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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
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(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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-22043
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NEW ERA OF NETWORKS, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 84-1234845
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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7400 EAST ORCHARD ROAD, ENGLEWOOD, COLORADO 80111
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (303) 694-3933
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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 [ ]
As of March 8, 1999, there were 30,739,744 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 8, 1999) was approximately
$1,762,255,250. Shares of the Registrant's common stock held by each executive
officer and director of the Registrant 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 for the
1999 Annual Meeting of Stockholders are incorporated by reference in Part III of
this Annual Report on Form 10-K to the extent stated herein.
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NEW ERA OF NETWORKS, INC.
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 2
Factors That May Affect Future Results...................... 10
Item 2. Properties.................................................. 16
Item 3. Legal Proceedings........................................... 16
Item 4. Submission of Matters to a Vote of Security Holders 17
Executive Officers of Registrant..........................
PART II
Item 5. Market for Registrant's Common Equity and Related 20
Stockholder Matters.......................................
Item 6. Selected Consolidated Financial Data........................ 21
Item 7. Management's Discussion and Analysis of Financial Condition 22
and Results of Operations.................................
Item 7A. Quantitative and Qualitative Disclosures About Market 30
Risk......................................................
Item 8. Financial Statements and Supplementary Data................. 31
Item 9. Changes in and Disagreements with Accountants on Accounting 31
and Financial Disclosure..................................
PART III
Item 10. Directors and Executive Officers of the Company............. 31
Item 11. Executive Compensation...................................... 31
Item 12. Security Ownership of Certain Beneficial Owners and 31
Management................................................
Item 13. Certain Relationships and Related Transactions.............. 31
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 32
8-K.......................................................
Signatures.................................................. 34
Consolidated Financial Statements........................... F-1
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New Era of Networks, Inc., NEON, NEONet, Rapport, Application Integration,
NEONimpact, NEONsecure, NEONadapter, NEON Physician Access, NEON Trading System
and Sentinel are trademarks of NEON. MQSeries is a registered trademark and
MQSeries Integrator is a trademark of International Business Machines
Corporation. This Form 10-K also contains trademarks and trade names of other
companies.
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PART I
This Annual Report on Form 10-K ("Form 10-K") contains forward-looking
statements made within the meaning of Section 27A of the Securities Act of 1933,
as amended (the "Act") and Section 21E of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates," and similar expressions
identify such forward-looking statements. These statements are not guarantees of
future performance and are subject to certain risks and uncertainties that could
cause actual results to differ materially from those expressed or forecasted.
Factors that might cause such a difference include, but are not limited to,
those discussed in the section entitled "Factors That May Affect Future Results"
on pages 10 through 16 in this Form 10-K. Readers should not unduly rely on
forward-looking statements, which reflect only the opinion of NEON as of the
date hereof. Unless required by law, NEON undertakes no obligation to revise
forward-looking statements. Readers should also carefully review the risk
factors set forth in other reports or documents NEON files from time to time
with the Securities and Exchange Commission, particularly the Quarterly Reports
on Form 10-Q and any Current Reports on Form 8-K.
ITEM 1. BUSINESS.
OVERVIEW
New Era of Networks, Inc. ("NEON") develops, markets and supports
enterprise application integration ("EAI") software and services. Our
architectural platform provides organizations with a structured software
platform for the rapid and efficient integration and ongoing maintenance of
disparate systems and applications across the enterprise. Our packaged software
solutions support EAI across popular hardware platforms, operating systems, and
database types. NEON has four product offerings: MQSeries Integrator, NEON
Integration Adapters, NEON Integration Options and NEON Integration
Applications. Through December 31, 1998, we shipped products or provided
services (including products and services acquired) to approximately 700
customers worldwide.
RECENT DEVELOPMENTS
Stock Split. On December 2, 1998, we effected a two-for-one stock split in
the form of a 100% stock dividend to stockholders of record as of November 23,
1998. All information in this Form 10-K reflects such two-for-one stock split.
Public Offerings. In May 1998, we sold 4,757,000 shares of our common stock
to the public at a price of $11.38 per share and received net proceeds of $50.6
million. In December 1998, we sold 4,780,000 shares of our common stock to the
public at a price of $34.00 per share and received net proceeds of $153.7
million.
Acquisitions. In September 1998, we acquired all the outstanding capital
stock of Century Analysis Incorporated ("CAI") for an aggregate purchase price
of $41.0 million, of which $23.0 million was paid in cash and approximately
$18.0 million was paid through the issuance of 880,062 shares of common stock.
In connection with the acquisition, we assumed all options outstanding under
CAI's option plan. In December 1998, an additional 391,138 shares of common
stock valued at $15.6 million were issued to the shareholders of CAI upon the
achievement of certain performance criteria. CAI is a software manufacturer that
has provided solutions since 1975 for productivity, connectivity and information
management.
In addition, in June 1998 we acquired all of the outstanding capital stock
of MSB Consulting Limited, a corporation organized under the laws of the United
Kingdom. In February 1999, we acquired all of the capital stock of D & M (Asia)
Ltd. and Database & Management (S) Pte. Ltd., two sister corporations organized
under the laws of Hong Kong and Singapore, respectively.
We accounted for these acquisitions under the purchase method of
accounting. See Note 3 of Notes to unaudited Consolidated Financial Statements.
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PRODUCTS AND SERVICES
We offer software products and related services that allow organizations to
integrate information from disparate systems across the enterprise.
The NEON EAI suite of products is comprised of four main product
categories:
MQSeries Integrator
MQSeries Integrator. MQSeries Integrator, formerly known as MQIntegrator,
combines IBM's MQSeries, a robust messaging and queuing foundation, with NEON's
Rules Engine and Formatter to give customers a comprehensive and powerful
solution for application integration. We have a multi-year joint development,
marketing and reselling agreement with IBM whereby the MQSeries Integrator
product is a product offering of both NEON and IBM.
NEON Rules Engine. The NEON Rules Engine provides enterprise users with a
content-based, transaction routing system. This enables real-time routing of
transactions based on easily modifiable business rules and the contents of each
message. The rules engine provides message creation and dispatch of multiple,
new, independently formatted, and delivered messages to multiple destinations or
processes from a single input message.
NEON Formatter. The NEON Formatter dynamically transforms messages to
multiple required formats, allowing heterogeneous applications to communicate
seamlessly. Each transaction reaches each recipient in the recipient's native
format, regardless of the underlying database.
NEON Integration Adapters
Building on the power of the MQSeries Integrator core technology, we
preload packaged software format libraries from leading packaged applications
into the Formatter, further enhancing the ease and speed of installation and
integration of these applications.
NEON PeopleSoft Integration Libraries. The NEON PeopleSoft Integration
Libraries provide a flexible solution to integrating with PeopleSoft
applications. NEON PeopleSoft Integration Libraries supply journal entry data
from a wide range of sources, such as manufacturing, inventory, and other
applications.
NEON SAP Integration Libraries. The NEON SAP Integration Libraries extend
the concept of Application Link Enabling (ALE) integration out to the
enterprise. Our SAP Integration Libraries facilitate data conversion, data
validation, and data enrichment. Our MQIntegrator and the SAP Integration
Libraries handle business-oriented, rules-based control of how and when data
flows between legacy, third party, or other ERP (i.e., Enterprise Resource
Planning) applications and SAP R/3.
NEON S.W.I.F.T. Integration Libraries. The NEON S.W.I.F.T. Integration
Libraries simplify complex tasks and reduce the time and effort required to
accept and reformat messages to a customer's own application. As businesses
change and evolve, our customers can customize the S.W.I.F.T. Integration
Libraries to meet the challenges of message reformatting on a global basis.
NEON Integration Options
NEONweb. NEONweb is a complementary module to the MQSeries Integrator. It
provides a browser interface to back-end applications, giving users the
ease-of-use of a browser with information access of EAI.
NEONimpact. NEONimpact is an interface engine for healthcare that supports
the healthcare standards and regulations such as HL7, CL7 and HIPAA.
NEONsecure. NEONsecure provides users with single sign-on security to the
back-end systems in the enterprise. Taking an EAI approach, NEONsecure provides
users with access to all applications that they have rights to.
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NEON Integration Applications
NEON Business EventManager. NEON Business EventManager is an EAI product
that facilitates integration based on business processes or events. This product
enables business analysts to make decisions or rules in typical business
language without having to deal with technical architecture.
NEON Rapport. NEON Rapport integrates client and customer files and systems
across the financial enterprise. By breaking down product and services
boundaries, Rapport manages client and contact relationship information. Rapport
also allows banks and securities firms to migrate to a client-focused strategy,
which provides a global resource for all client relationships.
NEON Physician Access. NEON Physician Access allows medical personnel to
use a web browser to access patient information from multiple applications,
including patient lists, client fact sheets, radiology test results, and Rx
profiles.
NEON Trading System. NEON Trading System is a modular set of financial
services products, including a pricing system, order routing system, position
keeping system, and relationship management system.
Products Under Development
NEON Enterprise ProcessExecutive. NEON Enterprise ProcessExecutive is a
comprehensive business process automation and workflow system for the business
enterprise. Enterprise ProcessExecutive provides a tool for modeling and
monitoring business processes across complex organizations. Process flows can be
directed across the enterprise, based on the results of defined required
activities. Enterprise ProcessExecutive builds upon the core MQSeries Integrator
functionality to provide valuable cost management capabilities, with a number of
defined events that may be discrete, associated, related, or collective. Each
NEON Enterprise ProcessExecutive purchase requires a license of MQSeries
Integrator. We expect to commercially release Enterprise ProcessExecutive in
mid-1999.
Customer Services
Maintenance and Support. We offer an array of support services that focus
on reporting and tracking work requests from customers. Our maintenance and
support service offers a seven-day a week, twenty-four hour a day customer
hotline.
Professional Services. We provide for NEON software installations and
consulting services, as well as generalized consulting on the design and
development of enterprise-wide application integration utilizing our expertise
in client/server, Internet/intranet and database management technologies. We
offer these professional services often in conjunction with other professional
service organizations and system integrations.
Fee-based Training Services. We offer our customers, for an additional fee,
comprehensive training in our software products. These courses are conducted at
our principal corporate facilities in Englewood (Colorado), New York City,
Pacheco (California) and London, as well as at customer locations on request. In
addition, our partners plan to provide fee-based training services on which we
will receive a royalty.
SALES AND MARKETING
We currently market our software and services primarily through our direct
sales organization, complemented by indirect sales channels. As of December 31,
1998, our direct sales force included 54 commissioned sales representatives
located in 12 U.S. states, London, Prague, and Sydney. In addition, our
multi-tiered channel program provides additional sales channels for jointly
marketed products. As part of this strategy, we have established distribution
relationships with 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. We have also developed alliances with key
solution providers to targeted vertical industry sectors, including financial
services, health care, telecommunications, and manufacturing.
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We believe that future growth also will depend upon our success in
developing and maintaining 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 our indirect
channels, which could adversely affect our operating results if our efforts do
not generate license and service revenues necessary to offset such investment.
Our inability to recruit and retain qualified distributors, resellers and
systems integrators could adversely affect our results of operations. Our
success in selling into these indirect distribution channels could also
adversely affect our average selling prices and result in lower gross margins,
since lower unit prices are typically charged on sales through indirect
channels. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 8 of Notes to Consolidated Financial Statements.
STRATEGIC RELATIONSHIPS
Our strategy has been to expand our indirect channel relationships with
strategic partners including third-party distributors, systems integrators and
resellers. Examples of certain of our key strategic relationships include:
IBM. We entered into a multi-year joint development, marketing and
reselling arrangement with IBM in the fourth quarter of 1997 for the
MQIntegrator product. MQSeries Integrator combines NEON's Rules Engine and
Formatter components with IBM's MQSeries messaging product. MQSeries
Integrator is sold as a standard product offering by both IBM and us. In
January 1999, the UNIX and NT versions of MQIntegrator were branded by IBM
as MQSeries Integrator. In 1998, revenues from IBM sales of MQIntegrator
accounted for approximately 13% of our software license revenues. See
"Factors that May Affect Future Operating Results -- Software license
revenue growth is increasingly dependent on our relationship with IBM."
PeopleSoft. We entered into a multi-year joint development, marketing
and reselling arrangement with PeopleSoft in the first quarter of 1998 for
the Business EventManager product. Business EventManager is sold as a
standard product offering from both companies as the solution to more
rapidly implement PeopleSoft's application solutions.
Candle Corporation. We entered into a multi-year marketing and
reselling arrangement with Candle Corporation in the first quarter of 1998
for products from both companies. Candle Corporation will integrate the
NEON's Rules Engine and Formatter components product into Roma Candle, a
proprietary software product of Candle Corporation, as a standard product
offering. In addition, we agreed to market and sell certain Candle products
to further enhance our product suite.
Hewlett-Packard Nederland B.V. Through our recent acquisition of CAI,
we assumed a five-year agreement between CAI and Hewlett-Packard Nederland
B.V. Under this agreement, Hewlett-Packard Nederland B.V. markets and
resells CAI products in the Netherlands.
We have recently expanded our presence in the Enterprise Resource Planning
(ERP) market through the signing of contracts with The Coca-Cola Company, Pitney
Bowes, Tivoli Systems, Monsanto Company and Industrial Bank of Japan. Each of
these customers has selected NEON's MQIntegrator for their SAP R/3 integration.
In addition, the Company has reseller and joint marketing relationships
with approximately 30 technology companies worldwide.
TECHNOLOGY
Our 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. NEON's EAI products
operate on a heterogeneous mix of hardware and underlying software platforms,
utilizing existing transaction management capabilities found in the underlying
operating environments.
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Our core technologies have been integrated into an enterprise level
information broker architecture that leverages the benefits of individual
modules to deliver the following additional benefits:
- employs dynamic formatting and guaranteed delivery to abstract the
translation and delivery of information across applications;
- simplifies the intrusion into new or legacy programs needed for such
programs to inter-operate;
- uses a non-programmatic and declarative rather than procedural definition
toolset, allowing configuration and maintenance workloads to scale
comfortably by describing formats for input and output as the number of
interfaces increases;
- maintains transaction level reliability and state matching for the
transmission of critical data;
- provides independent scalability 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.
Our Rapport product provides an integrated customer contact and status
application utilizing client/server, relational database, and web browser
technology, which integrates customer information, contact and financial data.
PROPRIETARY TECHNOLOGIES
Rules Engine, NEON Rules. 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 Graphical User Interface
("GUI") panels, or Application Program Interfaces ("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, NEON 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. NEON'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 the subscribing
application. 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 the subscribing application 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.
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RESEARCH AND DEVELOPMENT
We have made substantial investments since inception in research and
development. We first introduced NEONet in January 1996, and released new
versions periodically throughout 1996, 1997 and 1998. Each new version of NEONet
consisted of substantially rewritten code providing greater functionality,
higher performance and greater integration capabilities. A version of NEONet
incorporating IBM's MQSeries was introduced in May 1998 and named MQIntegrator.
Subsequently, an IBM-branded version was released, called MQSeries Integrator.
Our research and development efforts are focused primarily on the extension
of MQSeries Integrator's capabilities, additional hardware, operating system and
network platform support, the development of additional functionality and
libraries for targeted vertical markets, and quality assurance and testing. Our
research and development staff is also engaged in advanced development efforts
to exploit our core technology and expand the markets for our 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.
We make available new product releases approximately every six months. This
provides a means to disseminate features and functions requested by customers as
we continue to address specific targeted markets. In addition, we believe that
this discipline spurs continual innovation and quality control throughout the
development and quality assurance organizations. As of December 31, 1998, our
research and development staff consisted of 208 persons. Our research and
development expenditures in 1998, 1997 and 1996 were approximately $15.8
million, $7.7 million and $3.7 million, respectively, and represented 24%, 34%
and 51% of total revenues, respectively, during such periods.
To extend the interoperability of our products, we are currently developing
NEON OpenBroker, a gateway between MQSeries Integrator and other products
including Microsoft MSMQ, Object Request Brokers (ORBs), Transaction Processing
(TP) Monitors, and a variety of other products and architectures.
The markets for our products are characterized by rapidly changing
technologies, evolving industry standards, frequent new product introductions
and short product life cycles. Our future success will depend to a substantial
degree upon our ability to enhance our 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. We budget 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 that we 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 we will
successfully develop, introduce or manage the transition to new products. We
have in the past, and may in the future, experience delays in the introduction
of our products, due to internal and external factors. Any future delays in the
introduction or shipment of our new or enhanced products, the inability of such
products to gain market acceptance or problems associated with new product
transitions could adversely affect our results of operations, particularly on a
quarterly basis.
COMPETITION
We compete in markets that are intensely competitive and are expected to
become more competitive as current competitors expand their product offerings
and new competitors enter the market. Our current competitors include a number
of companies offering one or more solutions to the application integration
problem, some of which are directly competitive with our products. We have faced
competition for product sales with the following entities:
Internal Information Technology Departments.
"In-house" Information Technology departments of potential customers have
developed or may develop systems that substitute for some or all of the
functionality offered by our products. We expect that internally developed
application integration systems will continue to be a principal source of
competition for the foresee-
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able future. In particular, it can be difficult to sell our products to a
potential customer whose internal development group has already made large
investments in and progress towards completion of systems that our products are
intended to replace.
Software Vendors.
We face competition from a variety of vendors offering EAI capabilities,
including TSI International Software Ltd., Active Software, Software
Technologies Corporation and Vitria Technology, Inc. Other software companies
target the EAI market through various alternative technological solutions, such
as data synchronization, transaction monitoring, and subject-based
publish/subscribe messaging systems. Some vendors also sell software that
competes with only one of our products, but could be expanded or enhanced. For
example, Microsoft, BEA Systems and others provide messaging and queuing
solutions that compete with the NEON Messaging and Queuing module, but in the
future these vendors could elect to provide a more complete integration solution
that would also compete with NEON's dynamic formatting and rules-based engine
modules. We also face competition from relational database vendors such as
Oracle, Informix, Sybase and Microsoft.
System Integrators and Professional Service Organizations.
These entities design and develop custom systems and perform custom
integration of systems and applications. Certain of these firms may possess
industry specific expertise or reputations among potential customers. These
systems integrators and consulting firms can resell our products and may engage
in joint marketing and sales efforts with us. We rely upon these firms for
recommendations of our products during the evaluation stage of the purchase
process, as well as for implementation and customer support services. These
systems integrators and consulting firms may have similar, and often more
established, relationships with our competitors, and there can be no assurance
that these firms will not market or recommend software products that are
competitive with our products.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition, and a larger installed base of customers than we may
have. Many of our competitors may also have well-established relationships with
our current and potential customers. In addition, many of these competitors have
extensive knowledge of the application integration industry, and are capable of
offering a single-vendor solution. As a result, our competitors may be in a
better position than we are to devote significant resources toward the
development, promotion and sale of their products. They may also respond more
quickly to new or emerging technologies and changes in customer requirements.
Current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address customer needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. We also expect that the competition will increase as a
result of software industry consolidations. Increased competition is likely to
result in price reductions, reduced gross margins and loss of market share, any
of which could materially adversely affect our business, financial condition and
results of operations. There can be no assurance that we will be able to compete
successfully against current and future competitors, or that competitive
pressure we face will not materially adversely affect our business, financial
condition and results of operations.
INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS AND LICENSES
We rely on a combination of copyright, trademark and trade secret laws, as
well as confidentiality agreements and licensing arrangements, to establish and
protect our proprietary rights. We presently have no patents, but we have three
patent applications pending.
Despite our efforts to protect our proprietary rights, existing copyright,
trademark and trade secret laws afford only limited protection. Moreover, the
laws of certain countries do not protect our 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 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
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use, which could materially adversely affect our business, operating results or
financial condition. Moreover, there can be no assurance that others will not
develop products that infringe our proprietary rights, or that are similar or
superior to those developed by us. Policing the unauthorized use of our products
is difficult. 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 business, financial condition and results of operations.
We also rely on certain technology that we license from third parties,
including software that is integrated with internally developed software and
used in our products to perform certain functions.
There can be no assurance that these third-party technology licenses will
continue to be available to us on commercially reasonable terms. If we lose, or
are unable to maintain any of these technology licenses, it 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 our business, financial condition
and results of operations.
As is common in the software industry, we from time to time receive notices
from third parties claiming infringement by our products of such third parties'
proprietary rights. There can be no assurance, that third parties will not claim
infringement by us with respect to current or future products. We expect 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 us to enter into
royalty or licensing agreements, any of which could have a material adverse
effect upon our 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 us, 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 us, or that we would necessarily 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.
We are aware that a number of organizations are utilizing the names Neon
and New Era as either a trademark or tradename or both. In December 1998, we
filed a Declaratory Judgment Action in the Federal District Court for Colorado
to resolve the use of the trademarks "NEON," New Era of Networks, Inc., NEONet
and NEONSOFT. Such claims or any additional claims against us 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 us or an
injunction prohibiting our use of the particular trademark or tradename. Any
such injunction could materially adversely affect our corporate or product name
recognition and marketing efforts. Accordingly, any monetary damages or
injunction could have a material adverse effect upon our business, financial
condition and results of operations.
EMPLOYEES
As of December 31, 1998, we employed 601 persons, including 89 in sales,
marketing and field operations, 208 in research and development, 104 in finance,
legal, information systems and administration and 200 in client services. Of
these, 99 are located in the United Kingdom, seven are located in Australia,
four are located in the Czech Republic and the remainder are located in the
United States. None of our employees is represented by a labor union. We have
experienced no work stoppages and believe our relationship with our employees is
good.
Our future success will depend in large part upon the continued service of
our key technical, sales and senior management personnel, none of whom is 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 business, operating
results and financial condition. In particular, the services of George F. (Rick)
Adam, Jr., Chief Executive Officer, and Harold Piskiel, Chief Technology
Officer, would be difficult to replace. There is significant competition for
employees with the skills required to
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perform the services offered by us and there can be no assurance that we will be
able to continue to attract and retain sufficient numbers of highly skilled
employees. We have in the past experienced, and expect 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 we
are unable to manage the post-sales process effectively, our ability to attract
repeat sales or establish strong account references could be adversely affected,
which may materially affect our business, financial condition and results of
operations.
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:
- the continued growth of the Enterprise Application Integration ("EAI")
software market;
- the size of the orders for our products, and the timing of such orders;
- potential delays in our implementations at customer sites;
- continued development of indirect distribution channels;
- increased demand for our products;
- the timing of our product releases;
- competition;
- the effects of global economic uncertainty on capital expenditures for
software;
- 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 in 1998, and in particular the fourth quarter, reflected
strong sales of the MQIntegrator through IBM's distribution and reseller
channel. In 1998, royalty revenue from IBM sales of MQIntegrator accounted for
approximately 13% of our total software license revenues. We expect that IBM
will account for an increasing percentage of our software license revenue in
1999. Any delay or shortfall in such revenues from IBM could have a material
adverse effect on our business and operating results.
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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 early stage companies in
rapidly evolving markets. We have had only a limited operating history upon
which an evaluation of our Company and its prospects can be based. Prior to
1996, we recorded only nominal product revenue, and we have not been profitable
on an annual basis. At December 31, 1998, our Company had an accumulated deficit
of approximately $20 million (which includes acquisition-related costs). To
address these risks and uncertainties, we must do the following:
- successfully implement our sales and marketing strategy;
- expand our direct sales channels;
- further develop our indirect distribution channels;
- respond to competition;
- continue to attract and retain qualified personnel;
- continue to develop and upgrade our products and technology more rapidly
than competitors;
- commercialize our products and services with future technologies.
We may not successfully implement any of our strategies or successfully
address these risks and uncertainties. Even if we accomplish these objectives we
may not be profitable in the future.
Failure to add customers or expand into new markets may have a material
adverse effect on our business.
A significant portion of our revenue has come from a small number of large
purchasers. For example, in 1998 our top ten customers accounted for 38% of
total revenues. In 1998, 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 approximately 72% of total revenues in 1997. 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 affect 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
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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 our
suite of EAI products 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 our products 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.
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 February 1999, we acquired four companies. These
acquisitions will expose us to increased risks and costs, including the
following:
- assimilating new operations, systems, technology and personnel;
- diverting financial and management resources from existing operations.
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
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support channels may not be successful. International sales are subject to a
number of risks, including the following:
- longer payment cycles;
- unexpected changes in regulatory requirements;
- difficulties and expenses associated with complying with a variety of
foreign laws;
- import and export restrictions and tariffs;
- difficulties in staffing and managing foreign operations;
- difficulty in accounts receivable collection and potentially adverse tax
consequences;
- currency fluctuations;
- currency exchange or price controls;
- political and economic instability abroad.
Additionally, intellectual property may be more difficult to protect
outside of the United States. International sales can also be affected to a
greater extent by seasonal fluctuations resulting from the lower sales that
typically occur during the summer months in Europe and other parts of the world.
In addition, the market for our 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.
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 December 31, 1998 we had
a total of 601 employees. We may further expand domestically or internationally
through internal growth or through acquisitions of related companies and
technologies. This growth will continue to place a significant strain on our
management systems and resources.
For us to effectively manage our growth, we must continue to enact the
following measures:
- improve our operational, financial and management controls;
- improve our reporting systems and procedures;
- install new management and information control systems;
- expand, train and motivate our workforce.
In particular, we are currently migrating our existing accounting software
to a packaged application that will allow greater flexibility in reporting and
tracking results. If we fail to install this software in an efficient and timely
manner or if the new systems fail to adequately support our level of operations,
then we could incur substantial additional expenses to remedy such failure.
We must keep pace with technological change to remain competitive.
The market for our products is characterized by rapid technological change,
frequent new product introductions and enhancements, changes in customer demands
and evolving industry standards. Our existing products could be rendered
obsolete if we fail to keep up in any of these ways. We have also found that the
technological life cycles of our products are difficult to estimate, partially
because they may vary according to the particular application or vertical market
segment. We believe that our future success will depend upon our ability to
continue to enhance our current product line while we concurrently develop and
introduce new products that
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keep pace with competitive and technological developments. These developments
require us to continue to make substantial product development investments.
