<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
---------------
COMMISSION FILE NUMBER 000-22043
---------------
NEW ERA OF NETWORKS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 84-1234845
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7400 EAST ORCHARD ROAD
ENGLEWOOD, COLORADO 80111
(Address of principal executive offices)
Registrant's telephone number, including area code: (303) 694-3933
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past (90) days. YES [X] NO [ ]
The number of shares of the issuer's Common Stock outstanding as of March
31, 1999 was 30,918,040.
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
PART I FINANCIAL INFORMATION ----
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets....................................... 3
Consolidated Statements of Operations............................. 4
Consolidated Statements of Cash Flows............................. 5
Notes to Consolidated Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 20
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................. 21
Item 2. Changes in Securities............................................. 21
Item 3. Defaults Upon Senior Securities................................... 21
Item 4. Submission of Matters to a Vote of Security Holders............... 21
Item 5. Other Information................................................. 21
Item 6. Exhibits and Reports on Form 8-K.................................. 21
Signatures...................................................................... 22
</TABLE>
2
<PAGE> 3
NEW ERA OF NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................... $ 161,111,620 $174,173,008
Short-term investments in marketable securities................ 5,872,029 10,658,577
Accounts receivable, net of an allowance for uncollectible
accounts of $800,000........................................ 29,836,031 28,310,275
Unbilled revenue............................................... 4,118,266 3,124,536
Prepaid expenses and other..................................... 4,742,125 2,356,324
Deferred income taxes, net..................................... 147,300 147,300
------------- ------------
Total current assets................................... 205,827,371 218,770,020
------------- ------------
Property and equipment:
Computer equipment and software................................ 12,504,676 9,327,048
Furniture, fixtures and equipment.............................. 2,791,971 2,360,538
Leasehold improvements......................................... 1,645,238 1,569,125
------------- ------------
16,941,885 13,256,711
Less-- accumulated depreciation................................ (3,557,558) (2,701,024)
-------------- -------------
Property and equipment, net.................................... 13,384,327 10,555,687
Long-term investments in marketable securities................... 19,554,653 11,259,810
Intangible assets, net........................................... 60,472,554 51,876,649
Deferred income taxes, net....................................... 4,845,500 4,845,500
Other assets, net................................................ 1,379,059 1,370,283
------------- ------------
Total assets........................................... $ 305,463,464 $298,677,949
============= ============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable............................................... $ 4,750,801 $ 5,650,308
Accrued liabilities............................................ 6,967,648 7,856,926
Current portion of deferred revenue............................ 8,487,338 9,406,637
Taxes payable.................................................. 735,497 --
------------- ------------
Total current liabilities.............................. 20,941,284 22,913,871
Deferred revenue................................................. 185,887 149,137
------------- ------------
Total liabilities...................................... 21,127,171 23,063,008
Stockholders' equity:
Common stock, $.0001 par value, 45,000,000 shares
authorized; 30,918,040 and 30,333,778 shares issued and
outstanding, respectively................................... 3,092 3,033
Additional paid-in capital..................................... 301,948,124 295,570,769
Accumulated deficit............................................ (17,434,684) (20,016,790)
Cumulative other comprehensive income
(cumulative translation adjustment)......................... (180,239) 57,929
-------------- ------------
Total stockholders' equity............................. 284,336,293 275,614,941
------------- ------------
Total liabilities and stockholders' equity............. $ 305,463,464 $298,677,949
============= ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1999 1998
-------------- ------------
<S> <C> <C>
Revenues:
Software licenses............................... $ 17,366,335 $ 6,572,634
Software maintenance............................ 3,096,519 420,744
Professional services........................... 9,147,877 2,588,745
------------ -----------
Total revenues.......................... 29,610,731 9,582,123
Cost of revenues:
Cost of software licenses....................... 145,668 222,000
Cost of software maintenance and
professional services........................ 6,198,786 1,526,458
------------ -----------
Total cost of revenues.................. 6,344,454 1,748,458
------------ -----------
Gross profit...................................... 23,266,277 7,833,665
Operating expenses:
Sales and marketing............................. 9,824,956 3,605,521
Research and development........................ 6,887,822 2,691,047
General and administrative...................... 3,065,625 991,464
Amortization of intangibles..................... 1,699,766 49,377
------------ -----------
Total operating expenses................ 21,478,169 7,337,409
------------ -----------
Income from operations............................ 1,788,108 496,256
Other income, net................................. 2,184,363 296,122
------------ -----------
Income before provision for income taxes.......... 3,972,471 792,378
Provision for income taxes........................ 1,390,365 --
------------ -----------
Net income........................................ $ 2,582,106 $ 792,378
============ ===========
Net income per common share, basic................ $ 0.08 $ 0.04
============ ===========
Net income per common share, diluted.............. $ 0.08 $ 0.04
============ ===========
Weighted average shares of common stock
outstanding, basic.............................. 30,632,010 18,309,284
============ ===========
Weighted average shares of common stock
outstanding, diluted............................ 34,421,437 20,332,594
============ ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1999 1998
-------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 2,582,106 $ 792,378
Adjustments to reconcile net income to net cash
used in operating activities--
Depreciation and amortization...................... 2,566,874 263,837
Changes in assets and liabilities--
Accounts receivable, net......................... (1,192,097) (1,025,237)
Unbilled revenue................................. (983,040) (203,949)
Prepaid expenses and other....................... (2,376,484) (311,612)
Other assets, net................................ 596,034 (59,785)
Accounts payable................................. (923,172) (502,226)
Accrued liabilities.............................. (399,220) 62,030
Deferred revenue, current and long-term.......... (893,504) (55,821)
------------ ------------
Net cash used in operating activities......... (1,022,503) (1,040,385)
------------ ------------
Cash flows from investing activities:
Purchases of short-term investments in (3,371,944) --
marketable securities...............................
Proceeds from sale of short-term investments 8,158,492 1,028,624
in marketable securities............................
Purchases of long-term investments in (11,308,894) --
marketable securities...............................
Proceeds from sale of long-term investments 3,014,051 --
in marketable securities............................
Purchase of developed software and other intangibles.. (4,248,583) --
Business combinations, net of cash acquired........... (2,727,399) --
Purchase of property and equipment.................... (3,665,979) (992,296)
------------ -------------
Net cash provided by (used in) investing
activities.................................... (14,150,256) 36,328
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock................ 2,262,414 345,323
Principal payments on notes payable to banks.......... -- (16,886)
------------ -------------
Net cash provided by financing activities..... 2,262,414 328,437
Effect of exchange rate on cash......................... (151,044) 12,042
------------ ------------
Net decrease in cash and cash equivalents............... (13,061,389) (663,578)
Cash and cash equivalents, beginning of period.......... 174,173,008 7,150,362
------------ ------------
Cash and cash equivalents, end of period................ $161,111,620 $ 6,486,784
============ ============
Supplemental cash flow information:
Cash paid during the period for--
Interest........................................... $ 5,132 $ 5,582
============ ============
Taxes.............................................. $ 616,845 $ --
============ ============
Supplemental disclosures of noncash transactions:
Common stock issued for business combinations......... $ 4,115,000 $ --
============ ============
Accrued business combination costs.................... $ 30,181 $ --
============ ============
Accrued common stock offering costs................... $ 101,393 $ 1,300
============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION.
