<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
---------------------
COMMISSION FILE NUMBER 000-22043
---------------------
NEW ERA OF NETWORKS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 84-1234845
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
7400 EAST ORCHARD ROAD
ENGLEWOOD, COLORADO 80111
(Address of principal executive offices)
Registrant's Telephone Number, including area code: (303) 694-3933
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past (90) days. Yes [X] No [ ]
The number of shares of the issuer's Common Stock outstanding as of July
31, 1999 was 32,845,839.
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 3
Consolidated Balance Sheets................................. 3
Consolidated Statements of Operations....................... 4
Consolidated Statements of Cash Flows....................... 5
Notes to Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 27
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 29
Item 2 Changes in Securities....................................... 29
Item 3 Defaults Upon Senior Securities............................. 29
Item 4 Submission of Matters to a Vote of Security Holders......... 29
Item 5. Other Information........................................... 30
Item 6. Exhibits and Reports on Form 8-K............................ 30
</TABLE>
2
<PAGE> 3
NEW ERA OF NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 76,162,405 $174,173,008
Short-term investments in marketable securities........... 11,963,584 10,658,577
Accounts receivable, net of allowance for uncollectible
accounts of $1,600,000 and $800,000, respectively...... 39,654,982 28,310,275
Unbilled revenue.......................................... 4,826,578 3,124,536
Prepaid expenses and other................................ 6,124,743 2,356,324
Deferred income taxes, net................................ 147,300 147,300
Note receivable -- related party.......................... 7,899,412 --
------------ ------------
Total current assets.............................. 146,779,004 218,770,020
------------ ------------
Property and equipment:
Computer equipment and software........................... 15,369,718 9,327,048
Furniture, fixtures and equipment......................... 3,651,253 2,360,538
Leasehold improvements.................................... 1,628,821 1,569,125
------------ ------------
20,649,792 13,256,711
Less -- accumulated depreciation.......................... (4,312,472) (2,701,024)
------------ ------------
Property and equipment, net............................... 16,337,320 10,555,687
Long-term investments in marketable securities.............. 41,278,780 11,259,810
Intangible assets, net...................................... 166,427,657 51,876,649
Deferred income taxes, net.................................. 7,897,146 4,845,500
Other assets, net........................................... 1,479,516 1,370,283
------------ ------------
Total assets...................................... $380,199,423 $298,677,949
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 9,054,590 $ 5,650,308
Accrued liabilities....................................... 14,016,849 7,856,926
Current portion of deferred revenue....................... 10,486,979 9,406,637
------------ ------------
Total current liabilities......................... 33,558,418 22,913,871
Deferred revenue............................................ 185,887 149,137
------------ ------------
Total liabilities................................. 33,744,305 23,063,008
Stockholders' equity:
Common stock, $.0001 par value, 45,000,000 shares
authorized; 32,730,023 and 30,333,778 shares issued and
outstanding, respectively.............................. 3,262 3,033
Additional paid-in capital................................ 373,497,327 295,570,769
Accumulated deficit....................................... (26,257,347) (20,016,790)
Accumulated other comprehensive income.................... (788,124) 57,929
------------ ------------
Total stockholders' equity........................ 346,455,118 275,614,941
------------ ------------
Total liabilities and stockholders' equity........ $380,199,423 $298,677,949
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- --------------------------
1999 1998 1999 1998
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Revenues:
Software licenses................... $ 8,866,086 $ 7,267,594 $ 26,232,421 $13,840,228
Software maintenance................ 3,702,207 839,890 6,798,726 1,260,634
Professional services............... 13,572,927 3,352,403 22,720,804 5,941,148
------------ ------------ ------------ -----------
Total revenues.............. 26,141,220 11,459,887 55,751,951 21,042,010
------------ ------------ ------------ -----------
Cost of revenues:
Cost of software licenses........... 261,446 442,003 407,114 664,003
Cost of software maintenance and
professional services............ 10,319,242 2,134,838 16,518,028 3,661,296
------------ ------------ ------------ -----------
Total cost of revenues...... 10,580,688 2,576,841 16,925,142 4,325,299
------------ ------------ ------------ -----------
Gross profit.......................... 15,560,532 8,883,046 38,826,809 16,716,711
Operating expenses:
Sales and marketing................. 13,420,959 3,827,804 23,245,915 7,433,325
Research and development............ 9,322,615 2,915,247 16,210,437 5,606,294
General and administrative.......... 3,889,954 1,168,253 6,955,579 2,159,717
Charge for acquired in-process
research and development......... -- 3,740,000 -- 3,740,000
Amortization of intangibles......... 3,352,531 81,283 5,052,297 130,660
------------ ------------ ------------ -----------
Total operating expenses.... 29,986,059 11,732,587 51,464,228 19,069,996
------------ ------------ ------------ -----------
Loss from operations.................. (14,425,527) (2,849,541) (12,637,419) (2,353,285)
Other income, net..................... 1,758,849 490,675 3,943,212 786,797
------------ ------------ ------------ -----------
Loss before provision for income
taxes............................... (12,666,678) (2,358,866) (8,694,207) (1,566,488)
Income tax benefit.................... 3,844,015 -- 2,453,650 --
------------ ------------ ------------ -----------
Net loss.............................. $ (8,822,663) $ (2,358,866) $ (6,240,557) $(1,566,488)
============ ============ ============ ===========
Net loss per common share, basic and
diluted............................. $ (0.28) $ (0.11) $ (0.20) $ (0.08)
============ ============ ============ ===========
Weighted average shares of common
stock outstanding, basic and
diluted............................. 31,488,578 20,677,012 31,060,294 19,493,148
============ ============ ============ ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
NEW ERA OF NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1999 1998
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (6,240,557) $(1,566,488)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization.......................... 6,949,685 630,538
Minority interest share of losses...................... (12,720) --
Benefit for deferred income taxes, net................. (3,051,646) --
Charge for acquired in-process research and
development........................................... -- 3,740,000
Changes in assets and liabilities --
Accounts receivable, net............................. (3,459,543) (1,469,178)
Unbilled revenue..................................... (1,071,800) (744,381)
Prepaid expenses and other........................... (3,140,620) (686,038)
Other assets, net.................................... 748,645 (627,769)
Accounts payable..................................... 55,435 709,746
Accrued liabilities.................................. (3,664,869) 705,033
Deferred revenue, current and long-term.............. (1,257,639) 326,389
------------ -----------
Net cash provided by (used in) operating
activities..................................... (14,145,629) 1,017,852
------------ -----------
Cash flows from investing activities:
Purchases of short-term investments in marketable
securities............................................. (15,350,805) (2,032,587)
Proceeds from sale of short-term investments in marketable
securities............................................. 14,030,521 4,072,492
Purchases of long-term investments in marketable
securities............................................. (33,507,645) (3,515,370)
Proceeds from sale of long-term investments in marketable
securities............................................. 3,037,212 --
Purchase of developed software and other intangibles...... (4,248,583) --
Business combinations, net of cash acquired............... (37,303,959) (1,179,774)
Purchase of property and equipment........................ (6,189,091) (2,357,004)
Related party note receivable............................. (7,899,412) --
------------ -----------
Net cash used in investing activities............. (87,431,762) (5,012,243)
------------ -----------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 3,660,461 55,171,990
Common stock issuance costs............................... -- (3,486,911)
Principal payments on notes payable to banks.............. -- (19,340)
------------ -----------
Net cash provided by financing activities......... 3,660,461 51,665,739
Effect of exchange rate changes on cash..................... (93,673) 150,435
------------ -----------
Net decrease in cash and cash equivalents................... 98,010,603 47,821,783
Cash and cash equivalents, beginning of period.............. 174,173,008 7,150,362
------------ -----------
Cash and cash equivalents, end of period.................... $ 76,162,405 $54,972,145
============ ===========
Supplemental cash flow information:
Cash paid during the period for --
Interest............................................... $ 22,352 $ 6,962
============ ===========
Taxes.................................................. $ 805,175 $ --
============ ===========
Supplemental disclosures of noncash transactions:
Common stock issued for business combinations............. $ 74,615,000 $ 3,600,000
============ ===========
Accrued business combination costs........................ $ 3,443,908 $ 375,000
============ ===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated interim financial statements have been
prepared by New Era of Networks, Inc. (the "Company"), without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission (the
"SEC"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations. These
financial statements should be read in conjunction with the Company's audited
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998. The consolidated results
of operations for the three and six months ended June 30, 1999, are not
necessarily indicative of the results to be expected for any subsequent period
or for the entire fiscal year ending December 31, 1999.
The accompanying unaudited consolidated interim financial statements
reflect, in the opinion of management, all adjustments that are of a normal and
recurring nature and that are necessary for a fair presentation of the financial
position and results of operations for the periods presented. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Certain reclassifications have been made to prior period
financial statements to conform to the June 30, 1999 presentation.
2. BUSINESS COMBINATIONS
Microscript, Inc.
On June 28, 1999, the Company acquired all of the outstanding capital stock
of Microscript, Inc. ("Microscript"), a Massachusetts corporation, through a
statutory merger of Microscript into a new wholly owned subsidiary of the
Company. Microscript is a supplier of application integration software on the
Windows NT platform.
The aggregate consideration paid by the Company was approximately
$33,085,000, of which $8,741,000 was paid or payable in cash and approximately
$19,000,000 was paid through the issuance of 423,700 unregistered shares of
common stock of the Company. The Company also issued stock options exercisable
for 110,428 shares of the Company's common stock to assume all of the
outstanding Microscript stock options valued at approximately $5,000,000. The
fees and expenses related to the acquisition were approximately $345,000. An
additional 22,255 shares of the Company's common stock may be awarded as
additional purchase consideration upon the completion of the Microscript audited
financial statements. The acquisition was accounted for under the purchase
method of accounting and, accordingly, the assets, liabilities and operating
results of Microscript have been included in the accompanying consolidated
financial statements from June 28, 1999.