Existing Products. We currently serve a customer base with a wide variety
of hardware, software, database, and networking platforms. To gain broad market
acceptance, we believe that we will have to support our products on a variety of
platforms. Our success will depend, among others, on the following factors:
- our ability to integrate our products with multiple platforms, especially
relative to our competition;
- the portability of our products, particularly the number of hardware
platforms, operating systems and databases that our products can source
or target;
- the integration of additional software modules under development with
existing products;
- our management of software development being performed by third-party
developers.
Future Products. There can be no assurance that we will be successful in
developing and marketing future product enhancements or new products that
respond to technological changes, shifting customer preferences, or evolving
industry standards. We may experience difficulties that could delay these
products. If we are unable to develop and introduce new products or enhancements
of existing products in a timely manner or if we experience delays in the
commencement of commercial shipments of new products and enhancements, then
customers may forego purchases of our products and purchase those of our
competitors.
Our failure to maintain close relationships with key software vendors will
adversely affect our product offering.
We believe that in order to provide competitive solutions for
heterogeneous, open computing environments, it is necessary to develop, maintain
and enhance close relationships with a wide range of vendors, including
database, Enterprise Resource Planning, supply chain and Electronic Data
Interchange software vendors, as well as hardware and operating system vendors.
There can be no assurance that we will be able to maintain our existing
relationships or develop additional relationships with such vendors. Our failure
to do so could adversely 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
no patents, but we have three patent applications pending. Despite our efforts
to protect our proprietary rights, existing copyright, trademark and trade
secret laws afford only limited protection. In addition, the laws of certain
foreign countries do not protect our rights to the same extent as do the laws of
the United States. Attempts may be made to copy or reverse engineer aspects of
our products or to obtain and use information that we regard as proprietary.
Accordingly, there can be no assurance that we will be able to protect our
proprietary rights against unauthorized
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third-party copying or use. Any infringement of our proprietary rights could
materially adversely affect our future operating results. Furthermore, policing
the unauthorized use of our products is difficult and litigation may be
necessary in the future to enforce our intellectual property rights, to protect
our trade secrets or to determine the validity and scope of the proprietary
rights of others. Such litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on our future
operating results.
Intellectual property claims can be costly and result in the loss of
significant rights.
It is also possible that third parties will claim that we have infringed
their current or future products. We expect that EAI software developers will
increasingly be subject to infringement claims as the number of products in
different industry segments overlap. Any claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays, or
require us to enter into royalty or licensing agreements, any of which could
have a material adverse effect upon our operating results. There can also be no
assurance that such royalty or licensing agreements, if required, would be
available on terms acceptable to us, if at all. There can be no assurance that
legal action claiming patent infringement will not be commenced against us, or
that we would prevail in such litigation given the complex technical issues and
inherent uncertainties in patent litigation. In the event a patent claim against
us was successful and we could not obtain a license on acceptable terms or
license a substitute technology or redesign to avoid infringement, our business,
financial condition and results of operations would be materially adversely
affected.
Global economic uncertainty may affect the capital expenditures of our
customers.
The EAI software market could be negatively impacted by certain generic
factors, including global economic difficulties and uncertainty, reductions in
capital expenditures by large customers, and increasing competition. These
factors could in turn give rise to longer sales cycles, deferral or delay of
customer purchasing decisions, and increased price competition. The presence of
such factors in the EAI software market could adversely affect our operating
results.
Year 2000 risks may result in material adverse effects on our business.
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, in a little over a
year, computer systems and/or software products used by many companies may need
to be upgraded to comply with such year 2000 requirements. While we have
assessed our products, services and internal systems, certain internal financial
packages have not yet been implemented and may require further assessment by us.
We believe we are currently expending sufficient resources to review our
products and services, as well as our internal management information system in
order to remedy those products, services and systems that are not year 2000
compliant. We expect such modifications will be made on a timely basis and we do
not believe that the cost of such modifications will have a material effect on
our operating results. There can be no assurance, however, that we will be able
to modify such products, services and systems in a timely and successful manner
to comply with the year 2000 requirements, which could have a material adverse
effect on our operating results. Moreover, we believe that some customers may be
purchasing our products as an interim solution to their year 2000 needs until
their current suppliers reach compliance. Conversely, year 2000 issues could
cause a significant number of companies, including our current customers, to
reevaluate their current system needs and as a result consider switching to
other systems and suppliers. Any of the foregoing could result in a material
adverse effect on our business, operating results and financial condition.
Additionally, during the next twelve months there is likely to be an increased
customer focus on addressing year 2000 issues, creating the risk that customers
may reallocate capital expenditures to fix year 2000 problems of existing
systems. If customers defer purchases of our software because of such a
reallocation, it could adversely affect our operating results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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Our stock price has been highly volatile.
The trading price of our common stock has fluctuated significantly since
our initial public offering in June 1997. In addition, the trading price of our
common stock could be subject to wide fluctuations in response to quarterly
variations in operating results, announcements of technological innovations or
new products by 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 is scheduled to be 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 2. PROPERTIES.
We lease facilities located in Englewood, Colorado, which provide for
approximately 47,300 square feet of office space and contain our principal
executive, administrative, engineering, sales, marketing, customer support and
research and development functions. Such leases expire between December 1999 and
June 2000. We also lease approximately 8,900 square feet of office space in a
building in Manhattan, New York, approximately 6,800 square feet of office space
in London, England, approximately 55,000 square feet of office space in Pacheco,
California, and approximately 500 square feet of office space in Sydney,
Australia. We have leased approximately 42,300 additional square feet in
Englewood, Colorado, which we expect to occupy in September 1999. We believe
that our existing facilities, together with such additional space we have
committed to lease, will be adequate for the next 12 months and that sufficient
additional space will be available as needed thereafter.
In addition, we maintain secure Web servers which contain our and our
customers' confidential information. Our operations are dependent in part upon
our ability to protect our 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 our and our customers'
confidential or critical business information. Any such break-in or damage or
failure that causes interruptions in our operations could materially adversely
affect our business, financial condition and results of operations.
ITEM 3. LEGAL PROCEEDINGS.
As of the date hereof, there is no material litigation against us. From
time to time, we are a party to litigation and claims incident to the ordinary
course of business. While the results of litigation and claims cannot be
predicted with certainty, we believe that the final outcome of such matters will
not have a material adverse effect on our business, financial condition and
operating results. In December 1998, we filed a Declaratory Judgment Action in
the Federal District Court for Colorado to resolve the use of the marks "NEON,"
New Era of Networks, Inc., NEONet and NEONSOFT.
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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 1998.
EXECUTIVE OFFICERS OF REGISTRANT
Our executive officers and their ages as of March 8, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
George F. (Rick) Adam, Jr. ............... 52 Chairman of the Board, President and Chief
Executive Officer
Harold A. Piskiel......................... 52 Executive Vice President, Chief Technology
Officer
Stephen E. Webb........................... 50 Senior Vice President and Chief Financial
Officer
Robert I. Theis........................... 37 Senior Vice President and Chief Marketing
Officer
Frederick T. Horn......................... 45 Senior Vice President of Product
Development and Client Services
Leonard M. Goldstein...................... 51 Senior Vice President, Senior Counsel and
Secretary
Frank A. Russo, Jr. ...................... 54 President of Sales and Field Operations,
North America
Peter Hoversten........................... 43 Senior Vice President, Product Strategy
Michael E. Jaroch......................... 54 Senior Vice President of Human Resources
James C. Parks............................ 55 Vice President of Finance and Controller
Nicholas R. Sedgwick...................... 34 Chief Executive, International
Michael T. Donaldson...................... 40 Senior Vice President, Worldwide Marketing
Steven Lazarus............................ 67 Director
Mark L. Gordon............................ 48 Director
James Reep................................ 47 Director
Elisabeth W. Ireland...................... 41 Director
Patrick J. Fortune........................ 51 Director
Joseph E. Kasputys........................ 62 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
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HP Software Business Unit. Mr. Webb holds a B.A. degree from Stanford University
and an M.B.A. degree from the Harvard Graduate School of Business.
Mr. Theis has served as Senior Vice President and Chief Marketing Officer
since October 1996. Prior to joining the Company, Mr. Theis served as Managing
Director of the Worldwide Financial Services Industry Group of Sun Microsystems,
Inc. from April 1986 to October 1996. Prior to joining Sun Microsystems, Mr.
Theis served as the workstation program manager for Silicon Graphics. Mr. Theis
received a B.S. degree from the University of Pittsburgh, Pennsylvania.
Mr. Horn has served as Senior Vice President of Product Development and
Client Services since joining the Company in July 1996. From January 1994 to
July 1996, Mr. Horn was a partner with Ernst & Young, LLP in the Management
Consulting Group, where he specialized in financial industry consulting. From
February 1992 through December 1993, Mr. Horn served as a Managing Director of
SHL Systemhouse, a software services firm. Prior to joining SHL Systemhouse, Mr.
Horn served as a Vice President of Goldman, Sachs & Co. Mr. Horn received his
B.A. degree from Northwestern University.
Mr. Goldstein has served as Senior Vice President, Senior Counsel and
Secretary since joining the Company in July 1996. From 1976 to July 1996, Mr.
Goldstein practiced law privately with the firm of Feder, Morris, Tamblyn and
Goldstein, for which firm he served as Managing Partner and President. Mr.
Goldstein holds a B.A. degree from American University and a J.D. degree from
the State University of New York at Buffalo School of Law.
Mr. Russo has served as President of Sales and Field Operations, 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, Product Strategy since
August 1998. From May 1, 1997 to August 1998, he served as Senior Vice
President, Application Development and Field Operations. 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. Sedgwick has served as Chief Executive, International of the Company
since July 1998. He served as Managing Director, Europe, from September 1997 to
July 1998. From 1993 to September 1997, Mr. Sedgwick served as President and
Chief Executive Officer of Menhir. Mr. Sedgwick holds a B.A. degree from the
University of East London.
Mr. Donaldson has served as Senior Vice President, Worldwide Marketing,
since joining the Company in December 1998. Prior to joining the Company, Mr.
Donaldson served as Vice President of Technical Marketing for CrossWorlds
Software, Inc. from June 1998 to November 1998 and as Vice President of
Marketing from April 1996 to June 1998. Prior to joining CrossWorlds Software,
Mr. Donaldson served from 1989 to March 1996 in several capacities for Sybase,
Inc., most recently as Director, Technology and Business Planning. Mr. Donaldson
holds a B.S. degree and an M.S. degree from Virginia Tech.
18
<PAGE> 20
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.
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 a 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.
Mr. Kasputys has served as a Director of the Company since July 1998. Mr.
Kasputys has served as Chairman, President and Chief Executive Officer of
Primark Corporation. He currently serves as a Director of Lifeline Systems. Mr.
Kasputys holds a B.A. degree from Brooklyn College and an M.B.A. degree from the
Harvard Graduate School of Business.
19
<PAGE> 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The common stock of our Company has been traded on the Nasdaq National
Market under the symbol "NEON" since our initial public offering on June 18,
1997. Prior to that time, there was no public market for our common stock. The
following table sets forth the high and low sale prices per share of our common
stock for the periods indicated. All prices have been restated to reflect a
two-for-one stock split that was effected in the form of a 100% stock dividend
to stockholders of record as of November 23, 1998.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1997
Second Quarter (from June 18, 1997)....................... $ 8.63 $ 7.32
Third Quarter............................................. $ 8.75 $ 6.75
Fourth Quarter............................................ $ 7.25 $ 5.38
1998
First Quarter............................................. $12.44 $ 4.75
Second Quarter............................................ $16.50 $11.50
Third Quarter............................................. $23.44 $14.31
Fourth Quarter............................................ $45.19 $14.06
</TABLE>
As of March 8, 1999, there were 174 holders of record of our common stock.
Because many of our 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. We have never
declared or paid any cash dividends on our common stock. Because we currently
intend to retain all future earnings to finance future growth, we do not
anticipate paying any cash dividends in the foreseeable future.
In connection with our acquisition of CAI, an additional 391,138
unregistered shares, valued at $15.6 million, were issued to the former
shareholders of CAI in December 1998 upon the attainment of certain performance
criteria. The shares were issued pursuant to an exemption from registration
requirements of the Securities Act afforded by Section 4(2) of the Securities
Act. The stockholders of CAI had access to all relevant information regarding
NEON necessary to evaluate the investment and each stockholder represented that
the shares were being acquired for investment intent.
20
<PAGE> 22
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ---------- ---------- -----
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Software licenses............... $ 40,976 $ 15,970 $ 3,383 $ -- $ --
Services and maintenance........ 24,838 6,676 3,762 1,271 149
----------- ----------- ---------- ---------- -----
Total revenues.................... 65,814 22,646 7,145 1,271 149
Cost of revenues.................. 14,607 5,343 3,328 751 85
----------- ----------- ---------- ---------- -----
Gross profit...................... 51,207 17,303 3,817 520 64
Loss from operations.............. (12,521) (4,251) (5,733) (1,490) (690)
Net loss.......................... $ (8,499) $ (3,507) $ (5,672) $ (1,503) $(719)
=========== =========== ========== ========== =====
Net loss per common share, basic
and diluted(1).................. $ (0.38) $ (0.32) $ (2.10) $ (0.57)
=========== =========== ========== ==========
Weighted average shares of common
stock outstanding(2)............ 22,277,472 10,958,302 2,706,552 2,617,994
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents, short-term
and long-term investments....... $ 196,091 $ 22,724 $ 3,387 $ 1,135 $ 127
Working capital (deficit)......... 195,856 25,928 2,586 1,557 (55)
Total assets............ 298,678 40,229 7,073 2,209 333
Long-term obligations............. -- -- 442 318 780
Stockholders' equity (deficit).... 275,615 34,731 3,515 1,591 (718)
Cash dividends declared per common
share........................... -- -- -- -- --
</TABLE>
- ---------------
(1) The 1998 loss includes acquisition-related charges of $19.4 million for
in-process research and development and amortization of acquired
intangibles. Excluding these charges and related estimated tax benefit of
approximately $1.4 million, we generated net income of approximately $9.5
million, or $.38 per share based on 25,472,383 diluted weighted average
shares outstanding. Exclusive of 1997 acquisition-related charges of $2.7
million for in-process research and development and amortization of acquired
intangibles, our net loss was $841,000, or $.08 per share.
(2) All share and per share information has been adjusted to reflect a
two-for-one stock split that was effected in the form of a 100% stock
dividend to stockholders of record as of November 23, 1998.
21
<PAGE> 23
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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," "expect," "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,
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 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.
The following table sets forth the percentages that selected items in the
Consolidated Statements of Operations bear to total revenues.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Revenues:
Software licenses......................................... 62% 71% 47%
Services and maintenance.................................. 38% 29% 53%
--- --- ---
Total revenues.................................... 100% 100% 100%
Cost of revenues:
Cost of software licenses*................................ 4% 6% 30%
Cost of services and maintenance*......................... 52% 67% 61%
--- --- ---
Total cost of revenues............................ 22% 24% 47%
Operating expenses:
Sales and marketing....................................... 33% 39% 62%
Research and development.................................. 24% 34% 51%
General and administrative................................ 10% 10% 21%
Charges for acquired in-process research and
development............................................ 27% 11% --
Amortization of intangibles............................... 3% 1% --
--- --- ---
Total operating expenses.......................... 97% 95% 134%
--- --- ---
Loss from operations........................................ (19)% (19)% (80)%
Other income (expense), net................................. 4% 3% 1%
--- --- ---
Loss before provision for income taxes...................... (15)% (16)% (79)%
Income tax benefit.......................................... 2% -- --
--- --- ---
Net loss.................................................... (13)% (16)% (79)%
=== === ===
Net income (loss), excluding charges for acquired in-process
research and development and amortization of
acquisition-related intangibles as adjusted for their
respective tax effects.................................... 14% (4)% (79)%
=== === ===
</TABLE>
- ---------------
* As a percentage of Software licenses and Services and maintenance revenues,
respectively.
OVERVIEW
We began operations in January 1994 to develop, market and support
enterprise software for application integration. In 1994 and 1995, our 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 our NEONet software in
January 1996. Since such time, a substantial portion of our revenues have been
attributable to licenses of NEONet and related services. In November 1996, we
commenced shipment to customers of Release 3.0 of NEONet, which provided
additional capabilities for effective enterprise-wide application integration.
22
<PAGE> 24
In June 1997, we completed our initial public offering and issued 6,348,000
shares of common stock, and received net proceeds of approximately $34.3
million. In May and December 1998, we completed follow-on offerings and issued
4,757,000 and 4,780,000 shares of our common stock, respectively, and received
net proceeds of approximately $50.6 million and $153.7 million, respectively.
In September 1997, we 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. In June 1998, we acquired all of
the outstanding capital stock of MSB, a developer and marketer of trading floor
information systems. The aggregate consideration paid was $4.8 million, of which
$1.2 million was paid in cash and approximately $3.6 million was paid through
the issuance of 276,924 unregistered shares of our common stock. In September
1998, we acquired all of the outstanding capital stock of CAI, a developer and
marketer of enterprise application software and services. The aggregate
consideration was paid as follows: approximately $21.0 million in cash, $2.0
million in a short-term note payable to CAI shareholders and $33.6 million
through the issuance of 1,271,200 unregistered shares of our common stock. All
of these acquisitions were accounted for under the purchase method of
accounting.
RESULTS OF OPERATIONS FOR FISCAL YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Revenues
Our revenues increased from $7.1 million in 1996 to $22.6 million in 1997,
primarily reflecting an increase in software license revenues as we sold to a
greater number of customers and expanded internationally. Revenues increased
from $22.6 million in 1997 to $65.8 million 1998, resulting from increased
direct channel revenue, increased professional services revenue and the
expansion of our product lines through both internal development and
acquisitions.
Software license revenues grew from $3.4 million in 1996 to $16.0 million,
or 71% of total revenue, in 1997 and to $41.0 million, or 62% of total revenue,
in 1998. The increase in software license revenues reflected an increase in
market awareness and acceptance of our products, expansion of international
sales resources, the continued growth of an installed base of accounts to serve
as references for new customers, repeat business by existing customers, and
expanded functionality of the NEONet suite of products. In December 1997, we
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 our products.
Under the terms of the agreement, both NEON and IBM began selling the resulting
MQIntegrator product in May 1998. Our royalties from sales of MQIntegrator by
IBM were approximately $5.2 million, or 13% of total software license revenues
in 1998. Total license revenue for direct sales of MQIntegrator were
approximately $5.8 million, or 14% of total software license revenue in 1998. We
expect that future software license revenues will include the NEONet suite of
products, including the MQIntegrator product, format templates, and new products
internally developed and acquired.
Services and maintenance revenues grew from $3.8 million, or 53% of total
revenues, in 1996 to $6.7 million, or 29% of total revenues, in 1997, to $24.8
million, or 38% of total revenues, in 1998. Services and maintenance revenues
grew 77% in 1997 compared to 1996, reflecting service engagements associated
with the growing sales of the NEONet product. Services and maintenance revenues
grew $18.2 million, or 272% in 1998, compared to 1997, due to increased services
and maintenance revenue associated with recent acquisitions, growing maintenance
revenue streams of the NEONet suite of products, and increased emphasis on sales
of our implementation and development services.
In 1997 and 1998, our top ten customers accounted for 56% and 38% of total
revenues, respectively. For the years ended December 31, 1997 and 1998, our
largest customer accounted for 14% and 10% of total revenues, respectively. To
date, a significant portion of our revenues have been derived from sales to
large banks and financial institutions. For the years ended December 31, 1997
and 1998, sales to banks and financial institutions accounted for 72% and 57% of
total revenues, respectively.
23
<PAGE> 25
COST OF REVENUES
Cost of revenues consists of costs of software licenses and costs of
services and maintenance. As a percentage of total revenues, total cost of
revenues declined from 47% in 1996, to 24% in 1997, to 22% in 1998. The decline
reflects the increasing mix of higher-margin software license sales, net of an
increase in royalty expense associated with the sale of the jointly developed MQ
Integrator product by our sales force.
Cost of software licenses consists primarily of royalty payments. We had an
agreement to pay royalties to Merrill Lynch on NEONet license revenue until such
royalties reached a cumulative total of $1.9 million. We accrued royalties at
30% of NEONet license fees in 1996 and 10% of NEONet license fees in 1997,
reflecting our revised agreement with Merrill Lynch & Co. during 1997. As a
result, cost of software licenses was approximately 30% of software license
revenue in 1996. In the fourth quarter of 1997, we met the cumulative $1.9
million royalty requirement, and cost of software licenses in 1997 fell to
approximately 6% of software license revenue. In May of 1998, with the roll-out
of the jointly-developed MQIntegrator product, we began paying royalties to IBM
for sales of MQIntegrator made by our direct sales force. In 1998, a significant
portion of cost of software licenses were attributable to this royalty
obligation. In 1999, our royalty obligation to IBM is expected to increase. In
August of 1998, we began accruing royalties to JP Morgan on license revenue
collected for the sales of Business Event Manager. Our obligation under this
arrangement continues until we have paid cumulative royalties of $3,750,000.
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 61%, 67% and 52% in
1996, 1997 and 1998, respectively. The higher percentage cost in 1997 reflected
the use, at higher cost, of subcontract labor on certain engagements. We may
continue to use subcontractors for the delivery of professional services from
time to time.
OPERATING EXPENSES
Sales and Marketing
Sales and marketing expenses consist primarily of salaries for sales and
marketing personnel, commissions, travel, and promotional expenses. Sales and
marketing expenses were $4.4 million, $8.8 million and $21.9 million,
representing 62%, 39% and 33% of total revenues, respectively, in 1996, 1997 and
1998. These increases were due primarily to our expansion of overall sales and
marketing resources and infrastructure, including international expansion in
1997. The increase in absolute dollars from 1997 to 1998 of $13.1 million, or
149%, is due primarily to the increased sales commission rate for sales
professionals who have achieved and surpassed their individual annual sales
quotas for 1998. In addition, we continued to expand the sales team responsible
for supporting indirect channel sales. We expect to continue to expand the
direct sales force and professional marketing staff, further increase our
international presence, and continue to develop our indirect sales channels and
increase promotional activity. Accordingly, we expect sales and marketing
expense to continue to grow in absolute dollars.
Research and Development
Research and development expenses include amounts associated with the
development of new products, enhancements of existing products and quality
assurance activities. The research and development 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 $3.7 million, $7.7 million, and $15.8 million, representing 51%,
34% and 24% of total revenues, respectively, in 1996, 1997 and 1998. The
increase in research and development expenses is primarily attributable to
hiring additional technical personnel engaged in software development
activities. We currently anticipate that research and development expenses may
continue to increase in absolute dollars as we continue to commit substantial
resources to new product development.
24
<PAGE> 26
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, and administrative
functions. General and administrative expenses were $1.5 million, $2.3 million
and $6.6 million, representing 21%, 10% and 10% of total revenues, respectively,
in 1996, 1997 and 1998. General and administrative expenses grew in absolute
dollars as we added personnel to all administrative areas. We expect general and
administrative expenses to continue to grow in absolute dollars from expected
increases in personnel, implementation of additional management information
systems associated with our business growth, and continuation of our
international expansion.
Charge for Acquired In-Process Research and Development/Amortization of
Intangibles
Based on independent appraisals of the net assets acquired, $2.6 million,
$3.7 million and $13.9 million were allocated to in-process research and
development projects and were charged to operations in connection with the
acquisition of Menhir in September 1997, MSB in June 1998 and CAI in September
1998, respectively. Also in connection with these acquisitions, we allocated
approximately $7.0 million to marketable software products acquired which is
being amortized over periods of three to five years, and approximately $45.9
million to goodwill which is being amortized over periods of seven to ten years.
Amortization expense of approximately $66,000 and $1.8 million was recorded in
1997 and 1998, respectively. See "In-Process Research and Development Costs"
below.
Other Income (Expense), Net
We recorded net other income of $2.7 million in 1998. This compares to net
other income of $745,000 in 1997 and $61,000 in 1996. The increase in net other
income in 1997 and 1998 resulted primarily from the interest earned on cash
invested from the proceeds of our public offering in June 1997 and our follow-on
offerings in May and December 1998. We anticipate that interest income will
decline in future periods as cash balances may be used to fund potential future
acquisitions and our ongoing operations.
Income Tax Benefit
We reported no income tax expense in 1996 and 1997. Our deferred tax assets
at December 31, 1996 of $2.7 million were offset by a valuation allowance of the
same amount. As of December 31, 1997, deferred tax assets of approximately $3.4
million were also fully offset by a valuation allowance of an equivalent amount.
During 1998, our deferred tax assets increased by about $5.6 million 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 is likely that we will realize at
least $5.0 million of our deferred tax assets and the valuation allowance was
adjusted to $4.0 million. At December 31, 1998, our balance sheet reflects net
deferred tax assets of approximately $5.0 million, equal to the deferred benefit
recognized as part of the 1998 provision for income taxes. The deferred benefit
is offset by a current provision of $3.7 million, consisting of approximately
$500,000 of estimated foreign and state taxes currently payable and a $3.2
million charge to transfer to additional paid-in capital the tax benefit
realized from stock options exercised. Thus we reported an income tax benefit of
approximately $1.3 million for the year ended December 31, 1998.
Net Loss
We reported a net loss of $8.5 million, or $.38 per share for the year
ended December 31, 1998. The loss includes acquisition-related charges of $19.4
million for in-process research and development and amortization of acquired
intangibles. Excluding these charges and the related estimated tax benefit of
approximately $1.4 million, we generated net income of approximately $9.5
million, or $.38 per share based on 25,472,383 diluted
25
<PAGE> 27
weighted average shares outstanding. Our net loss for 1997 was $3.5 million, or
$.32 per share. Exclusive of 1997 acquisition-related charges of $2.7 million
for in-process research and development and amortization of acquired
intangibles, our net loss was $841,000, or $.08 per share. The reduced net loss
in 1997, as compared to 1996 when we lost $5.7 million ($2.10 per share)
resulted from significant growth in revenues, particularly from software
licenses, as compared with increases in costs and expenses.
Liquidity and Capital Resources
We had $196.1 million in cash and cash equivalents, short-term and
long-term investments as of December 31, 1998 compared to $22.7 million at the
end of 1997 and $3.4 million at the end of 1996. Notes payable to banks at
December 31, 1998 was zero compared to $67,000 at December 31, 1997 and $1.5
million at December 31, 1996. We maintain a line of credit for borrowings of up
to $2.0 million, which can be used for working capital requirements on an
as-needed basis. No amount was outstanding under this arrangement at December
31, 1998 or 1997.