The accompanying consolidated interim financial statements have been
prepared by New Era of Networks, Inc. (the "Company"), without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission (the
"SEC"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations. These
financial statements should be read in conjunction with the Company's audited
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998. The consolidated results
of operations for the three months ended March 31, 1999, are not necessarily
indicative of the results to be expected for any subsequent period or for the
entire fiscal year ending December 31, 1999.
The accompanying unaudited consolidated interim financial statements
reflect, in the opinion of management, all adjustments that are of a normal and
recurring nature and that are necessary for a fair presentation of the financial
position and results of operations for the periods presented. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Certain reclassifications have been made to prior period
financial statements to conform to the March 31, 1999 presentation.
2. BUSINESS COMBINATION.
D&M (Asia) Ltd. and Database & Management (S) Pte. Ltd.
On February 19, 1999, the Company acquired all of the outstanding capital
stock of D&M (Asia) Ltd., a Hong Kong corporation and Database & Management (S)
Pte. Ltd., a Singapore corporation (collectively "D&M"), by means of share
acquisition agreements by and among D&M, the shareholders of D&M, and the
Company. D&M provides professional integration services to customers in the
Pacific Rim.
The aggregate consideration paid by the Company was $5,900,000, payable as
follows: $3,000,000 in cash and approximately $2,900,000 through the issuance of
48,940 unregistered shares of the Company's common stock. The acquisition was
accounted for under the purchase method of accounting and, accordingly, the
assets, liabilities and operating results of D&M have been included in the
accompanying consolidated financial statements from March 1, 1999.
An independent valuation of D&M's net assets was performed to assist in the
allocation of the purchase price. The portion of the purchase price in excess of
the fair value of the net tangible assets of D&M was allocated to goodwill
($5,300,000) and is being amortized on a straight-line basis over a seven-year
period. D&M's other assets were valued at approximately $1,100,000 and its
liabilities assumed totaled approximately $384,000.
3. NET INCOME PER COMMON SHARE.
The Company has adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" ("SFAS 128"), by retroactively restating per share amounts
for all periods presented. Under SFAS 128, basic earnings per common share is
determined by dividing net income from continuing operations available to common
shareholders by the weighted average number of common shares outstanding during
each period. Diluted earnings per common share includes the effects of
potentially issuable common stock, but only if dilutive. The treasury stock
method, using the average price of the Company's common stock for the period, is
applied to determine dilution from options and warrants. The if-converted method
is used for convertible securities.
6
<PAGE> 7
4. COMPREHENSIVE INCOME.
In June of 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 "Reporting Comprehensive Income"
("SFAS 130"). The purpose of SFAS 130 is to report a measure of all changes in
equity that result from recognized transactions and other economic events of the
period other than transactions with owners in their capacity as owners. The only
item of other comprehensive income reported by the Company is the cumulative
translation adjustment. The Company's comprehensive income for the three months
ended March 31, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1999 1998
----------- ---------
<S> <C> <C>
Net income for the period $ 2,582,106 $ 792,378
Change in cumulative
translation adjustment (238,168) (11,232)
----------- ---------
Comprehensive income.... $ 2,343,938 $ 781,146
=========== =========
</TABLE>
5. STOCKHOLDERS' EQUITY.
On November 11, 1998, the Company's board of directors approved a
two-for-one stock split, payable in the form of a stock dividend to stockholders
of record as of November 23, 1998. All shares and per share data in the
accompanying financial information have been adjusted to reflect the stock
split.
6. SEGMENT INFORMATION.
In the fourth quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 131 "Disclosure about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 establishes standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related disclosures
about products and services and geographic areas. Operating segments are
components of an enterprise for which separate financial information is
available and is evaluated regularly by the chief operating decision maker, or
decision making group, in deciding how to allocate resources and assess
performance of the segments of an enterprise. The operating segments are managed
separately because each operating segment represents a strategic business unit
that offers products and services in different markets.
The Company classifies its business activities into three operating
segments: The Americas, Europe and Asia Pacific, and Corporate and Other.
Information regarding the Company's operations in these three operating
segments, which are managed separately, are set forth below. The accounting
policies of the operating segments are the same as those described in the
summary of significant accounting policies included in the Company's Annual
Report on Form 10-K for consolidated results. There are no significant
intersegment sales or transfers between the segments for the periods presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
--------------------------------------- -------------------------------------
EUROPE CORPORATE EUROPE CORPORATE
THE AND ASIA AND THE AND ASIA AND
AMERICAS PACIFIC OTHER TOTAL AMERICAS PACIFIC OTHER TOTAL
--------- -------- --------- -------- -------- -------- --------- -------
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues................. $ 17,375 $ 8,206 $ 4,030 $ 29,611 $ 4,074 $ 3,188 $ 2,320 $ 9,582
Total cost of revenues......... 3,663 1,536 1,145 6,344 705 378 665 1,748
-------- -------- --------- -------- ------- ------- -------- -------
Gross profit................... 13,712 6,670 2,885 23,267 3,369 2,810 1,655 7,834
Selling and marketing.......... 5,768 2,464 1,593 9,825 1,689 1,234 683 3,606
Research and development....... -- -- 6,888 6,888 -- -- 2,691 2,691
General and administrative..... -- -- 3,066 3,066 -- -- 991 991
-------- -------- --------- -------- ------- ------- -------- -------
Operating profit before
acquisition-related charges.. 7,944 4,206 (8,662) 3,488 1,680 1,576 (2,710) 546
Acquisition-related charges ... -- -- 1,700 1,700 -- -- 49 49
-------- -------- --------- -------- ------- ------- -------- -------
Operating profit (loss)........ 7,944 4,206 (10,362) 1,788 1,680 1,576 (2,759) 497
Other income and expense, net.. -- -- 2,184 2,184 -- -- 296 296
-------- -------- --------- -------- ------- ------- -------- -------
Net income (loss) before tax... 7,944 4,206 (8,178) 3,972 1,680 1,576 (2,463) 793
Tax............................ -- -- 1,390 1,390 -- -- -- --
-------- -------- --------- -------- ------- ------- -------- -------
Net income (loss) after tax.... $ 7,944 $ 4,206 $ (9,568) $ 2,582 $ 1,680 $ 1,576 $ (2,463) $ 793
======== ======== ========= ======== ======= ======= ======== =======
</TABLE>
7
<PAGE> 8
7. SUBSEQUENT EVENTS.
SLI International AG Acquisition
On May 4, 1999, the Company acquired all of the outstanding capital stock
of SLI International AG, a Swiss corporation ("SLI"), by means of a Share
Acquisition Agreement by and among SLI, the shareholders of SLI, and the
Company. The aggregate consideration paid by the Company was $22 million, of
which $16.5 million was paid in cash and $5.5 million was paid with 138,452
unregistered shares of the Company's common stock valued at $39.725 per share.
In addition, up to 75,519 additional unregistered shares having a total value of
$3 million may be issued to the shareholders of SLI upon the achievement of
certain performance targets. If earned, these shares will be recorded as
additional purchase price based on their fair value at the time they are earned.
