<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
------------------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-22043
------------------------
NEW ERA OF NETWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 84-1234845
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
7400 EAST ORCHARD ROAD, SUITE 230, ENGLEWOOD, COLORADO 80111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 694-3933
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.0001 PAR VALUE PER SHARE
(TITLE OF CLASS)
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 period 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [X]
As of March 16, 1998, there were 3,667,178 shares of the Registrant's
common stock outstanding and the aggregate market value of such shares held by
non-affiliates of the Registrant (based upon the closing sale price of such
shares on the Nasdaq National Market on March 16, 1998) was approximately
$91,221,000. Shares of the Registrant's common stock held by each executive
officer and director and by each entity that owns 5% or more of the Registrant's
outstanding common stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Registrant's definitive Proxy Statement to be
issued in connection with the Registrant's 1998 Annual Meeting of Stockholders
to be held on May 14, 1998 are incorporated by reference in Part III of this
Report on Form 10-K to the extent stated herein.
================================================================================
<PAGE> 2
PART I
ITEM 1. BUSINESS.
OVERVIEW
New Era of Networks, Inc. develops, markets and supports application
integration software and provides application integration services. The
Company's flagship software suite, NEONet, provides organizations with a
structured software platform for the integration of disparate systems and
applications across the enterprise, a process known as application integration.
NEONet facilitates the rapid and efficient deployment and ongoing maintenance of
application integration across the enterprise. NEONet supports a heterogeneous
environment of hardware, operating systems, networks 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. With
the acquisition of Menhir Limited in September 1997, the Company added to its
product portfolio Rapport, a leading customer management and contact information
system developed primarily for the banking industry.
As of December 31, 1997, the Company had a customer base of approximately
140 customers in the financial services, health care, information technology and
systems consulting, and other industries. Representative customers of the
Company include Merrill Lynch & Co., Inc., Deutsche Morgan Grenfell, Inc., Chase
Manhattan Bank, Credit Suisse, ADP Financial Information Services, Ernst &
Young, Aetna Insurance, Disclosure Inc., State Street Global Advisors, Xerox
Corporation and Pacific Investment Mortgage Company. The Company markets its
software and related services primarily through a direct sales organization,
complemented by a variety of indirect sales channels. As part of this strategy,
the Company has established reseller and joint marketing relationships with
firms such as IBM, Tandem Corporation, Hewlett-Packard, Sun Microsystems,
SunGard Financial Systems, Scopus, Oracle, Physicians Computer Network and
SWIFT.
RECENT DEVELOPMENTS
Effective as of September 1, 1997, New Era of Networks Limited ("NEON UK"),
a wholly-owned United Kingdom subsidiary of the Company, acquired all of the
outstanding capital stock of Menhir Limited, a corporation organized under the
laws of the United Kingdom ("Menhir"). NEON UK paid an aggregate of $2.8 million
to acquire Menhir, excluding all fees and expenses associated with the
acquisition. The acquisition was accounted for under the purchase method of
accounting.
PRODUCTS AND SERVICES
NEONET SOFTWARE
The Company's NEONet software provides organizations with a structured
software platform for the rapid and efficient development and ongoing management
of application integration among disparate applications across the enterprise.
The principal modules of NEONet are as follows:
Rules Engine. The NEONet Rules Engine module provides for the publishing of
a sending application's single message to multiple recipient applications and
databases, in each case in the proper format for the designated recipient, based
upon a set of user-defined business rules. Each receiving application registers
or subscribes to the data generated by multiple applications which, by
specifying the values of data in the transactions that are of interest, enables
each subscribing application to receive only the data it requires. The Rules
Engine module is based on a proprietary, high-speed, scaleable architecture that
can support high numbers of business rules while continuing to provide real-time
data access and distribution. This enables an organization to proscribe
sophisticated rules that determine which data needs delivery to specific
applications and databases and under which circumstances. These rules can be
readily modified or updated as business requirements change.
Formatter. The NEONet Formatter module can be added to the Messaging and
Queuing module to provide for dynamic reformatting of data messages in real time
so they may be accepted and read by multiple receiving applications in
heterogeneous environments. The NEONet Formatter parses and reformats
1
<PAGE> 3
messages by translating, selecting, calculating, converting, looking up data
values, and substituting messages among different protocols, programming
languages, applications, and hardware platforms. The sending application can
issue a message in a single format, and the dynamic formatter reformats the
message into the new format required by each receiving application, a function
that is critical to supporting database replication and application integration.
Messaging and Queuing. Messaging architectures are the foundation of the
NEON solution, using messaging and queuing technology as the method of
transporting data between applications, databases, and platforms around the
business enterprise. NEONet can use either IBM MQSeries or NEON Extended
Messaging and Queuing (EMQ) as a transport layer, depending on a wide variety of
varying business needs. Both MQSeries and EMQ send transactions from one
application to another, consisting of instructions or data between applications
and databases, and provide for guaranteed delivery of each message
(transaction). Messaging architectures ensure that the sending system can
distribute a high volume of messages in real time without the need to wait for
confirmation of receipt, as well as a message queue for the receiving system to
ensure that the receiving system can download messages when available.
NEONweb. NEONweb is a java-based light client interface to NEONet
MessageBroker. NEONweb is a complementary module to the NEONet platform that
facilitates the integration of Internet/Intranet environments with legacy and
client/server-based systems. NEONweb extends to the Internet/Intranet the
security of NEONet's guaranteed message delivery and receipt. This functionality
is essential for electronic commerce on the Internet, including both electronic
data interchange and consumer commerce.
NEONaccess. The Company's NEONaccess module facilitates application
integration using the SWIFT interface standard commonly used for financial
processing among financial institutions worldwide. This module requires a
license of the NEONet Messaging and Queuing and Formatter modules.
NEONreplication. The NEONreplication module is a set of libraries that
facilitates the automatic update and synchronization of multiple databases for
the purpose of database replication. Database replication is essential for
sophisticated, real-time applications in the financial services and other
industries, as it permits the maintenance of multiple databases in real time.
NEON BusinessEventManager. The NEON BusinessEventManager is a comprehensive
application integration software program for financial and business
applications, including the PeopleSoft General Ledger and others, delivering an
integrated approach to posting business events from across an organization's
entire global enterprise to its financial applications.
Rapport. Rapport is a client relationship management system for the banking
and securities industry, integrating all client and customer files and systems
across even the largest financial enterprise. Rapport manages client and contact
relationship information by breaking down product and services boundaries and
allowing banks and securities firms to move to a client-focused strategy and to
maximize cross-selling opportunities.
Application Integration Libraries. Using its high performance rules engine
and its dynamic formatter, the Company has produced pre-packaged interfaces and
formats for popular application products, starting with the complete SAP
libraries. This product is designed to significantly reduce the implementation
time and cost of these particular application products.
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 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.
2
<PAGE> 4
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 Denver,
New York City and London, as well as at several customer locations.
SALES AND MARKETING
The Company currently markets its software and services primarily through a
direct sales organization, complemented by indirect sales channels. As of
December 31, 1997, the Company's direct sales force included 25 commissioned
sales representatives located in nine U.S. cities, London, England and Sydney,
Australia. In addition, the Company has initiated the implementation of a
multi-tiered channel program to recruit, support, and jointly market
comprehensive product solutions. As part of this strategy, the Company has
established distribution relationships with certain strategic hardware vendors,
database providers, software and toolset developers, systems integrators and
implementation consultants, including companies designing software, database
packages, and hardware integration and consulting services. The Company has also
sought to develop alliances with key 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 NEONet
products and supplement existing NEONet product solutions. The Company also
utilizes advertising, direct mail and public relations programs, participates in
industry trade shows and organizes customer information seminars to promote the
adoption and implementation of its application integration technologies.
The Company believes that future growth will depend in part upon its
success in developing and maintaining strategic relationships with distributors,
resellers, and systems integrators. While the Company's current strategy is to
increase the proportion of customers served through these indirect channels,
sales through the indirect channels accounted for less than 10% of total revenue
in 1997. The Company is currently investing, and plans to continue to invest,
significant resources for developing indirect channels, which could adversely
affect the Company's operating results if the Company's efforts do not generate
license revenues necessary to offset such investment. The Company's inability to
recruit and retain qualified indirect channel partners and systems integrators
could adversely affect the Company's results of operations. The Company's
success in selling into this indirect distribution channel could also adversely
affect the Company's average selling prices and result in lower gross margins,
since lower unit prices are typically charged on sales through indirect
channels.
TECHNOLOGY
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 fully anonymous content-based publish-subscribe capabilities,
with dynamic formatting and exactly once guaranteed delivery to abstract
the translation and delivery of information across applications;
- Simplifies the intrusion into new or legacy programs needed for such
programs to inter-operate;
3
<PAGE> 5
- 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;
- 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 new and improved functionality.
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
4
<PAGE> 6
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 December 31, 1997, the Company's research and development
staff consisted of 96 persons. The Company's research and development
expenditures in 1995, 1996 and 1997 were approximately $1.1 million, $3.7
million and $7.7 million, respectively, and represented 88%, 51% and 34% 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 MQ Series product with certain of the Company's products.
EXTENSION PRODUCTS
NEONaccess and SWIFT Libraries. The Company is developing an interactive
interface to the SWIFT banking and brokerage network using the SWIFT ALLIANCE
gateway, proprietary queuing and message management algorithms and a library of
SWIFT formats pre-packaged in the Company's Formatter. This significantly
reduces implementation time for the Company's customers initially implementing
or maintaining SWIFT applications.
NEON BusinessProcessManager. Using its high performance, scaleable Rules
Engine, the Company is building a sophisticated, event-driven business process
modeling software program, enabling high performance management of complex,
inter-related and time-based transactions. 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.
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 believes
that the application integration market is relatively new, and that there is a
great likelihood that additional, significant competitors will 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 NEONet.
To date, the Company has faced competition and sales resistance from the
internal information technology departments of potential customers that have
developed or may develop in-house systems that may
5
<PAGE> 7
substitute for those offered by the Company. The Company expects that internally
developed application integration systems will continue to be a principal source
of competition for the foreseeable future. In particular, the Company has had
difficulties making sales to organizations whose internal development groups
have already progressed significantly toward completion of systems that the
Company's products might replace, or where the underlying technologies used by
such groups differ fundamentally from the Company's products.
The Company's competitors also include software vendors targeting the
enterprise application integration market through various technological
solutions. For example, Microsoft, BEA and others provide messaging and queuing
solutions that compete with the NEONet Messaging and Queuing module. In the
future these vendors could elect to provide a more complete integration solution
that would also compete with NEONet's dynamic formatting and rules-based engine
modules. In addition, a number of other companies provide alternative solutions
to application integration utilizing other technologies such as data
synchronization, transaction monitoring, and subject-based publish/subscribe
messaging systems. The Company also faces competition from relational database
vendors such as Oracle, Informix, Sybase and Microsoft, whose products
currently, and may in the future, compete with NEON's products.
The Company faces competition from systems 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 integration and consulting firms
can be resellers of the Company's products and may engage in joint marketing and
sales efforts with the Company. The Company relies upon such firms for
recommendations of NEONet products during the evaluation stage of the purchase
process, as well as for implementation and customer support services. These
systems integration and consulting firms may have similar, and often more
established, relationships with the Company's competitors, and there can be no
assurance that these firms will not market or recommend software products
competitive with the Company's products in the future.
Most of the Company's competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources,
significantly greater name recognition, and a larger installed base of customers
than the Company. In addition, many of the Company's competitors have
well-established relationships with current and potential customers of the
Company, have extensive knowledge of the application integration industry, and
are capable of offering a single-vendor solution. As a result, the Company's
competitors may be more able than the Company to devote significant resources
toward the development, promotion and sale of their products and to respond more
quickly to new or emerging technologies and changes in customer requirements. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address customer needs. Accordingly, it is possible
that new competitors or alliances among competitors may emerge and rapidly
acquire significant market share. The Company also expects that the competition
will increase as a result of software industry consolidations. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share, any of which could materially adversely affect the
Company's business, operating results and financial condition. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors, or that competitive pressure faced by the Company will
not have a material adverse effect on its business, financial condition and
results of operations.