Cash used in operating activities was $1.5 million in 1998 compared to $8.7
million in 1997 and $5.4 million in 1996. Operating cash flows were
significantly improved each year by the increased profit from the growth of our
business offset by a growth in accounts receivable. We expect this trend to
continue as a function of expected increases in total revenues.
Cash used in investing activities was $36.8 million, including $6.3 million
for net purchases of short-term and long-term investments in marketable
investment securities, $22.2 million for the purchases of MSB and CAI, and $7.3
million for purchases of property and equipment. This compares to cash used in
investing activities of $19.7 million in 1997, including $15.1 million for
investments in marketable investment securities net of related proceeds, $2.8
million for the purchase of Menhir, and $1.8 million for property and equipment.
Cash provided from financing activities was $205.4 million in 1998 compared
to $32.6 million in 1997 and $8.7 million in 1996. In 1998, the Company received
$208.0 million in net proceeds from our public offerings and proceeds from the
exercise of stock options.
We believe that our existing balances of cash and short-term investments in
marketable investment securities will be sufficient to meet our working capital
and capital expenditure needs for at least the next twelve months. We may
require additional sources of funds to continue to grow and support our
business. There can be no assurance that such capital, if needed, will be
available or will be available on terms acceptable to us.
Foreign Currency Risk
We have wholly-owned subsidiaries located in London, England 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.
26
<PAGE> 28
Our Company is a relatively new corporation and, therefore, does not expect
to encounter many Year 2000 computer problems associated with its 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 those utilities (e.g. phone service, public service) 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 an 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.
In-Process Research and Development Costs
During fiscal year 1998, we acquired Century Analysis, Inc. (CAI), and MSB
Consultants (MSB). Acquired in-process research and development (IPR&D) costs
expensed at the date of these acquisitions during 1998 were $13.9 million and
$3.7 million, respectively.
CAI (ACQUIRED SEPTEMBER 1998)
Century Analysis, Incorporated ("CAI") was a privately held software
manufacturer that provides solutions for productivity, connectivity, and
information management to middle- and large-sized enterprises. CAI's products
deliver application-to-application integration, which allows the easy exchange
of data between applications and ensures high quality enterprise data. The
non-invasive nature of CAI products is key to its implementation since it allows
various application integration efforts to move forward without having to modify
any of the applications involved.
27
<PAGE> 29
At the date of acquisition, CAI's research and development ("R&D") efforts
were focused on developing new products and services that would address the
rapidly expanding market opportunities emerging as a result of the Internet's
increasing presence in business organizations. Specifically, CAI was working on
the next generation Impact/TDM product (designed for the mainframe),
component-related products, and other enterprise technology. These projects are
particularly complex due to the component-based integrated nature of CAI's
products and technology. The acquired in-process research and development was
valued at $13.9 million based on an analysis of forecasted income and $50.7
million of the purchase price was allocated to goodwill, developed technology
and acquired workforce.
As of the date of acquisition, CAI had invested $4.9 million in the IPR&D
identified above. Development of the acquired in-process technology into
commercially viable products and services required efforts principally related
to the completion of all planning, designing, coding, prototyping, scalability
verification, and testing activities necessary to establish that the proposed
technologies would meet their design specifications, including functional,
technical, and economic performance requirements. 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 December 31, 1998, we had expended approximately 8.5
man-months on the acquired projects in total. Currently, we are contemplating
various strategies with respect to the continued development of the IPR&D
projects. With respect to certain projects, we are determining whether we will
develop products as stand-alone products, or alternatively whether the
technology will be integrated into portions of our existing products.
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,
construction of the various codes and surrounding architectures.
At December 31, 1998, we project the remaining costs required to complete
the next generation Impact/ TDM project will be approximately $1.7 million. We
believe that the work performed as of the acquisition date had encompassed many
of the critical elements necessary to complete this project, particularly due to
the importance associated with the underlying design and architecture.
Technological feasibility had not been reached by the end of 1998. 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. We envision that during the first half of 1999, we
will know if this next generation product will be released as a stand alone
product, or that the development undertaken will be incorporated as part of a
common product architecture. We spent approximately $30,000 through the end of
1998 on further design and architecture efforts.
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 spent approximately $45,000 through December 31,
1998 on Component related projects, including the evaluation of incorporating
Component technology within a set of integrated NEON products. Technology from
Component related projects was incorporated into a NEON product that has a
projected release date during the second 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 it was projected that additional efforts would need to be
accomplished in a timely manner and would cost approximately $1.6 million. We
spent approximately $175,000 on these projects, with XML technology advancing to
the testing stage on several modules, and the CORBA technology being brought
into a stand alone adapter product by year end 1998.
MSB (ACQUIRED JUNE 1998)
MSB supplies software to provide greater flexibility, inter-operability,
and enhanced functionality for the financial industry's use of financial data,
as transmitted from various providers (such as Reuters and Telerate).
At the date of acquisition, MSB's R&D efforts were focused on developing a
new generation of products and services that would address the rapidly expanding
market opportunities emerging as a result of the Internet's increasing presence
in business organizations. Specifically, MSB was working on the Price Server
(with new
28
<PAGE> 30
capabilities), aRTe (designed for a Windows NT environment), and Quantum Leap.
These projects are particularly complex due to the modular nature of MSB's
products and technology.
The acquired in-process research and development was valued at
approximately $3.7 million based on an analysis of forecasted income.
As of the date of acquisition, MSB had invested $3.1 million in the IPR&D
identified above. Development of the acquired in-process technology into
commercially viable products and services required efforts principally related
to the completion of all planning, designing, coding, prototyping, scalability
verification, and testing activities necessary to establish that the proposed
technologies would meet their design specifications, including functional,
technical, and economic performance requirements. We estimated that an
additional $850,000 would be required over the next 18 to 24 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. 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.
Significant development tasks for the Price Server product that remain
include the implementation of Web and Java technology; coding additional modules
and internal tests, system testing and documentation. We believe that the work
performed as of the acquisition date had encompassed many of the critical
elements needed to complete this project. We estimated that approximately $1.5
million in development costs had been incurred as of the acquisition date and
approximately $220,000 would be required to complete the remaining development
tasks. We spent approximately $75,000 through December 31, 1998. The Pricing
module for banking applications is expected to be generally available during the
first half of 1999.
ARTe is currently being tested, but additional steps required to complete
the products include: i) additional development for Web browser, Java support,
and e-commerce functions, ii) stress testing, and iii) testing at customer
sites. In order to achieve these milestones, we estimated that MSB had spent
approximately $1.5 million on this project as of June 1998. Remaining R&D
expenditures were estimated to be approximately $230,000. We spent approximately
$15,000 through December 1998. ARTe's functionality will be incorporated into a
NEON product introduction in early 1999, and further enhanced during the
remainder of 1999.
Quantum Leap is a middleware-based product that provides a framework for
sending information from legacy (financial) systems to the client. The first set
of product suites will be for transferring market data to client platforms, with
emphasis on thin clients. Additional functionality will be added allowing MSB to
serve new market sectors including e-commerce, retail and others during the
years 1999 through 2002. Quantum Leap was designed conceptually and a number of
detailed specifications had been completed at the time of purchase. It was
estimated that it would require approximately four full-time developers to
complete this project, that $75,000 had been incurred as of the acquisition
date, and that approximately $400,000 would be required to complete the product.
We spent approximately $180,000 through December 1998 and released the first
version in the fourth quarter of 1998.
Evaluation of Completion Efforts
To ensure a proper reflection of the value of the R&D achievements as of
the acquisition date, the overall forecasts associated with the R&D projects
reflected only the contribution of what had been completed as of the acquisition
dates. The relative contribution made to each major R&D effort was assessed and
the risks associated with the projects' completion were reflected in the
corresponding discount rates. To evaluate these results, an additional analysis
was developed that explicitly excluded the efforts to be completed on the
development efforts underway, but reflected the accomplishments made as of the
valuation date towards the ultimate completion of the projects. The relative
contribution made on the R&D efforts was estimated based on a variety of
factors, including absolute development costs incurred to date, relative time
spent on the projects, and a detailed analysis of each of the primary tasks
completed versus the tasks required to complete the efforts and the associated
risks. Milestones for the in-process projects were also examined as of the
acquisition date. For each project, our engineers evaluated the critical
milestones. This included comprehensive analysis of each acquired companies'
29
<PAGE> 31
R&D to clarify the technological hurdles that the development team had overcome
at the time of the acquisition as well as the hurdles that the engineers faced
going forward to complete the remaining development efforts. From this analysis,
the overall significance of tasks completed versus tasks remaining was assessed.
Based on the technical achievements completed as of the respective purchase
dates, milestone percentages were determined to be approximately 25%, 80%, and
30% for CAI's next generation Impact, Component-related, and other Enterprise
Technology R&D, respectively. For MSB, the milestone percentages were
approximately 80% for Price Server, 80% for aRTe, and 45% for Quantum Leap.
Valuation Methodology
The valuations of the respective acquired IPR&D included, but were not
limited to, an analysis of (1) the market for CAI and MSB products; (2) the
completion costs for the projects; (3) the expected cash flows attributable to
the in-process research and development projects; and (4) the risks associated
with achieving such cash flows. The assumptions underlying the cash flow
projections were derived from investment banking reports, independent analyst
reports, NEON, CAI, and MSB company records, and discussions with the management
of both companies. Primary assumptions such as revenue growth and profitability
were compared to indications of similar companies as well as to indications from
industry analyst reports, to determine the extent to which these assumptions
were supportable. We did not assume in our valuation any material change in our
profit margins as a result of the acquisition and did not assume any material
increases in selling, general and administrative expenses as a result of the
acquisition. We did not anticipate any expense reductions or other synergies.
The basis of the acquisition was an attempt to enhance our competitive position
by offering a broader product line, including applications and functionality
based upon the middleware software technology.
We did not break down revenues attributable specifically to CAI- and
MSB-derived products during 1998, but plan to begin doing so in 1999. 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, revenue from Quantum Leap was
slightly under forecast due to a December shipping date against a forecasted
October, but revenue from other MSB products was higher than plan. However,
NEON's sales channel efforts on marketing the Quantum Leap product are further
along than planned, so we still concur with the estimates used in the valuation.
There was no revenue forecasted or realized for CAI products under development
during 1998.
Because we do not currently account for expenses by product, it is not
possible to determine the precise actual expenses associated with the technology
acquired from CAI and MSB. However, we currently believe that expenses
associated with completing the purchased in-process research and development and
integrating the technology with our existing products 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. 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 acquisition
resulted in any material changes in our profit margins or in selling, general
and administrative expenses.
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
applied to projected cash flows from products under development were 35% for CAI
and 25% to 32% for MSB. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of our Company due to adverse
changes in financial and commodity market prices and rates. We are
30
<PAGE> 32
exposed to market risk in the area of changes in foreign currency exchange rates
as measured against the United States dollar, which risk is directly related to
our normal operating activities. Historically, and as of December 31, 1998, we
have not used derivative instruments or engaged in hedging activities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our 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.
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 "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement for the 1999 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, 1998 (the "1999 Proxy
Statement"), 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
Registrant" 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 1999 Proxy Statement.
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 1999 Proxy Statement.
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 1999 Proxy
Statement.
31
<PAGE> 33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 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>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Share Purchase Agreement dated June 12, 1998 by and among
Registrant, MSB Consultants Limited and the shareholders
of MSB (which is incorporated herein by reference to
Exhibit 2 to the Registrant's Current Report on Form 8-K
filed June 26, 1998).
2.2 -- Share Acquisition Agreement dated September 30, 1998 by
and among Registrant and the shareholders of Century
Analysis Incorporated (which is incorporated herein by
reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K filed October 14, 1998).
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 (which is incorporated by
reference to Exhibit 3.2 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997).
3.3 -- Certificate of Determination of Rights, Preferences and
Privileges of Series A Preferred Stock (included in
Exhibit 4.1).
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).
4.2 -- Preferred Shares Right Agreement, dated as of August 5,
1998 between the Registrant and Bank Boston N.A.,
including the Certificate of Designator, the Form of
Rights Certificate and the Summary of Rights attached
thereto as Exhibits A, B and C, respectively (which is
incorporated herein by reference to Exhibit 1 to the
Registrant's Registration Statement on Form 8-K/A
Amendment No. 1 filed August 17, 1998).
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).
</TABLE>
32
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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* -- 1998 Nonstatutory Stock Option Plan and related
agreements.
10.6 -- 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).
10.7 -- 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).
10.8 -- 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).
10.9 -- 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).
10.10 -- 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).
10.11 -- Standard Commercial Lease Agreement between the
Registrant and Greenwood Plaza Partners, LLC dated October
9, 1998.
10.12 -- 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).
10.13 -- 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).
23.1 -- Consent of Arthur Andersen LLP.
24.1 -- Power of Attorney (which is included on page 34 herein).
27 -- Financial Data Schedule.
</TABLE>
- ---------------
* Indicates management compensatory plan, contract or arrangement.
(b) Reports on Form 8-K.
1. A Current Report on Form 8-K was filed with the Securities and Exchange
Commission by NEON on October 14, 1998 to report the announcement of the
acquisition of all the outstanding capital stock of Century Analysis
Incorporated ("CAI"), as amended on Forms 8-K/A filed on November 18,
1998 to provide certain pro forma financial information relating to the
business combination with CAI.
33
<PAGE> 35
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 29th day of
March 1999.
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 on March 29, 1999 and in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S> <C>
/s/ GEORGE F. (RICK) ADAM, JR. President and Chief Executive
- ----------------------------------------------------- Officer and Director (principal
George F. (Rick) Adam, Jr. executive officer)
/s/ HAROLD A. PISKIEL Executive Vice President, Chief
- ----------------------------------------------------- Technology Officer and Director
Harold A. Piskiel
/s/ STEPHEN E. WEBB Senior Vice President and Chief
- ----------------------------------------------------- Financial Officer (principal
Stephen E. Webb financial officer)
/s/ JAMES C. PARKS Vice President of Finance and
- ----------------------------------------------------- Controller (principal accounting
James C. Parks officer)
/s/ STEVEN LAZARUS Director
- -----------------------------------------------------
Steven Lazarus
/s/ MARK L. GORDON Director
- -----------------------------------------------------
Mark L. Gordon
/s/ JAMES REEP Director
- -----------------------------------------------------
James Reep
</TABLE>
34
<PAGE> 36
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S> <C>
/s/ ELISABETH W. IRELAND Director
- -----------------------------------------------------
Elisabeth W. Ireland
/s/ PATRICK J. FORTUNE Director
- -----------------------------------------------------
Patrick J. Fortune
/s/ JOSEPH E. KASPUTYS Director
- -----------------------------------------------------
Joseph E. Kasputys
</TABLE>
35
<PAGE> 37
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> 38
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) AND SUBSIDIARIES as of December 31, 1998
and 1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. 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, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
January 26, 1999
F-2
<PAGE> 39
NEW ERA OF NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $174,173,008 $ 7,150,362
Short-term investments in marketable securities........... 10,658,577 10,514,390
Accounts receivable, net of allowance for uncollectible
accounts of $800,000 and $300,000, respectively......... 28,310,275 11,072,850
Unbilled revenue.......................................... 3,124,536 1,667,456
Prepaid expenses and other................................ 2,356,324 1,020,394
Deferred income taxes, net................................ 147,300 --
------------ ------------
Total current assets............................... 218,770,020 31,425,452
------------ ------------
Property and equipment:
Computer equipment and software........................... 9,327,048 2,725,144
Furniture, fixtures and equipment......................... 2,360,538 640,218
Leasehold improvements.................................... 1,569,125 86,563
------------ ------------
13,256,711 3,451,925
Less-accumulated depreciation............................. (2,701,024) (1,036,088)
------------ ------------
Property and equipment, net............................... 10,555,687 2,415,837
Long-term investments in marketable securities.............. 11,259,810 5,059,227
Intangibles, net............................................ 51,876,649 840,679
Deferred income taxes, net.................................. 4,845,500 --
Other assets, net........................................... 1,370,283 487,980
------------ ------------
Total assets....................................... $298,677,949 $ 40,229,175
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 5,650,308 $ 2,171,722
Accrued liabilities....................................... 7,856,926 2,081,959
Current portion of bank borrowings........................ -- 66,963
Deferred revenue.......................................... 9,406,637 1,177,262
------------ ------------
Total current liabilities.......................... 22,913,871 5,497,906
Deferred revenue............................................ 149,137 --
------------ ------------
Total liabilities.................................. 23,063,008 5,497,906
------------ ------------
Commitments and contingencies (Note 8)
Stockholders' equity (Note 6):
Preferred stock, 2,000,000 shares authorized; none issued
or outstanding at December 31, 1998..................... -- --
Common stock, $.0001 par value, 45,000,000 shares
authorized, 30,333,778 and 18,212,314, shares issued and
outstanding as of December 31, 1998 and 1997,
respectively............................................ 3,033 1,822
Additional paid-in capital................................ 295,570,769 46,190,279
Accumulated deficit....................................... (20,016,790) (11,517,978)
Cumulative other comprehensive income (cumulative
translation adjustment)................................. 57,929 57,146
------------ ------------
Total stockholders' equity......................... 275,614,941 34,731,269
------------ ------------
Total liabilities and stockholders' equity......... $298,677,949 $ 40,229,175
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-3
<PAGE> 40
NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Revenues:
Software licenses.................................. $ 40,975,703 $15,969,840 $ 3,382,464
Services and maintenance........................... 24,838,370 6,675,602 3,762,223
------------ ----------- -----------
Total revenues............................. 65,814,073 22,645,442 7,144,687
------------ ----------- -----------
Cost of revenues:
Cost of software licenses.......................... 1,701,458 899,710 1,021,849
Cost of services and maintenance................... 12,906,012 4,442,908 2,306,370
------------ ----------- -----------
Total cost of revenues..................... 14,607,470 5,342,618 3,328,219
------------ ----------- -----------
Gross profit......................................... 51,206,603 17,302,824 3,816,468
------------ ----------- -----------
Operating expenses:
Sales and marketing................................ 21,941,568 8,823,830 4,424,554
Research and development........................... 15,839,483 7,730,411 3,658,493
General and administrative......................... 6,571,100 2,334,185 1,466,594
Charge for acquired in-process research and
development..................................... 17,597,000 2,600,000 --
Amortization of intangibles........................ 1,778,410 65,836 --
------------ ----------- -----------
Total operating expenses................... 63,727,561 21,554,262 9,549,641
------------ ----------- -----------
Loss from operations................................. (12,520,958) (4,251,438) (5,733,173)
Other income, net.................................... 2,743,746 744,805 60,855
------------ ----------- -----------
Loss before provision for income taxes............... (9,777,212) (3,506,633) (5,672,318)
Income tax benefit................................... 1,278,400 -- --
------------ ----------- -----------
Net loss............................................. $ (8,498,812) $(3,506,633) $(5,672,318)
============ =========== ===========
Net loss per common share, basic and diluted......... $ (0.38) $ (0.32) $ (2.10)
============ =========== ===========
Weighted average shares of common stock outstanding
(Note 2)........................................... 22,277,472 10,958,302 2,706,552
============ =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-4
<PAGE> 41
NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<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, 1995.............. 15,352,367 $ 3,875,000 2,673,548 $ 266 $ 18,276 $ (2,302,571)
Issuance of Series C convertible
preferred stock for cash of
$7,510,000, net of issuance costs of
$36,456.............................. 4,664,596 7,510,000 -- -- -- (36,456)
Issuance of common stock to an employee
in exchange for services............. -- -- 35,554 4 39,996 --
Issuance of common stock upon exercise
of stock options..................... -- -- 9,080 2 10,218 --
Issuance of common stock options and
warrants in exchange for services.... -- -- -- -- 72,917 --
Net loss......................... -- -- -- -- -- (5,672,318)
---------- ----------- ---------- ------ ------------ ------------
BALANCES, December 31, 1996.............. 20,016,963 11,385,000 2,718,182 272 141,407 (8,011,345)
Issuance of common stock upon initial
public offering, net of issuance
costs of $3,861,852.................. -- -- 6,348,000 634 34,225,513 --
Conversion of preferred stock --
Series A............................. (9,169,028) (2,000,000) 4,075,122 408 1,999,592 --
Series B............................. (6,183,339) (1,875,000) 2,748,148 274 1,874,726 --
Series C............................. (4,664,596) (7,510,000) 2,073,148 208 7,509,792 --
Issuance of common stock upon exercise
of stock options..................... -- -- 249,714 26 439,249 --
Cumulative translation adjustment...... -- -- -- -- -- --
Net loss......................... -- -- -- -- -- (3,506,633)
---------- ----------- ---------- ------ ------------ ------------
BALANCES, December 31, 1997.............. -- -- 18,212,314 1,822 46,190,279 (11,517,978)
Issuance of common stock in public
offerings, net of issuance costs of
$12,308,142.......................... -- -- 9,537,000 954 204,321,780 --
Issuance of common stock upon exercise
of stock options and warrants........ -- -- 862,064 85 2,774,215 --
Issuance of common stock in business
combinations......................... -- -- 1,548,124 155 38,151,812 --
Tax benefit related to the exercise of
stock options........................ -- -- -- -- 3,225,488 --
Issuance of common stock in connection
with Employee Stock Purchase Plan.... -- -- 174,276 17 907,195 --
Cumulative translation adjustment...... -- -- -- -- -- --
Net loss......................... -- -- -- -- -- (8,498,812)
---------- ----------- ---------- ------ ------------ ------------
BALANCES, December 31, 1998.............. -- $ -- 30,333,778 $3,033 $295,570,769 $(20,016,790)
========== =========== ========== ====== ============ ============
<CAPTION>
OTHER
COMPREHENSIVE
INCOME TOTAL
------------- -------------
<S> <C> <C>
BALANCES, December 31, 1995.............. $ -- $ 1,590,971
Issuance of Series C convertible
preferred stock 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
Issuance of common stock in public
offerings, net of issuance costs of
$12,308,142.......................... -- 204,322,734
Issuance of common stock upon exercise
of stock options and warrants........ -- 2,774,300
Issuance of common stock in business
combinations......................... -- 38,151,967
Tax benefit related to the exercise of
stock options........................ -- 3,225,488
Issuance of common stock in connection
with Employee Stock Purchase Plan.... -- 907,212
Cumulative translation adjustment...... 783 783
Net loss......................... -- (8,498,812)
------- ------------
BALANCES, December 31, 1998.............. $57,929 $275,614,941
======= ============
</TABLE>
<TABLE>
<CAPTION>
NET LOSS
------------
<S> <C> <C> <C> <C> <C> <C>
Presentation of Comprehensive Income
(Loss):
Year ended December 31, 1996........... $ (5,672,318)
Year ended December 31, 1997........... (3,506,633)
Year ended December 31, 1998........... (8,498,812)
<CAPTION>
OTHER TOTAL
COMPREHENSIVE COMPREHENSIVE
INCOME LOSS
------------- -------------
<S> <C> <C>
Presentation of Comprehensive Income
(Loss):
Year ended December 31, 1996........... $ -- $ (5,672,318)
Year ended December 31, 1997........... 57,146 (3,449,487)
Year ended December 31, 1998........... 783 (8,498,029)
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-5
<PAGE> 42
NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (8,498,812) $ (3,506,633) $(5,672,318)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization........................... 3,459,187 701,636 324,182
Charge for acquired in-process research and
development........................................... 17,597,000 2,600,000 --
Provision for deferred income taxes..................... (4,992,800) -- --
Imputed interest on purchase consideration.............. 90,000 -- --
Issuance of common stock and common stock options for
services.............................................. -- -- 126,417
Loss on sale of property and equipment.................. -- -- 16,943
Changes in assets and liabilities --
Accounts receivable, net.............................. (13,087,311) (7,430,450) (1,639,085)
Unbilled revenue...................................... (918,453) (2,261,319) --
Prepaid expenses and other assets..................... (1,270,191) (1,030,195) (303,759)
Accounts payable...................................... 1,228,156 980,815 309,870
Accrued liabilities................................... 1,794,786 345,003 1,252,820
Deferred revenue...................................... 3,071,143 950,622 151,800
------------ ------------ -----------
Net cash used in operating activities............... (1,527,295) (8,650,521) (5,433,130)
------------ ------------ -----------
Cash flows from investing activities:
Purchases of short-term investments in marketable
securities.............................................. (12,161,058) (10,514,390) (500,000)
Proceeds from sales of short-term investments............. 12,016,871 500,000 102,532
Purchases of long-term investments in marketable
securities.............................................. (6,200,583) (5,059,227) --
Business combinations, net of cash acquired............... (22,160,671) (2,800,000) --
Purchases of equity investments........................... (400,000) -- --
Proceeds from sale of property and equipment.............. -- -- 5,654
Purchases of property and equipment....................... (7,273,860) (1,811,744) (1,131,053)
Purchase of developed software............................ (600,000) -- --
------------ ------------ -----------
Net cash used in investing activities............... (36,779,301) (19,685,361) (1,522,867)
------------ ------------ -----------
Cash flows from financing activities:
Proceeds from issuances of common stock................... 220,312,388 38,527,274 10,220
Common stock issuance costs............................... (12,308,142) (3,861,852) --
Tax benefit related to the exercise of stock options...... 3,225,488 -- --
Proceeds from issuance of preferred stock................. -- -- 7,510,000
Preferred stock issuance costs............................ -- -- (36,456)
Proceeds from note payable to stockholder................. -- -- 104,709
Payments on note payable stockholder...................... -- -- (422,867)
Proceeds from notes payable to banks...................... -- 609,807 2,545,116
Principal payments on notes payable to banks.............. (5,830,772) (2,676,451) (1,002,286)
------------ ------------ -----------
Net cash provided by financing activities........... 205,398,962 32,598,778 8,708,436
------------ ------------ -----------
Effect of exchange rate changes on cash..................... (69,720) -- --
Net increase in cash and cash equivalents................... 167,092,366 4,262,896 1,752,439
Cash and cash equivalents, beginning of period.............. 7,150,362 2,887,466 1,135,027
------------ ------------ -----------
Cash and cash equivalents, end of period.................... $174,173,008 $ 7,150,362 $ 2,887,466
============ ============ ===========
Supplemental cash flow information:
Cash paid during the year for --
Interest................................................ $ 46,675 $ 95,661 $ 25,007
============ ============ ===========
Taxes................................................... $ 370,085 $ -- $ --
============ ============ ===========
Supplemental disclosure of non-cash information:
Common stock issued for business combinations............. $ 38,151,967 $ -- $ --
============ ============ ===========
Accrued business combination costs........................ $ 496,511 $ 20,160 $ --
============ ============ ===========
Accrued deferred offering costs........................... $ 484,665 $ -- $ --
============ ============ ===========
Conversion of preferred stock to common stock............. $ -- $ 11,385,000 $ --
============ ============ ===========
Issuance of common stock to employees in exchange for
services................................................ $ -- $ -- $ 40,000
============ ============ ===========
Issuance of common stock options and warrants in exchange
for services............................................ $ -- $ -- $ 72,917
============ ============ ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-6
<PAGE> 43
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(1) DESCRIPTION OF BUSINESS
New Era of Networks, Inc. and its consolidated subsidiaries (collectively
referred to herein as "NEON" or the "Company") develops, markets and supports
Enterprise Application Integration ("EAI") software and services. The Company's
architectural platform provides organizations with a structured software
platform for the rapid and efficient integration and ongoing maintenance of
disparate systems and applications across the enterprise. The Company's packaged
software solutions support EAI across popular hardware platforms, operating
systems, and database types. NEON has four product offerings: MQSeries
Integrator, NEON Integration Adapters, NEON Integration Options and NEON
Integration Applications.