The acquisition will be accounted for under the purchase method of accounting
and, accordingly, the assets, liabilities and operating results will be included
in the Company's consolidated financial statements from May 1, 1999.
Related Party Note Receivable
On April 30, 1999, the Company funded approximately $5.1 million toward a
short-term construction loan to Greenwood Plaza Partners, LLP ("GPP") for
construction of two buildings and a parking structure. GPP is principally owned
by the Company's Chief Executive Officer and Chairman of the Board. Upon
completion of construction, the Company intends to lease the buildings from GPP,
in whole or in part, for use as its principal corporate headquarters.
The Company replaced an existing lender for the first phase of
construction, and has committed to fund up to $31.44 million for one year with
interest at 7.05% per annum. Following completion of construction, GPP intends
to obtain permanent financing from a third-party lender. The terms of the
construction financing are consistent with those that were in place with GPP's
previous lender and have been approved by the Company's board of directors.
VIE Systems, Inc. Acquisition
On April 5, 1999, the Company acquired all of the outstanding capital stock
of VIE Systems, Inc., a Delaware corporation ("VIE"), by means of a Share
Acquisition Agreement by and among VIE, the shareholders of VIE, and the
Company. Pursuant to the acquisition, the Company received VIE's products,
including its Copernicus rules and formatter product and rules engine patent.
The acquisition will be accounted for under the purchase method of accounting
and, accordingly, the assets, liabilities and operating results will be included
in the Company's consolidated financial statements from April 1, 1999.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in this Report on Form 10-Q contains certain trend analysis
and other forward-looking statements. Words such as "anticipate," "believe,"
"plan," "estimate," "expect," "seek," and "intend," and words of similar import
are intended to identify such forward-looking statements. These statements are
not guarantees of future performance and are subject to business and economic
risks and uncertainties which are difficult to predict. Therefore, our 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 set forth in this discussion under "Factors That May
Affect Future Results" and other risks detailed from time to time in reports
filed with the SEC. In addition, the discussion of our results of operations
should be read in conjunction with matters described in detail in our 1998 Form
10-K Report.
The following table sets forth the percentages that selected items in the
Consolidated Statements of Operations bear to total revenues:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
--------------
1999 1998
---- ----
<S> <C> <C>
Revenues:
Software licenses.......................... 59% 69%
Software maintenance....................... 10 4
Professional services...................... 31 27
--- ---
Total revenues............................... 100 100
Cost of revenues:
Cost of software licenses(1)............... 1 3
Cost of software maintenance and
professional services(2)................. 51 51
--- ---
Total cost of revenues....................... 21 18
Gross profit....................... 79 82
Operating expenses:
Sales and marketing........................ 33 38
Research and development................... 23 28
General and administrative................. 10 10
Amortization of intangibles................ 6 1
--- ---
Total operating expenses..................... 72 77
--- ---
Income from operations....................... 6 5
Other income, net............................ 7 3
--- ---
Income before provision for income taxes..... 13 8
Provision for income taxes................... 5 --
--- ---
Net income................................... 9% 8%
=== ===
Net income excluding acquisition-related
amortization of intangibles, net of tax effect 12 % 6%
==== ===
</TABLE>
- ----------
(1) As a percentage of software licenses revenue.
(2) As a percentage of software maintenance and professional services revenue.
REVENUES
Our revenues increased from $9.6 million for the three months ended March
31, 1998, to $29.6 million for the three months ended March 31, 1999. This
resulted from significant increases in license revenue through both direct and
indirect channels, software maintenance, professional services, and the
expansion of our business through both internal development and acquisitions.
Software license revenues increased from $6.6 million for the three months
ended March 31, 1998, to $17.4 million for the three months ended March 31,
1999. This growth in software license revenues resulted primarily from the sale
of products acquired from CAI, and royalty revenue from IBM's sale of MQSeries
Integrator as an IBM-branded product.
Software maintenance revenues increased from $421,000 in the three months
ended March 31, 1998, to $3.1 million in the three months ended March 31, 1999.
This increase is due largely to the growing installed base of customer support
and maintenance accounts both from ongoing operations and our acquisition of CAI
in September of 1998.
Professional services revenue increased from $2.6 million for the three
months ended March 31, 1998, to $9.1 million for the three months ended March
31, 1999. The increase in the relative percentage of service revenues to total
revenues in these periods was
9
<PAGE> 10
attributable to two primary factors: increases in the installed base of
customers receiving training and other support services; and a significant
increase in consulting revenues as a result of expanded demand for NEON's direct
assistance with application integration implementation projects. In addition, we
acquired D&M, a professional services integration company based in Hong Kong,
effective March 1, 1999.
COST OF REVENUES
Cost of revenues consists of cost of software licenses and cost of
professional services and software maintenance. As a percentage of total
revenues, cost of revenues increased from 18% for the three months ended March
31, 1998, to 21% for the three months ended March 31, 1999. This increase was
due primarily to the growth in professional service engagements created by the
increased demand for our direct assistance with application integration
implementation projects. If revenues derived from professional service
engagements increase as a percentage of total revenues in future periods, cost
of revenues as a percentage of total revenues may also increase.
Cost of software licenses consists principally of royalty payments to third
parties for jointly developed products, software purchased from third parties
for resale, and internal costs associated with the fulfillment of license sales.
Cost of software licenses decreased from $222,000, or 3% of software license
revenues, for the quarter ended March 31, 1998 to $146,000, or 1% of software
license revenues, for the quarter ended March 31, 1999. Cost of software
licenses as a percentage of software license revenues may fluctuate from period
to period due principally to the mix of sales of royalty-bearing software
products in each period. Royalties associated with certain software products
currently under development through joint business arrangements may cause the
cost of software licenses to increase in future periods.
Cost of services and maintenance consists primarily of personnel, facility
and systems costs incurred in providing professional service consulting,
training, and customer support services. Cost of services and maintenance
maintained constant as a percentage of services and maintenance revenues at 51%
for the three months ended March 31, 1998 and 1999.
OPERATING EXPENSES
Sales and Marketing
Sales and marketing expenses increased from $3.6 million for the quarter
ended March 31, 1998 to $9.8 million for the quarter ended March 31, 1999.
Although, an increase in absolute dollars, sales and marketing expenses
decreased as a percentage of total revenues from 38% for the three months ended
March 31, 1998 to 33% for the three months ended March 31, 1999. The dollar
increase is primarily attributable to our continued expansion of our domestic
and international direct sales force, which grew from 25 commissioned sales
personnel at March 31, 1998 to 64 commissioned sales personnel at March 31,
1999. We expect marketing expenses to increase in the future as a result of
further expansion of our software product offerings from both our internal
development as well as our acquisitions. Sales and marketing expenses declined
as a percent of total revenues due to higher percentage growth in revenues and
efficiencies associated with the achievement of economies of scale.
Research and Development
Research and development expenses increased from $2.7 million, or 28% of
total revenues, for the quarter ended March 31, 1998 to $6.9 million, or 23% of
total revenues, for the quarter ended March 31, 1999. Software product
development expenditure increases are directly attributable to increases in our
staff of software engineers and consultants, and the associated infrastructure
costs required to support software product development initiatives, including
funded software development projects. In addition, we continue to invest in
research and development on products which were in the development stage at the
time of acquisition. See "In-Process Research and Development." The decline in
research and development expenses as a percentage of revenues was due primarily
to higher percentage growth in total revenues.