The Company believes that the principal competitive factors affecting its
market include product features such as heterogeneous computing platforms,
responsiveness to customer needs, scaleability, adaptability, support of a broad
range of functionality, performance, ease of use, quality, price, and
availability of professional services for product implementation, customer
service and support, effectiveness of sales and marketing efforts, and company
and product reputation. Although the Company believes that it currently competes
favorably with respect to such factors, there can be no assurance that the
Company can maintain its competitive position against current and potential
competitors, especially those with greater financial, marketing, service,
support, technical, and other resources than the Company.
6
<PAGE> 8
INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS AND LICENSES
The Company relies on a combination of copyright, trademark and trade
secret laws, as well as confidentiality agreements and licensing arrangements,
to establish and protect its proprietary rights. The Company presently has no
patents, but has three patent applications pending.
Despite the Company's efforts to protect its proprietary rights, existing
copyright, trademark and trade secret laws afford only limited protection.
Moreover, the laws of certain countries do not protect the Company's proprietary
rights to the same extent as do the laws of the United States. In addition,
attempts may be made to copy or reverse engineer aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. Accordingly, there can be no assurance that the Company will be
able to protect its proprietary rights against unauthorized third-party copying
or use, which could materially adversely affect the Company's business,
operating results or financial condition. Moreover, there can be no assurance
that others will not develop products that infringe the Company's proprietary
rights, or that are similar or superior to those developed by the Company.
Policing the unauthorized use of the Company's products is difficult. Litigation
may be necessary in the future to enforce the Company's intellectual property
rights, to protect the Company's trade secrets or to determine the validity and
scope of the proprietary rights of others. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company also relies on certain technology that it licenses from third
parties, including software that is integrated with internally developed
software and used in the Company's products to perform certain functions.
There can be no assurance that these third-party technology licenses will
continue to be available to the Company on commercially reasonable terms. The
loss of or inability of the Company to maintain any of these technology licenses
could result in delays or reductions in product shipments until equivalent
technology could be identified, licensed and integrated. Any such delays or
reductions in product shipments would materially adversely affect the Company's
business, financial condition and results of operations.
As is common in the software industry, the Company from time to time
receives notices from third parties claiming infringement by the Company's
products of such third parties' proprietary rights. 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. 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
7
<PAGE> 9
injunction could have a material adverse effect upon the Company's business,
financial condition and results of operations.
EMPLOYEES
As of December 31, 1997, the Company employed 228 persons, including 83 in
sales, marketing and field operations, 96 in research and development, 32 in
finance and administration and 17 in client services. Of these, 60 are located
in the United Kingdom, two 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, Executive Vice President, Chief Technology Officer 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."
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 and London, England. Management believes that its current facilities
are adequate to meet its needs through the next twelve months, and that, if
required, suitable additional space will be available to accommodate expansion
of the Company's operations on commercially reasonable terms.
FACTORS THAT MAY AFFECT FUTURE RESULTS
As described by the following factors, past financial performance should
not be considered a reliable indicator of future performance and investors
should not use historical trends to anticipate results or trends in future
periods.
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 commercially introduced its initial
version of NEONet in January 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 December 31, 1997,
the Company had an accumulated deficit of approximately $11.5 million. The
Company's limited operating history makes the prediction of future operating
results difficult or impossible. The Company's prospects must be evaluated in
light of the risks, uncertainties, expenses and difficulties frequently
encountered by companies in the early stage of their development. The new and
rapidly evolving markets in which the Company operates makes these risks,
uncertainties, expenses and difficulties particularly pronounced. In order to
address these risks and uncertainties the Company must, among other things,
successfully implement its sales and marketing strategy, expand its direct sales
channels, develop its indirect distribution channels, respond to competitive and
other developments in the application integration software market, attract and
retain qualified personnel, continue to develop and upgrade its products and
technology
8
<PAGE> 10
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.
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 may not be sustainable and are not
necessarily indicative of future operating results and operating margins. The
Company's quarterly operating results have fluctuated significantly in the past
and may vary significantly in the future. Future operating results will depend
on many factors, including, among others, the growth of the application
integration software market, the size and timing of software licenses, the delay
or deferral of customer implementations, the ability of the Company to maintain
or increase market demand for the Company's products, the timing of new product
announcements and releases by the Company, competition by existing and emerging
competitors in the application integration software market, the ability of the
Company to expand its direct sales force and develop indirect distribution
channels, the Company's success in developing and marketing new products and
controlling costs, budgeting cycles of customers, product life cycles, software
defects and other product quality problems, the mix of products and services
sold, international expansion, and general domestic and international economic
and political conditions. A significant portion of the Company's revenues has
been, and the Company believes will continue to be, derived from a small number
of relatively large customer contracts or arrangements, and the timing of
revenue recognition from such contracts and arrangements has caused and may
continue to cause material fluctuations in the Company's operating results,
particularly on a quarterly basis. 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 such contract that 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 results of operations 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.
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 and services. 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
9
<PAGE> 11
the number of organizations demanding software and services for application
integration and seeking outside vendors to develop, manage and maintain the
application integration software used for their mission-critical applications.
Many potential customers for third-party application integration software have
made significant investments in internally developed integration systems, and
are highly dependent upon the continued use of such internally developed
systems. The dependence of organizations on such internally developed systems
coupled with the significant costs required to shift to third-party products may
substantially inhibit future demand for third-party application integration
software products, such as those offered by the Company. There can be no
assurance that the market for application integration software products and
services will continue to grow. If the application integration market fails to
grow or grows more slowly than the Company currently anticipates, the Company's
business, 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 any significant degree of
market acceptance. If the Company is unsuccessful in establishing broad market
acceptance for its current and future products, the Company's future growth,
business, 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 products 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.
Customer Concentration; Dependence Upon Financial Institutions Industry;
Risks of New Targeted Market Segments. 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. In
addition, to date the Company's revenues have been derived primarily from sales
to large banks and financial institutions. For the year ended December 31, 1997,
sales to banks and financial institutions accounted for 72% of the Company's
total revenues. 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's marketing strategy calls for the Company to increase its
penetration of the financial institutions market segment and to focus other
sales efforts on additional vertical market segments, principally insurance,
telecommunications and manufacturing. Accordingly, the Company expects that
revenues attributable to the financial institutions market segment will continue
to account for a substantial portion of the Company's revenues in the near
future. Any factors affecting the health of the financial services industry, or
other targeted vertical market segments that contain a significant portion of
the Company's customer base, could affect the purchasing patterns of the
Company's customers within these industries, which would have a material adverse
effect on the Company's business, 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
10
<PAGE> 12
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.
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 December 31, 1997, the size of the Company's staff increased
from 35 to 228 full time equivalent employees. Except for George F. (Rick) Adam,
Jr., the Company's Chief Executive Officer, and Harold A. Piskiel, the Company's
Executive Vice President, Chief Technology Officer, all of the Company's senior
management joined the Company in 1996 or 1997. In addition, the Company 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. There can be no assurance that the Company will install such
management information and control systems in an efficient and timely manner or
that the new systems will be adequate to support the Company's level of
operations. If the Company's management is unable to manage growth effectively
and new employees are unable to achieve targeted performance levels, the
Company's business, financial condition and results of operations would be
materially adversely affected.
Fixed-Price 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. 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.
Integration of Acquisitions and Joint Ventures. In September 1997, the
Company acquired Menhir Ltd. ("Menhir") through its wholly-owned subsidiary,
NEON, Ltd., and may from time to time engage in additional acquisitions of
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 additional
acquisitions may also result in additional stock issuances which could be
dilutive to the Company's stockholders. The Company may also evaluate, on a
case-by-case basis, joint venture relationships with certain complementary
businesses. Any such joint venture investment would involve many of the same
risks posed by acquisitions, particularly those risks associated with the
diversion of resources, the inability to generate sufficient revenues, the
management of relationships with third parties, and potential additional
expenses, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
11
<PAGE> 13
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.
The Company's competitors also include software vendors targeting the
enterprise-wide 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 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, whose products currently
compete with the Company to some extent and are likely to compete more directly
in the future.
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 in the future.
Most of the Company's competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources,
significantly greater name recognition, and a larger installed base of customers
than the Company. In addition, many of the Company's competitors have
well-established relationships with current and potential customers of the
Company, have extensive knowledge of the application integration industry, and
are capable of offering a single-vendor solution. As a result, the Company's
competitors may be more able than the Company to devote significant resources
toward the development, promotion and sale of their products and to respond more
quickly to new or emerging technologies and changes in customer requirements. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address customer needs. Accordingly, it is possible
that new competitors or alliances among competitors may emerge and rapidly
acquire significant market share. The Company also expects that the competition
will increase as a result of software industry consolidations. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share, any of which could materially adversely affect the
Company's business, 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.
12
<PAGE> 14
Rapid Technological Change; Limited Platform Coverage; Dependence on New
Products. The market in which the Company competes is characterized by rapid
technological change, frequent new product introductions and enhancements,
changes in customer demands and evolving industry standards. The introduction of
products incorporating new technologies and the emergence of shifting customer
requirements, or changing industry standards, could render certain of the
Company's existing products obsolete. The technological life cycles of the
Company's products are difficult to estimate, and may vary across vertical
market segments. The Company's future success will depend upon its ability to
continue to enhance its current product line and to continue to develop and
introduce new products that keep pace with competitive and technological
developments. Such developments will require the Company to continue to make
substantial product development investments.
The Company currently serves, and intends to continue to serve, a customer
base with a wide variety of hardware, software, database, and networking
platforms. To gain broad market acceptance, the Company believes that in the
future it must support NEONet on a variety of platforms. The Company's product
currently does not support all major platforms, and there can be no assurance
that the Company will adequately expand its database and platform coverage to
service potential customers, or that such expansion will be sufficiently rapid
to meet or exceed platform and database coverage of competitors.
The success of the Company's products will depend on various factors,
including the ability to integrate the Company's products with customer
platforms as compared to competitive offerings, the portability of the Company's
products, particularly the number of hardware platforms, operating systems and
databases that the Company's products can source or target, the integration of
additional software modules under development with existing products, and the
Company's management of software development being performed by third-party
developers. There can be no assurance that the Company will be successful in
developing and marketing product enhancements or new products that respond to
these technological changes, shifting customer tastes, or evolving industry
standards, or that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and marketing of these
products. If the Company is unable to develop and introduce new products or
enhancements of existing products in a timely manner or if the Company
experiences delays in the commencement of commercial shipments of new products
and enhancements, the Company's business, financial condition and results of
operations would be materially adversely affected.
Risks Associated with Expanding Distribution; Indirect Distribution Channel
Risks. To date, the Company has sold its products primarily through direct sales
and has supported its customers with its technical and customer support staff.
The Company's ability to achieve significant revenue growth in the future will
depend in large part on its ability to recruit and train sufficient direct
sales, technical and customer personnel, particularly additional sales personnel
focusing on the new vertical market segments targeted by the Company's marketing
strategy. The Company has at times experienced and continues to experience
difficulty in recruiting qualified sales, technical and support personnel. Any
failure by the Company to rapidly and effectively expand its direct sales force
and its technical and support staff could materially adversely affect the
Company's business, financial condition and results of operations.