An independent valuation of Microscript's net assets was performed to
assist in the allocation of the purchase price. A portion of the purchase price
was assigned to marketable software products ($5,800,000) and goodwill
($25,817,000), which are being amortized on a straight-line basis over three-
and seven-year periods, respectively. Microscript's other assets were valued at
$3,462,000 and its liabilities assumed totaled $1,994,000. Upon the finalization
of the purchase price allocation in the third quarter of 1999, we anticipate
recording a deferred tax liability and corresponding increase to goodwill of
approximately $2,200,000 as the value assigned to the software products is not
amortizable for tax purposes.
6
<PAGE> 7
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In July 1999, the Company agreed with the former equity holders of
Microscript to provide additional consideration to more closely reflect the
value agreed upon in the original purchase negotiations. The aggregate
adjustment to the purchase consideration of approximately $16,500,000 in cash
will be reflected in the Company's financial statements for the third quarter of
1999 as a one-time charge to net income.
Convoy Corporation
On June 9, 1999, the Company acquired all of the outstanding capital stock
of Convoy Corporation, a Delaware corporation ("Convoy"), by means of the
statutory merger of a wholly owned subsidiary with and into Convoy. Convoy is a
worldwide provider of application integration software for PeopleSoft
applications.
The aggregate consideration paid by the Company was $42,809,000. At closing
the Company issued 807,115 unregistered shares of its common stock valued at
$36,267,000. The Company also issued 105,333 stock options exercisable for
shares of the Company's common stock to assume all outstanding Convoy stock
options and warrants valued at approximately $4,733,000. Fees and expenses
related to the acquisition were approximately $1,809,000. The acquisition was
accounted for under the purchase method of accounting and, accordingly, the
assets, liabilities and operating results of Convoy have been included in the
accompanying consolidated financial statements from June 1, 1999.
An independent valuation of Convoy's net assets was performed to assist in
the allocation of the purchase price. A portion of the purchase price was
assigned to marketable software products ($8,500,000) and goodwill
($35,903,000), which are being amortized on a straight-line basis over three-
and seven-year periods, respectively. Convoy's other assets were valued at
approximately $2,129,000 and its liabilities assumed totaled approximately
$3,723,000. Upon the finalization of the purchase price allocation in the third
quarter of 1999, we anticipate recording a deferred tax liability and
corresponding increase to goodwill of approximately $3,300,000 as the value
assigned to the software products is not amortizable for tax purposes.
In August 1999, the Company agreed with the former stockholders of Convoy
to provide additional consideration to more closely reflect the value agreed
upon in the original purchase negotiations. Accordingly, 618,225 shares of the
Company's common stock will be issued to the prior Convoy stockholders subject
to final documentation and approval by the parties. As of the date of this
report, the Company has received approval of the agreement from a number of the
former Convoy stockholders. This adjustment to the purchase consideration will
be reflected in the Company's financial statements for the third quarter of 1999
as a one-time charge to net income of approximately $8,500,000.
SLI International AG Acquisition
On May 4, 1999, the Company acquired all of the outstanding capital stock
of SLI International AG, a Swiss corporation ("SLI"), a worldwide provider of
SAP R/3 software implementation, training support and other related
change-management services. The aggregate consideration paid by the Company was
$22,700,000, of which $16,500,000 was paid in cash and $5,500,000 was paid with
138,452 shares of the Company's common stock. Fees and expenses related to this
transaction were approximately $700,000. In addition, up to 75,519 additional
shares of the Company's common stock may be issued to the shareholders of SLI
upon the achievement of certain performance targets. If earned, these shares
will be recorded as additional purchase price based on their fair value at the
time they are earned. The acquisition was accounted for under the purchase
method of accounting and, accordingly, the assets, liabilities and operating
results have been included in the Company's consolidated financial statements
from May 1, 1999.
An independent valuation of SLI's net assets was performed to assist in the
allocation of the purchase price. The portion of the purchase price in excess of
the fair value of the net tangible assets was allocated to goodwill
($21,656,000) and is being amortized on a straight-line basis over a seven-year
period. SLI's other assets were valued at approximately $4,813,000 and its
liabilities assumed totaled approximately $3,769,000.
7
<PAGE> 8
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
VIE Systems, Inc. Acquisition
On April 5, 1999, the Company acquired all of the outstanding capital stock
of VIE Systems, Inc., a Delaware corporation ("VIE"), a provider of EAI software
with a strong presence in travel, transportation, financial services, and retail
markets. Assets acquired by the Company included VIE's products, including its
Copernicus EAI product and formatter patent. The acquisition was accounted for
under the purchase method of accounting and, accordingly, the assets,
liabilities and operating results have been included in the Company's
consolidated financial statements from April 1, 1999.
The aggregate consideration paid by the Company was $12,000,000 in cash. In
addition, up to $3,000,000 of cash may be paid to the shareholders of VIE upon
the achievement of certain performance targets.
D&M (Asia) Ltd. and Database & Management (S) Pte. Ltd.
On February 19, 1999, the Company acquired all of the outstanding capital
stock of D&M (Asia) Ltd., a Hong Kong corporation and Database & Management (S)
Pte. Ltd., a Singapore corporation (collectively "D&M"). D&M provides
professional integration services to customers in the Pacific Rim.
The aggregate consideration paid by the Company was $6,050,000, payable as
follows: $3,000,000 in cash and approximately $2,900,000 through the issuance of
48,940 unregistered shares of the Company's common stock. Fees and expenses
related to this transaction were approximately $150,000. The acquisition was
accounted for under the purchase method of accounting and, accordingly, the
assets, liabilities and operating results of D&M have been included in the
accompanying consolidated financial statements from March 1, 1999.
An independent valuation of D&M's net assets was performed to assist in the
allocation of the purchase price. The portion of the purchase price in excess of
the fair value of the net tangible assets of D&M was allocated to goodwill
($5,336,000) and is being amortized on a straight-line basis over a seven-year
period. D&M's other assets were valued at approximately $1,098,000 and its
liabilities assumed totaled approximately $384,000.
3. LOSS PER COMMON SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" ("SFAS 128"), by retroactively restating per share amounts
for all periods presented. Under SFAS 128, basic loss per common share is
determined by dividing net income from continuing operations available to common
shareholders by the weighted average number of common shares outstanding during
each period. Diluted earnings per common share includes the effects of
potentially issuable common stock, but only if dilutive. The treasury stock
method, using the average price of the Company's common stock for the period, is
applied to determine dilution from options and warrants. The if-converted method
is used for convertible securities.
8
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NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. COMPREHENSIVE LOSS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130"). The purpose of SFAS 130 is to report a measure of all changes in equity
that result from recognized transactions and other economic events of the period
other than transactions with owners in their capacity as owners. The only items
of other comprehensive income reported by the Company are the cumulative
translation adjustment and unrealized loss on marketable securities available
for sale. The Company's comprehensive income for the three and six months ended
June 30, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss for the period.......... $(8,822,663) $(2,358,866) $(6,240,557) $(1,566,488)
Change in cumulative translation
adjustment..................... (141,145) 86,764 (379,313) 75,532
Unrealized loss on marketable
securities..................... (466,740) -- (466,740) --
----------- ----------- ----------- -----------
Comprehensive loss............... $(9,430,548) $(2,272,102) $(7,086,610) $(1,490,956)
=========== =========== =========== ===========
</TABLE>
5. RELATED PARTY NOTE RECEIVABLE
During the second quarter of 1999, the Company funded approximately
$7,900,000 toward a short-term construction loan to Greenwood Plaza Partners,
LLP ("GPP") for construction of two buildings and a parking structure. GPP is
principally owned by the Company's Chief Executive Officer and Chairman of the
Board. Upon completion of construction, the Company intends to lease the
buildings from GPP, in whole or in part, for use as its principal corporate
headquarters.
The Company replaced an existing lender for the first phase of
construction, and has committed to fund up to $31,440,000 for one year at a
floating interest rate of 90-day LIBOR plus 2.05%. During construction, GPP
intends to obtain permanent financing from a third-party lender. The terms of
the construction financing are consistent with those that were in place with
GPP's previous lender and have been approved by the Company's board of
directors. The loan is secured with the project's assets, the project's rental
income and the personal guarantee of the Company's Chief Executive Officer and
Chairman of the Board.
6. STOCKHOLDERS' EQUITY
On June 15, 1999, the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation to increase the authorized shares of
common stock from 45,000,000 to 200,000,000. The Certificate of Amendment was
filed with the State of Delaware on August 11, 1999.
7. SEGMENT INFORMATION
In the fourth quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 131 "Disclosure about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 establishes standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related disclosures
about products and services and geographic areas. Operating segments are
components of an enterprise for which separate financial information is
available and is evaluated regularly by the chief operating decision maker, or
decision making group, in deciding how to allocate resources and assess
performance of the segments of an enterprise. The operating segments are managed
9
<PAGE> 10
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
separately because each operating segment represents a strategic business unit
that offers products and services in different markets.
The Company classifies its business activities into three operating
segments: The Americas; Europe and Asia Pacific; and Corporate and Other.