General and Administrative
General and administrative expenses grew from $1.0 million, or 10% of total
revenues for the three months ended March 31, 1998, to $3.1 million, or 10% of
total revenues, for the three months ended March 31, 1999. The increase in
general and administrative expenses resulted primarily from increases in
staffing, information systems, related infrastructure to support our growth,
administrative expenses associated with the operation of foreign subsidiaries
and acquisition activity.
10
<PAGE> 11
OTHER INCOME, NET
We reported other income, net of $296,000 for the three months ended March
31, 1998, and $2.2 million for the three months ended March 31, 1999. The
increase in other income was due to interest earned on cash invested from the
proceeds of our public offerings in May 1998 and December 1998.
PROVISION FOR INCOME TAXES
We reported no income tax expense for the quarter ended March 31, 1998. Our
deferred tax assets fully offset by a valuation allowance until the fourth
quarter of 1998. During 1998, our deferred tax assets increased to approximately
$9.0 million, principally for intangibles acquired from CAI that were expensed,
but which must be amortized for tax purposes over 15 years, and additions to our
tax credit carryovers. We also realized reduced U.S. taxes of approximately $3.2
million for deductions related to the exercise of stock options. As required,
the tax benefit from the options was added to additional paid-in capital and
excluded from net income. Without the stock option deductions, we would have
fully used our carryovers and paid U.S. federal taxes in 1998. Consequently, we
concluded that it was likely that we would realize at least $5.0 million of our
deferred tax assets and the valuation allowance was adjusted during the fourth
quarter of 1998 to $4.0 million. At December 31, 1998, our balance sheet
reflected net deferred tax assets of approximately $5.0 million. We currently
project that we will report taxable income for 1999 sufficient to fully utilize
all U.S. loss and tax credit carryforwards. We also currently expect the effects
of nondeductible amortization of purchased intangibles and other projected
taxable events during 1999 will be offset by reversal of all or part of the
remaining valuation allowance. The tax provision for the three months ended
March 31, 1999 is based on our current estimate of our effective tax rate for
1999 of 35%. However, the timing and tax consequences of additional acquisitions
and other transactions we may close during 1999 could cause our actual effective
tax rate for the remainder of 1999 to vary significantly to our current
estimate.
NET INCOME
We reported net income for the three months ended March 31, 1998 and 1999
of approximately $792,000,or $0.04 per diluted share and $2.6 million or $0.08
per diluted share, respectively. Excluding acquisition-related amortization and
assuming a 35% tax rate, we generated net income for the three months ended
March 31, 1998 and 1999 of $547,000 or $0.03 per diluted share and $3.7 million
or $0.11 per diluted share, respectively. The operating results improved due to
the increased growth of our revenues, as compared with the growth of costs and
expenses.
LIQUIDITY AND CAPITAL RESOURCES
We had $186.5 million in cash, cash equivalents, short-term and long-term
investments at March 31, 1999, compared to $196.1 million at December 31, 1998.
We maintain a line of credit of $2,000,000 that can be used for working capital
requirements on an as-needed basis. Net accounts receivable grew from $28.3
million at December 31, 1998 to $29.8 million at March 31, 1999. This increase
in net accounts receivable resulted from receivables acquired from D&M in
February of 1999 partially offset by increased cash collections. Unbilled
revenue, which consists primarily of progress on funded software development
projects which is not billed until specified by a contract date or milestone,
grew from $3.1 million at December 31, 1998 to $4.1 million at March 31, 1999.
Cash used for operating activities was $1.0 million for the three months
ended March 31, 1999 and was not significantly different from the quarter ended
March 31, 1998. Despite greater net income for the first quarter of 1999,
operating cash flows did not increase primarily due to an increase in prepaid
and other items which included the prepayment of $1.5 million of royalties for
the resale of third-party products.
In the first quarter of 1999, cash used in investing activities was $14.2
million, including $3.5 million for net purchases of short-term and long-term
investments in marketable securities, $6.1 million for the purchase of D&M, and
$3.7 million for the purchase of property and equipment. This compares to cash
used in investing activities of $36,000 for the first quarter of 1998.
Cash provided by financing activities was $2.3 million in the three months
ended March 31, 1999, compared to $300,000 for the same period of 1998. The
activity in the 1999 period was due entirely to the exercise of employee stock
options and the employee stock purchase plan arrangement.
We believe that our existing balances of cash, cash equivalents and
short-term and long-term investments will be sufficient to meet the Company's
anticipated working capital and capital expenditure needs at least for the next
twelve months. Thereafter, the Company
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may require additional sources of funds to continue to support its business.
There can be no assurance that such capital, if needed, will be available or
will be available on terms acceptable to the Company.
IN-PROCESS RESEARCH AND DEVELOPMENT
CAI (acquired September 1998)
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During fiscal year 1998, we acquired Century Analysis, Inc. ("CAI"), and
MSB Consultants ("MSB"). We continued to incur research and development expenses
in the first quarter of 1999 on the in-process research and development
("IPR&D") projects acquired from these two companies. Detailed descriptions of
these projects were included in our Form 10-K for the year ended 1998; specific
activities for the first quarter of 1999 follows.
As of the date of the CAI acquisition, CAI had invested $4.9 million in the
IPR&D identified in our Form 10-K. We estimated that an additional $4.2 million
would be required over the next 12 to 18 months following the acquisition to
develop the products to commercial viability.
We have continued to invest additional R&D dollars in the acquired IPR&D
projects. Through March 31, 1999, we had expended approximately 11.5 people
months on the acquired CAI projects in total. We are contemplating various
strategies with respect to the continued development of the IPR&D projects.
Significant achievements had been accomplished as of the valuation date on the
IPR&D projects such as the development of frameworks for design and coding and
construction of the various codes and surrounding architectures. We continue to
make progress in these areas, among others.
At March 31, 1999, we project the remaining costs required to complete the
next generation Impact/TDM project will be approximately $1.7 million should
this project be completed as anticipated on the acquisition date. The next
generation Impact/TDM project has been incorporated into our global R&D
strategy, and the continued development and remaining costs for completion are
currently under evaluation.
CAI had expended a total of approximately $3.1 million on component-related
projects prior to the closing of the acquisition. For these projects to reach
technological feasibility, additional efforts were projected to cost
approximately $950,000. We have continued development work in this area and
initial product release dates are set for the fourth quarter of 1999.
CAI had expended approximately $1.1 million on Other Enterprise Technology
Solutions as of September 1998. For these projects to reach technological
feasibility, we projected that additional efforts would need to be accomplished
in a timely manner and would cost approximately $1.6 million. We continue to
spend heavily on these projects and at this time, significant additional
achievements have been made. Specifically, the XML technology has advanced to
the testing stage on several modules, and the CORBA technology is being brought
into a stand-alone adapter product to be released by year end 1999.
MSB (acquired June 1998)
- ------------------------
MSB was working on the Price Server (with new capabilities), aRTe (designed
for a Windows NT environment), and Quantum Leap on the date of acquisition.