The Company believes that future growth will depend upon its success in
developing and maintaining strategic relationships with distributors, resellers,
and systems integrators. While the Company's current strategy is to increase the
proportion of customers served through these indirect channels, indirect channel
sales have not accounted for significant revenue to date. The Company is
currently investing, and plans to continue to invest, significant resources to
develop indirect channels, which could adversely affect the Company's operating
results if the Company's efforts do not generate license revenues necessary to
offset such investment. The Company's inability to recruit and retain qualified
indirect channel partners, and systems integrators could adversely affect the
Company's results of operations. The Company's success in selling into this
indirect distribution channel could also adversely affect the Company's average
selling prices and result in lower gross margins, since lower unit prices are
typically charged on sales through indirect channels.
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
13
<PAGE> 15
personnel, none of whom is bound by an employment agreement. The loss of any of
the Company's senior management or other key research, development, sales and
marketing personnel, particularly if lost to competitors, could have a material
adverse effect on the Company's business, financial condition and operating
results. 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.
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 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. There can be no assurance
that such customers will purchase support services from the Company or that they
will upgrade beyond their current version of the Company's software once their
current software suppliers reach compliance. 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.
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
14
<PAGE> 16
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.
ITEM 2. PROPERTIES.
The Company leases facilities located in Englewood, Colorado, which provide
for approximately 34,400 square feet of office space and contain the Company's
principal executive, administrative, engineering, sales, marketing, customer
support and research and development functions. Such leases expire beginning in
December 1999. The Company believes that its existing facilities will be
adequate for the next 12 months and that sufficient additional space will be
available as needed thereafter. The Company also leases approximately 5,000
square feet of office space in a building in Manhattan, New York and
approximately 6,800 square feet of office space in London, England.
In addition, the Company maintains secure Web servers which contain
confidential information of the Company and its customers. The Company's
operations are dependent in part upon its ability to protect its internal
network infrastructure against damage from physical break-ins, natural
disasters, operational disruptions and other events. Physical break-ins could
result in the theft or loss of confidential or critical business information of
the Company or its customers. Any such break-in or damage or failure that causes
interruptions in the Company's operations could materially adversely affect the
Company's business, financial condition and results of operations.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
15
<PAGE> 17
ITEM 4A. EXECUTIVE OFFICERS OF REGISTRANT
The executive officers of the Company and their ages as of March 16, 1998
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
George F. (Rick) Adam, Jr. 51 Chairman of the Board, President and
Chief Executive Officer
Harold A. Piskiel 51 Executive Vice President, Chief
Technology Officer
Stephen E. Webb 49 Senior Vice President and Chief Financial
Officer
Robert I. Theis 36 Senior Vice President of Marketing
Frederick T. Horn 44 Senior Vice President of Product
Development and Client Services
Leonard M. Goldstein 50 Senior Vice President, Senior Counsel and
Secretary
Frank A. Russo, Jr. 53 President of Sales and Field Operations,
North America
Peter Hoversten 43 Senior Vice President, Application
Development and Field Operations
Michael E. Jaroch 53 Senior Vice President of Human Resources
James C. Parks 54 Vice President of Finance and Controller
Steve Lazarus 66 Director
Mark L. Gordon 46 Director
James Reep 46 Director
Elisabeth W. Ireland 40 Director
Patrick J. Fortune 50 Director
</TABLE>
Mr. Adam has served as Chairman of the Board, Chief Executive Officer,
President and a Director of the Company since founding the Company in June 1993.
From 1987 to 1993, Mr. Adam was General Partner of Goldman, Sachs & Co. and
served as the Chief Information Technology Officer. From 1980 to 1987, Mr. Adam
was Chief Information Officer and Vice President of Personnel for Baxter Health
Care Corporation. Mr. Adam received a B.S. degree from the U.S. Military
Academy, West Point, New York and an M.B.A. from Florida State University.
Mr. Piskiel has served as Executive Vice President, Chief Technical Officer
and a Director of the Company since joining the Company in March 1995. From 1993
to 1995, Mr. Piskiel served as 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 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 of Marketing since joining
the Company in October 1996. Prior to joining the Company. Mr. Theis served as
Managing Director of the Worldwide Financial Services Industry Group of Sun
Microsystems, Inc. from April 1986 to October 1996. Prior to joining Sun
16
<PAGE> 18
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 of Sales and Services for North America
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 Development
and Field Operations since May 1, 1997. From January 1989 to March 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 and Illinois Superconductor. Mr. Lazarus holds a
B.A. degree from Dartmouth College and an M.B.A. degree from the Harvard
Graduate School of Business.
Mr. Gordon has served as a Director of the Company since the Company's
inception. Since 1980, Mr. Gordon has been a partner in the law firm of Gordon &
Glickson PC, directing the firm's information technology practice. Mr. Gordon
holds a B.A. degree from the University of Michigan and a J.D. degree from the
Northwestern University School of Law.
Mr. Reep has served as a Director of the Company since March 1996. Since
1980, Mr. Reep has served as Chairman and Director of First Consulting Group, an
information consulting firm specializing in health care systems that he
co-founded. Mr. Reep holds a B.S. degree from California State University at
Long Beach and an M.B.A. degree from the University of Chicago.
17
<PAGE> 19
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.
18
<PAGE> 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The common stock of the Company has been traded on the Nasdaq National
Market under the symbol "NEON" since the Company's initial public offering on
June 18, 1997. Prior to that time, there was no public market for the Company's
common stock. The following table sets forth the high and low sale prices per
share of the Company's common stock for the periods indicated.
<TABLE>
<CAPTION>
1997 HIGH LOW
---- ------ ------
<S> <C> <C>
Third Quarter...................................... $17.50 $13.50
Fourth Quarter..................................... $14.50 $10.75
</TABLE>
As of March 16, 1998, there were 63 holders of record of the Company's
common stock. Because many of the Company's shares of common stock are held by
brokers and other institutions on behalf of stockholders, the Company is unable
to estimate the total number of stockholders represented by these record
holders. The Company has never declared or paid any cash dividends on its common
stock. Since the Company currently intends to retain all future earnings to
finance future growth, it does not anticipate paying any cash dividends in the
foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995 1994
--------- --------- --------- -----
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Software licenses.............................. $ 15,970 $ 3,383 $ -- $ --
Services and maintenance....................... 6,676 3,762 1,271 149
--------- --------- --------- -----
Total revenues................................... 22,646 7,145 1,271 149
Cost of revenues................................. 5,343 3,328 751 85
--------- --------- --------- -----
Gross profit..................................... 17,303 3,817 520 64
Loss from operations............................. (4,251) (5,733) (1,490) (690)
Net loss......................................... $ (3,057) $ (5,672) $ (1,503) $(719)
========= ========= ========= =====
Net loss per common share, basic and
diluted(1)..................................... $ (0.64) $ (4.19) $ (1.15)
========= ========= =========
Weighted average shares of common stock
outstanding.................................... 5,479,151 1,353,276 1,308,997
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 7,150 $ 2,887 $ 1,135 $ 127
Working capital (deficit)........................ 30,987 2,586 1,557 (55)
Total assets........................... 40,229 7,073 2,209 333
Stockholders' equity (deficit)................... 34,731 3,515 1,591 (718)
</TABLE>
- ---------------
(1) Excluding the effect of the charge for in process research and development
of $2.6 million associated with the Menhir acquisition, the 1997 net loss
per common share, basic and diluted, is $0.17 per common share.
19
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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 Limited in September 1997. The loss
from operations and net loss are shown both with and without the effect of those
items.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Revenues:
Software licenses.................................... 71% 47% --
Services and maintenance............................. 29% 53% 100%
--- --- ----
Total revenues............................... 100% 100% 100%
Cost of revenues:
Cost of software licenses*........................... 6% 30% --
Cost of services and maintenance*.................... 67% 61% 59%
--- --- ----
Total cost of revenues....................... 24% 47% 59%
Operating expenses:
Sales and marketing.................................. 39% 62% 43%
Research and development............................. 34% 51% 88%
General and administrative........................... 10% 21% 27%
Charge for acquired in-process research and
development....................................... 11% -- --
Amortization of intangibles.......................... 1% -- --
--- --- ----
Total operating expenses..................... 95% 134% 158%
--- --- ----
Loss from operations................................... (19)% (80)% (117)%
Other income (expense), net............................ 3% 1% (1)%
Loss before provision for income taxes................. (15)% (79)% (118)%
Provision for income taxes............................. -- -- --
--- --- ----
Net loss............................................... (15)% (79)% (118)%
=== === ====
Net loss, excluding charge for acquired in-process
research and development excluding
acquisition-related intangibles...................... (4)% (79)% (118)%
=== === ====
</TABLE>
- ---------------
* As a percentage of Software licenses and Services and maintenance revenues,
respectively.
The discussion in this Report on Form 10-K contains certain trend analysis
and other forward-looking statements. Words such as "anticipate," "believe,"
"plan," "estimate," "except," "seek" and "intend," and other 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, but not limited to, those discussed in Item 1
under the heading "Factors that May Affect Future Results" as well as those
discussed in this section and elsewhere in this Report.
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 have been attributable to licenses of NEONet and
related services. In November 1996, the Company commenced shipment to customers
of Release 3.0 of NEONet, which provided additional capabilities for effective
enterprise-wide application integration.
20
<PAGE> 22
In mid 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.
RESULTS OF OPERATIONS FOR 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 revenue, 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 MQ Series product with certain of the Companies
products. Under the terms of the agreement, both companies are expected to begin
selling the resulting MQ integrator product as early as the second quarter of
1998. The Company expects that future software license revenues will include the
NEONet product, the planned MQ Integrator product, format templates, 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 & Co., Inc.
("Merrill Lynch") in the quarter ended June 30, 1996 and the commercial release
of the NEONet product. 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 product.
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 the year ended December 31, 1997, sales to banks and financial
institutions accounted for 72% of the Company's total revenues.
COST OF REVENUES
Cost of revenues consists of costs of software licenses and costs of
services and maintenance. As a percentage of total revenue, 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 associated with the NEONet product.
Cost of software licenses consists primarily of royalty payments. The
Company had an agreement to pay royalties to Merrill Lynch on NEONet license
revenue until such royalties reached a cumulative total of
21
<PAGE> 23
$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 & Co. 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 &
Co. on NEONet has been satisfied, the Company anticipates that there may be
other products that will carry royalty obligations in the future.
Cost of services and maintenance consists primarily of personnel, facility,
and systems costs incurred in providing professional service consulting,
training, and customer support services. As a percent of services and
maintenance revenue, 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
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.
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 increased in 1996 compared to 1995 as the Company
commercialized the NEONet product and deployed a professional sales force. Sales
and marketing expense decreased as a percentage of revenue 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 expense to continue to grow in absolute dollars.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of salaries and
related costs, outside professional fees, and software and equipment costs
associated with the finance, legal, human resources, information systems, and
administrative functions of 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
22
<PAGE> 24
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 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 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 of $3.5 million, or $0.64 per share in 1997.
Excluding the charge for acquired in-process research and development, the net
loss was approximately $907,000, or $0.17 per common share on 5,479,151 weighted
average shares outstanding. This compares to a net loss 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 very 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 rapid buildup of
the Company's sales force and other staff, and from royalty payments due to
Merrill Lynch.
Liquidity and Capital Resources
The Company's financial position remains strong, with $22.7 million cash
and cash equivalents and short-term investments as of December 31, 1997 compared
to $3.4 million in 1996 and $1.1 million in 1995. Notes payable to banks at
December 31, 1997 was $67,000 compared to $1.5 million at December 31, 1996 and
zero at December 31, 1995. The Company maintains lines of credit both in the
United States and in the United Kingdom which could be used for working capital
requirements on an as-needed basis.
Cash used in operating activities was $8.7 million in 1997 compared to $5.4
million in 1996 and $1.6 million in 1995. Most of the cash usage resulted from
the growth of the business.
Cash used in investing activities was $19.7 million, including $15.1
million for net purchases of short-term investments, $2.8 million for the
purchase of Menhir, and $1.8 million for purchases of property and equipment.