Information regarding the Company's operations in these three operating
segments, which are managed separately, are set forth below. The accounting
policies of the operating segments are the same as those described in the
summary of significant accounting policies included in the Company's Annual
Report on Form 10-K for consolidated results. There are no significant
intersegment sales or transfers between the segments for the periods presented.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
------------------------------------------ -----------------------------------------
EUROPE CORPORATE EUROPE CORPORATE
THE AND ASIA AND THE AND ASIA AND
AMERICAS PACIFIC OTHER TOTAL AMERICAS PACIFIC OTHER TOTAL
-------- -------- --------- -------- -------- -------- --------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues................ $16,749 $ 9,392 $ -- $ 26,141 $ 7,105 $3,350 $ 1,005 $11,460
Total cost of revenues........ 4,549 6,032 -- 10,581 926 696 955 2,577
------- ------- -------- -------- ------- ------ -------- -------
Gross profit.................. 12,200 3,360 -- 15,560 6,179 2,654 50 8,883
Selling and marketing......... 7,296 3,230 2,895 13,421 1,551 1,242 1,035 3,828
Research and development...... -- -- 9,322 9,322 -- -- 2,915 2,915
General and administrative.... -- -- 3,890 3,890 -- -- 1,168 1,168
------- ------- -------- -------- ------- ------ -------- -------
Operating profit (loss) before
acquisition-related
charges..................... 4,904 130 (16,107) (11,073) 4,628 1,412 (5,068) 972
Acquisition-related charges... -- -- 3,353 3,353 -- -- 3,821 3,821
------- ------- -------- -------- ------- ------ -------- -------
Operating profit (loss)....... 4,904 130 (19,460) (14,426) 4,628 1,412 (8,889) (2,849)
Other income and expense,
net......................... -- -- 1,759 1,759 -- -- 490 490
------- ------- -------- -------- ------- ------ -------- -------
Net income (loss) before
tax......................... 4,904 130 (17,701) (12,667) 4,628 1,412 (8,399) (2,359)
Tax benefit................... -- -- 3,844 3,844 -- -- -- --
------- ------- -------- -------- ------- ------ -------- -------
Net income (loss) after tax... $ 4,904 $ 130 $(13,857) $ (8,823) $ 4,628 $1,412 $ (8,399) $(2,359)
======= ======= ======== ======== ======= ====== ======== =======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
------------------------------------------ -----------------------------------------
EUROPE CORPORATE EUROPE CORPORATE
THE AND ASIA AND THE AND ASIA AND
AMERICAS PACIFIC OTHER TOTAL AMERICAS PACIFIC OTHER TOTAL
-------- -------- --------- -------- -------- -------- --------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues................ $34,124 $17,598 $ 4,030 $ 55,752 $11,179 $6,538 $ 3,325 $21,042
Total cost of revenues........ 8,212 7,568 1,145 16,925 1,631 1,074 1,620 4,325
------- ------- -------- -------- ------- ------ -------- -------
Gross profit.................. 25,912 10,030 2,885 38,827 9,548 5,464 1,705 16,717
Selling and marketing......... 13,064 5,694 4,488 23,246 3,240 2,476 1,717 7,433
Research and development...... -- -- 16,210 16,210 -- -- 5,606 5,606
General and administrative.... -- -- 6,956 6,956 -- -- 2,160 2,160
------- ------- -------- -------- ------- ------ -------- -------
Operating profit (loss) before
acquisition-related
charges..................... 12,848 4,336 (24,769) (7,585) 6,308 2,988 (7,778) 1,518
Acquisition-related charges... -- -- 5,053 5,053 -- -- 3,871 3,871
------- ------- -------- -------- ------- ------ -------- -------
Operating profit (loss)....... 12,848 4,336 (29,822) (12,638) 6,308 2,988 (11,649) (2,353)
Other income and expense,
net......................... -- -- 3,943 3,943 -- -- 787 787
------- ------- -------- -------- ------- ------ -------- -------
Net income (loss) before
tax......................... 12,848 4,336 (25,879) (8,695) 6,308 2,988 (10,862) (1,566)
Tax benefit................... -- -- 2,454 2,454 -- -- -- --
------- ------- -------- -------- ------- ------ -------- -------
Net income (loss) after tax... $12,848 $ 4,336 $(23,425) $ (6,241) $ 6,308 $2,988 $(10,862) $(1,566)
======= ======= ======== ======== ======= ====== ======== =======
</TABLE>
10
<PAGE> 11
NEW ERA OF NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. SUBSEQUENT EVENTS.
The Company has been named as a defendant in a number of class action
lawsuits alleging violation of the federal securities laws. Certain executive
officers of the Company also are named as defendants. These lawsuits were filed
in federal court in Colorado in July and August 1999. Most of the complaints in
these lawsuits assert claims on behalf of purchasers of the Company's securities
between April 21, 1999 and July 6, 1999. A few of the complaints assert claims
on behalf of purchasers between October 29, 1998 and July 7, 1999. The
complaints allege that the Company and the other defendants made material
misrepresentations and omissions regarding the Company's business and prospects,
causing harm to purchasers of the Company's securities. The complaints do not
specify the amount of damages sought. These cases are in the early stages and
the Company has not yet formally responded to the complaints. The Company
believes these lawsuits are completely without merit. The Company intends to
deny all material allegations and to defend itself vigorously. An adverse
judgment or settlement in these lawsuits could have a material adverse effect on
the Company's financial condition or results of operations. The ultimate outcome
of these actions cannot be presently determined. Accordingly, no provision for
any liability or loss that may result from adjudication or settlement thereof
has been made in the accompanying consolidated financial statements.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in this Report on Form 10-Q contains certain trend analysis
and other forward-looking statements. Words such as "anticipate," "believe,"
"plan," "estimate," "expect," "seek," and "intend," and words of similar import
are intended to identify such forward-looking statements. These statements are
not guarantees of future performance and are subject to business and economic
risks and uncertainties which are difficult to predict. Therefore, our actual
results of operations may differ materially from those expressed or forecasted
in the forward-looking statements as a result of a number of factors, including,
but not limited to, those set forth in this discussion under "Factors That May
Affect Future Results" and other risks detailed from time to time in reports
filed with the SEC. In addition, the discussion of our results of operations
should be read in conjunction with matters described in detail in our 1998 Form
10-K Report.
OVERVIEW
Our net loss for the second quarter of 1999 was $8.8 million, or $0.28 per
diluted share compared to a net loss of $2.4 million, or $0.11 per diluted
share, for the same period last year. Our net loss for the first six months of
1999 was $6.2 million, or $0.20 per diluted share compared to a net loss of $1.6
million, or $0.08 per diluted share, for the same period last year. Excluding
acquisition-related charges and assuming a 35% tax rate, the net loss per
diluted share for the second quarter of 1999 and six months ended June 30, 1999
was $0.19 and $0.08, respectively. This compares to a net earnings per diluted
share of $0.04 and $0.07 for the same periods of 1998.
During the second quarter of 1999, our results of operations reflected an
operating loss of $14.4 million compared to an operating loss of $2.8 million
for the second quarter last year. Quarterly operating expenses, excluding
acquisition-related charges and amortization, increased 237% to $26.6 million in
the first quarter of 1999 from $7.9 million in the same period last year and
exceeded total revenue growth of 128%. Our operating loss for the first six
months of 1999 was $12.6 million compared to an operating loss of $2.4 million
for the same period last year. For the six-month period ending June 30, 1999,
operating expenses, excluding acquisition-related charges and amortization,
increased 205% to $46.4 million in the first six months of 1999 from $15.2
million in the same period last year exceeding total revenue growth of 165%.
A shortfall in license revenues, combined with increases in expenses in
sales and administration in anticipation of higher revenues, impacted our
results for the quarter and six-months ended June 30, 1999. There were two
primary reasons for our revenue shortfall. First, a significant number of
software license sales our partners, as well as our internal sales force, had
projected for the quarter did not close or closed for smaller amounts than
anticipated. For example, we noted delays in sales where customer's approval
processes were elevated to higher levels, as well as clients who chose to
purchase on a project-by-project basis rather than a volume buy. In addition,
sales through some of our channel partners were delayed due to a variety of
factors, including our software being bundled into large enterprise agreements
which generally involve a longer sales cycle, and customers electing to defer
their purchase decision. Second, our software license revenue growth is
increasingly dependent on our sales and marketing partnership with IBM. Both of
our sales forces can sell the MQSeries Integrator ("MQSI") product, but the
economics are different depending on which partner actually takes the order. In
the second quarter of 1999, the percentage of total MQSI sales recorded by IBM
was much higher than anticipated, which resulted in lower than expected royalty
income.
We are actively addressing our future operating plans given the uncertainty
of market conditions, and we are currently focused on controlling expenses by
closely reviewing headcount additions and adding personnel only in critical
positions. Controls over discretionary expenses have also been tightened
throughout the organization.
Subsequent to June 30, 1999, we have planned significant personnel
reductions and facility consolidations. Consequently, we will incur a one-time
charge to operating expenses of approximately $3-$5 million in the third quarter
of 1999. In early July 1999, IBM informed us that they would no longer provide
royalty information during the current quarter. Beginning with the third quarter
of 1999, we will record royalty income from IBM on a one-quarter lag.
12
<PAGE> 13
The following table sets forth the percentages that selected items in the
Consolidated Statements of Operations bear to total revenues:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Software licenses.................................... 34% 63% 47% 66%
Software maintenance................................. 14 7 12 6
Professional services................................ 52 30 41 28
--- --- --- ---
Total revenues............................... 100 100 100 100
Cost of revenues:
Cost of software licenses(1)......................... 3 6 2 5
Cost of software maintenance and professional
services(2)....................................... 60 51 56 51
--- --- --- ---
Total cost of revenues....................... 40 22 30 21
Gross profit................................. 60 78 70 79
Operating expenses:
Sales and marketing.................................. 51 33 42 35
Research and development............................. 36 25 29 27
General and administrative........................... 15 10 13 10
Charge for acquired in-process research and
development....................................... -- 33 -- 17
Amortization of intangibles.......................... 13 1 9 1
--- --- --- ---
Total operating expenses..................... 115 102 93 90
--- --- --- ---
Loss from operations................................... (55) (24) (23) (11)
Other income, net...................................... 7 4 7 4
--- --- --- ---
Loss before provision for income taxes................. (48) (20) (16) (7)
Benefit from income taxes.............................. 4 -- 5 --
--- --- --- ---
Net loss..................................... (44)% (20)% (11)% (7)%
=== === === ===
Net income (loss) excluding
acquisition-related amortization of
intangibles, net of tax effect if taxed at
a 35% rate................................. (23)% 8% (4)% 7%
=== === === ===
</TABLE>
- ---------------
(1) As a percentage of software licenses revenue.