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. Through December 31, 1998,
the Company has shipped software products or provided integration services to
approximately 700 customers worldwide.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries is their
local currency. Assets and liabilities of international subsidiaries are
translated to U.S. dollars at year-end exchange rates, and income statement
items are translated at average exchange rates for the year. Resulting
translation adjustments are recorded as a separate component of equity. Gains
and losses resulting from foreign currency transactions are included in income.
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 sales of software licenses and
professional service arrangements. 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, determinable and deemed collectible.
Software maintenance revenue related to software licenses is recognized ratably
over the term of each maintenance arrangement. 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. To date, all
progress-to-completion projects have generally been performed over periods of
less than one year. At each reporting date, the Company evaluates each project
and determines whether an accrual for estimated losses is required. 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.
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, 1998 and 1997, the total
deferred revenue was $9,555,774 and $1,177,262, respectively.
F-7
<PAGE> 44
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Service contracts that are material in amount are generally
performed on a time and materials basis. Service contracts performed on a
fixed-fee basis are generally completed in less than 90 days or are routine in
nature.
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 in Marketable Securities
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. Under the criteria
set forth in Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS 115"), debt and
marketable equity securities are required to be classified in one of three
categories: trading, available-for-sale, or held to maturity. The Company's debt
and equity securities qualify under the provisions of SFAS 115 as
available-for-sale. Such securities are recorded at fair value, and unrealized
holding gains and losses, net of the related tax effect, are not reflected in
earnings but are reported as a separate component of stockholders' equity
(deficit) until realized. A decline in the market value of an available-for-sale
security below cost that is deemed other than temporary is charged to earnings
and results in the establishment of a new cost basis for the security. For the
years ended December 31, 1998 and 1997, the effect of adopting SFAS 115 was
immaterial.
Realized gains and losses are determined on the specific identification
method and are reflected in income. Interest on corporate bonds is accrued
through the balance sheet date.
Long-Term Investments in Marketable Securities
Included in long-term investments in the accompanying consolidated balance
sheets are investments in certain debt instruments with maturities are greater
than 12 months. The Company carries such investments at amortized cost as it
intends to hold such investments to maturity. At December 31, 1998 and 1997, the
recorded amounts for long-term investments approximate fair market value.
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...................................... 2-5 years
</TABLE>
Depreciation expense was approximately $1,665,000, $633,000 and $314,000 in
1998, 1997 and 1996, 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
F-8
<PAGE> 45
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Capitalized costs will be amortized based on current and future
revenue for each product with an annual minimum equal to the straight-line
amortization over the remaining estimated economic life of each product, ranging
from three to five years. As of December 31, 1998, the Company had not
capitalized any costs in accordance with this pronouncement.
As of December 31, 1998 and 1997, the Company has recorded approximately
$7,069,000 and $460,000 allocated to software products acquired in business
combinations and purchases, which is included in Intangibles, net in the
accompanying consolidated balance sheets. The Company recognized approximately
$562,000 and $51,000 of amortization expense in 1998 and 1997, respectively,
related to such capitalized costs. Unamortized costs of $7,055,113 and $408,892
are included in intangibles, net as of December 31, 1998 and 1997, respectively.
Goodwill
The Company recorded goodwill in connection with the purchase business
combinations described in Note 3 in the aggregate amount of approximately
$46,053,000 that is being amortized on a straight-line basis over seven- to
ten-year periods. Amortization recognized for 1998 and 1997 was approximately
$1,216,000 and $15,000, respectively. Unamortized costs of $44,821,536 and
$295,240 are included in Intangibles, net in the accompanying consolidated
balance sheets as of December 31, 1998 and 1997, respectively.
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 consolidated 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).
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). The purpose of SFAS 130 is to report a measure of all changes in equity
that result from recognized transactions and other economic events of the period
other than transactions with owners. The Company adopted SFAS 130 during fiscal
1998. The only component of other comprehensive income that has impacted the
Company through December 31, 1998 is cumulative translation adjustments.
F-9
<PAGE> 46
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net Loss Per Common Share
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128"), by retroactively restating loss per
share amounts for all periods presented. Under SFAS 128, basic earnings (loss)
per share is determined by dividing net income (loss) from continuing operations
available to common shareholders by the weighted average number of common shares
outstanding during each period. Diluted earnings per share includes the effects
of potentially issuable common stock, but only if dilutive. The treasury stock
method, using the average price of the Company's common stock for the period, is
applied to determine dilution from options and warrants. The if-converted method
is used for convertible securities. Because of reported losses, there are no
differences between basic and diluted per share amounts for the Company for any
of the years presented.
Potentially dilutive securities excluded under SFAS 128 as antidilutive are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Number of common shares issuable upon --
Conversion of Series Preferred Stock (Note 6).... -- -- 8,896,418
Exercise of outstanding stock options (Note 6)... 5,369,512 4,204,050 2,754,212
</TABLE>
Concentration of Credit Risk
The Company's accounts receivable are concentrated with certain customers
in the financial services industry. During the years ended December 31, 1998 and
1997, the Company recognized approximately 57% and 72%, 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements
In the year 2000, the Company will adopt SFAS No. 133, "Accounting for
Derivative Instruments and for Hedging Activities" ("SFAS 133"). This statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities. Among other things, the statement requires that an
entity recognize all derivative instruments on the balance sheet as either
assets or liabilities, and to account for those instruments at fair value.
Adoption of SFAS 133 is not expected to have a material impact on the Company's
financial position or results of operations.
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," was issued in March 1998. SOP
98-1, among other things, requires that certain costs of internal use software,
whether purchased or developed internally, be capitalized and amortized over the
estimated useful life of the software. SOP 98-1 was adopted by the Company in
1998 and did not have a material impact on the financial position or results of
operations of the Company.
F-10
<PAGE> 47
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SOP 98-5, "Reporting on the Costs of Start-Up Activities," was issued in
April 1998. SOP 98-5 requires, among other things, that the costs related to
start-up activities of a new entity, facility, product or service be expensed.
Adoption of SOP 98-5 is required as of January 1, 1999 and will not have a
material impact on the results of operations of the Company.
Reclassifications
Certain reclassifications have been made in prior years' financial
statements to conform to the 1998 presentation.
(3) BUSINESS COMBINATIONS
Century Analysis Incorporated
Effective as of September 1, 1998, the Company acquired all of the
outstanding capital stock of Century Analysis Inc., a California corporation
("CAI"), by means of a Share Acquisition Agreement by and among CAI, the
shareholders of CAI and the Company.
The aggregate consideration paid by the Company was $41,000,000, payable as
follows: approximately $21,000,000 in cash, approximately $2,018,000 in
short-term notes payable to CAI shareholders, and approximately $18,000,000
through the issuance of 880,062 unregistered shares of the Company's common
stock. The Company also issued stock options exercisable for shares of the
Company's common stock to assume all outstanding CAI stock options valued at
approximately $1,000,000. An additional 391,138 unregistered shares of the
Company's common stock, valued at approximately $15,600,000, were issued in
December 1998 upon the achievement of certain performance criteria by CAI. Fees
and expenses related to the acquisition were approximately $1,500,000. The
acquisition was accounted for under the purchase method of accounting and,
accordingly, the assets, liabilities and operating results of CAI have been
included in the accompanying consolidated financial statements from the
effective date of the acquisition.
An independent valuation of CAI's net assets was performed to assist in the
allocation of the purchase price. Approximately $13,857,000 of the purchase
price represented the intangible value of in-process research and development
projects that had not yet reached technological feasibility. The related
technology has no alternative future use and will require substantial additional
development by the Company. This amount was charged to operations in the quarter
ended September 30, 1998. A portion of the purchase price was also assigned to
marketable software products ($5,814,000) and goodwill ($44,930,000), which are
being amortized on a straight-line basis over five-and ten-year periods,
respectively. CAI's other assets were valued at approximately $6,800,000 and its
liabilities assumed totaled approximately $12,500,000.
MSB Consultants Limited
Effective as of June 1, 1998, the Company acquired all of the outstanding
capital stock of MSB Consultants Limited ("MSB"), a corporation organized under
the laws of the United Kingdom, by means of a Share Purchase Agreement by and
among the shareholders of MSB and the Company.
The aggregate consideration paid by the Company was $4,800,000, of which
$1,200,000 was paid in cash and approximately $3,600,000 was paid through the
issuance of 276,924 unregistered shares of common stock of the Company.
Additional unregistered shares having a total value upon issuance of up to
$3,000,000 may also be issued to shareholders of MSB upon the achievement of
certain performance targets during the two-year period following the closing.
The fees and expenses related to the acquisition were approximately $375,000.
The acquisition was accounted for under the purchase method of accounting and,
accordingly, the assets, liabilities and operating results of MSB have been
included in the accompanying consolidated financial statements from the
effective date of the acquisition.
F-11
<PAGE> 48
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
An independent valuation of MSB's net assets was performed to assist in the
allocation of the purchase price. Approximately $3,740,000 of the purchase price
represented the intangible value of in-process research and development projects
that had not yet reached technological feasibility. The related technology has
no alternative future use and will require substantial additional development by
the Company. This amount was charged to operations in the quarter ended June 30,
1998. A portion of the purchase price was also assigned to marketable software
products ($770,000) and goodwill ($698,000) which are being amortized on a
straight-line basis over three- and seven-year periods, respectively. MSB's
other assets were valued at $963,000 and its liabilities assumed totaled
$996,000.
Menhir Limited
Effective September 1, 1997, the Company acquired all of the outstanding
capital stock of Menhir Limited ("Menhir"), a corporation organized under the
laws of the United Kingdom 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 ($460,000) and goodwill ($310,000) 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.
The following unaudited tabulations present the pro forma effect of the
above described business combinations on the Company's results of operations for
the years ended December 31, 1998 and 1997, as if the transactions occurred on
January 1 of each year presented. Adjustments are reflected for additional
amortization of intangibles and the interest on the cash portion of the purchase
prices. Pro forma shares outstanding at December 31, 1997 also assume additional
shares outstanding sufficient to fund the cash portion of the CAI purchase
price. The pro forma results have not been adjusted for charges related to
acquired in-process research and development of $17,597,000 in 1998 and
$2,600,000 in 1997.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------
HISTORICAL
RESULTS OF PRO FORMA
AS REPORTED ACQUISITIONS ADJUSTMENTS PRO FORMA
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues............................... $ 65,814,073 $ 9,047,448 $ -- $ 74,861,521
Income (loss) from operations.......... $(12,520,958) $(4,637,195) $(4,438,431) $(21,596,584)
Net income (loss)...................... $ (8,498,812) $(4,927,730) $(5,340,931) $(18,767,473)
Net (loss) per share, basic and
diluted.............................. $ (0.38) $ $ (0.80)
Historical pro forma weighted average
shares of common stock outstanding,
basic and diluted.................... 22,277,472 23,370,703
</TABLE>
F-12
<PAGE> 49
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------
HISTORICAL
RESULTS OF PRO FORMA
AS REPORTED ACQUISITIONS ADJUSTMENTS PRO FORMA
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues............................... $ 22,645,442 $23,653,995 $ -- $ 46,299,437
Income (loss) from operations.......... $ (4,251,438) $(1,172,251) $(6,156,173) $(11,579,862)
Net income (loss)...................... $ (3,506,633) $(1,803,910) $(6,945,173) $(12,255,716)
Net (loss) per share, basic and
diluted.............................. $ (0.32) $ $ (0.85)
Historical pro forma weighted average
shares of common stock outstanding,
basic and diluted.................... 10,958,302 14,423,092
</TABLE>
(4) NOTES PAYABLE
Notes Payable to Banks
During 1996, the Company entered into a loan and security agreement with a
bank that provides for a revolving facility and an equipment facility.
Borrowings of up to $2,000,000 are available under the revolving facility and
bear interest at the bank's prime rate plus 1/2%. Borrowings up to $1,000,000
at the bank's prime rate plus 1% can be made for the purchase or refinancing of
qualified equipment under the equipment facility. All outstanding borrowings
were repaid during 1997, and no balances under these facilities existed at
December 31, 1998 or 1997.
In connection with the loan and security agreement discussed above, the
Company issued to the bank warrants which were exercised during 1998 for the
purchase of 13,802 shares of Company common stock for $3.63 per share.
(5) INCOME TAX BENEFIT
The provision (benefit) for income taxes is comprised of the following for
the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- ---------
<S> <C> <C>
Current --
Federal................................................... $ 2,958,100 $ --
State..................................................... 697,300 --
Foreign................................................... 59,000 --
----------- ---------
Total current provision........................... 3,714,400 --
Deferred --
Federal................................................... (4,763,900) (557,400)
State..................................................... (874,000) (65,600)
Increase in valuation allowance............................. 645,100 623,000
----------- ---------
Total deferred benefit............................ (4,992,800) (623,000)
----------- ---------
Total income tax benefit.......................... $(1,278,400) $ --
=========== =========
</TABLE>
F-13
<PAGE> 50
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the Company's deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts.................................. $ 132,200 $ 89,000
Trademark costs.......................................... 18,800 22,000
Accrued vacation......................................... 126,800 7,700
Tax credits carryforward................................. 1,168,600 520,600
Net operating loss carryforward.......................... 2,142,700 2,734,100
Purchased intangibles.................................... 5,373,800 --
Other.................................................... 5,400 4,500
----------- -----------
Total deferred tax assets........................ 8,968,300 3,377,900
Deferred tax liabilities:
Depreciation............................................. 24,500 (23,000)
----------- -----------
Total deferred tax liabilities................... 24,500 (23,000)
----------- -----------
Total net deferred tax assets.................... 8,992,800 3,354,900
Valuation allowance........................................ (4,000,000) (3,354,900)
----------- -----------
Deferred tax assets, net of valuation allowance............ $ 4,992,800 $ --
=========== ===========
</TABLE>
Presented in the balance sheets as:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
---------- ----
<S> <C> <C>
Net current deferred tax assets............................. $ 147,300 $--
Net deferred tax assets, noncurrent......................... $4,845,500 $--
---------- --
Deferred tax assets, net of valuation allowance............. $4,992,800 $--
========== ==
</TABLE>
The increase in deferred tax assets during 1998 results principally from
intangibles acquired from CAI that were expensed, but which must be amortized
for tax purposes over 15 years, and additions to tax credit carryovers. The
Company also realized reduced U.S. taxes of approximately $3,200,000 for
deductions related to the exercise of stock options. As required, the tax
benefit from the options was added to paid-in capital and excluded from net
income. Without the stock option deductions, carryovers would have been fully
utilized and the Company would have paid U.S. federal taxes in 1998.
Consequently, it appears more likely than not that at least $5,000,000 of
deferred tax assets will be realized, so the valuation allowance was adjusted to
$4,000,000. This resulted in recognition of a deferred benefit as shown above as
part of the 1998 provision for income taxes. The deferred benefit is offset by a
current provision of $3,700,000 consisting of about $500,000 of estimated
foreign and state taxes currently payable and a $3,200,000 charge to transfer
the tax reduction from stock options to paid-in capital.
As of December 31, 1998, the Company had net operating loss carryforwards
available totaling approximately $2,150,000. These carryforwards expire
beginning in 2010. The Company also has research and development tax credit
carryforwards of approximately $1,145,000 expiring beginning in 2010.
F-14
<PAGE> 51
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The income tax benefit calculated using the federal statutory rate is
different than the income tax benefit for financial reporting purposes as
follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Income tax benefit at the federal statutory rate........... $(3,324,252) $(1,192,300)
State income tax benefit, net of federal tax effect........ (116,575) (33,000)
Nondeductible expenses, including intangibles charged off,
but not amortizable for foreign tax purposes............. 1,713,919 974,300
Provision for foreign taxes................................ 59,000 --
Other...................................................... 369,238 --
Increase in tax credit carryforwards....................... (624,830) (372,000)
Change in valuation allowance.............................. 645,100 623,000
----------- -----------
Net benefit for income taxes............................... $(1,278,400) $ --
=========== ===========
</TABLE>
Income (loss) before provisions for income taxes reflected in the
accompanying consolidated statement of operations is attributable to domestic
and foreign sources as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
United States.............................................. $(5,572,682) $(1,072,333)
United Kingdom............................................. (4,148,575) (2,434,300)
Other...................................................... (13,152) --
Eliminations............................................... (42,803) --
----------- -----------
Consolidated............................................... $(9,777,212) $(3,506,633)
=========== ===========
</TABLE>
(6) STOCKHOLDERS' EQUITY
Public Offerings
In June 1997, the Company completed its initial public offering ("IPO") and
issued 6,348,000 shares of its common stock to the public at a price of $6.00
per share. The Company received approximately $34,226,000 of cash, net of
underwriting discounts, commissions and other offering costs. Upon completion of
the offering, all outstanding shares of Series A, Series B, and Series C
preferred stock (a total of 20,016,963 shares) were converted into 8,896,418
shares of common stock.
In May 1998, the Company sold 4,757,000 shares of its common stock to the
public at a price of $11.38 per share, which resulted in net proceeds to the
Company of $50,595,000. In December 1998, the Company sold 4,780,000 shares of
its common stock to the public at a price of $34.00 per share which resulted in
net proceeds to the Company of $153,727,000.
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
were
F-15
<PAGE> 52
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
converted into shares of common stock on the basis of nine preferred shares for
two common shares upon closing of the Offering.
Stock Split
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 share and per share data in these
financial statements have been retroactively adjusted to reflect this stock
split.
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 5,666,666
shares of common stock to employees and nonemployees; of which 266,666 shares
are available for grants to non-employees and consultants. In May 1998, the
Company's Board of Directors approved an amendment to the 1995 Plan to include a
provision providing for automatic increases in the number of shares available
for grant each fiscal year. 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 the date of grant. If
employment is terminated for any reason, vested options must be exercised within
60 days of termination or they are automatically canceled.
In 1998, the Company's Board of Directors approved the adoption of an
additional option plan for its employees (the "1998 Plan") and reserved 600,000
shares for issuance under the plan. The 1998 Plan provides for the granting of
nonstatutory stock options. The Board of Directors determines the term of each
award, the exercise price and conditions under which the option becomes
exercisable. The term of all options granted may not exceed 10 years; options
granted through 1998 have a term of five years. 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 the date of grant.
In connection with the acquisition of CAI, the Company assumed all of the
outstanding options of CAI. The CAI options were converted into 102,950 options
to purchase the Company's common stock (the "CAI Option Plan"). There will be no
future activity under the CAI Option Plan.
Non-employee Options
During 1996, the Company granted, from the 1995 Plan, stock options to
non-employees for 35,158 shares at a weighted average exercise price of $3.01
per share (range of $1.13 to $7.32) and recognized cost of $72,917 related to
these options based on the value of the services received. During 1998 and 1997,
23,154 and 2,666 options to purchase common stock were exercised at $2.50 and
$5.63 per share, respectively. At December 31, 1998, 2,672 options remained
outstanding and exercisable at a weighted average exercise price of $4.22 per
share. The accounting for these options is the same under APB 25 and SFAS 123.
Director Plan
The Company adopted an option plan (the "Director Plan") during 1997 for
its non-employee directors. The Director Plan provides for the automatic grant
to each non-employee director, on the day following the annual shareholder
meeting of each year, of an option to purchase 10,000 shares of the Company's
common stock at an exercise price equal to the fair market value of the common
stock on the date of grant. In addition, each new non-employee director joining
the Board of Directors after the Company's initial public offering will
automati-
F-16
<PAGE> 53
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cally be granted an option to purchase 32,332 shares of the Company's common
stock at an exercise price equal to the fair market value at date of grant. The
Board of Directors has reserved an aggregate of 200,000 shares for issuance
under the Director Plan, of which 50,004 remain available for grant at December
31, 1998.
Employee Stock Purchase Plan
The 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 633,332 shares of
common stock for issuance under the Purchase Plan, and has approved a provision
for an automatic increase in the number of shares available for grant each
fiscal year.
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
SFAS 123, "Accounting for Stock-Based Compensation," defines a fair value
based method of accounting for employee stock options and similar equity
instruments. However, SFAS 123 allows the continued measurement of compensation
costs for such plans using the intrinsic value based method prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), provided
that pro forma disclosures are made of net income or loss and net income or loss
per share, assuming the fair value based method of SFAS 123 had been applied.
The Company has elected to account for its stock-based compensation plans under
APB 25. Accordingly, for purposes of the pro forma disclosures presented below,
the Company has computed the fair values of all options granted during 1998,
1997 and 1996 using the Black-Scholes pricing model and the following weighted
average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate............................... 5.10% 5.98% 6%
Expected lives........................................ 3.0 years 3.0 years 3.0 years
Expected volatility................................... 65.5% 49.5% 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 1998 and 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 1998 and 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
$17,206,000, $5,575,000 and $3,193,000 for the years ended December 31, 1998,
1997 and 1996, 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 $4,208,404, $1,138,781 and $446,528 for 1998, 1997
and 1996, respectively.
F-17
<PAGE> 54
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
----------------------------------------
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Net loss --
As reported................................ $ (8,498,812) $(3,506,633) $(5,672,318)
Pro forma.................................. $(12,707,216) $(4,645,414) $(6,118,846)
Pro forma net loss per common share --
As reported................................ $ (0.38) $ (0.32) $ (2.10)
Pro forma.................................. $ (0.57) $ (0.42) $ (2.26)
</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.
A summary of the Company's option plans (the 1995 Plan, the Director Plan,
the 1998 Plan and the CAI Option Plan) for the years ended December 31, 1998,
1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 4,204,050 $ 4.34 2,754,212 $2.46 496,458 $1.03
Granted.................. 2,327,781 13.39 2,463,142 5.85 2,476,076 2.67
Canceled................. (314,057) 5.72 (763,580) 3.03 (215,906) 1.56
Exercised................ (848,262) 3.17 (249,724) 1.76 (2,416) 1.13
--------- ------ --------- ----- --------- -----
Outstanding at end of
year................... 5,369,512 $ 7.40 4,204,050 $4.34 2,754,212 $2.46
========= ====== ========= ===== ========= =====
Exercisable at end of
year................... 820,315 413,472 146,252
========= ========= =========
</TABLE>
The weighted average exercise prices and weighted average fair values of
options granted during 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
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 less than market
price.............................. 102,950 12.69 $ 6.58 -- -- -- -- -- --
Exercise price equal to market
price.............................. 2,204,831 7.11 $15.04 2,163,142 $2.29 $5.82 933,210 $2.09 $3.63
Exercise price greater than market
price.............................. 20,000 7.95 $19.53 300,000 1.37 6.05 1,542,866 0.76 2.09
--------- --------- ---------
2,327,781 2,463,142 2,476,076
========= ========= =========
</TABLE>
F-18
<PAGE> 55
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about the employee stock options
outstanding and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
NUMBER OF WEIGHTED -----------------------
OPTIONS AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE 1998 LIFE IN YEARS PRICE 1998 PRICE
PRICES ---------- -------------- ------------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$ 1.13 - 1.13.. 598,871 2.1 $ 1.13 254,540 $1.13
$ 2.25 - 3.13.. 61,388 7.9 $ 3.11 15,595 $3.05
$ 3.62 - 5.25.. 1,219,871 3.2 $ 4.33 281,337 $4.23
$ 5.44 - 7.94.. 1,538,779 3.8 $ 6.27 245,374 $6.29
$ 8.25 - 12.31.. 510,571 4.7 $11.61 23,469 $9.41
$12.44 - 18.50.. 1,074,100 5.8 $15.56 -- $ --
$18.97 - 26.50.. 236,032 5.7 $20.54 -- $ --
$29.25 - 42.19.. 128,150 4.9 $34.33 -- $ --
$44.50 - 45.19.. 1,750 5.0 $44.74 -- $ --
--------- --- ------ ------- -----
$ 1.13 - 45.19.. 5,369,512 4.1 $ 8.89 820,315 $4.01
========= === ====== ======= =====
</TABLE>
(7) RELATED PARTY TRANSACTIONS
A company owned by the Company's Chairman of the Board Chief Executive
Officer and relatives provides air transportation service for the Company. Total
expenses incurred during the years 1998, 1997 and 1996 for services rendered by
this related party was approximately $309,000, $57,000 and $0, respectively.
In October 1998, the Company executed a lease for commercial office space
in a building owned by the family of the Company's Chairman of the Board,
President and Chief Executive Officer. The initial lease term is for 10 years at
an initial annual rental amount of approximately $941,000 and will commence upon
occupancy of the building during 1999. The annual lease rate is subject to two
scheduled lease escalations in years six and nine at market rates.
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 both December 31, 1998 and 1997 was
$150,000.
(8) COMMITMENTS AND CONTINGENCIES
Cost of Software Licenses
Cost of software licenses in 1996 and 1997 represents royalties paid 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.