This compares to cash used in investing activities of $1.5 million in 1996 and
$404,000 in 1995.
23
<PAGE> 25
Cash provided from financing activities was $32.6 million in 1997 compared
to $8.7 million in 1996 and $3.0 million in 1995. In 1997, the Company received
$34.7 million in net proceeds from its initial public offering and proceeds for
the exercise of stock options.
The Company believes that its existing balance of cash and short-term
investments will be sufficient to meet the Company's working capital and capital
expenditure needs for at least the next twelve months. The Company may require
additional sources of funds to continue to grow and 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's financial statements and the report of the independent public
accountants appear on pages F-1 through F-18 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
24
<PAGE> 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information required by this item concerning the Company's directors is
incorporated by reference to the information set forth in the sections entitled
"Proposal No. 1: Election of Directors" and "Compliance with Section 16(a) of
the Exchange Act" in the Company's Proxy Statement for the 1998 Annual Meeting
of Stockholders to be filed with the Commission within 120 days after the end of
the Company's fiscal year ended December 31, 1997, except that the information
required by this item concerning the executive officers of the Company is
incorporated by reference to the information set forth in the section entitled
"Executive Officers of the Company" at the end of Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item regarding executive compensation is
incorporated by reference to the information set forth in the sections entitled
"Proposal No. 1: Election of Directors -- Director Compensation" and "Executive
Officer Compensation" in the Company's Proxy Statement for the 1998 Annual
Meeting of Stockholders to be filed with the Commission within 120 days after
the end of the Company's fiscal year ended December 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item regarding security ownership of
certain beneficial owners and management is incorporated by reference to the
information set forth in the section entitled "Beneficial Share Ownership by
Principal Stockholders and Management" in the Company's Proxy Statement for the
1998 Annual Meeting of Stockholders to be filed with the Commission within 120
days after the end of the Company's fiscal year ended December 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item regarding certain relationships and
related transactions is incorporated by reference to the information set forth
in the section entitled "Certain Transactions" in the Company's Proxy Statement
for the 1998 Annual Meeting of Stockholders to be filed with the Commission
within 120 days after the end of the Company's fiscal year ended December 31,
1997.
25
<PAGE> 27
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.
1. Consolidated Financial Statements. The following consolidated financial
statements of the Registrant and subsidiaries are filed as part of this
Report:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
2. Financial Statement Schedules.
All schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or rules thereto.
3. Exhibits:
<TABLE>
<C> <S>
2.1 Share Purchase Agreement dated September 26, 1997 by and
among Registrant and Menhir Limited (which is incorporated
herein by reference to Exhibit 2 to the Registrant's Current
Report on Form 8-K dated October 10, 1997 ("Registrant's
1997 8-K")).
3.1 Amended and Restated Certificate of Incorporation, as
amended through May 21, 1997 (which is incorporated herein
by reference to Exhibit 3.4 to the Registrant's Registration
Statement on Form S-1, Registration No. 333-20189
("Registrant's 1997 S-1").
3.2 Amended and Restated Bylaws of Registrant, as amended
through February 2, 1998.
4.1 Form of Registrant's Common Stock Certificate (which is
incorporated herein by reference to Exhibit 4.1 to the
Registrant's 1997 S-1).
10.1* Form of Indemnification Agreement entered into by Registrant
with each of its directors and executive officers (which is
incorporated herein by reference to Exhibit 10.1 to the
Registrant's 1997 S-1).
10.2* 1995 Stock Option Plan, (amended and restated as of January
3, 1997) and related agreements (which is incorporated
herein by reference to Exhibit 10.2 to the Registrant's 1997
S-1).
10.3* 1997 Director Option Plan and related agreements (which is
incorporated herein by reference to Exhibit 10.3 to the
Registrant's 1997 S-1).
10.4* 1997 Employee Stock Purchase Plan and related agreements
(which is incorporated herein by reference to Exhibit 10.4
to the Registrant's 1997 S-1).
10.5 Warrant to Purchase Stock issued to Silicon Valley Bank
dated April 12, 1996 (which is incorporated herein by
reference to Exhibit 10.5 to the Registrant's 1997 S-1).
10.6 Series A Convertible Preferred Stock Purchase Agreement
between the Registrant and the Purchasers named therein
dated May 9, 1995 (which is incorporated herein by reference
to Exhibit 10.6 to the Registrant's 1997 S-1).
10.7 Series B Convertible Preferred Stock Purchase Agreement
between the Registrant and the Purchasers named therein
dated September 20, 1995 (which is incorporated herein by
reference to Exhibit 10.7 to the Registrant's 1997 S-1).
10.8 Series C Convertible Preferred Stock Purchase Agreement
between the Registrant and the Purchasers named therein
dated June 3, 1996 (which is incorporated herein by
reference to Exhibit 10.8 to the Registrant's 1997 S-1).
</TABLE>
26
<PAGE> 28
<TABLE>
<C> <S>
10.9 Registration Rights Agreement between the Registrant and certain parties named therein dated May
9, 1995 (which is incorporated herein by reference to Exhibit 10.9 to the Registrant's 1997 S-1).
10.11 Amendment No. 1 to Registration Rights Agreement between the Registrant and certain parties named
therein dated September 20, 1995 (which is incorporated herein by reference to Exhibit 10.10 to
the Registrant's 1997 S-1).
10.12 Amendment No. 2 to Registration Rights Agreement between the Registrant and certain parties named
therein dated June 3, 1996 (which is incorporated herein by reference to Exhibit 10.11 to the
Registrant's 1997 S-1).
10.13 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 (which is incorporated
herein by reference to Exhibit 10.12 to the Registrant's 1997 S-1).
10.14 Master Agreement for Professional Services between the Registrant and Merrill Lynch, Pierce,
Fenner & Smith Incorporated dated March 1, 1995 and related agreements (which is incorporated
herein by reference to Exhibit 10.13 to the Registrant's 1997 S-1).
10.15 Value Added Reseller Agreement between the Registrant and SunGard Systems International Inc. dated
December 31, 1996 (which is incorporated herein by reference to Exhibit 10.14 to the Registrant's
1997 S-1).
21.1 Subsidiary of the Registrant.
23.1 Consent of Arthur Andersen LLP.
24.1 Power of Attorney (which is included on page 28 herein).
27 Financial Data Schedule.
</TABLE>
- ---------------
* Indicates management compensatory plan, contract or arrangement.
(b) Reports on Form 8-K. A Current Report on Form 8-K was filed on November 10,
1997 by the Company to report the acquisition of Menhir, Ltd. ("Menhir"). An
amendment to the Report on Form 8-K was subsequently filed by the Company to
include financial statements of Menhir and the required pro forma financial
information.
(c) Exhibits. See Item 14(3) above.
(d)Financial Statement Schedules. See Item 14(2) above.
27
<PAGE> 29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized on this 26th day of
March 1998.
NEW ERA OF NETWORKS, INC.
By: /s/ STEPHEN E. WEBB
------------------------------------
Stephen E. Webb,
Senior Vice President and Chief
Financial Officer
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints George F. (Rick) Adam and Leonard M.
Goldstein, his or her attorneys-in-fact, with full power of substitution, for
him or her in any and all capacities, to sign any and all amendments to this
Form 10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorneys-in-fact or their substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ GEORGE F. (RICK) ADAM, JR. President and Chief March 26, 1998
- ----------------------------------------------------- Executive Officer and
George F. (Rick) Adam, Jr. Director (principal
executive officer)
/s/ HAROLD A. PISKIEL Executive Vice President, March 26, 1998
- ----------------------------------------------------- Chief Technology Officer
Harold A. Piskiel and Director
/s/ STEPHEN E. WEBB Senior Vice President and March 26, 1998
- ----------------------------------------------------- Chief Financial Officer
Stephen E. Webb (principal financial
officer)
/s/ JAMES C. PARKS Vice President of Finance March 26, 1998
- ----------------------------------------------------- and Controller (principal
James C. Parks accounting officer)
/s/ STEVE LAZARUS Director March 26, 1998
- -----------------------------------------------------
Steve Lazarus
/s/ MARK L. GORDON Director March 26, 1998
- -----------------------------------------------------
Mark L. Gordon
/s/ JAMES REEP Director March 26, 1998
- -----------------------------------------------------
James Reep
/s/ ELISABETH W. IRELAND Director March 26, 1998
- -----------------------------------------------------
Elisabeth Ireland
/s/ PATRICK J. FORTUNE Director March 26, 1998
- -----------------------------------------------------
Patrick J. Fortune
</TABLE>
28
<PAGE> 30
NEW ERA OF NETWORKS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 31
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> 32
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> 33
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> 34
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> 35
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> 36
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.
F-7
<PAGE> 37
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries is their
local currency. Translation of balance sheet amounts to U.S. Dollars is based on
the applicable exchange rate at each balance sheet date. Statement of operations
and statement of cash flow amounts are translated at the average exchange rates
for the period.
Transactions denominated in currencies other than the local currency are
recorded based on exchange rates at the time such transactions arise. Subsequent
changes in exchange rates result in transaction gains and losses which are
reflected in income as unrealized (based on period end translation) or realized
(upon settlement of the transactions). Unrealized transaction gains and losses
applicable to permanent investments by the Company in its foreign subsidiaries
are included as cumulative translation adjustments, and unrealized translation
gains or losses applicable to short-term intercompany receivables from or
payables to the Company and its foreign subsidiaries are included in income.
Revenue Recognition
The Company generates revenue from professional service arrangements,
software license and software maintenance arrangements. Revenue from
professional service arrangements is recognized on either a time and materials
or progress-to-completion basis as the services are performed and amounts due
from customers are deemed collectible and contractually nonrefundable. Revenues
recognized under the progress-to-completion basis which have not yet been
invoiced are recorded as unbilled revenues in the accompanying consolidated
balance sheets. The Company recognizes license fee revenue when the licensed
software has been delivered, customer acceptance has occurred, all significant
Company obligations have been satisfied, payment is due within twelve months and
the fee is fixed and determinable and deemed collectible. Software maintenance
revenue related to software licenses is recognized ratably over the term of each
maintenance arrangement.
Amounts collected or billed prior to satisfying the above revenue
recognition criteria are reflected as deferred revenue in the accompanying
consolidated balance sheets. As of December 31, 1997 and 1996, deferred revenue
was $1,177,262 and $175,300, respectively.
Cost of Services and Maintenance
Cost of services related to professional service arrangements and
maintenance include the direct labor costs incurred plus a related overhead
allocation.
Research and Development
Research and development costs are expensed as incurred and include
salaries, supplies and other direct costs.
Cash Equivalents and Short-Term Investments
The Company invests certain of its excess cash in government and corporate
debt instruments. All highly liquid investments with original maturities of
three months or less are considered to be cash equivalents. The recorded amounts
for cash equivalents and short-term investments approximate fair market value
due to the short-term nature of these financial instruments.
F-8
<PAGE> 38
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
Property and Equipment, net
Depreciation of property and equipment is computed on a straight-line basis
over the following estimated useful lives:
<TABLE>
<S> <C>
Computer equipment and software................... 3 years
Furniture, fixtures and equipment................. 5-7 years
Leasehold improvements............................ 2-4 years
</TABLE>
Depreciation expense was $633,200, $314,000 and $80,600 in 1997, 1996 and
1995, respectively.
Software Development Costs
Under the criteria set forth in Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed" capitalization of software development costs begins upon the
establishment of technological feasibility of the product and ends when the
product is ready for general release. The establishment of technological
feasibility and the ongoing assessment of the recoverability of these costs
require considerable judgment by management with respect to certain external
factors including, but not limited to, anticipated future gross product
revenues, estimated economic life and changes in software and hardware
technology. The Company believes that costs incurred through December 31, 1996,
which satisfy the above criteria were immaterial, and therefore no software
development costs have been capitalized by the Company as of December 31, 1996.