(2) As a percentage of software maintenance and professional services revenue.
REVENUES
Our revenues grew by 128% to $26.1 million for the quarter ended June 30,
1999 from $11.5 million for the quarter ended June 30, 1998. The revenue mix
between software licenses, software maintenance, and professional services was
34%, 14% and 52%, respectively, for the second quarter of 1999 compared to 63%,
7% and 30%, respectively, for the same quarter last year. For the first six
months of 1999, total revenues grew by 165% to $55.8 million from $21.0 million
for the same period in 1998. The revenue mix between software licenses, software
maintenance, and professional services was 47%, 12% and 41%, respectively, for
the first six months of 1999 compared to 66%, 6% and 28%, respectively, for the
corresponding period last year. The increase in total revenues for the second
quarter and six-month period ended June 30, 1999 compared to the corresponding
periods last year was primarily from growth in software maintenance and
professional services revenue, which typically follows the license transactions
closed during prior quarters.
Software license revenues increased 22% to $8.9 million for the quarter
ended June 30, 1999 from $7.3 million for the quarter ended June 30, 1998.
Software license revenues increased 90% to $26.2 million for the six-month
period ended June 30, 1999 from $13.8 million for the six-month period ended
June 30, 1998.
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<PAGE> 14
There were two primary reasons for our revenue shortfall. First, a significant
number of software license sales our partners, as well as our internal sales
force, had projected for the quarter did not close or closed for smaller amounts
than anticipated. For example, we noted delays in sales where customer's
approval processes were elevated to higher levels, as well as clients who chose
to purchase on a project-by-project basis rather than a volume buy. In addition,
sales through some of our channel partners were delayed due to a variety of
factors, including our software being bundled into large enterprise agreements
which generally involve a longer sales cycle, and customers electing to defer
their purchase decision. Second, our software license revenue growth is
increasingly dependent on our sales and marketing partnership with IBM. Both of
our sales forces can sell the MQSI product, but the economics are different
depending on which partner actually takes the order. In the second quarter of
1999, the percentage of total MQSI sales recorded by IBM was much higher than
anticipated, which resulted in lower than expected royalty income.
Software maintenance revenues increased 341% to $3.7 million for the
quarter ended June 30, 1999 from $840,000 for the quarter ended June 30, 1998.
Software maintenance revenues increased 439% to $6.8 million for the six-month
period ended June 30, 1999 from $1.3 million for the six-month period ended June
30, 1998. The increase during both the quarter and six-month period compared to
the corresponding period last year was primarily as a result of our growing
installed base of customers and the consistent renewal rates for existing
customers.
Professional services revenue grew 305% to $13.6 million for the quarter
ended June 30, 1999 from $3.4 million for the quarter ended June 30, 1998.
Professional services revenue grew 282% to $22.7 million for the six-month
period ended June 30, 1999 from $5.9 million for the six-month period ended June
30, 1998. We continued to experience increased demand for services in both the
quarter and the first six months of 1999 compared to the same periods last year.
The increase was primarily due to higher revenue from consulting, which is the
largest component of services, although training revenue also increased during
the quarter and six-month period. The increase in consulting revenue was
primarily due to the acquisition of service-oriented operations, D&M and SLI,
and prior periods' license fee revenue growth, which resulted in more demand for
implementation services.
As a percentage of total revenues, professional services revenue increased
during the second quarter and first six months of 1999 compared to the same
periods in the prior year. This was due to the timing of professional services
revenue in relation to software license revenue growth in prior periods and
minimal license fee growth in the second quarter of 1999. Continued demand for
professional services also resulted from our ongoing emphasis on providing
consulting and training services that complement our software products. In any
quarter, total services revenue is dependent upon license transactions closed
during the current and preceding quarters, the amount and size of consulting
engagements, the number of consultants available to staff engagements, billing
rates for consulting services and training courses, and the number of customers
attending training courses.
COST OF REVENUES
Cost of software licenses include royalty payments to third parties for
jointly developed products, software purchased from third parties for resale,
documentation and software delivery expenses. The total dollar amount incurred
for the cost of license fees decreased 41% to $261,000 for the quarter ended
June 30, 1999 from $442,000 for the quarter ended June 30, 1998. For the
six-month period, the total dollar amount for the cost of software licenses
decreased 39% to $407,000 from $664,000 for the same period last year due
primarily to a decrease in royalty expenses payable to IBM. This decrease was a
result of a shift in the taking of customer orders. For the six months ended
June 30, 1998, the majority of all MQIntegrator orders were taken by our sales
representatives and we owed IBM a royalty percentage. However, in the six months
ended June 30, 1999, the majority of the customer orders for MQSI were taken by
IBM or an IBM distributor and a net royalty income was recorded by our Company.
Cost of software maintenance and professional services includes the
personnel and related overhead costs for services, including consulting,
training and customer support, as well as fees paid to third parties for
subcontracted services. Cost of software maintenance and professional services
increased 383% to $10.3 mil-
14
<PAGE> 15
lion for the quarter ended June 30, 1999 from $2.1 million for the quarter ended
June 30, 1998. For the six-month period ended June 30, 1999, cost of software
maintenance and professional services increased 351% to $16.5 million from $3.7
million for the same period last year. The increase was primarily due to
increased personnel expenses and subcontracted service costs to support the
growth in demand for implementation and consulting services. During the first
six months of 1999, a larger percentage of professional services revenue was
generated through subcontracted work, which increased the related costs compared
to the same period last year. As a result, the gross margin on services revenue
decreased to 40% and 44% for the second quarter and first six months of 1999,
respectively, compared to 49% for both the second quarter and the first six
months of 1998.
OPERATING EXPENSES
Sales and Marketing
Sales and marketing expense consists of personnel, commissions and related
overhead costs for the sales and marketing activities. Sales and marketing
expense increased to $13.4 million for the quarter ended June 30, 1999 from $3.8
million for the quarter ended June 30, 1998, representing 51% and 33% of total
revenues, respectively. Sales and marketing expense increased to $23.2 million
for the six-month period ended June 30, 1999 from $7.4 million for the
corresponding period last year, representing 42% and 35% of total revenues,
respectively. The increase in expense for both the quarter and six-month period
was primarily the result of additional personnel and expanded marketing
activities. The total number of sales and marketing personnel more than doubled
as of June 30, 1999 compared to a year ago. We continued to add personnel in
direct sales and supporting positions during the first and second quarters of
1999 in order to meet our future sales goals.
Research and Development
Research and development expense includes personnel and related overhead
costs for product development, enhancements, upgrades, quality assurance and
testing. Research and development expense increased to $9.3 million for the
quarter ended June 30, 1999 from $2.9 million for the quarter ended June 30,
1998, representing 36% and 25% of total revenues, respectively. Research and
development expense increased to $16.2 million for the six-month period ended
June 30, 1999 from $5.6 million for the six-month period ended June 30, 1998,
representing 29% and 27% of total revenues, respectively. The increase was
primarily due to an increase in the number of research and development personnel
compared to the end of the second quarter last year. Of this increase in
personnel, approximately two-thirds of this increase was a result of organic
growth and one-third was related to growth from acquisitions. We anticipate that
future research and development expenses will increase in the second half of
1999, as compared with the same period of 1998, due in part to the addition of
the research and development teams of our newly acquired subsidiaries in the
third quarter of 1998 and the second quarter of 1999. Additionally, we are
continuing our ongoing product enhancements in e-business and other areas such
as NEONtrak, Business Event Manager and integration adapters tools.
General and Administrative
General and administrative expense includes personnel and related overhead
costs for the support and administrative functions. General and administrative
expense increased to $3.9 million for the quarter ended June 30, 1999 from $1.2
million for the quarter ended June 30, 1998, representing 15% and 10% of total
revenues, respectively. General and administrative expense increased to $7.0
million for the six-month period ended June 30, 1999 from $2.2 million for the
six-month period ended June 30, 1998, representing 13% and 10% of total
revenues, respectively. The total dollar amount of expense increased primarily
due to an increase in personnel to facilitate expansion of our operations.
General and administrative expenses as a percentage of total revenues increased
primarily due to the lower than expected software license revenues during the
first half of 1999.
15
<PAGE> 16
OTHER INCOME, NET
Other income, net includes interest income earned on cash, cash
equivalents, short-term and long-term marketable securities, interest expense,
foreign currency gains and losses, and other nonoperating income and expenses.
Interest income increased to $1.9 million for the quarter ended June 30, 1999
and $4.2 million for the six-month period ended June 30, 1999 from $568,000 for
the quarter ended June 30, 1998 and $871,000 for the six-month period ended June
30, 1998. The increase was primarily due to interest earned on the remaining
proceeds from the follow-on offerings completed in May and December of 1998.
PROVISION FOR INCOME TAXES
We reported no income tax expense for the quarter and six months ended June
30, 1998. Our deferred tax assets were fully offset by a valuation allowance
until the fourth quarter of 1998. During 1998, our deferred tax assets increased
to approximately $9.0 million, principally for intangibles acquired from CAI
that were expensed, but which must be amortized for tax purposes over 15 years,
and additions to our tax credit carryovers. We also realized reduced U.S. taxes
of approximately $3.2 million for deductions related to the exercise of stock
options. As required, the tax benefit from the options was added to additional
paid-in capital and excluded from net income. Without the stock option
deductions, we would have fully used our carryovers and paid U.S. federal taxes
in 1998. Consequently, we concluded that it was likely that we would realize at
least $5.0 million of our deferred tax assets and the valuation allowance was
adjusted during the fourth quarter of 1998 to $4.0 million. At December 31,
1998, our balance sheet reflected net deferred tax assets of approximately $5.0
million.