These projects are particularly complex due to the modular nature of MSB's
products and technology.
As of the date of acquisition, MSB had invested $3.1 million in the IPR&D
identified above. We estimated that an additional $850,000 thousand would be
required to over the 18 to 24 months following the acquisition to develop the
aforementioned products to commercial viability.
We have continued to invest additional R&D dollars in the acquired IPR&D
projects during the first quarter. We expect to continue development on all of
these projects through their completion. Currently, the timeline and
expectations for completion of these projects do not differ materially from what
was anticipated at the time of the purchase. We also have a higher level of
certainty that the projects will be released as planned. Our current revenue and
cost estimates do not materially differ from the initial valuation.
We believe that the work performed as of the valuation date had encompassed
many of the critical elements needed to complete the Price Server project. We
estimate that approximately $1,500,000 in development costs was incurred as of
the acquisition date and approximately $220,000 would be required to complete
the remaining development tasks. We spent approximately $40,000 in the first
quarter. The Pricing module for banking applications is expected to be generally
available during the first half of 1999.
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In order to achieve milestones for the aRTe project, we estimate that MSB
had spent approximately $1,500,000 on this project as of June 1998. Remaining
R&D expenditures were estimated to be approximately $230,000 in order to
complete this project. We spent approximately $25,000 in the first quarter.
aRTe's functionality will be incorporated into a NEON product introduction in
early 1999, and further enhanced during the remainder of 1999.
It was estimated that $75,000 had been incurred as of the acquisition date
for the Quantum Leap project and that approximately $400,000 would be required
to complete the product. We spent approximately $80,000 in the first quarter.
The first version of this product was released in the fourth quarter of 1998,
and further development efforts are underway to incorporate Quantum Leap
technology into another of our products scheduled to be released in the second
quarter of 1999.
We do not measure revenues attributable to each specific CAI and
MSB-derived product. As products are offered both as a suite and as individual
applications, NEON license fees are not necessarily application specific.
However, we believe that overall revenues generated to date concur with the
assumptions used in the valuation analysis. Within the MSB product line, the
product revenue we expect during 1999 from the products sold on a stand-alone
version, as well as the product suite incorporating the technology, is
substantially the same as initially forecasted in the valuation study. There was
no revenue forecasted for CAI product IPR&D for the first quarter of 1999. The
product that incorporates the CAI Component related projects has a release date
now estimated for the fourth quarter. We believe that the total forecast for
this product remains substantially the same as in the valuation study over the
remaining life of the product.
We currently believe that expenses associated with completing the purchased
in-process research and development are consistent with the estimates used in
the valuation. In addition, completion dates for the development projects
discussed above remain consistent with projections used at the time of the
acquisition as well as are consistent with the numbers presented in this
analysis. The only change in the first quarter was that the product using the
Component related technology is scheduled to be released one quarter after our
initial estimate. Research and development spending with respect to these
offerings is expected to continue at a rate that is consistent with our overall
research and development spending. We do not believe that the acquisitions
resulted in any material changes in our profit margins or in selling, general
and administrative expenses. We do not believe that we achieved any material
expense reductions or synergies as a result of the acquisition.
The rates utilized to discount the net cash flows to their present value
were consistent with the nature of the forecast and the risks associated with
the projected growth, profitability and developmental projects. Discount rates
of 35% and 35% for CAI and 32% and 25% for MSB were deemed appropriate for the
business enterprises and for the acquired completed in-process research and
development, respectively. These discount rates were consistent with the
acquired companies' various stages of development; the uncertainties in the
economic estimates described above; the inherent uncertainty at the time of the
acquisition surrounding the successful development of the purchased in-process
technology; the useful life of such technology; the profitability levels of such
technology; and the inherent uncertainties of the technological advances that
were indeterminable at the time of the acquisition.
FOREIGN CURRENCY RISK
We have wholly owned subsidiaries located in London, England, Paris,
France, Zurich, Switzerland and Sydney, Australia. Sales and expenses from these
operations are typically denominated in local currency, thereby creating
exposures to changes in exchange rates. The changes in foreign exchange rates
may positively or negatively affect our sales, gross margins and retained
earnings. We do not believe that reasonably possible near-term changes in
exchange rates will result in a material effect on our future earnings, fair
values or cash flows and, therefore, have chosen not to enter into foreign
currency hedging instruments. There can be no assurance that such an approach
will be successful, especially in the event of a significant and sudden decline
in the value of foreign exchange rates relative to the United States dollar.
YEAR 2000 COMPLIANCE
The Year 2000 computer problem, commonly referred to as the Y2K bug,
creates a risk for our Company and, therefore, we make the following Year 2000
readiness disclosure. An adverse impact on our operations could occur if
computer systems do not correctly recognize date information when the year
changes to 2000. Our Company's risk exists in the following areas: 1) systems
used by our Company to run its business; 2) systems used by our suppliers; 3)
potential warranty and other claims from our customers; and 4) the potential
reduced spending by other companies on our software products due to significant
information systems spending to remediate Year 2000 problems.
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Our Company is a relatively new corporation and, therefore, does not expect
to encounter many Year 2000 computer problems associated with our internal
systems, equipment, or facilities. As internal systems and equipment have been
implemented, and as we have expanded into new facilities, in the normal course
of our Company's growth or through acquisition (e.g., CAI), we have attempted to
obtain assurances of Year 2000 readiness from appropriate sources. We will
continue to obtain such assurances for future internal systems, equipment, and
facilities. In addition, we will continue to monitor, including performing
additional testing, as appropriate, the Year 2000 readiness status of previous
obtained equipment, internal systems, and facilities. Noncompliant systems,
equipment, or facilities are expected to be replaced or upgraded in a timely
manner prior to December 31, 1999. We have not identified alternative
remediation strategies if replacement or upgrade is not feasible, but will
continue to reevaluate the need for alternative remediation strategies and
contingency plans as warranted by further risk analysis. For internal Year 2000
noncompliance issues identified to date and expected throughout 1999, the cost
of upgrade or replacement is not expected to be material to our operating
results. However, if significant new noncompliance issues are subsequently
identified, and replacement or upgrade is delayed beyond December 31, 1999,
operating results could be materially adversely affected.
We have limited material relationships with suppliers whose inability to
provide products or services would have a material adverse impact on operating
results. Suppliers where such material relationships do exist appear to be
limited to utility companies whose inability to provide service could materially
affect all business entities. We have and will continue to monitor their Year
2000 efforts and will develop contingency plans as appropriate.
Our Company, based on certain products not including date fields, date
field testing of other products or Y2K certification of CAI acquired products,
believes the majority of our current products are Year 2000 compliant and has
provided Year 2000 warranties to many of our customers. In fact, we believe that
some customers may be purchasing certain of our products as in interim solution
to their Year 2000 needs until their current suppliers reach compliance.
However, since all customer situations cannot be anticipated, particularly those
involving third-party products, increased warranty and other claims may be seen
as a result of the transition to Year 2000. Litigation in general may also
increase regarding Year 2000 compliance issues. Therefore, the impact of
customer claims could have a material adverse impact on our operating results.