As of December 31, 1997, the Company has recorded approximately $460,000
allocated to purchased software in connection with the Menhir acquisition. These
costs are being amortized on a straight-line basis over a three-year period. The
Company recognized approximately $51,000 of amortization expense in 1997 related
to such capitalized costs.
Goodwill
The Company recorded approximately $310,000 as goodwill in connection with
the Menhir acquisition, which is being amortized on a straight-line basis over a
seven-year period. The Company recognized approximately $15,000 in amortization
expense in 1997 related to goodwill.
Income Taxes
The current provision for income taxes represents actual or estimated
amounts payable or refundable on tax returns filed or to be filed for each year.
Deferred tax assets and liabilities are recorded for the estimated future tax
effects of temporary differences between the basis of assets and liabilities and
amounts reported in the combined balance sheets. Deferred tax assets are also
recognized for net operating loss and tax credit carryforwards. The overall
change in deferred tax assets and liabilities for the period measures the
deferred tax expense for the period. Effects of changes in enacted tax laws on
deferred tax assets and liabilities are reflected as adjustments to tax expense
in the period of enactment. Deferred tax assets are reduced by a valuation
allowance based on an assessment of available evidence if deemed more likely
than not that some or all of the deferred tax assets will not be realized (see
Note 5).
Net Loss Per Common Share
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share," ("SFAS 128") as required, by retroactively restating
loss per share amounts for all periods presented. Under SFAS 128, basic earnings
(loss) per share is determined by dividing net income (loss) from continuing
operations available to common shareholders by the weighted average number of
common shares outstanding during each period. Diluted earnings per share
includes the effects of potentially issuable common stock, but only if dilutive.
The treasury stock method, using the average price of the Company's common stock
for the
F-9
<PAGE> 39
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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.
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.
F-10
<PAGE> 40
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(3) BUSINESS COMBINATION
Effective September 1, 1997, Limited acquired all of the outstanding
capital stock of Menhir by means of a Share Purchase Agreement by and among
Menhir, the shareholders of Menhir, and Limited (the "Purchase Agreement"). The
total purchase price of $2,800,000, plus fees and expenses of approximately
$200,000, was paid in cash. The acquisition was accounted for under the purchase
method of accounting and, accordingly, the operating results of Menhir have been
included in the accompanying consolidated financial statements from the
effective date of the acquisition.
An independent valuation of Menhir's net assets was completed to assist in
allocation of the purchase price. Approximately $2,600,000 of the purchase price
represented the intangible value of in-process research and development projects
that had not yet reached technological feasibility. The related technology had
no alternative future use and will require substantial additional development by
the Company. This amount was charged to operations in the quarter ended
September 30, 1997. A portion of the purchase price was also assigned to
marketable software products and goodwill which are being amortized on a
straight-line basis over three and seven year periods, respectively. Menhir's
other assets assumed in the transaction were valued at approximately $1,063,000
and liabilities assumed were approximately $1,433,000.
(4) NOTES PAYABLE
Notes Payable to Banks
On March 15, 1996, the Company signed a promissory note payable to a bank.
As of December 31, 1996, $59,810 with interest at a fixed rate of 8.75% was
outstanding under this note. The note was paid in full in 1997.
During 1996, the Company entered into a loan and security agreement with a
bank that provided for a revolving facility and an equipment facility.
Borrowings of up to $2 million are available under the revolving facility and
bear interest at the bank's prime rate plus 1/2% (8.75% at December 31, 1996).
Borrowings up to $1 million at the bank's prime rate plus 1% (9.25% at December
31, 1996) can be made for the purchase or refinancing of qualified equipment
under the equipment facility. As of December 31, 1996, borrowings outstanding
included $1,006,438 under the revolving facility and $476,582 under the
equipment facility. All outstanding borrowings were repaid during 1997 with
proceeds from the Company's initial public offering.
In connection with the loan and security agreement discussed above, the
Company issued to the bank warrants which are exercisable through April 11,
2001, for the purchase of 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.
F-11
<PAGE> 41
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
The components of the Company's deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts......................... $ 89,000 $ 57,800
Trademark costs................................. 22,000 11,100
Accrued vacation................................ 7,700 31,600
Tax credits carryforward........................ 520,600 148,600
Net operating loss carryforward................. 2,734,100 2,458,000
Other........................................... 4,500 34,200
----------- -----------
Total deferred tax assets............... 3,377,900 2,741,300
Deferred tax liabilities:
Depreciation.................................... (23,000) (9,400)
----------- -----------
Total deferred tax liabilities.......... (23,000) (9,400)
----------- -----------
Total net deferred tax assets........... 3,354,900 2,731,900
Valuation allowance............................... (3,354,900) (2,731,900)
----------- -----------
Net deferred taxes................................ $ -- $ --
=========== ===========
</TABLE>
The provision for income taxes includes the following for the years ended
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1997 1996
--------- -----------
<S> <C> <C>
Current --
Federal.......................................... $ -- $ --
State............................................ -- --
--------- -----------
-- --
--------- -----------
Deferred --
Federal.......................................... (557,400) (2,076,100)
State............................................ (65,600) (177,900)
--------- -----------
Total deferred benefit........................... (623,000) (2,254,000)
Increase in valuation allowance.................... 623,000 2,254,000
--------- -----------
Total provision.................................... $ -- $ --
========= ===========
</TABLE>
The criteria for realization of net deferred tax assets are not currently
satisfied because of the losses incurred by the Company from inception. Further,
the Internal Revenue Code contains provisions which may limit the net operating
loss carryforwards available for use in any given year upon the occurrence of
certain events, including significant changes in ownership. Therefore, a
valuation allowance for the entire net deferred tax asset has been established.
As of December 31, 1997, the Company had net operating loss carryforwards
available totaling approximately $7,102,000. These carryforwards expire
beginning in 2010. The Company also has research and development tax credit
carryforwards of approximately $520,600 expiring beginning in 2010.
F-12
<PAGE> 42
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
F-13
<PAGE> 43
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
based method of SFAS 123 had been applied. The Company has elected to account
for its stock-based compensation plans under APB 25. Accordingly, for purposes
of the pro forma disclosures presented below, the Company has computed the fair
values of all options granted during 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> 44
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
F-15
<PAGE> 45
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
meeting of each year, of an option to purchase 5,000 shares of the Company's
common stock at an exercise price equal to the fair market value of the common
stock on the date of grant. In addition, each new non-employee director joining
the Board of Directors after the Company's initial public offering will
automatically be granted an option to purchase 16,666 shares of the Company's
common stock at an exercise price equal to the fair market value at date of
grant. The Board of Directors has reserved an aggregate of 100,000 shares for
issuance under the Director Plan.
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> 46
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> 47
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> 48
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
2.1 Share Purchase Agreement dated September 26, 1997 by and
among Registrant and Menhir Limited (which is incorporated
herein by reference to Exhibit 2 to the Registrant's Current
Report on Form 8-K dated October 10, 1997 ("Registrant's
1997 8-K")).
3.1 Amended and Restated Certificate of Incorporation, as
amended through May 21, 1997 (which is incorporated herein
by reference to Exhibit 3.4 to the Registrant's Registration
Statement on Form S-1, Registration No. 333-20189
("Registrant's 1997 S-1").
3.2 Amended and Restated Bylaws of Registrant, as amended
through February 2, 1998.
4.1 Form of Registrant's Common Stock Certificate (which is
incorporated herein by reference to Exhibit 4.1 to the
Registrant's 1997 S-1).
10.1* Form of Indemnification Agreement entered into by Registrant
with each of its directors and executive officers (which is
incorporated herein by reference to Exhibit 10.1 to the
Registrant's 1997 S-1).
10.2* 1995 Stock Option Plan, (amended and restated as of January
3, 1997) and related agreements (which is incorporated
herein by reference to Exhibit 10.2 to the Registrant's 1997
S-1).
10.3* 1997 Director Option Plan and related agreements (which is
incorporated herein by reference to Exhibit 10.3 to the
Registrant's 1997 S-1).
10.4* 1997 Employee Stock Purchase Plan and related agreements
(which is incorporated herein by reference to Exhibit 10.4
to the Registrant's 1997 S-1).
10.5 Warrant to Purchase Stock issued to Silicon Valley Bank
dated April 12, 1996 (which is incorporated herein by
reference to Exhibit 10.5 to the Registrant's 1997 S-1).
10.6 Series A Convertible Preferred Stock Purchase Agreement
between the Registrant and the Purchasers named therein
dated May 9, 1995 (which is incorporated herein by reference
to Exhibit 10.6 to the Registrant's 1997 S-1).
10.7 Series B Convertible Preferred Stock Purchase Agreement
between the Registrant and the Purchasers named therein
dated September 20, 1995 (which is incorporated herein by
reference to Exhibit 10.7 to the Registrant's 1997 S-1).
10.8 Series C Convertible Preferred Stock Purchase Agreement
between the Registrant and the Purchasers named therein
dated June 3, 1996 (which is incorporated herein by
reference to Exhibit 10.8 to the Registrant's 1997 S-1).
10.9 Registration Rights Agreement between the Registrant and
certain parties named therein dated May 9, 1995 (which is
incorporated herein by reference to Exhibit 10.9 to the
Registrant's 1997 S-1).
10.11 Amendment No. 1 to Registration Rights Agreement between the
Registrant and certain parties named therein dated September
20, 1995 (which is incorporated herein by reference to
Exhibit 10.10 to the Registrant's 1997 S-1).
10.12 Amendment No. 2 to Registration Rights Agreement between the
Registrant and certain parties named therein dated June 3,
1996 (which is incorporated herein by reference to Exhibit
10.11 to the Registrant's 1997 S-1).
10.13 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 (which is
incorporated herein by reference to Exhibit 10.12 to the
Registrant's 1997 S-1).
10.14 Master Agreement for Professional Services between the
Registrant and Merrill Lynch, Pierce, Fenner & Smith
Incorporated dated March 1, 1995 and related agreements
(which is incorporated herein by reference to Exhibit 10.13
to the Registrant's 1997 S-1).
</TABLE>
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
10.15 Value Added Reseller Agreement between the Registrant and
SunGard Systems International Inc. dated December 31, 1996
(which is incorporated herein by reference to Exhibit 10.14
to the Registrant's 1997 S-1).
21.1 Subsidiary of the Registrant.
23.1 Consent of Arthur Andersen LLP.
24.1 Power of Attorney (which is included on page 28 herein).
27 Financial Data Schedule.
</TABLE>
- ---------------
* Indicates management compensatory plan, contract or arrangement.
<PAGE> 1
Exhibit 3.2
AMENDED AND RESTATED BYLAWS
OF
NEW ERA OF NETWORKS, INC.