F-19
<PAGE> 56
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In May of 1998, with the roll-out of the jointly-developed MQIntegrator
product, the Company began paying royalties to IBM for MQIntegrator sales made
by the Company's direct sales force. In 1998, a significant portion of cost of
software licenses were attributable to this royalty obligation. In 1999, the
Company's royalty obligation to IBM is expected to increase. In August of 1998,
the Company began accruing royalties to JP Morgan for the sales of Business
Event Manager. The Company's obligation under this arrangement is subject to a
cumulative maximum of $3,750,000.
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, 1998, 1997 and 1996 was
approximately $2,494,000, $650,000 and $357,000, respectively. The following is
a schedule of future minimum lease payments for the years ending December 31:
<TABLE>
<S> <C>
1999........................................................ $ 3,819,397
2000........................................................ 3,095,957
2001........................................................ 2,452,779
2002........................................................ 2,095,806
2003........................................................ 2,032,380
Thereafter.................................................. 17,061,314
-----------
$30,557,633
===========
</TABLE>
Known Claims
As of January 26, 1999, 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.
(9) SEGMENT INFORMATION AND CUSTOMER CONCENTRATIONS
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 different products and serves different markets.
F-20
<PAGE> 57
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. For consolidated
results, the accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. There are no
significant intersegment sales or transfers between the segments for the periods
presented.
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------ ----------------------------------------- --------
EUROPE CORPORATE EUROPE CORPORATE
THE AND ASIA AND THE AND ASIA AND THE
AMERICAS PACIFIC OTHER TOTAL AMERICAS PACIFIC OTHER TOTAL AMERICAS
-------- -------- --------- -------- -------- -------- --------- ------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues............. $43,603 $18,351 $ 3,860 $ 65,814 $ 16,304 $6,342 $ -- $22,646 $7,145
Total cost of revenues..... 7,077 3,488 4,043 14,607 3,928 515 900 5,343 3,328
------- ------- -------- -------- -------- ------ -------- ------- ------
Gross profit............... 36,526 14,863 (183) 51,207 12,376 5,827 (900) 17,303 3,817
Selling and marketing...... 11,765 5,976 4,200 21,942 5,543 1,568 1,713 8,824 3,573
Research and development... -- -- 15,839 15,839 -- -- 7,730 7,730 --
General and
administrative............ -- -- 6,571 6,571 -- -- 2,334 2,334 --
------- ------- -------- -------- -------- ------ -------- ------- ------
Operating profit before
acquisition-related
charges................... 24,761 8,887 (26,793) 6,855 6,833 4,259 (12,677) (1,585) 244
Acquisition-related
charges................... -- -- 19,376 19,376 -- -- 2,666 2,666 --
------- ------- -------- -------- -------- ------ -------- ------- ------
Operating profit (loss).... 24,761 8,887 (46,169) (12,521) 6,833 4,259 (15,343) (4,251) 244
Other income and expense,
net....................... -- -- 2,744 2,744 -- -- 745 745 --
------- ------- -------- -------- -------- ------ -------- ------- ------
Net income (loss) before
tax....................... 24,761 8,887 (43,425) (9,777) 6,833 4,259 (14,598) (3,506) 244
Tax........................ -- -- (1,278) (1,278) -- -- -- -- --
------- ------- -------- -------- -------- ------ -------- ------- ------
Net income (loss) after
tax....................... $24,761 $ 8,887 $(42,147) $ (8,499) $ 6,833 $4,259 $(14,598) $(3,506) $ 244
======= ======= ======== ======== ======== ====== ======== ======= ======
<CAPTION>
1996
------------------------------
EUROPE CORPORATE
AND ASIA AND
PACIFIC OTHER TOTAL
-------- --------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Total revenues............. $-- $ -- $ 7,145
Total cost of revenues..... -- -- 3,328
--- ------- -------
Gross profit............... -- -- 3,817
Selling and marketing...... -- 852 4,425
Research and development... -- 3,658 3,658
General and
administrative............ -- 1,467 1,467
--- ------- -------
Operating profit before
acquisition-related
charges................... -- (5,977) (5,733)
Acquisition-related
charges................... -- -- --
--- ------- -------
Operating profit (loss).... -- (5,977) (5,733)
Other income and expense,
net....................... -- 61 61
--- ------- -------
Net income (loss) before
tax....................... -- (5,916) (5,672)
Tax........................ -- -- --
--- ------- -------
Net income (loss) after
tax....................... $-- $(5,916) $(5,672)
=== ======= =======
</TABLE>
The Company's revenues from major customers (revenues in excess of 10% of
total revenues) are from entities involved in the banking and financial services
industries. The revenues from such customers as a percentage of total revenues
for each of the three years ended December 31 are as follows:
<TABLE>
<CAPTION>
CUSTOMER 1998 1997 1996
- -------- ---- ---- ----
<S> <C> <C> <C>
Company A................................................... 10% N/A N/A
Company B................................................... N/A 14% 14%
Company C................................................... N/A N/A 22%
Company D................................................... N/A N/A 16%
Company E................................................... N/A N/A 13%
</TABLE>
(10) INTANGIBLES, NET, OTHER ASSETS, NET AND OTHER INCOME (EXPENSE), NET
Intangibles, net consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
----------- --------
<S> <C> <C>
Goodwill, net............................................... $44,821,536 $295,240
Purchased software products, net............................ 7,055,113 408,892
Other....................................................... -- 136,547
----------- --------
$51,876,649 $840,679
=========== ========
</TABLE>
F-21
<PAGE> 58
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other assets, net consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- --------
<S> <C> <C>
Notes receivable............................................ $ 155,000 $160,000
Prepaids.................................................... 212,091 222,704
Deposits.................................................... 487,731 105,276
Equity investments.......................................... 387,500 --
Other....................................................... 127,961 --
---------- --------
$1,370,283 $487,980
========== ========
</TABLE>
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Payroll and payroll related expenses....................... $4,687,183 $1,186,923
Accrued royalties.......................................... 303,499 --
Accrued business combination and deferred offering costs... 981,176 20,160
Accrued sales, use, vat and other taxes.................... 489,969 419,422
Accrued contractor costs................................... 443,071 24,027
Other...................................................... 952,028 431,427
---------- ----------
$7,856,926 $2,081,959
========== ==========
</TABLE>
Other income (expense), net consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- -------- --------
<S> <C> <C> <C>
Interest income.................................. $2,893,124 $867,156 $123,172
Interest expense................................. (46,675) (82,434) (50,640)
Other............................................ (102,703) (39,917) (11,677)
---------- -------- --------
$2,743,746 $744,805 $ 60,855
========== ======== ========
</TABLE>
F-22
<PAGE> 59
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) SELECTED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following tables present unaudited quarterly consolidated statement of
operations data for each quarter in the two years ended December 31, 1998. This
data has been derived from unaudited consolidated financial statements totals
that have been prepared on the same basis as the audited consolidated financial
statements and include all adjustments (consisting only of normal recurring
adjustments) that Management considers necessary for a fair presentation of such
information. Management believes quarter-to-quarter comparisons of our financial
results should not be relied upon as an indication of future performance, and
operating results may fluctuate from quarter to quarter in the future.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
1998 1998 1998 1998
----------- ----------- ----------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Software licenses............ $ 16,422 $ 10,714 $ 7,268 $ 6,573
Services and maintenance..... 10,887 6,749 4,192 3,009
----------- ----------- ----------- -----------
Total revenues......... 27,309 17,463 11,460 9,582
----------- ----------- ----------- -----------
Cost of revenues:
Cost of software licenses.... 586 452 442 222
Cost of services and
maintenance................ 5,726 3,518 2,135 1,526
----------- ----------- ----------- -----------
Total cost of
revenues............. 6,312 3,970 2,577 1,748
----------- ----------- ----------- -----------
Gross profit................. 20,997 13,493 8,883 7,834
Operating expenses:
Sales and marketing.......... 8,776 5,733 3,828 3,606
Research and development..... 6,064 4,169 2,915 2,691
General and administrative... 2,608 1,804 1,168 992
Charge for acquired
in-process research and
development................ -- 13,857 3,740 --
Amortization of
intangibles................ 1,165 482 82 49
----------- ----------- ----------- -----------
Total operating
expenses............. 18,613 26,045 11,733 7,338
----------- ----------- ----------- -----------
Income (loss) from
operations................. 2,384 (12,552) (2,850) 496
Other income (expense),
net........................ 1,061 896 491 296
----------- ----------- ----------- -----------
Net income (loss)
before provision for
income taxes......... $ 3,445 $ (11,656) $ (2,359) $ 792
Income Tax Benefit............. (1,278) -- -- --
----------- ----------- ----------- -----------
Net income (loss)...... $ 4,723 $ (11,656) $ (2,359) $ 792
=========== =========== =========== ===========
Net income (loss) per share,
basic........................ $ .18 $ (.43) $ (.11) $ .04
=========== =========== =========== ===========
Weighted average shares of
common stock outstanding,
basic........................ 26,165,444 27,003,514 20,677,012 18,309,284
=========== =========== =========== ===========
Net income (loss) per share,
diluted...................... $ .16 $ (.43) $ (.11) $ .04
=========== =========== =========== ===========
Weighted average shares of
common stock outstanding,
diluted...................... 30,094,866 27,003,514 20,677,012 20,332,594
=========== =========== =========== ===========
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
1997 1997 1997 1997
----------- ----------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Software licenses............ $ 6,279 $ 4,031 $ 3,213 $ 2,447
Services and maintenance..... 1,993 1,890 1,566 1,227
----------- ----------- ---------- ----------
Total revenues......... 8,272 5,921 4,779 3,674
----------- ----------- ---------- ----------
Cost of revenues:
Cost of software licenses.... 142 342 166 250
Cost of services and
maintenance................ 1,254 1,148 1,240 800
----------- ----------- ---------- ----------
Total cost of
revenues............. 1,396 1,490 1,406 1,050
----------- ----------- ---------- ----------
Gross profit................. 6,876 4,431 3,373 2,624
Operating expenses:
Sales and marketing.......... 2,893 2,253 1,988 1,690
Research and development..... 2,840 2,108 1,560 1,222
General and administrative... 853 616 371 495
Charge for acquired
in-process research and
development................ -- 2,600 -- --
Amortization of
intangibles................ 48 18 -- --
----------- ----------- ---------- ----------
Total operating
expenses............. 6,634 7,595 3,919 3,407
----------- ----------- ---------- ----------
Income (loss) from
operations................. 242 (3,164) (546) (783)
Other income (expense),
net........................ 301 429 17 (1)
----------- ----------- ---------- ----------
Net income (loss)
before provision for
income taxes......... $ 543 $ (2,735) $ (529) $ (784)
Income Tax Benefit............. -- -- -- --
----------- ----------- ---------- ----------
Net income (loss)...... $ 543 $ (2,735) $ (529) $ (784)
=========== =========== ========== ==========
Net income (loss) per share,
basic........................ $ .03 $ (.15) $ (.11) $ (.29)
=========== =========== ========== ==========
Weighted average shares of
common stock outstanding,
basic........................ 18,165,268 18,070,884 4,845,830 2,751,212
=========== =========== ========== ==========
Net income (loss) per share,
diluted...................... $ .03 $ (.15) $ (.11) $ (.29)
=========== =========== ========== ==========
Weighted average shares of
common stock outstanding,
diluted...................... 19,531,432 18,070,884 4,845,830 2,751,212
=========== =========== ========== ==========
</TABLE>
F-23
<PAGE> 60
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Share Purchase Agreement dated June 12, 1998 by and among
Registrant, MSB Consultants Limited and the shareholders
of MSB (which is incorporated herein by reference to
Exhibit 2 to the Registrant's Current Report on Form 8-K
filed June 26, 1998).
2.2 -- Share Acquisition Agreement dated September 30, 1998 by
and among Registrant and the shareholders of Century
Analysis Incorporated (which is incorporated herein by
reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K filed October 14, 1998).
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 (which is incorporated by
reference to Exhibit 3.2 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997).
3.3 -- Certificate of Determination of Rights, Preferences and
Privileges of Series A Preferred Stock (included in
Exhibit 4.1).
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).
4.2 -- Preferred Shares Right Agreement, dated as of August 5,
1998 between the Registrant and Bank Boston N.A.,
including the Certificate of Designator, the Form of
Rights Certificate and the Summary of Rights attached
thereto as Exhibits A, B and C, respectively (which is
incorporated herein by reference to Exhibit 1 to the
Registrant's Registration Statement on Form 8-K/A
Amendment No. 1 filed August 17, 1998).
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* -- 1998 Nonstatutory Stock Option Plan and related
agreements.
10.6 -- 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).
10.7 -- 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).
10.8 -- 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).
</TABLE>
<PAGE> 61
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.9 -- 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).
10.10 -- 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).
10.11 -- Standard Commercial Lease Agreement between the
Registrant and Greenwood Plaza Partners, LLC dated October
9, 1998.
10.12 -- 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).
10.13 -- 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).
23.1 -- Consent of Arthur Andersen LLP.
24.1 -- Power of Attorney (which is included on page 34 herein).
27 -- Financial Data Schedule.
</TABLE>
- ---------------
* Indicates management compensatory plan, contract or arrangement.
<PAGE> 1
NEW ERA OF NETWORKS, INC.
1998 NONSTATUTORY STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Nonstatutory Stock
Option Plan are:
o to attract and retain the best available personnel for
positions of substantial responsibility,
o to provide additional incentive to Employees and
Consultants, and
o to promote the success of the Company's business.
Options granted under the Plan will be Nonstatutory Stock
Options.
2. Definitions. As used herein, the following definitions shall
apply:
(a) "Administrator" means the Board or any of its Committees as
shall be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options are, or will be, granted under
the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Cause" means the commission of any act affecting employment
which involves (1) dishonesty, fraud or criminal conduct by Optionee, (2)
Optionee's knowing and willful violation of a material Company written policy or
a lawful direction by an authorized executive officer or the Board, (3)
Optionee's engaging in any activity in competition with the Company or its
subsidiaries in a material manner (excluding a less than 5% investment in any
public company), or (4) Optionee's knowing unauthorized disclosure of
confidential material, proprietary information or trade secrets of the Company.
(e) "Change in Control" means the occurrence of any of the
following events:
(i) The stockholders of the Company approve a merger
or consolidation of the Company with any other corporation or entity, other than
a merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Company
<PAGE> 2
or such surviving entity outstanding immediately after such merger or
consolidation, or the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all the Company's assets.
(ii) The acquisition by any Person or Group of Persons as
Beneficial Owner (as such terms are defined in the Securities Exchange Act of
1934, as amended), directly or indirectly, other than George F. (Rick) Adam,
Jr., of securities of the Company representing a majority of the total voting
power represented by the Company's then outstanding voting securities.
(iii) A majority of the Board of Directors of the Company
in office at the beginning of any thirty-six (36) month period is replaced
during the course of such thirty-six (36) month period (other than by voluntary
resignation of individual directors in the ordinary course of business) and such
replacement was not initiated by the Board of Directors of the Company as
constituted at the beginning of such thirty-six (36) month period.
(f) "Code" means the Internal Revenue Code of 1986, as amended.
(g) "Committee" means a committee of Directors appointed by the
Board in accordance with Section 4 of the Plan.
(h) "Common Stock" means the Common Stock of the Company.
(i) "Company" means New Era of Networks, Inc., a Delaware
corporation.
(j) "Constructive Termination" means only the following:
(i) the continued assignment to Optionee of any duties
or the continued material reduction of Optionee's duties, either of which is
materially inconsistent with the level of Optionee's position with the Company.
(ii) a material reduction in Optionee's salary, other
than any such reduction which is part of, and generally consistent with, a
general reduction of officer salaries;
(iii) a material reduction by the Company in the kind or
level of Optionee benefits (other than salary and bonus) to which Optionee is
entitled immediately prior to such reduction with the result that Optionee's
overall benefits package (other than salary and bonus) is materially reduced
(other than any such reduction applicable to officers of the Company generally);
or
(iv) the relocation of Optionee's principal place for the
rendering of the services to be provided by him hereunder to a location more
than fifty (50) miles from the present location of the principal executive
office of the Company;
-2-
<PAGE> 3
provided that none of the foregoing shall constitute a Constructive Termination
to the extent Optionee has agreed thereto.
(k) "Consultant" means any person, including an advisor, engaged
by the Company or a Parent or Subsidiary to render services to such entity.
(l) "Director" means a member of the Board.
(m) "Disability" means total and permanent disability as defined
in Section 22(e)(3) of the Code.
(n) "Employee" means any person, including Officers, employed by
the Company or any Parent or Subsidiary of the Company. A Service Provider shall
not cease to be an Employee in the case of (i) any leave of absence approved by
the Company or (ii) transfers between locations of the Company or between the
Company, its Parent, any Subsidiary, or any successor. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(o) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(p) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established
stock exchange or a national market system, including without limitation the
Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market,
its Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean between the high bid
and low asked prices for the Common Stock on the last market trading day prior
to the day of determination, as reported in The Wall Street Journal or such
other source as the Administrator deems reliable;
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(q) "Notice of Grant" means a written or electronic notice
evidencing certain terms and conditions of an individual Option grant. The
Notice of Grant is part of the Option Agreement.
-3-
<PAGE> 4
(r) "Officer" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(s) "Option" means a nonstatutory stock option granted pursuant
to the Plan, that is not intended to qualify as an incentive stock option within
the meaning of Section 422 of the Code and the regulations promulgated
thereunder.
(t) "Option Agreement" means an agreement between the Company and
an Optionee evidencing the terms and conditions of an individual Option grant.
The Option Agreement is subject to the terms and conditions of the Plan.
(u) "Option Exchange Program" means a program whereby outstanding
options are surrendered in exchange for options with a lower exercise price.
(v) "Optioned Stock" means the Common Stock subject to an Option.
(w) "Optionee" means the holder of an outstanding Option granted
under the Plan.
(x) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(y) "Plan" means this 1998 Nonstatutory Stock Option Plan.
(z) "Service Provider" means an Employee including an Officer,
Consultant or Director.
(aa) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 12 of the Plan.
(bb) "Subsidiary" means a "subsidiary corporation," whether now
or hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is Three Hundred Thousand (300,000) Shares. The Shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, or is surrendered pursuant to an Option Exchange Program, the
unpurchased Shares which were subject thereto shall become available for future
grant or sale under the Plan (unless the Plan has terminated).
4. Administration of the Plan.
(a) Administration. The Plan shall be administered by (i) the
Board or (ii) a Committee, which committee shall be constituted to satisfy
Applicable Laws.
-4-
<PAGE> 5
(b) Powers of the Administrator. Subject to the provisions of the
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value of the Common
Stock;
(ii) to select the Service Providers to whom Options may
be granted hereunder;
(iii) to determine whether and to what extent Options are
granted hereunder;
(iv) to determine the number of shares of Common Stock to
be covered by each Option granted hereunder;
(v) to approve forms of agreement for use under the
Plan;
(vi) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted hereunder. Such
terms and conditions include, but are not limited to, the exercise price, the
time or times when Options may be exercised (which may be based on performance
criteria), any vesting acceleration or waiver of forfeiture restrictions, and
any restriction or limitation regarding any Option or the shares of Common Stock
relating thereto, based in each case on such factors as the Administrator, in
its sole discretion, shall determine;
(vii) to reduce the exercise price of any Option to the
then current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option shall have declined since the date the Option was
granted;
(viii) to institute an Option Exchange Program;
(ix) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan;
(x) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(xi) to modify or amend each Option (subject to Section
14(b) of the Plan), including the discretionary authority to extend the
post-termination exercisability period of Options longer than is otherwise
provided for in the Plan;
(xii) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option previously
granted by the Administrator;
(xiii) to determine the terms and restrictions applicable
to Options;
-5-
<PAGE> 6
(xiv) to allow Optionees to satisfy withholding tax
obligations by electing to have the Company withhold from the Shares to be
issued upon exercise of an Option that number of Shares having a Fair Market
Value equal to the amount required to be withheld. The Fair Market Value of the
Shares to be withheld shall be determined on the date that the amount of tax to
be withheld is to be determined. All elections by an Optionee to have Shares
withheld for this purpose shall be made in such form and under such conditions
as the Administrator may deem necessary or advisable; and
(xv) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options.
5. Eligibility. Options may be granted to Service Providers; provided,
however, that notwithstanding anything to the contrary contained in the Plan,
Options may not be granted to Directors, and Options may only be granted to
Officers as an inducement essential to their initial employment with the
Company.
6. Limitation. Neither the Plan nor any Option shall confer upon an
Optionee any right with respect to continuing the Optionee's relationship as a
Service Provider with the Company, nor shall they interfere in any way with the
Optionee's right or the Company's right to terminate such relationship at any
time, with or without cause.
7. Term of Plan. The Plan shall become effective upon its adoption by
the Board. It shall continue in effect for ten (10) years, unless sooner
terminated under Section 14 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
Agreement.
9. Option Exercise Price and Consideration.
(a) Exercise Price. The per share exercise price for the Shares
to be issued pursuant to exercise of an Option shall be determined by the
Administrator.
(b) Waiting Period and Exercise Dates. At the time an Option is
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any con ditions which must be satisfied before the
Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the method
of payment. Such consideration may consist entirely of:
(i) cash;
-6-
<PAGE> 7
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six months on the date of surrender, and (B) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised;
(v) consideration received by the Company under a
cashless exercise program implemented by the Company in connection with the
Plan;
(vi) a reduction in the amount of any Company liability
to the Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;
(vii) such other consideration and method of payment for
the issuance of Shares to the extent permitted by Applicable Laws; or
(viii) any combination of the foregoing methods of
payment.
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. An Option may not be exercised for a fraction of
a Share.
An Option shall be deemed exercised when the Company
receives: (i) written or electronic notice of exercise (in accordance with the
Option Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 12 of the Plan.
-7-
<PAGE> 8
Exercising an Option in any manner shall decrease the
number of Shares thereafter available, both for purposes of the Plan and for
sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Relationship as a Service Provider. If an
Optionee ceases to be a Service Provider, other than upon the Optionee's death
or Disability, the Optionee may exercise his or her Option, but only within such
period of time as is specified in the Option Agreement, and only to the extent
that the Option is vested on the date of termination (but in no event later than
the expiration of the term of such Option as set forth in the Option Agreement).
In the absence of a specified time in the Option Agreement, the Option shall
remain exercisable for three (3) months following the Optionee's termination.
If, on the date of termination, the Optionee is not vested as to his or her
entire Option, the Shares covered by the unvested portion of the Option shall
revert to the Plan. If, after termination, the Optionee does not exercise his or
her Option within the time specified by the Administrator, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option
Agreement, to the extent the Option is vested on the date of termination (but in
no event later than the expiration of the term of such Option as set forth in
the Option Agreement). In the absence of a specified time in the Option
Agreement, the Option shall remain exercisable for twelve (12) months following
the Optionee's termination. If, on the date of termination, the Optionee is not
vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified herein,
the Option shall terminate, and the Shares covered by such Option shall revert
to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service
Provider, the Option may be exercised within such period of time as is specified
in the Option Agreement (but in no event later than the expiration of the term
of such Option as set forth in the Notice of Grant), by the Optionee's estate or
by a person who acquires the right to exercise the Option by bequest or
inheritance, but only to the extent that the Option is vested on the date of
death. In the absence of a specified time in the Option Agreement, the Option
shall remain exercisable for twelve (12) months following the Optionee's
termination. If, at the time of death, the Optionee is not vested as to his or
her entire Option, the Shares covered by the unvested portion of the Option
shall immediately revert to the Plan. The Option may be exercised by the
executor or administrator of the Optionee's estate or, if none, by the person(s)
entitled to exercise the Option under the Optionee's will or the laws of descent
or distribution. If the Option is not so exercised within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Option previously granted based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
-8-
<PAGE> 9
11. Non-Transferability of Options . Unless determined otherwise by the
Administrator, an Option may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee. If the Administrator makes an Option
transferable, such Option shall contain such additional terms and conditions as
the Administrator deems appropriate.
12. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Asset Sale.
(a) Changes in Capitalization. Subject to any required action by
the shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option shall lapse as to all such Shares,
provided the proposed dissolution or liquidation takes place at the time and in
the manner contemplated. To the extent it has not been previously exercised, an
Option will terminate immediately prior to the consummation of such proposed
action.
(c) Change in Control.
(i) Unless otherwise provided for in the individual
stock option agreement, in the event of a Change in Control as described in
Section 2(e)(i), each outstanding Option may be assumed or an equivalent option
may be substituted by such successor corporation or a Parent or Subsidiary of
such successor corporation. In the event the successor corporation refuses to
assume or substitute for the Option, the Optionee shall fully vest in and have
the right to exercise the Option as to all of the Optioned Stock, including such
Shares as to which the Option would not otherwise be vested or
-9-
<PAGE> 10
exercisable. If an Option becomes fully vested and exercisable in lieu of
assumption or substitution in the event of a Change in Control, the
Administrator shall notify the Optionee that the Option is fully vested and
exercisable for a period of fifteen (15) days from the date of such notice and
the Option shall be canceled upon the expiration of such period. For the
purposes of this paragraph, the Option shall be considered assumed if, following
the Change in Control, the Option confers the right to purchase or receive, for
each Share of Optioned Stock subject to the Option immediately prior to the
Change in Control, the consideration (whether stock, cash, or other securities
or property) received in the Change of Control event by holders of Common Stock
for each Share held on the effective date of the transaction (and if the holders
are offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares). If such consideration received
in the Change of Control event is not solely common stock of the successor
corporation or its Parent, the Administrator may, with the consent of the
successor corporation, provide for the consideration to be received upon the
exercise of the Option, for each Share of Optioned Stock subject to the Option,
to be solely common stock of the successor corporation or its Parent equal in
fair market value to the per share consideration received by holders of Common
Stock in the outstanding Change in Control; and
(ii) Upon any termination of the Optionee's status as a
Service Provider without Cause or as a result of Optionee's Constructive
Termination at any time within one (1) year after a Change in Control, each
Option then held by an Optionee (including any assumed or substituted option
upon the Change in Control) shall immediately become vested and exercisable with
respect to all shares which would otherwise become vested and exercisable within
one (1) year of the date of such termination of the Optionee's status as a
Service Provider.