Finally, Year 2000 compliance issues are becoming issues of focus for
almost all businesses. Companies whose computer systems and applications may
require significant hardware and software upgrades or modifications may
reallocate capital expenditures to fix Year 2000 problems of existing systems,
or reevaluate their current system needs. If customers defer purchases of our
software because of reallocation, or move to other systems or suppliers due to
reevaluation, this too could have a material adverse impact on our operating
results.
In order to evaluate the above risks, implement any necessary remediations
in the future, and provide risk reevaluations and continued appropriate
monitoring activities, we have designated appropriate individuals within the
organization responsible for Year 2000 issues. We will continue to assess the
need for additional Year 2000 readiness personnel as appropriate.
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.
OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY AND WE MAY NOT BE ABLE TO
MAINTAIN OUR HISTORICAL GROWTH RATES.
Although we have had significant revenue growth in recent quarters, such
growth rates may not be sustainable, and you should not use these past results
to predict future operating margins and results. Our quarterly operating results
have fluctuated significantly in the past and may vary significantly in the
future. Our future operating results will depend on many factors, including the
following:
o the continued growth of the Enterprise Application Integration ("EAI")
software market;
o the size of the orders for our products, and the timing of such
orders;
o potential delays in our implementations at customer sites;
o continued development of indirect distribution channels;
o increased demand for our products;
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o the timing of our product releases;
o competition;
o the effects of global economic uncertainty on capital expenditures for
software; and
o the effects of Year 2000 issues on software purchases.
Quarterly revenues and operating results depend upon the volume and timing
of customer contracts received during a given quarter, and the percentage of
each contract which we are able to recognize as revenue during each quarter,
each of which is difficult to forecast. In addition, as is common in the
software industry, a substantial portion of our revenues in a given quarter
historically have been recorded in the third month of that quarter, with a
concentration of such revenues in the last two weeks of the third month. If this
trend continues, any failure or delay in the closing of orders during the last
part of a quarter will have a material adverse effect on our business.
As a result of these and other factors, we believe that period-to-period
comparisons of our historical results of operations are not a good predictor of
our future performance. If our future operating results are below the
expectations of stock market analysts, our stock price may decline.
SOFTWARE LICENSE REVENUE GROWTH IS INCREASINGLY DEPENDENT ON OUR
RELATIONSHIP WITH IBM.
Our revenue growth for 1998 and the first quarter of 1999 reflected strong
sales of MQIntegrator through IBM's distribution and reseller channel. For the
first quarter of 1999, royalty revenue from IBM sales of MQIntegrator accounted
for a significant portion of our total software license revenue. In the first
quarter, IBM adopted MQIntegrator as an IBM-branded product known as MQSeries
Integrator. As an IBM-branded product, IBM has assumed production and
fulfillment obligations which is reflected in the royalty structure. IBM
distributors and resellers will sell MQSeries Integrator and we will resell it
both directly and through our indirect channels. We expect that IBM will account
for an increasing percentage of our software license revenue in the remainder of
1999. Accordingly, we are more dependent on IBM's management of the MQSeries
Integrator product, and any delay or shortfall in revenues from IBM, or in our
ability to report revenue, could have a material adverse effect on our business
and operating results.
IF OUR SALES CYCLE IS LONGER THAN WE ANTICIPATE, OUR OPERATING RESULTS MAY
SUFFER.
Our customers typically take a long time to evaluate our products.
Therefore the timing of license revenue is difficult to predict. A sale of our
products to a customer typically involves a significant technical evaluation and
a commitment of capital and other resources by the customer. This evaluation
process frequently results in a sales cycle that lasts several months.
Additional delays are caused by customers' internal procedures to approve large
capital expenditures and to test, implement and accept new technologies that
affect key operations within their organization. Our operating expense levels
are relatively fixed in the short-term and are based in part on expectations of
future revenues. Consequently, any delay in the recognition of revenue due to a
longer sales cycle caused by these factors could result in operating losses.
WE HAVE A SHORT OPERATING HISTORY AND A HISTORY OF OPERATING LOSSES.
An investor in our common stock must evaluate the risks, uncertainties,
expenses and difficulties frequently encountered by companies in rapidly
evolving markets. We have had a limited operating history upon which an
evaluation of our Company and its prospects can be based. Prior to 1996, we
recorded only nominal product revenue, and we have not been profitable on an
annual basis. At March 31, 1999, our Company had an accumulated deficit of
approximately $17 million (which includes acquisition-related costs). To address
these risks and uncertainties, we must do the following:
o successfully implement our sales and marketing strategy;
o expand our direct sales channels;
o further develop our indirect distribution channels;
o respond to competition;
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o continue to attract and retain qualified personnel;
o continue to develop and upgrade our products and technology more rapidly
than competitors; and
o commercialize our products and services with future technologies.
We may not successfully implement any of our strategies or successfully
address these risks and uncertainties. Even if we accomplish these objectives we
may not be profitable in the future.
FAILURE TO ADD CUSTOMERS OR EXPAND INTO NEW MARKETS MAY HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS.
A significant portion of our revenue has come from a small number of large
purchasers. For example, in 1998 our top ten customers accounted for 38% of
total revenues. In 1998 and the first quarter of 1999, Industrial Bank of Japan
accounted for approximately 10% of our total revenues. Historically, our
revenues have been derived primarily from sales to large banks and financial
institutions. For example, sales to large banks and financial institutions
accounted for 57% of total revenues in 1998 and 40% of total revenues for the
first quarter of 1999. These customers or other customers may not continue to
purchase our products. Our failure to add new customers that make significant
purchases of our products and services would have a material adverse effect on
our business, financial condition and results of operations.
While we have developed experience marketing our products to financial
institutions, we have less experience with other vertical market segments. New
market segments that we are currently targeting are likely to have significantly
different characteristics than the financial institutions segment. As a result,
we may change our pricing structures, sales methods, sales personnel, consulting
services and customer support. We may not be successful in selling our products
and services to the additional segments targeted. Our inability to expand sales
of our products and services into these additional markets will materially
adversely effect our business.
OUR GROWTH IS DEPENDENT UPON THE SUCCESSFUL DEVELOPMENT OF OUR DIRECT AND
INDIRECT SALES CHANNELS.
We sell our products primarily through our direct sales force and we
support our customers with our internal technical and customer support staff. We
will continue to rely on our ability to recruit and train additional sales
people and qualified technical support personnel. Our ability to achieve
significant revenue growth in the future will greatly depend on our ability to
recruit and train sufficient technical, customer and direct sales personnel,
particularly additional sales personnel focusing on the new vertical market
segments that we target. We have in the past and may in the future experience
difficulty in recruiting qualified sales, technical and support personnel. Our
inability to rapidly and effectively expand our direct sales force and our
technical and support staff could materially adversely affect our business.
We believe that future growth also will depend on developing and
maintaining successful strategic relationships with distributors, resellers, and
systems integrators. Our strategy is to continue to increase the proportion of
customers served through these indirect channels. We are currently investing,
and plan to continue to invest, significant resources to develop these indirect
channels. This could adversely affect our operating results if these efforts do
not generate license and service revenues necessary to offset such investment.