(A Delaware Corporation)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I - CORPORATE OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 REGISTERED OFFICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 OTHER OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II - MEETINGS OF STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1 PLACE OF MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.2 ANNUAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.3 SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.4 NOTICE OF STOCKHOLDERS' MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.5 ADVANCED NOTICE OF STOCKHOLDER NOMINEES AND
STOCKHOLDER BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.7 QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.8 ADJOURNED MEETING; NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.9 CONDUCT OF BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.10 VOTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.11 WAIVER OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.12 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING . . . . . . . . . . . . . . . . . . . . . . . 5
2.13 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING
CONSENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.14 PROXIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.15 LIST OF STOCKHOLDERS ENTITLED TO VOTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE III - DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.1 POWERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.2 NUMBER OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . 7
3.4 RESIGNATION AND VACANCIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.6 REGULAR MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.7 SPECIAL MEETINGS; NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.8 QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.9 WAIVER OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.11 FEES AND COMPENSATION OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.12 APPROVAL OF LOANS TO OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
</TABLE>
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
3.13 REMOVAL OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.14 CLASSES OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE IV - COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.1 COMMITTEES OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.2 COMMITTEE MINUTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.3 MEETINGS AND ACTION OF COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE V - OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.1 OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.2 APPOINTMENT OF OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.3 SUBORDINATE OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.4 REMOVAL AND RESIGNATION OF OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.5 VACANCIES IN OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.6 CHAIRMAN OF THE BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.7 PRESIDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.8 VICE PRESIDENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.9 SECRETARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.10 CHIEF FINANCIAL OFFICER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.11 ASSISTANT SECRETARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.12 ASSISTANT TREASURER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.13 REPRESENTATION OF SHARES OF OTHER CORPORATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.14 AUTHORITY AND DUTIES OF OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE VI - INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.2 INDEMNIFICATION OF OTHERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.3 INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
6.4 SAVINGS CLAUSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
6.5 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT
OF EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
-ii-
<PAGE> 4
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE VII - RECORDS AND REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.1 MAINTENANCE AND INSPECTION OF RECORDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.2 INSPECTION BY DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.3 ANNUAL STATEMENT TO STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE VIII - GENERAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.1 CHECKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.4 SPECIAL DESIGNATION ON CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
8.5 LOST CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
8.6 CONSTRUCTION; DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
8.7 DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.8 FISCAL YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.9 SEAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.10 TRANSFER OF STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.11 STOCK TRANSFER AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.12 REGISTERED STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE IX - AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
-iii-
<PAGE> 5
AMENDED AND RESTATED BYLAWS
OF
NEW ERA OF NETWORKS, INC.
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the
registered agent of the corporation at such location is The Corporation Trust
Company.
1.2 OTHER OFFICES
The Board of Directors may at any time establish other offices at
any place or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place, within or
outside the State of Delaware, designated by the Board of Directors. In the
absence of any such designation, stockholders' meetings shall be held at the
registered office of the corporation.
2.2 ANNUAL MEETING
The annual meeting of stockholders shall be held each year on a date
and at a time designated by the Board of Directors. In the absence of such
designation, the annual meeting of the stockholders shall be held on the third
Friday in June in each year at 3:00 p.m. However, if such day falls on a legal
holiday, then the meeting shall be held at the same time and place on the next
succeeding full business day. At the meeting, directors shall be elected and
any other proper business may be transacted.
2
<PAGE> 6
2.3 SPECIAL MEETING
A special meeting of the stockholders may be called at any
time by the board of directors, or by the chairman of the board, or by the
chief executive officer, or by one or more stockholders holding shares in the
aggregate entitled to cast not less than twenty percent (20%) of the votes of
all shares of stock owned by stockholders entitled to vote at that meeting.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
All notices of meetings of stockholders shall be sent or otherwise
given in accordance with Section 2.5 of these bylaws not less than ten (10) nor
more than sixty (60) days before the date of the meeting. The notice shall
specify the place, date and hour of the meeting and (i) in the case of a
special meeting, the purpose or purposes for which the meeting is called (no
business other than that specified in the notice may be transacted) or (ii) in
the case of the annual meeting, those matters which the board of directors, at
the time of giving the notice, intends to present for action by the
stockholders (but any proper matter may be presented at the meeting for such
action). The notice of any meeting at which directors are to be elected shall
include the name of any nominee or nominees who, at the time of the notice, the
board intends to present for election.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
To be properly brought before an annual meeting or special meeting,
nominations for the election of director or other business must be (a)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the board of directors or other person so authorized pursuant
to Section 2.3 of these bylaws, (b) otherwise properly brought before the
meeting by or at the direction of the board of directors or (c) otherwise
properly brought before the meeting by a stockholder. For such nominations or
other business to be considered properly brought before the meeting by a
stockholder, such stockholder must have given timely notice and in proper form
of his intent to bring such business before such meeting. To be timely, such
stockholder's notice must be delivered to or mailed and received by the
secretary of the Corporation not less than 90 days prior to the meeting;
provided, however, that in the case of a meeting called by or on behalf of the
Board of Directors of the Corporation where prior notice, or public disclosure,
of the meeting has not been given or made at least 100 days prior to such
meeting, notice by the stockholder to be timely must be so received not later
than the close of business on the tenth day following the day on which such
notice of the date of the meeting was mailed or such public disclosure was
made. To be in proper form, a stockholder's notice to the secretary shall set
forth:
(i) the name and address of the stockholder who intends to
make the nominations, propose the business, and, as the case
may be, the name and address of the
3
<PAGE> 7
person or persons to be nominated or the nature of the
business to be proposed;
(ii) a representation that the stockholder is a holder
of record of stock of the Corporation entitled to vote at
such meeting and, if applicable, intends to appear in person
or by proxy at the meeting to nominate the person or persons
specified in the notice or introduce the business specified
in the notice;
(iii) if applicable, a description of all arrangements
or understandings between the stockholder and each nominee
and any other person or persons (naming such person or
persons) pursuant to which the nomination or nominations are
to be made by the stockholder;
(iv) such other information regarding each nominee or
each matter of business to be proposed by such stockholder
as would be required to be included in a proxy statement
filed pursuant to the proxy rules of the Securities and
Exchange Commission had the nominee been nominated, or
intended to be nominated, or the matter been proposed, or
intended to be proposed by the board of directors' and
(v) if applicable, the consent of each nominee to serve as
director of the Corporation if so elected.
The chairman of the meeting may refuse to acknowledge the nomination
of any person or the proposal of any business not made in compliance with the
foregoing procedure.
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders shall be given either
personally or by first-class mail or by facsimile, telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the stockholder at the address of that stockholder
appearing on the books of the corporation or given by the stockholder to the
corporation for the purpose of notice. If no such address appears on the
corporation's books or is given, notice shall be deemed to have been given if
sent to that stockholder by mail or telegraphic or other written communication
to the corporation's principal executive office, or if published at least once
in a newspaper of general circulation in the county where that office is
located. Notice shall be deemed to have been given at the time when delivered
personally or deposited in the mail or sent by telegram or other means of
written communication.
4
<PAGE> 8
If any notice addressed to a stockholder at the address of that
stockholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the stockholder
at that address, then all future notices or reports shall be deemed to have
been duly given without further mailing if the same shall be available to the
stockholder on written demand of the stockholder at the principal executive
office of the corporation for a period of one (1) year from the date of the
giving of the notice.
An affidavit of the mailing or other means of giving any notice of
any stockholders' meeting, executed by the Secretary, Assistant Secretary or
any transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.7 QUORUM
The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute, by the certificate of
incorporation or these bylaws. If, however, such quorum is not present or
represented at any meeting of the stockholders, then either (i) the Chairman of
the meeting or (ii) the stockholders entitled to vote thereat, present in
person or represented by proxy, shall have power to adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum is present or represented. At such adjourned meeting at which a quorum
is present or represented, any business may be transacted that might have been
transacted at the meeting as originally noticed.
2.8 ADJOURNED MEETING; NOTICE
When a meeting is adjourned to another time and place, unless these
bylaws otherwise require, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting the corporation may transact
any business that might have been transacted at the original meeting. If the
adjournment is for more than thirty (30) days, or if after the adjournment a
new record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
2.9 CONDUCT OF BUSINESS
The chairman of any meeting of stockholders shall determine the
order of business and the procedure at the meeting, including such regulation
of the manner of voting and the conduct of business.
2.10 VOTING
The stockholders entitled to vote at any meeting of stockholders
shall be determined in accordance with the provisions of Section 2.13 of these
bylaws, subject to the provisions of
5
<PAGE> 9
Sections 217 and 218 of the General Corporation Law of Delaware (relating to
voting rights of fiduciaries, pledgors and joint owners of stock and to voting
trusts and other voting agreements).
Except as may be otherwise provided in the certificate of
incorporation or these bylaws, each stockholder shall be entitled to one vote
for each share of capital stock held by such stockholder.
2.11 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these bylaws, a written waiver thereof, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders need be specified in any written
waiver of notice unless so required by the certificate of incorporation or
these bylaws.
2.12 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Effective upon the closing of an initial public offering of any of
the corporation's securities pursuant to a registration statement filed under
the Securities Act of 1933, as amended, the stockholders of the corporation may
not take action by written consent without a meeting but must take any such
actions at a duly called annual or special meeting.
2.13 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING
For purposes of determining the stockholders entitled to notice of
any meeting or to vote thereat, the board of directors may fix, in advance, a
record date, which shall not precede the date upon which the resolution fixing
the record date is adopted by the board of directors and which shall not be
more than sixty (60) days nor less than ten (10) days before the date of any
such meeting, and in such event only stockholders of record on the date so
fixed are entitled to notice and to vote, notwithstanding any transfer of any
shares on the books of the corporation after the record date.
If the board of directors does not so fix a record date, the record
date for determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the business day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the business day next preceding the day on which the
meeting is held.
6
<PAGE> 10
A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting unless the board of directors fixes a new record date for the adjourned
meeting, but the board of directors shall fix a new record date if the meeting
is adjourned for more than thirty (30) days from the date set for the original
meeting.
The record date for any other purpose shall be as provided in
Section 7.1 of these bylaws.
2.14 PROXIES
Every person entitled to vote for directors, or on any other matter,
shall have the right to do so either in person or by one or more agents
authorized by a written proxy signed by the person and filed with the secretary
of the corporation, but no such proxy shall be voted or acted upon after three
(3) years from its date, unless the proxy provides for a longer period. A
proxy shall be deemed signed if the stockholder's name is placed on the proxy
(whether by manual signature, typewriting, telegraphic transmission or
otherwise) by the stockholder or the stockholder's attorney-in-fact. The
revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Section 212(e) of the General Corporation Law of
Delaware.
2.15 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of a corporation
shall prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting, either at a place within
the city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place
of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present. Such list shall presumptively determine the
identity of the stockholders entitled to vote at the meeting and the number of
shares held by each of them.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware
and any limitations in the certificate of incorporation or these bylaws
relating to action required to be approved by the stockholders or by the
outstanding shares, the business and affairs of the corporation shall be
7
<PAGE> 11
managed and all corporate powers shall be exercised by or under the direction
of the Board of Directors.
3.2 NUMBER OF DIRECTORS
The board of directors shall consist of seven (7) members. The
number of directors may be changed by an amendment to this bylaw, duly adopted
by the board of directors or by the stockholders, or by a duly adopted
amendment to the certificate of incorporation.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
Except as provided in Section 3.4 of these bylaws, directors shall
be elected at each annual meeting of stockholders to hold office until the next
annual meeting. Directors need not be stockholders unless so required by the
certificate of incorporation or these bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to
fill a vacancy, shall hold office until the expiration of the term for which
elected and until a successor has been elected and qualified or until his or
her earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
Any director may resign at any time upon written notice to the
attention of the Secretary of the corporation. When one or more directors so
resigns and the resignation is effective at a future date, a majority of the
directors then in office, including those who have so resigned, shall have
power to fill such vacancy or vacancies, the vote thereon to take effect when
such resignation or resignations shall become effective, and each director so
chosen shall hold office as provided in this section in the filling of other
vacancies.
Unless otherwise provided in the certificate of incorporation or
these bylaws:
(i) Vacancies and newly created
directorships resulting from any increase in the authorized number of directors
elected by all of the stockholders having the right to vote as a single class
may be filled by a majority of the directors then in office, although less than
a quorum, or by a sole remaining director.
(ii) Whenever the holders of any class or
classes of stock or series thereof are entitled to elect one or more directors
by the provisions of the certificate of incorporation, vacancies and newly
created directorships of such class or classes or series may be filled by a
majority of the directors elected by such class or classes or series thereof
then in office, or by a sole remaining director so elected.