We reported an income tax benefit for the quarter ended June 30, 1999 of
$3.8 million. The benefit results from reversing the provision we recorded for
the quarter ended March 31, 1999 of $1.4 million, and from increasing our net
deferred tax assets to reflect additional tax losses and tax credits that we
currently project we will generate during 1999. During the second quarter we
purchased all of the stock of four companies. In each case, the purchase price
has been allocated to the assets and liabilities acquired, including intangible
assets, based on their fair values. The excess of purchase price over the fair
value of the identifiable net tangible and intangible assets acquired has been
allocated to goodwill. For tax purposes, we have assumed the historical tax
basis of the assets and liabilities reflected in the preacquisition tax returns
of the sellers. Consequently, we must record net deferred tax liabilities for
the tax effects of these basis differences, other than goodwill, that we
currently estimate will be approximately $5.5 million. We expect to record these
deferred tax liabilities, and corresponding increases to goodwill, during the
quarter ending September 30, 1999, when we finalize the allocations to the
acquired assets.
The deferred tax provision for the six months ended June 30, 1999, reflects
our current estimated effective tax rate for calendar 1999 of approximately 35%.
The provision also includes current state and foreign income taxes projected to
be payable for 1999 of approximately $600,000, net of deferred tax benefits we
believe, more likely than not, will be realized. The impact of recording the
anticipated 1999 current state and foreign taxes payable against the tax
provision for the six months ended June 30, 1999 causes the overall effective
tax rate to be 28% for such period. The timing and tax consequences of
additional transactions, as well as operating results during the remainder of
1999, could cause our actual effective tax rate to vary significantly from our
current estimate.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, our principal sources of liquidity consisted of $129.5
million of cash, cash equivalents, short-term and long-term investments in
marketable securities compared with $196.1 million at December 31, 1998. No
amounts were outstanding under the line of credit during the six-month periods
ended June 30, 1999 or 1998. The Company had working capital of $112.1 million
at June 30, 1999. Included in determining such amounts are short-term deferred
revenue and customer deposits of $10.5 million. The majority of short-term
deferred revenue represents annual support payments billed to customers, which
is recognized ratably as revenue over the support service period. Without the
short-term deferred revenue and customer deposits, working capital would have
been $122.6 million.
16
<PAGE> 17
We used $14.1 million in cash for operating activities during the six-month
period ended June 30, 1999 compared to generating $1.0 million in cash during
the six-month period ended June 30, 1998. The decrease in operating cash flow
was due to the net loss for the 1999 period, a decrease in accrued liabilities
and an increase in accounts receivable, net.
Our accounts receivable, net increased to $39.7 million at June 30, 1999
compared to $28.3 million at December 31, 1998. Of the $11.4 million increase in
accounts receivable, net, $8.7 million of the increase was due to acquisitions
which occurred mid-quarter and near the end of the June 30, 1999 quarter. As
required by purchase accounting, our accounts receivable balance includes each
of the acquired entity's respective accounts receivable balances while sales are
included only from the effective date of the acquisition.
We used $87.4 million in cash for investing activities for the six-month
period ended June 30, 1999 compared to $5.0 million for the six-month period
ended June 30, 1998. In both periods, one of the primary investing activities
was the net purchases of short-term and long-term marketable securities. The
increase from the prior year was primarily due to the investment of the
remaining proceeds from follow-on offerings during the first two quarters of
1999. In the six months ended June 30, 1999, we continue to invest cash in
business combinations. The most significant cash outlays for acquisitions
resulted from the VIE, SLI and Microscript acquisitions with net cash
investments of $11.9 million, $16.2 million and $6.7 million, respectively.
During the first six months of both years, we purchased furniture, fixtures and
equipment necessary to support our expanding operations. During the second
quarter of 1999, we funded approximately $7.9 million toward a short-term
construction loan to Greenwood Plaza Partners, LLP ("GPP") for construction of
two buildings and a parking structure. GPP is principally owned by the Company's
Chief Executive Officer and Chairman of the Board. Upon completion of
construction, the Company intends to lease the buildings from GPP, in whole or
in part, for use as its principal corporate headquarters. We replaced an
existing lender for the first phase of construction, and have committed to fund
up to $31.44 million for one year at a floating interest rate of 90-day LIBOR
plus 2.05%. During construction, GPP intends to obtain permanent financing from
a third-party lender. The terms of the construction financing are consistent
with those that were in place with GPP's previous lender and have been approved
by our board of directors.
Financing activities provided $3.7 million in cash during the first six
months of 1999 compared to $51.7 million for the same period last year. For the
1999 period, this cash was from exercises of common stock options and the
Employee Stock Purchase Plan. In the 1998 period, we received $50.7 million in
net proceeds from our May 1998 secondary offering and $1.0 million in proceeds
from the exercise of stock options, warrants and the Employee Stock Purchase
Plan.
In July 1999, we agreed with the former equity holders of Microscript to
pay additional purchase consideration to more closely reflect the purchase value
agreed upon in the purchase negotiations. This will require additional cash
expenditures of $16.5 million in third quarter 1999.
We believe that our existing balances of cash, cash equivalents and
short-term and long-term investments in marketing securities will be sufficient
to meet our anticipated working capital and capital expenditure needs at least
for the next 12 months. Thereafter, we may require additional sources of funds
to continue to 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.
IN-PROCESS RESEARCH AND DEVELOPMENT
During fiscal year 1998, we acquired Century Analysis, Inc. ("CAI"), and
MSB Consultants ("MSB"). We continued to incur research and development expenses
in the second quarter of 1999 on the in-process research and development
("IPR&D") projects acquired from these two companies. Detailed descriptions of
these projects were included in our 10-K for the year ended 1998; specific
activities for the second quarter of 1999 follows.
As of the date of the CAI acquisition, CAI had invested $4.9 million in the
IPR&D identified in our 10-K. We estimated that an additional $4.2 million would
be required to over the next 12 to 18 months following the acquisition to
develop the products to commercial viability.
17
<PAGE> 18
We have continued to invest additional R&D dollars in the acquired IPR&D
projects. In the second quarter of 1999, we expended approximately thirty-six
man months on the acquired CAI projects in total. We are contemplating various
strategies with respect to the continued development of the IPR&D projects.
Significant achievements had been accomplished as of the valuation date on the
IPR&D projects such as the development of frameworks for design and coding, and
construction of the various codes and surrounding architectures. We continue to
make progress in these areas, among others.
At July 31, 1999, we project the remaining costs required to complete the
next generation Impact/TDM project will be approximately $1.5 million should
this project be completed as anticipated on the acquisition date. The next
generation Impact/TDM project has been incorporated into our NEON Common
Architecture R&D strategy, and the continued development and remaining costs for
completion are being incorporated into this global architecture strategy. We
estimate the total costs for the Impact/TDM project within our global
architecture to be approximately the same as initially projected.
CAI had expended a total of approximately $3.1 million on Component-related
projects prior to the closing of the acquisition. For these projects to reach
technological feasibility, additional efforts were projected to cost
approximately $950,000. We have continued development work in this area and
initial product release dates are set for the fourth quarter of 1999.
CAI had expended approximately $1.1 million on Other Enterprise Technology
Solutions as of September 1998. For these projects to reach technological
feasibility, we projected that additional efforts would need to be accomplished
in a timely manner and would cost approximately $1.6 million. We continue to
spend heavily on these projects and at this time, significant additional
achievements have been made. Specifically, the XML technology has advanced to
the testing stage on several modules (scheduled to be released in the third
quarter), and the CORBA technology is being brought into a stand alone adapter
product to be released by year end 1999.
MSB was working on the Price Server (with new capabilities), aRTe (designed
for a Windows NT environment), and Quantum Leap on the date of acquisition.
These projects are particularly complex due to the modular nature of MSB's
products and technology.
As of the date of acquisition, MSB had invested $3.1 million in the IPR&D
identified above. We estimated that an additional $850,000 thousand would be
required to over the 18 to 24 months following the acquisition to develop the
aforementioned products to commercial viability.
We have continued to invest additional R&D dollars in the acquired IPR&D
projects during the second quarter. We expect to continue development on all of
these projects through their completion. Currently, the timeline and
expectations for completion of these projects do not differ materially from what
was anticipated at the time of the purchase. We also have a higher level of
certainty that the projects will be released as planned. Our current revenue and
cost estimates do not materially differ from the initial valuation.
We believe that the work performed as of the valuation date had encompassed
many of the critical elements needed to complete the Price Server project. We
estimate that approximately $1,500,000 in development costs was incurred as of
the acquisition date and approximately $220,000 would be required to complete
the remaining development tasks. We spent approximately $140,000 in the second
quarter. The Pricing module for banking applications became available during the
first half of 1999.
In order to achieve milestones for the aRTe project, we estimate that MSB
had spent approximately $1,500,000 on this project as of June 1998. Remaining
R&D expenditures were estimated to be approximately $230,000 in order to
complete this project. We spent approximately $85,000 in the second quarter.
ARTe's functionality will be incorporated into a NEON product introduction in
mid-1999, and further enhanced during the remainder of 1999.
It was estimated that $75,000 had been incurred as of the acquisition date
for the Quantum Leap project and that approximately $400,000 would be required
to complete the product. We spent approximately $170,000 in the second quarter.
The first version of this product was released in the fourth quarter of 1998,
and
18
<PAGE> 19
further development efforts are underway to incorporate Quantum Leap technology
into another of our products scheduled to be released in the third quarter of
1999.
We do not break down revenues attributable specifically to CAI- and
MSB-derived products, and anticipate doing so later in 1999 or the beginning of
2000. As products are offered both as a suite and as individual applications,
NEON license fees are not necessarily application specific. However, we believe
that overall revenues generated to date concur with the assumptions used in the
valuation analysis. Within the MSB product line, the product revenue we expect
during 1999 from the products sold on a stand-alone version, as well as the
product suite incorporating the technology, is substantially the same as
initially forecasted in the valuation study. The product that incorporates the
CAI Component related projects has a release date now estimated for the fourth
quarter. We believe that the total forecast for this product, as well as the
other CAI projects, remains substantially the same as in the valuation study
over the remaining life of the products.