Also, our inability to recruit and retain qualified distributors, resellers and
systems integrators could adversely affect our results of operations. Another
risk is that because lower unit prices are typically charged on sales made
through indirect channels, increased indirect sales could adversely affect our
average selling prices and result in lower gross margins.
OUR OPERATING RESULTS ARE SUBSTANTIALLY DEPENDENT ON OUR SUITE OF EAI
PRODUCTS.
A substantial majority of our revenues come from the NEON EAI suite of
products and related services, and we expect this pattern to continue.
Accordingly, our future operating results will depend on the demand for NEON and
related services by future customers, including new and enhanced releases that
are subsequently introduced. There can be no assurance that the market will
continue to demand our current products or that we will be successful in
marketing any new or enhanced products. If our competitors release new products
that are superior to NEON in performance or price, demand for our products may
decline. A decline in demand for NEON as a result of competition, technological
change or other factors would have a material adverse effect on our business,
financial condition and results of operations.
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INABILITY TO INTEGRATE ACQUIRED COMPANIES MAY INCREASE THE COSTS OF RECENT
ACQUISITIONS.
We may from time to time acquire companies with complementary products and
services in the application integration or other related software markets.
Between September 1997 and March 1999, we acquired four companies. These
acquisitions will expose us to increased risks and costs, including the
following:
o assimilating new operations and personnel;
o diverting financial and management resources from existing operations;
and
o integrating acquired personnel and technologies.
We may not be able to generate sufficient revenues from any of these
acquisitions to offset the associated acquisition costs. We will also be
required to maintain uniform standards of quality and service, controls,
procedures and policies. Our failure to achieve any of these standards may hurt
relationships with customers, employees, and new management personnel. In
addition, our future acquisitions may result in additional stock issuances which
could be dilutive to our stockholders.
We may also evaluate joint venture relationships with complementary
businesses. Any joint venture we enter into would involve many of the same risks
posed by acquisitions, particularly those risks associated with the diversion of
resources, the inability to generate sufficient revenues, the management of
relationships with third parties, and potential additional expenses, any of
which could have a material adverse effect on our financial condition and
results of operations.
THERE ARE MANY RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
We continue to expand our international operations, and these efforts
require significant management attention and financial resources. Each version
of our product also has to be localized within each country. We have committed
resources to the opening and integration of additional international sales
offices and the expansion of international sales and support channels. Our
efforts to develop and expand international sales and support channels may not
be successful. International sales are subject to a number of risks, including
the following:
o longer payment cycles;
o unexpected changes in regulatory requirements;
o difficulties and expenses associated with complying with a variety of
foreign laws;
o import and export restrictions and tariffs;
o difficulties in staffing and managing foreign operations;
o difficulty in accounts receivable collection and potentially adverse tax
consequences;
o currency fluctuations;
o currency exchange or price controls; and
o political and economic instability abroad.
Additionally, intellectual property may be more difficult to protect
outside of the United States. International sales can also be affected to a
greater extent by seasonal fluctuations resulting from the lower sales that
typically occur during the summer months in Europe and other parts of the world.
In addition, the market for our products is not as developed outside of North
America. We may not be able to successfully penetrate international markets or
if we do, there can be no assurance that we will grow these markets at the same
rate as in North America.
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OUR FAILURE TO MANAGE GROWTH OF OPERATIONS MAY ADVERSELY AFFECT US.
We must plan and manage effectively in order to successfully offer products
and services and implement our business plan in a rapidly evolving market. We
continue to increase the scope of our operations domestically and
internationally and have grown our headcount substantially. For example, at
January 1, 1996, we had a total of 35 employees and at March 31, 1999 we had a
total of 748 employees. We may further expand domestically or internationally
through internal growth or through acquisitions of related companies and
technologies. This growth will continue to place a significant strain on our
management systems and resources.
For us to effectively manage our growth, we must continue to enact the
following measures:
o improve our operational, financial and management controls;
o improve our reporting systems and procedures;
o install new management and information control systems; and
o expand, train and motivate our workforce.
In particular, we are currently migrating our existing accounting software
to a packaged application that will allow greater flexibility in reporting and
tracking results. If we fail to install this software in an efficient and timely
manner or if the new systems fail to adequately support our level of operations,
then we could incur substantial additional expenses to remedy such failure.
WE MUST KEEP PACE WITH TECHNOLOGICAL CHANGE TO REMAIN COMPETITIVE.
The market for our products is characterized by rapid technological change,
frequent new product introductions and enhancements, changes in customer demands
and evolving industry standards. Our existing products could be rendered
obsolete if we fail to keep up in any of these ways. We have also found that the
technological life cycles of our products are difficult to estimate, partially
because they may vary according to the particular application or vertical market
segment. We believe that our future success will depend upon our ability to
continue to enhance our current product line while we concurrently develop and
introduce new products that keep pace with competitive and technological
developments. These developments require us to continue to make substantial
product development investments.
Existing Products. We currently serve a customer base with a wide variety
of hardware, software, database, and networking platforms. To gain broad market
acceptance, we believe that we will have to support our products on a variety of
platforms. Our success will depend, among others, on the following factors:
o our ability to integrate our products with multiple platforms, especially
relative to our competition;
o the portability of our products, particularly the number of hardware
platforms, operating systems and databases that our products
can source or target;
o the integration of additional software modules under development with
existing products; and
o our management of software development being performed by third-party
developers.
Future Products. There can be no assurance that we will be successful in
developing and marketing future product enhancements or new products that
respond to technological changes, shifting customer preferences, or evolving
industry standards. We may experience difficulties that could delay these
products. If we are unable to develop and introduce new products or enhancements
of existing products in a timely manner or if we experience delays in the
commencement of commercial shipments of new products and enhancements, then
customers may forego purchases of our products and purchase those of our
competitors.
OUR FAILURE TO MAINTAIN CLOSE RELATIONSHIPS WITH KEY SOFTWARE VENDORS WILL
ADVERSELY AFFECT OUR PRODUCT OFFERING.
We believe that in order to provide competitive solutions for
heterogeneous, open computing environments, it is necessary to develop, maintain
and enhance close relationships with a wide range of vendors, including
database, Enterprise Resource Planning, supply chain and Electronic Data
Interchange software vendors, as well as hardware and operating system vendors.
There can be no
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assurance that we will be able to maintain our existing relationships or develop
additional relationships with such vendors. Our failure to do so could adversely
affect the portability of our products to existing and new platforms and
databases and the timing of the release of new and enhanced products.
OUR INABILITY TO ATTRACT AND RETAIN PERSONNEL MAY ADVERSELY AFFECT US.
Our success greatly depends on the continued service of our key technical,
sales and senior management personnel. None of these persons are bound by an
employment agreement. The loss of any of our senior management or other key
research, development, sales and marketing personnel, particularly if lost to
competitors, could have a material adverse effect on our future operating
results. In particular George F. (Rick) Adam, our Chief Executive Officer, and
Harold A. Piskiel, our Chief Technology Officer, would be difficult to replace.
Our future success will depend in large part upon our ability to attract, retain
and motivate highly skilled employees. We face significant competition for
individuals with the skills required to perform the services we offer. We cannot
assure that we will be able to retain sufficient numbers of these highly skilled
employees. Because of the complexity of the EAI software market, we have in the
past experienced a significant time lag between the date on which technical and
sales personnel are hired and the time at which such persons become fully
productive, and we expect this pattern to continue.