If at any time, by reason of death or resignation or other cause,
the corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or
8
<PAGE> 12
guardian of a stockholder, or other fiduciary entrusted with like
responsibility for the person or estate of a stockholder, may call a special
meeting of stockholders in accordance with the provisions of the certificate of
incorporation or these bylaws, or may apply to the Court of Chancery for a
decree summarily ordering an election as provided in Section 211 of the General
Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or stockholders
holding at least ten (10) percent of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office as
aforesaid, which election shall be governed by the provisions of Section 211 of
the General Corporation Law of Delaware as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
The Board of Directors of the corporation may hold meetings, both
regular and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or
these bylaws, members of the Board of Directors, or any committee designated by
the Board of Directors, may participate in a meeting of the Board of Directors,
or any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 REGULAR MEETINGS
Regular meetings of the Board of Directors may be held without
notice at such time and at such place as shall from time to time be determined
by the board.
3.7 SPECIAL MEETINGS; NOTICE
Special meetings of the Board of Directors for any purpose or
purposes may be called at any time by the Chairman of the Board, the President,
any Vice President, the Secretary or any one director.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's
address as it is shown on the records of the corporation. If the notice is
mailed, it shall be deposited in the United States mail at least four (4) days
before the time of the holding of the meeting. If the notice is delivered
personally or by telephone or by telegram, it shall be delivered personally or
by telephone or to the telegraph company at least forty- eight (48) hours
before the time of the holding of the meeting. Any oral notice given
personally or by telephone may
9
<PAGE> 13
be communicated either to the director or to a person at the office of the
director who the person giving the notice has reason to believe will promptly
communicate it to the director. The notice need not specify the purpose or the
place of the meeting, if the meeting is to be held at the principal executive
office of the corporation.
3.8 QUORUM
At all meetings of the Board of Directors, a majority of the
authorized number of directors shall constitute a quorum for the transaction of
business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the Board of
Directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
3.9 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these bylaws, a written waiver thereof, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the directors, or members of a committee of
directors, need be specified in any written waiver of notice unless so required
by the certificate of incorporation or these bylaws.
3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise restricted by the certificate of incorporation or
these bylaws, any action required or permitted to be taken at any meeting of
the Board of Directors, or of any committee thereof, may be taken without a
meeting if all members of the board or committee, as the case may be, consent
thereto in writing and the writing or writings are filed with the minutes of
proceedings of the board or committee.
3.11 FEES AND COMPENSATION OF DIRECTORS
Unless otherwise restricted by the certificate of incorporation or
these bylaws, the Board of Directors shall have the authority to fix the
compensation of directors.
10
<PAGE> 14
3.12 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of,
or otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation
at common law or under any statute.
3.13 REMOVAL OF DIRECTORS
Unless otherwise restricted by statute, and except as otherwise
provided by the certificate of incorporation or these bylaws, any director or
the entire Board of Directors may be removed, with or without cause, by the
holders of a majority of the shares then entitled to vote at an election of
directors; provided, however, that, so long as stockholders of the corporation
are entitled to cumulative voting, if less than the entire board is to be
removed, no director may be removed without cause if the votes cast against his
or her removal would be sufficient to elect such director if then cumulatively
voted at an election of the entire Board of Directors.
No reduction of the authorized number of directors shall have the
effect of removing any director prior to the expiration of such director's term
of office.
3.14 CLASSES OF DIRECTORS
Following the closing of the corporation's initial public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended (the "1933 Act"), covering the offer and sale of Common Stock
of the corporation (the "Initial Public Offering"), the Directors shall be
divided into three classes designated as Class I, Class II and Class III,
respectively. Such Directors shall be assigned to each class in accordance
with a resolution or resolutions adopted by the Board of Directors. At the
first annual meeting of stockholders following the closing of the Initial
Public Offering, the term of office of the Class III Directors shall expire and
Class III Directors shall be elected for a full term of three years. At the
second annual meeting of stockholders following the closing of the Initial
Public Offering, the term of office of the Class II Directors shall expire and
Class II Directors shall be elected for a full term of three years. At the
third annual meeting of stockholders following the closing of the Initial
Public Offering, the term of office of the Class I Directors shall expire and
Class I Directors shall be elected a full term of three years. At each
succeeding annual meeting of stockholders, such Directors shall be elected for
a full term of three years to succeed the Directors of the class whose terms
expire at such annual meeting.
Notwithstanding the foregoing provisions of this Article, each
Director shall serve until his successor is duly elected and qualified or until
his earlier death, resignation or removal. No decrease
11
<PAGE> 15
in the number of Directors constituting the Board of Directors shall shorten
the term of any incumbent Director.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The Board of Directors may, by resolution passed by a majority of
the whole board, designate one or more committees, with each committee to
consist of one or more of the directors of the corporation. The board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of a member of a committee, the member or
members thereof present at any meeting and not disqualified from voting,
whether or not such member or members constitute a quorum, may unanimously
appoint another member of the Board of Directors to act at the meeting in the
place of any such absent or disqualified member. Any such committee, to the
extent provided in the resolution of the Board of Directors or in the bylaws of
the corporation, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers that may require it; but no such committee shall have the power or
authority to (i) amend the Certificate of Incorporation (except that a
committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the Board of Directors
as provided in Section 151(a) of the General Corporation Law of Delaware, fix
the designations and any of the preferences or rights of such shares relating
to dividends, redemption, dissolution, any distribution of assets of the
corporation or the conversion into, or the exchange of such shares for, shares
of any other class or classes or any other series of the same or any other
class or classes of stock of the corporation or fix the number of shares of any
series of stock or authorize the increase or decrease of the shares of any
series), (ii) adopt an agreement of merger or consolidation under Sections 251
or 252 of the General Corporation Law of Delaware, (iii) recommend to the
stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, (iv) recommend to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or (v) amend
the bylaws of the corporation; and, unless the board resolution establishing
the committee, the bylaws or the certificate of incorporation expressly so
provide, no such committee shall have the power or authority to declare a
dividend, to authorize the issuance of stock, or to adopt a certificate of
ownership and merger pursuant to Section 253 of the General Corporation Law of
Delaware.
4.2 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report
the same to the Board of Directors when required.
12
<PAGE> 16
4.3 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held
and taken in accordance with, the provisions of Article III of these bylaws,
Section 3.5 (place of meetings and meetings by telephone), Section 3.6 (regular
meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum),
Section 3.9 (waiver of notice), and Section 3.10 (action without a meeting),
with such changes in the context of those bylaws as are necessary to substitute
the committee and its members for the Board of Directors and its members;
provided, however, that the time of regular meetings of committees may be
determined either by resolution of the Board of Directors or by resolution of
the committee, that special meetings of committees may also be called by
resolution of the Board of Directors and that notice of special meetings of
committees shall also be given to all alternate members, who shall have the
right to attend all meetings of the committee. The Board of Directors may
adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a president, a secretary,
and a chief financial officer. The corporation may also have, at the
discretion of the Board of Directors, a chairman of the board, one or more vice
presidents, one or more assistant vice presidents, one or more assistant
secretaries, one or more assistant treasurers, and any such other officers as
may be appointed in accordance with the provisions of Section 5.3 of these
bylaws. Any number of offices may be held by the same person.
5.2 APPOINTMENT OF OFFICERS
The officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Sections 5.3 or 5.5 of these
bylaws, shall be appointed by the Board of Directors, subject to the rights, if
any, of an officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
The Board of Directors may appoint, or empower the Chief Executive
Officer of the corporation to appoint, such other officers and agents as the
business of the corporation may require, each of whom shall hold office for
such period, have such authority, and perform such duties as are provided in
these bylaws or as the Board of Directors may from time to time determine.
13
<PAGE> 17
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the Board of Directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
Board of Directors, by any officer upon whom such power of removal may be
conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless
otherwise specified in that notice, the acceptance of the resignation shall not
be necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
Any vacancy occurring in any office of the corporation shall be
filled in the manner prescribed in these bylaws for regular appointments to
that office.
5.6 CHAIRMAN OF THE BOARD
The Chairman of the Board, if such an officer be elected and unless
otherwise designated by the Board of Directors, shall, if present, preside at
meetings of the Board of Directors. In addition, such officer shall exercise
and perform such other powers and duties as may from time to time be assigned
to him by the Board of Directors or as may be prescribed by these bylaws. If
so designated by the Board of Directors, then the Chairman of the Board shall
also be the Chief Executive Officer of the corporation and shall have the
powers and duties prescribed in Section 5.7 of these bylaws.
5.7 PRESIDENT
Subject to such powers and duties, if any, as may be given by the
Board of Directors to the Chairman of the Board or any vice chairman, if there
be such an officer, the President shall be the Chief Executive Officer of the
corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction, and control of the business and the officers of
the corporation. The President shall preside at all meetings of the
stockholders and, in the absence or nonexistence of a Chairman of the Board or
if otherwise designated by the Board of Directors, at all meetings of the Board
of Directors. The President shall have the general powers and duties of
management usually vested in the office of president of a corporation and shall
have such other powers and duties as may be prescribed by the Board of
Directors or these bylaws.
14
<PAGE> 18
5.8 VICE PRESIDENTS
In the absence or disability of the Chairman of the Board, any vice
chairman and the President, the Vice Presidents, if any, in order of their rank
as fixed by the Board of Directors or, if not ranked, a vice president
designated by the board of directors, shall perform all the duties of the
president and when so acting shall have all the powers of, and be subject to
all the restrictions upon, the president. The vice presidents shall have such
other powers and perform such other duties as from time to time may be
prescribed for them respectively by the Board of Directors, these bylaws, the
President or the Chairman of the Board.
5.9 SECRETARY
The Secretary shall keep or cause to be kept, at the principal
executive office of the corporation or such other place as the Board of
Directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors, and stockholders. The minutes shall show
the time and place of each meeting, whether regular or special (and, if
special, how authorized and the notice given), the names of those present at
directors' meetings or committee meetings, the number of shares present or
represented at stockholders' meetings, and the proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the Board of
Directors, a share register, or a duplicate share register, showing the names
of all stockholders and their addresses, the number and classes of shares held
by each, the number and date of certificates evidencing such shares, and the
number and date of cancellation of every certificate surrendered for
cancellation.
The Secretary shall give, or cause to be given, notice of all
meetings of the stockholders and of the Board of Directors required to be given
by law or by these bylaws. The Secretary shall keep the seal of the
corporation, if one be adopted, in safe custody and shall have such other
powers and perform such other duties as may be prescribed by the Board of
Directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
The Chief Financial Officer shall keep and maintain, or cause to be
kept and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The Chief Financial Officer shall deposit all moneys and other
valuables in the name and to the credit of the corporation with such
depositories as may be designated by the Board of Directors. The Chief
Financial Officer shall disburse the funds of the corporation as may be ordered
by the Board of Directors, shall render to the Chief Executive Officer and
directors, whenever they request it, an account of all his or her transactions
as Chief Financial Officer and of the financial condition of
15
<PAGE> 19
the corporation, and shall have other powers and perform such other duties as
may be prescribed by the Board of Directors or these bylaws.
The Chief Financial Officer shall be the Treasurer of the
corporation unless otherwise designated by the Board of Directors.
5.11 ASSISTANT SECRETARY
The Assistant Secretary, or, if there is more than one, the
Assistant Secretaries in the order determined by the stockholders or Board of
Directors (or if there be no such determination, then in the order of their
election) shall, in the absence of the Secretary or in the event of his or her
inability or refusal to act, perform the duties and exercise the powers of the
secretary and shall perform such other duties and have such other powers as may
be prescribed by the Board of Directors or these bylaws.
5.12 ASSISTANT TREASURER
The Assistant Treasurer, or, if there is more than one, the
Assistant Treasurers, in the order determined by the stockholders or Board of
Directors (or if there be no such determination, then in the order of their
election), shall, in the absence of the Chief Financial Officer or in the event
of his or her inability or refusal to act, perform the duties and exercise the
powers of the Chief Financial Officer and shall perform such other duties and
have such other powers as may be prescribed by the Board of Directors or these
bylaws.