13. Date of Grant. The date of grant of an Option shall be, for all
purposes, the date on which the Administrator makes the determination granting
such Option, or such other later date as is determined by the Administrator.
Notice of the determination shall be provided to each Optionee within a
reasonable time after the date of such grant.
14. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend,
alter, suspend or terminate the Plan.
(b) Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to options granted under the
Plan prior to the date of such termination.
-10-
<PAGE> 11
15. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant to the
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with Applicable Laws and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
(b) Investment Representations. As a condition to the exercise of
an Option the Company may require the person exercising such Option to represent
and warrant at the time of any such exercise that the Shares are being purchased
only for investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation is
required.
16. Inability to Obtain Authority. The inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
17. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
-11-
<PAGE> 12
NEW ERA OF NETWORKS, INC.
1998 NONSTATUTORY STOCK OPTION PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
[Optionee's Name and Address]
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number
----------------------
Date of Grant
----------------------
Vesting Commencement Date
----------------------
Exercise Price per Share $
---------------------
Total Number of Shares Granted
----------------------
Total Exercise Price $
---------------------
Type of Option: Nonstatutory Stock Option
Term/Expiration Date:
----------------------
Vesting Schedule:
Subject to the Optionee continuing to be a Service Provider on such
dates, this Option shall vest and become exercisable in accordance with the
following schedule:
One-sixth (1/6) of the Shares subject to the Option shall vest one (1)
year after the Vesting Commencement Date, an additional one-third (1/3) of the
Shares subject to the Option shall vest two (2) years after the Vesting
Commencement Date and the last one half (1/2) of the Shares subject to the
<PAGE> 13
Option shall vest three (3) years after the Vesting Commencement Date, subject
to the Optionee continuing to be a Service Provider on such dates.
Termination Period:
This Option may be exercised for thirty (30) days after Optionee ceases
to be a Service Provider. Upon the death or Disability of the Optionee, this
Option may be exercised for such longer period as provided in the Plan. In no
event shall this Option be exercised later than the Term/Expiration Date as
provided above.
II. AGREEMENT
1. Grant of Option. The Plan Administrator of the Company hereby grants
to the Optionee named in the Notice of Grant attached as Part I of this
Agreement (the "Optionee") an option (the "Option") to purchase the number of
Shares, as set forth in the Notice of Grant, at the exercise price per share set
forth in the Notice of Grant (the "Exercise Price"), subject to the terms and
conditions of the Plan, which is incorporated herein by reference. Subject to
Section 14(b) of the Plan, in the event of a conflict between the terms and
conditions of the Plan and the terms and conditions of this Option Agreement,
the terms and conditions of the Plan shall prevail.
2. Exercise of Option.
(a) Right to Exercise. This Option is exercisable during its term
in accordance with the Vesting Schedule set out in the Notice of Grant and the
applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery of
an exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be completed
by the Optionee and delivered to [Title]. The Exercise Notice shall be
accompanied by payment of the aggregate Exercise Price as to all Exercised
Shares. This Option shall be deemed to be exercised upon receipt by the Company
of such fully executed Exercise Notice accompanied by such aggregate Exercise
Price.
No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with Applicable Laws. Assuming such
compliance, for income tax purposes the Exercised Shares shall be considered
transferred to the Optionee on the date the Option is exercised with respect to
such Exercised Shares.
3. Method of Payment. Payment of the aggregate Exercise Price shall be
by any of the following, or a combination thereof, at the election of the
Optionee:
-2-
<PAGE> 14
(a) cash;
(b) check;
(c) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan; or
(d) surrender of other Shares which (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares.
4. Non-Transferability of Option. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by the Optionee. The terms
of the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
5. Term of Option. This Option may be exercised only within the term set
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option Agreement.
6. Tax Consequences. Some of the federal tax consequences relating to
this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.
THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR
DISPOSING OF THE SHARES.
(a) Exercising the Option. The Optionee may incur regular federal
income tax liability upon exercise of an NSO. The Optionee will be treated as
having received compensation income (taxable at ordinary income tax rates) equal
to the excess, if any, of the Fair Market Value of the Exercised Shares on the
date of exercise over their aggregate Exercise Price. If the Optionee is an
Employee or a former Employee, the Company will be required to withhold from his
or her compensation or collect from Optionee and pay to the applicable taxing
authorities an amount in cash equal to a percentage of this compensation income
at the time of exercise, and may refuse to honor the exercise and refuse to
deliver Shares if such withholding amounts are not delivered at the time of
exercise.
(b) Disposition of Shares. If the Optionee holds NSO Shares for
at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes.
7. Entire Agreement; Governing Law. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement of
the parties with respect to the subject
-3-
<PAGE> 15
matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Optionee with respect to the subject matter
hereof, and may not be modified adversely to the Optionee's interest except by
means of a writing signed by the Company and Optionee. This agreement is
governed by the internal substantive laws, but not the choice of law rules, of
Colorado.
8. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT
THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE
OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT
CAUSE.
By your signature and the signature of the Company's representative
below, you and the Company agree that this Option is granted under and governed
by the terms and conditions of the Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.
OPTIONEE NEW ERA OF NETWORKS, INC.
- ----------------------------------- --------------------------------------
Signature By
- ------------------------------------ --------------------------------------
Print Name Title
- ------------------------------------
Residence Address
- ------------------------------------
-4-
<PAGE> 16
EXHIBIT A
NEW ERA OF NETWORKS, INC.
1998 NONSTATUTORY STOCK OPTION PLAN
EXERCISE NOTICE
New Era of Networks, Inc.
7400 East Orchard Road, Suite 230
Englewood, California 80111
Attention: [Title]
1. Exercise of Option. Effective as of today, ________________, 199__,
the undersigned ("Purchaser") hereby elects to purchase ______________ shares
(the "Shares") of the Common Stock of New Era of Networks, Inc. (the "Company")
under and pursuant to the 1997 Nonstatutory Stock Option Plan (the "Plan") and
the Stock Option Agreement dated , 19___ (the "Option Agreement"). The purchase
price for the Shares shall be $ , as required by the Option Agreement.
2. Delivery of Payment. Purchaser herewith delivers to the Company the
full purchase price for the Shares.
3. Representations of Purchaser. Purchaser acknowledges that Purchaser
has received, read and understood the Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the Shares, no right to vote or receive dividends or
any other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares so acquired shall
be issued to the Optionee as soon as practicable after exercise of the Option.
No adjustment will be made for a dividend or other right for which the record
date is prior to the date of issuance, except as provided in Section 12 of the
Plan.
5. Tax Consultation. Purchaser understands that Purchaser may suffer
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
<PAGE> 17
6. Entire Agreement; Governing Law. The Plan and Option Agreement are
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Purchaser with respect to the subject matter
hereof, and may not be modified adversely to the Purchaser's interest except by
means of a writing signed by the Company and Purchaser. This agreement is
governed by the internal substantive laws, but not the choice of law rules, of
Colorado.
Submitted by: Accepted by:
PURCHASER NEW ERA OF NETWORKS, INC.
- ---------------------------------- -------------------------------------
Signature By
- ---------------------------------- -------------------------------------
Print Name Title
-------------------------------------
Date Received
Address: Address: 7400 East Orchard Road
---------------------- Suite 230
Englewood, California 8011
----------------------
----------------------
-2-
<PAGE> 1
STANDARD COMMERCIAL LEASE
BETWEEN
GREENWOOD PLAZA PARTNERS, LLC
AS LESSOR
AND
NEW ERA OF NETWORKS, INC. AS LESSEE
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE/SECTION Page #
- --------------- ------
<S> <C>
1.00 BASIC LEASE TERMS 1
1.01 Parties 1
1.02 Leased Premises 1
1.03 Term 1
1.04 Base Rent 1
1.05 Address for Payment of Base Rent 1
1.06 Permitted Use 1
1.07 Security Deposit 1
2.00 RENT 1
2.01 Base Rent 1
2.02 Definition of Operating Expenses 1
2.03 Operating Expenses 2
2.04 Late Payment Charge 2
2.05 Increase in Insurance Premiums 2
2.06 Security Deposit 2
2.07 Holding Over 2
3.00 OCCUPANCY AND USE 3
3.01 Use 3
3.02 Signs 3
3.03 Compliance with Laws, Rules and Regulations 3
3.04 Warranty of Possession 3
3.05 Inspection 3
3.06 Acceptance of Leased Premises 3
3.07 Non-Smoking Building 3
4.00 UTILITIES AND SERVICE 3
4.01 Building Services 3
4.02 Theft or Burglary 4
4.03 Janitorial Service 4
4.04 Excessive Utility Consumption 4
4.05 Window Coverings 4
4.06 Charge for Service 4
5.00 REPAIRS AND MAINTENANCE 4
5.01 Lessor Repairs 4
5.02 Lessee Repairs 4
5.03 Request for Repairs 4
5.04 Lessee Damages 4
6.00 ALTERATIONS AND IMPROVEMENTS 4
6.01 Lessor Improvements 4
6.02 Lessee Improvements 4
6.03 Mechanics Lien 4
7.00 CASUALTY AND INSURANCE 5
7.01 Substantial Destruction 5
7.02 Partial Destruction 5
7.03 Property Insurance 5
7.04 Waiver of Subrogation 5
7.05 Hold Harmless 5
8.00 CONDEMNATION 5
8.01 Substantial Taking 5
8.02 Partial Taking 5
9.00 ASSIGNMENT OR SUBLEASE 5
9.01 Lessor Assignment 5
9.02 Lessee Assignment 5
9.03 Conditions of Assignment 5
9.04 Subordination 6
9.05 Estoppel Certificates 6
10.00 DEFAULT AND REMEDIES 6
10.01 Default by Lessee 6
10.02 Remedies for Lessee's Default 6
11.00 SUBSTITUTE PREMISES 6
11.01 Relocation 6
11.02 Expenses 7
</TABLE>
<PAGE> 3
TABLE OF CONTENTS (continued)
<TABLE>
<S> <C>
12.00 HAZARDOUS MATERIALS 7
12.01 Hazardous Materials 7
13.00 DEFINITIONS 7
13.01 Abandon 7
13.02 Act of God or Force Majeure 7
13.03 Building 7
13.04 Commencement Date 7
13.05 Completion Date 7
13.06 Square Feet 7
14.00 LESSEE'S INSURANCE 8
14.01 Fire and Extended Coverage 8
14.02 General Liability and Property 8
14.03 Endorsements 8
15.00 MISCELLANEOUS 8
15.01 Waiver 8
15.02 Act of God 8
15.03 Attorney's Fees 8
15.04 Successors 8
15.05 Rent Tax 8
15.06 Captions 8
15.07 Notice 8
15.08 Submission of Lease 8
15.09 Corporate Authority 8
15.10 Severability 8
15.11 Lessor's Liability 8
15.12 Indemnity 9
15.13 Amendment 9
15.14 Limitation of Warranties 9
15.15 Governing Law 9
15.16 Parking 9
15.17 Entire Agreement 9
15.18 Renewal Option 9
15.19 Right of First Refusal 9
Lessor/Lessee Signature Block 9
EXHIBITS
Exhibit "A" - The Leased Premises 10
Exhibit "A-1" - The Leased Premises Floor Plan
Exhibit "B" - Rules and Regulations 11
Exhibit "C" - Lessor Improvements 12
Exhibit "D" - Acceptance of Leased Premises/Tenant Estoppel Certificate 13
</TABLE>
<PAGE> 4
STANDARD COMMERCIAL LEASE
ARTICLE 1.00 BASIC LEASE TERMS
1.01 PARTIES. This Standard Commercial Lease (this "Lease") made as of this
9th day of October, 1998, is entered into by and between: Greenwood Plaza
Partners, LLC, ("Lessor"), and New Era of Networks, Inc., a Delaware corporation
(Lessee")
1.02 LEASED PREMISES. In consideration of the rents, terms, provisions and
covenants of this Lease, Lessor hereby leases, lets and demises to Lessee the
following described premises ("Leased Premises") as further delineated on
Exhibit "A" attached hereto and by reference incorporated herein:
<TABLE>
<S> <C>
Approximately 42,305 rsf, on the first and second floors (Approximate Rentable Square Feet)
ONE Greenwood Plaza (Name of Building)
6550 S. Greenwood Plaza Blvd., Suite 100 and 200 (Street Address/Suite Number)
Englewood, Colorado 80111 (City, State and Zip Code)
</TABLE>
1.03 Term. Subject to and upon the conditions set forth herein, the term of
this Lease shall commence on the "Commencement Date" (which Lessor shall use its
best efforts to establish as July 1, 1999. The term of this Lease shall expire
120 months thereafter (the "Expiration Date").
1.04 BASE RENT. Base rent is per the following rent schedule:
Years 1-5 $22.25 per rentable square foot per year
Years 6-8 $26.10 per rentable square foot per year
Years 9-10 $28.50 per rentable square foot per year
1.05 ADDRESS FOR PAYMENT OF BASE RENT.
Greenwood Plaza Partners, LLC
5000 South Quebec Street, Suite 450
Denver, Colorado 80237
1.06 PERMITTED Use. General Office
1.07 SECURITY DEPOSIT. Security deposit is $79,687.50
The Security Deposit will be returned, together with interest earned on
it as long as no default, on the fifth anniversary of the Commencement
Date, so long as no event of default has occurred before that date.
ARTICLE 2.00 RENT
2.01 BASE RENT. Lessee shall pay monthly as base rent during the term of
this Lease the sum of money set forth in Section 1.04 of this Lease, which
amount shall be payable to Lessor at the address shown above. One (1) monthly
installment of base rent for the first month's rent shall be due and payable on
the date of execution of this Lease by Lessee, and a like monthly installment
shall be due and payable on or before the first day of each calendar month
during the term of this Lease succeeding the Commencement Date or Completion
Date; provided, if the Commencement Date or the Completion Date should be a date
other than the first day of a calendar month, the monthly base rent set forth
above shall be prorated to the end of that calendar month, and all succeeding
installments of rent shall be payable on or before the first day of each
succeeding calendar month during the term of this Lease. Lessee shall pay, as
additional rent, all other sums due under this Lease. All rent shall be paid
without demand, setoff, deduction or offset, except as allowed by this Lease.
2.02 DEFINITION OF OPERATING EXPENSES. The term "Operating Expenses" shall
include all reasonable and necessary expenses incurred by Lessor with respect to
the maintenance and operation of the Building of which the Leased Premises are a
part, including, but not limited to, the following: maintenance, repair and
replacement costs; electricity, fuel, water, sewer, gas and other utility
charges; security, window washing and janitorial services; trash and snow
removal; landscaping and pest control; management fees, wages and benefits
payable to employees of Lessor or Lessor's property manager whose duties are
directly connected with the operating and maintenance of the Building; all
services, supplies, repairs, replacements or other expenses for maintaining and
operating the Building or the Project including parking and common areas; the
cost, including interest, amortized over its useful life, of any capital
improvement or structural repair or replacement made to the Building by Lessor
after the date of this Lease which is required under any law (or interpretation
thereof), ordinance, rules, regulations or orders of any governmental or
quasi-governmental authority having jurisdiction over the Building that is
enacted after the Commencement Date; the cost, including interest, amortized
over its useful life, of installation of any device or other equipment which
improves the operating efficiency of any system within the Building and thereby
reduces Operating Expenses but only to the extent of the reduction in each year
during the Term; all real property taxes and installments of special
assessments, including dues and assessments by means of deed restrictions and/or
owners' associations which accrue against the Building of which the Leased
Premises are a part during the term of this Lease; and all insurance premiums
which Lessor is required to pay or deems necessary to pay, including public
liability insurance, with respect to the Building. The term Operating Expenses
shall not include the following: repairs, restoration or other work occasioned
by fire, wind, the elements or other casualty; income and franchise taxes of
Lessor; expenses incurred in leasing to or procuring of lessees, leasing
commissions, advertising expenses and expenses for the renovating of space for
new lessees; interest or principal payments on any mortgage or other
indebtedness of Lessor; compensation paid to any employee of Lessor or Lessor's
property manager above the grade of property manager; any depreciation allowance
or expense (a) Costs of decorating, redecorating, special cleaning, or other
services not provided on a regular basis to Lessees of the Building; (b) Wages,
salaries, fees, and fringe benefits paid to administrative or executive
personnel or officers or partner of Lessor unless employed at competitive rates
as independent contractors; (c) Any charge for depreciation of the building or
equipment and any interest or other financing charge; (d) Any charge of Lessor's
income taxes, excess profit taxes, franchise taxes, or similar taxes on Lessor's
business; (e) All costs relating to activities for the solicitation and
execution of leases of space in the Building; (f) All costs for which Lessee or
any other lessee in the Building is being charged other than pursuant to this
paragraph 2.02; (g) The cost of any electric current furnished to the Leased
Premises or any rentable area of the Building for purposes other than the
operation of Building equipment and machinery and the lighting of public
toilets, stairways, shaftways, and Building machinery or fan rooms; (h) The cost
of correcting defects in the construction of the Building or in the Building
equipment, except that conditions (not occasioned by construction defects)
resulting from ordinary wear and tear will not be deemed defects for the purpose
of this category; (i) The cost of any repair made by Lessor because of the
total or partial destruction of the
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Building or the condemnation of a portion of the Building; (j) Any insurance
premium to the extent that Lessor is entitled to be reimbursed for it by Lessee
pursuant to this Lease or by any lessee of the Building pursuant to a similar
lease other than pursuant to clauses comparable to this paragraph 2.02; (k) The
cost of any items for which Lessor is reimbursed by insurance or otherwise
compensated by parties other than lessees of the Building pursuant to clauses
similar to this paragraph 2.02; (1) The cost of any repairs, alterations,
additions, changes, replacement, and other items that under generally accepted
accounting principles are properly classified as capital expenditures to the
extend they upgrade or improve the Building as opposed to replace existing items
that have worn out; (in) Any operating expense representing an amount paid to a
related corporation, entity, or person that is in excess of the amount that
would be paid in the absence of such relationship; (n) The cost of any work or
service performed for or facilities furnished to any lessee of the Building to a
greater extent or in a manner more favorable to such lessee than that performed
for or furnished to Lessee; (o) The cost of alterations of space in the Building
leased to other lessees; (p) The cost of overtime or other expense to Lessor in
curing its defaults or performing work expressly provided in this Lease to be
borne at Lessor's expense; and (p) Amounts paid (including interest) on account
of or to cure statutes, laws, notes, or ordinances by Lessor or any part of the
Building; or other operating expenses which are the responsibility of Lessee.
2.03 OPERATING EXPENSES. In the event that Lessor's Operating Expenses for
the Building and/or Project of which the Leased Premises are a part shall, in
any calendar year during the term of this Lease, exceed the sum of the calendar
year 1999 operating expenses per rentable square foot, Lessee shall pay, as
additional rent, Lessee's prorata share of such excess Operating Expenses.
Lessor may invoice Lessee monthly for Lessee's prorata share of the estimated
incurred Operating Expenses for each calendar year, which amount shall be
adjusted each year by Lessor based upon reasonable anticipated Operating
Expenses. Within five (5) months following the close of each calendar year,
Lessor shall provide Lessee with an accounting showing in reasonable detail all
computations of additional rent due under this Section 2.03. In the event that
Lessor's accounting shows that the total of the monthly estimated payments made
by Lessee exceeds the actual amount of additional rent due by Lessee under this
Section 2.03, then so long as Lessee is not in default hereunder, Lessee's
account shall be credited with such amount. In the event that Lessor's
accounting shows that the total of the monthly estimated payments made by Lessee
is less than the actual amount of additional rent due by Lessee under this
Section 2.03, then the accounting shall be accompanied by an invoice for the
additional rent. Notwithstanding any other provision in this Lease, during the
year in which the Expiration Date or sooner termination of the Lease occurs,
Lessor shall have the option to invoice Lessee for Lessee's prorata share of the
excess Operating Expenses based upon the previous year's Operating Expenses. If
this Lease shall terminate on a day other than the last day of a calendar year,
the amount of any additional rent payable by Lessee applicable to the year in
which such termination shall occur shall be prorated on the ratio that the
number of days from the commencement of the calendar year to and including the
termination date bears to 365. Lessee shall have the right, at its own expense
and within a reasonable time, to audit Lessor's books relevant to the additional
rent payable under this Section 2.03 Lessee may, upon not less than thirty (30)
days prior written notice to Lessor, inspect Lessor's records for all Operating
Expenses incurred during the preceding year at Lessor's general offices at such
other location reasonably designated by Lessor at any time during reasonable
business hours within six (6) months after the end of said year. If said
inspection reveals an overpayment of Operating Expenses, Lessor shall reimburse
Lessee its proportionate share of any such overpayment within thirty (30) days
after receipt of proper billing. If said inspection reveals that Lessor
misstated Operation Expenses and insurance expenses by more than five percent
(5%), Lessor shall reimburse Lessee for all costs reasonably incurred in making
such inspection within thirty (30) days after receipt of notice of
determination, and of the amount, of any such misstatement. Lessor's Operating
Expenses for any year shall be deemed correct if Lessee does not give Lessor
written notice of discrepancy within ninety (90) days of receipt of operating
expense notice. Lessee agrees to pay any additional rent due under this Section
2.03 within ten (10) days following receipt of the invoice or accounting showing
additional rent due. The Operating Expenses that vary with occupancy and that
are attributable to any part of the term in which less than one hundred percent
(100%) of the rentable area of the Building is occupied by lessees will be
adjusted by Lessor to the amount Lessor reasonably believes such expenses would
have been ninety-five percent (95%) of the rentable area of the Building had
been occupied. For purposes of determining Operating Expenses for the calendar
year 1999, the real estate taxes will be those imposed on the first year in
which the building is fully assessed as a completed building.
2.04 LATE PAYMENT CHARGE. Other remedies for nonpayment of rent
notwithstanding, if the monthly base rent and additional rent payment is not
received by Lessor on or before the first day of the month for which the rent is
due, or if any other payment due Lessor by Lessee is not received by Lessor on
or before the first day of the month next following the month in which Lessee
was invoiced, a late payment charge equal to the greater of $250.00 or five
percent (5%) of such past due amount shall become due and payable, after a 5 day
grace period, in addition to such amounts owed under this Lease.
2.05 INCREASE IN INSURANCE PREMIUMS. If an increase in any insurance
premiums paid by Lessor for the Building is caused by Lessee's use of the Leased
Premises in a manner other than as set forth in Section 1.06, or if Lessee
vacates the Leased Premises and causes an increase in such premiums, then Lessee
shall pay to Lessor, as additional rent, the amount of such increase to Lessor.
2.06 SECURITY DEPOSIT. The security deposit set forth in Section 1.07 shall
be held by Lessor in a federally insured interest bearing account for the
performance of Lessee's covenants and obligations under this Lease, it being
expressly understood that the security deposit shall not be considered an
advance payment of rental or a measure of Lessor's damage in case of default
hereunder by Lessee. Upon the occurrence of any event of default by Lessee or
breach by Lessee of Lessee's covenants under this Lease, Lessee forfeits any
rights to the interest earned and Lessor may, from time to time, without
prejudice to any other remedy, use the security deposit to the extent necessary
to make good any arrears of base rent or additional rent, or to repair any
damage or injury, or pay any expense or liability incurred by Lessor as a result
of the event of default or breach of covenant, and so long as Lessee is not in
default hereunder, any remaining balance of the security deposit shall be
returned by Lessor to Lessee within thirty (30) days following the fifth
anniversary of the Commencement Date so long as no event of default has occurred
before that date or sooner termination of this Lease. If any portion of the
security deposit is so used or applied, Lessee shall, upon ten (10) days written
notice from Lessor, deposit with Lessor by cash or cashier's check an amount
sufficient to restore the security deposit to its original amount.
2.07 HOLDING OVER. In the event that Lessee does not vacate the Leased
Premises upon the Expiration Date or sooner termination of this Lease, Lessee
shall be a tenant at will for the holdover period and all of the terms and
provisions of this Lease shall be applicable during that period, except that
Lessee shall pay Lessor as rental for the period of such holdover an amount
equal to 150% of the base rent plus additional rent which would have been
payable by Lessee had the holdover period been a part of the original term of
this Lease. Lessee agrees to vacate and deliver the Leased Premises to Lessor
upon Lessee's receipt of notice from Lessor to vacate. the rental payable
during the holdover period shall be payable to Lessor on demand. No holding over
by Lessee, whether with or without the consent of Lessor, shall operate to
extend the term of this Lease.
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ARTICLE 3.00 OCCUPANCY AND USE
3.01 USE. Lessee warrants and represents to Lessor that the Leased Premises
shall be used and occupied only for the purpose as set forth in Section 1.06.
Lessee shall occupy the Leased Premises, conduct its business and control its
agents, employees, contractors, invitees and visitors in such a manner as is
lawful, reputable. Lessor represents and warrants to Lessee that on the
Commencement Date, the Leased Premises will be in compliance with all current
laws, ordinances, orders, rules, regulations, and other governmental
requirements relating to the use, condition, and occupancy of the Leased
Premises, and all rules, orders, regulations and any body having jurisdiction
over the Leased Premises and the Building of which the Leased Premises are a
part. Lessee shall not permit any operation in the Leased Premises which emits
any odor or matter which intrudes into other portions of the Building, use any
apparatus or machine which makes undue noise or causes vibration in any portion
of the building or otherwise interfere with, annoy or disturb any other lessee
in its normal business operations or Lessor in its management of the Building.
Lessee shall neither permit any waste on the Leased Premises nor allow the
Leased Premises to be used in any way which would, in the opinion of Lessor, be
extra hazardous on account of fire or which would in any way increase or render
void the insurance on the Building.
3.02 SIGNS. No sign of any type or description shall be erected, placed or
painted in or about the Leased Premises or Building except those signs submitted
by Lessee to Lessor in writing and approved by Lessor in writing, and which
signs are in conformance with Lessor's sign criteria established for the
Building.