OUR FAILURE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS MAY ADVERSELY
AFFECT US.
Our success and ability to compete is dependent in part upon our
proprietary technology. We rely on a combination of copyright, trademark and
trade secret laws, as well as confidentiality agreements and licensing
arrangements, to establish and protect our proprietary rights. We presently have
two patents, and we have two patent applications pending. Despite our efforts to
protect our proprietary rights, existing copyright, trademark and trade secret
laws afford only limited protection. In addition, the laws of certain foreign
countries do not protect our rights to the same extent as do the laws of the
United States. Attempts may be made to copy or reverse engineer aspects of our
products or to obtain and use information that we regard as proprietary.
Accordingly, there can be no assurance that we will be able to protect our
proprietary rights against unauthorized third-party copying or use. Any
infringement of our proprietary rights could materially adversely affect our
future operating results. Furthermore, policing the unauthorized use of our
products is difficult and litigation may be necessary in the future to enforce
our intellectual property rights, to protect our trade secrets or to determine
the validity and scope of the proprietary rights of others. Such litigation
could result in substantial costs and diversion of resources and could have a
material adverse effect on our future operating results.
INTELLECTUAL PROPERTY CLAIMS CAN BE COSTLY AND RESULT IN THE LOSS OF
SIGNIFICANT RIGHTS.
It is also possible that third parties will claim that we have infringed
their current or future products. We expect that EAI software developers will
increasingly be subject to infringement claims as the number of products in
different industry segments overlap. Any claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays, or
require us to enter into royalty or licensing agreements, any of which could
have a material adverse effect upon our operating results. There can also be no
assurance that such royalty or licensing agreements, if required, would be
available on terms acceptable to us, if at all. There can be no assurance that
legal action claiming patent infringement will not be commenced against us, or
that we would prevail in such litigation given the complex technical issues and
inherent uncertainties in patent litigation. In the event a patent claim against
us was successful and we could not obtain a license on acceptable terms or
license a substitute technology or redesign to avoid infringement, our business,
financial condition and results of operations would be materially adversely
affected.
GENERAL ECONOMIC CONDITIONS MAY ADVERSELY AFFECT OUR BUSINESS.
The EAI software market could be negatively impacted by certain factors
that have impacted the ERP software market, including global economic
difficulties and uncertainty, reductions in capital expenditures by large
customers, and increasing competition. These factors could in turn give rise to
longer sales cycles, deferral or delay of customer purchasing decisions, and
increased price competition. The presence of such factors in the EAI software
market could adversely affect our operating results.
YEAR 2000 RISKS MAY RESULT IN MATERIAL ADVERSE EFFECTS ON OUR BUSINESS.
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, in a little over a
year, computer systems and/or software products used by many companies may need
to be upgraded to comply with such year 2000 requirements. While we have
assessed our products, services and internal systems, certain internal financial
packages have not yet been implemented and may require further assessment by us.
We believe we are currently
19
<PAGE> 20
expending sufficient resources to review our products and services, as well as
our internal management information system in order to remedy those products,
services and systems that are not year 2000 compliant. We expect such
modifications will be made on a timely basis and we do not believe that the cost
of such modifications will have a material effect on our operating results.
There can be no assurance, however, that we will be able to modify such
products, services and systems in a timely and successful manner to comply with
the year 2000 requirements, which could have a material adverse effect on our
operating results. Moreover, we believe that some customers may be purchasing
our products as an interim solution to their year 2000 needs until their current
suppliers reach compliance. Conversely, year 2000 issues could cause a
significant number of companies, including our current customers, to reevaluate
their current system needs and as a result consider switching to other systems
and suppliers. Any of the foregoing could result in a material adverse effect on
our business, operating results and financial condition. Additionally, during
the remainder of 1999 there is likely to be an increased customer focus on
addressing year 2000 issues, creating the risk that customers may reallocate
capital expenditures to fix year 2000 problems of existing systems. If customers
defer purchases of our software because of such a reallocation, it could
adversely affect our operating results.
OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE.
The trading price of our common stock has fluctuated significantly since
our initial public offering in June 1997, and often such fluctuations have been
unrelated or disproportionate to our operating performance. In addition, the
trading price of our common stock could be subject to wide fluctuations in
response to quarterly variations in operating results, announcements of
technological innovations or new products by us or our competitors, developments
with respect to patents or proprietary rights, changes in financial estimates by
securities analysts and other events or factors. In addition, the stock market
has experienced volatility that has particularly affected the market prices of
equity securities of many high technology companies and that often has been
unrelated or disproportionate to the operating performance of such companies.
These broad market fluctuations may adversely affect the market price of our
common stock.
ADOPTION OF THE EURO PRESENTS UNCERTAINTIES FOR OUR COMPANY.
In January 1999, the new "Euro" currency was introduced in certain European
countries that are part of the European Monetary Union, or EMU. During 2002, all
EMU countries are expected to be operating with the Euro as their single
currency. A significant amount of uncertainty exists as to the effect the Euro
will have on the marketplace generally and, additionally, all of the final rules
and regulations have not yet been defined and finalized by the European
Commission with regard to the Euro currency. We are currently assessing the
effect the introduction of the Euro will have on our internal accounting systems
and the sales of our products. We are not aware of any material operational
issues or costs associated with preparing our internal systems for the Euro.
However, we do utilize third party vendor equipment and software products that
may or may not be EMU compliant. Although we are currently taking steps to
address the impact, if any, of EMU compliance for such third party products, the
failure of any critical components to operate properly post-Euro may have an
adverse effect on the business or results of operations of our Company or
require us to incur expenses to remedy such problems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
20
<PAGE> 21
PART II. -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON 8-K
(a) Exhibit 27.1 Financial Data Schedule.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW ERA OF NETWORKS, INC.
(Registrant)
By: /s/ STEPHEN E. WEBB
--------------------------------------
Stephen E. Webb,
Senior Vice President,
Chief Financial Officer
(Principal Financial Officer)
Date: May 14, 1999
22
<PAGE> 23
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
------------------------------------------------
27.1 --Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S MARCH 31, 1999 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 161,111,620
<SECURITIES> 25,426,682
<RECEIVABLES> 29,836,031
<ALLOWANCES> 800,000
<INVENTORY> 0
<CURRENT-ASSETS> 205,827,371
<PP&E> 16,941,885
<DEPRECIATION> 3,557,558
<TOTAL-ASSETS> 305,463,464
<CURRENT-LIABILITIES> 20,941,284
<BONDS> 0
0
0
<COMMON> 3,092
<OTHER-SE> 284,333,201
<TOTAL-LIABILITY-AND-EQUITY> 305,463,464
<SALES> 29,610,731
<TOTAL-REVENUES> 29,610,731
<CGS> 6,344,454
<TOTAL-COSTS> 6,344,454
<OTHER-EXPENSES> 21,478,169
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,132
<INCOME-PRETAX> 3,972,471
<INCOME-TAX> 1,390,365
<INCOME-CONTINUING> 2,582,106
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,582,106
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