5.13 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The Chairman of the Board, the President, any Vice President, the
Chief Financial Officer, the Secretary or Assistant Secretary of this
corporation, or any other person authorized by the Board of Directors or the
President or a vice president, is authorized to vote, represent, and exercise
on behalf of this corporation all rights incident to any and all shares of any
other corporation or corporations standing in the name of this corporation.
The authority granted herein may be exercised either by such person directly or
by any other person authorized to do so by proxy or power of attorney duly
executed by such person having the authority.
5.14 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing authority and duties, all officers of
the corporation shall respectively have such authority and perform such duties
in the management of the business of the corporation as may be designated from
time to time by the Board of Directors or the stockholders.
16
<PAGE> 20
ARTICLE VI
INDEMNITY
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware, as the same now exists or
may hereafter be amended, indemnify any person against expenses (including
attorneys' fees), judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with any proceeding, arising by reason of the
fact that such person is or was an agent of the corporation. For purposes of
this Section 6.1, a "director" or "officer" of the corporation includes any
person (i) who is or was a director or officer of the corporation, (ii) who is
or was serving at the request of the corporation as a director or officer of
another corporation partnership, joint venture, trust or other enterprise, or
(iii) who was a director or officer of a corporation that was a predecessor
corporation of the corporation or of another enterprise at the request of such
predecessor corporation.
The corporation shall be required to indemnify a director or officer
in connection with an action, suit, or proceeding (or part thereof) initiated
by such director or officer only if the initiation of such action, suit, or
proceeding (or part thereof) by the director or officer was authorized by the
Board of Directors of the corporation.
The corporation shall pay the expenses (including attorney's fees)
incurred by a director or officer of the corporation entitled to
indemnification hereunder in defending any action, suit, or proceeding referred
to in this Section 6.1 in advance of its final disposition; provided, however,
that payment of expenses incurred by a director or officer of the corporation
in advance of the final disposition of such action, suit or proceeding shall be
made only upon receipt of an undertaking by a director or officer to repay all
amounts advanced if it should ultimately by determined that the director or
officer is not entitled to be indemnified under this Section 6.1 or otherwise.
The rights conferred on any person by this Article shall not be
exclusive of any other rights which such person may have or hereafter acquire
under any statute, provision of the corporation's Certificate of Incorporation,
these bylaws, agreement, vote of the stockholders or disinterested directors or
otherwise.
Any repeal or modification of the foregoing provisions of this
Article shall not adversely affect any right or protection hereunder or any
person in respect of any act or omission occurring prior to the time of such
repeal or modification.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the extent and in the
manner permitted by the General Corporation Law of Delaware, to indemnify each
of its employees and agents (other than directors and officers) against
expenses (including attorney's fees), judgments, fines, settlements, and
17
<PAGE> 21
other amounts actually and reasonably incurred in connection with any
proceeding arising by reason of the fact that such person is or was an agent of
the corporation. For purposes of this Section 6.2, an "employee" or "agent" of
the corporation (other than a director or officer) includes any person (i) who
is or was an employee or agent of the corporation, (ii) who is or was serving
at the request of the corporation as an employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, or (iii)
who was an employee or agent of a corporation which was a predecessor
corporation of the corporation or of another enterprise at the request of such
predecessor corporation.
6.3 INSURANCE
The corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of the General Corporation Law of Delaware.
6.4 SAVINGS CLAUSE
If this Article or any portion thereof shall be invalidated on any
ground by any court of competent jurisdiction, then the corporation shall
nevertheless indemnify each Agent against expenses (including attorney's fees),
judgements, fines and amounts paid in settlement with respect to any action,
suit, proceeding or investigation, whether civil, criminal or administrative,
and whether internal or external, including a grand jury proceeding and an
action or suit brought by or in the right of the corporation, to the full
extent permitted by any applicable portion of this Article that shall not have
been invalidated, or by any other applicable law.
6.5 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES
The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article VI shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
18
<PAGE> 22
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive officer or
at such place or places as designated by the Board of Directors, keep a record
of its stockholders listing their names and addresses and the number and class
of shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean
a purpose reasonably related to such person's interest as a stockholder. In
every instance where an attorney or other agent is the person who seeks the
right to inspection, the demand under oath shall be accompanied by a power of
attorney or such other writing that authorizes the attorney or other agent so
to act on behalf of the stockholder. The demand under oath shall be directed
to the corporation at its registered office in Delaware or at its principal
place of business.
The officer who has charge of the stock ledger of the corporation
shall prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, showing the address of each
stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting, either at a place within
the city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place
of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his position as a director. The Court of
Chancery is hereby vested with the exclusive jurisdiction to determine whether
a director is entitled to the inspection sought. The Court may summarily order
the corporation to permit the director to inspect any and all books and
records, the stock ledger, and the stock list and to make copies or extracts
therefrom. The Court may, in its discretion, prescribe any limitations or
conditions with reference to the inspection, or award such other and further
relief as the Court may deem just and proper.
19
<PAGE> 23
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
The Board of Directors shall present at each annual meeting, and at
any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
corporation.
ARTICLE VIII
GENERAL MATTERS
8.1 CHECKS
From time to time, the Board of Directors shall determine by
resolution which person or persons may sign or endorse all checks, drafts,
other orders for payment of money, notes or other evidences of indebtedness
that are issued in the name of or payable to the corporation, and only the
persons so authorized shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
The Board of Directors, except as otherwise provided in these
bylaws, may authorize any officer or officers, or agent or agents, to enter
into any contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the Board of Directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of the corporation shall be represented by certificates,
provided that the Board of Directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply
to shares represented by a certificate until such certificate is surrendered to
the corporation. Notwithstanding the adoption of such a resolution by the
Board of Directors, every holder of stock represented by certificates and upon
request every holder of uncertificated shares shall be entitled to have a
certificate signed by, or in the name of the corporation by the Chairman or
Vice-Chairman of the Board of Directors, or the President or Vice-President,
and by the Chief Financial Officer or an assistant treasurer, or the Secretary
or an assistant secretary of such corporation representing the number of shares
registered in certificate form. Any or all of the signatures on the
certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate has ceased to be such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the corporation with the same
effect as if the person were such officer, transfer agent or registrar at the
date of issue.
20
<PAGE> 24
The corporation may issue the whole or any part of its shares as
partly paid and subject to call for the remainder of the consideration to be
paid therefor. Upon the face or back of each stock certificate issued to
represent any such partly paid shares, or upon the books and records of the
corporation in the case of uncertificated partly paid shares, the total amount
of the consideration to be paid therefor and the amount paid thereon shall be
stated. Upon the declaration of any dividend on fully paid shares, the
corporation shall declare a dividend upon partly paid shares of the same class,
but only upon the basis of the percentage of the consideration actually paid
thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of
stock or more than one series of any class, then the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights shall be set
forth in full or summarized on the face or back of the certificate that the
corporation shall issue to represent such class or series of stock; provided,
however, that, except as otherwise provided in Section 202 of the General
Corporation Law of Delaware, in lieu of the foregoing requirements there may be
set forth on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock a statement that the
corporation will furnish without charge to each stockholder who so requests the
powers, the designations, the preferences, and the relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
8.5 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates for
shares shall be issued to replace a previously issued certificate unless the
latter is surrendered to the corporation and canceled at the same time. The
corporation may issue a new certificate of stock or uncertificated shares in
the place of any certificate theretofore issued by it, alleged to have been
lost, stolen or destroyed, and the corporation may require the owner of the
lost, stolen or destroyed certificate, or the owner's legal representative, to
give the corporation a bond sufficient to indemnify it against any claim that
may be made against it on account of the alleged loss, theft or destruction of
any such certificate or the issuance of such new certificate or uncertificated
shares.
8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules
of construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these bylaws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
21
<PAGE> 25
8.7 DIVIDENDS
The directors of the corporation, subject to any restrictions
contained in (i) the General Corporation Law of Delaware or (ii) the
certificate of incorporation, may declare and pay dividends upon the shares of
its capital stock. Dividends may be paid in cash, in property, or in shares of
the corporation's capital stock.
The directors of the corporation may set apart out of any of the
funds of the corporation available for dividends a reserve or reserves for any
proper purpose and may abolish any such reserve. Such purposes shall include
but not be limited to equalizing dividends, repairing or maintaining any
property of the corporation, and meeting contingencies.
8.8 FISCAL YEAR
The fiscal year of the corporation shall be fixed by resolution of
the Board of Directors and may be changed by the Board of Directors.
8.9 SEAL
The corporation may adopt a corporate seal, which shall be adopted
and which may be altered by the Board of Directors, and may use the same by
causing it or a facsimile thereof to be impressed or affixed or in any other
manner reproduced.
8.10 TRANSFER OF STOCK
Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS
The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock
of the corporation to restrict the transfer of shares of stock of the
corporation of any one or more classes owned by such stockholders in any manner
not prohibited by the General Corporation Law of Delaware.
8.12 REGISTERED STOCKHOLDERS
The corporation shall be entitled to recognize the exclusive right
of a person registered on its books as the owner of shares to receive dividends
and to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and
shall not be bound to recognize any equitable or other claim to or interest in
such share or shares on
22
<PAGE> 26
the part of another person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE IX
AMENDMENTS
Subject to any voting requirements set forth in the corporation's
certificate of incorporation, the bylaws of the corporation may be adopted,
amended or repealed by the stockholders entitled to vote; provided, however,
that the corporation may, in its certificate of incorporation, confer the power
to adopt, amend or repeal bylaws upon the directors. The fact that such power
has been so conferred upon the directors shall not divest the stockholders of
the power, nor limit their power to adopt, amend or repeal bylaws.
23
<PAGE> 27
CERTIFICATE OF ADOPTION OF AMENDED AND RESTATED BYLAWS
OF
NEW ERA OF NETWORKS, INC.
Certificate by Secretary of Adoption
The undersigned hereby certifies that he is the duly elected,
qualified, and acting Assistant Secretary of New Era of Networks, Inc. and that
the foregoing Amended and Restated Bylaws, comprising 22 pages, were ratified
as the Bylaws of the corporation by the unanimous written consent of the Board
of Directors effective as of February 2, 1998.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Adoption of Amended and Restated Bylaws on March 25, 1998.
By: /s/ Leonard M. Goldstein
----------------------------
Leonard M. Goldstein
Secretary
<PAGE> 1
EXHIBIT 21.1
New Era of Networks Limited - organized under the laws of the United Kingdom
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference of our Report dated January 27, 1998 included in this Form
10-K into the Registration Statement on Form S-8 of New Era of Networks,
Inc.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado
March 25, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S DECEMBER 31, 1997 AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,150,362
<SECURITIES> 15,573,617
<RECEIVABLES> 11,072,850
<ALLOWANCES> 300,000
<INVENTORY> 0
<CURRENT-ASSETS> 36,484,679
<PP&E> 3,451,925
<DEPRECIATION> 1,036,088
<TOTAL-ASSETS> 40,229,175
<CURRENT-LIABILITIES> 5,497,906
<BONDS> 0
0
0
<COMMON> 911
<OTHER-SE> 34,730,358
<TOTAL-LIABILITY-AND-EQUITY> 40,229,175
<SALES> 22,645,442
<TOTAL-REVENUES> 22,645,442
<CGS> 5,342,618
<TOTAL-COSTS> 5,342,618
<OTHER-EXPENSES> 21,554,262
<LOSS-PROVISION> 81,223
<INTEREST-EXPENSE> 87,378
<INCOME-PRETAX> (3,506,633)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,506,633)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,506,633)
<EPS-PRIMARY> (0.64)
<EPS-DILUTED> (0.64)
</TABLE>