3.03 COMPLIANCE WITH LAWS, RULES AND REGULATIONS. Lessee, at Lessee's sole
cost and expense, shall comply with all laws (and interpretations thereof),
ordinances, orders, rules and regulations, now in force or which may hereafter
be in force, of state, federal, municipal or other agencies or bodies having
jurisdiction over use, condition and occupancy of the Leased Premises. Lessee
will comply with the rules and regulations of the Building adopted by Lessor
which are set forth on Exhibit "B", attached to and incorporated by reference
into this Lease. Lessor shall have the right, at all times, to change and/or
amend the rules and regulations in any reasonable manner as may be deemed
advisable for the safety, care, cleanliness, preservation of good order and
operation or use of the Building or the Leased Premises. All changes and
amendments to the rules and regulations of the Building will be sent by Lessor
to Lessee in writing and shall thereafter be carried out and observed by Lessee.
3.04 WARRANTY OF POSSESSION. Lessor warrants that it has the right and
authority to execute this Lease, and Lessee, upon payment of the required rents
and subject to the terms, conditions, covenants and agreements contained in this
Lease, shall have possession of the Leased Premises during the full term of this
Lease as well as any extension or renewal thereof, if any. Lessor shall not be
responsible for the acts or omissions of any other lessee or third party that
may interfere with Lessee's use and enjoyment of the Leased Premises.
3.05 INSPECTION. Lessor, its property manager, or its authorized agents
shall at any and all reasonable times have the right to enter the Leased
Premises after reasonable notice to inspect the same, to supply janitorial
service or any other service to be provided by Lessor, to show the Leased
Premises to prospective purchasers, mortgagees, or lessees, and to alter,
improve or repair the Leased Premises or any other portion of the Building.
Lessee hereby waives any claim for damages for injury or inconvenience to or
interference with Lessee's business, any loss of occupancy or use of the Leased
Premises, and any other loss occasioned thereby. Lessor shall at all times have
and retain a key with which to unlock all of the doors in, upon and about the
Leased Premises. Lessee shall not change Lessor's lock system, or add any
additional locks, or in any other manner prohibit Lessor from entering the
Leased Premises. Lessor shall have the right to use any and all means which
Lessor may deem proper to open any door in or to the Leased Premises in an
emergency without liability therefor.
3.06 ACCEPTANCE OF LEASED PREMISES: Lessee shall execute an Acceptance of
Premises/Tenant Estoppel Certificate essentially in the form attached hereto as
Exhibit "D" and by reference incorporated herein, acknowledging that the Lessee
has assumed possession of the Leased Premises and confirming the Commencement
Date/Completion Date for the term of this Lease. Said Acceptance of
Premises/Tenant Estoppel Certificate shall be executed by Lessee at the time
Lessee receives keys and assumes possession of the Leased Premises. Lessor will
construct the Leased Premises as promptly based upon an agreed construction
schedule this Lease in a good and workmanlike manner and in conformance with all
applicable federal, state and local laws. Lessor warrants the design,
construction and materials of the Leased Premises and materials of the Leased
Premises and all components of the Leased Premises including, without
limitation, heating, ventilating, air conditioning, roof, mechanical,
electrical, and other systems for one (1) year after the date of Substantial
Completion and will repair, restore, renovate and replace as its cost with goods
and material of equal quality in any part of the Premises that is or becomes
defective during that period. Lessor will indemnify Lessee against and hold
Lessee harmless from any material loss, liability and expense (including
reasonable attorney's fees and court costs) arising out of a breach of this
warranty or any material defect of workmanships, design or materials in that
period.
3.07 NON-SMOKING BUILDING. The Lessor has adopted a policy of non-smoking
(for all employees, agents or invitees) in all confined spaces, common areas or
leased areas, within the Building. Certain designated areas outside the Building
will be identified for smoking by the Lessee, his employees, agents or invitees.
Lessee hereby acknowledges that such designated outdoor areas are necessary and
reasonable to prevent smoking by Lessee, Lessee's employees, agents and invitees
in unauthorized areas of the Building.
ARTICLE 4.00 UTILITIES AND SERVICE
4.01 BUILDING SERVICES. Lessor shall provide water and electricity to the
Leased Premises during the term of this Lease. Lessee shall provide and pay for
all telephone equipment and charges to the Leased Premises. Lessor shall furnish
hot and cold water at those points of supply provided for general use of other
lessees in the Building, central heating and air conditioning in season (at
times Lessor normally provides these services to other lessees in the Building,
and at temperatures and in amounts as are considered by Lessor to be standard or
in compliance with any governmental regulations, such service on Saturday
afternoons, Sundays, evenings and holidays to be furnished only upon the prior
written request of Lessee, who shall bear the cost at Lessor's then prevailing
rate). Lessor shall also provide routine maintenance, painting and electric
lighting service for all public areas and special service areas of the Building
in the manner and to the extent deemed by Lessor to be standard. Lessor may, in
its sole discretion, provide additional services not enumerated herein. Failure
by Lessor to any extent to provide these services or any other services not
enumerated, or any cessation thereof, shall not render Lessor liable in any
respect for damages to either person or property, be construed as an eviction of
Lessee, work an abatement of any rentals or relieve Lessee from fulfillment of
any covenant in this Lease. Should any of the equipment or machinery providing
services in the Building break down, or for any cause cease to function
properly, Lessor shall use reasonable diligence to repair the same promptly, but
Lessee shall have no claim for rebate of any rentals on account of any
interruption in service occasioned from the repairs. Lessor reserves the right
from time to time to make changes in the utilities and services provided by
Lessor to the Building.
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4.02 THEFT OR BURGLARY. Lessor shall not be liable to Lessee for losses to
Lessee's property or personal injury caused by criminal acts or entry by persons
into the Leased Premises or the Building.
4.03 JANITORIAL SERVICE. Lessor shall furnish janitorial services to the
Leased Premises and public areas of the Building five (5) times per week during
the term of this Lease, excluding holidays. Lessor shall not provide janitorial
service to any kitchens or storage areas included in the Leased Premises.
4.04 EXCESSIVE UTILITY CONSUMPTION. Lessee shall pay all utility costs, as
such may be determined by Lessor, occasioned by electrodata processing machines,
telephone equipment, computers and other equipment of high electrical
consumption, including without limitation, the cost of installing, servicing and
maintaining any special or additional inside or outside wiring or lines, meters
or transformers, poles, air conditioning costs, or the cost of any other
equipment necessary to increase the amount or type of electricity or power
available to the Leased Premises.
4.05 WINDOW COVERINGS. Lessor shall furnish and install window coverings on
all exterior windows in the Leased Premises so as to maintain a uniform exterior
appearance of the Building. Lessee shall not remove or replace these window
coverings or install any other window covering which would affect the exterior
appearance of the Building. Lessee may install lined or unlined over draperies
on the interior sides of the window coverings furnished by Lessor for interior
appearance or to reduce light transmission, provided such over draperies do not
affect the exterior appearance of the Building or affect the operating of the
Building's heating, ventilating and air conditioning systems.
4.06 CHARGE FOR SERVICE. All costs incurred by Lessor in providing the
services set forth in Article 4.00 (except those charges paid by Lessee pursuant
to Section 4.04) shall be subject to the additional rent provisions in Section
2.03.
ARTICLE 5.00 REPAIRS AND MAINTENANCE
5.01 LESSOR REPAIRS. Lessor shall not be required to make any improvements,
replacements or repairs of any kind or character to the Leased Premises or the
Building during the term of this Lease except as are set forth in this Section
5.01. Lessor shall maintain only the roof, foundation, parking and common areas,
the structural soundness of the exterior walls of the Building and the doors,
corridors, windows and other structures or equipment serving the Leased
Premises. Lessor's cost of maintaining and repairing the items set forth in this
Section 5.01 are subject to the additional rent provisions in Section 2.03.
Lessor shall not be liable to Lessee, except as expressly provided in this
Lease, for any damage or inconvenience, and Lessee shall not be entitled to any
abatement or reduction of rent by reason of any repairs, alterations or
additions made by Lessor under this Lease.
5.02 LESSEE REPAIRS. Lessee shall, at its sole cost and expense, repair or
replace any damage or injury to all or any part of the Leased Premises caused by
any act or omission of Lessee or Lessee's agents, employees, contractors,
invitees, licensees or visitors; provided, however, if Lessee fails to promptly
make the repairs or replacements, Lessor may, at its option, make the repairs or
replacements, and the costs of such repairs or replacements shall be charged to
Lessee as additional rent and shall become due and payable by Lessee with
payment of the base rent next due hereunder. All repairs made by Lessee shall be
subject to the requirements of Section 6.03 below.
5.03 REQUEST FOR REPAIRS. All requests for repairs or maintenance to the
Leased Premises of the Building that are the responsibility of Lessor pursuant
to any provision of this Lease must be made by Lessee in writing to Lessor at
the address in Section 16.07.
5.04 Lessee Damages. Lessee shall deliver the Leased Premises to Lessor in
as good condition as existed at the Commencement Date of this Lease, ordinary
wear and tear excepted. The cost and expense of any repairs necessary to restore
the condition of the Leased Premises shall be borne by Lessee.
ARTICLE 6.00 ALTERATIONS AND IMPROVEMENTS
6.01 LESSOR IMPROVEMENTS. If construction to the Leased Premises is to be
performed by Lessor prior to or during Lessee's occupancy, Lessor shall use
reasonable efforts to complete the construction of the improvements to the
Leased Premises, in accordance with plans and specifications agreed to by Lessor
and Lessee, which plans and specifications are attached hereto as Exhibit "C"
and are made a part of this Lease by reference. Within seven (7) days of receipt
of plans and specifications, Lessee shall execute a copy of the plans and
specifications and, if applicable, change orders setting forth the amount of any
costs to be borne by Lessee. In the event Lessee fails to execute the plans and
specifications and change order within the seven (7) day period, Lessor may, at
its sole option, declare this Lease cancelled or notify Lessee that the base
rent shall commence on the Completion Date even though the improvements to be
constructed by Lessor may not be complete. Any changes or modifications to the
approved plans and specifications shall be made and accepted by written change
order or agreement signed by both Lessor and Lessee and shall constitute an
amendment to this Lease.
6.02 LESSEE IMPROVEMENTS. Lessee shall not make or allow to be made any
alterations or physical additions in or to the Leased Premises without first
obtaining the prior written consent of Lessor, which consent may in the
reasonable judgement of Lessor be denied. Any alterations, physical additions or
improvements made by Lessee to the Leased Premises shall at once become the
property of Lessor and shall be surrendered to Lessor upon the Expiration Date
or sooner termination of this Lease; provided, however, that Lessor, at its
option, may require Lessee to remove any physical additions and/or repair any
alterations in order to restore the Leased Premises to the condition existing at
the Commencement Date, all costs of removal and/or alterations to be borne by
Lessee. This Section 6.02 shall not apply to moveable equipment or furniture
owned by Lessee, which may be removed by Lessee at the Expiration Date or sooner
termination of the term of this Lease only if Lessee is not then in default and
if such equipment and furniture are not then subject to any other rights, liens
and interest of Lessor.
6.03 MECHANICS LIEN. Lessee shall not permit any mechanic's or materialman's
lien(s) or other lien to be placed upon the Leased Premises or the Building on
account done by, for or at the request of Lessee and nothing in this Lease
shall be deemed or construed in any way as constituting the consent or request
of Lessor, express or implied, by inference or otherwise, to any person for the
performance of any labor or the furnishing of any materials to the Leased
Premises, or any part thereof, nor as giving Lessee any right, power, or
authority to contract for or permit the rendering of any services or the
furnishing of any materials that would give rise to any mechanic's,
materialman's or other lien against the Leased Premises or the Building. In the
event any such lien is attached to the Leased Premises or the Building, then, in
addition to any other right or remedy of Lessor, Lessor may, but shall not be
obligated to, obtain the release of or otherwise discharge the same. Any amount
paid by Lessor for any of the aforesaid purposes shall be paid by Lessee to
Lessor on demand as additional rent. At Lessor's request,
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Lessee shall post a completion bond or other financial security deemed adequate
by Lessor to avoid the potential for the placement of liens upon the property.
ARTICLE 7.00 CASUALTY AND INSURANCE
7.01 SUBSTANTIAL DESTRUCTION. If the Leased Premises should be totally
destroyed by fire or other casualty, or if the Leased Premises should be damaged
so that rebuilding cannot reasonably be completed within ninety (90) working
days after the date of written notification by Lessee to Lessor of the
destruction, this Lease shall terminate and Lessee shall be relieved of its
obligation to pay base rent and additional rent during the unexpired portion of
the Lease, effective as of the date of the written notification.
7.02 PARTIAL DESTRUCTION. If the Leased Premises should be partially damaged
by fire or other casualty, and rebuilding or repairs can reasonably be completed
within ninety (90) working days from the date of written notification by Lessee
to Lessor of the destruction, this Lease shall not terminate, and Lessor shall
at its sole risk and expense proceed with reasonable diligence to rebuild or
repair the Building or other improvements to substantially the same condition in
which they existed prior to the damage. If the Leased Premises are to be rebuilt
or repaired and are untenantable in whole or in part following the damage, the
rentals payable under this Lease during the period for which the Leased Premises
are untenantable shall be adjusted to such an extent as may be fair and
reasonable under the circumstances.
7.03 LESSOR'S INSURANCE. At all times during the term of this Lease Lessor
shall maintain a policy of insurance with the premiums paid in advance, issued
by and binding upon an insurance company with a Best rating of A-9 or better,
insuring the Building against all risk of direct physical loss in an amount
equal to at least ninety percent (90%) of the full replacement cost of the
Building and its improvements as of the date of the losses, in addition, Lessor
shall maintain two million dollars in liability insurance, however, Lessor shall
not be obligated in any way or manner to insure any personal property
(including, but not limited to, any furniture, machinery, goods or supplies) of
Lessee upon or within the Leased Premises, any fixtures installed or paid for by
Lessee upon or within the Leased Premises, or any improvements which Lessee may
construct on the Leased Premises. Lessee shall have no right in or claim to the
proceeds of any policy of insurance maintained by Lessor even though the cost of
such insurance is included as a component of Operating Expenses and partially
borne by Lessee as set forth in Section 2.03.
7.04 WAIVER OF SUBROGATION. Anything in this Lease to the contrary
notwithstanding, Lessor and Lessee hereby waive and release each other of and
from any and all right of recovery, claim, action or cause of action, against
each other, their agents, officers and employees, for any loss or damage that
may occur to the Leased Premises, improvements to the Building of which the
Leased Premises are a part, or personal property within the Building, by reason
of fire or the elements, regardless of cause or origin, including negligence of
Lessor or Lessee and their agents, contractors, officers and employees. Lessor
and Lessee agree immediately to give their respective insurance companies which
have issued policies of insurance covering all risk of direct physical loss,
written notice of the terms of the mutual waivers contained in this Section
7.04, and to have the insurance policies properly endorsed, if necessary, to
prevent the invalidation of the insurance coverage by reason of the mutual
waivers.
7.05 HOLD HARMLESS. Lessor shall not be liable to Lessee's employees,
contractors, agents, invitees, licensees or visitors, or to any other person,
for an injury to person or damage to property on or about the Leased Premises
caused by any act or omission of Lessee, its agents, servants or employees, or
of any other person entering upon the Leased Premises under express or implied
invitation by Lessee, or caused by the improvements located on the Leased
Premises becoming out of repair, the failure or cessation of any service
provided by Lessor, or caused by leakage of gas, oil, water or steam or by
electricity emanating from the Leased Premises. Lessee agrees to indemnify and
hold harmless Lessor of and from any loss, attorney's fees, expenses or claims
arising out of any such damage or injury.
ARTICLE 8.00 CONDEMNATION
8.01 SUBSTANTIAL TAKING. If all or a substantial part of the Leased Premises
are taken for any public or quasi-public use under any governmental law,
ordinance or regulation, or by right of eminent domain or by purchase in lieu
thereof, and the taking would prevent or materially interfere with the use of
the Leased Premises for the use specified in Section 1.06, then this Lease shall
terminate and Lessee shall be relieved of its obligation to pay base rent and
additional rent during the unexpired portion of the term of this Lease effective
on the date physical possession is taken by the condemning authority. Lessee
shall have no claim to the condemnation award or proceeds in lieu thereof.
8.02 PARTIAL TAKING. If a portion of the Leased Premises shall be taken for
any public or quasi-public use under any governmental law, ordinance or
regulation, or by right of eminent domain or by purchase in lieu thereof, and
this Lease is not terminated as provided in Section 8.01, Lessor shall, at
Lessor's sole risk and expense, restore and reconstruct the Building and other
improvements on the Leased Premises to the extent necessary to make it
reasonably tenantable. The rental payable during the unexpired portion of the
term of this Lease shall be adjusted to such an extent as may be fair and
reasonable under the circumstances. Lessee shall have no claim to the
condemnation award or proceeds in lieu thereof.
ARTICLE 9.00 ASSIGNMENT OR SUBLEASE
9.01 LESSOR ASSIGNMENT. Lessor shall have the right to sell, transfer or
assign, in whole or in part, its rights and obligations under this Lease and in
the Building to a transferee who is capable of performing Lessor's obligations
under this Lease and assumes and agrees to do so. Any such sale, transfer or
assignment shall operate to release Lessor from any and all liabilities under
this Lease arising after the date of such sale, assignment or transfer.
9.02 LESSEE ASSIGNMENT. Lessee shall not assign, in whole or in part, this
Lease, or allow it to be assigned, in whole or in part, by operation of law or
otherwise (including without limitation by transfer of a majority interest of
stock, merger, or dissolution, which transfer of majority interest of stock,
merger or dissolution shall be deemed an assignment) or mortgage or pledge the
same, or sublet the Leased Premises, in whole or in part, without the prior
written consent of Lessor which will not be reasonably withheld, conditioned or
delayed, and in no event shall any such assignment or sublease ever release
Lessee or any guarantor from any obligation or liability hereunder. No assignee
or sublessee of the Leased Premises or any portion thereof may assign or sublet
the Leased Premises or any portion thereof without the prior written consent of
Lessor, which will not be unreasonably withheld, conditioned or delayed.
9.03 CONDITIONS OF ASSIGNMENT. If Lessee desires to assign or sublet all or
any part of the Leased Premises, Lessee shall so notify Lessor at least thirty
(30) days in advance of the date on which Lessee desires to make such assignment
or sublease. Lessee shall submit to Lessor a non-refundable processing fee of
$300.00 for each such requests and shall provide Lessor with a copy of the
proposed assignment or sublease and such information as Lessor might request
concerning the proposed sublessee or assignee to allow Lessor to make informed
judgments as to the financial condition, reputation, operations and general
desirability of the proposed sublessee or assignee. Within fifteen (15) days
after Lessor's receipt of Lessee's proposed assignment or sublease and all
required information concerning the proposed sublessee or assignee, to include a
non-refundable processing fee, Lessor shall have the following options: (1) to
cancel this Lease as to the Leased Premises or portion
5
<PAGE> 9
thereof proposed to be assigned or sublet; (2) to consent to the proposed
assignment or sublease, and, if the rental due and payable by any assignee or
sublessee under any such permitted assignment or sublease (or a combination of
the rent payable under such assignment or sublease plus any bonus or any other
consideration or any payment incident thereto) exceeds the base rent and
additional rent payable under this Lease for such space, Lessee shall pay to
Lessor all such excess rent and other excess consideration within ten (10) days
following receipt thereof by Lessee; or (3) to refuse, in the exercise of its
good faith and reasonable judgement, to consent to the proposed assignment or
sublease, which refusal shall be deemed to have been exercised unless Lessor
gives Lessee written notice providing otherwise. Upon the occurrence of any
event of default, if all or any part of the Leased Premises are then assigned or
sublet, Lessor, in addition to any other remedies provided by this Lease or
provided by law, may, at its option, collect directly from the assignee or
sublessee all rents becoming due to Lessee by reason of the assignment or
sublease, and Lessor shall have a security interest in all properties on the
Leased Premises to secure payment of such sums. Any collection directly by
Lessor from the assignee or sublessee shall not be construed to constitute a
novation or a release of Lessee or any guarantor from the further performance of
its obligations under this Lease.
9.04 SUBORDINATION. Lessee accepts this Lease subject and subordinate to any
recorded mortgage or deed of trust lien presently existing or hereafter created
upon the Building and to all existing recorded restrictions, covenants,
easements and agreements with respect to the Building. Lessor is hereby
irrevocably vested with full power and authority to subordinate Lessee's
interest under this Lease to any first mortgage or deed of trust lien hereafter
placed on the Leased Premises or the Building, so long as Lessee receives a
subordination, non-disturbance and attornment agreement in form and substance
reasonably satisfactory to it and Lessee shall, upon demand, execute additional
instruments subordinating this Lease as Lessor may require. If the interests of
Lessor under this Lease shall be transferred by reason of foreclosure or other
proceedings for enforcement of any first mortgage or deed of trust lien on the
Leased Premises or the Building, Lessee shall be bound to the transferee
(sometimes hereinafter called the "Purchaser") at the option of the Purchaser,
under the terms, covenants and conditions of this Lease for the balance of the
term of this Lease remaining, including any extensions or renewals, with the
same force and effect as if the Purchaser were Lessor under this Lease, and, if
requested by the Purchaser, Lessee agrees to attorn to the Purchaser, including
the first mortgagee under any such mortgage if it be the Purchaser, as its
Lessor.
9.05 ESTOPPEL CERTIFICATES. Lessee shall furnish, from time to time, within
ten (10) days after receipt of a request from Lessor or Lessor's mortgagee, a
statement certifying, if applicable, the following: Lessee is in possession of
the Leased Premises; the Leased Premises are acceptable; the Lease is in full
force and effect; the Lease is unmodified; Lessee claims no present charge, lien
or claim of offset against rentals; the base rent and additional rent is paid
for the current month, but is not prepaid for more than one (1) month and will
not be prepaid for more than one (1) month in advance; there is no existing
default by reason of some act or omission by Lessor; and such other matters as
may be reasonably required by Lessor or Lessor's mortgagee. Lessee's failure to
deliver such statement, in addition to being a default under this Lease, shall
be deemed to establish conclusively that this Lease is in full force and effect
except as declared by Lessor, that Lessor is not in default of any of its
obligations under this Lease, and that Lessor has not received more than one (1)
month's Base rent and additional rent in advance.
ARTICLE 10.00 DEFAULT AND REMEDIES
10.01 DEFAULT BY LESSEE. The following shall be deemed to be events of
default by Lessee under this Lease: (1) Lessee shall fail to pay when due any
installment of base rent or additional rent or any other payment required
pursuant to this Lease; or (2) Lessee shall abandon or vacate all or any
substantial portion of the Leased Premises; or (3) Lessee shall fail to comply
with any term, provision or covenant of this Lease, other than the payment of
base rent and additional rent, and the failure is not cured within ten (10) days
after written notice to Lessee, unless the failure cannot reasonably be cured
within ten (10) days, in which event Lessee will not be in default so long as it
commences the cure within ten (10) days and diligently pursues it to completion;
or (4) Lessee shall file a petition or be adjudged bankrupt or insolvent under
any applicable federal or state bankruptcy or insolvency law or admit that it
cannot meet its financial obligations as they become due; or a receiver or
trustee shall be appointed for all or substantially all of the assets of Lessee;
or Lessee shall make a transfer in fraud of creditors or shall make an
assignment for the benefit of creditors; or (5) Lessee shall do or permit to be
done any act which results in a lien being filed against the Leased Premises or
the Building of which the Leased Premises are a part and the lien is not
released within thirty (30) days after Lessee received notice of it.
10.02 REMEDIES FOR LESSEE'S DEFAULT. Upon the occurrence of any event of
default set forth in this Lease, Lessor shall have the option to pursue any one
(1) or more of the remedies set forth herein without any notice or demand: (1)
Lessor may enter upon and take possession of the Leased Premises, by picking or
changing locks if necessary, and lock out, expel or remove Lessee and any other
person who may be occupying all or any part of the Leased Premises without being
liable for any claim for damages, and relet the Leased Premises on behalf of
Lessee and receive the rental directly by reason of the reletting. Lessee agrees
to pay Lessor on demand any deficiency that may arise by reason of any reletting
of the Leased Premises; further, Lessee agrees to reimburse Lessor for any
expenditures made by it in order to relet the Leased Premises, including, but
not limited to, leasing commissions, remodeling and repair costs. (2) Lessor may
enter upon the Leased Premises, by picking or changing locks if necessary,
without being liable for any claim for damages, and do whatever Lessee is
obligated to do under the terms of this Lease. Lessee shall reimburse Lessor on
demand for any expenses which Lessor may incur in effecting compliance with
Lessee's obligations under this Lease; further, Lessee agrees that Lessor shall
not be liable for any damages resulting to Lessee from effecting compliance with
Lessee's obligations under this Lease caused by the negligence of Lessor or
otherwise. (3) Lessor may terminate this Lease, in which event Lessee shall
immediately surrender the Leased Premises to Lessor, and if Lessee fails to
surrender the Leased Premises, Lessor may, without prejudice to any other remedy
which it may have for possession or arrearage in base rent and/or additional
rent, enter upon and take possession of the Leased Premises, by picking or
changing locks if necessary, and lock out, expel or remove Lessee and any other
person who may be occupying all or any part of the Leased Premises without being
liable for any claim for damages. Lessee agrees to pay on demand the amount of
all loss and damage which Lessor may suffer by reason of the termination of this
Lease under this Section 11.02, whether through inability to relet the Leased
Premises on satisfactory terms or otherwise. Notwithstanding any other remedy
set forth in this Lease, in the event Lessor has provided to Lessee any rent
concessions of any type or character, or waived any base rent and/or additional
rent, and Lessee fails to take possession of the Leased Premises on the
Commencement Date or Completion Date or otherwise defaults at any time during
the term of this Lease, the rent concessions, including any waived base rent
and/or additional rent, shall be cancelled and the amount of the base rent or
other rent concessions shall be due and payable immediately as if no rent
concessions or waiver of any base rent and/or additional rent or other rent
concessions had ever been granted. A rent concession or waiver of base rent
and/or additional rent shall not relieve Lessee of any obligation to pay any
other charge due and payable under this Lease including without limitation any
sum due under section 2.03. Notwithstanding anything contained in this Lease to
the contrary, this Lease may be terminated by Lessor only by mailing or
delivering written notice of such termination to Lessee, and no other act or
omission of Lessor shall be construed as a termination of this Lease.
ARTICLE 11.00 SUBSTITUTE PREMISES
11.01 RELOCATION. In the event Lessor determines to utilize the Leased
Premises for other purposes during the term of this Lease, Lessee agrees to
relocate to other space in the Building designated by Lessor, provided such
other space is of comparable size and contains comparable improvements as the
Leased Premises (the "Substitute Premises").