We currently believe that expenses associated with completing the purchased
in-process research and development are consistent with the estimates used in
the valuation. In addition, completion dates for the development projects
discussed above remain consistent with projections used at the time of the
acquisition as well as are consistent with the numbers presented in this
analysis. The only change was that the product using the Component related
technology is scheduled to be released one quarter after our initial estimate.
Research and development spending with respect to these offerings is expected to
continue at a rate that is consistent with our overall research and development
spending. We do not believe that the acquisitions resulted in any material
changes in our profit margins or in selling, general and administrative
expenses. We do not believe that we achieved any material expense reductions or
synergies as a result of the acquisition.
The rates utilized to discount the net cash flows to their present value
were consistent with the nature of the forecast and the risks associated with
the projected growth, profitability and developmental projects. Discount rates
of 35% and 35% for CAI and 32% and 25% for MSB were deemed appropriate for the
business enterprises and for the acquired completed in-process research and
development, respectively. These discount rates were consistent with the
acquired companies' various stages of development; the uncertainties in the
economic estimates described above; the inherent uncertainty at the time of the
acquisition surrounding the successful development of the purchased in-process
technology; the useful life of such technology; the profitability levels of such
technology; and the inherent uncertainties of the technological advances that
were indeterminable at the time of the acquisition.
FOREIGN CURRENCY RISK
We have wholly owned subsidiaries located in England, France, Switzerland,
Australia, Germany, Hong Kong, Malaysia and Singapore. 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,
continues to create 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 risks continue to exist in the following areas:
1) systems used by our Company to run its business; 2) systems used by our
suppliers; 3) potential warranty and other claims from our customers; and 4) the
potential reduced spending by other companies on our software products due to
significant information systems spending to remediate Year 2000 problems.
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Our Company is a relatively new corporation and, therefore, does not expect
to encounter many Year 2000 computer problems associated with our internal
systems, equipment, or facilities. As internal systems and equipment have been
implemented, and as we have expanded into new facilities, in the normal course
of our Company's growth or through acquisition (e.g., Convoy, Microscript), we
have attempted to obtain, and received, 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 continue to
monitor, including performing additional testing, as appropriate, the Year 2000
readiness status of previously 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
currently identified alternative remediation strategies or contingency plans if
replacement or upgrade is not feasible, since we perceive this possibility to be
low, 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, domestically or
internationally, whose inability to provide products or services would have a
material adverse impact on operating results. Suppliers where such material
relationships do exist appear to be limited to utility companies whose inability
to provide service could materially affect all business entities. We have and
will continue to monitor their Year 2000 efforts and will develop contingency
plans as appropriate.
Our Company, based on certain products not including date fields, date
field testing of other products, Y2K certification of CAI acquired products, and
Y2K related compliance information evaluated during recent acquisition due
diligence, believes the majority of our current products are Year 2000 compliant
and has provided Year 2000 warranties to many of our customers. In fact, we
believe that some customers may be purchasing certain of our products as in
interim solution to their Year 2000 needs until their current suppliers reach
compliance. However, since all customer situations cannot be anticipated,
particularly those involving third-party products, increased warranty and other
claims may be seen as a result of the transition to Year 2000. Litigation in
general may also increase regarding Year 2000 compliance issues, although
recently enacted Federal legislation, which we are currently evaluating in order
to implement processes for effective adherence, may impact this anticipated
increase. Therefore, the impact of customer claims could have a material adverse
impact on our operating results.
Finally, Year 2000 compliance issues continue to be 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. In addition, those Companies who have
completed Year 2000 upgrades or modifications, or are near completion, may still
continue to defer purchases of additional software until after the transition to
the Year 2000 to avoid the possibility of introducing additional contingencies
that they may believe may affect their Year 2000 compliance. If customers defer
purchases of our software because of reallocation or to avoid perceived
additional contingencies, or move to other systems or suppliers due to
reevaluation, this too could have a material adverse impact on our operating
results.
Our Company realizes the possibility that, in total, all of the potential
material adverse impacts discussed above may occur. To date, due to the
uncertainty in predicting actual outcomes, including impact based on action or
inaction by third-parties, this is considered the most reasonably likely worst
case scenario. However, contingency plans are currently not in place due to the
current state of information that is available to us and the anticipated flux of
reliable information prior to December 31, 1999, which could change the Year
2000 landscape relative to our Company several times over in the coming months.
Appropriate contingency plans will be put in place as available, reliable
information takes on a more static quality.
In order to evaluate the above risks, implement any necessary remediations
in the future, provide risk reevaluations and continued appropriate monitoring
activities, and develop appropriate contingency plans as
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warranted, we have designated appropriate individuals within the organization
responsible for Year 2000 issues. We will continue to assess the need for
additional Year 2000 readiness personnel as appropriate.
FACTORS THAT MAY AFFECT FUTURE RESULTS
As described by the following factors, past financial performance should
not be considered a reliable indicator of future performance and investors
should not use historical trends to anticipate results or trends in future
periods.
OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY AND DEPEND ON MANY FACTORS.
Except for the second quarter of 1999 results, we had significant historic
revenue growth. As in the second quarter of 1999, such growth rates may not be
sustainable, and you should not use these past results to predict future
operating margins or 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; and
- 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, such as occurred in the second quarter of 1999, will have a
material adverse effect on our business.
As a result of these and other factors, we believe that period-to-period
comparisons of our historical results of operations are not a good predictor of
our future performance. If our future operating results are below the
expectations of stock market analysts, our stock price may decline.
SOFTWARE LICENSE REVENUE GROWTH IS INCREASINGLY DEPENDENT ON OUR
RELATIONSHIP WITH IBM.
Our revenue growth for the first half of 1999 reflected strong sales of
MQSI and its predecessor product, MQIntegrator, through IBM's distribution and
reseller channel. MQSI is an IBM-branded product for which IBM has assumed
production and fulfillment obligations. IBM sells this product directly through
its distributors and resellers and we resell it both directly and through our
indirect channels. In the first half of 1999, royalty income from IBM sales of
MQSI accounted for a significant portion of our total software license revenue
and we expect it to continue to be a significant percentage of our software
license revenue in the future. Accordingly, we continue to be dependent on IBM's
management of the MQSI product, and any delay or shortfall in revenues from IBM,
or in our ability to report revenue, could have a material adverse effect on our
business and operating results.
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Through the second quarter of 1999, we recorded royalty income for the MQSI
product in the same quarter in which IBM recorded the sale to its customer. In
July 1999, IBM informed us that they would no longer provide royalty information
in time for us to record revenue during the current quarter. Thus, we will
record no IBM royalty income in the third quarter of 1999 and will record it on
a one-quarter lag thereafter.
IF OUR SALES CYCLE IS LONGER THAN WE ANTICIPATE, OUR OPERATING RESULTS MAY
SUFFER.
Our customers typically take a long time to evaluate our products.
Therefore the timing of license revenue is difficult to predict. A sale of our
products to a customer typically involves a significant technical evaluation and
a commitment of capital and other resources by the customer. This evaluation
process frequently results in a sales cycle that lasts several months.
Additional delays are caused by customers' internal procedures to approve large
capital expenditures and to test, implement and accept new technologies that
affect key operations within their organization. Our operating expense levels
are relatively fixed in the short-term and are based in part on expectations of
future revenues. Consequently, any delay in the recognition of revenue due to a
longer sales cycle caused by these factors could result in operating losses.
WE HAVE A SHORT OPERATING HISTORY AND A HISTORY OF OPERATING LOSSES.
An investor in our common stock must evaluate the risks, uncertainties,
expenses and difficulties frequently encountered by companies in rapidly
evolving markets. We have had a limited operating history upon which an
evaluation of our Company and its prospects can be based. Prior to 1996, we
recorded only nominal product revenue, and we have not been profitable on an
annual basis. At June 30, 1999, our Company had an accumulated deficit of
approximately $26.3 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; and
- commercialize our products and services with future technologies.
We may not successfully implement any of our strategies or successfully
address these risks and uncertainties. Even if we accomplish these objectives we
may not be profitable in the future.
FAILURE TO ADD CUSTOMERS OR EXPAND INTO NEW MARKETS MAY HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS.
A significant portion of our revenue has come from a small number of large
purchasers. For example, in 1998 our top ten customers accounted for 38% of
total revenues. In 1998 and the six months ended June 30, 1999, Industrial Bank
of Japan accounted for approximately 10% and 12% of our total revenues,
respectively. 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 38% of
total revenues for the second quarter of 1999. These customers or other
customers may not continue to purchase our products. Our failure to add new
customers that make significant purchases of our products and services would
have a material adverse effect on our business, financial condition and results
of operations.
While we have developed experience marketing our products to financial
institutions, we have less experience with other vertical market segments. New
market segments that we are currently targeting are likely to have significantly
different characteristics than the financial institutions segment. As a result,
we may change our pricing structures, sales methods, sales personnel, consulting
services and customer support. We may not be successful in selling our products
and services to the additional segments targeted. Our inability to
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expand sales of our products and services into these additional markets will
materially adversely effect our business.
OUR GROWTH IS DEPENDENT UPON THE SUCCESSFUL DEVELOPMENT OF OUR DIRECT AND
INDIRECT SALES CHANNELS.
We sell our products primarily through our direct sales force and we
support our customers with our internal technical and customer support staff. We
will continue to rely on our ability to recruit and train additional sales
people and qualified technical support personnel. Our ability to achieve
significant revenue growth in the future will greatly depend on our ability to
recruit and train sufficient technical, customer and direct sales personnel,
particularly additional sales personnel focusing on the new vertical market
segments that we target. We have in the past and may in the future experience
difficulty in recruiting qualified sales, technical and support personnel. Our
inability to rapidly and effectively expand our direct sales force and our
technical and support staff could materially adversely affect our business.
