:
<TABLE>
<CAPTION>
(i) ELECTION OF DIRECTORS FOR WITHHELD
--------------------- --- --------
<S> <C> <C>
Patrick J. Fortune..................... 7,975,169 38,000
Mark L. Gordon......................... 8,006,669 6,500
Elisabeth W. Ireland................... 8,006,669 6,500
</TABLE>
(ii) Approval of the amendment to the Company's Amended and Restated
1995 Stock Option Plan.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTE
--- ------- ------- ---------------
<S> <C> <C> <C>
6,214,939 662,092 15,120 1,121,018
</TABLE>
18
<PAGE> 20
(iii) Approval of the amendment to the Company's 1997 Employee Stock
Purchase Plan.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTE
--- ------- ------- ---------------
<S> <C> <C> <C>
6,571,130 353,407 14,420 1,074,212
</TABLE>
(iv) Ratification of Arthur Andersen, LLP as independent auditors for
the Company for fiscal year 1998.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTE
--- ------- ------- ---------------
<S> <C> <C> <C>
8,010,449 1,500 1,220 0
</TABLE>
The foregoing matters are described in more detail in the Company's
definitive proxy statement dated April 15, 1998.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10 Share Purchase Agreement relating to the MSB Transaction
(incorporated by reference to the Company's Form 8-K filed
on June 26, 1998).
27.1 Financial Data Schedule
</TABLE>
(b) A report on Form 8-K was filed on June 26, 1998 relating to the MSB
Transaction.
19
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW ERA OF NETWORKS, INC.
(Registrant)
By: /s/ STEPHEN E. WEBB
----------------------------------
Stephen E. Webb, Senior Vice
President,
Chief Financial Officer
(Principal Financial Officer)
Date: August 14, 1998
20
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10 Share Purchase Agreement relating to the MSB Transaction
(incorporated by reference to the Company's Form 8-K filed
on June 26, 1998).
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S JUNE 30, 1998 UNAUDITED CONSOLIDATED FINANCIAL 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> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 54,972,145
<SECURITIES> 13,533,712
<RECEIVABLES> 13,279,463
<ALLOWANCES> 300,000
<INVENTORY> 0
<CURRENT-ASSETS> 85,927,018
<PP&E> 5,853,943
<DEPRECIATION> 1,538,752
<TOTAL-ASSETS> 96,739,905
<CURRENT-LIABILITIES> 8,214,513
<BONDS> 0
0
0
<COMMON> 1,178
<OTHER-SE> 88,524,214
<TOTAL-LIABILITY-AND-EQUITY> 96,739,905
<SALES> 11,459,887
<TOTAL-REVENUES> 11,459,887
<CGS> 2,576,841
<TOTAL-COSTS> 2,576,841
<OTHER-EXPENSES> 11,732,587
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,644
<INCOME-PRETAX> (2,358,866)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,358,866)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,358,866)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> (.23)
</TABLE>