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11.02 EXPENSES. Lessor shall pay all of Lessee's reimbursable out-of-pocket
expenses for any such relocation to the Substitute Premises, including the
expenses of moving and reconstruction of improvements. In the event of such
relocation, this Lease shall continue in full force and effect without any
change in the terms or conditions of this Lease, but with the new location
substituted for the old location set forth in Section 1.02 of this Lease and a
revised base rent as set forth in Section 1.04 based upon the comparable rate
per rentable square foot then payable for the Leased Premises.
ARTICLE 12.00 HAZARDOUS MATERIALS
12.01 HAZARDOUS MATERIALS. In the event Hazardous Materials, as defined
below, are discovered to be present in, on, or below the Leased Premises or the
Building, Lessee shall not be required to pay any portion of the penalties,
fines or costs related to the presence of Toxic Materials and their removal,
including any costs incurred to comply with any and all rules, regulations,
codes, ordinances, statutes, and other requirements of any lawful governmental
authority respecting Hazardous Materials, pollution, harmful chemicals and other
materials which existed on or below the Leased Premises or the Building prior to
Lessee's occupancy of the Leased Premises; provided, however, if and to the
extent the presence of such Toxic Materials is directly or indirectly caused by
Lessee or its agents, employees or contractors, Lessee shall, at its sole cost
and expense, remove the same.
As used herein, the term "Hazardous Materials" shall include, but not be limited
to, any hazardous or toxic substance, material or waste which is or becomes
regulated by any local governmental authority, the United States Government, or
designated as a "hazardous substance" pursuant to Section 311 of the Federal
Water Pollution Control Act (33 U.S.C. (1317)), defined as a "hazardous waste"
pursuant to Section 1004 of the Federal Resource Conservation and Recovery Act,
42 U.S.C. (6901 et. seq.) (42 U.S.C. (6903)), or defined as a "hazardous
substance" pursuant to Section 101 of the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. (9601 et. seq. (42 U.S.C. 9601)).
Lessee shall not (either with or without negligence) cause or permit the escape,
disposal or release of any biologically or chemically active or other hazardous
substances, or materials in the Leased Premises of the Building. Lessee shall
not allow the storage or use of such substances or materials in any manner not
sanctioned by law or by the highest standards prevailing in the industry for the
storage and use of such substances or materials, nor allow to be brought into
the Building any such materials or substances except to use in the ordinary
course of Lessee's business, and then only after prior written notice is given
to Lessor of the identity of such substances or materials. Without limitation,
Hazardous Materials and materials shall include those described in the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, 42 U.S.C. Section 9601 et. seq., the Resource Conservation and Recovery
Act, as amended, 42 U.S.C. Section 6901 et. seq., any applicable state or local
laws and the regulations adopted under these acts. If any lender or governmental
agency shall ever require testing to ascertain whether or not there has been any
release of Hazardous Materials, then the reasonable costs thereof shall be
reimbursed by Lessee to Lessor upon demand as additional charges if such
requirement applies to the Leased Premises. In addition, Lessee shall execute
affidavits, representations and the like from time to time at Lessor's request
concerning Lessee's best knowledge and belief regarding the presence of
Hazardous Materials on the Leased Premises or the Building. In all events,
Lessee shall indemnify Lessor in the manner elsewhere provided in this Lease
from any release of Hazardous Materials on the Leased Premises or the Building
during the term of this Lease occurring, or elsewhere if caused by Lessee or
persons acting under Lessee. The within covenants shall survive the Expiration
Date or earlier termination of this Lease.
ARTICLE 13.00 DEFINITIONS
13.01 ABANDON. "Abandon" is defined as the vacating of all or a substantial
portion of the Leased Premises by Lessee, and whether or not Lessee is in
default of the rental payments due under this Lease.
13.02 ACT OF GOD OR FORCE MAJEURE. An "Act of God" or "Force Majeure" is
defined as strikes, lockouts, sitdowns, material or labor restrictions by any
governmental authority, unusual transportation delays, riots, floods, washouts,
explosions, earthquakes, fire, storms, weather (including wet grounds or
inclement weather which prevents construction), acts of the public enemy, wars,
insurrections and any other cause not reasonably within the control of Lessor
and which by the exercise of due diligence Lessor is unable, wholly or in part,
to prevent or overcome.
13.03 BUILDING. "Building" as used in this Lease means the Building
described in Section 1.02, including the Leased Premises and the land upon which
the Building is situated.
13.04 COMMENCEMENT DATE. "Commencement Date" shall be the date set forth in
Section 1.03. The Commencement Date shall constitute the commencement of the
term of this Lease for all purposes, whether or not Lessee has actually taken
possession of the Leased Premises.
13.05 COMPLETION DATE. "Completion Date" shall be "Substantial Completion"
of the Leased Premises, Building, parking, landscaping and all Building
specifications as described in Exhibit C, subject only to minor punch list items
that do not interfere with Lessee's use of the Leased Premises for its intended
purpose, all of which shall be corrected by Lessor, at its cost, within sixty
(60) days after the Lessee's occupancy and issuance of an unconditional
certificate of occupancy. The cure of the punch list items will be done with as
little disturbance to Lessee as possible. Upon termination or expiration of this
Lease, except for ordinary wear and tear, damages caused by Lessor or Lessor's
representatives, condemnation, and damages, Lessee shall deliver the Leased
Premises back to Lessor in the then "as is" condition. The Completion Date shall
constitute the Commencement Date of the term of this Lease for all purposes,
whether or not Lessee has actually taken possession of the Leased Premises.
Lessor shall use its reasonable efforts to establish the Completion Date as the
date set forth in Section 1.03. In the event that the improvements to the Leased
Premises have not in fact been completed as of that date, Lessee shall notify
Lessor in writing of its objections. Lessor shall have a reasonable time after
delivery of the notice in which to take such corrective action as may be
necessary and shall notify Lessee in writing as soon as it deems such corrective
action has been completed and the Leased Premises is ready for occupancy. Upon
completion of construction, Lessee and Lessor shall execute an Acceptance of
Leased Premises/Tenant Estoppel Certificate substantially in the form of Exhibit
"D", attached hereto and incorporated by reference herein. Whether or not Lessee
has executed such agreement, Lessee's taking possession of the Leased Premises
shall be deemed to establish conclusively that the improvements in the Leased
Premises have been completed in accordance with the plans and specifications,
are suitable for the purposes for which they are let, and that the Leased
Premises are in a good and satisfactory condition as of the date possession was
so delivered to Lessee, except for latent defects, if any and punch list matters
that Lessee will submit to us or within sixty (60) days after the Commencement
Date.
13.06 SQUARE FEET. "Square Feet" or "Square Foot" as used in this Lease
includes the area contained within the Leased Premises together with a common
area percentage factor of the Leased Premises proportionate to the total area of
the Building.
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ARTICLE 14.00 LESSEE'S INSURANCE
14.01 FIRE AND EXTENDED COVERAGE. Lessee shall, during the term of this
lease, maintain at its expense, a policy of fire and extended coverage
insurance, with vandalism and malicious mischief endorsements, on all of its
personal property, including removable trade fixtures, located in the Leased
Premises and on additions, improvements and fixtures made or installed by Lessee
to or in the Leased Premises to the extent of at least ninety percent (90%) of
their full replacement value.
14.02 GENERAL LIABILITY AND PROPERTY. Lessee shall, during the term of this
lease, maintain at its expense a policy of commercial general liability
insurance insuring Lessee against liability arising out of the use occupancy or
maintenance of the Leased Premises with liability limits of not less than
$2,000,000 per occurrence, combined single limit for bodily injury and property
damage. The policy shall name Lessor as an additional insured.
14.03 ENDORSEMENTS. All insurance to be maintained by Lessee shall (a)
contain an endorsement requiring a minimum of thirty (30) days written notice
from the insurance company to Lessor before termination, cancellation of or
change in the policy; (b) be primary and noncontributing with respect to any
insurance maintained by Lessor; and (c) be issued by an insurance company
satisfactory to Lessor. Prior to the Commencement Date and at all times during
the term hereof, Lessee shall provide Lessor with satisfactory evidence that
Lessee has obtained the required insurance. Lessee shall increase the protection
afforded by the public liability and property damage insurance at Lessor's
reasonable request.
ARTICLE 15.00 MISCELLANEOUS
15.01 WAIVER. Failure of Lessor to declare an event of default by Lessee
immediately upon its occurrence, or delay in taking any action in connection
with an event of default, shall not constitute a waiver of the default by
Lessee, but Lessor shall have the right to declare the default at any time and
take such action as is lawful or authorized under this Lease. Pursuit of any one
(1) or more of the remedies set forth in Article 11.00 shall not preclude
pursuit of any one (1) or more of the other remedies provided elsewhere in this
Lease or provided by law, nor shall pursuit of any remedy constitute forfeiture
or waiver of any base rent or additional rent or damages accruing to Lessor by
reason of the violation of any of the terms, provisions or covenants of this
Lease. Failure by Lessor to enforce one or more of the remedies provided upon an
event of default by Lessee shall not be deemed or construed to constitute a
waiver of the default or of any other violation or breach of any of the terms,
provisions and covenants contained in this Lease.
15.02 ACT OF GOD. Lessor shall not be required to perform any covenant or
obligation in this Lease, or be liable in damages to Lessee, so long as the
performance or non-performance of the covenant or obligation is delayed, caused
or prevented by an Act of God, Force Majeure or by Lessee.
15.03 ATTORNEY'S FEES. In the event either party defaults in the performance
of any of the terms, covenants, agreements, or conditions contained in this
Lease, following a non-appealable judgement, the prevailing party shall be
entitled to recover from the losing party reasonable attorney's fees and cost of
suit.
15.04 SUCCESSORS. This Lease shall be binding upon and inure to the benefit
of Lessor and Lessee and their respective heirs, personal representatives,
successors and assigns. It is hereby covenanted and agreed that should Lessor's
interest in the Leased Premises cease to exist for any reason during the term of
this Lease, then notwithstanding the happening of such event, this Lease
nevertheless shall remain unimpaired and in full force and effect, and Lessee
hereunder agrees to attorn to the then owner of the Leased Premises.
15.05 RENT TAX. If applicable in the jurisdiction where the Leased Premises
is situated, Lessee shall pay and be liable for all rental, sales and use taxes
or other similar taxes, if any, levied or imposed by any city, state, county or
other governmental body having authority, such payments to be in addition to all
other payments required to be paid to Lessor by Lessee under the terms of this
Lease. Any such payment shall be paid concurrently with the payment of the base
rent, additional rent, or any other charge upon which the tax is based as set
forth above.
15.06 CAPTIONS. The captions appearing in this Lease are inserted only as a
matter of convenience and in no way define, limit, construe or describe the
scope or intent of any section.
15.07 NOTICE. All rent and other payments required to be made by Lessee
shall be payable to Lessor at the address set forth in section 1.05. All
payments required to be made by Lessor to Lessee shall be payable to Lessee at
the address set forth in this Section 16.07, or at any other address within the
United States as Lessee may specify from time to time by written notice. Any
notice or document required or permitted to be delivered by the terms of this
Lease shall be deemed to be delivered (whether or not actually received) when
deposited in the United States Mail, postage prepaid, certified mail, return
receipt requested, addressed to the parties at the respective addresses set
forth below:
<TABLE>
<CAPTION>
Lessor: Lessee:
------- -------
<S> <C>
Greenwood Plaza Partners, LLC New Era of Networks, Inc.
5000 South Quebec Street, Suite 450 6550 South Greenwood Plaza Blvd., Suite 100 and 200
Denver, Colorado 80237 Englewood, Colorado 80111
</TABLE>
15.08 SUBMISSION OF LEASE. Submission of this Lease to Lessee for signature
does not constitute a reservation of space or an option to lease. This Lease is
not effective until execution by, and delivery to, both Lessor and Lessee.
15.09 CORPORATE AUTHORITY. If Lessee executes this Lease as a corporation,
each of the persons executing this Lease on behalf of Lessee does hereby
personally represent and warrant that Lessee is a duly authorized and existing
corporation, that Lessee is qualified to do business in the state in which the
Leased Premises are located, that Lessee, as a corporation, has full right and
authority to enter into this Lease, and that each person signing on behalf of
Lessee, as a corporation, is authorized to do so. In the event any
representation or warranty is false, all persons who execute this Lease on
behalf of Lessee shall be liable, individually, as Lessee.
15.10 SEVERABILITY. If any provision of this Lease or the application
thereof to any person or circumstances shall be invalid or unenforceable to any
extent, then the remainder of this Lease and the application of such provisions
to other persons or circumstances shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
15.11 LESSOR'S LIABILITY. If Lessor shall be in default under this Lease
and, if as a consequence of such default, Lessee shall recover a money judgment
against Lessor, such judgment shall be satisfied only out of the right, title
and interest of Lessor in the Building as the same may then be encumbered and
neither Lessor nor any person or entity comprising Lessor shall be liable for
any deficiency. In no event shall Lessee have the right to levy execution
against any property of Lessor nor any person or entity comprising Lessor, other
than Lessor's interest in the Building as herein expressly provided.
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<PAGE> 12
15.12 INDEMNITY. Except as disclosed in this Section 16.12, each party
hereto represents and warrants to the other that it has neither used or
consulted with any broker or similar person or entity in connection with this
Lease, and each party (the "Indemnitors") agrees to indemnify and hold harmless
the other party from and against any liability or claim, whether meritorious or
not, arising with respect to any broker or similar person from and against any
claims by such broker or entity for brokerage or similar commissions or fees
arising by reason of actions taken by the Indemnitor. Lessor has engaged the
services of Mile High Properties, LLC ("Mile High") in connection with this
Lease and shall pay a commission to Mile High in accordance with the listing
agreement between Greenwood Plaza Partners, LLC and Mile High.
15.13 AMENDMENT. THIS LEASE MAY NOT BE ALTERED, WAIVED, AMENDED OR EXTENDED
EXCEPT BY AN INSTRUMENT IN WRITING SIGNED BY LESSOR AND LESSEE.
15.14 LIMITATION OF WARRANTIES. LESSOR AND LESSEE EXPRESSLY AGREE THAT THERE
ARE AND SHALL BE NO IMPLIED WARRANTIES OF MERCHANTABILITY, HABITABILITY, FITNESS
FOR A PARTICULAR PURPOSE OR OF ANY OTHER KIND ARISING OUT OF THIS LEASE, AND
THERE ARE NO WARRANTIES WHICH EXTEND BEYOND THOSE EXPRESSLY SET FORTH IN THIS
LEASE.
15.15 GOVERNING LAW. This Lease will be governed by the internal laws of the
State of Colorado.
15.16 PARKING. Lessor will provide Lessee with 178 unreserved parking
spaces, all parking is free at the commencement of the lease term. The Lessee
hereby acknowledges that the Lessor intends to construct a Parking Garage with
Phase Two of the Project. At such time (with adequate notice) the Lessor may
choose to charge the Lessee with a monthly parking fee for each reserved or
unreserved parking space within the Parking Garage.
15.17 ENTIRE AGREEMENT. IT IS EXPRESSLY AGREED BY LESSEE, AS A MATERIAL
CONSIDERATION FOR THE EXECUTION OF THIS LEASE, THAT THIS LEASE, WITH THE
SPECIFIC REFERENCES TO WRITTEN EXTRINSIC DOCUMENTS, IS THE ENTIRE AGREEMENT OF
THE PARTIES; THAT THERE ARE, AND WERE, NO VERBAL REPRESENTATIONS, WARRANTIES,
UNDERSTANDINGS, STIPULATIONS, AGREEMENTS OR PROMISES PERTAINING TO THIS LEASE OR
TO THE EXPRESSLY MENTIONED WRITTEN EXTRINSIC DOCUMENTS NOT INCORPORATED IN
WRITING IN THIS LEASE.
15.18 RENEWAL OPTION. Lessee is granted the option to extend the term of
this Lease for one extended term of five (5) years (the "Extension Term"),
provided (a) there is no event of default at the time of exercise of the option;
and (b) Lessee gives written notice of its exercise of the option at least one
hundred eighty (180) days prior to the expiration of the original term. The
Extension Term shall be upon the same terms and conditions, except (i) Lessee
shall have no further right of renewal after the Extension Term prescribed
above; and (ii) the base rent will be at the prevailing market rate.
15.19 RIGHT OF FIRST REFUSAL. Lessor hereby grants to Lessee a "one time"
right of first refusal to lease the remaining space on the third floor of the
building. When Lessor first desires to lease any of the Space to a third party,
Lessor shall first notify Lessee in writing of its intention to offer such space
for lease. Lessee shall have five days from its receipt of such notice to notify
Lessor in writing of Lessee's intent to exercise its right of first refusal and
to execute Lessor's standard Modification and Ratification of lease form
modifying this Lease to include the Space. If Lessee does not exercise its right
of first refusal, then this right of first refusal shall terminate and Lessor
may lease any portion or all of the Space to any third party. If Lessee elects
to exercise its right of first refusal to lease the Space, the lease term for
the Space shall expire simultaneously with the term of this Lease, and the rent
for the Space shall be based on the then prevailing rental rates for properties
of equivalent quality, size, utility and location, with the length of the Lease
term and credit standing of Lessee to be taken into account, but in no event
shall the rent be less than the rent set forth in subparagraph 1.04 of this
Lease, otherwise subject to all of the same terms, covenants, and conditions of
this Lease. Within fourteen days from the date of Lessee's election to exercise
its right of first refusal, Lessee shall execute plans and specifications and
other documents showing construction costs to be paid by Lessee, if any,
otherwise Lessee's right of first refusal shall terminate and Lessor may lease
the Space to any third party.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals as of the
day and year first above written.
LESSOR:
GREENWOOD PLAZA PARTNERS, LLC
By: [ILLEGIBLE]
------------------------------------------
Its: [ILLEGIBLE]
-----------------------------------------
LESSEE:
NEW ERA OF NETWORKS, INC.
By: [ILLEGIBLE]
------------------------------------------
Its: Senior V.P. Counsel
-----------------------------------------
9
<PAGE> 13
EXHIBIT "A"
THE LEASED PREMISES
Suite 100, containing 21,101 rentable square feet.
Suite 200, containing 21,204 rentable square feet.
10
<PAGE> 14
[ONE GREENWOOD PLAZA FLOOR PLANS]
<PAGE> 15
EXHIBIT "B"
RULES AND REGULATIONS
1. Lessor shall furnish Lessee four (4) keys to the Leased Premises without
charge. Additional keys shall be furnished to Lessee at a nominal charge.
Lessee shall not change locks on doors or install additional locks on doors to
the Leased Premises and the Building without the prior written consent of
Lessor. Lessee shall not make or cause to be made duplicates of any keys
procured from Lessor without the prior approval of Lessor. All keys to the
Leased Premises and the Building shall be surrendered to Lessor upon The
Expiration Date or sooner termination of this Lease.
2. Lessee shall refer to Lessor all contractors, contractor's representatives
and installation technicians rendering any service on or to the Leased Premises
for Lessor's prior written approval before performance of any contractual
service. Lessee's contractors and installation technicians shall comply with
Lessor's rules and regulations pertaining to construction and installation. This
provision shall apply to all work performed on or about the Leased Premises or
Building, including the installation of telephones, telegraph equipment,
electrical devices and attachments and installations of any nature affecting
floors, walls, woodwork, trim, windows, ceilings and equipment or any other
physical portion of the Leased Premises or Building.
3. Lessee shall not at any time occupy any part of the Leased Premises or
Building as sleeping or lodging quarters.
4. Lessee shall not place, install or operate on the Leased Premises or in any
part of the Building any engine, stove or machinery, or conduct mechanical
operations or cook thereon or therein, or place or use in or about the Leased
Premises or Building any explosives, gasoline, kerosene, oil, acids, caustics,
or any flammable, explosive or hazardous material without written consent of
Lessor.
5. Lessor shall not be responsible for lost or stolen personal property,
equipment, money or jewelry from the Leased Premises or the Building regardless
of whether such loss occurs when the Leased Premises or the Building is locked
against entry or not.
6. No dogs (except working dogs), cats, fowl, or other animals shall be brought
into or kept in or about the Leased Premises or Building.
7. Employees of Lessor or Lessor's property manager shall not receive or carry
messages for or to Lessee or other person or contract with or render free or
paid services to Lessee or any of Lessee's agents, employees or invitees.
8. None of the parking, plaza, recreation or lawn areas, entries, passages,
doors, elevators, hallways or stairways shall be blocked or obstructed or any
rubbish, litter, trash, or material of any nature placed, emptied or thrown into
these areas or such area used by Lessee's agents, employees or invitees at any
time for purposes inconsistent with their designation by Lessor.
9. The water closets and other water fixtures in the Building shall not be used
for any purpose other than those for which they were constructed, and any damage
resulting to them from misuse or by the defacing or injury of any part of the
Building shall be borne by the person who shall occasion it. No person shall
waste water by interfering with the faucets or otherwise.
10. No person shall disturb occupants of the Building by die use of any radios,
record players, tape recorders, musical instruments, the making of unseemly
noises or any unreasonable uses determined by Lessor.
11. Nothing shall be thrown out of the windows of the Building or down the
stairways or other passages to the Building.
12. Lessee, its employees, agents and invitees shall park their vehicles only in
those parking areas designated by Lessor. Lessee shall furnish Lessor with state
automobile license numbers of Lessee's vehicles and its employees' vehicles
within five (5) days after taking possession of the Leased Premises and shall
notify Lessor of any changes within five (5) days after such change occurs.
Lessee shall not leave any vehicle in a state of disrepair (including without
limitation, flat tires, out of date inspection stickers or license plates) on
tile Leased Premises or the Building. If Lessee or its employees, agents,
contractors or invitees park their vehicles in areas other than the designated
parking areas or leave any vehicle in a state of disrepair, then Lessor, after
giving verbal notice to Lessee of such violation, shall have the right to remove
such vehicles at Lessee's expense.
13. Parking in a parking garage or other area of the Building shall be in
compliance with all parking rules mid regulations including any sticker or other
identification system established by Lessor. Failure to observe the rules and
regulations shall terminate Lessee's right to use the parking garage or area and
subject the vehicle in violation of the parking rules and regulations to removal
and impoundment. No termination of parking privileges or removal of impoundment
of a vehicle shall create any liability on Lessor or be deemed to interfere with
Lessee's right to possession of the Leased Premises. Vehicles must be parked
entirely within the stall lines and all directional signs, arrows and posted
speed limits must be observed. Parking is prohibited in areas not striped for
parking, in aisles, where "No Parking" signs are posted, on ramps, in cross
hatched areas, and in other areas as may be designated by Lessor. Parking
stickers or other forms of identification supplied by Lessor shall remain the
property of Lessor and not the property of Lessee and are not transferable.
Every person is required to park and lock his vehicle. All responsibility for
damage to vehicles or persons is assumed by the owner of the vehicle or its
driver.
14. Movement of furniture or office supplies and equipment in or out of the
Building, or dispatch or receipt by Lessee of any merchandise or materials which
requires use of elevators or stairways, or movement through the Building's
entrances or lobby, shall he restricted to hours designated by Lessor. All such
movement shall be under supervision of Lessor and carried out in the manner
agreed between Lessee and Lessor by prearrangement before performance. Such
prearrangement shall include determination by Lessor of time, method, and
routing of movement and limitations imposed by safety or other concerns which
may prohibit any article, equipment or any other item from being brought into
the Building. Lessee assumes, and shall indemnify Lessor against, all risks and
claims of damage to persons and properties arising in connection with any said
movement.
15. Lessor shall not be liable for any damages from the stoppage of elevators
for necessary or desirable repairs or improvements or delays of any sort or
duration in connection with the elevator service.
16. Lessee shall not install floor covering within the Leased Premises without
the prior written approval of Lessor. The use of cement or other similar
adhesive materials not easily removed with water is expressly prohibited.
17. Lessee agrees to cooperate with and assist Lessor in the prevention of
canvassing, soliciting and peddling within the Building.
18. Lessor reserves the right to exclude from the Building, between the hours of
6:00 p.m. and 7:00 a.m. on weekdays and at all hours on Saturday, Sunday and
legal holidays, all persons who are not known to the Building or security
personnel, and who do not present a pass to the Building signed by Lessee.
Lessee shall be responsible for all persons for whom Lessee supplies a pass.
19. It is Lessor's desire to maintain the Building with the highest standard of
dignity and good taste consistent with comfort and convenience for Lessee and
other occupants of the Building. Any action or condition not meeting this high
standard and observed by Lessee should be reported directly to Lessor.
20. Lessor reserves the right to make such other and further reasonable rules
and regulations as in Lessor's judgement may from time to time be necessary for
the safety, care and cleanliness of the Building, and for the preservation of
good order therein.
11
<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 26, 1999 included in this Form 10-K
into the Registration Statements on Form S-8 (Nos. 333-33573, 333-64013 and
333-68173) of New Era of Networks, Inc.
ARTHUR ANDERSEN LLP
Denver, Colorado
March 26, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S DECEMBER 31, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 174,173,008
<SECURITIES> 21,918,387
<RECEIVABLES> 28,310,275
<ALLOWANCES> 800,000
<INVENTORY> 0
<CURRENT-ASSETS> 218,770,020
<PP&E> 13,256,711
<DEPRECIATION> 2,701,024
<TOTAL-ASSETS> 298,677,949
<CURRENT-LIABILITIES> 22,913,871
<BONDS> 0
0
0
<COMMON> 3,033
<OTHER-SE> 275,611,908
<TOTAL-LIABILITY-AND-EQUITY> 298,677,949
<SALES> 65,814,073
<TOTAL-REVENUES> 65,814,073
<CGS> 14,607,470
<TOTAL-COSTS> 14,607,470
<OTHER-EXPENSES> 63,727,561
<LOSS-PROVISION> 500,000
<INTEREST-EXPENSE> 40,675
<INCOME-PRETAX> (9,777,212)
<INCOME-TAX> 1,278,400
<INCOME-CONTINUING> (8,498,812)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,498,812)
<EPS-PRIMARY> (0.38)
<EPS-DILUTED> (0.38)
</TABLE>