We believe that future growth also will depend on developing and
maintaining successful strategic relationships with distributors, resellers, and
systems integrators. Our strategy is to continue to increase the proportion of
customers served through these indirect channels. We are currently investing,
and plan to continue to invest, significant resources to develop these indirect
channels. This could adversely affect our operating results if these efforts do
not generate license and service revenues necessary to offset such investment.
Also, our inability to recruit and retain qualified distributors, resellers and
systems integrators could adversely affect our results of operations. Another
risk is that because lower unit prices are typically charged on sales made
through indirect channels, increased indirect sales could adversely affect our
average selling prices and result in lower gross margins.
OUR OPERATING RESULTS ARE SUBSTANTIALLY DEPENDENT ON OUR SUITE OF EAI
PRODUCTS.
A substantial majority of our revenues come from the NEON EAI suite of
products and related services, and we expect this pattern to continue.
Accordingly, our future operating results will depend on the demand for NEON and
related services by future customers, including new and enhanced releases that
are subsequently introduced. There can be no assurance that the market will
continue to demand our current products or that we will be successful in
marketing any new or enhanced products. If our competitors release new products
that are superior to NEON in performance or price, demand for our products may
decline. A decline in demand for NEON as a result of competition, technological
change or other factors would have a material adverse effect on our business,
financial condition and results of operations.
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 June 1999, we acquired eight companies, four of which
were acquired in the second quarter of 1999. These acquisitions will expose us
to increased risks and costs, including the following:
- assimilating new operations and personnel;
- diverting financial and management resources from existing operations;
and
- integrating acquired personnel and technologies.
We may not be able to generate sufficient revenues from any of these
acquisitions to offset the associated acquisition costs. We will also be
required to maintain uniform standards of quality and service, controls,
procedures and policies. Our failure to achieve any of these standards may hurt
relationships with customers, employees, and new management personnel. In
addition, our future acquisitions may result in additional stock issuances which
could be dilutive to our stockholders.
We may also evaluate joint venture relationships with complementary
businesses. Any joint venture we enter into would involve many of the same risks
posed by acquisitions, particularly those risks associated with the diversion of
resources, the inability to generate sufficient revenues, the management of
relationships with
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third parties, and potential additional expenses, any of which could have a
material adverse effect on our financial condition and results of operations.
THERE ARE MANY RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
We continue to expand our international operations, and these efforts
require significant management attention and financial resources. Each version
of our product also has to be localized within each country. We have committed
resources to the opening and integration of additional international sales
offices and the expansion of international sales and support channels. Our
efforts to develop and expand international sales and support channels may not
be successful. International sales are subject to a number of risks, including
the following:
- 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; and
- 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 June 30, 1999 we had a
total of 1,172 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; and
- 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.
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WE MUST KEEP PACE WITH TECHNOLOGICAL CHANGE TO REMAIN COMPETITIVE.
The market for our products is characterized by rapid technological change,
frequent new product introductions and enhancements, changes in customer demands
and evolving industry standards. Our existing products could be rendered
obsolete if we fail to keep up in any of these ways. We have also found that the
technological life cycles of our products are difficult to estimate, partially
because they may vary according to the particular application or vertical market
segment. We believe that our future success will depend upon our ability to
continue to enhance our current product line while we concurrently develop and
introduce new products that keep pace with competitive and technological
developments. These developments require us to continue to make substantial
product development investments.
Existing Products. We currently serve a customer base with a wide variety
of hardware, software, database, and networking platforms. To gain broad market
acceptance, we believe that we will have to support our products on a variety of
platforms. Our success will depend, among others, on the following factors:
- 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; and
- 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.
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OUR FAILURE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS MAY ADVERSELY
AFFECT US.
Our success and ability to compete is dependent in part upon our
proprietary technology. We rely on a combination of copyright, trademark and
trade secret laws, as well as confidentiality agreements and licensing
arrangements, to establish and protect our proprietary rights. We presently have
two patents, and we have two patent applications pending. Despite our efforts to
protect our proprietary rights, existing copyright, trademark and trade secret
laws afford only limited protection. In addition, the laws of certain foreign
countries do not protect our rights to the same extent as do the laws of the
United States. Attempts may be made to copy or reverse engineer aspects of our
products or to obtain and use information that we regard as proprietary.
Accordingly, there can be no assurance that we will be able to protect our
proprietary rights against unauthorized third-party copying or use. Any
infringement of our proprietary rights could materially adversely affect our
future operating results. Furthermore, policing the unauthorized use of our
products is difficult and litigation may be necessary in the future to enforce
our intellectual property rights, to protect our trade secrets or to determine
the validity and scope of the proprietary rights of others. Such litigation
could result in substantial costs and diversion of resources and could have a
material adverse effect on our future operating results.
INTELLECTUAL PROPERTY CLAIMS CAN BE COSTLY AND RESULT IN THE LOSS OF
SIGNIFICANT RIGHTS.
It is also possible that third parties will claim that we have infringed
their current or future products. We expect that EAI software developers will
increasingly be subject to infringement claims as the number of products in
different industry segments overlap. Any claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays, or
require us to enter into royalty or licensing agreements, any of which could
have a material adverse effect upon our operating results. There can also be no
assurance that such royalty or licensing agreements, if required, would be
available on terms acceptable to us, if at all. There can be no assurance that
legal action claiming patent infringement will not be commenced against us, or
that we would prevail in such litigation given the complex technical issues and
inherent uncertainties in patent litigation. In the event a patent claim against
us was successful and we could not obtain a license on acceptable terms or
license a substitute technology or redesign to avoid infringement, our business,
financial condition and results of operations would be materially adversely
affected.
We are involved in a declaratory judgment action in Federal District Court
for the State of Colorado and a trademark dilution case in Texas District Court
for Bend County against NEON Systems, Inc. over the use of the trademark NEON.
The Texas damage action was filed in June 1999. An adverse judgment or
settlement, particularly in the Texas action, may result in increased costs,
expenses and may have an adverse effect on our business.
GENERAL ECONOMIC CONDITIONS MAY ADVERSELY AFFECT OUR BUSINESS.
The EAI software market could be negatively impacted by certain factors
that have impacted the ERP software market, including global economic
difficulties and uncertainty, reductions in capital expenditures by large
customers, and increasing competition. These factors could in turn give rise to
longer sales cycles, deferral or delay of customer purchasing decisions, and
increased price competition. The presence of such factors in the EAI software
market could adversely affect our operating results.
YEAR 2000 RISKS MAY RESULT IN MATERIAL ADVERSE EFFECTS ON OUR BUSINESS.
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, in a little over a
year, computer systems and/or software products used by many companies may need
to be upgraded to comply with such year 2000 requirements. While we have
assessed our products, services and internal systems, certain internal financial
packages have not yet been implemented and may require further assessment by us.
We believe we are currently 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
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year 2000 compliant. We expect such modifications will be made on a timely basis
and we do not believe that the cost of such modifications will have a material
effect on our operating results. There can be no assurance, however, that we
will be able to modify such products, services and systems in a timely and
successful manner to comply with the year 2000 requirements, which could have a
material adverse effect on our operating results. Moreover, we believe that some
customers may be purchasing our products as an interim solution to their year
2000 needs until their current suppliers reach compliance. Conversely, year 2000
issues could cause a significant number of companies, including our current
customers, to reevaluate their current system needs and as a result consider
switching to other systems and suppliers. Any of the foregoing could result in a
material adverse effect on our business, operating results and financial
condition. Additionally, during the remainder of 1999 there is likely to be an
increased customer focus on addressing year 2000 issues, creating the risk that
customers may reallocate capital expenditures to fix year 2000 problems of
existing systems. If customers defer purchases of our software because of such a
reallocation, it could adversely affect our operating results.
OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE.
The trading price of our common stock has fluctuated significantly since
our initial public offering in June 1997, and often such fluctuations have been
unrelated or disproportionate to our operating performance. In addition, the
trading price of our common stock could be subject to wide fluctuations in
response to quarterly variations in operating results, announcements of
technological innovations or new products by us or our competitors, developments
with respect to patents or proprietary rights, changes in financial estimates by
securities analysts and other events or factors. In addition, the stock market
has experienced volatility that has particularly affected the market prices of
equity securities of many high technology companies and that often has been
unrelated or disproportionate to the operating performance of such companies.
These broad market fluctuations may adversely affect the market price of our
common stock.
ADOPTION OF THE EURO PRESENTS UNCERTAINTIES FOR OUR COMPANY.
In January 1999, the new "Euro" currency was introduced in certain European
countries that are part of the European Monetary Union, or EMU. During 2002, all
EMU countries are expected to be operating with the Euro as their single
currency. A significant amount of uncertainty exists as to the effect the Euro
will have on the marketplace generally and, additionally, all of the final rules
and regulations have not yet been defined and finalized by the European
Commission with regard to the Euro currency. We are currently assessing the
effect the introduction of the Euro will have on our internal accounting systems
and the sales of our products. We are not aware of any material operational
issues or costs associated with preparing our internal systems for the Euro.
However, we do utilize third party vendor equipment and software products that
may or may not be EMU compliant. Although we are currently taking steps to
address the impact, if any, of EMU compliance for such third party products, the
failure of any critical components to operate properly post-Euro may have an
adverse effect on the business or results of operations of our Company or
require us to incur expenses to remedy such problems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of our operations, we are exposed to market risk,
primarily changes in foreign currency exchange rates and interest rates.
Uncertainties that are either non-financial or non-quantifiable, such as
political, economic, tax, other regulatory or credit risks are not included in
the following assessment of our market risks.
FOREIGN CURRENCY EXCHANGE RATES
Operations outside of the U.S. expose us to foreign currency exchange rate
changes and could impact translations of foreign denominated assets and
liabilities into U.S. dollars and future earnings and cash flows from
transactions denominated in different currencies. During the first six months of
1999, 32% of our total revenue was generated from our international operations,
and the net assets of our foreign subsidiaries totaled 8% of consolidated net
assets as of June 30, 1999. Our exposure to currency exchange rate changes is
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diversified due to the number of different countries in which we conduct
business. We operate outside the U.S. primarily through wholly-owned
subsidiaries in Europe, Switzerland, Hong Kong, and Australia. These foreign
subsidiaries use the local currencies as their functional currency as sales are
generated and expenses are incurred in such currencies. Foreign currency gains
and losses will continue to result from fluctuations in the value of the
currencies in which we conduct our operations as compared to the U.S. dollar,
and future operating results will be affected to some extent by gains and losses
from foreign currency exposure.
INTEREST RATES
Investments, including cash equivalents, consist of U.S.,state and
municipal bonds, as well as domestic corporate bonds, with maturities of up to
thirty-four months. All investments are classified as available-for-sale as
defined in SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," and accordingly are carried at market value. Changes in interest
rates could impact our anticipated interest income or could impact the fair
market value of our investments.
28
<PAGE> 29
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been named as a defendant in a number of class action
lawsuits alleging violation of the federal securities laws. Certain executive
officers of the Company also are named as defendants. These lawsuits were filed
in federal court in Colorado in July and August 1999. Most of the complaints in
these lawsuits assert claims on behalf of purchasers of the Company's securities
between April 21, 1999 and July 6, 1999. A few of the complaints assert claims
on behalf of purchasers between October 29, 1998 and July 7, 1999. The
complaints allege that the Company and the other defendants made material
misrepresentations and omissions regarding the Company's business and prospects,
causing harm to purchasers of the Company's securities. The complaints do not
specify the amount of damages sought. These cases are in the early stages and
the Company has not yet formally responded to the complaints. The Company
believes these lawsuits are completely without merit. The Company intends to
deny all material allegations and to defend itself vigorously. An adverse
judgment or settlement in these lawsuits could have a material adverse effect on
the Company's financial condition or results of operations. The ultimate outcome
of these actions cannot be presently determined. Accordingly, no provision for
any liability or loss that may result from adjudication or settlement thereof
has been made in the accompanying consolidated financial statements.
The Company is involved in a declaratory judgment action in Federal
District Court for the State of Colorado and a trademark dilution case in Texas
District Court for Bend County against NEON Systems, Inc. over the use of the
trademark NEON. An adverse judgment or settlement, particularly in the Texas
action, may result in increased costs, expenses and may have an adverse effect
on our business. The Texas damage action was filed in June 1999.
ITEM 2. CHANGES IN SECURITIES
In May 1999, the Company issued 138,452 shares of common stock in
connection with its acquisition of SLI International AG, a Swiss corporation. Up
to an additional 75,519 shares may be issued to the former shareholders of SLI
in connection with the achievement of certain performance targets. In June 1999,
the Company issued approximately 881,775 shares of common stock in a statutory
merger with Convoy Corporation, a Delaware corporation. In June 1999, the
Company issued 445,956 shares of common stock in a statutory merger with
Microscript, Inc., a Massachusetts corporation. The Company relied upon the
exemptions from registration provided by Rule 506 of Regulation D, and/or
Section 4(2) under the Securities Act of 1933, as amended, in the foregoing
acquisitions.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of the Company (the "Annual
Meeting") was held on June 15, 1999.
(b) The following Class II directors were elected at the Annual Meeting for
three-year terms ending on the date of the annual stockholders' meeting
in 2002:
Joseph E. Kasputys
Harold A. Piskiel
The Company's Board of Directors is currently comprised of seven members
who are divided into three classes with overlapping three-year terms. A director
serves in office until his or her respective successor is duly elected and
qualified or until his or her earlier death or resignation. The term for Class
III directors (Patrick J. Fortune, Mark L. Gordon and Elisabeth W. Ireland) will
expire at the annual meeting of
29
<PAGE> 30
stockholders to be held in 2001, and the term for Class I directors (George F.
(Rick) Adam, Jr. and Steve Lazarus) will expire at the annual meeting of
stockholders to be held in 2000.
(c) The stockholders approved an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of common
stock from 45,000,000 to 200,000,000.
(d) The stockholders also ratified the appointment of Arthur Andersen LLP
as the independent auditors for the year ended December 31, 1999.
(e) The results of the vote on the matters voted upon at the Annual Meeting
were, respectively:
<TABLE>
<CAPTION>
FOR WITHHELD
(I) ELECTION OF DIRECTORS ---------- --------
<S> <C> <C>
Joseph E. Kasputys................................. 28,060,595 530,412
Harold A. Piskiel.................................. 28,040,889 550,118
</TABLE>
(ii) Approval of the amendment to the Company's Certificate of
Incorporation.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- --------- -------
<S> <C> <C>
23,693,256 4,874,764 22,987
</TABLE>
(iii) Ratification of Arthur Andersen LLP as independent auditors for
the Company for fiscal year 1999.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- --------- -------
<S> <C> <C>
28,543,059 28,433 19,515
</TABLE>
The foregoing matters are described in more detail in the Company's
definitive proxy statement dated May 10, 1999.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON 8-K
(a) Exhibit
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
2.1 -- Agreement and Plan of Reorganization dated June 2, 1999
by and among Registrant and Convoy Corporation (which is
incorporated herein by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K filed June 24,
1999).
2.2 -- Agreement and Plan of Reorganization dated June 15, 1999
(as amended effective June 28, 1999) by and among
Registrant and Microscript, Inc. (which is incorporated
herein by reference to Exhibit 2.1 to the Registrant's
Current Report on Form 8-K filed July 13, 1999).
3.1 -- Certificate of Amendment of Certificate of Incorporation
of New Era of Networks, Inc. dated August 11, 1999.
27.1 -- Financial Data Schedule.
</TABLE>
30
<PAGE> 31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW ERA OF NETWORKS, INC.
(Registrant)
By: /s/ STEPHEN E. WEBB
----------------------------------
Stephen E. Webb,
Senior Vice President,
Chief Financial Officer
(Principal Financial Officer)
Date: August 16, 1999
<PAGE> 32
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
2.1 -- Agreement and Plan of Reorganization dated June 2, 1999
by and among Registrant and Convoy Corporation (which is
incorporated herein by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K filed June 24,
1999).
2.2 -- Agreement and Plan of Reorganization dated June 15, 1999
(as amended effective June 28, 1999) by and among
Registrant and Microscript, Inc. (which is incorporated
herein by reference to Exhibit 2.1 to the Registrant's
Current Report on Form 8-K filed July 13, 1999).
3.1 -- Certificate of Amendment of Certificate of Incorporation
of New Era of Networks, Inc. dated August 11, 1999.
27.1 -- Financial Data Schedule.
</TABLE>
<PAGE> 1
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
NEW ERA OF NETWORKS, INC.
New Era of Networks, Inc., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify that:
FIRST: That pursuant to authority vested in the Board of Directors by the
Certificate of Incorporation of the Corporation, the Board of Directors of the
Corporation, at a meeting duly called and held on June 15, 1999, adopted a
resolution setting forth the proposed amendment to the Certificate of
Incorporation, declaring said amendment to be advisable, and calling for
approval by the stockholders of this Corporation upon the consideration
thereof. The resolution setting forth the proposed amendment is as follows:
RESOLVED: That the first paragraph of Article Four shall be amended in its
entirety to read as follows:
"The Corporation is authorized to issue two classes of shares to be
designated respectively Preferred Stock and Common Stock. The total number
of shares of Common Stock this Corporation shall have the authority to
issue is 200,000,000 shares, and shall have a par value of $0.0001 per
share ("Common Stock"), and the total number of shares of Preferred Stock
this corporation shall have the authority to issue is 2,000,000, and shall
have a par value of $0.0001 per share and shall be undesignated as to
series ("Preferred Stock")."
SECOND: That thereafter, pursuant to a resolution of the Board of
Directors of the Corporation, the consent of the stockholders of this
Corporation was duly called for at a meeting of the stockholders in accordance
with Section 211 of the General Corporation Law of the State of Delaware, and
holders of the necessary number of shares as required by statute consented to
the adoption of said amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
<PAGE> 2
IN WITNESS WHEREOF, New Era Of Networks, Inc. has duly caused this
Certificate of Amendment of Amended and Restated Certificate of Incorporation
to be signed by George F. Adam, Jr., its Chief Executive Officer, and attested
to by Leonard M. Goldstein, its Secretary, this 11th day of August, 1999.
NEW ERA OF NETWORKS, INC.
a Delaware corporation
By: /s/ George F. Adam, Jr.
-------------------------------
George F. Adam, Jr.
Chief Executive Officer
ATTEST:
By: /s/ Leonard M. Goldstein
------------------------------------
Leonard M. Goldstein, Secretary
-2-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S JUNE 30, 1999 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 76,162,405
<SECURITIES> 53,242,364
<RECEIVABLES> 39,654,982
<ALLOWANCES> 1,600,000
<INVENTORY> 0
<CURRENT-ASSETS> 146,455,410
<PP&E> 20,649,792
<DEPRECIATION> 4,312,472
<TOTAL-ASSETS> 380,935,829
<CURRENT-LIABILITIES> 34,314,173
<BONDS> 0
0
0
<COMMON> 3,262
<OTHER-SE> 346,451,856
<TOTAL-LIABILITY-AND-EQUITY> 380,935,829
<SALES> 55,751,951
<TOTAL-REVENUES> 55,751,951
<CGS> 16,925,142
<TOTAL-COSTS> 16,925,142
<OTHER-EXPENSES> 51,464,228
<LOSS-PROVISION> 1,442,078
<INTEREST-EXPENSE> 22,352
<INCOME-PRETAX> 0
<INCOME-TAX> 2,453,650
<INCOME-CONTINUING> (6,240,557)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,240,557)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
